WEBVTT - T. Rowe’s Giroux on Avoiding Fatally Flawed Firms 0:00:12.920 --> 0:00:15.960 Welcome to Inside Active, a podcast about active managers that 0:00:16.040 --> 0:00:18.840 goes beyond sound bites and headlines and looks deeper into 0:00:18.880 --> 0:00:23.840 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:23.840 --> 0:00:26.880 I lead mutual fund and active research at Bloomberg Intelligence. 0:00:27.200 --> 0:00:30.200 Today my co host is Gina Martin Adams, chief equity 0:00:30.240 --> 0:00:33.720 strategist at Bloomberg Intelligence. Gina, thank you for joining me today. 0:00:33.760 --> 0:00:35.760 Thank you for having me, David. I'm delighted to be here. 0:00:36.479 --> 0:00:38.640 So I first wanted to ask you about a note 0:00:38.640 --> 0:00:45.560 you wrote recently regarding valuations masking slowest EPs recovery. Since 0:00:45.840 --> 0:00:48.280 I believe it was twenty eighteen, can you give the 0:00:48.320 --> 0:00:50.720 audience kind of an overview of what was happening? 0:00:51.320 --> 0:00:53.840 Yeah, I think a couple of things really come to mind. 0:00:53.840 --> 0:00:55.880 The first is that valuations have really done the heavy 0:00:55.880 --> 0:00:57.920 lifting in the S and P five hundred bull market 0:00:58.040 --> 0:01:01.800 since twenty twenty two. If you go back to that 0:01:01.920 --> 0:01:05.040 bullmarket low or the big bear market low from twenty 0:01:05.080 --> 0:01:07.959 twenty two and classify this recent three year run as 0:01:08.000 --> 0:01:11.800 a big ballmarket rally, we've had trailing twelve month earnings 0:01:11.800 --> 0:01:14.479 that have grown just fourteen percent this is the slowest 0:01:14.520 --> 0:01:18.000 pace of non recessionary growth in the index for a 0:01:18.120 --> 0:01:21.119 rolling thirty some odd month windows since at least early 0:01:21.360 --> 0:01:26.120 twenty eighteen. Despite that really slow earnings growth, almost painfully 0:01:26.160 --> 0:01:29.320 slow earnings growth, we've had more than seventy percent price 0:01:29.360 --> 0:01:32.120 appreciation in the S and P five hundred, and this 0:01:32.200 --> 0:01:34.560 year in particular has been really interesting because it's sort 0:01:34.560 --> 0:01:37.320 of turned that relationship on its head for the first 0:01:37.360 --> 0:01:39.880 time in a long time. Earnings may actually grow faster 0:01:39.959 --> 0:01:42.520 than valuations. This may be one of those rare years 0:01:42.600 --> 0:01:45.160 in the S and P five hundred where we get 0:01:45.200 --> 0:01:49.840 some earnings growth allowing companies to grow into valuation multiples 0:01:49.880 --> 0:01:53.960 that have expanded so very quickly over the last three years. 0:01:54.280 --> 0:01:57.120 Great, well, I'd love to hear our guest thoughts on this, 0:01:57.320 --> 0:02:00.680 so I think it's a great time to introduce David 0:02:00.800 --> 0:02:04.440 Jaru to the podcast. David is a chief investment officer 0:02:04.560 --> 0:02:08.200 of US Equity at TROW Price and a portfolio manager 0:02:08.200 --> 0:02:12.680 for the Capital Appreciation strategy, including the Capital Appreciation Mutual 0:02:12.680 --> 0:02:17.760 fund ticker p RWCX and the Capital Appreciation Equity etf 0:02:17.960 --> 0:02:21.160 ticker TCAF. David, thank you for joining us. 0:02:21.160 --> 0:02:23.000 H it's a pleasure. Thank you for having me on. 0:02:23.240 --> 0:02:26.520 So let's start with your thoughts on the market dynamic 0:02:26.560 --> 0:02:30.360 that Gina has observed on with rising valuations and a 0:02:30.400 --> 0:02:31.679 slow EPs recovery. 0:02:32.600 --> 0:02:34.600 No, I think it's I read the artic thought that 0:02:34.639 --> 0:02:37.120 was a very thoughtful analysis, and then you don't see 0:02:37.120 --> 0:02:40.680 most people addressing. But as Gina said, if you kind 0:02:40.680 --> 0:02:44.280 of go from the market trough in twenty twenty two, 0:02:45.240 --> 0:02:47.760 the market with basically trot about you know, fifteen or 0:02:47.800 --> 0:02:51.240 sixteen times forward earnings, today we're kind of, you know, 0:02:51.280 --> 0:02:53.600 twenty two or twenty three. So we've had basically the 0:02:53.639 --> 0:02:55.800 market and Multiple go up by about fifty percent off 0:02:55.840 --> 0:02:59.520 the trough, sort of trough to peak, and Ernie's growth, 0:02:59.520 --> 0:03:01.600 which again and as Gena says, is starting to get 0:03:01.639 --> 0:03:03.920 a little bit better. This year, we'll probably end up 0:03:03.960 --> 0:03:06.240 doing double digitaries growth or let's least at least high 0:03:06.240 --> 0:03:08.600 school digitaries growth this year after a couple of years 0:03:08.600 --> 0:03:11.280 of what I call kind of somewhat sub parties growth 0:03:11.440 --> 0:03:14.440 in both twenty three twenty four. Great. 0:03:14.520 --> 0:03:18.519 Great, So let's switch over to your funds. So let's 0:03:18.560 --> 0:03:22.400 let's talk specifically about the capital appreciation strategy. What is 0:03:22.440 --> 0:03:25.200 the investment process. You know, how how do securities make 0:03:25.240 --> 0:03:26.359 their way to the portfolio? 0:03:27.560 --> 0:03:29.840 Sure, you know, you know there's we think about the 0:03:29.880 --> 0:03:32.120 sp FI FI. Let's just we'll take it through equities. 0:03:32.120 --> 0:03:34.359 We'll talk a little bit about fixed income, and we'll 0:03:34.360 --> 0:03:36.800 talk about kind of process. What I would tell you is, 0:03:37.360 --> 0:03:39.720 you know, there aren't five hundred great companies in the 0:03:39.760 --> 0:03:42.320 sp five hundred, right, you know, we believe there's only 0:03:42.320 --> 0:03:44.960 about one hundred and twenty five stocks that we call investable. 0:03:45.360 --> 0:03:47.440 And when I need investable, what does that mean? It 0:03:47.520 --> 0:03:50.280 really means, you know, when we look back and what 0:03:50.320 --> 0:03:53.000 are the five or six characteristics that kind of cosset 0:03:53.000 --> 0:03:55.560 stocks in to perform? And we want to avoid those 0:03:55.600 --> 0:03:58.760 five six characteristics. What are the five six characteristics? You know, 0:03:58.840 --> 0:04:03.840 bad management teams, secular risk, you know, extreme valuation and 0:04:04.160 --> 0:04:06.840 inability to do a high school digit kind of total return, 0:04:07.400 --> 0:04:10.160 poor cap allocation. Those are the kind of things if 0:04:10.200 --> 0:04:12.880 we basically get the whole last P. Five hundred and 0:04:12.920 --> 0:04:15.360 we may say, if we can avoid companies that have 0:04:15.400 --> 0:04:17.200 one or two, one or two or more of those 0:04:17.760 --> 0:04:21.240 fatal flaws, their odds about performing are really really low. 0:04:21.279 --> 0:04:24.159 So we want to we want to basically remove basically 0:04:24.200 --> 0:04:27.599 three hundred and seventy five companies that we invest in, 0:04:27.640 --> 0:04:29.480 So we invest the one hundred twenty five hundred companies 0:04:29.480 --> 0:04:31.840 that have none of those fatal flaws where we think 0:04:31.880 --> 0:04:34.080 the odds about performance over any kind of three five 0:04:34.200 --> 0:04:36.599 ten year basis are quite hot. So that's kind of 0:04:36.600 --> 0:04:39.880 our equity selection basis. The other thing about our equity 0:04:39.920 --> 0:04:41.920 selection basis is we tend to have in our north 0:04:41.960 --> 0:04:44.440 stars at five year i r R, what is the 0:04:44.480 --> 0:04:47.880 expected earnings five years out, what is the expected multiple 0:04:47.920 --> 0:04:49.800 we're going to get, and what is the kind of 0:04:49.839 --> 0:04:52.120 embedded i rr we're going to try to invest obfuly 0:04:52.200 --> 0:04:54.240 in the highest risk just at irs we can, and 0:04:54.279 --> 0:04:57.760 the equity sleeve, in the fixed income sleeve, we you know, 0:04:57.800 --> 0:05:02.600 we compete against kind of a Bloomberg ag However, we 0:05:02.640 --> 0:05:05.279 tend to think the Bloomberg gaging is actually not the 0:05:05.320 --> 0:05:08.760 best universe. That's a universe built based on the size 0:05:08.800 --> 0:05:11.480 of different markets. Are supposed to attractives of different markets. 0:05:12.000 --> 0:05:14.919 So you would see us investing much heavily you know 0:05:14.920 --> 0:05:18.320 what we call high quality leveraged loans, high quality high 0:05:18.360 --> 0:05:22.080 yield bonds with very very low risk of default. And 0:05:22.120 --> 0:05:25.520 then selectively by treasuries when the treasuries are attractive as 0:05:25.520 --> 0:05:28.800 they are now. So again we're focused on not the 0:05:28.920 --> 0:05:31.840 largest markets, but we're the best risks returns over time. 0:05:31.880 --> 0:05:34.000 And if you look at over time, the best risk 0:05:34.040 --> 0:05:37.839 of rewards and fixed income are not mortgages, not triple 0:05:37.839 --> 0:05:42.400 A securities, but double B credits, leverage loans. That's where 0:05:42.400 --> 0:05:45.200 the risk of reward is the highest. The last thing 0:05:45.240 --> 0:05:48.600 I would say is that we tend to be kind 0:05:48.640 --> 0:05:52.440 of countercyclical. In twenty twenty two, when the market was 0:05:53.040 --> 0:05:55.920 facing difficulties, we were adding to lot of equities. We 0:05:55.920 --> 0:05:58.679 were adding to semiconductor companies, we were adding to pyxicality. 0:05:59.680 --> 0:06:03.600 During this Trump tariff noise that drive the market down 0:06:03.600 --> 0:06:06.599 to four to nine hundred, we put four billion dollars 0:06:06.680 --> 0:06:09.520 to work in three day period of time. During COVID, 0:06:09.560 --> 0:06:12.159 we put nine billion dollars to work in less than 0:06:12.200 --> 0:06:15.440 a month. So you will almost always see us acting 0:06:15.520 --> 0:06:19.640 counterintuitively to the market. Marketing going lower, we're adding to 0:06:19.720 --> 0:06:24.280 risk assets. Market goes higher, we're reducing risk assets. And 0:06:24.360 --> 0:06:27.680 that process, over the last nineteen years since I've been 0:06:27.760 --> 0:06:30.680 managing these strategies has added a lot of alpha to 0:06:30.720 --> 0:06:33.480 the strategy being a little bit countercyclical when because we 0:06:33.560 --> 0:06:37.719 know when markets go lower, the odds of losing money 0:06:38.000 --> 0:06:41.560 actually go lower, the odds actually generate above average returns 0:06:41.560 --> 0:06:44.920 go higher. And again, you know, we know we are 0:06:44.960 --> 0:06:48.440 willing to invest into uncertainty in those kind of periods 0:06:48.440 --> 0:06:49.720 of time in the mark, whether that be in fixed 0:06:49.760 --> 0:06:52.480 income or whether that be in inequities. 0:06:53.080 --> 0:06:55.080 So before we dig a little bit deeper into that, 0:06:55.120 --> 0:06:56.960 I just wanted to ask a little bit about the 0:06:56.960 --> 0:06:59.360 two different fun types. I know, we you know, the 0:06:59.400 --> 0:07:02.960 big difference is obviously the ETF doesn't hold fixed income 0:07:03.279 --> 0:07:05.880 whereas the mutual fund does. But are there any differences 0:07:05.920 --> 0:07:08.440 between the equity portfolios of the you know, between the 0:07:08.520 --> 0:07:09.600 mutual fund and the ETF. 0:07:11.280 --> 0:07:14.240 The ETF would have will have more names, you don't 0:07:14.280 --> 0:07:17.720 have a little bit lower track year. The ETF has 0:07:17.760 --> 0:07:20.720 a slightly different objective. The e TF wants down from 0:07:20.760 --> 0:07:23.600 the market over time. It wants to do with always 0:07:23.600 --> 0:07:26.320 having a risk profile that's less in the market, and 0:07:26.400 --> 0:07:31.080 it also wants to have a a taxial income that 0:07:31.240 --> 0:07:34.360 is basically zero and has a you will always have 0:07:34.360 --> 0:07:36.680 a dividend below that of the market. So we say 0:07:36.720 --> 0:07:40.080 we can outform the market with less risk and more 0:07:40.120 --> 0:07:43.160 tax efficiency over over a long period of time. 0:07:43.520 --> 0:07:47.280 David, you mentioned all the factors that you do to 0:07:48.280 --> 0:07:51.239 use to avoid stocks, sort of avoiding the fatal flaws? 0:07:51.360 --> 0:07:53.840 Is the language that I loved you used? What do 0:07:53.960 --> 0:07:56.480 you what are you most attracted to? So how do 0:07:56.520 --> 0:07:59.960 you define capital appreciation potential? I know you mentioned I 0:08:00.520 --> 0:08:03.400 is a really critical component of your process, But are 0:08:03.480 --> 0:08:06.200 there other factors that you use? How do you identify 0:08:06.240 --> 0:08:07.840 those high RRR companies? 0:08:08.160 --> 0:08:10.000 Well, if you think about again, we think about the 0:08:10.040 --> 0:08:12.000 five hundred companies and the SPIF hundred, maybe a couple 0:08:12.000 --> 0:08:15.120 of companies outside the SPF hundred. We reduce that three 0:08:15.240 --> 0:08:17.480 hundred and seventy five companies that don't have one or 0:08:17.520 --> 0:08:20.760 more of those fatal flaws GITA, and then we'll basically 0:08:21.280 --> 0:08:24.520 myself and my team, we will basically actively model those 0:08:24.480 --> 0:08:26.680 one hundred and twenty five companies. We will look at 0:08:26.680 --> 0:08:28.480 their earnings power today. We'll look at their earnings power 0:08:28.480 --> 0:08:29.840 where what we think is going to be twenty thirty 0:08:29.880 --> 0:08:33.440 twenty thirty one. We'll look at what the dividends that 0:08:33.480 --> 0:08:35.640 are likely to pay over that period of time. We'll 0:08:35.640 --> 0:08:37.800 look at what the right multiple for that company is 0:08:38.760 --> 0:08:40.920 and then that will basically spit out an internal rate 0:08:40.960 --> 0:08:43.320 to return, and then we're trying to find companies that 0:08:43.320 --> 0:08:46.600 have an attractive risk to just return, but also with 0:08:46.960 --> 0:08:49.600 a as narrow of a range of outcomes as possible 0:08:50.160 --> 0:08:53.320 is really key to our process, right, So if you 0:08:53.320 --> 0:08:55.720 look at our portfolio today, we would have an IRR 0:08:55.760 --> 0:08:59.040 in the portfolio in the low teams. In the equity 0:08:59.080 --> 0:09:01.160 market that was as hot is during COVID in the 0:09:01.160 --> 0:09:04.440 mid twenties, during twenty twenty two, was in the mid teens. 0:09:04.840 --> 0:09:08.440 During the Trump tariff tantrument, if you will, it was 0:09:08.440 --> 0:09:12.040 also in the mid teens. But we compare that relative 0:09:12.080 --> 0:09:14.679 to what we perceive as a market i AR that's 0:09:14.760 --> 0:09:17.360 kind of in the mid seele digits and the potential 0:09:17.360 --> 0:09:20.080 to hopefully generate kind of mid you know, five hundred 0:09:20.120 --> 0:09:22.679 BIPs or more alpha versus the market over that period 0:09:22.720 --> 0:09:25.040 of time. So we're literally looking at one hundred and 0:09:25.040 --> 0:09:27.880 five companies that meet our criteria where we think there's 0:09:27.880 --> 0:09:30.319 a high odds of outperformance and the you know, we're 0:09:30.320 --> 0:09:33.920 trying to find that you're roughly the highest sixty on 0:09:34.000 --> 0:09:37.920 a risk us basis within the equity, sleep of the 0:09:38.520 --> 0:09:42.120 balance strategy, cap appreciation, and maybe we're like the top 0:09:42.240 --> 0:09:45.440 ninety stocks within the cappreciation ETF. 0:09:46.679 --> 0:09:49.480 You mentioned the SMP five hundred a few times, but 0:09:49.559 --> 0:09:52.080 it sounds like you're amenable to ideas outside of the 0:09:52.120 --> 0:09:55.200 SMP five hundred when and if it's appropriate, can you 0:09:55.240 --> 0:09:58.040 talk to us about you know what you know many 0:09:58.080 --> 0:10:01.640 people would suggest are really clearly very high valuations for 0:10:01.720 --> 0:10:03.839 certain select groups in the s and P five hundred. 0:10:03.840 --> 0:10:06.040 How are you navigating that right now? And is that 0:10:06.160 --> 0:10:10.160 pushing you into ideas outside the United States or even 0:10:10.280 --> 0:10:13.000 ideas in private markets not necessary? 0:10:13.640 --> 0:10:16.040 Maybe yes and no, Maybe yes and no to that 0:10:16.400 --> 0:10:18.960 to that point, you know, there are great companies outside 0:10:19.000 --> 0:10:21.079 the US, I would say coming great companies outside of 0:10:21.080 --> 0:10:23.520 the US are rare. So one example of a great 0:10:23.520 --> 0:10:27.079 company outside the US is Kadie National C and Q. 0:10:27.720 --> 0:10:32.680 It is an oil sands oil producer. The average major 0:10:32.720 --> 0:10:34.680 in the United States has a reserve life of like 0:10:34.760 --> 0:10:37.800 nine years. That means Exxon or Chevron has to go 0:10:37.840 --> 0:10:40.000 out every couple of years and spend it Shad's capital 0:10:40.040 --> 0:10:45.079 to buy Hess or buy Pioneer, whereas C and Q 0:10:45.160 --> 0:10:47.280 does have to do any acquisitions at all, they have 0:10:47.280 --> 0:10:50.400 twenty nine years reserve life, they can continue producing, and 0:10:50.440 --> 0:10:53.680 their continued to extend that reserve life. They traded a 0:10:53.720 --> 0:10:58.240 discount to C and Q or to Exon, and yet 0:10:58.240 --> 0:11:02.200 they grow production faster like four percent versus three percent. 0:11:02.720 --> 0:11:05.079 They have a higher dividend yield UH, and they have 0:11:05.160 --> 0:11:08.839 better cap allocation UH and so and again a very 0:11:08.920 --> 0:11:11.760 very strong tremendous on a free cash to that allows 0:11:11.760 --> 0:11:14.120 them to buy back stock, pay a dividend. It's almost 0:11:14.120 --> 0:11:18.080 five percent. So we do see opportunities out there. However, 0:11:18.120 --> 0:11:20.880 I would say is when when we do the micro analysis, 0:11:20.920 --> 0:11:23.600 when we go through look at all the companies in Europe, 0:11:23.880 --> 0:11:25.880 look at all the companies in Japan, like all the 0:11:25.920 --> 0:11:27.880 things in Australiak at all the other companies in develop 0:11:27.920 --> 0:11:30.760 market economies, we don't find a lot of great companies. 0:11:30.760 --> 0:11:33.360 We think, you know, the US has more than its 0:11:33.360 --> 0:11:36.560 fair share of great companies. And while the European and 0:11:36.640 --> 0:11:41.000 Japanese and Australian indexes are trading at lower valuations, in 0:11:41.040 --> 0:11:45.360 the US index is there's a there's a reason for that. 0:11:45.440 --> 0:11:48.360 And what what is in Europe is mostly you know, 0:11:48.720 --> 0:11:53.400 low quality banks, low quality materials, companies, energy companies that 0:11:53.440 --> 0:11:57.240 don't want to be energy companies, utilities that don't have 0:11:57.280 --> 0:12:01.960 the same characteristics as US utility. There's no mag six, 0:12:03.280 --> 0:12:07.120 there's there's very little, you know, attractive kind of businesses 0:12:07.160 --> 0:12:10.000 and kind of garpie companies. So if you do it 0:12:10.000 --> 0:12:12.480 an apples apples basis, we don't think the US is 0:12:12.520 --> 0:12:15.800 expensive relative to what you can get in Europe or 0:12:15.880 --> 0:12:20.080 Japan or Australia. Now your question on private markets, I 0:12:20.200 --> 0:12:25.800 do see opportunity in private markets. Again, we own four 0:12:26.400 --> 0:12:30.120 companies that are that are not public companies today. That's 0:12:30.160 --> 0:12:33.480 about you know, maybe let's call it four percent of 0:12:33.480 --> 0:12:36.839 our equities are in privates. We tend to own more 0:12:36.880 --> 0:12:40.199 what we call it kind of more stable private equity 0:12:40.240 --> 0:12:43.840 type businesses. So we would own a company like broad 0:12:43.840 --> 0:12:47.040 Street or Hub, which are both insurance brokerage companies. They're 0:12:47.080 --> 0:12:49.560 a little smaller than the Marsh mcclennan's or Aon's of 0:12:49.559 --> 0:12:52.800 the world, but they trade for lower valuations. They are 0:12:52.840 --> 0:12:56.120 able to do more acquisitions at low multiples, and they've 0:12:56.160 --> 0:12:58.480 been in creating value at it let's call it a 0:12:58.520 --> 0:13:02.120 mid to high teenh pace versus the public guys who 0:13:02.200 --> 0:13:04.480 kind of are growing, let's call it a ten percent 0:13:04.559 --> 0:13:08.840 pace with great management teams at evaluation that is below 0:13:08.960 --> 0:13:11.959 marsh or on. So we've chosen to take advantage of 0:13:11.960 --> 0:13:14.960 that kind of that private versus public market arbitrage and 0:13:15.040 --> 0:13:17.600 own some of those companies in size. We also own Weimo. 0:13:18.480 --> 0:13:21.680 Weymo is a private company. Obviously, they are the leader 0:13:21.720 --> 0:13:26.480 in autonomous driving. The last mark there I think publicly 0:13:26.679 --> 0:13:28.319 was in the you know, the forty to forty five 0:13:28.320 --> 0:13:31.280 billion dollar range. We're a big believer that when Weimo 0:13:31.360 --> 0:13:34.600 goes public, given the giant tam It has, that that 0:13:34.640 --> 0:13:36.760 will be a company that will probably have a market 0:13:36.920 --> 0:13:40.959 value of somewhere rotween two to three hundred billion dollars. 0:13:41.240 --> 0:13:45.760 I think Tesla has proved that, you know, autonomous driving 0:13:45.800 --> 0:13:48.880 is really really hard, Tesla's not ready for prime time, 0:13:49.480 --> 0:13:52.600 and that Weimo is by far the market leader and 0:13:52.920 --> 0:13:54.720 autonomous driving today. 0:13:55.120 --> 0:13:57.040 But I did want to ask, you know, in the 0:13:57.200 --> 0:14:01.760 perspectives it does talk about opportunity, opportunit hunistic investments in 0:14:01.800 --> 0:14:04.600 the portfolio. Is there a percentage that you limit these 0:14:04.600 --> 0:14:06.280 two No. 0:14:06.640 --> 0:14:09.320 Actually, it's it's an interesting question, David. What I would 0:14:09.360 --> 0:14:10.920 say is, I think everything we're trying to do is 0:14:10.920 --> 0:14:13.920 a little bit opportunistic, right, We're trying to take advantage 0:14:13.960 --> 0:14:17.280 of marketing efficiencies. We're trying to take a longer term 0:14:17.320 --> 0:14:21.760 horizon than other market participants. Some you know, some some 0:14:21.800 --> 0:14:25.040 situations like we, you know, we've bought hole Logic. Hole 0:14:25.080 --> 0:14:27.080 Logic is a company that we haven't really owned in 0:14:27.080 --> 0:14:30.840 the past. The company's trading at sixty four sixty three 0:14:30.920 --> 0:14:35.160 dollars a share. There's you know, there's been a you know, 0:14:35.560 --> 0:14:39.960 a I think a Financial Times reported that multiple private 0:14:40.040 --> 0:14:43.240 equity firms were looking to take hole Logic private at 0:14:43.280 --> 0:14:46.360 seventy two dollars. I think it would make sense that, 0:14:46.480 --> 0:14:47.760 you know, that would they would be able to generate 0:14:47.760 --> 0:14:49.520 a very high return if they were to do that. 0:14:50.000 --> 0:14:54.080 Given how attractively valued Hole Logic is. We believe that, 0:14:54.120 --> 0:14:57.200 you know, that that company could still go private, probably 0:14:57.200 --> 0:14:59.600 at a higher valuation, so that I would describe that 0:14:59.640 --> 0:15:05.040 as an opportunistic investment. You know. Another opportunitist investment is 0:15:05.120 --> 0:15:08.560 kind of Beckton Dickinson. Beckton Dickinson's has some challenges around tariffs, 0:15:09.880 --> 0:15:13.880 some challenges around weakness in China, but this is a 0:15:13.920 --> 0:15:17.200 company that has a massive some of the part's discount, 0:15:17.760 --> 0:15:20.280 they started going down the path of rectifying that supply. 0:15:20.440 --> 0:15:22.400 Some of the parts discount they're selling off in an 0:15:22.480 --> 0:15:25.560 arm T transaction some of their dignostics and life science 0:15:25.640 --> 0:15:28.960 tool businesses to Waters. We think that'll be a value 0:15:28.960 --> 0:15:31.600 creating endeavor. We think they'll end up spinning off their 0:15:32.240 --> 0:15:35.680 pharmaceutical systems business as well, maybe do another rm T 0:15:35.840 --> 0:15:38.400 with that transaction. And once you keep doing you know, 0:15:38.480 --> 0:15:41.920 once you do that arm T with the pharma systems business, 0:15:41.960 --> 0:15:45.440 once you get Waters transaction done. This is a company. 0:15:45.480 --> 0:15:47.520 It's basically traded for eight times earnings, which has the 0:15:47.560 --> 0:15:51.280 potential especially they continue to buy that stock to grow 0:15:51.360 --> 0:15:54.840 earnings in the you know, the low teens. Most companies 0:15:54.920 --> 0:15:58.320 that have low teens earnings growth don't trade for eight 0:15:58.320 --> 0:16:00.320 times earnings. They trade for more than like key to 0:16:00.320 --> 0:16:02.600 twenty times earnings. So we think Beck then this is 0:16:02.680 --> 0:16:06.080 also kind of an opportunistic investment. We've also had Catalyst 0:16:06.080 --> 0:16:08.920 in place with a starboard who's probably one of the 0:16:08.920 --> 0:16:12.720 better activists in the marketplace actively involved in the stock 0:16:12.760 --> 0:16:16.200 as well. So we will own a number of names 0:16:16.200 --> 0:16:19.640 where we think there is some kind of hidden optionality 0:16:20.960 --> 0:16:22.840 ow producing investment where we think we can make a 0:16:22.880 --> 0:16:24.440 lot of money in the near term. 0:16:24.560 --> 0:16:26.880 David, could I ask a little bit about kind of 0:16:26.920 --> 0:16:29.760 how you navigate some of the key risk factors that 0:16:29.800 --> 0:16:32.160 we think about as equity strategists. So one of the 0:16:32.160 --> 0:16:35.600 things we're thinking about a lot this year is concentration risk. 0:16:35.640 --> 0:16:37.800 In the fact that you know, effectively only ten percent 0:16:37.840 --> 0:16:39.520 of the S and P five hundred is now actually 0:16:39.600 --> 0:16:42.600 driving gains in the market. We think about the MAG 0:16:42.720 --> 0:16:47.520 seven as a specific risk within that concentration risk. I 0:16:47.560 --> 0:16:50.760 noticed in your portfolio that you have pretty heavyweights in 0:16:50.800 --> 0:16:53.680 Microsoft in the video. At the same time, you know, 0:16:53.800 --> 0:16:58.160 navigating a big difference in positioning in Amazon and Apple. 0:16:58.280 --> 0:17:00.680 Maybe talk to us broadly about how you're thinking about 0:17:00.720 --> 0:17:03.040 the biggest stocks in the S and P five hundred, 0:17:03.480 --> 0:17:06.200 how to navigate the risks as well as the benefits 0:17:06.240 --> 0:17:07.959 that they provide to your portfolio. 0:17:08.280 --> 0:17:10.480 You know, that's it's it's a great question. I would 0:17:10.520 --> 0:17:12.959 just I don't think we should really talk about the 0:17:13.000 --> 0:17:17.199 MAG seven anymore. There's really no reason for Tesla to 0:17:17.240 --> 0:17:20.359 be included in the MAG seven. Tesla is losing share 0:17:21.200 --> 0:17:26.120 in all of its end markets. It's autonomous driving efforts 0:17:26.160 --> 0:17:30.880 are are flailing. This is this. If we're gonna put 0:17:30.880 --> 0:17:33.680 Tesla in the in the Mag seven, we should put 0:17:33.720 --> 0:17:36.800 GM and Fords and every other you know, Toyota in 0:17:36.840 --> 0:17:39.840 the Mag seven as well, because it doesn't Tesla's not 0:17:39.880 --> 0:17:44.199 a stock anymore. Tesla is a cryptocurrency. Tesla is a 0:17:45.680 --> 0:17:48.639 It is a it is a purely speculative vehicle, so 0:17:48.720 --> 0:17:51.679 it doesn't has no characteristics like the other companies in 0:17:51.720 --> 0:17:53.760 the Mag seven. But if you you know, think about 0:17:53.760 --> 0:17:55.639 the Mag seven, So we to your point, we have 0:17:55.760 --> 0:17:59.320 a large overweight in the Mag seven. In Microsoft, we 0:17:59.359 --> 0:18:01.720 think you know, it trades at a very reasonable valuation 0:18:01.800 --> 0:18:05.399 even after a big move in the stock. This is 0:18:05.400 --> 0:18:09.720 a company that is you know, clearly a winner a market, 0:18:09.760 --> 0:18:12.840 probably the fastest growing company in kind of cloud computing. 0:18:13.920 --> 0:18:16.240 We think that growth rate has been accelerating and potentially 0:18:16.240 --> 0:18:19.560 could accelerate off a very very large base. You know, 0:18:19.680 --> 0:18:21.760 just a great company, great management team. And actually, if 0:18:21.800 --> 0:18:25.560 you think about AI, focusing on inference not on training, 0:18:26.000 --> 0:18:30.000 inference is more durable than training. In addition, you know, 0:18:30.040 --> 0:18:31.879 I think they've actually said no to open AI in 0:18:31.960 --> 0:18:34.639 some cases, which I think will end up proving to 0:18:34.640 --> 0:18:39.040 be a very wise capitallication. Decision that hurts the growth 0:18:39.080 --> 0:18:41.360 and the short term. So we love that. We love 0:18:41.560 --> 0:18:43.760 We love Amazon for a lot of the same reasons. 0:18:44.359 --> 0:18:47.359 You know, cost Go trades for fifty times earnings. Walmart 0:18:47.400 --> 0:18:50.120 trades for thirty five times earnings. You know, Amazon, even 0:18:50.119 --> 0:18:53.160 with a great cloud computing, a retail business that grows 0:18:53.160 --> 0:18:55.320 faster than both of those companies I mentioned, is still 0:18:55.320 --> 0:18:57.440 trading in the low thirties. It doesn't make any sense 0:18:57.640 --> 0:19:01.480 from my perspective. Again, not as fast is growing as 0:19:02.160 --> 0:19:05.439 amaz as your division, but still very very fast growing. 0:19:05.560 --> 0:19:07.720 And again we think Aws, which is kind of growing 0:19:07.760 --> 0:19:11.439 in the mid ties, can accelerate over time. I already 0:19:11.440 --> 0:19:15.200 mentioned no no position in Tesla. Tesla could fall ninety 0:19:15.240 --> 0:19:18.639 percent and we wouldn't buy one share of that. We 0:19:18.720 --> 0:19:22.320 had an underweight to Apple, Apple has You know, Apple 0:19:22.440 --> 0:19:25.359 is a great company. I do wonder in five or 0:19:25.400 --> 0:19:27.720 ten years, well, we'll still be using Apple devices and 0:19:27.760 --> 0:19:31.200 the same we were using today. You know, Apple will 0:19:31.240 --> 0:19:33.480 generate somewhere between twenty twenty five billion dollars a year 0:19:33.480 --> 0:19:37.200 from Google for its its tax, if you will, there's 0:19:37.240 --> 0:19:40.080 a very high probability that Google's ability to pay Apple 0:19:40.119 --> 0:19:43.800 that that very large, high margin revenue stream will go away, 0:19:44.480 --> 0:19:46.560 maybe as early as AUGUSTA this year, depending on a 0:19:46.600 --> 0:19:49.600 court decision. So again, you know, Apple and Google or names. 0:19:49.600 --> 0:19:52.640 We have a little bit of an underweight on were 0:19:52.720 --> 0:19:55.160 underweight in video as well. It's not that in video 0:19:55.200 --> 0:19:56.679 is not a great company. We just think there's a 0:19:56.680 --> 0:20:00.520 better rist reward if you want to play aig PUS 0:20:00.960 --> 0:20:04.639 in am D. You know, today in video it's basically 0:20:04.640 --> 0:20:06.520 one hundred percent you know, let's called ninety five percent 0:20:06.560 --> 0:20:10.240 market share of all GPUs acceleraties in the marketplace. We think, 0:20:10.320 --> 0:20:12.359 in talking with all of our doing all of our 0:20:13.000 --> 0:20:16.080 channel checks and research says in five years that share 0:20:16.119 --> 0:20:18.159 is going to go from ninety five percent to seventy percent. 0:20:18.800 --> 0:20:20.520 A m D today has let's call it a three 0:20:20.520 --> 0:20:22.840 percent market share of GPUs on the on the A 0:20:23.160 --> 0:20:26.360 I side, new products get very you know them four 0:20:26.440 --> 0:20:30.240 hundred class gets really good feedback from channel partners, and 0:20:30.320 --> 0:20:32.560 we think a MD can clearly be a fifty percent 0:20:32.560 --> 0:20:35.040 market share over time next in the next five years. 0:20:35.560 --> 0:20:38.760 In that case, AMD's that's probably going to triple, whereas 0:20:38.760 --> 0:20:40.879 in video can still go up, but probably not nearly 0:20:40.920 --> 0:20:43.399 as much as as a m D. Another company we 0:20:43.560 --> 0:20:46.520 liked a lot that helps offset the underweight to in 0:20:46.600 --> 0:20:50.080 video is Amfanol. Anthonol makes a lot of the connectors 0:20:50.119 --> 0:20:53.720 and switches that basically go between GPUs that basically allow 0:20:53.840 --> 0:20:57.960 GPUs to work, makes allows large clusters of GPUs to work, 0:20:58.000 --> 0:21:00.600 and honestly, for ANFLOL, it doesn't real matter if in 0:21:00.680 --> 0:21:03.600 video works or a MD works or custom silicon works, 0:21:04.200 --> 0:21:08.760 Anthonol's connectors are needing all those situations. So again underweight 0:21:08.800 --> 0:21:12.159