Loading summary
Transcript42 lines
- [00:00]
A
On this episode of Full Signal, I sit down with Tom Hewlick. He is the CEO and founder of Strategy Asset Managers. We get into the geopolitical backdrop and its impact on the stock market, his favorite stocks and sectors for this year and why he is optimistic even with rising oil prices. This is a fantastic conversation. I think you're going to love it. Tom, it is so good to see you. I want to get right into the geopolitical backdrop right now. That has pretty much been the story of markets to start the year. How are you thinking about this? And my understanding is that you're still optimistic. Walk us through this.
- [00:37]
B
It's great to be here Phil, and to talk about the the geopolitical backdrop right now is, is really important because not only is the war at the the third into the fourth week of the time frame of what pre President Trump discussed is what the operative is going to be, but we're now seeing a lot of sensitivity with the volatility in the market and what does that mean to us and what do we look at as the risks. So from an active manager that Strategy Asset managers are, we try to take a look at a longer term view and if the war, which is a very bad thing and there's a shock on oil, there's obviously an impact on interest rates that carries over to the Fed rate decisions and pushing them out, maybe even rate hikes. But we try to look at it with a different lens and giving the war, the operative, the timeframe time to actually execute. And the what if scenario is what if we go in and do what we said we were going to do as the administration talked about and what does that mean for us? So it's a risk off trade at the time we focus on dividend paying stocks, for example, we look at things what happened before the war and the scenario was set up to where it was a pretty nice economic environment. The data that we were seeing was positive. The interest rates were coming in the right direction, trending down. Inflation was stable between 2.53%. Corporate earnings were still solid. But then we got into this contentious situation. Then we actually entered into a war and now you kind of take risk off the table and the market is really trading with headlines right now. So we're staying pretty steady in the stocks that we own and we're not doing much right now. We're not doing much.
- [02:50]
A
What makes you optimistic about say where markets are going even if we've seen all the volatility, all the uncertainty and honestly a lot of I'd Say, bearishness in the market.
- [03:06]
B
I've always been an optimist. I have been taught that way from the mentors that I've had. I'll start with my father in the investment business at Dean Witter. My godfather ran the Capital Group. I sat on a board at my boarding school, Blair Academy with Jack Bogle. So some historically significant people in the investment markets to say that you've really got to just take a longer term view of things and look at the innovations that are there. You can't stop innovation and technological advances that we're seeing. So the optimism comes with what's in store for you, me, the audience, our investors. And that's the lens that I look at. I believe that we have an opportunity to have a next generation bull market. I really do. And the conviction that I have with that is just the efficiencies that we're seeing from the technological advances, the AI that we're seeing. But then there's the what if scenarios. Where does that really take us? And we look at the risks off of that. But we're very optimistic about the companies that we own, the improvement in the efficiencies that they'll have, the downstream positive impact on earnings. And we still see a lot of companies that we're looking at and also the ones that we're investing at in a positive light.
- [04:38]
A
So when we came into the year, the earnings picture was very solid from my understanding. The earnings outlook was very solid and people in analysts kept revising up their earnings expectations. All of that is plenty of reasons to be optimistic. But I think a lot of those expectations have pulled back in the last month with the conflict in the Middle East. But none of that seems to have shaken you, is that right?
- [05:03]
B
Well, a lot of people forgot where we were last March. The market dipped 20%. Earnings expectations were revised multiple times, increased, decreased, and we finally settled at, you know, some mere norm of where it was. I think at the beginning of the year we were at, you know, between 9 and 14%. I could be off on the number, but it did, it did vacillate between that time, March last year, the market tailed off. We were down 20%. We're only off 5% from the highs right now, maybe 6%. A lot of volatility, but from the highs we're only off, we're not in correction territory. So the perspective that we try to give our investors, our clients, even friends, is that you really have to have a conviction on where you're going to invest in, believe in where you're going to invest and the different sectors. And so we focus on the shift, the broadening of the market. We're optimistic that we're no longer concentrated in the Mag 7 and it's broadening out into multiple sectors now. That's very healthy for the environment. Corporate earnings are still strong, they really are. The war impacts certain companies, mostly small cap and mid cap companies, but the large caps are still in very good shape. Right now it's just a sector trade, a sector rotation trade.
- [06:38]
A
So to that point we've seen rotation into energy industrials and as you mentioned, dividend paying stocks. From a I guess historical perspective. What does that type of rotation typically signal or what should investors be looking at that as? Okay, here's what comes next.
- [06:57]
B
Well it signals a healthy market. It signals when you have a broadening of the market outside of a market cap weighted trade of the last maybe two years with the Mag 7 and you see the energy sector participating, the industrials participating. One of the most important sectors that you want to see participate is the banking sector. Those are all very healthy sectors right now. And when you see a broadening of the market it signals that we have room to, to go on the upside, albeit with a little bit of volatility Right now you throw in a war and it's very, very serious, very serious. But I see a lot of upside in the market for the next four, five, six years.
- [07:46]
A
Wow. So one of the things that's surprised me is actually how resilient the market is from a index level. Right. Because we've seen oil go absolutely crazy. It was up 20% over a couple days stretch and typically when oil prices spike like that, stocks go down, but stocks haven't really moved that much frankly relative to the oil shock. What do you make of that? I mean what type of market are we looking at where there's this level of resilience?
- [08:17]
B
When the markets trade with headlines it signals to us to kind of stand our ground in the positions that we own. So for example when oil spikes from 80 with West Texas crude to 100 and then you get Brent crude in the 120 range and then you get Middle Eastern oil in the 140 range, it's not good, it's not good for anybody. One, you can have a perspective that it from an economic standpoint here it will eventually increase prices for all consumers and that's a strain on the pocketbook here and that could cause a ripple down effect which we don't want to see on a spike level. It's Something that we think is going to be short term, and we hope it's short term. But we're already seeing a settling in the oil market. We're seeing a settling in the potential negotiations with the war. That signals to us that there could be smoother times ahead and we want to be optimistic in that fashion. But oil drives a lot of things. It could drive inflation up and it can hurt the consumer, it can derail the economic engine that we see. But we don't think that's going to happen.
- [09:54]
A
So my question in all this, with oil pressuring inflation, a lot of people think we're going to see inflation come back this year because of oil. Where does this leave the Fed? The Fed seems to be in a terrible position as far as first a lot of people said they were late, now people say they can't move. Do you fall on this?
- [10:17]
B
Well, they have to move. The mandate is to monitor inflation. And the long term opinion of us, of my firm and me, is that we've got an expansive debt level and we cannot service the debt that we have outstanding right now. The pressure is on the downside to lower rates, to pay the interest payments on the debt outstanding. So that's a big macro outlook on that. But when you look at what the pressure is on the Fed, the only pressure that they have is really just to monitor the inflation numbers, the unemployment numbers, and to make sure that they, they don't get political. They became political. They may have been late with rates. And it seems to me that we've had sticky inflation between 2 and a half and 3% for two to three years. It's not really going anywhere. Will oil drive that inflation rate up? You know, possibly, if it, if it extends towards the third and fourth quarter, potentially, I don't see that. Will rates, will rates be hiked? Will rates come down? Our outlook and we just look at the, you know, the, we look at the data sources that give us the predictions for rate cuts and rate hikes. And last week before I came to New York, there was a higher probability of a rate hike than a rate decrease. Now it's shifted again. So nobody knows really where it's going to go. The probability, the probability of the macroeconomic drop back improving, I think is far greater as an optimist than to detract and deteriorate to where we would have to hike rates. And you can't hike rates during a war. You can't. That's just, it's not going to happen. I will predict it doesn't happen. And if it does, we will become so defensive, we'll shift our emphasis into something else. But that hasn't happened in my career.
- [12:54]
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 that can scan every single stock, evaluate them, and instantly build a custom index around your thesis basis. 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 openingbelt that's public.com/opening bell. Now let's get back to the conversation. I think that's a very safe bet, I would say, from. From what I understand, there's this amazing story that I don't think gets Talked about enough. 8 trillion bucks cash on the sidelines right now. That could be seen as, on one hand, investors are very cautious, so they don't want to get into the market. But on the other hand, we could look at it as. Look, we have this incredible catalyst waiting to juice asset prices. How are you thinking about this?
- [14:29]
B
Opportunistic. One word. We had 6 trillion in cash three years ago, and everybody was waiting for this. The impact of 6 trillion in cash. Now it's at 8 trillion in cash. Is the 8 trillion is the difference the 2 million, $2 trillion delta? An impact of people getting out of private equities, the liquidation of assets that weren't performing, and going into something that was a little bit more stable for an opportunity to go into something that has a higher return on investment. For sure. For sure. So that rotation that we're seeing right now is going to be an opportunity for investors to enter into a broadening of the market and we can talk about the specific sectors. So I think it is a. I think it's a coiled spring. It's a coiled spring and we're going to see much higher highs in the next several years.
- [15:34]
A
Why do you think so many analysts on Wall street to start the year, only saw 8 to 10% returns in the S and P as opposed to. We're coming off multiple 20% years still with all that cash on the sidelines, the consensus was still pretty modest. Well,
- [15:55]
B
the analysts are smart. They have incredible sources of data and highly educated and I believe in them and. But we really just don't know you. You can, we can overanalyze situations and make predictions. It's like somebody asking me what the market's going to do for today or a specific asset class. It's too difficult to predict. But if you look at the, at the actual corporate structure or the earnings for a specific company, you can predict quite accurately now where things are going, especially with AI efficiencies. And take for instance the banking sector or the industrial sector or the energy sector. We follow the smart money so that if the government invests $1.9 trillion into the energy markets to backstop nuclear energy, alternative energy sources, liquid natural gas, petroleum, that's a pretty smart bet to follow the trend. It's the same thing with the infrastructure build out there. There's smart money going into that direction. So you could probably improve your estimates in those specific sectors. And that's what we like to see and that's what the analysts are cautiously predicting with this 8 to 10%. And as an active manager, we don't want to be average, we want to be exceptional. So we, we overweight in certain sectors and we think that the probability is higher this year for above 8 to 10%.
- [18:04]
A
So I know you like energy, I know you like industrials. As far as sectors, what else in the market are you looking at that you feel like is an opportunity right now?
- [18:13]
B
One thing that we're not talking enough about is the biotech sector. Not in our notes, but I'll just talk a little bit about it. And how about the pharma area and then the other sectors that we like as we talked about energy, infrastructure and obviously technology and the innovations there. But the one sector that we have not talked enough about is the sciences sector, you know, biotech and pharma. And the reason why we're, we're interested, and I'm interested in this area because there's so many drugs that are being innovated right now, but there are also a lot of drugs coming off a pipeline. Their ip, excuse me, they're coming off the IP restrictions that they had, so they're losing out. So pharma companies like Novo Nordisk, for example, Announced the other day an acquisition for a cancer therapeutic drug. There are more drugs being acquired by these large pharma companies because their pipelines need to be built up for future potential revenue. It's the same thing in the biotech world. There are incredible opportunities with therapeutics from heart neuro. You really can't limit yourself in what the improvements are there with the potential for there to be. Well, let's talk about the GLP drugs. You know, for example, the biggest blockbuster that we're going to see in our lifetimes. What if there's a cancer drug that prevents the reoccurrence of cancer? I mean it's there. I know for a fact that there are specific biotechnology companies that, that I'm involved with that are, that are very far along with immunotherapy that enhances the immune system to prevent the reoccurrence of cancer. So when you look at this sector, the biotechnology sector, you've really got to be, you've got to be selective. You can buy an index. But there are some wonderful stories that are going to evolve out of this that aren't being talked about right now.
- [20:39]
A
Can you share a favorite stock pick for us?
- [20:44]
B
We talked about Lilly, we're an owner of Lilly. I've been talking about Lilly for several years because of their innovations in the GLP area. If you look at what the evolution is in GLP drugs, when they first came out, they were specific for weight loss reduction, but also for those people with diabetes to, you know, help somebody live a higher quality of life. As, as the drug was introduced 20 plus years ago, this drug was probably created. It started to have an impact not only on weight loss, but your joints started to feel better. It turned out to be anti inflammatory and that started to catch on. So not only was it helping people who had glucose deficiencies and were prone to diabetes, it was also having a significant impact on weight loss. Well, the evolution came is that they started improving it and now the GLP drugs are called triple agonists. That's the next evolution of it. Retatrutide is Lilly's next phase three drug that's in the pipeline right now. It's going to continue to accrete on earnings, probably continue the 50% growth for Lilly for a long time because 40% of the population is obese. If you take a look at that on a global scale, the impact there and preventing diabetes. But what happens if it has an impact on inflammation and then the next thing is that how does it prevent muscle deterioration? The GLP Triple agonist drugs right now. Retatrutide reduces weight but does not deteriorate your muscle mass. So that's just the evolution there. There are so many opportunities that you'll see from the AI innovation, the acceleration of these therapeutics, it'll pour over to specific companies. Larger companies will start to acquire smaller companies to build up their pipelines and that will probably continue for quite some time.
- [23:07]
A
So just to clarify, you are a long term holder of Lilly?
- [23:10]
B
I am a long term holder of Lilly.
- [23:11]
A
And you plan to be.
- [23:12]
B
I plan to be.
- [23:13]
A
Okay.
- [23:14]
B
Lilly's earnings have been impacted significantly by this one drug. It is a blockbuster drug. In comparison to Merck that has Keytruda cancer therapeutic drug, 49, maybe $50 billion drug represents a huge percentage of their earnings. But they have to have another drug that's going to back up Keytruda. The GLP drug is a much broader drug for Lilly or the triple agonist or much broader. It covers more people. Keytruda's is for a certain type of cancer. We hope that the new, the next generation drugs that come out that will eventually be acquired by some of these companies will have a broader impact on cancer. So instead of covering four types of cancer, head, neck, non small cell lung cancer, stomach, et cetera, it goes across maybe 17 or 18 different attributes of cancer. That will be a drug that will be comparable to a GLP type drug that's in that situation, it covers a broader spectrum.
- [24:33]
A
Well, so.
- [24:35]
B
So it's powerful to think about.
- [24:36]
A
Yeah.
- [24:38]
B
And what it could actually do to a company and if we expand on the opportunity for a blockbuster drug. If you remember 40 years ago, Amgen came out with Nuvogen and Epogen. Those are two cancer therapeutic drugs that helped support red and white blood cell regeneration in the body. And it created Amgen's success a long time ago. My family and I had a relationship with Amgen early on because my father went to Harvard Business School with Gordon Binder, the CEO of Amgen. We invested early and it benefited us tremendously. It's the same thing going on now with some of these companies like Amerc or potentially a Novo Nordisk or a Roche. We don't own Novo Nordisk Roche. We do own Merck, we own Lilly. But we're not talking enough of the what if scenario. When it comes out in two years and we're sitting there and somebody who has cancer that we know and love has a doctor say we have a vaccine now that can prevent the reoccurrence of cancer. If we remove a Tumor, that's, that's game changing. You can imagine what the, what the revenues could be for something like that, you know, for a company.
- [26:13]
A
Real quick, we'll get right back to the interview. Just wanted to pop in and say if you like this content, I write 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. This is not my sector of expertise, but I'm certainly convinced at this point. So a few weeks ago, Tom, you and I did another interview for our Opening Bell's best ideas club and we're going to give away some alpha here. The stock you shared as one of your highest conviction picks was Intuitive Surgical.
- [26:52]
B
Right.
- [26:53]
A
And I think that is a very interesting pick.
- [26:56]
B
Sure.
- [26:57]
A
Can you walk us through the thesis to that stock?
- [26:59]
B
Sure. Intuitive Surgical, we own that. I'm trained to say ISRG is the symbol, but it has served us very well. My they are the creators of the da Vinci robot which now is on a Multiple upgrade generation DaVinci, maybe like 2.0.
- [27:22]
A
And that's like a surgery robot?
- [27:24]
B
Yeah, correct. It's a surgery robot. And why is ISRG so important now? Because of the precision during surgical procedures that surgeons have adapted to, to improve performance, to cut down risk of infection, and also to have better results for the patient in recovery. Intuitive Surgical has benefited from AI and if you would like to talk about the importance of how the da Vinci robot can be used with multiple doctors from multiple countries during one procedure. So that carries over to AI and the optical trade that is there with companies like Corning and Sienna. And if you. Let me see if I can describe this correctly. Intuitive Surgical must have fiber optic systems capable of transmitting images around the globe instantaneously for surgical procedures. How does that happen? Well, if you have a company like Corning which does optical fiber optics and you have Sienna which directs the traffic as a software. So building the highways is Corning laying down the groundwork for 5G and greater transmission with I think it's called a petabyte. There's a megabyte, gigabyte, petabyte, and I'm not an electrical engineer, but it's very fast transmission capabilities. But Intuitive Surgical would be using the transmission systems from let's say a Sienna directing the traffic through the fiber optics of the, of the Corning so that they could actually perform surgery in for somebody in A remote region without any delay of information flowing real time at a speed that we can't even fathom at this point. It's almost like the comparison is, I looked this up the other day. We're satisfied with Internet transmission in our house right now. We get upset if there's a disruption. Well, can you imagine Niagara Falls coming over and going through a hose? That's where we are now with the petabytes and the amount of information that can be coming through and seamlessly go through this optical network with the traffic of a Sienna and the glw, excuse me, the Corning helping to assist intuitive surgical to be able to help you or me or some patient that is performing surgery using the da Vinci robot and having surgeons in multiple countries opine and participate with the imagery and the precision of the surgery. I mean, it's mind blowing how, how great it is. My, my father in law, Dr. John Edwards, is a, is a urologist. He's 89 and they've been using the da Vinci robot for years. He's no longer performing surgery. But you know, quite honestly, John could probably go in. He's not going to do it, but he's. But you could go in and perform precision surgery in areas where even if you were the finest surgeon, you could not get into certain areas in the GI tract or the urological tract that now you can. I mean, it's a game changer when you look at. And robotic surgery is here, it's improving and intuitive surgical is the benefactor through the da Vinci robot. And that's why we think that there's so much promise down the road for this company.
- [31:47]
A
I think the thesis is very compelling and certainly no one else is talking about it, at least from the folks I'm speaking with. And it's very much a, it's sort of like a layered AI play. So you have the AI tailwinds for it, but then it's also the undercovered biotech play. So I think that's really compelling. Tom, what's. If we take a step back for a moment and look at the whole market. I know you're optimistic, but what has to happen for this year to end up negative in the S&P 500?
- [32:20]
B
We always have to have a, you know, what are the risks scenario? A good active manager, a good manager always takes into consideration the worst and the best case scenarios. The base case scenario is that oil stabilizes and inflation stabilizes and the war ends. The worst case scenario is a prolonged war. Inflation starts to rear its head again and potentially the threat of rate hikes, deterioration in corporate earnings, and that's all going to be subject to a prolonged conflict with Iran. I don't want that to happen. We want to see as much transparency as we can with a resolution to the war for the Iranian people, for the United States, for our allies, for the uae, Kuwait, Jordan, Saudi Arabia, the emirate countries, they're the ones on the front lines that are seeing missiles come overhead. Israel's experienced this for years. But when you're getting bombs, missiles sent into the uae, it's real and it's not good. I travel to the Middle east quite a bit into the uae, and my partners over there are trying their best to stay optimistic, but they understand that there's a. There's a reason why we're in this situation. We can't have it sustain itself for a long time. So the risk that we say is a prolonged conflict, let's just say it goes out three months, six months, and then it turns into ground forces going in, proxy groups, disrupting things. You know, we don't want to see that. So. And then we see oil spiking above 100. That's not going to be good because that'll put pressure on the consumers here. It'll take money off the table for the average American, and that'll pull money out of the system, and then you'll just start to see a slowdown, and it will. It'll come to a grinding halt. But on the optimistic side, we hope that the conflict is resolved soon. Oil stabilizes, inflation stays where it is, and we get back to the viewpoint of lowering rates.
- [35:07]
A
Yeah, the earnings story can sort of take prominence again. Tom, I really appreciate you joining the show today, and we'll have to do this again soon. Thank you so much.
- [35:17]
B
I'd like that. Thank you very much.