Wall Street Insider: 4 Contrarian Stocks to CRUSH 2026!

Summary

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Full Signal Podcast Summary

Podcast: Full Signal
Host: Phil Rosen
Episode: Wall Street Insider: 4 Contrarian Stocks to CRUSH 2026!
Date: June 30, 2026
Guest: Josh Schaefer – Barron’s finance writer and market commentator

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Episode Overview

In this episode, host Phil Rosen sits down with Josh Schaefer to break down the undercurrents of the current market rotation, analyze the declining dominance of the “Mag 7” tech stocks, and reveal four contrarian investment picks positioned to outperform into 2026. Together, they explore market strength outside large-cap tech, the impact of AI-driven inflation, and why recent price surges across everyday tech products signal profound shifts in the investing landscape.

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Key Discussion Points & Insights

1. Market Rotation and the Decline of the Mag 7

• The Shift: Josh highlights a rare phenomenon where, despite the S&P 500 falling five days in a row, more stocks advanced than declined—a signal of underlying market strength and rotation into new sectors. (00:07)
  • "People are starting to call the Mag 7 the Lag 7. The big tech stocks are not quite working right now." – Josh Schaefer [00:07]
• Earnings Strength: Market rotation is now supported by actual growing earnings and strong economic data, not just speculation.
• Investor Psychology: Despite tech sell-offs, investors aren’t fleeing equities for cash or bonds; they’re rebalancing within the market, reflecting confidence in equities broadly. (00:45)
  • "The rotation you’re seeing now is people want to stay within the equity market, which I think is a sign of strength." – Josh Schaefer [00:45]

2. Fed Policy and Its True Impact on Stocks

• Misunderstanding Rate Hikes:
  • Contrary to common belief, rate hikes do not always immediately damage stocks—especially when they're incremental, as evidenced by the 1990s. (02:09)
  • Long-term, stocks typically recover a year after hikes begin.
  • "If you zoom out...rate hikes have not always coincided with S&P 500 drawdowns in the first month or two." – Josh Schaefer [02:09]
• The Labor Market Factor:
  • Fears of a weakening labor market (used to justify rate cuts) have faded as employment data improves.
  • "No one’s concerned about labor market weakening... a hike, if it were to happen, is not the end all be all for stocks." – Josh Schaefer [03:39]

3. The Mag 7 Takes a Backseat

• Diminished Influence:
  • New data demonstrates that most S&P 500 gains this year came from outside the once-dominant Mag 7.
  • "The story of Mag7 leading the market is really over in 2026... The broadening from the extent of it just being the Mag 7 is clearly here." – Josh Schaefer [05:02]
• Potential Upside:
  • If Mag 7 stocks bounce back, the market rally could accelerate even further.

4. AI-Driven Inflation Hits Home

• Memory Prices Surge:
  • Skyrocketing cost of memory chips is pushing up the prices of consumer tech (e.g., Apple, Microsoft), fueling a new, sticky source of inflation. (07:14, 07:48)
  • "Changes that you’re seeing there range from about a 15% increase to as much as a 25% increase across iPad and MacBook products." – Josh Schaefer [07:48]
• Impact on Consumers:
  • For the first time, AI inflation is directly affecting everyday Americans.
  • "AI inflation is finally coming for your wallet." – Josh Schaefer [08:36]
• Fed Implications:
  • AI inflation is showing up in core PCE (personal consumption expenditures), which could delay rate cuts.

5. The Unbreakable 'Apple Moat'

• Consumer Lock-In:
  • Despite grumbling over price hikes, the Apple ecosystem’s convenience and friction to switch keeps customers loyal.
  • "I've been using Apple products for a long time and...even if prices increase, I may not want to pay it, but I would want to exit the ecosystem less." – Phil Rosen [11:04]
• Rare Mid-Cycle Increases:
  • Apple’s decision to increase prices mid-product cycle (without upgrades) is unusual and could test consumer tolerance. (11:56)

6. Social & Political Tensions from AI

• AI’s Image Problem:
  • Public anxiety over job losses and rising costs persists, despite longer-term deflationary and productivity promises from AI. (13:41)

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Contrarian Stock Picks for 2026

1. Okta (OKTA)

• Performance: Up 55% YTD; rare strength in battered software sector. (14:34)
• Why Josh Likes It:
  • Deep embeddedness in corporate America through identity and security functions.
  • AI adoption is expanding Okta’s addressable market — every AI 'agent' also needs security, driving more logins and accounts. (14:55)
  • "Your AI agent needs security too. So your AI agent also needs to use Okta, be able to log into Okta." – Josh Schaefer [16:10]
• Cybersecurity Theme:
  • Broader software sector is hurting, but companies tied to security (e.g., Okta, Palo Alto Networks) are standing out.

2. General Motors (GM)

• Performance: Flat YTD, but up 58% over last 12 months. (18:08)
• The Case:
  • Aggressive share buybacks.
  • Diversification: Moving into defense manufacturing with Lockheed Martin and capitalizing on EV batteries critical to AI/data center buildout energy needs.
  • "GM to me is the perfect example...they’re somehow getting some AI benefit from their traditional business." – Josh Schaefer [18:08]
• AI Angle:
  • AI narrative is boosting interest even in non-traditional tech names, but Josh warns of this trend getting “toppy” — not every AI-adjacent story will work long-term. (20:33)

3. Alphabet (GOOGL)

• Performance: Down ~20% from recent highs.
• Why Buy the Dip:
  • Recent sell-off linked to two AI executive departures is overblown compared to company's strong fundamentals.
  • Continued leadership in cloud and proprietary AI hardware (TPUs); YouTube and YouTube TV are underappreciated drivers.
  • "Cloud revenue is still growing...Gemini is still in a good position...if you liked Alphabet...maybe it's a time to add." – Josh Schaefer [22:41]
• Additional Bullish Points:
  • Alphabet's ability to keep AI costs down due to their own hardware (TPUs).
  • YouTube as a media juggernaut.

4. Microsoft (MSFT)

• Performance: Down 22% YTD; 35% off 52-week high.
• Valuation: Trades at a steep discount (about 20x forward earnings, vs. usual 30-33x).
• Catalysts:
  • Diversification away from OpenAI, continued strength in Azure and enterprise software.
  • Dominant moat in productivity tools (Office, Outlook, Copilot).
  • "Valuation is not a reason to buy a stock... For Microsoft...starting to diversify away from OpenAI... interesting to learn more about over the next 12 to 18 months." – Josh Schaefer [25:24]
• Caveats:
  • Chart looks weak; a technical bottom has not yet been established.
  • "You have to think maybe a lot of the bad news at this point is priced in." – Josh Schaefer [28:06]

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Other Themes & Sectors

Housing & Homebuilders: A Contrarian Bull Case

• Outperformance: Real estate stocks (e.g., homebuilders) are outperforming S&P 500 despite high rates. (28:40, 28:54)
• Key Insight: As oil and treasury yields drop, consumer-related and interest-sensitive stocks rebound.
• Fed Regime: New Fed Chair Warsh's lack of forward guidance means “wait-and-see” on rate hikes/cuts—but improving summer inflation data could bring dovish surprises.
  • "If you want to play them not hiking this year, I think that's an interesting area to do it." – Josh Schaefer [31:59]
• Rocket Mortgage Example: A way to gain exposure if you believe rate hikes are off the table, and possibly cuts ahead.

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Notable Quotes & Memorable Moments

• "People are starting to call the Mag 7 the Lag 7." – Josh Schaefer [00:07]
• "Rate hikes have not always coincided with S&P 500 drawdowns in the first month or two." – Josh Schaefer [02:09]
• "AI inflation is finally coming for your wallet." – Josh Schaefer [08:36]
• "The rotation you’re seeing now is people want to stay within the equity market, which I think is a sign of strength." – Josh Schaefer [00:45]
• "Even if the prices increase, I may not want to pay it, but I would want to exit the [Apple] ecosystem less." – Phil Rosen [11:04]
• "Not every stock we pick we’re looking for it to double over the next year." – Josh Schaefer [20:05]
• "Their [Microsoft’s] chart looks horrendous, but I would never count them out..." – Phil Rosen [27:28]
• "AI has had a big PR problem through the first couple years here." – Josh Schaefer [13:41]

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Timestamps for Key Segments

• Market Rotation, The ‘Lag 7’ – 00:07 – 01:36
• Fed Policy and Rate Hikes – 01:36 – 04:52
• Mag 7 Underperformance & AI Spending – 04:52 – 09:55
• AI Inflation Hits Tech Products – 07:14 – 09:55
• Apple Ecosystem Discussion – 11:04 – 12:49
• Societal Impact of AI & Perceptions – 12:49 – 14:34
• Contrarian Stock Picks:
  • Okta – 14:34 – 17:27
  • General Motors – 18:08 – 20:33
  • Alphabet – 21:58 – 25:02
  • Microsoft – 25:16 – 28:40
• Homebuilders and Housing Stocks – 28:54 – 32:50

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Where to Find Josh Schaefer

• Substack: "Searching for Signals" ([link hinted at Searching for Signals + Josh Schaefer])
• Barron’s: Barrons.com, search Josh Schaefer
• Social: @signalsjoshschaefer on social platforms

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Closing Thoughts

This episode arms listeners with contrarian investment ideas and a nuanced understanding of how market leadership is changing beneath the surface, highlighting overlooked opportunities and the growing, complex role of AI in shaping both stock returns and everyday inflation. Investors are encouraged to look past the headlines and focus on fundamentals and underappreciated shifts as they navigate the back half of 2026 and beyond.

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Transcript

[Host]

Josh, I'd love to start with your

[Phil]

big picture overview on markets because you are someone that is in the data, you're writing about it every day. What are you looking at these days?

[Josh Schaefer]

Yeah, so at the end of June, it feels like we're in another one of those moments of a market rotation. So people are starting to call the Mag 7 the Lag 7. The big tech stocks are not quite working right now. You're seeing rotation at essentially all of them. But what's interesting within that, our friend Ryan Dietrich over at Carson Group had a great stat over the weekend. He, he was highlighting S&P 500 was down for five straight days in a row. But you actually have more advancers than decliners. So if you look at all 500 companies within the index, 500 stocks within that index, you had more companies going up than down over that five day period. First time that's happened in a five day period since 2000. So over 25 years that is a very rare thing to see. What that's showing me is there's a lot of strength and elsewhere in the market right now, I think the big concern at the market moment is memory prices, sort of the surging memory costs that a lot of these companies are going to have to pay. That's where you're seeing the sell off. But if you look elsewhere in this market, you're seeing rotation and you're seeing strength within that. The fact that investors want to stay in the market and not get out. Remember going to cash, going to treasury bonds, those are always options. The rotation you're seeing now is people want to stay within the equity market, which I think is a sign of strength. When you look into the back half of the year, can we get to S&P8000? Can you get above P8000? I think the answer is likely yes. And that's because you're seeing strength in other areas of the market that is backed by growing earnings, strong economic data, fundamental reasons that are driving that rotation.

[Phil]

That's such a good way to capture it. And what's interesting to me, we're still almost at record highs in the S and P and yet the market is starting to price in rate hikes instead of rate cuts. And we've been moving in this way for a few months now. I don't know if we're going to really see a hike. I'm actually in the camp that we're probably more likely to see a cut still, even though markets are not thinking that. But you had this great chart, rate hikes don't always hit stocks. And usually you would think intuitively hikes are bad for stocks, but you are finding something else in your data, what's going on here?

[Josh Schaefer]

So I think as investors, a lot of people tend to have recency bias. And the last time the Fed Significantly hiked was 2022. It coincided with one of the only bear markets you've had over the last 10 years. And it was pretty bad for a lot of tech stocks. Remember Meta going down 70% from 52 week high in video? Of course those have all recovered now, but in that moment it was very difficult and a lot of folks talked about the rate hiking cycle being a part of that, which it was. But if you zoom out and you go back to, I believe in that chart I went to 1987, going all the way back over a longer 30 year period. Rate hikes have not always coincided with S&P 500 drawdowns in the first month or two. Because I looked at data, I put in six months before, six months after and a year after. But we had also looked at a week, two weeks, et cetera. In the short term it had been a little bit of a drawdown. But six months is really not that long of a time period. And you've seen strength in stocks. Now. Why is that? Because not every time that the Fed is hiking means that they're going to be going from zero up to over 5% on the federal fronts rate like we saw in 2022. They can make incremental hikes. And one economist had pointed out to me, look at the 1990s. The 90s on that chart pop out pretty well. Of course, that's an analog a lot of folks are making for a lot of reasons right now. But you had incremental hikes and actually incremental cuts in the 1990s, sort of just getting things a little bit more right sized. Maybe that's the kind of hike that the Fed would have to make. Maybe they do hike in July, but maybe they only hike once. Or maybe they're able to hike once or twice but then actually cut later in the next 12 months. And it's because again, inflation is not a great part of the story right now. But think about why the Fed isn't cutting. We were talking about cuts partially coming into 2026 because of a weak labor market. The unemployment rate peaked at I believe four and a half percent in November. So that was December data. That was the last fed meeting of 2025. You're talking about. Oh no, how high is the unemployment rate going to go? That conversation is just completely out the window right now. No one's concerned about labor market weakening. We're actually watching the labor market reaccelerate a bit. So I think that's one of the reasons why a hike, if it were to happen, is not the end all be all for stocks. I don't think it really crushes a lot of the story that is sort of driving the uptrend in stocks.

[Phil]

Well, one of the things you point out in your newsletter is that after a year of the first hike, stocks are typically up anyway. So even if we get a near term pullback, if you're planning to be in the market longer than a few months, it shouldn't be that big of a deal. And you also correctly point out that the reason why the Fed hikes or cuts matters a lot as much as if they hike or cut. Right. So I think that's pretty interesting.

[Host]

So Josh, you have this second chart

[Phil]

here that essentially shows the Mag 7 getting crushed this year. It's the new Lag 7 what stands out to you?

[Josh Schaefer]

Yeah, I got to give a quick shout out. The data is not mine on this one. This one is Matt Sermonaro, the co founder of Exhibit A who also does some charts, known as Chart Kid Matt over at Ritholtz Wealth Management. He has great data and this one popped to me for a couple of reasons. So one, the story of Mag7 leading the market, Mag7 leading the market is really over in 2026. It was the story of 23, it was the story of 24, and it was partially the story of some of 2025. The broadening from the extent of it just being the Mag 7 is clearly here. We could argue whether it's broadening beyond the AI theme because if you look at the top performers in the S&P 500 this year, it's still very focused within AI. But I look at that chart and I sort of wonder two key things. One, so if the S&P 500, nearly all of its points added this year, came without real contribution from the mag 7, what happens if it starts working then? Where do you go? Because I think that's an interesting story. When you start thinking about risk to the upside, how high can the market go? What if Tesla starts working again? What if Microsoft starts working again? Those are big members of the index that could sort of get the broader index really swinging above 8,000. And then also just looking at that, looking at the divergence in the companies that have outperformed versus underperform. Even Nvidia stood out to me on that chart. Nvidia having a better 2026 than a lot of those companies because it's a capex taker. It's been a pretty clear story in terms of the tech trade at this point. If all of the capex spending we're talking about maybe $1 trillion from the Mag 7 or the hyperscalers in 2027, who is getting that? Nvidia is one of the companies that's getting that. So they're a beneficiary. If you look at a company like Microsoft or Meta, not as much. I also think Meta laggard on that chart. They're struggling to tell their capex story at this point. What are they doing with 120, $130 billion in capex spend? Where exactly is it going? I think is a bigger question for a company like Meta than say maybe some of the other Max 7 and

[Phil]

that's a huge reason why all these names are struggling. The Mag 7 has been lagging in part because everyone's piling some memory.

[Josh Schaefer]

Sure.

[Phil]

So something like Micron is up many hundred percent this year and Micron has been making so much money because memory is becoming a key bottleneck in this AI buildout. What we saw last week was that Microsoft and Apple came out and said we gotta raise prices on our consumer facing products like our laptops, our consoles because memory is getting so expensive for them as a business. You laid this out in this chart, Apple inflation. And you have these changes in prices of key Apple products. What's going on here?

[Josh Schaefer]

Yeah. So the changes that you're seeing there range from about a 15% increase to as much as a 25% increase across iPad and MacBook products. To me, this is AI inflation has been a story. If you were reading through earnings calls for several quarters now, you go back to even the most recent quarter, Mark Zuckerberg talking about not having enough compute. That's part of why they're boosting their capex spending. Some of the boosted spending is actually getting them the same amount of compute as they were getting on their initial spend. Now it just costs more, so they have to spend more. But to me this is okay. Consumers, everyday Americans wake up. Here's where rising memory costs really start to hit your wallet, which is what I entitled that AI is coming for AI Inflation is finally coming for your wallet. People buy MacBooks, people buy iPads. And so it's. You're starting to understand that story. The other consumer angle here, this is in the economic data. This is in pce. So you're seeing Economist Barclays just had a note out recently highlighting the AI inflation and how it's impacting core pce. They're seeing multiple basis points of increase in core PCE because you're looking at software and technology prices absolutely surging. So that could also be a reason the Fed doesn't cut this year, because you have. It's not just you're rising prices from energy prices, you're rising prices starting to tail off, but a little bit from tariffs. AI inflation is also a part of that story. That's why the inflation problem is considered to maybe be so sticky. You have just multiple pillars that keep pressuring it and AI is one of them. And for now, we'll see what happens during this Apple product cycle, which I think is going to be fascinating to watch. Was $200 more on your cheapest MacBook too much or do people still buy them? If it comes to iPhone and iPhone is now $100 more to buy the new iPhone 18 than people thought it was going to be. Is that too much? The US Consumer over the last couple of years has pretty consistently said, no, that's not too much, we're resilient. But at some point, maybe you do start to see a hiccup, and it'll be interesting to see if that's what happens with those Apple products.

[Host]

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[Phil]

You know the, the moat Apple has is that they have 2.5 billion products in the world and it's so hard to exit that ecosystem. I've been using Apple products for a long time and even if the prices increase, I may not want to pay it, but I would want to exit the ecosystem less. Right. So the, the switching barriers is very hard. Even when I text people without imessage and the text show up green, it's kind of a pain to go through that. Yeah. So to me, I don't know how this really, I don't think this damages Apple long term. I know their stock went down when they had to announce these prices. I'm very bullish. Long term Apple, I think this is, it may be short term price changes, but prices are going to go up long term anyway as far as their products. This is just coming all at once, which probably hurts a bit more.

[Josh Schaefer]

Very rare. I saw through numerous reports for Apple to have a mid cycle price increase. What happened was if you had got up and went to go to the Apple store on, I believe it was a Thursday morning that they did these price increases. The site was actually down for a period of time while they updated prices and then they boosted them. Normally you see Apple say okay, iPhone 18 is coming out. It's got these five new great little aspects to it. It's 100 bucks more than 17. These were products that were already on the market. Nothing changed with the product that they had been offering the day before, but the prices went up. So I think that's why maybe you get a little bit of consumers frustrated. To your point, when I'm frustrated with Apple, I still buy a new phone. It doesn't change my consumer behavior. And I think a lot of us are like that. I like that my AirPods connect to my Mac and then if I move over to my iPad, they connect there. I use too many Apple products. So maybe I'm biased, but I think a lot of people do.

[Phil]

Well the interesting thing here too, the social fabric component of the AI boom I think is gonna increasingly become a factor here. You have guys like Kevin Warsh, other technologists coming out and saying, look, this is going to be a massive deflationary force. It's going to be positive in job creation. Long term it's going to bring all this world changing technology that will trickle down to everybody. That will take a long time to happen. I think probably faster than we think, but still not that fast. And politically and socially people, people get very upset at more expensive goods and technology. And also the Perception, whether it's true or not, that it's taking jobs. So this whole confluence of factors, I think it's very hard to get around how it negatively looks.

[Josh Schaefer]

And AI has had a big PR problem through the first couple years here. They have not done a great job of explaining to everyday people that AI will not fully take your job in that it can be a net positive overall. And then on the inflation side, I think maybe too many people are talking about the disinflationary aspects of AI because we don't know when that's coming. Instead of addressing how long do we think the memory bottleneck is going to last? What does it really mean for you over the next year or two, how short term is it? Think the conversation starting to shift there. But I would expect that to get louder. And I think Apple's price increases help stir up that conversation because again, that's something that, whether you're an investor that's sitting on the Bloomberg terminal reading headlines every five minutes or, or just someone that watches the general news, Apple prices going up hits you and you understand that story more. So I think AI inflation might be one of the bigger stories in the back half of 26.

[Phil]

Even rising Xbox prices for Microsoft customers, that's a big one. All right, Josh, I want to get into specific stock picks here. The first one that you sent me, Octa, and this I think is such an interesting pick. It's up 55% this year, even though almost all of software has gotten crushed. Why do you like this stock?

[Josh Schaefer]

Yeah, so at the Barron's investor circle, we, during the software sell off, we're sort of looking for where are dip buying opportunities here? What were companies that we were talking about a couple months prior before AI displacement became so pervasive and seemed like it grabbed everything. Where do we think who has a big enough moat and consistent customers that can be winners? Okta fits that bill on several levels. Of course. People that use Okta at work are familiar with the software as a service, part of their their suite offering. But you go to okta.com, you log in and it has all your tiles for your different workplace functions, like say a workday tile and a slack tile, etc. So Okta is very prevalent in corporate America. That doesn't feel like it would go away instantly. Why would a large corporation say we're going to vibe code away our Okta service? It's a reach. The vibe coding concept is great. I think it's super cool that people are making fun sports trivia. Apps that I play with my friends now and those types of things. But actually getting a Fortune 500 company to switch over some of their work systems is a lot bigger of a reach. And then after we picked Okta, they had one of the most important earnings calls probably of the last quarter because they were able to raise their full year revenue and earnings guidance and say it's because AI is bringing demand like they've never seen before. To be able to tell that story, because what's happening is AI, their phrase, one of their phrases, I'm going to paraphrase it because it's not exactly correct, is that your AI agent needs security too. So your AI agent also needs to use Okta, be able to log into Okta. If I was going to have an agent replace me at work, I use Okta at work. So if they're going to go around and be AI Josh, and go into my email and go into my different work servers, they also need to log in in Okta. So one of the concerns was a lot of these companies charge per seat. How many seats are going to go away? How many essentially accounts. Okta's argument is it's actually the pie is growing. So the pie grows as people use AI agents and more people need to use Okta. And Okta becomes a great central area for both you and maybe any agents. You have to sort of connect in the middle. So it's been one of the few. I would put cybersecurity also within that. I believe we talked about Palo Alto Networks before, but if you look within IGV and the software companies that have worked this year, it's pretty heavy on cybersecurity, which I think makes sense because if everything moves more online, I don't think that's a bear case for cybersecurity and safety.

[Phil]

It totally makes sense. You know, I just had a newsletter out that I wrote about the 10 worst performing s and P stocks this year. They're pretty much all software and I think Intuit is in there. And right near the top, the bottom 10 is like workday, Adobe Salesforce. These are all stocks getting crushed. But from a zoomed out perspective, Octa is a peer of those names and yet it's kind of crushing right now. All right, your next stock here, which is another interesting, like secondary AI play, is General Motors and it's flat this year, but over the last 12 months it's up 58%. What's going on here?

[Josh Schaefer]

Yeah, so to explain that last year, 58%. One thing we like about GM is just simply their share repurchase program. They bring great managers of capital, which is a very subtle thing sometimes it's not the sexy story that is very exciting to talk about, but they're buying back shares. GM has less stock on the market than they did several years ago. They've been operating this program for a while now now. So that's been a subtle way that shareholders are getting a returning gm. But GM to me is the perfect example of several picks that we've had that have worked over the last 12 months where the traditional business is the traditional business. But what they're somehow getting some AI benefit or some other benefit from their traditional business is the key. We did not pick GM because we think they're going to sell more cars in the next 12 months. So GM just signed a deal with Lockheed Martin. They're going to help manufacture on the defense front. They're using their infrastructure that they've built out. Obviously one of the core competencies of 100 year old car company is manufacturing. They understand how the plants work, how to operate that. So they partner with Lockheed Martin. They're going to now be in the defense space. Then you move over to one of their other projects. More recent projects. Ford's also been benefiting from this. EV batteries. EV batteries being a source to help build out the AI build out and play a role in the energy necessity. Everyone wants to talk about energy right now. How are we going to get more energy? EV batteries become an answer there now. Did those become the biggest growth story for. Maybe they are the biggest growth story for gm. Do I think that's going to be, you know, the, the top segment of their revenue in the next year? Probably not. But if you get those areas growing while the car business stays relatively stable and they're buying back shares, it's an interesting option for something to own that is not directly an AI tech stock. I don't think it's a 10 bagger or it's going to double over the next year. But not every stock we pick we're looking for it to double over the next year.

[Phil]

I've not heard anyone talk about GM for one, but it's interesting to me because so much of this feels like we're at a cycle in the market where as long as you're exposed or doing something with AI, it almost doesn't matter what your core business is. It's like look, they're making cars and making trucks. That's great. But your team likes the stock because they have this exposure. So it's like this kind of interesting. Like it's fundamental, but it's not.

[Josh Schaefer]

Does it feel toppy at all to you? It feels a little toppy to me a little bit. There's, there's a version of that story which I will fully admit is a year from now you'll be looking back and saying, remember when we talked about GM and Ford's EV business being like a key part of the build. I remember thinking that the day Ford went up, I think 15 or 20% over the course of a week because there was a bullish analyst note about them being part of this AI buildout. And it is one of the several things where I think you start talk bubbles or people starting to get concerned. It's a peg. It would be a rung on that ladder for me. Okay, we're not slapping.com on the back everything but we are kind of finding a way to tell an AI story about every single company in the market right now. And at some point, some of those stories almost certainly are not all going to pan out.

[Phil]

Well, the most explicit was Allbirds pivoting to AI and that stock went bonkers right after they announced it. And I'm sure there's been many other instances, especially since Allbirds that have tried to lean into it. If you have a struggling share price and you're an executive and you need some sort of catalyst, you can just tell a story about how you're exposed to the, the technology in some way. Okay, you have two stocks here that you also picked Microsoft and Alphabet as two of the Mag seven that you would like to buy the dip on. Why?

[Josh Schaefer]

Yeah, so I just think this is a fun question right now. One of my favorite things to do is just go to the S&P 500 heat map, look at 52 week drawdowns and just try and find a winner. Or try like what's, what's, what's starting to get interesting at this point. So we can start with Alphabet. Alphabet's now off almost 20% from its most recent 52 week high. The last leg of that sell off was started from two AI executives leaving the company. I this is not like the transfer portal in college football or an NFL team losing an assistant coach where people get all up in arms about it and oh my gosh, I can't believe Lane Kiffin took his strength coach LSU with him. What's that going to mean for Ole Miss?

[Phil]

Who?

[Josh Schaefer]

People don't usually talk about stocks like that. So there's a little version of it to me from A corporate standpoint, where were we following who was running AI Alphabet that closely that we're then going to sell off the stock 7%. So I think it's just an interesting entry point right now for Alphabet. If you're sitting back and you like the company, maybe you already own some shares, maybe it's a time to add something because cloud revenue or sorry, yeah, cloud revenue is still growing stronger year over year. You're still seeing cloud growth. Gemini is still in a good position. Gemini is in a good enough position that they told Meta that they can't use as much Gemini as they wanted to anymore. That was a headline that was out in the last 24 hours. So I think if you liked Alphabet and you feel like they're in a good position in AI? I didn't even mention TPU's yet. But if you want to talk about cost going up, Alphabet has a built in ability with their own development of TPUs to maybe not expose themselves to all of those cost worries. So maybe that's another reason that you like Alphabet more than some others. But I think all of that adds up to if you're a long term investor looking to get exposure into the Mag 7, Alphabet feels like it's at a good spot.

[Phil]

I love Alphabet. I've been in the stock for a while. I'm super bullish on what they're doing with Waymo. I think that's going to be fantastic. I am also super bullish on YouTube which if that was spun out, which you know, they've been talking about spinning it out for years, that would be a massive stock if it was just YouTube trading on the market.

[Josh Schaefer]

So you know what's interesting is if you read through the analyst notes after Foxbot, Roku and then after there was headlines that Comcast is going to spin out NBCUniversal, a lot of people just keep talking about competition with YouTube TV. Everyone in the media business is trying to figure out how to deal with this. YouTube TV behemoth that continues to grow, is doing very well. It's a way that I am a YouTube TV user so I do enjoy the experiences. I mentioned sports earlier. I love the four screen that you can use for YouTube TV, et cetera. But I just. To your point Phil, if YouTube was its own company that would be a lot louder of a story. Now you have to go into media notes about other companies to find people talking about YouTube TV because it's just such a smaller part of Alphabet's larger business, but an exciting one nonetheless.

[Phil]

Well, a lot of People that watch this show are using TV, YouTube, but via their television. So not even on their phone or tablets, but they're actually looking on their big screen televisions at home. All right, Josh, let me ask you about Microsoft.

[Host]

Yep.

[Phil]

This thing is down 22% this year. I personally do not own it. I don't know if I would touch it, but convince me.

[Josh Schaefer]

So we, I believe it was March. Microsoft was a cover of Barron's and we made our bullish case on it as sort of the.

[Phil]

Is that a top signal cover of Barons?

[Josh Schaefer]

It was our way of trying to pick a big brand out of the software sell off who's going to be a winner. And sort of the case that we made within the Microsoft story was and it's still trading as somewhere multiple now because it hasn't done great since we picked it. It's trading at about 20 times, I think next 12 month earnings. If you look over the last five years, that multiple is normally closer to 30, 33. So you can make a valuation argument pretty easy. At the time that we wrote it in March, it was its cheapest against the S&P 500 in over 10 years.

[Phil]

Wow.

[Josh Schaefer]

So you can make the simple valuation argument, as I always say with the valuation argument, well, what's my catalyst? Right. Start talking me into what actually brings people in. Valuation is not a reason to buy a stock. I think for Microsoft, a few one, I've been interested in how they're starting to diversify away from OpenAI a little bit. It seems like they're starting to separate that relationship slightly. I think that will be interesting to learn more about over the next 12 to 18 months. You also just look at Azure growth, at Microsoft, their cloud arm. They've been telling a pretty good AI story there of AI driving higher profits. And I think that continues to accelerate. I mean if you think about who wins from AI and how AI, if AI doesn't take all of our jobs, then what are the workers using? Copilot's got to be in there somewhere. A lot of people use Microsoft Outlook and that's your email. That's all of the different suite of Microsoft offerings that are within there. Again, is every bank on Wall street going to get rid of Microsoft Outlook and that email process? Because Copilot isn't good enough maybe, but that's a big reach. They have a very large moat. And so I think if you think about Microsoft and just sort of pinned down into the traditional business that they have, the traditional business at this point is being a little bit undervalued Maybe they don't ever go back to trading above a 30 times multiple, but they trade at 25. That's not a bad trade either.

[Phil]

It definitely looks cheap. The chart looks horrendous, but I would never count them out just because of, I mean one, how much cash they make every single quarter. Billions, billions of dollars are just essentially materializing in their account here. So Microsoft, I believe in it as a company. It's hard for me to get on board with the stock though.

[Josh Schaefer]

Sure, yeah. I mean the stock is 35% off 52 week highs. It's, I believe it's down 17% in the month of June or something like that. It's, it's worse. Worst month since I think 2000.

[Phil]

Wow.

[Josh Schaefer]

I believe I saw that number. So it hasn't been great. And so from a technical standpoint, could you look at the chart, which we do and say, okay, it's starting to look good. I really want to buy in here. Probably not yet. Maybe you wait for some certain things to start to turn. But when you look at a legacy brand, a tech leader for several decades, that's been one of the biggest tech stocks. For a while now, it's not a new company and it's down almost, it's down more than 30, approaching 40% from 52 week high. You have to think maybe a lot of the bad news at this point is priced in.

[Phil]

Yeah. And I think that is very fair, Josh. Homebuilders and housing stocks. Not a lot of people are talking about this right now. And I know a lot of people are also worried about these rate hikes. Why are you bullish on this theme?

[Josh Schaefer]

Yeah, so to wrap your head around this one, I've been looking at just different sectors during the rotation that we were talking about at the beginning about sort of, okay, out of Mag 7 and Mega Cap Tech into other areas. XLRE popped up on my screen. Real estate. It's actually outperforming the S&P 500 this year. Last time I checked, it was one of four sectors that was outperforming the benchmark index. I was sort of like, why, what's going on here? You got mortgage rates at six and a half percent. That's not great. The housing data is like fine, but it's not really getting that much better. There's not like a easy story there. And I was speaking with Piper Samuel's Michael Kankowitz and he points out to me, he goes, well, just look at the tenure. Look at when the 10 year peaks on May 19, the 10 year treasury yield peaked at about 4.68%. Same day crude oil had its most recent peak at about 109 bucks. Zoom out over a month later, 10 years down about 30 basis points and oil is down from close to 110 to about 70. It's down about 40 bucks. And what outperformed during that period? Consumer stocks. I've been writing a bit about sort of equal weighting out consumer discretionary rspd. Maybe that's a play. And then you look at home builders and different interest rate, essentially just interest rate sensitive areas. It's not that rates are low, it's that they were easily hit the hardest during the oil spike. They got crushed. So then you have your laggard start to lead as that headwind gets a little bit better. Now to own them. If you want to own real estate stocks, one that we had picked was rocket companies, rocket mortgage. The key there would be you don't get hikes and you actually maybe get cuts or you at least get the market. So the market is currently pricing roughly one rate hike for the year. Maybe come July that story starts to change. And then if you get rates even a little bit lower from here, what leads? Again, probably interest rate sensitive areas of the market. The key here being thinking about how to invest under the new FEG share. If you're going to be in interest rate sensitive areas, what does Kevin Warsh's new regime mean for you? Well, Warsh doesn't want to give forward guidance. That was an abundantly clear takeaway. And so what that meant was he's only going to talk about the data that they have. The inflation data right now is not good. If you look at what expectations are for inflation data for June, July, maybe even August, as that energy spike comes down the month over month data is likely to look pretty good through the summer. So if Warsh is only going to talk about the data he has and be very direct on it, you might get a more dovish Kevin Warsh come July or come September once that data starts to be real and we can talk about it because it already happened. Again, no forward guidance, but maybe a way to try and anticipate the data. I don't think it's a. You're putting all your poker chips in the Fed. Definitely not hiking. But if you want to play them not hiking this year, I think that's an interesting area to do it.

[Phil]

That is a great thesis, I must say. And I think the tie to oil is super interesting. And for myself I'm not in any housing stocks. But I do think there's a pretty good shot. The Fed actually cuts before the end of the year. So it sounds like this is a shoo in for me to get into

[Josh Schaefer]

the maybe some exposure there. Yeah, think about it and I mean if you look at because other areas have already gone up so much like small caps were. The popular Fed's going to cut play over the first couple times that they cut over the last couple of years. Maybe small caps move higher from year. Their earnings look great. There are reasons to like small caps but the Russell 2000 already had a great bout of outperformance to start this year. So I'm looking for some interest rate sensitive areas that are doing okay. I don't want to buy into pure weakness but haven't led and outperformed the S and P by a significant amount like the Russell S. Wow.

[Phil]

The Russell if I'm not mistaken is about 22% this year, so almost double the S and P for me. It's hard to get in when it's already doubled S and P and I'm not really a small caps guy. It's not my area of expertise by any means. Josh, where can people find your work online?

[Josh Schaefer]

Yeah, so the substack we were referencing throughout this is searching for signals that's on substack so just type in my name. You can type in searching for signalsjoshafer on all social medias and then same with it's Barron.com Josh Schaefer. That's where I'm at on Barron's and our team. The investor circle, which is where a lot of our stock picks come from is right on the top of the Barron's website. So you can check us out out there. We have a lot more picks, a lot of different themes at this point. We've been picking a lot of stocks weekly so we got multiple stock picks coming out weekly that we're excited about and trying to come up with new ideas.

[Phil]

Thank you so much Josh. Always learn from you and there's a lot of alpha today so I appreciate it.

[Josh Schaefer]

Appreciate you having me.