Pullbacks have been so extreme, if you have a longer-term outlook it makes sense to upgrade some stocks': TD Ameritrade Strategist

Shawn Cruz, TD Ameritrade Trader Strategy Manager, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss how the markets are being impacted by the coronavirus outbreak.

Video Transcript

ALEXIS CHRISTOPHOROUS: Want to bring in Brian Sozzi now for a look at a trending ticker. That would be Apple. What's the news there, Brian?

BRIAN SOZZI: Apple, simple-- up 4.5% spot in the early going here, Alexis. And that's just due to Deutsche Bank upgrade this morning. A bullish valuation perspective on Apple here, and I suspect, given we've had this relief plan and you've seen the Fed step in here, I wouldn't be surprised to see a lot of Wall Street sell-side firms come up and try to pick the bottom on Apple. And why not? Blue chip company-- lots of cash.

ALEXIS CHRISTOPHOROUS: All right. Good time to bring in Shawn Cruz right now. Shawn, a friend of the show, a TD Ameritrade strategy-- a trader strategy manager there. So Shawn, what's your take on the Apple upgrade this morning? Warranted?

SHAWN CRUZ: I think so. And I think you're seeing that out of not just Apple, but a lot of companies. Looks like these pullbacks have been so extreme that if you really do have a longer term outlook, these do look like attractive entry points. A lot of these companies, not just Apple, but many others are trading down to some those levels that we saw them in 2019 and some are down to levels that we saw them at last in 2018. So I think it does make sense that you are seeing analysts that have a little bit more of a longer run outlook coming in and see this as a buying opportunity.

BRIAN SOZZI: Shawn, Brian here. I put this question to Mike Lee a couple minutes ago. Do you think what we're seeing in the market the past couple sessions is simply a sucker's rally?

SHAWN CRUZ: No, I think you're going to need to see this back-- these back and forth moves for the foreseeable future, at least the next couple of weeks. And I think that's healthy. Bottoming right now, especially after this strong of a pullback, is a process. It's not something where we just hit that low and then we shoot straight higher. It's going to take a couple of weeks to figure out. I think what you're looking for now, which we have seen in some of these recent rallies, is leadership out of the cyclical sectors. You're seeing industrials are leading the way today. We're seeing strength out of financials.

Whereas if you think back to two or three weeks ago, when you saw rallies, they were being led by the defensive-- staples, real estate, utilities. So see leadership by the cyclical sectors on the updates is a good first sign. I want to see the VIX back further and I want to see these intraday moves on the up and downside settle into the low single digit ranges-- you know, be more in the order of 1%, 2%, maybe 3%. We can't get a sustainable meaningful rally where investors are comfortable coming back in any sort of meaningful size when you're getting these 7% up and down swings. So I think just a little bit of consolidation at these levels would be-- what would be needed if we're going to get some sort of a level we can move higher off of.

BRIAN SOZZI: Shawn, where do you see investors coming back to? What specific names? You know, we've talked to the past-- a lot of interest on your platform in Uber, but that business [INAUDIBLE] has been hammered over the past couple of weeks.

SHAWN CRUZ: It has. And Uber is something where maybe they put a smaller allocation to. But where we see a lot of interest from our clients and I think just across the board, you've seen a lot of interest from it, and that is names like Disney, Microsoft. Companies like that. Apple is also another one. Where I think investors realize that these businesses aren't going anywhere. And once we do get on the other side of this, those are going to be the companies that are in good stable footing to recover moving forward.

And this could represent a buying opportunity for those companies, especially if you think of something like Microsoft, where they have-- you know, their business has sort of geared and regenerate over the past couple years to benefit in this type of environment. They've gotten Microsoft their home services, which is basically a work from home offering. Went from 32 million daily active users to 44 million daily active users in the space of just one week. They also own Xbox. I know a lot of people sitting around at home now are looking at play in the Xbox more, some people are actually making those purchases for the first time. So there is a lot of things that Microsoft is doing that I think positioned them to benefit from this environment.

And then Disney's another one where you need to sort of look at the other side of things, because their theme parks is a major driver of value for that stock. And that is certainly not doing well right now when everything's on lockdown. But once you get to that side of this, they still have Disney streaming. They own Hulu. I'm sure a lot of people are getting Hulu subscriptions now. So I think those are the kind of businesses that investors are looking at now and we're seeing our clients look at now. And you just-- it's an opportunity take small bites.

ALEXIS CHRISTOPHOROUS: So Shawn, great point that's a lot of these blue chip companies you're talking about will still be here when we come out the other side of this, but what about some big name players in industries that are not going to survive? Like the airline industry? We could see major consolidation there. Some of the big carriers may actually have to go bankrupt.

We don't know if they're going to be able to continue to fly. And also, in the energy industry. We're already seeing dividends getting slashed, jobs getting cut, and some of those smaller players needing to close. So what do you do from an investor standpoint with sectors like energy and airlines, where you just don't know if those companies are going to be there when we come out the other side?

SHAWN CRUZ: Especially in energy, I think that's one thing to look at with oil down at these levels. And it's not just the demand issues from the coronavirus. There's also the Saudi Arabia and Russia standoff, where they're talking about flooding the market with crude oil, and that's pushing that price down. So when you look at these energy companies, they need oil, you know, well above 30, well above 40-- they need oil at north of $50 a barrel for them, I think, to really be kicking off enough cash flow to service some of the high levels of debt that are in that sector.

So what you're seeing companies do first is they're trying to go out there and cut expenses wherever possible. You're seeing CEOs take pay cuts. I believe the CEO of Occidental took an 80% pay cut. A lot of other members of staff took 30% pay cut. So they're doing a lot they can do to shore up expenses, but if they aren't able to find a way to get sustainable strong levels of cash flow, then those dividends are going to become threatened across that industry. And even in some of the companies I think that traditionally, those dividends were reviewed as completely safe-- the majors like Exxon and Chevron-- the fact that the CEOs are even coming out and saying our dividends are safe for now is very telling that that is a risk that you need to be aware of.

As far as the airlines go, it's going to really depend on what a lot of the aid packages look like. And that's not only coming from the government in terms of some sort of a bailout, but also, you know, the credit facilities that the Federal Reserve is setting up-- if there is going to be the ability for them to maybe get some lifelines to ride this out and come out on the other side of this. But I certainly do think you want to be on the lookout for some consolidation in the industry.

And really, what you're looking at here is if you're looking at these airlines, I think the airlines that have the smallest international footprint are probably the ones you want to avoid. And the one that comes to mind most of all, there is United. Delta and American really don't have quite the international exposure that United does, so I think, you know, those are the companies that you might want to look at. Southwest, another one very domestic-- domestically oriented here. They're definitely going to have a rough go of things over the next couple months as we get some of these lockdowns.

And there's still that potential that the government might come out and actually institute an official lockdown of air travel and for anything nonessential. That's another risk that's hanging out there for these airlines. So those are the sectors I would be cautious in right now if you're trying to put money back to work, because those are the ones that have the most clear impact from the slowdown due to the coronavirus, for the energy sector, just due to that drop in oil.

You can look elsewhere. And I think you are seeing investors, one, go and look at the banks. The banks, which some of these price to book values where were below one in some cases for pretty solid banks. So I think there is some buying opportunities taken there. And then on the tech front, I don't think it's difficult for a lot of investors to imagine how some of these tech companies that were doing well before this can actually benefit even more, so to speak, from this.

The only thing there is look at those companies that are getting a lot of subscription-based revenues. It's very important that as those companies have pivoted towards subscription-based revenues, that you're looking at the companies that are going to keep people sticking to their platforms and keep that stream of subscription revenue coming in the door. Not I'm going to use it for the next three weeks, and then when I get out of lockdown next three weeks, months, whatever that might be, the first thing I do is cut that subscription. You want to see the companies that bring new subscribers on and are able to keep them after this. Those are the companies that are really going to benefit moving forward.

BRIAN SOZZI: Shawn, real quickly, what do you think about Netflix here? I've read countless articles that consumers are cutting their Netflix-- Netflix subscriptions. Why? Because they're-- they're now out of work or about to lose their job in a week or two.

SHAWN CRUZ: Yeah, I think for Netflix, one, there's always that phenomena of password login sharing that you see out of a lot of Netflix users. But that is one risk out there. And that's really across the board. And I think that has generally been priced in to a lot of these companies on this pullback-- is that there are going to be some people going to make some pretty tough choices fiscally with what they're going to do if they're on limited income.

And I think that's why these government stimulus programs that have the ability-- I'm sorry, the government bailout packages that we're seeing out of Congress the stimulus packages that are being offered to just give some money, put money in consumers' pockets give us such broad based rally, especially a lot of those consumer-related sectors. Because that is going to enable some people maybe to not have to go out there and just start cutting things across the board to sort of make ends meet at the bare necessities-- food and shelter.

ALEXIS CHRISTOPHOROUS: Shawn, sticking with Netflix for a minute, do you think they might change things up and say, listen, we know you can't afford the service, so we're either going to lower the price or, I don't know, offer it for free for a limited time? Do you think they might do something like that? Because certainly, the optics would look pretty good to do something like that during this pandemic.

SHAWN CRUZ: I think if you were going to see Netflix do something like that, I don't know that, you know, as investors, anybody would want to see them do that just across the board. They'd want to figure out some way to extend that to people that need it. And then if you're able to continue to pay, I think they're going to try and sort of see if we can find a way to divvy that population up.

I think that would be a good gesture. And I do think some consumers are going to remember the companies that were sort of doing right by the population here to help get people through these rough times. And you refer that from companies like Starbucks, where they're going to continue to pay employees for the next 30 days. We're hearing a lot of companies that are going to keep health care benefits in place for employees, even if they aren't getting paid. So I think companies that are doing right sort of taking the hit here in the near term, I do think they actually will get a lot of brand value out of this moving forward when we come out on the other side.

But if Netflix were to do that, I don't think that would be a huge shock to their revenue or their earnings outlook, because that would presumably be something very short term. And like I said, I think investors are starting to get to the point where they're looking on the other side of this.

BRIAN SOZZI: All right, Shawn, I'll--

ALEXIS CHRISTOPHOROUS: Go ahead.

BRIAN SOZZI: Go ahead, Alexis.

ALEXIS CHRISTOPHOROUS: It's all right.

BRIAN SOZZI: Yes, real quickly on the-- you saw Target come out this morning and warn. Isn't that a big strength or the lack of strength of the consumer?

SHAWN CRUZ: I think it makes sense that it's just really what the consumer is doing. I expect consumers to entrench here, at least for a little bit, with all this uncertainty. And when they sort of trench in here, what they're going to be doing is stop buying those sort of very discretionary items, which tend to be higher margin. And that's what you're talking about.

They're not going to be selling as many of the high margin things-- a lot more the staple necessity type products, which usually are lower margin. I think that's something that is going to maybe affect these consumer companies for at least the next quarter or two. But I think it makes sense and I don't think it's too big of a shock that you are going to see some margin compression across the board here.

ALEXIS CHRISTOPHOROUS: All right, I'm going to leave it there. Shawn Cruz of TD Ameritrade. Thanks as always, and stay well. We'll talk to you soon.