17 Aug 17th August 2026

Markets Year to Date

At little change of tack this week. No macro views. Time for some micro action.

But just a little macro first to set the scene.

Oil is up around 44% this year. The fact that oil is up that much and at the same time stocks are up +14% is surprising. If you asked me at the start of the year where stocks would be if oil was up so much, I would have said down -14%. But here we are.

The reason is twofold. First the strength of the US economy has investors thinking there is absolutely no chance of recession. Even oil up 40% can’t slow it down. The second of course is the AI trade.

We have entered a different part of the AI trade now. The massive hyperscalers are still producing obscene amounts of cash every quarter from operations. But now, rather than giving that back to shareholders (usually through share buybacks) they are spending it on building AI infrastructure. There huge cash flows are being transported to other companies.

Those other companies are now reporting huge profits. So investors are starting to buy across a wider range of assets.

Take a company that I thought made digging machines. Catepillar (CAT). It just posted profits up 73% on last year. All off the back of its Power Systems and Energy division and what it calls its Construction Industries.

Both of those divisions are basically building AI data centres.

CAT is now trading on a PE of 36. That means investors think it is about two times more valuable than the average company in the index.

I question this. Yes, at the moment it is. But how long can this go on for? There are only a finite number of datacentres that can be built. Every one built is one closer to that goal. At some point it will slow down and CAT profits will fall.

But probably not for a few years.

The good news is probably about all priced in to CAT now. Analysts will get forecasts mostly correct going forward after being caught out by the surprising demand for Data. But they have now learnt and adjusted forecasts.

Is CAT a sell? Tough one. If I owned I would probably hang on for a bit. But not for too long. It will go the way of NVidia and tread water in the future. But I definitely will not be buying it now

On the topic of NVidia. It has now decided its customers need help to pay for their chips. So NVidia has been lobbying the big financiers, Blackrock, BlackStone, Brookfield, Goldman Sachs along with others. They want these companies to basically securitise their chips as an asset so their customers can get loans from these guys to pay for those same chips.

It is clever of Jensen Huang. He is solving his customers problems so he can sell more.

What these financiers will do is somehow securitise a fund or something, put them out to investors who take all the risk, then clip the ticket on the way through.

It reminds me of the lead up to the GFC with things like Collaterised Debt Obligations, Subprime Mortgages and Mortgage Backed Securities were created by the banks to cash in on the demand for loans to buy houses. We know how that ended.

But it did not end overnight. It took a long time so nothing to worry about yet.

Ok. On to today’s main topic

The reason we buy shares and which ones we should focus on.

Your first job as an investor is to decide if you want to create income (this is mainly retirees) or capital growth (typically younger investors)

Let’s look at income.

You could invest in fixed income. Like a fixed term deposit. You will get about 5% for this. But as inflation is running at 3% you are only really getting a 2% return. That does not really get you anywhere.

You could look at bonds. You get about 5% here. Maybe more if you go down the credit ratings. Maybe you get 8%. But you have more risk than you realise. These can fail. Which is why you get more than 5%

The problem with bonds is you get no capital appreciation. So you have the same inflation issue as term deposits. Your return is much lower than it looks on paper and your capital is not going to grow.

Or you can choose dividend paying stocks. You can find Australian stocks that pay around 5% cash dividend. With franking that goes up to about 8%. Plus, the stock price can also rise. That offsets inflation. You really do get the best of both worlds.

But don’t go out and buy the same ones everyone else is.

Here is one. I will tell you which at the end.

This company just reported earnings.

Profit was 2.7% higher than last year. Hey, at least it is growing. But hardly going to move the dial.

It did announce a cash dividend which comes to 4.4% per year. Add in franking and that gets it to an income of 6.2%

This is where things start to fall apart. It announced an increase in debt of about $1billion and also a share buyback of $1billion.

The problem with debt is it must be repaid (shareholders do not) and that interest adds to costs (shareholders do not)

So this company is making poor capital allocation choices. It is exchanging equity for debt. The capital allocation model preferred goes the other way. Get rid of debt. Reduce your costs and then you can reward shareholders forever based on a lower cost basis each year.

This same company is now trading on a PE of 24. That means shares are trading a price almost 50% higher than the average company on the market. It is saying this company is 50% more likely to grow than the average company.

Really? Growth of 3% and poor capital allocation decisions?

No thanks. It is clearly overvalued and I rate it a sell.

What is the company? Telstra.

Now, compare this with another company

This one is a financial institution in South America

My wife is from Brazil, so I have learnt a lot about South America recently

For example, I have learnt they have a saying in Brazil. It is similar to this one in Australia

Happy Wife. Happy Life.

Except their version goes

Happy Wife. Avoid the Knife

I have also learnt how the continent is turning itself around. Argentina in particular. But brazil also. After a long time of no growth things have changed recently

And this is the Argentina stock market over the last 5 years

4138% growth.

It is all down to their new President. Javier Milei. He has made radical moves. Like cutting government spending dramatically and introducing policies around tax that favour private business and investment.

I have written to him inviting him to Australia and asking what I can do so he takes up residence in The Lodge.

In this environment there is a bank that is doing……shall we say, fairly well.

NuBank (as it is known) started in Brazil. Has expanded to Mexico and Colombia and in 2026 it obtained a license to operate as a bank in the US.

It currently has 135million customers. (that is a bit like an Australian bank having 6 times the total population of Australia as customers). But its potential to get more customers is almost unlimited.

The population of South American is 440 million. They have done an amazing job so far. About 1 in 4 people in South American use their services but obviously they can get more and that’s before we even start talking about the US potential.

Recent earnings – Revenue up 54% on last year. Profit is up over 50% in the last 2 years.

Now they are using AI is fast track credit decisions and the company tracks some interesting metrics

It says it costs $1 per customer to serve them. But they generate an average of $16 per customer in revenue.

That is some profit margin. So their business model is simple. Just get more customers.

Management is very clear with their metrics and openly displays them in reports

Customers increased 14% over last year.

Customer activity up +83%.

I will end with a quote from the CEO. David Velez.

“Our AI transformation is a core priority of Nu. We are not adding AI to banking, we are rebuilding banking around AI. NuFormer, our proprietary set of foundation models, is in production today for credit card in Brazil and Mexico, and for unsecured lending in Brazil. Our AI Private Banker functionalities already serve more than 15 million monthly active users. These capabilities have been a meaningful driver of the significant expansion of our credit portfolio over the last twelve months, enabling us to grow limits with resilience, not just speed. In Mexico, the same earnings-generating formula that built Brazil has reached its inflection point. We have achieved break-even and become the third largest financial institution in the market, reaching 15 million customers. All of this comes on top of another strong quarter, with more than 135 million customers, revenues surpassing $5 billion for the first time, net income of $871 million, and ROE of 29%.”

As you can see the company is growing extremely well. Their opportunity for further growth is almost unlimited.

So how does the market value the stock? Just a PE of 20. Basically the same as the average company on the market.

So, which one would you prefer to buy today? Pay 50% overs for Telstra with 3% growth or even money for NuBank with 54% growth?

Investing is about seeing what others do not. Thinking longer term than others. This bank does not yet pay a dividend. It is using all its cash to reinvest and grow. But one day, it will mature and at that point it will pay a dividend. Just imagine what it could look like in 5 years time, if you buy today while it is cheap.

For disclosure, this is one of our recommendations from our Global Growth Portfolio.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.