Tech growth could slow: strategist

RegentAtlantic's co-head of investments Andy Kapyrin tells Reuters' Fred Katayama why it's time for investors to buy cyclical stocks like Disney instead of adding to their tech holdings.

Video Transcript

FRED KATAYAMA: Stocks retreating Tuesday afternoon after the big indexes hit record highs on Monday. What to do with all those big-cap tech holdings? Well, let's ask Andy Kapyrin. He's Co-Head of Investments at RegentAtlantic. Good to see you again, Andy.

ANDY KAPYRIN: Good to see you, Fred.

FRED KATAYAMA: So tech stocks, they've appreciated a lot. They're up-- I mean, they're trading at 26 times earnings. Do you sense that they're about to top out soon, or possibly are they in a bubble?

ANDY KAPYRIN: So I don't think tech stocks are in a bubble, and the reason I don't think that is 26 times earnings is, of course, expensive. It's not historically expensive for a growing sector. And where do I see a bubble is not so much in their stock prices. It's in the monopoly profits that they've been able to book.

Here's the thing. A lot of technology firms are a natural monopoly. It makes all the sense in the world to have one shopping portal where I can go to to search for-- to search for a particular item. So it makes sense that Amazon is as big as it is, for example. But it might call for more regulation and more control.

FRED KATAYAMA: Now, Andy, you gave me three stock picks, but I noticed all of them are on the cyclical value side. Are you suggesting that it's time for investors to rotate into cyclical stocks?

ANDY KAPYRIN: Yes, I think so, and the reason why I'm suggesting it is it's less valuation driven-- although they are, of course, cheap-- and more driven by getting back to normal as a catalyst for this trade to work.

So let me give you one idea that I think is a splendid getting back to normal idea, Disney. So Disney, why do I think it's such a good idea? Well, of course, Disney is an in-person, service-oriented business that requires it getting back to normal to get high theater revenues. People have to be comfortable going to theaters. To get high revenues off of its amusement parks, people have to want to go to Disney World.

But it has an edge over a lot of getting back to normal firms, which is that on a secular basis, it's also going to where the public is going in media. Just not that long ago, it launched its own media streaming service, and boy I'm sure the executives there are glad that they had a head start here because it's become from a loss leader, something that wasn't booking a significant profit at all, to likely the most important product at Disney as of 2020.

FRED KATAYAMA: So, Andy, do you think that the rotation to cyclicals, that this has legs, that it's not going to be one of those head fakes that we've seen in past years?

ANDY KAPYRIN: So I think this has legs, and the reason I think it has legs is we've seen five years' worth of growth materialize for the tech, for the growth side of the market. And they might experience something that they haven't experienced in a while over the next 12 months, which is a slowing down of growth and potentially a quarter or two of flat year-over-year revenues. That's entirely possible because what did the coronavirus do? It didn't permanently increase growth for them. It brought forward growth that was going to happen anyway. It just made it happen faster.

Meanwhile, what does the more cyclical part of the economy experience? It experiences a getting back to normal. It had four quarters robbed out of their profit potential. And, frankly, people will want to go out and spend. People want to catch up on all the things that they weren't able to enjoy during the COVID winter and, frankly, during the COVID year. It's going to supercharge their ability to earn a profit for the immediate future.

FRED KATAYAMA: All right, Andy, so what should investors do? Should they hold on to their big-cap tech holdings and add cyclicals to their portfolio, or should they take some profit on tech and then add cyclicals? What about the asset allocation within equities?

ANDY KAPYRIN: So let me answer that question this way. I view tech as a hold. Tech is a long-term secular growth story at a reasonable valuation that just experienced a one-shot, supercharges rate of growth as a result of a very unusual and unrepeatable event. It is likely to take some time off, but it is not so overvalued that it's likely to enter a bear market of its own making.

So my view is hold on to the tech stocks that you own. Maybe take some profits. Maybe trim a little bit and put those profits to work in cyclicals that are likely to lead the next leg of the stock-market rally.

FRED KATAYAMA: All right. Thank you, Andy, for your views and your thoughts on Disney.

Our thanks to Andy Kapyrin of RegentAtlantic coming to us today from New Jersey. I'm Fred Katayama in New York. This is Reuters.