Eli Salzmann loves nothing better than finding a company that’s a “dog of a stock with no momentum” but on the verge of better days. At its core, that is what value investing is all about. Over the course of his 36-year career, Salzmann has proved he has a knack for buying undervalued stocks shunned by the market and delivering stellar returns along the way.
Salzmann is a managing director at Neuberger Berman and senior portfolio manager of the $10 billion Neuberger Berman Large Cap Value fund (ticker: NBPIX), alongside fellow portfolio manager David Levine. As of the end of July, the fund was down 5.67% for the year, less than the Russell 1000 Value index’s 7.08% decline. For the three-year period, the fund is up 14.55%, besting 98% of its category peers. Over five- and 10-year periods, it has returned 12.80% and 13.51%, respectively, outshining 99% of its peers.
To be sure, just because a stock is cheap doesn’t mean Salzmann is buying. There must be a catalyst that could improve the company’s fortunes. “Buying a cheap stock without a catalyst is called a value trap,” he says. “You need to buy a company that’s earning below-normal returns, that has a catalyst or an inflection point, something that’s going to change it and take earnings from below normal back to normal, or even above normal.” The catalyst could be just about anything, from the launch of a new product to a change in management.
In a recent conversation with Barron’s, Salzmann discussed where he is finding value today and how investors should position their portfolios defensively for an impending U.S. recession. An edited version of our conversation follows.
Barron’s: What was the first value stock you bought?
Eli Salzmann: AT&T [T], back in 1997. Mike Armstrong was running the company, and the stock was very much out of favor. And luckily, it worked out well. I bought it at $33 [a share], and I sold it a year later in the upper $70s. For AT&T, that’s a very big move.
What do you look for in a stock?
There has to be a catalyst. And in addition to looking for companies that have depressed earnings relative to normal, we also look for sectors, subsectors, and industries that have been deprived of capital and, in turn, deprived of capacity.
Exxon Mobil [XOM] is your top holding, and it’s up more than 50% this year. Will it go higher still?
Absolutely. Energy is a perfect example of a sector that’s deprived of capital and capacity, and Exxon is one of our favorite stocks in this sector. Some of the capacity has come back. Oil-rig count peaked in 2014 at around 1,600 rigs, then came down to low 300’s in 2016, then peaked again just below 900 at end of 2018, bottomed at 172 in 2020, and is now back a little above 600. One of the reasons we focus on capital capacity is because when capacity comes out, that’s always a good thing for an industry. We were aggressively buying Exxon in the $30s and $40s. Today, it’s trading around $94 a share.
What was the catalyst for Exxon?
One of the catalysts that we look for is when a company thinks they’re a growth company and they’re not, and they finally wake up and realize that they’re not a growth company and need to start behaving like a value company. Growth companies are companies that constantly reinvest in themselves. If you’re really a growth company, and you can really generate better returns by investing in yourself, then by all means, you should do that, but it’s not our kind of stock, and it probably won’t be at our valuation.
Exxon was a very mismanaged company for a lot of years, believing they were more growth than they were value, and they started to wake up a year and a half to two years ago. Twenty years ago, Exxon was considered one of the blue-chip stocks, and every investor wanted to own Exxon or General Electric [GE] or Pfizer [PFE]. But it was a massive underperformer. Management realized that their strategy just didn’t make any sense, and they started to limit the capex [capital expenditure]. They started to return cash to shareholders. They started to get rid of noncore assets. And all of a sudden, we saw a major behavior difference on the part of management. It was driven partially by the proxy vote [to add new members to Exxon’s board] that occurred because shareholders were also angry. But in a nutshell, they woke up. And that was a major catalyst.
What other energy companies do you own?
ConocoPhillips [COP] and Chevron [CVX]. ConocoPhillips is one of most capital-disciplined energy companies and delivers consistent distributions to shareholders, while Chevron has a strong balance sheet and a huge buyback program.
Pfizer is another big holding. You’re a fan of the stock.
Pfizer is a company that has really transformed itself. It has gotten rid of a lot of noncore assets. Just like Exxon, it has been a massive underperformer for the past 20 years. We don’t buy companies simply because they’ve underperformed for 20 years; we had a catalyst: Covid. Pfizer is at the heart of Covid, which is going to be here for many years to come. Without question, Pfizer is leading the pack, both by reputation and research on Covid, and that is actually a true growth lever for this company for many years to come.
We have a lot of confidence in Pfizer. It meets that criteria of a company that’s a dog of a stock with no momentum. And now, all of a sudden, you had a catalyst and a catalyst that could actually change the world.
Where else are you finding value today?
Banks and metals and mining. We very much like JPMorgan Chase [JPM]. The valuation has come down dramatically—it had gotten ridiculously overdone on the upside when it got up to $165. And now it has ridiculously gone too far on the downside, now that it’s at $114.
One of the things that initially got us very interested in JPMorgan many, many years ago was when Jamie Dimon took over. The management team that he has put into place is first class.
What do you like in the metals and mining sector?
Freeport-McMoRan [FCX] management has done a great job operating the company over the past several years. It’s an example of a value stock where people aren’t paying attention. We bought it for around $10. The stock today is $30, and I would be surprised if it doesn’t outperform the market over the next several years. We’re bullish on Freeport because it’s an inexpensive stock based on mid-economic-cycle earnings. Also, it is an attractive takeover target for a large, diversified miner that wants to get bigger in copper. We’re very bullish on copper, and Freeport is the premier pure-play copper miner in the world.
What sectors are you overweight and underweight?
We are overweight utilities, healthcare, and consumer staples. Also metals and mining. We’re close to a market weight on energy. Don’t get me wrong—we really like energy for the next five years. But because we’ve repositioned the portfolio, we’re probably closer to a market weight. We’re underweight technology, banks, consumer discretionary, and communication services.
We are defensively positioned. We’re in for potentially a very challenging period over the next year as, across the board, many of the sectors we’re underweight are going to experience some very severe earnings deceleration.
Would you recommend that kind of positioning for others?
I would encourage investors to be very defensively positioned—so, sectors like utilities and consumer staples, with a company like Procter & Gamble [PG], because, like it or not, in a tough economy, people still need to wash their clothes and brush their teeth. In a tough economy, you want to be in noncyclical stocks, because at the end of the day, you don’t have to go out and buy a new Apple [AAPL] iPhone every year. You don’t have to go out and buy a new pair of jeans every year.
But the reality is you still have to wash your clothes, you’re still going to turn your electricity on, and so on. Same with healthcare. If you do get sick, you’re going to go to the doctor. Same thing from a medication standpoint in terms of pharma. So, where would I want to be? I want to be in healthcare and pharmaceuticals like Pfizer.
I also like basic materials, specifically metals and mining, and energy. The years 2020 and 2021 were very much a risk-on period. Everything went up. It was a wonderful risk-on environment. We are entering, outside of brief periods of risk-on, a reasonably extended risk-off period. So, in a risk-off period, you want to be careful.
What’s the biggest risk facing markets?
Everybody is screaming that the Fed is going to definitely engineer a soft landing. That’s not going to happen. In the mid-’80s, they did engineer a soft landing. In the mid-’90s, they did also, because you had disinflationary backdrops and the Fed was raising rates into a strong economy. This is exactly the opposite of that. We are in a decelerating economic landscape and the Fed is raising rates. Why? Because inflation is really a problem.
Remember, inflation is a lagging indicator. And as such, the Fed will continue to raise rates because they are determined to put inflation on hold and obviously deflate inflation. The problem is, the Fed is a reactive body, and as they continue to take this massive stimulus out, I can tell you in 2023 it is going to be about risk-off because we are looking at a very serious deceleration. That doesn’t mean investors shouldn’t be invested, but they need to know what they own. This is no longer the risk-on environment that we’ve been in for the past two years.
Sounds like you see a recession coming.
Where do I stand in the recession camp? Pretty darn close to 100%.
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