VIDEO: Construction, Meta and Your Other Office Hours Questions Answered

In this week’s reader-submitted edition of Portfolio Office Hours, Chris Versace explains why we’re watching the impact of higher rates on construction activity outside of data center. He also previews what matters in Meta’s (META) earnings and explains why Microsoft (MSFT) is a candidate for a higher price target rather than a sale.

Chris also walks through the Bullpen, from Dutch Bros’ (BROS) commodity headwinds to Linde (LIN) as a possible helium-shortage play. We fielded a few questions on SpaceX (SPCX), sharing what it would take to move SpaceX into the Portfolio, and why a Tesla (TSLA) merger isn’t a reason to wait.

Those answers and those for other questions can be found in today’s video or in the transcript below.

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Transcript

Chris Versace: Hey everybody, Chris Versace here. It is Wednesday, October 21. Earlier this week, we shared that we were going to try something a little different, a twist, if you will, on this week’s Portfolio Office Hours. I asked you to submit your questions as if we were having Office Hours so I could collect them and answer them in today’s video.

It’s just something a little different we’re trying out. If there’s a positive reception, we’ll do it a little more. If not, we can always go back to the existing format for Office Hours. So, with that, let’s get to some of the questions.

United Rentals and the macro backdrop

babe sevens says: “Hi, Chris. From what I recall, when the Portfolio sold United Rentals, you had some concerns about macro conditions. Do you still have those concerns? Is that a reason to keep it in the Bullpen? Would you sell United Rentals if it were still in the Portfolio?”

All right, babe sevens. One of the big concerns we had about United Rentals was what we were seeing on the inflation front and what that meant for higher interest rates, and we’ve obviously started to see that play out. We were also watching Treasury yields. That concern has played out on the housing front, where mortgage rates have moved higher and we’ve seen a slump in housing starts and related activity, including the September housing starts, particularly single-family starts. We talked all about that yesterday. But the real question is the flow-through to non-residential construction at the margin.

In a follow-up, you highlighted that the outlook for data center construction looks very favorable. I agree, which is why we have the positions we have in the Portfolio on the chip side, networking and the like. But my concern with United Rentals is the incremental headwind on the housing front, and whether higher rates slow other construction activity at the margin.

As we move through the current earnings season, we’re going to pay close attention to what equipment companies like Terex, Caterpillar and, to some extent, Deere, even though it’s more agricultural equipment, have to say. We’ll also listen to construction-related companies such as Granite Construction, Vulcan Materials, Martin Marietta and the like. And this may be a little surprising, but we’ll also pay attention to what a variety of REITs are saying about their plans for new facilities and locations, and what that means for non-residential construction.

Meta Platforms earnings preview

The next question comes from Khelms5148: “Chris, Meta reports Wednesday. What’s your read going into the earnings?”

We touched on this a little in today’s 8 Key Things, using some favorable Sensor Tower data for Muse as a springboard. I think the numbers are going to be good, and I think revenue guidance will be favorable. We continue to see Meta benefiting from the ongoing shift from analog advertising, meaning newspapers, radio and TV, to digital across its platforms, and it continues to use AI to improve monetization. That will be one of the key metrics we look for in the presentation Meta tends to release alongside its earnings call tonight.

As I pointed out in this morning’s comments, though, the real focal point is going to be AI adoption and usage on an external basis, the benefits on the internal side that I just mentioned, and what that means for margins, especially as Meta ramps its spending to scale up Muse. Also, coming off SpaceX’s big quarter-over-quarter increase in capital spending, with even larger plans for next year, what does Meta say about its own capital spending plans? Does it simply reiterate this year’s plan and say it expects more next year, or does it get a little more granular? These are the things I think folks are looking for.

The other thing, even though it’s early days for Muse, is what we hear from the company about subscriptions. Remember, the data we’ve seen on Muse so far shows robust downloads, but downloads don’t necessarily translate into subscription revenue. So, we’ll want to hear about that, and maybe some color on whether we’re seeing adoption from individuals, from enterprises or both, and what the plans are for the follow-up. Those are some of the things we’ll be looking for tonight when Meta reports.

The Bullpen: Dutch Bros and Neostellar

Next, my good friend Mike, or as he’s known around these parts, Beach Bum, has two questions. The first: “When it comes to the Bullpen, I cannot imagine why stocks like Dutch Bros and Neostellar are still in there. My question is: which of these would you defend to the end if someone challenged you on it, and which ones would you struggle to justify?”

Hmm, interesting. The reason we continue to have Dutch Bros in the Bullpen is that if we see some relief on key input prices like coffee, sugar and dairy, it could become an interesting play as the company continues to extend and expand its footprint. That footprint expansion was a key part of the story for us. Given concerns over consumer spending, as well as those higher commodity prices, the shares have been punished. Hence, we’re keeping an eye on them should we see those commodity prices fall off. But if I had to defend it to the end, Mike, it would be in the Portfolio, not the Bullpen.

As for Neostellar, there’s another question coming up about it, so I’m going to hold that for now. But remember, we exited it, and we’ll have more to say about that in a moment.

Microsoft and its price target

Mike’s second question: “Another one for you, Chris. With Microsoft well past the 12- to 18-month price target of $500, what would it take for you to sell it and apply the funds elsewhere?”

I think the right question isn’t what it would take to sell it, but what it would take to increase our price target. I’ll handle both. When the company reports, given its resegmentation and how it will be breaking down its business, the real keys are going to be Azure and cloud growth, AI monetization, margins and what Microsoft says about its incremental spending. The rest of the business is not nearly the driver it used to be. That’s what we’ll really be focusing on.

Given all the data points we’ve seen about rising AI adoption and expanding usage, I suspect Microsoft, given its position in cloud, is going to reap the benefits over time. That has us inclined to revisit our price target. The flip side would be if Microsoft were to suddenly say it’s not seeing any more uplift from AI adoption, and it has excess data center capacity. That would be worrisome, because it would mean decremental rather than incremental margins. Maybe it would get aggressive on pricing to fill that capacity, which would again weigh on margins and bottom-line performance.

But I don’t see that. If anything, looking at today’s comments from Super Micro Computer, the capacity ramp at SpaceX and what we’re likely to hear from Meta tonight, we’re still in the very early innings of AI adoption and expanding usage. So, we’re not inclined to sell. We’re more inclined to revisit the price target when we have a clearer sense of what Microsoft sees, in other words, later this month.

Income investing

Scott, better known to everybody as 17942, has a couple of different questions. The first: “Does TheStreet offer a format for retirees and income investing?”

Scott, I’m only responsible for the Portfolio here, although I hope you’re all checking out Stock Market Today. I think it’s a pretty interesting new addition to TheStreet’s lineup. I would flag the question to Jason Meshnick and talk about more income investing articles. I used to write, as did a few other folks here, columns about dividend stocks, both those with enticing high dividend yields, while pointing out that a high dividend yield can sometimes be a red flag, and companies delivering an increasing dividend policy for their shareholders.

So, I think it’s a good idea, and hopefully we’ll be able to do something around it. Remember, that’s not the main focus of the Pro Portfolio, but we do have a good number of holdings that kick out some very nice dividends, and a number with an increasing dividend policy.

The Iran war, the 10-year Treasury and stocks

Scott’s second question: “There are concerns that the Iran war may carry on longer than expected.” I’ve been saying this for a long time: duration, duration, duration. The question continues: “That means inflation and interest rates will continue to climb. Do you believe the 10-year will go over 6%? At what level on the 10-year will it start taking down stocks?”

Great question, Scott. What you’re really asking is, as the risk-free rate moves higher, are folks more inclined to sit on the sidelines and collect the higher interest rate, either in a high-yield savings account or some other vehicle? I do think that will tap some of the capital out of the markets. In fact, I’d argue it probably already has at the margin. Does this mean fewer people might be enticed to buy the dip, because the TINA argument, that there is no alternative to the market, no longer holds? I think that’s likely the case. But we’re going to continue to focus on putting the Portfolio’s capital to work in companies that are well positioned to benefit from multi-year tailwinds and poised to deliver superior earnings growth.

ROBO and PACCAR

Next question from Scott: “This looks to be a good price to add more shares of the ROBO Global Robotics & Automation ETF and PACCAR. At what price are you looking to pick them up?”

That’s a very timely question, because I wrote an alert about just that yesterday, October 20. I hope you caught it, Scott.

The helium shortage

Scott also says 60 Minutes did a show on the shortage of helium, which is used to make chips. Very much true, and the shortage is caused by the Iran war. Does this concern me?

I won’t say there’s any immediate concern, Scott. Typically, there’s some backlog out there, and as we’ve seen before, companies tend to shore up their supplies from a strategic perspective. I will share that it is one reason why we have Linde in the Bullpen. We’re going to continue to monitor that. If helium prices become egregious, that could be a reason for us to take a harder look at Linde.

Energy and refining stocks

Buy Low Sell High asks: “What are your thoughts, Chris, on oil, gas and refinery stocks, or ETFs like the Energy Select Sector SPDR Fund, given the current price of diesel and ongoing supply constraints caused by the Middle East situation?”

Even though that ETF isn’t in the Bullpen, are we taking a look at some of these areas? We are, because the crack spread, the difference between the cost of crude oil and the price of refined products like diesel and gasoline, has moved higher. There are two things to be mindful of. One is the impact of higher shipping costs, which I think we’ll hear more and more about as energy companies start to report. The other concern, given the move in some of these stocks, is what happens if we see a quick resolution to the U.S.-Iran war and those prices tumble. What does that mean for these businesses in 2027? That’s one of the things I’m struggling with. But it’s a good thought, Buy Low Sell High, and we are taking a harder look at it.

JPMorgan Chase and Taiwan Semiconductor

I hope I get this one right: kaushalk90, K-A-U-S-H-A-L-K-90. Apologies on the pronunciation. Trust me, when I was growing up, my last name got butchered like you wouldn’t believe. The question is: “Why not buy some obvious names like JPMorgan Chase and Taiwan Semiconductor, when comparisons like Bank of America, Applied Materials and Broadcom haven’t outperformed?” Interesting question.

With Bank of America and Applied Materials, it really comes down to where our cost bases are and what the prospects are for those particular businesses. With Broadcom, we’ve been working to improve our cost basis, and we continue to see it benefiting from the custom AI silicon ramp and networking demand, particularly as AI usage continues to widen and adoption continues to grow.

But I think the real question is why we choose one company over another. Remember that we view Bank of America as a complement to what we’re seeing in investment banking at Morgan Stanley. Bank of America benefits from that too, but it also brings us commercial banking exposure. And inside Bank of America, there’s a real focus on driving cost out of the business. That’s one of the reasons we’ve opted not to pursue a position in JPMorgan Chase, at least so far. We’ll have to see down the line.

As for Taiwan Semiconductor, again, an interesting question. But the reality is that our positions in Nvidia, Marvell, Broadcom and even Apple all flow business to Taiwan Semiconductor. Owning it would be a little duplicative, and we try to avoid that when and where we can. It would also increase our exposure to chips even more. If we were to move out of an existing chip position, could Taiwan Semiconductor be a candidate? It’s certainly possible.

Applied Materials is a very different beast. Remember, it’s not a chipmaker. It benefits from tight chip capacity and ramping capital spending at Taiwan Semiconductor and others. So that’s our thinking. I hope that answers your question.

SpaceX and a potential Tesla merger

A couple of questions from NYKirk11 and Barbara F, otherwise known as the Analyzer, are really about SpaceX. NYKirk11 says: “With SpaceX reporting tomorrow,” so this was obviously asked yesterday, “and the rumors of Tesla merging with it, why isn’t Tesla considered a buy for the Portfolio?” Interesting question. Barbara’s question was more about what we’re looking at with SpaceX, and what it would take for us to call it up from the Bullpen, where we recently added it, into the Portfolio.

We are very much intrigued by the Starlink business, and as I’ve said before, I think it is going to disrupt the U.S. wireless carriers. That pushes them to the side as a consideration for the Portfolio or even the Bullpen. So, we do like the prospects for that business, but we want to understand its competitive dynamics and growth prospects a little better. We also want to understand where peak margins could be for what is now being called the superintelligence business and balance that against its capital spending. Finally, for the actual space business, where should margins settle on a more consistent basis, understanding that expectations are high as the number of launches ramps and the number of satellites grows considerably? Those are some of the things we’re sweating through.

There’s also the question of the post-IPO share unlock. Remember, those come at around 180 days, and the biggest one is in early December. So, we’ll continue to do our homework and pick our spots, but it is rather intriguing.

Then there’s the potential merger with Tesla, as NYKirk11 asked about. We’ve seen Elon do this before, when he brought Twitter into SpaceX, and he’s done it with his other businesses in the past as well. That can be enticing and intriguing, but it also brings in other risks, including integrating the businesses. I’m not saying it wouldn’t work out long term, and perhaps that would be a greater catalyst and a reason to really revisit owning SpaceX shares. However, given some of the work we’re doing on SpaceX, I’d be surprised if we waited for a Tesla merger announcement to do something. In reality, the soonest that’s likely to be announced is sometime in the first half of 2027, and I don’t think we’d want to wait that long. Let’s continue to do our work, and we’ll have a lot more to say about that shortly.

Neostellar, OpenAI and the Anthropic IPO

Paul Carrera93 asks the other Neostellar question I referred to: “Chris, I wasn’t able to sell when the Portfolio exited Neostellar, and the stock is at even lower levels now. Should those who didn’t sell wait for OpenAI to go public?”

That’s an interesting question. I think the timing will hinge on the market’s reception to the Anthropic IPO, both the valuation accorded to the offering and how the shares trade afterward. As I commented in this morning’s 8 Key Things alert, remember that IPO valuation expectations for Anthropic are nudging down. A few months ago, they were around $2 trillion. Now, it’s $1.5 trillion to $1.7 trillion. Ultimately, the full reading of the S-1 and what’s said during the IPO roadshow, which I believe is expected to kick off the week of November 9, with the deal pricing before Thanksgiving, are really going to matter.

More specifically to OpenAI, remember that it has embarked on what we’ll call an accelerated capital raise, one it hopes to complete before the Anthropic IPO. If it does, Neostellar will probably report another step-up in its net asset value per share when it reports its fourth-quarter results.

The shares trade at a steep discount, and to the extent net asset value steps higher, we would at a minimum expect the shares to trend higher. But I think it will take other catalysts for that discount to really narrow, much like it did earlier this year. What could some of those catalysts be? One would be the potential monetization of Neostellar’s position in WHOOP, its largest holding. Given that Oura pulled its IPO, I suspect management is exploring a monetization process for WHOOP. That would be a positive. It would give Neostellar some cash, so perhaps it could pay down the notes due at the end of the year and announce a dividend, given the monetizations it did earlier in the year with CoreWeave, [name unclear] and a couple of other smaller positions.

Another catalyst would be other portfolio holdings raising capital at higher valuations, which would lift Neostellar’s net asset value even further. Ultimately, though, I think the story needs a monetization event in the portfolio to work. OpenAI going public at some point would certainly be one. Could there be other monetizations before then, including something with WHOOP? Certainly possible. I think that would be the catalyst to potentially trim back the position, because, as we’re seeing, private capital is becoming increasingly selective, especially with rates higher and hurdle rates even higher. So that’s my suggestion. Let’s see what happens. And Paul, continue to ask the question, and we’ll continue to revisit and reevaluate based on new information.

Wrapping up

Everyone, I hope that has been helpful. As you can tell, it’s a little off the cuff, but that’s what these are designed for. If you like the format, please let me know in the comments section below. We’ll have a lot more coming at you later today, and please be sure to check Stock Market Today throughout the day for comments and insights that I and others in TheStreet Pro stable may be sharing. Think of it this way: if we’re taking the time to post there, we think it’s worthwhile, and you should check it out.

All right, my friends, that’s today’s video. Thanks for watching. Keep an eye on your emails and alerts, with a lot more coming at you.

At the time of publication, TheStreet Pro Portfolio was long META and MSFT.