Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How the Great Megacap Rotation Is Creating a Stock Pickers Market
Transcript
- Lucas: So the NASDAQ just had its worst week in over a year — down 3 percent in five days, and some of the biggest names are down even more. Alphabet lost 7.3 percent. Microsoft fell 5.1 percent. Meta dropped 6.3. Meanwhile, the Russell 2000, the small-cap index, is up 1.2 percent over the same stretch. That is not a small divergence — that's a rotation. Luna: It feels violent if you're sitting on a concentrated tech portfolio. But for a stock picker, this kind of dispersion is actually where the opportunity lives. Lucas: Exactly. And I want to focus on one name in particular — Alphabet. It's trading at roughly 22 times forward earnings right now. That's below its five-year average of around 26. And the business itself is not broken. Google Search revenue grew 12 percent last quarter. Cloud is now running at a $55 billion annual run rate. The concern is capex — they're spending $50 billion this year on AI infrastructure, and investors are questioning the payback period. Luna: Right, the market is pricing in a scenario where that spending doesn't yield proportional revenue growth. But 22 times for a company that still prints $80 billion in free cash flow? That's not expensive if you have any patience. Lucas: Compare it to a mid-cap industrial like Eaton. Eaton is up 14 percent year-to-date. It trades at 28 times earnings. It grows revenue at maybe 6 percent. Alphabet grows at 12 percent, has a moat that's arguably wider, and yet it's cheaper on a P/E basis. That inversion is exactly what happens during a rotation — the market overshoots in both directions. Luna: So are you saying buy Alphabet here? Or is the rotation not done yet? Lucas: I'm not calling a bottom. But I am saying that if you're a stock picker, this is the moment to do the work. The easy money in megacap tech was made over the last two years. Now the market is forcing you to separate the companies that are investing intelligently from the ones that are just spending because they can. Luna: And that's where buybacks come in. I've been looking at buyback announcements this quarter, and there's a clear divergence. Alphabet announced a $70 billion buyback authorization in April. Microsoft did $60 billion. But then you have companies like Meta that did $50 billion, but their free cash flow actually declined year-over-year. Lucas: That's a red flag. A buyback funded by debt or shrinking cash flow is not shareholder friendly — it's financial engineering. The companies I want to own are the ones that can fund buybacks out of operating cash flow and still have room to invest. Apple is the classic example — they've reduced their share count by over 40 percent in the last decade while growing earnings. Luna: And Apple is down only 1.7 percent this week. It's holding up better than its megacap peers. That's not a coincidence. The market is rewarding discipline. Lucas: So the takeaway for this episode is not 'sell everything' or 'buy the dip.' It's: use this rotation as a forcing function to re-examine your holdings. If you own a megacap, ask yourself: does this company have a clear path to compounding free cash flow over the next five years? If the answer is yes, then a 7 percent drawdown is an opportunity, not a reason to panic. Luna: And if the answer is no, then it's time to rotate into something that does. Like Eaton, or a mid-cap industrial, or even a small-cap value ETF. The Russell 2000 is finally waking up. Lucas: One more thing on that — the Russell is still down about 8 percent from its all-time high in 2021. So it's not like small caps have had a huge run. There's still room to run if the economy holds up. Luna: Speaking of holding up — I want to quickly mention something. You and I do this show because we genuinely enjoy breaking down these decisions. And we keep it ad-free because a handful of listeners chip in monthly through Buy Me a Coffee. That literally funds the time we spend researching and recording. Lucas: Yeah. If our conversations have helped you think about a stock or a portfolio move differently, that's the best compliment we could get. And if you've ever considered supporting, it's at buymeacoffee.com/fexingo. No pressure, just wanted to say it directly. Luna: Right. And now back to the rotation — because I think there's another layer here that's underappreciated. Lucas: What's that? Luna: The bond market. The ten-year Treasury yield has been hovering around 4.3 percent. If it starts to fall — say, on weaker economic data — that could actually reverse this rotation. Because lower rates tend to favor longer-duration assets like tech. Lucas: That's a really good point. The rotation we're seeing now is partly a bet that the economy is strong enough for cyclicals and small caps to thrive. If that bet falters, money could flow back into megacap tech. So the stock picker's job isn't just to find the best company — it's to understand which macro regime we're in. Luna: And that's why I love this moment. It's not a market where you can just buy the index and check out. You actually have to think. Lucas: That's the whole point of this show. Alright, that's all for episode 71. We'll be back later this week with another name to dig into.