Closing Bell - Closing Bell Overtime: Warning Shot for the Bulls? 9/14/22

Episode Date: September 14, 2022

Investors treading lightly today as they assess the damage from yesterday’s major sell-off. So, was that a one-off drop or a warning shot of more selling to come? Eric Johnston from Cantor Fitzgerald gives his expert take. Plus, Oakmark’s Bill Nygren reveals his top value plays. And, Larry Cordiso of Osterweis Capital Management breaks down how to navigate the tech trade following yesterday’s 5% drop on the Nasdaq

Welcome to Overtime. I'm Mike Santoli in for Scott Wapner. You just heard the bells, but we're just getting started. In just moments, we near the flat line, just pulling green right near the close. Kind of a mild bounce after yesterday's 4.3 percent loss in the S&P. So we head into the back half of the trading month. We want to know, was Tuesday's route just a one-off drop or a warning shot of a major selling, more major selling to come? Let's ask Cantor's Eric Johnston. He joins me here at Post 9. Eric, good to catch up with you. Thanks for being here, Mike. Thanks for coming down. So today's action, obviously, often very kind of indecisive, tentative. Market got a little bit of a jolt yesterday, had been assuming that we would get more confirmation of the peak inflation story, and that was going to be a reason to get more traction perhaps in the market. You've been negative for about a year on the market. You've

been in tune with the prevailing trend. What makes you think from these levels still down 15 18 percent or whatever from the highs that there's that much more downside. Sure. So I think yesterday the CPI number was it was a big deal and somewhat of a game changer to a lot of the narrative out there. Here we are a year and a half into this inflation issue, and we're putting up a 0.6% month-over-month core CPI number, or annualized at 7.2%. And so the idea that inflation is going to magically come down without the economy suffering significantly, I think yesterday was somewhat put to rest in that in order to get inflation down and really squash inflation like Powell's talking

about you have to unfortunately hurt the economy. You have to reduce demand and having a soft landing having the S&P at 4000 having housing close to the highs that's not going to do it. So if you look at what the market's pricing in right now, they're pricing in that the Fed goes to 4.3 percent Fed funds rate. To put that in perspective, right, we're going to go from zero percent to one of the highest Fed funds rate in 20 years in a matter of one year while quantitative tightening is going on. So that's a recipe for lower multiples, a much weaker economy, and ultimately weaker earnings.

You know, the counterpoint to a lot of that is probably going to be, look, the leading indicators of inflation seem to be pointing lower. After World War II, inflation did magically come down after a huge post-war shock. It was just a matter of, you know, getting rid of the supply issues. And then you have this sense out there that, you know, corporate and consumer balance sheets can withstand a little bit more of a slowdown in the aggregate economy. And by the way, historically, high and declining inflation is a bullish setup for the market if you're looking out several months. So how does that fit in? So I think from an inflation perspective, what's different now is that it's been going on for a year and a half. And a lot of the transitory issues that we were facing early on around supply chains,

a lot of those have passed. Oil was a big contributor. That is now pulled back. And so the breadth of inflation has now gotten wider. So I think it's what it's shown is it's much more challenging to you know to get it to get it to go to move lower right. Yeah. You do have you know a peak to trough twenty three ish percent S. and P. decline. A lot of that registered as a valuation

decline now earnings estimates have been trimmed back off of the third quarter so that process is underway. You've had this rally off the lows and it seems like the market has been kind of in this range and trying to figure out if that was enough to price in what awaits the economy next year.

So, I mean, right now the market's trading at 17 times earnings. So if you look at that multiple of 17 times, we look at it from a bunch of different directions, and all of them suggest that that 17 multiple is extraordinarily high based on the current environment. So the 10-year average multiple over the last 10 years is 17, where we are right now. But the 10-year yield's at a 10-year high. The Fed funds rate

headed towards a 10-year high. The five-year real yield is a 10-year high. Earnings, I think everyone would agree, are closer to peak rather than trough. We have inflation that's a 40-year high. 40-year high. So all those would suggest, if you just didn't know anything else, that the multiple would be towards the 10-year lows, not at the average.

So the multiple needs to come lower. And then as far as earnings go, even if earnings come in in line, which think it's the best case scenario right now, the market should still trade down. And we think that the odds of earnings staying where they are right now, when you have peak margins, earnings well above trend, and an economy that it's going to have to slow down to get inflation down, it just seems it's highly unlikely that earnings estimates will stay where they are. So I think the argument for where we think the market's going to the low 3000s is a very simple one. It's a 14 to 15 multiple on earnings and earnings that are down a mere 5% from 2022, which is not heroic at all of a situation. So, yeah, let's say if it's 3200, what that's what an 18 percent down from here. I'm just doing rough numbers, something like that.

If you do pull apart that 17 times multiple and this is a point you here made to some degree, if you take out the biggest five stocks, you're under 16. In other words, there's a cluster of premium valuation within the market that's mostly about the largest stocks. I mean, Tesla and Amazon are top five stocks at monstrous PEs right now. The median is actually undemanding. So does that come into play at all in terms of the top down view? So I think you're exactly right to look at the components. I would just say that if you take out energy, right, which is very small, somewhat small percent of the S&P 500, the growth rate that we're seeing for the S&P 500 X energy is extremely poor, right? So if you just looked at

that growth rate, you took out energy and you took out the big four, right? You're talking about negative growth. And so that 16 multiple based on the growth outlook would look too high, not to mention looking at the rate outlook. Is there something to do tactically, strategically, aside from just if you're inclined to bet on direct downside in the market or look for relative advantages within groups? Sure. I mean, I think right now I would be long oil. And I think long oil is a good hedge to a short equity view. And the reason why is clearly there's the demand component for oil, which is going to have some sort of correlation to the economy and to equities.

But if you look at it from a supply perspective, the SPR is going to begin to stop releasing oil within the next month and a half. And then we have a new buyer that's likely going to come to the market with China, which at some point is going to open up most likely in the next six months. And so that supply demand dynamic that is most likely going to happen should be very bullish for oil. So I think that is a good setup. And then, by the way, if you do get an oil spike, inflation is having a problem right now with oil in the low 80s, mid 80s. If oil were to spike again, which I think is a very real potential scenario in the next couple of months, that's going to cause all sorts of more problems for the Fed.

Yeah. Let's bring out the conversation. We'll bring in Erin Brown of PIMCO and Eugene Profit of Profit Investments. And welcome to you both. Erin, I'd love to hear your thoughts on this general kind of cautious scenario and whether, in fact, you still think after yesterday, the market is not fully appreciating how much the Fed has to do or has the market finally sorted out the Fed path? You know, I still think that there's a big dichotomy between the signals that the fixed income market are sending to investors and the signals that were being absorbed by equity investors. And they're really singing a different tune in that I do think that equity expectations, as Eric just articulated, are too optimistic.

I think that margin expectations are too optimistic. And I think the earnings multiples right now probably have to go down to about 14 to 15 times. All of that means that we'll likely see another 15 percent downside from here before equities trough. And keep in mind that while we just started to see earnings revisions lower, they've only been revised lower from about 8 percent over the next 12 months or 8.8 percent over the next 12 months to about 8 percent. So we still have very, you know, a very long runway ahead of us before we get to that down 5% year-on-year number, which is probably more realistic. Also keep in mind that, you know, over the last decade or so, there really hasn't been any alternative to equities. I mean, equities have been the best game in town. But now that we

see yields on short-term interest rates, you know, up yielding 2%, 2.5%, there's actually money where people can park, you know, over the next couple of two and a half percent, there's actually money where people can park, you know, over the next couple of years that actually offers a decent return. So, you know, I think that the argument to own equities above everything else, you know, particularly given how expensive they are right now, and particularly going into what we think is a recession, there's just, you know, it's just not the best game in town and I think there's real risk to owning them relative to owning you know sit more safe haven

you know fixed income assets. Eugene how does the risk reward look to you if you are- let's say diversified investor and considering how to allocate a portfolio do we do you wait for stocks to get toward you know that more- kind of 14, 15 times earnings

and hope that you do have the chance to buy them there? Or do you park and fixed income? How are you approaching it? Well, no, I wouldn't wait. I think I have to be a little bit of a bullish guy today. I'm probably half as negative as Eric and a little bit more bullish than Aaron. I think basically that the psychology of the market has been a lot of a driver of what's been going on the last few days. I think investors have certainly been too optimistic about the Fed being able to engineer a soft landing. And now we're looking at whether we're going to have a mild recession or a hard recession. I think Eric is absolutely right that you're going to have some

earnings compression, that revenues will come down. However, I think that in this market, you still can find, especially in healthcare, companies that are trading at single digit PEs with a 4% dividend yield, here Pfizer. And I think I try to position the portfolio more in those types of names. But we're not going to go to the sideline because no one's going to tell us when it's over. But I think it's going to be a little bit rougher than investors were anticipating up to this point. Yeah. And Aaron, I do wonder about the notion of competition for dollars from fixed income. There's no doubt if you are, you know, an individual investor making the

decision between, you know, risk tolerance and what you get in terms of income, it makes sense to be considering that now. But, you know, in the 90s, two-year note yields were 5 and 6 percent. We had the most expensive stock market in the world and massive inflows into equities. It seems like it isn't as fine-tuned as, you know, 3% plus on the two-year note yield is going to somehow siphon money out of equities? No, it's not. But I think to the incremental buyer, I think it is now a consideration where it hasn't really been a consideration in the past because you weren't getting any yield for that fixed income asset. And, you know, you saw it today with IBM's announcement with respect to sort of defeasing their pension liability. You are going to see, I think, a little bit more of that where,

you know, pension funds that are fully funded can now defease their liabilities and actually earn a real return on those assets. You know, and I think that you will see increasingly buyers make that sort of decision that in this environment, given where we are in the cycle and given sort of the sell-off that we've seen to date in fixed income assets, they actually look optically more attractive in many cases. starts to now become more of a consideration on behalf of either, you know, high-grade IG corporates or, you know, even sovereign, you know, debt that is, you know, an IG quality. And so I do think now there is that alternative and that does, you know, sort of push the pendulum further towards, you know, further away from equities and towards fixed income assets. Yeah. You know, Eric, it's interesting in the sense of looking at valuations from equities and towards fixed income assets. Yeah. You know, Eric, it's interesting in the sense of looking at valuations of equities relative to where fixed income sits. And you have made this point, and others like Mike Wilson and Morgan Stanley have been making

this point, that that kind of premium that you should demand from equities in terms of an earnings yield over treasury yields does not look particularly attractive right now. However, if you go back again to the 80s and 90s, especially when inflation was the big threat and not deflation, as it was in the prior decade to where we are now, it persistently traded like that. In other words, the earnings yield was always lower than the treasury yield. So is there a regime shift going on? I guess how demanding should we be about how cheap stocks have to get? Sure. So I think part of it is also the incremental change that's going on. So I think the point that Aaron May was a great one, which is that right now you're getting a cash yield of 2.5%. If you fast forward four months, it's probably going to be up to 4%. But it's also where it came from. It came from zero. And we've had now a

decade or 12 years of suppressed yields that the individual investor has gotten used to that there is no yield in money markets. That is now changing so quickly that I think that the incremental dollar is now now does have a choice versus they didn't for the last 10 years. And to the point about the equity risk premium, yeah, as you said, like if you look at a 12-year chart of the equity risk premium, it is at the lows when I would argue that the risks to equities, considering this Fed experiment that we're doing currently, could be ultimately close to the highest. And so those are at odds. But you bring up a fair point that in the 80s and 90s, it was negative. Right. And so are we in a regime shift? I would not I don't see

anything that would lead me to that conclusion. But it's certainly, you know, something worthy of thinking about, considering. Eugene, aside from looking at those, you know, relatively defensive areas like health care, you mentioned you do really have a lot of cheap pharma stocks. I could I could point to parts of financials where there really are a lot of rock bottom valuations as well. There are parts of the market that you feel like you've had an opportunity to get in low on. Well, I think that, as you mentioned, financials are are cheap, but I'm a little bit more concerned there because if the economy does come down a lot harder as a result of interest rates increases, the interest rate margin that they're going to achieve on one side is going to be negated by loan losses on the other side. So I'm not quite

ready to go heavy in financials as of yet. As I said, health care, I don't think large cap technology is as attractive as it's been. But if you're waiting over a three to five year period, you can see some compelling valuations there. It's just a lot more difficult to sit here and watch them go down knowing that the earnings are going to be reduced coming through this next earnings period. Right. And Aaron, in terms of if you really do think equities don't offer you enough compensation for the risk, where within fixed income, you know, you talked about, you know, a lot of these pension funds now have an ability to lock in some kind of income return. But where would you as an investor say that the market is giving you a good shot for some, you know, either safe yield or just credit

opportunities? I think within credit and corporate credit in particular, I do think that IG on a relative basis versus equities looks attractive. I would look more in the CDX space rather than the corporate cash bonds. But on a relative basis, that spread differential now is definitely in favor of owning high quality corporate credit relative to equities that, you know, particularly because in a down grade, we're not expecting significant in a recession, significant defaults, particularly for IG. And we think that the credit compensation that you get because of the spread widening is pretty attractive. Yeah, I guess that would be another that you get because of the spread widening is pretty attractive. Yeah, I guess that would be another way this might not be the kind of recession if we get one that's going to match up with either of the last two ones,

if in fact it's a little bit less damaging to corporate balance sheets. We'll see how it all goes. I'm sure we'll have you all back. Appreciate the conversation, Eric, Erin, and Eugene. Let's now get to our Twitter question of the day. We want to know, will the market retest its June lows before the end of this year? Head to at CNBC Overtime on Twitter to vote. We'll share the results later in the hour. We are just getting started here in Overtime. Up next, finding value. Top Portfolio Manager Bill Nygren joins us next. The stocks he thinks are worth betting on in this volatile environment.

We are live from the New York Stock Exchange. Overtime, we'll be right back. We are back in overtime. Stocks ending slightly higher just ahead of today's market close. My next guest is finding pockets of opportunity amid the ongoing volatility. Let's bring in Bill Nygren, Oakmark Fund's partner and CIO of U.S. Equities. Bill, always good to see you. Thanks for having me, Mike.

Sure thing. Now, I know your approach is you're looking over a multi-year time period. You want to hold businesses that are going to do well in a lot of environments. But are you working under any kind of an assumption that we're going to have to weather a recession or an earnings downturn as you try to model out how your companies are going to do? At Oakmark, we don't think we have any special insights that others don't have as to what the economy is likely to do or, for that matter, where the stock market is likely to go in the next couple of months. I find it kind of humorous how every time after we go through a decent decline as we've had this year, you get people coming out betting that the market's going to go down a lot farther. If you look through history, the stock market goes up about seven out of every ten years, and there's just so much emphasis placed on trying to figure out which three years you shouldn't be in. We don't waste our time with that over a long time period. We expect equities to continue being the asset class of choice as they have been for

the past hundred years. Now, when the market does go down, as it has this year, clearly, you know, presumably there's more opportunities to find things at a better value than they had been before. And I'm particularly interested in financials, an area that you've kind of fished in a lot over the years. But now when you see a lot of these cross currents, both the companies seem like they're in better shape this cycle. And on the other hand, everyone's worried about the credit experience we're going to be in for next year.

What does look good to you in that area? Well, one of the names that we have a large holding in is Ally Financial. The stock sells at about five times estimated earnings, and almost all of that that isn't paid back to shareholders in dividends, which is about a 4% yield, is going to share repurchase. The company is expected to reduce its share base about 15% this year. They're one of the largest auto lenders. When consumers do get stressed, which there's no sign yet that they are, but when they do get stressed, the auto is one of the last bills that they stop paying

because they need to get to work. And they'll stop paying on their houses and their credit cards before they stop paying on auto loans. We think the company's very well positioned. It's got a lot of capital. Berkshire Hathaway just reported a large position. And if you look back to the last crisis when some of the auto lenders did poorly, largely it was because of one of two reasons. They were either overextended on lease obligations, and Ally has almost none of that today,

or they had trouble rolling over their funding. They were generally set up back then so that they were based on market funding. And today, a company like Ally, it's one of the leading online banks, so it's deposit-based funded, which puts them in a much more secure footing than they had in the last recession. I'm interested that you do have the big position in Ally at the same time that you like GM. I mean, clearly Ally used to be GM Financial, but that's a separate issue. More to me, it's about the fact that you seem to have confidence in the auto cycle in general. Well, I don't think it's specific confidence in the auto cycle in general? Well, I don't think it's specific confidence in the auto cycle.

For whatever reason, investors seem to be running away from almost anything auto-related that isn't Tesla. If you look at a company like GM, it sells at about six times expected earnings. They are making one of the more rapid shifts to EVs of the traditional companies, designing theirs from the ground up, targeting about 2 million EVs within the next three years.

That's twice Tesla's current capacity. And Tesla's market cap today is 16 times that of GM. If you look at GM's non-auto assets, like Cruise, Lyft, and their financial subsidiary, you could arguably say those businesses alone justify the price that GM is selling for. So we think it's a very attractive company today on its own merits. And then energy, you certainly have a few names there. Is it a call on the underlying commodity? Is it a comfortable level of oil and gas prices for the industry to be okay with for a while? Or what's the thesis?

Well, I think this is another area investors have run away from. The ESG crowd has generally just said traditional energy is bad and doesn't want to invest in it. That's the reason these companies are available at single digit PEs today. And we think current prices need to be maintained over most of the cycle to justify the amount of exploration the world needs to meet growing demand for fossil fuels. And fossil fuel demand is going to keep growing. I think maybe the ESG crowd will get a little more nuanced as they see the advantages that energy independence provides for a society. And you look at a company that's one of our largest holdings like EOG, it's the lowest cost producer of the US-based

E&Ps. It sells at less than eight times expected gap earnings over the next year. Almost all of that is coming back to shareholders, some in the form of share repurchase, but mostly in the form of special dividends. People talk about the market looking expensive, selling at a high teens multiple, but most of our portfolios at single digit PEs, and we think very attractive today. Yeah, a good reminder that there is plenty of cheap merchandise out there with the overall index multiple being dragged higher by some big ones. Bill, great to talk to you. Thank you very much. Thank you. Bill Nygren. Up next, the bull case for your money. One market pro says now could be the time to buy.

The key signals he's watching. Overtime. We'll be right back. Welcome back. Time for a CNBC News update with Tyler Matheson. Hello, Tyler. All right. Hi, Mike.

Here's what's happening at this hour. Two moderate House lawmakers have unveiled a bill that seeks to prevent stolen elections in the wake of the January 6th insurrection. The bipartisan legislation clarifies the limited role of the vice president in counting electoral college votes. A landmark defeat for Sweden's ruling coalition, the prime minister conceding defeat to a block of four right-wing opposition parties in the national election. Among the victors, the Sweden Democrats, an anti-immigration party that just entered parliament in 2010. It is now Sweden's second largest party. The head of the party says it is time to put Sweden first. And Amtrak says it will cancel all long-distance train service starting tomorrow. The move is in preparation for a possible shutdown of freight railroads over workers' pay and benefits.

Amtrak relies on their tracks for service to many cities. Tonight, join me to look at the push for a deal to keep trains moving and workers on the job and examine the issues that still remain unresolved. It is a big story. I'll see you tonight at Eastern, at 7 Eastern, here on CNBC. Mike, back to you. All right, Tyler, thank you very much. Well, despite yesterday's hotter-than-expected CPI report,

our next guest says inflation has peaked, and rampant downside speculation in the S&P 500 means it could be time to buy. Joining us now, Renaissance Macro Research Chairman Jeff DeGraff. Jeff, great to see you. I'd love for you to put yesterday's jolt into some perspective here. Market kind of found itself a little bit wrong-footed about that CPI number. You think it changes the overall cadence of this market? I don't.

You know, one-day events are pretty tough to extrapolate out. Usually, if you've made a low and you're in the space building process, which we really do think that we're in, those one-day events tend to snuff themselves out pretty quickly. And so I was encouraged by today's action. Again, one day is hard to extrapolate, but I certainly think that it is one of those types of, you know, sort of extreme events that doesn't have follow through. And that tends to be good news, not bad. Well, you mentioned that you've been thinking that the market is building a base with the June lows being relatively important. I know you've been kind of respectful of that low and how the market behaved coming out of it. What could we look for as part of that

process? I mean, in particular, I know you've been looking at the historical analogies, things like the year 1962, which has got some, I guess, echoes today. Yeah, I mean, you know, I think there's a lot of concerns about inflation, rightfully so. I mean, inflation is really a dark cloud over equities. But I think it's really important that people keep in mind that it's not about good and bad in the markets. It's about better or worse. And it does appear that inflation is getting better. And one of the things that we're really encouraged by is what we're seeing from the PPI data and some of these early input costs. You know, we look at inflation or CPI as really being the pig in the python, if you will, from COVID and supply chains and everything else. And you're seeing that in those numbers. But if you look at what's on the menu, what's, you know, for dinner for that python today, and you look at PPI, which are early input costs, those are contracting and they're actually in a pretty bullish zone. So I think inflation is going to look far better out the next six months. And I think the markets and the Fed will start to see that. And it's going to be more respectful of

that transitory inflationary environment that we really probably will prove to have been in. It was just a little longer transition than, you know, maybe people were more comfortable with. And then if we come out of that inflation panic, this prolonged idea that that was enemy number one, are we going to go right into, well, oh, it's time to prepare for a recession? What's the market telling you about how those risks are being absorbed? Yeah, that's a mixed bag. It's a really good question. It's a mixed bag. It's a really good question. It's a mixed bag. I mean, if we look at tech,

it's saying that, you know, good things are not on the horizon. If we look at industrials, it's actually saying that, you know, industrials are acting better than you would expect. We're seeing financials on a relative basis act better than we would otherwise anticipate on a relative basis.

You know, the tricky part are things like utilities. Utilities are part of the leadership structure of this market. Energy is still part of the leadership structure of this market. Those two areas we would expect to fade, but we're not seeing it in the relative performance yet. So we're not pulling the ripcord on those areas yet. But I would expect to see more improvement in discretionary deterioration in energy, deterioration in utilities if that script's going to hold. And then when we start to see these momentum confirmations, 20-day highs, the percentage of issues above their 20-day moving average, making breakouts, getting through that 200-day, all those would obviously be incremental steps into building the early foundation for that next bull phase. I know you've been pointing to this pretty stubborn kind of aggregate negative sentiment that professional investors, speculators seem to have against the S&P 500. It seems even the

bears can grant that, you know, institutional positioning is not very bullish right now. Is that enough when you're in a regime that says don't fight the Fed? Well, you know, we've looked at that historically and the the regime analysis is mixed. But when we look at it on where we are with the inflation data, we actually find that the returns are better when the Fed's hiking in this inflationary regime that we're seeing, because essentially the market saying, hey, look, they're on top of it, it they're getting it and so it might take some time but we're easily halfway through this inflationary um fed tightening cycle and so the market will start seeing through that and i look i think the data is going to be bad for the remainder of the year but we know that the market will see through that the next six months maybe even nine months forward and that's why we think

that things will start to look better i do think there's going to be a growth scare. I actually think bonds are really, really interesting right here because I think there will be a growth scare that the Fed has this proclivity to overdo things. So I'm really actually encouraged by what we're seeing out of the bond market and believe that we'll see a contraction in yields here. But that's how we're positioning and how we're seeing it. The sentiment isn't enough by itself, but when you marry that with momentum and the improvement in trends, that's actually a lot of dry powder that can help fuel those early stages of the advance, where the quote-unquote easy money is out there,

and that's what we're setting up ourselves and our clients for right here. Yeah, interesting. A growth scare that would maybe have yields peak and shake things out a little more ahead of a seasonally positive period for stocks going into the fall. Could be very interesting to watch, Jeff. Thanks a lot.

Thanks, Mike. Okay, up next, the tech trade where Osterweiss Capital's Larry Cordisco is finding upside opportunity in the recent volatility. He'll join us ahead. And don't forget, you can catch us on the go by following the Closing Bell podcast on your favorite podcast app. Overtime, we'll be right back. Welcome back to Overtime.

I'm Mike Santoli. Tech stocks rebounding slightly today following their worst session in nearly two years. But despite more than 90 percent of the sector being negative in 2022, our next guest is still finding bargains in some beaten down tech names. Larry Cordisco is co-CIO of Core Equity at Osterweiss Capital Management. Joins me now. And Larry, you know, the standard line, I think, for a moment like this would be, look, tech was the leader, leadership group on the way up. Usually they don't necessarily lead the next run higher in the market. Yields rising. Still some expensive big tech stocks out there.

Why are you finding individual names here that seem to have fallen through the cracks? Yeah, that's a great question, Mike. You know, first of all, I just want to say that the names we're most interested in typically have pretty reasonable valuations on free cash flow basis. And I think, you know, we put a lot of emphasis on that because we do think rates will remain a little higher for longer, partly because the economy is proving to be pretty resilient. But there's a lot of stickiness and structural shortages that are causing inflation like energy, labor markets, and the like. So when you think about what's attractive in tech, we really start with where are there good multiples and where are there stories where we think there's defensiveness or secular tailwinds that can drive earnings growth over time. And so that's how we come up with it. These names are already maybe beaten down a little bit, and that's where we see the values.

Yeah, and we are showing them, analog devices, AMD, as well as IBM. AMD, interested in, of course, it was very much in favor and kind of a darling on the way up. It's come down with the entire group. What's the thesis there? Well, AMD is the Intel slayer. And, you know, the stocks come in with semiconductors and is, you know, you know, when the market catches a cold, you know, semiconductors catch the flu. Right. And that's a lot of what's going on with the sector right now. We think the negativity for AMD is way overdone. They have a very big product cycle coming out basically right now in the data center. It's going to be a big earnings driver for them. And we're also very encouraged with the acquisition of Xilinx this year.

It really diversifies their revenue base into industrial and automotive. And those are areas that we think are actually going to play pretty well for an economy that's undergoing reshoring and onshoring and infrastructure builds and basically industrial automation demand. Yeah, that's certainly a big kind of capital infrastructure cycle underway there. IBM is interesting. It has outperformed this year. And my kind of surface level take is it's almost outperforming, not because it's a tech stock, but because it sort of doesn't matter what it is based on its valuation and its dividend yield profile, things like that. But what's the actual corporate story there? Yeah, so you nailed it. I think that is the reason IBM's outperformed. Underneath the surface, though, there's a massive transformation going on here.

They've spun off Kindrel, which was their big IT outsourcing division. They've refocused the sales force to basically cooperate and work with customers and not try to sell them a big basket of services. But the real big story here is the secular tailwind for IBM is hybrid cloud demand. 70% of enterprises have more than one cloud. They may have Azure, AWS, Google Cloud. They're using multiple clouds, and it's very expensive for these enterprises to manage these multiple clouds in one IT environment. So IBM under Red Hat, which they acquired a few years ago, is really making that easier. Now, investors really going to have to watch this next quarter to make sure Red Hat growth is in line with expectations, which is high teens. And the other thing is the consulting margins have been under pressure, which has hurt profits, right? So these are the two rubs where this is not a simple, straight, linear, up to the right story. It's a big transformation. It's gotten a little bit messy.

But I think the risk reward here to us looks pretty asymmetric. Yeah, certainly you're going to hear a lot of talk about foreign exchange exposures and things like that in the progress of the transformation, but has a decent start, at least in the market. A quick word on analog devices here as well. Just another sort of chip name that's come down to a relatively undemanding valuation. Yeah, it's trading at just about 15 times earnings. It's got a 2% dividend yield. Management thinks they can grow earnings 50%, 5-0, over the next four to five years. And really, it's a play, on this industrial automation. It's on auto, it's on

electric vehicles. Analog is a very interesting space because it's been, as an industry, it's been under-invested in for a number of years. So the leading analog companies all have pricing power and they're all feeding into the digitization of old economy businesses. And so we think this is one of the best ways to play that trend. It's reflecting a lot of bad news. It's not expected to grow earnings over the next 12 months. But that's exactly when you need to be looking at semiconductor companies when the sort of the news is the worst, the expectations are the lowest, because they will move ahead of the inflection in their business. What you haven't mentioned, at least not specifically here, is some of the bigger sort of fang type stocks, the ones that bump up against media. I mean, meta is looking like it's

pretty much nobody wants it at this point. Are there other parts of tech or internet that look attractive here? Yeah. So Google's our largest position. We continue to like Google a lot. The valuation is extremely attractive. Clearly, that's reflecting concerns over cyclical challenges and advertising. But that's a long-term hold and something that we're willing to work through. Microsoft is our second largest holding. We think there's going to be a lot of durability to their earning stream based on Azure and enterprise demand. So we feel pretty good about Microsoft. In terms of meta and Netflix, and I'll use those two as examples, we don't own them. We're not enthusiastic about them. There's one thing to have a cyclical

sort of worry around stocks and with the economy. But those companies have structural challenges as well. And when we look at those businesses, we just really can't get over both a cyclical worry and a structural worry. So those are names that we're not enthusiastic about as examples. All right. Well, appreciate you making that distinction, Larry. Good to talk to you. Thank you. All right. Well, I appreciate you making that distinction, Larry. Good to talk to you. Thank you. Thank you. All right. Up next, we're tracking all the biggest movers in the OT. Christina Partsenevel is standing by with all of it. Hi, Christina. Hi, Mike. So we have a large

science and tech firm that's spinning off part of its business and plans to take it public. I'll tell you how you can get a piece of that pie. And we've got some news from the C-suite. Cheap financial officers are making headlines in the OT. I'll tell you who after this break. Welcome back. We're tracking the biggest movers in the OT. And for that, we go to Christina Partsenevelos. Hey, Christina.

Hi. So we've got conglomerate Danaher plans to spin off its environmental and applied solutions segment into an independent publicly traded company. Why? It wants to become, quote, more focused on science and tech. The spinoff will consist of Danaher's water quality and product identification businesses. If you can't remember that, just remember EAS.

They will announce the official name at a later date. The transaction, though, is expected to possibly end in Q4 2023. But we might learn a few more details tomorrow because Danaher has an investor day. And this builds on the trend that we've seen this year of conglomerates like GE spinning off units. We got shares up, and you can see Danaher shares are up 5% in the OT. Let's talk about PayPal right now. PayPal moving slightly, 3 quarters of a percent in the red right now after reports stating its CFO, Blake Jorgensen,

would have to take medical leave effective immediately. Jorgensen was appointed to the role recently, just on August 3, 2022, so just a month ago. PayPal shares have been nearly, or cut nearly in half this year, down, what, over 48%. So just a month ago, PayPal shares have been nearly or cut nearly in half this year, down what? Over 48 percent. And I want to stick with C-suite conversations right now. Retailer William Sonoma, former CFO Julie Whalen, is now moving on to the same role at Expedia Group.

She joined William Sonoma 21 years ago, but she's going to be replaced by Jeff Howey. Howey most recently was, he's no stranger, he was William Sonoma's executive vice president. So he'll be taking over the role. Expedia, no movement. You can see William Sonoma down barely in the red. Mike. Christina, thanks so much.

Up next, our two-minute drill. A key consumer stock worth betting on this fall season will reveal that name straight ahead. And coming up on Fast Money, a major rail strike that could hit the supply chain and impact consumers. How it could cost the U.S. economy billions per day. The details at the top of the hour. Don't go anywhere. More Overtime after this. Last call to weigh in on our Twitter question. We want to know, will the market retest its June lows before the end of this year? Head to at CNBC Overtime, vote, and we'll bring you the results, plus our two-minute drill after this break.

Welcome back to Overtime. Let's get the results of our Twitter question. We asked, will the market retest its June lows by the end of this year. And 61 percent of you said yes, that would be about an 8 percent drop in the S&P roughly from here to the intraday lows of June 16th. Time now for our two minute drill. Let's bring in Jessica Inskip, director of product at Options Play. Jessica, good to see you. Good to see you as well. Interested in your picks, recognizable names. There's a theme of labor market adjustment through all of them. I'm interested also in Starbucks. It's had a nice little rebound lately.

What do you like about it here? Yeah, it certainly has. And it has a comeback as far as the fall season is regarded. Pumpkin Spice Lasse has come out and it has one of the best seasons. And so that's one reason to really look forward to earnings. But from the labor market perspective, what I really like about Starbucks is even before we got into this huge issue of the hot labor market, they have been positioning themselves for some of those solutions that are needed more broader, like automation and driving efficiencies. So that's certainly going to help position them with those

macro headwinds. And I think that's going to really translate into the next earning cycle. And yeah, so it's certainly been an automation story, getting their arms around workflow and things like that. Pinterest, I have to say, didn't occur to me that this was about how people are making a living right now. But what's the connection? Yeah, so Pinterest is very different than my normal picks. My marketing team's had me spend a lot of time on TikTok, and I've seen that this newer generation is very into side hustles and the monetization with Pinterest. So then that piqued my interest as that's coming across my feed.

And I've noticed that there's just, since they've had their new CEO, they're generating a lot more content. There's more ways for them to generate revenue. And it's actually rather genius by having the exact customers that you need come to the platform in order to create content. And so I think that's going to play out really interestingly. And then looking at the chart, I see bullish divergence. It's in the perfect form that I look for in a technical perspective. So therefore, I think Pinterest is a really great long- term view looking for some growth opportunities. And that new management is certainly going to help them get there.

Yeah, I will have to take your word for it on the TikTok content, although the chart is interesting. It's kind of got this base right here in the mid 20s. Where do you think the stock can get to? I think it can go up to its upwards trading range. So it's a little around 27. And it's that bullish divergence. So I say that quite often, too. So it's a great chart, yes. And finally, quickly on Rockwell Automation. Yeah, so that's overall theme, again, with the labor market. So that's a company that's going to benefit from the U.S. on-shoring. They are going

to benefit from a lot of ways. So iting, they are going to benefit from a lot of ways. So it's that automation and efficiencies. They've even, the chip shortage is something that they've gotten in front of as well. So I think they're on the forefront of that automation that's needed to help with those labor market issues. Labor replacement. Jessica, thanks very much. Jessica Insiket. All right. That does it for overtime. Fast Money begins right now.