Transcript:

Caroline WoodsFor years, growth investing meant big tech. Now AI hype is cooling. Volatility is back and investors are rotating into energy industrials and consumer staples. So where can you find quality growth at the right price? Jacob Hemmer is Chief Investment Officer at SRH Funds, he joins me now. Jacob, great to have you here.

Jacob Hemmer: Yeah. Thanks. It’s good to be here.

Caroline Woods: So let’s start with tech because it feels like AI has gone from unstoppable to questions almost overnight. How are you thinking about AI and tech investments at this point in the cycle?

Jacob Hemmer: That’s a good question. It seems like everybody’s got to have an opinion on AI. Is it in the early innings? Is it in the late innings or are we maturing? Is there years and years of great growth ahead? And as rich fans, we think we don’t have to have an opinion. It’s kind of back to the old Warren Buffett adage that investing is like, it’s like, batting in baseball, right?

You don’t have to swing it every pitch. And in investing, they don’t call a strike if you don’t. So you can just wait for the pitch. That makes sense for the pitch. You understand and you’re confident you can hit. So yeah, I ai is the buzz. It’s the trend. It’s exciting. It’s going to be transformative, just like the internet was in the late 90s.

That doesn’t mean it’s a great risk to take today, and it may be a wonderful, wonderful investment in future, but I don’t think you have to now. I think if you do good investing, you can find other opportunities.

Jacob Hemmer: Okay, so you might not have to have the answers to all the questions at this point because.

Caroline Woods: There certainly are a lot.

Jacob Hemmer: Of questions. But how do you position within it as you think.

Caroline Woods: About growth at a reasonable.

Jacob Hemmer: Price? Is the pullback that we’ve been.

Caroline Woods: Seeing creating.

Jacob Hemmer: Attractive entry points in quality.

Caroline Woods: Names? Or do you.

Jacob Hemmer: Think that the skepticism that we’ve been seeing is actually justified, and you need to find growth.

Caroline Woods: Elsewhere?

Jacob Hemmer: I think there is a lot of opportunity in a lot of different places. One example is growth has been or I was beaten up. The, the SAS based the software as a service and maybe a place where you can look for some potential growth opportunities if they’re disruptive. Technology doesn’t totally destroy the industry, as one of the questions raised like, is it going to work?

Is it going to work? There are other places that, again, I think you don’t have to be in the most competitive space. I think the smartest people in the world are trying to figure out if it is working or not working, and there are other opportunities, like you mentioned earlier, industrials, a good example. There’s places that are coming off a lot of cycles that have reasonable valuations, present some interesting opportunities and some of those companies can benefit from AI without sort of taking the capital risk that maybe some of the direct AI companies are.

Jacob Hemmer: Okay. So let’s dig into some of those.

Caroline Woods: Opportunities.

Jacob Hemmer: Because investors.

Caroline Woods: Seem to really favor.

Jacob Hemmer: Stocks linked to kind of the physical.

Caroline Woods: World versus digital. So far this year, we’re seeing.

Jacob Hemmer: A lot of the AI immunity trade. You mentioned.

Caroline Woods: Industrials.

Jacob Hemmer: But you know, specific names like.

Caroline Woods: Deere or Exxon.

Jacob Hemmer: Or McDonald’s, things that I might not be able to disrupt.

Caroline Woods: So are you in that pro rotation camp? Where do you.

Jacob Hemmer: Look when leadership broadens? If you could be a bit more specific?

Jacob Hemmer: Yeah. And one of the areas that we’re interested in is trucking. For example, trucking is something that you get beat up. I think trucking is within a down cycle. In the last few years, things are starting to look strong. It’s physical. It’s necessary. It’s also something that with all the routing and logistics that’s involved, it’s something that I could benefit without it being a something that is going to replace, if that makes sense.

That’s an area that we feel like there’s some potential opportunities. And another one is, some like looking at like the homebuilders, for example, not just home builders, but stuff like that where it’s inexpensive because no one seems to be paying attention. And there’s still a lack of, housing in the country. So there’s still a need.

It’s still demand. It’s not going away yet.

Jacob Hemmer: I’m taking a look at, so the.

Caroline Woods: Fund that we’re spotlighting here as the Schrage funds.

Jacob Hemmer: US quality.

Caroline Woods: Garp ETF growth at a reasonable price.

Jacob Hemmer: Taking a look at the.

Caroline Woods: Sector break down.

Jacob Hemmer: And I’m seeing that it’s.

Caroline Woods: Software.

Jacob Hemmer: And tech.

Caroline Woods: Really at.

Jacob Hemmer: The top still. So you still want exposure there.

Caroline Woods: But this provides diversification.

Jacob Hemmer: Just away.

Caroline Woods: From I.

Jacob Hemmer: I think the the key difference is when we talk about quality growth. So quality growth what we mean by that is we’re saying we want growth that’s sustainable. That’s not a flash in the pan kind of company kind of growth. It’s not a overly cyclical. It’s only on the growth side of the cycle. And it’s not growth is dependent on acquisitions.

And so yeah there there there are some great tech companies or great software companies that can provide that kind of growth without it being something that feels overly risky. It’s just a short term trend. It’s something that’s not going to last. So there are plenty of opportunities still in the tech world, still in the in the software world.

Jacob Hemmer: Okay.

Caroline Woods: So breaking it.

Jacob Hemmer: Down by some of the biggest holdings I cna so a.

Caroline Woods: Software play maker Jabil nurses, Cardinal Health.

Jacob Hemmer: I see New York Times on there. So not.

Caroline Woods: Necessarily.

Jacob Hemmer: The names that we would have typically associated with with growth is that because you think some of those big tech.

Caroline Woods: Names aren’t.

Jacob Hemmer: Quality.

Caroline Woods: Or they’re not a reasonable price asset right now.

Jacob Hemmer: But a lot of them, it comes down to price. Price matters. That’s something that we’ve seen in the market. We’ve been talking about a lot, internally is the large names. The large companies have gotten expensive. We see that in large caps. In general, large caps have one of the higher PE ratios and that is the end all be all.

That’s not how we do valuation, but it’s a good metric to look at. It’s higher than it’s been for a long time. And relative to some of these more mid-cap type companies, it’s, that gap in valuation has gotten really high. And so there’s some opportunities in some of these smaller companies. I think that’s one of the areas that, is shining in our portfolio is a lot more focus on kind of these medium sized companies.

Again, some of those are benefiting and employers are good example, some of those are benefiting from the AI trend. They’re more of the picks and shovel type company than they are the gold. But it’s if you can get it at a reasonable price, if you cannot overpay for it, that doesn’t mean it’s the cheapest thing in the world, but not overpay for it.

We think that that guards against too high of expectations where you got to really hit it out of the park to keep the stock moving in the right direction.

Jacob Hemmer: Okay. So you’ve made the case.

Caroline Woods: For.

Jacob Hemmer: Mid-cap over large cap. Make the case for mid-cap over small cap though because we have talked a lot about.

Caroline Woods: So far in.

Jacob Hemmer: 2026, the small cap outperformance that we’ve been seeing.

Caroline Woods: With the Russell.

Jacob Hemmer: Outperforming the Dow, Nasdaq and S&P 500 y mid-cap over small cap though.

Jacob Hemmer: Yeah I think it comes down to risk mid cap. You think about a medium sized company. It’s small enough relative to the large cap that it’s mature which we’ve talked about. The growth potential is there. But relative to a small cap company it’s got balance the balance sheet stability. It’s got maturity. It’s it’s I think got a higher probability of surviving, especially if we go into a down cycle.

And a down cycle could happen. So I mean I’m not predicting a down cycle I don’t know. But it could happen. And if it does happen, are there companies that you’re investing going to survive? I think that’s a big question. And the mid-caps I think of a better size, maturity scale, better balance sheets to withstand that. It’s sort of a I like to think of it as you’ve got sort of the growth potential of these small caps with maybe less of that risk.

The small caps might.

Jacob Hemmer: So if it’s mid-caps.

Caroline Woods: That really.

Jacob Hemmer: Have the compelling valuation.

Caroline Woods: And where you see the growth.

Jacob Hemmer: What does that.

Caroline Woods: Mean for the direction of the overall market, then?

Jacob Hemmer: Well depends on what you mean by the overall market, right? I think if you’re looking at some of these large cap indexes, anything can happen. Anything can happen in the next six months. We assess each one very much, have a long term focus when we’re thinking about trends. We’re thinking about ten years, not in the next year or the next six months.

So anything can happen in the short term. I do think there’s a relatively outsized risk, which you just don’t have in the mid caps. And so the question that we ask ourselves is we want to be in equities. We believe in the US. We want to be in the market. But do we need to take this outsized risk when we don’t know if things are going to turn sour or not in the large cap and the big the big growth names?

Jacob Hemmer: Okay. So how do you balance that? I guess just to kind of wrap things up, obviously when I said the.

Caroline Woods: Direction of the overall market, I mean, what sort of returns can we expect to see this.

Jacob Hemmer: Year? I wasn’t meaning ten years out, but you don’t also want to miss out on any of the potential momentum there. So how do you balance.

Caroline Woods: Risk with reward.

Jacob Hemmer: Quality.

Caroline Woods: At the right price.

Jacob Hemmer: With, you know, not missing out on.

Caroline Woods: Potential returns from areas that.

Jacob Hemmer: Are beaten down now but might, you know.

Caroline Woods: Leave the market higher later on down the road?

Jacob Hemmer: Yeah, I think looking at the beaten down areas is important to see if there are opportunities there. Right. That’s we’re taking that, relative value kind of saying, hey is it a reasonable price is good. Is the growth sustainable? I think that in the near term those returns could be it could be strong and it could be sour.

I mean, is we’ve been very bullish on the market the last few years. And now we’re seeing what’s what’s the question, what’s going to happen. And I think the way balance at risk is you go into these like we’ve been talking about go into these areas like mid-caps or industrials trucking, homebuilding where you feel like the risk is less.

I feel like the the outcome feels more. You’re more confident that we can get positive, solid returns even in the next year, in the next a little while, because the valuations seem more appropriate for the growth profile that these industries, companies, sectors have.

Caroline Woods: Okay, we’ll leave it there. Jacob Palmer, Chief investment.

Caroline Woods: Officer at SRH.

Jacob Hemmer: Funds the ETF is U.S. quality ETF.

Caroline Woods: SR HQ.

Jacob Hemmer: Thank you so much for joining us.

Caroline Woods: Really appreciate it.

Jacob Hemmer: I appreciate the opportunity.