Who's Got Real Pricing Power?

Ryan Leggio: The other secular theme you are working off of right now is companies that have pricing power. Can you talk a little bit about how you arrived at that secular theme?

Jerry Jordan: Essentially, since 1998--I know that seems crazy--but since 1998, in the Russian debt crisis, the Asian debt crisis, that was sort of the tipping point for the globe in terms of tipping from a mildly inflating world to a mildly disinflating world. And I think we're heading into more of a deflationary world.

So we've got lots of capital. I know this sounds crazy after last year and the decline in all the asset markets, but we still have tons of capital. If you look at money in money market funds, you look at sovereign wealth funds, there are still enormous amounts of capital out there.

So there's plenty of capital to chase after various lines of business if they can. We have [built] over-capacity [in] the solar business in the last two years. This is a business that's going to be enormous and we're going to sell millions and millions and millions of solar panels, and we've already got 30%-40% excess capacity in solar.

At the same time, with the number of people in India and China, we're probably over-capacity in labor as well. So capital is over-capacity. Labor is over-capacity. So I think we are in, essentially, a disinflationary to deflationary environment, and it's going to be very hard to have pricing power.

So the only way to get pricing power is to either have a product or a patent on a product, so that nobody else can sell that product or even sell something like it. Or you have such market dominance--like the Apple iPod, for instance, or the Google search engine--where they are sort of the de facto winner.

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Sure, there are other people that do the service or product, but the public has spoken, and they've been anointed the de facto winners. I mean, Google's got 70% market share. Bing or no Bing, they've got a 70% market share.

So we're investing in a lot of companies like Google, which we still own, some of the biotech companies, Celgene, Gilead, Amgen, some of the diagnostic companies like Myriad Genetics, which I think is a really cheap stock right now who's got a real next-generation breast cancer analysis toolkit that they've got a patent on.

On the other side of the equation, we want to own commodity companies where arguably they've got no pricing power unless the commodity goes up. But as we were talking about before, we believe that a lot of the commodities are secularly challenged for supply, and therefore there's an embedded bid to pricing.

Oil prices may fluctuate, but if you look at a one-year moving average of oil prices, it has been climbing. There are very few things in the world that have been climbing. Most things have been going down.

You look at clothing prices, the dollar, there are a lot of things that have been declining for a while, and I think are going to continue to be challenged because of supply.

So that ends up being sort of the two big groups we own. Everything in the middle for us isn't interesting. Most of technology, especially hardware, isn't interesting to us. We have no interest in the banks. We had big holdings in the banks in March when everyone thought the world was ending. We were aggressively buying banks. We have now eliminated all of them from our portfolios, which shows you we're not exactly a benchmark-hugging closet-indexer.

We've sold most of our technology stocks. We're not bulls on staples. A lot of people like Coca-Cola, they like Procter & Gamble, they like Nestle, as examples of people that can hold pricing.

I don't get the impression that that's true. If you look at volumes and revenue growth in the United States for Coke, it has been abysmal for the last few years. I think in the slow economy in the developed world, people will start using the cheaper toothpaste, the cheaper toothbrush, the cheaper razor blade. They'll use the razor blade 15 times instead of 13 times.

I think you're going to find that for a lot of these consumer packaged goods companies, they're going to have a very hard time holding price against store brand products. At the same times we've been talking about, we think the CPI has bottomed and is starting up.

And so the raw material prices that have been a tailwind for them the last six to nine months will start being a headwind as we get out of this year. And so you could see some margin compression in a lot of those companies.