So far, 2017 has been the year of the tech stocks.
Amazon.com’s AMZN 0.4579182104437138% Amazon.com Inc. U.S.: Nasdaq USD1011.34 4.61 0.4579182104437138% /Date(1496696400285-0500)/ Volume (Delayed 15m) : 2604453 AFTER HOURS USD1012.8 1.45999999999992 0.14436292443688573% Volume (Delayed 15m) : 161462 P/E Ratio 190.30540240483225 Market Cap 481191768559.143 Dividend Yield N/A Rev. per Employee 417613 More quote details and news » (ticker: AMZN) recent ascent to $1,000 a share illustrates how the sector has helped to fuel the stock market rally. Technology stocks now make up more than 23% of the Standard & Poor’s 500 index, well above the historical average of 15.4%.
And few tech-focused funds have done as well as the T. Rowe Price Global Technology fund (ticker: PRGTX). With lead manager Joshua Spencer at the helm, the $4.4 billion fund has returned almost 30% since the start of the year, beating 97% of the other tech-sector stock funds tracked by Morningstar.
Turn the calendar back three and five years, and the no-load fund, which charges 0.9% in annual expenses, ranks even higher.
Up 36.3% over the past 12 months, T. Rowe Price Global Technology has topped the MSCI ACWI Information Technology Index’s 33% gain. And for the three- and five-year periods, the fund’s annualized returns of 24% and 26.2%, respectively, have trounced the benchmark’s 14% and 15.7% gains, and the fund has outperformed 92% and 99% of its peers.
Spencer and his analysts look for names poised to profit from overriding investment themes, such as the rise of cloud computing. They favor companies trading at least 30% below their intrinsic value, building positions when the shares are unloved and taking profits when positions, even popular ones, begin to look overvalued.
With sentiment—and valuations—running so high, Spencer admits it is hard to find good stock ideas. The concentrated portfolio has 9.5% sitting in cash, a hefty weighting compared with the fund’s 3% to 5% historical norm.
The fund is benchmark-agnostic. Though the MSCI index has an 11.3% weighting in Apple AAPL -0.9778063686072692% Apple Inc. U.S.: Nasdaq USD153.93 -1.52 -0.9778063686072692% /Date(1496696400120-0500)/ Volume (Delayed 15m) : 23925001 AFTER HOURS USD154 0.0699999999999932 0.04547521600727603% Volume (Delayed 15m) : 1406661 P/E Ratio 18.003508771929823 Market Cap 810491387799.561 Dividend Yield 1.6371077762619373% Rev. per Employee 1894280 More quote details and news » (AAPL), the tech titan is absent from Spencer’s holdings. So is Facebook FB 0.013019985678015754% Facebook Inc. Cl A U.S.: Nasdaq USD153.63 0.02 0.013019985678015754% /Date(1496696400317-0500)/ Volume (Delayed 15m) : 11925215 AFTER HOURS USD153.55 -0.0799999999999841 -0.05207316279372518% Volume (Delayed 15m) : 595172 P/E Ratio 40.642857142857146 Market Cap 445121354136.802 Dividend Yield N/A Rev. per Employee 1776630 More quote details and news » (FB), the index’s third-largest holding.
Why? Spencer says that while both are great companies, other stocks offer better returns, a list that includes Salesforce.com CRM 0.572309046885318% Salesforce.com Inc. U.S.: NYSE USD91.38 0.52 0.572309046885318% /Date(1496696454155-0500)/ Volume (Delayed 15m) : 4585911 AFTER HOURS USD91.38 % Volume (Delayed 15m) : 951400 P/E Ratio 456.9 Market Cap 64632172267.6624 Dividend Yield N/A Rev. per Employee 354518 More quote details and news » (CRM), Ultimate Software Group ULTI 0.013400634296690044% Ultimate Software Group Inc. U.S.: Nasdaq USD223.9 0.03 0.013400634296690044% /Date(1496696400334-0500)/ Volume (Delayed 15m) : 118043 AFTER HOURS USD223.9 % Volume (Delayed 15m) : 3115 P/E Ratio 254.4318181818182 Market Cap 6652520686.08673 Dividend Yield N/A Rev. per Employee 219527 More quote details and news » (ULTI), Netflix NFLX -0.0726480203414457% Netflix Inc. U.S.: Nasdaq USD165.06 -0.12 -0.0726480203414457% /Date(1496696400246-0500)/ Volume (Delayed 15m) : 3490663 AFTER HOURS USD165.06 % Volume (Delayed 15m) : 384572 P/E Ratio 217.18421052631578 Market Cap 71193237200.2881 Dividend Yield N/A Rev. per Employee 2023310 More quote details and news » (NFLX), Ctrip.com International CTRP 0.8904719501335708% Ctrip.com International Ltd. ADR U.S.: Nasdaq USD56.65 0.5 0.8904719501335708% /Date(1496696400127-0500)/ Volume (Delayed 15m) : 3070462 AFTER HOURS USD56.85 0.200000000000003 0.353045013239188% Volume (Delayed 15m) : 18179 P/E Ratio 1933.4470989761091 Market Cap 29402973005.0272 Dividend Yield N/A Rev. per Employee 84578 More quote details and news » (CTRP), and Guidewire Software GWRE 1.197172941006779% Guidewire Software Inc. U.S.: NYSE USD70.16 0.83 1.197172941006779% /Date(1496696521040-0500)/ Volume (Delayed 15m) : 703914 AFTER HOURS USD70.17 0.0100000000000051 0.014253135689851768% Volume (Delayed 15m) : 8663 P/E Ratio 501.14285714285717 Market Cap 5126814839.99267 Dividend Yield N/A Rev. per Employee 308829 More quote details and news » (GWRE).
Spencer, 43, took over the fund in 2012, having served for eight years as one of its many analysts. These days, he walks a fine line. Tech is a highflying sector, but one where fortunes and stock prices can rise and fall both sharply and suddenly—so the portfolio’s composition can change frequently.
“The turnover isn’t driven by whether we do or don’t like a company, but whether we do or don’t like the stock price,” he says. “You will see wild swings in a stock price in a single year, and we try to use that volatility to our advantage.”
Spencer recently spoke with Barrons.com about why he sees upside ahead for shares of Alphabet (GOOG), and why he has reduced his exposure to Amazon and Tesla TSLA 2.1980285420038252% Tesla Inc. U.S.: Nasdaq USD347.32 7.47 2.1980285420038252% /Date(1496696400208-0500)/ Volume (Delayed 15m) : 6726622 AFTER HOURS USD347.95 0.120000000000005 0.18138892087988023% Volume (Delayed 15m) : 57748 P/E Ratio N/A Market Cap 55823760135.7116 Dividend Yield N/A Rev. per Employee 480787 More quote details and news » (TSLA). Here are some highlights from our conversation.
Barrons.com: What’s your outlook for the tech sector?
Spencer: It’s a volatile industry, but the further out the outlook, the more optimistic I feel. With the Nasdaq bouncing off a record high, I have some valuation concerns. There are many good companies, but it has been difficult to find good stock ideas. My portfolio has grown more concentrated, and I’ve grown slightly more conservative regarding positioning and cash levels. That said, the portfolio includes several companies that are growing revenue and earnings at a 10% to 20% annual pace. Over time, let’s say the next 18 months, that profit growth could digest high valuations.
Q: Have you been buying stocks over the last six months?
A: Certainly. I’ve also been selling some—taking profits when necessary. I have reduced some of our holdings in semiconductors and the internet. I am finding good ideas in the software space.
(as of May 26, 2017)
|T. Rowe Price Global Technology||(PRGTX)|
|Annual Portfolio Turnover:||171%|
Q: What’s your best software pick?
A: Salesforce.com is a big position in our portfolio, standing out as an attractive stock and one of the better-positioned technology companies. Not only does it benefit from the rise of cloud computing, but as a software provider, it is a more durable business than the infrastructure companies. Revenue has grown at a 20% annual clip for the past decade. It is steadily climbing toward a $10 billion revenue run rate and still has years of growth ahead of it. Salesforce has the potential to eventually expand operating margins to 40% and generate tremendous cash flow. Yet the stock is, in a sense, out of favor, rising just 9% over the past year, compared to the Nasdaq’s 26% return.
Q: Salesforce.com has bounced off a record high. How much upside do you see?
A: Salesforce could gain 50% over the next two years.
Q: Another software pick?
A: Ultimate Software is another cloud play, providing payroll and accounting software. It is an incredibly resilient business with monthly subscriptions paid by thousands of small customers. The company has grown revenue at a 20% annual clip for the past decade, and is gaining market share from much bigger companies, such as Automatic Data Processing ADP 0.11883541295306001% Automatic Data Processing Inc. U.S.: Nasdaq USD101.1 0.12 0.11883541295306001% /Date(1496696400272-0500)/ Volume (Delayed 15m) : 2995031 AFTER HOURS USD101.1 % Volume (Delayed 15m) : 143542 P/E Ratio 26.094362998141648 Market Cap 45179463671.7255 Dividend Yield 2.255192878338279% Rev. per Employee 214267 More quote details and news » (ADP) and Paychex PAYX 0.5567740846971486% Paychex Inc. U.S.: Nasdaq USD59.6 0.33 0.5567740846971486% /Date(1496696400257-0500)/ Volume (Delayed 15m) : 1521553 AFTER HOURS USD58 -1.6 -2.684563758389262% Volume (Delayed 15m) : 140742 P/E Ratio 26.968325791855204 Market Cap 21292628285.1782 Dividend Yield 3.087248322147651% Rev. per Employee 230119 More quote details and news » (PAYX).
Q: It’s up almost 7% over the past year, but Ultimate Software has dramatically lagged the Nasdaq. Why?
A: I can’t really put my finger on any one thing. It’s an off-the-radar name for many investors. It is durable and consistent, but not sexy, so it can get overlooked.
Q: What are the other attractive investment trends in the tech sector?
A: Technology is penetrating the industrial space and other areas where it hasn’t historically played a role, which opens big new markets. Data centers, network equipment, and personnel computers have become commoditized, making it hard for companies to grow profit, sustain margins, and compound value. But look at Amazon.com and Priceline Group PCLN -0.23101753201544337% Priceline Group Inc. U.S.: Nasdaq USD1891.58 -4.38 -0.23101753201544337% /Date(1496696400253-0500)/ Volume (Delayed 15m) : 322138 AFTER HOURS USD1890.05 -1.52999999999997 -0.08088476300235782% Volume (Delayed 15m) : 5524 P/E Ratio 42.68968630106071 Market Cap 93224347807.6905 Dividend Yield N/A Rev. per Employee 595367 More quote details and news » (PCLN). Tech companies didn’t have a big role in either retail or travel, until these two companies got flywheels going. Now they dominate their industries.
Tesla is another example of the theme. The electric-car maker has set an aggressive production goal—one million cars a year by the end of 2020. No one thinks Tesla can hit that number. If it does, it’s a wild success for Tesla, but still a drop in the bucket compared to the size of the global automotive market. That leaves lots of room for growth.
Top 10 Holdings
(as of May 31, 2017)
|Alibaba Group Holding||(BABA)|
|Taiwan Semiconductor Manufacturing||(TSM)|
|Ultimate Software Group||(ULTI)|
|Source: T. Rowe Price.com|
Q: Is Tesla your best play on the trend?
A: I’ve actually reduced my position in Tesla because of its valuation. It is a great example of the theme, but the stock is not that attractive right now.
Q: So what is the next Amazon.com or Priceline?
A: There are a few names. Netflix is still very attractive, though certainly not undiscovered. It faces a long growth runway. Not only is the content growing richer, but the international business may finally become an accelerant for subscriptions and revenue. Netflix is going to be bigger than anyone else in the space, and it will be hard for rivals to catch up.
Another stock is Ctrip.com. The online travel company is trying to do in China and Asia what Priceline did in Europe and the U.S. It’s a fantastic company with great growth opportunity.
And finally, there’s Guidewire, which makes software for the insurance industry. It’s a field with lots of opportunity as we see financial companies use more software.
Q: How much upside do you see for these three stocks?
A: Netflix could gain 20% to 30% over the next year or two, and then climb considerably higher as more time passes. Ctrip.com has less near-term upside, perhaps 10% to 15%, but should deliver better returns as time passes. Guidewire is in the same bucket, with 10% to 15% near-term upside, but more to follow.
Q: Alphabet and Amazon.com are among your top 10 holdings, but the fund does not own either Apple or Facebook. Why?
A: Since I don’t construct the portfolio with a benchmark in mind, Apple’s big weighting in the MSCI ACWI Information Technology Index didn’t enter my calculus. Apple is a great company that I respect enormously. Yet with its $800 billion market value and the challenge of growing sales and profit off such a large base, I thought it would be difficult to sustain and compound value. The stock has done really well, so it was a miss on my part. I can make a similar argument for Facebook, with its $440 billion market value. Profit margins are as good as they will ever get, and they could compress if Facebook has to make big investments in the business. Usually, that’s not good for a stock price.
Q: Twilio TWLO 0.4024144869215292% Twilio Inc. Cl A U.S.: NYSE USD24.95 0.1 0.4024144869215292% /Date(1496696521228-0500)/ Volume (Delayed 15m) : 2022963 AFTER HOURS USD25.1 0.150000000000002 0.6012024048096193% Volume (Delayed 15m) : 9355 P/E Ratio N/A Market Cap 2248470058.14111 Dividend Yield N/A Rev. per Employee 418311 More quote details and news » (TWLO) was a big initial public offering last year but suffered a dramatic reversal. Is this a buying opportunity?
A: It is hard to say. Twilio endured a massive one-day selloff in May when the company revealed that Uber, one of its biggest customers, will be reducing the use of its services. I like the company, and we still own the stock. We haven’t done much with the stock since the pullback, but we are spending more and more time on it. I want to make sure that Uber isn’t a long-term trend that will spread to other customers.
Q: What have you been selling?
A: I’ve cut back on a lot of things. Stock prices are up and sentiment is very positive. In my experience, it makes sense to be a little more cautious when there is this level of optimism.
I’ve reduced my Amazon stake by a significant degree. At the stock’s current price, it’s difficult to see substantial appreciation. I’ve cut back on ASML Holding ASML.AE -1.1432813659985153% ASML Holding N.V. U.S.: Nasdaq USD133.16 -1.54 -1.1432813659985153% /Date(1496696400354-0500)/ Volume (Delayed 15m) : 513260 AFTER HOURS USD133.2464 0.0863999999999976 0.06488434965455092% Volume (Delayed 15m) : 6255 P/E Ratio N/A Market Cap 58903749093.4577 Dividend Yield 0.9816731751276659% Rev. per Employee 487006 More quote details and news » (ASML). The semiconductor-equipment stock has done well, but it’s another name where it’s difficult to see intermediate-term upside.
Q: Are you also cautious on Alphabet?
A: No, because I still see meaningful upside. The stock price is up, but not as much as Amazon, Facebook, and other internet companies, so its valuation isn’t as rich. Alphabet is growing revenue at a 20% annual clip, though that future growth could slow to a range of 15% to 20%. The stock could climb 10% to 15% in the intermediate term and higher down the road.
Q: Last question. Snap SNAP -4.172593646277857% Snap Inc. U.S.: NYSE USD20.21 -0.88 -4.172593646277857% /Date(1496696430633-0500)/ Volume (Delayed 15m) : 14917047 AFTER HOURS USD20.2 -0.0100000000000016 -0.04948045522018803% Volume (Delayed 15m) : 308058 P/E Ratio N/A Market Cap 24864937965.88 Dividend Yield N/A Rev. per Employee 277209 More quote details and news » (SNAP) is another stock that fared badly after a much-awaited IPO. Is this a buying opportunity?
A: We bought the stock at the IPO. It was a very small position, which reflected our level of conviction in the stock at the time. I liked the company’s management team and saw them as entrepreneurial. The company had a high relevance with the teen demographic, which is a hard-to-reach group for advertisers. But Instagram has been upping its game and copying many of Snapchat’s features, which is something investors need to watch carefully.
Q: Thank you for your time.