Kevin O’Leary, chairman of O’Shares ETFs and star of Shark Tank, said that the digitization of America is here to stay, even if the economy opens up again. O’Leary has sold off his commercial real estate holdings to redeploy capital into the technology, healthcare, and consumer service sectors. On gold, O’Leary sees the metal as a hedge against inflation, and contrary to what some analysts think, it will not be replaced by bitcoin anytime soon.
Kevin O'Leary chairman of AU shares, ETFs investor, and star of shark tank is back on Kitco to give us an outlook on the economy, the sectors he likes, the investments he likes and what all investors from all ages should be paying attention to. Right now, Kevin, it's a pleasure speaking with you today.
Welcome back to Kitco. Great to be here. Thank you. I'm on a personally, a big fan of the work you've done and I've watched shark tank. I've watched Reagan's Dan, I've been watching, I've been following your work since university. So it's a real honor to be speaking with you today. I want to start with your outlook on the economy before we get into some of the investments that you like, and some of the philosophies around investments that you have, like, like that you could share with us this year has been difficult for all businesses across America, small businesses, large businesses.
Can we recover from this in 2021? Yeah, I think we are in 80% of the cases. Um, you know, there are some sectors that are disadvantaged and will remain. So, and also there's been some permanent change in consumer preferences and how they buy. And so, you know, just categorically right now, obviously business travel is going to be challenging.
Uh, motels, hotels, that surface business travelers that will be challenging into 2021. Uh, because many businesses are cutting business travel and entertainment costs by as much as 50%, not because of pandemic, but because you don't need to do it anymore. We're forced to try technologies that we ended up starting to like the one we're using right now, zoom.
Um, we do many meetings now with buyers, potential clients, investors, et cetera, online. And we don't anticipate changing that. Uh, into the new year or anytime in the future, because it's very efficient and saves time and money and travel. So there's another example and anything to do with restaurants, food services, cruise lines, et cetera.
I have investments in those spaces. They have fallen behind, but 80% of my private portfolio is actually head of free cashflow estimates. In Q4 because of what I call this giant digitization of America, this move towards moving directly to working with the consumer. And so the beneficiary of that has been the companies like Shopify, DocuSign, zoom, Facebook, Google, you know, the traditional players in digitization.
And I see that trend continuing. So sectorally, um, You know, what, what I've done is, is started to move money out of first time, I've done this in decades. I reduced my exposure, for example, the commercial real estate from 31% down to eight, which has freed up a tremendous amount of capital. I now have to redeploy.
Do you think the, uh, sectors that are tied to the digital digitization of the economy are at risk once the economy eventually opens up when people forego Shopify and Amazon for brick and mortar shops, once again? No. I think that genie's out of the bottle. Um, I think we're in the third inning and I think.
You know, uh, you know, I'm, I'm involved in an indexing company that tries to look at fund flows and index and create products, uh, for that either they get published as ETFs or the indexes get licensed. And one of our most successful indices in 2020 was Oh, gig, which just focuses on internet giants globally that are really leading the charge and providing the infrastructure or the technology to let these companies digitize.
You just saw Nike's numbers. What was so extraordinary about them is they basically have said it would take them five or six years to get to over a third of their customers direct. And now they were there in five months. And so that's, they have less, you know, they, they rely less on retail now and their margins are much higher selling direct.
Their products to people all around the world. That's all because of technology. And so, okay. Tries to index that sector and it's, you know, up over a hundred percent year to date. Um, you know, obviously I'm an investor in that, but it's because I use the technology for all these companies as well. Okay. Now, how do you see the economy improving next year?
Monetary stimulus obviously was a big factor in driving up a lot of the equities indices in 2020. What about on the fiscal stimulus front? Can we expect fiscal stimulus to alleviate some of this pain that Americans are still in. Well, you're seeing the first attempt to have it just to today. Really. I mean, it's w we know what's going to happen.
Um, I think the, the environment to consider as an investor for the next call it 18 months is a very accommodative fed with. Interest rates remaining at basically zero. And yet for the first time in my investment life, I have companies growing at 20 and 30, 40% annually. And I get to invest in them when interest rates are zero.
So when people ask me, you know, what about the stay at home stocks as we were just talking about, uh, I don't think they're stay-at-home stocks. I think they're work anywhere stocks, and I think they're going to continue to perform. And so technology is one of my go-to sectors. For 2021 as is healthcare as is the consumer.
Those are the three areas that I'm, you know, reducing my exposure to commercial real estate because I'm cutting back on lease holds everywhere. I'm not opening my marginal retail stores ever again. Um, I'm canceling leases all over the place I don't need, and I just don't want to be in that headwind. And so I've reducing exposure there and then deploying the capital back into those three sectors.
I just mentioned. I know, just from watching shark tank, that valuations are very important to you. So let's talk about valuations for the tech sector analysts. I've spoken to have been on both sides of the debate. One is that they agree with you. More growth is expected, but the, on the other hand, I've heard that it's difficult to get into the space now, given how high prices have already run.
So do you think valuations are overstretched? No, I don't. I mean, when you value a tech company, I mean, it's different in valuing an industrial company, or let's say an automotive company where you're willing to pay X time, multiple of free cashflow. That's the discipline I've lived with for decades. But when I value a tech company, what I look at is balance sheet strength and sales growth.
If you look over time, those. Tend to be the most important. If you just looked at free cash flow, our traditional PE multiples on Amazon 14 years ago, you wouldn't have invested in it ever. And yet it's been one of the best returns, you know, the market's ever seen. And so I don't let the, I look at sectors and I determined my discipline based on how those metrics are measured by investors.
And so in technology it's balance sheet strength and sales growth, and eventually these companies all turn cashflow positive because. They have in generally speaking high margin businesses and they're growing so fast, that scale matters. And so, you know, you would have started off early in Facebook and you're seeing what that's done, same with Google.
And I've traditionally been an investor in all of these primarily because I use the products and buy the licenses to fund my private company's growth. And so I'm very familiar with their business models. I know how zoom works cause I licensed. You know, enterprise versions of zoom from, for most of my platform.
And that kind of puts me in a place where if I'm giving them that much money, why do not? Why, why, why don't I own their equities too? That's sort of my investment philosophy. This year has been interesting for investments because we saw not only the device and technology companies and also the rise of gold and other safe Haven commodities.
Now, this is interesting because usually they move in an inverse correlation. But the story here is, like you said, is that people moved away from brick and mortar shops went into tech and at the same time they were afraid of what the pandemic would do to the economy in their investments. Then moved into gold.
Can the same story be applied to 2021? You think Kevin? Yeah, gold traditionally, um, has been a hedge against inflation. And if you ever wanted a hedge against inflation, you want it. Now we have, you know, 900 billion coming in. From the helicopter sky, just falling into the economy, perhaps there'll be more, uh, early in Q1 or Q2 that tends to be inflationary particularly into the fixed income markets.
And so for those of us that have been staked in sort of the allocation model, gold has always been a 5% waiting for me. I pay for storage of bullion for two and a half percent waiting in the position. And then I use ETFs to actually. Uh, you know, balance each month or each quarter back, back up to five or down to five.
And I've done that for a long, long, long time other investors at the same lately. Uh, some people have suggested that, um, Bitcoin could be a replacement for that. I am not in that camp for a whole host of reasons, but it doesn't mean others. Aren't going to try it. I haven't found the inverse correlation yet that people tell me, Bitcoin has to the markets.
If you go and look at the March, correction, Bitcoin corrected as much and more than the market did. So I'm not convinced that yet. Sure. Placement for goals. Would you, would you consider increasing your allocation to gold should have inflation one higher than expected next year? No, what I've done is I've increased my allocation up to 5% fully weighted, but then I've also gone from 50 50 Fisk skin fixed income equity to 70% equities.
And I've chosen companies in the S and P 500 that have pricing power in inflationary times. And that's the other hedge against inflation. So I find I don't buy indexes like a market cap, weighted index, the S and P 500. I would never own that. Cause there's many companies inside of it. In fact, I can only find around a hundred.
That I want to own. When I look for quality of balance sheet return on assets and giving me price protection in the case of inflation. And again, I use an index that I'm involved in. I had a hand in designing called Oh, USA. And so that owns a subset, it's a dividend strategy, but it looks for strength of business model and free cashflow.
And so distributions are part of the, of the economic theory or thesis in which you would own it. So that's my largest holding actually all USA. And I use it as a, a primary core bedrock holding, and I've made it much bigger than my weighting and fixed income now because I am worried about inflation in addition to what I do in gold.
Okay. Now a final question about gold. I know you were on the show before, and you had, you had told the audience that you didn't like gold miners for the reason that the management team. Is more of a risk than an opportunity for investors. Why not just own the metal is what you said. That's a good point.
I've used that counter argument with a lot of analysts who do like gold mining companies. But what about this year? They've written a lot. They've had a good leverage to gold price. Uh, do you, have you changed your mind? No, no. I've owned gold for, you know, decades. And so you get these cycles of, of. Um, you remember the only reason management exists in a gold company is to extract the commodity that has a value based on Mark to market pricing every day.
They're actually in the way of you they're there in between you, because if you end up with idiots management and I don't mean that, well, I, I don't know. I mean, any it management, I mean the majority of gold managers, miners have never shown an ability to manage costs. Not now, not ever. And, and so I'm very critical of, of their ability to forecast costs in their models.
They're incredibly bad at it. Probably one of the weakest sectors in all of the S and P 500. So why, why can't I just remove them from the equation and simply buy the metal? And so if there's any one time you could say, Oh, well, you get the leverage factor of, of, you know, owning or in the ground. And yada, yada, yada, this story, that story, it's all noise to me.
And so. I try and extract the idiot management from the commodity, uh, when I want to invest in it. So if I have already shark tank and I would have to tell you that I'm the CEO of a gold producing company, a mid tier, and I, and I, and I told you, Hey, Kevin, look, look at my balance sheet is expanded dramatically.
This year, I've paid down the debt. Our cash has expanded free cash flows have never been better. Our yields are higher than ever before our IRR has come down. I'm promising to pay dividends now because we could. W what would you say. Um, I'll buy the gold. When you get out of the ground, call me, do you like the metal?
You're going to 2021. I do, actually, I think it's a full waiting for me. I anticipate that, um, I, I may even do more of my own storage because there's many different ETFs you can use. I use GLD because it's the most liquid and I'm not going to move the market no matter how much I make an allocation in it.
Uh, there are others that are cheaper, but frankly, the cheapest is simply, uh, by the metal and storage. Uh, one of the many global storage facilities, which I do a lot of.