Episode 122 | Taking advantage of a stock picker’s market

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So overall the AI story I get the question.

 

You know use a baseball analogy. What are we in. What would you say we are in

 

would say we're either just leaving the locker room or, you know, top of the first,

 

Artificial intelligence seems to be everywhere today. From earnings calls to invest in conferences to everyday conversations. We've seen tremendous excitement around companies like Nvidia. Massive spending by scalars, and a growing debate about whether AI represents the next industrial revolution or simply another technology bubble. On today's episode of Investments Unplugged, we're going beyond the headlines. We are joined by Michael Scanlon, lead portfolio manager of the U.S. Opportunities Fund, and Leigh Pressman, a senior analyst on the team with a focus on technology.

 

Companies will discuss how stock picking can lead to performing markets. What anywhere in. For AI, and, of course, how to manage the potential risks. That's around one of the most important investment themes of our generation. Listen on. This is Investments Unplugged.

 

Let's go with you. Welcome back to Investments Unplugged. I'm your host, co-chief investment strategist at Manulife Investment Management, Kevin Headland. And today, I'm actually very excited to have two members of the capital appreciation team at Manulife based in Boston. Lead manager of the Manulife U.S. Opportunities Fund, Michael Scanlon, who many of you may have met before, and another member of his senior team.

 

Leigh Pressman, senior investment analyst who is responsible mostly for the tech sector or tech company, shall I say, because many of these companies don't even are even in the sector anymore. So welcome to the show. Thank you so much for joining us.

Thanks for having us.

 

You believe this is the best stock picking environment of your career. Can you care to comment on why you've been so

 

Yeah. So I think there's a, you know, we won't do this period of time after the mobile financial crisis where the market was just much more beta driven. Right. And you had, if you just on the SP or something like that, it was just an environment to kind of ride the beta on equities. And for whatever reason, I feel like 2019 was a bit of an inflection point where stock started mattering a heck of a lot more than it did for the prior roughly ten years.

 

And I think that that's only picked up pace. And if you think about it, you know, maybe like 3 or 4 years ago, everybody would say, well, the only way you can help reform is if you own the Mag seven¹. And now everybody says unless you own the AI beneficiaries, whether it's M.E. conductor companies or other hardware segments, you know you can't outperform unless you own those thoughts.

 

Well, what I think about in my head is that that's really just reflective of a great stock picking environment. And I think if you look at the market overall, whether it's been year to date last year, we really haven't had a lot of volatility at the index level. Right. The the VIX index has been very low kind of barely a double digit consistently.

 

But if you cut one layer deeper below that you have tremendous volatility at the the stock specific level right where these stocks have been whipping around like crazy. So you know, when you look at that opportunity said, if you're running a portfolio that doesn't you know, our portfolio is basically is narrow and as top heavy as it's ever been today.

 

We only own 52 stocks. The top ten names are about 50% of the portfolio and 70% active share. So as we've seen this opportunity to to really pick stocks with definitely skinny down the name count and made the portfolio more top heavy. And we haven't just rode the Mag seven to do that.

 

It's interesting where you would say that it's the tightest portfolio you've had. You would think that in a great stock environment, you want to own a ton of stocks. But I'd say this is the best because you have the highest conviction in our names. You can wait them better than just saying, I'm going to buy everything and

 

Yeah I, I and I think that's the case right. If you, you know, if, if you look at a portfolio that's just going to kind of mirror the index. Right. Be a very low active share portfolio in charge and active expense ratio on the on a mutual fund. Say you know that that's really hard to outperform the market consistently at all, let alone consistently because you're just hugging the benchmark.

 

You deduct your expense ratio every year. More likely than not you're going to lag pretty consistently. For us, you know, on our, our, our Canadian mutual fund strategies, we are charging in active management on these portfolios. So we're trying to earn that fee by picking stocks and over waiting and under waiting stocks. And you know, if you look at our portfolio, it is very meaningfully different from the S&P 500 in that the name count is very low but really that active share two.

 

So if we've seen some statistics that I shared with you recently where if you looked at active share across the US equity mutual fund universe in Canada, those metrics have actually never seen a time where active share has been lower than it is today. Whereas our strategy essentially it's as active as it's ever been because our actor shares over 70%.

 

 

And I think it's a great comment where the active share is so low. You know, we talked about this before and over my career. And I'm sure yours portfolio managers tend to be mindful about the risk of underperforming a bull market momentum driven market. So they can have style creep and they start owning names or maybe overweight names they probably don't really normally would have had in the portfolios.

 

And that becomes an issue, especially when we're, you know, going into an environment where we are much more cost conscious, where regulatory bodies are saying that the display costs to our end clients being different

So I had a partner that was I worked with for a number of years. He put the philosophy and process in place in oh three. We worked together for a very long time. He retired about nine years ago.

 

I mean, I tell the team all the time, we've got to beat our benchmark after fees or we're in a lot of trouble. Right. The environment today, anybody can be passively passively ETF did any point. So for us we've got to beat that benchmark not only consistently but cumulatively as well because it's really hard to build a business if you're just a boom and bust type strategy.

And that one anomaly on your on your performance track record I would say is 2024 the year that in video went absolutely parabolic and just to the moon essentially every day it was up and you didn't own it. And eventually you did at a bad added to the portfolio. And like, maybe this could talk about, you know, introduce kind of Leigh's aspect of this and why you added

Sure. So I'll kick things off and then hand it over to Leigh. So yeah, 2024 was a one year that we now perform the S&P 500. But we more than made up for it in 25. And then year to date 26. And in that 2024 time frame as you referenced. I mean that was a period of time where every single day you came into the office, Nvidia just traded straight up every day.

 

We didn't own the stock at that time because we felt like the earnings estimates were just pristine. Stock was trading at a 50 or 60 times multiple somewhere in that range. And we thought that, you know, we thought the street was missing. The opportunity said that there was going to be more competition coming into the market, which is certainly unfolding, unfolded.

 

So you flash forward to kind of the around April of 2025, when Trump made the tariff announcements, we had done the work on the name, and I'll let it take it from there. In terms of her downside target versus where we got into it and how that's gone since then.

 

Great. Thanks, Mike. So one thing I would add to is that back in January of 2025, just around the time that Trump took office, we also had the deep seek moment where the Chinese model entered the picture and everyone was concerned about what was going to happen. So between January and April in Vedere stock had taken quite a bit of a hit.

 

Before all of that, my downside target was about $90 a share, I think. And please correct me if I'm wrong. We entered the stock somewhere in the 95 ish range, per share, and we essentially swapped our position Apple, which was going to be pert a lot by tariffs for Nvidia, which was not going to feel the same effect.

 

The multiple had come down. It hit our downside price target essentially. And we've been very happy with it since.

 

it was really and, you know, you think about it, you bring things back to how we think about investing, right? It's a margin of safety and the business the safety and the valuation and the company specific catalyst. So that sort of indiscriminate sell off is how I would describe it, that we saw after the Tariff Day in, I think it was April of 2025, you know, that the stock sell off after that point.

 

You know, that margin of safety and the valuation really came around for us. So, as Leigh mentioned, I think our cost basis was 95 or 97 bucks. So we've more than doubled our our money in the name. But, you know, we got paid for being thoughtful about when we actually entered the stock versus just chasing it at the highs.

 

So it was a great entry point bringing into in video, which was a great business to begin with. But it was all about where and how you entered in the valuation, which is really ultimately important. Leigh, can we talk about in Virginia to start off and maybe we'll expand to other AI names or the overall AI segment is the earnings growth power has been extraordinary and the talk is cannot continue.

 

Can it continue to run at the same growth rates as it already has. And the component becomes that much more important right now. So where do you see earnings growth for for Nvidia. And where on the AI story are we seeing this continuous.

 

Yeah. So that's a good question. I asked myself that every quarter because it seems like we keep hitting our peak and somehow we still keep going. So the way that I'm thinking about Nvidia, especially from the east side of the equation to your point, is they have very long term contracts. They have financing arrangements where they're basically using their balance sheet as a bank for their customers to help them finance the infrastructure build out.

 

There are almost no real great applications for AI today. There will be, but today it's mostly advanced chatbot summaries, things that are pretty low value. So if that's what we're doing today, three years from now, we should be doing a lot more high value, which means Nvidia has plenty of room left to run to be able to power all of those things.

 

So overall the AI story I get the question.

 

You know use a baseball analogy. What are we in. What would you say we are in

 

I would say we're either just leaving the locker room or, you know, top of the first, like it's very early on. As much as we like to think that it's already there. It's just not yet. But it is coming. It's there's a lot of great promise. We just haven't seen it yet.

 

Yeah. Kevin, I would I would add to that to I think it's really important that, you know, some of these stocks have been material outperforms. Right. We've got multi baggers and a bunch of names associated with AI. But you know we do still think that there's a lot of upside to these names. So you know we've been judicious in terms of managing the size of these names and trimming them back when they do have these big pops.

 

But if you look at something like take micron in our portfolio, right. Microns been, you know, a huge winner triple digit return year to date that that sure. If we if we hadn't trimmed it it would probably be about 15% of the portfolio today. But we have trimmed it back but we still own it. You might say, well, why do you still own it if it's been that big of a winner?

 

And I think you look at that name today and you know, it's trading at six times the street number for earnings, a little bit lower than that on our earnings estimates. And you might say, well how are you different than the street or what is the street even missing at this point. And what I would say is, you know, the the new chip that Nvidia just started shipping, the Reuben chip, which I think it was last week, they started shipping it.

 

That chip is forecasted to consume more memory in its first year than if he took all of Apple and Samsung and added them together. So, you know, when you when we don't see this, this trend or this explosion in demand all of a sudden running into a wall anytime soon, and obviously you have this huge incremental

 

demand, it is really hard to bring on supply.

 

And frankly, the memory industry is just in a lot better shape today as an oligopolies industry, rather than having all these players that battle each other into bankruptcy every time there's a down cycle. So, you know, micron is still a name that we own in our portfolio, but we have managed around it as it had some of these big swings up year to date.

 

And Mike is the amount of time I spent on the road. I always keep learning more and more from you and, Leigh, maybe you can help myself and maybe the audience here as well is we're saying all these names and we're saying Nvidia and Micron and TSMC and, and there's a whole host in the AI space.

 

But how do they play together. So you know in Vedere is programing and Samsung's creating the chips. But you need micron

 

you know the

 

So it has become a very hard to distinguish certain parts of the supply chain from others. You have people moving up and down the value chain. So really I think about from a semiconductor perspective, you have the machines that make the semiconductors. We call that semi cap. We own a company called Applied Materials which falls in there and which is a smaller company.

 

Then you have the companies that actually physically make the chips, which as you said, is TSMC and Samsung and Intel are the three main ones. And then you have the chip designers, which is somebody like Nvidia. They don't own any of the machines. They don't make anything physically. They send their designs and work with TSMC, Samsung and Intel directly.

 

And then you also the memory guys that are in there too. But again, the lines are becoming blurred. The big one being that to make a memory chip is a lot different to how you make a video graphics card and the compute side of things. At the end of the day, you still need the same type of companies doing different parts of the supply chain.

 

It's just who does what. And now everyone has long term agreements with each other. Everyone is jockeying for as much capacity as they can find from these guys, and it just becomes a game of how much can we price till they get mad at us. Is where we're at right now with a lot of the chip stuff.

 

One of the names that Leigh weaved in there too. Qnity,

 

I think that's an interesting one to talk about because, you know, that's a market cap company that's maybe like in the ballpark of 25 billion or so. You think about AI themes and you think about all these companies that are trillion dollar market cap, so forth, but there's still opportunities down the cap range,

 

 

these are guys that I don't want to say they have a monopoly because I don't want anybody to sort of the peak their interest in it. But, you know, when you think about bonding agents and adhesives to stack semiconductors on top of each other. There's not a lot of new players coming into the market and where this is just such a low percentage of the bill of materials,

 

it's not something that people are looking to cut corners on and potentially destroy their supply,

 

they're having manufactured.

 

So this is a stock that's been a pretty unique or eclectic stock,

 

00:16:38:14 - 00:16:40:18

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relative to a lot of these mega,

 

cap names that are involved in this space. And I think there's other ways to play it, too, right? I mean, you think about this was supposed to be the year the pick and shovel plays for AI.

 

Certainly some of those names have done well. But, you know, if you look at our portfolio ect, which is equitable resources in the US, if you think about what's going to solve these electricity shortages in the US, which are being which are being put under a microscope today because of the impact that data centers are having in terms of driving up prices and making excess power more and more scarce.

You know, most break even costs of any natural gas provider in the US. We've got the best pipelines every earnings call. They're talking about how the they have these new taker paste II contracts, where they're going to fuel the new data centers that are being built. So even outside of those mega cap household type names, there's a lot of opportunities.

 

And whether it's June, which is still a technology company or even equitable resources on the natural gas side, there is a lot of opportunity out there.

 

It's interesting you were talking with the first one. You know, ultimately we're almost talking about just glue and it's funny, is worried about this technology and it's the next thing to come with, like, this is a bombing agent. It's like, kind of boring. Who cares about that? But it's so important in the in the supply chain and realizing that, you know, it's something that no one wants to talk about.

 

It's not as exciting as some of the other names, but the market needs it and rewards it. And that's great to find these little opportunities. Li, you mentioned something as well in terms of these. These companies have long term agreements. And one of the the terms we're hearing is circular financing¹. How much of that is concerning? I look at it also as if it's, you know, these companies were all one big company, a lot of just about vertical integration, because you need these, you know, you need your suppliers, you need all this is a risk.

Is it? There's something wrong there or is it just about

 

yeah, so I think it depends on who you ask.

 

So in video addresses head on in their most recent earnings call saying people are concerned as a circular financing. Here's why it's not. And it's the oppo went into a diatribe about it. I recently met with Mr. AI CFO in Europe last week or two weeks ago, and he said it was like a duck, quacks like a duck.

 

It's a duck. So calling it circular financing. So it depends who you are and where you are. But from where we sit, yes, there is definitely some circular financing. It's hard not to call it that. Is it concerning? As of now, no. So it is like we are absolutely paying attention to. We're avoiding companies like Oracle that have a lot of off balance sheet transactions and things that kind of hide their true level of debt.

 

But if you think about the fact that Nvidia is providing financing or AMD is providing compute for equity or any of these other arrangements, it's kind of like what GM and Ford have done in terms of their captive financing, or even John Deere to help their customers pay for their products. So it's not completely unheard of, but it is something that we are not taking our eye off of, and we're not too concerned for the companies that we like at this point.

 

And I think it's a great part where it comes down to the analysis. It's not about it's not past investing. It's identifying each individual company, kind of stripping it down and saying, okay, where are the risks? Where are the opportunities? As Mike, you mentioned, margin of safety evaluation, making sure we're not making missteps here. And that that's key.

 

Lastly, I want to finish off as we're getting into our time here 20 minutes a lot of talk, especially as midterm elections come up, is the societal impact of data centers and the risk that perhaps they're not going to be able to as build as many or in areas where they want to as much as they can. How much does that play into the

 

I can start with this one, Mike. So clearly the big societal risk is a is taking all of our jobs or data centers are hurting the environment and driving up our electricity prices. So on the first point, in terms of AI taking jobs right now, there is an estimate that about 8% of global job force is technically what's at risk from AI taking it away.

 

And these are the most low value type of jobs like a data entry. These are not lawyers accounted you know, doctors definitely not at this point. So there is a concern. But at the same time, we're even starting to see some tech companies hire people back to essentially babysit the AI and the code that it's putting together

 

on the data center front.

 

There are a lot of strides being made by some of the suppliers to the data centers, like some companies beyond like Schneider Electric or Train, which do the heating, cooling and electrical management of these buildings to keep as much into a closed loop system as possible. So the goal is to have the least amount of stress on the environment around them, whether that means all of the water being recycled and then purified and used again, or it means they create their own electricity, they have their own backup power.

 

So it's not as terrible as people seem to think on the surface. I'm not going to say, you know, everyone should want a data center in their backyard. I'm not sure that I do. But at the same time, it's not as harmful as people think. Nor is AI, especially if we're talking about top of the first sitting running out on the field from the locker room.

 

I would just add to that too. I mean, I go back to a couple anecdotes that I think are informative here, right? Warren Buffett was always famous for saying that the tractor didn't put the farmer out of business. I think that's your example here as well. And then, I think it was last summer, the CEO of Walmart, they were asking him about how AI was going to change everything.

 

And he said, listen, you know, there was a time where we showed up to build a house with hand tools, and now we're showing up to build the house with power tools. We still get to build the house. So I don't I'm not a believer that there's the that we're on the cusp of this jobs Armageddon. I think there's a bit of like before the thing worries here where we don't know what these jobs and these industries are going to look like, or what new jobs and industries are going to be created and not just induces some level of anxiety in people.

 

But on the other side of every technology revolution, there's always been more jobs. And I a great example of where you two would be think about the New York Stock Exchange, right. New York Stock Exchange definitely in the crosshairs of electronic of everything. Go back to 1990. There was 5500 people that used to walk in the door every day at the New York Stock Exchange.

 

Today, there's less than 500 people walking through that turnstile. And we've added in the US during that time frame have gone from 6 million financial services positions to over 9 million. So you've had this wholesale decimation of in-person jobs at the New York Stock Exchange, yet we've had 50% growth in financial services employment in the US. So I think that's very analogous to what we're likely to see in light of AI.

 

It's just there's sort of that discomfort before we actually know what everything is going to look like.

 

Knows? One great points, Mike, and I, you know, talk about things exactly that the the tractor even going back to the horse and buggy and creation of cars. And you know, we're all we always live these these these changes in technology, these shifts and you know, humanity

 

say is impossible to outperform. And you guys are doing it all comes down to stock selection, understanding the companies you're buying, the price you want to pay, having a great team like Leigh on your on your team to help you find company is phenomenal.

 

And Leigh, as you said, AI only in the early innings and is finding the companies that are benefiting whether it's in video nice and, you know, really attractive or the glue that bonds the way for us together. So great having you guys on the the podcast today really appreciate it. We go a lot deeper over time about this stuff, and hopefully we'll have you on maybe next year to talk more about the revolution in AI and everything else we're taking advantage of.

 

So once again, thanks very much for joining us, and thanks everyone for listening to the podcast today. Please feel free to rate us or tell other friends, family members, coworkers that you enjoy it. That's the best way to increase listenership. So I really appreciate listening and everyone have a great day. Until next time when we'll have another podcast

 

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The indicated rates of return are the historical annual compounded total returns, net of fees and expenses payable by the fund, including changes in security value and reinvestment of all dividends or distributions, and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed.

 

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¹“Mag Seven” refers to “Magnificent Seven”.
² “Winners” defined as what our Capital Markets Strategy Team views as quality stocks with strong performance potential.
³ “Circular financing” is defined as a business arrangement where an investor funds a partner company, which in turn uses those same funds to buy products or services back from the investor.