Growth stocks like Tesla ‘will rebound’ as inflation eases: Strategist

The Future Fund LLC Managing Partner Gary Black joins Yahoo Finance Live to discuss growth stocks, inflation, stock market futures, and the outlook for Tesla amid Elon Musk's Twitter takeover.

Video Transcript

- All right, one of the hardest hit areas during this market downturn has been growth stocks, notably in the tech space. So what should be your next move? Joining us now is Gary Black, managing partner at The Future fund. Gary, good to see you this morning. So what is your next move?

GARY BLACK: Well, we're still invested in growth. We like growth because we think there's going to be an easing of inflation. I know you guys just talked about inflation.

But when you look at over the last two years, so remember, 2020, you had COVID. In 2021, you had it reopen. Inflation has averaged about 3.3% if you look at the core PCE. So we see inflation easing throughout the year.

You're already seeing it come down. And as the Fed-- the Fed will take a 50 basis point increase in June and then again in July. And then we think it's going to pause.

So that lets us be more confident that growth stocks will continue to rebound as you saw last week. Not happening today, but we think that over time, you're going to see growth stocks rebound. So we're just sticking to our bets, which are we have megatrends that back each of our portfolio bets, and we're staying with them.

- Gary, what has this period been like for you? You're just looking at The Future Fund. Your top two holdings are Tesla and Alphabet. What are you telling investors when essentially stocks like this are getting hit so hard?

GARY BLACK: Yeah, you've got to be patient. And look, we've been through this before. If you look at Russell Value, it's down about 8% since the beginning of the year.

Russell Growth is down about 25%. So any growth stock that you bought didn't work so far this year. And that's because the Fed has raised rates the quickest pace since the '80s.

Again, if you think that that's going to ease, if we believe that rates will-- they'll go up again in June and July. But as long as the Fed pauses, because as you get close to the end of the second quarter, my guess is you'll see people bringing down second quarter GDP numbers. You already had a first quarter GDP number that was negative.

We're not predicting the second quarter will be negative, but you get a number that's closer to 0, my bet is the Fed will pause. And you have QT starting today, which is 47 and 1/2 million a month. We think that will probably get pushed back a little bit.

So we're staying the course. As you mentioned, Tesla is our biggest position. It had a tremendous 2020 and a good 2021.

It's been down this year because it's a long duration stock, and it's also been down because Ellen decided he wanted to go after Twitter, which has proved to be a distraction. But as the Twitter overhang lifts, which once Elon gets control of Twitter, which we think he will but at a reduced price, then the fundamentals of Tesla can shine through, and you got great fundamentals. If you look at earnings revisions this year, they're up about 35% since the beginning of the year. So analysts keep taking their estimates up for Tesla.

Second quarter is going to be weak because of China COVID, but most investors look past one quarter. One quarter, one time event, people usually look past it. And as you get to the back half of the year, people are going to look forward to the Cybertruck coming out.

They're going to look to Europe having it's-- they have its own plant. And they'll be ramping up production there. They'll have a sub $25,000 car at some point.

And full self-driving, while we don't look at it as being an incremental business, it will help sell more Teslas. So we're still very bullish about Tesla. It's our largest position in our fund.

- Just a brief follow up on that-- what price do you believe that Elon Musk goes after Twitter for if Twitter is even willing to say, all right, we'll hear you out on whatever this new price is that you want to put forward?

GARY BLACK: Right, now look. This is a three part drama, if you will. He basically bid 54 20 without doing any due diligence while he waived his due diligence. And then when the market started to fall and growth stocks started to fall, he came up with this idea that, well, the bots and the fake accounts are at least 5%.

And so he's been rattling their cage for I'd say a couple of weeks now, I think, trying to get the price down. Now we don't believe he'll actually walk away, but he'll threaten to walk away. And if I'm the Twitter board, I don't want to put my business plan on hold for the next 18 to 24 months.

Remember, Elon wants to change the revenue plan from being 90% advertising to a much greater percent Twitter fees-- you know, so basically charging for users to get a check mark next to their name, get rid of the bots. So he wants to charge $3 a month and see if he can get some more users that way.

But if I'm the Twitter board, I don't want to put the business plan if I've already agreed to sell it to Elon while they fight him in the court. So I think at the end of the day, Elon is going to threaten to walk away, or he's going to get a reduced price. Twitter will have to sue him to try to enforce the deal.

But at the end of the day, with most of these things, you see these guys settle. The last we saw was LVMH and Tiffany when you had COVID. LVMH walked away, and they negotiated a lower price.

I think the price will wind up being about $45 a share, and then they'll call it a day. And then that overhang will Lift Tesla, one of the things people worry about every time Tesla falls as it is this morning is maybe Elon is selling more shares because he needs more equity financing in order to close the deal. And what I tell people is he's got lots of folks who want to buy Twitter with him. But if you get a $45 price instead of a $54 price, it makes it a lot more compelling to an outside investor, an outside equity investor.

- Staying on the social media space, Gary, Snap is also in the Future Fund portfolio. Challenging two weeks for them. The stock has been slammed. Have you lost confidence in that company?

GARY BLACK: Yeah, It's a very small position for us. We have about a 9% position in Google. Google to us, it's our second biggest position.

We love the social media space in the sense that big advertisers keep shifting money away from linear TV and traditional advertising to social media because they can target specific segments. Obviously, Google has other things going for it. It's got the cloud.

It has YouTube as well, which is a juggernaut. So we like Google much better. Again, it's been a 9% position.

Snap is tiny for us. We're sticking with it because at $14, it just seems too cheap. It's about 22 times earnings.

This is a stock that's growing its users at about 15% to 17% per year. It's raising ARPU at about 4% to 5% a year. So we think it's got revenue growth at 20%. And at 22 times, we think it's still a good buy. But it's a very small position for us at this point plus the 1%.

- Gary, right now, especially in a time of economic uncertainty, you typically see corporations pull back on some levels of their advertising and their marketing spend. And so with that in mind, for some of these high growth internet stocks like Alphabet, which sees, what, about 83%, 85% of its revenue come in from advertising, and then you see a company in Snap which is essentially all advertising right now, in a time where they would presumably have less of that pricing power on the number of insertion orders that get put forward from advertisers, what does that mean for their own margins at this point in time?

GARY BLACK: Yeah, it's a great point. And look, we fundamentally believe we're not going to go into a recession. We think the Fed will push us right up to it where they are going to aggressively raise rates, again, the quickest since the 1980s.

But at the end of the day, the Fed-- Jay Powell is more dovish than he has hawkish, and we believe they'll see the data that says that if they keep pushing, we could enter recession. And on top of that, you have Europe, which, you know, Europe has very high inflation. So a high inflation rate today in the Eurozone, they're going to start raising rates.

The ECB will start raising rates next week. China could be in a recession because of the COVID lockdowns. So you're right.

When you have a global recession on the horizon, the very first place that companies cut back is on advertising. We just don't think we're going to have a recession.

We think there's too much strength in the economy. The consumer still looks pretty strong. You know, what we're watching very closely is now the numerator.

We've seen the denominator rise. We've had interest rates rise. We're watching revisions.

And so far, while you've had some guidance down-- Walmart, Snap is one of them. A lot of the retailers have brought numbers down. We haven't seen the overall S&P earnings estimates drop that much. They're still at about $240.

So you're right. During a recession, they do cut back. Most big companies do cut back on advertising.

But we just don't think we're going to get to a recession. We think that the fed will pivot again and slow up their aggressive policy stance, stop raising rates so quickly once they get the June and July interest rate hikes out of the way. And so that'll bring the federal funds rate up to about 1.75.

We think ultimately, it'll get to about 2 and 1/2 by the end of the year. But if you look back historically, that doesn't usually precipitate recessions. So we don't think we're going to get to a recession.