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'Dropping interest rates' are driving growth stocks higher: Westwood's Adrian Helfert

Adrian Helfert, Westwood Income Opportunity Portfolio Manager, joined Yahoo Finance Live to discuss his market outlook.

Video Transcript

[MUSIC PLAYING]

- Got just around 18 minutes left in the trading day, and all three of the major averages holding on to gains. The Dow off its highs of the day, up just over 300 points here, with a couple of minutes to go. And for more on this, we want to bring in Adrian Helfert. He is Westwood Income Opportunity Portfolio Manager.

And Adrian, let's just start with the action that we're seeing today. It's another day of gains. Investors, once again, very excited about this vaccine news today. We got news on a third vaccine from AstraZeneca. Do you think this momentum that we've seen over the last couple weeks can hold for the end of the year?

ADRIAN HELFERT: I think it can. I think what we're seeing now is the-- you know, that excitement, that exuberance that consumer spending can come back. And it's not coming back this year, necessarily, but it's the excitement that we can see a path to the end of the tunnel.

And as we do that, then that means economic growth is forthcoming. That means we might see rates go up a little bit further. That means that we start to actually start to price in some of those things that we look forward to in 2021 and 2022, where a very, very supportive Central Bank, fiscal policy, and a consumer going back out and sitting in a restaurant again will help the markets.

- Adrian, when we look at equities though, some are really expensive if you've been in tech since, what, 2017? I think you point out the growth stocks have outperformed value stocks. Then if you look at the Russell 2000, and what we're seeing flows into the-- the Russell 2000. And yet wouldn't some of those be more expensive than people may want to calculate? What's the potential upside as things do get back on track?

ADRIAN HELFERT: You know, one of the-- one of the biggest things that's driven those growth stocks becoming more expensive is simply dropping interest rates. So you'd think from a fundamentalist perspective of, you know, doing your discounted cash flow model, and when you do your discounted cash flow model, those-- those cash flows that you receive far off in the future, not today, not tomorrow, like in many value stocks, but Splunk and Workday and these securities that are going to realize their upside much further in the future, all of a sudden, you discount those cash flows at a lower rate, and they become more attractive.

You kind of think Popeye, where it used to be the-- you know, a hamburger today is worth more than a hamburger tomorrow, not so much when interest rates are near zero. So you're-- you're seeing growth stocks that are becoming more expensive, but not necessarily inappropriately, so in a low-rate environment.

- Adrian, one sector that's certainly catching a bid today, that's the re-opening trade. You can see that in airline stocks. You can see it in the cruise lines. Some of those retail names have been beaten down over the last several months are trading at 52-week highs today. Are you a buyer of this trade, or are you still worried though that there's still, I guess, a lot of uncertainty between now and when we actually get a vaccine to market?

ADRIAN HELFERT: That's a good question. I think there is a lot of uncertainty. There is uncertainty around two things. Number one, we are seeing a spike in the-- in the coronavirus incident rate. And we're going to see that spike, and we're going to see more concern before any of us actually get a vaccine.

And so that's a concern of we're going to go into lockdown mode, if-- if you're not already in lockdown mode, and we're going off just looking in the future and seeing the light at the end of the tunnel. So yes, we're going to-- we're going to be more concerned about downside possibilities of oh gosh, you know, let's make sure that these vaccines are going to work, because we don't have them yet. Let's make sure we can actually come out of this OK.

Now, the second thing, of course, is secular change. We don't know that yet. We don't know what secular changes are coming forth. I often tell my investors that, you know, it's like 9/11 in some ways.

The-- the horrible event that we have there, two months afterwards, I was, you know, waiting in line at the airport for another 60 minutes over what I was prior because of the-- the added security. All of that mechanism is still in place. When I go to the airport, all the security measures are still there. That's secular change.

How much of that has happened now, where I had to fly less, because I-- I don't need to do those meetings in person, in Chicago for my Dallas office, where, you know, I can do them on Teams or Google Hangout? That's the question that we don't yet have answered is how much is secular change.

- So if you're an investor trying to gauge that change and not put all your money into one basket, what sectors would you tell that investor to look at?

ADRIAN HELFERT: Well, health care is obviously one that we're going to see some change on. And it's less assuaged, I think, by the forces of-- of secular change, necessarily, from this. And it's going to be political and regulation change. There is some positivity to be had there.

Financial sector is an interesting one for which, you know, when I talk about the forward path and the light at the end of the tunnel, the light at the end of the tunnel is almost synonymous with the-- the interest rate curve, the 10-year yield minus the two-year yield. As that rises, so will net interest margins at some of these banks. As that rises, so will value-oriented equities that receive their cash flows in the near term. As will M&A activity and trading activity. I-- I think that's a well-positioned sector if we see this rotation continue.

- Right. Adrian Helfert. Great to get you on the show. Westwood Income Opportunity Portfolio Manager. We'll talk to you soon. Thanks so much for taking the time to join us today.

ADRIAN HELFERT: Thank you for having me.