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
Bill Baker, CFA, Founder and Portfolio Manager, Gaineswood Investment Management
Bill Baker, CFA, is Founder and Portfolio Manager at Gaineswood Investment Management, Inc. He founded the predecessor firm, GARP Research Corporation, in late 1995 after gaining portfolio management experience by managing in excess of $100 million for nine years.
Mr. Baker has performed investment management and research for over 30 years. Mr. Baker was a portfolio management professional at Oppenheimer Mutual Funds for nearly five years, managing stock investing for several funds totaling over $500 million.
One of these funds, Oppenheimer Asset Allocation, was awarded Morningstar’s 5-Star mutual fund rating in November 1990 shortly before he left the firm.
Subsequently, he joined Reich & Tang as one of four portfolio investment managers until founding Gaineswood. He received an MBA from the Amos Tuck School at Dartmouth College and a degree in economics from the University of Pennsylvania.
He wrote “Endless Money: The Moral Hazards of Socialism” which John Wiley & Sons published in 2009.
In this 2,525 word interview, exclusively in the Wall Street Transcript, Mr. Baker builds his portfolio from his investing philosophy.
“Gaineswood Standard has been here since the inception of the firm. It’s had what I think are pretty good returns. It’s over 25-plus years. It’s compounded at 15.5% annualized, and that compares to less than 10% for the Russell 2000.
And the three-year and five-year, well, even the one-year, they’re all at least 10% above the Russell 2000 on an annualized basis.
And we had a particularly solid year in 2020 during COVID, when we were up over 50%. And I think that was because of this niche and theme investing.
When we talk about some of the holdings, you’ll see a pattern emerge. I looked at all of our top 10 names just recently and almost none of them really have this direct gearing to the economy.
They kind of have their own motion internally from some niche that they’re involved in. And I think that’s something that got valued at a premium last year.”
One interesting stock pick that is currently top of the list for Gaineswood Investment is sheetrock supply company GMS.
“We recently took a position in a company called GMS Inc. (NYSE:GMS). It’s a little different from our typical investment in that it’s a slower grower. And accordingly, it’s priced at about 12 times earnings, excluding amortization charges, which are pretty high.
But what we found when we were going through our research process on another name that we recently bought, was that this is an interesting roll-up of local yards that produce or that distribute gypsum wallboard and also acoustic ceiling tiles, as well as other things. Those are the probably the two most significant areas.
And we found that their return on tangible capital was over 30%. They really got a local competitive advantage and have strong relationships with some of the suppliers.
And there’s some discipline from management on how they expand. So I think they can be a reliable, low-teens kind of grower. And on top of that, I think, we’re at a very interesting place in the housing cycle. And I don’t like to play cycles in commodities, but if it’s closer to the low point than the high point,
I’m not afraid to get involved because I see a multi-year trend benefiting them.
I just think it’s grinding out the improvement from COVID-19; some of the volume numbers dropped in 2020. And last year while the economy really took a whacking, the residential construction side was surprisingly resilient.
And for a cyclical area, I think that people should pick up and take notice of that — that there’s kind of repressed demand. I think you could have a strong year this year and next year on the residential side. The commercial side is probably slower in responding.
But there’s another company that we invested in, called Armstrong World (NYSE:AWI), which is how we discovered GMS during the due diligence. And on the commercial side, Armstrong is doing some very interesting things to basically double its available market, through specialty architectural ceiling and wall products. GMS is intertwined significantly, as the largest distributor of Armstrong products.”
Another Gaineswood Investment top pick is a glaucoma eye drop supplier.
“Our number-one largest holding is Aerie Pharmaceuticals (NASDAQ:AERI). It’s one we know extremely well. It has a market cap of less than $1 billion. By the way, our average or median market cap for the whole product — which has about 50 names — the median is $4 billion.
So, this one’s smaller and oftentimes we start out at the low end and then they appreciate to be far greater than the $4 billion median.
The stock is really depressed for a number of reasons. But probably the biggest one is that COVID-19 really did affect them. They make eye drops for glaucoma, and these kinds of patients didn’t want to see their doctors at all last year. But they also have this very robust research pipeline.
It’s very hard to analyze this company because there’s so many products they’re working on. But they’re all potentially very large payoffs, particularly in the retinal disease category where they’re developing competition for the market that typically requires frequent injections to the back of the eye.
These would be less frequent. So I see a lot of earnings potential down the road. And I think, we can hold this one for 10 years or 12 years and be very happy with it.”
Another recommended stock from Gaineswood Investment has been a 10 bagger for them so far.
“Our third largest position is something that we wouldn’t be buying right now. But it’s something that just provides an example of how we do things. It’s a company called Generac (NYSE:GNRC).
We got involved in Generac in late 2016, when the stock was a tenth of where it is today. And you look at what has happened to them. Their revenue and earnings really grew very significantly.
We certainly foresaw pretty significant growth. But it’s been interesting because their market has moved from just being an East Coast to Midwest a little bit. A new marketplace for them is California, being red hot, and basically, they make home standby generators. So with all of the fires and utilities having rolling blackouts, people are buying generators there, too.
I wouldn’t say they have a dominant share, but they’ve really got a terrific competitive advantage. It’s a little expensive. It’s done very well. Names like this are ones where we’ve peeled off.
We still like to maintain a core holding when we think things are good. And things are likely to continue to be good for this company for a number of years to come.”
Get all of Gaineswood Investment’s top picks and the details behind them by reading the entire 2,525 word interview, exclusively in the Wall Street Transcript.
Scott Berg, Managing Director and Senior Research Analyst, Needham & Company,
Scott Berg, Managing Director and Senior Research Analyst, joined Needham & Company, LLC in 2015. Previously, he was Senior Research Analyst at Northland Capital Markets covering enterprise/application software.
Prior to Northland, he was Senior Research Analyst with Feltl & Company and Research Analyst/Associate with ThinkEquity, both with a focus on enterprise software.
Before his Wall Street career, Mr. Berg held a variety of internal IT management positions for 10 years. He holds an MBA in finance and a B.A. in economics from the University of Minnesota.
In this 2,911 word interview, exclusive to the Wall Street Transcript, Scott Berg picks many mid-cap tech stocks to own in 2021.
The Needham senior analyst sees the pandemic related business process changes as permanent:
“Things have changed a lot since the start of the pandemic. In software, generically, especially in enterprise software over the last year, you saw a lot of the companies I cover actually benefit from the pandemic.
They’ve seen their customers spend more on their applications, mainly because their applications will automate certain business processes. In the environment that we’re in, a lot of that automation was required to work with teams, and amid the disparate nature.
We saw business trends that were soft initially. Since the first part of the pandemic everything has really picked up over the last two or three quarters. General bookings commentary has been quite positive across my space. We see it not just in the public companies, but the private companies.
I believe the IPO opportunity for a lot of private companies that I track is going to be very significant over the next one to two years.”
Some top Needham picks for this current market have already seen big benefits:
“Two companies that had at least immediate benefit from the pandemic — one is called Bill.com (NYSE:BILL). Bill is a company that helps small and midsize businesses automate their accounts payable processes and their payment processes.
A lot of small businesses still write checks to pay their bills, even to this day. Bill’s platform will digitize that process and then make payments electronically. So in a work-from-home environment when a controller or an AP clerk doesn’t have direct access to a manager or business owner to sign a check, that solution is an immediate benefit.
The second one is a company called Five9 (NASDAQ:FIVN) that does contact center software. A lot of these companies had to spin up much larger contact centers initially for a variety of different reasons. So both of those benefited.
The Needham analyst also has some top picks for 2021:
“Now, in terms of calendar 2021, the two companies that I really like are company called Anaplan (NYSE:PLAN) and a company called Smartsheet (NYSE:SMAR). Both of their businesses were not direct beneficiaries in the first four or five months after the pandemic.
But now that these businesses have remained on, or found their solid footings, they help to address different types of business processes that are kind of broken in a work-from-home environment. As we continue to work more remotely, going forward we will in some fashion see these systems really help foster better collaboration amongst employees.”
More detail from the Needham senior analyst on Anaplan as a top pick includes the reasoning for it:
“They’re a planning software company with software used by individuals within either a finance department, a sales department, or maybe an operations department, to put together the future financial plan of a company.
Most companies will have a one-year plan, a three-year plan, and maybe a five-year plan. And this is the software that’ll actually encompass all of those financial components. It might be sales projections, it might be headcount projections, but this is what you’ll use to manage your business in those different time frames.
Half of the market still uses Excel, which is obviously not a very efficient product to bring together information from what could be hundreds of different managers within your business if we’re talking a large company.
You really need a more automated solution, like Anaplan gives. This is a technology that’s going to be more widely employed.
But at the beginning part of the pandemic, companies weren’t buying because they were effectively stuck with what they were already using. And you couldn’t make this change overnight, because there tends to be a long implementation processes.
Now, as the business environment has stabilized, we’ve seen corporate executives and Anaplan partners talk about how using these tools can be used to more effectively manage the business, especially during this immediate change in the macro economy.
And Anaplan is the tool that can help manage those real-time changes much more effectively, let alone the five-year planning. And so PLAN is my top pick for the year.”
Another pick for the new work from home environment from Needham:
“Number two would be Smartsheet. This is a company that’s in what’s considered the collaborative work management space. Some like to call it just Excel in the sky. It’s much more than that, because the product looks like an Excel spreadsheet, but it has some really powerful business process and automation functionality within it.
Companies will use it for things like project management. For example, maybe when building a new store for project management in your IT area. I’ve seen some companies that will use it for expense management areas, or within a sales operations environment. There are many uses and functionalities.
Again, it’s a platform that wasn’t used a lot, and wasn’t sold a lot during the initial stages of pandemic because customers were stuck with what they had. But now as businesses find better footing, it’s been a much better solution to fix those business processes that don’t really work in the current environment.”
Get the detailed research insights and current market moves from Scott Berg’s 2,911 word interview, exclusively found in the Wall Street Transcript, and have all the top 2021 stock picks from this Managing Director and Senior Research Analyst from Needham & Company.
Bryant VanCronkhite, Portfolio Manager, Wells Fargo Asset Management
Bryant VanCronkhite, CFA, is a senior portfolio manager and co-team leader for the Special Global Equity team at Wells Fargo Asset Management.
Previously, Bryant was a senior research analyst on the team, which he joined before the acquisition of Strong Capital Management.
Earlier, Mr. VanCronkhite was a mutual fund accountant for Strong. He earned a bachelor’s degree and a master’s degree in accounting from the University of Wisconsin, Whitewater, and is a certified public accountant
In this 3,657 word interview, exclusively in the Wall Street Transcript, VanCronkhite of Wells Fargo Asset Management details the investing philosophy that underpin his top picks:
“The Special Mid Cap Value strategy is an approximately $13.5 billion strategy which today focuses on U.S. equities that possess a very specific set of criteria.
That criteria is a unique competitive advantage that we’ve identified through a durable asset base. That asset base provides very strong and ongoing free cash flow.
And importantly, the unique part of our process really revolves around our ability to identify companies that are well positioned to use their balance sheets to drive future free cash flow growth, and that balance sheet can be used for things like acquisitions, organic investments, stock buybacks, dividends, and vertical integration.
There are a lot of ways companies can use balance sheets to create value. But our process uniquely understands and identifies that opportunity. And we try to exploit a market inefficiency that really doesn’t give credit for those balance sheet-driven choices until after it’s visible through the income statement.
And through that lens, we deliver outperformance versus our benchmark and peers over rolling three- and five-year time periods. And we do so historically with a lower tracking year than our peer group on a very consistent basis.”
One unusual outcome from this idiosyncratic Wells Fargo Asset manager is a well known retailer:
“One of the areas in which we’re finding opportunity is the consumer staples sector. Investors have sold staples — even shorted staples — to reallocate capital into more cyclical industries to gain exposure to the reopening trade. And that’s left some very attractively priced companies.
And one example today would be BJ’s Wholesale Club (NYSE:BJ). BJ’s is a mass merchant retailer similar to the Costco (NASDAQ:COST) business model where customers pay an annual membership fee to access the club and purchase food and furniture, electronics, apparel, etc.
And they do so because there are usually very attractive prices within these clubs. And during the pandemic, BJ’s saw a significant increase in membership, which drove a meaningful acceleration in free cash flow. And the market rewarded the stock originally. But more recently, concerns over retention of membership growth has caused the stock to lag the market.
Our view on this is that the market is underappreciating the general stickiness of memberships. Once a customer has tried and benefited from shopping at BJ’s clubs, they tend to stick around and become longer-term members.
We think the market is also missing the degree to which the free cash flow growth has improved the balance sheet. And importantly, through our process, this now creates opportunity for BJ’s to strategically deploy that capital to sustain and grow future free cash flow.
So we expect them to accelerate new club openings, where they’re going to shift their product allocation to higher-margin items. They’re going to invest in higher-margin services.
All of these balance sheet-driven choices will drive higher revenue, better margins and higher future free cash flow than the market expects. And the relative attractiveness and the valuation are driven by a rotation away from staples in the near term, which we appreciate, but it’s creating a very attractive reward/risk opportunity within BJ’s today.”
Another Wells Fargo Asset Management favorite is a real estate brokerage:
“…A company that’s classified in the real estate sector, but really, it’s not a REIT. It’s a business service company called CBRE (NYSE:CBRE). We think many people commonly see CBRE signs as they are driving down the street and the signs are on buildings.
CBRE is one of the leaders globally in real estate transaction services, so helping landlords find tenants or helping people sell their real estate.
CBRE is a name we’ve owned for several years and continue to hold as one of our larger positions, because they too have gone through a business transformation. They used to be exposed meaningfully to transaction volume.
So whether a business lease was closed or a property was sold, that drove a lot of their earnings and free cash flow. Over the last decade, they’ve made several acquisitions and invested in technology and assets and services that will drive their business towards more of a service-oriented or recurring cash flow stream.
And the market begins to appreciate that.
But the added benefit of CBRE right now is that not only have they done a phenomenal job in navigating the pandemic and the recession, but we’re now seeing the uptick in business activity as people try to navigate how to deal with real estate in a new world, and that will drive additional needs for CBRE’s asset base, for their expertise, and all of that will result in strength of earnings in the future.
They’re doing this now with an incredibly underlevered balance sheet, which provides meaningful optionality for continued investments, both in organic growth and through acquisitions.
We believe CBRE is taking share from a very fragmented competitive base. And ultimately, we think that the future free cash flow is meaningfully underappreciated at today’s valuation.”
Another Wells Fargo Asset Management pick is looking for a big rebound from the pandemic panic:
“We do believe the economy is going to see a period of strength behind both monetary and fiscal support and the general recovery of the economy as we reopen.
And so one of the sectors that we find meaningful value today is the industrial sector. That’s a very diverse set of stocks. But one of the companies that we like a lot and have owned for a while, continue to hold at the top of our portfolio, is a company called AerCap (NYSE:AER).
AerCap is an airplane leasing organization. And through the cycle, they provide a highly predictable cash flow stream that is reinvested back into organic growth through the purchase of new planes and re-leasing them to clients, but also returning capital to shareholders through attractively priced buybacks.
And that combination of balance sheet allocation has driven strong growth in book value and stock price appreciation historically, something that we’re obviously very, very drawn to.
However, the pandemic caused air travel to grind to a halt. And many of their customers — think of global airlines — experienced financial hardship. AerCap had to work with their customers through these difficult times and, in our opinion, did so beautifully.
And at the same time, they have not been sitting on their hands. They use the opportunity of stress in their industry to grow their business. And most recently, they announced the acquisition of GE’s (NYSE:GE) aircraft leasing business.
The strength of AerCap’s balance sheet allowed them to play offense, while many of their peers were playing defense, frankly, and that we believe will ultimately drive compounding of wealth for their shareholders, including us. And this acquisition does several things for them. But importantly, it amplifies their strong competitive advantage. Scale in this industry is very important and very meaningful.
On top of that, the pandemic, in our opinion, will drive continued share shifts to leasing from buying of airplanes by their airline customers. The shift to leasing in addition to the individual steps the company made through acquisitions will, we think, drive much higher free cash flow in the future.
Both those elements we think are underpriced. The stock has appreciated nicely. Though many stocks are exposed to the reopening process, the steps that AerCap has made during the pandemic to improve their competitive advantage and drive higher market share through the acquisition of GE’s financing business, we think, is still underappreciated today.”
Get the complete detail by reading the entire 3,657 word interview with Mr. VanCronkhite of Wells Fargo Asset Management, exclusively in the Wall Street Transcript.
Bryant VanCronkhite
Managing Director & Senior Portfolio Manager
Wells Fargo Asset Management
(415) 396-8000
www.wellsfargoassetmanagement.com
Jonathan L. Brandt, Senior Equity Research Analyst, Metals & Mining, HSBC Securities
These are mining stock picks from Jonathan L. Brandt, CFA, is a Senior Equity Research Analyst covering GEMs ex-Asia Metals & Mining and LatAm Pulp & Paper at HSBC Securities (USA) Inc.
In the previous six years, he was a buy-side analyst at a major U.S. investment firm covering metals and mining companies in Latin America, Europe, the Middle East and Africa. He holds a bachelor’s degree in economics from Wesleyan University.
In this 3,157 word interview from December of 2020, Mr. Brandt highlighted his top mining stock picks, many of which have had stellar returns since then.
“I would say that in iron ore, the concern has really been over the supply from Brazil and, in particular, Vale (NYSE:VALE). You will remember almost two years ago, in January of 2019, they had the Brumadinho incident.
Production has really been hampered since then. In 2018, they did about 385 million tons of production; that has been hovering around 300 million tons. So we lost a significant amount of capacity from them over the past couple of years, and that combined with strong demand has led to iron ore prices staying north of $100 for a while, and now we’re sitting at about $120.
Vale is desperately trying to get that production back.
We think they will, but it’s a matter of time. Their capacity is about 400 million tons. What they’ve said is they should reach that run rate sometime in 2022. We would expect them to be back up to full-year production — about 385 million tons, which is what they did in 2018. We would expect them to be back up there by 2022 or 2023. We are seeing better supply coming from Vale.
Because iron ore prices have been strong, we’ve also seen incremental supply coming from other producers. Anybody that is producing iron ore is looking to produce as much as they can because prices are really, really strong.
And we’ve seen that not only out of domestic China, we’ve seen some incremental production also in other parts of Brazil. We’ve seen Australia be really, really strong. They set some records this year in terms of monthly production. But it’s really Vale that will need to bring back supply in order to try and balance the market.
…Within metals and mining, Vale is our top pick. We like the cash flow generation. We think the company is doing a lot of positive things on the ESG side.
The “controlling shareholders” and that agreement has expired today, so there are no more controlling shareholders. There’s less government influence. It’s becoming what they envisioned a couple of years ago — a “true” corporation.
It’s taken a few years to get there, and it’s still not 100% there yet, but it’s certainly on the right path.
The next big milestone for them will be their board of directors election in April of next year. Certainly, we’d expect more minority shareholder participation and influence on that election. So we think there are a lot of positive things, even if we expect the iron ore price to weaken a bit.”
There are other mining stocks detailed in this interview:
The other ones [mining stock picks] we’ve been recommending have been Gerdau (NYSE:GGB), Ternium (NYSE:TX) and Grupo Mexico. I think of those, the ones that look more attractive are Ternium and Grupo Mexico.
Gerdau is still a fantastic story, it’s just starting to look a bit expensive, but it’s a nice play on potential Brazilian infrastructure. We’ve seen their economy has really improved since April and May, when they were really impacted by the pandemic.
We have historically low interest rates in Brazil — I think they are at the lowest they have ever been — and that has spurred all sorts of demand for real estate.
We’ve seen significant real estate launches and construction starting, and that has obvious implications for long steel rebar and things like that. We think that demand for long steel continues until 2021 at least.
What we’re seeing from China in terms of their steel demand, that’s had an impact on pricing, and that pricing that we’ve seen in China has influenced prices positively in Brazil.
So there are price hikes; there are volume growth and good demand. We think Gerdau is a good way to play that, and if the U.S. government can put through an infrastructure stimulus program, Gerdau is the natural beneficiary of that, given their operations in North America.
Grupo Mexico is positively exposed to the copper price; 80% of their NAV is going to be copper through their subsidiary, Southern Copper. They are one of the lowest-cost producers; they’re well into the first quartile of cash costs.
Their C1 cash costs are $0.65, $0.70 per pound. You compare that to the $3.20 per pound that we have today for a price, and cash flow is really, really good.
They’re one of the few producers who can push through production growth in the next several years. It’s not a lot in the next several years, but it’s something. And then there’s more meaningful greenfield expansion coming probably later in the decade — six, seven years from now — and that has the ability to move production from 950,000 tons to 1 million tons today, closer to 1.5 million tons, 1.6 million tons.
You’re talking 50% growth over, conservatively, let’s call it 10 years, at the low end of the cost curve. To us, it’s attractive.
At the same time, you’re getting a 5%, 6% dividend. It’s not as good as some of the majors, it’s not as good as what we expect Vale and some of the London listed majors are paying, but you also don’t necessarily have the same type of growth with them.
And it’s trading at a pretty significant discount to Southern Copper. I think last we checked, it was like a 40%-plus sum-of-the-parts discount to Southern Copper and their railroad subsidiary, Grupo Mexico Transportes. We think you’re getting good growth, good exposure to the markets that we like. Presumably, their rail division is positively exposed to normalizing trade relations between the U.S. and Mexico.
So all in all, we continue to really like it, despite the good performance that it’s had.
The last one is Ternium. We’ve seen Mexico demand improve from the pandemic levels. We’ve seen prices increase.
They had a very good quarter; we’d expect that to carry over into the fourth quarter and into 2021, both from a volume standpoint and also from higher steel prices. In our view, they’re one of the best-managed steel companies, I would say not only in Latin America, but I would put them up against any steel company globally.
I think management is top notch, and we can see that through their returns, which have consistently been above cost of capital, regardless of the steel price environment. They manage their operations very, very efficiently. We continue to like that one as well.”
Mining stock picks have been a top performing sector, read the entire 3,157 word interview from December of 2020 with Jonathan Brandt to get all his mining stock picks.
Jonathan L. Brandt, CFA
Senior Equity Research Analyst
HSBC Securities (USA) Inc.
email: jonathan.l.brandt@us.hsbc.com
Chris Wright, Portfolio Manager, Kayne Anderson Rudnick
Chris Wright, CFA, is a portfolio manager and senior research analyst at Kayne Anderson Rudnick Investment Management, an investment management affiliate of Virtus Investment Partners, where he has primary research responsibilities for the financial sector.
Mr. Wright began working in the financial industry in 2001. Before joining Kayne Anderson Rudnick in 2012, he worked at Alvarez & Marsal and at Houlihan Lokey Howard & Zukin.
Chris Wright earned a B.S.E. degree with a concentration in finance from the Wharton School at the University of Pennsylvania and an MBA from the University of California, Los Angeles.
“Kayne Anderson Rudnick is a Los Angeles-based investment manager founded in the mid-1980s by Ric Kayne and John Anderson. Today, we manage over $50 billion in assets, with strategies ranging from small cap up to large cap, in core, growth and value.
We also have several billion in AUM in international and emerging market strategies as well.
There is one unifying investment philosophy across all of those strategies and that’s a focus on high-quality businesses. We think of high-quality businesses as being companies with a durable competitive advantage.
That competitive advantage allows a company to earn attractive rates of profitability and returns on capital over a long period of time. We focus on high quality for a few reasons. Number one, it allows us to concentrate our investments and it gives us the ability to hold our investments over a long period of time.”
In this 3,267 word interview, exclusively in the Wall Street Transcript, Chris Wright details the investment decisions for key stock picks:
“I’d like to discuss a couple of companies: Avalara (NYSE:AVLR) and Lamar Advertising (NASDAQ:LAMR), both long positions, which are interesting companies, but whose experience through the pandemic last year was very different.
I’ll start with Avalara. Avalara provides sales tax compliance software mostly to small and mid-size businesses. Its software is used to automate the calculation, collection in sales tax, use tax, excise tax, and anything with respect to taxes on any kind of sale by a business.
The process of identifying different local taxes for sales transactions is specific to both the location where the item is sold, as well as the item itself. And so this requires frequent updates to ensure companies are compliant with the local tax laws.
Hopefully you can appreciate it would be quite cumbersome if you’re selling across all 50 states — how difficult that endeavor might be.
Just to give you an example of how complex this can be, in New York, if you buy a bagel, and you don’t do anything with that bagel, it’s not subject to tax. However, if you were to cut that bagel, put cream cheese or butter, or toast it — suddenly that bagel is subject to local taxes.
Another example would be in Louisiana. If you buy a pre-packaged sandwich, it is not subject to sales tax. But if a retailer were to prepare that sandwich for you on premise, suddenly that sandwich becomes taxable.
There’s just a myriad of these types of examples all across the United States. Depending on the service or the item, it could be subject to local taxes. And those tax laws change constantly. And so that’s where Avalara steps in to really solve that headache for small and mid-size businesses.
Two things have happened recently that have provided a tailwind for this business.
First, you have the U.S. Supreme Court’s Wayfair decision, which in essence said that businesses without a physical presence can still be subject to local taxes, so long as the dollar value or the number of items sold hits a certain threshold within that state. So each state can go and determine what that threshold or economic nexus is.
Overnight, the Supreme Court allowed states to go collect taxes for online sales. You can imagine this has become a huge headache for online sellers. And then given what happened last year with the pandemic, local services were shut down and consumers started to buy more goods online — this just compounded the issue for many online sellers.
And so that clearly has been a boon for the business both because of the Wayfair decision, as well as what happened due to COVID.
I would contrast that to the other company that I mentioned, which is Lamar Advertising. Lamar is run by Sean Reilly, who is the fourth generation of the Reilly family to run Lamar.
Lamar is one of the largest outdoor advertising companies in the country. Unlike competitors, such as Clear Channel (NYSE:CCO) and Outfront (NYSE:OUT), Lamar tends to focus on smaller metropolitan areas. Think Baton Rouge, Louisiana, instead of New York City. In those local markets, Lamar tends to be the dominant billboard player.
If you want to have an advertisement up on a local billboard or poster in these smaller markets, you have to go to Lamar.
And just as a quick aside, something that’s unique about the outdoor billboard space is that there’s a myriad of state, local and federal zoning regulations that govern where billboards can be placed.
Because of these overlapping regulations, it’s extremely difficult to try to erect a brand-new billboard. There are some pretty significant barriers to entry to new supply.
Really, all the capital investment in the industry goes toward just renovating existing billboards and converting them into digital billboards. But no new billboards really are being erected today.
If you think about what happened last year, during the pandemic, clearly there was a pullback in advertising spending, as everyone tried to reassess what was going to happen as the economy shut down.
Advertising spending is the lifeblood of the outdoor billboard market. And so that was clearly a headwind to the business, but Lamar did a very good job of cutting expenses.
After the onset of the pandemic, they slashed capex by roughly 70%. Again, if you’re not converting billboards to digital, there’s very little as far as maintenance capex costs for existing billboards.
You can toggle capex pretty quickly. So as a result, even though revenue was down last year — double digits — the company actually was able to generate more free cash flow in 2020 than they did in 2019, even though, again, the top line was pressured due to the pullback in advertising spending from COVID.
As the economy starts to reopen, clearly better times are ahead for the industry as ad dollars come back into the market. More importantly, with respect to billboards, they’re not subject to some of the negative impacts hurting other types of media — cord cutting, ad skipping, etc.
If you think about billboards, you can’t close your eyes when you’re driving or walking, so you’re kind of forced to see these ads. That’s why ad dollars continue to go towards this channel versus others — say local TV stations or print media.
And so we think that longer-term trend, plus the economy reopening, plus potentially the success of programmatic advertising in the outdoor advertising space — they all present some potential nice tailwinds for this industry and also for Lamar.”
Get all of Chris Wright’s stock picks and the reasoning behind them by reading the entire 3,267 word interview, exclusively in the Wall Street Transcript.
Chris Wright
Portfolio Manager & Senior Research Analyst
Kayne Anderson Rudnick Investment Management
www.kayne.com
email: info@kayne.com
Bill Baker, Portfolio Manager, Gaineswood Investment Management
Bill Baker, CFA, is Founder and Portfolio Manager at Gaineswood Investment Management, Inc.
He founded the predecessor firm, GARP Research Corporation, in late 1995 after gaining portfolio management experience by managing in excess of $100 million for nine years.
Mr. Baker has performed investment management and research for over 30 years. Mr. Baker was a portfolio management professional at Oppenheimer Mutual Funds for nearly five years, managing stock investing for several funds totaling over $500 million. One of these funds, Oppenheimer Asset Allocation, was awarded Morningstar’s 5-Star mutual fund rating in November 1990 shortly before he left the firm.
Subsequently, he joined Reich & Tang as one of four portfolio investment managers until founding Gaineswood.
He received an MBA from the Amos Tuck School at Dartmouth College and a degree in economics from the University of Pennsylvania. He wrote “Endless Money: The Moral Hazards of Socialism” which John Wiley & Sons published in 2009.
In this 2,525 word interview, exclusively for the Wall Street Transcript, Mr. Baker reveals the Gaineswood Investment key investment philosophy and details his top stock picks for 2021 and beyond.
“Gaineswood Standard has been here since the inception of the firm. It’s had what I think are pretty good returns. It’s over 25-plus years. It’s compounded at 15.5% annualized, and that compares to less than 10% for the Russell 2000.
And the three-year and five-year, well, even the one-year, they’re all at least 10% above the Russell 2000 on an annualized basis. And we had a particularly solid year in 2020 during COVID, when we were up over 50%. And I think that was because of this niche and theme investing.
When we talk about some of the holdings, you’ll see a pattern emerge. I looked at all of our top 10 names just recently and almost none of them really have this direct gearing to the economy. They kind of have their own motion internally from some niche that they’re involved in. And I think that’s something that got valued at a premium last year.”
The small to mid cap space yields many unknown stock picks for Gaineswood Investment Management:
“We recently took a position in a company called GMS Inc. (NYSE:GMS). It’s a little different from our typical investment in that it’s a slower grower.
And accordingly, it’s priced at about 12 times earnings, excluding amortization charges, which are pretty high. But what we found when we were going through our research process on another name that we recently bought, was that this is an interesting roll-up of local yards that produce or that distribute gypsum wallboard and also acoustic ceiling tiles, as well as other things. Those are the probably the two most significant areas.
And we found that their return on tangible capital was over 30%.
They really got a local competitive advantage and have strong relationships with some of the suppliers. And there’s some discipline from management on how they expand.
So I think they can be a reliable, low-teens kind of grower. And on top of that, I think, we’re at a very interesting place in the housing cycle. And I don’t like to play cycles in commodities, but if it’s closer to the low point than the high point, I’m not afraid to get involved because I see a multi-year trend benefiting them.”
Another major position for Gaineswood Investment Management is in the earth satellite business:
“I will talk about Maxar (NYSE:MAXR). That’s a more recent purchase for us, in last December. Back then, it was trading in the low- to mid-$30s.
The stock ran up and came back close to that level. I think it was $36 yesterday. But there’s a lot of amortization in the earnings, so we see some pretty big earnings currently and growth in the next number of years. It’s a thematic play, if you will, on space.
We’ve been involved with the predecessor company. So we have over a decade of knowledge about this. We saw a transformation occurring there. They got a new CEO, Dan Jablonksy, back in January of 2019.
He divested Canada, cleaned up the balance sheet completely, turned around what was originally called the Loral Space Systems operation out in Palo Alto, California, doing U.S. government work now. Turned around the margins.
But the fundamental business historically has been the satellite business. Not just building them like Loral does, but operating a fleet. And that business has fundamentally changed.
It used to be very capital intensive, focused on building extremely large ones. And now they’re making much less expensive ones that are still pretty sophisticated. And for the return on capital employed, it is going to be very attractive going forward.
And they’re launching six satellites that cost a fraction of what the previous ones did. So that will be very interesting.
And in the technology, it’s just getting better. As you get down to 30-millimeter image sizes, you get to be able to produce 3D renderings. And that’s extremely valuable for military purposes.
And these satellites have a very big military and intelligence use. They’re skewed to that much, much more than other satellite fleet operators. Also, they are involved in a lot of the new technologies that will be used in the lunar and Mars space missions.
And so when we looked at the whole space, it was almost impossible to find companies that weren’t overly involved in legacy technology. And what we found in Maxar pleasantly surprised us.
Because we thought of it as this old-time satellite operator with the old big satellites. And we actually found they’ve been working on a lot of new propulsion technology that is well positioned for a number of years in the future. So we’re very excited about Maxar.”
To get the complete detail on these stocks, and many more, read the entire 2,525 word interview with Bill Baker of Gaineswood Investment Management, exclusively in the Wall Street Transcript.
Bill Baker
Founder & Portfolio Manager
Gaineswood Investment Management, Inc.
www.gaineswood.com
