FidelityConnects: Inside the engine room: U.S. industrials and services outlook

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Hello, and welcome to Fidelity Connects.

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I'm Pamela Ritchie. The global economy is shifting, quietly in

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some places, aggressively in others.

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In transportation tightening regulation is shrinking supply and pushing

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pricing higher. In defence geopolitics and policy are

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driving one of the most disruptive spending cycles we have seen in decades,

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if ever. What happens when safety rules, for instance, pull drivers

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off the road just as demand stabilizes, and how might investors

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position for a defence sector being reshaped by innovation and

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potentially historic budget growth.

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Joining us here now to help answer some of these questions and

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more is equity research analyst Payton Liske, and equity research

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associate Nathan Ha, for an in-depth look at two

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critical sectors here driving the U.S.

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economy. So we'll get into industrials and business and

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commercial services all in here today.

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Welcome, Payton. Welcome Nathan, great to see you both.

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Great to see you.

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Thank you very much.

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Delighted to have you here. Let's dig in a little bit on

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...before we get into everything we're ultimately going to come out the other

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end with how you invest this. That is sort of important to lay the foundation

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a bit. Payton, you take a look at companies that are, pardon the

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pun, defensive in nature, they are cyclical in nature.

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Some will say the cycle is broken right now and the way you invest can't

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just be cyclically focused.

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Tell us a bit about your style, how you approach things.

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I don't think it's a whole lot different than how we focus at

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Fidelity. It's focused on quality, it's focus on

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really strong management teams that are incentivized and aligned

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with shareholders to grow shareholder value over time.

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Getting more specifically into the cyclical areas, I mean, a lot of focus on

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balance sheet, that's extremely important to be able to capitalize on

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these down cycles.

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A lot of focus on ability to grow market share, which can be a differentiating

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factor on growth through a cycle, and a lot of focus on ability to

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drive incremental margins above their peers, so you have

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a differentiated kind of margin story that can drive differentiated

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earnings growth and ultimately superior returns through a cycle.

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Those are some of the key factors that we kind of focus on.

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It really is sort of a bottoms-up approach.

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The cycles be what they may and at the moment they are sort of being what they

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may so that's how you approach it.

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Nathan, tell us your coverage list.

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It's actually fascinating some of the areas that you go into and areas that

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produce products in some cases that we probably use every day we don't know

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anything about.

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Definitely. It's an eclectic mix.

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I cover information services, a wide mix of

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industrial and business services, government services, and IT services.

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Fantastic. At the moment there's lots of different areas within,

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there's consultants, there's other things, you're picking through for winners

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and losers, which you would always be doing.

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I might just ask you why this is a different moment for going hunting for

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winners and losers within all of those industries.

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We're at an interesting time where AI, it's

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unheard of on what it can do.

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We've seen AI losers in a case where c-count based

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businesses that need advice, they can replace that with ChatGPT

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or AI.

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So not a consultant, like a traditional consulting ...

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you'd hire that on, have them sit in your offices for six months and then

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recommend and implement. That's not happening.

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It's happening less.

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Where we really want to find good stocks and good businesses is ones that have

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a data moat and some type of intellectual property that can't be replaced.

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Are both of you looking at very, very large companies and also

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some smaller companies? Payton, why don't you begin a little bit with the

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universe that you take a look at.

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It's across cap structures.

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We've got some of the largest defence companies, some of largest aerospace

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and defence companies in the world, some of the largest transportation

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companies in the world right down to sub-billion market cap companies.

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It ranges the entire spectrum.

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And also, Nathan, would you say the same thing, some of the largest, some of

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the smallest? You have to kind of know what some of the smaller companies are

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doing because they're on a bit of a cutting edge there.

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Yeah, we try to triangulate it. We talk to customers but we also talk to a lot

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of the new entrants. There's a lot a new AI companies so we try to

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figure out what they have and what they can do as well.

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Should we begin with transportation with you to kind of go through this?

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Transportation involves all modes of it but there has

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been a fascinating, very long reopening from COVID

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and all kinds of messes within there.

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Why don't you take us through, I guess, a post-COVID cycle, if that's what you

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want to call it, and what it's done to the transport.

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We're exiting the third year of a down cycle which is very unusual for

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transportation.

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Typically a down-cycle lasts anywhere between kind of 9 to 18 months.

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This is coming off of an unprecedented up-cycle so there was

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the largest increase in driver supply that we've ever seen in the US

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so it stands to reason that it would take some time for that

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to kind of cleanse. I think there's a couple of really interesting

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factors as we head into' 26.

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The first is some changing around the regulatory environment, which you had

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alluded to earlier, we're starting to see a crackdown

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on the issuance of non-domiciled CDLs which...

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And this is all US.

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This is all specifically to US trucking which

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tends to drive the pricing for a lot of other modes of transportation.

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This is where we kind of focus.

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What we've seen is anywhere up to 20% of the total driver supply

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is under review.

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There's been a large amount of these licences that have been deemed to be

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issued improperly so they're having to go through a requalification process.

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It's unclear exactly to what extent the level of disruption will be

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but I'm watching spot trucking rates as kind of the

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real time indicator of the impact on the market that this policy will have.

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We've seen the largest increase post-US Thanksgiving in

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the last 10 years in truckload spot rates.

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It's clearly having an impact, and that's during a time where demand hasn't

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been overly strong either.

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We're seeing some real supply disruption.

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I think there's several positive catalysts

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on the demand side. It's always hard to predict but we're coming off of

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three years of a downturn.

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So we've got the it couldn't be worse piece.

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That's a good starting point.

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I think it's the 35th consecutive month that the Cash Freight shipment Index

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has been negative, which is the longest...

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What index?

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The Cash Freight shipment index, it's just a broad proxy of broader shipping

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volumes, 35th straight month, it's the longest coinciding

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downturn since the inception of the data series in 1990.

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It tells you pretty low starting point.

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We have aggressive easing and monetary policy as well

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as fiscal policy coming from the One Big Beautiful Bill Act.

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I think we're moving through kind of peak tariff uncertainty

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which will be really helpful in thawing some of that capital investment cycle

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which tends to trigger industrial production related activity.

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I think there's several different potential positive demand catalysts at the

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same time that you have capacity being kind of forced out of the market which

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could create the conditions for a really strong upcycle.

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Okay, and as you say, that pricing, that spot pricing is a really interesting

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indicator. Nathan, tell us a little bit about ...

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you spend a lot of time, it sounds like, at various conferences

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getting a sense of massive amounts of innovation in some of the

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areas that you follow. Do you want to just tell us some of highlights or some

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of the trends that are being discussed and maybe something that surprised you.

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What are you doing at these conferences? What are you hearing?

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One of the biggest things is the industry conferences are super helpful.

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We get to talk to customers as well and getting a good customer view on what

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matters and what is needed and what is mission critical is really where we find

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AI winners and losers. If there's a nice to have it's sometimes often

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replaced with AI. We want to avoid being in those areas and want to

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be in areas where it's a mission critical base.

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Can you give us an example? That sounds like it would apply to every sector

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almost.

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There's an insurance data provider company and what they do is they

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provide the insurance data for all the insurance industry.

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The key variable for this is the moat that they have with the proprietary

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data. We try to focus on companies like that where you can't replace it.

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What you would need is to get all 2,000 insurance companies

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to get on board and give them the data which is something that a new entrant

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AI would find very difficult to do.

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They can't go and scrape it from somewhere else.

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The insurance companies would have to release it and they don't.

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It's proprietary data.

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Really interesting.

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What about a nice to have?

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What's a nice to have?

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There's some consulting companies, some that sell it in terms

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of a seat-based approach and what

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they do is they give advice and something that companies and customers have

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found is you can get really good advice with AI.

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When you see and you look out a few years there's a real risk that they start

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replacing those seat-based contracts with AI.

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A seat-based contract is just bums in seats, so you have this many people we

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need to provide this many programs for those many computers, essentially.

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That is on the decline.

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Exactly.

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We've seen slow but we haven't seen it real bad yet.

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That's what we're trying to avoid.

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Okay, that's what you're trying to avoid because you see that kind of coming in

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a little bit. Let's go to the defence sector because actually there's quite a

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lot that you both take a look at that comes together there.

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The huge defence companies were told in the last

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several days that the Trump administration would like them as public

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companies to not give out dividends and no more share buybacks.

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You've got to do it for the nation type feel.

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We saw share prices plunge on this.

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Put this into context for us. I mean, it sounds bad for investors.

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Is there something else we should know here?

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I think there's quite a bit of nuance to it and it's pretty open-ended.

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I don't think it was necessarily that they can't pay dividends and buybacks,

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it's more performance-based.

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If you're not living up to your contractual standards, you're delivering

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on time, on budget, then there's going to be some consequences to

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that until you can get back on time and on budget.

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I think the other component to that was if you are deemed to be

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a bottleneck in the Department of War's ability to move towards their national

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security objectives over time, meaning mainly ability

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to ramp production, and if you're not investing enough to be able to get to

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where we need to be over the medium to long term, and we deem that to be

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a risk, then we're going to limit your ability to repay

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shareholders with buybacks and dividends until you have invested in the

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capacity.

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It's tied to an outcome.

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It's tied to an outcome and I think it doesn't really change how we invest

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or think about the stocks because we've always been focused on the companies

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that have been best of breed. I think, if anything, it's just going to drive

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that wedge of performance because the

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TSR has been driven in large part by the return of capital,

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the total shareholder return of these stocks over time.

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Anywhere upwards of almost a third has been driven by the return of capital to

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shareholders in various forms. I think it could have a meaningful divide

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in performance between the best in class and those that are underperforming.

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Hello, investors. We'll be back to the show in just a moment.

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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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else you get your podcasts. Now back to today's show.

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Are the biggest companies that we know, again, they tend to be household names,

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you know them at this point. They've been around for a long, long time

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producing conventional weapons along with other defence

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items.

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I don't know, I'm out of my depth, I don't know what you call them exactly.

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Are they the ones taking us into the future?

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Are they doing tuck-in acquisitions to make sure that they have the right

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innovations? Are they being disrupted?

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I think they're at risk of being disrupted.

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If you look at the objectives of this administration

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and kind of what they're pushing towards it's creating

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more innovation, faster innovation cycles, doing things cheaper.

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A lot of that is breaking down barriers to entry so we can increase competition

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because we've had this kind of consolidation of the industrial base among

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the four or five large defence primes which has stifled

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innovation. I think a review of the procurement practices have

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kind of shown that there's some perverse incentives in the system that need to

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be changed in order to incentivize new entrants as well as to incentivize

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better behaviour.

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Are they there to keep competitors out?

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Is that the idea?

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The process is very opaque, there's a lot of red tape, it's

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very difficult to manage, it's very lengthy so it

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tends to be a deterrent to private capital because you have large upfront

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investments and this kind of unknown long time horizon to recouping that

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capital.

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Got it.

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Enter Nathan because there's a lot of making way, it

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sounds like, with some of the companies that you're looking at and the

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industries themselves to make way to find ways

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to get these innovations through, either to the bigger defence companies

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or not. Take us through that.

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These are smaller players that may move faster.

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I cover a lot of the smaller ones.

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They're more on the add-on services.

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They don't build the big missiles that Payton's coverage does

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but what we have found is that historical ways of the cost plus contracting

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where you give them money and offer a margin on top of it,

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it seems like that is less inclined with this new administration.

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We're seeing a bigger shift to fixed price and outcome-based contracting.

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That actually does drive higher margins if you do have the right product.

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We're trying to focus on who has the right products.

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What is an example of an add-on?

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Not perhaps using an example of a missile itself but what would be an

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add on?

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These are backpacks that are put on troops to prevent people from being able to

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track where the troops are.

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These are software that tracks where the enemies are or where your current

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troops are or communication devices that don't need internet service.

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Not the big missiles  but things that you do need on the battlefield still.

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Do we need more of those or is that part of the discussion that you need more

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of that and less of something else? I mean, I guess things have to work in

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conjunction but it sounds like the battlefield is changing and

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what you need, therefore, is changing.

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I think they're needed together.

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It's a picks and shovels play, potentially underappreciated.

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Just say more about that. Why is it underappreciated?

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When we think about the defence budget growing we typically think about needing

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more missiles and more rockets and more tanks but we

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don't necessarily think about what the war fighter needs.

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If you can find a company that is geared to the war fighter that actually

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does have real benefits from the defence project growth.

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And less, I'm assuming, Payton, of things that slow things down.

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Is that part of the argument as well?

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It's just easier to get something that's smaller, perhaps, through and

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approved? Is that fair?

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That's fair. I think it's really difficult for the primes that have this legacy

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cash flow base and contract base that they need

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to gradually shift off of and move from.

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There's this push and pull, how quickly do we do this, how much do we disrupt

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ourselves and how fast do we move?

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I think that's part of the challenge.

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We're looking for the management teams that are willing to

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make those tough decisions, invest for the long term, make the right moves

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that we think are going to be strategically important to make sure they're

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relevant in the future and winning.

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That's what we're focused on.

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There's money hanging there, low-hanging fruit money.

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Talk to us, both of you, a little bit about the growth of the defence budget in

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the US. Put it in context for us.

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Start with you, I think there's something to add for everyone here but Nathan...

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Just over a year ago we had DOGE happen.

16:55.848 --> 16:57.116
Was that a year ago? It's been a long year.

16:57.116 --> 17:00.853
It was November of 2024.

17:00.853 --> 17:04.757
It does feel like a long time ago.

17:04.757 --> 17:07.159
The whole mission was to reduce spending.

17:07.159 --> 17:11.130
We've actually had a year of pent-up demand that has not

17:11.130 --> 17:14.900
been spent and now we've got an additional budget layer.

17:14.900 --> 17:18.670
I think the setup for this year is attractive.

17:18.670 --> 17:22.941
We've got a lot of budget that needs to be spent that will be spent likely

17:22.941 --> 17:24.977
in the next 12 months.

17:24.977 --> 17:29.014
It's a budget, I mean, it's certainly not peace time for the entire world

17:29.014 --> 17:31.450
but it's so-called a peace time budget, is that fair?

17:31.450 --> 17:34.153
It's big.

17:34.153 --> 17:39.124
To put it into context, the US is spending just a little over 3%

17:39.124 --> 17:42.494
on defence as a percentage of GDP.

17:42.494 --> 17:44.363
We're asking NATO to start to push towards 5.

17:44.363 --> 17:48.634
If you look at the proposal that Trump's put out of

17:48.634 --> 17:52.638
$1.5 trillion that would get us just under 5%, which I

17:52.638 --> 17:55.974
think would be a very challenging thing to do based on just the fiscal

17:55.974 --> 17:58.444
circumstances of the US at the moment.

17:58.444 --> 18:02.781
I think it's clear the direction of travel is that Trump's

18:02.781 --> 18:06.885
view of this peace through strength, we need to invest

18:06.885 --> 18:10.656
to be able to show force of strength.

18:10.656 --> 18:14.593
Part of that's going to be increasing the investment in the defence

18:14.593 --> 18:18.664
industrial base. I think it's more likely now that

18:18.664 --> 18:22.601
we see a higher level of growth into '27 than what people

18:22.601 --> 18:26.238
were expecting which presents some upside to earnings estimates in some of

18:26.238 --> 18:27.906
these companies.

18:27.906 --> 18:31.844
Certain things will come to fruition maybe in 2027,

18:31.844 --> 18:36.215
that's what you're aiming towards. A comment, I think it was during

18:36.215 --> 18:40.185
salary negotiations for Elon Musk, but it was just one of those comments

18:40.185 --> 18:43.021
that got made, sort of hung out there in the markets.

18:43.021 --> 18:47.025
He said something along the lines of if I'm building a robot

18:47.025 --> 18:49.428
army I'm going to have to get paid enough.

18:49.428 --> 18:53.465
It was along with many other reasons why his increase in

18:53.465 --> 18:57.669
salary happened. It just sort of gave you that visual of what is

18:57.669 --> 19:02.107
being worked upon by various companies and Starlink's capabilities

19:02.107 --> 19:03.942
in Ukraine and so on.

19:03.942 --> 19:07.412
There's lots of different places there that you can look towards that.

19:07.412 --> 19:10.282
Are those types, I mean, the robotic army, is that being discussed by some of

19:10.282 --> 19:11.517
the companies you're following?

19:11.517 --> 19:15.621
Definitely discussed. I was at a conference in Washington earlier

19:15.621 --> 19:19.925
this year and it seemed like all these new entrant startups

19:19.925 --> 19:24.062
wanted to turn their soldiers into variants of Iron

19:24.062 --> 19:27.065
Man. We'll see how that pans out.

19:27.065 --> 19:30.068
What's that look like? What are the add-ons to that?

19:30.068 --> 19:34.239
They've got AI goggles that can see through walls and predict where people are

19:34.239 --> 19:35.974
going.

19:35.974 --> 19:39.945
They've got rocket launchers that use AI to track where you

19:39.945 --> 19:41.013
should shoot.

19:41.013 --> 19:43.982
So it's a person with a rocket on their back but they're...

19:43.982 --> 19:47.753
It's got an AI screen on it that shows you where you should be shooting to hit

19:47.753 --> 19:52.391
the moving target. Those are a few examples.

19:52.391 --> 19:54.293
Do you like your job? Is it fun?

19:54.293 --> 19:58.564
It's a lot of fun but every time I go to Washington I come back realizing

19:58.564 --> 20:01.600
that the world's not getting any safer.

20:01.600 --> 20:05.103
That is really interesting. Maybe just to put it sort of back into the context

20:05.103 --> 20:09.741
of building for strength as a deterrent, ultimately.

20:09.741 --> 20:12.945
Is there anything you can comment on it just in terms of competitors across the

20:12.945 --> 20:16.014
world and what else is being done? What are we building towards to make sure

20:16.014 --> 20:19.384
that safety occurs?

20:19.384 --> 20:23.422
I think the big push is more the restructuring of how we do things

20:23.422 --> 20:27.226
to make sure that we're getting more productivity out of every dollar spent.

20:27.226 --> 20:30.929
I think if you were just to look at China, for example, the Department of

20:30.929 --> 20:32.397
Defence does a study every year.

20:32.397 --> 20:35.767
I'm sure they don't release exactly what they're planning to do but you just

20:35.767 --> 20:36.068
get a sense of...

20:36.068 --> 20:39.805
No, but they just look at the trends in their industrial base, their defence

20:39.805 --> 20:44.443
industrial base. The last one was, I think it's been picked up by the media and

20:44.443 --> 20:48.513
it was a pretty stark increase that we've seen in a

20:48.513 --> 20:53.452
lot of their industrial capacity that I think has kickstarted a fire under

20:53.452 --> 20:57.656
at least this administration to really start to move in the right direction.

20:57.656 --> 21:00.892
One of the things that likes to get quoted is that China has something like 230

21:00.892 --> 21:04.896
times the capacity to produce naval ships that the

21:04.896 --> 21:09.334
US has. I think they have one shipyard that's the entire capacity of

21:09.334 --> 21:13.405
all of the US naval shipbuilding capacity.

21:13.405 --> 21:15.674
We're clearly falling behind.

21:15.674 --> 21:19.611
China is spending, based on the regulatory

21:19.611 --> 21:24.082
stats, half of what the US spends, a little under half, but

21:24.082 --> 21:27.686
they're getting far more productivity out of every dollar spent.

21:27.686 --> 21:31.690
I think that's a big push. How we do that is, kind of going back, breaking down

21:31.690 --> 21:36.395
those barriers, making sure that we are increasing competition,

21:36.395 --> 21:39.131
bringing in private capital, attracting private capital.

21:39.164 --> 21:40.932
These are all really important things.

21:40.932 --> 21:44.102
Talk a little bit more about that breaking down entrance.

21:44.102 --> 21:48.473
We spoke a little bit, I think yesterday, just about

21:48.473 --> 21:52.844
comparing it almost to like an open platform in finance versus

21:52.844 --> 21:56.782
a closed. Just tell us a bit more about how that may create

21:56.782 --> 22:01.219
less friction ultimately for investing, for creating.

22:01.219 --> 22:05.223
When you think about historical way of contracts it was a sum of

22:05.223 --> 22:09.161
money that was given out and you can basically build what you need or

22:09.161 --> 22:11.396
what the government needs.

22:11.396 --> 22:15.600
The new model has been new entrants like a private company, Anderol,

22:15.600 --> 22:19.237
where they build a product and they front-run the cost and then they sell it to

22:19.237 --> 22:21.273
the government on a per cost basis.

22:21.273 --> 22:25.277
So more on a productized commercial way and the government's starting to

22:25.277 --> 22:29.014
appreciate that because there's more incentive to innovate faster and build

22:29.014 --> 22:30.248
faster.

22:30.248 --> 22:32.084
How do you notice that as well?

22:32.084 --> 22:36.121
Do the larger, well-known companies, are they trying to shift from

22:36.154 --> 22:38.490
that, because they've obviously have been built on the contract side of things.

22:38.490 --> 22:43.228
That's the big shift, kind of what Nathan was just discussing,

22:43.228 --> 22:47.532
we've got private companies now that are essentially

22:47.532 --> 22:51.503
going out and building products that they believe the government or the

22:51.503 --> 22:55.540
Defence Department needs, not the Defence Department coming to a contractor and

22:55.540 --> 22:57.576
saying this is what we think we need.

22:57.576 --> 22:59.578
That's a big difference.

22:59.578 --> 23:03.615
It's something that is a huge fundamental shift in your culture, in your

23:03.615 --> 23:08.653
company and how you run your business from an R&D perspective, from everything.

23:08.653 --> 23:12.824
That's really what we're focused on, finding the companies that are making that

23:12.824 --> 23:15.694
switch, showing evidence of it and that we think can be long term winners in

23:15.694 --> 23:16.661
this space.

23:16.661 --> 23:21.066
Do you think transportation being an example but you could probably extend

23:21.066 --> 23:24.903
it to other industries as well, that some of the changes that are being made

23:24.903 --> 23:29.307
here for defence purposes and to get things moving faster

23:29.307 --> 23:32.310
will trickle down and be used in other industries?

23:32.310 --> 23:36.448
There's also discussion of the other 493 stocks and companies

23:36.448 --> 23:40.252
implementing AI but this is actually a fundamental shift in the way you do

23:40.252 --> 23:43.889
business. Do you see that happening for transportation when they do their next

23:43.889 --> 23:46.591
investment cycle?

23:46.591 --> 23:50.929
There's potential benefits from AI, for sure, from a productivity perspective.

23:50.929 --> 23:53.832
It's less obvious, I think, at the moment.

23:53.832 --> 23:57.302
We've talked about autonomous driving technology which we'll see...

23:57.335 --> 24:01.072
Where is that? That was five years ago, we should be doing it now kinda thing.

24:01.072 --> 24:05.043
It's something that I track pretty closely because it has the potential

24:05.043 --> 24:07.279
to be hugely disruptive.

24:07.279 --> 24:10.949
From what I've seen it's still quite a ways away on the long haul trucking

24:10.949 --> 24:15.253
side. That's kind of where I think we'll see it first.

24:15.253 --> 24:19.591
I think it's still outside of our time horizon yet but

24:19.591 --> 24:23.628
monitoring closely. That could be extremely impactful on

24:23.628 --> 24:28.166
the broader industry. Outside of that I think we're seeing implementation

24:28.166 --> 24:32.871
of AI and brokerage. One of the largest brokerages

24:32.871 --> 24:34.706
in the US, C.H.

24:34.706 --> 24:38.844
Robinson, has recently shown that through this pass-down cycle they can

24:38.844 --> 24:42.914
actually have some of the best margins that they've ever put up through

24:42.914 --> 24:47.018
increased productivity. Part of that they attribute to implementations

24:47.018 --> 24:48.620
of AI.

24:48.620 --> 24:52.524
That's fascinating. Let me ask both of you this question.

24:52.524 --> 24:57.362
The opportunity for investment if actual

24:57.362 --> 25:01.433
deliverables may look more like 2027 and beyond,

25:01.433 --> 25:04.002
how long is this investment cycle, do you think?

25:04.002 --> 25:06.438
Are we right at the beginning? Where are we?

25:06.438 --> 25:08.139
We've certainly seen defence stocks have done very well over the course of the
last

25:08.139 --> 25:11.877
year or so but what inning are we in?

25:11.877 --> 25:14.479
I'll ask that to you both.

25:14.479 --> 25:15.814
Who wants to go first?

25:15.814 --> 25:18.917
I think on the defence side we're very early still.

25:18.917 --> 25:22.420
It's a long cycle business.

25:22.420 --> 25:26.691
Even though our goal is to shorten the

25:26.691 --> 25:30.595
innovation cycle it's going to take a long time to do that.

25:30.595 --> 25:34.833
The procurement process is still measured in years.

25:34.833 --> 25:37.068
I think defence, we are still very early in that transition.

25:37.068 --> 25:43.708
I think in other areas, transportation is a much shorter cycle industry and

25:43.708 --> 25:47.078
it's also being commercial, adapts very quickly.

25:47.078 --> 25:51.349
The companies that I cover are such a small wallet share of the budget that

25:51.349 --> 25:54.619
the budget is a tailwind for them. I'm trying to pick and choose winners that

25:54.619 --> 25:58.723
are the long term can continue to gain share despite what the budget does.

25:58.723 --> 26:04.029
Drones have been around forever, this isn't something new, and they're cheap.

26:04.029 --> 26:06.565
Is there an investment cycle in sort of that type of technology?

26:06.565 --> 26:09.734
Give us a sense of the types of technology where something's gonna be a bit

26:09.734 --> 26:12.737
more drawn out, or maybe there isn't.

26:12.737 --> 26:16.741
There's definitely a secular change there to how wars are

26:16.741 --> 26:21.446
fought following the Russia-Ukraine war.

26:21.446 --> 26:25.250
There are real threats that companies have talked about, the government has

26:25.250 --> 26:28.053
talked about that they're trying to get ahead of.

26:28.053 --> 26:31.923
There is a secular tailwind on that end.

26:31.923 --> 26:35.393
We are trying to focus on who can be a winner and loser there because it's

26:35.393 --> 26:38.330
tough to figure out what the differentiating factor is for each one.

26:38.330 --> 26:41.032
We're still early innings, that's why it's hard to figure it out.

26:41.032 --> 26:43.134
Very early, yeah.

26:43.134 --> 26:45.737
What would be a final thought from each of you on the industries that you

26:45.737 --> 26:49.741
follow? It can be one particular piece of what you're

26:49.741 --> 26:52.911
looking at but just sort of a forward-looking statement.

26:52.944 --> 26:55.981
Payton, I might ask you to start with that to finish this out.

26:55.981 --> 26:59.985
I'm just pretty optimistic on the outlook for the transportation space

26:59.985 --> 27:02.153
into '26. It's been a very long down cycle.

27:02.153 --> 27:06.057
I think that there's some really interesting catalysts shaping up here that

27:06.057 --> 27:09.828
could be a nice fundamental inflection for the industry and the stocks have

27:09.828 --> 27:12.797
started to react favourably. I think some of them had a good run but we still

27:12.797 --> 27:17.102
see quite a bit of value looking out on a mid-cycle range power basis for

27:17.102 --> 27:19.571
some areas within the space.

27:19.571 --> 27:22.040
Fascinating to speak to you about some of these things.

27:22.040 --> 27:26.044
Nathan, what do you think as sort of a final forward looking?

27:26.044 --> 27:29.114
Forward looking, I think there's a lot of opportunities for potential mispriced

27:29.114 --> 27:33.084
equities that have been picked as AI losers that we can find

27:33.084 --> 27:34.919
as AI winners.

27:34.919 --> 27:37.555
On the defence side of things, like Payton said, I think we're still in the

27:37.555 --> 27:42.060
early innings and I think that we've been able to find some gems that

27:42.060 --> 27:46.197
are real share gainers in the budget and have figured

27:46.197 --> 27:48.266
out the innovation aspect of it.

27:48.266 --> 27:52.203
The companies that have data locked up are looking more like

27:52.203 --> 27:53.071
winners.

27:53.071 --> 27:54.606
Exactly.

27:54.606 --> 27:56.975
Fascinating to get your thoughts on both of these.

27:56.975 --> 27:58.977
Nathan and Payton, thank you for joining us here today.

27:58.977 --> 27:59.577
We'll see you soon.

27:59.577 --> 28:00.578
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28:00.779 --> 28:04.716
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