Ticker Take: a weekly newsletter on investing.

A recap of the week.

Jun 16, 2024

Broadcom’s big move.

Rapidly rising demand for Broadcom’s AI products prompted a crowd pleasing forecast from the company this week, which once again fueled the stock (it’s now up 55% this year). Jamie Murray of The Murray Wealth Group has been a long-term holder and is sticking with Broadcom.

You can find that his pick and others, as always, at the bottom of the newsletter.

Happy reading!

Will Silicon Valley commit to spending on AI safety?

Before we dive into the investing highlights for the week, I wanted to recap my interview with the “godfather” of artificial intelligence, Geoffrey Hinton.

Having spent more than 50 years leading research in this area, Hinton long ago became a hot commodity in Silicon Valley, which ultimately landed him at Google.

But last year, Hinton resigned his role at the company so he could speak more freely about the existential risks surrounding AI.

Hinton is deeply concerned that skyrocketing stock market values — and competitive realities for these companies — is quickly lessening the industry’s focus on safety issues.

"It makes it clear to the big companies that they want to go full speed ahead and there’s a big race on between Microsoft, Google and possibly Amazon, Nvidia and Meta. If any one of those (companies) pulled out, the others would keep going.”

The problem, as he sees it, is that while those companies are spending to grow, there is not enough spending on the potential problems that could arise if AI becomes smarter than humans.

"I think there’s a 50-50 chance it will get more intelligent than us in the next 20 years," he told me. "We’ve never had to deal with things more intelligent than us. And so people should be very uncertain about what it will look like."

Given the unknowns, Hinton believes companies should be spending between 20 to 30 per cent of their computing resources to examine how this intelligence might eventually evade human control. And he believes governments are the only ones that can mandate that happening.

“I’m not sure (companies) would object if all of them had to do it. It would be equally difficult for all of them. And I think that might be feasible."

This will be an important theme to watch, as Hinton is an influential voice. If governments do coordinate on such efforts, it will force Wall Street to re-assess the costs associated with all this AI-related growth that is fueling tech companies to trillion dollar valuations.

Will Meta be the next big stock split?

Nvidia’s 10 for 1 stock split is official. And Broadcom announced its own stock split plan this week.

Who’s next?

One investor — Ken Mahoney of Mahoney Asset Management — told Bloomberg this week he thinks Meta is “ripe for a split”

If that happens, it would continue a trend of magnificent seven companies splitting their shares since 2022 — the others being Alphabet, Amazon and Tesla. Note Apple did its own split back in 2020.

Bank of America analysts had predicted Broadcom’s split. They identified other potential candidates for stock splits including Lam Research, Super Micro Computer, KLA and Netflix.

They also noted Microsoft could be an interesting one, but it has not split its stock in more than two decades.

As a reminder, stock splits don’t change anything fundamental for a company, but they do lower the price per share, possibly making the stock more attractive to investors and employees who might be deterred by a higher share price.

As for what that means for actual stock performance, it’s hard to call it a bullish indicator. Bank of America warns some 30% of stocks that split their shares actually see negative returns 12 months later.

Tech names that are expected to boost their dividends

I mentioned Broadcom earlier in the newsletter. What’s interesting about a business like Broadcom is its steady commitment to dividends. While some tech names have been reluctant to dish out dividends over the years, Broadcom’s investor base has come to rely on them.

That commitment to dividends is expected to continue. Bloomberg analysis suggests the company’s dividend will grow by more than 10 percent over the next three years.

That got us curious about which other tech companies are on pace to grow their dividends by as much – or even more. So, we took at look at bigger names – they had to have a market cap of at least $10 billion. We looked for companies that are expected to boost their dividend by more than 10 percent over the next three years. But the stocks also had to be recommended by a majority of analysts who cover them. And those analysts, on average, had to expect the stocks would rise in the next 12 months – in other words, they have to be seen as attractive as both stocks and dividend plays. Against that backdrop, here are some names that made the cut:

Broadcom

Microsoft

Visa

Vertiv Holdings

Roper Technologies

Dell

What are you buying, exactly, in GameStop?

GameStop shares have been on a wild ride. They’re basically back where they were before the recent Roaring Kitty frenzy began.

If you’re looking for fundamental research on Wall Street, you won’t find much. The stock has very little analyst coverage.

However, Wedbush analyst Michael Pachter has been covering the company for years and continues to do so, since there is investor curiosity, from both those who are betting in favor of and against GameStop.

We spoke this week. His view? Don’t buy the stock.

He notes that their capital raising activities have created options for the video game retailer in the short term, but he’s still unclear on the longer term plan. And he sees no adjacent businesses that will allow GameStop to leverage its retail footprint.

In his view, the company has no particular expertise in anything other than retail sales.

His one year target price for the stock is $11, compared to its current price above $28. That is based on what he estimates to be about $9.50 per share worth of net cash and a “going concern” value of about $1.50 per share.

The elf business with the giant stock gains

I had an interesting conversation with Tarang Amin, the CEO of e.l.f. Beauty.

The company’s stock has risen nearly 1,500% in the past 5 years, making it a top 10 performer in the Wilshire 5000 index, right behind names like Nvidia and Super Micro.

Amin has been chief executive for roughly a decade and has helped lead the company to 21 straight quarters of net sales growth, averaging at least 20% sales growth per quarter.

The research firm Piper Sandler has routinely named e.l.f. the #1 ranked beauty brand among teens.

It competes with the likes of Maybelline, Covergirl, and Revlon and maintains a marketing edge by outpacing rivals on social media. In fact, e.l.f. sees itself as an entertainment company, not just a beauty company.

And Amin sees plenty of room to keep growing, with the company focusing on three areas — color cosmetics, skincare, and growth in international markets.

He also said that while the main focus is their existing brands, the company has a strong enough balance sheet to go out and make acquisitions, such as its deal to buy skin care player Naturium.

On Wall Street, the company’s shares remain well liked. More than 70% of the analysts have a buy rating on the stock and the average 12 month target price is roughly $208, suggesting some modest upside.

How big will the obesity drug market be?

Weight loss drug makers have been in the spotlight, with investors bidding up the share prices of companies like Novo nordisk and Eli Lilly. The rapid rise in demand for obesity drugs remains in its early innings. It’s why we’ve had some guests, such as Brenda O’connor Juanas of UBS, who continue to recommend these stocks. But we wanted to get a better sense of just how big this market could be. And the research team at Bloomberg’s research arm, Bloomberg Intelligence, has put together some estimates.

According to their calculations, the global market for obesity drugs could top $93 billion by the year 2030. Here’s a closer look…

Estimated global market for obesity drugs

2030: $93.8 billion

2029: $77.9 billion

2028: $63.7 billion

2027: $48.6 billion

2026: $35.4 billion

2025: $24.6 billion

2024: $14.8 billion

2023: $6.3 billion

Source: Bloomberg Intelligence (U.S. dollars)

As for the companies that are expected to dominate that market – today’s big winners, Novo and Lilly, are expected to continue to essentially control branded drug sales, with market share of 40 percent and 47 percent respectively. Meanwhile, drugs by Amgen, Altimmune, Zealand Pharma, Innovent, Structure Therapeutics and Viking Therapeutics are expected to make up the remainder of that $93 billion dollar market. Having new entrants could create price pressures, which will be a consideration for investors. Other wild cards would include the percentage of these drug sales that are being paid for out of pocket by users, as well as the overall supply picture. Still, it seems pretty clear there is a big growth curve ahead.

The rise of the Mini-Me ETFs

I had a good catch up this week with my friend, Athan Psarofagis, who covers the ETF market for Bloomberg Intelligence. Athan noted that competition in the ETF industry and an increasing focus on retail investors has enabled the launch of cheaper versions of already popular funds.

As three examples, he pointed to SPLG, QQQM and GLDM, which are mini-me versions of much larger ETFs tied to the S&P 500, NASDAQ 100 and Gold. The main difference between these versions of the ETFs and their larger counterparts? Lower fees.

Why would these ETF providers offer cheaper versions of the exact same product?

As Psarofagis explained it, if they don’t, someone else will. And since exiting those larger funds would require longtime investors to lock in capital gains, he says the ETF providers are betting they can hold onto their existing investor base, while attracting new investors to their cheaper offerings.

Leaning into the “avocado toasters” trend…

It was great to catch up with Meredith Whitney this past week.

As you might recall, Whitney made a name for herself as a bank analyst, warning about the dire situation brewing ahead of the 2008 financial crisis.

These days she is once again tracking the performance of bank stocks, but also monitoring a whole host of other sectors, as the CEO of Meredith Whitney Advisory Group.

One of the biggest trends she has identified is the cohort of younger people who are not buying homes for a myriad of reasons (including them being too expensive). Whitney cited data suggesting people under the age of 38 own less than 10% of U.S. homes.

She calls them avocado toasters - a group in the age range of 24-38, who tend to be college-educated, have higher incomes, and either rent or live with their parents.

And while they aren’t buying homes, they are spending on travel, leisure and retail.

As such, she likes stocks like Abercrombie & Fith, DraftKings (given increased spending on sports betting) and American Express.

As for her views on the banking sector, she notes the banks themselves in the U.S. have largely been out of the housing market in the past 15 years. So instead, they are driven largely by consumer spending.

She doesn’t seem all that bullish on small banks, who can’t afford to invest in technology and are limited in their ability to consolidate. She sees midsized banks as challenged, so her main interest is the large banks, who have spent years downsizing. She sees Wells Fargo as a low hanging fruit pick right now, among the bigger players.

Cash is rarely king.

My old friend Sarah Ponczek of UBS Private Wealth Management joined me for a conversation this week and shared a helpful stat on the diminishing value of cash versus investing over the long term.

She cited data going back to 1926, which finds that over a 5-year period of time, 60/40 portfolios made up of US large-cap stocks and bonds have beaten cash around 80% of the time.

All-time highs are a positive, not a negative.

I also spoke with investment strategist TIm Urbanowicz of Innovator Capital Management this week and he noted some clients he’s been speaking with are getting nervous with the markets continuing to make all-time highs.

But he says now is the time to buckle down and remain invested. Looking historically, since 1950 in the 12 months following an all-time high, the S&P 500 has been positive 77% of the time, with an average return of 11.6%.

Notable call: take profits in utilities

In the past three months, utilities are the second best performing group of stocks in the S&P 500 after technology. One of the big drivers has been the conversation around AI fueling the need for more power sources.

It’s definitely a trend to watch over the long term. But what happens to utilities stocks after they’ve already had a big gain? Alec Young, Chief Investment Strategist at MapSignals says buyer beware!

He looked back at utilities performance one year after a big quarter of outperformance and history suggests the sector will underperform the S&P 500 by about 2.5% in the next 12 months.

Young brought up an important point, which has gotten lost in all the hype around power demand. He notes that utilities, at the end of the day, are a heavily regulated sector, where regulators ultimately decide what they can charge.

So in his view, the bullish view that has driven these stocks up is much too simplistic and he’s advising investors to take profits.

Bank of Canada’s rate cut signals positive gains for Canadian stocks.

Longtime strategist Brian Belski of BMO Capital Markets joined me again this week and shared his perspectives on the Canadian stock market, following the Bank of Canada’s decision to cut interest rates for the first time in four years.

Looking back at history, there are generally two paths for stocks, based on the kind of rate cutting cycle that unfolds. BMO’s analysis highlighted proactive “non-recession” easing cycles (1996, 1998, 2003, and 2015) versus more reactive “recession” easing cycles (2001, 2007, 2020).

In the more “proactive” periods like the current easing cycle, the TSX typically posting solid gains 6 months and 12 months after the first rate cut. This is in clear contrast to the more “reactive” easing cycles where the TSX typically sharply underperforms.

Time to buy Canadian government bonds

Speaking of the Bank of Canada’s rate cut, Earl Davis, Head of Fixed Income and Money Markets at BMO Global Asset Management says now is the time to lock in longer duration debt in Canada, given the path forward will lead to ever more rate cuts.

He told me would be buying 5-year and 10-year Canadian government bonds, with a preference for the 10-year. Ed Devlin of Devlin Capital also told me this week he likes Canadian bonds over U.S. treasuries.

Ed is also betting against the Canadian dollar, which he expects will weaken against the greenback, as Canada’s rate policy diverges from that of the Fed.

Energy names with big free cash flow yields

Canadian energy stocks have come off their best levels of the year, but many names in the group are well liked because of the perceived value these companies offer, compared to where they currently trade. One of the popular ways to measure that opportunity is through the free cash flow yield, which measures the free cash flow a company is generating, divided by the company’s market value. That metric is one energy investors such as Eric Nuttal of Ninepoint Partners have been watching closely.

He told us recently he was buying some names that are currently sporting very attractive free cash flow yields of between 15 and 30 percent. We decided to take a closer look at stocks on the TSX that have free cash flow yields of at least 10 percent. A good number of them are in the energy sector. Names tied to Canadian energy production that fall into that bucket include Cenovus, Whitecap Resources, Suncor, MEG Energy, Tamarack Valley and Freehold Royalties. The highest rated stocks by analysts in that group are Cenovus, followed by Whitecap, Tamarack Valley and Freehold.

Meanwhile, in the U.S., we wanted to look at some energy names that also have high free cash flow yields and are ranked well by analysts. One name that stood out was Marathon Oil.

Picks of The Week:

JJ Kinahan, IG North America: McDonald’s, PepsiCo, Ford

Brian Belski, BMO Capital Markets: Maple Leaf Foods, CAPREIT, Walmart, Trade Desk

David Rosenberg, Rosenberg Research: gold

Jamie Murray, The Murray Wealth Group: Broadcom

Tyler Ellegard, Gradient Investments: Palo Alto Networks, Fortinet

Earl Davis, BMO Global: Coastal Gas Link (TC Energy) 3y, 5y, 10y, 20y bonds

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