RS Investments manager Joe Wolf says there is an extraordinarily attractive set of high-quality, stable businesses that underwent positive structural changes during the downturn.
Ryan Leggio: Stepping back a little bit, you get to value businesses as small as a $250 million market cap all the way up to $100 billion-plus market cap, and we've been reading recently some famous value managers saying that these higher-quality, large-cap businesses are the cheapest they've been in 20, 30, even 50 years.
Are you seeing the same things when you're looking at first glance on your businesses. I know that you have a very focused portfolio, so even if a particular area is expensive, you can still buy the cheapest in those areas, but are you seeing similar things in the large-cap space?
Joe Wolf: A number of questions there. First of all, the way we're staffed, we have 15 investment professionals. 12 of them have over 10 years experience, and we only have 100 unique names across our entire business, so small-cap, mid-cap, large-cap, and natural resource sector fund as well. So the math would say that about every three or four months each of us needs one new name. We would argue that regardless of what's going on in aggregate valuations that we will always be able to find one name every three or four months.
But you do bring up an interesting point. If you look at what has worked in the last 18 months, it has been a lower-quality, low P/E, low price to book, higher leverage type environment, and certainly the high quality, large-cap, very good balance sheet, very high return businesses in a lot of respects they've been left out in some of this participation.
I mean, it's a very fun exercise right now to look up and down our large-cap product. We have roughly 33 names and to look at the quality of business, the diversity of business, the stability of businesses, the quality of management teams, the quality of balance sheets with the valuation backdrop, I mean, this is an extraordinarily attractive amount of merchandise.
But in our small and mid-cap space we also right now have more ideas than capital. The amount of debate for capital amongst our people is fierce right now, and I think what's happened is that the aggregate amount of structural changes that has occurred in the U.S. economy has been very significant.
When you get a lot of wind in your face, when you have the feet to the fire, companies are forced to make the tough decisions that they aren't forced to make when everything is going well. And so as an economy, we've taken out a lot of cost. We have rationed capex. We've sold underperforming divisions. We've closed down unprofitable lines. There is a lot of operating leverage that's embedded across the board, and we're all about structural change. We're looking for companies that are going through these structural changes that will lead to improving returns. And so again the amount of aggregate structural change has been very positive for our idea generation part of our process.
