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…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. Bi…
Microsoft or Broadcom. Broadcom.
AI-extracted context Amazon or Nvidia. Nvidia. Microsoft or Broadcom. Broadcom. Midterm elections worry or noise. Noise.
Full Transcript
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.
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