Stephanie Link: When to Buy the Dip

0:00I worry a lot about Europe. I worry a lot about India. There are countries that are not independent on energy. We are in the States. And, you know, an interesting fact is, you know, as I mentioned, like higher oil prices, higher gasoline prices, it's not good. But the U.S. consumer, only 3 percent of households' budget is gasoline. I started buying, actually, in the beginning of March, to be fair, and just kept on adding and buying the dip and not feeling very smart. But the way I think about it, Wilf, is, you know, I'm really big on themes. And I will say since the March 30th low, the market is up 12 percent, the S &P, the Nasdaq up 17 percent.

0:43But it's been led by technology semiconductors. It's led by energy and industrials. And those three are all have the same thing in common. They all have the AI food chain. It's really hard to continue to buy the dip when they keep going down. But I feel really strongly about the themes and that's how I can justify and that's part of my process.

1:10Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. I am delighted to welcome back to the podcast Stephanie Ling, Chief Investment Officer and Portfolio Manager at Hightower Advisors, a US-based wealth manager looking after$150 billion in AUM and a regular guest and friend of mine from my CNBC days.

2:04Steph, it's a joy to see you, a joy to have you back on the Master Investor Podcast. Thank you, Will. Thanks for inviting me back. It's a pleasure. I would refer everyone back to our first episode as well, where we really dove into the Hightower and Stephanie Link investment process and reflected on the huge growth at Hightower to 150 billion AUM, of which Steph personally manages $7 billion of. um steph amusingly this is genuinely not planned as fate would have it last time you came on the week after we had a very bearish jeremy grantham on and this time you've come on a week after we've had a very bearish jeremy grantham on and last time you injected a nice contrasting moment of positivity into the outlook are you going to be doing the same for us this time i think so um we We actually have been buying into the weakness in the beginning of this year.

3:03And I have a couple interesting stats for you. So we were talking about last time I was on that I was buying last year at this time, Liberation Day, and we're up about 34 percent since the Liberation Day low. But if you go back and you go back to the spring of 2023, when Silicon Valley Bank had collapsed, you would have and if you had sold, you would have missed 78 percent return from the lows. If you went back to covid in the spring of 2020, you'd have missed one hundred and ninety eight percent. And so to me, in March, when we saw the lows, I thought it was an opportunity. But I'll tell you, there's one caveat, Wilf.

3:50It's the timing of the war. If this war drags on for three or four more months and not three or four more weeks, that is when I think we might have some problems because I do believe the higher energy prices, higher oil prices, higher everything prices will start to eat into the consumer. As of now, it has not. And what I pay the most attention to, and you know this very well just from our relationship, I listen to what the banks have to say because they're at the front line. And last quarter, the big six banks talked about the consumer being resilient. And every one of the CEOs was very, very surprised at that.

4:33But they remain resilient. They continue to spend. and a lot of the reason is because they have jobs. The labor market has softened, there's no question, but it's not collapsed. Here in the States, there's still one job available per one unemployed person. And so I keep close eye on the weekly jobless claims, and I smooth it out over a couple of months time just to see where we're at, where at historically low levels, that continues. So that's something that I'm watching, but we care about the consumer because it's 70 % of the economy And the consumer continues to consume on services, which is 75 % of consumption.

5:10The other interesting points that the banks made was that credit quality continues to be quite good. Delinquencies fell. Non-charge-offs fell. Provisions for bad loans fell for the big six. And so I think that's really important. And then the third thing that they all did and said was that they're lending, which we want them to lend because that's going to feed into the economy. So that's the one piece that I feel okay about, but the war and the timing is really going to be, it's a very fragile situation, but the consumer continues to do their thing, and that's important. The other piece, and I'm sure we'll get into this, is what we talked about last time, the momentum in what I call the AI food chain.

5:54So it's AI. We all know Mag7 and how much they're spending on CapEx,$761 billion this year. But it impacts an entire other parts of the economy, meaning data centers. If you believe in AI, you need more data centers. We only have 11 ,400 data centers in the world. We have to get that to probably 30 ,000 by 2030. If you believe that, you need an upgraded grid. And we haven't updated the grid in over 50 years. In fact, 75 % of the grid is over 25 years old. And then power, we don't have enough power. And so that's, we need natural gas, we need coal, we need nuclear, we need renewables. All of this has been a nice impact to the economy.

6:44I think it could account for a 2 % growth overall. So these two factors are the reasons why I still feel good. Now, the AI food chain has nothing to do with the war. So let's just say the consumer does slow down. I think you still have a lot of momentum from what I think is a revolution. And I've talked to many, many companies and on the industrial side that are a part of building this stuff out. I've never heard of backlogs in the percentages that they have reported in my 35 years of being in this business, which is why I say this is a revolution. And it impacts so many different industries and companies.

7:24It's really interesting, Steph, because I think the consumer is significantly de-risked. Maybe we'll talk about government finances in a moment. But before we get into a lot of what you just said there, though, I just want to dwell on your confidence to buy the dip, because as I referenced, we spoke in July last year, you reflected how you'd successfully bought the April 2025 Liberation Day dip. Sounds like certainly in the short term, you've been correct to buy the March 2026 Iran war dip, albeit obviously shorter term bounce and smaller scale bounce so far since then. How do you have the confidence to do that?

8:02Because that is your classic Warren Buffett, buy when others are fearful. It's not an easy thing to do. No, I mean, and I didn't time it perfectly, of course. I started buying actually in the beginning of March, to be fair, and just kept on adding and buying the dip and not feeling very smart. But the way I think about it, Will, is you know I'm really big on themes. We just talked about one of the biggest themes in the whole AI food chain. I'm a big believer in, if you believe all the things I just said about AI, you need cybersecurity. And by the way, the cybersecurity stocks act horribly, and yet they are going to benefit, I strongly believe.

8:46I still believe in the housing cycle. And so that's just another theme. I believe in robotics and automation. We're just starting to hit on that. So I think about kind of big picture. And then I think about themes. And then I try to find stocks that are based on those themes, because I think those themes, at least I believe, are like a decade long. And when we do get the opportunities, when stocks do fall, I look at those stocks as opportunities. And of course, it's important, very important in terms of where I think earnings are going to be and how they're going to grow. And I will say, since the March 30th low, the market is up 12 percent, the S &P, the Nasdaq's up 17 percent.

9:32But it's been led by technology semiconductors. It's led by energy and industrials. And those three all have the same thing in common. They all have the AI food chain. And so those are the areas I have been buying because I believe those are where we're going to see better than expected earnings and higher earnings revisions. It's not easy. And honestly, it's really hard to continue to buy the dip when they keep going down. But I feel really strongly about the themes. And that's how I can justify. And that's part of my process. So a couple more macro things before we dig into some of those themes and your stocks.

10:11And by the way, do a quick review of your stock picks from last time as well. It's a good review for you. So you should be looking forward to it. On the war, I mean, clearly, NASDAQ, S &P, as you've said, up since the start of the war, all-time highs. Oil prices, though, up 50%, 60%, 65 % on Brent this morning. I mean clearly that can't hold long term one of those two things has to adjust in the opposite direction and and I guess at the start of the war people were saying you know this is as long as it's weeks not months then you know it's okay for the S &P 500 to to stay strong and we're into multiple months now pretty much and and I feel like there's a lot of just sort of adjusting the timeline in the rhetoric as opposed to fundamentally seeing oil prices come back down to earth yet?

11:06Yeah, I totally agree. Like I say, it does depend on the length of the war for at least the US economy, but not also the global economies. I worry a lot about Europe. I worry a lot about India. There are countries that are very dependent on, you know, in terms of they're not independent on energy. We are in the States. And, you know, an interesting fact is, you know, as I mentioned, like higher oil prices, higher gasoline prices, it's not good. But the U.S. consumer, only three percent of households, that's their budget, is gasoline. We are far less dependent on gasoline because we have much better fuel efficiencies.

11:52We're doing more in terms of EVs and that I imagine will continue going forward. And so as a percentage of the consumer's budget, I don't feel as nervous about. What I worry a little bit more about is it's not just gasoline prices, right? I mean, we hear about helium and we hear about fertilizers and all that. So it's the whole entire basket that I just keep my eye on. And again, if this war does go on for a long period of time, there will be a pinch. but war has nothing to do with the AI food chain. And so if we do see a weaker consumer, that is plausible, absolutely. And I worry about it, but the AI revolution is here and thriving and we're in the early innings and you have to have exposure to those particular sectors.

12:44So final macro question that follows from the war stuff, because I think the sort of best in playbook of trying one last time with a lot of government spending to grow your way out of a big debt problem with a 5 % or 6 % deficit. The hope was to flood short-term issuance and pay lower rates if and when rates came down. Looks like Kevin Walsh will be confirmed this week or soon either way. But doesn't the war make that playbook very hard to enact? And do you fear a two, three-year period of higher than otherwise rates than expected, and given the multiples you see in the market, or is that not a major concern?

13:25I do think you'll see higher rates. I don't think you're going to see a spike to 5 % inflation. If I did, then I would be a lot more concerned. But I will give it to you that we are seeing higher than average and higher than what we want in terms of inflation at like 3%, 3.5%. Does it get to 4 %? It's entirely possible. I don't think rates are going to spike higher, but they're going to probably remain elevated. I don't think Warsh is going to be able to cut rates, but yet we're still able to grow to 2.5%. We were going 3 % pre-war. We are now slower, of course, but that's why I say if we can have a short war, then maybe we can resume the momentum.

14:04One interesting thing is the one big beautiful bill, whether you think it's beautiful or not, is going to be stimulative to the economy by the tune of 80 basis points. So that'll also help the consumer offset higher inflation in my mind. Here's the reason why I think it has to be shorter versus longer, the war. We have midterm elections coming up, and I just can't imagine that President Trump wants higher gasoline prices at the pump, higher inflation. That, believe it or not, pre-war, he had, that was his victory. I mean, energy prices pre-COVID were only up 11 percent. And that was the thing that he could really, you know, tout, if you will, at the elections.

14:49I think if if you have gasoline where it is and you have inflation where it is, I think it's a harder call, which is, again, why I think it's going to be shorter rather than than longer. I'm not saying that we're not going to feel pain, even if it is, you know, another month. But if it's another three, four or five months, that's that's going to be problematic.

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16:01so let's get into the theme you've talked a lot um and and obviously been really on the money about as you call it the ai food chain so it's obviously not just the gemini's anthropics and open ais of this world but but all the beneficiaries of the huge uh capex that those companies have have triggered. Talk to me about the software meltdown off the back of AI in the last, whatever, six months or so. It's been, are software names the opposite of the AI food chain, or in fact, they part of it and people slightly missing the point here? I think there are winners and losers. I think you want to be where there are mission critical software companies that cannot get displaced.

16:45I don't think you want to be anywhere near a SaaS company because SaaS companies are getting paid by per seat, and therefore they have seen massive recurring revenues over the years, and that's why the multiples got to where they got to. Now I think if you're a SaaS company, you actually have to change your business model, and I have no doubt, Salesforce.com is an example. I have no doubt that they will figure it out, but I'm not willing to stay around to watch and wait because it's going to take some time. And what I have learned in my career wealth is that when you have a growth stock that becomes a value stock, it takes a really long time.

17:30Because even with the corrections in some of the SaaS companies, they're still trading at 20, 25 times earnings, and we just don't know what the growth rate is going to be. and then eventually they'll get a new business model, you know, on a per consumption basis is what I'm talking about, but that takes a long time. So I think you want to be very careful. One of the names that I think has gotten hit hard, unnecessarily so because it is mission critical, is a company called Synopsys. I would even throw Cadence Design in there as well. These are mission critical companies that the more complex the AI is in terms of producing chips, the more complex that the chips are, the more they need these design manufacturers and that software.

18:20And so to me, that's a very interesting space. And yet the stocks go down with all the other software stocks. I think you could pick and choose the ones that you feel comfortable about. I think very strongly about cybersecurity, as I mentioned, that I think I said this last year that AI is not secure. And we are now using more and more AI agents to code. And so as a result, that is also introducing a lot more security issues. And so I think those stocks have also gotten hit with software. And I think you can be buying those names for the long term. So let's pause before we get into some of the kind of stock recommendations in software directly and just reflect on your performance since last time.

19:09So in the end, we had six specific stocks from last time that you focused in on July 2025. Vertiv is up 154 % since then. Congratulations. DR Horton is up 17%. Amazon's up 16%. Palo Alto Networks and Boeing are sort of flat to slightly down and Uber is down 19%. And I run through all of that and applaud it, particularly Vertiv, because Palo Alto Networks was one of the recommendations. And I guess, in one sense, to only be down a little bit since last July, given the software sell-off, is relatively impressive. Is that your top pick in that area still? Yeah, I like it very much. And I like what they're doing.

19:58Over the last five months, they've made$30 billion worth of acquisitions. $30 billion. And I've said a lot of the reason I like cybersecurity is because not only is AI going to be a tailwind for them, but also I think you're going to see massive consolidation and the big five are going to get bigger and bigger. And what they're doing, what Palo Alto is doing is actually they're trying to build out their capabilities, their products, what they can offer to customers. They want to be able to offer more. It's called platformization. And they're still not able to offer 100 % of what a customer wants.

20:38But what the customer wants is they don't want to actually have 10 different vendors. They want maybe three, four, five vendors. and ideally they'd like one or two, but that's just not possible because no one, not even the big five own or have enough of the products of what the customers need. And I only know this because I talked to my own chief technology officer and he has said, he had said, he has said such. So I also think it's interesting that the CEO two weeks ago bought$10 million worth of stock. It's always a good sign. Yeah, it's pretty interesting. So, you know, it's trading at about 10 times price to sales, which is not cheap, but CrowdStrike is trading at 25 times price to sales.

21:23And so I think that there's a narrowing of the valuation, I think, that could happen. Let's just race through another one in the software space. So what about service now? How much has that fallen and why is that protected despite the sentiment? I mean, the stock is down huge. I bought it just recently because it's down quite a bit. But it kind of goes back to, I think, that they're mission critical. They're a software that tries to connect all various different pieces of a company, all the various different departments, all the various different technologies. And by the way, this CEO also has just bought$3 million worth of stock.

22:01They have industry high margins. I think the quarter was really actually good last week, but the guidance was conservative. Gross margins are down. And that was disappointing. I understand that. But I do believe the catalyst here near term is they have a May 4th analyst day. I think they'll do a good job talking about the mission critical aspect of the company. And I do think that they will see very strong bookings going forward. I wanted to talk about the flip side now. Obviously, there was a big software sell-off. Since mid-March, since the sort of Iran war low, there has been an unbelievable rebound in semi-stocks.

22:40I mean, 18 days in a row. What do you feel when you see that? I mean, certainly in the short term, one has to step back and think this isn't sustainable. Even if the last couple of months up to today might provide a long-term entry point, are you worried when you see that type of rebound? And what's been your kind of favoured semi-play of late? I think that it's always a little bit nerve-wracking when you see the moves that we've seen, almost meme-like, right? But as I mentioned, I think this is the area where you are going to see earnings revisions that are higher. Some of the numbers, Wilf, are off the charts in terms of what some of these companies are printing.

23:27Marvell happens to be my favorite. I've owned Broadcom forever. I still like Broadcom. But I like Marvell because it's an alternative for the AI trade. Instead of copper, they are optical. And I think both are going to be needed. But they just talked about growing optical 50 % over the next year. And they also have Custom Asics, which is what Broadcom also has. And the two of them have an 80 % share. And that business is growing 20%. So this stock has, and this company has a potential to grow earnings of$5 to$6 a share over the next couple of years, making it a pretty reasonable valuation. But again, it ties all the way back to the food chain of AI.

24:09They're a beneficiary of it. And in terms of Vertiv, if we come back to the beneficiary of the food chain, I mean, that has had a fantastic performance. How are you feeling about the valuation now? Well, they had an enormous backlog growth, over 60 % in their quarter. And I think that, and they're now not going to actually be posting backlog anymore, which is kind of a bummer. But when you see those kinds of backlog numbers, I mean, those are absolutely incredible. Like I said earlier, I don't think I've ever seen backlog numbers. And it's not just Vertiv, right? It's of all the other companies that we have talked about in the past.

24:48It's Qantaservices, Eaton, it's GE, Vernova, Rockwell Automation. But Vertiv actually is really an amazing way to play the data center and the fact that you need cooling systems inside the data centers. And what I think is really interesting is they just made an acquisition announced today that actually they're buying a small, very small company, but they're buying the company to help them with their engineers, people. because there's one thing that I have learned over the last year is that we don't have enough people. We don't have enough sophisticated electricians. We don't have enough sophisticated engineers.

25:27We don't have enough sophisticated pipe fitters. So I thought it was interesting this morning that they're going after a company just to get their engineers. This management is top rate and they're doing all the right things. That's very interesting. Also an indication of what younger people should be training towards, I think, perhaps going forward. 100 % wealth. It might be your kiddos. Yeah, exactly. He's two and a half. So I won't start pushing him towards learning those types of skills quite yet.

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26:50DR Horton, just want to hit that one from last time as well. Clearly a housing stock. I mean, how much is it linked to mortgage rates? And going back to that point at the start of the the discussion with the war and its impact on it, are they heavily, heavily correlated to what's happening with mortgages? Or is there more of a structural case either way? 100 % tied to mortgages. It was interesting that pre-war, the whole sector was doing quite well. And that is because interest rates had come down. And in fact, we hit below 6 % on the 30-year fixed mortgage for just a moment in time. But if you talk to the company, when we did hit that lower interest rate, they did say that inquiries and demand had started to pick up.

27:38And so I think you do need interest rates to come down. And so maybe this is a stock and a theme that kind of is in show me mode, I would say for sure. But this company in the face of all that actually just beat earnings estimates. And they're very conservative in guidance, but they basically feel good about the guidance that they've given at the very beginning of the year. And so they're doing and controlling all they can. I think at the end of the day, when you do get interest rates lower, and I think eventually we will, but you got to get it in the fives, probably in the low fives to really see this pent up demand.

28:10But we have pent up demand. We're 4 million homes short in this country. And we've got 5 million millennials that want to buy a home, a new home. And so I think it'll take a little bit of time. But in the meantime, the stock is extremely cheap at 10 times earnings. And you can build houses with less local planning restrictions than we can here. It's a time for another discussion for another day. Just actually one more from last time. I mean, you referenced Amazon. It's up 16 % since last July when you joined us. The Mag7, five of them or six of them report all on Wednesday this week. Yeah. Oh, I mean, five out of the seven report this week.