Money Life with Chuck Jaffe: Interview with Jim Callinan

Chuck: It's Big Interview time on today's show, and I am joined right now by Jim Callinan, Portfolio Manager for the Osterweis Emerging Opportunity Fund. If you want to learn more about the firm and the fund, it's Osterweis.com. Jim Callinan, thanks so much for joining me on Money Life.

Jim: Thank you, Chuck. Glad to be here.

Chuck: We are living through some really interesting market times, and you're somebody who, with the fund, et cetera, it's not just opportunity in the name. It's what is the right opportunity and what does it look like? And we were in a long bull market. We had a very short, shocking, steep bear market. We've now had this tremendous rally, but plenty of people think that the growth picture has really changed. You've got all these work-from-home companies, and all of the technologies that are changing that way. Or with health care or everything else around the pandemic and the recovery.

Jim: Well, I think that you could say that for 70 years, we had a value cycle, from 1940 to sort of 2009. In the last 10 years, we've had great growth stocks with obviously, the FAANGs developing and controlling a huge swath of tech development. But you're really seeing a lot of venture capital-backed companies come public, over the last year-and-a-half, that really could lay a great groundswell for future investment in the small cap and mid-cap growth areas. So the more product there is that comes public, the more companies that come public with great ideas, creates a great baseline for us to invest in. Because there's mystery, there's new industries, there's new companies, and there's new technologies that come public after a big cycle like this that are great for public investors.

Chuck: What's the thing that's coming next that we maybe are seeing but we're not necessarily believing? Or do you have to kind of see it and then maybe bite down hard on some of those hot stocks, because well, they might be doubling in value pretty quickly here, but there's many more doubles to come?

Jim: Well, I think that there's a lot of great segments that are coming out. I think we've seen the first company come out in this plant-based foods. There's so much technology going into that, and that's a huge vein of opportunity that the venture community is going to provide to us over the next five to 10 years. And that's going to be a big, big change, and that's in an area of the stock market which hasn't had a lot of change, the consumer staples part of the market. So that's one area.

Obviously, you may know, and your clients may have listened to this for a long time, but biotech has really changed. It's not your father or your uncle's biotech industry. It's not the total binary risk. It's a gene therapy immunological change in the market there, and that's really massive, and you see a lot of IPOs. And there's 1,100 drug trials going on right now, so a lot of those drug trials are going to come true, and there's going to be billions made on that area. And then on software, we'll also continue to march ... It's gone from 1% of GDP 20 years ago to now 3% of GDP. That's a tripling of software in a huge GDP market, and that's even without the Cloud industry taking off. And then you have, on top of that ... Because of Covid, this whole digital transformation of normal companies is accelerating, and so a lot of this demand that would have happened over the next five years is pulled in for over the next 18 to 24 months.

Chuck: I read a recent piece that you wrote earlier this month on the Osterweis.com website, and in it gave a great backgrounder on cyclical growth versus secular growth. And of course, cyclical growth is realistically, "Where are we in the cycle, and what's happened to drive things?" Whereas secular growth, if nothing else, is really situational. It's kind of, "What's the situation?" And as I hear you give that last answer, what you're talking about is very definitely situational, and it's secular, and yet we're in a market where for all of those situations, the real drivers of the big rally we've had have been those couple of names at the top of the heap. So if we're in some type of secular growth cycle or secular bull market, when's it actually going to show up in those secular names?

Jim: Well, I think that the most important thing to remember about cyclicals is you really need everything to be going great. You need an expanding economy. You need low unemployment. You need credit available. We have none of that now, in terms of an economy for cyclical. So it's really not ready for prime time, the [cyclicals]. However, the secular growth is just more predictable. It gives you more time to play the secular trends that you can identify out there, and what I mean by secular trends is it's a really structural shift in demand, caused by consumer rationality. Whether it's low cost, ease of use, a behavioral change, you can identify these secular growth opportunities more, because they're more predictable. You can miss the first 10% of the move or the first 20% of the move and still make money in the market and those names.

Chuck: Well, so let's go back to a company that you just named as an example, that being Beyond Meat. That's a stock that's been discussed on the show once or twice. But when you were writing your commentary, it was not that long ago, but the stock has practically doubled this month. So when you put that kind of action on top of that type of chassis, how's the stock moving, et cetera? How quickly does that picture change? Because as you said, you could miss the first 10% of the growth, but if somebody missed your commentary and were only finding out that you like it now, they would have missed the last double.

Jim: I think studying Beyond Meat, it will prepare you for the future of new ideas that come public, and there are a lot lining up to come public after. But right now, the best thing about Beyond Meat is they have manufacturing capacity of a billion dollars in revenues, and that's kind of what the street estimate is for 2021. And I think that now that they have that capacity in place, that's really key. They have gone from an unaided ... A brand awareness of 20% at the IPO to now over 50%, and this is how brands are built, right? We probably haven't seen a consumer staples brand being built in the food store in a long, long time, like something as revolutionary as this, that wants to take over the meat case. And so it's such a big market, globally. It's a little bit like Tesla, and no one believed in Tesla for a really long time, until you hit that tipping point of SKU advancement and technological advancement in the battery. You're going to see the same thing in plant-based meats, in taste, in texture. And in SKU count, you're going to have meatballs and you're going to have sausages. And then, I think, beyond that, you're talking about a 1.4 trillion-dollar market worldwide. You don't really need to move the needle that much, in terms of sheer gains and penetration by plant-based meats, and in particular, by the number-one brand leader in Beyond Meat, to make money over, say, a three-year period from here. And in any correction, you'll see people ... Just like Tesla did, you'll see people kind of ... If this stock were to go from 180 to say, 140, you'd get a whole new round of investors coming, supporting the stock. Unless there were some real dislocation, in terms of a plant shutdown or some kind of risk that you would have, in terms of ... Like you'd have with any food. You'd have some sort of risk, in terms of poisoning or something like that. But I don't think that's ... We're not looking at that now.

Chuck: The other side there is that that kind of risk ... If those are your big risks, you know what's not a risk? Is things like the election and some of the other stuff that people are so focused on right now. So in this time, when you're looking at the secular growth stocks, are you able to basically tune out most of that noise?

Jim: I think that's one of the goals of what we try to do, is when you don't have a lot of cushion, in terms of looking out three to five years, and you have ... We try to look for a minimum amount of cushion of say, 100% potential upside. If you're looking at the variability in these types of companies, they're pretty high. In an interim year, you could probably have a 35% correction in a company that's beating numbers and growing really fast, just because of the asset category. But that's why we try to look out three to five years and say, "Okay, if this company can continue to grow, say at 25, 30% top line ... And when we pencil this out, in five years from now, we've got a minimum of 100% potential return." That's the way we look at it things like Beyond Meat at initial time of purchase.

Chuck: So let's, in the limited time we have left, take a quick look at where we are in the cycle and where you think things will be. You're talking about secular growth, but can we truly have a secular bull market and a return to that without a vaccine, stimulus, and all the things that get us through the pandemic?

Jim: If we don't get a vaccine next week, which I guess is ... Pfizers is supposed to launch their data on their vaccine. If the vaccine isn't good, work-from-home will really take off. If the vaccine works, then the market will take off. In my opinion, it will really broaden out, and we'll be back to where we were, say January, in terms of people's confidence. Where we'll start to say like, "Okay, in six months, hotels will go from 60% occupancy to 80% occupancy, back where they kind of were in January." And that's sort of the ... The leisure group is the most hurt by this whole pandemic, and so I think leisure will lead the way out, if we get good news on vaccine. So I feel like the secular growth players have a win-win, in that vaccine good, secular guys still continue to grow. We've accelerated their timeline. And then if the vaccine is good, then we also get a broadening-out of the economic gains.

Chuck: Well, we'll see how it plays out. Jim, this was great. I hope you come back and chat with us again some time.

Jim: All right, thanks so much. Bye.

Chuck: That's Jim Callinan. He's Portfolio Manager for Osterweis Emerging Opportunity, OSTGX. He's the Chief Investment Officer of Emerging Growth at Osterweis, online at Osterweis.com. We're halfway into today's show, but buckle up. There's much more Money Life to come, right after this message.