Where to Invest Right Now: Top AI, Regional Bank & Biotech Stocks

Joining me now, Kevin Mahon, president and chief investment officer at Hennigan and Walsh Asset Management. Kevin, great to have you back. It's great to be back Caroline. All right. So the S&P 500 just had its best quarter since 2020. Some might assume that means that the market's ready for a breather. But you say not so fast. What gives you confidence. Yeah. If history serves as a guide. And of course this time could be different. But each time the S&P 500 has rallied by 10% or more in a quarter. 88% of the time it's been higher in the following quarter. We also have another potential tailwind. The month of July historically, is a very good month for the stock market. In fact, for 11 consecutive years, the market has been higher. During the month of July, by an average return of 3.2%. I think everybody on the floor right now would take a return of 3.2% for this month, right now, and call it quits. But that doesn't mean there won't be more volatility. Geopolitics. The new chair at the Federal Reserve, and of course, the upcoming midterm election could all throw a monkey wrench into those historical precedence. Okay, so history aside, is this a market that should power higher given the fundamental picture? If you look at the current state of the economy, the economy continues to grow 1% or greater. Not too hot, not too cold. Unemployment is relatively stable right now, around 4.2%. And we also know, based upon yesterday's CPI report in today's PPI report, that inflation is moderating. Of course, that could take up again if in fact, the Strait of Hormuz closes and remains closed for a long period of time. But that's not our base case. So if the economy is in this Goldilocks type of scenario and the fed does nothing with interest rates, yes, I think the market can and will continue to move higher if you continue to follow the money. Investors certainly seem optimistic that the fed will stay on hold now, especially after that inflation data and some commentary from the fed. Yet oil is trading near $80 a barrel. So are we getting ahead of ourselves thinking that inflation might not be so sticky? I believe most investors have already assumed that the US Iran conflict is behind us. It will be resolved and the strait will be open with tankers passing through at regular passage rates. I think that's the risk. If in fact, I ran continues to play their shenanigans and they continue to strike at our military equipment, then the strait could close and then oil prices are going to stay high, elevated for a prolonged period of time. Again, I don't believe that's the base case right now, but that's the biggest risk I see, at least over the next two months. How long are you giving? Two months until you would change some of your bullish views, that maybe this isn't actually behind, it's not behind us, but that maybe we shouldn't price it in? I would say two months is a good time frame. If oil prices stay above $80 and we're at the tail part of August at that point in time, the Federal Reserve doesn't meet in August. Remember that? Me at the end of July? They come back in September. Will they then have to raise interest rates by 25 basis points to help combat those high oil prices? So that would be the concern to me. Again, that's not my base case. I think the Federal Reserve does nothing with interest rates this year. The task force is look to change the way that the fed operates, the way they communicate, the data that they use. But all in all, I think interest rates where they stay, where they are for now and then perhaps they start to shrink the size of the balance sheet. Remember, though, if they shrink the size of their balance sheet as new Chair Wars continues to say he wants to, oh, that means they're selling bonds. As bond prices go down, yields go up on the high end of the curve. And that's not exactly what the Trump administration wants. Okay. So last time you were on last month you had said S&P 8000 by year end. Sounds about right. That's assuming the fed stays on hold. Oil is where and earnings season is what. Know all good questions. So we're on track right now based upon forecasts for another quarter of 20% plus year over year earnings growth. That's almost unheard of. Two consecutive quarters of 20% year over year earnings growth. I think we're setting up for a potential pullback. Why? Because sometimes in life our best isn't good enough. And if these companies come out and they continue to provide record earnings, but it's not good enough and falls short of investor expectations, then we could see a pullback. But I think that pullback will be met with money coming off the sidelines going back into the same areas of the market that have led it higher thus far. And by the end of the year, those that believe that we could be at 8000 by the end of the year could be proven true. But there's going to be more short term bouts of volatility before we get there. Okay, so I know from many times interviewing you you say it's time in the market not timing the market. So we probably shouldn't wait for that pullback to put money to work. So let's talk about where you're putting money to work right now. Last time you were on we talked about your air seven your eye infrastructure plays. We can go back to that in just a second. But this time you've added regional banks to your list. So tell us what's changed and what a week to assess at regional banks. Right. Oh very timely indeed. So financials are really set up for outperformance here. They've been one of the sectors that have lagged year to date. But I'm not necessarily talking about the big money center banks earlier. I'm talking more so about the smaller cap regional and community banks. Remember small caps have outperformed large cap banks thus far. Regional community banks have outperformed the large money center banks so far. And if in fact, their net interest margins continue to improve if interest rates stay where they are, or perhaps decline a little bit more over the next two years, and the economy continues to grow and there's less regulation in the banking space, regional banks should thrive. A lot of ifs, though, what names you'd be betting on right now? Sure. So three names that we currently hold in our premier banking opportunities. Trust. That's smart. Trust. I've all provided double digit returns year to date. All have attractive dividend yields. All have a current or forward P less than ten. And each of them actually allows you to have allocations into regional banks. I'll start with the first one, Tompkins Financial. They got a yield of about 2.8% right now. And they operate in the northeast area. Then there's another one bank, okay. Bank of the Ozarks. They actually operate in eight different states right now. And they got a little bit more attractive yield of about 3.7%. And last but not least, many of the viewers here in the New York area might know it. Provident Financial Services. Their year is 4.1%. They operate in New York, new Jersey, Pennsylvania, and provide wealth services through Beacon Trust. That combination of traditional banking and wealth management will serve these banks well in this environment. Okay so tmp. K p f s the three regional banks I some might be looking at the big banks especially this week that one be getting some FOMO because they're doing quite well after really crushing earnings expectations. Too late to get into those names. I don't think it's too late, but I think you should also consider, as the bigger banks continue to do well as their net interest margins continue to expand, they have more cash on their balance sheet. What could they do with that cash? They could be acquisitive and perhaps buy some of these smaller cap banks that I just mentioned. Okay. So we've talked a lot about some of the rotations that we've been seeing over the past several weeks, which I mentioned. Your a, your AR seven, your AI Revolution seven. Correct. Instead of the Mag seven. Overall though, what's your view on tech leadership where it goes from here? Tech is going to continue to provide leadership for both the U.S. economy and the U.S. stock market. Think about the Mag seven names. They currently account for about 33% of the weightings in the S&P, 541% of the weightings in the Nasdaq 100. But through the first two quarters of the year, they were down 1.7%, not exactly providing the leadership that they had over the previous years. So I introduced the AR seven as a better way to play that technology scene. In fact, my seven names, which are diversified across hardware, software, semiconductors and chips, data centers, cooling solutions and power solutions are up roughly 75% year to date through the first two quarters. Equal weighted. And I'm not suggesting that that's the reason you move into those names, but it's just a means to provide a better, more diversified path to find growth opportunities in the AI revolution without being so concentrated in these hyper scaling rooms. Okay, so let's go through those names quickly. Alphabet and Nvidia. So former mag seven names. Yes Taiwan semi micron digital Realty trust of holdings American electric power. Those are the seven. If you don't own any of these right now can you add all of these here. I think you absolutely can consider Micron Technology. We all know what their stock has done. We all know that SK Hynix now is a competitor to them with their ADR that's now listed on U.S. exchanges. But they're still trading at less than ten times forward earnings. And they can't keep pace with all the demand for their advanced bandwidth memory chips. So if you're looking for memory that's an opportunity. And then I think about a utility name like American Electric Power. Their stock is up over 20% year to date. It's a utility company. Why would their stock be up over 20% year to date. Dividend yield above 2% reasonable valuation. But now they're part of the back door playing to the I Revolution. So that's what I would suggest that your listeners consider other ancillary benefactors of the revolution. That may not be as volatile as the semiconductor names or the software names. Several AI high fliers have recently pulled back, including micron. What dip looks most attractive to you right now? That's not micron, say Corning, SanDisk, Western Digital, Seagate. You know, there's a there's a whole bunch of names that are are read on. How about IBM Big Blue. We keep talking about what's the next phase in the AI revolution when we're still in just batting practice as far as I'm concerned, of a doubleheader of games ahead. But IBM is really at the forefront of quantum computing. They don't get credit for that, but they've been in the quantum computing space for quite some time. They have a strong balance sheet. They have a very aggressive and entrepreneurial CEO who's not afraid to be acquisitive. And they're investing heavily in AI and quantum. So each pullback like I've seen this week creates an attractive entry point. From my perspective. I certainly got a good one yesterday. Moving on from well actually know what of the dips that you've seen. Would you say is a trap right now? Which could you avoid? Dare I say space X? Space X obviously debuted the iPod at a very unreal, realistic valuation. If you consider the fact that they had an operating loss of $4 billion as recently as last year. It's hard for me to justify, as a portfolio manager, adding their name at the price they were commanding when they first came to market. Now as they come back, they could become more and more attractive. But I really need to see a finite business plan for their orbital data centers, their satellite technologies, rocket propulsion. At what point in time will they be profitable? And when is that an attractive entry point? If you had to buy one space X or SK Hynix SK Hynix. Okay. All right. Let's move on from tech. Okay. And I was taking a look at your notes. Healthcare and small cap biotech I guess you still sort of tech their major list again. Oh tell us where the opportunities are. There, what you like. Sure. So let me give you the framework here and some perspective. So over the course of the next few years, there's over 200 drugs that are scheduled to lose their patent protection. 69 of those drugs are deemed to be blockbuster drugs because they have over $1 billion in annual sales each. So where are these large cap pharmaceutical companies going to turn to replace that lost revenue? Well, in my view, they're going to have to be more acquisitive. And they have already year to date, we've seen over $236 billion in announced M&A activity in the healthcare space, which is a 90% increase over last year and the quickest start to a year since 2021. So if you're looking to play the health care sector rotation right now, I think you look at some of these smaller cap biotech names, as opposed to the large cap pharma names, which are having some difficulties right here out of the gate. Can you give us a few of those names? Sure. I'll give you some names. Aloe gene would be one. Arcturus would be another. And I'll stick with the A's. Alchemy. Three different a related biotech names, all developing novel therapies. Whether they're using, the cell therapies, whether they're actually using some of the more advanced ways to to focus on cystic fibrosis, using messenger RNA or mRNA technologies, or even a company like alchemy who's looking to actually dive into those, central nervous system disorders such as addiction, schizophrenia and depression. Three great names that I think all have potential for being acquired over the next two years. We've had a few guests on recently who have said, Eli Lilly is a top pick. Are you avoiding Eli Lilly? No. Not necessarily. Or Johnson and Johnson, some of the bigger names. I just think the better bang for your buck, if I could use that term, and the better chance for more alpha would be picking up one of these smaller cap biotech names who could command a high premium if, in fact, they're acquired. Okay, so to sum it up. Still bullish double expecting potentially some volatility just might not be this summer. Maybe correct this fall. What sector do you have the highest conviction in for the second half of the year? Technology I hate to say technology because we all go back to technology, but if you believe, as I do, that we're still at the beginning stages of the next industrial revolution. And the I infrastructure buildout is still just in its batting practice stages. Well, then there's still going to be billions of dollars spent in that area. So you look for who's going to be receiving the money as opposed to spending the money for the best potential benefactors. If I had to give a second, even though you didn't ask me, I would look into the industrial sector, aerospace and defense, if you like, SpaceX, if you like SpaceX, there are plenty of other companies who operate in space, pun intended. Whether it's a red wire helmet, our best year, aerospace that have solid balance sheets that are doing the things that SpaceX is looking to doing and are more balanced. And then, of course, the defense contractors who are getting billions of dollars sent into them to help countries build out their defense capabilities and modernize their warfare. Give us a few names there. How about Boing Boing obviously has been a net benefactor of several large contracts of late. That would be a large catch defense contractor, a European defense contractor like Bay based systems. And let's look at a smaller cap name like Kratos defense and security, the drone maker. What sector do you have the least conviction in for the second half of the year? That's not energy. Oh, I was going to say energy. I knew you were going to energy. I was just coming out of my mouth and you beat me to it. You would have to look at somewhere like the communication services, consumer discretionary. If the consumer is really stressed as they are right now, given the maximum and record amount of outstanding credit card debt that they have, if interest rates stay where they are not, let's say, move higher but don't move lower if mortgages stay above 6%. That puts a lot of stress on the consumer. And we need consumers to spend for the economy continue to grow. I have two questions left. I was thinking about what order to do them in here. If in two months oil is still near $7,080 a barrel, what's the first change you make to your portfolio because you're less bullish? Do you just sit and cash that for a while? I already don't have the heavy exposure to energy, so I wouldn't be running back into energy, but the themes that I spoke about that relate to following the money, where all the money is being spent, I infrastructure, power solutions, aerospace and defense health care regardless of the price of oil. Those themes don't go away, and corporations aren't going to stop the flow of money going into those areas. But if oil prices get back near $100 a barrel again, and we see a dramatic pickup in volatility, why not just consider the utility sector? You still have the eye play, but now you have some defensive characteristics and good dividends as well. Okay. But utilities, regardless of what energy is doing or just if we see. Regardless of what energy is doing, but if you're looking for new money to add, if we get oil above $100 again, and you want to be invested in the markets as you should be through all periods of volatilities, utilities may be. Worth it. Okay, so finally, if a retailer investor has fresh cash to put to work today, you mentioned a ton of. I was I lost track I think at 14. But then you started giving. What's in the stock. What is the first stock of all of those picks that you would buy today? For, investor with, moderate to aggressive growth? Sure. Tolerance. I would go in video. You didn't even mention. Oh yeah. Nvidia was in my S7. It's still the hub of the I ecosystem. So many other companies benefit from the continued growth of Nvidia. I think they're going to have another record earnings season this quarter. And I think they're going to continue to grow and expand out and diversify their revenue streams as they've done moving beyond chips and into data centers. Okay. And I think Nvidia was or no, I think micron might have been your top pick last time we talked. To mix it up. Yeah. It's I, I guess I shouldn't be too surprised when I call. The seven names. Before we let you go. Of course, we like to play our rapid fire game. I know this or that. You've played many times with us before. Our quick questions. Quick answers. I'll be ready. Ready as I'll ever be. All right, here we go. Cooling CPI priced in or more. Room to run for stocks. More room to run for stocks. Iran back in the headlines. Temporary noise or real risk to the rally. Real rest of the rally. By now or wait for more. Volatility never pays to wait. It's not about timing the market. It's time in the market. Buy when you think appropriate and you have money to. Allocate growth or value. Value. Small caps or large caps. Small cap in most cases depends on the sector, but small cap rotation is real. Best small cap pick right now. Provident financial Services small cap regional community bank. Okay regional banks are big banks. Regional banks. You can only buy one I infrastructure or regional banks. I infrastructure. Health care or financials. Health care. If we're talking about small cap. Utilities or defense. Utilities. Micron or TSMC. Wow that's a tough one. I love both names. They're both in my air seven. But I'll go with micron. Nvidia or alphabet. Ended. More upside from here. Alphabet or Oracle. Alphabet. Better dip to buy Oracle or IBM. IBM. Salesforce or Adobe. I'll go Salesforce. Biggest opportunity outside of the S&P 500. Emerging markets where continue to outperform the U.S.. I think the best way to invest in emerging markets, though, is through a diversified basket of stocks across multiple countries, styles, industries and sectors. But having some allocation to global stocks, notably emerging stocks, will fare well for the balance of the year. All right. We'll leave it there. Kevin Mont, I always appreciate you playing along and thank you for all of your picks. My pleasure. Always good to have you. That's Kevin Mahn, president and chief investment officer at Hennigan and Walsh Asset Management. If you enjoyed this interview, check out our street talk with Art Hogan. He reveals the three sectors he believes offer the best opportunities right now.