Transcript:

Caroline WoodsJoining me now, Dryden Pence chief investment officer at Pence Capital Management. Dryden. Welcome to the desk. Great to have you here.

Dryden PenceGreat to be here. Thanks for having me.

Caroline WoodsAll right. So Dryden stocks under a bit of pressure today. It seems like Iran very much back in focus. How much of a threat is that to the bull market right now?

Dryden PenceI mean I think we’re going to have problems with Iran. We’ve had problems there for 50 years. And until they finally resolve it, you know, one day it’s going to be one thing, one day it’s going. And no one’s really sure who’s in charge over there at this point. But it really comes down to world prices. And what’s remarkable about this is we’re at in this low 80s, at low 80s, the U.S. economy is doing all right under a little bit of pressure.

Dryden PenceBut all right, we look at it as $60 a stimulative. $80 is okay, $100 is inflationary and 120 would be recessionary. And so we don’t need as much oil through the Straits of Hormuz as we used to. U.S. only gets 2% of our oil through there. We don’t. And the world doesn’t need as much because you have two big pipelines that move 10 million barrels a day around the Strait of Hormuz.

Dryden PenceSo now the the shortage is really more like 4 to 5 million barrels a day. And that’s two of the great big large tankers. So overall, the U.S. is definitely not as exposed as we used to be. This isn’t going to be 74 where we’re, you know, lined up a gas station and the world is less exposed. So while we get this these ups and downs and this overreaction to every time a missile goes off or something like that, we don’t have as much exposure as the U.S. economy certainly does.

Dryden PenceAnd I think that that’s one of the resilience that we’re seeing in the markets, resilience that we’re seeing in the economy. We’re just not as exposed to it as we used to be.

Caroline WoodsSo oil is trading around $84, $85 a barrel right now. You see if that’s okay for the economy. But what about for the market. At what point does higher oil become a market headwind? The hundred dollar?

Dryden PenceI think if you’re sustained above 90, then you begin to worry because because, you know, Americans go to the gas station more than they go to the bank. They go to the gas station when they go anywhere else. So at $4 a gallon, which is about where we are, except in California, you know, at $4, it’s it’s stressful for people, but it’s not changing behavior.

Dryden Pence$5 a gallon. That’s demand destruction. And and behavior does get changed. And we’ve kind of been studying this for a long time. So right in here it’s stressful but it’s not destructive. Okay. So we get north of 90 for a sustained period of time. Then we got a problem.

Caroline WoodsWe’ll dig more into the consumer in just a minute. Because this is obviously a big week for retail as well. But sticking with the broader market doesn’t seem like oil is a headwind for you right now, not geopolitics. Also, keeping a close eye on bond yields, hearing a lot about that. Right now we have the 30 year trading around 5.3%.

Caroline WoodsWe have the ten year yield trading around 4.7%. How concerning is that to you.

Dryden PenceConcerning who it was regard to? There’s a moment where equity investors begin to look at the bond market as a good place to go. And to me that’s around the ten year at five. So if we see the ten year at five we pop up to that. I think that’s a that’s an opportunity. That would be a buying opportunity to be a time that you would look at, wanting to for, for retail investor, you know, for a lot of them give me a solid, say, five or a solid, say, 7 or 6 a.m. in pretty good shape.

Dryden PenceSo I think you’d begin to see that trade off on the retail investor side between equities and fixed income when the ten year hits about five. So we’ll close. But I think that I think also part of this whole situation with Iran, they worry bond yields are kicking up because people are worried about inflation. They’re worried about inflation because they’re worried about oil prices.

Dryden PenceBut if oil prices aren’t going to spike then and you’re not going to see this inflation pickup.

Caroline WoodsTo bond yields oil geopolitics not necessarily getting in the way of this market. What’s the strongest fundamental reason to believe this market can head higher than earnings.

Dryden PenceEarnings are at an all time high. And we’re continuing to see earnings growth in most companies, not just in the hyperscalers but also throughout the entire S&P 500. And so when you look at if earnings are at an all time high, so the market is going to be at an all time high. And as long as we continue to see this tremendous earnings growth as we see eye adoption go up, you know, you have 71% of the companies.

Dryden PenceThe companies are see improvements that are using I are seeing improvements in productivity. Labor productivity goes up. Profit margins go on. Profit margins go up. Earnings go up. And it’s all working its way through the system that people can be confident.

Caroline WoodsBut we’re at the tail end of earnings season right now. So in terms of how much higher that market can go from here, what do you think?

Dryden PenceWell 86% of the companies a, B in terms of how we think the market can go, you’re gonna kind of get these volatility moments. So I would expect a little bit of a pullback between now and the end of the year. But then back to at some point a return to another all time high. So I think we’re slightly higher at the end of the year than we are now.

Dryden PenceBecause if you just take a look at earnings growth it’ll math out to that. So so somewhat higher but not a lot higher than we are right now. But I think we’re going to get like a little dip. I’ve been saying for a long time by chips on dips. And so I think that that’s that’s been a good strategy.

Caroline WoodsWell you’re getting a chip dip today. Exactly. Funny enough, software stocks actually are rising as chip stocks are falling. What is the the tech strategy then. Is it just buying chips right now. What specifically do you like.

Dryden PenceI think I like so we do like the hyperscalers. We don’t think that story’s over with. We think when it gets right down to it, we’re having this massive multi-generational build out of technological infrastructure that allows us to use artificial intelligence to increase labor productivity and more and more adoption, more and more people. And we really kind of gone from proof of concept into rapid adoption.

Dryden PenceAnd so I think you’ve got really 1 or 2 more years now where almost anything that’s involved with the infrastructure around the AI build out is going to have a start to it. And I think that also anything that that gives us greater labor productivity. So we’re always looking for companies that are rapid adopters. We’re looking for companies that are providing the meat and potatoes or the bones of the AI infrastructure piece, because I think that that’s really going to it’s going to revolutionize our economy.

Dryden PenceThis is as big as the light bulb. This is as big as the transcontinental railroad.

Caroline WoodsSo which names do you like? Is it early adopters, which are the meat and potatoes.

Dryden PenceWell I think Broadcom is really a very key company. It’s it’s basically part of the infrastructure. Everybody’s using it. It’s very important to Broadcom is one that we like the most in terms of picks and shovels meat and potatoes basically all of this stuff. And then we like Microsoft a lot because when you look at how dominant it is in every business using it, every household having it, now you’re beginning to see that we’re a little slow, but now you’ve got copilot going, you’ve got Azure going all of these parts of that company.

Dryden PenceSo they almost have a have this ability to both, you know, build out both the software piece of it and the adoption of AI. So that’s that’s one of the favorite ones. And then obviously Nvidia and Nvidia is the choke point. I mean you have you have companies that are important to this. You have if you know, ASML makes, extreme ultraviolet light machines.

Dryden PenceThat makes the chips, the TSMC makes for Nvidia. So you have a triumphant of three companies that occupy choke points. They’re almost have you can’t have you can’t have a you can’t have AI without in video. You can’t have Nvidia without TSMC and you can’t have TSMC without ASML. So you take a look at this supply chain of companies that occupy these kind of little monopolies and choke points.

Dryden PenceThey’ve got earnings that are 2 or 3 years out. They they booked their demand for 2 or 3 years out. Show me a company that can sell everything it can make for 2 or 3 years in advance. 21 oh.

Caroline WoodsAre there any other obvious hyperscalers or Meg seven names that you should definitely own here? Outside of Microsoft and Nvidia?

Dryden PenceI think Apple, and the reason why we like Apple’s has some volatility around it. But you know, again, it’s one of those companies that everyone not everyone, but many, many people have an iPhone. It’s part of your daily life. No one, you know, until we all go throw our mobile devices in the river, they become an appendage.

Dryden PenceAnd so that’s the vehicle that we’re going to use to access all of this technology that’s changing our lives. So I look for companies that are absolutely essential in the consumer behavior that’s going on.

Caroline WoodsSo tech’s still very much in favor in terms of your strategy. But looking outside of tech because we have seeing been seeing this rotation into other areas in the market. What sectors look attractive to you at these levels?

Dryden PenceI like defense, I mean, the world is not going to wake up and sing Kumbaya. We’ve talked about the issue with Iran. We’ve talked about the issues. When you look at Lockheed Martin, you look at a company that has 2 or 3 things going on. First of all, we’ve expanded a lot of the high altitude anti-ballistic missile thing.

Dryden PenceWe’ve seen a lot of the Patriots in the current war that we have. All that’s got to be replaced. They’re the they’re the single provider of it. They’re also a single source contract for a lot of our missile defense systems. They’re they’re also the single contractor for the F-35. So when you take a look, they’ve got $230 billion worth of backlog.

Dryden PenceThat’s three years of their revenues. So you have, you know, this company that is absolutely essential to the defense of our nation and indeed pretty much all the Western world. So now Europe is going to have to start, increasing their defense spending. Everybody’s increasing their defense spending. And Lockheed Martin is going to be a key, recipient of that.

Dryden PenceAnd Raytheon is going to do very well to their key positions of that. So I look for for companies, I mean, you know, government pays these bills and, Lockheed Martin 5.2, cash flow and and you have three years of revenue. I think it’s a very strong, strong one to hold for a long time.

Caroline WoodsOkay, so tech check, defense check. What else?

Dryden PenceI think, you know, on the when you take a look beyond those we almost get want to get down into the company. And taking a look at companies that are going to be positioned to to really increase labor productivity. So you have some manufacturing companies that are doing that. But what you also have to look at is as this moves in to better efficiencies, see, on the retail side, I still like Walmart, believe it or not.

Dryden PenceAnd and the reason why is they’re very dominant throughout the country. And they’ve always been very good at wringing every bit of efficiency out of what they’re doing. So if they’re able to use AI, that’s great. They’re able to make things more efficient for the consumer. That’s great. They’re able to keep prices lower. They’re now the number two to Amazon on the delivery process and e-commerce.

Dryden PenceSo we like that.

Caroline WoodsYeah Amazon wasn’t one of your hyperscalers picks. So you like number two versus number one.

Dryden PenceWell well two different things. Right. So we love Amazon and we like Amazon a lot. They are actually what’s very interesting about Amazon is their ability as a company to implement I and employ they have more robots and they have employees. And so robotics and all of these things are important. When you think of just the masses of things, Amazon has to move around.

Dryden PenceThey’re able to lower their cost on their delivery thing. This is before you ever get into AWS. But just the the meat and potatoes of of just moving stuff through factories. I don’t know if you’ve ever seen any of the videos of their delivery systems. You’ve got robots working as a hive, you know, going all over the place.

Dryden PenceIt’s quite fascinating. And so they’re one of the rapid adopters, and they’re doing it exceedingly well. And that’s lowering cost, increasing labor productivity, increasing profit margin, and then allowing them to deliver a better product to consumer at lower price.

Caroline WoodsI’m glad you mentioned Walmart though, too, because this is obviously a big week for retail earnings. Really kicking off with Home Depot today, that’s about 1% higher after its report. We have Walmart, target, Lowe’s, Ross stores all reporting. And then over the next couple of weeks, we’ll hear from a lot of the other discretionary names. What specifically are you watching for?

Caroline WoodsAnd would you bet on the consumer right now outside of some of the labor productivity plays and really kind of the eye plays within retailers, would you bet on the consumer right now?

Dryden PenceYou know, believe it or not, you know earnings are at an all time high and so is or wages and salaries if you take it. Wages and salaries are at an all time high. Now we’ve had some inflation and people aren’t slowing down. They’re spending they’re reallocating it. But the consumer is not slowing down. It’s being moved around a little bit.

Dryden PenceThey’ve got to pay a little bit more for gasoline. So maybe it’s a little bit less for something else. But in general we see the economy continuing to grow. And so we see the consumer continue to spend. If you give it American money, they’re going to spend it. And we have the coming into the back half of the year.

Dryden PenceWe have a lot of stimulus coming in from two things. So the great big beautiful bill, right. Well, it cuts taxes at about $630 billion. And then we had $150 billion in excess withholdings from last year. So when people are looking at it, they’re either getting a refund where they wouldn’t have before or their tax bill is a little less than it would have been.

Dryden PenceBut when you add up those two factors, that is about $730 billion of additional money that people have that they wouldn’t have had before, that’s almost as much money if remember those Covid checks where everybody got a check just for breathing? That was 830 billion. So weird. And we dumped it into a dead economy. We’re dumping 790 billion into an economy that’s running on all cylinders.

Dryden PenceSo I think the consumer’s going to stay intact.

Caroline WoodsSo who benefits from that from a stock perspective then. What’s a retail name that you would buy ahead of earnings. That’s not Walmart.

Dryden PenceThat’s hard almost. I wouldn’t say almost any of them. But I think a lot of the the luxury brands are going to do all right. Because yeah, they’re going to be fine. On the retail side, I think that you’re probably going to continue to see I think target will do okay, but I don’t think it’s going to be a blowout quarter for them.

Dryden PenceI think some of the other names you you’re going to begin to see people pull back a little bit. So you might see a little bit of a bid to, to the discounters, on that again, like, Walmart’s my favorite package, I think somebody else. But yeah, I try to concentrate. So I’m, I, I’m, I would bet that one before I would bet the others.

Caroline WoodsOkay. But overall you’re not necessarily leaning heavily into retail names outside of.

Dryden PenceNot and not not heavily into the retail. Okay. We we tend to we tend to. What I focus on on the retail side is the delivery chain of online shopping. So if you think about any of the companies that are involved in like, you know, what we do doesn’t change human being. We shop, right? It’s called retail therapy.

Dryden PenceWe spend our money. But then how we do it changes. So many of the companies that are involved with online retail are continuing to get an increase in that behavior. So it starts with obviously starts with Apple and Microsoft, but then it goes to to Amazon and Walmart and Shopify. All the companies involved in in that you see, I think is continuing to see stuff with Uber and DoorDash.

Dryden PenceThose become platforms at Costco. So these are all companies are involved in this consumer behavior of online shopping. And how do you pay for it? Will you pay for it with visa, Mastercard, American Express. And then it gets delivered by Fedex and UPS. So when you think about the behavior, you know, there’s like 22 companies that comprise almost 12.5% of total U.S. GDP.

Dryden PenceAnd they’re all involved with this with this ongoing piece. And so I think it’s it’s a it’s a big numbers equivalent, Great Britain’s GDP. Just take a look at those companies that are involved in how you execute an online retail purchase. Those are companies that have very strong demand across what they do.

Caroline WoodsWhat are you avoiding right now? What’s on the Dryden Pence no go zone at this point?

Dryden PenceI think the things that I want to try to avoid are companies that I mean, we because we look at individual companies and don’t want to come out negative on folks. But the bottom line, if you’re not investing in the future, you’re not going to be part of it. And a companies that are going ahead and instead of buying their own stock, they are they are, focused on doing what they do best, making that capital expenditure in the future.

Dryden PenceThose we like companies that are continuing to say, well, we’ll just buy our own stock. We’ll just do those. Those are companies I want to avoid because they’re going to miss the boat.

Caroline WoodsWhat’s an example?

Dryden PenceYou know, it’s it’s really hard to think of, of any that we have exactly today. But I worry about some of the banks. The banks are sitting there trying to trying to, you know, buy back their own stock, manipulate their pricing. So there’s, you know, list of some of particular, some of the smaller ones too. So I’m more worried about banks doing, doing that.

Dryden PenceThen, you know, we need to reinvest in what you’re doing. And we also like, like anybody involved in roads and bridges construction. So like caterpillar, you like you like companies that are involved in building out. We, we got to build roads and bridges in this country. You know, roads are deteriorated. So you take a look at some of the big engineering firms, that are important and that those that are publicly traded or like Vulcan Materials has almost, you know, I wouldn’t say monopoly, but bulk materials and Martin Marietta, they, the materials that we need for construction, no one is going to give you a permit for a new rock pit.

Dryden PenceRight. So you’re going to the government is going to have to buy rock and granite, those things and companies that already have those open pit mines. So it’s almost like a little monopoly. So those are going to have consistent earnings going forward over time.

Caroline WoodsCertainly a lot of picks there. Just to kind of wrap things up, if I’m a retail investor and I’m listening in saying, great, you’re still bullish, but by your end, if we’re only a little bit higher than where we are today and I have fresh money to put to work, why wouldn’t I put it in bonds with the ten year yield at 4.7%?

Caroline WoodsWhat is that? Well, make the case for.

Dryden PenceStocks, I think making the case right. I remember, you know, December 31st matters because of taxes. December 31st matters because I raised benchmarking to the end of the year. But for a retail investor that’s got money that wants to put it to work, I encourage them to think about a whole lot more than just this year. Think about next year because you’re, you know, we look at earnings are projected to grow by about 13 or 14% next year by 13 or 14% by the year after that.

Dryden PenceSo if earnings are going to continue on this path and the fundamental economy’s good, then the demand is fundamentally good. I wouldn’t worry about an arbitrary date on the calendar. I would worry about trying to find a reasonable entry point for a company that you really love, that you’re going to own for a long time. I think I encourage people to be investors rather than traders, and so particularly for retail investors.

Dryden PenceSo make a decision, find companies that you use that you like, the e-commerce companies or the technology companies that have these long drawn out things. Some of the construction companies, most federal government contracts for seven years and duration. And it doesn’t really matter when. So if you get a little dip between now and the end of the year for geopolitical overreaction, by the way, most geopolitical events are round trips in 45 days.

Dryden PenceYeah. So you get if you get an opportunity to buy between now and the end of the year, that’s a good thing to do. Or you just take a look at, put your money to work now and say, I’m making this investment not for next week, but for the next decade.

Caroline WoodsWell, you’ve given a lot of picks. So if I have fresh capital to put to work, where does my first dollar go from the picks that you gave today? Nvidia okay, I think this is a good time to pivot to our rapid fire rounds of this or that. First time playing. Quick questions, quick answers. Sure. No hedging if you can help it.

Dryden PenceI’ll try not to.

Caroline WoodsAll right. Here we go. Markets from here. More room to run or do for a pullback.

Dryden PenceShort term pullback and then running thereafter. So you get something short answer that something between now and the end of the year maybe a 5 or 7. And but that’s an opportunity because I think at the end of the year we’re higher than.

Caroline WoodsWe are now. So buy any dip or wait for a big pullback.

Dryden PenceI think you would anything you buy it anything of a 4 or 5 or below.

Caroline Woods4 or 5%, 4 or 5.

Dryden PencePercent.

Caroline WoodsWalmart or Target ahead of earnings. Walmart, Nvidia or Microsoft. Nvidia better for the market, strong economy and higher rates or weaker economy and lower rates.

Dryden PenceStrong economy and higher wage rates. Rather see the better. See the fed. Look at that raise because it’s too strong. They’d have to do something else because it’s to the.

Caroline WoodsFed for the rest of this year. On hold doesn’t even have to give you an option on hold. Bigger threat to stocks $100 oil or 5% on the ten year yield.

Dryden Pence$100 oil.

Caroline WoodsConsumer from here. Resilient or cracking.

Dryden PenceResilient as long as we don’t see $100.

Caroline WoodsWell, I CapEx still not enough or getting excessive not enough. Better IPO to invest in OpenAI or anthropic.

Dryden PenceWow, that’s a tough one. I would say OpenAI.

Caroline WoodsOpenAI or space X.

Dryden PenceSpace X.

Caroline WoodsSpace X or Tesla space X, y.

Dryden PenceSpace X is the future. It is the fact that they can cut. All right. I’ll take a second on this. Yeah that’s okay. We’ve been out of space X cuts cost of putting a kilogram into space. It was $20,000 in 2010. It’s $2,000 right now. When Super Heavy comes out in 20 2829, it’s going to drop to $20 per kilogram.

Dryden PenceWhen you do that, you open up possibilities that we haven’t even begun to think about. Space had really has has the monopoly now to getting lots of heavy stuff into low-Earth orbit or intermediate Earth orbit. And so they are the wave of the future. And the short answer is space X, and just be prepared to hold it for a while.

Caroline WoodsSpace X or Lockheed Martin.

Dryden PenceSpace X.

Caroline WoodsBetter confirmation of the bull market, broader earnings growth or broader market participation.

Dryden PenceBroader earnings growth.

Caroline WoodsStocks by year end. Higher or lower? Higher. How much higher?

Dryden PenceAnywhere between 1 and 5%.

Caroline WoodsFrom current levels. One word to describe how your feeling about the market.

Dryden PenceBullish.

Caroline WoodsAll right we’ll leave it there. Dryden pence thank you so much for your picks and your insights. Really appreciate it.

Dryden PenceThank you.

Caroline WoodsThat’s Dryden Pence chief investment officer at Pence Capital Management. If you enjoyed this street talk check out our full interview with Mark Newton. He says to stop waiting for the dips and outlines the stocks and sectors to buy now.