Top 2 GARP Stock Picks in a Bifurcated Market
Finding growth at a reasonable valuation has become a key challenge for prudent investors.
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Equities remain bifurcated within this K-shaped economy. Earnings growth has been fantastic so far this year with S&P 500 profits growing over 27% year-over-year in Q1 and roughly 50% in Q2. Of course, this growth comes with numerous caveats.
It comes within a U.S. economy that has been growing at less than 2% for the last three quarters. That is much better than what the sclerotic European economy is producing of note. That said, it is hardly impressive given the massive surge in tech spending around the AI infrastructure buildout. Most of the rest of the U.S. economy is flatlining.
In addition, much of the AI infrastructure growth is being increasingly financed by debt and equity issuance. Off balance sheet obligations at the five major hyperscalers and two major chipmakers, NVIDIA Corporation (NVDA) and Broadcom, Inc. (AVGO), have surged past the combined $3 trillion mark. This has caused free cash flow to plunge and stock buybacks to all but ceased among most tech titans as their capex budgets have grown exponentially.
The chipmakers are leading the profit surge this year. NVDA looks cheap given its blowout growth at 24-times forward earnings. However, the company is dependent on the AI bubble not popping. This would negatively impact the company’s margins, which are in the mid-70s when, historically, they largely have been in the 20s. And margins do tend to revert to the mean over time.
Profits have surged over the past couple of quarters within the energy sector. Refiners are printing profits like the Federal Reserve was printing money following COVID. Of course, this is largely due to the impacts from the conflict in the Middle East. Finding growth elsewhere that has reasonable valuations is a key challenge right now for the prudent investor as the AI Nnrrative is increasingly questioned.
I highlighted one of my recent GARP additions to my portfolio this weekend with Clear Secure (YOU). I have built a decent sized covered-call holding in this name. Another recent add to my accounts is Eldorado Gold Corporation (EGO). Gold and silver mining stocks have been successful covered-call trades for my portfolio throughout this year, and Eldorado is the latest effort on that front. Option premiums against the equity are both lucrative and have decent liquidity. I can utilize call strikes nearly 10% below the current trading level of the stock and still set up a solid potential return.
The miners are profiting from much higher silver and gold prices compared to where they were several years ago. I expect them to continue to trend up over time as part of the “debasement” trade, even as gold and silver pulled back in August, as most G20 governments continue to run unsustainable fiscal deficits. One reason that sovereign debt yields have been on an upward trend lately.
The miners have rediscovered capital discipline and their all-in costs per ounce is far below current prices. Eldorado got a shout out from another TheStreet Pro contributor last week based on technicals. Its current all in cost per ounce of gold is just over $1,900 per oz.
Production dropped year-over-year in Q2, and productivity costs rose concerningly. However, two new mines should come on line before year end. This will boost production going forward and drop capex costs. Earnings and revenues are projected to rise impressively over in FY2026 and FY2027 and analysts have Eldorado profits at north of $5 per share next fiscal year. The stock currently trades at around $43.00 a share.
At the time of publication, Jensen was long EGO and YOU.
