MW Value investor Bill Nygren explains why Nvidia isn't the best AI stock to own now

By Chuck Jaffe

Look at companies that use AI effectively - not AI-hardware manufacturers - Oakmark Fund manager says

'The Mag Seven are kind of sucking the oxygen out of the room.'

Legendary value-stock investor Bill Nygren, co-manager of the Oakmark Fund OAKMX, says that the S&P 500 SPX "looks more like a growth fund today than it ever has" - but he adds that the benchmark U.S. stock index isn't overpriced.

Like a lot of investment strategists, Nygren - who also serves as chief investment officer for money manager Harris Oakmark - said the U.S. market will broaden out this year, with the "Magnificent Seven" stocks offering less opportunity. These tech favorites could change the way stock-fund managers do their jobs, by shrinking the universe of attractively priced large-cap companies.

The biggest companies are supposed to make up the largest chunk of the economy. Investment researcher Morningstar Inc., for example, expects the large-cap category to reflect 70% of the value of a country's stock market. Just a few years ago, a $20 billion company would have been part of the large-cap universe. At the time, there were roughly 300 large-cap stocks.

Now, Nygren explained, the minimum for a large-cap is close to $70 billion in market capitalization, and there are roughly 150 companies that qualify. This group gets even smaller when a manager focuses on growth or value investments.

"The Mag Seven are kind of sucking the oxygen out of the room," Nygren said in an interview on the "Money Life with Chuck Jaffe" podcast. "It's a real issue for fund managers today. In the large-cap space, there are only 21 large-cap growth names. So if you're a large-cap growth manager, you're either buying less growth, more midcap or you're accepting the fact that your portfolio isn't going to have much active share. And I think it's really important for investors to understand how their fund managers are reacting to this change." (Listen to the interview here.)

Nygren noted that he's not changing his fund or its processes, which have brought above-average performance over the last five, 10 and 15 years. Nygren said the fund is focusing less on market capitalization and more on the 25 largest companies based on fundamentals. If the fund falls into the midcap category as a result, Nygren said, so be it.

In moving away from the Magnificent Seven - despite Google parent Alphabet $(GOOGL)$ being among Oakmark's largest holdings - Nygren has kept the portfolio light on technology stocks. With the artificial-intelligence revolution, he said he's less inclined to pursue stocks in the center of the action, and he likens the situation to the first big tech revolution - computers in the 1980s.

"Investors focused on the hardware makers and they missed the boat," Nygren said. "[It] was really the users of computers that were going to be the biggest beneficiaries."

Then, around 2000, "the next big tech revolution was the internet, and all the excitement initially was AOL and Cisco Systems. And again, the focus was on the hardware companies when the real beneficiaries were those that used the technology to create new businesses," such as Amazon.com $(AMZN)$, Meta Platforms' $(META)$ Facebook, and Alphabet's Google, he said.

'If we're wrong that Capital One can broaden its lead or Charter can develop a cost advantage, these are stocks that are priced around 10 to 12 times earnings anyway.'

Artificial intelligence is a similar dynamic. Nygren cautioned investors not to expect the biggest AI winners to be the hardware manufacturers, because that business will get increasingly competitive and see returns decrease as a result.

"The excitement is again likely to be in the companies that are the users of AI, who use that to broaden their moat," Nygren said. He pointed to financial-services giant Capital One Financial $(COF)$, which he said is developing "a data advantage versus other credit card providers. We think they're farther along at incorporating AI into their structure than most of the other credit-card companies."

Nygren also singled out cable-TV company Charter Communications $(CHTR)$, which "has made AI the primary customer-service representatives today. And customers are happier with the service and it costs Charter less. So our focus is more on the users than the equipment makers."

Moreover, Nygren noted, investors betting on AI hardware manufacturers are facing a lot of downside risk if they're wrong, given the current high prices of stocks like Nvdia $(NVDA)$. Said Ngyren: "If we're wrong that Capital One can broaden its lead or Charter can develop a cost advantage, these are stocks that are priced around 10 to 12 times earnings anyway, so it's not like there are big expectations baked into current prices."

Nygren described his value-investing style as "an educated guess of what a business might be worth seven years from today, then [buying] it at a low-enough price to earn a large excess return over those seven years if we're right." He suggested that long-term investors avoid knee-jerk reactions to current headlines, and instead view current concerns as potential opportunities.

"[President Trump] likes to do negotiating in public rather than in private," Nygren said. "Investors freak out with every position - which may be a negotiating position as opposed to where we'll end up - so our focus is looking for companies where that might be creating opportunity."

For example, "if the negotiations on tariffs become public and the companies that would be hit hardest by extreme tariffs go down significantly in price," Nygren said, "we're looking at that as an opportunity."

More: Why Nvidia's stock looks good to these analysts despite earnings jitters

Also read: The 'vibes' on Wall Street are starting to sour. Just look at these 6 charts.

-Chuck Jaffe

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February 26, 2025 07:55 ET (12:55 GMT)

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