Ramona Persaud looks for stocks the way she once approached engineering: with great precision. She picks apart businesses and examines trading data until she finds exactly what she wants. That is usually a high-quality company with a dividend, often a growing one, and always an attractive price. She rarely settles for less.
Persaud, who manages the $7 billion
Fidelity Equity-Income
fund and the $148 million
Fidelity Global Equity Income
fund, studied engineering at the Polytechnic Institute at New York University and later taught herself computer coding in order to digitize trade-clearing at Wall Street firms. Then, in 2003, she joined Fidelity and moved into investing.
Since she became lead manager on the Fidelity Equity-Income fund in 2018, the fund has notched an annual average return of 9.06%, beating 71% of its value-investing peers, according to Morningstar. Analysts at Morningstar highlight her savvy stock picks and willingness to stray from her index.
Barron’s spoke with Persaud in early November by phone and again via email to see what kind of dividend stocks she’s favoring at a time when cash is yielding 5%. Edited excerpts of the conversations follow.
Barron’s: What are the hallmarks of your kind of value stock?
Ramona Persaud:I’m trying to identify the greatest businesses in the world. That includes companies with core competencies that they have developed or identified. They have invested in some sort of differentiated product or service, reinvested the gains, and emerged even stronger. They have widened their lead with the competition.
Give us an example of a great business that you’ve picked up on the cheap.
Alimentation Couche-Tard is a Canadian convenience-store and fuel retailer. The store attached to the gas stations is a healthy, growing business you can get excited about. The other is fuel retail, and that is endearingly characterized in the value world as a “melting ice cube.”
Meaning what, exactly?
Fuel retail is a melting ice cube because electric-vehicle penetration is going up and fuel volumes are going down. I get excited when the market is obsessing about the melting ice cube while the other part of the business, which is healthy and has growth [catalysts], is quietly becoming a bigger share of the overall business.
The mix of
Couche-Tard’s
businesses is shifting in favor of its growing business, but the market is overly fearful of the shrink in the other, creating an excellent opportunity for long-term investors. Plus, is the shrinking business really a melting ice cube? I’m not sure the fear is justified. The fuel retail business is highly fragmented and inefficient. These guys have only 6% market penetration and are excellent consolidators.
What do you look for in management?
One theme in my portfolio is management with an extreme focus on operational execution combined with [strong] capital allocation. Couche-Tard is very good at running the store, sourcing and pricing the fuel, and reinvesting the cash flow to innovate inside the store. They are good at identifying inefficient competitors and [buying them] at good prices, bringing operational costs down, and taking the cash flow and reinvesting it better. They create small advantages over time and let them compound—basically, like a great investor.
The company has a midteens price/earnings multiple. The market has a high-teens to 20-times multiple. I don’t find this skill set in the average company. This is an above-average company for a below-average valuation.
How do equity valuations look generally, given investor confusion about the outlook for the economy and interest rates?
I love slicing and dicing valuation, and one of my most enduringly reliable valuation frameworks is dispersion—looking at the difference between the most expensive and the cheapest stock. If the cheapest stocks in the market are cheaper than usual, there’s indicative of more fear in the market. Right now, there’s less fear than usual so the stocks with some apathy or controversy aren’t plentiful—and they are showing up in higher-risk sectors like materials, energy, financials, and technology.
What is an example of one such stock you are willing to own?
Taiwan Semiconductor Manufacturing,
an incredibly wide-moat company, provides semiconductors that are mission-critical. It has superhigh entry barriers, captive customers and—like Couche-Tard—excellent management focused on profitability and capital allocation. It’s one thing to have great margins that produce free cash flow, but if you don’t know how to deploy cash flow, you aren’t going to sustain the margins. They do both.
The capital intensity of the business has gone up a lot, requiring more expensive machinery to keep pushing Moore’s law [the idea that the number of transistors on a chip doubles every two years]. They are excellent at balancing giving some of the cash back and reinvesting to maintain their lead.
How do you account for the geopolitical risk created by the U.S.-China rivalry, recent U.S. restrictions on China’s access to chips, and pressure on companies to produce more in the U.S.?
My threshold for quality is higher, and my threshold for valuation is lower [in this scenario]. Taiwan Semiconductor’s lead is phenomenal. There is a case for U.S. government support [through the Chips Act] of
Intel,
which blew the lead it had in prior decades by not reinvesting well. But in the meantime, Taiwan Semi keeps compounding its advantages.
Right now, there are two things going on. PCs and smartphones are considered mature, so you don’t have the growth of the prior decades, and there is an inventory correction post-Covid. But holy cow, look at this moat—not just today but where the company is going versus competitors.
That’s the quality part. What about the valuation?
At a midteens multiple, I can buy a much better moat for a lower-than-
S&P 500
multiple because the markets are worried about the next couple quarters of demand.
Interest rates—and bond yields—have risen in the past year. How do you think about income in a world where you can get 5% on cash?
I tend to look at how much extra yield there is in the highest-yielding parts of the
Russell 3000 Value
universe. If this measure is average or below, it is harder to get excess yield—and it probably means I have to be more valuation-sensitive too. The yield is currently slightly above average. That gives me some pause. Instead of leaning into a higher yield, I’m leaning more into companies that want to take payouts up, like Walmart.
How is
Walmart
navigating the challenges facing retailers?
We just had CEO Doug McMillon in, and my big-picture takeaway was that Walmart is playing a different game from Target and other retailers.
Walmart is thinking about the entire ecosystem around the consumer and how to drive the best combination of selection, value, and convenience to the consumer. They study not just all of retail, but businesses like Walt
Disney,
Netflix,
Shopify
—not something you hear when you meet with other retailers. They are very good at learning and incorporating what they find.
How is that translating to growth?
Everything is grounded in leveraging the supercenter and their vast customer base. About 90% of the U.S. population is within 10 miles of a Walmart store. If you combine that with their recent investments in e-commerce, they have an omnichannel approach that gives them an advantage.
What do you think of the stock price? At about $160, it is trading at about 22.7 times forward earnings.
The relative valuation versus the market is compressed for a company deepening its competitive advantage, with a good balance sheet, and generating a double-digit return on invested capital. As it mainly sells food, business predictability is higher than the average company, leading to relatively lower volatility in the stock.
Value stocks had a difficult run as interest rates fell. Is the situation changing now?
During that difficult period, the sorts of companies I prefer—quality, strong cash-flow producers—gained favor in the market because of the alternative cash-flow yield they offered versus low fixed-income yields. This was at the expense of more traditional value-oriented sectors with less or more volatile cash-flow production, like financials and cyclical companies.
If I benefited in the past decade from being focused on free cash flow and quality, in a potentially higher-interest-rate regime, there is 1701850070 a case for balancing more toward more-cyclical companies that often trade more on asset value versus cash flow.
What has led you to start dipping into military stocks?
After a long period of disarmament and peace and love, there’s a shift toward remilitarization in the wake of Russia-Ukraine. Germany has a special 100 billion euro fund for [defense] spending. France just increased the defense budget 40%. The United Kingdom is considering moving to 2.5 % of GDP for defense spending—all drivers of a long cycle of spending.
Defense, though, has some specific risks: Funky accounting, high execution risk, and politics, so I like to use a basket of stocks to diversify across countries.
What is in your basket?
Rheinmetall
is a direct beneficiary of huge spending from Europe, and
BAE Systems
in the U.K. benefits from the same [spending] cycle. BAE has the extra benefit of trying to improve its pricing strategies, which is great for free-cash-flow production and stability. The company has also improved its balance sheet by massively reducing its pension deficits. Both stocks trade for a midteens multiple and are 3% yielders, which is hard to find.
Thanks, Ramona.
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