Transcript:

Caroline WoodsJoining me now, Dan Niles, Founder and Portfolio Manager at Niles Investment Management. Dan, thanks so much for being here.

Dan NilesMy pleasure, Caroline.

Caroline WoodsSo, Dan, we’re kicking off the first full trading week of the year. We have what I spending fed policy, geopolitics, midterm elections all in play this year. How should investors be thinking about both risk and opportunity as we head into the new year?

Dan NilesWell, I mean, I think this year is going to be incredibly choppy. I think what we saw in the last two months of the year, is kind of indicative of what all of 2026 is going to look like, in the sense that you saw a lot of more discernment around the AI trade. People started to question you know, is OpenAI going to be able to come up with the 1.4 trillion in commitments that they have over the next eight years? And if they don’t, then who’s going to get impacted by it? And so I think you saw a lot of volatility obviously in names like Oracle or Core. We where you pick your favorite. And I think that’s going to continue in 2026 because I think investors are figuring out not everybody is going to win. And the market for the last three years since ChatGPT was introduced, assumed that the second big driver beyond AI for the last three years has obviously been easy money. And you know, the fed stopped hiking obviously three years ago. And they’ve been cutting for the last two years. And the S&P is up over 80% over the last three calendar years as a result of that. And the fed went into quantitative, easing QE lite, if you want to call it purchasing 40 billion in Treasury bills starting in December, you’re going to get a new fed chairman in May. Only way he’s going to get appointed is if he wants to cut rates by at least another 100 bips. And so that easy money that’s been really powering the markets for the last three years, you know, that’s probably going to continue. And so you have this push pull between more discernment and AI and easy money on the other side.

Caroline WoodsYou’re expecting an incredible amount of choppiness. But would you say that this is a market that’s more fragile or more resilient right now?

Dan NilesI think it’s a little bit of both. As I said the last two months, you saw that, right? You saw oracles and core waves getting killed. But you saw the overall market being able to hang in there. And so for me, I’m dealing with the market that’s sitting right in front of me. I’m not trying to forecast out a full year. I’m sort of looking at, well, how is the market reacting to news? Because it’s never the news. It’s always a reaction to the news. And we are in year four of this AI CapEx buildout. And as we talked about earlier, everybody’s not going to win. If you go back to the internet bubble, when you when that finally broke, Nasdaq went down 78%. I don’t think we’re there. I think we’ve got another 1 to 2 years of pretty strong CapEx spending in AI. But I also do think sometime this year you’re going to have one of these more marginal players not be able to get the funding that they need and that when that day happens, you’re going to have a big problem in this AI trade. Having said that, easy money helps drive the entire market outside of that. And if you look at The Magnificent Seven as an example, five out of the seven names in that group actually underperformed the S&P this year, which investors may not be aware of because Google was up so much, up over 60%, and Nvidia was up pretty nicely as well. It kind of masked a lot of that. So for me, I think the market’s both fragile because of the AI trade getting more discernment but also more resilient because you’re going to you have all of this easy money coming into the market. And so even if you have an issue within that AI space where some names are continuing to get hit, I think the rest of the market may actually do okay, just because you have more easy money being jammed into the market, which in and of itself inflating a bubble further, when you’ve got valuations at record levels by some measures, like enterprise value to sales for the S&P or market cap to GDP or price to cash flow, there’s a lot of metrics that are even higher than they were in 2000. And so that introduces a lot of fragility. If you do have a selloff that starts.

Caroline WoodsOkay. So you’ve been talking about this discernment around the AI trade and who actually is going to win. Who do you think is going to win?

Dan NilesWell, I think it’s to me it’s clear Google is going to be the long term winner. Now, that doesn’t mean that when open AI finally starts to put ads on their platform, which they have to do right. That’s the only way they’re going to be able to make these revenue forecasts they have. You’re going to see people go, well, obviously that’s going to hurt Google and Meta as well, because those two are the duopoly really in online advertising. And so some of that money is going to come out of that as advertisers look to put in the open AI. But over the long term, if you look at Google, obviously they have, you know, almost 5 billion users that use the product. You’ve got a way to monetize all of that through their ads. You’ve got devices with Android. And then obviously what they’re doing with their pixel phones to help, you know, cede the market and you’ve got the best amount of training data in the world because they’ve got over, I think, seven products with over a billion users each. And so you put all of that together, combined with massive amounts of cash flow, to be able to fund their efforts, they’re going to be the long term winner in consumer AI. And if you look at corporate AI, anthropic has about 75% of their revenues coming out of corporate, where OpenAI, 70 over 75% coming out of consumer anthropic, looks like they’re going to be clearly a strong player of the private ones and corporate. And then, of course, you’ve got Microsoft, which pretty much every corporation has. That’s going to do well because of their hammerlock through office. And then Oracle’s an interesting one because obviously most fortune fortune 100 companies have an Oracle database, but then they’ve also hitched their wagon to OpenAI. And so that one becomes a lot trickier.

Caroline WoodsAlthough I was taking a look at your top five stock picks for 2026. And one name that you didn’t mention that’s on that list is Apple. So is that a bet that Apple will finally pull through with a smarter Siri?

Dan NilesWell, remember, Apple doesn’t have their own AI, right? They’re going to end up partnering with probably Google. Maybe OpenAI pays enough where they get to be the default search engine. But Apple to some degree, because they’ve, you know, been woefully behind in their AI efforts. They get to kind of benefit from the fact that everybody wants to get access to their 1.4 billion installed base of iPhone users and 2.4 billion installed base of Apple devices overall. And so they kind of benefit in the fact that they’ve been so terrible in AI to some degree. And that’s one of the reasons it’s a top pick. The other big one, though, is the fact that form factor changes in the past have driven massive upgrade cycles. So you go back to the iPhone six, where you went from a four inch screen to a 5.5in screen and revenues accelerated from being up 7% year over year in fiscal 14, up 28% in fiscal 15. And I think the foldable phones you’re getting and remember, Samsung’s had one since 2019. Your Apple’s just getting there with this next year’s iteration. I think that’s going to drive a big upgrade cycle.

Caroline WoodsCisco is also on your top 2026 stock pick list. Tell us why.

Dan NilesWell, it was on my 2025 list and the stock was up over 30% this past calendar year. And the reason I put it on the list a year ago was because my thought was, look, people have given this company up for dead. It’s got a mid-teens multiple. I think they actually will do well in terms of gaining some share with AI infrastructure players. And that’s what they did last year. And if you look at this year coming up, I think you’re going to see corporations really starting to upgrade their networks because you’ve got all this AI traffic on the networks. The stock’s trading at you know, 19 times 20 times. You’ve got the S&P trading at about 26 times 25 times trailing. And so you’ve got some potential for the multiple to keep expanding. And I think when you look at AI infrastructure revenues after growing about a billion the last fiscal year, I think you’re going to see that going to about 3 billion this fiscal year. And revenues, which for five years had grown at 1% a year for five years. Last year, fiscal year grew at 5%. And I think this year you’re going to see that move up into the high single digits driven by AI, which will help the multiple continue to expand. So in a environment where, as I said, I think it’s going to be very choppy for AI names. I think this is a way to get some offense with growth accelerating and some defense, because the multiple is so low and still participate in AI. And as I said before, the Magnificent Seven as a group were up, I think 22% last year. Cisco is up over three.

Caroline WoodsOkay. Also on your list Boeing which had a good 2025. So it sounds like you expect that strength to continue. And pinch another winner from 2025. But one that’s on your list. That was not a winner last year is Nike. So you’re expecting a rebound story there.

Dan NilesYeah I mean I think if you look at the brand the brand is still pretty strong. It had gotten to number ten globally. Then when you had the new CEO come in or the old CEO, I should say come in from eBay. He went ahead and tried to change the company to a direct to consumer company. And then the brand really started to fall off because he alienated a lot of his channel partners like, you know, Foot Locker or Dick’s Sporting Goods. And he allowed other companies, like on our Hoka to get a foothold in the market. About a year ago, a 32 year Nike veteran, Elliot Hill, got brought back in. He took Nike kind of back to its roots, which is focused on sports. It’s focused on distribution. And I think and innovation and what you’re seeing in the US, which is US revenues went from being down 11% year over year. Two quarters ago. This most recent quarter, they were up 9%. I think you’re going to see that turnaround start to work in other markets. And the brand is still very strong. And then from a defensive point of view, on an enterprise value to sales basis, the multiples at the lowest levels in a decade outside of the track, you know, the tariff driven levels you saw in April. So you’ve got some defense with that multiple. And offense, if the business continues to turn around and the improvement in the U.S., you start to see in areas like China where revenues were down 17% year over year. And I think that’s the big opportunity.

Caroline WoodsNo crime. And Nike shares up about 2.5% today. I guess Google searches for Maduros tracksuit have reportedly surged since President Trump posted the photo of him in a tracksuit in custody. I do want to just wrap up by asking if what’s going on in Venezuela has changed your market outlook, your economic outlook at all markets seems to be shrugging it off today. You said it’s really the reaction to the news that matters most. What does this reaction tell you?

Dan NilesWell I mean the market should be up. So I’m not sure why anybody would think it would be down because Venezuela, since you’ve had sort of a socialist take over their oil production is down, I think 80%. And so if that well, production starts to improve, which it will over time. That should drive oil prices lower. And that’s one of the biggest fuels for the global economy there is. Because as much as we all like to talk about green energy, at the end of the day, oil powers the markets and it’s the fuel for global markets, especially not the first world countries, but the second third world countries. So if you’ve got cheaper energy supply that lowers inflation. That’s obviously very good. It helps the emerging markets even more so than the developed markets like the US. And so that’s a real big positive. If energy prices drop.

Caroline WoodsAll right. We’ll leave it there Dan Niles Founder and portfolio manager Niles Investment Management. Thank you so much for sharing your insights.

Dan NilesMy pleasure. Caroline.