Latest / Bloomberg Intelligence / Wunderlich's Hogan: Bargains in Financials, Healthcare (Audio)

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Wunderlich's Hogan: Bargains in Financials, Healthcare (Audio) · Bloomberg Intelligence

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  Speaker 1: now on West Texas Intermediate Crude. I'm Charlie Pellett, and
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  Speaker 1: that's a Bloomberg Business flash. This is taking stock with
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  Speaker 1: bin Box and Kathleen Hayes on Bloomberg Radio. Dividend paying stocks, Well,
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  Speaker 1: they're a hot theme on the global scene. Is that
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  Speaker 1: the attraction of the companies. Can they grow those dividends
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  Speaker 1: over time? Can they increase their cash flow? Can they
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  Speaker 1: increase their strong commitment to return capital to shareholders. Let's
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  Speaker 1: find out more about the equity market with Art Hogan.
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  Speaker 1: He is the chief market strategist for wonder Licked Securities.
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  Speaker 1: Art Hogan, thanks very much for being with us. Thank
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  Speaker 1: you so much for having me. You know, um, I
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  Speaker 1: want to just first of all, get your kind of
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  Speaker 1: overview of what is going on in the equity markets
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  Speaker 1: right now. Why are people buying stocks in your opinion, Well,
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  Speaker 1: probably free things. And I think first and foremost, we
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  Speaker 1: had a knee jerk reaction to the seismic event that
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  Speaker 1: was the UK referendum, and and that's really worked its
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  Speaker 1: way into a pretty steen steep, quick sell off. And
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  Speaker 1: then as they sort of settle into the post realization
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  Speaker 1: that that's probably not going to keep the globe from
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  Speaker 1: spinning here and uh and and certainly cause a recession
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  Speaker 1: in the US, and and and and be a dent
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  Speaker 1: in our earnings is, at least in the near term.
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  Speaker 1: I think it was kind of rationalizing where the best
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  Speaker 1: place to have money is right now. And unfortunately, when
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  Speaker 1: you look at yields across the globe and certainly our tenure,
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  Speaker 1: even though it's moved up from one thirty three to
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  Speaker 1: one fifty today, yeah, one fifty five today, you still
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  Speaker 1: have a about a forty five or fifty basis point
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  Speaker 1: delta between the yield on the SP five heard in
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  Speaker 1: the yield on a tenure, and that historically don't see
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  Speaker 1: that that had blown out about at basis points, you know,
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  Speaker 1: as early as the beginning of last week. So you know,
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  Speaker 1: I think on an attraction basis, and you mentioned divid
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  Speaker 1: and darlings and dividend paying stocks at the outset, but
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  Speaker 1: I think, you know, the real attraction here is, does
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  Speaker 1: the SMT five look any any more attractive than you know,
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  Speaker 1: putting your money in the US tenure in terms of
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  Speaker 1: what's your ultimately yield is. And I think that's one
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  Speaker 1: of the biggest draws. I also think that the economic
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  Speaker 1: data of the second quarter certainly seems to be better
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  Speaker 1: than the first quarter and certainly seems to be back
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  Speaker 1: in the line with a two and a half percent
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  Speaker 1: GDP growth rate, which is probably going to be you know,
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  Speaker 1: good enough and certainly better than a lot of alternatives.
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  Speaker 1: So I think you've gotta you know, the possibility that
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  Speaker 1: this earning season is an inflection point. And then we
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  Speaker 1: start seeing positive learnings growth against music comps coming in
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  Speaker 1: the second half of this year, and and uh, and
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  Speaker 1: then the stocks are looking more attractive, sounding pretty sanguine
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  Speaker 1: about stocks right now, Aret, do you think that people
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  Speaker 1: ought to be getting in and buying Well, I tell
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  Speaker 1: you this what I'm nervous about, and then you started
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  Speaker 1: you let off with what I'm most nervous about. And
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  Speaker 1: the good news is during this rally, we've seen a
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  Speaker 1: rotation out of some of those utilities and staples and
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  Speaker 1: telecoms which I think are getting dangerously over bought, you know,
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  Speaker 1: that crowded trade that is a utility though it is
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  Speaker 1: a trade that's works, and it's worked for a couple
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  Speaker 1: of years, and it's certainly percent on the unit date
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  Speaker 1: basis on the utility index, but it gets dangerous. And
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  Speaker 1: where I get the most concerned is thinking that bond
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  Speaker 1: Surrogan is safe. Right. You know, we're trying to get
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  Speaker 1: multiples that are historically high and yields that are historically
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  Speaker 1: low for that group, as is the staples as as
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  Speaker 1: a telecoms silser extent. And that's where I get concerned
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  Speaker 1: if if we start to see this continuation of a
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  Speaker 1: rotation out of those sectors, are the days that we
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  Speaker 1: do well. If those are the worst performing sectors, and
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  Speaker 1: some of the growthier sectors, like the industrials, like the healthcare,
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  Speaker 1: like the consumer discretionary, perhaps the technology sectors start to
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  Speaker 1: get the sponsorship that I feel whole lot better about.
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  Speaker 1: You know, the condition that the stock market was in
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  Speaker 1: art Hogan, It's easy to make the case, I guess,
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  Speaker 1: for dividend paying stocks when you compare it to of
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  Speaker 1: course what the ten year treasury is yielding, right one
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  Speaker 1: point five five percent? So you say, all right, well
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  Speaker 1: stocks could be a proxy uh four bonds. That's great.
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  Speaker 1: When stocks are moving up, do you think that investors
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  Speaker 1: are going to have another another thought? If we see
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  Speaker 1: a correction in equities, that's something that doesn't necessarily get
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  Speaker 1: as much attention as as that comparative yield program, right,
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  Speaker 1: And that's I think that's the point, right when you
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  Speaker 1: think about that let's let's say, for example, and utilities alone,
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  Speaker 1: if we were to take that and just mean we've
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  Speaker 1: heard half of the of the movie's seen on a
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  Speaker 1: multiple basis to you know what we typically see. So
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  Speaker 1: utility index typically say the fourteen and a half or
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  Speaker 1: fifteen times currently trading an eighteen and a half or
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  Speaker 1: nineteen times. Cut that in half, and then you've wiped
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  Speaker 1: out two years worth of yield. So that yield play
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  Speaker 1: that you had you lost in in uh capital appreciation.
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  Speaker 1: So that's where the danger comes in. And I'm not
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  Speaker 1: to know that's not to say that we need to
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  Speaker 1: see mean reversion and every over bought sector of the
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  Speaker 1: SP five hundred, but you're just a mild. Mean reversion
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  Speaker 1: is going to find investors that you know, thought they
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  Speaker 1: were buying bond sergus there actually buying stocks. And you
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  Speaker 1: find out pretty quickly how quickly that yield evaporates when
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  Speaker 1: you were you taking capital losses. Yeah. Well, also, no
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  Speaker 1: one rings a bell when when the stock hits a
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  Speaker 1: hits a high to tell you that you should get out. Now,
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  Speaker 1: that's that is the problem. And I think that's where
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  Speaker 1: you have to look at his story. Evaluations and and
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  Speaker 1: and hearken back. Now, the market itself probably appears to
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  Speaker 1: be a bit you know, pricey. Here if you look
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  Speaker 1: at this on a sort of trailing twelve months, you
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  Speaker 1: know we're turning at eighteen times and S and T
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  Speaker 1: probably sixteen and a half times next year's estimates. And
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  Speaker 1: and you know, if you went back to the last
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  Speaker 1: twenty five years, that's going to look a couple of
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  Speaker 1: multiple turns higher. So you know, they don't ring a bell,
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  Speaker 1: but oftentimes it's probably a good idea to look at
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  Speaker 1: where things tend to go. Now, none of those things happen,
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  Speaker 1: you know, in a vacuum, so you do have to
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  Speaker 1: look at the yield on the ten year, You have
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  Speaker 1: to look at what your alternatives are, and you have
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  Speaker 1: to look at the current state of inflation um and
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  Speaker 1: both of those are all ultra low. So you know, again,
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  Speaker 1: I suppose you can give yourself a couple of multiple turns.
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  Speaker 1: But you know, we're at a we're at a point
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  Speaker 1: now where I can see this market continue to get
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  Speaker 1: you know, upward momentum, and we certainly have found a
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  Speaker 1: path the least resistance for the upside. We'll know a
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  Speaker 1: whole lot more as we really get in the hard
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  Speaker 1: earning season the end of this week and into next
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  Speaker 1: week where we have north of d and fifty SPF
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  Speaker 1: owner companies reporting. But you have to be careful because
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  Speaker 1: you know, stocks priced for a perfection to deliver profection
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  Speaker 1: during this earning season, and we've seen what happens when
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  Speaker 1: they don't. Well, let's take one stock in particular, I
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  Speaker 1: know you've been following. This is Johnson and Johnson. Now
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  Speaker 1: here is a stock that is up more than twenty
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  Speaker 1: one percent so far this year, pays a two and
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  Speaker 1: a half percent dividend currently and the shares are hired
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  Speaker 1: by one and a half percent because of the earnings results.
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  Speaker 1: But yet it trades at an estimated p of more
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  Speaker 1: than eighteen times. Yeah, you know what, oddly enough to him,
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  Speaker 1: that's actually trading out of market multiple, right, it's trading
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  Speaker 1: at the same multiple DSPF. I've heard it. If you
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  Speaker 1: look at a business that has a handsome dividends done
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  Speaker 1: well in their farmer the farmers the bright spot. Uh
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  Speaker 1: and and and as as you think about things, you know,
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  Speaker 1: would you rather have a household name like Johnson and
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  Speaker 1: Johnson has actually been able to deliver solid earnings growth
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  Speaker 1: and pay that market multiple. So you know a relative basis,
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  Speaker 1: is Johnson and Johnson expensive at eighteen times historically, yes,
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  Speaker 1: but it's trading at the same multiple that DSPF I've
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  Speaker 1: heard it is. So you know, to the extent that
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  Speaker 1: you know, you have your choices here and obviously Johnson
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  Speaker 1: Johnson is one of the stars of the day. Here art,
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  Speaker 1: how do you know when to sell? Well, it's it's
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  Speaker 1: it's three things, and I certainly think one of those things.
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  Speaker 1: And we've seen this, you know, three three times in
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  Speaker 1: the last twelve months. It's your risk tolerance, right, So
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  Speaker 1: if if, if, if you're looking at your portfolio and
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  Speaker 1: you see the last August sell off when we we
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  Speaker 1: had the beginning of the China currency peg concerns and
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  Speaker 1: have been again you know in the januarys every time
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  Speaker 1: frame when we sold down tempersent on similar concerns, or
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  Speaker 1: you know the quick six percent down drafts were the
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  Speaker 1: UK referendum, and those things keep you awake at night.
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  Speaker 1: If if your natural reactions to sell and all three
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  Speaker 1: of those insan says you probably are overexposed equities. The
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  Speaker 1: the other piece of the puzzle is, you know, use
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  Speaker 1: history as a guide where you know, at some point
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  Speaker 1: in time, we're gonna mean reverting evaluations will either grow
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  Speaker 1: in evaluations and earnings will grow here, or we need
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  Speaker 1: to have a draw down here to normalize evaluations. We're
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  Speaker 1: getting expensive here. So you know, it's it's okay to
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  Speaker 1: be raising cash and have cash, you know, on the
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  Speaker 1: sidelines at some point in time, and it should be
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  Speaker 1: part of your portfold you when you think about your
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  Speaker 1: near asset allocation, there's there's always that percentage that should
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  Speaker 1: be in cash for those opportunities when you see dislocations
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  Speaker 1: in the market. The other thing is if your long
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  Speaker 1: term investor, if you're just starting in this game, you
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  Speaker 1: don't have to be as concerned about the ups and
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  Speaker 1: downs in the day to days and those three different
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  Speaker 1: drawtowns that we've seen in the last twelve months, and
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  Speaker 1: and thinking about this for the long term. But if
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  Speaker 1: your typical you know, older investor like myself who who knows,
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  Speaker 1: you know, in the in the next ten years, you're
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  Speaker 1: gonna need that money for things like retirement or the
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  Speaker 1: things of that nature. Your your exposure for the ectuly
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  Speaker 1: markets should be much less. Uh. If art Hogan suddenly
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  Speaker 1: found a bag of money that fell from the sky.
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  Speaker 1: What would you be doing with it? Well, that would
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  Speaker 1: be a little first and foremost, I would h I
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  Speaker 1: would probably be looking at those sectors and the spvernment
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  Speaker 1: that have underperformed here and and and we'll probably take
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  Speaker 1: a couple of years to play up. But I think
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  Speaker 1: if you look at the three of the biggest underperforming
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  Speaker 1: sectors first and foremost, I think financials are ridiculously and expensive,
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  Speaker 1: but you have to have a longer term view on that.
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  Speaker 1: We've had low interest r. If that's terrible for financials,
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  Speaker 1: writ large netsis margins are just non existent. It's difficult
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  Speaker 1: for them. That's gonna not gonna be in place forever.
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  Speaker 1: So I think there's some great financials that probably are
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  Speaker 1: fitting at some you know, percentage of their tangible look
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  Speaker 1: falure that are going to be great bargains and we'll
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  Speaker 1: look back two years from now and say that was
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  Speaker 1: that was a bicycle. I think the same is true
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  Speaker 1: in healthcare. And I think healthcare sort of an election
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  Speaker 1: year gets it that reimbursement um problem and we talk
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  Speaker 1: about you know what's going to happen, and then the
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  Speaker 1: electorcycle and then lo and behold, you know this has
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  Speaker 1: happened every presidential electorcycle that I can remember, and lo
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  Speaker 1: and behold, nothing really happens, and we go forward and
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  Speaker 1: those are probably bargains. And the third I think is
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  Speaker 1: opportunistically in a consumer discretionary space. I think we've decided
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  Speaker 1: that the American consumer no longer you know, likes to
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  Speaker 1: go out and and pay for things. I think if
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  Speaker 1: we find the brand leaders that are out there, you're
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  Speaker 1: getting some great bargains there. Thanks very much, Art Hogan.
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  Speaker 1: He is the chief of market Strategies for one Delected Securities,
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  Speaker 1: speaking about healthcare financials as well some consumer discretionary stocks.
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  Speaker 1: They might fit the bill for your portfolio. We're gonna
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  Speaker 1: take you through to the close. Next on Wall Street,
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  Speaker 1: this is Bloomberg