Senior Vice President George Smith of Davenport & Company LLC says his firm recently sold Wal-Mart Stores, Inc. (WMT) because the company is facing too many headwinds.
We liked the dividend record; we liked the quality of the balance sheet and the long-term history of the company. However, a combination of reasons caused us to sell it.
One, the earnings and sales flattened out despite numerous efforts and strategy changes to try to stimulate those sales, and we felt that, over time, they were just market-share losers that various other retail franchises were picking away at and even increasing costs for Wal-Mart on the labor side. All these added up to a period of growth not being there for another couple of years.
And while the stock had come down, it was still not really cheap. We felt like we could find better opportunities elsewhere. That was a hard one to sell because it’s a company we had for a while and was certainly the company that met many of our other criteria, but we felt like it was facing too many headwinds and was too big a ship to turn around in the kind of a horizon we were looking for.
Portfolio Manager Jason Hans of BMO Asset Management is overweight Citigroup Inc (NYSE:C), even as he is currently neutral-weighing financials as a whole. Hans says his firm began buying the stock this year after seeing positive changes to the company’s fundamentals.
We haven’t owned Citigroup since before the financial crisis. It’s a name that we have not liked for a very long time. But this year, we started to see some positive changes to a lot of the fundamentals at Citigroup, starting with their most recent stress test. They came through that process with a very good score from the regulators, and in fact, they came through with the best score of any of the big banks.
What that means to investors is that Citigroup will potentially have the opportunity to be more flexible with its capital in terms of share buybacks and dividend increases.
They are in a very strong capital position. At the same time, Citi is one of the only, if not the only, large universal money center banks that is trading below its tangible book value, so it is one of the cheapest stocks in our universe, and we are starting to see that stabilization and even improvement in the fundamental characteristics of the company. That is when we like to start buying, when we see a very cheap stock start to improve in its fundamental outlook.
Home Depot Inc (HD) is a good example of a stock benefiting from new housing starts and continuing home improvement, a sector of the economy expected to benefit from an improving consumer-discretionary segment, according to Portfolio Manager Jason Hans of BMO Asset Management.
This overweight is spread across a few different areas of discretionary. We’re seeing really attractive opportunities in what I would call very durable types of consumer discretionary stocks, as in things tied to the housing market and the automotive market.
HD specifically is expected to reap rewards in the current environment.
The housing market has continued to recover at a nice pace since the bottom of the financial crisis. That has really driven a lot of remodeling and renovation decisions. Home Depot got a nice boost from both new housing construction and ongoing renovation and remodels done by homeowners.
Hans says Home Depot has a strong fundamental story with profitable growth that is higher than the market as a whole, and that valuation is still reasonable.
We’ve seen the market as a whole rewarding stable, high-quality and good-growth stocks. We think Home Depot fits right into that story without having to pay too much for it. We’re cognizant of not wanting to overpay for those characteristics, and Home Depot, we think, is still a very attractive position to have in that market.
Also, we like that Home Depot’s exposure is almost 100% U.S. So with all of the volatility outside of the U.S., including exchange rates and a strong dollar, with Home Depot, you don’t have to worry about any of that noise coming through and impacting earnings. It’s a very clean story.
President and Portfolio Manager Matthew Dent of D.F. Dent and Company says Moody’s Corporation (NYSE:MCO) checks all the boxes in terms of what he is looking for in a stock.
“One company that fits our criteria is Moody’s. Moody’s is a leading provider of credit ratings for publicly traded bonds combined with a subscription-oriented analytics business. The company is niche-focused and has significant barriers to entry,” Dent says.
Matthew Dent
Dent adds that based on new regulations, compliance and infrastructure requirements, the barriers to entry have gotten even higher in the last five years.
“So they check the box on being a niche-focused company with significant barriers to entry. They have a very strong business model with significant recurring revenues and high margins. This enables Moody’s to reinvest its capital in high-return opportunities or to return it to shareholders through dividends and share repurchases,” Dent says.
Dent says Moody’s management team is doing a great job running the company for the benefit of shareholders. He says they have a strong track record of both operational excellence and capital allocation.
“Specifically, on the capital allocation side, Moody’s has been very disciplined. They’ve made small, tuck-in acquisitions and have returned capital to shareholders. In fact, over the last 10 years, they have bought back over 30% of the shares outstanding on a net basis. Actually, if you go back further, you’ll see that percentage increases to over 50%. So Moody’s checks all three boxes in terms of what we are looking for and has nice growth potential going forward,” Dent says.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Thomas S. Rooney Jr., then President & CEO of Energy Recovery, Inc. (ERII), interviewed with TWST for the Oil & Gas: Drilling Equipment & Services report. Since the interview, ERII‘s stock price has increased approximately 45%, from $4.9 to currently $7.1.
In this interview, Rooney discussed some of ERII‘s technology and its use in hydraulic fracturing:
The VorTeq technology, we just announced yesterday. It’s a technology that we’ve been working on for about 16 months. We believe it’s going to be very disruptive and create tremendous benefits for the shale gas industry, specifically in fracking.
One of the most significant operating challenges in the fracking industry comes from the fact that the industry uses very large, very expensive pumps to pump sand and proppant down into the holes to fracture the rock. Pumping very high-pressure fluids with sand in it is very destructive on these pumps. It’s an industry that deploys about $20 billion worth of pumps every year to do this and spends close to to $4 billion a year maintaining those pumps. So these are expensive pumps in a very hostile environment.
What we’ve been able to do is separate the sand from ever entering those pumps, and yet, still be able to pump the sand and proppants and the frac fluids all down the hole. So this should save the industry $1 billion a year in maintenance expenses. Obviously, that’s a tremendous benefit for the industry, close to or slightly over $1 million for every frac crew that’s deployed around the world, and there are about 850 of them. So that’s close to $1 billion of annual savings for the fracking industry, and it represents in the long run about $1.4 billion annual opportunity for our company. It is transformative for our company and highly beneficial for the fracking industry, all of which is predicated on a highly advanced technology that we developed over the years and now brought to bear for the fracking industry.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Kevin B. Thompson, President & CEO of SolarWinds Inc. (SWI), interviewed with TWST for the Business Services and Application Software report. Since the interview, SWI‘s stock price has increased approximately 18%, from $49.7 to $58.51 currently.
In this interview, Thompson discussed some of the central parts to SWI‘s strategy:
Our network management business, which is a set of about 12 products, is still the majority of our revenue. But our systems management business is growing very quickly and growing at a slightly higher percentage rate. We don’t have one product or one set of products that are the lion’s share of our business. Network management, because that’s where we started back in 1998, is still the largest single piece of our business, but the rest of the product suite is delivering a meaningful amount of revenue today.
We’ve actually got a very unique revenue model — always have — in that about 70% of our revenue is recurring. Not because we don’t sell software licenses; in fact, we do. We sell licenses to most of our products, but we’ve always had a very high maintenance component, meaning we never maximized the value of our licenses. Instead, we maximized the value of the maintenance. We sell maintenance at a list price without regard to what you pay for the license in the first year. And so we’ve always had a much heavier recurring component to our revenue stream than any other license-model company.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Bradley S. Jacobs, CEO & Chairman of XPO Logistics Inc (XPO), interviewed with TWST for the Transportation & Logistics report.
In this interview, Jacobs discussed XPO‘s performance up to date, which grew more than eightfold since 2011:
We’ve grown both organically and through acquisitions. Since you and I last spoke in September of 2013, we’ve grown a lot. Every quarter since we started XPO, we’ve grown the business. Now, we have leading positions in some of the fastest-expanding areas of our industry.
In the last 22 months alone, we’ve become the largest manager of expedite shipments, and gained leading positions in intermodal and technology-enabled logistics in North America. We added to our e-commerce network in last mile. In June, we expanded our drayage capacity. And most recently, of course, we took XPO to the next level as a global player.
Jacobs also discussed XPO‘s technology:
With respect to IT, we have a global team of approximately 1,000 IT professionals who understand how to drive innovation for the benefit of our customers. Our IT budget this year is around $225 million with over 200 projects under development. That’s more money than most logistics companies in the world spend on IT.
Our proprietary technology is a huge differentiator for us. Our Freight Optimizer system is used across the board in our brokerage operations in North America. The algorithms in this system help us efficiently match our customer’s freight to the right truck. Soon, we’ll be rolling this technology out in Europe to supercharge our brokerage business there.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Tom Ray, President and CEO of CoreSite Realty Corp (NYSE:COR), interviewed with TWST for the Data Hosting and Data Storage report. Since the interview was published, COR‘s stock price has increased approximately 21% from $47 to currently $57.
In this interview, Ray discussed part of CoreSite‘s strategy. He said the key changes in the marketplace were the acceleration of the cloud and outsourcing, both of which have been driving his business:
On the cloud side, there are two angles that have changed our business and continue to change our business. One, we’ve introduced new services that support the cloud. We have an Ethernet exchange, the CoreSite Open Cloud Exchange, that facilitates networks, enterprises and cloud providers connecting together. So we have brought new products to market to support the cloud. And obviously, the cloud companies are a larger component of our revenue and of our sales, driven by the growth in that industry.
Secondly, outsourcing has accelerated, and that outsourcing continues to take place along two dynamics. One of those occurs as enterprises go from an on-premises data center to putting IT equipment in a third-party, outsourced data center, such as CoreSite’s. The other outsourcing dynamic takes the form of the enterprise that used to own all of its own IT gear, but now outsources some pieces of that to a variety of different cloud providers, software-as-a-service and other IT service providers. So you see the old enterprise IT stack getting reconstituted in very different ways, and our business adjusts to serve those new incarnations of the old enterprise.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Robert J. Sprowls, President of CEO of American States Water Co (AWR), interviewed with TWST for the Alternative Energy & Utilities report. The stock price increase by approximately 10% since this interview, from $39 to currently $43.
In this interview, Sprowls discusses the utility’s dividend performance:
Our dividend policy is one where we’re focused on providing an increase in our dividend on average of at least 5% per year over the long term, and we think that’s what our shareholders want. We are proud of the fact that we are among a handful of companies on the NYSE that can say that we have increased annual dividends for 60 consecutive years. We’ve been pretty effective over the last few years on raising our dividend. In 2012, we were able to increase the quarterly dividend by 26.8%. In 2013, it was 14.1%, and in 2014, it was 5.2%.
Sprowl’s also said he plans to grow the dividend relative to AWR‘s competitors:
We established American State Utility Services, our contracted services business, and in 2004, we received our first military base privatization contract. For the first four or five years, we struggled to break even for the contracted services business. We really turned the corner in 2009, and we’ve been doing very well with that business ever since. In 2012, we determined that the earnings for that business were sustainable and that we could rely on its earnings to support our dividend. This change in view contributed to the substantial increase in the divided that year. We think the future for the overall company is bright and that our payout ratio is low relative to our peers, which will give us room to grow the dividend over time.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Anthony Ambrose, President and CEO of Data I/O Corporation (DAIO), interviewed with TWST for this year’s Electronic Components and Semiconductors report. In this interview, Ambrose discussed DAIO‘s growth catalysts.
Ambrose said growth has been coming from automotive:
Our first is Automotive Electronics, which has been a very, very large growth area for us. Traditionally that has been about 20%, 25% of our revenue. Last year, it was 30%, and so far this year, through the first half, it’s closer to 50%.
What we are seeing is real revolution in the way automotive electronics are built. There is a lot more functionality being put into automotive electronics. You hear a lot of talk about self-driving vehicles. That’s the sizzle, if you will, the steak underneath that is just a massive growth of all sorts of sensors, electronics computing power and memory, which grows our market substantially for programming services in the automotive industry.
He also said DAIO has seen significant growth from from the IoT trend:
The second big area we are seeing is the Internet of Things, and this is a very broad bucket, if you will, of products in the market. We define it as things like wearables; smart home devices; smart office devices, including lighting; and the extension of our traditional industrial markets to, again, require more programming. We have had a number of wins in that area as well, and we think over the longer term, Internet of Things will become an increasingly large part of our business.
