GOOGL & MSFT "Hidden Assets" & Markets Navigating "Knife Edge"

0:00Now let's take a look at the bigger picture. Christopher Davis is with us partner, Hudson value partners. Some of your thoughts, we just went over some of the details on the latest headlines that we are reading and hearing from the Iran War. Do you believe there's going to be a pushback on that date tonight or you know, are we seeing the end of a civilization tonight? I think it's you and Kevin so clearly put it, the markets and the situation is very much on a knife edge. I will honestly say I don't have a strong opinion one way or the other. There seems to be enough evidence and commentary on either side. I think there's a lot of incentives for all the participants to back off and to find a more peaceful resolution to bring a conflict to a close. But I think it's very tough to have an understanding of who exactly the U.S. and the Israelis are negotiating with. And if they have any sort of control or power on that side, on the Iranian side, to really bring about a resolution or not. So

1:01we're in a very tough situation and I think some of this economic data that you're pointing to that comes out tomorrow and when earning season really kicks off next week, I think that can be the lifeline that gets the market much less beholden to the headlines than it is now. What are your expectations for earning season? A lot of folks tell us the fundamentals are going to drive this market higher. That first quarter looks pretty good, the outlook looks pretty good. And that the fundamentals on earnings have been not bad at all. And that will help to push the S&P higher by the end of the year. What say you? Well, I think the world of February 27th, the day before this conflict started. That was a really strong economy. Very good news coming out of the companies that we follow. And that's two thirds of the first quarter in the bag. Most companies that are big energy consumers tend to hedge things forward in the spot market. So probably weren't consuming all that much at the higher prices in March. So I think you want earnings are going to be strong. I think the guidance we're going to see a little bit of a bifurcation here. Those companies that report early in earning season are probably going to be more cautious

2:04of those companies that report later in earning season, assuming we enter this decisive phase of the conflict in Iran and we get some resolution there. So I'm still optimistic on earnings, but I think people are going to be listening a lot to the guidance as well. Yeah, understood. So let's get into some of the sectors here today. Big tech, you have some names that you're watching pretty closely, including Alphabet Google, right? So let's go through some of these names that you're watching in tech. Yeah, absolutely. So as a as a value investor at heart, you know, I always start at the balance sheet and, you know, Alphabet and Microsoft this year are off substantially. They're the generals, the leaders of the market. And that's always a bit of a warning sign. And one of the things that's been sticking out to me as a real contrast is you have all this news around some of the big venture capital IPOs that are potentially coming this year. And the realization that big tech has some real hidden assets on the balance sheet. If we take Alphabet in particular, you know, Alphabet had their other bets division, which was in

3:06you know, something investors hated for years. It was just seen as them lobbying money into a black hole of Waymo. Well, it turns out if we think in what's really in that other bet segment, about 10 years ago, they made a $900 million investment in SpaceX at Alphabet. And that, you know, has earned them roughly about a 7% stake in that company, which could be worth more than a $100 billion. They have a similar investment in Anthropic, the parent company to Claw. They put in about $3 billion for something that the latest financing round is now about 50 billion, about 14% of the company. You know, put those two together to call it 150 billion dollars. That's about as much as Alphabet is planning to spend on AI related catbacks this year. So I think there's some hidden assets that the market just isn't paying much attention to right now. And once sentiment improves around technology, I think we might see some of these things start to get more realized and priced in, especially when SpaceX comes publicly this year. So Alphabet was SpaceX and

4:08Anthropic. And then Microsoft with Open AI. Now, of course, Anthropic is a path to profitability. That's more quick than that of Open AI. A final thought of Microsoft here because Bank of America actually added it to its US one list today. Some quick thoughts on Microsoft and where that could be headed. I know you have some picks that I want to get to here. McDonald's and Merck. But first, tell me about Microsoft, where you think that could be headed. Yeah, I think Microsoft, if they can tell a good story on the upcoming conference call about their investment in co-pilot paying off, co-pilot does allow users to use not just the co-pilot, the Microsoft LLM, but also Open AI, Gemini, other models as well as sort of an overall interface. If they can tell the story that their investment there is paying off because that's what spooked investors real on the first quarter call, I think Microsoft could find its footing and start advancing forward again. So I think it's interesting that you have McDonald's as a name that you like. Why is that? Is that a go to no matter what people love McDonald's?

5:13Yeah, there's certainly an economic resiliency to McDonald's. It's a $219 million market cap company about 710 million shares outstanding. It's not, you know, inexpensive at 22 times, but I think it's backed up by a lot of quality. McDonald's returned to some very strong sales growth in the fourth quarter, about 5% comp sales growth. And we look at the alternative data, which is something we like to do at Hudson Value Partners. We see that in Q1, you had some blips around some of the weather issues and big storms we had. But McDonald's sales look like they're going to outpace both quick service restaurants and full service dining, which points to what should be some pretty good results for them. They've done a very good job of enhancing the customer perception of value and affordability with some meal plans and meal deals that they've had as well as really integrating not only their new app, but as well as media and some big events later this year like the World Cup, which should be pretty big positives for McDonald's. In the fourth quarter, they noticed that they were having some trade down from those middle income customers, still having some weakness in the low end. I think

6:15that trend continues. I think that's actually a positive trend for McDonald's because those consumers, once they start using and going to McDonald's more frequently, they tend to like it. They get hooked on the app. And with the rising call and rising price at the pump, I think you'll see some more people suffer by McDonald's. Understood. Are you concerned about the private credit market? As I see Goldman Sachs coming out with some calls here on some of these names. They did have a buy on Eris and neutral on Blackstone and Black Rock, neutral on Blue Owl. What have you been hearing about private credit? Which of course we know redemptions were certainly the request of folks. They've been able to redeem about up to 5% though many wanted to redeem 20% or more. Private credit, where does that fit into this market? Yeah, it's a prisoner's dilemma right now Nicole. If you're in a private credit fund and you're worried that you may need liquidity in the future, you're going to want to test that and see if you can get that liquidity because your concern is if your fellow investors out there, they can probably do you more

7:16damage than the underlying loans because if they all start to redeem, they all start to liquidate, the fund has to sell things. Is that fund going to sell a little bit of everything or are they going to sell the things they can? So if you stick around, you may not be ending up as an owner of the most choice loans that they have. I would say that the retail focus private credit funds, there's some stats out there. It's perhaps only 20% of the overall private credit market. Most of it is held by institutions more in LP type products as opposed to BDCs. And again, in some insurance, separately managed accounts and insurance general accounts. So it's become an important part of the landscape. It's something to watch closely. I think we're going to have higher default rates in private credit than we have in the past. However, I don't see it right now as being a systemic issue, but all those privately held BDCs that a lot of these P firms tried to raise a lot of money through the retail and the wealth channels. I think those are going to be challenged for quite some time. And Jamie Diamond said the same thing that he did not think it was a systemic risk either.

8:19It's great to see you. Christopher Davis, partner Hudson value partners. Thank you very much. Appreciate it.