Buy Disney on ESPN-Penn deal, Sell Twilio on finances: Strategist's stock trades

While examining investor and market expectations for Thursday's CPI print, Belpointe Chief Strategist David Nelson joins Yahoo Finance Live discuss several of his latest stock trades: Buy Disney (DIS) and energy sector stocks (XLE), sell or avoid Twilio (TWLO) and Chinese ADRs, or American Depositary Receipts.

"Oils not in the $60's anymore," Nelson says on rising oil prices, which is trading above $84 per barrel today. Turning to Disney, Nelson cites CEO Bob Iger's leaderships fumbles during his tenure at the House of Mouse, including making the mistake of not buying Netflix. "This ESPN deal with Penn Gaming, I think that's a smart deal," Nelson says on the $2 billion deal with Penn Entertainment (PENN). "Those are the kinds of tie-ups Disney will have to make." This comes ahead of Disney's third-quarter earnings report, citing a revenue miss and narrower-than-expected losses for its streaming segment. Disney stock sits at a nine-year low.

"Companies like this tend to bleed cash," Nelson says on communication tech company Twilio. Twilio shares are up by over 18 percent year-to-date, but Nelson disagrees with the "divide" between certain earnings data. Lastly, Nelson advises investors to avoid Chinese ADRs, likening the asset to "owning a fantasy football team." He also points to the uncertainty taking hold of China's economy as a deterrent.

Video Transcript

SEANA SMITH: Well, stocks off the lows of the session for today as investors await tomorrow's key inflation report. We'll get the CPI data ahead of the opening bell. For more on this, we want to bring in David Nelson, Belpointe Chief Strategist. David, it's good to see you here. So we certainly have seen what seems to be a shift in investor sentiment. The NASDAQ off just about 3 and 1/2% since the start of the month. We've also seen a pullback in the S&P. Do you think this is the start of a larger pullback here, more broadly speaking, for the markets?

DAVID NELSON: I think we're going to have to watch 10-year rates. That's the narrative that's taking place right now. We've been so myopically focused on what the Federal Reserve was going to do, what Jay Powell is going to do with the short end of the curve. All the way on the long end of the curve, 30-year rates, 10-year rates were poking above 4%, starting with the Bank of Japan, then last week we had a downgrade from Fitch.

Every time rates get above 4%, stocks start to struggle, people start to rethink their playbook. It kind of hurts the valuation metric because in the end, most valuation models start with the risk-free rate. And that's what they're looking at right now.

AKIKO FUJITA: You know, we're all watching the CPI print tomorrow. Jared right now just pointing to energy prices slowly pushing higher again at a time when there seems to be some relief of that pull back in the inflation print. How significant is the risk of re-acceleration when we look at the overall inflation number? And to what extent you think, if that number comes in higher tomorrow, headline and core, what kind of reaction do you think we're seeing in the markets given how comfortable we'd have gotten?

DAVID NELSON: It'll be negative. Yeah, it would be a negative reaction for sure. That would be the knee jerk reaction. But I think people would lose sight of the bigger picture. The key thing that's happening here is the inflation is coming down. If we stumble for a single report or even a couple of reports, there'll be a reaction in the market, but then we'll be back to where we were. This is a bull market. The bottom was last October. We're not going to revisit those lows.

We're starting to get the benefits of what I would call one of the great secular growth themes in my career. We're so myopically focused on AI and what it means for companies like Nvidia and Microsoft, where the valuations admittedly are a bit stretched. The biggest beneficiaries of AI are the thousands of companies out there that are going to use this technology to enhance the top and bottom line. It's going to revolutionize the entire industrial complex.

SEANA SMITH: All right. David, let's talk about your strategy here going forward. We want to dive into some of the stocks and some of the sectors that you are watching right now. David Nelson, Belpointe Chief Strategist sticking with us here. David, let's get to one of your first picks right now, and that's energy. It's leading the way today. Oil at a nine-month high. What's going on with oil prices right now, given fears of that broader economic slowdown?

DAVID NELSON: Oil is not in the '60s anymore. We got WTI crude. I'm not sure where we are right now, but we were around 84. Each stair step higher in oil is going to enhance the bottom line and top line for a lot of these companies. I doubt President Biden is going to do a release from the SPR, not with it at dangerously low levels and approaching what could be a very difficult hurricane season.

I see a lot of names out there today like Schlumberger, Marathon Petroleum. Those are companies hitting 52-week highs. My horse in the race is a company like ConocoPhillips. They're at an inflection point. I'm looking for maybe $10 next year, a free cash flow yield of 9%. In a skittish market like this, a lot of investors will grab on to that.

AKIKO FUJITA: Let's talk about another stock that you are buying ahead of earnings today. That's Disney. This is a company that has a long list of challenges, whether it's the cord-cutting around ESPN, the cost around streaming, the slowdown at the parks. What do you think is going to be the next catalyst that could push this stock higher?

DAVID NELSON: I'm not sure. unusual. It's an unusual purchase for me. I'm mostly a Quant, so I focus on companies with factors that are accelerating to the upside. Obviously, that is not Disney. Analysts have been tripping over themselves to cut estimates. You know, Bob Iger has come back to try to save the company. And I think, ultimately, he will.

But a lot of the problems at Disney were actually caused by Bob Iger. I think probably his biggest failure as a CEO was not buying Netflix when he had the opportunity. He could have paid a significant premium, but instead he chose to buy back billions worth of stock. That did nothing to really enhance the future of Disney.

However, it's at nine-year lows. A lot of that bad news is in this stock. Free cash flow next year is likely to double. So while they sort through this, it's an unusual pick for me, but I'm going to put this one on right now. And I want to put it on right in front of the close. I think we bought it yesterday right at the close.

SEANA SMITH: David, what do you think the focus should be for Iger. You said that you are confident that he is the right person to correct some of the missteps of Disney in the past or some of the weaknesses, reshape the company. What should Disney look like?

DAVID NELSON: I think I think that Bob Iger, I think the best he could do right now is stabilize it. I think where they were with Bob Chapek, I think that was a mistake. I think a lot of the directions he chose in the company-- I think this ESPN deal with Penn Gaming, I think that's a smart deal. Those are the kinds of tie ups that Disney is going to have to make.

I don't think they want to lose sports. It's very important. I can understand if they want to get rid of a lot of the linear networks. That makes sense. Those have been losers certainly on an advertising level. But sports is important. I think they have to go all out and try to save that.

AKIKO FUJITA: Let's talk about one stock you were saying to avoid. That is Twilio. We saw a big pullback in cloud stocks in general. Given the expectations on revenue, a lot of companies pulling back on investments there, why Twilio specifically?

DAVID NELSON: It's not really specific to Twilio. It's really that space. Twilio is just up today, they probably beat the number. I'm not down on the company or the product itself. It's the financial Hocus Pocus that goes on with a lot of these companies and technology. Companies like this tend to bleed cash. There's a massive divide between reported EPS and GAAP EPS, Generally Accepted Accounting principles.

So there's a lot of shenanigans that go around in the earnings numbers there. At some point, investors want some food on their plate in the form of earnings, cash flow, and/or dividends. This is not a company that came out in the last two years. This has been around for a while. I need to see them make some significant money here.

SEANA SMITH: All right. David, another one of your icks, one of, I guess, a sector that you're saying to stay away from right now is Chinese-listed ADRs. Clearly, we're seeing the recovery over in China faltered just a bit, take much longer than initially anticipated. How much worse do you think it could get for some of these companies?

DAVID NELSON: I think down 70% might be a gift for some of these companies. I think you have to understand what you own here. You don't really own an interest in the company. You own an interest in a variable interest entity. Very often, what you own is a contract with this entity somewhere offshore in the Cayman Islands. Who knows what China could do to change that relationship? So I would avoid stocks like this like the plague.

It's like owning a fantasy football team. There's nothing really there. Not to mention the fact that China is certainly an adversary in every sense of the word, not just not just geopolitically. We're in the early stages of decoupling our economies. It's still a very important-- it's maybe one of the bigger risks for the market because it's still the second largest economy on the planet. If they falter as they are right now, that can weigh on everybody.

SEANA SMITH: Certainly we've seen some concerns about those ripple effects and what that could potentially look like globally. David Nelson, great to have you. Thanks

DAVID NELSON: Thanks for having me.