Tatro: Everyone is so preoccupied with big tech, they’re missing other opportunities

Although investors continue to focus in on big tech stocks, some investors are seeing opportunities elsewhere. Joule Financial Managing Director Quint Tatro joins The Final Round to break down what stocks he believes aren’t overvalued or overbought.

Video Transcript

MYLES UDLAND: Quint, let's just start with a point you raised about the FANG names, and I think that data we got from Bank of America today is a great frame on this. 80% of investors say that the most crowded trade is being long US tech stocks, most crowded trade they've ever tracked. But it sounds like you are a bit more constructive. You're not as worried, maybe, as that data might suggest folks should be about, you know, how many people are placing their bets on kind of the big tech names we all know.

QUINT TATRO: Well, I think it's interesting, because there's been a tremendous amount of correlation, or at least an assumption, that this is correlated to the tech bubble of '99, 2000. I've seen some charts going around showing the-- the concentration, for example, in the top five stocks compared to 1999. And I mean, I traded in that time period.

And this, as far as euphoria is concerned, or even concentration, I don't see the-- I don't see the correlation. I mean, again, some of the data points are there. But what I think people have to understand, and what we're trying to be constructive on-- and I think you have to be constructive because the market keeps going up.

If you're being stubborn and you're just sitting there watching the big names, and you're going, well, they're too overextended or their valuations are too high so I'm not going to look at the overall market or I'm not going to look at any place else, you're just being stubborn, and that's not a good way to make money. So we're trying to remain constructive, and what we're noticing is there is a lot of attractive valuation and a lot of-- of price action underneath the surface that we like, that we're constructive on, where we're focusing our attention.

MYLES UDLAND: So let's talk about some of those sectors and what is it about them from a valuation perspective that's attractive? Are you still looking at kind of traditional PEs? Are you focusing more on the free cash flow? How do you feel about the way so many companies are casually described as a multiple of revenue? I mean, that was-- that's kind of tech bubble stuff, but now we say normally about Peloton like it's no big deal.

QUINT TATRO: Well, I think-- you know, I'm not going to bunt. I'm going to give you some specific answers, but it does depend on the sector and, obviously, the metric that you're looking at. So for example, within tech, we're still kind of a growth at reasonable price type of a investor, but we're cognizant of balance sheets. We want to make sure that management is doing well to allocate capital.

We saw a pretty significant sell-off in the semiconductor space. And for example, Marvell, this is a company that is trading, I think, 20-- 20-plus times forward, which might, maybe on the surface, look-- look expensive or not that cheap. But if they hit their targets, they're set to grow by 50% next year, so that's an attractive valuation. Applied Materials, for example, they've gotten hit 16%, and the stock is trading 12 times forward earnings and set to-- set to grow at 20% next year. So again, those are-- and both of those companies, by the way, have great balance sheets.

We're just-- we just don't get excited about-- I mean, Apple's a great company, and it's, like, been, you know, an amazing investment, but the stock is rich. And it's easy to just look at Apple and go, OK, Apple trading, you know, 30 times and, you know, set to grow at 20, which is not all that attractive, whoa, let's stay away from the whole market. But there's still opportunity out there. I think it's really a stock picker's market right now, quite honestly.

MYLES UDLAND: And I guess when you look at the way that-- for a specific company, you know, 20 and some change times forward earnings can be a reasonable valuation. But I guess as you kind of work through, whether it's conversations with peers, with clients, just kind of in your own homework, do you feel like people are more accepting or understanding of how much that 0% rate that we're expecting now for three or four years changes expectations in terms of what is reasonable? I mean, I-- you know, I broke in the business the middle of-- or early part of last decade, and all I heard was expensive to history, expensive to history. Well, no one talked about the discount rate was zero. Are people more understanding of that this time around?

QUINT TATRO: So I don't think they realize it, but you hit the nail on the head. And it's-- I teach the students in the intrinsic value class that I teach, you know, risk-free rate. We used to plug a risk-free rate in when we would do some, you know, discounted cash flow or some intrinsic value calculations. We'd plug at risk-free rate in of about six, and we'd, say, OK, you know, at 6% risk-free rate, here's a basic valuation.

And then I'd show them, well, let's take that down to 0.6%, right? So I mean, the 10-year treasury at 60 basis points. So it changes valuation models. But the common investor, they're not running discounted cash flow models or intrinsic value calculations, but big institutions are. And big institutions have to place money.

So if you're looking even at an Apple that's expensive but still a yield 34 times what the 10-year treasury's giving you, you know, if you're a capital allocator for a perpetuity, like an endowment or an insurance company, you can't be sitting in 10-year treasury. So I don't think the average investors understand how it influences the actual valuation model, but they certainly understand how money is flowing from one asset class to another just because there's no yield.

MYLES UDLAND: And they look at their 401(k)s. And if they're invested in stocks, they're going to see them going up. Just before we get you out of here, Quint, I want to ask you about financials.

There's a couple of names that you like in there. We talk about it on the show almost as a punch line. I mean, they've been a little more constructive recently. But in this kind of environment, you know, tough for financials to get a lot going. What do you see there?

QUINT TATRO: So I sent you my notes this morning, and I said that, you know, I like them. The risk-reward is that and now-- or is attractive, and now they're falling apart, and they look-- they don't look attractive at all today, like right now. So I'm trying to be a little bit more patient.

We have investments across the board in some of the bigger banks and-- and the indices, you know, the sectors, the banking sector, or the financial sector, et cetera, but they're problematic. I mean, they can't-- they can't get out of their own way. And it makes sense-- I mean, it's a difficult environment for the traditional way to make money on a yield spread, so it makes sense. But you'd at least think that they'd get a bid.

In a-- in an environment where-- where money is trying to be allocated, these are stocks trading at or around book value, traditionally cheap, good dividends. I mean, we're supposed to be in an economic recovery, maybe. But if there's one fly in the ointment, like a day like today, is watching JP Morgan, you know, lose bids, and the stock just trading lower all day, that's concerning. So I'd feel a lot better, and I'm more constructive, if they would find some buyers here.