Adam Coons, Portfolio Manager at Winthrop Capital Management, talks about the last jobs data, and breaks down the future of social media and tech platforms.

Opening Bell

U.S. Adds Over 467,000 Jobs in January, While Unemployment Rate Rises to 4%

I'm joined by adam coons portfolio manager at Winthrop Capital Management. Adam, I just want to see kind of what you think is moving the market most today and certainly will get into the jobs numbers and other kind of factors. Personal. Thanks for having me. Yeah, I mean, I think the theme continues to be volatility here in 2022. So we think that's going to remain and we're gonna see companies continue, uh, to become more bifurcated where we're gonna have more winners and losers. So the, the era of the 24,021 were, you know, you could buy any tech stock and, and it was going to go up. I think that's come to an end unless you're buying snap right yesterday and up about 60% whoever bought snap yesterday. I thought about them last night, they had a really good night before we get to kind of actual earnings. Um, want to get your thoughts on the labor report and the number that we got out this morning. How are investors digesting that? Because I think on one end, it shows an optimistic picture kind of robust return to the workforce. And we know literally the number one thing aside from side to supply chain issues that has been noted on many earnings over the last a week or so has been this labor shortage impact. On the other hand though, um, this does kind of point to a Fed kind of having a clear path and no hesitation to proceed as expected in terms of a rate hike in March. Yeah, 460,000, 467,000 new jobs is a, is a great number. But yeah, it's, it's, it's one of those dynamics where, uh, good news and the economy is, is bad news for the markets right now because good news means that the Fed is likely going to continue a path of tightening and so markets are not liking that right now. You're seeing interest rates rise quite a bit on the news as well. So no surprise that you're, you're seeing the market fall a little bit here and even more. So you're seeing tech stocks that have been, you know, more sensitive to interest rates declining today despite snap and amazon's and you know, stellar earnings. Yeah. Speaking on some of the earnings this week, let's, let's just start with like the tech names, right. How do you kind of manage some of these big tech names, You got meta that reported earnings a major beat, kind of losing $200 billion plus in market cap over the last 48 hours, sucker himself kind of losing about $30 billion in his own kind of wealth. But then you got snapped yesterday, Similar issues of the IOS kind of privacy issues, but just jumping as much as 6, 60%, essentially kind of erasing the losses that it saw after its previous earnings report and then after the pullback that it saw yesterday really on the news of Metas losses. Yeah, I think the thing that's gonna be different this year is, you're gonna see more and more of this, we're going to see the winners and the losers become more divided. So even going back further where we saw Apple's earnings or we saw alphabet earlier this week. So the same thing alphabet added 200 billion market cap. Um, you know, with their earnings and, and they are just fantastic. And you know, they're obviously not leveraged to IOS, but then we saw facebook or meta blame IOS for some of the issues. I think, I think we're seeing that's just kind of a narrative and, and that's what we're seeing out of snap. Is that what's really happening is that the social media stocks are becoming more divided and the usage um, is just shifting. So we're seeing, you know, Tiktok is, is, you know, a big thing and, and Snapchat as well. And in facebook instagram is just, you know, it's becoming less popular now, whether that trend is gonna continue. Um, who knows, these things tend to shift pretty quickly and abruptly. Um, but with meta really what they're doing is they're shifting their business model in a different direction that's costing them a lot of money, which is a, creating a giant uncertainty. So for the stock to be down 25%. I think that that was an aggressive move. Um, but when you've got investors who don't know what the company is going to be in 5 to 10 years, it should be expected. You're going to see more and more stocks as they shift their business model have big swings either up or down. And so, you know, that's gonna continue to feed this volatility beast that we've got in the market right now. Yeah, You also have the added layer investors just trying to factor in the fact that the cost of capital, especially with these interest rate hikes is going to be more expensive. And when you're a company that's kind of pouring in billions of dollars essentially towards a division that could be profitable, that could be the future. But that future is a far away away as you kind of understand, some of the pull back with your, um, kind of inside there. And really everyone that we've talked to, this may be a more dramatic pullback than necessary for me to want to pivot though to amazon those numbers obviously coming out also after the bell yesterday, a nice beat for Andy Jassy, you know, one. And I think the high points were amazon that a lot of investors Or have excitement for, I don't know if consumers have excitement for this as much is prime fees that going up to $139 a year. I've heard some, some people even say, um, earlier this morning that they truly have the pricing power to potentially go as high as $200. Um, what do you make of Amazon's pricing power? It's strong. And I think when you look at it now, it's even even stronger in the fact that they have built up their supply chain to withstand a lot of the issues. So that's where they've separated themselves from the crowd. They did it, they've done it, you know, time and time again. Obviously, they kind of started this trend towards online consuming, um, and they continue to innovate. And one of the things they've done is they've gone and they bought their own containers, they bought their own renting their own container ships, they're, they're renting planes. And so they're getting into the logistics business, which is helping them withstand this storm of supply chain issues. So, you know, if you're ordering something on amazon for the most part, you're not having as much trouble getting those products as you are, if you're ordering from someplace else. So that does give them, give them tremendous, uh, you know, purchasing power and so they can, they can push us on to the consumer. And I agree, I think most consumers would stick with amazon prime probably at higher prices. You might lose a few people, but that's going to be offset by the higher price, Get a focus for investors when it comes to amazon was really around, um, it's cloud services. What's your thoughts there? Yeah. So, I mean, you know, cloud services is, it's tough to wrap your head around how large that market can get. And it seems like you've got a lot of players entering, but you still have, you know, the big three, you've got a W s, you've got Microsoft and then google and their earnings, you can see that they're growing. But while the pieces of the pie are shifting a little bit that Pie continues to grow and so we think that's going to continue, especially as the dynamics of the pandemic and people working from home, that's going to accelerate that. And so, you know, we think this is something that's gonna withstand for quite a while and all three of those competitors can, can operate and be successful on their own as the entire, you know, just like I said, Pie grows two sectors before I have to let you go here, I wanna get your thoughts on two sectors in specific financials and energy really going into this year, so many people were pointing to those being the bright spots, energy that has been proven, but financials haven't kind of been up as much as one would think, just given kind of, um, the environment with the rate hikes, they'll be all that being said, I think it is up around 8/10 of a percent in the last four weeks. Is there any concern though there in terms of profit margins, whether they're gonna grow at the same rate come March. Um, and why, what's your thoughts on why they haven't been up more given um, kind of, that you would think banks are set to benefit from higher interest rates. So the problem with, with banks this year has been the actual shape of the yield curve. So while interest rates on the short term are up dramatically, the long end of the curve has remained somewhat stable relatives. So you've seen the curve flattened from 100 and 60 basis points to 59 basis points on the Tuesday 10 year uh, curve. So that, that in itself is a negative for banks. And we believe that if the Fed continues to raise short term rates, uh, there's long end rates are probably anchored due to long term growth prospects being, you know, lower. So that curve is gonna continue to flatten. And if the Fed moves to aggressively, they could invert the curve. And all of those are scenarios that are not good for banks. So that's, that's why the performance and banks has not been as good as probably what some people expected. And, and frankly, from our viewpoint, we think that's going to continue. We think financials ultimately will underperform the market this year. One kind of certain bright spots, bright spot for the market has been energy consistently this year, up right around 22% in the last four weeks oil topping that $90 a barrel kind of threshold for the first time since 2014. And there's just been this growing consensus around the likelihood of seeing $100 a barrel in the future, what do you make of energies run over the last kind of three months? And, and do you see kind of these longer term challenges? When do you see some of these longer term challenges potentially impacting the industry? Yeah, I think, I think we're probably going to hit that here soon. So we're taking the opposite view on energy. And so you're seeing supply actually increase at the same time, you're seeing consumer sentiment drop and you're seeing consumer savings rates go back to pre pandemic levels down towards 7%. So with those ingredients, uh, that is a recipe for energy prices to actually decline. And so we think, you know, heading into the second half of the year, we'll probably start to see energy prices come down and and with that, you obviously see energy stocks underperform. So we think that they've kind of run as far as they can right now. Um, and so ultimately we're, we're kind of reducing our positions and energy right now with the the out performance so far this year, interesting kind of opposite take their of a good insight along with it. Um, what industries do you see kind of with the greatest growth potential moving forward amid this kind of consistent volatility and a lot of factors, macroeconomic factors and investors are having to deal with this year? Yeah. So I think you want to focus on companies that have low leverage or higher quality, um, but still showing some growth and, and while these names have become quite a bit boring, I think, you know, they're proving that they can withstand both economic pressures and interest rate pressures and those would be your apple alphabet Microsoft. Uh, those, those are stocks that just have great business models that continue to generate an enormous amount of free cash flow and at the same time have really low debt. So those should withstand any storm out of the Fed or even an economic downturn. So, Um, that that's where we're really focused. And then secondarily, we still like Chinese technology companies, we've seen those outperform so far here in 2022 and we think that's going to continue. I think a lot of the issues in China are proving that they've kind of washed themselves out. So companies like 10cent Baidu, we also like on in the technology sector. How do you play China then? Because I think there is still that continued concern around the regulatory environment and the uncertainty that we have really seen in China for the greater part of 2021. Yeah, I mean, I think, look, all investing is, has some level uncertainty facebook proves that in itself. Um, so what you do is when you're going into stocks that have more external issues like regulatory issues, is that you just position accordingly. These aren't positions that you have is your number one holding in your portfolio. But uh you know, we are incrementally adding uh if we saw declines, but we're we're positioning them and the sizing of those positions are at least half of that. What we would in the U. S. Counterpart, phenomenal insight really appreciate your time adam coons portfolio manager at Winthrop Capital Management.