Themes propel earnings, earnings propel stocks, strong themes propel strong stocks higher.
We see this play out every day, and I can tell you that while it's hard to divine politics, interest rates, and current events, it's not all that hard to divine great themes.
Tuesday morning on "Squawk on the Street" we had the privilege to interview Dave Cote, the former CEO of Honeywell International (HON) . Teaming up with CEO Rob Johnson, Cote is now the executive chairman of a company called Vertiv. You probably don't know Vertiv. It's a company that is merging with a special purpose entity run by Cote called GS Acquisition Holdings (GSAH) . Cote's a phenomenal manager. We saw him crush the S&P 500 when he ran Honeywell. When he retired and turned the reins over to Darius Adamczyk many thought he might be done running businesses.
But he simply regarded it as too much fun to quit. So he raised some money and looked around for a business that he felt had the wind at its back, a business that is growing much faster than the Gross Domestic Product and is not hostage to world trade or politics in general.
He came up with the data center, particularly to have data centers that will provide incredible speed to deliver data lightning fast from the edge, from the outer portion of a network. From there he looked for a property that's for sale that sells data center equipment and he found Vertiv. Was Vertiv of interest to Dave? All businesses, candidly, are of interest to Dave. Is the business itself a fantastic enterprise? He would be the first to tell you, no, not yet, and he's brought in Johnson, who is from the sector to run the day to day.
He compared it to coming to Honeywell a couple of years into the turn that he led and was quite confident that Vertiv could be a platform for tremendous growth. I have learned a tremendous amount about business from Dave. One thing he always liked, for example, about Honeywell was the aerospace business. Aerospace grows faster than most industries and the long-term secular growth of aerospace is levered to the great middle-classification of the world: simply put most people have never even stepped into an airplane.
The data center, he says, is even better. He thinks that data center traffic could have 21% growth for multiple years and the volume is just going to increase exponentially, especially when you consider that 90% of all data has been created with in the last two years, that there are expected to be 6 billion mobile subscribers and 75 billion internet of things devices that are expected to be in use by 2025, up from 23 billion in 2018.
Is this a can't miss proposition? There is no such thing as can't miss, but it sure seems to have a better shot at succeeding than most businesses. I like to crib from the methodical and the rigorous. That's Cote, that's Vertiv.
Themes like these tend to pop up in a lot of crazy places and you have to be ready to pounce on them, regardless of trade treaties, like the U.S.-Canada-and-Mexico NAFTA redo, which looks like it will be passed into law next week, or the China-U.S. tariffs, which look like they may or may not be delayed depending upon who last spoke to the media.
I nailed one of these themes just last week in the Gameplan on "Mad Money" when I talked about how much I liked the stock of AutoZone (AZO) . Is that because AutoZone is the best retailer in the world? No. There are many that are better. I said it because the average auto on the road is 12 years old and that means there are many cars that need to be taken care of.
The best way to take care of them? Do it yourself. The best do it yourself retailer? AutoZone which has tremendous consistency, 21 out of the last 25 quarters showing positive same store sales.
That's a terrific record, but you need more than that to be the best these days in an era where almost anything can be found on Amazon (AMZN) . You need convenience and you need lowest prices and that's something that AutoZone can give you with its huge selection of private label goods.
But what I like about AutoZone best? Like, Dave Cote, who believes in his business and himself, AutoZone chairman, president and CEO Bill Rhodes does the same. That's why he bought back 403,000 shares of stock. Now before you sneer at that number, consider that he spent $450 million doing so at an average price of $1,116. And that's how his stock could rally $80, going to $1,249.
I talked on Monday about destructive buybacks in retail, flagging both Macy's (M) and Kohl's (KSS) , which spent billions buying back stock at the behest of Wall Street to absolutely no avail as their market caps shrunk radically the entire time. That doesn't happen when you have a low-priced retailer with a secular theme behind it, which is why AutoZone's market capitalization in the last seven years has grown from $13 billion to $29 billion as it has taken shares down from 38 million to 23 million.
Again, you are looking for secular themes. And do it yourself auto, while totally unsexy, fits the bill perfectly.
Let me give you one more, one that I want you to remember if there is no trade deal this weekend: 5G. We have seen with this quarter an explosion growth in 5G and it's pretty much in year one of its growth.
We all know that there's a lot riding on 5G. We have a prospective merger in this country between T-Mobile (TMUS) and Sprint (S) that is so important to the national interest, because it can help foster 5G that it's a bigger imperative than lower prices for consumers, although a bunch of states attorneys general are in disagreement with the Justice's Department's antitrust division on the matter. We have China trying to assert 5G leadership with a government demanding supremacy. We have Europeans trying to catch up with companies like Ericsson (ERIC) and Nokia (NOK) .
You know who are the arms merchants in 5G? Specifically four U.S. semiconductor companies: Skyworks Solutions (SWKS) , Qorvo (QRVO) , Qualcomm (QCOM) and Marvell Technologies (MRVL) . Any one of these companies is investible for this multiple year theme that I repeat we are only in year-one for. What matters to me is that these stocks sink or swim with the Chinese talks. If they fail, they go down. If they succeed the go up.
What matters, though, are not the trade talks, but the theme itself. If we do not get a trade deal, if we get higher tariffs, these will all go down. But will that mess with the theme? Will that stop 5G?
Absolutely not.
Like the data center, like do it yourself auto repair, 5G stops for no government.
That's what we need at a time like this: Apolitical themes that work no matter what. You invest in them, you can make money. Multi-year money.
The best kind to make.
