“Buy Chips on Dips”: Top Tech Stocks to Buy (And Which To Avoid)

Joining us now, Dryden Pence, Chief Investment Officer at Pence Capital. Dryden, welcome back to the desk. Happy Friday. Great to have you. Happy to be here. Thanks for having me. All right. So we're wrapping up October. I love the Halloween suit there. We're heading into November with plenty for investors to worry about. We have this tech selloff. We have inflation. We have higher oil prices. We have the midterm elections. You're still bullish through it all. Why? Well because I think there's a variety of things that are going on. Very, very good. Earnings are still doing exceedingly well. 82% of the companies have beat on their earnings. The things that people are worried about, whether it's oil or, interest rates or the election. All of those things we kind of see relatively transient in that the oil situation is one of these things that sooner or later we either get resolution or resumption. We're either going to resolve this thing after the the peacefully after the election, or we're going to have a resumption of military action. But either way, the situation in the Strait of Hormuz probably is kind of over or changed over the next six months. And that's driving that's going to drive oil prices lower. I mean, we're already getting 16 million barrels a day through. So we're back to, you know, pre conflict levels going through regardless of what the IRGC says diesel is the problem. You know diesel inflation today or diesel prices today or core inflation next month or two months from now. So that's the bigger problem. But in general, and if you think about the biggest thing about this election is it's going to be over. The law of the land no matter. Red wave, blue wave, purple wave, it doesn't matter because the law of the land, that one big beautiful bill isn't going to change until sometime in 2020. So you have this, you know, bonus depreciation. You have all of the key features that are inside that that have helped be the fiscal policy underlying for the last two years when we've had double digit gains in the market. That bill is still in place for the next two years regardless of what happens in Congress. Okay. So I'm hearing midterm election outcome doesn't matter, right? Red wave, it doesn't really matter. What does matter, especially today, is the selloff that we're seeing in tech. I don't think anybody is even paying attention to some of those other things right at this point. And really, if you take a look at the month in general, the Dow is on pace to finish October higher thanks to names like Walmart, McDonald's, Procter & Gamble safety plays, and the Nasdaq is heading for a 6% decline. Do you look at that as a healthy rotation away from big tech, or do you look at that as a warning sign for tech? I think I look at it as an opportunity for tech. And the reason why, if you break it all down, what we're beginning to see is E is growing faster than P. What I mean by that, you look at P/E ratios, right? But earnings are growing faster than prices. We had this huge wave of tremendous earnings. And earnings are the most important thing of price of a stock. For a day for a retail investor who's looking long-term and what's going on. We're not trading every day. We're looking at what was happening. And when you look at the companies that earnings are doing exceedingly well and they're investing exceedingly well, that gets really important. The selloff today, are they going like, well, you know, we're spending a lot of free cash flow and those kind of things. But for me as a growth investor, I want companies to spend their money on the things that make them grow. A company buying back its own stock means that their CFO just doesn't have a better idea whereas a company that's spending its cash flow on the future is really trying to enhance their competitive advantage. They're doing the things that make them winners to begin with. So when you see the Amazon thing, people get worried about that. Well, what are they doing? I mean, they're spending their money on the things that have their highest margins. Same thing with Google spending their money on the things that have the highest margins. Everyone is investing in building out the cloud. But I'm I say that the cloud's making it rain and it's making it rain money. But the E, the earnings, despite how strong it is, isn't necessarily driving these stocks higher. Wasn't the case for Microsoft, Alphabet, Amazon now. So if it's not going to be the strong earnings driving these companies higher, what's it going to be. Well I think this is this is part of this problem lies that E is growing faster than P. I mean, if you think about the poster child for this is Nvidia, three years ago Nvidia stock was at $41. Its P/E ratio price-to-earnings ratio was 40. Today the stock is over $200 and the price-to-earnings ratio is 18. So you have higher prices and you've got some volatility around that. But the quality is better. So you're seeing better support. Zero values right here. Yes, yes we're seeing a very widespread tech selloff. How do we distinguish what's a good buying opportunity here and what we should avoid? What could be a trap. I think it depends on the company. When you look at companies that have a habit of executing very well on growth and you get this drawdown, well, I think that's an opportunity. I've been saying for a while, buy chips on dips. And I think that in this particular case you're seeing maybe an emotional selloff, maybe a rotation, all of these things. And you have you know, we get into the end of the year. So people are trying to figure those things out. But now what you're seeing is an opportunity to pick up companies that are investing in the future at a better price than you could a little while ago. And I think that that's important. We like to see companies. Look, if you're not investing in the future, you're not going to be part of it. So I like companies that are taking their money and their free cash flow and say, this is where it's going. This is where we need to be. We want to build out there's there's not enough, you know, there's not enough computing capacity. Who is going to have the best and fastest is going to be the winner. So you came into the interview. You actually sent these notes before we saw Amazon's results. But Amazon and Alphabet were two of your top picks. They've they're both obviously getting hit hard today after earnings. Alphabet more than Amazon you'd buy both here. Yes. Which was the better buying opportunity. I think Amazon is I think Amazon has more. If you wanted to pick between the two which I would do both. Right. But but you pick between the two. I like Amazon because of the other things that it does. Right. So Amazon, four out of every $10 spent on retail. And what you give an American the American public money what do they do. They spend it right. So four out of every $10 goes to this online goes to Amazon. And Amazon also has this great opportunity to increase its margin in its retail business through robotics. So when you think of how taking massive advantage of AI, massive advantage of robotics, massive advantage of all of these things that are going on, Amazon has the best opportunity to increase its margins because of that. And if they can increase their margins and they've got this much farther, longer term, opportunity for, for great returns. Okay. So Amazon getting the slight edge there. You say buy chips on dips. I know you like Nvidia. Is it buy chips on dips or buy Nvidia on dips? I think it depends on the company. Right. Intel has really gotten hit pretty hard. Yeah. I'm not an Intel fan. They they have seemed to have kind of lost their ability to execute. So there's something kind of wrong with the company in that sense. And so people aren't buying the turnaround story. I don't buy it yet either. They benefit from the fact that there's just huge demand for chips. So even though they're the, you know, second, third, fourth tier players, they're doing okay, but they're not playing to a competitive advantage. So you know, again, you know, I like you know, Nvidia I like AMD I like these these kind of companies that are... Broadcom, love Broadcom. Okay. Because last time you're on in the summer right. You said Broadcom and Microsoft are your top picks. Those weren't mentioned in these notes. You still like those or did something change. So like and you still buy them here. Yes okay. Only tech stocks higher on my watch list today, on my AI watch list, names like Adobe, Workday, Salesforce, some of the beaten down software names that have been catching a bid, some more than others. Do you like software? I like software if you can clearly point to its ability to increase labor productivity. Companies are. Where is that? Well, I think when you look at when you look again, if you're looking at Salesforce, it does increase increased labor productivity. And Adobe is getting is moving forward into that. So I like those companies. But you know software changes very, very rapidly. There's they're not there. They don't have, as you could call it, a wide moat. I call it a choke point. They don't have the choke point that some of the chip companies do. Someone else can come up with a new software. It's very hard to come up with another, you know, CUDA chip. You know, it's very hard to come up with the with the hardware pieces of this in these designs. So I prefer those for chips to the software. So as you look at the tech wreck that we've been seeing today and through October, really any other names that we haven't mentioned that investors should be scooping up here? Well, I think, I think TSMC is is probably one of the most important companies. And you can't you can't have AI without Nvidia. You can't have Nvidia without TSMC. You can't have TSMC without a company called ASML. All of these companies are are they really control what I call a choke point in that supply chain. And companies that are the only provider, the single source provider, or there's maybe 1 or 2 people there, they have pricing power and we're seeing that pricing power then turns into excess earnings. Excess earnings tends to turn into the better performance of the stock okay. What about outside of tech. Because we have been seeing you know I was taking a look at the sector break down this month. Energy consumer staples health care utilities all up double digits. Tech communication services largely because of tech down double digits. What areas of the market outside of tech look attractive to you at these valuations, these valuations? I think that when you take a look at energy, if you take a look at Exxon and Chevron right now, you've got companies that are again going back to earnings. You've got companies that their P/E ratio is like 12.4, right. But they're growing their earnings at 24%. So you have earnings growing a lot faster than the price of the stock. I think that obviously there's a they've been beaten up you know oil prices refining and all this stuff. They're integrated providers. Chevron and Exxon are really you know they've done well throughout this. Profits are way up. Earnings are way up. And we are going to have this situation around the Strait of Hormuz and Iran eventually. We think, you know, within the next six months, it seems to be resolved, and we're already getting more oil through than we have been, more than they want you to know, regardless of what the IRGC says, there's there's 16 million barrels a day go. But we've had this huge drawdown of worldwide so that, you know, that's got to be replenished. So I think the profit story for Exxon and Chevron is good for several more quarters. And I think that that's an important thing. And, you know, they pay good dividends. They've increased their dividends every year. So I think that's an area to be involved in. In the health care space. I think we like Lilly, and I don't think we're fully appreciating the value of the GLP-1s, the involvement, the ability to help our nation lose weight, helps change so many things. And, I mean, health care is the biggest, you know, cost that we're having, and we're fairly inefficient at it. But, man, if everybody lost 25 pounds it would really help help with the deficit, you know. So I think that that's one of the things that we have to look at. And Lilly's got the premium product. But then on the other side of the spectrum, I had mentioned names like McDonald's actually doing really well this month. Also, you know, some of the other staples like that is a kind of defensive safety trade. Or are you thinking that this is a market that's going to power higher? Do you need to own them? I think I think we really focus on the consumer. And so when you think of I mean, McDonald's is getting back to executing very well. So they're executing well. It is a lower cost alternative for eating out and fast food and what people do. So we think that that's, you know, physiological needs are kind of the basis of everything. And food's one of them. So we look at that and we want to find companies that are executing well because you know, as people you have to pay attention to the higher prices. They're going to move down the chain in terms of where they're going to buy. And Walmart is a perfectly good example, and we like that company. Even after a double digit gain in October. The fastest growing segment of Walmart's business are people making over $100,000 a year. And we talked about I think we talked about Walmart early on in the year. And the thing is, is, is while it's it becomes a fundamental place for people to go for things they execute exceedingly well. They're now number two to Amazon and online. So they really had this this ability. They've got, you know, 90% of the population of this country is within a couple of miles of Walmart store. So this is where you end up going. And you go to the grocery store more than you go anywhere else. They sell groceries. So I think Walmart is it was a really good example of some of these fundamental into the retail shoppers pattern of daily life. I mean, you're going to go to the grocery store, you're going to go to the gas station. So I think when we think of those things as. Two places, I don't need to go because you can get things delivered and then you don't have to. Yeah. And then and then. Perks of city life. And that's the purpose of. But then the thing is getting delivered by whom it's getting delivered by companies that are in that business. It's getting delivered by Amazon, is getting delivered by its meaning, delivered by the people to do that boxes. Not for groceries, but. Well, I guess Whole Foods though, actually, that's not true. Okay, so, you like staples? You like discretionary? It depends on which one. So which ones do you like? Which don't you like? I think that we probably are overpriced and some of the high end luxury things right now. I mean, this that's where if people get stressed, you're going to see some stress in the LVMH, you're going to see some stress in those in those areas. But in terms of, of, of luxury goods, I think that people are going to continue to look for value. So you look for the mid mid-level names that are nicer. I think that's more important. But I think that that where, you know, the, the, the high end of the market is kind of, you know, economically insulated, in a lot of ways, and you're going to have a fair number of luxury. So we're wrapping up October. We have November to think about starting next week. How much or what sort of changes should we be making to our portfolio as we think about year-end? Any significant change? Because last, you know, in August, you liked sure, you liked a lot of these names that you're talking about now. So given the fact that doesn't seem like you think midterms really will matter much in terms of the outcome, we have the potential for some seasonality, some strength there, given the tech selloff that we've been seeing. What sort of strategic positioning move should we be making here? I mean, I think what you're going to see is all of the online retail companies are going to do really well, I think, during the holiday season on a relative basis. First of all, if you're price sensitive, the best way to get the best price is to be able to compare. The best and cheapest way to compare isn't driving to the mall. It's going online. So I think we're going to see a big function in how people shop. People are still going to shop, but let's take a look at how so online things that are related to online retail companies like that, which again it goes back to Amazon. It goes back to Shopify. You have the platforms of DoorDash and Google and Costco. Those things those companies should do fairly well during this holiday season because they're going to, again, get a lot of traffic. And they you buy them ahead in anticipation of doing well. Do you I you know when we're we're I'm very much a longer term investor. I mean most of our clients are retirees or saving for retirement. So we kind of rather than trade daily, we're looking at what's the big long-term trend. And all of those are favorable. So when you get these selloffs and some of these names that are affiliated with this, that becomes an opportunity to participate in okay. I do want to talk about some things that could get in the way of the market moving higher. You don't have price targets, but you think that this is a market that's moving higher between now and year-end. I think we end up in the year at year-end somewhere around between 7,800 and 8,000. Okay. So it's a little higher. Yeah. Okay. 76 I think I think that we will going into 2027. The bottom line is this the market's at an all-time high when earnings are at an all-time high. And projections for earnings for this year we're pretty darn good. Projections for earnings this year are up about 13%, 14%. Projections for 2027 are up another 13 or 14%. So we will whether whether you're trying to worry about exactly the end of the year or you're looking forward into next quarter and beyond, earnings are continue to grow very, very well. Yeah. And I think the perspective is that S&P is still only 3% away from all-time highs. Even on a day that feels really awful. The Nasdaq down 6% this month. It's still up 13% so far this year. But you do think that the Fed will continue hiking rates. You are looking at a rate hike in December and then another next year. We had Eddie Ghabour on earlier this week. He said if the Fed hikes again, get ready for a 10% correction in the S&P, a 20% correction in the Nasdaq, which I guess would be a bear market, although he still thinks we would be in a bull market. Why do you think that's not the case or. Why or do. You think we well. I think I think the Fed's adjustments right now are adjustments around the margin. We're kind of taking back. We we were at five and a half. We dropped it to four and a half. That's a 20% downward move right. We were at four and a half. We dropped it. We dropped it to 3.75. That's an 18% down downward. But those moves become beneficial to companies that borrow money. Finance inventories, cost of goods sold you have a 20% reduction, part of your cost of goods sold or your margins go up. Well, now, I think the Fed is kind of adjusting on the margins. We had about a one increase. We may have another. Most of this is going to be driven really by, diesel prices. Most of this is going like I said before, you know, increase in diesel is it shows up in core inflation. And I think if we resolve. But the Fed can't bring down diesel prices. No it can't. The Fed's hiking in response to inflation. And if they're in they're doing in response to inflation. The point is is what's going to bring inflation down. Well there's probably a couple of things that can bring inflation down. And really the first one is going to be a resolution of our oil price situation that can move fairly quickly but not not immediately. Like this is not going to come down as fast as gasoline prices. Right. But when you think about the Fed looking at this, we're able to get back. We were on a downward projection. We were about 2.4. And now we're going back up to 2.6. That's driven by this price structure. I think you get beyond that. I think what happens is the Fed then is able to look at after maybe they raise one more time, maybe there's two more times and then they go, okay, we're we're probably about right. This is not, in our opinion, the beginning of a Fed tightening cycle. This is adjusting adjustments on the margin. So I would disagree. You might have the market overreact, but it's going to be a short term set of circumstances because the economy is fundamentally strong. Companies are making more money than ever before. Earnings are increasing. And the American public is is actually doing better than they've done. So what's the one thing that could change your bullish outlook then. I think obviously you can always have black swan events. You can you can have a major miscalculation of foreign policy. You could have a major miscalculation of fiscal policy. But not a lot other other than something that is an unexpected event that you really can't insure against. You get another COVID, you get, you get a something like that. It's not $100 oil for the next six months. No $120 oil would bother $100 oil is inflationary, but not recessionary. You get gasoline prices. So human behavior changes at like by $5. I mean, people go to the gas station more than they go to the bank. You go to the gas station where you get gasoline prices, go. To the bank. Yeah, because you go to the bank maybe once a week, but you get gasoline prices at $5. That's where behavior changes. We've been studying this for a while. Gas goes to $5. Then, you know, Bubba turns to Leroy and says, we're taking your truck today. People that don't carpool with each other will. And behavior changes and then oil prices and then gasoline prices come down because you really start cutting as a demand. You get demand destruction at $5. Probably not before then. So it's just inflationary on the market. It's inflationary and it's painful but it's not devastating. Not 120 devastating. And that could be recession. That would be the thing. But I don't see it happen. I that's the that's the issue. I don't see $120 oil happen because you're getting enough supply through as it is. So your best advice to the everyday retail investor who might be shaken up on a day like today, because maybe they just have, you know, a lot of tech exposure and broader index funds and they're thinking, oh, shoot, what do I do now? Your best advice for those retail investors right now? Breathe. Take a great big deep breath and recognize that this is an overreaction to companies doing actually what they're supposed to do. People are saying, oh, we're worried about free cash flow. We're worried about how much money they're spending. They're spending on AI buildout and stuff like that. But the companies, the growth companies are doing exactly what you want them to do. We want them to invest in their competitive advantage. So okay, the market's going to react a little bit. People are going to overreact to these things. Lean in. Lean in means buy the dip. That's all right I think this is a great time to pivot to a rapid-fire round of This or That. You know how to play. Quick questions, quick answers. No hedging. I'm ready. Dryden. Yes ma'am. Here we go. November market rally or pullback. After the election, a pullback and then a rally near the end of the month. Stocks by year-end, higher or lower from here? Dryden Pence Higher. Caroline Woods Tech selloff, buying opportunity or warning sign? Buying opportunity. Right now. Buy the tech dip or play defense. Buy the tech. Equal-weight or market-cap-weighted S&P. Equal-weight. Equal-weight or small caps from here. I would say equal-weight S&P rather than small. But but let me make I know this is not rapid fire but but I do like small caps because they are going to be able to really expand their, their earnings as they go forward. So like so like equal-weight and small caps. The companies that are taking advantage of AI are the ones who are going to have expanding profit margins. And that will make the biggest difference in those companies. So ask yourself that question, how effective is this company at increasing labor productivity? Bigger opportunity right now beaten-down AI stocks or defensive stocks. Today. Today is beaten-down AI stocks. It longer term. Some of the defensive stocks if you when you say defensive I actually say defense in terms. Oh right. I meant more staples. Yeah, well I'll tell you. So if you want to talk about that, Raytheon, L3Harris, Lockheed Martin, all of those companies, the world is not going to break out in the Kumbaya, and we're going to continue to have conflicts globally. So global defense stocks, I think, for the next couple of years. All right. Yes. Defense versus playing defense. Better buy right now Amazon or Alphabet. Amazon. Amazon or Nvidia. Nvidia. Microsoft or Broadcom. Broadcom. Midterm elections worry or noise. Noise. The most important thing about the midterm elections is they'll be over. Bigger threat to stocks $100 oil or rate hikes. Oil. Better investment for 2027. Big Tech or the broader market. Big Tech. Bigger mistake taking profits too early or buying the dip too soon. Taking profits too early. Yeah. One word to describe the market right now. It's exciting. All right. And I want to come back. I've already screwed up the rapid fire flow, so I'm sure our audience will point that out. But you chose equal-weight over market-cap weight. And then you chose Big Tech over the rest of the market. Explain that decision. So equal-weight over market-cap weight. The challenge is you have the market-cap weight. When you look at what's going on right now you have ten stocks are accounting for, you know, 40% of the S&P 500. Ten stocks accounting for 50% of the Nasdaq. That in and of itself is not a diversified portfolio. That in and of itself is one of these things where you have a lot of single stock risk. This is why you see those indexes overreact when you have something happen on a daily basis to, to an Amazon or to a Google that's kind of freaks people out. This is why when you take a look, if the broad economy is doing well, then equal-weight would make sense because you better diversified across all of the pieces of the portfolio. So I think for a retail investor who has trouble sleeping at night, you want to be equal-weight. And then if you really want to pick where you want your concentration, pick your concentration. Don't let the index pick it for you. And you would pick big tech. As I would pick I would pick the big tech and the companies that we have talked about. Okay, just finally one big, big tech name that would not be in that concentrated portfolio Intel. All right. We'll leave it there. Dryden, always a pleasure. Thank you so much. Thank you. That's Dryden Pence. Chief investment officer, Pence Capital. If you enjoyed this Street Talk, check out our full interview with Steve Sosnick. He is playing defense heading into year-end and explains why is a little bit different. And if you like what you're seeing, be sure to like, comment, and subscribe.