NVDA, GEV, JPM & Key Stocks Jeffrey Small Sees Weathering Macro Volatility

Marlee (0:00)

I see Jeffrey Small waiting here for us, managing partner of the Retirement Income Source. Jeffrey, great to have you on. Interesting week here. We were waiting for some key data later in the week. We've got a mixed picture today, net negative day yesterday. I mean, how are you looking at the market right now, as we're also about to come into essentially the kickoff of earning season with Micron?

Jeffrey Small (0:22)

Well, I think the market's holding its breath on its earnings from Micron here. But to answer your question, Marlee, we've got great growth in AI spending. We've got a lot of optimism. That's one side. The other side is a 5% 10-year treasury. Oil hovering close to 191, 103 in the Brent crude and really sticky inflation. So the markets are trying to balance all of these opposing forces today.

And so my macro view, my macro view really is that we're entering into a much more selective phase of the bull market. I think the market's going to become much less forgiving of companies that have really high valuations without the earnings growth to support them. So I'm still constructive on equities, but I want to own businesses tied to capital spending and real earnings growth with strong cash flow. And most importantly, big back orders, Marlee, big back orders.

Marlee (1:09)

And so Jeffrey, you mentioned where the yields sit, and obviously that comes into play heavily when we're starting to talk about earnings. How are you distinguishing the companies that are going to be able to weather these higher rates, especially looking like we are going to be higher for longer in terms of the Fed setup that's expected here as well?

How are you looking at them one by one? Is it an overall infrastructure play? Are you stock specific picking within the trade?

Jeffrey Small (1:36)

Well, I would say the three investment areas that look really good right now, of course, are AI infrastructure, power electrification and financials.

That gives you a key cohesive story despite the market forces that we're balancing here. And so the first area is AI infrastructure, semiconductors, companies like Nvidia, Broadcom, AMD, Arista Networks. On the second area, my favorite pick and power generation, of course, is GE Vernova. You've got Constellation Energy, Vertee, VanEten, and the third is financials. Someone's got a capital, well capitalized institutions. Someone has to finance all of this AI spend and companies like JP Morgan and Bank of America. So let's just say the best of the best, Marlee.

Marlee (2:14)

So the best of the best. So then are you, you're looking at Nvidia then, AMD. Are these names that are on your radar here when we're looking at top of the top in terms of the semis?

Jeffrey Small (2:26)

They really are.

But nobody's going to buy back $150 billion of their own stock like Nvidia is, and nobody's given us 12-month guidance like Nvidia is. So we know they've got that backlog order filled, and we expect that growth to continue beyond 27 next year. So is the stock underpriced today? It's cheapest ever in history. So yes, it is underpriced, but the market has a fear of large numbers.

Marlee (2:49)

So Jeffrey, as we're looking at these large numbers, and the massive spend that's going into all of this, knowing how early we are in terms of the innings in this AI infrastructure build out, how are you balancing that against these long-term rates above 5 percent? How are you valuing AI companies right now with these enormous growth expectations? But we also know we're potentially years away from really fully realizing any of the economic benefits and then add into it the bubble conversation or the overbilled conversation that people still believe may or may not be on the table.

Jeffrey Small (3:29)

Yeah. And that's a really great question, Marlee. I think I wouldn't abandon growth because rates are high or we have energy prices or sticky inflation. I'd become much more selective about where that growth is coming from. So you really want to own stocks today that have that solid growth trajectory of, you know, greater than 30, 40 percent a year, either on their top and bottom line numbers. And so, you know, obviously that's in the chip space.

That's in the GEV Renova space because we've got a three to five-year backlog in the power space. And the capital financing, the next phase of this economic build out is really going to be done by companies that have low valuation stay like JP Morgan and Bank of America. And so these are things that you want to own going forward. But it's not that hard to figure out based on where we are on the cycle. But again, those are the dynamics that we look at.