Loading summary
Transcript34 lines
- [00:00]
A
I am sitting down with Josh Schaefer today. He is an investment writer at Barron's, and we go over multiple charts and four specific stock picks that he brought to the table today, including two that I have never actually heard of. This is a fantastic conversation, full of specific, actionable alpha, and I think you're going to love it, Josh. Everyone's talking about earnings right now because pretty much every company is crushing expectations. But you share this great chart with me that kind of shows the counterintuitive approach to this. What's going on here?
- [00:31]
B
Yeah. So this chart, Phil, is from Savitar Subramanian, who is the head equity strategist at bank of America Securities. I recently interviewed her and we were chatting about this chart. So I chose to put it in my substack. And what Savita sort of points out within that chart is the best earnings years are not actually the best years for stock returns. So if you look at the chart working your way from left to right, what you're looking at is a negative earnings year and then small earnings growth, a little bit better earnings growth, all the way up to the top quintile of earnings growth, which this year, now that you're looking at The S&P 500, expected to grow 21% year over year, would fit into that. That part of the chart. Now, why is that? Because at some point, expectations just essentially get too high. Right. And so what Sabina and I chatted about a lot is, is when you think about this market right now, and where can surprises come from? Our surprises going to come and surprise you negatively or surprise you positively. So in the first quarter, and we're talking about earnings here, S&P 500 surprises did come excessively, positively. So the S&P 500 is expected to report year over year earnings growth of around 11% going into the quarter, into the reporting period, that's up to 27%. So that you did get your big positive surprise, but you're asking for a lot. Right. To have that continuously happen throughout the rest of the year becomes a challenge. So over history, it isn't typically the best time for the S&P 500. I would note the average return is over 7%.
- [02:03]
A
Right.
- [02:03]
B
So we're not talking about negative stock returns here, but it is below the long term average. So it's not quite as good.
- [02:10]
A
Okay. And I think what's interesting too, about this chart, it's essentially hinting that stocks are reacting to the expectation of good earnings rather than reacting to the actual earnings results, I think is how I read this and the bar for the next quarter and probably the quarter after are just even higher after the last couple weeks with how good first quarter earnings were. So that's something I'm going to be watching. I will say personally, I'm very optimistic for this year. I think earnings will continue to crush. I think stocks are going to continue to go up. I cannot see a world where that S&P 500 is only up 7% this year. That seems very modest.
- [02:49]
B
Yeah. Well, I think why stocks have continued to rally over the last couple of weeks. To your point of sort of being forward looking and expecting those earnings, it's not just first quarter earnings estimates that have been going up. It is second quarter earnings estimates, third quarter earnings estimates. If you look for the full year 2026, a chart I've been referencing a lot that I've been making is factset earnings estimates from the day before the war started on February 27, year over year expectations were for 15% earnings growth for the S&P 500. It's a solid year.
- [03:18]
A
Wow.
- [03:19]
B
Now in the beginning of May, year over year, earnings expectations for The S&P 500 is at 21%. So you went from 15 to 21. So what's happening right now is companies are coming out and boosting their own guidance, not just analysts. It's not analysts boosting guidance. It's companies coming out and saying, hey, we're doing better than we thought. Then the analysts get even more optimistic. So you are in that cycle right now where the expectations keep moving up. So price is chasing those earnings estimates moving higher. The question is, for the full year, can you keep that trend going? It becomes maybe a little bit, I guess, a harder story. I don't think The S&P 500 is just going to go up in a straight line like it did for April for the rest of the year.
- [04:01]
A
I agree with you. One thing about earnings, a lot of these company CFOs that are setting expectations and sharing them on these earnings calls, they are very clever in how high they set the bar for themselves. So that's most of the reason why that I think it's something like 3/4 of companies typically be earnings anyway in any given quarter. No one's going to set themselves up to fail in a public company. So you have to take into account that the reason stocks are going up and the reason stocks generally go up is because these CFOs are very clever with the bars they set for their own earnings expectations. Let me ask you about this second chart. Here. So typically we have companies that invest in certain things. You would expect those things to become more profitable over time. And we are putting that to the ultimate test with AI CapEx right now. And you shared this chart with me that shows Morgan Stanley's estimates for hyperscalers. Capex going above a trillion for 2027. What's going on here?
- [05:04]
B
Yeah, so this is looking at Amazon, Alphabet, Meta, Microsoft and Oracle. So those are sort of the major hyperscalers as they're called, the cloud part of the AI build out. The companies are spending the most right now in the AI build out. And so what Morgan Stanley's laying out here is 2024 CAPEX, 2025 CAPEX, how much these companies are spending but also their prior estimate for 26 and then their current estimate for 26. And the reason I made this chart using an analyst estimates rather than using the companies provide guidance. What I think is interesting is Wall street is even more optimistic that the capex will continue to move higher because it keeps moving higher quarter after quarter. So this number 1.1 trillion for Morgan Stanley is actually higher than what the companies have currently said for 26 and 27. And what I think is the big story here, I think there's, there's two stories. I think this is maybe the biggest story in the stock market from a macro perspective, which we can shelf and get to in a second. I'll dig into just the companies because I think that's also interesting. All of these companies are spending more, but they're not being treated the same. You look at the most recent quarter of earnings reports, Meta sells off, Alphabet still goes up. What's going on there? People are starting to wonder why Meta's spending so much money on AI. They don't have the same product offering as Alphabet. Alphabet has gemini, a true AI chatbot that's starting to compete with ChatGPT. Alphabet has their own chips that are starting to sell. Meta doesn't quite have these products. Meta has been long good at talking in the street about using AI. Instagram reels, anyone that's been on it. It's pretty addictive. And they're using AI and they're selling you more things and that's making more for them in ad revenue. It's a great story. But why are they continuing to spend more? Investors are starting to question that versus Alphabet. It's very clear where the path is and that they need to keep spending. And then from the broader market it's just their one company's CapEx is another company's revenue. And so this is kind of the key chart to me for the entire bull market is as long as they keep spending, then everything continues to move in terms of the AI, build out companies that can benefit and growing earnings in other areas.
- [07:11]
A
Yeah, I think that's a great point. And the thing about AI capex is that it's so monumental it's effectively overshadowed any geopolitics, even any domestic politics, anything that Trump is talking about. Pretty much it all comes down to what the AI companies are doing and how much spend and infrastructure is going to be pitched forward for the rest of the year. And that's like the whole thing.
- [07:34]
B
That's why it's the most important chart in the market. To me. If you want to talk about oil prices and talk about the war and wonder how it's going to impact stocks, I mean the ultimate question we're asking is how is it going to impact corporate profits? What is driving the corporate profit cycle in the US right now? Spending. So as long as oil prices don't stop these companies from boosting their capex and spending, then the center of this bull market, what's really driving us, AI and tech continues to be intact and that continues to drive corporate profits higher. And it keeps you in the bull market phase of this whole thing. If the shock that comes, and it might not be oil, it could be anything else, it could be any sort of exogenous shock. If that is something that makes tech companies say I want to spend less, then that's when you start to get concerned.
- [08:19]
A
I can't tell you how many investors and strategists have told me this year that AI is the new macro.
- [08:24]
B
Yes.
- [08:24]
A
And I just take that with me into every conversation, every stock pick, every decision I'm making.
- [08:31]
B
Essentially I wrote that at the start of 2026, Phil. That's the biggest macro factor.
- [08:35]
A
You might have been the first. You might have been the first. Josh, let's ask you about these stock picks here. You brought a handful of picks. I want to start with Intel. Something I think is interesting about intel is that it's a company that the White House or the government took a stake in about a year ago. And since that day, Intel's up more than 450% since President Trump announced that. Why do you still think this is a buy?
- [09:00]
B
I believe the government at least headed into their earnings in late April, had made 30, 30 billion off of that investment, if I'm remembering my numbers correctly. So intel was an interesting one for us. So the first couple stocks we're going to talk about when I talk about Capex spending and that's someone else's revenue. Intel certainly falls into that because they're a chip maker who are selling chips and selling part of that build out to the big hyperscalers. The story with intel was an interesting one because intel was up 220% over the last year when we picked it. Barron's does not often pick stocks that are already up over 200%. We're very often looking for value. We're looking for maybe where the market has gotten it wrong and hoping that the stock will catch up to sort of what we think the bull narrative is. Intel had already been running, but our argument at the time was the street still didn't love it. Estimates were not that great for Intel. And then you also take a look at just simply so street didn't love it from a rating standpoint. It didn't have a bunch of buy ratings. It didn't have bullish price target from an earnings standpoint. So we picked Intel. One week before they most recently reported earnings. The estimates on the day of the publish of that article was about $0.50 for 2026 full year earnings per share adjusted now after the earnings report, which was a blowout Earnings Report Full Year 2026 Adjusted Earnings per share estimates are above a dollar. They've more than doubled. And the stock since we picked it less than a month ago is up over 60%. So we were talking about surprises earlier. Where's the surprise going to be? We felt intel was a company that still had enough room from a fundamentals story standpoint. If estimates are still below a buck per share, you look at some of the memory chip names, you're talking about 10, $15 worth of earnings per share, maybe 30 in some cases. Intel it was. The bar was still low and we felt like there was room for a surprise to the upside that's played out so far.
- [10:56]
A
Some of you may not have heard this, but our partners at public just launched something called generated assets. It brings AI into investing in a way I've honestly not seen before. Here's how it works. You type in an idea like AI powered supply chain companies with positive free cash flow or something like defense tech companies growing revenue over 25% year over year. Publix AI then dispatches a swarm of agents to that can scan every single stock, evaluate them and instantly build a custom index around your thesis. What really stands out is how clearly it explains why each stock is included. And before you invest, you can even backtest Your idea against the S&P 500. So you're making decisions with real context and not just guessing. Beyond generated assets, Public lets you invest in stocks, bonds, options, crypto, all in one place. They'll even give you an uncapped 1% match when you transfer your investments over from another platform. If you want to build a portfolio that actually reflects your thesis, visit public.com/opening bell. That's public.com/opening bell. Now let's get back to the conversation. I mean it's been an incredible pick and it also falls into a theme that I've written about this year. Basically buy what the government buys. Because intel is one of their picks. The White House has also announced stakes in Trilogy Metals, MP Materials and Lithium Americas, all three of which are up pretty significantly since those announcements came out. The second pick you have here. Sterling Infrastructure. Tell me about this stock.
- [12:28]
B
So Sterling Infrastructure is. They used to make highways. So it's a construction style company. They used to be part of the highway build out. What does everyone build out now? They build out data centers. So they are now in the data center AI build out part of the. The picks and shovels. They're pure picks and shovels play. They're not making chips but they're making data centers. So they were just talking on their most recent earnings call. They went from making 100 acre facilities to making thousand acre facilities or multi thousand acre facilities. Those big sort of warehouse areas that you read about that Amazon's building or something like that. That's what Sterling does. So what Sterling has going on for it is again as these companies want to pay more and get data center build out quicker. Sterling is the customer that they're paying. They need to pay Sterling Infrastructure to help build out this data center. And so they're seeing increased demand to the point where they just reported earnings. The stock was up almost 50% the day that they reported earnings. Massive move higher because Sterling Infrastructure again talk about earnings a little bit earnings per share. Their adjusted earnings per share guidance went from essentially mid teens to high teens, somewhere in the 13 to 14 range, up to 18 or 19. And they're talking specifically about demand from hyperscalers. So management on the call highlighted we're getting so much demand from hyperscalers bringing us into new markets. He said they're quote screaming to get in to new markets and guide them. And what's interesting with Sterling, sort of like in video type story, from a demand standpoint, you've heard Nvidia talk about they can almost pick and choose Sort of where they're going to try and send ships. Right. And pick and choose deals. Sterling also talked on their most recent call about how they now feel like they're in a position with this much demand where they can pick and choose deals. Once you start picking, choosing deals, that brings pricing power. And so we do think that even though the pick is up over 160% since we picked it in December, there's perhaps more room to run here because there seems to be more room to run AI demand.
- [14:28]
A
I mean, I think this is an unbelievable pick. And it's also something that if I'm remembering correctly, this is a very small cap stock, right? About 10 billion market cap. So to me that always screams opportunity. More than a mega cap or a large cap, something like intel, which is a way more of a legacy big player third stock here. Palo Alto Networks Cyber security Play. Why do you like this?
- [14:55]
B
Yeah, so Palo Alto stood out because if we go back to sort of the SaaS apocalypse or disaster or whatever term we want to use from early in the year where all of software was selling off, we started looking at what is getting caught up in this and it's really unfair. Not necessarily debating is Adobe going to survive or is Salesforce okay, But rather what sector or industry group within the software sector or software industry group is really getting unfairly sold off. I think cybersecurity was one of those. So Palo Alto is still down 20% from its most recent high. It started to come back a little bit. We just recently picked this one right at the end of April. So there isn't a lot of return performance to report or anything like that. But essentially the thesis for Palo Alto is you're getting mid double digit earnings grower with consistent demand. And perhaps the argument, at least among the analyst community would be demand will actually grow even more. So if you have AI becoming everything and we're all going to use AI, well that's now your entire business is on your computer and on, on technology. So you're actually going to want cybersecurity and that's going to be a key piece of what's going on. I also like to throw in just this past weekend you're taking a look at Berkshire Hathaway's annual meeting. What did they start with? They started with a deep fake of Warren Buffett and sort of talking about cybersecurity risk and how it's underappreciated right now. And I think that message coming from Buffett himself, he was a part of that message, speaks to how big of a story cyber can be. And I think every. You could argue several companies I think within cyber can continue to win. You're sort of buying the. Buying the theme to some extent.
- [16:42]
A
That's a great new Buffett indicator we can use for cybersecurity. I like it a lot. I know that it's pretty much been flat this year. I haven't seen too much talk about it, frankly, because it hasn't made a lot of noise as far as its stock price. Let's move on here. Casey's General Stores. This was a super interesting pick I thought that you sent over. And frankly I've never heard anyone write about it, talk about it. And more people should be talking about it though. Tell us why.
- [17:11]
B
So I was going to ask, you're not from the Midwest, are you?
- [17:13]
A
No.
- [17:14]
B
So if you were from the Midwest, you would know what Casey's General Store is. So I spent a year in Wisconsin at one point for work. Casey's is very big in that area of the country. It is the. For any east coast viewers, it is the Wawa of the Midwest is sort of how I would compare it. They have gas, but they also have pizza that people like in Manhattan. I'm not sure we would rate it that high on a pizza scale, but it's quick, easy pizza. You can get other sorts of food. I believe there's ice cream. So it's kind of your one stop shop in small towns for people that are commuting to work every single day. Maybe blue collar folks that stop at the gas station on the way to get a sandwich, get something for lunch. Sort of again like a New York City bodega placed into suburbia is what Casey's is doing. And the interesting part of Casey's story, again, I mean they're just talking the fundamental aspect. Earnings are expected to grow over 20% this year. And then you go to 2027, that's actually expected to come down to more of a lower double digit level. So if that can get revised back up, maybe there's part of a fundamental story there. But with Casey's also, they're just growing. So they're only in. If you looked at the map of Casey's General Stores and the areas they're in, it's essentially all just the middle of the country. So they're expanding into areas like Texas, Southwest, trying to just grow the brand. So it's a defensive play in the sense of it's kind of everyday staples. They're selling gas and they're selling food. You can pick up, you know, the ad bill and that sort of stuff there that you need every day. So that part is a little bit defensive. The growth angle is that the business itself is literally expanding and putting out more locations. So you get a little bit of both here. We did notice Casey's was sort of in rally mode during that rotation into the what some called the halo trade or kind of that real stuff rotation. Casey's was benefiting in that kind of market.
- [19:05]
A
Okay. One of the things that I was reading right before this, Casey's is the third largest pizza maker in the country, which, again, coming from New York, you would never assume that they're a big player in pizzas. But another thing that's interesting, this Stock is up 55% this year, which is pretty much outperforming most tech companies. My question for you, is this a stock that you can compare to something like a Walmart or a Costco, or is it a totally separate player?
- [19:35]
B
So the one hard part with comparing it to Walmart and Costco is their grocery business, is they're not selling actual groceries. They're selling prepackaged foods, a protein bar, a bag of chips, but not full produce. And I think a large part of the Walmart story has become that they are everyone's everyday Sunday grocery store where you're gonna go and spend a couple hundred bucks to feed the family. But I think to your point of Walmart and Costco have been very hot stocks the last couple of years because they are very popular staples with club members that continue to get people back in the door. I do think you can think about Casey's story in that sense. Yes.
- [20:16]
A
Okay. I like it a lot. And certainly, again, this is something that no one I know is talking about other than yourself. So we have this unbelievable earnings story unfolding. Unbelievable AI spending story. Got a lot of winners to pick from already that you brought to the table. How are you feeling about markets for the rest of the year?
- [20:37]
B
I think the s and P500 is last time. I remember looking around 7200 right now. I mean, I think you finish higher, I think you get a couple more percent. I recently had our senior technical analyst, Doug Bush tell me he thinks we could hit 8,000. He was just simply looking at the technicals chart and sort of the breakout we've been in. He likes it up to eight by the end of the year, which would obviously be. But I think close to 10% higher from where we are. That would be a big additional rally where I sort of get Concerned is where your hiccups going to be. To go back to our surprises concept, I think new FEG share coming in is going to be interesting for this market, especially when you consider that the ten year treasury yields back near four and a half percent. The bull market, pretty much every time since 2023 we've been near four and a half percent and moving higher. You've started to see stocks have a little bit of a digestion period, maybe a sell off, some sort of correction. So I think that still remains in play. The inflation story still, quite frankly, does not look great. And so when you consider that with a new Fed chair who's coming in with what appears to be a divided Fed and a market that's now questioning rate hikes, you would probably expect some level of volatility. So from an index perspective, it's how bad is the volatility that draws you down a little bit. So then you have to crawl out of that. I also think, I would argue probably the inflation rate story is perhaps the most concerning at this point. I mean, the other sort of bear case we could make is you were saying there's plenty to be positive about, so what could we be negative about? It would be AI demand falling off. We're just not seeing signs of it. So I seems impossible. It seems very off the table right now. And so I think you need to start seeing more inklings of that starting to happen to be concerned. But I am a believer that bull markets have themes. As long as AI is the main theme and continues to look the way it does, that you have to stay bullish.
- [22:33]
A
AI is the macro. All right, Josh, where can people find your work? And specifically can you tell us about your substack?
- [22:40]
B
Yeah. So I'm the newsletter editor of Barron's Investor Circle. So that would be Barrons.com Investor Circle. It's an add on to Barron's. And the substack is called searching for signals. Essentially what we're doing on the sub stack or what I'm doing on the sub stack chart of the week style concept, trying to find the signal of what something in the market is telling us. Try and make the charts pretty simple so they're not overly complicated. I look through hundreds of charts every week so no one has to. And then sometimes I'll tinker with them and make them a little bit my own. Or sometimes I'll just find the most interesting chart out of all the research reports I read and I write. Why I think it's telling one of the more important stories about either the stock market or the economy.
- [23:20]
A
I will say I read it every week. It's fantastic. You do a great job. And, Josh, I appreciate your time. We're going to definitely have you on the show again.
- [23:27]
B
Thanks, Phil.