May 14, 2025 • 32 mins
Lower revenue growth for small-cap companies appears to be in store due to tariff turmoil, based on Bloomberg Intelligence’s fair value model on the Russell 2000. In this episode of Inside Active, host David Cohne, mutual fund and active-management analyst with BI, along with co-host Michael Casper, BI’s US small cap and sector strategist, spoke with Sam Chamovitz and Morgen Peck, co-lead managers of the Fidelity Low-Priced Stock Fund (FLPSX) about their investment process, which focuses on the intersection of value and quality, and how co-management fosters mutual respect and trust in investment decisions. They also discussed why they target underappreciated businesses and how small caps can provide an attractive setup for active managers given the disparity in the quality of businesses. The podcast recorded on April 30.
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Speaker 1 (00:12):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael casper, Us, small cap
and sector strategist at Bloomberg Intelligence. Mike, thanks for joining
(00:34):
me today. So you put out a note last week
on you know, the tariff's effect on small cap earnings
for your Russell two thousand earning season review. What could
you tell us about that? You know, what effect is
tariff's going to have on small cap earning?
Speaker 2 (00:50):
Yeah, so consensus is already you know, pairing back estimates
pretty significantly. I just want to recap though, a few
of our model highlights on a fair value model on
the Russell two thousand and what it suggested based on
macro conditions at the time when we updated it just
a couple of weeks ago, it's just about three point
two percent revenue growth over the next year. Consensus was
(01:14):
at seven point four percent. Obviously that's gotten paired back
a little bit since then, But really what investors had priced,
and a lot of this obviously is contingent on how
high yield has moved or not really moved, right, So
we've only had high yield spreads blowout near almost near
five percent at the worst, and that's a key component
(01:35):
of our modeled multiple. But given that that hasn't blown
out yet, you know, tanking the multiple, it would suggest
that to get to a roughly today's price or so,
you would need a ten percent revenue contraction over the
year ahead, and we've kind of seen consensus starting to
adjust to this reality, right, So, pairing back estimates thus
(01:56):
far this season, I would note we're at a one
point one percent gain on a current constituent basis, but
still down a little over one percent on the actual
constituency of the ross of two thousand, so the current
two thousand versus two thousand, and that it was a
year ago. And estimates have come down pretty much for
(02:16):
everything but a slew of defensives for the first quarter
and much of the first half of twenty twenty four
or twenty twenty five. So what we're really looking for
is how bad do these estimates get over the next
several quarters? Are those going to get trimmed even further.
They've really only taken the acts again to the first
half of twenty twenty five. The back half is still
(02:38):
for significant recovery. Obviously, we've got a pretty weak GDP
print today, but we'll see how bad estimates can get.
Certainly they are facing some brunt of the tariff turmoil
that we've gotten so far.
Speaker 1 (02:53):
We'll be interesting to watch, and so I think this
is a great time to bring on our two guests.
I'd like to welcome Moreian Peck and Sam Chamovit to
Inside Active. Morgan and Sam are portfolio managers for the
Fidelity Low Price Stock Fund ticker FLPSX. Morgan, Sam, thank
you for joining us today.
Speaker 3 (03:12):
Hi David, I'm Michael. Thanks for having us.
Speaker 4 (03:15):
Thanks for having us.
Speaker 1 (03:17):
So let's begin by learning more about your investment backgrounds.
We can start with Morgan.
Speaker 5 (03:22):
Sounds great and so I did not grow up with
much finance experience in my family. My dad was in advertising,
my mom was a writer.
Speaker 6 (03:34):
I knew that finance was a use for ros Stove,
but the closest.
Speaker 4 (03:39):
We had in my college to major was economics, which.
Speaker 6 (03:42):
Was not the seeing as finance and my assumers were.
Speaker 4 (03:45):
Of college, a couple of things happened.
Speaker 7 (03:49):
The first one is I stumbled across what looked like
a business work case study when I had a fils
that someone had left behind.
Speaker 4 (03:58):
And I lived through it, and I thought, but it
was so interesting that there was this entire field focused
on learning about companies and business drivers.
Speaker 6 (04:06):
So I wanted to pursue something related to this case study.
Speaker 4 (04:10):
And at the same time.
Speaker 7 (04:11):
I had a classmate who had had the summer internship
at Fidelity as an equity research associate, and he was
the one that explained to me the difference between the
buy side and the cell side, what the role of
an equity analyst was at Fidelity, and he encouraged me to.
Speaker 6 (04:27):
Apply, and so I did. And as I was going.
Speaker 7 (04:30):
Through the interview sessions, I was immediately impressed with the caliber.
Speaker 4 (04:34):
Of people who were interviewing me.
Speaker 6 (04:36):
It sounded like a very unique job coming.
Speaker 4 (04:38):
Out of undergraduate.
Speaker 7 (04:40):
I was really drawn to the idea of learning how
to analyze a business. I liked that the success or
failure for the job was very quantifiable, and I also
really liked how much responsibility and impact I could have
as a young professional.
Speaker 4 (04:54):
So when I was.
Speaker 6 (04:55):
Fortunate enough to get the offer I accepted on the spot.
Speaker 4 (04:58):
And so Fidelities that when we play that I've worked
at and I've been here for over twenty.
Speaker 7 (05:02):
Years, and I would say that as someone means to
invest in, working at Faedelities is just a great place
to learn because we get exposure at a really young
age to every type of investor.
Speaker 4 (05:14):
And you know, we have legends like world Dad Off and.
Speaker 7 (05:17):
Job's own pasts and everyone in between, and all of
their both open.
Speaker 4 (05:21):
For me to go in and ask questions and understand
the process. So early in my career.
Speaker 7 (05:27):
I naturally gravitated towards smaller cap companies and then eventually
to buy unions. And I think I like them because
it seemed like it's part of the market.
Speaker 4 (05:36):
I had a higher.
Speaker 5 (05:36):
Success of finding undiscovered gems because few of people are
just looking so so really who I am as an
investor day As a function of all of that, as
well as my kind of successes and failures.
Speaker 1 (05:47):
As an analyst, Great how about you? Sam?
Speaker 3 (05:51):
Similar? Similar to More, I did not grow up in
a finance householder family. My family was primarily doctors and lawyers,
so financial literacy and markets were not dinner table talk.
I didn't know what a portfolio mender was growing up,
so I started to kind of figure all that out
in college. So later in my high school years, my
mom stopped working and she developed an interested investing and
(06:13):
bought me my first markets investment related books. So overall,
my start was rather unsophisticated, but a start. Nonetheless, in college,
I really learned more about finance and investing, so that's
where i'd say like the passion really started to develop.
After graduating college, I joined the Investment Associate program at
Putnam Investments. At Putnam, I worked for and with some
(06:35):
excellent investors and mentors. Putnam was also very advantageous because
it was going through a lot of very turbulent times,
which allowed young people like myself to take a bigger
role more quickly than normal, which was a great learning opportunity.
I did well with these roles and continued to move up,
but after five years, decided that Fidelity was a better
(06:57):
place for me to continue my career. I moved to
Fidelity to start our international small cap research team, and
I did that with Derek Janssen and David Jenkins, who
both came from the outside to help start that team.
And both are great investors and close friends to this day.
(07:19):
And then after a year in Boston for Fidelity, I
left to help start our Tokyo office, which was sort
of meant to be a two year stint but became
a thirteen year adventure, which was absolutely amazing and you know,
an opportunity to learn to community, to grow as an investor,
but also you know, some leadership aspects and overalls an individual.
(07:40):
So I started to transition to fund management of twenty twelve,
and then I ran the International small Cap fund from
early twenty fourteen until I think we're out twenty twenty two.
Or David, who started the International small Cap team of me,
ultimately took sole responsibility for.
Speaker 1 (07:58):
Cool. You know, both of you are co managers on
this fund. I'd really like to understand, you know, how
does it work, you know, the dynamic between the two
of you. Do you have different responsibilities or you know,
I guess do you kind of run things by each other?
Speaker 5 (08:14):
Sure, I'm happy to take that. So so co ma management.
As you point out, it's.
Speaker 7 (08:19):
A pretty broad term, and so the specifics of the
relationship and the the roles I think are really important to.
Speaker 4 (08:25):
Define just for context.
Speaker 6 (08:28):
Sam and I are.
Speaker 5 (08:29):
Coming up in about thirteen years of co managing various
funds together.
Speaker 7 (08:33):
And that has been really valuable because it's given us
a lot of time to determine our definition of co
management and it's allowed us to build this great relationship
of mutual respect and trust as investors, and that's really
the foundation for our teamwork importantly, and they also have
a lot of experience co managing and pretty much every
imaginable market.
Speaker 4 (08:54):
Environment, and that means that we know how to.
Speaker 7 (08:56):
Manage to better employers where our investment processes and out
of favor. But so directly answer your question that the
way we describe how we work together is really an.
Speaker 4 (09:06):
Investment committee of two. So that means there are those sleeves.
We co own everything together, and so all of the.
Speaker 7 (09:14):
Fund exposures are decided and analyzed together.
Speaker 4 (09:18):
We monitor the risks of the fund jointly.
Speaker 5 (09:22):
And the only area that we really kind of split
up and dividing conquers and idea generation.
Speaker 7 (09:27):
We think it's really out that you just have two
people on the funds, you know.
Speaker 6 (09:32):
Scaring the globe for new ideas.
Speaker 7 (09:34):
But as soon as one of us finds in our idea,
we bring the other person into the group.
Speaker 4 (09:39):
And so most of.
Speaker 7 (09:40):
The time Sam and I are pitching each other stocks
for debating stocks, and then they're making a decision together
as to when a leather stock is going to be
you know, added into the court furtus. So that's really
how we work together as a team.
Speaker 1 (09:54):
Makes sense. And so you know, you talk about coming
up with idea generations. So I think that brings me
up to my next question is you know, is there
a process you follow in terms of you know, coming
up with ideas or what you're looking for for the portfolio.
You know, obviously it's called low price stock, you know,
I'm sure there's a lot more into it and what
you're looking for.
Speaker 3 (10:15):
Sure, I'll take that one, and I'll talk a little
bit about the philosophy as well as kind of the
what we're looking for. The first, we are fundamental investors
and make decisions based on deep fundamental work alongside our
research team. Fidelities research team is one of our coole
competitive advantages. For sure, we are opportunistic value investors, but
(10:36):
we do have a quality bias and take a very
long term horizon. The key is we look for the
intersection of value and quality, which to us leads to
not simply cheap stock ideas, but underappreciated businesses, which is
what we're really targeting. We cast a wide net in
terms of the types of companies we invest in, with
(10:56):
the thought process being the broader we cast our net,
more likely we will find bargains. So what are we
looking for when analyzing specific stocks. We tend to focus
on three things or three broad categories. First, we look
to determine the free cash flow power of a business
medium term. The second is the durability of the free
(11:18):
cash flow, and for us, durability is synonymous with quality.
And third we're looking to understand the reinvestment opportunities of
the business and its ability to grow it's per share value.
If we talk about durability and break that up for
a second, within that bucket is business quality, but it
is also management quality. Management's very important to us, as
(11:40):
well as the balance sheet. So those are the three
kind of subcategories within durability that we're looking at. We
consider these factors when determining what a business is worth
and establishing a margin of safety. We compare our assessment
of value of the stock to the opportunity set I'm
making a decision, right, so everything has to be in
a context of the overall opportunity to set do I
(12:03):
dig in a little bit to quality because I think
a lot of people talk about quality as part of
their process, so I like to talk about ours a
little bit more. There seems to be two types of
quality focused investors. The first folks who only invest in
the best businesses, so they segment the market into quality
buckets and only focus on what they will determine as
the top quality. And the second is is folks who
(12:23):
really truncate the market by excluding the worst businesses. We're
more in that second camp in order to keep the
net really wide, so we look to avoid bad business models,
shrinking businesses, low return businesses, and crookeeter and competent management.
So that's the way we think about quality. We describe
our process as preparation and patients. So preparation we are
(12:47):
constantly doing deep fundamental work on companies to understand those
three kind of buckets that I mentioned before, the free
cash flow power, the quality attributes, and the growth potential.
But then we wait patiently to buy the businesses only
when there are at attractive prices relative to our assessment
of intrinsic value.
Speaker 2 (13:05):
So do you consider macroeconomic conditions at all when you're
looking for stocks.
Speaker 3 (13:12):
We are macro aware when making investment decisions. We're paying
close attention to what is going on in the macroeconomy
and the geopolitical environment. That said, this does not determine
our investment strategy, nor do we change our process based
on the environment, but it does help us in terms
of informing where we are in the cycle, how things
(13:33):
may be impacting companies in the near term. It also
helps explain at times like why some companies are performing
well and other companies are poorly a very bad part
of the cycle, and a cyclical performing poorly may actually
be an opportunity to buy, not actually an opportunity to avoid,
you know, I'd like a key part of our investment
philosophy overall is that the world is uncertain and constantly changing.
(13:57):
So whether that's tariffs one day or or inflation the
next day, whatever it is, there's constant uncertainty and change.
But this is really why we're looking for strong management
teams and companies which have adaptable and resilient business models.
You know, companies with safe balance sheets and generating cash
that helps provide that margin of safety. These things make
(14:19):
kind of weathering tough times and uncertainly easier. It also
means our companies are able to play offense when when
times are tough, Like we want the boardroom conversation in
tough times to be about can we buy back stock
at highly discounted crisis? Can we reinvest to gain share?
Or can we consolidate the market at attractive crisis? Those
are the types of offensive questions we hope our companies
(14:40):
are asking in tough times versus how can we repair
our balance sheet when when times are tough? This is
not what we were looking for in our investments.
Speaker 2 (14:48):
And now smid caps have been out of favor for
quite some time now, and I know a lot of
other pms are searching for kind of defend your box
type answers. But what kind of catalysts are you watching?
Maybe for Smith Caps to turn it around and now
perform large caps.
Speaker 7 (15:06):
Sure I can take this so as Sam Engine, we're
remark very aware, but we.
Speaker 5 (15:10):
Don't spend a lot of time trying to put it
the future. We really think the value that we can
generate for the fund and our shareholders is the bottom
up stock picking.
Speaker 4 (15:19):
And finding those dislocated stocks, and you know, to.
Speaker 5 (15:23):
Remain thatch aware, we're watching all of the data points
that I think everyone else is watching. We do have
great analysis coming out of our internal.
Speaker 4 (15:33):
Economic team and they put.
Speaker 7 (15:35):
Sort of analysis on all of that data and that
that's informative to us.
Speaker 4 (15:39):
But to luckly into your question, and you know, we
don't have a strong view on.
Speaker 7 (15:45):
Small caps being about to outperform or continue to underperform.
Speaker 4 (15:48):
But maybe we can talk a little bit about.
Speaker 7 (15:50):
Why we're very excited about small caps for a few reasons.
Speaker 4 (15:54):
Like when caveat though is these have been through for a.
Speaker 7 (15:56):
While, so small caps as a note, they trailed large
caps for about fifteen years and that's that's much longer
than a normal cycle, which tends to be sort of
eight to ten years. That has allowed to really attractive
valuations for small caps, especially the profit there ones.
Speaker 4 (16:12):
And as a.
Speaker 7 (16:13):
Reminder about truly to forty five percent of the rest
of two thousand, which is the small cap benchmark we
look at, that's unprofitable and that's really unique to this benchmark.
Speaker 4 (16:24):
And so within small caps, we also find that it's.
Speaker 7 (16:27):
Just a more inefficient part of the market than the
large caps because these stocks, as I mentioned before, they're
just less well covered by both the buy side and
the cell side. The other interesting thing is that small
caps have tremendous disparity and the quality of the businesses,
given what I just mentioned about so many of them
being chronically unprofitable. And so that's why we think that
(16:49):
it's a really attractive setup for app the managers like
us to.
Speaker 4 (16:53):
Try to add value by picking the light stocks.
Speaker 2 (16:56):
And let's talk about evaluations a little bit. Are there
specific metrics you like to use to value stocks and
anything like that, and anything like that.
Speaker 3 (17:06):
We believe what we pay for a stock is critically
important to its return potential, and we don't compromise on
this valuation, although quantitative in nature is not a precise
science and involves a lot of art and triangulation. Importantly,
we believe the value of the business is solely determined
by the cash flows of business generates, not its adjusted earnings.
(17:27):
I think adjusted earnings have become quite popular, but we're
more focused on the cash that business generates. So first,
like everything we do, we try to embed conservative assumptions.
Using conservative assumptions, we focus on the estimates of normalized
free cash flows several years in the future. By focus
on normalized profits in the future, we hope to avoid
(17:47):
being overly anchored to what sounds good or bad in
the near term. Second, we try and look at several
types of metrics, so you know, but it must be
based on profits and cash flows, not eyeballs and sales. Third,
we spend a significant time on scenario analysis to help
us wrap our arms around the range of outcomes and
how asymmetric the return potential for our investments are. This
(18:10):
means we focus on bearish scenarios as well as bullish
scenarios so as to not rely on a single point
estimate given how much variability exists in the world. And lastly,
we don't have any mandatory hurdles to buy to buy
or sell, so it's always relative to the opportunity set.
The hurdles are dependent on the quality and the durability
(18:31):
of the free cash flow as well as the growth opportunity,
so there's not any set hurdles that we buy if
the upside is at or we sell if the upside
is want. We do try to bring a lot of
the art the other aspects into it.
Speaker 1 (18:43):
Do you consider stocks at all, you know, I know
the portfolio is called low price stock, but do you
ever consider stocks that are not low price?
Speaker 6 (18:51):
So maybe I can start off talking a little bit
about that.
Speaker 4 (18:56):
The post with that question a lot.
Speaker 7 (18:59):
So the fund was created about thirty five years ago
in nineteen ninety by Joss tolen Host and it was
launched before the popularization of style boxers that were offamiliar
with today and the fun that focused on more price stocks,
and it was.
Speaker 5 (19:15):
Named after them based on the view that stocks with
no prices implied are.
Speaker 4 (19:20):
Under valued or cheaper, So the name was really meant
to signal that this.
Speaker 6 (19:24):
Is a value fund.
Speaker 3 (19:26):
I'd also say we believe wholeheartedly in our evaluation based
process and we only invest when opportunities fit that process.
So we believe risk is actually deviating from this process
versus a stated data or track.
Speaker 2 (19:38):
And are are there any sectors you currently find particularly
compelling that stand out above the others?
Speaker 1 (19:45):
Maybe?
Speaker 5 (19:45):
So I'd say that there are always opportunities different business
models and.
Speaker 4 (19:50):
Every sector that we're looking at.
Speaker 5 (19:53):
And then I think.
Speaker 4 (19:53):
Maybe different to somebody that are fund managers you talk to,
you know.
Speaker 7 (19:57):
If the growth manager is really focused on the the
fear sectors of the market.
Speaker 4 (20:01):
We're looking at all sectors all of the time, and
so the answer question with the put up.
Speaker 7 (20:07):
And the market year to day, but we're really finding
opportunities in all sectors.
Speaker 4 (20:11):
So many stocks have declined, and.
Speaker 7 (20:14):
So many of them look like it's sort of been
indiscriminate selling driving some of that place action within all
the sectors, though, we're spending more time on the stocks
that have been most negatively impacted by terror related concerns
and macro uncertainty.
Speaker 4 (20:28):
And so as you may suspect, we're spending.
Speaker 5 (20:31):
Plenty of time and more sycrically exposed sectors and financials, the.
Speaker 7 (20:35):
Consumer discretionary, But interestingly we're spending just as much time
in ret's view probably is more defensive sectors like consumer
stakers and healthcare. And I'd say for each of the
names that looks interesting, we're really spending our time reevaluating
if the normalized earnings power and tree cash fishes have
changed for the business.
Speaker 4 (20:55):
So that's what we're spending our time on.
Speaker 2 (20:57):
And I saw that your fund has a sort considerable
x US exposure. Are you more optimistic maybe about foreign
stocks than US stocks, or how's your global view look
right now.
Speaker 3 (21:08):
So the process for picking stocks within the US or
outside of the US is the same, but we tend
to invest in businesses overseas when we can find something
unique or something similar with a significantly better risk adjusted reward.
There are a few attributes that make international stocks interesting
at the moment. The first is the long period of
(21:29):
US stock outperformance and dollar strength, which means that there
is likely to be relative bartmans overseas. The second is
many overseas markets are less consolidated, with more small and
family run businesses still listed on public exchanges. This makes
for a very broad pool to hunt for ideas. The
reason is the US has been the most aggressive in
terms of using cash flows and balance sheets to consolidate
(21:52):
markets for the M and A and privatize businesses via
private equity. The US has also benefited from uniquely large,
excellent tech companies that don't exist in most parts of
the world. This has been a huge advantage for the
US market and has sucked capital into them. But the
rest of the world is also starting to do things
that can drive a lot of value too, which had
(22:13):
not been happening previously. So, for example, in Europe, we're
seeing early signs of a much more stimulative government spending regime,
primarily around defense, but not limited to only defense. This
is a positive for businesses and economies there, which is
at the same time when the US seems to be
doing the opposite. In Asia, though primarily Japan but to
(22:34):
some extent Korea, companies are becoming much more proactive with
their capital allocation in terms of higher dividends and buybacks.
Buybacks with excess capital of lowly valued stocks like in
these countries can be really powerful drivers of shareholder value creation.
So this is positive backdrop, but we're still evaluating each
(22:55):
investment on a company by company basis, and Fidelity, with
its uniquely positioned analysts overseas, are helping us identify these
underappreciated investment opportunities.
Speaker 2 (23:07):
Now your fund is a bit obviously tilted a bit
more towards value over growth. Are you excited about the
style in twenty twenty five in the opportunities there? And
do you consider growth names as well if they are
you know, undervalue to you.
Speaker 3 (23:23):
We believe investing in low expectation stocks is always the
right thing to do for investors, and the very long
term data supports this. I think market cycles can be
very long, but they aren't permanent. So we've been in
a an elongated period of value under performance, and so
from here the starting valuations would imply significantly better for
(23:43):
returns in terms of value stocks, but you know, the
timing of this is unpredictable. Would also say to your question, Yeah,
we love growth stocks. We just want to buy them
and they have low expectations. We don't want no growth businesses.
We want as much growth as we can have, but
we want it when it's very discounted or how to
(24:04):
favor we don't focus on popular stocks.
Speaker 2 (24:07):
Let's talk about the earning season a little bit. Do
you have any major takeaways from the fourth quarter earning season?
Obviously the backdrop shifting quite a bit, and what are
you watching as the first quarter results start.
Speaker 7 (24:18):
To roll in?
Speaker 1 (24:21):
Sure?
Speaker 6 (24:21):
So Toni said, we really view earning.
Speaker 5 (24:25):
Season as a time checking with the company us and
to assess if our investment thesis is on track or not.
Speaker 7 (24:34):
We use earnings for a few different things. We use
it to hear about mian.
Speaker 5 (24:39):
Term trends in the business as you know that's changing
you know pretty quickly, as well as the operating environment
we're listening to get a better understanding of term earnings.
Speaker 4 (24:50):
The most important way that we're spending our time on
is to see if you need to alter our longer
term view of normalized screamings.
Speaker 7 (24:58):
And I would say the sending season that that's interested
in how companies are finding to navigate through the uncertainty
on how they're planning and BacT into the environment, and
to see if any potential on impacts sectors, but owns
really just starting for us.
Speaker 1 (25:14):
So you know, you touched a little bit about touching
base with management and also earlier in our conversation you
did talk about, you know, looking at management teams and
so you know, from a qualitative research aspect, you know,
are there certain qualities that you're looking for in management
teams as part of your research process.
Speaker 3 (25:34):
I think we're looking for management teams that have a
few characteristics. So when we're when we're analyzing management teams,
and you know, being part of Fidelity and Fidelity platform
provides us unique opportunity sets. So you have access to
the most senior managers of any company, which is you know,
(25:54):
wonderful advantage. But we're looking at at a few things.
The first is We're looking to understand their strategy rationale
and their strategic competency. So do they think broadly? Do
they understand and think through not just their base case,
but are they thinking about the risks associated with their industry?
Competitive change is what their competitors are doing. So we're
(26:18):
looking to understand how they think strategically. We're also looking
at how they think financially. We want to understand that
not just the CFO can talk to the talking points
of financial returns, but the CEO and the broader executive
team understand what drives over value. So do they understand
(26:38):
cash flow generation? Do you understand why you want to
have optimized working capital? Do you understand you know, growing
your ebit duh is one part of what you want
to do, or your earning is one part, but if
you don't convert that into cash, it's less interesting. And
then the last part is the tax of the capital required. Right,
are you looking at how much growth your career relative
(27:01):
to how much you're spending because that's what actually matters
to the value creation of a business. And then lastly
we bring that all together, we want to find management
teams that are aligned with us. Right, so we want
equity ownership that they have within the business, but not
simply equity ownership. We also want the KPIs of the
senior execs, but also how it permeates the business to
(27:24):
be driven by things that we believe drive to shareholder value. So,
for example, if you came to us with a company
that was solely compensated on growing their top line, with
how any focus on how much capital they had to
spend to grow their top line, how that turned into profits, Like,
that's very unattractive. What we would like to see is
our management teams with equity exposure and their KPIs linked
(27:49):
to growing their free cash flow per share and their
returns on capital. That would be like a very ideal scenario.
So those are the types of things we're really trying
to understand when analyzing manage.
Speaker 2 (28:03):
And M and A is a pretty big driver of
or a big ceter of valuations and a lot of
these small cap stocks. And I had a lot of
clients at the beginning of twenty twenty five that were
super excited about the deregulatory push from the new administration,
but obviously that hasn't panned out so far. Are you
excited about M and A in twenty twenty five. How
(28:24):
do you think about M and A and are there
any you know, areas or maybe sectors where you think
that M and A activity might pick up this year.
Speaker 8 (28:32):
Sure, So historically, you know, M and A and also
IPA activity for you know, all.
Speaker 3 (28:37):
Market caps, it's.
Speaker 8 (28:39):
Pretty highly quoted to economic activity, business confidence, you know,
need functioning capital.
Speaker 3 (28:46):
Markets, and it's tied to the outlook for quot So
you know, we.
Speaker 8 (28:51):
Really think that future activity is going to depend on
all of those factors.
Speaker 3 (28:55):
Yeah, I would say in terms of M and A
that we we do tend to be a benefit to
share of a lot of M and A and we
have if we're doing a good job, we're tending to
find underappreciated businesses that you know, consolidators or private equity
also ultimately find underappreciated and so we do tend to
have you know, a series of companies taken out of
(29:20):
the Fund of most here. So as M and A
is a good thing for the fund, we tend to
hope that that continues.
Speaker 1 (29:28):
Great, Well, we just have one more question for actually
both of you. I'd love for both of you to
answer this. Something I'd like to ask a lot of
our guests, you know. I know, Sam you mentioned earlier
when you were talking about your background, you know, different
investment books. But what are some of your favorites.
Speaker 3 (29:47):
Maybe I'll start, Yeah, So I would say, like early
in one's investment journey, reading the cannon of investment books
is critically important, and I would you know, I read
everything I could as I was developing my own investment
f laws. Many were influential, but I would certainly highlight
margin of safety by Seth Clarman, resonated with me and
was particularly influential, like the concept of patient contrariy and
(30:10):
investing and stops trading, or the margin of safety kind
of as you hopefully heard today, like permeates our investment process.
I guess like as that's developed, I kind of moved
more towards consuming other folks investment processes and ideas via
investment letters and journals and podcasts, and I shifted more
(30:32):
of my books and reading at this stage of my
career to things that focus on the history of businesses
and how they developed, in the biographies of some of
the awesome business leaders. So you know, at this stage
I like to recommend things like you know, even the
cable Cowboy or Chip Wars or Sam Waltons made in
the market. These kind of these things are more influential
(30:53):
at this stage of my career in terms of how
I think about businesses and analyzed businesses.
Speaker 1 (30:58):
Great to help you, Morgan, sure.
Speaker 8 (31:00):
So I've been a few favorites that I usually encourage
to people who start here as a new investor. So
the first one is called Investing the Last Level Art.
It's by Robert Hagstrom. This is a great book that
talks about the importance of overlaying investing with other fields
like psychology, biology, economics, and you can't just be so
(31:23):
focused on finance.
Speaker 4 (31:24):
It's it's sort of in a spirit of Cherry Munger.
Speaker 8 (31:27):
The second one is Thinking Fast as Though by Dan Conneman.
Speaker 3 (31:30):
So it's well known.
Speaker 4 (31:32):
It's not a finance or investment book.
Speaker 8 (31:34):
But it goes a long way in helping you understand.
Speaker 4 (31:36):
How you make decisions. And I think it's helped me
be more aware.
Speaker 3 (31:39):
Of my behavioral biases, and I think that's a really.
Speaker 8 (31:41):
Important consideration to being an investor.
Speaker 4 (31:45):
And the last thing I would comment on is I'm
a big reader of Howard Mark's.
Speaker 3 (31:49):
Books and memos. I found those very helpful.
Speaker 1 (31:52):
Great, well, I'll definitely, you know, take a look at
the ones I haven't read so far. But Morgan, Sam,
this is wonderful. Thank you again for joining us.
Speaker 3 (31:59):
Thanks thanks much.
Speaker 1 (32:02):
And Mike, thank you for being the Coast today.
Speaker 2 (32:05):
Thank you, David, and thank you both for joining.
Speaker 1 (32:06):
Us until our next episode. This is David Cone with
Inside Active
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael casper, Us, small cap
and sector strategist at Bloomberg Intelligence. Mike, thanks for joining
(00:34):
me today. So you put out a note last week
on you know, the tariff's effect on small cap earnings
for your Russell two thousand earning season review. What could
you tell us about that? You know, what effect is
tariff's going to have on small cap earning?
Speaker 2 (00:50):
Yeah, so consensus is already you know, pairing back estimates
pretty significantly. I just want to recap though, a few
of our model highlights on a fair value model on
the Russell two thousand and what it suggested based on
macro conditions at the time when we updated it just
a couple of weeks ago, it's just about three point
two percent revenue growth over the next year. Consensus was
(01:14):
at seven point four percent. Obviously that's gotten paired back
a little bit since then, But really what investors had priced,
and a lot of this obviously is contingent on how
high yield has moved or not really moved, right, So
we've only had high yield spreads blowout near almost near
five percent at the worst, and that's a key component
(01:35):
of our modeled multiple. But given that that hasn't blown
out yet, you know, tanking the multiple, it would suggest
that to get to a roughly today's price or so,
you would need a ten percent revenue contraction over the
year ahead, and we've kind of seen consensus starting to
adjust to this reality, right, So, pairing back estimates thus
(01:56):
far this season, I would note we're at a one
point one percent gain on a current constituent basis, but
still down a little over one percent on the actual
constituency of the ross of two thousand, so the current
two thousand versus two thousand, and that it was a
year ago. And estimates have come down pretty much for
(02:16):
everything but a slew of defensives for the first quarter
and much of the first half of twenty twenty four
or twenty twenty five. So what we're really looking for
is how bad do these estimates get over the next
several quarters? Are those going to get trimmed even further.
They've really only taken the acts again to the first
half of twenty twenty five. The back half is still
(02:38):
for significant recovery. Obviously, we've got a pretty weak GDP
print today, but we'll see how bad estimates can get.
Certainly they are facing some brunt of the tariff turmoil
that we've gotten so far.
Speaker 1 (02:53):
We'll be interesting to watch, and so I think this
is a great time to bring on our two guests.
I'd like to welcome Moreian Peck and Sam Chamovit to
Inside Active. Morgan and Sam are portfolio managers for the
Fidelity Low Price Stock Fund ticker FLPSX. Morgan, Sam, thank
you for joining us today.
Speaker 3 (03:12):
Hi David, I'm Michael. Thanks for having us.
Speaker 4 (03:15):
Thanks for having us.
Speaker 1 (03:17):
So let's begin by learning more about your investment backgrounds.
We can start with Morgan.
Speaker 5 (03:22):
Sounds great and so I did not grow up with
much finance experience in my family. My dad was in advertising,
my mom was a writer.
Speaker 6 (03:34):
I knew that finance was a use for ros Stove,
but the closest.
Speaker 4 (03:39):
We had in my college to major was economics, which.
Speaker 6 (03:42):
Was not the seeing as finance and my assumers were.
Speaker 4 (03:45):
Of college, a couple of things happened.
Speaker 7 (03:49):
The first one is I stumbled across what looked like
a business work case study when I had a fils
that someone had left behind.
Speaker 4 (03:58):
And I lived through it, and I thought, but it
was so interesting that there was this entire field focused
on learning about companies and business drivers.
Speaker 6 (04:06):
So I wanted to pursue something related to this case study.
Speaker 4 (04:10):
And at the same time.
Speaker 7 (04:11):
I had a classmate who had had the summer internship
at Fidelity as an equity research associate, and he was
the one that explained to me the difference between the
buy side and the cell side, what the role of
an equity analyst was at Fidelity, and he encouraged me to.
Speaker 6 (04:27):
Apply, and so I did. And as I was going.
Speaker 7 (04:30):
Through the interview sessions, I was immediately impressed with the caliber.
Speaker 4 (04:34):
Of people who were interviewing me.
Speaker 6 (04:36):
It sounded like a very unique job coming.
Speaker 4 (04:38):
Out of undergraduate.
Speaker 7 (04:40):
I was really drawn to the idea of learning how
to analyze a business. I liked that the success or
failure for the job was very quantifiable, and I also
really liked how much responsibility and impact I could have
as a young professional.
Speaker 4 (04:54):
So when I was.
Speaker 6 (04:55):
Fortunate enough to get the offer I accepted on the spot.
Speaker 4 (04:58):
And so Fidelities that when we play that I've worked
at and I've been here for over twenty.
Speaker 7 (05:02):
Years, and I would say that as someone means to
invest in, working at Faedelities is just a great place
to learn because we get exposure at a really young
age to every type of investor.
Speaker 4 (05:14):
And you know, we have legends like world Dad Off and.
Speaker 7 (05:17):
Job's own pasts and everyone in between, and all of
their both open.
Speaker 4 (05:21):
For me to go in and ask questions and understand
the process. So early in my career.
Speaker 7 (05:27):
I naturally gravitated towards smaller cap companies and then eventually
to buy unions. And I think I like them because
it seemed like it's part of the market.
Speaker 4 (05:36):
I had a higher.
Speaker 5 (05:36):
Success of finding undiscovered gems because few of people are
just looking so so really who I am as an
investor day As a function of all of that, as
well as my kind of successes and failures.
Speaker 1 (05:47):
As an analyst, Great how about you? Sam?
Speaker 3 (05:51):
Similar? Similar to More, I did not grow up in
a finance householder family. My family was primarily doctors and lawyers,
so financial literacy and markets were not dinner table talk.
I didn't know what a portfolio mender was growing up,
so I started to kind of figure all that out
in college. So later in my high school years, my
mom stopped working and she developed an interested investing and
(06:13):
bought me my first markets investment related books. So overall,
my start was rather unsophisticated, but a start. Nonetheless, in college,
I really learned more about finance and investing, so that's
where i'd say like the passion really started to develop.
After graduating college, I joined the Investment Associate program at
Putnam Investments. At Putnam, I worked for and with some
(06:35):
excellent investors and mentors. Putnam was also very advantageous because
it was going through a lot of very turbulent times,
which allowed young people like myself to take a bigger
role more quickly than normal, which was a great learning opportunity.
I did well with these roles and continued to move up,
but after five years, decided that Fidelity was a better
(06:57):
place for me to continue my career. I moved to
Fidelity to start our international small cap research team, and
I did that with Derek Janssen and David Jenkins, who
both came from the outside to help start that team.
And both are great investors and close friends to this day.
(07:19):
And then after a year in Boston for Fidelity, I
left to help start our Tokyo office, which was sort
of meant to be a two year stint but became
a thirteen year adventure, which was absolutely amazing and you know,
an opportunity to learn to community, to grow as an investor,
but also you know, some leadership aspects and overalls an individual.
(07:40):
So I started to transition to fund management of twenty twelve,
and then I ran the International small Cap fund from
early twenty fourteen until I think we're out twenty twenty two.
Or David, who started the International small Cap team of me,
ultimately took sole responsibility for.
Speaker 1 (07:58):
Cool. You know, both of you are co managers on
this fund. I'd really like to understand, you know, how
does it work, you know, the dynamic between the two
of you. Do you have different responsibilities or you know,
I guess do you kind of run things by each other?
Speaker 5 (08:14):
Sure, I'm happy to take that. So so co ma management.
As you point out, it's.
Speaker 7 (08:19):
A pretty broad term, and so the specifics of the
relationship and the the roles I think are really important to.
Speaker 4 (08:25):
Define just for context.
Speaker 6 (08:28):
Sam and I are.
Speaker 5 (08:29):
Coming up in about thirteen years of co managing various
funds together.
Speaker 7 (08:33):
And that has been really valuable because it's given us
a lot of time to determine our definition of co
management and it's allowed us to build this great relationship
of mutual respect and trust as investors, and that's really
the foundation for our teamwork importantly, and they also have
a lot of experience co managing and pretty much every
imaginable market.
Speaker 4 (08:54):
Environment, and that means that we know how to.
Speaker 7 (08:56):
Manage to better employers where our investment processes and out
of favor. But so directly answer your question that the
way we describe how we work together is really an.
Speaker 4 (09:06):
Investment committee of two. So that means there are those sleeves.
We co own everything together, and so all of the.
Speaker 7 (09:14):
Fund exposures are decided and analyzed together.
Speaker 4 (09:18):
We monitor the risks of the fund jointly.
Speaker 5 (09:22):
And the only area that we really kind of split
up and dividing conquers and idea generation.
Speaker 7 (09:27):
We think it's really out that you just have two
people on the funds, you know.
Speaker 6 (09:32):
Scaring the globe for new ideas.
Speaker 7 (09:34):
But as soon as one of us finds in our idea,
we bring the other person into the group.
Speaker 4 (09:39):
And so most of.
Speaker 7 (09:40):
The time Sam and I are pitching each other stocks
for debating stocks, and then they're making a decision together
as to when a leather stock is going to be
you know, added into the court furtus. So that's really
how we work together as a team.
Speaker 1 (09:54):
Makes sense. And so you know, you talk about coming
up with idea generations. So I think that brings me
up to my next question is you know, is there
a process you follow in terms of you know, coming
up with ideas or what you're looking for for the portfolio.
You know, obviously it's called low price stock, you know,
I'm sure there's a lot more into it and what
you're looking for.
Speaker 3 (10:15):
Sure, I'll take that one, and I'll talk a little
bit about the philosophy as well as kind of the
what we're looking for. The first, we are fundamental investors
and make decisions based on deep fundamental work alongside our
research team. Fidelities research team is one of our coole
competitive advantages. For sure, we are opportunistic value investors, but
(10:36):
we do have a quality bias and take a very
long term horizon. The key is we look for the
intersection of value and quality, which to us leads to
not simply cheap stock ideas, but underappreciated businesses, which is
what we're really targeting. We cast a wide net in
terms of the types of companies we invest in, with
(10:56):
the thought process being the broader we cast our net,
more likely we will find bargains. So what are we
looking for when analyzing specific stocks. We tend to focus
on three things or three broad categories. First, we look
to determine the free cash flow power of a business
medium term. The second is the durability of the free
(11:18):
cash flow, and for us, durability is synonymous with quality.
And third we're looking to understand the reinvestment opportunities of
the business and its ability to grow it's per share value.
If we talk about durability and break that up for
a second, within that bucket is business quality, but it
is also management quality. Management's very important to us, as
(11:40):
well as the balance sheet. So those are the three
kind of subcategories within durability that we're looking at. We
consider these factors when determining what a business is worth
and establishing a margin of safety. We compare our assessment
of value of the stock to the opportunity set I'm
making a decision, right, so everything has to be in
a context of the overall opportunity to set do I
(12:03):
dig in a little bit to quality because I think
a lot of people talk about quality as part of
their process, so I like to talk about ours a
little bit more. There seems to be two types of
quality focused investors. The first folks who only invest in
the best businesses, so they segment the market into quality
buckets and only focus on what they will determine as
the top quality. And the second is is folks who
(12:23):
really truncate the market by excluding the worst businesses. We're
more in that second camp in order to keep the
net really wide, so we look to avoid bad business models,
shrinking businesses, low return businesses, and crookeeter and competent management.
So that's the way we think about quality. We describe
our process as preparation and patients. So preparation we are
(12:47):
constantly doing deep fundamental work on companies to understand those
three kind of buckets that I mentioned before, the free
cash flow power, the quality attributes, and the growth potential.
But then we wait patiently to buy the businesses only
when there are at attractive prices relative to our assessment
of intrinsic value.
Speaker 2 (13:05):
So do you consider macroeconomic conditions at all when you're
looking for stocks.
Speaker 3 (13:12):
We are macro aware when making investment decisions. We're paying
close attention to what is going on in the macroeconomy
and the geopolitical environment. That said, this does not determine
our investment strategy, nor do we change our process based
on the environment, but it does help us in terms
of informing where we are in the cycle, how things
(13:33):
may be impacting companies in the near term. It also
helps explain at times like why some companies are performing
well and other companies are poorly a very bad part
of the cycle, and a cyclical performing poorly may actually
be an opportunity to buy, not actually an opportunity to avoid,
you know, I'd like a key part of our investment
philosophy overall is that the world is uncertain and constantly changing.
(13:57):
So whether that's tariffs one day or or inflation the
next day, whatever it is, there's constant uncertainty and change.
But this is really why we're looking for strong management
teams and companies which have adaptable and resilient business models.
You know, companies with safe balance sheets and generating cash
that helps provide that margin of safety. These things make
(14:19):
kind of weathering tough times and uncertainly easier. It also
means our companies are able to play offense when when
times are tough, Like we want the boardroom conversation in
tough times to be about can we buy back stock
at highly discounted crisis? Can we reinvest to gain share?
Or can we consolidate the market at attractive crisis? Those
are the types of offensive questions we hope our companies
(14:40):
are asking in tough times versus how can we repair
our balance sheet when when times are tough? This is
not what we were looking for in our investments.
Speaker 2 (14:48):
And now smid caps have been out of favor for
quite some time now, and I know a lot of
other pms are searching for kind of defend your box
type answers. But what kind of catalysts are you watching?
Maybe for Smith Caps to turn it around and now
perform large caps.
Speaker 7 (15:06):
Sure I can take this so as Sam Engine, we're
remark very aware, but we.
Speaker 5 (15:10):
Don't spend a lot of time trying to put it
the future. We really think the value that we can
generate for the fund and our shareholders is the bottom
up stock picking.
Speaker 4 (15:19):
And finding those dislocated stocks, and you know, to.
Speaker 5 (15:23):
Remain thatch aware, we're watching all of the data points
that I think everyone else is watching. We do have
great analysis coming out of our internal.
Speaker 4 (15:33):
Economic team and they put.
Speaker 7 (15:35):
Sort of analysis on all of that data and that
that's informative to us.
Speaker 4 (15:39):
But to luckly into your question, and you know, we
don't have a strong view on.
Speaker 7 (15:45):
Small caps being about to outperform or continue to underperform.
Speaker 4 (15:48):
But maybe we can talk a little bit about.
Speaker 7 (15:50):
Why we're very excited about small caps for a few reasons.
Speaker 4 (15:54):
Like when caveat though is these have been through for a.
Speaker 7 (15:56):
While, so small caps as a note, they trailed large
caps for about fifteen years and that's that's much longer
than a normal cycle, which tends to be sort of
eight to ten years. That has allowed to really attractive
valuations for small caps, especially the profit there ones.
Speaker 4 (16:12):
And as a.
Speaker 7 (16:13):
Reminder about truly to forty five percent of the rest
of two thousand, which is the small cap benchmark we
look at, that's unprofitable and that's really unique to this benchmark.
Speaker 4 (16:24):
And so within small caps, we also find that it's.
Speaker 7 (16:27):
Just a more inefficient part of the market than the
large caps because these stocks, as I mentioned before, they're
just less well covered by both the buy side and
the cell side. The other interesting thing is that small
caps have tremendous disparity and the quality of the businesses,
given what I just mentioned about so many of them
being chronically unprofitable. And so that's why we think that
(16:49):
it's a really attractive setup for app the managers like
us to.
Speaker 4 (16:53):
Try to add value by picking the light stocks.
Speaker 2 (16:56):
And let's talk about evaluations a little bit. Are there
specific metrics you like to use to value stocks and
anything like that, and anything like that.
Speaker 3 (17:06):
We believe what we pay for a stock is critically
important to its return potential, and we don't compromise on
this valuation, although quantitative in nature is not a precise
science and involves a lot of art and triangulation. Importantly,
we believe the value of the business is solely determined
by the cash flows of business generates, not its adjusted earnings.
(17:27):
I think adjusted earnings have become quite popular, but we're
more focused on the cash that business generates. So first,
like everything we do, we try to embed conservative assumptions.
Using conservative assumptions, we focus on the estimates of normalized
free cash flows several years in the future. By focus
on normalized profits in the future, we hope to avoid
(17:47):
being overly anchored to what sounds good or bad in
the near term. Second, we try and look at several
types of metrics, so you know, but it must be
based on profits and cash flows, not eyeballs and sales. Third,
we spend a significant time on scenario analysis to help
us wrap our arms around the range of outcomes and
how asymmetric the return potential for our investments are. This
(18:10):
means we focus on bearish scenarios as well as bullish
scenarios so as to not rely on a single point
estimate given how much variability exists in the world. And lastly,
we don't have any mandatory hurdles to buy to buy
or sell, so it's always relative to the opportunity set.
The hurdles are dependent on the quality and the durability
(18:31):
of the free cash flow as well as the growth opportunity,
so there's not any set hurdles that we buy if
the upside is at or we sell if the upside
is want. We do try to bring a lot of
the art the other aspects into it.
Speaker 1 (18:43):
Do you consider stocks at all, you know, I know
the portfolio is called low price stock, but do you
ever consider stocks that are not low price?
Speaker 6 (18:51):
So maybe I can start off talking a little bit
about that.
Speaker 4 (18:56):
The post with that question a lot.
Speaker 7 (18:59):
So the fund was created about thirty five years ago
in nineteen ninety by Joss tolen Host and it was
launched before the popularization of style boxers that were offamiliar
with today and the fun that focused on more price stocks,
and it was.
Speaker 5 (19:15):
Named after them based on the view that stocks with
no prices implied are.
Speaker 4 (19:20):
Under valued or cheaper, So the name was really meant
to signal that this.
Speaker 6 (19:24):
Is a value fund.
Speaker 3 (19:26):
I'd also say we believe wholeheartedly in our evaluation based
process and we only invest when opportunities fit that process.
So we believe risk is actually deviating from this process
versus a stated data or track.
Speaker 2 (19:38):
And are are there any sectors you currently find particularly
compelling that stand out above the others?
Speaker 1 (19:45):
Maybe?
Speaker 5 (19:45):
So I'd say that there are always opportunities different business
models and.
Speaker 4 (19:50):
Every sector that we're looking at.
Speaker 5 (19:53):
And then I think.
Speaker 4 (19:53):
Maybe different to somebody that are fund managers you talk to,
you know.
Speaker 7 (19:57):
If the growth manager is really focused on the the
fear sectors of the market.
Speaker 4 (20:01):
We're looking at all sectors all of the time, and
so the answer question with the put up.
Speaker 7 (20:07):
And the market year to day, but we're really finding
opportunities in all sectors.
Speaker 4 (20:11):
So many stocks have declined, and.
Speaker 7 (20:14):
So many of them look like it's sort of been
indiscriminate selling driving some of that place action within all
the sectors, though, we're spending more time on the stocks
that have been most negatively impacted by terror related concerns
and macro uncertainty.
Speaker 4 (20:28):
And so as you may suspect, we're spending.
Speaker 5 (20:31):
Plenty of time and more sycrically exposed sectors and financials, the.
Speaker 7 (20:35):
Consumer discretionary, But interestingly we're spending just as much time
in ret's view probably is more defensive sectors like consumer
stakers and healthcare. And I'd say for each of the
names that looks interesting, we're really spending our time reevaluating
if the normalized earnings power and tree cash fishes have
changed for the business.
Speaker 4 (20:55):
So that's what we're spending our time on.
Speaker 2 (20:57):
And I saw that your fund has a sort considerable
x US exposure. Are you more optimistic maybe about foreign
stocks than US stocks, or how's your global view look
right now.
Speaker 3 (21:08):
So the process for picking stocks within the US or
outside of the US is the same, but we tend
to invest in businesses overseas when we can find something
unique or something similar with a significantly better risk adjusted reward.
There are a few attributes that make international stocks interesting
at the moment. The first is the long period of
(21:29):
US stock outperformance and dollar strength, which means that there
is likely to be relative bartmans overseas. The second is
many overseas markets are less consolidated, with more small and
family run businesses still listed on public exchanges. This makes
for a very broad pool to hunt for ideas. The
reason is the US has been the most aggressive in
terms of using cash flows and balance sheets to consolidate
(21:52):
markets for the M and A and privatize businesses via
private equity. The US has also benefited from uniquely large,
excellent tech companies that don't exist in most parts of
the world. This has been a huge advantage for the
US market and has sucked capital into them. But the
rest of the world is also starting to do things
that can drive a lot of value too, which had
(22:13):
not been happening previously. So, for example, in Europe, we're
seeing early signs of a much more stimulative government spending regime,
primarily around defense, but not limited to only defense. This
is a positive for businesses and economies there, which is
at the same time when the US seems to be
doing the opposite. In Asia, though primarily Japan but to
(22:34):
some extent Korea, companies are becoming much more proactive with
their capital allocation in terms of higher dividends and buybacks.
Buybacks with excess capital of lowly valued stocks like in
these countries can be really powerful drivers of shareholder value creation.
So this is positive backdrop, but we're still evaluating each
(22:55):
investment on a company by company basis, and Fidelity, with
its uniquely positioned analysts overseas, are helping us identify these
underappreciated investment opportunities.
Speaker 2 (23:07):
Now your fund is a bit obviously tilted a bit
more towards value over growth. Are you excited about the
style in twenty twenty five in the opportunities there? And
do you consider growth names as well if they are
you know, undervalue to you.
Speaker 3 (23:23):
We believe investing in low expectation stocks is always the
right thing to do for investors, and the very long
term data supports this. I think market cycles can be
very long, but they aren't permanent. So we've been in
a an elongated period of value under performance, and so
from here the starting valuations would imply significantly better for
(23:43):
returns in terms of value stocks, but you know, the
timing of this is unpredictable. Would also say to your question, Yeah,
we love growth stocks. We just want to buy them
and they have low expectations. We don't want no growth businesses.
We want as much growth as we can have, but
we want it when it's very discounted or how to
(24:04):
favor we don't focus on popular stocks.
Speaker 2 (24:07):
Let's talk about the earning season a little bit. Do
you have any major takeaways from the fourth quarter earning season?
Obviously the backdrop shifting quite a bit, and what are
you watching as the first quarter results start.
Speaker 7 (24:18):
To roll in?
Speaker 1 (24:21):
Sure?
Speaker 6 (24:21):
So Toni said, we really view earning.
Speaker 5 (24:25):
Season as a time checking with the company us and
to assess if our investment thesis is on track or not.
Speaker 7 (24:34):
We use earnings for a few different things. We use
it to hear about mian.
Speaker 5 (24:39):
Term trends in the business as you know that's changing
you know pretty quickly, as well as the operating environment
we're listening to get a better understanding of term earnings.
Speaker 4 (24:50):
The most important way that we're spending our time on
is to see if you need to alter our longer
term view of normalized screamings.
Speaker 7 (24:58):
And I would say the sending season that that's interested
in how companies are finding to navigate through the uncertainty
on how they're planning and BacT into the environment, and
to see if any potential on impacts sectors, but owns
really just starting for us.
Speaker 1 (25:14):
So you know, you touched a little bit about touching
base with management and also earlier in our conversation you
did talk about, you know, looking at management teams and
so you know, from a qualitative research aspect, you know,
are there certain qualities that you're looking for in management
teams as part of your research process.
Speaker 3 (25:34):
I think we're looking for management teams that have a
few characteristics. So when we're when we're analyzing management teams,
and you know, being part of Fidelity and Fidelity platform
provides us unique opportunity sets. So you have access to
the most senior managers of any company, which is you know,
(25:54):
wonderful advantage. But we're looking at at a few things.
The first is We're looking to understand their strategy rationale
and their strategic competency. So do they think broadly? Do
they understand and think through not just their base case,
but are they thinking about the risks associated with their industry?
Competitive change is what their competitors are doing. So we're
(26:18):
looking to understand how they think strategically. We're also looking
at how they think financially. We want to understand that
not just the CFO can talk to the talking points
of financial returns, but the CEO and the broader executive
team understand what drives over value. So do they understand
(26:38):
cash flow generation? Do you understand why you want to
have optimized working capital? Do you understand you know, growing
your ebit duh is one part of what you want
to do, or your earning is one part, but if
you don't convert that into cash, it's less interesting. And
then the last part is the tax of the capital required. Right,
are you looking at how much growth your career relative
(27:01):
to how much you're spending because that's what actually matters
to the value creation of a business. And then lastly
we bring that all together, we want to find management
teams that are aligned with us. Right, so we want
equity ownership that they have within the business, but not
simply equity ownership. We also want the KPIs of the
senior execs, but also how it permeates the business to
(27:24):
be driven by things that we believe drive to shareholder value. So,
for example, if you came to us with a company
that was solely compensated on growing their top line, with
how any focus on how much capital they had to
spend to grow their top line, how that turned into profits, Like,
that's very unattractive. What we would like to see is
our management teams with equity exposure and their KPIs linked
(27:49):
to growing their free cash flow per share and their
returns on capital. That would be like a very ideal scenario.
So those are the types of things we're really trying
to understand when analyzing manage.
Speaker 2 (28:03):
And M and A is a pretty big driver of
or a big ceter of valuations and a lot of
these small cap stocks. And I had a lot of
clients at the beginning of twenty twenty five that were
super excited about the deregulatory push from the new administration,
but obviously that hasn't panned out so far. Are you
excited about M and A in twenty twenty five. How
(28:24):
do you think about M and A and are there
any you know, areas or maybe sectors where you think
that M and A activity might pick up this year.
Speaker 8 (28:32):
Sure, So historically, you know, M and A and also
IPA activity for you know, all.
Speaker 3 (28:37):
Market caps, it's.
Speaker 8 (28:39):
Pretty highly quoted to economic activity, business confidence, you know,
need functioning capital.
Speaker 3 (28:46):
Markets, and it's tied to the outlook for quot So
you know, we.
Speaker 8 (28:51):
Really think that future activity is going to depend on
all of those factors.
Speaker 3 (28:55):
Yeah, I would say in terms of M and A
that we we do tend to be a benefit to
share of a lot of M and A and we
have if we're doing a good job, we're tending to
find underappreciated businesses that you know, consolidators or private equity
also ultimately find underappreciated and so we do tend to
have you know, a series of companies taken out of
(29:20):
the Fund of most here. So as M and A
is a good thing for the fund, we tend to
hope that that continues.
Speaker 1 (29:28):
Great, Well, we just have one more question for actually
both of you. I'd love for both of you to
answer this. Something I'd like to ask a lot of
our guests, you know. I know, Sam you mentioned earlier
when you were talking about your background, you know, different
investment books. But what are some of your favorites.
Speaker 3 (29:47):
Maybe I'll start, Yeah, So I would say, like early
in one's investment journey, reading the cannon of investment books
is critically important, and I would you know, I read
everything I could as I was developing my own investment
f laws. Many were influential, but I would certainly highlight
margin of safety by Seth Clarman, resonated with me and
was particularly influential, like the concept of patient contrariy and
(30:10):
investing and stops trading, or the margin of safety kind
of as you hopefully heard today, like permeates our investment process.
I guess like as that's developed, I kind of moved
more towards consuming other folks investment processes and ideas via
investment letters and journals and podcasts, and I shifted more
(30:32):
of my books and reading at this stage of my
career to things that focus on the history of businesses
and how they developed, in the biographies of some of
the awesome business leaders. So you know, at this stage
I like to recommend things like you know, even the
cable Cowboy or Chip Wars or Sam Waltons made in
the market. These kind of these things are more influential
(30:53):
at this stage of my career in terms of how
I think about businesses and analyzed businesses.
Speaker 1 (30:58):
Great to help you, Morgan, sure.
Speaker 8 (31:00):
So I've been a few favorites that I usually encourage
to people who start here as a new investor. So
the first one is called Investing the Last Level Art.
It's by Robert Hagstrom. This is a great book that
talks about the importance of overlaying investing with other fields
like psychology, biology, economics, and you can't just be so
(31:23):
focused on finance.
Speaker 4 (31:24):
It's it's sort of in a spirit of Cherry Munger.
Speaker 8 (31:27):
The second one is Thinking Fast as Though by Dan Conneman.
Speaker 3 (31:30):
So it's well known.
Speaker 4 (31:32):
It's not a finance or investment book.
Speaker 8 (31:34):
But it goes a long way in helping you understand.
Speaker 4 (31:36):
How you make decisions. And I think it's helped me
be more aware.
Speaker 3 (31:39):
Of my behavioral biases, and I think that's a really.
Speaker 8 (31:41):
Important consideration to being an investor.
Speaker 4 (31:45):
And the last thing I would comment on is I'm
a big reader of Howard Mark's.
Speaker 3 (31:49):
Books and memos. I found those very helpful.
Speaker 1 (31:52):
Great, well, I'll definitely, you know, take a look at
the ones I haven't read so far. But Morgan, Sam,
this is wonderful. Thank you again for joining us.
Speaker 3 (31:59):
Thanks thanks much.
Speaker 1 (32:02):
And Mike, thank you for being the Coast today.
Speaker 2 (32:05):
Thank you, David, and thank you both for joining.
Speaker 1 (32:06):
Us until our next episode. This is David Cone with
Inside Active
Host
Gina Martin Adams
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