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 Michael casper, Us, small cap and sector strategist at Bloomberg Intelligence. Mike, thanks for joining me today. So you put out a note last week on you know, the tariff's effect on small cap earnings for your Russell two thousand earning season review. What could you tell us about that? You know, what effect is tariff's going to have on small cap earning?

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 Michael casper, Us, small cap and sector strategist at Bloomberg Intelligence. Mike, thanks for joining me today. So you put out a note last week on you know, the tariff's effect on small cap earnings for your Russell two thousand earning season review. What could you tell us about that? You know, what effect is tariff's going to have on small cap earning?

Yeah, so consensus is already you know, pairing back estimates pretty significantly. I just want to recap though, a few of our model highlights on a fair value model on the Russell two thousand and what it suggested based on macro conditions at the time when we updated it just a couple of weeks ago, it's just about three point two percent revenue growth over the next year. Consensus was at seven point four percent. Obviously that's gotten paired back a little bit since then, But really what investors had priced, and a lot of this obviously is contingent on how high yield has moved or not really moved, right, So we've only had high yield spreads blowout near almost near five percent at the worst, and that's a key component of our modeled multiple. But given that that hasn't blown out yet, you know, tanking the multiple, it would suggest that to get to a roughly today's price or so, you would need a ten percent revenue contraction over the year ahead, and we've kind of seen consensus starting to adjust to this reality, right, So, pairing back estimates thus far this season, I would note we're at a one point one percent gain on a current constituent basis, but still down a little over one percent on the actual constituency of the ross of two thousand, so the current two thousand versus two thousand, and that it was a year ago. And estimates have come down pretty much for everything but a slew of defensives for the first quarter and much of the first half of twenty twenty four or twenty twenty five. So what we're really looking for is how bad do these estimates get over the next several quarters? Are those going to get trimmed even further. They've really only taken the acts again to the first half of twenty twenty five. The back half is still for significant recovery. Obviously, we've got a pretty weak GDP print today, but we'll see how bad estimates can get. Certainly they are facing some brunt of the tariff turmoil that we've gotten so far.

Yeah, so consensus is already you know, pairing back estimates pretty significantly. I just want to recap though, a few of our model highlights on a fair value model on the Russell two thousand and what it suggested based on macro conditions at the time when we updated it just a couple of weeks ago, it's just about three point two percent revenue growth over the next year. Consensus was at seven point four percent. Obviously that's gotten paired back a little bit since then, But really what investors had priced, and a lot of this obviously is contingent on how high yield has moved or not really moved, right, So we've only had high yield spreads blowout near almost near five percent at the worst, and that's a key component of our modeled multiple. But given that that hasn't blown out yet, you know, tanking the multiple, it would suggest that to get to a roughly today's price or so, you would need a ten percent revenue contraction over the year ahead, and we've kind of seen consensus starting to adjust to this reality, right, So, pairing back estimates thus far this season, I would note we're at a one point one percent gain on a current constituent basis, but still down a little over one percent on the actual constituency of the ross of two thousand, so the current two thousand versus two thousand, and that it was a year ago. And estimates have come down pretty much for everything but a slew of defensives for the first quarter and much of the first half of twenty twenty four or twenty twenty five. So what we're really looking for is how bad do these estimates get over the next several quarters? Are those going to get trimmed even further. They've really only taken the acts again to the first half of twenty twenty five. The back half is still for significant recovery. Obviously, we've got a pretty weak GDP print today, but we'll see how bad estimates can get. Certainly they are facing some brunt of the tariff turmoil that we've gotten so far.

We'll be interesting to watch, and so I think this is a great time to bring on our two guests. I'd like to welcome Moreian Peck and Sam Chamovit to Inside Active. Morgan and Sam are portfolio managers for the Fidelity Low Price Stock Fund ticker FLPSX. Morgan, Sam, thank you for joining us today.

We'll be interesting to watch, and so I think this is a great time to bring on our two guests. I'd like to welcome Moreian Peck and Sam Chamovit to Inside Active. Morgan and Sam are portfolio managers for the Fidelity Low Price Stock Fund ticker FLPSX. Morgan, Sam, thank you for joining us today.

Hi David, I'm Michael. Thanks for having us.

Hi David, I'm Michael. Thanks for having us.

Thanks for having us.

Thanks for having us.

So let's begin by learning more about your investment backgrounds. We can start with Morgan.

So let's begin by learning more about your investment backgrounds. We can start with Morgan.

Sounds great and so I did not grow up with much finance experience in my family. My dad was in advertising, my mom was a writer.

Sounds great and so I did not grow up with much finance experience in my family. My dad was in advertising, my mom was a writer.

I knew that finance was a use for ros Stove, but the closest.

I knew that finance was a use for ros Stove, but the closest.

We had in my college to major was economics, which.

We had in my college to major was economics, which.

Was not the seeing as finance and my assumers were.

Was not the seeing as finance and my assumers were.

Of college, a couple of things happened.

Of college, a couple of things happened.

The first one is I stumbled across what looked like a business work case study when I had a fils that someone had left behind.

The first one is I stumbled across what looked like a business work case study when I had a fils that someone had left behind.

And I lived through it, and I thought, but it was so interesting that there was this entire field focused on learning about companies and business drivers.

And I lived through it, and I thought, but it was so interesting that there was this entire field focused on learning about companies and business drivers.

So I wanted to pursue something related to this case study.

So I wanted to pursue something related to this case study.

And at the same time.

And at the same time.

I had a classmate who had had the summer internship at Fidelity as an equity research associate, and he was the one that explained to me the difference between the buy side and the cell side, what the role of an equity analyst was at Fidelity, and he encouraged me to.

I had a classmate who had had the summer internship at Fidelity as an equity research associate, and he was the one that explained to me the difference between the buy side and the cell side, what the role of an equity analyst was at Fidelity, and he encouraged me to.

Apply, and so I did. And as I was going.

Apply, and so I did. And as I was going.

Through the interview sessions, I was immediately impressed with the caliber.

Through the interview sessions, I was immediately impressed with the caliber.

Of people who were interviewing me.

Of people who were interviewing me.

It sounded like a very unique job coming.

It sounded like a very unique job coming.

Out of undergraduate.

Out of undergraduate.

I was really drawn to the idea of learning how to analyze a business. I liked that the success or failure for the job was very quantifiable, and I also really liked how much responsibility and impact I could have as a young professional.

I was really drawn to the idea of learning how to analyze a business. I liked that the success or failure for the job was very quantifiable, and I also really liked how much responsibility and impact I could have as a young professional.

So when I was.

So when I was.

Fortunate enough to get the offer I accepted on the spot.

Fortunate enough to get the offer I accepted on the spot.

And so Fidelities that when we play that I've worked at and I've been here for over twenty.

And so Fidelities that when we play that I've worked at and I've been here for over twenty.

Years, and I would say that as someone means to invest in, working at Faedelities is just a great place to learn because we get exposure at a really young age to every type of investor.

Years, and I would say that as someone means to invest in, working at Faedelities is just a great place to learn because we get exposure at a really young age to every type of investor.

And you know, we have legends like world Dad Off and.

And you know, we have legends like world Dad Off and.

Job's own pasts and everyone in between, and all of their both open.

Job's own pasts and everyone in between, and all of their both open.

For me to go in and ask questions and understand the process. So early in my career.

For me to go in and ask questions and understand the process. So early in my career.

I naturally gravitated towards smaller cap companies and then eventually to buy unions. And I think I like them because it seemed like it's part of the market.

I naturally gravitated towards smaller cap companies and then eventually to buy unions. And I think I like them because it seemed like it's part of the market.

I had a higher.

I had a higher.

Success of finding undiscovered gems because few of people are just looking so so really who I am as an investor day As a function of all of that, as well as my kind of successes and failures.

Success of finding undiscovered gems because few of people are just looking so so really who I am as an investor day As a function of all of that, as well as my kind of successes and failures.

As an analyst, Great how about you? Sam?

As an analyst, Great how about you? Sam?

Similar? Similar to More, I did not grow up in a finance householder family. My family was primarily doctors and lawyers, so financial literacy and markets were not dinner table talk. I didn't know what a portfolio mender was growing up, so I started to kind of figure all that out in college. So later in my high school years, my mom stopped working and she developed an interested investing and bought me my first markets investment related books. So overall, my start was rather unsophisticated, but a start. Nonetheless, in college, I really learned more about finance and investing, so that's where i'd say like the passion really started to develop. After graduating college, I joined the Investment Associate program at Putnam Investments. At Putnam, I worked for and with some excellent investors and mentors. Putnam was also very advantageous because it was going through a lot of very turbulent times, which allowed young people like myself to take a bigger role more quickly than normal, which was a great learning opportunity. I did well with these roles and continued to move up, but after five years, decided that Fidelity was a better place for me to continue my career. I moved to Fidelity to start our international small cap research team, and I did that with Derek Janssen and David Jenkins, who both came from the outside to help start that team. And both are great investors and close friends to this day. And then after a year in Boston for Fidelity, I left to help start our Tokyo office, which was sort of meant to be a two year stint but became a thirteen year adventure, which was absolutely amazing and you know, an opportunity to learn to community, to grow as an investor, but also you know, some leadership aspects and overalls an individual. So I started to transition to fund management of twenty twelve, and then I ran the International small Cap fund from early twenty fourteen until I think we're out twenty twenty two. Or David, who started the International small Cap team of me, ultimately took sole responsibility for.

Similar? Similar to More, I did not grow up in a finance householder family. My family was primarily doctors and lawyers, so financial literacy and markets were not dinner table talk. I didn't know what a portfolio mender was growing up, so I started to kind of figure all that out in college. So later in my high school years, my mom stopped working and she developed an interested investing and bought me my first markets investment related books. So overall, my start was rather unsophisticated, but a start. Nonetheless, in college, I really learned more about finance and investing, so that's where i'd say like the passion really started to develop. After graduating college, I joined the Investment Associate program at Putnam Investments. At Putnam, I worked for and with some excellent investors and mentors. Putnam was also very advantageous because it was going through a lot of very turbulent times, which allowed young people like myself to take a bigger role more quickly than normal, which was a great learning opportunity. I did well with these roles and continued to move up, but after five years, decided that Fidelity was a better place for me to continue my career. I moved to Fidelity to start our international small cap research team, and I did that with Derek Janssen and David Jenkins, who both came from the outside to help start that team. And both are great investors and close friends to this day. And then after a year in Boston for Fidelity, I left to help start our Tokyo office, which was sort of meant to be a two year stint but became a thirteen year adventure, which was absolutely amazing and you know, an opportunity to learn to community, to grow as an investor, but also you know, some leadership aspects and overalls an individual. So I started to transition to fund management of twenty twelve, and then I ran the International small Cap fund from early twenty fourteen until I think we're out twenty twenty two. Or David, who started the International small Cap team of me, ultimately took sole responsibility for.

Cool. You know, both of you are co managers on this fund. I'd really like to understand, you know, how does it work, you know, the dynamic between the two of you. Do you have different responsibilities or you know, I guess do you kind of run things by each other?

Cool. You know, both of you are co managers on this fund. I'd really like to understand, you know, how does it work, you know, the dynamic between the two of you. Do you have different responsibilities or you know, I guess do you kind of run things by each other?

Sure, I'm happy to take that. So so co ma management. As you point out, it's.

Sure, I'm happy to take that. So so co ma management. As you point out, it's.

A pretty broad term, and so the specifics of the relationship and the the roles I think are really important to.

A pretty broad term, and so the specifics of the relationship and the the roles I think are really important to.

Define just for context.

Define just for context.

Sam and I are.

Sam and I are.

Coming up in about thirteen years of co managing various funds together.

Coming up in about thirteen years of co managing various funds together.

And that has been really valuable because it's given us a lot of time to determine our definition of co management and it's allowed us to build this great relationship of mutual respect and trust as investors, and that's really the foundation for our teamwork importantly, and they also have a lot of experience co managing and pretty much every imaginable market.

And that has been really valuable because it's given us a lot of time to determine our definition of co management and it's allowed us to build this great relationship of mutual respect and trust as investors, and that's really the foundation for our teamwork importantly, and they also have a lot of experience co managing and pretty much every imaginable market.

Environment, and that means that we know how to.

Environment, and that means that we know how to.

Manage to better employers where our investment processes and out of favor. But so directly answer your question that the way we describe how we work together is really an.

Manage to better employers where our investment processes and out of favor. But so directly answer your question that the way we describe how we work together is really an.

Investment committee of two. So that means there are those sleeves. We co own everything together, and so all of the.

Investment committee of two. So that means there are those sleeves. We co own everything together, and so all of the.

Fund exposures are decided and analyzed together.

Fund exposures are decided and analyzed together.

We monitor the risks of the fund jointly.

We monitor the risks of the fund jointly.

And the only area that we really kind of split up and dividing conquers and idea generation.

And the only area that we really kind of split up and dividing conquers and idea generation.

We think it's really out that you just have two people on the funds, you know.

We think it's really out that you just have two people on the funds, you know.

Scaring the globe for new ideas.

Scaring the globe for new ideas.

But as soon as one of us finds in our idea, we bring the other person into the group.

But as soon as one of us finds in our idea, we bring the other person into the group.

And so most of.

And so most of.

The time Sam and I are pitching each other stocks for debating stocks, and then they're making a decision together as to when a leather stock is going to be you know, added into the court furtus. So that's really how we work together as a team.

The time Sam and I are pitching each other stocks for debating stocks, and then they're making a decision together as to when a leather stock is going to be you know, added into the court furtus. So that's really how we work together as a team.

Makes sense. And so you know, you talk about coming up with idea generations. So I think that brings me up to my next question is you know, is there a process you follow in terms of you know, coming up with ideas or what you're looking for for the portfolio. You know, obviously it's called low price stock, you know, I'm sure there's a lot more into it and what you're looking for.

Makes sense. And so you know, you talk about coming up with idea generations. So I think that brings me up to my next question is you know, is there a process you follow in terms of you know, coming up with ideas or what you're looking for for the portfolio. You know, obviously it's called low price stock, you know, I'm sure there's a lot more into it and what you're looking for.

Sure, I'll take that one, and I'll talk a little bit about the philosophy as well as kind of the what we're looking for. The first, we are fundamental investors and make decisions based on deep fundamental work alongside our research team. Fidelities research team is one of our coole competitive advantages. For sure, we are opportunistic value investors, but we do have a quality bias and take a very long term horizon. The key is we look for the intersection of value and quality, which to us leads to not simply cheap stock ideas, but underappreciated businesses, which is what we're really targeting. We cast a wide net in terms of the types of companies we invest in, with the thought process being the broader we cast our net, more likely we will find bargains. So what are we looking for when analyzing specific stocks. We tend to focus on three things or three broad categories. First, we look to determine the free cash flow power of a business medium term. The second is the durability of the free cash flow, and for us, durability is synonymous with quality. And third we're looking to understand the reinvestment opportunities of the business and its ability to grow it's per share value. If we talk about durability and break that up for a second, within that bucket is business quality, but it is also management quality. Management's very important to us, as well as the balance sheet. So those are the three kind of subcategories within durability that we're looking at. We consider these factors when determining what a business is worth and establishing a margin of safety. We compare our assessment of value of the stock to the opportunity set I'm making a decision, right, so everything has to be in a context of the overall opportunity to set do I dig in a little bit to quality because I think a lot of people talk about quality as part of their process, so I like to talk about ours a little bit more. There seems to be two types of quality focused investors. The first folks who only invest in the best businesses, so they segment the market into quality buckets and only focus on what they will determine as the top quality. And the second is is folks who really truncate the market by excluding the worst businesses. We're more in that second camp in order to keep the net really wide, so we look to avoid bad business models, shrinking businesses, low return businesses, and crookeeter and competent management. So that's the way we think about quality. We describe our process as preparation and patients. So preparation we are constantly doing deep fundamental work on companies to understand those three kind of buckets that I mentioned before, the free cash flow power, the quality attributes, and the growth potential. But then we wait patiently to buy the businesses only when there are at attractive prices relative to our assessment of intrinsic value.

Sure, I'll take that one, and I'll talk a little bit about the philosophy as well as kind of the what we're looking for. The first, we are fundamental investors and make decisions based on deep fundamental work alongside our research team. Fidelities research team is one of our coole competitive advantages. For sure, we are opportunistic value investors, but we do have a quality bias and take a very long term horizon. The key is we look for the intersection of value and quality, which to us leads to not simply cheap stock ideas, but underappreciated businesses, which is what we're really targeting. We cast a wide net in terms of the types of companies we invest in, with the thought process being the broader we cast our net, more likely we will find bargains. So what are we looking for when analyzing specific stocks. We tend to focus on three things or three broad categories. First, we look to determine the free cash flow power of a business medium term. The second is the durability of the free cash flow, and for us, durability is synonymous with quality. And third we're looking to understand the reinvestment opportunities of the business and its ability to grow it's per share value. If we talk about durability and break that up for a second, within that bucket is business quality, but it is also management quality. Management's very important to us, as well as the balance sheet. So those are the three kind of subcategories within durability that we're looking at. We consider these factors when determining what a business is worth and establishing a margin of safety. We compare our assessment of value of the stock to the opportunity set I'm making a decision, right, so everything has to be in a context of the overall opportunity to set do I dig in a little bit to quality because I think a lot of people talk about quality as part of their process, so I like to talk about ours a little bit more. There seems to be two types of quality focused investors. The first folks who only invest in the best businesses, so they segment the market into quality buckets and only focus on what they will determine as the top quality. And the second is is folks who really truncate the market by excluding the worst businesses. We're more in that second camp in order to keep the net really wide, so we look to avoid bad business models, shrinking businesses, low return businesses, and crookeeter and competent management. So that's the way we think about quality. We describe our process as preparation and patients. So preparation we are constantly doing deep fundamental work on companies to understand those three kind of buckets that I mentioned before, the free cash flow power, the quality attributes, and the growth potential. But then we wait patiently to buy the businesses only when there are at attractive prices relative to our assessment of intrinsic value.

So do you consider macroeconomic conditions at all when you're looking for stocks.

So do you consider macroeconomic conditions at all when you're looking for stocks.

We are macro aware when making investment decisions. We're paying close attention to what is going on in the macroeconomy and the geopolitical environment. That said, this does not determine our investment strategy, nor do we change our process based on the environment, but it does help us in terms of informing where we are in the cycle, how things may be impacting companies in the near term. It also helps explain at times like why some companies are performing well and other companies are poorly a very bad part of the cycle, and a cyclical performing poorly may actually be an opportunity to buy, not actually an opportunity to avoid, you know, I'd like a key part of our investment philosophy overall is that the world is uncertain and constantly changing. So whether that's tariffs one day or or inflation the next day, whatever it is, there's constant uncertainty and change. But this is really why we're looking for strong management teams and companies which have adaptable and resilient business models. You know, companies with safe balance sheets and generating cash that helps provide that margin of safety. These things make kind of weathering tough times and uncertainly easier. It also means our companies are able to play offense when when times are tough, Like we want the boardroom conversation in tough times to be about can we buy back stock at highly discounted crisis? Can we reinvest to gain share? Or can we consolidate the market at attractive crisis? Those are the types of offensive questions we hope our companies are asking in tough times versus how can we repair our balance sheet when when times are tough? This is not what we were looking for in our investments.

We are macro aware when making investment decisions. We're paying close attention to what is going on in the macroeconomy and the geopolitical environment. That said, this does not determine our investment strategy, nor do we change our process based on the environment, but it does help us in terms of informing where we are in the cycle, how things may be impacting companies in the near term. It also helps explain at times like why some companies are performing well and other companies are poorly a very bad part of the cycle, and a cyclical performing poorly may actually be an opportunity to buy, not actually an opportunity to avoid, you know, I'd like a key part of our investment philosophy overall is that the world is uncertain and constantly changing. So whether that's tariffs one day or or inflation the next day, whatever it is, there's constant uncertainty and change. But this is really why we're looking for strong management teams and companies which have adaptable and resilient business models. You know, companies with safe balance sheets and generating cash that helps provide that margin of safety. These things make kind of weathering tough times and uncertainly easier. It also means our companies are able to play offense when when times are tough, Like we want the boardroom conversation in tough times to be about can we buy back stock at highly discounted crisis? Can we reinvest to gain share? Or can we consolidate the market at attractive crisis? Those are the types of offensive questions we hope our companies are asking in tough times versus how can we repair our balance sheet when when times are tough? This is not what we were looking for in our investments.

And now smid caps have been out of favor for quite some time now, and I know a lot of other pms are searching for kind of defend your box type answers. But what kind of catalysts are you watching? Maybe for Smith Caps to turn it around and now perform large caps.

And now smid caps have been out of favor for quite some time now, and I know a lot of other pms are searching for kind of defend your box type answers. But what kind of catalysts are you watching? Maybe for Smith Caps to turn it around and now perform large caps.

Sure I can take this so as Sam Engine, we're remark very aware, but we.

Sure I can take this so as Sam Engine, we're remark very aware, but we.

Don't spend a lot of time trying to put it the future. We really think the value that we can generate for the fund and our shareholders is the bottom up stock picking.

Don't spend a lot of time trying to put it the future. We really think the value that we can generate for the fund and our shareholders is the bottom up stock picking.

And finding those dislocated stocks, and you know, to.

And finding those dislocated stocks, and you know, to.

Remain thatch aware, we're watching all of the data points that I think everyone else is watching. We do have great analysis coming out of our internal.

Remain thatch aware, we're watching all of the data points that I think everyone else is watching. We do have great analysis coming out of our internal.

Economic team and they put.

Economic team and they put.

Sort of analysis on all of that data and that that's informative to us.

Sort of analysis on all of that data and that that's informative to us.

But to luckly into your question, and you know, we don't have a strong view on.

But to luckly into your question, and you know, we don't have a strong view on.

Small caps being about to outperform or continue to underperform.

Small caps being about to outperform or continue to underperform.

But maybe we can talk a little bit about.

But maybe we can talk a little bit about.

Why we're very excited about small caps for a few reasons.

Why we're very excited about small caps for a few reasons.

Like when caveat though is these have been through for a.

Like when caveat though is these have been through for a.

While, so small caps as a note, they trailed large caps for about fifteen years and that's that's much longer than a normal cycle, which tends to be sort of eight to ten years. That has allowed to really attractive valuations for small caps, especially the profit there ones.

While, so small caps as a note, they trailed large caps for about fifteen years and that's that's much longer than a normal cycle, which tends to be sort of eight to ten years. That has allowed to really attractive valuations for small caps, especially the profit there ones.

And as a.

And as a.

Reminder about truly to forty five percent of the rest of two thousand, which is the small cap benchmark we look at, that's unprofitable and that's really unique to this benchmark.

Reminder about truly to forty five percent of the rest of two thousand, which is the small cap benchmark we look at, that's unprofitable and that's really unique to this benchmark.

And so within small caps, we also find that it's.

And so within small caps, we also find that it's.

Just a more inefficient part of the market than the large caps because these stocks, as I mentioned before, they're just less well covered by both the buy side and the cell side. The other interesting thing is that small caps have tremendous disparity and the quality of the businesses, given what I just mentioned about so many of them being chronically unprofitable. And so that's why we think that it's a really attractive setup for app the managers like us to.

Just a more inefficient part of the market than the large caps because these stocks, as I mentioned before, they're just less well covered by both the buy side and the cell side. The other interesting thing is that small caps have tremendous disparity and the quality of the businesses, given what I just mentioned about so many of them being chronically unprofitable. And so that's why we think that it's a really attractive setup for app the managers like us to.

Try to add value by picking the light stocks.

Try to add value by picking the light stocks.

And let's talk about evaluations a little bit. Are there specific metrics you like to use to value stocks and anything like that, and anything like that.

And let's talk about evaluations a little bit. Are there specific metrics you like to use to value stocks and anything like that, and anything like that.

We believe what we pay for a stock is critically important to its return potential, and we don't compromise on this valuation, although quantitative in nature is not a precise science and involves a lot of art and triangulation. Importantly, we believe the value of the business is solely determined by the cash flows of business generates, not its adjusted earnings. I think adjusted earnings have become quite popular, but we're more focused on the cash that business generates. So first, like everything we do, we try to embed conservative assumptions. Using conservative assumptions, we focus on the estimates of normalized free cash flows several years in the future. By focus on normalized profits in the future, we hope to avoid being overly anchored to what sounds good or bad in the near term. Second, we try and look at several types of metrics, so you know, but it must be based on profits and cash flows, not eyeballs and sales. Third, we spend a significant time on scenario analysis to help us wrap our arms around the range of outcomes and how asymmetric the return potential for our investments are. This means we focus on bearish scenarios as well as bullish scenarios so as to not rely on a single point estimate given how much variability exists in the world. And lastly, we don't have any mandatory hurdles to buy to buy or sell, so it's always relative to the opportunity set. The hurdles are dependent on the quality and the durability of the free cash flow as well as the growth opportunity, so there's not any set hurdles that we buy if the upside is at or we sell if the upside is want. We do try to bring a lot of the art the other aspects into it.

We believe what we pay for a stock is critically important to its return potential, and we don't compromise on this valuation, although quantitative in nature is not a precise science and involves a lot of art and triangulation. Importantly, we believe the value of the business is solely determined by the cash flows of business generates, not its adjusted earnings. I think adjusted earnings have become quite popular, but we're more focused on the cash that business generates. So first, like everything we do, we try to embed conservative assumptions. Using conservative assumptions, we focus on the estimates of normalized free cash flows several years in the future. By focus on normalized profits in the future, we hope to avoid being overly anchored to what sounds good or bad in the near term. Second, we try and look at several types of metrics, so you know, but it must be based on profits and cash flows, not eyeballs and sales. Third, we spend a significant time on scenario analysis to help us wrap our arms around the range of outcomes and how asymmetric the return potential for our investments are. This means we focus on bearish scenarios as well as bullish scenarios so as to not rely on a single point estimate given how much variability exists in the world. And lastly, we don't have any mandatory hurdles to buy to buy or sell, so it's always relative to the opportunity set. The hurdles are dependent on the quality and the durability of the free cash flow as well as the growth opportunity, so there's not any set hurdles that we buy if the upside is at or we sell if the upside is want. We do try to bring a lot of the art the other aspects into it.

Do you consider stocks at all, you know, I know the portfolio is called low price stock, but do you ever consider stocks that are not low price?

Do you consider stocks at all, you know, I know the portfolio is called low price stock, but do you ever consider stocks that are not low price?

So maybe I can start off talking a little bit about that.

So maybe I can start off talking a little bit about that.

The post with that question a lot.

The post with that question a lot.

So the fund was created about thirty five years ago in nineteen ninety by Joss tolen Host and it was launched before the popularization of style boxers that were offamiliar with today and the fun that focused on more price stocks, and it was.

So the fund was created about thirty five years ago in nineteen ninety by Joss tolen Host and it was launched before the popularization of style boxers that were offamiliar with today and the fun that focused on more price stocks, and it was.

Named after them based on the view that stocks with no prices implied are.

Named after them based on the view that stocks with no prices implied are.

Under valued or cheaper, So the name was really meant to signal that this.

Under valued or cheaper, So the name was really meant to signal that this.

Is a value fund.

Is a value fund.

I'd also say we believe wholeheartedly in our evaluation based process and we only invest when opportunities fit that process. So we believe risk is actually deviating from this process versus a stated data or track.

I'd also say we believe wholeheartedly in our evaluation based process and we only invest when opportunities fit that process. So we believe risk is actually deviating from this process versus a stated data or track.

And are are there any sectors you currently find particularly compelling that stand out above the others?

And are are there any sectors you currently find particularly compelling that stand out above the others?

Maybe?

Maybe?

So I'd say that there are always opportunities different business models and.

So I'd say that there are always opportunities different business models and.

Every sector that we're looking at.

Every sector that we're looking at.

And then I think.

And then I think.

Maybe different to somebody that are fund managers you talk to, you know.

Maybe different to somebody that are fund managers you talk to, you know.

If the growth manager is really focused on the the fear sectors of the market.

If the growth manager is really focused on the the fear sectors of the market.

We're looking at all sectors all of the time, and so the answer question with the put up.

We're looking at all sectors all of the time, and so the answer question with the put up.

And the market year to day, but we're really finding opportunities in all sectors.

And the market year to day, but we're really finding opportunities in all sectors.

So many stocks have declined, and.

So many stocks have declined, and.

So many of them look like it's sort of been indiscriminate selling driving some of that place action within all the sectors, though, we're spending more time on the stocks that have been most negatively impacted by terror related concerns and macro uncertainty.

So many of them look like it's sort of been indiscriminate selling driving some of that place action within all the sectors, though, we're spending more time on the stocks that have been most negatively impacted by terror related concerns and macro uncertainty.

And so as you may suspect, we're spending.

And so as you may suspect, we're spending.

Plenty of time and more sycrically exposed sectors and financials, the.

Plenty of time and more sycrically exposed sectors and financials, the.

Consumer discretionary, But interestingly we're spending just as much time in ret's view probably is more defensive sectors like consumer stakers and healthcare. And I'd say for each of the names that looks interesting, we're really spending our time reevaluating if the normalized earnings power and tree cash fishes have changed for the business.

Consumer discretionary, But interestingly we're spending just as much time in ret's view probably is more defensive sectors like consumer stakers and healthcare. And I'd say for each of the names that looks interesting, we're really spending our time reevaluating if the normalized earnings power and tree cash fishes have changed for the business.

So that's what we're spending our time on.

So that's what we're spending our time on.

And I saw that your fund has a sort considerable x US exposure. Are you more optimistic maybe about foreign stocks than US stocks, or how's your global view look right now.

And I saw that your fund has a sort considerable x US exposure. Are you more optimistic maybe about foreign stocks than US stocks, or how's your global view look right now.

So the process for picking stocks within the US or outside of the US is the same, but we tend to invest in businesses overseas when we can find something unique or something similar with a significantly better risk adjusted reward. There are a few attributes that make international stocks interesting at the moment. The first is the long period of US stock outperformance and dollar strength, which means that there is likely to be relative bartmans overseas. The second is many overseas markets are less consolidated, with more small and family run businesses still listed on public exchanges. This makes for a very broad pool to hunt for ideas. The reason is the US has been the most aggressive in terms of using cash flows and balance sheets to consolidate markets for the M and A and privatize businesses via private equity. The US has also benefited from uniquely large, excellent tech companies that don't exist in most parts of the world. This has been a huge advantage for the US market and has sucked capital into them. But the rest of the world is also starting to do things that can drive a lot of value too, which had not been happening previously. So, for example, in Europe, we're seeing early signs of a much more stimulative government spending regime, primarily around defense, but not limited to only defense. This is a positive for businesses and economies there, which is at the same time when the US seems to be doing the opposite. In Asia, though primarily Japan but to some extent Korea, companies are becoming much more proactive with their capital allocation in terms of higher dividends and buybacks. Buybacks with excess capital of lowly valued stocks like in these countries can be really powerful drivers of shareholder value creation. So this is positive backdrop, but we're still evaluating each investment on a company by company basis, and Fidelity, with its uniquely positioned analysts overseas, are helping us identify these underappreciated investment opportunities.

So the process for picking stocks within the US or outside of the US is the same, but we tend to invest in businesses overseas when we can find something unique or something similar with a significantly better risk adjusted reward. There are a few attributes that make international stocks interesting at the moment. The first is the long period of US stock outperformance and dollar strength, which means that there is likely to be relative bartmans overseas. The second is many overseas markets are less consolidated, with more small and family run businesses still listed on public exchanges. This makes for a very broad pool to hunt for ideas. The reason is the US has been the most aggressive in terms of using cash flows and balance sheets to consolidate markets for the M and A and privatize businesses via private equity. The US has also benefited from uniquely large, excellent tech companies that don't exist in most parts of the world. This has been a huge advantage for the US market and has sucked capital into them. But the rest of the world is also starting to do things that can drive a lot of value too, which had not been happening previously. So, for example, in Europe, we're seeing early signs of a much more stimulative government spending regime, primarily around defense, but not limited to only defense. This is a positive for businesses and economies there, which is at the same time when the US seems to be doing the opposite. In Asia, though primarily Japan but to some extent Korea, companies are becoming much more proactive with their capital allocation in terms of higher dividends and buybacks. Buybacks with excess capital of lowly valued stocks like in these countries can be really powerful drivers of shareholder value creation. So this is positive backdrop, but we're still evaluating each investment on a company by company basis, and Fidelity, with its uniquely positioned analysts overseas, are helping us identify these underappreciated investment opportunities.

Now your fund is a bit obviously tilted a bit more towards value over growth. Are you excited about the style in twenty twenty five in the opportunities there? And do you consider growth names as well if they are you know, undervalue to you.

Now your fund is a bit obviously tilted a bit more towards value over growth. Are you excited about the style in twenty twenty five in the opportunities there? And do you consider growth names as well if they are you know, undervalue to you.

We believe investing in low expectation stocks is always the right thing to do for investors, and the very long term data supports this. I think market cycles can be very long, but they aren't permanent. So we've been in a an elongated period of value under performance, and so from here the starting valuations would imply significantly better for returns in terms of value stocks, but you know, the timing of this is unpredictable. Would also say to your question, Yeah, we love growth stocks. We just want to buy them and they have low expectations. We don't want no growth businesses. We want as much growth as we can have, but we want it when it's very discounted or how to favor we don't focus on popular stocks.

We believe investing in low expectation stocks is always the right thing to do for investors, and the very long term data supports this. I think market cycles can be very long, but they aren't permanent. So we've been in a an elongated period of value under performance, and so from here the starting valuations would imply significantly better for returns in terms of value stocks, but you know, the timing of this is unpredictable. Would also say to your question, Yeah, we love growth stocks. We just want to buy them and they have low expectations. We don't want no growth businesses. We want as much growth as we can have, but we want it when it's very discounted or how to favor we don't focus on popular stocks.

Let's talk about the earning season a little bit. Do you have any major takeaways from the fourth quarter earning season? Obviously the backdrop shifting quite a bit, and what are you watching as the first quarter results start.

Let's talk about the earning season a little bit. Do you have any major takeaways from the fourth quarter earning season? Obviously the backdrop shifting quite a bit, and what are you watching as the first quarter results start.

To roll in?

To roll in?

Sure?

Sure?

So Toni said, we really view earning.

So Toni said, we really view earning.

Season as a time checking with the company us and to assess if our investment thesis is on track or not.

Season as a time checking with the company us and to assess if our investment thesis is on track or not.

We use earnings for a few different things. We use it to hear about mian.

We use earnings for a few different things. We use it to hear about mian.

Term trends in the business as you know that's changing you know pretty quickly, as well as the operating environment we're listening to get a better understanding of term earnings.

Term trends in the business as you know that's changing you know pretty quickly, as well as the operating environment we're listening to get a better understanding of term earnings.

The most important way that we're spending our time on is to see if you need to alter our longer term view of normalized screamings.

The most important way that we're spending our time on is to see if you need to alter our longer term view of normalized screamings.

And I would say the sending season that that's interested in how companies are finding to navigate through the uncertainty on how they're planning and BacT into the environment, and to see if any potential on impacts sectors, but owns really just starting for us.

And I would say the sending season that that's interested in how companies are finding to navigate through the uncertainty on how they're planning and BacT into the environment, and to see if any potential on impacts sectors, but owns really just starting for us.

So you know, you touched a little bit about touching base with management and also earlier in our conversation you did talk about, you know, looking at management teams and so you know, from a qualitative research aspect, you know, are there certain qualities that you're looking for in management teams as part of your research process.

So you know, you touched a little bit about touching base with management and also earlier in our conversation you did talk about, you know, looking at management teams and so you know, from a qualitative research aspect, you know, are there certain qualities that you're looking for in management teams as part of your research process.

I think we're looking for management teams that have a few characteristics. So when we're when we're analyzing management teams, and you know, being part of Fidelity and Fidelity platform provides us unique opportunity sets. So you have access to the most senior managers of any company, which is you know, wonderful advantage. But we're looking at at a few things. The first is We're looking to understand their strategy rationale and their strategic competency. So do they think broadly? Do they understand and think through not just their base case, but are they thinking about the risks associated with their industry? Competitive change is what their competitors are doing. So we're looking to understand how they think strategically. We're also looking at how they think financially. We want to understand that not just the CFO can talk to the talking points of financial returns, but the CEO and the broader executive team understand what drives over value. So do they understand cash flow generation? Do you understand why you want to have optimized working capital? Do you understand you know, growing your ebit duh is one part of what you want to do, or your earning is one part, but if you don't convert that into cash, it's less interesting. And then the last part is the tax of the capital required. Right, are you looking at how much growth your career relative to how much you're spending because that's what actually matters to the value creation of a business. And then lastly we bring that all together, we want to find management teams that are aligned with us. Right, so we want equity ownership that they have within the business, but not simply equity ownership. We also want the KPIs of the senior execs, but also how it permeates the business to be driven by things that we believe drive to shareholder value. So, for example, if you came to us with a company that was solely compensated on growing their top line, with how any focus on how much capital they had to spend to grow their top line, how that turned into profits, Like, that's very unattractive. What we would like to see is our management teams with equity exposure and their KPIs linked to growing their free cash flow per share and their returns on capital. That would be like a very ideal scenario. So those are the types of things we're really trying to understand when analyzing manage.

I think we're looking for management teams that have a few characteristics. So when we're when we're analyzing management teams, and you know, being part of Fidelity and Fidelity platform provides us unique opportunity sets. So you have access to the most senior managers of any company, which is you know, wonderful advantage. But we're looking at at a few things. The first is We're looking to understand their strategy rationale and their strategic competency. So do they think broadly? Do they understand and think through not just their base case, but are they thinking about the risks associated with their industry? Competitive change is what their competitors are doing. So we're looking to understand how they think strategically. We're also looking at how they think financially. We want to understand that not just the CFO can talk to the talking points of financial returns, but the CEO and the broader executive team understand what drives over value. So do they understand cash flow generation? Do you understand why you want to have optimized working capital? Do you understand you know, growing your ebit duh is one part of what you want to do, or your earning is one part, but if you don't convert that into cash, it's less interesting. And then the last part is the tax of the capital required. Right, are you looking at how much growth your career relative to how much you're spending because that's what actually matters to the value creation of a business. And then lastly we bring that all together, we want to find management teams that are aligned with us. Right, so we want equity ownership that they have within the business, but not simply equity ownership. We also want the KPIs of the senior execs, but also how it permeates the business to be driven by things that we believe drive to shareholder value. So, for example, if you came to us with a company that was solely compensated on growing their top line, with how any focus on how much capital they had to spend to grow their top line, how that turned into profits, Like, that's very unattractive. What we would like to see is our management teams with equity exposure and their KPIs linked to growing their free cash flow per share and their returns on capital. That would be like a very ideal scenario. So those are the types of things we're really trying to understand when analyzing manage.

And M and A is a pretty big driver of or a big ceter of valuations and a lot of these small cap stocks. And I had a lot of clients at the beginning of twenty twenty five that were super excited about the deregulatory push from the new administration, but obviously that hasn't panned out so far. Are you excited about M and A in twenty twenty five. How do you think about M and A and are there any you know, areas or maybe sectors where you think that M and A activity might pick up this year.

And M and A is a pretty big driver of or a big ceter of valuations and a lot of these small cap stocks. And I had a lot of clients at the beginning of twenty twenty five that were super excited about the deregulatory push from the new administration, but obviously that hasn't panned out so far. Are you excited about M and A in twenty twenty five. How do you think about M and A and are there any you know, areas or maybe sectors where you think that M and A activity might pick up this year.

Sure, So historically, you know, M and A and also IPA activity for you know, all.

Sure, So historically, you know, M and A and also IPA activity for you know, all.

Market caps, it's.

Market caps, it's.

Pretty highly quoted to economic activity, business confidence, you know, need functioning capital.

Pretty highly quoted to economic activity, business confidence, you know, need functioning capital.

Markets, and it's tied to the outlook for quot So you know, we.

Markets, and it's tied to the outlook for quot So you know, we.

Really think that future activity is going to depend on all of those factors.

Really think that future activity is going to depend on all of those factors.

Yeah, I would say in terms of M and A that we we do tend to be a benefit to share of a lot of M and A and we have if we're doing a good job, we're tending to find underappreciated businesses that you know, consolidators or private equity also ultimately find underappreciated and so we do tend to have you know, a series of companies taken out of the Fund of most here. So as M and A is a good thing for the fund, we tend to hope that that continues.

Yeah, I would say in terms of M and A that we we do tend to be a benefit to share of a lot of M and A and we have if we're doing a good job, we're tending to find underappreciated businesses that you know, consolidators or private equity also ultimately find underappreciated and so we do tend to have you know, a series of companies taken out of the Fund of most here. So as M and A is a good thing for the fund, we tend to hope that that continues.

Great, Well, we just have one more question for actually both of you. I'd love for both of you to answer this. Something I'd like to ask a lot of our guests, you know. I know, Sam you mentioned earlier when you were talking about your background, you know, different investment books. But what are some of your favorites.

Great, Well, we just have one more question for actually both of you. I'd love for both of you to answer this. Something I'd like to ask a lot of our guests, you know. I know, Sam you mentioned earlier when you were talking about your background, you know, different investment books. But what are some of your favorites.

Maybe I'll start, Yeah, So I would say, like early in one's investment journey, reading the cannon of investment books is critically important, and I would you know, I read everything I could as I was developing my own investment f laws. Many were influential, but I would certainly highlight margin of safety by Seth Clarman, resonated with me and was particularly influential, like the concept of patient contrariy and investing and stops trading, or the margin of safety kind of as you hopefully heard today, like permeates our investment process. I guess like as that's developed, I kind of moved more towards consuming other folks investment processes and ideas via investment letters and journals and podcasts, and I shifted more of my books and reading at this stage of my career to things that focus on the history of businesses and how they developed, in the biographies of some of the awesome business leaders. So you know, at this stage I like to recommend things like you know, even the cable Cowboy or Chip Wars or Sam Waltons made in the market. These kind of these things are more influential at this stage of my career in terms of how I think about businesses and analyzed businesses.

Maybe I'll start, Yeah, So I would say, like early in one's investment journey, reading the cannon of investment books is critically important, and I would you know, I read everything I could as I was developing my own investment f laws. Many were influential, but I would certainly highlight margin of safety by Seth Clarman, resonated with me and was particularly influential, like the concept of patient contrariy and investing and stops trading, or the margin of safety kind of as you hopefully heard today, like permeates our investment process. I guess like as that's developed, I kind of moved more towards consuming other folks investment processes and ideas via investment letters and journals and podcasts, and I shifted more of my books and reading at this stage of my career to things that focus on the history of businesses and how they developed, in the biographies of some of the awesome business leaders. So you know, at this stage I like to recommend things like you know, even the cable Cowboy or Chip Wars or Sam Waltons made in the market. These kind of these things are more influential at this stage of my career in terms of how I think about businesses and analyzed businesses.

Great to help you, Morgan, sure.

Great to help you, Morgan, sure.

So I've been a few favorites that I usually encourage to people who start here as a new investor. So the first one is called Investing the Last Level Art. It's by Robert Hagstrom. This is a great book that talks about the importance of overlaying investing with other fields like psychology, biology, economics, and you can't just be so focused on finance.

So I've been a few favorites that I usually encourage to people who start here as a new investor. So the first one is called Investing the Last Level Art. It's by Robert Hagstrom. This is a great book that talks about the importance of overlaying investing with other fields like psychology, biology, economics, and you can't just be so focused on finance.

It's it's sort of in a spirit of Cherry Munger.

It's it's sort of in a spirit of Cherry Munger.

The second one is Thinking Fast as Though by Dan Conneman.

The second one is Thinking Fast as Though by Dan Conneman.

So it's well known.

So it's well known.

It's not a finance or investment book.

It's not a finance or investment book.

But it goes a long way in helping you understand.

But it goes a long way in helping you understand.

How you make decisions. And I think it's helped me be more aware.

How you make decisions. And I think it's helped me be more aware.

Of my behavioral biases, and I think that's a really.

Of my behavioral biases, and I think that's a really.

Important consideration to being an investor.

Important consideration to being an investor.

And the last thing I would comment on is I'm a big reader of Howard Mark's.

And the last thing I would comment on is I'm a big reader of Howard Mark's.

Books and memos. I found those very helpful.

Books and memos. I found those very helpful.

Great, well, I'll definitely, you know, take a look at the ones I haven't read so far. But Morgan, Sam, this is wonderful. Thank you again for joining us.

Great, well, I'll definitely, you know, take a look at the ones I haven't read so far. But Morgan, Sam, this is wonderful. Thank you again for joining us.

Thanks thanks much.

Thanks thanks much.

And Mike, thank you for being the Coast today.

And Mike, thank you for being the Coast today.

Thank you, David, and thank you both for joining.

Thank you, David, and thank you both for joining.

Us until our next episode. This is David Cone with Inside Active

Us until our next episode. This is David Cone with Inside Active