Transcript:
Caroline Woods
Becoming a member of me now, George Seay, Founder and Chairman, Annandale Capital. George, nice to have you ever again. Thanks a lot for becoming a member of us.
George Seay
My pleasure Caroline. Glad to be right here.
Caroline Woods
So, George, the power of the AI rally has actually been known as into query this month. It is attempting to make a comeback proper now. However are you continue to a believer? Is it fizzling or is there room to run? George?
George Seay
I do not understand how a lot room there’s to run, but it surely’s not fizzling. It is stopping and beginning and backing up and shifting sideways. It is in every single place as a result of no one actually is aware of what to suppose proper now. However no one actually needs to placed on a full on wager towards the market and the AI commerce, as a result of it is labored so properly for therefore lengthy that individuals are actually reluctant to present it up, and that now you’ve form of altering horses when it comes to folks that shares that individuals are most enthusiastic about.
George Seay
You have gone from Nvidia, Microsoft to Nvidia to Microsoft to Google to Amazon to Google, and now Google, which was form of the laggard for the primary two thirds of this 12 months, is now up 70% for the 12 months and is the brand new scorching AI dot. So I believe it does nonetheless have legs. I do not suppose it is going to expire till we get a dramatic slowdown in CapEx or recession or flat financial development or all the above.
George Seay
However I believe you are you are in the previous couple of, puffs out of the out of the very brief cigar. At this level, I do not suppose it is going to simply preserve going up endlessly. Gravity does take impact sooner or later.
Caroline Woods
Okay. So it has legs, but it surely sounds such as you suppose it’s totally near the tip. Are you involved in any respect that AI is a bubble?
George Seay
Properly, I believe that it’s totally clear that some parts of AI firms which are simply off the bottom, simply beginning up with no revenues, no earnings, no nothing are clearly in a bubble. I imply, you take a look at the information middle firm that went public and within the panhandle of Texas this 12 months, IPO did at a market valuation of near $20 billion.
George Seay
And so they’re not going to have any revenues or earnings for a lot of, a few years, if ever, that clearly that section is speculative at greatest. Google, Microsoft, Nvidia, these aren’t speculative firms. These are the best firms the world is de facto ever seen. And so the query then is a relative certainly one of what do you pay for this earnings development and what’s it going to be.
George Seay
And that is the place the the the straightforward evaluation turns into very complicated, as a result of that is a extremely exhausting query to ask whenever you get into relative valuation and what it is best to pay for issues.
Caroline Woods
Okay. So even when items of AI are literally in a bubble, if and when it bursts, what would the fallout seem like?
George Seay
I believe you’d see in firms which will by no means arrive, there’s lots of, enthusiasm. There’s lots of vitality, lots of hypothesis proper now, and so they’re all acting at very excessive ranges. It’s extremely paying homage to the web bubble 20, 25 years in the past as horribly. That is 25 years in the past, the place lots of these firms are going to go away or fade away or by no means, by no means arrive.
George Seay
However the mainstream firms which have very actual income, very actual revenues and really actual development, they’re simply going to attempt to discover their greatest spot from a valuation perspective. And that is going to be a course of, not a bid. And when the expansion fee of all this slows down considerably, you are going to discover folks that they will not pay 4550 instances earnings for these firms.
George Seay
They will pay 25 to 30 instances earnings. And that may be a painful brief time period correction. However that is what it’s. It is it is brief time period. It fades finally. You take a look at Microsoft and the inventory traded at 58 bucks in 2000. Then it traded all the best way down into like the kids. And within the subsequent decade it solely captured $58 once more in 2017.
George Seay
17 years later. And at this time it is virtually $500 a share. So these are processes and so they can take a really very long time and check the persistence of everybody. Nevertheless it’s enjoyable whereas the whereas the celebration laughs. I do not know if individuals bear in mind Michael Prince, the notorious CEO of Citigroup, proper on the tech bubble, bursting in 2000. And he stated, whereas they’re taking part in music, you bought to bounce.
George Seay
Once they cease the music, it may be fairly abrupt. So that you wish to unfold your bets round.
Caroline Woods
Okay, so only one extra query about this after which we’ll broaden it out. But when we do see that correction, are there any firms that you just suppose are secure when the music ends?
George Seay
Sure, I do truly. I believe that Microsoft and Amazon and Google are all readily investable. I used to be very excessive on Google about six months in the past when it was buying and selling below 200 bucks. The truth is, buying and selling nearer to 200 at one level than 200. However now that it is surged a lot and is properly over 300 souring on that from a timing standpoint, I am a way more curious about Amazon, which has lagged behind this 12 months, and Microsoft, which is method off its highs.
George Seay
A few of these firms are very investable and so they’re nice long run investments. So I would be wanting extra in the direction of these than on a speculative firm with no revenues, no earnings or the recent canine in the meanwhile. This stuff have actual momentum round them and actual reputation contests. And also you wish to play a contrarian a bit of bit with a few of them.
Caroline Woods
Okay. So let’s broaden it out as a result of I might say it sounds such as you’re possibly skeptical of the AI rally at this level. What concerning the total market? Proper now, which we all know the AI rally has actually powered increased? Are you able to make the case that shares will proceed to rise from right here?
George Seay
I can I’ve we now have not wager towards the market. Now we have not pulled out of the market. We have form of maintained positions and searching so as to add in areas which are much less so dearly liked. And you already know, you take a look at the S&P 500 on a market weight foundation and the S&P 500 on an equal weight foundation. And the differential within the value for earnings multiples is dramatic.
George Seay
It is virtually a 40% differential. And in case you purchase the S&P 500 on a market method foundation, you should buy shares properly below 20 instances earnings and properly below a market multiples. So we have been beginning to look extra in areas like that that we expect may do fairly a bit, higher than a number of the extra speculative form of firms in 2026 and 2027.
George Seay
And a part of that a part of that commerce for us is the insurance coverage trade, which is buying and selling barely above guide worth in single digit multiples of earnings with excessive dividend yields and pure fuel shares, which nonetheless have numerous upside developing in within the big LNG commerce with abroad liquefied pure fuel buying and selling and with the AI information middle commerce, they’re nonetheless buying and selling at very cheap valuations for import.
George Seay
And they are going to be to that vast development in electrical energy demand and pure fuel demand.
Caroline Woods
Okay. So insurance coverage Nat fuel talked to us about a number of the different adjustments you are making in ensuring portfolio as you consider 12 months finish. But in addition as you consider the brand new 12 months.
George Seay
Yeah, we’re doing fairly a little bit of abroad and worldwide and rising market shares as properly to attempt to broaden diversification away from simply Magazine seven and enormous S&P 500 shares. So we have some extra publicity to much less liked components of the world, just like the rising markets within the worldwide developed like Japan and Europe and locations like that. After which we’re additionally attempting to purchase some very unloved, nice franchise firms.
George Seay
PepsiCo has had a horrible 12 months this 12 months. All people’s down on them as a result of individuals are consuming extra Coca Cola and Physician Pepper than Pepsi, and so they’re down on Lay’s potato chips. And we expect that is an ideal franchise, nice firm that is fallen on exhausting instances. And you may purchase it at an inexpensive value. So we have been slowly layering into that firm.
George Seay
And there is a number of examples like that. It is only a regular market rotation and market development away from areas that we expect aren’t very engaging from a subsequent 5 years perspective and into firms that we expect are okay.
Caroline Woods
I used to be looking at your notes and also you stated shares are objectively costly and the subsequent ten years will not seem like the final ten. So degree set our expectations right here. What degree of returns ought to buyers truly plan for? As you consider the subsequent ten years?
George Seay
Yeah, it is it is actually fascinating for me as somebody who’s been doing this in my firm for 28 years, and also you take a look at all of the bipolar nature of the market and the way it will get euphoric after which it will get in despair and the way issues change a lot by which we attempt to suppose in decade lengthy phrases since you actually wish to earn money over the long run and generate long run capital positive factors as an alternative of buying and selling and paying extreme taxes.
George Seay
And so once I take a look at the market from that foundation within the truth from 2009 till now, it has been virtually straight up into the journey, apart from the pandemic in very temporary episodes, in order that that form of mid-teens return that individuals have seen over that time frame traditionally, that is utterly unsustainable. You simply cannot stick with it. Shares sometimes sometimes return round 8 to 12%, and we have been properly up above that for fairly a while.
George Seay
So if I am an investor, I am taking pictures for the market historic common, which is 10% earlier than inflation. I pre a pre pre inflation return or an actual return of extra like 6 to eight%, one thing like that relying on what inflation is. And I might attempt to hurdle no less than 5%. I believe someplace in that vary is life like and doable.
George Seay
However in case you begin considering I will make 15% endlessly, I believe you are going to be actually disillusioned.
Caroline Woods
Okay, so the S&P 500 is up 14% up to now in 2025. Can we finish the 12 months increased or decrease than the place we at the moment are.
George Seay
Greater. We’re not we’re not achieved with Turkey and Santa Claus rallies. They’re nonetheless coming.
Caroline Woods
All proper George Seay, Founder and Chairman, Annandale Capital. Thanks a lot.
George Seay
Thanks.
