[00:03:16] Chance Finucane: We would think long-term treasury yields would continue to come down like they typically do during a recess. And then we would be very wary of getting into anything too speculative right now. Anything like junk bonds probably would go down at value because credit spreads would widen further. And anything speculative in the stock market we would be concerned with.

[00:03:35] Chance Finucane: Finally, just a few other sectors I imagine we’ll talk about more, but we would expect housing prices to continue to come down. We’ve trimmed our exposure to the energy sector just because oil tends to underperform during a recess. And we do expect gold to continue to hold up pretty well in this environment, but we can delve in some more details in any of those area.

[00:03:55] Rebecca Hotsko: So I want to unpack a few things there, because it seems like this is the most anticipated recession ever, yet. Markets don’t seem to be pricing that in. And so in the Oxbow, I think it was the Q3 2022 report, there was a really great graph just showing how complacent investors are despite being the most pessimistic ever.

[00:04:16] Rebecca Hotsko: And so I guess I’m just wonder. What do you think are the main reasons investors are not selling stocks despite being so pessimistic about 

[00:04:24] Chance Finucane: the future? I think there’s a few reasons for that. First, anyone who’s been invested over the last 10 to 13 years has generated significant gains. So the fact that the market’s maybe gone down by anywhere from 15 to 30%, depending on the index you look at, it doesn’t feel that bad because you still have a lot of gains that maybe you lost a little bit, but you still feel okay.

[00:04:47] Chance Finucane: Same thing with the value of your home. If prices have gone up by a lot since you purchased, Also, I think people have gotten smarter, especially younger investors, about investing for the long term and just staying fully [00:05:00] invested, which makes a lot of sense. If you’re in your twenties or thirties and you have decades remaining in your career and you’re just trying to generate that savings over a long time.

[00:05:08] Chance Finucane: Finally, you’ve got pension plans that are still trying to generate a target return, which is keeping them more fully invested in stocks because they need to hit a certain annual return per year through an economic cycle. So even though you see people say negative things, they think that’s why you still see such a low percentage of cash in total being taken out of the market.

[00:05:29] Rebecca Hotsko: And then I guess the other thing that’s quite interesting to see is last year in 2022, it’s still, we’re waiting for Q4 data, I guess, but profit margins were at an all-time high. Earnings growth was still quite well despite everything. And then for this coming year, The Wall Street still has consensus estimates of earnings growth of about 5%, which seems quite unrealistic if we’re expecting a recession.

[00:05:54] Rebecca Hotsko: And so I guess I’m just wondering how you’re thinking about those two and maybe what’s your earnings [00:06:00] estimate? 

[00:06:01] Chance Finucane: We’d agree that we think earnings guidance is still too high. I think typically analysts are waiting for company management teams to confirm with their own annual earnings guidance that to expect lower for the coming.

[00:06:14] Chance Finucane: Right now, if you just looked at the S&P 500, we did about $220 per share in earnings in 2022. It looks like about two 30 of our, about 5% growth, like you said, is what’s expected for next year. We would expect actually that that number would be more like down five to 15%, so say anywhere between 190 and $205 per share.

[00:06:36] Chance Finucane: That would be more our expectation, and we would expect that to be realized more in guidance and what investors are anticipating over the course of the next six months or so. 

[00:06:46] Rebecca Hotsko: Okay. And then just circling back into what that means for prices, if that correction is realized, would that suggest about a 20% correction from current prices in the market?

[00:06:59] Chance Finucane: Yeah, [00:07:00] 20% is pretty much dead on right now. So if the S&P 500 today is at about 4,000, On average, the historic multiple for a priced earnings ratio for the index is about 16 times. So if you were saying $200 in earnings per share for the index, 16 times about 3,200 or 20% below current levels, that’s a decent starting place to say, all right, that would be a little bit more reasonable.

[00:07:23] Chance Finucane: And also where we would start to get more interested and think that valuations are looking more at. 

[00:07:28] Rebecca Hotsko: Okay. That’s really helpful to hear. And then I guess just on the Fed Pivot, because it just seems like markets are hyper-focused on the Fed Pivot yet they seem to be underreacting to Fed hikes and what this means for future corporate profits.

[00:07:43] Rebecca Hotsko: And so in a scenario where the Fed does pivot at some point in 2023 or 2024, whether it’s because they actually get back to their target or something breaks, what does this Fed Pivot mean for the stock market? 

[00:07:58] Chance Finucane: I think people have forgotten historically what happens or what drives a pivot by the Fed to start cutting rates.

[00:08:05] Chance Finucane: Usually that’s the signal that the recession has started and they have to really start easing on their monetary policy to try to help the economy and help companies. If the Fed actually shifted to where they’re cutting rates that would be assigned to us, that the recession has really taken hold, and either you’ve got a significant decline in financial market prices.

[00:08:25] Chance Finucane: Usually there’s some sort of a credit event and they need to do something to stabilize the financial system. Or they’re recognizing that the unemployment rate is going up, and if let’s say inflation is moderated enough that they can focus on employment again, then they might want to try and assist in that employment level.

[00:08:41] Chance Finucane: Like their dual mandate says they’re trying to focus on inflation and employment. We would actually take that sign of the Fed cutting rates as being a negative sign for the economy, that there might be more downside to go. It’s usually well into the Fed cutting rate before you’d hit a bottom in the the stock.

[00:08:58] Chance Finucane: And the final point on [00:09:00] this that I think is interesting is right now the market is anticipating about 200 basis points are 2% in a cut in the Federal funds rate over the next couple of years. But historically, in a recession, the Fed on average has cut rates by almost 7%. Which is not possible right now, but it tells you that right now I think everyone’s expecting too smooth of a return to normal.

[00:09:22] Chance Finucane: If anything, we would expect that rates would get cut significantly back towards 1% or even towards zero again, if they really needed to stimulate the economy. 

[00:09:31] Rebecca Hotsko: You mentioned that you think a recession is going to happen sometime later this year. Do you have any estimate on when you think that’ll be? I know it’s it’s impossible to predict recessions, but what’s your thinking behind this?

[00:09:46] Chance Finucane: We’re seeing the economy slow significantly right now, and there are a lot of bleeding indicators that we track that would suggest that it could be starting right now or at least sometime in the first half of this. I think for us, we’re [00:10:00] less concerned about the exact timing and more about just paying attention to the endgame scenario, which would, in our mind, would result in significantly lower financial asset prices, a better opportunity for our investors rather than what’s available right now.

[00:10:15] Chance Finucane: And that’s why we’re just being patient and letting this all play out. We think investors, especially that are newer to investing, haven’t lived through one of these events where you could have an 18 month or three year long bear market, and it just requires a lot of patience in letting everything play out and waiting for your opportunity.

[00:10:33] Chance Finucane: And 

[00:10:33] Rebecca Hotsko: I guess the one interesting thing is that the Fed will pivot, but they look at forward information while recession data is lagged. And so we could already be in recession, but we don’t know until months later. And so how should investors think about making well informed investment decisions at a time when you want to look at future data?

[00:10:54] Rebecca Hotsko: But then we’re also kind of relying on what happened in the 

[00:10:57] Chance Finucane: past. We wouldn’t pay attention [00:11:00] to an official announcement about a recession beginning or ending. Historically, the economic group that announces those recessions officially, they’re usually seven months late at announcing the beginning of the recession, and they’re 15 months late on average at announcing the end of the recession.

[00:11:18] Chance Finucane: That’s not something we would pay attention to. We would focus more on leading indicators such as the new orders component of the I S M index numbers that come out at the start of every month. You can look at some housing data like the N A H B Housing Sentiment Index or housing starts. Things along those lines give you a little bit better idea of what’s happening on the leading end of the economy, rather than focusing on the unemployment rate, which is usually the last thing that moves.

[00:11:46] Chance Finucane: And by the time the unemployment rate is heading up, you may already be in a recession. 

[00:11:51] Rebecca Hotsko: And so you mentioned you’re kind of being a bit more cautious rate now still, what would change your viewS&Put you in a more offensive 

[00:11:58] Chance Finucane: buying mode? [00:12:00] We would need to see valuations come down significantly. So right now, even if we had a soft landing, we would consider the market to be pretty fairly valued, and there’s not a lot of opportunity available where we want to be able to buy in at undervalued prices.

[00:12:14] Chance Finucane: So we want to see valuations come down. We’d also like to see more capitulation on the part of investors. We don’t think people, as we discussed, maybe people are saying negative things, but their actions are still suggesting that they’re not really being forced or capitulating and selling and just saying, oh, this is too much for me to handle.

[00:12:32] Chance Finucane: I really just want to have more safety right now. Usually that’s what you happen towards the end of any long-term bear. And we haven’t had that yet. It’s been a very sort of steady decline without any real spike in volatility like you would typically have. 

[00:12:47] Rebecca Hotsko: And then I guess, what parts of the market do you think today are still the most overvalued?

[00:12:52] Rebecca Hotsko: Because we have seen a lot of sectors come down substantially, like the tech or consumer sectors. And so which parts do [00:13:00] you think still have ways to. 

[00:13:02] Chance Finucane: It’s interesting if we were just looking at true overvaluation, it’s actually the defensive sectors right now where investors have been hiding for the last six to 12 months to try and mitigate some of the declines.

[00:13:14] Chance Finucane: So when we look at areas like consumer staples, pharmaceuticals, defense, stocks with the war, and Russia and Ukraine, those got bit up to levels we would consider overvalued and insurance. C. Those are areas where we’re actually seeing more overvalued valuations. And if you own some of those areas and you’re just using that because you’re trying to stay fully invested, it’s okay to sit in those a bit longer.

[00:13:38] Chance Finucane: But we would be ready to sell those and buy more cyclical areas of the market when the opportunity presents itself. The other areas that we would pay attention to and maybe still stay away from would be more cyclical financials like bankS&Private. And be just monitoring other sort of basic cyclicals, like some of the consumer discretionary names that deal with [00:14:00] consumer durables, maybe big purchases that are selling autos or, or things like that.

[00:14:05] Chance Finucane: Just because those usually deteriorate a lot further and their earnings decline a lot more through a recession and they’ll bounce back eventually. But right now there’s still probably some more downside. 

[00:14:16] Rebecca Hotsko: That’s very interesting because I know banks, for example, look extremely cheap. They can do well in rising interest rate environments.

[00:14:23] Rebecca Hotsko: But you think at this point the risk outweighs the benefit, perhaps? 

[00:14:28] Chance Finucane: Yeah. The problem right now is they still have to increase their provisions for loan losses and actually with an inverted yield curve, you’ll start to see their net interest margin start to come down, which will impact some of their their earnings report.

[00:14:44] Chance Finucane: Goldman Sachs is an extreme example, but they just reported a 70% decline in their earnings in their most recent quarter versus the previous year in that same quarter. And you start to see a movement like that where I think you’d rather get further into this recession and really [00:15:00] see valuations hit a real trough before you’d want to start putting exposure back into that area.

[00:15:06] Rebecca Hotsko: And then just to cover all the bases today on markets. What would happen that would change your base case scenario from what you talked about. Because there’s some people saying, what if the Black Swan event is that the Fed actually hits the target? They have the soft landing. Everything goes smoothly.

[00:15:22] Rebecca Hotsko: And so I think everyone’s expecting things to get a lot worse. What would change your view and change it to things might not actually be that. 

[00:15:31] Chance Finucane: If you look at an economic cycle like this, there’s usually further dominoes that have to fall, and if those don’t fall, then that would make us reengage our thesis.

[00:15:40] Chance Finucane: If you really don’t see any increase in the unemployment rate over the course of this year, that might suggest to us that this time is playing out differently than in the past. You also might want to look at some of the numbers, let’s say housing ends up bottoming and you actually see housing sentiment and housing starts start to increase again for a period of time.[00:16:00] 

[00:16:00] Chance Finucane: That may suggest that, okay, maybe this was just a short term blip and, and things will start to improve again. But historically, whenever the Fed raises rates this much, they’re going to break something and they really want to try and keep policy as restrictive as possible for as long as they can to try and reduce this speculation and and fervor that people have had for financial assets over the last two years.

[00:16:24] Chance Finucane: From our viewpoint, we think that that’s still the more likely outcome, but to your point, we’re always looking to see, we could be wrong and if we have to adjust, we will. 

[00:16:34] Rebecca Hotsko: Okay. That’s super helpful. So housing and unemployment. And I guess on that point, I’ve heard that some people say that even a 5% interest rate that could break the economy.

[00:16:45] Rebecca Hotsko: Do you have any views on a rate that you think would break it? 

[00:16:49] Chance Finucane: We’re already at a level, and if they get to 5% over the course of the next three to four months in the Federal funds rate, just staying at that level for a while is going to have problems for a lot of [00:17:00] companies that need to refinance debt or raise debt to make acquisitions.

[00:17:04] Chance Finucane: It’s other parts of the market that maybe weren’t a problem over the last 20 or 30 years. Areas like private equity or companies that have no free cash flow, and in order to stay in business, they’re going to have to raise new debt as some of their current debt matures, but now they have to do it at much higher interest rates than what they did two or three years ago.

[00:17:24] Chance Finucane: Those are the sorts of effects that. We would start to see more bankruptcy announcements and more issues for private real estate and private equity investments that maybe the numbers fit several years ago, but at the prices they were paying and the way rates are currently stated, it’s going to be difficult for them to really generate great returns.

[00:17:43] Chance Finucane: Are you at 

[00:17:44] Rebecca Hotsko: all at Oxbow concerned about the amount of government debt that has to be rolled over? I’ve spoke with another guest recently who is quite concerned that that could cause this time to be different. 

[00:17:58] Chance Finucane: You’re right. That is [00:18:00] an issue. To your point, there’s a large sum of the US government debt that matures within, say, three to four years, and they have to refinance that and issue new debt.

[00:18:11] Chance Finucane: The problem is all the short term debt several years ago was at very low rates, and now every time they issue new debt maturing in under three years, it’s going to be over four. That’s going to be a significant increase in the interest expense of the government they’re going to have to pay. So that’s actually one theory that we don’t consider.

[00:18:30] Chance Finucane: I mean, it’s, it’s an interesting one that we would expect to probably play out, is that the Federal Reserve and the government almost need a recession to induce them to cut rates again so that they can get back to issuing debt at lower interest rates. Otherwise, if they are paying a four or 5% interest rate on all their short-term, It’s going to really create a problem for the overall deficit and just trying to fund the government.

[00:18:54] Chance Finucane: Yeah. If they can generate a recession remove some of the speculation in the market, and that causes them to [00:19:00] have to cut rates back down to say, 1%. Now they’re in a more sustainable position, at least for the short term for as long as they can keep it down there. That is 

[00:19:10] Rebecca Hotsko: such a good point. And just the, I think I read that there was a trillion dollars of corporate debt that needs to be rolled over as well.

[00:19:18] Rebecca Hotsko: And so do you see, I guess, how do you factor in corporate debt ratings into your investment process? 

[00:19:25] Chance Finucane: There are two things we’d pay attention to. We usually don’t deal too much with junk grade rated companies either in buying their debt or their, their stock. Especially in an economic slowdown, that’s where things can start to break and they may not be in control of their destiny.

[00:19:40] Chance Finucane: You’d rather be with companies that have more solid credit ratings. The other factor is there might be companies that have an investment grade rating, but they carry a lot of debt. Just the way their business model works, they keep a high amount of financial leverage and they use that to buy back stock or do other things.

[00:19:57] Chance Finucane: And we’ve actually seen some of those [00:20:00] companies underperform over the last year as interest rates rose because you’re going to be refinancing debt that might have only been a couple percent and now you’re issuing new debt that could be as high as six. They’re going to have to factor that in and it’s going to lead to lower earnings growth for those businesses.

[00:20:17] Chance Finucane: So for us, it’s just easier to focus on the companies with great balance sheets, and you can still find businesses of that caliber that will trade undervalued from time to time. 

[00:20:27] Rebecca Hotsko: So I do want to move into some of your investments and where you kind of see the biggest opportunities in 2023 and long term.

[00:20:34] Rebecca Hotsko: You kind of touched on it in the beginning, but I’m interested to know what are you most excited for in 2023 when the opportunity arises? 

[00:20:43] Chance Finucane: I think the best way to look at this is if you’re really trying to wait for a great opportunity where this happens maybe once every handful of years, where you would actually think the stock market could double over a five year span, and we would need at least another 20% decline [00:21:00] for that sort of a setup.

[00:21:01] Chance Finucane: But what happens when you make a great low after a bear market like that in the first year after a low of that caliber? It’s usually cyclical sectors, but specifically financials and technology businesses that outperform. If we look back over every correction or bear market over the last 20 years.

[00:21:19] Chance Finucane: Those have been the areas that outperformed coming immediately out of a recessionary bear market. There’s also other cyclical sectors like consumer discretionary and then even energy materials, industrials. Those are the areas where you want to focus, and especially when you notice that improvement in the economy and the stock market.

[00:21:39] Chance Finucane: At that point, you really want to reduce your exposure to defensive sectors, so consumer staples, pharmaceuticals, utility. Those areas are going to underperform as the stock market starts to really rise again and you’ll get another opportunity one to two years out after those have been sold off by all investors to be able to buy back in when [00:22:00] you want to have a bit more balanced portfolio.

[00:22:02] Chance Finucane: But you really, at that point in time, when you see the great opportunity focus on cyclical sectors and companies that have really been beaten down and are trading in great valu. That’s what 

[00:22:12] Rebecca Hotsko: I want to get into next, because at Oxbow you have a long-term growth strategy focusing on companies that can grow above average for long periods of time.

[00:22:21] Rebecca Hotsko: And I’m just wondering if you can talk a little bit about what your investment process looks like for this strategy and what are the key things that you are looking for in companies to meet this criteria? 

[00:22:34] Chance Finucane: Yeah, this is our equity strategy. One of the the three strategies we manage for clients and for this strategy.

[00:22:40] Chance Finucane: We want to invest in companies that have a competitive advantage over their peers that we expect them to be able to sustain over at least the next handful of years. We then also want to make sure they have a great balance sheet that their investment grade rated, and we want to make sure that there’s a lot of visibility and consistency to their cash flow [00:23:00] generation.

[00:23:00] Chance Finucane: And we would say actually this past year has been a great example that focusing on free cash flow rather than EBITDA or sales or other valuation metrics, free cash flow ends up being the most important one to follow through a. So if you have a business that’s able to generate consistently growing free cash flow through a full economic cycle, you don’t have to worry quite as much about the fluctuations and the share price because the business can keep growing almost regardless of the environment.

[00:23:28] Chance Finucane: We focus on those consistently growing businesses that have an advantage. And then we just want to wait for an opportunity that we believe the company is undervalued today. And then we try to look and see what’s a reasonable price we think it’ll be worth five years from now. And we want to buy at a price that we think the company can double in five years.

[00:23:46] Chance Finucane: And by buying it at undervalued price today, we get a bit of a margin of safety so that if some part of our analysis is incorrect, we’re not going to see too much downside while waiting to see if that upside develop. 

[00:23:58] Rebecca Hotsko: That was the biggest challenge [00:24:00] over the past few years, and largely the last decade with low interest rates, is that multiples have just been extremely high and for a lot of growth companies then how do you think about not overpaying for them when a lot of them are just trading at Sky High multiples?

[00:24:16] Chance Finucane: It’s nice to be able to look at a company and think they have a great future and they might be able to grow their revenue or even their earnings or cash flow at a 20 or 30% annual rate. But we think it’s important to really look at the valuation multiples that those companies are trading at today. Is that at a cheap price relative to its history or relative to peers or the.

[00:24:38] Chance Finucane: You don’t want to overpay at that current multiple because it’s easy to talk yourself into the really bright future. But if you pay too high of a price starting out, it doesn’t matter if the revenue or the earnings are going to grow by a significant amount, if the valuation multiple that you paid is going to come down by a lot over your holding period, you end up making nothing or even losing.

[00:24:59] Chance Finucane: [00:25:00] One way to think about this is, I know another firm that I can’t remember off the top of my head, or I’d attributed to them, but they make a point that when they’re looking at a business, they said in every company’s history, it’s going to eventually, regardless of the bright growth future, it’s going to come down to trading at 30 times earnings or 30 times free cash flow at some point in it’s history.

[00:25:19] Chance Finucane: So to assume that some business is going to trade at some astronomical valuation five years from now is probably setting yourself up for. So you need to be able to see that the company’s going to generate real earnings or free cash flow, value it at no higher than 30 times five years out and see where it’s trading at at that point.

[00:25:38] Chance Finucane: And then, , you’re getting a combination of being able to buy, benefit from the growth, but not have the multiple compressed by a huge level while you own it. 

[00:25:47] Rebecca Hotsko: And I was looking yesterday at Google, for example, which has historically, or for the past five to 10 years, grown above average, their earnings per share rather than the industry and just market as a [00:26:00] whole.

[00:26:00] Rebecca Hotsko: And they were trading at a bit of a premium until recently. They’re trading at actually a discount to the industry and broader market. And so I was just thinking, okay, this could be a good opportunity for multiple expansion, but at the same time is that contracted multiple than just telling me that the market expects their growth to slow and in the future.

[00:26:20] Rebecca Hotsko: And so at the end of the day, then you could get less earnings 

[00:26:23] Chance Finucane: growth. Yeah, it’s a fair point and a fair concern with the tech business as it matures. You usually see the valuation compress, especially if that future earnings growth is going to be a lot slower than in the past. Alphabet or Google is still one of our top positions and our equity strategy.

[00:26:41] Chance Finucane: It might have some more short-term downside just because a huge part of their cash flow comes from the digital advertising market, which can slow during a recession or even turn slightly negative. But if you look out over five years, we think the valuation you’re paying today is pretty attractive.

[00:26:57] Chance Finucane: And the biggest driver of their cash [00:27:00] flow growth over the next handful of years is not the advertising market. It’s actually going to be their cloud business. And. So if you still are positive on those two businesses while still thinking that they’ll be able to keep their share of the digital advertising market and people will still be going to Google to do their searches, we think that still is a good setup.

[00:27:18] Chance Finucane: And it’s just overall a very high quality business that generates a lot of free cash flow and has a great balance sheet. So at today’s price, we think it’s an okay one to purchase anywhere in here and be able to hold it for the next half decade. 

[00:27:32] Rebecca Hotsko: And I did want to get into some of the tech stocks with you because I looked at OX expose’s filings and I noticed that you did add some shares to Microsoft Google and Amazon, but then sold some from or reduced positions in Apple.

[00:27:47] Rebecca Hotsko: And so I was hoping just to get some color around this in your thoughts around these other big tech stocks. 

[00:27:54] Chance Finucane: Sure. And we have some updates even since that filing at the end of the third. Some of those [00:28:00] fluctuations in, in our shares held have to do with just new clients joining and we’ll buy positions in the names that we think are undervalued at different times.

[00:28:09] Chance Finucane: Over the last six months, we thought Google and Microsoft were undervalued, which is why the number of shares there have gone up. Apple, we actually thought was more overvalued where we saw opportunities. We’ve been trimming that position and really all of the tech businesses in the first half of last year, we were trimming those position.

[00:28:25] Chance Finucane: But we still have to be mindful with separate accounts for clients about taxable gains and trying to identify what to realize and how to offset it with other losses on their behalf. For us, at this point where we sit now, we think Alphabet is undervalued. Microsoft and Apple are pretty, fairly valued at this point.

[00:28:43] Chance Finucane: And then Amazon, we actually sold in the fourth quarter after it popped higher after reporting earnings. And the main reason for that was we had been waiting for their free cash flow, which had been positive for a handful of years. And then it turned negative over the course of last year and we thought that [00:29:00] was going to be a short-term blip, but it, their free cash flows remained negative quarter after quarter, and we think they’re just, it’s not a good setup right now for them to be able to turn around their business in the near future.

[00:29:10] Chance Finucane: And right now we’d say it’s probably pretty fairly valued, but if you looked at Amazon on a free cash flow yield basis, The best times to buy Amazon is when the next 12 months of free cash flow that is expected to be generated, it’s trading at a 4% yield on that. Well, to get to a 4% yield, Amazon would have to fall by about another third to the high sixties.

[00:29:32] Chance Finucane: So there’s still downside left in Amazon, and maybe at that point we would reevaluate it and potentially add it back into the portfolio. But at this time, we’d think that Alphabet, Microsoft, and even Apple are better places to be rather than. 

[00:29:47] Rebecca Hotsko: Interesting. And then I guess just lastly on that, there’s considerable worries about growth slowing going forward.

[00:29:54] Rebecca Hotsko: We’ve seen massive layoffs across the board. And so I guess, do you see that as less of a risk for [00:30:00] your Google and Microsoft than the other companies that have already done layoffs? 

[00:30:05] Chance Finucane: If you see a company laying off five, maybe 10% of their employees, that’s not considered to be such a huge restructuring.

[00:30:12] Chance Finucane: That’s mainly just maybe they acquired too many businesses and overhired and they just need to right size their business based on maybe not generating quite as much revenue as they anticipated. If we look at Alphabet or Microsoft right now, it’s say their, their earnings growth is about flat. Maybe it declines a little bit, but their balance sheets are so strong that at the right valuation, we’re okay holding those positions because we think once things return to normal economic growth, they’ll be able to grow their businesses at a double digit rate again.

[00:30:42] Chance Finucane: The companies that we think are not generating free cash flow or they have much bigger competitive concerns that we would we would not maybe be as positive on it, but be quicker to want to cut those positions or sell outright. 

[00:30:55] Rebecca Hotsko: Just quickly on that, which companies do you think have the biggest competitive [00:31:00] concerns that maybe you’ve changed your view on 

[00:31:02] Chance Finucane: recently?

[00:31:04] Chance Finucane: I’m trying to think of any that we’ve owned. There’s not a ton of businesses. That we consider to be in a real deteriorating, competitive position from where they were a handful of years ago. But we do want to stay away from those names. There are some businesses like Intel or Oracle or s a p, that we just think there’s looming competition concerns.

[00:31:23] Chance Finucane: And so historically when we’ve looked at that it’s usually just a matter of time before they start to disappoint in the market. Another one, , area that happened years ago, but it’s a good example, is a lot of the brick and mortar retailers that over the course from 2015 on, you saw really start to deteriorate.

[00:31:41] Chance Finucane: And, and those sorts of cutthroat industries, there isn’t that much of a regression to the mean where, oh, they’ll bounce back. Usually if a company is getting worse relative to its competition in an, an industry like that, it’s going to continue to get worse. And so when you see headlines like Bed, bath and Beyond and Party.

[00:31:58] Chance Finucane: That might be going [00:32:00] bankrupt this year. , that’s been happening over the last six, seven years that their position has been deteriorating. And it’s important for investors not to try and go in and think, oh, this is the time to try and play the other side and we’ll buy and see if we can get a quick pop back in the stock.

[00:32:14] Chance Finucane: Usually your odds are not in your favor there, and you’re better off just staying away entirely and focusing on the businesses that are getting stronger over. I 

[00:32:22] Rebecca Hotsko: think that was great advice, and I want to talk about energy sector now because this was also very interesting. You mentioned in the beginning that you have kind of reduced some exposure to this, and so I’ve heard different views on energy this year.

[00:32:37] Rebecca Hotsko: On one hand, some people think that going to have a third year of performance given China’s reopening, and I guess factoring that into the demand for oil. But what is your thinking on energy for this? Yeah, I think 

[00:32:52] Chance Finucane: our view does not change from some of those more positive outlooks on energy for the long term.

[00:32:58] Chance Finucane: I think we’ve mainly [00:33:00] just cut our exposure to energy in our high income strategy where it tries to generate a lot of dividends and coupons for our clients. Those our energy portfolio probably was maybe 15, 16% of that strategy, the beginning of 2022. And we’ve cut that down significantly just because energy tends to be the last cyclical sector that peaks and starts going down in a recessionary bear market.

[00:33:25] Chance Finucane: This is how it played out during the.com bubble as well as in 2008 and 2000. And an oil bear market tends to last more than a year, and you tend to see the rice of oil go down by more than half on average. Right now the price of oil has gone down by about a third. We think there could be more downside to go and even though the, the long term outlook for owning oil and and energy stocks would be positive, we just cut our exposure because we think in the intermediate term over the next, say six to 18 months, that it might be a bit more difficult environment.

[00:33:58] Chance Finucane: And so we’re just trying to stick [00:34:00] with the companies that generate a lot of cash flow and are the most stable. And then we would add our exposure again if evaluations came down. At this time though, we haven’t really gotten to that point yet. 

[00:34:10] Rebecca Hotsko: Right, so it’s perhaps not that you’re less bullish, but it’s a position sizing type thing and you’re just waiting for a better price to get back in.

[00:34:20] Chance Finucane: Yeah. What’s been interesting is even though the price of oil has come down significantly, if you looked at xle, which is the The Sector ETF that covers the energy. That’s still trading near its highs of the past year, and that’s investors looking through the weakness in the short term and seeing that this structural opportunity is still there for oil prices to go higher.

[00:34:43] Chance Finucane: That would be a first though, where the price of oil stocks stayed strong even though the oil price is going down. So we just are kind of hedging our, our exposure there, just because we think that it could be that once you see more capitulation by investors, that you could see that [00:35:00] selloff in the energy sector, and then we’ll have a better opportunity to add some of those positions.

[00:35:05] Rebecca Hotsko: And then I guess just for our listeners, wondering, which names do you think have the best opportunities in the energy sector that you would be looking to get back in at the right 

[00:35:14] Chance Finucane: price overall basis? We usually have exposure to the pipelines because they generate a lot of cash flow and have high dividend yields.

[00:35:22] Chance Finucane: There are some oil royalty businesses that are just really high quality business models with great profit margin. And then if we wanted to get more positive and have more exposure, that might be where we look at exploration and production stocks like Devon Energy or Pioneer Natural Resources, or might look at refiners like Valero that tend to have a lot more volatility in their share price movement.

[00:35:44] Chance Finucane: But if you get the direction of the oil price and the sector movement correct, it can generate a lot of of return for an investor in a short period of time. But if you’re wrong and it goes the other direction, that’s also where you’re going to get the biggest decline. And those have been the areas that we’ve cut recently.

[00:35:59] Chance Finucane: I just [00:36:00] focused on the real high cash flow generators. In the meantime, 

[00:36:03] Rebecca Hotsko: And then lastly, I wanted to chat with you about gold because this has been quite interesting to look at how it’s performed over the past couple years and maybe how it hasn’t performed as expected. So I’m wondering, what is your stance on gold and do you think it offers a good opportunity for investors?

[00:36:24] Chance Finucane: We would say it does right now. The best environment for gold is when interest rates adjusted for the inflation rate or the expected inflation rate are coming down. So you have interest rates falling on the long term, and you have a weakening US dollar, and it’s only been in the last few months that you’re seeing long-term interest rates fall, which is why you’ve started to see an bump back higher in the gold price and the value of gold mining and royalty.

[00:36:49] Chance Finucane: And then now the US dollar. It had such a significant appreciation in the first nine months of last year, but that seems to be topping out. So even if there’s a bit more strengthening in the US [00:37:00] dollar, if a recession kicked in, we don’t think there’s a ton more appreciation there. So it’s a good time to start adding a bit of gold exposure when you see short-term sell-offs.

[00:37:08] Chance Finucane: And that’s what we’ve been doing here real recently, is getting a bit more exposure. After cutting about half of our holdings towards the end of last year, we’ve been adding a bit back. Now that we’re seeing this environment really take hold, that tends to be a good one for gold. And then gold miners, you really want to own the highest quality ones.

[00:37:26] Chance Finucane: So we own Newmont as an example, that generates a high dividend yield in good cash. The other really good business model to look at within gold is the royalty businesses like Franco, Nevada, which we own. That doesn’t have to deal with any cost inflation that a mining company might have to deal with if labor costs or other cost of goods are going up, and they have to deal with that, and it kind of hurts their profit growth.

[00:37:49] Chance Finucane: A royalty business doesn’t have that problem because they’re just getting a cut of the revenue generated from specific mines where they have an investment in. So it’s good to have a combination of both if you feel [00:38:00] positive about the direction gold and silver are headed. And I guess 

[00:38:04] Rebecca Hotsko: just for investors wondering, would you say that gold is still an inflation hedge part of the portfolio, or how do you view that in terms of your total portfolio?

[00:38:15] Chance Finucane: Gold’s just, it ends up being a good hedge against weakness in the currency that you live in. So , if there was real weakness in the US dollar. I think that’s really the main issue that you’re trying to cover for any sort of catastrophic events. It’s nice to have an exposure to gold and it’s meant to be really a long-term asset.

[00:38:35] Chance Finucane: We know of investors who’ve owned gold for over a decade, and while it may fluctuate a lot, they’ve gotten a good return in US dollar terms over that time period, and it was better than just having that money in cash. That would be in our minds, , you have anywhere from a few percent up to maybe five or 10% of your portfolio in exposed to gold and gold related companies.

[00:38:57] Chance Finucane: And it’s just a stable part of your portfolio [00:39:00] that’s not going to fluctuate in the same manner as the rest of your stock portfolio might. 

[00:39:05] Rebecca Hotsko: And then I guess just at the beginning, you also did mention precious metals. And so how does that fit into this allocation 

as 

[00:39:13] Chance Finucane: well? Precious metals. You got gold and silver are the two main ones.

[00:39:18] Chance Finucane: There are other ones there too. I think the way we would look at that is just metals in general, and this ties back to that long-term thesis on oil. There’s not enough mining happening right now for all of these precious resources. So whether it’s industrial metals that might feed into electric vehicle growth over the next decade, precious metals, golden silver, or sources of energy like oil and natural gas.

[00:39:43] Chance Finucane: The ways that you see prices of those different types of resources fall is that there’s a high amount of capital expenditures by mining companies to try and drill more of those resources outta the ground. And right now, the capital spending in these industries is really [00:40:00] low at the moment, outside of gold and, and silver doing better, they’re a bit separate.

[00:40:05] Chance Finucane: The other areas have actually been coming down in price over the past year because of the economic slow. But once we turn and economic growth starts increasing again, that might lead to another wave of inflation because we just have not been drilling enough to try and have enough of these resources that we need for all the different uses that were coming up for them over the next five to 10 years.

[00:40:26] Chance Finucane: I have heard 

[00:40:27] Rebecca Hotsko: that in a few different conversations where we could see these waves, and so is that something that you are particularly concerned about? 

[00:40:37] Chance Finucane: It’s something we’re much more mindful of this decade rather than last decade, and I think people need to realize that the 2010s was the lowest amount of volatility you had in the financial markets going back nearly a hundred years.

[00:40:49] Chance Finucane: That was not a normal environment where you just saw stocks kind of consistently go up in a pretty reasonable way following the growth in cashflow and earnings over the course of a. We [00:41:00] think the next 10 years might be a little bit closer to the 1970s where you see these ups and downs in inflation, and that affects financial asset prices and it’s going to pay to have a bit more of a flexible mentality and be able to shift within your portfolio depending on whether we’re in a risk on environment or it’s time to take some investments off the table, increase your cash or treasury position, or just get more defensive in general.

[00:41:25] Chance Finucane: So that she can mitigate any declines if you start to see interest rates go up and economies slow down. 

[00:41:30] Rebecca Hotsko: And if you could leave our listeners with one piece of advice, helping them become better investors, what would you tell them? 

[00:41:39] Chance Finucane: The real thing we came back to in the past year is one cycles have come back, really paying attention to the ups and downs of an economic cycle.

[00:41:46] Chance Finucane: Pay attention to that and just know, , are we on a side where it pays to take risk and the opportunity is great, or is everyone getting too exuberant and you’re starting to see things slow down. And then maybe it’s time to shift to being a bit more defensive and focus on free cash [00:42:00] flow and balance.

[00:42:01] Chance Finucane: Because then at a slowdown like this, that’s going to be what holds up the valuations of your companies and allows you to control things better in a decline so that you can get back to growing the portfolio, as opposed to if you lost half your money over the past year, it’s really hard to double your account in a short period of time to get back to where you were before.

[00:42:20] Rebecca Hotsko: Well, thank you so much Chance. That was excellent. That was really great insights that you gave us today. Before I let you go, where can the listeners go to learn more about everything that you do at Oxbow? 

[00:42:32] Chance Finucane: Sure, you can look us up on our website at oxbowadvisors.com, and we also have a great YouTube channel if you search for us at Oxbow Advisors, where we post much of our content that that we do in terms of interviews or any videos that we shoot here in the office, giving quarterly updates or updates that we’re seeing on the market.

[00:42:50] Rebecca Hotsko: Thank you again so much.

[00:42:52] Chance Finucane: Thanks Rebecca. 

[00:42:54] Rebecca Hotsko: All right. I hope you enjoyed today’s episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I would really appreciate it if you left a rating or review. This really helps support us and is the best way to help new people discover the show.

[00:43:14] Rebecca Hotsko: And if you haven’t already, make sure to sign up for our free newsletter. We Study Markets which goes out daily and will help you understand what’s going on in the markets in just a few minutes. So with that all said, I will see you again next time. 

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