Bonds. And Soup.

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Whether it's the Democrats or Republicans who win, you know, pulling us back now to a more reasonable level of deficits is going to be really difficult.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Jim Selinski. He's the global head of fixed income at Janus Henderson, the big money manager. And in a moment, Jim will tell us why there are good opportunities in bonds and some other income investments, and he'll share thoughts on the federal debt and the US dollar. Now, bonds are exciting enough. I do not want to overstimulate our listeners, but I will be saying a few words about the history of canned soup and the outlook for Campbell stock. Listening in is our audio producer Jackson. Hi, Jackson.

Hi, Jack.

Not a big canned soup fan, I'm gonna guess. You're a young guy. I know you're health conscious. When's the last time you had a can of soup?

It must have been— it must have been as a kid. And, and I don't know if you're counting Chef Boyardee You elitist guy. I do buy cans though. Sometimes I'll buy canned beans for recipes for my own stews and soups.

Yeah, you and everyone else. Look, soup is, soup's not a hot growth market. Soup's in trouble. Soup is in, soup has had some difficult decades. Now as an ingredient, it's still selling fine. People buy the broths. Families that are looking to stretch a dollar. They're cooking at home and they'll buy broths to use in their recipes. But the ready-to-eat soups, the meal in a can, that stuff is not selling particularly well. Young people would rather, um, they'd rather hit that Chipotle app and put in their order and go through the drive-thru and get themselves a burrito. Or they want something fancier than soup. Look, I'm a soup guy. I'll still, I'm not too cool for a can of soup. Yesterday.

I buy the lentil bags, you know, lentil soup that comes in bags. It doesn't come in a can. But if I'm like, if I'm reaching for the lentil beans. No, no, no. There's like these lentil soups, like Madras lentil. Anyway, that's for a topic for another time.

They're selling bags of soup?

They're selling bags of soup.

Yeah. They just sit behind it.

You put it right in the microwave.

How do they stack? Oh, they're frozen.

No, no, no.

They're just liquid-filled bags that sit there. How do they stack them up? Yeah. Wouldn't it be an unstable stack?

Yeah, well, they come in a box, so they'll put like 8 of these bags in a box.

That's good. I like to pay attention to what you're into. I feel like it's the future. I'm, I'm stuck in the past. I opened yesterday not one but two cans of soup because, uh, I opened a can and I glopped it into the pan from the can, and I saw— wait a second, that's pea soup. That is one of my co-favorites. But I wasn't in the mood for pea soup. I was in the mood for New England clam chowder. I like to take a separate can of clams and add it and make extra clammy clam chowder. That doesn't sound— you need it. You need a different name than that. But that's what I do. That's probably a problem for the sodium content because a can of soup, they say it has like 1,500 milligrams of sodium, which sounds like a lot. And then the clams have sodium. So sorry, kidneys. But that's what, that's what I did yesterday. And I put the pea soup in the fridge anyhow. That stuff is not selling particularly well. The broths are doing okay. So Campbell Soup, that's the market leader in soup. They have been— the stock has been a disappointment over just about every time horizon you can name: 1 year, 5 year, 10 year. If you bought that stock a decade ago, you've made 33%. That's including your dividends. That has to be like All dividends and then some. And that compares with a 236% return for the S&P 500. Not good. So I mentioned this to point out that Campbell stock is gradually gaining some fans, and that's a big deal because it is decidedly unpopular. If you look a year ago, there were 19 analysts covering the stock according to FactSet, and only one of them said to buy. And now there are 24 analysts and 5 of them are bullish. D.A. Davidson initiated coverage at buy in February, and just this past week, the analyst at JPMorgan upgraded Campbell stock to overweight. That is his first positive rating on the stock in 15 years. And that got me wondering, what's going on at Campbell? I sometimes use this company As I've mentioned it, right? I mentioned it as an example of like reputational safety stocks that maybe aren't as safe as you think, like packaged food in general. People think that's a haven in tough times, but actually there's some growth challenges there that can add risk for long-term holders. Where if you look at something that has a reputation from past decades of being risky, like technology, that's becoming much more of a staple. So you can't just go on reputation. You have to look at the financials, I think, to see what's really safe.

You can't just go around tasting the soup.

Look at the old, you know, standard deviation of yearly free cash flows or whatever you're into.

I feel like soup had a moment during the pandemic.

This is true. People did stockpile canned goods during the pandemic. I may have confessed to a little SpaghettiOs hoarding at some point, which is Campbell's product, by the way. But what happened is the people got back out of their homes and then inflation started to bite and families said, we got to save some cash here. Hey, let's eat through these excess pantry stockpiles. So Campbell Stock ended up having a really big year in 2022 and a really bad year in 2023. A little canned soup whiplash for investors. Okay, so what do these analysts suddenly like about Campbell? Well, the notes all seem to have in common one brand that they're mentioning and raving over, and that is— Jackson, is this— careful, wait a second. Whatever, there are two ways to pronounce this. Make sure that you get this right to sound cool. Go ahead.

I know I got the wrong one. Rouse.

I'm sorry, I can't accept that, but I'm going to give you one more choice. It's spelled R-A-O apostrophe S. Roos. That's actually a sneaker brand from the '80s. Um, we're looking— we were looking for Rao's. Rao's is the brand. Rao's tomato sauce. Um, we're gonna talk about Rao's in just a moment. Let me tell you first a little bit about Campbell as a company for people who are either curious or who are out walking their dogs and their hands are occupied and they can't be bothered to hit the fast forward button on their phones right now. I'll keep it quick, I promise. So Campbell traces its roots to just after the US Civil War. There was a New Jersey produce wholesaler. His name was Joseph Campbell, and he went into business with a local guy who specialized in packing.

Let me guess, his name was Mortimer Soup.

Yes, Mortimer Soup. And the company launched beefsteak tomato soup in jars. And then 2 years later, the nephew of one of the founders who had taken charge of the company, he invented a condensing process that allowed them to shift to cans. And there was some deal-making over the decades, but it was sparse. Franco-American canned pasta in 1915, V8 vegetable juices in the 1950s. Ronald Reagan used to do ads and Pepperidge Farms breads and snacks. That's, that's known today for those Goldfish crackers and the Milano cookies. It bought that in the 1960s. Now, more recently, dealmaking has been picking up. In 2017, Campbell bought Pacific Foods. They sell those organic soups and broths in cartons. The next year, it bought Snyder's Lance Snacks. Now, that was its biggest deal so far. Snyder's owns popcorn and Kettle and Cape Cod potato chips. So that got Campbell way into snacks. And then in 2019, a new CEO took over. Now last year, Campbell bought Sovos Brands, and this is where Rao's comes in. What can you tell me about Rao's, Jackson? How much do you know about it?

I see them at the grocery store in the pasta sauce aisle.

What's the origin?

Maybe there's a rest— is there a restaurant in—

Yes. Yes. Okay. In East Harlem. Manhattan.

Yes.

What do you know about it?

They must make pretty expensive pasta sauce because I always end up choosing the other brands. It's like, it's like $8.

Walmart sold it recently for $8.52. It used to be cheap. I remember I lived in Queens when Rao's hit store shelves and, and it was tasty and cheap, and today it's just tasty. But Rao's is a restaurant, and the restaurant is known, I think, mostly for like never having a table available ever for anyone. Forget about it. Don't even ask. And if there's one thing New Yorkers love even more than a meal they can't afford, it's a meal they're not entitled to. So that makes people want Rao's even more, I think. And look, I'm just a regular Joe, so, you know, I don't know. But I have read— there was an essay last year from a writer with The New Yorker who tried to get a table at Rao's and was turned away. And they counted the seating. There were 6 booths, 4 large tables, and a 2-top. That's not enough for a popular New York restaurant. I think it's popular partly because there are so few seats. And according to this writer, the seats today are controlled by locals. It's almost like a timeshare system, like people have a certain seat on a certain day and that's it. You can't get in. But Rayo's has parlayed this, uh, this off-limits reputation into— I mean, first of all, a couple other restaurants which are somewhat more accessible in Miami and Los Angeles, but more important for our purposes here, into jarred sauce. The sauce is good. It has a simple list of ingredients. It had limited distribution for years, but in 2017 The soup and other packaged foods from Rao's were bought by a former packaged foods executive who set up a company just for that purpose called Sovos. And the idea is you buy a niche brand, you launch new products using the brand, you spread distribution for the brand, and ideally you raise prices. That's exactly what has happened with Rao's. You can find Rao's pasta and Rao's soups, and you can find it everywhere including Walmart, and the prices are quite high. It's become snooty sauce, and that and the popularity are good for margins. Okay, so back to Campbell. JP Morgan estimates that Sovos— the sales for the Sovos division are going to grow by a mid-teens percentage over the first year of Campbell ownership, slowing to a 10% growth rate by fiscal 2026. That is exceptionally fast growth in packaged food. In packaged food, you tend to have minimal growth, and you try to improve margins each year, and you get decent earnings growth. There are ugly trends elsewhere in Campbell that you have to make up for. The, the sauces and the soups are part of this category that the company calls Meals and Beverages. And JPMorgan predicts that sales of the legacy products there, like the soups and V8 juices and Prego sauces, that those will decline by a half point a year. And snacks are supposed to be the growth leader, but even snacks are slumping. Investors are wondering how big of a role this new class of obesity medicines are playing. Those can sap cravings for snacks. Campbell management says that this year revenue growth will be 3 to 4%. That includes acquisitions. Without them, they predict down a percent to flat, somewhere in there. But longer term, they're targeting 2% yearly organic sales growth. By consolidating factories and adding more automation, the company can drive profit margins higher. It aims to grow earnings per share by 6% to 8% a year. JPMorgan thinks it can get there. It writes, we are not upgrading CPB Campbell because we see significant upside to consensus estimates. It's because we have increased confidence that estimates can be hit. And that is not exactly a stirring call to action for investors, but Campbell trades at about 14 times earnings and the S&P 500 is pushing 23 times. So soup looks cheap. There's a 3.3% dividend and JPM sees about 15% upside remaining for Campbell shares. What do you think, Jackson? Has JPMorgan's soup thesis left you Steamed up or lukewarm? Where do you stand on the stock?

I think I'm ready for something more exciting.

That's fair. Let's talk about bonds. We'll take a quick break. When we come back, we're gonna hear from Jim Selinski from Janus Henderson. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data. So you have the right ingredients to help you shine. Morningstar, where data speaks. Harvard Business School Executive Education creates powerful connections for leaders from around the world. Their programs strengthen organizations and individuals by deepening relationships and fostering new ones. Participants leave with lifelong friends, new potential business partners, and a powerful globe-spanning network of fellow changemakers. Learn more at hbs.me/breakthrough. That's hbs.me/breakthrough. Welcome back. I spoke recently with Jim Selinski. He's the global head of fixed income at Janus Henderson. I had questions on US bond yields. They remain pretty high even though the Fed is expected to start cutting rates sometime. The dollar is strong. What does that mean for investors? What pockets of the income world look most attractive? And what about the mounting federal debt? Let's listen to part of that conversation. There are indications that the Federal Reserve might cut rates sometime, and as rates fall, that would be good for bond prices. You would expect bond prices to rise. So if you own bonds, you'd be enjoying some capital gains to go with your income. But you say the starting point for yields is still pretty high. In other words, we haven't seen those gains for bonds yet. What's the holdup? If people expect interest rates to fall, how come the yields on bonds are still so juicy now?

Inflation has been sticky. Service inflation has remained, I think, very stubborn. So as goods inflation has come off, we haven't seen that same deceleration in things like rents or other key drivers on the service side. And that's kind of spooked the market. And then I think the Fed is going to cut, but they're going to be a little bit slower than I think the market might like. And as we've kind of priced that out, I think it positions us in a good place. You might have to wait a quarter or two quarters or even three before things really get—

Two quarters, that's a long-term time horizon, isn't it?

Well, it certainly is compared to what we had priced in in the beginning of the year when, you know, we came in with like 7 cuts and now we have, you know, 1 or 2 and, and the first one kind of being, you know, in September or something like that. I think they should cut sooner, by the way. I think there's enough evidence of slowing in wages and, you know, deceleration in goods inflation, but also slowing in things like employment. But they may not do it.

So I guess the good news for investors is that this slow footing on the part of the Fed has given them another opportunity or a longer opportunity to buy bonds. And as you point out, you can buy some plain vanilla bonds like treasuries and you can get a yield that's higher than the current inflation rate, which feels like a bit of a free lunch. I mean, that's not always the case, right? That you can buy a risk-free asset and get a yield that's higher than the inflation rate. I guess my question is, What should you do? I mean, do you just back up the truck on something simple like, uh, you know, intermediate-term treasuries, or where are the attractive parts of the bond market?

Treasury bonds and notes do look attractive. Like I said, you may have to be patient and you may see a range trade for a while. I think outside of that, when you look at areas like credit, you know, it looks okay, not, not great, just because credit spreads are kind of fully pricing in that soft landing. If you look at things like mortgages, I think things that maybe aren't as exposed to economic weakness or maybe more exposed to things like interest rate volatility, that's probably a better place to play. You know, for me, securitized and asset-backed mortgages look a little better than corporates. We're not bearish on corporates yet, but, you know, there's just not a lot of juice left in the spread.

When you say corporate bonds, people say, "I get what he's talking about, companies borrowing money." When you talk about mortgage-backed securities or collateralized loan obligations or things like that that you've written about, people say, "Oh no, that sounds like the fancy stuff. Didn't that stuff cause problems way back when?" Or, "What am I getting myself into?" How would you characterize the risk of those asset classes, mortgage-backed securities or CLOs, versus corporate bonds?

It's a broad asset class, so it ranges, you know, from more pristine credit quality and things like agency mortgages, and those are, again, GSE-backed, so very little credit risk, but they've got some duration and risk, and they're exposed to interest rate volatility. Things like AAA CLOs, again, pristine credit quality, so you don't have to worry so much on the credit side, but again, they're floating rate instruments. You don't have to worry so much on on the rate side either. So again, I think the mystery surrounding some of these, which dates all the way back to, you know, 2008 and the TFC, I think is maybe still what is kind of a hangover for the markets. They see they're a little bit less liquid, but, you know, most people, when they look at default rates, historical losses, even high-quality CMBS that isn't, say, for example, tied to the more troubled parts of the office market, are again looking fairly strong and certainly, you know, stronger, I think, than some of the areas in corporates, you know, but the days of, you know, having really widespreads are behind us, right? So I think people just need to be a little bit more focused on diversifying, taking some duration and rate risk, taking some credit risk, but then focus on those areas that maybe didn't really get exposed to higher leverage, I think, in this latest cycle. Late cycle is often the time to go up in quality and get a little bit more diversified. And I think that is the right approach here.

By the way, these CLOs, collateralized loan obligations, we have talked about them before on this podcast. I won't embarrass myself by trying to explain them from memory, but basically you take a pool of loans and you can slice them and dice them and create tiers of credit quality. And you can say these people must be paid first. And that makes that an exceptionally safe level in terms of repayment risk. And That's how you get, you know, AAA CLOs. And your firm, Janus, has some ETFs of these. I, I, I've spoken with some of your people that, that represent those ETFs and the, the inflows have been significant. In other words, they're becoming popular. People are, people are buying it. I, I believe the tickers on them are JAAA for one of them. And, um, the other one might be JBBB. You can correct me if I'm wrong, but you think the world is sort of catching on to the value in CLOs right now?

Yes, I think the world is catching on. They've been big successes for us as clients. Again, it's a combination of what you get there. You're getting great credit quality, insulation from higher interest rates because they tend to be floating, and you get yield, right? So more yield than what you traditionally might get on a short-duration, high-quality asset. And I think it's the combination of that coupled with where we are in the cycle that has appealed to a lot of new buyers. So a lot of traditional buyers have come back and then a lot of new buyers have really stepped up. Again, as a pool of CLOs, liquidity is actually quite good. And I think in the ETF wrapper, for example, I think that CLO type of structure is, I think, not brand new. They've been around for a long time, but it's now resonating with a much broader base of buyer.

I'm going to ask you a dollar question. You're the fixed income guy, but I'm going to ask you a dollar question. You don't have to answer it if you don't have a view on it, but you might. It's just that these high yields that we enjoy here in the US relative to some other countries, it seems to be contributing to a strengthening in the dollar. Do I have that right? And does that catch your eye? And what do you think of it? Do you think it'll stay strong? Is it getting too strong?

The dollar's had a fantastic run. One of the reasons for that, of course, is that you see the European Central Bank easing, Switzerland, Canada, other banks are now in easing mode. The US has been delayed, and I think the higher rates that you now see in the US have certainly helped strengthen the dollar. The economy has been a part of that too. So strong economy, higher rates, I think leads to a higher dollar. Now we know that, the market knows that. So my point would be that is now kind of priced in, but it's had a great run the last year, year and a half. For the most part, I would probably think that, that run is over. The yen has obviously been the talk of the day, right, as it kind of approaches new levels that we haven't seen in years. Even there though, I think you've now kind of priced in that relative differential between the US and Japan. I think the dollar still looks okay. I just think a lot of the upside is probably behind us now.

Do you think the level we're at now is good, bad, or indifferent? I think sometimes ordinary investors hear, "Okay, they're talking about a strong dollar. What does that mean? I've got these dollars here. They're the same dollars I've always had. I've got my bills, they're the same bills. So what does a strong dollar here mean?" I mean, there is a level that it can be too strong. Is the level we're at now okay for companies trying to do business and for the economy?

Yeah, there's crosscurrents to a strong dollar. I mean, one of the good ones is that, you know, it lowers inflation. You know, that will help the Fed, for example. And look, it represents a strong economy generally, so it tends to be associated with better risk periods. As it gets too high, you know, then I think it does start to hurt exports and things like that. For the US though, which has been historically a fairly closed economy, exports aren't really driving economic growth in the US. It's not going to be painful, I think, for either investors or for the US economy at these current levels.

Is there anything that I have neglected to ask you about that you want to add on the subject of bonds or the dollar or Japan and the yen?

I think one of the big focuses in fixed income is the unsustainable path of fiscal policy. We see deficits kind of reaching intractable levels, whether it's the Democrats or Republicans who win, you know, pulling us back now to a more reasonable level of deficits is going to be really difficult. And things like a clean sweep by either party probably propel the deficit to kind of new higher levels. Is there a number that's too much? I think is the question. Greater supply is clearly going to lead to higher yields, all else equal. It also, by the way, because you're running big deficits at the federal level, that does tend to correspond with surpluses elsewhere. And some of those surpluses, by the way, are things like, you know, corporate profits. And so it's generally supportive, but at some point we have to say, what is too much? That said, we thought Japan was too much when they had 100% plus debt-to-GDP ratios kept going, kept going, and then kept going further, right? And so there's no magic number as long as your rate of interest doesn't greatly exceed your underlying rate of growth. But I do think the US is in a slightly different kind of place than Japan, which had huge excess savings and things like that. You know, the US, if they don't get their house in order, we could see that kind of global supply-demand imbalance be the one thing that might upset the idea of a bond market rally.

I know I said that was the last question, but this is your fault because now you got me on the edge of my seat about the debt. So it's an attractive time to buy bonds, as you point out, but at the same time, the US debt looks unsustainable or the path looks unsustainable. And as you say, in the upcoming election, if you have a clean sweep by either party, either party gets its way, that's maybe more spending and maybe more bond issuance, and maybe that's negative for bonds. So how do you balance that in your mind as an investor? Are you still— you're still okay putting money to work in bonds, but what do you do? Do you stay up late election night with your index finger on the sell button in your portfolio, or how do you handle it?

Yes. And as a bond investor, I don't want to start betting on the election. That's for sure. I do think a mixed House, Senate, and president would be that kind of gridlock recipe that probably is a good thing for bonds. So, you know, I think as long as that is, you know, one of the higher probabilities, you know, probably should not worry short term. I think the market would get spooked, you know, by the deficit path if you had a clean sweep. But I do think that, you know, there are still enough global savings if you look externally, you know, outside the US, And it's one of the reasons yields are already higher in the US, I think, you know, than they are in other markets. So yields move higher, they absorb that savings. So far, we've really seen nothing to indicate we're at some kind of threshold of pain on the deficit and supply. You know, we learned that in the UK a short time ago when you become, you know, just so imprudent that you might have a really strong market reaction. I think the US is in a better position. They're a reserve currency, you know, lots of money to kind of flow in and take down bonds, you know, should yields spike a little bit higher. I just wanted to point out, Jack, that there's a few things that are new in every cycle. The fact is that, you know, it's hard with the deficit math to actually see borrowing go down.

Thank you, Jim, and thank all of you for listening. Jackson Cantrell is our producer. Jackson, that's the big bonds and soup episode. What's on tap for next week? Is it, uh, stocks and pretzels? What are we doing?

We got futures and smoothies.

Maybe people have to listen to find out. You can follow the podcast on Apple Podcasts, Spotify, YouTube, wherever you listen. Leave a comment, write us a review. You can tape a question on your phone if you want us to answer it on the podcast. Use your voice memo app and send it to jack.howe@barons.com. Thanks. And see you next week. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.