Sector Bets Without Going All In

The fastest way to blow up a portfolio is simple: get overly confident and shove a giant percentage into one “sure thing” sector. We take a calmer route and talk through how we actually weight industries when the market feels stretched, rates feel unpredictable, and every headline tries to pull you into an extreme. Our core point is discipline: stay mostly neutral across sectors, pick only a couple places to lean in, and keep your process tight enough that being wrong does not become fatal. 

We dig into why healthcare stocks look compelling right now, especially pharmaceuticals and the ripple effects of GLP-1 weight-loss drugs. We also walk through the real estate and REIT math behind a lower-rate environment, then pressure-test it against inflation risk and a world where the market may tighten conditions before the Federal Reserve does. Along the way, we talk valuation signals like the Buffett Indicator and why we prefer phasing into positions instead of trying to nail the exact bottom. 

Then we get concrete: Clem shares his current cash allocation and why he is underweight tech, plus his mix of healthcare, industrials, and a heavy slice of financials. We debate the hidden risks in consumer spending, the sensitivity of custodian banks to assets under management, and whether the AI data-center buildout will run into real-world constraints like permits, grid capacity, and water. We also compare views on energy stocks, oil prices, LNG exports, and the tech and semiconductor landscape from Google and Amazon to NVIDIA and TSM, including geopolitical risk around Taiwan. 

If you care about stock market investing, sector allocation, and building a portfolio that can survive volatility, hit subscribe, share this with a friend who loves making big calls, and leave us a review with the sector you’re most skeptical of right now.

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Transcript

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Welcome And Sector Weight Discipline

Clem Miller 0:26

Hello, everybody. Welcome to Skeptic's Guide to Investing. I'm here with Steve Davenport. I'm Clem Miller. And today we're going to talk about our views on various industries in which to invest. That is on the stock market, of course. So let me start, Steve, and ask you, you know, where are you invested? You know, what what which industries do you favor right now? Which industries do you not favor? You know, what are your views about these? How do you um, you know, why do you think this way?

Steve Davenport 1:04

Well, I try to keep things as simple as I can, which means that for most cases, we're neutral on sector weights. We try to be neutral on out of the 11 sectors, we're probably neutral on five or six of them. We try to have two that were underweight and maybe two that were overweight. And to me, this approach prevents you know something going terribly wrong, right? If you say, hey, I'm really all in on tech right now, and you make it a 10% overweight instead of 29%, you put 39% in there. You're putting a lot of pressure on that sector to deliver, and your viewpoint or your ideas or your

Healthcare Tailwinds And GLP-1 Debate

Steve Davenport 1:49

inputs just might be either too bearish or too bullish.

Clem Miller 1:53

Yeah.

Steve Davenport 1:54

And so when I look at these, I look at say one or two sectors that I think really have potential. , and right now that sector is healthcare. I think what's going on with healthcare and what's going on with the GLPs and is is starting to introduce this concept of what's a big problem that people have, and how can we help people move in a direction that's better for their health? And we know there's side effects to GLPs, and we know that there's reasons not to use them, but I think that we also know that you know, if you can lower your weight, a lot of other health issues start to get less, and and it's worth um the pain to get the game. And I think that when I

Real Estate REITs And Rate Math

Steve Davenport 2:44

look at the next sector, it becomes harder. , I had believed that two months ago we were gonna start to see rates come down when Warsh became the Federal Reserve chairman. And so I believe that real estate was gonna be the sector that really benefited from that. And so I was positive and overweight to real estate just because I think that we know that lower rates yield higher profits for each of these REITs and their payout's gonna be the same. And therefore, if the payout's at 90%, then we know that their interest costs just got reduced, then we know that money is going to flow pretty much to the bottom line. So when I look at things like that, I think those are longer-term trends. Now that we've had Warsh come in and inflation has been nagging, there's a possibility of one rate hike, there's a possibility of two rate hikes. But then I've also seen where writers are saying, look, we've already seen rates go up, and therefore he may not need to raise rates because the market's doing it for him. And so, in some ways, I'm not sure I want to take back that overweight in real estate, because honestly, my belief is we're gonna have a pullback sometime, whether it's before the election or after the election, because the market right now is trading at just historic levels, whether it's the amount of um the amount of investment, assets greater than the economy, which is the Buffett rule in terms of the GDP. And so we're supposed to keep that below 100, and we're now at 240, I think is one estimate. So that's a number that doesn't change that easily. So when we look at our markets, if we look at our economy, yes, I understand we have more international than we've ever had, so that does change somewhat the relevance of that statistic. But Clem, I'm I'm trying to look for little small inefficiencies that others may not recognize. And I think that people have had weets in the doghouse for a while, and I think that when something's in the doghouse, I kind of like to look and say, is everybody right? Is everybody on the right side of this boat? Or are there too many people against it that um like the cigar butt idea? You know, you can pick it up and there's still some left to smoke. So I I think that those two areas are areas that I really think are positive, that had a lot more potential and a lot more upside. What about you? You have any industries that you're positive about?

Clem Miller 5:36

Well, let me start by saying that um that right now, I mean, given so I agree with you that the market is in a rough shape right now. Maybe rough is too strong a word, is in a very uncertain state right now, very shaky. And for that reason, I have quite a bit of cash. I actually have less cash than I did just some months ago, um, because I think you know we might see some upturns in certain areas. so right now I've got 27 percent in cash, um, which is down from the you know around 50 that

Valuation Warnings And Gradual Re-Entry

Clem Miller 6:19

I had just a couple months ago.

Steve Davenport 6:22

So I'd like to make one more statement, which is I think the market peaked around the time of the IPO for SpaceX. I think that's when everybody just got behind this whole concept of AI and SpaceX and the future, and everybody was just patting themselves on the back for investing in projects.

Clem Miller 6:45

You think I should have moved 100% to cash at that time?

Steve Davenport 6:48

No, I'm just saying we started to correct as we traded more of that SpaceX than we saw. That what was at the IPO? I mean, we doubled and then it went back below it.

Clem Miller 7:01

Yeah, so maybe that we maybe it's we're at a good time to to get slowly back into the market then.

Steve Davenport 7:07

That's what I would say. I I've got a client who's not in, and I've said when we do five percent a month or five percent a quarter and get ourselves back up to a more reasonable position in the market.

Clem Miller 7:19

So anyway, I'm I'm um I'm back down. I mean, I'm down to 27%

Clem’s Cash Level And Tech Trim

Clem Miller 7:24

cash, you know, by no means a low amount of cash, but less than less than what I had before. on tech, I've brought that down. and so now I have right now I've got four stocks that are about 7% of the portfolio. Apple, Arista Networks, which I love. I love Arista Networks, Amphenol, which is a company I've held for a long time, Amphenol, , and Microsoft, which um you know I have mixed feelings about, but I put that back on there. I used to love Broadcom, AVGO, , but it hasn't done very well lately, and it's been very shaky. And so I don't know. I took that off. But um those are my those are my four tech stocks, 7%. So definitely well underweight, you know, the SP 500 with regard to tech stocks. like you, I like the healthcare sector, , especially pharmaceuticals. I do have Lily, right? You mentioned GLPs. I also have AB, Abbott, Johnson ⁇ Johnson, Vertex, , and then more broadly, Danaher and the Pennant Group, which does um you know retirement well not retirement communities, but more like health, retirement health care. I don't want to say not retirement communities, but more like health services for the elderly. so those are my healthcare stocks. So you can see a lot of pharmaceuticals there. I have some industrials, Crane, CSX, General Electric, Howmet Aerospace, Parker Hanniffan, RTX, that's you know the old Raytheon, right? United. and then yeah, so I've got some defense companies in here. I used to have Lockheed Martin, but I got rid of that. It wasn't doing well. so what is your investment? And then and then financials. I have a lot of financials right now. Yeah, we're gonna disagree on this one, which is kind of unusual for me, but but a lot of the financials, some of them are banks, but a lot of them are not banks. Okay, so the banks I have, I mean, the the the traditional banks, let's say, the traditional banks, , Bank of America, JP Morgan. , I have those are my banks, but look at some of the other companies I have. BlackRock, BY, which I don't really consider a bank, so to speak, right? I consider that more specialized. Capital One, well, that's a bank. Okay. J MasterCard, Marshall McClellan, that's the insurance.

Financials Concentration And Consumer Risk

Clem Miller 10:44

Morgan Stanley, , Northern Trust, which is like um State Street and Bank of New York Mellon, which are like custodian banks, right?

Steve Davenport 10:55

Can you decide which one's the best? I mean, how do you pick three of the same almost identical?

Clem Miller 11:02

Well, I put less in each, I put less in each one, right? So I'm like spreading my bet around, right? Progressive, which I progressive at one time was my best performing stock. And then I took it off and started going down. And now it seems to be reviving a little bit. Reinsurance Group of America, RGA, Schwab, SEI, which has been doing fantastic. United Fire Groups, very small-ish insurance company, and Visa.

unknown 11:38

Okay.

Steve Davenport 11:39

I guess I would say to you, you know, you've got Visa and MasterCard, and they're about they're about consumers and consumer spending. And we're starting to see from Walmart's earnings, they're saying that the bottom part of their, you know, they're finding that people are cutting tickets and and spending less at the store than they used to on basic goods. And then I'd say the second part of that is you got three custodians, and all of them are a lot based on AUM. And so assets are near an all-time high. That feels like that could change quickly. And if it did, they would start to take a pretty good size hit.

Clem Miller 12:22

, and so so Steve, my my counter to that. No, I think I think conceptually you're right, but the market isn't recognizing that yet. Okay. The market.

Steve Davenport 12:36

I'm not I'm not saying that you're not timed well with Lem. I'm just saying that if I looked at that as an unbiased observer, I'd say, wow, the market's very high, and he's got the three custodians that take care of all the assets that people are counting on on a retirement account. He's got their two big credit card processors. These are a MasterCard. That, you know, I I understand that the individual brands do a lot of the, you know, defying their customer and trying to figure out which balance sheets they want to use their credit cards. So, but ultimately, I guess I'm just um I I I think that as we go down into this talk about individual names and good or bad, these are all just educational and opinion-oriented.

Clem Miller 13:23

We're not really any of these ideas for we're not recommending them to any, you know, we're just trying to stocks that we hold, and you don't necessarily have to buy them. but um, you know, just I mean, look, look, MasterCard 1.03 percent short interest, like

Industrials And AI Buildout Pushback

Clem Miller 13:45

visa 1.22 percent short interest. Yeah, people are not betting against MasterCard and Visa.

Steve Davenport 13:52

No, I think I think they're good names, Quantum. The only thing the only other item I'd say about your group is you have a lot of industrials in there, and the industrial space is kind of benefiting from this build out of the servers for AI. And my belief is the build out will be harder and longer and take, you know, um, and take a lot more effort because communities are really starting to stand together and say, we don't want this in our community. We don't want what it does to our electric grid, we don't want what it does to our water supply. So therefore, I I'm a little bit hesitant in the industrial space. I believe it's kind of one of those places where I have two negatives, and my two negatives are right now in discretionary and industrial, because I think that people are pulling back on purchases. So I think discretionary is having a little less and industrials having a little less is a way to be a little more conservative in our portfolios. I think that your portfolio with all of your cash is a slightly different animal. So I'm not gonna say that you should or shouldn't be in that much industrial, and I don't know what percent it makes up of your overall portfolio. So if the industry is 11% industrial, I don't know if you add up to seven or you add up to 15.

Clem Miller 15:19

Hold on, let me find out. I can tell you in a second. so my industrials are hold on. By the way, my as I look this up, I don't think any of my industrials are really tied into um, where is this? I don't think all of my industrials are really tied that much into data centers and the like. Crane, CSX, G, Howmett, Aerospace, Parker Hannifin, RTX, and Rush Enterprises.

Steve Davenport 16:02

I don't think they're really tied into um what's CS CSX is the railroad.

Clem Miller 16:14

I have 11.5% in industrials.

Steve Davenport 16:18

Okay.

Clem Miller 16:19

So you're right about normal way. Yeah. 11.5, I've got seven in tech. I have one stock in materials, Freeport McMuran, copper, right? , I've got eleven percent in in healthcare, most of which are um pharmaceutical. I have thirty percent in financials.

unknown 16:47

Okay.

Clem Miller 16:51

Right.

Energy Outlook Oil And LNG Exports

Clem Miller 16:55

But again, I have all that cash too. I got one energy stock. I had, listen, I had Kaneko and I had Chevron and Exxon, right, in my in my energy stocks. , but I don't know that energy is going to go up, that oil prices are gonna go up much more. they've been coming down. I just you know, as much as I'm skeptical about the whole Iran thing, I don't know that oil prices are actually going to go up more than they have. And in fact, they've been sort of coming down. Okay. So on that score, , I felt that there was more downside on energy stocks than upside. Yeah. But I think I think the LNG exports, , Shineer is that's more of a of a secular story, I think.

Steve Davenport 18:11

Yeah, I agree. I love LNG. I think it's a great name. So I guess I would say, you know, if you were to look at things that you're negative on, what sectors or industries do you think are negative right now? I mean, should I take that from your pullback in energy? That you're a little bit negative on energy now.

Clem Miller 18:31

Yes. Okay, yeah, you can take that. , you know, there's there aren't that many communication stocks available, right? but you know, I would Google.

Tech And Chips Google NVIDIA TSM

Clem Miller 18:45

Yeah. Well, okay, so Google Everybody loves Google. You know, everybody loves Raymond, everybody loves Google, right? I love Google. I think Google, I mean, they they have a low short interest ratio. They might rebound, but they are so their share prices so volatile, , that I just think that Gemini is better than the others?

Steve Davenport 19:17

I mean, if you were to pick one to win in the next year, well, okay.

Clem Miller 19:22

Which AI platform would would you personally use and do you believe is a great assistance to I don't think I don't think this is I don't think large language models lend themselves. You may disagree. You may disagree with me, but I don't think they necessarily lend themselves to a a first mover advantage monopoly situation. I think there's going to be a lot of market niches.

Steve Davenport 19:56

you have to pick the perfect winner clone. I'm just saying to you in general, are you a clone? I I don't know. I'm I don't feel like I'm in a position to pick. you're a Gemini person.

Clem Miller 20:10

no. I'm I don't I wouldn't say I'm a Gemini person. I wouldn't say I wouldn't say I'm an anything person because I think I think they all do the same kinds of things. I know the AI experts out there would totally disagree with me and make fine-tuned recommendations. I'm not here to make fine-tuned recommendations about about individual models, but all I know is that Google Google's share price has been very volatile, and so has Amazon's. And um I know they're in different industries, but I kind of look at them kind of together. And Google and Amazon have been, you know, their share prices have been very volatile. And , and so I until things start to to coalesce and move in this in the in the right direction, , I'm I'm gonna stay somewhat removed from them. I'd I'd rather be I'd rather be in cash than be in Google, put it that way. Wow.

Steve Davenport 21:19

Okay. I'd I think I'm gonna disagree with you on Google because I think both Google and Amazon represent good value here. I think they're being pushed aside for some of the glory of NVIDIA and some of these other names. I'm not in NVIDIA either.

Clem Miller 21:37

I'm just I'm gonna go now what you know there are you know I always I mean I had NVIDIA. NVIDIA hasn't done well. a lot of volatility. Its short interest has come down, to be sure, , but it's had a lot of volatility. The AMD, its short interest has not come down as much. but it's looked a little bit better as a stock. TSM TSM C, right? has looked really good. but I haven't I haven't added that yet. I might, but I haven't added it yet.

Steve Davenport 22:30

You just have to worry about I mean, are you sure that G is not gonna do anything to blockade Taiwan?

Clem Miller 22:39

perhaps that's why I haven't added them yet. No, I mean I think that's I think that's a legitimate fear about about TSM.

Steve Davenport 22:55

So yeah. I'd say in the fact that you don't own it and it's one of the better names is probably somewhat you know we own it and we like it and it's hard not to own it because it just represents so much of the chip space and so much of the chip space is the heart of it out.

Clem Miller 23:14

And it seems to be a more stable play than NVIDIA or AMD or or you know any of any of the other players really in that space.

Steve Davenport 23:25

Yeah yeah so and then in the last section is what things

Utilities Staples And Election Uncertainty

Steve Davenport 23:30

are in the middle and what we need to happen to make them go away from the middle. And I I have energy in the middle um and I kind of believe that when we see this um you know one big move up um I I think we're gonna see um eventually a resolution here in the I think we're gonna see oil go higher before it goes lower but when it goes lower the next time I believe that this situation will be over in November. So my belief is if energy goes down um I think it's a great time to buy it because I think it will eventually recover back to somewhere in the 70s or 80s but I think you could see it go down to the 60s on WTI and I think that's an opportunity for you to buy energy. And the other in the neutral stage I've got utilities and staples and both of those I own as ballast in the portfolio. I think that utilities have gotten a little bit overpriced because some people believe in certain utilities are going to benefit from this demand on the networks for AI. And I think it's a little bit early to identify the regions of the the the providers that are going to do that because I don't think we have all the first of all you need permits. Second of all you need the technology third you need the the workers and the steel to build what you're gonna build. So I think it's a little bit early to say who's providing electricity to these facilities that are not even built yet. So I think it's a little bit of a weight on utilities but I do like staples like Coke and others because I think that you know that's where people are turning. When they don't buy much discretionary I think their staples purchases become more important to them.

Clem Miller 25:27

So those are the kind of middle names that I think of do you have stuff in the middle that you're thinking of adding or deleting well you know I already mentioned tech is something I'm low on right so I I would say that if I'm going to add anywhere it would be back to tech when I see that starting to stabilize if we see it stabilize so I think it will at some point right so it's hard to bet against tech. It's just a question it's just a question of when um you know when that's going to turn around and right now I'm a little bit impatient about that and I see um you know I I kind of anticipate you know for me what is neutral for me neutral is cash right that's what's neutral for me and so the question is to moving out of neutral for me simply means where do I want to buy it's not moving around sectors it's like where do I want to buy and I would say my next move is going to be buying tech and you know maybe selling some financials too if they start to to you know look more unstable but I think my next move would be buying tech buying back into tech. I don't see myself buying back into energy I've already got healthcare maybe a little more healthcare I don't know but buying back into tech from my cash would probably be what I would do but but let me say this as much as I think Trump is a lame duck and we can talk about that at in another podcast right but as much as I think he's a lame duck I think we're gonna see a lot of chaos at the end of the year around the time of the election and and after the election and before the new Congress comes in when the new Congress comes in I don't know that there's gonna be a lot of positive policymaking going on over the next six months.

Steve Davenport 27:44

Yeah I think there's gonna be a lot of show and a lot of ideas and like he comes up with you know we're all gonna get this piece you know this um this Musk dividend um I still haven't seen my check I don't know if you got it in Baltimore or Maryland because you're closer to Washington but I didn't see that check. I think he might try a check for military a thousand through all the military I I think he's gonna do things that are unusual to try to get these midterms. And I think it will be a crazy time. I think I I'd like to do a podcast maybe on this whole idea of what information do we use to make decisions about voting because I think some of those pieces of information you know could be questionable and it could be an area that you you're not sure of the validity of the information so therefore you can't make as good a decision.

Clem Miller 28:42

So um anything else on industries or sectors no but you have a we should do a podcast and and maybe it'll be our next podcast after this right um you know next week right we should do a podcast on um on how to make an informed decision right going into the election and I think what happened with the mail in ballots is gonna make it chaotic so I think there's they're trying to push people away from mail in and towards in person which then well that hasn't fully been resolved yet I'm sure you know um the Supreme Court is still reviewing that um they made one decision but basically that was to just kick it down the road a little bit um right I think we got to wait until after Labor Day.

Steve Davenport 29:37

After Labor Day is always when elections really get real people are on summer vacation still for another two weeks. Yeah I think we leave people on vacation for two weeks and let them enjoy but once we get after the um labor day holiday I think it's gonna it's gonna really heat up and things are gonna get busy. So I think everybody should enjoy their summer let us know what you like and don't like and we

Next Topic Ideas And Sign-Off

Steve Davenport 30:05

appreciate you listening to the podcast and being a part of our um discussion on markets. Thanks everyone thank you