Welcome to Soundbites – weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.

For today’s soundbites, we discuss investment processses with Aylon Ben-Shlomo, client portfolio manager with Aristotle Capital Management. We talk about where he finds value, his investment process, and the importance of market catalysts. And we started by asking why he’s not a big believer in the typical screening process.

Aylon Ben-Shlomo (AB): We find them to be exclusionary, backward looking, and if they are forward-looking, they’re likely based on consensus, which, for us, has little-to-no value. It’s akin to going to the local thrift store and searching through a bargain bin that has already been picked over by all the customers. We study all businesses in our universe, seek to identify competitors, suppliers, customers, or disruptors that are impacting the way businesses operate and how those impacts may or may not reveal themselves in fundamentals over the next three to five years.

How long he typically holds stocks.

AB: We invest in about 40 to 45 businesses in a given portfolio. And we’re investing for a long time. So, three to five years is the typical timeframe. However, on average, we own businesses for closer to seven. So, if the turnover is 15% per year on a portfolio of 40 businesses, that’s only six new companies a year. So, we have the luxury of being able to focus on a static and narrow universe of businesses and we find it’s a good recipe to follow.

Why supply chains are a big part of his investigative process.

AB: We focus on the value chain. All the way across, from the end consumer to the first supplier, understanding how profit pools may or may not be shifting from a supplier to a customer, a competitor, a potential disruptor, all to understand who’s ultimately delivering a good or a service that is valued and will continue to be.

A specific example is Oshkosh Corporation [based in Oshkosh, Wisc.]. They are a U.S.-based manufacturer of trucks and defense equipment. Well, there’s a trend going on, shifting from ownership to renting or leasing. Oshkosh’s customers are companies like United Rentals [Inc., based in Stamford, Conn.] and Ashtead Group [plc, based in London] out of the U.K., which operates under the Sunbelt brand. United Rental and Sunbelt are acquiring their competitors. As they consolidate the industry, their bargaining power is going up, which means Oshkosh’s power is maybe declining a little bit.

Another example is Apple and the [superconductor] chip supply chain. They had left Qualcomm [based in San Diego, Calif.], the provider of baseband or modem chips. They had gone to Intel [Corp., based in Santa Clara, Calif.] and unfortunately for Intel, they couldn’t deliver on Apple’s demands. When they returned to Qualcomm, that created a very large stamp of approval in our eyes of Qualcomm’s business model, their technology leadership — particularly in 5G — and provided us with greater conviction to invest in Qualcomm in July of last year.

And, finally, what kind of market catalyst he looks for.

AB: ‘Catalyst’ is admittedly an overused term. We define it as an action or event currently underway that management has control over. And those last two pieces are really important. So, a recent addition to our portfolio is Crown Castle [a REIT headquartered in Houston, Tex.]. They are one of the three largest providers of shared communications infrastructure. The tower business has high barriers to entry, great predictability of revenues, great cash flows, and incremental returns on cash flows. The fiber and small-cell business is really Part 2 of the towers. At present form, it’s not as attractive as towers because they have fewer customers. However, the pathway to profitability for Crown Castle is quite strong. That catalyst is starting to play out with contracts they’ve recently signed with Verizon and DISH Network [Network Corp., based in Englewood, Col.]. As Crown Castle’s tenancy ratios increase, we expect to see margin and cash flow and return on invested capital improvements. So, when we see a good business or an attractive valuation with compelling catalysts, we act. If we don’t, we wait.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Aylon Ben-Shlomo, client portfolio manager with Aristotle Capital Management.

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