Investor opportunities within a ‘relatively expensive’ market: Pacer ETF Distributors Pres.

Sean O’Hara, President of Pacer ETF Distributors, joins Yahoo Finance to discuss the outlook on the market, Delta variant concerns, and earnings season outlook.

Video transcript

ALEXIS CHRISTOFOROUS: I want to stick with the markets now and welcome in Sean O'Hara, president of Pacer ETF Distributors. Sean, good to have you here on the show. So we are looking at possibly back-to-back rallies for the market after that big dramatic sell-off we saw on Monday. Are you a buyer of this market right now at this level?

SEAN O'HARA: Well, good afternoon. Thanks for having me on. I'm not generally a buyer of the overall market. I still think the overall market is relatively expensive on a PE basis. And so it's susceptible to some negative shock, which we saw on Monday. But that doesn't mean that I'm not an investor looking for opportunities.

And so, in some of our funds, for example, we like streaming. But just to compare and contrast where we look for streaming opportunities versus the broad market, you talked about Netflix earlier down for the day. The two streaming names that we own, CBS, Viacom, and Discovery networks are both up today. And they just have different business models.

Netflix's problem is growth going forward. 200 million subscribers here in the US, that means in order to grow, they've got 10%. They need 20 million net new subscribers. And they're going to launch a whole new businesses, which is what they announced today. Whereas you take Discovery or CBS Viacom, CBS has content with their Paramount acquisition. And Discovery is a reality-based kind of a platform where, you know, they have a very inexpensive input in terms of their content. So and on top of all that, they are new entrants so that they can grow their subscriber base faster.

So I'd be thinking about the market that way. If you want to invest in the cloud, for example, you can buy the big names, Amazon, Microsoft, Google. Or we own IBM in the tech space. That's a cloud player now. And we saw what happened Monday and Tuesday with IBM versus the broad market. So I think you have to be a little more selective and not just focus on the total market today.

KRISTIN MYERS: All right, so Sean, I know that you're saying that right now, equities pretty expensive, making them even more susceptible to all of these headlines. On Monday was headlines around the Delta variant and the spikes that we're seeing around the country. Do you continue to see that, just looking out ahead at the second half of the year? Do you think that the Delta variant is going to be the main catalyst behind some of these swings, these sell-offs, or are there other headline risks that you think are existing out there right now?

SEAN O'HARA: Well, I can think of for the Delta variants would be-- variant would be one. I think inflation would be another. I think interest rate could be a third. And then we've sort of got an easy quarter year over year in terms of earnings. I think we'll close out this quarter with pretty remarkable year over year gains. I think the third quarter probably remains a fairly easy bogey to hit. But then once you get beyond that into the fourth quarter and the first quarter of next year, then the comparables become more difficult.

You talked about Coca-Cola a little earlier this year and their sales finally getting to the 2019 level. Well, the stock is now back there. So in order for them to get the growth going forward, they've got to start to exceed that number. And so that's going to be the big question is, is forget about the percentage change in earnings quarter over quarter or the revenue change in terms of percentage. We have to look at the real dollars to determine where the overall market goes. And we're trading at a high level.

I think we're expected to make $165 a share going into 2020 on the S&P. We're not quite back there. We expect we'll get back there sometime third quarter, fourth quarter. But the S&P 500 is 20% to 25% more expensive than it was going into 2020. So that's going to be the real challenge. I think there's more headwinds on the progress going forward upward movement in the market than there is on the other side of it.

And so, again, you don't have to buy the market to make money in this market. You can buy cheaper stocks that are higher quality that generate free cash flow that pay you today to own them. And that might be a strategy that, going forward, at least take some of your profits. Don't go away from the market, but reduce your overall PE exposure. Buy higher quality names, and ride it out from there.

ALEXIS CHRISTOFOROUS: Sean, I want to talk a little bit more about IBM. You briefly touched on it. But I know when you're looking for exposure for companies that deal with the cloud, you actually like IBM over Amazon, Microsoft, and Google, even though IBM seems to be quite far behind all those companies when it comes to cloud. They are quickly playing catch-up, though. They were out with earnings this week, beat on the top and bottom line. They're spending a lot on acquisitions. Make the case for IBM. And obviously, you hold the stock.

SEAN O'HARA: We do. It's relatively inexpensive on a free cash flow yield basis. So that's why I don't-- it's in one of our portfolios. It's an ETF, the ticker, COWZ. But they generate $20 billion a year in free cash flow. So they can afford to sort of move into these new areas. They've made a commitment. They're not going to go head to head with the other cloud players. They're going sort of in this, quote unquote, hybrid way.

And so the big surprise on the topline was that their cloud revenue surprised everybody on the topline. And if they continue to execute like they have, then you should continue to see these positive surprises. Whereas I'm not sure that there's going to be that level of positive surprise going forward for some of the other big cloud players because they're so entrenched.

ALEXIS CHRISTOFOROUS: All right, we're going to have to leave it there. And of course, need to point out, IBM continues to pay that quarterly dividend, making it pretty attractive as well. Sean O'Hara, President of Pacer ETF Distributors, thank you.