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There is a 'rotation' towards stocks that have more value: Portfolio Manager

Larry Cordisco, Co-Lead Portfolio Manager of The Osterweis Fund and Co-Chief Investment Officer, Core Equity at Osterweis Capital Management joins the Yahoo Finance Live team to discuss the latest with tech stocks.

Video Transcript

ZACK GUZMAN: Overall, though, still a lot of questions about what could be the impacts to the market for a Biden presidency, perhaps which control-- which party gains control in the Senate not being answered until January. So still a lot of questions over which winners there will be when all of this shakes out.

And here to answer that question for us here is Larry Cordisco, co-lead portfolio manager of the Osterweis Fund and co-chief investment officer, Core Equity at Osterweis Capital Management. And Larry, I appreciate you taking the time to chat with us here. We've been talking a lot about this rotation here from tech, but it seems like some of those stocks in growth are still going to enjoy a nice year end, as well as 2021. How are you looking at the relative risk reward on the table as it sits now?

LARRY CORDISCO: Thanks, Zack. Tech, first of all, it's a long-term secular winner. The last 30 plus years have been a story of technology adoption, and winner take most sort of markets in the United States and globally. So we don't think that trend really changes over time.

But right now, with the prospects of a economic reopening and a lot of these stocks having done so well in 2020, I think there is a rotation that we're seeing towards this combination of stocks that are more valuation, more cyclical, and where you'll see business getting better.

But I think this is where, you know, the way we approach it is a balanced portfolio where you have these long-term secular winners in technology. And you do also have industry leaders who should enjoy a secular rebound or a cyclical rebound as well.

AKIKO FUJITA: How are you looking at the healthcare sector-- or I guess biotech stocks to be specific? You know, we were talking yesterday about the big bump that Pfizer got today. Eli Lilly also getting a big pop on the back of their antibody treatment. But, you know, a lot of questions I think a lot of investors have is just how profitable this is going to be for the individual companies, especially when we're talking about governments being able to offer this up for free out of necessity.

LARRY CORDISCO: I think that's a really good question. Very few of these companies have talked about making a lot of money off of this. Johnson & Johnson is basically doing it at cost. I think Pfizer's said something similar. Moderna, I suppose, would be the one that would make a lot of money, and it would be their only commercial product. So that's where investors look, I think, for there to be a big boost in terms of equity valuation related to the vaccine.

One way to play it is in the arms dealers, companies, you know, [INAUDIBLE]. They make basically the consumables and the bioprocessing equipment that goes into actually manufacturing vaccines. And so investors can look to those kind of places where the volume of vaccine production would be very beneficial with those kind of companies.

ZACK GUZMAN: Yeah, for Pfizer, we were talking about this yesterday. It did look pretty interesting in the way that they were kind of distancing themselves from Operation Warp Speed. They did have that federal contract to deliver doses there. But it sounds like the CEO is comfortable profiting from the vaccine if it does get FDA approval.

On the front of cyclicals, though, we had a guest earlier on the show today talking about this being a potential head fake due to that vaccine news because a lot of these companies that are levered to leisure and hospitality are still going to be coming out of this with some pretty significant debt loads.

When you look at the cruise line stocks-- we'll just use that as an example-- we saw Royal Caribbean on their call saying that they'd be opportunistic about trying to capitalize on the short-term boost. Carnival as well looking to put out about $1.5 billion in the new share offering potentially up to that level here.

It would seem to indicate that investors in these companies might not benefit from whatever rallies if they continue to dilute just to survive the short-term question marks here. So talk to me about that being something investors should be careful up to.

LARRY CORDISCO: I think that's a legitimate concern. Not only will there be I think a lag between when people get-- enough people get vaccinated that you'll have a mass return to travel and leisure. That may be by mid or late summer.

But you have some other headwinds, especially with airlines and airline economics, that are around business travel. And you were all talking about Zoom earlier. I think that does change the long-term outlook for how frequent a traveler, a business traveler, gets on an airplane and goes to another city for a client meeting or the like.

So I think those are legitimate concerns. But there are a lot of industries where you're going to get a return to normalcy. And you're going to have some companies that do benefit in the near term or more immediately. And those are companies like Cisco, the food distribution company. They serve restaurants all over the United States. I would suspect that restaurants and local restaurants and eating out will be one of the areas that people return to more quickly.

We like return to work stories like Bright Horizons family. It's the largest daycare provider in the United States, and they're tied to a lot of on-campus facilities. So as people go back to work, they drop off their kids at these facilities and utilization rates go up. Ross stores, which is the off-price retailer, as people go back to work, especially women, they're going to need to update their-- upgrade their outfits, you know, their business wear.

So I think there are stories here I think you're going to see more immediate rebounds. But I can understand the concerns around how travel and leisure could lag.

AKIKO FUJITA: Larry, what about allocations outside of the US? Especially when you look at how the dollar has traded, yes, we saw a bit of a pop on the back of the election. But it has been relatively weak. Does that provide some opportunities especially for growth in emerging markets?

LARRY CORDISCO: Well, I don't do a lot of emerging market investing. So it's a little difficult for me to speak to that. But certainly, when you hear people who follow emerging markets, a weaker dollar is something that really comes back, you know, in every conversation as being a tailwind to those economies. So, you know, I can't really speak to it more than that. But, you know, the trade is a weaker dollar is good for emerging markets. I certainly have heard that before.

ZACK GUZMAN: Well, I mean, when we back up, too, and look at just kind of macro elements here, it does seem like some lingering questions. We were talking with Andrew Yang at the top of this show about those key Senate runoffs down in Georgia, which could deliver control either to Republicans or Democrats, depending on the way that those races go here.

So talk to me about how that might change the market dynamics, considering it could give Joe Biden much more leeway in terms of passing some of those more progressive agenda items that Democrats are pushing him on, like the Green New Deal or perhaps even boosting corporate taxes. That's not even that progressive. That's just something we knew that he ran on-- about what those risks might be to the market if it does swing to Democrats. Because it seems like status quo right now, markets pricing in Republican control.

LARRY CORDISCO: Well, there's a plus and a minus to that, right? And going into the election, you saw infrastructure stocks and renewables stocks do very well during the month of October. So there was definitely a trade in the market where people were anticipating a Biden victory and likely a Democratic-controlled Senate.

And you could really see Vulcan Materials, Martin Marietta, the aggregates companies Caterpillar, the earthmoving company, they all did quite well. And then those stocks unwound a bit on the election results when you could see infrastructure coming off the table as a likely outcome of the election. So that would be a positive if-- for those stocks-- if the Democrats won both those seats in Georgia.

The negative would also, to your point, would be the higher likelihood of taxes going up and some of the more onerous elements of the Biden tax plan. With 50-50, though, you know, it still feels kind of Goldilocks to me and not a lot of room for error. You have senators like Joe Manchin in West Virginia who aren't, you know, wild liberals that really become important swing votes for those kind of issues that investors are looking at.

So, big picture, I don't think 50-50 makes a really big difference in terms of there being downside. And you might actually get a little more infrastructure spending out of the government in that situation.

ZACK GUZMAN: All right, very interesting takes there. Appreciate it. Larry Cordisco, co-lead portfolio manager of the Osterweis Fund, thanks again for taking the time.