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welcome to trading nation on their chunni his wage inflation starting to negatively impact some stocks we're joined today on the phone by Tom Lee a fun strata advisors Tom thanks for joining us here on trading nation you've got an interesting research report out there I know it's just for your clients but it's really interesting about how certain companies that are less exposed to wage sensitivity they look like they're gonna do much better they've been doing much better for a while talk us a little bit about that yes thanks Eric you know I think for the past few years no one's thought about wage sensitivity because there's been slack in the labor market and indeed if you took the SP and you said 50 companies most exposed to wage pressures they didn't they perform in line with the rest of market but since May the companies that have the most wage exposure have underperformed those with the least by 1600 basis points and that's it that's a massive relative performance differential in five months and talk to us a little bit about this metric it's simply market value divided by the number of employees obviously we see Facebook has the most market value for the number of employees it has the thing was about 30 million dollars a person and so just explain to us the metric why it's important and how just any regular investor might be able to use it themselves sure I mean what investors have to keep mine is that a company's value is comprised of the people assets the hard assets and you know the intellectual property assets and so when you take the market value of a business divided by the employees you get a sense for how much other things are pulling the weight for that company Facebook has a three hundred seventy two million dollar market cap and a thousand employees that's a 30 million dollar market cap per employee that actually means Facebook if they had to suddenly treat their employees to like free lunches buy them a Lamborghini it's not going to hurt Cheryl dur value because you're dealing with thirty million dollars a market cap per employee on the other end of the spectrum company like Darden Restaurants has $50,000 a market cap for employee there's going to be a real affect to shareholders if a company like Darden has to increase the benefit it plays to its employees what was really interesting though is we think of a lot of these tech companies being up there on the on the positive side of it like Facebook having a lot of market cap per employee but Xerox was so far down the list at the bottom having very little market cap per employee what's that about what's going on with them yeah there's a really reason that coming like your ex could be low because of its capital structure meaning there might be actually quite a lot of debt per employee and so you're squeezing out how much equity market value there is per employee but it exposes the same issue the margin of safety for a shareholder of Xerox is low because if you increase the benefits to an employee you're subtracting that from the shareholders itself and so how long do you think this trade keeps going for if you say just take the best 50 companies on that market value to employee ratio if you just invested in them for example would you think this is a six-month trade a one-year trade how long do you think this has legs for yeah so our data scientist guy Sam he basically ran a simulation for 16 years looking at every every quarter the same metric and we found that there's huge sensitivity to employment cause the employment Cost Index and for the last seven years because the employment Cost Index hasn't gone anywhere there's been negligible differential like in other words for seven years it didn't matter but between 2000 and 2008 it was a big differentiator of price performance so I think it's suggesting to us that if wage inflation is picking up this is going to be a really important factor to pay attention to for the next couple years and then finally going into the election with that next couple of years do you think there's going to be one group versus the other that benefits depending on how the white house go is how Congress House Senate goes I mean on this specific issue in wages I think both are going to actually create wage inflation because when you look at this expansion versus any of the 11 prior to this since World War two government spending has been significantly higher than it has been the last eight years last eight years we've actually had a negative effect from government spending it's been you know a shrinking so I think whether it's a Republican or Democratic president fiscals loose things gonna come that's good for wages and that's good for inflation which helps SMP revenues but of course it really makes companies which are less weight sensitive outperform well Tom I think this is really fascinating and like the way you're working with that ratio to help look at some stocks in a different way than we normally do thank you for joining us here on trading nation everybody else thanks for watching we'll see you next time thanks have a great weekend hey CNBC fans thanks for checking out our YouTube channel here you're going to find videos packed with all of the information that you need to be smarter about your finances you can subscribe by clicking right here and click on all the videos around me or the I right here to watch the latest from CNBC thanks for watching
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