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Dan Niles on approach to investing amid coronavirus

Satori Fund Founder & Portfolio Manager Dan Niles joins Yahoo Finance’s Zack Guzman to discuss his market outlook amid the coronavirus pandemic and his approach to investing.

Video Transcript

ZACK GUZMAN: But of course, today, the big news was to Dr. Anthony Fauci, giving the update to the Senate here, talking about the risks associated with reopening economies too quickly, warning that it could lead to suffering and death for Americans across the country that could set us back on the overall road to getting the economy back to normal, which is something that he's been warning about. You never want to see the clock move back rather than going forward, he said.

And of course, we've also been watching the president weighing in on all this as well, as he focuses on getting the economy back up to normal. We've already seen the fed move with an unprecedented amount of action to come in here as the economy has ground to a halt, and we've hit record levels of unemployment here week over week as we continue to track unemployment claims. But of course, the Fed has moved into buying junk bonds today with their purchases, scooping up ETFs that do have exposure to some non-investment grade bonds out there, something that we haven't seen before. And today, President Trump also urging the Fed to take even more drastic measures, calling on the Fed to weigh the proposal of negative interest rates.

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His tweet this morning read, quote, "as long as other countries are receiving the benefit of negative rates, the USA should also accept the gift. Big numbers." For more on the unprecedented action that we've seen from the federal government here to come in and support the economy and by extension here, the stock market as well, I want to get to our first guest today. We've had him on about a month ago, notably up for the first quarter-- his fund is up in April and up in May. So how has he been able to do all that? Well, let's ask him. Dan Niles joins us now, Satori Fund manager-- Satori Fund founder and portfolio manager.

And Dan, it's been a bit since we had you on the show. Last time, you were warning about potential-- the potential for a bear market trap here. And we looked at the recovery off those March lows, that necessarily hadn't materialized here. But you're still raising the question it seems like the market's grappling with how effective the unprecedented action from the Fed might be in battling the unprecedented slowdown we're seeing play out right now. So how are you looking at it in terms of where we go from here?

DAN NILES: Sure. Thanks, Zack. Yeah, when we look at sort of how do you set up bear market trap, it sort of occurs the same way, right? Where you have the government and the Federal Reserve step in and put in a lot of stimulus. If you look at it, there's about 8 trillion in stimulus or a roughly 40% of GDP that's been put into the market. And if you look at it just from the Fed standpoint, their balance sheet is gone from 4.2 trillion at the end of calendar '19 to 6.7 trillion by April 30. So that's up 60% in just four months.

And so the market has bounced, the S&P gone up about 30%. But if you look at this historically, this was the fastest drop from peak to down 30% in history, including the Great Depression. And so the fact that you've gotten these really large bounce in some ways is not surprising if you, again, sort of look at the Great Depression. And we've got some of these statistics on my website, DanNiles.com or my Twitter handle @DanielTNiles.

During the Great Depression, you had a rally that averaged 24% on your way to losing 86% of your money over 33 months. And so, you know, it's great that all of this stimulus has gotten the market the bounce, but valuations are at incredibly high levels. And if the economy doesn't open up smoothly with valuations sitting at these current levels, you could have a really large problem. And you referred to that your opening comments on what Dr. Fauci was saying to Congress.

ZACK GUZMAN: Yeah, I mean, when we look at that, I mean, that has been kind of the main question here-- is if we do potentially see another rise in cases of states open up in there, there could be potential for that as people return to work if they do that. When we look at that, though, I mean, how right now has the market has been pricing in the rebound that we've seen here? We think about the fact that the Nasdaq has now up year to date perfection on the front of reopening the economy. Because what happens in your mind if maybe the market's pricing in perfection here, and we do see some states run into some problems that Dr. Fauci, as you said, was talking about today-- what happens then and how do you see the market reacting to that?

DAN NILES: Yeah. And that's a great question. And, you know, as you talked about in your comments, the real problem here is you're sort of pricing in perfection, in my mind. Because if you look at it from a risk standpoint-- and the way I think about it is, well, what valuation are you paying for the market or stocks in general? If you look at it from a very basic measure, which is market cap for the entire United States stock market divided by GDP, that number today, if you adjust for the fact that GDP is going to be down about 20% in the second quarter, but the market's only down about 10% from the beginning of the year-- that market cap to GDP figures is going to be about 1.6 times.

Now to put that in perspective, the average of the last 50 years is about 0.8. So half these levels. And when the market bottomed in March of '09, it was about 0.55. So if anything goes wrong, the market can go down quite a bit just to get back to an average level and obviously, even a lot farther down to get to 0.55.

The other thing that I think people are forgetting is we really started to lay in a lot of these job losses only starting in mid-March. We've laid off about 33.5 million people in seven weeks. The prior record in any one week was $700,000. And so that impact is really going to be felt in the second quarter, because you only really have that affecting demand for the last two weeks of Q1. You're going to have it for a good portion of Q2.

And in addition to that, obviously, you had some demand pulled forward. I mean, you and I are doing this conversation by phone. We were hoping to do it by the internet. The internet is down in my area, et cetera. And, you know, we've got all of these stresses being put on the mobile or remote working infrastructure. And so people bought a lot of PCs and portables, networking gear, et cetera. Well, that's not stuff you're going to need to buy in the third and fourth quarter. And so some of that demand has been pulled forward. It's going to look really bad when you get to the back half of the year, and that's not something I think people are spending enough time thinking about, either.

ZACK GUZMAN: Yeah. And you know, it's interesting too, because I'm kind of-- I'm kind of tired, if I could be frank here, about the discussions that everyone comes on shows, talks about what's the shape of the recovery we're going to witness here. Because if anything, I think your fund's performance points to the fact that right now is a time to really be focusing on individual names, because each one of these companies is going to be recovering. And some might not even need to recover all that much here when we think about what they've done and how some have benefited from people shifting into the work from home environment that you're describing there.

So when we look at it, there has been some issues raised about the way that tech has been leading the overall market. And Goldman Sachs has raised the issues about how we haven't seen them carrying these gains in the S&P since basically, the big tech bubble that we saw play out here, and they raised issues with that. So I mean, we're looking into some of these companies right now-- how are you looking at the ways that even if there are some of these issues that you're talking about in Q3, Q4-- some return of cases here that might make people have to stay home for longer-- how are you looking at positioning yourself a round some of these individual names?

I know you like Activision, because that was a company that was doing well before all this happened, and then the one that's continues to do well as people stay home so what are you looking at in individual names here in trying to play this volatility?

DAN NILES: Sure. So we have sort of a three pronged investment portfolio the first one is names we think will benefit long term with or without COVID. And so you brought up Activision. And it's a name we've like since late last year. And the thing, when we look at the gaming companies in general, is you have a new console cycle from Sony and Microsoft. This is the first brand new console since 2013, so seven years. So there's a lot of pent up demand for that.

The second thing that's interesting is you have streaming services coming out, which will allow you to play video games now on your PCs or your cell phones or tablets. This is an installed base of about 5 billion devices can do that. For consoles, there's only about 150 million. So we think the gaming companies will do well regardless of what the environment looks like. We liked them before COVID, we like them now, we like them going especially into the end of the year.

E-commerce, we liked Amazon before. We liked it even better during COVID. And they've gained a lot of customers during this process. I mean, it's estimated about 40% to 45% of the brands didn't sell products on Amazon at all. A third of them really didn't think they needed to use Amazon to reach their customers. Obviously, when all the retail stores were shut down, this was something people needed. Work from home, things like that.

But the second prong is, you know, as you sort of sit there and you think about it, you go, what companies have been hurt by COVID, but that might actually have portions of their businesses that are benefiting underneath that? And so in that sort of bucket, we put some of the media companies. We talked about on our Twitter handle @DanielTNiles, we talked about how we-- talked about Disney, which was a name we were actually short from mid-February on, because obviously, they have theme parks, they have movies. Nobody can go to either of those.

But the interesting thing is they have 55 million Disney streaming subscribers. They just opened that service four months ago in November or you know, whatever five, six months ago in November. And their target was to get to 60 million to 90 million subscribers by 2024. So they're almost four years early in reaching those targets.

Viacom is the name we bought before they reported. They have a streaming service, as well. That was a 50% year over year to almost 470 million in revenues.

ZACK GUZMAN: Yeah.

DAN NILES: And so those are names-- and gambling. Draft Kings was a name that we bought, because while there's no sports to wager on, but everybody is going to go online. And so we thought, OK, that's a name that could potentially benefit from this. And so that's the second prong.

And the third, obviously, is shorts, where we say, OK, if you bought a PC today, you're not going to need one in the third or fourth quarter. If you bought networking gear, et cetera, if you're an IT services company, and you have to send people physically to a location, well, clearly, you're not doing that. And so that's sort of the third bucket where we have a whole bunch of shorts that we think there's still a lot of risk in those names. And that's kind of how we're positioning the portfolio.

And we only have generally 20 to 40 names that any one time. So for us, it's more important to get the stocks right as opposed to, well, if the market is going to go up a bunch or down a bunch, if you can get the right stocks.

ZACK GUZMAN: [INAUDIBLE], here too, because I guess you have a new opportunity here today with the news that we're getting on Grubhub to put one of those companies in your second bucket, one that might be benefiting here as more people order food for delivery. What's your take on Grubhub and Uber's potential here to team up with them to be the largest company in the food delivery space-- of course, DoorDash still their, competition, as well.

DAN NILES: Yeah, and you're bring up a really good point, right? There's a lot of competition. So if you look at me for example, we're obviously ordering a lot of delivery service, because no restaurants are open, right? And we're using Grubhub, DoorDash, [INAUDIBLE], Uber Eats, and you know, there's a couple of more. And it drives me crazy, because you're, like, some restaurants are on one service, but they're not on another. And so you're constantly trying to figure out, well, which one do I need to get to order from which restaurant? And none of them really make any money.

So there's too much competition. There's not enough product. You're going to need to see some consolidation in the space. We're not involved in either Uber or Grubhub right now, because quite honestly, because there is no profitability, if the merger doesn't happen, you can see their stock come back down just as quickly. But all of the players in that home delivery space have talked about the fact there needs to be consolidation. But you have to remember-- there's not much profits in it.

So for us, we've looked at the internet we sort of approached it differently and said, you know what, advertising's been terrible. And so Facebook has gone from 24% growth in the fourth quarter to they exited March at about 12% growth. But that's still much better than what we would have expected, and people are using Facebook to stay connected with everybody else compared to, like, Google search for example. That went from plus 17% growth to minus 15% growth when they exited March.

And so Facebook is another name we've sort of added to the portfolio saying, you know, if the economy opens up, people will advertise more. In the meantime, if they don't, you're going to use it to keep in touch with people, and you've seen it in their numbers. I mean, you compare that against Twitter. Twitter was going 11% in the fourth quarter. They exited March at minus 27. So it sort of shows how strong Facebook is, relatively.

And so that's sort of in the internet space. You know, Facebook makes a lot of money, a lot of profits, great cash flow, and you get it at a really decent valuation relative to the market. And so that's where we're sort of putting money to work with. You know, with Uber and Grubhub having spiked today, if nothing happens, it could come down pretty quickly as well. And so if not, risk adjusted-- you know, if you were there already, that's great. You're not there, I'm not sure that right now is when I'd necessarily be wanting to jump in, because from a risk adjusted basis, there's other names, you know, I like better, I guess, the best way to put it.

ZACK GUZMAN: Yeah, I mean, that's exactly why we have you on to talk about the names that you do like better and the opportunities that are there. But Dan Niles, Satori Fund founder and portfolio manager. Always appreciate you coming on. And good luck with the second Satori Fund, also-- Satori 2 coming out later this year. Appreciate you take the time, sir.

DAN NILES: I appreciate it, Zack. Thank you.