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'If we look at where just the fundamentals are with valuation,' there's a lot of speculation: Portfolio Manager

The Osterweis Funds Co-Lead Portfolio Manager, Larry Cordisco, joined Yahoo Finance Live to break down why some companies are popping mid COVID-19 despite not having great fundamentals.

Video Transcript

ADAM SHAPIRO: We're going to keep talking markets right now with Larry Cordisco. He is the Osterweis Funds co-lead portfolio manager. We appreciate you joining us. And I'm curious, when you say we've noticed that companies with the worst fundamentals have, in many cases, been performing the best. those of us over 40 will remember, danger, danger, Will Robinson. But nobody in the market seems to be saying, danger, danger. Why not?

LARRY CORDISCO: You know, to some degree, it's rational. If you would have taken us back a year from now, and you tell us what's going to happen with this pandemic, I don't think any of us would have predicted the market would be up 20%. And then you'd have pockets that are up, you know, 3, 4x in their stock price.

So I think there is a bit of, like, what is really going on with the market. And I think the one rational reaction we are seeing is that we've seen so much change and disruption happen so quickly in the last year, that now, investors are kind of looking around every corner for the next thing that's about to be disrupted. And so, if you think about where we are in the hype cycle, our view is that you have just a lot of names that are in that inflated expectations part of the zone, where their stock prices are way ahead of where their fundamentals will be.

Eventually, many of these names may work out fine. But if we look at just where the fundamentals are with valuations and with growth and when free cash flow will come to a lot of these names, there's just a lot of-- there's a lot of speculation in the market. And so, that sort of catches us-- that catches our attention is how I would frame it.

SEANA SMITH: Yeah, and Larry, going off that, I think it's capturing a lot of the people's attention right now when they're taking a look at these movers day in and day out, and especially when it comes from such a small number of names that really seem to be driving this market. But how long is this expected to last? And I guess, at what point do you think investors will go back to looking at the fundamentals and realize that that's what really should matter?

LARRY CORDISCO: With any time you have this sort of enthusiasm in the market, knowing when it's going to end, it's sort of an impossible question to answer. Nobody knows. And I can't pretend to know. But what I do suspect will happen is we get into the summer, and we really start getting a reopening trade, a recovery trade, possibly talk of infrastructure coming from the new administration. I think the investor focus will shift more towards reopening, recovery, cyclical sort of names, where the rate of change in the business is going to improve dramatically.

And these are still companies-- there are still a number of companies that fit that kind of construct, where the valuation is attractive. I mean, generally, the market's expensive. But, you know, on a relative basis, there are a number of names that are poised to outperform over the next year. As those stocks start to respond well to the improving actual on the ground economy, I would suspect that given how fast the money flows around this market these days, I would expect that people are going to flock to some of these names as we get into the summer.

ADAM SHAPIRO: Well, one of the names you shared with us to keep an eye on is JPMorgan Chase. So which fundamental is it that has you saying, look at this? Because they didn't do loan origination in 2020, as did none of the banks or none-- and I'm not sure of the right grammar here, but very few of the banks were originating loans to make the kind of money they had in the past. So which is it? What do you see changing this year?

LARRY CORDISCO: Well, let's look at the yield curve just straight up right now. It's gone from 50, 55 basis points on the 10-year to now we're at 128 basis points. It's been steepening very consistently over the last month or so. So right there, you basically have a positive for the banks, especially because we know the Fed is going to stay anchored on the short end of the curve.

Then, just, look, the market's a forward-looking beast, right? If you look forward, you look at credit card demand, and you look at consumer spending, you look at demand for business loans, especially in a recovering eocnomy, JP Morgan's number one or number two in pretty much every segment it operates. So it's very well positioned to grow its loan book over the next year or two. And it's overcapitalized.

So as credit improves and we get this pandemic behind us, loan demand improves, you have a number of fundamental positives behind the business at the same time that they have too much capital. Some of that's going to come back to shareholders. So that's the setup with JP Morgan that we like a lot.

ADAM SHAPIRO: And we hear you. Larry Cordisco, the Osterweis Funds co-lead portfolio manager, thank you for joining us here on Yahoo Finance Live.