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Value stocks will continue to 'outperform large cap growth stocks' in 2021: Ariel Investments’ John Rogers

Ariel Investments Founder, Co-CEO & Chief Investment Officer John Rogers joins Yahoo Finance Live to discuss how investors can understand one of the craziest years in investing and what markets could look like in 2021.

Video Transcript

- All right. Well, let's stay on the markets and talk a bit about the year that has been so far. For that conversation, we're joined now by John Rogers. He is the founder, co-CEO, and chief investment officer at Ariel Investments. And John, it's great to speak with you this morning.

And I'd love to begin by talking about a piece that you and your co-CEO Mellody Hobson wrote in "The Wall Street Journal" last week. And one line really stood out to me, when you compared the current period in markets to the 1970s. And maybe for our viewers who aren't as familiar with some of those dynamics, what are you seeing and what concerns you?

JOHN ROGERS: Well, back then it was very similar to today. You had these really fancy, high growth companies that were doing extraordinarily well. They were blue chip companies that people thought were one decision companies. They would always just go up and up because they had these strong, strong brands. They'd been growing so readily, and people just couldn't see anything that would ever cause them to decline. But of course, they ended up having dramatic declines as people realized the stocks were vastly overpriced.

And I think that's what's happening today with these Fang stocks and these large, large companies that are doing so well today, these trillion dollar market caps. It is a little bit scary

JUIE HYMAN: John, it's Julie here. So we have seen this sort of shift away from value in terms of a performer pretty much over the last decade. And I know a lot of longtime value investors have said we will see a return to value. And you yourself say it should be coming in the next year. But what's really going to be the trigger and the catalyst for that since value has not been in that whole position over the last decade or so?

JOHN ROGERS: Well, one of the things that's happening is starting to happen already. You know, November was a great month where values started to really outperform these large cap growth stocks, which I think will continue into 2021. And we will have a really wonderful recovery for value stocks, the same way that the value stocks did so well when the internet bubble burst near the end of the century. Value just outperformed dramatically.

And partly what we're seeing, what we think will happen, as my colleague Charlie Bobrinskoy always talks about, inflation is going to come back. We're going to have higher interest rates. And that higher interest rate environment will help value stocks. It will really hurt these high PE stocks that can sell at such high multiples, partly because interest rates are so low. Also, the history shows that when we come out of a downturn in the economy, and you have a recession ending and the economy bursts forward, often value stocks do really, really well in that kind of environment.

And then finally, being a tried and true contrarian, we're seeing all kinds of signs. I serve on a number of investment committees. The number of times the consultants come in now and say we want to fire the value managers is just very, very consistent.

Secondly, so many value shops are starting to close. More and more people are getting fired, so often they've got a close up shop. And finally, I heard a discussion the other day where people are trying to redefine what value really means. So all these kinds of things that are happening make me highly confident that value is bottoming out, and there's massive upside for value relative to growth.

- John, I always enjoy very much how you break down your thinking behind certain calls by your firm. And Ariel owns just under 10% of Madison Square Garden Entertainment. What's your thesis there?

JOHN ROGERS: Well, we think that Madison Square Garden Entertainment is an extraordinary value. The thesis there is that eventually people will be back in the Garden with the vaccines, with the masks. People will be back watching concerts this summer, watching the Knicks play, getting back engaged with that extraordinary, one-of-a-kind facility in the heart of New York.

Also, Madison Square Garden owns not only the garden itself but the land around it, the air rights above it. They have the rights to Radio City Music Hall. They also own the Chicago Theater here in Chicago. And they're building this fabulous new place in Las Vegas called The Sphere, which we think is going to be a new attraction that's going to have the highest of high technology, the best audio. All performers are going to want to be there for that unique experience, which will bring in, of course, an extraordinary audience.

So we think it's really well-positioned for the recovery. And at the same time, they have enormous amount of cash on the balance sheet, and we think that will help isolate them and give them a chance to have the firepower to fight another day. So that's why we really love Madison Square Garden Entertainment.

JUIE HYMAN: John, trust me. I am pulling for entertainment and sports to come back. I would ask you, though, when it comes to MSG, all the cash in the world doesn't do you good if you're not making good decisions with it, right? So I know that they split up Madison Square Garden Entertainment and networks in order to try to unlock some value. The management, though, of MSG, has come-- certainly when it comes to the Knicks, it's come under some criticism. But I wonder what you think of Jim Dolan as the head of this company. Has he made the right decisions, and is he going to continue to make the right decisions coming out of this?

JOHN ROGERS: Well, there is a Dolan discount. There's no doubt about it. Many, many investors are skeptical of Jim Dolan. But if you look at his record, he has created a lot of value. He's made very good decisions that have ultimately played out very well for shareholders over time. If you think back when Madison Square Garden got sort of reinvented sort of a decade or so ago, we had a massive renovation. People were very skeptical then, but it worked out beautifully and built out an underbelly of a much stronger garden that's been much more profitable than people thought was possible.

Also, as you know, Jim Dolan loves the music world. He performs himself. He's built deep relationships in the entertainment industry, which helps him to be able to attract great talent to the Garden and now to The Sphere and to other places like the Chicago Theater. So I know he's controversial, but he's always made money for shareholders over time. And I think he's really well-positioned as Madison Square Garden Entertainment becomes more of an entertainment place, not just a sports place.

- You know, John, another name that you're interested in, BOK Financial, regional bank down in the Southwest, they own a couple of different brands down there. I'm curious not only on what you like with BOK, but just the regional banks more broadly. We've seen a lot of enthusiasm for the KRE Indexes has done well. We've seen financials, as a group, do OK in the last couple of months. Curious for your thoughts both on the company and maybe the regional space more broadly.

JOHN ROGERS: Well, it's interesting. I've been getting to know the bank more and more over the last several years. We've owned the stock in a modest way, and we built up a larger position this year because we think it's well-positioned, like many regional banks, to do well as interest rates go higher. You know, low rates have been very difficult on banks, especially regional banks.

But at the same time, we think they're located in the right parts of the country. You know, energy has been under siege for a long time. Commodity stocks have underperformed. They're in a position there where they'll be able to benefit from a reasonable recovery as the energy markets come back stronger and stronger. And George Kaiser is a terrific chairman, someone who's had enormous influence on that bank and its culture.

So it's just not an ordinary regional bank. We think it's a truly specialized one. I've had, actually, a chance to get to know George Kaiser because he's been part of helping to shine a light on the challenges that have happened in Tulsa. And many of you know that 100 years ago, we had the Tulsa race riots and race massacre. And they're going to be shining a light on Tulsa to be able to get past that tragedy.

My great grandfather actually owned the Stratford Hotel in Tulsa that was burned down during those riots. So I've been spending a lot of time getting to know Tulsa well and getting to know Kaiser well, George Kaiser well. And I think it's, again, a very well-positioned regional stock.

- John, you sit on some really prominent boards, McDonald's, Nike, New York Times. Let's zoom out here. What are some of the biggest issues not just these companies, but corporate America at large is facing next year? What's the biggest one? Is it COVID? Is it how to improve diversity in their ranks? What do you see?

JOHN ROGERS: Well, I think that we're going to get past-- I'm very confident that we're going to get past COVID. This country has always found a way to solve its problems, and we have the best capitalist democracy in the world, and it always works for us. So I'm highly confident that the momentum we see in the economy with major corporations will continue into 2021. It's just that these Fang stocks and these high growth stocks have just gotten to be too expensive.

But at the same time, you know, the issues of diversity, we're hoping that all the energy that happened after George Floyd's murder continues into 2021, and the corporations lived their values of not only hiring more African-Americans into leadership roles, but also doing business with African-American firms in everything we do, not just the commodity side of the spend, but also in the professional services, financial services, and technology base because that's where the economy is growing. That's where the profits are. That's where the jobs are.

And so we're hoping corporate America will keep this momentum of showing a real interest in trying to help solve this wealth gap between the African-American community and the white community.

JUIE HYMAN: John, I do want to pick up and follow on that. You sound hopeful. Are you indeed hopeful that that momentum is going to continue, because I think there was a lot of hope as protests were happening, as people were in the streets, as passions were high. Now we're, what, what half a year or so on. And we do see certain moves, right? We see the NASDAQ impose some new listing requirements, for example, about board diversity. But do you think there's enough accountability out there, or do you think there is enough responsibility out there?

JOHN ROGERS: Well, I think, you know, you continue to worry that many, many corporations are not living their values. And when it comes to economic decisions, they're not doing the right things. Dr. King often talked about how progressive white Americans deplore prejudice but accept or ignore economic injustice. So we need to keep pushing and pushing to get economic justice for minority communities here in this country.

But one of the things that I'm hopeful for, we have a progressive Congress now. And when you have a Congresswoman like Joyce Beatty chairing the Subcommittee on Diversity and Inclusion of the House Financial Services Committee and working with Chairman Waters, they are putting a lot of pressure on all the financial institutions to do the right thing and do business with minority firms.

You see Congressman Cleaver and Congressman Kennedy sending letters to the largest college endowments in the country, putting pressure on them to work with using African-American money managers and minority owned money managers for the first time, often. Again, many universities will hire black and Brown people to do the construction and the catering, which are important parts of our economy. But when it comes to who manages the endowment, it's traditionally all white males.

So having those kind of progressive political leaders pushing this agenda gives me hope, along with the fact that people are starting to, I think, really open up their eyes and understand that they have to do more because this wealth gap is just getting worse and worse each and every year in this country.

- And an extremely important conversation for investors to have next year. I think it is increasingly becoming part of the investment conversation as well.

All right. John Rogers is the founder and co-CEO at Ariel Investments. John, thank you so much for taking some time this morning. Have a great holiday and a happy and safe new year.

JOHN ROGERS: Thank you.