Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges, and philosophies and security selection. I'm David Cohne,
Speaker 1: i lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Michael casper, Us, small cap
Speaker 1: and sector strategist at Bloomberg Intelligence. Mike, thanks for joining
Speaker 1: me today. So you put out a note last week
Speaker 1: on you know, the tariff's effect on small cap earnings
Speaker 1: for your Russell two thousand earning season review. What could
Speaker 1: you tell us about that? You know, what effect is
Speaker 1: tariff's going to have on small cap earning?
Speaker 2: Yeah, so consensus is already you know, pairing back estimates
Speaker 2: pretty significantly. I just want to recap though, a few
Speaker 2: of our model highlights on a fair value model on
Speaker 2: the Russell two thousand and what it suggested based on
Speaker 2: macro conditions at the time when we updated it just
Speaker 2: a couple of weeks ago, it's just about three point
Speaker 2: two percent revenue growth over the next year. Consensus was
Speaker 2: at seven point four percent. Obviously that's gotten paired back
Speaker 2: a little bit since then, But really what investors had priced,
Speaker 2: and a lot of this obviously is contingent on how
Speaker 2: high yield has moved or not really moved, right, So
Speaker 2: we've only had high yield spreads blowout near almost near
Speaker 2: five percent at the worst, and that's a key component
Speaker 2: of our modeled multiple. But given that that hasn't blown
Speaker 2: out yet, you know, tanking the multiple, it would suggest
Speaker 2: that to get to a roughly today's price or so,
Speaker 2: you would need a ten percent revenue contraction over the
Speaker 2: year ahead, and we've kind of seen consensus starting to
Speaker 2: adjust to this reality, right, So, pairing back estimates thus
Speaker 2: far this season, I would note we're at a one
Speaker 2: point one percent gain on a current constituent basis, but
Speaker 2: still down a little over one percent on the actual
Speaker 2: constituency of the ross of two thousand, so the current
Speaker 2: two thousand versus two thousand, and that it was a
Speaker 2: year ago. And estimates have come down pretty much for
Speaker 2: everything but a slew of defensives for the first quarter
Speaker 2: and much of the first half of twenty twenty four
Speaker 2: or twenty twenty five. So what we're really looking for
Speaker 2: is how bad do these estimates get over the next
Speaker 2: several quarters? Are those going to get trimmed even further.
Speaker 2: They've really only taken the acts again to the first
Speaker 2: half of twenty twenty five. The back half is still
Speaker 2: for significant recovery. Obviously, we've got a pretty weak GDP
Speaker 2: print today, but we'll see how bad estimates can get.
Speaker 2: Certainly they are facing some brunt of the tariff turmoil
Speaker 2: that we've gotten so far.
Speaker 1: We'll be interesting to watch, and so I think this
Speaker 1: is a great time to bring on our two guests.
Speaker 1: I'd like to welcome Moreian Peck and Sam Chamovit to
Speaker 1: Inside Active. Morgan and Sam are portfolio managers for the
Speaker 1: Fidelity Low Price Stock Fund ticker FLPSX. Morgan, Sam, thank
Speaker 1: you for joining us today.
Speaker 3: Hi David, I'm Michael. Thanks for having us.
Speaker 4: Thanks for having us.
Speaker 1: So let's begin by learning more about your investment backgrounds.
Speaker 1: We can start with Morgan.
Speaker 5: Sounds great and so I did not grow up with
Speaker 5: much finance experience in my family. My dad was in advertising,
Speaker 5: my mom was a writer.
Speaker 6: I knew that finance was a use for ros Stove,
Speaker 6: but the closest.
Speaker 4: We had in my college to major was economics, which.
Speaker 6: Was not the seeing as finance and my assumers were.
Speaker 4: Of college, a couple of things happened.
Speaker 7: The first one is I stumbled across what looked like
Speaker 7: a business work case study when I had a fils
Speaker 7: that someone had left behind.
Speaker 4: And I lived through it, and I thought, but it
Speaker 4: was so interesting that there was this entire field focused
Speaker 4: on learning about companies and business drivers.
Speaker 6: So I wanted to pursue something related to this case study.
Speaker 4: And at the same time.
Speaker 7: I had a classmate who had had the summer internship
Speaker 7: at Fidelity as an equity research associate, and he was
Speaker 7: the one that explained to me the difference between the
Speaker 7: buy side and the cell side, what the role of
Speaker 7: an equity analyst was at Fidelity, and he encouraged me to.
Speaker 6: Apply, and so I did. And as I was going.
Speaker 7: Through the interview sessions, I was immediately impressed with the caliber.
Speaker 4: Of people who were interviewing me.
Speaker 6: It sounded like a very unique job coming.
Speaker 4: Out of undergraduate.
Speaker 7: I was really drawn to the idea of learning how
Speaker 7: to analyze a business. I liked that the success or
Speaker 7: failure for the job was very quantifiable, and I also
Speaker 7: really liked how much responsibility and impact I could have
Speaker 7: as a young professional.
Speaker 4: So when I was.
Speaker 6: Fortunate enough to get the offer I accepted on the spot.
Speaker 4: And so Fidelities that when we play that I've worked
Speaker 4: at and I've been here for over twenty.
Speaker 7: Years, and I would say that as someone means to
Speaker 7: invest in, working at Faedelities is just a great place
Speaker 7: to learn because we get exposure at a really young
Speaker 7: age to every type of investor.
Speaker 4: And you know, we have legends like world Dad Off and.
Speaker 7: Job's own pasts and everyone in between, and all of
Speaker 7: their both open.
Speaker 4: For me to go in and ask questions and understand
Speaker 4: the process. So early in my career.
Speaker 7: I naturally gravitated towards smaller cap companies and then eventually
Speaker 7: to buy unions. And I think I like them because
Speaker 7: it seemed like it's part of the market.
Speaker 4: I had a higher.
Speaker 5: Success of finding undiscovered gems because few of people are
Speaker 5: just looking so so really who I am as an
Speaker 5: investor day As a function of all of that, as
Speaker 5: well as my kind of successes and failures.
Speaker 1: As an analyst, Great how about you? Sam?
Speaker 3: Similar? Similar to More, I did not grow up in
Speaker 3: a finance householder family. My family was primarily doctors and lawyers,
Speaker 3: so financial literacy and markets were not dinner table talk.
Speaker 3: I didn't know what a portfolio mender was growing up,
Speaker 3: so I started to kind of figure all that out
Speaker 3: in college. So later in my high school years, my
Speaker 3: mom stopped working and she developed an interested investing and
Speaker 3: bought me my first markets investment related books. So overall,
Speaker 3: my start was rather unsophisticated, but a start. Nonetheless, in college,
Speaker 3: I really learned more about finance and investing, so that's
Speaker 3: where i'd say like the passion really started to develop.
Speaker 3: After graduating college, I joined the Investment Associate program at
Speaker 3: Putnam Investments. At Putnam, I worked for and with some
Speaker 3: excellent investors and mentors. Putnam was also very advantageous because
Speaker 3: it was going through a lot of very turbulent times,
Speaker 3: which allowed young people like myself to take a bigger
Speaker 3: role more quickly than normal, which was a great learning opportunity.
Speaker 3: I did well with these roles and continued to move up,
Speaker 3: but after five years, decided that Fidelity was a better
Speaker 3: place for me to continue my career. I moved to
Speaker 3: Fidelity to start our international small cap research team, and
Speaker 3: I did that with Derek Janssen and David Jenkins, who
Speaker 3: both came from the outside to help start that team.
Speaker 3: And both are great investors and close friends to this day.
Speaker 3: And then after a year in Boston for Fidelity, I
Speaker 3: left to help start our Tokyo office, which was sort
Speaker 3: of meant to be a two year stint but became
Speaker 3: a thirteen year adventure, which was absolutely amazing and you know,
Speaker 3: an opportunity to learn to community, to grow as an investor,
Speaker 3: but also you know, some leadership aspects and overalls an individual.
Speaker 3: So I started to transition to fund management of twenty twelve,
Speaker 3: and then I ran the International small Cap fund from
Speaker 3: early twenty fourteen until I think we're out twenty twenty two.
Speaker 3: Or David, who started the International small Cap team of me,
Speaker 3: ultimately took sole responsibility for.
Speaker 1: Cool. You know, both of you are co managers on
Speaker 1: this fund. I'd really like to understand, you know, how
Speaker 1: does it work, you know, the dynamic between the two
Speaker 1: of you. Do you have different responsibilities or you know,
Speaker 1: I guess do you kind of run things by each other?
Speaker 5: Sure, I'm happy to take that. So so co ma management.
Speaker 5: As you point out, it's.
Speaker 7: A pretty broad term, and so the specifics of the
Speaker 7: relationship and the the roles I think are really important to.
Speaker 4: Define just for context.
Speaker 6: Sam and I are.
Speaker 5: Coming up in about thirteen years of co managing various
Speaker 5: funds together.
Speaker 7: And that has been really valuable because it's given us
Speaker 7: a lot of time to determine our definition of co
Speaker 7: management and it's allowed us to build this great relationship
Speaker 7: of mutual respect and trust as investors, and that's really
Speaker 7: the foundation for our teamwork importantly, and they also have
Speaker 7: a lot of experience co managing and pretty much every
Speaker 7: imaginable market.
Speaker 4: Environment, and that means that we know how to.
Speaker 7: Manage to better employers where our investment processes and out
Speaker 7: of favor. But so directly answer your question that the
Speaker 7: way we describe how we work together is really an.
Speaker 4: Investment committee of two. So that means there are those sleeves.
Speaker 4: We co own everything together, and so all of the.
Speaker 7: Fund exposures are decided and analyzed together.
Speaker 4: We monitor the risks of the fund jointly.
Speaker 5: And the only area that we really kind of split
Speaker 5: up and dividing conquers and idea generation.
Speaker 7: We think it's really out that you just have two
Speaker 7: people on the funds, you know.
Speaker 6: Scaring the globe for new ideas.
Speaker 7: But as soon as one of us finds in our idea,
Speaker 7: we bring the other person into the group.
Speaker 4: And so most of.
Speaker 7: The time Sam and I are pitching each other stocks
Speaker 7: for debating stocks, and then they're making a decision together
Speaker 7: as to when a leather stock is going to be
Speaker 7: you know, added into the court furtus. So that's really
Speaker 7: how we work together as a team.
Speaker 1: Makes sense. And so you know, you talk about coming
Speaker 1: up with idea generations. So I think that brings me
Speaker 1: up to my next question is you know, is there
Speaker 1: a process you follow in terms of you know, coming
Speaker 1: up with ideas or what you're looking for for the portfolio.
Speaker 1: You know, obviously it's called low price stock, you know,
Speaker 1: I'm sure there's a lot more into it and what
Speaker 1: you're looking for.
Speaker 3: Sure, I'll take that one, and I'll talk a little
Speaker 3: bit about the philosophy as well as kind of the
Speaker 3: what we're looking for. The first, we are fundamental investors
Speaker 3: and make decisions based on deep fundamental work alongside our
Speaker 3: research team. Fidelities research team is one of our coole
Speaker 3: competitive advantages. For sure, we are opportunistic value investors, but
Speaker 3: we do have a quality bias and take a very
Speaker 3: long term horizon. The key is we look for the
Speaker 3: intersection of value and quality, which to us leads to
Speaker 3: not simply cheap stock ideas, but underappreciated businesses, which is
Speaker 3: what we're really targeting. We cast a wide net in
Speaker 3: terms of the types of companies we invest in, with
Speaker 3: the thought process being the broader we cast our net,
Speaker 3: more likely we will find bargains. So what are we
Speaker 3: looking for when analyzing specific stocks. We tend to focus
Speaker 3: on three things or three broad categories. First, we look
Speaker 3: to determine the free cash flow power of a business
Speaker 3: medium term. The second is the durability of the free
Speaker 3: cash flow, and for us, durability is synonymous with quality.
Speaker 3: And third we're looking to understand the reinvestment opportunities of
Speaker 3: the business and its ability to grow it's per share value.
Speaker 3: If we talk about durability and break that up for
Speaker 3: a second, within that bucket is business quality, but it
Speaker 3: is also management quality. Management's very important to us, as
Speaker 3: well as the balance sheet. So those are the three
Speaker 3: kind of subcategories within durability that we're looking at. We
Speaker 3: consider these factors when determining what a business is worth
Speaker 3: and establishing a margin of safety. We compare our assessment
Speaker 3: of value of the stock to the opportunity set I'm
Speaker 3: making a decision, right, so everything has to be in
Speaker 3: a context of the overall opportunity to set do I
Speaker 3: dig in a little bit to quality because I think
Speaker 3: a lot of people talk about quality as part of
Speaker 3: their process, so I like to talk about ours a
Speaker 3: little bit more. There seems to be two types of
Speaker 3: quality focused investors. The first folks who only invest in
Speaker 3: the best businesses, so they segment the market into quality
Speaker 3: buckets and only focus on what they will determine as
Speaker 3: the top quality. And the second is is folks who
Speaker 3: really truncate the market by excluding the worst businesses. We're
Speaker 3: more in that second camp in order to keep the
Speaker 3: net really wide, so we look to avoid bad business models,
Speaker 3: shrinking businesses, low return businesses, and crookeeter and competent management.
Speaker 3: So that's the way we think about quality. We describe
Speaker 3: our process as preparation and patients. So preparation we are
Speaker 3: constantly doing deep fundamental work on companies to understand those
Speaker 3: three kind of buckets that I mentioned before, the free
Speaker 3: cash flow power, the quality attributes, and the growth potential.
Speaker 3: But then we wait patiently to buy the businesses only
Speaker 3: when there are at attractive prices relative to our assessment
Speaker 3: of intrinsic value.
Speaker 2: So do you consider macroeconomic conditions at all when you're
Speaker 2: looking for stocks.
Speaker 3: We are macro aware when making investment decisions. We're paying
Speaker 3: close attention to what is going on in the macroeconomy
Speaker 3: and the geopolitical environment. That said, this does not determine
Speaker 3: our investment strategy, nor do we change our process based
Speaker 3: on the environment, but it does help us in terms
Speaker 3: of informing where we are in the cycle, how things
Speaker 3: may be impacting companies in the near term. It also
Speaker 3: helps explain at times like why some companies are performing
Speaker 3: well and other companies are poorly a very bad part
Speaker 3: of the cycle, and a cyclical performing poorly may actually
Speaker 3: be an opportunity to buy, not actually an opportunity to avoid,
Speaker 3: you know, I'd like a key part of our investment
Speaker 3: philosophy overall is that the world is uncertain and constantly changing.
Speaker 3: So whether that's tariffs one day or or inflation the
Speaker 3: next day, whatever it is, there's constant uncertainty and change.
Speaker 3: But this is really why we're looking for strong management
Speaker 3: teams and companies which have adaptable and resilient business models.
Speaker 3: You know, companies with safe balance sheets and generating cash
Speaker 3: that helps provide that margin of safety. These things make
Speaker 3: kind of weathering tough times and uncertainly easier. It also
Speaker 3: means our companies are able to play offense when when
Speaker 3: times are tough, Like we want the boardroom conversation in
Speaker 3: tough times to be about can we buy back stock
Speaker 3: at highly discounted crisis? Can we reinvest to gain share?
Speaker 3: Or can we consolidate the market at attractive crisis? Those
Speaker 3: are the types of offensive questions we hope our companies
Speaker 3: are asking in tough times versus how can we repair
Speaker 3: our balance sheet when when times are tough? This is
Speaker 3: not what we were looking for in our investments.
Speaker 2: And now smid caps have been out of favor for
Speaker 2: quite some time now, and I know a lot of
Speaker 2: other pms are searching for kind of defend your box
Speaker 2: type answers. But what kind of catalysts are you watching?
Speaker 2: Maybe for Smith Caps to turn it around and now
Speaker 2: perform large caps.
Speaker 7: Sure I can take this so as Sam Engine, we're
Speaker 7: remark very aware, but we.
Speaker 5: Don't spend a lot of time trying to put it
Speaker 5: the future. We really think the value that we can
Speaker 5: generate for the fund and our shareholders is the bottom
Speaker 5: up stock picking.
Speaker 4: And finding those dislocated stocks, and you know, to.
Speaker 5: Remain thatch aware, we're watching all of the data points
Speaker 5: that I think everyone else is watching. We do have
Speaker 5: great analysis coming out of our internal.
Speaker 4: Economic team and they put.
Speaker 7: Sort of analysis on all of that data and that
Speaker 7: that's informative to us.
Speaker 4: But to luckly into your question, and you know, we
Speaker 4: don't have a strong view on.
Speaker 7: Small caps being about to outperform or continue to underperform.
Speaker 4: But maybe we can talk a little bit about.
Speaker 7: Why we're very excited about small caps for a few reasons.
Speaker 4: Like when caveat though is these have been through for a.
Speaker 7: While, so small caps as a note, they trailed large
Speaker 7: caps for about fifteen years and that's that's much longer
Speaker 7: than a normal cycle, which tends to be sort of
Speaker 7: eight to ten years. That has allowed to really attractive
Speaker 7: valuations for small caps, especially the profit there ones.
Speaker 4: And as a.
Speaker 7: Reminder about truly to forty five percent of the rest
Speaker 7: of two thousand, which is the small cap benchmark we
Speaker 7: look at, that's unprofitable and that's really unique to this benchmark.
Speaker 4: And so within small caps, we also find that it's.
Speaker 7: Just a more inefficient part of the market than the
Speaker 7: large caps because these stocks, as I mentioned before, they're
Speaker 7: just less well covered by both the buy side and
Speaker 7: the cell side. The other interesting thing is that small
Speaker 7: caps have tremendous disparity and the quality of the businesses,
Speaker 7: given what I just mentioned about so many of them
Speaker 7: being chronically unprofitable. And so that's why we think that
Speaker 7: it's a really attractive setup for app the managers like
Speaker 7: us to.
Speaker 4: Try to add value by picking the light stocks.
Speaker 2: And let's talk about evaluations a little bit. Are there
Speaker 2: specific metrics you like to use to value stocks and
Speaker 2: anything like that, and anything like that.
Speaker 3: We believe what we pay for a stock is critically
Speaker 3: important to its return potential, and we don't compromise on
Speaker 3: this valuation, although quantitative in nature is not a precise
Speaker 3: science and involves a lot of art and triangulation. Importantly,
Speaker 3: we believe the value of the business is solely determined
Speaker 3: by the cash flows of business generates, not its adjusted earnings.
Speaker 3: I think adjusted earnings have become quite popular, but we're
Speaker 3: more focused on the cash that business generates. So first,
Speaker 3: like everything we do, we try to embed conservative assumptions.
Speaker 3: Using conservative assumptions, we focus on the estimates of normalized
Speaker 3: free cash flows several years in the future. By focus
Speaker 3: on normalized profits in the future, we hope to avoid
Speaker 3: being overly anchored to what sounds good or bad in
Speaker 3: the near term. Second, we try and look at several
Speaker 3: types of metrics, so you know, but it must be
Speaker 3: based on profits and cash flows, not eyeballs and sales. Third,
Speaker 3: we spend a significant time on scenario analysis to help
Speaker 3: us wrap our arms around the range of outcomes and
Speaker 3: how asymmetric the return potential for our investments are. This
Speaker 3: means we focus on bearish scenarios as well as bullish
Speaker 3: scenarios so as to not rely on a single point
Speaker 3: estimate given how much variability exists in the world. And lastly,
Speaker 3: we don't have any mandatory hurdles to buy to buy
Speaker 3: or sell, so it's always relative to the opportunity set.
Speaker 3: The hurdles are dependent on the quality and the durability
Speaker 3: of the free cash flow as well as the growth opportunity,
Speaker 3: so there's not any set hurdles that we buy if
Speaker 3: the upside is at or we sell if the upside
Speaker 3: is want. We do try to bring a lot of
Speaker 3: the art the other aspects into it.
Speaker 1: Do you consider stocks at all, you know, I know
Speaker 1: the portfolio is called low price stock, but do you
Speaker 1: ever consider stocks that are not low price?
Speaker 6: So maybe I can start off talking a little bit
Speaker 6: about that.
Speaker 4: The post with that question a lot.
Speaker 7: So the fund was created about thirty five years ago
Speaker 7: in nineteen ninety by Joss tolen Host and it was
Speaker 7: launched before the popularization of style boxers that were offamiliar
Speaker 7: with today and the fun that focused on more price stocks,
Speaker 7: and it was.
Speaker 5: Named after them based on the view that stocks with
Speaker 5: no prices implied are.
Speaker 4: Under valued or cheaper, So the name was really meant
Speaker 4: to signal that this.
Speaker 6: Is a value fund.
Speaker 3: I'd also say we believe wholeheartedly in our evaluation based
Speaker 3: process and we only invest when opportunities fit that process.
Speaker 3: So we believe risk is actually deviating from this process
Speaker 3: versus a stated data or track.
Speaker 2: And are are there any sectors you currently find particularly
Speaker 2: compelling that stand out above the others?
Speaker 1: Maybe?
Speaker 5: So I'd say that there are always opportunities different business
Speaker 5: models and.
Speaker 4: Every sector that we're looking at.
Speaker 5: And then I think.
Speaker 4: Maybe different to somebody that are fund managers you talk to,
Speaker 4: you know.
Speaker 7: If the growth manager is really focused on the the
Speaker 7: fear sectors of the market.
Speaker 4: We're looking at all sectors all of the time, and
Speaker 4: so the answer question with the put up.
Speaker 7: And the market year to day, but we're really finding
Speaker 7: opportunities in all sectors.
Speaker 4: So many stocks have declined, and.
Speaker 7: So many of them look like it's sort of been
Speaker 7: indiscriminate selling driving some of that place action within all
Speaker 7: the sectors, though, we're spending more time on the stocks
Speaker 7: that have been most negatively impacted by terror related concerns
Speaker 7: and macro uncertainty.
Speaker 4: And so as you may suspect, we're spending.
Speaker 5: Plenty of time and more sycrically exposed sectors and financials, the.
Speaker 7: Consumer discretionary, But interestingly we're spending just as much time
Speaker 7: in ret's view probably is more defensive sectors like consumer
Speaker 7: stakers and healthcare. And I'd say for each of the
Speaker 7: names that looks interesting, we're really spending our time reevaluating
Speaker 7: if the normalized earnings power and tree cash fishes have
Speaker 7: changed for the business.
Speaker 4: So that's what we're spending our time on.
Speaker 2: And I saw that your fund has a sort considerable
Speaker 2: x US exposure. Are you more optimistic maybe about foreign
Speaker 2: stocks than US stocks, or how's your global view look
Speaker 2: right now.
Speaker 3: So the process for picking stocks within the US or
Speaker 3: outside of the US is the same, but we tend
Speaker 3: to invest in businesses overseas when we can find something
Speaker 3: unique or something similar with a significantly better risk adjusted reward.
Speaker 3: There are a few attributes that make international stocks interesting
Speaker 3: at the moment. The first is the long period of
Speaker 3: US stock outperformance and dollar strength, which means that there
Speaker 3: is likely to be relative bartmans overseas. The second is
Speaker 3: many overseas markets are less consolidated, with more small and
Speaker 3: family run businesses still listed on public exchanges. This makes
Speaker 3: for a very broad pool to hunt for ideas. The
Speaker 3: reason is the US has been the most aggressive in
Speaker 3: terms of using cash flows and balance sheets to consolidate
Speaker 3: markets for the M and A and privatize businesses via
Speaker 3: private equity. The US has also benefited from uniquely large,
Speaker 3: excellent tech companies that don't exist in most parts of
Speaker 3: the world. This has been a huge advantage for the
Speaker 3: US market and has sucked capital into them. But the
Speaker 3: rest of the world is also starting to do things
Speaker 3: that can drive a lot of value too, which had
Speaker 3: not been happening previously. So, for example, in Europe, we're
Speaker 3: seeing early signs of a much more stimulative government spending regime,
Speaker 3: primarily around defense, but not limited to only defense. This
Speaker 3: is a positive for businesses and economies there, which is
Speaker 3: at the same time when the US seems to be
Speaker 3: doing the opposite. In Asia, though primarily Japan but to
Speaker 3: some extent Korea, companies are becoming much more proactive with
Speaker 3: their capital allocation in terms of higher dividends and buybacks.
Speaker 3: Buybacks with excess capital of lowly valued stocks like in
Speaker 3: these countries can be really powerful drivers of shareholder value creation.
Speaker 3: So this is positive backdrop, but we're still evaluating each
Speaker 3: investment on a company by company basis, and Fidelity, with
Speaker 3: its uniquely positioned analysts overseas, are helping us identify these
Speaker 3: underappreciated investment opportunities.
Speaker 2: Now your fund is a bit obviously tilted a bit
Speaker 2: more towards value over growth. Are you excited about the
Speaker 2: style in twenty twenty five in the opportunities there? And
Speaker 2: do you consider growth names as well if they are
Speaker 2: you know, undervalue to you.
Speaker 3: We believe investing in low expectation stocks is always the
Speaker 3: right thing to do for investors, and the very long
Speaker 3: term data supports this. I think market cycles can be
Speaker 3: very long, but they aren't permanent. So we've been in
Speaker 3: a an elongated period of value under performance, and so
Speaker 3: from here the starting valuations would imply significantly better for
Speaker 3: returns in terms of value stocks, but you know, the
Speaker 3: timing of this is unpredictable. Would also say to your question, Yeah,
Speaker 3: we love growth stocks. We just want to buy them
Speaker 3: and they have low expectations. We don't want no growth businesses.
Speaker 3: We want as much growth as we can have, but
Speaker 3: we want it when it's very discounted or how to
Speaker 3: favor we don't focus on popular stocks.
Speaker 2: Let's talk about the earning season a little bit. Do
Speaker 2: you have any major takeaways from the fourth quarter earning season?
Speaker 2: Obviously the backdrop shifting quite a bit, and what are
Speaker 2: you watching as the first quarter results start.
Speaker 7: To roll in?
Speaker 1: Sure?
Speaker 6: So Toni said, we really view earning.
Speaker 5: Season as a time checking with the company us and
Speaker 5: to assess if our investment thesis is on track or not.
Speaker 7: We use earnings for a few different things. We use
Speaker 7: it to hear about mian.
Speaker 5: Term trends in the business as you know that's changing
Speaker 5: you know pretty quickly, as well as the operating environment
Speaker 5: we're listening to get a better understanding of term earnings.
Speaker 4: The most important way that we're spending our time on
Speaker 4: is to see if you need to alter our longer
Speaker 4: term view of normalized screamings.
Speaker 7: And I would say the sending season that that's interested
Speaker 7: in how companies are finding to navigate through the uncertainty
Speaker 7: on how they're planning and BacT into the environment, and
Speaker 7: to see if any potential on impacts sectors, but owns
Speaker 7: really just starting for us.
Speaker 1: So you know, you touched a little bit about touching
Speaker 1: base with management and also earlier in our conversation you
Speaker 1: did talk about, you know, looking at management teams and
Speaker 1: so you know, from a qualitative research aspect, you know,
Speaker 1: are there certain qualities that you're looking for in management
Speaker 1: teams as part of your research process.
Speaker 3: I think we're looking for management teams that have a
Speaker 3: few characteristics. So when we're when we're analyzing management teams,
Speaker 3: and you know, being part of Fidelity and Fidelity platform
Speaker 3: provides us unique opportunity sets. So you have access to
Speaker 3: the most senior managers of any company, which is you know,
Speaker 3: wonderful advantage. But we're looking at at a few things.
Speaker 3: The first is We're looking to understand their strategy rationale
Speaker 3: and their strategic competency. So do they think broadly? Do
Speaker 3: they understand and think through not just their base case,
Speaker 3: but are they thinking about the risks associated with their industry?
Speaker 3: Competitive change is what their competitors are doing. So we're
Speaker 3: looking to understand how they think strategically. We're also looking
Speaker 3: at how they think financially. We want to understand that
Speaker 3: not just the CFO can talk to the talking points
Speaker 3: of financial returns, but the CEO and the broader executive
Speaker 3: team understand what drives over value. So do they understand
Speaker 3: cash flow generation? Do you understand why you want to
Speaker 3: have optimized working capital? Do you understand you know, growing
Speaker 3: your ebit duh is one part of what you want
Speaker 3: to do, or your earning is one part, but if
Speaker 3: you don't convert that into cash, it's less interesting. And
Speaker 3: then the last part is the tax of the capital required. Right,
Speaker 3: are you looking at how much growth your career relative
Speaker 3: to how much you're spending because that's what actually matters
Speaker 3: to the value creation of a business. And then lastly
Speaker 3: we bring that all together, we want to find management
Speaker 3: teams that are aligned with us. Right, so we want
Speaker 3: equity ownership that they have within the business, but not
Speaker 3: simply equity ownership. We also want the KPIs of the
Speaker 3: senior execs, but also how it permeates the business to
Speaker 3: be driven by things that we believe drive to shareholder value. So,
Speaker 3: for example, if you came to us with a company
Speaker 3: that was solely compensated on growing their top line, with
Speaker 3: how any focus on how much capital they had to
Speaker 3: spend to grow their top line, how that turned into profits, Like,
Speaker 3: that's very unattractive. What we would like to see is
Speaker 3: our management teams with equity exposure and their KPIs linked
Speaker 3: to growing their free cash flow per share and their
Speaker 3: returns on capital. That would be like a very ideal scenario.
Speaker 3: So those are the types of things we're really trying
Speaker 3: to understand when analyzing manage.
Speaker 2: And M and A is a pretty big driver of
Speaker 2: or a big ceter of valuations and a lot of
Speaker 2: these small cap stocks. And I had a lot of
Speaker 2: clients at the beginning of twenty twenty five that were
Speaker 2: super excited about the deregulatory push from the new administration,
Speaker 2: but obviously that hasn't panned out so far. Are you
Speaker 2: excited about M and A in twenty twenty five. How
Speaker 2: do you think about M and A and are there
Speaker 2: any you know, areas or maybe sectors where you think
Speaker 2: that M and A activity might pick up this year.
Speaker 8: Sure, So historically, you know, M and A and also
Speaker 8: IPA activity for you know, all.
Speaker 3: Market caps, it's.
Speaker 8: Pretty highly quoted to economic activity, business confidence, you know,
Speaker 8: need functioning capital.
Speaker 3: Markets, and it's tied to the outlook for quot So
Speaker 3: you know, we.
Speaker 8: Really think that future activity is going to depend on
Speaker 8: all of those factors.
Speaker 3: Yeah, I would say in terms of M and A
Speaker 3: that we we do tend to be a benefit to
Speaker 3: share of a lot of M and A and we
Speaker 3: have if we're doing a good job, we're tending to
Speaker 3: find underappreciated businesses that you know, consolidators or private equity
Speaker 3: also ultimately find underappreciated and so we do tend to
Speaker 3: have you know, a series of companies taken out of
Speaker 3: the Fund of most here. So as M and A
Speaker 3: is a good thing for the fund, we tend to
Speaker 3: hope that that continues.
Speaker 1: Great, Well, we just have one more question for actually
Speaker 1: both of you. I'd love for both of you to
Speaker 1: answer this. Something I'd like to ask a lot of
Speaker 1: our guests, you know. I know, Sam you mentioned earlier
Speaker 1: when you were talking about your background, you know, different
Speaker 1: investment books. But what are some of your favorites.
Speaker 3: Maybe I'll start, Yeah, So I would say, like early
Speaker 3: in one's investment journey, reading the cannon of investment books
Speaker 3: is critically important, and I would you know, I read
Speaker 3: everything I could as I was developing my own investment
Speaker 3: f laws. Many were influential, but I would certainly highlight
Speaker 3: margin of safety by Seth Clarman, resonated with me and
Speaker 3: was particularly influential, like the concept of patient contrariy and
Speaker 3: investing and stops trading, or the margin of safety kind
Speaker 3: of as you hopefully heard today, like permeates our investment process.
Speaker 3: I guess like as that's developed, I kind of moved
Speaker 3: more towards consuming other folks investment processes and ideas via
Speaker 3: investment letters and journals and podcasts, and I shifted more
Speaker 3: of my books and reading at this stage of my
Speaker 3: career to things that focus on the history of businesses
Speaker 3: and how they developed, in the biographies of some of
Speaker 3: the awesome business leaders. So you know, at this stage
Speaker 3: I like to recommend things like you know, even the
Speaker 3: cable Cowboy or Chip Wars or Sam Waltons made in
Speaker 3: the market. These kind of these things are more influential
Speaker 3: at this stage of my career in terms of how
Speaker 3: I think about businesses and analyzed businesses.
Speaker 1: Great to help you, Morgan, sure.
Speaker 8: So I've been a few favorites that I usually encourage
Speaker 8: to people who start here as a new investor. So
Speaker 8: the first one is called Investing the Last Level Art.
Speaker 8: It's by Robert Hagstrom. This is a great book that
Speaker 8: talks about the importance of overlaying investing with other fields
Speaker 8: like psychology, biology, economics, and you can't just be so
Speaker 8: focused on finance.
Speaker 4: It's it's sort of in a spirit of Cherry Munger.
Speaker 8: The second one is Thinking Fast as Though by Dan Conneman.
Speaker 3: So it's well known.
Speaker 4: It's not a finance or investment book.
Speaker 8: But it goes a long way in helping you understand.
Speaker 4: How you make decisions. And I think it's helped me
Speaker 4: be more aware.
Speaker 3: Of my behavioral biases, and I think that's a really.
Speaker 8: Important consideration to being an investor.
Speaker 4: And the last thing I would comment on is I'm
Speaker 4: a big reader of Howard Mark's.
Speaker 3: Books and memos. I found those very helpful.
Speaker 1: Great, well, I'll definitely, you know, take a look at
Speaker 1: the ones I haven't read so far. But Morgan, Sam,
Speaker 1: this is wonderful. Thank you again for joining us.
Speaker 3: Thanks thanks much.
Speaker 1: And Mike, thank you for being the Coast today.
Speaker 2: Thank you, David, and thank you both for joining.
Speaker 1: Us until our next episode. This is David Cone with
Speaker 1: Inside Active