This Sector is Driving the Market December 27, 2015

Steve McDonald: Hi, everybody. I'm Steve McDonald. This is your Market Wake-Up Call. Today we're coming to you from the 1840s Ballroom in downtown Baltimore at The Oxford Club's Christmas party. So if there's noise in the background, it's probably the people at the bar. Our guest today is Matthew Carr, Emerging Trends Strategist. He's here to talk about the new economy and how just technology stocks are driving the market. Welcome. Matthew Carr: Hey, thanks for having me, Steve. Steve McDonald: So tell me what the new economy is and why it isn't working better. I mean, we're bouncing off the bottom here. Matthew Carr: It's still relatively small, but as you said, the “new economy” - in terms of Amazon and Netflix - that is what's driving the market higher. We're seeing this huge trend over the last several years accelerate toward mobile devices; m-commerce, which is mobile commerce; and e-commerce, which is online commerce. And the growth has been so insane that it's really kind of hard to understand it. So in 2006, all right, let's think about that. It was the year before Apple introduced the iPhone. Eighty million smartphones were sold worldwide, right? This year, 1.5 billion. Steve McDonald: Wow. Matthew Carr: Apple is expected to sell 75 million iPhones just in the fourth quarter. So you have this huge thing where everybody now has a mobile device on them. Everybody now has connectivity to every single retailer, every single brokerage. You can sell and trade stocks just out of the device in your pocket. And it's actually leading to a difference where, you know, telecoms are suffering, where in 2003, 55% of the U.S. population had Internet access. Now 50% of the population does not have a hard line to their home. Steve McDonald: I don't have one anymore. Matthew Carr: Yeah, everybody has sort of moved away from it. So you see this big, rapid trend, and there's a lot of difficulties with companies adjusting to it. Steve McDonald: All right, let's talk about the companies adjusting to it because I'm starting to have concerns about brick-and-mortar stores. Yes, you can get better prices online, you have better selection, and, with things like Amazon Prime, it's there in a day or two. Matthew Carr: Right. Steve McDonald: But what's going to happen to brick-and-mortar stores if nobody's going to them? Let's go with just that for now. Matthew Carr: Well, that's the biggest hurdle that everybody's trying to deal with. This change has happened so quickly. So last year was the first time ever that 50% of all traffic and sales for retailers during the holiday season came from mobile devices. And that was an industrywide average. A lot of them saw between 45% and 55%. This year, the industry average is 60%. Everybody has to move over toward m-commerce and e-commerce and to these online sites. Brick and mortar, I think, actually are going to end up dying because no one can compete with Amazon, right? That's why Wal-Mart is trying to spend... Steve McDonald: But then that begs the question. All right, so we have better selection, better service, but lower prices. I mean, prices are lower online. What's that going to do for deflation? I mean, if we keep driving prices down and our brick-and-mortar stores go away, they're - I mean, do you see the problem? Matthew Carr: That is an issue, but it's actually something positive. Steve McDonald: It's not positive if you own brick and mortar. Matthew Carr: It's not positive if you own brick and mortar, but you get into this term that has popped up, technological deflation, which is, like you said, that you can find better prices online than you can in stores. So you're going to have to start seeing more stores closing down, more people trying to move that online presence. Take REI this year. REI was able to close on Black Friday and on Thanksgiving because management was like, “Well, you know what, we don't have to spend money paying for employees to be at the store. People are still going to shop. We're still going to make money. It doesn't really matter. It doesn't do anything; it doesn't affect our bottom line. It actually helps us because we can now just have three guys or whatever maintain the website and everything's fine.” And you see this bigger, larger trend moving toward business services, right? You talk about cloud computing data centers and all that kind of stuff, and that is another thing where I think we see a big tipping point. You know, a company like 8x8 Inc. Steve McDonald: All right, let's talk tipping points. Matthew Carr: Okay. Steve McDonald: If you look at the big technology companies, they've got ridiculous price-to-earnings (P/E) ratios, some in the triple digits. I mean, the earnings estimates, yes, they're big; the growth estimates are big. Are we betting too much on this stuff? I mean, what happens if the nature of the market catches up to technology? Matthew Carr: Well, I will say there are some technology companies that I do believe are overvalued. Now, a company that has a high P/E, that doesn't really bother me too much because that's backward-looking. I always like to look at their current P/E or their trailing 12-month P/E and compare that to their forward P/E. That's where you see a lot of this great growth and a lot of this disparity. So you take a company like Cheetah Mobile, right? Cheetah Mobile, which is a Chinese company. It's a very interesting company in the fact that it is not a play on China. It is a Chinese company that started focusing on that domestic market. It's now expanding internationally, seeing 85% to 100% growth per quarter, and seeing this huge bump in users outside of China. It has a current P/E of 119, a forward P/E of 2. Steve McDonald: And you're not concerned about that? Matthew Carr: That doesn't concern me because... Steve McDonald: What, me, worry? Matthew Carr: Yeah, what, me, worry? Because I can see that growth and I can see the markets that it's playing into, which is, one, security. You know, any sort of antivirus, piracy software, because there's the complete explosion of these devices all over the world. Sean Brodrick actually... Steve McDonald: We've got to shorten this. It's going too long, isn't it? Matthew Carr: I'm sorry, I'll just make one quick comment and then we can cut down. But, you know, Sean Brodrick made a comment one time at a conference: How many people have virus protection software on their mobile device? Steve McDonald: Nobody. Matthew Carr: Nobody. But that is a problem. We all carry it around; it carries all of our information. Things are now being broken into, so those are areas that we see a lot of growth going forward. Steve McDonald: Well, there's no doubt technology's going to be the driving force going forward, but the big question is, who's going to be the next Apple, Google or Amazon? Well, who is? Matthew Carr: That is a good question. Steve McDonald: Thanks for being with us. Matthew Carr: Thanks for having me, Steve. Steve McDonald: And for everybody here at the Market Wake-Up Call, I'm Steve McDonald. Thanks for putting up with the noise from our party in the background. I'll see you next week. [End of Audio]