U.S. stock markets are sitting at record highs and nothing seems to be able to keep markets down for long. Kim Parlee speaks to Phil Davis, founder, PhilStockWorld.com, about the disconnect between performance and valuation and where to find value.
- Well, if you take a look at any of the markets right now, most are sitting-- especially North American markets-- near all time highs. And nothing really seems to be able to keep those markets down for long. But our next guest says, this is precisely the time you should be careful. Because one day what is driving this rally, in his opinion, will not be there anymore.
Joining me from Fort Lauderdale is Phil Davis. He is Founder of philstockworld.com, and managing partner of PSW Investments. Phil, it's always great to have you with us. And let's just start with the premise that you believe that NASDAQ 100, all time highs, financials, all time highs, but your concern, this is not sustainable from your perspective.
- Right. I don't think it's sustainable, because we've already run ourselves up a $30 trillion deficit building this house of cards, basically, that we've got in the market. And if you look at just recent events, say-- forget the money that's been spent-- but this year, the US economy is $20 trillion. And we put $2.2 trillion of stimulus in the first half.
So in a $10 trillion first half, we had a 22% stimulus. And what was GDP growth? 6.6%. That means 15.4% was a negative without the stimulus. That's not really recovered healthy economy. And people are investing as if everything is great, and everything's going to continue to be great. But when the stimulus stops, and it has to eventually, I think that there's going to be quite a bit of a pullback.
- You talk about the disconnect in terms of the stimulus spending and how it shows up in the economy. I understand you see the same difference right now in terms of what's happening with company earnings, and what's happening with stock prices.
- Well yeah, I mean, if you look at earnings, you really have to compare earnings. It's tricky. You have to compare the earnings to 2019 earnings, not 2020 earnings. Everybody had bad earnings in 2020. So everyone looks great compared to last year.
But when you go back to 2019, and you look at the sectors, the only sector-- the market is up 50%. Let's put it that way. The S&P 500 is up 50%. But the only sector that has 50% more revenues is the semiconductor sector. And that's being actually caused by the virus as well. That's caused because there's a chip shortage, and they're charging much higher prices. And they're making more money and getting more revenues. It's an inflationary leading sector.
Retail is up 31% from 2019. Pharmaceuticals, up 25%. Financials are up 25%. But you get down to software services, personal goods, food, things like that, even banking, only up 10%. But meanwhile, the market is up 50%. That's a complete dislocation of value to earnings.
- So what's going to change? What's happening with the markets then? I mean, when are we going to see that balance out? Are you expecting a serious pullback this quarter, and what could cause it?
- I don't think-- it's not a quarter thing. It's very hard to pin down when this is going to happen. But for example, right now you've got a couple of issues still on the table, like COVID, and when it'll come back, and what's going on with travel and stuff. If you look at the travel and leisure sector, those stocks are down-- still down 40% in revenues from where they were. And some of them more. The cruise lines are down 90% in revenues from where they were in 2019.
Yet, they're trading at all time highs. People are just completely ignoring the reality of these stocks. They ignore the earnings reports. They ignore the revenues. They just think everything is going to be great, and if you just keep putting the money in, you'll get it back. But history shows us that doesn't really happen.
- What do you do, though? I mean, if you have to, or you want to deploy your capital, you need to make a return, how do you find, and how do you evaluate companies?
- Well look, I'm an old time fundamentalist. I mean, for me, it's like a company needs to make money. So if I have a stock, and I give it $1 billion to buy a company, I expect that company to make $100 million, or at least $50 million, at least pay my money back at a 5% rate, you know. But right now, inflation is 10%. So if your company isn't making 10%, you're falling behind.
So you need to look very closely at those PE ratios, and look very closely at what kind of returns your company is getting, and what kind of growth it has. And you can't extrapolate the growth of a stimulated economy and expect that to keep going. You have to assume it's going to flat-line. The 2019 levels of the real prices. And you have to find things that are a bargain at those levels.
And we find them. We have stocks like this. But you have to do your homework. You can't just throw darts at a board and pick stocks.