Today's capital market segment is brought to you by Alpaca. While Wall Street has entered October, historically the strongest month of midterm election year, with average gains of 3% since 1950, while benchmark ten year Treasury yields are hovering near multi-year highs and high yield credit plumbing 52 week lows.
While an expensive AI CapEx boom holds up, headline indexes strained Main Street sectors to face real wage erosion, as well as geopolitical spikes in energy costs and earnings. Season is just a week away. Dividend growth, industrial value, as well as idiosyncratic catalysts are taking center stage and portfolio allocation.
Well, joining us live here at the New York Stock Exchange to unpack the macro volatility as well as identify where the biggest value catalysts are, is Justin Bergner, portfolio manager at Gabelli Funds. Justin, good morning and welcome. Thank you so much for joining us.
Thank you for having me on FinTech TV this morning.
Well, of course, as we kick off a new trading week. A lot of headlines that are breaking and affecting all asset classes. But when we think about the macro volatility we've seen, especially on the heels of last week's data points, as well as seasonality. Where do we stand right now?
So last week there was a lot of macro data points, but they really didn't change the narrative too much. So we had a somewhat weak headline PCE, which the market initially responded to and interest rates came down. But it turned out there was some methodological methodological reasons why it was soft, and it probably was no surprise adjusting for those.
Then we had an ISM manufacturing number that slightly missed headline expectations on Thursday, but was strong in terms of the underlying detail, and it followed strong regional surveys. And on Friday, we had a nonfarm payrolls print that just reestablished the low, higher low fire dynamic that I think the market's been in for the last 6 to 12 months.
There was weak wage growth, only up ten basis points month on month, three month annualized just under 3%. So the narrative of modesty declining real wages continues. I think all people continue to be focused on the Treasury yield dynamic, which I've been focused on for a few quarters. But now it's really, you know, come to the surface for the entire market.
Yeah, absolutely. Justin. And as we head into the rest of the month, we will be looking ahead to more economic data before we get to the Fed's meeting for the month of October. And as you mentioned, Treasury yields. That is something all of us are keeping our eyes on, not just in the US, but also in Europe, especially as we kick off this week.
So give us your take when it comes for the case for dividend growth equities.
Sure. So dividend growth equities are an attractive place to be in the long term in the market. I think when people see um AI stocks accelerating upwards they pivot sometimes by going into high dividend stocks. High dividend stocks, as we've learned, can derail if rates go up materially. Those dividends can be subject to the risk of being caught, or they can prevent the company from investing adequately because we're forced to paddle large dividend and turn companies that pay no dividend and are hyper focused on organic growth or M&A related growth.
They may over invest. So a steadily growing dividend is a good baseline for a company to, you know, be able to return a decent amount of capital to shareholders and be disciplined in its approach.
Yeah. And Justin, while I have you here, I do want to get your perspective, not just on sectors but also on individual companies, because if we look below the surface, we're seeing this divergence between the S&P 500 as well as the equal index. So I do want to zoom in on a specific name. And that is Ferguson Enterprises.
So what is the case for Ferguson.
Sure. So Ferguson Enterprises is a type of name we love to own in our fund. So Ferguson Enterprises is the largest building products distribution company in the US, and it generates about 35 billion of sales and a 45 billion market cap. And the company, because of its scale, scope and technology, is outgrowing its markets by about 400 basis points.
So it's markets right now are flat and it's growing. About 400 basis points. The company has a large exposure to large capital projects, which are about 15% of its commercial sales and about 78% of its overseas overall sales. Half of that's data center, and they are generating disproportionate growth relative to their peers in that area.
They have some other growth levers, excuse me, including focus on dual contractors doing HVAC and plumbing and just general success in their Ferguson home business. So good grower, good operator, good capital allocator, and even the flat market. If that continues, given the weakness in construction markets with higher yields, you're going to get 7% earnings growth, 4% sales growth, and a company that could generate $13 of earnings in 2028.
And trade, you know, close to $275.18 months from now. So that's the type of steady, consistent grower performer name that we like to own, trading cheaply, not getting credit for the growth that it can generate.
Yeah. And Justin, as you mentioned, there are so many factors to consider when we're looking at the macro outlook and even for a lot of companies, especially as we head into earnings season, we'll be hearing from management and what their outlook is, especially given the geopolitical uncertainty. So I do want to get your perspective on genuine parts.
I understand that you prefer to focus on company specific catalysts over broad sector bets. So what about genuine parts?
Yeah. So on the one hand we like to own kind of steady outgrowth is like Ferguson. The other hand we like to own value oriented names. We are a large cap value fund that have catalysts in the future. So that could include companies that are splitting into two businesses. Genuine parts has a very strong industrial distribution business called motion that we think wants the separation of that business with the auto parts business occurs, can trade north to 15 times EBITDA, and then it has an auto parts business, with the primary US brand being Napa that
is currently struggling to maintain market share but is better exposed to the do it for me part of the market, which is growing faster, and we think that that business can be run better once it's split from the industrial business and trade north or near ten times EBITDA. You put those two pieces together and you have a stock that's $160 in 18 months versus, you know, $125 or so today.
It's just sort of a typical separation story where one business gets rerated upwards and then the other business hopefully is able to execute better and more nimbly.
And Justin, of course, we are counting down to next week when we hear from the big banks, but when we zoom in into the financial sector, we are looking at a divergence between big banks and regional banks. So what is your case for regional banks versus some of the defensive staples out there, especially given that consumers are indeed feeling the pinch when it comes to the grocery store as well as pain at the pump.
Yeah. So the financial sector has been under some stress in the market the last week, both the regional banks and more recently the broader financial sector ETF, like the XL for high yield spreads, have started to widen. So we own a mix of large banks and regional banks. But we think that, you know, the big headwind for regional banks over the last couple of years was concern on the commercial side.
That's mainly past. We think that lending will continue and continue to grow. And a name like Fifth Third Bank, which is acquiring Comerica and generating substantial cost synergies with a better footprint and a valuation that is trading, you know, 1 to 1 and a half times PE turn discount to its peers is a name that is attractive and we want to own for the next 3 to 5 years, regardless of the short term volatility.
And Justin, finally, before I let you go, we're keeping a close eye on Fed Fund futures as we kick off the trading week. But when it comes to the longer term outlook, I know at the top of the show you mentioned that we've been looking at a lot of volatility when it comes to the macro picture, but when it comes to the rate outlook for the Federal Reserve long term, what does it all mean for investors out there?
Well, I think what it means is we have hyperscalers, CapEx competing for capital with governments that are running large fiscal deficits, which squeezes the consumer that struggles to borrow at attractive rates with those two big calls on capital. So it just means a one side stock market with a lot of AI, CapEx and excitement about AI names.
Hopefully generating the productivity of their valuations would imply they need to generate while the consumer remains challenged. We view that as somewhat worrisome just because we think the business cycle remains and a weak consumer will eventually pose a challenge. But it is a unique environment with the level of AI, CapEx and productivity and its effect on interest rates, which are reaching levels that are not historically high, but certainly high relative to recent history and putting stress on the consumer.
Well, Justin, appreciate your time. We will have to leave it there. Thank you so much for sharing all of your insights on your perspective as we kick off a new trading week.
Thank you so much, Remy.
Thank you. My pleasure.
