Nothing Left to Buy: Sky-High Small Caps

Featuring Eric Cinnamond

Eric Cinnamond is a noted absolute return small-cap value fund manager with two decades of experience and a long track record of outperformance. But amid recent surging stock market valuations, he shut down his fund and returned his clients’ money. In this piece, he explains that decision, forecasts what’s ahead for stocks, and reveals the steps of his rigorous research process. Filmed on January 12th, 2018 in Jacksonville, Florida.

Published on
31 January, 2018
Topic
Valuation, Equities, Portfolio Management
Duration
32 minutes
Asset class
Equities
Rating
24

Comments

  • JV

    Jonas V.

    14 2 2018 01:51

    0       0

    He should take a look at uranium!

  • JD

    Jonathan D.

    10 2 2018 16:22

    0       10

    Fund manager misses out on 18 months of gains. Would rather listen to fund managers who killed it

  • NR

    Nuno R.

    9 2 2018 11:55

    2       0

    Really interesting and timely interview, especially after this week where the market finally seems to woke up to the ridiculous valuations. Smart, humble guy.

  • us

    ujjwal s.

    5 2 2018 03:17

    1       0

    Great!

  • BL

    Bruce L.

    1 2 2018 22:30

    28       0

    Great interview of a very principled man. Closed his fund because he didn't see opportunity and did not want to collect fees for
    "laddering t-bills". I would happily invest with this man and pay the fee. Worth paying for someone telling me to be out as well as in.

    • HM

      Hot M.

      1 2 2018 23:18

      0       0

      'Gladly', easier said than done, otherwise his AUM wouldntve dropped 60% (seeing others 'make out like bandits', picking up pennies, etc).

      So I'm with you on that, assuming I'd take the hint and didnt inadvertently f myself. :D

      https://www.youtube.com/watch?v=U8NpUZfVif8

  • ks

    kellen s.

    1 2 2018 20:35

    1       0

    Found his method for evaluating stocks very interesting. Would like to hear his rationale for using a RRR of a credit analyst vs a more traditional model..?

  • HM

    Hot M.

    1 2 2018 09:43

    12       0

    Lets get this straight: The small stock guy is out; the tech stock guy is out (Hickey); and the maverick is out (Hendry). I think a trend, save passive investing, is forming. I'd love to know (we know Hickey has some in gold) where these guys are putting their own cash.

    • EF

      Eric F.

      1 2 2018 13:34

      4       0

      I think your question pretty much answers itself - cash.

    • KF

      Ken F.

      1 2 2018 14:09

      4       0

      2 yrs T-Bills

    • MO

      Mike O.

      1 2 2018 22:23

      1       1

      Zinc and copper have been doing nicely ... gold, not too bad (currently waiting for silver to catch up and a little overweight here).

      Also, commodities not too bad (DBA, BG, NTR, JBSAY, etc.), how about you?

    • HM

      Hot M.

      1 2 2018 22:59

      1       0

      Cash and commodities. When I think of gold, I have a hard time equating paper (in all its forms) to physical. If the dollar goes, other currencies will likely follow at a point (currency wars) - inflation, so again gold, real asesets - commodities (spike like 2008?), and for that matter, assets of all stripes, including stocks (EM over US, developed).

      I think I've just described M Faber's diversified portfolio.

      A little music to accompany your frenetic portfolio balancing and rebalancing..

      https://www.youtube.com/watch?v=TxRl7o_dpMM

  • AR

    Alex R.

    1 2 2018 09:07

    1       1

    Fantastic interview.

  • KK

    Kevin K.

    1 2 2018 08:57

    1       1

    There are still a few opportunities in global markets where valuations are still relatively reasonable. They have become more of a rarity recently but I believe they are still to be found if one looks outside the US.

  • FV

    Fredrik V.

    1 2 2018 07:18

    1       1

    Brilliant!

  • CM

    C M.

    1 2 2018 04:42

    8       0

    Can't say enough good things about this interview. Perfect for those of us that look to invest on a longer horizon versus trading.

  • DS

    David S.

    1 2 2018 02:38

    3       1

    Excellent interview. One mitigating factor is the effect of the lower US corporate tax rate in 2018 and after. A lot of big-cap companies were not paying a 35% tax rate on income in 2017. It is possible that some small-caps were paying 35% and will now pay 21%. If so, they might be closer to Eric's criteria. With his broad knowledge of small-caps, he may be able to exploit this one-time change. DLS

    • CM

      C M.

      1 2 2018 04:53

      5       0

      Valid point though I am not sure a 14% pickup in operating income from lower tax rates is enough to offset the extreme overvaluation that Eric is seeing in the market. And who knows what the rates will look like in 4 years after the federal governments starts churning out trillion dollar deficits.

    • DS

      David S.

      1 2 2018 13:44

      1       1

      C.M. - I agree with you that it is probably not enough. In a simple example, a 14 % point tax reduction would take a 25 multiple to a 20.6 multiple at the same stock price. Likewise a 20 P/E would go to 16.5 P/E. The good news it would all add to the company's cash flow. DLS

  • JH

    Jesse H.

    1 2 2018 01:07

    17       0

    Really impressed by Eric - both his technical expertise and thoughtfulness, as well as his integrity. Takes courage, discipline and insight to hand back capital when you're making great money...but he knew something was wrong and he stuck to his guns. In this odd-ball market, he just lost the love of the game.
    Why? Because the game has changed, and it is now significantly rigged by central banks, complicit governments, ZIRP and the move to passive. And, let's not forget, the advent of algorithmic trading. It's no wonder the likes of Eric and Hugh Hendry are washing their hands of this nonsense. It's no longer a free market, in my view - my two cents, anyway.

  • KA

    Kelly A.

    1 2 2018 01:01

    0       0

    Very helpful to me...i know i'm not wired to deal with small caps! Thank you.

  • ra

    robert a.

    1 2 2018 00:50

    15       0

    I am an accredited investor and I would like to get on Eric's client list so that when he starts back up, I can receive a call. Very difficult to find an asset manager with such integrity !

    • TB

      Tim B.

      1 2 2018 13:56

      2       0

      Agreed.

    • JC

      John C.

      2 2 2018 16:24

      1       0

      want on that list as well

  • BO

    Bob O.

    31 1 2018 23:33

    9       0

    so, What currency and value do we put on integrity...... Priceless!

  • TB

    Tad B.

    31 1 2018 23:31

    5       0

    Great interview. Like his style.

  • Jc

    Justin c.

    31 1 2018 19:31

    3       3

    Just wait until the bubble really starts. Every fundamental investor will be in the graveyard by the time this bubble is over. Human's aren't wired to be early by 3-5 years. It is very tough emotionally. Much better to learn some charts and technical factors. Grab a surf board and ride the waves. The water is nice.

  • AL

    Andrew L.

    31 1 2018 19:30

    13       0

    If disciplined value investors like Eric are unemployed then we know we are very near the peak. Should create an indicator of how many value funds going out of business and replace Case Schiller

    • EF

      Eric F.

      1 2 2018 13:37

      6       0

      Yeah, but he’s been out of the market 3-4 years? He’s right but difficult to be so right so early. How much has been left on the table pulling out that early? I honestly feel we’re close to some sort of tipping point but it could also easily extend another year to two.

    • EF

      Eric F.

      2 2 2018 04:21

      3       0

      Correction - he's been out max 1-2 years, so only left (hopefully) a little on the table.

  • RA

    Robert A.

    31 1 2018 19:20

    4       0

    Kudos to Curator Milton for this one (right on top of the Hugh Hendry) and a hat tip to this Gentleman for treating his investors so well. Where but on RV do you think we would be exposed to this dynamic? Very helpful Video, IMO.

  • TC

    Terry C.

    31 1 2018 18:16

    5       2

    I am still a bit perplexed by why people use the same valuation metrics when interest rates are significantly lower than before... why P/S and shiller P/E should be in same range when interest rate is so low? I can see the argument if one thinks we are going back to 5%. However, this is a very admirable money manager who has the highest ethical standards.

  • AD

    Anthony D.

    31 1 2018 18:05

    6       0

    A clear voice of reason and integrity. Thanks RV

  • AG

    Austin G.

    31 1 2018 17:53

    3       0

    The pain of being out of the market too early! Less painful than the ride down will be. I wonder if when the crash happens if the ETFs will amplify the selling of good stocks. With a panic and forced selling the good goes out with the bad. With such a high % of small caps in ETFs there should be a lot of indiscriminate selling. Now is the time to make a wish list, and when the purge happens buy the bargains. But it is tough to sit mostly on cash while things keep going up.

    • DG

      Daniel G.

      31 1 2018 20:46

      2       0

      As Mike Green has pointed out, all the robos have been cramming overweight into small caps for the past few years based on academic research. When the margin dollar is a sell vs a buy, look out below!

  • rr

    rlw r.

    31 1 2018 17:33

    12       0

    Thanks Eric, you demonstrate what Advisors are to be.

    Kudos RV, providing content subscribers are willing to pay for.

    Have someone ask the Q's!

  • DM

    Dom M.

    31 1 2018 16:58

    6       0

    It seems he understands how to manage pain to produce progress

  • NH

    Neil H.

    31 1 2018 16:46

    18       0

    just makes you think how many managers are hugging an index because of job risk and what the repercussions might be at a later date.

  • ag

    anthony g.

    31 1 2018 15:49

    5       0

    Very useful interview. Many thanks to RV for this.

  • MG

    Mohamed G.

    31 1 2018 15:19

    3       0

    What a G. True rarity in a sea awashed with mediocrity and lack of integrity. Made the best call by exiting on a high. 99.9% riding the passive wave are in for a rude awakening.

  • SW

    Scott W.

    31 1 2018 14:29

    23       0

    Honor. Integrity. There's at least one left in the world for whom these still matter.

  • LN

    Lucy N.

    31 1 2018 13:55

    0       0

    excellent

  • TE

    Tito E.

    31 1 2018 13:05

    30       2

    Now thats real fiduciary duty!
    ..bit surprised he doesn't see value in PM mining space though

    • CM

      C M.

      1 2 2018 04:56

      0       0

      Wondering the same thing as gold prices move upwards though stock prices have not increased at the same rate.