'Apple has lagged a little bit in terms of incorporating AI capabilities into the phone': Dietze

Key Concepts

• Valuation: The price of a stock relative to its earnings (Price-to-Earnings ratio - P/E ratio) influences potential returns.
• Hyperscaler Cloud Business: Large-scale cloud computing services (like Amazon Web Services - AWS).
• Medicare Advantage: A type of health insurance plan offered by private companies approved by Medicare, often with lower costs but restricted networks.
• Consumer Staples: Essential products people buy regardless of economic conditions (e.g., food, household goods).
• AI Integration: The incorporation of Artificial Intelligence into products and services, impacting competitiveness.
• Reimbursement Rates: The amount paid to healthcare providers (like insurance companies) by government programs (like Medicare).

Amazon & Alphabet Earnings Preview & Stock Analysis

The segment begins with a discussion of upcoming earnings reports from Amazon and Alphabet (Google), framing them as potentially “buy and hold forever” stocks, though acknowledging recent performance variations. The conversation centers on assessing where these tech giants can grow from their already substantial positions.

Apple’s Current Position: Apple’s success is heavily reliant on iPhone sales, with the iPhone 17 receiving mixed reviews – perceived as not significantly improved over the iPhone 16 despite strong initial sales. A key area of concern is Apple’s relative lag in incorporating Artificial Intelligence (AI) capabilities into its phones, a feature competitors like Samsung are prioritizing. However, Apple’s services sector (app store sales) offers higher margins and growth potential, making it a crucial area to watch in the earnings report.

Amazon’s Performance & Valuation: Over the past five years, Amazon has significantly underperformed Apple, increasing by only 43% compared to Apple’s doubling. This is attributed to Amazon’s historically high valuations, with past P/E ratios reaching triple-digit levels, even noted by Warren Buffett. Despite this, Amazon possesses two strong business segments: its leading hyperscaler cloud business (AWS) and its expansive e-commerce marketplace, which now includes a substantial third-party seller component. Like Apple, Amazon is heavily investing in AI, recognizing its necessity for future growth, but acknowledging the potential for negative market reaction if investments don’t yield profitable results, referencing the contrasting experiences of Microsoft and Meta with their AI spending. A specific, albeit lighthearted, example of Amazon’s investment strategy is the $70 million spent on a movie about Melania Trump.

Stock Picks & Investment Strategies

David Deetsz presents three stock picks, focusing on undervalued opportunities with potential for upside.

1. Humana (HUM): Humana is currently trading down approximately two-thirds from its all-time high. The investment thesis centers on the growing demand for Medicare Advantage plans, particularly among seniors and in the rapidly growing Sun Belt region of the US. Humana’s model – offering lower costs and capped out-of-pocket expenses in exchange for a restricted doctor network – is attractive to seniors. However, a recent announcement of near-zero reimbursement increases from the government for Medicare Advantage plans poses a risk. Deetsz believes this is a negotiating tactic similar to past tariff announcements and anticipates a potential reversal, as insurers will likely reduce benefits rather than absorb the cost, a move that could alienate voters. He argues the downside risk is limited due to the fundamental demand for the service.

2. Campbell Soup Company (CPB): Campbell’s stock is at a 10-year low, trading at 11 times earnings with an 8 billion revenue and a 6 billion market capitalization. It offers a dividend yield of over 4%. The company has faced criticism regarding unhealthy ingredients and generic competition. However, Deetsz highlights new leadership, potential cost-cutting measures, and the profitability of its snack brands (Kettle chips, Cape Cod chips). He suggests consumer staples could outperform as investors shift away from expensive mega-cap tech stocks.

3. H&R Block (HRB): H&R Block’s stock is down 40% from its high, with a dividend yield of around 3.5% and a P/E ratio of 8. Concerns about AI simplifying tax preparation are considered overstated. The recent enactment of the “big beautiful act” (likely referring to a tax-related bill) is expected to create demand for tax assistance. H&R Block is projected to grow earnings in the low double-digit percentages over the next three to five years and is a potential acquisition target for a larger financial institution. The approaching tax season is expected to drive increased business.

Government Reimbursement & Market Dynamics

A significant point raised concerns the impact of government reimbursement policies on healthcare insurers like Humana. The announcement of minimal reimbursement increases for Medicare Advantage plans is viewed as a potential short-term setback, but Deetsz suggests it may be a negotiating tactic, citing historical precedents. He emphasizes the political implications, noting that seniors vote and are likely to react negatively to reduced benefits.

The discussion also highlights a potential shift in market dynamics, with investors potentially moving away from highly valued mega-cap tech stocks towards undervalued consumer staples and dividend-paying companies.

Notable Quotes

• “Amazon has been just a fantastic company, but you were paying at certain times price earnings ratios that were approaching triple-digit levels.” – David Deetsz, regarding Amazon’s valuation.
• “At this point you’re at about a 10-year low with the stock [Campbell’s]. It’s trading about 11 times earnings.” – David Deetsz, highlighting Campbell’s undervaluation.
• “I think that is uh an exaggeration [AI making taxes easy].” – David Deetsz, dismissing the idea that AI will eliminate the need for tax assistance.

Logical Connections

The conversation flows logically from a broad overview of Amazon and Alphabet’s earnings expectations to a more granular analysis of specific stock picks. The discussion of Amazon’s AI investments is connected to the broader theme of technological disruption and its impact on valuations. The stock picks are presented as opportunities to capitalize on market inefficiencies and undervalued assets. The discussion of government reimbursement rates is directly linked to the investment thesis for Humana.

Conclusion

The segment provides a nuanced perspective on the current state of the tech and consumer staples markets. It emphasizes the importance of valuation, AI integration, and government policy in driving stock performance. The stock picks presented offer a diversified approach to investment, focusing on undervalued companies with strong fundamentals and potential for growth. The key takeaway is that while tech giants like Amazon and Apple remain important, opportunities exist in other sectors for investors seeking value and income.