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Matrix's Katz on Utilities: Declare Victory and Sell (Audio) · Bloomberg Intelligence

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  Speaker 1: Charlie Pelt, and that's a Bloomberg business flash. You're listening
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  Speaker 1: to taking stock with Kathleen Hayes and Pim Fox on
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  Speaker 1: Bloomberg Radio, Taking stock now of the stock market. We've
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  Speaker 1: got a market that is looking for a reason to
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  Speaker 1: keep rallying today. A lot of volatility of course around
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  Speaker 1: the Fed Reserve and comments it has made taking a
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  Speaker 1: look at what companies are going to be doing well
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  Speaker 1: in the environment if the Fed does raise race this year,
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  Speaker 1: and then what did it what if it doesn't. Very
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  Speaker 1: happy to welcome back to the show. David Kats. He's
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  Speaker 1: president and c i O, Chief Investment Officer of Matrix
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  Speaker 1: Asset Advisors right here in New York City. David, welcome, Hey,
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  Speaker 1: definitely nice to be here. So set back kind of
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  Speaker 1: you know, the set the stage for us. Here we are,
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  Speaker 1: it's heading towards the end of August, We're going to
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  Speaker 1: head into the autumn. How how have this these past
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  Speaker 1: uh about eight months of the year kind of set
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  Speaker 1: up the stock market for what's going to happen? Is
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  Speaker 1: we had to you know, we're almost going to be well.
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  Speaker 1: The market has been a roller coaster this year. You
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  Speaker 1: had a historically bad start to the market the first
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  Speaker 1: six weeks for the worst six weeks in seventy years.
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  Speaker 1: Then you had a great rally, then post breaks that
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  Speaker 1: you had a sharp sell off followed by a sharp rebound.
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  Speaker 1: So lots of volatility, but quietly the market is up
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  Speaker 1: in the high single digits already. In fact, we if
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  Speaker 1: we just look at the past couple of months, it's
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  Speaker 1: certainly hasn't been too bad at this point. How big
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  Speaker 1: of a threat and how big of an opportunity is
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  Speaker 1: a FED or could the FED be requity investors? Well,
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  Speaker 1: we think the Fed is going to get a lot
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  Speaker 1: of notice. People are becoming obsessed with it. But the
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  Speaker 1: reality is the Fed once to raise rates. They need
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  Speaker 1: to raise rates. If they're gonna do it, it's gonna
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  Speaker 1: be very slowly. So the market at some point is
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  Speaker 1: going to calm down. If the FED raises in September
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  Speaker 1: or December but doesn't say that they're going to do
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  Speaker 1: a lot more raising next year, the equity markets should
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  Speaker 1: be able to digest it on a day daily basis,
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  Speaker 1: or the first week. They might sell off, but we
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  Speaker 1: do believe they're going to settle down. We say you
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  Speaker 1: probably have a little bit bigger risk in the next
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  Speaker 1: few months in terms of the election rather than the FED. Well,
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  Speaker 1: right now, the market is not focused a heck of
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  Speaker 1: a lot on the election. We think that the oddsmakers
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  Speaker 1: are putting a Clinton victory as the more likely outcome.
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  Speaker 1: We think if that were to happen, UH, the market
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  Speaker 1: would assume it's it's following a lot of the President
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  Speaker 1: Obama policies with a slightly better economy bias, So that
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  Speaker 1: would be a modest positive for the market. We think
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  Speaker 1: if Trump were to win the presidency, which is not
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  Speaker 1: being factored in, there's a lot more concern and uncertainty.
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  Speaker 1: If you look at the Trump policies in terms of taxes, Uh,
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  Speaker 1: that's actually fairly reasonable and a positive. Uh. In terms
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  Speaker 1: of lowering restrictions and laws for companies, also modest positive
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  Speaker 1: for business. But the big wild guard is something we're
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  Speaker 1: very fearful of and that the economy should be very
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  Speaker 1: fearful of is his comments about trade and starting a
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  Speaker 1: trade war with China or Mexico in that case. Uh.
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  Speaker 1: Some of the better economic forecasters say Trump's policies would
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  Speaker 1: put us into a recession, and clearly that would be
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  Speaker 1: real bad for the stock market. Yeah, it doesn't get
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  Speaker 1: too much worse than a recession, so that's obviously a threat.
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  Speaker 1: Now you're reasonably constructive, it seems on stocks, David uh
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  Speaker 1: You say you'd use any weakness to add to stocks,
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  Speaker 1: but it wouldn't change the rally, and it's not the
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  Speaker 1: time to aggressively add new money to the market. Why, well,
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  Speaker 1: So what happens is people always feel better after the
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  Speaker 1: market goes up. So you've just had about a ten
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  Speaker 1: percent rally in the last six or eight weeks, and
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  Speaker 1: all of a sudden, people are feeling more comfortable. You
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  Speaker 1: don't want to buy high. What you want to do
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  Speaker 1: is say, Okay, I have a long term time horizon.
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  Speaker 1: I like stocks over the next eighteen months, and rather
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  Speaker 1: than buying after they've run up, wait for the next self.
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  Speaker 1: Something's going to happen, whether it's out of Europe or China,
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  Speaker 1: or people fearful about Trump doing better in the polls.
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  Speaker 1: And when you have that three or five percent correction
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  Speaker 1: by companies you like but at prices that you like,
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  Speaker 1: and you know, that's what is our thinking all year.
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  Speaker 1: So we've been buying on the dips and then not
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  Speaker 1: chasing the rallies. You say value investing is coming back.
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  Speaker 1: It's been lagging growth for nearly a decade. Do you
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  Speaker 1: say this could be the the beginning of a new multi
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  Speaker 1: year trend. Why and why, well, thank goodness, more value guys.
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  Speaker 1: So it's not been fun for the last few years,
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  Speaker 1: but generally the market trades between value and growth and
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  Speaker 1: long seven to ten year cycles, growth is vastly outperformed value,
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  Speaker 1: as you said, in the last seven eight years. Uh,
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  Speaker 1: this year, value is doing better than growth. And right
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  Speaker 1: now we think value represents much better opportunity, thank growth,
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  Speaker 1: and better opportunity than it normally has. So as you
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  Speaker 1: have the growthier stock slowing down and the market coming
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  Speaker 1: back to more economically sensitive and or energy and or financials,
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  Speaker 1: we think value was due for a pretty good UH
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  Speaker 1: period in the on. Okay, so values back a good
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  Speaker 1: UH period of the sun. You are thinking that the
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  Speaker 1: dividend oriented investing trend has more upside, but you have
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  Speaker 1: to be more discerning, So tell us what you like
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  Speaker 1: in that trade and why. So right now you can
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  Speaker 1: get zero in the banks and you can get one
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  Speaker 1: and a half percent on its tenure treasury. So people
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  Speaker 1: are seeking yield. A lot of the market is paying
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  Speaker 1: good dividends, but we be wary of things like utilities
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  Speaker 1: that are selling at twenty plus times earnings. The flip
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  Speaker 1: side is you can get companies energy companies, financials, healthcare
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  Speaker 1: industrials that are paying three and a half to four
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  Speaker 1: yields that are growing over time at reasonable the evaluations.
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  Speaker 1: So we think that's a great place to put money.
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  Speaker 1: We think you get lower volatility and you still have
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  Speaker 1: some pretty good upside. Okay, okay uh. In terms of
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  Speaker 1: some of the companies that you're most fond of right now,
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  Speaker 1: let's just run through it and in the dividend arena.
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  Speaker 1: In terms of industries, who do you like the best?
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  Speaker 1: So we like financials the best. Financials have been the
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  Speaker 1: biggest lagger this year. We think that the businesses are
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  Speaker 1: actually doing very well. Credit is very good, and if
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  Speaker 1: interest rates ever go up, they do even that much better.
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  Speaker 1: But vote our investment thesis is they're going to do
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  Speaker 1: well either way. Our favorites would be JP Morrigan, MetLife, Wells, Fargo,
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  Speaker 1: all wonderful businesses uh and under ten eleven times earnings
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  Speaker 1: paying a three and a half to four percent yield.
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  Speaker 1: Okay uh. You also are have a couple of consumer
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  Speaker 1: discretionary stocks you like. So consumer discretionary has been uh,
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  Speaker 1: pretty volatile this year, the retailers have gotten beaten up,
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  Speaker 1: and by and large, we are a little bit wary
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  Speaker 1: about a lot of retailers because of the effects on
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  Speaker 1: from Amazon. But one that we do like is Target.
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  Speaker 1: We think that the company is very well run. They
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  Speaker 1: recently lowered guidance or the upper end of guidance for
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  Speaker 1: the balance of the year. The stocks hold off. They've
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  Speaker 1: y the dividend for forty five years in a row.
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  Speaker 1: They're paying a three and a half percent yields, it's
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  Speaker 1: at fourteen times earnings, and we think that there is
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  Speaker 1: a place for a Target, and they compete well against
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  Speaker 1: the Internet. Um. The the other um you know, uh.
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  Speaker 1: One that we like in that space is like a
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  Speaker 1: Harley Davidson. We think is a pretty good company there.
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  Speaker 1: And we also like McDonald's which pays a rock solid dividend,
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  Speaker 1: growing nicely, low volatility. Okay, let's run quickly through a
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  Speaker 1: couple more Cisco and CAALCLM in the tech space. So
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  Speaker 1: technology is doing well this year. Some of the old
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  Speaker 1: technology companies like the qal Comm and Cisco if something
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  Speaker 1: finally started to perk up, but they still sell it
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  Speaker 1: reasonable valuations, so we easily think they have another fifteen
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  Speaker 1: or twenty percent on the upside, and you're getting a
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  Speaker 1: three and a half percent plus yield while you're waiting. Alrighty,
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  Speaker 1: so how about what you like in the telegom space.
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  Speaker 1: So telecom is like utilities, but you're getting them in
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  Speaker 1: a much better price. So we like both Verizon and
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  Speaker 1: A T and T. You're getting a four and a
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  Speaker 1: half percent yield and you're buying the stocks of like
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  Speaker 1: fourteen times earnings. So we compare that to like a
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  Speaker 1: Duke Energy, which is selling its twenty one times earnings.
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  Speaker 1: We think the prospects for the telecoms are good, but
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  Speaker 1: you're not paying a heck of a lot for that. Okay, Um,
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  Speaker 1: you would be sellers, you'd be seller utilities? Why and
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  Speaker 1: is there anybody in particular that you'd say, please get
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  Speaker 1: out of this fast? So really, if you've been buying
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  Speaker 1: utilities for the yield and you've they've been doing well,
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  Speaker 1: so you're happy. We use this as an opportunity to
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  Speaker 1: declare victory. If you look at utilities over the last
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  Speaker 1: thirty years, they fell between eight times earnings and sixteen
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  Speaker 1: times earnings. Today many of them are north of twenty
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  Speaker 1: times earnings. Uh, if they were a dynamic growth business,
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  Speaker 1: maybe you could rationalize that twenty times earnings. But utilities
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  Speaker 1: are not. They're going to grow their earnings a two
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  Speaker 1: or three percent to yield their lowest levels that they've
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  Speaker 1: been in years. So we think that they've been marked
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  Speaker 1: up because of people are just trying to chase dividends. Uh,
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  Speaker 1: don't get caught up in that. Take your profits read
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  Speaker 1: deploy into some of the other names that we talked about.
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  Speaker 1: So what is the biggest risk? What? What? What should
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  Speaker 1: I be watching very closely? If I'm in the market,
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  Speaker 1: I'm not going to add stocks aggress so that could
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  Speaker 1: turn that around. What would you say? Oops, So I
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  Speaker 1: gotta be a little care cautious in here. Well, the
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  Speaker 1: the our biggest concern, as you mentioned a little bit earlier,
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  Speaker 1: is what's going on with the US election. Um, you know,
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  Speaker 1: we just think that if Trump were to be looking
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  Speaker 1: better in the police, he's been pretty erratic in his policy,
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  Speaker 1: so it's very difficult to handicaps. You know. While President
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  Speaker 1: Obama hasn't been the best in the world for the economy,
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  Speaker 1: it's it's been pretty understandable. Uh. And we think Clinton
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  Speaker 1: brings the same to the table with a little bit
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  Speaker 1: more pro business bias or pro economy bias, not pro
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  Speaker 1: business um. But that's our biggest concern right now. It
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  Speaker 1: looks like the break that is going okay, so we're
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  Speaker 1: keeping an eye on up, but we think that's okay.
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  Speaker 1: All right. Well, David cats a green light on buying
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  Speaker 1: some stocks and the dividend play. He likes the financials
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  Speaker 1: the death. So we're heading towards the market closed now,
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  Speaker 1: movers and shakers. Our stocks editor Dave Wilson will be
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  Speaker 1: joining us at the top of the hour. I'm Kathleen Hayes,
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  Speaker 1: and this is Bloomberg