Over the past few weeks, markets have come under pressure from rising oil prices, while volatility around the AI trade has persisted.
The CEOs of the three largest AI companies called for a slower pace of AI development. Markets initially reacted negatively but recovered quickly.
We are not suggesting that the market has peaked. We remain optimistic and expect markets to perform well over time, although short-term downturns are becoming more likely. Earnings growth across U.S. companies is still very strong, and large investments in AI technology are likely to continue.
What has changed is the number of things that can go wrong at once. The AI trade, higher inflation, and the war in Iran are now three separate sources of risk, although inflation and the Iran conflict remain somewhat linked.
The bond market has started to price this in.
The U.S. 10-year crossed 5% today, and the odds of a September hike have increased to roughly 80%, from 30% last month.
Given that short-term risks have increased, we think this is the right time to own companies that are largely uncorrelated with them. This company has a beta of -0.01, meaning its daily movements have almost no correlation with the S&P 500.
The company we are adding today cleared our process on its own merits.
We see a high-growth business (~20% earnings growth) benefiting from the aging U.S. population, operating in a stable and profitable industry that is growing faster than usual due to a supply shortage expected to persist for years.
The company remains relatively unknown and, in our view, undervalued given the growth ahead.
We also like the timing, with earnings starting to inflect and the next quarter looking particularly strong. Management is actively pursuing very accretive acquisitions, while the balance sheet is in good shape. We like the setup and see a clear opportunity for the market to catch up as earnings continue to improve.
Table of Contents
Why Now?
Company Overview
Investment Thesis
Market Dynamics: The Widening Supply Gap
Valuation & Forecasts
Management & Governance
What Could Go Wrong
Our Final Thoughts