Transcript:

Caroline Woods Joining me now is Dave Ellison, portfolio manager at Hennessy Funds. Dave, welcome to the desk. Great to have you.

Dave Ellison Good afternoon.

Caroline Woods All right. So stocks doing a whole lot of nothing right now following bank earnings. But we’ve officially heard from JP Morgan Goldman Sachs Citi Wells Fargo. What’s your biggest takeaway from these results. What are the banks telling us about the economy.

Dave Ellison Well I think the takeaway is that, the credit conditions are still very good in most cases, that the non-performing numbers are actually flat or down from a year ago. And so I think that tells you that, you know, they’re doing a good job managing credit and that the economy is not as case shaped as maybe people think it is, that there’s plenty of people at the bottom, but they’re making their they’re paying their bills.

Dave Ellison So.

Caroline Woods So even though JP Morgan missed on both the top and bottom line, we saw some mixed results from some of the others. The banks aren’t showing any signs of cracks in the economy that Wall Street’s ignoring.

Dave Ellison And I believe, you know, when you talk about myths, somebody predicted something that they were wrong, not the bank, right? I mean, so it’s this idea that they missed my number. Well, your number was wrong. So let’s get over the this missed stuff.

Caroline Woods Okay. Well, that could be why JP morgan’s higher. Actually, today we’re seeing kind of a split in terms of how they’re performing. Which of the four is most attractive to you at these levels right now?

Dave Ellison I think right now, if I look look at the big four, I think I think Citigroup has the most upside because they have the most to get better. They’re the they’re suboptimal on return on equity and assets. And that will improve. And that’s their goal obviously. JP Morgan is just you know, best in class. So you sort of have to own that because they’re doing everything right.

Dave Ellison And the other two are kind of in the middle. So I think you’re you know I think Citi has the best upside based on valuation.

Caroline Woods Would you say bank stocks overall are a buy here. Or can banks be healthy and their stocks maybe just aren’t attractive?

Dave Ellison Well, I think you that’s a good point I think. And that can happen. And it has happened in this sector before because it just doesn’t grow fast enough to compete with what’s happening in the rest of the economy. But generally, what it’s telling you is that the rest of the economy is in good shape, that we don’t have the nonperformance, that we have loan growth, that we have liquidity to support the growth of the rest of the economy, that we that is really more important.

Caroline Woods We’ve seen stocks continue to rise, not necessarily financial stocks. They took a bit of a breather in September. But you know the overall market thanks to tech rise despite a whole bunch of headwinds whether it be rising rates, oil geopolitical concerns midterm elections coming up. Does that concern you at all? Do you think the market is getting ahead of itself, or do you think this is a market that can power higher?

Dave Ellison Well, I think that, you know, as I said, a long time, the only problem with the market is the price, because earnings are fine. There’s plenty of access to capital, there’s plenty of new ideas, there’s plenty of new companies that are trying to change the narrative around how the world works. And that’s AI, that space, all these kind of things.

Dave Ellison So there’s plenty of that. The questions people are worried about the price. And my view is that, you know, that’s somebody’s opinion, not fact. But at the end of the day, there’s enough earnings, I think, in the system to keep keep the market from going down in any big way. So you sort of have to continue to play the game.

Caroline Woods So continue to play the games. Mean game means you continue putting money to work at these prices.

Dave Ellison I would, I would think so. I think there’s enough profit. And again, I think the banks are telling you that the economy is strong enough to support the earnings, which then will, you know, keep the yen. I think stocks will rise as earnings rise. That’s historic is what’s happened. And earnings are good right now. And I don’t see any reason why that’s going to stop.

Dave Ellison So again bull markets can be very challenging. It’s not it’s not fun to be chasing something you know and always trying to figure out what’s happening. So there’s a lot of stuff happening in the economy now whether it be AI or fintech or whatever. And it’s just confusing to people. And so it’s it’s, it’s you’re making money, but it’s not fun.

Caroline Woods So where would you be most confident putting money to work to make more money? What areas of the market look most attractive to you right now?

Dave Ellison You know, I think I think that’s hard to know. I think you you because again stocks you know, you may be in a great industry. The stocks just don’t work this year. They don’t work next year. So you got to say to yourself which companies are trying to get better. Which companies have a lot to get better? Which companies are innovating.

Dave Ellison Which companies are investing? So my view too is that if I, if JP Morgan came out next week and said, you know what, we’re not going to make any money next year because we’re going to take all of that profit and invest it in the business for the long term. But the stock go up or down, in my view, if you look at what Amazon did the last 30 years, that worked out pretty good.

Dave Ellison They invested all that money. And you look at some of these other companies that they’re investing a ton of money in their business to try to be competitive and stay competitive and stay ahead. That’s what you want. I think that’s what you’re seeing in the economy now. That’s why Wall Street is so strong, because people are looking to borrow money or raise capital to invest.

Dave Ellison And that’s why you look at the Max seven. They’ve gone from having all this cash to now people are worried about cash flow. Well they’re investing the money finally.

Caroline Woods

Dave Ellison After all these years they’re saying yeah I’ve got $100 billion in cash. Why don’t I spend it on new products and services. And so that’s why the economy is as strong as it is.

Caroline Woods So which names do you like.

Dave Ellison Well I think, you know, the bigger banks make sense to me. I think, you know, the, the, you know, the, the large tech companies, they’re investing and I think that’s that’s where you want to invest. You want to invest where the companies are investing. If they’re worried about profits and worried about making the Wall Street number, that’s not I don’t think, what you want.

Dave Ellison It’s never really work for long term either. The guys that chase profits and chase escalating area, well, we’ve had 510 years of up earnings. I don’t really care. What are you investing in. That’s why you look at know look at JP Morgan. What are you investing your your all your profits in. Are you paying all you’re paying dividends and doing stock buybacks.

Dave Ellison That doesn’t help grow the company. It just helps existing shareholders. So what I want is companies. We’re investing in AI. We’re investing in cybersecurity. We’re investing in new branches. We’re investing in deposit gathering systems. We’re investing in loan making systems. That’s what you want to hear. So those are the companies that I gravitate toward. And luckily a lot of companies are doing that now.

Caroline Woods So what I’m hearing is you like tech stocks. You like financial stocks. What areas of the market are you avoiding other than, you know, people who aren’t making a compelling case for investing?

Dave Ellison I, I don’t I don’t really I’m not sort of, you know, I’m a I’m a cautious bear, so I’m not really I’m, you know, I’m a cautious bull. I don’t necessarily think of what can what’s wrong. Right. You know, so I sit there and say, well, what’s what’s not a buy. And then of course the next year they do something spectacular, you know.

Dave Ellison So I think that, you know, where there’s a lot of competition and the companies aren’t investing. That’s when you want to stay out of that. So it’s a I think companies if most companies can do well, if they just pay attention to what’s happening. And so when you talk to managements like, are you really paying attention? You’re just worried about like me making money, me making a dividend, me making money on the stock buyback.

Dave Ellison That’s why Wall Street loves buybacks. That’s how they make money. That’s why they promote it.

Caroline Woods So I’m a retail investor listening to what you’re saying though. And I’m saying okay, so what’s the takeaway for me. What is it. What should they be doing at this juncture? I.

Dave Ellison I, I think a well thought out group of companies makes sense. You’re not going to necessarily double or triple your money, but that’s that’s luck in some degree because the timing is right. But I think that you’ve got to look at America as being the place where the investment is happening. The access to capital is happening and the momentum is there.

Dave Ellison And I think to be bearish is difficult because there’s so many good things happening even outside of this room. This is not where America is. It’s out. It’s outside, and outside is pretty good.

Caroline Woods Speaking of bearish, I don’t know if you saw, but Paul Tudor Jones was on CNBC this morning. He says 2027 will be a very challenging year for stocks and plans to be short all year. What’s your view on that.

Dave Ellison Well you know I he he’s you know probably a lot smarter than I am. And so that’s that you’ll give that is sort of a starting thing. And he’s looked he’s obviously looked at. He wouldn’t be saying that if he didn’t like do some research around it. But the end of the day he’s it sounds like he’s calling price.

Dave Ellison He says the problem with the market is the price, not the market. Right.

Caroline Woods Yeah. He did say well are you sure that you’re, there’s just very little of value. So.

Dave Ellison Right, right. But I think, I think that’s, that’s fine. But again if you had been able to hang on to your house in 2010 or 2008 and not get foreclosed on, you’d be fine today.

Caroline Woods Well, he actually was comparing the eye investment boom to the.com bubble. Do you think that’s a fair comparison?

Dave Ellison I, I think the, the companies that are borrowing the money that are raising the capital are a much stronger set of companies with much higher profitability. And I think they’re also smarter. They they’re, they’re they’re better managed and they have an understanding of what they’re trying to do. So and it’s amazing I mean, there’s a tremendous amount of caution out there.

Dave Ellison Everybody’s worried about it. I everybody’s worried about the price of the stock market is we’re about rising rates. They’re worried about the federal deficit. Right. This is this is wall to worry. Right. So that to me is good because that means the banks you know, the banks are worried about all this stuff. And Jay and Jamie Diamond would say that, you know, in spades.

Dave Ellison Like we got we’re we’re all right.

Caroline Woods Yeah.

Dave Ellison But that’s what banks should do. That’s what their job is to worry and not make that big mistake. So the fact that they’re concerned about all these things is actually bullish not bearish, because they’re actually thinking about what can go wrong.

Caroline Woods You raised an interesting comparison in your notes though about anthropic and OpenAI being the subprime mortgages of 2006. So are you suggesting that the companies could trigger the next financial crisis? Are you looking at this? Oh, my bubble burst.

Dave Ellison Well, I think the issue is you, those companies, as I say, you sort of gone from, you know, the mag seven to the Hail Marys. Right. And you but you need those companies to be successful because you’ve got all of this, this debt and these, these, you know, unilateral payments around this Ferris wheel that are going on. And I don’t think anybody really understands the full extent of it.

Dave Ellison We all think we do. But it’s like it just sounds complicated. Right. And nobody likes complicated stuff. Right? That’s what messes you up when it gets complicated, especially in the financial markets. And we saw that in 2008. You got way too complicated too quick. And it’s like it blew up on us. So but I think here if they’re successful they’re able to generate the revenues and therefore generate the cash flow to pay those, pay for those deals, pay for the debt, then we’re fine.

Dave Ellison But if they fall back, then that whole sort of Ferris wheel kind of like start to get start to get clunky.

Caroline Woods So we have anthropic potentially in November, OpenAI probably not until next year. Is this kind of a wait and see approach.

Dave Ellison See. Right. Well, that’s why the market reacted when anthropic came out and said their revenues were lower. Remember it was 70 to 50. It’s like, well that’s a big you know, that’s like whoa whoa whoa. And then of course it turned out it wasn’t the case. So I’m not really sure. I haven’t looked up that lately, but but if anthropic gets into trouble and they don’t generate the revenues or OpenAI or even SpaceX, for example, because they need tons of capital, you know, it’s going to be a problem for the market.

Dave Ellison So we should be cheering on these companies to to be successful.

Caroline Woods If the AI trade stumbles, can the overall market still hold up?

Dave Ellison It may not, but it’s not going to. I don’t think it’s going to affect the economy that much. I think there’s enough else going on in the world. And these companies aren’t, they’re not going to go away.

Caroline Woods

Dave Ellison Right. You know I think what was the big story Amazon went up and they went down 90% and came back. So it’s not like these companies are going to disappear. It’s like you can’t make money every day in the stock market. You got to sort it. There’s got to be a period of sort of digestion and and understanding.

Dave Ellison But right now I think the market is because profits are so good. It’s just hard for the market to go down.

Caroline Woods The S&P 500 bull market turned four yesterday. Do you think that it turns five.

Dave Ellison And be at the well again if profits hold up it probably will. I’m not saying the market’s going to go up 30% or 40% next year. But again it’s you know, profits are everything. And that’s what has been the case for the history of the market. And that that requires investment. It requires growth. And I think that we’re in a pretty significant investment cycle in the entire economy.

Dave Ellison Is everybody sort of just jumping on board? They’re saying, well, if you’re doing it, I’m going to do it because I don’t want to fall behind. And I think there’s enough money available on Wall Street that they can fund it, or they can raise equity or raise debt.

Caroline Woods So if you were my portfolio manager thinking a little bit shorter term, how would you have me positioned into a year end?

Dave Ellison I would I guess I would make sure that year over year you can sleep at night, you know, because there’s you’re going to get your your risk, your risk and fear level down to the point where you don’t care what happens because you longer term you’re okay. So I think that’s what I would say. If you’re nervous about what you own and you’re worried about losing money because this guy is right and this is going to be tough, then sell something and get to a point where you don’t care where you can say, look, I’m okay losing 10 or 20% on my way to getting a double in a couple in 3 or 4

Dave Ellison years.

Caroline Woods What if I’m just exposed to the S&P 500? I’m concerned. Okay. Is that too much tech exposure? Some are saying that I shouldn’t be that exposed to tech given how far it’s run. Should I be making a move into year end?

Dave Ellison Not necessarily. I think again, the S&P 500 is 500 companies now. Yes, it’s weighted with the market cap at the upper end. But if you’ve got 500 names in there and if you believe, you know, the economy is generally getting better and they can use AI to get more profitable or other things, then then you stay with it.

Dave Ellison But again, it’s your level of comfort. If you’re nervous, get below that nervous threshold and you’ll be fine.

Caroline Woods So if I gave you $10,000 today and said I’m willing to be risky, what’s the first thing you’d buy?

Dave Ellison Well, I think I buy the S&P 500. I take, you know, 50% of it put there put 20% in cash is that gives me a cushion and that’s me. I mean, that’s personally how I do it because I like to be able to say, you know, if something gets beat up, I’m willing to buy, but I don’t want to sell something to buy something.

Dave Ellison And the rest I would, you know, buy some individual stocks that I think.

Caroline Woods Are I want to know those individual stocks. Give me a few I.

Dave Ellison Think I think we’ve mentioned Citicorp.

Caroline Woods Yeah.

Dave Ellison We’ve mentioned JP Morgan.

Caroline Woods What about on the tech front. Memory stocks are getting beat up right now. Would you buy any of those dips?

Dave Ellison I think well you know, I think the memory stocks are fine. It’s just a matter of the market just is worrying about you. The other thing, too, is I think that there are companies that have a tremendous amount of excess profits now. And the question is what are they doing with them now we talking about investing. But if you look at Amazon, for example, you know, they went from selling books at a loss, trying to make it up on volume to being the largest cloud provider in the in the world.

Dave Ellison So the company took those profits that it eventually had and continue to move the company forward in the directions that they felt right. And they bought, you know, the the grocery store and all this stuff. Right? So the point being is that if you look at a micron, for example, they’re they’re spending a ton of money. I mean, they’re making a ton of money.

Dave Ellison The question is, what are they doing with that? They’re just going to buy back stock and pay a dividend. That doesn’t help me.

Caroline Woods Okay. So you wouldn’t buy micron would you buy Amazon.

Dave Ellison Well Amazon I think is a perfect example. They’re making a lot of profits there. They potentially could benefit mightily from AI and robotics because they have they’re moving a lot of stuff around. And then you look at Nvidia where they’ve they’ve they were a chip company and now they’ve invested in all these other businesses and they’re trying to vertically integrate and all these different ways.

Dave Ellison And so they’re basically it’s happening a lot faster than Amazon did it because the profits are so much higher. So if the company is just sitting there saying, I’m going to make this and that’s what I’m going to do, and they’re not going to try to move the company in a vertically or horizontal position in terms of trying to expand their business.

Dave Ellison That’s what that’s what. That’s why Amazon can be a, you know, a 20 year bull market stock because they went from A to B to C to D to eat up. And they’re going to continue to grow. They’re going to continue to to do that because that’s in the management as opposed to other companies. Just sit and do the same thing over and over again.

Caroline Woods Okay. All right. I think it’s a great time to pivot for our rapid fire this or that. Quick questions, quick answers. No hedging. Be ready.

Dave Ellison Okay.

Caroline Woods Stocks by year end higher or lower.

Dave Ellison A higher.

Caroline Woods Bull markets fifth birthday. Likely or unlikely?

Dave Ellison Likely. But the returns may be muted. Muted means we’re not going to go at 50%.

Caroline Woods Could we go up 10%?

Dave Ellison Probably. Yeah okay.

Caroline Woods Bank stocks or tech stocks for the next 12 months.

Dave Ellison I think tech stocks.

Caroline Woods AI infrastructure, AI software.

Dave Ellison Infrastructure.

Caroline Woods Memory cell up healthy shakeout or warning sign.

Dave Ellison I think it’s, shakeout.

Caroline Woods One memory stock you’d buy on a dip.

Dave Ellison I don’t know one well enough to pick one.

Caroline Woods Name ASML or TSMC ahead of earnings this week.

Dave Ellison I’m not sure.

Caroline Woods Nvidia or Amazon.

Dave Ellison Amazon.

Caroline Woods JPMorgan or Goldman Sachs.

Dave Ellison JP Morgan.

Caroline Woods City or Wells Fargo.

Dave Ellison City.

Caroline Woods Big banks or regionals from here.

Dave Ellison I think the bigger banks.

Caroline Woods Bigger threat to stocks, inflation or rising yields.

Dave Ellison Inflation.

Caroline Woods Ten year Treasury 6% or 4% first.

Dave Ellison Oh, say 6%.

Caroline Woods I trade more upside or downside risk from here.

Dave Ellison Downside risk, depending on what happens with the two big things, the OpenAI and anthropic.

Caroline Woods True or false. The next 20% market downturn will be triggered by AI.

Dave Ellison I don’t think so. Yeah. So there’s something else out there. People are too afraid of AI. There’s too much negativity around AI to have that be the reason it’s going to be something else.

Caroline Woods Next market correction, buying opportunity or start of something worse.

Dave Ellison Well, it’s always always depends why the market goes down. But I would I would think it would be a buying opportunity.

Caroline Woods Midterms market mover or just noise.

Dave Ellison It’s noise now. It will be noise.

Caroline Woods Then finish these sentences. The most valuable magnificent seven stock is

Dave Ellison Probably Apple.

Caroline Woods The most overlooked opportunity outside of AI is.

Dave Ellison Defense related spending.

Caroline Woods The biggest risk to this bull market that investors are ignoring is.

Dave Ellison Ignoring.

Caroline Woods Or just the biggest risk to this bull market is.

Dave Ellison The biggest risk is the the fed. The fed decides to do something extreme.

Caroline Woods Like hike many times.

Dave Ellison Hike many times, or lower, or do something that they don’t telegraph enough in. The market gets surprised by.

Caroline Woods The first sign this bull market is in real trouble will be.

Dave Ellison When you start getting redemptions, out of the index funds. Because if your value in different on the way up, you’re going to be value in price and different on the way down.

Caroline Woods If I could only buy one stock for 2027, it would be.

Dave Ellison I’d probably say Amazon. Still surprisingly.

Caroline Woods All right. We’ll leave it there. Thanks so much for playing along and for all your insights. That’s Dave Ellison, portfolio manager at Hennessy Funds. If you enjoyed this street talk, check out our full interview with Adam Turnquist He has an S&P 8000 price target by year end, and breaks down the charts that are most compelling to him at these levels.