Standby Me
In this edition of the Smart Investor newsletter, we spotlight the power behind AI’s uptime. But first, let’s review the latest Smart Portfolio developments.
1
Portfolio News and Updates
❖❖ Taiwan Semiconductor Manufacturing, aka TSMC (TSM) is scheduled to report its Q2 results on July 16, but has already released its revenue data through its regular monthly reporting schedule. The world’s largest contract chipmaker reported a 36% year-over-year jump in quarterly sales, while its first-half revenue increased by a similar 35.6%. Most strikingly, TSMC’s June revenue surged 68% year-over-year and increased 6.2% sequentially – a sharp departure from the month-over-month declines recorded in June during each of the previous four years.
TSMC manufactures advanced chips for major technology companies, including NVIDIA and Apple, and is widely seen as a key indicator of global investment in AI servers and data centers. Despite commanding more than 70% of the global pure-play foundry market and investing heavily in bringing additional manufacturing capacity online, the company has said that it may remain unable to fully meet customer demand for several years as global demand for AI hardware continues to soar at unprecedented rates. TSMC has allocated a record $56 billion to capex this year as it expands its advanced chip manufacturing and packaging facilities in the U.S. and Taiwan.
1
❖❖ Broadcom (AVGO) released the details of its expanded partnership with Apple, which was announced last week. The new multiyear agreement is expected to exceed $30 billion. AVGO will invest $1.5 billion to expand and modernize its Colorado facilities and supply more than 15 billion U.S.-made chips through 2031, cementing Broadcom’s role as a key partner in Apple’s American Manufacturing Program.
Since the start of April, AVGO has expanded its partnership with Meta, announced multiyear agreements involving Google and Anthropic, and helped OpenAI build its first-ever custom AI chip. Alongside considerably strengthening its grip on the custom silicon market, Broadcom commands roughly 70% of the custom AI accelerator market and maintains a similarly dominant position in high-end Ethernet switching. This leaves it exceptionally well positioned to capitalize on rising AI infrastructure spending and makes its goal of more than $100 billion in fiscal 2027 AI revenue look increasingly modest.
1
❖❖ NVIDIA’s (NVDA) Vera CPUs continue to draw strong interest. OpenAI, Anthropic, SpaceXAI, and Oracle have already received the first Vera CPU systems. The latest adoption announcement came from AI lab Perplexity, which found that Vera CPUs completed its real-world agentic coding workflow roughly 1.5 times faster than x86 processors, making the chips an exceptionally strong fit for the company’s core workloads.
NVIDIA’s Vera line is purpose-built for the AI agent era, giving it a significant performance advantage over conventional processors in the workloads it was designed to handle. NVIDIA projects that its CPU revenue across Vera and Grace could reach $20 billion this fiscal year, as it moves directly into a server CPU opportunity estimated at $200 billion and long dominated by Intel and AMD.
1
❖❖ According to media reports, Alphabet’s (GOOGL) Google is actively expanding access to its TPUs beyond its own cloud infrastructure. This includes deals with neocloud providers like Fluidstack, a joint venture with Blackstone, and major external customers such as Anthropic, OpenAI, Meta, and Apple.
New initiatives involve selling TPUs directly to select third-party data centers and operators, backed by software improvements to reduce switching friction. Google is also scaling TPU production aggressively and releasing new generations optimized for AI training and agentic inference workloads.
Historically focused on internal use and Google Cloud, the company has been shifting strategy over the past year amid surging AI compute demand. It is challenging NVIDIA’s dominance by targeting loyal enterprise and hyperscale customers, positioning TPUs as a lower-cost, more efficient alternative – particularly strong on performance-per-dollar for optimized workloads.
Most of the financial benefit from TPUs currently comes indirectly through a major boost to Google Cloud’s growth. Cloud revenue surged 63% year-over-year in Q1 2026, largely driven by AI infrastructure demand, including TPU-powered services. Direct external TPU hardware sales, however, are expected to become a more notable revenue line starting in 2027.
❖ In parallel developments, Google Cloud announced a landmark partnership with Samsung Electronics to deploy its Gemini Enterprise platform across Samsung’s Device eXperience (DX) Division globally. This represents one of GOOGL’s largest enterprise agentic AI deployments to date in South Korea and further strengthens the longstanding collaboration between the two companies. The move underscores Google’s expanding push into enterprise AI commercialization and should contribute to sustained Google Cloud revenue growth.
1
❖❖ Synopsys (SNPS) is discontinuing select legacy manufacturing analytics products to shift engineers and capital toward higher-margin AI-powered chip design tools. The company has informed more than 10 chipmakers that it will stop developing new versions of its anomaly-detecting automation software and will only carry out maintenance obligations. According to SNPS, these are noncritical tools, so their discontinuation should carry limited commercial risk.
Meanwhile, the move allows Synopsys to put more resources behind its higher-value core: AI-enabled electronic design automation. The company recently introduced technology designed to let AI agents perform more chip-design tasks and is exploring consumption-based pricing for their use. It also follows the sale of SNPS’ ARC Processor IP Solutions business to GlobalFoundries, removing a standalone processor operation and allowing the company to focus its investment on design software and the IP categories where it holds stronger competitive positions. Together, the two moves show SNPS actively pruning lower-priority operations to focus on areas offering stronger growth, differentiation, and margin potential.
1
❖❖ JPMorgan Chase (JPM) delivered another blowout quarter, posting the highest quarterly profit ever recorded by a U.S. bank. Net income reached $21.2 billion, or $7.70 per share, boosted by $4.2 billion in after-tax gains tied to Visa shares and other equity investments. Excluding these items, net income still climbed 13% year-over-year to $16.9 billion, while adjusted EPS of $6.14 easily cleared the $5.59 consensus. Managed revenue rose 27% to $58.0 billion, with every business segment setting a revenue record.
The star was JPM’s Commercial and Investment Bank, where revenue surged 27% to $24.9 billion. Equity trading revenue exploded 86% to a record $6.0 billion, lifting total markets revenue by 35% to $12.1 billion, while investment banking fees jumped 30% to their highest level since 2021. Asset and Wealth Management revenue rose 19%, with assets under management reaching $5.1 trillion, while Consumer Banking revenue increased 8% amid healthy spending and deposit growth.
The outlook also strengthened. JPM raised its 2026 NII guidance from $103 billion to $105.5 billion, including an increase in NII excluding Markets to $96.5 billion from $95 billion. It also lowered its expected card net charge-off rate to 3.2% from 3.4%, reflecting better-than-expected consumer health. Higher activity pushed the expense outlook to $107.5 billion. However, with an adjusted ROTCE of 23%, a robust deal pipeline, and the quarterly dividend set to rise to $1.65, JPM remains firmly in overdrive.
1
Portfolio Earnings and Dividend Calendar
❖ The Q2 2026 earnings season has officially begun, and several Smart Investor portfolio holdings are scheduled to reveal their quarterly results this week. Bank of New York Mellon (BNY), Morgan Stanley (MS), and PNC Financial (PNC) will report today, while GE Aerospace (GE) and TSMC (TSM) are scheduled for tomorrow, July 16. Interactive Brokers (IBKR) is expected to post its results on July 21, and Alphabet (GOOGL) will open the season for the U.S. Big Tech on July 22.
❖ The ex-dividend date for EMCOR Group (EME) is today, while for PNC Financial (PNC) it is July 20.
w
1
New Buy: Generac Holdings (GNRC)
Generac Holdings operates at the center of the shift toward more resilient, distributed, and intelligent power – designing and manufacturing energy solutions that help homes, businesses, and critical infrastructure remain operational when the grid cannot support them. Best known as the category-defining leader in home standby generators, Generac has expanded across battery storage, energy management, grid services, and commercial and industrial power systems serving data centers, telecom networks, healthcare facilities, and other mission-critical applications. Its technologies increasingly connect generation, storage, monitoring, and demand control into integrated energy ecosystems. As extreme weather strains aging grids, electricity demand accelerates, and uninterrupted power becomes essential to both daily life and the digital economy, Generac occupies a pivotal role in the energy landscape – helping customers secure their own power while enabling utilities to manage a more complex and decentralized grid.
1
Generation Shift
Generac began in 1959 in rural Wisconsin, commercializing affordable portable generators before expanding into industrial stationary power and launching its first residential standby line in 1989. That product helped create the automatic home standby generator category. Following its 2010 public listing, GNRC used acquisitions to build international scale and enter adjacent power markets. Its 2016 majority investment in Italy’s Pramac materially expanded its commercial and industrial presence outside of North America.
The company’s next transformation began with its 2018 “Powering a Smarter World” strategy. Generac started assembling the technology needed to connect generation, storage, monitoring, and energy management across homes, businesses, and utilities. Acquisitions including Pika Energy, Enbala, Deep Sea Electronics, and ecobee supplied battery storage, virtual-power-plant software, advanced controls, and smart-home capabilities, extending Generac beyond equipment manufacturing into connected energy ecosystems.
From 2022 through 2024, GNRC added industrial IoT, commercial battery systems, and microgrid controls. Blue Pillar, REFUstor, PowerPlay, and Ageto strengthened Generac’s ability to coordinate distributed energy resources, while selected distributor acquisitions deepened installation and service coverage. The strategy increasingly combined hardware, software, and grid participation around common platforms.
A more consequential expansion emerged in 2025. Generac introduced large-megawatt diesel generators designed for mission-critical facilities, opening the backup-power market for hyperscale, colocation, enterprise, and edge data centers. AI infrastructure spending had sharply increased the need for dependable onsite power while stretching incumbent generator capacity, creating room for a scaled entrant with established engineering, manufacturing, and global service capabilities.
Generac moved quickly to build that opening into a durable position. It expanded large-megawatt generator production and packaging capacity, while the 2026 acquisition of Enercon added custom generator enclosures, switchgear, and power-distribution expertise. GNRC’s collaboration with EPC Power broadened the offering into integrated generation, battery storage, and power conversion capable of handling volatile AI workloads.
In June 2026, Generac secured a global supply agreement with an unnamed leading hyperscale data center operator following an extensive qualification process. The agreement marked a clear expansion of GNRC’s role: alongside protecting homes and businesses during outages, it is now supplying backup power for the hyperscale infrastructure supporting the AI economy.
1
Power in Balance
Generac has evolved from a residential backup-power specialist into a balanced energy-technology company organized around two complementary platforms: a category-leading Residential franchise and a rapidly expanding Commercial & Industrial (C&I) business serving data centers, telecom networks, healthcare facilities, utilities, rental fleets, and other mission-critical operations. Across them all, the company increasingly combines generation with storage, switchgear, controls, monitoring, and energy-management software.
Residential remains the foundation, supported by a vast nationwide dealer and partner network that creates a substantial installation and service advantage. GNRC is the category leader in U.S. home standby generators, yet penetration is only 6.75% across approximately 63 million addressable homes, while Generac’s strongest states already average around 20%. Management estimates that reaching that level nationally would represent an opportunity exceeding $50 billion.
Generac Home is broadening the relationship beyond backup generation. The platform connects generators with storage, inverters, load controls, EV charging, and ecobee energy-management technology. With more than 5 million connected homes, ecobee provides an installed base for hardware cross-selling, monitoring, and recurring services. Solar and storage face near-term pressure from reduced incentives and elevated interest rates, although rising electricity prices and grid instability preserve the longer-term rationale.
GNRC’s largest incremental opportunity comes from AI and cloud infrastructure, where data centers are driving rapid C&I expansion. Global data center investment is expected to exceed $1 trillion in 2026 and reach more than $1.7 trillion annually by 2030, representing the largest technology-infrastructure investment cycle in history. Power availability has become a central constraint, creating substantial downstream demand for reliable onsite backup and distributed energy systems.
Generac entered this market with large diesel generators spanning 2.25-3.25 MW and has a 4 MW platform under development. Data center backlog exceeded $700 million in April, increasing by approximately $300 million from mid-February and providing visibility into 2027. In June, a global supply agreement with an undisclosed hyperscale data center operator strengthened GNRC’s position alongside its preferred-supplier relationships with two global colocation operators. Extensive factory, quality, performance, and supplier audits preceding the agreement provide valuable validation with other large customers.
Scaling those wins now depends on execution. Generac is expanding capacity, and Enercon brings packaging, enclosures, switchgear, and power distribution in-house, easing a bottleneck and improving delivery control. Exclusive U.S. access to its large-engine platform and extensive service coverage strengthen GNRC against entrenched competitors. Texas rules allowing grid operators to call on large users’ backup resources during emergencies further strengthen the case for onsite generation. Capturing that demand will depend on navigating the permitting process, securing critical components, and meeting demanding customer delivery and performance obligations.
Data centers, telecom, rental equipment, distributed energy, and grid services increasingly diversify the company’s growth profile while the residential franchise continues to provide scale, strong margins, and long-term penetration potential. The combination increasingly gives Generac several independent paths to growth as reliable power becomes essential across homes, critical infrastructure, and the AI economy.
1
Load Sharing
Generac entered 2026 with a balanced financial engine: C&I is driving top-line momentum, while Residential anchors profitability and supports cash generation. That divergence was already visible in late 2025: C&I sales grew 10% in Q4, while weak outage activity reduced Residential sales by 23% and left companywide revenue 2% lower for the full year.
The first quarter of 2026 marked an inflection from a difficult transition year and demonstrated how the two business lines complement each other: C&I drove nearly all consolidated sales growth, while Residential generated more than twice as much segment adjusted EBITDA.
Accelerating data center demand alongside growing rental-equipment exposure propelled C&I revenue up 27.8% year-over-year to $510 million. Meanwhile, Residential sales rebounded despite continued softness in energy storage. The segment’s revenue inched up 1.1% to $552 million, as a winter storm supported portable generators, while pricing offset lower home standby volumes. As a result, total Q1 2026 revenue increased 12.4% year-over-year to $1.06 billion, marking a return to double-digit growth.
The quarter’s margin pattern reflected the division of labor inside GNRC. A heavier C&I mix pressured gross margin by 80 basis points year-over-year to 38.7%, yet operating expenses increased only 2%, allowing profitability to scale faster than sales. Adjusted EBITDA rose 29.4% to $193 million, lifting margin from 15.9% to 18.3%, while adjusted EPS climbed 42.9% to $1.80, well above the $1.33 consensus. Generac Home efficiencies and favorable pricing expanded Residential’s adjusted EBITDA margin from 20.3% to 25.1%, while C&I margin advanced from 11.4% to 13.0% through volume leverage.
Cash generation also strengthened. Operating cash flow more than doubled to $119 million from $58 million, while free cash flow increased to $90 million from $27 million in the prior-year quarter as working-capital pressure eased. GNRC’s $1.26 billion of liquidity and leverage of 1.7x adjusted EBITDA provide room to finance capacity expansion, although inventory remains elevated at $1.25 billion. The rebound indicates that higher earnings are converting into cash again, with full-year cash generation expected to remain weighted toward the second half.
Management’s expectations reflect that progression, with Q2 guidance calling for 9-10% revenue growth and adjusted EBITDA margin near 18%. Analysts expect adjusted EPS of $2.00, roughly 21% higher year-over-year.
GNRC raised its 2026 revenue outlook after Q1 outperformance, with the entire increase coming from stronger C&I expectations. Consolidated revenue is expected to grow at a mid-to-high-teens rate, comprising about 10% in Residential and mid-to-high-20% in C&I. Around 55% of sales should arrive in the second half as data center shipments accelerate, while Residential guidance remains conservative, assuming average outage activity and no major storm.
The company’s 2026 gross margin is now expected at 38.5-39.5% and adjusted EBITDA margin at 18.5-19.5% (approaching 20% in Q4), with analyst estimates sitting within those ranges. Free cash flow is projected at approximately $350 million, while capex is slated to rise to roughly 3.5% of sales, above historical levels due to data center capacity investments. The vertical integration of the recently acquired Enercon should add about 50 basis points to C&I margins.
That integration, alongside higher C&I volumes and operating leverage expected to lift commercial margins, while normalized outage activity is expected to help Residential return to stronger volume growth. As a result, the profitability gap between the segments should continue narrowing over time.
Meanwhile, the combination of C&I growth, Residential cost efficiencies, and improving energy-technology results creates several paths to earnings expansion, visible in GNRC’s longer-term expectations. Management targets low-to-mid-20% annual C&I growth through 2028 and expects segment adjusted EBITDA margin to reach the mid-to-high teens by that year. Achieving those targets would make C&I a substantially larger contributor to both revenue and earnings.
Notably, the June hyperscaler agreement adds unmodeled potential. While it cannot yet be incorporated confidently into revenue forecasts, the deal validates Generac’s qualification and competitive position. Further progress will depend on converting the supplier approval into firm orders while meeting delivery, reliability, and service requirements at scale.
1
Capacity to Spare
Generac spans a broader section of the power market than most similar-sized industrial companies, combining residential backup generation with C&I systems and a rapidly expanding data center business. Regal Rexnord offers the closest all-around comparison through its similar scale, electrical equipment portfolio, and exposure to automation, buildings, and data centers. Powell Industries provides the sharpest benchmark for C&I power infrastructure, particularly switchgear, power control, and electrical distribution for mission-critical facilities. Smart Portfolio holding nVent Electric approaches the same data center opportunity through electrical protection, enclosures, power distribution, and liquid cooling, providing a strong reference for how AI infrastructure demand is reshaping electrical equipment growth. Hubbell adds the grid perspective through utility products and electrical distribution.
Together, these peers frame GNRC’s distinctive position: a residential power leader using its installed base and strong margins to fund expansion into the faster-growing infrastructure behind AI, grid resilience, and distributed energy. Their stock performance also reflects their connection to the AI infrastructure investment cycle, with the more AI-aligned peers rallying harder over the past year, while also suffering sharper declines over the past month as the AI infrastructure trade began wobbling under elevated valuations.
Powell soared more than 220% over the past year thanks to its role supplying electrical distribution and control systems for AI infrastructure. nVent followed with a gain of over 110%, supported by its increasingly visible position across data center power, protection, and cooling. Regal Rexnord notched a solid rally as its data center order book expanded, while Hubbell rose at a measured pace due to its grid and utility orientation. Generac advanced 53% over the past year, well below Powell and nVent. Its rally accelerated as its data center backlog and hyperscaler agreement brought its AI relevance into sharper focus. Yet its rerating arrived later and remained far less extreme – one of the reasons analysts still see potential upside of more than 30% for the stock.
Another key factor supporting that upside is that GNRC still carries a much calmer valuation than the longer-standing members of the AI rally. At 25.2x FY1 non-GAAP earnings, the stock remains far below Powell’s and nVent’s multiples, while carrying a premium to Regal Rexnord and sitting slightly above Hubbell. The forward-valuation gap narrows quickly as earnings catch up with the rerating, and Generac’s 20.2x in FY2 and 15.7x in FY3 place it below every peer except Regal. Generac’s enterprise-value multiples already reflect that: at 15.4x, its forward EV/EBITDA is lower than all peers but Regal, while its 2.9x forward EV/Sales is tied with Regal for the group’s lowest. The strongest argument comes from growth-adjusted valuation, as GNRC’s forward PEG of 0.92 is less than half of every available peer ratio.
As Generac’s free cash flow strengthens further, buybacks should become a meaningful part of its capital allocation strategy going forward. The company repurchased approximately $148 million worth of its common stock in 2025, with the majority of the buyback activity concentrated in the first quarter. In February 2026, the board approved a new $500 million repurchase program running over 24 months, which replaced the remaining balance of the previous plan. However, Q1 2026 repurchases were modest at roughly $20 million. At present, the company views buybacks as an opportunistic tool for shareholder value, with cash first directed toward C&I and data center capacity, margin improvement, and the execution needed to convert backlog into earnings.
1
Investing Takeaway
Generac is entering a new phase in which its residential leadership and expanding C&I platform reinforce each other. The home standby franchise provides scale, strong margins, a deeply rooted dealer network, and considerable penetration runway, while data centers, telecom, rental equipment, and distributed energy are opening faster-growing markets. A recent hyperscaler agreement validates GNRC’s move into large-megawatt backup power at a time when electricity availability and grid resilience are becoming central constraints on AI development. The company now has several paths to growth, with a profitable core supporting its expansion into mission-critical power infrastructure. That combination makes GNRC a compelling long-term way to participate in both rising grid instability and the growing power demands of AI.
1
New Sell 1: Citigroup (C)
We are selling Citigroup and locking in a gain of roughly 35%. This is not a response to weakening fundamentals: Citi’s turnaround is clearly working, and the latest quarter was one of its strongest in years. The issue is that the stock has already captured much of the progress we expected at purchase about nine month ago, while management’s near-term outlook leaves limited room for further upside.
Second-quarter revenue rose 14% year-over-year to a decade-high $24.8 billion, while EPS jumped 61% to $3.15, comfortably beating expectations. Net income climbed 45% to $5.8 billion, ROTCE reached 13%, and Citi generated more than 9% positive operating leverage. Four of its five businesses delivered double-digit revenue growth, led by Services, Markets, Banking, and Wealth. The bank also returned about $5 billion to shareholders and launched a $30 billion buyback program.
However, management maintained its full-year ROTCE target at 10-11% despite producing 13.1% in the first half. This implies a sharp sequential normalization as market activity cools and Citi increases spending on growth initiatives, severance payments, and other structural improvements. The full-year efficiency ratio is expected to rise toward 60% from 57.4% in Q2, while expenses are set to outpace revenue in U.S. Consumer Cards over the next few quarters.
Our original thesis has worked: earnings have strengthened, returns have improved, the balance sheet has been simplified, and the valuation discount has narrowed considerably. With the stock entering earnings near 1.4 times tangible book value, Citi no longer offers the deep margin of safety it did when we bought it.
This is a tactical exit from a successful investment, not a rejection of Citi’s turnaround. Re-entry would make sense if spending begins translating into higher sustainable ROTCE, regulatory remediation clears, or the valuation resets enough to restore a compelling margin of safety.
1
New Sell 2: Oracle (ORCL)
We are selling ORCL and locking in a gain of almost 57%. This is a difficult decision because our conviction in Oracle’s business remains high. The company is rapidly approaching hyperscaler status, its cloud infrastructure strategy is working, and its long-term opportunity may be greater today than when we bought the stock. The problem is that delivering this vision has become vastly more expensive – and the market is no longer willing to overlook what sits beneath the headline growth.
Oracle’s June report was extraordinary. Quarterly revenue rose 21%, cloud revenue jumped 47%, OCI surged 93%, and RPO reached $638 billion. Management also guided for 27-29% revenue growth (with cloud growth seen at 57-63%) in fiscal Q1 2027, maintained its $90 billion full-year revenue target, and raised its adjusted EPS forecast. Yet none of this reversed the stock’s downward trajectory.
The concern has shifted from demand to delivery. Oracle expects roughly $70 billion in net cash outlays for capex this fiscal year and plans to raise another $40 billion through debt and equity, including its $20 billion at-the-market program. Customer prepayments and customer-supplied GPUs reduce part of the burden, but they do not solve power, construction, cooling, and broader capacity constraints. Those challenges are weighing even on cash-rich hyperscalers such as Alphabet and Amazon. Oracle has less financial flexibility, while S&P’s downgrade to BBB- leaves it facing higher borrowing costs with no rate cuts currently in sight.
The stock’s behavior reflects that concern. ORCL rallied more than 80% from its April low to its June 1 peak, then began sliding before earnings and continued falling despite the outstanding report and a wave of analyst price-target increases. Over the past year, ORCL has performed almost as poorly as ServiceNow and worse than Salesforce – two prominent casualties of the “SaaSpocalypse” scare. Markets are now looking beyond growth and scrutinizing how that growth is funded.
ORCL’s valuation has become compelling, at roughly 16x forward adjusted earnings and just over 10x forward EBITDA. However, attractive valuation alone is not a catalyst for a tech stock, and the next major fundamental update will not arrive until September.
We still strongly believe in Oracle and expect to return when capacity deployment, cash conversion, and financing progress become strong enough to change the market’s view. For now, we are stepping aside while preserving the gain – and waiting until the sun shines on ORCL again.
1
Smart Investor’s Winners Club
The Winners Club represents stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The markets were extremely volatile, but the Club member count would have remained steady at 28 had we not sold two of its members, C and ORCL. As a result, the Winners are down to 26:
GE, AVGO, ANET, TSM, HWM, EME, APH, IBKR, VRT, ASX, CRWD, PH, MTZ, PANW, GOOGL, STRL, CSCO, ATI, BNY, KEYS, MS, JBL, RTX, NVT, CRDO, and JPM.
The first runner-up is still LLY with a 16.55% gain since purchase. Will it break into the winners’ circle, or will another stock outrun it to the finish line?
1
|
