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- [00:00]
A
What's up guys?
- [00:01]
B
I'm sitting down with Lou Bassinise today. He is a veteran market strategist and the founder of the Big Skinny. We get into his four favorite stock picks right now. Why he's so bullish on the energy sector and biotech and much more. I think you're going to love this conversation, Lou. I want to get right into the energy sector. Been the top performing sector of the year and now there's a lot of sort of divided views on it because we have oil pulling back. But a lot of people are still bullish. Where do you fall on this?
- [00:29]
A
I'm still bullish. I mean I was wildly bullish about a year ago and that was a very contrarian stance. But look, I look at it, it was such an obvious trade a year ago because the sector was trading at like 13 times forward earnings. Super cheap, super low allocation in the s and P500. It was bound to just catch up eventually. Now with higher oil prices, I think there's a point that most people are missing. Energy sector took off as it should on the war in Iran. Oil prices ramping higher. Just, just because oil prices are coming down though, that doesn't mean the profitability of these oil companies is going to change. In fact, even though the valuations have gone up, they're using this one time spike in oil to really improve their bottom line. They're not taking that excess profits and drilling more. So you're going to see a lot of it hit the bottom line of these E and P companies that you wouldn't anticipate. You know, the president's out pushing drill baby drill and the operators are like, no, not yet. Because we need to see sustained prices over 70 and which we just haven't seen that for a period of like a quarter or two. So I think you're going to see a sur in the first and second quarter as all of these companies report better than expected earnings and the sector as a whole is just not overvalued. It's now at about 19 times forward earnings. So right in line with the market, you know, maybe about a 3 1/2% allocation in the S&P 500. I think we can still go another 15, 20% higher from here. So I think it's still a great setup. If you don't know anything about the space, I still think you play it with ETFs. The XLE is the easiest way to do it. It's a momentum trade that I think is going to get is just kind of consolidating before the next leg. Higher.
- [01:58]
B
I think XLE is up about 30% or maybe more than 30% as of this recording. And the interesting thing here too, AI is a huge part of the story that's kind of been pushed away because of all the Middle east stuff. And now you have. Hopefully if that starts to go in the rearview mirror, we get more attention back to the AI trade. And I think that's a pretty big tailwind for energy.
- [02:21]
A
I think it's a huge tailwind for energy because like, I would think about it this way, everyone knows real estate's about location, location, location. I'd argue AI now is all about power, power and power. Because we don't have a supply constraint in terms of chips. Nvidia is making plenty of chips. We're starting to get some supply constraints with memory chips. But the biggest bottleneck is now data centers that have guaranteed power supplies. So that doesn't necessarily impact oil as much because oil is not a preferred fuel obviously for electricity generation, but natural gas is. You start getting into just all the other areas, like you're going to see every source of power that we can get used to power this AI trend. No, no pun intended. So I think you're right. Get rid of the Iran oil risk premium and the attention refocuses back on the. I think arguably the biggest tech boom we're ever going to see with AI. And the tech sector is not trading expensive anymore. I mean, the valuations collapse 50% from a 40x multiple down to a 20x. So I think there's another leg higher with, with AI. So I can't. I mean, I'm usually a pretty optimistic guy, but if I look at the earnings backdrop, I look at the demand for AI, I think the market's really setting up for a big rally through the rest of this year. Especially as you start seeing some of the implications of the regulatory changes on tax reforms for corporations and individuals. It's like the perfect setup for a really bull market rally. And the icing on the cake for me is the latest bank of America sentiment survey. Institutions are super negative. Like they're most negative they've been in over a year, which is a contrarian indicator to me.
- [03:54]
B
That's very bullish. And I'm with you as far as being optimistic for the rest of the year. This V shaped rebound we've seen with the Middle east, it's exactly like what we saw with Liberation Day surprised everybody. And it's been just pretty mind blowing actually to watch. If you just look at the chart, it is a perfect V just like a year ago. And it's funny about the AI valuations and tech trademark Nvidia people have been pointing to that as cheaper than Costco for months now. Yeah. And Walmart. So I know you have a few more contrarian or maybe under the radar ideas in the AI and chip theme. What are you looking at right now?
- [04:35]
A
Yeah, I look at the like low tech chips. Right. Because think about it, AI has been dominating chip demand. TSMC just reported their latest results and I think it was like 61% of their revenue was generated from AI chips. Right. Well what about all the analog chips that go in things like industrials and cars? None of that components and content has changed. Right. Like automobiles now have more and more chip chips that go in that and just these middle layer kind of like run of the mill chips that really provide the functionality. You're getting into a situation where those makers, guys like NXPI on semiconductor, even STM are going to have some pricing power. You're running out of inventory because no one's stockpiling it. So I think you're going to see a big catch up trade in the lower tech chip makers because that area has been neglected by prioritizing AI chips. So I think it's like NXPI right now I think trades at about a 15 times forward multiple. Historically when it gets into this 12 to 15 times multiple, it rallies 30, 40, 50% off that bottom. So I love that as kind of a low tech, unexpected AI adjacent play in this market.
- [05:43]
B
I will say I've never heard anyone talk about these three names. You just mentioned an xpi, STM and on. I know there's semiconductor adjacent or semiconductor companies, but they're so off the radar. At least in my, in my little world. No investors have told me about these.
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A
Yeah.
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B
So I really like these. Let me ask you about what we saw last week with Allbirds. It made this big AI announcement go from a shoe company to an AI company. And it really reminded me of what we saw with the Internet companies in the late 90s. If you added dot com to your name, your stock was almost guaranteed to go up.
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A
Yeah.
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And I think Allbirds was playing into that. And right now we have, you know, this unstoppable AI force. What did you make of this?
- [06:33]
A
I think it's a head fake. Right. I think a lot of people are going to attribute it to froth in the market. It's a sign, a clear signal of the top because it's so easy to say hey, this is just like the dot com days when companies like Long Island Ice T changed their name and like rallied. Right. Or like we saw in the early days of Bitcoin or the marijuana trend that really took off, that companies were pivoting to focus on crypto. And you just saw these rallies irrespective of any fundamental reason for it. But here's why I think it's misleading. I think there was just a structural setup there that really, really set it up. There was a low float, there was. They pivoted and you got a classic short squeeze that just played into then becoming a meme stock. And I think what's different this time is there's so many degenerate speculators in this market. Right. I'm not even gamblers. These are just degenerate. Like we don't care about the fundamentals. If the thing's moving, price is all that is all telling. Let's just pile in and drive it farther. I mean, you look at that, what was that? The fundrise pre IPO stock. Right. Rips to like 4 or 500% higher and then back down, know 80% from there. So I think Allbirds is going to be used as the poster child and the scapegoat for like this is another dot com bust. I just don't think you're going to see it work the same way if other companies try and pivot to AI and then you just look at the fundamentals like the real drivers of AI. The Nvidias of the world, the TSMCs, they're not talking about, you know, demand weakening, they're talking about it accelerating. So I think the underlying fundamentals are still intact. Like to sum it up, we're still very much in the early innings of the AI trend, in my opinion. Will we have some volatility? Absolutely. But I think this is a trend that persists for another two, three years at least.
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B
I mean, Allbirds is like the opposite of a fundamental story. I think to my memory it had 17 losing quarters in a row before this stock rally, which is just insane. Do you think that this, let's say the Allbirds spike, are you reading into that as something that could signal something about the coming IPO pipeline? Yeah.
- [08:38]
A
So I think the read through here is pretty interesting that people will bid up companies irrespective of the fundamentals, which is a good sign, but also a warning sign. It's a good sign for the performance of SpaceX IPO or the Anthropic IPO, because you're going to get investors that are just like, hey, this thing's going to rip. It's the greater fool theory. I'm just going to buy it and send it higher. Which for more prudent long term investors, the IPO data is just undeniable if you look at it. Jay Ritter out of the University of Florida, my alma mater, has done exhaustive research on the performance of IPOs, and by and large, they're just not great investments for everyday investors. When you're buying in the aftermarket, after it prices and it runs, the best opportunities come about six to nine months later where you're buying them after the dip. So like you look at a company like Meta came to market tremendous fanfare in 2012 and like 38 bucks a share by September it was trading for just under $18 per share before then it went on a historic run. So I think like SpaceX, it's one of maybe 12 companies that are going to have a trillion dollar plus market cap when it comes public. You're telling me that that thing's going to quadruple easily? No, it's going to be really hard. I think that's going to have a blow off top and then pull back. I'm not a buyer on the ipo, but I definitely would be a buyer, you know, three, six months down the road but depending on where the price comes down to.
- [09:58]
B
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- [11:30]
A
But valuation matters, right? So like holdings came public and rallied and then pulled back. So I think if you're, if you're not, you don't suffer from fomo, right? You're not worried about like hey, I'm never going to get a chance to buy again. Most often you do get multiple bites at the Apple here to buy these companies when they come newly public and pull back. You know, there's always a lockup period that expires for insiders about 180 days after the IPO. That's traditionally a very great window to start looking to make purchases. I don't think Space X is going to be the exception to the norm. I don't think Anthropic will be, there'll be tons of fanfare and I mean, I hate to say, I mean this is an easy prediction. There's going to be a lot of bag holders for a little bit.
- [12:08]
B
Yes, that is almost always the case. I think the same thing with Allbirds too is me already we're seeing some pain I would say on Allbirds. You know, we at Pro Cap Insights, we published this report the other day about SpaceX coming to market on the back of pretty much every other space company destroying shareholder value in public markets. And I think it was like seven of the last 11 space companies that came to public markets are negative since they've IPO'd. So it's not a great.
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A
You should take a look at one that I think stands out is Planet Labs. So they have a network of satellites that are basically think of Google Earth in real time. They're taking pictures of everything in the earth as it's unfolding. And then they sell those pictures obviously to governments for national security, but then also to businesses that are looking at, you know, different transport routes and stuff. It's done. It's a momentum stock completely divorced from the fundamentals. But it's a space related company that I think is the exception. But you're right, like most of these space and satellite companies have been capital incinerators both for the companies and for investors. So it's a, it's a tough trend
- [13:15]
B
to break out of totally and but if there's one guy that can do it, it's probably Elon. So he's someone I would not bet against. Lou, let me ask you about this ongoing AI layoff trend. Yeah, we saw Snap come out with a big layoff and, you know, pointing to AI as one reason for restructuring. What do you make of this?
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A
I think that if you needed to make a boy band of guys that make excuses in tech for why they suck at managing companies, it would cons of Evan Spagel, Mark Zuckerberg, and Jack Dorsey. Because the three of them have now attributed layoffs to AI. But if you dig beneath the surface and you look at their track records, Dorsey did it at X. He overhiered, overspent. And then Elon Musk had to come in and cut it in half the workforce and the product still worked. He did it at Block. Meta has done it twice now. In 2022, 2023, you saw tons of layoffs. So I think Snap is, is up against the same thing. They just got a little too big for the britches, got a little excess capital. They overhiered, they had to right size. And now it's just very convenient to blame it on AI. In fact, there was a survey that was like two weeks ago where they were talking to HR managers and they were saying that they blame 50 to 55% of the layoffs on AI, but it's really only 7 to 12% is really responsible for it. So they're even, even lying to employees saying like, hey, we're letting you go because of AI, when most of the time it's not. So I think there's a misnomer that these AI layoffs are really related to AI. It's actually just these companies just got too big and they're just right sizing, which is, you know, should be applauded by shareholders because you now are going to do more with less overhead. So that should drop to the bottom line and drive higher earnings.
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Wow. I know that a lot of executives, especially Will, it's very hard to take responsibility for your own mismanagement.
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Yeah, yeah.
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So now that you have a very trendy, buzzy scapegoat, easy to make that connection. Right. And it's. It's also easier to tell your employees that I think. Yeah, you know, if you lay off a thousand people, you don't want to blame yourself for that.
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A
Agree. I mean, but like, you look at the tracker like Zuckerberg has incinerated $80 billion on the metaverse. Right. He changed the entire company's name. To your point, he doesn't take accountability for that. He's just like, oh, we're going to pivot over here. You know, like it was, what, three, four months ago. We were talking about the $100 million plus packages he was using to bring new AI engineers on board. And now they're resorting to layoffs for the lower employees. So I think it's just a bad capital allocation that happens in tech a lot, and we kind of go through these cycles where they have to, you know, recalibrate and get back to what works. So I think we'll see more of it for sure. I think over time they're going to have to figure out what the right size is for these companies. And, you know, look, shareholders are probably wise to wait and see the valuations come down before you start, you know, buying these companies. But Snap, I would like, for me, Snap's never been a buy because of one single thing. It's patents. So Snap has no ip. They came public, they have no meaningful ip. So what you've seen happen, they had a smaller network, about 300 million users. Any feature that they could create that worked and resonated, meta slash, Facebook ripped off with impunity because there's no recourse, right? Like, hey, we can copy this and we have a bigger network so it'll roll out faster and get bigger. So I think Snap has got a fundamental Achilles heel problem and not having patent protection, so they couldn't even come out with the latest and greatest and make it be a competitive advantage that had any kind of durability in the market, in my opinion.
- [16:53]
B
Wow. Yeah, that's not a real flying colors for Snap there. Lou, let me ask you, if you don't buy into the AI layoffs narrative, do you think there's something in the labor market that investors are maybe not paying attention to that they should?
- [17:11]
A
Yeah, I think for me, the most interesting thread is just what we're seeing at small companies. 50 employees and lower. There's a lot more weakness there. I don't think it's because the businesses are fundamentally weaker. I think it's because there's uncertainty in the markets. There was uncertainty over trade and tariffs for a long time, uncertainty over the war in Iran. So I think this is the underneath the surface potential crack that should be motivating the Fed to lower interest rates, to really provide some, you know, just a catalyst for these smaller businesses, some confidence, lower the cost of borrowing, give them some more, just a little added, you know, fuel to continue growing their businesses. So I think that's something that can be worked out. But what is also interesting to me is I think AI is changing productivity in a way where what we would expect, the number of job ads per month for a level of GDP is being reset too much lower. Right? Because if we're at like 3 and a half, 4% GDP growth, we should be adding 350, 400,000 jobs a month somewhere in that level. And you saw, even with a gangbuster report last month it's only 172,000 or so. And then the month before that it was a loss of 90. So there's a, I think it's a, it's a fragile egg right now, the labor market in certain areas.
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B
Real quick, we'll get right back to the interview. Just wanted to pop in and say if you like this content, I read a newsletter every single morning called Opening Bell Daily. I cover macro, the stock market, asset prices, why things are going up, why they're going down. And if you want to get that for free, you can sign up at the link in the description. Let's get back to the interview. I mean, this is probably the first time maybe in history that the labor market is no longer a reliable indicator of the strength of the economy, which I think is going to cause all sorts of distortions and tear up the social fabric in ways we can't anticipate. But last year we're coming off like the worst job market in years, I believe, and economic growth wasn't paltry. So it's this weird conundrum that we're stuck in. And I think AI is going to accelerate that trend. I don't think it's necessarily a positive thing for, let's say, people's sentiment about the world we live in and the economy we live in. Companies will do very well, but I don't know if the labor market will be as welcoming to new entrants.
- [19:31]
A
Yeah, it's to be determined, I think, because there's some interesting early data now coming out where you're seeing a lot of layoffs in IT related jobs, but at the same time new job postings. But these new job postings have a different skill set in that sector that is reliant on AI. What is your experience with it? How well can you adapt? So I think the labor market's bifurcating into people that are adopting AI, even if they're almost 50 year olds like myself, saying I have to learn it somehow, some way. And those that are going to be luddites if I was Luddite Lou and said like nope, not doing this and you're going to get left behind. I mean you have to embrace AI in some way, shape or form or this labor market unless I mean even in the trades, right. Like you look at mechanics and stuff, you're going to start seeing AI infiltrate its way into repair shops and all of these industries. So I think you got to be sensitive to are you going to be on the leading edge or, or the lagging edge and pay attention to those trends in the, in the labor market.
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B
I, I totally agree with you. You know we had a, another ProCap Insights report. Sorry to keep plugging our.
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A
No man, I love it.
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B
And it had this amazing chart and finding that showed how entry level like young engineers 22 to 25, they've actually seen their employment opportunities drop by 20% since the launch of ChatGPT. Yeah but then if you were above 30 in the same field, your work opportunities went up by 10%. So you're saying it's a totally different. I think that kind of breaks the narrative that is taking jobs. It's mostly AI is kind of blocking out people from joining young people. But if you've already had a job and you have some experience under your belt, there might actually be more opportunities for you. You know, you got to pick and choose your sector. But that was a really interesting finding that certainly surprised me when I read it. What if we add one more takeaway for listeners here? What is your, I would say your favorite thing or favorite corner of the market right now?
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A
Favorite corner of the market.
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That's a good.
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A
I still love biotech. I start you're seeing the M and A activity coming back to the sector. I think there's a lot of undervalued names that are in the small and mid cap space. The innovation economy never sleeps. So like no matter whether there's a war in Iran or the economy's going through a recession, these just really leading edge drug discovery companies keep chugging along and it's a more patient game. Right. Like I think most investors now, I think the average hold time is like under six months for a compelling biotech to go from drug discovery development to approval. You know you're talking three, four, five years in the market. But I think that's why you have these opportunities to buy companies that have drugs that are in phase two. Like I look at a company like Actuate Therapeutics, it's trading at like a $50 million market cap right now. They have a treatment for pancreatic cancer that is extending life by 3 or 4x what the standard of care is. And it's going into what is now could be a potentially, you know, approval trial. So I think you're going to look back on these years and you're going to start seeing a lot more acquisitions happen in the biotech space. So it's a hard, don't get me wrong, BioTech. There's only two things that kill biotechs bad data and a lack of capital. It's very binary, but I think the asymmetric upside is really in favor of individual investors that take the time to do the work in the sector.
- [22:48]
B
I love that. Lou, where can people find your work online? Yeah.
- [22:51]
A
Best place is thebigskinny.com we put out a newsletter periodically, not as frequently as you, where we always focus on one headline that's misleading, one chart that gives you really the underlying story and trend to follow, and then one investment insight that hopefully increases your bottom line, not takes away from it.
- [23:07]
B
Perfect. All right, Lou, thank you so much. We're going to do this again very soon.
- [23:10]
A
Love it, man.