The Setup: Records, but a Crowded Trade
Markets are sitting at or near record highs. The Dow is at a record, small caps have hit a record, and while the broad S&P 500 may not be at its own record, big technology names are once again at the top of the leaderboard. That tells us something about investor positioning: big tech has become the crowded trade, the reflexive go-to trade ever since the war began.
But the more interesting opportunity lies in reversing course — a "back to the future" trade. The reasoning is rooted in what was happening just before the war. In January and February, the market displayed massive breadth, with broad participation beneath the surface. The unglamorous, non-headline stocks — what can be called the "unmagnificent 493," the index constituents outside the handful of mega-cap leaders — were performing exceptionally well. The argument is that the market is heading back to that regime of broad participation.
Why the Rotation Happens: The Consumer Recovery
The catalyst for this shift is a recovery in the consumer. Several threads support this:
- Inflation expectations are coming down, a consequence of a recently struck deal.
- Consumer confidence has been at multi-year lows. The key question is what revives it. People have jobs, so employment is not the problem. The problem has been high gas prices.
- Gas prices have fallen 54 cents from their peak on May 20th.
- Inflation expectations carry the highest correlation to consumer confidence. As they fall, confidence should rebuild.
Given that, the logical move is to focus on a consumer recovery and the rebuilding of consumer confidence over the summer — and to move out of crowded technology.
The "Lag Seven": Why Big Tech Is Less Magnificent
The mega-cap technology leaders — once the "magnificent seven" — are increasingly being called the "lag seven" because of a deteriorating financial picture. The core problem is cash. These companies have effectively run out of free cash flow: their capital expenditures now run at roughly 98% of free cash flow. As a result, they have flipped from being net buyers of their own stock to net sellers.
The financing progression is telling. To fund their capex commitments, these firms moved from cash-flow financing to debt financing — and debt financing has now hit its cap. Several are being forced to issue equity, diluting their existing owners for the first time in many years. Google has already done this, Meta is now doing it, and more are expected to follow. That is not a good scenario for the owners of these businesses.
The sequence — from cash-flow financing, to debt financing, to equity financing — points to a logical next step: no financing at all. That is why the expectation for the next round of quarterly (Q2) earnings is that a couple of these companies will back off their capex commitments. And that retreat is precisely when bargains in the AI trade will appear.
Is the equity issuance just opportunism?
A natural counterpoint is raised: perhaps the equity issuance isn't a sign of financing distress at all, but simply an attempt to tap the abundant liquidity that exists right now. There is a wave of IPO fever — SpaceX activity, with a couple more mega-IPOs coming this year. Maybe these companies are simply going to market because the liquidity is here and they want to strike while the iron is hot.
The answer: "When the ducks are quacking, you feed them" — yes, you raise money when demand is there. However, if these companies could still do debt financing, they would. The fact that they are forced to move to equity and dilute their owners signals that they have exhausted the cheaper options. The opportunism explanation does not override the underlying message that financing capacity is being depleted.
The Timing: Fifth Inning, Not the End
What do you do with the AI winners right now? Trim them. The AI trade is judged to be in roughly the "fifth inning" — and it's stressed that the exact inning doesn't matter (fourth, third, fifth, sixth). The crucial point is that we are not at the end of the AI trade; it likely has many more innings to run. This is not a call to abandon the theme.
The reason to trim now rather than buy now is that the crowded AI trades are super-crowded and super-overbought, and better opportunities to buy them will come later in the year, before the election. Several sources of potential volatility lie ahead:
- Wars or war-related developments looming.
- A new Federal Reserve chair, who historically gets tested in their first year.
If volatility arrives over the summer, the question becomes where you want to be positioned. The answer: in more defensive stocks, in lower-valuation stocks, and in those names that had begun taking off in January and February — before the war — and have since been "left for dead," where significant opportunity now exists. In short, when everyone else is digging into the crowded, overbought tech and AI trade, the place to "zag" is the consumer, which has been left for dead: consumer discretionary, consumer staples, and some defensive stocks should serve investors well in the coming months.
Consumer Staples and Healthcare: The Cheapest Corners of the Market
Consumer staples is not a sexy sector — practically nobody wants it; you can't give it away. But that is the point. The two lowest-valuation sectors in the S&P 500 right now, on a price-to-sales basis, are healthcare and staples. The last time these sectors carried such a low relative valuation versus technology was at the 2021 tech peak and the 2000 tech peak (26 years ago).
A caveat is acknowledged: this cheapness can persist. Staples could stay subdued for another year. But on a relative-valuation basis, many of these defensive stocks pay dividends, and dividend yield comes into favor precisely when interest-rate cuts arrive and demand for yield rises. With these stocks, the downside is protected while the upside could be meaningful if volatility hits.
Why healthcare now, after last year's head fake?
A skeptical question is posed: calling healthcare's "turn" is not new — it was called coming into this year, and there was a head fake last year where momentum appeared and then faded. What backs up the conviction this time?
The answer is framed around a long-term, turnaround-investing approach: buy businesses when they are out of favor, accept that it takes about three years to get doubles and triples, then rinse and repeat. There's no claim about whether healthcare rallies in the next two months. But over the next two years, the value per dollar is expected to deliver a great return with downside protected — which is why exposure to the sector is favored.
Two Specific Ideas
Baxter — a boring healthcare turnaround
The first pick is described as "as boring as it gets." This company doesn't fly to space; it makes IV bags, infusion pumps, hospital essentials, and anesthetics. The setup:
- The stock trades at roughly a nine-times multiple — its lowest in 20 years.
- A new CEO, Alex Hitter, spent 10 years at Danaher and brings the "Danaher way." At his last company, ASTS, which he ran, he produced a five-bagger, and he is applying the same operating principles here.
- The company sold its kidney business — a low-margin, slow-growing segment that had weighed on the valuation multiple.
- They deleveraged the balance sheet, and margins are starting to increase.
- They are recovering from Hurricane Helen, which had knocked out the IV business for a period.
On a normalized basis, the company is expected to earn around $3.50 a share. At a nine-times multiple it is cheap, but the normalized multiple of about 18 times would take the stock to roughly $55–$60 over the next two to three years — from current levels, almost a three-bagger (two-and-a-half to three times).
Hormel — a protein-centric dividend story
The second idea is a food stock and a dividend story, and it aligns with GLP-1 (weight-loss drug) trends because all of its brands are protein-centric. The portfolio includes Planters nuts, Skippy, Jennie-O, Applegate, and Spam — with the note that people love Spam far more than one might expect.
Key points:
- The company has paid a dividend for 65 consecutive years and has raised that dividend every single year for 65 years.
- It currently offers a 5% dividend yield — income you collect while you wait.
- Margins had been hurt by high beef costs, but input costs are now coming down, so margins are rising. The company has also cut costs.
- The stock trades at a super-low historic multiple and has already moved about 20% off its bottom in recent weeks. It is expected to keep climbing over the next couple of years, with patience required.
- The thesis sees this name potentially doubling, with downside protection and a dividend paid along the way.
The Bottom Line
Are these two stocks going to the moon or to Mars? No. But the trade-off is deliberate: rather than paying 100 times sales for crowded, overbought names, these positions offer downside protection and get you paid while you wait. The overarching strategy is to trim the crowded, expensive AI winners — without abandoning the theme, since the trade is far from over — and rotate into the beaten-down consumer, staples, healthcare, and defensive names that combine low valuations, dividend income, and protected downside ahead of a potentially volatile summer and pre-election period.