On May 25, Prospector Portfolio Managers John Gillespie, Kevin O’Brien (CFA), Jason Kish (CPA, CFA) and Steve Labbe (CFA) recently conducted a video conference call with Stacy Havener, Founder & CEO of Havener Capital Partners, in which they shared their views on markets, inflation and value investing, among other relevant topics.
Questions about inflation and the potential for a rising rate environment was a theme throughout the call. Steve offered his take on what the market is pricing in:
Steve Labbe: The inflation topic is everywhere. You can't pick up a newspaper, you can't watch a business news channel, you can't listen to a conference call where management teams aren’t lamenting the inflationary pressures that they're dealing with today. It's everywhere. And while the Federal Reserve acknowledges that it's picked up recently, they continue to harp on it being transitory. I think the market believes what the Fed is selling.
This pullback, or pause, that we've seen in the climb in interest rates and some of the economic numbers that were good, but not great, have led people to believe that the Fed is spot on about what's going to happen. So, as we look at the markets on a daily basis, it looks like the markets are priced for the Fed's version of the story. If that's where the markets are priced, then the risk or reward, depending on your point of view, comes from asking: What if the Fed is wrong?
And to the extent that the Fed is wrong and interest rates do go higher, and sooner than people expect, that could be a really good tailwind for a lot of different companies and a lot of different industries. We don't make investments where the number one bullet point is ‘we're going to buy this because interest rates are going higher,’ but we do fish in the pool where there's an awful lot of businesses, industries and sectors that are clearly beneficiaries from higher interest rates, particularly if higher rates end up surprising people. So, we look at it as a very favorable call option, on an environment that would be different than the one that the Fed is laying out for all of us right now, and that the markets seemingly reflect.
Stacy followed up by asking Steve about some of the other opportunities he sees:
Steve Labbe: We definitely like those sectors where even if there is a lag to when they feel the inflationary pressure, they can price for it prospectively. I'm thinking of some of the pockets within the industrial sector, or within consumer staples … different companies have that ability to pass on those higher costs, which is why it's inflationary. It happens to dovetail nicely with a lot of the areas that we spend a disproportionate amount of time. Again, there could be hiccups, there could be lags where it might take six months to price for this higher resin, for example, or to price for this higher raw material cost, but they do get to pass it on, and it gets calibrated by the end customer.
John also discussed where he’s seeing opportunity:
John Gillespie: So far, the value rotation has been concentrated in more cyclical areas, specifically the banks and then the industrial and energy sectors. They've really led the move. To the extent that the value rotation continues to take hold, you're going to get breadth. Part of our job is to try to look around, peer around the next corner, and as we're doing that, we're starting to spend more time looking in areas where the breadth will lead investors. And those are more traditional steady growth areas within value, things such as health care and defense-related companies, would be two really good examples where, if it plays out as we anticipate, you'll start to see more of that exposure showing up in the portfolio over time.
Interested in hearing more on topics related to the new economic cycle, inflation and value investing? Check out the full video call with the portfolio managers titled Value Investing: Is Your Portfolio Ready for the Rotation? Click on the graphic below to get started.