Portfolio manager says investors should avoid these sectors

Julie Biel, Portfolio Manager at Kayne Anderson Rudnick, joins Yahoo Finance’s Alexis Christoforous to discuss market action, cryptocurrency, and the boom in SPACs.

Video transcript

ALEXIS CHRISTOFOROUS: Let's keep the conversation going with the markets now and bring in Julie Biel. She is portfolio manager at Kayne Anderson Rudnick. Julie, welcome to the show. I want to actually start with some of the things that are giving you pause right now in the market. Are there any red herrings that you're seeing out there for investors?

JULIE BIEL: Sure, thank you for having me. There are a couple of things that I'm really concerned about. The first is that I think we're going to see continued vaccine hesitancy as a result of the J&J stoppages. It's going to, I think, not derail, but slow down adoption of vaccines. And I think that's going to slow down reopening. You also have millions of families who just don't know what to do because they can't vaccinate their children. And so that's going to limit the economic growth that we would expect from that. So I'm happy to see bookings on the rise for vacations. But I still think there's going to be hesitation around how quickly we can reopen.

The other concerns I have are the amount of stimulus that we've put. It's well beyond what was in the output gap as a result of COVID. And so we just don't know how much that stimulus is going to impact the economy longer term. We don't know how that's going to impact inflation. And we don't know what the Fed's really going to do about that.

ALEXIS CHRISTOFOROUS: What about sectors that you're avoiding right now? I mean, are you treading carefully when you start looking at the reopening trade?

JULIE BIEL: Yeah, so I think there are opportunities in the reopening trade. But sectors that I really are continuing to avoid are the travel and leisure sectors because I think business travel is forever changed and likely impaired, at least in the medium term. We've all learned how to do a lot of business over Zoom. And I think it's going to take a really long time before we see the kinds of big conferences that used to really help support the profitability of leisure sector in particular. So I'm very hesitant to get back into that because I think it's really unlikely that we're going to have the same level of earnings power in those businesses at least in the next two or three years.

ALEXIS CHRISTOFOROUS: And I'm curious if you have any exposure to cryptocurrencies, and if so, where is that exposure?

JULIE BIEL: So for us right now, we have not been involved in cryptocurrency. I think it's an interesting dynamic, and we're seeing that mature and grow up. But for us, we don't feel like we have strong competency in being able to discern what the real value is in that. And I think it's just going to take time. Especially, I think the regulatory overhang is going to limit how much adoption we're going to see in a broad-based manner.

ALEXIS CHRISTOFOROUS: I want to switch gears and talk about something that was very hot for a while on Wall Street, but now has seemed to churn ice cold. And that is SPACs, these Special Acquisition Blank Check companies bringing companies to market. It seemed to be the way a lot of companies were choosing to become public. We saw over 100 of them choose SPACs alone in the month of March. And now we've got, I think, less than 10 or about 10 companies coming to market via SPACs? What's your take on that?

JULIE BIEL: You know, I think the concern that we have with SPACs is that the regulatory issues around being able to give forward estimates are different for SPACs than they are for IPOs. And so that allows companies that are not very mature definitely unclear in terms of the earnings projections that they can have to issue really rosy forecasts. Many of them don't even really have earnings. And I think that's a problem because we don't allow that for IPOs because we just don't put a lot of credence in the ability of these young untested companies to issue proper forecasts.

I think that is a concern in being able to sell those really rosy forecasts to a retail investor. I know many professional institutional investors are very hesitant around SPACs. Many of them just won't even look at them because a lot of the regulatory issues are weaker in terms of giving shareholders an understanding of the business with proper disclosure.

ALEXIS CHRISTOFOROUS: And finally, there's been a lot of talk about, is this market too frothy? Are we in a bubble? I know there was a recent survey that found an overwhelming number of individual investors, something like 75% believe we're in a bubble, but yet still want into the market. Do you believe we're in a bubble? Or if so, what pockets of the market are too frothy for you?

JULIE BIEL: So I think a lot of the reopening trade is pretty frothy. And I think you need to be thoughtful of how businesses are going to be impacted by rising inflation. So for us as long-term quality investors, we're really focused on businesses that have proper pricing power. A couple that I would point to is FICO. And FICO, the advantage of FICO is as the economy reopens, you will see an increase in people drawing claims and pulling FICO requests for credit. But they are also enabling some pricing power. They've been increasing prices on their scores.

Old Dominion is another company that I really like. They have pricing power. They have consistently been able to price ahead of inflation. And as their economy reopens, of course, there will be more goods in transit. So they should benefit from that as well. So I'm really focusing on businesses that have some leverage to the reopening of the economy, but also have pricing power in the event that we have unexpected inflation.

ALEXIS CHRISTOFOROUS: All right, Julie Biel, portfolio manager at Kane Anderson Rudnick, thanks so much for being with us.