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
Amberjae Freeman, CEO, Etho Capital
Amberjae Freeman is Board Chairperson and Chief Executive Officer of Etho Capital and is currently an expert advisor and partner for the ETF Manager Group’s (ETFMG) ETHO Climate Leadership US ETF.
Ms. Freeman heads Etho Capital and its board to shape strategy and execute vision. She also serves on the board of directors of The Forum for Sustainable and Responsible Investment (US SIF) and is on the Advisory Board of the South Bay Economics Institute (SBEI) at CSU Dominguez Hills.
Ms. Freeman’s career in sustainable finance began 15 years ago when she received dual fellowships with the Clinton Global Initiative in New York City and the Clinton Hunter Development Initiative in Kigali, Rwanda. Prior to joining Etho Capital, Ms. Freeman developed innovation-focused thematic portfolios for fintech startup Swell Investing.
As senior analyst for the SRI Wealth Management Group at the Royal Bank of Canada (RBC), she developed proprietary ESG and impact research and mission-related investment solutions for institutional, foundation, and endowment portfolios representing US$2 billion in assets. Ms. Freeman has served as an adjunct professor of political science and economics at Santa Barbara City College (SBCC), and coordinated country-specific research to support asylum cases for the Center for Gender & Refugee Studies (CGRS) at UC Hastings College of the Law.
Ms. Freeman holds a bachelor’s degree and a master’s in Global & International Studies from the University of California, Santa Barbara.
In this 3,404 word interview, exclusively in the Wall Street Transcript, Ms. Freeman reveals her Etho Capital fund methodology and applies it to her top stock picks for investors.
“What we found is that if you consider a company’s total environmental footprint — from product components all the way through to the finished product and beyond — the companies that manage their carbon emissions and environmental resource use better relative to their subsector peers tend to have stronger long-term stock performance. We observed a correlation between these factors. So we developed the ETHO ETF and the index with this relationship in mind.
Our process has five steps: The first step is quantitative. We assess the total carbon emissions for each company in the U.S. stock market and identify companies whose performance is 50% better than the median average of their sub-industry group. We add those to the first tranche of companies that may be eligible for inclusion.
The second step includes the identification and avoidance of companies whose business activities are inconsistent with most ESG mandates. I should say here that all of our investment products are fossil fuel free.
We do not invest in companies that extract and sell oil and gas or coal. Those securities are automatically ineligible. Additionally, companies that generate significant income from alcohol, gambling, tobacco, and the manufacture and sale of weapons are also avoided.
Now, we understand that many investors find exposure to these particular industries perfectly acceptable. However, the negative environmental consequences of tobacco cultivation and the pollution and human health consequences associated with smoking cigarettes is well documented, as is the environmental degradation and pollution that results from violent conflict. As such, these business activities are not in alignment with our environmental sustainability focus.
Next, we do a qualitative assessment of each company to identify material environmental, social, and governance risks.
For example, if a company has a pattern of health and safety controversies, or questionable accounting practices. Such controversies can hamper a company’s business activities, which in turn can negatively impact the company’s ability to create long-term value for shareholders.
Removing companies with a significant pattern of material ESG risks and/or are unresponsive to engagement efforts helps us further distill our list.
Our process identifies positive climate and ESG leaders and then mitigates risk through the avoidance of companies that demonstrate behaviors that are inconsistent with the ESG concerns that are material to their business.
We also include information we receive from a variety of industry subject matter and civil society experts. This is the fourth step in our process.
We keep tabs on the corporate concerns that non-governmental organizations such as US SIF, As You Sow, Rainforest Action Network, etc., are paying attention to and raising awareness about to get even more granularity about company ESG opportunities and risks.
We also leverage industry expertise to learn about new technologies and innovations being developed at companies, with an eye to those that help address our social and environmental challenges. We see these as powerful growth drivers.
Finally, in the case of the ETHO ETF and its index, we equal weight the constituents. This is a diversified product. The ETHO ETF is designed to be a sustainable alternative for core U.S. equity index offerings (e.g. Russell 3000, S&P 500).
We find that by equal weighting the constituents in the portfolio we are able to provide an additional layer of financial risk management in line with these popular broad-market U.S. indices.”
One example from the Etho Capital ETF is the well known stock Tesla:
“Tesla (NASDAQ:TSLA) is one of our top holdings, and that weighting that you’re looking at is not based on how we weighted our portfolio. As I mentioned previously, the ETHO ETF is equal weighted. Its current position in the top 10 indicates how its stock price has moved since it was added to our index.
In the case of Tesla, our research identified it as a climate leader relative to its ICE-based peers.
Additionally, Tesla is not just an automobile manufacturer. We think of it as an integrated energy solutions company. Its innovations in batteries, its solar panels, its work in autonomous vehicles, etc., make its climate leadership case very strong.
Sure, Tesla makes electric vehicles — you know, one of the central problems that ESG practitioners do not talk about or contend with well is the relationship between the proliferation of renewable energy and EVs and the significant human and labor rights issues associated with the extraction of the metals and minerals needed to produce these renewable/sustainable products.
Consider cobalt in particular. The largest deposits of cobalt in the world are generally found in the Democratic Republic of the Congo, which is known for its gross human rights abuses.
Child labor, forced labor, and incredibly horrific violence against women is endemic in this region and much of it involves the control of cobalt and other essential mineral resources.”
To get more insight into the Tesla stock pick, and many others in the Etho Capital ETF, read the entire 3,404 word interview, exclusively in the Wall Street Transcript.
Scott M. Kimball, Co-Head, U.S. Fixed Income, BMO Global Asset Management
Scott M. Kimball is Co-Head, U.S. Fixed Income for BMO Global Asset Management and portfolio manager for the BMO Strategic Income fund. In this role, his primary responsibility is leading the application of the investment process across the team’s strategies.
Utilizing a team-based approach to portfolio management, he works alongside the rest of the portfolio managers on the portfolio construction of client accounts. He joined BMO in 2007 and served as a research analyst prior to joining the portfolio management team in 2011, and during that time, has served as a member of the team’s management and investment committees.
Previously, Mr. Kimball held positions at Merrill Lynch and other boutique investment firms. He began his career in the investment industry in 2003. He holds an MBA from the University of Miami and a B.A. in international business from Stetson University.
In his 2,286 word interview, exclusively in the Wall Street Transcript, Mr. Kimball describes his experienced view of the US debt marketplace.
“The BMO Strategic Income fund is a multi-sector approach to fixed-income investing that looks across the bond market, both investment grade and high yield, as well as in areas such as securitized or structured products, most commonly mortgage-backed securities for both commercial and residential properties.
It seeks to earn an above-average amount of income through a focused, but diversified portfolio of fixed-income assets.
We typically don’t consider maturity of most investments to be a key indicator in this type of a strategy because what we are buying is usually highly idiosyncratic and focused on cash flow generation potential.
Something that has sustainable cash flows with a longer maturity date may be quite favorable. Usually, the types of investments we are making are not directly correlated with interest rates; it’s about the unique bottom-up risk of the investment.
Right now, emerging market debt is our lowest allocation at about 5% of the portfolio and that reflects our views on valuations being more attractive in the other sectors…
So when we think about what the impact of low rates has really been, it has forced people to reach for yield.
In that case, many people have just looked at yield as an indicator of where they should invest. Because of that, they tend to buy into securities without fully appreciating the impact the business cycle could have on some higher-yielding securities.
What happens when there’s an economic disruption or bad earnings cycle is people tend to sell the things with which they’re least familiar first. As we are more familiar, we will step in and look to purchase those securities at very attractive rates.
Because we’re buying based upon a price at which someone is exiting due to the risk of the individual security, we are not making a call on interest rates. We are making a call on the credit worthiness or the cash flow-producing ability of the security itself.
The decision is not tied to interest rates. The bonds that we buy tend to have a lower correlation with interest rates relative to other parts of fixed income.”
One example that has worked out well for the BMO Strategic Income fund is an oil and gas producer.
“WTI (NYSE:WTI), which is an oil name we bought in the thick of the crisis.
What was interesting about it to us was that it’s not a big issuer, meaning it doesn’t have the focus of a lot of large managers, but it’s always had a very conservative financial profile for the oil industry. When the oil crisis occurred, and prices were negative, the bonds fell tremendously, as did everything in the oil sector.
Unlike any other issuer we’re aware of, they actually went to the market and bought back debt at a lower price. What happens is, they issue the bond at par and they buy it back at $0.20 on the dollar. They save themselves a lot of liquidity. That is something that we view very favorably.
Now, rating agencies have a different viewpoint on that. They think that’s a form of default, but, if you look at the way the bond prices had behaved following that maneuver by the company, they did nothing but rally.
Despite whatever the market or the rating agency methodology was indicating about WTI, we recognized early on that this is an operator that has a built-in layer of protection against adverse moves in the commodity itself, but you had to dig deep enough to realize that.”
This bond portfolio manager is rather sanguine about inflation in the near term.
“The market has certainly priced in a lot more inflation risk, but our question is about the durability of it. For example, if you look at the nature of how inflation has flowed through from expectations to real inflation in the past decade, it’s been pretty poor.
There are a lot of structural issues in the marketplace which curtail inflation. Everything from automation through disparities in the labor force are a concern. Then there are current events that we can point to.
We are out of fiscal stimulus we can borrow. We have to actually pay for the next one.
So if we have to issue fiscal stimulus to households, at the same time raise the corporate tax rate, that could curtail inflation, because it doesn’t read well for capex; that is a big part of inflation.
Our view is near-term inflation pressures are real, but likely to subside…
While warranted, a lot of faith was put into the monetary policy tools that were enacted during the onset of the COVID lockdowns, and risk assets really got ahead of where the economic data was.
This has probably shown that not only the central bank has been effective, but the degree of faith in their effectiveness is also at an all-time high. Now, with some modest increases in things like inflation expectations, the market is worried the Fed is behind the curve.
We still side with the Fed. The recovery has a way to go to be on firm footing, so they’re going to keep yields low, and therefore investors are going to continue being more creative in how they solve for income.”
Read the entire 2,286 word interview, with Mr. Kimball of the the BMO Strategic Income fund, exclusively in the Wall Street Transcript.
Scott M. Kimball, Co-Head, U.S. Fixed Income
BMO Global Asset Management
www.bmogam.com
Mr. Chervitz, Chief Portfolio Manager of the Discovery Fund
Darren Chervitz is Portfolio Manager and Director of Research for Jacob Asset Management and Mr. Chervitz also serves as the Chief Portfolio Manager of the Discovery Fund as well as the Director of Research and Co-Portfolio Manager of the Jacob Internet Fund and the Jacob Small Cap Growth Fund, a micro cap and SPAC investing fund.
He joined Jacob Asset Management shortly after the firm was founded in 1999. Mr. Chervitz’s primary responsibilities include evaluating existing holdings, helping to find new opportunities, reviewing portfolio weightings and providing ongoing risk assessment.
His education and experience in the field of journalism — he is a graduate of Northwestern University’s Medill School of Journalism — have given him the perspective and investigative skills needed to dig through mountains of available information to find the most relevant content while asking the tough questions.
In his 4,117 word interview, exclusively in the Wall Street Transcript, Mr. Chervitz describes his micro cap investing philosophy and key picks for the balance of 2021:
“The way I look at the fund is kind of like a public venture capital fund.
What does that mean, exactly? Well, again, we like to go small. To me, this is an area of the market that is underserved in terms of institutional investors. If you look at Morningstar, which obviously tracks all mutual funds, and you look at the small-cap growth category, which is the category they put us in, we are the smallest by far.
Our average, our median market cap, in terms of investment, is somewhere between $300 million and $400 million.
There is no one else in the category that’s under $600 million and only a few under $1 billion. Like I said, that’s where we like to look, in terms of where we start investing — it is under that $1 billion mark.
Again, going small, it is an important part of the process. I also like to start early. Now that becomes somewhat challenging, because for the most part nowadays, when companies come public through the traditional means, or perhaps through a SPAC, they tend to be larger than $1 billion.
You don’t find many small companies and certainly not many micro caps coming public, but you still will occasionally find companies that list directly, and do reverse mergers. They’ll find a way to get to the market in an earlier stage at times. And absolutely, I’d like to find perhaps fallen angels within the IPO or SPAC market that could become an attractive investment sometime in the future.
Starting early can also mean starting over. To me, a lot of times companies will have points in their history where they stumble. Maybe they have an interesting technology, but it’s kind of the wrong time.
Again, we look at companies that we believe most of institutional Wall Street isn’t paying much attention to. Sometimes in these turnaround situations, you can have new management and new technologies, and, all of a sudden, the story has changed somewhat dramatically, and there’s an upside, once again, in the stock moving forward.
That can be an interesting time for us to take advantage of that. So it can mean early in terms of its corporate history, but it can also mean early as in starting over.
I want to get large returns for the risks we’re taking.”
The micro cap strategy has rewarded some obscure picks:
“One of the names that we invested in late last year, which has been phenomenal and remains a large position of the fund, is a company called Voyager Digital (OTCMKTS:VYGVF).
This is a cryptocurrency broker that has obviously ridden the wave of excitement and interest and rising prices within the cryptocurrency space. They have seen incredibly dramatic rises in users and trading volumes and revenues from under $1 million a quarter last year to, in February, they announced over $20 million in revenue.
The company when we bought it was trading at less than $1. It’s now in the upper $20s. It’s been a phenomenal homerun for us.
We still think when you look at the potential, obviously, there are risks, and the higher the valuation goes the more those risks give one some concern, but when you look at some of the competitors in the space, you’re seeing valuations that are even higher than what Voyager has achieved so far.
We still think there’s a fair amount of upside in that name.”
SPACs are providing additional portfolio stocks that could replicate this upside:
“…A company called Inspired Entertainment (NASDAQ:INSE), a company that was actually a SPAC before SPACs were hot.
This is what I’m talking about a little bit in terms of investing in companies that are in some ways not necessarily new but starting over. This is a little bit of both. It’s a relatively new company. It was started by really a legend in the slot and gaming world from Scientific Games (NASDAQ:SGMS).
He brought over a whole team of people from that company to create this company called Inspired Entertainment, which does something similar in terms of creating terminals for the gaming industry. They have really significant market share in London, Greece, and Italy.
They also have created a division within their company called Virtual Sports that is software that allows gamblers to bet on simulated sporting events. They’ve done an excellent job at selling the software to a wide variety of players in the industry, including some of the biggest online sports books in the world.
Entities like the Pennsylvania Lotto also use them within their own programs.
They’ve come through or they’re in the midst of coming through a pretty horrific time because of COVID. Most of their operations are in locations that were affected quite dramatically by the pandemic.
A lot of their locations where their gaming machines were located were completely shut down. For a while, it was a little bit touch and go in terms of how they were going to be able to manage through, but thanks to some healthy payments from the U.K. government as well as this Virtual Sports business that really has grown gangbusters, they were able to push through this.
Now coming out on the other side of it, I really like the upside and potential for this name going forward. They are strongly cashflow positive and trading at a very reasonable value on that cash flow.”
To get all the top picks from this SPAC and micro cap stock investing professional, read the entire 4,117 word interview, exclusively in the Wall Street Transcript.
Darren Chervitz
Portfolio Manager & Director of Research
Jacob Asset Management
www.jacobinternet.com
Chris Natividad is the CIO and Founder of Equbot, the AI stock picking fund
Chris Natividad is CIO and Co-Founder of EquBot. Mr. Natividad brings more than 15 years of experience in the institutional investment management industry.
Previously, he was an Investment Portfolio Manager for Gilead Sciences and Apple Inc.’s Braeburn Capital and was responsible for managing multi-billion-dollar onshore and offshore investment portfolios.
Mr. Natividad’s previous experience also includes investment management and analysis across a variety of asset classes for several financial service firms including Goldman Sachs and Franklin Templeton. He holds an MBA, B.S. and B.A. from UC Berkeley.
In this 3,367 word interview, Mr. Natividad describes the AI based mutual fund powered by IBM’s Watson that he and his colleagues have created.
“AIEQ is the ticker, and it is the first AI-powered equity ETF. It was done in collaboration with IBM Watson and ETFMG. It is combining the growing amount of structured and unstructured investment data.
Working around the clock, the system analyzes over 5,000 U.S. companies to determine a set of securities it will invest actively in each day.
To take a step back one second, our partners at IBM say 90% of the world’s data was created in the past two years. At EquBot, we believe we are going to be saying this every two years from now.
The data is absolutely growing from a volume perspective. The variety, veracity, and velocity of the data is causing this boom. Our mission at EquBot is to transform data into better investment outcomes with artificial intelligence.
We saw that, looking at the data, there has been a tremendous movement towards ETFs. Investors want more transparency and liquidity.
So, we decided to launch AIEQ, the ETFMG AI Powered Equity ETF, just over three years ago, and it has done quite well. It has outperformed its benchmark.
From our system perspective, we continue to see it learn and grow from every single trade.
The way we tend to characterize our operating system is it’s like an army of research analysts, traders and quants working around the clock to help figure out what we should be investing in and when we should be investing in it.”
The AI stock picking incorporates the global data flow:
“When we think about AI in the highest sense, it is about using a technology to replicate human behavior, so to speak. In our instance, the system is autonomously managing a portfolio for AIEQ that is looking at the thousands of U.S. publicly traded companies and creating a portfolio.
To do that, we can take a look at the traditional asset manager framework. We ingest millions of news articles, market signals, things from pricing to volume data daily, and we utilize an ensembled architecture. That’s important for us because we need to have observability into what we are investing in, and why we are investing in it…
To do this, we utilize IBM Watson’s natural language processing as it’s one of the top in this field.
Most people know IBM Watson through beating Deep Blue in chess or beating the “Jeopardy” champions. The reality is, it’s not just the English language. We are processing dozens of different languages.
The analogy I like to provide is: All of these different investment data points is similar to a single pixel.
A decade ago, right, when we’d have video conference calls or something, or even images online, they’d be quite granulated. Sometimes you’d kind of scratch your head and say, what am I really looking at here? Well, fast forward to today, we have high definition and pictures with increasing amounts of detail and speed.
That is the analogy I connect with using our system. We are connecting and adding more pieces of the puzzle to understand what that market picture is and where it is headed.
For AIEQ, we are benchmarked against the broad U.S. market. Retail investors like to compare it to the S&P 500.
Year to date, it has done quite well. We are in the top two percentile. When we look at the one-year time period as of this past Monday…we were outperforming the S&P 500 by north of 20%.
But again, it’s not like the system we just turned it on and said, OK, what do we invest in? It needs to grow over time. What’s increasingly compelling and what we like to talk with many of our institutional investors and institutional clients about is the excess return each year.
The first year we slightly underperformed. The second year, we beat our benchmark. Going to third year, that spread continues to improve.”
The AI stock picking is continually evaluating and re-evaluating the data for appropriate equities to own:
“To provide some context, a quite interesting time for fun was the beginning of the pandemic. We would actually be ingesting information related to coronavirus and the COVID pandemic back in December of 2019. But, if we think about artificial intelligence, at the highest level, it is pattern recognition.
The system at the time was diversifying into consumer staples, so names like Costco (NASDAQ:COST), Walmart (NYSE:WMT), and getting active and increasing exposures into a variety of the different pharmaceutical names that we’re approaching like Gilead (NASDAQ:GILD), Moderna (NASDAQ:MRNA) and Johnson & Johnson (NYSE:JNJ).
These are names with strong balance sheets and they had performed quite well during historically volatile periods.
Now, it didn’t get it 100% correct because the magnitude had never been experienced, meaning the system had never seen something as drastic as the coronavirus. We had only had SARS and MERS, with muted market downturn. Again, the lesson or the magnitude associated with these types of downturns now becomes part of the system and part of that pattern recognition that we’re going through.
We take a deeper dive into the system and we can see that it is scouring clinicaltrials.gov and then, I believe, in March we saw that it was looking at north of 3,000 different clinical trials associated with COVID vaccines, testing and treatment.
There was a selecting of some of the different names with positive sentiment and positive business operating structures to become part of the portfolio in addition to the technology and some of those stable value names.”
To get the complete interview on this AI stock picking innovator, read the entire 3,367 word interview exclusively in the Wall Street Transcript.
Chris Natividad
CIO & Co-Founder
EquBot
www.equbot.com
email: info@equbot.com
