“Given current restrictions on large gatherings, we entered the name at a meaningful discount to our estimate of private market value,” says Rogers. “With $1.4 billion in cash and investments, we believe the company has enough liquidity to withstand the current cash burn until event attendance normalizes. At that point, we think the company is positioned to see a more rapid return to higher usage than its peers.”
In the Ariel Appreciation Fund, a pure mid-cap offering, Rogers scooped up shares of former large caps that had fallen into mid-cap territory during the selloff. New additions to the portfolio over the period included the Goldman Sachs Group, drugstore super chain Walgreens Boots Alliance, and Charles Schwab & Co. “These are blue chips that got hit hard because of the pandemic but are great companies over the long run,” he says.
Growth Versus Value
In recent years Ariel has faced a double headwind as investors have turned toward both growth stocks and large companies. Over the three years ended June 30, the value component of the Russell 2500 Index, a barometer for small- and mid-cap stocks, was down an annualized 2.6%, while the index as a whole had increased 4.08%. Meanwhile the S&P 500, whose performance is largely driven by mega-cap growth stock names, was up an annualized 10.73%.
Rogers says the dominance of large company growth stocks reminds him of the seemingly endless appetite for technology stocks in the late 1990s. “Back then, people saw nothing but upside, and the stocks could do no wrong,” he says. “But when the bubble burst, the shift to value was dramatic.”
The rise of telecommuting, the popularity of index investing and other factors continue to propel well-known giant growth stocks. But these companies also face rising challenges such as increased competition, antitrust legislation and nosebleed valuations. In a prolonged market drawdown, the extraordinary bargains in the small and mid-cap value space may begin looking more attractive. Private equity investors, who like smaller companies with strong cash flow that they can buy cheaply, could also provide support for a shift toward small and mid-cap value.
What Being A Financial Advisor Taught Him
Rogers spent the first two years of his career as a stockbroker for William Blair, an institutional investment and private wealth management firm based in Chicago, before launching his own firm at age 24. His experience as a broker helped him recognize how emotions can cloud investment judgement.
“Many of my clients focused on the short term and got swept up in the emotions of the moment that led to behavioral biases,” he says. “My response was to talk about successful contrarians such as Warren Buffett, and about the value of taking a long-term view.” He also learned a lot about finding inefficiencies in the small- and mid-cap space, which was Blair’s specialty at the time.