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Katz Picks Cisco, Starbucks Over Nvidia

David Katz chooses Cisco, Starbucks, Bank of New York Mellon, and PNC Financial over Nvidia due to valuation concerns.

TakeAway Points:

  • David Katz of Matrix Asset Advisors steers clear of Nvidia because of valuation worries, anticipating a one to two year price decline.
  • Katz is a fan of Cisco Systems, pointing to $28 billion in acquisition of Splunk and AI-driven network demand; analysts predict a 14% gain.
  • Despite recent failures, analysts still recommend Katz for Starbucks, which could see an 11.5% upside with new management.

Concerns about Nvidia’s Valuation

As investors deliberate on the future of U.S. chipmaker Nvidia, David Katz of Matrix Asset Advisors has opted to avoid the stock. Katz, who manages the Matrix Asset Advisors Value Fund and serves as CIO and president at the firm, expressed concerns about Nvidia’s current valuation. 

“Nvidia is a great company with really good short- and intermediate-term prospects. The issue that we have with Nvidia is that we think the stock is fully priced.” Katz said on Thursday. 

Katz anticipates that Nvidia will face competitive threats over the next one or two years.

 “We think it’s a great company, but we are not owning the stock now. We would not be moving into the stock. We think that probably a year or two from now, the stock could be lower than it is today,” he added. 

Katz believes there are better investment opportunities with lower risk, naming several stocks he currently favours.

Potential of Cisco Systems

One of the stocks Katz is optimistic about is technology giant Cisco Systems. Cisco, which offers networking and security services as well as data centers, has had a challenging couple of years but has recently shown signs of improvement. Despite a 13% drop in revenue in its fiscal third quarter, Cisco’s earnings surpassed expectations. However, shares in the company are down around 7% year-to-date and 7.8% over the last 12 months.

Katz views Cisco as a “second or third derivative play from artificial intelligence,” driven by increased demand for its networks as internet traffic grows. He also expects the company to benefit from its $28 billion acquisition of security software maker Splunk. 

“We’re expecting the business to start to accelerate for the first time in a long, long time, and at 12.5 times [price-to-earnings], you have a lot of upside,” Katz said. 

According to FactSet data, of the 28 analysts covering the stock, 7 give it a buy or rating, while 21 have a hold call. Their average price target is $53.51, implying a potential upside of around 14%.

Starbucks’ chances of Recovering

Katz also favours coffee chain Starbucks, citing its “addictive product [with] global power.” Trading at 22 times forward earnings, Katz believes the stock offers “a great business at a very good price.” Starbucks recently reported weaker-than-expected quarterly earnings and revenue, attributed to falling same-store sales and traffic. The company’s executives had previously linked sluggish sales to boycotts over its stance on Israel.

“The problems last quarter were self-inflicted by management mistakes. We think they’re going to fix it,” Katz said, adding that he expects a management refresh, potentially including a new CEO. Shares in Starbucks are down 17.6% year-to-date and nearly 20% over the last 12 months. Of 35 analysts covering the stock, 14 give it a buy or rating, according to FactSet data. The average price target of $88.50 suggests an upside potential of around 11.5%.

Opportunities in the Financial Sector

Katz also sees potential in large regional financial sector stocks like Bank of New York Mellon and PNC Financial Services, which he believes offer “more upside.” He explained that large banks have “a very understandable commercial real estate portfolio,” unlike smaller or mid-sized regional banks. “Large banks had a very good first quarter and very good outlooks,” he said. “So these stocks are at 11 times price-to-earnings. The market is 21 times earnings. So, we think they’re cheap.”

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