Look to use market downside opportunistically and fade the frothiness: Raymond James' Matt Orton

Key Concepts

• Market Volatility: The natural and healthy fluctuation of stock prices, including declines.
• Opportunistic Investing: Using market downturns as chances to buy quality assets at lower prices.
• Fading the Froth: Selling or avoiding speculative assets with inflated valuations and little underlying earnings growth.
• High-Quality Companies: Businesses with strong earnings growth, sustainable long-term trends, and expanding margins.
• Trading vs. Investing: Distinguishing between short-term speculation and long-term ownership based on fundamental value.
• Earnings Growth: The primary driver of long-term investment returns.
• Durable Trends: Long-term, sustainable economic or technological shifts, such as Artificial Intelligence (AI) and the capex super cycle.
• Data Center Buildouts: The construction and expansion of facilities that house computing infrastructure, driven by demand for AI and cloud services.
• Backlog Visibility: The predictability of future revenue based on existing contracts and orders.
• Expanding Margins: An increase in a company's profitability relative to its revenue.

Market Dynamics and Investment Strategy

Matt Orton, Chief Market Strategist at Raymond James Investment Management, discusses the current market environment, emphasizing that market declines are a normal and healthy phenomenon. He advises investors to view these downturns as opportunities to buy quality assets rather than panicking. Orton advocates for an "opportunistic" approach, suggesting that investors should "fade the froth" in the market.

Fading the Froth: Identifying Quality Investments

Orton defines "fading the froth" as avoiding or selling speculative assets, which he categorizes as "nuclear names," "crypto type names," and "quantum names." These are described as stocks that have experienced disproportionate rallies relative to their actual earnings or revenue. Instead, he recommends focusing on "high-quality companies" that demonstrate robust financial performance.

Key characteristics of these high-quality companies include:

• Double-digit top and bottom line growth: Consistent and significant increases in both revenue and earnings.
• Leverage to sustainable long-term trends: Companies whose business models are aligned with enduring economic or technological shifts, such as Artificial Intelligence (AI).

Trading vs. Investing: A Fundamental Distinction

Orton draws a clear distinction between trading and investing. He illustrates this with an anecdote about bars in South Korea where people watch stock trading like sports, suggesting this behavior is more akin to betting or gambling than genuine investing.

• Investing: Focuses on long-term earnings growth and fundamental value.
• Trading: Characterized by short-term speculation and often driven by market sentiment rather than intrinsic value.

Orton reminds long-term investors that market cycles involve both upward and downward movements, but the ultimate goal is to invest in companies with strong future earnings potential.

Durable Trends and Earnings Season

The current "earnings season" is highlighted as a period where durable trends like Artificial Intelligence (AI) and the "capex super cycle" are demonstrating continued strength and resilience. Orton emphasizes the importance of leaning into these trends.

Case Study: Sterling Infrastructure

Sterling Infrastructure is presented as a prime example of a high-quality company that investors should consider, especially during market weakness. This company is directly involved in "data center buildouts," a sector benefiting from the AI trend.

Specific details about Sterling Infrastructure:

• Recent Performance: Reported strong results with double-digit earnings growth.
• Backlog Visibility: Possesses a substantial backlog extending to 2029, providing significant predictability for future revenue.
• Expanding Margins: Demonstrates improving profitability as it continues to expand its data center operations.

Orton finds Sterling Infrastructure appealing because it exhibits expanding margins, clear visibility into future earnings, and is leveraged to the durable theme of AI. He notes that while some data center companies might be considered "frothy," Sterling Infrastructure appears to be a more fundamentally sound investment that may not have received the same level of speculative attention.

Conclusion and Key Takeaways

The core message is to approach market volatility with a strategic mindset. Investors should resist the urge to chase speculative assets ("froth") and instead focus on identifying and accumulating shares of high-quality companies that are experiencing genuine earnings growth and are positioned to benefit from sustainable long-term trends like AI. Market downturns should be viewed as opportunities to acquire these quality assets at more attractive valuations. The distinction between short-term trading and long-term investing is crucial for achieving sustained success.