Albion Financial's Jason Ware on what he's expecting from big tech earnings

Jason Ware, Partner and Chief Investment Officer at Albion Financial, joined The Final Round to discuss his outlook for upcoming earnings from the big tech stocks and his outlook for the market as the Presidential election approaches.

Video Transcript

SEANA SMITH: Welcome back to "The Final Round." We're just around 30 minutes left in the trading day. We're looking at a rally today, with the Dow up just around 200 points. So, well off its highs of the day. S&P and NASDAQ also holding onto gains for the week. Industrials and technology, those sectors are leading the way.

So for more on this, we want to bring in Jason Ware. He's a partner and chief investment officer at Albion Financial Group. And Jason, great to have you back on the program. Let's just start with this week's action. Because we've seen a decent amount of volatility in the market this week.

What do you think, one, was the cause of it? And as we do see the rebound today, how much of it has to do with retail sales and that better than expected economic data, rather than maybe just some of the technical analysis that we're seeing in the market?

JASON WARE: Yeah, it's always hard to divine what's happening over the short-term. But the best guess would be that, you know, investors are still battling, you know, will we get stimulus? Won't we get stimulus? I think the consensus is that it's probably not going to happen. Even if it were to happen, getting it out into the real economy through the plumbing of how a stimulus is rolled out, it's still not going to happen before November 3.

So there is a bit of a struggle there on the headlines with regards to stimulus. Sometimes it looks more optimistic than others. But I think, by and large, we're just seeing a pretty normal pattern of volatility going into a major election. That's something that we see a repeat over and over again. It's pretty bankable.

And by and large, you know, we're two weeks out or a little more than two weeks out on election is pretty consequential for those that are paying attention to it. And I think that has just people repositioning a bit.

BRIAN CHEUNG: Hey, Jason, Brian Cheung here. So you rightly point out in your notes that, you know, we could be in a bull market already, that we've likely already exited the malaise that we saw in the depths of the COVID crisis.

But what's interesting about specifically this third quarter of earnings is that the expectations have really ramped up among the analysts over the past few weeks. So does that present any sort of downside risks as the companies begin to report this season of those stocks potentially falling if they don't meet those expectations?

JASON WARE: Yeah, it's a great question, Brian. And the way that we view that is it's going to be real company specific. You know, I think the bar is still low. If you look at the S&P 500 operating earnings at large, you know, the expectation is for something on the order of down 20% year over year for S&P 500 earnings. We'll probably do a little bit better than that.

But if you look at it on a company by company basis, to your point, there have been some sectors and some individual companies that have seen their estimates rise going into earnings. And of course, that makes the hurdle just that much harder for companies to jump over. So I really think it's going to be based on the kind of company we're talking about, whether it's technology, whether it's energy. It's going to look very different.

And again, even the ability to beat those expectations are going to depend regarding the stock price on where the stock starts going into earnings. You know, if you have really low expectations in the financial sector, which actually didn't really work out that well with banks this week. I'd say most of the reports from banks looked pretty good.

You know, JP Morgan and Goldman and Morgan all reported some really good results. Stocks were somewhat mixed on that. So we'll see what happens. Everything's kind of-- it's not monolithic. It's really got to be company specific analysis to be able to figure out what's going to happen there.

SEANA SMITH: Well, Jason, I mean, looking ahead to next week, let's get your thoughts on technology. I know you follow this sector very closely. We have a lot of big names starting to report next week. We're getting Netflix. We're going to get results from Amazon. What names do you like heading into the third quarter earnings season specifically for some of these big tech names?

JASON WARE: Yeah, you know, over the short run, just like everything, hard to say. I think the setup going into earnings in a couple of weeks for the major technology companies like Apple and Microsoft and Alphabet and Amazon, et cetera, look better right now than they did six weeks ago when they were all at record highs, you know.

Between those four that I mentioned, those four we own for clients, those stocks are off somewhere between 6% and 13% from the highs that they logged in, in September. So the setup for now looks a little bit better. Expectations aren't as high as they were if you look at it through the lens of stock price right now.

But we still have a couple of weeks before they start reporting. And those stocks may go up into earnings. So we'll see what happens. I think the last bit that I'll mention is context for the year to date is important. I mean, every one of those stocks have handily beat the S&P 500, Amazon up 80% year to date. So there are some high expectations in there, maybe just a little bit more, you know, based in reason right now than they were six weeks ago.

SEANA SMITH: Jason, how much of that regulatory risk has already been priced into these stocks? Dan Roberts was talking about it at the top of the show. I mean, it's more specifically when it comes to Facebook and Twitter. Well, they have been the two names under fire over the last 48 hours.

But of course, you can also push it out to Google and Apple and Amazon and what we've seen there. I mean, how much of a concern is that for the stock heading forward, or is it already baked in?

JASON WARE: Yeah, that's a great question. And I think, by and large, it's baked in over the near term. We just had the House release their report from the Judiciary subcommittee, 449 pages of recommendations on what they would do to help tamp down some of the monopolistic powers that they see that these five large tech companies have. I think that's been well digested by the markets.

I think, you know, we certainly have pending investigations from FTC and DOJ on Google and Facebook. And I think those are our near-term uncertainties that have kept those stocks a little bit on a short leash relative to Apple and Amazon.

But by and large, this is all fairly well understood by the markets. I don't think anyone expects any major break ups. We certainly don't over the next 6 to 12 months, let's say-- probably not over the next three to five years, to be honest with you. But I think at this point, you know, they're going to trade on how the stocks are doing amid a pandemic and what the growth looks like for 2021. And right now, that setup looks pretty good.

INES FERRE: Jason, I had a question about the streaming stocks because at Netflix, there's been a lot of analysts that have come out recently, or various, very bullish on Netflix ahead of its earnings on the 20th, basically talking about subs and about a price increase in the future that subscribers would absorb just fine. And even after the stay-at-home restrictions ease, that they would still stay with Netflix.

You even had Disney this week that had announced that it was going to focus more on Disney Plus, and that day, Disney was up more than 3%, and Netflix was up more than 2%. So is this-- when it comes to streaming, is it Netflix world, and everyone else is just in it? Or are there other stocks that we should be also looking at as far as streaming is concerned?

JASON WARE: Yeah, I mean, I think Netflix is clearly the established leader. They have a multi-year headstart over the other players that are trying to jockey for position. We own Disney for clients. So we celebrate the recent reorganization announcement because we think it puts a more dedicated focus on what the growth story for Disney is. And that is their streaming service, Disney Plus, et cetera.

Disney is clearly in the number two position, and it's nipping at Netflix's heels. I mean, if you look at the growth rate of their streaming subscribers, it's just been unbelievable. I mean, they're north of 100 million subscribers, about 60 something million of those with Disney Plus, in less than 12 months. It took Netflix, I think, five to seven years to get to that level.

So Disney has huge content library, arguably the most impressive content library, and are well capitalized with some of the smartest people and media working for that company. So we think that Disney represents a nice undervalued play on streaming. It's not getting the multiple that Netflix has. It probably never will, given the parks and resorts business and the consumer business.

But even if you rerate that stock up five turns on a PE, that's a good looking return, you know, once we get out of this pandemic and if they can really turn on that Disney Plus, which we think they will.

SEANA SMITH: All right, Jason Ware of Albion Financial Group, great to have you back. We'll talk to you soon.

JASON WARE: Thanks, guys.