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Key Market Outlook(s) and Pick(s)

On Monday, I joined Liz Claman on Fox Business “Claman Countdown” to discuss markets, picks, and more. Thanks to Liz and Brooke Haliscak for having me on. Link here.

On Tuesday, I joined Brian Brenberg, Charles Payne, Marcus Lemonis, Kenny Polcari, and Lydia Hu on Fox Business “The Big Money Show” for the full two hours. Thanks to Brian, Charles, Marcus, Kenny, Lydia, and Madison Murtagh for having me on.

On Wednesday, I joined Stuart Varney on Fox Business “Varney & Co” to discuss markets, outlook, picks, and more. Thanks to Stuart and Christian Dagger for having me on.

On Monday, I joined Hannah Bewley on BBC World Business Report to discuss Intel, Nvidia, and more. Thanks to Hannah for having me on.

On Tuesday, I joined Ashley Mastronardi on NYSE TV to discuss markets, picks, and more. Thanks to Ashley and Melissa Montanez for having me on.
 

Greenlight for Rotation

Heading into the second half of 2025, our #1 theme and something we had long been pounding the table on was Housing. With sentiment at multi-year lows, we laid out our thesis and highlighted the catalysts: a 4+ million unit housing shortage after more than a decade of under-building, 70+ million millennials entering prime family formation years, favorable policies and regulations, and easing mortgage rates on the horizon. Rather than owning the warring factions of home builders trapped in race to the bottom of incentive wars, we played the theme with a handful of levered arms dealers, two of which we will touch on later.

Fast forward to today, all of those catalysts remain firmly intact. The only change is that the Fed and Jay Powell have done a complete about-face, effectively giving the sector the green light. For months, we have argued the Fed has been well over 100 bps too restrictive, hurting housing and forcing millions of millennials to put their lives on hold. To us, it appeared Fed Chair Powell was more focused on LEGACY than anything else. Last week in Jackson Hole, he finally acknowledged the dual mandate.

As a result, Jay Powell may finally shed the title of Too Late Powell and embrace a new one: Just in Time Powell.

Joking aside, the point is that barring an August jobs report that blows expectations out of the water, the Fed has all but guaranteed a September cut. If the report comes in significantly weaker than expected, a 50 bps move would not shock us.

The market has clearly priced this in, with 88.2% odds of a September cut and 85.4% odds of two cuts by December.
 

 

Whether we get one, two, or three cuts this year, anyone’s guess is as good as mine. What really matters is the Fed is finally moving in the right direction and we could not be better positioned, with rate-sensitives, small caps, and discretionary finally getting a bid after being left for dead.
 

 

The best part is that when it comes to Housing specifically, this is just the tip of the iceberg, with catalysts such as:

1. Trillions in trapped equity sitting on the sidelines:
 

2. De-levered consumer balance sheets, with mortgage debt at 28% of housing market value, the lowest level since the 1950s:
 

3. A surge of 1.6 million renter households since 2023 directly coincides with the lowest share of first-time home buyers in US history. These are the millennials trapped on the sidelines, waiting to buy starter homes, a trend we expect to quickly reverse:
 

 

These are just a few of the catalysts behind the imminent housing recovery. We continue to expect mortgage rates to hit the 5-handle by year-end, which should unlock massive supply, sparking a buyers’ market and starter-home revival. And with its latest move, the Fed has taken the first steps toward opening that floodgate…
 

QXO Update

QXO is up ~60% since we discussed it on Fox Business a couple months ago on April 4 and even more since we first covered it on the podcast.

Not only is QXO one of our favorite levered arms dealer plays on Housing, it is also a bet on one of, if not the, best jockeys in business, Brad Jacobs.

Brad Jacobs’ track record speaks for itself. An investment in XPO when he got involved would have been a 50x bagger. United Rentals would have been closer to a 200x bagger. Taken together, investing alongside Jacobs across his companies would have generated more than a 300x bagger. Simply put, Brad Jacobs is in a league of his own when it comes to consistently creating shareholder value at scale.

So when Jacobs spots an industry ripe for disruption, you pay attention. That’s exactly what we see with QXO – his next venture – as he aims to build a $50B+ powerhouse in the $800B building products distribution industry.

After laying out the playbook, QXO is finally getting the recognition it deserves. The only difference is we are already closing in on a double from our cost basis while the rest of Wall Street is just catching on.
 

Better late than never, as we continue to believe this story is still in the very first inning.

Here’s a great article from Barron’s last week making the case for QXO:
 

 

 

 

Q2 Earnings Breakdown

QXO’s recent earnings report was its first since the Beacon acquisition and included two months of combined operations.

Revenues of $1.91 billion beat consensus of $1.87 billion, while EPS of $0.11 came in $0.07 ahead of expectations. More importantly, Jacobs and his team continue to identify opportunities with the Beacon integration that exceed initial expectations. Management remains confident in at least doubling legacy Beacon EBITDA organically while also driving over 500 bps of margin expansion. Early signs of the Jacobs “Midas touch” are already visible, with adjusted EBITDA margins of 10.7% running well ahead of the 2025 pre-acquisition consensus of 9.8%.

For those concerned about QXO walking away from the GMS deal and Lowe’s $8.8B FBM acquisition, it’s important to burden ourselves with the facts. At the end of the day, this is a $800B industry with over 7,000 distributors across North America, making it one of the most fragmented markets out there. Translation: there is no shortage of attractive acquisition targets, both public and private, for QXO.

What matters far more is staying disciplined on price, and Brad Jacobs has made a career out of never overpaying. Unlike most operators, he actually cares about the “IC” in ROIC. No matter how good you are at finding efficiencies and growing a business, if you pay too much on the front end it’s nearly impossible to generate superior returns. That principle is rare in today’s market, and it’s exactly what we want to see from QXO.

QXO remains well on track to becoming a $50B powerhouse over the next decade. Beacon alone accounts for the first ~$10 billion, and Jacobs accomplished that in the first year. Have some patience, park this one in the filing cabinet, and let Brad Jacobs work his magic.
 

 

 

 

Generac Update
 

 

Another one of our favorite pick and shovels plays on the housing recovery is Generac, or as we like to call it, the “Kleenex of Generators.”

This “sleepy” name turned out to be a textbook example of a quote we live by at Great Hill Capital:

Generac found itself caught way off-sides following a once-in-a-century pandemic event. The ensuing de-stock cycle drove inventories up 85% from 2021 to 2022 – leading to multiple quarters of negative free cash flow and a gross margin collapse of over 500 bps – sending the stock down more than 80%.

That’s when Generac came across our desk and quickly got our attention. Through the noise and temporary overhangs, we saw a high-quality market leader with nearly 80% market share, strong normalized earnings, a solid balance sheet, a shareholder-friendly management team with skin in the game, and secular tailwinds that weren’t going anywhere. That gave us all the confidence we needed to build a solid-sized position.

Management quickly got to work on the turnaround, spending the next few quarters cleaning up inventories, which were back to normalized levels by the end of 2024. As expected, gross margins sharply rebounded from a trough of just 33% to over 39%, while free cash flow inflected and hit a record high of $605 million, with another strong year of $400+ million on deck for 2025. Needless to say, the turnaround has played out as we expected, rewarding us with a solid double in just a few years.

The good news is that when you buy great businesses at great prices, you tend to get upside surprises along the way. This past quarter, Generac delivered exactly that, announcing its entry into the megawatt generator market for AI and data centers, along with guidance for the space that frankly blew us away.

Here are a few lines from the earnings call that put it into perspective:

“I think this is, by far and away, one of the biggest needle-moving opportunities that I’ve seen in my time here in my three decades with the company.”

“Again, like I said, I don’t — I’ve never seen something that can move the needle like this. I think if we do things the right way, this part of our business, which has always been a good solid business, is over a, call it, $1.5 billion opportunity today. That’s the size of the C&I products part of our business. That’s something that can grow dramatically in the next several years. We could be in a situation in several years where the C&I products are larger than the rest of the company.”
 

Some quick back-of-the-envelope math shows the scale of the opportunity. For C&I to surpass the rest of the company, revenues would need to reach at least $3 billion for the segment. Even if you assign ZERO GROWTH to the rest of the business during that time, meaning the bread-and-butter Residential business suddenly flat-lines along with Energy Storage, etc., total revenues would still reach $6 billion, or roughly 40% above 2024 levels.

The way we see it, this past quarter was a complete game changer for GNRC. What began as a “sleepy” contrarian de-stock and restock turnaround has morphed into an AI and data center play. For us, that is just the whipped cream and cherry on top.

Here’s everything you need to know following Generac’s lights-out quarter:

Q2 Earnings Breakdown
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 Key Points

1) Generac reported Q2 revenues of $1.06 billion (+6% YoY), beating consensus by ~$35 million and topping management’s prior guidance for low single-digit growth. Adjusted EPS of $1.65 crushed expectations by $0.33 (~25% above consensus).

2) Gross margins exceeded expectations, expanding by over 170 bps to 39.3%, with management lifting full-year guidance to 39.5% at the midpoint (+75 bps YoY). Adjusted EBITDA margins of 17.7% also came in well ahead of guidance, which had called for a decline from Q1’s 15.9%. The upside was driven by stronger gross margin performance and better-than-expected operating leverage on higher shipment volumes, leading management to raise full-year guidance to 18–19% (vs. prior 17–19%). Importantly, management continues to see room for further expansion from current levels and remains confident in its longer-term adjusted EBITDA margin target of 21.5–22.5%.

3) The key story of the quarter was Generac’s formal launch of its new large megawatt generators for data centers, which management views as one of the biggest needle-moving opportunities in the past three decades. Early demand has been strong, with backlog already exceeding $150 million, supported by lead times roughly half that of competitors. Initial international shipments are expected in Q3, with domestic deliveries late this year and the bulk of current backlog realized in 2026. Management estimates a structural deficit of ~5,000 machines in 2026 alone, representing a $5+ billion opportunity. Generac currently has capacity north of $500 million across nine facilities, with aggressive expansion plans to capture what they see as a $1.5 billion near-term opportunity—equal to the entire size of today’s C&I business. If executed, management believes this segment could make C&I larger than the rest of the company over the next several years, implying C&I revenues doubling to $3+ billion and total revenues of at least ~$6 billion (~40% above 2024 levels). Keep in mind, those numbers attribute ZERO GROWTH to the entire rest of the business (Residential, Energy Storage, etc.). Importantly, these products are margin accretive, with profitability tracking above initial expectations.

4) Generac’s Home Standby sales, the company’s bread-and-butter segment with over 75% market share, were flat YoY. Notably, results held at a higher baseline level despite outage hours falling sharply from last year’s elevated period. As expected, home consultations declined alongside the drop in outages, but close rates improved sequentially and are expected to strengthen further through year-end. Installations also rose modestly during the quarter. Management continues to see a massive runway ahead, with U.S. penetration still only ~6.5% and each additional 1% penetration representing a $4 billion opportunity.

5) The C&I business outperformed expectations, with revenues up 5% YoY and management now projecting modestly higher full-year sales versus prior guidance. Growth was led by strong shipments to domestic industrial distributors, which helped reduce lead times, while both quoting activity and win rates improved YoY in the first half. Shipments to national telecom customers also continued their recovery, posting strong growth with robust momentum expected for the remainder of the year. The rental equipment business, however, remained in a cyclical trough with softness expected to persist into the second half. Importantly, management views the weakness as cyclical rather than structural, with future growth supported by upcoming infrastructure projects and broader end-market demand.

6) Ecobee posted a record quarter for sales and has turned profitable year-to-date, with management expecting a positive EBITDA contribution for the full year. The connected home footprint expanded to more than 4.5 million residences, and management continues to view Ecobee as a key differentiator for driving cross-platform sales opportunities.

7) Despite policy-related headwinds in residential solar and storage, management continues to view clean energy as a critical part of the residential energy ecosystem longer term. With the market expected to contract sharply in the near term, investments in the segment are being re-calibrated. The business has long been a drag on profitability, weighing on adjusted EBITDA margins by 300–350 bps this year, but management expects steady improvement from here. The prior Investor Day goal of achieving segment profitability by 2027 remains intact.

8) Cash flow from operations in Q2 was $72 million, down slightly from $78 million in the prior-year quarter, with free cash flow declining modestly to $14 million from $15 million. The decrease was largely due to higher working capital from replenishing portable generators, preparing for the next-generation Home Standby product launch, and additional capacity build out increasing capex. Importantly, management raised full-year FCF conversion guidance following the One Big Beautiful Bill Act, increasing adjusted net income to FCF conversion to 90–100% from the prior 70–90% range. At the midpoint, this implies full-year free cash flow of over $400 million.

9) Management repurchased 393,000 shares of common stock during the quarter for $50 million, at an average price of ~$127 per share. At the end of Q2, approximately $200 million remained under the current share repurchase authorization.

10) For full-year guidance, management narrowed the net sales growth range while maintaining the midpoint at 3.5%, bringing the new range to 2–5% from the prior 0–7%. As previously noted, adjusted EBITDA margin guidance was increased to 18–19% from 17–19%, and FCF conversion guidance was raised to 90–100%. Guidance assumes a significantly lower baseline level of outages in the second half, without the benefit of a major power outage event, which management estimates could impact results by $50–$100 million, similar to last fiscal year.

Earnings Call Highlights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Market

The CNN “Fear and Greed Index” ticked up to 59 this week from 54 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
 

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked up to 98.15% this week from 85.66% equity exposure last week.
 

Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week.  Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.

*Opinion, Not Advice. See Terms

Not a solicitation.

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