Tom Antony Illustration by Joel KimmelThe Globe and Mail
Although some investors fear artificial intelligence stocks are in a bubble that’s set to burst, money manager Tom Antony remains bullish on the technology for the long term.
“There are excesses in the AI space, but in general, the bigger companies are not expensive,” says Mr. Antony, founder and fund manager at Toronto-based Peregrine Investment Management Inc., who oversees about $350-million in assets. About 60 per cent of his portfolio is technology stocks, including large-, mid-, and small-cap companies.
“You have to have some exposure to AI. It’s a very important revolution, probably as big as the internet, if not bigger.”
On the markets, in general, Mr. Antony remains “cautiously optimistic.” His caution is with the large deficits that many governments, including those of the United States and Canada, are running.
Still, he notes that recent economic shocks from higher oil prices don’t appear to be large enough to derail U.S. economic growth. He also expects the resulting rise in inflation to be temporary.
“We expect that inflation should soon revert to its general downtrend of the past few years, which should support the broadening of the market that we have seen this year,” he says.
Mr. Antony also points to the recent strength of the Purchasing Managers’ Index (PMI), a key monthly economic indicator released by the Institute for Supply Management that tracks factory output and gauges the health of the U.S. economy. A reading above 50 indicates sector expansion and the most recent June data came in at 53.3 per cent, the sixth consecutive month of expansion.
“The start of a PMI cycle usually favours a broadening of the market. And so, that may explain why small-caps have seen a meaningful outperformance here over large-caps and we expect this trend to continue,” he says.
Peregrine Fund, which focuses primarily on stocks in Canada and the U.S., has returned 24 per cent so far this year and 51.9 per cent over the past 12 months. Its three-year annualized return is 26.5 per cent while the five-year annualized return is 7.5 per cent. The annualized return since inception on June 1, 2004, is 14 per cent. The performance is based on total returns, net of fees, as of June 30.
The top five holdings in the fund include semiconductor company Advanced Micro Devices Inc. AMD-Q, tech conglomerate Sea Ltd. SE-N, manufacturing online marketplace Xometry Inc. XMTR-Q, e-commerce giant Amazon.com Inc. AMZN-Q and radio-frequency identification devices and software company Impinj Ltd. PI-Q.
The Globe spoke with Mr. Antony recently about what he’s been buying and selling:
Name three stocks you’ve been buying recently and why:
Lightpath Technologies Inc. LPTH-Q, the Orlando-based optics and photonics solutions company, is a stock we bought early this year. It’s a niche photonics company that produces Black Diamond, a proprietary material that can replace germanium in certain infrared optics applications. This has big defence implications because germanium has a very high refractive index. It’s good for its use in optics to identify missiles and drones.
The problem is China has a near-monopoly on germanium mining and has shut it off to the rest of the world. Germanium prices have skyrocketed. But the U.S. Navy, in conjunction with Lightpath, have developed an alternative.
So, we think this company is well-placed to win major contracts, including the Army’s next-generation Stinger missile program, which would materially increase its scale.
We discovered it while talking to regional brokers in the U.S. and bought it about six months ago, believing it has a very large opportunity ahead. Lightpath isn’t inexpensive, but we believe that reflects its large market opportunity.
Sea Ltd. SE-N, a Singapore-based internet service provider company that offers digital entertainment, e-commerce and digital financial services known as Garena, Shopee and Monee, is a stock we bought about six months ago.
Sea operates Southeast Asia’s dominant e-commerce platform and is leveraging that position to become one of the region’s leading digital financial services companies.
In terms of U.S. comparisons, we can think of it as a combination of Amazon, PayPal Holdings Inc., and Block Inc., formerly Square, in Southeast Asia. Amazon recently exited the Southeast Asian market, strengthening Sea’s position.
The company is growing rapidly and trades at an inexpensive valuation. The stock recently got beaten up after it pivoted from prioritizing profits to prioritizing growth. We’ve seen this in the past, and growth investments ultimately and quickly lead to growing profits, generating outsized returns.
We think this is a good entry point in an attractive business. Management is well regarded, and the company has a strong market position with significant growth ahead.
Propel Holdings Inc. PRL-T, the Toronto-based financial services company, is another stock we bought around the end of last year. It’s a lender to non-prime consumers who are often underserved by traditional banks.
Most of its business is in the U.S. Its proprietary AI-driven risk engine enables the company to assess borrowers quickly and at scale, helping drive rapid growth, high profitability, and strong returns on capital.
The stock trades at a low valuation as investors remain cautious about the cyclical nature of lending to this segment of the population. But absent a U.S. recession, which we don’t think is imminent, we believe Propel will generate attractive returns. We also like its seasoned management team, a high return on equity and low valuation, which is usually a winning combination.
Name a stock you’ve sold or trimmed recently.
Micron Technology Inc. MU-Q, the multinational semiconductor company [specializing in advanced computer memory and data storage], is a stock we sold a few weeks ago after owning it for about a quarter. We did really well owning it.
The company’s doing extremely well because of rising demand for memory driven by AI. Ultimately, this is a commodity business in which supply eventually catches up to demand.
I don’t know exactly when [that will happen], but the parabolic nature of the stock’s move frightened me, so I sold it. At some point, the market will sense that supply is catching up to demand.
This interview has been edited and condensed.