Managing Equity with Phil Laverson, Equity Portfolio Manager at Matrix LLC

Today our guest is Phil Laverson, an equity portfolio manager at Matrix LLC, a family-based hedge fund with over $500 million in assets.

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How are you today Phil?

I'm good, how about yourself?

I'm good. Why don't you tell our listeners a little bit about yourself and what you do at Matrix?

Basically, I'm an equity portfolio manager that remains very engaged in whatever new trend are going on, and whatever industry phenomenon is going on, and whatever macro events are going on.

We're both top-down and bottom-up. We pride ourselves on having our fingers on the pulse of everything going on throughout different class units, through lower class, middle class, upper class, spending patterns. Whether it's going on in Russia – we travel a lot, we volunteer a lot, and we're very engaged in things politically and geographically and economically.

How many people work at Matrix?

We're four people in total.

What did you do before Matrix?

Right out of business school I went through an investment banking program at Fidelity Bank. That bank gave me very intense bottom-up skills for investing. From there I went to work at Prudential Securities on their macro team, doing top-down macro GDP forecasting economic data for daily events. From there I [moved to the equity team] at Merrill Lynch. There, I worked on a value fund, a growth fund, and a long/short fund. From there I went to hedge funds where I've remained ever since.

So you've been doing this quite a while?

Yeah, I've been doing equity investing for about 12 years.

And you came to Matrix a few years ago – how long have you been managing money personally?

I started about 14 years ago.

What's your specific outlook on the economy going forward? Where do you see the US and world economies going in three months, six months, a year?

Having an extensive background in macros shows you the importance of being relevant, you know, in terms of your bottom-up focus. I would say that we see the economy growing 1 to 3% GDP. Whatever detractions and all the naysayers are [citing] the 10% unemployment, [but] we see that being more than made up for at the top end by people that are valued consumers. We see different kinds of consumerism.

Before, some of the displaced buyers that went away from Circuit City going out of business, and stocks like that are now buying from Rent-A-Center Inc. RCII. We think that consumerism will be there but it just won't be there in a difficult form.

In addition to the credit quality of the consumer going downhill, there's a lot of recipients; there are publicly traded subprime auto lenders now. There's Rent-A-Center. There are ways to play this market based on the new, for lack of a better word, new.

You mentioned a couple specific names. Can you tell us why you like them?

Rent-A-Center can typically get a TV at discount and sell it at full price. But they're almost using predatory lending, for lack of a better analogy. For people who need this television that's the only way they're gonna get it. So they're doing this weekly financing charge in some cases, monthly charges in another, depending on your credit quality. And for some people, it's the only way they're going to get that couch or TV. It's sad, but they're providing a necessary function.

People don't mind spending that extra [amount] if they can get that TV that they otherwise wouldn't be able to get. It's the same with these subprime auto lenders. They're satisfying a need. You're not gonna get that car because people looking at credit now aren't giving out loans for cars unless you have perfect credit.

As an anecdote from my personal life, I have a friend who just bought the new Porsche Cayman. She has perfect credit. She just bought a house practically for cash. And when she went in to finance the Cayman they wanted $25,000 down on a $60,000 car. So, for everyone that's going to sit there and think that to invest in this group is bad, it serves a necessary function.

I found, strategically, whether it's homes, cars, retail, whatever it is, there's about $35 to $40 billion in market cap of stocks that are dedicated to this new consumer.

Or, not this new consumer. These stocks have been around for a long time. Unfortunately, more people have gone down than up.

If we get out of this niche of stocks, you see this in Dollar Tree, Inc. DLTR, you see this in Family Dollar Stores Inc. FDO, whenever we've had recessions in the past, Family Dollar and Dollar Tree have suffered. Everyone thinks that the middle class is going to go down and buy that dollar item, but what happens is their core customer thinks twice before they get in a car and drive there. So whatever displacement they do it isn't made up for by losing their core customer.

But this time around, their core customer is doing okay, and the middle class is saying, “Hey, what do I need a $10 shampoo for, when there's a dollar shampoo, 9 times out of 10, made from the same factory?”

Everyone makes good and bad trades. Can you tell us about some of your better trades and a few that you aren't so proud of?

Most recently, the intellectual property semiconductors have been great, whether it's ARM ARMH, MIPS MIPS, and most recently CEVA CEVA. They're all beneficiaries of the wave of new tablet computing and mobile computing.

Another great stock for us has been Starwood HOT. We saw the growth in there. They have these lower-priced hotels in other markets that are selling for $100 a night. And it's more than a Motel 6, but for $100 a night you're getting a loft-style room with a 52-inch flat screen. We saw the evolution of the W lowering its rates – that worked as well.

On the worst side, I thought Wendy's WEN was going to be able to do more. Wendy's, which also owns Arby's, doesn't have breakfast. So, over the past year and a half, they've been experimenting with getting a breakfast menu. And you know, if they add breakfast, it's going to make their idle space much more profitable. It should add 35% to 40% to the EPS because breakfast items are typically higher margin.

And they were testing new breakfast items at Arby's in New Jersey, and I stumbled upon one. They had great sourdough sandwiches and things like that, but for some reason it never took off. And it's not that Wendy's was bad, it's that our thesis never came to fruition.

How long do you give a thesis to play out?

It depends on the thesis. With ARMH, MIPS and CEVA we were waiting patiently for the iPad to come out. We were there probably four to six months before the iPad became a catalyst just based on interviews we were doing and looking at the semiconductor space in general. We actually found that one by looking at NVIDIA NVDA and wondering how NVIDIA was going to play into the next generation, and we stumbled upon those three names as being prevalent and mobile.

Typically, I scale into stocks in a staggered way. So what we normally do, the first leg comes when we do all the due diligence of a normal mutual fund company or a normal hedge fund. We've met with the company, we've seen the product, we've seen the execution.

Our second leg comes when we see a sell-side research team put out a piece talking about what we think we've found early. That's when we'll take our second leg.

The third leg doesn't come until we get actual movement in the stock. That way we're not stuck in value traps or growth traps or things like that. We found that's the best way to deploy capital over time.

Okay, I assume that Matrix Capital has an investment committee. Are all four people making decisions?

Yeah, I make [the decisions] on the equity. When the stuff is staying within equity, it's 100% me. Everyone has their own portion and is allowed to do what they feel necessary. And then we have kind of a CIO that looks over us a monthly and quarterly basis to make sure we're actually executing what we're supposed to be executing.

You mentioned that you speak to companies and that you look at sell-side research reports. What other websites or sources do you use to make decisions?

I'm constantly reading trade press, [which] I find leads regular press by three to four weeks and normally is leading the sell-side by two to three weeks.

I do a lot of volunteer work in communities. For example, doing something in the inner city in Philadelphia back in March '09 got me to a store where I noticed that everybody who was borrowing money to go to a McDonald's was wearing Polo RL. Polos are important; when Polo bottomed at around $30, it's now [over $100]. If a guy had $100 in his pocket in the inner city, he'd rather spend $50 on a Polo t-shirt than getting a Fruit of the Loom t-shirt, which was very unexpected. And I just happened on that by doing volunteer work.

I guess the more important thing is to always have your eyes and ears open to trends in nontraditional ways.

I agree, they can come from anywhere.

Even when you're doing due diligence – I'll use retail as an example. American Eagle Outfitters, Inc. AEO and Abercrombie & Fitch Company ANF. You know, Abercrombie & Fitch will do better [with a weaker dollar] because a lot of their sales are overseas.

But the interesting thing is, with the obesity trends in the United States, when you go to Abercrombie & Fitch you see that the biggest waist size is a 36 when they have full inventory. When they don't, it's a 34, [and] you start to see different limitations in inventory, and over inventory at J Crew (JH2.F).

You can't just sit at your computer and look at valuations, look at what investors are doing and what price movements are doing.

You sometimes have to look at what Peter Lynch did back 20 years when he was at Fidelity. Back before anyone [realized] that you really have to like what you're investing in.

To me, another classic example is, when I'm traveling travelling around, looking at companies, a lot of the time you're forced to eat fast food. Three or four years ago, I couldn't eat at a Taco Bell YUM. And now all of a sudden they come up with this Fresco menu, this quarter, where they have tacos that are like seven grams of fat and under 150 calories. And you just knew that was a home run.

So there is an experiential quality to this in and above your valuation format. Yeah, you can run for the hills when you see these macroeconomic indicators come out, but when you're living day-to-day, outside of Manhattan, and you're looking at what people are spending [their money] on, you can get an edge.

Who are some of your mentors?

I'd say working directly with Bob Doll was a great gift. You know, being able to work on growth funds and value funds and a hedge fund all at the same time, with billions of dollars at Merrill Lynch – that was probably the greatest gift I've had for my career development.

I also worked alongside Kevin Rendino at BlackRock. I learned a lot about cyclical investing from him. Another guy, Larry Fuller, ran the fundamental growth fund at Merrill Lynch. I credit him with showing me how to utilize my top-down skills that I learned from macro and from doing sector rotation.

A lot of times with investing, it's a lot like Slumdog Millionaire – you have to get beat up a few times, you have to be in non-optimal situations. You have to make some mistakes to learn how to not keep making mistakes.

Outside of managing money, what do you do? Are you married? Do you have kids?

I'm not married right now. Again, I volunteer. I am constantly obsessed with what's next. I'm trying to start a hip-hop label. As funny as that may sound, Jay-Z made three albums with rappers from Philadelphia and didn't profit from them at all and they were largely responsible for the success of trying to get those guys back to being relevant again.

I'm trying to give back to the community. I'm very active. I travel back to Philadelphia a lot because again, it led us into the recession, and it kind of stayed there, and spiritually and for work I get a lot out of being in the community and being engaged.

Thanks for coming on to Zing Talk