Terry Smith continues tech buying spree as shares drop

The investment veteran has bought a new holding that has seen its share price fall sharply in recent months.

Never one to go with the crowd, star stock picker Terry Smith has continued his strategy of buying technology stocks as share prices plummet in the face of rising interest rates and inflation.  

The Fundsmith Equity manager, a member of the interactive investor Super 60 list, added creative software giant Adobe (NASDAQ:ADBE) to his giant £25.5 billion strategy in April. He bought Alphabet (NASDAQ:GOOGL) (Google) shares for the first time in February this year and Amazon (NASDAQ:AMZN) shares in August last year.

The portfolio has 27.1% invested in “technology”, including top holding Microsoft (NASDAQ:MSFT), Facebook-owner Meta (NASDAQ:FB) and payments firm PayPal (NASDAQ:PYPL). The only technology giant he does not own is Apple.

Technology stocks have dropped in value over the past six months due to central bank willingness to dramatically raise interest rates to control inflation. Higher rates eat into the perceived value of future profits and therefore hurt technology stocks whose valuations are based on rapid growth.

Since the peak for the sector in November 2021, Adobe shares have fallen 41%, Meta shares are off 36%, Alphabet shares are down 21% and Amazon shares have fallen 33%.

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Smith is not a dedicated technology investor, but pledges to “buy good companies” – those that have loyal customers, high profit margins and reliable growth.

But he refuses to overpay for such companies and tends to use periods of market weakness to initiate positions.

On buying Amazon last year, he said it had becoming better at productively investing its cash flows, but the shares had moved sideways for a year. He bought Alphabet after a 10% drop in shares, praising its emerging cloud computing operation.

Adobe owns widely used software programmes that are critical for businesses, such as photo editing tools Photoshop and Lightroom. It has grown revenues 20.5% annually over the past three years and profits 23% a year over this period, according to financial data firm Morningstar.

Dan Romanoff of Morningstar said: “Wide-moat Adobe reported solid first-quarter results for 2022, including increases in revenue and digital annually recurring revenue.

“Revenue growth with continued cost management as offices slowly reopened drove profitability, which we expect to remain a strong suit for the company in the long term.”

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Smith also revealed that he bought Mettler-Toledo (NYSE:MTD), an American scales and analytics instrument manufacturer, in April.

Speaking to interactive investor in March 2021, he said that Adobe and Mettler-Toledo were companies that met his strict investment criteria but had not yet made it into his portfolio.

Fundsmith Equity has fallen 13% this year compared with a 5% drop for the MSCI World index of global shares. Since launch in 2010, it has returned 481% compared with 267% for its benchmark.