How the coronavirus is impacting market health

Everyone should be paying attention to the coronavirus right now… and not just for their health.

The virus could have a serious impact on the U.S. stock market.

John Petrides, portfolio manager for Tocqueville Asset Management, explains the potential ramifications of the coronavirus on the market—and why the timing is so important.

Later, we discuss the current earnings season, and John shares some of his favorite contrarian ideas right now [10:20].

In my educational segment, I break down some numbers surrounding the coronavirus… how to keep perspective around all the news coverage… and the one sector poised to move higher as a result of the virus. Plus, as earnings season rolls around, pay attention to these names [36:49].

Inside this episode:
  • Guest: John Petrides, portfolio manager for Tocqueville Asset Management [10:20]
  • Educational segment: Coronavirus [36:49]
Transcript

Wall Street Unplugged | 707

How the coronavirus is impacting market health

Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on main street.

Frank Curzio: How’s it going out there? It’s February 5th. I’m Frank Curzio, host of the Wall Street Unplugged podcast, where I break down the headlines and tell you what’s really moving these markets. My apologies. I know we usually win by betting the opposite team that I pick to win the Superbowl every year, it used to be a guaranteed trend, picked the Chiefs to win by seven, unfortunately won by 11. I’m sorry about that. And look, you know me by now, I’d rather be wrong and you guys make money than right and you guys lose money, so that’s my fault. Although, one person did email me, one of my listeners, and said, “Frank, you made such a compelling case for the Chiefs, I put big money on them and I won.”

Frank Curzio: But my analysis is pretty good on this one, I have to say. I’ve been doing a little bit of a victory lap. You guys know I always talk about my losers, and say… But I have to take a little bit of a victory lap. I mean, the Chiefs did stop the run. I talked about them having one of the best defenses in the league, that was in the second half of the year, which everyone was talking about the 49ers D. Did a good job pretty much blocking the front four, right? There’s a front four that gets to every single quarterback, and they got some homes a couple of times. They did a pretty good job overall.

Frank Curzio: They contained Garoppolo, since he’s the number one quarterback when it comes to play action pass, that’s what he does all the time. And the reason why they contained him, because the Chiefs are the best ranked defense against a play action pass this year. Also, so the 49ers run out of gas. The same thing against the Packers, Packers had a terrible offense this year. They’re known for their defense, which was horrible against the 49ers. I’ve never seen bigger holes in the defense in my life. I mean, that guy almost didn’t get touched half of those touchdowns. I think he scored four touchdowns over 200 yards.

Frank Curzio: But the Packers started scoring late against San Francisco, and they looked pretty bad. They looked tired. But San Francisco, their defense really fatigued in that fourth quarter, which makes you think the Chiefs should’ve probably went to the no huddle a little sooner, which should’ve hurry up a lot faster. And I thought, like I said, Andy Reid, it was just his year. And look, I’m a Philly fan. We love this guy. He just had the wrong quarterback in McNabb, that had the ball to win against the Pats, they were down 10, they got a… they scored I believe touchdown and then they got the ball to win the game, and they couldn’t do it.

Frank Curzio: Mahomes, different story, he did it. So good for Andy Reid. San Francisco fans out there, I thought you guys played a great game. I think it would’ve been a lot worse for you if Mahomes… When I first saw him come out of the tunnel, his face, I’ve seen him play lots of games this year, and he looked incredibly nervous. And he should be. He already signed a deal with Disney to say, “I won the Superbowl, I’m going to Disney World.” All this stuff. I mean, expectations were sky high for this kid, and he’s young, and he’s 24. And he had the worst game up to the third quarter, or through the third quarter, of any game that he’s probably played in at least the last two years that I saw.

Frank Curzio: He was horrible. He was missing easy passes, he was throwing them on the ground, he was throwing them over their heads. This guy doesn’t miss. Even lights out, had two interceptions. But I will highlight one thing, which I think was the key factors for the 49ers, and that was made just before half, you have three time outs, 1.45. You just stopped the Chiefs who had to punt, and Shanahan didn’t call a time out. He let the clock run all the way down, which by the way, I don’t think I saw that happen in any game, not just this year, I can’t remember the last time I saw any team get the ball with 1.45 left and a half.

Frank Curzio: You could say it’s a tie game even if it’s not a tie game, even if you’re winning, and not try to score. Three time out. Times not a factor, 1.45, three time outs. It’s not a factor, it’s not a factor. One of the biggest things I remember with the Eagles in the championship game, now it’s against the Vikings, yes I’m bringing it back, I’m an Eagles fan, but one of the biggest things I remember, and they were underdog at a homer. They were underdog at home because nobody trusted Nick Foles. So they unleash Foles, they let him throw like crazy. They’re up 21-7, they just stopped the Vikings, and with 29 seconds left they got the ball back. Would’ve been easy, right?

Frank Curzio: They’re home, they’re up on the ball, just stopped the Vikes, they’re getting the ball back in the second half. So they get the ball at 29 seconds left, up 21-7, again with Nick Foles as your backup quarterback, and coach Peterson got aggressive. He let Foles pass, they drove all the way down the field, 60 yards in 28 seconds and kicked a 40 yard field goal to go up 24-7 with no time left. Right there the game was over, right there the game was over. That’s a huge moment swing, because San Francisco’s got to get the ball back in second half, they had the ball.

Frank Curzio: If they score a touchdown there and go up seven, and they get the ball back, it’s a different locker room going into the half. Definitely a different locker room. And moment’s a big, big thing. And you come out… Eagles wind up winning that game 38-7. It was over, but Shanahan doesn’t trust Garoppolo. You’re sitting on a ball three time outs left, a minute 45, go into the half 10-10, his excuse was, “I didn’t want to punt the ball back to the Chiefs, and so offense is great, because the Chiefs had three time outs left.” Are you crazy? So basically you’re playing not to lose, which never wins, especially big games, you don’t play not to lose. You got to take it. Take it, you had them on the ropes, take it.

Frank Curzio: And what happened when the 49ers got the ball back late in the fourth quarter with a chance to win the game after Chiefs scored the go ahead? I mean, Garoppolo’s coming out. You think that guy has confidence now? Absolutely not, you just told the whole team, “Oh, we’re going to sit on the ball. We don’t want to put… We’re not going to be able to drive down in the field at all.” And if your coach has just showed that your entire team that you had no confidence in the quarterback just before half, what do you think he’s going to do when he gets the ball back to win the game?

Frank Curzio: He ripped the heart out of the 49ers. Otherwise that was a great Superbowl all around, I thought the officiating was good, maybe a missed call or two. I think one passed their fear on the Chiefs in the first half, and one in the second half, the 49ers, a pretty big call. But Kittle was passing the fear, and he pushed off offensive passing, and he can’t extend the arm. It’s such an easy call. I know San Francisco are going to say otherwise, but yeah, that interference call against the 49ers too, I mean, a pretty easy call. I thought if someone who doesn’t have a stake in the game or nothing, I just thought the officiating was pretty good.

Frank Curzio: I know 49er fans will say otherwise, that’s okay. Loved the halftime show. I mean, probably the most entertaining halftime show I can remember. Shakira, J-Lo, I thought they killed it. And talk about Shakira’s 43, J-Lo 50, dancing, going crazy. I mean, moving like teenagers. Gives me hope that I’m approaching 50, that you could still stay in pretty good shape when you’re older. They were fantastic. Even the commercials were pretty good. Some bad ones, but overall it was pretty good, so I enjoy it. But again, my fault. I mean, I got the Eagles right in 2018, the Pats wrong in 2019, but I thought the Rams were a much better team that just choked.

Frank Curzio: So yes I got last year wrong, I thought my analysis was pretty good, and now I got the Chiefs right. But again, I’d rather be wrong, have you guys make money than be right and have you lose money. So I promise I’ll try to do a better… No, actually do a worse job, next year’s Superbowl. So let’s move on. A lot going on. Coronavirus, earning season. I mean, you’ve seen China sell off. Tesla going up 100 points a day, over 900. FANG earnings very, very strong across the board other than Google, which went up I think over 3% the day before earnings, and ran up into the quarter and then earnings were solid, the revenue numbers had made people a little bit nervous, fell 3%. So FANG is on fire.

Frank Curzio: So let’s talk about all these topics, which are relevant, from one of your favorite analysts, and break down all these events, how to play them, that person is John Petrides. Petrides’ a portfolio manager of Tocqueville Asset Management, over 15 years of experience managing money, and researching stocks or some analysts who can tell you exactly how you should be positioned for these major trends, especially the coronavirus which China has basically shut down impacting lots of stocks, lots of industries but you’re seeing the US equity market bounce back. I mean that’s such a concern.

Frank Curzio: And like always, John’s going to share his favorite stock to buy today in a sector that’s easily one of the most hated. So it’s a surprise pick, it is a large cap but you’re going to be surprised by it, trust me it’s an industry that’s just been decimated, especially over the past six months, but really, really great interview coming up. And then in my education segment, I’m going to dig further for you into the coronavirus. This is impact, sectors to buy in the pullback, sectors to avoid at least over the next few months as this virus is showing no signs of slowing down, individual names I’m going to give you.

Frank Curzio: But again like we always see with the news, there’s a lot of BS being reported about this disease. For me, I’m going to go over the facts, show you the latest statistics and how to position your portfolio to benefit, since a lot of sectors should not be selling off as much as they are and other stocks which have run higher, should not have run as high and could see a pullback. I’m gonna break this whole entire industry down. I know that’s a biggest fear in the markets right now, coronavirus. Let’s get to the bottom of it. Let’s go over the facts. Find out the stocks industry sectors that are going to benefit and not benefit the most. That’s going to be on the educational side. Before we get to that, here’s my interview with the one and only, John Petrides. John Petrides, thanks so much for coming on Wall Street Unplugged.

John Petrides: Thanks Frank for having me on. Great to be back on the show.

Frank Curzio: Awesome. Awesome buddy. So let’s talk about something that’s not really in the news that much, which is the coronavirus. Biggest story, right? Actually, it originally pushed stocks lower. I mean, we’re doing this interview on Tuesday and stocks… the markets are up, they’ve come back, they’re up about seven and a half across the board. Does the coronavirus pose a risk to I guess US equities, right? That’s what people want to know. Because right now it seems that investors don’t care and this blowing up could stop this bull market right now.

John Petrides: Yeah. So I think to answer your question, we have to keep an eye on it. Nothing should be taken lightly when it has spread to 20,000 people as of this recording and 400 people have unfortunately died. And because the way it’s transmitted, it’s viral, it’s fairly easy. So you can’t take that lightly. But at the same time, the response from the Chinese and the response from governments across the world to try to limit traffic and limit travel, is a good sign in terms of people are on top of it, compared to past social outcome, past outbreaks. So I think that gives the market some credence to waiting for there to be an end to this issue and using sell offs as a buying opportunity. So I guess one way to way of saying is we continue to monitor it. The market has been so resilient since August, that not much was needed to take some gains off the table. And I think that’s what we’ve seen over the past week and a half or so.

Frank Curzio: Now let’s switch over to China, right? Because we have a lot of companies that have exposure to China. We’ve seen this market, I mean this virus, it’s not just continuing to spread, but it’s impacting more than 80% of the companies that provide goods and services to the country. It’s taken place during spring festival, which is Chinese new year where customers spend hundreds of billions of dollars. It’s not just one day. It’s through I think the lantern festivals, so pretty sure it’s the 25th to February 8th. This is pretty much not saying totally dead, but definitely impacted. You throw an existing problems with Hong Kong, Macau market is really hurting right now in the fact that, which no one’s really talking about here. A lot of major companies moved their supply chains or at least a large percentage of their supply chains out of the country last year, reduced tariff risk. Is this sell off right now a buying opportunity? I know a lot of these names getting crushed or is this something that hey, you see more paint ahead and maybe avoid until we know more about the coronavirus?

John Petrides: Yeah, I mean, I think we came into the year thinking that emerging markets and international in particular was trading at a big discount to domestic US based stocks. The interesting thing in your comments is not once did you really mention phase one of the tariff deal being signed because that was a big deal in terms of at least hopefully taking the pressure off of the economy to begin to grow again by removing tariffs with signing a phase one, hopefully. I mean, at least that’s the perception. So I still think that the area and the region of the world is attractive from a valuation standpoint. The long-term growth dynamics of the movement of the middle class from the rural class to the middle class is still very prevalent to drive the growth story, particularly within China, but other emerging economies.

John Petrides: So again, being mindful of if the coronavirus doesn’t get out of hand, then yes, I do think it provides a good buying opportunity for Chinese stocks and for international stocks. I mean, you’re seeing the response from the central bank where they’re continuing to broaden more quantitative easing and support to help stimulate the economy given this shock to the system. Outside of obviously the human loss and the travesty that this is happening on people’s lives, one of the unfortunate things is this would have been a really interesting time to see how the Chinese economy was going to respond post the resolution to at least phase one terrace with the US. But now you can’t even track that data on a year over year basis because it’s muffled or it’s all disrupted and distorted because of what’s happening, coronavirus. Because the timing of it was so unique because the coronavirus really started to spread just as the Chinese new year began. And I was hoping to see what was coming through on the data, how weak really was the Chinese economy leading up to this without the coronavirus issue, because the economy had been weakening.

John Petrides: So because as goes the Chinese economy, so goes the global economy. So since China’s economy is the second largest, at least on a per country basis in the world and growing north of five and a half, 6%, the impact is really huge. So I really wanted to see what this data was going to be and unfortunately, we can’t get a good read on where Chinese economy is at because of what’s happened with the coronavirus.

Frank Curzio: Yeah, it is tough. It is tough right now. So let’s change subjects here from outside China to earning season. We’re in the middle of earning season, I think around 50% of the companies report made 55%, not sure if you have an opinion on some of these thoughts. Where we’re seeing technology in the Western Digitals, the FANG names, Amazon, Microsoft, Apple, Netflix, even Google write up nicely. I think it was up 3% the day before earnings and it fell 3%. So these companies continue to rise. And also maybe thoughts on Tesla, which is just going through, I mean the short positions that people have in this that they disclosed at 400, 500, 600, it now broke $900. Pretty crazy. I think everybody would agree, but I don’t know if you have opinion on that as well, since that is the hot topic. It’s being mentioned every five minutes on every news channel and rightly so because it’s going up like a hundred points a day this week. Right?

John Petrides: Yeah, seriously. So I think with in terms of earning season, it’s the normal dance that we have seen over the past seven, eight, nine years. And that is, analysts’ earnings expectations have been on a quarterly basis lower than what companies have been able to beat. And whether that beat is on a healthy beat, meaning they’ve been able to do it through top line growth or cutting costs or it’s been through financial engineering by buying back stock, whatever the reason is by and large, more than 70% of the companies in the S&P 500 really since the crisis, every quarter has beaten a Wall Street analyst expectations. And then the future guide has been typically lower. That’s the dance. So companies beat expectations that guide lower in the future, stock sells off in the short-term.

John Petrides: And then because we’re in a low interest rate environment, stocks are proven to be a better alternative than bonds. And that that sell off has been short lived and we’ve been rising higher. I mean that’s the dance that we’ve been doing for really the past decade. And I think that continues. There’s really no difference during this earning season. It’s just the issues regarding the coronavirus that has… And valuation in the market in general, where investors following a very strong year where the S&P 500 was up 31%, where investors are taking some money off the table. So there’s nothing new really coming out of earning season that I could see that that doesn’t continue, that’s not driving my thoughts one way or the other. But the market is trading at 18 times forward earnings and forward earnings right now, the growth rate is not very high, it’s low to mid-single digits year over year. So it begs the question of what are people actually paying for from evaluation standpoint. So that’s the market in general. That’s one common regarding earnings.

John Petrides: Regarding Tesla, it’s been a fascinating move to say the least, not only in the past week or so, but really over the past six months. The only thing that I can think of, it’s like, particularly the last couple of days if you’re a football fan and you watch the NFL playoffs and if you saw the running back for the Tennessee Titans, Derrick Henry, whenever he got the ball and started running, your goal is to get out of the way. When that guy starts running at full speed, you’re going down hard and he’s just going to run over you. And that’s what I’m looking at Tesla’s movement of the last couple of days. That’s what it feels like. It’s like just get out of the way. And this thing just keeps continuing to March higher. I mean, as we’re talking, at 12:40 PM eastern time on Wednesday the fourth, the thing is up 17% on an intraday day, which is just astonishing.

Frank Curzio: Yeah, it is pretty crazy here. And I know we talked before this too, when you’re mentioning like David Einhorn, how to shorten this, which he said at the beginning of his shareholder letter… And just because they are short doesn’t mean that they’re not hedged someplace else even with an option, futures market and stuff like that. But seeing this, I mean, they have to be getting hurt. It’s just pretty crazy. It’s almost forcing you to cover right now and… Yeah, just for me, I think it’s just algos that are triggering this and it’s going higher and higher with 18% of the coats still short. But it reminds me though, doesn’t it reminds you of 1999. Even the market in general, some of these technology stocks where in 1998, 97, 98, you saw a huge run up and everyone was like, “Wow, this is overdone. This is crazy.” And we went down a little bit and it began in 1999 and then the NASDAQ doubled in 1999. Right?

Frank Curzio: So before the tech bubble burst in March 2000, it seems like this is maybe that stage where we’re not crazy, when I have 40 times forward earnings you got like you said, 18 times forward earnings and that might be conservative based on the growth estimates, but it just feels like that when I see things like Tesla going up through the roof like this.

John Petrides: Yeah, it’s a great point and I’m about to publish a commentary on our website, regarding some of the risks within the market right now and we can talk through the pros and cons of today versus 1999, not the pros and cons, the similarities, differences. Here’s the similarities between now and 1999, 2000, is that the concentration of the S&P 500 is really between one or two sectors. In 1999, the end of 1999, right at the foot of the burst of the .com bubble, tech and telecom reached about 38% of the S&P 500. So two sectors were nearly 40% of the index. Today, tech and communication services, so really think Google and Facebook, make up about 36% or 35% and if you add in Amazon, which is a consumer discretionary stock, that makes it 37% of the index, so you have massive sector concentration.

John Petrides: The other thing too is the top five holdings of the S&P 500 in ’99, 2000, made up about 17% of the overall index. Well guess what? The top five holdings of the S&P 500 today make up about 17 and a half percent of the index. So when people are buying passive index funds, when they say, “Yeah, I’m going to own the market because I don’t have to pay a fee, so I’ll just have access to the market and look, the market went up 31% last year, I could do that. I don’t have to do anything and stocks rise.” Well they don’t lift up the hood and really understand what they’re owning because there’s massive sector and stock concentration.

John Petrides: I mean, look at Apple and Microsoft right now, those stocks are above four and a half percent of the S&P 500. I think Apple’s 4.6 Microsoft’s about 4.5% of the overall index. Guess what, each one of those stocks have a higher weight than the energy sector, than utility sector, than the rate sector and the basic material sector. So when you think of all the companies that make up those four sectors, their earnings results are almost meaningless because what’s going to move the market really is what’s happening with Microsoft and Apple because their current concentration with the index is so large, it’s almost like they’re in a sector in and of themselves.

John Petrides: So, and that was very similar ’99, 2000. Now, here are the differences between now and then. To your point, valuations are nowhere near the bubble territory of where we were in ’99. ’99 the market got up to about 28 times forward earnings. Today we’re at about 18 times forward earnings. What does that mean? If you look past over the past 60 years, six, zero, 60 years, the markets traded about 15 and a half, 16 times earnings. So yes, we’re at a premium to where we’ve traded over the average but we’re nowhere near bubble territory. Okay? And by and large tech companies today, particularly Apple and Microsoft are flush with cash. So these are real businesses making a lot of cash. So it’s not like dot com where pets.com is a proverbial dot com stock that everyone likes to kick around where everything was based on hope and eyeballs and made up metrics to try to justify some valuation. So valuation are definitely, although more of a premium than where we have been, more reasonable than we were 20 years ago.

John Petrides: The other thing though, Frank, between today and 20 years ago, that’s very different and one of the reasons why stocks are being driven higher is bonds. You have fixed income market. If you buy a 10 year bond right now, it’s less than 2%, interest rates are significantly higher back in ’99, 2000 and you can get adequate yield in the fixed income market. So part of the reason of what’s driving up stocks is there really is no alternative. If you buy a 10 year US treasury right now, it’s, I don’t know, 1.7% or something like that 1.6% yield. If you own that in a taxable account and after inflation for the next 10 years, you have a negative return, that’s not very attractive. So it’s forcing investors to go out the risk curve and go into stocks because there’s no other alternative, very different from ’99, 2000. So there are different forces driving the market higher today than there was 20 years ago.

John Petrides: As Alan Greenspan mentioned 20 years ago. We were in a period of irrational exuberance, here we’re in an environment… Frank, if you remember, I know you’re a fan of Happy Days when there was a show, Joanie Loves Chachi, today you’re in an environment where Tina Loves FOMO. Tina, there is no alternative, loves FOMO, Fear Of Missing Out and that’s driving the market higher. So it’s a very interesting time period.

Frank Curzio: Yeah, all great stuff there. Really, really good stuff in the comparisons. And also just to put in perspective too, when you were talking about Microsoft and Apple, just looking at Microsoft by itself, it has a $1.3 trillion market cap guys, so put that in perspective. Last time I looked which was just last week, there was only 13 stocks in S&P 500 that had higher than a $300 billion market cap. This is a $1.3 trillion mark. That’s how big this company is. I think Google’s in that trillion dollar club, Amazon is as well and Apple or basically Google is pretty close, but it’s really insane how big these companies are and they continue to put up the numbers like they did and margins and earnings and the balance sheets that you talked about.

Frank Curzio: So here’s the big question here for you, which I love putting you on the spot buddy. Earnings pretty solid. You just brought in a lot of factors. Look, you can’t really use the same multiple now compared to them because we have a lower interest rate environment. It’s much, much different. You have the coronavirus fears that nobody really cares about. Tariff risks seems off the table, at least for now. We’re in election year where the current administration gauges the US economy based on where the S&P 500 is trading, a favorable monetary policy. Easy question here, what’s going to drive the market lower?

John Petrides: Yeah. I think the big risk that I think the entire global economy and global investors, particularly US investors are banking on one thing, that the Federal Reserve and global central banks are not going to raise interest rates. If the economic data starts to… Particularly within the US, right? So investors are really baking the cake that has an election year and the Fed doesn’t want to get political. So the Fed says they’re comfortable between one and a half and 1.75% on interest rates. And of course there’ll be data dependent, but right now they’re going to leave it in neutral around those ranges. Well that gives traders and investors fair amount of certainty that they’re going to stay in that range. And given it’s an election year, the fed wants to not be seen as a political animal and stays to the side.

John Petrides: But what if there is a pop? Clearly coronavirus helps because it’s going to artificially depress the data in the near term where you’re not going to see inflationary pressures. Okay? But let’s say this ends sooner rather than later. And let’s say the US economy, which has been at full employment for a long time, starts cranking and digging into higher gear. And because we’ve had a tight labor market that starts pushing up wages higher and you start seeing the inflationary data creep higher and then all of a sudden the fed gets forced their hand in saying, “You know what? We can’t ignore the date anymore, maybe we do have to think about increasing rates in 2021 or something along those lines.” And investors get spooked.

John Petrides: So this idea of cheap money that’s been flowing around the world and we’re back into a 2018 environment where equity investors sold off because interest rates were higher. I’m not forecasting that, but you’re asking me to play devil’s advocate. That’s the bear case. There are two bear cases in my opinion. The one bear case is clearly, if the fed is forced to raise rates higher, the other bear case is, if you want to play devil’s advocate with coronavirus, if this thing does get out of control and really starts creeping into the US economy and prevents the US consumer from spending extra money because the US consumer has been holding up the global economy and we’ve been in an industrial recession really for the past 18 months or so, and it’s been the US consumer that has a full employment that’s been out there spending the paycheck and making the wheel spin. If the US consumer gets spooked because maybe coronavirus comes in and really infiltrates the US economy, then that has the reverse effect and then that would hurt equity investors. So those are the two scenarios that I see that can derail this market.

John Petrides: But it’s also the same on the other hand, which is why you’re seeing when there are sell offs in the market, it should be met with buying opportunities. Although yes, we are trading at a bit of a premium relative to historical valuations, by no means am I suggesting, get out of the boat on equities. What we’ve been arguing for or advising clients on for quite some time is really to take a balanced approach here where you should have exposure to equities. Your exposure to fixed income should be purely to tamper volatility and rebalance when you can. And cash is really a timing mechanism and not something that that we advise clients to be. We think there are opportunities to put cash to work, but you should definitely be standing in the middle of the boat and not leaning to one side or the other.

Frank Curzio: Definitely makes sense. So now for the fun part, which people love getting from you, are there any names that you like here? It’s probably a lot more difficult, maybe not so much more difficult because you are seeing some sectors, especially due to coronavirus sell off where it’s airlines, travel agencies, casinos. But are you looking at anything that maybe not even that you bought yet, but just waiting for the right opportunity or something that you really like here because people love to get your fix man, they really do.

John Petrides: Clearly it’s a contrarian play. It was the worst, relative performing sector in 2019 but I think energy is really oversold. Oil has just gotten crushed, to start the year, particularly with coronavirus fears that the Chinese economy is going to slow. That’s going to crimp the demand side of the equation further. And as well, we all know that we’re cranking a lot of oil out of the Permian, so the supply situation is going to be high and you’re going to be in an oversupplied market for quite some time, that’s what’s happening in the energy markets. But we think or I think energy is quite attractive. It was up 11% last year and really just rallied in the month of December. Prior to that, it was really a laggard with the S&P 500 being up to 31%.

John Petrides: And it’s amazing, Frank, to think 10 years after where we had oil over $100 a barrel for quite some time. In 10 years Frank, how many podcasts shows did you do with people coming on talking about peak oil, you know?

Frank Curzio: Mm-hmm.

John Petrides: “Oh, the world’s running out of oil. We’re at peak oil.” And perception was, “We’re at over $100 a barrel and Oh my God, we’re going to move to all these alternative energy.” And here we are 10 years later and we’re talking about the world is oversupplied with oil. And the fact that energy is now less than 5% of the S&P 500 is just astounding. And half of that is probably just the weight of Exxon. So I think energy is contrary in play. Within the space, I really like Chevron.

John Petrides: Chevron is a large cab company, 4.7% dividend yield, has a very, very strong balance sheet. If you listen to any of the conference calls, management is really focused on making sure that, that dividend is sustained and growing. They really view themselves as capital allocators now. They’re not out there trying to force the well into production growth. They are focused 100% on returning cash to shareholders. And this all came out of 2016 when the price of oil collapsed to $25 a barrel. The entire energy sector really got caught with its pants down and they had way too much leverage. And many of them, many of the large cap, the super majors, particularly someone like Chevron, never wanted to face that situation ever again. So, they sold off non-core assets, they paid down debt, they’ve hugged some cash.

John Petrides: And if you’re going to be in the energy sector, you want to be the top of the capital expenditure stack, right? If the price of oil goes down lower, who controls the cards? It’s all the super majors. So think about it. If the price of oil goes down further, Chevron says, “Okay, we’ll just turn the spicket off and stop drilling and we’ll cut our cap X budget. Well then who does that hurt? That hurts all of the service guys. If you think you can just go downstream, everyone else gets hurt because Chevron and the likes, the super majors are responding to a lower oil environment and stop cranking out and stop spending money. So if you’re going to play the oil space, you want to be in the super majors, the top of the capital expenditure stack and I like Chevron.

John Petrides: And you get a big fat yield, company with really strong balance sheet that if oil prices do go lower can withstand that. And with a management team committed to a return in cash to shareholders. And they understand that part of the reason of why the oil sector got beaten up in 2019 was the emergence of SRI, Social Responsible Investing and ESG, Environmental Social and Government’s wave that really started cranking in the investor paradigm and fossil fuels were really one of the first casualties of that. It’s an easy one. So if you’re going toward the SRI, ESG world and Chevron CEO is very aware of this and the recent comments called, they’re talking about how are they going to pledge capital to get into more bio diesel fuel and alternative forms of fuel. So they’re not being naive or sticking their heads in the sand as to what’s going on in the world around them.

Frank Curzio: So we’ll end with this because this is the most important question by far. I’m not where you’re doing this interview from, if you’re doing it from your office, do you have your fantasy football trophy there on your desk or …?

John Petrides: It was a father, son league. I let my son drive the keys, he drove the ship this year and in the last three years when I drove the ship, we didn’t make the playoffs. And then when I turned the keys over to him, we won the whole thing. So we have our trophy, it’s on our mantle. It’s on the fireplace at home. And I’m just about to show that picture of my son holding the trophy to anybody’s willing to view it.

Frank Curzio: That’s great stuff. All right, let’s finish with this buddy. So if anyone wants to learn more about you, I know you’re like writing a lot. You’re on TV a lot. I see you everywhere. Where can they find out more information about you?

John Petrides: Yeah. So with Tocqueville Asset Management. You go to tocqueville.com, our team is up there along with our entire company. We have 7 billion in assets under management and we manage mutual funds and for high net worth individuals and investors. So definitely check out our content there. So I appreciate that.

Frank Curzio: All right, sounds good. I know you’re busy. Thank you so much. You gave me a nice time slot to do this interview in, as always, everybody loves you. I really appreciate it.

John Petrides: And Frank, do me one last favor. Make sure you have the production team check any of your transcripts and if any other guests has ever referenced Joanie Loves Chachi or any other Happy Day shows or any of the late seventies shows, then if not, then you heard it here first. How did that sound?

Frank Curzio: I’d say I’m pretty sure nobody mentioned Joanie Loves Chachi, I don’t think I’ve ever mentioned that. It’s great stuff. Thanks so much for coming on buddy. I really appreciate it.

John Petrides: Thank you.

Frank Curzio: Hey guys, great stuff from John as usual and he’s so proud at that fantasy football win, had to give him that, very happy. Share that with me. Text it to me, but I love him because we can go anywhere. He covers all these topics in the markets. He’s in the newsline, you’ll see him on CNBC, Bloomberg, you’ll see him everywhere. And he’s just a person that loves the markets, loves his job, is doing great in Tocqueville, again, a great firm. So I love having him on. I know you guys love having him on. At least that’s what you tell me all the time. But I always say this podcast’s about you and not about me. If anything changes, please let me know, frank@curzioresearch.com. That’s frank@curzioresearch.com. I just want to put the best analysts in front of you that are going to share their opinions, that would be track records, and John’s definitely one of them.

Frank Curzio: Now let’s talk about the million pound gorilla in the room, which is a coronavirus. Are you as nervous about it, you would know by Tuesday because the markets went up tremendously. But there’s a lot of news out there and sources that are just reporting nonsense. The same thing when I explained this before, I think on a podcast when I went to Brazil to see the World Cup and they were saying body parts are floating in the ocean, there’s pickpocketers, very dangerous. It’s horrible. I went there, saw these beautiful places, kind people. It was unbelievably amazing. I didn’t see any body parts. I didn’t like grabbed people’s hands and legs and body parts and start beating people up with them. Nothing. Right? We don’t know what’s going on in other countries, right? We really don’t.

Frank Curzio: And when I hear some of this, remember you have to understand, you could see what politics… I don’t care if you’re a Republican or Democrat or how biased the news is, right? They’re going to report the news. Two ways to see every story, probably 10 ways to see every story, but they’re going to report based on their audience and they all want to scare the crap out of you, which is very, very important. Not saying that we shouldn’t take this seriously, but that’s their goal because that results in more page views and they make money from advertisements, right? That’s their incentive. They have to come out with great headlines, great everything. So people looking at this stuff, reading this stuff, controversial stuff, and I get it, I get it. I’m not picking on them. That’s their job. I get, they’re businesses. That’s what they need to do.

Frank Curzio: But as an investor, you need to understand what’s real and what’s not. And let’s cover that today because another example of the nonsense, which I’m glad so many of you listened. I mean something I’m very proud is the tariffs and for the past two years I told you, just ignore it. It’s not going to have an impact on the US. China, they have to come up with a deal, it’s much bigger. And I’m not saying anything bad about China. I love China. I actually wouldn’t mind living in China. I love the culture so much, but they need us a lot more than we need them. Okay. We could buy our goods anywhere. We have money. They can’t sell their goods anywhere. They had to come at a deal. Plus you have all these other risks that John and I mentioned where it wasn’t just the tariffs, Hong Kong, the economy I was crashing, but they had to do a deal with us.

Frank Curzio: But yet there was literally tens of millions, if not hundreds of millions of stories at tariffs and the trade wars, we’re going to be in so much trouble. And it was all nonsense. I provided a research report, it was 10 12 pages, I think of why this isn’t a big deal. Stay long stocks and went up 30% last year. We had a great year the year before, well actually went down the last four months of the year. A rebound tremendously 2019 and stocks are doing pretty well this year.

Frank Curzio: Now, in order for you to make the best investment decisions, you need to know the facts. So here it goes, the coronavirus is obviously the virus strain first identified in Wuhan and the Hubei Province in China that has spread. It really started in December. It’s recent, it’s like three months, right? So experts are concerned and they should be because they don’t know much about it. It’s a new virus, spreading rapidly, it has the potential to cause severe illness and pneumonia. It spreads similar to a cold. You come in within six feet or contact with somebody and they’re coughing or sneezing and it gets on you. There’s a good chance you’re going to catch it.

Frank Curzio: The symptoms include, some of the things that a common cold, running nose, fever, and you could get severe pneumonia sometimes. So we have about 20,000 people who are now affected. Mostly is people in China because only 11 people were infected in the US, nobody died. That was 20,000 people. We have 360 plus deaths that have been reported.

Frank Curzio: Many comparing this to SARS, which spread in 2013, but you have to realize SARS was much more infectious and fatal. Yeah. Most of the new sites that I see are reporting that the death toll from the coronavirus exceeds that of SARS. So it’s bigger than SARS. That’s true. That’s a true thing. But you have to look into the details a little bit because the amount of people who we covered already from the coronavirus has risen sharply, especially over the past couple of weeks. But this suggests the fatality rate is relatively low. For example, you have well over 20,000 infected, around say 360 deaths as base information. Works out the less than 2% of the people who died who can track this virus. Yet with SARS, it was close to 10% of the people unaffected, much more dangerous, much more fatal. So it’s not SARS in terms of fatalities, more people are getting infected and most of these fatalities when it comes to coronavirus occur in men who have some existing heart conditions.

Frank Curzio: Now, if we put this in perspective using the flu as an example, which people do, I’m not comparing this a hundred percent to the flu, just going to throw some numbers at you because you have 20,000 infected. Over 19 million people in the US get the flu each year. Almost 6% of the population, up to 60% die each year. So it’s only 0.3% a lot less than 2% for the coronavirus and also the 10% for SARS. We look at it in 20,000 infected from coronavirus, 360 deaths while 19 million in the US alone get the flu every year and 60,000 people die. Again, just putting things in perspective. Because with the flu, we do have flu shots. We know the disease well. I mean I’m happy to say that my daughter’s got the flu shot. I didn’t get the flu shot this year, but almost everyone in her class has the flu right now, she doesn’t have it and they didn’t get the flu shot, which is pretty cool.

Frank Curzio: So I think last year, don’t quote me on this, but I think it was only 19 to 20% that flu virus cove the strains of the flu last year. So it wasn’t that effective last year. I think the year before is better, but this year I think has been pretty good so far.

Frank Curzio: Now when we look at the coronavirus, it’s scary because it’s spreading really, really fast and we don’t know much about it. When we look here in the US, spending flights containing it with a few cases, I think it’s 11 or 12 nobody died. It’s where you see not too much of an impact with the overall markets. That’s not the case with China. At least 21 provinces in China, I think there’s 25, 26 total. But 21 have told businesses, “Hey, don’t go to work.” And why is this such a big deal? Because these provinces in parts of China accounted for more than 80% of GDP and 90% of China’s exports. That’s why China’s market is crashing. I mean, if you look on Monday, CSI 300 plunged 9% that was Monday’s open and the 4,000 stocks that trade on Shanghai, Shenzhen changes, 90% hit their daily down limit or drop by the maximum percent allowed by the country’s exchanges for being halted.

Frank Curzio: And China is injecting money as they may be a little bit short selling, increased financial support to create an antivirus. They print money to support the economy. Hearing news about that, that’s why the markets have really been pushed higher, But when I look at the numbers, this is important guys, China casts a 17% of the global economic output, 17% and it’s being severely impacted right now. It was basically shut down. It shut down to the US, to other countries. I’m talking about the biggest market for new cars, semiconductors, international tourism, biggest export by far of clothing and textiles, a place where virtually every iPhone is made. Apple has said that they’re at least over the last six months trying to get a lot of the supply chain out of China, at least some of it.

Frank Curzio: Now let’s break down the companies with the largest exposure to China and this is in terms of revenue because this is what I want to give you. It’s very, very important guys. Okay, we know how important this virus is, but it’s an investment podcast, we want to make sure and… I get it. Sometimes it’s tough to talk about and even when I talk about tobacco stocks or altruism, my dad died of lung cancer, I always put that in perspective, but you’ll listen to this podcast to get investment ideas, how to position your portfolio. It’s very sad that people are dying from this and they still really don’t have any vaccines.

Frank Curzio: We’ll cover that in a second but if you look at the companies with largest disclosure to China in terms of revenue, Yum Brands win, Qualcomm, Micron, Nvidia, these stocks are doing well right now, be careful going into earnings next earning season, Applied Materials, Texas Instruments, Marvell, Teradyne, Broadcom, that says a percentage of revenue, but companies that have significant exposure, which is, it may be less exposure, just like if you’re looking at cloud revenue from Microsoft, right? I mean most of their revenue gets generated from other sources. Right now it’s getting bigger and bigger and bigger, I think was something $10 billion, but that’s the revenue that accounts for their growth and that’s why these stocks are trading at high multiples.

Frank Curzio: So even though it’s not a large percentage of revenue, it’s specific enough that that’s the growth component that you’re taking away. So don’t be fooled when they say, “Well, these guys, they don’t have …” They have exposure and this is their growth. You look at Nike, I mean all the upgrades on Nike, if you look at China, that’s where most of the growth came over the past two years. Starbucks, McDonald’s, KFC, Apple, Tesla, which is crazy. $900 who knows where it’s going to go? It’s all algorithms. I don’t think about it. Don’t say you have an opinion, whatever. It’s all algorithms. You see all the orders. 18% of the that the float is short. Algorithms could trade.

Frank Curzio: Millions and millions and millions of shares in milliseconds and get in and out and they know that they’re going to be able to push it in. There’s going to be forced buying as a shorts cover. That’s all it is right now. I mean otherwise, stuck with me going up on… The report earning’s a week ago, four or five days ago, whatever it was. Monday, it’s up a hundred something points. Tuesday is up a hundred something points. Amazing. One of these day’s a front running. These guys are going to get investigated, but since nobody closed their eyes or whatever, we’ll wait till a blow up happens because of this. That’s a different podcast, a different rant. But you look at other companies, Honeywell, Kohls, Caterpillar, Best Buy, a two week high, and all time high, Cummins, Rockwell, Skyworks, Dollar Tree, Tiffany, Deere, most auto suppliers, these companies will be impacted next quarter, they will.

Frank Curzio: Now this is temporary, which it’s likely temporary. I would guess it is. Maybe it’s not, but I’m hoping it is. I think it will be where we will have vaccines and lots of companies don’t work in them, Inovio, Novax, Vir Biotechnology. If your biotechnology is the name of that company, which is up a hundred percent in the past month, larger names working on vaccines, Regeneron, J&J, AbbVie, Gilead. A lot of these companies have seen their stocks move higher since this outbreak, since December, mostly in January, and they have pull back, especially the smaller names.

Frank Curzio: But if you look at the virus, it will die down. It will, may take weeks, may take months, hopefully it doesn’t take that long, but it will. And when it does, many of the stocks with the biggest exposure to China that are getting hit right now, especially the airlines, the travel sites, cruise lines, they’re going to be strong buys. In fact, something that not too many people were talking about. Airlines suspended their travel to China that’s going to hurt their earnings. So what do we have right now? We have analysts and most of these guys already reported. We have analysts lowering their estimates heading into next quarter. I think airlines are a screaming buy.

Frank Curzio: What nobody’s talking about is fuel prices. Fuel prices are down from a $1.78 a gallon in January to under a $1.50 today. So we’re talking about a 16% decline in a month in fuel prices. That’s going to mask the losses from those canceled flights in China, which not too many people are talking about. So what are we going to have? We’re going to have earnings coming down from these analysts, which is going to provide an easy beat for these guys, especially if the coronavirus or the fears around it. We have vaccines to help it. If you’re spreading slows over the next month, those are going to be screaming buys. Those things are going to pop 10, 15% when they report earnings because everyone’s lowering their earnings, but yet they shouldn’t really be lowering their earnings. Yes, they’re going to see lower earnings because of those cancel flights in China, but those earnings are going to be significantly higher with those few costs and they hedge their fuel, then they don’t hedge 100% but it’s going to be significant enough where you’re going to see very, very strong earnings, especially if those lights go back online before next quarter, say in the next month or two, something to think about.

Frank Curzio: But one area I like again, something I like to give you guys something that people aren’t talking about, not really hearing this, sorry. And these are group of stocks I like right now, and these are the ones that pulled their supply chains out of China over the past 12 months because of the terror fears, right? Uncertainty, I tell you all the time is a worst thing in the world when you have… and this was before the phase one got signed, this is why it was such a big deal even though the numbers weren’t that great, we all know that. It was a big deal because now you don’t have Trump every week saying, “Hey, you know what? I’m going to raise. China doesn’t do this, I’m going to do this, and China’s back and forth.” That moves the markets. It scares people because supply chains are impacted, especially if you could have more terrace on those goods, it’s significant for some companies. So they are like, “Look, we got to stop doing this.” This has been going on for two years, right? Since what? January, February, 2018?

Frank Curzio: It went through 2018 so the market crashed that last four months 2018. 2019 was really good, but we got some positive on terror front, but that’s second half 2019. You have a lot of companies that move their supply chains out of China because they don’t want to deal with that uncertainty or at least a percentage of them. That includes Dell, Hewlett-Packard, Nintendo, Skechers, Gap just got beaten up. GoPro, a name I don’t like, but maybe expectations are so low, who knows? I’m going to revisit it. Panasonic, A6, Black and Decker, Steve Madden, Hasbro, Whirlpool, Intel.

Frank Curzio: Throw lots of names at you and don’t email me at frank@curzioresearch saying, “Frank, what was the name of that stock?” Just press rewind on your podcast and listen again. Just listen again and write all the names down if you can. I love you guys, but seriously, some people say, “Frank, what was that stock you recommend?” Just go back to the podcast and listen to it. The little button that’s new to the world, it’s called rewind, rewind it a little bit and then play and you’d be fine, you’d be able to know. But I named a lot of stocks there, but these are stocks, some of these names are getting hit because people would think they have exposure to China and they significantly lower that risk over the past six months moving at least some of their supply chains, if not their full supply chains out of China into other areas.

Frank Curzio: These companies are getting hit in the coronavirus, so those fears, which some are, I’m going to start researching a lot of these names, I think. I don’t think, I know they’re going to be great, great buying opportunities for you. So that’s my analysis on the coronavirus. The facts, the figures, the things that I know about it. Again, you want to listen to… do your own research. Even for me, you listened to this podcast, I’m one opinion or whatever. Do your own research on this stuff? Don’t just take the word of someone on CNBC or someone on Fox Business News or even someone that’s on a Today Show is talking about this and what could happen.

Frank Curzio: I mean, David Tepper who was super bullish on the markets too, I think is pretty much the best fund analyst in the world over the past 20 years. He even said this could be a game changer. Let’s see what happens. That’s one person’s opinion. Maybe he’s right, maybe he’s not right. I don’t know. But do you on homework because you’re going to see reactions and overreactions just like you see in the overreaction to Tesla. Go up a hundred points a day, past couple of days, shorts getting crushed. And would you be surprised this stock went down to 600 it would still, I think be up for the year. If it went down from 900 to 600 it would still be up for this year. Maybe it does, maybe it doesn’t, but go into these names that I mentioned, start doing your research, see which ones got hit.

Frank Curzio: It’s not too difficult to see if earnings estimates are being lowered. You could punch that in Google. They’re not going to give you the full report. I have access to a lot of these full reports because we pay a lot of money for that, but they’ll tell you that they load earnings into the quarter just like they’ve been doing for Disney, just like they’ve been doing… I mean it’s just trading 26 times earnings and they’re going to see an earnings decline of pretty much 20%, 20% more year over year, but they lower those earnings so much. Oh, we’ll see. But this is how you want to gauge the market. See, especially airlines, a lot of companies have lowered their estimates because, hey, we need to do this. They stopped their flights to China. Here’s how much exposure they have. Maybe that 5%, 7%, 9%, whatever it is.

Frank Curzio: United, Delta, American, I mean other companies, but see, because a lot of these estimates have been lowered, but they’re not factoring a 20% decline or around 16, 17% decline in fuel prices over the past month. Which is going to offset that risk. So I expect airlines which are already, one of the cheapest sectors and growing much faster than the overall market. They’ve pulled back on this news and I think they’re screaming buys right now. Covered a lot. Lots of names. Great guests today. Again, my apologies on the Superbowl. I win that bet for you guys. I’ll try and be wrong next year. But with that said, listen, I love you guys. Thanks so much for listening. I really appreciate it. And that’s it for me. I’ll see you guys in seven days. Take care.

Announcer: The information presented on Wall Street Unplugged is the opinion of its hosts and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility. Wall Street Unplugged produced by the Choose Yourself Podcast Network. The leader in podcasts produced to help you choose yourself.

P.S. As the coronavirus impacts the global economy, it’s important to know how to protect yourself from major market losses. Genia Turanova, editor of Moneyflow Trader, recently shared the 3 market sectors to avoid during the coronavirus outbreak… and one innovative biotech to watch

Frank Curzio
Frank Curzio, founder and CEO of Curzio Research, is one of America’s most respected stock experts. His research is regularly featured on media outlets like CNBC’s Kudlow Report, The Call, CNN Radio, ABC News, and Fox Business News. His weekly Wall Street Unplugged podcast—ranked the No. 1 “most listened-to” financial podcast on iTunes—has been downloaded over 8 million times.

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