KAR Talks US Large Cap Value with The Wall Street Transcript

KAR Celebrated Its 40th Anniversary in 2024

Expanding on KAR’s history, Rich shares “What we’ve done over the years is consistent in the fact that we want to invest in high-quality businesses and let the business results drive the investment results. And when we say high quality, we’re thinking about businesses that have a sustainable competitive advantage, strong balance sheets, and the ability to generate strong free cash flow through a full economic cycle.  That has been consistent throughout the 40 years that the company has been in existence, across all our strategies, from small to large, domestic and international, value and growth.”  He shares the criteria he uses for evaluating a company’s potential for future success: Do they have a unique set of assets?  Are there high customer switching costs?  Is there some kind of structural cost advantage?

The Research Process

Rich’s focus is on identifying companies that are growing, compounding, and providing consistent growth over the long term to build a portfolio of 25 to 40 names with exposure to different economic sectors.  In his process, Rich seeks to build a portfolio that will outperform its benchmark with less risk.  “In our experience, risk reduction/downside protection comes from the resilient earnings profiles and strong balance sheets of the businesses that we own in the portfolio. They tend to have earnings that hold up better during an economic downturn, which in turn contributes to stocks that tend to hold up better when the economy slows down and markets begin to dip.”  In the interview, he shares examples from the Large Cap Quality Value strategy and how these holdings meet his investment criteria.

Large Cap Value Today

Rich discusses how AI has provided a tailwind to large cap value stocks, but in addition there are things such as nearshoring, reshoring, and a lot of capital spending going on in the U.S. economy, which have also been beneficial for these businesses. While these companies are not primarily focused on AI, they are nonetheless, reaping benefits from its application.  “Instead of in the past, when a smaller, nimbler competitor might come after an established player, now with AI you’re seeing it the other way around, where the larger established players are using AI to pull ahead from the smaller players that in the past might have interrupted their business model. We’re seeing that today in the large value space, where historically you didn’t typically see that type of impact when technological change happened within the broader economy.”

Download The Wall Street Transcript report to read the rest of Richard’s interview and learn about specific holdings in KAR’s Large Cap Quality Value strategy.