FOCUS 2025: Uncovering hidden gems: Intrinsic value investing – Morgen Peck and Sam Chamovitz

[00:00:12.846]

[Subtitles coming soon]

[00:00:37.871]

...the big prevailing theme in the market, kind of U.S.

[00:00:41.141]

large-cap growth, AI, which I know dominates discussions.

[00:00:46.212]

We are a really nice diversifier away from that.

[00:00:49.849]

I'm going to start at a high level with a few questions from my colleagues,

[00:00:52.952]

Morgen and Sam, and then we will get more tactical.

[00:00:56.122]

I'm told if there's time we'll take questions as well, we're happy to do so.

[00:01:01.027]

I guess starting big picture for Sam, it's been a

[00:01:05.498]

per usual in a way of volatile macro environment,

[00:01:09.469]

tariffs, employment, sort of the picture weakening,

[00:01:14.140]

the Fed cutting rates.

[00:01:16.209]

In this volatile environment, Sam, how do we take advantage of

[00:01:21.014]

volatility for the benefit of shareholders and for the benefit of the

[00:01:25.051]

portfolio in a process consistent way?

[00:01:29.355]

Thanks, Naveed.

[00:01:31.024]

Philosophically, we believe that markets are inherently volatile.

[00:01:36.529]

The subcomponents of the market, companies, economies

[00:01:40.567]

and politics, are also volatile.

[00:01:44.003]

Understanding this is crucial to long term success.

[00:01:47.507]

Now, predicting what will drive the volatility, where

[00:01:51.678]

it will appear, where the dislocations will come, is impossible.

[00:01:56.316]

Preparing for it is not.

[00:01:58.551]

That's why we've structured a process that prepares for volatility

[00:02:03.022]

and then tries to take advantage of volatility.

[00:02:05.492]

How do we do that? We look at a very

[00:02:09.596]

large set of numbers, we have a huge opportunity set.

[00:02:13.766]

We're looking for good businesses that have growth and strong free cash

[00:02:17.704]

flow as we are trying to populate the fund with underappreciated

[00:02:23.376]

companies.

[00:02:25.245]

We've termed our process preparation and patience.

[00:02:29.883]

What that means is we spend our time preparing, which

[00:02:33.820]

is doing the deep fundamental work on companies to understand what we

[00:02:38.024]

think are the key drivers, that's normalized free cash flow power,

[00:02:42.362]

the quality of the business, management teams, and try to come up with what

[00:02:46.432]

we have a normalized intrinsic value for those companies.

[00:02:50.637]

Then we wait patiently to take advantage of that, or the volatility.

[00:02:56.409]

One of the key things is we're focused on normalized.

[00:02:59.212]

We think about normalized free cash flow to really think about a business's

[00:03:03.183]

value. The market, on the other hand, tends to focus on short

[00:03:07.287]

term changes in fundamentals and then can be quite emotional around that.

[00:03:11.624]

What we try to do is zig when the market is zagging.

[00:03:15.295]

At a big picture level volatility is an opportunity, we

[00:03:20.066]

have a wish list that we've prepared.

[00:03:22.569]

That volatility will often allow us to buy those companies on the

[00:03:26.506]

wishlist at attractive prices.

[00:03:28.441]

That's the preparation and the patience.

[00:03:30.543]

Great. I think one of the things I've learned from you over the years is when

[00:03:34.681]

those volatility episodes happen you need to have already done your work.

[00:03:38.551]

That is not the time to open up the spreadsheet

[00:03:42.488]

and sort of think about it. Preparation and patience, I love that.

[00:03:47.794]

We typically go down a lot less than the market.

[00:03:50.163]

You often emphasize that with a value approach to investing there's

[00:03:54.167]

a margin of safety. Can you tell us kind of how this principal guides

[00:03:58.738]

your investment thinking?

[00:04:01.574]

Value is a core pillar of our investment process

[00:04:05.545]

but value investing is not the same thing as just

[00:04:09.549]

buying cheap stocks.

[00:04:11.484]

There are plenty of stocks out there that are trading at low valuation

[00:04:15.421]

metrics, call it 10 times forward earnings or 1 times book value,

[00:04:19.425]

and those stocks could be fairly valued, they could

[00:04:23.329]

even be overvalued. Typically, those types of stocks,

[00:04:27.634]

there's usually some sort of issue that is structural.

[00:04:30.937]

It could be they're at a competitive disadvantage, they're secularly

[00:04:34.907]

declining or maybe they've got a management team who is destroying value

[00:04:39.178]

by bad capital allocation decisions.

[00:04:42.415]

That's not what we're looking for.

[00:04:44.917]

Sam and I are looking for something more nuanced which is undervalued,

[00:04:49.555]

underappreciated stocks, and that's based on our work of normalized free cash

[00:04:53.626]

flow and earnings power that Sam just talked about.

[00:04:57.263]

To answer your question, the reason that value stocks provide good

[00:05:01.401]

downside protection is because the embedded expectations for

[00:05:05.838]

those stocks are pretty low to begin with.

[00:05:08.107]

Maybe just to give an example, we don't usually see this but it makes the

[00:05:11.177]

point, if you've got two stocks that are identical in

[00:05:15.281]

terms of the quality of the business, the management teams and the growth

[00:05:19.385]

prospects but one of them is trading at 10 times forward earnings and the other

[00:05:23.289]

one is trading it 15 times, the growth expectations are much higher

[00:05:27.427]

for the one trading at 15 times.

[00:05:29.729]

When you get a market scare or a sell-off globally

[00:05:34.467]

the stock trading at 15 times just has more to fall.

[00:05:38.705]

We need to be right, though, on that underlying earnings power.

[00:05:41.607]

That's the real thing that we are focused on.

[00:05:45.178]

It's not just the undervalued nature of the stocks that we own that

[00:05:49.182]

provide good downside protection, it's also the quality tilt.

[00:05:53.553]

That's the other pillar of our investment process.

[00:05:56.155]

That overlap between undervalued, underappreciated stocks that

[00:06:00.126]

have some sort of quality tilt, that's what provides great downside

[00:06:04.297]

protection for the fund over time. It's been a feature of the fund for, I

[00:06:08.901]

think back when it was started and investors should expect

[00:06:13.072]

that to be the case going forward.

[00:06:16.976]

Value does not equal cheap, that's one of my takeaways from that.

[00:06:21.681]

Turning back to you, Sam, the U.S.

[00:06:24.250]

equity markets, as I said at the beginning, have been heavily dominated by sort

[00:06:28.321]

of large-cap, mega-cap tech companies.

[00:06:32.258]

In international markets the value style of investing

[00:06:36.229]

has done a little bit better of late but broadly speaking,

[00:06:40.466]

can you tell us why you think value investing is a rewarding endeavour

[00:06:44.704]

long term.

[00:06:46.606]

Yeah.

[00:06:49.609]

Buying something below what it is worth, or value investing, should

[00:06:53.613]

be timeless. Now, when markets move towards extremes that

[00:06:58.084]

can mask value, and that's often driven by emotions.

[00:07:01.053]

It is very clear that there are pockets of euphoria

[00:07:05.158]

in the market today.

[00:07:09.262]

We are investors that are looking for things that are different.

[00:07:18.204]

What we're trying to do is find things

[00:07:22.241]

... right now the biggest companies, historically,

[00:07:26.546]

you can see that as the most popular stocks, the most

[00:07:30.583]

analyzed stocks, tend to not lead

[00:07:34.887]

the performance into the future.

[00:07:38.024]

As the market is concentrating or increasing in concentration the

[00:07:42.161]

probability that if you look beneath the hood you're going to find some pretty

[00:07:46.065]

special things.

[00:07:47.767]

That's what Morgen and I are doing right now.

[00:07:49.869]

We're able to find good growing companies

[00:07:54.574]

generating lots of cash flow, good management teams at very attractive prices.

[00:07:58.177]

But the market is gravitating to much

[00:08:02.615]

more speculative things, especially in  smid-cap.

[00:08:05.017]

Things like drones and quantum computing, these things

[00:08:08.988]

sound so much fun but the reality is they don't

[00:08:13.059]

have proven business models, or in some cases they don't even have

[00:08:17.263]

business models.

[00:08:20.299]

Again, when we're looking to build a portfolio we're looking for businesses

[00:08:23.803]

that have durable growth potential, that are underappreciated

[00:08:28.641]

in the market. There's a lot of that out there right now.

[00:08:34.380]

I guess picking up on that topic, Morgen, this portfolio, I think one of the

[00:08:38.317]

things that I really like about it, it is a super unconstrained portfolio.

[00:08:41.921]

We can go to whatever sector the opportunity is, up and down

[00:08:45.958]

the cap spectrum and, obviously, geographically.

[00:08:49.395]

I guess on Sam's point, can you tell us where

[00:08:54.433]

your investing sense is telling you the more interesting opportunities are

[00:08:58.604]

from a geographic standpoint?

[00:09:00.072]

Sure, and maybe just as a reminder, the geographic tilts in the fund

[00:09:04.110]

are not a representation of where Sam and I have a strong view

[00:09:08.180]

of a particular geography in terms of top-down macro.

[00:09:12.184]

It's really a result of where we're finding the best opportunities on a

[00:09:15.922]

bottom-up basis.

[00:09:17.823]

Today we are finding more opportunities outside of the U.S.

[00:09:21.761]

That's true even though some international markets have performed well

[00:09:25.831]

year-to-date. One area that we're finding a lot of opportunities

[00:09:30.002]

is within Europe.

[00:09:32.805]

If you look at the valuations of small, mid-cap companies in

[00:09:36.976]

Europe they're trading around 12 to 13 times forward earnings.

[00:09:41.147]

When you compare that to the U.S., looking out a few

[00:09:45.084]

years both the large and small-cap markets in the U.S.

[00:09:47.920]

are trading north of 20 times. That's a really big valuation disparity.

[00:09:52.091]

What's great about Europe is, Sam just alluded to this, we're able to

[00:09:56.228]

find business models that are, basically, identical to what we find in the U.S.

[00:10:00.299]

Think about a retailer or a bank or a consumer staples company

[00:10:04.303]

led by great management teams, They've got good growth prospect, they're

[00:10:08.040]

generating good cash but they just trade at a much bigger discount to what

[00:10:11.944]

they're worth. What's also interesting about

[00:10:15.948]

Europe, and could be an opportunity, is that with all of the geopolitical

[00:10:20.186]

turmoil that we're seeing every day there is an opportunity for Europe

[00:10:24.690]

to work a little bit more together in terms of taking out regulation and

[00:10:28.761]

reducing trade frictions and so forth and maybe having a broader,

[00:10:32.698]

deeper capital market. If any of that happens that would be positive for

[00:10:36.702]

our European holdings. That's not why we have an overweight to Europe but it's

[00:10:40.106]

an opportunity that's not priced in.

[00:10:42.408]

The other part of the world where we're finding opportunities is Japan.

[00:10:47.380]

Again, looking at valuations for small and mid-cap Japanese companies, they're

[00:10:52.184]

trading around 13, 14 times forward earnings, a

[00:10:56.122]

big discount to the U.S. There are thousands of public companies in Japan.

[00:11:01.360]

Not a lot of people, not a lot of investors are looking at those companies.

[00:11:04.263]

We've got a great research team in Tokyo doing primary research for

[00:11:09.068]

us and helping us find these undiscovered gems.

[00:11:12.638]

What's interesting too in Japan is this focus on improving corporate

[00:11:16.809]

governance and focusing on trying to focus more

[00:11:20.980]

on shareholder returns.

[00:11:22.715]

We're seeing some of that in the companies that we own, not all companies

[00:11:26.919]

are moving at the same pace, but to the extent that that behaviour

[00:11:31.057]

proliferates that would be a really big positive for many of

[00:11:35.094]

our Japanese holding. That's just where we're finding opportunities today.

[00:11:38.798]

I might add that we were invested in Japanese equities before

[00:11:43.169]

a famous competitor of ours from Omaha found it a couple of years ago,

[00:11:47.707]

so like-minded investors eventually

[00:11:51.711]

get there. Let's maybe shift from the broader to the slightly more narrow

[00:11:55.915]

and talk about stocks in particular.

[00:11:58.818]

Sam, maybe you can give us an example of a stock that kind of reflects

[00:12:02.822]

the thinking of the fund and kind of represents that

[00:12:06.792]

in a clear way.

[00:12:08.427]

Sure. So I'll try to highlight something that walks through that preparation

[00:12:12.665]

and patients. I think from the earlier value question

[00:12:17.570]

we'll show that we're not focused on the FOMO parts of the market and avoiding

[00:12:21.440]

that is a crucial thing that our experience should bring.

[00:12:26.112]

I'm going to talk about Elanco which is the number two animal health care

[00:12:30.249]

company. This, to Morgen's point, came from our research

[00:12:34.987]

analyst who's a highly experienced farm analyst.

[00:12:37.323]

We have worked with our team globally so closely that

[00:12:42.061]

Kareem, who is the analyst, was able to say this fits their process.

[00:12:45.664]

Why did he think that? It's because it had durability and it had growth.

[00:12:49.802]

Why does it fit us? It's because those things were underappreciated.

[00:12:53.873]

What is Elanco? Elanco is 50% companion animal

[00:12:58.144]

and 50% livestock or farm.

[00:13:01.847]

The companion side of the business in particular is a secular growth market.

[00:13:05.918]

This is a market that through the humanization of pets is growing.

[00:13:09.255]

It avoids some of

[00:13:13.192]

the negatives of human pharma.

[00:13:14.927]

That would be there's much lower generic risk because

[00:13:19.398]

of the nature of the markets and you have no single payer risk.

[00:13:21.567]

The government doesn't actually pay for the pharma products.

[00:13:27.072]

Why did this opportunity exist?

[00:13:29.008]

So Elanco spun out of Eli Lilly in 2018 and they disappointed

[00:13:33.512]

on growth.

[00:13:35.481]

They came out, they spun off and they didn't deliver.

[00:13:38.617]

In 2024 when Kareem came to us and we started to do work,

[00:13:43.289]

what we saw was an inflection in these things, a growth that was going to

[00:13:47.359]

sustainably accelerate, margins that were heading up,

[00:13:52.031]

and significantly so, and then a lot of free cash flow.

[00:13:56.101]

Importantly, as I've tried to mention, that was not being reflected in the

[00:13:58.971]

stock.

[00:14:01.774]

What did we do? Tactically in late 2024 we built a

[00:14:05.978]

small position. We prepared, we built a small position and then

[00:14:10.015]

lo and behold in the beginning of this year Elanco was seen as

[00:14:14.186]

this massive loser around tariffs and things like that, which we disagreed with

[00:14:18.057]

completely. It was one of the worst performing stocks in this period.

[00:14:22.494]

We really started to buy it and now year-to-date, I think it's up 70%

[00:14:26.966]

year-to-date, not from the bottoms but from the beginning of the year.

[00:14:30.336]

That's just this preparation. We waited and we

[00:14:34.440]

didn't predict tariffs, and if I did predict tariffs I wouldn't have said

[00:14:38.210]

Elanco is going to be the big loser but we saw it there and we saw this thing

[00:14:41.947]

being kind of thrown out with the bathwater. That was one of the big things

[00:14:44.817]

we're adding to.

[00:14:48.454]

Awesome. I'm going to shift gears to another non-FOMO sector.

[00:14:53.826]

Financials is sort of ...

[00:14:57.363]

maybe a more boring, steady Eddy sector.

[00:14:59.965]

We have a number of financials in the top 10, 20,

[00:15:04.103]

names like Wells Fargo, Stifel and others.

[00:15:07.640]

Can you tell us a little bit about your thinking on that sector and

[00:15:12.645]

what gives us confidence that it's an interesting sector that meets the

[00:15:16.649]

criteria.

[00:15:18.150]

No surprise ... maybe I'll start off with valuations.

[00:15:20.452]

If you look at valuations across different sectors

[00:15:24.823]

today, and this is true both in the U.S.

[00:15:27.526]

and internationally, financials are close to the bottom.

[00:15:31.797]

They're one of the cheapest sectors.

[00:15:34.566]

Actually, if you at their valuation versus their own history, the financial

[00:15:38.804]

sector today versus how it's traded historically, it's also at a pretty low

[00:15:42.641]

valuation. That's just one thing to help you

[00:15:46.779]

understand how we think about where there are opportunities.

[00:15:49.148]

We're trying to find the areas that are most undervalued, financials fits the

[00:15:53.185]

bill. There are definitely a number of commoditized

[00:15:57.389]

business models within financials.

[00:15:59.224]

You might say, well, it's cheap for a reason.

[00:16:01.393]

That may be true for the sector but there are a number of individual companies

[00:16:05.464]

that are doing something unique and differentiated and

[00:16:09.802]

that deserve to exist. Those are the types of businesses that we're trying to

[00:16:13.238]

buy when they become undervalued.

[00:16:15.274]

Hello, investors. We'll be back to the show in just a moment.

[00:16:18.477]

I wanted to share that here at Fidelity, we value your opinion.

[00:16:22.047]

Please take a few minutes to help us shape the future of Fidelity Connects

[00:16:24.350]

podcasts. Complete our listener survey by visiting fidelity.ca/survey,

[00:16:29.455]

and you could win one of our branded tumblers.

[00:16:31.423]

Periodic draws ending by March 30th, 2026.

[00:16:34.493]

And don't forget to listen to Fidelity Connects, the Upside, and French

[00:16:38.097]

DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

[00:16:42.134]

else you get your podcasts. Now back to today's show.

[00:16:46.338]

Thank you for that, Morgan. I think in those answers you get a little bit of a

[00:16:50.442]

sense for ... I think the superpower of our portfolio is that when we

[00:16:54.646]

identify these opportunities like an Elanco or a Wells,

[00:16:58.851]

in this kind of portfolio you can really get paid twice because

[00:17:02.788]

you're right about the earnings, that comes through, the market appreciates

[00:17:06.992]

that, and investors are attracted to that, and then there's a valuation

[00:17:11.130]

catch-up. This is fundamentally different from when you buy

[00:17:16.902]

an outperforming fundamentally strong company at a 50, 60 multiple.

[00:17:20.039]

The key there from Morgan and Sam's comment

[00:17:24.043]

is that enthusiasm is largely already reflected in the stock.

[00:17:27.946]

To outperform further you really have to surprise

[00:17:32.117]

to the upside. I think we've got the benefit of, hopefully, you get paid twice

[00:17:36.355]

in a lot of our key holdings over time.

[00:17:38.791]

Sam, we've been talking,

[00:17:43.662]

at least indirectly, about the AI excitement in the market.

[00:17:48.934]

We own some technology stocks in the portfolio, what role does technology have

[00:17:53.372]

in a quality value oriented portfolio?

[00:17:57.042]

Thanks, Naveed. Yeah, I'll answer that but I wanted to clarify one thing on

[00:17:59.478]

your comment. We are also looking for fundamentally strong businesses just not

[00:18:03.248]

paying a lot for them.

[00:18:05.050]

We want good, growing, fundamentally strong business, we just don't want to pay

[00:18:07.619]

50 times. We want to pay quite a low price.

[00:18:10.589]

That's why what we're looking for is underappreciated not just statistically

[00:18:13.492]

cheap.

[00:18:15.794]

Value investing works across all sectors, it just doesn't work across all

[00:18:19.865]

sectors all the time.

[00:18:22.534]

It tends not to be fashionable in the hot

[00:18:26.572]

parts of the market. The good thing is what's hot changes and that's

[00:18:30.609]

what creates the opportunities.

[00:18:32.544]

Now, if we focus on tech specifically, tech is a very

[00:18:36.882]

broad definition.

[00:18:39.551]

The sector has a lot of different kinds of business models and markets

[00:18:43.555]

and combinations of secular growth and cyclicality.

[00:18:47.493]

The way the market views that those pockets of secular growth

[00:18:51.463]

and cyclically change. As those views or

[00:18:55.601]

sentiment towards them shift there can be wild deviations

[00:18:59.972]

between the price and the intrinsic value on both

[00:19:04.076]

sides. In some ways value investing works incredibly well

[00:19:08.480]

in tech, and I can walk through a couple of examples.

[00:19:11.250]

If we talk about some holdings like Micron and Seagate,

[00:19:15.988]

these are hot stocks right now because

[00:19:20.559]

they play into these themes. We were able to buy them

[00:19:24.863]

multiple times throughout our careers

[00:19:28.834]

at rock bottom prices, really low absolute

[00:19:32.971]

price and well below their intrinsic value.

[00:19:36.441]

I'll walk through kind of a theoretical case as to why.

[00:19:40.779]

If you think about the semiconductor cycle, demand increases,

[00:19:45.984]

supply demand tightens, prices go up, customers get worried so they

[00:19:50.088]

start to order above and beyond demand, called double ordering.

[00:19:53.625]

When that happens earnings explode, the market gets excited, stocks rerate.

[00:19:56.862]

Except then you have too much inventory.

[00:20:04.303]

Then demand falls below the true demand, earnings fall, sentiment falls,

[00:20:08.440]

and the market takes that short term approach we had talked about, and stocks

[00:20:11.577]

get to really discounted prices.

[00:20:13.245]

It could be TSMC, it doesn't matter.

[00:20:15.414]

It happens time and time again.

[00:20:17.783]

That's what we're there to take advantage of.

[00:20:19.851]

If we want to focus in specifically on AI,

[00:20:23.956]

Dell and Hon-Hai, two of the stocks that we've held for a long period of time,

[00:20:27.793]

are value stocks that turned into big AI beneficiaries.

[00:20:31.964]

Now, they may not  be Nvidia but they have been big AI beneficiaries.

[00:20:36.001]

Value investing works, it works across cycles and it very much works in tech.

[00:20:40.606]

It's just the percentage of stocks that may be attractive on

[00:20:44.543]

a value lens could be huge or it could be small,

[00:20:48.547]

depending on where the sentiment of the market is.

[00:20:54.286]

Great, thank you. Turning back to Morgan, as I emphasized earlier it's an

[00:20:58.023]

unconstrained portfolio. We go to where the opportunity is but we do have an

[00:21:01.960]

undeniable kind of small, mid-cap tilt over time.

[00:21:06.999]

This is a less followed part of the market.

[00:21:08.867]

Can you tell us about our advantage working at Fidelity

[00:21:13.071]

and how you sort of harness that advantage to put shareholder assets

[00:21:17.242]

to work in the space.

[00:21:18.377]

Absolutely.

[00:21:21.046]

Fidelity has a number of resources that help

[00:21:25.317]

Sam and I find opportunities within this part of the market.

[00:21:28.854]

The first is our very large global network of

[00:21:32.824]

research analysts. We have about 130 research analysts across the

[00:21:36.762]

globe and they are working pretty much non-stop, meeting

[00:21:41.566]

with companies and doing primary research.

[00:21:45.170]

Sam and I get that information and that informs a lot of our investment

[00:21:48.440]

decisions. Maybe just to put some numbers to it, in

[00:21:52.511]

2024 our research division wrote about

[00:21:56.748]

10,000 notes. You have to write a note every time you talk to a company

[00:22:00.719]

or you do that primary research. That's a lot of insights.

[00:22:04.389]

Our small-cap team, we have a devoted small-cap team that looks just at this

[00:22:08.727]

part of the market, they produced about a quarter of those notes.

[00:22:12.431]

There's a lot of information there and that doesn't even cover the

[00:22:16.101]

conversations that Sam and I are regularly having with these analysts.

[00:22:20.272]

That's a really important resource because the small-cap part of

[00:22:24.209]

the market doesn't get as much attention from the sell side.

[00:22:27.946]

If you look at the average S&P 500 company,

[00:22:32.751]

those companies have on average 20 analysts on the sell side doing primary

[00:22:37.055]

research, writing up research on those stocks.

[00:22:39.791]

If you go to the small-cap part of the market it's actually five analysts on

[00:22:43.562]

average and often it can be zero. There are many companies that have no sell

[00:22:47.099]

side coverage.

[00:22:47.899]

And we own many of those.

[00:22:48.800]

And we own many of these, exactly.

[00:22:50.802]

If you go internationally the numbers are even lower.

[00:22:55.173]

The other thing that's happened in the past few years is a number of sell side

[00:22:58.110]

shops have shuttered down their small-cap research effort.

[00:23:01.947]

Our competitive advantage with our research department is just growing in

[00:23:06.184]

importance over time given that backdrop.

[00:23:08.887]

The second resource that we have that's been very helpful is our quantitative

[00:23:12.791]

research department. They help us with a number of things but as it relates to

[00:23:16.928]

this topic they help us screen for new ideas.

[00:23:21.166]

Sam and I have this fantastic bespoke, customized

[00:23:25.203]

screen that was built based on our process.

[00:23:28.373]

It's dynamic, it's been something we've used pretty regularly and

[00:23:32.411]

we found a number of great ideas from that screen.

[00:23:36.782]

The last resource I'll mention is just our trading desk.

[00:23:39.885]

One challenge that can exist in the small and mid-cap market is

[00:23:44.523]

getting liquidity both to build a position and to exit.

[00:23:48.593]

Sam and I have a great dialogue with our research desks across the globe and

[00:23:52.697]

they are just phenomenal at finding us liquidity for names that maybe

[00:23:56.802]

are a little less trafficked in.

[00:23:59.404]

We're really lucky, again, to work at Fidelity and have these resources.

[00:24:02.240]

That's what we sort of lean into every day when we come to

[00:24:06.244]

work to find opportunities.

[00:24:08.246]

Sam, I'll tilt the same question but almost ask you

[00:24:13.752]

... there's a torrent of information coming our way.

[00:24:16.321]

Morgan talked about all these analysts, all these notes.

[00:24:19.424]

How do you, yourself, as an investor make sure that you are integrated

[00:24:23.662]

with the best ideas, they're making their way into the portfolio, are there

[00:24:27.332]

things you do on a day-to-day basis to stay on top of that?

[00:24:33.839]

The first thing I would highlight is Morgan and I, and I think one of the key

[00:24:37.309]

things to us, we are very process oriented.

[00:24:40.679]

Fundamental research and

[00:24:45.183]

fundamental analysis is the cornerstone of that process but

[00:24:49.488]

sticking to it and being willing to avoid the FOMO and look

[00:24:53.558]

for companies that actually fit the process, and sometimes that's maybe a lot

[00:24:56.628]

of tech, sometimes it may be no tech, but going through where the process is

[00:25:01.233]

being able to be applied, that's key.

[00:25:04.769]

Why that's even more important in a place like Fidelity

[00:25:08.907]

is because we travel extensively to the foreign

[00:25:12.944]

offices, we have a lot of analysts in our home office in Boston, allowing

[00:25:18.550]

them to understand what we're doing that's

[00:25:22.754]

what allows our pharma analyst to say, ding, ding, Elanco fits

[00:25:27.492]

this process.

[00:25:30.662]

That helps us filter ...

[00:25:33.398]

if you think about Fidelity overall, that research team is our

[00:25:37.669]

singular competitive advantage, or one of them,

[00:25:42.407]

helping that team be more focused for us and our

[00:25:46.411]

process and our shareholders is crucial because the

[00:25:52.117]

breadth of expertise in that group and the velocity of insights

[00:25:56.121]

that they create is amazing, but making sure

[00:26:00.292]

that that is getting filtered to Mark Schmehl for what's appropriate for

[00:26:04.396]

Mark, and what's getting filtered to Sam and Morgan are not like, hey, Sam,

[00:26:08.600]

Morgan and Mark, why don't you look at the same exact thing even though your

[00:26:11.136]

processes are completely different.

[00:26:12.137]

The Venn diagram might not have a big overlap.

[00:26:13.371]

Not a big overlap, occasional overlap.

[00:26:18.977]

That's really important. We're travelling a lot and we

[00:26:23.081]

travel extensively to the foreign offices.

[00:26:26.985]

We were in Japan, Hong Kong, and London this year for one to two

[00:26:31.122]

weeks at least each.

[00:26:33.258]

We do that to sit alongside the team, to go see companies

[00:26:37.262]

with the team, to understand the landscape there but also

[00:26:41.366]

to host lunches where we're presenting our

[00:26:46.037]

philosophy. Those analysts are asking questions and

[00:26:50.508]

over time that stuff really has a high return on time.

[00:26:55.513]

It's a combination of having a distinct process,

[00:26:59.784]

communicating that process and then working alongside the research team to make

[00:27:03.588]

sure we're flipping as many rocks as possible, then we're constantly

[00:27:07.392]

communicating. So yes, there's the travel side but the day-to-day is really

[00:27:11.830]

Zoom and Teams and emails and, hey, let's call Elanco together,

[00:27:17.369]

as an example, or let's call Wells Fargo together.

[00:27:19.904]

Hey, Wells is going to come in, let's sit down with Charlie Sharf, let's do

[00:27:23.608]

these things. That's a constant dialogue.

[00:27:26.611]

Having that clear communication to the analyst team means that

[00:27:30.749]

time is not wasted. We are not spending time analyzing a

[00:27:34.686]

quantum stock that has no revenue.

[00:27:36.855]

No business model.

[00:27:38.790]

No business model, forget the revenue.

[00:27:42.160]

We have a question from the audience that maybe I'll pose to you guys.

[00:27:45.864]

I think the gist of it is, what are some of the characteristics

[00:27:49.834]

that you're looking for? I think having worked with you guys for a long time

[00:27:54.305]

I think it'd be great for the audience to hear because some of these are

[00:27:57.042]

financial metrics that you are looking for but you get to interact with the

[00:28:00.445]

management teams face-to-face and there are certain

[00:28:04.883]

attributes as well of a good, high quality management team.

[00:28:08.286]

Can you maybe flesh that out a little bit more for the audience?

[00:28:11.289]

Focusing on the management team?

[00:28:12.323]

Yeah, yeah.

[00:28:14.092]

We're looking to analyze a management team across a variety

[00:28:18.196]

of metrics. The two big ones would be we're looking for management

[00:28:22.133]

teams that have good strategic understanding and

[00:28:26.104]

vision so that they can think through their competitive landscape, they

[00:28:30.208]

can talk through their addressable market,

[00:28:34.579]

what's driving the growth of that addressable market, what are the threats to

[00:28:38.016]

that addressable market, what are they doing to prepare and be front-footed?

[00:28:42.020]

That's a very subjective conversation.

[00:28:44.789]

The second thing that we're really trying to make sure is

[00:28:49.194]

that they have strong financial acumen

[00:28:53.131]

as well.

[00:28:55.734]

Having a giant addressable market doesn't do anything for the

[00:28:59.671]

shareholder unless you're converting that into high returns on

[00:29:03.708]

capital and free cash flow.

[00:29:07.045]

Driving growth with no profits is not helpful.

[00:29:10.281]

We're driving growth that you've given away to the customers or you've given

[00:29:13.852]

away in stock-based comp, again, not helpful.

[00:29:18.957]

That would be the second pillar that we're looking for.

[00:29:21.626]

Finally, we want alignment. Alignment can come in a variety of different ways.

[00:29:25.597]

Clearly, if you're invested alongside a founder who owns 50

[00:29:29.801]

or 60% of a company, which we do a lot of, you have alignment.

[00:29:34.539]

But in a lot of cases there's agency issues so you want

[00:29:39.077]

management teams who have taken that financial acumen and

[00:29:43.214]

they've applied it in KPIs that actually drive value

[00:29:47.285]

for the shareholders.

[00:29:49.154]

If you're sitting down with a company and they're telling you, oh, we want to

[00:29:51.089]

make all these acquisitions and do all these things and you ask them what are

[00:29:54.692]

their KPIs and its sales growth, well, you can buy your way into getting paid a

[00:29:58.596]

lot of money when the shareholders suffer. What they need to be focused on

[00:30:02.667]

would be our returns on investment, cash-on-cash returns,

[00:30:07.472]

paybacks, free cash flow per share growth.

[00:30:12.410]

You want to make sure that they're aligned with what we think drives value.

[00:30:15.880]

Great. That's wonderful. Maybe one last one for Morgan this time, can you

[00:30:20.118]

talk to us about our sell discipline and what drives the exits

[00:30:24.055]

or the trims in the portfolio?

[00:30:25.623]

Sure.

[00:30:27.759]

As we think about exiting a

[00:30:31.863]

position we're constantly comparing our estimate of

[00:30:36.434]

fair value to where the stock is trading.

[00:30:39.437]

Sam and I have a very large spreadsheet that

[00:30:43.608]

sort of houses our estimate of fair value.

[00:30:46.978]

For most companies that estimate can sort of change over time so I don't want

[00:30:50.949]

to give you the impression that the minute a stock in the spreadsheet says it's

[00:30:55.186]

at fair value we automatically send it to the desk to get sold because

[00:31:00.024]

companies' earnings power and free cash flow power, that normalized number that

[00:31:03.695]

Sam mentioned before, that can change over time.

[00:31:07.031]

What we spend most of our time doing is trying to evaluate and update

[00:31:11.302]

what that normalized earnings power is for business and

[00:31:15.640]

comparing that to the stock price.

[00:31:18.543]

When we get sort of close to that estimate we

[00:31:22.547]

will most likely sell.

[00:31:24.015]

The sell decision is also based on what the opportunity set is at a given

[00:31:27.986]

time. Maybe just as an example, during the Liberation Day

[00:31:32.223]

sell-off we had stocks in our spreadsheet,

[00:31:36.394]

we still had decent amount of fair value but we also had a number of

[00:31:40.431]

names that were on our watch list that Sam mentioned before, those stocks

[00:31:44.569]

gapped down 50%.

[00:31:46.771]

There was a lot of fear in the market, there were unknowns about what near term

[00:31:50.675]

earnings power were going to be because of the tariffs so in some cases we

[00:31:54.479]

trimmed names that were in the portfolio that maybe did have a little bit more

[00:31:58.449]

upside to buy ones that we were really getting paid to

[00:32:02.553]

just wait for earnings to normalize.

[00:32:03.988]

We're dynamic.

[00:32:07.091]

I lied, I want to ask one more question because this is a really important one.

[00:32:09.961]

I think one of the things that distinguishes this portfolio, Global Intrinsic

[00:32:12.664]

Value, over time is that we delivered really good returns

[00:32:17.001]

and we have avoided ...

[00:32:18.736]

we have a very low batting average of investing in value traps.

[00:32:21.639]

Can you tell us how we avoid them and why we've

[00:32:25.743]

been so successful in that space?

[00:32:28.413]

I think one of the key things is that folks should take away here,

[00:32:31.449]

deteriorating fundamentals can

[00:32:35.653]

be cyclical or they can be secular. Secular, we're really trying to avoid

[00:32:40.425]

secularly declining businesses.

[00:32:42.126]

Mistakes do happen but that is not what we're trying to ...

[00:32:46.130]

the glide path down is expected to be down 10 and we think it's down 9

[00:32:50.568]

so there's a little bit of value there. That's not really what we are doing.

[00:32:53.671]

Short term pain like that semi-cycle where we think there's lots of secular

[00:32:57.041]

opportunities but it's being masked in the short term, that's the type of

[00:33:01.179]

value we're trying to unlock.

[00:33:04.248]

I'm meant to ask a couple of personal questions, just give the audience

[00:33:08.319]

a sense for who you are. Morgan, what is a typical weekend ritual

[00:33:12.523]

for you?

[00:33:13.324]

I am an Uber driver for my children's weekend activities.

[00:33:15.827]

Five stars, I heard.

[00:33:19.530]

Definitely not five stars.

[00:33:20.932]

Pro bono. Not five stars. I wish I had a more exciting answer but that's the

truth.

[00:33:22.600]

Sam, your favourite season?

[00:33:25.169]

I like the shoulder seasons around the summer so late spring and early fall.

[00:33:29.407]

Lots of ability to be outside, be active, play with the kids.

[00:33:34.612]

Soccer, I'm sure. If you could swap lives with someone for a day, Morgan,

[00:33:38.583]

who would it be?

[00:33:39.384]

I'm going to sort of answer this differently.

[00:33:41.285]

I would like a master class, so this person is not alive and I think most

[00:33:45.123]

people in the room will know who I'm talking about but if you don't you should

[00:33:46.924]

look him up, I would like a master class in grit and resilience from Terry Fox.

[00:33:55.666]

My husband's Canadian which is how I know who he is.

[00:33:59.370]

He's amazing.

[00:34:00.571]

The secret is revealed.

[00:34:01.105]

My kids have his poster in their room.

[00:34:03.441]

Sam, I guess something you're proud of in your personal

[00:34:07.378]

life, not in investing.

[00:34:08.846]

I'm most proud of my kids and I like to watch them achieve their goals.

[00:34:12.583]

That's where I spend my time outside of work.

[00:34:15.620]

Okay, with that we are on the button, 10:50.

[00:34:17.789]

Thank you so much for the time and the attention and thank you guys for

[00:34:21.926]

engaging with us.

[00:34:23.594]

Thanks for watching or listening to the Fidelity Connects

[00:34:27.532]

podcast. Now if you haven't done so already, please subscribe to Fidelity

[00:34:31.669]

Connects on your podcast platform of choice.

[00:34:34.472]

And if you like what you're hearing, please leave a review or a five-star

[00:34:37.308]

rating. Fidelity Mutual Funds and ETFs are available by working with

[00:34:41.279]

a financial advisor or through an online brokerage account.

[00:34:44.649]

Visit fidelity.ca/howtobuy for more information.

[00:34:48.352]

While on Fidelity.ca, you can also find more information on future live

[00:34:52.190]

webcasts. And don't forget to follow Fidelity Canada on YouTube, LinkedIn,

[00:34:56.327]

and Instagram.

[00:34:58.329]

We'll end today's show with a short disclaimer.

[00:35:01.199]

The views and opinions expressed on this podcast are those of the participants,

[00:35:05.036]

and do not necessarily reflect those of Fidelity Investments Canada ULC or

[00:35:08.973]

its affiliates. This podcast is for informational purposes only, and should not

[00:35:12.977]

be construed as investment, tax, or legal advice.

[00:35:15.513]

It is not an offer to sell or buy.

[00:35:17.815]

Or an endorsement, recommendation, or sponsorship of any entity or securities

[00:35:22.153]

cited. Read a fund's prospectus before investing, funds are not guaranteed.

[00:35:26.958]

Their values change frequently, and past performance may not be repeated.

[00:35:30.528]

Fees, expenses, and commissions are all associated with fund investments.

[00:35:34.365]

Thanks again. We'll see you next time.