Leading value investors with decades of experience participated in a recent Ariel Investments panel. Fund managers including John Rogers and Bill Miller gave their views on inflation and tech stocks. Panelists also discussed the effects the war in Ukraine could have on markets. For years, value investors have been predicting a turn toward cheaper stocks and away from high-flying growth names, and if they wanted to take a bit of a victory lap now, it would be understandable.
As investors reacted to high inflation, climbing energy prices, and the prospect of rising interest rates, they dumped many of the tech-adjacent names they’d favored for more than a decade and bought cheaper names in industries like energy and banking.
Investors who pick stocks that they see as undervalued based on measurements like price to earnings, price to book, or free cash flows have been predicting that kind of sea change, but there hadn’t been many signs it was going to happen. But when Ariel Investments convened a conference call with seven famed value investors on Wednesday, they mostly looked ahead rather than back.
That meant discussing Russia’s invasion of Ukraine. Decorated international fund manager Dan O’Keefe, managing director of Artisan Partners and manager of its Global Value Fund, said the economic worst case is a recession in Europe. He says that’s not a step Russia wants to take, but it could happen.
“The real bad scenario is Russia decides to stop selling gas to Europe and Europe will have to buy that gas somewhere else and it will drive prices way up,” he said. “That’s the real risk. It just blows up energy markets and sends Europe into a recession.”
David Herro, the chief investment officer for international stocks at Harris Associates and manager of its $25 billion Oakmark International Fund, said that if the war ends relatively quickly, its effect on the global economy and on markets will be limited.
Turning to the next phase for markets, the group’s interests revolved around a couple of recognizable themes: inflation, the economic recovery from COVID, and the never-ending hunt for stocks that are much cheaper than they should be.
What follows is a summary of what the fund managers discussed owning during the Ariel event.
John Rogers, Ariel’s co-CEO, investment chief and the manager of its flagship fundWhat he’s buying: Rogers said Ariel has been buying flooring maker Mohawk and financial firm Northern Trust because although the stocks have suffered from broad market volatility , their businesses are exceptionally strong.
He said the firm is emphasizing pricing power in response to rising inflation. Rogers said jelly and jam maker J.M. Smucker has great pricing power, and so do sports and entertainment giants Madison Square Garden Entertainment and Manchester United.
Rogers is also a backer of Paramount Global, praising its streaming services and brands like CBS, Nickelodeon, and Viacom.
“It’s more and more clear to us there’s going to be three or four ultimate winners” in streaming, he said. “We know Apple will be there, you know Disney is going to be there. We think Paramount Plus will be there.”
Mario Gabelli, CEO of GAMCO InvestorsWhat he’s buying: The billionaire investor said he’s “a buyer of defense stocks on a global basis” and is looking for companies that will benefit from the transition to electric vehicles.
While most of the group agreed that investing in Russian stocks makes little sense right now — the national stock market is closed and Russian stocks have crashed — Gabelli says he’s holding on to a stake in the wireless company Veon, which is Dutch but does a lot of business in Russia. That’s because there’s nothing to lose now.
“The risk of loss versus something that can triple or quadruple overnight is de minimus. So we’re not doing anything,” he said. Gabelli said he’d be willing to invest in wireless companies that do some business in Russia as well because there’s more upside than downside now.
David Herro, Harris AssociatesWhat he’s buying: Herro, who was named international fund manager of the year by Morningstar in 2006 and 2016 and international fund manager of the decade in the 2010s, said he sees a lot to like in European banks because they have huge amounts of cash to return to shareholders or invest in their businesses.
“All of these major financials – Lloyds, Intesa, Allianz, BNP – all announcing huge stock buybacks, increased dividends and probably more lending,” he said. “After a ten-year drought, I think now is the time to really gain exposure to these European financials.”
Bill Miller, founder and portfolio manager, Miller Value PartnersWhat he’s buying: Miller, whose funds delivered better returns than the S&P 500 for a 15-year stretch in the 1990’s and 2000’s, said his firm has substantial bets on Norwegian Cruise Lines and Delta Air Lines as reopening plays.
Miller also said that Amazon is once against his firm’s largest position, which has often been the case. He was an Amazon bull at a time Wall Street had doubts about Amazon’s ability to earn profits. Miller was also optimistic about Google and Meta Platforms, the former Facebook. He said both are trading like average stocks.
“The spending there seems to us quite excessive, but we also believe it’s in the price,” he said of Meta. “We own Google, which we think trades at a market multiple. It’s far better than a market company.”
Rupal Bhansali, Ariel’s chief investment officer and a portfolio manager in global equitiesWhat she’s buying: Bhansali says she’s taking a different tack on inflation. Betting on pricing power — simply companies that can raise their prices when their costs go up — is a well-known strategy, which means that investors follow it when inflation rises and bargains quickly disappear as those stocks get expensive.
She said another way to respond is by buying companies that can deliver better value or that emphasize higher-priced premium products without actually changing their prices.
“Nestle, which is a food and beverage company in our portfolio, even within the coffee category does it extremely well,” she said. “You sell more Nespresso pods compared to regular Nescafe, you can have a very different impact on your revenues and margins.”
Dan O’Keefe, managing director and portfolio manager, Artisan PartnersWhat he’s buying: Leisure travel recovery plays like Expedia and Booking Holdings. O’Keefe says they have inflation protection built into their businesses because their labor costs are low, and higher expenses are passed directly to travelers.
He also remains optimistic about Facebook, saying that recent privacy changes from Apple are negative for Facebook but not as damaging as investors think.
“I don’t know that it’s meaningfully competitively disadvantaged versus a lot of the other advertisers,” he said.” And I do think that the ROI that it presents to the advertising base is still very attractive.”
Lastly he said Alibaba might be the cheapest stock in the world.
“Alibaba trades for a single-digit multiple of free cash flow and three or four times EBIT,” he said. “It’s the largest e-commerce company in the world that is levered to digitization and the expansion of the increasing wealth of the consumer and middle class in China. … I mean it’s one of the cheapest stocks I’ve ever seen.”
Staley Cates, vice chairman and portfolio manager, Southeastern Asset ManagementWhat he’s buying: The former Morningstar Fund Manager of the Year is making reopening bets with an investment in hotel operator Hyatt and Macau-based resort operator Melco.
“The lockdowns in China have been so much more severe that while Las Vegas has come roaring back … Macau has not,” he said.