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Market Recap: Wednesday, August 4

Stocks fell below record levels Wednesday, with investors weighing concerns over the economic impact of the ongoing pandemic against optimism over rebounding corporate earnings. Eric Sorensen, PanAgora CEO and Mike Vogelzang, CAPTRUST CIO joined Yahoo Finance Live to discuss.

Video transcript

SEANA SMITH: About 90 seconds here until the closing bell-- looking at losses for the Dow and the S&P. We have Eric Sorensen. He's the CEO of PanAgora. We also have Michael Vogelzang, he is CAPTRUST Chief Investment Officer. Michael, let me start with you. The losses that we're seeing the day, the Dow off nearly 300 points. What do you make of the drop?

MIKE VOGELZANG: Well, you know, other than another dose of Adderall for the market, you know, not a whole lot today, right? There's a lot of mixed signals. We saw interest rates falling a lot. We're not terribly perturbed by the slowdown scare. So frankly, kind of a quiet day, actually-- very mixed signals inside the market today.

SEANA SMITH: All right, let's take a look at where we are here with the final 40 seconds to go in the trading day-- Dow off just around 306 points-- so a slightly larger leg lower here in the final couple of minutes of trading. S&P off 4/10 of a percent, pulling back from yesterday's record close, NASDAQ, though, holding on to gains, up just around 2/10 of a percent. In terms of the sector action that we're seeing, energy the worst performer followed by consumer staples and industrials-- those three trades not working in today's action.

Dow's biggest laggards, Amgen by far-- that stock off just around 6.5%. Chevron and Walgreens among the worst performers in the Dow today.

[BELL RINGING]

ADAM SHAPIRO: All right, we got a fresh hot serving of closing bell for you. Let's see where the markets are going to settle. And it's going to be the Dow off 320-some odd points, S&P 500 down about 20 points, but NASDAQ's going to be up about 19. And just a quick point, as Seana was just talking about with the Dow laggards-- we did have some winners on the Dow-- very few, just two.

Salesforce, they were up about 1.5%. Nike was up about half a percent. Let's go back to our panel and talk about what we're witnessing here. And, Michael, you're not too concerned about the Delta variant. The COVID-induced moderation is not, as you say, the end of the world. But you know, the GM for instance-- the numbers we got out of GM is kind of a warning, isn't it, that there's still a lot of bottlenecks.

MIKE VOGELZANG: Yeah, the logistics will work themselves out, right? We've got some difficulty and logistical challenges. We have some inflation that's causing some indigestion at the moment. But specifically, the Delta variant of COVID-19 we think is actually potentially positive for the stock and bond markets, mostly because, yeah, it might induce a bit of a slower economy-- frankly, the economy is booming. It wouldn't be the end of the world, as I said, to slow it down a bit.

But it also might give the central banks around the world a little more cover to continue to provide some more liquidity than what I think the market's been expecting. So that could actually accelerate or extend some of the bull market action.

SEANA SMITH: Eric, what's your view just in terms of the threat that the Delta variant poses to the market?

ERIC SORENSEN: Say that again.

SEANA SMITH: Eric, can you hear us?

ERIC SORENSEN: Yeah, I can hear you.

SEANA SMITH: What's your view just in terms of the threat that the Delta variant poses to the market at this point.

ERIC SORENSEN: I don't have a view on that. I don't know if you got the story right, but your handler was asking me to talk about some work we've done on small cap versus large cap over the last 40 years, including the last major run in small cap stocks starting about a year ago when I wrote a paper and predicted that.

SEANA SMITH: Where do you think we go from here that in small caps? Because we do see the Russell 2000 off just around 1% today. You correctly called the bottom back in September. So where do we go from here?

ERIC SORENSEN: Let me-- by way of backdrop, as a former academic, many of us studied small cap stocks. And there was something called a small cap effect. Basically, it was either return for risk or an efficiency that they had radically outperformed the bigger companies for 30 or 40 years. And the studies go back to 1926. And that changed in the 1980s and the trend reversed itself to some degree.

So there are long-term, secular causes for small cap performance. And there are, then, short-term cyclical. And when we, a year ago, wrote this paper, the long-term secular one was interest rates. Bonds have duration-- yield curve. Stocks have duration-- I've studied that and written about it.

Some stocks are very sensitive to rates. A steady growth large company that's got pretty predictable earnings, rates rise, its multiple's going to get squeezed. Rates fall, it's going to expand. So what you saw from 1980 from the Volcker rigor with respect to controlling the money supply, really up to the last couple of years, is a general secular decline of rates-- that hurt small companies versus the large companies.

That's reversing itself in the next 5 to 10 years. So small companies are going to benefit from that. Three other things-- cyclical things. One of them is economic growth. That does help the Russell 2000. Secondly, market volatility being higher-- things are repriced more efficiently when people pay more attention, when there's volatility, which is no longer down single-digits like it was the last three or four years. And they were unbelievably cheap.

A PE basis-- price of sales, price to book-- you didn't see small cap stocks as cheap a year ago as they were since-- they were cheaper, actually, than they were in 2000 in the last big run-up. The flip side of that is what drives the large companies, and I think that's part of the catalyst as well.

ADAM SHAPIRO: Michael, I'm curious about this that you sent through to us that your strategy is one that you're overweight US equity positions but with a more cautious tone. Describe your cautious tone. I know you're using a barbell strategy, but what does it look like?

MIKE VOGELZANG: Well, I think it's exactly-- that's exactly the point is that, you know, Eric's talking about interest rate sensitivity-- and what we've seen are some of these really large mega cap stocks become very interest rate-sensitive. The correlations to interest rates for the FANG stocks, plus Microsoft, plus a number of others are very, very high.

And so as a market participant, I'm not particularly interested in trying to figure out which direction interest rates are going in the next certainly not six or 10 months. What we know, though, is that those are very highly sensitive to interest rates. That is, if interest rates fall, those stocks are going to continue to do well.

On the flip side, smaller value stocks will do exceptionally well when interest rates rise over the short-term. We saw that in November when the small cap rally happened when interest rates were rising. So we're trying not to predict things like interest rates, or oil prices, or currencies. We're trying to understand and find interesting stocks to invest in for our clients. And so that's really what we mean by a barbell in our equity portfolios.

SEANA SMITH: Michael, what do you make of the developments down in DC, or really lack thereof, I guess, today, because another day, we don't really have any significant development on the bipartisan infrastructure talks and the fact that we could potentially get a bill. But I guess how big of an impact-- or do you see this having an impact at all to the market?

MIKE VOGELZANG: Infrastructure is marginally constructive for the economic environment and for growth. I think longer term, it's really important for the country to make sure its infrastructure is in place. I don't think that has anything to do with today's stock market, but I think, again, the competitiveness of the US economy vis a vis our competitors or other foreign countries is really important.

And it's been under-invested in for a long time. So from that perspective, I think it's critical. Short-term, I don't think it's a particularly big deal. More worrisome for investors, I think, is taxes. And again, same point-- we're not seeing a whole lot of progress on taxes over the last few weeks. I think the further we get along in the year, the more clarity we'll get. But it's hard to handicap that at the moment.

ADAM SHAPIRO: I realize it's hard to handicap it, but it seems incredibly unlikely that the administration would get the proposals it's put forward with capital gains tax increases. It just seems like it would be very hard, Michael-- even if we got something from the Fed at Jackson Hole, they can't even get past-- the Democrats can't get past themselves regarding infrastructure and reconciliation.

MIKE VOGELZANG: Yeah. Look, anything I say about the legislative process probably shouldn't be done on family television. So it's pretty tough to know exactly where this is going to shake out. I do think the Democrats are playing a reasonably strong hand here. There's a lot of inter-party squabbling. And our best guess-- and that's about what it is at the moment-- is that we'll see some higher tax rates on capital gains, which for wealthy individuals is going to matter. The devil's in those details. And like I said, it's really, really tough to handicap except we think, certainly, the direction is higher.

SEANA SMITH: All right, we want to pause real quick because we have a phoner joining us that we need to get to, and it's MediFast's CEO. MediFast just out with earnings just a few minutes ago, and taking a look at the reaction-- not seeing a heck of a lot of reaction after the stock closed at just around $287 a share. We want to bring in Dan Chard for his reaction to the quarter. And, Dan, what can you tell us?

DAN CHARD: Well, it's good to be with you today. I think we started a growth cycle that started, really, in 2018 when we were up 66%, 2019 42%, and the pandemic year, up 31%. We had a strong start to this year, first quarter 91%. And so now we just reported the second quarter, up 79%.

So it's really driven by the unique aspect of our model, which is our independent OPTAVIA coaches who help individual clients get healthy by learning a set of healthy habits. So that number of coaches grew 62% to 59,000. And that's what's driving the growth. So we feel like we're in a unique position at a time when there's a lot of interest in becoming healthy.

And so we're happy with the quarter and feel like we're well-positioned to continue to address this large market.

ADAM SHAPIRO: Dan, I know you're going to get grilled on that earnings call in just a few minutes, but where do you go forward? Where should we be watching? Is it going to be growth in the United States, is it Asia-Pacific? What do you see coming down the pike?

DAN CHARD: Well, this health and wellness, I'll call it a pandemic that's kind of led by obesity rates across the world is led by the United States, but other developed countries, and also in developing countries. So there's this enormous addressable market, not just in the United States, but abroad. Our specific focus, we talk about our mission as being to offer the world lifelong transformation one healthy habit of time.

So we started in the United States, as you pointed out, about a year and a half ago, expanded into Asia-Pacific into Hong Kong and Singapore. And we continue to grow in both of those markets. And our focus really is leveraging this model to attract new clients and achieving our long-term growth objectives of continuing to expand throughout the world and achieving growth in the mid-teens.

SEANA SMITH: Dan Chard, CEO of MediFast, we will let you go because we know your earnings call is getting underway in just a few minutes. You are a man in high demand right now. But we look forward to talking with you a little bit more about the quarter and what to expect going forward tomorrow afternoon. So make sure everyone tunes in for that. In the meantime, though, the earnings keep rolling in. Roku is out with its results-- shares off pretty significantly here after hours. Jared Blikre has that for us. Jared.

JARED BLIKRE: That's right-- it's a mixed report, beats on a few key numbers, but a miss on another few key numbers here. Let me go through them-- net revenue was a beat, $645.1 million, up 81% year-over-year. And that beats the Street estimate quite handily of $613.1 million. But a lot of that's coming from platform revenue.

So platform revenue beat-- $532 million, estimate was for $494 million. But player revenue missed. So that came in at $112.8 million, up only 1.3% year-over-year. Estimate was for higher at $121.3 million. Average revenue per user-- now that's a beat as well, $36.46, up 46% year-over-year. Estimate was for slightly lower at $34.66.

Now, active customer accounts came in at 55.1 million, and that is lower than the estimate of 55.8 million. Streaming hours-- that's a miss too, 17.4 billion, estimate was for 19.19 billion. So what this might be saying is-- and this is going to be interesting to find out potentially on the call-- are people simply streaming less now because they're going out more? Or is the competition eating their market share? That's the key question there.

Gross margin was a beat-- 52.4%, estimate was for 48.9%. And then finally, adjusted EBITDA coming in at $122.4 million, and the estimate was for $69.3 million-- so big beat right there. But the stock sinking in after hours trading because of the misses on some of those key numbers.

ADAM SHAPIRO: All right, hey, Mike, hold one more second, because we've got to get an Uber earnings. I got Dan Howley standing by. And, Dan, I don't want to steal the headline here, but I'm trying to figure out why the shares are selling off.

DAN HOWLEY: Yeah, right now, if we're looking at it, they obviously seem to have had a good quarter based on gross bookings-- $21.9 billion, beating expectations by a hair of $20.93 billion. Mobility was higher than expected by about 300 million. Delivery was higher than expected by about $500, $600 million. Earnings per share beat.

What the issue here is the EBITDA loss. Analysts were expecting an EBITDA loss of $324.5 million for the quarter, but what they ended up with was $509 million for the quarter. So obviously, that means that they're not going to get to an EBITDA profit any time soon. They're now saying that the next quarter they will potentially get closer to what analysts were expecting.

They're looking for an EBITDA estimated loss of $95.4 million. Uber is saying below $100 million. So you know, $95.4 million is definitely below $100 million, but it's not exactly what analysts were expecting. And I think that's really where the shakes are coming in.

SEANA SMITH: Dan Howley, thanks so much. We will have more on Uber's earnings in just a few minutes. But, Mike, I want to bring you back in quickly. Just as we take a look at earnings season so far, this reaction that we've seen if a company disappoints on just one line, one item, we're seeing the severe reaction to the downside. What do you make of that? And I guess, what does that tell us about what investors are expecting at this point?

MIKE VOGELZANG: You know, look, I don't know anything about the companies that were just talked about. I mean, I know them a bit, but I think the takeaways that make some sense here are twofold. One is that these kind of companies-- Roku, Uber-- are exceptionally highly valued. They're priced for perfection, and if you have a blemish on your earnings quarterly call, you're going to have a difficult time, right?

So I don't see it a whole lot more than that. There are people who are living on every number. And when you get a number that doesn't hit what analysts and portfolio people were hoping for, you're going to get a sell-off. You know, the other thing is, of course, this can change in the morning. So once real trading starts-- the trading tonight is pretty thin on some of these names.

The other thing I would say that I really actually like about what we've seen in the market over the last number of months is sort of these rolling corrections in various sectors. You know, if you think about February, we had a really big, large pop in small cap, in very aggressive growth stocks. That have all-- that's deflated in a lot of ways. But the market hung in there.

We've seen the same thing with value stocks. They had a really huge rally. They've rolled over in a significant way. The FANG stocks, the super large cap tech companies have done really well recently. There's this sort of rolling release of pressure and tension in the markets that I think is really healthy. So instead of the market taking a nosedive, you get these swells underneath it. And then I think that's really helpful. And so to me, actually, seeing some of these really good negative reactions can be a sign of a healthier market than not.

SEANA SMITH: Mike Vogelzang, great to have you-- CAPTRUST Chief Investment Officer.