Transcript:
Caroline Woods:Joining me now is Justin Bergner, portfolio manager at Gabelli Funds. Justin, thanks so much for being here. Great to have you back.
Justin Bergner:Thank you. Caroline, it’s a pleasure to be back. I know it’s a somber and emotional day for many, but glad to be on your show nonetheless.
Caroline Woods:Yes, we appreciate you being here. Thanks for wrapping up the week with us. Let’s start by talking about CPI, the latest inflation report. Did anything change in the report or did the report change anything in terms of your view for stocks or for the fed?
Justin Bergner:Well, I think for the fed it more or less cements that they will do a September rate hike next week with a bias for a second rate hike in December. The two year yield at 4.6% is certainly reflecting that. And, you know, the fed is sort of torn between this. You know, can we ignore consistently high ish inflation or do we need to tighten against consistently high ish inflation.
Justin Bergner:And so when you get a PPI and a CPI that are slightly hotter than expected, even if it’s very slightly I think it pushes the fed towards you know, being in that we can’t let inflation continue at high levels for that much longer.
Caroline Woods:So we have the market pricing in this rate hike that you you mentioned we have oil sitting pretty close to $100 a barrel. We have yields closing in on 5%. Which of those things worries you the most? Oh and the Iran war of course is in at seven months seventh month.
Justin Bergner:Yeah. I mean, it’s all additive I guess, to some degree. You have the trade war with Cannes and to a lesser extent, other countries. You have the Iran war and higher oil prices. You have the higher yields, reflecting a variety of factors. And you have a challenge consumer. I would say the higher yields probably worry me the most, particularly on the long end of the curve.
Justin Bergner:I think that it creates a tightening. Some of that is due to legitimate factors. We’re seeing, you know, the back, the long end of the curve. The yields are go up around the world. Obviously, the Iran war and the trade war don’t help there. And we’re seeing AI CapEx push yields higher as it competes for capital.
Justin Bergner:But I do think that there was a modest mistake by Warsh in the July Fed meeting, where he complimented the long end of the curve on doing some of the tightening for the market. And that brought out concerns about fiscal deficits and bond vigilantes. And now the fed is potentially forced to tighten a little bit more than it would have had it not let the cat out of the bag in July.
Caroline Woods:So the biggest risk to this market is what.
Justin Bergner:I think the biggest risk is the long end of the curve, I think, because that, just creates government funding concerns. It challenges the consumer. It even makes, you know, AI related CapEx more expensive to fund. Right? Like not all AI CapEx is being funded on the short end of the curve. So I think it’s just a big headwind to the economy in the U.S. and other countries around the world that are also dealing with higher, rates on the long end of their curves.
Caroline Woods:Yeah, we have the S&P 500 up about 1% today, still on pace for a lower week, but rebounding pretty significantly today. Do you think investors are getting too comfortable buying here.
Justin Bergner:Well I think it’s somewhat of a bounce after the last couple of days. We’ll see what happens next week. Obviously there’s a lot going on with the fed meeting. And as you know, everyone fully returns from whatever holidays they might have been still on. I also think that maybe the market is taking comfort in a little bit more clarity about which direction the fed has to go in September.
Justin Bergner:So now that the rate hike is mostly priced in, the market can look beyond that rate hike. And it’s unlikely we will get another rate hike in November. So, you know, perhaps the fed is on hold till December. And that creates a little bit more visibility.
Caroline Woods:So is this a market that can move higher than from here.
Justin Bergner:It’s going to be challenging but it’s not impossible. You know, on the one hand you have tremendous earnings growth greater than 25% this year with low double digit earnings growth forecast for next year. You have a consumer that’s still spending out of savings despite real incomes being flat. But each of those things, you know, has some headwinds of their own, right.
Justin Bergner:Like a lot of the earnings growth is related to earnings from AI CapEx today. That will become depreciation expense for numerous hyperscalers tomorrow and work against earnings in the future. Consumer spending financed by savings can only go on so long. And the big beautiful bill stimulus is in the rearview mirror. So I certainly think that the strength in the market can persist.
Justin Bergner:I remain modestly, defensively positioned, in the funds that I manage because I think there’s more that can go wrong than can go right in the market. It is fairly expensive, but I think as a whole, you know, one is better served by looking at idiosyncratic opportunities than trying to call the market or sectors on a day to day, week to week basis against all this volatility.
Caroline Woods:Well, we’ll talk about how you’re defensively positioned. But let’s dig into that a little bit more. Because you were last on back in March and you sounded more cautious back then. I think your price target was around 7000 for the S&P 500. Have you changed that price target then.
Justin Bergner:Yeah I mean with higher earnings growth, one should you know, lift up their view of the market. I still think that, you know, the market will be hard pressed to end the year higher from here, even if there is, some strength after the election. And, you know, I think that it’s just hard to calibrate what multiple to apply to S&P earnings that are probably being boosted by 10% or more by this mismatch between CapEx today, generating earnings today and the fact that that will lead to depreciation expense that’s materially higher tomorrow and work against earnings in the future.
Justin Bergner:But you know, there’s clearly tremendous earnings strength even when you discount that. And so I do think that a market at current levels can persist for a while.
Caroline Woods:Okay. All right. So let’s talk about what playing defense actually looks like. Tell us the strategy.
Justin Bergner:Well I would continue to kind of argue for a modestly defensive orientation. Part of the challenge is being in being defensive, as you don’t exactly know, what makes for a defensive stock today with the long end of the curve higher that works against, you know, yield oriented stocks have traditionally been defensive like staples, health care and utilities.
Justin Bergner:Moreover, those sectors at least staples and to a lesser extent, health care exposed to the consumer, which is certainly the more challenging part of the economy. So I would argue to modest, defensive, you know, what’s worked for us, you know, year to date in, the Dividend Growth Fund is our large position in Merck. Merck obviously a big winner with its partnership with Moderna in the cancer vaccine.
Justin Bergner:And that just goes to highlight the strong R&D organization that they have in pharma, probably the best in large cap pharma. And the fact that that our R&D organization can meaningfully contribute not just to internal drug development, but to business development through partnerships and M&A. So the stock is run up a lot, but it’s our largest position, is not inexpensive, but the quality characteristics of the company in its R&D organization are certainly coming to the forefront.
Justin Bergner:Other names that we’ve, been, adding to, and have conviction in the name Ferguson Enterprises in the construction arena.
Caroline Woods:Justin, you mentioned that Merck has performing, has been performing well for you. It’s up, though, almost 40% year to date. Is that a hold here or would you still buy it at these levels?
Justin Bergner:Yeah, I think it’s a hold, but I’m, not. I’ve reduced my position some just to not make it to large position against recent strength. But I’m holding, you know, the vast majority of the position as I think it will continue to perform at least in line, if not slightly better than the market.
Caroline Woods:Okay. So it’d be a buy and a pullback kind of play for some of the retail investors listening.
Justin Bergner:Yes. If it was to pull back, you know, 5 to 10%, you know, relative to the market. Yeah, I would certainly look to to add there, I think that, Merck is kind of regaining its status as the highest quality large Cat pharma name, you know, outside of the whole Lilly and GLP one dynamic.
Caroline Woods:Okay. So what else do you like here? What would you add at these levels?
Justin Bergner:Sure. So one name I like in the housing and construction oriented arena, despite having a very kind of sober view of those markets, is Ferguson Enterprises and Ferguson Enterprises has actually, you know, pulled back recently along with a lot of housing oriented stocks. So it is, the largest building products distributor in the country, with a market cap of about 44,000,000,033 billion in sales.
Justin Bergner:And the company is 50% exposed to residential, but more importantly, 50% exposed to nonresidential. And in nonresidential. They’ve been benefiting, from large capital projects, you know, notably data centers. They probably generate, you know, close to 15% of their nonresidential sales, from the data center market today, where they’re supplying a variety of products, and they’ve really been showing outsized success in that market given their scale and scope.
Justin Bergner:And they’ve had a number of attributes which have allowed them to outgrow their markets by 300 to 400 basis points. Mainly the exposure to large capital projects, but also their focus on the dual trade contractors, which is HVAC and plumbing contractors, contractors that do both of that, as well as just good execution in their Ferguson home business.
Justin Bergner:They’ve recently seen our growth on the high end of that 300 to 400 basis points. They are operating well, deploying capital. Well, recently did a $1.6 billion acquisition of Flow Works to expand their presence in, pumps and valves, and that exposures increase our industrial exposure. And I think the stock can generate, $12 of earnings in the next 12 months and grow earnings at a 10% clip from there.
Justin Bergner:Even if the back up in yields slows that earnings growth to something more like 7%, you know, you’re still looking at a stock that can trade, at 20 times earnings, just given their outgrowth capabilities. And be worth $208 18 months from now. So really like Ferguson and what they’re doing just winning in their markets, however tough those markets could, might be right now.
Caroline Woods:Okay, I see you also like Smucker SJM. That one has actually outperformed the market this year. Should note that Ferguson is basically flat on the year whereas Smucker is at more than 20% year to date. So you still like it here even after that Twinkie acquisition?
Justin Bergner:I mean, the Twinkie acquisition was almost three years ago. Caroline. So I like it. As the Twinkie acquisition becomes more rearview mirror for the company. Yeah. So Smucker’s has, you know, one of the better growth profiles in consumer staples. And it’s a good example of a defensive stock that one can find a little bit more motivating in this market.
Justin Bergner:They have a tremendous set of brands across Pat coffee and spreads. Clearly, you know, they have Folgers, they have Cafe Pistola, they have Jif, they have their crust apples franchise. And they recently reported a quarter where they grew sales, you know, 5%, including 1% volume. They took up their sales guy by 200 basis points for the year.
Justin Bergner:The volume growth forecast is now flat, which might not seem great, but it’s better than many consumer staples companies. And they just have a good, you know, set of growing products. Again, in a tough staples market. I think they can do, earnings of about 1050 looking out over the next 12 months, when you look beyond some of the benefit from tariff refunds in the last quarter, and they can grow sales low single digit, mid-single digit.
Justin Bergner:From there, Elliott is involved with to, designated representatives on the board, and the company is deleveraging towards three times EBITDA. And once they get a little bit lower repurchases are not out of the picture. So capital allocation should be a source of strength. Any residual family discount. You know, Mark Smucker CEO, I think will go by the wayside.
Justin Bergner:And the company can trade at 13 times earnings and beat, you know, $150 stock or close to $150 stock 18 months from now.
Caroline Woods:Okay. So staples check. Utilities, check. Healthcare? Check. What about tech? Because I know back in March, at the time we have seen some beaten down I high fliers. You said it was too early to buy them. Then six months later. How are you feeling about tech? Yeah.
Justin Bergner:I we have a value orientation. So we have certainly a more modest tech exposure. We own meaningful positions, in Amazon and Alphabet, which we think will be winners in the LLM world and the, the cloud world. Obviously they’re spending oodles and oodles of CapEx, which has its own concerns. We also, you know, have a position in the fund and Hewlett Hewlett-Packard enterprises, which is having an exceptional day today for reasons that aren’t entirely clear, but, is just a winner in networking.
Justin Bergner:And the juniper acquisition there is going well. So we have some selective exposure in tech. Certainly. Not nothing like what a growth investor might, might have in their fund.
Caroline Woods:Given your value orientation, what would you say is the best value in the market right now, either sector wise or stock wise?
Justin Bergner:I think it’s very idiosyncratic. You know, I think it’s a market with a lot of uncertainties. And so, you know, it’s a market where you don’t take as big bets. You know, I think Ferguson Enterprises is certainly one of those stocks that I feel very confident about the long term value. I mean, if you’re outgrowing your market by 400 basis points, you know, you can still grow when the market’s not not growing or even shrinking.
Justin Bergner:So that would be one example where I think there’s really good value. But I think it’s more idiosyncratic in stock specific than sector.
Caroline Woods:Okay. So if you had to kind of sum up the that the biggest advice for retail investors, as they think about some of the seasonal September weakness that we’ve already seen as they think about heading into the fall into year end, what’s your best piece of advice?
Justin Bergner:My best piece of advice would be to look for stocks that you want to own in the next 3 to 5 years, and if they pull back, even for reasons that might be somewhat deserve it. I mean, Ferguson’s pulling back because housing is weak and interest rates are up. You know, don’t hesitate to add to those positions. I mean, it’s hard to know what the business cycle will bring in the next couple months or the next couple of quarters, the next couple of years.
Justin Bergner:And you want to own good quality companies that can grow revenue and grow earnings and aren’t too expensive. And, you know, manage those positions in your portfolio with an eye towards, you know, long term capital appreciation.
Caroline Woods:And just clarify what a pullback actually looks like. Are you talking 1%, 5%, 10%. What sort of pullback would you be looking for? Obviously if stock specific. But you know kind of broadly speaking.
Justin Bergner:I think broadly speaking you’re looking at a pullback 10% or close to 10%. You know relative to the market or whatever sector index might be relevant. I think that was that’s when you should start being more aggressive. So in the case of Smucker’s, the CEO of Smucker’s did a meaningful insider sale after the stock respond to earnings.
Justin Bergner:And that’s created an opportunity to buy into the stock somewhat lower, or to add to its position somewhat lower, for example.
Caroline Woods:So that works if you’re a stock picker. But as we think about even some of the weakness that we’ve seen this week, and you take a look at the S&P 500 and it’s only down 6/10 of a percent or 7/10 of a percent on the week, despite it feeling like a bad week because of obviously today’s bounce.
Caroline Woods:So is it kind of the strategy just to sit tight then and wait for more weakness. Or is it deploy cash because the market might keep hitting higher and these levels might are good.
Justin Bergner:I think it’s to sit tight. Caroline. I mean, you can certainly justify a much larger pullback in the market than we saw over the last week, given the back up in yields and what that could do to the discounted value of, stocks, future earnings and cash flows. I also think there’s just a lot of volatility ahead in the coming weeks.
Justin Bergner:And, you know, I would just, encourage, you know, folks to be mindful of interest rates and what they mean for the value of all assets. You know, it was in 2000, in the fed funds rate got to 6.5% before the market crashed. So the market may be able to tolerate a number of interest rate hikes, but it just feels that any upside from here is going to be much more of a grind higher than, something more material from a broader market point of view.
Caroline Woods:Okay. I think this is a great point to pivot to our rapid fire round of this or that you’ve played before. Quick questions, quick answers. No hedging. Are you ready, Justin?
Justin Bergner:Sure. Let’s go.
Caroline Woods:All right. Here we go CPI reassuring or concerning.
Justin Bergner:Concerning the.
Caroline Woods:Fed next week. Hike or hold. Hike one fed hike healthy reset or start of a bigger problem.
Justin Bergner:There’s going to be two hikes. I think it’s a needed reset.
Caroline Woods:Hundred dollar oil market killer or manageable headwinds.
Justin Bergner:I think oil by itself is a manageable headwind.
Caroline Woods:Ten year near 5% opportunity or danger zone?
Justin Bergner:Danger zone. I don’t know if it’s next next month or next year, but definitely danger zone.
Caroline Woods:Stocks or bonds at today’s yields.
Justin Bergner:I would argue for bonds. I think that while we are in a long term rising interest rate cycle, the recent moves feel a little bit too far, too fast.
Caroline Woods:Okay, but if you do buy stocks growth or value for the rest of 2026.
Justin Bergner:The value personal always lean towards value. But, I don’t think it’s going to be a huge differential. But I would argue for for value because value is more defensive stocks. And I think defensive stocks will do a little better.
Caroline Woods:I stocks buy now or hold off.
Justin Bergner:Hold off higher interest rates. This levels aren’t great for them either.
Caroline Woods:Mega cap tech keep riding it or diversify away.
Justin Bergner:I would say keep riding. I think it’s a good place to have meaningful exposure in this market.
Caroline Woods:Best name to play defense with.
Justin Bergner:Oof!
Justin Bergner:That’s a tough one. I guess I would just say, you know, something generic in health care brands like Merck. Yeah, Merck’s run a lot. So I wouldn’t say it’s the best generic, necessarily the best generic name in health care, but feels like just, you know, owning the health care sector as a whole wouldn’t be a bad place to be.
Caroline Woods:Stock the market loves that you’d avoid.
Justin Bergner:Stock. The market loves that I would avoid.
Justin Bergner:That’s a that’s a tough one. Because I’m not sure what the market loves today. I would just probably say a memory area, because even if the AI cycle goes on longer, I think there will be new Chinese capacity and there’ll be limits on how quickly we can build.
Caroline Woods:Market pullback, buy it or wait for more downside.
Justin Bergner:Wait for more downside.
Caroline Woods:S&P 7000 possible or off the table?
Justin Bergner:Definitely possible in a pre-election pullback.
Caroline Woods:But if you had to make a call market by your end higher or lower from here.
Justin Bergner:Touch higher.
Caroline Woods:Finish this sentence. If I had $10,000 to invest, I’d put it in.
Justin Bergner:$10,000 to invest probably. I mean, today where everything stands today, I probably say money market is is fine, particularly if, rates go up a little more.
Caroline Woods:And finally, the best sector to own if the fed hikes rates is.
Justin Bergner:
Justin Bergner:That’s a tough one. But I would say, if the fed hikes rates, let’s just say twice, I would say industrial stocks, given the recent pullback, given a practical place, I there are a number of industrial names I own. I like Paccar just because I think the trucking cycle is finally, recovering. So that would be a name on the industrial side.
Justin Bergner:But there, there are a number of names that one could own.
Caroline Woods:All right. We’ll leave it there. Justin Bergner, a portfolio manager at Gabelli Funds, thank you so much for playing and for your insights and picks. We really appreciate it.
Justin Bergner:Thanks so much, Caroline. Pleasure to be on.
Caroline Woods:If you enjoyed this street talk, check out our full interview with Ross Gerber. He says he’s getting defensive as well, and reveals the tech stocks that he’d still scoop up at these levels.