It turned out that, despite the lofty credentials in his business card, he was in the office not to do business with us, not even to help us raise capital, but to pitch the Fidelity Consumer Staples mutual fund. For the time being, Mr. Fidelity was a salesman. And in retrospect, that position was deliberately meant to garner respect. An appeal to authority.
The pitch began with a brief introduction to his company. Largest private employer in Dallas, long tenure in the investing business, yada yada yada. All the mushy stuff about his company. To further add to his credibility. Somehow Fidelity Man pulled the conversation into the territory of today's market environment. His focus was on the U.S. Fiscal Cliff, on the uncertainty politics has brought upon economics like a massive sledgehammer. Tax hikes were likely to occur come January as was a recession. Europe was a one-second mention in his introduction. Japan, Australia, China, and the failures of mainstream macroeconomics were nowhere in this one-sided speech.
Soon our conversation centered itself on the markets and their hatred for volatility. "It's obvious, isn't it?" Mr. Fidelity snarks. "They WANT stability. It's understandable." His gaze then pans across the conference room. All the advisers were excited to hear what he had to say. Some were still in thought. The others were attentive. Everyone was already being reeled in by him, ex cathedra.
Everyone but the two analyst-investors in the room. We weren't smiling. We weren't frowning. Had you looked into our eyes then, the sentence "get on with the program and quit the marketing bullshit" should be tangible and easy to grasp. The officer-turned-salesman must have been unnerved by the stoic gazes, and so he called out my partner, proclaiming he can name "five things he's done this morning" and "one he's most likely done in the week."
You know where this is going, right? Just by those lines alone you would already have an idea what he said to us. "Larger, bluer chip" consumer staples was the real star of the show, and the Fidelity man just spent 15 minutes easing us into the concept before even handing us the brochures for his mutual fund.
I tuned out Mr. Fidelity the instant I got my hands on his brochure. Under the table, I took out my phone and started putting the ticker symbols into my Google widget. Erupting in the background were the elated cries of the advisers, and it was difficult for me to discern whether they were being enthused to show some respect for giving us something so obvious or they were taken in by his marketing pitch.
After seeing how the top three holdings of the mutual fund are presently trading at 20 to 24 P/E multiples, I raised my hand and asked a question any value investor in this website would undoubtedly ask: "Excuse me, but don't you think you're likely to overpay for companies in this sector? Dividend-paying stocks and higher-yield bonds should be trading at a premium already. Isn't a consumer staple business going to be overpriced?"
I was aiming for Fidelity Man to give any one specific company that falls in the sector that is cheap in the market but doing well economically. My plan backfired on me, as he replied back with an answer I would personally tell any investor who is skeptical of the markets today. Fidelity's fund managers were on the prowl for gems in the rough, still cheap despite the attention the sector's probably getting.
I would have been satisfied with his answer, if I hadn't noticed the brochure placed a little plus (+) sign next to the names of the top 4 holdings. Why would you entrench your position in a stock when the price was trading at a market premium to begin with? And in mature businesses large and ubiquitous within America, too! Why risk overpaying for growth that may not come up as high as your entry price subtly expects?
I did not see Danone (DANOY) in there. Neither did I glimpse VeriSign (VRSN). These are companies recently featured in the November 2012 Invest for Kids conference in Chicago, respectively supplied by Nelson Peltz and Steve Mandel. They are cheap and are reported to be investment worthy.
Although Mr. Fidelity's consumer staples portfolio did have Altria, CVS (CVS), and Wal-Mart Stores (companies with better-looking P/Es that fell beneath Benny G's 16x prescription) among its holdings, the fund devoted a mere 5 and 7 percent of AUM into the first two, with Wal-Mart getting 2 percent.
A drug company within CVS' peer group (defined by Google Finance so the applicability isn't perfect) had a much lower P/E of 14, a dividend yield of 5%, and a not-so-attractive beta coefficient of 0.60. (Value investors should welcome volatility, not shun it!) Zero debt and double-digit returns on equity for the past four years. You'd expect something as good as this wouldn't have gotten past Fidelity's radar. It sounds like a reasonable candidate for further analysis and future investment, especially in January right as the fiscal cliff is resolved! (Whether the resolution is good or bad is another matter.) In fact, I added it to my ever-growing backlog and now I'm conflicted between studying this business and a biotech manufacturer of diagnostics systems once I finish the trucking company I'm scrutinizing at present.
And the Fidelity fund's top three holdings? A combined total of 34% AUM. Mull over how these apparently high-conviction investments are currently overpriced from the P/E standpoint and they're still increasing their long positions.
Everyone should be more or less aware P/E multiples by themselves are insufficient absolute indicators of overpricing, since excessively high P/E multiples can be caused by non-operating, extraordinary expenses or individual setbacks and severely depressed ratios can fool a value investor into so-called "value traps": those worthless stocks trading for peanuts, and for exactly the right reasons.
But remember two things. One, we're talking about investments not just in consumer staples, but also in large companies. A single or double-year underperformance is unlikely barring competitiveness concerns. Two, I perceive Fidelity as a bonafide Wall Street fund.
I hold little respect for people working for Wall Street funds — unless they show either the intelligence or the code of ethics we value investors have in common.
I also happen to have a sadistic streak. I enjoy bashing the mainstream investment industry. Had I been at the NYC Value Investing Congress this year, at one moment my laughter would have been crisp and intensely audible. You'd laugh too if you heard one of the presenters joke how "investment bankers can be paid to say anything" right in front of an audience that clearly didn't find it funny. (Interesting observation there...)
Value investing junkies and ideologues like many of us in GuruFocus are investment hipsters by default.
Knowing this, my partner was nervous every time I opened my mouth to talk to Fidelity man. He could see in my face that I wanted to grill him and figure out what Fidelity's average cost per share is (because it can justify additional entries in overpriced positions) and why they weren't studying investments recently propounded by the people who actually worry about their clients' wealth rather than joining the herd and keeping in line with them.
Fortunately, I held my tongue, remembering this was Fidelity Man in the conference room. He's big-time. You don't attack someone in his position unless you're also big-time. To do so will cut you off from that person's connections, and that's the last thing you want when you're seeking capital to manage and other birds who share your feathers.
As much as this meeting was a waste of two hours I could have spent on my trucking company project, it was not an entire loss of productivity. Not only did I uncover a company that seems worthy of further inspection, but also the lessons I've learned from this meeting are significant.
The short-term relative performance derby is still alive and kicking in the midst of our global environment, hiding behind the terms of "value investing" and "stability." Moreover, the enthusiastic reactions displayed so conspicuously by the advisers are a reminder to all of us that even the "professionals" are as susceptible to behavioral biases as the laymen, latching on to a properly executed sales pitch and argumentum ad vericundiam, without pausing to think about the present investment worthiness of the individual investments. I can vividly recall one of the advisers, easily hooked and undergoing some sort of "mindgasm," throwing around the suggestion that the two analyst-investors in the room study the largest holding in the Fidelity fund. Never mind that one of them already thinks it's overpriced. Never mind that the current projects they're perusing can be purchased at possibly better margins of safety. Never mind that an option not even on the list has been discovered right in that very room.
Whenever someone comes to you with an investment idea, it is best to remain aloof. To approach the matter with skepticism. Enough with the bull and get on with the deal. Urge people to show the facts and narrate their implications however necessary, so long as none of the material information is diluted. The more comprehensive, the better: you do not want to be agog on a single variable and miss the big picture. And even then, you are better off analyzing the opportunity yourself if you are capable of such endeavors, for it garners more professional respect and it shifts the control from your source of inspiration to you, the analyst-investor.
Happy investing, everybody!
† Take note that I named the Fidelity Investments representative as "Mr. Fidelity" or "Fidelity Man" because I have already forgotten his name and I don't have his business card with me at the moment.