Market Pullback Ahead? Dryden Pence Says Buy These Stocks On A Dip

Joining me now, Gidon Penn's chief investment officer at Penn's Capital Management. Dryden. Welcome to the desk. Great to have you here. Great to be here. Thanks for having me in. All right. So tried in stocks under a bit of pressure today. It seems like Iran very much back in focus. How much of a threat is that to the bull market right now? I mean, I think we're going to have problems with Iran. We've had problems there for 50 years. And until they finally resolve it, you know, one day it's going to be one thing, one day it's going in there, and no one's really sure who's in charge over there at this point. But it really comes down to the oil prices. And what's remarkable about this is we're at in this low 80s, at low 80s, the US economy is doing all right under a little bit of pressure. But all right, we look at it as $60 a stimulative $80 is okay, $100 is inflationary and 120 would be recessionary. And so we don't need as much oil through the Straits of Hormuz as we used to. The U.S. only gets 2% of our oil through there. We don't. And the world doesn't need as much because you have two big pipelines that move 10 million barrels a day around the Strait of Hormuz. So now the the shortage is really more like 4 to 5 million barrels a day. And that's two of the great big large tankers. So overall, the U.S. is definitely not as exposed as we used to be. This isn't going to be 74 where we're, you know, lined up a gas station and the world is less exposed. So while we get this these ups and downs and this overreaction to every time a missile goes off or something like that, we don't have as much exposure as the U.S. economy certainly doesn't. And I think that that's one of the resilience that we're seeing in the markets, resilience that we're seeing in the economy. We're just not as exposed to it as we used to be. So oil is trading around $84, $85 a barrel right now. You say that's okay for the economy, but what about for the market? At what point does higher oil become a market headwind? The hundred dollar. Level? I think if you're sustained above 90, then you begin to worry because because, you know, Americans go to the gas station more than they go to the bank. They go to the gas station when they go anywhere. So at $4 a gallon, which is about where we are, except in California, you know, if it's it's stressful for people, but it's not changing behavior. $5 a gallon, that's demand destruction. And and behavior does get changed. And we've kind of been studying this for a long time. So right in here it's stressful but it's not destructive okay. And so we get north of 90 for a sustained period of time. Then we've got a problem. We'll dig more into the consumer in just a minute. Because this is obviously a big week for retail as well. But sticking with the broader market doesn't seem like oil is a headwind for you right now, not geopolitics. Also, keeping a close eye on bond yields, hearing a lot about that. Right now we have the 30 year trading around 5.3%. We have the ten year yield trading around 4.7%. How concerning is that to you. Concerning who it was regard to? There's a moment where equity investors began to look at the bond market as a good place to go. And to me that's around the ten year at five. So if we see the ten year at five, we pop up to that. I think that's a that's an opportunity. That would be a buying opportunity to be a time that you would look at, wanting to pay per retail investor. You know, for a lot of them give me a solid, say, five or a solid, say, 7 or 6 in pretty good shape. So I think you'd begin to see that trade off on the retail investor side between equities and fixed income when the tenure hits about five. So we'll close. But I think that I think also part of this whole situation with Iran, they worry about bond yields are kicking up because people are worried about inflation. They're worried about inflation because they're worried about oil prices. But if oil prices aren't going to spike then and you're not going to see this inflation pick up. So bond yields oil geopolitics not necessarily getting in the way of this market. What's the strongest fundamental reason to believe this market can head higher than earnings. Earnings are at an all time high. And we're continuing to see earnings growth in most companies, not just in the hyperscalers but also throughout the entire S&P 500. And so when you look at if earnings are at an all time high, so the market is going to be at an all time high. And as long as we continue to see this tremendous earnings growth as we see eye adoption go up, you know, you have 71% of the companies. The companies are see improvements that are using. They are seeing improvements in productivity. Labor productivity goes up. Profit margins go up. Profit margins go up, earnings go up. And it's all working its way through the system that people can be confident about. But we're at the tail end of earnings season right now. So in terms of how much higher that market can go from here, what do you think? Well, 86% of the companies have be in terms of how we think the market can go, you're going to kind of get these volatility moments. So I would expect a little bit of a pullback between now and the end of the year. But then back to at some point a return to another all time high. So I think we're slightly higher at the end of the year than we are now. Because if you just take a look at earnings growth it'll math out to that. So so somewhat higher but not a lot higher than we are right now. But I think we're going to get like a little dip. I've been saying for a long time by chips on dips. And so I think that that's that's been a good strategy. Well you're getting a chip dip today. Exactly. Funny enough, software stocks actually are rising as chip stocks are falling. What is the the tech strategy then. Is it just buying chips right now. What specifically do you like. I think I like it. So we do like the hyperscalers. We don't think that story's over with. We think when it gets right down to it, we're having this massive multi-generational build out of technological infrastructure that allows us to use artificial intelligence to increase labor productivity and more and more adoption, more and more people. And we really kind of gone from proof of concept into rapid adoption. And so I think you've got really 1 or 2 more years now where almost anything that's involved with the infrastructure around the AI buildout is going to have a start to it. And I think that also anything that that gives us greater labor productivity. So we're always looking for companies that are rapid adopters. We're looking for companies that are providing the meat and potatoes or the bones of the I infrastructure piece, because I think that that's really going to it's going to revolutionize our economy. This is as big as the light bulb. This is as big as the transcontinental railroad. So which names you like as early adopters? Which are the meat and potatoes? Well I think Broadcom is really a very key company. It's it's basically part of the infrastructure. Everybody is using it. It's very important. So Broadcom is one that we like the most in terms of picks and shovels meat and potatoes basically all of this stuff. And then we like Microsoft a lot because when you look at how dominant it is in every business using it, every household having it, now you're beginning to see they were a little slow, but now you've got copilot going, you've got Azure going all of these parts of that company. So they almost have a have this ability to both, you know, build out both the software piece of it and the adoption of AI. So that's that's one of the favorite ones. And then obviously Nvidia and Nvidia is the choke point. I mean you have you have companies that are important to this. You have if you know, ASML makes, extreme ultraviolet light machines. That makes the chips that TSMC makes for Nvidia. So you have a triumphant of three companies that occupy choke points. They're almost have you can't have you can't have a you can't have AI without Nvidia. You can't have Nvidia without TSMC and you can't have TSMC without ASML. So you take a look at this supply chain of companies that occupy these kind of little monopolies. And they choke points. They've got earnings that are 2 or 3 years out. They they booked their demand for 2 or 3 years out. Show me a company that can sell everything it can make for 2 or 3 years in advance. 21 oh. Oh all right, quick break. We spend a lot of time talking about what stocks to buy. But before you invest your next dollar, it helps to know how much you actually have available to invest. That's where today's sponsor, monarch, can help. 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I think Apple, and the reason why we like any apples has some volatility around it. But you know, again, it's one of those companies that everyone not everyone, but many, many people have an iPhone. It's part of your daily life. No one, you know, until we all go throw our mobile devices in the river, they become an appendage. And so that's the vehicle that we're going to use to access all of this technology that's changing our lives. So I look for companies that are absolutely essential in the consumer behavior that's going on. So tech's still very much in favor in terms of your strategy. But looking outside of tech because we have seeing been seeing this rotation into other areas of the market. What sectors look attractive to you at these levels? I like the fence. I mean, the world is not going to wake up and sing Kumbaya. We've talked about the issue with Iran. We talk about the issues. When you look at Lockheed Martin, you look at a company that has 2 or 3 things going on. First of all, we've expended a lot of the high altitude and ballistic missile saying we've seen it. A lot of the Patriots in the current war that we have, all that's got to be replaced. Their the they're the single provider of it. They're also a single source contract for a lot of our missile defense systems. They're they're also the single contractor for the F-35. So when you take a look they've got $230 billion worth of backlog. That's three years of their revenues. So you have, you know, this company that is absolutely essential to the defense of our nation and indeed pretty much all the Western world. So now Europe is going to have to start, increasing their defense spending. Everybody's increasing their defense spending. And Lockheed Martin is going to be a key, recipient of that. And Raytheon is going to do very well to that key positions of that. So I look for for companies that I mean, you know, government pays these bills and, Lockheed Martin of five point to, cash flow. And, and you have three years of revenue. I think it's a very strong, strong want to hold for a long time. Okay. So tech check, defense check. What else? I think, you know, on the when you take a look beyond those we almost get want to get down into the company level. And taking a look at companies that are going to be positioned to to really increase labor productivity. So you have some manufacturing companies that are doing that. But what you also have to look at is as this moves in to better efficiencies with on the retail side I still like Walmart believe it or not. And and the reason why is they're very dominant throughout the country. And they've always been very good at wringing every bit of efficiency out of what they're doing. So if they're able to use AI, that's great. They're able to make things more efficient for the consumer. That's great. They're able to keep prices lower. They're now the number two to Amazon on the delivery process. And, and e-commerce. So we like that. Yeah Amazon wasn't one of your hyperscalers picks. So you like number two versus number one. Well well the two different things right. So we love Amazon and we like Amazon a lot. They are actually was very interesting about Amazon is their ability as a company to implement I. And they have more robots and they have employees. And so robotics and all of these things are important. When you think of just the masses of things, Amazon has to move around. They're able to lower their cost on their delivery thing. This is before you ever get into AWS. But just the the meat and potatoes of of of just moving stuff through factories. I don't know if you've ever seen any of the videos of their delivery systems. You've got robots working as a hive, you know, going all over the place. It's quite fascinating. And so they're one of the rapid adopters. And they're doing it exceedingly well. And that's lowering costs, increasing labor productivity, increasing profit margin and then allowing them to deliver better product to consumer lower price. I'm glad you mentioned Walmart though too because this is obviously a big week for retail earnings. Really kicking off with Home Depot today, I saw it's about 1% higher after its report. We have Walmart, target, Lowe's Raw stores all reporting. And then over the next couple of weeks we'll hear from a lot of the other discretionary names. What specifically are you watching for and would you bet on the consumer right now outside of some of the labor productivity plays and really kind of the eye plays within retailers, would you bet on the consumer right now? You know, believe it or not. You know earnings are at an all time high and so is or wages and salaries if you take it wages and salaries at an all time high. Now we've had some inflation and it but people aren't slowing down their spending if they're reallocating it. But the consumer is not slowing down. It's being moved around a little bit. The got to pay a little bit more for gasoline. So maybe it's a little bit less for something else. But in general we see the economy continuing to grow. And so we see the consumer continue to spend. If you give it American money, they're going to spend it. And we have the coming into the back half of the year. We have a lot of stimulus coming in from two things. The great big beautiful bill. Right. Well, it cuts taxes at about $630 billion. And then we had $150 billion in excess withholdings from last year. So when people are looking at it, they're either getting a refund where they wouldn't have before or their tax bill is a little less than it would have been. But when you add up those two factors, that is about $730 billion of additional money that people have that they wouldn't have had before, that's almost as much money. Remember those Covid checks where everybody got a check just for breathing? That was 830 billion. So weird. And we dumped it into a dead economy. We're dumping 790 billion into an economy that's running on all cylinders. So I think the consumer's going to stay intact. So who benefits from that from a stock perspective then. What's a retail name that you would buy ahead of earnings. That's not Walmart. That's hard. Almost like I wouldn't say almost any of them. But I think a lot of the the luxury brands are going to do all right. Because you have they're going to be fine. On the retail side, I think that you're probably going to continue to see I think target will do okay, but I don't think it's going to be a blowout quarter for them. I think some of the other names you you're going to begin to see people pull back a little bit. So you might see a little bit of a bid to, to the discounters. On that again, like Walmart's my favorite package. You said pick somebody else. Yeah I try to concentrate. So I'm, I'm, I'm, I would bet that one before I would bet the others. Okay. But overall you're not necessarily leaning heavily into retail names outside. Of not and not not heavily into the retail names. Okay. We we we tend to we tend to. What I focus on on the retail side is the delivery chain of online shopping. So if you think about any of the companies that are involved in like, you know, what we do doesn't change human being. We shop, right? It's called retail therapy. We we spend our money. But then how we do it changes. So many of the companies that are involved with online retail are continuing to get an increase in that behavior. So it starts with obviously starts with Apple and Microsoft, but then it goes to to Amazon and Walmart and Shopify. All the companies involved in in that you see, I think is continuing to see stuff with Uber and DoorDash. Those become platforms at Costco. So these are all companies are involved in this consumer behavior of online shopping. And how do you pay for it? Will you pay for it with visa, Mastercard, American Express. And then it gets delivered by Fedex and UPS. So when you think about the behavior, you know, there's like 22 companies that comprise almost 12.5% of total U.S. GDP. And they're all involved with this with this ongoing piece. And so I think that's it's a it's a big number equivalent, Great Britain's GDP. And just take a look at those companies that are involved in how you execute an online retail purchase. Those are companies that are have very strong demand across what they do. What are you avoiding right now. What's on that Dryden Pence no go zone at this point? I think the things that I want to try to avoid are companies that I mean we because we look at individual companies and don't want to come out negative on folks. But the bottom line, if you're not investing in the future, you're not going to be part of it. And companies that are going ahead and instead of buying their own stock, they are they are, focused on doing what they do best, making that capital expenditure in the future. Those we like companies that are continuing to say, well, we'll just buy our own stock. We'll just do those. Those are companies I want to avoid because they're going to miss the boat. What's an example? You know, it's it's really hard to think of, of any that we have exactly today. But I worry about some of the banks. The banks are sitting there trying to trying to, you know, buy back their own stock, manipulate their pricing. So there's, you know, list some of them in particular some of the smaller ways too. So I'm more worried about banks doing doing that then, you know, need to reinvest in what you're doing. And we also like, like anybody involved in roads and bridges construction. So like caterpillar, you like you like companies that are involved in building out. We we've got to build roads and bridges in this country. You know, roads are deteriorate. So you take a look at some of the big engineering firms, that are important and that those that are publicly traded or like Vulcan Materials has almost, you know, I wouldn't say monopoly, but Vulcan Materials and Martin Marietta, they, the materials that we need for construction, no one's going to give you a permit for a new rock pit. Right. So you're going to the government is going to have to buy rock and granite and those things and companies that already have those open pit mines. So it's almost like a little monopoly. So those are going to have consistent earnings going forward over time. Certainly a lot of picks there. Just to kind of wrap things up, if I'm a retail investor and I'm listening in saying, great, you're still bullish, but by your end, if we're only a little bit higher than where we are today and I have fresh money to put to work, why wouldn't I put it in bonds with a ten year yield at 4.7%? What is that? Well, make the case for stocks. I think the making the case for I remember, you know, December 31st matters because of taxes. December 31st matters because I raised benchmarking to the end of the year. But for a retail investor that's got money that wants to put it to work, I encourage them to think about a whole lot more than just this year. Think about next because you're you know, we look at earnings are projected to grow by about 13 or 14% next year by 13 or 14% by the year after that. So if earnings are going to continue on this path and the fundamental economy's good and the demand is fundamentally good, I wouldn't worry about an arbitrary date on the calendar. I would worry about trying to find a reasonable entry point for a company that you really love, that you're going to own for a long time. I think I encourage people to be investors rather than traders, and so particularly for retail investors. So make a decision, find companies that you use that you like, the e-commerce companies or the technology companies that have these long drawn out things. Some of the construction companies, most federal government contracts for seven years and duration. And it doesn't really matter when. So if you get a little dip between now and the end of the year for geopolitical overreaction, by the way, most geopolitical events are round trips in 45 days. Yeah. So you get if you get an opportunity to buy between now and the end of the year, that's a good thing to do. Or you just take a look at, put your money to work now and say, I'm making this investment not for next week, but for the next decade. Well, you've given a lot of picks. So if I have fresh capital to put to work, where does my first dollar go from the picks that you gave today? Nvidia okay, I think this is a good time to pivot to our rapid fire rounds of this or that first time playing quick questions answers. Sure. No hedging if you can help it. I'll try not. To. All right. Here we go. Markets from here. More room to run or do for a pullback. Short term pullback and then running thereafter. So you get something like short answer something between now and the end of the year maybe a 5 or 7. And but that's an opportunity because I think at the end of the year we're higher than we are. So buy any dip or wait for a big pullback. I think you would anything you buy it anything of a 4 or 5 or below. 4 or 5% for. Fibers. Walmart or Target ahead of earnings. Walmart, Nvidia or Microsoft. Nvidia. Better for the market. Strong economy and higher rates or weaker economy and lower rates. Strong economy and higher wage rates. Rather see the better. See the fed. Look at that. Because raise because it's too strong. Then have to do something else. Because the stream. Fed for the rest of this year on hold doesn't even have to give you an option on hold. Bigger threat to stocks $100 oil or 5% on the ten year yield. 100 oil. Consumer from here. Resilient or cracking. Resilient as long as we don't see $100. Well I CapEx still not enough or getting excessive not enough. Better IPO to invest in OpenAI or anthropic. Wow, that's a tough one. I would say OpenAI. OpenAI or SpaceX. Space X or. Space X or Tesla. Space X. Y. Space X is the future. It is the fact that they can cut. All right. I'll take a second on this. Yeah that's okay. We've been out of space. Cuts cost of putting a kilogram into space. It was $20,000 in 2010 is $2,000 right now. When Super Heavy comes out in 20 2829, it's going to drop to $20 per kilogram. When you do that, you open up possibilities that we haven't even begun to think about. Space have really has has the monopoly now to getting lots of heavy stuff into low-Earth orbit or intermediate Earth orbit. And so they are the wave of the future. And the short answer is space X, and just be prepared to hold it for a while. Space X or Lockheed Martin. Space X. Better confirmation of the bull market earnings growth or broader market participation. Broader earnings growth. Stocks by year end. Higher or lower? Higher. How much higher? Anywhere between 1 and 5%. From current levels. One word to describe how your feeling about the market. Bullish. All right we'll leave it there. Dryden pence thank you so much for your picks and your insights. Really appreciate it. Thank you. That's Dryden Pence chief investment officer at Pence Capital Management. If you enjoyed this street talk check out our full interview with Mark Newton. And he says to stop waiting for the dips and outlines the stocks and sectors to buy now.