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Here’s why one portfolio manager calls Netflix a ‘lousy’ investment at this point

Villere Balanced Fund Portfolio Manager Lamar Villere joins Yahoo Finance's On The Move panel to recap the latest earnings reports and weigh in on how markets are faring over the pandemic.

Video Transcript

ADAM SHAPIRO: To help us understand what's going on regarding earnings is Lamar Villere. He is with Villere Balanced Fund. He's the portfolio manager. And we appreciate your being here.

Want to start with this, that you are more focused than ever on balance sheets. And you said it's critical to find companies that can survive massive temporary declines in earnings. We had that-- you know, Moynihan saying this is the worst period since the Great Depression. So how do you find those diamonds in the rough?

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LAMAR VILLERE: Sure. Well, first of all, the balance sheet is one thing. But you know you look at financials. As you guys pointed out, Morgan Stanley had record profits. So it's also important to be focused on finding companies that can benefit from different types of markets. So even though the economy was shut down, Morgan Stanley managed to grow.

But in general, yeah, if you're looking at a particular sector, it's critical to look at who can cover their costs and not have these massive debt on their balance sheet. A lot of companies are very tempted, understandably, at these incredibly low interest rates to issue lots and lots of debt. But you get into a downturn and there could be some real problems there.

JULIE HYMAN: Lamar, I want to ask you about large-cap tech also. Because there, in most cases-- I know in your note to us you mentioned Amazon, Netflix, perhaps Tesla not the poster child for a very robust balance sheet. But when you look at the tech bellwethers that have been leading the rally most of the way up here, they would fit that criteria. And yet you're not necessarily attracted by those right now. Why not?

LAMAR VILLERE: That's right. Those are great companies and I think do a wonderful job for their customers. That said, I don't think they're good investments. In fact, I think they're lousy investments at this point.

If you look at the performance of those companies, it's been tremendous. I mean, those are the guys that have led-- if you look at the NASDAQ, the NASDAQ's actually up almost 16% year-to-date. You compare that to the Dow, which is down 6%.

That's a huge dispersion. Why? Because that handful of companies just keeps getting bigger and bigger and driving the index higher and higher on the technology side. I think the valuations are really stretched.

And it's fine as long as people keep piling money into index funds and not really looking or doing their homework on what valuations are reasonable. But you buy one of those stocks, everything better stay perfect for the foreseeable future or else you're going to have a real pullback. And I think a lot of people really can get hurt on that trade.

ADAM SHAPIRO: Lamar, for investors who are looking for opportunity in those stocks which are not high flying, I'm going to point out the airlines. For instance, you've got all of them, the big four-- Delta, American, Southwest, United, all taking on much larger amounts of debt than they have in the past. The question of whether they'll be able to make it is another issue.

But how do you separate out the company with all of this debt-- and they're all doing it at these low interest rates-- which companies are poised-- despite the decline in travel revenue are going to make it a year, two years out?

LAMAR VILLERE: Well, candidly, we don't own an airline and wouldn't. I think that to invest in an airline right now, you need a lot of things to go right. And a big one of those is for continued support from the government.

And that's not the kind of investment we like to make for our shareholders. We want survivors who are surviving regardless of the type of situation. So to pick an-- to buy into an airline right now requires a lot of things to go right.

So even when demand comes back, is it going to be what it was? You hear a lot of people saying that they've re-thought how they're going to handle meetings going forward. The Zooms of the world are going to continue to be successful. And I think there will be more telecommuting.

I don't think that's going to be the end of air travel. I think we are still going to see people traveling for meetings because face-to-face is important. But if you look at-- if you're considering buying an airline right now, I think you're kind of just running on just hope, and hoping that things go right. And that's not what we would recommend.

ANJALEE KHEMLANI: Lamar, Anjalee here. I noticed that a lot of conversations around small cap forget that small biotechs are actually doing pretty well, considering the environment right now. But generally speaking, other smaller health tech companies that were really seeing a lot of momentum pre-COVID have seen that sort of flatten out. Any thoughts on when that might recover?

LAMAR VILLERE: Yeah, so to that point, the Russell 2000, which is really the key small-cap US index, is actually down 12% year-to-date, so one of the worst-performing indexes. And there's a lot of companies that were I think overvalued. But I think that's where you find a lot of interesting opportunities.

What swings that? It's hard to say. But I think some of those companies are going to prove over the next several quarters that they are worthy of, maybe not these crazy valuations that you're seeing on the FAANG stocks, but some of these companies are really opportunities that you can only find by doing your homework and really looking through the whole spectrum of opportunities out there.