WEBVTT - Ancora Advisors Managing Director David Sowerby Talks Predictions For The New year 

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Join us now?

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<v Speaker 2>Is David Sowerby and Core portfolio manager here with us

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<v Speaker 2>on this Boxing day. I guess not in the US

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<v Speaker 2>but around the world sales you're celebrating, I know, but

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<v Speaker 2>we're supposed to celebrate.

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<v Speaker 1>With the Dale Canada too. It's Canada as well.

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<v Speaker 3>Well, said CommonWell, my neighbor to the south.

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<v Speaker 2>Yes, right, David, great to speak with you, and I

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<v Speaker 2>want to start just by before we look ahead, looking

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<v Speaker 2>back on this last year. What lessons will you carry

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<v Speaker 2>over from the way the market performed this year? And

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<v Speaker 2>if you kind of think of this as chapters, how

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<v Speaker 2>much is the story of the same here going into

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<v Speaker 2>twenty twenty five for you?

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<v Speaker 3>Enough of the same, But one very good same is

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<v Speaker 3>never underestimate the ability of solid US companies to deliver

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<v Speaker 3>superior capital allocation shareholder value creation in the face of

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<v Speaker 3>higher interest rates, questionable fiscal policy, time and time again,

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<v Speaker 3>bet on US companies. That's been the rule of thumb

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<v Speaker 3>for thirty plus years.

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<v Speaker 4>David, you know, am I gonna be lazy in twenty

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<v Speaker 4>twenty five and just hang on to my mag seven?

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<v Speaker 1>Or should I take a little bit of a roll

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<v Speaker 1>up my sleeves a little bit.

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<v Speaker 4>Maybe take a look at some small caps, some mid caps,

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<v Speaker 4>maybe some sectors or factors that haven't really performed over

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<v Speaker 4>the past two years.

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<v Speaker 3>Well, Paul, I don't root against the MAG seven, but

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<v Speaker 3>I think you have to think broader, more participation in

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<v Speaker 3>the markets. We saw this rotation since July eleventh, where

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<v Speaker 3>small caps outperformed quite well, value outperform growth, the MAG

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<v Speaker 3>seven lied or lagged excuse me, And here we go

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<v Speaker 3>into December Mag seven right back on the treadmill. Small

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<v Speaker 3>caps have still modestly beat large caps since July eleventh,

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<v Speaker 3>ten percent for small caps up seven percent.

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<v Speaker 1>For the S and P five hundred.

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<v Speaker 3>It's that two steps forward, one step back, one step

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<v Speaker 3>back in December, but I think we're back to small

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<v Speaker 3>caps having very good turns in twenty twenty five relative

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<v Speaker 3>to some of the megacaps.

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<v Speaker 2>David count me among those who hears that watchword are

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<v Speaker 2>those watchwords small caps and just sort of wonders what

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<v Speaker 2>to do with it. Where are you looking when we

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<v Speaker 2>talk about small caps? Where is there opportunities you see?

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<v Speaker 2>What's your counsel to your clients about what sectors, what

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<v Speaker 2>types of companies? Are are of interest in that world, A.

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<v Speaker 3>Proven process for twenty plus years. Two buckets to look

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<v Speaker 3>into first spinoffs small company spins out of a larger

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<v Speaker 3>company on lock shareholder value.

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<v Speaker 1>Look at the Bloomberg Spinoff.

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<v Speaker 3>Index in twenty twenty four, it's up better than sixty

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<v Speaker 3>sixty percent.

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<v Speaker 1>That's the first bucket.

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<v Speaker 3>The second bucket is under followed companies where there's only

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<v Speaker 3>two or fewer Wall Street analysts following the company compared

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<v Speaker 3>to the previous story on Apple. So an example is

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<v Speaker 3>National Cinemedia ticker symbol NCMI. Only two analysts follow the company.

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<v Speaker 3>They do that advertising when you go to the movies

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<v Speaker 3>hate it and you get there early, and you see

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<v Speaker 3>that active audience for advertising at National Cinemedia over one

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<v Speaker 3>thousand theaters they're in. There's an idea for an underfollowed

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<v Speaker 3>small cap stock.

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<v Speaker 1>And that stock's just ripped.

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<v Speaker 4>It's up a sixty percent year to day with a

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<v Speaker 4>market cap of about just six hundred and twenty five

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<v Speaker 4>million dollars. So that thing has worked here. David, how

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<v Speaker 4>do you think about valuation here? Because I've got a

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<v Speaker 4>fed that I think maybe they're going to cut a

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<v Speaker 4>couple of times in twenty twenty five.

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<v Speaker 1>But I think that's it.

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<v Speaker 4>It feels like earnings have to be a real driver

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<v Speaker 4>of this market going forward. How do you feel about

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<v Speaker 4>earnings visa the evaluation?

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<v Speaker 1>These days?

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<v Speaker 3>All valuation rich, no other way to describe it. If

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<v Speaker 3>you go on a free cash flow basis and value

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<v Speaker 3>the market that way, not as rich, still opportunities for

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<v Speaker 3>the investor, but you nailed it.

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<v Speaker 1>It's a tug of war.

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<v Speaker 3>In twenty twenty five, earnings, pre cash flow dividends will

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<v Speaker 3>all be up ten percent or better. That's pulling on

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<v Speaker 3>the upside. But valuation is stretched. And I looked back

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<v Speaker 3>to nineteen ninety there have been nine years in a

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<v Speaker 3>calendar year where valuation went lower, and in those nine

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<v Speaker 3>years the market only finished positive four on in nine

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<v Speaker 3>years when valuation slipped a bit. So that's the tug

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<v Speaker 3>of war for twenty twenty five rich valuations. I hope

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<v Speaker 3>they don't go lower. With earnings and free cash flow

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<v Speaker 3>up double digits.

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<v Speaker 2>I could detect what my friend Paul Swiney was saying,

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<v Speaker 2>some disdain or eagerness to stop talking about the Fed

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<v Speaker 2>Reserve as much as we have been over the course

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<v Speaker 2>of this last year. What's the role that it's going

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<v Speaker 2>to play in twenty twenty five as you see it.

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<v Speaker 2>I know you were listening closely to that press conference

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<v Speaker 2>just a couple of days ago. How much is it

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<v Speaker 2>going to be continuing to drive things going forward here

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<v Speaker 2>as you look at valuations, as Paul suggests, other facets

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<v Speaker 2>of investing beyond what the oracles down in the Echos

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<v Speaker 2>building are telling the market.

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<v Speaker 3>Well, you're in New York, so let's borrow from a

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<v Speaker 3>famous New York investor, Reggie Jackson. The FED is a

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<v Speaker 3>straw that stirs the So if the market only gets

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<v Speaker 3>two interest straight cuts next year, I don't think the

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<v Speaker 3>Fed should do anymore. Their number one mission should always

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<v Speaker 3>be price stability, and if the market doesn't like it

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<v Speaker 3>in the near term, you have to grind through it.

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<v Speaker 3>But at the same time, if inflation is not brought

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<v Speaker 3>even a bit lower, just look at what the market

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<v Speaker 3>did from nineteen sixty five to nineteen eighty one. It

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<v Speaker 3>was flat on an inflation adjusted basis, it dropped forty

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<v Speaker 3>to fifty percent. So we have to be encouraging that

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<v Speaker 3>the Fed States committed to inflation, and that's going to

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<v Speaker 3>be a story in twenty twenty five. In that Tuga

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<v Speaker 3>war relative to the I think favorable earnings, free cash flow,

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<v Speaker 3>and free cash flow margins that'll still exist.

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<v Speaker 4>David, I've been doing this Wall Street thing since nineteen

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<v Speaker 4>eighty six. One of the really interesting markets to watch

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<v Speaker 4>develop has been private credit. Talk to us about Ares

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<v Speaker 4>Ares Management Corporation.

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<v Speaker 3>Areas is one of the largest private credit publicly traded companies,

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<v Speaker 3>so bank loans in particular, and that has been an

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<v Speaker 3>insatiable appetite for pension funds. I sit on the City

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<v Speaker 3>of Detroit's Investment Committee. My alma mater, Wayne State, I

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<v Speaker 3>chair the State of Michigan Pension Fund for a number

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<v Speaker 3>of years. The demand for private credit continues to grow

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<v Speaker 3>because the expectations are you can get near like public

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<v Speaker 3>equity returns without the same volatility, and that plays into

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<v Speaker 3>a name like Ares, which is one of the largest

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<v Speaker 3>private credit publicly traded companies.

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<v Speaker 2>You know, let's take advantage of the fact that you're

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<v Speaker 2>there in Michigan. I'd love to get your sense of

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<v Speaker 2>sort of not not the politics of the election per se,

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<v Speaker 2>but what issues were front and center, particularly in your

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<v Speaker 2>home state, and what that tells you about what to

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<v Speaker 2>focus on here in the years to come.

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<v Speaker 3>The economy first and foremost, that cumulative inflation was up

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<v Speaker 3>better than two twenty percent since early two thousand and

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<v Speaker 3>twenty twenty one, and I think that's why Michigan, perennial

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<v Speaker 3>swing state, swung back for incoming President Trump relative to

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<v Speaker 3>twenty twenty twenty sixteen.

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<v Speaker 1>We end up voting with our pocketbook.

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<v Speaker 3>The other matters, the other factors matter, But I think

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<v Speaker 3>that was the key reason for Michigan going back to

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<v Speaker 3>Trump the way they did in twenty sixteen.

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<v Speaker 4>David, when you and your team woke up the day

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<v Speaker 4>after election day, did you change your investment outlook for

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<v Speaker 4>twenty twenty five at all?

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<v Speaker 3>Generally no, because I can't predict politics, Paul, But my

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<v Speaker 3>axiom in predicting politics is never never expect.

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<v Speaker 1>Washington to do the right thing. They do the least

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<v Speaker 1>amount to fix a problem.

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<v Speaker 3>That said, after the election, you saw small cap stocks

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<v Speaker 3>the day after pop three to four percent. That was

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<v Speaker 3>validation at animal spirits, we're going to be resurrected. And

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<v Speaker 3>we saw that November NFIB Optimism index take a decided

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<v Speaker 3>spike higher. That can be a factor that bodes well

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<v Speaker 3>for the market next year and in particular animal spirits

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<v Speaker 3>and small cap cyclically sensitive stocks.

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<v Speaker 1>You can't predict politics.

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<v Speaker 2>Let me just ask you about geopolitics in terms of

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<v Speaker 2>what you're watching and how that maybe colors your appetite for, say,

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<v Speaker 2>assets outside the United States, equities overseas, other opportunities are

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<v Speaker 2>Are you staying pretty closely focused on the US or

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<v Speaker 2>do you see opportunity across the Atlantic.

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<v Speaker 1>Outside the US.

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<v Speaker 3>It's interesting, but the bias is still in US domestic portfolios.

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<v Speaker 3>And since the end of nineteen eighty seven, US stocks

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<v Speaker 3>have compounded five five percentage points better compound analyzed return

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<v Speaker 3>superior than the MSCIEFA. That goes back to the superiority

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<v Speaker 3>of US companies delivering shareholder value. The bar is high

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<v Speaker 3>to have meaningful assets oute of the US. You get

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<v Speaker 3>enough diversification here given our indexes.

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<v Speaker 4>So, David, what's your message to your clients? You have

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<v Speaker 4>a thematic message to your clients for twenty twenty five.

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<v Speaker 3>I'm generally not that creative other than keep your head

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<v Speaker 3>down buying good companies that are generating capital and free

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<v Speaker 3>cash flow to the investor. And at the end of

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<v Speaker 3>the day, I'll have the same five risks that every

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<v Speaker 3>wall street analyst has on the street, but ultimately it's

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<v Speaker 3>always going to be the risk you don't know that

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<v Speaker 3>bites you the hardest.

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<v Speaker 2>David, Do you still have clients who are on the

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<v Speaker 2>more conservative side of things, who are part of that

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<v Speaker 2>six trillion dollars cash pile, who are reluctant to get

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<v Speaker 2>back into this market? And if you do, what's the

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<v Speaker 2>council you're giving them to jump in?

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<v Speaker 3>Generally, no, but if there are some you just want

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<v Speaker 3>to take a look at the potential for the S

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<v Speaker 3>and P five hundred, or the average stock and the

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<v Speaker 3>S and P five hundred to compound seven to eight.

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<v Speaker 1>Percent over the next three years. You're not going to get.

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<v Speaker 3>That in treasury bills or treasury notes, and the probability

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<v Speaker 3>is probably better than eighty percent that the US and

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<v Speaker 3>the S and P five hundred, the average stock will

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<v Speaker 3>compound better than cash.

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<v Speaker 1>I like those odds. The next calendar year flip a coin.

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<v Speaker 3>But the next two or three years you feel like

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<v Speaker 3>equities will still meaningfully outperform cash.

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<v Speaker 4>All right, David, thank you so much for you Always

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<v Speaker 4>appreciate getting a few minutes of your time. David Sowerby

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<v Speaker 4>and Core Portfolio Manager from the Great Midwest,