Ariel Investments, founded by John Rogers (Trades, Portfolio) in 1983, focuses on disciplined, long-term investing. On Oct. 3, long term adjutant Charles Bobrinskoy, manager of the Ariel Focused Value Fund, appeared on CNBC. He discussed the potential effects of Covid-19 on markets as markets sold off for the third straight day.
Bobrinskoy thinks that if people start behaving differently because of the virus - in other words, not going on vacation, not going to the mall or foregoing purchases - that it could indeed lead to a recession. A recession leads to higher unemployment, which could also harm incumbent U.S. President Trump's chances of being re-elected.
Bobrinksoy emphasizes that a lot of people get sick every year from the flu. The facts are that a mortality rate of 2% (which is the estimated mortality rate for Covid-19) is not in and of itself going to be devastating to the U.S. economy. However, fear and changing behavior would be devastating. Bobrinksoy wants to convince people that there is nothing to panic about yet.
Treasuries are a great barometer of fear. The 10-year treasury yield is the lowest rate we have ever seen, even though the U.S. has a major deficit at the moment. Bobrinskoy expects inflation in excess of the ~1.3% yield. In his view, it is much more likely to go down than up from here.
The firm's current top holdings that include Microsoft (MSFT, Financial), Philip Morriss International (PM, Financial), Lazard (LAZ, Financial), Kennametal (KMT, Financial) and Baidu (BIDU, Financial), most of which are down year-to-date. I noticed that the firm has started bargain shopping, as it acquired a small stake in Carnival Corp (CCL). Carnival sold off hard as passengers were stuck on these ships for weeks in quarantine, and many became infected or even died. I shorted this name early February and think that this is a brave (and risky) long.
On the other hand, the firm's opportunistic buying of Gilead (GILD, Financial) looks like a savvy move to me. Gilead has a powerhouse franchise in HIV treatment and also owns the rights to the frontrunner among Covid-19 treatments, Remdesivir, with two phase 3 trials starting in the U.S. and two ongoing trials with 700 patients in China.
Gilead has a $88 billion market cap and trades below 10x free cash flow and at 13.7x enterprise value / Ebitda. Gilead has $29 billion in debt but $25 billion in cash to offset that. A 10x free cash flow valuation on an entity without much net debt to speak that may soon hold the only treatment amidst a potential global pandemic should be a solid risk/reward.
Disclosure: long Gilead, short Carnival
Read more here:
- Warren Buffett: Coronavirus May Affect Berkshire Meeting
- Why I'm Happy to Be Long on Underperforming Berkshire
- Charlie Munger: Boeing Will Survive, and Elon Musk Isn't Wrong all the Time
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