March1,2021 BARRON’S 17
Cyclical stocks, long left for dead, could
show surprising strength as pent-up
economic demand is unleashed.
hate. That’s such a different persona
than that of someone who loves buying
something that has gone up yesterday
and [has] all the “obvious” reasons why
it’s going to go up forever.
We did a conference call with value
managers including Bill Miller and
Mario Gabelli. It’s interesting that we
are all of a certain age. There’s not a
new generation around, which is an-
other sign that people have given up on
this sector. That’s where the opportu-
nity comes.
We’ve been waiting for a comeback
for a while. Value has outper-
formed so far this year.
Fingers crossed, we are at a tipping
point. It has been a wonderful re-
awakening for value [recently]. The
signs have been there for a while, and
valuations are too far apart. Invest-
ment committees are so committed to
growth stocks. People come in with
consultants who say, “Value is dead.
This is a new world. It’s really differ-
ent this time.” That’s always a sign
that we are getting to the top.
A lot of value managers have closed
up shop and left the business, and
some are finding excuses to own
growth stocks. That’s usually a sign of
the bottom. The catalyst is happening
now: As interest rates go higher and
inflation starts to comeback, the value
of future earnings of growth stocks
won’t be valued as richly. A higher-
interest-rate environment is going to
be a great tailwind for value investors.
The Federal Reserve doesn’t seem
to be in a rush to raise rates. Could
this take a while?
It’s going to surprise people and hap-
pen sooner than people think. The
economy is coming back so strong.
There’s so much pent-up demand.
We’ll get this huge stimulus plan from
President Joe Biden, and it’s going to
put a lot of pressure on commodity
prices and wages.
Will this recovery look different
than in the past?
No. Traditional cyclical stocks haven’t
had their day in the sun since the
2008-09 global financial crisis. This is
finally going to be the period where
these forgotten and undervalued cycli-
cals are going to surprise people on
how strong they are. They have done a
great job of cost-cutting; their balance
sheets are strong and cash flows are
strong, and they are set up for a real
significant recovery.
What’s an example?
One longtime favorite isKennametal
[KMT], the primary leader when it
comes to metal-cutting tools and ma-
chinery. It has constantly had to lower
expectations and push out [hopes for]
the recovery, with several false starts.
It’s going to be a prime beneficiary of
an infrastructure bill as we redo
roads. They have done a lot of cost-
cutting and rationalizing the footprint.
They had too many plants around the
world and an inefficient structure. As
this recovery comes, more cash will
drop to the bottom line. A lot [of these
companies] are underestimated, but
also neglected. They aren’t sexy and
haven’t shown tangible evidence of
the new recovery that we see coming.
[We’ll] be awash in vaccines once
the Johnson & Johnson vaccine is out
there. We do a lot of behavioral fi-
nance work, and there is this recency
effect—where people get swept up in
the here-and-now and can’t look two-
to-three months out.
Who will be a beneficiary?
Sports will be back bigger than ever.
One of our two favorites isMadison
Square Garden Entertainment
[MSGE], which owns Madison Square
Garden, the land around it, air rights
above it, and the Chicago Theater.
Everyone thinks there’s no future. The
stock price is not much more than the
cash on the balance sheet. I won’t be
surprised if concerts are back at the
Garden this summer and the Knicks
are in the playoffs, and [Madison
Square Garden] will surprise.
What’s the other favorite?
Lazard[LAZ]. The [initial public of-
fering] business is booming. The SPAC
[special purpose acquisition company]
business is booming. Mergers and ac-
quisitions are booming. I have friends
who are investment bankers who say
they haven’t been as busy as they are
now. An economic recovery is coming,
and these relatively low rates makes it
easier to do transactions. Lazard has
bounced back from lows in the spring,
but it hasn’t participated in the recov-
ery like the rest of the market. It trades
at 10.4 times 2021 earnings, selling at a
30% discount. They have a big global
brand, but with all of the indexing,
there is a fear that asset managers are
doomed to low-to-little growth.
Who has come out stronger from
the pandemic?
We love media stocks; they have recov-
ered strongly. People were absorbing
all of the content that companies like
ViacomCBS created—andMSG Net-
works[MSGN] has a regional sports
network that has the rights to broad-
cast the Knicks and Rangers. Ratings
are substantially better than people
expected.Meredith(MDP) is also
roaring back. It ownsPeople magazine
and local TV stations where local
news is still viable content and avail-
able on all the streaming services.
Another isMattel[MAT]. Not only
are Barbie and Hot Wheels doing
great, but Uno is doing extraordinarily
well. There is still a lot [to improve]—
Fisher-Price hasn’t fully recovered.
American Girl is very valuable. Mattel
will be able to use its [intellectual
property] in ways people don’t believe.
It has a lot of famous brands, and also
a lot in the background that can be
movies someday and have toy tie-ins.
Are you concerned about debt?
Because [media companies] did so
well during the pandemic, and news
companies did well with election dol-
lars spent, they have been able to pay
down debt. Six months ago, these
looked like risky industries that were
old-fashioned and overlevered.
What are you seeing in terms
of buybacks and dividends?
In the past couple weeks, we have seen
several companies, likeAffiliated
Managers Group[AMG], announce
significant buybacks.Six months ago,
they had suspended them because
of Covid. Now, it’s starting to come
back, and it’s a strong signal of the con-
fidence that’s building in this recovery.
What companies did you pick up
in the throes of the crisis?
Envista Holdings[NVST], a dental-
product manufacturer, was the one we
were waiting the longest to add.Vail
Resorts[MTN] is a great brand with
a real moat that’s hard to replicate.
Another new position isBOK Finan-
cial[BOKF], a regional bank with
branches throughout Texas and neigh-
boring states. It has a great culture,
and longtime chairman George Kaiser
has built an extraordinary brand. It
has rigorous lending standards and is
often misunderstood [as being] depen-
dent on the rise or fall of oil prices, but
it’s much more diversified.
You have been vocal on race and
wealth-gap issues. What is the
CEO’s role in creating change?
There has been a sea change in Corpo-
rate America; it’s nothing like I’ve
seen in the 38 years since I started
Ariel. Literally every day, I’m getting
calls from CEOs asking how we built
such a diverse team at Ariel. They
realize that to be competitive in the
21st century, they need a management
team that looks more like America.
Companies also need to do a better
job working with minority-owned
businesses, especially in professional
services [where they spend much
more money] like law, financial, and
technology. CEOs always want to talk
about supplier diversity, but the econ-
omy has moved beyond that.
Is there a good example?
Exelon[EXC] is doing everything
well; follow the playbook there. It
keeps track of all its spending, so
there’s transparency. It holds all pro-
fessional service partners accountable
for the diversity of their teams.
You also need diverse leaders at the
top who are well respected within
their community, so when they get in
the boardroom they can lead like John
Lewis talked about: When they see
somethingnot right, they feel the
moral obligation to make good trouble.
Also, make sure they have the time
and freedom to be out at events and
a visible leader in the community.
Thanks, John.B
The recent pickup in buyback activity
reflects rising confidence about an
economic recovery.
“A higher-interest-rate environment is going
to be a great tailwind for value investors.”
Value Added
The Ariel fund
returned 36%
over the past
year, beating
94%
of its mid-cap
value peers.
Rogers’ Picks
Kennametal/ KMT
Recent
Price:$38.
Madison
Square Garden
Entertainment/
MSGE
Recent
Price:$100.
Lazard/LAZ
Recent
Price:$39.
Mattel/MAT
Recent Price:
$19.
Envista
Holdings/NVST
Recent Price:
$37.
Vail
Resorts/ MTN
Recent Price:
$307.
BOK
Financial/ BOKF
Recent Price:
$88.
Source: Bloomberg