This Stock Beat Earnings by a Mile... and Still Crashed (What Wall Street Got Wrong)

Washington changed the I race overnight. [music] The AI power trade is getting even stronger and SanDisk delivered great earnings only to get pushed away. Let's get into it. Welcome back to Navalier Market Buzz. We're joined again with Adam Johnson, founder and author of the Bullseye Brief. Adam, it is so great to have you back. >> Thanks for having me, Crystal and Louie. Always very good with you. >> Yeah, I was just on Fox Business and Maria was talking about you, Adam. So obviously you have great insights. >> Thank you. >> Yeah. Well, you know, you and I both love Maria. So >> she's been very kind to us. Yes. >> And also later in the show we'll talk about why one company beat earnings and still sold off and whether investors should actually be buying that weakness. But before we get into that, the Dow keeps pushing higher. Adam, does this rally still feel healthy or is Wall Street getting ahead of itself? >> I think the rally is very healthy. In fact, I sort of feel like it's behind schedule. I was amazed. Now remember, I'm fully invested, okay? So if you think it sounds like I'm talking my book, I am. I certainly wouldn't talk anyone else's. But you know, over the past six, seven weeks, markets have been so volatile. I mean, the semiconductors fell, call it 30, 35, which I just thought was completely unwarranted. The earnings have been so strong, and that's really the story. So as I look forward, I think we're going to see a continuation of the spectacular earnings growth um that we've seen. It's been the best run, by the way, over the past several quarters. The best run since 2021 when we were coming out of the COVID lockdowns. And as I say, I think we're going to continue to see that given the fact that so many companies are guiding up, which again is a forwardlooking metric. So, yeah, I think this market's going higher. Given the growth rate, 35% quarter over-arter, almost 50% year-over-year. Given that kind of growth rate, I think actually the S&P 500 is cheap at call it 21 times earnings. >> Yeah, because P ratios are being compressed. That's an outstanding point. Adam, let's talk about the volatility because I I think it still unnerves a lot of investors. So, we had the situational awareness hedge fund having forced liquidations. I believe Financial Times reported they were up 4 and 39% through June. Then they declined 67% in July. and Citadel saved them because the prime brokers were just unwinding all their leverage and that hurt Bloom Energy. It hurt SanDisk. But even after that was cleaned out, we saw the memory stocks on a wild ride. And I keep blaming these leverage ETFs that Wall Street issues and I I know the Koreans have fun with them. So, a lot of this has been the tail wagging the dog, but as we talk right now, memories stocks are resurging. But what do you think about all these leverage vehicles and the derivatives where that are just manipulating markets? >> Yeah, I don't like them. And I say that as a former options trader. I mean, Lou, I spent almost 15 years of my career as an options market maker back at Ferman Sales, if you remember that wonderful old school >> brokerage house. And the problem with all these these new vehicles is that they just create way too much leverage, number one. And to use a fancy word, I guess it's opacity, right? It's like the opposite of transparent. You just can't tell what's going on back there. I mean, I think it's crazy that people are buying ETFs. I think it's crazy that companies are issuing ETFs that are levered 3 to one. I mean, if you run the math, those things ultimately go to zero because when they go down, they go down three times more and then you can't get back to where you were. And people continue to buy them. I don't like the same day expiring options. I don't like the oneweek options. I think it's crazy that in addition to the regular options that expire quote on the Saturday after the third Friday, there are now options that expire on the last day of the month. Why do we need so many? It's just I feel like it's runaway. I think Wall Street trying to capture fees by creating all these other vehicles and, you know, Wall Street's always looking for fees and, you know, trying to make their money for nothing. Um, yeah, I don't I don't like it, but you know, traders love it. I'm not a trader. I'm an investor. >> That's great insight. You We talk a lot about how the algorithmic trading firms like to write covered call options on hot stocks because, you know, the hotter the stock, the bigger the premium they're going to collect. >> That's right. >> The last thing they want to do after they collect that option premium is to deliver the stock. So, after So, they write it on an update to collect the big premium and then, you know, the stock's going to have to back and fill. It's almost like they nudge it with a mean reversion program to make sure they never have to fill it. And uh so yeah, we have a lot of tail wagging the dog things going on. But thank god that earnings are working. As you mentioned, we're pushing 50% earnings growth this quarter on the S&P. That's amazing. Obviously, the market didn't go up that much. So PS are under compression now. Uh it's just truly a wonderful time. And normally I dread August, but we got so oversold in July. You know, August is okay. You know, >> I think so. I mean, my portfolio was out a lot in July and it's just come flying back so far in this first week of August. I mean, to the point where some of my names are are almost moving too much, you know, I mean, it's great. You know, you look at that and you say, "Wow, fantastic." But, you know, gently. >> Well, yeah. Just look at Bloom Energy. It bounced 40% last several days. And, you know, G Vernova has got that 176 billion order backlog. by the way, is it going to take them six or seven years to deliver all those turbines? >> Yeah. I mean, if there's a negative to that story, it's that they can't make turbines fast enough, right? And so, you know, you can only gr your earnings so much if you can't make the stuff. But they are, you know, booking forward sales. Uh you have to be careful on the revenue recognition when that happens. But, you know, you can count down payments. um they are trying to bring on other manufacturing capabilities so that they could start making more of these turbines. And just just for the benefit of the people who've never heard of GE Vernova, they make the turbines uh through which you put natural gas to then spin and create electricity. It's basically the same technology as a jet engine, but instead of putting jet fuel through it and creating propulsion, you put that gas through it to create electricity. And it's a beautiful, clean, wonderful way to power data centers. That's why the stock's up so much. In fact, you can power anything, any factory with these GV Renova turbines. But, you know, it's amazing, Louie. I mean, it's hard to sort of quantify the earnings because they keep surprising at the upside. Is the growth 60%, 65, 70, 73. I mean, it's it's kind of tough to quantify, but it's up there. And with a stock trading less than 50 times, I mean, for me, usually when a stock's in the 40s, you know, a PE of 45 and say, "Oh, it's getting expensive." But not when the growth is 65 70%. So that's why I always look at forecast to P ratios. I should ask you, so we have over 700 data center projects in in the pipeline right now in America. I know seven were were cancelled. New York had the one-year moratorum. I'm sure that they will just have the new regs and reopen that because it'd be a shame for them to lose all that business to Pennsylvania. >> My be shooting yourself in the foot, by the way, to say no, we don't want data centers. Really? Really? You really don't? >> Yeah. I think they want free electricity for the people is what they want. You know, >> but New York's perfect for data centers. You got hydroelectric. You got the direct grid from Quebec Hydro. It's cold at night. You get to vent the data centers at night to get the heat out. And obviously New York has lots of high-speed internet, but upstate New York is perfect for data centers. So just, you know, and but right now they're going to Western Pennsylvania. >> You know, it's mindboggling. Politicians sometimes really make stupid decisions. You know, this is the governor of New York, Kathy Hogel, saying, "No, we don't want to do it." And it's under the guise of, "Well, we're protecting people from high electricity." No, just don't allow the data centers to pull electricity off the grid. And guess what? You've protected them. But she's saying no, no more data centers. It reminds me, Louie, of several years ago when uh AOC basically had an opportunity to welcome Amazon with like 20,000 jobs into Queens, you know, one of the bureaus of New York. And she said, "No, no, we don't want that big corporation coming in. Big corporations are bad." Yeah. We don't want Amazon coming in and basically buying land that had been just sitting vacant for years. and and and put those warehouses back to work, creating 20,000 jobs in the process, not to mention the tax revenues of all of that. And so ultimately, Amazon said, "Okay, fine. We're not going to New York." And it was just it was such a bonehead move because, you know, politicians, they're not efficient in their decision-m oftent times, right? You know, they try to put these other issues ahead of growth. >> We look we look forward to you running, Adam. Okay. Okay. That is one thing I will never do. You couldn't pay me to be a politician. I think that is just the worst job description on the face. >> I know, but you're It looks so perfect. You know, I'm sure the political guys are calling it. >> No, they're not. Thankfully, thank you. >> I'd love to ask if there's an AI infrastructure company that investors still aren't paying enough attention to. >> Gosh, probably all of them. I mean, I just wrote up Coherent Co, which has had a huge run and and it can go higher. You know, these are the guys who make the lasers that beam data across optical transmission lines made by Corning. There's another one, GLW. You know, there's this whole this whole ecosystem that enables AI to happen. And it's really technical stuff and some of these stocks have had huge runs, but the growth is just so incredible that um I mean, look at Micron. I mean, for crying out loud, you know, earnings of 450% and it's trading at five times earnings, right? Which is what you were saying, Louie, you know, there's got there's that earnings compression where people don't believe that the earnings are going to continue. So, the stock should go higher, but they say, "Oh, no, this is as good as it gets." No, it's not as good as it gets. I mean, Micron is starting to now think about production out to 2029 and 2030 and even forward selling some of that to their best clients. This AI, I hate to call it an AI trade, that sounds sort of cavalier, but the the AI freight train is what it is, is is still gathering steam. It has not yet hit full speed and it's it's gone to the far coast. >> And kudos to Micron for building a new facility in New York. I'm sure New York will reimbrace data centers as soon as election's over. They have to. By the way, did you see Senator Tommy Tubberville of Alabama who uh literally as soon as Governor Hokll of New York said, "No more data centers here. There's a moratorum." Senator Tubberville said, "Come on out of Alabama. We'll build them for you." You know, they'd love to have the jobs and the growth and the revenue. >> It's a very pro business place. And of course, in Huntsville, you've got all the the rocket engineers now. It's fun to watch that that economy expand in Alabama. Let let's talk about the bottleneck in AI. As as I understand it, a lot of the AI appliers have not been able to get enough power to run their systems. So when Microsoft said they finally were able to monetize chat GPT, it's because they got access to more power and processing power. So this is a bottleneck that for anthropic for Grock and that's why we have to build the data center so they can get the processing power. And this all goes back to the the tokens. Uh the AI starts you off with tokens and then they you keep asking more questions and they keep charging you more. So to me, this looks like we're going to infinity and beyond here. Do you have any insight into this? >> Well, I don't know how far this is all going, but I know it's going to keep going and I know it's only just started. I mean, think about the software companies right now. Oracle, Service Now, Salesforce.com, Intuit. These are companies that uh the market has sort of kind of in some ways left for dead. I mean some of these stocks have really gotten crushed. I mean Oracle you know was down I don't know at the lows I think 70 70 um you know trading at whatever 13 14 times earnings. Uh kind of crazy in it uh the makers of Turboax and QuickBooks trading down at 10 times earnings. These companies are being treated like they're AI casualties when in fact they're AI use cases. So just looking at into it they have 100 million customers and that group that 100 million strong client base every single day deploys half a million AI agents that have been written created by into it engineers. So all these companies now that we thought were going to be replaced by AI have embraced AI and they're using AI on their software platforms to help their clients generate more business. Well, this is only just beginning. I mean, think of the possibilities. I mean, let's just talk about something we can all understand. You know, airplanes flying around the country every day and you've got all these air traffic controllers. Well, what if AI started coordinating all of the all of the air traffic? I mean, they probably are already starting to use it, you know, in in sort of little bits and pieces, but I mean, imagine AI enabled all the airplanes to speak to one another, right? What if that's what happens with cars? I mean, that's, you know, look at autonomous driving. You know, drones are going to start delivering packages. Door Dash just got the approval to start delivering packages via drones. I don't think they're going to do it next week. I don't think they're going to do it in every location, but somewhere along the way, Door Dash is going to start delivering their food by a drone. And those drones aren't going to be flown by by people with joysticks. They're going to be flown autonomously because AI is coordinating all that interaction. So, you know, if you start thinking about where this could go, I mean, there's there's kind of no telling. And that's why I think it's such early stages. >> Earlier, we teased SanDisk, and I want to get into that, Adam. SanDisk, as you know, beat expectations on both revenue and earnings and the stocks delve fell. How how does something like that happen? >> Yeah, this is kind of a crazy market right now where I can't tell you how many of my companies have beat earnings, beat revenues, raise guidance, and suddenly the stock's down 10%. Makes no sense. I don't have an answer for you, Crystal, other than to tell you it's very frustrating. And on occasion when that does happen with my stocks, if I have a little extra cash, I go out and buy them. There I think are a lot of naysayers out there who are saying, "Well, this is as good as it gets." And so a company comes out like SanDisk, knocks the cover off the ball, and people say, "Yeah, they'll never be able to repeat that again." Uh, I mean, I think we've seen this now several times with Nvidia. We've certainly seen it with Micron. I mean, on and on and on. There is so much negative sentiment, which I guess if you're a contrarian is a good thing. you'd rather have some negativity out there because everybody were positive then chances are everybody would already have bought and there would be no one left to buy and that's when stocks actually stumble. So I mean I guess on the one hand I can't be too upset about it but yeah there's a lot of just illogic response out there to some very strong earnings this season. >> That's great insight Adam. You know, even Google, which had a phenomenal quarter, consolidated because they uh were spending extra money on their AI development and of course that stock got going. So all those stocks that pull back do bounce. Good stocks always bounce. So that's very good insight. You know, there's this narrative that has reemerged that uh if you remember the deepseek narrative a couple years ago that deepseek was going to outdo chat GPT and Chinese AI would overpower American AI. That was a false narrative. And now they're spreading that deep seek is involved in this mega data center in Mongolia and then China will again take over the world and all our AI will fail. That's a false narrative. But you know unfortunately everybody reacts to the headlines. So a lot of this negative press seems to be coming from overseas. And I forced myself to read the the British media, which is painful, which clearly they don't like America or at least they don't like Trump, that's for sure. >> I think it's more intense going into the midterms and hopefully after the midterms we'll we'll just move on and they'll be less critical. So >> yeah, I hope so. It is funny to read publications from other countries because, you know, we're the big dog. We're the biggest economy in the world. We've got the growth. We've got the innovation. We've got the per capita income. We've got the American dream and there are a lot of places that don't and we've got the money. Yeah, China would like to be us. There's no question. I do think sometimes that we get a little I don't know just unnecessarily worked up over China. I mean, you know, you talk to some people in the media and you would think that they're about ready to drop a bomb on us. That's the case. I've traveled extensively through China and uh I've found it to be well like Vietnam, arguably the most mercantile place in the world. They work seven days a week. They work hard. They work 15 hour days. They want to be rich. They want to succeed. They want to lead. And again, I've traveled extensively throughout China. And I found I was trying to figure out the commodities trade really, which is why I went there. I wanted to see if it was really real. Are they really buying and building as much as they say they are? And the answer was yes. Uh they are. When I first went over back in 2010, I said it's sustainable for the next several years. And then, you know, they hit some speed bumps. But they were so welcoming. The Chinese were so welcoming uh to me. I mean, at one point I was in a in a town uh near Shiion, you know, where they have the Clay Warriors and that's really their high-tech center, Shiion. And I was with the mayor of a a town just outside of Shian. And he said, "Can you introduce me to John Deere?" And I said, "I'm sorry." He goes, "Yeah, we need tractors because we're still using animals to plow fields and we need to buy tractors and I need it because John Deere, see what I can do." But I mean, you know, I mean, it's amazing. You can't make this stuff up, you know. They love America, you know. >> Yeah, that's great insight. Well, we want the entire world to grow and prosper. And obviously, we're a little competitive with China, but that's hopefully it's healthy. And obviously, we need them. They need us, we need them. So, >> it's a symbiotic relationship, you know. >> Yeah. I didn't want to interrupt with you when you were talking about Deep Seek, but you know the the dirty little secret about Deep Sea. You know, the Chinese homemade quote unquote AI platform is that there were a lot of watermarks that indicated significant portions of their code was lifted right out of chat GBT. It was really chat GBT code that the Chinese repurposed and called it Deep Seek. And and the other dirty little secret, it was also built on the back of 2000 Nvidia processors. So Deepc is, you know, as American as Apple Pi with Nvidia processors and chat GPT code. >> Yep. That's a phenomenal insight. We wouldn't have got it from anybody but you. Thank you, Adam. So, >> and Adam, one more question about the job report that just came out. Suddenly feels more bigger than usual. What surprised investors the most? Well, Lou, I don't know about you, but I was surprised and a little troubled by the the falling labor participation rate. So, you know, curiously, the unemployment the headline number looked great. What was it? 4.1, right? We said, "Oh my gosh, that's great. Unemployment's only 4.1%. Everyone's working." Well, we're counting fewer people. The labor force participation rate has fallen several months. And so, people are leaving the labor force. I don't know why. Are they retiring? Are they giving up? Is AI taking their jobs? You know, robot took my job and so they just decided they're not going to look for a while. I mean, I don't know, but it's it's troubling for me. >> There's there were definitely a lot of seasonal issues in that report. Of course, we had downward revisions the previous two months of over 100,000. But leisure and hospitality, I think, was fell for 40,000. ADP also reported the same issue. Mhm. >> So that might have been, you know, the World Cup is gone and the temporary workers that helped host all those people, those jobs disappeared. So yeah, we have to keep an eye. I think there was a lot of noise in the numbers. They lost 50,000 government workers in July. So there was some interesting details in there, but it's very odd to lose job and have the unemployment rate drop. So >> yeah, >> obviously people disappeared from the workforce. Yeah. So >> yeah, mixed mixed signals. But you know, I mean, life is about mixed signals, right? I mean, in our job is to try to sift through all that ultimately. >> Well, the reason Yeah, I didn't mean to interrupt, but the reason the market responded so positively is that there's no pressure on the Fed to raise rates because they have an unemployment mandate. So >> Kevin Walsh is right. And we'll see just how big these productivity gains are. You know, we had evidence that I think productivity in the first quarter was8%, second quarter was 1 and a.5%. It's clearly accelerating right now. So, and that's obviously part of the big GDP number that's building for the third quarter. I think the last I looked the it's 5.8% with the Atlanta Fed, but uh we'll see. >> I mean, think of that. 5.8, Louie. That's incredible. 5.8% GDP. Wow. Well, that has to happen because I predicted on Fox back in December. And then and then, you know, I met Howard Lutnick at Marlargo. My son went to school with his kids, so we we knew each other. But Howard said 6% and he promised me we'd hit six. The only thing that's going to potentially screw it up is all the imports of all our memory and GPUs from Asia. you know the trade deficit can have a big adjustment but it's we definitely have 4% plus GDP growth solid plus or minus the trade adjustment so it'll be fascinating and so despite all these record energy exports the the tech industry is importing quite a bit and that was a drag on second quarter GDP even though the components are great the consumers were spending more money business spending more money so uh I still think we'll probably get a second quarter upward uh GDP revision >> well you know think of these numbers sort of In total, Louie, we have unemployment down at 4.1%. Very low. We have GDP somewhere above 4%, maybe as you said, 5%. That's very high. And then we have earnings growth of, you know, more than 30% quarter over-arter and somewhere around 50% year-over-year. I mean, this is incredible. And by the way, we have, you mentioned productivity. We have profitability at US corporations, the highest it's ever been. net profit margins of like 13.6%. Never in history have we seen that. There is so much to like right now. It's just amazing that there are all these shorts out there saying, "Ah, it's as good as it gets. Sell it." No, no. This is a freight train. The economy and therefore stocks and therefore I think the stock market. It's a freight train. >> That's outstanding insight. You know, operating margins have expanded for I believe at least 12 straight quarters. And anytime earnings grow faster than sales is because of margin expansion. But yeah, I mean this is economic nirvana. This is as good as it gets. Uh I keep telling people you got to pinch yourself, you know, and it's a phenomenal environment we're in. So I'm very excited. >> Yeah, me too. >> So the bottom line is power, storage, and hardware. The AI trade is getting real and it's showing up in the names we talked about today. Adam, thank you so much for breaking it down with us. >> Well, thanks for having me, Crystal Lou. Thank you. >> Great to have you. As always, if you have any questions, please leave them in the comments below, but all of Adam's links will also be in the description. [music] Let us know what you're watching this week, but we'll see you this Wednesday for a new midweek update.