February 27, 2025 • 54 mins
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Join us as we navigate through the intricacies of stock investing as we approach 2025. This episode delves deep into the predictions of the stock market, highlighting significant players across technology, finance, and healthcare.
- In-depth analysis of Microsoft’s valuation and growth potential
- Exploration of semiconductor giant ASML’s market challenges
- Adobe’s crucial role in AI and document management discussed
- Debate on top stock picks: value vs. growth perspectives
- Overview of investment strategies in the finance and healthcare sectors
- A discussion on the impact of external market factors on stock selection
- Insights on portfolio construction and risk management
You can find more insightful discussions in our next episode, where we’ll tackle how to manage risks in the investing landscape.
Straight Talk for All - Nonsense for None
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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Davenport (00:02):
Hello everyone.
It's Steve Davenport and ClemMiller, again from Skeptic's
Guide to Investing, and wethought today we would start and
have a little debate about whatnames we think are going to do
well in the next year.
So when people look at theirportfolios, we as CFAs look at
(00:24):
the construction and say, ok, inthe tech sector I'm going to
have this much and I think Ishould have this many names, and
we try to construct what wethink are the best in each of
those sectors and then hopefully, when you combine it in the
right weighting, it gets closeto the best portfolio you can
have overall.
(00:45):
But it ultimately is built onthe best names and you've got to
feel that for the marketenvironment that we may
experience this year, which is apretty big caveat because I
don't know what the Fed is goingto do, I don't know what Trump
is going to do and I especiallydon't know what's going to
happen militarily at any of thefronts that we're currently
(01:06):
dealing.
So I'd say that we all come atthis from a position of humility
.
We realize it's tough, but youstill have to pick, you still
have to decide, you still haveto choose.
So when I kick this off, theway it's going to work is I'm
going to pick my three bestnames for a particular sector
(01:31):
and then I'm going to give youmy justification for why I think
this name is the best.
I think this name is the best.
So when I start this process, Ilooked at technology and I said,
(01:51):
okay, you know which namesreally do I feel, from a
standpoint of price to fairvalue, offer me the best
opportunity.
And so when I do that, I comedown to one of the leaders and
(02:12):
one of the giants, which isMicrosoft.
Microsoft's now at 0.81.
And therefore, you know, it'sstill got upside of almost 20%.
It's kind of been pushed to theside by the excitement of
NVIDIA and the excitement in thechip space, but it's still a
(02:33):
pretty, you know, pretty muchthe elephant in most rooms in
terms of what it has and what itcan do for your portfolio
portfolio.
So I think Microsoft belongs tobe there and is at a reasonable
price.
The next one I look at is alittle bit foreign to us, but
(02:56):
it's pretty familiar to anyonein semiconductors ASML, which is
from the Netherlands, and ASMLHoldings is at 0.82, and it's a
name that is just integral toall that's going on, whether
you're talking about AI chips orother chips, asml is going to
be in the middle of how they areproduced and how overall
(03:20):
semiconductor growth in the nextfive years is going to be.
So I like what ASML representsand I like the fact that we go
globally when we look for thebest names in these things, and
I think this is one instancewhere a US manager might not own
it just because it's a foreigncompany, which I think is really
(03:44):
not the right thing to do foryour clients.
There's an ADR that you cantrade in the US.
It's a global brand.
It is known across all thecountries.
So therefore, I say why letnationalistic views segment?
And then the last name and theone that has the biggest
(04:05):
discount to fair value and is inour portfolio for our core, is
Adobe.
Adobe's at 0.75 of its fairvalue, which means it has 33%
upside before it gets to what wethink is the right price.
The right price.
(04:28):
That, to me, adobe is justeverywhere in our lives, whether
I'm downloading a short storyor whether I'm downloading the
documents for my taxes.
Everything involves a PDF,everything involves how do we
process these documents?
How do we produce documents toput on our webpage?
How do we make sure that ourdata and our integrity of our
(04:50):
documents is good?
And I just think that Adobe islike a part of your life that is
not going to change.
It is the leader, clearly, andit is going to continue to lead
as we evolve into more video andother.
And I look at all this workthat we keep doing in terms of
our discussions we have aboutproprietary information
(05:13):
proprietary, you know, roboticsand whether something is AI
generated.
I think that Adobe is going tobe the firm that comes out and
says this has been documentedand certified.
This is, you know, this is notAI, bot generated.
This is a person, and I thinkthat we're going to have to have
(05:34):
somebody differentiate what'sreal and what's AI or computer
generated.
Ai or computer generated Ithink that Adobe sits right in
the middle and I think that thatis going to be a very
interesting area growing forward.
So if I don't want to pay toomuch right now and I want to buy
(05:55):
something for the next 12months that's going to give me
the best results in thetechnology space, I'm going to
say Adobe, and I know that maynot be on Clem's top three or
favorite name, but that's why weplay the game.
That's why we have this, becauseI think, that Clem has more of
(06:17):
an orientation towards growth.
I have more of an orientationtowards value, and that's why
we're pretty skeptical when wetalk to each other about what
the other thinks.
So, clint, if I have to pick,if you have to pick three in the
tech space, hey, steve, who areyou talking to, steve?
Clem Miller (06:37):
before I give you my three, let me challenge you a
little bit on your three, okay?
Steve Davenport (06:45):
That's not fair .
You made me go first and youblindsided me.
Clem Miller (06:55):
So you know, let me say that on Adobe, you know you
mentioned at the end that youknow they might be might be in
the validation of AI business.
I'm a little skeptical aboutthat.
I think the market isdefinitely discounting Adobe
(07:16):
right now because they aren'texploiting the AI trend.
I don't really feel like I haveenough evidence to be able to
say that Adobe is going to ridethat trend.
They almost feel like a companythat's going to be left behind.
To me, they almost feel like acompany that's going to be left
(07:36):
behind by the AI train.
But I could be wrong.
I could be wrong about that.
Steve Davenport (07:41):
I guess I would say it's been said about Adobe,
since I've been following it,that it's too expensive, it's
too pricey.
All they're doing is converting.
You know, and I remember whenpeople were starting to use the
Internet because I'm an old dogand I remember people saying,
well, adobe is not going tosurvive because as we go to more
(08:03):
computer and digital we're, youknow how does Adobe fit?
And I look at it and saythey're so integrated.
And I just went through aclosing.
You know, for this house,everything was Adobe and you
know it was all signatures andsharing of data.
And I look at the process and Isay, boy, this is a lot more
(08:27):
automated than it was six yearsago.
Right, that closing was moreautomated than the one before.
Yeah, in terms of gatheringdocuments, when I'm doing my
taxes, I go into my Fidelityaccount, I go into my Schwab
account, I download the PDFs, Isend them to my tax.
You know it's electronic andits center is Adobe.
(08:51):
So you could think, hey,somebody else is going to come
in an AI space and suddenly getthe reputational.
And I would say, if they do,adobe will buy them and they
will attach it to the processthey already have with every
business, and I think that it'sgoing to be.
(09:21):
You know, somebody's got toovercome that bridge and attack
that wall and knock down, and Idon't.
If you have a couple ofcontenders, I'd love to hear
about them.
Clem Miller (09:35):
Well, let me talk about, let me talk about your
others, and then I mean justASML.
Steve Davenport (09:41):
You're going to eventually have to give me
three names.
Clem Miller (09:43):
you know, and I'm going to have to do this to you,
I know.
So.
ASML is the Dutch maker of theenhanced ultraviolet and deep
ultraviolet lithographyequipment that's used by Taiwan
Semiconductor and othercompanies in order to make chips
(10:04):
Taiwan Semiconductor and othercompanies in order to make chips
and I am concerned about ASMLthese days.
I used to think ASML was thegreatest right.
I'm concerned about it in thelast couple of years because one
it's been subject to the USexport control rules.
(10:28):
Now you might think, why is aDutch company subject to that?
Well, the US Export ControlAgency, the Bureau of Industry
and Security in the Departmentof Commerce, has something
called the Foreign DirectProduct Rule, has something
called the foreign directproduct rule.
So if you've got a piece ofequipment and this EUV equipment
(10:52):
from the Netherlands, from ASML, is huge and if you have a
piece of equipment that embodiessome element of US technology,
then the US has the right to sayyou cannot export to China.
So that's happened and ASMLcannot export to China.
(11:13):
I'm also concerned about ASML'ssales of equipment to Taiwan
for obvious reasons having to dowith politics in the region.
So I'm a little bit concernedthat ASML could be subject to
(11:34):
these risks, and I think thatpolitical risks play a role in
the discounting that the marketis doing of ASML.
Finally, let me talk aboutMicrosoft.
You know, I think there's arule of size issue, right?
(11:56):
So I think Law of large numbers, yeah, law of large numbers.
So I think that when you have acompany like Microsoft or
Google or Apple, at a certainpoint they don't grow anymore or
they don't grow as much, andgrowth is the, in my mind,
(12:17):
growth, earnings, growth is themain driver of returns over
periods of time, time, overlonger periods of time, and so
if I look at what microsoft hasbeen doing, especially over the
last year more than a year um, Idon't see a lot of uh, I don't
(12:37):
see a lot of growth, a lot of um, you know, a lot of um.
I don't see a lot of growth.
I don't see a lot of priceappreciation, I just don't see
it.
And so I'm not sure what itwould take to have another
growth spurt in Microsoft.
They're already in a number ofindustries.
(12:59):
They're already pursuing AI, ofcourse, with their OpenAI
investment or partnership.
They already have a cloudbusiness in Azure, so I'm not
sure how much more they can do.
I'm less convinced aboutMicrosoft than I am about NVIDIA
(13:22):
or Google.
Steve Davenport (13:25):
Okay, I originally mentioned Google as
tech, but it really belongs incommunication, so we're going to
leave Google aside.
Well, no Google, yeah Google.
That's really a communicationsdiscussion.
So we got three sectors we'regoing to cover today tech,
finance and healthcare, and so Iwill make one more comment, and
(13:46):
then we'll have to go to getClem.
Clem Miller (13:49):
My comment would be .
Steve Davenport (13:50):
Look, I heard this five years ago.
With servers, Amazon is theking, Amazon has the server
business and Microsoft isentering.
And all of a sudden, five yearslater, Azure is, if not
competitive, a leader in thisspace.
And I look at it and say, okay,if they're a leader in this
(14:12):
space and we know that we'regoing to need server farms for
this AI, I think that Amazon andMicrosoft are going to be the
ones who have those, and thequestion is what kind of chips
are they going to have and howare they going to grow?
And I think that, by itsproject, you made this easy for
me.
Open AI is going to be at theforefront of what happens in
(14:35):
this space.
It is a project that issupported and guided by
Microsoft.
Therefore, I don't see how theydon't become a big player in
this space?
Clem Miller (14:46):
Yeah, I don't understand.
Now they don't become a bigplayer in this space?
Yeah, I don't understand.
What I don't understand is whyMicrosoft hasn't done better,
even though the market realizesthat they have open AI.
I just don't.
Steve Davenport (15:01):
I think that Clem.
I think people get overlyexcited about some names.
I think we can argue if wewanted to have a show just on
NVIDIA.
We could do that.
I think that we got too manynames to think about right now.
I would just say all right,those are my three and I can
(15:23):
defend them and I can give youmy number one.
But I will defer to you to seewhat your top three are and then
I will criticize them and thenI will try to berate them so
that you know my top name willbe.
Your top name Is that fair,Even if it's not fair.
It's what we're going to do.
Clem Miller (15:45):
Um, so I would say that my number one name, name
which I've held for an awfullong time, uh, which has done
very well for me, uh isaristaaristanetworks.
Okay, and arista network growthportfolio what you have it there
in our growth portfolio, notour core.
(16:07):
It's client-to-cloud networking, so it's in that same thematic
as cloud.
So that's my number one.
It's got 41% net income margin.
It's got a interestingly, it'sgot a short interest ratio of
(16:30):
only 0.78.
It's got a forward peg of about2.06, so not a lot Is the fact
that it's got a 1.79 beta,because I'm trying to lower beta
(16:56):
in my portfolio, so I do offsetthat with some staples and some
other stuff.
Okay, so there's that.
I would say that my nextfavorite favorite uh on this
list uh, would be netflix, andnetflix has a short interest
(17:17):
ratio of about one point.
I mean, we all know netflix,okay, um, and I think netflix is
dominant in its industry andits narrow industry Short
interest ratio 1.48, which isgood Forward peg, really
attractive, nicely valued at1.32.
(17:39):
And it's got a beta,interestingly enough, of 0.45.
Yeah, and it's a differentspace income to margin ratio of
(18:00):
32%.
So I really like Netflix.
So that's my second choice inthis field and, again, we're
looking forward.
This isn't necessarily what isat the top of our portfolios
because we've let, I think,especially I don't know about
(18:23):
you, steve, but I tend to letsome of my positions run a
little bit uh trimming a littlebit here and there, so like meta
and nvidia are at the top, butthey're not necessarily my best
choices going forward uh,blogcom and nvidia are at the
top of mine as well, so I wouldsay those names I just have
(18:46):
trouble going, trouble going forthe next year.
Steve Davenport (18:49):
And so let me just summarize my critique of
yours would be so I believe thatwe are going to see stubbornly
high inflation and that is goingto cause the markets overall to
have struggles, especially ifto see enough inflation Friday
where the people would start toput in the future an interest
(19:15):
rate increase, if the marketsees that the names that are
going to be hurt first are thosehigher beta names.
So I would say that's where Iwould have the problem with
Arista.
I think it's a great name, butif we start to discount with a
higher rate, if we start to seehigher rates at all I think this
(19:37):
market has been discounting theFed lower, lower, lower and if
not lower, at least stay thesame and if we start to see that
tariffs are inflationary Ithink that you and I may
disagree about some things, butI think we both agree about that
Then, all of a sudden, I thinkwe're going to start to see
(19:57):
rhetoric about inflation, andrhetoric about inflation is
going to cause the Fed to raise,and if they raise, I would
rather be in the names whichhave huge balance sheets and are
very safe with very good corebusinesses, because they're not
going to give you the samediscounted cash flow impact of a
(20:18):
higher discount rate.
So that's where I look at ASML,microsoft and Adobe and I know
I'm going to get some flack forthis, but the biggest discount
is in Adobe.
So I would put Adobe as one,microsoft as two and ASML as
(20:39):
three, and so it comes down tomy view on Adobe versus your
view on Arista.
And now we battle to the deathbefore we go on to the next
sector.
My argument would be Adobe is sointegrated into our business
(21:00):
environment and our individualenvironment that it represents a
cash flow king because of allthe things that it does for
businesses and therefore itcan't be removed in terms of you
know, I can delay enhancing mynetwork security and doing
(21:20):
things with Arista, I can'tdelay or eliminate Adobe.
So therefore I think it's morecritical to core businesses and
therefore I would say it will beless impacted by an increase in
rates.
And therefore, for the next 12months, it's obvious Adobe is
(21:41):
the winner.
Ready, let's go on to the nextsector.
Clem Miller (21:47):
You know, I didn't even give you my third one.
But that's okay.
Okay, go, go, go.
Steve Davenport (21:53):
Give me a third one.
Clem Miller (21:54):
So just to remind everybody, you told me earlier
it was Spotify.
Just to yeah, I told youearlier Spotify Okay.
Spotify is my third Okay andyou know it has a high short
interest ratio, but it's got alow peg and it's got a low beta.
Beta is only 0.85.
(22:18):
And it's very profitable a netincome margin of 79%.
So it's very, very profitable.
Steve Davenport (22:32):
I think they're great names.
I just have to look at it andsay, from my perspective of if
we hit a volatile market and ifthat volatility is going to have
a higher discount rate, thenames with more growth into the
future in my mind are going tohave a higher discount rate.
The names with more growth intothe future in my mind are going
(22:54):
to be more impacted.
So therefore, I tend to go alittle bit safer.
My three names I mean ASML,Microsoft and Adobe I think have
a little better balance sheetstrength than your three names.
I think your names have bettergrowth strength than my three
names.
I think your names have bettergrowth.
So I think the question to mebecomes which is more important
for you in the next 12 months?
And so I probably would havepicked Netflix, because of its
(23:18):
low correlation, as the numberone, but you didn't.
You picked Arista.
So I'm going to say Adobe isbetter than Arista from a
standpoint of balance sheet andvolatility and I think that's
going to be what stakes it to abetter return going forward for
the next year.
What's your final minute?
Give me your final argument andthen we'll.
Clem Miller (23:41):
Well, I don't know how we resolve this if we have a
tie.
So I like the idea of youmentioned that I tend to be more
growthy, so let's just talkabout that, okay.
Steve Davenport (23:53):
The reason I like growth I still love you,
Clem, even if you are agrowthier guy.
Clem Miller (24:00):
You don't have to defend the reason I like.
Okay.
So I'm anticipating that we'regoing to have an economic
slowdown, if not even arecession, and what happens in
those periods of time is thatthe market will price up growth
opportunities, and so I see agood potential for growth
(24:23):
opportunities being priced up,and you have to.
I mean, these are growthy names, but remember, I've got a
portfolio that includes a lot ofnames that don't fit into that
Arista or Netflix category.
Steve Davenport (24:45):
No, I think that you know.
My view is I think we are goingto have a recession as well,
and so in the next 12 months, Ithink we're going to see a
downturn in the market.
There's going to be a lot ofpressure on the Fed to respond
with lower rates.
I think they're going to saythat inflation is not out of the
woods and we aren't done withtariffs.
So I think that we're going tohave a Fed who is sitting there
(25:08):
saying we need to probably dosomething.
And it's not popular withmarkets, but since we saved the
world during COVID and we'vesaved the world several other
times because of what was a Fedreaction to market swoon, I
(25:28):
think the Fed is going to be alittle bit slow to react.
And that slowness in reacting Ithink we could see rates higher
in six months and lower in ayear and a half, because I think
that we will start to have thedocumentation of slow growth and
no growth.
And then, all of a sudden, theFed will say all right, now that
(25:50):
we've verified that inflationis dead and growth is challenged
, it's time for us to take ratesback down.
And as we move out of thatperiod, I think you could be
right.
I think our difference is intime frame.
My belief is, over the next yearwe're going to want growth, but
(26:10):
we're going to want it to bevery stable and very cashflow
positive and I think that someof these older names, like a
Microsoft that you think mightbe challenged in terms of growth
.
I think Microsoft just isn'tbeing valued as much as others,
and it's not necessarily becauseit doesn't contain the value.
(26:32):
It's just because I thinkthere's a little misvaluation
and emphasis on the chips.
You put the chips andeverything is important for AI.
In reality, people are startingto talk about the stacks of
software and how does thesoftware drive the chips and how
does that application solve aneed for people and how we
(26:54):
integrate all those things.
I think initially it's a chipbattle and then, as we go
forward, I think it's going tobe a software battle.
So I look at the lithographywork of ASML, I look at the
software and the server centersof Microsoft and I look at Adobe
and how documents andultimately videos are going to
(27:17):
be evaluated for truth andhonesty.
Clem Miller (27:21):
Do you?
Steve Davenport (27:21):
have Amazon too , steve.
Clem Miller (27:23):
Huh, do you have Amazon too?
Steve Davenport (27:25):
Yes, Okay, I have Amazon, but Amazon is not
in tech, it's in whatever.
Clem Miller (27:31):
Oh yeah, Well, kind of in tech.
Steve Davenport (27:35):
Yeah, clem, I'm a disciplined guy.
I'm not a kind of a tech so Iget to.
No, we picked one name, so Idon't know.
We should have probablyresolved this whole tie question
, since we only have two of us,right?
Yeah, do we want to look atwhat?
Do we want to look at Analystsforecast, or how do we?
(27:59):
How do we?
How do we break a tie?
Clem Miller (28:03):
Oh, I don't know.
I mean, we don't.
Why do we have to break a tie?
Steve Davenport (28:07):
All right, let's just say we came with a
tie.
We're tied between AristaNetworks from Clem and Adobe
from me.
And now I'm going to go intohealth care and my three health
care names are going to put Clemto sleep a little bit, but he
(28:27):
needs a nap.
He's had a busy day so far.
So step back, close your eyes.
Clem and my three names inhealthcare are really solid
names with great cash flow andgreat businesses.
And those three names areDanaher, Becton, Dickinson and
(28:48):
J&J.
And I'll start with J&J, becausesomeone asked me if I was to
buy bonds, who would I buy?
And I said you'd buy corporates, because I think corporates are
underestimated right now interms of their quality of their
balance sheet.
We keep having this argumentthat treasuries are the safest,
(29:14):
even though our budget deficitsand our budgeting process is
going to blow up in about twoweeks, when the debt ceiling
comes and goes and we don't havea budget.
I'm going to say J&J's balancesheet is still A+, the US
government is A.
I think J&J's balance sheet iswhere you want to be when you
look for the next 12 months.
As we said, I think that it'llbe challenging.
(29:36):
I don't think people are goingto stop bleeding.
I don't think the need forgauze and other medical is going
to go away.
So I kind of feel that in thehealthcare space that's been all
about GLP and obesity and allof these other things with the
(29:56):
human genome.
I like the stability of a namelike J&J.
I like the dividend.
I like the dividend growth.
I like the fact that thecompany is just going on.
It continues to find ways togrow and I know Clem is always
looking for that growth in termsof revenue.
(30:18):
But I think when you look atsome of these bigger companies,
they can take a small revenuegrowth.
But because they can operate inso many different countries,
because they can operate in somany deals in terms of long-term
vendor contracts, I think a J&Jis a very good place for you to
(30:40):
put your money today and itwould be my number one in health
care.
What are your top three?
Clint.
Clem Miller (30:49):
So the two I've had for a while, and then I'm going
to introduce a third one whichI just added at a smaller amount
.
Steve, can I hear you?
Can you hear me now?
Yeah, I can hear you.
Okay, boston Scientific Okay,steve, can I hear you?
(31:10):
Can you hear me?
Now?
I can hear you.
Okay, uh, boston scientificokay, uh and uh, interactive
surgical are my two that I'veheld for a long time on um
talking about, and then my thirdone, which I recently added at
a smaller amount, is gileadSciences.
Gilead Science, so Boston.
Let me start with theInteractive Surgical.
(31:32):
It's got a 28% net incomemargin.
It's got short interest ratioof 1.18, which is pretty low.
It does have a high peg, veryhigh peg 5.04, and its beta is
1.23.
(31:52):
So it's expensive.
It's done pretty well and Ioffset that with some of my
cheaper and also lower shortinterest ratio stocks.
(32:13):
So a peg of 2.61 and a beta of0.75.
So I'm bringing down beta onthat one to help offset what
(32:41):
we're seeing from interactivesurgical.
Interactive Boston Scientific,uh, medical surgery items, so
everything that can get uh stuckin you after surgery.
They, they provide those kindsof items and uh.
Interactive surgical providesuh, basically robotic, uh
(33:04):
equipment for use in surgery.
So these are all I'd say.
Boston Scientific provides thesort of ongoing needs for
surgery and interactive surgicalis really the future of surgery
.
(33:25):
So, moving down the list, I justrecently add Gilead sciences,
because they uh mainly becausethey are really into they've
really won a number of of uhapprovals by the FDA, uh, and
(33:47):
and others for some of their newdrugs.
So this is kind of a thematicplay, but you know it's done.
It's done very well.
It's got a beta of really only0.52.
Of really only 0.52.
(34:08):
So it helps bring down my betafor the portfolio which, as I
said to you, is important for me.
It's got a short interest of1.84.
And it's got I think it had aloss, actually a net income loss
(34:37):
last year, which I don't liketo see normally.
But let me see here, if it'syeah, we don't have a oh no,
it's got a forward peg that'sreally really attractive of 0.56
.
Nice.
So it's got a really attractiveforward peg, it's got a really
(35:02):
attractive short interest ratioand it's got it's got a beta
that pulls down the beta for theportfolio.
So it's all those things that,um, uh, things that have helped
it.
The only thing I don't like isthe fact that, at least from an
accounting standpoint, they'vehad a loss recently.
But looking forward, it lookspretty good and it's shown some
(35:23):
good performance over the lastsix months as well.
So those are my three, steve.
Steve Davenport (35:29):
What are yours?
Clem Miller (35:29):
One, two, Number one among those, I'm going to
say Boston Scientific.
That's the one I've held in theportfolio the longest.
Okay.
Steve Davenport (35:42):
So here's how I look at the three names and
this is my approach.
It's different than yourapproach, but the three names
have a price-to-fare value.
The Danaher has a price fairvalue of 77%.
The Becton Dickinson is thebest value with a 69% price to
(36:06):
fair value and J&J is the worstat 0.99.
But when I go over and I lookat the grade based on balance
sheet and based on informationand I look at financial health
grade, all three are A's.
So all three are going to benames that have good financial
(36:28):
health.
But then I look atprofitability.
At profitability, j&j has an Aand the other two's are Bs.
So I like the fact that I'mgetting them for better value.
But I can't get away from thatdifference of A's versus B's in
(36:48):
profitability because I thinkyour point about companies are
going to look for people,investors are going to look for
companies that have goodprofitability which they can
maintain through a downturn, andI think that J&J is that stock
for a lot of people.
So I agree that BostonScientific has an interesting
area and is very hard Good moat.
(37:10):
It's going to be very hard tounseat Boston Scientific and the
medical community.
I think they're a good company.
I'm just looking for a calm inthe storm and I think if there
is a storm this year, the J&Jwill get a lot of bid up because
(37:31):
of people looking for a safeharbor.
Do you want wanna make a?
Clem Miller (37:38):
final question what about the law of large numbers?
Steve Davenport (37:44):
I think the healthcare industry, based on
America's spending on healthcare, is going up, not going down,
and I think that the aging ofAmerica is gonna mean that the
healthcare sector as a whole isgoing to get more attention, not
less.
So I'm not worried about thesize of the healthcare budgets.
(38:06):
I think that there'll be morepressure on the farmers, which
in my mind, opens up opportunityfor names like this, like
Becton and J&J.
They are not a constant battleof when does my patent expire
and when do I go to generics.
And that whole drug kind oftreadmill that I don't think
(38:29):
we've figured out is very hardto invest for that treadmill.
I like the idea of being safe.
Safety is important.
So safety wins in my mind withJ&J.
Clem Miller (38:41):
You got any?
No, I think it's a better playthan Novo Nurisk and Lilly at
this point.
Steve Davenport (38:48):
Yeah.
I mean, I think it's a good youknow it's a good place to be
and that's why I picked it.
I think we could be a littlegrowthier.
I like your names.
They're in our growth portfolio.
Gilead is and um, the othername that we that we kind of
like, but I think it's kind ofgone a little bit uh, in the
(39:09):
price area is vertex we have.
Clem Miller (39:11):
Yeah I used to have that and berserker.
Steve Davenport (39:13):
Tex is at 1.35 a fair value.
Yeah, I, I used to.
I used to have that.
And Vertex is at 1.35, a fairvalue.
Clem Miller (39:18):
Yeah, I used to have Vertex and then even in my
system it kind of priced its wayout.
When I look at J&J.
Steve Davenport (39:27):
Last item here forward PE 15.4.
Danaher is at 27.
And Becton is at 16 and a half.
So in my mind, even though it'sat its target price, 15 times
earnings really.
(39:49):
You know, when you look at someof these names in the AI space,
you don't start until 35 timesearnings.
So I'm paying for this earningstream in a way that I think is
reasonable.
So what do you think?
Have we killed the healthcaresector and we're going on to
finance?
Clem Miller (40:09):
I think so let's do finance.
Steve Davenport (40:11):
So finance, again, is not the sector that's
the sexiest, it's not the mostglamorous in terms of growth and
it's not going to get onanybody's list of people doing
TikTok videos about finance, butit is a place that represents a
large percentage of the economy, percentage of the economy and
(40:39):
therefore, as people that wantto allocate to what the business
is happening, we look at thissector and think it's pretty
important that it represents apretty significant plus 10%
weight in the overall benchmark.
So my three names in this spaceare ICE, intercontinental
Exchange, berkshire Hathaway,which is insurance and other
(41:01):
investments, and Visa, thetransaction company.
So all three of them have verydifferent businesses about this
portfolio.
Because it really allows yousome diversification.
When you think about thesethree names in related to the AI
space and related to theobesity space or related to
(41:25):
anything in terms of growth inour society, these three names
to me offer you a differentperspective.
Ice, as we know from its growthin buying the New York Stock
Exchange and other exchangesaround the world, is going to be
a factor in the crypto space,the exchange and how the
(41:48):
exchanges are run andcoordinated worldwide.
I think that when that iscompletely done, ice will be in
the middle of it, and I thinkthat when that is completely
done, ice will be in the middleof it, and I think that ICE will
be helping to legitimatize theoverall crypto space.
I think it has good growthprospects and I think it has a
good you know.
(42:08):
It is in a good place.
So therefore, I really like ICEpersonally.
I really like ICE personally.
It's also an A-rated financialhealth, but so is Visa and so is
(42:35):
Berkshire.
So they're.
I think that, based on itsreturns over the last three
years, again it comes out to bevery interesting 17.5 for Visa,
11 for Intercontinental and 15and a half for Berkshire.
(43:00):
I think that what Berkshire isdoing is causing a lot of
consternation among managerslike me, which is why do they
have $330 billion in cashwaiting for investments?
They don't think they can findthings that are going to be good
investments, and so Berkshireis making a large statement with
(43:24):
their cash position, and I kindof like the idea of a company
that says what they feel anddoes what they feel based on
their analysis, and doesn'tworry about what others are
thinking or doing.
I like that independent nature,I like the fact that it's been
around and I think it's gotunbelievably capable people.
(43:46):
They reported and wrote theirletter last week that was
released on Saturday Again.
Aja Jane is a genius ininsurance and I think that they
are a leader in the energy space.
I like the two managers they'vehired to help manage their
assets that are offsetting theirinsurance liabilities.
(44:07):
I like what they do.
So I'm going to go out on a limbhere and again, be probably
more conservative than I need tobe, because I worked hard to
get this money.
I don't want to lose it.
So I look a little more atdownside protection and I think
Berkshire is my pick in thefinance space.
(44:27):
I think they're going to beable to charge more as insurance
premiums are raised in a lot ofstates because of weather.
I think that's going to lead tomore profits and I think
they've done an unbelievable jobof managing the assets.
I think the fact that they'reselling Apple and selling Bank
of America is telling you theiropinion of the markets are that
(44:53):
they may have too much exposurein spaces that have run a long
way.
I love the prudence, I love thethoughtfulness.
I love the fact that they arenot stepping back and saying we
don't want to be in these spaces, but we want to be in spaces
that we truly believe have thebest prospects, and I like that.
(45:16):
And so if I can get managementof one of the greatest assets if
you look at the last 50 years,if I can get a management team
that doesn't cost anything interms of an additional fee,
berkshire is like a mutual fundfor me.
It should be held like gold orlike other assets.
(45:37):
It really shouldn't necessarilyhave to go up against other
companies on a PE or on a priceto book level, because I think
it's just a different asset.
And so, whether it's in thatalternative space like
infrastructure and it does havean infrastructure type feel, I
(46:00):
don't know where it's going togo in the next year, but if I
had to pick one in the financespace, I think I'd go Berkshire.
Clem, what are you doing in thefinance space?
Clem Miller (46:13):
Well, you raised a lot of interesting issues here,
ok, well, I'm of interestingissues here.
Okay, so, so I'm skeptical,right.
So let me say first of all,well, no, let me.
Let me jump right to myfavorite financial stock, which
is progressive insurance, andthat's the and that has a short
(46:36):
interest ratio of 0.93, which isgood, forward peg of 1.16,
which is really good, and a betaof only 0.21.
(47:08):
Over the last six months it'sgenerated 13.1% net income
margin of 11, and it's generated13% of return over the last six
months.
So it's, I really like it.
It's been doing well for me.
I mean, I've held it for, Idon't know, maybe a year and a
half, two years, and it'scontinued to do well for me.
(47:31):
So I really, you know it's gota pretty steady uh pace to it.
So I really like progressiveinsurance and it's by far my
favorite, uh favorite, financialnow I like, I like, uh,
american express.
I also like visa and mastercard.
I have all three of them, uh,in my portfolio.
(47:54):
Uh, at the moment I haveamerican express is slightly uh,
higher uh percentage, higherweight than the others, but you
know, they're all, you knowthey're all doing well, uh, they
all have.
I would say you know, similarmetrics, roughly similar metrics
(48:14):
that all fit into you know whatI like in terms of short ratio
and forward peg and beta.
So I like, I like all of those.
So I also just, you know.
I just wanted to say onBerkshire, I agree with you
(48:37):
everything you said aboutBerkshire and I would further
say that I like Berkshirebecause it represents yet
another insurance company inaddition to Progressive, and so
so I like that.
You know, down my list, not inthe top 15, is Brown and Brown,
which I don't know if you'veeven heard of that, right, yeah,
(48:59):
smaller insurance company.
So those are my names.
My favorite name, as Imentioned, is Progressive
Insurance.
Okay, by far, I would say.
Let me say this while we're onthis topic, and I don't know if
this falls into the financialarea or not, but I do have, at
(49:19):
the moment, since you brought upBerkshire, I have 9% in cash, a
little over 9% in cash, okay,and I've got 4% in gold in gold
ETF, gld.
So I'm being prettyconservative there.
Gold has a beta of 0.12 andit's hada really good run and
(49:44):
it's a really good run that'sbeing buoyed by Chinese
purchases of gold and, and Ithink that's a secular tailwind
for gold.
Steve Davenport (49:58):
No, I think.
I mean, I've looked at gold forclients and written options
against gold and I think it's aninteresting asset to stabilize
a portfolio.
I think it's.
The question is is, how do you?
You know there's a carryingcost and there's a management
cost and you kind of have aquestion about what is it
(50:20):
producing?
What is it giving you in termsof return?
It gives you stability, itgives you a low correlation, but
it's hard to see.
You know and try to estimateversus other names, versus other
names.
When I look at the betas of mynames, I'm surprised that both
(50:41):
ICE and Berkshire have betasnear one and Visa is the best
with a beta of 0.6.
So I still will stick with myBerkshire.
I don't think it pushes me thatfar in terms of.
I think that beta might be alittle bit of a time period
specific and it might notnecessarily if I look over the
(51:02):
long enough time horizon.
So I think this has been aninteresting discussion.
Now we have to pick our best ofthe three.
So your best idea right now forsomebody for the next 12 months
, based on coming from thesethree sectors.
You have three names.
I have three names.
(51:23):
We need to pick one.
If we only had, you know, a 2%position we were thinking of
starting right now, where wouldwe put the money?
Clem Miller (51:35):
Where would we put the money?
Progressive insurance, okay,okay.
And the reason why is because Ianticipate we're going to have
a recession and I thinkprogressive insurance will power
through that recession.
I think Boston Scientific willdo well as well.
(51:57):
Maybe Ariston, you know, maybemight do a little less well, but
I think Progressive Insurancewould be my number one.
Keep in mind that I also havethe gold and the cash.
Steve Davenport (52:12):
Yeah, I've got a couple of bond funds as well.
What we're really saying is inequity exposure, if you were to
take it, who would you want totake it with?
Who do you want to walk down?
We're only dating these stocks,we're not marrying them.
Clem, my three names wereBerkshire, j&j and Adobe, and of
(52:35):
those three, based on where Ithink the market's going to go,
I think I would probably stickwith Berkshire.
So we're in the same sector,we're in the same industry.
I think it's just a question ofwhich given name has the best
prospects.
So I hope that this has been aninteresting discussion for
(52:56):
people.
I hope they like it and I hopethat you give us some ideas and
some names and some things todiscuss.
If you like this, let us know,send us a text, send us a
message, share and support us.
Skeptic's Guide exists, with nocommercials, for everybody to
try to improve their investingIQ.
(53:16):
Thanks everyone for listeningand we look forward to our next
topic, which is how to managerisk in this environment.
Thank you, have a good day.
Hello everyone.
It's Steve Davenport and ClemMiller, again from Skeptic's
Guide to Investing, and wethought today we would start and
have a little debate about whatnames we think are going to do
well in the next year.
So when people look at theirportfolios, we as CFAs look at
(00:24):
the construction and say, ok, inthe tech sector I'm going to
have this much and I think Ishould have this many names, and
we try to construct what wethink are the best in each of
those sectors and then hopefully, when you combine it in the
right weighting, it gets closeto the best portfolio you can
have overall.
(00:45):
But it ultimately is built onthe best names and you've got to
feel that for the marketenvironment that we may
experience this year, which is apretty big caveat because I
don't know what the Fed is goingto do, I don't know what Trump
is going to do and I especiallydon't know what's going to
happen militarily at any of thefronts that we're currently
(01:06):
dealing.
So I'd say that we all come atthis from a position of humility
.
We realize it's tough, but youstill have to pick, you still
have to decide, you still haveto choose.
So when I kick this off, theway it's going to work is I'm
going to pick my three bestnames for a particular sector
(01:31):
and then I'm going to give youmy justification for why I think
this name is the best.
I think this name is the best.
So when I start this process, Ilooked at technology and I said,
(01:51):
okay, you know which namesreally do I feel, from a
standpoint of price to fairvalue, offer me the best
opportunity.
And so when I do that, I comedown to one of the leaders and
(02:12):
one of the giants, which isMicrosoft.
Microsoft's now at 0.81.
And therefore, you know, it'sstill got upside of almost 20%.
It's kind of been pushed to theside by the excitement of
NVIDIA and the excitement in thechip space, but it's still a
(02:33):
pretty, you know, pretty muchthe elephant in most rooms in
terms of what it has and what itcan do for your portfolio
portfolio.
So I think Microsoft belongs tobe there and is at a reasonable
price.
The next one I look at is alittle bit foreign to us, but
(02:56):
it's pretty familiar to anyonein semiconductors ASML, which is
from the Netherlands, and ASMLHoldings is at 0.82, and it's a
name that is just integral toall that's going on, whether
you're talking about AI chips orother chips, asml is going to
be in the middle of how they areproduced and how overall
(03:20):
semiconductor growth in the nextfive years is going to be.
So I like what ASML representsand I like the fact that we go
globally when we look for thebest names in these things, and
I think this is one instancewhere a US manager might not own
it just because it's a foreigncompany, which I think is really
(03:44):
not the right thing to do foryour clients.
There's an ADR that you cantrade in the US.
It's a global brand.
It is known across all thecountries.
So therefore, I say why letnationalistic views segment?
And then the last name and theone that has the biggest
(04:05):
discount to fair value and is inour portfolio for our core, is
Adobe.
Adobe's at 0.75 of its fairvalue, which means it has 33%
upside before it gets to what wethink is the right price.
The right price.
(04:28):
That, to me, adobe is justeverywhere in our lives, whether
I'm downloading a short storyor whether I'm downloading the
documents for my taxes.
Everything involves a PDF,everything involves how do we
process these documents?
How do we produce documents toput on our webpage?
How do we make sure that ourdata and our integrity of our
(04:50):
documents is good?
And I just think that Adobe islike a part of your life that is
not going to change.
It is the leader, clearly, andit is going to continue to lead
as we evolve into more video andother.
And I look at all this workthat we keep doing in terms of
our discussions we have aboutproprietary information
(05:13):
proprietary, you know, roboticsand whether something is AI
generated.
I think that Adobe is going tobe the firm that comes out and
says this has been documentedand certified.
This is, you know, this is notAI, bot generated.
This is a person, and I thinkthat we're going to have to have
(05:34):
somebody differentiate what'sreal and what's AI or computer
generated.
Ai or computer generated Ithink that Adobe sits right in
the middle and I think that thatis going to be a very
interesting area growing forward.
So if I don't want to pay toomuch right now and I want to buy
(05:55):
something for the next 12months that's going to give me
the best results in thetechnology space, I'm going to
say Adobe, and I know that maynot be on Clem's top three or
favorite name, but that's why weplay the game.
That's why we have this, becauseI think, that Clem has more of
(06:17):
an orientation towards growth.
I have more of an orientationtowards value, and that's why
we're pretty skeptical when wetalk to each other about what
the other thinks.
So, clint, if I have to pick,if you have to pick three in the
tech space, hey, steve, who areyou talking to, steve?
Clem Miller (06:37):
before I give you my three, let me challenge you a
little bit on your three, okay?
Steve Davenport (06:45):
That's not fair .
You made me go first and youblindsided me.
Clem Miller (06:55):
So you know, let me say that on Adobe, you know you
mentioned at the end that youknow they might be might be in
the validation of AI business.
I'm a little skeptical aboutthat.
I think the market isdefinitely discounting Adobe
(07:16):
right now because they aren'texploiting the AI trend.
I don't really feel like I haveenough evidence to be able to
say that Adobe is going to ridethat trend.
They almost feel like a companythat's going to be left behind.
To me, they almost feel like acompany that's going to be left
(07:36):
behind by the AI train.
But I could be wrong.
I could be wrong about that.
Steve Davenport (07:41):
I guess I would say it's been said about Adobe,
since I've been following it,that it's too expensive, it's
too pricey.
All they're doing is converting.
You know, and I remember whenpeople were starting to use the
Internet because I'm an old dogand I remember people saying,
well, adobe is not going tosurvive because as we go to more
(08:03):
computer and digital we're, youknow how does Adobe fit?
And I look at it and saythey're so integrated.
And I just went through aclosing.
You know, for this house,everything was Adobe and you
know it was all signatures andsharing of data.
And I look at the process and Isay, boy, this is a lot more
(08:27):
automated than it was six yearsago.
Right, that closing was moreautomated than the one before.
Yeah, in terms of gatheringdocuments, when I'm doing my
taxes, I go into my Fidelityaccount, I go into my Schwab
account, I download the PDFs, Isend them to my tax.
You know it's electronic andits center is Adobe.
(08:51):
So you could think, hey,somebody else is going to come
in an AI space and suddenly getthe reputational.
And I would say, if they do,adobe will buy them and they
will attach it to the processthey already have with every
business, and I think that it'sgoing to be.
(09:21):
You know, somebody's got toovercome that bridge and attack
that wall and knock down, and Idon't.
If you have a couple ofcontenders, I'd love to hear
about them.
Clem Miller (09:35):
Well, let me talk about, let me talk about your
others, and then I mean justASML.
Steve Davenport (09:41):
You're going to eventually have to give me
three names.
Clem Miller (09:43):
you know, and I'm going to have to do this to you,
I know.
So.
ASML is the Dutch maker of theenhanced ultraviolet and deep
ultraviolet lithographyequipment that's used by Taiwan
Semiconductor and othercompanies in order to make chips
(10:04):
Taiwan Semiconductor and othercompanies in order to make chips
and I am concerned about ASMLthese days.
I used to think ASML was thegreatest right.
I'm concerned about it in thelast couple of years because one
it's been subject to the USexport control rules.
(10:28):
Now you might think, why is aDutch company subject to that?
Well, the US Export ControlAgency, the Bureau of Industry
and Security in the Departmentof Commerce, has something
called the Foreign DirectProduct Rule, has something
called the foreign directproduct rule.
So if you've got a piece ofequipment and this EUV equipment
(10:52):
from the Netherlands, from ASML, is huge and if you have a
piece of equipment that embodiessome element of US technology,
then the US has the right to sayyou cannot export to China.
So that's happened and ASMLcannot export to China.
(11:13):
I'm also concerned about ASML'ssales of equipment to Taiwan
for obvious reasons having to dowith politics in the region.
So I'm a little bit concernedthat ASML could be subject to
(11:34):
these risks, and I think thatpolitical risks play a role in
the discounting that the marketis doing of ASML.
Finally, let me talk aboutMicrosoft.
You know, I think there's arule of size issue, right?
(11:56):
So I think Law of large numbers, yeah, law of large numbers.
So I think that when you have acompany like Microsoft or
Google or Apple, at a certainpoint they don't grow anymore or
they don't grow as much, andgrowth is the, in my mind,
(12:17):
growth, earnings, growth is themain driver of returns over
periods of time, time, overlonger periods of time, and so
if I look at what microsoft hasbeen doing, especially over the
last year more than a year um, Idon't see a lot of uh, I don't
(12:37):
see a lot of growth, a lot of um, you know, a lot of um.
I don't see a lot of growth.
I don't see a lot of priceappreciation, I just don't see
it.
And so I'm not sure what itwould take to have another
growth spurt in Microsoft.
They're already in a number ofindustries.
(12:59):
They're already pursuing AI, ofcourse, with their OpenAI
investment or partnership.
They already have a cloudbusiness in Azure, so I'm not
sure how much more they can do.
I'm less convinced aboutMicrosoft than I am about NVIDIA
(13:22):
or Google.
Steve Davenport (13:25):
Okay, I originally mentioned Google as
tech, but it really belongs incommunication, so we're going to
leave Google aside.
Well, no Google, yeah Google.
That's really a communicationsdiscussion.
So we got three sectors we'regoing to cover today tech,
finance and healthcare, and so Iwill make one more comment, and
(13:46):
then we'll have to go to getClem.
Clem Miller (13:49):
My comment would be .
Steve Davenport (13:50):
Look, I heard this five years ago.
With servers, Amazon is theking, Amazon has the server
business and Microsoft isentering.
And all of a sudden, five yearslater, Azure is, if not
competitive, a leader in thisspace.
And I look at it and say, okay,if they're a leader in this
(14:12):
space and we know that we'regoing to need server farms for
this AI, I think that Amazon andMicrosoft are going to be the
ones who have those, and thequestion is what kind of chips
are they going to have and howare they going to grow?
And I think that, by itsproject, you made this easy for
me.
Open AI is going to be at theforefront of what happens in
(14:35):
this space.
It is a project that issupported and guided by
Microsoft.
Therefore, I don't see how theydon't become a big player in
this space?
Clem Miller (14:46):
Yeah, I don't understand.
Now they don't become a bigplayer in this space?
Yeah, I don't understand.
What I don't understand is whyMicrosoft hasn't done better,
even though the market realizesthat they have open AI.
I just don't.
Steve Davenport (15:01):
I think that Clem.
I think people get overlyexcited about some names.
I think we can argue if wewanted to have a show just on
NVIDIA.
We could do that.
I think that we got too manynames to think about right now.
I would just say all right,those are my three and I can
(15:23):
defend them and I can give youmy number one.
But I will defer to you to seewhat your top three are and then
I will criticize them and thenI will try to berate them so
that you know my top name willbe.
Your top name Is that fair,Even if it's not fair.
It's what we're going to do.
Clem Miller (15:45):
Um, so I would say that my number one name, name
which I've held for an awfullong time, uh, which has done
very well for me, uh isaristaaristanetworks.
Okay, and arista network growthportfolio what you have it there
in our growth portfolio, notour core.
(16:07):
It's client-to-cloud networking, so it's in that same thematic
as cloud.
So that's my number one.
It's got 41% net income margin.
It's got a interestingly, it'sgot a short interest ratio of
(16:30):
only 0.78.
It's got a forward peg of about2.06, so not a lot Is the fact
that it's got a 1.79 beta,because I'm trying to lower beta
(16:56):
in my portfolio, so I do offsetthat with some staples and some
other stuff.
Okay, so there's that.
I would say that my nextfavorite favorite uh on this
list uh, would be netflix, andnetflix has a short interest
(17:17):
ratio of about one point.
I mean, we all know netflix,okay, um, and I think netflix is
dominant in its industry andits narrow industry Short
interest ratio 1.48, which isgood Forward peg, really
attractive, nicely valued at1.32.
(17:39):
And it's got a beta,interestingly enough, of 0.45.
Yeah, and it's a differentspace income to margin ratio of
(18:00):
32%.
So I really like Netflix.
So that's my second choice inthis field and, again, we're
looking forward.
This isn't necessarily what isat the top of our portfolios
because we've let, I think,especially I don't know about
(18:23):
you, steve, but I tend to letsome of my positions run a
little bit uh trimming a littlebit here and there, so like meta
and nvidia are at the top, butthey're not necessarily my best
choices going forward uh,blogcom and nvidia are at the
top of mine as well, so I wouldsay those names I just have
(18:46):
trouble going, trouble going forthe next year.
Steve Davenport (18:49):
And so let me just summarize my critique of
yours would be so I believe thatwe are going to see stubbornly
high inflation and that is goingto cause the markets overall to
have struggles, especially ifto see enough inflation Friday
where the people would start toput in the future an interest
(19:15):
rate increase, if the marketsees that the names that are
going to be hurt first are thosehigher beta names.
So I would say that's where Iwould have the problem with
Arista.
I think it's a great name, butif we start to discount with a
higher rate, if we start to seehigher rates at all I think this
(19:37):
market has been discounting theFed lower, lower, lower and if
not lower, at least stay thesame and if we start to see that
tariffs are inflationary Ithink that you and I may
disagree about some things, butI think we both agree about that
Then, all of a sudden, I thinkwe're going to start to see
(19:57):
rhetoric about inflation, andrhetoric about inflation is
going to cause the Fed to raise,and if they raise, I would
rather be in the names whichhave huge balance sheets and are
very safe with very good corebusinesses, because they're not
going to give you the samediscounted cash flow impact of a
(20:18):
higher discount rate.
So that's where I look at ASML,microsoft and Adobe and I know
I'm going to get some flack forthis, but the biggest discount
is in Adobe.
So I would put Adobe as one,microsoft as two and ASML as
(20:39):
three, and so it comes down tomy view on Adobe versus your
view on Arista.
And now we battle to the deathbefore we go on to the next
sector.
My argument would be Adobe is sointegrated into our business
(21:00):
environment and our individualenvironment that it represents a
cash flow king because of allthe things that it does for
businesses and therefore itcan't be removed in terms of you
know, I can delay enhancing mynetwork security and doing
(21:20):
things with Arista, I can'tdelay or eliminate Adobe.
So therefore I think it's morecritical to core businesses and
therefore I would say it will beless impacted by an increase in
rates.
And therefore, for the next 12months, it's obvious Adobe is
(21:41):
the winner.
Ready, let's go on to the nextsector.
Clem Miller (21:47):
You know, I didn't even give you my third one.
But that's okay.
Okay, go, go, go.
Steve Davenport (21:53):
Give me a third one.
Clem Miller (21:54):
So just to remind everybody, you told me earlier
it was Spotify.
Just to yeah, I told youearlier Spotify Okay.
Spotify is my third Okay andyou know it has a high short
interest ratio, but it's got alow peg and it's got a low beta.
Beta is only 0.85.
(22:18):
And it's very profitable a netincome margin of 79%.
So it's very, very profitable.
Steve Davenport (22:32):
I think they're great names.
I just have to look at it andsay, from my perspective of if
we hit a volatile market and ifthat volatility is going to have
a higher discount rate, thenames with more growth into the
future in my mind are going tohave a higher discount rate.
The names with more growth intothe future in my mind are going
(22:54):
to be more impacted.
So therefore, I tend to go alittle bit safer.
My three names I mean ASML,Microsoft and Adobe I think have
a little better balance sheetstrength than your three names.
I think your names have bettergrowth strength than my three
names.
I think your names have bettergrowth.
So I think the question to mebecomes which is more important
for you in the next 12 months?
And so I probably would havepicked Netflix, because of its
(23:18):
low correlation, as the numberone, but you didn't.
You picked Arista.
So I'm going to say Adobe isbetter than Arista from a
standpoint of balance sheet andvolatility and I think that's
going to be what stakes it to abetter return going forward for
the next year.
What's your final minute?
Give me your final argument andthen we'll.
Clem Miller (23:41):
Well, I don't know how we resolve this if we have a
tie.
So I like the idea of youmentioned that I tend to be more
growthy, so let's just talkabout that, okay.
Steve Davenport (23:53):
The reason I like growth I still love you,
Clem, even if you are agrowthier guy.
Clem Miller (24:00):
You don't have to defend the reason I like.
Okay.
So I'm anticipating that we'regoing to have an economic
slowdown, if not even arecession, and what happens in
those periods of time is thatthe market will price up growth
opportunities, and so I see agood potential for growth
(24:23):
opportunities being priced up,and you have to.
I mean, these are growthy names, but remember, I've got a
portfolio that includes a lot ofnames that don't fit into that
Arista or Netflix category.
Steve Davenport (24:45):
No, I think that you know.
My view is I think we are goingto have a recession as well,
and so in the next 12 months, Ithink we're going to see a
downturn in the market.
There's going to be a lot ofpressure on the Fed to respond
with lower rates.
I think they're going to saythat inflation is not out of the
woods and we aren't done withtariffs.
So I think that we're going tohave a Fed who is sitting there
(25:08):
saying we need to probably dosomething.
And it's not popular withmarkets, but since we saved the
world during COVID and we'vesaved the world several other
times because of what was a Fedreaction to market swoon, I
(25:28):
think the Fed is going to be alittle bit slow to react.
And that slowness in reacting Ithink we could see rates higher
in six months and lower in ayear and a half, because I think
that we will start to have thedocumentation of slow growth and
no growth.
And then, all of a sudden, theFed will say all right, now that
(25:50):
we've verified that inflationis dead and growth is challenged
, it's time for us to take ratesback down.
And as we move out of thatperiod, I think you could be
right.
I think our difference is intime frame.
My belief is, over the next yearwe're going to want growth, but
(26:10):
we're going to want it to bevery stable and very cashflow
positive and I think that someof these older names, like a
Microsoft that you think mightbe challenged in terms of growth
.
I think Microsoft just isn'tbeing valued as much as others,
and it's not necessarily becauseit doesn't contain the value.
(26:32):
It's just because I thinkthere's a little misvaluation
and emphasis on the chips.
You put the chips andeverything is important for AI.
In reality, people are startingto talk about the stacks of
software and how does thesoftware drive the chips and how
does that application solve aneed for people and how we
(26:54):
integrate all those things.
I think initially it's a chipbattle and then, as we go
forward, I think it's going tobe a software battle.
So I look at the lithographywork of ASML, I look at the
software and the server centersof Microsoft and I look at Adobe
and how documents andultimately videos are going to
(27:17):
be evaluated for truth andhonesty.
Clem Miller (27:21):
Do you?
Steve Davenport (27:21):
have Amazon too , steve.
Clem Miller (27:23):
Huh, do you have Amazon too?
Steve Davenport (27:25):
Yes, Okay, I have Amazon, but Amazon is not
in tech, it's in whatever.
Clem Miller (27:31):
Oh yeah, Well, kind of in tech.
Steve Davenport (27:35):
Yeah, clem, I'm a disciplined guy.
I'm not a kind of a tech so Iget to.
No, we picked one name, so Idon't know.
We should have probablyresolved this whole tie question
, since we only have two of us,right?
Yeah, do we want to look atwhat?
Do we want to look at Analystsforecast, or how do we?
(27:59):
How do we?
How do we break a tie?
Clem Miller (28:03):
Oh, I don't know.
I mean, we don't.
Why do we have to break a tie?
Steve Davenport (28:07):
All right, let's just say we came with a
tie.
We're tied between AristaNetworks from Clem and Adobe
from me.
And now I'm going to go intohealth care and my three health
care names are going to put Clemto sleep a little bit, but he
(28:27):
needs a nap.
He's had a busy day so far.
So step back, close your eyes.
Clem and my three names inhealthcare are really solid
names with great cash flow andgreat businesses.
And those three names areDanaher, Becton, Dickinson and
(28:48):
J&J.
And I'll start with J&J, becausesomeone asked me if I was to
buy bonds, who would I buy?
And I said you'd buy corporates, because I think corporates are
underestimated right now interms of their quality of their
balance sheet.
We keep having this argumentthat treasuries are the safest,
(29:14):
even though our budget deficitsand our budgeting process is
going to blow up in about twoweeks, when the debt ceiling
comes and goes and we don't havea budget.
I'm going to say J&J's balancesheet is still A+, the US
government is A.
I think J&J's balance sheet iswhere you want to be when you
look for the next 12 months.
As we said, I think that it'llbe challenging.
(29:36):
I don't think people are goingto stop bleeding.
I don't think the need forgauze and other medical is going
to go away.
So I kind of feel that in thehealthcare space that's been all
about GLP and obesity and allof these other things with the
(29:56):
human genome.
I like the stability of a namelike J&J.
I like the dividend.
I like the dividend growth.
I like the fact that thecompany is just going on.
It continues to find ways togrow and I know Clem is always
looking for that growth in termsof revenue.
(30:18):
But I think when you look atsome of these bigger companies,
they can take a small revenuegrowth.
But because they can operate inso many different countries,
because they can operate in somany deals in terms of long-term
vendor contracts, I think a J&Jis a very good place for you to
(30:40):
put your money today and itwould be my number one in health
care.
What are your top three?
Clint.
Clem Miller (30:49):
So the two I've had for a while, and then I'm going
to introduce a third one whichI just added at a smaller amount
.
Steve, can I hear you?
Can you hear me now?
Yeah, I can hear you.
Okay, boston Scientific Okay,steve, can I hear you?
(31:10):
Can you hear me?
Now?
I can hear you.
Okay, uh, boston scientificokay, uh and uh, interactive
surgical are my two that I'veheld for a long time on um
talking about, and then my thirdone, which I recently added at
a smaller amount, is gileadSciences.
Gilead Science, so Boston.
Let me start with theInteractive Surgical.
(31:32):
It's got a 28% net incomemargin.
It's got short interest ratioof 1.18, which is pretty low.
It does have a high peg, veryhigh peg 5.04, and its beta is
1.23.
(31:52):
So it's expensive.
It's done pretty well and Ioffset that with some of my
cheaper and also lower shortinterest ratio stocks.
(32:13):
So a peg of 2.61 and a beta of0.75.
So I'm bringing down beta onthat one to help offset what
(32:41):
we're seeing from interactivesurgical.
Interactive Boston Scientific,uh, medical surgery items, so
everything that can get uh stuckin you after surgery.
They, they provide those kindsof items and uh.
Interactive surgical providesuh, basically robotic, uh
(33:04):
equipment for use in surgery.
So these are all I'd say.
Boston Scientific provides thesort of ongoing needs for
surgery and interactive surgicalis really the future of surgery
.
(33:25):
So, moving down the list, I justrecently add Gilead sciences,
because they uh mainly becausethey are really into they've
really won a number of of uhapprovals by the FDA, uh, and
(33:47):
and others for some of their newdrugs.
So this is kind of a thematicplay, but you know it's done.
It's done very well.
It's got a beta of really only0.52.
Of really only 0.52.
(34:08):
So it helps bring down my betafor the portfolio which, as I
said to you, is important for me.
It's got a short interest of1.84.
And it's got I think it had aloss, actually a net income loss
(34:37):
last year, which I don't liketo see normally.
But let me see here, if it'syeah, we don't have a oh no,
it's got a forward peg that'sreally really attractive of 0.56
.
Nice.
So it's got a really attractiveforward peg, it's got a really
(35:02):
attractive short interest ratioand it's got it's got a beta
that pulls down the beta for theportfolio.
So it's all those things that,um, uh, things that have helped
it.
The only thing I don't like isthe fact that, at least from an
accounting standpoint, they'vehad a loss recently.
But looking forward, it lookspretty good and it's shown some
(35:23):
good performance over the lastsix months as well.
So those are my three, steve.
Steve Davenport (35:29):
What are yours?
Clem Miller (35:29):
One, two, Number one among those, I'm going to
say Boston Scientific.
That's the one I've held in theportfolio the longest.
Okay.
Steve Davenport (35:42):
So here's how I look at the three names and
this is my approach.
It's different than yourapproach, but the three names
have a price-to-fare value.
The Danaher has a price fairvalue of 77%.
The Becton Dickinson is thebest value with a 69% price to
(36:06):
fair value and J&J is the worstat 0.99.
But when I go over and I lookat the grade based on balance
sheet and based on informationand I look at financial health
grade, all three are A's.
So all three are going to benames that have good financial
(36:28):
health.
But then I look atprofitability.
At profitability, j&j has an Aand the other two's are Bs.
So I like the fact that I'mgetting them for better value.
But I can't get away from thatdifference of A's versus B's in
(36:48):
profitability because I thinkyour point about companies are
going to look for people,investors are going to look for
companies that have goodprofitability which they can
maintain through a downturn, andI think that J&J is that stock
for a lot of people.
So I agree that BostonScientific has an interesting
area and is very hard Good moat.
(37:10):
It's going to be very hard tounseat Boston Scientific and the
medical community.
I think they're a good company.
I'm just looking for a calm inthe storm and I think if there
is a storm this year, the J&Jwill get a lot of bid up because
(37:31):
of people looking for a safeharbor.
Do you want wanna make a?
Clem Miller (37:38):
final question what about the law of large numbers?
Steve Davenport (37:44):
I think the healthcare industry, based on
America's spending on healthcare, is going up, not going down,
and I think that the aging ofAmerica is gonna mean that the
healthcare sector as a whole isgoing to get more attention, not
less.
So I'm not worried about thesize of the healthcare budgets.
(38:06):
I think that there'll be morepressure on the farmers, which
in my mind, opens up opportunityfor names like this, like
Becton and J&J.
They are not a constant battleof when does my patent expire
and when do I go to generics.
And that whole drug kind oftreadmill that I don't think
(38:29):
we've figured out is very hardto invest for that treadmill.
I like the idea of being safe.
Safety is important.
So safety wins in my mind withJ&J.
Clem Miller (38:41):
You got any?
No, I think it's a better playthan Novo Nurisk and Lilly at
this point.
Steve Davenport (38:48):
Yeah.
I mean, I think it's a good youknow it's a good place to be
and that's why I picked it.
I think we could be a littlegrowthier.
I like your names.
They're in our growth portfolio.
Gilead is and um, the othername that we that we kind of
like, but I think it's kind ofgone a little bit uh, in the
(39:09):
price area is vertex we have.
Clem Miller (39:11):
Yeah I used to have that and berserker.
Steve Davenport (39:13):
Tex is at 1.35 a fair value.
Yeah, I, I used to.
I used to have that.
And Vertex is at 1.35, a fairvalue.
Clem Miller (39:18):
Yeah, I used to have Vertex and then even in my
system it kind of priced its wayout.
When I look at J&J.
Steve Davenport (39:27):
Last item here forward PE 15.4.
Danaher is at 27.
And Becton is at 16 and a half.
So in my mind, even though it'sat its target price, 15 times
earnings really.
(39:49):
You know, when you look at someof these names in the AI space,
you don't start until 35 timesearnings.
So I'm paying for this earningstream in a way that I think is
reasonable.
So what do you think?
Have we killed the healthcaresector and we're going on to
finance?
Clem Miller (40:09):
I think so let's do finance.
Steve Davenport (40:11):
So finance, again, is not the sector that's
the sexiest, it's not the mostglamorous in terms of growth and
it's not going to get onanybody's list of people doing
TikTok videos about finance, butit is a place that represents a
large percentage of the economy, percentage of the economy and
(40:39):
therefore, as people that wantto allocate to what the business
is happening, we look at thissector and think it's pretty
important that it represents apretty significant plus 10%
weight in the overall benchmark.
So my three names in this spaceare ICE, intercontinental
Exchange, berkshire Hathaway,which is insurance and other
(41:01):
investments, and Visa, thetransaction company.
So all three of them have verydifferent businesses about this
portfolio.
Because it really allows yousome diversification.
When you think about thesethree names in related to the AI
space and related to theobesity space or related to
(41:25):
anything in terms of growth inour society, these three names
to me offer you a differentperspective.
Ice, as we know from its growthin buying the New York Stock
Exchange and other exchangesaround the world, is going to be
a factor in the crypto space,the exchange and how the
(41:48):
exchanges are run andcoordinated worldwide.
I think that when that iscompletely done, ice will be in
the middle of it, and I thinkthat when that is completely
done, ice will be in the middleof it, and I think that ICE will
be helping to legitimatize theoverall crypto space.
I think it has good growthprospects and I think it has a
good you know.
(42:08):
It is in a good place.
So therefore, I really like ICEpersonally.
I really like ICE personally.
It's also an A-rated financialhealth, but so is Visa and so is
(42:35):
Berkshire.
So they're.
I think that, based on itsreturns over the last three
years, again it comes out to bevery interesting 17.5 for Visa,
11 for Intercontinental and 15and a half for Berkshire.
(43:00):
I think that what Berkshire isdoing is causing a lot of
consternation among managerslike me, which is why do they
have $330 billion in cashwaiting for investments?
They don't think they can findthings that are going to be good
investments, and so Berkshireis making a large statement with
(43:24):
their cash position, and I kindof like the idea of a company
that says what they feel anddoes what they feel based on
their analysis, and doesn'tworry about what others are
thinking or doing.
I like that independent nature,I like the fact that it's been
around and I think it's gotunbelievably capable people.
(43:46):
They reported and wrote theirletter last week that was
released on Saturday Again.
Aja Jane is a genius ininsurance and I think that they
are a leader in the energy space.
I like the two managers they'vehired to help manage their
assets that are offsetting theirinsurance liabilities.
(44:07):
I like what they do.
So I'm going to go out on a limbhere and again, be probably
more conservative than I need tobe, because I worked hard to
get this money.
I don't want to lose it.
So I look a little more atdownside protection and I think
Berkshire is my pick in thefinance space.
(44:27):
I think they're going to beable to charge more as insurance
premiums are raised in a lot ofstates because of weather.
I think that's going to lead tomore profits and I think
they've done an unbelievable jobof managing the assets.
I think the fact that they'reselling Apple and selling Bank
of America is telling you theiropinion of the markets are that
(44:53):
they may have too much exposurein spaces that have run a long
way.
I love the prudence, I love thethoughtfulness.
I love the fact that they arenot stepping back and saying we
don't want to be in these spaces, but we want to be in spaces
that we truly believe have thebest prospects, and I like that.
(45:16):
And so if I can get managementof one of the greatest assets if
you look at the last 50 years,if I can get a management team
that doesn't cost anything interms of an additional fee,
berkshire is like a mutual fundfor me.
It should be held like gold orlike other assets.
(45:37):
It really shouldn't necessarilyhave to go up against other
companies on a PE or on a priceto book level, because I think
it's just a different asset.
And so, whether it's in thatalternative space like
infrastructure and it does havean infrastructure type feel, I
(46:00):
don't know where it's going togo in the next year, but if I
had to pick one in the financespace, I think I'd go Berkshire.
Clem, what are you doing in thefinance space?
Clem Miller (46:13):
Well, you raised a lot of interesting issues here,
ok, well, I'm of interestingissues here.
Okay, so, so I'm skeptical,right.
So let me say first of all,well, no, let me.
Let me jump right to myfavorite financial stock, which
is progressive insurance, andthat's the and that has a short
(46:36):
interest ratio of 0.93, which isgood, forward peg of 1.16,
which is really good, and a betaof only 0.21.
(47:08):
Over the last six months it'sgenerated 13.1% net income
margin of 11, and it's generated13% of return over the last six
months.
So it's, I really like it.
It's been doing well for me.
I mean, I've held it for, Idon't know, maybe a year and a
half, two years, and it'scontinued to do well for me.
(47:31):
So I really, you know it's gota pretty steady uh pace to it.
So I really like progressiveinsurance and it's by far my
favorite, uh favorite, financialnow I like, I like, uh,
american express.
I also like visa and mastercard.
I have all three of them, uh,in my portfolio.
(47:54):
Uh, at the moment I haveamerican express is slightly uh,
higher uh percentage, higherweight than the others, but you
know, they're all, you knowthey're all doing well, uh, they
all have.
I would say you know, similarmetrics, roughly similar metrics
(48:14):
that all fit into you know whatI like in terms of short ratio
and forward peg and beta.
So I like, I like all of those.
So I also just, you know.
I just wanted to say onBerkshire, I agree with you
(48:37):
everything you said aboutBerkshire and I would further
say that I like Berkshirebecause it represents yet
another insurance company inaddition to Progressive, and so
so I like that.
You know, down my list, not inthe top 15, is Brown and Brown,
which I don't know if you'veeven heard of that, right, yeah,
(48:59):
smaller insurance company.
So those are my names.
My favorite name, as Imentioned, is Progressive
Insurance.
Okay, by far, I would say.
Let me say this while we're onthis topic, and I don't know if
this falls into the financialarea or not, but I do have, at
(49:19):
the moment, since you brought upBerkshire, I have 9% in cash, a
little over 9% in cash, okay,and I've got 4% in gold in gold
ETF, gld.
So I'm being prettyconservative there.
Gold has a beta of 0.12 andit's hada really good run and
(49:44):
it's a really good run that'sbeing buoyed by Chinese
purchases of gold and, and Ithink that's a secular tailwind
for gold.
Steve Davenport (49:58):
No, I think.
I mean, I've looked at gold forclients and written options
against gold and I think it's aninteresting asset to stabilize
a portfolio.
I think it's.
The question is is, how do you?
You know there's a carryingcost and there's a management
cost and you kind of have aquestion about what is it
(50:20):
producing?
What is it giving you in termsof return?
It gives you stability, itgives you a low correlation, but
it's hard to see.
You know and try to estimateversus other names, versus other
names.
When I look at the betas of mynames, I'm surprised that both
(50:41):
ICE and Berkshire have betasnear one and Visa is the best
with a beta of 0.6.
So I still will stick with myBerkshire.
I don't think it pushes me thatfar in terms of.
I think that beta might be alittle bit of a time period
specific and it might notnecessarily if I look over the
(51:02):
long enough time horizon.
So I think this has been aninteresting discussion.
Now we have to pick our best ofthe three.
So your best idea right now forsomebody for the next 12 months
, based on coming from thesethree sectors.
You have three names.
I have three names.
(51:23):
We need to pick one.
If we only had, you know, a 2%position we were thinking of
starting right now, where wouldwe put the money?
Clem Miller (51:35):
Where would we put the money?
Progressive insurance, okay,okay.
And the reason why is because Ianticipate we're going to have
a recession and I thinkprogressive insurance will power
through that recession.
I think Boston Scientific willdo well as well.
(51:57):
Maybe Ariston, you know, maybemight do a little less well, but
I think Progressive Insurancewould be my number one.
Keep in mind that I also havethe gold and the cash.
Steve Davenport (52:12):
Yeah, I've got a couple of bond funds as well.
What we're really saying is inequity exposure, if you were to
take it, who would you want totake it with?
Who do you want to walk down?
We're only dating these stocks,we're not marrying them.
Clem, my three names wereBerkshire, j&j and Adobe, and of
(52:35):
those three, based on where Ithink the market's going to go,
I think I would probably stickwith Berkshire.
So we're in the same sector,we're in the same industry.
I think it's just a question ofwhich given name has the best
prospects.
So I hope that this has been aninteresting discussion for
(52:56):
people.
I hope they like it and I hopethat you give us some ideas and
some names and some things todiscuss.
If you like this, let us know,send us a text, send us a
message, share and support us.
Skeptic's Guide exists, with nocommercials, for everybody to
try to improve their investingIQ.
(53:16):
Thanks everyone for listeningand we look forward to our next
topic, which is how to managerisk in this environment.
Thank you, have a good day.
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