Thomas A. Reynolds IV is a managing director of Artisan Partners and a portfolio manager on the U.S. Value team. In this role, he is a portfolio manager for the Artisan Value Equity and U.S. Mid-Cap Value Strategies, including Artisan Value and Mid Cap Value Funds.
Prior to joining Artisan Partners in October 2017, Mr. Reynolds was a portfolio manager for Perkins Investment Management at Janus Henderson, where he co-managed the Perkins Small Cap Value strategy and the Perkins All Cap Value strategy.
Mr. Reynolds joined Perkins in 2009 as a research analyst covering the U.S. financials sector and was later promoted to portfolio manager. Earlier in his career, he worked at Lehman Brothers in the financial institutions investment banking group and fixed income sales and trading.
Mr. Reynolds holds a bachelor’s degree in anthropology from Dartmouth College and a master’s degree in business administration from the University of Chicago Booth School of Business, where he graduated with honors.
In this 2,670 word interview, exclusively in the Wall Street Trancript, Mr. Reynolds reveals his firm’s investing philosopy as well as some current top picks and the reasoning behind them.
“The Artisan U.S. Value team has an absolute-return, risk-aware, value investing focus. We seek cash-producing businesses in sound financial condition, selling at undemanding valuations. Said differently, we’re looking for opportunities where the business is on our side, the balance sheet is on our side and valuation is on our side.
These are our margin of safety criteria.
Our structure is intentionally flat — with four generalist portfolio managers and one research analyst taking a very collaborative approach to investing — which is a result of high trust and confidence in each other’s capabilities.”
The value investing focus is metric driven:
“Research suggests that the demand for growth corresponded this summer with a surge in retail participation in options markets. Social media and fintech collided with idle capital to drive a flurry of speculative activity and boost valuations.
Imagine buying out-of-the-money call options on stocks trading at 30 times revenue with no earnings.
And as it turns out, large institutional investors like SoftBank (OTCMKTS:SFTBF) were reportedly making the same basic trades, amplifying the trend.
I think those momentum trades, those so-called YOLO stocks, seem to be very different from growth-at-a-reasonable-price stocks or the FAANG stocks, which actually generate tons of free cash flow — at least some of them. Maybe not Netflix (NASDAQ:NFLX), but if you’re looking at Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG), those have been very, very high cash-returning or cash-generative businesses over time.
So there’s not a single environment that we think is better or worse. But what we’re trying to do is anticipate a whole range of outcomes, and understand points where the market is taking the view that there’s a single outcome, which results in mispricing of risk.
For example, we agree with secular trends, such as e-commerce, online payments, social media’s dominance of ad spend. And we also agree COVID-19 has accelerated the demise of levered and outdated competitors, such as malls and retailers within those malls.
Still, it seems the broad consensus from both market participants and economists is we should treat COVID-19 as a transitory event and therefore position for continued cyclical economic recovery. Now while we consider that an outcome, it isn’t the only outcome, and we need to take into consideration any number of items that could knock that consensus off-track.”
This leads to an interesting top pick:
“One holding, which is in our mid-cap strategy but is emblematic of our process, is Lamar Advertising (NASDAQ:LAMR). It’s one of the largest outdoor advertising companies in the United States.
Think billboards, highway signs, what you see on a bus or on the subway, in airports, etc. — what’s known as out-of-home advertising. This industry has been outside of digital media’s onslaught, making it pretty much the only traditional advertising segment that’s been able to grow over time because its reach and efficacy are unchanged by digital media.
If you think newspaper, yellow pages, magazines, radio, they’ve all been significantly disrupted — even TV is being disrupted more recently.
But digital media has a harder time disrupting the act of viewing a billboard while sitting in traffic or driving between cities in the Midwest because America still drives, and billboard advertising cannot be skipped or blocked. It’s a good business to be in. And the measurement keeps improving thanks to data analytics.
Over time, digital billboards have been added into the traditional analog mix — the customer mix is evident as you drive around. You see local services and entertainment, local attorneys or doctors, you see restaurants, whether it’s a local restaurant or national chain like McDonald’s (NYSE:MCD).
Now this whole market in 2019 was close to $9 billion in revenues, and Lamar approaches this market differently than peers. A publicly listed peer like Clear Channel (NYSE:CCO) or Outfront (NYSE:OUT) will derive three-quarters of its revenue from urban markets, and Lamar is actually the inverse.
It’s more focused on smaller local and rural markets — a focus which leads to attenuated business results, especially on the downside. So it’s kind of a perfect get-rich-slow, steady-compounder-type niche.
Lamar owns and operates about 157,000 billboards, about 3,500 of which are digital billboards — the growth area of the industry. Prior to the COVID crisis, the company was adding about 200 of these billboards a year, which, depending on location, can drive 5 to 10 times more revenue than an analog peer.
And the turnover of the digital billboards can be quicker, which can lead to higher profitability.
The company has an attractive moat, due in part to federal, state and local regulations prohibiting rapid billboard proliferation, such as the Highway Beautification Act. For example, you can’t put another billboard within a certain distance of an existing structure. And so that helps control supply.
On the demand side, Lamar focuses on areas where it can own 80% of the market, which helps create a disciplined pricing environment. And the company has a strong balance sheet.
Luckily, it refinanced its capital stack in Q1 2020 before COVID concerns hit, putting it in a strong position. It has very strong cash flow and an attractive valuation. Furthermore, the Reilly family runs Lamar like a family business, focused on the long term — something we like and appreciate as investors.”
Get more top picks from Mr. Reynolds value oriented portfolio management by reading the entire 2,670 word interview, exclusively in the Wall Street Trancript.
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