Government tailwinds are baked into stocks, says DCLA's Sarat Sethi

Leslie Picker (Reporter) 00:00.350

joining us now surat sethi DCLA managing partner in a CNBC contributor surat banks for being here today good morning to you sir as we think about the markets heading into next year we talk about the benefit of taxes and and the one big beautiful bill act ultimately trickling

Leslie Picker (Reporter) 00:19.390

down into consumers bank accounts in terms of tax refunds and benefits how much of that is already priced into the the markets that we're seeing right now

Sarat Sethi (Managing Partner) 00:29.720

i think you're seeing some of it leslie the markets are staying where they are just because there is this enthusiasm that you're going to get some tailwinds you're going to get it from the government you're going to get it potentially from lower interest rates and i think a lot

Sarat Sethi (Managing Partner) 00:41.960

of that is baked in especially into the higher valuation stocks we're looking at sectors that we think just have been underappreciated and you know there's been talking the last couple weeks of the four ninety three but i think if you dig deeper you look at sectors like

Sarat Sethi (Managing Partner) 00:54.400

healthcare you look at commodities basic materials they're just under owned and under and i think most momentum investors don't really look at them and say hey you know maybe i can trade in them but we think there's more earnings power and long term investing in those sectors

Leslie Picker (Reporter) 01:11.670

that's going to change in twenty twenty six it feels like they've been under owned and underappreciated for quite some time now well

Sarat Sethi (Managing Partner) 01:17.750

OK for example just commodities and basic materials you're seeing copper huge demand for copper it's a proxy for industrial supply we had higher GDP numbers and if you look at copper you know again just basic materials if you think the dollar is going to get devalued so you've

Sarat Sethi (Managing Partner) 01:32.790

got a lot of money going into gold and then you look at you know we haven't had a copper mine built in ten years so a combination of inflation industrial production debasement and these things are very small in the S and P so you get any type of incremental demand you can see

Sarat Sethi (Managing Partner) 01:48.390

stocks like freeport and you and tech resources do really well

Leslie Picker (Reporter) 01:52.590

freeport mac moran and thermo fisher are the two specific stocks you like

Sarat Sethi (Managing Partner) 01:58.030

yeah and thermo has just been you know out of favor like danaher if you look at their cash flow their growth rates and historically they've traded at you know twenty one twenty two times earnings it's trading at eighteen times earnings we're getting demand back in biotech and

Sarat Sethi (Managing Partner) 02:11.270

pharma you know this company is well known to a lot of investors and we think you know you want to be in high quality cash flow companies going into the next couple of years not to say you don't want to own the maps you know the the fab seven you can actually diversify and have

Sarat Sethi (Managing Partner) 02:26.510

earnings growth in other and high quality companies that you know not necessarily that you're playing in the weeds but you want quality going into the next couple of years

Leslie Picker (Reporter) 02:35.830

want cash flow and demonstrably so surat how do you see then the whole AI arena right now where there there's so much so much credit going into this field and so the hopes are so high for i guess a jackpot of a payoff

Sarat Sethi (Managing Partner) 02:56.590

yeah and that's certain and that's why i kind of diversification is going to work here because initially it was free cash flow working for capex you've now morphed into the SPVS and who's owning what so really you want to look at companies that earn their own cash flow and own

Sarat Sethi (Managing Partner) 03:11.510

it yes you can be you know you can play in the other parts of those sectors but i think when when when you know debt is very important here and credit is going to be really important going into a latter half of the cycle so to your point yes you can own them but now it's time to

Sarat Sethi (Managing Partner) 03:27.430

really diversified because underneath we're not really sure where the liabilities

Leslie Picker (Reporter) 03:33.150

lie is the best way to diversify next year or as people are kind of thinking about their portfolio allocation is it international is it based on sectors is it based on other asset classes

Sarat Sethi (Managing Partner) 03:44.510

we look at it more on the sector basis i think you can play international through investing in multinational companies in the US but really it's a sector basis so overweight you know we talked about healthcare commodities even financials financials are going to really benefit

Sarat Sethi (Managing Partner) 03:58.310

you've seen that this year but even more as the capital markets open up you've got more restructuring more M and A activity i think those are really key ways to play in the sector top down and then bottoms up you know stock selectivity is going to be really going into next year

Sarat Sethi (Managing Partner) 04:15.390

because you're going to get companies that will have earnings growth but the market as a whole is pretty fairly valued