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How the U.S. election could impact the tech sector

Satori Fund Founder & Portfolio Manager Dan Niles joins Yahoo Finance to discuss how the 2020 election could impact big tech companies like Google, Facebook, Apple and Amazon.

Video Transcript

AKIKO FUJITA: Let's bring in Dan Niles. He is the Founder and Portfolio Manager of the Satori Fund. And, Dan, we came to you. We teased you. We teed you up saying you aren't a fan of Apple right now, but let's start by talking about what you are liking and why you are concerned about the valuations in tech.

DAN NILES: Sure. I mean, I think as you saw this last month, Akiko, you had some very good results out of a lot of the big tech companies. And with the exception of Google, every single one of them-- Microsoft, Netflix, Facebook, Amazon-- they all went down, and they all went down hard on the day of their earnings despite that. And so I think what it kind of tells you is that valuations are finally starting to matter, and it's starting to matter with some of the biggest companies in the US and the world.

And now expectations, because of those valuations, have gotten so extended that you really need to start paying attention to what you own and what you think is durable as we go through another resurge in COVID and then also, you know, how the elections will influence a sector or not.

So we're really trying to focus on the fact that, you know, you've got one of my favorite measures, which is market cap for the entire United States stock market divided by GDP. That's sitting at about 1.6 times. The average over the last 50 years is 0.8 times. So obviously we're at double normal valuation levels.

And you can say, well, you know, that makes some sort of sense because interest rates are going to be at zero for a long period of time, and the Fed is very stimulative, and we're going to get another massive stimulus package regardless of who wins, you know, potentially $2 to $3 trillion if Biden wins, you know, potentially a trillion or so if Trump wins. And so all of those things are good, but at a certain point what you pay for an asset, as we found out last week with the big tech giants, it actually matters. And so we're paying more attention to that.

ZACK GUZMAN: That's a good point because, you know, you can apply a lot of the valuation questions that you're raising about Apple to a lot of the other big tech companies too, whether you look at Google, Facebook, Amazon, Microsoft. I mean, that rotation here has started to happen. That was the big driver in terms of where we went on the year to date basis. Those big five had been driving it, but now it seems like that rotation was under place, as you're talking about here. So how much of that might stem from investors realizing if that wave of support is going to be there regardless of who wins this election why they might be looking at some of those smaller-cap names right now and where you see opportunities there outside of those big five?

DAN NILES: Yeah, I mean, for me, actually, where we're sort of taking a look is in some of the other sectors outside of tech. So we're looking at things like the banking sector which, if you looked at the numbers there, the financial-services sector-- there's a lot of sectors in the S&P-- it has had the worst relative performance-- and this was true as of a week or two ago-- in the last 35 years relative to the market, which is pretty amazing when you think we had the global financial crisis as well in there.

And so, you know, if you end up with, let's say, a Biden victory, you're probably going to have the yield curve steepen a lot because you're going to get, you know, $2, $3 trillion plus of stimulus coming. And whether you believe or not in modern monetary theory, which is kind of what the socialists sort of have in there bucket of things they want to do, that's probably going to steepen the yield curve a lot because the way that's judged is when you get inflation, that's when you know you've reached maximum output, to oversimplify things.

So I think, you know, we're looking at some of things like the banks where you've got, you know, 3% plus dividend yields. You've got, you know, price to book in some cases well below 1, near 0.5 in some cases. And if the economy does get, you know, a massive kick-start from a lot of stimulus, you know, that'll benefit.

I think in tech in particular, we're trying to look for things that are more durable in nature. And so for us, you know, you've got 3 billion gamers out there in the world. It's anticipated they generate over $100 billion in revenues this next year coming up, and that's why you saw Microsoft buy Bethesda for $7 and 1/2 billion.

Everybody's competing to become the Netflix of gaming between Microsoft, Amazon, and Google. And so the value of great content is even that much more magnified. So Activision, EA, Take-Two, those are names that we think will do great, and that's what we're focused in in tech.

AKIKO FUJITA: So, Dan, looking broadly though, I mean, I'm taking a look at your notes here. You say you're sitting on more than 30% of the fund in cash right now because of the volatility that we've seen. What would it take for you to put that money back again [INAUDIBLE]? We're talking here just hours away from the results. We don't know how that's going to pan out. We don't really know how the pandemic, that path is moving forward as well. So are you sort of staying on the sidelines in the mean time given those two key risks right now?

DAN NILES: Well you got to remember, Akiko, we put out a tweet under-- @DanielTNiles is my Twitter handle-- on October 25 saying, look, SAP just came out, cut numbers drastically, and we think this is going to be a real test for the market over the next week because we felt, you know, people have just been ignoring the fact that COVID cases have been ramping. Valuations were high.

Obviously last week the S&P went down 6%. So, you know, we were selling to start the week, and so we were in pretty good shape, relatively speaking, last week because of it, and that's why we're sitting on so much cash.

And right now with the election, there's certain sectors-- I mean, if we get a surprise Trump victory, you know, solar is going to get just absolutely crushed. And there's other sectors where if Biden gets it, obviously, you know, solar is going to go up a lot, but tax rates will go up a lot. So there's a lot of uncertainty around this.

But the one thing you do know for 100% certain is COVID is ramping and economies around the globe are shutting down. And the weather's going to get colder. We know that for sure. And the vaccine is still out some ways, and you know valuations are high.

So for me right now with the market up as much as it is for the year-- which makes no sense when you think about it, right? The S&P was up 29% last year, and it's up again this year. Oh, by the way, we did have a pandemic.

So when you look at that, that tells you a lot about the risk you're taking right now. And so for us, you know, we'd rather sit on some cash, let some of the election uncertainty get behind us because I think much to Zack's point, I think there's a good shot we don't know who's president for a little bit of time. And that's not-- you know, historically you can see the playbook from 2000. The markets did not like it, and especially with the ramp we've had, that's how we're thinking.

AKIKO FUJITA: The markets just don't like uncertainty, bottom line, and there's a lot of that going on right now.

Dan Niles, it's good to talk to you. He's the founder and portfolio manager of the Satori Fund.