Ankur Crawford Call Transcript


Ankur Crawford (continued): Energy was untouched. Health care was untouched. It was just this tech bubble that we’ve known about.

kind of the lens that we’re looking at and the philosophy that we’re abiding by.

Dennis Hearns: Earlier you mentioned digitization is one of the most significant themes in both the Spectra and the Alger 25 strategies. Can you give us some examples of areas where digitization is being expressed in the portfolios? Ankur Crawford: I love this question because digitization is all encompassing. Every company and every sector are being touched by it. Perhaps it is best for me to illustrate this by example to make it a little bit more tangible. We look at payments. The move to a cash flow society is accelerating. We know that. The beneficiaries we see are PayPal, Visa. In consumer, we see companies like Nike embracing digital transformation. You know it might be surprising for you guys to hear this, but last quarter when we were all locked down and sitting at home, Nike’s digital growth was 83 percent. Digital, which is basically an online sale, is 30 percent of their total revenues. This is an example of companies using data to not only enhance their sales but make their entire supply chain more efficient. And both of those have direct benefits for us, the shareholders. Another example, which I love to give, is always surprising to people: Progressive Insurance. It’s another example of a very forward-thinking management that is in a relatively slow industry. They are using data to better understand who they’re selling to and identify how they can take share by targeting the best driver. They use telematics to learn more once you become a customer. They have been growing their topline at a rate of three to four times the industry average and their bottom line at four to five times the average: in the mid to high teens. In their last earnings call, their CEO said this is three years ahead of plan. Now they expect it to be 50 percent of overall sales in their near future.

This time, almost every sector is feeling the seismic change of this move to digitization. Every sector must quickly adapt. So that was the second point.

The third point was to question whether value was about to outperform growth as many kept asking. Although the valuation spread between value and growth were quite wide even then, it seemed as though to me that the spread could be justified in part because we were beginning to question the terminal value of some of these traditional value businesses, which were being out-innovated. A great example is a traditional retailer they may seem very cheap at 10 times earnings. But what is the earnings power of that entity in five years? The way I view it is if you can’t model it, how can you ascribe it any value? So what ends up happening and surprising investors in cases like this is that as these businesses have deteriorating fundamentals, the earnings that you might have thought would go from x to x plus as anyone might think in a Value type market where it mean reverts, end up deteriorating. The stocks actually look a lot more expensive than they were today. Just this morning for example, I was looking at a stock that we own. I was just looking out to 2024 and 2025. The growth rate of the stock is so incredible that by 2025, on our estimate, it trades at 10 times. Now, this is a leader in their market. It is a share gainer. It is a front foot forward business. One might view that as a much better alternative to a traditional retailer especially if you can put on a longer lens. Business models are being disrupted at a rate we haven’t experienced. When this happens, value becomes value traps. And that is what we have seen in kind of the permanence of value underperforming over the last few years.

So those are the three points in that paper if you don’t want to read it. I just gave you the footnotes. That is

Conference Call 4/11

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