Carlisle Reports Small and Midcap Value Stocks at Maximum Pessimism
"I think that when a lot of the market moves towards one narrative, which is the AI narrative, and to some lesser extent specifically for this stock, the GLP-1 narrative that it does seem to pull money away from the part of the market that hasn't done anything, and it creates this little air pocket."
About this episode
Host Stig Brodersen convened with value investors Tobias Carlisle and Hari Ramachandra for a mastermind discussion focused on unloved stocks trading at significant discounts due to AI disruption fears. The trio each pitched companies they believe the market has oversold: Hari presented Meta, which has fallen 20% from its peak despite being on track to surpass Google in ad revenue by 2026 with $243 billion projected; Tobias analyzed Booking Holdings, down 30% as investors fear LLMs will disintermediate travel aggregators; and Stig pitched Adobe, trading near seven-year lows at $270 despite 96% subscription revenue and 41 million paying users. The central debate centered on whether AI represents an existential threat or temporary headwind for these businesses. Hari argued Meta's distribution advantage and data moat will allow it to monetize AI successfully, projecting 46% upside. Carlisle warned all three companies face an extended period of potential underearning as they pour billions into AI infrastructure that may not generate expected returns, noting AI chips age faster than traditional infrastructure. Brodersen made a contrarian case that human nature and switching costs will slow AI adoption far more than markets expect, as employees lack incentives to embrace automation and organizations resist change. The discussion revealed extreme valuation spreads between AI beneficiaries and perceived losers, with Carlisle noting small and mid-cap value stocks show the most compelling forward returns he's seen since launching his funds. All three investors emphasized these high-quality businesses generate massive free cash flow and are aggressively buying back stock at depressed prices, suggesting management views current valuations as extreme discounts.
Key takeaways
- Hari Ramachandra projects Meta will surpass Google in ad revenue by 2026 with $243 billion, seeing 46% upside despite stock falling 20% on AI spending concerns.
- Tobias Carlisle warns tech companies may under-earn for up to 5 years as they overspend on AI infrastructure that ages faster than traditional assets.
- Stig Brodersen argues employee incentives and professional pride will significantly slow AI adoption, as workers fear efficiency gains threaten their livelihoods.
- Adobe trades near seven-year lows at $270 despite 96% subscription revenue and massive switching costs in the creative professional market.
- Booking Holdings down 30% from peak as market fears LLM disintermediation, though relationships with hotels may preserve its position.
- Carlisle reports small and mid-cap value stocks show most compelling forward returns since he launched funds, with extreme valuation spreads versus AI beneficiaries.
- BellRing Brands collapsed from $27 to $8 since Carlisle's prior pitch, exemplifying broader distress in consumer stocks impacted by AI and GLP-1 narratives.