A Geopolitical ETF Trade & a 30% Dip Stock — Two High-Conviction Calls from TheStreet Pro

Hey everyone, it is Julie here with Tip Ranks and we are back for another episode of the Street Pros Insight and I have a new guest joining me today for the first time. Welcome to Lewis Giannis. He is a CFA, a CMT and a wealth adviser for high netw worth clients and has more than 30 years of experience in the investment industry. So, welcome Lewis. I'm really excited to chat with you here today. >> Oh, it's going to be a lot of fun. I'm glad to be here. We're we're going to be diving in to a few areas that you see some opportunity right now. And to start things off, we have what I think is a really interesting macro trade that you've been writing about. And most investors, you know, we hear the straight of horm. We think oil prices, energy stocks, maybe defense plays, but your thesis goes in a bit different direction. And we're looking at Asia ETFs. So to set the scene here, we've heard a lot about the straight of Hormuz obviously over the last few months, but for any watchers that maybe aren't familiar, why is this shipping route so important and what impact has this disruption had on global energy markets? >> Well, uh, that's a loaded question because there's so many moving parts to it, but I I think it it's helpful to just step back a minute and say, okay, when was this trigger triggered? What happened right after that? And what set up this trade? And then what are we looking for in the future? So uh you might remember this whole thing got triggered in late February. February 28th is arguably the date that this thing was triggered uh when we had the US and Israeli strikes on Iran that Operation Epic Fury and that's when Iran declared that they were going to close the straight and um you know obviously without any kind of permissions but uh you know that's a a whole another issue but uh that was you know there was a lot of expectations that things were going to get really rough and then there was it was just a lot of uncertainty so a lot of stocks went down. And most of those stocks that went down, you know, had to do with oil prices as well as just being able to ship goods out of that that area. And uh the big issue there is that Asia is a huge importer of oil. They need that oil. It's a choke point really. We have about 20% of the global oil uh you know going through that area. And Asia is a a massive net oil importer. And really, especially when you're looking at South Korea, Taiwan, China, and India, they're the ones that face the highest kind of input cost pressures if if uh oil prices go up. So, that's affecting industries like semiconductors autos manufacturing companies. They got punished really hard right right out of the gate. And you saw those stocks underperform the market really dramatically. And I'd been looking at that time I was looking at well, you know, China was was already pretty inexpensive relative to its own history and relative to other emerging markets and rightfully so. There's a lot of risk there. Uh but sometimes things can get overblown and and a lot of times being ahead of the curve and taking initial small positions and I had argued that it's time to take some positions as this thing came down really hard. Uh I wrote that article on March 23rd. Uh but the reason why this is such an important route really has to do with the the net oil importation as well as key technology that uh is driven by the AI boom and uh and we saw some significant snapbacks in the prices since uh since that article. >> Now diving into some of the actual investment vehicles, you highlighted a few ETFs with high potential gains. Uh so you included MCHI, uh INDA, and AAXJ to name a few there. Can you walk us through a few of these top ETFs that you're looking at and as far as like what their focus is, what they're owning, and what one maybe offers the best risk versus reward in your view? >> Sure. All right. So, uh in this case, there's there's really a couple of crossurrens going on, but let's just start off with EWY, which is South Korea. The biggest holding there is Samsung and it had a huge big initial drop and the main reason was energyintensive chip fab uh you know uh production was being hit by the oil oil prices and jet fuel prices. So that became undervalued and it's part of the future growth. So I really like that setup in that particular ETF. Um and there's others in there as well. I'm just going to name maybe maybe one or two stocks per ETF if that if that's okay. I mean Japan uh the biggest one there that was interesting to me is Toyota. Uh you know Toyota had uh they have a you know huge oil reliance and shipping costs and so that stock was pretty relatively good attractiveness there and the airline companies. Um in India uh Reliant Industries would be the probably the the most notable one. They were uh their margins were being squeezed by the crude costs. Um and in Taiwan, the most interesting one I think that the market is recognizing is Taiwan semiconductor in Taiwan. EWT um obviously had a very sharp uh decline in a massive rebound. And so that was one of the big drivers in the outperformance. By the way, the the the both the basket and the AJX did outperform the S&P or has outperformed the S&P so far. Um uh so we'll see if that continues depending on how things shake out. But the thing I want to keep in mind and and and communicate though to viewers is that this is not a a full resolution yet, right? Because we're still as of right now, uh most of the traffic is we're I want to say something like 10% of our full uh uh traffic right now. So we've seen some relief and the stocks have started to show improvement, but we're not we have not had a full relief yet of the situation obviously. >> Yeah. Now you did mention AAXJ to help uh dilute the opportunity by spreading exposure across multiple countries. So how does that diversification potentially improve the setup? I love this question because uh first of all, AAXJ has outperformed the basket that I presented in that article uh by a little bit and the main reason why is because it has more exposure to that AI boom sector and the high the higher volatile uh component. The basket that I constructed is more riskmanaged. So, it has a somewhat smaller position there. uh but it's also more targeted towards the actual straight of hormuz uh having relief there with traffic. So uh I I think that and we have exposure to both of them and and both have have outperformed. So what I would say there about a axj is that it's more market cap weighted and does not have Japan in it whereas the basket that I uh showed does have some Japan in there. Uh it's less exposed to some of the value uh plays. I would say that it does dilute these the straight of hormuse play a bit but so far it's outperforming just because of that AI boom component of it but that's not the only component of it there's also the uh the industrial side the manufacturing side whereas the basket has more representation across the whole uh thesis. >> Sure. Gotcha. Now markets do tend to anticipate events. So, how much do you think that this reopening thesis is, you know, already reflected in Asian equities and where do you still see some mispricing? >> Well, I think it's already been reflected mostly with the AI boom component. We've seen strong momentum there. In particular, where I see the the more value is with China and India. you know, we still have a higher risk premium that's assigned to those in terms of valuation and those those se those countries have lagged compared to the others. And if you look at their fundamentals and there's still strong growth there and if you look at the like price to earnings ratio is somewhere around 12 for China. Uh price to sales is somewhere just over one 1.2 something like that. Price to books around 1.4. And the reason why I bring that up, it's historically low compared to its own history as well as compared to all of the other emerging markets. So they're a bit bigger beneficiary of of the straight of Hormuz uh opening up. So I I would say that uh that it's not reflected in that component yet of the basket. and uh and if things go much more positive in you know like in an unexpected way to the upside those will probably do better even though people are kind of shunning them because they're really thinking more about the AI side of things right now >> now this might be an obvious question as far as you know what's ideal over the next few months for this thesis to play out the obvious is the straight over moves reopens everything goes back but over the next few months what do we think this actually looks like and when do we think we'll see things really shift in a positive Okay. >> Yeah, that's a that's a tough question. I don't think anybody really knows that. But you know what I love about what you said is that it's there's like there's an obvious thing that what we need to see. And some of the best trades sometimes, amazingly are obvious. Sometimes it's like, wow, that's that's really obvious that this is, you know, this is not going to stay stay in this state forever. One way or another, there'll be some some shift. Um, I would say the three indicators I'm looking at are just the actual traffic itself. If we see a higher degree of traffic starting to happen, we're not at 10%, we're at, you know, 50%. Um, the the biggest though market thing I'm looking at is the price of oil in Dubai, Brent, uh, even even uh, West Texas Intermediate Crude. If you look at a chart, uh, you know, we we are going in a kind of up and down fashion called a a base or a consolidation. And there's a couple of lows there that can act as support where buying interest has come in. If we were to fall below those levels, uh that would indicate to me that that this trade could exceed expectations. I'd be looking for that as a technical indicator for that. And obviously, we'd want to see some diplomatic efforts that calm the further tensions. That's the one that it's hard for anybody to see how that would happen given the long-term history of what's been going on in that region. uh which is outside the scope of our conversation today. But I would say from an investment perspective, the number one thing I'd be looking at is the price of oil at those support levels. I don't have those numbers in front of me, but if you pull up a chart, you could see very clear support levels uh in the oil u data series. >> Perfect. Now shifting away from this basket of ETFs in the Asian market there, we're going to go into something a little different and that is uh going from this big macro geopolitical trade to just a single stock conviction call uh because you are bullish on progressive insurance ticker PGR. Now Progressive has dramatically outperformed a lot of financial stocks over the last 3 to 5 years but in this past year we've actually seen it fall I think it's about 30%. So, what originally has attracted you to this company and what opportunity do you see existing there today? >> Well, the question itself kind of tells why, right? Cuz this is a great company that's been compounding for years and years. I've been attracted to PGR PGR for gosh decades and I've owned it for a long time. Um, and there's times in this industry when things look bleak and then the these stocks sell off. But the best managed ones, the ones with uh low expense ratios, high customer loyalty, good distribution, they will rebound. They have they have resilience in their earnings. you know recently we saw price increases in the whole sector because they you know we needed to recoup that sector needed to recoup some losses and there was some regulatory issues like in the state of Florida that caused uh you know some concerns so that that's that is the setup right because we have this high quality company with very good returns on capital very well managed their data management is like second to none the way they they view their their uh business and how real time they view everything and they have very strong underwriting. So, uh, you know, you're looking at it current valuations now that it's down, uh, it's it's a good area in my estimation to start picking up more again. So, I've already I already owned and owned it for years, but, you know, it's a good time to buy this type of company, high quality compounder during periods like this. >> Absolutely. And a couple of those parts maybe started to answer my next question, but obviously they they do operate in a very competitive industry. So, what do they do differently from their peers that allow them to consistently gain market share? >> Well, I I had mentioned they uh they've got this uh they call it Telmatics. I believe it's where they're they have like a snapshot of their business and they look at the usage and their expense ratios very disciplined in their underwriting because they have this technology. So they have there's a metric called a combined ratio and they have a very strong combined ratio. It's like 90 to 95% depending very efficient. They're they're implementing AI. They're one of the winners the real winners with AI because they're >> you know we have a lot of capital spend that's going into the semis and stuff like that and that makes a lot of sense but that could be more cyclical over the long run. But companies like progressive they're going to have continual return on capital improvements by using AI with their efficiency. And it's not just PGR, but many companies are going to be in that position over the longer term. But I I really like that strong compounding of premiums and um their c customers like them. And I mean I've actually had a claim. I'll tell you a quick story. I was uh I got rearended and um I did at that time I did not have Progressive, but the person who rearended me did and so got into a legal battle and guess what? Progressive stepped up and they made things whole very quickly. So, they're good with the claims, too. So, customers tend to like them. Now, I'm sure there's plenty of stories of people that don't like them, but on average, there's a high customer satisfaction with Progressive. >> And did you switch to Progressive or that? No. Yeah, I was going to say that sold you, right? >> Yeah. [laughter] >> Yep. >> Now, for our viewers who want to follow your work and read more of your analysis, where can they find you? >> Well, you could always uh read my articles on the street.com. Um, I write about various different not only individual stock picks or ETFs, but uh, portfolio strategy. Uh, you can also go to my website. I've got leisianis.com. I have some various links. You could uh, follow me there. And then I'm on Twitter. Uh, Lewis Jiannis. My last name is is actually pronounced Giannis. It's spelled lanes. It's a little tricky. It's, uh, it's a Spanish name from northern Spain. So, >> we'll make sure to uh have all those links in the description down below for our viewers. Thank you so much for your time today and we'll hopefully chat again here soon. >> Awesome. Thank you very much. We'll talk to you later.