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John Rogers, Mario Gabelli and Bill Miller.
Photographs by Christopher Goodney/Bloomberg; Tim Boyle/Bloomberg
Veteran value managers gathered for a virtual discussion earlier this week from Ariel Investments said they’ve been buying up a wide range of stocks during the coronavirus-induced volatility, including hunting down an industry Warren Buffett fled is.
Among the seven money managers were two Barrons Roundtable members – Rupal Bhansali of Ariel and Mario Gabelli of Gamco – as well as Ariel co-CEO John Rogers, Jr.; global value manager Daniel O’Keefe of
Artisan Partners
and David Herro of Harris Associates; G. Staley Cates of Southeastern Asset Management; and Bill Miller, chairman of Miller Value Partners. Most managers expected that
Dow Jones industry average
be higher in 12 months, although they also said US markets were feeling “a little hot” in terms of valuation and expected a U-shaped economic recovery. Here are edited and condensed highlights of Tuesday’s discussion.
On the shape of the economic recovery:
Bhansali: From China’s point of view, people report to work but prefer to drive rather than use public transport. There are traffic jams during rush hour, but after hours you will see a ghost town. People are extremely psychologically uncomfortable moving away from social distancing. This has implications for consumer discretionary. We spoke to Tencent Music: In-app purchases in video games have fallen sharply. People are very concerned about their income levels and are very frugal, which is why I think we’re seeing either a U-shaped or W-shaped recovery.
Forkli: With the recent new cases of infection in Wuhan and South Korea, a second wave is likely, leading to a W-shaped economic recovery with a “
Nike
rush.”
How to find opportunities
O’Keefe: I feel like a credit analyst. It’s an extension of value investors’ work of evaluating where revenue is coming from and how they perform in stress scenarios, but now it’s an extremely stressful scenario — how can Southwest burn $30 million a day and still survive a few months? A year? 18 months?
Categories: Nirvana doesn’t have to make those guesses and burn into the money. As a concentrated fund, we don’t have many new names. We own
Williams
(ticker: WMB), a stable pipeline; or woodland; Trees will grow whether there is a harvest or not. Our happy place is making sure there’s still free cash flow this year.
On airlines
O’Keefe: We own
Southwest Airlines
(LUV). It has $14 billion in cash, $8 billion in unencumbered aircraft, which it owns outright and through no fault of its own. It’s likely to lose $4 billion to $5 billion this year. You have tremendous financial resources to survive what is likely to be a temporary situation. People will fly again. We’ll likely see another airline go bust, and that will be a huge benefit for Southwest. It has the lowest cost network, is purely domestic, and has the best balance sheet. It is poised to bounce back and gain market share.
Bhansali: In emerging markets, we will continue to see growth in air travel. We own
saffron
(SAF.France), which produces the next generation of engines that help make aircraft more ESG friendly and fuel efficient. I like her and even
airbus
(AIR.France) better than the airlines themselves.
Miller: We owned
Delta Airlines
(DAL) and United Airlines Holdings (UAL) for a long time. I’m not disagreeing with anything Warren Buffett said [about airlines]. He wants to project with confidence to five to ten years and can no longer do that. The way we see it, all the bad news comes straight from the airlines. If you don’t own airlines, make a bet against a vaccine. If there is a vaccine, it will eliminate people’s problems with flying. There isn’t much downside risk in the share price over the next three to six months.
Mister: If you’re traveling intercontinentally at short notice, there are still issues, including countries quarantining those arriving from abroad. We will see a different glide path as the airlines that focus on long haul versus short haul. We own
Ryanair Holdings
(RYAAY); Short distance is quicker to recover than long distance.
About healthcare
Rogers: dental supplier
Envista Holdings
(NVST) has great brands. People will have to go to the dentist again; 35% of offices are back in operation this month. People have been postponing visits so this is a popular one. We’ve found great bargains in healthcare.
Miller:
Teva Pharmaceuticals
(TEVA) is our third largest position. The CEO is one of the best we’ve seen. It has a free cash flow yield of 15%. There’s a product liability backlog on its generics and opioids, but if you fall into the weeds: The history of these lawsuits is that they rarely result in companies going bankrupt. Teva is worth twice its current price.
O’Keefe: We have a great position in
anthem
(ANTM). It’s 11 times next year’s revenue and the business is poised to grow this year. The odds of a depositor healthcare system are now closer to zero. We also own
Novartis
(NVS). It has one of the best pipelines in the industry and trades at 12.5 to 13 times next year’s earnings. In this environment, where people are really scared of the economy, I’m not sure why they aren’t offering these stocks at up to 15 to 17 times earnings.
On banks
O’Keefe:
UBS
(UBS) is our largest holding. Every time there’s a shake in the banking industry, the stock falls, but it’s a wealth management business. It has an investment bank but is fairly low risk and charges a lot of fees. It doesn’t have much credit exposure – most of it is high quality like mortgages to wealthy customers.
Mister: We like European banks [like
BNP Paribas
(BNP.France)] because the balance sheet has changed a lot in the past few decades and they’ve been through interest rate compression. The market is missing that the way they make money has changed. They’re trading at a third of book value and should be able to generate a 10% return on equity.
About the comeback of value investing
Mister: Value is so badly underexposed that we will get severe mean reversion. I’m not sure what the catalyst will be, but probably some believe there is light at the end of the tunnel.
Rogers: It’s like the bursting of the internet bubble. There will be a violent reversal that offers value investors the greatest opportunity over the next decade.
write to Reshma Kapadia at [email protected]
