Portfolio Insights: Large Cap Strategies


Patrick Kelly (continued): They have a great balance sheet, and that compares to the 10-year yield at 0.5 or 0.6% in money market funds that are yielding virtually zero. Microsoft in our opinion, is one of those high quality, long duration growth assets that trades at 21 times earnings, they should have durable double-digit top line and bottom line–and faster bottom line growth over the next several years. We think the valuation is reasonable given the durable growth profile, and again with rates as low as they are. Facebook trades at 26 times 2021 earnings for a company that will grow at the top and bottom line 15% to 20% over the next several years, and a company that showed the resiliency of their business model by increasing their top-line 10%+ in one of the worst economic quarters we have seen in a long time. And Amazon, which we believe trades at very reasonable multiples if you look out a few years. I think the multiples have expanded on many of these companies. But in a lot of cases, it's justified given their long-term prospects and where rates are. Jessie Quick: Thank you so much for shedding light, especially using the stock examples. Patrick, do you mind answering the valuation question about Google (Alphabet) and your thoughts there please? I almost like to think of Google as almost a staple in some respects because it's something that we use every day. I know I use Google every day. I think if you looked at Google versus many staple valuations, it looks very attractive. I think the valuation is also attractive relative to, again, its growth and where rates are. On an enterprise value to free cash flow basis, Google has a very large net cash position and they generate a significant amount of free cash flow. So Google's valuation is 22 times on Patrick Kelly: I think Google is a very well-positioned company. They dominate their market.

2021 and less than 20 times on 2022 from an enterprise value to free cash flow perspective, which again I think is very reasonable for a company that should be able to grow its top line close to 15% in those years. I think they're also probably the leader in artificial intelligence (AI) and I think that continues to be an emerging theme. We've talked about the AI to be a theme that can be very disruptive and we're just in the first inning. And it's going to be a 50-plus-year theme, in our opinion. I would say that of the tech companies, we do think they are probably most at risk of antitrust regulations because of their dominance in the search market, so that's something that we've tried to balance a little bit with Google. Our position is not quite as high as it has been in the past, as we kind of balance a great company, good fundamentals but a company that we think is at most risk from an antitrust perspective. Speaker Question: Have you guys built a model on Tesla and how in the world can we look at a company like this and try to comprehend how it trades at somewhere at over 700 times earnings? I've heard the argument about it not being an auto company but a tech company. But even this seems extremely ridiculous to me. Can you comment on that and tell me what your models may have said and if you've ever owned it? Patrick Kelly: Yes. We do own a small position in Tesla. Unfortunately it has not been bigger this year, as the stock has obviously appreciated significantly. I think if you build models out over the next five years, there's some companies that are going to provide more certainty than others. We do have a model that goes out five-plus years on Tesla and we do think they will have a significant earnings ramp over the next five-plus years. Jessie Quick: Thank you. I appreciate you being so forward and thoughtful in that response. Let’s take our first question from the audience, please.

Conference Call 5/9

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