Index investing usually beats active managers, but Larry Sarbit is one of the few who often comes out ahead.
Larry Sarbit is best known for sitting on large amounts of cash when others are actively buying equities. But lately, he's been busy snapping up U.S. stocks. In fact, his fund, IA Clarington Sarbit U.S. Equity, is now 80 per cent invested in 21 U.S. stocks - and he's not finished buying.
Over time, Mr. Sarbit's funds have beaten or came close to outpacing benchmark U.S. indexes after fees. So what makes the U.S. stock market so attractive right now to the veteran fund manager - and where can the best deals be found?
Here's a transcript of our one-hour discussion with Mr. Sarbit on April 28.
11:52 Darcy Keith - Good morning everyone and welcome to this live discussion with Larry Sarbit, who runs the IA Clarington Sarbit U.S. Equity fund. I'm Darcy Keith, an editor with the Globe and Mail.
12:00 [Comment From Larry Sarbit]/b>
Hi Darcy--thanks for the invitation
12:02 Darcy Keith - Just to start things off Larry, I'm wondering what your latest view is overall on the US stock market. Nasdaq, the Dow....they are back at multi-year highs. Are things getting too frothy you think overall?
12:03 [Comment From Larry Sarbit]/b>
I think there are still bargains in the US market even with the big recovery in the market--you have to be selective.
12:04 [Comment From Bill ]/b>
Coinstar is one of your picks. What kind of a time horizon do you see on that in a niche that probably won't exist in 3 years? Think VHS tapes about 12 years ago!
12:06 [Comment From Larry Sarbit]/b>
I am not sure I agree that we won't be renting DVD's in 3 years--think 5-10 years. Redbox rents new movies at $1 per night--no one streams new movies for that price--extremely competitive.
12:06 [Comment From Fred ]/b>
The electricity of America remains largely based on coal generators. Where do you see the best future stock increases, in wind, or solar, or nuclear, or in so-called "clean coal" technologies?
12:08 [Comment From Larry Sarbit]/b>
This is outside of my circle of understanding--I don't like businesses where the underlying business model is changing and doing so rapidly. As a society, we will all benefit from all this development long term but who will the winners be? I don't know.
12:10 Darcy Keith - For us Canadians, no discussion on buying US stocks would seem complete without bringing up the currency. What is your view on where the loonie may be heading, and do you advise investors to participate in any hedging at this stage?
12:12 [Comment From Larry Sarbit]/b>
My view is that the US/Cdn $ relationship will fluctuate!! I hedge the currency because I don't know where it will go. We just want to make sure our clients don't lose money and unhedged, that can happen. For us, it's a long term strategy.
12:12 [Comment From Tony ]/b>
Last quarter Coinstar had some issues with inventory management re RedBox which effected earnings. Do you expect Coinstar to report solid earnings tonight?
12:14 [Comment From Larry Sarbit]/b>
Short term quarterly numbers are definitely not my specialty. Long-term, they will sort out the inventory issue. This has arisen because of the rapid growth in the business and will be sorted out, probably not in one qtr.
12:15 [Comment From Louise ]/b>
Your success rate overall in picking stocks appears impressive. Have you ever made a regretted "bad call" in the past year? If so, was there any lesson in it you could share?
12:17 [Comment From Larry Sarbit]/b>
There isn't enough space here to talk about my mistakes!! The quality of the people running the business has been a problem for us in the past. As a result, we brought on our investigative journalist, Harvey Berkal to, in part find out who the management and Board of Directors are--do they have bad past behavior?
12:18 [Comment From Jonathan ]/b>
With the end of Q2 coming up, broadly speaking, how do you think this will effect the US and CDN markets?
12:19 [Comment From Larry Sarbit]/b>
Short term forecasting is another thing I can't do. Long term, I think the US market will be higher--next 5-10 years. I am even more confident in that for the companies I own.
12:21 Darcy Keith - You're known as an investor who can sit on tons of cash when markets are soaring. With markets still rising in the US, are you increasing your cash component at all?
12:23 [Comment From Larry Sarbit]/b>
I held a lot of cash in the first part of the last decade because of a lack of bargains--they were almost non-existent then. I am still finding ideas and adding to the companies we already own. We're still highly invested.
12:23 [Comment From Bo ]/b>
Where do you see the Bank of America (BAC) going in the next 2-3 years? Is it a good buy at this time?
12:25 [Comment From Larry Sarbit]/b>
I am unable to understand banks very well--no idea the risks they are taking. And our investigator can't do any digging there. 2008 was a great example in this sector of not knowing what was going on.
12:26 [Comment From Jason ]/b>
Are there any US multi-national companies that are a strong buy at this time?
12:27 [Comment From Larry Sarbit]/b>
Iconix is a royalty apparel brand company that up until recently has been a US story but its expansion into China, Latin
12:28 [Comment From Larry Sarbit]/b>
Latin America and India makes it a global business--growing continually
12:28 [Comment From Angelo ]/b>
I purchased GE at a low $7 per share. These days its up in the teens low 20s. Is it time to sell or buy more?
12:28 [Comment From Tony ]/b>
With current car production halts in Japan do you believe it will help out GM and Ford? Would you consider GM or Ford a potential good investment over the next 2 to 3 years?
12:29 [Comment From Larry Sarbit]/b>
GE will be around a long time--still a large financial component that makes me uncomfortable.
12:30 Darcy Keith - And any thoughts on the US auto industry?
12:31 [Comment From Larry Sarbit]/b>
The auto industry is a tough bus--requires a lot of capital on an ongoing basis and by the time you get to sell the product, you're facing lots of strong competitors--I don't like strong competitors!! Good for the consumer, bad for the long term investor.
12:32 [Comment From Trevor Roberts ]/b>
Trevor and Andy here in Sarnia. Can the SP500 continue it's rally without financials?
12:33 [Comment From Larry Sarbit]/b>
Don't know. I can only know something about a few businesses, not the broad markets--my opinion wouldn't be of any great value here. Just buying wonderful businesses with highly probable predictable futures.
12:34 [Comment From Bob ]/b>
What do you think of Intel or the semiconductor industry?
12:36 [Comment From Larry Sarbit]/b>
The business demands continual capital input in the form of R&D and more bricks and mortar. The bus is changing all the time--they are one of the agents of that change!! And highly competitive. I can't answer the question of what the bus will look like 3-5 years from now--don't know what they will be doing at that time.
12:37 [Comment From Michael Cann ]/b>
Whats your view on natural gas and when will the market start to improve
12:38 [Comment From Larry Sarbit]/b>
It's abundant--that much I know! We can drive cars with it--my best guess (only a guess) is that it has a future LT.
12:39 Darcy Keith - Would you consider buying any natgas companies right now? Are you overall quite bearish on commodities given their runup?
12:41 [Comment From Larry Sarbit]/b>
Commodities in general are not my cup of tea. We have and do own a couple but they have distinct advantages in the market. Generally, I have not been in this area--no pricing power, no predictable price for the product either.
12:42 Darcy Keith - Anything you can share on which couple you own?
12:43 [Comment From Larry Sarbit]/b>
Suncor--known resource--don't have to discover anything for a long time. Polaris Minerals--THE source of high grade aggregate to California.
12:43 [Comment From Charles ]/b>
What do you think about large techs such as csco or RIM which is trading at low multiple due the the fear about their long term growth
12:46 [Comment From Larry Sarbit]/b>
Tech companies have the problems of unpredictable change. I can't begin to know what RIM will be doing 3-5 years from now. Demands lots of investment capital and tough competitors--not the "Equity/Bond" we are looking for. But I love my blackberry!!
12:47 [Comment From Guest ]/b>
Why was it that you sold out of Iron Mountian
12:48 [Comment From Larry Sarbit]/b>
We like IRM, the business but the stock was driven up by other events--a change in the corp structure. Not cheap anymore, either. But a wonderful bus.
12:49 [Comment From George ]/b>
How about Altria, 3M and P&G?
12:50 [Comment From Larry Sarbit]/b>
All three have some of what we look for--unchanging business model, recurring revenue streams, less requirement for capital with the end result being lots of free cash flow.
12:51 [Comment From ben ]/b>
Would it be a good time to by PFE
12:54 [Comment From Larry Sarbit]/b>
Pharmaceuticals require lots of ongoing investment in R&D--I think they spend on average about 15% of Rev on that. They have to keep coming out with new successful compounds to survive. Their 'franchise' of exclusivity eventually ends and the drugs go generic. Pricing pressures from insurance and gov't programs and they are competing to develop drugs in the same areas as competitors--tough.
12:55 Darcy Keith - We're just about out of time for today, but we have this great final question from Bob:
12:55 [Comment From Bob ]/b>
If you had to put all your money in 1 stock what it be an why?
12:58 [Comment From Larry Sarbit]/b>
That's a great question! Because most wealth in business is created in this world from one or few ideas. Iconix (already mentioned), is a model that will make us a lot of money over the next several years--my biggest position. Incredible bus model in every way.
12:59 Darcy Keith - Thanks Larry. Any final thoughts to share with our audience on where and how to go hunting for US stock bargains?
1:02 [Comment From Larry Sarbit]/b>
Doing this hunting is a full time job for me-tough for others to be able to spend the time and resources that we have on this. Look for stocks that have been decimated in price and that have the characteristics I have outlined. The fear in investing in the US remains high in Canada--that's a postive, may mean we are just at the beginning of a long run in the US.
1:03 Darcy Keith - Thanks Larry, and thanks to all for joining us today for this discussion!
Good bye