Analyst Outlook: Artificial Intelligence, Dividend, Barbell Investing Outlook Research (NYSEARCA: SCHD)

There’s no doubt that investors will be cautious heading into 2025, given what some view as an overextended and unstable market.

But the right pivot could allow investors to seize opportunities when they arise.

Lucas Ma of Envision Research, the head of the investment group behind Envision Early Retirement, uses a “barbell” approach that divides investments into high-risk and low-risk allocations , can not only withstand market downturns, but also seize growth opportunities. The strategy includes steady dividend investments as well as exposure to growth areas such as artificial intelligence, with adjustments based on market direction.

Working with Sensor Unlimited at Seeking Alpha, Ma shares her thoughts on industries to consider in 2025 and areas to avoid.

Seeking Alpha: What are your expectations for the market in 2025? 2024 is a big year for Wall Street. Can investors expect more of the same next year?

Vision research: My short answer is no. My overall assessment of the broader market is that it’s too expensive right now by all accounts and I’d be lucky if it doesn’t see a major correction in 2025 (say 20% or more). The answer is succinct, and I will only cite one metric – which I consider to be the most fundamental – the so-called excess CAPE return (“ECY”), detailed in Dr. Robert Shiller’s book Irrational Exuberance This indicator is introduced. In my opinion, ECY covers all the key elements of stock valuation: price-to-earnings ratio, risk-free rate, inflation, etc.

Over the longer term, historical data shows a clear correlation between ECY and subsequent S&P 500 returns. A lower ECY indicates a higher valuation of the S&P 500 relative to the risk-free rate, which is the real 10-year Treasury bond rate. Therefore, I expect a low probability that the S&P 500 will outperform Treasury rates and vice versa. ECY is currently hovering near the S&P 500’s lowest ever levels. Historically (e.g., the past 100 years), ECY has only appeared a handful of times, and the S&P 500’s returns have been poor each time in subsequent years. I don’t expect this time to be different.

Seeking Alpha: Tech stocks surge in 2025, largely thanks to artificial intelligence. Maybe things are getting hottest in the industry? How do you recommend investors leverage technology in 2025?

Vision research: forward To answer this question, let me digress for a moment and talk about my overall investment philosophy. Without proper context, my answer may be misleading. In addition, this digression will also help me answer your next two questions.

The core idea of ​​my investing approach is the so-called barbell model. In this model, I divide my investable funds into two parts. Not necessarily equal parts. The allocation of each segment changes with market conditions. I then invest each segment in the two extremes of the risk curve (similar to the ends of a barbell) and avoid the middle risk range. The low-risk extremes help me survive extreme market crashes, while the high-risk extremes help me grow. My experience with this approach (over 20 years and counting) is successful because it helps me clearly isolate risks.

Against this backdrop, I’m not too concerned about artificial intelligence stocks getting the highest in the current scenario. I still own a lot of AI-related stocks. But again, a key reason I’m comfortable with my risk exposure is that I’m adequately allocated to the other extreme of the risk curve (this will be detailed in my answer to your next question). I’m bullish on the expansion of artificial intelligence over the long term, and many stocks are reasonably priced given their growth potential. For example, Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA) etc.

Many investors, even growth investors, may find that their current P/E multiples (in the 30x to 40x range) cancel each other out. But for these high-quality composites with long-term growth prospects, I’m comfortable with that multiple. Thinking from an owner’s perspective (I do intend to hold my shares for the long term), their current valuation still provides strong total returns. Many of these companies have an enviable ROCE (return on capital employed) of over 70%. At a 70% ROCE, an investment rate of 10% would provide an organic real growth rate of 7% (i.e. before adjusting for inflation). An AP/E of 40x would provide at least a 2.5% yield. Therefore, combined with the growth rate, even at a price-to-earnings ratio of 40 times, the annual total return may still reach double digits in the long run.

Seeking Alpha: You also focus on dividend investing. What’s your approach to finding high-quality dividend ideas for next year?

Vision study: Yes I do. oneThe fundamental reason is that, as mentioned earlier, these stocks help anchor the other end of my barbell. In terms of screening methods, I prefer a top-down approach. More specifically, I developed some tools to help me track various marketing departments (interested readers can view and download my department dashboard in this Google Sheet as an example of these tools). Sectors with attractive valuations provide a starting point for me to further research promising stocks.

As for some specific thoughts, right now, my reading is that dividend stocks — especially in the traditional value space — are quite attractive. For example, if you just look at the dividend yield of the Schwab U.S. Dividend Stock ETF (SCHD), you’ll see that its current yield is not only significantly higher than its historical average, but it’s also hovering between its highest levels in at least 10 years. This provides strong motivation and a promising starting point for further research into the fund’s holdings. I do have identified and established positions in several of its constituent holdings, such as Altria (MO) and Chevron (CVX).

Seeking Alpha: What industries might investors be missing out on that might offer opportunities?

Vision research: I invite investors to pay attention to the communications industry represented by the Communications Services Select Industry SPDR ETF Fund (XLC). My observation from other investors around me is that both technology investors and value investors tend to ignore XLC. The name gives off the impression of a traditional telecom stock, so it may not catch the attention of many tech investors. For value investors, XLC does not provide clear “value”. Value investors typically look for companies with low price-to-earnings ratios and high dividend yields. As of this writing, XLC trades at a price-to-earnings ratio of about 20x and a dividend yield of about 0.88%, so overall it won’t pass either filter.

However, I like XLC for several reasons and urge you to take a closer look at its actual holdings. In short, roughly half of XLC’s assets are allocated to three companies: Google (GOOG) (GOOGL) (about 20% of the fund’s total assets), Meta Platforms (META) (another 20%), and Netflix (NFLX) ( about 7%). The other half is allocated to more traditional telecom companies such as T-Mobile (TMUS), Charter Communications (CHTR) and AT&T (T). All told, the top ten holdings account for almost three-quarters of total assets, which is an advantage for me because I like concentration. I can only dig into a handful of stocks.

I feel like my situation with XLC is this, having written a lot about XLC’s holdings recently. I’m optimistic about the return potential for most of them. Also, XLC is a good example in my mind of the above barbell model and also a simple implementation, it separates its assets into high growth and high risk assets and the more boring ones (which is fine in this case )assets.

Seeking Alpha: What areas should be avoided?

Vision research: I’m wary of utilities. They are traditionally considered safe havens, and given the overall market’s high valuations and the many ongoing uncertainties, many investors are likely to turn to them. However, I think their current risk premium is quite high, both based on past historical levels and current risk-free rates.

I’m also very cautious about speculative bets. Overall, I’m against these types of bets, especially in expensive markets. In my opinion, if there was a time to make speculative bets, it would be at the market bottom, not closer to the market top. Under this guidance, I won’t touch stocks with ridiculous P/E ratios (Palantir Technologies (PLTR) and its ~200x P/E ratio is a notable example) or stocks that don’t yet have profits and/or marketable products (where Many early quantum chip stocks are notable examples), no matter how promising their business models were.