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A Recession Is Coming. These Are the Shares to Hunker Down In.


Eli Salzmann loves nothing higher than discovering an organization that’s a “canine of a inventory with no momentum” however on the verge of higher days. At its core, that’s what worth investing is all about. Over the course of his 36-year profession, Salzmann has proved he has a knack for getting undervalued shares shunned by the market and delivering stellar returns alongside the way in which.

Salzmann is a managing director at Neuberger Berman and senior portfolio supervisor of the $10 billion

Neuberger Berman Large Cap Value

fund (ticker: NBPIX), alongside fellow portfolio supervisor David Levine. As of the tip of July, the fund was down 5.67% for the yr, lower than the Russell 1000 Worth index’s 7.08% decline. For the three-year interval, the fund is up 14.55%, besting 98% of its class friends. Over five- and 10-year durations, it has returned 12.80% and 13.51%, respectively, outshining 99% of its friends.

To make certain, simply because a inventory is affordable doesn’t imply Salzmann is shopping for. There should be a catalyst that would enhance the corporate’s fortunes. “Shopping for an affordable inventory with out a catalyst is known as a price lure,” he says. “You should purchase an organization that’s incomes below-normal returns, that has a catalyst or an inflection level, one thing that’s going to alter it and take earnings from under regular again to regular, and even above regular.” The catalyst might be absolutely anything, from the launch of a brand new product to a change in administration.

In a latest dialog with Barron’s, Salzmann mentioned the place he’s discovering worth at the moment and the way buyers ought to place their portfolios defensively for an impending U.S. recession. An edited model of our dialog follows.

Barron’s: What was the primary worth inventory to procure?

Eli Salzmann:


[T], again in 1997. Mike Armstrong was working the corporate, and the inventory was very a lot out of favor. And fortunately, it labored out properly. I purchased it at $33 [a share], and I offered it a yr later within the higher $70s. For AT&T, that’s a really huge transfer.

What do you search for in a inventory?

There must be a catalyst. And along with in search of corporations which have depressed earnings relative to regular, we additionally search for sectors, subsectors, and industries which have been disadvantaged of capital and, in flip, disadvantaged of capability.

Exxon Mobil

[XOM] is your prime holding, and it’s up greater than 50% this yr. Will it go greater nonetheless?

Completely. Vitality is an ideal instance of a sector that’s disadvantaged of capital and capability, and Exxon is one among our favourite shares on this sector. Among the capability has come again. Oil-rig rely peaked in 2014 at round 1,600 rigs, then got here right down to low 300’s in 2016, then peaked once more just under 900 at finish of 2018, bottomed at 172 in 2020, and is now again somewhat above 600. One of many causes we concentrate on capital capability is as a result of when capability comes out, that’s all the time an excellent factor for an trade. We had been aggressively shopping for Exxon within the $30s and $40s. As we speak, it’s buying and selling round $94 a share.

What was the catalyst for Exxon?

One of many catalysts that we search for is when an organization thinks they’re a progress firm and so they’re not, and so they lastly get up and notice that they’re not a progress firm and want to begin behaving like a price firm. Development corporations are corporations that continuously reinvest in themselves. For those who’re actually a progress firm, and you may actually generate higher returns by investing in your self, then by all means, it’s best to do this, but it surely’s not our type of inventory, and it in all probability gained’t be at our valuation.

Exxon was a really mismanaged firm for lots of years, believing they had been extra progress than they had been worth, and so they began to get up a yr and a half to 2 years in the past. Twenty years in the past, Exxon was thought of one of many blue-chip shares, and each investor needed to personal Exxon or

General Electric

[GE] or Pfizer [PFE]. However it was a large underperformer. Administration realized that their technique simply didn’t make any sense, and so they began to restrict the capex [capital expenditure]. They began to return money to shareholders. They began to eliminate noncore property. And swiftly, we noticed a serious habits distinction on the a part of administration. It was pushed partially by the proxy vote [to add new members to Exxon’s board] that occurred as a result of shareholders had been additionally offended. However in a nutshell, they awoke. And that was a serious catalyst.

What different power corporations do you personal?


[COP] and


[CVX]. ConocoPhillips is one among most capital-disciplined power corporations and delivers constant distributions to shareholders, whereas Chevron has a powerful steadiness sheet and an enormous buyback program.


is one other huge holding. You’re a fan of the inventory.

Pfizer is an organization that has actually reworked itself. It has gotten rid of numerous noncore property. Similar to Exxon, it has been a large underperformer for the previous 20 years. We don’t purchase corporations just because they’ve underperformed for 20 years; we had a catalyst: Covid. Pfizer is on the coronary heart of Covid, which goes to be right here for a few years to come back. With out query, Pfizer is main the pack, each by status and analysis on Covid, and that’s really a real progress lever for this firm for a few years to come back.

We have now numerous confidence in Pfizer. It meets that standards of an organization that’s a canine of a inventory with no momentum. And now, swiftly, you had a catalyst and a catalyst that would really change the world.

The place else are you discovering worth at the moment?

Banks and metals and mining. We very very similar to

JPMorgan Chase

[JPM]. The valuation has come down dramatically—it had gotten ridiculously overdone on the upside when it received as much as $165. And now it has ridiculously gone too far on the draw back, now that it’s at $114.

One of many issues that originally received us very eager about JPMorgan many, a few years in the past was when Jamie Dimon took over. The administration crew that he has put into place is top quality.

What do you want within the metals and mining sector?


[FCX] administration has finished a fantastic job working the corporate over the previous a number of years. It’s an instance of a price inventory the place folks aren’t paying consideration. We purchased it for round $10. The inventory at the moment is $30, and I’d be stunned if it doesn’t outperform the market over the following a number of years. We’re bullish on Freeport as a result of it’s a reasonable inventory based mostly on mid-economic-cycle earnings. Additionally, it’s a gorgeous takeover goal for a big, diversified miner that desires to get larger in copper. We’re very bullish on copper, and Freeport is the premier pure-play copper miner on this planet.

What sectors are you obese and underweight?

We’re obese utilities, healthcare, and shopper staples. Additionally metals and mining. We’re near a market weight on power. Don’t get me improper—we actually like power for the following 5 years. However as a result of we’ve repositioned the portfolio, we’re in all probability nearer to a market weight. We’re underweight expertise, banks, shopper discretionary, and communication companies.

We’re defensively positioned. We’re in for doubtlessly a really difficult interval over the following yr as, throughout the board, most of the sectors we’re underweight are going to expertise some very extreme earnings deceleration.

Would you advocate that type of positioning for others?

I’d encourage buyers to be very defensively positioned—so, sectors like utilities and shopper staples, with an organization like

Procter & Gamble

[PG], as a result of, prefer it or not, in a troublesome financial system, folks nonetheless want to scrub their garments and brush their enamel. In a troublesome financial system, you need to be in noncyclical shares, as a result of on the finish of the day, you don’t must exit and purchase a brand new


[AAPL] iPhone yearly. You don’t must exit and purchase a brand new pair of denims yearly.

However the actuality is you continue to have to scrub your garments, you’re nonetheless going to show your electrical energy on, and so forth. Identical with healthcare. For those who do get sick, you’re going to go to the physician. Identical factor from a medicine standpoint when it comes to pharma. So, the place would I need to be? I need to be in healthcare and prescribed drugs like Pfizer.

I additionally like primary supplies, particularly metals and mining, and power. The years 2020 and 2021 had been very a lot a risk-on interval. All the things went up. It was a beautiful risk-on setting. We’re getting into, outdoors of temporary durations of risk-on, a fairly prolonged risk-off interval. So, in a risk-off interval, you need to watch out.

What’s the largest threat going through markets?

Everyone is screaming that the Fed goes to undoubtedly engineer a tender touchdown. That’s not going to occur. Within the mid-’80s, they did engineer a tender touchdown. Within the mid-’90s, they did additionally, since you had disinflationary backdrops and the Fed was elevating charges into a powerful financial system. That is precisely the alternative of that. We’re in a decelerating financial panorama and the Fed is elevating charges. Why? As a result of inflation is mostly a downside.

Keep in mind, inflation is a lagging indicator. And as such, the Fed will proceed to lift charges as a result of they’re decided to place inflation on maintain and clearly deflate inflation. The issue is, the Fed is a reactive physique, and as they proceed to take this large stimulus out, I can let you know in 2023 it’s going to be about risk-off as a result of we’re taking a look at a really critical deceleration. That doesn’t imply buyers shouldn’t be invested, however they should know what they personal. That is now not the risk-on setting that we’ve been in for the previous two years.

Sounds such as you see a recession coming.

The place do I stand within the recession camp? Fairly darn near 100%.

Thanks, Eli.

Write to Lauren Foster at [email protected]

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