Chris Wright, Portfolio Manager, Kayne Anderson Rudnick
Chris Wright, CFA, is a portfolio manager and senior research analyst at Kayne Anderson Rudnick Investment Management, an investment management affiliate of Virtus Investment Partners, where he has primary research responsibilities for the financial sector.
Mr. Wright began working in the financial industry in 2001. Before joining Kayne Anderson Rudnick in 2012, he worked at Alvarez & Marsal and at Houlihan Lokey Howard & Zukin.
Chris Wright earned a B.S.E. degree with a concentration in finance from the Wharton School at the University of Pennsylvania and an MBA from the University of California, Los Angeles.
“Kayne Anderson Rudnick is a Los Angeles-based investment manager founded in the mid-1980s by Ric Kayne and John Anderson. Today, we manage over $50 billion in assets, with strategies ranging from small cap up to large cap, in core, growth and value.
We also have several billion in AUM in international and emerging market strategies as well.
There is one unifying investment philosophy across all of those strategies and that’s a focus on high-quality businesses. We think of high-quality businesses as being companies with a durable competitive advantage.
That competitive advantage allows a company to earn attractive rates of profitability and returns on capital over a long period of time. We focus on high quality for a few reasons. Number one, it allows us to concentrate our investments and it gives us the ability to hold our investments over a long period of time.”
In this 3,267 word interview, exclusively in the Wall Street Transcript, Chris Wright details the investment decisions for key stock picks:
“I’d like to discuss a couple of companies: Avalara (NYSE:AVLR) and Lamar Advertising (NASDAQ:LAMR), both long positions, which are interesting companies, but whose experience through the pandemic last year was very different.
I’ll start with Avalara. Avalara provides sales tax compliance software mostly to small and mid-size businesses. Its software is used to automate the calculation, collection in sales tax, use tax, excise tax, and anything with respect to taxes on any kind of sale by a business.
The process of identifying different local taxes for sales transactions is specific to both the location where the item is sold, as well as the item itself. And so this requires frequent updates to ensure companies are compliant with the local tax laws.
Hopefully you can appreciate it would be quite cumbersome if you’re selling across all 50 states — how difficult that endeavor might be.
Just to give you an example of how complex this can be, in New York, if you buy a bagel, and you don’t do anything with that bagel, it’s not subject to tax. However, if you were to cut that bagel, put cream cheese or butter, or toast it — suddenly that bagel is subject to local taxes.
Another example would be in Louisiana. If you buy a pre-packaged sandwich, it is not subject to sales tax. But if a retailer were to prepare that sandwich for you on premise, suddenly that sandwich becomes taxable.
There’s just a myriad of these types of examples all across the United States. Depending on the service or the item, it could be subject to local taxes. And those tax laws change constantly. And so that’s where Avalara steps in to really solve that headache for small and mid-size businesses.
Two things have happened recently that have provided a tailwind for this business.
First, you have the U.S. Supreme Court’s Wayfair decision, which in essence said that businesses without a physical presence can still be subject to local taxes, so long as the dollar value or the number of items sold hits a certain threshold within that state. So each state can go and determine what that threshold or economic nexus is.
Overnight, the Supreme Court allowed states to go collect taxes for online sales. You can imagine this has become a huge headache for online sellers. And then given what happened last year with the pandemic, local services were shut down and consumers started to buy more goods online — this just compounded the issue for many online sellers.
And so that clearly has been a boon for the business both because of the Wayfair decision, as well as what happened due to COVID.
I would contrast that to the other company that I mentioned, which is Lamar Advertising. Lamar is run by Sean Reilly, who is the fourth generation of the Reilly family to run Lamar.
Lamar is one of the largest outdoor advertising companies in the country. Unlike competitors, such as Clear Channel (NYSE:CCO) and Outfront (NYSE:OUT), Lamar tends to focus on smaller metropolitan areas. Think Baton Rouge, Louisiana, instead of New York City. In those local markets, Lamar tends to be the dominant billboard player.
If you want to have an advertisement up on a local billboard or poster in these smaller markets, you have to go to Lamar.
And just as a quick aside, something that’s unique about the outdoor billboard space is that there’s a myriad of state, local and federal zoning regulations that govern where billboards can be placed.
Because of these overlapping regulations, it’s extremely difficult to try to erect a brand-new billboard. There are some pretty significant barriers to entry to new supply.
Really, all the capital investment in the industry goes toward just renovating existing billboards and converting them into digital billboards. But no new billboards really are being erected today.
If you think about what happened last year, during the pandemic, clearly there was a pullback in advertising spending, as everyone tried to reassess what was going to happen as the economy shut down.
Advertising spending is the lifeblood of the outdoor billboard market. And so that was clearly a headwind to the business, but Lamar did a very good job of cutting expenses.
After the onset of the pandemic, they slashed capex by roughly 70%. Again, if you’re not converting billboards to digital, there’s very little as far as maintenance capex costs for existing billboards.
You can toggle capex pretty quickly. So as a result, even though revenue was down last year — double digits — the company actually was able to generate more free cash flow in 2020 than they did in 2019, even though, again, the top line was pressured due to the pullback in advertising spending from COVID.
As the economy starts to reopen, clearly better times are ahead for the industry as ad dollars come back into the market. More importantly, with respect to billboards, they’re not subject to some of the negative impacts hurting other types of media — cord cutting, ad skipping, etc.
If you think about billboards, you can’t close your eyes when you’re driving or walking, so you’re kind of forced to see these ads. That’s why ad dollars continue to go towards this channel versus others — say local TV stations or print media.
And so we think that longer-term trend, plus the economy reopening, plus potentially the success of programmatic advertising in the outdoor advertising space — they all present some potential nice tailwinds for this industry and also for Lamar.”
Get all of Chris Wright’s stock picks and the reasoning behind them by reading the entire 3,267 word interview, exclusively in the Wall Street Transcript.
Chris Wright
Portfolio Manager & Senior Research Analyst
Kayne Anderson Rudnick Investment Management
www.kayne.com
email: info@kayne.com
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