Image Source: Unsplash
 

Key Market Outlook(s) and Pick(s)

On Wednesday, I joined Stuart Varney on Fox Business’s “Varney & Co.” to discuss markets, outlook, China, inflation, and the Fed. Thanks to Stuart and Christian Dagger for having me on:

On Friday, I joined Nicole Petallides on Schwab Network to discuss Lululemon & Broadcom earnings, markets, outlook, Albemarle, QXO, Stanley Black & Decker, and Generac. Thanks to Nicole and Ally Thompson for having me on:
 

Time for a Rotation?

This time of year, with the Stanley Cup Playoffs in full swing, I’m reminded of one of the key frameworks we live by at Great Hill Capital. It comes straight from The Great One himself, Wayne Gretzky, who famously said:

This kind of framework isn’t exactly popular in today’s investment world. More often, we see investors chasing the shiny objects, AKA the names making the headlines that are already up 5x and suddenly being called “great buys.”

We prefer the names that no one wants. The ones left for dead. And we’ve built a long track record of doing just that. Whether it was Energy during COVID when oil prices went negative, Big Tech in the fall of 2022 when everyone was calling for a recession that had already come, or banks and real estate after the mini banking crisis in 2023, we skate to where the puck is GOING. Even this year, look at Boeing. Just a few months ago, nobody wanted to touch it in the $130s. Now, at $215, it’s all anyone wants to talk about.

So the question today is, where is the puck going next?

That brings us to one of our favorite themes right now and the topic of this week’s article: housing and rate-sensitives.

The consensus view is that rates will stay higher for longer and anything rate sensitive, especially housing related, is left for dead. We’re happy to take the other side of that trade. What I’m about to say is something you won’t hear anywhere else.

By the end of 2025, we expect to see 30-year fixed mortgage rates fall below 6%. When this happens, you will see the beach ball of pent-up demand held underwater for the past three years finally explode higher.

At that point, housing-related stocks and cyclicals will be the talk of the town.

So, with mortgage rates currently sitting at 6.85%, how do we see a path to below 6% in the next six months?

Treasury Secretary Scott Bessent has a couple of arrows in his quiver that address that question, two of which we will highlight today:

Supplementary Leverage Ratio (SLR)

The SLR was introduced after the GFC as part of the Basel III reforms, requiring banks to hold a minimum level of capital relative to their total assets. Scott Bessent has argued, and Jerome Powell has agreed, that because the SLR does not factor in risk weightings, it effectively penalizes banks for holding U.S. Treasuries.

Bessent has called loosening the SLR a high priority and proposed exempting government-guaranteed securities from banks’ asset totals. Regulators are reportedly “very close” to making the change, with an announcement possible as early as this summer.

Bessent estimates that the exemption could free up as much as $2 trillion in bank balance sheet capacity, creating an overnight surge in demand for Treasuries and lowering yields by 30 to 70 basis points.

Here’s a great interview from a few weeks ago where Bessent goes over the SLR around the 13-minute mark, followed by an article that explains the change in detail:

The GENIUS Act and Stablecoins

Buffett has always preached the importance of staying within one’s circle of competence. It’s a principle we have long followed, staying in our lane by focusing on buying high-quality businesses when they are temporarily impaired and sitting tight until they reach full value. But even old-school equity guys like myself are starting to get excited about the potential impact of digital assets. Here’s why:

Currently, the Stablecoin market is valued at roughly $250 billion but remains largely unregulated and lacks a formal legal framework.

The GENIUS Act, currently under review in Congress and possibly heading to the Senate floor as soon as next week, would change that. The bill would require issuers to fully back Stablecoins with high-quality liquid assets, including U.S. Treasuries.

If passed, estimates suggest the Stablecoin market could grow to more than $2 trillion by 2028. That kind of growth would create a near overnight surge in demand for Treasuries. Bessent estimates that between $1 and $2 trillion in incremental demand could materialize over the coming years.

Even if those estimates are cut in half, you’re still looking at a major tailwind for lower rate compression across the board.

Here’s a good breakdown of Stablecoins and the GENIUS Act straight from the Treasury:

Oh and by the way, not only do our rate-sensitive plays stand to benefit as yields come down with the GENIUS Act, but we also own PayPal AKA the issuer of the sixth-largest Stablecoin in circulation, now approaching a $1 billion market cap…

 QXO Update

QXO is up ~65% since we talked about it on Fox Business – a couple of months ago – on April 4:

It’s up much more since we originally covered it on the podcast.

A few weeks ago, Brad Jacobs laid out the blueprint for turning QXO into the $50 billion powerhouse he envisions. His five-year plan includes more than DOUBLING EBITDA and driving over 500 basis points of margin expansion. In fact, his expectations for earnings upside for Beacon have MATERIALLY INCREASED since closing the deal…

For us, QXO is a classic example of betting on the jockey. Brad Jacobs has a track record that 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 70x bagger. Altogether, investing alongside Jacobs across his companies would have generated more than a 300x BAGGER.

On top of that, Brad Jacobs also puts his money where his mouth is and has some serious skin in the game with QXO. He wrote a $900 million check out of his own pocket and now owns ~28% of the total equity. The rest of QXO’s leadership has material ownership and incentive plans tied to stockholder returns.

This is the kind of position we are happy to buy, throw in a filing cabinet, and watch Brad Jacobs work his magic over the next couple of years. We think over the long term, this is a 5 to 6x BAGGER. Knowing Brad Jacobs, it could end up being much more.

Here’s the full QXO Investor Presentation, which does a good job laying out the playbook for how Jacobs plans to build his next masterpiece and disrupt the building products distribution industry. Safe to say we are excited to be along for the ride…

Shortly after, Wolfe came out with a street high price target of $44, clearly liking what they saw. That might be looking a little down the road, but we certainly agree.

Now, the reason housing is one of our favorite themes isn’t just because it stands to benefit from lower rates. We’ve also discussed the strong demographic tailwinds (peak family formation in the 30 to 35-year-old age group), improving affordability driven by a starter home revival, the multi-million unit housing shortage, and opening up federal lands — all supporting our thesis. Apollo put out a great Housing Outlook note a few weeks ago highlighting some of these tailwinds:

Crown Castle Update

10 Key Points

1) Crown Castle’s top priority remains closing the $8.5 billion sale of its small cell and fiber solutions business in the first half of 2026. Management continues to make solid progress, working through the regulatory approval process. Once completed, Crown Castle will become the only publicly traded pure-play tower company focused exclusively on the US.

2) Management continues to expect annual AFFO in the range of $2.27 billion to $2.42 billion once the transaction closes, compared to the current outlook of $1.77 billion to $1.82 billion. The increase is largely driven by anticipated reductions in interest expense and the significantly leaner cost structure of the standalone business.

3) Management expects to repay $6 billion of debt with the transaction proceeds and allocate up to $3 billion toward share repurchases, roughly 7% of the current market cap.

4) Organic revenue growth came in at 5.1% in Q1, ahead of the 4.5% full-year guidance. Management reiterated guidance across the board but noted they are tracking toward the high end of the range and may even expand it as the year progresses.

5) Mobile data demand continues to grow at a strong clip with the rollout of 5G networks. CCI’s customers have invested over $35 billion annually into their networks, helping drive more than 5% organic growth in the US tower business since 2020. Conversations with customers remain constructive, and growing competitive pressure among carriers continues to be a strong tailwind for tower companies.

6) Capex, long a concern in the capital intensive Fiber business since it accounted for nearly 90% of spending last year, totaled just $40 million this quarter, only 4% of revenues compared with 20% last year. With the US tower business requiring minimal capex, capital allocation will begin shifting toward returning capital to shareholders.

7) Consolidated adjusted EBITDA margins for the quarter were 68%, a 500 basis point improvement year over year as the highly attractive tower business is no longer held back by the fiber and small cell segments.

8) Sprint churn should be largely gone by the end of 2025, with management continuing to expect long-term churn rates of just 1 to 2%.

9) Management remains committed to maintaining an investment grade balance sheet, with an average maturity length of over 6 years, 89% fixed rate debt, and long-term leverage targets of 6 to 6.5x EBITDA.

10) Beginning in the second quarter, management reduced the dividend to $4.25 per share, still yielding 4.27% at today’s prices. The new quarterly payout is expected to run at a rate of 75% to 80% of anticipated AFFO.

Earnings Call Highlights

Morningstar Analyst Note

General Market

The CNN “Fear and Greed Index” ticked up from 56 last week to 64 this 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 down to 81.62% this week from 88.41% 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

---

More By This Author:

“What The Consumer Wants” Stock Market (And Sentiment Results)
“Cleanup To Comeback” Stock Market (And Sentiment Results)
“The Magic’s Still There” Stock Market (And Sentiment Results)