In this Motley Fool Money podcast, host Chris Hill kicks off the year with a 2018 preview show, joined by Total Income's Ron Gross, and Motley Fool Pro and Options' Jeff Fischer.
In this segment, Chris hits the guys with a two-part question: What sector are you watching this year, and what is your key question regarding it? The spaces they replied with -- industrials and biotech, with a side trip into artificial intelligence -- have a lot going on.
A full transcript follows the video.
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This video was recorded on Jan. 5 2018.
Chris Hill: Let me start with the opening question I had for the last group that was sitting at the table. Ron, one industry you're watching in 2018, and what's your question about that industry?
Ron Gross: I'm going to go with industrials.
Jeff Fischer: A surprise.
Gross: [laughs] I think things look good for industrials right now. The global economy, relatively strong. I think the new tax plan that was just passed will be a nice boost for these folks. I think an upgrade cycle is a need, where people have to replace their old equipment. I think if Trump gets an infrastructure bill through on the heels of this tax plan, that's gravy for industrials as well. And I also think valuations are not as stretched in that industry as they are in some, for example, technology.
Hill: In terms of the infrastructure bill, isn't the lead time -- and whenever anyone says industrials, the first company I think of is Caterpillar (CAT 0.55%). Isn't the lead time for a company like Caterpillar, in terms of ordering equipment at delivery and things like that, isn't it years out?
Gross: It's definitely a long lead time. But we've seen a turn in agricultural, mining, commodities, over the last year or so. In fact, you'll see stock prices, if you look at the Caterpillar's stock price, you'll see that goodness reflected in the stock price. But, I think there's still a lot of room to run for infrastructure stocks like Chicago Bridge or Jacobs Engineering. And then, yes, the Deeres and the Caterpillars.
Fischer: In a lot of cases, too, you can lease that equipment on pretty short order. Ron, are you bullish on energy as well? I'm curious. Do you put that into industrials?
Gross: I do, but it's hard for me to analyze, and I've always shied away from energy, because it's even more commoditized than industrials, and it's hard for me traditionally over the years to get a handle on where we are in the cycle there. So, I traditionally just stay away. I almost put it in the same category as I do banks. It's very hard for me as an analyst to analyze those things.
Hill: Jeff, what about you? Industry you're watching and question that you have about it?
Fischer: Chris, the year has changed, but the world hasn't changed, really. I'm still fascinated, as I think most of us are, by artificial intelligence leading to automation and convenience for consumers, and smart homes and smart cars, all those things that are going to unfold in the coming years. I think you have to be invested in the leaders there. But I'm going to say for this, gene therapy --
Gross: So that was a lean in for no reason?
Fischer: It was. I like to have two answers for every question, and I think I do today. Gene therapy, immunotherapy, biotech writ large is changing rapidly and it's exciting. Whereas AI and automation may really improve our lives, biotechnology may, if it needs to, save your life down the road someday. But, there are so many companies there that are working on it, that I'm looking at the SPDR S&P biotech ETF, ticker is XBI. It's equal-weighted. Its average company that it owns is a $13 billion market value, but the median market value is only $1.5 billion. So, this ETF owns a lot of smaller companies like Puma Biotech and bluebird bio. It's a great way to buy 109 biotechs and just let it be.
Gross: Yeah, I love that because, while of course biotech comes with its own set of risks, the big question that I had for industrials was the geopolitical instability. If something goes wrong, which, hey, eventually something's going to go wrong --
Fischer: Every day.
Gross: -- in this globe we live in, industrials are going to get smacked around much more than a biotech stock would as a result of something going on with North Korea or what have you, because that's kind of insulated, it's kind of a binary. Is this FDA program working or not? Is this drug going to work or not? It's not as affected by geopolitical instability.
Hill: Let me go back to AI for a second. You reminded me, Jeff, when you mentioned the smart home, about Google years ago buying Nest, and the assumption by a lot of investors at the time was, "If anyone is going to make a smart home work, it's going to be Google, for a variety of reasons, not the least of which is their deep pockets." Are you surprised that Google, for all of its success, hasn't had more advancement on that front?
Fischer: A bit surprised, but I guess not too surprised, because Google is not a consumer products giant. They didn't have the know-how in the space at the time they bought Nest. And I think it's early. It's still early. What most people are waiting on, from what I read, and my own personal experience, is that category killer that makes a smart home work across the board. Right now, you have to piece it together bit by bit. And it pays to just wait, because the technology is advancing so quickly. So, I think they were early.