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To tap the US tech boom, a quality approach helps filter out the froth

Focussing on the quality of a company and how it's likely to perform is a key part of a high-conviction strategy, says fund manager Claremont Global. It's also a useful strategy for investors who want access to the AI-fuelled tech phenomenon in the US without getting caught up in the noise.

Investors looking for quality stocks, particularly in the explosive US tech market, can be hard-pressed to pick out what’s actually worth their money from the noise – and the artificial-intelligence (AI) boom has added even more froth to the mix. A focus on what truly makes a stock high-quality, and likely to succeed, is key to homing in on the keepers, says Claremont Global.

“We don’t pretend to know what’s happening with the global economy or the next market cycle,” says Bob Desmond, who heads up the $1.4 billion high-conviction fund manager. “What we can know is the quality of a company, and how it’s likely to perform irrespective of market conditions and the wider economy.”

On that basis, Claremont Global has laid out two promising US tech propositions that it expects to underpin the fund’s performance in 2024. As investors see the whopping performance of Magnificent 7 stocks and wonder how to approach this space, the fund manager sees a bright future for some near kin: Adobe (Nasdaq: ADBE) and Alphabet (Nasdaq: GOOGL).

  • Both companies performed strongly in 2023, with Adobe posting a US$4.89 billion revenue result for the third quarter, for 10 per cent year-on-year growth. Alphabet similarly surpassed expectations for the third quarter, thanks to increased advertising and cloud revenues.

    “It’s these companies that best handle the inevitable adversity of recessions and bear markets, with any decline in earnings and value likely to be to be temporary,” Desmond says. “These companies also boast other common traits, such as being conservatively leveraged, not relying on hard-to-predict variables such as interest rate movements, commodity prices and having the capacity to withstand internal and external pressures, whether it be a global pandemic or management change.”

    Alphabet’s results lend further support to the view that the US advertising market, at least, has stabilised, according to Desmond.

    “Further, its cloud revenues increased 28 per cent, the fastest of the three largest US cloud providers, while its reported financials were much cleaner this quarter, following the restructuring charges taken earlier in the year,” he says.

    “We will continue to monitor operating and capital expenditure associated with artificial-intelligence initiatives, and management’s ability to tightly control costs on an ongoing basis,” he adds.

    Another pick, Adobe, has retained a dominant position in the market after recently announcing more than 100 changes and updates across its Creative Cloud platform that will “dramatically advance power and precision for creative professionals”, Desmond says.

    “Adobe Firefly and AI-powered features are transforming Creative Cloud applications, empowering anyone to quickly bring their creative visions to life at the speed of their imagination,” he says. “Since the release of the first Firefly image model in March, there have been more than 3 billion image generations to date – highlighting the customer appeal of this technology.”

    Other stocks in the fund include LVMH, Nike, Visa, Microsoft, Equifax and CME, all based on Claremont Global’s fundamental criteria for its high-conviction strategy.

    “These are the companies we like to own – strong organic growth, a good understanding of their competitive advantage, recurring revenues, low cost to the value delivered, high margins, and low capital intensity, which delivers very strong free cash flow.”

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