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Eminence Capital CEO: I Don’t Think The Worst Of The Selling Is Over

By Jacob Wolinsky. Originally published at ValueWalk.

Eminence Capital CEO Ricky Sandler

Following is the unofficial transcript of CNBC interviews with Eminence Capital Founder & CEO Ricky Sandler and Quadratic Capital Management Founder & CIO Nancy Davis on CNBC’s “Closing Bell: Overtime” (M-F, 4PM-5PM ET) today, Thursday, March 17th for premiere week. Following are links to video on

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I Don’t Think The Worst Of The Selling Is Over, Says Eminence Capital CEO Ricky Sandler

I Think It’s A Good Time To Own Fixed Income Volatility, Says Quadratic’s Nancy Davis

Interview with Eminence Capital Founder & CEO Ricky Sandler

Part I

SCOTT WAPNER: We asked super investor Ricky Sandler. He is the founder and CEO of Eminence Capital. He joins us now live. Ricky, welcome to “Overtime.” It’s great to have you on this new program.

RICKY SANDLER: Thanks Scott, and congratulations on the new show. Good to be here.

WAPNER: Thank you so much. It’s really good to have you. I did note on Twitter a few moments ago, two years ago yesterday, you came on with me in the throes of the COVID outbreak. Dow was down some 2800 points. You’re unafraid to make a big call on the market. Things are obviously different now. There’s a lot of uncertainty still out there. How do you see things today in the markets?

SANDLER: Yeah I mean, I think I think I see things cautiously. I wouldn’t say bearish, but I think that we’re entering a new sort of paradigm shift based on the Fed withdrawing liquidity, starting to raise interest rates. And that kind of all made a lot of sense and I think the war and its impact particularly on, on food and energy inflation adds a whole new wrinkle besides the geopolitical risks. And so I think the market was going to have a tougher time even before the war. I think I think that gets more difficult because it puts the Fed in a trickier position. Inflation is going up even faster in the near term and they seem determined to be on a predictable path and not wanting to surprise the markets to the downside.

WAPNER: So if I asked you, do you think we’ve bottomed here after three pretty good days now? And as I said this, what feels at least for the moment like newfound momentum, do you think that the worst of the selling is over?

SANDLER: No, I don’t. You know, again, I don’t like to make short term predictions. But I think we see lower lows this year. I think the market probably ends the year, you know, here or lower. But you know, it’s not a total bearish outlook, but but one where it’s important to to be focused on what kinds of stocks you’re in. There’s plenty of stocks that have profitability, durability, value. It all matters today. I think we’ve moved out of the environment where kind of top line and narrative are driving stocks and back into an environment where the real fundamentals and sort of real value of which growth is a piece but but the other factors on profitability and valuation are also important.

WAPNER: Are you basically suggesting that ultimately the market, Ricky, buckles under the Fed tightening and this path that they’re on and they may have to be even more aggressive than the market is expecting because of where inflation is?

SANDLER: So what I’m suggesting is, I think it’s going to be hard for the market to have continued strength when you’re heading into a slowing economy, greater pressures on the consumer, and a Fed that is tightening. I don’t think the Fed buckles and surprises the market. I think they talk hawkishly, and eventually the market will lead the Fed. I think the one thing that Fed does not want to do is is surprise the market to the downside, i.e. actually be tighter than the market expects and surprise them. So they’ve been talking hawkishly, and they seem to be on this very predictable path. And it’s possible that inflation runs higher than they think for for longer, and they will just continue to be on this tightening path because I don’t think they want to shock the market. I don’t think they want to make a policy mistake in that direction.

WAPNER: So let me ask you this because Lloyd Blankfein had a tweet about an hour or so a couple hours ago that I thought was quite interesting, and I’d love your take on it as well regarding how hawkish the Fed either is or isn’t. We’re putting it up on the screen here. “The Fed’s 7 projected 1/4 pct rate rises thru ‘22 is not so hawkish,” said Blankfein. “Real interest rates still negative to the horizon. By itself, current Fed policy is less of a tailwind to the equity market but not a headwind. And a lot of the froth has already left the market this year…” I’m wondering what you make of that on the same day that a closely followed strategist at J.P. Morgan, Marco Kolanovic, suggested that the areas of the bubbles had largely corrected enough and that that’s over too. What do you think about that?

SANDLER: So we definitely corrected some meaningful amount of where the exuberance was. I personally don’t think it’s over. I don’t think that we have cleaned out all of the excessive optimism on companies that are growing just top line but not profits or companies that have large TAMs but but difficult paths to attack those TAMs. So so I think we’ve we’ve had a good amount of the damage, but I don’t think we’re done with it and so I agree with Lloyd’s comment that we still have negative real interest rates and that is one support for parts of the market that that that stocks are still a good deal compared to investors alternatives. Companies should have pricing power and be able to at least retain nominal earnings growth and kind of purchasing power. So, I get where Lloyd’s coming from and I think the Fed is talking a certain game and putting out certain forecasts to just let the market know we’re on this path, you know, and the market might force their hand if we get really high inflation prints, the market might start to price 50 basis points in one of these meetings. And then I think it would be okay for the Fed to go but I don’t think they want to they want to get more aggressive than the market expects.

WAPNER: Let me ask you this. Do you think the Fed put is dead or is there some level of a market upset that would force the Fed’s hand in a way that people aren’t thinking about right now?

SANDLER: I think the Fed’s be gonna be focused on the unemployment rate as far as whether it’s gone too far and not on equity prices. So, I don’t I think the Fed put is there if unemployment starts to back up and we’re, you know, back through four and a half percent and it looks like we’re losing jobs. I could see the Fed easing at that point, but but that’s going to be their true north and not the stock point.

Part II

WAPNER: Back to Ricky Sandler. Now, Ricky, thank you so much for bearing with us. That’s going to happen from time to time as we have this new program and earnings are breaking. So I do appreciate your patience, back to our conversation. So given everything that you had to say, how does your positioning look? You run a long, short strategy. Where are you net today?

SANDLER: Yeah, our net’s somewhat below average. Our long, short ratio is below average. I think it’s not at uber bearish levels, but it is below average. I think, you know, it is a stock pickers’ market. I think there’s a lot of things that are still quite overvalued for kind of the business prospects and, and kind of even the hangover from, from some of the exuberance we had and then at the same time, there’s been a lot of damage beneath the surface of the market. And so, there’s quite a lot of, you know, strong businesses, some growth, some durable value that I would argue offer great absolute value and across a range of outcomes. Obviously, you know, we don’t know how the economy’s gonna play out, how the Fed is going to play out. I try not to overly predict that but view, have a view of a range of outcomes and then feel good about our positions across a range of those outcomes.

WAPNER: You know—

SANDLER: But I think importantly. Scott, I think importantly with the Fed withdrawing liquidity, this market is moving back towards a regime where traditional bottoms up fundamentals are gonna matter. It’s not just going to be top line. It’s not just going to be narrative in TAM. That was an environment of a lot of liquidity. And prior to that, a uncertain world and so I think we are in a new paradigm as it reflects what what factors matter for stocks.

WAPNER: You know, I literally was going to bring up and now we’re showing them at the bottom of your screen, GameStop earnings are crossing the tape as well and we’ll have a look at the stock in “Overtime” as it moves in real time and you have gone after at least on Twitter and maybe in your short book as well, some of this whole meme mania if you want to call it that and I don’t know specifically your your short GameStop. Maybe you want to address that as the stock is down some 11% or so. But you’ve had a commentary running on Twitter from time to time about the AMC apes, about GameStop. It sounds like more broadly, you’re speaking about stocks like this in in some of those areas that really got way ahead of itself.

SANDLER: Look I think I think there are a number of stocks, a number of areas where retail investors have driven the stocks to non-fundamental levels and levels that can’t be supported by fundamentals that will happen over the next one year, three years, five years. There’s a whole range of things there are EV companies, there are mean stocks. And and those represent a piece of things that were short, I don’t like to talk about specific shorts. We have a very diversified short book, so that we can navigate through squeezes and other things, but I do think this is one area where there’s been a lot of demand for shares from from retail investors that I think is going to come back to not look like such a good place to invest.

WAPNER: And lastly before I take another quick break and then we get into some stock picking and I want to talk to you about your long ideas and get some actual, actionable names from you. How do you think about the retail cohort today in terms of the stimulus if you want to put it that way into the bull market? And what happens now and what becomes a more uncertain environment? If that money leaves the market and doesn’t come back, what is the greater impact to the overall direction of stocks if any at all?

SANDLER: So it’s two factors. I think I think one you you bring up a good point, which is they have been a very big factor in driving the market since the outbreak of COVID. And I think that more recently, they have been heavily exposed to some of these high growth areas that that did well early but then have corrected so I think there are potentially sizable losses, and then leaving would obviously accelerate that. In addition, we’re coming up on April 15 and tax payments and I know there’s a significantly larger tax bill this year than, than last year or years past so to the could be some selling as retail investors look to meet their, their tax bills, and they’re a factor and look I’m a fan of of the democratization of markets and, and I think that you know, retail investors are here to stay but at times they move in groups and in amassed into some of the same stocks and create certainly valuation levels that that a fundamental investor would say is unsupported by what could happen to the business.

Part III

WAPNER: Alright, welcome back to “Closing Bell: Overtime.” We’re back with Ricky Sandler from Eminence Capital. He of course is still with us. Let’s talk some ideas for our viewers Ricky if we could stocks, that you have bought recently or added to outright the MSOs, pot stocks?

SANDLER: Cannabis stocks, you know, we’ve we think that the US MSOs particularly Green Thumb, Verano and TerrAscend, they trade in Canada, they trade on the pink sheets. This is one of the next great growth industries that has stocks that are severely mispriced because there’s still a large number of institutions that are not yet comfortable buying these stocks. And so even though they’re legal, legally operated at the state level, we still have some some federal ambiguity which is which is keeping people from buying them so you have a big mismatch and stocks that are massively mispriced. Those companies trade at eight or nine times, this year’s cash flow six or seven times, out year cash flow maybe less, and the opportunity for that space to triple or quadruple over the next five to seven years and we can identify the winners and the leaders today. And so because they’re not listed on US exchanges and because there’s some compliance concerns that at traditional institutions, there’s a big mismatch and we expect that to change in 2022 as we get some safe banking regulation is something we think is quite probable this year.

WAPNER: You know, my eyes got quite wide. When I saw Coupa Software was on your list. That stock took it on the chin to say the least earlier in the week.

SANDLER: Yep. And so we’ve been, you know, we own a small position coming into that and we added to it significantly. You know, it’s ironic I think that the software companies are maybe some of the best places to be investing now. If we’re heading into a world of slowing economic growth where there’s all sorts of inflation up and down the P&L, these sort of growth companies that don’t have the same cost pressures are not gonna have the same economic risks are quite interesting but because they were so over owned and such, the positioning was so far off, these stocks have traded poorly. So we have been adding to a few enterprise software companies. Coupa is one, is another that we’ve been adding to and so I think that’s an interesting space. Amongst all the tech wreckage, enterprise software is a place where we’re fishing a little bit.

WAPNER: You know, Zillow has had its own issues this year for, for certain. That’s another name that you have. What’s attractive to you today about that?

SANDLER: Yeah, so, so Zillow owns the top of the funnel traffic. Two thirds of all consumers looking to buy a house come to Zillow’s website without a search. They kind of come directly. And we think that, and Zillow got into the ibuying space which created and they were late to the ibuying space and it wasn’t their core business, so they did poorly, and they pulled the ripcord, Rich Barton pulled the ripcord and exited that and I think that upset a lot of growth investors. We were quite happy with that decision. We think the core business in providing a better consumer experience in searching for a house, in finding a broker, in all the attachments. I mean, it is a massive, massive TAM. If you look at just the brokerage pool alone is $100 billion but the size of the of the US housing market and the ancillary services is tremendous. You know, Zillow has a low double-digit billions enterprise value. It’s probably trading at 12 times its current EBITDA and yet it has enormous runway as, as founder, Rich Barton has come back about three years ago and has really been pushing them into a lot of these ancillary services to provide just a great customer experience as consumers shop for housing. We’re actually pretty constructive on the housing market itself. So we don’t think that’s going to be a negative and Zillow was just a leader that has been through a classic boom bust for investors and now people are kind of leaving it for dead and we think the opportunity for this company to continue to grow its revenues well faster than the housing market and take advantage of its tremendous competitive position as, as the source of information for homebuyers.

WAPNER: And finally, before I let you go, I figured you had to be bullish on, on the housing space if you had Zillow on your list along with Tempur Sealy.

SANDLER: Yes. So, so TempurPedic is a phenomenal company. They dominate largest player in the in the mattress market. I think this is a classic case of where it looks like it was a COVID beneficiary so when they reported a little bit of a messy quarter, the stock sold off hard. This company trades it at eight times earnings, yet is the leader in a very defensible growing industry. We think that sleep has secular growth from, from health benefits. You know the world when when I came into the business, people used to crow about how little they needed to sleep and it was a sign of how strong you were. Today, people are taking sleep a lot more seriously. And Zillow is the strongest, best position company in there. We think there’s there’s secular growth, great cash flow, they’re buying back a ton of stock. We think the CEO is terrific. And it is massively mispriced at eight or nine times this year’s earnings.

WAPNER: Thanks so much, appreciate your time and that stock chart really tells the story about what we’re trying to do here in “Overtime.” Ricky, the bells rang, the action though it doesn’t stop. Trades still happened. Stocks still move and that’s what we’re trying to bring to our viewers. Thank you for helping us do that today.

SANDLER: You got it, Scott. Thanks a lot for having me. Good luck with the new show.

WAPNER: You bet. That’s Ricky Sandler of Eminence. We’ll see you again soon.

Interview with Quadratic Capital Management Founder & CIO Nancy Davis

WAPNER: Let’s bring in Nancy Davis, Chief Investment Officer of Quadratic Capital Management. She’s also the portfolio manager for the Quadratic Interest Rate Volatility and Inflation Hedge ETF, that’s called the IVOL. Welcome back. It’s nice to see you.

NANCY DAVIS: Hi Scott, great to see you. Congrats on your new show.

WAPNER: Thank you so much. It’s great having you on this first week. I know you’ve been looking for more volatility. It certainly has been more volatile. The question is what happens now? Let’s look forward. Are you still?

DAVIS: Yes, definitely. I think interest rate volatility. I think VIX is equity volatility. So one thing for your viewers is anything with an options market has a vol market. There are lots of different volatilities out there. And I think interest rate law especially in the US with such unknown monetary policy with the balance sheet and fiscal stimulus is a pretty good opportunity. I think it’s a good buy right now. I’m not allowed to give financial advice, but I think as an asset class, it looks pretty attractive.

WAPNER: Yeah. I mean, what do you make of what the Fed had to say the path forward whether they’re going to be able to realize what the market has priced in or not, and then how that ultimately impacts the vol picture?

DAVIS: Well, the hikes are already priced in so nothing really changed with Powell’s forward guidance. He had already tightened the rates market because the hikes had been priced in already. I think the thing that was quite unusual was dancing around the balance sheet and not really talking about it. It was kind of kicking the can down the road a little bit. I think that’s the elephant in the room and how they let that roll off or unwind. We’ve never had, you know, the QT happen before, the quantitative tightening, so I think it’s a good time to own fixed income volatility in portfolios.

WAPNER: Beyond buying let’s let’s say talking your own book, right, the IVOL, and I can understand why you would suggest that people may want to do that. You also have a way of playing the flatter yield curve that may be a counterintuitive way of looking at it. Is that right?

DAVIS: Yes, that’s our BNDD ETF, B, N, double D, that’s also long volatility, long fixed income volatility but it has exposure to the long end of the curve in case of the Fed hikes a lot like what’s priced in that might actually cause the economy to slow and go into sort of more of a Japan style recessions. So that’s, that’s another strategy that we want to offer to investors depending on their view on the market.

WAPNER: We had Jeffrey Gundlach on here with us to react to the Fed and he always gives actionable ideas. Will you listen to what he said yesterday about his own view, and more specifically to the VIX. I would like to get your reaction to it. Here’s Jeffrey.

GUNDLACH: I’ve just gotten to the point in my career. I’ve seen this movie so many times. When the VIX gets above 35, I don’t care how bad the tape looks. I don’t care how bad the geopolitics look. You’re supposed to get more bullish.

WAPNER: What do you make of that? And I don’t know whether we’re going to get back to 35 or not. It sounds like you think we may. But what do you think?

DAVIS: Well, the VIX is just equity volatility. Specifically, it’s S&P short, dated volatility. So I think it is equity volatility is very mean reverting. So I would agree with, with Jeffrey that, that having the VIX tends to mean revert when it does spike. I mean, it’s definitely just one type of volatility out there. I think the thing that he knows really well is that most investors are actually short, fixed income volatility naturally in their portfolio from their exposure to mortgages. If you think about if you own a financial mortgage, the homeowners, the homeowners are the ones who are long the option to prepay whenever they want. They call that convexity correction, or prepayment risk, which is just a nice way of saying short volatility and it’s actually fixed income volatility that most investors are short naturally.

WAPNER: What happens though if, and Gundlach by the way also had a view on that the 2-year may be topping out shortly as well and Scott Minerd was on this week. I mean, you’re talking about pretty keen bond minds that maybe the 10-year was in a range of two to two and a quarter that it was was topping out. What happens if both are in terms of the kinds of strategies that you’re recommending our viewers pursue?

DAVIS: Well, our strategies are really agnostic to the level of interest rates. We’re other, we’re another type of spread product so we gain exposure to the spread between interest rate differentials, so it doesn’t really matter necessarily where interest rates are, whether they’re, you know, 2% or 5%, or 1%. It’s really just the spread between short and long dated rates that we provide access to.

WAPNER: We’re gonna see what happens. Nancy Davis, I appreciate you being with us here for the first week of “Overtime.” I’ll see you again soon.

DAVIS: Thank you, Scott. Great to be on.

Updated on

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