During earnings season, big banks are often among the first companies to unveil their quarterly financial results. But rather than looking at bank earnings themselves, market expert Paul Schatz wants to direct people’s attention to something that could have a major impact on the future health of financial institutions: real estate.

During a July 11 appearance on Fox Business, Schatz, president of investment banking and financial advisory firm Heritage Capital, shared his insights on a potentially problematic future at the cross-section of these sectors.

“The big banks, the big money centers, they’re going to be fine. And when the crisis comes, money is going to flow there, right? That’s the worst kept secret around,” he said. “I think net interest margins are going to be as expected, a little bit better. I want to see if they’re going to make any comments, especially the regionals, about the real estate problem.”

The real estate problem

Real estate issues could have a pronounced impact on regional banks due to their more localized business models and loan portfolios.

Schatz highlighted that the concerns might extend beyond commercial real estate, which became an area of focus after the U.S. Federal Reserve began raising interest rates in March 2022.

“Everyone thinks it’s contained, possibly to commercial real estate, but we saw in ’08, we saw in the ’90s, we saw in the ’80s, when people can’t sell what they want to — meaning the garbage, because it’s illiquid — they sell what they can,” he explained.

Schatz predicts financial “contagion” within the next two years “not limited to just commercial real estate.”

Following his comments on real estate, Schatz also offered some intriguing stock picks.

Idiosyncratic plays

Schatz shared three stocks that he likes: Chewy (NYSE:CHWY), Sarepta Therapeutics (NASDAQ:SRPT) and Viking Therapeutics (NASDAQ:VKTX).

Chewy is an online retailer of pet food and other pet-related products. Sarepta Therapeutics, a commercial-stage biopharmaceutical company that develops precision genetic medicine for rare diseases. Viking Therapeutics is a clinical-stage biopharmaceutical company dedicated to developing therapies for metabolic and endocrine disorders.

Pet supplies and biotechnology might appear unrelated at first glance. However, Schatz provided a rationale for grouping them together.

“They each have some idiosyncratic story,” he said.

Schatz emphasized his enthusiasm for biotech stocks, noting that Sarepta and Viking “each have their own unique stories.”

Story continues

As for Chewy, Schatz described it as a “great turnaround story,” pointing to its earnings report in May and its stock buybacks.

For the fiscal quarter that ended on April 28, Chewy reported a 3.1% increase in net sales year over year, reaching $2.88 billion. Adjusted diluted earnings per share rose by 55%, climbing from 20 cents in the prior year to 31 cents.

More recently, the company announced a repurchase of approximately $500 million worth of shares from Buddy Chester Sub LLC, an entity affiliated with funds managed by BC Partners Advisors LP, which is Chewy’s largest shareholder.

Chewy also made headlines when “Roaring Kitty,” the famous meme stock investor whose real name is Keith Gill, revealed a position in the company. According to a filing with the Securities and Exchange Commission, Gill took a 6.6% stake in Chewy on June 24.

Schatz is not thrilled about Gill’s involvement, remarking, “I wish that that kid with the cat was not involved, it makes it more difficult.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.