Value stocks

Value stocks are now ‘overvalued’, says ERShares CEO

ERShares CEO Joel Schulman joins Yahoo Finance Live to discuss finding growth stocks in the tech sector amid Fed quantitative tightening and interest rate hikes, in addition to considering the inflation and unemployment as indicators of recession.

Video transcript

DAVE BRIGGS: For more on the markets, let’s call on Joel Shulman, CEO of ERShares. Joel, good to see you. It’s been a wild ride the last few days. Let’s take a step back and take it all in, from the Fed announcement, the surge there, quickly hammered yesterday, and then a bit of a rebound today. Where are we, overview?

Joel SHULMAN: Overall, I think we will bounce back. Like you said, in the last few days we’ve been going up. Same news, up Wednesday, down sharply Thursday, up Friday. The news really hasn’t changed. The paradigm has not really changed. I mean, we trade in ranges. And if you look back over the past month, you’ll see that we’re trading in the 5-10% range. I see this continuing throughout the year.

What’s interesting is that a lot of the big growth stocks, especially the big loss ones, are down 70%, 80%, are the ones that are bouncing the strongest today, also the ones rebounding – which were hit hard yesterday. So we’re seeing very strong results, in some cases up more than 10%, against some of the highest and most speculative stocks today.

SEANA SMITH: Joel, do you expect that momentum to continue in some of these names that have been beaten for so long?

Joel SHULMAN: Yeah, well, you know, it’s interesting. If your listeners look at stocks like Walmart, Target, and even Coca-Cola, you go back to the last 30, 40 years, they were pretty much flat. And then from COVID, over the last two years they’ve gone up 200%, 300% in the case of Coca-Cola, right? The growth is not there. So when you look at adjusted for growth and compare it to a tech company like Nvidia, which is known to have a very high relative price multiple adjusted for growth, NVIDIA is actually 1/3 the cost of a Target, a Walmart, or a Coke.

So what happened was that a lot of people put money into commodities, and the indices pushed the prices up. And now the so-called value stocks are, in fact, in my opinion, overpriced.

RACHELLE AKUFFO: So as we see these fallout from the Fed announcement and markets are still trying to find their feet, how should people position themselves right now?

Joel SHULMAN: That’s an excellent question. We look at stocks globally. So we review over 56,000 companies worldwide. What we are looking for are companies that can contain costs. They have prizes – you hear a lot about them lately. Were they putting pressure on prices? Can they wait and keep their margins constant?

There are only about 250 companies that we follow that are profitable, that have actually reduced selling and general administration, SG&A. And there are a handful of companies that are cutting costs on a relative basis, increasing gross margin, and expanding net income, which is EB– EBIT, earnings before interest and taxes.

Now these are companies we are looking for. In many cases, they were outbid. But if you can find them, there are hidden gems off the beaten path, where they’re actually able to keep their margins intact. And we think these are the best places to look right now.

DAVE BRIGGS: Alright, let’s talk tech. A nice rebound for the NASDAQ today, up about 2%, but down almost 31% since the start of the year. Joel, you say the brave investor invests in technology at this point. But is there an opportunity?

Joel SHULMAN: I think it’s… I think there’s an opportunity. And you have to look at some of these things in the long term. And the technology has been so good over the last 15, 20 years. I mean, since the crash of 2008, 2009, we’ve had really good social performance. Growth was the dominant leader. Over the past year and a half, high growth tech stocks and high growth stocks in particular have taken quite a beating.

We think they still have great growth on a relative basis. We believe that if investors are looking at a horizon of a year or more, they will be rewarded with technology. I mean, they’re going to… ultimately, people want to see growth. Now what they don’t want to see is growth at any cost, right? And that’s what was going to happen last year. We’ve seen some cases, price earnings multiples greater than – in fact, earnings multiples greater than 100. So the earnings market cap is greater than 100, which is very high. But we have seen valuations fall. And we think the technology over the next year will be well received, well – very well rewarded.

SEANA SMITH: Joel, how much of the Fed’s tightening plans do you think has already made it into the market?

Joel SHULMAN: I think a lot of it has been priced in. I mean, when you look at mortgages – and that’s been a big story over the past week. And mortgages have almost doubled. They went from 3% to 6% recently. This means that the individual who buys a house for $500,000 at the beginning of the year, same mortgage payment, can now only pay $350. So that has been reduced by almost a third for the individual. So that brought things down.

Now what has happened is that mortgages are up almost 3%. We haven’t seen that over a similar maturity period for the federal bond, the long bond, known as the long bond, with a 30-year maturity. And federal bonds didn’t… didn’t go up 3%. It only went from about 1% to 1 and 1/2%. We believe this will continue to increase.

We see 10-year and 30-year yields surpassing 4% by the end of the year. So we’re going to continue to see pressure on high growth stocks because people tend to think of them as being inversely related. We believe they were unfairly beaten. We see some of the growth coming back. Much of it has been built into the price. But we will continue to see rates increase through the end of the year.

RACHELLE AKUFFO: And in this discussion of whether or not the Fed can have that soft landing or the country goes into a recession, you said that the unemployment rate would be the key to watch. What are you watching over there?

Joel SHULMAN: Well, interestingly, when you look at COVID, it went from 157 million jobs to 147 million and then it bounced back. What’s really interesting, the story that a lot of people don’t focus on, is that we have 75 million baby boomers, these people– that’s a big chunk that’s going through our system. And before COVID, about a million a year were retiring. Last year, three million people retired.

And now what we’re seeing because of inflation, some of these boom– and by the way, because they’re retiring, it’s creating openings for more people to come into the workforce. And that has kept our unemployment rates low. Today, with inflation so high, many of those baby boomers who are afraid of retiring early are delaying their retirement. So what this is going to do is put increasing pressure on our unemployment rate.

So we see that employment, which has been the only bright spot in our economic situation, is that we’ve had high levels of employment to absorb some of these high cost increases and so on. If we start to see inflation stay high and then unemployment rise, we could see our economy come to a screeching halt. And we’re already seeing some of the leading indicators, like building permits, of course, the bear market. The market hit below 20– fell below 20%. It is a leading indicator. We see the sentiment dropping.

So we are already seeing leading indicators pointing to a recession. The only thing keeping us above water is low unemployment rates. If the baby boomers are delaying their retirement and some of the tech companies, which are having low cash flow and losing money, and they’re not being refinanced, and they’re starting to lay off more and more, we are going to see this economy suddenly collapse come to a halt very quickly. And that’s the big fear that we don’t have a soft landing, that we’re going to go into a tough time.

DAVE BRIGGS: Yes, and we had 60% of 750 CEOs saying they think in the next 12-18 months we will have a recession. I haven’t heard if you are one of those. And if so, is it this year or next?

Joel SHULMAN: I don’t think it will be this year. I think if we have it, it will be 2023. Hopefully things will continue to go well and inflation peaks. We certainly don’t get any help from the energy side. Food prices remain high. These are concerns. And again, wages, which are sticky, they’re not going down that fast. What tends to happen is that wages generally don’t go down until there’s an economic downturn. And so I hope that’s not the case.

But we didn’t get into this mess overnight. Nor are we going to get out of trouble overnight. And I think that’s the problem here, that a lot of people were encouraging the Fed to raise rates more and more, from 50 basis points to 75 basis points to try to get this inflation under control quickly. We must remember that this problem did not happen overnight. These are trillions of dollars that have been injected into the economy over a period of two years. And it takes time to relax.

SEANA SMITH: Joel Shulman, thank you very much for joining us, CEO of ERShares. Have a good week-end.