Forget AI Stocks. KKR Says the Real Money Is in What Powers Them.

One of the reasons I enjoy reading KKR's outlook pieces is that they approach investing the same way we do.

They are not trying to predict next month's payroll report or whether the Federal Reserve cuts rates in September or December.

They are looking for large pools of capital that have to be deployed over many years. They are looking for themes that will create winners and losers regardless of what CNBC is yelling about on any given afternoon.

Their latest outlook points investors toward defense, power infrastructure, collateral based cash flows, Asia, and operational improvement stories. That list should sound familiar to longtime readers. Those themes all share something in common. They involve tangible assets, real cash flows, and businesses that matter in the real world.

Huntington Ingalls is one of those businesses that investors tend to overlook because it is not flashy. Nobody is standing in line to buy the latest Huntington Ingalls aircraft carrier. There are no viral social media videos about submarine construction. Wall Street analysts rarely get excited about shipyards.

That is precisely why the stock interests me.

Huntington Ingalls is America's dominant builder of nuclear powered aircraft carriers and a critical builder of nuclear submarines. There are only a handful of facilities in the world capable of performing this work. Building a competing operation would require billions of dollars, decades of expertise, regulatory approvals, and a very patient group of investors.

Good luck with that.

KKR's defense thesis centers on the idea that military spending is becoming structural rather than cyclical. That matters enormously for Huntington Ingalls. Governments can postpone buying office furniture. Governments can delay building parks. Governments generally do not decide to stop maintaining their nuclear deterrent because the quarterly budget meeting ran long.

Revenue visibility is exceptional. Backlogs stretch years into the future. Customer concentration is not a problem because the customer is effectively the United States government. Investors often complain about government bureaucracy until they realize government bureaucracy also means long term contracts and highly predictable cash flows.

Valuation remains surprisingly reasonable given the strategic nature of the business. Shares trade at levels that imply very little growth despite what appears to be a multi decade naval modernization cycle. If KKR is right about rising geopolitical competition, Huntington Ingalls could spend years benefiting from increased spending on naval capabilities.

This is exactly the type of asset heavy, difficult to replicate business that tends to perform well over long periods of time.

Mercury Systems represents the next generation of defense spending. Investors who picture defense as tanks, ships, and fighter jets are looking in the rearview mirror.

Modern warfare increasingly depends on sensors, secure computing systems, advanced electronics, electronic warfare, and information processing. Mercury sits directly in the middle of those trends.

The company has experienced operational challenges over the past several years. That is actually one of the reasons it interests me. Great investments rarely arrive wrapped in perfect execution and universal optimism. Those usually show up at 40 times earnings.

Mercury supplies mission critical technology embedded in some of the most sophisticated defense systems in the world. The barriers to entry are substantial. Customers do not casually replace trusted suppliers when national security is involved.

KKR's outlook highlights software, sensors, cyber capabilities, and autonomous systems as some of the most attractive areas within defense. Mercury touches several of those categories simultaneously.

Management has been working through execution issues while improving margins and restoring profitability. Investors willing to look beyond the next quarter may discover a business positioned directly in the path of a powerful secular tailwind.

Defense modernization is not a one year theme. It is likely a 10 to 20 year theme. Mercury offers exposure to that trend through technology rather than hardware.

CACI may be one of the purest ways to invest in the modernization of government operations.

The company provides information technology, intelligence solutions, cybersecurity services, electronic warfare capabilities, and advanced communications systems. Much of what it does is invisible to the average investor. That is often where the best opportunities are found.

Governments around the world face a simple reality. Military hardware is important, but information superiority increasingly determines outcomes. Cybersecurity, intelligence gathering, secure communications, and electronic warfare capabilities are becoming as important as traditional weapons systems.

CACI benefits from this shift.

Unlike many technology companies, CACI operates in an environment with extremely high switching costs. Customers do not casually replace mission critical intelligence systems. Once embedded within government operations, these relationships often last for years.

What makes CACI particularly attractive is that it combines technology exposure with government spending stability. Investors often must choose between growth and predictability. CACI offers a bit of both.

Shares trade at valuations that are remarkably reasonable relative to many technology businesses despite serving markets with strong barriers to entry and long term demand growth.

This is the type of business that can compound value quietly while investors remain distracted by the latest speculative craze.

If KKR is right about anything, it is probably their power infrastructure thesis.

Artificial intelligence requires electricity. Data centers require electricity. Manufacturing requires electricity. Electric vehicles require electricity. Population growth requires electricity.

Electricity does not magically appear because politicians hold press conferences.

Quanta Services builds the infrastructure necessary to move power from generation facilities to consumers. Transmission lines, substations, utility infrastructure, and grid modernization projects form the backbone of the business.

Investors obsess over artificial intelligence software while largely ignoring the fact that somebody has to build the electrical infrastructure supporting the entire ecosystem.

That somebody is often Quanta.

The company sits at the intersection of several massive trends. Grid modernization. Renewable energy expansion. Natural gas infrastructure. Data center development. Electrification.

Few businesses have more direct exposure to the physical buildout required by these trends.

This is not a speculative story. This is a company performing essential work that must occur regardless of political preferences or market sentiment.

Many investors still think Builders FirstSource is simply a housing stock.

That perspective misses the bigger picture.

Builders FirstSource is really a building products and construction supply company with exposure to residential housing, commercial construction, manufacturing facilities, logistics infrastructure, and increasingly data center development.

Every major construction project requires building materials. Every new facility requires doors, framing systems, windows, components, and countless products that most investors never think about.

The beauty of businesses like Builders FirstSource is that they profit from activity rather than prediction.

Nobody knows exactly which artificial intelligence company will dominate in 10 years.

Everybody knows new facilities will need to be built.

Management has also demonstrated exceptional discipline with share repurchases and capital allocation. Those qualities matter enormously when evaluating long term investments.

Boring businesses often produce exciting returns.

Sterling Infrastructure may be one of the most underappreciated beneficiaries of America's infrastructure renaissance.

The company participates in transportation, utilities, manufacturing facilities, and data center development. That creates exposure to several of KKR's preferred themes simultaneously.

Infrastructure spending tends to occur over long periods rather than short bursts. Projects often require years of planning, permitting, financing, and construction.

That creates visibility.

Investors frequently underestimate the duration of infrastructure cycles. Once governments and corporations commit to upgrading facilities, spending often continues much longer than expected.

Sterling's position within these markets provides opportunities for sustained growth without requiring heroic assumptions.

This is exactly the type of practical, real world business that tends to prosper during periods of elevated capital spending.

Millrose may be the single best example of KKR's collateral based cash flow theme.

The company owns land. That may not sound revolutionary. Land ownership has only been creating wealth for a few thousand years.

Millrose provides land banking solutions to homebuilders while generating attractive cash flows for investors. The model combines real asset ownership with recurring income.

Shares currently trade around 0.81 times tangible book value while yielding more than 10%.

Those numbers alone should attract attention.

Many investors spend their time chasing the next speculative technology story while ignoring a business backed by tangible assets that produces real cash flow and trades below book value.

Perhaps I am old fashioned.

Land still matters.

Book value still matters.

Cash flow still matters.

Millrose offers all three.

Ares Capital remains the gold standard of publicly traded business development companies.

Private credit continues expanding as traditional banks retreat from certain lending activities. Ares has established itself as one of the premier platforms in the sector.

The company focuses heavily on senior secured lending. Asset coverage is strong. Diversification is broad. Credit underwriting remains disciplined.

KKR's preference for collateral based cash flows fits perfectly with Ares.

Investors receive an attractive yield while maintaining exposure to a professionally managed portfolio of middle market loans.

This is not a story stock.

This is an income producing asset supported by substantial collateral and experienced management.

Those qualities become increasingly attractive in uncertain economic environments.

Blue Owl represents another compelling way to participate in private credit.

The company maintains a large portfolio of primarily senior secured loans backed by operating businesses and tangible assets. Credit quality remains solid, and management has demonstrated a conservative approach to underwriting.

Private credit has become one of the most important developments in modern finance. Banks face increasing regulatory constraints. Borrowers still need capital.

Firms like Blue Owl help bridge that gap.

The result is an attractive yield supported by collateral and professional credit management.

Investors often underestimate how valuable income can become when supported by real assets and disciplined underwriting standards.

That is especially true when markets become volatile.

The KKR report argues that collateral matters more in today's environment.

Blue Owl provides a direct way to express that view.

If KKR is right about Asia, then Japanese banks may be one of the most overlooked opportunities in the world.

For decades, investors viewed Japan as the land of zero growth, zero inflation, and zero interest rates. Banking was not exactly an exciting business when rates were pinned near zero and economic growth moved at the speed of a government committee meeting.

Those conditions are changing.

Inflation has returned. Interest rates have started to normalize. Corporate governance reforms continue to gain momentum. Capital allocation is improving. Shareholder returns are improving.

SMFG sits squarely in the middle of these developments.

Banks make money on spreads. When interest rates rise from abnormally depressed levels, spreads generally improve. Profitability improves. Returns on equity improve.

The market has spent so many years treating Japanese banks as value traps that many investors have failed to recognize that the underlying economics are changing.

SMFG is also benefiting from increased corporate activity. Mergers, acquisitions, financing transactions, and capital market activity tend to expand when economic confidence improves.

Valuation remains attractive by global standards. Investors can still purchase a well capitalized banking franchise at a price that does not require heroic assumptions about future growth.

That combination of improving fundamentals and reasonable valuation is becoming increasingly rare.

Longtime readers know that I have always preferred buying good assets at cheap prices instead of buying exciting stories at expensive prices.

SMFG fits that framework nicely.

MUFG is the largest financial institution in Japan and perhaps the most direct beneficiary of the country's transition away from deflation.

Many investors continue to view Japan through the lens of the past 30 years. Markets have a habit of looking forward. Investment returns often come from recognizing change before the crowd notices.

MUFG has spent years building capital, improving efficiency, and strengthening its balance sheet. Those efforts occurred while operating in one of the least favorable banking environments imaginable.

Management did not have the luxury of waiting for better conditions. They had to prepare for them.

Those better conditions may finally be arriving.

Higher interest rates improve earnings power. Stronger economic activity supports loan demand. Corporate reforms increase financial activity. Rising inflation helps normalize financial relationships throughout the economy.

Investors often underestimate how powerful a change in interest rate conditions can be for a large banking institution.

Even modest improvements can produce meaningful increases in profitability.

MUFG also offers significant diversification through international operations. Exposure extends beyond Japan into several important global markets.

That geographic diversity provides additional opportunities while reducing reliance on any single economy.

Shares still trade at valuation levels that suggest investors remain skeptical. Skepticism can be a wonderful thing when it creates opportunities to purchase quality businesses at discounts to intrinsic value.

Nomura provides a different way to participate in the Asian opportunity.

Where SMFG and MUFG are traditional banking franchises, Nomura offers exposure to capital markets activity, wealth management, and investment banking.

The company stands to benefit from many of the same trends highlighted by KKR.

Corporate reforms create more transactions.

Improved governance creates more shareholder activism.

Higher valuations encourage capital raising.

Greater investor participation supports trading activity.

Growing wealth supports advisory and asset management services.

All roads lead back to increased financial activity.

One of the more interesting aspects of Nomura is that it offers leverage to sentiment and activity levels rather than simply interest rates.

When investors become more engaged, Nomura benefits.

When corporations become more active, Nomura benefits.

When capital markets expand, Nomura benefits.

Those conditions appear increasingly likely as Asian economies continue evolving.

Valuation remains attractive relative to many global financial firms. Investors are not paying premium prices for exposure to improving conditions.

That creates the potential for both earnings growth and multiple expansion.

Those two factors working together can produce excellent long term returns.

One of the themes running throughout the KKR report is operational improvement.

Knowles may be one of the better examples of that concept.

The company manufactures specialty electronic components used in industrial, defense, medical, and communications applications. These are not glamorous products. Most consumers have never heard of them.

That is perfectly fine with me.

Knowles has spent several years reshaping its business, divesting noncore operations, improving margins, and focusing on higher quality opportunities.

Management is essentially performing the same type of operational improvement playbook that private equity firms use.

The market rarely gives companies full credit while transformations are underway.

Investors want proof before they pay up.

Value investors try to identify improvements before the proof becomes obvious.

Knowles operates in attractive niche markets with meaningful technical expertise and customer relationships. These are not products that competitors can casually replicate.

As profitability improves and management continues streamlining operations, earnings power should become increasingly visible.

Shares continue to trade at levels that suggest the market remains unconvinced.

That is usually where opportunities live.

Vislink is one of the more unusual opportunities in this group.

The investment thesis has evolved dramatically over the past several years. Asset sales have unlocked substantial value and transformed the balance sheet.

Readers know this story well.

The company sold its CCS business to Amphenol for approximately $7.4 billion. The Ruckus business followed in another major transaction. Those deals generated significant cash distributions while simplifying the company considerably.

Investors often struggle to evaluate situations where corporate actions create value rather than operating performance alone.

That creates opportunity.

Vislink today is a much different company than the market remembers.

The remaining operations focus on specialized communications and networking technologies. Management has greater flexibility, a stronger financial position, and opportunities to pursue growth initiatives.

Special situations require patience.

The market rarely updates its perceptions quickly. Old narratives often persist long after the facts have changed.

One of the lessons I learned from investors like Marty Whitman is that corporate events can create tremendous value when assets are sold at attractive prices and proceeds are distributed intelligently.

Vislink fits that mold.

This is not a conventional value stock.

It is a special situation where corporate actions have created a significant disconnect between perception and reality.

Visteon represents a fascinating combination of operational improvement and technological change.

The company develops cockpit electronics, digital displays, connectivity systems, and software solutions for automobile manufacturers.

Cars increasingly resemble rolling computers.

Every year brings more screens, more software, more connectivity, and more electronic content.

That trend directly benefits Visteon.

Many investors continue to think about automobile suppliers as cyclical manufacturing businesses. Visteon occupies a different position.

The company's value proposition revolves around technology, software integration, and increasingly sophisticated electronics.

As content per vehicle increases, Visteon's opportunity expands.

Management has also done an excellent job improving operations and focusing on higher value segments of the market.

This is not simply a bet on automobile production volumes.

This is a bet on the growing complexity of modern vehicles.

Valuation remains reasonable despite attractive long term growth prospects. Investors are not paying software company multiples for a business that increasingly exhibits software like characteristics.

That disconnect creates opportunity.

The common thread running through all 15 of these companies is remarkably simple.

They own assets.

They generate cash flow.

They benefit from long term trends rather than short term forecasts.

They operate in industries where demand is driven by necessity rather than fashion.

Defense spending is necessary.

Electricity is necessary.

Infrastructure is necessary.

Banking is necessary.

Credit is necessary.

Communications are necessary.

Many investors spend enormous amounts of time trying to predict what consumers will want next year. KKR's report focuses on what society will need over the next decade.

That is a much more useful question.

Viewed collectively, this portfolio represents a direct expression of KKR's major themes. Defense. Energy infrastructure. Collateral based cash flows. Asia. Operational improvement.

Viewed through a deep value lens, the appeal is equally clear. Most of these companies trade at valuations that still assume modest expectations. Few require speculative assumptions. Most are supported by tangible assets, recurring cash flows, or both.

Markets eventually change their minds.

Infrastructure still needs to be built.

Power still needs to be generated.

Governments still need to defend themselves.

Banks still need to lend money.

Businesses still need capital.

Investors willing to focus on those realities instead of the latest market obsession often find themselves rewarded over time.

That has been true for decades.

There is very little reason to believe it will not remain true over the next decade as well.