Transcript:

Caroline Woods

Joining me now, George Seay, Founder and Chairman, Annandale Capital. George, great to have you back. Thanks so much for joining us.

George SeayMy pleasure Caroline. Glad to be here.

Caroline WoodsSo, George, the strength of the AI rally has really been called into question this month. It’s trying to make a comeback right now. But are you still a believer? Is it fizzling or is there room to run? George?

George SeayI don’t know how much room there is to run, but it’s not fizzling. It’s stopping and starting and backing up and moving sideways. It’s all over the place because nobody really knows what to think right now. But nobody really wants to put on a full on bet against the market and the AI trade, because it’s worked so well for so long that people are really reluctant to give it up, and that now you have kind of changing horses in terms of people that stocks that people are most excited about.

George SeayYou’ve gone from Nvidia, Microsoft to Nvidia to Microsoft to Google to Amazon to Google, and now Google, which was kind of the laggard for the first two thirds of this year, is now up 70% for the year and is the new hot AI dot. So I think it does still have legs. I don’t think it’s going to expire until we get a dramatic slowdown in CapEx or recession or flat economic growth or all of the above.

George SeayBut I think you’re you’re in the last few, puffs out of the out of the very short cigar. At this point, I don’t think it’s going to just keep going up forever. Gravity does take effect at some point.

Caroline WoodsOkay. So it has legs, but it sounds like you think it’s very close to the end. Are you concerned at all that AI is a bubble?

George SeayWell, I think that it’s very clear that some elements of AI companies that are just off the ground, just starting up with no revenues, no earnings, no nothing are clearly in a bubble. I mean, you look at the data center company that went public and in the panhandle of Texas this year, IPO did at a market valuation of close to $20 billion.

George SeayAnd they’re not going to have any revenues or earnings for many, many years, if ever, that clearly that segment is speculative at best. Google, Microsoft, Nvidia, these are not speculative companies. These are the greatest companies the world is really ever seen. And so the question then is a relative one of what do you pay for this earnings growth and what’s it going to be.

George SeayAnd that’s where the the the simple analysis becomes very complex, because that’s a really hard question to ask when you get into relative valuation and what you should pay for things.

Caroline WoodsOkay. So even if pieces of AI are actually in a bubble, if and when it bursts, what would the fallout look like?

George SeayI think you’d see in companies that may never arrive, there’s a lot of, enthusiasm. There’s a lot of energy, a lot of speculation right now, and they’re all performing at very high levels. It’s very reminiscent of the internet bubble 20, 25 years ago as horribly. That’s 25 years ago, where a lot of these companies are going to go away or fade away or never, never arrive.

George SeayBut the mainstream companies that have very real profits, very real revenues and very real growth, they’re just going to try to find their best spot from a valuation perspective. And that’s going to be a process, not a bid. And when the growth rate of all this slows down somewhat, you’re going to find people that they won’t pay 4550 times earnings for these companies.

George SeayThey’ll pay 25 to 30 times earnings. And that can be a painful short term correction. But that’s what it is. It’s it’s short term. It fades eventually. You look at Microsoft and the stock traded at 58 bucks in 2000. Then it traded all the way down into like the teens. And in the subsequent decade it only captured $58 again in 2017.

George Seay17 years later. And today it’s almost $500 a share. So these are processes and they can take a very long time and test the patience of everyone. But it’s fun while the while the party laughs. I don’t know if people remember Michael Prince, the infamous CEO of Citigroup, right at the tech bubble, bursting in 2000. And he said, while they’re playing music, you got to dance.

George SeayWhen they stop the music, it can be pretty abrupt. So you want to spread your bets around.

Caroline WoodsOkay, so just one more question about this and then we’ll broaden it out. But if we do see that correction, are there any companies that you think are safe when the music ends?

George SeayYes, I do actually. I think that Microsoft and Amazon and Google are all readily investable. I was very high on Google about six months ago when it was trading under 200 bucks. In fact, trading closer to 200 at one point than 200. But now that it’s surged so much and is well over 300 souring on that from a timing standpoint, I’m a much more interested in Amazon, which has lagged behind this year, and Microsoft, which is way off its highs.

George SeaySome of these companies are very investable and they’re great long term investments. So I’d be looking more towards those than on a speculative company with no revenues, no earnings or the hot dog at the moment. These things have real momentum around them and real popularity contests. And you want to play a contrarian a little bit with some of them.

Caroline WoodsOkay. So let’s broaden it out because I would say it sounds like you’re maybe skeptical of the AI rally at this point. What about the overall market? Right now, which we know the AI rally has really powered higher? Can you make the case that stocks will continue to rise from here?

George SeayI can I have we have not bet against the market. We have not pulled out of the market. We’ve kind of maintained positions and looking to add in areas that are less so dearly loved. And you know, you look at the S&P 500 on a market weight basis and the S&P 500 on an equal weight basis. And the differential in the price for earnings multiples is dramatic.

George SeayIt’s almost a 40% differential. And if you buy the S&P 500 on a market way basis, you can buy stocks well under 20 times earnings and well under a market multiples. So we’ve been starting to look more in areas like that that we think might do quite a bit, better than some of the more speculative kind of companies in 2026 and 2027.

George SeayAnd part of that part of that trade for us is the insurance industry, which is trading barely above book value in single digit multiples of earnings with high dividend yields and natural gas stocks, which still have quite a lot of upside coming up in in the huge LNG trade with overseas liquefied natural gas trading and with the AI data center trade, they’re still trading at very reasonable valuations for import.

George SeayAnd they’re going to be to that huge growth in electricity demand and natural gas demand.

Caroline WoodsOkay. So insurance Nat gas talked to us about some of the other changes you’re making in making sure portfolio as you think about year end. But also as you think about the new year.

George SeayYeah, we’re doing quite a bit of overseas and international and emerging market stocks as well to try to broaden diversification away from just Mag seven and large S&P 500 stocks. So we’ve got some more exposure to less loved parts of the world, like the emerging markets in the international developed like Japan and Europe and places like that. And then we’re also trying to buy some very unloved, great franchise companies.

George SeayPepsiCo has had a terrible year this year. Everybody’s down on them because people are drinking more Coca Cola and Doctor Pepper than Pepsi, and they’re down on Lay’s potato chips. And we think that’s a great franchise, great company that’s fallen on hard times. And you could buy it at a reasonable price. So we’ve been slowly layering into that company.

George SeayAnd there’s several examples like that. It’s just a normal market rotation and market progression away from areas that we think are not very attractive from a next five years perspective and into companies that we think are okay.

Caroline WoodsI was taking a look at your notes and you said stocks are objectively expensive and the next ten years won’t look like the last ten. So level set our expectations here. What level of returns should investors actually plan for? As you think about the next ten years?

George SeayYeah, it’s it’s really interesting for me as someone who’s been doing this in my company for 28 years, and you look at all the bipolar nature of the market and how it gets euphoric and then it gets in despair and how things change so much in which we try to think in decade long terms because you really want to make money over the long term and generate long term capital gains instead of trading and paying excessive taxes.

George SeayAnd so when I look at the market from that basis in the fact from 2009 until now, it’s been almost straight up into the ride, except for the pandemic in very brief episodes, so that that kind of mid-teens return that people have seen over that period of time historically, that’s completely unsustainable. You just can’t keep it up. Stocks typically typically return around 8 to 12%, and we’ve been well up above that for quite some time.

George SeaySo if I’m an investor, I’m shooting for the market historical average, which is 10% before inflation. I pre a pre pre inflation return or a real return of more like 6 to 8%, something like that depending on what inflation is. And I would try to hurdle at least 5%. I think somewhere in that range is realistic and doable.

George SeayBut if you start thinking I’m going to make 15% forever, I think you’re going to be really disappointed.

Caroline WoodsOkay, so the S&P 500 is up 14% so far in 2025. Do we end the year higher or lower than where we are now.

George SeayHigher. We’re not we’re not done with Turkey and Santa Claus rallies. They’re still coming.

Caroline WoodsAll right George Seay, Founder and Chairman, Annandale Capital. Thank you so much.

George SeayThank you.