Listen to Larry Cordisco’s recent interview on the podcast “Money Life with Chuck Jaffe,” where he discusses the effects of Covid-19 on the market and a couple of stocks he feels will fare well in this environment.


Chuck: Welcome to the really big interview on today's show. On Money Life on Wednesdays throughout the summer, we've been extending our big interviews and we've been doing it, well, for some logistical reasons internally, but also because we're getting some big names and folks that we want to add the extra time to, and that definitely applies today.

My guest is Larry Cordisco. He's a portfolio manager for Osterweis Capital Management. He's Co-Chief Investment Officer for Core Equity at the firm. He used to manage a contrarian fund. Today, he at Osterweis is involved in the Osterweis Fund, their core equity funds, and much, much more. And if you want to learn more about the firm, Now, if you become familiar with Osterweis and you weren't before you got involved in Money Life, it's because I have yet to in my entire life talk to an Osterweis manager where it wasn't a good interview. That just has not happened. And if you read their commentaries, you understand why. It is really some of the most thoughtful stuff in the business, so And now you know why I'm excited to say Larry Cordisco, Thank you for joining me on Money Life.

Larry Cordisco: It's great to be here, Chuck. Thank you.

Chuck: We are living in these very distinctive, unusual, not completely unique, but mostly unique for our lifetime kind of times, and everybody is looking for things to grab onto. Now, I didn't mention that Osterweis is located in California, but here's a question that maybe you are more uniquely positioned, not because of your portfolio management job, but because of your location, to talk about. We have seen, of late, California as it has re-tightened up and said, Oh, wait, we can't go forward with some of the reopenings, it has been moving the market. It has been a lot of people watching California. So I'm curious because you've been in the middle, and obviously you've been watching California the whole time, is the California perspective on how the recovery and whatever phase we get into on the market different from the rest of the world? I mean, if the rest of the world's looking at California to try to gain a clue, you're in California, what clues have you gained?

Larry Cordisco: That's an interesting question, Chuck. It kind of goes back to the idea that California always leads, right, whatever the trend is. We look at California as being kind of that trendsetter that we expect the rest of the country to follow with respect to maybe being what we think of as a stuttering W sort of economic recovery, and probably the stock market follows that trend as well. There's going to be a lot of fits and starts to how we come out of this situation, and California is just highly reflective of that. And even if you look at the state, it's really the tale of two different geographies. Northern California is much more stable, and that's where I am, and the shelter-in-place compliance has been really high, and southern California has been a bit less so, and that's where you've seen a bit more of a resurgence in the cases. So I think this is kind of what we as a country are going to be dealing with for the next six, nine, 12 months until we get a more permanent solution, is these rolling waves of resurgence and waning cases of Covid.

Chuck: As an investor, when you talk about, well, six, nine, 12 months and potentially a lot longer than that, of uncertainty and fallout, how does that change things? Does that make you say, I want to be more fundamentally driven at a time when oh, by the way, it doesn't feel like fundamentals are working that well, but at least I know what I'm buying? Does it change your value proposition, or this is investing, nothing but the times change?

Larry Cordisco: Yeah. This is a very unique period. We haven't seen this sort of fast stop to the economy in I think any of our lifetimes, and the other big aspect that's really different this time is, because of the nature of Covid and the shelter in place and work from home sort of dynamic, it's really created a step-function in terms of a lot of trends that have been underneath the economy like working from home and e-commerce. It's really accelerated and created a step-function up in the adoption of those trends.

And so what we see a lot, and I hear a lot of talk about maybe too big, I'll call it competing tensions in the market. The first is sort of the Covid economy and the Amazons and the Zooms where you're seeing that step-function up. And these are business models that are benefiting significantly from the type of economy we live in right now. And those stocks make a lot of sense, but they're also pretty uniformly expensive.

The other approach that people seem to be gravitating toward is buying these significantly beaten down companies. These would be companies that would really disproportionately benefit from a reopening of the economy. A lot of people think of the airlines and the cruise ships and anything really travel and tourism-related as being really good examples of this. But with those names, it's really discretionary spending-oriented and there's a lot of debt on those, and we don't know when the economy is going to reopen.

So the way we've approached this is really consistent with our overall approach in general of just looking for industry leaders that are great valuations. What we see out there is this kind of third way where the risk/reward is a lot more favorable. There's a number of companies out there that are industry leaders. They're definitely dealing with depressed financial performance because of the economy, but they're also in much better financial shape than their competitors to weather the storm. These are companies that been gaining market share for years, and we think that the current economy is going to weaken their competitors further and their share gains are going to accelerate. So if you have a three-plus year investment horizon and you eventually think we get out of this, which we will, these are companies where you're talking 10 to 12 times normalized earnings and a real acceleration of their market share gains. That is kind of a sweet spot in the market right now that we think has been under discovered, frankly, by other investors.

Chuck: Is there a name or two that kind of represent that company to you? I mean, because it sounds really smart. This is a time to go buy market leaders and let the market, which is going to rain on everybody's parade, but these are the companies better able to weather the storm. Makes a lot of sense, but who stands out to you as that kind of a star?

Larry Cordisco: Sure. Yeah. There are a couple of names that we own that really fit this quite well. One is Sysco, the food distribution company, not the computer networking company. People may have seen Sysco trucks. You may notice them. They're on the road all the time. They basically deliver food and all kinds of kitchen supplies and the like to the restaurant industry, and we all know what's going on in the restaurant industry. Its sales are down 40 or 50% depending on which week we're talking about. And so their business is depressed, but they're the largest in the country in what is a very fragmented industry. They're the largest but only have 16% share, and the top three companies only have 30% share, so you have 70% of this food distribution market, which is comprised of these smaller, regional, a lot of times, mom and pop sort of distribution companies, and that group of companies is feeling far more financial stress than at Sysco and they don't have the sort of balance sheet or financial cushion to help them get through it.

In fact, we've done an analysis. We think up to 20% of that industry could fail, and in fact, even Sysco on their first quarter earnings call talked about winning about $500 million from a distressed competitor who no longer could stay in the industry. And so if you look at the Sysco story with its scale and its financial strength, it's the only investment grade company in the industry, it's got the best margins, it certainly looks to us like a company that's going to come out of this downturn with more than 16% share and probably be in a really strong position to continue those share gains through a recovery. So that's one good example of that that I think fits the question.

Chuck: Okay. Now, we've gotten maybe a little bit ahead of ourselves, cause we're talking about examples, and Sysco, by the way, ticker symbol SYY for those who want to follow along with the tickers from home, but we've gotten down to individual names before I've actually asked you some of the broader questions, which is, what do you expect the recovery to look like? You've talked about how you expect strong companies to weather the storm and why you'd want to buy them now if you have that three-plus year time horizon, but a three-plus year time horizon suggests that you see some murkiness and maybe some struggle recovering in the next 12 months or maybe 18 months, et cetera because you need to leave yourself a cushion, but if you felt more strongly that recovery would be pretty quick, you could shorten up that time horizon. So what do you see happening as a recovery?

Larry Cordisco: This is where we come back to that stuttering W idea, and I think it's going to really be a lot of fits and starts. So the big picture is I think it's almost impossible to really say this is what the recovery is going to look like. I have a lot of confidence in this forecast, and so when you look at the way we're balancing the risk and reward for either a recovery happening more quickly than we think or recovery happening more slowly than we think, the Sysco example is a good one for what we think offers a really balanced risk/reward. We don't think there's a lot of downside and if you're a patient investor, you really should be able to compound a good story over time.

The timing is the hardest part to predict, and in fact, I would say that the market, generally speaking, is less concerned with the depth of the current economic downturn than it is with the idea that we will start seeing a recovery in six, nine months or so or have a lot of visibility to it in 12 months. And so I think that is probably the biggest risk factor in the market that people have to gauge in their minds in terms of what the expectation is.

Timing aside, I actually, and I think across our firm, we're pretty optimistic that the recovery, when it comes, will be somewhat strong, and there are a couple things we look at. The first one is we think there's a lot of pent-up spending demand amongst consumers. We've looked at bank deposit levels across the United States. These are publicly reported figures. And typically if you look at it over the last four or five years, banks add about a trillion dollars of deposits a year. It's normal economic activity. As the economy grows and bank deposits grow, about a trillion dollars a year that gets added into the system.

This year, we added a trillion dollars in two months. Part of that is PPP, but that's not all. That's only a portion of it. Most of it is just there's a lot of households aren't out there spending money because you can't go to restaurants, you can't go on vacations, you can't do these things. So we think there's a lot of dry powder and pent-up demand in the economy for when the recovery comes.

The second big thing we think we'll see, and this is a lot of just job creation. There's a lot of workers. We know what the unemployment level is. They'll be going back to work. So that's another form of spending that you'll see in the economy.

And then there are a couple of sort of optional things that could happen that we see that would be really positive. The first one is millennial home buying. They've been reported to be at home for a number of years. While they're getting older, and this is something where everybody's sick of looking at each other now, so if there's a time to get your own place, this is probably it. You also probably see a lot of people, and we see it around San Francisco, a lot of people fleeing the urban center, so there's a lot of home buying demand stories out there that we think would probably have legs.

We also think there could be some reshoring, which is all these supply chains that are global. China's no longer as cheap as it was for its labor, and we've seen disruptions from tariffs and the pandemic risk. A lot of that over time, I don't think it's tomorrow, but over time, will come home.

And the third thing which doesn't get reported very often, and maybe it's more of a tech thing, we can't tell, but there is a real embracing of work from home. What that means is companies are getting better at managing distributed workforces. They can hire people in lower cost areas, and I'll say that they can hire better talent in lower cost areas, which means a lot more productivity for lower costs over time. We think there's a long-term tailwind to corporate profits. We don't know if it shows up next year or the year after, but I think it will be a story over time.

So for a bunch of those reasons, whenever we get there, we think that the recovery is going to be pretty decent.

Chuck: That, I think, folks would take as very, very good news, and again, nice to see those things being unleashed. The flip side to all this is that there are always consequences. I mean, I think back to when it was Hurricane Sandy up and down the East Coast and a lot of people lost cars, there was a huge surge in car buying. That then meant that the following year, nobody's buying cars. Things along those lines. Do you worry that our economic cycle is going to be off-kilter for a while? I mean, we're going through this. Nobody can really take vacations. You talk about a surge in spending, but you've got other things where, okay, people's cars are lasting longer because they're not commuting. Some of that will be permanent, of course, if work at home stays there. Are there some other offshoots that you think are yet to surface?

Larry Cordisco: Well, I mean, certainly one of the biggest ones that people talk about is commercial real estate demand, especially office real estate. When you think about people working from home, that means you have less people working in an office, and in fact, commercial real estate is an area that we've been shying away from and reducing our exposure. In fact, I don't think we have any exposure in our portfolio now because I do think there's a long-term trend where less office space will be needed and rents can be depressed. And those are business models that typically carry a little more debt and have enjoyed a long run of pricing power. So I think that's an example of an industry that probably gets a lot of focus and concern from investors.

Chuck: Well, we talked about Sysco as one possibility, but you've talked about a few different industries here. So in those other industries, is there that strong-getting-stronger kind of company that to you is the thing that people should be looking at?

Larry Cordisco: Yeah. Another one is Ross Stores. It's one of the largest off-price retailers and it just has a history of being a very strong grower. That store and that company and TJ Maxx are the fastest growing retailers in the industry. I should say brick and mortar retailers. Ross has very strong returns on capital, 30 to 40% consistently. So with all the store closings, the near-term story is quite depressed for them, and I think they've just started reopening their stores recently.

But when you look at the big secular trend there, off-price, as a category, has been gaining share for a number of years, and part of that isn't part of the downside of the economy where you have more workers pushed into more difficult income levels and those workers are being pushed in the off-price category, but that's a trend that probably will continue. And Ross is one of the leaders.

What you're seeing, though, right now across retail, are thousands and thousands of store closings. It's the Macys, the JC Penneys, the Pier Ones. I read yesterday that they expect across the industry, analysts expect up to 5,000 stores to close. What that means is there's fewer alternatives for shoppers to go to. That pushes more traffic to a Ross, and clearly over time, it's a big share gain opportunity.

But there's two other aspects to this story that we think are super interesting for Ross. The first one is those store closings create real estate opportunities for Ross to expand its own store base. And it's a bit under-indexed in I think the Southeast and Northeast, so when you see these opportunities come up, it is going to allow Ross to expand more quickly than it would have otherwise. And it also creates, or results, in less competition for Ross when they're merchandising, when they're buying their own merchandise for customers. So when you put all that together, we think that this is a company that's been growing earnings at 10, 12% plus for a number of years. As we come out of this, we really expect there to be an earnings acceleration story for a company like Ross.

Chuck: And it's Ross Stores, ticker symbol ROST. Interesting, because again, yeah, you're talking about a brick and mortar retailer at a time when that's not popular, but that kind of holds the whole thing together.

Larry, we extended our time here. I still have questions. I just don't have any more time, which is just shocking to me, but time flies when you're having fun. We've had fun. I hope you have, too, and that I hope you will come back and chat with us again in the not-too-distant future.

Larry Cordisco: Chuck, it was a pleasure. Thanks so much for having me.

Chuck: That's Larry Cordisco, everybody. He is portfolio manager for Osterweis Capital Management. He is the Co-Chief Investment officer for core equity at Osterweis. And you can learn more about the firm, what he does, and again, check out their commentaries and insights at

All right. We are just about done with Hump Day, July the 15th. I know what day it is. July the 15th here on Money Life, but we're going to tell you what's coming the rest of the week. We'll tell you about some guests we've added to the calendar for the rest of the month and then we'll cross the finish line together right after this message.

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