July 1, 2025 • 23 mins
In this episode of InFocus, CEO Mike Gassewitz sits down with Portfolio Manager Dave Gill, CFA®, MBA, to explore how the technology and industrial sectors are performing. The conversation highlights Microsoft's AI strategy, capital investment ramp-up, and evolving market expectations, illustrating how long-term fundamentals can diverge from short-term sentiment. The discussion explores why some strong earnings results still elicited lukewarm reactions and what current valuations reveal about investor sentiment.
Together, they discuss why TriCert's focus on quality companies, strong balance sheets, and long-term thinking continues to offer clarity and confidence amid uncertainty in the sectors.
Recorded on June 12, 2025
DISCLAIMER: This content has been prepared by TriCert Investment Counsel Inc. The information, including forecast financial information, should not be considered as advice or a recommendation to investors and does not take into account your particular investment objectives or financial situation. Before acting on any information, you should consider the appropriateness of the information and speak with one of our portfolio managers. All securities and financial products or instrument transactions involve risks, including the risk of adverse or unanticipated market, financial or political developments and, in international transactions, currency risk. This content may contain forward-looking statements, including statements regarding our beliefs on current expectations and market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. TriCert Investment Counsel Inc. does not undertake any obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof to reflect the occurrence of unanticipated events. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside TriCert Investment Counsel Inc.’s control. Past performance is not a reliable indication of future performance.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:12):
Hi, I'm Mike Gaswitz, CEO of Tricert Financial Group.
Welcome to another episode of InFocus.
Today I'm joined by Dave Gill, our portfolio manager
responsible for our industrial and tech sectors.
Welcome to the show, Dave. Good afternoon, Mike.
Great to have you on the show. So yeah, we want to get an
update in terms of what's been happening in industrials and
(00:32):
technologies. So we always like to start from
a business perspective, the business results.
So how have the two call them? The sub sector has been faring.
Yeah, I think if you haven't really been paying attention
and, and maybe just zoom out, you know, you look at the
performance on a year to date basis and you'd probably think
that things were pretty normal from a from a return perspective
(00:56):
and a business performance perspective.
But it's really been a tale of two markets, Mike, for most
sectors, including the information technology and
industrial sectors, you know, webasically saw a risk off
environment into Liberation Day as investors questioned whether
this was an ideological shift ora negotiation strategy.
(01:19):
Then we saw a risk on phase after investors got their answer
early in April, which essentially took the worst
outcome off the table, at least for now.
IT and industrials are generallymore economically sensitive
sectors as you know. So in the macro deteriorates,
they generally lag. In addition to that, when we
(01:41):
examine the fundamentals of the sector, so things like
valuation, earnings growth, profitability or the price you
pay and the what you get, these sectors looked less favorable
from our perspective, particularly on valuation.
Also for the industrial sector, we thought that expectations for
(02:02):
calendar year 2025 on the revenue and earnings line looked
a bit optimistic, particularly when one considers the macro
backdrop. I think incrementally however,
we've been become more positive as more recently we've seen the
information technology sector lagging the broader market,
(02:23):
which has improved its relative valuation.
And then from the industrial side of things, we've seen
revenue and earnings expectations come down over the
last quarter or two to much morereasonable levels, which is also
a net positive. OK.
And the net positive, again, you're looking at it more from a
called the buy side, investment side, things becoming maybe a
(02:46):
little more reasonable. Exactly.
Investors or the market generally has expectations for
how these businesses are performing.
And while business results may be good overall, they may not be
up to the level of expectation of the market, and in that case,
they're likely to disappoint. OK.
(03:07):
So you mentioned and you know, well, yeah, why don't we talk
about then you know, and you mixed it in there a little bit,
but a little bit more in terms of the market reaction then sure
in terms of some of these results and what.
We're seeing, yeah, well, you know, our focus obviously is, is
mostly on, on business performance like you've you've
talked about. And I think all things
considered, our core picks are performing quite well despite
(03:31):
the the difficult operating environment.
On average when I look at the names that I, I cover, they beat
expectations both on the top andbottom lines and and those at
those results are actually in line to a slightly better than
the overall market. So that's, that's a good thing.
That's something that we want tosee.
Only a few companies, so call ita handful of companies saw
(03:53):
negative share price reactions to their earnings reports.
But those reactions overall, Mike, were relatively muted.
They were more related to a lackof guidance or clarity
disclosure, whatever you want tocall it, regarding tariff or
DOGE impacts on the business rather than actual operational
(04:14):
missteps or a lack of execution.So I think that that generally
or or potentially highlights oneof the key components of
Tricert's value proposition. And it's something that you've
talked about at length over the last little while.
And that's our philosophy on investing in quality businesses
(04:36):
for the long term. The companies that I look at in
industrials and IT not only havestrong management teams, solid
prospects for growth or the opportunity to increase
profitability, but they also have strong balance sheets.
So they're able to weather the storm.
In addition to that, based on myanalysis in information
(04:56):
technology and in industrials, the type of companies that we
look at, generally speaking, they're better prepared in my
opinion for today's challenges than ever before.
Because if you look back to 2000eighties, management teams have
really faced a rolling series ofcrises.
And so when you face a rolling series of prices, you get a
(05:16):
dress rehearsal and each dress rehearsal you get a little bit
better and a little bit better. And that's where these companies
are right now in this challenging environment.
These management teams are also much more agile and they're
focusing on controlling the controllables.
So that's leading to better execution overall.
(05:37):
In addition, when we look at what these companies have done
and how they've responded to thethe environment that we are in
currently, remember this administration was in place in
2016 to 2020. So they had a runway and an
opportunity to prepare for what's what's ahead.
And so these these teams have diversified their end markets
(05:58):
and their revenue streams and have solidified their
relationships with both customers and suppliers.
So you feel pretty good about where these companies are and
how they're positioned. Beyond all that, they've
undertaken great lengths and andmade great investments in supply
chain optimization. So they're able to respond more
quickly. Certainly there's been some
(06:20):
clarity with regards to the trade and tariff backdrop, but
we're sort of not out of the woods yet.
And then finally at what I wouldsay is that a lot of these
companies that I look at, particularly in the industrial
sector, if you look at their manufacturing footprints,
they've tried to diversify thosemanufacturing footprints and
(06:41):
give them more optionality. And then on top of all of that,
during COVID, when the revenue line sort of disappeared, these
companies paid a lot of focus tothe expense line and they became
much more efficient operators. Now, just on that point, if I
think back to our last time we spoke, we talked about one of
our core picks in the industrialsector and that that company was
(07:04):
John Deere. So farm equipment manufacturer,
great quality company. In fact, stock's done very well
since we spoke. But nonetheless, one of the
reasons they they've done so well since we spoke is that they
provided a lot of disclosure, which is obviously welcomed by
the investment community with their most recent earnings
report. And I think I talked about, you
know, really what's been drivingthat stock is a deterioration in
(07:27):
farm fundamentals and just demand for farm equipment, which
is basically dropped 20% year over year.
But having said all of that, they provided disclosure on some
of the things that I just talkedabout, these hallmarks of
quality companies. And one of the things that they
talked about is that you know their end markets are actually
more levered towards the US. In fact 80% of finished goods
(07:51):
and I believe about 75% of the components for their equipment
are actually sourced in America and built by American.
So in my opinion, one of the reasons that that stock has has
moved higher is not just sort ofimproving sentiment overall in
in farm fundamentals and then ultimately demand for for farm
equipment, but this whole tariffcloud has been lifted because
(08:14):
because of management disclosure, which again is is
welcomed. That's good to see that they're
well positioned and any any special call outs in terms of
you mentioned John Deere from last quarter, maybe this quarter
in you know anybody you want to highlight and dive deeper into
in terms of what they've done? Yeah, absolutely.
I think maybe we'll shift over to the information technology
(08:38):
sector again. Last time we spoke about
industrials, I, I, I circled back on here and, and that's not
to say that there aren't some good candidates and quality
companies on the investment and the information technology
sector side as well. And, and one of the companies
that I'd like to highlight just because it's really indicative
of what's kind of been going on in the market more broadly and
(09:00):
that is at that is Microsoft. So if you look in the last few
months, we've seen A2 quarterly reports come out of this
company, their fiscal year 2025 Q 2 and Q3 reports.
Both reports, Mike, were solid for both the top line and the
bottom line. So revenue was better and
earnings were better. But after the second quarter
(09:21):
report, the stock sold off sharply.
Their Asia business, which is basically their cloud platform
and related services was light versus expectations.
I think we talked about that a little bit earlier.
Sometimes the actual results aren't what drives the stock,
it's the expectations or the whisper numbers regarding those
results which is more important in in the short term, but that
(09:45):
business, So Microsoft, Microsoft Azure business or
cloud platform business was already benefiting from on
premise to cloud migration, which basically helps clients
lower IT costs, increase scalability, enhance security,
etcetera. But but now there was an
(10:05):
additional revenue tailwind coming from AI or an increase in
AI related workloads. When we look at that business,
it it's got obviously a lot of runway for growth and and that's
something that investors are paying a lot of attention to.
Microsoft itself has stated its intention to integrate and to
(10:28):
scale the power of AI across itsdata and tax stack.
I think you'll remember they made their initial investment in
open AI back in 2019, a very large subsequent investment in
2023, which was really a watershed moment for, for AI
because it, it led to sort of broad acceptance or
commercialization of, of AI. And basically it's created this
(10:52):
inertia that we're seeing in theinformation technology a space
since then. Regardless, most of us would see
this AI like on a day-to-day basis.
You come into work, you, you know, you open up Microsoft 365
and you see copilot. That's Microsoft sort of working
this AI across its data and TaxAct.
(11:12):
It's also in other product categories.
Of course, Microsoft's a huge company.
It's got several very deep and broad product offering.
So they have AI Co pilots in in search, security, cloud and then
software development tools that you're likely familiar with like
GitHub. Needless to say, to prepare for
(11:33):
this AI demand tailwind, Microsoft has had to invest.
And if you look at their capitalexpenditures from 2021 to 2023,
they ran at about call it 20 billion a year.
Right now, Microsoft is spendingroughly that 1/4.
Oh wow yeah, didn't realize it had jumped that much.
(11:53):
It has and and they're spending that on both short lived assets
and long lived assets. So short lived assets, you know,
we're talking about GPUSCPUS, sothese high performing chips,
servers, things like that, call it the stuff that goes inside of
these data centers. And then then the actual brick
and mortar, the data centers themselves, more long lived
assets. So they're CapEx or they're the
(12:16):
amount of money that they're spending to support that future
demand is ramped up materially. And so the investment
controversy right now, what investors are paying attention
to is like, are we going to get a return on that investment and
when is it coming and is it going to justify the cost?
And I think if you look at at that, Microsoft, it's done a
great job so far at, at managingits cost of goods sold and its
(12:39):
operating expenses, because if you look at their margins,
they've they've actually been inbeen been able to maintain their
margins in light of this significant investment cycle.
This is a company that gets, youknow, call it high 60% gross
margins and mid 40% operating margin.
So it's a very, very profitable company and they're doing all of
this well. Capital expenditures have gone
(13:00):
up from call it a run rate of $20 billion a year to about $80
billion a year and quite impressive results.
But nonetheless, the stock stillsold off after Q2 results.
Now, the point I'm guess I'm trying to make is that the
market can be impatient at timesand I know one of your mattress
has been, you know, we're not traders, we're investors.
(13:22):
And you know, to that end, the Q2 miss on Asia didn't change
our view because we're not so myopic.
You know, we're thinking about the long term.
We want to hold these good businesses over long time
periods and and that's what we continue to do with Microsoft.
And of course, you know how thisstory ends is that they reported
their Q3 results not that long ago when they flipped the
(13:43):
script. Asia beat expectations moving
the stock significantly higher and showing that the AI
monetization story is still verymuch intact.
In fact, I think the company hassaid that the aggregate revenue
run rate for AI related businessis now north of $13 billion on
(14:03):
an annual basis, which makes it's the fastest growing
business to reach that milestonein the company's history.
And again, when you consider some of these like, you know,
legendary products and the depthand breadth of the product
portfolio at Microsoft, that's pretty, pretty impressive.
And it's a story that that we continue to like.
You know, I've got to tell you, before recording this podcast, I
(14:23):
literally just came up back froma meeting with our tech folks
and, and you know, we're a long a journey of, you know, called
digital transformation, like a lot of firms.
And you know what you were talking about.
And we are a Microsoft shop, We're an Azure shop, exactly
what you talked about. And when you look at the
integration of AI, what they do for us today, and then the
(14:46):
development tools and, and, and you know, call it the networking
effect by integrating all those things, they, they're pretty
unbeatable. You know, you know, for a small
to medium enterprise, pretty hard to say no to what Microsoft
is bringing to the to the marketand what they're integrating
across. You know, even things like Power
(15:06):
BI for a data analytics and the like.
It's just they are doing a masterful job from from Aceo's
perspective and operations type perspective there.
There really isn't another player out there who can
integrate what they do across all aspects of the business.
Given M365 S, Yeah, it's a powerful story.
(15:28):
It it's a great point, Mike. I mean, you know, a lot of
people say, you know, what do you ask me, what do you do for a
living? I'm like, you know, I manage, I
manage money. But when you really, when you
really break it down, you, what we really do is we manage
information. You know, you, if you can't
measure, you can't management. There's that old adage.
But really what we're trying to do is become more efficient at
managing all of this informationthat we get, figuring out what
(15:51):
it means to the business, and then reacting accordingly.
And I think Microsoft is firmly positioned to provide that
service to companies like us, which will position us great for
the future. Yeah, yeah, for sure.
Well, thanks for that, Dave. So looking forward, what are
what are the kind of things you're you're watching?
What are you keeping your eye on?
Well, I think, you know, obviously we're, we're in a
(16:16):
tumultuous environment like no question.
So I think for for information technology, the focus remains on
this whole AI optimize, excuse me, AI monetization opportunity.
I think if you look at the hyperscaler so that the big cloud
providers, they're targeted to invest call it between two and
$3 trillion in this opportunity over the next five years.
(16:41):
You know, they got to get an ROIon that.
So they we got to start seeing revenues that show up to support
that level of investment. Otherwise these valuations
can't, can't persist. Having said that, you know if
you look at the information technology sector, it has been
lagging after a couple of good years in 2023 and 2024.
So valuations like I mentioned earlier in the call are much
(17:05):
more attractive certainly on a relative basis.
And you know, the, the quarter, the first quarter was, was good
for most of these companies and they've high levels of
profitability. So we're we're still attracted
to to the space. And I think that on top of all
of that, you know, if you start looking at some of these macro
indicators, they're being markeddown generally, like if you look
(17:27):
at the US, they're being, they're being marked down like
we're looking for essentially slower growth and then maybe a
little bit higher inflation. And, and one of the things
investors may not realize is like when we're in a situation
like that, you know, generally you can see an investor start to
pay a premium for secular growth.
So while I frame information technology or put it in the same
(17:48):
bucket as industrials, you know,there's also this secular driver
as well. And, and the secular story in,
in information technology can and will be the AI monetization
opportunity. So that may be an opportunity to
see information technology reassume leadership from a
market perspective. And then for the industrials
(18:11):
sector, it's really for me, it'sa focus on price cost, right?
Like if you think about 2020-2021 inflation was high.
And, and basically what happenedis a lot of the companies that
we own, because they've got a good brand, they've got good
market leadership. When you're in that position,
it's, it's nice, it's a nice place to be.
And that's why we gravitate towards those companies because
(18:31):
you can push through price. In other words, if you want to
take price, you can take price, you can raise prices because
you've got that brand, you've got that market leadership
position and that can help you maintain margins.
So, but what we'll have to see is like, is it sustainable that
price spread because you know, Idon't know about you, but I'm a
little bit fatigued with these, these prices.
(18:52):
You know, is there is there moreappetite in the market for
pushing through price increases?And then if not, how will these
companies maybe maintain that price cost spread by cutting
costs or garnering efficiency initiatives or benefits in lieu
of in lieu of higher price. And then of course, one of the
things we're looking at on the industrial side as well is just
(19:15):
more clarity with regards to tariffs and, and DOGE.
I know DOGE has kind of taken a little bit of a backseat, but
there's still a fiscal issue in the US And so we have to see
like, you know, from a budgetary, from a spending
perspective and a budgetary perspective, you know, the
government always is a big customer to the private sector.
And so, you know, we'll see whatthey're doing from a fiscal
(19:37):
perspective, you know, whether we see cutbacks or not and what
the implications are for guidance for the rest of 2025 as
we head into a second quarter earnings season, which should
happen shortly. I mean, and thanks for that,
Dave. I mean, you think about as you
say, tumultuous is the word uncertainty.
(19:57):
I mean, you think about between Doge and then you think about,
you think about this big beautiful bill.
In terms of the spend that's being proposed and it yeah, it
just makes your head spin. It's like, OK, which way are
these guys going? And and that's, you know, back
to your opening in terms of, well, you know what, just stay
focused on the quality companies, the quality
(20:18):
investments and, and quality management teams because they'll
navigate through this. And again, for my mantra, I
still believe sanity will prevail.
I mean, you're saying, you know,the street talked about the Taco
trade. Trump always chickens out.
You know, again, I think it is going to be, you know,
tabultuous interesting time, butit's good to know that we're
(20:41):
invested in some quality stocks and Microsoft is an excellent
one that you've highlighted. I.
Was just going to say, it's funny though, like when there's
not a lot going on, nobody wantsto talk to me, you know, but
when, when things get, when things get difficult, you know,
my phone never stops ringing. And so the funny part is, is
like, if you just think about what we do and how, how you can
(21:05):
be successful in, in this type of market, it's just be
consistent. Stick to your process, stick to
the blocking and tackling that got you here.
And for us, for an analyst, A portfolio manager, for some of
our business partners and our and our clients, it's just
nothing, nothing changes, just stick to the plan.
In fact, if I look back at the performance of of our core picks
(21:26):
during the the tumult in call itthe lead up into into April,
they, they outperformed and thenand then as we saw sort of these
tariff clouds, you know start todissipate, they participated in,
in the upside. So overall, I mean, I think
we're in a really good place. And if we continue to, you know,
sort of select and focus on goodcompanies with these hallmarks
(21:50):
of quality that that we try to pick for our clients and try to
think about like the risk perspective from actual capital
loss perspective, you know, we'll, we'll do good things for
our for our clients and, and nothing changes and there really
never is a good time to invest. There's always something,
there's always some something inthe background is valuations,
it's deteriorating earnings, it's geopolitical tensions, it's
(22:12):
you know, there's always something.
So if you if you want an all clear signal, you're, you're
probably never going to invest so.
And when you say that never a good time and actually never
think about it, when you think about it, when do people really
invest when the market's hot and, and, and this is back to,
you know, your opening comments about well, but you got to look
at the price, what are you paying for these things?
(22:35):
So, and that's, it's all perception at the end of the
day. I mean, we see good times to
invest, good opportunity to invest where we can.
We can jump in and and leverage some of the, what do I say the
insanities in the market. You know, sometimes things are
overpriced, sometimes they're ridiculously underpriced.
And yeah, all right, Dave, thankyou so much for this.
(22:58):
Yeah, great. Thank you very much, Mike.
Folks, as always, if you have any questions, don't hesitate to
reach out to your financial advisor at your accounting firm,
our chat with your Tri CERT Investment Council portfolio
manager, or don't hesitate to reach out to myself.
Take care.
Hi, I'm Mike Gaswitz, CEO of Tricert Financial Group.
Welcome to another episode of InFocus.
Today I'm joined by Dave Gill, our portfolio manager
responsible for our industrial and tech sectors.
Welcome to the show, Dave. Good afternoon, Mike.
Great to have you on the show. So yeah, we want to get an
update in terms of what's been happening in industrials and
(00:32):
technologies. So we always like to start from
a business perspective, the business results.
So how have the two call them? The sub sector has been faring.
Yeah, I think if you haven't really been paying attention
and, and maybe just zoom out, you know, you look at the
performance on a year to date basis and you'd probably think
that things were pretty normal from a from a return perspective
(00:56):
and a business performance perspective.
But it's really been a tale of two markets, Mike, for most
sectors, including the information technology and
industrial sectors, you know, webasically saw a risk off
environment into Liberation Day as investors questioned whether
this was an ideological shift ora negotiation strategy.
(01:19):
Then we saw a risk on phase after investors got their answer
early in April, which essentially took the worst
outcome off the table, at least for now.
IT and industrials are generallymore economically sensitive
sectors as you know. So in the macro deteriorates,
they generally lag. In addition to that, when we
(01:41):
examine the fundamentals of the sector, so things like
valuation, earnings growth, profitability or the price you
pay and the what you get, these sectors looked less favorable
from our perspective, particularly on valuation.
Also for the industrial sector, we thought that expectations for
(02:02):
calendar year 2025 on the revenue and earnings line looked
a bit optimistic, particularly when one considers the macro
backdrop. I think incrementally however,
we've been become more positive as more recently we've seen the
information technology sector lagging the broader market,
(02:23):
which has improved its relative valuation.
And then from the industrial side of things, we've seen
revenue and earnings expectations come down over the
last quarter or two to much morereasonable levels, which is also
a net positive. OK.
And the net positive, again, you're looking at it more from a
called the buy side, investment side, things becoming maybe a
(02:46):
little more reasonable. Exactly.
Investors or the market generally has expectations for
how these businesses are performing.
And while business results may be good overall, they may not be
up to the level of expectation of the market, and in that case,
they're likely to disappoint. OK.
(03:07):
So you mentioned and you know, well, yeah, why don't we talk
about then you know, and you mixed it in there a little bit,
but a little bit more in terms of the market reaction then sure
in terms of some of these results and what.
We're seeing, yeah, well, you know, our focus obviously is, is
mostly on, on business performance like you've you've
talked about. And I think all things
considered, our core picks are performing quite well despite
(03:31):
the the difficult operating environment.
On average when I look at the names that I, I cover, they beat
expectations both on the top andbottom lines and and those at
those results are actually in line to a slightly better than
the overall market. So that's, that's a good thing.
That's something that we want tosee.
Only a few companies, so call ita handful of companies saw
(03:53):
negative share price reactions to their earnings reports.
But those reactions overall, Mike, were relatively muted.
They were more related to a lackof guidance or clarity
disclosure, whatever you want tocall it, regarding tariff or
DOGE impacts on the business rather than actual operational
(04:14):
missteps or a lack of execution.So I think that that generally
or or potentially highlights oneof the key components of
Tricert's value proposition. And it's something that you've
talked about at length over the last little while.
And that's our philosophy on investing in quality businesses
(04:36):
for the long term. The companies that I look at in
industrials and IT not only havestrong management teams, solid
prospects for growth or the opportunity to increase
profitability, but they also have strong balance sheets.
So they're able to weather the storm.
In addition to that, based on myanalysis in information
(04:56):
technology and in industrials, the type of companies that we
look at, generally speaking, they're better prepared in my
opinion for today's challenges than ever before.
Because if you look back to 2000eighties, management teams have
really faced a rolling series ofcrises.
And so when you face a rolling series of prices, you get a
(05:16):
dress rehearsal and each dress rehearsal you get a little bit
better and a little bit better. And that's where these companies
are right now in this challenging environment.
These management teams are also much more agile and they're
focusing on controlling the controllables.
So that's leading to better execution overall.
(05:37):
In addition, when we look at what these companies have done
and how they've responded to thethe environment that we are in
currently, remember this administration was in place in
2016 to 2020. So they had a runway and an
opportunity to prepare for what's what's ahead.
And so these these teams have diversified their end markets
(05:58):
and their revenue streams and have solidified their
relationships with both customers and suppliers.
So you feel pretty good about where these companies are and
how they're positioned. Beyond all that, they've
undertaken great lengths and andmade great investments in supply
chain optimization. So they're able to respond more
quickly. Certainly there's been some
(06:20):
clarity with regards to the trade and tariff backdrop, but
we're sort of not out of the woods yet.
And then finally at what I wouldsay is that a lot of these
companies that I look at, particularly in the industrial
sector, if you look at their manufacturing footprints,
they've tried to diversify thosemanufacturing footprints and
(06:41):
give them more optionality. And then on top of all of that,
during COVID, when the revenue line sort of disappeared, these
companies paid a lot of focus tothe expense line and they became
much more efficient operators. Now, just on that point, if I
think back to our last time we spoke, we talked about one of
our core picks in the industrialsector and that that company was
(07:04):
John Deere. So farm equipment manufacturer,
great quality company. In fact, stock's done very well
since we spoke. But nonetheless, one of the
reasons they they've done so well since we spoke is that they
provided a lot of disclosure, which is obviously welcomed by
the investment community with their most recent earnings
report. And I think I talked about, you
know, really what's been drivingthat stock is a deterioration in
(07:27):
farm fundamentals and just demand for farm equipment, which
is basically dropped 20% year over year.
But having said all of that, they provided disclosure on some
of the things that I just talkedabout, these hallmarks of
quality companies. And one of the things that they
talked about is that you know their end markets are actually
more levered towards the US. In fact 80% of finished goods
(07:51):
and I believe about 75% of the components for their equipment
are actually sourced in America and built by American.
So in my opinion, one of the reasons that that stock has has
moved higher is not just sort ofimproving sentiment overall in
in farm fundamentals and then ultimately demand for for farm
equipment, but this whole tariffcloud has been lifted because
(08:14):
because of management disclosure, which again is is
welcomed. That's good to see that they're
well positioned and any any special call outs in terms of
you mentioned John Deere from last quarter, maybe this quarter
in you know anybody you want to highlight and dive deeper into
in terms of what they've done? Yeah, absolutely.
I think maybe we'll shift over to the information technology
(08:38):
sector again. Last time we spoke about
industrials, I, I, I circled back on here and, and that's not
to say that there aren't some good candidates and quality
companies on the investment and the information technology
sector side as well. And, and one of the companies
that I'd like to highlight just because it's really indicative
of what's kind of been going on in the market more broadly and
(09:00):
that is at that is Microsoft. So if you look in the last few
months, we've seen A2 quarterly reports come out of this
company, their fiscal year 2025 Q 2 and Q3 reports.
Both reports, Mike, were solid for both the top line and the
bottom line. So revenue was better and
earnings were better. But after the second quarter
(09:21):
report, the stock sold off sharply.
Their Asia business, which is basically their cloud platform
and related services was light versus expectations.
I think we talked about that a little bit earlier.
Sometimes the actual results aren't what drives the stock,
it's the expectations or the whisper numbers regarding those
results which is more important in in the short term, but that
(09:45):
business, So Microsoft, Microsoft Azure business or
cloud platform business was already benefiting from on
premise to cloud migration, which basically helps clients
lower IT costs, increase scalability, enhance security,
etcetera. But but now there was an
(10:05):
additional revenue tailwind coming from AI or an increase in
AI related workloads. When we look at that business,
it it's got obviously a lot of runway for growth and and that's
something that investors are paying a lot of attention to.
Microsoft itself has stated its intention to integrate and to
(10:28):
scale the power of AI across itsdata and tax stack.
I think you'll remember they made their initial investment in
open AI back in 2019, a very large subsequent investment in
2023, which was really a watershed moment for, for AI
because it, it led to sort of broad acceptance or
commercialization of, of AI. And basically it's created this
(10:52):
inertia that we're seeing in theinformation technology a space
since then. Regardless, most of us would see
this AI like on a day-to-day basis.
You come into work, you, you know, you open up Microsoft 365
and you see copilot. That's Microsoft sort of working
this AI across its data and TaxAct.
(11:12):
It's also in other product categories.
Of course, Microsoft's a huge company.
It's got several very deep and broad product offering.
So they have AI Co pilots in in search, security, cloud and then
software development tools that you're likely familiar with like
GitHub. Needless to say, to prepare for
(11:33):
this AI demand tailwind, Microsoft has had to invest.
And if you look at their capitalexpenditures from 2021 to 2023,
they ran at about call it 20 billion a year.
Right now, Microsoft is spendingroughly that 1/4.
Oh wow yeah, didn't realize it had jumped that much.
(11:53):
It has and and they're spending that on both short lived assets
and long lived assets. So short lived assets, you know,
we're talking about GPUSCPUS, sothese high performing chips,
servers, things like that, call it the stuff that goes inside of
these data centers. And then then the actual brick
and mortar, the data centers themselves, more long lived
assets. So they're CapEx or they're the
(12:16):
amount of money that they're spending to support that future
demand is ramped up materially. And so the investment
controversy right now, what investors are paying attention
to is like, are we going to get a return on that investment and
when is it coming and is it going to justify the cost?
And I think if you look at at that, Microsoft, it's done a
great job so far at, at managingits cost of goods sold and its
(12:39):
operating expenses, because if you look at their margins,
they've they've actually been inbeen been able to maintain their
margins in light of this significant investment cycle.
This is a company that gets, youknow, call it high 60% gross
margins and mid 40% operating margin.
So it's a very, very profitable company and they're doing all of
this well. Capital expenditures have gone
(13:00):
up from call it a run rate of $20 billion a year to about $80
billion a year and quite impressive results.
But nonetheless, the stock stillsold off after Q2 results.
Now, the point I'm guess I'm trying to make is that the
market can be impatient at timesand I know one of your mattress
has been, you know, we're not traders, we're investors.
(13:22):
And you know, to that end, the Q2 miss on Asia didn't change
our view because we're not so myopic.
You know, we're thinking about the long term.
We want to hold these good businesses over long time
periods and and that's what we continue to do with Microsoft.
And of course, you know how thisstory ends is that they reported
their Q3 results not that long ago when they flipped the
(13:43):
script. Asia beat expectations moving
the stock significantly higher and showing that the AI
monetization story is still verymuch intact.
In fact, I think the company hassaid that the aggregate revenue
run rate for AI related businessis now north of $13 billion on
(14:03):
an annual basis, which makes it's the fastest growing
business to reach that milestonein the company's history.
And again, when you consider some of these like, you know,
legendary products and the depthand breadth of the product
portfolio at Microsoft, that's pretty, pretty impressive.
And it's a story that that we continue to like.
You know, I've got to tell you, before recording this podcast, I
(14:23):
literally just came up back froma meeting with our tech folks
and, and you know, we're a long a journey of, you know, called
digital transformation, like a lot of firms.
And you know what you were talking about.
And we are a Microsoft shop, We're an Azure shop, exactly
what you talked about. And when you look at the
integration of AI, what they do for us today, and then the
(14:46):
development tools and, and, and you know, call it the networking
effect by integrating all those things, they, they're pretty
unbeatable. You know, you know, for a small
to medium enterprise, pretty hard to say no to what Microsoft
is bringing to the to the marketand what they're integrating
across. You know, even things like Power
(15:06):
BI for a data analytics and the like.
It's just they are doing a masterful job from from Aceo's
perspective and operations type perspective there.
There really isn't another player out there who can
integrate what they do across all aspects of the business.
Given M365 S, Yeah, it's a powerful story.
(15:28):
It it's a great point, Mike. I mean, you know, a lot of
people say, you know, what do you ask me, what do you do for a
living? I'm like, you know, I manage, I
manage money. But when you really, when you
really break it down, you, what we really do is we manage
information. You know, you, if you can't
measure, you can't management. There's that old adage.
But really what we're trying to do is become more efficient at
managing all of this informationthat we get, figuring out what
(15:51):
it means to the business, and then reacting accordingly.
And I think Microsoft is firmly positioned to provide that
service to companies like us, which will position us great for
the future. Yeah, yeah, for sure.
Well, thanks for that, Dave. So looking forward, what are
what are the kind of things you're you're watching?
What are you keeping your eye on?
Well, I think, you know, obviously we're, we're in a
(16:16):
tumultuous environment like no question.
So I think for for information technology, the focus remains on
this whole AI optimize, excuse me, AI monetization opportunity.
I think if you look at the hyperscaler so that the big cloud
providers, they're targeted to invest call it between two and
$3 trillion in this opportunity over the next five years.
(16:41):
You know, they got to get an ROIon that.
So they we got to start seeing revenues that show up to support
that level of investment. Otherwise these valuations
can't, can't persist. Having said that, you know if
you look at the information technology sector, it has been
lagging after a couple of good years in 2023 and 2024.
So valuations like I mentioned earlier in the call are much
(17:05):
more attractive certainly on a relative basis.
And you know, the, the quarter, the first quarter was, was good
for most of these companies and they've high levels of
profitability. So we're we're still attracted
to to the space. And I think that on top of all
of that, you know, if you start looking at some of these macro
indicators, they're being markeddown generally, like if you look
(17:27):
at the US, they're being, they're being marked down like
we're looking for essentially slower growth and then maybe a
little bit higher inflation. And, and one of the things
investors may not realize is like when we're in a situation
like that, you know, generally you can see an investor start to
pay a premium for secular growth.
So while I frame information technology or put it in the same
(17:48):
bucket as industrials, you know,there's also this secular driver
as well. And, and the secular story in,
in information technology can and will be the AI monetization
opportunity. So that may be an opportunity to
see information technology reassume leadership from a
market perspective. And then for the industrials
(18:11):
sector, it's really for me, it'sa focus on price cost, right?
Like if you think about 2020-2021 inflation was high.
And, and basically what happenedis a lot of the companies that
we own, because they've got a good brand, they've got good
market leadership. When you're in that position,
it's, it's nice, it's a nice place to be.
And that's why we gravitate towards those companies because
(18:31):
you can push through price. In other words, if you want to
take price, you can take price, you can raise prices because
you've got that brand, you've got that market leadership
position and that can help you maintain margins.
So, but what we'll have to see is like, is it sustainable that
price spread because you know, Idon't know about you, but I'm a
little bit fatigued with these, these prices.
(18:52):
You know, is there is there moreappetite in the market for
pushing through price increases?And then if not, how will these
companies maybe maintain that price cost spread by cutting
costs or garnering efficiency initiatives or benefits in lieu
of in lieu of higher price. And then of course, one of the
things we're looking at on the industrial side as well is just
(19:15):
more clarity with regards to tariffs and, and DOGE.
I know DOGE has kind of taken a little bit of a backseat, but
there's still a fiscal issue in the US And so we have to see
like, you know, from a budgetary, from a spending
perspective and a budgetary perspective, you know, the
government always is a big customer to the private sector.
And so, you know, we'll see whatthey're doing from a fiscal
(19:37):
perspective, you know, whether we see cutbacks or not and what
the implications are for guidance for the rest of 2025 as
we head into a second quarter earnings season, which should
happen shortly. I mean, and thanks for that,
Dave. I mean, you think about as you
say, tumultuous is the word uncertainty.
(19:57):
I mean, you think about between Doge and then you think about,
you think about this big beautiful bill.
In terms of the spend that's being proposed and it yeah, it
just makes your head spin. It's like, OK, which way are
these guys going? And and that's, you know, back
to your opening in terms of, well, you know what, just stay
focused on the quality companies, the quality
(20:18):
investments and, and quality management teams because they'll
navigate through this. And again, for my mantra, I
still believe sanity will prevail.
I mean, you're saying, you know,the street talked about the Taco
trade. Trump always chickens out.
You know, again, I think it is going to be, you know,
tabultuous interesting time, butit's good to know that we're
(20:41):
invested in some quality stocks and Microsoft is an excellent
one that you've highlighted. I.
Was just going to say, it's funny though, like when there's
not a lot going on, nobody wantsto talk to me, you know, but
when, when things get, when things get difficult, you know,
my phone never stops ringing. And so the funny part is, is
like, if you just think about what we do and how, how you can
(21:05):
be successful in, in this type of market, it's just be
consistent. Stick to your process, stick to
the blocking and tackling that got you here.
And for us, for an analyst, A portfolio manager, for some of
our business partners and our and our clients, it's just
nothing, nothing changes, just stick to the plan.
In fact, if I look back at the performance of of our core picks
(21:26):
during the the tumult in call itthe lead up into into April,
they, they outperformed and thenand then as we saw sort of these
tariff clouds, you know start todissipate, they participated in,
in the upside. So overall, I mean, I think
we're in a really good place. And if we continue to, you know,
sort of select and focus on goodcompanies with these hallmarks
(21:50):
of quality that that we try to pick for our clients and try to
think about like the risk perspective from actual capital
loss perspective, you know, we'll, we'll do good things for
our for our clients and, and nothing changes and there really
never is a good time to invest. There's always something,
there's always some something inthe background is valuations,
it's deteriorating earnings, it's geopolitical tensions, it's
(22:12):
you know, there's always something.
So if you if you want an all clear signal, you're, you're
probably never going to invest so.
And when you say that never a good time and actually never
think about it, when you think about it, when do people really
invest when the market's hot and, and, and this is back to,
you know, your opening comments about well, but you got to look
at the price, what are you paying for these things?
(22:35):
So, and that's, it's all perception at the end of the
day. I mean, we see good times to
invest, good opportunity to invest where we can.
We can jump in and and leverage some of the, what do I say the
insanities in the market. You know, sometimes things are
overpriced, sometimes they're ridiculously underpriced.
And yeah, all right, Dave, thankyou so much for this.
(22:58):
Yeah, great. Thank you very much, Mike.
Folks, as always, if you have any questions, don't hesitate to
reach out to your financial advisor at your accounting firm,
our chat with your Tri CERT Investment Council portfolio
manager, or don't hesitate to reach out to myself.
Take care.
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