Ramona Persaud searches for stocks the same way she used to work in engineering, with great precision. She selects companies individually and researches transaction data until she finds exactly what she wants. It is usually a high quality company with a dividend, is often growing and always has an attractive price. She rarely settles for less.
Mr. Persaud manages $7 billion.
Fidelity stock income
Fund and $148 million
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He joined the fund, studied engineering at New York University Institute of Technology, and then taught himself computer coding to digitize trade clearing for Wall Street firms. He then joined Fidelity in 2003 and moved into the investment field.
Since she became lead manager of the Fidelity Equity Income Fund in 2018, the fund has returned an average of 9.06% annually, outperforming 71% of its value investing peers, according to Morningstar. . Morningstar analysts emphasize her smart stock selection and her willingness to deviate from her index.
Barons He spoke with Persaud by phone and email in early November to find out what dividend stocks she favors now that cash yields are 5%. Edited excerpts of the conversation follow below.
Barons: What are the characteristics of your type of value stock?
Ramona Persaud:I’m trying to identify the greatest businesses in the world. This includes companies with developed or identified core competencies. They invested in some differentiated product or service and reinvested the profits to become even stronger. They widened the gap with their competitors.
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Give me an example of a great business you got on the cheap.
Alimentation Couche-Tard is a Canadian convenience store and fuel retailer. Stores attached to gas stations are vibrant, growing, and exciting businesses. The other is fuel retail, affectionately characterized in the value world as “melting ice.”
What exactly does that mean?
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While electric vehicles are becoming more popular, the amount of fuel available is decreasing, and fuel retail is experiencing a melting ice situation. I get excited when the market is obsessed with melting ice while other parts of the business are healthy and growing. [catalysts]is secretly becoming a larger proportion of the overall business.
Couche-Tard mix
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While companies are shifting in favor of growing businesses, the market is overly fearful of shrinking the other, creating a great opportunity for long-term investors. Moreover, is the shrinking business really melting ice? We don’t know if that fear is justified. The fuel retail business is highly fragmented and inefficient. Although these companies have only 6% market share, they are great integrators.
What do you want from management?
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One of the themes of my portfolio is management with a strong emphasis on business execution; [strong] Capital allocation. Couche-Tard is very good at reinvesting cash flow for store operations, fuel sourcing and pricing, and in-store innovation. They are good at identifying inefficient competitors; [buying them] Affordably reduce operating costs and leverage and reinvest cash flow. They create small benefits and amplify them over time. Basically the same as any good investor.
The company’s price/earnings ratio is in the mid-10s. Market multiples range from high 10x to 20x. This skill set is not found in the average company. This company has an above-average valuation despite a below-average valuation.
With investors confused about the outlook for the economy and interest rates, how are stock valuations in general?
I love to slice and dice valuations, and one of the most reliable valuation frameworks is looking at dispersion, or the difference between the most expensive stocks and the cheapest stocks. When the cheapest stocks on the market are cheaper than normal, it is a sign of increased fear in the market. There is less fear than usual at the moment, so indifferent or controversial stocks are not plentiful, and they appear in high-risk sectors such as materials, energy, financials, and technology.
What are some examples of such stocks that you would like to own?
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taiwan semiconductor manufacturing
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It’s an incredibly deep-rooted company that provides mission-critical semiconductors. The company has very high barriers to entry, exclusive customers, and, like Couche-Tard, excellent management with a focus on profitability and capital allocation. It’s one thing to have strong profit margins that generate free cash flow, but you can’t maintain those profit margins if you don’t know how to deploy your cash flow. they do both.
The capital intensity of business has increased significantly, requiring more expensive machinery to continue to drive Moore’s Law [the idea that the number of transistors on a chip doubles every two years]. They’re great at striking a balance between giving you a portion of your cashback and reinvesting it to maintain your lead.
How do you account for the geopolitical risks created by the US-China conflict, recent US restrictions on access to Chinese chips, and pressure on companies to expand production in the US?
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High standards for quality, low standards for evaluation [in this scenario]. Taiwan Semiconductor’s lead is staggering.There are cases where support from the U.S. government is required. [through the Chips Act] Intel’s
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It lost the lead it had over the past few decades because of poor reinvestment. However, in the meantime, the Taiwanese cicada continues to increase its dominance.
Two things are happening right now. Because PCs and smartphones are considered mature, they are not growing like they have been in previous decades, leading to inventory corrections post-COVID-19. But holy cow, look at this moat. Look at where the company is headed today as well as against its competitors.
That’s the quality part. How do you rate it?
Multiples in the mid-teens will get you a much better moat for less.
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This is because the market is concerned about demand in the coming quarters.
Interest rates and bond yields have risen over the past year. In a world where you earn 5% on cash, how do you feel about your income?
I tend to focus on how much extra yield there is in the highest yielding part.
Russell 3000 worth
universe. If this metric is below average, it will be difficult to obtain excess yield. It probably means we need to be more sensitive to valuations as well. Current yields are slightly above average. So let me pause for a moment. I lean towards companies like Walmart that want to grow their dividends, rather than looking for higher yields.
How does Walmart overcome the challenges faced by retailers?
CEO Doug McMillon just took over, and the biggest takeaway for me is that Walmart has a different strategy than Target and other retailers.
At Walmart, we think about the entire ecosystem around the consumer, and how we offer consumers the best combination of selection, value and convenience. They study not only retail as a whole, but also businesses like Walt Disney.
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Netflix
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Shopify — It’s not something you hear when meeting other retailers. They are very good at learning and incorporating what they find.
How does that lead to growth?
It’s all based on leveraging supercenters and their vast customer base. Approximately 90% of the US population lives within 10 miles of a Walmart store. Couple this with recent investments in e-commerce, and they have an omnichannel approach, which gives them an advantage.
What do you think about the stock price?It trades at about $160, or about 22.7 times expected earnings..
Companies with deep competitive advantages, strong balance sheets, and generating double-digit returns on invested capital have compressed relative market valuations. Because the company mainly sells food products, its business performance is more predictable than other companies, and stock price volatility is relatively low.
Value stocks struggled as interest rates fell. Has the situation changed now?
During that difficult time, the kind of companies I like – high-quality, strong cash-flow generating companies – gained traction in the market because they offered cash flow yields that were different from lower bond yields. This was done at the expense of traditionally value-oriented sectors, such as financials and cyclical enterprises, whose cash flow production is more or less volatile.
If you’ve benefited from a focus on free cash flow and quality in a potentially high interest rate environment over the past decade; 1701851199 This is a case where there needs to be more balance towards more cyclical companies, which often trade more on asset value than cash flow.
What made you start dabbling in military stocks?
After a long period of disarmament, peace and love, the conflict between Russia and Ukraine has led to a transition to rearmament. Germany has a special her 100 billion euro fund. [defense] Spending. France just increased its defense budget by 40%. The UK is considering moving defense spending to 2.5% of GDP, all of which are drivers of long-term spending cycles.
However, defense has some unique risks, such as weird accounting, high execution risk, and politics, so I prefer using a basket of stocks to diversify across countries.
What’s in your basket?
Rheinmetall is a direct beneficiary of huge spending from Europe, as is Britain’s BAE Systems. [spending] cycle. BAE has the added benefit of striving to improve its pricing strategy, which is great for free cash flow production and stability. The company also improved its balance sheet by significantly reducing its pension deficit. Both stocks trade at mid-teens multiples and yield 3%, making them hard to find.
Thank you, Ramona.