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Halftime Report
Trading Tech's Troubles 2/26/26
00:43:54
Scott Wapner and the Investment Committee react to Nvidia's earnings and debate how you should trade the tech sector. Plus, the desk shares their latest portfolio moves. And later, Josh Brown spotlights Waste Management in his "Best Stocks in the Market." Investment Committee Disclosures
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- [00:00]
Stephanie Link
What does it mean to live a rich life? It means brave first leaps, tearful goodbyes, and everything in between. With over 100 years experience navigating the ups and downs of the market and of life, your Edward Jones financial advisor will be there to help you move ahead with confidence. Because with all you've done to find your rich, we'll do all we can to help you keep enjoying it. EDWARD Jones Member, SIPC Finding the music
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Josh Brown
you love shouldn't be hard. That's why Pandora makes it easy to explore all your favorites and discover new artists and genres you'll love. Enjoy a personalized listening experience simply by
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Scott Wapner
selecting any song or album, and we'll
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Josh Brown
make a station crafted just for you.
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Scott Wapner
Best of all, you can listen for free, download Pandora on the Apple App
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Josh Brown
Store or Google Play and start hearing
- [00:50]
Scott Wapner
the soundtrack to your life. I'm Scott Wapner, and you're listening to CNBC's Halftime Report, the podcast the most profitable hour of the trading day. We record this live weekdays at 12 Eastern. Listen in. Carl, thank you very much. Welcome to the Halftime Report. I'm Scott Wapner. Front and center this hour, the Nvidia reversal. What that says about the state of the tech trade. Right now, we discuss and debate with the investment committee. Joining me for the hour, Josh Brown, Malcolm Etheridge, Rob Seachen, and Stephanie Link. We'll show you the markets here. And it's not a great picture, to be quite honest, following what was an amazing print from Nvidia on almost every metric that you look at, the commentary matches JP Morgan, are we back? That was the most popular client question yesterday. Before in video. Our answer was a yes. Before and after. Dan Ives watching Nvidia, like watching Michael Jordan in his first few years for the Bulls, Baird. Nvidia has the most predictable revenue path for the rest of the year. And yet, Josh, the stock is now down almost 5%. You know what? What do we make of the price action in this name and what it says about the bigger picture of where we think we are here?
- [02:06]
Malcolm Etheridge
Okay, Number one, this stock never rallies after earnings. I don't know if people realize that. Go back and look at the last. I don't know. Let's just start with the last 12 quarters. The last three years, Nvidia runs into its numbers, and then the next day is almost always anticlimactic. I can't explain why to you. I'm just telling you the reality of the way the name trades. Not at all surprised to see it pulling back. It did make a nice move into Its earnings. It was the best of the Mag 7 names going into the announcement.
- [02:38]
Scott Wapner
Given a lot of it back here because it was up, you know, over the last week or so they're more than 5% and now that's evaporating.
- [02:44]
Malcolm Etheridge
Right. So if you're a person that buys the stock on the day of earnings thinking you're going to get a plus 8% the next day, I'm sorry, look at a chart. Look at the way that the stock has reacted the last few quarters. Not a great strategy for investors. The big picture here is there was only one soft thing in the report and it really wasn't that soft. Only one minor, minor, minor concern. And I'll start with that slight miss on compute 51.33 billion versus the street at 51.6. Literally it's a joke. But whatever, we should shout it out. The reason why that number matters to people is that the only real concern here is that they may be losing a tiny bit of market share to AMD and at the fringes, TPU is from Alphabet. I think that's reflected in the multiple. Now you're talking about a Stock with a sub 18 forward P E in a market that trades even higher than that 17.65 times forward earnings. I think that more than discounts the fact that TPU's are going to be part of inferencing training, we are going to see chips from the Amazons, etc. I think all of that is already factored in. And right now, just so you know, this is the lowest for all the MAG7 names and the lowest multiple of the top 12 largest market caps in. In. In the S&P, only JP Morgan has a lower forward earnings multiple. So should Nvidia trade at this much of a discount to its own Mega Cap peers? Given the degree to which they crushed and the guidance, Obviously I think the answer is no. Not selling. Staying long.
- [04:22]
Scott Wapner
What? What if. Malcolm, we just need to come to grips with the fact that at least now the disruptive nature of AI itself, you know, job loss, impact on different companies and their businesses and their revenue models and their revenue growth, etc. Is more powerful than whatever in video or whatever anybody else could say from the Mega Cap Group feels like that's kind of what the market's trying to grapple with.
- [04:51]
Rob Seachen
I think that's reasonable. I was on closing bell with you yesterday and I told you I had a feeling that the market could figure out a way to turn really good news into bad news one way or another because it Seems like a market that just wants to trade out of AI, at least right now. And I think to your point, it's incumbent upon all of the leaders of the AI revolution right now to say positive things. It's the reason you saw Jensen Huang and Mark Zuckerberg bear hugging each other and making sure that the market understood that their partnership is intact and there's nothing to see here. It's the reason that Open Air has been doing what it can to go back on a campaign to make sure that people know that they are going to be a player here and don't give it all too anthropic. And so I think that it is really important that we separate the, the headlines and the announcements of a deal and the framework of a deal from actual activity that's generating revenue. And I think now that's what we're starting to see investors do.
- [05:43]
Scott Wapner
What did I say? You know, the last couple of days, the worst thing theoretically for this market would be for in video to have great numbers, a great earnings report with great guidance, and the price action be miserable. On the other side of that, yes, as Josh points out, it typically doesn't trade great up or huge up or down following earnings in the more recent reports. But on that point, great report, not great price action. That needs to tell you something, doesn't it?
- [06:13]
Josh Brown
It tells me that the Frankenstein narrative, this monster we created, is still intact, honestly. And it might be a little bit of a time before it's over. You know, it's hard to find anything not to like from a fundamental standpoint and that in that earnings release, as Josh said. But I think it's emblematic of what we're seeing in the entire equity market right now. Healthy fundamentals outweighed by sentiment. Investor attention is focused totally on something else, and that's how these companies are going to disrupt the SaaS business, the software trade. My investing career has been riding these momentum waves, watching them reset. It sometimes watches when they reset too rapidly in a narrative gets traction. That's probably way overdone. We're talking software is completely displaced. These are service businesses, okay? They are going to reach a valuation standpoint where people start to say, hmm, is this right? No doubt some are going to be disrupted.
- [07:15]
Scott Wapner
We're going to get to the whole debate over software. But, Steph, if. If this report was supposed to make anybody feel better about the Mega Cap trademark, it doesn't appear to be working. For most of the names today, which are almost all in the red, Meta is just barely a blip in the green. You trimmed Amazon today. That's the big news from you, which says a lot to me. The stock's down 10% year to date. So why do you do this on the back of what was a pretty darn good report from Nvidia?
- [07:53]
Stephanie Link
Well, Amazon, the free cash flow story, that's going to be the overhang for the stock for the short term to medium term in my mind, minus 10 billion in free cash flow this year. And I have a real problem with that, to be honest with you. They're going to spend on CapEx $200 billion this year, up from 150 billion when we were headed into the print. So I do not doubt that the fundamentals and do I not, I do not dispute the fundamentals are great. At the company growing 11% in total revenues, AWS, they're actually humming at this point and probably going to expand. But I'm not really sure the stock could get out of its way until we get more clarity on the free cash flow. In terms of Nvidia, these numbers are insane. I mean, total revenues of 73%, datacenter up 75% and computer, 58% gross margins, which everybody was nervous about. 75.2% and probably going to stay around that level. The problem is the Stock is up 98% since the April lows, so the expectations are high. Same thing for Broadcom, by the way. That's up 111% since the April lows. So we got to give it a little bit of a break. It could take a breather for the time being. And oh, by the way, we all know we're going to talk about software in a bit, but software is flat since the April lows. So where's the real value and where are people offside? They're offside on software and there are some opportunities, but that does not mean that the game is over for Nvidia or Broadcom or the AI trade in this Chop Scott.
- [09:26]
Josh Brown
Really what it does is it allows fundamentals to catch up to the price move that happen if you get chopped deceleration. These earnings are still exploding. Yeah, but the reason why stuff in many cases.
- [09:38]
Scott Wapner
Look at the reason why Stephen trimmed Amazon. You all, all you guys own, own that stock companies are spending a large percentage of their free cash flow and
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Malcolm Etheridge
actually all of it.
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Scott Wapner
Okay then if they're. Why are we just getting why they
- [09:54]
Malcolm Etheridge
do it about that now, why are they doing that?
- [09:57]
Josh Brown
I agree with this. I know what he's.
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Scott Wapner
What is that?
- [09:59]
Josh Brown
I agree.
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Scott Wapner
Let's.
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Malcolm Etheridge
Why would a company take 100. In the case of Amazon, I think it's 110% that's operating cash flow for this year and commit to putting that into capex. Is it a suicide attempt? Is it like some. Is it some sort of Brewster's Million situation where Richard Pryor has to give away 30 million in order to inherit 300 million? Is it like some. Some sort of a mass delusion? There's obviously a demand side to these CapEx numbers. And by the way, I talked to Nick Colis and Jessica Rabe from Data Track about this on Monday. They calculated Metta, Amazon and Alphabet. All of them, all of their capex budgets for this year are 100% of their cash flow. So people said, where do these numbers come from? How do they get these numbers? Literally, it's all of their cash flow. The only reason a sane, rational business manager would do anything near what we're talking about here is because they see what this could lead to on the other side. Could they overshoot? Totally. What happens if two of them do it and one of them doesn't? What does that look like for that third company?
- [11:13]
Scott Wapner
But, yeah, but, Steph, if it's such a defensive move, then why do you have such a problem with it?
- [11:18]
Stephanie Link
Yes, Steph, I don't think it's a defensive move. I want these companies to spend, but I also want it to be a little measured. I want to see optimism, operating leverage. That's what I'm looking for. And when you're spending as much as they are, you're not going to get it. And so some people will look through it. That's fine. I still own some of it. I just found that there are other opportunities out there that are more compelling and maybe actually less owned. And that's what I did. I took money from Amazon and I bought something that I already own that's down, that I have more conviction in.
- [11:56]
Rob Seachen
I think what we also have to consider that we don't talk about a lot is the regulatory pressure that these companies are up against. So if you think about Wisconsin, where they've been heavily investing in data centers, if you think about Virginia, where they've been heavily investing in data centers, the neighborhood organizations, the local political apparatuses have all been taking heat from the people who live in those places. And so these companies have to get, as fast as they can, shovels in the dirt to be building out these data centers before an election cycle that turns over the loose regulations that have allowed a lot of these buildings to pop up.
- [12:28]
Scott Wapner
I think you make A good point. It's like a not in my backyard argument now.
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Malcolm Etheridge
And as you. So that becomes scarcity, which becomes pricing power. And I think that Malcolm is 100% right. Very underappreciated component of this. It's not crazy to think that the midterms in some way could end up in local jurisdictions becoming a referendum on, do we even want these things in our neck of the woods?
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Scott Wapner
What if there's enough political pressure put on these businesses to help foot the bill for the power to run the very data centers that they are building and investing in? That takes a hit to somebody's bottom line, doesn't it? Isn't that a risk? Does anybody.
- [13:08]
Malcolm Etheridge
Well, I think, I think what you're seeing in the utility stocks, the XLU made a record high this week.
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Scott Wapner
It did. And let's. Back before you make the point, let's, let's show what is, I guess you could call it the great divergence between many of the AI stocks like the Mega Caps and the igv, the software names and the power players. You're spending, you're spending, you're spending. Well, who's reaping the benefits of that? All of the power producers that have to make the data centers work and make them run. We're showing you here the Mag 7 and the IGV versus the power infrastructure type stocks. And, and it's obviously no competition in terms of performance. One month, Vertiv's up 35%, GE Vernova is up 27. Eaton, Constellation and Vistra staff are up a lot relative to the other AI trades. So there's not anxiety everywhere.
- [14:06]
Stephanie Link
No, definitely not. And I don't own Nvidia, but I offset that by owning overweight, all the, all of those names. Because if you do believe, and we've talked about this a lot, if you believe in AI, which we all do, you do need data centers. And you're going to see $7 trillion of data center spend between now and 2030. You're going to, you also need a grid. We have 75% of the grid is over 25 years old. We've said that many, many times. You've got to upgrade the grid for this thing to work. And you're going to see $1.4 trillion in grid space spend between now and 2030. And then of course, you have power and we don't have enough power. I mean, GE Vernova is sold out until 2028. And we're going to see $1.1 trillion in spend on power. Which we still don't have enough of. And so I own all of these names. And by the way, these orders and backlogs are crazy. I've never seen Vertive having an order growth year over year of 252% and up 150% sequentially. Sequentially. I mean that's really. These are absurd numbers. But yes, they are all benefiting from this spend. That's where I'd rather put my money versus the ones in mag 7 that are spending all that money and they're not. And they're not seeing the growth like some of these.
- [15:21]
Scott Wapner
Unless you think there's a bubble and you own Vistra, right?
- [15:23]
Josh Brown
I mean we own Vistra. I mean these are names that we've owned for a long time and they continue to benefit from the infrastructure build out here. And there's no doubt that if, if there's pressure being put on these hyperscalers to invest in energy, these guys are the beneficiaries. Steph's right. I'm just saying, why are you getting off the other trade? The fundamentals become attractive because you saw headline risk, because they move from cap light to cap heavy. As Josh said, the reason they're investing, the reason they became cap heavy is because this is generational opportunity. They need to do it.
- [16:01]
Scott Wapner
Unless you think, unless you think the whole thing is a bubble. Well, and that all these stocks are going up and the way that those charts look are going to look ugly. You know, one day, who knows, I'm
- [16:12]
Josh Brown
sure there'll be a reset, an episodic reset, I'm sure. And this might be it. The narrative might allow. We already know back up the track.
- [16:19]
Malcolm Etheridge
So very famous quote about the advertising business guy says I know 50% of my ad budget is wasted. The problem is I don't know which half. We don't know that every dollar being allocated to this data center build out is definitely a good ROI on that dollar. But broadly speaking, if you cater to governments, the military, Fortune 500 companies, small and mid sized business and your Azure, you could pull back the reins. But if AWB doesn't and who's going to have the more advanced chips in place and computer that's going to be relevant to that audience. How are you going to consider yourself a viable player in data center if you're not building AI enabled infrastructure? That's the bet here. They're all making it. Yes, there's probably some waste. Of course every tech innovation wave has something like it.
- [17:12]
Josh Brown
You're saying it's an air Well, I
- [17:13]
Malcolm Etheridge
don't, I don't see. What is the. What is the alternative?
- [17:17]
Josh Brown
There is no alternative. That's the defense.
- [17:19]
Malcolm Etheridge
You're in the business, you win the business.
- [17:21]
Scott Wapner
Yeah, we talk about software, which is trying to make a bit of a turn today. Some, you know, looking at the price action and some of those names and saying, well, maybe we're trying to put a bottom in. If you look at Salesforce was down. Let's look at Salesforce, because that stock, last I looked, had turned positive. And it still is. The guide wasn't great from a revenue standpoint. They announced the $50 billion buyback, though, sort of Benioff, you know, stand up and saying, all right, this is getting a little absurd. And he was animated when he was on with Jim Cramer last night, talking about how the markets punish these names unfairly in his mind, listen, we are projecting 46.2 billion in revenue. Jim, the first time I was on your show, I think it was a billion in revenue. We're talking 46.2 billion.
- [18:09]
Stephanie Link
It's just a 46 times since 2008,
- [18:12]
Scott Wapner
when I was first. 2009, I think I was first on the 2008.
- [18:16]
Stephanie Link
Amazing.
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Scott Wapner
Well, and Jim. Yes, Jim, that, of course, was one of our first sass apocalypses. You know, remember that you said I had to come on the show because it was a sass apocalypse. And then, you know, we lived through the 2020 Sass apocalypse. When you're like, oh, how are you going to survive through the pandemic? And here we are, Jim, we're in another sass apocalypse. It's a series of sass apocalypses. All right, that's Marc Benioff with Kramer. Maybe this time is different than some of the others. Not sure. Dan Ives says solid quarter. He lowers his target, though, to 325 from 375 to reflect the lower multiple. You have at least five target cuts today. The lowest I saw was to 194. Reiterated underperform at Bernstein. Rob, you own this name and this name.
- [19:04]
Josh Brown
I own some other names. And I think we're likely to be longer, stronger at some point, but we're not ready to call a bottom. The reaction today demonstrates how. How oversold these names have become and how extended the positioning between semi and software have become. And most companies have been absolutely guilty until proven innocent in this space. And the. There's valid questions on terminal growth rates. There's no question about it. But. But I think we're in a place where these service businesses, Scott, are ultimately possible. Beneficiaries of the things that are happening here. Maybe it's not.
- [19:45]
Scott Wapner
They want you to believe that.
- [19:46]
Josh Brown
Well, and we do. We've seen these, these dark periods before and they become essential adoptions into many of the way businesses operate. And they can develop AI agents that ultimately are useful to their technologies and their, their service individuals.
- [20:05]
Malcolm Etheridge
I think a memo, I think a memo went out this week or over the weekend and I think in the memo this is like metaphorical. Not actually nobody wrote this in print, but I think a conversation behind the scenes was had. It's enough already, Dario. No more podcasts. The guy from Microsoft, nobody wants to hear from you anymore either. It's enough of this kind of talk. And now we want supportive talk from the AI layer of tech or you're going to have some very angry customers, all of which are in the software business.
- [20:38]
Scott Wapner
So you don't even your action hold up, but your actions speak louder than words. They don't have to say anything. They continue to roll out new products and innovations that are disagree. Look at perplexity and what they've done in the last.
- [20:49]
Malcolm Etheridge
Let me finish the thought. I think you'll agree with what I'm about to say. Here's what we've seen since this, this hypothetical conversation happened behind the scenes. We saw in my industry, LPL announce a massive thing with Kevin Nolan, who runs the wealth management vertical at Anthropic. This was not about, look how many financial advisors we're going to replace. It's hey, here's lpl, almost as big as Morgan Stanley in terms of advisor headcount. We're doing a collaborative deal where Anthropic is going to power the human, I don't know what they call them in Silicon Valley these days. Meet computers who actually are serving clients on the front line. And that was not a disruptive announcement from Anthropic. It was a collaborative one. Then you hear Jensen Huang come out and say, if you have a robot in your kitchen, are you trying to invent a new Cuisinart or does the robot learn to use that Cuisinart? The Cuisinart is a great stand in for Salesforce, for Servicenow, for Workday, for all of these tools. It's more likely the agents are going to learn to use the SaaS companies products rather than how quickly can we destroy them and build new ones.
- [21:55]
Scott Wapner
That's probably why when Jensen Huang was asked about what's been happening in software when he was on Squawkbox, he said the following. I think the market's got it wrong.
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Josh Brown
I think it's very likely that these
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Malcolm Etheridge
companies that we're talking about are going
- [22:13]
Scott Wapner
to introduce agents that run on their platforms.
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Malcolm Etheridge
You know, these agents, of course they have to be experts in what they
- [22:21]
Scott Wapner
do and nobody's going to understand customer Service better than ServiceNow. And they're going to come up with agents that are really fine tuned and
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Malcolm Etheridge
optimized for the type of work that
- [22:29]
Scott Wapner
uses the tools that they have. Okay, so there's Jensen defending in some ways the software business. Snowflake also reported their revenue guide was good. The stock's not reacting very well either. Steph, what's happening here? You have at least 7 target cuts. Top pick at B of a 275 target to 195@ Bernstein. Their market perform. What's, what's with this one?
- [23:00]
Stephanie Link
Well, last year it really had a very nice year and the year before that it had a really bad year. It's a pretty volatile stock, but I think that the numbers are very supportive of the stock going higher over time. Product revenue growth of 30%. Who do we know that's actually growing product revenue at 30%? RPO's of running up 42%. Huge deferred revenues 31%. Their net retention is 125%. I mean their customers love their products. They've got more products coming out. The guidance was fine. I think a little conservative, but that's more learning that this management team actually is a lot more conservative conservative than previous management. I think margins eventually can get to 50. Operating margins can eventually get to 15%. I mean they just did 9. So I think that there's a lot of operating leverage in this one and I think it's just, it's getting caught up with the rest of software. I think that's the opportunity though. These guys have a consistent way of growing 25 to 30% in product revenue growth and I think that's going to continue for bit a quite, quite some time.
- [24:01]
Scott Wapner
So you bought more synopsis. It's the one that you were alluding to earlier when you said you trimmed Amazon and then you bought more of something. And this is the something.
- [24:12]
Stephanie Link
This is the, this is the something. It was an outstanding quarter and this was a very conservative guide and that's the reason why the stock is down 5%. But this thing is down 35% from its highs. Earnings grew 24%. Revenues up 66%. Design automation grew 96%. This is mission critical stuff that is sold software that's sold to the semiconductor companies. The Sophisticated semiconductor companies, the more sophisticated AI gets, the more they need Synopsis and Cadence, by the way. And it trades at a 6 multiple point discount to Cadence. And they just made a huge acquisition with Ansys. And I think that it's going to grow, enable the company to grow its total addressable market from $31 billion today to 58 billion by 2028. So I just don't see why this stock is down as much as it is, especially today after a good number. But Conservative Guide is concerned. Conservative Guide.
- [25:07]
Scott Wapner
So in terms of stocks that we think, or you guys ostensibly think are down too much, Service Titan, let's look at that one. Because the Stock was down 34% year to date. It is not down 34% today. And it's probably not down 34% year to date anymore because stock's up near 7%. What's, what's the deal with this surge today? Your name.
- [25:28]
Malcolm Etheridge
So I added to this one and I added to toast during the unpleasantness last week, not this week. And I think the obvious thing to say here, in the case of Service Titan, the company's only been in business for a, been public for a year and a month or something like that. They just don't have the institutional sponsorships. So when people started selling software names, this is in all those baskets. The bottom fell out. People don't even know the story. That's why it got to as low as it got. It's the dumbest thing in the world if you think carpenters and plumbers and electricians are running out to code their own customer billing software. That's obviously never going to happen in a million years. So this to me is a screaming buy. That's why I added to it. And I'm not saying it goes right back to 100. I just can't understand the rational person that would think that this thing is under threat from AI.
- [26:19]
Scott Wapner
Okay, so Zoom's another one that was on the watch list today for sure. The stock's down a lot. Josh had sold it recently. Now we learned from our own Joe Terranova. He owned it personally, he sold it today, and you'll hear from him the next time he's on regarding it directly. But stock's down 13%. Joe's like, I'm out of here. And then lastly, before we get to a break, you bought and you've been making the point, hey, I'm buying the SaaS Apocalypse. And you bought more. I think it was ServiceNow a week ago and now you bought more IBM today.
- [26:55]
Rob Seachen
IBM so as you and Josh were having the conversation a little bit ago, Claude code announcements have caused these opportunities for investors who are willing to look past the red on the screen screen and actually take action. IBM is one of those to me. A piece of Claude code announced that it could actually replace the old 60s coding that powers ATMs that IBM is specialty is and the stock goes down 12% in a day. I loved it at 300. I really love it now. In the two 40s it was silly to me and so I stepped in and added to that position. It's a position that I own really based on their developments in AI and their ability to create a business line out of nowhere. They forexed their book of business basically in the last year and change. That's what I'm invested in, not their ability to create old code code models and keep them going one more decade.
- [27:45]
Scott Wapner
All right. You can't talk about software these days, it seems, without talking about what's happening in private credit. They are now linked, there's no doubt about that. Now you have another warning from a very well known credit manager, our Leslie Picker just spoke with another very big name in the private equity space and is going to join us on the other side of this break with her conversation and her insights into exactly what happens from here. We're back after this.
- [28:17]
Rob Seachen
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- [28:42]
Josh Brown
Pandora makes it easy for you to
- [28:43]
Scott Wapner
find your favorite music.
- [28:44]
Josh Brown
Discover new artists and genres by selecting any song or album and we'll make
- [28:48]
Scott Wapner
you a personalized station for free download
- [28:50]
Josh Brown
on the Apple App Store or Google
- [28:52]
Scott Wapner
Play and enjoy the soundtrack to your life. Why have I asked my electrician I found on Angie.com to bury my pet hamster Nibbles in our yard for me? Because I was so moved by how carefully he buried my electrical wires, I knew I could trust him to bury my sweet Nibbles after his untimely end.
- [29:07]
Rob Seachen
Huh?
- [29:08]
Malcolm Etheridge
Nibbles gone too soon.
- [29:10]
Scott Wapner
May he scurry in peace. Hey, sorry about your pet, but I just wire stuff. Nibbles would have loved you like a brother.
- [29:16]
Josh Brown
Connecting homeowners with skilled pros for over 30 years. Angie, the one you trust to find
- [29:21]
Scott Wapner
the Ones you trust.
- [29:22]
Rob Seachen
Find pros for all your home projects@angie.com.
- [29:37]
Scott Wapner
Welcome back. I was talking about software and private credit being attached at the hip these days. Marathon's Bruce Richards, big credit manager, fears 15% direct loan software defaults. That is what he has told a couple, according to a report. That's what he said, according to a report. You have a lot of big names speaking out about what's happening here. Leslie Picker spoke with another one, the Carlyle CEO and she joins us now. Would you learn?
- [30:03]
Leslie Picker
Yeah. So we spoke with Harvey Schwartz, the CEO of Carlyle at their shareholder update this morning. He base I asked him about what's going on with software and how it's impacting the private markets industry. And he said there's been kind of a big oversimplification as it pertains to software and the impact of there. Now it's important to know Carlyle as you look at their peers in the alt manager space, they're the best performer. They're still down significantly down double digit percentages even despite today's higher moves as a result of some targets that they set. But they only have about 6% of their A wham that is exposed to software. So they're a bit more diversified into other areas than some of their peers perhaps. And so that is why you see them outperforming, although still still kind of down with everybody else. Now the reason why you see so much software in the private markets is because it wasn't always this way. Back a couple decades ago, no one would, you know, finance a software buyout because they didn't have any real assets. So people weren't as comfortable with collateral. Then they realized, okay, they have this recurring revenue model that's very attractive so you can model things out future. That gives us some comfort in terms of being able to put leverage on this and make a return that worked really, really well for a long period of time. Then you get to the 20, 20, 2021 phase of things and people were doing these at very high valuations. Now there's this big rethink. So when we talk about the 15% number that you mentioned, Scott, some of that has to do with just kind of the behavior that we saw in the pandemic years and the valuations that things were done at and the financing that things were done at. And if you're in a dramatically different world, you know, how do you model the recovery from that and how do you model just the overall portfolio health as a result of this rapidly changing world which is something that people got into the software industry because it was so predictable and because it was. They were so comfortable with it.
- [31:58]
Scott Wapner
You guys both own it. In fact, Malcolm, you just bought more.
- [32:02]
Rob Seachen
So bought more yesterday. Okay, so I sold out of one company that has its roots in private credit and instead bought more Carlyle because to Leslie's point, it's the least dirty sock in the hamper, if you will, when it comes to that. So getting rid of Blackstone made sense to me. Adding to Carlyle made sense to me. The reason I want exposure to this space is because of, to your point, the annual recurring revenues that Carlyle brags about right there, distributable earnings are obvious. It's easy to predict. And so it's a great space to be in. I just don't necessarily want all of the exposure to building out the data center.
- [32:37]
Josh Brown
So you, you went from an actor in the space that had 7% exposure to one that had six.
- [32:45]
Rob Seachen
So Blackstone, I am concerned, has a little bit more exposure than we can actually see because of how many of those loans we don't have. The data, data on Carlyle, to me, looks like a much cleaner picture.
- [32:55]
Leslie Picker
You mean the GP stakes?
- [32:57]
Rob Seachen
Yes.
- [32:57]
Leslie Picker
They're not going there invest their investment, whereas Carlyle is not invested in other private equity companies.
- [33:03]
Scott Wapner
The week in which you had Boaz Weinstein, we talked about this, right? The wheels coming off in private credit is what he said down at I Connections in Miami.
- [33:14]
Josh Brown
You, you've been defending this space and still will. There's no question, question that there is episodic issues in this space. Whether that be the energy credit scare in 2016, which frankly was massively overblown. The exposures weren't as big as everyone thought, but the spreads widened out. Realize that underneath every one of these transactions, there's equity. So you're worried about the credit instead of the equity. If the business is performing, I am telling you, the equity is stepping in to save that.
- [33:52]
Malcolm Etheridge
People are worried about people.
- [33:53]
Josh Brown
What are they worried about?
- [33:54]
Malcolm Etheridge
They're worried. They're worried about future fundraising and therefore revenue because the investment.
- [33:59]
Josh Brown
But doesn't that impact the equity more?
- [34:01]
Malcolm Etheridge
Josh, let me, let me finish. The thing that people are worried about is the growth plan was we're going to tap America's 401ks and we're going to go through the wealth management channel and insurance, etc. Etc. And they've done, they've made some inroads. But the big idea was that institutions are fully invested in these asset classes. We need the Next group to come in, we're going to double our share of the US investable asset. The problem with that story is if there is a credit hiccup right at the moment that the American public is being introduced to these strategies and they see some blow up, some pain, that's going to push that story out further or cancel it entirely. Especially if you think Lloyd Blankfein is right and the government looks at this and says, you know what, actually, let's pump the brakes.
- [34:51]
Josh Brown
It's not a great idea. That last part's the most valid point you made there. But I have always found in doing this for a long time, and I'm sure you have too, there's two things that really drive returns in markets. Number one is right the end at Momentum, that's positive. If you can ride it longer, you're going to do really, really well. Mag 7, whatever it is. The other is steering into disruption when it gets crazy. And right now, the public BDCs are discounting dramatic failure. Not just three 5% defaults, dramatic defaults in their pricing. Okay. And if you can go in and do the work, you can earn higher forward returns. When you stare in at the point
- [35:35]
Malcolm Etheridge
of you buy the BDCs or the sponsors. Right now I have fresh cash. Which would you buy?
- [35:40]
Josh Brown
If I was doing a trade for profitability, I'd go to the BDCs. If I was working with somebody, you
- [35:45]
Rob Seachen
would be one of the few.
- [35:47]
Malcolm Etheridge
You would buy OBDC before you bought Blue Owl.
- [35:50]
Josh Brown
So blue. We own more or the other. But yes, as a trade, I would do that because I think it's been over. I think it's been massively overdone. You look at KKR with 22% yield, you know, you can go to Aries and get a 9% yield because their portfolio is viewed as maybe a little
- [36:08]
Scott Wapner
more defending it the way you are. Because you're putting your clients into private credit more than you ever have, not
- [36:17]
Josh Brown
more so than I ever have. It's been a consistent story, consistent story for us. And by the way, most of these portfolios, we dive in, we do a lot of work, we understand the credits that are in them. And I know there's different credits in the public BDCs versus the private BDCs. They're different liquidity profiles. But at the end of the day, if you do your underwriting, we can't be fear mongering this. They have a ton of equity beneath each one of these loans. It's a ton. It would have to be hugely disruptive. I will continue to defend and take the heat.
- [36:51]
Scott Wapner
Isn't what's happening in software hugely disruptive? It's what meets the moment of hugely disruptive.
- [36:57]
Josh Brown
It's expected to be so. So tell me why, when you look at indeed they're hiring, they're 11% up in the software engineers that they are hiring at the SaaS businesses. Why is that happening? Is it because they're unhealthy? Scott, that doesn't make any sense yet. Yes, they. There's possible disruption coming can. And by the way, most of these loans are short duration loans. You're worried about the credit. These are not long loans. Private credit are not long loans. They're not.
- [37:29]
Scott Wapner
So they still need to be marked somewhere.
- [37:32]
Josh Brown
They do. And you could question. You could.
- [37:34]
Scott Wapner
Well, no, you can't question.
- [37:36]
Josh Brown
Hold on. You could say that maybe there's some more defaults in there, but is it discounting a 22% discount to Navy? You know, I think at some point you have to say the four the juice is worth the squeeze. Malcolm. Saying it's not. I'm saying it could be for a
- [37:54]
Scott Wapner
little bit till the squeeze, until the juice gets sour.
- [37:57]
Josh Brown
Okay. Why? I've told you, my success in investing has come from two things. Riding that wave and also when disruption happens, trying to steer into it.
- [38:06]
Scott Wapner
We're so, so for time. My gosh. I'm sorry, Katie, do you want to just wrap it up real quick? You deserve a last word.
- [38:13]
Leslie Picker
Oh, no, I was just going to say it's the trustworthy of trustworthiness of these marks that I think is the next thing that will be in focus. The fact that you can do the work on the bdc, but we've seen countless examples of, of loans that were made that were valued at par essentially a month before and then zero the next month. So there's some concern about the trustworthiness of what you are seeing after you do the work.
- [38:35]
Scott Wapner
All right, thanks, Leslie. Christina Parsonnevalis has the headlines for us. Hi.
- [38:39]
Rob Seachen
Hi.
- [38:39]
Stephanie Link
Well, former Secretary of State Hillary Clinton says she has no information on the late sex offender Jeffrey Epstein's criminal activities and never recalls actually meeting him. She shared the text of her opening statement to the House Oversight Committee today before the panel's closed door deposition got underway. Just this morning, Clinton also called on the committee to ask President Trump under oath about his connection steps in. A Texas judge rejected a bid from Tylenol maker Ken View to throw out a lawsuit accusing the company of concealing the risk of autism to pregnant mothers. Texas attorney general filed the suit back in October, about a month after President Trump publicly claimed there was a link. Despite decades of studies showing no clear evidence of risk can be. You said at the time it would defend itself against the claims. And eBay said today it is cutting 800 jobs are roughly 6% of its workforce. The layoffs follow the company's $1.2 billion acquisition of the secondhand fashion marketplace Depop. EBay says the cuts will streamline its operations and help it meet its strategic priorities.
- [39:42]
Scott Wapner
Scott. All right, Christina. Thanks Christina. Parts and nobles Coming up, Josh's best stocks in the market. Hey, this is Jeff Lewis from Radio
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Josh Brown
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Malcolm Etheridge
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Josh Brown
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Stephanie Link
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Scott Wapner
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Stephanie Link
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Josh Brown
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Scott Wapner
Don't worry, I can fix this.
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Josh Brown
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Stephanie Link
I'm so relieved.
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No problem. I'll be with you every step of the way.
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Josh Brown
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- [40:52]
Malcolm Etheridge
have I asked my H Vac guy
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Stephanie Link
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- [41:04]
Malcolm Etheridge
Make it quick, young man.
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Stephanie Link
Aw. See, Pop Pop trusts you.
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Scott Wapner
I think we should call a doctor. Connecting homeowners with skilled Pros for over 30 years, Angie, the one you trust to find the ones you trust.
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Rob Seachen
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- [41:35]
Scott Wapner
All right. We are back with Josh Brown's best stocks in the market. And I don't know if this is an omen on what the feeling this market is, but it is on garbage.
- [41:47]
Malcolm Etheridge
There's no analogy. No analogy.
- [41:53]
Rob Seachen
All right.
- [41:53]
Malcolm Etheridge
Waste Waste management. Bill Gates was doing Halo before I made it cool. He owns 28 million shares. This I think 7% of the company. Before that, in the 90s, he was buying Republic Services, which was another garbage collection stock. Basically. Waste management is in this really interesting spot. You have a technical breakout that looks like it's about to happen. Stay tuned. I'll tell you about in a second. But the story here is this is a company that spent the last three years making massive capex investments. They've built automation into their machinery. They bought Stericycle, which is medical waste, which is going to be, I think, hugely profitable now that they've integrated it. They've done a lot of spending and as a result, you see the stock price hasn't done much. Now that spending has been converted into profits. They're talking about 29% year over year free cash flow growth at the midpoint. That would be the biggest free cash flow jump for this company since prior to Covid. Technically a Decisive push through 238 to 40 I think triggers a new range, takes us into a new bull market for the stock after a lot of consolidation. Your downside here, if you're a trader, I think you want to use that 222 area that has been support. You can see how the stock had bounced off of that before. Watch that rise in 50 day. Next stage is we want to see that 200 day turn up. And I think it's a very well defined risk reward trade from these levels.
- [43:21]
Scott Wapner
Okay, there it is. Wm. We'll take a quick break, come back. Talk about another one of Josh's names today. It is on fire. Back after this.
- [43:44]
Malcolm Etheridge
All right.
- [43:44]
Scott Wapner
We were learning during the break that you are a french fry aficionado.
- [43:47]
Malcolm Etheridge
Can you believe it?
- [43:48]
Scott Wapner
This health nut, which you should be.
- [43:51]
Rob Seachen
Yeah.
- [43:52]
Scott Wapner
Given your history in Shake Shack, which is surging up 10% after earnings, right?
- [43:58]
Malcolm Etheridge
Yes. Look, the reality is that they have an operator now running this business who came from a much larger system at at Papa John's. And I think what you're going to see happen here now going forward is people are going to look at results like these and they're not going to have these like, oh no. Is Shake Shack susceptible to the consumer? Every quarter where we see these huge pullbacks in the name, the reality is everybody is susceptible to the state of the consumer. But the Shake Shack experience is a premium experience. And quarter after quarter they deliver, they're innovating, they're offering a better discount program on things like fries and sodas. And in the end, if they get people to continue to come in, the stock's going to keep working. So I am long not going anywhere.
- [44:42]
Scott Wapner
What about over the. We're looking at it. Why is it down 8% over the last year do you think?
- [44:47]
Malcolm Etheridge
None. None of the results So I mean
- [44:50]
Scott Wapner
they deliver these kind of results. You'd have to wonder I mean if Brinker, Chipotle, Darden, Roadhouse.
- [44:54]
Malcolm Etheridge
It doesn't evaluate.
- [44:56]
Scott Wapner
Wendy's, McDonald's are all higher today.
- [44:57]
Malcolm Etheridge
More sophisticated answer. It doesn't have valuation support. Some expensive stock. It always has been. It deserves the premium multiple but it doesn't help you when the sector gets shaky.
- [45:07]
Scott Wapner
Got you. Thank you. All right, finals next. I will see on closing bell today 3:00 clock to Bracco Lacos and JPM just dropped a new note on this market. You don't want to miss that. He's going to be right here. Post nine Adam Parker, Ed Yardeni with us too. Lori Calvacena and Brian Levitt. So we'll kick it all around. We'll see where this market goes. See how Nvidia finishes up, what the software trade does, etc. Stephanie Link, what's your final trade?
- [45:35]
Stephanie Link
Truest Financial down 9% from its highest trades at 1.07 times book.
- [45:41]
Scott Wapner
Okay, who's got Netflix?
- [45:42]
Josh Brown
Me. You 50% discount to its long term average. I don't think think that you know Warner Brothers is is going to matter that much if it doesn't happen. They have great content so the stock's
- [45:54]
Scott Wapner
up today and it was up big yesterday on the idea that that is not going to happen for them.
- [46:00]
Malcolm Etheridge
So for Netflix, right?
- [46:01]
Josh Brown
Yes, yes. So and listen it's trading at a 25 times P. It has been at these levels for a long time and they're to monetize that content library with or without warranty.
- [46:11]
Scott Wapner
You miss it after I mean after selling it now if they don't get it.
- [46:14]
Malcolm Etheridge
I added some some of the seventies. I like it. Rob's going to make money here. I'm long the stock but I don't own enough of it so I actually hope that it doesn't raise higher right away.
- [46:23]
Rob Seachen
Zscaler Mal Zscaler reports tonight focus on net customer retention procedures.
- [46:28]
Scott Wapner
Okay, thank you Joby.
- [46:29]
Malcolm Etheridge
This is the stock I get the most questions about like on the street. Yeah, people are so yes to answer everyone. I still own it.
- [46:36]
Scott Wapner
Okay, I'll see you on the bell. You've been Listening listening to CNBC's Halftime Report the podcast you can always catch us live weekdays at 12 Eastern only on CNBC.
- [46:51]
Stephanie Link
All opinions expressed by the Halftime Report participants are solely their opinions and do not reflect the opinions of CNBC or its parent company or affiliates and may have been previously disseminated by them on television, radio, Internet or another medium. You should not treat any opinion expressed on this podcast as a specific inducement
- [47:05]
Leslie Picker
to make a particular investment or follow
- [47:06]
Stephanie Link
a particular strategy, but only as an expression of opinion. Such opinions are based upon information the half time report participants consider reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such.
- [47:19]
Leslie Picker
To view the full Halftime Report disclaimer,
- [47:21]
Stephanie Link
please visit cnbc.com halftimereportdisclaimer Finding the music
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Josh Brown
you love shouldn't be hard. That's why Pandora makes it easy to explore all your favorites and discover new artists and genres you'll love. Enjoy a personalized listening experience simply by
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Scott Wapner
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Josh Brown
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Scott Wapner
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Josh Brown
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Scott Wapner
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