Loading summary
Transcript40 lines
- [00:00]
A
Lou, walk me through your thought process here on why you think buying the dip has been such an effective strategy these days.
- [00:06]
B
Yeah, I think it's most effective in the chip sector because demand is off the charts. I think also because of earnings. Right. So if I expand outside of earnings and then can unpack both of these earnings for the broad market have been so strong six quarters in a row of double digit earnings growth. It used to be bifurcated between Mag 7 and the, you know, unmagnificent 493 as Tom Hayes likes to call them. And now you're seeing that convergence where the back half, the, you know, the 493 are catching up in earnings growth. So I just ask like, where's the negative data point? What's the economic data point that's going to undermine this earnings growth? And I haven't seen it yet. Right. High oil prices because of the war in Iran. Could have been that if it lasted too long. But now we're back sub 70 for West Texas, you know, $72 a barrel for WTI. So that's not a drag. But then the chip sector specifically. Right. We're coming off of the heels of another nasty drawdown, a two day drawdown of double digit magnitude. Historically that's been a great buying opportunity. We look back to the beginning of June, we had like a 12% plus drawdown. We look back to May, we had at least a 6%. You look at Micron back in March and I would say this. Everyone thinks in their mind that chip stock investments are always volatile. And I would say that's correct. The prices of the stocks are volatile, but there's no volatility in demand for chips. If you look at the annual volumes of chips that are sold, not just AI chips, like every manner of chips, we've only had two consecutive years of year over year declines and that came in the great financial crisis and during COVID So if I told you I was just going to keep selling more and more of a product over time and that the margins were going to go up and the uses are going to go up, you would think earnings would go up eventually. And that's what you've seen in the chip sector. So a lot of guys get into the, and get into the weeds on like which is going to be the best chip stock and like which one's, you know, the most undervalued. I say screw that whole debate and just buy them all. Buy the basket. I think it's a better approach to make sure you've got the exposure and then you find the dislocations. Right. Like Micron trading at 78 times earnings. That's undervalued Nvidia. Right. Right back below the S&P 500 in valuation. That's probably a pretty good buy because it's the, you know, the poster child for AI chip demand.
- [02:13]
A
Those are such good points. And this is literally the most debated sector and topic these days because everyone wants to point to chips being a bubble and they compare it to dot com, but there's really no numbers that line up when you compare the two. So Lou, when I think about all the bear arguments, there they go, they're gone.
- [02:34]
B
What are they?
- [02:35]
A
I. Well that's, that's what I'm getting at here. Are there any that stand out to you as something that you would actually give some thought to and say, all right, this holds some weight here, maybe we should pay attention to this? Bearish take?
- [02:47]
B
Yeah. The one thing that really stands out to me in recent just discussions is what happens if the hyperscalers start slowing their capex spending. And I say, yes, that's a red flag. But the disclaimer there is no, they're eventually going to slow it down. Right. The metas of the world, the alphabets of the world, the Microsofts of the world can't spend hundreds of billions of dollars every year on an AI infrastructure build out. So what if they start slowing down and we don't see this is the key, the, the revenue or profit increases. Right. So they're essentially planting the seeds of future growth. If we don't see that future growth manifesting or you know, popping the green shoots popping through the ground by the time they start scaling back capex Katie bar to the door because I think you're going to see a massive correction in that. So that, that's the one thing that makes sense to me. But I haven't seen it anywhere yet. I'd argue now everyone's worried about, you know, dramageddon and prices getting pushed up and, but think about this before the, the memory issue and price pressures because the demand was so great, we had it for electricity. Right. We solved that bottleneck by big tech saying we'll cover the increased electricity costs. Now how are we going to pass on the increased memory costs? Well, companies like Apple are passing on to their loyal consumers that really, really don't bat an eye at higher prices. Right. Historically. So I think that bottleneck's gonna move somewhere else in the chip sector and people are trying to front run that. But over the overall chip demand. I just don't see or hear a bearish argument that resonates yet. Now my biggest thing is like I'm not trying to time the top use trailing stops. We talked about this last time. Like if I use a 20 or 25% trailing stop, what if I miss something completely? You know, I'm just stopped out higher up as opposed to sitting on the sidelines and trying to figure out, you know, I'm buying an all time high. Well, guess what, that all time high in the rear view is going to look like a low if this continues the way it's going.
- [04:33]
A
So I will say I trimmed about 80% of my Micron holdings personally when it hit about 1100 or so and I've been holding it for over a year. So I've had a lot of profits on Micron. But I started to get worried because so many non finance people were messaging me and asking about Micron stock.
- [04:53]
B
Yeah, yeah.
- [04:53]
A
So then I started cult following begins. Yeah. So I'm like, all right, if these non finance folks are texting me and saying should I buy Micron or should I buy the Dram etf?
- [05:04]
B
Yeah.
- [05:04]
A
I was like, maybe it's time to start taking a little bit of profits. I still have some of it, but that starts to look a bit frothy to me because it starts go very mainstream. Yeah. And maybe that was a emotional decision because the fundamentals really haven't changed. If anything, the stock looks cheaper than it was when I sold. Yeah. That was the big red flag for me and doesn't mean I'm bearish on the stock or the, the chip cycle.
- [05:29]
B
I think that's smart. You're paying attention to sentiment. Right. And like it used to be a contrarian idea, now it's becoming mainstream, which is what you want. But then you have to realize like, okay, when does it become too mainstream? When people pile in and, and like it now collapses under itself. And the only thing I always tell myself is that John Maynard Keynes quote is right. The the markets can remain a lot irrational a lot longer than you can remain solvent. So don't spend too much time obsessing on the sentiment change. Do what you did, you're prudent, you trimmed your profits. It's getting a little bit of a crowded trade. Don't know how long it'll last. Now let's go find some other opportunities that are more contrarian, undervalued. Whatever your investment strategy is, you know,
- [06:06]
A
it wouldn't feel anything if you and I sit here Talk about Micron, how much we like chip stocks. But I knew when I had a buddy who is a surf instructor in California messaging me asking about Micron. Yeah, something's going on here. This is a bit unusual. What part of the cycle are we in right now?
- [06:24]
B
Yes.
- [06:25]
A
Okay, Lou, you have a handful of stocks that you brought to the table today. Frankly, I don't think most people have heard of these. I want to start with Terror Wolf. Ticker is W U L F. It's a data center stock. Why do you like this?
- [06:40]
B
I love this. This was, I was in early at $4 or $5 a share. I still love it now north of 25. This is in that trade of companies that when we knew we had runaway companies, capex on, on AI and we didn't have enough data center space. These were companies, Ter Wolf was one of them in the cohort of like IRN and Cipher that had data centers but they were being used for bitcoin mining that they now repurposed to be for HPC for high powered compute. Right. High performance compute. That whole trend unfolded and you saw these massive deals happening. There's a scarcity of data center and guaranteed power. What I love about Terror Wolf is these guys were not bitcoin early adopters that then realized like, hey, we can get more premium for hpc. These were power guys. These were guys that built power plants, managed power plants. So they understand the economics of having just a dumb shell basically building the building but not worrying about the technology risk. So they've poured concrete, they've hung steel, they've operated it. Whereas some of the other players in the space came out of the bitcoin. And that's, that's okay. But it gives them a unique skill set on how to manage construction timelines because I think that's key in this space, right? How to go procure and secure guarantee power contracts. Because now you saw that anything that was available has gotten pretty much scooped up and guaranteed. Now we're talking about is power going to be available for these other names? And so terrible for me, it's a management bet as much as it's, you know, it's a horse and a jockey play. Because I, you know, I spent some time with management really convinced that they have an edge in there. And you're seeing, you know, today as we're recording this, they just printed a deal, a $19 billion deal with Anthropic. I love this long term for one simple reason. The CEO basically told me face to face, he's like look, we're going to do 250 gigawatts or whatever his number was a year or 25 gigawatts, I can't remember. Megawatt. 250 megawatts, whatever. It's back to the future Doc Brown. I get confused. 1.2 gigawatts, right. Just until he can't anymore and then he's going to convert it into a reit. So I think of this as like early stage investor in Equinix. That REIT that is, you know, the old school data center reit, this Terror Wolf, has the potential to grow into that. And when the demand slows or we get to an equilibrium, a steady state for AI demand and data centers, they just start spinning off dividends and it's a cash generator. And at that point your cost basis is so low, this is like a free pick because you know you've made money and you're just getting it return. Your capital returned to you through the dividend.
- [09:07]
A
So the stock is up almost 90% already in the last six months. Do you think these levels are still attractive?
- [09:15]
B
I do, because they keep getting pulled in where other people are stumbling and failing in terms of construction timelines. The Terror Wolf team keeps getting pulled in to, I don't want to say bail them out, but be the person that can fill the gap because they understand the construction and the power dynamics, I think more than anyone else. And you know, if you listen to management's comments, they don't anticipate slowing down the pace of growth that they've had. I think today was a bellwether announcement for them. But they've got more demand that they can sell.
- [09:41]
A
You know, I think that makes sense. It reminds me of the stock hut 8, which that went up tremendously over the last year. And I had some colleagues get in probably last February and they were up hundreds and hundreds percent on that stock, which was originally a bitcoin miner. And then they got into data center AI exposure and they've really taken off. And I think their expertise was in power essentially. So this terrible.
- [10:09]
B
So you got a few in there like hut 8, clean spark, Mara, there's I think 11 or 12 that kind of fall into that category that were, you know, bitcoin miners first these guys at Terra Wolf, basically bitcoin was the bridge to data centers. They knew all along they were going to make this pivot where I think some of the other guys were like, oh my gosh, the market moved on us. Let's go over there. It's going to Be more attractive. These guys knew eventually as AI took off, it would be much more lucrative. So Bitcoin mining paid the bills. I would say Core Scientific is very similar in that sense. Corz is another holding of mine in the space. Core Weave tried to acquire them twice and failed. I think that's another name that's undervalued. But again, they do not have the operational history that Terra Wolf does. Not a knock against management. It's just a different skill set.
- [10:56]
A
I love it. This next stock is totally different. It's more. I see it more as a macro bet. Navon Navn, from what I understand, this is a travel booking agency, is that right?
- [11:10]
B
Yeah. Think about if you've ever used RAMP or Expensify for corporate accounting and expense reports. Think about doing that for travel, business travel. So you can book and then handle all the middleware, the accounting software, all in one. It's a business travel play. Right. I would never buy an airline. Just like Warren Buffett, he's learned multiple times that it's a terrible business to be in. I think his great quote was that a farsighted capitalist would have done all of us a favor if he shot down the Orville brothers out of the air at Kitty Hawk. Right. Because it's just incinerates capital, that industry. But I think this is a unique play on it. You're seeing oil down, so the back half of the year, you're going to see a lot of increase in business travel because airline costs are going to come down. But then you're seeing they use an AI overlay to basically automate a lot of these tasks that difficult middleware was doing or humans were doing. So, you know, why, you know, combine three roles into one, the travel agent, you know, the accounting and just the, you know, the user interface. And now you get it all simplified. This was a fallen angel ipo. So it came public, I think October of last year at like 25 a share and then pulled back all the way as low as 8. And then they just reported their first quarterly report as a public company and had a triple play where they beat earnings, they beat revenue and raise guidance. And now it's back into the 20s. So I missed that bottom buy. But for me, I think it's a good back half of the year play on increased business travel. You're seeing it show up United data, Amex, corporate card spending data. Again, macro bet not, you know, it could change very quickly on raising oil prices, but I think the momentum's on its side.
- [12:44]
A
I have not seen Anyone really talk about this stock? So I think it's really, really compelling. It's interesting and it's, it's not an obvious AI play either, which I think also makes it interesting. Okay, this next stock, Gain Therapeutics, G A N X. I have never heard of this until just before we recording. Yeah, so tell me about this stock.
- [13:08]
B
Tiny stock that's been working on a drug for the treatment of Parkinson's disease. So if you look at Michael J. Fox, he's the most known individual with Parkinson's. Dean Cain, Superman, his father suffering from it as well. We've made no progress on this disease for the better part of 20, 25 years. Gain had a phase one drug that they use machine learning to discover the druggable site, the protein to develop this drug showing really strong results. Encouraging. The disclaimer here is it's on a small patient population in phase one, but they're seeing this. There's a way to measure progression. It's the MDPRS scores, I think is the acronym for Parkinson's patients. And they're supposed to decline by a certain number each month. It's about one or two points. And gaines drug in phase one patients was actually arresting the decline. It was stopping it. So not reversing Parkinson's. But if you can catch it early enough and then say, hey, this is a drug that can stop the progression. And that's the key. In their phase one study, they discovered some biomarkers that would allow us to test preemptively. Are you predisposed to Parkinson's? Am I? Or are we in the early stages? Much sooner than we can? Almost like blood testing for cancer. Early early stages of that. They just got the nod in the last week to go into the phase two trial, which is significant. Not all biotechs get that approval. So again, still very risky, still early stage. But this is a potentially disease modifying drug for Parkinson's. Phase two should be registrational, so if the data holds up in phase two, that they could get approved for it. I had a similar scenario set up for a company, Prevention Bio. If you look that up, PRV was the ticker got acquired by Sanofi for the treatment of type 1 diabetes or juvenile diabetes. So these are extremely risky, but could be extremely lucrative. Prevention Bio was trading for 2 bucks a share and I got taken out at $26 a share. So I think gain, you know, it's a couple, it's about just over $100 million market cap, you know, could easily be half a billion or a billion as it moves through phase two and becomes a natural acquisition candidate.
- [15:08]
A
So I, I looked this morning, it's down 40% this year. So it's not, it's not done well. And it is right around 100 million market cap. This seems like a pretty prime acquisition target.
- [15:22]
B
Yes.
- [15:22]
A
Is that, is that how you think?
- [15:24]
B
I do, I think. Look, ultimately all biotechs become acquisition candidates because it' costly and lengthy time to develop a new drug and get it all the way through trials. So I think the partnership potential comes first in phase two. They find someone to partner with to get phase two done and funded, although they do have cash on hand that can let them enter it and then they get acquired based upon the results. So you're seeing that happen a lot more nowadays in the last 12 months where big pharma is paying up in phase two to make acquisitions where you know, 24 months ago no one would touch biotech, including big Pharma. I think there was something like 250, 300 biotech names that were trading below cash balances was just beaten, battered, bloodied. No one wanted to go near it. You're seeing that sentiment change because big Pharma has to replace by 2030 the numbers 180 billion in revenue from, from drugs that are going off patent. So think about that. That's in the next four to five years that they've got to come up with some really new drugs that can be innovative and multibillion dollar sales. You can't do that just developing on your own.
- [16:29]
A
You got to go acquire it, man. See, it's such a tough sector to know how to find the winners in because it's one, it's a very complicated industry, biotech and pharmaceuticals. But two, I think it's so tied to negative sentiment generally because of the public perception of these health care giants, these biotech giants. Generally they're not favorable, you know, socially or politically, I would say. And even with the UnitedHealth CEO who was murdered last year. Two years ago, yes. So that was obviously a huge flashpoint socially. And I think that was a big part of the sell off.
- [17:09]
B
Yeah, I agree. But I always say biotech is the only sector in the market where you have a double bottom line. You're doing good for humanity and you're also increasing your net worth if it's right. But the science is the hard part, right? The only two things can ruin biotechs Bad data because you can't fix that, and running out of capital because you can't, you can't keep Development and keep a clinic, clinical trial going if you don't have the capital.
- [17:31]
A
See, Lou, you make it sound so easy to find these stocks.
- [17:34]
B
It's the hardest area of the market I've ever invested in.
- [17:36]
A
I. I think it's really hard when you go about looking for opportunities in the market. Can you talk about your process of how you're finding stocks? Because these are very obscure.
- [17:46]
B
Yeah. So I. I like to think top down, bottom up. Like, what are the big prevailing trends that are going to matter? Right. AI comes to mind immediately. The smartphone boom was another one more personalized medicine that got kicked off with CAR T where we really were figuring out that we don't need to create a synthetic molecule. We can figure out a way to trigger the body's natural immune response with amino acid chains like GLP1s. Right. Like, those are just chains of amino acids that we know the body treats as a signal to do X, Y and Z. So I try and go top down and then go bottom up. Who's doing? So if the big guys, If Alphabet's investing $20 billion a year in Waymo and driverless cars, who are the small players in that space that might have a unique chip or a patented piece of hardware? Then that's how I kind of winnow the. The universe of investable companies down pretty quickly. And in biotech, too, it's just looking towards things that have no treatments. Right. Where we look at a lot of cancers, our standard of care there is like extending life for three to four months. I mean, we look at places like brain cancer, prostate cancer. If anyone comes along and has an early stage drug that's doing twice that or three times that, which there are companies out there, they're now showing promising results, extending survival. That's where I start digging in. And then you got to look at do they have partnerships? Right. And then that you start de risking it from that standpoint. Because I'm not going to pretend to be the science genius. I'm not. I mean, I have enough to be dangerous. But then how do we validate it? Just like we do with, like a Terra Wolf. Right. Terra Wolf is a bitcoin miner that pivots to hpc. No one really knows them until they sign their first deal with Fluid Stack. And. And Google is backstopping it. Okay. That's a validation point. So you look for the same things in biotech. Yeah. And then it's like I said, the travel one is just top down, bottom up. Right. Top down. Macro is changing. Oil prices are coming down, who's going to benefit the most from that? And then it also plays in the AI. So this is. I look at the list of, of recent IPOs and see which ones have come down 40, 50, 60% and go, did the baby get thrown out with the bathwater here? So it's just little pockets of looking for alpha that you learn after almost 30 years in the markets that just patterns repeat themselves. It's never different. Right. Like SpaceX, I still contend, will follow that traditional IPO pattern where it drops below its IPO price within the first six months and would be a great entry point for me to get in to build a position.
- [20:07]
A
There's so many variables at play. All the things you're describing, you again, you say it as if it's obvious or easy to do, but you're describing 10 different variables that you're pulling into to find maybe one stock. Yeah, right. And I think that's really challenging, especially in today's market, because so many things are going up and so many things look like winners. I think because of this broader bull market, I think it's really easy to convince yourself you found a winner just because the market is going up.
- [20:36]
B
And so how do I control for that? Because I'm just as wrong as the other. Every average investor is. I go, I do top down, bottom up with my allocation, right. So we talk about ETFs a lot on here, you and I, with semiconductors, right. I own a bunch of socks. And then I go look for an individual name, like a company called Adam that I've owned multiple times in my career that's got a new way of doping a layer of oxygen that improves performance. Right. Super volatile, bought it at 4, ran to 47, came all the way back down. That was trading at like 2, ran back to 9. But I just small position size in these speculative names and then own the trend via the etf. So own the trend for semiconductors. Own the trend. I mean, I wouldn't buy DRAM as an etf. I think you get too narrow with some of these and never use leverage ETFs. But that's how I prevent from me getting like you talked about, you know, your surf instructor buddy going all in, you know, YOLO into Micron is like, I don't want to ever be that. Because if you spend a lot of time, you can researching a company, you convince yourself that you're right. There's confirmation bias in that. So position sizing is the way I combat that confirmation bias.
- [21:41]
A
That's spoken like a man with experience. Lou, where can people find your work online?
- [21:47]
B
Yeah, the bigskinny.com and just on Twitter trying to catch up to you in terms of putting out the content as frequently as you do, my friend.
- [21:55]
A
Lou, you are a TV star. Okay, One day I'll catch up to you. Thank you so much for your time as always and looking forward to next time.
- [22:02]
B
Always a pleasure, man.