Transcript:
Caroline Woods Joining me now, Bill Mann, chief investment strategist at Motley Fool Asset Management. And Bill, welcome to the desk. Great to have you.
Bill Mann Great. Thank you for having me.
Caroline Woods All right. So tech stocks selling off again this morning AI names taking another beating. Core. We’ve is down more than 20% this week. Maybe is down 20%. Dell SanDisk micron all down double digits. Is this an opportunity to buy some of the biggest beneficiaries of AI on sale? Or is this the start of a much bigger correction and a warning sign?
Bill Mann So I feel like on the street, it has gone from wondering whether I was in a bubble to when it is going to pop, and maybe we’re seeing the beginning of that now. There’s a huge amount of financial distress that is in that marketplace, in the form of the debt that the hyperscalers have taken on in order to do a build out at the time that that eye prices are falling.
Bill Mann So there are big questions about these businesses. I happen to think that eye is a very real thing, but I think that we’re going to go through a period of of much more turbulence than we’re seeing even now.
Caroline Woods So talk to me about what that could look like. If I is a bubble and is going to pop. How much damage could be done?
Bill Mann Well, if you think about the debt market, about 17% of the new debt issuance now is coming just from the hyperscalers for the eye for the eye industry, which is one of the reasons why you’re seeing treasury notes go up about 6% higher than they’ve been in two and a half decades. These two things are interrelated. So I don’t know that there are places to hide in terms of the eye bubble.
Bill Mann An unraveling, if you will. There are areas of the market that have not participated at all in the rise. And so it is one of the most, split markets that I’ve seen in my career. So there are opportunities out there, but they may not look like opportunities for a while if we are, in fact, seeing the bubble pop.
Caroline Woods Okay. So we’ll talk about those opportunities in just a second. But first, you talk about that investors are increasingly worried about the debt financing piece of the AI boom. There’s also competition with China that seems to be spooking a lot of investors this week. You are looking at those things as real cracks in the AI story. And not that investors are overreacting right now.
Bill Mann No, I’d say that the overreaction has happened on the upside, but I do want to be sure to emphasize the fact that I think AI is real. I don’t think that we’re looking at something that is just going to, you know, that’s going to disappear so long term. I don’t think that you should be pulling away from AI investments.
Bill Mann You just have to be realistic about the fact that there are going to be a lot more turbulence than we’ve seen in the in the.
Caroline Woods Past, but I don’t get it. If I stocks are due for a reckoning, why do we want to hold AI stocks then?
Bill Mann Well, what is it that you’re trying to dodge or you’re trying to dodge volatility? Or are you trying to end up in something that is real and that is going to transform the economy? So I happen to think as a long term investor that it’s really, really difficult to pull out and put your money back in if you believe that something is real.
Bill Mann I think that, you know, as far as, as far as we’re concerned, you kind of hold the hold the line a little bit and, and maybe make your positions a little bit smaller. We have, we have ETFs that, that are a little bit more, limited in their exposure to the market. And those are the types of things that I would recommend.
Caroline Woods So you would look at it as a healthy correction, a healthy shake out that ultimately will be beneficial to investors.
Bill Mann Healthy but huge.
Caroline Woods How huge. So how much bigger are we talking about?
Bill Mann Well, again, if 17% of the overall debt market issuance right now is just coming from the hyperscalers, that is a massive component of the debt market. And equity comes behind in terms of preference. And so it’s it’s conceivable that, you know, that these companies could drop a 40% or more.
Caroline Woods How do you distinguish between a temporarily beaten down eye stock and one that might never recover?
Bill Mann I think that one of the key ways to do it is to look at the companies that seem foundational. You know, Nvidia, for example, is a foundational company. They are they are involved in the build out, for example. And I don’t really see that as being something that, you know, that that is going to change. There are there are other components of the market where again, you’re starting to see these companies take huge amounts of debt on.
Bill Mann So they might be foundational companies, but they also might be creating a mismatch for themselves and and their I’m thinking about the meadows of the world and the and the alphabets of the world, which are great companies. And I have no problem having exposure to them. But, you know, debt is an entirely different set of factors than equity, just because of the of the time importance of, of the cash flows.
Caroline Woods So you would choose Nvidia over Meta and Alphabet. What about some of the stocks that are on steepest sale this week I had mentioned core Weave and Micron and nebulous names like that, especially in the memory space SK Hynix. Are you looking at any of those is a good buying opportunity right now?
Bill Mann We would focus on ones of those that don’t necessarily have debt obligations and are some in that mixed with core weave, some of their debt obligations are now, you know, 15% and higher, which is the sign that the market believes that this is a distressed business. And and as people who focus on high quality companies, I don’t have that much interest in distressed businesses.
Bill Mann But micron, maybe EBS companies of that, of that nature that don’t have the same level of immediacy and the need to, you know, to, to make profits and are part of the build out. I think they’re probably. Okay.
Caroline Woods Okay. But you you would wait for lower. Are you okay here? Because I’m okay.
Bill Mann Here.
Caroline Woods Okay. Yeah.
Bill Mann But they may go lower. I mean, I think if you, you know, if you’re a long term investor and you believe in the market, you have to be comfortable with something going down after you buy it.
Caroline Woods So it’s all about the quality of the company and how much debt exposure they have.
Bill Mann Exactly.
Caroline Woods It feels like a brutal week for stocks. Perspective is that the S&P is actually only down 1.4% at this point in the week. We obviously still have tomorrow too. Do you think that the index is masking a bigger problem for the broader market, or is this just okay? You know, it’s very much specific to tech.
Bill Mann It feels bad. I mean really it really does. A huge part of the market hasn’t really participated in in in the updraft either though. So while the market is just below its all time highs, there are parts of the market that are outside of tech that are foundationally cheap, and those are some of the areas, you know, that that we’ve been focusing instead.
Caroline Woods And like what?
Bill Mann Yeah. So like for example, TJX, which is the the company that owns TJ Max on its home stores owns Marshalls. They’re benefiting from from a trade down their opening stores are up to 1300 stores worldwide. And it’s it’s a company that has not really benefited from the market going up because there’s been so much concentration in the tech industry, which TJ Max is a lot of things, but it’s not tech.
Caroline Woods So that’s a valuation story versus a trade down story. It’s not that consumer is going to be so weak that they’ll need to go to TJ Max. It’s just that they it’s just cheap.
Bill Mann It’s just cheap. And it’s it’s it is again a very high quality company. And I think that, the market has been so focused on the institutional imperative of you’ve got to be na you’ve got to have focus and tack that there are other parts of the market that you’d have to be brave to buy. And I think that that retail, particularly discount retail is one of those segments.
Bill Mann But TJ to me is too cheap to it.
Caroline Woods Is that a call on consumer discretionary overall because retail stocks are actually having a pretty good day today. It’s not just Walmart and Home Depot that are doing well. I was taking a look at my retail watch list and almost every company was higher, despite the, you know, the sell off that we’re seeing on the tech side. So is that a a call on the overall consumer or it’s very specific to TJX?
Bill Mann I think it’s very specific to the segment that TJX is in. It’s the highest quality of, of of that segment.
Caroline Woods All right I was taking a look at some of your other picks. Progressive is also a pick down about 6% year to date. Is that another just is not the most exciting thing insurance, but just another example of a stock that investors should be kind of rotating into if they’re taking some some money off the table in tech.
Bill Mann So I’ve gone to the Berkshire Hathaway meeting for a number of years. And for the last four years in a row, they carved out time to talk about how progressive was eating their lunch. And so when Warren Buffett’s company is talking about losing to another company, that that tells me that you should pay attention to that company. And so, this last earnings report kind of on a technicality, they missed, they missed their estimates.
Bill Mann They made about 10% in profit on their insurance underwriting, which is extraordinary.
Caroline Woods Okay. So progressive on the list. Also on the list, Adobe, which is actually up 5% today but down 30% year to date. And I have to say, when we have guests on and we talk about which companies won’t get disrupted by AI in terms of the software space, Adobe is not usually there. So tell me, what is Wall Street getting wrong about Adobe?
Bill Mann So Adobe got hammered earlier this year when when, the market was I is going to crush all of the software companies, but something that’s missing, the the market is missing about Adobe is that its AI revenues are up 150% year over year because they own the catalog of so many images. You know, whenever you do an AI image, it looks very much like an I am at 12.
Bill Mann Adobe owns a huge catalog of images as proprietary. So they have a walled garden, which means that I will actually be augmenting their business rather than competing it away.
Caroline Woods Okay. All right. So making the case for Adobe. So you have three picks there. But what’s the strategy for retail investors going into your end versus just, you know, potentially scooping up some of your picks? I think that as people think about preparing their portfolios for potentially a seasonally strong period in the market, we have this tech reckoning, you know, what should they do overall to their portfolios?
Bill Mann I think one of the things that you will really want to do is focus on companies that do not require a huge amount of debt financing, because no matter what, and whatever the source of it, borrowing has become much more expensive. And so I think that that is a foundational thing that you should pay attention to. And also, people have been worried for years about the concentration in the tech industry and the Mag seven, you know, in, within the markets.
Bill Mann And, and I don’t think that the market has been wrong to, to favor those companies. But at some point, the other parts of the market, that people have been ignoring, that the market has been ignoring are places that you really need to put your money into. And and frankly, if if we’re right about, AI being a bubble that’s going to be deflated, you want to be in other components of the market that are resistant to to that downward trend.
Caroline Woods We’re seeing some strength in financials today. We’re seeing some strength in health care in almost every area of the market outside of tech right now. You know, materials, real estate any of those areas look attractive to you?
Bill Mann I think that’s the market agreeing with me. Yeah. So health care biotech has had a very, a rough quarter.
Caroline Woods But linked to I mean, everyone who’s bullish on health care is bullish on health care. At least I talk to because of I.
Bill Mann Yeah. Yes. But at the end of the day that’s I as a as a as a potential tool to help them with their research to speed up their process. And so, you’re not necessarily talking about the research component being, being a profit center so much as a cost center, which they should be able to, intermediate using I that’s that’s the case for it in the, in the segment.
Bill Mann So yes, it’s been a tough market for them. But I think that when you think about the eye trade, it’s all it’s been all about the construction and much less about the downward benefits of it. And I think that the benefits are things that we’re going to start seeing 2027.
Caroline Woods So add health care here. Yes. Add financials here.
Bill Mann I think so.
Caroline Woods And stock picker broader sector exposure.
Bill Mann I think broader sector exposure for the financials is just fine.
Caroline Woods Okay. If I a lot of my money is in an S&P 500 index fund, I have a lot of exposure to AI, whether I like it or not. Some of the names though you like, but what should I be doing in that case? Should I be making any changes to my portfolio right here?
Bill Mann So it depends on your level of comfort. So Motley Fool Asset Management has launched a number of ETFs that are much more focused on on giving people the the exposure that they want, lower exposure to the largest companies, which is almost entirely at this point, tech. And I think that that’s helpful for people who are worried about that volatility.
Bill Mann So so we always say that, that your portfolio is going to promise you a certain type of experience and you need to make sure that you’re capable of withstanding that experience. And so if taking some of the exposure away from from tech helps you sleep at night and stay the course, I think that’s the way to go.
Caroline Woods Do you think stocks are going to end the year higher or lower than where we are right now?
Bill Mann I suspect that they’re going to end up higher than they are now. But with a very, very different leadership than we’ve seen through the beginning of 2020.
Caroline Woods So it won’t be because Big Tech is leading the way.
Bill Mann Yeah, exactly.
Caroline Woods What about in 2027? Will that be the tech comeback story then? I know you don’t have a crystal ball but I’m you know you’re bullish but.
Bill Mann I’m gonna ask you yeah I think that 2020 something is going to be a pretty a pretty tough year. The questions that we have now are going to start to be answered in terms of all of these largest companies, and they make up such a huge component of the market. Are they going to be able to earn money quick enough to start, servicing the debt that they’ve taken on?
Bill Mann And it’s $250 billion in new debt, which is an extraordinary and historic level. So, it really depends on if some of the use cases for I really start to generate, free cash flow.
Caroline Woods So if we see an anthropic IPO, if we see an open AI IPO, those won’t be names you’ll be scooping into your portfolios anytime soon.
Bill Mann I think we’ll be I think we’ll be pretty cautious.
Caroline Woods Okay. All right. This is a great time to pivot to our rapid fire round of this or that. Quick questions quick answer is no hedging if you can help it okay. If you’re ready. All right Bill here we go. Market sell off. Buying opportunity or warning.
Bill Mann Sign buying opportunity.
Caroline Woods Nasdaq temporary shakeout or bigger correction ahead. Bigger correction correction or bear market ahead. Correction I bubble bursting are still inflating.
Bill Mann Bubble bursting.
Caroline Woods Buy stocks now or wait for a bigger pullback for I.
Bill Mann Buying stocks now.
Caroline Woods Ten year treasury at 5%. Stocks or bonds. Stocks ten year. Treasury at 6%. Stocks or bonds.
Bill Mann Stocks.
Caroline Woods Micron or Nvidia.
Bill Mann Nvidia.
Caroline Woods TJX or Walmart, TJX, Adobe or Salesforce.
Bill Mann Adobe.
Caroline Woods Progressive or Berkshire Hathaway.
Bill Mann Oh, progressive.
Caroline Woods Finish these sentences before finding a bottom. The S&P 500 could fall another 15%.
Bill Mann You.
Caroline Woods The I stock I buy into this selloff is Adobe. The I stock I’d avoid right now is better. The biggest risk to the bull market is timing. If I could only buy one stock today it would be progressive. Wow. You played by the rules girl. Thank you so much for playing along for your picks and your insights. Really appreciate it.
Caroline Woods That’s Bill Mann, chief investment strategist at Motley Fool Asset Management. If you enjoyed this street talk, check out our full interview with Dave Ellison. He breaks down what bank earnings tell us about the economy and which stocks have the most upside from here.
