Wildfires and Utility Stocks. Plus, Merrill’s Investment Chief.
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These Southern California wildfires that occurred in January have nothing to do with our equipment or our company, but leaves investors concerned that there is no backstop in the event of a fire if it were to occur in 2025.

Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe and the voice you just heard is Patty Poppy. She's the CEO of Pacific Gas and Electric or PG&E. In a moment, we'll explain why PG&E shares have slid this year. It's not the LA Fires. That's a different utility, but also it totally is the LA Fires because of something called the California Wildfire Fund. We'll explain and we'll hear from Patty.

Plus, we'll answer one of your questions about S&P 500 equal weight funds. Yes, Matt, it's your question. Stop jumping up and down for joy. It's really our pleasure. We'll also get a broad market overview from the chief investment officer at B of A Private Bank and Merrill.

Listening in is our audio producer, Jackson. Hi, Jackson. Welcome back. Hey, Jack. You are a Californian, a California utility bill payer. We've heard about people there being upset about their electricity costs. What have you seen? You're also an anomaly, which I'll explain in a moment. But what have you seen in terms of the rates of electricity?

So 10 years ago, if I lived in the same apartment, I would have paid 19 cents per kilowatt hour in 2015. And this year, depending on if it's a peak or off peak hour, I pay 37 to 52 cents per kilowatt hour. Wow. More than double.

And this is, when you say apartment, I'm picturing like a New York high rise, but you've also described this as a bungalow. This is a freestanding. Yeah, this is a bungalow court. So imagine you open a gate and there's a bunch of little homes in a row. And when we were talking earlier, you also told me about the cost of fueling, if you will, your electric vehicle. Yeah, so at that 37 cents per kilowatt, if I were to drive, say, 400 miles, it would

cost about 40 bucks. It's like a tank of gas. Yeah, like a gas car. So I'm not really gaining anything there. And if I charge during on-peak hours, it's like I'm driving a Hummer or something. That's a lot. Now, I say you're an anomaly because you pay, when we talk about your total dollar bill, almost nothing. I really don't know...

how you've managed to do this. I mean, you've explained it to me. Why is my electricity bill more than 20 times the size of yours? It's just you and your wife, and so you have this bungalow, but I still don't understand. What are you doing there to avoid using electricity? I'm trying to think. We have no...

Yeah, first of all, we're not Amish, but we do have a... Utility-wise, you're basically three-quarters Amish. Yeah, we have no washer-dryer, so we get that done at a laundromat. So I guess that electricity is paid indirectly. And also, it's really temperate here. So we're about two miles from the ocean, so it only ever ranges between...

say 50 and 85 degrees. And our heat is gas. We don't have AC. And you've rigged a Peloton to power the lights. Is that right? You have to pedal constantly. Yeah, that's the ticket. Well, congratulations on your savings. This episode will not be about unlocking the mysteries of the electricity bill. That is beyond my brain power. But we do want to unlock one mystery.

PG&E stock is down 22% year to date, as I speak. That compares with about a 5% increase for the S&P 500. This is at a moment when utility stocks are investor darlings right now. Look at the Utilities Select Sector Spider Fund. That tracks a basket of blue chip utilities. It's up almost 6% this year, more than the S&P 500. Why?

Because investors have gone bananas for all things artificial intelligence. And one thing you need for artificial intelligence is a lot of power to run your data centers. So electric utilities have become AI plays. Gosh, I hate the word play when it comes to investing money, but there I've said it.

Now, PG&E covers Silicon Valley. What's a bigger AI play than that? So why is this stock falling when much of the rest of the utility universe is rising? It has to do with those disastrous L.A. fires in January, even though that's a different utilities territory. Jackson, that's where you are, L.A. That is Southern California Edison, correct? Correct.

The city has its own municipal utility, but the surrounding area, what do you call that for short? Southern California Edison. SoCal Ed? I think it's just SCE if you see the bills. But SoCal Ed sounds like a guy I surf with sometimes. Yeah.

He's a nice guy, Ed. He'll teach you how to goofy foot a barrel wave and then you can go out for acai bowls afterward. Have I got that right? Oh, yeah. All right. Well, let me give you just the briefest of backgrounds on these California utilities and wildfires and what regulators have done there.

There are three big publicly traded utilities in California, Pacific Gas and Electric covers, I want to say like the northern two thirds of the state. That's not exactly right, but it's close. Then there's Southern California Edison to the south of that and all the way downstairs is the San Diego utility. San Diego Electric and Gas? Gas and Electric. That was so close.

So think about this business for a minute, PG&E. It has more than 100,000 miles of high voltage line. California is a humongous state. It's a woodsy state and it's becoming hotter and drier. Basically, there are going to be fires.

And in the past, PG&E pleaded guilty or settled or paid fines for its involvement in fires that were so fierce that they have their own names. The Camp Fire in 2018, the Kincaid Fire and Easy Fire in 2019, one called Zog in 2020, Dixie in 2021.

Okay, so Patty took over in January 2021, and that was six months after the company had emerged from bankruptcy. If you look at the company's most recent quarterly report, it touted a, quote, second consecutive year of zero major wildfires caused by the company's equipment. That doesn't sound like a bragging point, right? Only two years without starting a big fire? And what do we mean when we say major wildfires?

But it is an accomplishment compared with where the company was, considering that the conditions have not gotten any easier. They've gotten harder. As you will hear in a moment, Patty estimates the PG&E has reduced its fire risk by more than 90%. They've covered power lines. They've buried power lines. They've taken down some trees. They put up stronger poles.

As you will also hear, there are pretty much always fires when you run a big utility. Little brush fires. The key is to put them out quickly before they become major problems. And PG&E has invested in that too.

If you put fires aside for a moment, business is good. Core earnings per share rose 11% last year. Operating cash flow jumped to $8 billion from $4.7 billion. There's been excellent growth from data centers. PG&E is predicting 10% earnings growth this year and at least 9% a year over the next few years. For a company that was recently trading between 10 and 11 times earnings, that's excellent growth.

That utility ETF I mentioned earlier, that trades at closer to 18 times earnings. Jackson, do you remember the money manager we had on who recommended PG&E stock? Yeah, that was Richard Taft of Columbia Threadneedle. And that was in October of 2023. Right. So there are investors out there that have recognized this discount for the stock. And there was a solid recovery going on for the stock for about three years until this year. So what's going on?

What we call the LA fires. It's a bunch of fires with different names. Two of the biggest ones were Eaton and Palisades. Those are probably going to be among the most expensive fires in history. They were incredibly destructive and these are pricey places. Edison International, that's the parent company of Southern California Edison, which is directly exposed here. That stock is down 34% year to date. So about 12 points more than PG&E.

Since 2019, all three of these companies, PG&E, Southern California, and San Diego Gas & Electric, they've been part of what's called the California Wildfire Fund. It collects funds from utilities and from their customers, and it currently has the ability to pay $21 billion in claims.

No one knows what the claims might look like for the LA fires. It depends in part on who's at fault and even what we mean by at fault. Southern California Edison has said that it has found irregularities with some of its equipment near the origin of the Eaton fire. It doesn't say that its equipment caused the fire. It's still investigating. As we'll hear from Patty, this California wildfire fund is really a first of its kind in the country.

One of the key things that it does is establishes a safety standard that companies have to meet ahead of time. There are also liability caps for companies that are related to the size of their equity rate base. That's an industry measure of assets.

For Southern California Edison, the cap is just over $3 billion. It seems to be, and you don't always know what's in the mind of investors, but it seems to be that investors aren't so much worried about the direct exposure for the utilities as they are about the depletion of the California wildfire fund and how much that would cost utilities in the future to replenish it.

I did see one estimate on that from JP Morgan. It is bullish on PG&E. It estimates the gross liabilities related to Eaton. Keep in mind that liabilities are not the same as total costs. Gross liabilities related to Eaton could come in at $16 billion, according to JPM. And after settlement reductions and other adjustments, the hit to the California wildfire fund could be $8 billion to $9 billion.

It's way too early to do anything but educated guessing on that figure. J.P. Morgan writes about PG&E shares, we anticipate a policy and or regulatory response could catalyze a return to prior levels. I

In other words, if I read into that a bit, regulators don't really want the local utilities to fail. And if they come up with a response that is comforting to investors, the shares could bounce back. JPM says it prefers PG&E shares to Southern California Edison because of PG&E's lack of direct involvement in the LA fires. BMO Capital Markets recently initiated coverage of PG&E with an outperform rating. Its price target recently implied about 50% upside for the stock.

It calls the company a, quote, rare deep value opportunity with premium visible growth. That's their thought on the stock. I don't have any recommendation either way, but I was pleased to recently have a chance to speak with Patty about the work she's done there at PG&E and the path ahead. Let's jump into that conversation now. What do you think it is that investors are most interested to hear from you? What's top of their mind about your company right now? I'd say wildfire risk.

and investors' exposure to wildfire risk in California. You know, these Southern California wildfires that occurred in January have nothing to do with our equipment or our company, but there's a legal construct in California. And that legal construct has a wildfire fund from which victims are paid in the event that utility equipment was involved. And so as a result of the Southern California wildfires, the degree of exposure

in the event that one of these fires is the cause of a utility, which we do not know yet, but if it were, it could take the whole fund or a large portion of the fund, and it leaves investors concerned that there is no backstop in the event of a fire if it were to occur in 2025. Investors are worried, but in fact, there's no other state in the nation that has this kind of regulatory protections for investors

that also protect and provide for people who have had a loss as a result of a wildfire. How would you quantify and describe for people what you have done since you got there to reduce risk, to bring down risk? I mean, I was kind of struck by the company has more than 100,000 miles of power lines. It's an enormous state. One third of it I read somewhere is wooded.

And, you know, it's becoming hotter and drier and you put all these things together. I don't want to oversimplify the past issues, but you have power lines that come in contact with trees. It can start fire. So you've had to address that and cover some lines, put some lines underground, trim some trees, put up some stronger poles, etc.

Have I got that right? And if I asked you, how far along are you in that job of risk reduction? What would you tell me? I would tell you that we've reduced our wildfire risk and exposure of a catastrophic wildfire by over 90 percent. We have layers of protection, some of which you described, like the fundamental hardening of the system, doing better inspections. We've increased our inspection frequency by 600 percent already.

with the use of drones and new technology, we have invested billions and billions of dollars into strengthening and making our system hardened and safer. And we also can proactively de-energize lines in very targeted areas. So for example, in January of this year, we had three public safety power shutoffs. So my

hazard awareness center could see the incoming weather we could enable our system and we have it sectionalized so in this case we had a couple transmission lines and a couple distribution lines affecting about 50 000 customers total that were de-energized proactively to make sure that our lines were not at risk under really risky conditions and then you layer in one last layer of protection is in the event that there is an ignition because electric equipment by design

sparks. That's how it's designed everywhere in the world. When there is a spark in an area that has the risk of fire, we have AI-enabled cameras that can notify first responders automatically within a

an instant of the ignition, it is most routinely first notification, but sometimes the only notification. So the situational awareness, the technologies, the tools, plus the system hardening, our system has never been safer. I want to ask you about the business, but one last question. This is just a nitty gritty thing, but on the earnings announcement, it said something about no major wildfires that were caused by your equipment for two consecutive years, which, you know, the

That's great. But when you say major, is that related to this? Like, are there minor incidents all the time and you catch them quickly or have there been a few minor incidents or what does that look like? Yeah, every utility has ignitions and we do everything we can to minimize that risk. But by design, it will spark. There are something we called CPUC, our California Public Utilities Commission, reportable ignitions.

And we report those any time there's an ignition that results in the spread of a fire of more than one linear meter. So you can imagine that's small. That ignition rate is down over 75 percent. The ignitions on our highest risk days in our highest risk areas are down about 25 percent since prior to when we were putting in all this equipment.

You're the CEO of a power company. You do not, to my knowledge, put on a fire helmet when you get up in the morning. But conversations, I mean, to your point earlier, people want to talk to you about fires and liability and risk. And meanwhile, there's like the business of distributing power and gas to your customers. Are there days where you say, boy, I wish somebody would ask me more business questions. I want to talk about how the business is going. And part B of that question is, how's business going? Well,

Well, you know, I was the CEO of another utility and I will say in retrospect, it seemed a lot easier than this one. I didn't have to talk about fire. So I have learned a whole new language and techniques and I'm proud of the team for everything that we have learned and we're still dissatisfied. We know that there's more that we can do. We're super curious every day about

How do we mitigate this risk that our equipment can cause? We've got to make sure we can keep our communities safe. And we really have taken a stand that catastrophic wildfires shall stop. So transitioning to the business, I like to tell people we're out of the triage phase post-bankruptcy when we had to really put in all of these safety measures and have our emphasis on safety. And now we're into a phase of our company where we can actually deliver for customers safely.

something we call our simple affordable model. We can invest in infrastructure that helps keep our communities powered, prosperous, safer. We happen to serve the Bay Area, which includes the headquarters of the major tech companies in the world. They're growing. That helps us grow in such a way that we can actually reduce costs.

for the rest of our customers because we're more fully utilizing our existing assets. I hear those folks are putting some money into data centers and I hear that those data centers use a good few watts when they're up and running. How's that affecting things? So we have new applications for 5.5 gigawatts of new load to serve

large data centers. And in fact, 5.5 gigawatts, number one, it's a big number, but it's a big number even relative to our peak here in California. The PG&E's peak is about 20 gigawatts. So you're talking about 20% of additional demand on top of our system is very beneficial when done right for our residential customers as well.

There's probably 1.4 gigawatts that are most furthest along in our engineering studies. And those customers have agreed to go to the next stage, which moves towards construction phase. That 1.4 gigawatts will enable us to reduce all of our other customers' bills 1% to 2%. You have nuclear assets, correct me if I'm wrong. And I'm in New York. I live in an area where we shut down a big nuclear power plant here.

They shut it down earlier than it had been. I read these headlines about in some places they're powering them back up to, you know, co-locate them with data centers, this and that. What do you hear about your nuclear power and what people are saying about it and its prospects going forward?

Yeah, we have a 2200 megawatt two unit nuclear power plant at Diablo Canyon. It provides about 17 percent of the clean energy, carbon free energy here in California, 17 percent. And it was scheduled to close last year. One of the units last year and one of the units this year. The governor really realized what a benefit that plant was to the state, that kind of baseload greenhouse gas free energy. And he decided.

the legislature and they followed suit and they passed legislation to extend the life of that plant by five years. We're in the process of filing for an NRC extension for 20 years because they only do them in 20-year chunks. I think we would advocate that it's a very valuable resource to the people of California, especially when you think about greenhouse gas, carbon-free emissions to serve this growing load of our large data centers. When I look at your stock, it's down...

significantly year to date, not as much as that other California utility that's more in the direct area of those LA fires. But it's clear that like it's falling in tandem or sympathy, or maybe it's just investors concerned about that wildfire fund that you mentioned. Do you view that as an overreaction on the part of investors? Do you think that they really understand your story right now? Or do you think there's something else that you need for them to know about it?

Right now, my goal is to make sure that our investors can see all the reasons to believe in California policymakers and that California policymakers will provide the important legal constructs so that their investment is safe. And it's important for my California policymakers to trust that investors' intentions are well-placed. Is their concern overstated? I don't get to define their concern levels, but I do think

Once you pass that threshold and we get the fixes that are necessary that I'm confident we'll see in the next year, then you layer in the rest of the story. There's not a higher performing utility. We have the highest earnings growth, rate-based growth. We have

a real reputation for operational excellence. We reduced our operating maintenance expenses again this year by 4% against a target of 2%. We have growing load. We have more efficient financing as we continue to improve our credit metrics, our balance sheet. We did a $3 billion equity issuance end of last year, fully funding our five-year capital plan. The fundamentals of the story are extraordinary, best in breed,

But you got to get past the safety threshold first. And so we'll work closely with policymakers and our investors to make sure they can trust one another. Thanks, Patty. Coming up, we'll answer a question about equal weight S&P 500 funds. And we'll hear from the chief investment officer at Bank of America, Private Bank and Merrill. That's next after this quick break.

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Welcome back, Jackson. How was your vacation? You took a trip recently. I hinted about it. I didn't want to blow your cover and tell people exactly where you went. You want to tell us anything about it? Well, you did kind of give it away. You said it rhymes with Bratamala.

It was a strong hand, I'm not going to lie. For people who guessed Guatemala, they were correct. And how was it? It was great. We went to a wedding. We spent most of our time in Antigua and in and around Lake Atitlan. So it's a lake surrounded by volcanoes and we went on lovely hikes and...

Great food, nice people, a ton of fun. Sounds great. Guatemala is the first country I ever went to outside the U.S. many, many years ago. Lovely place. Now, I have a listener question. Matt, right? Yeah, we have Matt from Greensboro, North Carolina.

My wife and I are traditionally S&P 500 index investors, and I'm just wondering if there is going to be future volatility in the IT space, would it make sense for us to reallocate into the S&P 500 equally weighted index fund?

Love the show. Thank you, Jackson, for keeping Jack out of trouble. Thank you, Matt. Jackson, is that what people think of us? That I would turn to a life of crime if it weren't for your positive influence on me? Is that where we're at now? You're just a huge troublemaker at heart, and I'm keeping you away at every turn. Well, thank you for that.

Matt, let me give you a quick response to your question, and then we're going to hear a little more about it when we hear from Chris Heisey at B of A in just a moment. The regular S&P 500 index that so many investors are exposed to, including in their 401ks and such, that weights companies according to market value. The biggest companies have the most sway.

A February report from B of A points out that passive investing, just tracking index funds, that's reached critical mass. It's 54% of listed U.S. stock funds. It's crowding out active management. And when you have these passive flows of funds, in other words, people just putting money into index funds without regard for company fundamentals, B of A says you can get more concentrated markets and higher risks.

It can magnify both the upside and the downside. Today, B of A writes, new economy sectors make up 53% of the S&P 500's market value. That's the most in 60 years. You've heard of the nifty 50, a bunch of large cap stocks that everyone piled money into in the 60s and 70s. Those ended up falling from 40% of the benchmark down to 23%.

So in other words, we're higher now than those were all those years ago. A similar thing happened during the dot-com stock bubble in the late 1990s. A handful of companies making up a disproportionate share of the index and then falling. Now B of A also writes, don't sell just because concentration and valuations are high. These things are really difficult to time.

One thing you could consider, as Matt suggests, is an S&P 500 equal weight fund. Not for all your money, not for most of your money, but maybe for a slice of your money to diversify against that market value weighted fund. B of A writes that the equal weighted index, and by the way, it's just what the name sounds like. It's got an equal amount of money in each of the 500 stocks. That gives it different sector weightings than the regular S&P 500 index.

It's less loaded up on tech and these new economy stocks, in other words. That equal weight index has outperformed the regular market value weighted index by about a percentage point a year since 1958. There have been five periods where the regular S&P 500, the market value weighted index, has outperformed, and these periods typically last 16 quarters, according to B of A. It writes that today...

the market value weighted index is two and a half standard deviations overbought relative to the long-term trend. In other words, the regular S&P 500 index is much more expensive relative to the equal weight index than usual. And that is about all I have to say on the subject. Let's hear from Chris. Chris Heisey is the chief investment officer at Bank of America Private Bank and Merrill. He's the guy who advises the company's advisors on what advice to give.

So I'd like to check in with Chris now and then to hear what investors should make of the market and where he thinks we're headed from here.

Let's hear part of that conversation now. When we were coming into this year, like many others, I don't like to use the word constructive because that has a lot of different meanings to it. But we were overweight equities relative to fixed income. We still are for three primary reasons. Number one, economic resilience. The consumer's been through a lot through the pandemic, came out the other side, yes,

It was a lot of stimulus, you know, 11 trillion in total if you include what the central bank did. But now that excess savings has been wound down, we're back into a normal cycle again where you point to your job

wage growth, you manage your household a certain way, even though rates have risen, that hasn't impacted the consumer as much. It has impacted the companies that had new maturities coming on, that had to issue new debt, but not the consumer, generally speaking. So the consumer's been resilient, the economy's been resilient, and corporate America has been able to produce earnings to feed into that high multiple. The other second point is that we are in an asset-light era,

Companies are becoming less labor intensive, number one, in general. Number two, they have less fixed cost, heavy fixed cost in relationship to prior decades. And number three, the U.S. and the globe has less heavy assets. What I mean by that is more and more companies are in the world of innovation, in the world of tech, in the world of copyrights, in the world of software, patents, and

And that by itself has less heavy costs. If that's the case and you buy that argument, then having a higher multiple makes sense, even with a rate structure that's very similar to what we had in the 1990s. That doesn't mean the vulnerability is not there. You're still vulnerable if you don't get that earnings momentum. So you got high vulnerability, but it makes sense in a world that's increasingly becoming asset-light. Here's my last point on this, Jack.

The next decade, we have high conviction that could be one of the best bull markets, first, second, or third, than we have witnessed in the past three or four decades. And the question is why? Well, because the supply of assets is dropping. Less public companies, less ability to invest in certain assets. But the demand for assets is going up. More people need to retire comfortably. There's worries over Social Security and other things.

And people are starting earlier with new structures to enable them to advance their wealth. So if you've got a higher demand for assets and the supply of assets is dropping, that's where you get your prices staying sticky and your valuation staying higher than what people think they should be.

I appreciate what you said at the beginning that you avoid using the word constructive. People tell me they're constructive on something. I always wonder, what does that mean? I should build it rather than buy it? Do I need tools? What's going on here? I just want to know whether I should buy something. So I do appreciate that. Now, the U.S., because of all this innovation, some of these share prices here have raced up and some of these companies have

They look like, you know, they're ambitiously priced, some of them, let's put it that way. And as you point out, that's justified by great earnings growth. When we look overseas, it's just been a long, long time that the U.S. has outperformed. But if I kind of squint and look at the numbers just so I can kind of see Europe starting to come around, is that a head fake? Is that a blip? Or, you know, what do you think about valuations overseas relative to the U.S. right now?

Another financial term overused. It's a relief rally. It might be a horse race this year with Europe and the U.S., largely speaking because of enthusiasm over a potential end to Ukraine-Russia war, the fact that oil prices are coming down, and the fact that China's growth is coming back up because of stimulative measures there, lending itself to better economic wins for Europe because they're large trading partners with each other.

But in order for that to continue, you're going to need much greater movement towards what I would say better economic growth, better economic resiliency, and how that feeds into the corporate sector. What's interesting here, Jack, is in the last 12 months and so far to start the year, two or three of the top stocks in Europe –

happen to get a majority of their revenues and earnings outside of Europe. That's pretty telling to me. And when we talk to investors that are there or global investors, they too want to see that economic dynamism and they just they can't see it. So relief rally is what comes to mind for me. OK, not enough to be cheap. You need some more growth to get excited about Europe. What about if you're an investor in the U.S.?

and you hold an S&P 500 fund. So you know that the fund has been led by this small group of very large tech companies. Is it enough to just stick with that fund right now and stick with that cap weighting here in the US? Or do you want to be doing some things different from what has worked in the recent past? There has been this call on the part of Wall Street and a lot of us in our profession to

The rotation, the rotation, the rotation. It's coming. It's here. I'm watching for it. I keep watching. I don't see it yet. And I think a better way to think about it, perhaps, is it's a rebalancing of money. So if you're an asset manager and you're an investment manager, a chief investment office, you're always looking for the next dollar of investment to be in something that's

gives you a little bit more better reward given the risk you're going to take. So with that as the backdrop, equal weighted S&P, in our opinion, should either be added, not replaced,

but either added to anyone who is investing in just a cap-weighted S&P 500. And it's because a blend of those two is a nice way that if you're wrong and the leadership doesn't ultimately change, which we're starting to see some of it. You know, some are saying the MAG-7 is the LAG-7 right now. I'm not going to get that cue on that. But certainly when earnings momentum starts to wane and slow down just a little bit, the asset management community has their next move.

number of companies they want to own in their portfolio. And they're slowly adding money to those areas. Financials are the leading sector to start this year. Parts of utilities have nothing to do with tariffs. So

you're going to start to see some of that but it's very quiet it's sneaky and it's not just one big button that someone pushes and all of a sudden you wake up and the rotation's gone so i would say think about equal weighted s&p to be added i'm going to guess that about half of people who are hearing this conversation are going to know what that is the normal s&p 500 it's weighted by market capitalization so the biggest companies get the most oomph in the index the

the equal weight index that like, like the name says, every company gets an equal weighting. So

You tend to have different sector weightings, different tilts in the portfolio. If you look at that portfolio, what do you like about those tilts? Is it cheaper? Is it different sectors that you think are going to come on strong? What do you like about that equal weight? Yeah, I apologize for saying another overly used term, the second derivative. The second derivative in that area is

of the marketplace and their earnings, they're now starting to get more relatively attractive. What does that really mean? They went from having collectively a majority of the S&P companies over the last couple of years were not earnings attractive.

They're slow growers, some of them unprofitable. And when you change that narrative to becoming slightly positive, to becoming attractive again, that delta is very attractive to an investment manager. And that's why they start to add more money to those areas. And that's when those prices start to climb, relatively speaking, to those others that have high multiples. So they're now becoming positive earnings contributors.

Sometimes I hear the words green shoots when I hear that next two second derivative, meaning you're talking about the rate of change of a rate of change

And so maybe these companies aren't the fastest growing yet, but they're starting to grow faster than they have in the past. And that's worth paying attention to. Do I have that right? You do. You do. And some of that has to do with the fact that we just tilted back up into expansion territory in the manufacturing indices, which hasn't been the case for over two years. Longest stretch ever.

where you're now starting to see an expansion. Some think it's because of on-shoring coming back. We're not quite there yet, but a lot of it has to do with the fact that outside the United States, which are very manufacturing heavy, has now started to do better, particularly China. And therefore, some of the companies that are in the world of changing their better story are manufacturing intensive. We had a goods recession, right? After the pandemic for a while. So that has been wound down and now you're seeing inventory start to come up.

Some of it may be because of tariffs, fear of tariffs. But expansion territory in manufacturing lends itself to more cyclical companies doing well versus a few years ago when they did terribly. I wonder if there's a mistake that you see people making out there or when you talk with the thundering herd, as they call Merrill's army of financial advisers.

Is there a question that's on everyone's mind or something? What's out there that you think people are not seeing that they should be seeing right now or something you think that the ordinary investor might be getting wrong?

Well, it's healthy to always be guarded. That's a healthy way to think about, okay, what am I missing? But what gets unhealthy as it relates to building wealth and ultimately watching your dollars grow is, again, focusing on too many of the negatives. The likelihood of all the negatives we all talk about coming through and being a conclusion is very low.

And you see it every decade, every two decades or so. The second principle is recessions are hard. They don't happen often. You need a lot of leverage. You need an event to occur and then behaviors to take over and a massive pullback. So trust the facts. Recessions rarely occur.

Bear markets with recessions rarely occur. Overwhelmingly, bull markets are there. And then, of course, you get range bound markets. And that's where the dividend side of things pull through. So just be simple about it. Don't overbake everything you see. And know this one last principle. And I said it before. Time in the markets is your most powerful tool.

Thank you, Chris. And I want to thank Patty and Matt and SoCal Ed. Keep that board waxed, Ed. We're going to hit Dawn Patrol soon. I'll bring the avocado toast. Unless you're off gluten again. If you have a question you'd like answered on the podcast, just tape it on your phone. Use the voice memo app and send it to jack.how. That's H-O-U-G-H at barons.com.

Thank you all for listening. Jackson Cantrell is our producer. If your electricity bill is lower than his, you live in a tree fort. Say hi to the other Ewoks for us. You can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. If you listen on Apple, write us a review. See you next week.