Neville Javeri, a portfolio manager at Allspring Global Investments, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): Tesla disappointed. Google parent Alphabet disappointed. It’s been a wild morning in the market. What’s your take?
NEVILLE JAVERI (NJ): Yeah, I think [with] Tesla, there was disappointment in multiple segments. The delay of the Robo Taxi, the fact that if there hadn’t been the EV credits, the margins would’ve been lower, revenue missed. There were misses across the board. Alphabet not so much. Decent print, decent guide, somewhat disappointing on YouTube revenues and the fact that the company on the call mentioned that they weren’t seeing the return that they were making in investments in AI. So that’s what led Alphabet lower.
AM: Yeah. You said recently that there may be some ‘AI fatigue’ in the market. Is that what you’re seeing here in these earnings?
NJ: I think you’re seeing it. It’s too early to say just yet. We’ll know when the other hyperscalers report later this week or next week. But I think there may be a little bit of that just because of Google’s alphabet’s admission last night in terms of the fact that they aren’t seeing the kind of return. So you may be in an environment where folks are going, Hey, is this AI cycle probably overdone for now?
AM: Yeah, there’s been billions of investment in AI in the last couple years, and I think now we’re seeing the market kind of wake up and say let’s see the money. Where are the returns? Can you predict when investors might see those profits?
NJ: Yeah, look, we’re looking longer term. So the way we look at the world is looking out four to five years over a business cycle. But I think any which way you look at what had built up up until this point, there was certainly a crowding that was taking place in the, in the top heavy Mag 7. There was a perceived safety play over there. I think you’re seeing that unwind to some extent and you’re seeing money move out of Big Tech. You’re seeing it move into small caps and you’re seeing it move into other parts of the market like industrials, healthcare cyclicals.
AM: Gotcha. I wanna talk about Tesla. There’ve been a number of promises about the, the taxi, and the self-driving services and they’ve kind of kicked the can down the road. Yeah. Do you think that they have to deliver in the Fall in order to save their stock price?
NJ: The price action after he made those comments after Musk made those comments is telling, I mean, the fact that the Roboto TAXII gets pushed out is clearly disappointing if, if you’re looking at it from Tesla’s standpoint, they want more EVs on the road and the Robo Taxis is an extension of that. So at some point they do have to deliver.
AM: We’ve been talking about the Mag 7 a little bit. They’ve been lagging while the rest of the market kind of is taking off. And you’ve mentioned that AI fatigue is one of the, are there any other reasons?
NJ: I think valuation and expectations. I think if you look at valuations in the Mag 7 and the growth expectations relative to the other 493 stocks, there’s quite a disparity. I mean, you look at the cap weighted S&P that’s trading at about 22 times, primarily driven by these seven names equal weighted as about 15 times a 25% discount to the cap-weighted index. And in large part, that growth was driven by those Mag 7 names. I think now you’re starting to see investors question how much incremental growth is in those stocks given where valuations are today.
AM: So if you’re an investor, what stocks would you be buying right now as the market kind of shifts out of tech or Mag 7 stocks?
NJ: Yeah, Andy, I think there’s a lot of value in some of these sectors. We talked about industrials, healthcare. I mean, you’ve got some, some great names outside of the Mag 7 that have typically traded at premiums or at market multiples that are trading at a discount today. I mean, Union Pacific is one of those, it’s a great railroad, got a phenomenal management team. They’ve invested heavily in the network. It’s starting to pay off. Jim Vena, who’s the CEO, is sort of the protege of precision scheduling railroading. And they’re using more efficiencies across the network, longer cars, productivity’s up, margins are up. They’ve started a share buyback stocks growing at about 11, 12%. Bottom line trades at a 15% discount to the market. So that’s one name we like.
AM: And you’re also a fan of UPS as well, right?
NJ: Lots of good stuff happening there. They’re investing in what they call the network of the future Frankfurt, which is becoming their big hub in Europe to tie Europe and China. They’ve monetized their brokerage business. They’ve started a share buyback repurchase, and they’re going to exit the US margin business with 10% margins at the end of the year. And that’s only gonna trend higher as they absorb the costs from the labor union and the labor agreement that they signed last year.
AM: Any other picks for our viewers today?
NJ: We like UnitedHealth. That’s another company typically, one of the best in the healthcare space that’s traded at a premium historically, got beat down a little bit post pandemic because seniors were going in and they were driving up the cost. So the cost had gone up. They had a hack which impacted their Optum business. They’ve gotten past that. They get new clients in, they had a great quarter. They raised guidance. Stocks trading at about a 20% discount, is growing at about 13-to-15% bottom line. Incredible opportunity right now.
AM: Well, thanks a lot.
NJ: Thanks, Andy.