☕ Drones, small caps & now what?

Howdy! 👋  

The negative nellies were absolutely convinced the end of the financial universe was upon us a few months ago. I, on the other hand, told you that the dip that had ‘em so flummoxed was far more likely to be a monster buying opportunity. 

I mighta been on to something. 

Today as I type… 

• The Dow has climbed more than 8% YTD which puts the index on track for its best first-half performance since 2021, when it jumped 12.7%.  
• The S&P 500 has tacked on 8%+ for an impressive but not quite record setting first half. 
• The Nasdaq has turned in 11%+. 
• And last but not least, the Russell 2000 has gained ~20% which puts it on track for the best first half since the first six months of 1991. 

What’s next? 

There’s still a boatload of money looking for a home which means that it’s still far more profitable over time to play offense and to invest in optimism than it is to cower in fear and pessimism. 

Companies – and investors – who hesitate become footnotes but the ones who lead – and who lean in – become legends. 

Who are 🫵 ? 

Here’s my playbook. 

1 – Smart investors take note: 25+ million new buyers overnight on Medicare’s dime  

Starting tomorrow, eligible Medicare beneficiaries can get GLP-1 drugs for obesity — Wegovy, Zepbound, the works — for a flat $50 a month, down from north of $1,000. (Read) 

For years, federal law banned Medicare from covering weight-loss drugs, period. Now there's a workaround — a "Bridge" demonstration program — and it just blew the doors off a market that's been locked for decades. 

I’m reading that there’s estimates of between 15 and 20 million Medicare beneficiaries that could qualify. I think that’s very conservative and put the figure north of 25+ million people. 

Basically a new market the size of Australia showing up at the pharmacy counter practically overnight.  

I’ve got a few ideas of who will benefit from this – including three names the OBA Family know well. Hopefully you’re thinking “forward” too because (and if you are) all those pounds could translate into some impressive profit potential over time. 

New clothing, new insurance regs, new pharmacies… it boggles the mind. 

Keith’s Investing Tip: People often think only about the immediate benefits when it comes to specific stocks, but my experience is that it’s often the secondary and tertiary moves that surprise – meaning those companies that are indirectly related to whatever is happening. So connect the dots instead of slicing and dicing. 

2 – The irony is killing me 

Let me get this straight. 

The Magnificent 7 — Microsoft, Nvidia, Alphabet, Apple, Meta, Tesla and Amazon — have shed roughly $2.3 trillion in value this month because investors are suddenly nervous about AI spending. (Read)  

Yet, they continue to invest in the chip companies from which the Mag7 can’t buy enough schtuff???!!! 🤦‍ 

The irony is killing me. 

The Mag7 are going to collectively spend north of $725 - $750 billion with a “B” on chips, data centers, networking and so on with chips being the biggest line item across all CAPEX categories. 

Imagine what happens when those chips are put to use and the revenue that’ll generate. 

For example… 

If a hyperscaler spends $150B a year and even 20% of that hardware gets monetized at a conservative 3-5X lifetime revenues via cloud rental and AI service fees, that means we’re talking $90-150B in eventual revenue from a single year’s spend not counting the initial revenue that it books on the sale. 

We’ve seen this before. 

Five times, in fact. 

Keith’s Investing Tip: There’s no shortage of people thinking big, just not big enough. 

3 – The Japanese yen’s just hit 40-year lows and Tokyo’s intervention plan is “let’s try that again” 🤦‍ 

The Japanese yen sank to its weakest level against the dollar since 1986 on Tuesday — trading around 162 per dollar. So low that Tokyo is now openly talking about stepping in. (Read) 

Japan's finance minister says he's ready to take "decisive action" if the currency keeps sliding - meaning that officials might intervene and buy yen to defend the price.  

Riiiiiiiight. 

Japan already burned through close to $73 billion doing exactly that back in April and May, and it barely held for a few days before the slide resumed. 

It’s a popular line of thinking amongst investment advisors and “allocators” that a cheap yen is a gift to Japanese exporters because it’ll fatten their margins and make “Japan” a screaming buy. 

Once upon a time that was true. 

These days, not so much. 

Most of the big sogo-shosha — Japan's giant trading houses — don't make their money on exports anymore. They haven’t for years. 

Instead, they’ve turned their attention to overseas resource and energy projects, global infrastructure development, and equity stakes in operating companies around the world — which means that they’re now earning in dollars, euros and other currencies so a weak yen does bupkis for ‘em. 

MyPOV: I've spent more than 35 years living in and closely involved with Japan and I’ll be the first to tell you that many if not most of the U.S. and European advisors pushing "diversify into Japan" right now haven't spent enough time there to even remotely know what they’re talking about. High inflation is grinding down Japanese household spending. The "restructuring" story everyone's excited about isn't going to move the needle much while domestic demand keeps shrinking. A weak yen on top of that isn't a tailwind but an additional challenge. 

Keith's Investing Tip: Cheap currencies make for tempting headlines, but they don't fix a demand problem. That’s why I'd rather own growth and innovation any day of the week than a currency trade dressed up as a stock pick. 

4 – Small caps just had their best first half since 1991, should you jump in? 

It’s tempting but do so at your own risk. 

The Russell 2000 is up more than 21% this year — the best first-half performance since 1991 — and Wall Street's already lining up to tell you small caps are "the next big thing." (Read) 

Here's the problem and, btw, it almost never changes. 

Whenever Wall Street's talking up a sector loudly, you owe it to yourself to stop for a moment. 

Why? 

Because chances are good that the easy money's already been made which means that the big players have either cashed out or they’re counting on unsuspecting investors to buy and – in doing so – provide the liquidity they need to make a clean exit.

Small and mid-caps can work and there can be a place for ‘em in your portfolio, but only if you're brutally selective.  

Take a hard look at this chart. 

5 – Drones? Yeah, got that covered 

AVAV has popped this morning on news that revenue has more than doubled from a year ago while the funded back log has jumped 65%. (Read) 

Shares have popped 21.47% as I type and, imho, they’ve got a long way to go. 

Three guesses whether or not the OBA Family had that covered ahead of time. 

First two don’t count, btw. 😀 

War, terrorism and ugliness remain growth industries and – as unfortunate as that is – it means that the US government and its allies must spend gobs of money to modernize as geopolitics intensify. 

The urgency is accelerating which means the need to pick carefully is too. 

Buy the best, ignore the rest.® 

Hopefully and like a lot of things we talk about regularly, you’ve got this covered in your own investing but if not and you’d like some help, I’ll be here. 

Bottom Line 

Everything starts with a single decision… to make today better than yesterday.   

What are you waiting for? 😀 

Now and as always, let's MAKE it a great day. 💯 

You got this — I promise! 

Keith 😀