A Second Chance to Panic

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I think this is an opportunity for investors to rethink about their overall positioning and use the weakness in certain categories to build better and bigger positions.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Brian Van Cronkite. He's a portfolio manager at Allspring Global Investments. And in a moment, we'll hear about why Brian thinks the time is right for mid-cap stocks. They're not really that mid, as the young people may or may not still say. They're fire. How am I doing here, Alexis?

Very close.

Very close enough. Brian particularly likes mid-cap value stocks, and he'll share with us a few of his favorites. That's coming up. Listening in is our audio producer, Alexis Moore. Hi, Alexis.

Hey, Jack.

Stock market's bouncing right back. It's almost back to its, what do you call it again? The tariff liberation day. It's almost back to its liberation day perch. That's good.

Well, hallelujah.

Earnings season has been decent. There've been some good tech earnings. It hasn't been perfect. I saw this past week that McDonald's reported its largest US same-store sales decline since 2020. I think of that as one of those economic indicators. McDonald's to me is no longer super affordable. I have ranted on this podcast before about how, uh, how the how those Big Mac meals have gotten kind of pricey. I think that's something that you stop buying when the economy is looking tough or budgets are getting tight. So we'll have to see what that means for spending.

How much was a Big Mac when you were growing up?

Well, a value meal was $3. It was $2.99. You get a 2-cheeseburger meal with fries and a Coke. And my move was I would say, and can I have some extra pickles on the side? Because if they put them on your burger, they might give you 1 or 2. But if you ask for them on the side, They put them in a little cup and they would just— mathematically, I noticed that they would always put more when they put them in the side. So you might end up with— you know, they're busy people. They're not going to sit there and count out pickles if they don't have to. But if they're putting them in a cup, oh, they were throwing like 6, 7, 8 in there. I was going wild with pickles when I was young.

That huge. Thanks for putting me on game.

Yeah, I don't know if you can get away with that today. I haven't tried it. Uh, I haven't tried it in 35 years. You know what, maybe it's time.

Recession indicator.

Speaking of things that have gotten too pricey, I will be interested to see Disney's results this coming week. I think expectations there are low enough, but that's one— I, I'm someone who used to go to Disney with the kids regularly, and I haven't been in years. That around the time when a Disney vacation came to cost like what college tuition costs almost. Let's call it in-state tuition. I noticed two things about Disney this past week. One is that the movie Snow White, that hit $200 million in box office revenue, which sounds like a good thing, but it's been out for six weeks now. So the receipts have slowed to a trickle and it costs reportedly somewhere around $250 million to make. So as you know, in the, in the movie game, you have to make, what is it, 2, 2.5 times? Because you got to pay to distribute it and market it, all that. So you got to bring in, I don't know, $500 million, $600 million plus to make a profit on that movie. In other words, Disney is not going to come anywhere close, I don't think, on Snow White. And it has already canceled— brace yourself, Alexis, I don't know if you're a Rapunzel fan— Disney, but it has canceled a live-action remake of, uh, what's it called? Tangled, which is based on the Rapunzel story. I'm sorry. I should have, I should have talked. I should have broken that in more gently, uh, off the microphone. I'm sorry to do that to you.

It's okay. It's okay.

Alexis, what's the last movie you saw at the theater?

At the theater was Sinners, the Ryan Coogler film in IMAX. It was beautiful.

I know what it, I know what IMAX is. I don't know what any of that other stuff is.

It's sort of like a horror historical film.

Oh.

So it was a big thing, partly because it was on all these different screens, but also because he had this, you know, sort of uncommon deal that he made with Warner Brothers where he got first dollar gross, meaning he gets paid before the studio, and he gets the rights reverted back to him after 25 years. Which is really cool.

I'm not entirely sure what that means, but I'm telling everyone I got first dollar gross on something on this podcast. Maybe let me have first dollar gross on this episode. I said there were two things I noticed about Disney. The movies, one. The second one, this has just quietly happened. It's amazing to me. Back in 2018, there were, there were big announcements about how Netflix had just passed Disney in stock market value. They were both around $150 billion-ish at the time, uh, dollars in market value. And sometime late last year, Netflix reached double Disney's value. And now it's just about at triple. Netflix is flirting with a half trillion dollars in stock market value. Disney has gone pretty much nowhere since 2018. I mean, the share count has gone up. A little, the stock price has gone down a little and they're in kind of the $160-something billion range in market cap. So Netflix is 3 times the size of Disney. Here we are. By the way, I think Netflix, this is a gut feeling more than anything else, but I think it's become the anti-Big Mac indicator. I think it's become the last thing that people are going to let go of if we go into a recession or people sort of pull back on spending. I think that Netflix has become— you cancel your cable bundle, you get rid of all your streaming services, you hold on to Netflix until the bitter end. But if you get rid of Netflix, boy, the economy is in trouble. That's how I feel about it. Fortunately, Netflix's latest numbers were pretty good, so we're not there yet. We're passing by the drive-through at McDonald's, but we're not canceling our Netflix. Let's see what we're doing with our Disney+. Next week we'll tell that. I want to just briefly touch on what I'll call a second chance to panic. And that is that the stock market, as we mentioned, has kind of plugged away and retraced its steps, and we're almost back to Liberation Day levels. But I don't know if we're totally out of Liberation Day troubles. Remember, there were these huge tariff announcements and everyone panicked, and now we have a pause on a big portion of the tariffs, 90 days. So those sky-high tariff rates country by country are gone for at least 90 days. And that pauses up on July 8th. And I don't really know what can be done between now and then. I think it takes years for two countries to hammer out a comprehensive trade deal. You could come up with agreements to make agreements, and maybe that would appease investors. I don't really know which way it's going to go. I hear a lot of talk about a Trump put and a Fed put. I don't really love those terms because they're so vague. You never know where you stand, but a Fed put basically means if things get really bad with the stock market, then the Fed will step in and do something to make investors bullish again, like lower rates. But it wouldn't do that if we still had higher inflation than the Fed wants. So there's some discussion about whether there is or is not a Fed put at this point. A Trump put means that if the stock market tanks, then the president might relent on some of the things he said about tariffs or, you know, say things to appease the market and investors. It's good to have something like that as a backup, but it gets weird if the tariff announcements were the things that sent the market down to begin with, right? I mean, you can't be ping-ponging back and forth. The market goes up, you say, we're going to get tough on tariffs. Market goes down, you say, Ah, we're gonna make some deals. Up, tough. Down, deals. I don't know how long I wanna rely on that as an investor. If you felt panicked when stocks were at their lows and you held on wisely, right? That has worked out for you. The stock market has bounced back. Now you're feeling better. Now you're not as panicked. My advice is to take this moment to revisit your panic and ask yourself, is there anything that you felt that you were missing? When you were at that point, did you say to yourself, boy, I wish I wasn't so loaded up in this S&P 500 fund or US large-cap growth or whatever it was? I have too much tech, for example. If you felt that way then, you get a second chance to do something about it now. That something is not selling out of all your stocks, bailing out of the market, going to all cash. Maybe it's just bringing down your percentage in stocks. Maybe it's shifting to different kinds of stocks. Europe and Japan have done well relative to the US. If you don't have exposure there, here's another chance. Bank of America has been writing a lot about large-cap value. They say all roads lead to large-cap value. Basically, their strategists say that higher volatility is here to stay, and that if we're going to have that, you do not want momentum stocks and you do want quality stocks. And it just so happens that there's a lot of quality found in value indexes right now. What do I mean by quality? They define it as stability in earnings and dividend growth. Companies that can be relied upon to make money. You wouldn't normally think of, let's say, industrials and financials. Those are two groups that turn up in value indexes. You wouldn't normally think of those as being the most stable. Maybe you think of them as more cyclical. But B of A writes, we just went through a decade of industries like these being deprived of investment funds. And taking the time to consolidate and to shore up their balance sheets. So actually, there's a lot of quality in those industries and in value stocks in general. The S&P 500 has done so well for so long that I'm always a little skeptical when people talk about a rotation into value. But if you feel like events of the past couple of months have changed things and you wish you had more value stocks in your portfolio with the S&P 500 back up, here's a second chance. You can buy an ETF, something like the iShares Russell 1000 Value ETF. The ticker there is IWD. I show the S&P 500 as we speak at around 21 times earnings. We certainly used to call that expensive. That doesn't necessarily mean we're headed for another big downturn. Anyhow, that's it. No big whoop. If the last downturn made you panicky, now we're back and you feel better, but take this time to pre-panic just in case there's another panic. Should we take a quick break first? I don't want to, uh, DTM. I don't want to do too much.

Oh my gosh.

Probably time for a break, right? Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks. Model portfolios have evolved from a one-size-fits-all solution. In a recent roundtable conversation, Jeffrey Safe of BlackRock and Alessio DeLongis of Invesco break down what's driving the next model moment, discussing how a deeper level of customization is producing a better alignment with investor goals and creating a practice differentiator for financial advisors. Welcome back. I want to get to mid-caps. I want to hear about Alexis running a 5K this weekend. How's that going to go? Are you a runner? Have you been training?

I'm not a runner. I have been training. I don't particularly like running, which is—

wait, is this the corporate challenge?

No, no, no.

I used to do that like 100 years ago. It was a little too much of the challenge part for me, so I stopped doing it. What's your time going to be? Where are you going to come in this 5K?

I just want to finish. That's where I'm at.

Hold on. Let me get the calculator out. George Bush, not the elder, the younger. I think he used to run 7-minute miles. That's a, that's a good benchmark for a fit president. I think I was more of an 8-minute mile guy back when I was running them.

8 is a little, is a little quick for me. I'm a newbie.

I mean, George, the younger George Bush used to run 7-minute miles. You can't beat a president. He was, you know, he was a middle-aged man at that point.

Let me tell you, I have no— if I finish, then I'm happy.

I wish you the best of luck with your race. We'll be cheering for you. I'm going to get on my treadmill and I'm going to do a walk. I don't— I'm not sure. I'm not trying to compete with you. I'm just— we're all out there doing our part. Let's turn to Brian Van Cronkite. He's a portfolio manager at Allspring, and I had a chance to speak with him recently about his view of the market.

I think this is an opportunity for investors to rethink about their overall positioning and use the weakness in certain categories to build better and bigger positions. We saw a GDP print that came in pretty weak. Obviously everyone's worried about recession, but they're also worried about stagflation. This to me is an opportunity to rebalance your book, to stay invested, but to, to improve the positioning of it and make it healthier for the next 5 to 10 years. When we think about investing and through our process, what we want to do is find companies that can spend their balance sheet flexibility in a unique way that surprises the market. And those things can look like acquisitions. It can be R&D. It can be CapEx. It can be buying back stock. But when you become extremely large, the ability to have one of those transactions or events and actually drive a material change becomes more challenging.

I asked Brian for some of his favorite stocks right now, and he gave me 3, starting with LabCorp, ticker LH, in the healthcare space.

LabCorp is a phenomenally important business to the medical industry, right? We all know costs are high, access to care can be challenging, but as we get more and more sophisticated around medical devices and drugs, we're relying more and more on diagnostic tools to help us make the right decisions. And the cost of lab work relative to the overall cost of care is extremely low. And so it's critical, and doctors do more and more tests to get more and more clarity and frankly to make sure they protect themselves from, from bad diagnosis. And so LabCorp is an important piece of the pie, but what's happening right now is that consolidation is crossing over that echelon where LabCorp and Quest have now got such scale that they become dominant in their ability to have lower cost to produce the products. They have lower cost to operate the labs. And they have a lot of capital available to make acquisitions. And we're seeing the acquisitions ramp up right now. A lot of the labs that are inside hospitals, they're losing money. They're hard to run. They're annoyances now for the hospital operators, and they're looking to sell off that business. And LabCorp is one of the bigger acquirers of that. As they do that, the cost to acquire, once you roll up synergies, it becomes very, very low. And the returns on that capital deployed are very high. They have a massive runway opportunity right now. But along the way, their defensive cash flow characteristics are very appealing during uncertain macro times. So I like LabCorp as a combination of defense while at the same time a unique opportunity for them to continue to deploy capital in a way that could materially change the future income statement and return profile of business.

Okay, that's LabCorp. Alexis, you know what I like to say when someone's making a case on LabCorp?

Pray tell.

I like to say, I agree with your analysis.

Wah wah.

Come on. Bryant also likes a homebuilder, D.R. Horton.

D.R. Horton, when we first started to own the company a couple years ago, began going through a transition that was improving the return profile by getting out of, to a large extent, the land ownership business and really focusing on the core of actually manufacturing and building homes. And as they've gone through that process, they've freed up capacity on their balance sheet to spend capital wisely. We sold the stock out of one of our portfolios and then have recently bought it back because the stock has underperformed meaningfully here as home construction has slowed. But why D.R. Horton? Well, we believe the work they've done has put them in the pole position for being able to maintain the margins as we work through the trough of the cycle and ultimately grow the margins meaningfully on the other side of this. They are also able to now position themselves to win as rates come back in. And we can talk more macro, but ultimately the cycle will be reset. Maybe it's post-recession, maybe it's because the Fed decides to cut down rates, but ultimately we think rates are going to have to move lower. And as that does, we think the market will rapidly move to stocks like D.R. Horton even before the fundamentals change. This is one of those times where you can start to begin to think offensively with a portion of your allocation and use this as an opportunity to go back into a name, into a stock that we think is grossly mispriced over the 3-year horizon.

I was pretty familiar with LabCorp and D.R. Horton. I didn't know much about the third company that Brian mentioned. It's called Graphic Packaging. The stock took a big drop this past week on quarterly results. Revenues were in line, but guidance was a little bit below expectations. Here's Brian.

Ticker is GPK. They do packaging for consumer products. Could be in the grocery store with boxed goods. It could be in your health and beauty products, but they do a lot of paperboard products that touch consumer beauty and other categories. And they're obviously exposed to the health of the overall consumer. And we're seeing spending at your Targets and your Walmarts and your Krogers slowing down and volume is slowing down. And so the amount of boxes they're making, it's been under pressure. Volume's been sort of in that flat to down a little bit. That's the near-term opportunity because the market sees that and says, wow, maybe this stock isn't one I want to own right now. Here's what I see. I see a company that about 2 years ago began a process of exiting non-core businesses. Those non-core businesses were commodity-like in nature, meaning that the pricing they had really wasn't their own. They were subject to the whims of a broader market. That creates high volatility cash flow, a cash flow stream I don't like. But they sold that business and reinvested it back into their, their company through research and development. You're going to have the most efficient manufacturing footprint of their entire category, which will allow them, we believe, to begin to take more market share we believe it will boost their margins, it'll boost return on capital, and it's all going to happen at a time when their CapEx is dropping quickly.

Thank you, Brian. Alexis Moore is our fleet-footed producer. If you have a question you'd like played and answered on the podcast, you can send it in. It might be in a future episode. Just use a voice memo app and send it to jack.hough@barons.com. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, write us a review. See you next week. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.