Today’s headlines are dominated by one story: artificial intelligence (AI).
In their defense, it’s not difficult to see why.
As my colleague Nick Ward described last Friday, Nvidia’s (NVDA) recent earnings report showed that revenue grew 85% and earnings increased 129%. Micron (MU) had similar growth, except it didn’t achieve it over the course of one year.
It did it in a single quarter.
The temptation for investors to pour money into anything remotely tied to AI is almost irresistible. Even Ford (F) is up over 50% in the past 12 months on those tailwinds.
But while I am a strong believer in this disruptive technology’s long-term potential, let’s not kid ourselves. There will be severe pullbacks, and many weak hands will fold.
We also can’t forget that there’s an investment world outside of AI. Something quieter – and potentially much more lucrative – is happening in the income markets right now.
Select high-quality income investments are trading at meaningful discounts, offering yields that feel almost impossible.
While this disconnect isn’t new, it has become pronounced in 2026. And if you know where to look, there are legendary wide moat-style companies offering safe yields that can support your income needs for decades.
So let’s take a closer look at what’s happening on the ground.
The great valuation divide
Right now, Nvidia trades at forward multiples that price in extraordinary long-term dominance. We might call this “priced for perfection.”
Maybe the market will be right about its $5.2 trillion valuation. I know Nick makes a strong argument for this. But both of us agree that Nvidia will need to deliver truly extraordinary results quarter after quarter for many years in that case.
If it can’t, the stock will come back down to earth. And it’ll be a bumpy ride along the way.
That’s why I’m more interested in equally strong companies with rock-solid financials and business models… as well as current valuations that only price in bearish views.
Why is the market exceedingly bullish in some areas and completely bearish in others? I’ll sum it up with three reasons.
Rate trauma: The record rate hikes of 2022-2023 left many investors scarred. Things got so bad that “risk-free” Treasury bonds were the worst-performing major asset class at one point. Even though inflation has moderated since then, the fear of higher-for-longer rates has destroyed confidence and interest in the income markets.
Complexity discount: Some income investments are more complicated than plain common stocks or short-term Treasuries. And if terms don’t fit the traditional template perfectly, the stock or bond can be tossed aside. Usually, the market applies a small discount and still buys. But today, income investors are either too tired or impatient to work through the details.
Herd mentality: In the short term, capital flows are based on sentiment. Long term, they’re fundamentals driven. Today, AI is in favor… and anything with interest rate risk is not.
If you think I’m oversimplifying that last reason, just ask your friend or neighbor. My bet is that, if you do, you’ll hear their personal version of the “pro AI” and “anti long duration” thesis.
As a reminder, duration is how sensitive an investment’s value is to changes in interest rates. Since many preferred stocks and baby bonds are perpetual (i.e., they never mature) and pay a fixed amount, they have the greatest duration.
Real market examples
The undervalued, non-AI opportunities I’m seeing today aren’t theoretical. There are several areas where wide-moat income opportunities exist, including:
Select preferred stocks: Many high-quality preferred issues from utilities, infrastructure-related companies, and strong financial institutions are trading way below par. Some offer current yields north of 7%, complete with investment-grade credit profiles. These are hybrid securities that sit above common equity in the capital structure, giving them a margin of safety most common stocks lack. Wells Fargo (WFC) and Pacific Gas & Electric (PCG) both have offerings that currently pay above 6.5%, with big upside if rates go down.
Baby bonds: These $25-par bonds from well-capitalized companies have seen some of the deepest discounts. Certain issues from reputable global asset managers and infrastructure platforms trade in the mid-$14 to $16 range, delivering current yields well above 7%. This creates an attractive combination of high income today… and serious price appreciation potential if long-term rates ease.
My favorite example so far from this category has been my recommendation for May’s edition of the High-Yield Advisor. It’s generating a current yield of 7.6%, with well over 30% in near-term upside potential on top of the income.
Defensive REITs: Certain healthcare, industrial, and net-lease real estate investment trusts (REITs) with strong tenant credit and long lease durations are also trading at discounts to their historical valuations and net asset values. These businesses benefit from inflation-protected rents and resilient demand, yet many still offer yields in the 5%–7% range.
In each case, the fundamentals remain sound. These are not distressed companies; they’re established businesses with competitive advantages that have simply fallen out of favor due to macroeconomic noise.
Open opportunities for wide-moat investors
When sentiment eventually normalizes – as it usually does – these discounted income assets have the potential to deliver both attractive current yield and capital appreciation.
Even if rates remain elevated, you’ll be well compensated while you wait. And if there’s a recession like many are predicting, it will also play out in our favor.
Trust me. High-flying tech stocks are not where you’ll want to be.
But select income plays should do just fine. After all, the more severe the recession (if there is one), the more likely the Federal Reserve will be to cut rates.
So while the hype investors are fleeing for the exits, we’ll likely see double-digit capital gains in our “boring,” long-duration preferred stocks and bonds.
Just remember: Not all high-yield investments are created equal. If you pick the highest yield you can find, a class in “sucker-yield performance” is almost certainly in your future.
We must continue focusing on company quality, balance sheet strength, and cash flow visibility. Our goal is to find above-average levels of income from above-average quality businesses.
We all know markets go through cycles of obsession and neglect. And right now, we’re in a definite period where exciting AI growth stories are getting all the attention.
As long as the top players in this field continue to deliver incredible growth, that narrative will stay intact. But it won’t last forever.
Meanwhile, reliable income generators with long durations are clearly under-loved. Yet this, too, won’t last forever.
Patient investors – the ones who build positions in wide-moat income assets during these periods of dislocation – typically end up with superior long-term results. They collect generous income while they wait.
And when the market finally recognizes real value, they benefit from price recovery as well.
This is the essence of wide-moat investing: buying durable businesses at great valuations when others are distracted by the latest shiny object. Staying that course might not be an easy one.
But ultimately, there are few things in life better than getting a “distressed yield” from a quality company that’s built to last.
Regards,
Stephen Hester
Chief Analyst, Wide Moat Research
The Wide Moat Show
Source: ChatGPT
The markets may be up, but that doesn’t mean every single stock is. In fact, there are 10 previous market “darlings” that now trade at a steep discount.
Cell tower giants… specialized real estate… tech consulting firms… These out-of-favor companies may span the sectors, but they all beg the same question.
Are they bargains or value traps?
That’s what Nick Ward and I discussed in last week’s Wide Moat Show, with some interesting conclusions all around.
Catch the full episode right here.
