While they intended to contrast their investment styles, long-short investors Jonathan Angrist and Ali Motamed ended up sounding a stern warning on U.S. equity markets on Monday.
In “Different Flavors, Market Neutral Vs. Long-Short” a panel discussion at the 9th Annual Inside Alternatives and Asset Allocation conference at the Wynn Las Vegas on Monday, Motamed, managing partner at Invenomic Capital Management, warned that patterns in the U.S. equity markets may portend a crash in the future.
“People haven’t cared about value, and thus we’re on a 10-year run of growth outperforming value,” said Motamed. “The last few times that’s happened, we walked right into 1989 and 1929. I think taking the time to discern good opportunities will pay off.”
Motamed, a star long-short strategist, is still finding good long opportunities in U.S. equities. He said that he liked cable companies and companies running data centers, noting that cable companies’ businesses were shifting from television to broadband where they could exercise broad pricing power and potentially the ability to act as gatekeepers to the internet.
Angrist, president and chief investment officer at Cognios Capital and himself a manager of a market neutral long-short strategy, agreed that there were good opportunities for investors, but added that they’re few and far between—which is good news because a smaller opportunity set means easier choices for investors. But he added that rising rates will cause stock prices to go down, which should expand the universe of solid investment options.
Angrist argued that, currently, many U.S. stocks are severely overvalued.
“There are 271 companies in the Russell 3000 now trading at 10 times sales or more,” said Motamed. “That is the highest in recorded history except for in one quarter, the first quarter of 2000. … If you look at the median valuations, it blows people’s minds. The median enterprise value to sales ratio in the first quarter of 2000 was below 1.2. The median enterprise value to sales ratio right now is 2.5.”
Unlike the market in 2000, the market today is being led by a handful of strong companies, said Motamed, who added that there were $500 billion market cap companies leading the market in early 2000 that had absolutely no earnings. Today, there are $1 trillion companies leading the market, “but a lot of junk underneath that.”
Motamed said he doesn’t put much stock into the argument that tech stocks like the FANGs were worth their valuations because of the data and intellectual property they held.
“At the end of the day, these companies have to make money off of what they sell,” said Motamed. “We look at labor costs going up and interest rates going back up, and this all keys into earnings. If you move interest rates up another 106 to 107 percent, that will take earnings down.”