Analyst breaks down top stock picks, what to sell this quarter

CapWealth CIO Tim Pagliara joins Yahoo Finance Live to discuss his top stock picks, Berkshire Hathaway stock, and what stocks to avoid.

Video transcript

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AKIKO FUJITA: Well, we are seeing the markets close in the green today with the S&P 500 notching its highest close since August. A lot of uncertainty, though, still in the markets, especially with concerns around the debt ceiling debate as well as the Fed. So we're going to take a look at couple of stocks to consider and a couple you may want to avoid with Tim Pagliara. He's CapWealth chief investment officer.

Tim, let's start with the two picks that you really like. Chevron is one that I want to hone in on, because energy was the best performing sector last year. It's the worst performing this year. What do you see there that you like?

TIM PAGLIARA: Well, I see an improving global economy. I see increased demand for oil at a time when supplies are a little tightened. It's a great company with great operating earnings. It's a dividend play, 3.85% dividend. And it fits the profile of a conservative investor that is looking for consistency and a long-term runway of success.

SEANA SMITH: --Hathaway Warren Buffett has liked in the past here. Tim, Berkshire Hathaway is one of your picks. Why are you so bullish on Berkshire Hathaway? And what do you think the future looks like for that company, potentially without Warren Buffett at the helm?

TIM PAGLIARA: Well, first of all, I think he's done a great job of putting a tremendous team around him, you know, led by Greg Abel and Nadeep. And, you know, they have tremendous discipline. When treasuries were five basis points, they were there buying them every Monday morning, $125 billion worth of treasuries. And now, that $50 million are the operating earnings from his cash turns into $5 to $7 billion. So he's got a lot of wind at his back. They have the opportunity to take advantage of any of the dislocations that are going to continue as the Fed tightens and tries to bring, you know, inflation under control.

So it's a kind of a golden period for a company like Berkshire Hathaway that really has been out of favor just because of their discipline. And-- so I'm excited about it. And I think they will have a really good three to five-year plus run.

AKIKO FUJITA: Let's take a look at two stocks that you're bearish on. These are two high growth names that some would argue just grew at a rapid clip during the pandemic and have now seen significant pullback. I'm curious to get your take on Zoom, though, because you could argue it's a little different from Peloton in that the use cases are still there. Is this a valuation play? What are your concerns with the stock?

TIM PAGLIARA: Well, they really haven't found a way to monetize their business model. And their business model doesn't have much of a moat around it. So, you know, and people are going back to work. They're going to be back in the office. So a lot of the dynamics that made it successful during the pandemic are starting to wane. At the same time, they're not generating excess capital. And those are the kinds of companies that you want to avoid during a period like this.

Price of credit has really gone up. I mean, there's no really even 8% money out there except for the best credit quality that customers of banks. And, you know, a lot of people are paying 12% to 15%, which just sounded outrageous three years ago. But it's a reality again.

SEANA SMITH: Tim, what do you think the future then looks like for the company? Could they be a potential M&A target?

TIM PAGLIARA: I just-- we don't-- we've excluded it from our list of companies that we follow for the reasons that I told you. So I don't know that it makes a good merger candidate or possibly an acquisition candidate at some point or it's a bolt on. I believe, what we're-- the period we're in right now mimics a lot of what we saw with the dotcome bubble of 2000.

Take a company like Sun Microsystems. From 2000 to 2010, it lost 98% of its value. And Larry Ellison bought it up for $7 billion just so he could buy an operating system and stick it to his old friend Scott McNealy. So, you know, there are a lot of these companies that just will not survive as standalones. And they may get bought up by another company, but it's not going to be, you know, a core business like everybody had envisioned during the pandemic.

AKIKO FUJITA: You talk about potential acquisition targets. Peloton, one that's getting named a lot. And you mentioned that is your one stock that you're very bearish on. You've raised questions about the sustainability of its business model. I wonder if there's a counterargument here, though, that the stock has fallen so much. This is a company that is very much in restructuring mode. Does it make sense for investors to potentially position themselves for the turnaround?

TIM PAGLIARA: In our opinion, Peloton was the poster child for the excesses of the market. You know, $186 a share to where it is today, sub-$10. And it just never had the characteristics of a really good business at the valuations that it had. So what, somebody would pay for it? Why they would buy it? You know, it's-- they have a subscription model. I think you're going to even see weaknesses in that as people go back to the gym, and you know.

So it's just a difficult call. And it represents to me a lot of what was wrong in that free money period that the Fed still has challenges to correct.

AKIKO FUJITA: CapWealth's Tim Pagliara with his top picks. Great to have you on today. Appreciate the time.