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Skepticism around big tech provides an ‘attractive entry point’ ahead of earnings: Albion Financial Group CIO

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Albion Financial Group CIO Jason Ware joins Yahoo Finance Live to discuss what to expect from this week’s upcoming big tech earnings.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. We've got a busy week of earnings ahead of ourselves, folks. One-third of the S&P 500 are going to be reporting, including some of the companies you may have heard of here, Johnson & Johnson, Microsoft, Facebook, Tesla, and Apple. Tech no doubt being a major theme of this week ahead. For more on what to expect here, I want to bring on Jason Ware, Albion Financial Group CIO joins us right now.

And Jason, I know you own a few of these companies we're going to be chatting here. But the expectations-- it's sure interesting to think about some of the offsets, maybe some of the underperformance here, interesting, given some of the beats we've seen thus far in 2021. So, what do you expect?

JASON WARE: Yeah, I think the set-up going into these tech reports is a good one, just given the fact that a lot of these large cap technology stocks have consolidated in terms of their price for the past four to six months. I mean, if you look at Amazon for next week or Google next week, Microsoft this week, they've all been in the sidelong pattern for some time. So I don't think the expectations are terribly high going into earnings.

And this is the first time in several quarters where we can say that. So I think if you're a long-term investor and you're looking for a good entry point ahead of what we think are going to be some pretty strong reports from Microsoft this week and Apple, I think that you have a long-term view. These might be some good spots to put some money to work in these big cap tech stocks.

I mean, if you look at the consensus, everyone thinks we're going the other direction to cyclicals and value. And I think in some way, that's kind of left technology in this spot, where there's not a lot of overexuberance. So we'll see what happens as we get into these reports.

AKIKO FUJITA: Yeah, although there's an argument to be made that in some of these names that have recently come to market, there is a lot of exuberance on that front. But let me talk about the big tech earnings because I know you own Microsoft. Of course, they are kicking things off tomorrow.

When you move on to some of the other names like an Apple or a Facebook, there's, of course, a concern about whether the growth that they saw last year is sustainable, but also, whether new regulations could look like under a Biden administration. How significant do you think that risk has been elevated, or is that pretty much still a few years out, in your calculation?

JASON WARE: Yeah, it's a good question. And the consensus opinion seems to be that big tech's big comeuppance is near. And the reason is because of Joe Biden is in the White House. We have Democratic control of Congress. But I'm not so sure that that's the case. I mean, I understand why the path toward regulation seems potentially easier now, given that makeup in DC.

But you have to remember, President Biden has been very clear, and he's spoken in very plain English on what he considers to be four concurrent crises that he's trying to manage, of course, the first and foremost being the pandemic and the corresponding recession, racial inequality and injustice, and climate change. So that's a pretty heavy agenda for his first term. And really, he only has two years before we're back into election cycle.

ZACK GUZMAN: And Jason, one of the questions I have for you was kind of this reaction to the beats that we've seen so far. Bank of America researchers pointing out that it's interesting in that we're seeing a pretty weak historical reaction to raised guidance, with them pointing out the last time we saw that as weak of a response, you saw the S&P 500 fall 13% over the next three months, including a noted outperformance in terms of value over growth.

So with tech companies coming out here, I wonder if you'd be in that camp that potentially we could see this rotation that we've talked about so much that seem to be reversing back into these growth names, maybe potentially catching some steam.

JASON WARE: I think so. And I'd be careful just drawing too much with one data point, like correlation causation thing. There's a lot of variables that go into the direction of stocks. So, I think the good news is that if you look at the market where we're at are near record highs. And I think that's a set-up going into earnings where you really have to beat the bogey by a lot in order to excite investors to buy on the other side of that.

But I think those pullbacks and those dips post-earnings can be very healthy, and they can be good entry points into good companies. I think as far as tech is concerned, again, the setup looks a lot better going into this quarter's earnings than it has over the past few quarters because of that rotation we saw in the fall. So I expect that that rotation into value and cyclicals has been a little bit overdone. And the skepticism around big tech performing is creating an attractive entry point into some really good companies.

AKIKO FUJITA: Jason, beyond big tech, there seems to be a lot of concern about just how frothy valuations are getting for some of these names that have especially come to market more recently. Goldman Sachs out with that note listing 39 stocks that they believe are overheated, names like Zoom, Slack, Snowflake, Cloudfare or CrowdStrike. I mean, these are all names we have seen significant upside during the pandemic. How are you playing those names right now? And are there concerns? These concerns about a potential bubble, is that justified?

JASON WARE: Yeah. I think there are parts of the market that are frothy, as you noted. I mean, we had a pretty strong IPO year last year. Technology in particular was coming to that party in earnest. There's a number of companies that have gone off on valuations that don't make a lot of sense, Grubhub having a valuation higher than FedEx. I mean, does that really pass the sniff test for long-term investors? Probably not.

But I also think you can avoid those parts of the market if you're a long-term investor by sticking to good companies that have profits and cash flows and revenues and wide economic moats that don't have 100 times revenue multiples, that instead have something like five and six times revenue. Amazon is at 3 and 1/2 times revenue.

So I think you can find good secular growth companies without having to delve into the speculation of the IPO market. I mean, Jay Ritter at the University of Florida has done a lot of research on IPOs. And most of them over the long-term don't provide the kind of performance that investors would hope to get. So I think most of them, you want to avoid. There are some good ones in there, but we haven't played in that space.

ZACK GUZMAN: Yeah, Jay Ritter, a friend of the show, been on many times. I love that guy. Great research there. When you look ahead, though, what company maybe stands out as one that has an easier shot perhaps of topping expectations? And also, what one might impact the broader market? Because we know some of these advertising companies in tech-- Snap, Pinterest-- trade off of generally how Facebook might do relative to expectations. So when you look out this week, which one should investors keep their eyes most on?

JASON WARE: Yeah, It's a really good question. I think Visa's one that investors should look to for potential upside. It's a stock-- it's not really in that bank fold, but we consider it to be technology. It's really at the crossroads of technology, consumer, and finance. But I think there's some fintech opportunity with a name like Visa. You know, I think this is a quarter, or perhaps next quarter, where the business inflects some, given the recovery in the economy.

Meanwhile, it dramatically underperformed the NASDAQ over the last 12 months. So I think the setup for Visa to deliver above expectations and for the stock to perhaps begin to work in earnest is one that I think I find to be quite interesting. I think Google, next week, has an interesting setup. Clearly, that stock has done quite well over the last few months, but I think advertising spending, we'll see that with Facebook this week is picking up. And I expect the fourth quarter was pretty strong for them. So we'll see how that goes early next week for Alphabet.

AKIKO FUJITA: Yeah, Visa and Alphabet both names that you own, along with many others. Jason, it's always good to get your take. Jason Ware, CIO of Albion Financial Group.