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It’s a big, noisy universe of stocks out there. Welcome to Good Buy or Good-bye. Our goal: To help cut through that noise to navigate the best moves for your portfolio. Today, we’re taking a look at cyclical and defensive stocks. I’m here with Thomas Hayes, Great Hill Capital chairman and managing member. Thanks for being here, Tom. Good to see you.

Good to see you.

So, the your buy stock is a cyclical stock, right? So, we’re talking about GXO Logistics. This stock has not done great over the past year. It’s down a little more than 20%. This is one of the spins of the former XPO Logistics, which is Brad Jacobs’ creation. And, um, you like that, uh, he is involved in this particular company as well.

Yeah, Brad Jacobs has the Midas touch. If you got involved when he did United Rentals, you made a 47 bagger. If you got involved when he got involved in XPO Logistics, if you invested $1 million, you got $31 million. So, he knows how to create value for shareholders. So, you ask, “Well, then, why is the stock down so much?”

Yeah. That would be my next question. Yes.

So, um, this business does well. They get paid for outsource goods, okay? So, they do supply chain, outsource logistics. And there was a huge demand for goods during COVID. And then the demand shifted to services and their business, the stock basically collapsed. The business did okay. And now, that has troughed, okay? So, we’ve gone from the destocking cycle, which troughed in Q4 of 2023, and now we’re starting the restocking cycle. And they have huge tailwinds behind them and basically operate in a duopoly with DHL.

So, let’s talk about the potential growth, then. You’re looking at EBITDA basically doubling by 2027.

Yeah.

This is guidance from the company. They expect EBITDA to nearly double by 2027. And what’s interesting about that, Julie, is not just, wow, well, if EBITDA doubles, maybe the stock could double. When you get that type of double-digit growth rate back, both on the top line and the bottom line, you get multiple expansion. So, not only will the business do well, but the multiple applied to the stock could actually expand in the meantime. And that’s why we see reasonably significant upside to this over the next two to three years.

Gotcha. We kind of jumped the third point a little bit in terms of that restocking cycle just starting. But it’s interesting when you talk about GXO and DHL. I mean, if what’s also interesting about that is, like, I think everybody knows DHL as a household name. GXO is sort of less known or recognized.

Yeah, he’s not great with branding, but he makes billions of dollars for his owners. I gotta be honest. I mean, he he consistently does that. You know, they said something on the most recent conference call, last holiday season was actually kind of a disappointment for GXO for the retailers, et cetera. And what they’re seeing right now in the month of August, he’s saying, “The clients are getting ready for a good holiday season.” It won’t be a shoot-the-lights-out holiday season, but it will be more in line with a normalized holiday season, not a disappointment. Restocking is happening. This is a very positive tailwind for GXO. And, uh, they’ve just completed the Winkington acquisition in the UK, so they get close to over 50% of their business from Europe. UK is recovering, Europe’s recovering. They just did a huge warehouse for Levi’s in Germany. They’re getting industrial business from, uh, different manufacturers like Boeing, et cetera, uh, all over the world. So, they’re expanding verticals, they’re increasing the duration of contracts with their clients, and it’s a very sticky business. Once they outsource their business to you, you’ve got them for life.

All right. So, what could go wrong? Well, if it’s a cyclical stock, and that, you know, restocking cycle doesn’t materialize, that would be bad news.

Yeah.

Yeah. That’s a big thing.

I I think, right now, the only thing that could cause a recession is if the Fed dithers. Uh, they do need to go in September. We saw starting to see some cracks in the labor market, starting to see some cracks in defaults rising, even though they’re historically low, auto loan defaults, et cetera. So, if they move in September, I think we’ve got the we’ve got the tailwinds from earnings, we’ve got the tailwinds from GDP, and this will be off to the races. But if they get too cute with their cuts, uh, that could be a problem.

Gotcha. Okay. Now, let’s get to your good-bye stock. And this one’s a little contrarian here, Tom. We’re talking about utilities. Excel, you know, this group has been one of the winners of the year, right? And it’s up almost 20% over the past year, but you say, “Let’s hit the pause button.” And in part is that after the big run-up that we have had.

Yes.

Yeah. Yeah, we were pounding the table last fall when you couldn’t give away utilities. Everyone said, “No one needs energy anymore.” I don’t know what people were thinking, but basically, there was an expectation about rates that’s different than the expectation right now. So, this has rallied on two basic things. First of all, as a group, this is a defensive sector. It’s up 50 50. 5-0% in less than a year. So, that tells me it’s a little bit overdone here. Uh, you know, that that’s a significant move. And the the basis for this run-up, uh, the AI narrative, which is slowing down, that that trade is cooling. Uh, and cutting rates, it’s almost a buy-the-rumor, maybe-sell-the-news here. So,

Right. In other words, people were buying in anticipation of the rate cuts. Perhaps once they arrive,

Yeah.

the trade will lose some steam, you think?

Yeah. Yeah.

And, finally, it’s a defensive stock. And if you look at earnings, if you look at GDP, et cetera, I don’t think you want to be overly defensive right now. You’ve seen staples have run up a lot. Utilities have run up a lot. Um, and you see it in fund managers, and this is usually a contrarian indicator. They’re 1.4 standard deviations overweight utilities above the long-term average.

So, it’s what we like to call a crowded trade, in other words.

It’s it is getting a little bit crowded, and, uh, and I think it’s a little bit overdone at the moment.

Interesting. Okay. So, what could go right for utilities?

The exact opposite of

It’s the opposite of the other ones, right?

It’s the opposite, yeah. If we do If the Fed dithers and we go into a recession, you want to be in defensives, and this would do well. Although, given the multiple expansion that they’ve had already, it’s like I don’t see where the additional upside comes from.

Well, or or, I guess, if you can have the continuation of the AI trade, and, you know, is are the fortunes of Nvidia the fortunes of the utilities, for example, as we continue to see a build-out of AI infrastructure and the demand for power?

Yeah.

Yeah, it’s part of it. Yes, uh, but I think a better derivative way to play that is through natural gas, and I think those stocks are beaten down. So, these have priced in the possibility of great things happen. The natural gas stocks are are trading like they’re dead.

All right, save that for another, uh, future Good Buy or Good-bye, I guess. Tom, thank you so much for coming in. Appreciate it. We’ll we’ll leave them wanting more, won’t we, on this Friday? Appreciate it. All right. Thank you so much for watching Good Buy or Good-bye. We’ll be bringing you new episodes next week at 3:30 p.m. Eastern.

And that’ll be next time. Exactly.