Latest / Bloomberg Intelligence / Beaconcrest's Divney Is Avoiding Retail, But Likes Coach(Audio)

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Beaconcrest's Divney Is Avoiding Retail, But Likes Coach(Audio) · Bloomberg Intelligence

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  Speaker 1: there's some evidence of that. Four of schwab six new
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  Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim
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  Speaker 1: Fox on Bloomberg Radio. I had a nice little rally
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  Speaker 1: going in stocks today until the FED released the minutes
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  Speaker 1: of its April meeting at two o'clock Wall Street time.
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  Speaker 1: Stocks sliding after the minutes revealed the Feder reserve that
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  Speaker 1: is ready willing and able to raise rates in its
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  Speaker 1: meeting in June if the continue to support this move.
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  Speaker 1: It doesn't seem like this is a symmetric question. It
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  Speaker 1: seems like the Fed is poised just waiting to see
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  Speaker 1: if the data is supported. What does this mean for stocks?
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  Speaker 1: Not just today but down the road for bonds as well.
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  Speaker 1: Happy to welcome back to the show. Kevin Divney, chief
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  Speaker 1: investment Officer Beacon Crest Capital Management in Boston. So, Kevin,
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  Speaker 1: first of all, your take on the minutes looks like
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  Speaker 1: the treasury market, the US bond market was not positioned
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  Speaker 1: for minutes that sounded this hawk ish. I guess definitely
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  Speaker 1: good to be with you. The market was clearly surprised,
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  Speaker 1: But also I thought it was interesting how so much
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  Speaker 1: of the said minutes were explaining what they thought the
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  Speaker 1: market thought about their last comments. So I think that's
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  Speaker 1: something else that's been happening here. The said is sort
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  Speaker 1: of responding too much to the capital markets in in
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  Speaker 1: the short term. But I think the good news is
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  Speaker 1: for investors looking at equity markets not so much. What's
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  Speaker 1: happening today is that the exiting of the stimulative policies,
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  Speaker 1: in our view, is a positive thing they've done. There's
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  Speaker 1: long term unintended consequences, and I think we're transitioning to
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  Speaker 1: a point where we could be more of a normal
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  Speaker 1: operating environment for stocks. Kevin Tiffany talk about the death
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  Speaker 1: of beta. First, you got to tell me what it is,
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  Speaker 1: and then tell me what happens when it has a
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  Speaker 1: stake through its heart. Well, what we've seen, obviously since
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  Speaker 1: the QUEUEI really exited in the end of FEEN is
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  Speaker 1: sort of a flat the sideways market with a lot
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  Speaker 1: of alatility. So a lot of equity investors are not
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  Speaker 1: feeling that's good. They were feeling very good after we
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  Speaker 1: had the zero interest rate policy and watching this set
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  Speaker 1: and seeing the market recover and you know, this STIMULTI
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  Speaker 1: policy we're about. The benefits from the stimulus really went
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  Speaker 1: to the capital markets, maybe went to the real economy.
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  Speaker 1: So what has happened across multiple equity strategies, whether you
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  Speaker 1: call it hedge funds, traditional mutual funds, traditional strategies, it's
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  Speaker 1: been very difficult for them to generate alpha because they've
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  Speaker 1: been relying so much on the beta for the last
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  Speaker 1: x years or so. So now I think what we're
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  Speaker 1: seeing is stocks being priced more on the underlying fundamentals,
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  Speaker 1: more of the individual characteristics of the company, not so
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  Speaker 1: much the group as a whole. And that's a very
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  Speaker 1: very healthy thing because one, it's how the capital markets
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  Speaker 1: are supposed to function to allocate capital, and two, for
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  Speaker 1: active management strategies, that's the environment that we want to
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  Speaker 1: see because we're buying fundamentals. We're not trying to buy
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  Speaker 1: the whole market generally, So you see um a margin contraction.
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  Speaker 1: Now you see market arrange bound stock market, it's it's
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  Speaker 1: not exactly maybe realistic, but not necessarily the most positive
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  Speaker 1: I think to a lot of people who just want
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  Speaker 1: to jump in and buy stocks, there are ways to
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  Speaker 1: make money at a time like this, where do we start?
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  Speaker 1: There are ways to make money. I think that's the
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  Speaker 1: one message people can't forget. There's plenty of opportunities in
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  Speaker 1: the stock markets. One on the interest rates that I
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  Speaker 1: think if you look at the ten year yield and
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  Speaker 1: just very quickly as the backdrop we're operating, and the
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  Speaker 1: tenure yields very highly correlated to nominal GDP. If you
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  Speaker 1: go back to nineteen fifty nine, I think the R
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  Speaker 1: squares like point three five, which means it's positive. So
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  Speaker 1: now we have a ten year going up hopefully it's
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  Speaker 1: going to be reflective of and and the economy growing. Also,
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  Speaker 1: I think that when you look at the earnings productivity
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  Speaker 1: that happened, which was very very impressive in this last
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  Speaker 1: expansion of recovery, wherever we want to call it is
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  Speaker 1: that we heat, we hit peak margins again, and every
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  Speaker 1: time we go through a recession, margins contract. But we've
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  Speaker 1: seen this cycle in the United States which is very impressive.
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  Speaker 1: Is each cycle we hit a new peak, and we
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  Speaker 1: got to that about a year ago. Now we're contracting
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  Speaker 1: part of that. You could allocate the energy um and
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  Speaker 1: now what you've seen what that also led to is
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  Speaker 1: multiple expansion. So what are we left with after this
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  Speaker 1: interst rate policy with us? It's an expensive looking market
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  Speaker 1: was contracting multiples and people use a lot of that
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  Speaker 1: cheap money to buy back stock, which really drove up
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  Speaker 1: the multiples as well and kept earnings growing, maybe not organically.
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  Speaker 1: So now investors have been paying for value this year,
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  Speaker 1: so tilting towards value strategies or company with better earnings visibility,
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  Speaker 1: and even as we saw some of the moves from
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  Speaker 1: other investors going into technology, seeing there as a value
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  Speaker 1: trade this week is attractive. But the long cycle businesses
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  Speaker 1: and those with good good visibility and good free cash
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  Speaker 1: flow yields is what we're really looking at and what
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  Speaker 1: our screens are telling us where we want to point
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  Speaker 1: new money. Kevin, let's talk specifically about handbags and wallets
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  Speaker 1: and shoes and watches and jewelry and all kinds of
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  Speaker 1: leather goods from Coach, because I want to get your
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  Speaker 1: thoughts on Coach. The shares are of about fourteen percent
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  Speaker 1: so far this year. It pays a dividend of a
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  Speaker 1: little bit more than three and a half percent. Well,
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  Speaker 1: that's a very unique thing to get a dividend that
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  Speaker 1: high in that space, and that's one thing. Another replacement
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  Speaker 1: for these low yields is looking for dividends. So that's
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  Speaker 1: a sub part of the story for us. But retail
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  Speaker 1: has been very treacherous, But there are positive stories out
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  Speaker 1: there and what Coach has been able to do. Even
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  Speaker 1: they had some competitive threats come in in the last
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  Speaker 1: three or five years, they continue to reinvent, they continue
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  Speaker 1: to keep the brand. They have an underlying recognition. Obviously,
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  Speaker 1: you have to come up with new ideas all the time,
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  Speaker 1: and they were willing to do that. Plus, on a
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  Speaker 1: valuation basis, I think when you have an established leader
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  Speaker 1: like a Coach, when it looks cheap, you can buy
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  Speaker 1: without really having to worry too much about it. Um
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  Speaker 1: retail in general, our view is it's very treacherous. You
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  Speaker 1: have to be very specific, and I would not buy
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  Speaker 1: the group right now because there's very powerful creative destruction
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  Speaker 1: happening in the retail sector right now. What about the
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  Speaker 1: technology space broadly? And I guess maybe more particularly, would
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  Speaker 1: you be on board with the the two people who
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  Speaker 1: work for Warren Buffett Berkshire halfway now who pumped a
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  Speaker 1: billion bucks into Apple recently well out of So what
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  Speaker 1: is Apple is now a value stock? I think that's
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  Speaker 1: a question. I mean, when it's a group, it's I
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  Speaker 1: wouldn't buy it as a quote unquot growth stock. I think,
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  Speaker 1: you know, we sort of pique that when you see
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  Speaker 1: the unit sales, especially in China, affecting the top line
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  Speaker 1: growth for Apple. But is there value? They're sure, and
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  Speaker 1: and then deploying money like that clearly as a lot
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  Speaker 1: there very long horizon investors. They're not going to accept
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  Speaker 1: that trade anytime soon. So I think that's a positive
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  Speaker 1: for a long horizon in general, though, I think the
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  Speaker 1: trans in tech, you want to exploit our continued broadband
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  Speaker 1: to the home, continued mobility, that continued bandwidth that we're
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  Speaker 1: doing everywhere, and that really is more of the unknown
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  Speaker 1: mid cap and small cap companies that that seem to
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  Speaker 1: have a technology advantage of you will either be acquired
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  Speaker 1: by one of the large guys or they can really
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  Speaker 1: take share in a very very fast way. But you know,
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  Speaker 1: multiples are still high in tech in general and profits.
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  Speaker 1: Really that's one of the fastest declining sectors we're seeing
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  Speaker 1: right now, at least within the SMP five hundred um.
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  Speaker 1: But still the innovation and combining that with a good valuation,
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  Speaker 1: it's a place I would be deploying capital, and technology
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  Speaker 1: makes a big makes up a big component of our
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  Speaker 1: portfolios today. How about the can I interest you, Kevin
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  Speaker 1: in some shares of LB Foster and Company. They've lost
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  Speaker 1: about fifteen percent of their value so far this year.
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  Speaker 1: What do you like or don't like about this Pittsburgh
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  Speaker 1: based company. Well, one, it's in Pittsburgh. We'd like to
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  Speaker 1: avoid crowded trades, and we'd like to find companies that
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  Speaker 1: have an attractive valuation and are under followed by Wall
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  Speaker 1: Street at least when we start to enter them. Uh,
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  Speaker 1: they're a MidCap company with a good balance sheet, a
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  Speaker 1: long term management in place, and they're just repeating success
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  Speaker 1: over and over again. So in that sense, when you
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  Speaker 1: can deploy capital like that. That was what I would
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  Speaker 1: call a more longer horizon holding. And you could probably
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  Speaker 1: be much more patient than when we talked about coach.
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  Speaker 1: When you make some money and coach, you may want
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  Speaker 1: to be kind of pulling that back because that tends
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  Speaker 1: to get a lot of the a lot of the
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  Speaker 1: chatter from the street when stocks like that do well.
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  Speaker 1: Thank you very much for spending time with us. Kevin
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  Speaker 1: Divney is the chief investment officer for becon Crest Capital Management,
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  Speaker 1: joining us from Boston home to Bloomberg twelve hundred and Uh. Well, Kathleen,
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  Speaker 1: we're going to take it into the clothes on a
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  Speaker 1: day when we've learned a little bit more, perhaps about
• 10:55
  Speaker 1: the Federal Reserves thinking process. We certainly have him. I
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  Speaker 1: mean that when we had three FED officials in the hotels,
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  Speaker 1: it was a live meeting in June. In our recent interviews,
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  Speaker 1: I guess they met what they were saying and a
• 11:06
  Speaker 1: lot of other people on them. He agree, you're listening
• 11:09
  Speaker 1: to taking Stock on Bloomberg Radio.