Tech stocks taking a backseat in markets is 'healthy': Heritage Capital Pres.

Paul Schatz, Heritage Capital President joins the On the Move panel to discuss the tech stocks and the impact of COVID-19 on the markets.

Video Transcript

JULIE HYMAN: As you're thinking about both the sort of China headlines and the vying for TikTok headlines and the interplay here, does this highlight even more the market's, perhaps, over-reliance on large-cap tech.

I mean, is this China's situation a risk factor that the markets aren't paying enough attention to?

PAUL SCHATZ: Always good to be with you guys. My ter answer is absolutely not. I think Dan mentioned it, that this is just jockeying for a better price, or maybe Rick mentioned it. I want to give proper credit. But I think the whole thing is nonsense.

Trump's not gonna let it stay the way it is. We all know that. It's an election. He's jawboning. He's energizing his base. TikTok is not staying in the ownership of the Chinese.

I'll tell you that if I had to bet, I think Microsoft takes it at the end of the day. I don't think there's any debate about that. They want it. They'll take it. Cash. The price is irrelevant. I've been with you guys several times and your colleagues.

You know, July 13 to me was the seminal change in those five stocks, the large-cap tech. The big kind of dislocation that we haven't seen since the dot-com bubble. So do I think this is accelerating it?

No, I don't. We're long China and we're long Taiwan through ETFs, and I'm-- and we're sticking with that. And I've pulled back on my large-cap techs, as well. But I don't think this is the time to sell China. Absolutely not.

ADAM SHAPIRO: OK, Paul, as you pointed out and often do, markets can stay irrational longer than investors can stay solvent. So which is the greater threat right now for investors?

Is it the tech giants and the potential threats from China, or is it the own-- get our house in order here in the United States? Because we saw what happened over the weekend.

PAUL SCHATZ: Oh, I think it's certainly the latter? Listen, China is an economic threat. It was last decade, last century. No matter what we do, they're gonna become the largest economy on earth. And there's little we can do about that.

Sometime in the next five to 15 years, that's gonna happen. It's not an existential threat. That's just a threat to our global dominance, and as Americans, we don't like that. But in the here and now regarding the markets, the large-cap tech, this is not the dot-com bubble.

I've argued with this for months. Just because the tech stocks have gone vertical and because Microsoft and Apple own the S&P 500 and everything looks so bubble-esque, it doesn't mean it's-- bubbles are generational.

These companies have earnings. They're growing their earnings. They've got huge revenues. I just don't think in the next two to three to four or five years they're gonna be able to keep these valuations. But the companies, the fundamental basis, fine.

It's where they are in valuations. A terrible timing tool. But for my money right now, I would not be running into those five stocks. I think you're seeing today, you know, banks and industrials and materials and transports, they're all breaking out with the Dow and the small-caps.

And what's happening over the last couple of days, tech is taking a back seat. We should applaud this as healthy. And it's positive rotation into things that should come up a little bit.

DAN HOWLEY: But Paul, don't you see kind of the idea that maybe the valuations don't match up with the earnings? I mean, some of these big tech companies-- yes, I mean-- you know, OK, Microsoft, Apple, Amazon, sure, they have the fundamentals to back it up.

But, you know, you look at some of the others out there. I'm thinking something along the lines of newer companies, like an Uber, for instance. Those valuations are still way out there. But, you know, we're seeing how fundamentally these companies are being harmed.

So is it really just those, you know, small handfuls of the mega stocks that are kind of, I guess, inoculated against a bubble?

PAUL SCHATZ: Well, you can-- if-- if, if. If you push me and say, where are the bubbles? I mean, look what happened in Kodak, in Nikola, in that GNU genius stock. I mean, those were you know kind of insane, embarrassing day-trading overnight phenomena where everybody got crushed.

And they should get crushed. Seriously, there are consequences when the markets turn on you. Those great-- you know Microsoft, Facebook, Amazon. You guys know the list. Those stocks is where-- they are the most-- probably most crowded trades in the market.

Tesla was, but Tesla is not in the same class as Apple and the rest of them. So they don't-- those five stocks don't have to colla-- everyone's thinking they're eventually gonna collapse. They don't have to.

They could go sideways and then gently trend lower as earnings catch up. Walter Demir posted a great chart about McDonald's, as in the Nifty Fifty in the '70s today.

And as earnings went up the side of the page at a 45-degree angle after the Nifty Fifty was burst in January of '73, what happened? The stock price went sideways and down.

So the market will eventually catch up to the price action of these great five companies, but I don't think they're gonna become-- that they're gonna reward investors over the next 12 months vis-a-vis the other stock-- the other, you know, 4,000 stocks in that trade.

JULIE HYMAN: There are other stocks. Paul Schatz, thank you so much. It's always good to see you.

PAUL SCHATZ: Thank you. Yes, there are.

JULIE HYMAN: Heritage Capital president. Appreciate it.