WEBVTT - Inside Active: T. Rowe Price’s White on Four-Pillar Investing 0:00:13.160 --> 0:00:16.279 Welcome to Inside Active, a podcast about active managers that 0:00:16.360 --> 0:00:21.000 goes beyond soundbites and headlines and looks deeper into the processes, challenges, 0:00:21.040 --> 0:00:24.600 and philosophies and security selection. I'm David Cone, I, lead 0:00:24.680 --> 0:00:28.000 mutual fund and active research at Bloomberg Intelligence. Today, my 0:00:28.120 --> 0:00:33.000 cost is Michael Casper, Senior US equity strategist at Bloomberg Intelligence. Mike, 0:00:33.080 --> 0:00:34.280 thanks for joining me today. 0:00:34.720 --> 0:00:35.320 Thanks David. 0:00:36.760 --> 0:00:39.920 So this is actually our last episode of twenty twenty five, 0:00:40.479 --> 0:00:43.400 and as we head into the year end and into 0:00:43.479 --> 0:00:45.800 next year, I wanted to ask about a note you 0:00:45.840 --> 0:00:48.800 put out earlier in the week. You know, basically on 0:00:48.840 --> 0:00:51.960 what two three earnings are signaling for the market. Could 0:00:51.960 --> 0:00:54.000 you give our audience kind of a brief overview of 0:00:54.320 --> 0:00:54.960 what you're seeing. 0:00:55.560 --> 0:00:58.320 Yeah, so the third quarter was obviously a blowout quarter. 0:00:58.800 --> 0:01:01.120 We doubled the preseason expectation for the S and P 0:01:01.240 --> 0:01:04.920 five hundred, nearly doubled the preseason expectation for the Russell 0:01:04.959 --> 0:01:09.679 two thousand revenue growth. And really what I'm seeing in 0:01:09.720 --> 0:01:12.680 the earning stream is a lot of green signs, a 0:01:12.720 --> 0:01:15.119 lot of green shoots. I think they're just a little 0:01:15.160 --> 0:01:17.320 bit less bright than they were in the second quarter. 0:01:17.440 --> 0:01:21.360 So what I'm talking about there is revision momentum, specifically 0:01:22.240 --> 0:01:25.759 cyclical minus defensive earnings. We're hitting a peak on that, 0:01:26.240 --> 0:01:30.720 but revision momentum also has peaked and is starting to 0:01:30.720 --> 0:01:33.119 come down. What I mean by revision momentum is the 0:01:33.200 --> 0:01:36.399 number of companies with hikes, number of companies with cuts 0:01:36.400 --> 0:01:40.559 over the total number of companies that reported. And why 0:01:40.600 --> 0:01:44.360 that's coming down a little bit is just, you know, 0:01:44.680 --> 0:01:47.720 we had such dramatic cuts in the beginning of the 0:01:47.800 --> 0:01:50.800 year as a result of Liberation Day and a result 0:01:50.840 --> 0:01:52.800 of all the tariffs that were flowing through the system. 0:01:53.080 --> 0:01:56.560 Consensus got it completely wrong for twenty twenty five kind 0:01:56.560 --> 0:01:59.680 of yet again, they weren't necessarily great in twenty twenty 0:01:59.680 --> 0:02:01.880 four either, but they got it completely wrong in twenty 0:02:01.920 --> 0:02:03.840 twenty five and they really had to walk that back. 0:02:04.520 --> 0:02:06.640 And much of that happened in the first and second 0:02:06.720 --> 0:02:09.360 quarters as those results rolled in and they were better 0:02:09.400 --> 0:02:13.280 than expected. Third quarter again better than expected, but it's 0:02:13.280 --> 0:02:15.680 a little bit less robust than you know, a double 0:02:15.680 --> 0:02:18.280 digit gain off a two percent expectation like we saw 0:02:18.280 --> 0:02:21.320 in the second quarter, So that's a little bit less green. 0:02:21.639 --> 0:02:24.840 Cyclical minus defensive earnings I mentioned before, we're hitting a 0:02:24.880 --> 0:02:29.000 peak on that. Typically I look for that to peak 0:02:29.120 --> 0:02:32.200 and wane to signal some volatility for the market. And 0:02:32.240 --> 0:02:35.600 the earnings bar is very high going into twenty twenty six. 0:02:35.639 --> 0:02:38.320 Whether we can hit that or not remains to be seen. 0:02:38.360 --> 0:02:43.400 I will mention though that consensus has only overshot once 0:02:43.560 --> 0:02:46.840 in the past four years, so quarters on the preseason 0:02:46.840 --> 0:02:49.639 expectation for the S and P five hundred. So yeah, 0:02:49.680 --> 0:02:51.519 the bar is a little bit high. Typically that means 0:02:51.520 --> 0:02:54.720 a little bit more volatility, given you know, earnings are 0:02:54.720 --> 0:02:57.000 already baked in, but that's yet to be seen in 0:02:57.000 --> 0:02:57.760 twenty twenty six. 0:02:58.560 --> 0:03:02.320 Well, certainly be interesting to watch. Much Speaking of the markets, 0:03:02.400 --> 0:03:05.360 I do want to introduce today's guest. Justin White, is 0:03:05.360 --> 0:03:08.799 a portfolio manager of the US multicap growth equity strategy 0:03:08.840 --> 0:03:12.760 at TROW Price, including the trow Price All Cap Opportunities 0:03:12.760 --> 0:03:16.920 fund ticker PRWAX. Justin, thank you for joining us on 0:03:16.960 --> 0:03:18.160 our last episode of the year. 0:03:18.960 --> 0:03:19.760 Thanks for having me. 0:03:20.680 --> 0:03:24.120 So let's start with your process. The four Pillars framework 0:03:24.280 --> 0:03:27.440 is central to your process. How did this framework evolve 0:03:27.480 --> 0:03:29.520 over time and do you ever feel like you have 0:03:29.600 --> 0:03:32.799 to bend or adapt it? When the markets, you know, change. 0:03:33.720 --> 0:03:36.440 Sure, just to kind of get everybody on the same 0:03:36.520 --> 0:03:39.400 page who might not be familiar with with my process. 0:03:39.760 --> 0:03:43.040 Four pillars is the stock picking framework that drives my 0:03:43.120 --> 0:03:46.160 decision making in the portfolio. And the way to think 0:03:46.200 --> 0:03:49.960 about it is each pillar is an incremental reason for 0:03:50.040 --> 0:03:53.440 a fundamental investor to want to own a stock. And 0:03:53.520 --> 0:03:56.920 the idea is that if you can stack attractive attributes together, 0:03:57.520 --> 0:04:00.480 you have a high probability of that stock up reforming 0:04:01.000 --> 0:04:03.320 because there are lots of people who could be interested 0:04:03.320 --> 0:04:06.400 in buying it for a lot of different logical reasons, right, 0:04:06.440 --> 0:04:08.600 And so the four pillars I look for, but for 0:04:08.680 --> 0:04:12.560 high quality businesses. Look for businesses that have potential for 0:04:12.680 --> 0:04:18.919 positive estimate revisions. Businesses with fundamental acceleration and valuation is 0:04:18.960 --> 0:04:21.800 the fourth pillar. So just how did I kind of 0:04:21.839 --> 0:04:24.120 come up with this? So I joined TROW, you know, 0:04:24.160 --> 0:04:27.000 seventeen years ago as a career switcher. Then didn't know 0:04:27.040 --> 0:04:29.600 what I was doing, had to figure it out. So 0:04:29.800 --> 0:04:32.760 I took that whole you know, Warren Buffett mental models 0:04:32.800 --> 0:04:35.520 approach to heart, and the first year or two I 0:04:35.600 --> 0:04:38.240 was in this in my seat as an analyst, I 0:04:38.400 --> 0:04:42.360 just you know, tried to write down notes about lessons learned. 0:04:42.720 --> 0:04:45.680 For example, in two thousand and nine, when a company 0:04:45.720 --> 0:04:49.600 that was seeing negative revenue growth and the stock started working. 0:04:50.160 --> 0:04:53.240 It kind of didn't understand why, but after talking to 0:04:53.279 --> 0:04:56.400 other pms, they're like, oh, it's because revenue growth bottomed. 0:04:56.400 --> 0:04:59.280 It went from negative twenty percent to negative sixteen percent 0:04:59.440 --> 0:05:02.640 year over year. That's why it's working. Right. So anyway, 0:05:03.360 --> 0:05:05.480 over two to three years, I collapsed to all these 0:05:05.520 --> 0:05:09.120 mental models into the four pillars. I started using this 0:05:09.160 --> 0:05:12.400 framework as an analyst in about the twenty eleven timeframe 0:05:12.680 --> 0:05:16.200 and really haven't changed it at all during my tenure. 0:05:16.680 --> 0:05:20.720 You know, each pillar has been approximately equal weighted, so 0:05:20.839 --> 0:05:23.080 you know, save weight to quality and positive visions and 0:05:23.120 --> 0:05:26.599 acceleration and valuation. The one thing I would mention is 0:05:26.600 --> 0:05:29.720 that recently, as as market structure has changed, I've been 0:05:29.760 --> 0:05:32.039 giving a little bit more weight to the quality pillar. 0:05:33.240 --> 0:05:35.840 Okay, so actually it was kind of goes right into 0:05:35.880 --> 0:05:38.239 my next question is when you're looking at a company 0:05:38.360 --> 0:05:41.479 using the four pillars. You know you mentioned it's you know, 0:05:41.800 --> 0:05:45.000 equal weighted, but you know what happens when one looks 0:05:45.040 --> 0:05:47.880 strong as you mentioned, you know, quality, you're really focusing 0:05:47.920 --> 0:05:51.039 on when something else, like maybe valuation might not be 0:05:51.080 --> 0:05:52.520 as strong. How do you balance that? 0:05:53.360 --> 0:05:56.760 Yeah, it's a good question. So the four pillars is 0:05:56.880 --> 0:06:00.960 a body of evidence approach. Right, you look for stocks 0:06:00.960 --> 0:06:05.040 that have enough pillars working for you strongly enough, and 0:06:05.080 --> 0:06:07.880 not many pillars working against you. Right, You don't need 0:06:07.960 --> 0:06:11.200 all four to be positive. So in fact, it's quite 0:06:11.320 --> 0:06:13.520 rare to have all four working for you at the 0:06:13.520 --> 0:06:16.400 same time. And when that happens, you make a big bet, 0:06:16.560 --> 0:06:19.680 like in Nvidia end of twenty twenty two, like was 0:06:19.680 --> 0:06:22.120 scored awesome on all four pillars, and kind of we 0:06:22.480 --> 0:06:26.040 see what happened thereafter. But I'd say, like to kind 0:06:26.040 --> 0:06:29.000 of answer the questions, you can get to four pillars, 0:06:29.720 --> 0:06:32.880 get to yes in a number of different ways. Right. So, 0:06:33.080 --> 0:06:37.000 if there's a really expensive stock like pal Andeer, where 0:06:37.120 --> 0:06:42.159 the valuation is very difficult to justify, right, but it's 0:06:42.160 --> 0:06:46.680 a super high quality business, high margin rapid growth estimates 0:06:46.720 --> 0:06:49.240 have been coming up a lot, you know, the rate 0:06:49.279 --> 0:06:53.040 of revenue growth they're seeing in dollar terms keeps accelerating. 0:06:53.520 --> 0:06:56.680 You know, it's one where even though valuation is negative, 0:06:56.720 --> 0:06:59.080 there's enough good stuff in other parts of the framework 0:06:59.160 --> 0:07:03.280 that you can justify having a small overweight. You know, 0:07:04.279 --> 0:07:07.800 you can also own lower quality stocks if they check 0:07:07.839 --> 0:07:12.280 all the other boxes. Historically, financials don't sort to the 0:07:12.280 --> 0:07:14.520 top of the pack in terms of business model quality. 0:07:14.640 --> 0:07:17.400 I mean, some are better than others, right, But I've 0:07:17.440 --> 0:07:20.880 been overweight banks and capital market stocks this year on 0:07:20.960 --> 0:07:26.400 the view that the starting valuations were attractive. They're being deregulated, 0:07:26.440 --> 0:07:30.000 which is going to be good for returns. Capital markets 0:07:30.000 --> 0:07:32.800 activity was improving from a trough as a kind of 0:07:32.840 --> 0:07:35.520 Trump cut a lot of red tape and allow more 0:07:35.560 --> 0:07:38.040 activity to happen, and that basically is a set up 0:07:38.080 --> 0:07:41.320 for higher returns and higher estimates. So I'd say that 0:07:41.360 --> 0:07:45.520 it's a body of evidence approach, and it instills a 0:07:45.600 --> 0:07:48.480 cell discipline as well, which is important to point out 0:07:48.880 --> 0:07:51.640 because you know, when a stock checks a lot of 0:07:51.680 --> 0:07:53.680 the boxes, I buy it, and when it doesn't check 0:07:53.720 --> 0:07:56.120 a lot of the boxes, I sell it. This led 0:07:56.120 --> 0:07:58.440 me to sell a lot of my tech exposure in 0:07:58.480 --> 0:08:00.160 late twenty twenty one. 0:08:00.440 --> 0:08:03.120 Well, it makes sense. There's something else I wanted to 0:08:03.160 --> 0:08:05.360 ask you about. Is you know I've read you describe 0:08:05.360 --> 0:08:08.880 your research as pattern recognition, you know, basically looking at 0:08:08.880 --> 0:08:12.640 how the world fits together and making sense of what's happening. 0:08:12.960 --> 0:08:15.000 You kind of walk us through, you know, a recent 0:08:15.040 --> 0:08:17.720 example of how how this you know, might have worked 0:08:17.760 --> 0:08:20.480 for you and how that translated into an investment. 0:08:21.480 --> 0:08:24.720 Sure, so I'd begin by answering by saying that four 0:08:24.760 --> 0:08:28.880 pillars is essentially how I describe my pattern recognition, right, 0:08:29.040 --> 0:08:33.760 because it's a the each pillar kind of is a 0:08:33.800 --> 0:08:35.280 reason for people who want to buy a stock, And 0:08:35.360 --> 0:08:38.520 so that's kind of a pattern I observed over kind 0:08:38.520 --> 0:08:41.960 of over time. But let me start with a historical 0:08:41.960 --> 0:08:44.120 example to get to your question, and that a more 0:08:44.160 --> 0:08:46.720 recent one, because the historical example I think is a 0:08:46.720 --> 0:08:50.480 fun one. Right. So there's a company called Smile Direct Club, 0:08:50.559 --> 0:08:53.560 which kind of you know, doesn't it's not not listed anymore, 0:08:54.679 --> 0:08:59.120 and they had their IPO and it's basically an invisiline company, 0:08:59.160 --> 0:09:02.720 you know, clear retainers. And the reason I passed on 0:09:02.840 --> 0:09:06.840 the IPO was because I had studied Netflix's business model. 0:09:08.040 --> 0:09:09.880 People like, what does Smile Direct Club have to do 0:09:09.920 --> 0:09:15.400 with Netflix? Well, both their consumer products, but Netflix is 0:09:15.440 --> 0:09:18.920 like easy to sign up, easy to cancel, the cost 0:09:18.960 --> 0:09:21.160 is pretty low, the value is pretty high, Like it's 0:09:21.200 --> 0:09:25.720 a low friction experience in contrast Smiled Rec Club. Right, 0:09:25.840 --> 0:09:29.760 it's a considered purchase, high cost, high friction, Like you 0:09:29.840 --> 0:09:31.880 have to go in the store, you have to keep 0:09:31.960 --> 0:09:35.720 using the products you know reliably every day. So basically, 0:09:36.480 --> 0:09:39.080 Smiled Rec Clubs the model had attributes that would argue 0:09:39.120 --> 0:09:43.600 for a much shallower s curve of adoption than Netflix. 0:09:44.080 --> 0:09:46.160 People just aren't going to penetrate the tam as quickly. 0:09:46.840 --> 0:09:50.160 Yet when Smile Direct Club came public, they claim they'd 0:09:50.200 --> 0:09:54.760 penetrate their market by ten points a year. Netflix, in 0:09:54.800 --> 0:09:57.280 the sweet spot of its adoption curve only outed a 0:09:57.280 --> 0:10:00.200 few percent of US households in any given year. Kind 0:10:00.200 --> 0:10:03.480 of knew that SDC's numbers were unrealistic in I passed, right, 0:10:03.480 --> 0:10:05.320 So that's that's one one way to get at it. 0:10:05.600 --> 0:10:08.520 But more recently, I'd say, you know, Carvana is a 0:10:08.559 --> 0:10:12.439 major bet in the fond. It's been a very positive contributor. 0:10:13.080 --> 0:10:16.120 And the powder recognition here is that, you know, Carvana 0:10:16.240 --> 0:10:18.520 is a business that a lot of people think is 0:10:18.760 --> 0:10:21.480 you know, they're not sure how how high quality it 0:10:21.520 --> 0:10:23.920 is or not. But when I look at it, I 0:10:23.960 --> 0:10:27.400 see a business targeting a huge market with a first 0:10:27.440 --> 0:10:31.680 mover advantage, with the material cost advantage very early in 0:10:31.720 --> 0:10:34.120 the s curve. Right, they're one and a half percent 0:10:34.240 --> 0:10:38.000 penetrated in their market, and powder recognition tells you that 0:10:38.000 --> 0:10:40.600 when you have a company this kind of has a 0:10:40.679 --> 0:10:43.440 really open ended runway and a competitive advantage that's going 0:10:43.480 --> 0:10:46.560 to persist. You know, don't worry about the valuation, don't 0:10:46.559 --> 0:10:49.679 worry about the quarterly estimates. The structural tailwinds are just 0:10:49.720 --> 0:10:52.680 too strong and pursas for so long that valuation will 0:10:52.720 --> 0:10:55.840 take care of itself. So so that's one that kind 0:10:55.840 --> 0:10:58.600 of we've done it. We bought quite a quite a 0:10:58.600 --> 0:11:00.960 bit earlier, and it's a it's it's been a performer 0:11:01.000 --> 0:11:01.400 this year. 0:11:01.880 --> 0:11:05.199 Okay, great, And you know with your fund it's it's 0:11:05.200 --> 0:11:07.800 an all cap, so you get a lot of flexibility 0:11:07.880 --> 0:11:11.559 in what you can invest in. And so you've also 0:11:11.640 --> 0:11:13.560 said before, you know, when I've looked at you know, 0:11:13.600 --> 0:11:17.960 some of the things online, the il zigmore growth zagmar value, 0:11:18.200 --> 0:11:21.200 you know, tilt up cap or down cap. How much 0:11:21.240 --> 0:11:24.200 of that is tactical versus like long term in your view. 0:11:24.240 --> 0:11:27.280 It's a good question, and at the risk of sounding repetitive, 0:11:27.320 --> 0:11:30.920 for one sentence, I make buy and sell decisions based 0:11:30.960 --> 0:11:34.920 on the four pillars framework, and so when value stocks 0:11:34.960 --> 0:11:39.120 score more strongly, I own more value stocks, right. I 0:11:39.480 --> 0:11:42.000 think the spirit of the question is kind of getting 0:11:42.040 --> 0:11:44.840 at what are my biases and as like, what kind 0:11:44.840 --> 0:11:48.280 of investor am I know? Deep in my bones? And 0:11:48.600 --> 0:11:51.040 I think the answer to that question is that I 0:11:51.120 --> 0:11:52.400 have a growth bias. 0:11:52.880 --> 0:11:53.120 Uh. 0:11:53.280 --> 0:11:55.520 Most of the time my fund has had a growth 0:11:55.600 --> 0:12:00.080 tilt versus the underlying benchmark. And the reason for that 0:12:00.679 --> 0:12:03.439 is because one of my four pillars is the quality pillar, 0:12:04.600 --> 0:12:08.720 and the highest quality stocks tend to outgrow the economy. 0:12:09.760 --> 0:12:15.040 Lower quality stocks outgrow the economy less often. So value 0:12:15.040 --> 0:12:18.079 stocks are often at a starting point at a disadvantage 0:12:18.120 --> 0:12:20.880 because on average they score lower on one of the pillars. 0:12:21.559 --> 0:12:24.320 You know, all else equal, I'd rather own Microsoft over 0:12:24.360 --> 0:12:25.960 time than a brick and mortar retailer. 0:12:26.200 --> 0:12:26.400 Right. 0:12:26.800 --> 0:12:29.760 So I point out that in late twenty twenty one 0:12:29.800 --> 0:12:32.559 and most of twenty twenty two I did not have 0:12:32.600 --> 0:12:35.400 a growth tilt, and that is because growth stocks scored 0:12:35.440 --> 0:12:40.240 really poorly then, especially tech stocks. The issue was that 0:12:40.280 --> 0:12:43.720 we had peakish growth from the pandemic that was about 0:12:43.720 --> 0:12:48.840 to decelerate. We had extremely high valuations, We had consensus 0:12:48.920 --> 0:12:52.520 estimates that were not anticipating any deceleration and so looked 0:12:52.640 --> 0:12:55.800 generally too high. And so you know, I went zero 0:12:55.800 --> 0:12:59.720 eight Amazon went zero weight Meta With hindsight, this was 0:12:59.760 --> 0:13:03.920 the right move. But the reason that I tiled down 0:13:03.920 --> 0:13:05.960 the growth that and added to some value sector was 0:13:06.000 --> 0:13:08.480 really because of the four pillars framework signaling that was 0:13:08.520 --> 0:13:11.000 the right thing to do. Yeah, makes sense. 0:13:12.080 --> 0:13:13.520 And you know, one of the thing I know before 0:13:13.600 --> 0:13:15.800 it might gets into some of the more market focused 0:13:16.520 --> 0:13:20.679 topics is you know, you've also mentioned in your research 0:13:20.800 --> 0:13:22.880 that you come across a lot of data and a 0:13:22.880 --> 0:13:25.560 lot of it doesn't matter, and you're really focusing on 0:13:25.600 --> 0:13:28.200 a couple of things. What are the one or you know, 0:13:28.240 --> 0:13:30.559 maybe two data points state you think are really being 0:13:30.640 --> 0:13:32.040 underappreciated by the market. 0:13:32.559 --> 0:13:36.360 Yeah, so when you say what's underappreciated by the market, 0:13:36.600 --> 0:13:39.160 I do want to point out that that's a different 0:13:39.240 --> 0:13:43.240 question than underappreciated by the media. So just because we 0:13:43.280 --> 0:13:45.840 see headlines about AI bubble one week or it doesn't mean 0:13:45.880 --> 0:13:49.600 the market's doing that or the prices reflect that they 0:13:49.640 --> 0:13:55.200 believe that. So the market's generally brutally dispassionate and right 0:13:55.320 --> 0:13:58.480 most of the time. But in terms of the prices, 0:13:58.480 --> 0:13:59.240 we see out there. 0:13:59.240 --> 0:13:59.440 Now. 0:13:59.520 --> 0:14:01.280 I think they're are a couple things top of mind 0:14:01.320 --> 0:14:05.000 that the market may be missing or getting wrong. I 0:14:05.000 --> 0:14:06.719 don't know if I call these data points per se, 0:14:06.840 --> 0:14:09.200 but but they're just a couple areas where I'm disagreeing 0:14:09.600 --> 0:14:13.360 with the market. The first one is I think the 0:14:13.400 --> 0:14:18.080 market is still too complacent about believing the depreciation schedules 0:14:18.320 --> 0:14:22.800 for AI chips among the cloud platforms. Right. I personally 0:14:22.840 --> 0:14:25.960 don't believe the GPUs have a six year useful life. 0:14:27.160 --> 0:14:29.440 And if these companies are buying chips and advertising them 0:14:29.440 --> 0:14:33.040 over six years but they only last four, then their 0:14:33.080 --> 0:14:37.000 earnings quality is being overstated and returns are being overstated. 0:14:37.720 --> 0:14:40.600 Oracle and core Weave are starting to snit this out 0:14:40.800 --> 0:14:43.320 because they're kind of the tip of the spear, but personally, 0:14:43.360 --> 0:14:45.680 I think there's still a ways to go. I mean, 0:14:45.680 --> 0:14:49.320 if Oracles chips last four years instead of six, then 0:14:49.400 --> 0:14:52.440 they're locking in a half trillion dollar backlog at value 0:14:52.440 --> 0:14:55.120 destructive return levels, and that would be that would be 0:14:55.160 --> 0:14:58.520 a problem if that's the case. One other thing I 0:14:59.040 --> 0:15:03.320 kind of struggling to understand here is the markets enthusiasm 0:15:03.480 --> 0:15:08.880 for the value potential of humanoid robots and autonomous driving. 0:15:09.600 --> 0:15:13.400 And my hang up here is that, you know, like 0:15:13.520 --> 0:15:15.080 Tesla has a market have of one and a half 0:15:15.120 --> 0:15:20.160 trillion dollars, and the logic underlying it feels kind of lazy, 0:15:20.560 --> 0:15:24.040 right as an industry structure issue. You know, suppose Tesla 0:15:24.040 --> 0:15:26.720 figures out humanoid robots, do you think China is going 0:15:26.800 --> 0:15:29.160 to figure it out too? Do you think China is 0:15:29.160 --> 0:15:31.840 going to have a dozen manufacturers? Will they be selling 0:15:31.880 --> 0:15:33.680 those robots below cost for a decade? 0:15:34.160 --> 0:15:34.360 Right? 0:15:34.840 --> 0:15:37.120 And autonomy it's not going to be winner take all. 0:15:37.360 --> 0:15:39.760 There's a lot of Chinese options, There's Weamo, et cetera. 0:15:40.240 --> 0:15:43.960 And so so I feel like this idea that you know, 0:15:44.440 --> 0:15:49.120 one company is going to have monopoly type profits and 0:15:49.160 --> 0:15:50.840 we are confident that that's going to be true for 0:15:50.880 --> 0:15:54.920 decades to come, I'm a little bit unsure about that. 0:15:55.640 --> 0:15:59.680 Do market valuations in general, and maybe particularly for tech, 0:15:59.720 --> 0:16:02.960 do they concern you at all in terms of your portfolio? 0:16:03.760 --> 0:16:09.000 The short answer is absolutely, the valuation concerns me because 0:16:09.040 --> 0:16:12.560 it's always less comfortable when you have to invest with 0:16:12.560 --> 0:16:17.040 a lower margin of safety. But personally, I think that 0:16:17.120 --> 0:16:20.320 stocks tend to follow earnings and will continue to cooperate 0:16:20.360 --> 0:16:24.200 as long as earnings cooperate. And you know, I think 0:16:24.240 --> 0:16:26.280 you mentioned at the start of the of the podcast 0:16:26.320 --> 0:16:29.040 there's been some broadening out of earnings across the market, 0:16:29.080 --> 0:16:32.880 including in small caps. So so you know, just because 0:16:32.920 --> 0:16:36.040 the valuation is uncomfortable doesn't make that a good timing tool. 0:16:36.360 --> 0:16:40.520 It just means there's more negative asymmetry if we have 0:16:40.520 --> 0:16:44.920 have a market hiccop. So one argument in support of 0:16:44.920 --> 0:16:47.160 the higher multiples, by the way, is that the mix 0:16:47.280 --> 0:16:50.640 of stocks in the markets has changed over time. It 0:16:50.680 --> 0:16:54.800 has become higher quality. Right, the megacap businesses are very 0:16:54.880 --> 0:16:59.400 high quality businesses, so some degree of premium is warranted 0:16:59.480 --> 0:17:04.280 versus his. But the areas that make me really uncomfortable 0:17:04.840 --> 0:17:07.600 are stocks where you kind of know approximately what the 0:17:07.640 --> 0:17:09.679 earnings growth is going to be and you just have 0:17:09.720 --> 0:17:13.320 to pay too much for it. Right, So seeing Walmart 0:17:13.480 --> 0:17:15.959 pushing forty times earnings, like, there's a lot of good 0:17:16.000 --> 0:17:19.400 stuff happening at Walmart. But now, even if they do 0:17:19.440 --> 0:17:21.359 grow earnings that at a rate a little better than 0:17:21.400 --> 0:17:24.439 the street expects, couldn't that not go sideways for three years? 0:17:24.920 --> 0:17:28.200 You know? I also think some of the more commoditized 0:17:28.640 --> 0:17:33.960 AI data center component stocks going parabolic because they're in shortage, 0:17:34.200 --> 0:17:36.880 like cables that connect one server to another, and there's 0:17:36.920 --> 0:17:39.400 not enough of them, and so stocks are up tenfold 0:17:39.440 --> 0:17:41.520 in a year. You know, a lot of these stocks 0:17:41.520 --> 0:17:43.399 are beating numbers, but they make no sense on a 0:17:43.440 --> 0:17:47.040 DCF basis, and so when fundamentals peak, in turn, a 0:17:47.040 --> 0:17:48.760 lot of these are going to be down eighty ninety 0:17:48.760 --> 0:17:52.479 percent from the peak. So I say that there are 0:17:52.680 --> 0:17:56.280 areas that make me more uncomfortable and some areas where 0:17:56.320 --> 0:17:59.480 I feel like it's more okay. But on balance, valuations 0:17:59.520 --> 0:18:00.120 are pretty. 0:18:01.119 --> 0:18:04.040 And it seems that tech and maybe more specifically AI 0:18:04.160 --> 0:18:07.240 companies are transitioning from an asset light to a capital 0:18:07.280 --> 0:18:10.720 intensive model with all of this infrastructure build out that's 0:18:10.760 --> 0:18:13.760 kind of necessary to support that theme. Does that change 0:18:13.760 --> 0:18:16.960 how you value companies at all or change your or 0:18:17.040 --> 0:18:18.600 change your view on growth companies? 0:18:19.520 --> 0:18:24.240 Yes, this is a super important question. The rising capital 0:18:24.280 --> 0:18:28.480 intensity of the hyperscalar platforms makes it harder to make 0:18:28.520 --> 0:18:31.320 big bets in them than before. And here's how I 0:18:31.440 --> 0:18:36.320 frame it. So in the past financial metrics that say meta, 0:18:36.640 --> 0:18:39.600 they all trended the same way. Right when revenue was growing, 0:18:39.680 --> 0:18:42.439 ebit was growing, free cashal was growing they all trended 0:18:42.400 --> 0:18:46.320 in the same direction, and now there's this divergence, right, 0:18:46.800 --> 0:18:49.439 and get a setup where you're like, Okay, suppose Meta's 0:18:49.480 --> 0:18:53.240 next quarter, Suppose they beat on revenue by quite a 0:18:53.240 --> 0:18:56.440 bit but miss on ebit because they're investing so heavily 0:18:56.440 --> 0:18:59.000 in AI and guide to no free cash on in 0:18:59.000 --> 0:19:02.560 twenty twenty six. How does the stock process that? It 0:19:02.640 --> 0:19:05.200 depends what people want to focus on, and that's it's 0:19:05.240 --> 0:19:08.920 just harder to know. So essentially the degree of difficulty 0:19:08.960 --> 0:19:15.160 has gotten harder. Oracle has robust earnings growth, accelerating revenue growth, 0:19:15.640 --> 0:19:18.840 and burns a ton of cash. And that cash burns amplifying. 0:19:19.240 --> 0:19:22.480 Like if you look at a chart graphing oracles free 0:19:22.480 --> 0:19:25.520 cash flow against its share price over the last three years, 0:19:25.720 --> 0:19:28.760 it's like a mirror image. It's fascinating. Right, The more 0:19:28.800 --> 0:19:31.640 cash they burn, the more the stock goes parabolic up. 0:19:32.040 --> 0:19:34.360 So I'm not trying to pick on Meta and Oracle, 0:19:34.400 --> 0:19:36.639 but the point is just it's getting harder to score 0:19:36.680 --> 0:19:39.800 these stocks cleanly on four pillars because it's harder to 0:19:39.800 --> 0:19:44.479 score each pillar. Right, is Oracle getting is it accelerating? Well? 0:19:44.960 --> 0:19:47.240 Revenues are, but free cash flow is the wrong way. 0:19:47.720 --> 0:19:50.760 Is meta cheap? Well, it's twenty times earnings, but one 0:19:50.800 --> 0:19:53.440 hundred times free cash flow right, And it's only twenty 0:19:53.480 --> 0:19:56.119 times earnings if you trust the DNA assumptions on their chips. 0:19:56.240 --> 0:20:00.720 So overall, this dynamic is causing you to rotate capital 0:20:01.080 --> 0:20:03.280 to other names and other pockets at the market where 0:20:03.280 --> 0:20:06.359 the setup feels cleaner. Not that I'm running, you know, 0:20:06.920 --> 0:20:09.879 rapidly away from the mag seven, but on balance, the 0:20:09.920 --> 0:20:12.080 incremental dollar of capital is going elsewhere. 0:20:12.800 --> 0:20:15.040 I'm a macro guy at heart, and it seems rates 0:20:15.040 --> 0:20:17.879 are coming down. You know, the White House is influencing 0:20:17.920 --> 0:20:20.719 the FED a little bit and might install their preferred 0:20:20.760 --> 0:20:23.439 FED chair in twenty twenty six in fact, and then 0:20:23.680 --> 0:20:26.480 they may even come down even faster. Does that concern 0:20:26.560 --> 0:20:29.920 you that there might be a lasting shift from growth 0:20:29.920 --> 0:20:31.040 style to value style. 0:20:31.960 --> 0:20:38.160 Yeah, so, I personally wouldn't make the connection that lower 0:20:38.240 --> 0:20:43.439 rates necessarily means you buy value and sell growth. I mean, 0:20:43.440 --> 0:20:46.480 if you took your business school textbook out and thought 0:20:46.480 --> 0:20:50.000 about the concept of duration, theoretically, duration will argue for 0:20:50.040 --> 0:20:52.639 the opposite. Right, lower rates should be more of a 0:20:52.680 --> 0:20:56.240 tailwind for growth stocks than value stocks because more of 0:20:56.240 --> 0:20:59.280 their values terminal value, which was more sensitive to changes 0:20:59.320 --> 0:21:02.199 of discount rate. We kind of saw this with profitless 0:21:02.200 --> 0:21:05.520 tech in twenty twenty and early twenty twenty one. So 0:21:05.800 --> 0:21:07.560 I think the answer to the question about, you know, 0:21:07.640 --> 0:21:12.040 value versus growth really comes down to company specific fundamentals. 0:21:12.560 --> 0:21:15.280 I mean, if you force me to abstract and generalize 0:21:15.880 --> 0:21:19.080 that the times that you want to overweight value are 0:21:19.160 --> 0:21:23.520 either when growth stocks look particularly dangerous like they did 0:21:23.720 --> 0:21:26.560 in late twenty twenty one and early twenty two, or 0:21:27.320 --> 0:21:32.000 the economy's early cycle and broadening out because value stocks 0:21:32.040 --> 0:21:35.320 have a heavier cyclical component to them. I point out 0:21:35.320 --> 0:21:38.840 that even though we've seen some breadth in earnings, which 0:21:38.920 --> 0:21:44.600 is encouraging, it's unclear how much magnitude of improvement there's 0:21:44.640 --> 0:21:46.560 going to be in twenty six. It doesn't feel like 0:21:46.800 --> 0:21:49.480 you're starting at a very depressed level with an imminent 0:21:49.600 --> 0:21:53.280 massive acceleration coming. So I think that the case for 0:21:53.359 --> 0:21:56.560 value stocks is more favorable now than it has been. 0:21:57.040 --> 0:22:00.760 But my portfolio is still growth tilted because on four pillars, 0:22:01.040 --> 0:22:03.639