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Technology trends, for better or worse

CIBC's Mark Lin buys into e-commerce and smartphones, but he's wary of sky-high valuations in the cloud.

Diana Cawfield 10 September, 2015 | 5:00PM
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Global technology specialist Mark Lin, vice-president and portfolio manager at CIBC Asset Management, has set aside some cash during the recent market swings.

"I don't see many attractively priced opportunities just yet," says Lin, "but if the markets continue to correct from the current levels, such opportunities should increase."

He also does not see the current market volatility affecting the operations of most of the large established companies. Today, the largest technology companies are supported by "real earnings and real cash flow," unlike many of the companies whose stock prices collapsed during the tech bubble in 2000.

However, Lin notes that share prices and valuations recently have been quite volatile, particularly for China-based Internet companies and U.S. semiconductor companies. "As for China, a sharp slowdown in the economy may have a material impact for  Apple Inc. (AAPL)," says Lin, "as the country is a very important market for iPhone 6. More than 70% of Apple's revenue comes from iPhones."

The CIBC technology-stock mandate's weighting of 80% in U.S. equities reflects the fact that the majority of the technology leaders are based there.

A buy-and-hold investor, Lin typically has a five-year holding period. He seeks companies that can consistently grow with low volatility throughout a business cycle. His holdings must generate at least 10% earnings per share and a minimum of 4% revenue growth.

For example, CIBC Global Technology, which Lin manages, has large holdings in payment companies like  Visa Inc. (V) and  MasterCard Inc. (MA). "People are using more electronic money versus cash, and there's no going back," he says. "Even in emerging markets where a lot of people still use cash, it's also heading that way."

Other e-commerce holdings include online travel agencies, such as  Expedia Inc. (EXPE) and  Priceline Group Inc. (PCLN). "These are growing into undisputable leaders in that field that are hard to challenge, and their market share is not likely to shift," says Lin.

Mobile devices are also enjoying strong growth. "Smartphones are serving as a platform to pretty much everything," says Lin. "Eventually the world is going to move to everyone having one smartphone."

Market penetration for smartphones is still pretty low in emerging markets but Lin believes there is huge potential. He says China has about 700 million Internet users right now. Out of a total population of 1.4 billion it's not inconceivable to see at some point a billion users. There's "tons of opportunities" for revenue growth from app-related fees.

Lin is also looking to capitalize on the growth of the "sharing economy," which he believes is underutilized. This includes car-sharing services such as Uber, or Airbnb through which people can rent a portion of their home to travellers.

One trendy segment that Lin is avoiding is cloud computing. Though there's a "new breed" of companies that is growing rapidly, he says they're trading at very high multiples. "Not everyone will win in this segment," he warns.

As some technology segments gain momentum, others are in decline. An example of the latter is the trend among consumers to "cut the cable," cancelling their cable-television subscriptions in favour of video-streaming services like Netflix. Because of their lower fees, lack of commercials and on-demand nature, the online services tend to be particularly attractive to millennials. "If you want a company to grow in the future, you have to adapt to what young people want," says Lin.

Also in decline is the personal-computer market. Lin says Internet browsing is very easy to do with a tablet, supplemented by a phone, and with convenience and flexibility that a desktop can't match. "That's why  Intel Corp. (INTC) is facing such a big challenge," says Lin, "Their biggest market is shrinking, so they have to find a way to diversify."

In positioning CIBC Global Technology, assuming market multiples don't change, Lin says "we do see our fund delivering double-digit growth in terms of intrinsic value. The world is moving toward an Internet-based economy. China and India are countries that have huge populations and there will be new opportunities to market. Many of them are not even born yet."

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About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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