August 9, 2023
Dear Fellow Shareholders:
The past year has been marked by persistent volatility and uncertainty affecting the investment landscape under which our Funds operate. Although rapid technological change creates uncertainty as to where to invest and often creates price overreactions on both sides of the ledger, we have repeatedly used these periods of uncertainty and negativity to purchase companies whose stock prices we believe have fallen to levels that no longer accurately represent a company’s future fundamentals or in essence a company’s ability to generate future excess free cash flow. Similarly, when markets are overly optimistic, we do the exact opposite, selling companies we believe are fully valued and whose prices no longer give us an edge. As value players, we believe it is very important to have strict sell discipline.
Despite the turmoil in the banking sector, a hawkish Federal Reserve policy, and the market’s fear of recession which could cause declines in future earnings estimates, your Funds have so far gotten off to a strong start in the first six months ending June 30, 2023. During the six months ended June 30, 2023, both the Olstein All Cap Fund and Strategic Opportunities Fund shares are up high single digits and ahead of their comparative indexes. Full performance details for the year ending June 30, 2023, are contained in the body of the report. Patience can reward shareholders who have a long-term perspective when the Funds experience price declines during negative market periods. We advise you to review the table on page 13 showing the All Cap Value Fund’s quarterly long-term performance since inception (September 1995) and reach your own conclusions about the price appreciation that has occurred after periods of short-term underperformance.
IT IS IMPORTANT TO READ THE ENTIRE FOLLOWING SHAREHOLDER LETTER as we are taking the opportunity to familiarize our shareholders with the current state of economic affairs and share our insights on the prevailing financial climate and how we are responding to the more than usual secular changes currently taking place. We believe the current herd-like negative mentality of the press and some of the large brokerage house strategists produced many opportunities to add to our positions or find new positions in good companies which have dropped to prices that are materially below our calculation of the company’s intrinsic value. A key determinant of our intrinsic value is our estimate of a company’s normalized future excess cash flow.
We also favor investing in companies whose management emphasizes maintaining a conservative balance sheet providing these companies with the ability to ride out tough periods while waiting for the tide to change.
We believe our long-term value-oriented looking behind-the-numbers investment philosophy is at a competitive advantage, especially during periods when uncertainty and negativity motivate investment decisions by the public having little to do with long-term company fundamentals.
We believe the heavily discounted prices available to your Funds have been produced by the investment public overreacting and making emotional decisions based on their belief that the current strong negative economic concerns (potential recession, bank failures, war, the lasting effects from the Covid Crisis, etc.) affecting stocks and/or the general market since 2020 will last forever. Many of the good companies being sold in bulk are now at prices which, in our opinion, misrepresent their future ability to generate and grow future excess cash flow. We believe paying the right price for stocks is the major determinant of the Funds’ future returns. Thus, we will only buy or hold stocks that, in our opinion, are selling at a discount to current market value. Our conclusions are reached after performing an inferential look behind the numbers of financial statements to determine whether the potential future cash flow is being accurately valued by the market. Other criteria we look for are companies with conservative accounting assumptions and run by managements who make decisions based on creating long-term shareholder value. However, patience is required to realize future expected returns to give the public time to recognize green shoots which are indicating that the future free cash flow has started to turn upward.
THE MARKET AND OUR STRATEGY
While we expect investor nervousness and doubts about the economy will continue to cause periods of volatility during the remainder of the calendar year, we believe a fair amount of negative sentiment has already been priced into the market. In our opinion one of the best ways to deal with the uncertainty of equity markets is to remain focused on company fundamentals, the quality of a company’s earnings, and its ability to generate free cash flow. Since we value companies based on their ability to generate future free cash flow, our approach focuses on company fundamentals and operations in all market and economic environments.
As previously stated, the past couple of years have been marked by more than the typical amount of technological and secular changes which are creating uncertainty in the investment landscape. Examples of changes affecting future economic activity include the ongoing effects of the Covid Pandemic and how people have changed the way they live (e.g., work from home), the shift in the longtime market-leading growth companies who experienced 50% or more corrections in the past five years (such as Meta-Facebook, Amazon, Netflix, and Google) has opened the eyes of the investors who were buying these companies at any price under the assumption that these stocks would never stop growing at the rates being reported. These 50% corrections appeared to shake up the momentum investors (different music same dance) and we are already seeing green shoots of investment money again being allocated to high quality undervalued companies. Investors are starting to return to valuing companies based on fundamentals and their future ability to generate and or grow future free cash flow. The overpriced market leaders of yesterday are giving rise to a broadening array of market leaders who are selling below our estimates of intrinsic value based on the analysis of company fundamentals rather than quarterly earnings misses and beats and stock price momentum. Another rapidly rising issue is the risks associated with the increasing use of more sophisticated computers to run businesses and the resultant risks and opportunities created by increasing levels of cybercrime. Another big area of opportunity and risk in the current environment is the technological changes rapidly taking place in the entertainment industry such as the many new formats being developed for pricing and distributing entertainment. These changes are creating new opportunities for some advertising agencies who have added to their capabilities to deal with the high rate of technological changes taking place in order to reach more potential consumers but correspondingly there could be potential problems for smaller agencies who have not modernized their offerings to take advantage of the newly developed ways to reach more potential consumers using the internet to stream programs on demand into homes. Another issue facing producers and distributors of entertainment products is how to produce profits from the large expenditures needed to produce unique entertainment products in order to attract enough subscribers (via the rapidly evolving streaming industry) to profit therefrom. We are also paying attention to the rapidly changing ways of communicating with each other which includes companies benefiting from new technologies such as Artificial Intelligence, Virtual Reality, Virtual Meetings, etc., etc. We believe our two Funds contain many undervalued great companies with the financial strength to weather the current storm and have the potential to generate future free cash flow which is not being correctly valued by the market. For example, as of the date of this letter, two large positions in the All Cap Value Fund which we believe are severely undervalued are Disney and Cisco. Disney’s diverse range of iconic brands, theme parks, and entertainment offerings provide a strong foundation for future growth. We believe Disney has long-term earnings power of at least $6.00 a share and believe many investors are too negative and too focused on losing basic television subscribers and missing the long-term values of the best library in the entertainment business (Marvel, Star Wars, Mickey Mouse, ESPN, etc.), the value and long-term growth of Disney’s popular and heavily attended amusement parks business and Bob Iger’s determination to make each business line including streaming profitable. We believe Disney offers the Fund opportunities for material appreciation when investors realize the company’s ability to utilize existing assets to generate normalized free cash flow is far in excess of current levels. Disney stock is down significantly from its high caused by the heavy startup cost of converting more of the company’s future distribution model to a direct-to-consumer format. The growth in these startup costs should begin to slow down in the next few years. We believe that the combination of Disney’s pricing power from having the best library in the business, the ability to set up profitable joint ventures and the slowdown in the growth of future startup costs should produce above-average growth in future free cash flow. Once Disney demonstrates its ability to use its valuable assets to produce earnings far above its current rate, we believe Disney offers the potential for above-average appreciation.
Cisco (CSCO, Financial) plays a pivotal role in powering global networks. As businesses and individuals continue to embrace digital transformation the demand for networking and communication technology solutions is going to accelerate. In addition, Cisco is participating in the growth of needed cyber security and from the continued expansion of the Internet of Things, accelerating infrastructure investment, and the increasing need for secure network solutions. We believe Cisco’s financial position is solid, providing the company with the ability to ride out the current storm and should grow at an accelerated rate. Cisco has been a successful long-term holding for the All Cap Value Fund and we believe the future is just as promising.
A final topic that we believe is extremely important is the continuing trend of valuing companies according to management-adjusted earnings rather than Generally Accepted Accounting Principles (“GAAP”). Your Funds’ investment professionals value companies based on a company’s ability to produce normalized future excess free cash flow and we make our own adjustments to reported earnings based on how conservative or aggressive management’s accounting assumptions are. Our portfolio managers and analysts have over 100 years of collective investment experience and extensive training in accounting and looking behind the numbers to determine whether or not the financial statements are in accord with economic reality and determine if the financial statements are conservative or aggressive. When valuing companies, it is risky in today’s world to accept management-adjusted earnings without judging the realism of their accounting assumptions. Before evaluating the future, we believe it is important for us to know what adjustments have been made by management. Our accounting background and experience examining management’s accounting adjustments to GAAP reported earnings help us determine the economic reality of a company’s financials and thus a company’s ability to achieve future estimates and its ability to withstand hard times.
We study footnotes, shareholder letters, balance sheets, and disclosures (10k’s, 10 Q’s, management discussions, and proxy statements) to determine whether or not the balance sheet is conservative and whether or not management’s accounting assumptions are realistic. We also look for assets that are carried on a company’s balance sheet at unrealistic valuations that are no longer applicable. We believe the focus on accounting analysis is a lost art when valuing companies which is counterintuitive in an environment where most analysts are utilizing management-adjusted earnings rather than GAAP earnings when valuing companies. The fox is guarding the chicken coop.
We view the current environment as presenting many good investment opportunities as negative investor sentiment has resulted in driving the prices of good companies with solid balance sheets and significant cash flow potential to prices that undervalue the company’s fundamentals. For us, stock selection driven by an emphasis on company fundamentals is the key to favorable investment performance in an environment characterized by rising rates, inflationary pressures, and recession fears. We continue to favor high-quality companies with unique business models, competitive advantages, strong balance sheets, stable cash flow and above-average operating returns. We believe this focus on fundamentals, particularly our emphasis on free cash flow and returns on invested capital, should allow us to identify those companies that not only have focused their priorities in the face of a weaker economic environment but also have identified options that can create a substantial strategic advantage for what we believe is an already improving economic environment. Again, let us remind you we believe if you pay the wrong price for a great company, you have a high probability of having a bad investment, that is precisely the reason why we believe in the saying “price, price, price”. In essence, we ask ourselves does the price we are paying place the risk-reward heavily in our favor. Thus, whether we buy, sell, or hold a stock is heavily determined by whether or not the current price is providing a sufficient discount to justify buying or continuing to hold a stock.
For the portfolios of the Olstein All Cap Value Fund and Olstein Strategic Opportunities Fund, we remain focused on individual companies, their operations, and prospects for maintaining or growing sustainable free cash flow not yet appropriately valued by the investing public. As long-term value investors, we recognize that companies generating sustainable free cash flow are well-positioned to compete profitably during a challenging economic environment. The Olstein All Cap Value Fund and Olstein Strategic Opportunities Fund consist of companies that we believe have sustainable competitive advantages, discernible balance sheet strength, management teams that emphasize decisions based on cost of capital calculations and deploy free cash flow to create shareholder value. The current economic negativity by the investment masses who believe the glass is half empty is creating an abundance of opportunities for the Funds to add to existing positions or buy new materially undervalued stocks with above-average long-term capital gains potential based on current prices that appear to ignore future company fundamentals. Although these companies also face change, we believe the market has overreacted and driven prices to discounts that we believe are unrealistic.
THE OLSTEIN ALL CAP VALUE FUND
For the fiscal year ended June 30, 2023, Adviser Class shares of the Olstein All Cap Value Fund appreciated 9.57%, Class C shares appreciated 8.46% and Class A shares appreciated 9.30%. During the same twelve-month period, the Fund’s primary benchmark, the Russell 3000® Value Index appreciated 11.22% and the Fund’s secondary benchmark, the Russell 3000® Index, appreciated 18.95%.
On June 30, 2023, the Olstein All Cap Value Fund portfolio consisted of 82 holdings with an average weighted market capitalization of $142.82 billion. During the fiscal year, the Fund initiated six positions and eliminated its holdings in nine companies. During the reporting period, the All Cap Value Fund initiated positions in Avantor, Inc. (AVTR, Financial), John Deere (DE, Financial), Dover Corporation (DOF), International Flavors & Fragrances Inc. (IFF, Financial), Korn Ferry International (KFY, Financial), and Target Corporation (TGT, Financial). During the fiscal year, the Fund sold its holdings in Automatic Data Processing Inc. (ADP, Financial), Booking Holdings Inc. (BKNG, Financial), Keurig Dr. Pepper (KDP, Financial), Oracle Corporation (ORCL, Financial), and Scotts Miracle-Gro (SMG, Financial) as the price of each stock reached our valuation level. The Fund also sold its holding in Cushman & Wakefield plc (CWK, Financial), Paramount Global (PARA, Financial), Walgreens Boots Alliance (WBA, Financial), and Western Digital Corp. (WDC, Financial) and redeployed the proceeds into what we believed were better opportunities with more favorable risk-reward profiles.
The Olstein All Cap Value Fund’s leading performers for the twelve-month reporting period ended June 30, 2023, include Meta Platforms, Inc. (META, Financial) (formerly named Facebook, Inc.), WESCO International, Inc. (WCC), Delta Airlines (DAL), Oracle Corporation, and Kulicke & Soffa Industries, Inc. (KLIC). At the close of the year the Fund continued to maintain positions in each of these companies except Oracle Corporation as previously mentioned.
Laggards during the twelve-month reporting period include: Cushman & Wakefield plc, Fidelity National Information Services (FIS), Generac Holdings (GNRC), Baxter International Inc. (BAX), and US Bancorp (USB). At the close of the year the Fund continued to maintain positions in each of these companies except Cushman & Wakefield plc, as previously discussed.
THE OLSTEIN STRATEGIC OPPORTUNITIES FUND
For the twelve-month reporting period ended June 30, 2023, Adviser Class shares of the Strategic Opportunities Fund appreciated 17.41%, Class A shares appreciated 17.08% and Class C shares appreciated 16.29%. The Fund’s primary benchmark, the Russell 2500® Value Index, appreciated 10.37% and the Fund’s secondary benchmark, Russell 2500® Index appreciated 13.58%, during the same time period.
As of June 30, 2023, the Olstein Strategic Opportunities Fund portfolio consisted of 38 holdings with an average weighted market capitalization of $5.47 billion. During the reporting period, the Fund initiated two new positions and eliminated four holdings. The Fund initiated positions in Korn Ferry International and the Scotts Miracle-Gro Company. Over the course of the fiscal year the Fund eliminated its holdings in Big Lots Inc. (BIG), Federal Signal Corporation (FSS), Lifetime Brands (LCUT) and the Scotts Miracle-Gro Company. The Fund sold its holdings in Federal Signal Corporation and Scotts Miracle-Gro as the price of each company’s stock reached our valuation. The Fund eliminated its holdings in Big Lots Inc., and Lifetime Brands and redeployed the proceeds into what we believed were better opportunities with more favorable risk-reward profiles. Regarding the Scotts Miracle-Gro Company, the Fund sold its holdings in this company as the price reached our valuation within a six-and-a-half-month holding period. Our discipline emphasizes price and discount to make decisions, and short-term quick movements like this one are a rare occurrence.
Leading performers for the twelve-month reporting period include: Blue Bird Corporation (BLBD), Wabash National (WNC), Graham Corporation (GHM), The Timken Company (TKR) and Vishay Intertechnology, Inc. (VSH). At the close of the fiscal year the Fund continued to maintain positions in each of these five companies.
Laggards during the twelve-month reporting period include: Cushman & Wakefield plc, Lifetime Brands, Generac Holdings, Inc., Integra LifeSciences (IART), and WestRock Company (WRK). At the close of the reporting period the Fund continued to maintain positions in Cushman & Wakefield plc, Generac Holdings, WestRock Company, and Integra LifeSciences. As previously discussed, the Fund eliminated its holdings in Lifetime Brands during the reporting period.
The Trials and Triumphs of Value Investing
While market declines often test an investor’s long-term commitment to equities, this is particularly true for investors following a value investing approach. Market volatility, such as we have experienced over the Funds’ past fiscal year, is unsettling, but such periods are often necessary to be successful as a long-term value investor. Periods of negativity and volatility create fear for speculators and the right prices for long-term value investors in companies with sustainable competitive advantage, discernible balance sheet strength and whose continuing free cash flow continues to add to the company’s fundamental value (despite falling stock prices). Excess free cash flow companies that are being penalized by temporary market conditions or short-term problems that are easily fixable are often in a position to achieve greater appreciation when economic activity turns up and negativity turns down.
As previously stated, our quest for value is guided by two prerequisites: (1) a company’s ability to generate sustainable future free cash flow; and (2) advantageous securities prices that allow us to buy what we believe are good companies, with solid balance sheets, and profitable business models, at a significant discount. These two requirements guide our investment process and force us to focus on a company’s future prospects and value while capitalizing on current favorable prices.
Uncertainty and volatility are common adversaries when determining the future value of a company even under normal market conditions. However, during periods of volatility, the stocks of many good companies are penalized by negative market sentiment or reduced expectations that have little to do with a company’s underlying long-term financial performance. A company may have the misfortune of being in a sector that has fallen out of favor or may sell its products and services into an industry that is expected to underperform. A portion of a company’s business may originate from a country or region suffering from a pullback in economic activity or a company may have exposure to an unfavorable economic trend such as falling commodities prices or large secular changes taking place within an industry. Whatever the reason, investors often feed off of and into broad negative market sentiment to pull back from a broad range of companies that have products and/or services that can weather such storms.
As value investors, this often-short-sighted market dynamic can create ample opportunities to buy great companies at substantial discounts which, in turn, sow the seeds for future potential outperformance. For us, the most important metric for identifying superior investment opportunities in an uncertain market is a company’s ability to generate sustainable free cash flow and a stock price which undervalues that capability. Paying the right price is our method of timing when purchasing individual stocks and is also our attempt to limit risk and we believe sets up the Funds for potential long-term above-average appreciation.
In conclusion, Olstein’s investment approach focuses on individual companies and the potential for meaningful capital appreciation based on the price we pay for a business. We seek to take advantage of market volatility, which presents opportunities in individual companies whose stock prices have declined, to levels having little to do with fundamentals by establishing new positions or adding to our existing positions. Our long-term value approach focuses less on market sentiment and more on the strengths of an individual company’s fundamentals and whether or not the price we have to pay discounts the favorable future fundamentals we envision. It is important to remember a privately owned company has no public market price, and the owners would not be assessing the value of the business on a daily, monthly, or quarterly basis. A private company is focused on running the business for the long term and we value each public company in our portfolio as if we own 100% of the shares. We believe the public companies in our portfolios are often selling at a discount as a result of short-term problems, negative market psychology, or just plain investor misperception. A company’s future ability to generate sustainable free cash flow gives us the conviction to ride out periods of short-term volatility until markets regain a balanced perspective and focus on company fundamentals. In our experience, patience provides generous opportunities for the long-term investor. We intend to stay the course of our long-term strategy since we believe we are invested in high-quality companies that have the financial strength to ride out current market jitters and are selling at material discounts to intrinsic value. Again, we ask you to review the chart on page 13 which shows the net asset value of the Olstein All Cap Value Fund each quarter since its inception in 1995 and demonstrates past short-term periods of underperformance and the results thereafter.
As value investors, we believe in having a long-term horizon while investing in an environment that is maniacally focused on short-term events. For us, patience is a virtue – a virtue that has become rarer as the media and many investors tend to focus on months and quarters instead of three-year, five-year, and longer time horizons. We believe that our long-term horizon, in conjunction with our in-depth analysis of financial statements, should provide our Funds with an advantage even during the most negative environments. It is our opinion that purchases made in our Funds during the most recent periods of extreme market negativity should result in higher future rates of return. The market is a discounting mechanism and while past performance is not necessarily indicative of future results, it is noteworthy that the seeds of past periods of relative outperformance for the Olstein All Cap Value Fund were sown during previous periods of volatility in 1998, 2002, 2008, 2009, 2011, 2015 and 2020 (examine long-term chart on page 13) showing quarterly values of the Fund for the past 28 years and provides results for shareholders who rode out previous periods of short-term underperformance.
While market dips present us with buying opportunities (following our strict stock selection criteria), low stock prices are not the sole criteria for buying companies for the Funds. Additional criteria include strong balance sheets; well-run operations which have the ability to consistently generate excess free cash flow; and company management with a disciplined track record of improving the returns of the business and a focus on creating shareholder value.
As previously stated, we believe the Funds’ portfolios primarily consist of fiscally strong, excess-cash-flow companies whose businesses are primed to provide suitable returns over the long term based on the ability to generate long-term, growing free cash flow, have little or no debt or are aggressively paying down debt, and selling at a discount to our calculation of intrinsic value.
We value your trust and remind you that our money is invested alongside yours as we work hard to accomplish the Funds’ objectives.
Robert A. Olstein, Chairman and Chief Investment Officer
Eric R. Heyman, Co-Leasd Portfolio Manager
The performance data quoted represents past performance and does not guarantee future results. The Olstein All Cap Value Fund’s Class C average annual return for the one-year, five-year, and ten-year periods ended 06/30/23, assuming reinvestment of dividends and capital gain distributions and deduction of the Olstein All Cap Value Fund’s maximum CDSC of 1% during the one-year period, was 7.48%, 6.64%, and 7.75%, respectively. Per the Fund’s prospectus dated 10/28/22, the expense ratio for the Olstein All Cap Value Fund Class C was 2.15%. Performance and expense ratios for other share classes will vary due to differences in sales charge structure and class expenses. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than performance quoted. To obtain performance data current to the most recent month end, please go to our website at www.olsteinfunds.com.
The above represents the opinion of the Manager and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. The references to securities are not buy or sell recommendations but are intended to be descriptive examples of the Funds’ investment philosophy and are subject to change. Do not make investments based on the securities referenced. A full schedule of Fund holdings as of 06/30/23 is contained in this report and is subject to change.