Transcript:
Caroline Woods
Joining us now is Andrew Graham, managing partner in Jackson Square Capital. Andrew, great to have you at the desk.
Andrew Graham
Great to be here. Thanks for having me.
Caroline Woods
So stocks are rebounding after yesterday’s selloff. We see oil prices moving in the opposite direction. They’re coming down. Do you think this rebound is justified or is the market still underestimating the geopolitical risk that’s out there.
Andrew Graham
That’s a really hard call for me. I mean the geopolitical risk stuff usually put in the, you know, sort of lower on the on the risk list. And yeah, I mean, if you have higher oil prices, you’re going to have higher headline inflation, you’re going to have higher bond yields. That’ll be a drag on risk assets. So it’s something to keep an eye on.
Andrew Graham
But ultimately I think the consensus view and I don’t have a reason to disagree with that is that, you know, eventually they’ll come to terms and the fighting will stop. And you can move oil through the Strait of Hormuz, you know, back to 60% of fall or something like that, which is what it was last week.
Caroline Woods
So this escalation that we’ve seen between the U.S. and Iran is not making you any more cautious on this market.
Andrew Graham
No. We have this big drawdown in tech names. And that’s sort of, you know, where I’m most comfortable. And, and I, I think this is the opportunity to, to reload, to add exposure to, you know, your highest conviction stocks after a 20% pullback in a lot of them. So that’s our opinion.
Caroline Woods
Yeah. It’s interesting because when you were last on in February, you said that Big Tech was going to take a pit stop. So that’s still sort of the case. And do you think that big tech will continue to lead.
Andrew Graham
So big tech when we’re it as hyperscalers? Let’s just kind of narrow it down a little bit. So let’s call it Google Amazon Microsoft meta. Do I think, the pit stop is over? I think so, yeah. It’s time to kind of put up or shut up when it turns, you know, it comes to return on invested capital.
Andrew Graham
And I think they have the ability to do that. Now. You have token costs that have been going down, consistently falling, and then you have token prices, which is what they’re selling the compute for. That would be consistent and have been just right. Pretty steady. So that margin there is I think what’s going to give them the ability to put up higher revenue numbers.
Andrew Graham
And I think incremental margins are also biased higher.
Caroline Woods
You’d be a buyer of all of those right now because we’ve had other guests come on this week actually alone saying either trim profits in the big seven or avoid them altogether.
Andrew Graham
No, I think it’s too late for that. And I would buy Google and Amazon. Those are our two favorite names there. So I think the gap between the performance gap between the hyperscalers, which have underperformed and semis, is going to close, rather than most people who say they’re going to cut CapEx guidance for 2027. That’s going to cause the hyperscalers to go up and, semis to to crack.
Andrew Graham
I think that was part of the story as well. Initially, the selloff that started with semiconductors started in South Korea. You’re talking about all the leverage. It was a very, very crowded trade. So what we’re doing is unwinding that now. And in the background is this other story like hey, what if these 1 or 2, whatever guide or at least get the messaging a little softer messaging on CapEx?
Andrew Graham
I don’t see that at all. I expect CapEx guidance to be biased higher as well, but I think you can still bring that performance gap together by putting up a better return on invested capital. They did it in Q1. I think they’re gonna be able to do it again here. And so.
Caroline Woods
So this market that seems a bit shaky and concerned that we’ll start to see this cut in CapEx down the road. Do you think that’s wrong?
Andrew Graham
No. Eventually they will start to trim CapEx. It won’t grow at this rate, you know, exponentially. So eventually you’re going to get there. And I think what’s going to happen, though, is you’re going to have the, the, revenues improved. You’re going to have the incremental margins improve for the hyperscalers, and that’s enough. That’s all they want to see is that it’s working and then you don’t have to you can cut it a little bit later.
Andrew Graham
It’s not going to hurt the semi’s at that point.
Caroline Woods
We’ve seen memory stocks which have been you know, some of the year’s biggest winners really start to pull back. Obviously not necessarily the case today. Do you look at that is a buying opportunity.
Andrew Graham
Will these memory start I mean the commodity business right. Commodity and prices solve themselves eventually. Right. You’ve got not enough supply. You’ve got a lot of demand. And that will come into balance. Probably not until you see meaningful capacity in 2028, you know, before things kind of, reach some sort of stasis in terms of supply and demand.
Andrew Graham
But yeah, that’s not on our list of things that we’re buying that we’re adding at the moment. They have moved a great deal. They’ve all moved, you know, the disk drive guys and, Seagate and Western Edge and, and and micron and so forth. They’ve just had the run and you got to worry about at some point.
Andrew Graham
Again, it is a commodity and it’s going to the party is going to stop. And so if we are.
Caroline Woods
You’re saying 2028, that’s still seems like a lot of runway now.
Andrew Graham
We own those we own those names. And we have large embedded gains. So I don’t necessarily think we’re going to need to add more for this pullback. We’re using it as an opportunity to to add exposure to the, networking equipment stocks, the optical transceiver stocks. So momentum coherence. And we’re also but we’d probably get a little bit more pullback here on some of the cyber cybersecurity names.
Andrew Graham
So the whole idea that these Chinese open source models are closing the gap with the US frontier Lab models, maybe 6 to 9 months behind, but they’re 6 to 9 months behind cloud mythos. Does that bring up this whole danger of vulnerability detection and so forth? And I don’t see US corporates slowing their spending on cybersecurity. So Palo Alto easy one, CrowdStrike.
Andrew Graham
We own those folks with the big platforms. And then we recently added tenable, which is a mid-cap stock. And you can only own so much of it. But that’s right in their wheelhouse is that vulnerability identification detection?
Caroline Woods
Okay. I just going back to memory for just a second. I do have to ask you say you’re not you’re holding on to some of the names you already have. You’re not buying any on any dips. What about SK Hynix U.S. listed shares. Would you be a buyer there?
Andrew Graham
We’ll let it. We’ll let it sit around for a while like we you got that question on space. Actually you’re going to be a buyer on the IPO. And now we’ll just let it trade for a while. We’ll let them, you know, report a quarter or two and just kind of get the feel for it because like the whatever the dirty secret about, you know, what we do at Jackson Square Capital is we do blend a little technical stuff in there as well.
Andrew Graham
We just want to make sure we’re not buying something absolute high. So we’re buying stocks when they’re oversold, and you kind of get a sense for where they’re going to settle down. That’s where we’re trying to add them. I see that in the, networking equipment stocks I mentioned. I see that also in the hyperscalers that I mentioned.
Andrew Graham
And so those we would buy now and then we would wait on the cybersecurity names.
Caroline Woods
Okay. So you didn’t buy space cheaper than the IPO?
Andrew Graham
No, but I’m open to it. Like I have no bias against any stock. And, you know, people like, would roll their eyes at Tesla because it’s just a really expensive car company. But you have to stay open minded about these things. And so there’s a time and a place for everything and we’ll get to it.
Caroline Woods
Okay. We’ve spent a lot of time talking about tech. What about the rest of the market. Because we have seen the Russell outperform. We’ve seen the Dow. Although I will say the Dow and Russell are lower on the week. But what other pullbacks are you buying. Where are you putting money to work maybe potentially not on a pullback.
Caroline Woods
That’s areas of the market that are still undervalued.
Andrew Graham
Yeah I mean it’s hard Pharma. We have a big position in Lilly of course. And probably about four months ago was Johnson Johnson. We added but we own all those of AbbVie. They’re all fine to to buy in here. I think the problem that we’re having is that consumer, consumer confidence is so low, reached an all time low last month, and there’s only one place for it to go, which is up.
Andrew Graham
And a lot of that’s driven by inflation expectations really gasoline prices. So gasoline prices go down, consumer confidence goes up. And you probably want to own the consumer discretionary names like just the retailers and things of that nature. Can’t find many. I’m really, you know, excited to go out and own. There’s the mighty Costco that you could buy that you know numbers yesterday I think it’s clearing event.
Andrew Graham
You’re going to add that name. TJX is a stock that we like a lot. We’ve known for a long time. I don’t know if we’ve.
Caroline Woods
Actually been underperforming the broader market. What about target. Target’s actually been an outperform.
Andrew Graham
Open minded to that. But they’ve owned it in the past and sold it for a profit. Paid taxes. And that’s kind of a bitter name. But yeah I’m open to it I just not today.
Caroline Woods
That’s interesting because I feel as if a lot of guests come on, and they’re all avoiding the consumer discretionary stocks because they’re like, compete on the consumer, maybe the Costco’s or TJX, but not a lot else. But you actually think that the consumer has hit bottom and is.
Andrew Graham
Yeah, I mean, there’s a, you know, pretty good gear ratio there between consumer confidence is just the numbers you get from the conference board or, you know, or maybe even, University of Michigan conference. There’s a really high correlation between that and the performance of these, these stocks. And if you hit rock bottom, there’s only one way for it to go, which is up.
Andrew Graham
So you got to look for those stocks and when to buy them. Maybe it’s Abercrombie or whatever. But we’re we’re actively shopping.
Caroline Woods
What would you avoid here.
Andrew Graham
So yeah, we just, still avoiding the, the oil, stocks for the most part. We’re, avoiding the, Dow Chemicals, the petrochemical companies as well. You know, the UAE leading OPEC, I think is a material event. And eventually you’re going to get to this point where, yeah, prices will go below $70. I think they might go much lower than people expect.
Andrew Graham
So I’m like a weirdo when it comes to the inflation outlook. I mean, everybody’s looking for, you know, high sticky inflation and the fed to raise interest rates. I don’t see any rate hikes this year. Core drivers of inflation are all trending lower or not all, but the important ones housing costs and wages have been sort of decelerating here.
Andrew Graham
So core inflation is going to, you know, sort of Peter out I don’t see a rate rate hike. And if anything, I guess the next move for me would be a rate cut.
Caroline Woods
But not because the economy is too weak.
Andrew Graham
No, not at all. I mean, you could be, you know, the jobs market by the time we get there, you know, six, eight, 12 months from now might be weak enough for the for the fed to act. But I really think it’s about, inflation generally. They know that the, the fed funds rate is now higher. It’s restrictive more restrictive than it necessarily needs to be so uncertain about an economy that’s clicking along.
Andrew Graham
Yeah I think they’d be willing to cut.
Caroline Woods
Interesting. All right. I was just taking a look. You have an S&P 500 price target of 7840. So not the most bullish I’ve heard but higher from here. Yeah. What’s the biggest reason you’re optimistic from here.
Andrew Graham
Well you know we’re a double digit earnings growth. It could definitely end tomorrow. But until we get some sort of signal that it is I think you stay with it. You know that’s earnings growth is is everything. Estimate revisions probably going to be higher coming out of Q2 earnings season. There are some hiccups in the near term.
Andrew Graham
The reason I don’t have a higher price target, going into the midterm elections, that tends to bring out a lot of realized volatility. That’s unhelpful for multiples. So not looking for materials to go any higher. But you can get there on earnings growth. And so that’s kind of where I came up with that.
Caroline Woods
And that’s all assuming that we get some sort of resolution between the U.S. and Iran, that oil prices are going to come much lower, that inflation’s not going to be sticky, that market can move higher. When do we see this resolution.
Andrew Graham
I don’t know. Yeah okay. So yeah you keep all these you know balls in the air all these directional current cues. And a lot of them fall right. And and we just toss things away all the time. That’s my view now. But just like a rolling evolution, you know, with everybody in this business. And so our expectation is that it gets resolved, sometime within the next month or so.
Caroline Woods
Okay. So if our viewers, the, the everyday retail investor season, another day like yesterday where we actually closed well off the lows of the day, but sort of a sea of red. What’s your message to them? Do they stay patient? Do they buy any dip. Do they get more defensive knowing that there could be, you know, some volatility down the road?
Andrew Graham
Yeah, I would say that if you’re buying individual positions I think tech could be a habit here. And and if you’re buying ETFs like soul B wood or zinc or whatever you’re owning, that’s fine too. I guess my big message and message that I had from my mentor when I was in my 30s, which was avoid leverage.
Andrew Graham
He always told me leverage is a killer and hubris is a killer. And when you get the two of them together, you’re in trouble. And so when we had all that leverage so you could see in SK Hynix and Samsung and South Korean Kosky, that was paying trade and everybody sitting on one side of the boat, and you got to go the other way.
Andrew Graham
You knew eventually it was going to crack. And that unwind has already happened largely. And so I think it’s okay to come here after a 20% pullback. I think that’s okay.
Caroline Woods
So no levered ETFs for you know those two times kind of you.
Andrew Graham
Really don’t you just go to Las Vegas if that’s what you’re looking for. If you’re trying to make money to stay away from leverage okay.
Caroline Woods
All right I think it’s a great time to pivot to our rapid fire game of this or that. You’ve played with us before. Quick questions, quick answers. Are you ready?
Andrew Graham
Can I say no? Yeah.
Caroline Woods
I’m ready. All right, here we go. You can say no, but you won’t have any fun. Then here we go. Buy any dip or wait for a bigger pullback.
Andrew Graham
By any dip.
Caroline Woods
Flight to safety or stay invested. Stay invested defense stocks or energy stocks. Defense. Alphabet or Amazon.
Andrew Graham
Alphabet.
Caroline Woods
Broadcom or Nvidia.
Andrew Graham
Broadcom.
Caroline Woods
Semiconductors or hyperscalers.
Andrew Graham
Hyperscale.
Caroline Woods
Cybersecurity or AI infrastructure.
Andrew Graham
Cybersecurity.
Caroline Woods
CrowdStrike or Palo Alto both of your CrowdStrike AI spending slowdown overblown or real risk overblown?
Andrew Graham
I think we’ve been on bubble watch far too long for two years. There are some things out there, but most of the things that I’ve seen are anecdotal.
Caroline Woods
Is I a bubble? Yes or no? No. Bigger risk China catching up on AI or hyper scalar CapEx cuts.
Andrew Graham
The former China catching up on a.
Caroline Woods
Memory cycle peaking or just getting started.
Andrew Graham
In the process of peaking.
Caroline Woods
One memory stock you would buy here.
Andrew Graham
It would have to be micron.
Caroline Woods
But you’re not buying it.
Andrew Graham
We own it. And yeah, not at these levels. We want it to be oversold when we’re adding something. It’s just not there.
Caroline Woods
SK Hynix IPO opportunity overhyped.
Andrew Graham
Opportunity.
Caroline Woods
Nasdaq listing boom. Bullish signal or warning sign. Bullish signal equal weight S&P or mega cap tech.
Andrew Graham
Mega cap to.
Caroline Woods
Highest conviction pick for the second half of the year.
Andrew Graham
Momentum.
Caroline Woods
One word to describe this market.
Andrew Graham
Now strong. And I would say earnings growth extra strong. This is an amazing period. And it’s a great time to be involved. You got to stay involved though. You got to make sure that your your know what’s going on at all times. But yeah. 22% earnings growth expectations 28% Q1. That’s boom period.
Caroline Woods
And just finally S&P 500 price target by year end.
Andrew Graham
7850 7840.
Caroline Woods
So leave it there. That’s Andrew Graham, Managing partner, Jackson Square Capital. Thank you so much. Really appreciate it.
Andrew Graham
Thank you for.
Caroline Woods
Lunch. Are you glad you said yes.
Andrew Graham
Yeah I’m glad.
Caroline Woods
If you enjoyed this street talk check out our full interview with Victoria Fernandez. She’s actually trimming her tech winters right now and explains the name she’s rotating into.
