August 6, 2025 • 30 mins
Valuation expansion, not earnings growth, has driven most of the S&P 500’s gains since 2022. In this episode of Inside Active, hosts David Cohne, mutual fund and active management analyst with Bloomberg Intelligence, and BI’s Chief Equity Strategist Gina Martin Adams speak with David Giroux, chief investment officer of US equity at T. Rowe Price and a portfolio manager for the Capital Appreciation strategy. Giroux shares why internal rate of return projections guide his stock selection, the critical importance of avoiding companies with fatal flaws and how counter-cyclical actions historically boost performance. They also discuss private investments, bonds and why independent thinking is essential for long-term investment success. The podcast was recorded on July 21st.
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Speaker 1 (00:12):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Gina Martin Adams, chief equity
strategist at Bloomberg Intelligence. Gina, thank you for joining me today.
Speaker 2 (00:33):
Thank you for having me, David. I'm delighted to be here.
Speaker 1 (00:36):
So I first wanted to ask you about a note
you wrote recently regarding valuations masking slowest EPs recovery. Since
I believe it was twenty eighteen, can you give the
audience kind of an overview of what was happening?
Speaker 2 (00:51):
Yeah, I think a couple of things really come to mind.
The first is that valuations have really done the heavy
lifting in the S and P five hundred bull market
since twenty twenty two. If you go back to that
bullmarket low or the big bear market low from twenty
twenty two and classify this recent three year run as
a big ballmarket rally, we've had trailing twelve month earnings
(01:11):
that have grown just fourteen percent this is the slowest
pace of non recessionary growth in the index for a
rolling thirty some odd month windows since at least early
twenty eighteen. Despite that really slow earnings growth, almost painfully
slow earnings growth, we've had more than seventy percent price
appreciation in the S and P five hundred, and this
(01:32):
year in particular has been really interesting because it's sort
of turned that relationship on its head for the first
time in a long time. Earnings may actually grow faster
than valuations. This may be one of those rare years
in the S and P five hundred where we get
some earnings growth allowing companies to grow into valuation multiples
that have expanded so very quickly over the last three years.
Speaker 1 (01:54):
Great, well, I'd love to hear our guest thoughts on this,
so I think it's a great time to introduce David
Jaru to the podcast. David is a chief investment officer
of US Equity at TROW Price and a portfolio manager
for the Capital Appreciation strategy, including the Capital Appreciation Mutual
fund ticker p RWCX and the Capital Appreciation Equity etf
(02:17):
ticker TCAF. David, thank you for joining us.
Speaker 3 (02:21):
H it's a pleasure. Thank you for having me on.
Speaker 1 (02:23):
So let's start with your thoughts on the market dynamic
that Gina has observed on with rising valuations and a
slow EPs recovery.
Speaker 3 (02:32):
No, I think it's I read the artic thought that
was a very thoughtful analysis, and then you don't see
most people addressing. But as Gina said, if you kind
of go from the market trough in twenty twenty two,
the market with basically trot about you know, fifteen or
sixteen times forward earnings, today we're kind of, you know,
twenty two or twenty three. So we've had basically the
(02:53):
market and Multiple go up by about fifty percent off
the trough, sort of trough to peak, and Ernie's growth,
which again and as Gena says, is starting to get
a little bit better. This year, we'll probably end up
doing double digitaries growth or let's least at least high
school digitaries growth this year after a couple of years
of what I call kind of somewhat sub parties growth
in both twenty three twenty four. Great.
Speaker 1 (03:14):
Great, So let's switch over to your funds. So let's
let's talk specifically about the capital appreciation strategy. What is
the investment process. You know, how how do securities make
their way to the portfolio?
Speaker 3 (03:27):
Sure, you know, you know there's we think about the
sp FI FI. Let's just we'll take it through equities.
We'll talk a little bit about fixed income, and we'll
talk about kind of process. What I would tell you is,
you know, there aren't five hundred great companies in the
sp five hundred, right, you know, we believe there's only
about one hundred and twenty five stocks that we call investable.
And when I need investable, what does that mean? It
really means, you know, when we look back and what
(03:50):
are the five or six characteristics that kind of cosset
stocks in to perform? And we want to avoid those
five six characteristics. What are the five six characteristics? You know,
bad management teams, secular risk, you know, extreme valuation and
inability to do a high school digit kind of total return,
poor cap allocation. Those are the kind of things if
we basically get the whole last P. Five hundred and
(04:12):
we may say, if we can avoid companies that have
one or two, one or two or more of those
fatal flaws, their odds about performing are really really low.
So we want to we want to basically remove basically
three hundred and seventy five companies that we invest in,
So we invest the one hundred twenty five hundred companies
that have none of those fatal flaws where we think
the odds about performance over any kind of three five
(04:34):
ten year basis are quite hot. So that's kind of
our equity selection basis. The other thing about our equity
selection basis is we tend to have in our north
stars at five year i r R, what is the
expected earnings five years out, what is the expected multiple
we're going to get, and what is the kind of
embedded i rr we're going to try to invest obfuly
in the highest risk just at irs we can, and
(04:54):
the equity sleeve, in the fixed income sleeve, we you know,
we compete against kind of a Bloomberg ag However, we
tend to think the Bloomberg gaging is actually not the
best universe. That's a universe built based on the size
of different markets. Are supposed to attractives of different markets.
So you would see us investing much heavily you know
(05:14):
what we call high quality leveraged loans, high quality high
yield bonds with very very low risk of default. And
then selectively by treasuries when the treasuries are attractive as
they are now. So again we're focused on not the
largest markets, but we're the best risks returns over time.
And if you look at over time, the best risk
of rewards and fixed income are not mortgages, not triple
(05:37):
A securities, but double B credits, leverage loans. That's where
the risk of reward is the highest. The last thing
I would say is that we tend to be kind
of countercyclical. In twenty twenty two, when the market was
facing difficulties, we were adding to lot of equities. We
were adding to semiconductor companies, we were adding to pyxicality.
(05:59):
During this Trump tariff noise that drive the market down
to four to nine hundred, we put four billion dollars
to work in three day period of time. During COVID,
we put nine billion dollars to work in less than
a month. So you will almost always see us acting
counterintuitively to the market. Marketing going lower, we're adding to
(06:19):
risk assets. Market goes higher, we're reducing risk assets. And
that process, over the last nineteen years since I've been
managing these strategies has added a lot of alpha to
the strategy being a little bit countercyclical when because we
know when markets go lower, the odds of losing money
actually go lower, the odds actually generate above average returns
(06:41):
go higher. And again, you know, we know we are
willing to invest into uncertainty in those kind of periods
of time in the mark, whether that be in fixed
income or whether that be in inequities.
Speaker 1 (06:53):
So before we dig a little bit deeper into that,
I just wanted to ask a little bit about the
two different fun types. I know, we you know, the
big difference is obviously the ETF doesn't hold fixed income
whereas the mutual fund does. But are there any differences
between the equity portfolios of the you know, between the
mutual fund and the ETF.
Speaker 3 (07:11):
The ETF would have will have more names, you don't
have a little bit lower track year. The ETF has
a slightly different objective. The e TF wants down from
the market over time. It wants to do with always
having a risk profile that's less in the market, and
it also wants to have a a taxial income that
is basically zero and has a you will always have
(07:34):
a dividend below that of the market. So we say
we can outform the market with less risk and more
tax efficiency over over a long period of time.
Speaker 2 (07:43):
David, you mentioned all the factors that you do to
use to avoid stocks, sort of avoiding the fatal flaws?
Is the language that I loved you used? What do
you what are you most attracted to? So how do
you define capital appreciation potential? I know you mentioned I
is a really critical component of your process, But are
there other factors that you use? How do you identify
(08:06):
those high RRR companies?
Speaker 3 (08:08):
Well, if you think about again, we think about the
five hundred companies and the SPIF hundred, maybe a couple
of companies outside the SPF hundred. We reduce that three
hundred and seventy five companies that don't have one or
more of those fatal flaws GITA, and then we'll basically
myself and my team, we will basically actively model those
one hundred and twenty five companies. We will look at
their earnings power today. We'll look at their earnings power
(08:28):
where what we think is going to be twenty thirty
twenty thirty one. We'll look at what the dividends that
are likely to pay over that period of time. We'll
look at what the right multiple for that company is
and then that will basically spit out an internal rate
to return, and then we're trying to find companies that
have an attractive risk to just return, but also with
a as narrow of a range of outcomes as possible
(08:50):
is really key to our process, right, So if you
look at our portfolio today, we would have an IRR
in the portfolio in the low teams. In the equity
market that was as hot is during COVID in the
mid twenties, during twenty twenty two, was in the mid teens.
During the Trump tariff tantrument, if you will, it was
also in the mid teens. But we compare that relative
(09:12):
to what we perceive as a market i AR that's
kind of in the mid seele digits and the potential
to hopefully generate kind of mid you know, five hundred
BIPs or more alpha versus the market over that period
of time. So we're literally looking at one hundred and
five companies that meet our criteria where we think there's
a high odds of outperformance and the you know, we're
trying to find that you're roughly the highest sixty on
(09:34):
a risk us basis within the equity, sleep of the
balance strategy, cap appreciation, and maybe we're like the top
ninety stocks within the cappreciation ETF.
Speaker 2 (09:46):
You mentioned the SMP five hundred a few times, but
it sounds like you're amenable to ideas outside of the
SMP five hundred when and if it's appropriate, can you
talk to us about you know what you know many
people would suggest are really clearly very high valuations for
certain select groups in the s and P five hundred.
How are you navigating that right now? And is that
pushing you into ideas outside the United States or even
(10:10):
ideas in private markets not necessary?
Speaker 3 (10:13):
Maybe yes and no, Maybe yes and no to that
to that point, you know, there are great companies outside
the US, I would say coming great companies outside of
the US are rare. So one example of a great
company outside the US is Kadie National C and Q.
It is an oil sands oil producer. The average major
in the United States has a reserve life of like
(10:34):
nine years. That means Exxon or Chevron has to go
out every couple of years and spend it Shad's capital
to buy Hess or buy Pioneer, whereas C and Q
does have to do any acquisitions at all, they have
twenty nine years reserve life, they can continue producing, and
their continued to extend that reserve life. They traded a
discount to C and Q or to Exon, and yet
(10:58):
they grow production faster like four percent versus three percent.
They have a higher dividend yield UH, and they have
better cap allocation UH and so and again a very
very strong tremendous on a free cash to that allows
them to buy back stock, pay a dividend. It's almost
five percent. So we do see opportunities out there. However,
I would say is when when we do the micro analysis,
(11:20):
when we go through look at all the companies in Europe,
look at all the companies in Japan, like all the
things in Australiak at all the other companies in develop
market economies, we don't find a lot of great companies.
We think, you know, the US has more than its
fair share of great companies. And while the European and
Japanese and Australian indexes are trading at lower valuations, in
(11:41):
the US index is there's a there's a reason for that.
And what what is in Europe is mostly you know,
low quality banks, low quality materials, companies, energy companies that
don't want to be energy companies, utilities that don't have
the same characteristics as US utility. There's no mag six,
(12:03):
there's there's very little, you know, attractive kind of businesses
and kind of garpie companies. So if you do it
an apples apples basis, we don't think the US is
expensive relative to what you can get in Europe or
Japan or Australia. Now your question on private markets, I
do see opportunity in private markets. Again, we own four
(12:26):
companies that are that are not public companies today. That's
about you know, maybe let's call it four percent of
our equities are in privates. We tend to own more
what we call it kind of more stable private equity
type businesses. So we would own a company like broad
Street or Hub, which are both insurance brokerage companies. They're
(12:47):
a little smaller than the Marsh mcclennan's or Aon's of
the world, but they trade for lower valuations. They are
able to do more acquisitions at low multiples, and they've
been in creating value at it let's call it a
mid to high teenh pace versus the public guys who
kind of are growing, let's call it a ten percent
pace with great management teams at evaluation that is below
(13:08):
marsh or on. So we've chosen to take advantage of
that kind of that private versus public market arbitrage and
own some of those companies in size. We also own Weimo.
Weymo is a private company. Obviously, they are the leader
in autonomous driving. The last mark there I think publicly
was in the you know, the forty to forty five
billion dollar range. We're a big believer that when Weimo
(13:31):
goes public, given the giant tam It has, that that
will be a company that will probably have a market
value of somewhere rotween two to three hundred billion dollars.
I think Tesla has proved that, you know, autonomous driving
is really really hard, Tesla's not ready for prime time,
and that Weimo is by far the market leader and
(13:52):
autonomous driving today.
Speaker 1 (13:55):
But I did want to ask, you know, in the
perspectives it does talk about opportunity, opportunit hunistic investments in
the portfolio. Is there a percentage that you limit these
two No.
Speaker 3 (14:06):
Actually, it's it's an interesting question, David. What I would
say is, I think everything we're trying to do is
a little bit opportunistic, right, We're trying to take advantage
of marketing efficiencies. We're trying to take a longer term
horizon than other market participants. Some you know, some some
situations like we, you know, we've bought hole Logic. Hole
Logic is a company that we haven't really owned in
(14:27):
the past. The company's trading at sixty four sixty three
dollars a share. There's you know, there's been a you know,
a I think a Financial Times reported that multiple private
equity firms were looking to take hole Logic private at
seventy two dollars. I think it would make sense that,
you know, that would they would be able to generate
(14:47):
a very high return if they were to do that.
Given how attractively valued Hole Logic is. We believe that,
you know, that that company could still go private, probably
at a higher valuation, so that I would describe that
as an opportunistic investment. You know. Another opportunitist investment is
kind of Beckton Dickinson. Beckton Dickinson's has some challenges around tariffs,
(15:09):
some challenges around weakness in China, but this is a
company that has a massive some of the part's discount,
they started going down the path of rectifying that supply.
Some of the parts discount they're selling off in an
arm T transaction some of their dignostics and life science
tool businesses to Waters. We think that'll be a value
creating endeavor. We think they'll end up spinning off their
(15:32):
pharmaceutical systems business as well, maybe do another rm T
with that transaction. And once you keep doing you know,
once you do that arm T with the pharma systems business,
once you get Waters transaction done. This is a company.
It's basically traded for eight times earnings, which has the
potential especially they continue to buy that stock to grow
earnings in the you know, the low teens. Most companies
(15:54):
that have low teens earnings growth don't trade for eight
times earnings. They trade for more than like key to
twenty times earnings. So we think Beck then this is
also kind of an opportunistic investment. We've also had Catalyst
in place with a starboard who's probably one of the
better activists in the marketplace actively involved in the stock
as well. So we will own a number of names
(16:16):
where we think there is some kind of hidden optionality
ow producing investment where we think we can make a
lot of money in the near term.
Speaker 2 (16:24):
David, could I ask a little bit about kind of
how you navigate some of the key risk factors that
we think about as equity strategists. So one of the
things we're thinking about a lot this year is concentration risk.
In the fact that you know, effectively only ten percent
of the S and P five hundred is now actually
driving gains in the market. We think about the MAG
seven as a specific risk within that concentration risk. I
(16:47):
noticed in your portfolio that you have pretty heavyweights in
Microsoft in the video. At the same time, you know,
navigating a big difference in positioning in Amazon and Apple.
Maybe talk to us broadly about how you're thinking about
the biggest stocks in the S and P five hundred,
how to navigate the risks as well as the benefits
that they provide to your portfolio.
Speaker 3 (17:08):
You know, that's it's it's a great question. I would
just I don't think we should really talk about the
MAG seven anymore. There's really no reason for Tesla to
be included in the MAG seven. Tesla is losing share
in all of its end markets. It's autonomous driving efforts
are are flailing. This is this. If we're gonna put
(17:30):
Tesla in the in the Mag seven, we should put
GM and Fords and every other you know, Toyota in
the Mag seven as well, because it doesn't Tesla's not
a stock anymore. Tesla is a cryptocurrency. Tesla is a
It is a it is a purely speculative vehicle, so
it doesn't has no characteristics like the other companies in
(17:51):
the Mag seven. But if you you know, think about
the Mag seven, So we to your point, we have
a large overweight in the Mag seven. In Microsoft, we
think you know, it trades at a very reasonable valuation
even after a big move in the stock. This is
a company that is you know, clearly a winner a market,
probably the fastest growing company in kind of cloud computing.
(18:13):
We think that growth rate has been accelerating and potentially
could accelerate off a very very large base. You know,
just a great company, great management team. And actually, if
you think about AI, focusing on inference not on training,
inference is more durable than training. In addition, you know,
I think they've actually said no to open AI in
some cases, which I think will end up proving to
(18:34):
be a very wise capitallication. Decision that hurts the growth
and the short term. So we love that. We love
We love Amazon for a lot of the same reasons.
You know, cost Go trades for fifty times earnings. Walmart
trades for thirty five times earnings. You know, Amazon, even
with a great cloud computing, a retail business that grows
faster than both of those companies I mentioned, is still
(18:55):
trading in the low thirties. It doesn't make any sense
from my perspective. Again, not as fast is growing as
amaz as your division, but still very very fast growing.
And again we think Aws, which is kind of growing
in the mid ties, can accelerate over time. I already
mentioned no no position in Tesla. Tesla could fall ninety
percent and we wouldn't buy one share of that. We
(19:18):
had an underweight to Apple, Apple has You know, Apple
is a great company. I do wonder in five or
ten years, well, we'll still be using Apple devices and
the same we were using today. You know, Apple will
generate somewhere between twenty twenty five billion dollars a year
from Google for its its tax, if you will, there's
a very high probability that Google's ability to pay Apple
(19:40):
that that very large, high margin revenue stream will go away,
maybe as early as AUGUSTA this year, depending on a
court decision. So again, you know, Apple and Google or names.
We have a little bit of an underweight on were
underweight in video as well. It's not that in video
is not a great company. We just think there's a
better rist reward if you want to play aig PUS
(20:00):
in am D. You know, today in video it's basically
one hundred percent you know, let's called ninety five percent
market share of all GPUs acceleraties in the marketplace. We think,
in talking with all of our doing all of our
channel checks and research says in five years that share
is going to go from ninety five percent to seventy percent.
A m D today has let's call it a three
percent market share of GPUs on the on the A
(20:23):
I side, new products get very you know them four
hundred class gets really good feedback from channel partners, and
we think a MD can clearly be a fifty percent
market share over time next in the next five years.
In that case, AMD's that's probably going to triple, whereas
in video can still go up, but probably not nearly
as much as as a m D. Another company we
(20:43):
liked a lot that helps offset the underweight to in
video is Amfanol. Anthonol makes a lot of the connectors
and switches that basically go between GPUs that basically allow
GPUs to work, makes allows large clusters of GPUs to work,
and honestly, for ANFLOL, it doesn't real matter if in
video works or a MD works or custom silicon works,
(21:04):
Anthonol's connectors are needing all those situations. So again underweight
in the video, but still a overweight to what it
called AI GPUs.
Speaker 2 (21:14):
I'm glad you brought up this Tesla conundrum because it's
been one of my frustrations of kind of this MAG
seven construct as well. And as a result, I just
really quickly looked up on the terminal here as to
who are the seven biggest stocks, because I think that
was the original kind of construct is the biggest and
Broadcom is actually in there now. I know that Berkshire
(21:35):
has occasionally jumped in in the place of Tesla, So
to your point, Tesla's been in and out of even
the top seven if you use top seven as your
construct of of MAG seven, but that's maybe here nor there.
I just found it very interesting and we won't tell
Elon Musk that.
Speaker 3 (21:52):
You know, you can tell you mustag you want, you
can tell that he doesn't deserve it anymore. You have
to grow. You have to grow to be in the
max seven.
Speaker 2 (22:00):
You cans fighting words. Okay, hold it, hold him to that.
I will hold him to that.
Speaker 3 (22:07):
Okay. Good.
Speaker 1 (22:10):
So I wanted to ask does bond analysis affect your
equity decisions at all?
Speaker 3 (22:16):
It does?
Speaker 2 (22:17):
It?
Speaker 3 (22:17):
Does it? Does? I mean? We we are we have
the ability to go where we see value in the marketplace. Right,
So I always think about, you know, having a double
b rated Hilton bond, right that's earning six percent, that
has a beta of point two? What is the risk
reward of that that Hilton bond relative to a low
risk equity that you know, like a utility that might
(22:38):
have a beta point five? Right, So, we we have
the ability to go where we see value in the marketplace.
And some of the way that manifests itself is, you know,
during the COVID downturn, you know, we were selling bonds
and buying equities. During the Trump tariff tantrum, we were
selling bonds and buying equity. Today with the market being very,
(23:01):
very richly valued as you know, again Gina's thoughtful analysis highlighted,
you know, our fixing can exposure, you know, has gone
from back in twenty twenty two kind of high teens
percentage of the portfolio today in the low thirties. So
we have the ability to go where we see the value,
and we can change that bond allocation as well. Back
in twenty twenty two, we were mostly in leveraged loans
(23:24):
because we thought you had free optionality if rates ever
went up, and they did, and today we have a
little more balance because rates are higher. You'll see us
having the almost fifty percent of our portfolio and kind
of five year treasuries and you know, a low teens
kind of exposure to leverage the loans and a high
stealage exposure to high quality, high yield. So we can
(23:44):
change the mix of equities versus debt, but also the
mix of debt and actually the mix of equities too.
In twenty twenty two, when the market is really cheap,
we owned a higher beta mix of equities. Actually started
buying a video. We bought somemic connectric companies, We bought
in industrials because everybody believed that there was one hundred
percent chance we're going to recession. We said, even if
(24:05):
there is, even if we do go into recession, all
those cylical companies already pricing it in. So just because
Jamie Diamond was saying we're going into recession, the market believed,
it believed that was happening, and but it was already
fully priced in. So it created a really attractive restueward.
If we went to a recession, there were that we
had limited downside. If we didn't go into recession, all
those cyclicals would pop in, which they did. Today is
(24:26):
the inverse. Everybody is very, very bullish on the economy.
Everybody's bullish on a cyclicality, everybody's bullish on beta, and
we're taking the other side of that. So we're adding
to utilities, we're adding to lower beta stocks, we're adding
to healthcare. We're kind of doing you know, because not
because you know, we're betting the time is going to
(24:48):
fall off the cliff. We just think over a five
year basis, you know, buying Goldman Sachs at two times
tangible book value, you're not going to make a lot
of money. Buying JP Morgan at fifteen times, you're not
going to make a lot of money buying select industrials
at twenty five times earns. You're not going to make
a lot of money, but buying really great utilities at
a discount of the market where their business is inflecting
(25:09):
positive on an organic growth basis. Healthcare comes is a
little bit out of favor today, but where the long
term sol looks really good. But there's all these idiosymocratic
ideas that we like. That's we're always kind of going
where weceive value, not what the market is telling us
we should like. I think that's that that that ability
to think independently the market is really important to our
(25:29):
strategy and important to our success over time.
Speaker 2 (25:33):
Well, I think we're all in trouble then, because our
sector scorecard right now is telling us also move into
defensive ideas. So watch yourself. We all have the same idea.
We could be in trouble. But I would agree with you.
In general, the market seems to be a little bit optimistic,
which is crazy to think about three months ago. You know,
for a hot minute, we were pricing kind of really
(25:55):
devastating conditions emerging, and then we pivoted so quickly and
we roared back, And I think that's been a really
big challenge for investors. But if you think the dynamics
of trade as one of the big policy issues that
has emerged this year, are there any nuanced changes that
you're making in your portfolio specific to trade policy risk
and the evolution of tariffs and the changing global trade
(26:19):
relationships that have really kind of hit us this year
as a major risk to stocks.
Speaker 3 (26:26):
You know, not really, I would say a couple of things.
One I would say in the market was very very
to your point, the mark was very, very concerned about
tariffs early April, early in mid April, right and the
market fell off again. We use it as an opportunity
to buy directions. But today the market is just you know,
I think they believes is the Taco situation and it
won't manifest itself. I would say, as someone who is,
(26:49):
you know, again a chief hit investment officer, one of
the things in addition to managing money for my clients
is trying to be a trying to think about bigger
picture issues for the market. I think when that one
of the reasons that we had so much conviction to
put four billion dollars to work in three days at
the market's bottom was a some of the work we
(27:10):
did to the that came up to the you know,
talking with you know, law school professors, talking to constitutional scholars,
and we believe very strongly, uh, you already saw it
kind of it C decision on this. I think by
the you know, let's call it early next year, the
vast majority of tariffs that this president's put in place
will be ruled on constitutional. Maybe not all of them,
(27:32):
but the vast majority of those tariffs will be ruled
on county that you could actually argue that's a little
bit of a bullish sign for the market that again,
the Supreme Court, I would bet in the seven to
one or seven two or eight one decision will strike
down the vast majority of the tariffs. The ITC already
came back three zero. That was a Obama, a Bush,
(27:52):
and a Trump supporter who probably don't agree on anything,
could agree that the tariffs were unconstitutional. And I think
we'll see that at the Supreme Court. And so I
think the vast majority of the terrafs, maybe maybe the
Chinese terraffs, maybe the Illudin was still terraf, might stay
in place, but the vast majority of the other terrafs
will be ruled unconstitutional.
Speaker 1 (28:11):
I also want to ask about management teams. So you know,
we talked about what you look for in companies and
you know what you're avoiding when it comes to looking
at management teams. Do you have any set of process
where you're you know, is there like a way you're
evaluating them or certain things that you look for.
Speaker 3 (28:27):
Well, there's a couple of hats we really want to
invest alongside management teams where the cap allocation is excellent.
I think if you look at a lot of the
giant winners for our strategy over the last decade or more,
whether that you know, AutoZone, O'Reilly, five, Serve, Texas Instruments,
(28:47):
Dan or her Roper, those were all companies that had
excellent cap allocation that really we're able to generate very
attractive returns with an efficient capital structure almost all of
those cases. So capital location. We also want management teams
that are operationally sound, where they you know, again they
generate nicety in creminal margins on incremental sales. They don't
(29:12):
they don't have big operational hiccups all the time. They
they what they promise they're going to do, they actually
deliver upon to the best extent they can. I think
those are the you know, good operational prowess, good capitallarcation,
and you know companies that that that that that run
(29:32):
their business as well well.
Speaker 1 (29:33):
This is a great discussion, David. We really appreciate your
time and thank you again for joining us.
Speaker 3 (29:39):
No, thank you for having me great questions as always,
Thank you and.
Speaker 1 (29:41):
Gina, thank you for being my co host today.
Speaker 2 (29:44):
Oh my absolute pleasure. Thank you David, and nice to
meet you. David. Thanks for thanks for joining us.
Speaker 1 (29:50):
My pleasure and I want to thank our listeners. If
you liked the episode, please subscribe and leave a review. Also,
if you'd like to see more of our research, go
to b I FI on Go n BI Stalks Go
on the Terminal Until our next episode. This is David
Cone with the Inside Out.
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Gina Martin Adams, chief equity
strategist at Bloomberg Intelligence. Gina, thank you for joining me today.
Speaker 2 (00:33):
Thank you for having me, David. I'm delighted to be here.
Speaker 1 (00:36):
So I first wanted to ask you about a note
you wrote recently regarding valuations masking slowest EPs recovery. Since
I believe it was twenty eighteen, can you give the
audience kind of an overview of what was happening?
Speaker 2 (00:51):
Yeah, I think a couple of things really come to mind.
The first is that valuations have really done the heavy
lifting in the S and P five hundred bull market
since twenty twenty two. If you go back to that
bullmarket low or the big bear market low from twenty
twenty two and classify this recent three year run as
a big ballmarket rally, we've had trailing twelve month earnings
(01:11):
that have grown just fourteen percent this is the slowest
pace of non recessionary growth in the index for a
rolling thirty some odd month windows since at least early
twenty eighteen. Despite that really slow earnings growth, almost painfully
slow earnings growth, we've had more than seventy percent price
appreciation in the S and P five hundred, and this
(01:32):
year in particular has been really interesting because it's sort
of turned that relationship on its head for the first
time in a long time. Earnings may actually grow faster
than valuations. This may be one of those rare years
in the S and P five hundred where we get
some earnings growth allowing companies to grow into valuation multiples
that have expanded so very quickly over the last three years.
Speaker 1 (01:54):
Great, well, I'd love to hear our guest thoughts on this,
so I think it's a great time to introduce David
Jaru to the podcast. David is a chief investment officer
of US Equity at TROW Price and a portfolio manager
for the Capital Appreciation strategy, including the Capital Appreciation Mutual
fund ticker p RWCX and the Capital Appreciation Equity etf
(02:17):
ticker TCAF. David, thank you for joining us.
Speaker 3 (02:21):
H it's a pleasure. Thank you for having me on.
Speaker 1 (02:23):
So let's start with your thoughts on the market dynamic
that Gina has observed on with rising valuations and a
slow EPs recovery.
Speaker 3 (02:32):
No, I think it's I read the artic thought that
was a very thoughtful analysis, and then you don't see
most people addressing. But as Gina said, if you kind
of go from the market trough in twenty twenty two,
the market with basically trot about you know, fifteen or
sixteen times forward earnings, today we're kind of, you know,
twenty two or twenty three. So we've had basically the
(02:53):
market and Multiple go up by about fifty percent off
the trough, sort of trough to peak, and Ernie's growth,
which again and as Gena says, is starting to get
a little bit better. This year, we'll probably end up
doing double digitaries growth or let's least at least high
school digitaries growth this year after a couple of years
of what I call kind of somewhat sub parties growth
in both twenty three twenty four. Great.
Speaker 1 (03:14):
Great, So let's switch over to your funds. So let's
let's talk specifically about the capital appreciation strategy. What is
the investment process. You know, how how do securities make
their way to the portfolio?
Speaker 3 (03:27):
Sure, you know, you know there's we think about the
sp FI FI. Let's just we'll take it through equities.
We'll talk a little bit about fixed income, and we'll
talk about kind of process. What I would tell you is,
you know, there aren't five hundred great companies in the
sp five hundred, right, you know, we believe there's only
about one hundred and twenty five stocks that we call investable.
And when I need investable, what does that mean? It
really means, you know, when we look back and what
(03:50):
are the five or six characteristics that kind of cosset
stocks in to perform? And we want to avoid those
five six characteristics. What are the five six characteristics? You know,
bad management teams, secular risk, you know, extreme valuation and
inability to do a high school digit kind of total return,
poor cap allocation. Those are the kind of things if
we basically get the whole last P. Five hundred and
(04:12):
we may say, if we can avoid companies that have
one or two, one or two or more of those
fatal flaws, their odds about performing are really really low.
So we want to we want to basically remove basically
three hundred and seventy five companies that we invest in,
So we invest the one hundred twenty five hundred companies
that have none of those fatal flaws where we think
the odds about performance over any kind of three five
(04:34):
ten year basis are quite hot. So that's kind of
our equity selection basis. The other thing about our equity
selection basis is we tend to have in our north
stars at five year i r R, what is the
expected earnings five years out, what is the expected multiple
we're going to get, and what is the kind of
embedded i rr we're going to try to invest obfuly
in the highest risk just at irs we can, and
(04:54):
the equity sleeve, in the fixed income sleeve, we you know,
we compete against kind of a Bloomberg ag However, we
tend to think the Bloomberg gaging is actually not the
best universe. That's a universe built based on the size
of different markets. Are supposed to attractives of different markets.
So you would see us investing much heavily you know
(05:14):
what we call high quality leveraged loans, high quality high
yield bonds with very very low risk of default. And
then selectively by treasuries when the treasuries are attractive as
they are now. So again we're focused on not the
largest markets, but we're the best risks returns over time.
And if you look at over time, the best risk
of rewards and fixed income are not mortgages, not triple
(05:37):
A securities, but double B credits, leverage loans. That's where
the risk of reward is the highest. The last thing
I would say is that we tend to be kind
of countercyclical. In twenty twenty two, when the market was
facing difficulties, we were adding to lot of equities. We
were adding to semiconductor companies, we were adding to pyxicality.
(05:59):
During this Trump tariff noise that drive the market down
to four to nine hundred, we put four billion dollars
to work in three day period of time. During COVID,
we put nine billion dollars to work in less than
a month. So you will almost always see us acting
counterintuitively to the market. Marketing going lower, we're adding to
(06:19):
risk assets. Market goes higher, we're reducing risk assets. And
that process, over the last nineteen years since I've been
managing these strategies has added a lot of alpha to
the strategy being a little bit countercyclical when because we
know when markets go lower, the odds of losing money
actually go lower, the odds actually generate above average returns
(06:41):
go higher. And again, you know, we know we are
willing to invest into uncertainty in those kind of periods
of time in the mark, whether that be in fixed
income or whether that be in inequities.
Speaker 1 (06:53):
So before we dig a little bit deeper into that,
I just wanted to ask a little bit about the
two different fun types. I know, we you know, the
big difference is obviously the ETF doesn't hold fixed income
whereas the mutual fund does. But are there any differences
between the equity portfolios of the you know, between the
mutual fund and the ETF.
Speaker 3 (07:11):
The ETF would have will have more names, you don't
have a little bit lower track year. The ETF has
a slightly different objective. The e TF wants down from
the market over time. It wants to do with always
having a risk profile that's less in the market, and
it also wants to have a a taxial income that
is basically zero and has a you will always have
(07:34):
a dividend below that of the market. So we say
we can outform the market with less risk and more
tax efficiency over over a long period of time.
Speaker 2 (07:43):
David, you mentioned all the factors that you do to
use to avoid stocks, sort of avoiding the fatal flaws?
Is the language that I loved you used? What do
you what are you most attracted to? So how do
you define capital appreciation potential? I know you mentioned I
is a really critical component of your process, But are
there other factors that you use? How do you identify
(08:06):
those high RRR companies?
Speaker 3 (08:08):
Well, if you think about again, we think about the
five hundred companies and the SPIF hundred, maybe a couple
of companies outside the SPF hundred. We reduce that three
hundred and seventy five companies that don't have one or
more of those fatal flaws GITA, and then we'll basically
myself and my team, we will basically actively model those
one hundred and twenty five companies. We will look at
their earnings power today. We'll look at their earnings power
(08:28):
where what we think is going to be twenty thirty
twenty thirty one. We'll look at what the dividends that
are likely to pay over that period of time. We'll
look at what the right multiple for that company is
and then that will basically spit out an internal rate
to return, and then we're trying to find companies that
have an attractive risk to just return, but also with
a as narrow of a range of outcomes as possible
(08:50):
is really key to our process, right, So if you
look at our portfolio today, we would have an IRR
in the portfolio in the low teams. In the equity
market that was as hot is during COVID in the
mid twenties, during twenty twenty two, was in the mid teens.
During the Trump tariff tantrument, if you will, it was
also in the mid teens. But we compare that relative
(09:12):
to what we perceive as a market i AR that's
kind of in the mid seele digits and the potential
to hopefully generate kind of mid you know, five hundred
BIPs or more alpha versus the market over that period
of time. So we're literally looking at one hundred and
five companies that meet our criteria where we think there's
a high odds of outperformance and the you know, we're
trying to find that you're roughly the highest sixty on
(09:34):
a risk us basis within the equity, sleep of the
balance strategy, cap appreciation, and maybe we're like the top
ninety stocks within the cappreciation ETF.
Speaker 2 (09:46):
You mentioned the SMP five hundred a few times, but
it sounds like you're amenable to ideas outside of the
SMP five hundred when and if it's appropriate, can you
talk to us about you know what you know many
people would suggest are really clearly very high valuations for
certain select groups in the s and P five hundred.
How are you navigating that right now? And is that
pushing you into ideas outside the United States or even
(10:10):
ideas in private markets not necessary?
Speaker 3 (10:13):
Maybe yes and no, Maybe yes and no to that
to that point, you know, there are great companies outside
the US, I would say coming great companies outside of
the US are rare. So one example of a great
company outside the US is Kadie National C and Q.
It is an oil sands oil producer. The average major
in the United States has a reserve life of like
(10:34):
nine years. That means Exxon or Chevron has to go
out every couple of years and spend it Shad's capital
to buy Hess or buy Pioneer, whereas C and Q
does have to do any acquisitions at all, they have
twenty nine years reserve life, they can continue producing, and
their continued to extend that reserve life. They traded a
discount to C and Q or to Exon, and yet
(10:58):
they grow production faster like four percent versus three percent.
They have a higher dividend yield UH, and they have
better cap allocation UH and so and again a very
very strong tremendous on a free cash to that allows
them to buy back stock, pay a dividend. It's almost
five percent. So we do see opportunities out there. However,
I would say is when when we do the micro analysis,
(11:20):
when we go through look at all the companies in Europe,
look at all the companies in Japan, like all the
things in Australiak at all the other companies in develop
market economies, we don't find a lot of great companies.
We think, you know, the US has more than its
fair share of great companies. And while the European and
Japanese and Australian indexes are trading at lower valuations, in
(11:41):
the US index is there's a there's a reason for that.
And what what is in Europe is mostly you know,
low quality banks, low quality materials, companies, energy companies that
don't want to be energy companies, utilities that don't have
the same characteristics as US utility. There's no mag six,
(12:03):
there's there's very little, you know, attractive kind of businesses
and kind of garpie companies. So if you do it
an apples apples basis, we don't think the US is
expensive relative to what you can get in Europe or
Japan or Australia. Now your question on private markets, I
do see opportunity in private markets. Again, we own four
(12:26):
companies that are that are not public companies today. That's
about you know, maybe let's call it four percent of
our equities are in privates. We tend to own more
what we call it kind of more stable private equity
type businesses. So we would own a company like broad
Street or Hub, which are both insurance brokerage companies. They're
(12:47):
a little smaller than the Marsh mcclennan's or Aon's of
the world, but they trade for lower valuations. They are
able to do more acquisitions at low multiples, and they've
been in creating value at it let's call it a
mid to high teenh pace versus the public guys who
kind of are growing, let's call it a ten percent
pace with great management teams at evaluation that is below
(13:08):
marsh or on. So we've chosen to take advantage of
that kind of that private versus public market arbitrage and
own some of those companies in size. We also own Weimo.
Weymo is a private company. Obviously, they are the leader
in autonomous driving. The last mark there I think publicly
was in the you know, the forty to forty five
billion dollar range. We're a big believer that when Weimo
(13:31):
goes public, given the giant tam It has, that that
will be a company that will probably have a market
value of somewhere rotween two to three hundred billion dollars.
I think Tesla has proved that, you know, autonomous driving
is really really hard, Tesla's not ready for prime time,
and that Weimo is by far the market leader and
(13:52):
autonomous driving today.
Speaker 1 (13:55):
But I did want to ask, you know, in the
perspectives it does talk about opportunity, opportunit hunistic investments in
the portfolio. Is there a percentage that you limit these
two No.
Speaker 3 (14:06):
Actually, it's it's an interesting question, David. What I would
say is, I think everything we're trying to do is
a little bit opportunistic, right, We're trying to take advantage
of marketing efficiencies. We're trying to take a longer term
horizon than other market participants. Some you know, some some
situations like we, you know, we've bought hole Logic. Hole
Logic is a company that we haven't really owned in
(14:27):
the past. The company's trading at sixty four sixty three
dollars a share. There's you know, there's been a you know,
a I think a Financial Times reported that multiple private
equity firms were looking to take hole Logic private at
seventy two dollars. I think it would make sense that,
you know, that would they would be able to generate
(14:47):
a very high return if they were to do that.
Given how attractively valued Hole Logic is. We believe that,
you know, that that company could still go private, probably
at a higher valuation, so that I would describe that
as an opportunistic investment. You know. Another opportunitist investment is
kind of Beckton Dickinson. Beckton Dickinson's has some challenges around tariffs,
(15:09):
some challenges around weakness in China, but this is a
company that has a massive some of the part's discount,
they started going down the path of rectifying that supply.
Some of the parts discount they're selling off in an
arm T transaction some of their dignostics and life science
tool businesses to Waters. We think that'll be a value
creating endeavor. We think they'll end up spinning off their
(15:32):
pharmaceutical systems business as well, maybe do another rm T
with that transaction. And once you keep doing you know,
once you do that arm T with the pharma systems business,
once you get Waters transaction done. This is a company.
It's basically traded for eight times earnings, which has the
potential especially they continue to buy that stock to grow
earnings in the you know, the low teens. Most companies
(15:54):
that have low teens earnings growth don't trade for eight
times earnings. They trade for more than like key to
twenty times earnings. So we think Beck then this is
also kind of an opportunistic investment. We've also had Catalyst
in place with a starboard who's probably one of the
better activists in the marketplace actively involved in the stock
as well. So we will own a number of names
(16:16):
where we think there is some kind of hidden optionality
ow producing investment where we think we can make a
lot of money in the near term.
Speaker 2 (16:24):
David, could I ask a little bit about kind of
how you navigate some of the key risk factors that
we think about as equity strategists. So one of the
things we're thinking about a lot this year is concentration risk.
In the fact that you know, effectively only ten percent
of the S and P five hundred is now actually
driving gains in the market. We think about the MAG
seven as a specific risk within that concentration risk. I
(16:47):
noticed in your portfolio that you have pretty heavyweights in
Microsoft in the video. At the same time, you know,
navigating a big difference in positioning in Amazon and Apple.
Maybe talk to us broadly about how you're thinking about
the biggest stocks in the S and P five hundred,
how to navigate the risks as well as the benefits
that they provide to your portfolio.
Speaker 3 (17:08):
You know, that's it's it's a great question. I would
just I don't think we should really talk about the
MAG seven anymore. There's really no reason for Tesla to
be included in the MAG seven. Tesla is losing share
in all of its end markets. It's autonomous driving efforts
are are flailing. This is this. If we're gonna put
(17:30):
Tesla in the in the Mag seven, we should put
GM and Fords and every other you know, Toyota in
the Mag seven as well, because it doesn't Tesla's not
a stock anymore. Tesla is a cryptocurrency. Tesla is a
It is a it is a purely speculative vehicle, so
it doesn't has no characteristics like the other companies in
(17:51):
the Mag seven. But if you you know, think about
the Mag seven, So we to your point, we have
a large overweight in the Mag seven. In Microsoft, we
think you know, it trades at a very reasonable valuation
even after a big move in the stock. This is
a company that is you know, clearly a winner a market,
probably the fastest growing company in kind of cloud computing.
(18:13):
We think that growth rate has been accelerating and potentially
could accelerate off a very very large base. You know,
just a great company, great management team. And actually, if
you think about AI, focusing on inference not on training,
inference is more durable than training. In addition, you know,
I think they've actually said no to open AI in
some cases, which I think will end up proving to
(18:34):
be a very wise capitallication. Decision that hurts the growth
and the short term. So we love that. We love
We love Amazon for a lot of the same reasons.
You know, cost Go trades for fifty times earnings. Walmart
trades for thirty five times earnings. You know, Amazon, even
with a great cloud computing, a retail business that grows
faster than both of those companies I mentioned, is still
(18:55):
trading in the low thirties. It doesn't make any sense
from my perspective. Again, not as fast is growing as
amaz as your division, but still very very fast growing.
And again we think Aws, which is kind of growing
in the mid ties, can accelerate over time. I already
mentioned no no position in Tesla. Tesla could fall ninety
percent and we wouldn't buy one share of that. We
(19:18):
had an underweight to Apple, Apple has You know, Apple
is a great company. I do wonder in five or
ten years, well, we'll still be using Apple devices and
the same we were using today. You know, Apple will
generate somewhere between twenty twenty five billion dollars a year
from Google for its its tax, if you will, there's
a very high probability that Google's ability to pay Apple
(19:40):
that that very large, high margin revenue stream will go away,
maybe as early as AUGUSTA this year, depending on a
court decision. So again, you know, Apple and Google or names.
We have a little bit of an underweight on were
underweight in video as well. It's not that in video
is not a great company. We just think there's a
better rist reward if you want to play aig PUS
(20:00):
in am D. You know, today in video it's basically
one hundred percent you know, let's called ninety five percent
market share of all GPUs acceleraties in the marketplace. We think,
in talking with all of our doing all of our
channel checks and research says in five years that share
is going to go from ninety five percent to seventy percent.
A m D today has let's call it a three
percent market share of GPUs on the on the A
(20:23):
I side, new products get very you know them four
hundred class gets really good feedback from channel partners, and
we think a MD can clearly be a fifty percent
market share over time next in the next five years.
In that case, AMD's that's probably going to triple, whereas
in video can still go up, but probably not nearly
as much as as a m D. Another company we
(20:43):
liked a lot that helps offset the underweight to in
video is Amfanol. Anthonol makes a lot of the connectors
and switches that basically go between GPUs that basically allow
GPUs to work, makes allows large clusters of GPUs to work,
and honestly, for ANFLOL, it doesn't real matter if in
video works or a MD works or custom silicon works,
(21:04):
Anthonol's connectors are needing all those situations. So again underweight
in the video, but still a overweight to what it
called AI GPUs.
Speaker 2 (21:14):
I'm glad you brought up this Tesla conundrum because it's
been one of my frustrations of kind of this MAG
seven construct as well. And as a result, I just
really quickly looked up on the terminal here as to
who are the seven biggest stocks, because I think that
was the original kind of construct is the biggest and
Broadcom is actually in there now. I know that Berkshire
(21:35):
has occasionally jumped in in the place of Tesla, So
to your point, Tesla's been in and out of even
the top seven if you use top seven as your
construct of of MAG seven, but that's maybe here nor there.
I just found it very interesting and we won't tell
Elon Musk that.
Speaker 3 (21:52):
You know, you can tell you mustag you want, you
can tell that he doesn't deserve it anymore. You have
to grow. You have to grow to be in the
max seven.
Speaker 2 (22:00):
You cans fighting words. Okay, hold it, hold him to that.
I will hold him to that.
Speaker 3 (22:07):
Okay. Good.
Speaker 1 (22:10):
So I wanted to ask does bond analysis affect your
equity decisions at all?
Speaker 3 (22:16):
It does?
Speaker 2 (22:17):
It?
Speaker 3 (22:17):
Does it? Does? I mean? We we are we have
the ability to go where we see value in the marketplace. Right,
So I always think about, you know, having a double
b rated Hilton bond, right that's earning six percent, that
has a beta of point two? What is the risk
reward of that that Hilton bond relative to a low
risk equity that you know, like a utility that might
(22:38):
have a beta point five? Right, So, we we have
the ability to go where we see value in the marketplace.
And some of the way that manifests itself is, you know,
during the COVID downturn, you know, we were selling bonds
and buying equities. During the Trump tariff tantrum, we were
selling bonds and buying equity. Today with the market being very,
(23:01):
very richly valued as you know, again Gina's thoughtful analysis highlighted,
you know, our fixing can exposure, you know, has gone
from back in twenty twenty two kind of high teens
percentage of the portfolio today in the low thirties. So
we have the ability to go where we see the value,
and we can change that bond allocation as well. Back
in twenty twenty two, we were mostly in leveraged loans
(23:24):
because we thought you had free optionality if rates ever
went up, and they did, and today we have a
little more balance because rates are higher. You'll see us
having the almost fifty percent of our portfolio and kind
of five year treasuries and you know, a low teens
kind of exposure to leverage the loans and a high
stealage exposure to high quality, high yield. So we can
(23:44):
change the mix of equities versus debt, but also the
mix of debt and actually the mix of equities too.
In twenty twenty two, when the market is really cheap,
we owned a higher beta mix of equities. Actually started
buying a video. We bought somemic connectric companies, We bought
in industrials because everybody believed that there was one hundred
percent chance we're going to recession. We said, even if
(24:05):
there is, even if we do go into recession, all
those cylical companies already pricing it in. So just because
Jamie Diamond was saying we're going into recession, the market believed,
it believed that was happening, and but it was already
fully priced in. So it created a really attractive restueward.
If we went to a recession, there were that we
had limited downside. If we didn't go into recession, all
those cyclicals would pop in, which they did. Today is
(24:26):
the inverse. Everybody is very, very bullish on the economy.
Everybody's bullish on a cyclicality, everybody's bullish on beta, and
we're taking the other side of that. So we're adding
to utilities, we're adding to lower beta stocks, we're adding
to healthcare. We're kind of doing you know, because not
because you know, we're betting the time is going to
(24:48):
fall off the cliff. We just think over a five
year basis, you know, buying Goldman Sachs at two times
tangible book value, you're not going to make a lot
of money. Buying JP Morgan at fifteen times, you're not
going to make a lot of money buying select industrials
at twenty five times earns. You're not going to make
a lot of money, but buying really great utilities at
a discount of the market where their business is inflecting
(25:09):
positive on an organic growth basis. Healthcare comes is a
little bit out of favor today, but where the long
term sol looks really good. But there's all these idiosymocratic
ideas that we like. That's we're always kind of going
where weceive value, not what the market is telling us
we should like. I think that's that that that ability
to think independently the market is really important to our
(25:29):
strategy and important to our success over time.
Speaker 2 (25:33):
Well, I think we're all in trouble then, because our
sector scorecard right now is telling us also move into
defensive ideas. So watch yourself. We all have the same idea.
We could be in trouble. But I would agree with you.
In general, the market seems to be a little bit optimistic,
which is crazy to think about three months ago. You know,
for a hot minute, we were pricing kind of really
(25:55):
devastating conditions emerging, and then we pivoted so quickly and
we roared back, And I think that's been a really
big challenge for investors. But if you think the dynamics
of trade as one of the big policy issues that
has emerged this year, are there any nuanced changes that
you're making in your portfolio specific to trade policy risk
and the evolution of tariffs and the changing global trade
(26:19):
relationships that have really kind of hit us this year
as a major risk to stocks.
Speaker 3 (26:26):
You know, not really, I would say a couple of things.
One I would say in the market was very very
to your point, the mark was very, very concerned about
tariffs early April, early in mid April, right and the
market fell off again. We use it as an opportunity
to buy directions. But today the market is just you know,
I think they believes is the Taco situation and it
won't manifest itself. I would say, as someone who is,
(26:49):
you know, again a chief hit investment officer, one of
the things in addition to managing money for my clients
is trying to be a trying to think about bigger
picture issues for the market. I think when that one
of the reasons that we had so much conviction to
put four billion dollars to work in three days at
the market's bottom was a some of the work we
(27:10):
did to the that came up to the you know,
talking with you know, law school professors, talking to constitutional scholars,
and we believe very strongly, uh, you already saw it
kind of it C decision on this. I think by
the you know, let's call it early next year, the
vast majority of tariffs that this president's put in place
will be ruled on constitutional. Maybe not all of them,
(27:32):
but the vast majority of those tariffs will be ruled
on county that you could actually argue that's a little
bit of a bullish sign for the market that again,
the Supreme Court, I would bet in the seven to
one or seven two or eight one decision will strike
down the vast majority of the tariffs. The ITC already
came back three zero. That was a Obama, a Bush,
(27:52):
and a Trump supporter who probably don't agree on anything,
could agree that the tariffs were unconstitutional. And I think
we'll see that at the Supreme Court. And so I
think the vast majority of the terrafs, maybe maybe the
Chinese terraffs, maybe the Illudin was still terraf, might stay
in place, but the vast majority of the other terrafs
will be ruled unconstitutional.
Speaker 1 (28:11):
I also want to ask about management teams. So you know,
we talked about what you look for in companies and
you know what you're avoiding when it comes to looking
at management teams. Do you have any set of process
where you're you know, is there like a way you're
evaluating them or certain things that you look for.
Speaker 3 (28:27):
Well, there's a couple of hats we really want to
invest alongside management teams where the cap allocation is excellent.
I think if you look at a lot of the
giant winners for our strategy over the last decade or more,
whether that you know, AutoZone, O'Reilly, five, Serve, Texas Instruments,
(28:47):
Dan or her Roper, those were all companies that had
excellent cap allocation that really we're able to generate very
attractive returns with an efficient capital structure almost all of
those cases. So capital location. We also want management teams
that are operationally sound, where they you know, again they
generate nicety in creminal margins on incremental sales. They don't
(29:12):
they don't have big operational hiccups all the time. They
they what they promise they're going to do, they actually
deliver upon to the best extent they can. I think
those are the you know, good operational prowess, good capitallarcation,
and you know companies that that that that that run
(29:32):
their business as well well.
Speaker 1 (29:33):
This is a great discussion, David. We really appreciate your
time and thank you again for joining us.
Speaker 3 (29:39):
No, thank you for having me great questions as always,
Thank you and.
Speaker 1 (29:41):
Gina, thank you for being my co host today.
Speaker 2 (29:44):
Oh my absolute pleasure. Thank you David, and nice to
meet you. David. Thanks for thanks for joining us.
Speaker 1 (29:50):
My pleasure and I want to thank our listeners. If
you liked the episode, please subscribe and leave a review. Also,
if you'd like to see more of our research, go
to b I FI on Go n BI Stalks Go
on the Terminal Until our next episode. This is David
Cone with the Inside Out.
Host
Gina Martin Adams
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