Transcript
Caroline Woods: Joining me to kick off the week is Julian Koski chief investment officer at New Age Alpha. Julian, welcome to the desk. Happy Monday.
Julian Koski: Thanks for having me.
Caroline Woods: Great to have you. All right. So tech stocks are bouncing back this morning after last week’s pretty brutal sell off. Seeing a lot of green on the screen right now. But you’ve argued that investors are essentially talking themselves into a market correction. Is this a buying opportunity right now or is this market underestimating the risks?
Julian Koski: I think investors.
Julian Koski: Are always talking themselves into a problem, right. And it’s mainly human behavior that is the risk in the market. So if you look at the actual math, the math suggests that this is an opportunity to be in the market. In fact, our indicators are is that it’s a relatively undervalued market, not an overvalued market. It’s just the talk that’s causing the problems right now.
Caroline Woods: So undervalued, despite the fact that many have said, I guess up until the past week or two that valuations are stretched. So on the whole, undervalued even for some of these high flying tech stocks that we’ve seen triple digit gains in this year.
Julian Koski: Yes. On a whole, just generally traditional valuation measures, we don’t use them. We use actual science to measure valuation. Traditional valuation measures don’t fully, allow one to comprehend whether something is undervalued or overvalued. You look at it from an actual, real perspective. It’s pretty much undervalued right now.
Caroline Woods: Your strategy uses economic indicators, market momentum, volatility, fed policy to determine how much money to really keep in stocks. So tell us what are your indicators signaling to you right now about where your money should be going.
Julian Koski: So all those signals you just mentioned are positive right now. So if you were looking at a traditional allocation we’re right now 80% equity, 20% bonds. And there’s no evidence to suggest that that’s going to change, right. Those fundamental indicators are still showing that they are strong. There might be a change. There might be one changing one of those numbers.
Julian Koski: But we’re not seeing any reason other than to be 8020.
Caroline Woods: Okay. And you did bring some stock picks with you based on your models. We’ll get to those. But first I want to talk to you about the rotation that we were seeing last week. Not necessarily the case today, but we saw the S&P 500 lose about 2% last week, or almost 2%. And seven sectors actually finished the week higher.
Caroline Woods: But we some money going from some of the high flying tech stocks, as I said, into names like Mikey and McDonald’s. Now those are both lower today. But do you look at that as a healthy rotation, or do you think that investors are confusing smart investments with cheap stocks?
Julian Koski: We don’t believe in rotations at all. In fact, one has to look at the individual names when you look at these rotations. What are you saying now that all stocks in a particular sector are good or bad? Not possible. You have to look at the individual names. They’re going to be good names in the sector, and they’re going to be bad names in the sector.
Julian Koski: And it’s the shortcuts that get investors into trouble. And rotation is one of those shortcuts.
Caroline Woods: Okay, so no sector picks from you. But as you look at the market as a whole, you say that your model suggests that the S&P 500 is less risky than usual. So does that mean that investors should be investing aggressively right now into the S&P 500, even though it’s near all time highs?
Julian Koski: So right. Now and I’m going to use a term maybe your audience isn’t familiar with. But there’s a 20 the median probability of the S&P 500 that the companies in their 500 companies will fail to deliver. The growth indicated by their current stock prices is 28%. That is the lowest I have ever seen it, right? Which means it is undervalued, which means the companies in the S&P 500 are actually delivering the growth indicated by their stock prices, because that’s what valuation is.
Julian Koski: It’s not is it a growth stock. Is it a value stock. It’s all nonsense right. It comes down to one thing. Can the company deliver the growth implied by its stock price? And the answer is overwhelmingly yes.
Caroline Woods: Okay. All right. So you also I was taking a look at the probabilities. Your model gives Nvidia a 31% failure probability. So what exactly does that mean for an investor deciding whether or not to buy the stock today.
Julian Koski: Well you’ve got to look at three numbers. The first number is the current stock price of Nvidia. What does the growth rate imply from that stock price. Right. And right now invidious stock price implies a growth rate of 68%. However, if you look back over the past 12 quarters, you can see that the median historical growth rate was 78%.
Julian Koski: So now ask yourself a question. If the historical growth rate is trading at 78% but the implied is 68, then it’s undervalued because it means they’ve done more than they need to to support the current price. So the probability of failure is quite low. Again, it’s not whether it’s good or bad. The question becomes that probability. Think of it like odds.
Julian Koski: Think of it like a Margaret. Right. What are the odds that the company is going to deliver? Right. And the number is 31%. So the question is, are those odds good enough? And in our view they are.
Caroline Woods: But the 31% is that they’re going to fail to deliver.
Julian Koski: Yes. Correct.
Caroline Woods: Right. So in vedere is a buy on your list. We’ll get right into your picks here. So by now.
Julian Koski: Yes.
Caroline Woods: Absolutely not. Wait for a better entry point. Okay.
Julian Koski: Alphabet right.
Caroline Woods: Is one of the strongest scores in your according to your models. Is that your favorite mag seven stock?
Julian Koski: Again.
Julian Koski: We probably don’t look at it from what’s favorable. What’s not favorable, what’s undervalued not undervalued. We look at it from odds probability and a 3% chance, which I think that’s Alphabet’s score of failing to deliver pretty damn low.
Caroline Woods: 3% versus 31% for Nvidia.
Julian Koski: Correct?
Julian Koski: Correct.
Caroline Woods: What makes alphabet such a strong. I know you don’t do favorable unfavorable, but why would alphabet have such a low? What is it that pushes it so low?
Julian Koski: Look to the math. The math is suggesting an implied growth rate, which is far lower than what they’ve historically done over the past 12 quarters. So that’s why it gets a low probability of failure. If the company you know, it’s a simple logical question based on the current stock price. If this is the growth rate you need to grow by.
Julian Koski: But yet you’re blowing it away over the past 12 quarters. What’s to suggest that you’re not going to do it again in the next quarter? And right now, until we have evidence that actually alphabet can’t do that or Google can’t do that, own it.
Caroline Woods: Meta is also on the list. I will say. I feel like when I ask people their favorite mag, seven stocks, meta is usually meta, or Tesla are usually the ones that are chosen. Least meta is on your list of your bullish stock list. Obviously it reports earnings this week. Is this the by before earnings. Wait until after.
Julian Koski: There’s always a chance with earnings that you’re going to have a lot of volatility. Because a lot of people like to talk about it’s got a lot of human behavior baked into it. And so on the days that earnings comes out, you got all kinds of behavior going on. But on a fundamental basis on in other words, that stock price is ability to deliver.
Julian Koski: Absolutely. We’d own it. It might, you know, this week might drop because someone announces some kind of guidance or something like that. Who knows what goes on. But fundamentals wise. Absolutely.
Caroline Woods: Okay. Tesla is also on the list that reports this week its stock has always been about, you know, future promises, if you will. What makes you confident that it can deliver the growth that investors are paying for but hasn’t necessarily, you know, seen the returns this year.
Julian Koski: And you’re right about Tesla has been all over the map. But right now Tesla stock price implies a growth rate that they can deliver on. In fact, they are. If you look at the past again, if you look at the past world borders, based on what they need to do versus what they’ve done, they are delivering more than they need to do.
Julian Koski: So again, our question always becomes based on probability or odds. If you’re delivering more than you need to do, well, then the odds are in your favor. So invest right? Don’t invest if the odds are not in your favor. There are many companies where the indicated growth rate is far higher than what they’ve done in the past. And there’s clearly the odds are not in your favor and you’d want to fold or use if you use a gambling analogy, get rid of it.
Julian Koski:
Caroline Woods: Netflix has fallen after each of its last five earnings report reports. But your model gives it a very hot or very low risk score. Right. Is that a stock you buy ahead of earnings despite the track record.
Julian Koski: Despite the track record. Because again there’s so much that goes into the reason why it falls. And a lot of it is behaviorally driven guidance all those different things. But fundamentally is it a good stock. Can it deliver. Has the stock price gone up. Absolutely yes. Right. So based on again based on odds, we would still own.
Caroline Woods: It if the S&P 500 is already heavily concentrated in the stocks that your model actually likes Y by individual stocks at all, why not just invest in the S&P 500.
Julian Koski: Well I think investing in the S&P 500 is the way to go. I mean, it’s not you’re getting all the concentration risk you need if you buy the S&P 500. I’m not suggesting one needs to buy individual names, but I am evaluating all the stocks in the SM 500 because not all of them are good, right? In fact, if you can remove the losers you actually outperform.
Julian Koski: Alpha today doesn’t come from picking winners. It comes from avoiding losers. Right. Which is really much more of an actual science type thinking.
Caroline Woods: Yeah. No, I was taking a look at that. This kind of h factor that you use to help identify the losers. How can investors, I guess, spot the losers before their in their portfolio before it’s too late?
Julian Koski: It’s a it’s it is math. It it’s not complicated math. Right. It’s just really a three step process which is one. Figure out what the stock price implies. Stock prices mean something. Think about it. It’s the market’s forecast of expectations. Well what are those expectations. What is the market expecting. That’s math. Then at a simple level to compare it to what they’ve done a simple levy.
Julian Koski: Just know if they’re doing more than what they’ve done. Well that suggests they’re pretty much going to do it again, right? But if not, you want to avoid it. You know, we talk about avoiding the losers, right? And that’s the problem. It’s owning stocks where the stock price has gone to a point where they can’t deliver the growth anymore.
Julian Koski: Right. And that happens. Why? For simple reason, it’s not the balance sheet an income statement that causes the problem. It’s humans. It’s humans that their behavior leads to overpricing and overpricing leads to losses.
Caroline Woods: All right. Let’s talk about some of the stocks you say investors should avoid right here. First up mike Richards. So you’re bullish on Nvidia bearish on microchip. Both are up about 16% year to date I was taking a look at the chart. So what’s the difference between the two.
Julian Koski: The difference is is again if you look at microchips stock price it’s gone way beyond their skis. Right. In other words the mountain growth they have to deliver compared to what they’ve delivered, is this the inconsistency? One thing to be sure about, when you deal with probability and odds, you can’t be right all the time. This is like if I believe the market is a casino and if it’s a casino, I’m using odds to bet against the market.
Julian Koski: That doesn’t mean I’m going to be right all the time. And again, with microchip, we might be wrong, but on the law of large numbers, the the low odds probability of failure are the ones you want to own.
Caroline Woods: A lot of gambling references here, yet we think of investing as a safer bet, if you will, than, you know, maybe some of the more speculative plays. But at the end of the day, you look at it all as just a giant risk.
Julian Koski: Well it’s true. I mean, it is it is different. But the language we use, I mean, when we look at the stock market today, what do we use. Earnings per share forward multiples. What is things mean. Value versus growth. They don’t mean anything. End of the day one thing mean something. Can the company deliver the growth. What’s the odds they can deliver the growth.
Julian Koski: That is a gambling metaphor. But it can be used for investing.
Caroline Woods: So a few more names that you don’t think can deliver the growth based on your your model doesn’t think deliberative growth. Kimberly-Clark, which has an 82% probability of failing to meet expectations. So some of the safety trade that we were seeing as tech stocks were dipping might not be the smartest bet. Or is it just specific to Kimberly-Clark, would you say?
Julian Koski: Well, again, it’s that safety trade, right? What’s the safety trade now inside the safety trade, you’ve got a company like Kimberly-Clark, right. Deemed safe by what standard. Right. The problem is that stock price of Kimberly-Clark has dislocated from the underlying fundamentals. There’s something out there new, something that humans are grabbing onto, and it’s being embedded into the stock price.
Julian Koski: But that’s creating risk.
Caroline Woods: So AIG is also on the list. It’s as particularly risky. I’m curious. I didn’t see any on your your bull notes. But are there financial stocks that are positive on your on that are getting bullish scores according to your models. And AIG is just not.
Julian Koski: Absolutely within every sector. There’s always good probabilities and bad probabilities. Right. And that’s why I say be careful to basket everything into one particular sector or basket or style. You’ve got to look at the individual names. They are plenty of financials.
Caroline Woods: Dow is up 30% year to date. Material stocks have really been attracting a lot of buyers. Again I’m clumping it into its sector because that’s what I that’s what I’m kind of trained to do. Right. You would say take your profits here.
Julian Koski: Absolutely. Absolutely.
Caroline Woods: And Paramount’s guidance no profits to take. It’s a it’s been a stock that’s been really struggling right. Obviously it’s skied now, but that has a 63% probability of failing to meet expectations. If an investor owns Skydance at these levels do they sell here?
Julian Koski: The jury’s still out on that one. You know, you some of the stocks within the database. And as we think about it, a little early to start having an opinion on even the math, having an opinion on even things like space and things like that. It’s a little early to to suggest whether one should be in or out.
Julian Koski: I still think there’s time before one makes a decision about Skydance.
Caroline Woods: If I own a stock that’s already down 30, 40, 50%, how do I know if I should cut my losses or buy Buy More?
Julian Koski: Well, let’s think about the math. If a stock drops the indicated growth rate, what’s going to happen to that? It’s going to drop two. They need to generate less to support the lower stock price. Right. Which means one way or the other, they’re getting closer to what they’ve done in the past. Own it. Right. Because that’s what happens, right?
Julian Koski: You know, a good stock at a bad price is going to be a bad investment. A bad stock at a good price will be a great investment. If you look back at BlackBerry when the whole Apple iPhone came out, it was the same thing, right? So some point price discovery means something. It’s the price you pay which if it drops, could be a good price.
Caroline Woods: Now what’s a popular stock that might look safe to investors but could actually be a big loser according to your model Tesla.
Julian Koski: Yeah, you have to be careful there because there’s a lot of hype out there in the market that is generated both by Elon Musk and everybody else out there. I’m not saying that it will be a bad stock, and there are times.
Caroline Woods: Where it was on your bull.
Julian Koski: List, because there are times when it’s good and there’s times when it’s bad, right? But you have to be careful when there’s a lot of what I call vegan, ambiguous information surrounding a stock price, right? That’s when you have to be careful. It’s the news that, you know, unfortunately, I know you’re in the news business, but it’s not the fundamentals that cause a problem for the stock.
Julian Koski: Unfortunately, it’s the vegan ambiguous information. And when there’s a lot of that, you have to be careful.
Caroline Woods: What’s a stock that’s been unfairly beaten down that your models say should run higher from here?
Julian Koski: Well, again, Tesla is at the same time going back. If you look at Tesla, Tesla’s probability of failure was around 60% just a quarter ago. Right. So now it’s suddenly improved dramatically. And that’s always the shock. The shock is always at some point he’ll deliver.
Caroline Woods: I had Bill man on on Thursday, and he warned that some AI stocks could fall 40% before reaching the bottom. He believes in AI as he believes in the AI revolution, if you will, but was expecting a much bigger market correction. Bear market in some of these stocks. You don’t think that AI is a bubble at all. So what is?
Julian Koski: Well.
I have a question.
Julian Koski: I have a question. How does he know? No one knows that’s the problem, right? If you’re going to sit and forecast where you think stocks are going to go, you’re more likely to get it wrong. What it’s gambling, it’s forecasting is the is the calm, gentle word. Gambling is the more harsh word. But that’s what it is, right?
Julian Koski: So if you are gambling and you are forecasting well, I’m going to use odds and probability to essentially bet against you or with you. Depends on where I think the math is going.
Caroline Woods: So you’re not saying AI isn’t a bubble. You’re saying.
Julian Koski: There’s no evidence.
Caroline Woods: So you don’t know if it’s a bubble or not.
Julian Koski: You keep owning until that’s not until it is a bubble. And when the problem.
Caroline Woods: What about names like core? We’ve which plunged what, 25% last week. Debt financing, all of that sort of really. And obviously for AI to China risk really sent a lot of those stocks lower. Could we see the AI revolution succeed. But the stocks financing it turned out to be terrible investments?
Julian Koski: The all kinds of problems that can emerge in these stocks on whether it’s financing issues to bubble issues. The problem is we don’t know. And when the market ends, that’s human behavior reacting. And so again, I would say turn to the math. See what the math is saying. I generally have much more confidence in the math than I have the human reaction to the information.
Julian Koski: We’ve been trained to react. We’ve been trained to forecast. It’s better to be trained to be a mathematician and look at it that way.
Caroline Woods: Okay, so, I hate to put you on the spot. You don’t have a computer in front of you. Do you know what your models say about core weave?
Julian Koski: I don’t. Unfortunately, I would have to look up the individual name.
Caroline Woods: What about Apple?
Julian Koski: So Apple has got around about a 34% chance that a probability of failing to deliver. But don’t don’t didn’t think of that as bad. It’s not bad. It is good. You know, again, probably the way probabilities work is it’s all relative, right. The question I would have is that anyone better with the lower probability of failure. And you probably want to own that.
Julian Koski: But at 34% it’s low enough that I know certainly it’s in our portfolios and we would continue to own it. Right. But it’s not it’s not Meta or Google. It’s a 3% probability of failure.
Caroline Woods: And so for our listeners who are like, okay, great, I need to base everything based on your your models. How do I get access to that data?
Julian Koski: You can come to our website to new age alpha.com. You can contact us. We can make we do have a system that we can make available. We make it available for free to to.
Caroline Woods: To retail investors.
Julian Koski: If somebody wants to come along and get the probabilities, they can also type it in on our website and get an individual ticket. And they’ll tell you the probability of failure. But it is available.
Caroline Woods: But it’s not behind a paywall. No. Okay. What would make you actually start selling stocks because you’re you’re bullish right now. So what would need to be flagged within the models to say you know what to risky. Now I want that 20% to be higher.
Julian Koski: So if any one of those indicators. So if the lie changes leading economic indicators that that is one you have to pay attention to. It is really reflective of the underlying fundamentals of the economy. The VIX and market momentum are more human behavior driven. And the fed decision which comes later is almost reactive. But it’s the lie. So if you see the lie change right.
Julian Koski: Pay attention. Because that is reflecting that there might be a problem in the underlying economy. However, I would say this is that I have seen a change in one month and it changes right back to positive the next month. So you have to look at a sustainable trend on the early.
Caroline Woods: The fed policy was one of the factors that your model considers. Yes. Does that assume that the fed is that based on the semi fed futures, is does that assume that the fed is going to continue hiking rates because can this market rally if the fed is in a new hiking cycle?
Julian Koski: All it means is when the fed makes a decision, we rebalance that portfolio to take into account that fed decision. But generally the fed the the other three signals have changed in advance of the fed. The fed always lags in terms of their decision making. So what we’ve noticed is even when the fed does make a decision and we do rebalance, our signals don’t change because they really changed.
Julian Koski: You know it’s the fed catching up now with those underlying signals.
Caroline Woods: I want you to lean into your chief investment officer title. Now for someone with if I gave you $10,000 to invest today, would you put it to work immediately? Would you spread it out over the next few months? Would you wait until we got through earnings? How would you spend it?
Julian Koski: I would spend it immediately. I don’t see anything out there that suggests that we should be worried. There’s always something that investors will talk ourselves into. Most of the time the reaction will be behavioral and not seeing anything fundamental. If you look at 2008, there was a fundamental problem. One had to be careful. Even if there’s a reaction right now, it’s going to generally be behaviorally driven.
Julian Koski: And if it is, we might have a drop. But generally these drops off V-shaped. They recover very, very quickly because they are behavioral in nature. There’s no evidence to support what investors are actually doing.
Caroline Woods: You don’t look at a ten year yield above 5%. It’s a 5.1% today. Well above $100 a barrel. As anything fundamental that could derail this rally.
Julian Koski: They certainly are fundamental indicators, but they’re not showing up in the underlying fundamental indicators. Not yet. And again, when they do, I’ll worry about it as a c, I, I worry about it when something’s telling me to worry about it. But there’s nothing to worry about. I’m not seeing it in the data. We’re a data driven investment house and we’re not seeing.
It, so.
Julian Koski: Okay, don’t react.
Caroline Woods: So you’d put $10,000 to work immediately? Absolutely. Where would you put it to work?
Julian Koski: If I just got $10,000 now, I would continue to invest in the S&P. I think that is a broad based, even though they are names in there that one would avoid. You can’t avoid them. You have to buy the whole the whole shebang. That’s fine. But that is the place. I certainly would do it. Picking individual names, even as good as probabilities are, it’s still a probability.
Julian Koski: Even if you go to 1% chance of failure, there’s still a 1% chance of failure, which means you still need a diversified portfolio. S&P 500.
Caroline Woods: What about small caps? What about S&P equal weight? We’ve heard calls for you know, invest in equal weight or mid caps or small caps. What’s your view on those areas of the market versus the S&P 500.
Julian Koski: Well let’s start with equal weight. The only reason the equal weighting argument keeps coming up is because of this idea that we have concentration risk right. Well what happens if we argued something different. What happens if the S&P 500 today actually reflects a new economy. What happens if this is not the S&P 500 of yesteryear. What happens if these names don’t actually change?
Julian Koski: I mean, you think about Facebook. You think about Amazon. These are globally dominant companies. Maybe it’s time for the S&P 500 to be, you know, reinvigorated or thought about differently. Right. I think we can worry about concentration risk all day long. And we can tend to want to switch to things like equally weighted. You’ll probably just end up underperforming at some point in time.
Julian Koski: That’s exactly what’s going to happen. It’s not going to solve anything.
Caroline Woods: Okay. All right. I think it’s a great time to pivot to our rapid fire round of this or that. This is your first time play. No, you’re not done yet. Quick questions, quick answers. No hedging if you can help it. Are you ready? Yes. Here we go. Tech rebound. Sustainable rally or temporary.
Bounce in a.
Julian Koski: Sustainable.
Caroline Woods: Rally AI stocks buying opportunity or more downside.
Buying.
Caroline Woods: Meta earnings positive. Surprise or disappointment?
Positive.
Caroline Woods: Tesla earnings beat or miss beat. Netflix earnings by before or wait until after.
By before.
Caroline Woods: More upside from here in Vidya or alphabet?
Julian Koski: Both I would say. And and and and.
Caroline Woods: Which has more upside. That’s called hedging.
Julian Koski: I would say Google alphabet.
Caroline Woods: Better AI investment in Vidya or meta.
Julian Koski: O in Vidya.
Caroline Woods: AI infrastructure or AI applications.
Julian Koski: AI AI infrastructure.
Caroline Woods: Bigger risk to the bull market inflation or AI debt.
Julian Koski: Inflation.
Caroline Woods: Fed’s next move. Hold or hike?
Julian Koski: Hike.
Caroline Woods: Stocks or bonds?
Julian Koski: Both. But stocks.
Caroline Woods: 80%. Stocks. Bonds for the S&P 500 at 8000 by year end two bullish or two conservative.
Julian Koski: Maybe too bullish.
Caroline Woods: Invest $10,000 now or wait until after earnings. Now finish this sentence. The stock to watch most closely this earnings season is Tesla. The biggest mistake investors could make this week is.
Julian Koski: Reacting to news.
Caroline Woods: The stock to buy on a pullback is.
Julian Koski: Apple.
Caroline Woods: The popular stock to avoid right now is a.
Julian Koski: That’s a difficult one and you need one answer.
Caroline Woods: Hey we’ll take more.
Julian Koski: I’m just going to guess I would say Tesla.
Caroline Woods: Even though that was on your bull list.
Julian Koski: Yeah absolutely.
Caroline Woods: Okay.
Julian Koski: Because you’re doing it without information.
Caroline Woods: The biggest threat to the bull market is.
Julian Koski: Geopolitical risk.
Caroline Woods: The clearest warning sign for this bull market would be.
Julian Koski: Again, to me would be the lie, the leading economic indicator to see what’s going on underneath that.
Caroline Woods: All right. Before I actually let you go, I need clarification on two things. Tesla as the stock to avoid but also your bull pick. Explain I’m not that’s not tracking for me. So is that a buy or is that a sell at this point?
Julian Koski: Your question was if I was doing it now right. We already own it. Okay. So based on a really owning we believe in owning it, right? But if you ask me to enter the marketplace right now, I see I wouldn’t.
Caroline Woods: If you got an earnings pullback, would you buy it there. Yes. You would add more. Okay. One other quick thing that I realized I didn’t ask you about is software right. Does your model flag any software stocks as low risk as we think about AI disrupting software. Are there any.
Julian Koski: No it doesn’t. And but not that I want to be careful. Not that I can recall, but from what I do recall though, it does not flag any. That should be a low a good stock. No.
Caroline Woods: Okay. All right. We’ll leave it there. That’s Julian Koski, chief investment officer at New Age Alpha. Thanks so much for playing along. Thanks for explaining your models to us and giving some of your your bull and bear cases here.
Julian Koski: Thank you. Thanks. Thanks very much for having me.
Caroline Woods: If you enjoyed this street talk, check out our full interview with Johnny Wu. He has a whole list of AI stocks by right now.
