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Tech Is Getting Ahead Of Itself (Video Transcript)



  • We speak with Mott Capital Management about a market that may be getting ahead of itself, especially in tech.
  • While there are reasons to favor tech, he argues that too much optimism is priced in.
  • We talked about what a bull case could be, and the luxury investors have of not needing to make up their mind.

Editors' Note: This is the transcript of the video we posted last Wednesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the video as well as a podcast embedded below if you need any clarification. We hope you enjoy.

Daniel Shvartsman: I'm Daniel Shvartsman, Director of the Seeking Alpha Marketplace continuing our series of video interviews with our Marketplace authors. Today I'm joined by Michael Kramer, the author of Mott Capital Management, who runs the service Reading The Markets, a service that uses fundamental, technical, charts and options to find the next big move in the market.

Listen and subscribe to the Marketplace Roundtable on these podcast platforms:

The conversation with Michael runs from 1:00-28:15 on the above podcast.

So, Michael, good morning. How are you doing?

Michael Kramer: Good, how are you?

DS: I'm good. It's good to speak with you today. So my first question is worth orienting this around tech for the most part. And tech is interesting because as we sit here on June 2nd, NASDAQ is up for the year, XLK is up for the year, the sector -- it's not all the sector but the sector in general is doing pretty strong. What do you make of it both in the broader economic context and this is basically the last week of earnings for the sector, a few big software and what do you make of what's going on?

MK: So certainly there's been a shift towards the software side of things, anything at home related has certainly performed very well. I think that's mostly because you have an idea or concept that perhaps more people will be working from home in the future.

Also, for the most part, it seems to be immune to the coronavirus, meaning that, if you're a company, you're going to be using likely Microsoft Teams or Microsoft Office products, whether you're in the physical office space, or whether you're working like in your spare bedroom, like I am at the moment to do your work, right.

So, anything I think that's related to keeping productivity up through a software application has obviously done very well. I think anything even that's related to the data center has done very well, right? Because all this stuff is going somewhere and it's got to be transmitted through the cloud or someplace. And somehow it has to come down to your machine. So whether it would be wirelessly or through the internet connection or your cell phone or whatever it may be.

So certainly I think that's one of the reasons why you've seen really a strong outperformance. Another reason why I think you've really seen strong outperformance too is that, let's face it, a lot of the big tech companies, Apple, Microsoft, Google, Facebook, they all have tremendous balance sheets, right?

So if anyone's going to weather the storm, these guys are going to weather the storm because they have the assets and the resources to do that. And so that's I think, part of the reason why these guys have performed so well.

DS: The question that begs though and we caught myself back on there, the question that begs is the -- what about -- first of all, economic gravity because it's great for software to be in high use. But at some point, the reality around us is going to pull us down and we saw, we'll get into some specific parts attacking segment.

We did see companies that gave guidance at the beginning of the quarter didn't do well. And the companies that tried to put a number on what's going on they struggled in earnings response. But then also there's that gravity and then there's also valuation.

So what do you make about the fact most obviously, we're recording this on Zoom reports I believe it either at the end of today or on end of Thursday, I forget which but tonight. So they are for today. Obviously pricing in a lot but how much do you think that balances out here?

MK: So to some degrees it doesn't make any sense to me, to be honest. I have this conversation with some really close friends of mine that I've known for a very long time for very smart. I've been in the business for a very long time. And I've seen this story before. Unfortunately, it was in the late 1990s.

And I was just doing a video for my subscribers and reading the markets and I was just going through Qualcomm (QCOM), Intel (INTC) and Cisco (CSCO). They've never recaptured those late 1990 highs. They've come closed, but they've never gotten there. So, the market has this ability to look forward. The question is, how many years forward is it looking.

And a stock like Zoom (ZM) for example, I just wrote on my blog last night, that goes to all my followers on Seeking Alpha as well, this trading has something ridiculous or was trading at over 100 times like 2023 forward sales estimates. Basically Zoom with a $50 billion valuation has to earn -- has to see sales grow to like $5 billion to $10 billion a year by the year 2023, just to carry a 5 to 10 forward earnings multiple and not far at forward on earnings but on sales.

So some of the evaluations are extreme DocuSign (DOCU), $25 billion company, I mean it is half the value of Zoom, and it still carries some of the similar multiples. So, some of the stocks have obviously overshot. I mean, clearly, Zoom could be a product that's more widely used, but what's to say that Microsoft doesn't come out with a Zoom like product on its own, right?

But -- I mean, if it doesn't already have one, I think and might already have something. I mean, Cisco already has WebEx and Adobe (ADBE) has its product. So there are plenty of other competitors out there. Facebook just launched its own as well. So I think the barrier to entry in this market is probably very low.

But, in terms of some of these companies, I mean, Apple (AAPL) for example, stock I've owned since January, no, since July of 2017, I wrote it through all 2018 all the ups and downs. And I own Apple. I love it. I think it's a great company going to be around forever, certainly very innovative.

But it's expensive. I wouldn't be buying it here at these levels as a new position, not at 25 times one year forward sales over earnings estimates. Microsoft's another example, I own it. I've owned it for a very long time. I bought it in the winter, January 2019. Got at the bargain basement price of $105. I love the company for the long-term. I mean, they have a tremendous balance sheet but I wouldn't be paying almost 30 times one year forward earnings for a company like this.

So I think valuations have been very stretched and I think for the most part, companies like Facebook (FB), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG) (GOOGL) and other stock I own have all basically carried this market higher. And Alphabet, the funny thing about Alphabet, I've owned Alphabet now since I think March of '17 when it was like an $800 stock.

Great company long-term but all they said on the conference call the key to the conference call and I picked up on this a little bit afterwards. A lot of companies, all they had to start saying was, but we started to see a bottoming in April, where the last two weeks we've started seeing things improve. And that was all needed and every stock went up there, Uber was a perfect example of this.

Uber (UBER) reported probably the worst quarter you could have ever seen. And I own Tesla (TSLA) since 2014. So I've seen plenty of bad quarters. And all your readers know about bad quarters for Tesla. I mean, Uber made Tesla look like, it wasn't even close, it wasn't even in the same ballpark, right? But yeah, all they had to say was we started to see improvement the last couple of weeks in riders and the stock goes up.

So what's going to happen next quarter when Uber comes out with potentially another loss because that seems to be what they do? And all of a sudden, the real numbers hit and there's something that's more quantifiable. And that's my big concern.

DS: Let's jump to it because I think you're hitting on a really interesting point let's, I wanted to ask about digital advertising because that's a -- that's a sector unlike. So on software, what you hear on the earnings calls is accelerate, amplify, things are set in Dallas at something like more changes in the last two weeks than we would see in two years, whatever.

The digital advertisers like you said, it's a little bit more of this. We might be seeing year-over-year growth slowing or we're not seeing your snap gave us a week-by-week breakdown. And then this is already now almost two months ago. But what do you make of that digital advertising center as a microcosm for this sensation of the market is so obsessed with the rate of change, and maybe it's overthinking itself, like where do you make for where these companies are positioned going forward?

MK: I mean, Facebook is price perfection, nothing could go wrong, if you're in Facebook. I mean, this is a company that is just telling you, they're going to spend tons of money, right? That their revenue growth is going to slow, right, and fine it trades at 20 times earnings.

But I mean, has the market price in anything that could potentially go wrong for this company? I mean, it's trading at an all-time high when 40 million people are unemployed. And I understand how the markets healthy forward looking. I've been doing this for 25 years, right?

You don't -- I mean, people always like to point especially readers like to point out to me how markets forward looking. And I'm a growth investor. I understand the concept. But basically the way that Facebook is priced right now, it's as if nothing could go wrong. And I just think that in this environment that's a crazy assumption.

And it's not an overly expensive stock on a fundamental basis in terms of its one year forward earnings estimates or things of that nature. But they're going to spend a tremendous amount of money to come up to get to compliance to get up to speed to take care of all these regulatory issues that they have to deal with.

They're telling you they have a slower rate of revenue growth in the future. So what does that mean for margins, it means margins are going to continue to compress and the margins are compressing, then that means earnings are going to be slowing even further. So I don't know. I mean, I don't know what the market necessarily seasons some of these things.

DS: So are you seeing reality? Are you worried? I mean, nobody has a crystal ball. Are you worried that reality comes back in Q2 or in Q3, when whether without getting too much into the epidemiological issues, but just whether the bounce back from lockdown is not as strong as people see or whether the scars from this past period persist, like what are you seeing for -- or you just don't know and you're kind of spread out?

MK: No. So actually, I just did a video on this morning, I was uploading it, while we were on before we started for the readers in my group of subscribers. And but people don't understand, is that, if GDP in the second quarter contracts at an annualized rate of 50%, we need to grow the GDP at 60% in the third quarter to get back to just where we were in the first quarter. When was the last time U.S. GDP ever grew at 60%? But then again, it's never fallen by 50%, either.

So the reality is, is that there's no such thing as a V shaped recovery. We're not going to like see a contraction in the second quarter magically, in the third quarter, everything's going to return normal. That's just not how it's going to work.

We're going to have -- the CBO just came out with the same thing last night. You're going to see a tremendous contraction in the second quarter GDP now, which is the Atlanta Fed tool is currently projecting a 52% annualized rate of contraction in the second quarter. That's like 13% on a quarterly basis.

And CBO is only projecting like a 10% rebound in the third quarter. Okay, and so all of a sudden you get a giant checkmark. And then you have your potential long-term trend. So your output gap is growing tremendously over the next few years.

Based on many things, GDP will not return to where it was at the end of 2019 until after 2021. So if that's the case, and the market is projecting a V shaped recovery in earnings, how do you square the two?

Basically, what it tells me is the market assumption is wrong and it needs to be more like that for earnings. And that means that the market has to either correct or come down so that the multiples can compress or we have to trade sideways for a very long period of time to have the multiple -- have the fundamentals of the market catch up with the actual market valuation.

DS: So you don't see -- you didn't put in the scenario of a correct. You just said sort of, or no, I guess your first scenario is the correction or the time. It's interesting not to open this debate. But you said, you own Tesla or have owned Tesla.

Tesla is a stock that, I mean, your skepticism about the market right now is something that we've heard from Tesla bears for the whole decade. So do you -- you sound bearish on the market obviously, is the implication here. Like how do you -- what do you feel where are we? What are you feeling about this? And how do you position in light of all this?

MK: So this is a complicated question obviously, right? Because that's what people ask me a lot. Why are you invested long-term in equities, if you think that we have a correction coming? Well, because number one, we'll go through a growth reset, what I think of it like, right? So the market had the initial violent move lower in March -- February and March, which was totally unexpected, very extreme, a lot of mechanical things going on there that probably led to an overcorrection.

We're now in a reflex phase where we're I think we're bouncing back from that oversold condition. And I think what's going to slowly happen is, like I said, we're either going to see a correction that pulls us back down, or we're going to trade sideways. The thing here though is that if you like Microsoft, or you like Tesla, are you trading it or are you investing in it? And those are two totally different topics, right?

So my position in Tesla is an investment, which means over the next 5 to 10 years, I believe that they're going to be valued even more than where they are now. And so to me with a cost basis of $200, I'm not going to even mess around with it, right? If I were to go in and buy -- but also, I'm not buying new positions for myself at this point in time, because I believe over the next three to six months, I can get better prices, if that makes any sense.

DS: So what I was going to ask, are there any names you think are attractive now or do you feel that right now the best move is to sick wait, and something more drag?

MK: No, what I've been telling the reader, the subscribers in my group, at least. Mostly is that if you're going to play, know what you're playing with, be prepared, don't over leverage yourself. Don't get involved in ETFs and ETNs, you don't know anything about unless you understand the product, right?

There was just an article in the journal I write about the guy who went bankrupt in two weeks trading in ETN, right? Because they don't realize the risks that come with it exchange traded note as opposed to an exchange traded fund. And you know, where they trade these double and triple X leverage products.

So, my belief is either if you're going to play, know what you're playing with, keep your limits tight, don't use a lot of leverage, be ready to get out, or just sit and wait and be patient. I think that this is an environment where patients will be rewarded. We're talking longer term. If you're going to be a trader and you're ready to trade, like I have a lot of traders in my groups, that's a different story.

I think you have to have two different types of mentalities and two different types of perspectives, depending upon what you're going to do. But if you're a long-term investor looking to add to positions or establish new positions, I think at this point, the best option is probably to wait until you at least see what they say at the end of the second quarter.

What if Microsoft comes out in June or let's take a company like who hasn't given guidance or pulled guidance. And they just come out and they pull their guidance, because they didn't -- they don't have a lot of certainty in the market, or they don't see a lot of -- they don't have a lot of certainty in their business outlook.

And then they come out in the second quarter and they project they say, okay, well now for the 2020, we see this, and it's like, much worse than what the Street was anticipating what happens that? I mean, basically, stocks are trying to value on something they have no visibility -- that the companies don't even have visibility into. So how are the investors going to have visibility into?

DS: So I'm not expressing this as my view. But I'm curious to share like a bull take to hear how you would incorporate it into your viewpoint, which is that let's say we have stimulus -- we have a lot of stimulus ignore the Fed. The Fed is more of a liquidity thing, but there's a lot of stimulus in the markets. There is -- that the…

MK: Stimulus requiring to the relief bill.

DS: Relief bill, potential further relief bills et cetera. People are, I'm not so much talking about the Robin Hood trading that's happening because people are getting money in the bank that they want to invest. But we've had so many spills around the world, but focus on the U.S. We have -- there's a potential, I'm in Spain, and we're starting to open back up and it's proceeding relatively brisk. We had a strict lockdown about where Phase II, et cetera.

You could see, let's say Q3 were to a new normal, so people are wearing masks or whatever, but life is closer to normal. And in the meantime, a lot of small businesses have been hurting. I'm not saying this for good -- I think that's bad, but I'm not saying it from it just as a reality, a lot of big businesses that trade on the indices are doing well. More advertising is going to digital, more of your software is in the cloud instead of on premise, et cetera, all of that acceleration I refer to.

And so the companies that are in this S&P 500, the companies we're talking about, end up coming out, okay, from this. And so actually, the market is not forward looking where they're everybody's talking about, they're just cutting 2020 out of their DCF and imagining we can start fresh 2021.

But they're actually saying, look, their competitive position is now stronger in the future. And so yeah, well suck up a couple bad years of earnings, because this company is directing. Do you see anything in there? Do you see anything that's interesting, or is it not enough to consider for an investment?

MK: Well, again, so I think the first problem is, number one, the relief bill is in stimulus. It's actually meant to replace the lost GDP and lost wages. So stimulus would come in addition to this is really just meant to replace what's been missed, and we're likely to take a $3 trillion hit just in the second quarter alone in GDP. So the relief bill just barely covers that. So that's one thing.

And no, you're right. I mean, I was driving one day into town, we're in New York, I'm in Nassau County, which has been one of the epicenters of least U.S. and we've been under I guess strict lockdown I don't know I mean, I find that every state's a little bit different in terms of how what they call lockdown and essential businesses and such.

But yeah I was driving I talked to a lot of people in the town I work on a main street and I know a bunch of the shop owners and things are certainly slow they're struggling and I worry about their viability. And I thought to myself, well, maybe we're just going to live in a Home Depot (HD), Lowe's (LOW) world after this is over. And that's all that's going to be left.

And it's very possible that we're in a world where the bigger just bigger, and mom and pop stop stores are going to struggle if they still are around. What that means that there's going to be less office space that's going to be rented. And if there's less office space that's going to be rented, that means there's going to be fewer employees.

And if there are fewer employees, they're not going to have the money to spend their home depot or they're not going to need the material to furnish their office. And then what about all the REITs that own these office spaces? Are they going to start defaulting on their loans, and if they start defaulting on their loans, what happens to the banks?

So there's a whole cascading effect that it's really just it's too early to possibly know. I have a friend that has a little rental business I mean, it's not little but in relatives furnace repair the S&P 500 as little as 10 inches, saying here, here the keys take it back, I'm never going to be able to recover from this or it's going to take me far longer to recover from this than what I have the cash to be able to do.

And there are just people giving the keys back, but he's still responsible to cover his taxes, because no one's giving him a holiday. And he still has to make his mortgage payments because no one's giving them a holiday.

So it is just in my opinion, it is way too early to know whether we're in a bull case or a bear case. This is like and I really don't want to say this, right. But after the stock market crashed in 2009, we didn't go immediately into a depression.

I'm not in a camp where I'm saying we're into going into a depression, although some of these numbers would rival that right. But those people in 1929 didn't know that they were going into a depression. And I hope that we're not, and I hope that we recover, but I think what I'm trying to say it’s too premature to know for certain which way we're going to pretty much go.

And I'd like to think that when we come out of this, it's all going to be kind of back to some sort of normalcy, or at least what it was in February of 2019. But I'm just not sure when that's going to be.

DS: Very well, but I think it's hard and I'll point the finger at ourselves Seeking Alpha. You're on Seeking Alpha every day you're reading it, you were publishing news and not that we shouldn't but there's a sensation of okay, now what, now what, now what and looking forward, looking forward and things take time to play out. And I think for investors, as you serve espouse the patience to not -- you don't have to make take a bet on the future of the economy today. There was so much I know.

MK: So that's right. And I try to write articles for you guys. I try to give a perspective of long-term stuff and short term stuff. And people are very quick to say, oh, you're wrong, you're wrong, because you've been wrong for a week. Well, I wasn't writing with the intention of being right or wrong for the week, I was writing with the intention of trying to give you some things to think about, that maybe you weren't thinking about before.

And I think these are all necessary steps if you're really going to be an investor, to really understand the bull and the bear case. And at this point, I can't decide which one is the right one.

DS: Which is again, where -- and it's so hard in our modern social media environment, et cetera. But you don't have to have an opinion on everything. And you can no called strikes in investing anyway.

MK: Well, I mean, but the biggest hurdle is that the market moves at a speed that's faster than any of us can digest or the information we're getting and that speed makes people make mistakes that they wouldn't otherwise have given if given the time may not have made. And so that's why it's really what I try to at least teacher tell people when they asked me about my opinion about the market is that sometimes the best trade made is the big trade not made at all. And giving yourself that chance to kind of really think through and make that smart decision.

DS: Absolutely. Okay. Really good. So I've been speaking with Michael Kramer, the author of, he writes at Mott Capital Management on Seeking Alpha. He's the author of Reading The Markets. Michael before we wrap up any positions that you need to disclose any of the stocks name?

MK: Yes, so I am long Microsoft, Tesla, Apple, Alphabet. I think those are the only ones we spoke about. But I do own Acadia Pharmaceuticals. I've owned that for many, many years. I do own Unilever. I love that company, well positioned, Verizon for 5G. And I think I might be missing one, but some days I can't remember them all. It's like, who can remember everything.

But yes, but all of my holdings are basically for a long-term time horizon, and I'm not trading around positions or anything like that. So now.

DS: I am long Alphabet myself, though. Mostly just give me something exposure and kind, it's essentially instead of owning the QQQ Ion, a little bit of Google.

MK: Yes, I mean if you own Apple, Microsoft and Alphabet for an Amazon, you're not having a bad year.

DS: Exactly. It at least papers over some of the losses.

MK: Exactly. Exactly.

DS: All right. Well, Michael, thanks so much for your time today. And best of luck out there. I hope you take your time and making your next decision and that things would go for you.

MK: Hopefully the next time we get to talk will be better times.

DS: Exactly. Yes, for sure. Okay. Take care.

This article was written by

The SA Marketplace Roundtable Podcast is a weekly podcast featuring our Seeking Alpha Marketplace authors. We talk with authors about their investing styles, current views on the market, and any favorite ideas for their portfolio currently.Follow this account to get new podcasts from our authors. You can also find this podcast on iTunes, Apple podcasts, Soundcloud, stitcher, and anywhere else you would sign up for podcasts.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Daniel Shvartsman is long GOOG. Mott Capital Management is long GOOG, AAPL, MSFT, and TSLA. Nothing on this video should be taken as investment advice.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given that any particular security, portfolio, transaction or investment strategy is suitable for any specific person. The author is not advising you personally concerning the nature, potential, value or suitability of any particular security or other matter. You alone are solely responsible for determining whether any investment, security or strategy, or any product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. The author is an employee of Seeking Alpha. Any views or opinions expressed herein may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.

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