Axos Financial (AX) and Capital Bank (CBNK) are two small banking stocks that fly under the radar but each has specialized sustainable competitive advantages that the CEOs have developed.
Gregory Garrabrant, the President and CEO of Axos Financial, Inc. (NYSE: AX)
Gregory Garrabrants has been the President and CEO of Axos Financial (AX) since 2007.
Prior to joining Axos Bank, Mr. Garrabrants was a senior vice president and the head of corporate business development at the nation’s seventh-largest thrift, focusing on entry into new business segments, mergers and acquisitions, joint ventures and strategic alliances.
Before his senior executive roles at banking institutions, Mr. Garrabrants served the financial services industry as an investment banker, management consultant and attorney for over 15 years at Goldman Sachs, McKinsey & Company and Deloitte Consulting.
Mr. Garrabrants earned his Juris Doctorate, magna cum laude, from the Northwestern University School of Law and his Master of Business Administration, with the highest distinctions, from the Kellogg Graduate School of Management at Northwestern University.
He has a Bachelor of Science degree in industrial and systems engineering and a minor in economics from the University of Southern California. He is a Chartered Financial Analyst and member of the California Bar.
“…We were one of the first internet-only banks and over time what we realized is that the digital interaction capabilities that would allow us to gain customers were obviously going to continue to become more ubiquitous as the smartphone came out.
So, remember the iPhone came out seven years after the bank started.
So when we first started, we were a little bit ahead of ourselves from a technology perspective because there was no real way to deposit checks online with photo capture and things like that.
There were just certain tasks that we had to do through the mail or things like that that were a little more difficult, but then over time what happened is we put a lot of money into our own platform, which is our own app.
That app allowed us to digitize pretty much every single element of the customer interaction process, not only for consumer banking, but also for commercial banking. It allowed us to take a variety of, I’d say, pain points out of the process with respect to using data to be able to make sure we didn’t hold checks, we approved transactions more rapidly, and all those kinds of things.
I think in general, we’ve continued to evolve the underlying banking process, expanding it from consumer to commercial, but then also launching our own online trading platform.
We’ve launched our own robo-advisor platform so you can manage money through us, you can stock trade, and pretty soon you’ll be able to trade cryptocurrencies through our platform as well.”
The President and CEO of Axos Financial (AX) has a cure for what ails the cryptocurrency market, FDIC insurance:
“I think what we’re doing on the crypto side is very interesting.
We recently announced an alliance with Tassat Pay which allows us to work with institutional crypto clients and allows us to transfer value 24/7 between different participants in the crypto market, which is an important component of settlement because the crypto markets never shut down and you can trade at any time.
So that’s one innovative project we’re doing. We also have crypto trading that’s going to be launched in our online platform and I think we’ll be one of the first financial institutions that have done that.
So we will have integrated banking, stock trading, robo management — so automated wealth management and crypto trading.
Literally somebody could deposit their check, immediately get credit for that check and be able to be in the market immediately for a variety of assets or place some of their savings immediately into the market in a variety of ways.
And so, I think that that does reduce a lot of friction that is currently in the processes that are involved in trying to open a crypto account with some of the existing players.
We also think that particularly given the change in the crypto environment that having recognized players that are where money is FDIC insured with respect to the banking deposits and things like that, there’s some credibility benefit to us doing that business.
Those are just two examples. We have quite a few more.”
Edward Barry, CEO, Capital Bank (NASDAQ:CBNK)
Edward Barry joined Capital Bank (CBNK) as Chief Executive Officer in 2012.
Since that time, Capital Bank has rapidly expanded throughout the D.C. area and into Baltimore.
Under Mr. Barry, Capital Bank has consistently been recognized as one of the top performing banks in the U.S.
In 2014, Capital Bank won Product Innovation of the year in payments by Retail Bankers International. In 2015 it was named to the Future 50 by SmartCEO magazine.
Prior to joining Capital Bank, Mr. Barry held senior positions at Capital One Bank (COF), Bank of America (BAC), and E&Y/Capgemini (CAP).
On a more personal level, Mr. Barry believes in giving back, and is on the board of the Mid Atlantic Chapter of The Make-A-Wish Foundation.
Similar to Axos Financial (AX) CEO Gregory Garrabrants, Edward Barry joined Capital Bank (CBNK) as Chief Executive Officer in 2012 in order to differentiate what had become an out of favor financial sector:
“The community banking landscape has been under assault really over the last several decades.
If you just look at the numbers, the number of community banks in America has been steadily declining for very long periods of time.
And the formation of new community banks has slowed.
So you’re seeing every year a net decrease in the community bank landscape.
And that’s really a sad thing because historically the community banks really filled a lot of the gaps from the larger banks.
They’ve been very good on the small business sector and in some of the local communities that tend to get underserved.
And what we saw with the advent of PPP in the COVID crisis, there was a big resurgence of community banks across America.
Most of the PPP loans went to community banks that stepped up in the time of need and were very responsive.
So I think there’s a bit of a renaissance now going on for community banks as they’re seeing opportunities to justify their existence in the marketplace on both the business and consumer side and take advantage of things like fintech to help level the playing field between them and a lot of the larger banks that are out there where they can now go head to head and offer the same suite of services and in many respects a much higher quality of service just given their greater customer intimacy, more flexibility and just being deeply embedded in their local community as opposed to some of the larger banks.”
One point of differentiation for Capital Bank (CBNK) is their Open Sky division.
“OpenSky is a company we acquired several years ago and it was a hidden gem as part of a larger institution.
OpenSky is a digital credit card platform that’s focused on underserved customers.
So really targeted towards people that have had credit blow-ups in the past or people that are new to credit.
So as an example, maybe students, people graduating from college, immigrants — so people that are generally frozen out of the credit markets. And so this is a way for people now to get established or reestablished in the credit landscape.
The number-one reason we hear from our customers that sign up for the product is they want to get a mortgage and they can’t qualify.
So it’s really this way we work with them and help educate them. And we’re trying to build other suites of services around it to help them with their journey of homeownership.
It’s had a lot of success with COVID as a lot of people have really doubled down, saying I want to repair my financial health and my financial lives.
And we saw a big uptick in customer base.
Different from our core community bank lending, the OpenSky business is nationwide.
So we serve customers all across the U.S. through our technology. And we have just over 600,000 customers that are active on our platform, working to improve their financial loss.”
Get the complete detail on both Axos Financial (AX) and Capital Bank (CBNK) by reading the complete interviews with their CEOs, exclusively in the Wall Street Transcript.
Gregory Garrabrants, President & CEO, Axos Financial, Inc. (AX)
Las Vegas, NV 89148
email: investors@axosfinancial.com
Edward Barry, CEO, Capital Bancorp Inc. (CBNK)
Rockville, MD, 20850
www.capitalbankmd.com
Fla Lewis III, Principal, Weybosset Research & Management
C.H. Robinson Worldwide (NASDAQ:CHRW) and Expeditors International (NASDAQ:EXPD) are only two of the stock picks from these top level money managers that are seeking to buy when others are selling, the traditional way to Warren Buffet level wealth.
Fla Lewis III is Principal of Weybosset Research & Management, LLC. At the start of his career, he went to work at Kidder, Peabody & Co. in 1980.
He was named Assistant Vice President in 1985 and Vice President in 1986. He was affiliated with Kidder, Peabody Asset Management from 1990 until 1995.
In January 1995, he joined Compton Capital Management as Vice President and Senior Portfolio Manager.
Mr. Lewis graduated from Brown University with honors. He was awarded the Samuel T. Arnold Fellowship, Brown’s highest honor for a graduating senior.
After study in Vienna and London, Mr. Lewis received a Master of Arts degree from Harvard.
“It’s in times like these that people are running as hard as they can away from stocks, all stocks.
But it’s a good time to look around, see what’s available out there as babies are being thrown out with the bathwater.
In our case, we’ve bought three new stocks since the first of the year. And remember, we don’t do many transactions.
We bought nothing in 2020, for instance, and that was just because the whole thing happened so fast.
We didn’t understand what was happening, so we didn’t act.
But this time around two companies that I’ve been following for nearly 30 years caught our attention.
I had met up with them in the 1990s and the early 2000s and love the businesses, love the management, loved everything about them, except they were selling at very, very high prices. I just couldn’t get myself to pay those prices.
I’m talking about C.H. Robinson Worldwide (NASDAQ:CHRW) and Expeditors International (NASDAQ:EXPD).
These are two freight forwarding companies.
Their businesses overlap to a degree, but they’re both pretty much in different aspects of the same business. I followed them for a long time, admired them intensely, and just woke up one day earlier this year and discovered they were selling at the cheapest prices relative to earnings, book value, etc., that they had ever sold — I mean ever.
They came public in the 1980s or ’90s. And were selling at by far the lowest prices since coming public.
Nothing had changed except the prices.
The business was the same. And they were selling at prices that were low enough that even I would gladly pay.
And just to show that we’re not afraid of anything, we put some money into a big furniture retailer, RH (NYSE:RH). RH used to be Restoration Hardware.
And RH has been more controversial and more difficult. But we think it’ll work out. If it works out, it will work out very well indeed. And we think it will work out.”
Fla Lewis further details his investment love for Expeditors [Expeditors International (NASDAQ:EXPD)] and C.H. Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)]:
“Our two freight forwarders, Expeditors [Expeditors International (NASDAQ:EXPD)] and C.H. Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)]: Imagine that you own a manufacturing business where I live, Massachusetts.
You source your materials abroad, maybe in Asia.
A lot of your customers are in Europe.
You’ve got to bring stuff from China.
You’ve got to get it from where it’s manufactured to a port across the ocean, through customs, across the North American continent to where you have your facilities and turn out whatever it is that you’re that you’re turning out.
And then you’ve got to get it from Massachusetts across the Atlantic into Europe or wherever it’s going.
Well, you know, it’s going to be some combination of sea and land and air.
And if you’re going to figure out the best way to put all these things together, you better have a pretty good in-house transportation outfit — or you can call C.H. Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)] or Expeditors International [Expeditors International (NASDAQ:EXPD)] and they’ll arrange everything for you.
Expeditors [Expeditors International (NASDAQ:EXPD)] and Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)] are what are called asset-light businesses.
They own no trucks. They own no airplanes. They own no ships.
They’ll just arrange for the best combination of trucks, airplanes, trains, intermodal transportation, whatever, to get whatever it is you’re moving from where you need to move it to you and then to other places.
They just make the arrangements. They don’t move it for you.
It’s complicated. We read about problems in the global supply chain.
Well, these guys are the right ones to help you with it. And they’ve got a lot of experience and a lot of contacts.
They know how to handle these things. You can have your own staff and hope that they are good, or just bring these guys in — and I’ll bet they will save you some money while they’re at it.
So I followed these companies for a long time.
The story has remained largely the same for the past 30 years or so.
So all of a sudden, the price is right, so what are you going to do? We stepped up and bought shares of those companies. They’ve held up pretty well since we bought them.”
David A. Katz, CFA, Matrix Asset Advisors, Inc.’s President and Chief Investment Officer
David A. Katz, CFA, is Matrix Asset Advisors, Inc.’s President and Chief Investment Officer.
He has overall responsibility for the firm’s investment efforts. After initially working at Management Asset Corporation (Westport, CT), Mr. Katz co-founded Value Matrix Management with the late John M. Gates in 1986.
He served as the firm’s Senior Vice President and Chief Investment Officer and was Head of the Investment Policy Committee.
In 1990, he merged Value Matrix Management organization into Matrix Asset Advisors.
Mr. Katz chairs the Investment Policy Committee and is a Portfolio Manager/Analyst.
He appears frequently as a guest on CNBC and Bloomberg Radio.
He graduated summa cum laude from Union College with a degree in economics.
He also received an MBA from New York University Graduate School of Business.
In addition to the Fla Lewis recommendation of buying Expeditors [Expeditors International (NASDAQ:EXPD)] and Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)] at current market prices, David Katz has some value picks of his own for investors looking to deploy cash:
“Moving on to the dividend side, a little bit less exciting, but also very good long-term businesses. Air Products & Chemicals (NYSE:APD) has just been beaten up this year from the $300 level.
Now down to the $230 level. It pays a very good dividend. It’s a green play and a very attractive industry leader; we really like management.”
The current market fear feeds Mr. Katz’ long term optimism:
“…You’ve just had a 20% market pullback in the first half of the year.
And the headline is: worst start to the year in 52 years.
Investors are rightfully concerned.
We think the best advice that we can give investors is, if you have a sound long-term plan, you don’t want to change your investment strategy in reaction to the market selloff.
You don’t want to be selling stocks at this point in the cycle if possible.
We think, if anything, you’d want to be a buyer of stocks rather than a seller. You want to stick to your plan.
Generally, if you’re using the stock market to develop your long-term wealth, you’re going to confront many bear markets over your lifetime.
And the best advice is you have to stay with stocks during the good and the bad times.
And generally, the market recoveries are very swift.
They occur when they’re least expected.
Your biggest returns occur in the very early stages of a bull market recovery.
And also, you get some significant bounces during a bear market.
So don’t time the market, instead focus on good businesses and good industries.
And one thing that we’re also doing for clients, which we think individuals want to consider, is harvesting tax losses at this point in the cycle, because we don’t think they’re going to be as deep by the end of the year.
So you can lower your tax bill, sell a stock or double up on a stock and then sell it after 31 days.
So tax strategies make enormous sense at this point in the year.”
Words of wisdom from both Fla Lewis III, Principal, Weybosset Research & Management, and David A. Katz, CFA, is Matrix Asset Advisors, Inc.’s President and Chief Investment Officer, exclusively in the Wall Street Transcript.
David A. Katz, CFA, Chief Investment Officer, Matrix Asset Advisors
email: matrix@matrixassetadvisors.com
Fla Lewis III, Principal, Weybosset Research & Management LLC
www.weybosset.com
Plug Power (PLUG): developing a sustainable hydrogen fuel cell energy network
Plug Power (NASD:PLUG) is the hydrogen fuel cell company that counters the argument that the publicly traded enterprise is only concerned with only next quarter earnings.
For the last 20+ years, Plug Power (NASD:PLUG) has been chasing the dream of using green hydrogen fuel in commercial, industrial and consumer applications. Recently, the success of PLUG in this endeavor has led to its recognition as a “best in class” hydrogen fuel application company and a sharp increase in its stock price.
In an October 20, 2003 interview in the Wall Street Transcript, David Smith, a Vice President in the US equity division of Smith Barney Inc. gave investors a first look at the young company. Mr. Smith was covering power technology and multi-industry companies for Smith Barney, and had joined the firm in early 1997.
At the time, Smith Barney’s analyst team was the number one Institutional Investor ranked electrical equipment/multi- industry research team and PLUG was trading at about $65 per share.
In this interview, the Wall Street Transcript asked:
“This fuel cell space has been an area that everybody is talking about, yet nothing much seems to happen. How do you see it?
Mr. Smith replied
“Yes, it is definitely a farther-out-there sector.
I often refer to it as a DCF-based sector and that really comes under the valuation on the stocks.
There are a lot of assumptions that are actually made into when markets will develop.
Very few, if any, of the companies today have commercial products. You will probably see the first commercial fuel cells that you can buy as a consumer hitting the market in 2004 through 2020.
And the order that you are probably going to see that in is beginning with micro fuel cells (for laptops and cellphones) and then standby and backup power systems, and then residential and small commercial stationary systems followed by, farther out, bus and automotive markets.”
With fuel cells, a similar metric applies in a residential application, but mind you, the systems have got to come down in price probably 10 times from where they are today. Plug Power (PLUG) has come out and said they are going to be offering a system later this year at $3,000 a kilowatt.
We think you have to get to $300 per kilowatt to be in a home.
I am not saying that’s not going to happen, I think it is going to happen through technological development, I think it is going to happen through a supplier base developing, and also through mass manufacturing.
But ultimately you have to get down to a point where it makes sense for the consumer to buy one of these.
Realistically, the recent blackouts have shown us that we are dependent upon electricity for almost everything, from gasoline, to getting cash
at the ATM, to buying groceries ‘ reliability and quality are an issue.
Within the home today, we are not as reliant on power quality. I think ultimately today we really look at it and say, ‘How much are we spending on our electricity bill?’”
The initial applications projected in 2003 seem slightly odd from 20 years of hindsight.
“A couple of small companies are out there making them today that will actually go right into the back of your cell phone and into your laptop, and you will fuel them with a methanol cartridge.
Mechanical Technology (MKTY) last week announced a deal with Gillette (G), whereby Gillette is going to co-develop a methanol-based cartridge refueling system that will go onto your cellphone and you will be able to walk downstairs in your office building or outside of your apartment and actually buy one of these cartridges and the cartridges are going to be designed to last between 15 and 30 days.”
And while no one today is powering their iPhone with Plug Power (PLUG) hydrogen fuel cells bought in street level retail stores, there are some applications predicted by Mr. Smith of Smith Barney that resonate today.
“It will cost them a lot of money, but the opportunity cost could be huge if someone like a Plug Power (PLUG) which is teamed up with Honda (HMC) came out with a residential system so that you could refill your car in your garage.
I really think that the automotive market is going to be driven by competition.
We are already seeing it with Honda and GM (GM) and Toyota (TM) battling it out to have the first hybrid vehicle units on the road.
Similarly, the hydrogen infrastructure is going to be battled out in the competitive field from companies like Honda saying, ‘Why don’t you put a system into your home…by the way you can also refuel it while you are at home, and you don’t have to go the gas station ever again.’
In addition, companies that make specialty gases today that already make hydrogen could open refueling stations on the road for additional
competition to the oil companies.”
Even at this stage, as Mr. Smith points out, the role of the US government in determining if this renewable source of energy would prevail was important.
“…the first thing I can point to is this year’s State of the Union address, in which Bush actually mentioned fuel cells; nobody expected
that.
He actually devoted a whole paragraph to fuel cells and how they were needed to attain energy independence.
That is critical in light of global events of the past 24 months.
Having said that, though, some people are starting to question the commitment of the Bush government, although in my view I think that they have done a pretty good job at getting the FreedomCAR program up and rolling and directing some funds and realizing as well that it is not going to happen overnight. ”
Soon after the Smith Barney PLUG analysis, Stephen Sanders, a Vice President with Stephens, who was promoted to Analyst in January 1999 and in 2000 initiated coverage on the energy technology subsector.
“Looking more at the pure play energy technology theme, we cover a company called Plug Power (PLUG), which makes proton exchange membrane (PEM) fuel cells for small stationary applications like backup power for telecom companies.
The company has done a good job of reducing costs and improving system reliability over the past several years. Year in and year out, they’ve
made good steady progress, and they are now selling a product that is competitive in select markets with incumbent technologies that are based on mature technology.
So it’s a company that is quite a ways from profitability but is worth spending time on due to their long-term potential. So if you are looking for a higher-risk, higher-return fuel cell play, Plug is an interesting company.”
In 2004, Mr. Sanders also indicated the impact of political considerations.
“Politically and economically, we are seeing a much more intense focus on energy independence.
It’s obviously an election year ‘ coal, gas, and oil prices are high; the economy is chugging along; environmental concerns are becoming more acute and energy is in the news daily.”
If we fast forward to 2014 to a February 3 interview with the President and CEO of Plug Power (NASDAQ: PLUG) we are told a more prosaic yet realistic focus for the company. Unfortunately for “buy and hold” investors, the price of PLUG per share had dropped to $3.
Andy Marsh joined Plug Power as President and CEO in April 2008 and the stock traded between $30 and $35 per share that month.
Under his leadership, Plug Power had become a leading innovator in the alternative energy field, with a focus an entirely new hydrogen fuel cell (HFC) market in the material handling space.
“Plug Power sells fuel cells, which power forklift trucks.
And that’s what I’ve told you over the last three, four years, but the business has really expanded over the past six months where today we actually sell full turnkey solutions for distribution centers and manufacturers, which include the hydrogen infrastructure, hydrogen, the fuel cell power for forklift trucks, as well as a service for that equipment.
Our customers include people like Wal-Mart; Sysco, the international food distributor; BMW; Mercedes; and Kroger, just to name a few…
I’m a pretty simple guy.
Customers like Wal-Mart and Kroger came to us and said that it would be much simpler for them, since we’ve already been involved in 45 deployments, if Plug Power would take over the complete responsibility for the deployment.
GenKey would reduce their administrative load, provide them a single point of contact and really enable them to work with the company that knows how to execute on a program as they change their systems from batteries or from diesel-powered forklift trucks to hydrogen-powered forklift trucks.
It was really driven by customers, and that’s really why we had such great success in the fourth quarter, and we are able to book over $32 million in revenue with people like Kroger, who signed up for our turnkey deal.”
So from that “turnkey deal” in 2014 we jump to the Wall Street Transcript July 10, 2020 with a new interview with the President and CEO of Plug Power (NASDAQ: PLUG) and a price per share of between $8 and $9.
“I am going to give you a long-term view of the world.
Plug Power is a member of a global group called the Hydrogen Council, which includes 80 companies looking to develop this market.
We hired McKinsey to put together a study to tell us where it thinks the market is today as well as the applications that will make fuel cells more attractive than alternatives by 2030.
The long-term view of hydrogen is that it is a $2.5 trillion market, and that view includes storage of hydrogen for power processing and industrial heating where hydrogen is much more effective.
For example, if you are going to use electricity for steel or cement manufacturing, a need is there.
We talked about on-road vehicles here, but we also are interesting to a company like National Grid that is looking to convert a natural gas base into a hydrogen one to heat buildings in the U.K. by 2040.
Overall, it is a huge pie.
What is going to come first?
As the cost of hydrogen continues to go down, it opens opportunities for fuel cells.
The lower cost of hydrogen is really closely tied to green hydrogen and a continual reduction in price of renewable energy. But over the next five years, we will see the cost of renewable hydrogen, green hydrogen, on par with hydrogen produced by natural gas.
That opens up huge markets because hydrogen itself today in the fertilizer and other industries is already a $30 billion to $50 billion market opportunity.
We see huge opportunities for ourselves just in material handling over the short term and over the next 10 years at a $30 billion annual TAM for on-road vehicles.
Over the next 10 years, we see that could be as big as $300 billion.
For large-scale stationary products, it could be as much as $15 billion, and that includes providing fuel cells for data centers.
You would think: Why would anybody do that?
Well, people like Microsoft are having issues today siting diesel generators at new data centers in places like Virginia, California and Singapore, where they are demanding that all their solutions be clean and green.
Top that off with the fact that the noise pollution associated with diesel generators has made it unattractive in many areas.
So there is a large market opportunity for fuel cells and hydrogen that are real today and will become more real by 2030.
The Hydrogen Council has a great report that was issued this past January at our annual meeting, and in it, McKinsey laid out the program of how there are 15 different markets in which hydrogen will be competitive with present technology by 2030.
I suggest your audience might want to take a look at that website…
Our guidance for 2020 is to do over $300 million in gross billings, with $20 million in EBITDA.
If you look at our plans going forward, by 2024, we have been very public about our plan to be a $1 billion revenue company with about $750 million coming from our traditional business with customers like Walmart, Amazon, Home Depot, BMW, throughout the United States and in Europe.
We expect $200 million from on-road vehicles.
We are doing some exciting work with a company like Lightning Systems that is providing vehicles to Amazon, and we have a number of other partners we have been engaged with.
We see the stationary market being a $50 million market opportunity for us.
We have laid out a five-year plan that says, at the end of 2024, our revenue will be $1 billion, our EBITDAs will be $200 million, and our operating income will be $170 million.”
Currently PLUG is trading at about $21 per share, and the Wall Street Transcript has recently published a new interview with the CEO and President. Read the entire interview as well as the past interviews for Plug Power, still on the cutting edge after over 20 years.
Utility Stocks for your portfolio from John Ullman, President and Founder of John G. Ullman & Associates
Utility Stocks have traditionally been the safe haven in an economic downturn with dependable free cash flow generation that covers a generous dividend income to investors.
The Wall Street Transcript has recently interviewed several award winning investment professionals in our exclusive network. These are some of their current top picks from which investors can begin to build a portfolio of utility stocks.
In a 5,174 word interview, exclusive to the Wall Street Transcript, John Ullman and his team of professionals detail their investment philosophy and several of their recent top picks among utility stocks.
John G. Ullman is President and Founder of John G. Ullman & Associates, Inc. Earlier, he was President of USGM Securities, Inc., and at Corning Inc., he worked in financial management.
He received a bachelor’s degree in economics from Johns Hopkins University. He received an MBA from the University of Chicago, with a focus in financial management.
“Our investment methodology is buying securities based upon our determination of good value.
While there are certainly growth stocks in the portfolios, we use fundamental analysis to try to find stocks that we see as undervalued, in sectors that we very much like.
At this point, we are interested in health care, infrastructure, technology, with some of these technology stocks being ones that are in fields that we like.
However, some of the firms have been somewhat out of favor, so the valuations are much lower.
An area that over the years has worked very well for us is value-based stocks, with a mathematical process tied to their underlying values.
We also have foreign holdings in particular countries. Right now, that is very low, but in the reasonably near future we would like to look at adding back into some of the developing countries.”
Utility Stocks recommendation from Mark Abdalla, Senior Equity Research Analyst, John G. Ullman & Associates
Mark Abdalla, CFA, works for John Ullmann as a Senior Equity Research Analyst at John G. Ullman & Associates.
Previously, he worked at Strategic Financial Services, Manning & Napier, and BNP Paribas.
A graduate of Carnegie Mellon University, he received a master’s degree in economics from Boston University and an MBA from Cornell University.
“One specific company within the Utility sector that we like and own shares of is Dominion Energy (NYSE:D).
The utility company sold off its midstream assets in 2020 for $8.7 billion, and it also cut its dividends.
It did a little restructuring.
The stock sold off at the time.
Generally, investors do not like it when dividends are cut.
The midstream assets were sold to Warren Buffett. It was seen as if Warren Buffett was getting a good deal in terms of value for the assets, but we liked the long-term strategic thinking of management at the time.
We also liked the valuation of the stock price, it having sold off because of these moves.
And with that, we increased our position in Dominion Energy.
One of the strategic initiatives that Dominion’s management is taking is investing heavily in the renewable energy sector.
Management plans to spend $37 billion in renewable energy growth capex, so that is capital expenditure in renewable energy projects that will be in offshore wind.
The company plans to spend heavily in the offshore wind sector right off the coast of Virginia, in addition to onshore wind and solar farms.
These initiatives are supported by tax credits, and the company is protected by semi-automatic rate increases. Therefore, we feel that this utility company is favorable in terms of a risk/reward scenario that would take place.
In addition, we think the downside is fairly limited, while the company can grow along with these initiatives.
One other reason why we see the Renewable Energy sector to be favorable is that it is being supported at the state level.
States are now mandating certain renewable energy goals to meet their climate change endeavors. We view climate change as a long-term problem, and some of these solutions are being tackled by the utility companies themselves.
So, many renewable energy stocks are priced very, very high.
We stay away from those. But we found utilities such as Dominion Energy to be a safer way to invest in the renewable energy sector, given the reasonable valuation.
The price of oil and natural gas is high right now; that is another reason to invest in renewable energy, given that it is an alternative source of energy.
But that said, the price of oil and natural gas can come down. It is very volatile, and it is really determined by geopolitical factors, in addition to overall supply/demand.
While climate change is a long-term problem, we see utility companies with their resources being a major player in tackling that problem.
So overall, we like their management’s strategic thinking, their plans, their investments, in addition to the valuation of the stock.”
Utility Stocks expert Timothy Winter, CFA, portfolio manager, Gabelli Funds
Timothy Winter, CFA, is a portfolio manager of The Gabelli Utilities Fund, The Gabelli Utilities Trust, The Gabelli Global Utility & Income Trust, and the Love Our People and Planet ETF and a research analyst covering the utilities industry for GAMCO Investors, Inc.
He joined the firm in 2009 and has over 25 years of industry experience.
Previously he served over 15 years as research analyst covering utilities at AG Edwards, as well as Jesup & Lamont and SM Research. Mr. Winter has received numerous awards and recognition for his work in the industry.
He was a three-time All-Star Wall Street Journal winner and five time ranked number-one Electric Utility Team by Institutional Investor.
In 2018 he received Thomson Reuter’s U.S. Analyst Award and was ranked the number-one stock picker in the electric utility sector and water utility sector and number two in the gas utility sector.
Mr. Winter holds a B.A. in economics from Rollins College and an MBA in finance from Notre Dame. He is a CFA charterholder.
His 2,253 word interview in the Wall Street Transcript reveals his top utility stocks.
“The first name to highlight is NextEra Energy (NYSE:NEE).
They are the biggest electric utility in the world: $150 billion of equity cap, $210 billion of enterprise value.
They are also by far the leading and largest renewable energy developer in the world, and specifically, they’re focused on North America. And 60% of their earnings do come from regulated business in Florida, Florida Power & Light, which benefits from customer growth and solid regulation and a healthy rate plan for the next four years.
NEE management outlined the tremendous opportunity and capital needs for U.S. decarbonization and clean energy by 2050.
The numbers are staggering.
Currently, the U.S. has 1,100 gigawatts of power generation including coal and nuclear, natural gas, wind, solar and hydro.
The U.S. needs 7,000 gigawatts of renewable energy to decarbonize the U.S. economy by 2050, including 3,500 gigawatts from the power sector.
And so, as they’re the leading developer of wind, solar and battery storage, and they’re also investing in hydrogen, NEE is hands down the leading player with 50% market share of wind development and going to participate in this huge megatrend.
So that’s the number-one company.
NEE also owns 58% of NextEra Energy Partners (NYSE:NEP) which is also a renewable company.
They own wind, solar and some natural gas pipelines that are unique from NextEra Energy.
And it’s a dividend play.
NEP grows the dividend 12% to 15% per year and acquires renewable projects from NextEra Energy and/or from other entities, or develops its own renewable projects.
So those would be the one and two on my list for sure.”
One step up from these utility stocks are the copmanies that supply utilities with the components to generate power for the people.
Benjamin Nolan, CFA, Managing Director, Transportation sector, covering Shipping and Energy Infrastructure at Stifel Financial
Benjamin Nolan, CFA, is a Managing Director in the Transportation sector, covering Shipping and Energy Infrastructure at Stifel Financial Corp.
Mr. Nolan joined the firm in 2013. Before joining Stifel, he covered both equity and debt of companies in the maritime sector at Knight Capital.
He also spent six years at Jefferies as an Equity Research Analyst covering the shipping sector and spent several years as a corporate Financial Analyst for EOG Resources in the oil and gas business.
He received a BBA degree in finance from Texas A&M University and an MBA from the University of Houston.
Mr. Nolan has won numerous StarMine and Institutional Investor awards for stock picking, earning estimating, and research analysis.
In this 3,081 word interview, from February of 2022, and exclusively in the Wall Street Transcript for our subscribers, Benjamin Nolan explained how the utility stocks are dependent on the supply of LNG.
“So we started maybe two years ago with COVID. Initially, there was a downward pressure in demand.
And then, so was LNG demand.
The price got really low in 2020, to the point that a number of the U.S. export facilities actually shut in some of their capacity for several months, because there was no economic incentive to produce and export the LNG.
That changed pretty dramatically starting maybe a little over a year ago.
Demand began to recover pretty quickly in a lot of places around the world.
That was first seen in Asia.
And then, as a consequence of that, all of the U.S. production came back to being fully online.
And in fact, in some respects, it overcorrected.
So there was starting last summer, much more demand for natural gas, and there was the ability to produce and export that was in part due to a few outages in places like Australia or Norway, but in general, underlying demand was just extremely robust.
The price of LNG internationally went up 10-fold, 12-fold from the trough of 2020, when it was $3, $4.
We saw prices in Europe and Asia just a few months ago over $40. It’s come off a little bit since then, but it is still extremely strong.
The other big factor that has been in play lately is Europe. Europe has seen a relatively strong level of demand.
It’s a function of coal-fired power generation closing down, nuclear power generation closing down.
At the same time, there’s been disruption of gas flows coming from Russia and a relatively healthy level of demand.
And that has been unable to be met by renewables, which was the original hope. And it could get worse if something terrible were to happen with Russia and Ukraine.
So, at the moment, everybody wants LNG.
And the problem is that these export projects take many years to develop and produce.
So you can’t just decide that you want more. It won’t happen overnight.
The good news is that there are a number of projects that are being constructed now.
In fact, one in the U.S. in Louisiana just came on stream and is shipping its first cargo as we speak.
But again, it’s going to be a slow growth process for incremental LNG.
So I think, as we look out today, prices are high. It doesn’t seem as though there’s any real reason that they should be falling back, at least anywhere in the next year or two.”
The development of the LNG market globally leads Ben Nolan to an interesting company dependent on the utility stocks.
“The other important part of it is — and really what we’re talking about primarily here is for power generation — you do have a lot of developing economies, various places around the world — India, Pakistan, Bangladesh, even China — where their power consumption is going up a lot.
They’ve got to figure out how they’re going to meet those demands and the cleanest and, generally, one of the cheapest methods of being able to do that is with natural gas.
Now, it’s not carbon free.
So perhaps you could argue that it’s just a bridge fuel, but if it is a bridge fuel, it’s a multi-decade bridge fuel.
And then, point number two is that there are a lot of places around the world where we know natural gas exists and there’s not really a strong domestic use for it, or at least it’s not enough to use all that’s available.
And so it’s simply a function of resources being available, but not where they’re needed.
And so, that’s what LNG is all about.
Taking that natural gas, condensing it down to a size that makes economic sense to transport it when you refrigerate it and get it cold enough to be a liquid — it condenses down to 1/600th of its size.
And then you can move it and power the world.
The challenge is, it’s really expensive to get something negative 260 degrees. So that’s a challenge. Again, it takes some time.
It’s pretty expensive to do.
But if you’re doing it in scale, then there’s both the resource and the demand.
So LNG is, you might argue, a sort of an old energy, not perfectly clean source of fuel, but it is cleaner, and I think almost definitively is very much still a growth business.”
The development of the LNG market globally leads Ben Nolan to an interesting company dependent on the utility stocks.
“…the other aspect of LNG that makes all of this work is transportation.
So that means ships.
There are a decent number of those on order. Longer term, there’s going to be the need for more, and growth in that category, but that’s going to be a little bit more of a cyclical play.
Ships can be built or removed or the distance that a ship needs to travel can vary.
And so, a little less of a structural investment, a little bit more of a trading play.
I also think that some of the people who produce the equipment that is used for LNG have some nice tailwinds behind them.
The one that I would call out there is Chart Industries (NASDAQ:GTLS), that makes the equipment that liquefies it, that turns it from a liquid back into a gas, that puts the tanks that would go on trucks on trucks.
And so I think as the volume increases and it’s produced and consumed and everything else, there are the sort of picks-and-shovels type players that would really stand to benefit. Chart is the one I would call out there.”
This stock pick is up about 50% from Mr. Nolan’s recommendation and is one example of how even a safe haven sector like utility stocks can often perform as well as many riskier portfolios.
Benjamin Nolan, CFA, Managing Director & Research Analyst, Stifel Financial
email: nolanb@stifel.com
Timothy Winter, CFA, Portfolio Manager, GAMCO Investors, Inc.
email: twinter@gabelli.com
Mark Abdalla, CFA, Senior Equity Research Analyst
John G. Ullman, President & Founder
John G. Ullman & Associates, Inc.
![Plug Power [NASDAQ: PLUG] President and CEO Andy Marsh](https://www.twst.com/wp-content/uploads/2015/09/AndyMarshPlugPower-96x109-1.jpg)
Plug Power [NASDAQ: PLUG] President and CEO Andy Marsh
Under his leadership, Plug Power has been a leading innovator in the alternative energy field, helping create an entirely new hydrogen fuel cell (HFC) market in the material handling space.
This new market has proven to be one of the first successful endeavors to commercialize HFC technology, and today, the firm’s fuel cell solutions, including its GenKey suite and ProGen engine line, are leveraged by global marketplace leaders such as Amazon, Walmart, and Carrefour to power industrial electric vehicles.
As the Plug Power (NASDAQ:PLUG) President and CEO, Marsh plans and directs all aspects of the organization’s goals and objectives, and is focused on building a company that leverages Plug Power’s combination of technological expertise, talented people and focus on sales growth to continue the company’s leadership stance in the future alternative energy economy.
Under his leadership, Plug Power (NASDAQ:PLUG) continues to spearhead hydrogen fuel cell innovations in both mobility and stationary applications, and his ability to generate revenue growth of more than 296% since 2012 has landed Plug Power on Deloitte’s Technology Fast 500 list in both 2015 and 2016.
Previously, Mr. Marsh was a co-founder of Valere Power, where he served as CEO and board member from the company’s inception in 2001, through its sale to Eltek ASA in 2007.
Under his leadership, Valere grew into a profitable global operation with over 200 employees and $90 million in revenue derived from the sale of DC power products to the telecommunications sector.
Prior to founding Valere, he spent almost 18 years with Lucent Bell Laboratories in a variety of sales and technical management positions.
Mr. Marsh is a member of the board of directors for the California Hydrogen Business Council, a non-profit group comprised of organizations and individuals involved in the business of hydrogen.
He holds an MSEE from Duke University and an MBA from SMU.
In August/September 2017, Mr. Marsh was invited to join the Global Hydrogen Council as well, an international council of major auto manufacturers that is focused on the proliferation of hydrogen fuel cell technologies.
“Plug Power (NASDAQ:PLUG) built the first commercial market for fuel cells.
We’ve shipped over 60,000 fuel cell products — so more than anyone else in the world.
These are used primarily in distributions and manufacturing facilities to power forklift trucks.
We also have built over 185 fueling stations. So that capability and that turnkey solution really was just the starting point.
Today, we’re building the first green hydrogen network across the United States, which by 2025 will produce over 200,000 tons a year of green hydrogen.
We’re in a wide variety of applications around the world, be it for on-road vehicles with our JV with Renault in France called HYVIA, to generating hydrogen in Europe with our partner ACCIONA, the largest provider of renewable green hydrogen.
With SK, the second largest conglomerate in South Korea, we are building large-scale stationary products to provide power to the grid.
And in Australia, we’re leveraging our electrolyzer technology, and we’re building a gigafactory with Fortescue Future Industries to be able to build large-scale electrolyzers for that market.
So Plug [Power (NASDAQ:PLUG)] is known as the global leader in fuel cell and hydrogen technologies. We’ve been doing this for a long time, 25 years.
From a company-culture point of view, this is a very entrepreneurial company.
You don’t create a market from scratch, which Plug has done, without being entrepreneurial.
And we’ve gone from $1 million in revenue when I started with the company 14 years ago to doing $925 million in revenue this year.
And then, as we’ve grown, we’ve also added processes and the right folks. We’re building out large-scale manufacturing led by people who built out the Tesla gigafactory in Reno, Nevada.
The company is broadly recognized as the manufacturing leader in this space, and to do that you need to have discipline. And we add processes which allow us to move faster in keeping with our entrepreneurial company business model.”
Hydrogen fuel cell power is global and Plug Power (NASDAQ:PLUG) is participating in the next phase of its development:
“In the United States, in the infrastructure bill, there’s actually $9.5 billion for clean hydrogen initiatives; $8 billion for four hydrogen hubs and about $1.5 billion for manufacturing and electrolyzers.
That’s really just the start.
For example, on the hydrogen hubs, we’re closely working with the northeast hub being driven by the New York State Energy Research and Development Authority — NYSERDA.
And Plug is instrumental in defining the plans and outlines for what a northeast hub would be.
We’re also deeply involved in the hubs for West Virginia and California. I think everyone who looks at the infrastructure bill wants us involved, knowing Plug is the U.S. leader.
In the climate bill, one of the areas that has not been controversial is support for the generation of green hydrogen.
It’s something that Senator Manchin and Senator Schumer both strongly support, which would have a production tax credit for green hydrogen which would be $3 a kilogram.
A kilogram is about equivalent to two gallons of gasoline.
So that’s a really exciting prospect for Plug [Power (NASDAQ:PLUG)], and we think there’s a two in three chance that it will become law.
On top of that, when you go to Europe — Europe has a very, very aggressive plan to support green hydrogen deployment.
I was in Denmark this week and Denmark has a plan to have 65 gigawatts of wind power by 2030.
Most of that wind power would be used for the generation of hydrogen, via parts like our electrolyzers.
We already have one deal in Denmark with a company called H2 Energy that is supported by Trafigura which will deploy 1 gigawatt of our electrolyzer products in the near future. So, a very strong climate to support hydrogen in Europe.
And you see the same in Korea where the Assembly this past May passed edicts on deployments of hydrogen.
And leaders like Mackenzie, Goldman, BloombergNEF all believe that approximately 20% of the world’s energy will come from hydrogen.
And many people know that Plug [Power (NASDAQ:PLUG)] is the leader in this area.”
Andy Marsh, President & CEO, Plug Power (NASDAQ:PLUG)
Timothy Winter, CFA, portfolio manager, The Gabelli Utilities Fund, The Gabelli Utilities Trust, The Gabelli Global Utility & Income Trust, and the Love Our People and Planet ETF
Timothy Winter, CFA, is a portfolio manager of The Gabelli Utilities Fund, The Gabelli Utilities Trust, The Gabelli Global Utility & Income Trust, and the Love Our People and Planet ETF and a research analyst covering the utilities industry for GAMCO Investors, Inc.
He joined Gabelli Funds in 2009 and has over 25 years of industry experience.
Previously he served over 15 years as research analyst covering utilities at AG Edwards, as well as Jesup & Lamont and SM Research.
Mr. Winter has received numerous awards and recognition for his work in the industry. He was a three-time All-Star Wall Street Journal winner and five time ranked number-one Electric Utility Team by Institutional Investor.
In 2018 he received Thomson Reuter’s U.S. Analyst Award and was ranked the number-one stock picker in the electric utility sector and water utility sector and number two in the gas utility sector.
Mr. Winter holds a B.A. in economics from Rollins College and an MBA in finance from Notre Dame. The Gabelli Funds portfolio manager is a CFA charterholder.
“The utility sector includes renewable power and storage developers, wind, solar, utility scale batteries and so on. Utilities are actively involved in the research and development for new technologies and improving existing technologies like hydrogen and carbon capture.
I’ve covered the sector for 30 years. And the utility funds are obviously focused on utility stocks. Love Our People and Planet is 30% to 40% focused on the E part of ESG, where a lot of that has to do with clean energy and with all elements of saving our planet.”
The Gabelli Funds manager has developed “a deep understanding of the major macro and micro themes in the environment and a deep understanding of how these themes impact the sector and each individual business model.
So for example, the biggest issues or themes of our time are decarbonization and the current energy crisis.
To pick winners, one must understand how returns, earnings and cash flow of the various different players in the energy ecosystem are impacted in the environment.
With utilities specifically, they earn returns when the state regulators recognize their investment and set rates to allow a return on the investment.
We try to have a good understanding of the regulatory environment of the various states and countries. We also want to have a grasp of the political environments, service area economies and management motives.
And then, we dig deeper down into the various groups, subgroups and players and forecast earnings, cash flows and risk profiles.
We then compare the valuations which suggest whether we should be buying, selling or holding. We go top down to identify big themes and then bottom up to ensure we identify those we think will be winners.”
This long term view guides Gabelli Funds portfolio manager:
“In the bigger picture, successful long-term investment requires consistent long-term energy policy.
In Germany, for instance, because of Fukushima, they’ve eliminated nuclear.
Because of climate change, they’ve eliminated coal.
Because they don’t have the fracking ability and the abundant natural gas reserves that are available in the U.S., they have grown more dependent on renewable power and energy imports.
Renewable power is the future, but wind and solar cannot run as baseload power or 24/7, and battery storage is not fully developed.
Germany and parts of Europe are experiencing shortages and high prices.
This energy crisis has been building for several years but was put on hold by the economic shutdowns and really reached crisis proportions in the fall of 2021, when Europe started to see real shortages and prices going through the roof.
The situation has been made even worse by the Ukraine invasion.
So yes, the very policies and desire to eliminate fossil fuels are leading to the unintended consequence and need to use more fossil fuels.
Is it a long-term trend? I would say, no.
And that’s why I just called it a double-edged sword that we have this near-term issue — near term meaning three to five years, perhaps — as there’s a massive push towards investing in clean energy. And, yes, it’s impacting my companies in the U.S. and in North America.
This is one of the reasons why we like the electric utility sector and the gas utility sector as plays in investing in clean energy in the decarbonization of the world.
Because they have a diversity of fuel sources, and understand the need for affordability and reliability, and are methodical and careful in where and how they invest capital.
As gas prices in North America and the United States go from $3 per MMBtu to $8 or $9 per MMBtu, it is causing concerns and issues.
It shines the spotlight on the lack of investment in natural gas infrastructure and the pipelines that have been canceled.
Companies have been discouraged to invest because they don’t know if they will be allowed to earn the returns going forward. Again, wind and solar are great and the economics and reliability are improving, but they’re not ready to run all the time, and battery storage is not to the point where we can make this dramatic shift as a country to 100% renewables.
So there has to be a transition.
And so, the back and forth, which is the hallmark of the United States, does allow for the debate in energy policy.
Utilities benefit even during the back and forth of the pendulum shifts because they earn returns investing in energy infrastructure.”
The Gabelli Funds portfolio manager has a job to back his theory with his investor’s money:
“The first name to highlight is NextEra Energy (NYSE:NEE).
They are the biggest electric utility in the world: $150 billion of equity cap, $210 billion of enterprise value.
They are also by far the leading and largest renewable energy developer in the world, and specifically, they’re focused on North America. And 60% of their earnings do come from regulated business in Florida, Florida Power & Light, which benefits from customer growth and solid regulation and a healthy rate plan for the next four years.
NEE management outlined the tremendous opportunity and capital needs for U.S. decarbonization and clean energy by 2050.
The numbers are staggering.
Currently, the U.S. has 1,100 gigawatts of power generation including coal and nuclear, natural gas, wind, solar and hydro.
The U.S. needs 7,000 gigawatts of renewable energy to decarbonize the U.S. economy by 2050, including 3,500 gigawatts from the power sector.
And so, as they’re the leading developer of wind, solar and battery storage, and they’re also investing in hydrogen, NEE is hands down the leading player with 50% market share of wind development and going to participate in this huge megatrend.
So that’s the number-one company.
NEE also owns 58% of NextEra Energy Partners (NYSE:NEP) which is also a renewable company.
They own wind, solar and some natural gas pipelines that are unique from NextEra Energy. And it’s a dividend play.
NEP grows the dividend 12% to 15% per year and acquires renewable projects from NextEra Energy and/or from other entities, or develops its own renewable projects.
So those would be the one and two on my list for sure.”
Get the complete interview in the Wall Street Transcript.
Timothy Winter, CFA, Portfolio Manager, GAMCO Investors, Inc.
email: twinter@gabelli.com
![Pavel Molchanov is the Managing Director of Renewable Energy and Clean Technology for Raymond James & Associates [ticker:RJF].](https://www.twst.com/wp-content/uploads/2015/09/Pavel-Photo-Casual.jpg)
Pavel Molchanov, Managing Director, Renewable Energy and Clean Technology, Raymond James & Associates [ticker:RJF].
He joined the firm in 2003 and has been part of the energy research team ever since.
He became an analyst in 2006, the year he initiated coverage on the renewable energy/clean technology sector. In this role, he covers all aspects of sustainability-themed technologies, including solar, wind, biofuels, electric vehicles, hydrogen, power storage, grid modernization, water technology, and more.
Within the energy research team, he also writes about the broader topics of geopolitical and regulatory issues, climate change, and ESG investing.
He has been recognized in the StarMine Top Analyst survey, the Forbes Blue Chip Analyst survey, and The Wall Street Journal Best on the Street survey.
He graduated cum laude from Duke University in 2003 with a bachelor of science degree in economics, with high distinction.
In the broader community, he is a member of the Board of Visitors at the University of North Carolina’s Institute for the Environment; a member of the Advisory Board at Cool Effect, an environmental project funding charity; and the founder of the Molchanov Sustainability Internship Program at the Royal Institute of International Affairs in London.
The Raymond James analyst develops a strong case for the acceleration in the adoption of alternative energy:
“To state the obvious, the most important news story on the planet right now is Russia’s war in Ukraine.
This war carries countless consequences, of which one of the most important is escalation in energy prices: oil, natural gas and coal, and as a result electricity as well.
We are seeing Europe, for obvious geographic reasons, as the most directly affected by the war in the sense of energy price increases. But the effects have a global footprint, and nobody is entirely immune.
In the oil market, prices are at the highest level in eight years, and not far from all-time highs.
This encourages, among other things, more adoption of electric vehicles, because that is the most direct way for consumers and businesses to avoid paying $120 a barrel.
Oil is a global market.
As a result, the boost to electric vehicle economics is manifesting itself around the world.
On the other hand, natural gas has a series of regional markets. It is in Europe where record-high natural gas prices are the most noticeable.
Europeans are paying more for natural gas than they have ever before. And in fact, several countries — Poland, Bulgaria, Finland, the Netherlands — have been cut off from Russian gas supply for explicitly political reasons.
The effect that record natural gas prices in Europe are having on energy transition is to accelerate the path towards renewable power.
The economics of wind and solar were pretty good before the dramatic spike in natural gas prices from the war.
Now those economics are even more favorable towards wind and solar, not to mention the geopolitical urgency of energy security. When the Russian government can simply shut off supply of natural gas to nearby countries as a kind of blackmail, that is a lesson for the rest of Europe to disentangle their economies from Russian energy as rapidly as possible.
Sanctions are also encouraging — and in fact mandating — the disentanglement of European economies from Russian energy.
But even if there were no sanctions, the fact that Russia has proven itself to be an unreliable supplier of energy is pushing European consumers and businesses to pivot their energy mix away from Russia.
In some cases, the current focus is on finding other sources of fossil fuels, but renewable and low carbon energy is very much part of the story too.”
The Raymond James [ticker: RJF] analyst sees an opportunity as the bear market in the tech stoce k sector affects the prices of cleantech stocks.
“In the case of tech stocks, including cleantech, they are in a bear market.
We have seen, for the last six months, investors rotating out of growth-oriented, speculative stocks and towards more defensive, more established equities.
There is a range of macroeconomic reasons for this sector rotation. Some of it is simply the fact that growth stocks had outperformed for much of the previous decade and eventually it was only a matter of time before value outperforms.
There are also rising interest rates, which is pushing investors towards value and dividends.
There are supply-chain problems across a wide range of industries, including many of the cleantech manufacturing businesses.
This is not about any one industry; rather, this is a broader shift in equity market conditions with growth stocks for the time being out of favor.
Growth stocks, including cleantech, were extremely popular in 2020 during the initial crisis period of COVID.
In 2020, the average cleantech stock was up 200%, which is by far the best year ever.
Last year, the average cleantech stock was down 30%, and this year, down about 25% since the beginning of the year.
There is a disconnect where the fundamentals of many of these industries — electric vehicles, solar, green hydrogen — I would argue have never been better.
But share prices have been underperforming because of macroeconomic conditions and changes in investor preferences.
The result is that valuations have come down, and multiple compression has occurred. In many cases, this presents attractive opportunities for investors with a longer-term perspective.
Companies that used to trade at 30 times EBITDA might now be trading at 15 times EBITDA.”
The Raymond James [ticker: RJF] stock picker has some interesting portfolio recommendations:
“A company that is uniquely well positioned in the context of Europe’s energy security urgency is ADS-TEC Energy (NASDAQ:ADSE).
This is a German company, and 72% of its revenue came from Germany last year, but it is listed on the NASDAQ. ADS-TEC Energy provides ultra-fast charging equipment.
This is the leading edge of electric vehicle charging technology.
For Europe to become less dependent on Russian oil without buying even more from the Middle East, the solution needs to be electric mobility.
As it stands, almost 25% of the new vehicles sold in Europe are electric.
Within three years, that will probably be close to 50%. So that means Europe needs more and more charging infrastructure.
ADS-TEC Energy is one of the few public companies that is directly tied to that infrastructure buildout. This is a small-cap, very-high-growth company.
For people that are looking for something a little bit larger, I would point to Bloom Energy (NYSE:BE).
It is the world’s largest provider of stationary fuel cells, which are used in data centers, hospitals, and office buildings to generate clean electricity on site.
The electricity can be from natural gas or from hydrogen, in which case, there is zero CO2 emissions.
Also, Bloom will soon be launching its electrolyzer product. The electrolyzer is literally the inverse of a fuel cell.
Instead of using hydrogen to generate electricity, an electrolyzer takes electricity and water and makes hydrogen.
This is very relevant in the context of disentangling Europe from Russian energy, because a portion of the Russian natural gas is used to make hydrogen.
An electrolyzer enables the production of hydrogen without natural gas. Green hydrogen is a nascent, fast-growing market, and Bloom is about to enter it.”
Raymond James [ticker: RJF] is not the only investment bank developing a case for building an alternative energy portfolio.
Michael Webber, CFA, co-founder Webber Research & Advisory and Armistead Street Capital Partners
Michael Webber, CFA, co-founded Webber Research & Advisory and Armistead Street Capital Partners in 2019, and has spent the past 15 years in energy infrastructure, renewables and transportation finance.
Mr. Webber was previously a Managing Director & Head of LNG, Shipping & Equipment Leasing Research at Wells Fargo, prior to which he was a senior member of the Transportation Equity Research team at Deutsche Bank.
Mr. Webber was named to Institutional Investor’s (I.I.) All-America Research Team for six consecutive years, finishing as the #1-ranked Shipping & LNG analyst in 2019, 2018, 2017, 2016 and 2015, and part of the #1-ranked Natural Gas team in 2019.
In 2020, Webber Research & Advisory finished as runner up, and was the only new research platform to receive ranked I.I. recognition across any of the survey’s 60+ sectors.
Mr. Webber was named the sector’s best stock picker by the FT in 2013, #2 in 2012, named in Business Insider’s Rising Stars of Equity Research Under 35 in 2017, and is a NAMEPA award winner for his work in ESG.
He graduated from the University of Virginia in 2004.
Greg Wasikowski, CFA, is a Senior Analyst, Associate Partner and Co-Founder of Webber Research & Advisory
Greg Wasikowski, CFA, is a Senior Analyst, Associate Partner and Co-Founder of Webber Research & Advisory, with a focus on renewables, infrastructure and alternative fuels.
Mr. Wasikowski helped lead Webber Research to a runner-up finish in Institutional Investor’s (I.I.) 2020 All-America Research Team, becoming the only new platform to receive ranked I.I. recognition across any of the survey’s 60+ sectors.
Prior to co-founding Webber Research & Advisory, Mr. Wasikowski was a senior member of the #1 I.I.-ranked Wells Fargo LNG, Shipping & Equipment Leasing team in 2019, 2018, and 2017, with a focus on energy infrastructure and shipping.
Mr. Wasikowski began his career as an accounting consultant for RSM, a global leader in audit, tax and consulting services, where he focused on middle-market, growth-focused organizations in the U.S.
Mr. Wasikowski was a student athlete at Bucknell University, where he majored in Accounting and Financial Management while also captaining Bucknell’s Division 1 baseball team.
Mr. Wasikowski is also a CFA Charterholder.
“I think there are going to be several winners over the longer term in terms of forms of energy and/or power that take more significant market share from incumbent sources.
So we certainly think that there is going to be a place for hydrogen in different verticals, but it’s not going to compete extremely well with BEVs — battery electric vehicles — on the retail side of the business.
Yet for large pieces of infrastructure, micro grids, stationary power, off-grid charging, there are a number of different interesting applications on the hydrogen side.
And then, wind and solar will take a part of the mix. And we don’t know that there’s a consensus around what the right mix level ultimately is. We think it’s going to be significantly wider than we’re at today.
But transitioning to a grid based entirely on renewables doesn’t make sense either. And I actually think we’ll see a higher mix of nuclear within that mix on a long-term basis than what people have expected today.
But we certainly focus a significant amount on alternative fuels.
So we have a background in energy and industrials and alternative fuels.
We like to say we focus on the aspects of renewable energy that are energy transition, that are grounded in industrial reality.
So it’s not the pie-in-the-sky, super sexy hydrogen truck parked in every driveway.
We’re talking about fuel distribution, backup power for telecom, dual fuel charging — so using methanol to generate hydrogen and electricity at the same time, which means you’re able to fuel multiple forms of vehicles or industrial equipment at once.
And then, we’re starting to look at alternative fuels for primary propulsion both on the marine side, on the airfreight side, and on the land-based transportation side. So we think what is ultimately going to drive maybe a tighter slope on that adoption is going to be that you’re seeing energy majors and others are going to really be plowing considerable resources into alternative fuels to meet customer demands.
And that’s going to help drive adoption a lot more quickly than entities being originated from scratch, so kind of scrappy upstarts.
We need those for sure, but we also need those large swaths of capital to come in to drive the pace of adoption.
And it’s also worth noting that the biggest headwind over the near term for that pace of adoption is going to be what’s happening within traditional energy and traditional fossil fuels.
We’re looking at tight supply curves for natural gas and LNG for crude and refined product. And so you’re going to have a pull, from a capex perspective, and to some of those more traditional lanes, just to be able to get those cost curves back in check.
So maybe there’s a bit more competition for that capital expenditure than there might have been a year or two ago. But there’s ultimately going to be a natural balance there.
And then typically, generally speaking, the dollars that are spent on alternative fuels and renewables, as significant as they may be, are generally dwarfed in scale by what’s typically needed to bring new projects online from a large-scale energy perspective. So not that significant investment within those two lanes are mutually exclusive.
And we think you’ll see continued investment, actually more investment in natural gas in the United States than people expect.
It’s sorely needed both in terms of export and in terms of domestic consumption.
And at the same time, you’re going to see people continuing to invest in an energy mix still 20 or 30 years away in terms of alternative fuels and renewables…”
Webber Research and Advisory sees some specific stocks on the upside as well but not as well known as the Raymond James [ticker: RJF] analyst:
“…Names like Fusion Fuel (NASDAQ:HTOO), which is a green hydrogen producer in Europe, primarily in Portugal, but expanding into Spain and elsewhere — they’re blending hydrogen with natural gas. So you’re literally producing it and dumping it into the grid on a 30-year basis, which isn’t particularly sexy, but it is effective.
…Fusion Fuel is actually a very good answer for that, because they are a public company; they already went through the de-stacking process, and they’re traded on a U.S. exchange.
But at the same time, they don’t get the same sort of attention, the same sort of headlines, and certainly not the same sort of valuation premium that some of its peers get, like a like a Plug (NASDAQ:PLUG) or a Ballard (NASDAQ:BLDP) or a Bloom (NYSE:BE) or a FuelCell Energy (NASDAQ:FCEL).
They’re a bit more understated.
And the reason being is that they’re very much earlier in their process, still on the pathway to profitability, but at the same time, demonstrating their concept, demonstrating their technology, which could end up being game-changing for green hydrogen, especially in certain geographies.
And there’s a new technology, a new promising method coming out seemingly every day and some even get some funding here and there, and get some attention.
But there’s so much out there that it’s hard to pluck one out that is going to be dominant in the mix of clean energy in the future. But Fusion Fuel is probably the closest thing to that.”
Get these complete interviews and more, exclusively in the Wall Street Transcript.
Pavel Molchanov, Managing Director, Renewable Energy and Clean Technology, Raymond James & Associates [RJF]
email: pavel.molchanov@raymondjames.com
Michael Webber, CFA, Greg Wasikowski, CFA, Webber Research & Advisory
email: info@webberresearch.com
John R. Beaver, President, CEO, and Director of BIOLASE (BIOL) the Laser Dentistry Specialist
Dental Surgery stock Biolase (BIOL) CEO John R. Beaver is the President, Chief Executive Officer and Director. Mr. Beaver brings over 40 years of substantial leadership and technical experience in finance and business management for both public and private companies.
His experience leading debt and equity fundraising efforts to elevate companies from startup to commercial success has positioned BIOLASE for growth.
At BIOLASE, he has a pulse on investor relations, using dentist education to establish lasers as the gold standard of care, and building cross-functional teams internally.
When not charting the path for BIOLASE, you can find Mr. Beaver rooting for the Houston Astros or heading to Texas to visit his grandkids.
“So, of all the specialties, we probably were less, I would say penetrated in endodontics.
It was never really a focus for us.
We knew that our technology would be beneficial in that area. But you have to pick where are you going to succeed and where are you going to put your resources.
We knew that endodontics was a growth opportunity for us.
But at the same time, EdgeEndo came to us — and they are majority owned by Henry Schein — and they say, “We want to get involved or have a product that’s going to do irrigation of the canal via lasers,” because they recognized the importance of that and the improvement of that is, if you use traditional instrumentation, the rotary file system, through a root canal, you get maybe 50% of the bacteria out of that root.
I don’t know about you, but if a surgeon came in after surgery and told me, “Yeah, we’re good, we got about 50% of the bacteria out of that surgical area,” I wouldn’t feel really good about it. Lasers remove 99.5% of the bacteria and the improvement there is significant in terms of success of the root canal and the rate of retreatment.
So they came to us and at first I said, I’m not sure if I want to put somebody else in business competing with us here. But knowing those guys like I do, if we had said no, somebody else would have said yes. And I’d much rather work with them than against them. And so we partnered up.
They came to us because they felt like the 2,780nm erbium chromium YSGG wavelength, which we have a patent on, was the best for this.
And they also believed BIOLASE (BIOL) has a core competency in getting new products through FDA clearance. And so, we started working with them.
We developed what’s called an EdgePRO and it is based upon our 2,780nm wavelength, but it doesn’t ablate or cut.
So it’s simply a microfluidic irrigation device, which is important for endodontists. But if endodontists want to do more, or a GP wants to do more than just irrigate that canal in the most efficient and best manner possible, then they would go to a Waterlase.
And so, we got the approval in December of 2021, which was for us a record in basically a year of start to finish with that product.
We started producing and selling it commercially to EdgeEndo in the first quarter. And so far, so good.
Not only have we sold a number of units to them through our OEM partnership, but we are also raising awareness of endodontics around this wavelength. We’ve actually had ancillary sales of our Waterlase.
I look at it as the best outcome for us is if you have endodontists that may have, let’s say six operatories.
They’ll buy six EdgePROs, one for each operatory. But they might buy one or two Waterlase because they want to do more, but they don’t need it in every operatory.
That’s a home run for us.”
Biolase (BIOL) CEO John Beaver has experience getting FDA approvals for new applications for the company’s equipment:
“We have the best laser on the market. It is proven. And guess what — we talked about the 90% of dentists that don’t have an all-tissue laser. The ones that do have, 60% have ours, but the 90%, you know a lot of them don’t even know what a laser is or haven’t been really talked to about it.
It is such a fertile ground for education and training that when we show our laser even though this particular model has been out a few years, it’s brand new to them.
So we don’t need a new laser as much as we need to invest in additional clinical procedures and getting FDA cleared for those. And consumables — what I mean is a different handpiece or something like that.
I’ll give you an example of one thing that we did a couple of years ago.
We knew that our laser was being used by dentists, even though we did not have FDA clearance and we could not market it around then. But it was being used for crown and veneer removals.
But if you think about, as an example, I was at a dentist’s office I’m visiting with — I do ride-alongs with each of my territory managers, spend the day with them.
It’s been great. I get to go out and see the customer, see future customers and all that good stuff.
But I was with a dentist who was removing 19 veneers from one person at one appointment.
And I asked her, “What were you doing before you had a laser?” And she said, “Oh, it would take two or three different sittings or appointments. I would be using my high-speed handpiece to try to grind those veneers off, pretty tedious.”
And we’re watching, we were able to do all 19 in less than an hour.
Yeah, it just pops off.
But that’s an example of something that we saw our dentists were using.
OK, let’s go out and get the FDA clearance for it, which we did back in 2019-2020.
And now we’re selling.
Does that mean anybody is going to buy lasers because of that? You know, probably not.
But it’s just another thing with the Waterlase — there are over 80 FDA-cleared indications for that laser.
And that’s just one more reason to look at incorporating this technology into your practice.”
The Biolase (BIOL) CEO has a lot more to detail in his entire interview, exclusively in the Wall Street Transcript.
John R. Beaver, President & CEO, BIOLASE (BIOL) Inc.
email: info@biolase.com
James (Jim) Connor is Chairman and Chief Executive Officer of Duke Realty (DRE) and John G. Ullman is President and Founder of John G. Ullman & Associates whose portfolio includes Dominion Energy (D).
Duke Realty (DRE) is one of the largest owners, developers and managers of industrial properties in the United States and a NYSE-listed company with a total enterprise value nearing $30 billion.
Mr. Connor serves as head of Duke Realty (DRE)’s Executive Committee, overseeing the strategic direction of the company, and its Investment Committee, with responsibility for approving major capital transactions.
He is a member of the Executive Board of Governors and Vice Chair for NAREIT, a member of the Real Estate Roundtable, and a member of the Society of Industrial and Office Realtors (SIOR). Mr. Connor is on the Advisory Board of the Marshall Bennett Institute for Advanced Real Estate Studies and serves on the Board of Trustees of Roosevelt University and EPR Properties.
In this interview, exclusively in the Wall Street Transcript, the Duke Realty (DRE) CEO exposes his strategy for success:
“We brand ourselves as the top U.S. logistics REIT.
We’re not in any of the international businesses, we’re exclusively an industrial logistics REIT, which differs from some of our peers.
Everybody has their own brand and their own mission, but we’re very focused on that. We’re actively developing and acquiring and operating properties in the top 19 markets across the country.
We’ve been in other markets and, for varying reasons, sold out of those markets, but we like the top 19 markets that we’re in.
Today, I would tell you our highest priority is the coastal Tier 1 markets, so that’s going to be Seattle, Northern California,
Southern California, Southern Florida, and then New Jersey. We’re also big players in the other Tier 1 markets, Chicago, Dallas and Atlanta, but really the growth focus is in the coastal markets today.
I will tell you, in terms of our strategy, for us it’s really all about value creation, because we can do any number of things. We’re very prolific developers.
We do greenfield development.
We do brownfield development.
We do acquisitions.
In the world of acquisitions, we will buy existing buildings and retrofit them. We’ll buy brand new buildings that other people have built and lease them up. We do build-to-suit development. We do spec development.
So our teams on the ground in these 19 different markets have virtually every opportunity to go out and create value for shareholders.
It’s not just about we’re only going to do greenfield development or we’re only doing brownfield development or we can only do acquisitions. We can do all of the above.
I like to tell our people, you have unlimited opportunity, you can look at any opportunity in the marketplace and if we can figure out how to make money — either through our expertise, our size and our scale, our balance sheet, our ability to lease and manage properties — then those are opportunities for us.
It’s been quite an exciting time.
This has been a great 13-year run.
Sitting here today, the company has about 165 million square feet, give or take.
Our largest market is Southern California, where we have about $5.5 billion invested. New Jersey is second, with about $3.4 billion. And then South Florida and Chicago would be the other top two, which would be about $2.2 billion or $2.1 billion.
So we’ve got size and scale across the country, and we’ve got great teams on the ground.
A couple of the characteristics of our portfolio which would differentiate us from all of our peers: Our buildings tend to be bigger, our average building size is about 275,000 square feet.
Our peers are probably much closer to 200,000.
Our average tenant size is bigger, our average tenant size is 175,000 feet. And because we’re such prolific developers, the average age of our portfolio is much younger than our peers.
The average age of our portfolio is 12 years, and our peers’ is about 20 years.
Because [Duke Realty (DRE)] is creating brand new product every year and placing it in service, we’re able to keep that average age down because we’re pruning less desirable assets and replacing them with brand new assets.”
Read the rest of the interview and how the Duke Realty (DRE) CEO plans to accommodate any potential recession.
John G. Ullman, President and Founder, John G. Ullman & Associates
John G. Ullman is President and Founder of John G. Ullman & Associates whose portfolio includes Dominion Energy (D).
Earlier, he was President of USGM Securities, Inc., and at Corning Inc., he worked in financial management. He received a bachelor’s degree in economics from Johns Hopkins University.
He received an MBA from the University of Chicago, with a focus in financial management. He was named the Corning Chamber of Commerce Small Business Person of the Year in 1997.
“One specific company within the Utility sector that we like and own shares of is Dominion Energy (D). The utility company sold off its midstream assets in 2020 for $8.7 billion, and it also cut its dividends. It did a little restructuring.
The stock sold off at the time.
Generally, investors do not like it when dividends are cut.
The midstream assets were sold to Warren Buffett. It was seen as if Warren Buffett was getting a good deal in terms of value for the assets, but we liked the long-term strategic thinking of management at the time.
We also liked the valuation of the stock price, it having sold off because of these moves. And with that, we increased our position in Dominion Energy (D).
One of the strategic initiatives that Dominion’s management is taking is investing heavily in the renewable energy sector.
Management plans to spend $37 billion in renewable energy growth capex, so that is capital expenditure in renewable energy projects that will be in offshore wind.
The company plans to spend heavily in the offshore wind sector right off the coast of Virginia, in addition to onshore wind and solar farms.
These initiatives are supported by tax credits, and the company is protected by semi-automatic rate increases.
Therefore, we feel that this utility company is favorable in terms of a risk/reward scenario that would take place. In addition, we think the downside is fairly limited, while the company can grow along with these initiatives.
One other reason why we see the Renewable Energy sector to be favorable is that it is being supported at the state level. States are now mandating certain renewable energy goals to meet their climate change endeavors.
We view climate change as a long-term problem, and some of these solutions are being tackled by the utility companies themselves.
So, many renewable energy stocks are priced very, very high. We stay away from those.
But we found utilities such as Dominion Energy (D) to be a safer way to invest in the renewable energy sector, given the reasonable valuation.
The price of oil and natural gas is high right now; that is another reason to invest in renewable energy, given that it is an alternative source of energy.
But that said, the price of oil and natural gas can come down. It is very volatile, and it is really determined by geopolitical factors, in addition to overall supply/demand.
While climate change is a long-term problem, we see utility companies with their resources being a major player in tackling that problem. So overall, we like their management’s strategic thinking, their plans, their investments, in addition to the valuation of the stock.”
Get more information about Dominion Energy (D) and Duke Realty (DRE) and many more, only in these exclusive interviews in the Wall Street Transcript.
James Connor, Chairman & CEO, Duke Realty Corporation
email: ir@dukerealty.com
John G. Ullman, President & Founder, John G. Ullman & Associates, Inc.
Stephen Biggar, Director of Financial Services Research, Argus Research Group
Stephen Biggar is Director of Financial Services Research at Argus Research Group specializing in banks and asset managers. Mr. Biggar is responsible for coverage of large global banks, regional banks and domestic credit card companies.
“We can look at pre- and post-pandemic, or at least the start of it, clearly all the groups like everything else had a pretty difficult time in early 2020 and most were growing fairly well before that. And the pandemic had a way of checking some winners and losers along the way.
Banks had a difficult time as the Federal Reserve moved rates down to zero.
So that had a pretty poor impact on net interest margins.
But that was kind of quickly superseded by — about a quarter or two later as we started to emerge, it became clear that particularly for the large banks and multinationals that trading was doing extremely well. Companies were very active in investment banking, debt and equity underwriting.
Of course, when rates go to zero, that helps debt underwriting.
People were scrambling to refinance at much lower rates. There’s growth in a lot of technology areas. So the investment banking side for the banks did very well.
And then once the economy got going again and the stimulus impact began to wear off, then you had a resumption of loan growth that started in mid to late 2021. And then you had the prospect of higher interest rates from the Federal Reserve to tame inflation.
So you had a resumption of widening of net interest margin. That lasted until earlier this year.
And now we have again a return to the negative cycle where investors are concerned that there’s going to be a very aggressive Fed rate hike cycle here and that’s going to result in a much slower economy and that is not good for loan growth and that may not be good for credit costs, which had up till now been at historically low levels.
So that’s largely the picture.”
Banks and asset managers benefit in rising interest rate environment from being “asset sensitive”.
“Banks are almost universally what analysts would call asset sensitive, which means their assets reprice faster than their liabilities and that is therefore helpful in a rising interest rate environment.
When the Fed raises the Fed funds rate, they immediately raise the prime rate and that’s beneficial. And then they’re slower to reprice liabilities like deposits.
That’s an enormous tailwind.
Banks can make money a few ways. The short end, which largely controls the prime rate and there’s a lot of lending based off that. And then the long end, residential mortgages are based off the 10-year yield generally.
And so when the long end of the curve moves up — so banks will talk about a parallel shift upward or downward in the yield curve, meaning that for every 25, 50 or 100 basis points increase across the yield curve, that will be beneficial by so many — 100 million or 1 billion — to net interest income.
And that’s basically when you’re not doing anything, right? It’s just an automatic tailwind as rates move up. But to a point.
Obviously, if rates move up too quickly and it slows the economy too quickly as well, then you have an impact on lending growth and if banks aren’t making new loans, then they’re not going to benefit as much from that higher interest margin.
And if it slows the economy to the point that there are layoffs that means that credit costs are probably no longer going to be at historical lows.
There is a very high correlation between unemployment levels and credit costs for banks.
If you have a job or if you lose a job and find it easy to replace one, you tend to stay current on your bills.
But if you lose a job and can’t find another job to replace it then you might go delinquent on your bills and that’s where higher credit costs come in for banks.
Banks are starting to put more money aside in expectation of higher loan losses and starting to guide a bit lower for less loan growth as the Fed is aggressive on rate hikes and cools the economy.”
The current legislative and regulatory environment for banks and asset managers is positive in the United States.
“…Regulation, which is always, I think, on the minds of bank investors, and maybe increasingly asset managers — I’ll get to that in a second — but the regulations for banks in particular. Now, we’ve got a CCAR — Comprehensive Capital Analysis and Review — cycle coming up, with an announcement from the Fed later in June where they once a year green light or red light the capital return plans of banks on buybacks and dividends.
Banks up until now, throughout the cycle, had been pretty flush with capital.
So we expected a pretty good improvement on returns based on that.
Now they submit these plans much earlier in the year and then the Fed takes a few months to take a look at all the ratios and see if it’s proper for banks to have the kind of returns that they’re asking for. So it’s going to be a tricky cycle, given what’s transpired since earlier in the year.
Still we expect decent returns, elevated buybacks. I think banks are particularly interested in buying shares back at these reduced levels and would like to return more in terms of dividends as well.
Of course, two years ago there was a moratorium on dividends for the 2020 cycle because of the pandemic.
So, banks — the CCAR banks anyway, the systemically important ones — didn’t have any increases. And then came the improvement a year later in the 2021 cycle. So not completely made up perhaps from the year of no increases.
Banks do have some flexibility there to improve returns across the board.
And there was an interesting proposal yesterday for the asset managers.
Senator Sullivan, out of Alaska, introduced legislation that would return the voting of shares from the large asset managers, which have up till now had the power over how they vote shares that are in ETFs and mutual funds and so forth.
The three largest companies here, BlackRock (NYSE:BLK), Vanguard and State Street (NYSE:STT) have about $20 trillion in combined assets, and they vote something like 25% of all votes at annual meetings.
If that bill passes, it removes a lot of political power from these large firms and others in the asset management space embracing ESG standards for business and so forth.
And shares aren’t always voted, I guess, in the way that an individual shareholder that owns these funds would want them voted. And so it’ll be an interesting power dynamic change, if that goes through as well.
A lot of firms, companies — and politicians for that matter — will want to put pressure on some of these asset management firms to vote a certain way. And so that’ll be an interesting, again, power dynamic change.”
This leads Stephan Biggar to several specific stock picks from his banks and asset managers sector:
“I think Invesco and BlackRock is the way to go. We didn’t touch on a few others, like, maybe Charles Schwab (NYSE:SCHW), who would normally be a natural benefiter from the higher interest rates, also just had a difficult time with the asset levels, so they’ve pulled back. But nothing too surprising there.
Schwab is another company we like because of the product creation, the efficiencies. They rolled out their own ETFs which got a lot of traction and are much more profitable for them.
They have a strong adviser base that attracts assets over time. So that’s another long-term, I think, strong growth story.”
Get the entire list of current banks and money manager company stock picks from Stephen Biggar, Director of Financial Services Research, only in the Wall Street Transcript.
