Move Over, Magnificent 7, There’s a New Stock Basket in Town

0:01Tyler Crowe:The Mag 7 was so 2023. Today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe. And today I'm joined by longtime Fool contributors Matt Frankel and Travis Hoium, who's pulling in some spot duty away from the host chair and doing some actual hard hitting analysis for us today. We are going to get into the state of athletic wear with some earnings results coming out of Nike, on holdings and some others. We're going to get into a listener question on gambling stocks. Travis, guys, is it gambling stocks, gaming stocks, sportsbook? How are we supposed to call these things these days?

0:41Travis Hoium:Yeah, the gaming word is what I would normally use if you're talking to people in the gaming industry. But that really gets confusing with games themselves. So gambling is probably the right way to go.

0:51Tyler Crowe:I feel like we're just going mask off now and just be like, they are gambling stocks. Let's not try to hide anything anymore. But we're going to start today with what we said the headline is basically move over the mag seven. We got a new moniker now. It's the AI 11. Yardeny Research put out a note yesterday, as research companies love to do when we're talking about stocks and dissecting things, is they put out a new moniker, what they're calling the AI 11. This is basically a basket of stocks that are tied to the infrastructure build out. And I think if you squint really hard, it's basically a semiconductor sort of basket, if you will.

1:30Tyler Crowe:We've got semiconductors in memory with Sandesk, Western Digital, Micron. We've got chip makers, Intel, Samsung, AMD, Marvel Technologies, Taiwan Semi, Broadcom. I don't want to also, I can't also forget SK Hynix and ASML as well. So that's the 11 stocks we're talking about here today. Kind of a fun little pivot to what we normally talk about, because this is obviously a play to drum up their name for themselves in terms of new ideas for people to get investing in. And we could chalk this up to a silly Wall Street game and short-term thinking, but I think there's something worth exploring here.

2:10Tyler Crowe:And it's the idea of picking baskets of stocks versus individual stocks in thematic investing. When a trend has longer-term catalysts and we can debate the AI infrastructure build on the length of it, I think for days. Do you think it's better in those instances to invest in a basket or individual companies within that trend? And Travis, I'd love to get your thoughts on this as the analyst guest today.

2:35Travis Hoium:The answer can be both. I think this is what it makes investing both fun and challenging is that I think we really like to look at those individual companies. So I would love to say, hey, I'm going to be able to pick the winner in any given space. But the reality isn't something I've learned over decades of investing at this point is you can get the theme wrong, the industry trend, or sorry, the theme right, the industry trend right, and get the individual stock wrong. So I think the idea of using baskets is not a bad idea. I don't know if this is necessarily the best basket to be buying right now in May 2026, but it definitely tells a story about what's going on with the market.

3:16Yeah. First of all, I don't know how you can call this the AI, the AI 11 without Nvidia being included in the basket. I, I, I don't know. It is. It's about time.

3:25Tyler Crowe:Well, they're part of the mag seven, Matt. I mean, come on, we got a new names, new ideas here. Come on. I know that they're trying not to have overlap, but even so you can't call it the AI 11. So it's about time we had a new top stocks basket. It seems like the Fang thing was so long ago. The mag seven, It's been the market's gold standard for several years. But I mean, to really answer your question, I like the basket approach, but tend not to just include the stocks at the top when I'm forming a basket, whether it's fintech, whether it's real estate, you know, all the things that I focus on.

3:56Now, in recent years, it hasn't been the best strategy, if I'm being fair. The MAG7 has clearly outperformed all the mid-cap and small-cap baskets of tech stocks I could have made. I'd expect the 11 stocks in this particular basket, we could debate whether you think it's a bubble or whether you think it's a good time to buy, like Travis said, but I would expect them to generally move more in tandem than I would the Mag7 because they're really all plays on the same thing, AI-focused hardware. They're not just the largest tech companies in the market, which is essentially what the Mag7 are. And Travis makes a really good point that it might not be the best time to buy this at least it, these are all stocks that could tumble if the AI investment surge cools off.

4:40And that's really kind of goes along with the, the, the movement in tandem of this basket that you need to expect.

4:46Tyler Crowe:I'm going to put a pin in the, is it a bubble? Because that feels like it's the obligatory question that we ask with any AI related, you know, segment that we do on this radio show at any given time. But before we do that, I do want to say that of the 11 companies we just mentioned here. Which of those ones are you like particularly interested in the most, regardless of valuation, business strategy? Like what are the ones in that group of 11? You're like, yeah, I do really like this business.

5:15Travis Hoium:Taiwan Semiconductor has got to be number one because almost every one of these companies are going to be reliant on Taiwan Semiconductor in one way or another, whether they're an equipment company like ASML selling to Taiwan Semiconductor or they're a customer. So that's probably going to be the company to watch now. That is a little bit more of a, you know, it's like a more capital intensive business. It is also at least a little bit cyclical, but probably not going to be nearly as cyclical as something, you know, like a Micron or like a SanDisk. So that would at least be kind of the bellwether.

5:45Travis Hoium:And if you if I only had to pick one, that would definitely be the one. For me, the one I own in the basket is AMD, and it's been a roughly 5X performer in like a year, a year and a half since I've owned it. I bought it as a value investment and I didn't think I'd be this right this fast. There's a solid case to be made that it's run too far. It's trading for about 50 times forward earnings. There's the rapid data center growth. Tyler and I, we've talked about the potential to lead the CPU shift in the next phase of AI build out. And they have a lot of extremely promising product rollouts coming later this year.

6:19I think all 11 are excellent businesses. Don't get me wrong. Some are a little bit, let's call them frothy at the current valuations.

6:27Tyler Crowe:again getting to the obligatory ai bubble is it a bubble one of the things about like monikers that we get with baskets of stocks this has happened for decades like there's nothing wall street loves more than you know putting a name on a group of stocks and making it seem cool for everybody you know some of them worked fang worked i mean kudos to jim kramer 2013 you fang worked pretty well from then on facebook amazon uh netflix google great idea uh mag 7 2023 so far it's been a great idea i've got other ones the four horsemen of the 1990s i think it was like intel cisco dell i forgot the fourth one but my not a great idea microsoft i mean at the time not a great idea the nifty 50 in the 1960s i think of all of them maybe home depot and walmart And after that, it was kind of like, so, you know, mixed results for these moniker names and for a lot of people to be like, oh, that must be the top whenever you start using names like this.

7:30Tyler Crowe:So in that vein, I'm going to let you guys have it out because I think there's differing views on is it a bubble? Travis, you've already made your view pretty clear here. So lay out your case.

7:43Travis Hoium:well this is ai i think is is very confusing for investors right now because there is a ton of tailwinds and that is completely undeniable you look at what's going on with you know particularly memory is really hot right now those prices are going crazy margins are going up but you have to look historically and what's sustainable and what's not sustainable so i actually pulled all 11 of these companies if you added up their free cash flow in 2023 so before this current wave It was negative. These 11 companies were all negative in 2023. By the way, they were very positive. If we go back to 2018,$85 billion worth of cash flow.

8:24Travis Hoium:So now that's up to 123 in 2025. So these are inherently cyclical businesses. AI has been a tailwind for them. Historically, that does not last in these businesses forever. Once you get some sort of, you know, choke point in the industry like memory is today. Developers are going to figure out how to optimize a little bit better. Hardware companies are going to change what they're buying and when they're buying it. Companies are going to over invest in capital expenditures. So that's why this is sort of indicative of what I'm seeing as a bubble in artificial intelligence. That doesn't mean that that bubble is going to burst.

9:01Travis Hoium:It may be 1998. We may have another two or three years left. but I just, this is where I get a little bit nervous about, am I buying at the top or too close to the top for comfort? Yeah, we're fairly aligned on this. I mean, I could see both ways. I wouldn't necessarily buy this basket of 11 stocks today, but I also wouldn't bet against them in any form. I mean, with AMD, for example, the one that I own and talk about, I can see a scenario where it's a trillion dollar company or even a$2 trillion company by the end of the year, but I can also see a scenario where it gets cut in half if like one of its product launches doesn't go as well as expected for example.

9:38I wouldn't necessarily call it a bubble but it's definitely a fragile environment when it comes to the AI spending that we're seeing and not that it can't continue for years even more than two or three years. This could be a long-term trend for the next decade. You know how many of us called the Mag7 expensive when we first heard that name? um so i i wouldn't bet against them in any way i wouldn't call it a bubble but they're definitely you know where they need things to go well my two cents to it i think a lot of it is priced

10:12Tyler Crowe:in the idea that everything that is happening in its current trajectory is going to stay on that trajectory for four or five six years which maybe but has that happened for three months in

10:25Travis Hoium:artificial intelligence.

10:26Tyler Crowe:But to your point, one of the things that I have discussed here before is the idea of like, there is going to become a point where like efficiency and cost efficiency and like the, you know, cost per token or the compute per token or some sort of like way of bringing down costs or usage for these algorithms is going to take place. Like the, the, the amount of resources that we have to put behind this is so staggering. It's, it's hard to wrap my mind around and it unless you have some breakthrough in you know compute power with like i don't know major breakthroughs in quantum computing or all of a sudden energy becomes way way cheaper than it is today or we just get better algorithms i'm gonna bet on the better algorithmic uh you know efficiency kind of thing and say like yeah it's gonna continue to grow but perhaps not at the same rates so again i think we're all kind of on the same page with just seems like slight nuances on where it's all going to go.

11:23Tyler Crowe:All in all, fun idea. We'll see. Coming up next, we're going to look at a very different topic, athletic wear.

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12:17Tyler Crowe:If you were to look at the athletic wear, athletic footwear, clothing industry today, I feel like you could play a game. And that game would be, is it an actual headwind or is it a management excuse? Over the past couple of quarters, we've seen some pretty conflicting stories coming out from various players in this industry. Over the past couple of days, Under Armour, On Holdings, and Adidas have recently reported. And we got some pretty conflicting numbers or conflicting commentary on those numbers, depending on how well a company did. So before we get into the kind of nitty gritty of everyone else in the industry, what were the two of you?

13:00Tyler Crowe:What were some of the earnings reactions you had or thoughts, conference calls? What did you see in any of these reports that really stood out to you? Yeah, well, I noticed a few common themes among them. As you said, all three of the companies you just mentioned had very different performance. But there were some common themes. I mean, for example, all three are seeing meaningful hits from tariffs to the business in one way, one extent or the other, with Under Armour taking the worst hit. In all three cases, direct-to-consumer sales, meaning like sales through a website, are outperforming wholesale.

13:31For all three, apparel sales, this is interesting, are growing faster than footwear sales because all three of these are footwear companies at heart. or at least declining less rapidly than footwear sales in Under Armour's case. All three are facing challenges in the U.S. market. Consumer spending has slowed down quite a bit. Even on, the biggest growth story of the three reported slower revenue in North America than it did everywhere else. I mean, for me, just looking at these reports on is the most attractive, and it's not very close. Accelerating growth and margin expansion in a difficult environment for consumer spending is impressive.

14:07Gross margin improved by more than four percentage points year over year, despite the tariff headwinds that contracted gross margin for the other two. Extremely strong growth in Asia Pacific, and there's a lot more room to grow there. As far as what I wouldn't do out of the three, I wouldn't touch Under Armour. It seems to be a restructuring story with no clear path to finishing, restructuring and recovering. Adidas is a great business, just not as exciting of a growth story as on to me.

14:35Travis Hoium:yeah the the consumer has got to be the big takeaway and it's both good and bad right like if you look at uh i think under armor and nike are probably kind of in the same category sorry nike shareholders but they've moved much closer to that you know discounting we're gonna we're gonna win on price we're not gonna out innovate everybody else so i think what investors need to look at is those companies that are kind of playing defense who are discounting hey we need to move product through the ecosystem so that we're not sitting on a whole bunch of inventory. That's where you get a little bit of weaker margins.

15:09Travis Hoium:That's where you get commentary about things like tariffs. If you look at the results from on in particular, I always think their conference calls are really interesting because a year ago when the tariffs were the big topic, they just said, hey, we're going to raise our prices. You know what? Like if there's tariffs, we're going to raise our prices. We're going to keep our margins. And that's the way it's going to work. They were sort of making a dig at the industry going, hey, in a really promotional environment. We don't need to promote. We're going with a full price strategy. So that just shows you where companies are in the industry and where their pricing power lies.

15:43Travis Hoium:And so I think that's the biggest thing that we have to look at is where is their pricing power? Where is their demand? It still exists at kind of that high end of the market, the people who are spending$200,$300 on a pair of shoes. Most consumers who are spending money on a pair of shoes that are spending$50 to$100 or even$150 are looking for a little bit better deal or buying shoes for kids like I do. I'm sorry, my kids aren't getting on holding shoes. I'm not spending that kind of money. But Under Armour, you know, that's a much more attractive price point. And I think that's just kind of generally where the economy is going today.

16:18Travis Hoium:So I think that's the broad takeaway.

16:20Tyler Crowe:Yeah, I think to your point, too, Adidas was interesting in that way, where like, you could see the even mentioned in their like, earning statement was like, you know, we did some discounting here, but on our like fresh, innovative products, we're actually driving a lot of price. And they did see margin expansion on the operating side overall, because that, you know, pricing effect there versus the discounting they're doing on some of their older stuff. And to that same point, Deckers, they don't report, I think, until the 21st of May, but on their previous quarter, they were mentioning the same thing.

16:49Tyler Crowe:Strong performance in Hoka with, you know, basically like we passed as much of the cost we can on their, you know, on the consumer as we could to fight tariff headwinds. And I can say buying my trail running shoes from Hoka, I can confirm they have definitely been pushing price versus, you know, trying to go down the discount route. So, you know, in this vein, like as you are looking at the retail space, Travis, I know this on holdings has been kind of one of your favorites for quite a while now. Is there anything else in the space that looks intriguing to you? And then Matt, You said on holding as well.

17:25Tyler Crowe:Is there anything else in this industry that you're watching, keeping an eye on? Like, how is this thing developing more? And are there any other interesting stories that people could be watching over the next couple of quarters?

17:36Travis Hoium:To me, on sort of sits alone in this category. You know, if you look at the Lululemon or Nike, sort of the other kind of turnaround stories in the market, I have a really hard time figuring out where there's pricing power, where's their tailwinds being in the industry. you know we're kind of moving to this working out maybe running maybe lifting is is kind of the the trend for users we're not in the yoga is a growth category anymore so i think those are the kind of big things that i'm looking at is who has that pricing power and honest just sort of sits alone in that category they said you know a couple of years ago when they put out their long-term guidance said hey we're going to get to 60 gross margins they're almost at 65 gross margins so that's showing you the strength of that business.

18:20Travis Hoium:And I just don't see that same analogy with it. Even a Decker's Outdoor, Hoka just isn't quite growing as quickly. They don't have quite the same pricing power. So I think they just kind of sit alone. And that's why I find them attractive. Now, that said, this is also one of the most confusing companies to follow because they consistently report in Swiss francs and the market quarter after quarter seems to be confused about currency conversions and how much they're actually growing. So it is kind of a difficult company to follow from that perspective. Yeah. And I would just add, I mean, I already gave my little spiel on holding a little while ago, but I would say as far as the three major turnarounds, Travis just mentioned Lululemon and I'm glad he did because between Lululemon, Nike and Under Armour, Lululemon to me sounds is by far the most attractive of the three turnaround candidates.

19:09The reasons I say that one, one kind of like on holding, but not to the same extent, They have more pricing power than either Nike or Under Armour in this market. They just made some missteps in their marketing strategy. For example, the percentage of new products, meaning like new lines, new styles in their stores, steadily declined over the past few years. And that kind of drove customers away because they don't want to go and buy the same things they already had. And they're making a conscious effort to remedy that, focusing on new products, focusing on reasons for customers to set foot in their stores.