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Breaking down what kind of stocks should keep an eye on going forward

BMO Capital Markets Chief Investment Strategist Brian Belski joined Yahoo Finance Live to break down what stocks investors should pay closer attention to.

Video Transcript

ADAM SHAPIRO: And we want to talk about betting on some of the turnaround stocks. We've heard a lot of people say, energy, energy, energy. But you're actually talking about-- at least, BMO is saying outperform rated stocks that fit the theme, like Devon Energy, for instance. What are some of these other stocks that we should pay attention to?

BRIAN BELSKI: Well, good afternoon, Adam. Thank you so much for having us. You know, we built a methodology through years and years of back testing it and looking at how to find turnaround stocks. So quite frankly, it was our fundamental answer to, quote unquote, some of the silliness that's been going on in terms of trying to buy these beaten down stocks and what are obviously well documented.

But we took a look at companies in the S&P 500 that underperformed in the preceding 12 months, but are beginning to outperform the last three months that have discounted valuations with respect to price earnings ratios, earnings growth that's more than the market, and actually pay an increasing dividend over the last 12 months. And we looked at the top 100 stocks, and of the 41 that we identified in the research report that we published last week, Adam, 44% of the stocks were actually financials.

Now financials is a sector that we are overweight. We have been since we came out with our 2021 forecast in November. And we really think the theme for financials is scale. So Bank of America is on the list. JP Morgan's on the list. And I think the reason is, is that these companies, I think, continue to show very strong earnings power. And quite frankly, from our institutional client base around the world, we still think that they're underowned assets.

So I think a lot of people, as you said in the beginning of the hit, are all hopped up on Mountain Dew with respect to buying energy. We think the play is financials with respect to these types of names.

SEANA SMITH: Brian, I got to-- it's Seana. I've got to ask you just about what's been playing out in the markets over the last couple of weeks. And that's, of course, this frenzy that we've seen, this Reddit-fueled frenzy around some of these heavily shorted names. I'm curious just to get your thoughts on this and whether or not this is something that you expect to happen now, not on a relatively normal or regular basis, but not to be just a one-off event.

BRIAN BELSKI: Well, Seana, great to see you. This stuff is going to continue, or these types of games. And they'll find some other games to go on. But, you know, as I've been telling people, this particular strategy, Seana, has been going on for decades.

It just so happens that with the information flow and the lack of original thought on Wall Street, everybody kind of jumping on the same thing, and really, the true power of social media, but more than anything, it's all these people watching TV. And I think, you know, no offense, but we need people to stop watching TV and get outside and live their lives and return to normalcy. I think some of that will dissipate.

But this reeks of me-- to me, I'm sorry-- that we're going to see some new regulations from this. And I never like to see regulation in terms of any businesses, let alone financials. But clearly, the bigger overarching theme has to be, Seana, this really speaks to why investors absolutely positively need professional wealth management advice in terms of managing their money.

The only thing I would say to this in terms of chasing these stocks and playing these themes, be prepared to lose the money. If you're OK with losing the money, go ahead and do it. God bless you. But this is why you need a wealth management professional to really manage your money longer term.

ADAM SHAPIRO: Brian, I think you can sum that argument up by saying those of you who bought GameStop at $480, how are you feeling today? But let me ask you this question. When you bring up regulation, I mean, there's a role that shorts play in this world to help expose companies which are not, perhaps, healthy companies. Look, Nikola, for instance, and Hindenburg Research, that was a short call. I mean, we don't want to eliminate that, do we?

BRIAN BELSKI: No, absolutely. I'm not saying about that. I'm just saying I think there's a very good chance that some of these platforms that are zero cost commissions could force those people that are actually using those platforms, Adam, to not be able to margin or have minimums or something interesting like that. I think that could actually do that, or actually have to sign up for a wealth management professional.

So I mean, I don't know what that looks like. It just-- if the more that this continues, I think the more likelihood that you're going to see that. You're absolutely right. I mean, I've been doing this business now for 31 years. And we used to, a long, long time ago-- I'm not going to tell you how long ago-- I used to look at short lists and take advantage of those companies that we thought the shorts were wrong. So I think there are opportunities out there to use these types of strategies, but not the way that I think that we're doing it right now, or at least we're seeing it right now.

SEANA SMITH: Brian, last time we spoke, you were talking about earnings. You were optimistic, just in terms of what we are going to see this year. Now that we're in the midst of earnings season, I'm curious just to get your thoughts on these results so far and whether or not they're living up to what you had expected to see.

BRIAN BELSKI: It's a great question, Seana. Yes, they are. And, you know, we used the word "unprecedented" last year for unprecedented price performance. But I think-- continue to think we're going to see unprecedented earnings growth in 2021, but really, the second half of the year, once the economy starts to really kick in. And I think, actually, if you follow the formula of investing-- stocks lead earnings, which lead the economy-- the economy is even going to be better in 2022. So as earnings kind of catch up to price, we're ultimately, Seana, going to be driven by an earnings-driven market, less so a momentum and PE-driven market.

But given the fact of the volatility in terms of this package, that package, in terms of the stimulus, or when we're going back to work, what's going on with the vaccine, I think the return to normalcy is going to be pushing into 2022. So look for these earnings to continue to, I think, surprise to the upside, but really be focused on those companies that are really benefiting the most in terms of taking out capacity during this pandemic and really remodeling their business models and growing from here.

ADAM SHAPIRO: Brian Belski, BMO Capital Markets chief investment strategist, thank you, as always. Good to see you.

BRIAN BELSKI: Thank you.