U.S. stocks have been red-hot, with the S & P 500 hitting its highest level in over a year. But Steven Glass, managing director and analyst at Pella Funds Management, says U.S. markets have “run too fast, too quickly.” The S & P 500 is up around 15% in the year to date, while the Nasdaq has soared about 31%. “We’re very cautious at the moment because [the] market rally has run … very hard given where interest rates are,” he told CNBC’s ” Street Signs Asia ” on Wednesday. Glass said the S & P 500 earnings yield is at about 5.2% — a level similar to that of one-year Treasury bonds. Traditionally, the differential is around 5%, meaning the index’s earnings yields should be at 10% right now. That would translate to a 10 times price-to-earnings ratio for the S & P 500 — but the figure is now at 19. “The markets either believe that equities aren’t that risky anymore, so it doesn’t really deserve a risk premium, or are going to grow very quickly, or interest rates are going to decline very quickly. We think all those propositions are quite risky,” Glass said. “Unless there are material earnings upgrades, particularly from Big Tech, [the] market is very expensive on all statistical measures,” he told CNBC. Stock picks Investors can look at cheaper stocks instead, according to Glass. He named two “very cheap” American fertilizer stocks: Mosaic and Nutrien . Both stocks have a double-digit free cash flow yield, and close to all-time low valuations, Glass said. He pointed to two favorable conditions: the need to rebuild grain stock levels — which have declined for six consecutive years — and the expectation that China will buy more soybeans in the coming months. Glass is also very bullish on the electric vehicle sector. He expects that EVs will drive the growth in semiconductors even more than the artificial intelligence boom. “So the move to EVs is actually going to be the single largest, most significant growth driver of semiconductors,” he said. He picked American company Albemarle , the world’s largest lithium producer, as a way to play the EV sector. Lithium is a critical component of electric vehicle batteries. “We think there’s going to be a supply shortage at about 2025 because it takes years and years to actually produce all that lithium and you have to have started 10 years ago in order to be ready by 2025. And the market just isn’t there,” Glass said. “There’s a lot of lithium in the world. But the problem is actually bringing it to market and there are huge issues with that, whether it be access to water or whether it be the local governments or whether it be just built an actual facility,” he said, adding that Albemarle has the world’s “best mining assets.” He also likes Chinese firm CATL , the world’s biggest EV battery maker. “It is the leader in that space. And it has the lowest cost of production so we see it as a clear winner,” Glass said. The stock is accessible to global investors via the VanEck ChiNext ETF, where it has a 18.7% weightage, or the KraneShares MSCI China Clean Technology Index ETF, of which the stock makes up 8.1%.
This story originally appeared on CNBC
