The last quarter of 2022 saw a lot of uncertainty in the financial markets, due to various economic and geopolitical factors creating higher inflation levels — forcing central banks to tighten their monetary policy by increasing interest rates.

There are reasons for optimism, with significant drops in natural gas prices and data showing that inflation could have reached a peak, but we will have to follow the situation carefully to see where we are heading.

Investors in general, and growth stocks investors in particular, have had a tough 2022. Major stock indices posted their worst year since 2008, but the S&P 500 gained 7.82% in Q4 2022; and while the Nasdaq, a recognised growth stocks benchmark, had fallen by as much as 30.09% in 2022, it gained 1.28% in the last quarter of the year (as of 6/1/23).

In this article, we introduce an alternative strategy to investing in growth companies while partially hedging the portfolio, by betting against a particular competitor or the entire market just in case the market will continue its decline. To do so, first of all, we will explain how to hedge your portfolio using short positions.

How to hedge your portfolio

In periods during which the markets behave negatively, it is essential for investors to know how to take advantage of it, or at least know how to protect their portfolio. In fact, billionaire investor David Tepper, who is known to be long and optimistic,mentioned in a recent interview that he is also shorting the market.

“I’m gonna lean short. I’ll be short bonds,” says David Tepper. “I’m an optimist but I would lean short on the equity markets because so many central banks are telling me what they’re going to do.”

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As is logical, to hedge your investments, you should take positions contrary to those you already have in your portfolio. This is mostly done through Contracts for difference (CFDs), since they allow you to utilise leverage and open a short position.

When you trade CFDs, you can essentially buy an asset (go long) or sell it (go short), which allows you to profit from any price movement, either up or down.

Two examples of strategies

Keeping all of this in mind, in this article, we introduce two alternative strategies to invest in growth companies from the technology sector, while partially hedging your investment with short positions in other assets. The strategies for Q1 2023, presented as examples and not as recommendations to buy or sell any securities, are the following:

Long: Taiwan Semiconductor Manufacturing Co.; Short: Intel

This strategy focuses on the semiconductor industry and consists of taking a long position (BUY) in Taiwan Semiconductor Manufacturing Co Ltd, one of the most efficient companies in the sector, and a short position (SELL) of the same size in Intel, a company with an old business model that has been struggling against its peers for years.

By taking simultaneous positions, you are predicting that Taiwan Semiconductor Manufacturing Co Ltd will perform better than Intel in the given investment period, without depending on what the industry does in general, because through this trade you are betting on one company against the other.

Long: Taiwan Semiconductor Manufacturing Co Ltd (TSM)

EN-Growth-TSM-Stock-Graph

Past performance is not an indication of future results.

  • Taiwan Semiconductor Manufacturing trades in the electronic technology sector and is the world’s largest semiconductor foundry company which manufactures and sells semiconductor devices internationally.
  • Over the next few years, the top drivers of growth in the electronic technology sector are expected to be wireless communications, automotive and Internet of Things (IoT), while the strategic priorities will be focused on talent development and retention, supply chain flexibility and M&A.
  • Regarding its financial results in Q3 2022, Taiwan Semiconductor obtained a net revenue of $20.23 billion, while its operating margin stood at 50.6%. For the last quarter of the year, the company provided a very similar guidance of between $19.9 and $20.3 billion of net revenue and an operating margin of between 49–51% which is very encouraging.
  • In December 2022, Taiwan Semiconductor started volume production of its most advanced chips, with 3-nanometer technology, in southern Taiwan, adding to its expansion plans with its new Arizona plant and potential expansion into Germany, while building a chip plant in Japan.

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Short: Intel (INTC)

EN-Growth-INTC -Stock-Graph

Past performance is not an indication of future results.

  • Intel Corporation is the world’s largest manufacturer of integrated circuits based on annual turnover and is also part of the electronic technology sector. The American company, based in Santa Clara, California, is the creator of the x86 series of processors. The x86 series is one of the most used processors within personal computers.
  • Given the economic and geostrategic importance of the semiconductor industry, and the electronic technology sector in general, there is a global race to innovate and produce the next generation of high-tech semiconductors in a broad range of sectors, and this tendency is expected to continue in the coming years.
  • Intel’s third-quarter results showed a revenue of $15.3 billion, including restructuring charges, down 20% YoY due to worsening economic conditions, with the company focused on driving $3 billion in cost reductions in 2023. The third-quarter EPS was $0.25 — which is negative when compared with TSM.
  • Intel’s problems are likely to persist during Q1 2023 and beyond. Its main concern is the reduction in sales of its PC and smartphone segments, while the company tries to apply a strategy of capacity expansion and effective cost management.

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Long: Palo Alto Networks; Short: NASDAQ100 Index

In the second example, the strategy focuses on the cybersecurity sector and consists of taking a long position (BUY) in Palo Alto Networks, one of the leading companies in the industry, and a short position (SELL) of the same size in the NASDAQ100 Index, an index that reflects the evolution of technology shares as a whole.

By taking simultaneous positions, you are hoping that Palo Alto Networks will outperform the NASDAQ100 Index, meaning you are speculating that this particular company will outperform tech companies in general, in the given period.

Long: Palo Alto Networks (PANW)

EN-Growth-PANW-Stock-Graph

Past performance is not an indication of future results.

  • Palo Alto Networks is an American multinational cybersecurity company based in Santa Clara, California, whose core products are a platform with cloud-based offerings and advanced firewalls that enable the prevention of cyberattacks with an automated approach. This company trades within the information technology sector.
  • The cybersecurity industry, found in the information technology sector, will experience significant changes in the coming years. As more systems are connected to online networks, we can expect to see more threats and outages, while the talent shortage will continue. However, the cybersecurity space is historically resilient in tough economic times.
  • In the first fiscal quarter of 2023, Palo Alto had a total revenue of $1.6 billion, which grew 25% year-over-year, while its net income was $20 million, or $0.06 per diluted share. Meanwhile, its remaining performance obligation increased 38% YoY to $8.3 billion, which is much better than what the Nasdaq as a whole showed.
  • Last year, Palo Alto Networks extended its partnership with Google Cloud to bring customers a comprehensive cloud-delivered Zero Trust solution. The company also announced new features on safeguard applications and the latest version of its industry-leading PAN-OS software, which brings many product updates and innovations.

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Short: NASDAQ100 Index

EN-Growth-NSDQ100-Stock-Graph

Past performance is not an indication of future results.

  • The NASDAQ100, is a United States stock index and, therefore, trades within the indices sector. It includes 100 stocks of the most relevant companies in the technology industry, which are listed on the Nasdaq stock market and are part of many sub-sectors like hardware, software, retail, biotech and telecommunications.
  • During 2022, investors pulled out funds from tech stocks at a record pace, leading to the technology-based NASDAQ Index falling in line. Investors will have to pay attention to a possible “pivot” from central banks in the coming months that could bring relief to the sector.
  • In this instance, however, you are shorting the NASDAQ100, so you are hoping to gain in this position if the price falls. The index lost -29.30% in 2022, but gained 1.04% in the last quarter; so it is worth waiting to see what happens with the so-called “soft landing,” since it still seems possible to reduce inflation while avoiding a recession.
  • Nasdaq’s revenue for the twelve months ending September 30, 2022 was $6.110B, a 3.89% increase year-over-year. The Nasdaq’s annual revenue for 2021 was $5.886B, a 4.64% increase over 2020.

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