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Stocks due for 5-10% correction 'pretty soon': CIO

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O'Neil Global Advisors chief investment officer Randy Watts tells Reuters' Fred Katayama investors should buy when the big pullback comes because he sees strong earnings growth this year propelling stocks further north. He names a 5G stock that has recently pulled back.

Video Transcript

FRED KATAYAMA: The Dow and the S&P 500 hitting the pause button Tuesday. But the NASDAQ climbing to yet another record high for the fifth straight session. Well, let's ask Randy Watts of O'Neil Global Advisors if this market is due for a pullback soon. Randy, good afternoon. Welcome back.

RANDY WATTS: Hi, Fred.

FRED KATAYAMA: Well, Randy, we've seen record-after-record winning streaks for the market indexes. Are we due for pullbacks and based on what you're seeing on the charts?

RANDY WATTS: I think we are. The market's clearly become extended. You have about 89% of the S&P right now above its 200-day moving average. That's about as good as it normally gets. We haven't had a substantial pullback in this run. And I think if you look at a lot of individual stocks, they're quite extended from their breakout points.

So I do think we're due for a 5% to 10% correction pretty soon. But I do want to say to your viewers that longer-term, we still feel positive about the US market for 2021. And that's because we think earnings are going to accelerate a great deal this year. Obviously in 2020, corporate profits were down. In 2021, we think earnings growth is going to be north of 20% for the S&P.

FRED KATAYAMA: And Randy, given those elevated stock levels where the market is right now, are there any stocks that you see that you're comfortable recommending buying at these current levels?

RANDY WATTS: Given where the market is, we really want to go after stocks that we think have long-term growth. I think a lot of the reopening trade as the vaccine gets rolled out is already in a lot of the stocks in the market. So we don't want to chase this cyclical value trade. We really want to look for long-term leaders. A good example of that and a stock that's been down recently after the quarter is Qualcomm. They're the leader in 5G chipsets.

All the major handset manufacturers, including Apple and Samsung, are clients. The stock's trading at 20 times the calendar year 2021 estimates. That's below the market. Right now, the S&P is about 23 times. And we think the number of 5G handsets sold this year is going to be more than double what it was in 2020. So that's a stock we'd have people look at.

FRED KATAYAMA: Well, Randy, Qualcomm, in fact, is down 3% year to date as you point out. So it's pulled back. On the other hand, did rise 66% over the last 12 months. Is 5G already factored into that price?

RANDY WATTS: I don't think it is because the earnings expansion the company is going to have. And it put in perspective. Yes, it did have a good year last year. But, you know, NASDAQ's up 47%, I believe, from over the last year. So it's been ahead of the market but not by a ridiculous amount. And we think owning a company like this as it goes into a new product cycle is going to be very profitable for investors from here.

FRED KATAYAMA: And Randy, I was looking at your note. And I know one of the big themes for your company is clean energy in terms of what you're recommending. Is there one good clean energy stock that you'd recommend that investors pick up right now? Because we've seen a lot of action and a lot of appreciation in those stocks.

RANDY WATTS: A lot of the clean energy stocks are very extended, as you're pointing out. One name we like is NextEra Energy. That's the largest electric utility in the United States. They're actually headquartered down here in Florida where I am right now. They've done a great job at that company of shifting from fossil fuels to renewable and clean energy.

Right now, 40% of their EBITDA comes from clean energy. So they've really been a leader here. They've been growing their earnings at about 10% a year. They're forecast to have 10% earnings growth again this year. And they've got a 1.7% dividend, which we think is attractive given that the 10-year right now is about 1.12%. So that's a stock I would encourage investors to look at. I think it's a long-term sort of steady-eddie holding people can sleep at night with.

FRED KATAYAMA: And I might add that it's up 9% already this year. Clean energy being a big theme especially with the Biden administration. And Randy, looking at today's action, what's your read into it? We've had a good long run. The Dow and S&P right now sort of on pause it appears. The NASDAQ still rising.

RANDY WATTS: I think the market is extended. I think it's looking for an excuse to correct. I think that correction has been put off a little bit by the stimulus bill that's coming down the pike and also the fact we've had such a good earnings season where 2021 earnings have risen from an estimate of 165 to 170.

But I do think the market is really getting set up for a 5% to 10% correction. I think it's going to happen-- happen fairly soon. We think that's a buying opportunity. We think stocks will end the year higher than they are now. But things are a little extended. Most markets usually have some kind of a breather or a pause in a calendar year.

FRED KATAYAMA: Is impeachment hearings having any factor that playing a factor today?

RANDY WATTS: I think the market doesn't really care about that. I think it's very likely that the impeachment will not be successful because the number of Republicans who have said they're not going to vote for it. I think the market is not concentrating on that. I think the market is concentrating on the roll out of the vaccine, the stimulus package, and the economic and corporate profit recovery that we think is going to happen this year in the US.

FRED KATAYAMA: OK, thank you, Randy-- appreciate it. Thanks for your stock picks. Our thanks to Randy Watts of O'Neil Global Advisors coming to us today from Miami, Florida. I'm Fred Katayama in New York. This is Reuters.