A May gala event presented by The Jewish Theological Seminary (JTS) honored Richard S. Pzena, founder and chief investment officer of Pzena Investment Management, a participant in and supporter of Jewish adult education at JTS and elsewhere. JTS was kind enough to provide ValueWalk a press. Besides for Richard Pzena, Joel Greenblatt, and Leon Cooperman also spoke at the event. The moderator of the event was CNBC’s Scott Wapner. See ValueWalk’s informal notes below.
Scott Wapner Roundtable With Leon Cooperman, Joel Greenblatt, Richard Pzena
Scott Wapner: Lee, what’s it like to be a hedge fund manager today?
- The most respected writer at Fortune is Carol Loomis. I gave you an article from 1970 about hedge funds being dead. She claimed it was over. The hedge fund industry now has nearly $3T in AUM.
- Money goes where money is treated best. In 2000-2007 – money came in from people who didn’t know what they were doing. The average hedge fund in 08 lost 16%. S&P lost 34%. Hedge funds did their job but then they screwed up by putting up gates. The best way to raise money is like Madoff – say I’m closed. The best way to scare money off – say they can’t get their money back.
- People have gotten tired of paying 2 and 20 to underperform an index. But that’s what hedge funds do in a bull market. Short exposure means you’ll underperform. We’re going through a downturn in the hedge fund industry. I’m getting my share of withdrawals. I wouldn’t be concerned. It’s a downturn. Don’t worry about your hedge fund friends; they’re doing fine.
Scott Wapner: Thoughts on the current political environment? Is it going to be a headwind for markets?
Richard Pzena: If you’re worried about how the election is going to affect the market, you shouldn’t be in the market. This isn’t a short term game. You’re going to get lucky or get wiped out doing that. I’ve watched over the years as corporate management teams dealt with every kind of political environment. They figure it out. Corporate America adapts.
Joel Greenblatt: Big picture – it doesn’t affect the way we invest. There are always stocks that are out of favor. Ones we can buy cheaply and then ones priced too high. There’s always opportunities. As far as the country is concerned, “capitalism is the worst system except for all the others.” We have freedom in property rights; rule of law; one person can’t ruin it that much. It’s very hard to get stuff done in Washington and hopefully that continues!
Leon Cooperman: Young people are dissatisfied with lack of economic opportunity. I agree with Rich and Joel. “Washington is an island surrounded by reality.” How are these two candidates our choices?
Scott Wapner: Are value stocks back?
Richard Pzena: it’s probably too early to answer but I have an opinion. We just finished the longest anti-value period in 50 years. You have to go back to 2011 to find a period of time where, broadly speaking, value did well. You have to go back 10 years to find a consistent time. It’s been a bad period for value. This all cycles around the world’s view on the economy. As the world is getting long in the tooth in an economic recession and recession fears set in, the market tends to bifurcate and people pile into companies that they think will be immune to the next downturn. We’re far along in this “downturn” although I’m not an economist. My observation would be that many excesses in the world were based around the idea of China’s “insatiable” demand for industrial goods and energy.
Companies went to great lengths to try and satisfy that demand. They went too far – expanding capacity beyond what was reasonable in long term. The growth rates, the stimulus from China faded – we got caught with excess capacity – and now we’re in an economic downturn that is constrained to the capital-intensive parts of the market. So my simplistic view – there’s not many signs of excesses in consumer spending or debt or home construction. Autos may be in excess. Generally speaking, the world has been doing okay. Then we had a boom of capital spending that has turned into a bust. I think that bust is mostly over. We collapsed drilling for oil. We collapsed new mining capacity. It’s been multiple years of reduction in revenue in capital equipment companies.
Leon Cooperman: I define a value stock as: if I own it, it’s a value. I find a tremendous number of values. If you’re a capitalist; you have to be positive on oil. Current rates of cash burn are unsustainable. For example, take out OPEC’s capex and social costs and they’re burning $500B a year. Oil will be $50-60 next year. Whether stocks are discounting that is a different discussion.
Leon Cooperman: The market of today is not the one our fathers and grandfathers traded. Dodd frank. Demise of specialists. Demise of uptick rule. It’s a new game. The uptick rule worked for 70 years. In July 2007, they got rid of it for some reason. Now these momentum HFT’s are scaring people out of the market – including me! Whether the S&P is up or down 50 points in an hour – that’s not a real market!
Scott Wapner: Any stock picks?
Joel Greenblatt: The only book I wrote, that someone bought, was about buying a group of companies with certain characteristics. I always take a basket approach. For example, I like Apple – but to put it one way, I have a whole basket full of “apples.” Some people say that AAPL is the next BBRY, and some say it’s an ecosystem. The answer is probably in between those two. On average, my whole basket will do well as long as I stick to companies that are earning a lot relative to their price. It’s hard just to pick one. That said, AAPL is in my basket.
Leon Cooperman: “Only one?”
- Apple will be smaller and less profitable in three years. Nothing in the pipeline.
- Growth oriented? At 17x and $100B in cash – buy Google. If you want cyclicals – buy UAL. Bought back a ton of stock in the open market. Constructive activism. Generating a ton of cash.
- Can’t lose money? I can’t stand mgmt actually, but it’s called tetragon financial – 7% yield – $100m buyback – earns 14% on equity. 7% yield and it’s 4x covered.
- One with hair: ASPS. Former CEO owns 35%.
- Bubble in fixed income. Stock market is 1/10th of a standard deviation away from normal. Bubble isn’t in equities.
Scott Wapner: SAC said the bull market is ending. How do you answer that?
Richard Pzena: I probably agree. My entire adult life – I’ve watched rates go from 20% to 0%. In that environment, no matter what you bought, you made a lot of money. That’s over. Now it’s hard.
Joel Greenblatt: We looked back at history to answer that with numbers. We looked at the S&P over the last 25 years and looked at how valuations today compared to those 25 years. We’re in the 28th percentile – market has been cheaper 72% of the time. The market has been up an average of 5-9% at these levels historically. Less than past 25 years of 10-11% per year. You’ll probably get 5-9% from here.
Leon Cooperman: Templeton’s arc – pessimism ended in 2010. We’re somewhere between optimism and skepticism. I don’t see euphoria. Individuals have taken $800B out of equity mutual funds this cycle. Bear markets don’t suddenly appear. They come from four things:
- The market smells recession – not present
- Market isn’t euphoric in valuations – 16-17x and zero rates – not present
- Hostile Fed. Nope. We have two big problems. Extreme Muslim fundamentalism and income disparity. The fed understands the 2nd one.
- Significant geopolitical event – Russia missiles to Cuba etc.
The market has repriced. Take 2012-2015 – economy grew at 2.1% on average. Corporate profits grew 5%. Market grew 16.5% per year. That doesn’t happen. Market ought to grow 5% like Joel said – then 2% in dividends so 7% – we’re closer to end than beginning but definitely not near end. Everyone’s running accommodative policy. What are you supposed to do with cash? Half the stocks in the S&P yield more than bonds. Stocks are the favorite asset. We’re not looking for 15-17%. Maybe it’s over. The view is the markets okay.