Published on February 19, 2021

If you were unable to join Portfolio Manager Larry Cordisco present “Where Are We in the Cycle for Equities,” watch the replay to hear how he finds a balance between near-term cyclical winners and long-term secular winners.

Transcript

Shawn Eubanks: Good afternoon, everyone. And thanks for joining our webinar today titled, Where are We in the Cycle for Equities? I'm Shawn Eubanks and I'm the Director of Business Development at Osterweis Capital Management.

And now I'm very pleased to introduce Larry Cordisco, who joined the firm at Osterweis as Co-Lead Portfolio Manager for the Osterweis fund. Prior to joining the firm, Larry was a Co-Portfolio Manager for the Meridian Contrarian Fund. I hope you'll find Larry's perspectives on the equity market environment useful. With that I'll turn it over to Larry.

Larry Cordisco: Thank you very much, Shawn. And I thank you all for joining us here today. As you may know, I joined Osterweis, and as Shawn mentioned almost two years ago, and have had a fantastic experience here. And today I'm going over some material that we talk a lot about internally, which is navigating what I find to be a very challenging market. It's whippy, it's chocked full of rotations, and there are clear pockets of froth and speculation. In fact, I think there's been a lot of that in the news recently beyond the GameStop and Blackberry and AMC Theaters stories, there are a number of other observations worth noting. Trading volumes have increased dramatically, especially in speculative micro cap stocks. Small cap stocks are now trading at 40% above their 200 day moving average. That's an all-time high.

And when you look at inflows into things like silver, technology companies, emerging markets, and the small caps, those inflows are at all-time highs. At the end of this discussion, there are a couple other things that I'll touch on, but really what the theme of this presentation is about is the fundamental backdrop of the equity market in 2021. And, at some point, I would think the market will come back to fundamentals. And I think the really big challenge for 2021 for investment managers is balancing the tension between stocks that will benefit from a cyclical recovery and against stocks that are long term secular winners.

That's the topic I'll be covering mostly today. And a lot of my view and the way we manage money here is rooted in the belief that rate of change is one of the most powerful variables in investing. And so when you look at where the rate of change is for 2021, it's going to be much more favorable, assuming that we get to reopening with the vaccines. And I have some thoughts on that, but it will be much more favorable for reopening recovery type of stocks, as opposed to these long-term secular winners that have done so well in the past.

So a lot of this is around how to balance, a lot of this talk is around how to balance those two competing views of the world. And so let's start with actually, what has been the winning trade for a number of years, which has been mega cap tech. I chose the rebound off the December '18 lows of that year's corrections as a starting point, but this trend has been in place for a while. And these companies have been doing very well for a long time. We created a basket of mega cap companies, the Apples, Amazons, Facebooks, and Microsofts, and Google. And you can see that from December '18 on, they just trounced everything else. Against the S&P 500, it's a huge outperformance against equal-weighted index and equal-weighted index it's 100 basis points of outperformance.

And when you look at the contribution of that stock price appreciation that comes from earnings growth versus multiple expansion, about 60 to 80% of the basket's performance, it ranges amongst the companies that are in the basket, comes from multiple expansion. The remainder comes from earnings regrow, earnings growth. And I think this reflects two things. The first is there has been a growing recognition of the durability of these companies' competitive advantages and how long the growth runway still is in front of them. But the second one, which is interesting that we talk about a bit internally here, is the lack of attractive alternatives. It's been an uneven economy, a low growth economy, for a number of years.

And so we think there's been a bit of a consistency premium put on these companies. By the way, that's deserved. And so this isn't to talk down the attractiveness to this day of those stocks. But one of the things that really drove the multiple expansion is this consistency premium. It's something - these companies are companies that investors can bet on in a world where there was not a lot of outsized growth to find. Now this stock performance changed a bit in November. Since the election, oil companies, banks, and small caps have dramatically outperformed the overall market and big tech. And while it's not pictured, the industrials ETF is outperforming the S&P as well.

And this is a situation where investors have been getting ahead of the reopening, the recovery, and to some degree also an expected infrastructure plan from a new administration. And certainly now that we have a democratically controlled Congress, I think, most people say the odds are even higher, that we will see a fair amount of infrastructure spending over the coming years. This chart stops in mid-January, but I point out if you continue to today, there was a second leg up in all of those and economically sensitive stocks over the last couple of weeks.

So if you can picture a little V-shape recovery there at the end of that chart, that's what we've been seeing. And while these stocks have performed strongly, energy is still just getting to about 80% of pre-pandemic levels. Banks are just back to pre-pandemic levels. And small caps really are the only category we're well outpacing pre-pandemic levels. They're up 36% from this time last year. And, as I think we've all seen, that's been an area where there's been a lot of speculation in the market. We look for confirmation of these trends. So we look at other markets and one of the places we look is the commodities market.

A basket that we like to track is the CRB spot price basket. This is a mix of all kinds of commodities, oil, gold, copper, et cetera. And the bounce off this bottom is pretty impressive. It's still not to a tie from a couple of years ago, but it's getting close. And of note that we think is interesting is, this was starting to perk up about this time last year. That's where we've circled on the graph here. So if you remember, there was a lot of anticipation that 2020 was going to a really good earnings year. People were expecting close to 10% earnings growth in the S&P 500. And we were actually seeing a lot of signs of the economy perking up January and going into February.

That commodity basket started moving last year. Well, we've blown past where we were last year and are clearly on an uptrend here. And again, I think this is capturing some of these things we've talked about with reopening, recovery, infrastructure. And the other thing that's I think being captured in the pricing of this basket is that Covid has had a lot of negative effects on supply chains, on capacity expansions. And so I think this is also reflecting, to some degree, a supply and demand imbalance that may be in the market. So when you add it up, we actually think that what the market's signaling here is that this time could be a little bit different.

And what I mean by this time could be different. I'm talking about, it could be a bit more inflationary. I think it could be a period of a year or two or longer where these industrial companies do better. And the reason that I think that this is worth at least considering, is because, if you think about the last 12 years that we've gone through with supportive monetary policies, and some may argue that it's 30 or 40 years, right, if central banks continuing lowering rates, but certainly in the last 12 years near zero have been an exceptional period.

You can see that the money supply has increased a lot, substantially. But money velocity is decreasing. And effectively, the way we look at this is that a lot of money is being trapped in the financial markets. And a lot of people talk about asset inflation. And I think this is an example of what they're talking about. It's pretty remarkable to us how the money supply and the equity markets have tracked through this period. And it could also explain some of the multiple expansion we've seen in the stock market, but we think this coming money cycle may be different and certainly sets up this way.

It looks to be much more fiscally oriented on the margin. That's where the incremental money will be coming from. And if it's successful in creating jobs and wage growth and investment in hard assets, and green energy, or ports and airports, it will eventually lead to the Fed pulling back on this balance sheet. And the Fed has this dual mandate, and one is full employment. So as we get closer there on the margin, we would expect the Fed to be less involved. Now that's not a great recipe for financial asset inflation, but it is a good recipe for hard asset inflation.

And the key that we're watching through all of this is the money velocity, it will need to pick up. And so that's something that, this chart is printed quarterly, so it's a little bit of a lagging indicator, but we will be going back and watching this update to money velocity throughout the next year or two to see if there actually is a pickup as the economy reopens. This leads us to our view on cyclicals. The first point is, our investment process places a lot of emphasis on companies that have sustainable competitive advantages and secular tailwinds. Those are not often attributes that are typically associated with cyclicals, like banks and energy companies and industrials.

So the reality is this is a little difficult for us to think through, and we've put a lot of effort into this. But there are some common patterns that we go back to, that really fit our process and what we do and how we choose securities in this area. The most common patterns where we can find competitive advantages and cyclical areas that we think people should consider is low-cost and scale production advantages.

If you're a low-cost producer in an industry, you're always going to have an advantage. And I think that's even more so in industries that are more commodity oriented, and that would make sense. The other is, there are a lot of technology advantages. Companies that have technology advantages in the cyclical space, but they still operate industries that are highly cyclical. And so, they're still subject to the laws of gravity and the macro cycles that throw those around. And so for all those reasons, we temper our view a little bit. We leaned into cyclicals more.

We're going to talk about one area in particular next that we really like, but in the back of our minds, we're always thinking, these positions probably don't ever get as big as a company that has a strong secular tailwind, like a cloud computing company. And we're also emotionally prepared for there to be shorter holding periods for these companies. The macro can change and it's something that none of us can... everyone's hostage to, basically is what I would say, if you're a cyclical company.

But one area that I do want to focus on today is the banks. This is an area where we continue to see a lot of value, a lot of opportunity. And we think actually a pretty strong margin of safety. One of the things we really like when we put money to work, fresh money to work in any areas is an asymmetric setup, right? And I think the optionality in banks these days is to the upside. And we're going to talk about the yield curve in a second, but let me start with first, the key assumption here is that the vaccines work and we get to reopening. And in case you haven't seen, there's been a lot of information about this.

Recently we went through a bit of a volatile period in the market as these new virus strains started coming out, net/net we strongly believe that reducing the severity of symptoms is the most important thing, and all the vaccines appear to do that. And so when you put that together with this macro view that we have, we basically are betting on a reopening story here. So, the bull/bear case on the banks here you can see is really premised number one, on the yield curve steepening. Number two is you're going to get demand for money increasing, as with reopening and recovery. And if infrastructure comes into this story, you'll really get a lot of a lot of demand for capital inventory and capital equipment to be financed.

And the last part of this is that, a lot of these companies have taken pretty big reserves, forbearance of loans, a lot of basically kicking the can to the curb, which is the negative view to what's happened during Covid, but as we get to reopening and customers are able to get back to work and come current, we think that the credit risk really starts to decrease rapidly. There is a bear case of course, on banks, which is around credit risk and demographics and low interest rates. The one area though that we probably think about the most is the opportunity for disruption in their business models, through companies like whether it's Square or PayPal, those are some of the really big ones that come to mind. That's the area we pay very strong attention to. Because there is an opportunity and the phrase gets used a lot in the investment management industry.

There's the opportunity to get "Kodaked," to basically be disrupted in your business. We don't think that's going to happen in the companies that we've chosen to invest in, and we'll touch on those in a second, but that's definitely something that we watch. So the number one thing here in the bank world that we watch is the yield curve. This is the thing I look at first when I wake up in the morning, where's the 10-year is the best proxy for the overall curve. And it certainly looks to us like rates have broken the downtrend. Which makes sense as the bond market, again, anticipates this reopening recovery story.

To us, if you look at this breaking of the downtrend, we would say that assuming all stays on track, 1% looks to be more of the floor instead of the ceiling as it had been during the much of the Covid crisis. Also to note, there's been some movement in long-term inflation expectations over the past month, TIPS break-evens are now over 2%. They've gone up 20 to 30 basis points. So parts of the fixed income market are starting to recognize that we're going to get back to a more normal world here over the coming in the near term. And if real yields are to really catch up to these break evens, one could argue for the 10-year rate to be around 3% or higher.

Now I'm not going to argue for that here, but what I can easily see over the next year is the 10-year rising to one and a half to one and three quarters, which would be a really nice positive for banks, especially because we know the Fed is going to stay put on the short end. So bringing this sort of in, how do you play this? I'll tell you how we play this is an example of how we think about the world. We think we have two banks in our portfolios: JP Morgan, and First Republic. We look at this as kind of a barbell strategy around quality names. JP Morgan is the largest bank. It's number one, or number two, in pretty much every market it operates. It's highly levered to business lending and consumer lending. It's one of the largest home lenders and credit card underwriters globally.

And if loan growth gets to mid-single digit levels for a company like JP Morgan, the bank has tremendous earnings power. It is already over capitalized and management has clearly and consistently signaled the desire for dividend increases and share repurchases. We think all that adds up to really good returns from shareholders, for shareholders here. The other way we play the banking opportunity is First Republic Bank. It is the fastest growing bank in the country. It's tied to wealth creation in San Francisco, Los Angeles, Boston, and New York. And it's slowly starting to expand into some other areas.

And what we find super interesting about First Republic is, given the pace of loan growth, the bank is very asset-sensitive. If you will do the math on them growing the loan book by 15 to 20% over the next three to four years, and just give them some appreciation, some expansion and the net interest margin of 30 to 50 basis points over the next three to four years, you would double the earnings of First Republic Bank. Now, it's not a prediction, it's just a math exercise, but again, it creates optionality to the upside, when we look at a company like that and where we think that the rates are biased to the upside, First Republic is one that would be a really big beneficiary.

So that's one area, to recap a cyclical area, that we're actually getting more enthusiastic about in banks. But the other side of the equation is, does that mean, sell my long-term secular winners? And we would say, absolutely not. These are areas that you have to have a long-term view. There are three areas here I want to call attention to, and we think there are very clearly identifiable trends that make these areas a must-invest anchor point to your portfolio, which is the way we have approached this. The first is cloud, and this probably is not a newsflash to anyone on the webcast. Cloud computing is a big deal. It's not a fad.

I put that there as kind of a joke because it's obvious, but you know what is debatable, and we find interesting is, where are we in the adoption cycle and how big a deal will it be? We have noticed a lot of people talking about the cloud growing about 5x over the next 10 years. And I think that's a very safe bet. And if you look at the big cloud-providing stocks today, you will make a good money if the cloud grows five times in the next 10 years. But we actually think that five times is a low number. When you do the math, again, the optionality, which is the way we think about things is to the upside. We think cloud computing can grow by more than 10 times over the next 10 years. And the reason we come to that kind of conclusion is because cloud today is only 15 to 20% of the computing market, of the data center market.

So on-premises computing is still the vast majority of what the industry is. And, when you look at again, the cost advantages, the capabilities, the ability for a company to just turn a switch and all of a sudden be doing natural language processing or artificial intelligence, or big data sort of analytics, that's going to continue to move computing to the cloud. The mix-shift is going to increase dramatically over the next 10 years. And in fact, we think that the mix-shift probably goes close to 50/50 over that period. So when you consider that data continues to grow 40%, data processing spending continues to grow at about 20% plus per year. That's an argument for, when you put all that together, that's an argument for cloud providers to be about 10 to 12 times bigger than they are today.

Now there are a couple of ways to play this, and we all know that Google and Amazon and Microsoft are the big three. We own all three. But the one we really favor is Google. And the reason we favor it is, it has the most favorable mix of growth and valuation. And we're really impressed with Tom Kurian, who Google hired from Oracle and is running that business. When you look at the competitive advantages of Google, we really like the way they're positioned in a couple of the fastest growing areas of cloud computing. And those are artificial intelligence and machine learning.

Google is considered, when you look at the Gartner reports and that kind of stuff, it's considered to be the leader in those areas. The other big advantage that Google has is not being Amazon. Google is the top cloud provider for retailers worldwide, who are not Amazon. And it makes sense if you're a big retailer, you would be nervous about having your online hosting done at Amazon. So retailers who are moving to the cloud, do not want to be in the AWS cloud. And something I didn't know until recently that Google processed more online revenue than Amazon on Black Friday.

So it's already surpassed Amazon for cloud retailing processing. Google also has some other optionalities to it, it has YouTube, which is rapidly growing and becoming profitable. And it's also what we like to call a sneaky recovery play. Online advertising went negative last year for the first time ever in the June quarter. That market is starting to recover rapidly. We saw the green shoots on Google's earnings call a week or so ago. And we just think, again, the rate of change, we come back to that a bit, the rate of change for Google's advertising business sets it up very favorably for 2021.

The next area that we would like to call attention to for people is Next Gen Auto. We all know Tesla's out there. But many of the things that drive enthusiasm for that company are on the cusp of being quite ubiquitous across the automobile industry. And the next 10 years, most cars will be electric, will be connected. And ultimately we'll get to a point where they're autonomous. In addition to the auto manufacturers, there are number of ways to play this theme in the emerging auto ecosystem. There's auto suppliers, there's the potential for infrastructure and the fuel stations. Although that's been a little speculative here recently, I would say, and then there's a lot of materials that go into the batteries and the powertrains of these cars.

Two ways that I want to talk about today to consider playing are Aptiv and General Motors. We own Aptiv. It's a picks and shovel play for ADAS and electric vehicles. And it's a technology leader. And basically what it's done is it's integrated the electric harnessing and delivery system with all the main sensors that matter, that means it's lower power. That means it's lower cost. And it's a one-stop shop solution for auto manufacturers. It also has a first mover advantage, which is extremely important in the automotive industry. These suppliers get designed in for five, six, seven-year cycles. So with Aptiv being designed in today, you know they're going to be in the auto production plans for three, four, five, six years down the road.

And as the EVs take off and advanced safety features take off, they are going to have a lot more content per vehicle. So in fact, it's about twice the amount of combustible engine cars that the content per vehicle and people are looking at EVs now growing 4x over the next three to five years. So this is a company we think has tremendous earnings power. There's been a nice move in the stock price. So I think that's being recognized. But for a long-term play, this is an area we would look. The other name, I just want to highlight today is General Motors. We do not own General Motors, but it's something that we've talked about increasingly, and it's an area we're doing work.

We wonder if one of tomorrow's leaders really could be hiding in plain sight. And the reason we wonder this is because if you look at General Motors, they have some tremendous competitive advantages that other people don't have. And the main one is the potential for vertical integration. If you think about a future, and this is, again, maybe 10 years away, but it's something you got to think about a couple of years ahead of time is, you're going to call a car on your app. You're going to get in the car and you're going to go somewhere. If you call a car on GM's app, GM has made the car, they have local service dealer networks, dealer networks to service the car, that car, the cost of bringing that car to your house would be cheaper for GM than you could say the same for Ford or any other traditional OEM, than Uber or Lyft, or any of these other car service companies that are all planning for the same future as well.

So we think basically there's a huge value in vertical integration for General Motors and an opportunity to be a low cost provider in this space. The other thing we look at and the report just came out, I think two or three days ago. California has an autonomous vehicle a report, where they basically gather information from all the companies that are testing their cars, their autonomous driving programs, and you get to see who's driving the most miles using an autonomous system. GM Cruise is by far the number one testing company for autonomous vehicles. They seem very well positioned to us to deliver a technology that will power autonomous cars. And so the last thing that we'd like to consider here that we think people should think about is the unit economics of autonomous driving.

Say GM sells a car and pockets three to $5,000 per vehicle. Tomorrow, if they make that car and it comes to your house and picks you up and it's utilized 10, 12 hours a day, 300 days a year, they can make $20, $30,000 a year on that car. They could possibly manufacture less cars. So the capital intensity goes down, the unit economics go up. We don't know when this type of situation will inflect, when we'll actually see autonomous cars. But when we look at all the different piece parts that go into the success of a business here, we kind of have to look at General Motors as a potential winner.

So something to think about and when you're out there reading, we think it's something that hopefully we've planted an idea for you to consider when you're looking at ideas for your clients. The next way to play and this is related to the auto world is semiconductors in particular, in auto. Today, it's already a $40 billion industry. And what we did was a calculation. We looked at the amount of the data services we use, we looked at the amount of revenue generated in the industry and an amount of cars being produced. And you can see an inflection, there's been about $300 to $350 of semiconductor content per car produced globally for a long time, that inflected in 2015. And it totally makes sense why it inflected.

That's when Tesla started making a lot more cars, that's when the higher end vehicles started putting more ADAS systems in, the rear-view cameras and the like, that's when the infotainment systems started coming in, the digital dashboards. So that content now is over $500 per vehicle. If you look at the trend and the types of cars that'll be produced, that number will probably go over $1,000 over sometime in the next five years or so. This is also an example of just how we try to boil down an industry into one big key trend. And we think for semiconductors in the auto industry, it makes sense this would be the trend, but this is the thing we're watching. And so we're expecting this slope to continue upward for quite a while.

There are two companies in particular that we think are great ways to play this trend. We own them in different portfolios. The first is Monolithic Power. Monolithic is an analog semiconductor company. It grows 10 to 15% faster than the industry. That means that if you think about somebody like a Texas Instruments that grows 5% a year, Monolithic is growing 10 to 15% a year, sorry, 15 to 20% a year. The reason Monolithic has such a high growth rate is because this is what we call a White Sheet Company. It's a newer company. It doesn't have the burden of legacy manufacturing systems. So it was able to go to leading-edge technology, smaller nodes, lower power consumption, bigger wafers.

All of these things that you hear about. The analog industry is actually a lagging industry, when you think about what Intel does to do all these things, to get on the bleeding edge, analog is a lagging edge, but Monolithic kind of put itself in the middle and became a leading-edge analog company. That means that when you think about applications that are very power sensitive and autos is a big one, people are very concerned and focused on how much computing, how much electricity is required for computing inside the cars, energy envelope, as they call it. Monolithic is very well positioned for that kind of use case.

Auto is about 10% of their business, or I think 11 here and it's growing at 25% a year. And they gave a very favorable outlook for that just recently on their earnings call. And you may also remember, you may also have noticed all the auto companies is that they can't get enough chips this year. So the demand for these chips is really high. That's a global statement that just popped into my head. But if you look at Monolithic and the proliferation of new charging ports and infotainment, ADAS systems, and the battery management, we think it's got a huge runway ahead of it. The other way we're playing this is Analog Devices. This is more of a broad-based analog company.

It's known for having a very deep technical bench of engineering talent at the company. Auto mix will be close to 20% of the business when it closes its acquisition with Maxim, which is expected over the summer. And so if you look at the change in mix that's coming from the combination of these companies, again, auto will be 20%, and you're also going to have a really big mix of industrial use cases. So this is a little outside of the auto world, but when you think about the Internet of Things and industrial controls and the digitization of hard assets and manufacturing processes, Analog Devices is very well positioned to take advantage of this. So those are two examples in real world that we really like in the auto-meets-semi space, but not all is rosy out there. And there are some things that make me go, "Hmmm," and this it's funny. We created this slide even before some of the craziness of the last couple of weeks, but this caught my attention about a month ago. And the chart you're seeing here is the option call volume that's in the market. And you can see for going back a number of years here, it's been pretty consistent, maybe a very slight upward creep, but mostly, around this high single digits at 10,000 contracts per week. Something changed dramatically this year. And we think this is a really indicative chart of some of the speculation you've seen in the market.

And it took a real big leg up in the first half of January, and it took another leg up the last couple of weeks. I don't know how this ends. Historically 80% of options expire worthless. So I don't know if there's a lot of pain to be experienced amongst the group of people that have this sudden enthusiasm for options, but it certainly has caught my attention. In retrospect, this is one of the reasons we've had what they call this gamma squeeze and those names we referenced earlier, like GameStop and AMC Theaters and the like.

Of course, the retail investors are behind a lot of this, Robinhood is involved in a lot of this. Is this all started happening, I ran a screen on Bloomberg and if you look at the total number of stocks that are listed in the United States, and this includes all the micro-cap and over-the-counter stocks, there's about 15 and a half thousand stocks that you could buy if you wanted to. Sixteen hundred of them, so more than 10%, we're up over 100% in the last three months. Now that's the screen I ran when I first did this presentation a few weeks ago. I ran that screen again this week. And that number is now 2,500 stocks are up more than 100% in the last three months. So, there's clearly an acceleration and this enthusiasm that's out there.

I don't know how it ends. I don't know. Maybe it's all very well founded, but certainly some of the names we see affected make me go hmm a bit, this could, not so great for a lot of people. And then there's, things that make me go, "Hmmm" part two. The VIX, we've had a tremendous recovery in the stock market here over the last, since the bottom in March. Yet the VIX has remained elevated the entire time. We really have not been able to get under 20 on the VIX. And so maybe I don't know, but maybe we're entering a period of heightened volatility that looks a lot like the 90s. We saw this before, and if you go back, you can... the mid- to late-90s were tremendously great for the stock market, but the VIX stayed over 20 and elevated the entire time.

Then we went into a long period of low volatility, punctuated of course by the great financial crisis. And a couple other scares along the way like Fukushima and the like, but generally very low volatility environment for a long time. I've read and people talked about that the market goes through periods of long low volatility and long periods of heightened volatility. I don't know if that's what's going to happen here, but if it does, it would suggest to me that we're probably going to be living in a world where there are more extreme corrections, and, what I would do, and this is the way we approach the world is we have a list of companies we really like, some of which we think are just too expensive to buy.

And we remain poised to act in times of high volatility, if corrections create an opportunity for us to buy a great asset. I think in our view, that's the best way to handle this world. Maybe volatility goes back under 20 and becomes very muted again. And this is a non-point, but if it doesn't, this is something to keep in the back of your brain to use as a playbook for action, as opposed to something that we think would be something that would scare us away, I think is the way we would position that. So the last point I think I want to make today, the last point I do want to make today is to bring it back to the beginning, which is around fundamentals.

And if you look at fundamentals today, that's not a focus of the market. And so what makes me sleep well at night in this world of craziness? Well, I think fundamentals ultimately will matter again, there will be a rediscovery that quality matters. I don't know when this is going to happen, but when it does, I think the worst place to be is in assets that are overvalued with bad fundamentals. And the best place to be is going to be assets that are fairly valued with great fundamentals. Now, in general, the market's pretty expensive. So this is fairly valued as in the eye of the beholder, but what you really want are a basket full of assets that have these identifiable competitive advantages.

We think of market share winners and faster growers and the growth supported by long-term secular tailwinds is key tenants to where we want our money to be. Typically, these are lower volatility baskets. There's a nice source of lower protecting on the downside. At some point this will end. We've seen this movie before, whether it was the internet bubble or the housing bubble, or if you go back to the South Seas bubble, or the tulip bubble or whatever. These periods of high speculation, parabolic charts, they reverse. And when they reverse you definitely want to be holding better quality assets. And so, well, I'll be honest. I've had frustration with what's going on with the current market at times. And unfortunately we don't own any of these super exciting bubblicious-type stocks.

The thing I go back to is when it ends. And whenever that is, we're going to be in a pretty good situation. And it's just the gospel I preach to everyone who's picking stocks and choosing assets that, you want to have some rationality underneath you to protect you when the party ends and the music stops. So that concludes my statements today. And I don't know if we've gotten any questions, Shawn, but I'd be happy to take any questions.

Shawn Eubanks: Okay. I don't see any questions in the queue right now, but we'll wait a minute or two and see what we get. In the meantime, I know that the portfolio has been focused on these long-term secular growers, and more recently with the rollout of vaccines, you've also felt like it makes some sense to own some more cyclical names in the portfolio, at least over the course of the next year or so. So could you talk about how you're thinking about that in the overall portfolio and maybe, an example of one of those types of opportunities?

Larry Cordisco: Yeah. So I touched on the banks, thanks Shawn. I touched on the banks earlier. We also have some industrial positions. We like Union Pacific for rails. We like Old Dominion for trucking. These are areas that, in fact, Union Pacific's one that we added last year, Old Dominion we've owned for a while. We added Federal Express last year, and there's some really interesting internal stories going to Federal Express, but you have to also acknowledge that it is a cyclical company, its overnight delivery demand goes up as there's more B2B commerce, the overall drivers for FedEx and business and margins. Those are the highest margin businesses for Federal Express. So those are some areas where we've leaned in.

We've also leaned in to a lot of consumer names. We've bought Ross, the retailer that's one of the best retailers, fastest growing retailers in the country. It's actually a back-to-work play. Women's apparel is one of its biggest categories. And so as we get back into the office, we think that's a name that will have some outsides growth to it. We owned, bought during the pandemic, Sysco, the food distribution company, not the router technology company, but S-Y-Y it's the largest food distributor for restaurants and hospitality in the country. Again, as people go back to restaurants, as they get back to hotels, as they start getting back to more normalcy, we think Sysco is going to do quite well.

We also think Sysco has gotten a lot of share. That's a really fragmented industry, where there's a lot of mom and pop players and so Sysco's size, and it's the only investment grade debt company in the industry, its ability to get to the other side here. It's going to be a big market share winner as well. We think. So those are a couple ideas that I would highlight as ways that we're leaning in. The last thing I'll say is there are a number of sneaky recovery plays. We talked about Google and online advertising coming back, travel is 10% of Google's advertising business. So that offset was like zero during the pandemic. That'll come back.

VISA is a sneaky recovery play. Everyone might not realize how much, well, we all know that travel is down quite a bit. Cross border credit card transactions are VISA's most profitable business segment. So as that comes back, we would expect a pretty nice earnings recovery for VISA. And we own like a company called Zendesk, which does customer relationship software. Basically, if you go on a web chat where the company you are, you're interacting, a lot of times if you go to a hotel and you get a text from the hotel saying, "Hey, welcome, would you like to go to the spa?" All that technology that's power, one of the biggest companies that powers that stuff is Zendesk. Well, 20% of their customers are small and medium business, who've been hurt disproportionately by the pandemic. And they have a huge hospitality and travel business. Just like these example, this example I just gave you.

So we would expect that type of company to come back pretty strong, their growth though actually fell to about 15% during the year during Covid. So that's a pretty big sign for them too, but again, it will inflect as we get back to normal this year. So there are a lot of really sneaky ways to play recovery. I think a lot of businesses will see it. It touches a lot of businesses in a lot of different ways, but those are a couple of the examples that I would highlight right out of the gate in terms of cyclical recovery stories that we're watching.

Shawn Eubanks: Thank you, Larry. We appreciate your time and your insights. And I don't see any questions right now, but thanks again and feel free, any of our participants stay if you do have questions about our outlook or would like to get more information on the portfolio, we'd be happy to help.

Larry Cordisco: Thank you all.


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