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P&L: Hologic's 3D Technology Finds Early Stage Cancer, CEO Says · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg pm L podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether you're at the grocery store
• 0:16
  Speaker 1: or the trading floor. Find the Bloomberg p L podcast
• 0:20
  Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. Logic shares
• 0:31
  Speaker 1: right now are up more than eight percent. They reported
• 0:34
  Speaker 1: earnings after the bell yesterday that beat analysts estimate and
• 0:39
  Speaker 1: uh we have a special guest with us, Steve McMillan, chairman,
• 0:43
  Speaker 1: president and CEO of Logic to explain a little bit
• 0:47
  Speaker 1: more about what happened in the past quarter and why
• 0:50
  Speaker 1: it was so successful. Thank you so much for joining us.
• 0:52
  Speaker 1: Thank you, Lisa, thanks for having us so um So,
• 0:55
  Speaker 1: what happened? What sort of drove the better than expected earnings? Really?
• 0:58
  Speaker 1: I think it was broad based growth. We have three
• 1:00
  Speaker 1: key businesses in the company. We have the mommography business,
• 1:03
  Speaker 1: where we've become the world leader, especially behind our genius
• 1:06
  Speaker 1: three D technology. We also a very strong molecular diagnostics
• 1:09
  Speaker 1: business that has been the world leader in both cervical
• 1:13
  Speaker 1: cancer testing as well as reproductive health, so all kinds
• 1:16
  Speaker 1: of sexually transmitted infections. That business is performing very very well.
• 1:20
  Speaker 1: And then we have a guy in surgical division, which
• 1:23
  Speaker 1: is really for endometrioliblation as well as fibroid removal through
• 1:27
  Speaker 1: the uterus, and that business is also performing way above expectations.
• 1:31
  Speaker 1: It had a seventh straight quarter of double digit growth,
• 1:34
  Speaker 1: So it's really broad based growth. And as you know,
• 1:37
  Speaker 1: in a very skittish healthcare and investor environment right now,
• 1:41
  Speaker 1: we always kind of want to be a safe port
• 1:42
  Speaker 1: in the storm, and and we showed we came through
• 1:45
  Speaker 1: so very proud of our team. Well, I do want
• 1:47
  Speaker 1: to raise one thing. I mean, I would imagine that
• 1:50
  Speaker 1: Logic is sort of at the forefront of the controversy
• 1:54
  Speaker 1: over mammograms and how effective they are. And you know,
• 1:57
  Speaker 1: there's some talk about removing the recommendation that the men
• 2:00
  Speaker 1: get mamograms, which I'm sure is leading into insurance and
• 2:02
  Speaker 1: whether or not they'll cover it. How much is that
• 2:06
  Speaker 1: affecting Logic and the business going forward. We we really
• 2:10
  Speaker 1: see it as a great opportunity in that so many
• 2:12
  Speaker 1: of the shortfalls and shortcomings of traditional mamography or mammograms
• 2:18
  Speaker 1: has really been the old technology, and because we've brought
• 2:21
  Speaker 1: our three D technology to the marketplace just in the
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  Speaker 1: last few years, it's really addressing all of the key
• 2:28
  Speaker 1: issues historically. So if you think about it, what are
• 2:30
  Speaker 1: the key issues historically? One is, you know, false positives.
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  Speaker 1: Our three D technology dramatically reduces the amount of false positives.
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  Speaker 1: So what does that mean in real terms? You know,
• 2:40
  Speaker 1: fiftcent fewer false positives means women are not having to
• 2:44
  Speaker 1: go back and have biopsies that aren't needed, so you
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  Speaker 1: can see things so much better. The other part is
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  Speaker 1: that we're detecting early stage cancers about fifteen months earlier
• 2:57
  Speaker 1: and or depending on how look at the data, we're
• 2:59
  Speaker 1: getting about more positives in terms of effectively diagnosing the
• 3:05
  Speaker 1: breast cancer. So what's happening is a lot of the
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  Speaker 1: research and the guidelines are based on old mammograms. Everything
• 3:12
  Speaker 1: that we've brought with three D is effectively addressing those shortcomings.
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  Speaker 1: But have fewer women been getting mamograms? And is that
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  Speaker 1: affecting your business? Not really, we're seeing you know, actually,
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  Speaker 1: part of the strength of our business over the last
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  Speaker 1: couple of years has been the adoption of our three
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  Speaker 1: D technology. So even though there's pressures on healthcare costs.
• 3:30
  Speaker 1: There are some controversies. You know, the USPSTF, which is
• 3:35
  Speaker 1: the US Prevented Services Task Force Society, had come out
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  Speaker 1: a year ago suggesting that women should wait until they're
• 3:43
  Speaker 1: fifty for their first mammogram. I think everybody on this
• 3:46
  Speaker 1: planet has either a friend or someone in their family who,
• 3:51
  Speaker 1: if they waited until fifty, would be dead. Quite frankly,
• 3:54
  Speaker 1: my own mother was diagnosed almost twenty years ago, so
• 3:57
  Speaker 1: to wait until you're fifty is just completely nonsensical. And
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  Speaker 1: so I think what we've actually seen is despite the
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  Speaker 1: USPSTF guidelines, the American College of Radiology and the radiologist
• 4:09
  Speaker 1: who were close to this are absolutely going against that,
• 4:12
  Speaker 1: and they know that really starting at forty and frankly,
• 4:15
  Speaker 1: if you've had a history of breast cancer, you should
• 4:17
  Speaker 1: start sooner. You know, we all know, you know, there
• 4:19
  Speaker 1: are women in their twenties and thirties diagnosed. So the
• 4:22
  Speaker 1: whole key in breast cancer it's it's an eminently deal.
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  Speaker 1: You know, it's a disease you can totally deal with
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  Speaker 1: if you catch it early, and that's what three DM
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  Speaker 1: ammograms are helping to do. So we actually feel we're
• 4:35
  Speaker 1: on the right side of it, and we're reducing costs,
• 4:37
  Speaker 1: we're improving the patient outcomes, and it's good for everybody
• 4:41
  Speaker 1: in the system, the patient, the payer, the radiologist, and
• 4:45
  Speaker 1: frankly our company. You mentioned. If you're reducing the cost,
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  Speaker 1: what specifically, well, the big cost in breast cancer is
• 4:53
  Speaker 1: when you start to deal with it later. If you
• 4:54
  Speaker 1: get somebody who stage three or stage four, you're dealing
• 4:57
  Speaker 1: with full blown you know, let's face it mustaqu to me,
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  Speaker 1: is radiation, chemo, all of that. When you can catch
• 5:05
  Speaker 1: breast cancer in its very early stages, you can have
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  Speaker 1: much more les. You know, basically a less intervention is needed.
• 5:13
  Speaker 1: And so if you can get it early, when it's
• 5:15
  Speaker 1: small and it hasn't started to fantasticize, you deal with it.
• 5:18
  Speaker 1: And that's where the big win is both in terms
• 5:21
  Speaker 1: of survival rates, but it's also dramatically less in cost.
• 5:24
  Speaker 1: So that's why a win win. Something like SIGNA just
• 5:28
  Speaker 1: in the last couple of months is now covering three
• 5:30
  Speaker 1: D mammograms and we think that's clearly the trend that's
• 5:33
  Speaker 1: occurring because they're realizing it's better for the patients. It's
• 5:36
  Speaker 1: also frankly better for their caution, seconds got to be quick.
• 5:38
  Speaker 1: Does the election outcome impact you guys, not really? I
• 5:41
  Speaker 1: think you know again, we've even Donald Trump says he
• 5:44
  Speaker 1: wants to change in terms of Obamacare. At the end
• 5:46
  Speaker 1: of the day, we are reducing healthcare costs and we're
• 5:49
  Speaker 1: improving patient outcomes. We think it puts us in a
• 5:51
  Speaker 1: good place. Steve mcmilany's chairman Presidency of Logic, Morble mass
• 5:55
  Speaker 1: Is where they're based in our New York studio on
• 5:57
  Speaker 1: this Thursday, this is Bloemberg. Well, we want to talk
• 6:09
  Speaker 1: a bit about Wells Fargo today because it's back in
• 6:11
  Speaker 1: the news, the SEC investigating sales practices at the company
• 6:15
  Speaker 1: and our Bloomberg exclusive how the stars at the company
• 6:19
  Speaker 1: climbed as abuses flourished beneath them. Let's talk about it
• 6:22
  Speaker 1: all with us. As Laura Keller, financial reporter at Bloomberg News,
• 6:25
  Speaker 1: she's here with Elliot Stein's senior litigation analyst at Bloomberg Intelligence.
• 6:30
  Speaker 1: First off, Lord, let me start with you. Um, talk
• 6:32
  Speaker 1: to me about what was going on at the company.
• 6:35
  Speaker 1: We know about these fake accounts, these fraudulent accounts. A
• 6:38
  Speaker 1: lot of people lost their jobs as a result. But
• 6:40
  Speaker 1: what some of the senior people. They did just fine,
• 6:43
  Speaker 1: right exactly, And this is the story. UM, we hope
• 6:46
  Speaker 1: and I think it accomplished this UM you know that
• 6:48
  Speaker 1: was looking at accountability, so it really did focus more
• 6:51
  Speaker 1: on these senior managers and senior levels of people rather
• 6:54
  Speaker 1: than what we already know the company has you know,
• 6:56
  Speaker 1: fired these very low level workers. UM. So what we
• 7:00
  Speaker 1: essentially chronicled here was really just this generation of executives UM,
• 7:05
  Speaker 1: who rose through the ranks even while all of these
• 7:09
  Speaker 1: practices were going on. UM. These were very very ambitious people.
• 7:13
  Speaker 1: A lot of them came out of California, some of
• 7:15
  Speaker 1: them specifically out of southern California, UM, where we already
• 7:18
  Speaker 1: know from the Fortums former CEO excuse me, John Stump UM,
• 7:22
  Speaker 1: where a lot of these problems were happening. UM, and
• 7:25
  Speaker 1: then sort of chronicled the story of these UM Southern
• 7:29
  Speaker 1: California and California stars fanning out across the country and
• 7:33
  Speaker 1: therefore sort of bringing these sales practices that they had
• 7:36
  Speaker 1: you know, come to know and and used um throughout
• 7:40
  Speaker 1: their career, you know, to these other places like Florida
• 7:42
  Speaker 1: or like Texas. Well, hold on a second, and these
• 7:45
  Speaker 1: star managers are they immune at this point. I mean,
• 7:48
  Speaker 1: the story seems to suggest that some of them could
• 7:51
  Speaker 1: get fired. Still, yes, I mean, I want to be clear.
• 7:54
  Speaker 1: In the story, we do name many particular managers. We did,
• 7:58
  Speaker 1: um speak to some one who, um we note in
• 8:01
  Speaker 1: the story who told us that indeed there are some
• 8:04
  Speaker 1: managers that the company executives have already identified to be fired. Um,
• 8:09
  Speaker 1: but we don't We're not able to say at this
• 8:11
  Speaker 1: point whether those are the same people. So there's gonna
• 8:14
  Speaker 1: be clear on that. Well, I'm curious to how this
• 8:16
  Speaker 1: all folds. And Elliott, let's bring you in, senior litigation
• 8:18
  Speaker 1: analyst at Bloomberg Intelligence, and we're also talking with Laura Keller,
• 8:20
  Speaker 1: financial reporter at Bloomberg News. So I saw the headline
• 8:23
  Speaker 1: this morning about the SEC investigating the sales practice at
• 8:27
  Speaker 1: well before I thought, oh okay, another chapter. What does
• 8:30
  Speaker 1: this mean? How does it kind of maybe playing too
• 8:32
  Speaker 1: some of what Laura was talking about? Right, Well, it
• 8:34
  Speaker 1: just it shows that this continues to be in evolving
• 8:37
  Speaker 1: and growing story that the bank is really trying to
• 8:40
  Speaker 1: you know, rapids hands and head around and they haven't
• 8:43
  Speaker 1: quite yet. It feels like right right, Um, you know,
• 8:45
  Speaker 1: I think they've been criticized. Well, it's interesting because the
• 8:48
  Speaker 1: SEC investigation. First of all, it's not not really a surprise.
• 8:52
  Speaker 1: I mean, how could they not that and not only that, right,
• 8:55
  Speaker 1: how could they not after the Department of Justice is
• 8:57
  Speaker 1: investigating them? UH, states are invest to gain in them,
• 9:00
  Speaker 1: including California. But three U. S. Senators sent the SEC
• 9:03
  Speaker 1: a letter saying you should investigate Wells far ago UM.
• 9:07
  Speaker 1: And you know, the focus will probably be on whether
• 9:10
  Speaker 1: the bank should have disclosed in their filings that they
• 9:14
  Speaker 1: were being investigated for these things about the CFPV and
• 9:16
  Speaker 1: the o c C. Nothing really was disclosed until the fine,
• 9:20
  Speaker 1: the hive million dollar fine in September, even though these
• 9:24
  Speaker 1: things have been going on for year years, including lawsuits
• 9:28
  Speaker 1: UM and investigations by the City of Los Angeles. I
• 9:31
  Speaker 1: want to talk about that. As far as the expense
• 9:33
  Speaker 1: of the litigation, you noted that they increase their litigation
• 9:37
  Speaker 1: reserves by about seven hundred million dollars UH since the
• 9:41
  Speaker 1: first quarter. UM. Is this is this enough? UM? All right? So,
• 9:47
  Speaker 1: so today in their filing they disclosed that they're reasonably
• 9:50
  Speaker 1: possible litigation costs beyond reserves or one point seven billion
• 9:54
  Speaker 1: dollars as of September UM the same number at the
• 9:58
  Speaker 1: end of June three. For June thirty was one billion. So,
• 10:01
  Speaker 1: like you said, they increased by seven hundred million dollars UM.
• 10:07
  Speaker 1: It's unclear whether it will be enough. What's interesting is
• 10:10
  Speaker 1: um that it's potentially not the fake account scandal may
• 10:13
  Speaker 1: not be even the biggest um litigation cost if they'd
• 10:17
  Speaker 1: already we knew they'd already reserved the billion dollars. They're
• 10:20
  Speaker 1: still being investigated by the Justice Department's RMBS task Force,
• 10:24
  Speaker 1: which has been in the news because of the anticipated
• 10:27
  Speaker 1: Deutsche Bank settlement and settlements with other European banks. Wells
• 10:31
  Speaker 1: Fargo is one of one of one of the few
• 10:33
  Speaker 1: U S banks that still has to settle with that
• 10:35
  Speaker 1: task force. Well, go ahead, No, I was wondering the
• 10:38
  Speaker 1: lore like in your story, So you think, you know
• 10:40
  Speaker 1: you profile, you know, you talk about one individual Kim Young, Um,
• 10:44
  Speaker 1: you know who? You know who? Who was I guess
• 10:47
  Speaker 1: not senior senior or was she senior? Um? Pretty senior? Yeah.
• 10:50
  Speaker 1: I mean most of the people that we talked to
• 10:52
  Speaker 1: what they call regional presidents or even beyond that, I
• 10:55
  Speaker 1: mean within the retail bank, they're very senior people, um
• 10:59
  Speaker 1: just not senior you would think, you know, sea level
• 11:01
  Speaker 1: sweet for the whole company. Like, I wonder how much
• 11:03
  Speaker 1: of this investigation, whether the SEC and others will eventually
• 11:06
  Speaker 1: come back to some of those senior people who were
• 11:09
  Speaker 1: rising in the ranks as all of this was going on.
• 11:11
  Speaker 1: We know John Stump certainly is gone and has taken
• 11:14
  Speaker 1: a fault because of this, but you wonder how much
• 11:17
  Speaker 1: we'll trickle down. Coming off the financial crisis, it felt
• 11:19
  Speaker 1: like so many financial executives we're not prosecuted at all.
• 11:23
  Speaker 1: So I'm just curious if it'll if it will play
• 11:25
  Speaker 1: out here. Well, yeah, and I think that's a really
• 11:27
  Speaker 1: interesting question. I don't think we know the answer to
• 11:28
  Speaker 1: that yet and what authorities themselves will focus on. But
• 11:31
  Speaker 1: I think it's very interesting in the story that you know,
• 11:33
  Speaker 1: we note that the you know, when you go back
• 11:36
  Speaker 1: to these exacts, um, the that have identified people already
• 11:39
  Speaker 1: for firings, we we you know, in our story talk
• 11:42
  Speaker 1: about how well, actually they don't want to fire them
• 11:44
  Speaker 1: yet they're delaying this because they actually want to use
• 11:47
  Speaker 1: those people to an aid the investigation. They like that
• 11:50
  Speaker 1: inquiry to keep going. So you know, whether that means
• 11:53
  Speaker 1: they you know, eventually take the full brunt of us.
• 11:56
  Speaker 1: You know, I don't know, We'll have to see what
• 11:57
  Speaker 1: the investigation finds. You know, I'm looking at well Frago
• 12:00
  Speaker 1: shares right now. Year to date, they're down about thirteen percent. Uh.
• 12:04
  Speaker 1: You just have to wonder, given all of this uncertainty,
• 12:07
  Speaker 1: given potential turnover in the upper ranks of management that
• 12:11
  Speaker 1: are below the sea level suite Laura, like you're talking about,
• 12:14
  Speaker 1: you have to wonder, you know, what, what are going
• 12:16
  Speaker 1: to be the implications. I mean when you talk to investors,
• 12:18
  Speaker 1: what are they say? Yeah, I mean investors. It's funny.
• 12:21
  Speaker 1: Originally didn't really worry about this very much because it
• 12:23
  Speaker 1: was only million. But if I kind of pick up
• 12:26
  Speaker 1: on where you're going, Lisa, if this was so systemic
• 12:29
  Speaker 1: to the point, I mean, you know, our story chronicles
• 12:31
  Speaker 1: a lot of things here. You know, let's just say
• 12:34
  Speaker 1: we we found you know, the bank has around two
• 12:37
  Speaker 1: very senior managers. Let's just say, you know, wild guess,
• 12:40
  Speaker 1: and this is really based on just you know, hypotheticals.
• 12:42
  Speaker 1: What if of those people really had some hand in this?
• 12:46
  Speaker 1: Do you fire every single person? How do you actually
• 12:50
  Speaker 1: but hold on a second, Elliott, I want just real
• 12:52
  Speaker 1: quick and twenty seconds. I mean, what is sort of
• 12:55
  Speaker 1: the level of scrutiny that rises to legal accountability here? Well,
• 13:00
  Speaker 1: so you're just going back to the share, the share
• 13:03
  Speaker 1: losses um that actually goes to the SEC investigation, because
• 13:06
  Speaker 1: the issue there is whether it was material to the company.
• 13:09
  Speaker 1: You know, two million accounts sounds material um, but a
• 13:13
  Speaker 1: hundred and eight five million dollars may not have sounded
• 13:15
  Speaker 1: material to Wells Fargo. So that's sort of going to
• 13:17
  Speaker 1: be the issue that plays out there, which is exactly well,
• 13:21
  Speaker 1: Thank you so much, great conversation Laura Keller with a
• 13:24
  Speaker 1: fantastic story on the Bloomberg as well as Elliott Stein,
• 13:28
  Speaker 1: senior litigation analyst for Bloomberg Intelligence. Thank you so much
• 13:31
  Speaker 1: for being with us. This will be something that probably
• 13:33
  Speaker 1: will keep our attention for quite a few months to come,
• 13:36
  Speaker 1: so we'll keep an eye on it. Wells Fargo shares
• 13:39
  Speaker 1: slightly up, but overall this year they've been they've been
• 13:42
  Speaker 1: down quite a bit. This is Bloomberg right now, though,
• 13:53
  Speaker 1: we want to go back to some news we got
• 13:54
  Speaker 1: out of the UK this morning. A panel of London
• 13:57
  Speaker 1: judges deciding that the UK must hold a vote Parliament
• 14:00
  Speaker 1: before starting the two year countdown to Brexit. Let's talk
• 14:03
  Speaker 1: about what the implications of that decision, that legal decision,
• 14:07
  Speaker 1: what it all means. Kit Hillela's legal reporter at Bloomberg News,
• 14:11
  Speaker 1: was at the UK Supreme Court in London earlier today
• 14:14
  Speaker 1: and joins us from London at this hour. A Kit,
• 14:17
  Speaker 1: nice to have you here with Lisa and myself. So
• 14:20
  Speaker 1: what does this mean, Hi, Carol? What does it mean? Well,
• 14:25
  Speaker 1: the most important thing to remember is that this was
• 14:28
  Speaker 1: round one of a legal fight. Um. The government has
• 14:32
  Speaker 1: lost today, but it will be very quickly appealed to
• 14:36
  Speaker 1: the Supreme Court, who will ultimately have the final say
• 14:40
  Speaker 1: on this case. Okay, so um, But the markets are responding.
• 14:44
  Speaker 1: So it seems to indicate I mean there is some
• 14:46
  Speaker 1: significance here in that it's not going to be an
• 14:49
  Speaker 1: easy resolution, right, I mean even the Supreme Court how
• 14:54
  Speaker 1: long that will take a while? Right. Well, what they've
• 14:56
  Speaker 1: done is because because it's such an important question, they
• 15:00
  Speaker 1: us tracted. So the Supreme Court will hear the case quickly, um,
• 15:04
  Speaker 1: maybe as soon as December, and will probably make a
• 15:06
  Speaker 1: decision by January. UM. I guess the significance is that
• 15:11
  Speaker 1: if the Supreme Court agrees with the decision today and
• 15:14
  Speaker 1: there has to be a vote in parliament. That makes
• 15:16
  Speaker 1: it difficult for Thereason May to do a fast, hard Brexit,
• 15:20
  Speaker 1: which is what she wanted to do. It means they'll
• 15:22
  Speaker 1: have to consult Parliament, They'll have to be a vote.
• 15:25
  Speaker 1: It's going to take some time, it's going to be difficult,
• 15:27
  Speaker 1: and it's certainly going to going to affect the timetable. Okay,
• 15:30
  Speaker 1: And that's what I wanted to know. What were the
• 15:31
  Speaker 1: implications of having now the Parliament If it stays that
• 15:34
  Speaker 1: they have to vote you mentioned speed, that it's going
• 15:37
  Speaker 1: to slow down the process. If Thereason May was trying
• 15:39
  Speaker 1: to go much more quickly with this, and that they've
• 15:42
  Speaker 1: got a potentially consult parliament, what does that mean though? Then,
• 15:45
  Speaker 1: in terms of what a Brexit might ultimately look like.
• 15:49
  Speaker 1: I think most people accept that Parliament isn't going to
• 15:52
  Speaker 1: block Article fifty being triggered. It's not going to block
• 15:55
  Speaker 1: a Brexit, but Parliament wants to have a say in
• 15:59
  Speaker 1: how any deal will look and that makes it difficult
• 16:01
  Speaker 1: for the reason May. She has to go to negotiate
• 16:04
  Speaker 1: with other European nations about the terms of Britain's exit.
• 16:08
  Speaker 1: Now she has to go and do that with a
• 16:09
  Speaker 1: bunch of conditions from British lawmakers. That makes her job
• 16:12
  Speaker 1: a bit harder. Well, you know, I've got to I'm
• 16:15
  Speaker 1: a little confused. Can you help me out here? The
• 16:18
  Speaker 1: British on a lot of levels, but you know one
• 16:21
  Speaker 1: in particular, the British pound. You know, it gained on
• 16:25
  Speaker 1: the news, it gained quite a bit relative to recent history. Um.
• 16:30
  Speaker 1: I'm wondering whether this is a realistic kind of collective
• 16:34
  Speaker 1: effects cheering, or whether people are kind of uh getting
• 16:38
  Speaker 1: a little bit lost in the weeds here, because realistically
• 16:41
  Speaker 1: this just sort of creates more uncertainty, which could potentially
• 16:44
  Speaker 1: be negative for the economy. Right, Am I missing something here? No,
• 16:49
  Speaker 1: it's a fair point. It is. It is confusing, I think.
• 16:53
  Speaker 1: I think a lot of people are confused, especially even
• 16:55
  Speaker 1: legal reporters are confused by it. Um. I think traders
• 17:00
  Speaker 1: looking for any any sort of move that is going
• 17:02
  Speaker 1: to affect the Brexit timetable, and they're looking to trade
• 17:05
  Speaker 1: off any information. So in the middle of the trial,
• 17:08
  Speaker 1: the government's lawyers made a what I thought was quite
• 17:10
  Speaker 1: an obvious statement that they would have to be a
• 17:13
  Speaker 1: vote in Parliament eventually on whatever deal was reached. And
• 17:16
  Speaker 1: you know that news sent a pound up half a percent.
• 17:19
  Speaker 1: That's ridiculous. Of course they would have to vote on it.
• 17:22
  Speaker 1: So so so people are looking for any sort of news,
• 17:24
  Speaker 1: any indication of how long this is going to take.
• 17:27
  Speaker 1: And it is worth remembering that this legal. You know
• 17:29
  Speaker 1: that a potential, although very unlikely, outcome of this process
• 17:34
  Speaker 1: is that it makes Brexit impossible or too difficult, or
• 17:37
  Speaker 1: delays it for such a long period of time that
• 17:39
  Speaker 1: things change and maybe people are sort of trading on
• 17:41
  Speaker 1: that remote possibility. All right, so what's the next step.
• 17:46
  Speaker 1: The next step is that the government has said it's
• 17:47
  Speaker 1: going to appeal to the Supreme Court in the UK,
• 17:50
  Speaker 1: which is the highest court. That will happen very quickly
• 17:53
  Speaker 1: and we'll have a rerun of all the arguments from
• 17:55
  Speaker 1: both sides. The Supreme Court has a roughly fifty fifty
• 17:58
  Speaker 1: track record of allowing appeals or dismissing them, so you know,
• 18:03
  Speaker 1: you could make an argument that the government has a
• 18:05
  Speaker 1: has a fighting chance of winning at the highest courts,
• 18:07
  Speaker 1: and then the Supreme Court will make their decision in January. Okay,
• 18:10
  Speaker 1: So I'm looking up with the average hourly fee is
• 18:14
  Speaker 1: for lawyers in Britain, and it sounds like on average
• 18:18
  Speaker 1: it's about a hundred pounds an hour, which I guess
• 18:21
  Speaker 1: can be less than here, um, based on where the
• 18:24
  Speaker 1: pound is versus the dollar. But I mean, who's incurring
• 18:26
  Speaker 1: all of these legal fees? Um? Yeah, I think the
• 18:30
  Speaker 1: lawyers in this case are earning more than a hundred
• 18:32
  Speaker 1: pounds an hour. I would, I would think so. But
• 18:35
  Speaker 1: this is this isn't going to be inexpensive yet. Yes,
• 18:39
  Speaker 1: it is expensive to run these these cases in this country.
• 18:43
  Speaker 1: If you win your case, Um, the other side pays
• 18:46
  Speaker 1: your legal costs. So as of right now, the claimants
• 18:49
  Speaker 1: of one and the government will have to pay for everything. Um.
• 18:52
  Speaker 1: But is it is that the government versus the government here? No,
• 18:56
  Speaker 1: The claimants are a range of different people who have
• 18:58
  Speaker 1: an interest into laying or stopping Brexit. One of them
• 19:03
  Speaker 1: is Gina Miller. She's a she's an investment worker who
• 19:06
  Speaker 1: was sort of voted to remain in the EU. There
• 19:08
  Speaker 1: are various expat Brits living abroad. They're a diverse bunch
• 19:13
  Speaker 1: of people. Um. A few of the lawyers are acting
• 19:15
  Speaker 1: pro bono that they're doing it for free and you
• 19:18
  Speaker 1: know they've also raised funds using crowdfunding to pay for
• 19:21
  Speaker 1: this because there's obviously there's a there's popular support in
• 19:24
  Speaker 1: the UK for the idea of there being a vote
• 19:26
  Speaker 1: in Parliament about Brexit. That's amazing crowdfunded legal costs web business.
• 19:30
  Speaker 1: We did a story though about like the one, you know,
• 19:33
  Speaker 1: kind of jobs that will actually benefit because of Brexit.
• 19:35
  Speaker 1: They talked to think about the legal community in particular,
• 19:38
  Speaker 1: certainly in the short run. Kitchell, thank you so much
• 19:42
  Speaker 1: for joining us. It's really fascinating legal proceeding. Kitchell, legal
• 19:46
  Speaker 1: reporter for Bloomberg in London, talking about what's going on
• 19:50
  Speaker 1: with the Brexit vote and whether or not it can
• 19:53
  Speaker 1: be a fast, quick, easy clean Brexit sounds like not
• 19:57
  Speaker 1: so much. We'll stick with that though. This is berk Um.
• 20:09
  Speaker 1: I want to bring in, uh, somebody who can talk
• 20:11
  Speaker 1: to us a little bit about, uh, what's going on
• 20:14
  Speaker 1: with these smaller companies that perhaps people are looking over
• 20:18
  Speaker 1: as they rush to uh the stock markets. I want
• 20:22
  Speaker 1: to thank you very much for coming in. John Campbell,
• 20:25
  Speaker 1: chief investment officer of Cornerstone Investment Partners. Uh, so what
• 20:30
  Speaker 1: are you looking at? I mean, you focus on the smaller, less,
• 20:34
  Speaker 1: less less popular stocks. Which ones do you think are
• 20:37
  Speaker 1: the best best right now? Well, our approaches to look
• 20:39
  Speaker 1: at the overall market and try and find companies that
• 20:42
  Speaker 1: have improving fundamentals, and we try to take the risk
• 20:45
  Speaker 1: out of buying small cap stocks by buying companies that
• 20:48
  Speaker 1: have free cash flow so they can cover their debts
• 20:50
  Speaker 1: in the near term to cover their capex in the
• 20:52
  Speaker 1: near time, have tangible assets. These small small cap asset
• 20:57
  Speaker 1: classes an excellent class. If you look back nine the years,
• 21:01
  Speaker 1: the returns on small cap have greatly outperformed other classes.
• 21:05
  Speaker 1: For example, you can versus large cap stocks. Small cap
• 21:08
  Speaker 1: stocks have done about twelve on average over that period,
• 21:11
  Speaker 1: in large cap stocks have done closer to ten percent.
• 21:14
  Speaker 1: So a two percent advantage over ninety years is a
• 21:17
  Speaker 1: dramatic difference. The problem is you have a strong stomach
• 21:20
  Speaker 1: that for small caps it can be really volatile. You
• 21:22
  Speaker 1: could you have to have a strong stomach, and they're
• 21:24
  Speaker 1: much more volatile than large cap stocks. That's exactly right.
• 21:27
  Speaker 1: So if you want to get exposure of this class,
• 21:30
  Speaker 1: and we think it's a good idea to do it
• 21:31
  Speaker 1: because of the higher historic returns, you have to do
• 21:35
  Speaker 1: things to mitigate the risks so that you can make
• 21:36
  Speaker 1: it something you can live with and you can stomach.
• 21:38
  Speaker 1: As you say, so, by doing things like looking for
• 21:41
  Speaker 1: companies that are financially sound, we think we can take
• 21:43
  Speaker 1: a little bit of that edge off, and also by diversifying.
• 21:46
  Speaker 1: So let me ask you what does it mean now?
• 21:47
  Speaker 1: I was looking at the small cap index and we
• 21:50
  Speaker 1: broke it down too early. With Davi Wilson, brook Stocks columnist,
• 21:53
  Speaker 1: small caps are at roughly two point six percent this year.
• 21:55
  Speaker 1: I look at S and P five hundred, the large
• 21:57
  Speaker 1: caps up about two point eight percent, pretty mu almost
• 22:00
  Speaker 1: on par with one another. Mid caps have done really
• 22:03
  Speaker 1: well this year six percent. So in that kind of perspective,
• 22:07
  Speaker 1: when we see that kind of correlation with large caps,
• 22:09
  Speaker 1: does it tell you anything, Well, they took different paths
• 22:12
  Speaker 1: to get there, so it's it can be sometimes just
• 22:14
  Speaker 1: largely coincidental. Numbers are so close. For example, if you
• 22:17
  Speaker 1: broke down small cap into say growth small cap and
• 22:21
  Speaker 1: value small cap, you have dramatically different numbers. Value small
• 22:25
  Speaker 1: cap stocks have done over ten percent this year, and
• 22:27
  Speaker 1: growth small cap have done closer to one percent. The
• 22:31
  Speaker 1: Russell two thousand, which has a blend of all is
• 22:33
  Speaker 1: around the number you said, so it looks like maybe
• 22:36
  Speaker 1: a similar to large cap. But I mean the charts
• 22:39
  Speaker 1: are almost you know, we've really seen the market kind
• 22:41
  Speaker 1: of move, at least certainly the smart than the large
• 22:43
  Speaker 1: cap universe kind of move in tandem this year. And
• 22:45
  Speaker 1: there and there are and there are some elements that
• 22:48
  Speaker 1: are going on that are a little bit unique to
• 22:49
  Speaker 1: this time in history. The passive investment craze has become huge,
• 22:54
  Speaker 1: and so you tend to get a lot of indexes
• 22:56
  Speaker 1: and stocks moving in concert with each other. I think
• 23:00
  Speaker 1: this is something that happens from time to time where
• 23:02
  Speaker 1: you get these cycles, especially now, and we manage an
• 23:05
  Speaker 1: active e t F, there are a lot of passive
• 23:08
  Speaker 1: e t f s, and those passive ETFs are buying
• 23:10
  Speaker 1: the market. So whatever you buy one, you get everything,
• 23:12
  Speaker 1: and so they tend to push them together, you know.
• 23:14
  Speaker 1: I I wanted to bring that up. Um. You know,
• 23:16
  Speaker 1: there's been a sort of controversy behind e t f
• 23:18
  Speaker 1: s and actively managed the tfs in particular, especially those
• 23:21
  Speaker 1: that invest in less liquid assets. I mean, small caps
• 23:24
  Speaker 1: aren't exactly a liquid but they can be a lot
• 23:28
  Speaker 1: less traded than bigger stocks. I mean, how much of
• 23:31
  Speaker 1: a concern is liquidity for you, Well, we build a
• 23:34
  Speaker 1: portfolio of two forty stocks, so when an investor invest
• 23:38
  Speaker 1: with us, it's spread out of a lot of stocks
• 23:40
  Speaker 1: and we take care of a lot of the liquidity
• 23:42
  Speaker 1: issues that way. Also we're taking out the bottom part
• 23:45
  Speaker 1: of the liquidity UH spectrum and saying those maybe a
• 23:49
  Speaker 1: little bit too a liquids. We're playing in a little
• 23:50
  Speaker 1: bit larger space. In general, the companies were buying are
• 23:54
  Speaker 1: our companies that have solid fundamentals UH in improving fundamentals.
• 23:59
  Speaker 1: They also have free cash flow to cover their obligations,
• 24:02
  Speaker 1: so that takes a lot of the risk out. If
• 24:04
  Speaker 1: you just look at companies free cash when compared it
• 24:05
  Speaker 1: to their interest payments do and their capital expenditures do
• 24:09
  Speaker 1: and you can cover that for a year, that's a
• 24:11
  Speaker 1: pretty good gauge that that these stocks are. Okay, I'm
• 24:14
  Speaker 1: thinking about you know, at least when I'm with Corey,
• 24:15
  Speaker 1: I mean Corey Johnson, that's one of his favorite metrics.
• 24:17
  Speaker 1: I think looking at free cash flow essentially has means
• 24:20
  Speaker 1: that they've got the money to cover the cost of
• 24:22
  Speaker 1: their business and then some sure, if you're just trying
• 24:24
  Speaker 1: to get exposure to this space, but you don't want
• 24:26
  Speaker 1: to take all the risks they're one of the big
• 24:28
  Speaker 1: risk is a lot of these companies, especially when it
• 24:30
  Speaker 1: comes to accounting. Uh. The earnings can be you know,
• 24:34
  Speaker 1: they can be moved around and their the opinion of
• 24:36
  Speaker 1: the management. But cash flow it's hard to fool the
• 24:38
  Speaker 1: cash flow numbers well. And and one thing that that
• 24:40
  Speaker 1: leads into is leverage. And we've heard a lot about
• 24:42
  Speaker 1: how companies are borrowing as quickly as they possibly can
• 24:45
  Speaker 1: so that they can take advantage of these incredibly low
• 24:47
  Speaker 1: borrowing costs. I mean, how much of a concern is
• 24:49
  Speaker 1: that to you as you run your analyzes of companies. Yeah,
• 24:52
  Speaker 1: it's uh, it's of some concern. Our portfolio generally has
• 24:55
  Speaker 1: much lower leverage than the overall market, so uh, you know,
• 24:59
  Speaker 1: companies that are highly leveraged could be uh, could have
• 25:02
  Speaker 1: a more difficult time. There's been a lot of bankruptcies,
• 25:04
  Speaker 1: for example in the energy space. But some of these
• 25:06
  Speaker 1: companies can't cover their obligations. That's almost the definition about
• 25:10
  Speaker 1: bankruptcy is you can't meet your near term interest payments
• 25:12
  Speaker 1: and debt payments. So the companies were buying don't have
• 25:15
  Speaker 1: that issue. They can cover their cash cover with or
• 25:17
  Speaker 1: cash flow the interest and uh principal payments under debt. Hey,
• 25:21
  Speaker 1: I'm gonna ask you about two names that um you
• 25:23
  Speaker 1: wanted to come in and talk about. UM. One is
• 25:25
  Speaker 1: Grand Canyon Education tickers l o PE stocks up about
• 25:28
  Speaker 1: se so far, uh this year, it's hitting a fifty
• 25:31
  Speaker 1: two week high today. Drew Industries is another tickers d
• 25:34
  Speaker 1: W that stucks up forty one so far this year.
• 25:37
  Speaker 1: I'm curious when did you buy these or I'm assuming
• 25:40
  Speaker 1: you're not chasing a performance here. Well, we're not chasing performance.
• 25:43
  Speaker 1: We've owned these these companies for some time now, what's sometime?
• 25:46
  Speaker 1: Uh for several months? Uh so uh, you know, Drew,
• 25:50
  Speaker 1: you know we can buy it. We were having. The
• 25:52
  Speaker 1: fund is new to right, Well, the e t F
• 25:55
  Speaker 1: was launched in July. But let's keep in mind we've
• 25:57
  Speaker 1: been running the strategy for over four years and we
• 26:00
  Speaker 1: we poured it in, actually the track record into this
• 26:02
  Speaker 1: active ETF, and we are the first of that kind.
• 26:05
  Speaker 1: Nobody has ever ported separately managed account track record into
• 26:08
  Speaker 1: an e t F before. So we feel like we're
• 26:10
  Speaker 1: a bit, along with Advisor Shares, a bit of a
• 26:12
  Speaker 1: trailblazer in that regard, what's your biggest contrarian bet right now?
• 26:15
  Speaker 1: Our biggest contrarian bet is we have we're low on
• 26:17
  Speaker 1: financials right now, and I think maybe there's some sentiment
• 26:21
  Speaker 1: towards buying financials because they're so cheap. But a lot
• 26:23
  Speaker 1: of the financials that are in the small cap arena
• 26:26
  Speaker 1: are regional banks. Some of those regional banks are struggling
• 26:28
  Speaker 1: with the current interest rate environment. Do you think that
• 26:30
  Speaker 1: we're going to see some kind of recession in the
• 26:32
  Speaker 1: next year or so, or do you think that we're
• 26:33
  Speaker 1: going to kind of chuck along for all? That's a
• 26:35
  Speaker 1: that's a that's a good question. We try not to
• 26:37
  Speaker 1: forecast things like that, because but is that is it
• 26:40
  Speaker 1: essential if you're gonna be looking at well, we buy
• 26:43
  Speaker 1: companies that we we like, and uh, you know, you
• 26:46
  Speaker 1: can't forecast things like interest rates or elections or brexits.
• 26:50
  Speaker 1: But uh, you know, right now the economy is seased
• 26:53
  Speaker 1: to be doing just okay. And uh, I think of
• 26:55
  Speaker 1: the Federal Reserve is scheduling, and I think there's a
• 26:58
  Speaker 1: seventy percent chance or se kind of which priced in
• 27:01
  Speaker 1: is a chance that they will raise rates the next
• 27:03
  Speaker 1: goal around which means that they feel like the economy
• 27:07
  Speaker 1: is strong enough that they can do that without without
• 27:09
  Speaker 1: damaging too much. John Campbell, thank you so much for
• 27:12
  Speaker 1: joining us. John Campbell, Chief investment Officer, Cornerstone Investment Partners,
• 27:16
  Speaker 1: covering earnings and the outlook for small cap stocks. Thank
• 27:19
  Speaker 1: you so much for joining us. Thanks for listening to
• 27:27
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 27:30
  Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform
• 27:36
  Speaker 1: you prefer. I'm pim Fox. I'm out there on Twitter
• 27:38
  Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.
• 27:42
  Speaker 1: It's one before the podcast. You can always catch us
• 27:45
  Speaker 1: worldwide on Bloomberg Radio