'Some of the ranges are just crazy in terms of valuation': Portfolio Manager on tech stocks

Michael Cuggino, President of the Permanent Portfolio Family of Funds, joins The Final Round to discuss the day's market action and what to expect in different sectors post COVID-19.

Video Transcript

SEANA SMITH: Just in terms of taking a step back and what this tells us about the market at this point, are you encouraged by this? And what do you think it says about where we are and the current levels that we're trading at?

MICHAEL CUGGINO: Well, it certainly was a pretty active morning. Coming off the correction last week, going into September 30, which is a quarter end, a lot of window dressing tends to happen the last few days of the quarter. But you know it was a healthy correction last week. And hopefully, a broader market expansion. When you look at the macro landscape, low cost to capital, likely improving economic recovery in the coming months, although it could be slow and choppy, it's not, and the lack of return in other places like bonds, for example, equity still makes sense, especially in areas that have been beaten down.

Probably more of the cyclical type names. More bent materials, financials, transports, those sorts of things than maybe some of the tech winners. So there may be some rotation there. But it still is a reasonably decent environment for continued stock market moves from here. Now, there are a lot of uncertainties. The election coming up, whether we get a cure, a vaccine, an antiviral or anything for COVID, whether the economic recovery is more choppy and nonexistent than we perceive. So I wouldn't say it's risk-free, but there's always uncertainty out there, and I think because of the landscape with monetary and fiscal policy, it's a healthy one for a stock market move.

ANDY SERWER: Hey, Michael, could we really see ourselves soon, like this fall, going from a situation where we only had a narrow group that outperforms, which is the FANGs and the stay at homes, to a narrow group that doesn't perform, which is to say cruise ships, hotels and Delta and UAL or something like that?

MICHAEL CUGGINO: Oh, I think absolutely. I mean, we're in uncharted waters here. And while we do get some, the old saying, history doesn't exactly replicate, but it rhymes, I think is very true. There's a lot of factors here we've seen before in other corrections, other recessions, et cetera. But we've never had a situation where we voluntarily shut down the economy for this long and have had to bring it back up to speed. And so there are winners.

I mean, the tech stocks are going up for a reason. It's not just speculation. There's tons of profit. There's revenue growth. And it's aligned with a sort of belief system on how people are going to live coming out of COVID. So there's a reason for it. But having said that, it is very consolidated. I mean, most of the equity gains are in a half, a couple dozen names. And so you would expect, if you do get economic recovery, to broaden out. But within that, that would be normal.

But within that, you're going to have in this belief system of how people are going to behave going forward post COVID. Some industries are going to have trouble. Live entertainment, sports events or concerts, cruise ships, as you mentioned. Those might suffer a lot more than broader cyclicals maybe when consumer spending and disposable income increase. So yeah, I think that's a very valid point, and something investors should keep in mind as they pick through all these names going forward.

- Michael, I want to stick on that point with tech shares, because I was reading a note from DataTrek last week, and one of their points stuck with me. And that's that when we look ahead next year, the next six months, in terms of comps for sales, earnings growth for tech, that that might actually be difficult to match, because you have consumers already having invested in that work from home hardware, that cloud computing capacity now. So does that pull forward in tech investment this year present a downside risk going forward? And does that mean that we've already seen peak tech outperformance for this cycle?

MICHAEL CUGGINO: Possibly. There's no question, valuations in some names are incredibly high, even companies with great business models and business plans. And some that are likely going to get some competition as other firms move in and try to take some of that share or some space. So I think that's a very valid concern, where you've sort of front loaded some of that growth, and some of that equity performance during this pandemic phase. And then those companies come down, they come back to earth in terms of a PE compression or something coming back to normal.

I mean, some of the ranges are just crazy in terms of valuation. It's a $500 cup of coffee in some cases. And it just doesn't make any sense. But there is a lot of new investors coming into the market. Those are what's working. At in that way, this is very similar to other bull markets, late stage bull markets. Think '99, 2000, where you have a lot of froth coming in, a lot of new investors buying what goes up. And so that aspect of this COVID rally is very, very normal and we've seen that before. And that has tended to moderate over time. So I think that's a very fair point, and likely for some names going forward. Yeah.

SEANA SMITH: Michael Cuggino of Permanent Portfolio Family of Funds, thanks for joining us today.