A Portfolio Discussion & The Indirect Impact of Tariffs (NOTW#52)
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The tariff talks are back in full force, not only due to Trump’s words but because many companies have started flagging tariff uncertainty as a source of weakness (primarily those dependent on the CapEx of their customers). Despite all of this, many investors seem to continue to firmly believe in TACO (Trump Always Chickens Out).
I also decided to share some portfolio reflections in this week’s NOTW.
Without further ado, let’s get on with it.
Articles of the week and a follow-up on ASML
I published one article this week: ‘Is it time to buy ASML?’ The company reported strong earnings (beat, beat, “raise”) this week but cautioned investors about what 2026 might look like. A lot of investors claimed that ASML’s management was masking fundamental weakness behind geopolitical uncertainty, but just the following day, its primary customer (TSMC) confirmed that they were being more cautious with their planning due to geopolitical uncertainties despite having the tightest capacity they’ve ever had. Unsurprisingly, nobody claimed that TSMC was lying:
Amidst the uncertainties, we want to remain mindful of the potential tariff-related impact and be prudent in our business planning going into the second half of 2025 and 2026.
ASML has long lead times, so if TSMC doesn’t make a decision soon, then it’s most likely that orders will not come in time to make 2026 a growth year. We’ll see because the environment is changing swiftly. What this shows is that in the stock market, management credibility (and the perception of its quality) is intrinsically related to the stock’s performance (not surprising). The best recent example here is probably Mark Zuckerberg, who went from someone “who did not know how to run social media” (interesting claim considering he invented the business model at scale) to being a genius as the stock recovered from its 2022 drop.
Some portfolio reflections
I'd like to discuss some reflections about my portfolio in this NOTW. The thing is that I own some stocks that are currently out of favor and therefore are “not working,” with the market seemingly benefiting the direct beneficiaries of AI more than anything else (not unjustified, I must say). The two best examples here are ASML and bioprocessing (although Stevanato is also working just fine). I expect the fundamentals of both ASML and my bioprocessing exposure to perform well over the coming years, but there’s no denying that this is not where the market is currently positioned.
While it's challenging to own assets that are not performing well when the index remains close to all-time highs, I genuinely believe that if one owns the factors that most investors are currently favoring and have favored for a while, then that’s likely not the best place to be going forward. The key here is: do I believe that the things that are not currently working will ultimately work? Given that I still own these stocks, the obvious answer is yes, I believe these will work eventually. Now, investors walk on a thin line here. One can simply excuse a poor decision by saying that it will work eventually (we’ve all been there), but when things are not working, it is when one should do even more work to understand if the investment makes sense.
Some people will claim that it’s better to be positioned in what’s working and wait on the sidelines until the other stuff starts working. This market timing evidently makes perfect sense, but there’s a catch: things might start working when it’s not obvious they will. Knowing when something will start (or stop) working is very challenging, but things can change rapidly once the paradigm shift has begun. There are plenty of recent examples, but let me share two.
I discussed this example just last week, but Texas Instruments (TXN) is up more than 50% in under three months, despite professional analysts confidently claiming that analog semiconductors were a terrible place to be just a short time ago. The lesson here is that nobody is going to be shouting from the rooftops when something starts working.
Meta is another good example here: who was betting for a turnaround at its 2022 lows? Very few, not even the most optimistic bulls, were confident in a V-shaped recovery. However, when something changes, sentiment flips quickly, and the same people who were following sentiment to the bottom will be chasing it to the highs (this is just how pro-cyclicality works). Stocks are upgraded when they are already working, not when they are about to start working! Let’s look at more specific data with Texas Instruments. During the tariff tantrum, the company received 8 analyst updates, of which:
1 upgrade (good on Baird)
3 lowered price targets, including one downgrade (Barclays downgraded and lowered their PT to $125)
1 Sell initiation
3 maintained their ratings
The stock has received its fair share of analyst upgrades, now at all-time highs, all of which have been raises. If this doesn’t demonstrate the pro-cyclicality of a good part of the sell-side, I don’t know what does.
Now, everything I have just described is psychologically challenging. The reason is that people will queue up to tell you how wrong you are when things are not working, but you’ll meet silence when things eventually work. When things are not working, you’ll also get a constant negative news flow pushed by an engagement-hungry algorithm. This is normal stock market behaviour, but it’s tough to overcome unless you have conviction in what you are doing. Stock returns are far from being linear, so patience and conviction are needed to sit out the periods when something is not working, but we as investors also probably underestimate how fast sentiment can shift. It’s frustrating, but nobody said the game was easy.
The good news I see here is that, despite several important positions in the portfolio not working, it’s still beating the S&P 500 and the MSCI World on a Money-Weighted Return basis by a good margin (albeit lower than I would like). Of course, some things have worked very well and have compensated for the things that are not working (one of the benefits of investing in the stock market):
While I don’t think the current performance is indicative of anything, it does give me confidence in where my portfolio will stand when some of the stocks I currently own start “working” again (I have high confidence they will eventually begin to do so). I believe there’s a very wide divergence between the valuations of what’s working and the valuations of what’s not working. This is also a reason why I don’t think index multiples are indicative of much, as most indices are likely composed to a great extent of what’s currently working.
I see several interesting opportunities across my portfolio, whereas when I study new companies trying to get exposure to the data center build-out (a place where I am actively looking), I struggle to find attractive valuations. Only time will tell where things end up, but AI will not solve all of our medical needs in the future. If it did, then I’d say that’s a pretty strong tailwind for the pharma value chain.
I share a document called ‘The decision spreadsheet’ with paid subscribers so that they can see the prices at which I consider the stocks in my portfolio attractive. I’ll be updating this document shortly, and I'll likely add to several of my positions in the coming weeks.
Market Overview
Both indices were up again this week:
Indices are also a good example of what I discussed in the portfolio commentary: nobody is going to be shouting on the rooftops that things are going to start working again. How many people were optimistic about the US indices and economy at the April lows? Very few, and most of those who say they saw it coming are probably being misleading. Well, with nobody expecting a recovery, indices quickly recovered and marched to ATHs!
Those people who did expect a recovery and were buying (even if not expecting a V-shaped recovery) were probably taken as delusional because…how could you be buying with everything that was going on? Nobody is there to congratulate the people who have added significantly to their portfolios, but they made money, so I guess they are okay with it.
The topic of the week was once again tariffs. Trump continued his discourse on tariffs, but now that earnings season has begun, we are starting to see the indirect impact of tariffs on the fundamentals of certain businesses. Tariffs (in my view) can have two potential impacts: one direct, one indirect. The direct impact is the tariff per se, but due to the postponements of tariffs, we’ve yet to see this. The indirect impact is how expectations of future tariffs might influence companies' decisions, and we are already seeing this play out.
ASML was the first to flag this, and its management team was ridiculed for it. Then came TSMC claiming that tariffs were indeed playing a role in their capacity expansion plans. Later in the week, Atlas Copco, an industrial company, also reported that customers were being more cautious amid tariffs, but that underlying activity remained strong. The good news for investors is that, even though this indirect impact is likely to negatively affect the fundamentals of businesses exposed to their clients' Capex, it may create a fairly attractive setup for the future. The reason is that even if postponed, this demand will eventually come. So, more than a cancellation of orders, it’s a deferral of orders that will create pent-up demand at some point. Of course, seeing those orders come sooner would be better, but one can’t control the timing of such orders in a volatile environment.
The industry map reflected what I discussed in this article. Healthcare continues to be out of favor with other parts of the market performing pretty well:
The fear and greed index remained in extreme greed:
