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'Stimulus is at roughly 30% of GDP': Expert

Yahoo Finance's Alexis Christoforous and Brian Sozzi joins Matt Lockridge, Co-Director of Equity Portfolios and Senior Portfolio Manager at Westwood Holdings to discuss overall markets, consumer staples and the road to recovery.

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BRIAN SOZZI: All right, let's bring in here Matt Lockridge. He's the Co-Director of Equity Portfolios and Senior Portfolio Manager at Westwood Holdings. Matt, good to see you this morning.

We have an IPO today. We have a market in rally mode. We have a Dow up more than 250 points. To me, simply mind blowing, given what we've seen in this country from COVID to now civil unrest.

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My question to you is is it warranted? Does the market deserve to be trading at these current valuations?

MATT LOCKRIDGE: Well, good morning. And you're right. It is quite astonishing how quickly the market has come back. But I think it's important to remember all of the stimulus that's been put into the system. So by the end of the year, our expectation is that the Fed's balance sheet will be up over 100% year-over-year.

And just to put that into context, if you look at the stimulus as a percentage of GDP, we're going to be running in the 30% range. And compare that to the global financial crisis, where we only got to 15%. So all that stimulus is impacting asset prices, including equities, which frankly does give some credence to the strong up market we've had.

ALEXIS CHRISTOFOROUS: Matt, we've seen a lot of money be poured into the cyclicals. You say you like, in particular, consumer staples and those dividend-yielding stocks. What else do you like in this market right now?

MATT LOCKRIDGE: Sure, yeah. To your point on consumer staples-- in our view, interest rates are likely to remain low for a long time. And so investors, if they are looking for any type of income, would be well-served to investigate some of these very blue chip, consistent, defensive consumer staples that are yielding anywhere between 3% to 3 and 1/2%. That's on a pre-tax basis.

So after tax, you can build a portfolio diversified that will have a 2 and 1/2% income stream to investors. Importantly, that income stream is going to grow annually. So it's very much like a bond with a coupon payment that grows, which in our view is very attractive if you're an investor with a longer-term time frame.

Other areas that are looking interesting-- financials, we are value investors. This is an area where valuation is extremely attractive. And we are really keying on some comments that JPMorgan made just a week ago, that if we continue to recover, as we are, we may not need any more reserve bills. In fact, you could see some reserve releases in the back half of this year, which to us would be an upside surprise to earnings in banks.

BRIAN SOZZI: Matt, why do you like-- why do you like consumer staples here? They've had quite the run, I will give you that. But I look at Campbell's Soup this morning-- US soup sales were up 35% in the first quarter as people stocked their pantries. But don't you think that's priced in?

MATT LOCKRIDGE: It really has been a strong group, you're right. They have benefited from the stock-up behavior. And interestingly, over the last few years, the center of the store in the grocery store, those food companies, that really hasn't been the place you've wanted to invest.

That's a slow or no-growth area. There's a lot of competition. Private label penetration is higher. But interestingly, with this COVID pandemic, you've seen that area be some of the strongest growth out there. And some of the other channels within consumer staples, whether it's food service, convenience stores, that's been really an area of problem.

So we do think, yes, they have benefited from stock-up. But we think there is a longer-lasting benefit, as consumers spend more and more time at home. They're visiting restaurants less.

Over long periods of time, there's roughly a 50-50 split between food away from home and food at home. We think consumers will start to go back to restaurants. But they're likely not to go back at the same pace they were before the crisis. So that will continue to be a natural tailwind to organic sales growth, specifically in food, as well as other household products.

INES FERRE: Matt, Ines Ferre here. What about the airlines? What about the cruise liners? Will consumers be going on those travels like before? Will this rebound be quick for the airlines and for the cruise liners?

MATT LOCKRIDGE: Sure. So we've definitely seen a rebound in stock prices in some of those areas that were the hardest hit. In our view, though, there still is a very long-term road to recovery. And while consumers and business travel may increase, we still think you're going to be well below traffic levels before the pandemic. And the same would be true with cruise lines.

So to us, we would stay away from those areas, given the strong bounce that they've had, and really focus on those high-quality businesses with longer-term growth prospects, like consumer staples that I mentioned. These are defensive blue chip companies with high dividends that are growing high return on capital, strong free cash flow generation, and conservative balance sheets. These are businesses that are going to withstand the current economic pressure and grow over the long term.

ALEXIS CHRISTOFOROUS: Matt, would you throw hotels into that bucket when you're talking about those travel stocks? You're staying away from the airlines and the cruise lines right now. What about a Hilton or a Marriott?

MATT LOCKRIDGE: That's another one of those areas that in our view will likely-- there will be some longer-term negative impacts. And so while the stocks have rebounded, given everything that the Fed has done as well as fiscal stimulus, it really is important to case all of this. Over the last year, there's been roughly 200 central bank rate decreases around the world. And when you throw in quantitative easing and fiscal stimulus, over the last year, there's been roughly 500 easing events.

This is clearly making its way into equity markets, as well as fixed income markets. So you're seeing that early bounce in some of the most distressed areas, like you mentioned hotels, restaurants, cruise lines, et cetera. But I think as we look ahead, you want to be in those businesses that have more durable, consistent cash flow streams.

So yeah, we would rope hotels into that first group that really has seen the bounce. But we would start to move away from those now.

ALEXIS CHRISTOFOROUS: I would love your take on the video conferencing space. We got absolutely spectacular numbers out of Zoom, perhaps no big surprise there. The stock is up better than 200% year-to-date.

But you've also got Microsoft Teams in that space. And Satya Nadella, CEO there, has already said that's a huge part of their growth of their business going forward. You've got Google in that space as well. We're actually doing this on a Google Meets right now.

So where do you see opportunity there? And for some investors, is this just too late to get into a company like Zoom?

MATT LOCKRIDGE: Well, you're absolutely right. These companies, not only have the stock prices done very well, but they've really helped our economy and economies around the world with their technology. So they really are terrific companies, all of those that you named.

In our view, Microsoft is going to be one of the best-positioned companies over the long term. Not just because of their Teams software-- which at Westwood we deploy that. It's been terrific for video conferences.

But more broadly, their cloud exposure, specifically Azure, has really been a growth area for the company. We think penetration remains low for cloud broadly. Excuse me. And we'll see many years of runway ahead for a business like Microsoft.

BRIAN SOZZI: All right, let's leave it there. Matt Lockridge, Co-Director of Equity Portfolios and Senior Portfolio Manager at Westwood Holdings. Good to see you this morning.

MATT LOCKRIDGE: Thank you very much.