August 2023

Insights

The Good: The High Street Golf Day

This month brought us a highlight we eagerly anticipate every year: the annual High Street golf day hosted at Parkview Golf Club. Against the picturesque backdrop of Johannesburg’s fantastic weather, our valued clients, and partners joined us for a memorable event. A field of 56 participants showcased their golfing prowess, which saw some impressive golf being played on a firm and demanding setup put forward by Parkview Golf Club.

The chosen format for the event was a fourball alliance with two scores to count. Emerging victorious with an impressive 88 points winning on a count-out, we applaud James Whitehouse, Craig Clucas, Andrew Wilson, and Rob Stretch for their exceptional performance. Not far behind also on 88 points, securing second place, were Karen Wales, Jax Clucas, Sandy Ainge, and Gill Randall. In third place, Mike Omand, Gary Braithwaite, Jarred Breen, and Colin Alexander claimed their spot with an admirable 87 points. On a different note, it’s important to acknowledge the perseverance of the team comprising Ian Patchitt, Reg Besseling, Shaun Mc Cormack, and Andre Brink, who navigated a seemingly more challenging course and secured the longest day award.

 

 

Source: High Street Asset Management

 

There were also some individual performances worth noting with a closest to the pin award on the 5th hole going to Peter Ebell and the longest drive on the 12th being awarded to Shaun Mc Cormack. Much like the longest day award, we have to acknowledge the challenges faced by some of our golfers out there. There was also a notable bout of misdirection by Travers Metherell, unfortunately playing a slightly different course design – losing his way on the final hole and landing up in the carpark rather than the 18th green. Some impressive golf knowledge was also on display, with Greg Vercellotti receiving an award for answering a question about who won the 1965 US Open before the question was even finished. Perhaps there might have been some prior experience answering a similar question at a previous event.

Overall, the annual High Street golf day was a resounding success, marked by friendly competition, camaraderie, and plenty of fun. A special thanks must go out to our partners, Prescient, DMA, Standard Bank and EasyEquities for their generosity and support for the event. We would also like to thank all that participated in the festivities and look forward to next year’s instalment.

The Bad: Partly Cloudy

We’ve all heard about the macroeconomic situation, where a multitude of companies have been impacted by the rise in input costs and interest rates. Finding ways to maintain healthy margins has meant that companies have had to reduce expenses to meet these objectives, ranging from staff layoffs to infrastructure changes. Impacted by these measures have been software-as-a-service (SaaS) companies, who have been hit by a wave of companies implementing cloud optimisation strategies. This is the process of reducing expenses relating to cloud infrastructure. Datadog, a cloud observability platform that we hold in our Wealth Warriors Fund, lowered revenue guidance by 2% on the back of this negative environment, despite having beaten operating profit and free cash flow by 27% and 94% respectively. We are confident in the recovery of this technology sector, which was corroborated by Datadog’s management, who stated that they are seeing signs that the cloud optimisation across their customer base may start to subside. Additionally, Amazon’s management mentioned that they are seeing ‘more customers shift their focus towards innovation and bringing new workloads to the cloud.’

 

 

Source: TechCrunch

Cyber security has also been impacted by this macro environment, evident with companies such as Fortinet and SentinelOne having forecasted weaker than expected revenue in the coming quarter. However, the importance of cyber security cannot be underestimated. It was mentioned in June’s ‘The Good, The Bad, and The X’ newsletter that global companies had data breaches that cost them a whopping $4.35 million on average in 2022, a number that is forecasted to increase in the coming years. This surge means that protection from cyber-attacks will become a non-negotiable cost of business, and we remain confident in the long-term investment case for this sector and maintain our overweight position.

& Mike the Greek

High Street CEO Mike Patchitt shares his expertise on the impact that the derivatives market can have on share prices…

Over the years, options trading has become a popular alternative to traditional stock trading. The options market is massive, with some analysts estimating its size to be more than 10 times that of global GDP. Options are often written by banks, which charge a premium for the right to buy or sell an asset at a specific price. To manage the associated risks, banks engage in hedging by trading the underlying stock to balance their books. This trading can exacerbate movements in share prices, which is why it can be helpful for investors to understand the “Greeks” – a set of calculations that measure the sensitivity of an option’s price to its underlying parameters.

While there are a number of Greeks, we will focus on “Delta” and “Gamma” here. Delta measures how an option price changes relative to the underlying asset price, while Gamma measures the rate of that change. Think of Delta as the speed of your car, and Gamma as the speedometer that tells you how quickly you’re accelerating or decelerating. While knowing your speed (Delta) is important, knowing how quickly you can accelerate or decelerate (Gamma) is crucial for making quick manoeuvres. Gamma becomes most important when options near their maturity, as banks are forced to trade constantly to hedge their exposure.

 

Source: SMB Capital

This continuous trading can give rise to a phenomenon known as a “Gamma Squeeze.” This occurs when the share price moves quickly from banks unable to cover their liabilities. This creates a feedback loop that can dramatically increase/decrease the share price in a short period. One notable example of an increase was during the “meme stock” mania of 2021, when bankrupt cinema chain AMC rocketed over 500% as bullish investors left banks scrambling to cover their positions. To a lesser extent, Nvidia’s movement after their recent results suggests a Gamma Squeeze might have occurred that suppressed the share price, as it remained muted despite the company posting top line growth of 171% and increasing their gross margin by 5 percentage points. Although investors like High Street are much better served by focusing on the company fundamentals, an understanding of options and Greeks can offer valuable context for why markets move in the short-term as well as give insights into potential opportunities for the long-term.

 

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