Transcript:
Caroline Woods: Joining me now is Kevin Mahn, president and chief investment officer at Hennion and Walsh Asset Management. Kevin, great to have you back at the desk.
Kevin Mahn: It’s great to be back.
Caroline Woods: So, Kevin, we had stocks ripping higher yesterday. Kind of a mixed picture at least so far today. Do you look at this is really the start of the next leg higher or is it a temporary relief rally following what we hope is a deal.
Kevin Mahn: Perhaps the latter as a deal has been reached. We believe the strait will be opened. We believe oil prices have come down and the markets have rallied. However, if the first two tenets of that statement start to unwind over the upcoming days, we could see oil prices going back up and the markets pulling it back again. I don’t believe that to be the case, but if in fact, we really do have a deal that’s been reached, even if it’s a moratorium for 60 days and we start seeing tankers pass through the Strait of Hormuz again.
Kevin Mahn: Well, that should give some inflationary relief, which is a very welcome sign for investors across the globe. And if that’s the case, then we can start talking about the economy, the I infrastructure, build out earnings and of course, what the Federal Reserve does or doesn’t do on Wednesday. And going forward will be fun to play the fed guessing game again.
Caroline Woods: I want to break all of that down. But is this a market that’s really that concerned about inflation? With the Dow and Russell hitting new highs today the S&P very close as well.
Kevin Mahn: It’s not concerned about it now because it believes inflation is now in the rearview mirror because a deal has been reached. If in fact that deal gets unwound and oil prices start to shoot up again. And the inflation that we saw in May continues throughout the summer, then the market will become concerned.
Caroline Woods: How low does oil actually have to go for investors to stop worrying about inflation?
Kevin Mahn: I think in the 70s range, which is what we’re seeing right now, gives a lot of reprieve. Clearly, we want to see it get back into the 60s, if not the 50s, but that may take a long time to get to that point.
Caroline Woods: So if what’s the what’s specifically are you watching to determine if this is just a temporary bounce or something bigger.
Kevin Mahn: To see what takes place on Friday? As I understand that there is going to be a deal that signed in Switzerland on Friday, following the next week thereafter. Is there any type of repercussions? Does anybody start to deviate from the terms of that deal? If it doesn’t, then I become a lot more comfortable. If, on the other hand, both sides are now pointing fingers at each other again, or Israel or somebody steps in and says, we don’t want to abide by the terms of that deal, then it’s going to put it all back into flux.
Caroline Woods: You also mentioned that, of course, we have a fed meeting this week, the first under new fed chair Kevin Warsh. Does the market care if we see additional rate cuts this year?
Kevin Mahn: Good question. I wouldn’t expect to see any rate cuts this year. I also wouldn’t expect to see any rate hikes this year. In fact, I think the fed does nothing with respect to interest rates. But what Kevin Warsh has stated that he wants to do when he joins the fed and becomes the chair with his first meeting ending tomorrow, is redesigned.
Kevin Mahn: Exactly how the fed operates, changed the manner in which they communicate with the public. How transparent are they going to be going forward? He wants to shrink the size of their balance sheet, change the narrative in terms of how inflation is calculated. But he’s never said that he wants to cut interest rates or even raise interest rates. So time will tell how dovish exactly Kevin Warsh is.
Kevin Mahn: But I wouldn’t expect too much from the fed this year. As of now.
Caroline Woods: We seem it seems like investors are really focused on this this potential deal with Iran or the the I guess we don’t have a lot of details, but there is this deal with Iran, the cooling oil prices. You know, a lot of momentum behind some of the tech stocks. What’s the biggest risk, though, that you think investors aren’t pricing in at these levels?
Kevin Mahn: I think what they have to appreciate is that the air revolution is still at its very early stages. And for those investors who continue to poke at the air bubble, almost seemingly hoping that it burst, I think they run the risk of missing out on some significant growth opportunities, and their time would be better spent not focusing on who is spending all the money, but rather who’s receiving all the money.
Kevin Mahn: And that brings you to the I infrastructure buildout, whether it’s the data center, construction companies, the electrical conductivity companies, the memory providers, the cooling solutions or the power solution, it feels to me like that’s where the better home is for growth opportunities today. Although down the road, if I say it’s transformative, as everyone says, it’s going to be all those hyperscalers spending all this money, we’re going to see it, ROI and all that spending at some point down the road.
Caroline Woods: So you came with a list of seven stocks that aren’t the Meg seven, although two are. So give us those seven beneficiaries of the early innings of the AI trade.
Kevin Mahn: Yes, I call it the I Revolution seven or the seven stocks across the AI ecosystem that I think represent a better way to play the AI revolution or investing in technology than the old, outdated magic. Seven I’m not suggesting you sell any of the magic seven names, Caroline, but this is just a different way to complement that and provide a smoother path forward.
Kevin Mahn: So the two names that overlap Nvidia shocker. They’re bright. The hub of the AI ecosystem. They’re not going anywhere. In fact, they continue to spread out their tentacles. The other name that overlaps alphabet. I think Alphabet’s a great software play. Everything they’re doing with YouTube, with Gemini for search capabilities and autonomous driving checks. The box for me in terms of alphabet.
Kevin Mahn: Now here’s where we deviate with the other five names. First one is Taiwan Semiconductor, the largest dedicated chip foundry in the world for 70% market share. Who boasts that’s their largest client? Nvidia doesn’t make their own chips. All right, one semiconductor does. But to me, the revolution starts and stops without power and without memory. When I think of memory, who has a near-term monopoly on memory?
Kevin Mahn: Micron, especially with their high bandwidth memory chips that they’re providing to companies like Nvidia. Once again, it’s funny how it always goes back to in video, right?
Caroline Woods: All roads lead back to Nvidia.
Kevin Mahn: Exactly. And then beyond that, where do you do with these chips. You need to plug them into server farms. Those server farms reside in data centers. So I chose Digital Realty. In fact, all these names I’m going through in the year seven come from two of our trust drives as a smart trust. But Digital Realty owns and operates 300 data centers in 31 countries across the globe.
Kevin Mahn: But we spoke about this the last time I was on. Data centers run really high. They consume a lot of energy. They run really hot. So that brings in a cooling solution provider like Vertov. Now, Vertov has a lot of other competition in this space, too, whether it’s Modine, manufacturing, comfort systems, trading technologies. But furtive is the one I picked for the year seven.
Kevin Mahn: And then after that power, I chose a utility company, American Electric Power. There’s a lot of utility companies I could have chose, but American Electric Power supplies electricity of 5 million customers in 11 different states, including the state of Virginia, which, as we all know, has become the data center capital of the world. So that’s my X7.
Caroline Woods: AR seven stands for AI Revolution seven. I interestingly enough, alphabet is your software play, but no typical software names on there. Why not?
Kevin Mahn: I think once again, that goes back to my earlier statements. If I’m looking to build a portfolio that maximize the first five growth opportunities today and for the balance of this decade, I lean a little bit away from software and lean into hardware, data centers, utilities, cooling, and even in one case, the memory side.
Caroline Woods: And you’ve argued that the Mag seven is really losing its grip on the overall market. Do you look at that as a warning sign then, or as just a healthy broadening?
Kevin Mahn: I think it’s a healthy broadening. I think it’s had its heyday, but that doesn’t necessarily mean it’s going to ride off into the sunset. I mean, I think back to 2023, when the Mag seven accounted for 62% of the total return of the S&P 500 last year, it was down to 43%. Year to date, it’s less than zero.
Kevin Mahn: So does that mean it’s broadening? Does that mean that those names are coming out of favor. Or does it mean that you should be looking to follow the money into where all those seven names are spending their money, and look at the people receiving the money.
Caroline Woods: But it still makes up, up what, roughly a third of the S&P 500? So can the S&P 500 keep riding higher without the Mag seven?
Kevin Mahn: It’s a phenomenal question. Can you imagine how well the markets would be doing this year if the Mag seven was actually contributing to it, but I wonder if the Mag seven was contributing at the levels that it has been in recent years, with the rest of the market be doing as well, so the market can’t rally at the expense of the Mag seven.
Kevin Mahn: But it’s really healthy to see a broadening out. And once those Mag seven names start to catch up again, then you could see the market moving to new record highs.
Caroline Woods: So you do think that they’ll start to catch up?
Kevin Mahn: I do think some of the names certainly will. I mean, you think about the two names that overlap alphabet. Nvidia, Microsoft I wouldn’t count out Amazon. I wouldn’t count out by any means. Apple needs to do a lot to catch up right now.
Caroline Woods: No mention of Tesla. Is Tesla the name you would sell here?
Kevin Mahn: Tesla is never one that’s been a big favorite of mine because of the nature of their balance sheet, their profitability measures the same concerns I have with SpaceX, actually, ironically enough. But the other names, I think have more.
Caroline Woods: Well, let’s talk about space, because it’s become one of the hottest trades on Wall Street and just a just a few days here for investors who are looking at this huge run up. Yeah. And they were going to wait and see how it played out. Did they already missed the boat?
Kevin Mahn: I don’t know, it’s just all portfolio managers been in this business now for over three decades. It’s really hard for me to fathom, Caroline, how a company that had a $4 billion operating loss as recently as last year has drawn this much attention, and who has seen their stock rise as much as it has since it debuted on Friday, it now has a $2 trillion market cap.
Kevin Mahn: What that tells me is a couple of things. One, IPOs are back. And this could lead to many more IPOs on the New York Stock Exchange in the Nasdaq this year inside and outside the technology sector. But even more importantly, investors are now gravitating our growth opportunities outside of this world, otherworldly growth opportunities, if you will. And if you look at aerospace right now, whether it’s satellite technologies, rocket propulsion technologies or even data center construction in space, there are some intriguing investment opportunities there.
Kevin Mahn: But I would go beyond just space. I think about other aerospace companies GE aerospace, Helmet Aerospace, or even some defense contractors to complement the aerospace names. I really like the aerospace and defense industry as a whole.
Caroline Woods: Okay, so a lot of tech place here. Yeah, a lot of it. If I were to give you fresh capital today, where would you put it. That’s not tech I never heard of it.
Kevin Mahn: Does defense count. It’s defense technology. How about biotech a blend of health care and technology. How about the utility sector? You know, even if the AI revolution somehow goes away, all these utility companies are still in business. Yet they become a backdoor play into the AI revolution because these data centers need their power to fuel what they’re doing.
Kevin Mahn: So I like the utility sector. I like aerospace and defense. I like biotechnology companies because large cap pharma needs to buy their innovative health care solutions to help continue to grow up their health care platforms. So there’s an opportunity there as well. So I infrastructure build out health care through biotech, M&A, aerospace and defense. And the utility sector I think are the the most attractive areas.
Caroline Woods: And what else are you avoiding aside from Tesla and SpaceX?
Kevin Mahn: I think one area to really focus in on very carefully is consumer discretionary. Right now we’re in a no hire, no fire state of the labor market. Right now, we have elevated oil prices even though they’re starting to come down. So if consumers aren’t comfortable spending, the economy can and will only slow because 70% of our economic growth comes from consumer spending, even though are infrastructure spending is starting to catch up.
Kevin Mahn: So my biggest concern is if the spigot starts to turn off and companies and consumers start to spend less, where would that affect or would affect the infrastructure buildout? But it would also affect consumer discretionary. So that’s one area malaria. And then the energy sector with how much it’s risen because of Operation Epic Fury, you could see a lot of those gains come back pretty quickly if this deal is for real.
Caroline Woods: Okay. So basically TBD in terms of what this market could do until we find out if this deal is for real.
Kevin Mahn: Yes.
Caroline Woods: But this is a market that you think can power higher once that’s behind us.
Kevin Mahn: Absolutely. I mean, if you look back to February 27th, the day before the commencement of Operation Epic, very what we’ve been talking about, then the I infrastructure buildout is the I revolution for real? What is large cap pharmaceutical companies going to do to replace their lost revenues, either from the patent cliff or pressure from Congress to lower their prices?
Kevin Mahn: How much are Q1 earnings going to grow? They actually grew by 28%. Wow. So at that point in time, we were relatively comfortable with the stability of the US economy, with earnings growth and with the infrastructure buildout. Are we back there right now?
Caroline Woods: But do you buy here or do you wait for things to shake out a bit?
Kevin Mahn: I’m not a market timer, so I would suggest that you stay invested. You lean into the themes that continue to resonate, and if you follow the money, you’ll see those continued growth opportunities, I think, for the balance of this decade.
Caroline Woods: But stay invested. What about those people who have extra cash to put to work?
Kevin Mahn: Yeah. So where do you want to put that extra cash to work, have that money follow the money in terms of where the money is being spent.
Caroline Woods: But today, today, no better day like today. Okay. All right.
Kevin Mahn: First of all, I can’t wait one day.
Caroline Woods: All right. Perfect time to pivot to our rapid fire game of this or that. You know how to play. Quick questions, quick answers. Are you ready, Kevin I am ready. Here we go. Iran deal. Green light for stocks or temporary by the news bounce.
Kevin Mahn: Temporary buy the news.
Caroline Woods: Bounce market’s next like higher or relief rally.
Kevin Mahn: Relief rally.
Caroline Woods: More upside from here Dow or Russell. Russell better bet S&P 500 or Nasdaq 100.
Kevin Mahn: For this year. Yes Nasdaq 100.
Caroline Woods: For one year.
Kevin Mahn: S&P 500.
Caroline Woods: Meg seven fading. We’re taking off.
Kevin Mahn: Fading. Leading the way for the air seven.
Caroline Woods: I trade overcrowded or just getting started.
Kevin Mahn: Just getting started. But look to where the money is being spent as opposed to spending it. But it’s just getting started.
Caroline Woods: AI leader Nvidia or Alphabet.
Kevin Mahn: Nvidia.
Caroline Woods: Both fix space buy here or wait, wait wait until what?
Kevin Mahn: Wait until I feel more comfortable that they’re profitable, that their revenues are growing, and that they have a real business plan to get business.
Caroline Woods: Wait until they get into the S&P 500, maybe, specs space valuation excessive or justified?
Kevin Mahn: Excessive, given what they’ve done in their operating loss just of last year of billions of dollars. I think the valuation is excessive, but time will tell. I wouldn’t bet against Elon Musk either.
Caroline Woods: Fed this week hawkish hold or dovish surprise.
Kevin Mahn: I think neither. I think they’re not going to do anything and they’re just going to come out and discuss everything that they’re looking to do to revamp the Federal Reserve as a whole. But I think there’s more of a bias to dovish coming out of this meeting than there will be hawkish because of the news coming out of Iran.
Caroline Woods: Inflation, cooling or sticky temporarily cooling.
Kevin Mahn: I hope it to see it pick up pace in terms of cooling.
Caroline Woods: Markets by year end. Higher or lower?
Kevin Mahn: Higher.
Caroline Woods: How much higher?
Kevin Mahn: I mean, there’s a lot of people out there forecasting 8000 by the end of the year. That would be about 6 to 7% higher. I don’t think that’s totally unrealistic.
Caroline Woods: If you can only buy one stock for the rest of this year. Which is it?
Kevin Mahn: Oh, you and Micron Technological.
Caroline Woods: You’ve been up 278% year to date. Yep.
Kevin Mahn: Because they’re turning away business and they’re only trading at less than six times for earnings despite the rapid ascent of their stock price.
Caroline Woods: Kevin Mahn, thanks so much for playing along. I always appreciate your picks and your insights. Thanks Caroline. That’s Kevin Mahn. He is president and chief investment officer at Hennion and Walsh Asset Management. If you enjoyed this street talk check out our full interview with Daniel Newman. He also is in the AI is in the early innings camp and gives his top picks.
