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- [00:04]
A
I have never seen the magnitude of these earnings increases that I have seen year to date. And if this continues, we're going to look back and say, wow, the stock market wasn't expensive, it was actually cheap.
- [00:22]
B
Hello and welcome to the Baron Streetwise Podcast. I'm Jack Howe and the voice you just heard, that's Andrew Slimon. He's a Senior Portfolio Manager at Morgan Stanley Investment Management. Last week we heard a somewhat cautious view on the market. This week we'll hear from Andrew about a sunnier outlook. You can compare the two and go with one you like more, or you can take an average. You can arm wrestle yourself for it, whatever you like. We'll hear from Andrew in just a moment. First, we'll say a few words about a big development and in felonious Video Gaming, let's get into it. I cannot believe that it has been 25 years since I stole a Mr. Whoopee ice cream truck and rigged it with a bomb, parked it near the docks and then played the jingle to lure rival gang members to murderous dairy based doom. They say enjoy it while you're young. They're not wrong. Back then I had time for occasional Grand Theft Auto as with a capital G N T and A as in Grand Theft Auto 3, a landmark video game from Take Two Interactive. I bet many of you are familiar with Grand Theft Auto, but If you're not, GTA 1 and 2 in the late 1990s those were pretty simple two dimensional affairs. They had a top down perspective. This company, Take Two, bought the studio behind those games and then it created something called Rockstar Games to develop edgy cinematic titles. And in 2001 it came out with GTA 3, which was a total departure. A naughty revelation. You might say this was a first person three dimensional open world of beauty and barbarity. I did things with a rocket launcher and a flamethrower back then that I'm still not proud of and I'd like to apologize to the entire Liberty City Police Department. But I also sometimes pulled over my Banshee sports coupe just to admire the sunset, even with a four star wanted level while I ran so far away from a flock of seagulls played on flashback 95.6. But enough about my life of crime. GTA 3 was transformative for take two shares. In the month leading up to the Game's launch in 2001, the stock had dipped below $5 a share split adjusted. Two decades later it was $180 and shareholders had done more than four times as well as they would have in the S&P 500 index. However, over the past five years the stock has disappointed. It's gained only 28% while the S&P with dividends has made 90%. I didn't keep up with the franchise, by the way. Somewhere around GTA 4 I got married and before long I was immersed in an even more chaotic first person open worlder called Parenting. But now I hear that after much delay, there's a new installment, GTA 6, that looks likely to ship in November, and this one seems particularly significant for what is now a struggling stock. See, GTA releases used to be frequent over the first decade after the game went 3D, there was nearly one a year if we count major and minor titles. And then there were a few quiet years. And in 2013, Take2 launched GTA 5. That one added a multiplayer mode which is now available separately as GTA Online, and there hasn't been a new version in the 13 years since. Why? Well, the online game operates as a continuous money maker, kind of like Roblox or Fortnite. If you're a new player, you buy the game you spend on in game currency. You can use that to get special vehicles or apartments or weapons, what have you, and you might even pay a monthly membership fee for other perks. So take two revenues over the past 13 years have multiplied and growth has gotten smoother. But there are good reasons for a new Release now. If take 2 modernizes the mapping technology, it'll allow for bigger worlds with better artificial intelligence and physics. If it updates the monetization system, it can draw closer to a lucrative Roblox type model of allowing players to create and profit from content in exchange for a cut. Plus, fans of the series. They want a new single player storyline like the one I used to play. By giving them one, Take two will boost upfront game sales. But there have been delays. GTA 6 was originally supposed to come out last year. The latest target launch date is in November. There was recently a leaked Best Buy email related to imminent pre orders. That was enough to make investors think maybe we're really on for November, and to send take two shares 6% higher in a day. The shares are not obviously cheap, at over 50 times projected earnings for the company's fiscal year, which runs through March 2027. However, earnings have recently been depressed by high development costs for GTA 6 without the corresponding revenues because it hasn't launched yet. So after this fiscal year, Take two is expected to triple its earnings per share in four years. Like many other investment banks that cover the stock. Morgan Stanley sees upside. It recently reiterated its overweight call on the stock, predicting upside of close to 20%. It notes that historically, video game publisher stocks have risen an average of 18% over the six months prior to highly anticipated launches. The peak is actually better than that. The peak has tended to occur about a month before the launch at a 26% gain. We'll see whether that happens in this case. There's a lot of money at stake. Overall, yearly spending on console games has more than doubled since GTA 5 came out in 2013 to nearly $40 billion estimated for this year. If GTA 6 can capture the same 10% of the market that GTA 5 did back then, Wall street estimates could prove low. I do have one late update. On Thursday, after the stock market closed closed, Take Two reported fourth quarter financial results. The numbers were good. They beat expectations. But the big news was that Take Two stated November 19 as the launch date for Grand Theft Auto 6. In other words, no more delays. At least that's how it looks. And the company has a record of delivering very conservative guidance and then beating that guidance by a lot in the year ahead. At first glance, I'll call this guidance pretty solid, and the stock was trading up after hours. We'll see what happens. I don't think I'll get a chance to play the new gta, by the way. I saw that it's set in Vice City, which is based loosely on Miami, whereas back in my GTA three days, Liberty City was more like New York. And my first thought when I learned that was about the state tax savings. It's probably as good a sign as any that my days of carefree video game criminality remain behind me. Coming up, what are the rising bond yields that we saw over the past week mean for the stock market? Is it still attractive? Which parts are most attractive? Are we still okay here as investors? I mean really, are we okay? I'm a little nervous and also pretty greedy. Andrew Slimon from Morgan Stanley is going to tell me how to feel and what to do. That's next after this quick break.
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- [09:26]
B
Welcome back. We started this episode by talking about my GTA days back in Liberty City. All I had to worry about back then was snagging a slick ride and creating mayhem. One thing you didn't have to think about in Liberty City was the deficit. Government spending. Whether that's making bond vigilantes nervous and whether that's the reason that yields on government bonds have been rising over the past week and whether those higher yields might lure investors out of stocks and send stock prices lower. And could that set off a whole reverse wealth effect that could be bad for the economy? I don't know if that level of realism is coming in the new game, but I hope not. We do have to think about it in the real world, however. We need one of those. What do the gamers call them when you got to go online and find the and cheat and find what you should do instead? A walkthrough. We need a walkthrough. I've got just the person to give us one. His name is Andrew Slimming. He's a senior portfolio manager at Morgan Stanley Investment Management. I reached out to Andrew recently for a fresh perspective on what's going on in investing markets. Let's hear part of that conversation now. I have some anxieties I'd like to lay at your feet. Maybe you can help me with them. These are stocks going up anxieties, which are better than stocks going down anxieties. But the market has run up pretty far pretty fast. And the concern in recent days has been rising bond yields everywhere. Is that going to be the thing where investors say, well, I can get juicy yields now in bonds. Let me switch this money out of stocks and there goes the stock market. So what do you make of that swirl of concerns right now when you look at stocks relative to bonds?
- [11:12]
A
Sure. I mean, there's no question higher yields will draw money out, more money into fixed income than lower yields. The question is, will that cause a collapse in the stock market or what is the rate at which the, you know, the tipping point happens? Anyone that comes on your show, Jack, and says they know the number, you know, they're just taking a guess. I don't know the number. And I think next year is the key number. Because if I think about what where the S and P will end this year, it won't be 2026 earnings that matter. It will be 2027 because that'll be the forward 12 months and that has gone up a lot year to date. Will that reverse if rates Go higher? You know, I don't think so, but we've just come off a very good run for the stock market based on strong earnings. So I think the market will revert to some of these more macro concerns like higher rates, and it could cause a little steam to come out of the market. I think that's, I think that's what you want to see.
- [12:16]
B
I've seen in some of your published comments that you refer to this as a late cycle, not the end of the cycle. End of the cycle sounds bad. How do you tell the difference? And can late cycle still be okay? Can that still be a pretty benign environment for investors?
- [12:35]
A
First of all, I think it's late cycle because I don't think this cycle has changed at all. We had a bear market in 2022 down 25%, which offers a great chance for investors to buy. But tragically in 2023 and in year 2024, at least the first half, there was net outflows from equities and the number one pushback, you know, I'd say to people, when the market is down that magnitude, the likelihood of making higher returns than average goes through the roof. And people would say, well, why should I buy equity when I can get risk free, you know, 5 to 6%. That's consistent with late early cycle. I don't hear people saying that anymore. Now, maybe they will if rates keep going up, but I don't hear that. And that's because investors frame their viewpoint on the future looking solidly in the rear view mirror. It's a great Warren Buffett quote in the rearview mirror. In 2023 saw a bear market. In today, the rear view mirror shows a bull market. So that's why I think it's late cycle. But euphoria is when stocks that are leading are not. The stocks that have the strongest fundamentals, they be, you know, like in 2021, it was SPACs, meme stocks. Today, I would argue that, you know, yes, semiconductors are leading, but they have the great fundamentals. They're the ones that are beating out the numbers the most. So I am worried about that. We are Jack, late cycle and euphoria is around the corner. But I do see there's a fundamental backing to why the companies that are leading are doing so.
- [14:15]
B
So the companies that are leading, right, the semiconductors, all these marvelous companies. I mean, incredible earnings right now and incredible pricing on their products. So as you say, these companies are working and I suppose that's where investors want to be. But how do you figure out A way to do that safely without having too much exposure to the thing that has run up too far. Like what, what do you do for that?
- [14:38]
A
Look at the last couple days, there's been a sell off because you know there will come times when there's too much enthusiasm for these types of stocks and the market rotates and I think what the opportunity set is, yes, you want to have a, a certain portion of your portfolio and what I would call the AI beneficiaries. Companies are benefiting from the build out of artificial intelligence. But don't lose sight of the fact that more companies will benefit that are not in the industries like the banks. Financials I think are a very good balance. I think about the dot com bubble and I don't think we're close to it but I think we have to remember yes, the dot com bubble, you know, ultimately some of those dot com beneficiaries got too expensive and they went down a lot. But the Internet didn't die, the Internet continued and it was, it is a great profitability enhancer for a lot of companies, a lot of industries. So I think that's how you balance a portfolio. So you're just not in these one, you know, this one trait.
- [15:45]
B
Is there anything you can tell me beyond the AI companies about your favorite types of exposure for investors now? The pockets of the market that you like or that you don't like or particular tilts that you think make sense right now?
- [16:02]
A
I really think these stocks are not expensive yet. And I'll start with the memory semiconductor stocks. People say well there's a buying frenzy. And I say, and I look and say well these stocks aren't all that expensive. I was around in the late 90s, these, the frenzy, these traded to, you know, some of them triple digit multiples.
- [16:24]
B
Just to give a specific example of what you're talking about. Micron technology, which sells memory which is in desperate need in these AI data centers that was recently the third cheapest stock in the S&P 500. If you just look at the price to earnings ratio because investors are saying the boom is great, we don't know how long it'll last. So, so continue just for that reason
- [16:44]
A
they're being very rational. They're not being irrational, they're being rational. However, when the, you know, when the tide goes out on these stocks from time to time they're correlated and so I think you want to offset that with other areas that will benefit. And I think the banks are a key beneficiary.
- [17:05]
B
How do you feel about Overseas markets, let's call it developed markets overseas versus the U.S. do you have a view there?
- [17:13]
A
So I run global strategies and I've always said one of the benefits of a global approach versus an international only is if the US market is the best market in town, we'll just own much more in the US and for years I would have these again, these strategies would come to see us and they'd say, well Europe is cheaper, you should buy Europe. And I'd say, well, what stocks own, I gotta own stocks. What stocks in Europe have catalysts? Well, we don't do that. And the reality of Europe is that the PEs always look cheap because the E during the year would drop and at the end the year go, oh, maybe it wasn't as cheap. So you need catalysts. And what we have picked up on the last few really since the beginning of 2025 is we're starting to find more ideas where companies are starting to beat and raise and they're starting to be much more pro shareholder friendly. So. So I think there is an opportunity elsewhere. Now obviously the war is impacting Europe more than the US So it's weighing on the war. But every day, any day, where you see maybe, you know, some Trump comment that maybe the war, you know, an agreement is around the corner, those stocks in Europe come roaring back. So I think we need to have some type of agreement coming. But at the end of the day, my bet is a global approach will outperform just the S and P. But I wouldn't run out and sell the US because if you sell the US we are the, we're the focus of the AI rollout. And as I've articulated, I think you want to have exposure there.
- [19:00]
B
Do you see something out there that investors are getting wrong right now? You see a mistake that a lot of people are making or something that they're, or an opportunity that they're not seeing.
- [19:10]
A
Jack, the number one question that I get from individuals is I don't get why the stock market is at an all time high. I hear that all the time. I bet you have too. And when I hear that, I think you are focused on the macro. I understand AI disruption leading to unemployment, private credit, you know, is that going to cause the next great financial crisis? Iran, you know, the Iran war. Oil's over a hundred dollars, I get it. But what they're not focused is on the micro. And like I said before, I have never seen the magnitude of these earnings increases that I have seen year to date. And if this continues, we're going to look back and say, wow, the stock market wasn't expensive, it was actually cheap. So I think what investors are getting wrong is, is what ultimately drives stocks is earnings and earnings revisions. And that's going very powerfully the right way. But with all these headlines and all these concerns, you know, now that we're past earnings season, I suspect the market is going to go back to focusing on these macro worries and they're going to forget about micro, and that'll be a great, you know, fat pitch, the way it was kind of in the February March timeframe.
- [20:32]
B
Last question I have for you is about the US Debt because we're seeing some of these bond yields rise around the world and people are taking a look. I mean, I've been hearing concerns about the debt for at least three decades, but really those deficits are pretty big. And there doesn't seem to be a lot of momentum or movement toward getting that under control. And I think some investors wonder, maybe not about what, what happens immediately, but like, where, how does the story end? What do you think happens there? How does that play out?
- [21:02]
A
Well, what you said, you stole my lie, which I've been saying for a very long time, is I've been hearing this question since I've been in this business, and I've heard people give projections that what a deficit when people would walk away and they have it. And last time I checked, our rates are still pretty low. When I started my career on Wall Street, I remember the fixed income expert in my training program said, you never buy a municipal bond that doesn't yield 7 to 8%. So I don't know when that happens. And it may not happen, you know, in our career. And if you sit around and you avoid equities because you're convinced it's going to happen, you can miss out on a lot. What it does argue for, Jack, is it argues for diversification. It argues for having assets other than in US Dollars. I think that's, that's very true because at the end of the day, the dollar doesn't go in vote. You know, in the polling stations, people vote. And when they know that they're going to get benefits from elected officials, you know, that's what wins votes. And so inherently there is a, you know, a voting decision to devalue, you know, devalue currencies. We go through these periods when the market gets a little frothy and then we get these bolts of concern and it washes out that froth. And what I would argue is that's good news because as long as we wash it away that froth, then this will extend the cycle. So if a little higher rates, bond vigilantes challenging and incoming Fed takes a little heat out of the market, that's just been very strong. I think that's, that's good news.
- [22:50]
B
I enjoyed speaking with you, Andrew.
- [22:51]
A
Thank you, thank you.
- [22:55]
B
I like what Andrew was saying about the froth and the washing it away and maybe extending the cycle. Makes me think of fabric softener and clean socks, which are always a good idea. I don't care what kind of investor you are. Thank you all for listening. If you have a question you'd like played and answered on the podcast, you can send it in. Question could be in a future episode. Just use the voice memo app on your phone. Send it to jack how that's h o u g h barrons.com you can subscribe to the podcast on Apple Podcasts, Spotify or wherever you listen to podcasts. If you listen on Apple, you can write us a review. See you next week.
- [23:42]
D
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