Broadcom's dividend and the potential growth of its AI business are just two reasons why Nancy Tengler, Laffer Tengler Investments CEO and Chief Investment Officer, likes the stock. Tengler also likes Spotify for its pricing power and fiscal discipline. As far as stocks Tengler is staying on the sidelines for, CVS and consumer staples top the list. Tengler explains why in an interview with Yahoo Finance Live.
Video Transcript
AKIKO FUJITA: We are taking a look at names investors may want to consider avoiding and stocks worth another look. Laffer Tengler investment CEO, and CIO, Nancy Tengler, is back with us. And, Nancy, let's start with one of those stocks you really like, and that is Broadcom. An interesting pick here just given the action that we have seen within semiconductors. How much of this has to do with the strength that we are seeing in their custom chip business?
NANCY TENGLER: Well, Akiko, this is an extraordinarily well managed company, and we like the VMware deal. We think the management expects it to go through in the third quarter. They have a great capital allocation plan for shareholders so they return a significant portion of free cash flow via dividend increases and stock buybacks. But in addition to that, they expect that their enterprise AI computing business is going to grow from 10% to 25% in 2024.
They just re-inked the deal with Apple for chips and so there's a lot going well. The stock has run a great deal. It's still fairly attractive on our valuation work. And so while we've been trimming it because it's overweighted, if it pulled back, we would still add to it with fresh money, we are still committing a significant portion of our portfolios to the stock.
JULIE HYMAN: Another one of the stocks you liked that caught my eye was Spotify, and that company is recently-- or there are at least reports that it is going to be offering a new premium tier. And it's interesting that we're seeing sort of parallel activity in music streaming to what we've started to see in video streaming in terms of adding more pay tiers, for example. Is that what sort of drawn you in here or there are the things you like about Spotify?
NANCY TENGLER: That that's such an important point, Julie. Yes, I mean, they have not raised prices since 2011. I used Spotify then I shifted to Apple Music. I'm going back to Spotify because Apple keeps raising the price and Spotify's format is just a lot better but so they have pricing-- the pricing power lever to pull. But they also showed fiscal discipline. So they're laying off 200 people in the podcast business.
They've kind of regrouped that business. It hasn't been-- outside of Joe Rogan, it hasn't been terribly successful, and they own 33% of music streaming. So I think their ecosystem is pretty sound. And if they can leverage that and continue to focus on expansion and profitability-- the CEO thinks they'll be net income positive in 2024. That's important. The stock has lost money for a long time.
So we like the way they're managing the business, and we think they have not only brand dominance, but the opportunity to raise prices and as you point out, the premium business is another way to improve margins.
AKIKO FUJITA: Nancy, let's talk about one of the names you say that investors should stay away from. One of them, CVS here. I'm looking at the chart, and it is-- it's not a pretty one so far this year.
NANCY TENGLER: No, and, Akiko, I think we were not enthusiastic buyers in the first place. We added a position a couple of years back. Karen Lynch is a compelling CEO, but then she proceeded, I think, to, kind of, have acquisition FOMO. And so they made a number of acquisitions after being very disciplined about paying down their debt from the Aetna merger acquisition. They made these acquisitions that aren't going to be accretive for years.
And so free cash flow is going to be muted, and we're a little bit concerned about the sustainability of the dividend. We just can't find the catalyst for outperformance, so we exited a number of months back. It was still a bad portfolio decision but sometimes I've learned-- as a value manager, sometimes you want to buy more and that's always your instinct, but our decision was that there were much better places to be and the opportunity cost was too great to wait for this one to play out, especially if the dividend becomes at risk. Certainly, dividend growth is going to be at risk.
JULIE HYMAN: Nancy, another area, more broadly that you don't like, is in consumer staples. This has been such a fascinating area to me this year just because of the pricing power narrative that so many of them have put forward, right? So many of them talked about that volume wasn't doing well, at least on the consumer products side, right? Volume wasn't well but they were able to raise prices. So how are you thinking about it and framing this group as we go into the second half of the year, especially with your thesis that we're going to start to see inflation abate.
NANCY TENGLER: Well, yes, great points all. I think a couple of things. One, the stocks are pretty fully valued, and that's important to us. We still own names like Procter & Gamble because they do have pricing power. But we've also, I guess, embraced a theme for the last two years of old economy companies that are embracing the digital revolution and then those that are supplying the arms, if you will, to digital adaptation.
So in the consumer staples space, there are a couple of names that you could say-- well, more in the discretionary space like McDonald's and Chipotle that are embracing digitization. But what we've decided is we eliminated Philip Morris from our portfolio again because we couldn't find a catalyst. It was a great defensive name during the bear market last year but there's limited growth. They've really been growing the dividend quite slowly, and it's a business that you really buy that stock for the dividend because it's not a high growth business.
So we've selectively reduced our exposure in staples and we will probably continue to do so, because we're finding a lot of attractive names in industrials which tend to do much-- really well coming out of periods of low manufacturing PMIs-- contractionary PMIs. So that's where we're repositioning ourselves for the next leg up, and we still are overweight technology, health care, industrials and energy.
AKIKO FUJITA: OK. Some good takeaways as always. Nancy Tengler, thank you so much for joining us today. Really appreciate the time
NANCY TENGLER: Thank you.
