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Has used this a few times as a Top Pick over the last 6 months. If he had to pick one bank in the US, this would probably be it. Very domestically focused. He likes the improvement that is going on in the US economy. They are an enormous beneficiary of rising interest rates. In the most recent quarter, there was one interest rate increase, and this bank had an additional $600 million of earnings from one interest rate increase. Trading at just over 1X BV. You are going to get dividend growth, earnings growth and multiple expansion. This has 5-6 years in front of it.
This was a Top Pick about a year ago, and has been one of his best performing positions over the last year. He really likes semiconductors as a group and technology as a whole, because that is secular growth, i.e., there is change taking place that will go on for a long time. This company is in the absolute forefront of what is happening with things like self driving and Artificial Intelligence (AI). An expensive stock, but in technology, if it is good it should be expensive.
A great business. In asset management, you get paid a fee to manage assets. If you a do a great job in buying them, then people will give you money to manage for them and they’ll pay you an ongoing fee. They’ve done a great job of building a diverse set of holdings, and have had very, very steady growth in cash flow. Technically, it has just broken out. He likes asset management. Prefers asset management in a developed market public equities today, as he thinks that is where things are going. However, this will be a very steady hold. This is a good time to be entering the stock.
KKR & Co (KKR-N) or Blackstone (BX-N)? He prefers an asset manager that is focused on public market equities. Asset classes are always being revalued. At certain times, certain asset classes do better than others. We have just gone through 10 years where regulation, compliance and rules around being a public company went through the roof, and it became very, very expensive. During that time, managing investing in private companies became very attractive, as they didn’t have the same problems. However, many private companies trade at higher valuations than public market companies, and yet public market companies are liquid every day and can be bought or sold. We have entered a period of many years where public market equities and developed markets, are likely to outperform. Asset managers in that area are under-owned and under-loved, and things are changing for the better. Multiples are expanding. Prefers Morgan Stanley (MS-N).
KKR & Co (KKR-N) or Blackstone (BX-N)? He prefers an asset manager that is focused on public market equities. Asset classes are always being revalued. At certain times, certain asset classes do better than others. We have just gone through 10 years where regulation, compliance and rules around being a public company went through the roof, and it became very, very expensive. During that time, managing investing in private companies became very attractive, as they didn’t have the same problems. However, many private companies trade at higher valuations than public market companies, and yet public market companies are liquid every day and can be bought or sold. We have entered a period of many years where public market equities and developed markets, are likely to outperform. Asset managers in that area are under-owned and under-loved, and things changing for the better. Multiples are expanding. Prefers Morgan Stanley (MS-N).
Diversified investing? Looking at a fully invested equity portfolio of 20 to 40 securities, he starts with a 2%-2.5% weighting. A full weighting is 5%. If he had 20 positions, it would be about 5% weight. He picks companies, not size. Prefers an equal weight portfolio, but you want representation from different types of companies, i.e. different industries, different market sizes.
He really likes the video game space. You make money if you find a company or industry that is perceived to be good to begin with, but where there is some change that has taken place that allows them to take their business to a whole different level. It used to be that you would buy a disc to upgrade a videogame. Now you download a game, and you are in the heat of a battle, and you pay extra for another weapon. Their ability to generate cash from their properties has gone markedly upward. So, the multiple you pay for that business should expand. Not only are earnings growing, but the multiple of earnings that people are willing to pay is growing.
Another example of an industry that is going through a change. The last time we were in a boom for fibre was the late 1990s, and they put way too much fibre in the ground, so we had too much capacity and the whole thing went to sleep. With the growth and boom in band width use, these networks are now getting strained, and are going through another uptick in replacement of some of the fibre and some of the fibre gear. This company sells transmitters and multiplexers that are used in fibre. A very interesting industry, because demand is really ramping up. This has doubled in the last 6 months, and has just recently technically broken out again. It is only trading at 13X next year’s earnings.
Market. A new bull market was started in 2013 and we have lived through the 1st major correction of a long-term bull market that ended in February 2016. Since February, economic data, price behaviour in the market and leadership has slowly been improving. We made new all-time highs in July in the S&P 500. Cyclicals that are leading the market, started to lead in June signalling a transition from a market driven by interest rates, to one driven by earnings. The groups that have been leading since then are the groups that led through the election period. Then we made new all-time highs again over the last few days. The market is showing steady improvement, and there is no deterioration. Earnings growth is coming in a little ahead of expectations. In a strengthening market, you always want to look for low correlations, i.e. stocks that are not behaving like one another. That is very healthy in a market. There is no bear market or major correction in history that happened while breadth was expanding. The simplest way to determine what type of market you are in is to look at the way the market reacts to news. If a market can handle bad news and rally, don’t fight it.