Three Picks From AI Chips to Beauty Filters

Sam Vardas (0:00)

Welcome back to Market on Close. I'm Sam Vardas alongside Marlee Caden. Let's discuss a tree of stock picks to consider for your portfolio. And welcome in our next guest, Ben Connard, CIO of Carnegie Investment Council. Ben, thank you so much for your time today. Let's kick things off with the AI trade and TSM, which you say is a smart way to play the infrastructure story. I mean, I suppose it is when it's up. I'm talking about the ADR 40% or so year to date. I mean, looking at these numbers, it's been performing well, record shattering monthly revenue. I mean, obviously, it's had these guidance upgrade. It's got these market monopolies as well. But you do point out that there are some risks attached with this. Just tell us how you're thinking about this name.

Ben Connard (0:43)

Well, we're thinking like you said, it's a smart play on AI infrastructure. It's kind of a winner no matter which chips are, the hot chips or the needed chips net right now, whether the GPUs or CPUs.

So all those companies work with them. They're developing their advanced packaging, and that's becoming another mode providing them more barriers over the competition.

As you mentioned, there's always concerns with Taiwan Semiconductor on the geopolitical side. Obviously, they're located in Taiwan, and we know what goes on there between China and the US and that country. But they're doing their best to diversify away from that, increasing their facilities in Japan and the US.

Obviously, it takes a while to expand that capacity, but they are expanding it outside Taiwan. And then increasing competition is coming. Samsung and Intel. Intel is really kind of the new guy on the block. But Intel is sort of years away from really competing with Taiwan, especially in the most advanced chips. And so we think Taiwan can hold them off and really will just be a general beneficiary of the amount of chips that are needed for data center construction.

Marlee Caden (2:07)

And let's move to your next pick here. You've got Ulta Beauty. And Sam and I covered those earnings live on air. They delivered, I think it was close to 5% same store sales growth. In the first half, they're guiding about 3.5% for the full year. But as I'm just looking at where they're trading, they're only trading about 18 times forward earnings versus their historical median, which is about 24 times. So as you look at Ulta, what's the market missing here about the business?

Ben Connard (2:36)

I think the market's just being pretty cautious.

As you mentioned, 5% same store sales in second quarter, but guiding for the full year lower than that, which means the management's been pretty conservative and they're guiding for a slowdown, and so the market is a little concerned. I think with Ulta, the market always overlooks how important beauty is to their customers. So even if we have an economic slowdown and consumers are feeling more pinched, they generally still spend on their beauty products, and I think Ulta will be a beneficiary, and that's, you mentioned, the multiple. That's part of the reason why we like the stock, because we think they can continue to grow earnings, and then there is upside if their multiple expands a little, and you can see a nice return over the next few years.

Sam Vardas (3:28)

Yeah, and obviously, they've been benefiting, as we mentioned, when we were covering these earnings from that so-called lipstick effect, when people go out and buy this stuff regardless of the good times and the bad times. Let's move on to another company among your stock picks as well, and that is Donaldson Company.

I mean, you say it's a fairly valued industrial company. It's not one that we cover very often here, Ben. Just wondering if you could give us an overview, why you're looking at this one.

Ben Connard (3:55)

Yeah, Donaldson is, it's a little, you know, it's a mid-cap industrial. It's when I say fairly valued, what I mean there is the, it's not really trading at a discount on the multiple side, but it's not expensive. It's not like some of the sort of picks and shovels AI industrial names that are trading all-time high multiples.

But ultimately, they're in the filtration business, and it's required in mining equipment, filters, in turbines, and even semiconductor manufacturing needs filtration, and what they have a nice business model where they get, they custom design their filters for a particular product, and then there's a lot of recurring revenue as those filters need replacement. So it's got a nice little kind of razor blade model, which it justifies their multiple, and then with sort of the little extra AI data construction going on, they're at peak margins and their growth is decent, so you can see some nice returns on that stock as well.