August 5, 2022
Dear Fellow Shareholders:
We are pleased to report that earlier this year Olstein Capital Management, L.P., promoted Timothy S. Kang and John D. Sullivan, Jr., to the role of Portfolio Manager on the investment team which manages the Olstein All Cap Value and Olstein Strategic Opportunities Funds. Tim and John have been with the firm for more than 16 years and over that time they have developed a keen understanding of Olstein’s unique accounting-driven approach to value investing. We believe these promotions have strengthened the investment team here at Olstein, and we invite you to visit our website at https://www.olsteinfunds.com/about-us/leadership-team to review Tim’s and John’s backgrounds.
MARKET ENVIRONMENT
A combination of negative factors severely hampered U.S. equity markets during the Funds’ fiscal year ended June 30, 2022. Inflation, rising interest rates, tighter financial conditions and recession risks have weighed heavily on equity markets and triggered periods of severe volatility and sell-offs dur-ing the past twelve months. Compounding these factors was the Russian invasion of Ukraine, which shocked equity markets and forced the broad S&P 500 Index into correction territory in February. The ongoing conflict in the Ukraine has severely impacted commodities prices, particularly oil and gas prices, contributing to a surge in inflation and further disrupting the global supply chain.
We expect investor nervousness and doubts about the global economy to weigh heavily on equity markets in the near term, causing periods of increased market volatility. Yet, despite the challenges and uncertainty weighing on markets, as value investors we see an environment full of oppor-tunity. As we have said many times before, we believe that a difficult eco-nomic environment provides the best time to find good investment ideas at the right price.
We remain focused on individual companies and their operations and prospects for maintaining or growing sustainable free cash flow. A majority of current market prognosticators are issuing daily warnings of an imminent recession, higher interest rates, continued market volatility, continued product shortages, and increasing rates of inflation. The overall economic pes-simism has led to a 20% market correction in the S&P 500 Index (from December 2021 through June 2022) and has resulted in future growth prospects being called into question. The overall doubts about future growth have resulted in momentum and high growth-oriented stocks (which gener-ally had outstanding performance for the last five years) suffering the brunt of the last year’s poor stock market performance.
STRATEGY
Then why are we extremely long-term bullish about the Funds’ current port-folios despite the continued pessimistic environment and market decline? As we have said many times before, we believe a difficult environment provides the best time to find good investment ideas at the right discounts (because paying the right price determines the degree of our long-term investment returns). Although we expect investor nervousness and doubts about the global economy to affect equity markets in the near term (creating extreme volatility), as value investors we believe the indiscriminate selling taking place in reaction to the current negativity has resulted in many high-quality companies’ market values being unfairly punished by the indiscriminate sell-ing creating material discounts to intrinsic value. During the current market correction, we have been able to add to our positions or purchase new hold-ings at material discounts which we believe have sound financials, unique business models, and management focused on adding shareholder value.
The pessimism is creating bargain prices in good companies. We believe the price you pay for good companies is the main determinant of above-average future returns. Although short-term returns during periods of pessimism are often disappointing, patience is the most important attribute of successful value investors. In our 27-year history, we have been through many similar negative periods that have disrupted and adversely affected equity markets. During these periods, we strive to buy high-quality companies at the right discounted price. As always, we are company oriented and have no interest in the conventional market or stock timing suggested by many in the analyst community or the media every minute of the day. We believe overall market timing is a long-term failure process. We have yet to find anybody or any service that has been able to time overall market directions with enough reg-ularity and/or precision to make the timing of stock markets a profitable long-term endeavor. We believe that the major determinant of long-term returns is paying the right price that provides enough of a discount to stack the risk-reward ratio in our favor. The discount we require is a function of our assessment of the risk taken to correctly estimate the future cash flow that we believe is necessary to justify our estimate of long-term value.
The current market malaise has enabled our Funds to add to their portfolios strong balance sheet companies with some of these companies offering over 4% dividend yields and price-earnings ratios under eight times and future free cash flow yields of 10% or more. We believe our strong emphasis and experience over the years in valuing companies utilizing our unique accounting-based inferential analysis of financial statements, footnotes, management disclosures, and management assumptions have provided the Funds with a decided advan-tage in valuing companies. Most companies today report adjusted earnings – that is, GAAP (generally accepted accounting principles) earnings adjusted by the company’s management – and most analysts use these management-adjust-ed earnings to value companies. Our valuations are based on our estimate of a company’s normalized ability to produce future free cash flow which in many cases can deviate materially from management-reported earnings. We will con-tinue to make our own adjustments to management reported earnings using our methodology of performing an inferential look behind the numbers of financial statements, footnotes, management disclosures, etc., looking for clues that our estimate of a company’s future normalized free cash flow is not being appropri-ately reflected in a company’s current public market price.
Throughout our history, we have concentrated on analyzing risk (which we define as permanent loss of capital) before considering potential gains. Our attempt to control losses includes paying the right price and forensically examining management accounting assumptions to produce our own adjust-ed numbers. As previously stated, we believe our knowledge and experience in accounting and finance give the Funds a decided advantage versus those analysts who focus mainly on management’s adjusted earnings to value com-panies. Is the fox guarding the chicken coop?
The FANG (Facebook, Apple, Netflix, and Google), medical, and social media stocks have declined sharply in the past year as many investors are now questioning whether their future growth and earnings can justify the high prices they climbed to. For example, Netflix investors experienced a five-fold price increase over the last seven years, valuing the company at $313 billion dollars at the peak price. Of course, based on 20/20 hindsight, we wished we had bought NFLX around $200 a share and sold it at its high. However, our discipline rejected taking the risk based on our inability to accept that the price to free cash flow ratio at the time was indicative of a realistic valuation of Netflix’s intrinsic value. In essence, although Netflix was a successful young high-growth company, we were not willing to take the risk that the company’s future expenditures necessary to build a competitive library would allow the company to produce the amount of future free cash flow necessary to justify its lofty market prices. When Netflix stunned shareholders in April of 2022 by reporting its first customer decline in more than a decade, the stock crashed, reducing NFLX’S market capitalization by $35 billion in one day. Many analysts then began to cut the company’s estimated market value by up to $100 billion in one day. The stock fell back from an all-time high of almost $700 a share (achieved only one and a half years ago) and was trading around $225 a share in June of 2022. We estimate that at its all-time high, many ana-lysts and Netflix investors were valuing the company at 200 times free cash flow despite clear signs that heavy competition was entering their market-place. Many Netflix analysts and investors obviously missed the signs that companies with stronger libraries than Netflix, such as Disney, Paramount, and Warner, were in the process of building their own competitive offerings which would require increased spending by Netflix to stay competitive.
As in the past, we have used the current pessimistic environment to add to the portfolios free cash flow companies whose market prices have been driv-en down to the point that their prices have little to do with the company’s future ability to generate either current or future free cash flow.
As previously stated, throughout our history managing the Funds, we have concentrated on analyzing risk before weighing potential capital gains. The number and size of losses are more important to future returns than a few oversized gains. Paying the right price in combination with a forensic accounting analysis of the financial statements to determine the conser-vatism of the balance sheet and whether or not the financial statements or management’s adjusted earnings are in accord with economic reality is another technique we utilize in our attempt to limit risk.
ALL CAP VALUE FUND
For the twelve-month reporting period ended June 30, 2022, Adviser Class shares of the Olstein All Cap Value Fund depreciated -15.76%; load-waived Class A shares depreciated -15.99% and load-waived Class C shares depreciated -16.62%.1 The Fund’s primary benchmark, the Russell 3000® Value Index, fell -7.46% and the Fund’s secondary benchmark, Russell 3000® Index fell -13.87%, during the same time period.
PORTFOLIO REVIEW
As of June 30, 2022, the Olstein All Cap Value Fund’s portfolio consisted of 85 holdings with an average weighted market capitalization of $144.16 bil-lion. During the twelve-month reporting period, the Fund initiated positions in six companies and eliminated its holdings in seven companies. Positions initiated during the past fiscal year include: ABM Industries, Cushman & Wakefield plc, FIS (Fidelity National Information Services), Fortive Corp., Hormel Foods, and The Scotts Miracle-Gro Company. Positions eliminated during the reporting period include Accenture plc, Aon plc, Dollar Tree, Inc., JetBlue Airways Corp., Keysight Technologies, Lowes Companies, and The Timken Company.
During the reporting period, the All Cap Value Fund sold its holdings in Accenture plc, Aon plc, Dollar Tree, Inc., Keysight Technologies and Lowe’s as the price of each company’s stock reached its valuation level. The Fund eliminated its holdings in JetBlue to reduce the portfolio’s exposure to the airline industry. Although we continue to see a significant discount in the stock of The Timken Company, the Fund eliminated its holding in Timken and used the proceeds to invest in opportunities that we believed offered a better risk-reward tradeoff.
Our Leaders
The Olstein All Cap Value Fund’s leading performers for the twelve-month reporting period ended June 30, 2022, include: Dollar Tree, Inc. (
LOW, Financial), Keysight Technologies (
KEYS, Financial), UnitedHealth Group (
UNH, Financial), and Aon plc (
AON, Financial). At the close of the fiscal year the Fund continued to maintain a position in UnitedHealth Group.
Our Laggards
Laggards during the twelve-month reporting period include: Meta Platforms Inc. (
META, Financial), JetBlue Airways (
JBLU, Financial), Generac Holdings (
GNRC, Financial), Stanley Black & Decker (
SWK, Financial), and Denny’s Corp. (
DENN, Financial). At the close of the fiscal year the Fund continued to maintain positions in Meta Platforms Inc., Generac Holdings, Stanley Black & Decker, and Denny’s Corp.
THE OLSTEIN STRATEGIC OPPORTUNITIES FUND
For the twelve-month reporting period ended June 30, 2022, Adviser Class shares of the Strategic Opportunities Fund depreciated -27.65%; load-waived Class A shares depreciated -27.83% and load-waived Class C shares depreciated -28.38%.2 The Fund’s primary benchmark, the Russell 2500® Value Index, fell -13.19% and the Fund’s secondary benchmark, Russell 2500® Index, fell -21.00%, during the same time period.
PORTFOLIO REVIEW
As of June 30, 2022, the Olstein Strategic Opportunities Fund portfolio consisted of 40 holdings with an average weighted market capitalization of $4.51 billion. During the reporting period, the Fund initiated positions in two companies and eliminated five holdings. The Fund initiated positions in ABM Industries, and Cushman & Wakefield plc. The Fund eliminated its holdings in CoreCard Corp., JetBlue Airways, Keysight Technologies, Korn/Ferry International, and UFP Technologies, Inc. The Fund sold its holdings in CoreCard Corp., Keysight Technologies, Korn/Ferry International, and UFP Technologies, Inc. as the price of each company’s stock reached our valuation levels. During the extreme volatility that char-acterized equity markets during the last half of the fiscal year, the Fund elimi-nated its holdings in JetBlue in order to take advantage of perceived better risk-reward opportunities in other companies. It was a tough year for many small-cap funds after achieving outstanding performance the previous year.
Our Leaders
Leading performers for the twelve-month reporting period include: UFP Technologies (
UFPT, Financial), Prestige Consumer Healthcare (
PBH, Financial), Keysight Technologies, Korn/Ferry International (
KFY, Financial), and WESCO International. At the close of the fis-cal year the Fund continued to maintain positions in Prestige Consumer Healthcare and WESCO International (
WCC, Financial).
Our Laggards
Laggards during the twelve-month reporting period include: Big Lots Inc. (
BIG, Financial), Blue Bird Corp. (
BLBD, Financial), JetBlue Airways, The Shyft Group (
SHYF, Financial), and Generac Holdings (
GNRC, Financial). At the close of the fiscal year, the Fund continued to maintain positions in Big Lots Inc., Blue Bird Corp., The Shyft Group, and Generac Holdings.
FINAL THOUGHTS
We believe the current period is no different than others we have experi-enced over the past 27 years. As has happened many times in the past, we see above-average undervaluation opportunities becoming more plentiful during this period of market pessimism. We intend to stay the course utilized over our past 27 years of buying and selling securities based on discounts to our cal-culation of intrinsic value after an exhaustive fundamental analysis of a com-pany’s business, management, financial statements, and quality of earnings (defined as financial statements that are in accord with economic reality). We believe that markets are at the beginning of at least a three-to-five-year trend in which company fundamentals, free cash flow levels, and realistic accounting assumptions again become more important to valuing a company than quarterly earnings beats and misses. The probability of the permanent loss of capital (risk) should again be considered before selecting individual stocks or investment advisors. We believe that managers performing funda-mental research should again be valued rather than just relying on index investing (S&P 500 Index was heavily influenced by FANG Stocks) or man-agers who only focus on high-growth companies without considering the price paid for this growth. While the style box treats growth stocks and value stocks as different categories for diversification purposes, we believe investing according to the style box philosophy won’t necessarily accomplish its diversi-fication goal because growth is merely a component of value.
The intrinsic value of a company is determined by the difference between the company’s market price and its discounted normalized future ability to produce free cash flow. To characterize “value” as being in or out of style is a misuse of the word when it comes to investing. Whether a stock is underval-ued, fairly valued, or overvalued is determined by whether or not its con-stantly changing market price is fairly valuing the company’s future free cash flow. Thus, individual stocks can fall in and out of value territory as their prices and free cash flow change. A rapidly growing good company can become overvalued if its stock price increases are a result of unrealistic future free cash flow assumptions that are not realistic. Overvalued high-growth free cash flow companies can take precipitous falls when it becomes apparent that their growth rates may be slowing down. Remember Netflix investors lost $35 billion of dollars of cumulative market value when the latest earn-ings report revealed a slowdown in Netflix’s growth rate. Another example would be Microsoft and Cisco investors who paid ridiculously overvalued prices during the internet boom in 1999. Despite continued free cash flow growth in both companies, the growth rate eventually slowed. Microsoft and Cisco investors had to wait ten years just to get even. Great young high growth companies often attract speculators who are attracted to the constant high earnings growth but rarely pay attention to value. The stampede into these stocks can eventually result in periods of extreme overvaluation. Paying the wrong price even for good companies can become very costly to long-term investment results.
As short-term economic news and events overwhelm equity markets from time to time (recently the pandemic), we believe it is important that we maintain perspective and take advantage of the short-term noise affecting individual stock prices which can have little to do with long-term values.
Growth companies are not a separate investment category from value com-panies. Growth companies can be undervalued or overvalued, and we con-tinue to believe that growth rates by themselves are merely factors to consider when valuing a company.
Throughout our 27-year history, we have experienced many investment pan-ics that led to indiscriminate selling. However, we were able to weather the intermittent storms and panics by following our long-term looking behind-the-numbers investment philosophy, which relies on paying the right price in order to put the risk-reward ratios in our favor. Remember, great growth companies can become overvalued, and paying the wrong price could become costly to long-term investment results.
We value your trust and remind you that your money is invested alongside ours as we work hard to accomplish the Funds’ objectives of long-term capi-tal appreciation. We invite you to look at the chart on page 11 showing how a patient investor who invested in our initial fund – the All Cap Value Fund– since its inception in September 1995 would have fared.
Sincerely,
Robert A. Olstein, Chairman and Chief Investment Officer
Eric R. Heyman, Co-Lead Portfolio Manager
1 The performance data quoted represents past performance and does not guarantee future results. The Olstein All Cap Value Fund’s Class C average annual return for the one-year, five-year, and ten-year periods ended 06/30/22, assuming reinvestment of dividends and capital gain distributions and deduction of the Olstein All Cap Value Fund’s maximum CDSC of 1% during the one-year period, was -16.62%, 6.07%, and 9.26%, respectively. Pursuant to the Fund’s prospectus dated 10/28/21, the expense ratio for the Olstein All Cap Value Fund Class C was 2.14%. Performance and expense ratios for other share classes will vary due to differences in sales charge structure and class expenses. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than performance quoted. To obtain performance data current to the most recent month end, please go to our website at olsteinfunds.com.
2 The performance data quoted represents past performance and does not guarantee future results. The Olstein Strategic Opportunities Fund Class C return as of 06/30/22 for the one-year, five-year, and ten-year periods, assuming deduction of the maximum Class C contingent deferred sales charge of 1% during the one-year period, was -28.38%, 2.65% and 7.53%, respectively. Per the Fund’s 10/28/21 prospectus, the gross expense ratio for the Class C share was 2.46% and the net expense ratio was 2.35%. The Adviser has contractually agreed to waive certain fees/expenses until October 28, 2022. Performance would have been lower without waivers in effect. Expense ratios for other share classes will vary. Performance for other share classes will vary due to differences in sales charge structure and class expenses. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than performance quoted. To obtain performance data current to the most recent month end, please visit our website at olsteinfunds.com.
