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Value stocks are now ‘overpriced,’ ERShares CEO says

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ERShares CEO Joel Schulman joins Yahoo Finance Live to discuss finding growth stocks in the tech sector amid the Fed's quantitative tightening and interest rate hikes, in addition to looking to inflation and unemployment as recession indicators.

Video Transcript

DAVE BRIGGS: For more on the markets, let's bring in Joel Shulman, ERShares CEO. Joel, good to see you. It's been a wild ride the last couple of days. Let's kind of step back and take it all in, from the Fed announcement, skyrocketing there, quickly hammered yesterday, and then a bit of a bounce back today. Where are we, big picture?

JOEL SHULMAN: Big picture, I think we're going to be bouncing around. As you said, the last few days, we went up. Same news, went up on Wednesday, down Thursday big, up again on Friday. News really didn't change. The paradigm didn't really change. I mean, we're trading within ranges. And if you go back over the last month or so, you'll see that we're trading within 5% to 10% band. I see this continuing through the rest of the year.

What's interesting is that many of the great growth stocks, particularly those that have had big losses, are down 70%, 80%, are the ones rebounding the strongest today, also the ones bounce-- that got hit hard yesterday. So we're seeing some very strong results, in some cases, up more than 10%, from some of the higher, more speculative stocks today.

SEANA SMITH: Joel, do you expect that momentum to continue in some of those names that had been beaten down for so long?

JOEL SHULMAN: Yeah, well, you know, it's interesting. If your listeners look at stocks like Walmart, Target, and even Coca-Cola, you go back over the last 30, 40 years, they were pretty much flat. And then from COVID on, for the last two years, they went up 200%, 300% in the case of Coca-Cola, right? Growth isn't there. So when you look at adjusted for growth, and you compare it to a tech company like Nvidia, which is known to have a very high relative price earnings multiple, adjusted for growth, NVIDIA is actually 1/3 the cost of a Target, a Walmart, or a Coke.

So what's happened is, a lot of people have moved money into staples, and the indices pushed the prices up. And now the so-called value stocks are, actually, in my opinion, overpriced.

RACHELLE AKUFFO: Then, as we're seeing this aftermath from the Fed announcement and the markets still trying to find their feet, how should people be positioning themselves right now?

JOEL SHULMAN: That's a great question. We're looking at stocks globally. So we look at 56,000 plus companies globally. What we search for are companies that are able to contain costs. They have pricing-- you hear a lot about this lately. Did they have pricing pressure? Can they hold off and keep their margins constant?

There's only about 250 companies that we track that are profitable, that they've actually reduced the sales and general administrative expenses, the SG&A. And there's a handful of companies are reducing the cost on a relative basis, increasing the gross margin, and widening the bottom line, which is EB-- EBIT, Earnings Before Interest and Taxes.

Now, those are companies that we look for. In many cases, they have been bid up. But if you can find some, there's some hidden gems off the beaten track, where they're actually able to keep their margins intact. And we think those are the best places to look right now.

DAVE BRIGGS: All right, so let's talk tech. A nice bounce back for the NASDAQ today, up about 2%, but down almost 31% year to date. Joel, you say the brave investor invests in tech at this point. But is there an opportunity?

JOEL SHULMAN: I think it is-- I think there is an opportunity. And you have to look at some of these things over the long haul. And tech has been such a strong performer in the last 15, 20 years. I mean, since the '08, '09 crash, we had very strong social performance. Growth was the dominant leader. In the last year, year and a half, high growth tech and high growth stocks in particular had been beaten up quite a bit.

We think they still have great growth on a relative basis. We think if investors are looking at a horizon a year plus out, they're going to be rewarded with tech. I mean, they're going to-- at the end of the day, people want to see growth. Now what they don't want to see is growth at any cost, right? And that's what would happen last year. We saw some cases, price earning multiples over-- in fact, multiples to revenue over 100. So market cap to revenue is over 100, which is very high. But we've seen valuations come way down. And we think tech over the next year plus is going to be well received, well-- rewarded very well.

SEANA SMITH: Joel, how much of the Fed's tightening plans do you think has already been priced into the market?

JOEL SHULMAN: I think a lot of it has been priced in. I mean, when you look at the mortgages-- and that's been big story over the last week. And mortgages came close to doubling. They went from 3% to 6% recently. What that means is the individual who's buying a $500,000 house at the beginning of the year, same mortgage payment, can now only pay 350. So it's come down almost 1/3 for the individual. So that's kind of brought things down.

Now what's happened is, the mortgages went up by almost 3%. We have not seen that on a similar length of maturity for the federal bond, the long bond, so-called long bond, the 30-year maturity. And the federal bonds have not-- has not gone up 3%. It's only gone about 1% to 1 and 1/2%. We think that's going to continue to rise.

We see 10-year, 30-year rates going above 4% by year end. So we're going to continue to see some pressures on high growth stocks because people tend to view those as being inversely related. We think they've been unfairly beaten up. We see some of the growth coming back. Much of it's been priced in. But we're going to continue to see rates rise to the end of the year.

RACHELLE AKUFFO: And in this discussion about whether or not the Fed can have that soft landing versus having the country go into a recession, you said the unemployment rate is going to be key to watch. What are you keeping an eye on there?

JOEL SHULMAN: Well, what's interesting, when you look at COVID, it came down from 157 million jobs to 147 million, and then it's bounced back up. What's really interesting, the narrative that a lot of people aren't focusing on is, we have 75 million baby boomers, these people-- it's a big chunk going through our system. And pre-COVID, about a million per year were retiring. Last year, three million retired.

And now what we're seeing because of inflation, some of these boom-- and by the way, because they're retiring, it creates openings for more people to come into the workforce. And it's kept our unemployment levels low. Now when we have inflation so high, many of these baby boomers who are afraid to retire early are delaying retirement. So what that's going to do is put increasing pressure on our unemployment level.

So we see the employment, which has been the only bright spot in our economic situation, is that we've had high levels of employment to absorb some of these high costs increases and so forth. If we start seeing inflation continuing to stay high and then unemployment going up, we could see our economy really come to a sudden halt. And we're already seeing some of the leading indicators, like building permits, of course, the bear market. The market's hit below 20-- fell below 20%. That's a leading indicator. We're seeing sentiment down.

So we're already seeing some leading indicators pointing to a recession. The only thing that's kept us above water are the low levels of unemployment. If the boomers delay retirement and some of the tech companies, which have weak cash flows and losing money, and they don't get refinanced, and they start laying off more and more, we're going to see this economy come to a sudden halt very quickly. And that's the big fear that we won't have a soft landing, that we're going to go into a tough period of time.

DAVE BRIGGS: Yeah, and we had 60% of 750 CEOs say they do think in the next 12 to 18 months, we'll have a recession. Didn't hear if you are among those. And if so, is it this year or next?

JOEL SHULMAN: I don't think it's going to be this year. I think if we have it, it's going to be 2023. I'm hopeful that things will continue to work out fine and that inflation is peaking. We're certainly not getting any help on the energy side. Food prices continue to remain elevated. These are concerns. And again, wages, which are sticky-- they don't drop that quickly. What tends to happen, wages generally don't go down until we have an economic recession. And so I hope that's not the case.

But we didn't get into this mess overnight. We're not going to get out of the mess overnight either. And I think that's the problem here, that a lot of people were encouraging the Fed to increase rates more and more, go from 50 to 75 basis points to try and get this inflation under control quickly. We've got to remember, this problem did not happen overnight. It was trillions of dollars feeding into the economy over a period of two years. And it takes some time to unwind.

SEANA SMITH: Joel Shulman, thanks so much for joining us, CEO of ERShares. Have a great weekend.