The fund employs both quantitative and qualitative approaches. “The quantitative work is a must-have, meaning that we won’t look at a name unless it first passes our quantitative screens,” Abate says, adding that he’ll typically end up with 80 to 100 stocks that look attractive quantitatively before subjecting them to old-fashioned qualitative work to discern which 40 to 50 ideas to invest in.
“I like to say it took me 30 years to develop the quantitative framework, and literally one minute a day to run it. So the vast majority of time is spent on the qualitative research and looking at the data,” he says.
He explains that the fund’s qualitative work involves identifying certain variables that add value. It can be a simple thing like a company’s inventory levels, or it could be the company’s focus on its margins or its capital investment strategy for dividends. In many cases, he will narrow it down to a particular element he thinks will move the stock higher or lower.
“We take a longer-term view and try to own companies as they hopefully reach an inflection point where we can buy them at the bottom, and ride them for however long that fundamental momentum and wealth creation last,” Abate says.
Not All Fertilizers Are The Same
One of the holdings he highlights is Corteva, a seed producer spun out of DuPont three years ago. He says people misjudged the company’s ability to expand its margins because they were distracted by the lagging effect of seed pricing. Many materials companies have seen strong price increases in their products this year, he notes, but people missed that with Corteva because seeds are typically prebought by farmers six months to a year in advance and at prices contractually agreed to.
Abate thinks the company will likely be able to sell its seeds at higher prices going forward and improve its profit margins. “That will be more impactful to Corteva’s earnings in 2023 than it will be in 2022,” he says. “And we think that has some persistence.”
He also likes Exxon Mobil, not just because oil prices have zoomed this year but because they could stay high for the foreseeable future. Abate started buying shares of the company in August 2020 after it had greatly reduced its capital spending on new projects following the twin blows of the oil price plunge in the mid-2010s and then the Covid-induced price collapse in 2020.
The company has recalibrated its business to prioritize free cash flow and debt reduction rather than drilling new holes. “So what they’re doing with the money is supporting the highest dividend we’ve seen, the biggest share repurchase program we’ve seen,” Abate says, adding that this has led to a big reduction in the financial risk the company encounters from cyclicality.
From an EVA standpoint, this all results in wealth creation for shareholders (though some of those gains are being depleted by higher gasoline and heating oil prices). Abate notes that this period of reduced capital investment in new projects means that the current supply-and-demand imbalance causing higher oil prices likely won’t end anytime soon.
“We’re pretty confident pricing will continue to be a benefit for Exxon and most every other energy company,” he says.
As for unloading positions, Abate says he looks for company-specific clues rather than top-down information to dictate when to sell. He points to Mosaic, a potash and phosphorous miner that was a top-10 holding as late as this year’s second quarter.
“Our outlook on potash and phosphate, including some of the capacity additions made there and pricing, is a big reason why we’ve taken our profits out of Mosaic after being in very early in the agricultural names,” he says, adding that his viewpoint on nitrogen, where portfolio holding CF Industries Holdings is a leading producer, is much more favorable.