Turnkey Tech Investing: July 2021 Market Brief

By Bill Studebaker, CIO & President, ROBO Global

 

As we wrap up another month in 2021, the headline numbers at the index level still point to a bull market in motion. That said, the cracks below the surface are becoming more apparent, and dispersion is increasing. For the month of July, the ROBO ETF gained 0.89%, while the HTEC ETF declined -1.41% and the THNQ ETF closed virtually flat at -0.26%. (See standardized performance here: ROBO, HTEC, THNQ)

From a market perspective, the final week of June was particularly lively—to say the least. Many factors contributed to a rise in volatility. China’s manufacturing growth slowed to the lowest level in 15 months due to lower export demand and continued supply chain disruptions. The FOMC opted to hold interest rates at the near-zero range, while choosing to maintain asset purchases at $120 billion a month until “substantial further progress” is made on employment and inflation. Then came the earnings reports for the constituents of the S&P 500, bringing positive surprises from companies in multiple sectors.

 

Here are three key takeaways I believe can be drawn from this mixed bag:

 

1. First, risk sentiment is clearly souring as we head into the latter stage of the summer. We may be in store for a period similar to last August when we saw gamma-driven pain at the index level. It’s clear that some of the current weakness is being driven by fears of the Delta variant, which may be more difficult to overcome than currently priced, especially as we near a particularly complicated back-to-school season.

 

2. Second (and perhaps more importantly for markets), the major indices continue to sit at all-time highs. The Nasdaq, DJIA, and S&P 500 indexes all claimed new record highs in July—again—which has many investors wondering whether this bull market can continue to run, or if we’re headed for an ‘inevitable’ downturn. (Wouldn’t a crystal ball be nice?)

3. Third, every investor should be keeping a close eye on both the demand trajectory and the longevity of COVID gains for names that benefitted from the lockdown environment, as well as the potential for margin pressure created by factors such as the labor-market slack and goods inflation.

 

 

With so much in play, identifying strong pockets for growth is no simple task. But, as our team at ROBO Global has always believed, smart automation is the key to accelerating supply chains, reducing costs, and increasing efficiencies—all of which benefit goods manufacturers and consumers alike. Here are just a handful of examples of ROBO Global constituents that are delivering on the promise of automation today:

 

  • CareDx, which discovers, develops, and commercializes diagnostic solutions for transplant patients and caregivers worldwide, reported Q2 with another impressive beat and raise. Revenue of $74M beat consensus of $68M, and the bump raised the midpoint of revenue guidance by $10M. HeartCare led the businesses with 6600 AlloSure heart tests. This represents 85% attachment to AlloMap Heart, driving test volumes to 37,4001. There are several drivers that could bring further upside to performance beyond guidance, such as further growth of HeartCare and AlloSure resulting from testing adherence driven by patient and nephrologist engagement initiatives, as well as increasing attachment of HeartCare. Over time, the company remains committed to expanding its transplant solution to other solid organs, and to developing new transplant tests like AlloHeme for stem cell transplant relapse.

 

  • Dexcom, a medical device company, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The company reported a strong beat and raise Q2 with sales of $595M—well above the consensus of $552M and demonstrating 32% YoY growth. Strength was evident across both domestic and international sales, with US sales the strongest in the company’s history. Strong GM was the driving factor behind the EPS beat of $0.63 vs. consensus $0.112. The company increased FY revenue guidance above the amount of its beat. Additionally, the fact that Dexcom can put up record numbers in the face of heavy competitive pressure from market-leader Abbot validates that there is room for more than one strong player in this market. With its newest CGM system, the G7, Dexcom further adds to its value proposition, and we expect to see strong growth over the next several years.

 

  • Fanuc Corporation provides factory automation products in Japan, the United States, Europe, Asia, and internationally. The company offers CNC series products, servo motors, lasers, robots, compact machining centers, electric injection molding machines, wire-cut electric discharge machines, and ultra-precision machines. After the bullish lead from rival Yaskawa Electric Corporation earlier in the month, Fanuc’s similarly strong results came as no surprise. Q1 OP of Y52.1B compares with 2020’s Y11.1B, and was in line with consensus. The key number to watch is orders, which more than doubled to a record high Y224.5B, led by robo-machine demand in China; that compares with Y203B last quarter. Both interim and full-year guidance have been revised to Y102B and Y194B3, respectively.

 

  • Rapid7 is a clear market leader in cybersecurity, a fact that was confirmed by its position in the 2021 Gartner Magic Quadrant for security information and event management (SIEM) technology. The company offers a cloud-native Insight Platform that enables customers to create and manage analytics-driven cybersecurity risk management programs. Rapid7 recently announced that it will beat its 2Q results and expects ARR of $489M vs. consensus of $479M, representing 29% YoY growth. Building on that momentum, the company acquired IntSights Cyber Intelligence in July for $335M4. A company with 400 clients, 180 employees, and $27M of ARR ending in 2Q, IntSights was named a contender in the Forrester Wave for External Threat Intelligence Services. We see this as a smart addition to Rapid7’s portfolio as the company seeks to broaden its detection and response systems. IntSights plays in the XDR (Extended Detection and Response)—a hot space that is pushing many private companies to record valuations.

 

While these companies and many like them are showing impressive progress, it’s easy to view the current market as either ‘glass half empty’ or ‘glass half full.’ On the one hand, the Delta variant is gaining momentum against a society in which only 14.9% of the world population is now fully vaccinated and only ~1% of people in low-income countries have received a single dose of the vaccine. And while 49.6% of Americans are now fully vaccinated, there remain many regions with a rate that is shockingly low. That means that this new strain of COVID-19 is unlikely to be contained any time soon. If that reality leads to new lockdowns here and abroad, the global growth outlook could be critically impacted and the already slowing second derivative trends in the US and China could be exacerbated.

The more positive perspective is that the strong growth being driven by US consumers is enough to propel the markets forward. That promise is being bolstered by the relatively high vaccination rate in the US which, hopefully, will help prevent the new lockdowns that are likely in other regions of the world. The ROBO Global constituents, of course, will help, too. From accelerating challenged supply chains, to automating tasks amid a global labor shortage, to transforming the face of healthcare, these companies are helping to create a better future for us all. That sure sounds like a ‘glass half full’ to me!

 

ROBO Top Ten HoldingsHTEC Top Ten HoldingsTHNQ Top Ten Holdings

 

1 Source: CareDx

2 Source: Dexcom

3 Source: Fanuc Corporation

4 Source: Rapid7

 

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

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