Barron's Streetwise - Picking Value Stocks. Plus, Magnificent 7 Price Check

Episode Date: October 20, 2023

Jack speaks with a top value manager and does some noodling on Big Tech.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. You're not going to be able to buy a great company unless there's some level of controversy. You can buy a bad company at a cheap price, but to buy a really good company or a quality company, when you peel the onion back, there probably needed to be some level of controversy

or mispricing. And so that's what we're looking for. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe. And the voice you just heard is Richard Taft. He co-manages the Columbia Select Large Cap Value Fund. And he'll talk to us in a moment about how to identify good stock market values and why you should target

companies that look different from what other investors are buying. We'll also say a few words about stocks that everyone is buying through their S&P 500 funds of the seven most heavily weighted companies, Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla. We've heard that stock market gains have been driven by these companies this year. People have talked about the possibility that these companies have become elevated in valuation while the rest of the market looks attractive. We're going to look one by one and try to figure out which ones might deserve their elevated prices. Listening in is our audio producer, Meta. Hi, Meta. Hey, Jack. We're going to hear about two stock picks in a little while.

Let's talk first about these Magnificent Seven, as they call them, these giant seven tech companies. I want to look at them one by one. Shall I go in order of descending magnificence or just take them in market cap order? You know what? I'll figure it out as I go along. Let's just start with a quick look at where the stock market stands. The top economist over at Apollo Global Management, that's our friend Torsten, who's been on the podcast a couple of times. Meta will give his last name a proper Danish pronunciation. Meta? Sløk? Yes,

that Torsten. He wrote this past week that the S&P 500 hasn't looked this overpriced in 20 years. And what he bases that on is a comparison of two things. The 10-year treasury yield has now risen to about 5%. And the earnings yield of the S&P 500 index, what's that? Well, if you know what the price to earnings ratio is, and you take that and you flip it upside down and you turn the result into a percentage, that's the earnings yield. And that's also about 5% right now. And so if you see 5% on bonds and 5% on stocks, you think to yourself, why would I want to take all this risk in the stock market when I could just buy safe bonds and get the same percentage? There's a wonkier way of saying that, and it's, has the equity risk premium of the stock

market collapsed to zero? Now there's a bullish rebuttal to that. Bond coupons, they're fixed, but company earnings, those are not fixed. They tend to grow over time. So it's not quite the same when you've got the two measures at five percent%. Bonds aren't quite on par with stocks for long-term savers. Also, investors commonly assume that when bond yields rise, that's bad for stock valuations. The stock valuations tend to fall. But think about it. If one of the reasons bond yields might rise is because the economy is too peppy right now to ensure that inflation will come down to acceptably low levels? And if a peppy economy is good for companies and their earnings growth, is it at least possible that rising bond yields might be a good signal for stocks? Bank of America thinks so. They point

out that since 1945, the correlation between rising bond yields and a falling stock market valuation has been weak and negative. In other words, those rising bond yields are no reason to bail out of stocks. Now, I don't know what the next move for the market is. I don't see a clear case for unloading stocks. I do see a pretty clear case for if you were someone who unloaded bonds a few years ago when that 10-year treasury yield was less than 1%. And so you're overloaded on stocks now, or maybe you're just overloaded on stocks because they've done so well relative to bonds recently. I think it's a pretty good time to get back to your normal mix of bonds and stocks. But I want to focus here on another argument you hear made

about the stock market, which is that, hey, look, the S&P 500 as a whole might look expensive, right? The P.E. ratio is about 20. But that's been driven higher by seven tech giants. You know the ones I mean, Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta Platforms, and Tesla. Those are the seven biggest companies in the S&P 500, or they were until this past week. Tesla had a bit of an oopsie-daisy and Berkshire Hathaway pulled ahead of it. Anyhow, the price to earnings ratio for those seven companies has climbed from 29 to 45 this year, and that has pulled the valuation of the overall S&P 500 higher. So if you figure out some way of adjusting for that, if, for example, instead of taking the company weighted P.E. ratio for the index, you just take all 500 companies and you pick

the middle one, you say, what's the typical P the typical PE ratio? It's a more reasonable 17. That might give stock pickers some comfort, but what about all those investors in S&P 500 index funds? They had better figure out whether to get comfortable or not with the fact that those seven big tech companies carry such elevated price to earnings ratios. And that's hard. It's hard to figure out what companies are worth. There are people who get paid a lot of money to do that on Wall Street. The records are just, they're not super duper great at it. One of the key tools they use is something called the discounted cash flow analysis or DCF analysis. That's where you get those analysts price targets and their buy and

hold and sell ratings. And here's how it works. You start by predicting free cash flows for a company, the amount of excess cash it's going to produce each year, far into the future, let's say 10 years, right? Even though each quarter, Wall Street has difficulty predicting much easier measures like revenue. They can't get revenue right for the current quarter. How could you possibly know free cash flow for the next 10 years? But forgetting that, you predict it anyway. Step two is you choose something called a discount rate. Now, forget about the particulars for now. Just know that it's based partly on risk, how risky a stock is. In the four century history of stocks, no one has figured out exactly how to

measure how risky a stock is, how to quantify it perfectly. But even that being the case, you come up with this discount rate. And the rest of the steps are basically use that make-believe discount rate to figure out how much to pay today for those totally unknowable future cash flows. I'm leaving out some important steps. You've got to calculate something called a terminal value, which involves looking even beyond year 10. And you have to adjust for future debt, which you also couldn't possibly know. I'm not saying the price targets are meaningless.

No, wait, I'm saying price targets are meaningless. That's what I'm saying. I don't think they're pointless, though. I think they're fun. I think it's fun to argue about them. I think somebody makes a case and they put it out there and they say, here are my assumptions. And you look at their assumptions and you say, I agree with those assumptions or I don't. It gives you a starting point to argue about something, which is always fun on Wall Street. But if you want to figure out how much to pay for a particular stock or, or better yet, whether it's reasonable to pay the price that you're seeing, I don't think it's going to be much help.

I think there's a better way and it's less mathy and it involves starting with stuff you know. Instead of starting with no price and trying to conjure a price, why not start with the price that the market is showing you today? That's an important piece of information. And then start with a reasonable assumption. Like if you bought one of these stocks, you'd want to get a decent return over the next five years. You're not buying one of these stocks because you want to get an index-like return. You're buying it because you want to get, I don't know, instead of 10% a year, maybe 12%. I know there's, you know, market return has been pretty good for these stocks. So there's some people out there thumping their chest and saying, 12%, that's ridiculous. I want 30% a year.

All right. You know, you do, you do you. I'll say 12%. And it's easy to calculate what that would do with the stock price five years from now. And then you can look at which way the share count has been heading has it been rising has been falling and you assume a little more of the same and that gives you a sense of what the stock market value is going to be five years from now let's take a company like apple the recent share price is 175 dollars you figure 12 return over the next five years it It puts you a little over $300 on the stock price. You look at the share count. It's been steadily falling. Apple's been buying back stock at a pretty good clip. So you figure a market value five years from now of, I'm going to say $4 trillion. And then you ask yourself, how much free cash flow would an investor reasonably

expect a business of that size to produce? It's going to be a mature business. Let's set a low bar and say an investor is going to want to see a yearly free cash yield of at least 4% coming out of that business. So for Apple, that works out to $160 billion a year. I know numbers that big are hard to get your head around, but think of it in terms of Saudi Aramco. That's that Saudi oil monopoly, and it is a preposterously cash generative business, as you might imagine. And it's publicly traded, so now we have financials for it. Last year, free cash flow was a little over 150 billion dollars. It was a good year. year, free cash flow was a little over $150 billion. It was a good year. Might not be quite that high going forward, somewhere between $100 billion and $120 billion a year over the next

several years. Now, Apple is not at those levels, but it's not so far off. It's over $100 billion a year on free cash flow, and it's expected to stay there in the years to come. The estimate for the company's fiscal year that just ran through September is 103 billion dollars for an example. Could Apple get from 103 billion dollars of free cash flow to 160 billion dollars, that minimum bar, in the course of five years? I'm gonna say that's feasible especially because in the case of Apple, it's yearly capital expenditures. It's spending on things like plants and equipment or big ticket items.

It's been $10, $11 billion a year. It's expected to stay pretty steady in the years to come, $11, $12 billion. That's what happens for companies of this size. You don't run out of things to spend the money on, but you run out of ways to keep ramping up the spending as quickly as you have in the past. It's kind of like... Money. Everyone wants it. Until now, Monty Brewster didn't have it. Matt, are you familiar with a movie called Brewster's Millions?

Yeah, vaguely. It's got Richard Pryor and John Candy. And basically there's a minor league baseball player. And there's a deal where he has 30 days to spend $30 million. And he has to spend that money in order to inherit $300 million. And you think to yourself, no problem spending $30 million. But mayhem ensues and it turns out it's harder than you might think. This movie was 1985. It might not be as hard to spend $30 million in 30 days right now.

How would you do it if you had to, Meta? I don't exactly remember the rules of the movie it was something about like you can't have anything to show for it so you can't just buy a big house or something like that you gotta like you gotta really blow the money so what do you buy you gotta take baths and the most expensive champagne for 30 days baths the whole family and the two dogs exactly and then by like day three you're gonna have a skin condition and the dermatologist alone is gonna probably cost you two million there you go i say if you want to take better care of your skin remember we spoke recently in this podcast

about when we were talking about private equity we talked talked about Stephen Schwartzman's 70th birthday party. Yeah, I remember he had camels and the cast of Jersey Boys. Somebody said that the estimated cost of that was three to five million dollars. So yeah, find his party planner and you say, give me that every day for a month. Anyway, Apple kind of has a Brewster's Million situation going on. It's not going to ramp up those capital expenditures much higher than it is now over the next five years, I wouldn't imagine. Even if it goes into a totally new product category like something with cars. And so I think it probably could get to that level of free cash flow. Now this analysis of mine, if you want to call it that, this is not discounted cash flow analysis or anything close.

What I'm doing doesn't really have a name. I've been trying to come up with one. I'm thinking discounted crash flop electrolysis, which would be DCFE, but I have to do a trademark search. I don't know if that might already be the name of a business. Anyhow, it doesn't give you a price target. It doesn't give you this sort of silly sense of certainty that's based on guesswork to begin with. It gives you a properly iffy, eh, I don't know. I think of it as giving you one of three ratings. Yeah, or meh, or nah.

And I would say for Apple, it's at least a meh. Maybe even a yeah. Somewhere between a meh and a yeah. Now I'm not going to do that individually for each of these companies, but many of them are in that same Brewster's Millions type of situation. Take a company like Microsoft. Free cash flow there for the current fiscal year. That runs through next June. That's pegged at $66 billion a year. But there are some analysts who think the company could hit $100 billion within several years. It could if its capital investments don't rise quite as quickly as they have in the past. They're already at about $30 billion a year. You can figure out for yourself how big that business might be in five years based on a reasonable share price return, and then whether the free cash flow it's expected to produce by

then will make up for that price. But the potential for free cash flow growth certainly looks impressive. The same is true of Alphabet, which is expected to generate a little over $70 billion in free cash this year and more than $100 billion within the next three or four years. And especially Amazon, free cash flow is estimated there at about $30 billion this year. It could more than triple in the several years ahead. The company has CapEx of over $50 billion a year. Think of the cost to build out that distribution network. Think of the cost to build all of that cloud computing infrastructure.

What do you spend the money on when the bulk of that work is done? I don't think the answer gets you to anywhere near the percentage CapEx increases we've seen in the past. So the bottom line is that the U.S. three or four years from now could have the equivalent of four Saudi Aramco's companies generating over a hundred billion dollars a year in free cash. And you might find when you do the math in these companies that valuations for some of them don't look so stretched. Where things get iffier is with Nvidia and Tesla. With Nvidia the valuation math implies explosive free cash flow growth in the years ahead from a relatively small base, which is exactly what some analysts are predicting and which could

happen if the company remains at the center, really, of the push toward artificial intelligence. It's just that more of that story remains to be seen. With Tesla, the valuation also implies explosive free cash flow growth in the years ahead. And not all the recent signs there have been great. The stock dropped this past week on third quarter results that disappointed investors. There was a lot of price cutting to sell cars. Some models haven't been updated for a while. There's supposed to be a new Cybertruck coming out later this year, but no one's quite sure what the market for that is going to look like. How's it going to do? I've got my own concern about Tesla. I hesitate almost to describe it because I don't want to get into a whole thing

with the Tesla crazies because there's people out there who are like, they are irrationally tied to some sort of Tesla argument that just goes beyond, you know, people get very passionate on this subject for what reason, I don't know. But my concern is this, I do everything possible to steer clear of politics, but let me put it like this. Teslas are electric vehicles. They're bought by people who, they're bought by tree huggers, right? People who are concerned about global warming. We would typically think of those people as being disproportionately on the political left. Is this fair to say, Meta? Meta, you sound the alarm when I get into hot water here. You ready? All right. I think you're OK for now.

for now. Okay. I think that there are some people on the political left who feel like, you know, they've been irked by some of the things that the founder of Tesla, Elon Musk, has said and done, and by his sort of posture and tone after taking over Twitter, now called X. Now, you might agree with that or disagree or what have you, but there are some people who feel, is the word rankled? They feel rankled. And some of the people who might have been likely Tesla fans or buyers in the past. Now, that could be totally offset by buyers on the political right who might be cheering Elon Musk and saying, hey, what he's doing is in support of free speech and whatever, whatever. The question is, are they as likely as people on the left to go electric? Are they going to say, no, I don't need it.

I'm going to buy a gas burning vehicle. By the way, I own a gas burning vehicle. I'm not judging people for that. I'm electric curious. I might make the switch. I'm not there yet. You know, we'll see. When the time is right, I probably will.

When the time is right, I probably will. But my point is, what happens if the potential U.S. customer base for Tesla has shrunk because of politics? Is that a concern? I think it's a concern. There's a much bigger world in the U.S., of course. Tesla sells cars all around the world. But it's just that this is happening at a time when the market for electric vehicles is being flooded with other models that don't have these same concerns. And some of the prices on those are reasonable. And I don't know. How did I do, Maddie? Did I veer off course? Did I crash? There's a bit of fishtailing, but I think you're fine.

Call AAA for a tow. The point is, is that Tesla is one of those where I just also think that the growth there is possible. And Tesla fans will say it's likely, but I think more of it remains to be seen in terms of the mounting of the free cash flow in the years ahead. Making cars is hard. Is that it? Have I covered the big seven? I think you did. All right, we'll take a break. I'm going to head out to the car and pound my head against the steering wheel just hard enough so that I don't sit off the airbags a few times just to clear my head. And we'll be back right after this.

Welcome back. Let's talk about the opposite of high-flying tech stocks. Let's talk about value stocks. For people who think now is a good time to buy them, I wanted to learn more about how you identify good ones. And for that, I reached out to someone who does it for a living. Richard Taft co-manages the Columbia Select Large Cap Value Fund. Ticker there is S-L-V-A-X. It's a concentrated portfolio. There are 35 stocks. It's long-term in nature, Richard says. Average holding period is five to seven years. Sometimes in the mutual fund business, you hear the metric active share, and that means the degree to which this particular fund manager strays from the underlying benchmark, the underlying index, and does something different. And in Richard's case, that degree is pretty high, which is good.

That's what you're paying for, something different from the indexes. The first thing I asked Richard was for his read on the stock market overall right now and over the next several years. I think it's a question of that really depends. really depends. We started this year out clearly with a bias towards growth. We had expectations for a recession, expectations for rates to come down, and there was a lot of economic uncertainty. So I think it's understandable why growth had such a great start to the year, particularly in light of the challenges growth had in 2022, which I think were primarily driven by higher interest rates. I think we're entering a new phase in the market. There's a recognition that higher rates

are probably here to stay for a longer period of time. We've seen a lot of inflation come down, particularly supply chain driven inflation, but there is some persistency in inflation. And so as we look to 2024, we think that there is somewhat of a regime change that was started in 2022 when we saw rates initially inflect up. We believe higher rates are here to stay. Richard says he expects interest rates remain elevated for some time. One reason he points out is for a long time we, as he puts it, imported deflation from China. In other words, we bought cheap goods from China that kept our inflation rate low here in the U.S. and allowed policymakers to keep interest rates very low.

Now there's been a backlash against globalization and a move to bringing more manufacturing home or near home or to other markets that we consider friendlier. So while the overall inflation rate has come down, maybe we should expect more price growth than we're used to going forward. Richard says another reason to favor value stocks now is simply that they've been beaten by growth stocks for so many years. He thinks it's time for a pivot. I think it's also fair to say we've had a large underinvestment in commodities and manufacturing over the last 10 to 15 years. And I think these types of trends favor value, whether it's energy prices, whether it is

the concept of reshoring semiconductors back to the United States, or whether it's investing in infrastructure. These are more industrial type applications, more manufacturing oriented. And so, you know, I think it does provide a medium term outlook that's more constructive for value. I spoke with Richard about how he and his colleagues manage the portfolio. They don't trade often. Richard says they're macro aware, but not macro driven. Matt, I like the sound of that. From now on, if anybody asks you, hey, you know, what's Jack Howell all about? You just say he's macro aware, but he's not macro driven.

Let's just say that. I like macro conscious too. Noted. Well, Richard says often the starting point for buying something is selling something. And at the fund had sold two stocks that had worked out well both of them had been bought at good discounts to the stock market and they had been sold at premiums one of those companies is honeywell that's uh let's call it an industrial conglomerate honeywell's like the biggest company whose brand you don't see on

stuff around you so you're not quite really sure what they make. I mean, we used to, in the house I grew up in, we had a thermostat that said Honeywell. That's not really representative of what they do. The company is in aerospace and energy and healthcare and smart factories and satellites and all sorts of stuff. Maybe I've seen an air purifier by Honeywell. Oh, the Honeywell 4000. No, I'm just probably confusing it with something else. Here's how you figure out what branded stuff they sell. You go to Amazon.

Hang on. You type in Honeywell. All right, we've got thermostats. Air purifier. You're right. Ding, ding, ding, ding. So Honeywell, ticker H-O-N, is one stock that the fund sold, and the other is Nextera Energy. The ticker there is N-E-E.

And Nextera is the company that runs FPL, Florida Power and Light, but absolutely no one gets excited about it for that reason. They get excited because it has a humongous clean energy electricity generation business. Wind and solar. So while a lot of utilities are slow and boring, this is one with a very growthy division. So with those two stocks sold, the fund needed two to buy. Here's Richard. So two names that we bought to replace these names were Cisco and PG&E. Tell me about Cisco. When I think of Cisco, I think of a company that has certainly been profoundly profitable in the past from the infrastructure of the internet selling its own hardware, you know, specific hardware. And the competitors to Cisco are companies selling

commodity hardware and running these software-based networks. But Cisco is still making great money. Do I have that landscape right? And what is it that you see that tells you that Cisco is going to do well over the coming years? Yeah, that is largely right. I mean, they compete against companies like Juniper and Arista, but they also do compete with some more commodity-oriented businesses. I mean, what Cisco does best, I think, to your point, is they provide a bundled solution for their customers. In particular, they do a very, very good job in the small and more medium-sized customer segment. These customers may not have

the big IT departments that a Fortune 100 company has. And so Cisco's ability to provide kind of a broader solution is really value-added. Cisco has over 50% share in a number of these markets. And it's noteworthy that Cisco sometimes has lagged from a market share with the largest customers, whether it's the telcos or even some of the famed type of names like the Googles and the Amazons. But that's one of our catalysts for actually buying the name. So fundamentally, why did we want to do this? Because we want to improve the risk reward of our portfolio. We sold Honeywell, which had a similar growth rate to Cisco, inferior cash flows. Cisco had a much, much stronger cash flows. Their free cash flow yield was closer to 10% where

Honeywell's was closer to the low single digits. And so we're upgrading the risk reward in our portfolio by buying Cisco on a pullback about a year and a half ago. We bought it closer to the $40 range. The stock was trading at a 12 PE versus Honeywell at a 24 PE. So it's half the valuation, a similar growth rate, and had almost a 4% free cash flow yield. Cisco had pulled back about 30% before we had bought it. With the shuttering from COVID, Cisco wasn't able to go into offices and upgrade the equipment. And so that showed up in the results. But we had a strong view that this was a temporary phenomenon and they were going to come out of this stronger. And then indeed,

they did. With a hybrid work environment, it actually requires more networking gear because now you're networking employees in from home and at work. We had a couple other catalysts. You touched on it earlier. So Cisco historically has not done as well with some of the largest customers. And so customers like Amazon, we talk about the hyperscaler market. These companies, they've got capital budgets in the $30, $40, $50 billion range. And so they want to buy more commodity products, and sometimes they want to build their own products.

And so Cisco had kind of a more bundled product. And they missed this market seven or eight years ago. Companies like Arista and Juniper did much better than Cisco did. Arista, I believe, was formed, it was kind of a breakaway company. Some employees from Cisco left to form that Arista and took some market share there with the hyperscale players. So what's Cisco's plan now to make a play at this market? So Cisco completely missed this market. It was

the fastest growing market by far. That said, in the last couple of years, what they've done is they've learned to sell more point solutions. They're willing to actually sell their own silicon. And so they're accommodating the requirements of some of these larger customers and allowing them to customize what they buy as opposed to a one size fits all. customers and allowing them to customize what they buy as opposed to a one-size-fits-all. And it's very promising that AI, which is going to require a different type of data center, certainly more compute through GPUs and more networking, that Cisco's better positioned for this next leg up in data center spending cycles that we're seeing from AI. They missed the last cycle, but early signs they're participating in the AI cycle.

And even if they participate and are not the majority share, the reality is just participating will help their growth rate and multiple. Okay, so Richard's first stock is Cisco, and the ticker there is CSCO. And a fun fact about Cisco, the stock has been moving nicely lately, but it's not nearly back to its all-time high price, which was reached in the spring of 2000. And when I say fun, it's not really that fun if you've owned the stocks and sent. And it's just more of a fact in that case. The next company is PG&E. That's the owner of Pacific Gas and Electric.

The company is headquartered in Oakland, California. And if you're guessing that the ticker there is PGE, you're making perfect sense to me, but it's not. It's PCG. PCG as in pretty confusing going. With that ticker, if your company name is PG&E. Anywho, you might have heard of PG&E in connection with some California wildfires in the past that were blamed in the utility and there was legal action, there was a bankruptcy, and that's where Richard got interested. We bought this company a year and a half, two years ago, coming out of bankruptcy. Again, the idea was really driven by our desire to sell NextEra. I mean, NextEra was really fully valued.

The stock was over 30 PE. We would never buy a stock over 30 PE. Unlikely, we'd buy a stock over 20 PE even. But the stock had performed well. And so we'd maintained it in the portfolio. I mentioned before, we had an expectation of rising rates. And so this became an obvious sell. You know, we had an expectation of rising rates. And so, you know, this became an obvious sell. And so we sold Nextera at over 30 PE and we bought PG&E at an 8 PE, which in our mind is improving the risk reward in the portfolio and a name that we think is going to do well out of bankruptcy. And it did do fairly well. We looked for catalysts in terms of, you know, new names. And you had a new management team that had a very good pedigree coming from a few companies that we already knew quite well. They cleaned up the balance sheet through bankruptcy.

You had a change in the regulatory framework. So previously, you know, as a utility, you were somewhat deemed guilty until you could prove yourself innocent. And that might take five to seven years. You might actually be bankrupt at that point. This was the company that was connected with the California wildfires and there was a lot of overhang there. And so investors tend to think of bankruptcy as the end, not the beginning. So how has bankruptcy changed this company and the risk profile? No doubt. That's exactly the point. As I mentioned, they brought in a new management team, they cleaned up the balance sheet, they set up a wildfire fund, which is a buffer fund, which basically says, listen, if we act in a prudent standard, we can access these funds to pay plaintiffs and some of the

costs of a wildfire. From a legal and regulatory framework, it really was a dramatic change here. The final thing that really changed it was really a change in stakeholders. The old PG&E plaintiffs, as part of the bankruptcy process, became stakeholders or shareholders. So about a third of the company of the equity was owned by California citizens that were previously plaintiffs. You know, you think about it, that really shifts the stakeholders at the table, because now the reality is politicians, governments, and even California citizens have an invested interest in the success and survival of PG&E. And so this is kind of a classic restructuring story in which you had a company that was not run very well and really has made a pretty dramatic change in the other direction. They

haven't reinstituted a dividend yet, but we think that that's a catalyst going forward. Clearly, this is a utility, so higher interest rates don't help them. There's always risks of a pivot in the regulatory environment. But I think it's noteworthy that this stock nearly doubled in 2022 in a rising rate environment. And I think that shows the power of buying low expectations names. Yeah. I mean, if someone's making a stock pitch to me and I say, well, just give me two words. And they say bankruptcy and wildfire. I say, that's enough. I'm out. It sounds too complicated. Yeah. But this is where you got interested.

This is where we got interested. We talk about value traps, right? And so you think about our fund. If we're holding stocks for over five years, we're not trading stocks, right? And so we don't want to buy a bad business that's been a bad business for a long time. We're more likely to buy a good business during a controversial point that trades down to a deep value. And so when you think about our portfolio, we don't have 35 deep values, right? We're buying two to four new names a year. So you almost think about it from a vintage perspective. If you've got a seven-year vintage of 35 names

over seven years, the names in the first early years of the vintage, years one and two, they tend to be deeper values. And then if we're right and our catalysts come through, we get a re-rating. And these deeper values tend to be high controversy, more volatile. As the volatility recedes, the multiple goes up and they become more GARPy names. GARP, growth at a reasonable price. You get decent growth and you don't pay too much for it. Exactly. The truth is you're not going to be able to buy a great company unless there's some level of controversy. You can buy a bad company at a cheap price. But to buy a really good company or a quality company, when you peel the onion back, there probably needed to be some level of controversy or mispricing.

And so that's what we're looking for. Thank you, Richard. Thank you, Richard. Thank you, Brewster and your millions and thank all of you for listening. Meta Lootsoft is our producer. If you like our little podcast, tell a couple of friends. If you don't like it,

drop your enemies a line. Or go do the car thing that Jack did earlier. See you next week.