WEBVTT - Laffer Tengler CEO Tengler on Value Beyond Labels 0:00:14.900 --> 0:00:17.960 Welcome to Inside Active, a podcast about active managers that 0:00:17.980 --> 0:00:22.250 goes beyond soundbites and headlines and looks deeper into their processes, challenges, 0:00:22.410 --> 0:00:25.910 and philosophies in security selection. I'm David Cohn. I lead 0:00:25.950 --> 0:00:30.390 mutual fund and active research at Bloomberg Intelligence. Value investing 0:00:30.410 --> 0:00:34.379 can sound relatively straightforward. Find companies trading for less than 0:00:34.400 --> 0:00:37.260 their worth and wait for the market to recognize that value. 0:00:37.820 --> 0:00:41.520 But identifying what's actually under value is much harder in practice. 0:00:42.180 --> 0:00:45.169 A low valuation can signal an opportunity. where it can 0:00:45.210 --> 0:00:48.529 reflect the fundamental problem with the business. Investors have to 0:00:48.550 --> 0:00:51.300 determine why a stock is cheap, whether its earnings and 0:00:51.340 --> 0:00:54.740 cash flows can support a higher valuation, and what could 0:00:54.840 --> 0:00:57.360 cause that gap to close. And the opportunity set doesn't 0:00:57.400 --> 0:01:00.850 necessarily have to be limited to companies traditionally associated with value. 0:01:00.990 --> 0:01:03.350 A broader approach can look at the market for businesses 0:01:03.390 --> 0:01:07.569 where strong fundamentals and future earnings potential may not fully 0:01:07.650 --> 0:01:10.440 reflect in the stock price. So today I wanted to 0:01:10.500 --> 0:01:13.959 explore how that works in practice, how value opportunities are 0:01:14.020 --> 0:01:18.190 identified in research, how dividends and other value measures factor 0:01:18.250 --> 0:01:21.150 into security selection, and how investors try to distinguish an 0:01:21.209 --> 0:01:24.230 opportunity from a value trap and how a portfolio is 0:01:24.270 --> 0:01:27.830 constructed around those ideas. So joining me to discuss that 0:01:28.130 --> 0:01:31.979 is Nancy Tangler, CEO and Chief Investment Officer of Laffer 0:01:32.100 --> 0:01:36.679 Tangler Investments and a Portfolio Manager for the Wedbush Laffer 0:01:36.720 --> 0:01:41.500 Tangler New Era Value ETF, which has the ticker TGLR. Nancy, 0:01:41.560 --> 0:01:42.400 thanks for joining me today. 0:01:42.840 --> 0:01:44.240 David, thanks so much for having me. 0:01:45.340 --> 0:01:49.560 So the strategy is called new error value. What does 0:01:49.640 --> 0:01:52.280 value investing mean to you today? And how is that 0:01:52.300 --> 0:01:55.600 different than the way investors have traditionally thought of value? 0:01:57.250 --> 0:02:00.830 Great question. So I got into the business in the early, 0:02:01.410 --> 0:02:04.750 mid 1980s. And that was back when the yield on 0:02:04.790 --> 0:02:08.360 the S & P was about 4%. or between 3% 0:02:08.360 --> 0:02:11.340 and 4%. I don't recall exactly, but it was much 0:02:11.380 --> 0:02:15.160 higher than it is now. We focused on price-to-book ratio. 0:02:15.800 --> 0:02:20.470 We looked at price-earnings ratios. And a value portfolio was 0:02:20.510 --> 0:02:25.130 a collection of consumer staples, REITs, well, not even REITs 0:02:25.150 --> 0:02:28.620 because we didn't have them early days, but electric utilities, 0:02:29.210 --> 0:02:34.050 old line industrial companies, chemical companies, for example, and energy. 0:02:34.910 --> 0:02:37.570 And then we tried to add in some diversification around 0:02:37.610 --> 0:02:40.370 the edges. But what happened in the 90s was the 0:02:40.410 --> 0:02:44.000 whole thing shifted. And if you were a value investor 0:02:44.060 --> 0:02:47.440 and you didn't pivot at all, you did really well 0:02:48.160 --> 0:02:51.080 in the early half of the decade. I was actually 0:02:51.120 --> 0:02:54.080 managing money then, but you didn't really keep up in 0:02:54.120 --> 0:02:56.600 the second half. which in some ways was a good 0:02:56.660 --> 0:02:58.899 thing and in some ways was a bad thing. But 0:02:58.960 --> 0:03:02.340 what I learned from that was that some of these 0:03:02.500 --> 0:03:06.790 old line metrics, not that we were embracing eyeballs on 0:03:06.810 --> 0:03:09.840 a screen, which was all the rage back in the 90s, 0:03:09.889 --> 0:03:12.850 but what we did learn from that was that you 0:03:12.889 --> 0:03:15.300 have to broaden out the way you look at companies. 0:03:15.400 --> 0:03:19.679 So We pioneered a discipline called relative dividend yield. We 0:03:19.700 --> 0:03:22.500 looked at a stock's dividend relative to its own past 0:03:22.560 --> 0:03:24.579 and the S & P, and it gave us a 0:03:24.639 --> 0:03:27.960 lot of indication of over and undervalued periods. And then 0:03:28.000 --> 0:03:32.780 the dividend growth also told us that management was confident 0:03:32.820 --> 0:03:36.390 about future earnings growth to the X percent, which usually 0:03:36.470 --> 0:03:39.730 matched the dividend growth. That was great. That still works, 0:03:40.130 --> 0:03:43.370 but it really limits your universal stock. So we developed 0:03:43.430 --> 0:03:46.360 a discipline called relative price to sales ratio, I wrote 0:03:46.400 --> 0:03:48.559 a book called New Era Value Investing, which is why 0:03:48.600 --> 0:03:52.800 we named the ETF after that. And I think it 0:03:52.920 --> 0:03:56.860 really helped us to outperform in the coming decades from 0:03:56.880 --> 0:03:57.640 the late 90s. 0:03:58.560 --> 0:04:00.790 Well, I definitely remember the late 90s. I was in 0:04:00.850 --> 0:04:03.310 college and just getting into, you know, the market at 0:04:03.350 --> 0:04:05.590 that point of, you know, I started my career right 0:04:05.610 --> 0:04:07.130 at the tail end of the dot com. And it 0:04:07.190 --> 0:04:09.770 seemed like no one was even paying attention to any, 0:04:10.130 --> 0:04:13.610 not necessarily value, but any like, you know, profitability or, 0:04:13.670 --> 0:04:16.040 you know, everything was all the dot coms. So, Definitely 0:04:16.080 --> 0:04:19.620 remember that time. Do you think, or has your philosophy 0:04:19.690 --> 0:04:23.030 changed at all since that period? Or has it kind 0:04:23.070 --> 0:04:24.010 of remained unchanged? 0:04:25.010 --> 0:04:27.950 Both. I mean, we still use relative dividend yield because 0:04:27.990 --> 0:04:30.250 it gives you great insight to what management and the 0:04:30.270 --> 0:04:34.390 board is thinking. And it does identify these vast periods 0:04:34.450 --> 0:04:37.210 of under and over valuation. But we've added in a 0:04:37.270 --> 0:04:41.180 second discipline called relative price to sales ratio. And the 0:04:41.240 --> 0:04:43.320 reason we use that, we developed that, I mean, it 0:04:43.380 --> 0:04:46.339 sounds normal now, but in the late 90s, I mean, 0:04:46.360 --> 0:04:49.140 you had to graph this stuff by hand. And what 0:04:49.200 --> 0:04:51.880 we were looking for was what was a company paying 0:04:51.940 --> 0:04:55.160 for future sales based on what we've paid in the 0:04:55.240 --> 0:04:58.520 past as an investor? And then how does that compare 0:04:58.560 --> 0:05:01.060 to the S & P? That's the relative part. So 0:05:01.080 --> 0:05:03.960 it was very similar to our relative dividend yield, but 0:05:04.000 --> 0:05:07.140 it utilized sales. And the reason we used sales instead 0:05:07.160 --> 0:05:10.469 of earnings is because sales are a fact. If you 0:05:10.490 --> 0:05:13.800 manipulate sales, it doesn't usually work out very well for you. 0:05:13.880 --> 0:05:17.339 There's very high-end prisons littered with folks that messed with 0:05:17.400 --> 0:05:20.800 sales numbers. But earnings can be a little bit fungible. 0:05:20.900 --> 0:05:22.919 So what we wanted to do was have a metric 0:05:22.940 --> 0:05:26.060 that was constant, that really gave us some insight into 0:05:26.080 --> 0:05:30.320 the company's future. And then because stocks can be cheap 0:05:30.360 --> 0:05:33.880 for a good reason, we call them terminally cheap stocks. 0:05:34.279 --> 0:05:39.260 We developed a research discipline, and it's a multi-factor discipline 0:05:39.279 --> 0:05:43.370 called the 12 Fundamental Factors. Three qualitative, nine quantitative. And 0:05:43.400 --> 0:05:45.890 we still conduct that to this day. It still works. 0:05:45.950 --> 0:05:50.390 We look at all these factors that some are applicable, 0:05:50.450 --> 0:05:53.710 some are not to certain sectors. But overall, the 12 0:05:53.710 --> 0:05:57.660 Fundamental Factors give us insight. It's not a guarantee, but 0:05:57.680 --> 0:06:00.640 it gives us insight to companies that are cheap for 0:06:00.660 --> 0:06:01.260 a good reason. 0:06:01.279 --> 0:06:04.020 Okay. And, you know, I'm going to get into the 0:06:04.300 --> 0:06:07.060 relative dividend yield and the relative price of sales in 0:06:07.100 --> 0:06:08.620 a second. We can go a little deeper on that. But, 0:06:08.640 --> 0:06:10.800 you know, I'd just love to hear, you know, when 0:06:10.820 --> 0:06:12.990 you're looking for a new investment or if you kind 0:06:13.050 --> 0:06:15.960 of start your research process, what does the initial universe 0:06:16.060 --> 0:06:18.650 look like? You know, what typically causes a company to 0:06:18.670 --> 0:06:20.469 get your intention, attention, excuse me. 0:06:21.350 --> 0:06:26.210 Intention and attention. So we're going to be starting with 0:06:26.270 --> 0:06:28.990 valuation because what we want to know when we buy 0:06:29.029 --> 0:06:33.130 a company is, is it cheap? Is it cheap relative 0:06:33.150 --> 0:06:35.180 to its own past? And is it cheap relative to 0:06:35.240 --> 0:06:38.540 its peers? And so that's where we start. But sometimes, 0:06:38.620 --> 0:06:40.820 as I mentioned, stocks are cheap for a good reason. 0:06:41.200 --> 0:06:45.280 And that's why we overlay the 12 fundamental factors. The 0:06:45.360 --> 0:06:50.110 qualitative factors, David, matter the most to me. That is management. 0:06:50.170 --> 0:06:54.610 That's a catalyst for outperformance, industry dominance. Because if you 0:06:54.650 --> 0:07:00.430 have superior management, a catalyst for outperformance, and you dominate 0:07:00.470 --> 0:07:05.670 your industry, You could suffer through periods of underperformance. So 0:07:05.790 --> 0:07:09.390 in our value portfolio, we added over the summer, during 0:07:09.450 --> 0:07:12.970 what I call the summer swoon, we added NVIDIA, trading 0:07:13.170 --> 0:07:15.710 at not typically thought of as a value stock, but 0:07:15.790 --> 0:07:18.970 trading as a value stock. We added Google two years 0:07:19.030 --> 0:07:21.670 prior when everybody left them for dead after the BARD 0:07:21.730 --> 0:07:26.530 announcement or the BARD failure announcement. And so we bought 0:07:26.570 --> 0:07:28.450 it because we thought there was a lot going right. 0:07:29.030 --> 0:07:31.930 very cheap and it's up over 110%, but it did 0:07:32.010 --> 0:07:35.450 nothing for a while. And so that's the hallmark of 0:07:35.530 --> 0:07:38.490 being a good value investor. You got to identify the 0:07:38.530 --> 0:07:40.890 right companies and then you got to stick with them 0:07:40.930 --> 0:07:46.500 during periods of consolidation or underperformance. Other names in our 0:07:46.540 --> 0:07:49.560 value portfolio you would not expect to see are Amazon 0:07:49.620 --> 0:07:52.580 and Meta, both trading like, or at least when we 0:07:52.680 --> 0:07:54.720 added them, both were trading like value stocks. 0:07:55.790 --> 0:07:58.760 No, it's interesting. I've done some research on value funds, 0:07:58.880 --> 0:08:02.460 and I do see a lot of tech would be 0:08:02.500 --> 0:08:06.180 considered growth, but it's interesting because they do trade as 0:08:06.240 --> 0:08:08.760 value occasionally, and so it's always interesting to find those 0:08:09.200 --> 0:08:11.430 in those types of funds. And so if we talk 0:08:11.450 --> 0:08:13.990 a little bit more about the relative dividend yield, can 0:08:14.030 --> 0:08:17.030 you kind of walk us how you use a company's 0:08:17.090 --> 0:08:19.910 current dividend yield relative to its own history in the 0:08:19.950 --> 0:08:23.570 broader market to determine whether a stock may be undervalued? 0:08:24.070 --> 0:08:27.570 Yeah. So So we don't care about absolute yield. In fact, 0:08:27.590 --> 0:08:30.650 I would argue that high yielding stocks are a value 0:08:30.730 --> 0:08:34.180 trap typically. But what we're looking for is a dividend 0:08:34.220 --> 0:08:36.660 growth history. So the first thing we do is we 0:08:36.679 --> 0:08:41.360 take the yield and we measure it against the S & 0:08:40.820 --> 0:08:43.370 P 500. We try to go back 25 years. We 0:08:43.410 --> 0:08:46.000 measure it against the S & P 500. one standard 0:08:46.400 --> 0:08:50.400 deviation away from its own mean is also the beginning 0:08:50.440 --> 0:08:52.459 of the buy range and the sell range. So it 0:08:52.500 --> 0:08:55.920 gives us a nice broad period or nice broad range 0:08:56.500 --> 0:09:00.559 of performance that we can benefit from. But then we 0:09:00.620 --> 0:09:03.959 graph it. And so we establish buy range and sell ranges. Now, 0:09:04.420 --> 0:09:07.330 the only stocks that are a little bit more nuanced 0:09:07.400 --> 0:09:09.670 are the fallen angel growth stocks, the stocks you were 0:09:09.690 --> 0:09:13.790 just talking about. Former growth stocks currently being viewed or 0:09:13.830 --> 0:09:18.839 not viewed but certainly trading like value stocks. And then 0:09:18.900 --> 0:09:21.300 we have to use recent history. So it could be 0:09:21.320 --> 0:09:24.240 as short as five to 10 years to really look 0:09:24.300 --> 0:09:28.100 at the patterns. And once you have an elevated relative yield, 0:09:28.140 --> 0:09:31.820 then you do the research because the stock is cheap 0:09:31.900 --> 0:09:34.580 on its own history. And then we look at all 0:09:34.620 --> 0:09:38.040 the factors that most value managers look at or any manager. 0:09:38.100 --> 0:09:42.200 So we look at free cashflow, priced earnings, we look 0:09:42.260 --> 0:09:45.200 at PEG, We look at debt to equity, you know, 0:09:45.510 --> 0:09:49.220 the normal sort of quality benchmarks on the quantitative side. 0:09:49.600 --> 0:09:53.620 But we really dig into management and to the catalyst 0:09:53.660 --> 0:09:56.220 for outperformance. Because if you don't have a catalyst, you 0:09:56.240 --> 0:09:59.140 can be right but be wrong for a couple of years. 0:10:00.160 --> 0:10:01.719 No, it makes sense. You know, if we move over 0:10:01.760 --> 0:10:04.640 to the relative price to sales, you know, I know 0:10:04.660 --> 0:10:06.780 you did mention kind of the difference between looking at 0:10:06.820 --> 0:10:09.030 sales and earnings and, you know, how one can be 0:10:09.070 --> 0:10:10.310 kind of messed. 0:10:10.150 --> 0:10:10.829 With a little bit. 0:10:11.190 --> 0:10:14.209 What about price to book? What does price to sales 0:10:14.290 --> 0:10:15.990 tell you that price to book may miss? 0:10:16.870 --> 0:10:21.040 Well, I just think sales are more reliable and more universal. 0:10:21.140 --> 0:10:24.630 So price to book becomes a little challenging in certain 0:10:24.670 --> 0:10:27.490 industries where book value doesn't, and particularly in some of 0:10:27.510 --> 0:10:32.189 the growthier industries where we're not really dependent on asset 0:10:32.270 --> 0:10:37.370 measurement or asset turnover, which is also another factor. So 0:10:37.410 --> 0:10:42.230 we wanted something that told us something about the company's potential. 0:10:42.730 --> 0:10:46.120 I'm much more interested in what the company's top line 0:10:46.150 --> 0:10:52.030 growth is than what the EPS is. Because it is raw, 0:10:52.150 --> 0:10:54.980 it's out there, it's a fact. So that was why 0:10:55.010 --> 0:10:58.260 we chose sales that just seemed much more reliable. And 0:10:58.300 --> 0:11:03.180 it has been a reliable indicator of value, not just 0:11:03.240 --> 0:11:06.359 in value names, but in these fallen angel and even 0:11:06.400 --> 0:11:07.000 growth names. 0:11:08.000 --> 0:11:09.900 And so you have these two different tools. How do 0:11:09.940 --> 0:11:12.500 they work together with the dividend yield and the price 0:11:12.540 --> 0:11:15.199 to sales? What happens when one suggests a stock may 0:11:15.240 --> 0:11:16.979 be attractive, but the other doesn't? 0:11:17.670 --> 0:11:21.310 Yeah, well, so the nirvana point is when they both 0:11:21.370 --> 0:11:25.290 tell you. So if you go back to 2013, 2014, 0:11:25.290 --> 0:11:28.670 Apple was a buy on both metrics, and we're sure 0:11:28.690 --> 0:11:32.970 glad we bought it. But oftentimes, it depends on the company. 0:11:33.050 --> 0:11:35.510 So if it's a company that is known as or 0:11:35.530 --> 0:11:39.700 has a history as a dividend payer and a dividend grower, 0:11:40.040 --> 0:11:43.720 then we're going to yield to what we call RDY, 0:11:43.800 --> 0:11:48.630 relative dividend yield, as our primary metric. But if it's 0:11:48.670 --> 0:11:52.370 a company that has historically not paid a dividend, or 0:11:52.410 --> 0:11:57.150 at least hasn't for the entire 25 to 30-year period prior, 0:11:57.550 --> 0:12:00.089 then we're going to look at both and probably lean 0:12:00.350 --> 0:12:04.130 on relative price-to-sales ratio. And that has given us a 0:12:04.190 --> 0:12:09.890 lot of flexibility. The ETF we run, TGLR, through last 0:12:09.929 --> 0:12:13.870 year was in the top. That strategy that underlies the 0:12:13.910 --> 0:12:17.840 discipline was in the top 1%. of value managers because 0:12:17.920 --> 0:12:21.929 we take advantage of the fallen angel growth stocks. This year, 0:12:21.990 --> 0:12:24.910 it's a little more challenged relative to the Russell 1000 0:12:24.910 --> 0:12:28.550 value because the index has changed a little bit, but 0:12:28.670 --> 0:12:31.800 also because some of those stocks have not been rewarded. 0:12:31.960 --> 0:12:34.740 We think they will be in the fourth quarter. and 0:12:34.840 --> 0:12:37.240 in 2027. And as a long-term investor, David, and this 0:12:37.260 --> 0:12:40.600 is the challenge, you and I watch the financial news media, 0:12:40.679 --> 0:12:43.810 you are the financial news media, and you have to 0:12:43.870 --> 0:12:46.470 think about things on a day-to-day basis. I kind of 0:12:46.490 --> 0:12:49.630 do too, but what I'm doing for my clients is 0:12:49.950 --> 0:12:53.050 a three to five year time horizon. So sometimes I 0:12:53.090 --> 0:12:57.200 have to sit on my hands and just do the 0:12:57.240 --> 0:12:59.840 research and stick with the name. Okay. 0:13:00.420 --> 0:13:02.540 And, you know, so once you have this company that 0:13:02.559 --> 0:13:05.770 looks attractive just based on valuation using your metrics, and 0:13:05.890 --> 0:13:07.530 you kind of alluded to this a little bit earlier 0:13:07.590 --> 0:13:09.970 with you have the whole process where you look at 0:13:10.030 --> 0:13:12.790 the fundamentals, and I know you mentioned management. Can you 0:13:12.830 --> 0:13:14.970 kind of go deeper into the other parts of that, 0:13:15.510 --> 0:13:18.250 what you're trying to learn that valuation alone can't tell you? 0:13:19.030 --> 0:13:21.810 Yeah, so I'll give you an example. This name happened 0:13:21.830 --> 0:13:24.580 to be in our 12 Best Ideas portfolio. Turned out 0:13:24.620 --> 0:13:29.160 it wasn't, and our growth portfolio. But it illustrates it perfectly. 0:13:29.650 --> 0:13:33.120 So Adobe was a name that we thought had really 0:13:33.240 --> 0:13:37.679 interesting growth potential, especially because of Firefly, which was their 0:13:37.920 --> 0:13:41.830 image business, I guess you'd call it. We began accumulating it, 0:13:42.290 --> 0:13:44.590 had a lot of confidence in management. And then we 0:13:44.630 --> 0:13:48.849 went through about three earning cycles where the company missed. 0:13:48.950 --> 0:13:53.080 They weren't gaining share in Firefly because AI had started 0:13:53.150 --> 0:13:56.600 to step in as a dominant image producer and management 0:13:56.700 --> 0:14:00.590 wasn't pivoting. And so we looked at it, we waited, 0:14:00.650 --> 0:14:02.980 we waited another quarter, we sit on all the calls, 0:14:03.040 --> 0:14:05.420 we listened to the change in tone from the management 0:14:05.520 --> 0:14:08.920 and the analysts, and we punted it. And it was 0:14:08.960 --> 0:14:12.330 at much, much higher levels than it is today. And 0:14:12.370 --> 0:14:15.870 I think that's a win. Now, sometimes we do that 0:14:16.270 --> 0:14:20.729 based on fundamental research, which at the end of the 0:14:20.790 --> 0:14:26.460 day has nuance and guesstimates and you know, biases in it, 0:14:26.540 --> 0:14:30.480 but also positive biases. And we've, we've sold other names 0:14:30.560 --> 0:14:33.840 that have not done, not gone straight down. And the 0:14:33.880 --> 0:14:36.080 example of that would be Intel. You know, the company, 0:14:36.560 --> 0:14:39.920 we owned it for years, high dividend payer, dividend grower, 0:14:39.940 --> 0:14:42.800 about four or five years ago, we sold it out 0:14:42.840 --> 0:14:44.870 of the value portfolio and we were right for a 0:14:44.880 --> 0:14:48.910 really long time until we were wrong. So we missed the, 0:14:49.110 --> 0:14:52.350 the pivot of, um, Bhutan, La Bhutan, you know, we, 0:14:52.850 --> 0:14:55.510 We thought that the business was failed. I mean, there 0:14:55.580 --> 0:14:59.200 is a government put in the stock, but nonetheless, we 0:14:59.240 --> 0:15:01.860 missed it. So sometimes, you know, I used to tell 0:15:01.900 --> 0:15:04.520 this to the Bechtel folks I manage money for, which 0:15:04.580 --> 0:15:07.450 is all engineers. I'd say, you know, investing is being 0:15:07.490 --> 0:15:11.010 about is about being mostly right. And you'd hear audible 0:15:11.070 --> 0:15:13.810 gas can't build a bridge that way, though. 0:15:14.650 --> 0:15:17.170 That's a good analogy. I like that. And you also 0:15:17.190 --> 0:15:19.630 mentioned cash flow a little earlier. And, you know, what 0:15:19.650 --> 0:15:21.640 are you looking for in the direction and quality of 0:15:21.700 --> 0:15:22.520 a company's cash flow? 0:15:23.400 --> 0:15:26.300 Yeah, I mean, we want to see that it's growing. 0:15:26.520 --> 0:15:29.180 So like one of the names that I just don't 0:15:29.360 --> 0:15:34.020 get based on what the market is talking about it 0:15:34.110 --> 0:15:36.710 or trading it at is Micron. I mean, if you 0:15:36.730 --> 0:15:39.390 look at the name, okay, earnings growth was up a 0:15:39.430 --> 0:15:45.910 thousand percent year over year, revenue growth, 340%. But importantly, 0:15:46.050 --> 0:15:49.310 free cashflow was like 32 and a half billion this 0:15:49.510 --> 0:15:55.080 last quarter, which is Q1 fiscal 27. versus $ 800 million 0:15:55.100 --> 0:15:57.640 the previous quarter. Now, if this is just a flash 0:15:57.720 --> 0:16:00.870 in the pan, well, then the stock doesn't deserve a 0:16:00.880 --> 0:16:04.050 higher multiple. But if you look at it on a 0:16:04.270 --> 0:16:08.090 kind of a three-year estimated basis, assuming the analysts are 0:16:08.150 --> 0:16:11.870 either overstating or understating, I don't care. There's so much 0:16:11.930 --> 0:16:13.920 room for error in there. You've got a stock that's 0:16:13.960 --> 0:16:17.000 trading at six times 27, and the earnings growth is 0:16:17.040 --> 0:16:21.270 going to be about 120%, five times 27. 28 and 0:16:21.320 --> 0:16:23.500 the growth is going to be somewhere between 20 and 0:16:23.500 --> 0:16:27.060 25 percent. And free cash flow, it's hemorrhaging free cash flow. 0:16:27.600 --> 0:16:30.720 So it's raising the dividend dramatically. Doesn't matter. It's not 0:16:30.760 --> 0:16:34.410 much of a dividend payer, but it's also buying back shares. 0:16:34.630 --> 0:16:38.250 And so when companies have a strong capital allocation program 0:16:38.290 --> 0:16:40.790 that is supported by free cash flow, we kind of 0:16:40.830 --> 0:16:44.360 love that story and we want to see it expanding 0:16:44.820 --> 0:16:45.560 and quality. 0:16:45.740 --> 0:16:45.960 Right. 0:16:46.040 --> 0:16:48.970 I mean, they're not foregoing CapEx. I don't think anyone 0:16:48.990 --> 0:16:52.270 would accuse any of these companies of foregoing CapEx for 0:16:52.930 --> 0:16:55.840 free cash flow. But yeah, that's what we're looking at. 0:16:56.620 --> 0:17:00.200 Okay, got it. And obviously, you mentioned management is a 0:17:00.420 --> 0:17:03.180 huge part when you're in your kind of due diligence process, 0:17:03.200 --> 0:17:06.879 when you're looking at fundamentals, or at least qualitative. How 0:17:06.900 --> 0:17:08.810 do you judge whether a management team is making the 0:17:08.869 --> 0:17:13.270 right choices? You mentioned, obviously, buybacks, it could be dividends, 0:17:13.810 --> 0:17:15.989 it could be reinvestments, acquisitions. 0:17:17.410 --> 0:17:20.139 Yeah, I think... So it's hard to know in the 0:17:20.200 --> 0:17:23.300 near term sometimes if you're right. And the example I'll 0:17:23.380 --> 0:17:27.790 use for that is Amazon. Andy Jassy is the father 0:17:27.830 --> 0:17:32.070 of cloud computing via AWS. He's now the CEO of Amazon. 0:17:32.609 --> 0:17:37.590 He has rationalized the company. I think he's pivoted to advertising. 0:17:38.250 --> 0:17:41.490 The AWS business is growing close to 30% in the 20% range. 0:17:41.510 --> 0:17:47.430 And earnings growth is gonna be 20 plus percent over 0:17:47.470 --> 0:17:50.369 the next three years. And the stock's trading at a 0:17:50.450 --> 0:17:55.390 multiple below 20. So either we're wrong and he doesn't 0:17:55.450 --> 0:17:58.210 know what he's doing, or the market just is not 0:17:58.260 --> 0:18:03.000 yet giving credit for the future earnings growth and the 0:18:03.380 --> 0:18:08.720 underlying valuation of the company, as well as management's instincts 0:18:09.020 --> 0:18:13.630 on what to do when. We keep accumulating the name. 0:18:13.790 --> 0:18:17.760 We might be wrong. I don't think we are. But 0:18:18.020 --> 0:18:20.220 you can look at a name like Glam Research, which 0:18:20.280 --> 0:18:22.820 did nothing in our portfolios for two years. And then 0:18:23.820 --> 0:18:27.199 this last year, it's up about 1,000%. So you have 0:18:27.220 --> 0:18:29.790 to have the conviction of sitting on the conference calls, 0:18:30.190 --> 0:18:34.890 going back to the management team, attending investor day, whatever 0:18:35.010 --> 0:18:38.550 gives you that insight, but not just reading Wall Street 0:18:38.609 --> 0:18:42.320 analyst reports. Because as smart as those guys are, They're 0:18:42.540 --> 0:18:43.960 always wrong at turning points. 0:18:45.220 --> 0:18:48.480 Okay. You know, it sounds like the research process has, 0:18:48.619 --> 0:18:50.680 you know, kind of a combination of both quantitative and 0:18:50.760 --> 0:18:53.740 qualitative judgment. What do you think the human judgment part 0:18:53.780 --> 0:18:56.419 is the greatest influence on the final decision if it's 0:18:56.440 --> 0:18:57.359 going to go into the fund? 0:18:58.700 --> 0:19:02.129 I think it's about time in the market as a 0:19:02.550 --> 0:19:04.629 portfolio manager. I had an analyst who said, well, I 0:19:04.630 --> 0:19:07.570 can just read about it. I didn't have to be there. 0:19:07.790 --> 0:19:12.459 And you can read about it, but... If you weren't there, 0:19:12.520 --> 0:19:15.280 you don't really understand the nuance. So about four years ago, 0:19:15.300 --> 0:19:17.460 I went to the team and said, look, this is 0:19:17.540 --> 0:19:20.550 analogous to the 90s. At least for now, it's the 0:19:20.590 --> 0:19:23.550 good part of the 90s. And so we need to find, 0:19:24.470 --> 0:19:27.869 we need to develop an investing theme. And so our 0:19:27.910 --> 0:19:31.250 investing theme was old economy companies that are pivoting to 0:19:31.270 --> 0:19:34.690 the new technologies and then the picks and shovels. And 0:19:35.090 --> 0:19:38.580 constantly I've been reassessing that analogy. You know, we had 0:19:38.960 --> 0:19:43.320 higher inflation, higher interest rates in the 90s, but robust 0:19:43.340 --> 0:19:47.970 stock price performance. Why was that? Because growth was disinflationary 0:19:48.070 --> 0:19:51.460 or deflationary thanks to the internet. Well, the technologies we're 0:19:51.500 --> 0:19:55.000 talking about now are so much more powerful, so much 0:19:55.280 --> 0:20:00.680 deeper in changing the way we live going forward. So 0:20:00.720 --> 0:20:04.389 it started with digitization and our sort of poster child 0:20:05.290 --> 0:20:09.250 was Walmart. They were digitizing, then cloud computing, and then 0:20:09.450 --> 0:20:16.220 robotics and AI and physical AI. And so our conviction 0:20:16.280 --> 0:20:18.129 in the name was we just kept adding to it. 0:20:18.520 --> 0:20:23.520 And that was right. Now, stock's consolidating. We've been adding 0:20:23.560 --> 0:20:26.280 to it again recently because we think the theme is intact. 0:20:26.660 --> 0:20:28.850 So if you've been through it, if you live through it, 0:20:28.880 --> 0:20:32.050 if you pay attention, there is an instinct, I think, 0:20:32.109 --> 0:20:34.850 a muscle memory that kicks in. But if you don't 0:20:34.910 --> 0:20:37.250 have the experience, you can still be a good investor. 0:20:37.290 --> 0:20:40.169 You just have to know who to listen to. And 0:20:40.230 --> 0:20:45.080 I've cultivated and developed the people I listen to over 0:20:45.700 --> 0:20:48.880 my entire career, but it shifts. And so you have 0:20:49.400 --> 0:20:50.800 to make that transition. 0:20:50.820 --> 0:20:55.830 Okay. And obviously you mentioned NVIDIA and you do look 0:20:55.869 --> 0:20:59.690 at companies that one might not consider a typical value investment. 0:21:00.190 --> 0:21:02.540 How do you kind of handle situations like that where, 0:21:02.560 --> 0:21:05.280 you know, is this a growth company that's actually become 0:21:05.320 --> 0:21:07.960 a value opportunity or is it just a less expensive 0:21:08.040 --> 0:21:11.959 growth stock? You know, how does that fit your philosophy? 0:21:12.080 --> 0:21:15.970 That's a great question. So I guess what I'm going 0:21:15.990 --> 0:21:20.629 to define the valuation using relative price to sales ratio 0:21:20.670 --> 0:21:23.189 for NVIDIA. It was in our buy range. It was 0:21:23.270 --> 0:21:25.859 trading or it is trading at a multiple well below 0:21:25.900 --> 0:21:31.090 the S & P. And it's generating ridiculous earnings growth, 0:21:31.130 --> 0:21:36.170 you know, 150 percent, then 60 percent in subsequent years. 0:21:36.550 --> 0:21:39.750 But more importantly, you have a CEO who came out 0:21:39.830 --> 0:21:41.790 and nobody's talking about this. He came out about four 0:21:41.810 --> 0:21:44.590 or five months ago and he said we're going to 0:21:45.250 --> 0:21:48.869 he didn't say we're going to de-emphasize long, large language models, 0:21:48.910 --> 0:21:51.450 which we are now calling Frontier. But he did say 0:21:51.490 --> 0:21:56.500 we're going to turn our focus to sovereigns and industries. Well, 0:21:56.780 --> 0:21:59.359 that's huge because I think what we've learned from the 0:21:59.400 --> 0:22:04.920 last couple of weeks is that the LLMs are, I think, 0:22:05.020 --> 0:22:08.560 a little bit concerned about their moats as everything or 0:22:08.680 --> 0:22:11.870 as many things move to open weight. Muse, I think, 0:22:11.920 --> 0:22:16.490 just put an exclamation point on that question. So NVIDIA 0:22:16.530 --> 0:22:19.910 had already made the shift. And then secondly, when everybody, 0:22:20.390 --> 0:22:22.950 and this is recent, has been wringing their hands over 0:22:23.010 --> 0:22:26.219 the end of humanity. which I think is nonsense. I've 0:22:26.260 --> 0:22:28.719 heard it throughout my life. That's the other good thing 0:22:28.770 --> 0:22:31.189 about living a while. When I was a kid, we 0:22:31.230 --> 0:22:33.669 used to hide under the desks in school. It was 0:22:33.750 --> 0:22:35.710 part of a drill that we had to do called 0:22:35.750 --> 0:22:38.490 duck and cover. And the reason for that was that 0:22:38.840 --> 0:22:42.140 the Russians might drop a nuclear bomb I've never figured 0:22:42.200 --> 0:22:44.240 out how hiding under my desk was going to protect 0:22:44.260 --> 0:22:46.220 me from that. But that is something we did. And 0:22:46.280 --> 0:22:49.560 it was end of humanity, Armageddon kind of stuff that, 0:22:49.700 --> 0:22:53.460 you know, you go through history. Same thing with nuclear power. 0:22:53.520 --> 0:22:55.590