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“The earnings estimates are rising, obviously the fourth quarter numbers have shown some really terrific strengths”: Fort Pitt Capital CIO

Charlie Smith Fort Pitt Capital joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ZACK GUZMAN: Let's shift back over to the market here, though, as it looks to be a quiet day. A bit of a pause from some of the strong February trading days we've seen. For more on where we go from here, I want to bring on Charlie Smith, Fort Pitt Capital, joins us now.

And Charlie, when we talk about it, it's interesting because we saw a lot of volatility around some of these retail names. Cannabis stocks obviously the highlight this week when we saw Reddit's Wall Street Bets shift that way. But what do you make of the macro look here as some of those jitters might have unnerved some other investors in this space?

CHARLIE SMITH: Well, you know, the valuation is where we go right away to try to decide if share prices are reasonable or not. We're looking at consensus estimates for S&P 500 for calendar of 2021 of $173. And so that gives us about a 22 and 1/2 multiple on forward earnings. You know, we're in the top decile historically for S&P multiples.

So it's our best guess that the economy is going to be the star this year, whereas last year, the stock market was the star. We've seen the S&P rally 75% in the last 11 months from the March 23rd lows. So we've already discounted a heck of a lot of good news on the economic side in the past 11 months.

AKIKO FUJITA: Well, what does that suggest then in terms of how much further runway there is? If you look at the S&P 500, for example, I mean, we had a guest on earlier who said, look, the valuations are already there. The fundamentals are finally catching up to it. But that doesn't suggest there is significant upside looking ahead.

CHARLIE SMITH: We would agree. You know, the earnings estimates are rising. Obviously, the fourth quarter numbers have shown some really terrific strength, mostly due to significant cuts in travel and entertainment spending, real estate spending on the part of corporate America.

So the estimates are rising. And we expect that 173 number for consensus for 2021 to probably go up another 6% So that, to us, is pretty much the upside ceiling for the S&P. Because we don't think multiples are going to expand a heck of a lot, particularly if long term rates continue to rise as they have over the past 50, 60 days.

ZACK GUZMAN: If you don't expect multiples to expand all that much, I guess it would seem to make sense to focus in on those companies you expect to see big earnings boosts. And when you look at that, where should people be putting money to work now? Because if you do project higher interest rates sooner, would that mean you'd be looking at financials, or would you be more into the energy space at this time in 2021?

CHARLIE SMITH: Well, I think particularly financials, given that net interest margins have been weak now for years, and obviously, with the weakness in the economy in 2020, loan growth. Particularly the Payroll Protection Plan has been very weak. So I think the opportunity for bank loan volumes and net interest margins to expand to a certain extent this year is a real possibility.

That's why we like PNC Financial, the super regional-- now the fifth largest bank in the country based here in Pittsburgh. They're making a significant acquisition with Banco Bilbao in the southwestern US. So they're going to be really increasing the size of their franchise.

And they've got a terrific operating record, very cost sensitive management, and they're going to integrate this acquisition, we think, pretty successfully. So between better net interest margins and the growth from the acquisition, we think PNC is one example of a financial that's pretty well positioned.

AKIKO FUJITA: Charlie, another stock that you've highlighted, KMI, talking specifically in the nat gas space. And I'm wondering what the play is here. Is that sort of a medium term hold? Because the demand is expected to pick up as we see economic activity pick up. But when you think about the long term play here, you're seeing a number of cities sort of start to look at bans on nat gas, especially as these cities try to meet these climate goals.

CHARLIE SMITH: Right. No, and the management is absolutely fully aware of that issue. Rich Kinder, on their analyst day about a week ago with his initial remarks, really covered that issue. But the runway for the reduction eventually in consumption of natural gas is very, very long. We're finding, for example, that recent super cold weather in Europe is forcing Germany to call on significant increases in natural gas imports to cover their inability to generate enough electricity with renewables to keep their country warm.

We saw in the state of California in the past year or so that many locales had to institute rolling blackouts because they don't have the capacity in renewables. So I think the question is a valid one with regard to the political pushback against the volume, long-term volume increase for natural gas. But as you mentioned, the interim play is that we're going to be using natural gas in significant volumes for many, many years.

And I think tinder is particularly well positioned as the largest US natural gas pipeline and the largest pipeline connected to the export for LMG. So export use is going to continue to grow as well. So they also have a 7% dividend yield, which the company expects to increase next year. So it's a well-covered dividend. Management understands the problems that they're dealing with, and it's a long runway for the reduction, eventually, in use of natural gas.

ZACK GUZMAN: And Charlie, just to come full circle here on maybe the stimulus discussions and what we saw play out last year, with the stock market being the standout, how do you expect the $1.9 trillion package, if indeed, it is that big, to maybe play out this year, considering it's still kind of split when you look at the surveys on investors about whether or not it's more risky to go too big versus going too small? How do you see that shaking up?

CHARLIE SMITH: Well, I think we can look at what we saw in 2020 with regard to how the stimulus funds were used. We found that households with-- obviously that were able to maintain employment, maintain their incomes, socked away these stimulus payments in many cases. Others didn't put them into savings. They donated them to food banks, for example.

So I think it's going to be the same sort of behavior this time around where the segments of the population that have been hit hardest by job loss-- personal services in the areas of hospitality and dining-- those folks are going to go out and spend them. But in terms of their broader hit on the economy, I think the fact that households that are better off are going to be saving these payments is-- signals good things for household balance sheets on average in the US.

AKIKO FUJITA: Yeah, we've already seen the savings rates go up. It's good to get your insight today, Charlie. Charlie Smith, CEO and founding partner of Fort Pitt Capital Group.