WEBVTT - Fidelity’s Chamovitz, Peck on Opportunistic Value 0:00:12.840 --> 0:00:15.960 Welcome to Inside Active, a podcast about active managers that 0:00:16.040 --> 0:00:18.920 goes beyond sound bites and headlines and looks deeper into 0:00:19.000 --> 0:00:24.160 their processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:24.200 --> 0:00:27.280 i lead mutual fund and active research at Bloomberg Intelligence. 0:00:27.560 --> 0:00:30.920 Today my co host is Michael casper, Us, small cap 0:00:30.960 --> 0:00:34.320 and sector strategist at Bloomberg Intelligence. Mike, thanks for joining 0:00:34.400 --> 0:00:38.320 me today. So you put out a note last week 0:00:38.800 --> 0:00:41.720 on you know, the tariff's effect on small cap earnings 0:00:41.720 --> 0:00:45.760 for your Russell two thousand earning season review. What could 0:00:45.800 --> 0:00:48.120 you tell us about that? You know, what effect is 0:00:48.440 --> 0:00:50.280 tariff's going to have on small cap earning? 0:00:50.920 --> 0:00:54.560 Yeah, so consensus is already you know, pairing back estimates 0:00:54.560 --> 0:00:58.440 pretty significantly. I just want to recap though, a few 0:00:58.440 --> 0:01:01.040 of our model highlights on a fair value model on 0:01:01.080 --> 0:01:04.200 the Russell two thousand and what it suggested based on 0:01:04.280 --> 0:01:07.720 macro conditions at the time when we updated it just 0:01:07.760 --> 0:01:10.360 a couple of weeks ago, it's just about three point 0:01:10.440 --> 0:01:14.240 two percent revenue growth over the next year. Consensus was 0:01:14.280 --> 0:01:17.000 at seven point four percent. Obviously that's gotten paired back 0:01:17.040 --> 0:01:21.240 a little bit since then, But really what investors had priced, 0:01:21.400 --> 0:01:24.959 and a lot of this obviously is contingent on how 0:01:25.040 --> 0:01:28.880 high yield has moved or not really moved, right, So 0:01:28.920 --> 0:01:32.240 we've only had high yield spreads blowout near almost near 0:01:32.280 --> 0:01:35.920 five percent at the worst, and that's a key component 0:01:35.959 --> 0:01:39.360 of our modeled multiple. But given that that hasn't blown 0:01:39.400 --> 0:01:42.480 out yet, you know, tanking the multiple, it would suggest 0:01:42.520 --> 0:01:44.920 that to get to a roughly today's price or so, 0:01:45.360 --> 0:01:47.600 you would need a ten percent revenue contraction over the 0:01:47.680 --> 0:01:51.720 year ahead, and we've kind of seen consensus starting to 0:01:52.640 --> 0:01:56.280 adjust to this reality, right, So, pairing back estimates thus 0:01:56.320 --> 0:01:59.480 far this season, I would note we're at a one 0:01:59.520 --> 0:02:02.720 point one percent gain on a current constituent basis, but 0:02:02.800 --> 0:02:07.760 still down a little over one percent on the actual 0:02:07.840 --> 0:02:10.040 constituency of the ross of two thousand, so the current 0:02:10.040 --> 0:02:12.120 two thousand versus two thousand, and that it was a 0:02:12.160 --> 0:02:16.440 year ago. And estimates have come down pretty much for 0:02:16.639 --> 0:02:19.600 everything but a slew of defensives for the first quarter 0:02:19.639 --> 0:02:22.720 and much of the first half of twenty twenty four 0:02:22.840 --> 0:02:25.480 or twenty twenty five. So what we're really looking for 0:02:25.720 --> 0:02:29.600 is how bad do these estimates get over the next 0:02:29.639 --> 0:02:32.480 several quarters? Are those going to get trimmed even further. 0:02:32.520 --> 0:02:34.960 They've really only taken the acts again to the first 0:02:35.000 --> 0:02:38.760 half of twenty twenty five. The back half is still 0:02:38.800 --> 0:02:42.640 for significant recovery. Obviously, we've got a pretty weak GDP 0:02:42.840 --> 0:02:47.320 print today, but we'll see how bad estimates can get. 0:02:47.560 --> 0:02:51.040 Certainly they are facing some brunt of the tariff turmoil 0:02:51.080 --> 0:02:52.200 that we've gotten so far. 0:02:53.600 --> 0:02:55.880 We'll be interesting to watch, and so I think this 0:02:55.919 --> 0:02:58.320 is a great time to bring on our two guests. 0:02:58.400 --> 0:03:02.120 I'd like to welcome Moreian Peck and Sam Chamovit to 0:03:02.320 --> 0:03:06.200 Inside Active. Morgan and Sam are portfolio managers for the 0:03:06.240 --> 0:03:11.320 Fidelity Low Price Stock Fund ticker FLPSX. Morgan, Sam, thank 0:03:11.320 --> 0:03:12.400 you for joining us today. 0:03:12.960 --> 0:03:15.400 Hi David, I'm Michael. Thanks for having us. 0:03:15.600 --> 0:03:16.680 Thanks for having us. 0:03:17.080 --> 0:03:21.200 So let's begin by learning more about your investment backgrounds. 0:03:21.280 --> 0:03:22.520 We can start with Morgan. 0:03:22.960 --> 0:03:26.880 Sounds great and so I did not grow up with 0:03:27.200 --> 0:03:32.399 much finance experience in my family. My dad was in advertising, 0:03:33.040 --> 0:03:34.040 my mom was a writer. 0:03:34.840 --> 0:03:37.560 I knew that finance was a use for ros Stove, 0:03:38.240 --> 0:03:39.560 but the closest. 0:03:39.160 --> 0:03:42.160 We had in my college to major was economics, which. 0:03:42.040 --> 0:03:45.920 Was not the seeing as finance and my assumers were. 0:03:45.800 --> 0:03:48.080 Of college, a couple of things happened. 0:03:49.160 --> 0:03:52.040 The first one is I stumbled across what looked like 0:03:52.200 --> 0:03:55.200 a business work case study when I had a fils 0:03:55.240 --> 0:03:57.040 that someone had left behind. 0:03:58.240 --> 0:04:00.240 And I lived through it, and I thought, but it 0:04:00.280 --> 0:04:03.240 was so interesting that there was this entire field focused 0:04:03.280 --> 0:04:05.800 on learning about companies and business drivers. 0:04:06.760 --> 0:04:09.600 So I wanted to pursue something related to this case study. 0:04:10.240 --> 0:04:11.440 And at the same time. 0:04:11.240 --> 0:04:14.320 I had a classmate who had had the summer internship 0:04:14.320 --> 0:04:17.960 at Fidelity as an equity research associate, and he was 0:04:18.000 --> 0:04:20.520 the one that explained to me the difference between the 0:04:20.520 --> 0:04:23.240 buy side and the cell side, what the role of 0:04:23.320 --> 0:04:26.840 an equity analyst was at Fidelity, and he encouraged me to. 0:04:27.120 --> 0:04:30.760 Apply, and so I did. And as I was going. 0:04:30.560 --> 0:04:35.120 Through the interview sessions, I was immediately impressed with the caliber. 0:04:34.800 --> 0:04:36.080 Of people who were interviewing me. 0:04:36.680 --> 0:04:39.160 It sounded like a very unique job coming. 0:04:38.920 --> 0:04:40.000 Out of undergraduate. 0:04:40.560 --> 0:04:42.920 I was really drawn to the idea of learning how 0:04:42.920 --> 0:04:46.000 to analyze a business. I liked that the success or 0:04:46.120 --> 0:04:49.840 failure for the job was very quantifiable, and I also 0:04:49.960 --> 0:04:52.760 really liked how much responsibility and impact I could have 0:04:52.880 --> 0:04:54.000 as a young professional. 0:04:54.560 --> 0:04:55.360 So when I was. 0:04:55.320 --> 0:04:58.760 Fortunate enough to get the offer I accepted on the spot. 0:04:58.560 --> 0:05:00.960 And so Fidelities that when we play that I've worked 0:05:00.960 --> 0:05:02.640 at and I've been here for over twenty. 0:05:02.400 --> 0:05:05.480 Years, and I would say that as someone means to 0:05:05.640 --> 0:05:08.719 invest in, working at Faedelities is just a great place 0:05:08.760 --> 0:05:11.360 to learn because we get exposure at a really young 0:05:11.440 --> 0:05:13.400 age to every type of investor. 0:05:14.040 --> 0:05:17.360 And you know, we have legends like world Dad Off and. 0:05:17.400 --> 0:05:19.960 Job's own pasts and everyone in between, and all of 0:05:20.000 --> 0:05:21.240 their both open. 0:05:21.480 --> 0:05:23.919 For me to go in and ask questions and understand 0:05:23.960 --> 0:05:27.200 the process. So early in my career. 0:05:27.080 --> 0:05:31.360 I naturally gravitated towards smaller cap companies and then eventually 0:05:31.480 --> 0:05:33.799 to buy unions. And I think I like them because 0:05:33.800 --> 0:05:35.520 it seemed like it's part of the market. 0:05:36.320 --> 0:05:37.160 I had a higher. 0:05:36.960 --> 0:05:39.680 Success of finding undiscovered gems because few of people are 0:05:39.720 --> 0:05:42.719 just looking so so really who I am as an 0:05:42.760 --> 0:05:45.040 investor day As a function of all of that, as 0:05:45.080 --> 0:05:47.719 well as my kind of successes and failures. 0:05:47.279 --> 0:05:50.599 As an analyst, Great how about you? Sam? 0:05:51.160 --> 0:05:53.000 Similar? Similar to More, I did not grow up in 0:05:53.040 --> 0:05:57.359 a finance householder family. My family was primarily doctors and lawyers, 0:05:57.360 --> 0:06:01.160 so financial literacy and markets were not dinner table talk. 0:06:01.720 --> 0:06:03.800 I didn't know what a portfolio mender was growing up, 0:06:04.880 --> 0:06:07.280 so I started to kind of figure all that out 0:06:07.320 --> 0:06:10.800 in college. So later in my high school years, my 0:06:10.800 --> 0:06:13.200 mom stopped working and she developed an interested investing and 0:06:13.240 --> 0:06:16.760 bought me my first markets investment related books. So overall, 0:06:16.800 --> 0:06:21.320 my start was rather unsophisticated, but a start. Nonetheless, in college, 0:06:21.360 --> 0:06:24.440 I really learned more about finance and investing, so that's 0:06:24.480 --> 0:06:26.760 where i'd say like the passion really started to develop. 0:06:27.839 --> 0:06:31.680 After graduating college, I joined the Investment Associate program at 0:06:31.720 --> 0:06:34.960 Putnam Investments. At Putnam, I worked for and with some 0:06:35.120 --> 0:06:39.920 excellent investors and mentors. Putnam was also very advantageous because 0:06:39.920 --> 0:06:43.760 it was going through a lot of very turbulent times, 0:06:43.800 --> 0:06:47.440 which allowed young people like myself to take a bigger 0:06:47.520 --> 0:06:50.560 role more quickly than normal, which was a great learning opportunity. 0:06:51.320 --> 0:06:54.120 I did well with these roles and continued to move up, 0:06:54.120 --> 0:06:57.640 but after five years, decided that Fidelity was a better 0:06:57.640 --> 0:07:00.880 place for me to continue my career. I moved to 0:07:00.960 --> 0:07:07.280 Fidelity to start our international small cap research team, and 0:07:07.320 --> 0:07:11.400 I did that with Derek Janssen and David Jenkins, who 0:07:11.480 --> 0:07:13.559 both came from the outside to help start that team. 0:07:13.600 --> 0:07:17.760 And both are great investors and close friends to this day. 0:07:19.120 --> 0:07:22.280 And then after a year in Boston for Fidelity, I 0:07:22.360 --> 0:07:25.560 left to help start our Tokyo office, which was sort 0:07:25.560 --> 0:07:28.640 of meant to be a two year stint but became 0:07:28.680 --> 0:07:32.160 a thirteen year adventure, which was absolutely amazing and you know, 0:07:32.160 --> 0:07:34.840 an opportunity to learn to community, to grow as an investor, 0:07:34.920 --> 0:07:39.800 but also you know, some leadership aspects and overalls an individual. 0:07:40.040 --> 0:07:44.080 So I started to transition to fund management of twenty twelve, 0:07:44.120 --> 0:07:47.520 and then I ran the International small Cap fund from 0:07:47.560 --> 0:07:50.720 early twenty fourteen until I think we're out twenty twenty two. 0:07:50.840 --> 0:07:53.440 Or David, who started the International small Cap team of me, 0:07:53.600 --> 0:07:56.520 ultimately took sole responsibility for. 0:07:58.720 --> 0:08:02.280 Cool. You know, both of you are co managers on 0:08:02.320 --> 0:08:04.920 this fund. I'd really like to understand, you know, how 0:08:04.960 --> 0:08:07.080 does it work, you know, the dynamic between the two 0:08:07.120 --> 0:08:10.280 of you. Do you have different responsibilities or you know, 0:08:10.440 --> 0:08:12.600 I guess do you kind of run things by each other? 0:08:14.320 --> 0:08:17.920 Sure, I'm happy to take that. So so co ma management. 0:08:18.280 --> 0:08:19.480 As you point out, it's. 0:08:19.320 --> 0:08:22.320 A pretty broad term, and so the specifics of the 0:08:22.400 --> 0:08:25.680 relationship and the the roles I think are really important to. 0:08:25.640 --> 0:08:28.240 Define just for context. 0:08:28.520 --> 0:08:29.520 Sam and I are. 0:08:29.400 --> 0:08:32.920 Coming up in about thirteen years of co managing various 0:08:32.960 --> 0:08:34.000 funds together. 0:08:33.679 --> 0:08:36.600 And that has been really valuable because it's given us 0:08:36.640 --> 0:08:39.400 a lot of time to determine our definition of co 0:08:39.640 --> 0:08:42.920 management and it's allowed us to build this great relationship 0:08:42.960 --> 0:08:45.760 of mutual respect and trust as investors, and that's really 0:08:45.840 --> 0:08:49.240 the foundation for our teamwork importantly, and they also have 0:08:49.360 --> 0:08:52.800 a lot of experience co managing and pretty much every 0:08:53.240 --> 0:08:54.480 imaginable market. 0:08:54.400 --> 0:08:56.640 Environment, and that means that we know how to. 0:08:56.600 --> 0:09:00.840 Manage to better employers where our investment processes and out 0:09:00.840 --> 0:09:03.920 of favor. But so directly answer your question that the 0:09:03.960 --> 0:09:06.600 way we describe how we work together is really an. 0:09:06.440 --> 0:09:10.360 Investment committee of two. So that means there are those sleeves. 0:09:10.880 --> 0:09:14.719 We co own everything together, and so all of the. 0:09:14.720 --> 0:09:18.080 Fund exposures are decided and analyzed together. 0:09:18.720 --> 0:09:20.880 We monitor the risks of the fund jointly. 0:09:22.240 --> 0:09:25.080 And the only area that we really kind of split 0:09:25.200 --> 0:09:27.760 up and dividing conquers and idea generation. 0:09:27.960 --> 0:09:30.120 We think it's really out that you just have two 0:09:30.160 --> 0:09:32.319 people on the funds, you know. 0:09:32.360 --> 0:09:35.000 Scaring the globe for new ideas. 0:09:34.720 --> 0:09:36.840 But as soon as one of us finds in our idea, 0:09:36.960 --> 0:09:39.679 we bring the other person into the group. 0:09:39.880 --> 0:09:40.800 And so most of. 0:09:40.720 --> 0:09:43.080 The time Sam and I are pitching each other stocks 0:09:43.360 --> 0:09:46.280 for debating stocks, and then they're making a decision together 0:09:46.800 --> 0:09:48.880 as to when a leather stock is going to be 0:09:49.080 --> 0:09:51.679 you know, added into the court furtus. So that's really 0:09:51.720 --> 0:09:53.319 how we work together as a team. 0:09:54.120 --> 0:09:56.720 Makes sense. And so you know, you talk about coming 0:09:56.800 --> 0:09:59.360 up with idea generations. So I think that brings me 0:09:59.440 --> 0:10:01.280 up to my next question is you know, is there 0:10:01.320 --> 0:10:04.600 a process you follow in terms of you know, coming 0:10:04.679 --> 0:10:07.760 up with ideas or what you're looking for for the portfolio. 0:10:08.000 --> 0:10:10.240 You know, obviously it's called low price stock, you know, 0:10:10.240 --> 0:10:13.000 I'm sure there's a lot more into it and what 0:10:13.040 --> 0:10:13.720 you're looking for. 0:10:15.440 --> 0:10:17.520 Sure, I'll take that one, and I'll talk a little 0:10:17.520 --> 0:10:20.439 bit about the philosophy as well as kind of the 0:10:20.800 --> 0:10:24.360 what we're looking for. The first, we are fundamental investors 0:10:24.400 --> 0:10:27.520 and make decisions based on deep fundamental work alongside our 0:10:27.520 --> 0:10:30.640 research team. Fidelities research team is one of our coole 0:10:30.760 --> 0:10:36.160 competitive advantages. For sure, we are opportunistic value investors, but 0:10:36.200 --> 0:10:38.360 we do have a quality bias and take a very 0:10:38.400 --> 0:10:41.440 long term horizon. The key is we look for the 0:10:41.480 --> 0:10:45.240 intersection of value and quality, which to us leads to 0:10:45.320 --> 0:10:50.000 not simply cheap stock ideas, but underappreciated businesses, which is 0:10:50.040 --> 0:10:53.559 what we're really targeting. We cast a wide net in 0:10:53.640 --> 0:10:56.160 terms of the types of companies we invest in, with 0:10:56.240 --> 0:10:59.520 the thought process being the broader we cast our net, 0:11:00.040 --> 0:11:03.040 more likely we will find bargains. So what are we 0:11:03.080 --> 0:11:07.080 looking for when analyzing specific stocks. We tend to focus 0:11:07.160 --> 0:11:11.760 on three things or three broad categories. First, we look 0:11:11.800 --> 0:11:14.080 to determine the free cash flow power of a business 0:11:14.440 --> 0:11:18.240 medium term. The second is the durability of the free 0:11:18.240 --> 0:11:22.520 cash flow, and for us, durability is synonymous with quality. 0:11:23.679 --> 0:11:27.800 And third we're looking to understand the reinvestment opportunities of 0:11:27.840 --> 0:11:30.480 the business and its ability to grow it's per share value. 0:11:31.640 --> 0:11:33.960 If we talk about durability and break that up for 0:11:34.000 --> 0:11:37.439 a second, within that bucket is business quality, but it 0:11:37.520 --> 0:11:40.319 is also management quality. Management's very important to us, as 0:11:40.360 --> 0:11:42.320 well as the balance sheet. So those are the three 0:11:42.760 --> 0:11:47.160 kind of subcategories within durability that we're looking at. We 0:11:47.280 --> 0:11:50.000 consider these factors when determining what a business is worth 0:11:50.280 --> 0:11:53.880 and establishing a margin of safety. We compare our assessment 0:11:53.920 --> 0:11:57.600 of value of the stock to the opportunity set I'm 0:11:57.600 --> 0:11:59.720 making a decision, right, so everything has to be in 0:11:59.720 --> 0:12:03.360 a context of the overall opportunity to set do I 0:12:03.360 --> 0:12:05.240 dig in a little bit to quality because I think 0:12:05.240 --> 0:12:06.920 a lot of people talk about quality as part of 0:12:06.920 --> 0:12:08.720 their process, so I like to talk about ours a 0:12:08.720 --> 0:12:11.320 little bit more. There seems to be two types of 0:12:11.400 --> 0:12:15.280 quality focused investors. The first folks who only invest in 0:12:15.280 --> 0:12:18.319 the best businesses, so they segment the market into quality 0:12:18.360 --> 0:12:20.559 buckets and only focus on what they will determine as 0:12:20.600 --> 0:12:23.920 the top quality. And the second is is folks who 0:12:23.960 --> 0:12:28.280 really truncate the market by excluding the worst businesses. We're 0:12:28.280 --> 0:12:30.040 more in that second camp in order to keep the 0:12:30.400 --> 0:12:34.040 net really wide, so we look to avoid bad business models, 0:12:34.080 --> 0:12:37.960 shrinking businesses, low return businesses, and crookeeter and competent management. 0:12:38.200 --> 0:12:43.000 So that's the way we think about quality. We describe 0:12:43.640 --> 0:12:47.839 our process as preparation and patients. So preparation we are 0:12:47.880 --> 0:12:51.440 constantly doing deep fundamental work on companies to understand those 0:12:51.480 --> 0:12:53.719 three kind of buckets that I mentioned before, the free 0:12:53.760 --> 0:12:56.720 cash flow power, the quality attributes, and the growth potential. 0:12:57.320 --> 0:12:59.760 But then we wait patiently to buy the businesses only 0:12:59.800 --> 0:13:03.280 when there are at attractive prices relative to our assessment 0:13:03.280 --> 0:13:05.280 of intrinsic value. 0:13:05.520 --> 0:13:09.960 So do you consider macroeconomic conditions at all when you're 0:13:10.240 --> 0:13:11.080 looking for stocks. 0:13:12.640 --> 0:13:17.400 We are macro aware when making investment decisions. We're paying 0:13:17.400 --> 0:13:19.800 close attention to what is going on in the macroeconomy 0:13:19.800 --> 0:13:24.440 and the geopolitical environment. That said, this does not determine 0:13:24.640 --> 0:13:28.000 our investment strategy, nor do we change our process based 0:13:28.040 --> 0:13:30.880 on the environment, but it does help us in terms 0:13:30.920 --> 0:13:33.520 of informing where we are in the cycle, how things 0:13:33.520 --> 0:13:36.360 may be impacting companies in the near term. It also 0:13:36.400 --> 0:13:38.840 helps explain at times like why some companies are performing 0:13:38.840 --> 0:13:41.920 well and other companies are poorly a very bad part 0:13:41.920 --> 0:13:45.240 of the cycle, and a cyclical performing poorly may actually 0:13:45.240 --> 0:13:48.800 be an opportunity to buy, not actually an opportunity to avoid, 0:13:50.760 --> 0:13:52.960 you know, I'd like a key part of our investment 0:13:53.000 --> 0:13:57.160 philosophy overall is that the world is uncertain and constantly changing. 0:13:57.840 --> 0:14:01.200 So whether that's tariffs one day or or inflation the 0:14:01.200 --> 0:14:04.800 next day, whatever it is, there's constant uncertainty and change. 0:14:05.400 --> 0:14:07.840 But this is really why we're looking for strong management 0:14:07.840 --> 0:14:12.040 teams and companies which have adaptable and resilient business models. 0:14:12.360 --> 0:14:14.760 You know, companies with safe balance sheets and generating cash 0:14:14.800 --> 0:14:19.720 that helps provide that margin of safety. These things make 0:14:19.800 --> 0:14:22.920 kind of weathering tough times and uncertainly easier. It also 0:14:22.960 --> 0:14:25.600 means our companies are able to play offense when when 0:14:25.600 --> 0:14:28.280 times are tough, Like we want the boardroom conversation in 0:14:28.320 --> 0:14:31.560 tough times to be about can we buy back stock 0:14:31.800 --> 0:14:34.840 at highly discounted crisis? Can we reinvest to gain share? 0:14:35.040 --> 0:14:37.520 Or can we consolidate the market at attractive crisis? Those 0:14:37.560 --> 0:14:40.120 are the types of offensive questions we hope our companies 0:14:40.120 --> 0:14:43.160 are asking in tough times versus how can we repair 0:14:43.200 --> 0:14:46.080 our balance sheet when when times are tough? This is 0:14:46.120 --> 0:14:48.440 not what we were looking for in our investments. 0:14:48.960 --> 0:14:51.760 And now smid caps have been out of favor for 0:14:52.400 --> 0:14:54.600 quite some time now, and I know a lot of 0:14:54.640 --> 0:14:58.320 other pms are searching for kind of defend your box 0:14:58.520 --> 0:15:01.440 type answers. But what kind of catalysts are you watching? 0:15:01.520 --> 0:15:04.160 Maybe for Smith Caps to turn it around and now 0:15:04.240 --> 0:15:05.720 perform large caps. 0:15:06.480 --> 0:15:09.520 Sure I can take this so as Sam Engine, we're 0:15:09.640 --> 0:15:10.960 remark very aware, but we. 0:15:10.880 --> 0:15:13.000 Don't spend a lot of time trying to put it 0:15:13.120 --> 0:15:16.000 the future. We really think the value that we can 0:15:16.040 --> 0:15:18.640 generate for the fund and our shareholders is the bottom 0:15:18.680 --> 0:15:19.840 up stock picking. 0:15:19.520 --> 0:15:23.840 And finding those dislocated stocks, and you know, to. 0:15:23.920 --> 0:15:27.200 Remain thatch aware, we're watching all of the data points 0:15:27.200 --> 0:15:30.960 that I think everyone else is watching. We do have 0:15:31.360 --> 0:15:34.200 great analysis coming out of our internal. 0:15:33.960 --> 0:15:35.720 Economic team and they put. 0:15:35.520 --> 0:15:37.920 Sort of analysis on all of that data and that 0:15:37.920 --> 0:15:39.200 that's informative to us. 0:15:39.840 --> 0:15:43.200 But to luckly into your question, and you know, we 0:15:43.240 --> 0:15:45.000 don't have a strong view on. 0:15:45.040 --> 0:15:48.760 Small caps being about to outperform or continue to underperform. 0:15:48.840 --> 0:15:50.800 But maybe we can talk a little bit about. 0:15:50.520 --> 0:15:53.840 Why we're very excited about small caps for a few reasons. 0:15:54.360 --> 0:15:56.720 Like when caveat though is these have been through for a. 0:15:56.760 --> 0:16:00.680 While, so small caps as a note, they trailed large 0:16:00.680 --> 0:16:03.640 caps for about fifteen years and that's that's much longer 0:16:03.640 --> 0:16:05.760 than a normal cycle, which tends to be sort of 0:16:05.800 --> 0:16:08.920 eight to ten years. That has allowed to really attractive 0:16:09.000 --> 0:16:12.400 valuations for small caps, especially the profit there ones. 0:16:12.840 --> 0:16:13.320 And as a. 0:16:13.320 --> 0:16:16.320 Reminder about truly to forty five percent of the rest 0:16:16.360 --> 0:16:19.000 of two thousand, which is the small cap benchmark we 0:16:19.040 --> 0:16:23.760 look at, that's unprofitable and that's really unique to this benchmark. 0:16:24.280 --> 0:16:27.720 And so within small caps, we also find that it's. 0:16:27.520 --> 0:16:29.840 Just a more inefficient part of the market than the 0:16:29.920 --> 0:16:33.400 large caps because these stocks, as I mentioned before, they're 0:16:33.480 --> 0:16:36.000 just less well covered by both the buy side and 0:16:36.040 --> 0:16:39.360 the cell side. The other interesting thing is that small 0:16:39.400 --> 0:16:42.880 caps have tremendous disparity and the quality of the businesses, 0:16:42.920 --> 0:16:45.080 given what I just mentioned about so many of them 0:16:45.160 --> 0:16:49.040 being chronically unprofitable. And so that's why we think that 0:16:49.400 --> 0:16:52.400 it's a really attractive setup for app the managers like 0:16:52.520 --> 0:16:53.640 us to. 0:16:53.680 --> 0:16:56.840 Try to add value by picking the light stocks. 0:16:56.920 --> 0:16:59.840 And let's talk about evaluations a little bit. Are there 0:17:00.040 --> 0:17:04.040 specific metrics you like to use to value stocks and 0:17:04.119 --> 0:17:05.560 anything like that, and anything like that. 0:17:06.280 --> 0:17:09.000 We believe what we pay for a stock is critically 0:17:09.040 --> 0:17:12.000 important to its return potential, and we don't compromise on 0:17:12.119 --> 0:17:16.960 this valuation, although quantitative in nature is not a precise 0:17:17.000 --> 0:17:20.160 science and involves a lot of art and triangulation. Importantly, 0:17:20.160 --> 0:17:23.200 we believe the value of the business is solely determined 0:17:23.200 --> 0:17:26.320 by the cash flows of business generates, not its adjusted earnings. 0:17:27.119 --> 0:17:31.080 I think adjusted earnings have become quite popular, but we're 0:17:31.119 --> 0:17:34.399 more focused on the cash that business generates. So first, 0:17:34.760 --> 0:17:37.680 like everything we do, we try to embed conservative assumptions. 0:17:38.119 --> 0:17:41.800 Using conservative assumptions, we focus on the estimates of normalized 0:17:41.840 --> 0:17:44.879 free cash flows several years in the future. By focus 0:17:44.960 --> 0:17:47.399 on normalized profits in the future, we hope to avoid 0:17:47.400 --> 0:17:49.840 being overly anchored to what sounds good or bad in 0:17:49.880 --> 0:17:54.040 the near term. Second, we try and look at several 0:17:54.040 --> 0:17:56.720 types of metrics, so you know, but it must be 0:17:56.760 --> 0:18:00.480 based on profits and cash flows, not eyeballs and sales. Third, 0:18:00.680 --> 0:18:03.920 we spend a significant time on scenario analysis to help 0:18:04.040 --> 0:18:06.480 us wrap our arms around the range of outcomes and 0:18:06.520 --> 0:18:10.439 how asymmetric the return potential for our investments are. This 0:18:10.560 --> 0:18:13.479 means we focus on bearish scenarios as well as bullish 0:18:13.480 --> 0:18:16.399 scenarios so as to not rely on a single point 0:18:16.520 --> 0:18:20.360 estimate given how much variability exists in the world. And lastly, 0:18:21.119 --> 0:18:24.920 we don't have any mandatory hurdles to buy to buy 0:18:25.080 --> 0:18:28.359 or sell, so it's always relative to the opportunity set. 0:18:28.600 --> 0:18:31.240 The hurdles are dependent on the quality and the durability 0:18:31.240 --> 0:18:33.760 of the free cash flow as well as the growth opportunity, 0:18:33.840 --> 0:18:36.760 so there's not any set hurdles that we buy if 0:18:36.800 --> 0:18:39.000 the upside is at or we sell if the upside 0:18:39.080 --> 0:18:41.600 is want. We do try to bring a lot of 0:18:41.640 --> 0:18:43.320 the art the other aspects into it. 0:18:43.760 --> 0:18:47.080 Do you consider stocks at all, you know, I know 0:18:47.080 --> 0:18:49.119 the portfolio is called low price stock, but do you 0:18:49.200 --> 0:18:51.000 ever consider stocks that are not low price? 0:18:51.920 --> 0:18:55.040 So maybe I can start off talking a little bit 0:18:55.040 --> 0:18:55.480 about that. 0:18:56.119 --> 0:18:58.120 The post with that question a lot. 0:18:59.000 --> 0:19:02.240 So the fund was created about thirty five years ago 0:19:02.480 --> 0:19:06.080 in nineteen ninety by Joss tolen Host and it was 0:19:06.560 --> 0:19:10.800 launched before the popularization of style boxers that were offamiliar 0:19:10.840 --> 0:19:14.880 with today and the fun that focused on more price stocks, 0:19:14.880 --> 0:19:15.480 and it was. 0:19:15.480 --> 0:19:18.240 Named after them based on the view that stocks with 0:19:18.359 --> 0:19:20.800 no prices implied are. 0:19:20.440 --> 0:19:23.720 Under valued or cheaper, So the name was really meant 0:19:23.720 --> 0:19:24.720 to signal that this. 0:19:24.760 --> 0:19:25.680 Is a value fund. 0:19:26.359 --> 0:19:29.520 I'd also say we believe wholeheartedly in our evaluation based 0:19:29.560 --> 0:19:32.560 process and we only invest when opportunities fit that process. 0:19:32.640 --> 0:19:36.600 So we believe risk is actually deviating from this process 0:19:36.680 --> 0:19:38.160 versus a stated data or track. 0:19:38.960 --> 0:19:42.440 And are are there any sectors you currently find particularly 0:19:42.520 --> 0:19:45.000 compelling that stand out above the others? 0:19:45.000 --> 0:19:45.600 Maybe? 0:19:45.920 --> 0:19:50.200 So I'd say that there are always opportunities different business 0:19:50.200 --> 0:19:50.720 models and. 0:19:50.800 --> 0:19:52.920 Every sector that we're looking at. 0:19:53.040 --> 0:19:53.920 And then I think. 0:19:53.760 --> 0:19:56.919 Maybe different to somebody that are fund managers you talk to, 0:19:57.520 --> 0:19:57.720 you know. 0:19:57.680 --> 0:20:00.080 If the growth manager is really focused on the the 0:20:00.200 --> 0:20:01.480 fear sectors of the market. 0:20:01.880 --> 0:20:05.320 We're looking at all sectors all of the time, and 0:20:05.400 --> 0:20:07.520 so the answer question with the put up. 0:20:07.480 --> 0:20:09.520 And the market year to day, but we're really finding 0:20:09.560 --> 0:20:11.359 opportunities in all sectors. 0:20:11.720 --> 0:20:14.280 So many stocks have declined, and. 0:20:14.280 --> 0:20:16.159 So many of them look like it's sort of been 0:20:16.240 --> 0:20:20.880 indiscriminate selling driving some of that place action within all 0:20:20.960 --> 0:20:23.600 the sectors, though, we're spending more time on the stocks 0:20:23.600 --> 0:20:27.080 that have been most negatively impacted by terror related concerns 0:20:27.080 --> 0:20:28.880 and macro uncertainty. 0:20:28.880 --> 0:20:31.840 And so as you may suspect, we're spending. 0:20:31.520 --> 0:20:35.480 Plenty of time and more sycrically exposed sectors and financials, the. 0:20:35.640 --> 0:20:39.520 Consumer discretionary, But interestingly we're spending just as much time 0:20:40.040 --> 0:20:43.440 in ret's view probably is more defensive sectors like consumer 0:20:43.520 --> 0:20:46.520 stakers and healthcare. And I'd say for each of the 0:20:46.640 --> 0:20:50.800