Transcript:
Caroline Woods: Joining us to kick off the week is George Seay founder and chairman Annandale Capital. George welcome back. Great to have you.
George Seay: Thank you. Caroline always great to be here.
Caroline Woods: So George seeing some green on the screen. Stocks are coming off back to back losing weeks. But we’re seeing AI stocks bounce this morning after anthropic filed for an IPO. Is this the catalyst the market needs, George. Or just another short lived rally?
George Seay: I think we’ll probably get a Santa Claus rally between here and year end, but we’ll also get some year end tax selling, tax loss selling at some point as well. I think the market’s kind of churning right now. I don’t I don’t see a clear direction either way. And I think the Q3 earnings season is going to really be kind of outcome determinative about how well we go into the year end and how well it goes.
George Seay: And I think that the expectations are just so high that earnings, in reality, not in prediction, have got to be so good that they blow the street away for it, for the market to continue to rally significantly into your end. Otherwise, I think we’ll continue to chop or even trend down a little bit.
Caroline Woods: Oh, interesting. Because we do have this huge week ahead of us with big tech earnings. But we also have a fed decision. We have inflation data. You talked about the market kind of churning. You’ve described it as a tired market. If it’s not necessarily going to be that reenergize it. I was going to ask what will it be.
Caroline Woods: But it sounds like maybe you don’t think the market will be re-energized heading into your end.
George Seay: I think it’s all earnings. I think if earnings are outperforming a significant way, I think the market will rally significantly into year end and it sure wants to. But I think the earnings got to prove that up. I don’t think there’s really anything else that’s really going to spur the market significantly. I mean, interest rates are higher than the market likes.
George Seay: And the Iran situation. What if what if the president starts bombing Iran here next week? Again, like people are predicting? I think there’s lots of headwinds to the market right now. The market is tired. I see the volatility where the Dow goes up 600 points one day, and then it’s down 500 points the next day. And the the triple cues the same thing.
George Seay: They’re up 2% one day and down 2.5% the next day. Because people are trying to gauge what is the this AI trade or the earnings real or these companies real. Is the spending negative because all these companies go negative free cash flow when they spend all this money? Or is it are they pursuing something that’s real? And I think the market’s very confused right now.
George Seay: And that’s why you’re seeing a whole lot of chop but very little forward movement.
Caroline Woods: What happens because we do know that beat and raise doesn’t necessarily indicate that stocks will move higher. So what happens if Big Tech delivers strong results but the stock’s sell off anyway. Would you be a buyer of those dips. Or would that tell you something bigger about where this market is ultimately headed.
George Seay: Yeah, it’s all guidance in it. I mean it’s where it’s where these companies say they’re going in the next quarter, the next year. That’s that’s all the market really cares about. It doesn’t really care about past performance and beating expectations because all these companies game theory, these expectations, they all lowball it so they can beat it every single time.
George Seay: So I think that if these companies outperform to the downside after they give their expectations, it’s going to really it’s going to really depend on how how badly they underperform their guidance or how badly they under, deliver for the street in terms of whether guidance is in terms of whether you buy them or not. I’m actually very constructive on the hyperscalers right now.
George Seay: I think they’re tremendously out of favor. And the market’s rotated into other stuff because because there’s because most stock pickers are scared about them right now. And in terms of all their, their, their massive spending on on AI and to me it breeds opportunity. I’m not saying with all of them, but I look at Google in particular and meta and these are not expensive stocks at this point.
George Seay: They’re really not.
Caroline Woods: Yeah. You mentioned the scrutiny that AI stocks have really been under. Yet you you did bring a whole bunch of stock picks with you. And I see in Vidya micron Microsoft Alphabet to your point Oracle meta all on your list. So what gives you confidence that those stocks still have room to run.
George Seay: You know, this is just such the opposite of the.com bubble in 2000. I mean, you do not have stocks writing at 80 times earnings or 30 times sales and stuff like that, unless you count space in that number. And, and so I look at micron and I look at all the negativity and all the people saying it’s a cyclical stock and it’s going to go way down from here, blah, blah, blah.
George Seay: But I look at they’re saying they’ve got at least a two year runway in terms of what they’re doing right now. And come December 9th, when they’re freed up after a government prohibition, to buy back a whole lot of their stock got major tailwinds on this, on the stock. I mean, they’ve got a lot of runway going forward.
George Seay: They’re going to make tons of money. They’re going to buy back a lot of stock. They’re they’re living their highest and best life. I think it could double from here. I mean I, I want to own that stock and I want to write puts against it. And there are several other stocks in that category to a lesser degree.
George Seay: I think Nvidia is a an amazing American company, and it’s one I want to own and I want to own larger in size. I hope it goes down a lot more so I can buy a lot more.
Caroline Woods: Yeah, if you could only buy one of those names right now, which would it be?
George Seay: It’d be Microsoft. I want to own Microsoft forever. It’s the greatest company on the planet, but it’s not cheap anymore. I mean, it’s run quite a bit the last quarter, so it’s not super attractive. But if I have to buy, buy and own one, that’s the one.
Caroline Woods: Why not Amazon or Apple? Why didn’t those make the list?
George Seay: Well, I own both. I don’t want to buy more of each. I think Amazon is kind of underperforming in this category currently, and with Apple app is just so expensive. I just don’t see anything attractive about Apple. I’m not selling it, but I’m not buying it either.
Caroline Woods: Oracle is a name that when I ask guests which name they’d avoid, oftentimes they say Oracle, why would you be? Why are you a buyer here?
George Seay: Never bet against Larry Ellison, ever. He’s so competitive. He’s so capable. And Oracle is going to be fine. And it’s really cheap. Speaking of cheap it it matter the cheapest of all these stocks.
Caroline Woods: Meanwhile we’ve seen these neo cloud stocks get hammered. Some are lower again today over concerns about how much debt they’re taking on. Do you look at that as a warning sign for the AI, the broader AI trade, or is it a reason to stick with established players like Nvidia, Microsoft and Alphabet?
George Seay: Yeah, neo clouds really not my game. I don’t like to bet on people that are uncertain and they go out of business. So I tend to stick to the tried and true and people that are going to be around ten years from now. So I, I feel like that the neo Cloud play is kind of gambling and I’m not a gambler.
George Seay: So I understand why people do that. And I think there could be some significant money to be made there, but not for me enough for my clients.
Caroline Woods: Are there AI stocks do you think investors should be selling here even after the recent pullback?
George Seay: That’s a great question. I think if you if you if you’re if you’re zealous and a and a believer in the trade you don’t I think if you’ve been speculating and things that work out for you and you’ve got a nice capital gain, most certainly I think the ones that you have the least conviction about you ought to get rid of.
George Seay: But I have really high conviction on the hyperscalers right now. I think they’re a good trade. I think people have abandoned them out of fear. And I think it’s it’s a mistake.
Caroline Woods: Okay. All right. I was taking a look at your notes. You’re pairing AI with energy in this kind of barbell strategy. Prices are retreating today, although still above a 102 a barrel. Are you betting on prices staying high or the companies that you brought your picks, which we can get into, can those deliver even if prices come down?
George Seay: Well, I feel like somebody kind of agrees with me because you saw it by range today for a premium. And range has got incredible assets in the Marcellus Utica gas play in in the eastern U.S. and West Virginia, Pennsylvania, Ohio. These stocks are just cheap and they’re cheap at $65, and they’re cheap at $100, and they’re going to buy back a lot of stock, and they’re going to pay a lot of dividends.
George Seay: And if you ask me where I want to hang out in terms of protecting capital and having it, the potential for a lot of capital appreciation as well. This is where I want to hang out. I don’t really want to buy the exons and the chevrons of the world so much, because they’re more fully priced and there’s not as much upside there.
George Seay: But upstream natural gas stocks, refinery stocks diversified, and gas stocks like Oxy and Matador and some of the others like that. Venom Fang I mean, these these are just great, great stocks at a very, very low price. And the the wind is that they’re back, so to speak, because the commodity trade is not going to disappear overnight. Fossil fuels are so needed.
George Seay: They’re so in love. There’s so little money there. If you think about what they were as a percentage of the SB 500 index, I mean, you go back to 1980 and I think they were 25 or 30% somewhere in there. And as recently as like 2008 or or so, they were about 20%. Now they’re 3% up from 2%.
George Seay: That’s crazy. And they’re so unloved and so under owned it. It’s just it’s got a lot of wind behind their backs and they’re going to go up and they need to be owned.
Caroline Woods: That’s so do you look at energy is a way to capitalize in the AI boom or protection against an AI sell off?
George Seay: Both I think I think they fit both. I think they’re they’re good barbell to AI. And I think also that they’re a key beneficiary of all this AI buildout and all these data centers, they’ve got to have natural gas to supply them. And you know, most people think of of of companies that drill wells in the Permian Basin in West Texas is all stocks.
George Seay: But the reality is that basin is getting mature. And as it gets mature, it becomes a lot less all in, a lot more gas. See, more gas comes out of these wells. Is they over drill this this play. And so that’s a major gas play. And they’re only now building pipelines to take that gas down to the Gulf Coast so it can be shipped through LNG to other, other, other countries.
George Seay: So basically it’s a play that has 30 or 40 years to go. And hopefully our, our country, the rest of the world will get completely zero carbon footprint and clean energy at some point. I’m all for that, even as a Texan. But for the next 30, 40 years, the reality is we’re going to need a lot of fossil fuels if we want to live this modern life that we’ve all become very comfortable and used to.
Caroline Woods: Okay, so you gave a few of your picks there. Want to make sure we get some of the others in and tarot resources AR ect. You mentioned Occidental, Diamondback Energy, Expand Energy, Comstock Resources, Matador Venture Global, Cheniere Energy, ticker symbol LNG. Which of those names provides the most upside from here?
George Seay: Yeah, I’d buy interior resources end over foot. It’s so well managed. The management is exceptional. They did an incredible job and they’re very very exposed to the liquid natural gas trade. They they send natural gas liquids all over the world especially to China. Methane, propane, all the all these various liquefied natural gas elements that they get out of their wells, they’re drilling very liquid wells in the Marcellus Utica right now, which the world desperately needs.
George Seay: The price for propane is going to almost double this year. So not only has has all gone gone up a whole lot, but so has natural gas liquids and dry gas is is just being crushed right now because we’ve got so much supply of it. But Antero is kind of and knocked it from that because they have so many liquids in their in their mix.
George Seay: And also they’re an incredible takeover candidates. Exxon or Chevron or one of the big diversified players should buy them right now for a 40% premium and never look back. They’re just a great asset.
Caroline Woods: The problem is, though, it’s you know, that one’s up about almost 20% year to date. But energy is a sector is far out performing any other sector in the S&P 500 so far this year. So if you didn’t already get in, is it too late for some of these names or to play the sector as a whole?
George Seay: It’s later. It’s probably sixth inning, but it’s not too late. And Antero, like you said very accurately, it’s only gone up about 20% or his energy’s gone up over all, about 50%. So it’s too late on the pipeline stocks. It may be too late on the on the downstream refinery stocks and stuff like that. But it’s not too late on intro.
George Seay: It’s actually the perfect time to do it.
Caroline Woods: And is there a price that all or a natural gas could get to that would make you rethink that investment idea?
George Seay: Gosh, natural gas is not even close. I mean, I feel like that it’s it’s at around 250 this morning and it should be at four bucks and then higher than that eventually. And eventually LNG will take it there because we’re going to take we have so much demand for gas from LNG. But the the infrastructure buildout is not complete.
George Seay: So you’ve got about a B, C f of of natural gas demand that’s not on line yet, but we’ll be on line in the next 2 to 3 years. So that price is going to go way up. If all goes above 150, that’s going to be a major recession indicator and economic headwind and friction costs for our economy and will probably tip us into recession.
George Seay: So you see all go above 150. I think we’re in trouble. But right now we’re we’re completely safe. I mean, you look at the inflation adjusted price of, of of the commodity versus 2008 when it peaked at 148, it’s probably around 75 bucks inflation adjusted. And that that’s actually really cheap. And gas over four bucks on everybody’s complaining about it and affordability and all so forth and so on.
George Seay: But compared to $4 gas in in 2008, it’s really not that bad. So I know people who hate me saying that, but it’s the truth. If gas goes above $6 a gallon at the pump, then we got a real problems and we may get that real ran things not going away. It’s just not.
Caroline Woods: Yeah. How real of a risk is $150 a barrel oil and $6 gas. Is that something that’s actually part of your base case?
George Seay: Yeah, I think it’s very real. I hope it doesn’t get there, but I think it’s a very real threat. Yeah. I think our U.S. policy and everything that’s going on in the world, I mean, the really bad stuff had to happen, if you think about it. I mean, Iran and us have not really hit all infrastructure in the Middle East to a significant degree.
George Seay: And if it does, that’s not just a maybe it’s a certainty. So we should all be praying and hoping that doesn’t happen.
Caroline Woods: And if that does happen. How does that change your portfolio construction? What’s the first move you would make if we do start to see all to, you know, closer to 150?
George Seay: Well, I doubled down on all the gross stocks, the hyperscalers and the really high quality growth stocks. And I would probably write calls or, or sell out. Right. Or, and gas stocks at that point because they would have peaked at that point.
Caroline Woods: Okay. Sticking with some of your picks here, you’re also getting into the housing cycle early with Home Depot, Home Builders and Berkshire Hathaway. What makes you confident the housing recovery is around the corner, given those risks, but also given the fact that the fed is widely expected to hold rates steady this week, so it doesn’t look like borrowing costs are coming down anytime soon.
Caroline Woods: So why buy housing stocks now?
George Seay: Yeah, I kind of want to get in that trade early. I’m probably early, but I don’t really care because Home Depot is such a great stock and I’ve earned Berkshire forever, and I haven’t really added lately because it’s it’s basically 1.55 times book value, which is about where it’s been all, all the time, and I’ve already got a healthy position in it.
George Seay: But if it falls back, I’ll add to it. And I think these traits kind of go together. I mean, if all goes well above one 2130, that’s going to put brakes on the economy and it’s going to press the, the fed, even though it’s worried about inflation to cut rates. And when we start cut rates all these stocks are going to explode.
George Seay: And that’s not anytime real soon. But I think it’s in our imminent future. I think in the next 12 day two months, the Fed’s going to be forced to start cutting back again. And I want to be ahead of that.
Caroline Woods: You think stocks could explode if we do see prices that high?
George Seay: I think the housing stock is good. Yeah. Because I think the fed will start cutting rates and then people will pivot up over to the housing stocks. And Home Depot’s the blue chip and all those kind of stocks. So I just have to own that okay.
Caroline Woods: All right. You also say that investors feeling dangerous should buy streaming stocks including Disney, Netflix and Skydance. What makes those attractive enough to take that risk?
George Seay: Gosh, I just love these stocks right now. I may be dead wrong, and I’m happy to be wrong, and I’m happy to admit it if I’m wrong in the future. But you look at Netflix at well below market multiple when it was trading at 40 times earnings, and it’s about double the price it is right now, only about 10 or 11 months ago.
George Seay: And you got a blue chip company that’s going to be there forever. That generates just gobs of free cash flow on sale. And when these kind of companies are on sale, you just have to buy them. And Disney’s been unloved and hated forever. And it’s just a it’s just a blue chip franchise kind of stock. I think you have to own it.
George Seay: And if you don’t own it, buy it. Bite heavily right now. And then you, you pivot to to Skydance. And I go back to my thematic, if you just do not bet against the Ellison’s, I think they’re really, really capable people. And you don’t bet against Elon Musk. And he just put $1 billion into this company. And yeah, they have a lot of debt, but they’re going to pay it down.
George Seay: And the future is streaming. And these are the three biggest, best streaming franchises that you can own is kind of not a pure play on streaming, but where a lot of their profits come from that. Where is it Amazon and Apple? These are rounding errors for those companies. So it really doesn’t move the needle to buy those in this instance.
George Seay: So I would buy all three of these and put them away and look back in three years and congratulate yourself on really good investing.
Caroline Woods: All right. So George, you’ve given us a pretty extensive by list. A lot of you came with a lot of stock picks, which we love. If I gave you cash right now, how would you divide it among AI, energy, housing, streaming, everything else?
George Seay: I put 25% in Antero Resources that put 25% in other gas stocks. I put 25% in the hyperscalers, diversified across 4 or 5 of them, and I put 25% in the streamers. That’s what I do.
Caroline Woods: Okay, so AI and streamers get the same amount of that money. So you’re just as much conviction in Netflix as you have in alphabet, in Microsoft.
George Seay: In the near term. More so in the long term, less so.
Caroline Woods: Okay. All right. I think this is a great time to pivot to a rapid fire round of this or that. You know how to play. Quick questions, quick answers. No hedging. Are you ready George.
George Seay: Yes. And I play this well so far away.
Caroline Woods: All right here we go. Markets next big move higher or lower. Higher stocks by year end. Higher or lower?
George Seay: Higher.
Caroline Woods: How much higher.
George Seay: Say it again.
Caroline Woods: How much higher?
George Seay: Not much.
Caroline Woods: Big tech earnings. Rally. Catalyst or sell the news event.
George Seay: Sell the news.
Caroline Woods: Big tech or the rest of the S&P 500.
George Seay: The rest.
Caroline Woods: AI or energy for the next 12 months.
George Seay: Energy.
Caroline Woods: Oracle or Amazon.
George Seay: Oracle.
Caroline Woods: Amazon or Apple. Amazon anthropic IPO by at the debut or wait for volatility to settle.
George Seay: Oh gosh, you’d have to tell me what it opens that for me to answer that question I’d say probably buy it if you can sell it whenever you want. Not locked up.
Caroline Woods: And I want to go back to the last question because I’m still thinking about those answers. So Oracle or Apple. Oracle rotation into defensive sectors smart move or risky business.
George Seay: Oh that’s a very smart move.
Caroline Woods: Staples utilities or real estate from here.
George Seay: Real estate.
Caroline Woods: Home depot or home builders.
George Seay: Home depot.
Caroline Woods: Disney or Netflix Netflix. Whale or natural gas.
George Seay: Natural gas.
Caroline Woods: Higher for longer rates. Good for stocks or bad for stocks?
George Seay: Good. Actually, it’s very counterintuitive, but higher rates show a lot of growth. So I really hope for higher rates.
Caroline Woods: 1 or 2 words about how you’re feeling about stocks for the rest of this year.
George Seay: Trepidation.
Caroline Woods: And for 2027.
George Seay: Cautiously optimistic is the third year of a presidential cycle, and that’s usually a really good year.
Caroline Woods: George Seay Founder and Chairman, Annadale Capital. Always a pleasure. Thanks so much.
George Seay: Thank you. Caroline, I really appreciate it.
Caroline Woods: If you enjoyed this street talk, check out our interview with Matthew Tuttle. He explains why he’s keeping his stock exposure relatively low and reveals which stocks he thinks are worth buying right now.
