Forget recession fears. Adam Johnson sees a massive opportunity in today’s market!
In this compelling conversation with Maggie Lake, Adam, Portfolio Manager at Bullseye American Ingenuity Fund, explains why recession concerns are exaggerated, why AI stocks like NVIDIA are attractively valued now, and reveals his top investment picks: including Coinbase, Delta Airlines, and surprising innovators like GE Vernova and Symbotic. Discover his bullish outlook on American exceptionalism, why he’s buying tech stocks, and how to confidently navigate market volatility.
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Adam Johnson 0:00
I do not think that there is any chance of recession anytime soon. I think any conversation about recession is absurd. The valuations here now are so appealing for a lot of these AI stocks, I think you have to own them. So I’m I’m very comfortable with the economy. I’m comfortable with us exceptionalism, and I’m certainly comfortable owning AI stocks now.
Maggie Lake 0:26
Hi everyone. Welcome to wealthion. I’m Maggie Lake, and today I’m joined by Adam Johnson, portfolio manager of the bullseye American ingenuity fund and author of the weekly investment letter the bullseye brief. Hi Adam. It’s great to have you with
Adam Johnson 0:38
us. Oh, likewise, Maggie, thank you. It’s a pleasure. So
Maggie Lake 0:42
lot to discuss, and I think a lot of people are kind of wringing their hands trying to figure out what’s going on. You know, the stock market’s had a pretty rough month, a little bit longer than a pretty rough year so far, NASDAQ and S P near correction territory that Russell came close to a bear market. Everyone’s worried about recession. Does it feel like things are stabilizing, or is there more downside ahead? What do you make of this market?
Adam Johnson 1:06
Honestly, I don’t really think it’s been that bad. I think this is just markets being markets, and I’ll tell you why I say that. Over the past three years, Maggie, there have been nine declines of 10% or more, and on average, the decline was about 14% as it turns out, each of those ended up being a wonderful buying opportunity, and here we are, decline number 10 in three plus years, and we stopped it down 14% on the NASDAQ. So I’ve been buying, and I think what we just have to recognize is there are always reasons not to buy. There are always reasons to be afraid, but if you take it in totality, I think there’s a lot more to like right now than to fear. And as I say, just a 14% correction is is not out of the ordinary. It’s just like everything else that we’ve seen over the past three years. And I’ll even take it a step further and say this is probably the first of three 14% corrections that we’ll have over the course of the year, just because that’s what we’ve seen each of the past three years. And again, they were all wonderful buying
Maggie Lake 2:06
opportunities. So interesting. So you don’t feel like something’s this different. This time around, we have a different administration in there seems to be different signals coming from the economy, but you’re not worried that there’s a bigger shift happening.
Adam Johnson 2:19
There’s always something. And so I run the American ingenuity fund. I’m a growth investor. Growth stocks are generally more volatile than the market, but we make more when we have the wind at our backs. And three times last year, Nvidia went down plus or minus 30% I’ve owned Nvidia for a long time for my investors, and each time people said, Adam, do you think it’s over? Is this finally the time where Nvidia just, you know, they’ve lost their edge? I said, No, as a matter of fact, last week at the at the bottom of the selling when things were just really nasty, in the middle of the week, for one brief shining moment, Nvidia was cheaper than the S p5 100, it was trading at about 20 times earnings, and the S P was trading about 20 and a half times earnings. And that, to me, is a signal that our pessimism has gotten the best of us. You know, when you see a company like Nvidia, which is the golden child of AI, trading cheaper than the market with 567, times the growth, call it 60, 70% versus 10 or 12% for the S, p5, 100, you buy it, and that’s what I’ve been doing. And I think thoughtful, long term investors buy on dips like this, and we end up doing very well. It’s
Maggie Lake 3:33
so refreshing to hear someone making the bull case, because there’s not a lot of you right now, or if, if you’re out there, the bear voices seem to be overwhelming. Um, so it’s really refreshing to hear that. Let me just, let me just ask you, I want to, I want to touch on growth and AI in a moment, but staying really big picture, because you are, as you say, running the ingenuity fund, right? The American ingenuity fund. We have been hearing a lot of talk that America is over owned, overvalued and overhyped, to borrow a phrase from an ft article, and that we are at the beginning of this major shift away from us assets. Do you buy that? Do you do you think that it’s possible that there’s a big rebalancing going on?
Adam Johnson 4:19
Well, first of all, just look at who wrote the article, the ft. Where are they based? London. London hates us right now. So do the French, so do Italians, so do a lot of other countries right now because of what’s happening with the tariffs, and yet, this is the place to be. We are the biggest economy in the world. We have the growth that is the envy of the world. Yeah, I know the Atlanta Fed thinks that the economy is contracting 2.8% I think that’s the craziest thing I’ve ever seen. When I look at what’s happening in corporate America, Maggie, over the past quarter, we had 12% earnings growth coupled with 13% profit margins. That’s the best fundamental combination that we’ve seen since. 2001 unemployment is somewhere around four, 4.1 4.2 we can debate decimals, but around 4% which means that we have the most number of people ever making the highest gross adjusted income ever, and spending the most amount of money ever, and that is what’s driving both GDP growth and earnings growth. We also have inflation now that is coming down. Three of the four indicators peg inflation below 3% there’s only one producer prices, PDI, still above 3% and the most recent data came in lighter than expected. So I think inflation is cooling. We’re not going to get a ton of cuts from the Fed. They don’t need to cut a lot, but they’ll probably give us one, two, I don’t think three. So let’s say two cuts this week. That helps bring borrowing costs down for consumers, for companies and the government. We know we’ve got a spending problem at Governmental level, which we’re addressing. So when I look at at all these macro factors in totality, again, I think there’s a lot more to like than to fear. And then when I drill down deeper into my American ingenuity stock picks, of which they’re about 41 these are companies that I think can double, triple or quadruple over the next couple of years because of cash flow growth.
Maggie Lake 6:19
Wow. So you’re doubling down on on the US exceptionalism. Let’s talk a little bit about AI. So is that? How are you feeling about that sector? Because I think a lot of the fears are kind of centered on a bubble bursting there, or the valuations that have run well ahead of what is undeniably going to be an important trend. How are you thinking about AI as a sector?
Adam Johnson 6:44
Well, first I’ll address the evaluation question, because that’s what I spend my time doing on any given day, Palantir, I haven’t touched at one point Palantir was trading at 200 times earnings and 57 times sales. You would need 57 years worth of revenues and or 200 years worth of earnings to justify that price, I have not touched Palantir. However, as I mentioned in via Nvidia trading cheaper than the S, p5, 100. Sure I’ll buy that the heart of of AI. Look at a Celestica, which effectively builds AI platforms for companies. And that’s trading somewhere in the mid teens, 1516, times earnings, with 30 to 35% growth. So it’s cheaper than the s, p, and it’s got more growth. Look at a super micro computer, which, again, like solistica, assembles AI platforms. You know, they go out, they buy the NVIDIA chips, they wire them all together in an array. They go get Marvel storage technologies, they get power sourcers. They put it all together, and now you’re in in business for AI that company is trading down at 12 times earnings because a short seller that has since gone out of business incorrectly alleged that there were counting irregularities. The company has been cleared by a independent third party, the company management and the board, I should note, have all been cleared. The analysts are coming back in the short sellers out of business that stock trades at 15 times earnings, with 70% growth based upon the most recent guidance. So yeah, I would actually take exception to the notion that AI is expensive. It’s not. I think what has knocked a couple of bricks out of the AI wall is what came out of China, the deep seek. And the funny thing about that is that the Chinese claim to have built deep seek for 6 million bucks, and that it’s faster and smarter than chat GPT as an example. Well, as it turns out, they used 2000 Nvidia chips to build deep seek, and they actually stole code from chat GPT to power their deep seek alternative to chat GPT. So as far as this notion that somehow the Chinese are going to supplant the entire US based AI ecosystem. I think it’s just misguided, because the facts don’t support that. And coupled with those facts, the valuations here now are so appealing for a lot of these AI socks, I think you have to own them. So I’m I’m very comfortable with the economy uncomfortable with us exceptionalism, and I’m certainly comfortable owning AI stocks now.
Maggie Lake 9:25
So I think that you make a very good point about deep seek, and there are a lot of questions about how they managed to do what they they did. And we don’t have a lot of transparency ever when it comes to China. But what about this broader idea that, listen, you have open source out there, and it’s just so, so hard to build a moat around the kinds of investments that are being made. It’s advancing, AI, but can you get a return on the spend for individual companies? Does that concern you at all?
Adam Johnson 9:58
No, because. Because what you’re getting at, which is a fair point, I think, brings into the notion of what I call use cases. So there’s this thing AI, wow. It’s really powerful. Holy cow, I can take this question into my computer and get an amazing answer. I could write my term paper. Wow. Well, now how do we use it beyond writing a term paper? If you are salesforce.com, and you want to mine customer data that’s proprietary. You’re developing those algorithms yourself. If you’re Palantir again, which I wouldn’t touch because it’s too expensive, but you are helping the US Government Department of Defense build satellite defense systems so that satellites orbiting the Earth can view what’s happening down below and start gaming out various scenarios. That’s incredible, and that’s proprietary. So yes, there is an element of openness to the code. I mean, chat GPT has actually made aspects of chat GPT open in the same way that Google made the Android operating system open. The Apple operating system is still proprietary to Apple, and I certainly use an apple, but no there when we when we drill down to use cases, and it’s all over the place. What? What target? What Costco, what BJ wholesalers, are doing with AI, incredibly exciting. I mean, do you realize, if you walk into Costco and you just go your Costco app, when you’re in the store, turn it on, the AI will actually follow you, because geolocation is so good, they can pinpoint you exactly where you are on the right side or the left side of a given aisle, they look at what you’re looking at what you’re putting in your basket, and they just start recording that over time. And so the next time you walk into a Costco, they will say, three of the four items you bought in your basket last time are now on sale, 10% off, and in the next 20 minutes, if you double what you buy, will give you an extra five. I mean, that’s incredible stuff. And I mean, at Target, yeah, they’re doing things. This is really neat. So they’ll have a mannequin in the middle of the sales floor, and the mannequin might be dressed in, I’m making this up. Just illustrate an orange dress. And it’s a Tuesday, and they record how many sales of that orange dress they do on Tuesday. What if they dress the mannequin in a yellow dress or a striped dress? What if they put that mannequin over by the elevator or by the window? What if they do it on a Wednesday instead of a Tuesday? They track all of that and they actually adjust their merchandising to maximize sale. That’s incredible. And again, that’s proprietary. That’s a use case, and that’s not something that can be easily copied, that’s going to be unique to each of those stores. And that’s the kind of stuff if you couldn’t tell that gets me excited, and why I want to own companies that are making it all possible.
Maggie Lake 13:01
Yeah, very interesting. I just came from an event with a bunch of business leaders, and there was a so much talk about AI and not what if, but the to the extent they’re doing it, AI agents, I mean, everyone is figuring this out. So whether you feel creeped out that you might be watched at Target, that’s a different conversation. It is most certainly happening. How can people optimize their data? So I can see why that gets you excited. Are you thinking about so when you’re looking at a you mentioned a couple of names, super micro computer. Are you mostly looking at? I don’t know if I want to call them infrastructure plays in the AI space, or are you moving into, into the increasingly looking sort of at extending and moving to the sort of use cases and software that might be enabling companies? How, where are you on the on the evolution of your investing in AI? I
Adam Johnson 13:58
think you have to own all three of the components. You have to own the big guys, right? The mag seven. You have to own the infrastructure, and you have to own the use cases. So working backwards use cases we were just talking about, I mean, practically, in the same way that every company had to become an E commerce company 15 years ago and then a cloud company five years ago, while they’re all having to become AI companies today, that’s just the reality of the world in which we live. So yes, I can make a case that practically any company out there has a use case for AI. I think the obvious ones are salesforce.com, largest for customer relationship management, and Palo Alto Networks, the largest for security, online security. So you know, guarding companies, systems and networks, etc. So those are some obvious ones. As far as infrastructure, we talk a lot about data centers. Let me give you a really cool company, GE vernova. Ticker is GE v this is a spin off from the old GE, and they took. A technology that powered, quite literally, GE Aviation, you know, jet engines. Instead of mounting the engines on a wing, they mount the engines on huge steel brackets. And instead of running jet fuel through these engines, they run natural gas through them. And they burn very cleanly, and they use that thrust that’s generated not to move an airplane, but instead to spin a turbine that generates electricity on site. Guess what? We’ve just figured out how to power data centers. So that would be an infrastructure example. Or you look at a symbolic a company that’s up and down and up and down. Bottom line, when it gets to 20, you buy it. When it goes to 40, you sell it and you just play it back and forth. I’ve done that with about a quarter of the position, three quarters of the position I just hold for long term appreciation. But symbiotic is the company that is robotizing or automating all of Walmart’s 47 distribution facilities, and when they’re done with that, they’re going to start automating the stores. And what a concept when robots will be going in and restacking the stores. So there’s another use case that crosses over to infrastructure, and then the big guys, meta, Google, etc, Amazon. I mean, you have to own them, just because, to me, that’s core ingenuity, but they’re also the ones developing it. Microsoft, as I’m sure our viewers and listeners know, owns half of chat. Well, I should say open AI, the company that owns chat, GBT, so I think it just yeah, you have to have a basket of all these names. Yeah. Do
Maggie Lake 16:35
you? It sounds like that? You, you have everyone has to get a little bit more niche and really understand what these companies are doing. So right now, you have to own the big ones, but it sounds like smaller players are going to be able to really make a difference here. In the beginning, with that big spend, it seemed like it was concentrated in the mag seven, the Microsofts, the deep pockets, alphabet and meta, is it? Is it? Are we in a period now where smaller companies, I don’t want to call them mid size, they’re probably bigger than that, but we’re smaller companies are going to be a little bit more specialized in what they do. Is that kind of where you’re fishing right now? Well, I
Adam Johnson 17:18
buy across all market caps. So yeah, I’ve got the big guys, but then I’ve got some of these other smaller, really neat companies. Maybe one that our viewers are familiar with, Sofi, which was the first ever from the ground up, online bank ticker, is so fi. Maybe our viewers, who live out in California, familiar with SoFi Stadium, home of the LA Rams, etc. And so that’s an interesting company, because here it is, a bank that doesn’t have any branches. It’s totally online. It started off just making loans to students, you know, as part of a student loan program. Well, now student loans only account for about 14% of revenues, and what they have found is that because they start with kids, 17, 1819, years old, and making loans to them, they’re able to track these customers over long periods of time and find that they graduate, they get jobs, they have stable income, and they’re very good people to lend to. And so now they have an auto loan program. They have a home lending program. They have home equity lines, because eventually, then these kids not only have homes, but want to renovate their homes, etc. And so they’re really able to grow over the lifetime with these customers, who are fiercely loyal, because this was the only company that would loan to them, right? So that’s a wonderful, wonderful business that at some point, I think a big bank, or maybe an Amazon ought to buy you want to be an online bank with a complete soup to nuts operation by so far. So there’s Walmart.
Maggie Lake 18:52
Had always tried to get into banking as well, and it’s been difficult, but we’re kind of in a new political environment in DC, so that that gets super interesting. We know data is at the heart of AI and data centers were an early area that people were super interested in. Someone made a really interesting comment to me, who has a lot of experience of commercial real estate. And real estate tends to be a long game. Things move slowly. Is it Is that a worry for that part of the market that may be the sort of life cycle of data centers by the time you’re investing in and plowing all that money and things may move quickly in a very agile, fast changing environment. Is that, is that a kind of weird intersection that concerns you based on the time horizon? Yeah,
Adam Johnson 19:39
I understand where you’re going with that, but there’s always demand for what I call Class A space, and there are a couple of different ways we could define that, for real for commercial real estate. Class A would be two REITs, Real Estate Investment Trusts. One would be Boston properties, which is only in six cities, the biggest six cities in the US, and they own a. Only the best properties you come to New York, and the best properties are all Boston properties, and occupancy is in the mid 90s. So for all the hand wringing and angst about, oh, commercial real estate is dead, and people don’t go to the offices anymore, not a problem at Boston properties. So that is the best of the best. And I always like Best In Breed companies. That’s one example, Alexandria, real estate equities ticker A, R, E is another. They focus specifically on the health care industry. And what’s fascinating about that is that they custom build campuses, really for healthcare companies that want to be located near institutions of higher learning. So they’re concentrated in Boston, San Diego, San Francisco, New York City, to a lesser extent, and then the triangle down in North Carolina, where, again, there are lots of learning institutions, and so they create these custom built, beautiful campuses. You know, if you’re Pfizer, Merck, or you’re a larger biotech company, like you remember the old Genentech, you know, you you need a customized space for the labs, for the presentation rooms, etc. You know, you may have 3000 employees. And once these places are custom built, and by the way, they’re gorgeous. The companies never leave. So it’s a really wonderful business model. Again, Class A best in breed. And so I don’t worry about companies like Boston properties or Alexandria real estate equities. I won’t touch any of the retail REITs, because do we really need strip malls? You know, every in every city, I don’t think we do not with E commerce. Now, 17 or 18% of total retail stuff, and I just don’t think we need it. And they’re trying to, you know, readapt, or readapt, the uses for some of that space. So I don’t want to touch that stuff. As far as data centers go. The demand for data centers is huge, and we’re going to build 20% more data centers this year. There are a number of studies that point to that, and we’re still nowhere near being able to satisfy the ongoing demand, which, of course, is because of AI and the importance of being able to compute. And you know, that has to be done in data centers. It requires. It’s a very specialized space. You know, data centers, in the middle of the winter, they’re running air conditioning through them to cool the machines. The power consumption is so voracious, and that’s why we talk about stressing the grid. Well, that’s why I like, Gee vernova. We’re going to just power these things on site. So I think you have to think about the totality of what is happening in the economy and the demand that that creates. There’s always population growth, and thank goodness, as a result, there’s GDP growth, and there’s also GDP growth, I should note, because of productivity growth, and there’s productivity growth because of AI. So this becomes a virtual cycle. And I don’t mean to sound like a Pollyanna, you know, life is not perfect. There are all sorts of issues that we have. I’ll tell you right now, every clean energy stock I’ve ever bought I’ve lost money on. So, you know, nothing is perfect, but there again, I go back to what I said initially. There’s a lot more to like than to fear.
Maggie Lake 23:27
Yeah, you so on your list, I noticed that you have Coinbase. I think at least you did, or is that something that you’re still positive about, because that’s been at the center of so many changes, and the beneficiary, really, of it, what seems to be a different environment in Washington when it comes to crypto, Blockchain, digital asset assets. How are you feeling about Coinbase these days? I
Adam Johnson 23:50
love it. For the long term investors among us, and I’m certainly one of those. I’ve owned this company for a long time. I mean, I don’t know how many, how many up I am on it, whether it’s 400 or 500 600% it’s very volatile, so it’s kind of tough to and every now and then I sell a little, but for the most part, I just leave it alone for the traders among us, I will tell you at the moment, it’s kind of trading back and forth from 200 to 300 200 300 right? As as Bitcoin goes from sort of 80 to 110 80 to 110 80. So you can trade it if you want, or trade a portion of it, but I just like to hold it, and I tell you why, Maggie, it’s kind of a last man standing of all of the different criminals. Remember when silvergate blew up? That was so painful, but, and you know, Coinbase went down a lot, but the key to Coinbase is that it’s now part of the essential infrastructure, the crypto infrastructure in this country. It’s the backbone for all of blackrocks, institutional and even individual. But there. Really institutional, for all their institutional clients who trade crypto. So if you are a hedge fund and you want to trade crypto, and you’re you’re doing it through BlackRock, you’re using Coinbase. You’re using Coinbase as an exchange. You’re using Coinbase to swap your Bitcoin into dollars or euros or whatever currency you want. You’re using Coinbase to custody your crypto in a safe member. It didn’t use, you know, it wasn’t always safe to store crypto. You’re right. You had to put in the little thumb drive and pull it out, and that was cold storage. Well, now you can safely store it online. You don’t have to do that anymore, and that’s because of technology developed by Coinbase. And again, that’s the they provide the entire ecosystem for all of Blackstone’s clients. And Blackstone, by the way, is the world’s largest money manager, right? So if it’s good enough for Blackstone, it’s, by definition, good for all of us. So I think it’s one you have to own. It’s almost core ingenuity, kind of like, you know, the big guys, the mag seven and more. Recently, in the past couple of weeks, Citadel has talked about making markets, and guess who they’re gonna use Coinbase. So I think it’s just the one. I think it just has to be in the portfolio. I’ve never owned Bitcoin, neither personally nor for my clients, but I have certainly own Coinbase. I do own Coinbase, and will continue to own Coinbase.
Maggie Lake 26:28
Yeah, it’s your proxy to what’s happening there. What do you there? There has been some talk that, as the market matures and now we see a different environment, and get, if we get different environment in DC, and if we get regulatory clarity that may open the way for institutions to get more involved in a way they weren’t, not be beyond just the ETFs and BlackRock. But is that a threat to Coinbase, or does that just increase their, you know, increase the validity of the entire sector? Yeah.
Adam Johnson 26:58
I mean, if they’re the essential player, if they’re really the backbone ecosystem, yeah, then more use just emboldens, strengthens, ratifies, justifies, Coinbase, as the leader, Brian Armstrong, the CEO, said two, three years ago, back when the SEC remember Gary Gensler, The SEC chairman, under the Biden administration, was just hammering Coinbase. Well, his whole thing, he’s a regulator. He loves to regulate and hammer, and he and Brian Armstrong had a very ugly argument that went on for months in the press. The Press loved it because, you know, they love that sort of thing. It gives everyone something to talk about. But it got very ugly, and there was a lot of pressure on Coinbase. Well, Gensler is now out and anti regulation, lower regulation, fewer regulations. That’s the mantra. And the fact that the US is talking about creating a strategic Bitcoin reserve, I’m not sure entirely know what that means, or think we need it, but nonetheless, they’re talking about it. That’s certainly good for Bitcoin. Well, it’s good for crypto. I think one of the reasons that Bitcoin is down is because they don’t want to hold just Bitcoin. If they really do create this strategic reserve, they want to own a bunch of coins. And I think their people say, Oh, well, that means there’ll be demand for coins other than Bitcoin. Us All the Bitcoin and buy all these other ones. So I think that’s kind of what’s going on. There’s some gamesmanship. But yes, bottom line to answer your question, if there are more players coming into legitimize Bitcoin, whether it’s the US government or a citadel or a fortress investments or whomever, Coinbase is the go to name. It’s the top tier. Remember what I said about best in breed? You know, if you want customer relationship management. You go to Salesforce. You want online, internet security, Palo Alto, networks. You want crypto Coinbase period, best in best in breed. That keeps it really simple. Yeah, it
Maggie Lake 28:52
does another name I saw on your list in your notes, which, which really struck me was delta and airline. I mean, I used to people used to joke and money match. I used to spoke to say, It’s brutal. It’s really hard to make money owning an airline. It’s just and we’ve got all these recession fears and we’ve got a sort of heightened geopolitical tensions. Why is an airline on your list?
Adam Johnson 29:17
Yeah, Warren Buffett famously said when he got out of US air, please thank me if I ever buy an airline again, ever. And I will tell you that delta is the only airline I’ve ever owned, because you’re right. It’s a really hard business. But, and again, I run the American ingenuity fund. You say is an airline really ingenious? Well, Delta Airlines is ingenious, and I’ll tell you how. And thank you for teaming me up, because I do love talking about it. So delta has figured out. They were the first to figure out, and they’re still really way ahead of everybody else. They have figured out how to segment the cabin into 34 different price zones. It’s not just the obvious first class, business class, Premium Economy, it’s also do. On an aisle. Do you want a window? Do you want to advance book? Do you want to select your seat or not? How many bags are you carrying? There’s so many different ways that they can segment the cabin, all those different permutations, so they really squeeze all the money out of the cabin. Number one, number two, eight to 10% of their revenues come from cargo. So there’s no such thing as an empty flight on Delta. Well, first of all, their load factor is 78 to 80% so you know, four fifths of the seats are taken, and typically it’s higher than that if you’ve flown on Delta anytime soon. I mean, you know, they always get on and say, we have a packed flight today, right? So you’d like to check your bag? Yeah, exactly. So not only are we crammed into the passenger cabin, and I would say that that’s it’s one of the nicest passenger cabins out there, because they’re new aircraft and beautiful lighting and temperature controlled, air pressure controlled in a way that, thanks to technologies Boeing, they’re not able to do but the belly is full of cargo. That’s important. Number three, not only do they service their own aircraft, they make another eight to 10% of revenues by servicing other airlines aircraft. And it’s not just servicing, it’s the parts business. So for example, if a united airplane comes into one of their hubs, when a Delta hub, say, in Atlanta, and there’s an issue with the United plane, it’s Delta mechanics that go fix it, and delta bills united for the parts, again, brilliant. They get another billion dollar point number four, they get another billion dollars a year, actually more at this point from Amex selling the very few extra seats they have, but nonetheless selling the right to give those seats away to Amex. So Amex pays delta a billion dollars. That goes right to the bottom line, and now delta can hand or Amex can hand out rewards as its reward program, oh, a flea fight, a free flight on Delta, brilliant, right? That’s how they just eat more money. And the fifth and final thing that I think is just brilliant. Delta owns an oil refinery. That’s their hedge. They own a refinery in Philadelphia, about a 218,000 barrel per day refinery. So when jet fuel prices go up, they’re a lot less stress than the other airlines because they’re making more money at the refinery. I mean, that is ingenious, and those five reasons are why Delta makes it into the bullseye American ingenuity fund. I should also note right now it’s trading very cheap. They just lowered guidance on some of the winter outages, you know, from January, February, but they kept full year guidance up here. It’s trading at six times earnings. So delta, you basically buy in the 40s and you sell it up above 6570, my target, I just raised it is 80, and I just bought some more down in the 40s. Wow.
Maggie Lake 32:54
So interesting. They really managed to diversify. It sounds like their revenue streams, which is not easy to do. Why were they able to do that? As opposed to other airlines like you mentioned united, and they fly kind of into obviously, they all have different hubs, but they fly sort of similar routes. How did Delta manage to do this? And the others aren’t just better management
Adam Johnson 33:17
for a long time. Remember, you know, in the 70s, although not now that I say that the 70s were 50 years ago, but Right? But, you know, there was a time when the airline industry, and even in the 80s, was highly regulated. I mean, it was almost like the insurance business, and then they came out of that, and it was sort of like the airlines were were deer in the headlights, and, you know, they just would sort of freeze. And they didn’t run their businesses like businesses. They just sort of ran them like battleships where, you know, we’re just going to point the battleship in this direction, and it’s going to go and buy gum. It’ll get there,
Adam Johnson 33:53
open the doors, let everybody on, yeah, feed
Adam Johnson 33:56
them lots of food. I mean, remember when they had magazines there and then they, you know,
Maggie Lake 34:00
when they had a lot of things, it’s so that the airlines are doing better business wise. But I don’t, I don’t know if the flying public would agree that things are at their greatest and yet, we’ve seen everyone spending on services so they’re managing their business better. But how vulnerable are they to the economy? So clearly, you don’t, you think recession fears are overblown. I suppose that is the risk to this trade is that if we do go into a recession, we’ll see a pullback on that part of consumers, and then that that will presumably hurt a company like delta or any airline.
Adam Johnson 34:34
Well, the last time we thought that there was going to be a recession, yeah, Delta went into the 20s. And I suspect that if we really thought there were going to be a recession, it probably go into the 20s, meaning it gets cut in half and then some. But no, I do not think that there is any chance of recession anytime soon. I think any conversation about recession is absurd. And even if someone were to come to me and say, Yeah, but tariffs are so disruptive, you. Is what I would say, Okay, fine. Net imports to this country are about a trillion dollars. You say, Wow, trillion dollars. That’s a lot of money. I mean, it’s a trillion, yes. And US GDP, our economy is 30 trillion. So net imports to this country are about about 3% of GDP. And if we’re talking about, for the most part, 10 to 25% tariffs on that 1% of GDP, what we’re really talking about is a fractional impact to GDP. I’m not going to say it’s much ado about nothing, but I think the whole tariff conversation is blown way out of proportion, a lot less onerous than it really is in the final analysis. And the other thing about tariffs that I don’t think people fully appreciate, although they’re starting to figure it out, I think tariffs are negotiating by the Trump administration to leverage conversations about getting what they want. As an example, whenever a European car comes into the US, there is a two and a half percent tariff on it, and that’s to try to incentivize the building of European cars here in the US. That’s why BMW now builds BMWs in South Carolina, and they have a research facility there too. Alright, fine, two 9% tariff, but when an American car goes over to Europe, there’s a 10% tariff. So why is it that we are effectively charged four times what we charge the Europeans? Well, Trump effectively threatened to put a 10% tariff, you know, in the way he said it, you know, we’re doing to them what they do to us. Well, guess what? Within 36 hours, the European said, Okay, fine, we’ll match your two and a half percent. So there, there’s some gamesmanship that can be very ugly and very strenuous, and it’s it may undermine some of, you know, our relationships with allies. I mean, just pick up any newspaper, and that’s, you know, probably one of the lead articles somewhere on the front page. And yet, I think you have to view tariffs as a means to an end and not an end unto themselves. And we’re starting to kind of figure that out. I think in some ways, why do
Maggie Lake 37:25
you think, I mean, this is, it’s, it’s sort of a hard question, but I’m curious if you have any thoughts. Why do you think people are so worried about recession, so worried about an AI bubble bursting, so worried that assets are going to flow out of the US for the next decade and relocate overseas. Why do you think it feels so fraught right now?
Adam Johnson 37:47
That’s just human nature. Sadly, I am not that way. I’m a risk taker, I’m an optimist, and I’m all American. That’s who I am. That’s why I started the bulls eye American ingenuity fund, and I almost rarely raise cash, and that has served me very well, because over time, I’ve beaten the S, p5, 100 by just playing through the pain. You know, this is what we’re aiming to do. We’re not trying to buy and sell time in the market, not timing the markets. But, you know, bears always sound smarter than bulls, right? Because they’re skeptical and they must see something that we bulls don’t see. So people always give them attention. You know, listen to the news on any given night, they never lead with how wonderful things are. They always lead with the worst of the worst. And I mean, really, I’m so sick and tired of every 12 months another government shutdown. And sober faced news anchors, come on and say, looming government shutdown now, as you know, blah, blah, blah. And isn’t it amazing, they always figure it out. And I remember in 2018 the entire world was obsessed with recession. We were so certain. And december 24 I remember going to church and talking to my family, and they all said, Oh, what do you think? You know, cousins and grandparents, are we going to it? I said, guys, it’s Christmas Eve, please. Well, we came in on december 26 boom. The market never looked back early, early January. He was the chairman then too. Jerome Powell said, Well, we may start cutting rates. The market was up 36% I mean, the pendulum of emotion is it just, it does the same thing all the time. It always swings way too far to the left, and then, admittedly, probably too far to the right, and somewhere in the middle is reality. So it’s it. It’s just people being people. That’s, that’s all we’re seeing. Yeah, it
Maggie Lake 39:42
is true. And certainly, if it bleeds it leads, has been a long, long adage in media, and we never seem to be able to break the traditional media never seems to be able to break that last question for you, I’m so happy that you were talking about time frame. You know, if you’re a long term investor, do this. If you’re short term you want to trade it. Do this. Yes, it’s such an important distinction. So thank you for that. Do you feel like we’re in an environment where you, I think you mentioned we may see three different dips of 10% at some point this year, or should we just get used to this volatility? And do we all have to be a little bit more plugged in and be thinking about and checking our portfolio, like, are you rebalancing or changing your positions more than you usually do.
Adam Johnson 40:22
Nope, I don’t touch them. I set my allocation, and then I let those stocks do their thing. And then when new money comes into the fund, or an existing investor says, I you know, I’m going to wire you another quarter million, put it to work. It’s the same allocation, unless something has changed, for example, a company reaches my target, so I sell half, as I always do, and then I redeploy that capital into our next potential double or triple. I make very few changes. And as to the volatility, I think we have to make peace with the fact that a lot of the daily trading the New York Stock Exchange has done studies on this, and the New York Stock Exchange itself admits that probably three quarters, some days, even more, three quarters of the daily trading is just computers. You know, it’s not people like you and me having a conversation saying, you know, Maggie, what do you think? Well, I don’t know Adam. What do you know? I ran the numbers? I think, you know? No, that’s not what’s happening. It’s algorithms. I’ll give you an example, especially around earnings. So the algorithms have been pre programmed to as an example when meta, Facebook comes out with earnings to look at earnings, revenues, margins, the different businesses, ad revenues, contribution from Instagram, contribution from WhatsApp. Guidance, daily active users, monthly active users, all of these numbers have been pre programmed, and as soon as the press release comes out, an algorithm, a computer effectively immediately word scans, and in an instant, and I’m by in instant, I mean literally, a split, split second, looks for all of the numbers associated with all those words, and matches The numbers with the pre program. And if, say, more than 80% of those numbers fall short, or if one of the critical ones, like earnings fall short, or guidance falls short, the stock is instantly down 10% and frequently down more than that, it happens so fast that you can’t possibly get a trade off. And then what happens is, there’s the conference call later that night, and then analysts rerun their numbers, and next morning, analysts come into the portfolio manager’s office and they have a talk about it. Maybe there’s a meeting at 10 or 11, and everyone’s sitting around a table. That’s when the conversation happens. It says, Okay, explain what happened at metal last night, stocks down 14% but it’s looks like it’s coming back, and then the analyst runs you through the numbers. So multiply that by every stock of note in the market, and then there’s some of these high beta stocks, like the ones that I trade. You know, the growth stocks are more volatile. That’s what’s driving markets, and I think investors need to be aware of that dynamic. They can get depressed by it, or they can just acknowledge it and see it as an opportunity to, on occasion, actually pick up a stock that shouldn’t have traded down as much as it did. That’s what’s driving the volatility. It’s here to stay. And yes, I think the current sell off has bottomed. And yes, I think there will, we will rally to new highs. And yes, I think we will see more sell offs this year, maybe back down to where we are again, and it’ll retest. And people say, Oh my gosh, is it over? And we’ll say, No, we’re not over. It’s just markets being markets. Keep
Maggie Lake 43:56
your eye on the on the long term horizon, we’re going to end on that positive note, Adam, as I said, so refreshing to get that point of view and really appreciate you coming by. Thank you so much. Oh,
Adam Johnson 44:06
thank you, Maggie, any time, pleasure to be with you.
