Beyond Mega Caps with John Petrides, Portfolio Manager at Tocqueville Asset Management
Summary
Market Concentration: Mega-cap tech dominance and passive market-cap weighting pose downside risk, with equal-weight indices showing healthier breadth.
AI Evolution: The narrative is shifting from AI infrastructure builders to AI adopters in low-margin sectors where small margin gains can drive large multiple expansion.
Capex Risks: AI data center spending could undershoot lofty expectations due to utility pushback, higher memory and energy costs, and labor constraints, pressuring ROI.
Semiconductor Geopolitics: Supply chain concentration in Taiwan/South Korea (e.g., TSMC, Samsung) makes a Taiwan flashpoint the most significant systemic risk for markets.
Small and Micro Caps: Valuation dispersion favors small caps and micro caps, with potential M&A tailwinds and more diversified sector exposure than the S&P 500.
Sectors in Focus: Undervalued Healthcare and derisked Software (SaaS) look attractive, especially as AI lifts productivity in staples, industrials, and healthcare.
Hard Assets: Preference for Energy and Rare Earths as government stockpiling and U.S. energy independence support hard assets and select small-cap energy names.
Fixed Income: Be active in fixed income; long-end yields near 4.2% may not compensate for deficits, rollover risk, and a less supportive Fed balance sheet.
Transcript
Welcome to the Planet Micro Cap podcast, the number one destination for everything micro cap investing. I'm your host, Robert Craft, and each week I sit down with elite investors, CEOs, and market experts to uncover actionable insights and real world lessons you can apply immediately. Are you a new or experienced micro cap investor? Do you want to meet MicroAP management teams as well as other micro cap investors from around the world? Planet Microap hosts the highest quality in-person micro cap events in North America. The mission is to bring the best micro cap investors, companies, and allocators together to gather, connect, and grow. Visit planetmicrocap.com to learn more about our Las Vegas and Toronto events. Now, a quick disclaimer. The purpose of this conversation is forformational and educational purposes only and should not be construed as a recommendation to purchase or sell any security. Plan of Microcap Holdings LLC and Microap Club LLC are not registered investment advisors. Planet Microcap Holdings LLC, Micro Cap Club LLC, its partners, contractors, members, subscribers, guests, and affiliates may or may not hold positions in one or more of the securities mentioned on this program and may trade in such securities at any time. Do your own due diligence and seek counsel from a registered investment adviser before trading in any security. In this episode of the Planet Micro Cap podcast, I spoke with John Petrites, portfolio manager at Toqueville Asset Management. We take a step back and examine the broader market landscape from record concentration in mega cap tech to the evolving AI investment thesis and the growing geopolitical and fiscal risks shaping today's capital markets. We discussed why the S&P 500's historic concentration may be creating hidden risks for passive investors, how the AI story is shifting from infrastructure providers to real world adopters across industries, and why geopolitical flash points like Taiwan could represent the market's most significant systemic risk. We also explore the implications of rising US deficits and higher interest rates for fixed income investors and why the growing valuation gap between large cap tech and the rest of the market may be setting the stage for renewed opportunity in small and micro cap stocks particularly those with strong balance sheets and exposure to hard assets like energy and critical minerals. We mentioned several companies and sectors during this conversation and I'm not a shareholder in any of them. Thank you again for tuning in to the Planet Micro Cap podcast and please enjoy my conversation with John Patritis. John, thank you for joining me today. How you doing? I'm great, Rob. Thanks for having me back on. >> Absolutely. It's great to have you. You know, last time we did a an interview together, we published that April 12th, 2023, and I have a whole host of questions uh since then. you know, we at during that interview, we talked a lot about how the macro influences the micro and uh I figured it was time to kind of get an update about what's going on. So, let's dive right in. My my first question that I have for you is that uh actually in in our last conversation, you mentioned that the overall market looked expensive, but not necessarily in a bubble, and that valuation dispersion across sectors could create opportunities. Since then, in your opinion, what areas of the market have surprised you the most, either positively or negatively from a valuation standpoint? Yeah. No, it's a great question. You know, two major things have happened, uh, three major events have happened since the last time we spoke, right? So, we spoke basically the spring of 2023. And remember what was going on at that point in time? Silicon Valley Bank basically had just gone uh just got taken out by the FDI and you had a massive run in the banking sector, right? So at that point in time there was a lot of fear running through investors minds that this was going to be 2008 all over again and clearly that has not happened. Uh uh so that was the first event. The second one is uh the spending on AI has proven to be real. Now that may sound silly in hindsight but remember chat GPT came out in the fall of 2022. Um, we were, it was May of 2023 where Nvidia came out with that blockbuster earnings report where, uh, the stock was up 25% in one day and really are off to the races on the AI story at large, right? So, that was the second one. And of course, the third one is clearly the the the reelection of uh President Trump and all of the uh the the the the fiscal policies and bank deregulation and uh the one big beautiful bill that's coming uh for tax cuts. And now clearly this year uh we're starting more on the uh we had tariffs last year and this year we're starting with uh the the geopolitical conflict in uh in Venezuela and now obviously in Iran. So, you know, we had three massive things. I I guess one one issue was I would I don't I did not expect tech to rally nearly as extreme as they have. Right? So I think from a surprise standpoint uh the the fact that technology as a sector is 33% of the S&P 500. the fact that the top 10 holdings of the S&P 500 is about 40% of the index, which means 490 stocks only make up 60%. We've never had a concentration of the stock market this high. Um, uh, you know, chips, microchips as a percentage of the market is about 13 and a.5%. So, I guess the the level of concentration that the market has sustained and elevated is something that I did not expect. um and and frankly I think is actually quite a risk to the downside for stocks. Uh I guess on the other side where is their value? I think the fact that the healthc care stocks have not rallied as much has been uh one surprise to me. I think healthcare has a tremendous amount of value. And then speaking to your audience, the little guys, you know, this has been a large cap tech growth do US dominated market uh for quite some time and the little guys, the small cap, the micro cap really have not uh as as an asset class in general have not really kept up from a performance standpoint. And I think there's tremendous value uh in the smaller companies which which which uh which your your listener base is following for sure. >> I think everybody that's listening is like preach John. Yes. Amen to that. You know um next question for you. Last last time you described the market as one where multiple economic scenarios could play out simultaneously which made diversification even more important. So, as we sit here today with ongoing macro uncertainty, has your view on portfolio construction changed at all? >> Well, what I'm happy to see is, you know, last year despite US stocks by the S&P 500 being up like 15 16% something like that, international stocks were up 30%, 33%. Right? So, you had a big rally in international and there are multiple reasons for that. The first one is US has dominated international for a decade at least 15 years. So you had a valuation on your side if you were diversifying away from US and into international. That's number one. Number two, uh you had uh the dollar uh sell off about 10% last year. The dollar had been stubbornly high. So that clearly helped international which a lot of investors probably were not prepared for. And the reality is that if you remember this time last year, uh investors were very nervous about the Chinese emergence of deepseek and their capabilities of building out their AI what was proclaimed of basically using scotch tape and bubble gum to come up with their own version of AI. Meanwhile, the US players are spending, you know, collectively hundreds of billions of dollars, right? So that that really threw the the the AI narrative on its head and forced investors to go abroad. So I think that that's number one of of of where investors should if they were diversified in 2023 away from the US or spread out more into uh international that would have helped. Uh I think going back to that concentration risk within the stock market, you're seeing this year the equal weighted S&P 500 far outperforming the S&P 500. So what does that mean? The stock market is based on is market cap weighted. So the larger the size of the company, the larger the weight the index. So if Nvidia is a $4.5 trillion company or a $4 trillion company, that's going to equate to about 7.5% of the index. Microsoft the four trillion dollar company is going to be 6%. Apple four and a half you get the idea. The larger the size the larger this part in the index. So what we like to look at and what you're seeing is rallying is well what is the average stock price doing? You know what if you equal weighted the index and say forget about market cap. I want to see poundforpound on a stock price standpoint. What is Apple versus Dollar General doing? I'm making something up. Two completely different businesses. But stock price for stock price, what are we doing? forget market cap and you're seeing a broadening out. You're seeing the equal weighted uh S&P 500 uh versus the market cap waiting outperforming this year again which is diversification away from technology because the market had been too concentrated. Okay. And now I think you know this year or really starting into last year investors would have been better would be better off of going into the little guys small cap you know if you have a positively sloping yield curve uh from the bond standpoint or set another way I'm not forecasting recession uh I'm forecasting actually despite what's going on in Iran and despite what's going on around the world a pretty healthy US economy um larger cap companies are going to have a harder time growing their their top line so I wouldn't be surprised if you see more M&A mergers and acquisitions and they buy the little guys, right? It's easier to to sometimes to buy than grow organically. So, and again the small caps and micro caps have far underperformed large cap for quite some time and I think the valuation is quite attractive uh for small caps as well. So again, the whole world has been piled into one trade, US large cap tech growth. And again, it still makes sense for investors to be positioned away from that uh into other sectors and into other asset classes. >> Absolutely. My my next question for you has to do with kind of market narrative cycles. I mean, you once compared the current market to Everything Everywhere All at Once, which is a movie I'm sad to say I have not seen yet. I hope to see, you know, maybe we'll see. Well, I I must watch it this week. I guess >> you're not alone. You're not alone. That may have been a good tag on for you to use, but I haven't seen the movie either. So, uh but enough people have because it won best picture one, you know, that and it makes sense when you say it out loud, too. It's one of those like, oh, there's nothing there's nothing that doesn't make sense about, you know, so you compared the current market to everything everywhere all at once where investors are dealing with multiple poss possible uh economic outcomes at the same time. In a market with so many competing narratives, AI, rates, geopolitics, a couple things you've already mentioned today, how do you filter signal from noise when deciding what actually matters for long-term investing? >> Yeah, it's a good question and you your your key the key of what your question was the end was long-term investing. So, let's just talk about the stock market and let's talk about stocks, but I'm going to use the stock market judged by the S&P 500 as an example. Okay? Around 1926, okay, so we got about a hundred years of data. Okay. Is when the bean counters started getting serious about tracking performance of stocks. So literally if you go back to most data will will draw a line in the sand around 1926. That's around when the S&P 500 was created. So you have now you know 100 years of returns. And if you look at those those those time periods on a calendar basis 75 or 74 of those years the stock market has a positive rate of return. All right. And half of those were the stock market had a 20% or greater rate of return. All right, that's fanta. That's phenomenal. Which means you had 25 years of negative rates of return. And I think it's about six years where the stock market had uh 20% or greater or or less or a negative return or or greater, right? Six years. So basically one set out of every four years you get a stinker. That's basically what it's me what it what it's what it's what it's averaged out to. And and look, past performance doesn't indicate future returns, but if I have a hundred years of data on my side, something tells me that something works in a capitalistic society to be a long-term investor in equities, right? over time, you know, the long game is as long as capitalism and as long as people are incentivized to make money. And if you're the owner of a company, you're incentivized to grow earnings because that's going to make you more profitable. And a stock's price is a discount of future cash flows. And the future cash flows, your earnings going forward. As long as that basic theory stays intact, over the long term, stocks are going to go up because people are incentivized to make money despite war conflict or or or who's in charge of the Fed or or what's going on in the banking cycle. You know, at the end of the day, uh you know, people are incentivized to make money and and and a stock's price is a discount of future cash flows. So that's the long term for me is is that is that whenever I go back to despite the near-term volatility that may or may not come in the stock market, it always comes down to uh what you where we think um you know that that that theory and of course it all matters on the individual, right? So if you are your investment time horizon, your risk tolerance, your need for cash flow, your need for income on an individual level will determine or should determine uh how much stocks you have in your portfolio. But the general idea about stocks over time is that capitalism works. >> Absolutely. I mean it it hearkens back to something I always remember having a conversation with Jim Oanessy on a couple not to name drop and I worked together at fair so I know >> oh okay good I'm not trying to name drop or anything like that so I apologize when I say that but you know one thing I remember an interview we did I want to say like five or six years ago we was always talked about how human nature doesn't change you know when it comes to thinking long term and short term you know we've seen this multiple times throughout history where there's always going to be something near-term that we're going you know, we're gonna, you know, and and it and it, yeah, it's important to pay attention to that and understand what's going on near-term versus maybe other situations that have happened in the past. But at the end of the day, that those who have made the most money have been thinking more long term and really focus there and where they can unlock value and where they think things are going. So, I mean, this situation almost seems like it it this this nothing's really changed in this sense. It's just a matter of okay, well, how should I really think about the near-term right now and how will that influence whatever long-term decisions I'm going to ultimately make? >> Yeah, that's right. >> You know, so next question that I have for you here, you also have previously highlighted how market cap weighted indices can quietly concentrate risk in a handful of stocks. As passive investing continues to grow, do you think we're approaching a point where market structure itself is influencing price discovery? And if so, what kinds of opportunities or distortions might active investors be able to exploit? >> Yeah, I I I think therein lies the issue with, you know, you could have a situation where the economy is fine, but the stock market finishes negative for the year. And it's not because stocks aren't making money. It's not because companies aren't in good in good shape. It's just the fact that technology as a sector uh is dominating the asset class from a large cap standpoint so much that if you have the tide go out on all of this money being spent on AI, right? Then it takes the wind out of the sales out of some of this out of this technology trade. um right and but if you're active and you're in other sectors where there's value to be had uh that may not be uh directly tied to spending in AI you know uh there's value you know that that's one of the interesting things of just the complexion or the construct of indices it's not that small cap stocks as a have done poorly it's just the construct of the small cap index if you look at the Russell 2500 today versus the large cap index if you look at the S&P 500 per se is that the small cap index is significantly more diversified. You know, uh there's a 20% waiting in banks, a 20% waiting in industrials and and and you have so many more it's so much more horizontally diversified which is so healthy whereas the S&P 500 has been so concentrated to tech and that's not the case within the small cap index, right? So, so you get distortion on performance and valuation on say the S&P 500 versus the small caps of the 2500 simply because of how the passive index is constructed. It doesn't. So if you roll up your sleeves and you get conviction in a business model and cash flows and earnings and a balance sheet and all that good stuff that comes with what we do specifically in buying individual companies. Uh there's value to be had out there for sure rather than just simply buying the index. Absolutely. Another question I had for you is you've written about how government involvement in markets has expanded over the past several years from fiscal stimulus to industrial policy. How should investors think about the government increasingly acting as a capital allocator? And does that change how you evaluate certain sectors or industries? You know, we're looking at like energy, defense, infrastructure, industrial, reshoring, all that kind of stuff. >> Yeah. You know, the the Trump administration has made things confusing to be honest with you because there is uh a conflict between the message being sent and the actions being done, right? So deregulation of the banking sector is clearly the government stepping back right and that was clearly a bullcase for banks uh last year. Um tariffs is very much government involvement. Um you know the government has taken stake in some rare earth mineral companies publicly traded. They've taken stakes in some tech companies. Um it's you know it it's the only time I in during my career where you really saw the government uh take stake in in in publicly traded companies is if they're failing or they had to inject capital. you know, the government being involved so viciferously into the Federal Reserve uh and and really putting pressure is, you know, is is really a conflict between the message of, you know, we're going to step back and let free markets take their place, but at the same time, we're going to force a heavy hand. You know, here we are, you know, we're in the middle of this Iranian Middle East conflict. And it was just a couple of weeks ago where the government was saying to military defense companies, you know, I want you to stop uh buying back stock. Don't, you know, grow your dividend and focus on um you know, munitions and and and and so basically the government telling a publicly traded company, a defense contractor nonetheless, of how to run their business. Um so it's to a degree slightly new territory. Yeah, it's a it's I let's compound that a little further. I mean, how are you thinking about that from, you know, an allocation standpoint as as a portfolio manager when you might be looking at some defense ideas, especially with, you know, war outbreak in Iran and stuff like that? >> Yeah. Um I I think the option of that optionality of the government taking a stake is now you know has to be added into the probability of um you know for an upside for a stock assuming it's in a category that's deemed potentially with a narrative that's potentially deemed essential to the defense and safety and protection of the United States of America. Right? I mean that has been sort of the narrative that's been blanketed to you to utilize the government to uh take some stakes in companies um in terms of the best of national interest uh and that's something honestly that we've only seen in China or you know some other places where uh you didn't have a free open market capitalistic society. So it's a it's a very new uh or it's a it's a it's a new variable that needs to be thought of uh when looking at certain companies. >> Absolutely. So, you know, to take this a step further when we talk about where the opportunity actually is, you know, we've already talked about even here today about how a lot of the conversation markets right now is dominated by mega cap tech and AI, but historically some of the best opportunities appear in the areas investors are ignoring microc. Where in the market today do you see the biggest disconnect between fundamentals and investor attention? Yeah, I I think um I I think the software scare is way too broad. You know, the SAS magdon where you know there is definitely risk uh and and that that industry has been derisked from a valuation standpoint for sure. Um but software companies uh I I think there's some on the larger cap side compelling value there. Um I think uh health care for some reason just can't catch a bid and that doesn't make much sense to me. Uh the population continues to get older. Um those are low margin businesses where u they will employ AI and and and make a lot of money. I think that theme actually is quite interesting. I think the those that will I think the AI trade is no longer about investing in the picks and shovels of AI. I think where investors will get the most value has the chance to get most value are those low margin sleepy dull businesses you know in consumer staples in industrials and in healthcare where I'm going to make something up maybe has four or 5% profit margins and they start employing AI and all of a sudden their margins go up to five and a half or 6%. You know that half a percent increase in margins or that 1% increase in margins of a low margin business is enormous. You know if if a big tech company grows margins from 70% to 70.5% people say okay their margins didn't go down. But if you have a low margin business that goes from say 4% margins to 5% margins you'll get massive uh valuation expansion. So, we're looking for those companies that are starting to employ AI to make their productivity significantly stronger where they'll get higher profitability, not necessarily those that are investing that are building out the AI infrastructure. Um, so, so, so that's where we're finding value. >> Again, on the same vein of questioning, what when you look across markets today, what do you think investors are most likely mispricing right now? whether that's inflation, rates, earnings growth, or something else. >> That is a good question. Um, I think there's there's three things that I think investors haven't or aren't taking aren't focused on enough. The first one is on um is on uh the spending on AI. Investing in stocks is about the rate of change. Okay, go back to your, you know, sophomore year in high school calculus when you're talking about derivatives and we all said, you know what, I'm never going to use this stuff. Why are we learning it? I use derivatives all the time. I use calculus all the time. And it's all about the rate of change. And what I mean by that is right now expectations are for 2027 that collectively, you know, these big cap tech companies are going to spend about $800 billion in building out data centers and the AI ecosystem. 800 billion. Okay. There's a lot of rumblings going on about affordability on uh on on utility bills and there's a lot of push back on building out data centers. What happens if that number actually turns out to be 750 billion. Still a lot of money, still a ridiculous amount of money, but less than expected. Okay. Less than expected. The market will will sell that off because the tide will go out on AI spending. And there's a lot of companies like a big whale feeding off of all that capex. If that capex comes in less, you know, you have the tide goes out. So I I am of the view that let's not pencil in if it's a guaranteed that that money is going to be spent on AI. And given how topheavy the S&P 500 is to tech, that's a risk to passive investing, right? To to to owning a market cap that is so one-sided simply because the market cap of them goes up, right? So that's number one. Number two, uh I think on from a geopolitical standpoint, right? Everyone's attention should be focused on Taiwan. All right? Not on the Middle East is an issue, but but but the oil particularly in the U. The US is energy independent, right? So this is not 1973, you know, Middle East, you know, OPEC oil embargo. Uh you know, the US is now uh energy self-sufficient for by and large. Okay. So you have some rumblings and it causes some issues, but it's not as catastrophic as it was in the 70s. However, microchips are the new data. So if China were to go into and invade Taiwan and disrupt Taiwan, that's a real big issue because most of the world's microchips are being manufactured by Taiwan semiconductor. The other is Samsung. And to be honest with you, Intel has been, you know, lackluster to say the least. So the actual the fabs, the manufacturing of of chips is few and fewer and far between. It's more concentrated. So if there's disruption to that, then geopolitically we have a real big issue. Okay. And the third one is I know this is a micro cap, you know, stock, you know, discussion, but investors should really be focusing on bonds and the yield curve. Okay? and focus on the long end of the yield curve. Right now, the US 10-year yield is about 4.2%. Which means if you buy a a US 10year today that's going to mature in 2036, you're getting 4.2%. So given what we know about the deficit, given know what we know about the debt situation, given what we know about potentially where inflation may be, given what we know that the new uh the incoming FOMC chair Walsh uh is is more hawkish or not in the sense that he doesn't want to use the Fed balance sheet anymore. you know, given the fact that there's a movement away from the dollar, given the fact that central banks are are are stockpiling gold, do you really feel compensated uh by getting 4.2% over the next 10 years annually for owning a US Treasury? >> You know, that that to me is I I don't All right. So, so my feeler is if you know the long end of the curve sells off, interest rates go higher. And let's not forget the US is rolling off a lot of debt that it took on during uh COVID at extremely low interest rates that now has to refinance that at extremely high interest rates um or much much higher not extremely high much higher interest rates and that puts stress on the US uh fiscal situation. So, if you're going to be in bonds and you have bonds as a portion of your uh portfolio, that's definitely a place where you want to be active. You want to be buying your individual bonds, which is something that we do for our clients. Uh we talk about fears of passive investing on the equity side. Don't be passive on your fixed income side of your portfolio. >> Absolutely. So, this is going to actually a perfect segue now to uh risk and under underappreciated risk. In your opinion, what is a risk that markets right now that what what is a risk in markets right now that you think investors are underappreciating or not discussing enough? >> Yeah, I I think um I think I go back to Taiwan from a geopolitical standpoint. U the the lack of diversification of manufacturing of chips around the world uh is a risk. Uh penciling in the amount of money being spent on AI as a given um is a risk. You know, there's something that that really hasn't been talked much about or disclosed is the quality of the capex, the quality of the money being spent on AI buildout. Yes, the numbers have gone up, but Rob, let's say I'm doing a renovation on my house, right? And let's say it cost a h 100red grand to do to do a renovation. And because the price of, you know, siding and concrete and lumber and all these other things go up, my contractor comes back to me and says, "Hey, John, it's actually going to be 120 grand, right? Just because of just because the cost of goods is up." Well, I didn't get more squattage of footage to my house, but it's costing me a lot more. My fear is that that could be going on underneath the hood for some of this AI data stuff. Look at the price of memory. You know, memory has gone through the roof for these tech companies. The price of natural gas has gone up. You got to power the data centers through natural gas. Labor to to build this stuff is scarce. That's all gone up, right? So, what does all that do? It all eats into the return on investment, the ROI of what was initially projected for the data center. So my fear is that or my concern is and we just don't know the answer right now is how much of the increase in spending on AI capex is due because it's incremental new initiatives to help a company grow on the dollar they're spending or is it simply the cost to do the original product has gone up exponentially and we don't know what that is and we don't know that answer. >> Absolutely. That is definitely something we'll be paying attention to that's for sure. So this is actually a nice transition into micro caps because we've covered the big picture macro themes and you know we've touched we've touched a little bit on micro caps but you know now we're here let's let's spend a little time in our small micro cap universe here. So when you move down the market cap spectrum into small micro caps liquidity and institutional coverage drop off significantly you know it's no secret do you think the environment is creating more inefficiencies today and where do you think investors should be looking within the micro cap universe? Yeah, that is a really good question. I'll tell you how we're playing it within for our models. Uh, you know, for my team specifically at Toqueville, we have an allocation of small cap. Uh, and within that we use uh a thematic play and we own a fund within that uh publicly traded mutual fund. Uh, the American Beacon uh small cap fund. The ticker is TOVYX. Uh, I own it personally. We own it for clients. Uh and this owns uh small uh small cap um international and emerging market companies and it combines quantitative analysis of earnings fundamentals and all these factors with qualitative analysis. So when they run through their screens, they get this basket and then they see, okay, well, what checks the box of what we look for within value. And then the managers, because this is actively managed, the managers then go out there and make sure that they don't let concentration risk within anyone's stock get too high, right? Because they understand when you're dealing with small and midcap stock, small and micro cap stocks, and not even that, not even US-based, international and emerging markets. So you're dealing really with really illquid um certain situations that are liquid. they make sure that uh things don't get out of hand and they rebalance quarterly uh to to keep things aligned. So here's a situation where there's a bit more momentum um there are more factors uh combined uh and then once they reach their screen they do their uh due diligence and uh and then from a risk management standpoint from a portfolio management standpoint it's aligned to how we think of avoiding concentration uh within individual positions. So, um, that's one way that that we really like, um, to play the space cuz to be honest with you, Toqueville, uh, and and my team specifically is played historically more in although we're all cap has played historically more in the mid to larger cap, uh, realm. So um you know if there's there's uh compelling parts of the market um that we find think are attractive for the clients with the right risk uh tolerance with the right time horizon where small and micro cap and midcaps are the right component that we feel within their asset allocation that's one the way that we played it. >> Speaking of which and this has to do with that institutional ownership inflection point. Uh uh one of the recurring themes in micro caps is that the biggest moves often happen when institutional ownership begins to build. When you're evaluating some of these smaller companies, what are the key signals that tell you a business might be on the verge of attracting larger pools of capital? >> That is a fantastic question. But we whenever we're looking at a company, we always start with the balance sheet. All right? So it's kind of like when you're building a house, you know, the balance sheet is the foundation. If the foundation's weak, it doesn't matter how, you know, what type of kitchen counter caps countertops you have if the house is going to crumble, right? So, so we start with that. We typically want something that has, you know, very solid balance sheet. If they're in a net cash position where they have more cash than debt on the balance sheet, that's the home run. Okay. Then the second question is, are they generating free cash flow? You know, when I look at the cash flow statement, you know, what's the free cash flow like? uh and if they're uh growing their free cash flow, that is the second check. That's kind of like, you know, the uh the if the balance sheet is the foundation, the free cash flow is the structure and the siding of the house. Then we'll move to the income statement. And the income statement is okay, well, what's the business model and how are they growing their earnings? What's their profit margin? And that then allows me to see, you know, how nice the furniture is, how big the kitchen is, what type of appliance, what type of appliances I'm using within the house. So, um, it's kind of backward looking in the sense that we focus on the balance sheet first, cash flow statement second, then the income statement third, um, and and then we find where we're looking. So you have to check off a lot of those quality screens for us before we then get into, you know, what institutional ownership is is is or there are there activist investors involved or or something along those lines because I think of, you know, if I was, you know, a potential, you know, private equity company that wanted to take out a smaller company like that, you know, those are the qualities that I'd be looking for. So, painting with a little bit of a broad brush, I mean, has there been any, I guess, investing theme or sector in particular that has popped up on the screen within the smaller micro cap universe that you've been like, "Oh, okay. This is this is kind of interesting going on right here." >> Yeah. I mean, I don't want to get too wonky or or or too siloed, but the rare earth um you know, go making this whole conversation go full full circle, you know, the the the rare earth space uh and the minerals space has really become more attractive because if you have a sell off in the dollar, right, there's a there's a strength in the heart asset. If you now have the United States government as a natural buyer, um you know, there's this this fear of or this this movement to uh corral and stockpile uh minerals, right? Um and you could now maybe say the same thing for small maybe micro cap energy companies, uh oil and natural gas given what's going on in the Middle East, right? that there's a there's a a need, want, desire to stockpile stuff, hard stuff. Uh meanwhile, you know, when we talk again making this conversation come full circle, we talked about the selloff in software companies. You know, we went from a an environment where uh investors wanted to own asset light models to an environment where if you made something where if I dropped it on my foot, I hurt my toe. That's what people want now, you know. And if you made a software, you know, and people don't want the software because they feel that's threatened. So, uh, it's a complete reversal. >> So, I got two more questions for you. And for this one, this next one really has to do with discipline, especially right now. And I mean, this is kind of a general question now, more or less moving forward because with the rate of information and headlines moving as fast as they are, it's sometimes difficult to be disciplined in your approach. So, you know, in this environment where this information really moves so quickly and instantly for you, what what in your opinion separates the investors who succeed from those who get pulled into the noise? What maybe some of the things that you're doing in order to make sure you're just staying zoned in and focused on the things that are within either your circle of competence or within your own interest that you think will unlock value versus being like, "Oh, this I got to this shiny object. I got to go over here. Oh, wait. This this thing I got to go over here." >> Yeah. It's it's a great question and it really comes down to you know portfolio management or asset allocation or risk management 101. It's knowing who you are or in our case who our clients are as investors and making sure on day one that we're aligned with their portfolio and their asset allocation to who they are, right? And then and and what what their goals are, right? What what's their time horizon? What's their income needs? What's their tax situation? What are they looking to do with their money that they're entrusting us to manage? And uh and then and then so when times like this happened, yes, there's some volatility uh but but if it's an investor who is historically uh conservative, who doesn't need to shoot the lights out from an equity standpoint, we probably should have been in a lot of bonds to begin with, right? Um so so it's it's getting that right as to who you are and being true and honest to who you are and it's an investor, right? So if you are not a risk taker okay but you get lured into micro cap and small cap stocks because you know they had gone up recently right and you want to you know you feel comfortable where the world is and then we all know micro cap and small caps are massively volatile right I mean we understand that that's part of getting into this space is that you have an understanding or you should have an understanding of the volatility to the upside and downside on this asset class right and if you don't understand that you're in for a rude awakening. So, you know, for those clients that want this portion of their portfolio in smaller micro caps, it's saying it's like, okay, what do you want to do? And let's carve out a portion, but you need to understand that this portion is your long duration, right? This is your long duration asset class that's going to move around a lot. But over time, go again squaring the circle on this. We're going full circle on this conversation about the the the the the proof of concept of capitalism over 100 years of uh uh since the stock market has taken returns. This is going to outperform and this is going to go up and to the right over time. And so that that's been that's the key u to everything else. just being true to who you are and constructing the portfolio accordingly. And if micro caps or I even put micro caps and small caps almost in the same category as alternatives or private equity, the only difference is your liquidity is better in small caps and micro caps than than than in private equity alternatives. You know, it's all sort of long duration stuff. Um and and and it's making sure that um you know the client has x% of their portfolio given their liquidity that if everything goes wrong uh with those you know higher beta higher vol asset class it won't derail them from their overall financial objectives. >> It's a great answer. Final question for you here today. Uh and again John thank you for sharing and and taking the time here. This is a lot of fun. But for investors that are trying to navigate today's market, what's one principle or frame framework that has served you well throughout your career? So coming being a product of Bear Sterns uh which is which is where I began my career and you know Bear was you know one of the highest quality you know scrappiest uh money center banks on the street and then until it wasn't and it went and you know here we are uh Rob on March 16th will be uh you know bear went down 7 not that not that I not that I had any trauma from this Rob but at 7:10 p.m. On Sunday, March 16th, 2008, uh the Wall Street Journal issued an article that JP Morgan bought their shares for $2 a share. So, we're coming up on the eve of that. And what I saw from that was two things. So many friends and colleagues that were illquid at the time. Had too much money locked up, had too much money, too much of their money in Bear Stern stock of the employer that they worked for. Right? So the hallmark of what we do here is about capital preservation first. You know Warren Buffett says there are two rules to investing. The first one is don't lose money. The second rule is don't forget rule number one. So we focus on preserving your capital first. The second one is we focus on liquidity. Right? If you needed money, do we have a bucket set aside for you that you can access it? Uh the third one is reducing concentration. Okay? It's it's if you work for uh a company that you're getting stock in of that company, let's try to keep it, you know, uh you know, but less than 15% of your total net worth. Uh so if something bad happens to the company, you're not getting a triple whammy where you lose your wealth, you lose a portion of your asset, and you lose your income, right? And then we start working on the asset allocation, right? So, so before we really start rolling up our sleeves on if we like this bond or if we like this stock or if we like, you know, US or international or large or small, we're going through a deep dive on who the individual is and what they're looking to achieve with their money and where their profile is before we go anywhere else. And and I think that's that's key to to to to to surviving the long game. >> John, I think this is a great place to end it. Where can our audience go and find more information uh to get in touch with you and or for more information on Toqueville? >> Yeah, I appreciate that, Rob. So, you go to toqueville.com to occlat.com uh and uh and find out more information and and uh love to spread the word. >> Very good. Well, John, thank you so much for joining me today. Really do appreciate it. Good luck. Stay safe and I I look forward to our next uh our next update. Hopefully, it won't be in another three years. >> Yeah, that's right. And hopefully by then, if it is, you've watched uh Anywhere Everything All at once, so we've seen that movie by then. >> We will definitely start off the the combo with that. Well, thank you, John.
Beyond Mega Caps with John Petrides, Portfolio Manager at Tocqueville Asset Management
Summary
Transcript
Welcome to the Planet Micro Cap podcast, the number one destination for everything micro cap investing. I'm your host, Robert Craft, and each week I sit down with elite investors, CEOs, and market experts to uncover actionable insights and real world lessons you can apply immediately. Are you a new or experienced micro cap investor? Do you want to meet MicroAP management teams as well as other micro cap investors from around the world? Planet Microap hosts the highest quality in-person micro cap events in North America. The mission is to bring the best micro cap investors, companies, and allocators together to gather, connect, and grow. Visit planetmicrocap.com to learn more about our Las Vegas and Toronto events. Now, a quick disclaimer. The purpose of this conversation is forformational and educational purposes only and should not be construed as a recommendation to purchase or sell any security. Plan of Microcap Holdings LLC and Microap Club LLC are not registered investment advisors. Planet Microcap Holdings LLC, Micro Cap Club LLC, its partners, contractors, members, subscribers, guests, and affiliates may or may not hold positions in one or more of the securities mentioned on this program and may trade in such securities at any time. Do your own due diligence and seek counsel from a registered investment adviser before trading in any security. In this episode of the Planet Micro Cap podcast, I spoke with John Petrites, portfolio manager at Toqueville Asset Management. We take a step back and examine the broader market landscape from record concentration in mega cap tech to the evolving AI investment thesis and the growing geopolitical and fiscal risks shaping today's capital markets. We discussed why the S&P 500's historic concentration may be creating hidden risks for passive investors, how the AI story is shifting from infrastructure providers to real world adopters across industries, and why geopolitical flash points like Taiwan could represent the market's most significant systemic risk. We also explore the implications of rising US deficits and higher interest rates for fixed income investors and why the growing valuation gap between large cap tech and the rest of the market may be setting the stage for renewed opportunity in small and micro cap stocks particularly those with strong balance sheets and exposure to hard assets like energy and critical minerals. We mentioned several companies and sectors during this conversation and I'm not a shareholder in any of them. Thank you again for tuning in to the Planet Micro Cap podcast and please enjoy my conversation with John Patritis. John, thank you for joining me today. How you doing? I'm great, Rob. Thanks for having me back on. >> Absolutely. It's great to have you. You know, last time we did a an interview together, we published that April 12th, 2023, and I have a whole host of questions uh since then. you know, we at during that interview, we talked a lot about how the macro influences the micro and uh I figured it was time to kind of get an update about what's going on. So, let's dive right in. My my first question that I have for you is that uh actually in in our last conversation, you mentioned that the overall market looked expensive, but not necessarily in a bubble, and that valuation dispersion across sectors could create opportunities. Since then, in your opinion, what areas of the market have surprised you the most, either positively or negatively from a valuation standpoint? Yeah. No, it's a great question. You know, two major things have happened, uh, three major events have happened since the last time we spoke, right? So, we spoke basically the spring of 2023. And remember what was going on at that point in time? Silicon Valley Bank basically had just gone uh just got taken out by the FDI and you had a massive run in the banking sector, right? So at that point in time there was a lot of fear running through investors minds that this was going to be 2008 all over again and clearly that has not happened. Uh uh so that was the first event. The second one is uh the spending on AI has proven to be real. Now that may sound silly in hindsight but remember chat GPT came out in the fall of 2022. Um, we were, it was May of 2023 where Nvidia came out with that blockbuster earnings report where, uh, the stock was up 25% in one day and really are off to the races on the AI story at large, right? So, that was the second one. And of course, the third one is clearly the the the reelection of uh President Trump and all of the uh the the the the fiscal policies and bank deregulation and uh the one big beautiful bill that's coming uh for tax cuts. And now clearly this year uh we're starting more on the uh we had tariffs last year and this year we're starting with uh the the geopolitical conflict in uh in Venezuela and now obviously in Iran. So, you know, we had three massive things. I I guess one one issue was I would I don't I did not expect tech to rally nearly as extreme as they have. Right? So I think from a surprise standpoint uh the the fact that technology as a sector is 33% of the S&P 500. the fact that the top 10 holdings of the S&P 500 is about 40% of the index, which means 490 stocks only make up 60%. We've never had a concentration of the stock market this high. Um, uh, you know, chips, microchips as a percentage of the market is about 13 and a.5%. So, I guess the the level of concentration that the market has sustained and elevated is something that I did not expect. um and and frankly I think is actually quite a risk to the downside for stocks. Uh I guess on the other side where is their value? I think the fact that the healthc care stocks have not rallied as much has been uh one surprise to me. I think healthcare has a tremendous amount of value. And then speaking to your audience, the little guys, you know, this has been a large cap tech growth do US dominated market uh for quite some time and the little guys, the small cap, the micro cap really have not uh as as an asset class in general have not really kept up from a performance standpoint. And I think there's tremendous value uh in the smaller companies which which which uh which your your listener base is following for sure. >> I think everybody that's listening is like preach John. Yes. Amen to that. You know um next question for you. Last last time you described the market as one where multiple economic scenarios could play out simultaneously which made diversification even more important. So, as we sit here today with ongoing macro uncertainty, has your view on portfolio construction changed at all? >> Well, what I'm happy to see is, you know, last year despite US stocks by the S&P 500 being up like 15 16% something like that, international stocks were up 30%, 33%. Right? So, you had a big rally in international and there are multiple reasons for that. The first one is US has dominated international for a decade at least 15 years. So you had a valuation on your side if you were diversifying away from US and into international. That's number one. Number two, uh you had uh the dollar uh sell off about 10% last year. The dollar had been stubbornly high. So that clearly helped international which a lot of investors probably were not prepared for. And the reality is that if you remember this time last year, uh investors were very nervous about the Chinese emergence of deepseek and their capabilities of building out their AI what was proclaimed of basically using scotch tape and bubble gum to come up with their own version of AI. Meanwhile, the US players are spending, you know, collectively hundreds of billions of dollars, right? So that that really threw the the the AI narrative on its head and forced investors to go abroad. So I think that that's number one of of of where investors should if they were diversified in 2023 away from the US or spread out more into uh international that would have helped. Uh I think going back to that concentration risk within the stock market, you're seeing this year the equal weighted S&P 500 far outperforming the S&P 500. So what does that mean? The stock market is based on is market cap weighted. So the larger the size of the company, the larger the weight the index. So if Nvidia is a $4.5 trillion company or a $4 trillion company, that's going to equate to about 7.5% of the index. Microsoft the four trillion dollar company is going to be 6%. Apple four and a half you get the idea. The larger the size the larger this part in the index. So what we like to look at and what you're seeing is rallying is well what is the average stock price doing? You know what if you equal weighted the index and say forget about market cap. I want to see poundforpound on a stock price standpoint. What is Apple versus Dollar General doing? I'm making something up. Two completely different businesses. But stock price for stock price, what are we doing? forget market cap and you're seeing a broadening out. You're seeing the equal weighted uh S&P 500 uh versus the market cap waiting outperforming this year again which is diversification away from technology because the market had been too concentrated. Okay. And now I think you know this year or really starting into last year investors would have been better would be better off of going into the little guys small cap you know if you have a positively sloping yield curve uh from the bond standpoint or set another way I'm not forecasting recession uh I'm forecasting actually despite what's going on in Iran and despite what's going on around the world a pretty healthy US economy um larger cap companies are going to have a harder time growing their their top line so I wouldn't be surprised if you see more M&A mergers and acquisitions and they buy the little guys, right? It's easier to to sometimes to buy than grow organically. So, and again the small caps and micro caps have far underperformed large cap for quite some time and I think the valuation is quite attractive uh for small caps as well. So again, the whole world has been piled into one trade, US large cap tech growth. And again, it still makes sense for investors to be positioned away from that uh into other sectors and into other asset classes. >> Absolutely. My my next question for you has to do with kind of market narrative cycles. I mean, you once compared the current market to Everything Everywhere All at Once, which is a movie I'm sad to say I have not seen yet. I hope to see, you know, maybe we'll see. Well, I I must watch it this week. I guess >> you're not alone. You're not alone. That may have been a good tag on for you to use, but I haven't seen the movie either. So, uh but enough people have because it won best picture one, you know, that and it makes sense when you say it out loud, too. It's one of those like, oh, there's nothing there's nothing that doesn't make sense about, you know, so you compared the current market to everything everywhere all at once where investors are dealing with multiple poss possible uh economic outcomes at the same time. In a market with so many competing narratives, AI, rates, geopolitics, a couple things you've already mentioned today, how do you filter signal from noise when deciding what actually matters for long-term investing? >> Yeah, it's a good question and you your your key the key of what your question was the end was long-term investing. So, let's just talk about the stock market and let's talk about stocks, but I'm going to use the stock market judged by the S&P 500 as an example. Okay? Around 1926, okay, so we got about a hundred years of data. Okay. Is when the bean counters started getting serious about tracking performance of stocks. So literally if you go back to most data will will draw a line in the sand around 1926. That's around when the S&P 500 was created. So you have now you know 100 years of returns. And if you look at those those those time periods on a calendar basis 75 or 74 of those years the stock market has a positive rate of return. All right. And half of those were the stock market had a 20% or greater rate of return. All right, that's fanta. That's phenomenal. Which means you had 25 years of negative rates of return. And I think it's about six years where the stock market had uh 20% or greater or or less or a negative return or or greater, right? Six years. So basically one set out of every four years you get a stinker. That's basically what it's me what it what it's what it's what it's averaged out to. And and look, past performance doesn't indicate future returns, but if I have a hundred years of data on my side, something tells me that something works in a capitalistic society to be a long-term investor in equities, right? over time, you know, the long game is as long as capitalism and as long as people are incentivized to make money. And if you're the owner of a company, you're incentivized to grow earnings because that's going to make you more profitable. And a stock's price is a discount of future cash flows. And the future cash flows, your earnings going forward. As long as that basic theory stays intact, over the long term, stocks are going to go up because people are incentivized to make money despite war conflict or or or who's in charge of the Fed or or what's going on in the banking cycle. You know, at the end of the day, uh you know, people are incentivized to make money and and and a stock's price is a discount of future cash flows. So that's the long term for me is is that is that whenever I go back to despite the near-term volatility that may or may not come in the stock market, it always comes down to uh what you where we think um you know that that that theory and of course it all matters on the individual, right? So if you are your investment time horizon, your risk tolerance, your need for cash flow, your need for income on an individual level will determine or should determine uh how much stocks you have in your portfolio. But the general idea about stocks over time is that capitalism works. >> Absolutely. I mean it it hearkens back to something I always remember having a conversation with Jim Oanessy on a couple not to name drop and I worked together at fair so I know >> oh okay good I'm not trying to name drop or anything like that so I apologize when I say that but you know one thing I remember an interview we did I want to say like five or six years ago we was always talked about how human nature doesn't change you know when it comes to thinking long term and short term you know we've seen this multiple times throughout history where there's always going to be something near-term that we're going you know, we're gonna, you know, and and it and it, yeah, it's important to pay attention to that and understand what's going on near-term versus maybe other situations that have happened in the past. But at the end of the day, that those who have made the most money have been thinking more long term and really focus there and where they can unlock value and where they think things are going. So, I mean, this situation almost seems like it it this this nothing's really changed in this sense. It's just a matter of okay, well, how should I really think about the near-term right now and how will that influence whatever long-term decisions I'm going to ultimately make? >> Yeah, that's right. >> You know, so next question that I have for you here, you also have previously highlighted how market cap weighted indices can quietly concentrate risk in a handful of stocks. As passive investing continues to grow, do you think we're approaching a point where market structure itself is influencing price discovery? And if so, what kinds of opportunities or distortions might active investors be able to exploit? >> Yeah, I I I think therein lies the issue with, you know, you could have a situation where the economy is fine, but the stock market finishes negative for the year. And it's not because stocks aren't making money. It's not because companies aren't in good in good shape. It's just the fact that technology as a sector uh is dominating the asset class from a large cap standpoint so much that if you have the tide go out on all of this money being spent on AI, right? Then it takes the wind out of the sales out of some of this out of this technology trade. um right and but if you're active and you're in other sectors where there's value to be had uh that may not be uh directly tied to spending in AI you know uh there's value you know that that's one of the interesting things of just the complexion or the construct of indices it's not that small cap stocks as a have done poorly it's just the construct of the small cap index if you look at the Russell 2500 today versus the large cap index if you look at the S&P 500 per se is that the small cap index is significantly more diversified. You know, uh there's a 20% waiting in banks, a 20% waiting in industrials and and and you have so many more it's so much more horizontally diversified which is so healthy whereas the S&P 500 has been so concentrated to tech and that's not the case within the small cap index, right? So, so you get distortion on performance and valuation on say the S&P 500 versus the small caps of the 2500 simply because of how the passive index is constructed. It doesn't. So if you roll up your sleeves and you get conviction in a business model and cash flows and earnings and a balance sheet and all that good stuff that comes with what we do specifically in buying individual companies. Uh there's value to be had out there for sure rather than just simply buying the index. Absolutely. Another question I had for you is you've written about how government involvement in markets has expanded over the past several years from fiscal stimulus to industrial policy. How should investors think about the government increasingly acting as a capital allocator? And does that change how you evaluate certain sectors or industries? You know, we're looking at like energy, defense, infrastructure, industrial, reshoring, all that kind of stuff. >> Yeah. You know, the the Trump administration has made things confusing to be honest with you because there is uh a conflict between the message being sent and the actions being done, right? So deregulation of the banking sector is clearly the government stepping back right and that was clearly a bullcase for banks uh last year. Um tariffs is very much government involvement. Um you know the government has taken stake in some rare earth mineral companies publicly traded. They've taken stakes in some tech companies. Um it's you know it it's the only time I in during my career where you really saw the government uh take stake in in in publicly traded companies is if they're failing or they had to inject capital. you know, the government being involved so viciferously into the Federal Reserve uh and and really putting pressure is, you know, is is really a conflict between the message of, you know, we're going to step back and let free markets take their place, but at the same time, we're going to force a heavy hand. You know, here we are, you know, we're in the middle of this Iranian Middle East conflict. And it was just a couple of weeks ago where the government was saying to military defense companies, you know, I want you to stop uh buying back stock. Don't, you know, grow your dividend and focus on um you know, munitions and and and and so basically the government telling a publicly traded company, a defense contractor nonetheless, of how to run their business. Um so it's to a degree slightly new territory. Yeah, it's a it's I let's compound that a little further. I mean, how are you thinking about that from, you know, an allocation standpoint as as a portfolio manager when you might be looking at some defense ideas, especially with, you know, war outbreak in Iran and stuff like that? >> Yeah. Um I I think the option of that optionality of the government taking a stake is now you know has to be added into the probability of um you know for an upside for a stock assuming it's in a category that's deemed potentially with a narrative that's potentially deemed essential to the defense and safety and protection of the United States of America. Right? I mean that has been sort of the narrative that's been blanketed to you to utilize the government to uh take some stakes in companies um in terms of the best of national interest uh and that's something honestly that we've only seen in China or you know some other places where uh you didn't have a free open market capitalistic society. So it's a it's a very new uh or it's a it's a it's a new variable that needs to be thought of uh when looking at certain companies. >> Absolutely. So, you know, to take this a step further when we talk about where the opportunity actually is, you know, we've already talked about even here today about how a lot of the conversation markets right now is dominated by mega cap tech and AI, but historically some of the best opportunities appear in the areas investors are ignoring microc. Where in the market today do you see the biggest disconnect between fundamentals and investor attention? Yeah, I I think um I I think the software scare is way too broad. You know, the SAS magdon where you know there is definitely risk uh and and that that industry has been derisked from a valuation standpoint for sure. Um but software companies uh I I think there's some on the larger cap side compelling value there. Um I think uh health care for some reason just can't catch a bid and that doesn't make much sense to me. Uh the population continues to get older. Um those are low margin businesses where u they will employ AI and and and make a lot of money. I think that theme actually is quite interesting. I think the those that will I think the AI trade is no longer about investing in the picks and shovels of AI. I think where investors will get the most value has the chance to get most value are those low margin sleepy dull businesses you know in consumer staples in industrials and in healthcare where I'm going to make something up maybe has four or 5% profit margins and they start employing AI and all of a sudden their margins go up to five and a half or 6%. You know that half a percent increase in margins or that 1% increase in margins of a low margin business is enormous. You know if if a big tech company grows margins from 70% to 70.5% people say okay their margins didn't go down. But if you have a low margin business that goes from say 4% margins to 5% margins you'll get massive uh valuation expansion. So, we're looking for those companies that are starting to employ AI to make their productivity significantly stronger where they'll get higher profitability, not necessarily those that are investing that are building out the AI infrastructure. Um, so, so, so that's where we're finding value. >> Again, on the same vein of questioning, what when you look across markets today, what do you think investors are most likely mispricing right now? whether that's inflation, rates, earnings growth, or something else. >> That is a good question. Um, I think there's there's three things that I think investors haven't or aren't taking aren't focused on enough. The first one is on um is on uh the spending on AI. Investing in stocks is about the rate of change. Okay, go back to your, you know, sophomore year in high school calculus when you're talking about derivatives and we all said, you know what, I'm never going to use this stuff. Why are we learning it? I use derivatives all the time. I use calculus all the time. And it's all about the rate of change. And what I mean by that is right now expectations are for 2027 that collectively, you know, these big cap tech companies are going to spend about $800 billion in building out data centers and the AI ecosystem. 800 billion. Okay. There's a lot of rumblings going on about affordability on uh on on utility bills and there's a lot of push back on building out data centers. What happens if that number actually turns out to be 750 billion. Still a lot of money, still a ridiculous amount of money, but less than expected. Okay. Less than expected. The market will will sell that off because the tide will go out on AI spending. And there's a lot of companies like a big whale feeding off of all that capex. If that capex comes in less, you know, you have the tide goes out. So I I am of the view that let's not pencil in if it's a guaranteed that that money is going to be spent on AI. And given how topheavy the S&P 500 is to tech, that's a risk to passive investing, right? To to to owning a market cap that is so one-sided simply because the market cap of them goes up, right? So that's number one. Number two, uh I think on from a geopolitical standpoint, right? Everyone's attention should be focused on Taiwan. All right? Not on the Middle East is an issue, but but but the oil particularly in the U. The US is energy independent, right? So this is not 1973, you know, Middle East, you know, OPEC oil embargo. Uh you know, the US is now uh energy self-sufficient for by and large. Okay. So you have some rumblings and it causes some issues, but it's not as catastrophic as it was in the 70s. However, microchips are the new data. So if China were to go into and invade Taiwan and disrupt Taiwan, that's a real big issue because most of the world's microchips are being manufactured by Taiwan semiconductor. The other is Samsung. And to be honest with you, Intel has been, you know, lackluster to say the least. So the actual the fabs, the manufacturing of of chips is few and fewer and far between. It's more concentrated. So if there's disruption to that, then geopolitically we have a real big issue. Okay. And the third one is I know this is a micro cap, you know, stock, you know, discussion, but investors should really be focusing on bonds and the yield curve. Okay? and focus on the long end of the yield curve. Right now, the US 10-year yield is about 4.2%. Which means if you buy a a US 10year today that's going to mature in 2036, you're getting 4.2%. So given what we know about the deficit, given know what we know about the debt situation, given what we know about potentially where inflation may be, given what we know that the new uh the incoming FOMC chair Walsh uh is is more hawkish or not in the sense that he doesn't want to use the Fed balance sheet anymore. you know, given the fact that there's a movement away from the dollar, given the fact that central banks are are are stockpiling gold, do you really feel compensated uh by getting 4.2% over the next 10 years annually for owning a US Treasury? >> You know, that that to me is I I don't All right. So, so my feeler is if you know the long end of the curve sells off, interest rates go higher. And let's not forget the US is rolling off a lot of debt that it took on during uh COVID at extremely low interest rates that now has to refinance that at extremely high interest rates um or much much higher not extremely high much higher interest rates and that puts stress on the US uh fiscal situation. So, if you're going to be in bonds and you have bonds as a portion of your uh portfolio, that's definitely a place where you want to be active. You want to be buying your individual bonds, which is something that we do for our clients. Uh we talk about fears of passive investing on the equity side. Don't be passive on your fixed income side of your portfolio. >> Absolutely. So, this is going to actually a perfect segue now to uh risk and under underappreciated risk. In your opinion, what is a risk that markets right now that what what is a risk in markets right now that you think investors are underappreciating or not discussing enough? >> Yeah, I I think um I think I go back to Taiwan from a geopolitical standpoint. U the the lack of diversification of manufacturing of chips around the world uh is a risk. Uh penciling in the amount of money being spent on AI as a given um is a risk. You know, there's something that that really hasn't been talked much about or disclosed is the quality of the capex, the quality of the money being spent on AI buildout. Yes, the numbers have gone up, but Rob, let's say I'm doing a renovation on my house, right? And let's say it cost a h 100red grand to do to do a renovation. And because the price of, you know, siding and concrete and lumber and all these other things go up, my contractor comes back to me and says, "Hey, John, it's actually going to be 120 grand, right? Just because of just because the cost of goods is up." Well, I didn't get more squattage of footage to my house, but it's costing me a lot more. My fear is that that could be going on underneath the hood for some of this AI data stuff. Look at the price of memory. You know, memory has gone through the roof for these tech companies. The price of natural gas has gone up. You got to power the data centers through natural gas. Labor to to build this stuff is scarce. That's all gone up, right? So, what does all that do? It all eats into the return on investment, the ROI of what was initially projected for the data center. So my fear is that or my concern is and we just don't know the answer right now is how much of the increase in spending on AI capex is due because it's incremental new initiatives to help a company grow on the dollar they're spending or is it simply the cost to do the original product has gone up exponentially and we don't know what that is and we don't know that answer. >> Absolutely. That is definitely something we'll be paying attention to that's for sure. So this is actually a nice transition into micro caps because we've covered the big picture macro themes and you know we've touched we've touched a little bit on micro caps but you know now we're here let's let's spend a little time in our small micro cap universe here. So when you move down the market cap spectrum into small micro caps liquidity and institutional coverage drop off significantly you know it's no secret do you think the environment is creating more inefficiencies today and where do you think investors should be looking within the micro cap universe? Yeah, that is a really good question. I'll tell you how we're playing it within for our models. Uh, you know, for my team specifically at Toqueville, we have an allocation of small cap. Uh, and within that we use uh a thematic play and we own a fund within that uh publicly traded mutual fund. Uh, the American Beacon uh small cap fund. The ticker is TOVYX. Uh, I own it personally. We own it for clients. Uh and this owns uh small uh small cap um international and emerging market companies and it combines quantitative analysis of earnings fundamentals and all these factors with qualitative analysis. So when they run through their screens, they get this basket and then they see, okay, well, what checks the box of what we look for within value. And then the managers, because this is actively managed, the managers then go out there and make sure that they don't let concentration risk within anyone's stock get too high, right? Because they understand when you're dealing with small and midcap stock, small and micro cap stocks, and not even that, not even US-based, international and emerging markets. So you're dealing really with really illquid um certain situations that are liquid. they make sure that uh things don't get out of hand and they rebalance quarterly uh to to keep things aligned. So here's a situation where there's a bit more momentum um there are more factors uh combined uh and then once they reach their screen they do their uh due diligence and uh and then from a risk management standpoint from a portfolio management standpoint it's aligned to how we think of avoiding concentration uh within individual positions. So, um, that's one way that that we really like, um, to play the space cuz to be honest with you, Toqueville, uh, and and my team specifically is played historically more in although we're all cap has played historically more in the mid to larger cap, uh, realm. So um you know if there's there's uh compelling parts of the market um that we find think are attractive for the clients with the right risk uh tolerance with the right time horizon where small and micro cap and midcaps are the right component that we feel within their asset allocation that's one the way that we played it. >> Speaking of which and this has to do with that institutional ownership inflection point. Uh uh one of the recurring themes in micro caps is that the biggest moves often happen when institutional ownership begins to build. When you're evaluating some of these smaller companies, what are the key signals that tell you a business might be on the verge of attracting larger pools of capital? >> That is a fantastic question. But we whenever we're looking at a company, we always start with the balance sheet. All right? So it's kind of like when you're building a house, you know, the balance sheet is the foundation. If the foundation's weak, it doesn't matter how, you know, what type of kitchen counter caps countertops you have if the house is going to crumble, right? So, so we start with that. We typically want something that has, you know, very solid balance sheet. If they're in a net cash position where they have more cash than debt on the balance sheet, that's the home run. Okay. Then the second question is, are they generating free cash flow? You know, when I look at the cash flow statement, you know, what's the free cash flow like? uh and if they're uh growing their free cash flow, that is the second check. That's kind of like, you know, the uh the if the balance sheet is the foundation, the free cash flow is the structure and the siding of the house. Then we'll move to the income statement. And the income statement is okay, well, what's the business model and how are they growing their earnings? What's their profit margin? And that then allows me to see, you know, how nice the furniture is, how big the kitchen is, what type of appliance, what type of appliances I'm using within the house. So, um, it's kind of backward looking in the sense that we focus on the balance sheet first, cash flow statement second, then the income statement third, um, and and then we find where we're looking. So you have to check off a lot of those quality screens for us before we then get into, you know, what institutional ownership is is is or there are there activist investors involved or or something along those lines because I think of, you know, if I was, you know, a potential, you know, private equity company that wanted to take out a smaller company like that, you know, those are the qualities that I'd be looking for. So, painting with a little bit of a broad brush, I mean, has there been any, I guess, investing theme or sector in particular that has popped up on the screen within the smaller micro cap universe that you've been like, "Oh, okay. This is this is kind of interesting going on right here." >> Yeah. I mean, I don't want to get too wonky or or or too siloed, but the rare earth um you know, go making this whole conversation go full full circle, you know, the the the rare earth space uh and the minerals space has really become more attractive because if you have a sell off in the dollar, right, there's a there's a strength in the heart asset. If you now have the United States government as a natural buyer, um you know, there's this this fear of or this this movement to uh corral and stockpile uh minerals, right? Um and you could now maybe say the same thing for small maybe micro cap energy companies, uh oil and natural gas given what's going on in the Middle East, right? that there's a there's a a need, want, desire to stockpile stuff, hard stuff. Uh meanwhile, you know, when we talk again making this conversation come full circle, we talked about the selloff in software companies. You know, we went from a an environment where uh investors wanted to own asset light models to an environment where if you made something where if I dropped it on my foot, I hurt my toe. That's what people want now, you know. And if you made a software, you know, and people don't want the software because they feel that's threatened. So, uh, it's a complete reversal. >> So, I got two more questions for you. And for this one, this next one really has to do with discipline, especially right now. And I mean, this is kind of a general question now, more or less moving forward because with the rate of information and headlines moving as fast as they are, it's sometimes difficult to be disciplined in your approach. So, you know, in this environment where this information really moves so quickly and instantly for you, what what in your opinion separates the investors who succeed from those who get pulled into the noise? What maybe some of the things that you're doing in order to make sure you're just staying zoned in and focused on the things that are within either your circle of competence or within your own interest that you think will unlock value versus being like, "Oh, this I got to this shiny object. I got to go over here. Oh, wait. This this thing I got to go over here." >> Yeah. It's it's a great question and it really comes down to you know portfolio management or asset allocation or risk management 101. It's knowing who you are or in our case who our clients are as investors and making sure on day one that we're aligned with their portfolio and their asset allocation to who they are, right? And then and and what what their goals are, right? What what's their time horizon? What's their income needs? What's their tax situation? What are they looking to do with their money that they're entrusting us to manage? And uh and then and then so when times like this happened, yes, there's some volatility uh but but if it's an investor who is historically uh conservative, who doesn't need to shoot the lights out from an equity standpoint, we probably should have been in a lot of bonds to begin with, right? Um so so it's it's getting that right as to who you are and being true and honest to who you are and it's an investor, right? So if you are not a risk taker okay but you get lured into micro cap and small cap stocks because you know they had gone up recently right and you want to you know you feel comfortable where the world is and then we all know micro cap and small caps are massively volatile right I mean we understand that that's part of getting into this space is that you have an understanding or you should have an understanding of the volatility to the upside and downside on this asset class right and if you don't understand that you're in for a rude awakening. So, you know, for those clients that want this portion of their portfolio in smaller micro caps, it's saying it's like, okay, what do you want to do? And let's carve out a portion, but you need to understand that this portion is your long duration, right? This is your long duration asset class that's going to move around a lot. But over time, go again squaring the circle on this. We're going full circle on this conversation about the the the the the proof of concept of capitalism over 100 years of uh uh since the stock market has taken returns. This is going to outperform and this is going to go up and to the right over time. And so that that's been that's the key u to everything else. just being true to who you are and constructing the portfolio accordingly. And if micro caps or I even put micro caps and small caps almost in the same category as alternatives or private equity, the only difference is your liquidity is better in small caps and micro caps than than than in private equity alternatives. You know, it's all sort of long duration stuff. Um and and and it's making sure that um you know the client has x% of their portfolio given their liquidity that if everything goes wrong uh with those you know higher beta higher vol asset class it won't derail them from their overall financial objectives. >> It's a great answer. Final question for you here today. Uh and again John thank you for sharing and and taking the time here. This is a lot of fun. But for investors that are trying to navigate today's market, what's one principle or frame framework that has served you well throughout your career? So coming being a product of Bear Sterns uh which is which is where I began my career and you know Bear was you know one of the highest quality you know scrappiest uh money center banks on the street and then until it wasn't and it went and you know here we are uh Rob on March 16th will be uh you know bear went down 7 not that not that I not that I had any trauma from this Rob but at 7:10 p.m. On Sunday, March 16th, 2008, uh the Wall Street Journal issued an article that JP Morgan bought their shares for $2 a share. So, we're coming up on the eve of that. And what I saw from that was two things. So many friends and colleagues that were illquid at the time. Had too much money locked up, had too much money, too much of their money in Bear Stern stock of the employer that they worked for. Right? So the hallmark of what we do here is about capital preservation first. You know Warren Buffett says there are two rules to investing. The first one is don't lose money. The second rule is don't forget rule number one. So we focus on preserving your capital first. The second one is we focus on liquidity. Right? If you needed money, do we have a bucket set aside for you that you can access it? Uh the third one is reducing concentration. Okay? It's it's if you work for uh a company that you're getting stock in of that company, let's try to keep it, you know, uh you know, but less than 15% of your total net worth. Uh so if something bad happens to the company, you're not getting a triple whammy where you lose your wealth, you lose a portion of your asset, and you lose your income, right? And then we start working on the asset allocation, right? So, so before we really start rolling up our sleeves on if we like this bond or if we like this stock or if we like, you know, US or international or large or small, we're going through a deep dive on who the individual is and what they're looking to achieve with their money and where their profile is before we go anywhere else. And and I think that's that's key to to to to to surviving the long game. >> John, I think this is a great place to end it. Where can our audience go and find more information uh to get in touch with you and or for more information on Toqueville? >> Yeah, I appreciate that, Rob. So, you go to toqueville.com to occlat.com uh and uh and find out more information and and uh love to spread the word. >> Very good. Well, John, thank you so much for joining me today. Really do appreciate it. Good luck. Stay safe and I I look forward to our next uh our next update. Hopefully, it won't be in another three years. >> Yeah, that's right. And hopefully by then, if it is, you've watched uh Anywhere Everything All at once, so we've seen that movie by then. >> We will definitely start off the the combo with that. Well, thank you, John.