Lori Woods, CEO, Isoray Inc.
Lori Woods is CEO of Isoray and is a member of the board of directors. Ms. Woods has more than 30 years of experience in the medical device technology and health care services industries and is particularly well-known and respected in the brachytherapy community.
Her distinguished career includes her position as a Principal of Medvio, LLC, where she worked with large public and international medical device companies and was also involved in the development of proprietary technologies for the colo-rectal and liver treatment markets.
She has also served as Chief Executive Officer of Pro-Qura, Inc., a privately-owned cancer treatment management company focused on the quality delivery of brachytherapy treatments for prostate cancer.
Ms. Woods’ previous experience also includes her role as Director of Business Development for the Tumor Institute Radiation Oncology Group and the Seattle Prostate Institute (SPI) in Seattle, Washington, an early innovator in prostate brachytherapy treatments.
Ms. Woods’ appointment as CEO marked her return to Isoray after having previously served as Vice President in July 2006, Acting Chief Operating Officer in February 2008, and Chief Operating Officer from February 2009 through January 2010.
In this extensive 4,585 word interview, exclusively in the Wall Street Transcript, Lori Woods opens up on the prospects for Isoray.
“Isoray is a medical technology company and seed brachytherapy innovator.
Brachytherapy is internal radiation therapy and it is a powerful weapon in treating prostate cancer as well as cancers like brain, lung, and head and neck cancer. We have been innovating since about 2004 when we introduced Cesium-131, our proprietary radioactive isotope for internal radiation therapy. We have a strong history of providing focused internal radiation therapy treatment for prostate cancer.
We have also created state-of-the-art personalized products that allow us to provide patients and physicians with very specific treatment for a patient at the time they need treatment.
Recently, the company has been expanding our product and service offerings as we continue innovating in developing new and exciting ways to treat cancer patients.
Isoray holds the distinction of being the world’s sole manufacturer and supplier of Cesium-131, which is our proprietary radioactive isotope that we use in our targeted treatment for cancer.
We’re really excited about this particular isotope, because we believe it has the combination of two things that are really unique and important when you’re using a radioisotope to treat cancer. One is that it has a short half-life. And what that means is that the radiation comes into your body, it treats your cancer, and then it dissipates very quickly and leaves your body, which is a good thing.
You don’t want it to stay in your body too long.
The other part of that is its high energy.
You need to have the right level of energy, so the treatment dosage can actually get in there and kill the cancer.
So, the combination of having a short half-life where it leaves your body quickly and the high energy where it’s getting in there and killing the cancer is really important in what we do.
In short, Cesium-131 internal radiation therapy is able to deliver a targeted treatment dose quickly with precise placement of Cesium-131 seeds, leaving healthy tissues and organs undamaged, and leaving the body quickly so it avoids prolonged radiation exposure. And that’s why we’re so excited about Cesium-131’s important place as a powerful cancer treatment.”
Isoray has greater brachytherapy ambitions.
“…Brachytherapy, or internal radiation therapy, has been around really since the mid-1990s in various forms with other isotopes. Cesium-131 was the last entrant into this market.
Two other isotopes in this market are iodine and palladium. They both have some good properties, but Cesium-131’s entrance into the market was a breakthrough because it has the combination of the two most important treatment features, which is the short half-life and higher energy.
We’re very excited about the impact in treating our core prostate cancer market, where about 80% of our revenue comes from.
But we’re also increasingly growing Cesium-131’s role in the treatment of other cancers including brain, lung, head and neck, and GYN — to name a few…
We have a unique approval. We have a 510(k) clearance to treat any cancer from head to toe that a physician would deem appropriate to treat with Cesium-131. So that is an important advantage.
Where we may need to seek new FDA approvals is as we innovate and if, for example, we were combining Cesium-131 with a new delivery device then we might need regulatory approval.
But we have very broad regulatory approval, as well as reimbursement through Medicare and reimbursement through normal insurance carriers for our Cesium-131 seeds, as they are known.”
Brachytherapy is going to be a big winner for Isoray, according to CEO Lori Woods:
“Brachytherapy has been around for a while and is being increasingly recognized as a potent treatment for prostate cancer and other cancers throughout the body.
Reimbursement levels for brachytherapy suffered from the competition of higher reimbursement for other competing radiation treatments back then, so it wasn’t a level playing field.
Now we have some changes coming up with reimbursements to level the playing field and not give one therapy an advantage by reimbursing it at a higher rate.
But I think it’s important to understand that in addition to the treatment advantages we discussed earlier, another very important advantage of brachytherapy is what I call one-and-done treatment.
A patient goes in to see their doctor and the doctor decides that brachytherapy is the right option for that patient’s cancer. A patient goes to a hospital and usually in an outpatient setting or an ambulatory surgery center and the surgery takes about an hour.
Then, the patient moves into the recovery room for a couple of hours and then is free to go home and go about their day.
This is exciting because the cancer is being treated and in many, many cases cured right then and there. It doesn’t require the patient having to come back for multiple treatments like some other treatment options where you must return repeatedly for treatment.
And that can be day after day after day, or every other day, for a length of time depending on the treatment plan that you have with your physician.
The bottom line is Cesium-131 brachytherapy is very efficient, very effective, and it’s important from a quality-of-life consideration as well because people need to be able to get back to their lives.
And brachytherapy is a fantastic way to do that and in many prostate cancer cases it can cure your cancer.”
Lori Woods, CEO, Isoray, Inc.
(501) 255-1910
www.isoray.com
Harris “Shrub” Kempner, President and Portfolio Manager, Kempner Capital Management
Harris L. “Shrub” Kempner Jr. has been Kempner Capital Management’s President since the firm’s inception in 1982. He is also a Portfolio Manager.
He was President of U.S. National Bancshares and Chief Investment Officer for Frost Bank of Galveston (formerly United States National Bank) from 1969 to 1982.
He received a B.A. from Harvard University in 1961 and an MBA from Stanford University in 1963.
In this 2,995 word interview, exclusively in the Wall Street Transcript, this 60 year veteran of portfolio management details his investing philosophy and his top picks for 2021 and beyond.
“First place, we’re deep value managers. We have a tendency to be always in the value area, and in areas which have been washed out because they’re unpopular by others — so in our terms, deep value.
And secondly, our criteria for success is different than many others.
We are trying to make sure our clients have more money in real terms when they come with us than they did before. And that means our bogey is the compound rate of inflation over time. We’re very long term, expecting to hold individual stocks for three to five years.
And so, if our clients have done better than that, we have met our objectives.
This is easier in a period of time with low inflation. It’s a lot harder in periods of time where inflation is increasing. And we’ve been through all of those.
It has led us to periods of time when our performance is not as good as many others because the markets are not rewarding value stocks.
But we have a very tried-and-true discipline that served us well over this extended period of time and we see no reason to modify it or change it.
So, we treat everybody alike. Nobody is treated differently. Private clients and clients that invest in our mutual funds basically end up with portfolios that look quite similar within three to five years.”
Kempner Capital invests into stocks other portfolio managers are avoiding:
“One of them, interestingly enough, is GM (NYSE:GM), which we think not only is going to have extremely good earnings, but we think because of their move into certain high-growth areas of transport, that they will get a higher p/e multiple than they’re used to. There’s been some of that already. But we think there’s more coming…
Our view is that they’ve been trading as a cyclical company — which is in cars, primarily in transport vehicles generally, and which is going to rise or fall based on the perception of the consumer for those things.
They’ve almost all been internal combustion engines.
What has changed is that they’re still going to be in the same transport areas of cars and trucks and such, but there’s the possibility that they will break new ground with some of their electric and self-driving vehicles in a way that will begin to generate higher growth rates and therefore higher p/e multiples over the next several years.
It is one of the largest holdings we have. And it’s not so much that we’ve invested huge amounts in it. But we think it’s a longer-term hold.
There are a couple of others, some very out-of-favor stocks, like BP (NYSE:BP) and Royal Dutch (NYSE:RDS.A). There are a lot of moving parts, it’s very complicated, and everybody is sort of negative on petroleum.
These guys not only are going to benefit from what we think are going to be much higher petroleum prices over the next year or two, but in addition, they themselves are working into some of the new areas as growth areas for them.
And I just think there’s multiple expansion there that’s pretty substantial coming along.
You give me 10% earnings growth. Going from eight- to 10- or 11-times earnings and you have a very substantial return. You’re being paid a nice dividend while you’re waiting for this to work out.
Note though that all of these are long-term holds in the sense that we and they are certainly contrarian. I mean GM less so now.
But close to everybody is still certain that oil prices will never rise again. However, they’re beginning to change their view on this. And I think the oil companies are both going to have earnings growth and multiple growth as people begin to realize it.”
Kempner Capital is not swayed to negativity on oil and gas companies by the coming electrification of motor vehicles:
“I think the concept that oil demand is going to somehow get frittered away in five or 10 years is nonsense.
Let’s take the world fleet of vehicles. There are roughly 1.2 billion cars and trucks and other kinds of things on the roads and about 5 million of those are electric vehicles now.
The most optimistic projections I’ve seen show that for electric vehicles, they’ll increase twentyfold to 100 million in the fleet by 2030.
But then you have to step back and realize that the overall fleet will grow from about 1.2 billion to 1.5 billion or 1.6 billion according to the same studies.
You’re going to have, let’s say, 1.5 billion. You’re going to have instead of 1.2 billion, 1.4 billion cars and trucks on the road that use oil.
To the extent that transportation in that regard is one of the biggest users of petroleum and petroleum products, that’s not a formula for a fall off in demand for oil.
It’s hard to get there. And so I think that a lot of this is wishful thinking, and the desire for the brokerage community sometimes to hype something new and therefore get people to give them commissions.
I’m really sort of cynical about that whole thing.”
Kempner Capital is also increasing its investment into is the financial sector.
“I think that in general with the banks, not so much the insurance companies, but with the banks, the big ones we own.
Citicorp (NYSE:C) particularly looks terribly cheap just because people are skeptical still that they’re going to have solid earnings growth.
We believe that the progress they were making before new management — and now with this new CEO, Jane Fraser, doing her thing to cut back on some of the not-so-strong commercial lending areas in various countries and bringing that back home — you’re going see much steadier and much better earnings growth.
They aren’t selling even at book value the way all the other banks are.”
Get all the detail and complete top picks from Shrub Kempner of Kempner Capital Management by reading the entire 2,995 word interview, exclusively in the Wall Street Transcript.
John Cole Scott, Chief Investment Officer, Closed-End Fund Advisors.
John Cole Scott, CFS, is Chief Investment Officer of Closed-End Fund Advisors.
Mr. Scott has worked at Closed-End Fund Advisors since 2001. He holds the FINRA 66 License and the Certified Fund Specialist designation (CFS).
He is a graduate of The College of William and Mary and has been quoted and interviewed widely in the financial press, and has presented at conferences and for investment groups on more than 50 occasions.
In 2008 Mr. Scott founded CEFA’s Closed-End Fund Universe, a data service covering all U.S. listed closed-end funds and BDCs. Currently supported by an internal 10-member data and analysis team, the service covers the 600+ ticker universe of CEFs/BDCs/iCEFs. They regularly do consulting and projects for CEF/BDC sponsors, hedge funds and institutional investors.
He is a Portfolio Consultant with over $300MM+ in deposits into a UIT focused on BDCs with a fund sponsor partner. He developed 35 CEF/BDC based indexes: 9 diversified portfolio objective, 9 equity and 15 bond sector.
Mr. Scott is also the Founder & Exec. Chairman of Active Investment Company Alliance (AICA). Mr. Scott is a past board member of The Richmond Association for Business Economics (RABE), and serves as Assistant Treasurer and on the Investment Committee for The New York State Society of The Cincinnati, and board member and Finance & Investment Committees for The William & Mary National Alumni Board.
In this extensive 5,172 word interview, exclusively in the Wall Street Transcript, Mr. Scott details his data driven Closed End Fund investment philosophy and selects some potential examples for investors.
“We have my team at the firm that understands closed-end funds. We have 10 analysts that input the back end. We get data feeds or spreadsheets from some sponsors.
We review SEC filings and press releases and such. Some things are automated, and some things are human only. I would say that, while it’s considered to be a lot of information, we focus heavily on having more granular and a more closed-end-fund-centric data perspective.
It is not looking at a closed-end fund through an open-end fund lens.
Also, BDCs are a hybrid investment structure, blending a closed-end fund with an operating company, but technically speaking, their SEC filings state they are “closed-ended management companies” so they are a 1980 modification to the 1940 Investment Company Act. They still have active management for a diversified portfolio of holdings.
It is generally a listing of common stock that you buy and sell through an exchange like traditional CEFs. It has a very similar flavor and offers investors exposure to investments that are often similar to high-yield bond funds or senior loan funds.”
John Scott is a big advocate of Closed End Fund investing:
“A closed-end fund has an initial public offering when investors buy shares. Capital is raised. A public listing occurs on an exchange with most on the New York Stock Exchange for U.S. investors.
There are some at NASDAQ but, just to put in perspective, there are closed-end funds listed in London, in Toronto and Hong Kong, so it is not a unique to the U.S. investment. The primary difference with closed-end funds is that they have a fixed pool of capital, the capital a fund uses to make the investments.
For a listed fund, which is most of the funds, you have a publicly listed ticker symbol, and the difference between the market price of the fund shares and its net asset value is the discount or premium.
Generally, discounts are far more common than premiums with the 25-year average at around a -4% discount. For example, back in late March of 2020, you could buy funds at -20%, -30%, -40% discounts because people were freaking out.
Because the U.S. closed-end fund market is heavily owned by individual investors, it definitely reflects sentiment and emotional responses. Because individual investors sometimes buy at the worst times and sell at the worse times, sometimes there are opportunistic periods with very attractive discounts.
Examples include Q4 of 2018, with a technical correction, or March of 2020, or with the Great Financial Crisis, or a period energy pullback. We seem to have an event like this every four to five years when closed-end funds dropped -20% plus.
That’s been an above-average time to buy them, but because they generally pay yields of 6% to 8% and much of that is deemed sustainable by many outside investors — like us and others — it’s an attractive source for ongoing cash flow.
Your question might be, “Well, how do they do that JCS?” I would say, there’s really three reasons why they generally yield more. One is they use leverage — 25% average for a blended portfolio, and bond funds can easily be 30% to 40% levered — which means, $1.30, $1.35, or $1.40 of gross exposure will be covered by $1 of net assets.
If they trade at a discount, if you think of $0.10 per share distribution monthly and a $10 net asset value. If you then can buy that for $9, then that yield is bigger.
With many funds offering a discount, you get a higher yield due to discounts. The third reason is because they don’t have to be redeemable daily to shareholders. If you own 1,000 shares of any listed closed-end fund, and you want to sell it, you can trade it just like a stock.
It is an independent relationship from the fund sponsor, so the fund sponsor never has to worry about redemption risk. Just think about March of 2020 as an example, when an open-ended fund might be forced to sell holdings to raise cash for investors redeeming shares.
It is similar but different to an ETF, and an ETF is actually a modification of the open-end fund and they generally act much more like an open-end fund.
The fourth reason is that these funds can technically pay whatever distributions they want, which is why you cannot just look at the headline yield figures.
Funds can pay you back with your principal investment, called return of capital, which isn’t always a bad thing. You could have a $20 fund that pays you $4 a year, that’s 20%, and nobody can be expected to consistently earn $4 on $20.
Sometimes, when some funds are low on capital, they do a rights offering, likely above net asset value and add capital back to the fund to be able to keep paying the $4 moving forward. We stay away from those situations; we seek to avoid destructive return of capital to shareholders.
But at the end of the day, diversified closed-end fund portfolios do have relatively higher yields due to the combined features and policies.”
Get the complete detail and more of John Scott’s recommendations for Closed End Fund investors by reading the entire 5,172 word interview, exclusively in the Wall Street Transcript.
John Cole Scott, CFS
Chief Investment Officer
Closed-End Fund Advisors, Inc.
www.cefadvisors.com
email: jcscott@cefadvisors.com
Andrew Watts, Executive Vice President, CFO, Brown & Brown (NYSE: BRO)
Andrew Watts is executive vice president and chief financial officer at Daytona Beach based Brown & Brown (NYSE:BRO). Earlier, he worked at Thomson Reuters in managing customer relations. He was also a senior vice president at Thomson Financial. Prior to that, he was a co-founder and CFO at Textera.
In this 2,786 word interview, exclusively in the Wall Street Transcript, Mr. Watts details his company’s strategy for navigating through the COVID 19 business wreckage in the insurance sector.
“We are an insurance broker. We are the sixth largest in the world. We’ve been in operation since 1939. We’re based here in Daytona Beach, Florida, but we’ve got operations in 43 different states around the U.S.
We also have operations up in Canada, over in Ireland, the United Kingdom, as well as down in Bermuda.
We primarily focus on property/casualty and employee benefits, as well as personal lines. We have four different divisions within the organization. Our largest is retail, where we come out in a direct sales model to talk with the buyer of insurance.
We also have a national programs division, which is our managing general agent — MGA — division, where we really operate as a virtual insurance company, providing risk solutions to retail brokers, either B&B retail or independents.
Then we have a wholesale division, which is focused on the excess and surplus markets, for higher-risk type assets that need to be insured. We support B&B retail and independents. Finally, we have a specialty services division, which processes workers’ compensation and property claims as well as advocacy claims for Medicare or Social Security set aside. Generally, these businesses are linked to one of our MGAs.”
Daytona Beach certainly was impacted by the Colonial Pipeline extortion that led to long gas lines throughout the southeastern US. Thfule Brown & Brown take on this issue is insightful:
“The topic around cyber exposure, cyber coverage, has been front and center for a lot of organizations over the past few years. We wouldn’t say that it has increased exponentially during COVID.
It was a big topic prior to COVID. The threat actors that are out there, or those individuals or firms or whoever is trying to have some sort of malicious actions or intentions, were there before. They’re here now and they’re going to be here in the future.
If anything, the risk is probably going to increase.
One of the things that has probably challenged some companies is the increase in remote workers. If you had all of your workforce in your building, maybe you were a little more comfortable that you knew how the threat actors might try to get into your infrastructure.
As you have a more deployed workforce, and definitely over the last 12 to 15 months, it is about making sure you’ve got the right level of security on all of your computers, especially if you’ve got people working remotely.
The actual coverage itself is still fairly limited in nature. That’s one of the challenges in the space — knowing how to fully underwrite the exposure without knowing how large it could be. Normally, these policies are fairly prescriptive regarding what is covered.
Will this evolve in the future? Probably, as the collective industry gets a better feel for what the exposures are…
There’s a lot of discussion about this topic. They call them the gig workers. Are they considered an employee of the firm they work for? Are they truly an independent agent?
Historically, the view has been that if you’re an employee of the company, then all the applicable coverages are there.
However, when you’re an independent worker, the relationship has to be evaluated very thoroughly. There’s different scenarios in the marketplace where the employee or contractor line is becoming blurred.
It does require us to have more conversations about what exactly the independent contractors are doing to help ensure we get the proper guidance on coverages and related risks.”
The future strategy of Brown & Brown (NYSE:BRO) will be supportive of the local Daytona Beach economy for years to come:
“We’re going to continue to invest in our capabilities. Our capabilities can be anything from proprietary product, to the teammates that we have as an organization, the niches we are able to serve and our utilization of technology and data.
As a result, we can support a customer at any size in their maturation from a smaller company that’s just getting going to a large multinational.
We feel really good about our company, and that we’re going to be able to continue to make sure that we’ve got great capabilities. We’ve been making a lot of investments in technology over the past few years.
We started with infrastructure and our core operating systems, so we can scale even better. These programs are substantially done and we are seeing the benefits.
From an innovation standpoint, we acquired a business last year called CoverHound. That was really our ability to offer what we call a curated quote.
This ties back to our discussion earlier about technology. We do think there’s a segment of the market that we can support in a more automated fashion than what we do today.
What we’re going to be able to do with this technology is allow a buyer of insurance to go online, provide us with their information, and then we will get quotes for different lines of coverage from multiple insurance carriers and provide this back to the customer in what we call a curated quote.
We think we’ve got something that’s unique and differentiated in the space, and are pleased to have the CoverHound team join the Brown & Brown (NYSE:BRO) team.
We will continue to look for additional areas to invest in as an organization that will help further enhance the overall experience for our customers and make our teammates as efficient and effective as possible.
We will continue to invest in our data and analytics initiatives. We want to ensure we’re utilizing our data to help win more customers, retain more customers and help our customers get the best coverage at the best price.
These are some of the important areas we’re thinking about today and into the future.”
Andrew Watts
Chief Financial Officer & Executive Vice President
Brown & Brown, Inc.
220 South Ridgewood Avenue
Daytona Beach, FL 32114
(386) 252-9601
www.bbinsurance.com
Hessam Nadji, President and CEO, Marcus & Millichap
Hessam Nadji has served as President and Chief Executive Officer of Marcus & Millichap, Inc. since March 2016. He previously served as Senior Executive Vice President and Chief Strategy Officer.
Mr. Nadji joined the company as Vice President of research in 1996 and held various other senior management roles through the years, including Chief Marketing Officer and head of the company’s specialty brokerage divisions.
He played a leading role in the company’s initial public offering in 2013. Mr. Nadji received a B.S. in information management and computer science from City University in Seattle and has over 30 years of experience working in the real estate industry.
A frequent source on behalf of the firm to national business media outlets, including The Wall Street Journal, Investor’s Business Daily, Real Estate Forum, CNBC, Fox Business TV, Bloomberg TV, and numerous commercial real estate publications, Mr. Nadji is a member of the National Multifamily Housing Council executive committee, the Urban Land Institute, the International Council of Shopping Centers and NAIOP.
In this 4,374 word interview, exclusively in the Wall Street Transcript, Hessam Nadji details the strategy for increasing the value of his company for shareholders.
“It just so happens that 2021 marks our 50-year anniversary of the company’s founding in 1971. We are really excited to be celebrating this milestone.
A lot of companies, of course, have been around for a long time, but coming into 2021, our founding principles and reasons behind the company’s inception are still extremely relevant. The pandemic actually proved the significance of the concepts the firm was founded on in 1971, maybe more so than any other event could have.
The market dislocation and the difficulty in executing transactions much of last year illustrated the need for our value-added brokerage model.
So, what were those founding principles? Investment specialization, research, information-sharing, technology and having a managed sales force. The combination was truly ground-breaking.
The company was essentially started because George Marcus, who was a broker at a full-service firm at the time, wanted to specialize in investment brokerage, particularly apartments, a very underserved sector throughout the brokerage community.
In trying to launch a practice for himself as part of a larger full-service company, he found that most of the firm’s focus was on leasing, property management, and areas like construction and development management. Investment sales were part of the service offering, but didn’t have the same infrastructure, policies and focus as the other segments.
It was kind of a sideshow.
In dissecting what it would take to make a market for investment commercial real estate, obviously you have to be able to underwrite the property with the most recent economic and operational data points, comparable rents and prices, so underwriting and expertise were deemed essential.
As importantly, exposing the property to the right group of potential buyers is the foundation of how a value-added broker can maximize the value for the seller, and offer options and opportunities to the buyer. So, unless the information is being shared and there is a specialist understanding the underwriting and the key components of the asset’s operations, you can’t make any of these parts come together effectively.
In 1971, there was no information-sharing on the investment real estate brokerage side. There was no repository of information.
As a result, George Marcus became very frustrated, and decided to dedicate his life and his professional career to creating a platform for the real estate owner who was interested in maximizing returns through solid market information and their value when they were ready to sell.
The largest component of the marketplace at that time, and still today, falls into two categories. Most are private investors who are either high-net-worth individuals, friends and family, small partnerships that buy real estate assets throughout the years and create wealth in a passive way, or they’re entrepreneurial, local traders who buy assets, improve or renovate them, reposition them, and sell them, typically within a two- to four-year period.
Both of those audiences — the passive private investor and active private investor — were completely underserved.
Presently, 83% to 85% of all commercial real estate transactions in the U.S. are priced under $10 million, which is the sweet spot for the private investor, and that price point is where they mostly play.
Institutions, who need scale, have to invest in much larger assets — $20 million, $25 million, $30 million-plus. And so there is this market gap that left the private investor and the middle-market investor very underserved.
Our company was created with the founding principle of investment specialization, so you can dig deep and really become an expert at the local level by property type.
Number two was information-sharing. From the day that George started the company, the policy of sharing information on every listing that every agent had was a mandate, enabling other brokers in the office to expose the listing from their colleague to their potential buyers, and widen the pool of offers.
The whole idea is to generate quality offers from multiple buyers.
The third concept was very different at the time, and still is today, where the company would invest in a professional manager and compensate them as an executive, as a part of management, and not as a broker making commissions.”
Hessam Nadji also describes the personnel supporting this strategy.
“These dedicated managers hire, train and support the sales force, and their compensation is tied to the office’s productivity and growth, not any one deal. George dedicated the company to being a managed sales force that didn’t have player coaches, but professional managers.
We’re fortunate that the vast majority of our managers have been former investment brokers with the firm, so they know the business well and can pass on that knowledge and training.
Another founding principle of the company was around a culture of collaboration, people bringing buyers and sellers together and sharing the fee. And providing value-added services is the next one, which is where research and technology come in. We were the first company to ever have a centralized database.
As early as the late 1970s, the company introduced a mini computer system that had a centralized inventory of investment real estate, because if you’re mandating information sharing, then you have to facilitate that through technology, even back then.
We were very much influenced by the fact that the company was founded just down the street from Hewlett Packard’s (NYSE: HPE) corporate headquarters.
Bill Millichap, in particular, was a pioneer and big believer in technology, so that became part of our DNA. In fact, there’s a story of one of our weekly workshops where we have guest speakers, one of those speakers happened to be Steve Jobs, pitching one of the early generations of Apple (NASDAQ: AAPL) computers in our Palo Alto office.
People always get a kick out of that story.”
Hessam Nadji has recently developed a future strategy that is building from this base.
“In the last three years, one of the key strategies that we implemented was to attract a lot of existing senior brokers from other brands or independent shops that would bring coverage in this institutional arena that we didn’t have. We started an acquisition strategy that really augmented our financing capability and larger deal brokerage presence in key markets like Seattle, Canada, and South Florida.
Those acquisitions, having been completed over the past three years, also added a lot of value in the fourth quarter, because we could help institutions and we could help the private investor sell, finance and acquire assets.
From a market perspective, you’re right, we’re getting very close to earnings, but it’s common knowledge that the market continues to open up.”
Get the full information on the Marcus & Millichap strategy for investors by reading the entire 4,374 word interview with Hessam Nadji, exclusively in the Wall Street Transcript.
David Toti, Colliers Securities, Senior Research Analyst, REITs
David Toti joined Colliers Securities as Senior Research Analyst in January 2021 to expand coverage in the REIT space. A long-time real estate professional, Mr. Toti spent nearly 20 years on sell-side REIT equity research teams for a variety of firms, including Lehman Brothers, Citi, FBR, Cantor Fitzgerald and BB&T.
Before Wall Street, David Toti was a design project manager for a leading architectural design firm. Mr. Toti is a graduate of Syracuse University, and also holds a Master’s in Business Administration in Real Estate from the University of Wisconsin-Madison.
In this 2,978 word interview, exclusively in the Wall Street Transcript, David Toti details his real estate investing methodology and reveals some top portfolio picks for 2021.
“The securities firm is a relatively small division of Colliers International, and Colliers is largely, as you said, a commercial real estate brokerage.
There are many other businesses wrapped around that — a variety of related services, management, valuation, appraisal, and so forth. The securities business, which is based in Minneapolis, is relatively small; there are probably a dozen analysts, who are largely tech and health care focused.
Real estate was an important mandate for the firm, given our ability to stitch some of the various Colliers units to the securities business, and vice versa — to begin to interconnect the businesses and the verticals and develop synergies, if you will.
That’s a specific experience that I’ve had in the past at a prior firm, which is why I believe Colliers reached out to me, and also why I accepted the role. I thought it was an interesting mandate and a rare opportunity.
For a REIT analyst, it’s basically like having a gold mine of data in your pocket, because of the sheer volume, breadth and depth of market data and market intelligence.
We effectively have eyes and ears all over the world in different markets and different asset classes. So for me, instead of going through the usual data vendors that everyone uses, we have an incredible amount of market knowledge that helps us produce more accurate, more timely, and more proprietary real estate research.
I have also long focused on an unusual quant approach within the space. The concepts, experience and implementation ability are assets I brought to Colliers; when married to the Colliers platform, their value will be materially amplified.
The bundle of predictive valuation models essentially run off of large pools of market data to forecast real estate asset values, market conditions and REIT values in the context of an assumed macroeconomic environment.
I’m excited to weave all of these things together. It is always a challenge to produce a unique product in the space, and as a result, there’s a lot of commoditized “me-too” research proliferating.
It’s hard to develop a product for clients that they haven’t seen, that they want but can’t source, and I struggled for a long time to discover a performance-based niche with a supply and demand imbalance.
To add the Colliers brand and Colliers resources to the process will produce a truly powerful product, in theory, so I am quite excited about what’s coming over the next couple of months.”
David Toti is not as sanguine about the real estate stock sector as some of his peers:
“…Going into the pandemic, many office and retail assets were highly occupied, and priced to perfection — many assets are trading with remarkable prices and ultra low cap rates, historically low cap rates, and basically no risk premium — and lo and behold, risk appears.
So the value impact to those asset classes is yet to be determined. Transaction activity has been very limited as well, so one can’t point to that, either.
But I think for the short lease — self-storage, apartments, some segments of health care — the recovery is appearing by way of rents, which have renewed and are pricing on a new rate basis.
Overall, portfolio occupancies have remained stable. A few tricky issues to watch within the REIT space might include expense pressure, as the conversation will not move off of inflation and cost inflation.
The REITs are seeing expenses grow anywhere from 5% to 8%. I’ve never seen that in my 20 years covering the space, these kinds of remarkable growth rates, and they don’t really have that much pricing power at the top line yet.
So it’s to be determined if they can really fight inflation in the near term. I suspect they will, especially for the shorter lease REITs, where there are only limited supply issues.
The REITs are ultimately rate-sensitive instruments, first and foremost, and if we have the U.S. Treasury bouncing up at a historically rapid pace that could drive up borrowing costs, coupled with inflationary pressures that could erode margins — I remain a little cautious at the margins.
It’s nice to paint a happy story and say, “The world’s coming back, everything’s getting back to normal,” but we don’t know the effects of all this liquidity, all this government stimulus, the rapid rise in the Treasury, and the sudden appearance of inflation, which is only just beginning to play out.
So there are a lot of question marks around interest rates and the REITs especially, because generally as rates move up, the REITs — especially the longer leases — typically move inversely to those rates, and they could lose value as those rates move up, so that’s what we watch for.”
This leads David Toti to just a handful of stock recommendations:
“Camden Property Trust (NYSE:CPT) is one of our recommendations. IRT (NYSE:IRT) is another one that we like.
As well, a couple of health care names that we point to, and those typically have higher exposure to private pay segments, because we think there will be more growth as things return to normal there.
So we like the shorter leases, we like when there’s pricing power visible, we like the non-core markets, the Sunbelts and Texas and so forth.
It’s a trade that’s been working for a while, but I don’t think there’s any reason to get off of it at the moment, it’s just a matter of finding a stock that’s palatable from a pricing perspective.
A lot of these stocks are bid up pretty high, so the thesis might sound great, but then when you look at the pricing, you say, “Well, the upside is somewhat limited.”
Get the complete background on these picks and more by reading the entire 2,978 word interview with David Toti, exclusively in the Wall Street Transcript.
David Toti
Senior Research Analyst
Colliers Securities
(612) 376-4000
www.colliers.com
email: david.toti@colliers.com
Alexander Goldfarb, Managing Director, Senior Research Analyst, Piper Sandler.
Alexander Goldfarb is a Managing Director and Senior Research Analyst at Piper Sandler where he covers real estate investing including Howard Hughes (NYSE:HHC). Previously, he was a Managing Director and the Senior REIT Analyst in the research department of Sandler O’Neill + Partners, L.P.
Mr. Goldfarb joined the firm in 2009 following two years as a Director and Senior REIT Analyst at UBS and five years at Lehman Brothers where he was a Vice President and REIT analyst.
He holds a Master of Business Administration degree from the F.W. Olin Graduate School of Business at Babson College and a bachelor’s degree from Wheaton College.
In this 3,038 word interview, only to be found in the Wall Street Transcript, Mr. Goldfarb details his top picks for a real estate stock portfolio.
“It was an exciting time, because in contrast to other typical years of research, or typical recessions, there was no playbook for a pandemic. There was no looking back on how REITs did last time the economy shut down.
From an intellectual standpoint it was incredibly interesting, fascinating, and we think that we provided our investors some very good ideas and framework, as I said principally on the Sunbelt migration, the move to the suburbs, the urban exodus, and how shopping centers emerged out of the “death of retail” narrative and into the “one of the essentials” of not only people’s personal days, but also to REIT portfolios.”
Some real estate assets like Howard Hughes (NYSE:HHC) rebounded faster than others:
“Well, like a lot of sectors they got beaten up hard because of COVID, but REITs quickly rebounded. Certainly, industrial was one sector that was thrown out quickly — the baby with the bathwater — but sharply rebounded. And then you saw other sectors, like, as I mentioned, shopping centers, that suddenly started to show signs of life as people realized that in order to get your hand sanitizers, your wine, your paper towels, if you couldn’t get it on Amazon (NASDAQ:AMZN), you went down to your shopping center.
And in fact, with everyone locked up at home, suddenly grocery shopping became an exciting endeavor, so that rebounded.
The other was the Sunbelt apartments and anything housing related, like Howard Hughes (NYSE:HHC), for example.
We upgraded Howard Hughes in late summer, and that stock started to work as ourselves and others realized that all these people moving were buying homes, and it played well into Howard Hughes’ portfolio in the Sunbelt and Hawaii and their housing development program, which they sell to the homebuilders, but they keep them on a very short leash to make sure that the homebuilders don’t land bank too much.
But it’s proven to be a boon, so that was something else.
Right now, where we sit, I think a lot of investors have played the recovery trades, the reopening of the cities.
And I think people are now looking at which companies actually have earnings growth versus which companies either have yet to trough earnings — like some of the coastal urban apartments — or are going to be in a sort of slack tide like some of the office names.
I think that’s something that investors are spending a lot of time on. In our view at Piper Sandler, areas we like are Sunbelt apartments, industrial, retail — and that includes Simon (NYSE:SPG) and the shopping centers — and niche plays like Howard Hughes and CHCT (NYSE:CHCT).”
2021 will see other real estate stock picks prevail according to Alexander Goldfarb:
“I think that if you look at the Sunbelt, like Camden (NYSE:CPT), where their average rent is around $1,800 a month, and then you compare that to the coastal REITs where it can be $3,000-plus a month — that’s a big difference.
There’s a much wider renter swathe the lower the rent you go. Obviously, you don’t want to go too low, because then you start running into tenant credit issues, but the point is that you want a rent that is for the widest possible audience.
So I think when you mix balance sheet with rent affordability, that’s a really powerful combination, especially right now…
Our top stock picks are Brixmor (NYSE:BRX), Kimco (NYSE:KIM), Kite (NYSE:KRG), SITE Centers (NYSE:SITC), Simon, Douglas Emmett (NYSE:DEI), EastGroup (NYSE:EGP), Terreno (NYSE:TRNO), CHCT, and Newmark (NASDAQ:NMRK).
These are all stocks that we really think are well positioned. And an interesting part is, with the amount of spending that the new administration is proposing, it’s really changed our views on interest rates.
For over a decade we had a view of “lower for longer.” But with the Biden administration just seeming to have unshackled spending desires, I think that can really cause the 10-year to gap out and stoke inflation fears, which you’re seeing already, whether it’s lumber, gasoline, copper — you name it, prices are going up, and there’s no way that that’s not going to have an impact on the broader economy.
So when you look at REITs, we think sectors like retail shopping centers, industrial — things that rely on goods flowing through their facilities — are really good inflation hedges.
Because the more prices go up, the more those goods go up, the more profit the retailers or the industrial tenants make, the more that landlords can raise rents, and it’s still the same affordability metric.
So that’s really attractive to us, and that would be names like EastGroup, Terreno, Brixmor, Kimco, Kite, SITE Centers — they all play into that. Those are all really good ways to profit from that inflation hedge.
Another one is Urstadt Biddle (NYSE:UBP/NYSE:UBA), which is tristate New York area shopping centers. It is heavily small tenant focused, which is why their results have lagged, because they’ve been nursing their tenants.
But as more and more people move out of the city and move to the New York suburbs, and those tenants reopen and get back in business, there’s a lot of upside there. And again, with cost of goods rising and prices rising, Urstadt is able to capture that and increase rents.”
Get all the fundamental detail behind these top picks including Howard Hughes (NYSE:HHC) by reading the entire 3,038 word interview, only to be found in the Wall Street Transcript.
Alexander Goldfarb
Managing Director & Senior Research Analyst
Piper Sandler
(800) 333-6000
www.pipersandler.com
email: alexander.goldfarb@psc.com
Floris van Dijkum, Real Estate Investing, Compass Point Research and Trading
Floris van Dijkum joined Compass Point Research and Trading, LLC in June 2019, bringing 30+ years of real estate investment banking experience. and covers malls, shopping centers and hotels including the Simon Property Group (NYSE: SPG).
Prior to joining Compass Point, he started the REIT research effort at Boenning & Scattergood. Before that, he started the global REIT investment platform at BlackRock (NYSE: BLK), where he served as COO and was responsible for a quarter of the U.S. portfolio.
Prior to BlackRock, Mr. van Dijkum worked in Europe where he served as Chief Investment Officer for Speymill Property in London, head of real estate banking at NIBC in the Netherlands, partner at Forum Partners, head of Lehman Brothers European real estate banking in London, and Senior European Real Estate Research Analyst at Morgan Stanley in London.
Before Europe, Mr. van Dijkum worked at Salomon Brothers in New York covering REITs, helping the team become top ranked. Mr. van Dijkum started his real estate career at LaSalle Partners in Chicago and London. He graduated with a B.A. in history and philosophy from the University of Virginia.
In this extensive 4,695 word interview, only in the Wall Street Transcript, Mr. van Dijkum details his top picks and the fundamental research that supports his portfolio recommendations.
“One of the things that probably sets me apart from most sell-side analysts is my focus on asset quality. I have probably visited most of the A-rated malls in the country; I’ve visited most of the most valuable shopping centers that are owned by REITs in the country; I’ve visited a fair amount of hotels, but probably not as many as I have seen in the retail space.
I believe it’s important to understand the real estate quality, in order to understand how the assets are positioned in the local markets, and so hopefully we do a more thorough and more fundamental job on that.
Our valuation work is very much bottom-up driven, so we value every single asset held by a REIT. We look at multiple valuation metrics but tend to focus most on net asset value (NAV), which in shorthand is the private market value of the assets less the net debt.
The private market value is typically expressed by applying a cap rate to net operating income — NOI — or property operating earnings.
In order to come up with a warranted cap rate to value the REIT overall, we aggregate the individual cap rates to come up with what the appropriate, warranted cap rate is for the company.
So it’s more granular, more detailed. Hopefully that means that we are slightly more accurate, and certainly more thought-provoking.
Hopefully we have a pretty thorough understanding of the assets of the companies, and I’ve known some of these management teams for a very, very long time. David Simon was running Simon (NYSE:SPG) when I covered SPG in the mid-1990s.
At Macerich (NYSE:MAC), the current CEO was the CFO back when the company went public. So I’ve got a fair amount of background information and knowledge and personal relationships, and I think that’s helpful to understand each of these companies. Capital allocation is a key way for management teams to create value, and investors pretty quickly understand who are good capital allocators.”
The SPG pick is one of Mr. van Dijkum’s favorites and he defends it vigorously:
“There are some investors who don’t understand why Simon would buy a retailer; is the company going away from its core competency?
But mall landlords know retailers better than anybody as they see the traffic and sales data. Simon should understand the retail business really well.
It does not necessarily know how to run these retailers, so Simon has partnered with ABG, or Authentic Brands Group, who basically does the purchasing and supply chain management.
ABG owns over 50 brands and has over $14 billion of sales in those brands, and Simon owns 6.8% of ABG as well.
And if you look at that, there are a lot of synergies. Now, Simon bought into Aeropostale, Forever 21, and Brooks Brothers. The biggest one probably is going to be J.C. Penney where it partnered with Brookfield and ABG now also owns 16.7%.
Simon got a lot of flak at the time for that purchase — investors asked why are you buying a department store? But a department store typically controls lots of its real estate, and so we believe that the deal makes sense purely from the real estate perspective. The dirt that was underneath those J.C. Penney boxes represented the vast majority of the value in the J.C. Penney business, based on our analysis.
For example, in A++ rated Fashion Valley in San Diego, an outdoor format, high end, super profitable. What is a leasehold J.C. Penney store doing there? That store’s higher and best use is probably something else. Simon could even think about putting apartments there, because AvalonBay (NYSE:AVB) built right across the street from them and has done very well. San Diego remains a strong market and with a lot of housing demand, and housing prices are very, very strong in Southern California.
Similarly, the land underneath A++ rated Roosevelt Field on Long island was a leasehold by J.C. Penney and would be important to control. Through long-term ground leases or outright ownership, J.C. Penney controlled strategic space at several valuable Simon malls, and now the company should have a say in what happens there.
So, as we think about these retailer investments, we think there are lots of synergies. If you look at some of the earliest investments, Simon and its partners have actually managed to turn loss-making companies around. Aeropostale was loss-making when Simon bought the company, and I think it’s very comfortably profitable today.
And so, if Simon manages to do that with some of these other ones, I think those investments are probably going to be very profitable — maybe Aeropostale becomes the first retailer bought by its SPAC. That’s certainly what the investors appear to be expecting, but perhaps it’s ABG that gets bought by the SPAC. And again, the SPAC offers another way to monetize some of Simon’s retailer investments, which are currently getting almost zero value in most investors’ minds.”
To get all the top real estate stock picks from Floris van Dijkum including his strip mall favorites, read the entire 4,695 word interview, only in the Wall Street Transcript.
Floris van Dijkum
Managing Director
Compass Point Research & Trading, LLC
(646) 757.2621
www.compasspointllc.com
email: fvandijkum@compasspointllc.com
Jeffrey Davis, Chairnan of the Board and CEO, Perficient, Inc.
Jeffrey S. Davis is the Chairman and Chief Executive Officer for Perficient, Inc., where he leads daily business operations and directs the development and execution of the company’s global growth strategy and initiatives.
He became the Chief Executive Officer of the company and a member of the board in 2009 and became Chairman of the board in February 2017. He previously served as the Chief Operating Officer of the company following its acquisition of Vertecon in April 2002 and was the company’s President from 2004 through 2021.
He served the same role of Chief Operating Officer at Vertecon from October 1999 to its acquisition by the company.
Before Vertecon, Mr. Davis was a senior manager and member of the leadership team in Arthur Andersen’s Business Consulting Practice, where he was responsible for defining and managing internal processes, while managing business development and delivery of all products, services, and solutions to a number of large accounts.
Mr. Davis also served in leadership positions at Ernst and Young, LLP in the Management Consulting practice and in industry at Boeing, Inc. and Mallinckrodt, Inc.
Mr. Davis is an active member of the board of directors of the Cystic Fibrosis Foundation of St. Louis, is a member of the University of Missouri Trulaske College of Business advisory board, and sits on the board for St. Luke’s Hospital.
He holds a Masters of Business Administration degree from Washington University in St. Louis and a Bachelor of Science degree in electrical engineering from the University of Missouri.
In this 3,335 word interview, exclusively in the Wall Street Transcript, the Perficient CEO details his plan to rapidly grow shareholder value.
“Perficient has been around for more than 20 years, and we’ve really pivoted to digital consulting over the last several years, as have many firms in the industry, but I would say we’ve moved that needle quite far. We really consider ourselves to be a digital consultancy.
Although our primary demand market is domestic U.S., we have a global footprint with many colleagues located outside the U.S. in our global delivery centers, doing development work for our clients here in the U.S. In total, we have 4,500 colleagues around the world.
We partner with many of the biggest technology companies — many of them household names — which gives us the opportunity to collaborate across almost any technology stack.
One of the things that makes us particularly unique is our true end-to-end delivery capability around digital solutions. By that, I mean that we have agency and creative capability on the front and in the back, we have integration, transactional, and analytics capabilities. So we tend to focus on long-term relationships where we can deliver that whole portfolio. The average tenure of our top 50 customers is over nine years.”
Perficient has used podcasts to spread its message:
“The podcasts are going really well. In general, we get a lot of great consumption of our thought leadership pieces, whether that’s a blog or some other form, but the podcasts obviously are the newer launch.
In the first three months since launch, we’ve had more than 3,800 listeners, and we’ve averaged 540 new listeners each month over that period. We’re really excited about the reception with those.
Podcasts are another medium for us to reach out, build awareness of Perficient, and help educate our clients and prospects.
In some cases, that’s the first interaction people have with Perficient. They are truly resonating very, very well. The Intelligent Data podcast, in particular, investigates the value of data technology across industries.
So listeners discover what’s possible with digital and how we can help make those possibilities a reality.
Another thing that we’ve recently launched that we’re really proud of is Perficient Bright Paths. It’s designed to advance STEM education and career opportunities for underrepresented constituencies and communities, specifically around women and minorities, and close the employment gap in the technology industry.
Our first fully funded Bright Paths program launched in Detroit in March with a membership of 25 women. At the end of each of the Bright Paths program, we hope to hire qualified graduates to join our teams and work on some of our largest client accounts.
We’re also engaged in Mark Cuban’s Foundation, AI Bootcamps, to host AI training sessions.
We’ll be working with the foundation to fully fund and educate underserved high school students in the Dallas area and train the next generation of AI leaders.
On the M&A front, we’re super excited about the most recent acquisition we completed. The acquisition of PSL was completed in June of last year.
Located in Colombia, that acquisition significantly expanded our nearshore delivery presence, something that’s in super high demand right now, primarily because of the beneficial time zone and language alignment…
PSL, our largest acquisition to date, which brought about 600 people to Perficient who are primarily located in Medellin, but also Bogota and Cali, Colombia.
It’s a really mature organization. The team, which we now refer to as Perficient Latin America, has been around about 35 years, with a great business, very talented people, and is super complementary.
After looking for about two years, and courting several companies, most of whom we decided weren’t going to be a good fit, we found PSL and recognized it would be a perfect fit.
It’s turned out great. In fact, within the 10 months since completing the acquisition, we already have a dozen of the legacy Perficient portfolio companies now engaged with that nearshore development center.
And that’s just the beginning. Most of the engagements are starting small but building, and the success has been great.
So we’ve added about 10% to 15% to that business in terms of revenue with just our legacy accounts. That’s growing rapidly — I think that number will grow much further, probably by the middle of the year.”
The Perficient CEO likes his competitive landscape:
“…Against the boutiques — and we’re competing with boutiques all the time — they don’t have the scale or the breadth that larger enterprises need.
Our target market is primarily Fortune 1000 companies, so we’re trying to find relationships where we can represent our entire portfolio. Because of that, we can be an end-to-end provider to those clients, do a good job, and maintain those relationships.
As I mentioned earlier, the average tenure of our top 50 customers is over nine years. So that’s our business model.
The large integrators obviously have the depth and the breadth, but often are more expensive and less collaborative.
The thing I hear most consistently from our clients is that they really appreciate our people, our skills, and our culture. I heard that from the CIO of a very large health system just the other day who said that our transparency, our flexibility, and our nimbleness is a breath of fresh air.
That’s something we hear often. So I would say, again, it is that end-to-end capability.
In the digital space, we’re fairly unique in that regard. I don’t think even the majors have figured that out.
They were late to the game, and a lot of them are scrambling to get digital capability through a series of acquisitions. I think Accenture is doing one a week. So they’re struggling a little bit. And of course Cognizant has struggled as well.
So, compared to the large integrators, we’re digital-ready and we’re end-to-end in the digital space. Compared to the boutiques, the smaller guys, we have the scalability and the breadth of portfolio.”
Read the entire 3,335 word interview with Jeffrey S. Davis, the Chairman and Chief Executive Officer for Perficient exclusively in the Wall Street Transcript.
Jeffrey S. Davis
Chairman & CEO
Perficient, Inc.
(314) 529-3600
Maggie Nolan, Research Analyst, William Blair, IT Services
Maggie Nolan, CPA, who joined William Blair in June 2015, is a research analyst covering IT services companies. Before joining William Blair, she worked at PwC in their financial services assurance practice.
Ms. Nolan graduated from Miami University with a Bachelor of Science degree in business with majors in finance and accounting.
In this 2,731 word interview, exclusively in the Wall Street Transcript, Maggie Nolan reveals her investing parameters and details the logic behind her current top stock picks.
“I am the IT Services Analyst at William Blair. IT services is somewhat of a broad term for my coverage. Within the industry, I generally look at a couple of subcategories.
I look at the traditional IT outsourcers, or SIs, I look at the next-generation custom product development companies, business process management and customer experience companies.
And I look at value-added resellers or IT solution providers. But what really ties them all together, and the commonality between all of these, is that they’re people-based businesses, and they’re obviously focused on technology services.
In general, what I’m looking for in an outperform-rated stock is strong financials, including the revenue growth and the margin profile.
I’m going to be looking for reliable cash flows, the earnings growth potential, effective capital deployment, and then just in general, an effective business strategy, or really the leadership effectiveness and how they’ve developed the strategy over time.
If you think about those a little bit more granularly, there are several key attributes. On the revenue side of things, it’s really going to the organic revenue growth profile.
And this can vary by those different buckets. So it can range anywhere from the low-single-digit growth levels — which would be in line with broader total IT spending growth — to anywhere above the 20% growth range in some of the fastest growing subsegments of the industry.
Other metrics I look at are the revenue per billable employee, because these are people-based businesses, customer concentration, and that vertical exposure or concentration within the revenue base as well.
Also along the lines of evaluating revenue, just the visibility into those revenue streams. So again, this gets at kind of the difference between some of the subsegments.
The visibility is really going to be a function of a couple different things. But one such thing is how much project work a company might be engaging in versus how much of the revenue base is more managed services.
But really, you can look at similar metrics when you’re considering those things like bookings, repeat business, and client tenure.
And then obviously, the margin profile of these companies is important. So the gross margin is going to reflect the employee costs.
But at this point, most companies are managing to and guiding to operating margin. I would say that expanding margins are generally preferred over peak margins, but that high-growth companies are often holding margins steady and reinvesting back into the business.
And then the balance sheet; we’re going to be looking for a strong balance sheet. You don’t typically see much debt in this industry, and then healthy free cash generation as well.”
Maggie Nolan sees the IT space from the perspective of a portfolio stock picker:
“It’s really about making an enterprise that is agile and can create something, scale it up, scale it down, completely change directions, and do all of that with ease.
So the companies that are best positioned in the IT services space to create that value proposition are the companies that are using agile development methodologies, the ones that don’t have any of the legacy baggage weighing them down.
So in the custom product development space, big companies like an EPAM (NYSE:EPAM), or an Endava (NYSE:DAVA), or Globant (NYSE:GLOB) or Grid Dynamics (NASDAQ:GDYN) that really aren’t exposed to any of the infrastructure outsourcing, or some of those other areas that have faced pricing pressure as digital transformation started stealing more of the IT spend.
And then on the business process outsourcing side, I would say those companies play a role in creating these frictionless experiences. So for actual process reengineering, you’d see companies like Genpact (NYSE:G) or WNS (NYSE:WNS) or ExlService (NASDAQ:EXLS) helping with that in areas like automation, data and analytics.
And then there’s a subsegment as well that’s a little bit more heavily weighted to the customer experience side of things, a company like TELUS International (NYSE:TIXT) or TTEC (NASDAQ:TTEC), for instance.
I think we’re still early in how all of this affects businesses across the globe. And cloud adoption is going to continue to progress. Companies are going to continue to embrace that agility.
And actually, COVID can help accelerate that, as companies rethink how they want to connect with their end customers going forward.”
This perspective on IT service company winners has created several current hot stocks picked by Maggie Nolan:
“I’ll start with a small-cap name that I’ve been pretty interested in for a while now. It’s a company called Perficient (NASDAQ:PRFT).
It has about a $2.2 billion market cap. They are a digital transformation consulting firm. They’re serving the Global 2000. The reason I think they’re really interesting right now is that the company is picking up a lot of momentum.
There are several growth tailwinds that I would outline. The first being they have a robust acquisition strategy, and have done some M&A over the years that has really produced nice synergies, and it’s been transformational for the company, kept them very relevant. And their positioning is very favorable.
We talked about this enhanced demand for digital transformation coming out of COVID. This is a company with 80% of what they’re doing in terms of revenue is going to be tied to digital transformation work. There’s definitely an opportunity for them there.
When you think about another sub-exposure, this is a company that has 33% of revenue in health care-related clients and health sciences. And so that’s an industry that we think is ripe for digital transformation.
There is a lot of opportunity there, there’s a lot of efforts from services companies across the spectrum to pick up market share there. And Perficient already has a nice brand name and a nice client base that’s starting to grow there.
And then, the last thing that I’ll point to in terms of the growth tailwinds is their maturing sales force.
They’ve made investments here a couple of years back. We’re seeing those clearly start to pay off in terms of the revenue acceleration they were experiencing pre-COVID. And now that’s picking back up as we see the light at the end of the tunnel here in terms of COVID.
So great growth tailwinds, combined with an opportunity for long-term margin expansion here.
They’re shifting more new work offshore and nearshore. That’s going to be higher margin for them going forward.
And so, you can see an opportunity for this company to grow their margin profile to the 20% EBITDA range in the medium term. I think you have a good buy here.
And that there is accelerating revenue growth coupled with margin expansion that oftentimes drives multiple expansion, when you’re thinking about those valuation multiples, plus additional upside from continued successful M&A strategy, and then transformational M&A that could push the structural growth rate of this company even higher.”
To get all of Maggie Nolan’s top picks, read the entire 2,731 word interview, exclusively in the Wall Street Transcript.
Maggie Nolan, CPA
Research Analyst
William Blair & Company, L.L.C.
email: mnolan@williamblair.com
