How a Gabelli Funds Manager Finds ‘Idiosyncratic' Dividend Stocks

**SPEAKER_1** (0:00)
Welcome back to Opening Bell, and a good Monday morning to you. We are getting you ready for this trading day. Justin Bergner, Portfolio Manager of Gabelli Funds, is with me now when you talk about what straw can break the camel's back. And so you're setting up a bit defensively. We're ahead of a very busy trading week. How are you feeling on this Monday?

**Justin Bergner** (0:23)
Good morning, Nicole. Thank you for having me on the show.
So there are a lot of countervailing forces in the market right now. The CapEx is booming. The consumer is challenged. Long dated yields are backing up. But inflation prints have been relatively modest, and expectations for a rate cut, sorry, rise have gone down in recent weeks and months. So a lot of investors, including myself, are focused on what straw is going to break the camel's back, with budget deficit concerns and yields being the most recent. But the camel is getting stronger with earnings growth of 25 percent plus this year and expected double-digit earnings growth next year. I think what is challenging is that a lot of the earnings growth is driven by the depreciation of hyperscaler CapEx, which improves earnings today at the expense of tomorrow. Of course, the recipients of that hyperscaler CapEx, all the hardware companies are gaining earnings boost today. So, you could think of those as performance-enhancing drugs for the camels, and whether or not that turns out to be a good thing or a bad thing, we don't know. So, there's just so many different factors at play today, making it very challenging to kind of make broad market calls for the investor.

**SPEAKER_1** (1:41)
I see. So, the hyperscalers and the CapEx, you said how it's booming, it's continuing to boom, and it's funding the things that we're seeing for 2026 and 2027
It seems somewhat merited at this time. You said it's a wild card. When will you make some sort of decision? Because are you expecting some sort of correction in the markets because of it?

**Justin Bergner** (2:04)
Well, I mean, I guess correction could have been likely anytime in the last few months. We have not seen a correction yet, and we're not sure what will cause a correction, because the market continues to shrug off bad news, including the Canada tariffs that came about this weekend. I think ultimately the markets can make a decision as to what are the expected returns on this hyperscaler cap X, which are juicing earnings today and also hurting free cash flow today.
Once that decision is made, I think the market has the potential to go higher or to go lower. If the market votes that some of this hyperscaler cap X is wasteful and incentivized by a desire not to lose the arms race, we could see the market vote against that and cause some deceleration in the AI cap X dynamic.

**SPEAKER_1** (3:05)
Staying on this for a moment, because I know you have Merck and many other names, other areas that we can talk about, you do have Google and AMZN as some top holdings in the fund. Comfortable with that? I mean, do you think there's some real upside potential for those names?

**Justin Bergner** (3:19)
Yes. Thank you, Nicole. I think that those names, first of all, they're a large part of the index.
AMZN is now principally a value stock. Alphabet, I continue to own, has now moved to more of a growth stock in the large cap index. But I do think that they are names that have long-term upside from compounding earnings and eventually free cash flow. I think that the downside is relatively modest. I think that they each have multiple legs to their business. In the case of Amazon, retail, cloud, some nascent chip business, advertising business, in the case of Alphabet, YouTube, Waymo, obviously, the cloud and AI business and they will be long-term winners. I probably would be a little bit happier if they were in notching up the capex dial quite as much, but I like both of them as core holdings.

**SPEAKER_1** (4:18)
Then Merck is one of your large holdings as well. When we talk about healthcare and biotech, that's an area that you like overall.
It's been a winner. It's at a 52-week high. This last trading session on Friday, it hit a 52-week high. One year up 80 percent. Still more upside for Merck and or healthcare and biotech?

**Justin Bergner** (4:41)
Yes. I was surprised by the violent positive move in healthcare and biotech on the heels of the Merck Moderna mRNA Cancer Vaccine News. I think it was more company and situation specific, and I think it's just representative of some of the big unexpected moves we're seeing in asset groupings today. But yeah, I continue to like Merck. The primary reason for having owned Merck as the largest position in the Dividend Growth Fund is its top-notch R&D franchise and its ability to do favorable mRNA, which a lot of pharma companies don't do, and that's amplified by its R&D expertise. The upside from the potential favorable readout of the mRNA vaccine was a secondary reason, but obviously it's boosted the stock. And so we continue to own Merck as our largest position.