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Speaker 2: Even with today's thirty seven percent increase and lift, the
Speaker 2: stock still has a market cap, you know, six seven
Speaker 2: billion dollars worth.
Speaker 3: Uber's got you know.
Speaker 2: Multiples of that's skyrocket and such a huge divergence. So
Speaker 2: let's break down both of those numbers. We can do
Speaker 2: that with men Deep Singh. He follows some of the
Speaker 2: technical sectors of this market, follows pretty much everything in
Speaker 2: ten Yeah, so he's a technist for Bloomberg Intelligence.
Speaker 3: So let's start with Lyft.
Speaker 4: I took getting fired.
Speaker 3: I took a Lyft home last night because why because
Speaker 3: it was cheaper than.
Speaker 4: Uber by how much?
Speaker 2: By like twenty Yeah, and that's typical one one or
Speaker 2: the other not. I just arbitraged the too. Matt Miller
Speaker 2: does not do that. I arbitraged the too. I thought
Speaker 2: everybody did that. So anyway, what happened to Lyft with
Speaker 2: their earnings last night?
Speaker 5: Well, last night was bizarre because you know, you don't
Speaker 5: often see that in press releases.
Speaker 6: You there, but you know, at the end of the.
Speaker 5: Day, it was I think just a mistake that happened.
Speaker 5: It wasn't intentional in any way. And the stock move
Speaker 5: was pronounced because of you know, the short interest and uh,
Speaker 5: the fact that obviously people were not very optimistic going
Speaker 5: into the print. And look, I think in the case
Speaker 5: of Lyft, not much has changed in terms of execution.
Speaker 5: There's still kind of a distant number two. And you
Speaker 5: talked about taking a lift, but there are certain zip
Speaker 5: codes where they are able to meet the ETAs that
Speaker 5: Uber has, but in other zip codes they have no supply.
Speaker 5: So even if you want to take a lift, there
Speaker 5: is no availability.
Speaker 2: But my dude last night, like most markets I go to,
Speaker 2: he's got a n Uber sticker and he's got a
Speaker 2: Lift sticker, and he's got both apps open and they'll
Speaker 2: drive each other.
Speaker 6: Yeah, there is a huge amount.
Speaker 4: Of owner that and so literally it's apparently.
Speaker 3: It's just here's my reading and you're the effort. It's
Speaker 3: just Uber algorithm, Lift algorithm. They're different. They're going to
Speaker 3: give you different prices and things like that. But but from.
Speaker 5: A driver perspective, what Lift is doing is they are
Speaker 5: paying out more to lower drivers. So if it was
Speaker 5: a ten dollars ride, the driver is getting seven dollars
Speaker 5: or eight dollars from Lift, whereas from Uber they're getting
Speaker 5: six dollars.
Speaker 6: It's just an example.
Speaker 5: Yes, So that's where you know, the take rate matters
Speaker 5: what these companies keep versus.
Speaker 6: What the driver is getting. And that's the I think tactic.
Speaker 5: Lift is using to really pay more to the driver
Speaker 5: to bring on more supplies.
Speaker 7: So then how does that then play out? So at
Speaker 7: some point they get enough supply and then they can
Speaker 7: sort of make more money per ride and increase the shares.
Speaker 4: When does that moment happen?
Speaker 5: I mean scale is the only mote you can have
Speaker 5: in this business, scale and operating efficiency. And so what
Speaker 5: Uber has done is obviously they have the scale. They
Speaker 5: are six times bigger than Lift in just the mobility segment,
Speaker 5: and like think of the gross margin. The reason why
Speaker 5: this is a sixty percent gross margin business is because
Speaker 5: insurance costs is.
Speaker 6: Pretty high for right sharing, So how do you bring down.
Speaker 5: Insurance costs through scale? And that's what Uber has because
Speaker 5: it does, you know, six times more rides, then lift,
Speaker 5: and in the case of Lift, if they don't maintain
Speaker 5: the supply, then they're just going to keep losing share,
Speaker 5: which is what was happening.
Speaker 6: So they have to compete on price.
Speaker 5: The only way they can maintain their share is they
Speaker 5: if they offer a lower price, as they did with
Speaker 5: Paul last night.
Speaker 6: So that's that's the tactic. And I don't think.
Speaker 3: It's going to be term modeled.
Speaker 5: Yeah, so think of what happened with food delivery. There
Speaker 5: were so many players. Now you're down to two or three,
Speaker 5: you know, remaining it's Uber Door.
Speaker 3: I still will not pay for for my youngest in college.
Speaker 4: I have a hard time paying, but I'm.
Speaker 5: Not going to.
Speaker 3: We've established that firmly.
Speaker 4: I support this.
Speaker 6: Yeah, so there will be consolidation.
Speaker 5: But if uber is announcing a seven billion dollar buy back,
Speaker 5: you know they're not buying Instacart now, So that's and
Speaker 5: are they are buying left? Okay?
Speaker 4: Talk about that that buy back?
Speaker 7: What does that tell us like when you buy backstock,
Speaker 7: isn't that because you're no longer a growth company?
Speaker 4: Like? Is that the thing?
Speaker 6: Yes? I think there is that element.
Speaker 5: And also they're going to be prudent in terms of returning.
Speaker 6: Cash to the shareholders.
Speaker 5: So remember they acquired the freight business, that is a
Speaker 5: big drag on profitability. Uber didn't build freight business organically.
Speaker 5: They bought a company that didn't work out well. They
Speaker 5: bought Postmates for food delivery that didn't work out well.
Speaker 5: So their track record with Aquas isn't great. And so
Speaker 5: now they're saying is we are going to generate about
Speaker 5: seven to eight billion dollars in free cash flow. Well,
Speaker 5: guess what we are using seven billion out of that
Speaker 5: for buying back er stock. I mean, obviously it's going
Speaker 5: to be over a period of time, not in the
Speaker 5: next twelve months. But I think that's good sound capital allocation, stuality,
Speaker 5: And look, this company is generating.
Speaker 6: The mobility side is very healthy.
Speaker 5: They've got you know, mid twenty percent ebit dumb margins
Speaker 5: compared that to lift, which what got people excited is
Speaker 5: they could get to twenty percent ebit dumb margins.
Speaker 6: Well, not so fast. I guess that was the typo.
Speaker 2: So I say, all right, how about the Uber each business. Again,
Speaker 2: I don't support this. I mean, I know it's a
Speaker 2: great people love it, but not on my credit card.
Speaker 2: So talks about the each business.
Speaker 5: This is just to drive frequency, ok, just so that
Speaker 5: Paul has more transactions.
Speaker 4: Which is advertising.
Speaker 5: Then basically exactly and the only profit they're going to
Speaker 5: generate right now is through advertising. So the good thing
Speaker 5: working out for Uber is they have a membership's business,
Speaker 5: So that's your recurring subscription. You're going to buy an
Speaker 5: Uber membership that works for both mobility and delivery, and
Speaker 5: also they're going to show ads. So ads is a
Speaker 5: billion dollar rundread business now primarily driven by delivery and
Speaker 5: it's almost ninety percent gross market, so that's what's going
Speaker 5: to drive the delivery profitability. But on a transaction basis,
Speaker 5: this is zero.
Speaker 7: So this is sort of like Amazon Prime VIDDEO. Like
Speaker 7: it's just basically sell more subscriptions Amazon Prime up the
Speaker 7: price a little bit and then you get more viewers
Speaker 7: who were just into it and they buy more stuff
Speaker 7: on Amazon's Coming.
Speaker 6: Is the way.
Speaker 5: So they like Uber talked about this concept of being
Speaker 5: a super app almost three four years ago and they
Speaker 5: have been working towards it. Now they have integrated taxi.
Speaker 5: Remember when Uber came to the scene, they were supposed
Speaker 5: to or they actually disrupted taxis. Now they have onboarded
Speaker 5: Taxis on the platform to boost supply, and Taxis is
Speaker 5: about five percent of their business, So clearly, you know.
Speaker 6: You come a full circle there.
Speaker 5: You have integrated Taxis and their thing is will bring
Speaker 5: everything related to transportation on one app and you can
Speaker 5: find any and everything.
Speaker 2: Neahi, I mean, he's done an amazing job turning that
Speaker 2: company around.
Speaker 6: Minus the acquisitions.
Speaker 5: If it was buying stuff, and that's.
Speaker 6: What he did at Expedia. Expedia was built around acquisitions.
Speaker 8: There.
Speaker 5: I think acquisitions worked out probably better than they did
Speaker 5: in Uber, but clearly acquisitions wasn't and.
Speaker 2: So one of the potential acquisitions I was out there
Speaker 2: was Instacart to ramp up the Uber eats. But you're
Speaker 2: now saying the stock buybacked signals that un likely to do.
Speaker 6: That's completely out of question.
Speaker 5: I mean, the question is can door Dash buy something
Speaker 5: given Like the reason why Lift's stock moved this much
Speaker 5: is because the valuation is like one time CB to sales.
Speaker 6: Compare that to.
Speaker 5: Five times ZV do sales or Airbnb ten times ZV
Speaker 5: do sales.
Speaker 6: So clearly a.
Speaker 5: Lot of the growth prospects are reflected in the lifts valuation.
Speaker 2: Yeah, Airbnb will do that next time. I'm just I'm
Speaker 2: just not comfortable that concept. But I know a ton
Speaker 2: of people are around the world and they love it.
Speaker 2: So we'll get to that next time.
Speaker 7: Staying or renting out your renting out your house or
Speaker 7: staying at someone else's.
Speaker 3: House, both both, you know, I don't know, but I
Speaker 3: might not that weird. Yeah, coming into somebody else's It's more.
Speaker 4: Like an investment property lot at the time.
Speaker 2: All right, man, Deep Seeing Senior Tech anais Bloomberg Intelligence.
Speaker 2: We appreciate you stopping buy.
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Speaker 7: I want to take a little deeper into the small
Speaker 7: cap world because the rust of two thousands up one
Speaker 7: point six percent of the narrative, if you just rewind
Speaker 7: the money, was that we were broadening out this rally
Speaker 7: in the S and P, that it wasn't just big tech.
Speaker 7: We were finally seeing small caps get a little bit
Speaker 7: of a bit. Well, let's talk to Brian Smoluck. He's
Speaker 7: principal and portfolio manager of the Hood River Small Cap
Speaker 7: Growth Fund. He joins us from Palm Beach, Florida, much
Speaker 7: to Paul Kane as he looks at the palm trees
Speaker 7: in the background.
Speaker 4: Hey, Brian, kill me. Do you buy small caps here?
Speaker 6: Like?
Speaker 7: Are they actually going to finally make a good comeback?
Speaker 6: I think so.
Speaker 9: The CPI print yesterday clearly didn't help things near term,
Speaker 9: given the FED was a little bit too aggressive in
Speaker 9: December when they talked about aggressive cuts this year. But
Speaker 9: I think once the CPI does settle down to a
Speaker 9: level of people are comfortable with where the Fed's going
Speaker 9: to cut, it's a matter of when, not if, then
Speaker 9: small caps will outperform. You see that when people want
Speaker 9: to put on risk, small cap, particularly small cap growth,
Speaker 9: tends to put on a really big move, and then
Speaker 9: in Q four last year when that happened, the space
Speaker 9: really ripped. And it's been a fairly protracted period of
Speaker 9: big underperformance for the last several years. So the setup
Speaker 9: is good given valuations, earnings revisions are trending. Positive spreads,
Speaker 9: which are a great leading indicator for small cap stocks,
Speaker 9: have tightened significantly to just a little over one hundred
Speaker 9: basis points, So the odds are highly in the space's
Speaker 9: favor for it to app perform over the next twelve months.
Speaker 2: Hey Brian, Am I going to get an evaluation break
Speaker 2: if I go down into smaller mid MidCap territory relative
Speaker 2: to the S and P five hundred?
Speaker 9: Yeah. So if you look at small cap growth versus
Speaker 9: the SMP, it usually trades at a premium. Right now,
Speaker 9: it's trading around eighteen times twenty twenty five earnings versus
Speaker 9: the SMP at twenty times, so you do get a
Speaker 9: discount there, And that's part of what I was saying
Speaker 9: why the setup is good because you get a relative
Speaker 9: valuation break. Usually the growth is faster and small cap names.
Speaker 9: I wouldn't expect this upcoming cycle to be any different.
Speaker 9: So that's why you'll get probably some multiple expansion and
Speaker 9: positive ring servision which would lead to our performance over
Speaker 9: the next twelve months.
Speaker 7: Hey Brian, would you have made a different argument six
Speaker 7: months ago because small caps did have a moment last
Speaker 7: year in that moment was short lived? Is the argument
Speaker 7: different now?
Speaker 9: I would say it's honestly pretty similar. You know, we're
Speaker 9: bombs up stock pickers trying to find companies with a
Speaker 9: dislocation of fundamentals valuation. It's been a constructive setup, and
Speaker 9: six months ago it actually was good when you look
Speaker 9: into Q four and small capt putting up playing a
Speaker 9: move on to being up around nineteen percent for the
Speaker 9: year last year, so it was solid. But it has
Speaker 9: been a waiting game for small cap and you need
Speaker 9: race to cooperate with spreads for the sector to work.
Speaker 2: Fortress Aviation FTAI is the ticker.
Speaker 3: What's the call there, Brian.
Speaker 9: We like the stock, it's one of our bigger positions.
Speaker 9: It's been really huge over the last eighteen months. We
Speaker 9: think there's some significant legs left in the story for
Speaker 9: it to really work. It trades it around twenty times earnings.
Speaker 9: They have a new module repair business for engines that's
Speaker 9: growing around one hundred percent, and we think there's upside
Speaker 9: in that area, particularly when you look at all the
Speaker 9: news in the supply chain and airlines across the world
Speaker 9: really need to optimize how well their current engines were
Speaker 9: given that they can't get new engines or new planes
Speaker 9: when Boeing's having all these problems. Meanwhile, the asset value
Speaker 9: on their current their current engines has been moving up
Speaker 9: because of the supply to demand and balance created by
Speaker 9: the fact that new planes really can't make it out
Speaker 9: the door, and you have rising demand around the world
Speaker 9: continuing for passenger travel.
Speaker 7: You also have Celsius, which is it's like a Red
Speaker 7: Bull energy drink, right, I know it's different, but it's
Speaker 7: the same kind of idea.
Speaker 4: You like this company, how come?
Speaker 3: Yeah, we've owned it for a while.
Speaker 9: It's a secular market share gainer. We think in the
Speaker 9: category it's gone from around two percent share to ten
Speaker 9: percent share. We think they can reasonably get to twenty
Speaker 9: percent share. They have a partnership with Pepsi that's ramped
Speaker 9: up over the last twelve months. Pepsi's the largest distributor
Speaker 9: in the world. And fortuitously they left Budweiser, which obviously
Speaker 9: wasn't great with all the bud light issues that they
Speaker 9: were having. And we think the streets at about forty percent,
Speaker 9: they could easily grow fifty this year and the stocks
Speaker 9: has can around thirteen percent share, and as I said earlier,
Speaker 9: we think they can get to twenty And have.
Speaker 4: You ever had them on those energy drinks? No, I'm
Speaker 4: scared of them.
Speaker 3: Yeah, a little bit bitlius.
Speaker 9: Yeah, Celsius is a little bit healthier. It's all natural ingredients.
Speaker 9: You still get the boost from caffeine. It's two hundred
Speaker 9: milligrams of caffeine. So I definitely wouldn't take it for
Speaker 9: you to go to bed, but it tastes better, it's
Speaker 9: healthier than some of the other drinks out there.
Speaker 3: Yeah, I don't know.
Speaker 2: Hey, Brian, what's a what's a how do you divine
Speaker 2: kind of like the market cap? Like what's a small cap,
Speaker 2: what's a MidCap?
Speaker 6: Few?
Speaker 3: And what happens when they maybe grow out of those levels.
Speaker 9: So the last the last six months has been abnormal
Speaker 9: for the sector, and that there's been a huge bifurcation.
Speaker 9: So within the Russell two thousand growth, for example, super
Speaker 9: Micro is actually in the benchmark and it's over a
Speaker 9: thirty billion market cap. So normally I would say the
Speaker 9: range is between call it one hundred million up to
Speaker 9: six or seven billion, but it has expanded over time.
Speaker 9: The sweet spot really is in that two to five
Speaker 9: billion dollar range, and those stocks tend to be a
Speaker 9: little bit more inefficient, and we don't typically sell stock
Speaker 9: when it gets too big. It's really when we think
Speaker 9: it's efficiently priced based on the fundamentals, or we think
Speaker 9: something bad is going to happen, we'll step aside.
Speaker 7: It is a leading question because we're talking about you
Speaker 7: manage a small cap growth fund, but growth versus value
Speaker 7: in the rustle? Is it the same kind of thing
Speaker 7: as what we see in the general market growth, tech,
Speaker 7: everything else.
Speaker 9: Well, in small cap growth you do have a larger
Speaker 9: percentage of software companies, semiconductor companies, biotech, and a little
Speaker 9: bit less financials and then some of the higher growth consumers.
Speaker 9: But small cap growth and small cap value are relatively
Speaker 9: highly correlated. But in different area there can be biggest versions,
Speaker 9: Like in twenty twenty you saw growth massively outperformed value
Speaker 9: and then it completely inverted the prior year. We frankly
Speaker 9: try to be agnostic and try to find companies that
Speaker 9: are growing reasonably quickly called fifteen percent, but are inefficiently priced,
Speaker 9: So we kind of thread the needle there.
Speaker 2: There's a good article in the Bloomberg Terminal today Florida
Speaker 2: boom cools an area where home insurance costs tripled Hurricane
Speaker 2: Ian worsened already rising homeowners rates, and they call that
Speaker 2: like Naples Sarasota Cape Coral.
Speaker 3: I noticed you guys own some exposure here.
Speaker 2: HCI Group is a homeowner's insurance company based in Florida.
Speaker 3: Uhh yes, what's that?
Speaker 9: Yeah, So it's been a great stock because of the
Speaker 9: dislocation in this particular geography. And what's happened is the
Speaker 9: lawyers had the upper hand, not a big surprise for
Speaker 9: an extended period here. A lot of insurers pulled out
Speaker 9: because of that because they were having massive losses. The
Speaker 9: state legislature came in made it so that it was
Speaker 9: more reasonable and favorable to insurers. Each CI was set
Speaker 9: up well to write new premiums profitably, as well as
Speaker 9: takeover existing premiums from the state entity, which is called citizens,
Speaker 9: which allowed them to dramatically apperform expectations and earnings. Growth
Speaker 9: is significant. So it's trading eleven times zarniings. We have
Speaker 9: to think there's upside of that number. And they're just
Speaker 9: set up well because the supply demand in the area,
Speaker 9: and as you know, the area is really growing, so
Speaker 9: you have a lot of people moving here, so demand
Speaker 9: is strong.
Speaker 4: As Paul talks about all the time, you do want
Speaker 4: to move here?
Speaker 3: No, no, he doesn't that's a hard note.
Speaker 4: Okay, it's a hard no, but it does get jealous
Speaker 4: of the pond trees.
Speaker 3: Yes.
Speaker 7: What I find interesting though, when you talk about insures
Speaker 7: is that you know Florida is going to get hit
Speaker 7: with storm after storm, and it is a bit worse now,
Speaker 7: and I just wonder how the risk premium got to
Speaker 7: bake into these docks.
Speaker 9: So whether it's a big issue obviously during hurricane season,
Speaker 9: HCI has been here forever and they did a good
Speaker 9: job pricing for that risk. So you just got to
Speaker 9: assume over extended period of time that when you take
Speaker 9: your lumps, you're going to more than make up for
Speaker 9: it based on pricing, And as you've noted from that article,
Speaker 9: pricing is up huge and there are a lot of
Speaker 9: different reasons for that. In condos, for example, there was
Speaker 9: that condo that went down in Miami and that jacked
Speaker 9: up premiums all over the area, and an insurance companies
Speaker 9: were able to capitalize because now condos realized they just
Speaker 9: had to become conforming with state codes. So to me,
Speaker 9: hurricanes are a manageable risk here. There's actually been less
Speaker 9: direct hurricane impacts on Southeast Florida than in the up
Speaker 9: to the northeast where you guys are so but you
Speaker 9: do have a fair amount happening happening in the golf,
Speaker 9: but there's less population in Florida and the golf and
Speaker 9: on the southeast side.
Speaker 2: Hi, Rian, thank you so much for joining us. As always,
Speaker 2: Brian Smallock. He's a principal and portfolio manager of the
Speaker 2: Hood River Small Cap Growth Fund. Not in Bend, Oregon,
Speaker 2: but in Palm Beach Gardens, Florida.
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Speaker 4: I want to know what's up with Craft?
Speaker 7: So that' stock is moving a wopping six percent, it's
Speaker 7: down six percent. Organic sales decline wasn't so great. It
Speaker 7: was a lackluster end of the year and that's really
Speaker 7: dragging on sales.
Speaker 4: So what's up with that?
Speaker 7: Let's go to Jim Bartash's she has Boomberg Intelligence Senior analyst,
Speaker 7: retail Staples and packaged foods. Jen what was just so
Speaker 7: bad about Craft?
Speaker 8: Well, the big surprise for Craft that volume was down,
Speaker 8: which was not a surprise, but it was down more
Speaker 8: than prices rose, and that really put pressure on the
Speaker 8: ability to generate sales growth, and so organic sales were
Speaker 8: negative for the first time since twenty twenty. And although
Speaker 8: there's some momentum in the business, it's got people concerned.
Speaker 2: So, Jen, as I understand the package food business from
Speaker 2: reading your research and talking to you, you know, I
Speaker 2: guess post pandemic volumes are down, but then they've been
Speaker 2: able to make up for it by raising prices. More so,
Speaker 2: is that game kind of played out now?
Speaker 8: Yeah. Basically a lot of these companies have run out
Speaker 8: of their pricing power. And what that means is, you know,
Speaker 8: they were able to raise prices because their input costs
Speaker 8: were hire, whether it was ingredients or transportation or packaging.
Speaker 8: But as inflation is coming down, they're losing the ability
Speaker 8: to pass through additional price increases, which means that if
Speaker 8: you want to have top line growth or organic sales growth,
Speaker 8: you have to have positive volume growth because you're not
Speaker 8: getting it from just higher price anymore. And the problem
Speaker 8: for Craft Hends has right now is that volume is
Speaker 8: still down, price is lower than it's been and they're
Speaker 8: not seeing that bounce back in volume that typically lower
Speaker 8: pricing would encourage.
Speaker 7: Okay, so a couple things to focus on. Let's go
Speaker 7: to the product side then, because you mentioned that a
Speaker 7: few times so volumes are down, it doesn't seem like
Speaker 7: that's just a pricing power thing. Do they not have
Speaker 7: the right products right now?
Speaker 8: Well, I think their portfolio is actually pretty good. It's
Speaker 8: just that the consumer is not buying as much as
Speaker 8: they were before. So if you think back to pre pandemic,
Speaker 8: people had huge pantries and everything was stocked. They had
Speaker 8: lots of boxed goods in there. And now people are
Speaker 8: still a little bit more conservative and buying more on
Speaker 8: a need basis rather than a stockpiling basis. And so
Speaker 8: until people start to bulk up those pantries again, it's
Speaker 8: hard to entice them to buy more than what they
Speaker 8: just need for this week.
Speaker 2: So as I look at the analyst forecast, jen, I
Speaker 2: kind of see the one and a half to two
Speaker 2: to two and a half percent revenue growth in the
Speaker 2: next several years. That really is the story for most
Speaker 2: of these consumer package goods companies, isn't it.
Speaker 8: It really is, especially for companies where the bulk of
Speaker 8: their portfolio are what you would call center of the
Speaker 8: store items, so that's the candy items, the boxed items.
Speaker 8: You know, that type of outlook for top line growth
Speaker 8: is pretty much in line with where you would expect
Speaker 8: normal inflation rates to be, and so that in and
Speaker 8: of itself is probably a reasonable expectation for where these
Speaker 8: where these companies can go over the next few years.
Speaker 7: Do you think that prices then will come down or
Speaker 7: do you think that they stay sticky?
Speaker 8: Prices will slowly come down. Retailers are looking to pass
Speaker 8: through cost savings to their customers, so there will be
Speaker 8: higher pressure on package food companies to lower prices as well.
Speaker 8: And as their input costs or their packaging packaging costs
Speaker 8: come down, it's harder for them to just tofy holding
Speaker 8: prices at a higher level and not passing through some
Speaker 8: of those savings. So while prices may never come back
Speaker 8: down to where they were pre pandemic, they should come
Speaker 8: down a little bit from where they were in terms
Speaker 8: of peak pricing in the last eighteen month.
Speaker 4: A little bit, I don't know if we like a
Speaker 4: little bit.
Speaker 3: No, we don't. And that's and that's what that's the problem.
Speaker 3: That's a problem.
Speaker 2: That's a problem for a lot of people, and it's
Speaker 2: a problem for the politicians who are saying inflation is still.
Speaker 3: A bad story here.
Speaker 2: So all right, So Jen, with these names like Craft
Speaker 2: Hinds and General Mills and Kellogg's, I got a you know,
Speaker 2: low single digit revenue growth.
Speaker 3: I'm looking.
Speaker 2: I got dividend yields for Craft Highs about four point
Speaker 2: seven percent. I mean, what am I owning this thing for?
Speaker 2: Am I owning it for single digit kind of maybe
Speaker 2: stock prece return plus some dividend yield.
Speaker 3: And that's and that's my game.
Speaker 8: That's that's that's probably the value play at the moment, right,
Speaker 8: meaning you've got steady kind of slow and steady growth,
Speaker 8: you've got a reasonable dividend. They do do share buybacks,
Speaker 8: you know, so there's some some shareholder benefit there, and
Speaker 8: you know, as consumers start to pick up their spending,
Speaker 8: then we may see a better outlook for these companies
Speaker 8: as well.
Speaker 4: Who does Craft This is a really dumb question. Who
Speaker 4: does Craft compete with?
Speaker 7: Like the Coke and PEPSI I know that PEPs was
Speaker 7: all like snack snack snacks, but they have the soft
Speaker 7: drink business. Who's like a straight up Craft competitor.
Speaker 8: Someone like Caniagra would be, you know, or Campbell Soup.
Speaker 8: You know, those would be kind of those center type
Speaker 8: store companies that would compete most directly with the Craft Times.
Speaker 2: Hey, Jen, I look at the at the holder's list
Speaker 2: here and I forgot about this. Berkshire Hathway Warren Buffett
Speaker 2: by far the biggest shareholder of this company with about
Speaker 2: twenty six twenty seven percent ownership.
Speaker 3: What what?
Speaker 2: What is Berkshire Hathway publicly said about this investment? How
Speaker 2: long have they owned it? What do they say about
Speaker 2: their stake here?
Speaker 8: They've been involved for a very very long time. Haven't
Speaker 8: made a lot of public comments lately. But when Kraft
Speaker 8: Times began its transformation plan, which was now a little
Speaker 8: or three years ago, Berkshire Halfway was very pro They
Speaker 8: were very positive on that transformation story. And to be fair,
Speaker 8: Craft Times has executed on that transformation plan and generally
Speaker 8: ahead of schedule when it comes to cost savings initiatives,
Speaker 8: streamlining things, rebalancing their portfolio. So they really have been
Speaker 8: sticking to that plan and delivering ahead of schedule. It's
Speaker 8: just that it's a multi year process.
Speaker 7: Right, And like it's a tough time, and I get it,
Speaker 7: and there's inflation and then there's the demand. Do you
Speaker 7: think that the stock move I mean, I'm just looking
Speaker 7: at the chart here is it overdone?
Speaker 8: Well? Part of it, you know, part of it is
Speaker 8: the concern about the volume. And when they gave their
Speaker 8: guidance for twenty twenty four, the company actually said that
Speaker 8: they think volume is going to shift to positive growth
Speaker 8: in the second half of the year. That seems like
Speaker 8: it might be overly optimistic and is probably part of
Speaker 8: what's contributing to that stock decline today.
Speaker 2: So Jen, in your coverage area, you know, you got
Speaker 2: to Staples, the package food companies. What's the kind of
Speaker 2: the best idea? What do you talk to clients about
Speaker 2: most often?
Speaker 8: Well, right now we're talking to people about, you know,
Speaker 8: who is it that has taken the least amount of
Speaker 8: price increases over the last say, eighteen months, and where
Speaker 8: are volumes holding up? Because to be successful over twenty
Speaker 8: twenty four and into twenty twenty five, it really is
Speaker 8: that question of how are you going to actually drive
Speaker 8: overall growth and profitability. And so the companies that have
Speaker 8: been more conservative and been more prudent in that approach
Speaker 8: are the ones who are positioned right now to maybe
Speaker 8: benefit from.
Speaker 3: That, So you haven't benefit from those. Actually, what's a
Speaker 3: representative name there?
Speaker 8: So a good example there would be Mandolies where they
Speaker 8: took a lot less price than and actually the spinoff
Speaker 8: from Kraft Times career. Yeah, but they've been very They've
Speaker 8: been a little bit more prudent in terms of their
Speaker 8: price increases. And what we've also seen is that their
Speaker 8: volume has held up better Hershey, is another one where
Speaker 8: their volumes have held up, and part of that is
Speaker 8: that people love their chocolate.
Speaker 4: That's true. I don't care about the Flowers examples. I'll
Speaker 4: definitely take.
Speaker 2: We're learning a lot about Jen, we're learning a lot
Speaker 2: about Alex and her Valentine's Day preferences.
Speaker 3: So flowers know, but chocolate, well.
Speaker 4: I don't want anything.
Speaker 3: Don't stupid but stupid.
Speaker 10: If one tray herself as like this, simple girl, no demands,
Speaker 10: I don't buy it for a.
Speaker 4: Minute, simple girl?
Speaker 7: What No do I like Valentine's No, it's done. But
Speaker 7: will I eat chocolate? Absolutely as long as it's high
Speaker 7: end dark chocolate. Hey, Jen, what what's something you really
Speaker 7: don't like right now?
Speaker 8: Like?
Speaker 7: What sort of a negative trend because I'm also trying
Speaker 7: to understand for some of these names, the normalization that
Speaker 7: we've seen sort of backtrack the last four years and
Speaker 7: erase that, and that's where you have to kind of
Speaker 7: pick up and go from there.
Speaker 8: Well, I think one of the I think one of
Speaker 8: the things that is an issue for the industry is
Speaker 8: that everyone still believes that they can optimize their portfolio
Speaker 8: and that they're going to find a buyer for the
Speaker 8: products and the product lines that they don't want at
Speaker 8: a good multiple. And you know, at the end of
Speaker 8: the day, there aren't a lot of buyers out there
Speaker 8: for you know, categories that are slow growth or declining,
Speaker 8: and so there's maybe a little bit of a mismatch
Speaker 8: in terms of the belief that they can streamline their portfolio,
Speaker 8: get up you know, all the value that they think
Speaker 8: they deserve out of it, and yet I don't see
Speaker 8: a whole, you know, a whole suite of buyers lining
Speaker 8: up to look at those products.
Speaker 2: Hershey, this company went public in nineteen twenty seven. Oh boy,
Speaker 2: they did one follow on offering, and then for about
Speaker 2: a period about twelve months in nineteen ninety three or four,
Speaker 2: we pitched them hard on doing another following. We actually
Speaker 2: had a good analyst on the name in the company
Speaker 2: like this, We went to Hershey probably six or seven
Speaker 2: times in a space you're pitching a falling pitching. Nothing
Speaker 2: didn't get paid, but the got the Hershey and got
Speaker 2: a lot of Hershey chocolate.
Speaker 3: There's that.
Speaker 2: So, so, Jen, what does a company like Hershey do?
Speaker 2: It's one of those things. I know they've gotten bigger
Speaker 2: through some acquisitions, but there's still relatively a small player
Speaker 2: relative to some of the.
Speaker 3: Other big names.
Speaker 2: But is there a brand so good that they can
Speaker 2: kind of remain independent?
Speaker 8: Yeah, I believe that the Hershey brand is really iconic.
Speaker 8: And if you think about some of their uh some
Speaker 8: of their biggest chocolate lines, there really aren't a lot
Speaker 8: of uh, mass targeted competitors out there, so, you know,
Speaker 8: people may prefer the higher end alex, you know, but
Speaker 8: but when it comes to kind of that mass market,
Speaker 8: it's hard for an external brand to come in and
Speaker 8: get the kind of penetration that Hershey has. And in addition,
Speaker 8: Hershey has really done a good job of diversifying into
Speaker 8: the broader snacking, so they own you know, they own
Speaker 8: popcorn brand they own, you know, Pretzel brand, so you
Speaker 8: know they've they've done a good job of diversifying and
Speaker 8: that'll help, you know, that'll help them with their long
Speaker 8: term growth as well.
Speaker 4: Really interesting.
Speaker 7: I'm surprised that John Tucker didn't have some weird factoid
Speaker 7: about Hershey, Pennsylvania.
Speaker 3: We have the Hershey School and all that kind of stuff, and.
Speaker 7: Yeah, but I mean like weird off the beaten track,
Speaker 7: like here's where the cemetery.
Speaker 10: I don't have any fun facts about Hershey, but I
Speaker 10: suspect it's out in that region of the world because
Speaker 10: there are lots of farms and milk cows that give
Speaker 10: milk and stuff.
Speaker 7: I could have told you that. All right, we really
Speaker 7: appreciate it. It's so great to catch up with you.
Speaker 7: Such wonderful analysis. Jen Bartasha's Consumer Staples Bloomberg Intelligence senior
Speaker 7: industry analysts, and she covers everything everything, everything food related,
Speaker 7: which is just such.
Speaker 2: An years ago which still shocks me to this day.
Speaker 2: The number one supermarket chain in the United States is Amazon.
Speaker 3: What no, I mean Walmart. I'm sorry Walmart.
Speaker 4: Oh, okay, okay, that makes more sense.
Speaker 3: Sorry, right, and I forgot about that. But when you
Speaker 3: do go in there. They're just massive square footage.
Speaker 4: It's huge. H I mean, isn't where they make the
Speaker 4: majority of their money or.
Speaker 2: I think I think it drives traffic and they make
Speaker 2: it on it because it I think, you know, supermarkets,
Speaker 2: I think the margins are really really, really really low,
Speaker 2: so you make it up on buy them and you
Speaker 2: bring them into the store and they buy other stuff.
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Speaker 7: Okay, let's get to the markets here at the SP's
Speaker 7: up four tenth of one percent. You know, I kind
Speaker 7: of felt like this was going to happen yesterday when
Speaker 7: we had that big sell off, particularly as we closed
Speaker 7: off the lows.
Speaker 4: But the question is how sustainable is this? Sort of
Speaker 4: by the dip narrative?
Speaker 7: So let's ask Nancy Davis, founder and CEO of Quadratic
Speaker 7: Capital Management. She joins us now from Greenwich, Connecticut. Nancy,
Speaker 7: how do I own understand the price action right now
Speaker 7: on the main index.
Speaker 6: Well, Alex, I think you said it. Well, it's a
Speaker 6: little confusing.
Speaker 11: I mean, it's basically good data. Yesterday we had a
Speaker 11: stronger inflation, less FED height or FED cuts, and that's
Speaker 11: what's kind of fueling the market. The market's on hope
Speaker 11: right now that the FED is going to ease rates
Speaker 11: and save everything from being overly tight.
Speaker 2: So you know, I'm looking at the bond market here
Speaker 2: because boy, in twenty twenty two, the bond market just
Speaker 2: got crushy. There's no place left to hide. The sixty
Speaker 2: forty portfolio did nothing for you, a little bit of
Speaker 2: a positive performance, and last year, thanks goodness to November December.
Speaker 2: But here we are starting off the year again in
Speaker 2: the red for fixed income.
Speaker 3: What is what do we do in the fixed income space? Nancy?
Speaker 11: Well, it's tricky because the US yield curve is so
Speaker 11: incredibly inverted. So what that means is that longer dated
Speaker 11: interest rates are anticipating the FED will aggressively cut rates,
Speaker 11: and everybody in the bond market is kind of holding
Speaker 11: out their hands saying okay, cut now. And the market
Speaker 11: being inverted, you're getting paid less yield to take more
Speaker 11: duration risk. And so the market has been rushing into credit,
Speaker 11: private credit, public credit. So credit spreads are incredibly tight,
Speaker 11: right along with their corporate cousin equities, So those financial
Speaker 11: assets that are at all time highs. And then if
Speaker 11: you look at the treasury market, you can buy a
Speaker 11: one month T bill and get paid five point four percent,
Speaker 11: or you can lend money to the US Treasury for
Speaker 11: ten years and get over a percent less. So it's
Speaker 11: a really crazy environment because the yield curve is not
Speaker 11: normally this inverted for this long and it's really I
Speaker 11: think a message to bond investors that you're not being
Speaker 11: paid to take duration risks.
Speaker 7: So it's funny you mentioned that because a week ago,
Speaker 7: the conversation was, Okay, my three month T bill was up?
Speaker 7: What do I do with the money? Do I do
Speaker 7: I go into equities? Now do I do something else?
Speaker 7: And now it's like whoof Nope, gotta stay, gotta stay,
Speaker 7: because that the money market funds are just really too attractive.
Speaker 7: How do you then navigate an environment where we're going
Speaker 7: to get three cuts maybe for normalization rather than something
Speaker 7: more dramatic.
Speaker 11: I mean, I think most people do have equities in
Speaker 11: their portfolio, and the equity market is really hanging on
Speaker 11: to this premise that the FED is going to cut rates.
Speaker 11: So I think it's reasonable to have some short term treasuries.
Speaker 11: And I don't think you're really getting paid for the
Speaker 11: risk to take credit risk, because it's similar. You know,
Speaker 11: if you think about owning a corporate bond and owning
Speaker 11: a corporate stock, it's a similar corporate beta, and corporates
Speaker 11: are really expensive right now, so I think it makes
Speaker 11: more sense to just have treasury exposure and not add
Speaker 11: that credit risk into your bond portfolio because you already
Speaker 11: have it on the equity side.
Speaker 2: You know, I was surprised last year when we did
Speaker 2: get some decent performance out of fixed income, that high
Speaker 2: yield was the real outperformer. And I would have thought
Speaker 2: with all the discussion of everybody talking about a recession
Speaker 2: right around the corner, that you wouldn't want to take
Speaker 2: that level of risk.
Speaker 3: What happened in the HYLD space.
Speaker 2: And I assume, just by your previous comment that you're
Speaker 2: not being enticed by the hyold space this year.
Speaker 11: Yeah, I think high yield investment grade pretty much anything
Speaker 11: with a credit spread. What you want is credit spreads tighter.
Speaker 11: If you own bonds with credit risk, and credit spreads
Speaker 11: are near you know, their tenth percentile of all time tightness.
Speaker 11: So you know, especially I think I caution people it's
Speaker 11: not just high yield, it's also short dated. A lot
Speaker 11: of people have been going into short duration funds, and
Speaker 11: if you look at your short duration funds that take
Speaker 11: credit risk, you know, ig credit spreads are around thirty
Speaker 11: basis points for the three year point. It's even tighter
Speaker 11: when you go closer in and there you need a
Speaker 11: company to amend or extend, right, they either have to
Speaker 11: pay back the loan or they have to turn it out.
Speaker 11: So it's really you know, it can only go to zero, right,
Speaker 11: so there's very little. You know, you're taking a lot
Speaker 11: of risk and not getting a ton of return. And
Speaker 11: so going back to those tea bills, like, yeah, maybe
Speaker 11: maybe the FED is going to cut rates, but then
Speaker 11: you should be okay on your equity side of the portfolio.
Speaker 11: And if they don't cut rates, you don't have that
Speaker 11: reinvestment risk. So I don't I don't think T bills.
Speaker 11: They're they're boring and they're not super exciting, but I
Speaker 11: don't think they're bad.
Speaker 7: You also mentioned here in your notes of the fiscal
Speaker 7: situation and watching the deficit. I feel like, yes, except
Speaker 7: no one seems to care, So like, what do you
Speaker 7: do with that?
Speaker 6: Yeah?
Speaker 11: No, Alex, You're exactly right, nobody cares. But I think
Speaker 11: that's also the time when nobody's talking about something, it's
Speaker 11: important to be mindful of it because usually that risk
Speaker 11: is not priced. You know, the Treasury Department does have
Speaker 11: to refinance a tremendous amount of debt, we have a
Speaker 11: ton of fiscal spending, we have an election year. There's
Speaker 11: really even no election premium priced into the volatility markets.
Speaker 11: I mean, talk about pulling my hair out. I want
Speaker 11: to grab people and be like, what's wrong with you?
Speaker 11: Do you realize what's around the corner and what we're
Speaker 11: going to be facing. So I think that's the time
Speaker 11: that investors. You know, in all markets, you want to
Speaker 11: buy things that are low and sell things that are high.
Speaker 11: And there's certain things in the fixed income markets that
Speaker 11: are really inexpensively priced, and then there's ninety percent of
Speaker 11: the market that's really expensive, so you want to kind
Speaker 11: of avoid the expensive stuff and buy the cheaply priced things.
Speaker 2: In my opinion, so what is the FED going to
Speaker 2: do this year. I guess obviously the March cut is
Speaker 2: off the table. I think people are now really debating
Speaker 2: May and maybe even suggesting June might be the first,
Speaker 2: might be the launching point.
Speaker 3: What do you think?
Speaker 11: I think it's really hard to predict what policy makers
Speaker 11: are going to do, and then it's even harder to
Speaker 11: predict what markets are going to do in response to
Speaker 11: that policy, because it's all related to expectations. Right. You know,
Speaker 11: if we if we rewind before the FED started hiking
Speaker 11: rates and the dot plots started to come out higher,
Speaker 11: I don't think any economist out there would have said, Okay,
Speaker 11: the Fed's going to hike to five twenty five and
Speaker 11: about a twelve month window. I think nobody was talking
Speaker 11: about that, and now everybody is talking about rate cuts.
Speaker 11: It's just a question of how many, how quickly, and
Speaker 11: when is it going to happen. I think we also
Speaker 11: have to be mindful of the Silicon Valley swap lines.
Speaker 11: So the BTSP program is expiring in March. That's put
Speaker 11: a ton of liquidity out there in the system that's
Speaker 11: going to be coming out. So I think there are
Speaker 11: a lot of things out there that are catalysts to
Speaker 11: make markets more normal and fixed income, I think having
Speaker 11: an upward sloping yield curve. You know that's not some
Speaker 11: kind of tail event, right, that would just be normal.
Speaker 11: Like in normal environments, when you lend somebody money longer,
Speaker 11: whether it's a sovereign or a municipality or a corporate,
Speaker 11: you typically get paid more interest to lend longer, right,
Speaker 11: because it's more risks. Right now, we're not seeing that.
Speaker 11: So I think there are a lot of ways to
Speaker 11: kind of play for a more normal market, and it
Speaker 11: doesn't necessarily have to be dependent on the FED just
Speaker 11: cutting rates, because I think the longer the FED pushes
Speaker 11: off the rate cuts, the more the economy, especially all
Speaker 11: the corporates out there that have debt will have to refinance.
Speaker 11: So it could potentially be higher for longer means more
Speaker 11: cuts faster later because the economy is really slowing. So
Speaker 11: I think it's tricky.
Speaker 4: That, all right, Nancy, We appreciate it.
Speaker 7: Nancy Davis, founder and CEO of Quadratic Capital Management talking
Speaker 7: about fixed income, and then also you layer in the
Speaker 7: election timetable and the idea that the closer you get
Speaker 7: to the election and the more you cut the more it.
Speaker 4: Looks political, and that kind of changes the framework to
Speaker 4: a little bit.
Speaker 2: Yeah, so I think if you start, maybe that takes
Speaker 2: some of the political risk at you start.
Speaker 3: Olentially see how play that.
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