1 00:00:03,900 --> 00:00:06,449 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,450 --> 00:00:09,809 Sean Aylmer: Aylmer. Start of a new financial year and the end 3 00:00:09,929 --> 00:00:13,559 Sean Aylmer: of a pretty turbulent one for equity investors. I wanted 4 00:00:13,559 --> 00:00:14,909 Sean Aylmer: to have a look at some of the sectors that 5 00:00:14,910 --> 00:00:17,190 Sean Aylmer: did well, the ones that didn't, and the companies that 6 00:00:17,190 --> 00:00:20,459 Sean Aylmer: really stood out. Remember, this is general information only and 7 00:00:20,460 --> 00:00:24,210 Sean Aylmer: you should seek professional advice before making investment decisions. Roger 8 00:00:24,210 --> 00:00:27,569 Sean Aylmer: Montgomery is the founder and Chief Investment Officer of Montgomery 9 00:00:27,570 --> 00:00:30,210 Sean Aylmer: Investment Management. Roger, welcome back to Fear and Greed. 10 00:00:30,540 --> 00:00:31,409 Roger Montgomery: It's great to be with you. 11 00:00:32,130 --> 00:00:35,760 Sean Aylmer: Okay, end of fiscal year 2023, what will it be remembered for? 12 00:00:35,760 --> 00:00:38,729 Sean Aylmer: What was the standout good or bad over the past 13 00:00:38,729 --> 00:00:39,269 Sean Aylmer: 12 months? 14 00:00:39,900 --> 00:00:42,629 Roger Montgomery: Well, I have to say up until or for the 15 00:00:42,630 --> 00:00:47,130 Roger Montgomery: first half of the year, the compression in P/E (Price/Earnings) ratios for 16 00:00:47,130 --> 00:00:51,539 Roger Montgomery: small companies or the continuation of that, really was a 17 00:00:51,540 --> 00:00:55,260 Roger Montgomery: big deal. We saw small caps particularly, but large caps 18 00:00:55,260 --> 00:00:58,889 Roger Montgomery: as well. We saw their P/E ratios compressed, and that 19 00:00:58,890 --> 00:01:03,570 Roger Montgomery: was a function of fear around recession and the combination 20 00:01:03,570 --> 00:01:08,130 Roger Montgomery: or the potential for the combination of recession with persistent inflation, 21 00:01:08,130 --> 00:01:11,849 Roger Montgomery: which of course would mean higher for longer interest rates, 22 00:01:12,240 --> 00:01:17,100 Roger Montgomery: and that superficially is seen as a disaster for equities, 23 00:01:17,100 --> 00:01:21,660 Roger Montgomery: particularly growth equities. And then in the second half of 24 00:01:21,660 --> 00:01:24,990 Roger Montgomery: the financial year, so year to date or calendar year 25 00:01:24,990 --> 00:01:29,578 Roger Montgomery: to date, what we saw was a reversal of that 26 00:01:29,639 --> 00:01:33,840 Roger Montgomery: only for a select number of stocks. And so we saw, 27 00:01:33,870 --> 00:01:37,740 Roger Montgomery: for example, the S&P 500 up about 15%, and we 28 00:01:37,740 --> 00:01:41,429 Roger Montgomery: saw the NASDAQ up about 21% or thereabouts. But what 29 00:01:41,429 --> 00:01:43,708 Roger Montgomery: we actually, when you drill down or dig a bit deeper, 30 00:01:43,709 --> 00:01:48,000 Roger Montgomery: what you discover, is that it was really led by just seven 31 00:01:48,029 --> 00:01:54,960 Roger Montgomery: mega cap companies. And you all know the names Alphabet, Amazon, Apple, Microsoft, 32 00:01:55,380 --> 00:01:59,580 Roger Montgomery: Nvidia's in there as well. And those sorts of businesses, 33 00:02:00,000 --> 00:02:03,989 Roger Montgomery: if you remove them from the major global indices, particularly the S&P 500 and 34 00:02:03,990 --> 00:02:07,139 Roger Montgomery: the MSCI (Morgan Stanley Capital International) world index, then what you find is the 35 00:02:07,140 --> 00:02:10,139 Roger Montgomery: rest of the market pretty much went sideways. So we 36 00:02:10,139 --> 00:02:13,230 Roger Montgomery: saw that P/E compression last year and then not much 37 00:02:13,230 --> 00:02:17,910 Roger Montgomery: else after that. And I think that's a fairly reasonable 38 00:02:17,910 --> 00:02:22,440 Roger Montgomery: description of how the markets traded over the last 12 months. 39 00:02:23,250 --> 00:02:24,900 Sean Aylmer: Was it a typical year? I mean, I want to 40 00:02:24,900 --> 00:02:27,960 Sean Aylmer: get into looking forward what we should expect, but it 41 00:02:27,960 --> 00:02:31,740 Sean Aylmer: just seemed the last year or so post COVID, it 42 00:02:31,740 --> 00:02:34,228 Sean Aylmer: was probably a difficult year to be an investor. 43 00:02:35,070 --> 00:02:39,359 Roger Montgomery: Oh, definitely. And that's because the normal things that we 44 00:02:39,360 --> 00:02:41,970 Roger Montgomery: expect to see is we expect to see share prices 45 00:02:42,389 --> 00:02:45,150 Roger Montgomery: follow maybe over the longer than 12 months, but we 46 00:02:45,150 --> 00:02:48,030 Roger Montgomery: expect them to follow earnings performance of businesses. And what 47 00:02:48,030 --> 00:02:51,629 Roger Montgomery: we saw is businesses with some of the very best 48 00:02:51,719 --> 00:02:55,200 Roger Montgomery: earnings potential and businesses that were growing their earnings, we 49 00:02:55,200 --> 00:02:59,339 Roger Montgomery: saw them hammered just as hard as companies that were 50 00:02:59,609 --> 00:03:03,720 Roger Montgomery: maybe classed in the profitless prosperity category. They weren't making 51 00:03:03,720 --> 00:03:06,840 Roger Montgomery: any money at all. So it was an atypical year 52 00:03:06,840 --> 00:03:11,880 Roger Montgomery: from that perspective. And remember, there's the ongoing thematics. For example, 53 00:03:11,880 --> 00:03:17,909 Roger Montgomery: the decarbonisation thematic still played its part. Stocks that benefit 54 00:03:18,360 --> 00:03:23,220 Roger Montgomery: from decarbonisation or the EV movement, for example, and lithium batteries, 55 00:03:23,490 --> 00:03:26,490 Roger Montgomery: they through various times in the year did well and 56 00:03:26,490 --> 00:03:28,349 Roger Montgomery: then did not so well when their share prices perhaps 57 00:03:28,349 --> 00:03:31,980 Roger Montgomery: got ahead of expectations or ahead of what was realistic. 58 00:03:33,089 --> 00:03:37,020 Sean Aylmer: So where we sit today, given that you had some 59 00:03:37,020 --> 00:03:39,990 Sean Aylmer: compression of P/E ratios in the first half, then sideways 60 00:03:39,990 --> 00:03:42,900 Sean Aylmer: trading if you exclude some of those really big stocks, 61 00:03:43,380 --> 00:03:46,379 Sean Aylmer: you mentioned small caps as well, having been hit harder. 62 00:03:46,800 --> 00:03:51,419 Sean Aylmer: Looking forward, does that suggest that small caps, are there are opportunities 63 00:03:51,420 --> 00:03:52,860 Sean Aylmer: in small caps? What do you think? 64 00:03:52,860 --> 00:03:55,800 Roger Montgomery: I think so. I'm convinced and I'm putting my money where 65 00:03:55,800 --> 00:03:59,190 Roger Montgomery: my mouth is, I'm convinced that small cap companies, both 66 00:03:59,190 --> 00:04:02,730 Roger Montgomery: domestic small caps and global small caps, if not over 67 00:04:02,730 --> 00:04:05,880 Roger Montgomery: the next six months, then over the next 12 months perhaps, 68 00:04:06,120 --> 00:04:08,249 Roger Montgomery: should do very, very well. And the reason I say, 69 00:04:08,250 --> 00:04:10,649 Roger Montgomery: there's a few reasons for that. Number one, let me 70 00:04:10,650 --> 00:04:17,669 Roger Montgomery: just point out that Australia's Future Fund has recently, I guess, 71 00:04:17,730 --> 00:04:22,589 Roger Montgomery: set the tone by making relatively large investment in small 72 00:04:22,589 --> 00:04:25,649 Roger Montgomery: cap managers in Australia. So that's the first thing. I 73 00:04:25,650 --> 00:04:30,299 Roger Montgomery: think they're noticing that the P/E compression and they're investing in 74 00:04:30,299 --> 00:04:34,230 Roger Montgomery: an area that they haven't been big investors in before. 75 00:04:34,589 --> 00:04:37,860 Roger Montgomery: Then that says something. The other thing is valuation. Small 76 00:04:37,860 --> 00:04:41,250 Roger Montgomery: cap funds have underperformed, and if that underperformance is due 77 00:04:41,250 --> 00:04:44,520 Roger Montgomery: to undervaluation, which I think it is because of that P/E 78 00:04:44,790 --> 00:04:49,380 Roger Montgomery: compression that we talked about, then the temporary headwinds through 79 00:04:49,380 --> 00:04:54,240 Roger Montgomery: sentiment that small caps are experiencing, will ultimately be reversed. 80 00:04:54,570 --> 00:04:57,120 Roger Montgomery: So while they're out of favour at the moment, both 81 00:04:57,120 --> 00:05:01,349 Roger Montgomery: relatively and perhaps absolutely, I think that sentiment will eventually change. 82 00:05:01,349 --> 00:05:04,199 Roger Montgomery: And when it does, unfortunately for investors who take their 83 00:05:04,199 --> 00:05:07,710 Roger Montgomery: time about participating, they tend to recover very, very quickly. 84 00:05:08,040 --> 00:05:11,190 Roger Montgomery: We also know that historically stocks tend to revert to 85 00:05:11,190 --> 00:05:15,029 Roger Montgomery: the mean depending on, it doesn't really matter what valuation 86 00:05:15,029 --> 00:05:18,089 Roger Montgomery: metric you use. So if you're investing in high quality 87 00:05:18,089 --> 00:05:22,049 Roger Montgomery: but underperforming small cap funds at the moment, then you 88 00:05:22,049 --> 00:05:26,010 Roger Montgomery: could actually get a really significant boost when prices mean revert. 89 00:05:26,460 --> 00:05:28,320 Roger Montgomery: And then of course, you've got the benefit in small 90 00:05:28,320 --> 00:05:30,960 Roger Montgomery: caps of long runways for growth. There are a lot 91 00:05:30,960 --> 00:05:33,029 Roger Montgomery: of companies in Australia that we talk about regularly, the 92 00:05:33,029 --> 00:05:36,029 Roger Montgomery: Harvey Normans of the world, JB Hi- Fi's, Woolworths, Wesfarmers 93 00:05:36,360 --> 00:05:38,789 Roger Montgomery: and so on. We talk about all these businesses, but 94 00:05:38,790 --> 00:05:42,510 Roger Montgomery: they are mature businesses. In the small cap space, you find 95 00:05:42,510 --> 00:05:46,770 Roger Montgomery: a lot of businesses with runways of 10, 15, 20% growth for many, 96 00:05:46,770 --> 00:05:50,250 Roger Montgomery: many years ahead. And that's all being ignored at the moment. 97 00:05:50,639 --> 00:05:54,029 Roger Montgomery: And then you've got market inefficiencies as well. So we 98 00:05:54,029 --> 00:05:57,210 Roger Montgomery: just know that sell side analysts don't cover small caps 99 00:05:57,450 --> 00:05:59,610 Roger Montgomery: to the same extent as the large caps. The revenue 100 00:05:59,940 --> 00:06:03,330 Roger Montgomery: benefit for them isn't there. And so that lack of 101 00:06:03,330 --> 00:06:07,200 Roger Montgomery: coverage means that investors can find stuff that hasn't been 102 00:06:07,589 --> 00:06:10,229 Roger Montgomery: discovered by the rest of the market. So I think there's 103 00:06:10,800 --> 00:06:16,019 Roger Montgomery: that and diversification as well. There's lots of fundamentally sound 104 00:06:16,020 --> 00:06:18,928 Roger Montgomery: reasons to be investing in small caps and because of 105 00:06:18,930 --> 00:06:22,380 Roger Montgomery: that P/E compression that we experienced, and that hasn't really 106 00:06:22,380 --> 00:06:26,970 Roger Montgomery: reversed yet because there's still fears of a recession, that small 107 00:06:26,970 --> 00:06:29,849 Roger Montgomery: caps are relatively cheap. And can I just add one 108 00:06:29,849 --> 00:06:33,388 Roger Montgomery: other thing? The maths of investing is really simple, and 109 00:06:33,389 --> 00:06:36,569 Roger Montgomery: we've talked about this before here on your program. If 110 00:06:36,570 --> 00:06:39,300 Roger Montgomery: you buy and sell a stock on the same P/E ratio, 111 00:06:39,960 --> 00:06:42,118 Roger Montgomery: your return over a period of years is going to 112 00:06:42,120 --> 00:06:45,570 Roger Montgomery: equal the earnings per share growth rate of that particular company. 113 00:06:45,960 --> 00:06:48,928 Roger Montgomery: So if it's growing its earnings at 15% per annum 114 00:06:48,928 --> 00:06:50,849 Roger Montgomery: and you buy it on a P/E of 20 and you 115 00:06:50,849 --> 00:06:54,299 Roger Montgomery: sell it on a P/E of 20, you are going to earn 15% per annum. 116 00:06:55,110 --> 00:06:57,779 Roger Montgomery: So that's what you want. You want to find businesses 117 00:06:57,779 --> 00:07:00,660 Roger Montgomery: that can grow their earnings at double-digit rates over the 118 00:07:00,660 --> 00:07:03,990 Roger Montgomery: next few years irrespective of what the state of the 119 00:07:03,990 --> 00:07:06,988 Roger Montgomery: economy is. And there are businesses that we think can 120 00:07:06,990 --> 00:07:09,990 Roger Montgomery: do that, and those businesses are going to generate great 121 00:07:09,990 --> 00:07:12,930 Roger Montgomery: returns for investors just because the maths is really simple. 122 00:07:13,140 --> 00:07:15,810 Roger Montgomery: You are buying at compressed P/Es. Even if you sell 123 00:07:15,810 --> 00:07:18,060 Roger Montgomery: at compressed P/ Es in years to come, you'll get 124 00:07:18,060 --> 00:07:19,260 Roger Montgomery: the earnings per share growth rate. 125 00:07:19,770 --> 00:07:21,720 Sean Aylmer: Stay with me, Roger. We'll be back in a minute. 126 00:07:27,570 --> 00:07:30,240 Sean Aylmer: My guest this morning is Roger Montgomery, founder and Chief 127 00:07:30,270 --> 00:07:35,280 Sean Aylmer: Investment Officer of Montgomery Investment Management. Now, we aren't an 128 00:07:35,280 --> 00:07:38,759 Sean Aylmer: investment podcast and everyone should of course seek professional advice 129 00:07:39,330 --> 00:07:41,370 Sean Aylmer: to suit their own circumstances. But Roger, I do have 130 00:07:41,370 --> 00:07:43,559 Sean Aylmer: to ask you, what are you interested in? Be it 131 00:07:43,559 --> 00:07:45,450 Sean Aylmer: sectors or stock specific, what do you like? 132 00:07:45,839 --> 00:07:48,510 Roger Montgomery: There's a lot! In the small cap space, there are 133 00:07:48,510 --> 00:07:50,850 Roger Montgomery: a lot of great businesses. One, for example, that's on 134 00:07:50,850 --> 00:07:53,220 Roger Montgomery: the nose or that has been on the nose recently 135 00:07:53,220 --> 00:07:55,890 Roger Montgomery: is ARB Corporation. I think I've talked to you about 136 00:07:55,890 --> 00:08:00,990 Roger Montgomery: that particular company before. It designs and manufacturers 4x4 accessories, 137 00:08:00,990 --> 00:08:05,969 Roger Montgomery: aftermarket accessories. They started out, the Brown Brothers started that 138 00:08:06,090 --> 00:08:11,340 Roger Montgomery: business in literally a shed in the backyard in a 139 00:08:11,700 --> 00:08:14,970 Roger Montgomery: house in Melbourne, and it's been going for decades now. 140 00:08:15,240 --> 00:08:18,929 Roger Montgomery: They are considered some of the world's best aftermarket four-wheel 141 00:08:19,170 --> 00:08:23,430 Roger Montgomery: drive parts and accessory manufacturer and suppliers. And that what 142 00:08:23,430 --> 00:08:26,910 Roger Montgomery: they've done is they're expanding globally. So the reason why 143 00:08:26,910 --> 00:08:28,770 Roger Montgomery: the share price has been depressed or they've been a 144 00:08:28,770 --> 00:08:32,519 Roger Montgomery: bit on the nose, is because there's a belief amongst 145 00:08:32,520 --> 00:08:35,189 Roger Montgomery: a lot of analysts that demand for their product was 146 00:08:35,190 --> 00:08:37,799 Roger Montgomery: pulled forward. And what I mean by that is through 147 00:08:37,799 --> 00:08:42,269 Roger Montgomery: the pandemic people bought stuff. They might've spent that money 148 00:08:42,270 --> 00:08:44,070 Roger Montgomery: over the next two or three years. They spent it 149 00:08:44,070 --> 00:08:46,740 Roger Montgomery: all at once, fitted out their four wheel drives because 150 00:08:46,740 --> 00:08:49,949 Roger Montgomery: they couldn't travel overseas, and that's brought forward a lot 151 00:08:49,950 --> 00:08:52,650 Roger Montgomery: of the demand. And so there's an air pocket presumably 152 00:08:53,190 --> 00:08:55,649 Roger Montgomery: that they're going to fall into and their sales are going 153 00:08:55,650 --> 00:08:59,279 Roger Montgomery: to decline. But the reverse of that or the countering 154 00:08:59,279 --> 00:09:02,910 Roger Montgomery: that is their growth overseas and they're expanding into the 155 00:09:02,910 --> 00:09:05,160 Roger Montgomery: United States. And what they've done is they've signed deals 156 00:09:05,160 --> 00:09:10,020 Roger Montgomery: with Ford and with Toyota to provide OEM parts. So 157 00:09:10,020 --> 00:09:13,679 Roger Montgomery: that's Original Equipment Manufacturing parts. So if you sit down 158 00:09:13,679 --> 00:09:16,229 Roger Montgomery: with a dealer at a Ford dealership, for example, in 159 00:09:16,230 --> 00:09:18,990 Roger Montgomery: the US and you spec out the things that you want, 160 00:09:18,990 --> 00:09:21,630 Roger Montgomery: you want foot rails and you want spotlights and you 161 00:09:21,630 --> 00:09:23,098 Roger Montgomery: want a bull bar and all that sort of thing, 162 00:09:23,460 --> 00:09:26,250 Roger Montgomery: you tick the specifications or the options list. They are 163 00:09:27,389 --> 00:09:30,240 Roger Montgomery: ARB parts that are now being supplied to your new 164 00:09:30,240 --> 00:09:34,259 Roger Montgomery: vehicle by Ford or being attached by Ford to your vehicle. 165 00:09:34,529 --> 00:09:37,439 Roger Montgomery: So that is an enormous market, much bigger than the 166 00:09:37,440 --> 00:09:41,700 Roger Montgomery: Australian domestic market. It's only small relative to its Australian business, 167 00:09:42,000 --> 00:09:44,820 Roger Montgomery: which is why I guess the company's share price is 168 00:09:44,820 --> 00:09:48,450 Roger Montgomery: going to be sensitive to conditions in Australia, but in 169 00:09:48,450 --> 00:09:52,260 Roger Montgomery: the long run, that business could easily swamp the Australian 170 00:09:52,260 --> 00:09:54,150 Roger Montgomery: business. So that's just one example. 171 00:09:54,600 --> 00:09:56,069 Sean Aylmer: Okay, we're running out of time. You have to give 172 00:09:56,070 --> 00:09:56,790 Sean Aylmer: me another one though. 173 00:09:57,330 --> 00:10:00,270 Roger Montgomery: Yeah. Okay. So I think Breville's another one that's really 174 00:10:00,270 --> 00:10:03,870 Roger Montgomery: interesting, longer term. So I'm not suggesting anyone go out 175 00:10:03,870 --> 00:10:05,790 Roger Montgomery: and buy these stocks by the way, because we own 176 00:10:05,790 --> 00:10:08,250 Roger Montgomery: them. So you're helping us if you rush out and 177 00:10:08,250 --> 00:10:10,199 Roger Montgomery: buy them, you'll drive the share price up and that'll 178 00:10:10,199 --> 00:10:12,360 Roger Montgomery: benefit us. We may end up selling the stock, so 179 00:10:12,360 --> 00:10:15,780 Roger Montgomery: don't do that. Go and seek personal professional advice first. 180 00:10:16,440 --> 00:10:18,630 Roger Montgomery: But this is a business that's also benefiting from growth 181 00:10:18,630 --> 00:10:23,130 Roger Montgomery: overseas. We take good coffee for granted in Australia. In 182 00:10:23,130 --> 00:10:26,969 Roger Montgomery: the United States, the idea of becoming a barista at 183 00:10:26,969 --> 00:10:30,119 Roger Montgomery: home and having a coffee machine and making great coffee 184 00:10:30,119 --> 00:10:34,500 Roger Montgomery: at home, is relatively new. Sure it exists on the East Coast and the 185 00:10:34,500 --> 00:10:37,920 Roger Montgomery: West Coast, but the bulk of Americans, they're pretty used 186 00:10:37,920 --> 00:10:41,190 Roger Montgomery: to pretty rubbish coffee. And so Breville is tapping into 187 00:10:41,190 --> 00:10:43,110 Roger Montgomery: that trend, and I think that's going to be something 188 00:10:43,440 --> 00:10:45,449 Roger Montgomery: that'll hold them in good stead over years to come. 189 00:10:45,929 --> 00:10:47,760 Sean Aylmer: Roger, thank you for talking to Fear and Greed. 190 00:10:48,330 --> 00:10:48,990 Roger Montgomery: Absolute pleasure. 191 00:10:48,990 --> 00:10:52,800 Sean Aylmer: That was Roger Montgomery, founder and Chief Investment officer of 192 00:10:52,800 --> 00:11:01,710 Sean Aylmer: Montgomery Investment Management. For more information, visit montinvest. com. That's M-O-N-T-I-N-V-E-S-T, montinvest.com. 193 00:11:02,340 --> 00:11:04,499 Sean Aylmer: This is the Fear and Greed Daily Interview. Remember, this 194 00:11:04,500 --> 00:11:07,348 Sean Aylmer: is general information only, and you should seek professional advice 195 00:11:07,350 --> 00:11:10,290 Sean Aylmer: before making investment decisions. Join us every morning for the 196 00:11:10,290 --> 00:11:13,560 Sean Aylmer: full episode of Fear and Greed. Australia's most popular business podcast. 197 00:11:13,710 --> 00:11:15,540 Sean Aylmer: I'm Sean Aylmer. Enjoy your day.