Investors should look beyond the mainstream momentum, says DCLA's Sarat Sethi

[00:00:00] Speaker 1: Joining us right now is Surat Sethi. He is Portfolio Manager at DCLA. He's also a CNBC contributor. And Surat, it's good to see you. It's been a while since I've gotten to talk to you on set. Where are you thinking things stand right now? We have seen markets, some people think at elevated levels. Jamie Dimon said recently he wouldn't necessarily put money in the markets at [00:00:20] Surat Sethi: these levels. What about you? So, you know, it's kind of going to the adage, it's a market of stocks. And if you look at kind of where we are, yes, there's definitely a lot of froth in certain areas. Valuations are extended, whether you talk semiconductors or technology. But kind of our view is so much money underneath the surface has kind of moved away from value and even growth at a reasonable price to really super growth. And if we look at, you know, not just sectors, but individual companies, high quality companies have sold off or just are trading in multiples we haven't seen in five to 10 years. So we are still finding opportunities, whether it's, you know, in health care, like a company like Stryker that normally trades at 25 to 30 times earnings is trading at 19. You know, it's in the orthopedic business, it's going to grow or, you know, a high quality company like Ferrari, like, you know, that for years traded at 25 times EBITDA is now trading at 17 times EBITDA. So if you want quality and you want high quality growth without paying the price, I think there's opportunities. But look, when you see the macro and you see interest rates rising, you see oil going up and you see the market kind of rising with it, it does give you pause to do I want to buy the whole market or do I kind of want to wait, especially as we go into earnings season [00:01:39] Speaker 1: and you've got some big earnings coming up in the next two weeks. Yeah. But the idea that there is a little bit of worry there is a relatively new thing. Yeah, because we've been kind of running for the last [00:01:51] Surat Sethi: couple of years without any worry, but you've seen the markets now basically baking in best case cases for a lot of these companies and to see kind of where the cash flow is going to come from. Have you [00:02:01] Speaker 1: moved money out of some of those high growth technology names? We have cut back our exposure. [00:02:06] Surat Sethi: We still have our largest holding is still Nvidia, but we own Google, Amazon, but not in the size of the market. It's really there because we think they're higher quality companies, but the opportunities are going to be elsewhere. But no question, we've been taking some profits off. I mean, some of these companies have done so well for so long. It's a question of kind of where else can you find other opportunities or just diversify because you don't want to get stuck with kind of holding these large positions. Are there [00:02:33] Speaker 1: reasons for some of these other companies to have the pullbacks? You mentioned Stryker, some other names in health care. You mentioned Ferrari. But when you look at the potential for government spending, if it gets cut when it comes to health care, when you look at higher oil prices, is there a reason that you would pull back, let's say, in consumer names or something? Or do you feel like the consumer is [00:02:51] Surat Sethi: really strong still? So the big worry is the K shape, right? If the upward K continues, these companies are going to be just fine. The lower K, I think, is going to affect a lot of other companies. And it's stuff that we're not really exposed. I worry about retail. I think that could get really hurt. I think in the auto side, you know, Ferrari is a high end, right? It's not really sensitive to what incomes like. But I do worry about auto parts, auto parts suppliers, auto companies in that sense. But the experience of people now that we've seen post COVID, they want to travel. They want to do a lot of the things, even on the lower K. So but the question is, then, what gets affected? And I think higher prices, people travel less. You'll see some of that going on, too. But we haven't [00:03:33] Speaker 1: seen that yet. We got earnings from GM yesterday, and they came in with strong numbers and actually said that they anticipate some of these positive trends they've seen, not only with strength in the consumer, but also their ability to continue to improve operating profit, that they expect that to continue into 2027. Is that not enough when companies say things like that? Are you still skeptical that that that can remain true? Yeah, because the thing with the GM, it's not [00:03:59] Surat Sethi: just them. It's the macro. And the first thing that people pull back is, well, I don't need to upgrade my car, but I'll still go to the experiences. So I think that that's why these stocks trade at such low multiples, too. So it's very hard to kind of invest for the long term. So you want durable earnings, cash flow that can grow. And, you know, companies that misstep for a quarter or two, like a striker that had a cyber issue, that's when you kind of get the opportunity to say, hey, these are high quality companies. What else is out there? Because so much money has moved to the momentum side. And I don't disagree. I think there's some great companies on the momentum side, but you kind of have to barbell as well, because as a long term investor, you kind of say, hey, wow, I missed these opportunities to own companies that I'd want to own for 5, 10, 15 years that I just couldn't buy because they just didn't hit my valuation metrics. [00:04:46] Speaker 1: So if it's a stock pickers market, tell us a few other stocks that you like right now. [00:04:50] Surat Sethi: So if I go, it's Visa, MasterCard. I love those type of companies that have tolls around them. They're all using, you know, tokenization, crypto to kind of see how else I'm going to benefit my businesses. So if I add those into the mix, I can look at value companies also, companies that have been completely thrown out, you know, parent of, you know, not Versin, but Versin is very cheap. Comcast is very cheap at this point. I think you've got consolidation potentially about to happen with the Disney's of the world as well. Disney's trading at 14 times earnings. You know, you've got all the catalysts there. You've got a new CEO, experiences with all their theme parks. So I can find opportunities in quite a few different areas. If you look at commodities, look at copper companies. If we do believe the demand for data centers is going to be so high, and EV is going to be so high, you want to own copper. You know, just like you saw the semiconductor stocks, like the microns of the world, copper is a commodity that we know that we can't put in. They haven't, we haven't built a new copper mine in 10 years. So you get a Freeport McNamara or a tech resources, the sensitivity of those companies, and they're all sold in dollars as well. So depending on kind of where the dollar goes, if the dollar gets any stronger, you know, these could all benefit these companies too. So you really want to be exposed to kind of not just the mainstream momentum, but also the underlying companies that can benefit from moving down the supply chain is basically what you're talking about. Which is what's happening with the semiconductors, right? We've moved down the supply chain to companies that nobody would have ever thought of owning, but value players. So you get this exposure with value, growth, reasonable price and growth, and you can create a portfolio that might not go gangbusters every day, but at least gives you the ability to, if things happen in a different way, you're still going to do well in your portfolio. [00:06:35] Speaker 1: You mentioned higher rates. Are you anticipating that the Fed's going to raise rates? Because that's not what the market is betting right now. [00:06:42] Surat Sethi: So market's definitely not betting, but I can't see rates going lower. So it's going to be very interesting to see where, what this comes out, because especially when you look at employments for, you know, we've got very strong employment, demand for labor is high, input prices are going up, we're building more products, you know, in the U.S. That's going to cost more money too. So I don't see how the Fed's really going to cut rates unless we get a slowdown in the economy. And that's a whole different thing. But then you're going to face a completely different, the word that we haven't used in many months, the sagplation word, I don't see that coming, but I don't see the market really expecting cutting rates. And that's going to look at the credit markets. You're kind of seeing some of the cracks in there too. Spreads are widening, the 10 years going to four or five. And I think that's where the focus is going to be as to, if that goes even higher, then you get the whole valuation of discount rates for growth companies. And we haven't really focused on that, because that's where, if you look at all the hyperscalers, they're going to the debt markets. And I think we got to just, you know, I don't want to be a Jamie Dimon, but you do have to look at these things. It's not just green light, it's green lights in certain sectors, but you got to be a little yellow in certain ones too.