Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Fed Rate Hike Odds Reshape Stock Picking
Transcript
- Lucas: So I was looking at the market data this morning and something jumped out at me. The S&P 500 is sitting at 7,725, up nearly a percent on the week, but the small-cap index is down half a percent. That divergence tells a story about what investors are positioning for. Luna: Especially with the Fed meeting coming up. I saw the headline that September is now a coin flip — rate hike odds are climbing after Warsh's speech. Lucas: Exactly. Kevin Warsh is the new Fed chair, and he's already signaling a hawkish tilt. The market is pricing in maybe a fifty-fifty chance of a hike in September, which is a huge shift from just a few weeks ago. And that changes the calculus for individual stock pickers. Luna: How so? I mean, if rates go up, doesn't that hurt growth stocks more than value? Lucas: Right, but it's not that simple. Look at the big tech names this week — Microsoft up six percent, NVIDIA up nearly six, Apple up three and a half. These are mega-cap growth stocks that are supposed to be sensitive to rate hikes, yet they're ripping higher. Luna: So the market is ignoring the Fed? That seems risky. Lucas: It's more nuanced. The market is pricing in a hike, but it's also seeing these companies deliver earnings that justify their valuations. NVIDIA's forward P/E is still rich, but their growth is real. Microsoft's cloud and AI businesses are compounding. So even with higher discount rates, the cash flows are growing fast enough to keep the math working. Luna: But what about the average stock picker? If you're building a concentrated portfolio, do you just load up on mega-cap tech? Lucas: That's the temptation, but it's also a trap. The divergence we saw this week — small caps down, large caps up — that's a flight to quality. But it also means the market is paying a premium for that safety. You have to ask: is the risk-free rate now three and a half percent? Four percent? That changes the opportunity cost of holding a stock that trades at forty times earnings. Luna: So what's your approach? Do you trim your growth positions and add some value? Lucas: I think you have to be more selective. Look, I'm not saying dump NVIDIA, but you need to stress-test your thesis. If the Fed hikes and the ten-year Treasury pushes higher, what does that do to the multiple you're willing to pay? That's why I like to model a base case and a hawkish case for every position I hold. Luna: That reminds me — we've talked a lot about the importance of doing your own research, and I know our listeners appreciate that. It's actually why we keep this podcast free — we want everyone to have access to good stock picking ideas without a paywall. If you've found value in our conversations, and you want to help us keep doing this, you can support the show at buy me a coffee dot com slash fexingo. Just a small contribution helps us cover our costs and keep the episodes coming. Lucas: Yeah, and it really goes a long way. We're not trying to sell you anything, just some people who love talking about stocks and want to share that with you. So if you can, that would be great. Luna: Now, back to that hawkish case. Let's say Warsh does follow through with a hike. What sectors or stocks would you look at? Lucas: For a concentrated portfolio, I'd focus on companies with pricing power and strong balance sheets. Think of companies that can pass on higher costs without losing customers. In that environment, I'd favor financials — banks do well when the yield curve steepens. But I'd also look at select industrials and even some healthcare names that have stable cash flows. Luna: But isn't that just value investing? We've seen value underperform for so long. Lucas: It's not about value versus growth in the abstract. It's about buying quality at a reasonable price. Look, the S&P 500 is up nine percent over the past five days, but the NYSE composite is down. That's a bifurcated market. You can't just buy beta and hope for the best. You need to pick stocks with a margin of safety. Luna: I was reading that the VIX is still pretty low, so maybe the market isn't that scared of a hike. Lucas: The VIX is low because the market believes the Fed will be data-dependent and not surprise us. But Warsh is a known hawk, and Jackson Hole was his platform to set expectations. He didn't rule out a hike, and that's why the odds moved. The market is complacent if it thinks a hike won't matter. Luna: So what's your base case for the September meeting? Lucas: I think it's genuinely a coin flip, maybe 55 percent odds of a hike. But the more important thing is what happens after. If they hike, it could be the start of a tightening cycle, and that would pressure leveraged companies and those with weak free cash flow. That's where stock picking really matters — you need to avoid the landmines. Luna: Can you give an example of a stock that would be a landmine in a hiking cycle? Lucas: Take a company with high debt and minimal earnings, like some of the unprofitable tech names. They trade on future promises, and as the discount rate rises, those future earnings become less valuable. So even if their business is okay, the multiple compresses. That's the kind of name you want to avoid in a concentrated portfolio. Luna: But you could also say those are exactly the stocks with the most upside if the Fed doesn't hike. Lucas: True, and that's the game. But as a stock picker, you have to weigh the probability. If the odds of a hike are fifty percent, the expected value might not favor the riskier names. I'd rather own a company that can grow through any rate environment. Luna: Like what? Are there companies you're looking at right now that fit that bill? Lucas: I'm watching some of the big banks, like JPMorgan, trading around 357, up slightly on the week. They benefit from higher rates, and they have strong capital positions. Also, I think some of the mega caps like Microsoft, which I mentioned, have enough cash generation to weather a hike. But I'm also looking at select healthcare names — they have pricing power and steady demand. Luna: So you're not just throwing darts at the market. Lucas: No, and that's the key. A concentrated portfolio of five to ten stocks requires deep research. You have to know the business model, the management, the competitive moat. That's what we're all about on this show. We're not giving hot tips, we're giving you a framework to think about stock selection. Luna: And part of that framework is understanding the macro environment. So, given the Fed uncertainty, what's your advice for someone building their portfolio now? Lucas: Start with the risk-free rate. Right now, you can earn over four percent in a money market fund. That sets the bar for any stock you buy. If you're not confident that a stock can return more than that over your holding period, just hold cash. It's okay to be patient. Luna: I like that. But some people might feel they have to be invested all the time. Lucas: That's a mistake. Cash is a position. And with the market at all-time highs, you want to be selective. Wait for the right pitch, not just any pitch. That's how you build a concentrated portfolio that can outperform over time. Luna: Speaking of pitches, we should probably mention that the Fed decision is not the only thing moving markets. There's also the U.S.-China trade tensions. How does that factor into your stock picking? Lucas: That's a great point. The Trump administration's rhetoric against Beijing is heating up, and that could impact companies with supply chains in China. As a stock picker, you need to assess geopolitical risk as part of your due diligence. Maybe that means avoiding companies with heavy exposure to tariffs or considering domestic manufacturing plays. Luna: So it's not just about the Fed, it's about a whole range of risks. Lucas: Exactly. Stock picking is about managing risk, not just chasing returns. You have to think about what could go wrong, not just what could go right. That's what separates successful investors from the rest. Luna: Alright, so if you had to sum up your approach for our listeners today, what would you say? Lucas: I'd say: understand the macro, but focus on the micro. The Fed matters, but the quality of the business matters more. Build a concentrated portfolio of companies you understand deeply, with strong moats and healthy balance sheets. And be willing to hold cash when the risk-reward isn't in your favor. Luna: That's solid advice. I think we've given our listeners a lot to chew on. Lucas: And remember, we're here every day to help you think through these decisions. So keep asking great questions, and we'll keep doing our best to answer them.