Dana Telsey, CEO and Chief Research Officer of Telsey Advisory Group (TAG)
Kimberly Greenberger, Managing Director, Morgan Stanley
Dana Telsey is the CEO and Chief Research Officer of Telsey Advisory Group (TAG). Telsey Advisory Group was founded in 2006 and Telsey Consumer Fund Management LP, an asset management firm, was founded in 2016. Ms. Telsey has followed over 100 companies during her 30-plus year career. From 1994 to 2006, she worked for Bear, Stearns & Co., covering the retail sector as a Senior Managing Director. Earlier, Ms. Telsey was the Retail Analyst at C.J. Lawrence and Vice President of the Baron Asset Fund at Baron Capital. Ms. Telsey was recognized for her leadership in finance by Barron’s, on their list of the 100 Most Influential Women in U.S. Finance on their inaugural list in 2020 and again in 2021.
Kimberly Greenberger, a Managing Director in Retail Research, joined Morgan Stanley in 2010. She focuses on North American specialty apparel and department stores and has covered the apparel industry for nearly two decades. She is also a Chartered Financial Analyst. Ms. Greenberger consistently ranks among the top analysts for coverage of the retail sector in industry surveys from Institutional Investor, The Wall Street Journal, and others.
These two professional equity analysts recently reviewed the retail stock landscape, exclusively for the Wall Street Transcript, in interviews totalling 5,403 words.
Dana Telsey sees a new era of “supercharged change.”
“It’s been a time of what we call supercharged change. One of the things that happened with the pandemic, a lot of the headwinds that were being discussed over the past few years have really been minimized, and to some extent, eliminated, given the force of the pandemic. The headwinds included: Why go to a store? And now, the essential need for a physical store is greater than ever and integrates seamlessly with digital and creates socialization that consumers crave, and drives conversion…
With the hybrid work model that looks like it will be in place, at least over the next few years, it is going to lead to what will be an always-work-from-home environment. We’re almost seeing more work hours than we would have expected before, because of the reduction in commuting time.
I think the future for the near-term in office may only be two to four days per week, because what we need is that collaboration. We need that culture building. We need the experiences that you get from training in office, from meetings that basically create memories.
The other element of supercharged change is schedules. Given the fact that we can virtually communicate, we are seeing multifunctional activities and placemaking. The home being multifunctional as an office, exercise center and an entertainment center.
And take a look at people’s schedules. We’re seeing schedules where all of a sudden, medical appointments or other activities have more flexible time options, allowing for greater control of one’s schedule. Basically, if you have staff that is more satisfied, they may be more productive workers, also.
The other element of supercharged change would be personal technology. With personal technology, connectivity and speed are essential. The ability to communicate anywhere, anytime is the benefit. And now its use has only increased.
Next, I think of supercharged change being about contactless commerce — contactless payments that are replacing cash given the focus on safety. In addition, buy online, pickup in store, curbside pickup, faster delivery are all other contactless options.
And the last part of supercharged change is a return to nature. The outdoors is providing peace of mind. And, given that it takes 66 days to form new habits, increased outdoor activities may be longer lasting.”
One of the points of change that Dana Telsey reviews is the retail mall experience:
“I think right now what we’re seeing is the greatest strength happens to be open air. Outdoor centers that are grocery anchored are very compelling. And they’re able to get back to sales and/or traffic at or near 2019 levels.
Some of the best enclosed malls also have seen a resurgence in traffic with the increase in vaccinations.
Through socialization, the camaraderie, the ability to engage, they create an experience that is what makes people want to go to stores. Yes, malls are going to change. They’ve been undergoing change. But those very best malls with locations around strong demographic areas — these areas that are growing in terms of the number of people, growing in terms of household incomes — are compelling.
And whether it’s hotels, restaurants, museums, medical, health and wellness, or whether it is co-working, we’re seeing new usages, and new business models going into these malls.
I think the mall of the past isn’t the mall of the future. It may not even be called a mall. Community shopping centers are basically the new term for the future. What helps drive it is community and engagement, along with entertainment that includes the services of food, beverage and restaurants.”
Kimberly Greenberger has also seen a rebound from e-commerce to physical stores:
“…In fact, retailers like TJX (NYSE:TJX), Ross (NASDAQ:ROST), Burlington (NYSE:BURL) that really do not have an e-commerce presence or much presence online, those retailers were actually able to restore their in-store traffic levels to pre-pandemic levels earlier this year.
So not all of the non-essential stores have seen a full recovery in store traffic.
But what we are seeing is that, in general, the retailers have recovered back to 2019 levels of revenue, as a result of either a combination of restored store traffic, as is the case for TJX, Ross and Burlington and their U.S. operations, or the combination of a much higher e-commerce business and the store business that is still below 2019 levels.
But on balance, their revenue has recovered to pre-pandemic levels. And I think they’re sitting in very good shape today compared to where they were, let’s say, a year ago.”
The Morgan Stanley Managing Director Kimberly Greenberger sees further improvement for these retailers:
“…In addition, Ross and TJX and Burlington, the retailers who’ve seen the fastest rebound in in-store traffic, they responded very, very quickly to changing buying behavior among consumers.
So consumers, certainly, were not very interested late last year or early this year in purchasing work apparel or suits, or in many cases, special occasion dresses. They were interested in being comfortable, because many of them were working from home.
If they were working out of the home, they really needed to dress very comfortably for the job. And so they adjusted the inventory on hand for those changing preferences.
They also, in many cases, enhanced the offering of home-related merchandise in their stores. Most of us were spending a lot more time at home over the last year and a half than we had previously and we got tired of our interior decoration.
We wanted a bit of change, or we wanted more comfortable chairs or more comfortable desks to work from, or just a few more conveniences at home. And so consumers were buying products to enhance their quality of life at home, more so over the last year than we had seen previously.”
Get the complete picture from these two highly experienced equity analysts by reading both interviews in their entirety, only in the current Retail Report from the Wall Street Transcript.
Regina Chi, Portfolio Manager, AGF Investments
Regina Chi, CFA, is Vice-President and Portfolio Manager at AGF Investments Inc., with lead responsibility for the AGF Emerging Markets strategies. She has an investment philosophy consistent with AGF’s Global Equity Team and looks for quality companies that have long-term sustainable competitive advantages at attractive valuations.
Ms. Chi brings more than 25 years of international equity experience to this role. She was most recently a partner at a boutique U.S. investment firm, where she served as portfolio manager for the Emerging Markets and International Value disciplines.
Regina Chi is a CFA charterholder. She received her Bachelor of Arts in economics and philosophy from Columbia University.
In this 2,425 word interview, exclusively found at the Wall Street Transcript, Regina Chi details her investing philosophy that leads to undiscovered high return stocks in developing markets.
“AGF focuses on investment management services and offers a broad range of investment strategies across the asset class spectrum. I’m on the global fundamental team, and we manage active public equity strategies from global to emerging markets, as well as single countries such as the U.S. I have over 25 years of global equity experience covering developed and emerging countries.
I am the lead portfolio manager of the AGF Emerging Markets Fund. Out of all the asset classes I have managed, I am most passionate about emerging markets — EM — where there is faster GDP growth and an increasing middle-income class dominated by Asia.
EM has the greatest scope for enormous change, predominantly due to digitalization where there is leapfrogging of legacy assets and businesses into the digital world.
The EM asset class is also exciting because it has evolved the most — from being dominated by energy and materials to technology and consumer discretionary…
We actively manage an all-cap, style-neutral global emerging market product.
We maintain a core approach, and we use a combination of quantitative and qualitative analysis for stock selection as well as for country selection. Our key competitive advantage as an EM portfolio manager is that we have dual sources of excess returns.
One is our bottom-up stock-picking focus on quality and strict valuation methodologies, as well as our country allocation framework. We are very focused on owning high-quality companies that consistently earn a rate of return above their cost of capital and have attractive valuations and a fundamental catalyst.
I took over the Fund on January 1, 2018, and overall, the performance has been very solid.
The fund is a core strategy with growth and value stocks, and benchmark agnostic and style neutral.
Our turnover is quite low, less than 40% because we have a long-term time horizon.
From a regional perspective, we are overweight Eastern Europe and Latin America and underweight Asia.
As of the second quarter of this year, we maintain a slight underweight to China and Hong Kong.
We are overweight India, South Africa and Brazil. Our sector weightings are a byproduct of our bottom-up stock selection. So rather we focus on country allocation and bottom-up stock picking.”
Regina Chi has taken a somewhat contrarian view on the India stock market:
“India has had one of the worst COVID surges over the past couple of months, and it really has knocked growth prospects. However, what’s clear is that the impact to the economy from the second wave was considerably smaller compared to the first wave, which was the summer of 2020.
What’s different this time is that the Indian firms have been able to learn to live with the virus.
With the vaccination supplies improving, the economic outlook is actually getting better. The central bank remains very accommodative. What we like about India is that you have over 1.3 billion people, where growth is among the highest in the world, besides China.
We can find a plethora of long-term, high-quality companies there.
For example, we like Varun Beverages (NSE:VBL) which is the largest PepsiCo (NASDAQ:PEP) bottler in India. This company has been able to show an exceptional track record in tripling their business over five years as they have been able to acquire more territories within India and diversify outside of carbonated drinks into juices and coffee.
We expect Varun Beverages to continue to have strong topline growth and margin expansion.”
One of Regina Chi’s current picks has an exposure both to the China economy and the green technology:
“Most of my high-conviction names are not listed in the United States. This is why being an EM-specific manager gives us a differentiated advantage, because we can find the stocks that are not available to U.S. investors.
For example, one of my highest-conviction names is NARI Tech (SHA:600406), which is an A-share listed Chinese company. China has gone through their own investment cycle and the current U.S.-China trade war will persist. We are focused on domestic-oriented companies like NARI Tech.
Given China’s push to being carbon neutral by 2060, there is a greater need for electrification of the grid to onboard renewable energy sources, and NARI Tech is one of the biggest beneficiaries. They are a dominant manufacturer of secondary equipment for the state grid, and more of its software and related hardware products will be needed to manage the stability of the power grid as they onboard more renewable energy sources like wind and solar.”
Regina Chi also finds value in the turmoil of South Africa:
“Yes, one of the tailwinds we are seeing is the higher commodity prices that benefit some emerging countries, especially the commodity-rich ones.
These include South Africa, Brazil, and the Mideast where there are a lot of mining and material companies, as well as energy stocks.
We remain positive on these sectors, particularly in South Africa where we are holders of Anglo American (OTCMKTS:NGLOY). They are a diversified miner with exposure to precious metals, base metals, iron ore and diamonds.
South Africa has been interesting this year as the country’s stock market has performed well amidst a backdrop of rising global bond yields, resurgence of the coronavirus and low vaccination rates.
I credit this to the fact that the higher commodity prices allowed their external balances to be very strong. This time versus the taper tantrum in 2013, South Africa has current account surplus, and the South African rand actually appreciated as bond yields rose.”
Get the complete picture by reading the entire 2,425 word interview with Regina Chi of AGF Investments, exclusively in the Wall Street Transcript.
Regina Chi, CFA, Vice-President & Portfolio Manager
AGF Investments Inc.
Paul Lambert, Portfolio Manager, Tocqueville Asset Management
Paul Lambert, CFA, is a Portfolio Manager at Tocqueville Asset Management L.P. Mr. Lambert is the Portfolio Manager of the Tocqueville Opportunity Fund and for several private wealth clients of the firm. He also provides research support for the U.S. Multi Cap Equity Strategy at Tocqueville Asset Management.
Prior to joining Tocqueville in 2010, Mr. Lambert served as a securities analyst at Key Bank where he worked within their Asset Recovery Group helping middle-market companies to restructure their debt. Mr. Lambert received his A.A. from Dean College in 2005 and a B.S. from Babson College in 2007.
In the extensive and wide ranging 2,144 word interview, exclusively in the Wall Street Transcript, Paul Lambert of the Tocqueville Opportunity Fund details his current and future stock buying plans.
“The Tocqueville Opportunity Fund (MUTF:TOPPX) focuses on small- and medium-sized U.S. companies that exhibit clearly defined sustainable competitive advantages tied to secular growth opportunities.
These companies typically offer a disruptive technology that makes their customers more productive and efficient or have a product or service that is extremely difficult to replicate. Our sector ratings are, as of today, 60% in technology, 17% in health care, 12% in industrials and 5% in consumer discretionary.
I have been working on the fund for about 10 years now and took over as lead Portfolio Manager within the last three years.”
The Tocqueville Opportunity Fund portfolio is maintaining it’s large tech stock positions:
“The revenue model of the companies that assist in digital transformation are recurring-revenue, subscription-based businesses. They are getting very predictable revenues with low churn rates and high gross margins — typically 80%-plus — which allows for rapid reinvestment of capital for new product development and cross-sell of existing products.
We are very bullish on technology as we sit here today and believe we are in the early innings of the digital transformation theme.”
This leads to the Tocqueville Opportunity Fund (MUTF:TOPPX) top picks:
“Our biggest position remains Shopify (NYSE:SHOP), which was our biggest position pre-pandemic. And it is our biggest position post-pandemic.
We could not be more bullish about the company’s prospects. Early on, when all the lockdown restrictions went into place as a result of the pandemic, brick-and-mortar retailers that were without online capabilities were basically out of business.
As a result, they were turning to companies like Shopify to, at the very least, get an online store and take payments. Shopify saw its merchant count double in 2020 from about a million merchants to roughly 2 million.
Part of the allure and genius of Shopify is its open architecture platform, which enables a robust developer network and more choices for merchants. On the sales side, Shopify has partnered with some of the biggest retailers and social media companies including Facebook/Instagram (NASDAQ:FB), Pinterest (NYSE:PINS), Walmart (NYSE:WMT) and Google (NASDAQ:GOOG).
This makes it easier for Shopify merchants to reach more end consumers through an integrated offering that enables online consumers to transact on a Shopify store seamlessly. We believe this is a very important development and only deepens Shopify’s moat versus other competitors.
Despite these positive developments, Shopify has been very aggressive reinvesting capital in areas like logistics, Shopify Capital to help their merchants grow faster, and they are investing in marketing.
They are doing all these things to help their end merchant transact more through the platform. And the more commerce that goes through the Shopify platform, the more Shopify and its shareholders benefit because they get a requisite take rate.
The secular growth theme of ecommerce is accelerating. Today, approximately 20% of worldwide retail sales happens online and we expect that to increase considerably as consumers have gotten more comfortable transacting online.”
The recurring revenue model is found in another top holding of the Tocqueville Opportunity Fund (MUTF:TOPPX):
“ServiceNow (NYSE:NOW) is our second-largest position. It is one of the preeminent enterprise software providers as it functions as a platform of platforms that sits on top of an enterprise tech stack.
It enables digital workflows to be done faster and quicker through its low code products. NOW’s software offering can sit on top of all the legacy software applications and can integrate with them. As businesses embark on their digital transformation, enterprises are using the NOW platform to facilitate digital workflows and expedite time-intensive tasks.
The company has shown impressive growth, compounding revenues at 35% for the last five years.
They are projected to do about $5.5 billion in revenues in 2021 with a 30% free cash flow margin, which is one of the best combinations of growth and profitability in software. We continue to be very bullish on the company as its opportunity set continues to grow.
Management estimates its total addressable market at roughly 160 billion. This includes its products in areas such as IT service management, IT operations management, customer service management, and human resources.
Eighty-five percent of the Fortune 500 are already customers and NOW has a retention rate of over 95%, so clearly large enterprises are seeing the positive impacts of the NOW platform. We believe the company is in the very early innings of upselling and cross-selling its enterprise install base, which could expand FCF margins even further as cross-selling is the most capital efficient way to grow revenues.”
Even in other sectors the Tocqueville Opportunity Fund (MUTF:TOPPX) likes to keep focus on the recurring revenue model:
“Within industrials we have been selective. One of the sectors we continue to be bullish on is housing. We think the steady migration out of urban areas will continue and that has put upward pressure on housing prices.
Homeowners have more home equity and are reinvesting back into their homes as work from home is likely a trend that will persist for some time. The way we have approached the sector is somewhat like the technology sector insofar as targeting companies with recurring or maintenance revenues.
Pool Corp (NASDAQ:POOL) and SiteOne Landscape (NYSE:SITE) are examples.
Both have large maintenance components to their revenue base, north of 50%. Pool Corp is a name we have owned for a long time. They are a wholesale distributor of swimming pool supplies, equipment and related leisure products.
Sixty percent of their revenue base is maintenance; pools require constant attention — from chlorine to keep the right pH levels to pumps to keep the water fresh and circulating.
These types of expenditures cannot be delayed or ignored, which has manifested in very sustainable revenue growth and high ROIC. We remain positive on the company as homeowners have been electing to construct pools, which requires these maintenance purchases.
SiteOne Landscape Supply is one the largest distributors of commercial and residential landscape supplies…”
Get the complete detail on the 2021 top picks from the Tocqueville Opportunity Fund (MUTF:TOPPX) by reading the entire
Paul Lambert, CFA, Portfolio Manager
Tocqueville Asset Management L.P.
Richard X. Bove, Chief Financial Strategist, Odeon Capital
Kevin O’Connor, CEO, Dime Community Bank (NASDAQ:DCOM)
Richard Xavier Bove is Chief Financial Strategist for Odeon Capital Group LLC. Mr. Bove began his career on Wall Street as a retail salesperson at legacy Eastman Dillon Union Securities in late 1965.
He joined Wertheim & Co. in 1971 as an analyst covering the building and banking industries. Later, Mr. Bove became the Director of Research at C.J. Lawrence and Raymond James. In the mid-1980s, he returned to the analytical profession as a banking and financial analyst serving at Raymond James, Dean Witter Reynolds, Lehman Brothers and Ladenburg Thalmann, among other firms in his 56 years in the industry.
In 2013, Mr. Bove joined Rafferty Capital Markets. In 2018, he was selected to be the firm’s Chief Financial Strategist, after which time he was named to the role for Odeon.
Mr. Bove has been interviewed on television over 1,600 times and his print interviews now number over 10,000. His views have been reported on in Europe, Asia and Latin America. He holds a bachelor’s degree from Columbia College where he graduated in 1962. He has been married 55 years and has seven children and 19 grandchildren.
In his 6,505 word interview, exclusively in the Wall Street Transcript, Richard Bove details his current take on the US banking sector.
Kevin O’Connor has been the Chief Executive Officer of New York’s Dime Community Bank since 2020.
Earlier, he was CEO of BNB Bank, and had senior roles at North Fork Bank. Mr. O’Connor has been on the boards of Pursuit, the New York State Bankers Association, the Hauppauge Industrial Association, the Long Island Association, as well as the Brooklyn Chamber of Commerce.
He is also a member of the Board of Trustees of Suffolk County Community College. He received accounting degrees from Suffolk Community College and Adelphi University.
In his 3,111 word interview, exclusively in the Wall Street Transcript, Mr. O’Connor details his vision for increasing shareholder wealth for investors in his company, Dime Community Bank.
Kevin O’Connor has managed to put together a community bank merger in the midst of the COVID 19 global pandemic:
“Dime Community Bank is the result of a recent merger that we announced a year ago and closed on February 1, 2021, between the former BNB Bank and Dime Community Bank. It was a merger of equals.
I had been the CEO and President of BNB Bank and we had been operating over 100 years. Dime was about 150 years old.
We created the headquarters in Hauppauge for the new Dime, strategically positioned with about $13 billion of assets today and $1 billion in capital. And I’ll just say legacy BNB had a deep history in C&I — commercial and industrial — commercial real estate, and small business lending, while legacy Dime had been a leading player in New York multifamily lending.
We had a strong market share and brand awareness on Long Island. Dime’s footprint was primarily in the boroughs, Brooklyn, Queens, with some presence in Manhattan.
We have now created a strong community bank, operating truly from Montauk to Manhattan with specialty in business banking, commercial real estate and multifamily lending.
We have a unique footprint in our marketplace.
If you take the geographical footprint of Long Island, we would be the 14th largest state in the country including Nassau, Suffolk, Brooklyn and Queens.”
Kevin O’Connor takes his role as Dime Community Bank leader quite seriously:
“I think, for our employees, when it was very dark and health care workers and frontline workers were saving lives, it gave us a chance to actually make a difference.
In fact, one of the accounting firms that had clients with many of the larger banks got frustrated they were not getting answers, and came to us. And we probably got loans for 35 of their customers. And one of their customers made trophies, and they actually made a gift for us that we have displayed in our lobby here to thank us for helping all of these customers get these PPP loans when other banks failed.
I was at an event the other day where there was a not-for-profit that had been struggling to get their PPP loan done with larger banks — they were just overwhelmed. And we were able to get that done, and we were recognized for this.
I think the community banks and our bank, in particular, really stepped up. Our employees live in the communities where they work, in many cases, and they knew the customers that were struggling. And we’re there to help reach out and help them navigate what was going on.
Now, we still sit here today. People’s financial statements are still somewhat affected by what happened. And we’re making sure that as we look at their loans and renew their loans, we’re understanding the impacts of the pandemic and how they may have affected your financials.
If the fundamentals of your business are still strong, we’re going to be lending to you going forward.”
This focus on servicing the community has Dime Community Bank at a disadvantage, according to Richard Bove, a long term veteran of the US banking sector:
“Let me dispute the Jeffersonian argument which suggests that small banks and personal service creates the ideal banking system. My view is that there is no place for small banks in the United States because they cannot provide the consumer with the best financial deal.
In other words, the business model simply is no good.
When I started following banks, there were 14,500 of them. Today, there are about 4,900 of them. You have to ask yourself: Did someone with a machine gun come from Bank of America (NYSE:BAC) and enter into Joe Jones’ bank and say, “Close down or we’re going to blow this place up?” No. Joe Jones’s bank went out of business because it had a business model that was no good.
It was taking in money at variable cost and putting it out at a fixed cost. Next, small banks have limited product offerings. Third, small banks are relatively high cost in nature. They lack technology, scale, and are too labor intensive. Fourth, they do not have the money to buy the technology that would allow them to reduce their costs. Moreover, if they bought the technology, they don’t have enough business validate making the expenditure.
JPMorgan Chase (NYSE:JPM) is America’s largest bank. It is in this position because it can offer its customers — among which I am one — more products with greater utility faster and at lower price.
They offer the consumer a better deal and for that reason they are growing their market share. Bank of America is the nation’s second-largest bank, they have attracted tens of thousands of clients who do all of their banking on mechanical devices. Small banks cannot match that.
So the small banks continue to fold up and go away. An estimated 10,000 of them have gone in my career. You cannot get rid of 10,000 more, because there’s only 4,900 left. Unfortunately, they are done.”
Get the full picture on the US banking sector from the new Wall Street Transcript Banks Report, exclusively at TWST.com.
Fifth Third Bancorp (NASDAQ:FITB) is First with Two Banking Analysts
Fifth Third Bancorp (NASDAQ:FITB), based in Cincinnati, Ohio has $205 billion in assets and operates 1,096 full-service Banking Centers, and 2,369 Fifth Third branded ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia, North Carolina and South Carolina.
Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Wealth & Asset Management. Fifth Third is among the largest money managers in the Midwest with $483 billion in assets under management.
In this issue of the Wall Street Transcript, two top banking analysts picked FITB as one of their banking winners for 2021 and 2022 stock appreciation.
Peter Winter is a Managing Director at Wedbush Securities. He covers regional and Texas banks. He has 19 years of sell-side experience with CIBC World Markets, BMO Capital Markets and most recently, Sterne Agee CRT.
He was ranked first in earning estimate accuracy in 2019, 2018 and 2017 and third in 2016 and 2015 by Starmine. He is a graduate of Syracuse University.
In his 2,007 word interview, exclusively in this week’s issue of the Wall Street Transcript, Peter Winter bangs the table for FITB investors:
“Fifth Third Bancorp (NASDAQ:FITB) is a well-run company. It’s another Ohio-based bank. They’ve got an expense initiative in place. They’ve done an incredible job to hedge the interest rate environment for a long period of time with rates being low. That’s helped support the net interest margin.
They’ve been very disciplined on waiting for higher rates to invest all its excess liquidity into either loan growth or security. So there’s a lot of dry powder sitting on the balance sheet — $30 billion in excess liquidity, earning 15 basis points. That would be a real earnings leverage when they put that money to work.
They’ve got capital ratios that are above their targeted levels, so they’ll be aggressive with buying back stock. They’re going to increase the dividend in the third quarter. It’s a great story with the way that they’ve positioned the balance sheet, capital, and they’ve got dry powder for earnings growth along with an expense initiative.”
Peter Winter has been a long term advocate of the stock, suggesting investors put their money to work there in this 2019 2,406 word interview, where he stated that:
“They have some earnings levers that other banks don’t have to generate above average EPS growth. There will be costs savings from the integration of its pending acquisition of MB Financial (NASDAQ:MBFI), expected to close in the first quarter. …they de-risked the loan portfolio and exited $5 billion in loans, setting the stage for stronger loan growth in 2019.
They provided 2019 average loan guidance of 3.5% versus 1.2% in 2018. They have levers on the expense side, excluding the acquisition, where they are projecting 1% or less expense growth in 2019.”
Christopher Marinac is Director of Research at Janney Montgomery Scott. Mr. Marinac oversees the firm’s Equity Research team, which covers more than 225 companies within the financials, health care, infrastructure, and real estate sectors. Mr. Marinac has more than 27 years of financial services and research analysis experience.
Prior to joining Janney in 2019, he was Co-Founder and Director of Research at FIG Partners LLC, a premier investment banking and research firm specializing in community banks. At FIG, he established and managed an award-winning Equity Research team that covered more than 150 banks, thrifts, and REITs.
Earlier in his career, he spent six years as Managing Director at SunTrust Robinson Humphrey and five years as a Research Analyst at Wachovia Corporation (formerly Interstate/Johnson Lane Inc.).
He has served as a financial expert and resource to global and national media outlets including American Banker, Bloomberg, CNBC, Financial Times, FOX Business, and The Wall Street Journal. Mr. Marinac graduated from Kent State University with a Bachelor of Science in Accounting and Finance.
He is actively involved with Atlanta Ronald McDonald House Charities, where he is serving his fourth three-year term as a board member.
In his 4,851 word interview in this issue of the Wall Street Transcript, Chris Marinac sees tons of investor upside in FITB:
“From the large-cap perspective, a company that I think is not fully appreciated is Fifth Third (NASDAQ:FITB). We have a “buy” rating and feel that Fifth Third has a lot of untapped earnings, primarily because they can put their excess cash to work in higher loans and higher-earning assets. The company is going to be very thoughtful about being a bigger lender in both the consumer and commercial channels. They will most likely do more consumers sooner.
There’s an opportunity for Fifth Third stock to continue to trade higher.
They are going to be pretty active in share buybacks. They told us that, but I think that’ll play out for them as well. So the stock has certainly done well in the big picture. There is more upside and a bigger valuation still ahead for the company. Also, just like I mentioned in that whole group, there is an opportunity for the Fifth Third to have a higher earnings estimate, which therefore helps the stock price to go higher from here.
TWST: When you mentioned untapped earnings, what do you mean exactly there?
Mr. Marinac: That there is excess cash. Cash and securities are a large part of the balance sheet right now. We think that can be higher or can be utilized in the higher earnings. That is the main point. The other point that rings true is that, in the case of Fifth Third, the share count was going to come down, so that the share repurchases are going to cause a lower share count, which therefore means higher EPS numbers.”
These strong affirmations of Fifth Third Bancorp (NASDAQ:FITB) are available exclusively in the Banks Report from the Wall Street Transcript.
Previous reports advocating Fifth Third Bancorp (NASDAQ:FITB) investments are available including this 3,768 word interview from Portfolio Manager Barry James: “Fifth Third…is a national bank, but its focus is more in the Midwest, to be honest. That seems to be one of the areas that is coming back in pretty good order.
It is strong financially and has the ability to take advantage of the rising interest rates to boost the bottom line. We don’t like to see too much heavy overhead in the business so that they can take pretty swift advantage of the improving economy that we see.”
Matthew Lilling, Portfolio Manager & Managing Director, ClearBridge Investments
Matthew Lilling, CFA, is a Portfolio Manager and Managing Director at ClearBridge Investments.
He co-manages the Mid Cap, Mid Cap Growth, and SMID Cap Growth portfolios.
He began at ClearBridge in 2010 and has 15 years of investment industry experience. Earlier, he was a Private Equity and M&A Advisory Associate at MTS Health Partners and an Investment Banking Analyst at Lehman Brothers.
He received an MBA from Columbia Business School and holds a B.A. degree in economics from Emory University.
In this 2,734 word interview, exclusively at the Wall Street Transcript, Mr. Lilling details some of his top picks and his underlying research for investors.
“One company we hold is Chewy (NYSE:CHWY).
Chewy is a company we’ve been invested in since the IPO. It sells pet foods, products and prescription drugs online to pet owners. It can deliver them in one to two days. It is a digitally advantaged company that has a business model that benefited from the pandemic, as customers shifted purchases online.
It has also benefited from the increasing number of pet owners. This caused revenue to accelerate significantly in the summer of 2020 and we saw Chewy’s stock price quadruple from pre-pandemic levels. Chewy gave back some of those gains in early 2021 as growth stocks moved out of favor.
But when looking closely at the fundamentals, there’s still a lot to like. First, the majority of their products are consumables, so the customers they gained during the pandemic will keep coming back. And secondly, the new customers typically utilize more of the products that they sell.
So Chewy has this large recurring customer base and they can grow it by offering new services, like prescription drugs and higher-margin private-label products.
It looks like Chewy is now returning to pre-pandemic growth levels, but just off of a higher base, along with better customer economics and profits, and that all makes a strong argument for a sustained higher multiple.
Do we know if those types of companies are going to be in favor over the next six months? No. But we do think that Chewy can be a much bigger and better and more valuable company over the next three to five years.
Matthew Lilling has another top pick for investors in 2021:
“I’ll mention a company that has benefited more in the last six months.
Regal Beloit (NYSE:RBC) is a company that has benefited from the cyclical recovery of the economy, but one that we still feel has a lot of opportunities, mainly from internal optimization efforts under a new management team.
Regal sells electric motors into commercial and residential HVAC companies as well as those that make pool heaters and industrial power transmission equipment. And under the mismanagement of the prior CEO, this was a decade-long value trap.
It had low multiples, but there was never any reason for that to change.
When we started researching it last summer, we saw a company with pretty high market share, rational competition, and the ability to pass along price increases to cover commodity inflation. Those are pretty sound fundamentals.
But it also had returns on invested capital from only 4% to 8% over the last decade. When new management arrived in 2019, they laid out long-term targets to improve margins, organic growth and returns using a plan called the 80/20 plan.
They wanted to do simple things like decentralize profit and loss, or P&L, through regional and plant managers, rationalize its manufacturing footprint, get rid of unprofitable products, ask unprofitable customers for better pricing, and improve cash collections.
The prior management team was focused on projects that didn’t have payback to them. And the new management team is doing things like having the research and development team talk with the sales team to make sure that capital is being allocated correctly.
These aren’t complicated things to fix. And there’s a company-specific opportunity to improve margins, returns and growth. And so, even though this is a company that’s done really well over the last six months, there’s still a lot of room to move returns higher as the company executes on its internal strategy.
…especially in Regal’s electric motor product sets, where improvements in energy efficiency can have large impacts on improving environmental outcomes.
So as Regal invests in new products, the impact of residential and commercial HVAC systems on the environment is reduced.
I would also add that it’s important to understand what their customers are looking for, and what they need, and what their goals are for their products that they’re releasing to the end markets in order to adequately match the R&D spending and allocation to what the customer actually needs.
And that way, they’re being more efficient with their spend.”
A used car company is also at the top of Matthew Lilling’s stock pick list:
“Going back to another digitally advantaged company, Carvana (NYSE:CVNA) is an example of a company that benefited massively from the pandemic.
The stock, similar to Chewy, worked well throughout the summer of 2020, and has been range-bound since. When looking forward here, though, they still have a huge market to disrupt.
Carvana sells used cars online. This is another company that we’ve been invested in since the IPO, and is a good example of a company with a huge addressable market.
It has less than 1% market share, even after they’ve grown greater than 100% for three of the last four years. Customers were getting more comfortable buying big ticket items online, like used cars, prior to the pandemic and the pandemic accelerated that even further.
To be clear, this isn’t a pull forward in demand that’s going to create tough comparisons. It’s more of an acceleration in penetration into a massive growth market.
People are not going to go back to doing things the old ways, once they’ve seen how much of a better process this is.
In addition to continuing to penetrate the used car market online, Carvana has adjacent opportunities that they’re not currently taking advantage of. There may be opportunities to sell maintenance contracts or insurance to car buyers in the checkout process, as well as a call option on how new cars are eventually distributed in the future.
Carvana also has sustainable competitive advantages from building out reconditioning centers and infrastructure to distribute these vehicles. These are actions that are not easily duplicated by others.
My co-portfolio manager, Brian Angerame, has been an investor in the used car space for over 15 years, and provided a lot of the analytical power behind this one.”
Get all the top picks from Matthew Lilling by reading the complete 2,734 word interview, exclusively at the Wall Street Transcript.
Matthew Lilling, CFA, Portfolio Manager & Managing Director
ClearBridge Investments
email: info@clearbridge.com
Raymond Saleeby, President, Saleeby & Associates
Raymond Saleeby is President of Saleeby & Associates, Inc. He has over 38 years of investment experience. He formed Saleeby & Associates in April 2001.
In this 3,228 word interview, exclusively in the Wall Street Transcript, Raymond Saleeby details his investing philosophy and has many top picks to recommend to investors:
“There is always a good time to be contrarian. It’s a question of how many stocks are available to you. But it’s obvious with stocks hitting new highs, it’s harder to find contrarian stocks. But like anything else, there’s many opportunities, not just in this market but overseas as well…
I’ve followed many, many over a period of 38 years that I’ve been managing money. And I used to be, in the 1980s and 1990s, heavily involved in the water business. I thought that was the best business in the world for 30 years.
And I still think it’s a very good business, anything tied to it, whether it be water utilities or water service companies that service different pumps and the like. It’s just a great business. And I made a lot of money, but it was discovered in the last 10 years with the price/earnings ratios and the multiples increasing dramatically. So I’ve shied away from it.
I think the next best business that I found in the last five years — it’s a phenomenal business — is the flavor and fragrance business. It’s termed different names in different areas. But it’s a great business.
The same companies have been around, for the most part, the last 100 years, and the barriers to entry are enormous. It’s a sticky relationship. And it’s a nice business which you want to buy today in an environment where we’re going to have higher inflation.
And as you see higher inflation, your profit margins start to squeeze somewhat with higher material costs, higher labor costs. But you want to buy businesses where you can increase your prices where the customer is not going to jump ship just because you increase your prices to go to another competitor. And that’s why I say it’s a very good business — being the sticky business…
…it absolutely also includes beverages, drinks, foods, better ways to take sugar out of things — it’s basically healthy. It’s a good business during bad times and good times and it’s a business that’s not necessarily mostly American.
For the most part, it’s more European. It’s a business that offers phenomenal future opportunities with developments of new foods.
They’re healthier for you and more natural. Natural ingredients is a buzzword today in any business.”
Raymond Saleeby has some specific names in this sector:
“A business that has done very well that is heavily involved with millennials is the spice business. And you’re absolutely right.
They love spices.
McCormick (NYSE:MKC) has done very well over the years. It’s a company I bought many years ago.
And I’m not recommending it necessarily today, but they have red hot sauces, and those things are booming right now.
The millennials like that. And you’re absolutely right. Many people are looking for different things for food to add flavor that are not necessarily the traditional ones of salt, fat and sugar.”
Another sector that is catching Raymond Saleeby’s interest is real estate:
“Housing — I wrote a special report about it in the last newsletter and did an in-depth analysis. Basically, there’s a shortage of housing right now, and you have several factors affecting that.
One is older people who typically supply a lot of homes to the market for the younger people and next generation — they are staying in their homes longer, remodeling them.
They were afraid of COVID, because it felt like it was a death sentence to go to a nursing home last year. So that’s changing the supply dynamics.
Secondly, you’re finding that costs of lumber are increasing with other raw materials, dramatically in the last year, up 300% to 400% off the lows.
And you can’t find enough labor because a lot of people quit the profession since 2008 when you had the last housing bubble.
But right now, you have more housing affordability from an interest rate perspective than you’ve ever had before. And you also have other institutions like private equity out there and publicly traded corporations that are competing against you to buy a $300,000 or $400,000 house, which makes sense to do that because you can get the rental income to offset it and some growth behind the value of the house itself.
It makes a nice return. So they’re competing.
It’s very difficult for the average person to buy a house today in a hot market, especially because these are cash buyers. You’re seeing many, many overbids right now.
Thirdly, what’s changed housing more than anything else in the last 10 years, I think, is people buying it without seeing the house. And you’ve got such great graphics with Zillow (NASDAQ:ZG) and Redfin (NASDAQ:RDFN) and the like, that people can see what a house looks like.
You can see it in 3D as well. You can find so much more information that before was only for the real estate broker. It’s the same thing happening in our business, the financial business.
The consumer and the client are beginning to be so much more informed than ever been before. It’s mind-boggling how much information they can receive today. And they can receive it accurately and fast.”
Raymond Saleeby has a specific recommendation for investors:
“I think people need to take the Warren Buffett approach. If I were to tell people one thing it is go back and read everything you can about Warren Buffett. He may be the greatest investor of all time.
He shares some of his secrets.
And I followed him for my whole career and I’ve learned an incredible amount from him. His investment advice has been spot on, and he’s a genius. And we’re very fortunate to have him in our lives right now.”
To get all of Raymond Saleeby’s top picks, read the entire 3,228 word interview, exclusively in the Wall Street Transcript.
Raymond Saleeby, President, Saleeby & Associates, Inc.
(314) 997-7486
email: rsaleeby@cutterco.com
Eric J. Marshall, President and Co-Chief Investment Officer, Hodges Capital
Eric J. Marshall, CFA, currently serves as President, Co-Chief Investment Officer, and Director of Research for Hodges Capital Management.
He joined the firm in 1997 and also serves on the board of directors of the firm’s parent company, Hodges Capital Holdings. Mr. Marshall holds a B.A. in Finance from West Texas A&M University.
In this 2,738 word interview, exclusively in the Wall Street Transcript, Eric Marshall explains the investing philosophy of Hodges Capital for investors.
“…We’re very much bottom up; we focus entirely on what’s going on with the fundamental earnings picture of the companies that we follow. And we do pay attention to macro factors, such as what’s going on with interest rates in the Fed because they affect how risk is priced out in the market.
But we don’t spend a lot of time trying to forecast the macro environment.
What we’re really trying to forecast is what does the fundamental backdrop look like for each of the individual companies in our portfolio over the next 12 to 18 months, and then make the best risk/reward decisions in the portfolio based on that.
…When we look at multiples right now, relative to where interest rates are, we think that given the current backdrop for inflation rearing its head, there’s not much room for multiples to expand.
Also, higher corporate tax rates and higher capital gains taxes potentially could also be headwinds for multiple expansion.
So really, what this means as investors, is we want to be focused on businesses that have pricing power and have the ability to leverage their cost structure in an inflationary environment.”
This leads Eric Marshall of Hodges Capital to some interesting stock picks:
“One area that we particularly like in the material space is companies that make things like cement.
One of the stocks that we own in three of our four funds is a company called Eagle Materials (NYSE:EXP), and they are one of the largest producers of cement in North America.
They also are a leading provider of gypsum wallboard. But the interesting thing about cement is we haven’t really added any meaningful cement capacity in the United States over the last 20 years.”
Eric Marshall also likes a well known retail name:
“One that’s definitely kind of a turnaround but you don’t hear a whole lot of people talking about is Nordstrom (NYSE:JWN).
And that’s one that’s very unloved, and kind of hated. But we see that there are some valuable assets there. In a post-pandemic world, we still think over the next 12 months consumers are going to get back out and update their wardrobe. Nordstrom is kind of a higher-end luxury retailer, where you have aspirational customers realizing value.
And that’s one that looks very inexpensive to us.
It’s been flying underneath the radar and it is in a turnaround situation, but one that we think has a pretty good risk/reward. We believe that they have the balance sheet to make it through.”
The current market has created some investing dilemmas for Eric Marshall of Hodges Capital:
“…There’s certainly been far more upside surprises over the last several quarters — almost to an extreme.
At one point, we looked at our coverage universe and about 85% of the companies that our team of analysts follow saw earnings come in better than expected in the most recent first quarter. And I think in a lot of cases, management teams have given very conservative guidance because they lack visibility and because of the timing of the economy reopening.
Also, they lack clarity to what’s going to happen with federal policies that are currently underway from tax reform to other regulatory items.
There’s just a lot of uncertainty out there. And that set conservative expectations. So I think that’s why you saw so many companies beat analysts’ expectations over the last couple quarters.
In many cases, the stocks didn’t even go up when the companies beat expectations because it was such a widespread phenomenon that occurred.
Where if you didn’t beat expectations that was almost like missing expectations, and if you just met expectations, something must be wrong. And that’s something that will probably continue for the next couple quarters.
I’ve talked to a lot of management teams.
Our investment team this past year made over 3,200 contacts across over 1,000 different publicly traded companies. We’re constantly talking to management and we do get the sense that the guidance that’s made public on these quarterly conference calls is very conservative.
In many cases, it’s much easier to paint a picture for a company to exceed expectations than to miss expectations.
And that’s kind of become the new phenomenon on Wall Street.”
Eric Marshall has identified a fintech hidden inside a very old Wall Street name:
“We’re looking for companies that can actually prevail under difficult conditions like that and then actually emerge, maybe in a little bit better competitive situation than they had before the pandemic.
We also like NCR (NYSE:NCR), a company that makes point-of-sale equipment like cash registers, and they also make ATMs. But we also see a real recovery in things like self-checkout at retail, and we think that’s something that’s here to stay. As companies have learned to change their payment methods, people are paying using their phones.
A lot of that is automated through NCR’s hospitality business. And this is one that we think is actually poised to do really well on the backside of the pandemic as things continue to reopen.
So it’s kind of a derivative of the reopening. We think, really, it’s a fintech company hidden inside of an old company that used to make cash registers and ATM machines and things like that.
Now they’ve evolved from an appliance manufacturer to more of a software-as-a-service company. Because of the software component of their business and reoccurring revenue associated with that, we think they’re going to get a much higher multiple over the next year or two.”
To get all the top picks from Eric Marshall of Hodges Capital, read the entire 2,738 word interview, exclusively in the Wall Street Transcript.
Andrew Hokenson, Senior Equity Analyst, Pier Capital
Andrew Hokenson is a senior equity analyst at Pier Capital. His responsibilities include conducting equity research for the firm’s small- and smid-cap growth strategies. Earlier, he worked at Benefit Providers and Fordham Financial.
In this 3,626 word interview, found exclusively in the Wall Street Transcript, Andrew Hokenson of Pier Capital reveals his current top picks and his methodology for selecting them for his portfolio.
“…We are a bottom-up, fundamental-focused, long-only small-cap growth fund. We manage about $1 billion worth of institutional assets. We’ve been employing the same process since inception for about 35 years.
We have about 100 names in our fund, 75 to 100 names. We can be actively overweight in certain sectors.
We don’t do any closet indexing.
And our overweight can be a natural result of our bottom-up approach. Generally speaking, we have a three-legged stool as far as industries that we tend to have more focus on: tech, consumer and health care. And we don’t invest in REITs.”
Pier Capital equity analyst Andrew Hokenson believes in a deep research basis for his growth stock picks.
“So the investment strategy centers on a core principle, and that principle is that great products or services can create great companies. That’s where our deep research and experience come in.
We believe that great products and services are identified by a superior value proposition. And a value proposition fuels a customer, or retail customers, whether it’s a business or retail decision-making process.
It’s what compels the customer to choose one product over another.
So it’s either the product’s or service’s performance, price, or some combination of those two which create a superior value proposition.
And that value proposition is what we believe is the true essence of what creates disruption in a market. The strength of that value proposition, we believe, is what determines the lifecycle of that product, and therefore the earnings growth potential of that company.
So as the company has greater ability to penetrate that market and even expand that addressable market, that’s what creates that disruption and really what we call a secular growth story.
Now, if we identify this value proposition early enough in the growth phase, these companies have the opportunity to substantially outperform expectations.
We found that to be true time and time again.
So that’s essentially the core philosophy. We do try to back up a lot of what we believe through something we call key performance indicators.
Key performance indicators are a way for us to verify and justify what we find to believe to be a strong value proposition.”
One example of this investing research is the Pier Capital investment theme based on digital transformation.
“I’ll start off with just mentioning that overarching theme we call digital transformation.
Digital transformation is basically turning your business from being an analog, face-to-face process to being done through an app or online or digitally, and in any shape or form.
This is a major secular trend that encompasses a lot of different areas. I kind of drill down a little bit here.
Obviously, I’ll point out that COVID-19 was a huge catalyst for digital transformation. However, when you want to play these stories, there’s some obvious ones that really benefited from COVID.
We don’t really participate in those stories.
We don’t want to really participate in companies where the digital world was used as kind of a crutch during COVID. Instead, we invest in companies where we think COVID served as a proof point.
And I’ll get into more detail about what I mean about that. But things like food delivery.
We thought it was more of a crutch as opposed to a proof point. So we stayed clear of food delivery as a secular disrupter and we focused more on things like real-time analytics. We thought it actually served as a great proof point.
And so, when I drill down into where that goes, I believe that obviously we have a lot of cloud software companies out there these days and those companies had a phenomenal year in 2020.
And while I still think that there are a lot of growth opportunities within software-as-a-service, I do think that the valuations have gotten a little expensive.
This happened late last year, so we’ve been trimming exposure to software for the last year. Now, actually, we’re starting to dabble back into software again. But we are just dipping our toes right now.
I think there could be some more weakness ahead there, but we’re getting closer to where we feel the valuations are right.
So, staying away from software for now, I think another area that’s very interesting are these digital-first consulting companies.
There’s a few of them out there that are publicly traded. These companies help large enterprises with digital transformation.
And it’s a combination of business processes as well as kind of creative designs for app development and creating kind of a digital presence for large enterprises — Disney (NYSE:DIS) being a great example of a company that needs to build a better kind of digital presence. These companies will come in and help with that.
And interestingly, they’ve been doing so well with that. We just see not only new customers come along, but also continued investment from existing customers.
Also, no two industries are the same and certain industries are a lot slower to embrace technology than others for good reason. A lot of it has to with regulatory and compliance issues.
I remember when fintech started becoming very popular, when banks actually started to use technology. That for me was a very big sign that digital transformation is for real.
Because if banks are saying, I’m willing to go through all the hoops to start developing a more digital-based platform, that’s when I knew that this is for real.
And now, after COVID, the health care industry is doing that now.
The health care industry used real-time analytics during COVID and saw the benefit from it, and now they’re stepping in. And a lot of these consulting companies, or at least the ones that I look at, are going to be benefiting from that.
I think that’s a new market opportunity for them that should, I think, help drive future growth.
I do like these digital-first consulting companies. I think that they’re trading at a p/e of around 30 times. I think for some of them, maybe, they will be above a little bit. But a nice p/e multiple for a high-growth story, I think, is very fair.”
Get the complete picture by reading the entire 3,626 word interview with Andrew Hokenson of Pier Capital, found exclusively in the Wall Street Transcript.
Andrew Hokenson, Senior Equity Analyst
Pier Capital
www.piercap.com
Jonathan S. Raclin, Princicpal, Barrington Asset Management
Jonathan S. Raclin is a Principal of Barrington Asset Management.
Mr. Raclin graduated with a B.A. from St. Lawrence University and an M.A. from Northwestern University. Following service as a commissioned officer in the U.S. Marine Corps, Mr. Raclin was associated with White, Weld & Co., a Partner of William Blair & Company, and Executive Vice President for Capital Markets with The Chicago Corporation.
He is a former regional chairman of The National Association of Securities Dealers, a former President of the Bond Club of Chicago and of the Attic Club. He previously served as a director of the St. Simon’s Land Trust, and has been President of the Coastal Georgia Historical Society and Co-Chairman of Emmi Solutions, a privately held health care information company.
He is recently retired as a director of the Public Broadcasting Service in Washington, D.C.
In this 2,386 word interview, found exclusively in the Wall Street Transcript, Jonathan Raclin of Barrington Asset Management applies his long experience in the financial markets to this current point in our economic cycle.
“I employ an asset allocation approach using closed-end mutual funds. Presently, I own three mutual funds: Liberty All-Star Equity Fund (NYSE:USA), Liberty All-Star Growth Fund (NYSE:ASG) and Central Fund of Canada, now the Sprott Precious Metals Trust (NYSEARCA:CEF). The remainder of the portfolio is in cash.
…I find that valuation is an important component of determining what you want to own.
As opposed to relying upon somebody’s opinion as to what something may or may not be worth, I like the objective approach of being able to see what the fund is selling for relative to the net asset value. Sometimes, that ratio is at a premium, which is a cautionary sign.
Sometimes, it is at a discount, which often provides an opportunity.
I like closed-end funds where they have an objective distribution policy. In the case of the Liberty Funds, they pay a percentage of net asset value every quarter.
We are not dependent upon waiting until the end of the year or dependent upon some manager deciding what they are going to pay to the shareholders.”
The Barrington Asset Management principal has a sober view of the current economic cycle:
“I think people forget how strong the economy was before the virus showed up, by all criteria — unemployment, market valuations, GDP growth, almost everything that you could look at.
Everything looked very, very strong until the virus appeared. The result was dramatic with a significant drop in the stock market, that drop occurring in a very short period.
From a point of view of the government, I think that the current political administration, like the previous one, recognized that when we had the financial crisis back in 2008, a somewhat gradualist approach tended to suppress the rebound, and perhaps spread it out longer than otherwise would be the case.
This time, they basically decided to throw everything at it, including the kitchen sink, which is why we end up with these gigantic deficits.
The recovery has been exceptionally dramatic, both in terms of economic activity and, obviously, stock market results. Nothing breeds confidence in a somewhat dangerous approach as does short-term success.
The consequences of this have been huge increases in the national debt. And some of the proposals that Mr. Biden has put forward are going to significantly add to that debt.
I find it somewhat of a bizarre approach, that debt may not matter.
That might be true if you can finance with interest rates artificially controlled by the Federal Reserve. The Fed are buying Treasuries and mortgage bonds every month.
Paid for with money just created out of thin air.
On the fiscal side, the stimulus is flooding the market with cash. The administration has proposed an additional three or four programs, which means even more cash coming into the system.
It’s my view that the bond market has told you that this is going to continue for some time. It’s hard to see interest rates going up when the Federal Reserve is buying everything in sight.
Now, the consequences from the point of view of inflation are appearing, as one would expect, especially in very price-sensitive commodities.
We are going to see this problem get worse. It is going to be a real struggle for the Biden administration to continue.”
The Barrington Asset Management executive is not a fan of current Federal tax proposals:
“I will say I think that people do not appreciate the enormous consequences of the tax proposal of getting rid of what they call step-up in basis.
Basically, if you had bought a stock at $10 and then passed away, your heir might have a cost basis as of when you died — say, for example, $100. Under the new proposal, the cost basis would remain back at $10. That would result in an immediate tax due; you had a transference of ownership.
I have no idea how that is going to work without significant liquidation of investments — where else would people get the money to pay the tax?
So I think some of the tax proposals seem based more on revenge. I noticed recently an article that was talking about how very wealthy people like Warren Buffett and Elon Musk and Jeff Bezos apparently have not been paying any taxes on their “income.”
Well, it is not income, it is unrealized appreciation of assets.
If you are going to start taxing people based upon unrealized appreciation of assets that means you are going to have to start taxing them on their house, not just stocks.
What are you going to do about things like art and jewelry? What about a security with a loss? I am not sure that these proposals are very well thought out…
Diversify your assets and be an equity owner. I do not believe in debt, especially at these price levels. Number two, I believe in concentrating on distributions, preferably capital gains distributions, which are the majority of distributions from my funds. I believe that tax rates are going to go up, if only because we’re spending money at the speed of light.”
Get the complete picture of investing at this point in the economic cycle by reading the entire 2,386 word interview with Jonathan Raclin, found exclusively in the Wall Street Transcript.
Jonathan S. Raclin, Principal
Barrington Asset Management, Inc.
www.barringtonasset.com
