Weight of Change
In this edition of the Smart Investor newsletter, we spotlight we spotlight the force reshaping health, behavior, and growth. But first, let’s review the latest news and developments.
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Portfolio News and Updates
❖❖ Alphabet (GOOGL) stock rallied after a standout Q1 print showed that the tech giant’s AI spending is now translating into real earnings power, with Google Cloud emerging as the key driver.
Total company revenue grew 22% year-over-year to $109.9 billion, operating income rose 30%, and margins expanded to 36.1%, reflecting broad strength across the business. Adjusted EPS soared 82% to $5.11. However, investor awe and analyst applause were driven primarily by the growth sources, as these represent pillars for expected outperformance in coming quarters and even into the following years.
Google Cloud is central to the bullish narrative. The segment’s revenue surged 63% to $20.0 billion, while operating income tripled to $6.6 billion, pushing margins above 30% and confirming that Cloud continues to scale profitably. The Cloud backlog nearly doubled sequentially to $462 billion, supported by new TPU agreements, among other factors. Enterprise deal activity accelerated, and AI demand continued to ramp at a pace that is exceeding available capacity. Management noted Cloud growth would have been even higher without compute capacity constraints.
AI momentum is visible across the platform. Products built on generative AI models saw near-800% growth, while usage scaled rapidly, with more than 16 billion tokens processed per minute via APIs. Alphabet’s full-stack approach – including custom TPUs – continues to improve cost and performance efficiency, strengthening its competitive position.
The core business is also chugging along. Search & Other revenue grew 19% to $60.4 billion, supported by AI-driven engagement and higher query volume, pushing back against concerns that generative AI would disrupt Search. YouTube ads rose 11%, while subscriptions and platforms grew 19%, lifting total paid subscriptions to 350 million.
Google continues to invest heavily in growth, with capex reaching $35.7 billion in the quarter, full-year guidance raised to $180-190 billion, and further increases expected in 2027. Operating expenses also rose sharply, reflecting continued investment in infrastructure and AI development. However, the market no longer sees capex ramp up as a negative for Google, having received the necessary proof in Q1 results. The company is clearly converting AI investment into growth and profitability, particularly through Cloud. The debate is no longer about whether AI will pay off, but how fast the company can scale capacity to meet surging demand.
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❖❖ Amazon (AMZN) has surged toward an all-time high, building on momentum from a blowout Q1 2026 report that helped settle the key debate around its nearly $200 billion capex commitment – whether the company is overinvesting in AI, or building a long-term advantage.
The results clearly pointed to the latter. Revenue grew 17% year-over-year to $181.5 billion, operating income rose 30% to $23.9 billion, margins reached a record 13.1%, and diluted EPS increased to $2.78 from $1.59 a year ago, up nearly 75%. More importantly, the growth drivers aligned directly with the areas absorbing the bulk of investment.
AWS remains the core growth engine. Revenue accelerated to 28%, its fastest growth in 15 quarters, reaching $37.6 billion, while operating income rose to $14.2 billion. Backlog expanded to over $360 billion, providing multi-year visibility as enterprise AI workloads scale and capacity is gobbled up in advance. That demand is already translating into usage, with Bedrock customer spend rising 170% quarter-over-quarter and total usage exceeding all prior years combined, while AI-related revenue is growing at triple-digit rates. AMZN is scaling infrastructure into confirmed enterprise demand, not speculative adoption.
Custom silicon strengthens the model. The chips business has surpassed a $20 billion annual run rate, with Trainium capacity largely committed and Graviton widely adopted across top customers. This improves cost control and unit economics, while positioning AWS to capture a larger share of AI infrastructure spend.
Execution across the rest of the business remains solid. Retail unit growth accelerated to 15%, supported by faster fulfillment and improving efficiency, while advertising grew 22% to $17.2 billion, reinforcing a high-margin revenue stream tied to purchase intent.
At the same time, the scale of investment is significant. Capex reached $43.2 billion in Q1 and is expected to approach $200 billion for the full year, compressing free cash flow as infrastructure is built ahead of monetization. However, Q1 results showed that AWS growth, backlog expansion, and AI adoption are already moving in line with that investment cycle, supporting future revenue and margin expansion. With monetization now visible and growth accelerating alongside investment, the focus shifts to how quickly this cycle converts into sustained cash flow.
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❖❖ Microsoft (MSFT) delivered strong results and reinforced its position in the AI race, but with expectations high and capex surging, the absence of a clear upside surprise – combined with complex monetization signals and delayed cash flow visibility – kept investors from rewarding the stock.
MSFT reported fiscal Q3 revenue of $82.9 billion, up 18% year-over-year, and diluted EPS of $4.27, beating expectations. Azure grew 40%, while Microsoft Cloud revenue rose 29% to $54.5 billion. AI momentum remained strong, with annual recurring revenue exceeding $37 billion, up 123%, and Microsoft 365 Copilot seats surpassing 20 million. Just as important, forward demand remains highly visible. RPO rose 99% to $627 billion, signaling a large base of contracted revenue tied to enterprise AI adoption. With roughly 25% of that RPO expected to convert to revenue in the next 12 months (up 39% year-over-year), the pipeline is not just visible, it is accelerating.
The results confirm that Microsoft is monetizing AI at scale. The challenge is how that monetization shows up financially in the near term. The company’s strategy is broad and deeply integrated, spanning infrastructure, applications, and a shift toward consumption-based pricing layered on top of its traditional seat model. That breadth is a strategic advantage, but it also fragments the signal investors rely on. Instead of a single defining KPI, the story is spread across AI ARR, Copilot seats, Azure growth, and usage metrics, making it harder to track how adoption translates into margins and cash flow.
At the same time, the cost side is clear. Capex reached $31.9 billion in the quarter, with guidance pointing to roughly $190 billion for calendar 2026. While these investments are necessary to meet demand, which continues to exceed available capacity, they are also compressing free cash flow and weighing on margins. The result is a timing mismatch: demand is strong and largely contracted, but financial benefits are still catching up.
That dynamic is reflected in analyst reactions. Ratings remain broadly positive, with continued confidence in MSFT’s AI positioning, but price targets show wide dispersion and several firms trimmed estimates despite constructive commentary. The consistent message is that execution is solid, but the payoff timeline remains uncertain.
Compared to peers, the distinction is clear. GOOGL and AMZN delivered more immediate evidence of AI translating into earnings or margin expansion. Microsoft delivered confirmation of demand and adoption, but not the type of upside surprise that resets expectations.
The long-term case remains intact. Microsoft is building one of the most comprehensive enterprise AI platforms, with strong positioning across infrastructure and applications. However, in the near term, the combination of elevated expectations, heavy investment, and a less visible financial translation is creating uncertainty. For now, sentiment will depend less on proof of demand and more on how quickly that demand converts into sustained cash flow and margin expansion – a transition that will likely take time, and one we will continue to monitor closely, as the near-term uncertainty reflects timing and investor interpretation rather than any fundamental deterioration in the business.
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❖❖ ASE Technology (ASX) extended its 100%+ year-to-date rally after delivering a strong Q1 2026 earnings beat, as the company continues to ride a powerful AI infrastructure capex wave. Total net revenue rose 17.2% year-over-year, driven by a 30% surge in the ATM (chip packaging) revenue, with the segment’s contribution to total expanding to over 64%. Adjusted EPS (for the U.S. ADRs) soared by 79% to $0.20, well above the consensus expectations. That, despite increased investments in capacity, with the management describing capacity as a binding constraint. ASE is currently installing additional LEAP manufacturing capacities that are expected to start generating revenues weighted towards the fourth quarter of 2026.
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❖❖ EMCOR Group (EME) rallied, touching a new 52-week high, as investors continued to digest the company’s blowout Q1 2026 earnings report.
The company posted record quarterly revenue, earnings, and backlog. Revenue climbed 19.7% year-over-year (16.8% organically) to $4.15 billion, while adjusted EPS jumped 30% to $6.84 – both crushing Street estimates. Operating income also hit a record $403.8 million, while operating margin expanded to 8.7%. Growth was broad-based, supported by continued strength in U.S. data centers, network and communications, healthcare, and manufacturing end markets. EMCOR highlighted a record RPO of $15.62 billion, up 32.9% year-over-year, underscoring sustained demand across its project pipeline; book-to-bill reached a record high of ~1.5x. Following the strong quarter, EMCOR raised its full-year 2026 guidance. The company now expects revenue of $18.50-19.25 billion and diluted EPS of $28.25-29.75, while maintaining an operating margin target of 9.0-9.4%.
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❖❖ Amphenol (APH) saw a wave of analyst price-target hikes after its stellar Q1 2026 beat-and-raise, delivering a sharp year-over-year jump in revenue, orders, and earnings – all of which surged to record highs – while also raising its Q2 2026 outlook.
The company’s sales jumped 58% year-over-year to $7.62 billion, or 33% organically, while adjusted diluted EPS soared 68% to $1.06. Orders reached a record $9.4 billion, up 78% year-over-year, producing a book-to-bill ratio of 1.24x with every end market positive. Adjusted operating income came in at $2.1 billion, and adjusted operating margin expanded to 27.3%. Operating cash flow was $1.1 billion, with free cash flow of $831 million. APH also completed the acquisition of CommScope’s CCS business during the quarter. Growth was broad-based across end markets, with exceptional strength in IT datacom and continued momentum in other diversified segments, supported by both organic growth and acquisitions. Management said the company’s strong start to 2026 was driven by the ongoing electronics innovation cycle and its expanding high-technology interconnect portfolio.
Amphenol raised its Q2 sales guidance to $8.1-8.2 billion and adjusted EPS forecast to $1.14-1.16 – both well above Street expectations – representing year-over-year growth of approximately 43-45% and 41-43%, respectively.
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❖❖ MasTec (MTZ) saw its stock jump, extending a 95%+ year-to-date rally, after posting a blowout Q1 2026 earnings report with record revenue, EBITDA, and EPS, and raising its full-year 2026 guidance.
The company’s revenue rose 34.5% year-over-year to $3.83 billion, adjusted EBITDA surged 73% to $284 million, and adjusted EPS soared 172% to $1.39. Momentum was strong across all major segments, particularly in Pipeline and Clean Energy and Infrastructure, where revenues increased 92% and 45%, respectively. Management highlighted long-term demand drivers including AI and data center growth, grid modernization, LNG and natural gas infrastructure, and fiber connectivity, noting that data center interconnectivity alone represents a multiyear opportunity measured in tens of billions of dollars. MTZ ended the quarter with a record backlog of $20.3 billion, up 28% year-over-year, including a $1.4 billion sequential increase.
Following what management described as the strongest first quarter in company history, MasTec raised its FY2026 revenue guidance to $17.5 billion, implying ~22% growth. Adjusted EPS guidance was lifted to $8.79 – approximately 35% growth – while adjusted EBITDA is now expected to reach $1.5 billion, representing an 8.6% margin. The company also expects cash flow from operations to exceed $1 billion.
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❖❖ nVent Electric (NVT) reported record Q1 2026 results, marking a third consecutive quarter with revenue exceeding $1 billion. Net sales surged 53% year-over-year (+34% organically) to $1.24 billion, while adjusted EPS rose approximately 63% to $1.09 – both well above Wall Street consensus.
Organic growth was broad-based across all verticals, led by Infrastructure, which grew nearly 80% year-over-year, driven by strength in data centers and power utilities. Orders increased about 40% year-over-year, and backlog reached $2.6 billion. Net cash from operations rose more than 40% to $90 million, while free cash flow increased roughly 23% to $44 million. Net leverage remained at 1.5x – below the company’s 2.0-2.5x target range – despite ongoing acquisitions and investments in growth and supply chain resiliency.
Following the strong quarter, nVent raised both Q2 and full-year 2026 guidance. The company now expects Q2 sales to grow 28-30% year-over-year (23-25% organically), with adjusted EPS of $1.12-1.15. For the full year, sales are now expected to increase 26-28% (21-23% organic, up from prior guidance of 10-13%), and adjusted EPS is projected at $4.45-4.55 (previously $4.00-4.15).
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❖❖ Parker Hannifin (PH) reported strong FQ3 2026 results. Total sales rose nearly 11% year-over-year (6.5% organically) to a record $5.5 billion. Total orders grew 9% and backlog reached a record $12.5 billion, with Aerospace and Defense backlog at a record $8.4 billion, up 15% year-over-year. The A&D segment, representing 35% of sales, delivered 14.2% organic revenue growth, putting the company on track for its fourth consecutive year of double-digit organic growth in the key business segment. Parker’s adjusted segment operating margin reached 26.7% and adjusted EBITDA margin arrived at 27.2%. Adjusted net income surpassed $1.0 billion for the first time, and adjusted EPS hit a record $8.17 after rising nearly 18% year-over-year.
PH raised its full fiscal year guidance, now expecting total sales to rise 7% (5.5% organically) and adjusted EPS to increase by 14.2% to $31.20, both at the midpoint. Adjusted segment operating margins is now seen at 27.2%, while free cash flow guidance is raised to $3.3-3.6 billion.
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❖❖ Labcorp Holdings (LH) delivered another strong quarter, topping analyst expectations for both revenue and adjusted EPS while raising its FY2026 outlook. In Q1 2026, the diagnostics and laboratory services leader saw revenue increase 5.8% year-over-year to $3.54 billion, while adjusted EPS rose 10.7% to $4.25. LH generated $71 million of free cash flow in Q1 and ended the quarter with $981 million of cash after investing $202 million in acquisitions and returning capital through $98 million of buybacks and $61 million of dividends. Labcorp raised its FY2026 guidance to $17.70-18.35 in adjusted EPS and $14.7-14.8 billion in revenue, modestly above consensus at the midpoint. The company also saw broad institutional accumulation during the quarter.
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❖❖ ATI (ATI) saw several price-target hikes from leading Wall Street firms following its stellar earnings report and raised guidance. Q1 sales of $1.15 billion were broadly in line with estimates, supported by strong demand in its Aerospace & Defense segment, which expanded to 69% of total revenue. Total order backlog rose to an all-time high of $4.1 billion with significantly extended lead times for differentiated products. Adjusted EBITDA of $232 million was up 19% year-over-year, while consolidated adjusted EBITDA margin expanded by more than 300 bps, reaching 20.1%. Adjusted EPS registered a standout beat, surging roughly 39% year-over-year to $1.00.
The manufacturer of specialty materials and high-performance components significantly raised its full-year 2026 guidance across all key metrics, now targeting adjusted EBITDA of $1.01-1.06 billion (20% growth at the midpoint), adjusted EPS of $4.20-4.48 (up 23% at the midpoint), and adjusted free cash flow of $465-525 million (up 14%).
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❖❖ SPX Technologies (SPXC) dropped post-earnings despite a strong beat, raised guidance, and analyst support. The infrastructure equipment provider reported revenue of $566.8 million, up 17.4% year-over-year. Revenue growth was primarily driven by the surging data center demand in its HVAC segment, while margin expansion was led by the Detection & Measurement segment. Adjusted EBITDA increased 22.9%, with margin expanding by 90 bps to 22.2%, while adjusted EPS came in well above estimates at $1.69, up 22.5% year-over-year.
SPXC raised its 2026 revenue outlook to $2.610 billion at the midpoint, implying roughly 15% year-over-year growth. Adjusted EPS guidance was lifted to a midpoint of $7.95, significantly higher than expected, implying 17.7% year-over-year growth. Adjusted EBITDA is now expected to come in at $600-625 million, up 21% at the midpoint.
Multiple analysts lifted their price targets, citing planned capacity expansions and growing data center exposure that are viewed as key long-term revenue drivers not yet fully reflected in the current valuation. Despite all these positives, investors appear focused on HVAC segment margin compression (down 40 bps year-over-year), largely attributed to capacity expansion start-up costs, short-term pressure from tariffs, and marginally elevated input costs.
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❖❖ Sterling Infrastructure (STRL) soared more than 50% on Tuesday after reporting record Q1 2026 results that significantly exceeded expectations. Revenue climbed 92% year-over-year to $825.7 million, well above the $603.6 million consensus, while adjusted EPS surged more than 120% to $3.59, compared with expectations of $2.28. The company’s combined backlog expanded 131% to $5.15 billion, while signed backlog reached $3.8 billion, up 78% year-over-year.
The E-Infrastructure segment delivered standout performance, with revenue growing 174%, including over 100% organic growth, driven by data-center and mission-critical projects. The segment’s combined backlog and future phase opportunities now exceed $5 billion, up $2 billion year-to-date. The recently integrated CEC electrical business posted 78% revenue growth and contributed meaningfully to backlog expansion.
The guidance raise was equally massive, with revenue forecast lifted by 20% from the prior outlook and adjusted EPS by 35%, while capex guidance of $100-110 million remained unchanged. STRL now expects full-year revenue to come in at $3.7-3.8 billion, adjusted EPS at $18.40-19.05, and adjusted EBITDA at $843-873 million. At the midpoint, this implies approximately 51% revenue growth, ~72% adjusted EPS growth, and ~70% adjusted EBITDA growth.
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❖❖ Pfizer (PFE) delivered a clean Q1 earnings beat, with adjusted EPS of $0.75 topping the $0.72 consensus and revenue of $14.45 billion surpassing estimates of $13.84 billion. The outperformance was driven by focused execution and 22% operational revenue growth of launched and acquired products. The pharma giant reaffirmed full-year 2026 guidance of total revenues of $59.5-62.5 billion and adjusted diluted EPS of $2.80-3.00.
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❖❖ Arista Networks (ANET) declined in after-hours trading on Tuesday, despite beating first-quarter revenue and earnings expectations and raising its full-year outlook, as investors appeared to expect even stronger guidance from the AI networking leader, whose stock has surged nearly 90% over the past year.
ANET reported Q1 revenue of $2.71 billion, up 35.1% year-over-year and well ahead of consensus estimates. The company also delivered the strongest operating cash flow in its history, generating $1.69 billion during the quarter. Profitability remained exceptional, supported by Arista’s highly efficient operating model and disciplined cost structure. Non-GAAP operating income rose 35.2% year-over-year to $1.29 billion, representing 47.8% of revenue, while non-GAAP net income increased 31.0% to $1.11 billion, or 40.9% of revenue. Adjusted EPS climbed 31.8% from a year ago to $0.87, also comfortably above forecasts.
Still, margins showed modest pressure. Non-GAAP gross margin declined to 62.4% from 64.1% a year earlier, as higher procurement costs and a shifting product mix weighed on profitability. More specifically, Arista is increasingly prioritizing large-scale AI deployments, where customers require faster delivery timelines and massive volumes of advanced networking gear such as 800G systems. To secure enough supply in a constrained component environment, the company has been paying premiums for critical parts and building larger long-term purchase commitments, supporting revenue growth and customer retention while compressing margins in the near term.
For the second quarter, Arista expects revenue of approximately $2.8 billion, implying roughly 27% year-over-year growth, alongside a non-GAAP operating margin of 46-47%, gross margin of 62-63%, and adjusted EPS of about $0.88, up around 20% from last year. The company raised its full-year 2026 revenue growth outlook to 27.7%, now targeting approximately $11.5 billion, and increased its AI fabrics revenue goal from $3.25 billion to $3.5 billion, which would represent more than a doubling of AI sales year over year.
Management acknowledged ongoing industry-wide shortages in wafers, silicon, CPUs, optics, and memory, which continue to pressure supply chains and procurement costs. While these figures still reflect exceptionally strong demand trends – especially from hyperscaler AI infrastructure projects – investors likely focused on the combination of slowing margin momentum and guidance that, while strong, did not meaningfully exceed already elevated expectations. That likely explains the after-hours pullback.
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Portfolio Stocks Under Review
❖ We are keeping Oracle (ORCL) under review, as the investment case continues to evolve on the back of AI-driven catalysts while investor sentiment remains fragile.
Oracle’s accelerating execution across AI applications and enterprise software remains at the core of the bull thesis. The company continues to expand its agentic AI ecosystem across finance, supply chain, HR, customer experience, and corporate banking, while pushing deeper into autonomous enterprise workflows. This shift from assistive tools toward systems that execute decisions and processes reinforces ORCL’s positioning as a central layer in enterprise operations, not just a software provider. The scale of this push is also becoming clearer, with Oracle now deploying hundreds of specialized AI agents across its Fusion platform, signaling a structural shift in how enterprise software is delivered and monetized.
On the infrastructure side, Oracle continues to move aggressively to secure scale. The previously announced Michigan data center tied to its AI buildout has now secured $16 billion in financing, marking a transition from planning to execution. At the same time, Project Jupiter in New Mexico continues to advance, with updated designs centered around Bloom Energy fuel cells and large-scale microgrid deployment, reinforcing ORCL’s strategy of securing power supply as a core competitive advantage.
The multicloud strategy is also expanding meaningfully. Following the AWS interconnect announcement, Oracle extended its partnership with Google Cloud, further embedding its AI database and workloads across external platforms. This reinforces a clear shift toward a platform-agnostic model, where ORCL positions itself as the data and infrastructure layer across clouds rather than competing directly with hyperscalers. Strategically, this reduces customer friction, broadens Oracle’s addressable market, and strengthens its role in AI workloads that increasingly span multiple environments.
The broader narrative continues to be anchored by Oracle’s ~$553 billion remaining performance obligations backlog, which provides strong visibility into future demand and supports the case that capacity expansion is tied to contracted workloads rather than speculative investment. At the same time, the closing of large-scale financing transactions and continued infrastructure buildout provide increasing evidence that the company is executing on this backlog in a tangible way.
That said, the financing side of the story remains a point of tension. Reports that large-scale data center debt tied to Oracle is testing bank balance sheets, alongside estimates of more than $100 billion in additional funding needs over the coming years, highlight the scale and complexity of the company’s investment cycle. This keeps investor focus on funding durability, capital discipline, and execution risk.
The latest concerns around OpenAI missing internal growth and revenue targets add another layer of uncertainty, but the read-through to Oracle is not straightforward. While this raises questions around the pace of demand and funding for large-scale compute contracts, the underlying signal appears more about normalization and intensifying competition across AI platforms than a collapse in usage. Importantly, ORCL today is far less of a single-customer story than it was just a year ago, with growing exposure across hyperscaler partnerships, enterprise workloads, and government demand.
However, the scale of Oracle’s commitments, particularly through its Stargate tie-up and broader AI infrastructure buildout, means that partner dynamics and funding conditions remain critical. Even if long-term demand remains intact, any reassessment at the partner level can influence deployment timelines and reinforce investor caution.
All in all, the fundamental story continues to improve, supported by strong backlog visibility, expanding multicloud relevance, and clear execution across both infrastructure and applications. However, sentiment remains sensitive to both financing concerns and external signals around AI demand. The continued fragility in investor confidence is why we are keeping ORCL under review for now.
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Portfolio Earnings and Dividend Calendar
❖ The Q1 2026 earnings season is well past its peak, but some Smart Investor Portfolio holdings are scheduled to reveal their results in the coming week. Regal Rexnord (RRX) will report today, while Howmet Aerospace (HWM) is expected to report on May 7.
❖ The ex-dividend date for Parker Hannifin (PH), Howmet Aerospace (HWM), IBM (IBM), Pfizer (PFE), and Energy Transfer (ET) is May 8.
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New Buy: Eli Lilly & Co (LLY)
Eli Lilly and Company operates as a core force within the global biopharmaceutical industry, focused on developing and commercializing medicines that address some of the most widespread and complex diseases. The company’s portfolio spans metabolic disorders, oncology, immunology, and neuroscience – areas where scientific progress directly influences patient outcomes and long-term healthcare demand. Its therapies are embedded across chronic and specialty care, targeting conditions that require sustained treatment and ongoing innovation. Lilly’s model combines deep research capabilities with large-scale manufacturing and global distribution, enabling it to turn scientific breakthroughs into broadly available therapies. As healthcare systems increasingly prioritize effective, long-duration treatments, the company is positioned as both a driver of medical advancement and a key supplier of next-generation therapeutics.
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Patented Evolution
Eli Lilly’s history traces back to 1876, when it was founded as a small pharmaceutical business built on a simple premise – consistent quality and scientific rigor in drug manufacturing. Over the following decades, the company established itself as a pioneer in modern medicine, playing a central role in the mass production of insulin and advancing treatments in antibiotics, oncology, and neuroscience. While that legacy serves as a durable foundation, the company that exists today is defined far more by a strategic pivot that accelerated in the past decade and became decisive over the last five years.
That shift centered on a deliberate focus toward high-impact, biologically complex therapies, supported by sustained investment in research and development. Eli Lilly steadily moved away from areas with weaker differentiation, while doubling down on disease categories where scientific breakthroughs could translate into both clinical relevance and long-term commercial opportunity. This repositioning was reinforced through a series of targeted business development actions – including the 2019 acquisition of Loxo Oncology, which expanded its precision oncology capabilities, and subsequent deals such as the 2020 acquisition of Dermira, strengthening its immunology pipeline.
In parallel, the company invested heavily in its development engine and manufacturing infrastructure, anticipating a new wave of demand in metabolic diseases. Over the past five years, this strategy converged around the emergence of GLP-1-based therapies, where LLY moved early and aggressively to scale both clinical development and production capacity. That included multibillion-dollar commitments to expand manufacturing sites across the U.S. and Europe, aimed at addressing supply constraints and supporting long-duration growth.
Technology has also become more embedded in the model. Eli Lilly has expanded its use of advanced data analytics and AI across drug discovery and clinical development, while entering partnerships to accelerate innovation cycles and improve trial efficiency. At the same time, the company has broadened its external collaboration strategy, working with biotech firms and research institutions to supplement its internal pipeline.
What ties this evolution together is a clear strategic approach – concentrate on areas of high unmet need, build scale where demand is structural, and invest ahead of the curve. From a diversified pharmaceutical manufacturer to a more focused, innovation-driven platform, Eli Lilly has reshaped itself to align with the next generation of therapeutic demand – setting the stage for its current growth trajectory.
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Metabolic Shift
Eli Lilly operates at the center of one of the most consequential shifts in modern healthcare – the rapid rise of incretin-based therapies1 targeting obesity and diabetes. These are systemic drivers of long-term disease burden, linked to cardiovascular disease, kidney failure, and a wide range of chronic complications. As treatment rates rise and diagnosis expands, demand is no longer cyclical or even episodic – it is structural, global, and surging.
GLP-1 therapies have moved beyond their original clinical role into a broader economic phenomenon. They are reshaping patient behavior, consumption patterns, and long-term healthcare economics, with implications that extend from food demand to insurance costs. That shift has made the category the focal point of pharmaceutical innovation, attracting a disproportionate share of industry R&D and capital.
LLY has positioned itself as a market leader in GLP-1 therapies, with leading share across both U.S. and international markets. Its core products, Mounjaro and Zepbound, together account for roughly two-thirds of company revenue, reflecting both the scale of demand and the company’s ability to capture it. The advantage has been driven primarily by efficacy – tirzepatide’s dual mechanism2 has consistently delivered stronger outcomes, supporting market share gains across both U.S. and international markets. Growth is volume-led, with adoption expanding across both diabetes and obesity indications. Meanwhile, regulatory developments – particularly restrictions on compounded GLP-1 drugs – are reinforcing Eli Lilly’s position by limiting lower-cost alternatives.
The next phase of expansion is already underway. The launch of Foundayo, an oral GLP-1 therapy designed for ease of use without timing restrictions, marks a shift toward broader accessibility and mass-market adoption. At the same time, Lilly is advancing next-generation incretin therapies, including triple agonists3 such as retatrutide, aimed at extending both efficacy and the lifecycle of the franchise. These drugs are not confined to metabolic disease alone – label expansion efforts are targeting cardiovascular outcomes, sleep apnea, and other related conditions, increasing the total addressable market. Moreover, LLY is increasing its focus on combination therapies, including GLP-1 integration into immunology and other disease areas.
Beyond cardiometabolic health, the business retains additional growth engines, though at smaller scale. Oncology represents a low-teens share of revenue, anchored by Verzenio and supported by combination therapies and new assets such as Inluriyo. Immunology, led by Omvoh, is building momentum in inflammatory bowel disease with durable, long-term efficacy data. Neuroscience remains early but contributes optionality, particularly in neurodegenerative diseases.
How Eli Lilly executes is just as important as what it develops. The company is scaling manufacturing aggressively, investing heavily to eliminate supply constraints and build global production capacity. This includes a mix of internal facilities and external manufacturing partners, creating both scale and flexibility. Over time, this infrastructure could become a competitive advantage, as high-volume production and supply reliability begin to matter as much as clinical performance.
At the same time, innovation is broadening. LLY is integrating AI into drug discovery, accelerating development timelines and improving target selection, while pursuing advanced modalities such as gene therapy and in vivo cell therapies through targeted acquisitions. The strategy is not to rely on a single breakthrough, but to build a layered pipeline across multiple therapeutic areas.
From here, growth is likely to shift from share gains toward market expansion. Competition is intensifying, particularly from Novo Nordisk and a growing field of entrants, while early signs suggest that leadership positions may begin to stabilize. New product launches, including oral therapies, introduce execution risk and potential cannibalization within the portfolio. Over time, pricing dynamics and eventual patent expirations will also come into focus.
Even so, Eli Lilly is not positioned as a single-product story. It is building a platform around one of the fastest-growing categories in healthcare, supported by scale, pipeline depth, and manufacturing capacity. The trajectory from here depends less on discovering demand – that is already established – and more on sustaining leadership as the market matures and competition catches up.
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1 – Incretin-based therapies are drugs that mimic gut hormones (such as GLP-1) to regulate blood sugar, appetite, and metabolism.
2 – Tirzepatide activates both GLP-1 and GIP receptors, enhancing insulin response and weight loss compared to single-pathway drugs.
3 – Triple agonists target GLP-1, GIP, and glucagon pathways simultaneously, aiming to further improve metabolic control and weight reduction.
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A Dose of Power
Eli Lilly is scaling rapidly around a powerful core growth engine, while simultaneously investing in the infrastructure and pipeline needed to sustain that momentum. Q1 2026 continued that trajectory at scale. Revenue rose 56% year-over-year to $19.8 billion, exceeding expectations, while adjusted EPS reached $8.55 – up more than 155% year-over-year and well above consensus. The quarter extended a consistent pattern of execution, with LLY beating on revenue for at least eight consecutive quarters and on EPS in eleven of the last twelve, including six recent straight beats.
The underlying driver is straightforward. Growth is overwhelmingly tied to the GLP-1 franchise, with Mounjaro and Zepbound together contributing roughly 60-65% of total revenue. Both products continue to scale at exceptional rates, with triple-digit year-over-year growth for Mounjaro and high double-digit expansion for Zepbound. Outside cardiometabolic health, the contribution is more modest but still expanding. Oncology, anchored by Verzenio, represents a low-teens share of revenue and continues to grow, while immunology and neuroscience remain smaller but developing contributors.
What stands out is the nature of growth. It is primarily volume-driven, with prescription demand rising sharply across both diabetes and obesity indications. That demand is offset in part by lower realized prices, reflecting rebates, discounts, and broader access strategies, including direct price reductions to expand adoption. Even so, gross margins remain high – around the 80% range – supported by differentiated therapies and a biologics-heavy mix.
Operating leverage is significant. Revenue growth is outpacing expense growth, driving disproportionate earnings expansion, even as LLY continues to invest heavily. Research and development spending remains elevated, reflecting a broad pipeline across multiple therapeutic areas, while capital expenditures are rising sharply to support manufacturing expansion. The balance sheet reflects this shift, with increased inventory and production capacity tied to scaling demand.
Cash generation remains strong, enabling continued reinvestment and an active business development strategy. Lilly has been consistent in deploying capital toward early-stage acquisitions and licensing deals, often absorbing in-process R&D charges as it builds future optionality.
Guidance reflects continued momentum. For full-year 2026, LLY expects revenue of $82-85 billion, raised from $80-83 billion (implying over 28% year-over-year growth at the midpoint), with adjusted EPS of $35.50-37.00 (nearly 50% growth at the midpoint), also revised upward. Both ranges exceed consensus estimates. The outlook implies continued high-growth expansion, supported by sustained demand in GLP-1 and ongoing pipeline contributions.
However, concentration is a key consideration. A majority of revenue and earnings are tied to a single therapeutic class, amplifying both upside and risk. Pricing pressure remains a persistent headwind, with growing regulatory scrutiny and payer influence. Competition is intensifying, particularly from Novo Nordisk and a broader set of entrants, raising the potential for price competition over time. Early signs of market share stabilization near the 60% level suggest future growth may rely more on overall market expansion than further share gains.
Execution also becomes more complex at scale. Manufacturing capacity, supply chain reliability, and the rollout of new products – including oral therapies – introduce operational risk. Over the longer term, patent expirations in the mid-2030s and the potential for generic competition will come into focus, even if near-term regulatory actions currently support pricing power.
Even with these pressures, Eli Lilly’s financial trajectory is defined by momentum and reinvestment. The company is not optimizing for short-term margins, but for scale – building capacity, expanding its pipeline, and anchoring itself in a category that continues to outgrow the broader pharmaceutical market.
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Outweighing the Curve
Eli Lilly sits among a small group of global pharmaceutical leaders, but its current positioning is increasingly shaped by a single, rapidly expanding category. Novo Nordisk stands as the closest and most direct comparison, with both companies dominating the GLP-1 market and competing across diabetes and obesity with similarly scaled, high-impact franchises. Beyond that head-to-head dynamic, the U.S.-listed peer set provides a broader valuation and structural context rather than direct operating parity. AbbVie offers the closest domestic comparison in terms of a franchise-driven model, having transitioned from Humira into a new generation of immunology assets. Merck presents a parallel in concentration, with Keytruda anchoring growth while introducing long-term patent-cycle considerations. Amgen adds a biotech-oriented angle, combining high-margin innovation with emerging exposure to obesity therapies. Together, these peers frame Eli Lilly not as a typical large-cap pharma company, but as a category leader whose valuation and trajectory are increasingly tied to its position at the center of the GLP-1 market.
That positioning also helps explain the recent divergence in stock performance. Eli Lilly’s ~20% gain over the past year reflects a business that has largely delivered on already-elevated expectations, sustaining confidence in its GLP-1 leadership without materially expanding its valuation multiple. By contrast, Novo Nordisk’s sharp ~35% decline highlights how quickly sentiment can shift when that leadership is questioned. A series of clinical and commercial disappointments, alongside intensifying competition from LLY, forced a reset in expectations and broke the perceived symmetry of the duopoly. At the same time, the group has traded more as a sector than as individual stories in 2026. After peaking around February, large-cap pharma sold off in tandem as capital rotated out of a crowded defensive and GLP-1-driven trade, before stabilizing more recently. Within that move, Merck’s outperformance reflects a re-rating from a lower base, while AbbVie and Amgen have tracked steadier execution.
Against that backdrop, Eli Lilly stands out less for outperformance than for maintaining its premium as the central driver of the GLP-1 narrative. That stability is now starting to tilt higher. Following the latest earnings report, analysts raised price targets, pushing the average implied upside to around 27% – suggesting the market is beginning to reassess the upside potential from current levels.
Meanwhile, valuations have come down to earth from last year’s overheated levels, becoming compelling when taking into account accelerating growth and the duopoly position in the GLP-1 market. LLY is trading at a significant discount to its own five-year averages across all key metrics. At the same time, it still commands a premium to peers, with a forward P/E around 27x versus ~12-15x for Novo Nordisk, AbbVie, and Amgen, and ~22x for Merck. That premium, however, looks more than justified when set against ~28% forward revenue growth and ~50% EPS growth, far outpacing peers’ single-digit trajectories. Moreover, when adjusting for forward earnings growth, LLY appears relatively inexpensive, with a PEG of roughly 1.3x, suggesting the valuation is supported by earnings momentum rather than excess optimism.
Eli Lilly’s capital return profile remains secondary to its growth strategy, but it is becoming increasingly relevant as cash generation scales. The company pays a modest dividend, yielding roughly 0.6%, with a consistent track record of annual increases, reflecting confidence in long-term earnings expansion. Payout ratios remain conservative, leaving ample room for continued growth.
Share repurchases have been more selective, as LLY has prioritized reinvestment into R&D, manufacturing capacity, and acquisitions to support its pipeline and GLP-1 leadership. That said, the company has meaningfully scaled up its buyback activity over the past several quarters, supported by strong operating cash flow. LLY repurchased about $4.1 billion in 2025, and then accelerated sharply in Q1 2026, repurchasing $2.35 billion in shares during the first quarter alone. This step-up signals that Eli Lilly is beginning to layer in capital returns as cash flow scales, without pivoting away from its growth-first strategy.
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Investing Takeaway
Eli Lilly is no longer in the phase of proving its position – it is operating from it. The question has shifted from whether GLP-1 can drive growth to how durable that growth remains as the market scales and competition intensifies. Lilly’s edge lies in execution: expanding supply, extending its pipeline, and broadening the reach of its therapies across indications and formats. As the category moves toward wider adoption, leadership will depend less on breakthrough moments and more on consistency at scale. With a deep pipeline and growing manufacturing footprint, LLY is positioned to remain at the center of that shift. The opportunity from here is not discovery, but durability – sustaining momentum as the market matures.
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New Sell 1: Northrop Grumman (NOC)
We are stepping aside from Northrop Grumman for now, as the near-term setup has become more complex even though the long-term story hasn’t changed. We are looking to come back to NOC once visibility improves.
The latest earnings report was solid on the surface. Q1 delivered 4% revenue growth, 5% organic growth, strong bookings of $9.8 billion, and a backlog approaching $96 billion. Margins improved to 10.8%, and full-year guidance was reaffirmed, including expectations for sales acceleration and stable free cash flow generation.
However, the stock suffered a double-digit post-earnings decline, driven by the step-up in capital intensity tied to the B-21 ramp, with 2026 capex raised to roughly $1.85 billion and a broader multi-year investment cycle underway. At the same time, cash flow remains back-end loaded, with Q1 showing a roughly $1.8 billion outflow. Execution complexity is also rising as large-scale programs move through development and early production phases under fixed-price structures. This introduces more uncertainty into the next 12-24 months than was reflected in the original thesis, even as the business continues to perform well.
Northrop Grumman remains a high-quality defense contractor with deep program visibility, structural demand tailwinds, and a portfolio anchored in some of the most critical U.S. and allied defense priorities. Nothing in the latest quarter changes that. If anything, the fundamentals are still pointing in the right direction, with strong demand, near-record backlog, and flagship programs like B-21 and Sentinel continuing to gain momentum and reinforce a multi-year – even multi-decade – growth runway.
At the same time, the acceleration of key programs, while strategically positive, brings forward costs and increases reliance on execution. NOC is entering a phase where capital allocation, production scaling, and program delivery will have a greater influence on near-term returns.
That shift is already being reflected in sentiment. Analysts broadly continue to view the company favorably, with no Sell ratings and a majority of Buy recommendations. At the same time, a meaningful portion of the Street sits on Hold, and several price targets were reduced following the earnings release. This suggests that while confidence in the long-term story remains intact, expectations for the near term are being recalibrated.
While Northrop Grumman remains a staple holding in many long-term portfolios, the near-term setup is shifting. With elevated investment requirements, cash flow timing pressure, and execution risk becoming more prominent, the risk-reward balance over the next several quarters appears more balanced than compelling. That is why we are taking a pause for now, with the intention of revisiting NOC as conditions improve – whether through clearer cash flow visibility, greater confidence in program execution, or a valuation that more fully reflects the temporary turbulence.
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New Sell 2: Flowserve (FLS)
We are selling Flowserve after its earnings report revealed demand weakness, which may prove temporary but introduces unnecessary portfolio risk in the meantime. While FLS’s long-term margin story remains intact, the near-term setup has weakened, and the resilience we expected has not materialized.
The latest earnings report was mixed. Adjusted EPS grew 18% to $0.85, supported by 230 basis points of operating margin expansion, marking the 13th consecutive quarter of improvement. The Flowserve Business System and 80/20 initiatives are clearly delivering, driving efficiency gains, pricing discipline, and sustained margin expansion.
However, the underlying demand picture tells a different story. Revenue declined 7% year-over-year, and bookings fell 6%, with original equipment orders down 13% and revenue down 18%. While management pointed to Middle East disruption and early-quarter softness, the weakness was broader, including slower MRO activity and lower backlog conversion tied to a higher mix of long-cycle nuclear projects. The company also lowered its organic growth outlook to a range of -1% to +2%, confirming that demand is not keeping pace with expectations.
This matters because the original investment case relied not just on margin expansion, but on resilience through the cycle, supported by aftermarket strength and diversified end markets. That resilience has not fully held. Aftermarket remains relatively stable, but it has not been strong enough to offset declines in original equipment, and overall growth has turned negative. At the same time, earnings quality is less clean than it appears, with the quarter benefiting from a net $0.07 tailwind from one-time items.
Flowserve is no longer presenting as a steady, execution-driven compounder in the near term. Performance is increasingly tied to a second-half recovery in bookings and revenue that management expects, but has yet to demonstrate.
This shift is also visible in market sentiment. While analyst ratings remain broadly positive, price targets have been trimmed, reflecting a more cautious stance as expectations are recalibrated around a back-half recovery. For a position that was intended to provide diversification and resilience, the setup is now less compelling. Instead of stabilizing the portfolio, Flowserve has introduced meaningful downside risk and is becoming increasingly dependent on improved conditions later in the year to support its investment case. That dependence reduces the margin of safety at this stage.
Flowserve remains a well-managed company with a credible long-term strategy and real progress on margins. But until demand trends stabilize and growth begins to reaccelerate, the near-term risk-reward profile appears less attractive. We will step aside for now, but we’ll revisit the name in the coming quarters to see whether the expected recovery begins to take shape.
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New Sell 3: APi Group (APG)
We are selling APi Group – not because the thesis has broken, but to reallocate capital into names with stronger momentum. APG has performed well since our entry, gaining about 7% even after a post-earnings pullback, but its relative performance has lagged key peers in our portfolio, particularly EMCOR and MasTec.
The latest earnings report reinforces that APi remains a high-quality operator. Q1 delivered 15% revenue growth, over 10% organically, alongside continued margin expansion and strong cash flow generation. Management also modestly raised full-year guidance, pointing to steady execution and a healthy demand environment across core end markets.
At the same time, the results highlight the limits of the current setup. Growth remains in the mid-single-digit range organically, and margin expansion continues at a gradual pace. While this supports the long-term compounding story, it does not represent a step-change that would drive a meaningful re-rating.
The market reaction reflects that dynamic. Despite solid results and supportive analyst sentiment, the stock declined following earnings as investors focused on gross margin mix, foreign exchange headwinds, and the growing complexity tied to a more active M&A pipeline. This reinforces the view that execution alone is not enough to unlock near-term upside.
In contrast, other industrial names with greater exposure to faster-growing end markets, particularly those tied more directly to the AI-driven infrastructure buildout, continue to attract stronger investor interest and deliver superior returns. Within our own portfolio, that gap has become increasingly clear.
Given this backdrop, APi no longer presents a clear-cut investment case. The business remains well-managed, fundamentally sound, and supported by analysts, but the combination of steady – rather than accelerating – growth and limited near-term catalysts reduces its relative appeal, suggesting capital may be better deployed elsewhere. We are therefore locking in gains and stepping aside. However, APi remains on our radar, and we plan to revisit the stock as market conditions evolve or if the company begins to show signs of re-acceleration.
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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.
Markets have been in a rally mode on earnings strength, and the Club ranks expanded again, now holding 25 stocks:
AVGO, GE, EME, ANET, TSM, HWM, VRT, APH, IBKR, MTZ, STRL, ORCL, GOOGL, PH, ASX, KEYS, JBL, CSCO, BK, ATI, NVT, MS, CRWD, RTX, and C.
The first runner-up is still JPM with a 26.48% gain since purchase. Will it return to the Winners’ circle, or will another stock outrun it to the finish line?
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