Strong earnings from big banks can tell investors that borrowers are paying bills, loans are growing, and credit remains available, but that does not automatically make bank stocks the market’s best opportunity.
Dave Ellison, a portfolio manager at Hennessy Funds, says the more useful lesson from the banking sector’s results is that a healthy economy can support companies willing to reinvest their profits in artificial intelligence, cybersecurity, lending systems, new products, and other growth initiatives. Ellison, a tenured mutual fund manager with over three decades of investing experience, sat down with TheStreet’s Caroline Woods to discuss which stocks offer unique buying opportunities after reporting earnings.
Ellison’s central argument is counterintuitive in a market that often rewards companies for returning cash to shareholders. To existing shareholders, dividends and stock buybacks signal strength and financial security. For investors deciding where to put new money to work, though, he prefers companies that can explain how today’s profits are being used to build future earnings power. His examples include Amazon, JPMorgan Chase, and, for more upside among large banks, Citigroup.
The approach comes with meaningful trade-offs. Reinvestment can pressure near-term cash flow, create execution risk, and leave investors exposed if a company spends heavily without producing a viable new product or service. Yet Ellison argues that the economy’s current investment cycle, supported by profits and access to capital, gives long-term investors a reason to focus on corporate spending plans rather than treating every quarterly earnings forecast as the final verdict.
Here is a closer look at how Ellison connects bank credit, corporate investment, artificial intelligence, and portfolio risk.
Note: The market musings expressed herein are those of the interviewed guest and should not be treated as professional investment advice. Readers should consult a certified financial planner (CFP) for individualized advice based on their available capital, goals, risk tolerance, and time horizon.
Why healthy bank credit can matter more than bank stock performance
Ellison’s first read on major-bank earnings was about lending conditions rather than whether a particular bank beat Wall Street estimates. He said non-performing loans, meaning loans on which borrowers are no longer making required payments, were flat or down from a year earlier in many cases. In his view, that suggests banks are managing credit well and that many consumers are continuing to pay their bills.
That isn’t to say that every bank stock is attractive. Ellison said a healthy banking sector can still lag businesses in faster-growing parts of the economy. But loan growth, liquidity (meaning readily available money that can support lending and transactions), and relatively contained credit problems can be evidence that the broader economy has room to keep expanding.
His answer to an earnings “miss” also pushes back on a familiar Wall Street framing. When a company’s reported results fall below an analyst forecast, investors often call that a corporate failure. Ellison argued that the forecast itself may have been wrong. The distinction does not erase a disappointing result, but it does caution investors against treating a comparison with a consensus estimate as the only measure of a company’s health.
Among the largest banks, Ellison identified Citigroup as having the most upside because it has more room to improve its return on equity and return on assets. Return on equity measures profit relative to shareholder capital, while return on assets measures profit relative to a company’s asset base.
He called JPMorgan Chase “best in class” and said investors may feel they need to own it because of its execution, but he viewed Citigroup’s valuation and improvement potential as the more compelling upside case.
Are you paying dividends and doing stock buybacks? That doesn’t help grow the company. It just helps the existing shareholders.
Dave Ellison, when asked how he judges companies that are investing for the future
Ellison’s point is not that dividends and stock buybacks are inherently harmful. A dividend distributes cash directly to shareholders, while a stock buyback uses company cash to repurchase shares. Both can be sensible uses of excess capital.
His argument is narrower: Investors looking for years of future growth should ask whether a company has exhausted better uses for its cash before celebrating a payout.
Related: What is a stock buyback? Definition & effects
How investors can judge whether a company is building for growth
Ellison’s practical screen begins with a simple question: What is management doing with its profits? He said he gravitates toward companies that are trying to improve, have room to get better, are innovating, and are investing. That emphasis shifts the analysis away from whether a company can hit the next quarterly target and toward whether its spending could strengthen its competitive position over time.
For a bank, the answer could include investments in branches, deposit-gathering systems, loan-making systems, cybersecurity, or artificial intelligence. For a technology company, it could include data centers, new products, automation, or expansion into adjacent businesses.
The specific project will differ by industry, but the investor’s task stays the same: Connect the spending to a credible path toward a larger or more durable business.
Amazon is Ellison’s clearest example. He described the company as one that repeatedly used its profits to move into new businesses, from its original book-selling operation to cloud computing, logistics, and other ventures. He also said Amazon could benefit from artificial intelligence and robotics because of the scale of the goods it moves.
The case is not that every expansion will work. It is that a company with a demonstrated willingness to reinvest can create additional ways to grow instead of relying on a single, mature operation.
That framework also explains Ellison’s interest in companies engaged in vertical integration, a strategy in which a company expands into additional stages of producing, supplying, or delivering its products. He cited Nvidia’s efforts to invest in businesses beyond its original identity as a chip company.
For investors, vertical integration deserves scrutiny rather than automatic approval. It can widen a company’s opportunity set, but it can also consume capital and introduce new operational challenges.
An investor using Ellison’s approach should therefore look for evidence, rather than simply accepting a management presentation. Is the company explaining the purpose of its investment?
Does the spending address a competitive need or open a credible new market? Is the company financing the effort from profits, equity, or debt? And can an investor tolerate a period in which the payoff remains uncertain?
Those questions help separate a growth plan from spending for its own sake.
Why artificial intelligence investment creates both opportunity and risk
Ellison sees the current artificial intelligence investment cycle as an important source of economic activity. He said companies have access to capital and are raising money or borrowing to invest in projects that could change how they operate. That spending, in his view, helps explain why the economy can remain strong even as investors worry about stock valuations, rising rates, oil prices, geopolitical concerns, and the U.S. midterm elections.
He also made a distinction between the current artificial intelligence buildout and the dot-com bubble. Ellison said today’s companies raising capital are generally more profitable, better managed, and more conscious of risk than many businesses associated with that earlier period. His reasoning rests on the quality and profitability of the borrowers, not on a claim that high valuations cannot fall.
Related: What was the dot-com bubble & why did it burst?
The risk becomes more complicated as the AI trade depends on capital-intensive companies such as Anthropic, OpenAI, and SpaceX. Ellison said the financial links around those companies are difficult to map and that success depends on their ability to generate enough revenue and cash flow to support their commitments.
If they fall back, then that whole sort of ferris wheel is going to like start to get clunky.
Dave Ellison, when asked whether Anthropic and OpenAI could create a wider market problem
Ellison’s warning is a useful complement to his enthusiasm for investment. A company can spend heavily on artificial intelligence and still produce a disappointing return. That is why investors should distinguish between the broad economic use of artificial intelligence and the financial prospects of every company associated with the AI trade.
How to set a portfolio risk level you can hold through volatility
For investors who agree with the long-term case but remain uneasy about valuations, Ellison’s advice starts with personal risk tolerance. He said investors should reduce risk until they can “sleep at night.” In practical terms, that means holding an allocation that an investor can keep through a downturn rather than selling in response to fear.
Ellison gave a personal illustration of being willing to accept a decline of 10% or 20% while pursuing the possibility of a stock doubling over three or four years. A long-term strategy requires deciding in advance whether the potential reward justifies the loss an investor is prepared to accept before exiting a position.
For a hypothetical $10,000 allocation, Ellison said he would put 50% in the S&P 500, 20% in cash, and the remainder in selected individual stocks. The S&P 500 is an index of 500 large U.S. companies, although it is weighted by market capitalization, meaning the largest companies have the greatest influence on its performance. The cash allocation, he said, would give him a cushion and allow him to buy an opportunity that gets “beat up” without having to sell another holding first.
Investors should view that split as Ellison’s stated personal approach, not a ready-made plan for every household. Someone who needs the money soon, has little emergency savings, or cannot tolerate equity-market declines may need more cash and less stock exposure. Someone with a longer time horizon may reach a different conclusion.
The key is consistency between the portfolio’s risk level and the investor’s ability to stay invested.
The takeaway for long-term, buy-and-hold investors
Ellison’s case is ultimately a decision procedure for long-term, buy-and-hold investors. Start by asking whether the company has a sound current business, then examine whether management is reinvesting profits in ways that could make that business stronger.
Consider the balance sheet and financing needs, especially in capital-intensive areas of artificial intelligence. Finally, size the position so that a bad quarter, or even a substantial decline, does not force a decision that conflicts with the original plan.
Bank earnings fit into that process as a broad signal. Ellison sees relatively healthy credit conditions, loan growth, and liquidity as evidence that the economy remains capable of supporting corporate earnings. He also sees Citigroup as the large bank with the most upside potential, while viewing JPMorgan Chase as a high-quality industry leader.
Those calls, of course, are his personal preferences, not proof that either stock will outperform.
The larger lesson is to look past the immediate reward of a dividend, a stock buyback, or a quarterly earnings beat, especially if you plan to keep your money in the market for a long time.
A company that retains profits and explains how it plans to use them may be taking on more uncertainty today in pursuit of a larger opportunity tomorrow. Investors who want that potential should demand a credible plan, understand the risks, and keep enough flexibility in their portfolios to live with the result.
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