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Retail stocks: ‘There’s no safe haven,’ strategist says

CAPTRUST Director of Investments Christian Ledoux and ERShares COO Eva Ados join Yahoo Finance Live to talk about the market outlook amid sell-offs, retail stocks, how the Fed is viewing future interest rate hikes, and rises in energy and food prices.

Video transcript

[BELL RINGING]

SEANA SMITH: Stocks taking a leg lower here, as we shake out the final trades of the day. All three of the major averages ending in the red once again. You can see the Dow off 237 points. Remember, the Dow falling on the heels of its worst day that we have seen since 2020. S&P moving to the downside and the NASDAQ off another a quarter of a percent.

We want to break all of this down with Christian Ledoux. He's CAPTRUST Director of Investments. We also have Eva Ados, ERShare Chief Operating Officer.

Ava, let me start with you. When you take a look at today's leg lower, albeit very mild compared to the selling action that we saw yesterday, but certainly there has been a lot of fear creeping back into the market. Where do you think we're heading from here?

EVA ADOS: Well, unfortunately there's no safe haven. When we see the news that came out of consumer discretionary and staples yesterday, with Target and Walmart and Costco, that shows the struggles that companies have regardless of their size. And ironically, these are the sectors, staples and consumer discretionary, that are viewed as safe havens in a bad economic market.

And so we are seeing these valuations, these retailers have appreciated tremendously over the last two years. In fact, Walmart and Target on a price per earnings adjusted for growth ratio, PEG ratio, have double to triple the PEG ratio of Nvidia. So these guys are way to the moon, and we will see even the conservative companies drop tremendously over the following months.

- Christian, Eva says there is no safe haven. Your notes say zig when others are zagging. But towards what?

CHRISTIAN LEDOUX: Well, look at what's not been working for a long time. And one example would be a homebuilder. And yes, the data now is just starting to turn down. But these are stocks that peaked almost a year ago. So we already have built in a lot of what's coming in a cyclical downturn in homebuilding already. That's a group that can trade as low as 3 and 1/2 times earnings.

And yes, you'll say those earnings are poised to decline. But this group has done a much better job since the last recession of protecting the downside. They take options on land instead of buying the land outright. And if we see a sign that rates are going to come back down as we go into maybe a recession, we could see that that group gets a little bit more buying activity. We're still structurally undersupplied in homes.

- And Eva, you mentioned in your notes, as we look at what's been happening with this asset bubble that we've been seeing, were we due for this correction, and is it time to buy the dip, as a lot of retail investors are wondering, is now a good time for me to come in?

EVA ADOS: Well, my advice will be to not follow the go-to stock. So we listen all the time about Apple and Amazon and Target. And these are the big companies that everyone is getting into just because we're in a recessionary market. But ironically, when you sell the queues, when the institutions are setting the queues, that because of their high weight in the queues, they're the ones that drop a lot compared to the others.

So I think investors have to go off the beaten path and look for opportunities and really do their home their homework and study the companies. And I think we might see again the retail investor making better investment decisions than the institutions, just like we saw in the pandemic, just because these are the people who actually look at companies and they just don't go to the high profile mega caps that we speak a lot on business TV.

SEANA SMITH: So Eva, I don't know if you could say specific names, but I guess when they are looking to identify some of those names, what is in that criteria?

EVA ADOS: So steady margins. And that's the tricky thing here with inflation, because you have the top line, and you have to look on both the top line and the bottom line. And as we are seeing, many companies are now struggling with SG&A costs. And you also want to see if a company in the tech sector, for example, is not profitable, you want to see sufficient cash balances that can take them through their R&D cycle, or at least to break even. So you really need to see these cash balances there and also profitability, ideally, and, of course, good growth.

- Christian, in these earnings reports we've seen in the last couple of days, are we seeing demand begin to wane? And if so, how does it change the job the Fed thinks they need to do?

CHRISTIAN LEDOUX: Well, good question. Because those retailers from yesterday brought up some potentially deflationary data. We saw retailers trying desperately to catch up to consumer demand by ordering a lot of goods. It took a long time to get through supply chains but it's finally hit the store shelves. And now they're finding they have a little bit too much.

So we could see a deflationary effect on some of the CPI elements coming in the future months. And if that does indeed come through, the Fed may feel a lot more comfortable going slower or even stopping at a lower interest rate point sometime in the future.

- So Eva, then, as we look at some of these recession fears and inflation fears that the market has already priced in, what signals are you watching for so you can decipher the noise from the clear signals about where the market is headed from here?

EVA ADOS: So we are very focused on food prices. Because out of the three primary factors that drive inflation, between wages and energy prices and food costs, food costs are the most concerning to us. When it comes to energy prices, the supply of Russian oil has not really diminished. It was sold to India, who is refining it and then reselling it to Europe. And so you also have more producers now coming into play. They're boosting their production. So we think we'll see some relief there and prices stabilize.

When it comes to wages, you are already seeing a lot of layoffs. So that will be a relief there too. But food costs, unfortunately, with the Ukraine basket going away, with Russia blocking the existing grain storage that the Ukrainians have, and with the droughts globally, this is the biggest concern to us which we believe will keep prices high and inflation above 6%.

SEANA SMITH: What do you think, Christian? Do you agree?

CHRISTIAN LEDOUX: Well, some of those elements are absolutely true that Eva put out there. I don't see energy or food prices coming down anytime soon. But what you might see that could be enough to get the aggregate inflation down lower is those items can crowd out other consumer spending.

Right now we're seeing a big spike in hotels and other leisure, as people finally get out from the pandemic doldrums. And that may be short lived if people can't afford to put food on their plate or fill their tank. So these are items that I would expect the larger items of CPI, such as autos, consumer goods, travel, these are going to probably be in a downward trajectory for the next six to nine months.

- Eva, you referenced some of those geopolitical events. Do you believe Europe is headed towards recession? And what's the trickle down here?

EVA ADOS: Yeah. Unfortunately, we think it's very likely that they're heading to a recessionary period, just because their proximity to Ukraine and also their dependence on Russian natural gas. And so we think the economy is not that strong. They were already heading into 2022 with a slower economy, and these factors now exacerbate the issues they have. Ironically, you don't see wages rise there, as we are seeing now, and that's because people are not optimistic about the economy.

And that might, of course, have a spillover effect to the US. So we might see that and the slowdown of China spillover to the US. But our base case for the US is that we're not going to have a recession at least in 2022.

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