New technologies take time to mature and in the beginning they are more about hype and hope than a viable business.
Blockchain is a good example. Many of the startups of two years ago aren’t around anymore, highlighting the rule of thumb that says: Products first out of the gate aren’t necessarily the ones that win the race.
The question for investors is how to go about it? A conservative approach is to invest in companies that have the most to lose by not keeping up with the times. These mature players want to stay on top and have the wherewithal to invest in R&D, acquire startups, and the leeway to make mistakes. All the while they pay dividends generated from core businesses. Move into new players as they mature.
Some of today’s leaders include IBM and Microsoft (which I own) as well as Visa, Mastercard, PayPal and Accenture. Logistics companies, including FedEx and UPS are early adopters, aggressively using this technology during the pandemic to move goods faster and ensure the right package ends up at the right address.
Another option involves ETFs that blend holdings of large capitalization players with the smaller companies on the rise. As the emerging companies mature the mix changes, replacing large cap companies with emerging ones.
Here is an example of each.
Harvest Portfolio Blockchain Technologies ETF (TSK: HBLK) Closed Fri. Dec. 4 at $13.75.
Background: Harvest launched this ETF in 2018 just as the blockchain hype peaked. A dotcom-like bust followed and Blockchain funds crashed the following year. The shakeout has seen many early players disappear as new ones with better business models emerge.
Performance: HBLK was launched at $10 per unit and fell to a low of $4.62 this spring during the pandemic sell off. It has rebounded strongly and year-to-date, the unit price is up 117.5% to $13.75.
Discussion: The large companies, which account for 45% of holdings, have benefitted from the general run up in high-tech stocks, including Microsoft and Accenture. Many of these firms offer IT consulting and services related to blockchain applications. The large-cap holdings will continues to decline as the list of emerging players grows.
“We designed the fund to participate in the technology over time,” Mr. MacDonald says.
Holdings: The top 10 holdings account for 56% of the fund. The top three are Conduent Corp., (9%), which is a 2017 Xerox spin off; Virtusa Corp., an IT consultant (7.4%); and Galaxy Digital Holdings Ltd. (5.9%), a merchant bank dedicated to digital assets and blockchain technology. Infosys, Microsoft, Visa, Accenture, and Oracle are among the top 10.
Key metrics: The fund had an average market capitalization of US$181 billion through Nov. 30. The dividend yield is 0.79% and the management fee is 0.65%. It has $8.9 million in assets.
For investors with an eye to blockchain’s potential, the mature companies offer balance and the emerging players provide growth potential.
IBM (NYSE: IBM) Closed Fri. Dec. 4 at $127.16. All figures in U.S. dollars.
Background: International Business Machines is one of the world’s largest technology companies with operations in over 175 countries. It is betting heavily that investments in cloud computing and artificial intelligence will offset slowing growth in its mainframe and consulting segments.
IBM spent $34 billion in 2018 to buy Red Hat Inc., the open source software company. Red Hat users can make changes to its software under license and then resell it, which helps IBM expand its artificial intelligence and blockchain initiatives.
Performance: The shares hit a high of $158.75 in early February, but the pandemic sent them tumbling to $90.56 mid-March. They have recovered some of that ground, but year-to-date IBM is off 5.1%.
Recent developments: In mid-October, IBM posted a third consecutive quarter of declining revenue, which fell 2.5% year-over-year to $17.6 billion. Earnings per share of $2.58 met expectations.
Just before releasing those results, IBM announced the spin-off of its infrastructure services operation, allowing the parent to narrow its focus on cloud computing and AI. The infrastructure unit helps clients manage day-to-day IT needs including data centres. The spin off should be complete by late 2021. IBM shareholders will receive the spin-off tax-free.
IBM subsequently announced 10,000 jobs cuts at the infrastructure unit to lower costs ahead of the spin-off. The cuts affect about 20% of the staff and should be completed by June.
Dividend: Despite weaker earnings, IBM raised its quarterly dividend by a penny to $1.63 per common share ($6.52 a year) in April. It marks the 24th year in a row the dividend has increased. At current prices, the yield is 5.24% and appears safe.