Crypto is very much a ‘behavioral kind of a trade’: Strategist

Sam Stovall, CFRA Chief Investment Strategist, joins Yahoo Finance to discuss the outlook on earnings season, the energy market, and the crypto space amid the launch of ProShares Bitcoin Strategy ETF.

Video transcript

KARINA MITCHELL: Stay on the markets and bring in our next guest, Sam Stovall, CFRA chief investment strategist. Sam, thank you much so much for being with us today.

SAM STOVALL: Happy to be here, Karina.

KARINA MITCHELL: I want to ask you-- third quarter earnings after a great start off to the races, starting with banks, which outperformed last week. And then we got J&J earnings today. It beat the Street, improved guidance, and that sent the stock way up. It's soaring. News not so good for P&G. Also beat the Street, but warned about inflationary pressures. So my question is, how do those pressures affect the rest of the earnings season and moving forward?

SAM STOVALL: Well, it seems as if Wall Street likes what it's seeing so far, not only in terms of third quarter. At the beginning of the quarter, expectations were for a 26% year on year rise, according to the S&P Capital IQ consensus estimates. Now that number is above 27%. But if you look to the fourth quarter, initial estimates were 20.6. Now they're at 21.6. And obviously, those numbers are going to be ratcheted higher when they are, then, incorporated overnight into the new numbers, heading forward.

BRIAN SOZZI: Sam, I caught up this morning with P&G's soon-to-be CEO, and he told me, listen, Brian, we're probably going to raise prices even more. And oh, yeah, our inflationary outlook is higher than we shared three months ago, now looking for $2.1 billion hit because of inflation over the next 12 months. Do you think the market is just too optimistic on profit margins for S&P 500 companies here?

SAM STOVALL: Not really, Brian. I think that the problem really is more sector specific. Our consumer staples analyst was talking in the most recent earnings report that the expectations for consumer staples were pretty low. We've had an underweight on the group for a while. In terms of rolling 200-day relative strength, the group has been among the four worst performing sectors.

And items that were a big concern were increased fuel costs, transportation costs because lack of drivers, et cetera, and then commodity input costs, as well as the reluctance by consumers to accept much higher costs for the items that they are purchasing. Whereas other areas, the expectation is, especially growth areas, et cetera, investors are willing to accept some higher prices because the growth in earnings are expected to be much greater than the increase in the cost.

KARINA MITCHELL: And Sam, where do you see, sort of, parking your money, given that it doesn't look like energy costs are going to stabilize anytime soon? Which sectors will work well under that sort of scenario?

SAM STOVALL: Well, obviously, energy looked pretty good. That's a category that when you have the integrateds that benefit from both the upstream and the downstream, as well as drilling equipment and services and exploration and production, you know, they're going to be benefiting from the higher oil prices. Also, interestingly enough, because of the increase in retail spending, because of the expected improvement in economic growth activities, consumers are saying, you know what? Yeah, the prices are, what, 350 per gallon for regular, but I'll be willing to take it just to get outside.

Other areas of strength are financials. With the short-term rates continuing to stay low, but longer term rates creeping higher, that's increasing the slope of the yield curve, which does tend to benefit the banks. And then real estate and communication services are also two categories that are still holding up quite well on a relative basis.

BRIAN SOZZI: Sam, you could feel the excitement over this Bitcoin futures ETF, the ProShares ETF that launched this morning. So far out of the gate, pretty strong. I mean, just so much enthusiasm right now for all things crypto. Do you think crypto can rise-- or let's just focus in on Bitcoin. Do you think Bitcoin could rise alongside the market here? If I am so enthusiastic or if one is enthusiastic about crypto, do they have to sell some of their stocks and rotate into these names?

SAM STOVALL: Well, but there's also a lot of cash on the sidelines. So maybe we're going to find, little by little, more people are willing to take their-- put a toe in the water, if you will. And if the trend continues to advance, then they'll put in the whole foot. So I think that with crypto, it really is very much a behavioral kind of a trade right now. Investors, because you really can't look at the fundamentals-- there really are no fundamentals-- you look more at technicals. And then you also hope that it's a good inflation hedge. But really, that has not proven itself out.

Companies like Coinbase, however, you can actually try to forecast revenue growth. Our analyst has a buy recommendation on Coinbase. And one of the things is that they're forecasting about a 30% year on year growth in revenues. And so, from a discounted cash flow model, they have a 375 target price. But I think it'll be a bit harder to try to come up with that kind of valuations for Bitcoin itself.

KARINA MITCHELL: And how do you think it affects other crypto going forward? Because, as you say, it is so difficult to value. And why should people buy, you know, spot Bitcoin now when they have this ETF that they can sort of move away from? And doesn't it sort of hurt the underlying in the end?

SAM STOVALL: Well, I guess that all depends. I mean, the Bitcoin ETF trades on the futures. It doesn't trade on the Bitcoin itself. So, obviously, you have some purists who actually want to own the digital currency itself. I think that because it is very much an emotional trade at this point, fear of being left out kind of a trade that it really is being driven by greed on both sides.

And so, you know, where the top will be, I don't know. Maybe you look back to the internet in the late 1990s to try to get a comparative idea. But right now, the enthusiasm is certainly behind them.

BRIAN SOZZI: Sam, right, and, you know, you and I, we've seen a lot on market cycles here. Where do you think Bitcoin prices are a year from now? I mean, do you think we're at that stage, given the enthusiasm, Bitcoin, let's say, in three months has doubled here.

SAM STOVALL: Well, unfortunately, whenever anything goes parabolic, it does tend to run out of fuel. And then it ends up like a rocket where you don't have enough fuel to push it out of the orbit. It just comes straight back down again. So it's one of those situations where it's almost like the meme stocks, like GameStop, et cetera, that somebody is going to be left holding the bag. I don't know exactly when that will be.

I think that we've got to go through a couple of periods in which we have downward moves, but then we have investors buy on the dip, only to then find out that buying on the dip has run out of fuel. So it could end up lasting longer than people like you and I, who have experience, it could end up lasting longer than we think.

KARINA MITCHELL: OK, Sam Stovall, we will have to leave it there. CFRA chief investment strategist. Thank you so much for being with us today.