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Stock market drop 'is an opportunity for some names,' strategist explains

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CFA and owner of Portia Capital Management Michelle Connell joins Yahoo Finance Live to discuss Big Tech, energy and financial sector fund data, commodity futures, and Fed policy makers expecting three interest rate hikes in 2022.

Video transcript

ALEXIS CHRISTOFOROUS: Let's stick with the markets and bring in Michelle Connell, CFA and owner of Portia Capital Management. Michelle, good to see you here. So today, look, we're seeing a bit of a bounce back in tech, although the NASDAQ still in correction territory. Is this a head fake, do you think? Or is there more downside for the tech and growth sector?

MICHELLE CONNELL: I don't think it's a head fake for some names. I think it's a case of we finally realized that valuations do matter and it's not just a case of growth versus value. But a lot of these names were priced to perfection, as we keep hearing. And so people are looking at those particular names that may have some downside, and they're taking money off the table at the beginning of the year.

They're being prudent. But at the same time, there are some technology names that do look interesting here, that do have positive cash flow, that do have strong moats in terms of their competitiveness. So I think it's an opportunity for some names.

KARINA MITCHELL: Well, Michelle, if you are looking outside of growth, what is your opinion on getting into defensive and value names? Is it too late? Has that bowl already left?

MICHELLE CONNELL: That also is an area where you need to be selective. So we've had some of the financial names that after they reported in the last-- since the beginning of the year, they've been hurt. You have the JP Morgan's, the Goldman Sachs that have pulled back. Some of those names look interesting here, you're looking at potential upside anywhere from 10% to 20%.

Other value names, you know, we have an uncertainty in front of us. Currently, we only have about 6% of the companies on the S&P that have reported. So we've got a lot of unknown ground to cover in terms of expectations.

So I think you need to be careful and know your company. And at the same time, there will be opportunities. There are some now, and I think we're going to have even more in front of us.

ALEXIS CHRISTOFOROUS: Let's talk about where you're seeing some of those opportunities, Michelle. I mean, I'm thinking financials in an environment where interest rates are going to be moving higher, energy, which we continue to see have a strong start to this year, adding to last year's gains. Where are you seeing those opportunities? Because some might argue that energy is already a little too frothy to get into at this level.

MICHELLE CONNELL: I might agree at that level. A lot of the energy names have done extraordinarily well, especially this year. A lot of them are up 10%, 15% since the beginning of the year. So there are a few that have some upside, I'd say, but the number is pretty limited.

So I look at financials. I look at maybe some staples. And again, technology doesn't have to be considered just GARB. It can be growth at a reasonable price, meaning that it's a blend of growth and value. And so there's some good strong technology names like Nvidia, and Intel, and Microsoft. And this isn't a GARB, name but Shopify-- that's definitely a growthy, frothy name. It looks interesting here given the amount of pullback that you've had.

So I think, again, it's just a matter of valuations. We're becoming a little bit more prudent now that we realize that maybe money isn't as free as it was due to the Fed.

KARINA MITCHELL: And, Michelle, talking about that, let's move over to the bond market-- and wondering what you make of what you see with the yields climbing. They were flat for the longest time-- stuck below 1.5, touched 1.9 on the 10, now retreating a little bit. How diligent do investors have to be in that space? And then also want to ask you your opinion of the Fed. Is it jawboning? How many rate hikes do you see coming this year?

MICHELLE CONNELL: Looking at the bond side of a portfolio right now, I talked to a client yesterday who has a friend who's a prospective client, and this is somebody who thought that they were safe at retiring at a 60% equities, 40% bonds. And now they're getting concerned because they see what bonds did last year. Overall, they were negative.

And we're seeing expectations for this year being about the same. So whether it's an individual or it's an institution, there is a lot of concern, maybe even more so on the bond side, of a portfolio versus equities. So there's risk there, especially interest rate risk. So people need to understand what's underneath their bond portfolio, look at the duration, the maturities, and try to have as much floating rate bonds as possible to protect yourself from that interest rate risk.

In terms of the Fed jawboning, who knows at this point, right? Because we listened to a lot of jawboning up until they decided that there needed to be a little bit more prudent and tighten. So I think anywhere from three to five rate hikes is very possible. I hope it doesn't go beyond that. But when you look at the potential discount rate that you're looking at, even with those three to five rate hikes, it's still not enough to make stocks not look attractive here.

ALEXIS CHRISTOFOROUS: And, Michelle, I just want to get back to earnings real quick. After the bell, Netflix kicking off those big tech earnings-- wondering what you're expecting, perhaps, from Netflix, but also just the larger media landscape-- you know, where you're seeing some opportunity for investors right now.

MICHELLE CONNELL: Well, they're all competing on content, right? And so they're taking on a lot of money, a lot of debt to get that content. That's basically what Microsoft was doing yesterday with the acquisition of Activision. Content is king.

But also, at the end of the day, it's also going to be, how much did that company pay for that content? Ultimately, will they be positive cash flows? And who's going to be number one in the sandbox? And obviously, Netflix has done extraordinarily well, and Microsoft will too with the acquisition of Activision.

So know what you own, who's going to do the best in terms of scrambling to buy all that content, spending millions and millions of dollars. Is it ultimately going to lead to profits? Because at the end of the day, that's what you're buying with the stock. You're buying positive profits in that stream of those.

ALEXIS CHRISTOFOROUS: Yep, content certainly king. Michelle Connell, CFA and owner of Portia Capital Management. Thank you.

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