Great Hill Capital Chairman and Managing Director Tom Hayes joins Yahoo Finance Live to discuss market risks including Russia-Ukraine tensions and Fed policy, commodity prices, value stocks, and portfolio positioning.

Video Transcript

KARINA MITCHELL: For now, we want to keep it on markets and bring in our guest, Tom Hayes, from Great Hill Capital, the chairman and managing director there. Tom, thanks so much for stopping by today. First, just really want to get your sense about this about face that we're seeing in markets today and what that says about sentiment and conviction in the markets because historically, when it comes to geopolitical tensions, markets shrug them off. Obviously, the gravity of the situation between Ukraine and tension is escalating and is quite severe. But there are a lot of bears out.

THOMAS HAYES: Yeah, there's no question about it. And however, I do, to your point, think that the risk right now in the market is actually to the upside. Everyone is positioned for more downside. I think this is just some aftertremors. That which had been most feared, Russia moving in and invading, has happened. They're in the Dunbass separatist region. We know that.

So, you know, this is a case of sell the rumor, buy the news. We marked a correction. Yesterday was a retest of those January 24 lows intraday. And sentiment is completely washed out. You look at the AAII sentiment survey for retail investors. Only 19.2% were bullish this week. That's a level that we usually see bottoms or inflection points within a matter of days or weeks.

The CNN Fear and Greed Index is still at 32. That's a compilation of seven indicators. That is an extreme level. And the National Association of Active Investment Managers are showing that managers are down to 53.49% equity exposure. Finally, you saw the put-call ratio yesterday get up to 1.1. That's usually an inflection when everyone's buying insurance. The time to buy insurance is before your house is on fire, not after the 10% correction.

KARINA MITCHELL: Absolutely, so the S&P is in correction. A lot of liquidity has left the market. So in your opinion, what should investors be doing now? Should they sort of sit on some cash and sit it out for a while, watch this volatility? Or is it time to sort of find some sweet spots and dip back in?

THOMAS HAYES: Yeah, I think you want to zig when everyone else is zagging. If you look at the Bank of America Global Fund Manager Survey last week, managers are now at 38% overweight for cash. People have fled tech. They're at their lowest overweight to tech since December of 2008. If you had bought tech in December 2008, you're a very happy person. And they're at their highest overweight in cyclicals-- banks, energy, financials, materials, et cetera.

And the last three times that they got this overweight to cyclicals marked short-term tops in the groups of cyclicals, January 2018, January 2011, and mid 2006. So while energy and cyclicals could push a little higher, obviously, with the Ukraine aftershocks and some of the noise, keep in mind that everyone is now crowding in. The time to buy cyclicals-- and we were on your network in fall of 2020-- that was the time into accelerating growth GDP at 6%. With slowing growth this year, we're going to grow at 4%. Next year, we'll probably grow GDP around trend.

Money is going to start to shift back into those areas that can grow in a slowing growth environment. And we think there are opportunities, believe it or not, in tech, now that we've had such a massive correction on the rate hike fears. Both value tech is attractive here, and biotech has sold off dramatically. Since November alone, biotech earnings power of the top 30 weights of the sector has reduced by about 50 basis points, a half a percent for 2022. The sector has corrected more than 37%. So we like that divergence.

This sector is so cheap that in order to get back to its average multiples since 1986, the sector would have to appreciate 24% to get to its average price to book multiple, 155% to get back to its average price to operating cash flow multiple, and 112% to get back to its average forward PE multiple. So we think there's opportunity in value tech and in biotech.

We do not think there's opportunity in the high price to sales innovation stocks, many of which are still losing money and trading at 10 to 20 times sales. Not earnings-- sales. Even after coming down 50%, they're still trading at those levels. And with rates going up and the cost of capital, managers are going to want to get a return on their capital. They're going to want to see earnings power. They're going to want to see free cash flow. And there's plenty of opportunities still left in tech and biotech where you can take advantage and move ahead with that.

As it relates to cyclicals, we also have to be aware that shortly after we have some type of resolution in-- with Russia-Ukraine, we're going to see an Iran deal, which could put a million to 1.8 million barrels a day back on the market by the end of the year, and that that could take out some of the Johnny come latelys in the sector that wanted nothing to do with energy in 2020 and now are tripping over themselves to get exposure after most names are up double and triple. We think there are better opportunities elsewhere.

KARINA MITCHELL: Now Tom, I want to try and get a couple more questions in. So real quick, what about raw materials and commodities? Because the futures are red hot right now.

THOMAS HAYES: Yeah, again, I think this-- you know, the time to buy the insurance is before the house is on fire. So we were buying aggressively materials and commodities in anticipation of high growth, in anticipation of inflation. Now that it's here, if you look at the six months following the first rate hike historically, the best sector is tech and real estate. No one is positioned for that right now because the narrative is when the Fed starts raising rates, you want to be in cyclicals. You want to be in cyclicals in anticipation of the rate rises. Cyclicals outperform into the first rate hike, so we could see a little more juice in the next few weeks before that first rate hike in March.

But after that, the six months following, tech tends to outperform, as does real estate, et cetera. So I think that it's a time to-- and we've been in the last couple of weeks lightening up on the energy we've owned since 2020, lightening up modestly on the banks with the yield curve flattening. And we're looking at the general health of the market. We've got $1.2 trillion of buybacks authorized for 2022. That's the highest in history. That's why we think the risk is to the upside in the market from here, while everyone else is positioned for the downside.

Liquidity is still growing. Money supply is still growing. Earnings are rising, $225 for the S&P in 2022. That's up from $219 before the year started. And we're just coming off a quarter of 30% earnings growth. So a lot of positive things are in the fire to push things higher from here when sentiment is so low.

KARINA MITCHELL: Yeah, and earnings still looking good, but what's the future for companies right now, amid all of these Ukraine-Russia tensions? Because, you know, they were hoping to sort of say goodbye, to put supply chain issues in the rearview mirror, but how feasible is that now with oil climbing? You know, metals are climbing. Russia controls 10% of global copper reserves. It is used in a wide variety of products. And Ukraine's neon is vital to chip production. Its currency has fallen so that drives up the price of exports. What sort of position does this put on companies who are already, some of them, feeling the margin squeezes?

THOMAS HAYES: Yeah, well, in poker, they say there are a lot of outs. And I think there are a lot of outs in this Russia-Ukraine situation. You know, you could see Russia's biggest concern is the application to NATO for the Ukraine. Perhaps we could see some movement on that front, which would diffuse the situation. As for energy, you are going to see that Iran deal come online pretty quickly, which is going to add 1 to 1.8 million barrels a day before the end of the year, and a meaningful amount quickly.

So I think that we're kind of at peak euphoria as it relates to commodities and materials. And while you could push a little higher, as I said, I don't want to be picking up nickels in front of a steamroller. A lot of that move is already taking place, with most of these stocks up two times, three times, and some of the energy stocks up even four times. So I'd wait for a breather on this and then maybe reload later in the year for a longer term commodity cycle. But for now, everyone's tripping over themselves. And I want to help them out and lay off some of the stock that we built up a year and a half ago.

KARINA MITCHELL: Peak euphoria-- I love that phrase. OK, we'll leave it there. Tom Hayes, Great Hill Capital chairman and managing director, thanks so much for stopping by today.