Finding Bargain Stocks In AI's Shadow

Hotchkis & Wiley, a $35 billion value manager, is running a $767 million Value Opportunities fund (HWAIX) that leans away from AI winners toward beaten-down, high-quality franchises; the fund has returned 12.5% annualized since its 2002 inception (Institutional) beating the Russell 3000 Value by ~3ppt and the S&P 500's 9.6% over the same period. Manager David Green concentrates in 40–70 names (top 10 ≈45% of assets, turnover ~76%), favoring metrics like EV/EBIT; top holdings include Workday (8% of the portfolio, ~5x EV/sales, shares down ~11% YTD), Ericsson (≈$24bn revenue, ~1.1x EV/sales), and U-Haul (≈$5.6bn revenue, $9bn market cap, shares down ~30% YTD, trades at <9x normalized earnings). Green argues these positions reflect durable fundamentals and temporary headwinds (e.g., elevated depreciation, self-storage ramp, low mobility from high mortgage rates), positioning the fund to benefit if market breadth broadens away from a narrow AI-led rally.

Analysis

Market structure: The market is bifurcating — a narrow cohort of AI beneficiaries (large-cap semis, cloud infra) continues to attract outsized flows while broad parts of software, telecom equipment and offline services are being discounted. Direct winners are AI platform owners, cloud infra vendors and passive funds that own them; losers are steady-recurring enterprise software (Workday), telecom infra (Ericsson) and capital-intensive services (U‑Haul) that face negative sentiment but stable cash flows. Cross-asset: expect higher implied vol in concentrated growth names, modest outperformance in credit (BBB spreads tighten if investors rotate to cyclicals), SEK/USD and USD strength to matter for Ericsson, and diesel/fuel cost sensitivity for U‑Haul capex models.

Risk assessment: Tail risks include an accelerated AI productivity shock that meaningfully cannibalizes enterprise spend (20–30% lower growth in legacy SaaS flows), regulatory action on AI platforms reducing profits, or a sharp telecom capex cut (-15% YoY) from macro slowdown. Immediate (days) risk is momentum reversals; short-term (3–6 months) risk centers on earnings misses and guidance; long-term (12–36 months) risk is structural re-pricing if AI adoption meaningfully reduces labor-driven revenues. Hidden deps: Workday’s low churn (~<2%) masks contract duration concentration and potential pricing pressure; U‑Haul profitability is sensitive to used-truck resale values and mortgage-driven mobility rates.

Trade implications: Favor selective value exposure: establish modest core longs in WDAY (2–3% portfolio), AMERCO/U‑Haul (UHAL, 1.5–2%), and Ericsson (ERIC, 1–1.5%), scaling into 5–8% cumulative allocation on 8–12% pullbacks. Pair trades: long WDAY / short NVDA or SOXX to neutralize AI beta; size short at 50–70% of the long notional to reduce sector skew. Options: buy 12-month LEAP calls on WDAY (25% OTM, notional ≈1% portfolio) and finance by selling 3–6 month covered calls on concentrated AI winners after >30% rally; use put spreads on NVDA (6–9 month) as tactical protection.

Contrarian angles: The consensus underestimates integration complexity and stickiness of enterprise workflows — AI code generation is unlikely to displace deep ERP/HCM integrations in 12–24 months, implying WDAY upside if churn stays <3% and ARR growth normalizes. The market may have over-penalized telecom and logistics leaders: Ericsson at ~1.1x EV/sales and U‑Haul at <9x normalized earnings create asymmetric returns if 5G capex or mobility normalizes. Watch triggers: if telecom capex guidance falls >10% or Workday churn rises >3%, cut exposure; conversely, Fed pivot expectations or a 25–50 bps drop in mortgage rates should be used to add to U‑Haul.

Key Decisions for Investors

• Establish a 2–3% long position in Workday (WDAY) within 30 days, scaling into any >5% pullback; target 12-month upside 20–40% if EV/Sales re-rates from ~5x toward 8–10x and churn remains <3%; place a tactical stop-loss at -18%.
• Initiate a 1.5–2% long position in AMERCO (UHAL) with horizon 12–18 months to capture normalization to ~9x "normal" earnings; add if 30‑year mortgage rate falls >75 bps from current levels or if used-truck resale prices stabilize, trim if shares rise >35%.
• Buy a 1–1.5% position in Ericsson (ERIC) (or ADR) as a 12-month value play; hedge geopolitical/FX risk by shorting 0.5–1% notional of large-cap AI exposure (e.g., NVDA) to neutralize market beta; take profits on ERIC if EV/Sales moves above 1.6x.
• Implement options hedge: purchase 12‑month LEAP calls on WDAY ~25% OTM sized ≤1% portfolio and finance by selling 3–6 month call spreads on concentrated AI names after a >30% rally; additionally buy 6–9 month NVDA put spreads (cost-limited) sized 0.5–1% as tail protection.
• Reduce passive mega-cap growth exposure by 5–10% of portfolio weight over 60 days and redeploy into selected value/industrial names described above; re-evaluate after two major catalysts (Fed policy shift or next two earnings seasons) and rebalance if dispersion compresses by >200 bps.