[PODCAST] The Prospector Flavor of Value Investing with PM Jason Kish

On a daily basis, investors are exposed to a lot of numbers and a lot of information. But it should be known that portfolio evaluation goes beyond just the stats.

Behind every portfolio is a person with a story. How did they get to where they are today? What was the path they took to join the firm?

Today, we invite you to join us as we look beyond the portfolio and listen to the story of Jason “Jay” Kish (CPA, CFA), Portfolio Manager and Analyst at Prospector Partners.

From a senior associate at a big-six accounting firm to a portfolio manager at Prospector, self-proclaimed “information junkie” Jay has had some dramatic changes throughout his career.

In this podcast, Jay was joined by Havener Capital Partners Founder & CEO Stacy Havener in which he talks about the road from public accounting to asset management, what he learned along the way and what kinds of investment opportunities he’s currently excited about.

By listening to this podcast, you will also hear Jay elaborate on:

  • The Prospector flavor of value investing

  • How the team was built from the ground up

  • Relating Led Zeppelin’s When the Levee Breaks to capital markets

  • Opportunities in cyclically-exposed companies

  • Investors' over-exposure to growth stocks

We invite you to listen to this podcast (previously recorded in October 2020--31 min).

 

Listen to the interview

 

Or read the transcript of the interview below.

 


Interested in more insights from Prospector? View our content library for access to Q&A’s with Prospector Portfolio Managers, commentaries, white papers and more.


INTERVIEW – (TRANSCRIPT) – PROSPECTOR PARTNERS PORTFOLIO MANAGER JASON “JAY” KISH, CPA, CFA

Speakers:
Jason "Jay" Kish, CPA, CFA & Portfolio Manager/Analyst at Prospector Partners
Stacy Havener, Founder & CEO, Havener Capital Partners

Stacy Havener: Hello, everyone. I'm Stacy Havener of Havener Capital Partners, and I'm pleased to welcome Jay Kish, Portfolio Manager at Prospector Partners to our studio today. Jay, thank you for being here.

Jay Kish: Thanks for having me.

Stacy Havener: All right. So, we're going to start at the beginning. And as we were chatting before we went live, so to speak, I was saying that one of the things we want investors to take away from these interviews, is a chance to get to know the people behind the portfolio. So, with that context, can you tell us your back stories for the Jay Kish story? How did you get to Prospector? What was your path to join the firm?

Jay Kish: So, let's see if I can remember back that far. I'm kidding. So, I was an accounting major, finance minor at Providence College. I ended up getting your coveted big six accounting job back then. I'm dating myself, but it's I think the big four now.

Stacy Havener: Now, now, it's big four and probably was big eight before six. Yeah.

Jay Kish: That's right. So I'm glad I didn’t say big eight. So, I worked for Coopers & Lybrand, and after a little over two years of working there, I was a senior associate and Pete Perugini, who is our CFO at Prospector right now, reached out to me. He was the first employee that John Gillespie hired when he was starting Prospector in Hartford in 1997. Pete was actually my peer mentor at Coopers & Lybrand before he left to join John, maybe six months ahead of me, could have been a little less than that, but he reached out to me and inquired as to whether I would be interested in, considering leaving Coopers and joining Prospector. You know, at the time, I hadn't really even contemplated leaving public accounting. I'm not sure it was a career I was interested in pursuing over a very long term. I wasn't sure if I was going to ever, you know, be interested in making partner there.

Stacy Havener: Mm-hmm (affirmative).

Jay Kish: I was on a lot of the clients I wanted to be on at Coopers, and that's important when you're in public accounting at one of the big audit firms and you need to advocate for yourself and get on jobs that you want to be on. And, I had some really good ones, a lot of financial service firms, some university endowments. So, I was relatively happy, but I chatted with Pete and got some more details on what Prospector was going to be. It had just really incepted. And, liked what I heard and put in my resume, had a meeting with John and I guess the rest is history.

Stacy Havener: And that was 20 years ago, right?

Jay Kish: It was over 20, yeah.

Stacy Havener: That's awesome.

Jay Kish: '97.

Stacy Havener: So, what was it that you liked? What did you, what did you see? I mean, obviously it's so different from being at public accounting. I can only imagine.

Jay Kish: Right.

Stacy Havener: What kind of spoke to you?

Jay Kish: Well, the first thing that spoke to me was, you know, doing a lot of research on John's background and he was clearly, is clearly a very impressive person. So, there was the opportunity to learn from a, a just great investor-

Stacy Havener: Yeah.

Jay Kish: ...obviously. And, then just in learning more about what it means to be, you know, kind of a Wall Street investment analyst, I realized that, that was potentially the, the perfect role for, for someone like me. I mean, I'm an information junkie. I love learning new things. And in talking to Pete, talking to John, it was obvious that the role of an analyst is one where you're constantly learning new things, every day is different. You need to process new information. So it was just a really exciting prospect to change careers. And, like I said, although I was liking public accounting, but this just seemed a lot less repetitive than the work I was doing then and the future looked like it could be a lot brighter and a lot more interesting. So, that's really what attracted me.

Stacy Havener: That's great. And, so obviously you've been there a long time. What are you most proud of in your time at the firm?

Jay Kish: Yeah, so, I would say really the thing I'm most proud of is just what Prospector has become and watching Prospector grow. I mean, when I started there, it was three of us, Pete, John and I, and, I feel like we were just instrumental and I was instrumental in, in building a business which is, you know, a just, a very rewarding thing. I think back to things, like, after I was there a while, I believe in 2012, when the partners came to me and, and said, "Hey, we've expanded, we're growing, you've covered a lot of industries. You work well with people and we kind of need a director of research role." And so I said, "Yeah, I'm game, let's do it." And basically was able to kind of create that position and mold it into what I felt like we needed. And after doing that, instituted a research management system, where we can all access each other's research, and whether we're on the road, in the office. And, you know, we didn't need that when it was just a few of us-

Stacy Havener: Sure.

Jay Kish: ... but as a growing firm that was really important. And so, just things like that and building the business-

Stacy Havener: Yeah.

Jay Kish: ... I'm very proud. And, you know, lastly, but certainly not least, I'm really proud of the team we've built. I mean, we've hired some really quality people through the years. We've had very low turnover and I just work with a great group of people.

Stacy Havener: That's awesome. And that's so important to building a business.

Jay Kish: Oh, absolutely.

Stacy Havener: Right? The team.

Jay Kish: Absolutely.

Stacy Havener: That was a great answer. And I think I realized that you were the third employee, so, I can relate so much to what you said about how special it is to be on the ground floor of creating something.

Jay Kish: Yeah, I mean, when John [John Gillespie] hired me, it was okay, back up Pete [Pete Perugini] on accounting, learn from me on research, put in the trades, go out and grab lunch, do anything to add value.

Stacy Havener: You do everything, yeah.

Jay Kish: Yeah, and that's the great way to learn and build a business.

Stacy Havener: Yeah. And especially in your comment about John as a mentor, I mean, so cool that Pete was your mentor, and then you had a chance to have John as your mentor on, on a different kind of element of your expertise.

Jay Kish: Absolutely. 

Stacy Havener: I mean, no one's probably going to get, like, in those early days, the time you spent with John, that's, that goes away as the firm grows, right? So, that's very special.

Jay Kish: Yes, definitely.

Stacy Havener: So let's talk philosophy a little bit. You guys have some really unique ... It's, it's so tough with philosophy to, you know, kind of grab onto what's unique and different. One of the things that you talk about, I was hoping you could expand on a little bit, and that's free cash flow, which certainly, you know, is a hallmark of value investing, but also sort of the free cash flow versus private market value. Can you speak to that?

Jay Kish: Yeah, sure. This comes up a lot. Obviously, you know, we're value investors and there's many different types of value investing. People look at low PEs, high dividend yields, low price to book. We live by two different ones or two of them, free cash flow yield and private market value as you mentioned. So, free cash flow yield is, you know, we look for companies that are able to generate significant cash flow which we think generally makes them less reliant on capital markets for financing. It leads to more owner-oriented behavior, you know, things like buy-backs and dividends. And, so we look for companies trading at high free cash flow yields as a kind of as a starting point as a main metric.

So, that's one of them. And the second one is private market value. And, this one might be a little more complicated, but it's actually fairly simple. It might sound more complicated, but it's pretty simple. Private market value takes values that are set by third party, private market transactions as a way to determine true intrinsic value for a company. So, it's effectively a way to mark a GAAP balance sheet to market.

Jay Kish: And I'll give you an example that I think is timely and fairly easy to understand. We do a lot of investing in property-casualty insurance companies, as I think, you know. Through the years, there's been a lot of m&a in the space, and Lloyd's syndicates, Lloyd's insurance companies have been bought and traded at very high multiples of book value, over, over two times book value, two and a half times sometimes. And so, the private market value of a Lloyd's franchise is well north of book often.

Jay Kish: Now, there are cases of publicly traded insurance companies that own a Lloyd's franchise, but that's not their main business. They might be a Bermuda reinsurance company. So if you, but if, if you delve into the capital allocated to their Lloyd's franchise and mark that piece of the business to market based on these third party transactions, often you can find businesses where the rest of the business is valued very inexpensively if you take a look at that. And Lloyd's franchise as I mentioned, they're really at a premium. There aren't that many left, and there's a lot of beneficial aspects to the Lloyd's franchises. So that's one example of using private market value to value a franchise. And, and I should point out that we, like using these two methods because we feel like they most closely mimic what acquirers of whole companies care most about when businesses are looking to buy other businesses, and M&A through the years has been a major catalyst for us at Prospector, realizing value on our investments. So, hopefully that-

Stacy Havener: That was a great example. And it reminds me when we were talking with an investor who, who knew of Prospector, and knew of the team, knew John. And when I was asking the investor, "Oh, you know, what do you know about them? What do you, what do you think of them?" And, and they said, "They're truly investors in businesses, and there are so few of them left."

Jay Kish: We certainly ... yes, we certainly look at every investment as you're buying the business. It's not a stock.

Stacy Havener: That's great. Okay. So let's stay with this a little bit, and move into strategy and outlook. You've obviously given us some great examples of what you, you look at. The balance sheet work you do, the cash flow, the private market value, and you're certainly not afraid as a team to, to, you know, dig into some complex balance sheets. When you're doing that work, and obviously you have a market that's been very challenging, what are you seeing right now? What's the market missing?

Jay Kish: So, that's interesting. We're certainly seeing opportunities in cases like I just mentioned on the private market value. But what immediately comes to mind is, you know, obviously value is still out of favor. And, we've actually been finding opportunities to add cyclically exposed companies, companies with solid balance sheets producing substantial cash flows, even in this environment. You know, in many of these companies are still off 30, 35% from their highs and we're finding that they're getting back to normal earnings power, or their prospects of getting back to normal earnings run rates are, are faster than people are expecting. Many of these companies are viewed as "COVID losers." And-

Stacy Havener: It makes me laugh every time you say that. It's not even funny, but it's such-

Jay Kish: No.

Stacy Havener: I can't even believe that's what they call them.

Jay Kish: Well, we're in a market where anything perceived as a COVID winner just keeps going higher.

Stacy Havener: Right, yeah.

Jay Kish: And, it's a smaller group of companies. But, we found opportunities whether they're restaurants or industrial coatings companies, real estate companies, companies that produce electrical components, you know, and it's, we're long-term investors. And, we're finding these at what we believe are free ca- very attractive free cash flow yields and companies that are poised to, to benefit from a rebounding economy and, are poised to outperform over the next few years. So, that's one main the- major theme I would say recently, we've been we've been finding.

Stacy Havener: That's interesting. And it's probably a good segue to the next question I have. Obviously Prospector has been around a long time. You very successfully navigated some challenging markets. And in that context, in that process, you've developed something you call the crisis playbook. So now here we are 2020, and you've just alluded to kind of this COVID winner COVID loser thing. How has the playbook adapted or how, what's changed? What are you doing with COVID as it relates to the portfolio?

Jay Kish: Yeah, that's a really good question because, you know, every time is different, but there are certainly certain things and we do have a playbook and there's a go-to things we always do. You know, when pretty much everything is declining at once, we always look for opportunities to upgrade the quality of the portfolio. And we, we like to say, we're, we're leverage allergic during even normal times but we become even more so when times get tougher, when it looks like we're in a bear market. So, you know, we upgrade the quality of the balance sheets of our portfolio holdings, as well as, the perceived quality of management teams and even just the franchise value. So, we look for any opportunity to upgrade quality. And we certainly did that, but to your question specifically, I'd say, this pandemic induced downturn was different and is different in that, things are just happening so quickly. And it's, it's even more important to follow the flow of news every day and things are changing so rapidly.

Jay Kish: So, we definitely have found ourselves reacting a bit more quickly and, portfolio turnover is, is higher than it otherwise would have been, I would say. And kind of your "normal recession-induced downturn." So I would say that's been the biggest difference is just feeling like, we just, we're a little bit more - needing to be more reactionary because, you know, the, things changed so quickly, the stuff we learned about COVID and the pandemic, literally just a, on a day-to-day basis. So I would say that was the biggest difference.

Stacy Havener: That's interesting. And how real is that COVID winner, COVID loser thing? Is that a huge driver?

Jay Kish: It's I feel certainly been a driver, in stock performance, and it's also something we are on a day-to-day basis, very mindful of.

Stacy Havener: Mm-hmm (affirmative).

Jay Kish: We're constantly looking through our portfolio and, and thinking, "All right, this company has been somewhat benefited by work from home or staying, you know, or, hoarding or just certain technologies." And a lot of those companies, if you take a step back and think, "Okay, well, in a normal world, does this valuation makes sense?" You're often finding that those, the valuation of those COVID winner stocks it's hard, it's hard to rationalize some of the valuations. And then you look at some of these cyclicals or other value stocks that have been thrown out with the bath water, and they, and they look ... as long as you're willing to wait a while, they look very attractive.

Stacy Havener: That's great insight. So let's take it from the market and the outlook down to the level sort of a, a practical level, but from a different perspective. So there's a framework, there's a gentleman named Donald Miller who has a framework called StoryBrand. And the framework basically says that in any story, the hero of the story is not you. So the hero of your story at Prospector is not Prospector. The hero of the story is the investor, and Prospector is the guide. So with that backdrop, if we put ourselves in the shoes of the investor, what problem are they facing right now, or problems, and how can you Prospector help them as the guide?

Jay Kish: Well, I think segueing from that last answer, I think a problem many investors likely have, you know, after this decade plus of growth dominance is just being overexposed to growth stocks.

Stacy Havener: Yeah.

Jay Kish: And, you know, whether they know it or not, a lot of people are in index funds and, and I'm not sure how many of them realize how, you know, concentrated that they actually are. The S&P 500, as I think you know, I mean, six “growthy” stocks make up over 25% I think, of the S&P 500. So I think a problem, a lot of people have and will have if there's a rotation to value is just, they're concentrated in growth names. And you know, it's not just a problem because of concentration, but it's also a problem because of just the valuation discrepancy between growth and value. We recently put a blog up on the website that shows that the gap between growth and value as far as valuation is the widest it's been since the dotcom bubble. So that's definitely an issue. I mean, I don't know when we're gonna see a rotation, but we're long in the tooth.

Stacy Havener: Yeah. And so that begs the question. I mean, are we at an inflection point here? I mean, it's certainly as value investors, it's got to, it must have been incredibly challenging to just getting up and sort of getting kicked in the teeth every day-

Jay Kish: Yeah. Maybe that-

Stacy Havener: ... and just because you're a value investor really. I mean-

Jay Kish: Maybe that should have been my-

Stacy Havener: ... when does that change?

Jay Kish: Maybe that should have been my answer to the thing I'm proudest of... surviving as a value investor, but yeah, I mean, timing is always hard. As you know, I started my career in '97, so, you know, I've kind of seen this movie before. And I, I remember during the dotcom bubble, um, you know, we knew we were in a bubble. We didn't know when it was going to burst, but we knew, you know, going to family barbecues and every person is talking about their, how well their Janus funds are doing, which at the time were the kind of go-go dotcom stock beneficiaries. They were just loaded with those stocks and you, you, you knew you were in a bubble. And, you know, I often would mention, "Hey, maybe you might want to diversify into value stocks." But I'm sure nobody listened. Um, (laughing) but as you know, the bubble burst and, um, the value, uh, I think had a seven, seven year run of, of dominance after that. So, you know, obviously we're, we're pretty long in the tooth of this growth run. And, you know, we do see a couple of potential catalysts however. I mean, you know, first, value typically does lead in a cyclical recovery and you’ve seen a few fits and starts, but really if you look at kind of, whatever, if you look at the Russell growth versus value, you're pretty much at a low point for value right now. So, there clearly hasn't been a rotation yet. But as I said, value typically leads in a cyclical recovery. I think we're in a cyclical recovery, and a lot of people are kind of waiting for more stimulus and we're pretty confident we're going to get more stimulants. It's just a matter of when and in what form.

So, in a second, and maybe more importantly, we think inflation could be a catalyst. This recovery is very different than the '08, '09 downturn and recovery. I think a lot of people are thinking, you know, we're going to have this deflationary period, and we don't think that's necessarily the case. I mean, the monetary and fiscal response this time has been faster. It's been more targeted to consumers. In fact, um, retail sales have already rebounded back to where they were. And I think it took 32 months after the '08, '09 crisis for that to happen. So you've had a lot of stimulus and importantly banks are in much better shape this go round. They're, they're part of the solution instead of part of the problem and their capital levels are in much better shape. They're more able and I think willing to lend this time around, which is important. And also importantly, as I think listeners probably know, the Fed has indicated a willingness to allow inflation to go over 2% for some period of time. So, we think there's definitely risk to overshooting here and having a bit of inflation. And so we think increasing expectations for inflation could cause the long end of the yield curve to steepen and look, it's easy to rationalize ever growing valuations for growth stocks if the interest rate by which you're discounting future earnings continually goes lower.

Stacy Havener: Mm-hmm (affirmative).

Jay Kish: But if you need to start discounting those future earnings at a higher interest rate, things change in the equation a lot. So, we think that could be a catalyst. If expectations for inflation start to increase and interest rates start to increase. That could be your big value rotation catalyst.

Stacy Havener: Very interesting, especially that part about rates as it relates to discounting cash flows. Thank you for that. Okay. So can we end with the fun one?

Jay Kish: Sure.

Stacy Havener: Okay. So again, we're going to go back to getting to know the people behind the portfolio. So this is going to ... we're going to end where we started, with a little bit more about Jay. So I have two questions and you can pick from these. My favorite one, not that I'm trying to sway your choice is, you know, to us at Havener, we say portfolio managers are rock stars. And if we pretend that you were entering a stadium of cheering fans, so let's pretend this is obviously pre-COVID, and you're going to, you know, put on a show, what would your walkout anthem be? What song do they play as you walk out onto the stage? So that's question option one.

Stacy Havener: And then option two, we did a call the other day with an investor in the RIA who asked a portfolio manager, you know, about books, which, you know, that's a great question, especially for all of us who are readers, but the, but the twist was they said, what book ... not what book are you reading now, but what book had the most impact on you as an investor? So, you can pick music or book.

Jay Kish: All right. So I'm going to pick both, because the book one is super easy for me because, you know, having started, as a young guy, as a research analyst and not really knowing much about it, Ben Graham's Intelligent Investor, which John bought for me, I think the first holiday season, the first Christmas where I, when I worked there and, you know, it's just a great book and I recommend it to any ... You know, we do, we, we have a lot of interns coming through and when I sit down with them, I say, "Listen. Read everything possible, read the papers, but get yourself Intelligent Investor."

Because it gives you, it, it gives you an appreciation that, like we talked about earlier, you're not buying stocks. You're valuing entire businesses when you do this.

And also just the concept of a margin of safety is so important. And, you know, our process is, we always consider what could go wrong first, and we always consider the downside. So, that book was just integral in kind of opening my eyes as a young, junior and analyst.

Stacy Havener: It's a great one. Great suggestion.

Jay Kish: Yeah. And as, as far as the rockstar- my 15 year old daughter is the rockstar in my family which is why I wanted to answer to this one. She's a lead singer at the local School of Rock program, which is-

Stacy Havener: She's legit a rockstar.

Jay Kish: She has gigs. She just had one last weekend.

Stacy Havener: No way. That's amazing.

Jay Kish: So, the first song that came to mind is, a Led Zeppelin song because, currently, her session she's doing is Led Zeppelin. And she's not doing this song, but, you know, kind of segueing again from the value growth, I think I'd walk out to When the Levee Breaks.

Stacy Havener: Oh, so good.

Jay Kish: Which I think it is a good metaphor.

Stacy Havener: Oh, it's great.

Jay Kish: And also just a great song.

Stacy Havener: A great song. And I know you love music. So the next time we have you on, we're going to do the music one again. Maybe we'll put a different twist on it, but what a great, great song, great book. Jay, it has been such a pleasure spending time with you today. Thank you so much for all of your insights and for sharing a little bit more with us about you. Giving us a chance to see the people behind the portfolio. Yeah, it's been great. Thank you Jay.

Jay Kish: Thank you.

 

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