Outlook for Value Investing

Hi, Christy. Thank you so much for being with me today.

Christina Siegel Malbon:

Thank you for having me.

EMS:

Absolutely. So to kick off the conversation, tell us a little about your firm and how you got to where you are today.

CSM:

Yeah, so Patient Capital is a woman-owned woman-run asset manager that was founded in 2020 by Samantha McLemore. We're really one of the successor firms to Miller Value Partner, which was founded by legendary investor Bill Miller. Samantha worked with him for over two decades before starting Patient Capital, and myself and the team that joined her had worked with Bill for over a decade.

So we're really excited about the future. We think of ourselves as next-generation value investors, and the reason why we say that is we think of value differently from other investors. We like to break it down into sort of three groups. We think of classic value, which is traditionally what you've seen in the space, which is companies trading at low valuation multiples that are generating a lot of cash today and returning that cash to shareholders. That's going to be names like Delta Air Lines or JP Morgan.

The second group is attractively priced compounders. Those are names that are trading at fair valuations but that we think have longer competitive advantage periods than the market is currently paying for. Those are names like Amazon or Google. And then finally we look at early-stage companies. Those are companies that are early in their lifecycle but we think have the potential to grow into become compounders, and those are names like Coinbase and Uber.

And we think about building a portfolio this way kind of makes this unique overall, and so that kind of helps you understand how we think about investing and what we're trying to provide investors.

EMS:

Christy, as a follow-up with your outlook for value investing, I wanted to ask you where you see some of the greatest opportunities in this space and why?

CSM:

Yeah, so we think the greatest opportunities from this point are really in the bucket that we call classic value, and particularly within that group, we think that cyclicals or industries that have historically been cyclical are most attractive. And these are going to be sectors like airlines, banks, car manufacturers. And the reason for that is these names are trading at low single-digit multiples because the market perceives that their current strong cash generation isn't sustainable, and so they're not going to pay for it.

What gets us excited is that we think these businesses are more durable than they have been in the past, given the consolidation that we've seen in a lot of these sectors and the diversification of revenue streams. And so we think over time as the market gets conviction that those cash flows are sustainable, that the multiples can re-rate and in the meantime they're returning the majority of their cash to shareholders. So we're getting paid to be patient in the meantime through dividends and share buybacks.

EMS:

Christy, on the other hand, what are some of the greatest challenges you face in value investing right now and why?

CSM:

In terms of challenges, I think the one that we see the most is getting the story out there. Value investing has been an unloved part of the market for the past decade, which makes sense given how much it's underperformed on a relative basis since about 2008. And over that time, we've seen shops go out of business. We've seen shops switch from being value to being growth managers as that's where investors have focused on. And so we actually see a really compelling opportunity for value from this point forward.

If we look at periods of historical underperformance, once that's reversed, the value strategy has actually provided returns on average twice that of the market. And we actually have seen value start to outperform since mid-2021. And so for us, we think the challenge is trying to get people to listen and understand this compelling story and get them to pay attention to the strategy again. And we try to do that I think by using social media. We have a blog post on patientcapitalmanagement.com where we kind of voice our views of the market and how to understand it and why we think value is compelling. And so we're always working hard to get that story out there, but that's been a challenge to kind of get the attention that we would hope to share with investors.

EMS:

Christy, to shift gears a bit with ESG, DEI top of mind for the investment management industry, wanted to hear how Patient is addressing these topics.

CSM:

So that's obviously a very important aspect of investing, not only on the names that we like to invest in, but also in the team that we hope to build. In terms of the team, we often talk about diversity of thought being a large contributor to long-term outperformance. And the difference between a female and male perspective is obviously one that you don't find at a lot of shops. And so I think the names that maybe I bring to the table versus the male counterpart are going to be different and we think that adds to diversity.

And so we're always looking for ways to make the team more diverse, have different perspectives and different viewpoints. And then as we think about names that we want to invest in, we are long-term. And so we think that names that will be winners over five and 10 years are making the right investments and choices on a DEI and ESG perspective today because they're not going to be left behind. So that's kind of the two different ways that we think about incorporating it in our firm.

EMS:

Christy, being a woman investment manager in the industry is clearly an inspiration and wanted to hear your thoughts and what you're doing to inspire others to get into investment management.

CSM:

Yes, I've been extremely lucky to be where I am today. As I noted, I worked with Samantha, or I've worked with Samantha for over a decade. And so it's rare to have a woman mentor in the industry, especially on the investment side of things. And one thing that we've been really focused on, as well as our whole team, is sort of volunteering in ways that we can get younger women more excited about the opportunity. Because I think we can't expand the number of women on an investment team if we don't have a large pool of talent to choose from. And that really requires getting women when they're choosing their majors, they're early in their discovery in terms of career opportunities and letting them know, "Hey, this path exists and here's what it's like and here's why it's exciting and here's why you should consider it."

And so we volunteer. We have internships. We are available for conversations if people just reach out and want to talk about it. And so we think that that will help over time kind of expand that pool of talent to kind of help get more women on these investment teams.

EMS:

Christy, we've covered a lot of ground today and wanted to see if you have any final thoughts you'd like to share with us.

CSM:

This has been a great conversation. I think we hit on all the major points. I would just point people again to our website patientcapitalmanagement.com to check out our insights page to see what we're writing about and where we see opportunities on the market.

EMS:

Christy, I wanted to thank you so much for sharing your perspective with our listeners.

CSM:

Thank you again for the time.

EMS:

And thank you for listening to the EisnerAmper Podcast Series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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