Margin expansion to be a big story in the next several months: Portfolio Manager

Josh Wein, Portfolio Manager with Hennessy Funds, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss the latest economic data and outlook on the market.

Video transcript

KRISTIN MYERS: I want to keep this market conversation going with Josh Wein, portfolio manager with Hennessy Funds. So Josh, I want to start with some of the jobless claims numbers that came in. They fell to another pandemic low, better than expected. However, we of course had that huge miss on that headline print figure or the April jobs report. What do you make of the labor market right now and the economic recovery?

JOSH WEIN: Sure. Yeah, it's good to be with you. Yeah, I mean, we're getting encouraging news with jobless claims. And of course, the April report I think confused a lot of people, and I think it speaks to, in a time like this, it is hard to-- for an econometrician or an economist to forecast. And so now we realize that we're going in the right direction. There are some enormous speed bumps. And I think it's principally labor shortages.

And we hear about that now routinely, you know, with restaurant workers and, to some degree, production facilities. And it's a little bit of a-- it sounds humorous, but I was kind of struck with Chick-fil-A running out of sauce. And I think it's a labor issue in their production facility. They are having trouble staffing a production line to make barbecue sauce. So that speaks volumes about where we are. And we have some good problems and we have some real problems, but we are going in the right direction.

ALEXIS CHRISTOFOROUS: And you know, just speaking to that labor shortage, that tight labor market, we're seeing a number of companies come out, Josh, and say they're going to raise wages for their lower income workers as they try to attract people to the jobs. McDonald's, Chipotle, Amazon today said it's going to hire 75,000 workers and hand out some signing bonuses. What will the cumulative effect of that be? Are we going to finally start seeing some wage inflation, the kind of inflation the Fed has said it needs to see in order to move on interest rates?

JOSH WEIN: Yeah, that's a great point. So near-term, absolutely there's wage inflation. I think McDonald's indicated that they would be raising wages about 10% for some of their, I guess, entry-level workers. I'm a little skeptical, though, you know, for a year or two out, absolutely some wage inflation. I think as those wages are being raised, I would think that those same companies are figuring out how to do more with less.

So for the worker with a job, there could be inflation. It's just a matter of how many workers get invited to that party. So you know, I think automation and the use of technology, you see it in fast food restaurants with ordering through a computer and in other applications of technology. I'm skeptical that there's wage inflation that ultimately, you know, upsets the apple cart. Inflation is, I think, what everyone's worried about, and I don't see that-- short-term, absolutely that's, I guess, an issue, quote unquote, but I don't see that as a long-term problem. I think that companies will work around some of the drivers of their, you know, inflation on their income statement.

KRISTIN MYERS: Now Josh, I think most people have told us that they are still bullish on equities, looking at the broader market right now. I'm looking at all three major indices right now in the green, a nice rally, of course, after the last two days, where we had seen selloffs. And the markets feel a little bit choppy lately. Do you see it the same way? How long do you think that choppiness could continue out ahead?

JOSH WEIN: Yeah, I mean, yeah, it's only a week ago that we were making highs. And it's interesting because I think the cumulative effect of the anecdotal evidence of inflation is really starting to lean on people. And-- but I think that, you know, my thought, and I think many agree, is that it's temporary. It's more driven by supply side issues, whether it's a pipeline or the unavailability of chips, which might be a longer lasting issue, you know, semiconductor chips. But I think at the end of the day, it's things that are unique to this restart of the economy, this very hard restart, which is a great thing.

You know, ultimately, looking at interest rates, I think a lot of what's been going on of late, you know, provides a bit of a lid to where rates could go. I don't think that growth in and of itself is going to get rates going much above the recent range. So I would say 22 times earnings on the S&P, that's an earnings yield of about 4.5%. You look at where the 10-year is, and that spread above the 10-year is very compelling. And it's where we were before the pandemic started. So you know, you add into that growth, revenue growth, you know, first quarter on the S&P, it's coming in at around a 9% or 10% clip. Margin expansion I think is going to be a big story in the next several months. We saw GE indicate that some of these cost cuts that they've implemented are going to become permanent. So I think we'll hear more of that, and I think those are the building blocks for what could be a great run in the market, another leg higher.

ALEXIS CHRISTOFOROUS: I know that among the stocks you like right now are in the utilities, power, infrastructure area. And I'm wondering if this ransomware attack against Colonial Pipeline, which once again exposed our vulnerabilities to the infrastructure in this country, does that give you pause to go all in and invest in some of these companies, which could very much be, you know, vulnerable to future hackings?

JOSH WEIN: Sure, yeah. I mean, in our Hennessy Cornerstone Mid Cap 30 fund, one of our holdings is Quanta Services. So to your point, infrastructure services and the utility-- power and utility industry is going to be a-- an evolving theme. And I would say that, you know, Quanta's role in working on behalf of utilities for grid hardening and modernization, some of that touches on what we're going through right now. So certainly the answer to what happened with Colonial Pipeline is not give everyone an electric car. It's never going to be that easy, and there could certainly be a lack of electricity grid. And I'm sure we've seen that already, whether we knew it or not.

But what I do think it speaks to the idea of diversity of source. So right now, we rely on gasoline. That's a tough thing as we speak. I'm in North Carolina, and 70% of gas stations have no gas. But I think it speaks to the idea that anyone with an electric car is maybe having a better day than I guess many of us are. And so that idea of utilities using renewables and powering renewable focused vehicles, like a Tesla, I mean, that's where a Quanta comes in. So we're looking at stock price momentum, earnings growth, and valuation. So a company like Quanta fits in that squarely. About 20 times earnings, nice growth in earnings, and certainly a lot of momentum of late.

KRISTIN MYERS: All right. Josh Wein, portfolio manager with Hennessy Funds, thank you so much for joining us.