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For today’s soundbites, we talk about U.S. equities with Aylon Ben-Shlomo, principal and client portfolio manager with Aristotle Capital Management. We talked about how future interest rate moves could affect outlooks, what companies and sectors he’s keeping an eye on, and his general view of the U.S. equity market. We started by asking about the impacts of debt — both positive and negative.

Aylon Ben-Shlomo (AB): Oftentimes debt is viewed as a four-letter word. And, in our eyes, it shouldn’t be. Prudent use of leverage can be beneficial for a business. There are some very strong real estate businesses like Sun Communities [headquartered in Southfield, Mich.] or Equity Lifestyle [Properties Inc., headquartered in Chicago, Ill.] — two businesses we own — that can and should have financial leverage. You have very stable, very highly predictive cash flows that can support the use of higher leverage, relative to a commodity producer. Now, in the case of Pioneer Natural Resources [Co., headquartered in Irving, Tex.], when you’re selling oil, you have significant operating leverage in your business because you can’t influence the price of oil. It makes sense for a business that has meaningful operating leverage to perhaps have less financial leverage. When Pioneer did their deal for Parsley [Inc., acquisition completed January 2021], they took on more financial leverage, which gave us some pause. And so we’ll observe that company from the sidelines.

What companies he likes.

AB: Cincinnati Financial [Corp., headquartered in Fairfield, Ohio] is a property and casualty insurer unique in a world of insurance, where they really focus on the agent rather than the policyholder. They have a high-service, high-touch model with about 1,700 independent agents making sure that claims are handled quickly and accurately, delivering higher market shares, better loss ratios, better premium pricing. So, this is a business that is very strong financially, differentiated in terms of their operating structure, and from a valuation perspective, we think is quite attractive.

What sectors he’s looking at.

AB: We have more exposure in the financial sector these days than we’ve had in the past. Companies like Capital One [Financial Corp., headquartered in McLean, Va.], a credit card provider. The consumer is healthy and the consumer is spending, and that’s something that could benefit Capital One, as well as a few regional banks that we’re invested in, such as PNC [Financial Services Group Inc.]. It’s a Pittsburgh based bank that recently acquired the U.S. operations of BBVA [USA Bancshares Inc.], a Spanish bank. Their history is quite good at integrating and upgrading the operations that they’ve acquired. Also, there are some great plant-based protein companies out there right now, like Tyson Foods [Inc., headquartered in Springdale, Ark.] that we’re invested in, that have decades of history feeding the world, whether it be through chicken, pork or beef and, increasingly, plant-based proteins. The world needs to eat, and as people increase their wealth, they turn to protein more and more. And that’s something that will benefit the large producers like a Tyson.

How interest rates could impact equities.

AB: For us, what we’re focused on is how and why interest rates may move. If it’s a steady, slow, gradual path of interest-rate increases, that could be really, really good for spread-based businesses like banks. If we see a healthy economy and interest rates increasing because the rate of growth is increasing, that’s a good thing for lenders. If we see interest rates be more volatile and gap up, that could be a challenge for spread-based businesses.

His view of U.S. equities during the ongoing recovery.

AB: The long-term implications of the necessary fiscal and monetary support that was lent to the U.S. economy is a big question mark. There will be winners and losers. It’s too soon to tell which are which. The long-term implications could be a risk. Also, the Covid vaccine is something that this country has rolled out for free to its citizens, and for many people, it’s their first experience with a single-payer healthcare system. That may drive increased conversation or potentially even change. It’s something to pay attention to.

And, finally, the challenge and rewards of picking stocks.

AB: It’s interesting to read the press release of a company’s earnings and then try and predict what’s the market going to do when they have this information. And, you know, that’s really hard to do. That’s really hard to do. But if we focus on, ‘How is this business changing,’ if we get that right, the stock price should follow.

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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