The stock market is a scary place, but that doesn’t worry Charles Kantor, a senior portfolio manager at Neuberger Berman and a manager of the
Neuberger Berman Long Short
fund. Given the fund’s mandate, he’s prepared for almost anything.
The fund buys underpriced stocks that Kantor and his colleagues believe will gain in value, while selling short those they expect to fall. Short sellers sell borrowed shares, in the expectation of buying them back later at a cheaper price.
The fund’s strategy is one that might appeal to investors looking to weather a storm. While the fund has returned 6.7% annually over the past five years, above the category’s 4.6% but below the
S&P 500
index’s 11%, it has a “beta” of just 0.4, which means it is 40% as volatile as the index. “We’ve taken people on a much smoother ride,” Kantor says.
Kantor’s own journey started in South Africa. He moved to New York in 1992 and joined a management consulting firm, Stern Stewart. After graduating from Harvard Business School in 2000, he joined Neuberger Berman, where he was an analyst before starting the Kantor Group, a money-management unit that now oversees $10 billion, in 2005. In 2011, Kantor launched the Long Short fund (ticker: NLSIX), which has earned a four-star rating from Morningstar.
Kantor, joined by portfolio manager Marc Regenbaum, talked with Barron’s over the past few weeks about his fund’s long/short strategy, his views on the macro environment, and his favorite stocks. An edited version of these conversations follows.
Barron’s: Long-short strategies might be unfamiliar to some investors. How does yours work?
Charles Kantor: The principle of the fund is, effectively, you make more by losing less. We are trying to make money while protecting the downside to drive attractive, risk-adjusted returns. But underpinning all of that is a belief in fundamental research—and we think we’re in an environment where doing fundamental research should make a difference.
How do you pick stocks to buy?
Kantor: On the long side, we want to invest in great businesses at reasonable prices, and own them for long periods of time. We try to make nice capital gains over time.
And how do you pick short-sale targets?
Kantor: Our short process isn’t the inverse of our long process. We short individual securities that we believe face headwinds that we hope will be reflected in the next three to six months. Those headwinds will be reflected in a financial metric—disappointing earnings or an earnings pre-announcement—and we expect the stock will fall when it manifests. We leverage our industry and company knowledge to find opportunities on the short side.
Long/short managers talk about their “exposure” to the market, a fancy way of talking about how much of the long portfolio is “neutralized” by short positions. If you have only longs, you’d have 100% exposure to the market, but if you had an equal amount of longs and shorts you’d have 0% exposure. How do you manage your exposure?
Kantor: Typically, our net exposure—longs minus shorts—is in the range of 30% to 60% of the S&P 500. We are positioned more bullishly when our net exposure is running closer to 50% to 60%; we are a little more conservatively positioned when we are running closer to 30% to 40%.
“We’re in an environment where doing fundamental research should make a difference.”
We tend to be disciplined and move incrementally throughout that 30% to 60% range, depending on the investment opportunity set we find for both longs and shorts. As of the third quarter, the fund was generally running in the 40% to 45% range.
The stock market has had a difficult month. What is your outlook?
Kantor: We just don’t believe you can guess tomorrow. It is always the unexpected good or bad news that catches folks off-guard. Last year, I don’t think there were many predicting Russia would invade Ukraine. I don’t think there were many predicting this year that two of our largest financial institutions would go away. We haven’t had a recession that everyone thought we were going to have. And candidly, there weren’t many people predicting an artificial-intelligence interface.
Marc Regenbaum: We love finding idiosyncratic opportunities, where the returns can come from [a company’s] own strategic success or lack thereof.
One of the companies you like is discount retailer
Dollar Tree
[DLTR], whose shares have fallen 23% this year. What do you like about the stock, and when did you first buy it?
Regenbaum: We first bought Dollar Tree in the fourth quarter of 2022. We have the opportunity to own a defensive retailer with multiple shots on goal and accelerating earnings power. The company benefits from customers trading down, and has countercyclical tailwinds. Dollar Tree has a negative correlation with consumer confidence and a positive correlation with unemployment.
The company also has a best-in-class and highly aligned management team. It brought in a new CEO in January, Rick Dreiling, a retail veteran who formerly ran
Dollar General
[DG], and is now bringing that playbook to the Dollar Tree concept. Importantly, and unlike some peers, comparable-store sales—up 7.8% in the most recent quarter—are terrific. They’re some of the best in retail, showing that the strategic initiatives are working. Dollar Tree is getting positive traffic, and management is still confident about the trajectory of its long-term goals.
You’re also a fan of
Match Group
[MTCH], which runs online-dating sites. What do you like about it?
Regenbaum: Match Group is the leader in the online-dating market, with a market share of about 30%. Its largest sites are Tinder and Hinge. Match has favorable long-term secular trends and is relatively defensive. People do like companionship; they will pay for [dating-site subscriptions] over time. And, while online-dating penetration has grown aggressively in the U.S., there are significant growth opportunities overseas.
Tinder was an asset that the space had never seen before. It went viral with its swipe feature, and effectively gained such market share and traction that it slowed down its innovation engine. It needed a new team to come in, because suddenly more competition started to emerge.
Hinge is still going quite strong. Match has a much lower valuation, combined with strong free-cash-flow metrics and more realistic expectations. It has an opportunity to be thoughtful in how it deploys its capital, whether related to dividends, increasing share buybacks, or M&A [mergers and acquisitions]. It is in a great seat, given the low capital intensity of the business model. This is a great entry point.
Match stock has fallen from a 2021 high around $160 to about $30. The company posted disappointing third-quarter earnings on Oct. 31, and the stock fell 15% the next day. What do you make of the earnings and the market’s reaction?
Regenbaum: There’s a normalization going on in the payer base of Match. It will take a few quarters to show the outcome of their execution. When you separate the forest from the trees, Match is still an asset that should grow its revenue base at a high-single digit rate and its operating income at a very similar rate.
Match seems like it could eventually be a beneficiary of AI.
Regenbaum: AI can be utilized effectively in helping build out the user profiles, and continuing engagement. Also, you might be chatting [with a potential match], and conversation might come to a lull. There could be AI-generated prompts to keep the conversation going. There are different ways that AI could be deployed to keep engagement high on the broader platform.
Equifax
[EFX], another of your long positions, is usually thought of as a credit bureau. Why do you like it?
Kantor: The more exciting piece of the business is called workforce solutions. It is the crown jewel. This business is engaged in employment verification. It enjoys an exclusive relationship with a number of the payroll providers and other companies to collect employee data, including income data, allowing Equifax to build a fully verified digital résumé on a prospective hire.
But we also think there is a coiled spring underneath Equifax. At some point, mortgage rates will settle out, and people will re-engage in moving and getting mortgages. This could create a nice tailwind for credit checks. Then, on the employment-verification side, the coiled spring would be more engagement, especially by white-collar workers. Hiring around white collar is a little bit more challenging versus the blue collar. It doesn’t mean that people are losing their jobs; there is just less velocity in hiring white-collar workers. That could change.
What is the outlook for Equifax earnings?
Kantor: Somewhere between $7.50 and $8 a share is doable next year with no mortgage recovery. As mortgage rates and white-collar hiring return to more normal levels— we don’t anticipate that happening until 2026—somewhere between $13 and $15 a share is reasonable.
What are some stocks you are shorting?
Regenbaum: We tend to be owners of businesses on the long side, which means a three-year-plus time horizon. We tend to be renters on the short side, holding positions for the short term. As of the end of our latest quarter, in terms of consumer-staples companies with leverage, one stock we were shorting was
J.M. Smucker
[SJM]. In terms of business models that used to be valued on growth and took credit risk,
SoFi Technologies
[SOFI] is an example.
Redfin
[RDFN] is a company based on traditional models that was being valued as a tech company.
Thanks, Charles and Marc.
Corrections & amplifications: The Kantor Group, a money-management unit at Neuberger Berman, oversees $10 billion. An earlier version of this article incorrectly said that the unit oversees $6 billion.
Email: emily.dattilo@barrons.com
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