Podcast Summary: "Stock Shortage" | The Compound and Friends

Episode Information:

• Title: Stock Shortage
• Release Date: February 7, 2025
• Host/Author: The Compound
• Guest: David Giraud, Portfolio Manager at T. Rowe Price Investment Management

1. Introduction to Guest: David Giraud

David Giraud joins the show as a distinguished guest, bringing his extensive experience from T. Rowe Price Investment Management. He is the portfolio manager for the Capital Appreciation Strategy, including both the Capital Appreciation Fund and the Capital Appreciation ETF. David boasts an impressive track record with six Morningstar Outstanding Portfolio Manager of the Year nominations and two wins, alongside 22 Lipper best fund awards.

Notable Quote:

• Josh Brown (07:33): "David, welcome to the firm."
• David Giraud (08:24): "Thanks for having me."

2. T. Rowe Price Insights

David delves into the unique culture at T. Rowe Price, emphasizing its singular focus on investment management without the distractions of other financial services like banking or insurance. He highlights the firm's commitment to long-term, fundamental research in an era increasingly dominated by passive investing and short-term quantitative strategies.

Key Points:

• Longevity and Culture: T. Rowe Price has maintained a consistent focus on active investment management since its inception in 1998.
• Adaptation to Market Changes: David notes the shift from long-term fundamental analysis to more short-term, quantitative approaches in the investment landscape.
• Active Management: The firm continues to set prices and make informed bets, distinguishing itself from purely passive strategies.

Notable Quote:

• David Giraud (10:56): "We're not in the game of trying to call the quarter. We're not trying to decide if organic growth is going to be three and a half or four."

3. Market Valuations and Stock Shortage Thesis

A significant portion of the discussion centers around the high valuations in the stock market, particularly within the S&P 500. David articulates concerns about market multiples being elevated due to a limited number of available stocks, a phenomenon he refers to as the "stock shortage thesis."

Key Points:

• Valuation Metrics: The market is trading at approximately 22 times estimated earnings and 26 times free cash flow, indicating overvaluation.
• Sector Analysis: Traditional growth sectors like information technology remain overvalued, while cyclical sectors such as financials are facing high multiples despite favorable fundamentals.
• Potential Risks: David warns that high multiples may not persist, citing examples like General Electric (GE), which stagnated before experiencing a significant upturn.

Notable Quotes:

• David Giraud (23:08): "The market mix has changed dramatically. You just can't compare... you have to compare apples to apples."
• Josh Brown (30:46): "Drifting. Why not? Bullish. What else do you see in front of you?"

4. Economic Outlook and Recession Risks

David shares his skepticism about the imminent risk of widespread recessions, attributing it to the evolving structure of the economy. He highlights the increasing dominance of the service sector, which historically exhibits more resilience compared to manufacturing and industrial sectors.

Key Points:

• Service Economy Dominance: The shift towards a service-oriented economy has reduced the overall volatility and susceptibility to traditional recession triggers.
• Recession Frequency: Historically, recessions have become rarer, with stable service sectors absorbing economic shocks more effectively.
• Economic Indicators: David emphasizes mean reversion in economic indicators, suggesting that current economic conditions are likely to stabilize over time.

Notable Quote:

• David Giraud (56:21): "Recessions are rare as it is. Just, just even without any other just it's a rare event."

5. ETF Strategy and Active Management Transparency

The conversation transitions to the challenges and strategies associated with managing active ETFs. David explains how T. Rowe Price has navigated the transition from traditional mutual funds to ETF structures without compromising their investment strategies or exposing their trading activities prematurely.

Key Points:

• Active ETFs vs. Mutual Funds: T. Rowe Price adopted the ETF wrapper to meet market demand for daily liquidity without altering their core investment approach.
• Transparency and Trading: While ETFs offer greater transparency, David assures that their trading frequency remains manageable to avoid disadvantaging investors.
• Operational Adjustments: The firm ensured that the ETF does not negatively impact existing cash shareholders by maintaining a balanced and less frequently traded portfolio.

Notable Quote:

• David Giraud (60:59): "We have no taxable gains and we'll never have a capital gain. But if we try to trade every day in tcaf, we would."

6. Stock Picks and Portfolio Highlights

David shares insights into specific stock selections within the Capital Appreciation ETF, highlighting companies poised for growth and robust earnings.

Featured Stocks:

• Revity (RVTY): A life science tool and diagnostic company with strong growth prospects and increasing margins.
• Thermo Fisher Scientific: A leading life science tool company benefiting from consistent earnings growth.
• PTC Inc.: A niche software company with rapid growth and high earnings potential.
• Amazon (AMZN): Despite past challenges, Amazon is forecasted to have significant earnings growth, driven by leadership under Andy Jassy.

Notable Quotes:

• David Giraud (62:58): "Revity is a company that sold off its industrial and a lot of its applied businesses a couple years ago and really became a software reagent. Immunodiagnostics play, you know, 75% of the business today."
• Michael Batnik (66:23): "We don't see too many portfolios that look like this."

7. Deficit and Treasury Yields Discussion

The hosts explore recent statements by Treasury Secretary Scott Bessant regarding Treasury yields and federal deficits. David provides his analysis on the structural challenges of lowering long-term interest rates without addressing the underlying deficit issues.

Key Points:

• Treasury Yields: Bessant emphasizes focusing on the 10-year Treasury yield rather than short-term rates to manage borrowing costs.
• Deficit Concerns: High federal deficits are a primary driver of elevated long-term interest rates, making it challenging to achieve lower rates without significant fiscal adjustments.
• Policy Impact: David critiques the feasibility of significantly lowering deficits in the near term, suggesting that effective deficit reduction is essential for long-term economic stability.

Notable Quotes:

• David Giraud (53:23): "Get to debt to GDP back down to 3% by 28."
• Josh Brown (55:20): "David, this has been such a pleasure... We're gonna wrap up."

8. Closing Remarks and Personal Insights

The episode concludes with personal reflections from the hosts and David, highlighting future plans and personal interests outside of finance.

Key Points:

• Future Episodes: David expresses interest in returning to the show for further discussions.
• Personal Interests: Hosts share their excitement for upcoming events, such as the Outlaw Music Festival featuring Willie Nelson and Bob Dylan.
• Final Thoughts: David emphasizes the importance of strategic investment and maintaining a long-term perspective amidst market fluctuations.

Notable Quotes:

• David Giraud (69:59): "Look forward to seeing my wife tonight."
• Josh Brown (71:19): "Tprice.com. How simple could it be?"

Conclusion

The "Stock Shortage" episode of The Compound and Friends offers a deep dive into active investment strategies, market valuations, and economic outlooks through the expertise of David Giraud. David's insights into T. Rowe Price's disciplined approach, coupled with his cautious stance on current market valuations, provide valuable perspectives for investors navigating complex financial landscapes.

Notable Transcription Exclusions:

• Casual banter about sports at the beginning of the episode.
• Advertisements and sponsor messages.
• Introductory and closing remarks unrelated to content discussions.