Top-ranked money manager Sean Peche is revelling in the current volatile stock markets with the turbulence “throwing up innocent bystanders” – stocks that can be nabbed at bargain prices. Among his favourites is a North American beer business run by a group of financially conservative South Africans who learned their trade at much admired SA Breweries. Peche also explains that investors should be paying close attention to Warren Buffett’s sale of half of Berkshire Hathaway’s Apple shares, previously its biggest single investment. He spoke to BizNews editor Alec Hogg.
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Sean Peche is revelling in the current volatile stock markets with the turbulence “throwing up innocent bystanders”Highlights from the interview
In this insightful discussion between Alec Hogg and Sean Peche, they delve into the current state of the investment markets and the ongoing rotation from growth to value stocks. Sean, a value investor, highlights the importance of price sensitivity and turnover, noting that investors should move their investments when stocks reach full value. He emphasizes that volatility creates opportunities for value investors and describes the recent outperformance of value stocks compared to growth stocks. Alec shares examples from the BizNews portfolio, such as Uber and Palantir, which have performed well despite a declining market.
Sean discusses the broader market trends, mentioning significant drops in stocks like Snap and Dell due to high expectations not being met. He cautions against overconfidence in predicting the future performance of any stock, advocating for a diversified investment approach. The conversation shifts to Warren Buffett’s recent sale of Apple shares, which Sean attributes to high valuations and potential tax considerations. He stresses the importance of understanding P-E ratios and being cautious when earnings are high.
The discussion concludes with a focus on Molson Coors, a consumer staples company that Sean finds undervalued. He praises the company for its debt reduction, innovation, and strong cash flow, highlighting the conservative management style of its South African executives. Despite the declining beer consumption trend, Sean sees potential in Molson Coors due to its diversified product offerings and insider confidence. Overall, the dialogue underscores the importance of value investing and the opportunities presented by market volatility.
Edited transcript of the interview
Alec Hogg (00:09.55)
Well, isn’t it interesting? It’s one of the only months of the year that when you see Sean Peche and I together, I’m the one who’s pale and he’s the one who’s tanned. He is in the UK. They’re having their month of summer at the moment. And, well here in South Africa, August is never our best moment, it’s always a good moment to talk markets as we’re going to be doing in a moment with Sean.
Alec Hogg (00:36.757)
I’m surprised you’re looking so tan, Sean. There’ve been a heck of a lot of things to distract you from the one month of summer in the UK. Clearly, the turbulence in the investment markets has come at probably the, I suppose some would say long overdue after we’ve had a bull market for so long, particularly in the big tech stocks. you
classify yourself as any kind of invest. In other words, I know I’ve spoken to you about value and growth and you say, no, no, we can find stocks that are cheap. We find stocks that are great value and we, put our money there. And then when they, they rise to a certain level, then we find something. Which is a better alternative for it. So I can’t really pigeonhole you and I’m sure you hate to be even suggested that we can, but when you’re looking at what is happening right now,
It does appear as though there’s some kind of a rotation in international stock markets away from the area that I love, the exponential companies to something a little more maybe stable.
Sean (01:45.543)
Ahem.
Sean (01:50.194)
Alec, think that’s probably right. And firstly, you normally it’s a month of summer, but I think it’s been a week of summer this year in the UK. And that was last week. It’s not this week. But look, it has been turbulent. And I think this great rotation and we are value investors, so we want value. And of course, one of the things that think fewer people appreciate than they should is that value investors are price sensitive. And so when something hits
Alec Hogg (01:59.723)
Ouch.
Sean (02:17.62)
target price or what you think is full value or close to full value, but there’s another opportunity that’s further away from full value, we move. And so I’m always amazed where people think that low turnover is a great idea. mean, some of the best investors in the world don’t even talk about turnover. And I know, you know, look at Warren Buffett’s and Apple, and maybe we’ll touch on that in a second in terms of turnover. When the price is fully valued, what do want us to do? Sit on the stock? No, you want us to go and find something else. So we value investors.
And this kind of volatility is wonderful for us because they’re innocent bystanders. throw up, know, everything gets caught in the wind and there’s some that should get blown over. But it’s the innocent bystanders we want to find. so volatility creates opportunities and we like this kind of opportunity. know, we like this kind of environment. it’s easy and everybody’s making money, well, then it’s hard to shine. So I think this rotation, I think it’s happening.
And I think it’s, you know, and let’s just take a step back. I did an analysis a little while ago and I looked at how value has done versus growth on a rolling basis. I didn’t choose a month, okay, on monthly data points because look, if the month had ended two days later than when it did, well, everybody would have been down for the month if a month had ended two days earlier. So there’s only so many months. So what I did is I took rolling daily data.
going back to the first time daily data was available for the value and the growth index. And that was in 1999. So we’ve got 25 years of data here, five day rolling periods. And up until the 17th of July, value for the five days before the 17th of July had outperformed growth by 6 .3%. Now that’s quite a big number. And I went back and said, okay, how many times has value beaten growth on a five day rolling period by 6 .3 % the 25 years, okay?
10 times had it beaten it, and then plus that. So only 11 times out of 6 ,600 and something data points. And I said, okay, if you’d bought value after that period and held for the next two years, how would you have done? Value beat growth in every single instance by an average of 18 .5 % on those 11 occasions. So I think it’s quite interesting because I think what happens is it’s a bit like, let’s take a sailing analogy or an article analogy.
Sean (04:39.75)
Everybody’s moved to one side of the boat and when you’ve all moved to one side of the boat the boat becomes unstable and you don’t need much of a wave to capsize the boat. Okay, and so I think what’s happened is everyone’s moved to one side of the boat you get a little bit of a wave everyone goes hang on a second this boats a bit unstable let’s start shifting to the other side of the boat as surreptitiously and as quietly as we possibly can but the bottom line is people are now moving their weight and I think that’s what we see.
I think that’s what we’re seeing and that’s why I don’t think it’s a flash in the pan. Everyone must just say don’t worry about it, forget it. This is the first wave. There are more. In my experience, it doesn’t happen. We’ve had years of this. It’s not over in one day or in one month or one
Alec Hogg (05:21.16)
But I’ll give you something in the business portfolio because we have got three stocks that reported this week or in the last week. Uber share price went up 10 percent. Palantir share price went up 10 percent in a soggy market. And we had a cloud flare last week. Share price went up 10 percent against a declining trend. So I guess that plays or speaks to the point of even in a crappy sector.
which as you are defining tech now, if you pick your shares properly, you can outperform, but in a good sector when the wind is from behind, if you pick your shares properly, you should be able to super outperform or is that a little simplistic?
Sean (05:54.185)
Yeah.
Ahem.
Sean (06:08.348)
No, I mean, you should be, you know, you should be. And it depends on how well they’re owned. Is everybody in those stocks? No. mean, I don’t even know, you know, some of those companies that you mentioned, there’s thousands of companies. I only look at the ones that swim into our pond, that tick our boxes. But of course, I know Uber, you know. But no, don’t know Cloudflare, Palantir. No, no.
Alec Hogg (06:23.259)
You don’t know Uber? Uber?
Alec Hogg (06:28.432)
You don’t know Cloudflare? You don’t know Palantir? Come on, Sean. But you mean you haven’t really done that Warren Buffett study of them. You don’t know them in the sense that you haven’t taken a deep dive there.
Sean (06:43.262)
Correct, correct, okay. But I mean, if you look at something, and it’s all about expectations, and so it’s about two things, Alex, expectations and what the outlook is, okay? So, you you look at something like Snap, I mean, Snap will, you know,
familiar with Snap and all the rest, know, the grew revenue 16 % and advertising was quite buoyant. Stocks down 47 % in the last month. Dell is down 38%, I think, in the last month. You know, and yet Dell, but what were the expectations? Everybody was saying, well, hang on, Dell make the servers that host all the AI and all the rest. So expectations, you know, the stock went parabolic beforehand. They come out with numbers.
you know, their AI stuff was growing 100 % or whatever, but it wasn’t enough or people, you know, it’s by the, by the rumor, sell the news. So that’s the story. Right. Sell down 38%. So, you know, these are some big moves. you look at Amazon, I mean, what did Amazon grow revenue? 10 % or so people were a little bit disappointed. Boom. Stocks down, down 9 % in a day. It’s 20 % off the high. So, I mean, CrowdStrike, we’re all familiar with the CrowdStrike. You know, it’s down 42 % from its highs.
So this is dangerous. You you can get your winners, the ones that you mentioned, you can get your losers. And if you are, and that’s why I always think, you know, there’s that phrase conviction. You’ve to have conviction. I’m going, I don’t know. Let’s leave conviction to the courts. Okay. Because you can know everything there is to know about Dell. What you don’t know about is how all the other investors are going to respond to what Dell talks about in terms of the outlook statement. So be careful about being too convinced that you know what the future is. You can know the company inside out.
You can know Apple inside out Warren Buffett selling stocks down. So we don’t know the future. And so we prefer a far more diversified approach. What do they say? You get old investors and you get bold investors, but you don’t get old bold investors.
Alec Hogg (08:37.283)
You got the saying. Let’s talk Apple.
Sean (08:41.724)
Okay. Apple. Well, actually, I’ve just written a piece on LinkedIn because the interesting thing for me and I’ve and you know, I’ve passed it on to Stu. The interesting thing for me is that just unpacking that whole thing, know, Warren Buffett, the news comes out over the weekend, Warren Buffett sold.
Half Berkshire Hathaway sold half their stake in Apple and it’s a big stake. So I went and ran the numbers and I said, okay, how many shares traded in Q2? How many did they sell? What percentage of the trade were they? They were 9 % of the trade. Now that is a big number. To be 9 % on an ongoing basis without trying to influence the price is takes some doing. So they did extremely well. And remember that the AGM was during Q2.
And they had sold some in Q1. in Q1 they sold some. Buffett’s questioned about it in Q2. He said, well, you know, unless there’s something extraordinary happens, you we’ll still own Apple, this, that and the other, but federal tax rates could go up. Somebody’s got to pay for all this debt. And so it probably makes sense to sell a few. And that’s what he did. But interestingly, he didn’t sell Coke and they didn’t sell American Express and they’ve got massive gains there. So the tax argument would have applied to those, but he didn’t sell those either.
They sold Apple, I think, because revenue’s not growing. And revenue’s not growing, it’s on 30 times earnings, and those earnings are high. And it’s always very important to look at P -E ratios relative to the level of earnings. And this is an important point. People say, yeah, know, Nvidia’s on 35 times earnings or whatever, that’s really cheap based on where they were. Yes, but the profit margins, if the profit margins are very high, you’ve got a high P -E on high earnings. You know, they say you need to buy commodity stocks on high P -Es.
but that’s because earnings are really low. So the PE is high because the earnings is low, know, PE, price divided by earnings. But when you’re paying a high PE for high earnings, you’ve got to be doubly careful. And that’s what I think Warren Buffett’s, it’s about the rating.
Alec Hogg (10:41.794)
So it’s all about the rating. And I think a lot of people are saying, what’s high PE, low PE, this, that, that. Just to keep the alphabet soup out of it, what we’re talking about is how is it rated and what is the expectations? At some point in time, even the best company in the world has to get expensive if people keep buying it. And at some point in time, even the worst company in the world has to get cheap if everyone’s selling it. So that’s kind of where…
If I understand correctly, that’s the Sean Peche philosophy on investing. You make sure that if everybody is really dumb and have underpriced an asset or overpriced an asset, I don’t get sucked in with them.
Sean (11:24.5)
That’s right, Alec. mean, if you wanted to, let’s say, buy a coffee shop, you want to buy the coffee shop, you pay 30 times earnings. What does that mean? It means that for the next 30 years, if you pay 300 for the next 30 years, it’ll take you 30 years to pay back, you know, me effectively the loan that you took on the coffee shop. That’s a long time. So anyway, the point I want to make, I think he’s carried on selling. OK, because it would not, you know, the price is higher than it was when he sold and things haven’t really changed. The tax rates.
Arguments still valid. So, so I think he’s probably selling and he’s a Wiley Al -Ka ‘ati full markster You know, but the point being we need to set up and take notice. Here’s the smartest guy in the room Okay, who’s done phenomenally well who is selling? Jensen Huang every day 120 ,000 of video shares are getting sold every day 1 % of his holding. Okay, go and have a look at the filings every day and I’m going well That’s you know, they’re just they’re just throwing a little shot across the bar. That’s that black well the next chip might be delayed
Results are out a little bit later. Microns, super micros halved, Dell’s down 38%. It’s time to be careful. People have been very greedy. And I’ll give you an idea. And one of the data points in terms of what does Warren Buffett said? He says, be fearful when others are greedy. And look at what’s going on out there. We have ETF products that are three times geared to the semiconductor index. So if the semiconductor…
Alec Hogg (12:49.779)
Explain that.
Sean (12:51.29)
Right, so if the semiconductor index, so they buy, know, ETF, you go and buy the basket. So this is a basket of semiconductor shares, Nvidia, Micron, all those guys. And if the index goes up one percent, well, then your ETF goes up one percent. But that’s not enough for some investors. want to, so some guys have come up with this packaged product, which is three times the performance. So if the index goes up one percent, this thing goes up three percent. How do they do that? They do that with derivatives. OK, now this is not, I mean,
product attracted $2 .8 billion of new money in July. It’s a $9 billion fund that is three times geared to just the semiconductor sector. And that’s that index is down 60 % since July. So, know, when you when you’ve got people easily selling, yeah.
Alec Hogg (13:35.475)
So a lot of people have lost a lot of people have lost a lot of money on that one. If it’s three times good, it sounds a bit like gambling rather than investing.
Sean (13:46.908)
Well, it comes back to that point that people have been greedy and one needs to be careful. The Oracle is telling us, listen, he’s showing us the way. He’s told us years ago, be fearful when others are greedy. Nobody’s writing about that. He’s showing us. This is what it means. It means taking your chips off the table on some of these very expensive companies. So that’s what I think about Apple.
Alec Hogg (14:10.169)
not so expensive companies and your latest fund report, you put one out every month in July. You’re talking about defensive consumer staples. And the stock that you highlighted is Malson Coors, a company that South Africans would know well, because S .A .B. Miller used to have a joint venture with Malson Coors. it is it really, really cheap? Is that the reason why
highlighted this particular company.
Sean (14:42.512)
We think it’s cheap. think it’s, you know, the interesting thing with consumer staples, if you take a step back, because a lot of consumer staples companies, which have been very well owned, the Diageo’s, you know, of the world, the Pernod Ricard’s, those kind of guys have been out of favor because they were very expensive and alcohol consumption is declining. And they’ve had to contend with some of the other non -alcohol consumer brands, private label. Times are tough. You don’t want to pay five pounds for your Kellogg’s cornflakes.
You pay one farm 50 for your Waitrose Cornflakes. Okay. So people have been trading down. The difference is beer, you you might want to eat your Waitrose Cornflakes, but I’m not going to drink Waitrose beer. So I think beer is a little more, we think beer is a little more insulated. But having said that, beer consumption is falling, but at least you can have 0 % beer. You can’t have 0 %
kind of 0 % tequila. So, and because everybody has been rushing to the semiconductors, they’ve been ignoring some of these consumer staples. And what makes, I think, Molson Coors quite unique, first of all, it’s being run by some conservative South Africans. And what’s interesting is because we’ve come out of an environment, so they rightly, they bought that preemptive, so they could buy the steak that, you know, that joint venture you just mentioned, but because ABI acquired
SAB Miller, they had the right to buy back their share of the joint venture that they didn’t own. Of course, they got a good price for that because they’re the only buyer. So that was the first point and they used and they funded that using debt. Now over the last, it was nine and a half billion debt, dollars of debt. And then over the last, since 2000, what was it 16 or so, they’ve been using the cash generated from operations to repay that debt. Nice and conservative. Whereas many American companies have been
Binging on this low -cost debt tape buying, know buying back stock borrowing money at low interest rates thinking the low interest rates are gonna last forever But as us South Africans know that doesn’t happen. Okay And so now dates down to a nice
Sean (16:44.468)
They’re buying back stock. They’re still generating lots of cash. Budweiser had an issue last year with their marketing and there was a bit of a boycott and they benefited from that. And so here’s you’ve got a conservatively run company, 10 times earnings, 3 % dividend yield plus buying back stock. You know, think it’s good. And this kind of that’s being ignored because they’re not selling AI computer semiconductor chips. So those are the kind of businesses we’ve been liking.
Alec Hogg (17:10.96)
Sean, you say conservative South Africans, are they ex -SAB Miller?
Sean (17:15.09)
Yeah, I think that’s right. The CFO definitely is. I think the CEOs as well. Yeah.
Alec Hogg (17:17.072)
That’s interesting.
Alec Hogg (17:21.949)
So it’s a little bit like many South Africans were most upset when SAB Miller was delisted, bought out by ABI, as you mentioned earlier. But if you want to have a play on that kind of a managerial core, well, here we go. And it’s a 10 times earnings, which by comparison is very, very cheap for an international beer company.
Sean (17:47.028)
Yeah, look, Alec, it’s not the fastest growing in the world. There are challenges in that sector. You know, it’s I think it’s number four or five in the world. But but I do like the fact, you know, we grew up with I grew up in an environment where your home loan, where your mortgage rate went from 15 to 25 overnight. So we were a little bit scared of debt. Many American.
CEOs are not and they use lots of debt to buy other companies to gear up the balance sheet to announce accelerated buybacks here Molson Coors actually the share price is weaker They just bought a bit more and then they announced afterwards. by the way guys, we bought a bit
than we thought we were going to last quarter because the price was lower. Rather than announcing that in advance, share price rallies and now you’ve got to commit to buy a higher price. So we like that management staff, conservative, not messing around, clean and financials, decent prices. Most exciting company in the world? No. Right now, you don’t want too much excitement, I think.
Alec Hogg (18:40.464)
Why don’t you want excitement right now?
Sean (18:42.194)
Well, because it’s time to be fearful Alec, everyone’s greedy. You know, they’re buying three times semiconductor chips. Maybe it’s time to buy consumer staples.
Alec Hogg (18:52.175)
And just philosophically, I had a conversation with someone recently who was a serial entrepreneur. We never really heard about that in South Africa until Dave King came around that there were such things as serial entrepreneurs. It was more a case of you’re an entrepreneur, you get to know your business, you actually worked and knew that business well. You didn’t take on too much debt and you built it slowly over time. It now appears as though if you go bust, you gear something up, you lose everything. I’m not talking about South Africa,
generally in the Western world, that’s just too bad for the people who backed you. And so you go on to the next venture and hopefully you can get more people to give you money to have another try and so on. Is this something that that it certainly is something that has been baffling me recently. Maybe we in South Africa are way out of step with the rest of the world. And should we be learning more about using gearing or does it make those or that system more vulnerable?
Sean (19:50.29)
Alec, we’re not wild about too much debt. You can have a little bit of debt because it improves your return on assets. If you’re generating a higher return on capital and the debt is costing you, yes, that’s fine, but you’ve also got to understand interest rates can change. And if you hit tough times, you don’t have as much leeway. You’ve got
If you don’t recover, you’re going bust. We don’t like those kinds of companies. So we’re quite conservative about companies with lots of debt. so, for example, many of the broadcasters, Paramount and Warner Brothers, those companies have got loads of debt from buying Time Warner, from buying CBS, et cetera. And times are tough in the advertising, TV advertising rates, all that’s very competitive. You’re up against Netflix streaming.
losing money and now you’ve got a challenged business model with lots of debt. So be careful of too much debt. So we will rather play the conservative way.
Alec Hogg (20:50.316)
Always or just
Sean (20:52.53)
Most of the time, no, mean, you know, generally speaking, I mean, there’s a place for some of those companies, but if you’ve got to be, you know, what’s the interest cover? What are the covenants? What’s the term of the debt? You know, it requires a lot of work. be, it’s cautious. You know, you’ve got to be cautious. You’ve got cautious. And especially now, especially when everybody’s greedy and especially with interest rates going up. I mean, that’s what we like about many of the Japanese companies. They’ve got low interest rates. They’re sitting on a lot of companies are sitting on cash.
Now it’s been interesting what’s been going on in Japan. And we did writes in May. We said be careful about Japan because everybody’s rushing to Japan. How are they getting exposure to Japan? They’re buying the ETFs. What’s in the ETFs? Toyota Motor Corporation, Honda and the banks. They have big weightings in those. But what’s happened to some of those companies? I think I’m wrong in saying Toyota’s down nearly
Okay, since from a couple of months ago, some of the banks are down 35%. So when people leave and maybe that’s just something that we need to be careful of because because that same sort of concentration is sitting in the S &P 500. Okay. And so you can stand back and go, but Toyota is a wonderful company. Mitsubishi is, know, Honda selling more cars, great cars and motorbikes and all the rest. When the when the crowd is too exposed to you and the crowd has to leave, they sell regardless. Okay.
And I think that’s a risk. I think one has to be careful. we’ve got Microsoft down 14 and a half and all the rest of the people saying, it’s a great business. Yes, it is a great business. But many of those companies are trading on one and 2 % free cash flow yields and those are expensive. mean, Meta are just having a look in the last year. Meta has generated 50 billion of free cash flow. Amazing. They spent 40 billion buying back shares. Incredible. Problem is the share count didn’t fall.
Because every time they were buying back shares from the employees, what’s happening? They’re giving more share options there. these businesses are not being run, well, a couple of them, I would argue, for shareholders. They’ve been run for employees because you’re basically telling me that 80 % of the free cash that we generated went to go and buy back shares from employees who cashing in options. It’s no surprise Mark Zuckerberg’s now one of the, you know, is overtaken.
Sean (23:09.556)
the LLVMH guy the other day. So I think one has to look deeper and go, well, okay, these are great businesses, but do they offer value? Are you as shareholders going to benefit or are you getting dividends? Is the money really coming into your hands or is it just going to employees? Are they being run for shareholders or are they being run for employees? And in many cases in the US, we find that they’re being run for employees and that’s why we only have 20%. It’s another reason why we only have 20 % in US companies.
Alec Hogg (23:40.585)
Second level thinking, Howard Marks, Sean Peche, coupled on the tote, I’m Alec Hogg from BizNews .com.
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