Transcription
All right guys, with the market running up big and everything just being in overdrive, the question becomes: what is the best opportunity right now? Specifically, we're going to talk about the Magnificent 7. So, I'll give you guys my opinion on that, but I want to hear Wall Street's opinion on what they're thinking. We'll break it all down: what's true, what's not true, all that good stuff.
But first, hit that like button if you like getting the truth without the hype, because that's exactly what you're going to get today. I know I've personally heard a lot of differing opinions on this, and I'm not sure there's a perfect answer. However, I'm not necessarily going to say that these Wall Street Bubbas aren't necessarily that far off in regards to their opinions on this.
Now, obviously, there's a lot of different factors. We'll talk about all of those, but generally speaking, if you're going to put your money into the Magnificent 7 right now, which one is the best opportunity today? That’s what we're going to talk about here.
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Why you will never return. I looked into all those interruptions that I've been having in my videos, and I was told that this weekend The Blacklist is going to go live for the Black Friday sale. So thankfully, hopefully, those guys won't be hacking into our videos anymore. We get down to business, so let's jump into this video here.
Welcome back to Market on Close. Let's talk some tech and figure out where the Mag 7 fit in the portfolio. Joining us is Eric Clark, a portfolio manager at Rational Dynamic Brands. Eric, welcome back! Tell us about how you guys find out which brands are the most dynamic first, and then we'll talk about the ones that you like right now.
I don't know why, but I always find it funny whenever these guys are on nationally televised TV shows and such, and they have like the worst green screen ever behind them or whatever the heck they're doing there in the background. I get it; you may not want to set up all the lighting and everything else, but come on, we could do a better job of green screening than that. It is what it is, but it's just something I find funny.
Sometimes these guys are worth millions of dollars; some of them have multi-billion dollar funds, but yet, you know, we get a junior high green screen session there.
Hey Oliver, yeah, you know, a lot of this is just which spending categories are really important to consumers. How are consumers thinking? How are they feeling? What's their sentiment? The consumer has been largely underappreciated all year. We've talked about the consumer being tapped out, but there's no data to support that. Consumers are being very stingy about spending, but they are indeed spending in the most important areas, and obviously, Amazon is a key name and a key theme for all consumers. We all have the box in front of our mailbox almost on a daily basis, so consumers are good and looking forward to holidays. Holiday spending should be pretty robust.
Yeah, I know that it wasn't popular all the time when I said it, and I'm not saying that people aren't stretched, but we aren’t in a situation where people are like—we're actually in a recession. All these other GI things, like that, the data doesn't support that people are still spending. I agree they're paying more for stuff. I agree that they are obviously using debt more. There's a lot of things, but when you look at the actual data, especially what the big banks' data are showing you in regards to spending, we're getting back to pre-shutdown levels, pre all the money coming in and all that sort of stuff, where folks got much better financially in terms of their financial situation.
Obviously, they were able to spend more, pay down debt, take on less debt in the meantime. We're basically back to historical norms in regards to a lot of that sort of stuff. That's what the data is actually saying. So in regards to that, he's right; the consumer is definitely being more—I guess they're not just as willy-nilly. But I think we also had a two or three-year period there where it was just crazy, and people were buying all kinds of unnecessary things.
Obviously, we saw that with valuations, right? We saw stocks, you know, companies—you see one in the background there, actually Peloton—was producing these incredible quarters after incredible quarters after incredible quarters, and I just was thinking there’s no way people are going to continue to buy thousand-dollar bikes infinitely into the future and then pay more than a gym membership for a monthly membership to continue to use that bike. It was just a product of the time and the particular financial situation, with all the money that flooded the market—not just for corporations but for individuals, for everyone.
That's what we're seeing—a normalization of that. Now, of course, if we get another giant spike of inflation again, like we had last time, and like we were able to absorb last time, I'm not sure we could absorb it again. I agree we’re kind of right up against that buffer to where the consumer's okay, but definitely kind of on the—if you want to put it on a scale—we're over here on the max end of the scale as opposed to kind of post-shutdown, when all the free money and everything else was coming in.
Definitely, that kind of moved us more towards that middle point. Now we’re over here, kind of on the "hey, we're still doing well; we're still going to spend." I mean, not like people are spending less—I can assure you. There's still lines everywhere for everything. But nonetheless, people are definitely starting to be more discretionary with it, and they’re right there on the end in regards to that max.
So, as long as we don't have another event like that, I don't suspect that we'll see the consumer come in super weak for holiday numbers or anything like that. You guys fund up to 14% waiting in Amazon; that's big.
That it is, that it is. We think it is by far the best opportunity, particularly in the Mag 7 names. It's cheap relative to itself; they're firing on all cylinders. Even the international division is starting to kind of cross into that positivity. So we love the retail business. There's a lot of torque in a model that's $500 billion in revenues when margins are just gently creeping up as the cost to serve customers goes down. Plus, the AI and the cloud business are doing really well. So combined, there's a lot of robust growth ahead with good margin, profitability, and free cash flow.
All right, I'll tell you my pick for the Magnificent 7—the best stock there, or the best opportunity right now. I guess you caveat that—the best opportunity, because that's the discussion of this particular segment. But everything he's saying about Amazon is absolutely true; that is how they run the business.
It is, obviously, a capital-intensive business, but they go through these periods of time where the profitability goes down—everything goes down—because they're pouring money back into the business. Now you're seeing you're basically reaping the rewards of all that capital expenditure. Now, obviously, seeing margins continue to get better—continue to get better—that was my thesis from the start with Amazon.
It's kind of like, are people going to use Amazon less or more in the future? I think there's no doubt, no doubt people are going to use it significantly more in the future. Now, does that mean it's the best opportunity right now? Well, we'll wait and see here in regards to that. But in regards to everything he said so far, I agree. It’s just a great company, very well run, has been well-run for multiple decades now, so it's definitely a great stock.
I'm definitely glad we were adding—shoot, we added this year actually more Amazon. Obviously, 2022 that was easy—everybody should have added Amazon in 2022, along with Google and Meta and all the other—you know, obviously, you could even get Palantir down in the sixes back then. But nonetheless, we were adding just this year because Wall Street got dumb this year with Amazon towards the beginning of the year. I just put on a simple DCA and was able to add a couple batches of shares there earlier this year.
So, you had opportunities this year with Amazon. Obviously, we're up over $200 now per share, but that doesn't necessarily mean it's overvalued either—that's where valuation comes into play. But you had, you know, basically Amazon in a screaming deal earlier this year.
The only other big tech name I see in there from the Magnificent 7 category close to 5% is Apple. I guess Meta, too—Apple, Meta, Alphabet—are kind of all sliding in there at 4.5% in terms of the functionality of the fund.
Then how much does it skew towards Amazon? How do you rebalance it if it gets too big?
Well, we made this a very big overweight starting in the last half of ’22, when Amazon in particular, all those stocks got beat up in 2022 with rates rising. But we took that up pretty meaningfully because it just got way too cheap, and we have trimmed it along the way a little bit. But obviously, it's had a pretty good run since the fourth quarter in particular of 20...
Yeah, he trimmed it along the way; that's what we talk about all the time. That's a hedge fund move, and every single share he trimmed is—obviously, he would have made a lot more money if he just would have held. This is why dead people outperform hedge funds, traders, and everybody else. Go look at the returns for all these things; there's occasionally a hedge fund out there that outperforms, but they very, very, very rarely do.
And that's one of the reasons why—because they trim, because they take profits. They do that to make money for themselves, not necessarily what's going to make you the most money over the long run. So, obviously, that's a reason why I don't trim. I don’t do those types of things. I don’t play those sorts of games. I don’t get into that because all I've ever done with every single share that I've ever, quote unquote, trimmed—I wish I had them for a great company.
Now, obviously, if you're trimming a company that's just on a hype run and you don't believe in, that's a whole different story. But you know, hey, any share you trimmed of Apple in 2010—bet you wish you had them back! Or 2012—bet you wish you had them back. You know, Tesla 2015, 16, 17, 18—bet you wish you had them back.
You know, obviously, we can get in cases like Tesla being overvalued at $400 per share, maybe at that stage. But for a lot of these companies, he wasn't trimming whenever it was at 1,000 PE. See where I'm kind of going with that? If you have a company that's performing and just on a nice run, you just let it go; you just let it ride. Trimming is a hedge fund move, and that's why they outperform—excuse me, that's why they underperform dead people, too.
We’re happy having it even bigger. I mean, if we pull back even further, I don't anticipate much more pullback. It's already had about a 6% pullback here in the last two or three days, but it just broke out of its 2021 range. So that one's kind of early in its breakout, and the business is really inflecting higher. So, we're happy at a 14-15% weight, but if it got—if the market sold off and it got a little cheaper, I'm happy to build it bigger. I mean, the ETF's like 25% Amazon, so, you know, we're certainly not opposed to being bigger in a name that we have super high confidence in.
Okay, well, he would be bigger if he didn't trim, but I don’t know—maybe it’s just me nitpicking. Sorry, fair point. Apple at 4.5%—what's the hold up for Apple from the consumer, from the branding perspective? How come that's not ranking up there alongside Amazon?
Well, you know, valuation is obviously a lot different, but I really do believe in this upgrade cycle. I just think it’s going to take some time. So, that's a multi-year upgrade cycle for an Apple intelligence, and I don't think that's in the numbers yet. It's just going to start slow, right?
Word of mouth for first the early adopters—take a bite of the Apple, so to speak—and upgrade to the 16 and then try the features. Then word of mouth builds, and more people start to upgrade. So, for the first time in, you know, in a couple of years, you're going to start to see iPhone sales really ramp up again.
When you have, you know, a massive install base around the world plus good service revenue, you know, that tells me the valuation is pretty warranted. It's frankly the greatest consumer staple ever created. I know it's intact as a sector, but it is clearly a consumer staple part of our everyday lives.
I think the AI thing is going to really enhance all the products across the board over the next couple of years.
All right, so he was absolutely correct—valuation is the reason why it's not as large as the other. I can't argue that. It is, you know, by any metric, trading rich. It seems like that is where everybody's going for safety during downturns, good times, whatever the case is—that's where the money's flowing.
So, he kind of gave you a whole lot of Wall Street speak there for “hey, it’s a little bit overvalued and it’s going to take time for sales and everything else to catch up to the valuation.”
It might take a couple years—that's kind of the easy version of what he said. But that doesn't sound near as intelligent as the other one where you’re talking about all these different upgrade cycles and everything else. The reality is it’s going to take time to catch up to the valuation to get to that undervalued point again, especially when you’re looking at a stock like Apple versus an Amazon in terms of growth rates for now.
Obviously, you know Apple's one product away from, you know, blowing this out of the water, but for now, I would definitely say in the near term, Amazon's growth is going to be better than Apple's as well. On top of that, from a valuation perspective in regards to historical valuation—not putting them side by side in regards to historical valuation—it's not trading as rich as Apple is right now in regards to that.
So, that makes perfect sense to me, what he’s saying all the way around.
We’ll wait and see on the AI and everything else. Again, they're taking a different approach than everybody else, so we'll see if that pans out and whether consumers actually like it or not. They should benefit really well with free cash flow and revenue growth.
When do you expect we’ll get clear answers on the actual iPhone cycle and how the Apple AI is informing sales? Because right now, we’re mostly still guessing, right?
Yeah, we are, but I think they'll have a good Christmas holiday season, and I think it'll slowly just kind of ramp up—step higher every quarter as that word of mouth and as that functionality and the tools get added to the software updates. So, we're pretty bullish on that one. In fact, we added to Amazon and Apple today into this weakness.
Eric, real on Meta: what do you think about the way they're employing AI?
It's pretty prevalent all over their apps now, it really is. I think they were an early winner in AI, so I expect that to continue. I mean, you know, it's not surprising—they're easing off a little bit today. I mean, you know, if RFK gets involved in some of the commercials for Pharma on television, I mean, you know, they’re always in the crosshairs of potential lumpiness in advertising revenue.
But long term, we just feel like more engagement, just because of AI, is going to drive more revenue, more free cash flow. They’re serial buyers of their stock; they're managing their business a lot better than they were. There's no more metaverse; you know, it's a pretty streamlined focus group of people, and the valuation is pretty reasonable.
Okay, good arguments. Eric, thanks. All right, so we'll go ahead and stop the video right there. Now, in regards to their pick, I can’t say Amazon's a bad pick. If you want to just throw Meta out there as the best of the Magnificent 7, I can't argue there.
Obviously, I look at Nvidia and I just go, at least for the next year, I obviously don't believe they can keep this pace long term, but at least for the next year, I mean, demand isn't slowing down for those guys either. So, you know, you kind of look—there's a lot of—that's the reason why they’ve run; that's the reason why they're doing so well—is because they're just performing as businesses, and that's what matters to me in the end.
Now, that’s different than the question that was asked, which was: what was the best opportunity right now? And to me, the best opportunity right now is actually Google because it's beaten down, it's trading cheaply relative to its valuation. The government breaking it up or taking away—it's just all these goofy things that come up periodically with big tech, and it never really amounts to anything in the end.
So you've got to kind of weigh those types of things and understand, I mean, what are people going to start searching less on Google? That was the whole thesis behind chat GPT and why it got all the way down to $80.
Didn't happen, still not happening, probably not going to happen. Same thing with advertising and everything else—Meta and Google do it so much better than everybody else. Talk to anybody who advertises, and they'll tell you it’s Meta and Google, and then nobody—you know, just the gap between those two and everybody else in regards to advertising is just light years.
So, are they going to all of a sudden lose that spot? Probably not as well. So for me, I'm very, very confident in Google in their ability to execute and a lot of other things like that moving forward. And I like the valuation right now; it's still trading cheap. So for me, it's the best opportunity right now.
But really, any of the Magnificent 7 right now is performing wonderfully as businesses, which is the important piece there. Although I'm probably forgetting one, and now, you know, somebody's going to tell me down in the comments: "Oh, you forgot about so and so; they had a triple miss" or something sorry if I missed it.
But you know, just kind of going off the Google, Meta, Apple, Amazon, Nvidia—going off those—to me, I think we're just fine for now in regards to those names. But Google, to me, is the best in terms of the opportunity right now based upon that valuation metric.
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So, thanks for watching and we'll see you in the next one. [Music]