Transcript:
Caroline Woods: Joining me now, Gus Scacco, senior portfolio manager at Advisors Capital. Gus, great to have you here at the desk. Thanks so much for being here.
Gus Scacco: Thanks for having me.
Caroline Woods: All right. So we’re seeing a rally across the board today. Dow up more than 1000 points after the election seeing the Democratic sweep of Congress. Has anything fundamentally changed for investors now that the election is behind us? Or is this just kind of a sigh of relief that any sort of political uncertainty is now in the rearview mirror?
Gus Scacco: I don’t know about political uncertainty being in the rearview mirror, but we do have a clearing event. So a lot of times emotions take hold as opposed to, you know, what the market is going to interpret. So I think we’re past that clearing event, and now we’re looking toward the end of the fourth quarter and into 2027, and what the election might have had an impact on.
Gus Scacco: But in general, we’re looking at, you know, earnings growth that has shown improvement in this quarter. And we anticipate that moving forward in spite of the election.
Caroline Woods: Okay. So we’re seeing buying in just about every sector today outside of energy, industrials and utilities. Which sectors stand to benefit the most from a divided government and which stand to benefit the least?
Gus Scacco: I think you have to look at the state level elections. So the big places where Georgia, Texas and then in Virginia. And you’re hearing that there’s going to probably be moratoriums. So that’s where the way that politicians had pushed things. But there’s a lot of business that’s within the pipeline that’s going to come through. That’s not going to stop.
Gus Scacco: So you have two years where you’re going to get a sorting out of things in terms of the AI trade on data centers and things of that nature. But most of these governors and people that are in political positions really don’t want to cut off the revenue stream that’s been generated. So you’re going to come to some sort of an agreement, probably whether it’s, you know, slowing it down, but actually putting more money toward different things to improve the degree, the geographies that these companies are based.
Caroline Woods: Yeah, we are seeing some weakness in some of the names that had already been weak CoreWeave, Nebius around sort of the, the data center uncertainty. Now I also seeing some weakness in names like space. But has anything actually changed for the tech trade at this point because of the elections.
Gus Scacco: I think you will see probably in anticipation that things might slow down a little bit. And that’s a good thing. But I think it was coming before we ended up having an election. It really was about funding. And if you’re looking at CoreWeave as an example here, you ended up having a company that’s going to have to go to the debt markets again.
Gus Scacco: And they were trading or getting somewhere between 8 and 9% yields for their bonds. Now we’re looking at 15%. That doesn’t make it economically viable. Those assets, if something were to happen potentially will get bought by some other company that needs the supply.
Caroline Woods: Okay. So you’ve brought us three stock picks today. None are big tech names. Is that deliberate? Are the best opportunities now outside of the AI trade or are they AI-adjacent type picks?
Gus Scacco: They are AI-adjacent stock picks because these companies have been actually implementing AI already. So it’s starting to flow through the companies. And we’ll give you some great examples. But it’s improving in profitability. And what we talk about with the AI, you get profitability improvement margins ROE should go up and cash flow should improve. So you get that productivity improvement with these names.
Caroline Woods: Okay. So your first pick. We’ll get right into it is eBay which is up more than 35% year to date. Why buy eBay after such a big move.
Gus Scacco: Moving forward, if you’re looking at earnings next year? This was a company that was only growing in the low single digits. We’re looking at them getting up to 15% growth, which is pretty healthy. And if you were looking at the what the software models, that, you know, everyone loved because they were asset-light, this is an asset-light model.
Gus Scacco: So keeping that in mind, we’re watching all those that have improved. The growth has happened because of the segmentation, but AI helped them in two ways. 25% of the sales were overseas, and it took 7 to 9 clicks in order to get a transaction done. Now it’s only three. So language barrier is removed and the speed and efficiency to get through the friction, so to speak, has basically gone down.
Gus Scacco: Second thing is, if I have a product that I’m placing on that website, I just take a picture, upload it, and they actually will put a video around it based on AI. So it helps in terms of marketing. It helps in terms of ease of use. And it also in terms of the software updates. It actually enhances that as well.
Caroline Woods: Not too late to get in though at this point. Amazon dominates so much of online shopping Amazon leading the Dow higher today getting a nice pop up 7% last I checked. Where does eBay have a competitive advantage over Amazon?
Gus Scacco: Amazon’s generic. So if I wanted to buy a blouse that’s brand new and it’s coming off of a website or a certain type of blouse, I’m going to Amazon. But you’re looking at AI bots that actually might be decent remediating. So you have a question with that moving forward, as opposed to if I’m looking at eBay, it’s unique product and it’s on that marketplace and you’re placing it on that marketplace to be sold.
Caroline Woods: So consumer discretionary in general was having a good day today. Is eBay a company-specific stock pick, or is it a call on the broader consumer discretionary sector.
Gus Scacco: This is a company-specific pick.
Caroline Woods: All right. Let’s move on to healthcare. Next up Thermo Fisher Scientific, TMO, about 20% year to date closing in on all-time highs at these levels. What’s the reason to be bullish from here.
Gus Scacco: If I’m looking at the company they ended up going through post-COVID. There was a big buy in in terms of their products. So if you’re building out a lab, this is the company that you would use. So there’s a lot of pull forward on products. It’s been worked through. The inventories have been worked through the system. We’re now seeing an increase in terms of product growth.
Gus Scacco: They’ve also instituted new product sets that are coming in. 40%, 50% of their—80% of their business is recurring. So it’s a razor blade business, which is great. But China was basically sales had gone down tremendously. They are actually resurrecting and coming back. And you’re seeing a real improvement in terms of people doing research in terms of the health care area.
Gus Scacco: And this is the company that has the picks and axes, the picks and shovels of, making drugs.
Caroline Woods: When we talk healthcare. Eli Lilly seems to be the most popular healthcare pick amongst almost all of our guests. Would you buy Thermo Fisher over Eli Lilly?
Gus Scacco: I think that it’s two different companies. So if I’m looking at Lilly, they have that’s the first $100 billion drug. Before that, Humira was the largest drug was $10 billion. Just to give you a perspective. And that $100 billion total addressable market has actually probably increased since the last time they gave those statistics out. So we think that has a great long runway, but this is another name that’s in that sector that hasn’t been hasn’t justified, where it came from to where it is now.
Gus Scacco: It’s probably going to be going higher.
Caroline Woods: So not too late to get into TMO or Eli Lilly, would you say, because you were very close to the highs.
Gus Scacco: That’s right.
Caroline Woods: Okay. Finally, Deere, your final pick or the third pick that you brought, maybe you’ll have others for us as well. The name is up 40% year to date. So you’re bringing some high fliers for us. You know, maybe people kicking themselves that they didn’t get in. Still a buy at these levels?
Gus Scacco: You have to look at forward earnings. So only about 17 times. And they’re going to grow probably somewhere around 20. So when you’re talking about high fliers, you have to look into the next year and discount, you know, what the growth rates are and where they are currently to where they’re potentially going. And the ROE sort of improved.
Gus Scacco: And the thing about Deere, it’s another AI-adjacent play. So just as an example, they have a great machine for spraying pesticides that actually uses a camera. So it can drive through autonomously through a field. And it sprays directly onto the weeds. So it uses 75% less pesticides. So it helps the farmer in terms of if he doesn’t have to put as much resources, into paying for pesticides, it’s more accurate.
Gus Scacco: It’s better for you and me in terms of, you know, the food that we get. But the best thing, it’s called a GUSS. That’s the name of the machine. So I love the name of machine. It’s similar name.
Caroline Woods: I just made the connection. It took me a second here.
Gus Scacco: Okay, but they have to do this to us.
Caroline Woods: So is this a broader call, though, as we think about obviously Deere is not your typical AI play it’s a company benefiting from AI. Is that where the opportunities are now? Not so much in the companies building out AI anymore, but in the companies benefiting from it?
Gus Scacco: I think it’s still you can—the buildout is still there. And I think that’s still a lot of runway. But these are companies that got in early in terms of technology. So if I’m looking at Deere, the big thing about it, it’s a software applied software and hardware. So you get the hardware and software is the thing that’s changing the business.
Gus Scacco: Less labor, more efficiencies the farmers are always looking for how do I gain productivity. So I have autonomous vehicles that can plant, I can harvest, and now I have sprayers there. That’s just the tip. And it’s 10% of their business is probably going to be software as we move forward.
Caroline Woods: Okay. What about traditional software companies. Do you like those here?
Gus Scacco: I think it depends if you’re embedded within a company so that it’s, you know, it’s the the investment that’s been made is embedded and you’re going to use the information that you already have from those software products and then incorporated into AI. But if you’re a new AI company trying to hit a specific segment, it’s going to be a lot more difficult than it has been.
Caroline Woods: So give us an example of both. What’s a name that you don’t think would be disrupted by AI? And what’s a name that you think might be?
Gus Scacco: So a company looking at a Salesforce, they’re already embedded. You’re not going to unwind it. You’ve made a big investment in it. You’re going to end up putting layers on top that are AI-induced that are going to help you as opposed to if I’m looking at a commoditized software company that, it’s tough to think off the top of my head.
Gus Scacco: But if I’m looking at a commoditized software company that doesn’t bring any type of a moat and it isn’t embedded within the company itself, that’s going to probably have more of a tougher time.
Caroline Woods: Where are you finding genuine bargains in this current market? Because I did say, obviously, compared to if you look ahead to earnings, you might say that Deere could still technically be a value at these levels. But as you think about kind of like genuine bargains here based on some of the pullbacks that we’ve been seeing. Oh, where are you finding those.
Gus Scacco: We actually put money to work a while ago in, Union Pacific. And you say, well, why would you want an old line rail company? But again, we’re looking at efficiencies and where you can get benefits. So they actually transport things cheaply relative to trucks and other forms of transportation. So you actually are lowering your cost in terms of transportation using, using a a train.
Gus Scacco: And technology has gotten better. And we’re looking at consolidation within the industry. So when you have to change, loads at different, locations in Kansas City or maybe Chicago, you actually might get a straight through. So it will actually save days and increase, you know, the productivity and lower the cost.
Caroline Woods: You said that you put money to work a while ago, though. Would you still put it to work today there? Yes. Okay. What about within tech? Are you avoiding it at this phase? Are you being selective with it, or are you waiting for an even bigger pullback? What are you doing within tech?
Gus Scacco: We’re going to take the market day by day. I don’t mean to hedge myself, but it’s you don’t want to make a knee-jerk reaction. We invest for people over a you know two- to five-year period. So when we buy something it’s a company. It’s not a piece of paper. And we’re looking at what does it bring to the table.
Gus Scacco: Where is it valued relative to the rest of the market? What are the cash flows. And that’s going to be a big change for people because you’re looking at interest rates that have increased. So the cost of capital and making some of these investments changes the economics. So we want companies with free cash flow dividends and then have sustainable growth.
Gus Scacco: Like we gave you a couple of examples. But I’ll give you another. We still think Microsoft is a great place to be. You end up having free cash flow that will be there after this year. The company is triple-A rated, pays a dividend. And we’re looking at, you know, the beginnings of AI for companies to start using it.
Gus Scacco: You know, on a macro basis, they’re going to be one of the layers that are going to basically be where companies are and that on on a system basis.
Caroline Woods: No, no dip in Microsoft though Microsoft is yet another name sitting pretty close to all-time highs. What about some of the stocks that we’ve seen. This bigger pullback in Micron obviously still up significantly Sandisk Western Digital Oracle any of those names look appealing?
Gus Scacco: We’re still we still are positive on Oracle. We think that it’s time and it’s just the debt burden that they have. They ended up having an analyst meeting recently and they talked about that. They’re going to probably limit debt as they move forward. So that’s something we’re keeping an eye on.
Caroline Woods: The Nasdaq is now less than 10% off of the highs. I’m looking up at the board and realizing we don’t actually get to see the Nasdaq here at the NYSE. They don’t they don’t list that. But, do you think that we’re out of the woods at this point? Has there been enough of a shakeout or could there be more volatility ahead?
Gus Scacco: I think you are going to continue to have a broadening out. If you look at the Magnificent Seven, they’ve kind of gone flat to down. Whereas if we’re looking at the rest of the market, I believe you’ve had 50% of the, the stocks in the S&P have actually hit all time. Well, they’ve had highs for the season.
Gus Scacco: So you’re looking at a broadening out. There were less than 20. Now you were at 50. And the Magnificent Seven has come down some money staying in the market. But it’s rotating into other areas.
Caroline Woods: So for someone who’s heavily invested in The Magnificent Seven, should they be trimming those positions and looking for other stocks like the ones that you’ve mentioned, or should they stay put?
Gus Scacco: I think that you’re going to see a broadening out market. Everybody’s different in terms of the timing. In terms of our investments, we’ve stayed with a lot of the names, but we may be pared back in a couple of situations, but for the most part, we’re sticking. We think it’s a great long-term story for the majority of names that we own.
Gus Scacco: And we have Joanne Feeney at our shop who, you know, used to design chips at GlobalFoundries. Brilliant woman. And, you know, she’s positive on a lot of these names.
Caroline Woods: What are some names that you think it’s maybe time to take profits in now?
Gus Scacco: Oh, wow. You know, we look out and we trim accordingly, but, right now, most of the names that we set in our portfolio is we like a lot in terms of areas that there might be some trimming. I mean, we’re going to have to take a look and see what comes out of, of out of Congress and what’s happening in terms of direction.
Gus Scacco: Because once again, I think now you have to govern. You’ve gone from the election to having to govern. What policies are we looking at? A total shutdown. Are we looking at, you know, moratoriums that are going to last a certain number of months? So that’s going to change the complexion of how people look at the investments in the market and tech, other areas.
Caroline Woods: So what are some names that are sort of on your watch list that could be most impacted?
Gus Scacco: We’re looking at names in the healthcare area, some names that actually are using information. That’s the new goldmine, right? If you have information and you can harvest it, I mean, names it. Just looking at the energy area you now have, I believe it’s one third less rigs, but you produce the amount of oil and gas and it’s because of AI and tech.
Gus Scacco: So you have to look at where AI is getting embedded, how they’re getting benefits from it, and what are the potential outcomes where it was, where a company was, where it is and where it’s going. We like looking at the ROI of these companies. You can break it down further into asset utilization margins and then leverage. So we can tell from those three examples where we’re getting productivity growth and we screened for that.
Gus Scacco: So those are the areas that we’re going to be focusing on.
Caroline Woods: So for the everyday retail investor who hears people like you say okay I think we’ll continue to see this broadening out. What does that mean for them? What should they do?
Gus Scacco: You want to be diversified. So it’s actually helpful. You don’t have concentration risk to the same extent that you did. So if you’re staying in the S&P 500 U.S. based, I think it’s a great place to be. Again, you want to look at cash flows more readily today because of higher interest rates, and you want to look at companies that have staying power and moats.
Gus Scacco: So, you know, as you move forward, you’re looking at cash flows. You’re looking at, companies have staying power that we know that two and three years out that there’s going to be consistency in earnings.
Caroline Woods: Explain how you don’t have a concentration risk in the S&P 500 given big tech’s dominance within it.
Gus Scacco: Well it’s pulled back. You don’t want to see that. You might not want to have a 10% weighting in one name. You might want to be market way or slightly below. If you look at the equal weight S&P 500, that’s actually done very well over the last month and a half.
Caroline Woods: So would you on the side of investing new money in the equal weight S&P or the the market cap weight S&P?
Gus Scacco: I would probably be more equal weight at this point.
Caroline Woods: Okay. So talk to me just in terms of some of the beneficiaries outside of the names that you’ve picked, areas of the market that you think will continue to benefit or will benefit from this broadening out that we’re seeing?
Gus Scacco: Okay, if I’m looking at we’re talking about capital and cost of capital investment banks are going to probably do well in spite of the fact that we’re looking at a market that we’re talking about. AI investment in those names that might slow a little bit, but you also have a two year window in order to get things done.
Gus Scacco: So if you’re going to do a merger you have 6 to 12 months usually to get it done. So you’re going to probably try to get investment banking work done in order to get those, acquisitions done. That’s number one. Other areas that I would look at, you’re probably going to be seeing, you know, an improvement in terms of how people feel about things because you have a change.
Gus Scacco: And that also a lot of times brings in more consumer spending. Consumer spending has actually been very strong. But in a K-shaped economy, it’s been the upper end. You might see an improvement from the bottom end where people would feel the purse strings are, less tied and that they can start spending a little bit.
Caroline Woods: So that would be consumer discretionary versus consumer staples.
Gus Scacco: That’s correct.
Caroline Woods: And financials.
Gus Scacco: That’s right.
Caroline Woods: Do you have names in those sectors that you like specifically. Or if I’m thinking okay, investment banks should do well from here. How do I choose where to invest?
Gus Scacco: Well, if you look at, say, a name like Morgan Stanley, which we own, we end up having a good chunk of it is now basically investment advice. That’s almost 48% of the business that used to be less than 15. So that’s a consistent business that doesn’t have a lot of fluctuation. On the flip side, I know the 40% is investment banking trading fixed income.
Gus Scacco: So they’re going to benefit as the markets change a little bit here okay.
Caroline Woods: And what about on the consumer discretionary side. Because there’s been some winners there but some big losers as well. How do we tell which one we should put our money in?
Gus Scacco: Right now I think you’re looking at names that are, a combination of things. We gave you Uber, which is really an industrial name, but I guess you didn’t.
Caroline Woods: Did we talk Uber? No, we didn’t talk. Oh.
Gus Scacco: I’m sorry.
Caroline Woods: Oh, so we take it.
Gus Scacco: Okay. So we like Uber as an example. And it’s been held down because people are worried about the Waymos or the world self-driving cars. But they just reported earnings actually today numbers were a little light in terms of, EPS, but revenues were better than expected. The uptick in terms of utilization was up 20%. The company—75% of all of the driving here in the United States in terms of—excuse me, about 20% of its—75% of autonomous driving here in the States in terms of hiring.
Gus Scacco: Sorry about that.
Caroline Woods: No, it’s totally fine.
Gus Scacco: But, the company is actually situated. Well, great free cash flow driver. And you have to remember, three years ago, they were they were, subsidizing, the, the, the, the rides and also the food part of it. Now, they don’t subsidize. And we’re seeing a big increase in free cash flow.
Caroline Woods: Yeah, we’re seeing much higher prices because of it. When you actually go on the Uber app. Okay. So, we asked you to bring stock, which you brought three for us, gave us a whole bunch more. So we certainly appreciate that. Any names that we haven’t hit on that you’re especially bullish on heading into year end. And as you think about 2027?
Gus Scacco: I mean, you still I think you’re going to end up still having the tech names are going to be great. You end up having health care has done very well. We think that you’re going to end up having financial should be, you know, companies that should do well. We’re just we’re kind of sitting back and watching how the cards come out of the deck at this point.
Caroline Woods: Where do you not want to be?
Gus Scacco: Wow. Heavily indebted companies for the most part, although there are certain situations like where you want to be, there are. We know. Okay. All right. I just think the funding is going to be tough there.
Caroline Woods: I think that this is a great time to pivot to our rapid fire round of this. Are that your first time playing? Yeah. So quick answer, quick questions quick answers. No hedging if you can help it. We’ll take a little context if you have it. But but this goes fast. Are you ready Gus? Yes. Okay okay here we go.
Caroline Woods: Best opportunity after the election. Health care or financials?
Gus Scacco: Health care.
Caroline Woods: Market pullback. Worst is over or more pain ahead?
Gus Scacco: I think you went through a mid-cycle slowdown. And we think that we’re going to be seeing higher. Now we’re gonna see a upwardly biased market.
Caroline Woods: So S&P 500 by year end higher or lower. Higher. How much higher?
Gus Scacco: Say 5 to 7%.
Caroline Woods: From here okay. You don’t have price targets. No. Okay. 2027 bull market continues or correction ahead?
Gus Scacco: Third year of a presidential cycle. Generally it’s a positive we’ve never had in the last thing since 1938. We’ve never had a three year presidential cycle that’s been down okay.
Caroline Woods: So bull market continues. Sounds like market leadership in 2027 Magnificent Seven or other companies?
Gus Scacco: I think tough. But you’ll have a combination of Magnificent Seven and regular ten.
Caroline Woods: Most upside from here beaten down stocks or stocks already hitting new highs?
Gus Scacco: Wow. I would think you have to look at forward earnings. Sorry to hedge myself, but I think it should be a combination of those.
Caroline Woods: Individual stocks or index funds?
Gus Scacco: Individual stocks.
Caroline Woods: AI infrastructure stocks buy the dip or stay away?
Gus Scacco: Buy the dip.
Caroline Woods: One AI infrastructure stock you’d definitely buy now.
Gus Scacco: Eaton’s getting hit today. But I think that’s a company that you want to look at.
Caroline Woods: One you steer clear of.
Gus Scacco: When we’re looking at infrastructure right now, probably more on the CAT side.
Caroline Woods: AI’s next winners, chipmakers or companies using AI to boost profits?
Gus Scacco: The latter ones that are using AI to boost profits. That’s where the money is going to be made.
Caroline Woods: Okay, so Nvidia or Deere?
Gus Scacco: Wow. Both.
Caroline Woods: That’s called hedging. Okay. We’ll give you one. Both. Okay. eBay or Amazon?
Gus Scacco: eBay.
Caroline Woods: Thermo Fisher or Eli Lilly? Lilly. Consumer stocks buying opportunity or too much risk?
Gus Scacco: Buying opportunity selectively.
Caroline Woods: One consumer stock you’d definitely buy that’s not Uber.
Gus Scacco: Ross Stores.
Caroline Woods: Biggest risks to stocks disappointing earnings or stretched valuations?
Gus Scacco: I am going to add a third I think debt.
Caroline Woods: Okay. If you could buy just one today eBay, Thermo Fisher or Deere?
Gus Scacco: Probably Thermo Fisher.
Caroline Woods: One sector you’re avoiding heading into 2027.
Caroline Woods: Staples one stock outside of big Tech that investors will wish they’d bought today.
Gus Scacco: I still think Microsoft.
Caroline Woods: Okay, we’ll leave it there. That’s Gus Scacco senior portfolio manager at Advisors Capital. Guys, thanks again for playing for all of those picks and for your insights.
Gus Scacco: Caroline, thank you very much for having me here.
Caroline Woods: Thank you. If you enjoyed this Street Talk, check out our full interview with Kevin Gordon. He reveals the five sectors to buy beyond tech.
