Investors should give PayPal a second look says Thomas Hayes, Chairman of Great Hill Capital. Hayes says the payments company has a few things going for it, including an activist investor. Hayes also likes Generac ahead of the summer season. Hayes is less of a fan of Oracle and Eli Lilly due to the stocks' valuations.

Video Transcript
DIANE KING HALL: There's a lot of uncertainty in the markets. Fed Chair Jerome Powell adding to that feeling after announcing a pause in interest rate hikes. Well, some of that uncertainty seems to be in the rear view mirror. Powell though, saying despite the pause in June, there may be more hikes ahead. Here to help manage some of the questions and give us some stock picks in this context is Tom Hayes, Great Hill Capital chairman and managing member. So let's start with your picks. You have a couple for us. I find both of them interesting. Let's start with the first pick.

TOM HAYES: I'll tell you what, Diane. If I didn't shock you in the A block, I'm going to shock to you right now. So I've got two stocks that are down 80% off their 2021 peaks. And the first one is about as boring as boring gets.

DIANE KING HALL: I know. I know what it is. Tell the people.

TOM HAYES: This is the Kleenex of home standby generators. It's called Generac.

BRAD SMITH: Riveting.

TOM HAYES: And you know, Generac has a 75% share in this business. The problem is during COVID, they built up their inventories too much because they couldn't get parts. And it looks like in Q1 was the trough. So they're working through those inventories. They were at 1.7 times normal inventories. They got down to 1.4 times. They think they're going to be normalized by early in the second half. They're going to be cash flow-positive this year.

And the thing about this company, first and foremost, because of the pessimism, they're trading at about 15 times their historic average multiples, about 30 times. So you're getting a huge discount in terms of the growth. And the runway ahead is monstrous. They only have 6% penetration. And you could say, well, you know, does it get saturated at some point? People don't buy two generators for their house.

What they find is in the top states where they have the most penetration above 10%, they consistently have the biggest growth rates because what happens is everyone has a generator, so everyone wants a generator. Whereas in the markets where they're under-penetrated, they say, well, none of my friends have a generator. So what do I need a generator for? This is going to continue. This company is could be over the next 12 to 24 months, we think, a double after being down 80%.

DIANE KING HALL: And that's because of it being down 80%. So is this also just like a summer play because of, I don't know, potential for just demand, power outages, et cetera. Is that what is part of this?

TOM HAYES: Diane, I'm going to bring you in as an analyst at our fund because you hit the nail on the head. This company does well on the basis of weather events, and we just entered hurricane season from June through September. You get the power outages. And by the way, our grid has been underinvested for so many years that what you're seeing is-- you know, when I was growing up, power outage was an hour, 30 minutes. Now in some cases, they're three days, four days, five days.

DIANE KING HALL: Like Texas. Yeah.

TOM HAYES: And when that happens-- even in Connecticut, it's crazy-- when that happens, everyone goes out and buys a generator. So we're expecting above average weather events for the next four months. And if that's the case, that's going to be a further tailwind for Generac. We're going to see some acceleration.

With rates lower, we're going to see the housing market start to come back, Homebuilding come back. That helps Generac as well. So there's a lot of pent up demand with all the millennials, the young folks like you, 33, housing and family formation. You all are buying houses now that rates moderate. You're going to jump on that, you're going to want a generator, and that's what's going to come.

DIANE KING HALL: He's the millennial. I'm Gen X.

BRAD SMITH: You find me a bank that's going to give me a loan, Tom, we can talk. I also got to talk about PayPal, though. You talk about millennials. Of course, this is like the Venmo season, if you will. Summertime, you're out with your friends, you pay for this pizza, I'll hit you back with that money later on. Let's talk about PayPal here because that's one of your other picks on the day.

TOM HAYES: Yeah. This is probably one of the most hated stocks right now. Again, down 80%. Look, they've got 435 million users around the world. That's mind-boggling. 3 billion transactions. So why is everyone all up in arms? Number one, obviously, they got ahead of themselves during COVID. The valuations were crazy.

Right now, it's trading at 11 times forward earnings compared to its average historic multiple of 33 times. This thing is a monster. So what happened is they did this acquisition called Braintree. And Braintree really ramped up the volume, but their margins are lower because you don't have as much juice as you have on the normal PayPal transactions.

So analysts got worried that you were having margin contraction, but you were having-- it's OK to have margin contraction as long as the bottom line keeps going up. And what they wanted, they wanted it to go up at a certain percentage all the time. I'll take tons of extra volume as long as the bottom line goes up. And that's going to continue to happen.

You have two other things. Dan Schulman is stepping down before the end of the year. So you have leadership uncertainty. That will get resolved. They'll have someone good. And then you've got an activist also to catalyze with Elliott in the stock, Elliott Management. So they are good at extracting value. So I think there are a lot of things that can go right while everyone's looking at what can go wrong.

DIANE KING HALL: Unless for lack of a better way of expressing it, what could go wrong plays that you have. The ones that, I guess, you're not a fan of. Let's start with Oracle, which surprised me. You're going against the grain here. I mean, it's up on the day, continuing to extend its advance. Explain your thinking here.

TOM HAYES: OK. So Oracle and Lily-- I mean, you know, we're not short these stocks, so let's be clear about that. I don't think this is the time to be short aggressively anything. However, we like things that are on sale, we don't like things that are marked up. And we think that after Oracle's earnings, they're now trading about four turns above their average historic multiple.

They usually trade at 18, they're trading 22. And we just say, OK, let this thing breathe. It's a great quality business, we get that their cloud is growing. But see if there's a pullback before you get interested. You don't need to chase it up here after earnings is our view.

BRAD SMITH: Yeah. And then Lily as well, one of the other picks here, Eli Lilly. Similar, multiple issue, that you're taking?

TOM HAYES: Yeah. It's certainly a multiple issue. It's trading at 51 times, I think, relative to its average of 25 times. And it's on the hype around Mounjaro.

DIANE KING HALL: That's what I was going to say. I'm sorry to jump in. It has Mounjaro. Like how would you go against this? I mean, these weight loss drugs are all the craze right now.

TOM HAYES: Yeah. There's no question. But obviously, they have competition for Ozempic and Wegovy. And the stock has moved up dramatically in anticipation of the approval for weight loss usage. Right now, it's being written off-label. But they want to get the weight loss usage. So two things can happen. Number one, you could get that approval and it's a sell-the-news because it's run up so much.

Or number two, god forbid, which I think is very low probability, what if you didn't get that approval and it's already priced that in? So I think, again, I think the long term runway is certainly good, Diane. I agree with you. But I don't want to pay up two times it's average multiple. So for me, they're just a pass for now. It's not they're not great. They're both great businesses. But they're a little rich for me right now, just today.

DIANE KING HALL: Understand. We need a sale. All right. We like that. We like a sale. All right, Tom Hayes, thanks to you so much for this great conversation today.

TOM HAYES: Thank, Diane. Thanks, Brad. Appreciate it.

Source: finance.yahoo.com