Transcript:
Caroline Woods:
The S&P 500 to 8100. That’s a bold call for my next guest. But while he still likes U.S. stocks, he says some of the biggest opportunities right now may actually be overseas. Joining me now with five international stock picks is James Demmert, founder and CIO at Main Street Research. James, great to have you on.
James Demmert:
Good to see you, Caroline.
Caroline Woods:
So you still see a path to S&P 8100 this year, but none of your top picks are actually in the S&P 500. So what does that tell us James.
James Demmert:
It tells us that we think the S&P goes to 8100 which used to be a lofty number I know not as it’s closer than we think. And that tells us if we’re leaning into the foreign markets we think they can actually exceed the performance of the S&P 500.
Caroline Woods:
So if investors only own US stocks right now, what are they missing?
James Demmert:
You know I think what they’re missing number one is diversification. Number two they’re missing this amazing opportunity outside the US where stock prices are much more reasonably priced and growth rates are as attractive or even more attractive. You probably know foreign markets have outperformed the US so far this year. We think that will continue.
Caroline Woods:
Okay, so let’s get into your top five picks, starting with ASML already up big this year. Why are you still a buyer here?
James Demmert:
You know I know in technology everybody’s obsessed with micron and the memory trade. You know don’t forget ASML is a company that makes the design manufacturing and technology. So we can make these chips. And they’re an integral important part. They’re based in the Netherlands. Yes. They’re trading at 38 times earnings but they’re growing way in excess of that as far as their percentage growth each year.
Really great way to play a foreign stock.
Caroline Woods:
You mentioned micron though. Why own ASML instead of just buying micron or even Nvidia or another chip stock.
James Demmert:
Well we own Nvidia. We own micron and we use ASML because it’s really a different part of the AI trade because it’s design technology. And it also gives us that diversification outside of the US as you know the US dollar continuing to go downward. Having your assets in stocks and foreign countries helps that get away from that dollar denominated trade.
Caroline Woods:
Okay. Next step is HSBC Holdings. There are plenty of big U.S. banks you could buy. Why are you looking overseas for that?
James Demmert:
You know this is a very good question. And it’s really about valuation. HSBC trades at nine times the earnings Caroline where JP Morgan and that great companies. We own JP Morgan as well. But you’ve got better valuation and better forward growth because what you’re seeing is a reinvention a reawakening if you will in people investing outside of the US.
That’s why those indexes are doing better than domestic. And HSBC is a big part of the indexes overseas, but also as a big investment global bank doing tons of work not just in the US, but in Europe and also in Asia, where JP Morgan doesn’t have as much of a footprint.
Caroline Woods:
That being said, though, how should investors be thinking about China risks?
James Demmert:
Well, I don’t know if China is investable, but I do think that you can invest in companies that are safely doing business there. I know that’s one of the reasons why Nvidia is dying to get the door open where they can sell their products into it. So I don’t know that Chinese stocks at this time are investable, but companies that do business there or are able to do business there, I think that makes a lot of sense.
Caroline Woods:
Next up on your list, Siemens Energy. Why here in the U.S.? Why are you a buyer of this one up about 40% year to date?
James Demmert:
Yeah, it’s done well this year and I think it will continue to do well. And let’s keep in mind the world is running out of electricity. We know AI is eating it up. Crypto is heating up and electric vehicles, as we’re trying to figure out how can we increase supply of electricity. That’s exactly what Siemens Energy focuses on. They’re helping us build out the electrical grid for the world, not just where they’re based in Germany, but all over the world.
And the stock is trading at 37 times earnings. But it’s growing and that’s less than that.
Caroline Woods:
You know what though, I mentioned how well it’s doing year to date. It also has a pretty impressive one-year chart, up over 90%. How should investors be thinking about some of these stocks that have already seen these huge run-ups? Is it too late to get in if you’re not already in there?
James Demmert:
Well, if you’re not in yet, I always say wait for a pullback, buy the stock on some weakness, or maybe buy a third of it and kind of wade yourself in. But if you are in the stock, keep in mind these stocks can be volatile. The whole AI trade can be volatile. But in our view we’re in the third or fourth inning of a nine-inning game when it comes to the AI revolution.
So this is the early stages still. And this type of stock performance, if you remember the 90s tech boom, was a very similar type of trading in the first few years. And that can extend for quite a long time.
Caroline Woods:
Okay. Next up, BHP Group, up more than 40% year to date as well. Why do you still like the mining space here?
James Demmert:
You know the world needs more copper. The more we build out these data centers, copper is going to be a big part of that. We also think that this is a global expansion for the economy. And we’re just going to need more materials. And BHP is a wonderful way to play that, based in Australia.
Trading at 16 times earnings. Again, valuations overseas much more attractive than they are in the US.
Caroline Woods:
So is this a commodities trade or is it an AI infrastructure trade?
James Demmert:
It’s both. Thank you for asking. That’s exactly what it is. Most people think it’s just a commodities trade. But when you think about the demand needs for all of these data centers, it’s absolutely an AI play. What I would call the second derivative of AI.
Caroline Woods:
Okay. And finally, a healthcare play. AstraZeneca, which has actually underperformed the broader market this year, essentially flat. Why buy a lagging healthcare stock?
James Demmert:
Yeah. This is the little engine that could. We really feel like healthcare has been ignored way too long. And AstraZeneca has got a great pipeline of pharma and biomedical products, trading at 18 times earnings, growing at about 20-plus percent a year. We think the market is going to come back to this.
And we also feel like investors are going to start to lean into healthcare sometime in the back half of this year, as they feel like AI starts to be accretive and adding value. So I think this will eventually be an AI play, and we think it’s a great way to diversify your portfolio on valuation and also being overseas.
Caroline Woods:
Okay. So as you think about value there and as we think about these top five picks overall, is the case for international over U.S. strictly a valuation story right now?
James Demmert:
It’s a valuation story. But it’s also a story about how policy around the world has changed. As you know, in the US, we’re tightening our fiscal spending, or trying to. And what we’re doing is we’re taking that away from Europe, which is now taking a page from our playbook.
In Europe and overseas and Japan as well, you’re seeing those economies really heat up because they’re throwing a lot of government fiscal spending at them, which they never have done before.
They’re trying to keep rates low. So that’s why you’re seeing these foreign markets do better than the US for the first time in many years. And we think this is a trend that’s going to go on for a number of years going forward.
Caroline Woods:
Okay. So let’s move on to our rapid-fire round. This will be quick questions, quick answers. Are you ready James?
James Demmert:
I’m ready.
Caroline Woods:
If you could only own one of these stocks for the next five years, which one is it?
James Demmert:
ASML.
Caroline Woods:
Which name would you cut from the list first?
James Demmert:
AstraZeneca.
Caroline Woods:
What’s the first stock you’d buy on a pullback?
James Demmert:
Siemens Energy.
Caroline Woods:
Which stock on this list doubles first?
James Demmert:
ASML.
Caroline Woods:
Most resilient name if the economy slows?
James Demmert:
AstraZeneca.
Caroline Woods:
Which name on your list has the biggest competitive advantage over its rivals?
James Demmert:
Siemens Energy.
Caroline Woods:
What’s the biggest risk to all five picks?
James Demmert:
A bear market.
Caroline Woods:
What stock would be number six on your list?
James Demmert:
Nvidia.
Caroline Woods:
Most underrated international market right now?
James Demmert:
Europe.
Caroline Woods:
Biggest mistake U.S. investors make when looking overseas?
James Demmert:
Not committing enough capital to overseas, being too shy.
Caroline Woods:
So for a standard portfolio, how much should be in the U.S. and how much should be international?
James Demmert:
We would suggest 45% should be outside the US, the rest domestic.
Caroline Woods:
A U.S. name you’d buy here and hold for five years that’s not Nvidia?
James Demmert:
Costco.
Caroline Woods:
U.S. name you’d avoid right now?
James Demmert:
Anything in the real estate sector or consumer discretionary.
Caroline Woods:
Is that a rate story?
James Demmert:
It’s a rate story and the K-shaped economy.
Caroline Woods:
Okay. One word to describe how you’re feeling about the U.S. market from here.
James Demmert:
Bullish. But always worried.
Caroline Woods:
And one word to describe how you’re feeling about international.
James Demmert:
Very optimistic.
Caroline Woods:
That’s two words.
James Demmert, founder and CEO, Main Street Research. Thank you for keeping those rapid fire. And thank you for your picks and your insights. I always appreciate having you on, James.
James Demmert:
Pleasure.
Caroline Woods:
For more stock picks, check out our interview with Joanne Feeney where she reveals her top five picks that could still work even if the market cools off.
