AI mania is creating opportunities elsewhere, says money manager, who has three stocks to consider.

By Barbara Kollmeyer

Critical information for the U.S. trading day

Money managers aiming to keep a balanced portfolio have had their work cut out for them in 2024 as tech stocks continue to dominate.

Dan Eye, who helps manage $5.3 billion as chief investment officer at Fort Pitt Capital Group, can relate. The former JPMorgan portfolio manager said coming out of 2023, he expected more rotation out of the big tech and high-growth stocks.

"The Magnificent Seven has kind of scaled down to the terrific two, with Nvidia accounting for something like 35% of the year-to-date return of the S&P 500. That's a difficult environment for balanced and diversified portfolios," Eye told MarketWatch.

Across his portfolios, they do own five of the biggest tech names, but not Tesla (TSLA) or Nvidia (NVDA), the latter which they sold too early coming out of its 2022/2023 rebound, he said. But a call he got right was to stay short duration on the fixed-income side, a boost for portfolios over the past three years amid high interest rates.

Eye says they are trying to stick to a barbell of value and growth, and are now adding "growth at a reasonable price type of exposure," as they hunt for overlooked stocks, which he says isn't that difficult right now.

Healthcare, for example, is the firm's biggest overweight in core stock strategies, he said. "It's really just a statement of where we see a lot of value in the pharmaceutical space within medical technology and with the health insurers," he said.

He likes UnitedHealth (UNH), down 8% this year as investors got spooked over higher amount of premiums it and rivals have to pay out for healthcare costs. But he argues that will normalize as the pandemic catch-up from postponed doctor visits and surgeries evens out.

"So we think it's a temporary issue that's creating a really good entry point, and I think the markets are also forgetting that if you look back over the last 10 years, UnitedHealth is growing their earnings at a mid-teens type of growth rate and we don't think it's too difficult for them to carry that forward," he said.

"We think it's a growth company that trades at a value multiple," he said, adding that 10,000 baby boomers turning 65 every day are "tailwinds for you on age and it gives you pricing power."

Switching to a tech holding, he flags Oracle (ORCL), which recently reported upbeat guidance and a Google (GOOGL) cloud deal. "I don't think I've ever heard the management team more bullish on their future prospects," he said. "They are really establishing themselves as a real player in the cloud space."

He notes Oracle is building massive data centers, and sees revenue only being held back by how long it will take to get those ramped up. The company is doing "extremely, extremely well," he said, flagging remaining purchase orders in the fourth quarter that soared 44% to $98 billion, almost two times its annual revenue.

"Oracle is probably a No. 4 player in the cloud space, but that's a $300 billion market that's growing at 20% a year, so there's a lot of opportunity for them not only to grow in line with the market in their cloud segment but also take market share," said Eye, who adds that Oracle lacks the big valuation concerns that surround Nvidia or other hot chip stocks.

Switching sectors again, he flags Deere (DE), which announced layoffs after lowered earnings guidance in May. He recalls strong years for Deere, such as 2022 when crop prices and farm incomes were high and they could raise prices.

"I think investors have forgotten that this is still a cyclical business, and right now they're in the down cycle. I think what I really like about it is that we think that the bottom of this cycle will still be much higher than the previous down cycle," he said.

Eye believes margins and pricing will stay elevated compared with that prior down cycle, largely because of the tech features Deere have been adding to help farmers reduce costs and boost crop yields. Autonomous driving and customized seed and spray solutions, for example, weren't offered in prior down cycles such as 2013 and 2016.

"And this is where you want to be buying in these cyclical businesses...at the bottom of the cycle, and I think we're pretty close to that," he said.

UnitedHealth, Oracle and Deere all fall under the same theme, he says. "I think there is a lot of sectors, a lot of great high-quality stocks that have just been neglected, overlooked, passed over because of the singular focus on AI. I think that's creating a lot of opportunities in a lot of good companies.

Many companies will be able to use AI technology to create efficiencies and grow their margins, he said. "That's just being overlooked in favor of just the ones that have exposure to the picks and shovels and the GPU."

The markets

The S&P 500 SPXand Nasdaq COMP are trading modestly higher in early action. Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y are higher post data. The dollar DXY is up after the Swiss National Bank cut rates 25 basis points. The Bank of England kept key rates steady.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5487.03    2.08%  3.11%   15.04%  25.03% 
   Nasdaq Composite                                                     17,862.23  2.99%  6.12%   18.99%  30.69% 
   10-year Treasury                                                     4.255      0.60   -22.50  37.41   45.84 
   Gold                                                                 2357.3     1.62%  1.15%   13.78%  22.53% 
   Oil                                                                  80.62      3.45%  4.74%   13.02%  15.95% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Weekly jobless claims fell to 238,000 but remained near a 10-month high, a Philly Fed manufacturing survey barely grew in June and housing starts fell to a four-year low.

Shares of Trump Media & Technology (DJT) are down 8%, over fears a recent SEC move will increase the overall supply of shares.

Accenture stock (ACN) is up 7% after the consulting firm's results showed more than $900 million in bookings from generative AI.

Dell shares (DELL) are up more than 4% after CEO Michael Dell said the company is building an "AI factory" with xAI in a post on X. Tesla CEO and X boss Elon Musk then piped up in another X post that Dell would assemble half the racks going into it, and Super Micro Computer (SMCI), up by a similar amount, would build the rest.

Honeywell (HON) reportedly plans to buy CAES Systems for $2 billion from Advent International.

The U.K. is reviewing HP Enterprise's (HPE) deal to buy Juniper Networks (JNPR).

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   GME     GameStop 
   TSLA    Tesla 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   AMC     AMC Entertainment 
   AVGO    Broadcom 
   PLTR    Palantir Technologies 
   AMD     Advanced Micro Devices 
   SMCI    Super Micro Computer 

The chart

Bitcoin weakness could be flagging a stock market correction, says a team at Stifel, led by chief equity strategist Barry Bannister. Their chart shows that after bitcoin peaks, the S&P has tended to be flat over six months, with past cycles pointing to a drop in the index:

Since 2011, Stifel explains that dovish Fed pivots have been the biggest drivers for major bitcoin bull markets - crypto shares Fed sensitivity with tech. But with bitcoin (BTCUSD) down to $66,332 from a high of over $73,000 in March, and the Fed likely to shift away from a dovish view in Stifel's opinion, "an imminent S&P 500 summer correction and consolidation phase" looms, they say.

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-Barbara Kollmeyer

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06-20-24 0932ET

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