2023 has been the year of the tech trade, but this rally also has mega-cap names trading at egregious valuations. At some point, value is going to matter again, but is it possible to gain exposure to disruptive innovation without paying such a premium price? Thomas George and Scott Willis, portfolio managers for the Grizzle Growth ETF, believe the answer is yes. Their fund targets the “disruption at a reasonable price” theme and they join the ETF Think Tank to discuss their process.
The obvious first question is how artificial intelligence fits into their strategy. George says that AI is the clear “next big thing”, but he’s not sure there’s a consensus on that yet. In terms of the fund, he looks at the picks and shovels. NVIDIA and AMD are getting hyped right now and he feels that the incumbents have so many advantages that it’s really theirs to lose. He says that he can see the big names scooping up the emerging names or one of the juggernauts mimicking smaller companies’ software and effectively driving them out. His team was hesitant on chips at first, but once they understood NVIDIA, he felt they needed to own it. He’s also big on Microsoft, feeling that the incumbents really have an advantage in this space.
GRZZ’s management style specializes in a “barbell” approach. George notes that there is disruption in the technological world and the physical world. Years ago, natural gas would have been considered disruptive to the oil industry. On the commodities side, copper and lithium are underfed. NextEra, for example, will always be on the cutting edge. In the utility category, there’s nothing else that comes close. Utilities have all the dinosaurs, but there are a couple of emerging names that are really interesting.
One notable underweight in the fund is Apple. George’s idea was to go long the picks and shovels FANG and go short the others, such as Apple and Netflix. It was a good way of getting the targeted exposure they wanted. The other big name the fund is missing is Tesla. The competition against Tesla by other automakers is ramping up and that will keep getting worse. George says his feeling is that the sweet spot for Tesla has passed and his position isn’t a statement about Elon. It’s based on increased competition. They’re bullish on the thesis of electric metals, but less so on electric vehicle manufacturers.
At what point is the disruption more important to own and to worry less about the price? George says that it’s always about a reasonable price. If you have a long-term view, the growth trajectory should make it easier to swallow. If Amazon is trading at a 100 P/E, that’s not very DARP, but sometimes a company is just different from the others. If you’re growing at such a high rate, you have to evaluate current valuation metrics versus where you think it could be down the road. Amazon several years ago is where NVIDIA is right now. P/E ratios are huge, but expected growth is so huge that it will look like an attractive entry point years down the road.
The other major development in the space is Blackrock filing for bitcoin ETF. They’re 17th in line filing for physical bitcoin ETF, but is this the product that finally gets approved? It’s interesting that this happened right after the government went at Coinbase. The big question is why would they do this if they knew they’re going to be denied? A physical bitcoin ETF would clearly push more people into bitcoin. George says he’ll be curious to see how the bitcoin maxi market takes it if BlackRock gets this product approved.
Other key takeaways:
- George says that his fund isn’t going for the home runs, they’re trying to avoid the misses.
- GRZZ’s 15% position in Microsoft might be considered a huge overweight, but Microsoft is a heavyweight. The idea is to provide participation on the upside but some protection on the downside while focusing on risk-adjusted returns. It gives us an opportunity to demonstrate that DARP can work.
- The preference for GRZZ is organic growth. Acquisitions tend to be smoke & mirrors. They need to see some cash flow within a reasonable period of time and a growth trajectory. Their sweet spot is 4-6 years, but it really can’t be longer than 6.
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