Stocks fall on final trading day of Q1

Girard CIO Tim Chubb joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss the latest market action.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to welcome Tim Chubb, CIO of Girard. Tim, good to see you. Thanks so much for being with us. Tim, we were talking to Gabriela Santos of JP Morgan just before this segment, and we were talking about what a recovery is going to look like. I know we're sort of putting the cart before the horse here, but we're already talking about a possible recovery. Trying to stay positive.

When we get that, are you seeing that more as U-shape, a W, a V? I know we're throwing a lot of letters out there. She seemed to think we're going to have a U-shaped recovery. What are your thoughts?

TIM CHUBB: Yeah, and good morning. I tend to agree. I think ultimately the shape of recovery is going to depend on science whether we see a reacceleration in the contagion. How will the countries start to normalize? What will normalization look like here in the United States as we approach summer and hopefully see cases start to peak, I think, will all depend upon the shape of the economic recovery.

The good news that we've seen-- I'm sure was mentioned in previous segments-- is that, you know, within the last week as we've seen markets bottom, we've gotten a ton of confidence and reassurance from both the Federal Reserve and Congress that the stimulus package that should hopefully provide enough relief for those businesses and consumers most economically sensitive so that they can come out on the other side in a better position than they would had it not been available.

BRIAN SOZZI: Tim, Brian Sozzi here. What don't you like about this rally we've seen off the lows?

TIM CHUBB: I think it's a bit of a bear market trap here. You know, we had fallen obviously very far very fast. I think, you know, what we've seen in the last couple days, we've sort of come up too quickly. I think it's a lot of rebalancing. We've heard about, you know, pensions looking to do rebalancing, the [INAUDIBLE] looking to do rebalancing before a quarter end. I think there's probably quite a bit of short covering, and I don't think there has been enough news outside of what I've just mentioned related to serious progress with cases flattening here within the United States to get really excited about us finding more of a floor and, I guess, a trading range that's going to be a little bit more normal.

ALEXIS CHRISTOFOROUS: Tim, what is your base case for second half of the year? And when we do get that recovery, what are you going to be looking at in terms of picking sectors and/or stocks?

TIM CHUBB: Sure. Yeah, I think in the second half of the year, as I mentioned, I think that the sheep the recovery's largely going to be dependent upon, you know, the science behind all this. Will we have-- not a vaccine, but some reasonable therapies that are going to be effective? Are we going to have the consumer comfortable with getting out to restaurants again? And so I'm taking a bit more of a cautious view.

Our firm still really focuses on quality. That had been the case last time I was on the segment talking about some of these large secular growth stories that we've seen, not just here in the United States, but globally. And I think investors who can focus on high quality technology companies, who are-- have cash rich balance sheets, asset light load debt, who can make acquisitions, take away talent from other firms during an environment like this, as well as some of the companies, you know, maybe in the utility space, which had lagged, even the index going into this week.

And so, again, we take a bit of a cautious view. We don't anticipate changing our sector neutral stance at the moment. And I think we're going to really-- not really look to get too excited about some of these cyclical high beta companies, which seemingly have still priced in a V-shaped recovery.

BRIAN SOZZI: Tim, you mention you're taking a cautious stance. Do you still trust dividend payouts from companies? Over the past couple of weeks, we've seen a lot of reputable companies draw down their credit revolvers, boost up their balance sheets, and completely slash dividends. And I think one outcome from the coronavirus situation is that corporate America may not be the same, and these years of steadily rising dividends might be over.

TIM CHUBB: Yeah, that's a great point. And I think there's a lot of companies out there who have decided to obviously put the shareholder first and foremost, but they had overextended themselves with dividend payouts. They had overextended themselves with share buybacks.

And the good thing about share buybacks is they're discretionary. You know, the markets aren't going to penalize a company that holds back on share buybacks. Although, arguably now is really the time to be doing that when stock prices were [INAUDIBLE] highs about-- down about 35%.

As far as dividends are concerned, I mean, we had seen dividend growth in the high single digits, the double digits for many, many years in a 2% world. And so while we've certainly seen investors get attracted to the stocks for these reasons, the dividend yield for many years was hanging in there around 1.9% to 2% in an environment where yields were much lower than that sometimes. I think there is a day of reckoning coming for a lot of these companies who haven't reinvested back in their business appropriately. We're not good capital allocators.

And ultimately, I think this will only contribute to growth continuing to outperform value longer term because many of these value-oriented companies-- in consumer staples, I would say banks were probably the exception, but definitely energy companies-- haven't prepared for an environment like this. And, of course, you know, no one was preparing for a contagion spreading across the globe as a result of a biological crisis. But they certainly didn't have their affairs in order and had made smart capital allocation decisions within the last decade.

ALEXIS CHRISTOFOROUS: You know, today, of course, is the last day of the quarter. We're not expecting good news. We're expecting the second quarter to be even worse. Jared Blikre, you've got a heat map, a look at what the first quarter is shaping up to be. What have you got?

JARED BLIKRE: That's right, Alexis, and I'm just trying to pull this up on the YFi interactive heat map, which is hung right now. So I'm not going to be able to show you what's going on, but, as you can imagine, a lot of the sectors and stocks, very, very few in the green right now. I'll see if I can reset this and maybe get back to it in a little bit.

ALEXIS CHRISTOFOROUS: All right. Hey, Tim, I'll go back to you. What about health care in terms of sectors? We've seen a lot of stocks that have something to do with either treatment or trying to find a vaccine being embraced by investors. Is this a sector that you, too, are embracing? And do you think that as we continue on throughout the year, we might even see some merger activity within health care?

TIM CHUBB: Yeah, health care is definitely a sector which coming into this, you know, I guess, month or two had been really pretty attractive. The sector overall had sold off from the fear that we would see a presidential candidate who was seeking Medicare for all. Typically, health care has lagged during years leading into an election due to some of the fears that would result in changes to the health care system [INAUDIBLE] on its states, and so it came in looking relatively attractive.

I think there was a lot of opportunities. And what we've seen so far this week is, to your point, a lot of blue chip companies, health care companies included, looking out, looking at the raised debt to be acquisitive during this environment. Maybe it's raising debt to support a dividend and sustain their business, but I definitely think that as a result of this, we're going to see a lot of M&A activity in health care and beyond as we look and see which companies were most vulnerable to a recession.

BRIAN SOZZI: You know, Tim, how-- do you think buybacks are dead moving forward? I mean, how absurd is this activity of all these companies drawing down credit revolvers, in some cases, ready to take some of this relief money from the government? How can you go back in this market here and buyback your stock or your cash?

TIM CHUBB: Yeah, this is a great question. I think, I mean, we saw Starbucks come out and say this. You know, they are, I think, in a pretty good financial position mentioning that they want to come back and buy back some stock in this environment. But, you know, ultimately, these companies can be strong capital allocators, whether it's paying a dividend, buying back stock, paying down debt, reinvesting back in their business, putting some cash on the sidelines for a rainy day, or making an acquisition.

I think investors-- and maybe this is a function of a world where lots of money has flown in the past of vehicles that we just haven't been as considerate of what these companies are doing with their free cash flow. I think, you know, buybacks probably aren't dead. It's a great way to compensate shareholders, but I think they're going to be looked at much more critically. And I think the good news, like I said with buybacks, is that they're discretionary.

The markets are not going to penalize a company whose pulling back on buybacks, unlike what the [INAUDIBLE] would look like if they were to pull back on a dividend. So I guess, of course, they could have raised dividends at a higher rate. But, again, I think investors coming down to this environment, I definitely think it's going to be something, a subject that we'll continue to hear about down in Washington as it relates to just how much a company can buy back stock and maybe we have some additional guidelines around that or at least investor pressure so that, you know, companies are, again, being better capital allocators for their shareholders.

ALEXIS CHRISTOFOROUS: Yeah, and I agree with you, Tim. Not the last we've heard on Capitol Hill regarding this, especially in an election year. I believe Jared Blikre is back with the heat map. Jared.

JARED BLIKRE: That is correct. All right. So we're going to take a look at the NASDAQ 100, which is a year to date or quarter to date. And we can see a lot of red on the screen. In the bottom right, we have WYNN, which is down 56% followed by the airline American Airline, Marriott, Expedia, all with about down 50%.

In the upper left, we see a few green names like Citrix Systems and Regeneron. These are kind of coronavirus plays. But just take a look what happens if we look over the last six days from the bottom. It's just about the opposite.

We've seen a lot of value and cyclicals rally outperforming the rest of the market. Just something to think about here. Not necessarily the best company to keep when you're rallying off these lows like this, but some of these gains are really impressive.

ALEXIS CHRISTOFOROUS: All right. Jared Blikre, thank you. Also want to thank Tim Chubb, CIO at Girard, great to have you both with us.