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As central banks grapple with high inflation, global investors look for new ways to evaluate investment opportunities. Kim Parlee speaks with Phil Davis, founder of Philstockworld.com and PSW Investments about what company metrics he is watching.
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Hello and welcome to a special edition of MoneyTalk, I'm Kim Parlee. You may have noticed our set looks a little bit different today and that's because we are filming in front of a live studio audience. And not only that, we are in studio for the first time in this studio for the first time in seven years with one of our favorite guests, none other than Phil Davis, the founder of philstockworld.com Phil, we are so excited to have you here. How are you?
I'm great. Thank you, Kim.
But let's just start off with the markets themselves. They've been incredible for 2022, and incredible is not always a good word. Let's be clear about that. What are you seeing right now? I mean, what do you read in the tea leaves in terms of recession? How close are we? Is it happening? Has it already started?
I think globally there's clearly going to be recession and it's very hard for us to avoid the impact of a recession, even if we don't technically fall into one. And I mean the US and Canada, because we're both a little bit stronger than most countries in the world. There's still a war, there's still COVID, supply chain issues are still lingering. And the moves the Fed has made are forcing other banks to raise their rates, as well, even though it may not be the best thing for their economy.
In other words, we want to slow down and cool our economy, but Germany doesn't want to cool their economy. Italy doesn't want to cool their economy. But if they don't raise their rates, their currency collapses against the dollar and they have the same sort of issues. So because the other countries, even if they have economic hardship, have to raise their rates, they're going to end up going into recession involuntarily while our Fed is trying to cause a recession here, or something very close to it.
Yeah. Yeah. And I think people are seeing, I think, the level of determination, as well, in terms of wanting to cause that recession to slow things down. How much of that is already priced in? I mean that's always the thing, right, is what's happening versus what's already priced into the market?
Yeah. I think a mild recession is being priced into the market. I think that's keeping us down at the 4,000 level on the S&P 500. But, you know, you're on such a tightrope between having a mild recession, the fabled soft landing that everybody wants to shoot for, and then accidentally going a little bit too far and everything goes off a cliff, like housing begins to collapse--
Yeah.
--liquidity falls apart. You know, look what just happened with FTX on the Bitcoin side. It doesn't take much for certain things to trigger a collapse in liquidity, and all of a sudden there are problems.
Yeah. When the liquidity tide goes out, you see who's wearing a bathing suit or not, right?
Buffett.
Yeah. When you think about that then, because I know-- and I should mention, I know we were just speaking with, you know, my producer earlier and you said, because of where we are in this market you're looking at things a little bit differently now. You're looking at metrics, perhaps, that maybe are just, you know, newer to you in ways you haven't looked before. What are they?
Well, as far as picking stocks, because we were talking about the trade of the year and such, and we go through thousands of stocks, whittling down to hundreds of stocks, take a very close look at hundreds of stocks, and we started looking at things we don't usually concentrate on, like well, debt, obviously.
I mean, our assumption is that anybody who has debt now, we take 5% of the debt off their earnings in the future, because that's a worst case scenario, that rates go up to 7%, 8% and they're paying 5% more than they were last year or this year. And that's not baked into the financials. So when I see a company where if I take 5% more of debt service and take it off the earnings and it's drastically impacting the earnings, stay away.
Yeah.
You know, nobody's magically going to avoid this. The interest rates are rising. It's going to cost a lot more for companies to borrow.
Yeah.
That's the big one. Another one we started looking at closely is the employee-to-earning ratio.
Employee-to-earning ratio.
Employee-to-earning ratio. How much profit do you make per employee as a company? Apple is the king, $1 million per employee.
Really?
Yeah. Really nice numbers. And when people start dipping down below $100,000 per employee, which is most companies are below $100,000 per employee, it just means that when they raise wages ultimately, and in the States you have to realize there's 25, 30 states that it's still $7.25 an hour minimum wages. Everybody's going to go to $15 eventually.
And so when you think about doubling wages, you cannot say that's not going to impact these companies. And so we're looking at companies. How are they going to be affected by these increases?
Companies with very high employee-to-income ratios are going to be much less affected than the companies like a Walmart, say, where they have $32,000 per employee. They're drastically affected by that. Starbucks, $48,000 per employee. Drastically affected by a small increase in wages.
Yeah.
So, you know, we stay away from the ones where they're going to take a big hit.
But is there anything else you think that people just aren't seeing in the market it right now that you see?
Well, I think the strong dollar issue is also another thing we look at, is how much money is coming in from overseas.
Yeah.
That money weakens, so you have, apparently, less revenues as you're bringing it in because you have the stronger dollar, weaker foreign currency that you're doing business in. Some people it's an advantage. For Apple, it's an advantage because they spend so much money in China, it's a lower cost for them. But for most companies, it's usually disadvantageous. So the S&P earns about 60% of their money from overseas. And so when you have a very strong dollar it decreases their overseas profitability. [AUDIO LOGO]
[MUSIC PLAYING]
[MUSIC PLAYING]
Hello and welcome to a special edition of MoneyTalk, I'm Kim Parlee. You may have noticed our set looks a little bit different today and that's because we are filming in front of a live studio audience. And not only that, we are in studio for the first time in this studio for the first time in seven years with one of our favorite guests, none other than Phil Davis, the founder of philstockworld.com Phil, we are so excited to have you here. How are you?
I'm great. Thank you, Kim.
But let's just start off with the markets themselves. They've been incredible for 2022, and incredible is not always a good word. Let's be clear about that. What are you seeing right now? I mean, what do you read in the tea leaves in terms of recession? How close are we? Is it happening? Has it already started?
I think globally there's clearly going to be recession and it's very hard for us to avoid the impact of a recession, even if we don't technically fall into one. And I mean the US and Canada, because we're both a little bit stronger than most countries in the world. There's still a war, there's still COVID, supply chain issues are still lingering. And the moves the Fed has made are forcing other banks to raise their rates, as well, even though it may not be the best thing for their economy.
In other words, we want to slow down and cool our economy, but Germany doesn't want to cool their economy. Italy doesn't want to cool their economy. But if they don't raise their rates, their currency collapses against the dollar and they have the same sort of issues. So because the other countries, even if they have economic hardship, have to raise their rates, they're going to end up going into recession involuntarily while our Fed is trying to cause a recession here, or something very close to it.
Yeah. Yeah. And I think people are seeing, I think, the level of determination, as well, in terms of wanting to cause that recession to slow things down. How much of that is already priced in? I mean that's always the thing, right, is what's happening versus what's already priced into the market?
Yeah. I think a mild recession is being priced into the market. I think that's keeping us down at the 4,000 level on the S&P 500. But, you know, you're on such a tightrope between having a mild recession, the fabled soft landing that everybody wants to shoot for, and then accidentally going a little bit too far and everything goes off a cliff, like housing begins to collapse--
Yeah.
--liquidity falls apart. You know, look what just happened with FTX on the Bitcoin side. It doesn't take much for certain things to trigger a collapse in liquidity, and all of a sudden there are problems.
Yeah. When the liquidity tide goes out, you see who's wearing a bathing suit or not, right?
Buffett.
Yeah. When you think about that then, because I know-- and I should mention, I know we were just speaking with, you know, my producer earlier and you said, because of where we are in this market you're looking at things a little bit differently now. You're looking at metrics, perhaps, that maybe are just, you know, newer to you in ways you haven't looked before. What are they?
Well, as far as picking stocks, because we were talking about the trade of the year and such, and we go through thousands of stocks, whittling down to hundreds of stocks, take a very close look at hundreds of stocks, and we started looking at things we don't usually concentrate on, like well, debt, obviously.
I mean, our assumption is that anybody who has debt now, we take 5% of the debt off their earnings in the future, because that's a worst case scenario, that rates go up to 7%, 8% and they're paying 5% more than they were last year or this year. And that's not baked into the financials. So when I see a company where if I take 5% more of debt service and take it off the earnings and it's drastically impacting the earnings, stay away.
Yeah.
You know, nobody's magically going to avoid this. The interest rates are rising. It's going to cost a lot more for companies to borrow.
Yeah.
That's the big one. Another one we started looking at closely is the employee-to-earning ratio.
Employee-to-earning ratio.
Employee-to-earning ratio. How much profit do you make per employee as a company? Apple is the king, $1 million per employee.
Really?
Yeah. Really nice numbers. And when people start dipping down below $100,000 per employee, which is most companies are below $100,000 per employee, it just means that when they raise wages ultimately, and in the States you have to realize there's 25, 30 states that it's still $7.25 an hour minimum wages. Everybody's going to go to $15 eventually.
And so when you think about doubling wages, you cannot say that's not going to impact these companies. And so we're looking at companies. How are they going to be affected by these increases?
Companies with very high employee-to-income ratios are going to be much less affected than the companies like a Walmart, say, where they have $32,000 per employee. They're drastically affected by that. Starbucks, $48,000 per employee. Drastically affected by a small increase in wages.
Yeah.
So, you know, we stay away from the ones where they're going to take a big hit.
But is there anything else you think that people just aren't seeing in the market it right now that you see?
Well, I think the strong dollar issue is also another thing we look at, is how much money is coming in from overseas.
Yeah.
That money weakens, so you have, apparently, less revenues as you're bringing it in because you have the stronger dollar, weaker foreign currency that you're doing business in. Some people it's an advantage. For Apple, it's an advantage because they spend so much money in China, it's a lower cost for them. But for most companies, it's usually disadvantageous. So the S&P earns about 60% of their money from overseas. And so when you have a very strong dollar it decreases their overseas profitability. [AUDIO LOGO]
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