John Fieldly, CEO, Celsius Holdings, Inc. (NASDAQ:CELH)
Cameron Donahue, Investor Relations, Celsius Holdings, Inc. (NASDAQ:CELH)
John Fieldly is CEO of Celsius Holdings, Inc. He is a results-driven executive with an extensive consumer goods background and over 20 years of broad financial and operational experience.
In April of 2018, Mr. Fieldly was named Celsius Holdings Inc.’s CEO.
Prior to that, he had been the company’s CFO since 2012. Since beginning his accelerated career at Celsius (NASDAQ:CELH), he has demonstrated a proven track record of driving robust business results and shareholder value.
In his current role as CEO, Mr. Fieldly uses his strong background in financial leadership and operational expertise to focus on and to maximize resources to drive revenue, corporate efficiencies, and shareholder value.
Cameron Donahue is the Investor Relations contact at Celsius Holdings, Inc. He has been also been affiliated with Hayden since joining the firm in 2000. He received a degree in finance from Coastal Carolina University’s Wall College of Business Administration.
In this 3,229 word interview, exclusively in the Wall Street Transcript, these two executives detail the outstanding results of their company over the last 12 months and project future success with their business strategy.
“… Historically, we’ve been selling an emotional selling story. But now, due to our scan data and some of the Nielsen data we’re getting, and the velocity levels, Celsius warrants additional shelf space.
So it’s moved from an emotional selling story into a financial selling story. And Celsius more than pays for its shelf space when you look at the velocities that are turning at retail. We feel it’s getting much easier, but still a very competitive category.
We have such a great story aligned with today’s health and wellness trends, consumer trends, and then the velocity levels we’re seeing at retail. And being the third-largest energy drink brand on Amazon really shows you, giving Celsius the same opportunities — apples-to-apples opportunity in retail — Celsius will perform at the same level, if not better, than the leading energy drinks in the category.
So as many investors are trying to beat the S&P, these buyers in retail are trying to beat the Nielsen scan data category. And in order to do that, you need to bring on these fast-growing innovative brands that are attracting new consumers to the category.
Celsius is 50/50, male/female. And then also, new consumers entering the category for the first time are looking for products that are aligned with their health and wellness trends, the goals, and Celsius very much aligns with that.
In addition, consumers that are aging out of traditional energy are looking for alternatives, and Celsius is capturing that audience as well.
So it’s a great story. We’re working on getting it out there even more and we’re looking to convince more retailers each and every day.”
The key to continued success for CELH is distribution:
“Our goal right now is to get Celsius more distribution, where our consumers are. And historically, we’ve been distributing at the gym and the health clubs, and we’ve expanded into grocery, mass and drug.
And right now, we’re starting to gain traction in the energy category or in the convenience channel and that’s really where about 70% of energy drink sales traditionally have been sold.
So that’s a really exciting time for us. There’s higher velocity levels in the convenience channel.
And we also, just most recently, brought on a national distribution network of over 150 DSD — direct store delivery — partners, of which we cover about 85% of the major metropolitan markets in the United States right now.
So we’re really excited about that, activating our distributors, getting further distribution, increasing our ACV — all commodity volume — in our targeted markets.
I think what’s so important about that distribution game though, as far as making that shift from the traditional early-stage wholesale distribution to this national direct store delivery, is that we typically see velocities at least double in those existing stores.
We’ve historically had kind of between a 30%-35% organic growth rate in our same-store sales.
And so, as they have turned over to DSD, and especially now that we have national coverage, we’ve been allowed to transfer over these national accounts, for example Target, and in the process with CVS.
We also have started the process with 7-Eleven, which I believe will start in May. So there’s going to be a significant number of doors that’s going to add additional velocity to those same-stores as well as the new penetrations that we’re getting from the spring resets.”
A broad age demographic supports the distribution roll out strategy for CELH for 2021 and beyond:
“Historically, we’re seeing 18 to really 44 as really our sweet spot right now, but absolutely. It’s really the product for anyone looking for additional energy; that usage occasion has extremely expanded outside of the gym and health clubs and we’re seeing that.
We’re seeing audiences really engage with us on social media and a variety of different platforms and it’s a broad consumer base, which is really exciting to see.
It’s not that traditional energy drink consumer — that 18 to 24 male — it’s a broader demographic.
And that goes back to why retailers need to carry Celsius, because we attract a much broader audience, tracking the new consumers entering the category that are looking for alternatives, or converting consumers who have been drinking some of those leading energy drink brands, traditional energy drink brands, over the years and really looking for something that aligns with their health and wellness goals.
Celsius is well positioned to be a leader in the energy drink category field with our health and wellness position, our fitness, lifestyle position, as well as the velocity levels we’re currently seeing in existing accounts and the opportunities that lay ahead.
As we activate these distributors, 150 distributors, we feel we’re well positioned. We’re excited where we’re at. We’re not providing any forward guidance but we’ll take it quarter by quarter here. But there’s a lot of momentum underneath the brands, and we look forward to delivering.
We’re working hard.”
To get the full picture from the Celsius Holdings (NASDAQ:CELH) John Fieldly, read the entire 3,229 word interview, exclusively in the Wall Street Transcript.
John Fieldly, CEO
Cameron Donahue, Investor Relations
Celsius Holdings, Inc.
2424 N Federal Hwy
(561) 276-2239
www.celsius.com
Pablo Zuanic, Managing Director, Cantor Fitzgerald
Pablo Zuanic is a Managing Director in Cantor Fitzgerald’s equity research department. He covers consumer and cannabis stocks (a universe of 30 companies).
Pablo is a well known and highly rated equity analyst (II ranked several times; called as expert witness on industry investigations) with a deep global background having covered stocks over the past 20 years in the U.S. (JP Morgan; SFG), Europe (JPM/Liberum), LatAm (JPM), and Asia (Barings), across subsectors (retail, drinks, food, cannabis, personal care, OTC, agro, pet).
His product has been consistently deemed thought-provoking and insightful. He started his career as a management consultant, which brings a strategic mindset to his approach to equity research. He has an MBA from Harvard Business School.
In this 4,237 word interview, exclusively in the Wall Street Transcript, Pablo Zuanic demonstrates his cannabis stock picking ability.
“…In terms of the context, back in 2018, Canada legalized recreational cannabis, so there was a lot of expectation from that legalization.
The large companies in Canada — the large, licensed producers — were able to raise large amounts of capital. Their stocks were bid up on the expectation that the Canadian market would grow, and that these companies would also benefit from overseas opportunities.
So you saw stocks like Tilray (NASDAQ:TLRY) at one point trade at about $300 because people were thinking about a global market of $200 billion and opportunities for these Canadian stocks.
What happened after that was reality set in. Then, pretty much the whole Canadian cannabis space traded down through March 2020, in part because of two reasons: The Canadian market developed very slowly because there were a number of restrictions.
They’re understandable to some extent, because it’s the first G7 country that legalized cannabis at the recreational level. And then also because overseas markets, especially Europe, developed very slowly; these markets were quite restrictive in terms of their access to medical cannabis.
So that was the situation.
As a result, there was a dearth of capital. Companies were not able to meet expectations and were saddled with larger cost infrastructures and excess capacity. They had to write off assets. They had to lay off people, share prices collapsed and there was no access to capital. So that was the situation until early 2020.
Since then, cannabis stocks began to trade up.
People began to differentiate between the Canadian and the U.S. companies.
And in general, there was this expectation that the election could somehow favor the cannabis industry. And that’s what we saw in November with Joe Biden elected president and then the Democrats taking control of the Senate in in early January, after the Georgia runoff.
So since then, there’s been a lot of positive sentiment coming back to the group — both to the U.S. companies and to the Canadian companies.”
The cannabis stock analyst obviously has many specific cannabis stock picks and pans:
“…One high-conviction stock that we like is called Trulieve (OTCMKTS:TCNNF).
They are the largest operator in Florida. First of all, it’s an MSO, because they operate in other states. But for practical purposes it’s an SSO — single-state operator — because close to 95% of their sales come from Florida.
But because Florida does not have caps on licenses for stores or cultivation, once you have a license to operate in the state, they can have as many stores and as much cultivation as they want.
At the moment, Trulieve has 50% market share of Florida. There’s no other MSO that has 50% share with a state.
So Trulieve is unique in the sense that they have 50% share of Florida’s medical market, and the market continues to grow. Only 2% of people there are in the medical program, and in states like Arizona it’s 4%, Pennsylvania is 3%; Oklahoma is as high as 7%.
So the state of Florida still has a lot of room to grow medical sales. So Trulieve has a strong market share position. Also, Florida voters may get a chance to vote for recreational cannabis in the November election, so there is a scenario where Florida could become a recreational state as early as 2023.
You had 130 million visitors a year ago to Florida, and with Trulieve being the Starbucks of cannabis in Florida.
So Trulieve is a stock that trades at a big discount to the rest of group about 9 times EBITDA 22, the average is 15. So it’s a stock that we have a lot of conviction on that would be a top pick.
Another stock that we like in the U.S. is Curaleaf, which is the largest player in the U.S.
They operate in about 25 states right now. And they normally have a number-one or number-two position in most of the states they operate in — and with strong profit margin and cash flow.
We think that scale matters in this industry. Scale can mean complexity, but in their case, they are able to have good profit margins, they are only valued about 16 times EBITDA, so one point over the average. They operate in 25 states and they have depth in the states they operate.
The reason we like this, and think scale matters, is that when Georgia or Texas or other large states approve medical cannabis, we expect that companies with a good track record in other states will have a good chance of getting licenses in those markets.
So Curaleaf would also be a stock that we recommend. Those are two top names.
And the third one I would choose is in Canada — we like Aphria. It’s obviously a global industry. Israel, Mexico could legalize recreational cannabis, Morocco in the next 12 months. Other markets may relax their medical rules — Germany.”
The cannabis stock analyst has a view towards mainstream acceptance of these cannabis stocks:
“Someday perhaps consumer companies that I do not cover — like Diageo (NYSE:DEO) and Anheuser Busch (NYSE:BUD) — or large Canadian companies like Canopy Growth can come in and start buying U.S. cannabis assets.
Right now, they are not allowed to do so as cannabis remains federally illegal.
So the U.S. MSOs that are there now have a bit of a window to consolidate the U.S. industry. Also, there are some private companies that decided not to sell, not to be consolidated in the U.S., but they decided to list, or to do an IPO, or at least list through a SPAC transaction.
So yes, we expect consolidation both in the U.S. and Canada.”
Get the complete detail on these cannabis stock predictions and sector analysis by reading the entire 4,237 word interview with Pablo Zuanic, exclusively in the Wall Street Transcript.
Pablo Zuanic, Managing Director, Cantor Fitzgerald
www.cantor.com
email: pablo.zuanic@cantor.com
John Vandermosten, Senior Biotechnology Research Analyst, Zacks Investment Research
John Vandermosten is a senior biotechnology research analyst for Zacks SCR where he covers a portfolio of biotech IPO and small-cap equities.
His background includes 20 years of experience in a variety of investment management and research roles across all market cap ranges and throughout the capital structure.
Formerly, Mr. Vandermosten was a research analyst for Singular Research covering the health care space and a consultant with Coker Group, a national health care services firm providing financial services to health care organizations. At Coker Group he consulted with clients in a variety of strategic and financial areas, including asset valuations, due diligence and transactions.
Prior to his role as sell-side analyst and consultant, Mr. Vandermosten was a portfolio manager at Westwood Holdings Group and covered health care and other spaces as a research analyst. Mr. Vandermosten was also an analyst at the Teacher Retirement System of Texas.
Mr. Vandermosten has an MBA from Texas A&M University, an M.A. from Tulane University and a B.A. from San Diego State University. He has also earned the Chartered Financial Analyst (CFA) designation and is a member of the CFA Society of Dallas.
In this 3,554 word interview, exclusively in the Wall Street Transcript, Mr. Vandermosten details his new top 2021 biotech IPO stock picks.
“When I spoke with you last, the coronavirus was just starting.
There was a lot of uncertainty around that time about the availability of capital. But actually, it’s been kind of a blockbuster year and the capital markets really opened up.
We’ve had 11 new initiations over the last year, in a number of areas with unmet needs.
One, which is quite interesting, is called Anpac Bio-Medical (NASDAQ:ANPC), and they do cancer screening.
Another is a company developing a peptide able to ferry molecules across the blood-brain barrier: Bioasis (OTCMKTS:BIOAF).
A digital therapeutics company called DarioHealth (NASDAQ:DRIO) is working in diabetes.
And electroCore (NASDAQ:ECOR) is yet another; this company sells a vagal nerve stimulation device that helps people with headaches.
Kintara Therapeutics (NASDAQ:KTRA) has a chemotherapy for brain cancer.
And Lantern Pharma (NASDAQ:LTRN), which uses artificial intelligence to identify populations that will benefit from existing drugs. Right now, they are developing a treatment for lung cancer in non-smokers.
Our most recent initiation is for MiMedx (NASDAQ:MDXG), and this company uses regenerative medicine for wound care. And perhaps in the future if their trials are successful, a treatment for osteoarthritis.
Then also we’ve gone north of the border to Montreal to cover a company called Ortho Regenerative Technologies (OTCMKTS:ORTIF). They’re working on a combination product that may help repair damaged and injured tendons and cartilage, now focused on rotator cuff tears.
And then another recent initiation is Protalix BioTherapeutics (NYSEAMERICAN:PLX), and they should soon see their enzyme for Fabry disease be approved by the FDA, which is coming up at the end of April.
And then another exciting name that we’ve initiated on in January is Reviva Pharmaceuticals (NASDAQ:RVPH). This company has an improved treatment for schizophrenia, and several other neuro-psychiatric disorders. So we’ve been really busy.
It’s been a really busy year for us here.”
Mr. Vandermosten sees little government activity to slow down drug price increases for Biotech IPO stocks:
“Drug pricing has been an issue for quite a long time.
There’s a lot of pushback from payers and consumers on that. And I think at some point, there’s going to have to be a reckoning in terms of pricing. It hasn’t happened yet. I think many were hoping that perhaps the government might do something. And so far, we haven’t seen much.
One interesting thing that I saw is that a substantial amount of revenues come from outside the United States.
And if we have price controls here, it may affect the revenue from the United States, but probably pushes more companies to expand the revenues globally. And it makes these drugs more available throughout the world. We’ll see how that turns out.
You can only raise prices so much before there’s a reaction, because even medicines are elastic. They’ll respond to price increases.
In terms of other trends, another trend I wanted to mention was the high number of life sciences IPOs that occurred last year.
By my count, there were around 120 health care-related IPOs. And that’s pretty astounding.
They’re in all different areas, gene therapy, precision medicine, immuno-oncology and even health care-related SPACs, which you may have heard of. So we’ve observed a high level of interest in going public for many of these life sciences names.”
One of these new biotech IPOs is a pick from Mr. Vandermosten:
“Lantern Pharma IPO’d last year.
They use artificial intelligence to help identify predictive biomarkers and patient subpopulations, and use this information to maximize the probability of success in clinical trials, which can be used to salvage drugs that previously failed, but are otherwise safe and may still be effective in some patients.
So we really like these guys, because we think AI is going to play a big role in success of drugs in the future.
Drugs cost too much, they take too long to develop, and the regulatory burden is very heavy.
And if you can use AI to help identify populations that will benefit more, it means you can run more rapid and smaller trials, and also be more successful.
That means you’ll have fewer failed trials. AI lets you use a system to rapidly process large volumes of information, which really makes a difference in selecting populations for these trials and for these drugs. So that’s an exciting IPO name: Lantern Pharma.”
Another Biotech IPO on Mr. Vandermosten’s need to own list:
“One that I mentioned earlier, electroCore, is one of the names that we like because they have many catalysts right now that that we expect will drive future revenue growth.
I think they’ll beat expectations.
And again, what they do is they sell a device which stimulates the vagal nerve in the neck. And this nerve is associated with many, many different things.
They are approved by the FDA to treat headache, several types of headache. They’re also in investigational studies for respiratory symptoms associated with COVID and in investigations for stroke and several other indications with studies being conducted by the Veterans Administration.
Another thing I like about electroCore is that they’re expanding globally.
Their product is approved by the National Health Service in the United Kingdom, and they’re expanding into all different parts of the United Kingdom, and getting reimbursement guaranteed at a higher level than it used to be.
The NHS is recognizing the value that their product adds. It actually saves the system money. So the National Health Services in the U.K. decided to expand the use of the product, because it’s an overall savings to the system.
And they’re also creating relationships with international distributors in Eastern Europe, Australia and in Canada, which should further expand the growth of their product there as well.
In the United States they also sell into the Veterans Administration and with health care payers here. And those areas are improving as well. So they have a lot of irons in the fire, and all of them seem to be hot right now.
All of these favorable trends should provide a long runway of growing earnings.”
Get the rest of the Biotech IPO stocks and the research backing them by reading the entire 3,554 word interview with Mr. Vandermosten, exclusively in the Wall Street Transcript.
John Vandermosten, Senior Biotechnology Research Analyst
jvandermosten@zacks.com
scr.zacks.com
David Nierengarten, Managing Director, Wedbush Securities
David Nierengarten, Ph.D., is Managing Director and Head of Healthcare Equity Research at Wedbush Securities specializing in biotech stocks.
He mainly covers development-stage therapeutic companies. He began his career on the financial side of biotechnology at a venture capital firm that focused on early-stage therapeutic and medical device companies.
Additionally, prior to joining Wedbush, he worked in a clinical-stage, venture-backed biotechnology company, in business development and clinical trial operations.
This biotech stock specialist received his bachelor’s degree in biochemistry from the University of Wisconsin-Madison and his Ph.D. in molecular and cell biology from the University of California-Berkeley.
“In my specific therapeutic areas, that means for oncology companies in the space where there are treatments for some of the less severe cancers, or cancers that do have other treatments that are more established, which makes it a little bit more challenging for my companies to launch new drugs into the space.
In this 2,488 word interview, exclusively in the Wall Street Transcript, Dr. Nierengarten reveals his top picks for biotech stock upside in 2021.
“My coverage list is all really small mid-cap companies, about two-thirds focused on oncology drug development and about one-third in rare diseases, which in this environment means several gene therapy companies.
So I cover all different kinds of therapeutic modalities from small molecules, all the way up to engineered cell therapies.
For the gene therapy companies, the major impact has been felt on clinical trial recruitments. And since last year there have been several delays in patient recruiting, and in opening clinical sites in particular.
So if a company has to open new clinical sites, it’s been a real challenge, because a lot of the academic centers and hospitals are focused, and we’re all focused, on treating COVID patients and staying ahead of the curve in that way.
So many of these sites literally did not have the time to deal with trying to function as a new clinical trial site for new and different therapies.”
Dr. Nierengarten points out that capital availability drives biotech stock volatility:
“Small- and mid-cap biotechs are exquisitely dependent on the availability of capital.
They have a higher beta than stocks in general. And that’s because once the stock market starts going negative, for example, the biotechs will go more negative, further down, because the assumption is that people will pull back from committing capital to these riskier investments.
And so they have wider swings in the broader market.”
Biotech stocks are a concern at this stage of the economic recovery cycle, according to Dr. Nierengarten:
“The small-cap biotech index peaked out probably late January, early February and has trended down significantly. However, it’s been masked because large-cap performance can mask it a bit.
But small caps look like they peaked out right around February 8, 9 and they’re actually down at around 20% on average since then. So we’ve already seen the beginning of the downturn here.
I think looking ahead into summer in the second half of the year, what concerns me a bit specifically for biotech — but it’s good for the rest of the economy — is as the economy does reopen, will people shift their growth dollars to reopening names that are even more closely tied to the sectors that are recovering, and reopening?
So hotels or cruise lines, airlines, areas like that.
And it’s not necessarily that biotech is doing poorly, or companies are failing or anything like that, but just as an investor, I might see a better opportunity in a highly leveraged hotel chain that now can open up and entertain tourists again.
So that’s my biotech-specific concern for the summer and the rest of the year.
And that’s certainly true in a market downturn where capital becomes less available. And the reverse is also true when capital is more available and the stock market’s doing well, when people often pursue higher beta names to generate even higher returns, and that makes the capital available to the biotech.
So they’re definitely pro-cyclical in that regard. And also just generally speaking throughout the year, they are much more volatile than the average stock.”
Biotech stocks that outperform will be well capitalized, according to Dr. Nierengarten:
“One example tied to clinical readouts coming up soon that I’m quite confident in is Magenta Therapeutics (NASDAQ:MGTA).
The company is working on transplant-related improvements to the stem cell transplant process. They have a couple of data points coming up in the third quarter or fourth quarter of this year. And I think they’ll be positive.
Another name we like is SpringWorks Therapeutics (NASDAQ:SWTX). They have quite a bit of cash, along with a key clinical readout, probably in the third quarter, which is a Phase III for their lead drug, nirogacestat, and desmoid tumors — relapsed desmoid tumors, a rare tumor type.
I have high confidence in a positive readout.
They’ll also have several other earlier stage, clinical readouts throughout the year. So that’s one with multiple data points, and a fair bit of cash to hold them through the foreseeable future.”
There are also some biotech stock standouts:
“One that had a bit of a rough go relating to bluebird bio (NASDAQ:BLUE) is Orchard Therapeutics (NASDAQ:ORTX).
I think they were unfairly grouped in with bluebird bio’s serious adverse events they reported. Actually Orchard and Avro (NASDAQ:AVRO), both are lentiviral-focused gene therapy companies like bluebird, but I think that bluebird’s problems are bluebird-specific to treating sickle cell disease patients, while Avro and Orchard both have not had any similar kind of problems.
And Orchard has a gene therapy now approved in Europe that there should be a bit higher risk tolerance for.
Metachromatic leukodystrophy — MLD — which is a deadly disease — even if you believe that there could be potential problems from their lentiviral gene therapy, I think, the prognosis for that disease is so dire, you take whatever treatment there is available for those patients.
So that one was, I think, unfairly punished. Both of them were hit with the bluebird bio news, and they shouldn’t have been, and they should recover.”
Get all the top biotech stock picks from Dr. Nierengarten by reading the entire 2,488 word interview, exclusively in the Wall Street Transcript.
David Nierengarten, Ph.D., Managing Director & Head of Healthcare Equity Research
email: david.nierengarten@wedbush.com
George Tharakan, Chief Investment Officer, Alamar Capital Management
George Tharakan is the co-founder and chief investment officer of Alamar Capital Management LLC, a private wealth management firm in Santa Barbara, California.
Previously he was the Director of Research and Portfolio Manager at Santa Barbara Asset Management.
Prior to becoming an investor, Mr. Tharakan was an engineer at Intel Corporation where he designed microprocessors.
He is currently the Co-Chair of the CFA Institute – Santa Barbara Chapter and a member of the Santa Barbara Angel Alliance, a group that assists and invests in entrepreneurs in Santa Barbara.
He is also a member of the University of California Santa Barbara (UCSB) Dean’s Investment Group Advisory Board.
Mr. Tharakan graduated from the Indian Institute of Technology (IIT) as the top student in his department, obtained an M.S. in computer engineering from the University of Illinois, and received an MBA in finance, with honors, from the Anderson School of Business (UCLA).
In this 2,313 word interview, exclusively in the Wall Street Transcript, George Tharakan details his investing philosophy and gives examples from his current portfolio.
“I’m the Co-Founder of Alamar Capital, located in Santa Barbara, California.
I started the firm in 2010, with my partner, John Murphy. We manage investments for a diverse group of individuals and institutions in a separate account format. I’m also the Chief Investment Officer, and I manage the Alamar Equity portfolios of the firm.
We are very tax efficient; our average holding period is five years. We invest in long-term compounding machines.
I was the initial client of the firm managing my personal savings, and I remain the largest client in our equity strategy to this day. Both John and I are fully aligned with our clients’ investments.
I started my professional career as a microprocessor designer at Intel and left to become an investor. I have been investing professionally since 1997…
We typically purchase anywhere from 35 to 50 stocks, and use a very long-term approach for investing. Our average holding period is about five years.
We invest across all capitalizations, from about $1 billion all the way up to $200-plus billion in value.
A client who joined us in the beginning, when we started in 2010, would now have made over five times their initial investment.
We typically purchase profitable, growing companies, reasonably priced, with great prospects and strong secular growth, across all sectors. We have investments in consumer, financials, technology, and healthcare, all with varying capitalizations.
We avoid what I call cocktail names. That means, for example, during our entire 11-year history we have never purchased Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Netflix (NASDAQ:NFLX) or Tesla (NASDAQ:TSLA).
I call these the cocktail names because everybody knows and brags about them at cocktail parties.
These are great companies and have been fantastic investments, but we are not sure what value we bring to the table if every mutual fund, hedge fund and index fund owns these stocks in large amounts.
Moreover, they are widely followed on Wall Street with over 30 analysts covering each of these stocks, analyzing and critiquing every single action of company management.”
Currently, the Santa Barbara money manager is focusing his attention on financial and insurance companies:
“For insurance, one of our long-term holdings is Centene (NYSE:CNC), a healthcare insurance company.
We have owned that stock now for 11 years — since we started the firm. And it’s now up roughly 12 times our initial purchase price. The company has a very good management team, and we continue to like it even today.
…There are just a few companies that do what they do.
They started off as a very small regional company based in St. Louis, Missouri, and they have now become a nationwide health insurance provider.
There are very few companies that offer health insurance nationwide. There’s Cigna (NYSE:CI), Aetna (NYSE: CVS), Anthem (NYSE:ANTM), United Healthcare (NYSE:UNH) and Centene.
Healthcare costs are one of the biggest problems state governments are facing.
And although states have tried very hard to reduce their expenses in that area, it’s very difficult for a state to tackle. So they need to outsource it to professional companies like Centene, who find places to cut back on healthcare costs, and be more efficient.
Healthcare is a very inefficient sector in terms of cost, waste and misallocation of resources.
We feel the primary avenue to reduce costs is information; you need access to large datasets across the health spectrum.
For example, which are the best hospitals that provide the best results for a particular surgical procedure, risk-adjusted; who are the best doctors who can provide similar or better results for a lower price; can an expensive drug be replaced with a cheaper therapy; and so on.
So it’s a tremendous information game.
And it’s very difficult for a state or a company to figure all this out. It’s best left to insurance providers because they alone have all the relevant information.
And there are just a few of them with access to this whole spectrum of data to help states and employers drive costs down.
This will become an increasingly bigger problem going forward, as healthcare costs eat up a larger share of the wallet.”
The Santa Barbara money manager George Tharakan sees new opportunities for these companies:
“Well, we have a huge budget deficit and we have a huge amount of debt, which eventually has to be paid off.
So in my view, the only way to solve this is through taxes. Inevitably, taxes are going to go up for both corporations and individuals.
There’s just no way around it.
We cannot continue to have these fiscal deficits year in, year out.
And especially what this pandemic has shown us is that there’s been a severe underinvestment in healthcare facilities across the country, in preparedness for pandemics, and how vaccines are rolled out.
From the beginning, whether it’s the CDC or the FDA, they just all fell behind as soon as this pandemic hit. In the future, I would expect a big investment in these areas.”
Get the complete picture from the Santa Barbara money manager George Tharakan by reading the entire 2,313 word interview, exclusively in the Wall Street Transcript.
George Tharakan, Co-Founder & CIO
Alamar Capital Management LLC
email: george@alamarcapital.com
Hugh Johnson, Chief Investment Officer, Hugh Johnson Advisors picks (NASDAQ:CHKP)
Check Point Software (NASDAQ:CHKP) is being bought by Hugh Johnson, the Chief Investment Officer, Founder, Partner and a member of the Investment Strategy Committee at Hugh Johnson Advisors.
His work on the U.S. economy and financial markets guides the firm’s investment strategy. He joined First Albany Corporation in 1978 after serving as Executive Vice President of Hugh Johnson & Company, Inc. Mr. Johnson has more than 40 years of investment experience.
In this 3,411 word interview, exclusively in the Wall Street Transcript, Hugh Johnson advocates his philosophy and uses Check Point Software (NASDAQ:CHKP) as an example of this investing strategy.
“Basically, I would say we are a conservative manager of assets. We’re not trying to hit homeruns.
We’re not developing pooled assets or mutual funds. We manage individual accounts on a separate-account-by-separate-account, objective-by-objective basis.
We’re managing portfolios for individuals that tend to be in the high net worth, ultra-high net worth category. They tend to be individuals who have very, very different goals and objectives and financial needs.
We do a number of things or provide a variety of services for clients. We do manage their investment assets in most cases. But we also provide estate planning, tax planning, foundation management, as well as managing bill payments.
There are many services associated with a family office business. So it’s many services for individuals.
And then I should add that Hugh Johnson Advisors also specializes in managing assets or portfolios for non-profit organizations. So there is a broad range of investment services we provide.
It is always account by account, individual by individual, or a separate account business. We work really hard at it.
If there’s a philosophy on the investment side it is that we integrate the top down — the overall analysis, the world’s financial markets and world’s economy — with the structure of portfolios, to include asset allocation.
Additionally, there is the bottom-up component, which is picking individual securities. It is quite a diverse approach. But nevertheless, it seems to be working pretty well.”
The market run-up for stocks such as Check Point Software (NASDAQ:CHKP) has created uncertainty for Hugh Johnson’s investors:
“…Our clients are very, very concerned and worried. They’re also worried about something that’s a subcategory of what I just mentioned.
I think they’re all aware of the fact that the stock market has had a significant move to the upside since, say, March 23 of 2020. The rise has been about 70%.
Clients ask the question: Has it come too far too fast? Can we feel comfortable that the stock market has further to go or has it come too far too fast, and therefore is pricey or overvalued? Maybe we are even in a bubble?
And so I hear the words “mania” and “bubble” from our customers often. I think they’re all very, very concerned.
They’ve made lots of money in the stock market. They are asking us, what do they do to preserve it? How do they preserve gains particularly in an environment where it’s difficult to preserve profits or generate a positive return from the fixed-income markets with interest rates being so low?
So those are the kinds of questions we get. Believe me, people are very focused and interested in what’s going on.”
Hugh Johnson believes that this is all part of a cycle:
“I’m a student of cycles going back to 1890. There have been 25 cycles.
I’m not going to go through them all, obviously.
And there’s commonality among the cycles, cycles consisting of three parts: the stock market cycle, which is followed by an economic cycle, which is followed by an interest rate cycle.
And the key is to determine where you are in that cycle and we have developed methodologies to try to determine where we are in that three-part cycle.
And on the basis of that, we see that, first of all, the markets perform in very specific ways at the beginning, the middle, and the end of the cycle.
And if we can identify, by looking at the performance of the financial markets, where we are in that three-part cycle, then making the important decisions in a portfolio, such as asset allocation, sector allocation, doesn’t become easy, but it becomes certainly easier.
So I think that’s the starting point of everything we do.
And once we’ve identified or think we’ve identified where we are in the cycle, then comes the important process of sector allocation and picking individual stocks within each sector or the sectors we want to overweight and the sectors we want to underweight.
Of course, we try to set equity allocation. That’s the starting point. That is what is common to all clients. It’s made very specific for every client.
As you can imagine, some clients want to take considerable risk or they want a very meaningful percentage of their assets allocated to equities and in addition alternatives.”
This leads to the Check Point Software (NASDAQ:CHKP) pick:
“Nevertheless, we are in the early stages.
And if you’re in the early stages, you generally want to overweight the so-called economically sensitive sectors of the market, such as materials, consumer discretionary, communication services stocks, along with technology stocks, industrial stocks.
In that wide group of sectors, there’s a number of features you want to examine or be aware of. And you want to look at the kinds of things or themes that are developing.
An example is Check Point Software (NASDAQ:CHKP). It is a technology company. It’s performed very well.
It’s in the cybersecurity business or the security business. As you know, cybersecurity is receiving much attention these days. Check Point is one of the companies that’s been performing extremely well in that particular corner of the market.
When I look at companies like Check Point, I want to see that the company is in the right business and I want to see that the company is performing well.
And Check Point, although their growth rate has been somewhat slow — and in some ways disappointingly slow to some analysts — it nevertheless has been positive growth. That’s one thing I look at. We look at the general business.
And the second thing we want to look at is, of course, their financial statements, particularly their free cash flow, cash from operations, and the level of cash that they have on their balance sheet.
We want that to be solid and strong in all cases. It’s certainly solid and strong in the case of cash of Check Point. Good cash numbers, good balance sheet numbers and reasonably OK performance, and a good operating statement in a business, which is extremely important at this time.
Cybersecurity is getting a lot of attention and deservedly so. So that would be one company I would mention.”
Get all the top picks from Hugh Johnson by reading the entire 3,411 word interview, exclusively in the Wall Street Transcript.
Hugh Johnson, Chief Investment Officer & Founder
www.hjadvisors.com
email: info@hjadvisors.com
John Heffern, Founder, KCA/Princeton Advisors
John A. Heffern is Principal and Founder of KCA/Princeton Advisors, LLC. His career includes nearly 30 years of senior level portfolio management and equity research mandates. He leverages a deep background in financial services for investment selection across a wide expanse of companies, themes, and factors. The fund follows a qualitatively oriented process in portfolio construction that is unique in the industry.
In this 4,239 word interview, exclusively in the Wall Street Transcript, the long/short hedge fund manager John Heffern details his investing philosophy and current portfolio positions.
“I would assert that we really are unique in terms of our overarching investment philosophy.
And in the way the world is developing these days in the investment industry, I think we’re increasingly unique. And what I mean by that is that investment management firms and strategies have rapidly evolved in quantitative directions.
We’re unabashedly qualitative in our investment foundation.
We really do believe strongly that people with the right skills and philosophies and incentives are the last mile of execution and risk management, and that’s where we start. We start with the people, and that’s also where we end.
And we hand-select our investments based on our confidence in management, the underlying franchises of the businesses, their operating and governance philosophies. And so we favor long-term reliability over the allure of short-term momentum.
In this way, corporate governance matters in a broad sense that captures strategy, risk, incentives, aspirations, predictability, and reliability.
Given our focus on financial services, we invest in capital-intensive, highly regulated sectors and companies. And you can’t escape the importance of people and culture.
So as the world evolves toward quantitative momentum and artificial intelligence, we know that people are still key, particularly in regulated companies. And that’s where our focus and our experience come together and create a unique advantage.”
The long/short hedge fund portfolio positions are unique as well.
“…In my opinion and based on observations I get from bank managements who I talk to — is yes.
Many, many small businesses initially went perhaps to their core bank relationship with a larger bank. They were disappointed with the service level and the speed and ease of reaction in terms of having their loans underwritten and funded in a seamless way.
So they then turned to smaller local banks in their communities, which responded very quickly and very efficiently. And I think that has generated goodwill which has resulted in relationships moving from larger banks to smaller banks, certainly, at the margin.
I’m not going to say there’s been a groundswell of market share shift from the biggest banks in the country to the smallest banks in the country.
But I do think what we saw and continue to see in the pandemic — from a service perspective — is something that re-emphasizes the use case for community banking and regional banking in America. Now, that’s in the near term.
And the duration of that feeling of goodwill is something that we will only fully understand as we progress through time.
To be fair around all of this, there remain significant structural changes that are occurring in a society that’s becoming more digitally oriented. And those pressures on small banks versus large banks will continue unabated.
This is to say that the very large banks have the wherewithal to invest hundreds of millions of dollars, even billions of dollars, in technology innovation that we’re all seeking.
That ultimately drives market share in their direction. Those pressures will not go away.
But as I said, in the short term, from a pure service point of view at a time of great need, the use case for community banking was re-emphasized during the pandemic.”
The long/short hedge fund portfolio manager is devoting his money to this fundamental economic position.
“I want to go back and re-emphasize the qualitative aspect of our investment process.
We are very focused on management teams, their franchises, and conversations with those teams about how they’re running their banks, their governance priorities, and their perspective on opportunities and challenges going forward.
We also think, as we mentioned, that there will be consolidation — more M&A.
And in the space of community and regional banking, you can benefit both ways.
You can own buyers of other banks in accretive transactions, and you can own banks that sell for premiums.
Our approach has been to pursue a basket of favored investments in a community bank space. And just to name two or three: Atlantic Union Bankshares in Virginia (NASDAQ:AUB); Prosperity Bancshares in Texas (NYSE:PB); Peoples Bancorp in Ohio (NASDAQ:PEBO); and even a tiny bank, which very few investors would have heard of that we’ve owned for some time, Oak Valley Bancorp, out in California (NASDAQ:OVLY).
Banks like these operate all over the country.
They tend not to get Wall Street attention. And we like that. We do our work independently. We like the management teams in each of these companies. And we think that we have optionality either on the buying side or the selling side wrapped in very strong fundamentals and appealing valuations.
So we’ve taken a basket approach with these companies.
We are very happy with the performance we’ve seen from all of them through the pandemic and the outlooks we’re hearing from management as we enter 2021 and progress toward 2022.”
Another side of the long/short hedge fund portfolio are larger capitalization financial institutions.
“We think there is an opportunity on the turnaround side for companies that are cheap, where there has been significant management and cultural change and where valuations remain significantly discounted.
And that for us includes Deutsche Bank (NYSE:DB), which after years and years of regulatory and compliance errors, has embarked on a significant improvement in enterprise risk management and cost efficiency under a new CEO who arrived a couple of years ago.
We think the company has made great progress.
It will continue to make significant progress not just on the cost side, but on the revenue side.
And the shares are trading at a dramatic discount to its peers and to the group generally — well less than 50% of tangible book value.
So if Deutsche Bank can deliver on its financial goals and aspirations over the next year or two, we think the shares have 50% to even 100% upside.”
Get all the top picks and positions in the long/short hedge fund by reading the entire 4,239 word interview with John Heffern, exclusively in the Wall Street Transcript.
John A. Heffern, Founder, KCA/Princeton Advisors, LLC
www.kcaprinceton.com
email: jaheffern@kcaconsult.com
Stephen Davenport, Director of Alternative Investments, Decatur Capital
Stephen Davenport is the Director of Alternative Investments at Decatur Capital Management Inc. and is responsible for the firm’s Alternative strategies including buying puts for equity portfolio insurance.
He has an extensive knowledge of equities, derivatives and market dynamics, and uses a combination of quantitative and fundamental approach in managing assets.
Mr. Davenport received a B.S. degree in industrial engineering at Columbia University, a B.S. degree in math/computer science at Providence College, and a M.S. degree in finance from Boston College.
Mr. Davenport began his career as an Industrial Engineer in the manufacturing industry, and then moved into finance, working for State Street Global Advisors in the Private Wealth Management group. At SSGA, he developed a tax-optimized solution that utilized alpha, tracking risks, taxes, and other transaction costs for over 5,000 accounts.
After obtaining the CFA designation, he began directing derivative strategies at Fleet Bank. Mr. Davenport moved to Atlanta for the role of Director of Equity Risk Management at Wilmington Trust.
He developed strategies for premium income, exit and buying puts and calls for equity collars.
After Wilmington Trust, he became a Private Wealth provider at SunTrust managing derivative strategies. Mr. Davenport has held multiple volunteer roles and leadership positions with the CFA Society Atlanta, ASFIP Foundation.
During his role as President, he established a financial literacy foundation, with the main goal of helping the metro Atlanta community. In 2019, he received the FLY (Financial Leader of the Year) award from McCracken Alliance for his work in the financial literacy field.
In this 4,363 word interview, exclusively in the Wall Street Transcript, Mr. Davenport details buying puts as a strategy for his clients as well as a variety of other option trading tactics.
“We can sense the market is pretty overstimulated from a standpoint of liquidity that’s being provided by ultra-low rates. The buying of a lot of instruments by the Fed. The fiscal stimulus that’s been put in place and is going to be further added to has created unprecedented liquidity, which causes distortions.
When interest rates go below the rate of inflation, they’re basically real negative returns. People have to then take assets out of bank accounts and put them to work in risk markets. You look at what happened with GameStop (NYSE:GME), and there was obviously a lot of people who were on Reddit with money.
They probably had stimulus payments, and when you don’t differentiate who gets a stimulus, it creates liquidity, and that liquidity has to go somewhere.
I think we’ve seen very unusual things going on with some of the IPOs, SPACs and some of what’s happened in Reddit with GameStop and AMC theaters (NYSE:AMC). Companies aren’t necessarily doing anything that I would say is wrong or right.
The reaction of media and the idea of Robinhood, it was really a very strange story, right? I grew up talking about Robin Hood as taking from the rich and giving to the poor, and I’m not sure that the people who were making money on the Robinhood trades were the poor.
It’s just a strange characterization of the hedge funds who are losing money, but there were probably just as many hedge funds who were making money. There were probably people that said, “Hey, I’m going to take the other side of this trade and get behind all these people and take advantage of that momentum.”
It’s very hard for us to sound bite the markets and say, “Here, I’m going to take all of these trades and all the things that are happening and I’m going to give you a 15-second summary.” Markets are a little more complicated.
There was a lot of use of options and specifically call options. Seventy-five percent of the options used in August were duration of less than two weeks. I don’t consider that investment decisions if you’re horizon is two weeks or less and you’re using leverage to implement it. I think of investing as a one-year to three-year horizon. When you have a timeframe less than that, I consider that trading, not investing.”
Buying puts would have been a successful portfolio strategy for Cisco executives in the early 2000s:
“I remember when we looked at Cisco (NASDAQ:CSCO) in 2000 and we said, “Cisco is going to be a trillion-dollar company; they are going to continue to have 40% growth in revenue for the next five years,” and it really was like, “How are we going to use that much bandwidth?” We’re saying the same thing with some of these names like Tesla (NASDAQ:TSLA) and Amazon.
They are huge market caps. How do we see them fitting into that market cap and making it more reasonable in terms of a p/e multiple? It’s very difficult to get to those, so I look at a name like Etsy that’s smaller, that has a huge market runway in front of it and sells at a similar multiple. Degas feels that maybe Etsy is the better way to play stay-at-home, small business growth.
Another example would be GM (NYSE:GM) versus Tesla. We looked at the auto space and the EV market, and Tesla, most of their revenue now is coming from carbon credits, and you look at their actual vehicle sales and it’s a small percentage in terms of their profit.
You look at a car manufacturer like GM and their Volt and other things that they have in the pipeline, and you realize that they’re building a traditional business where they’re looking at profitability per vehicle, and they’re being priced in the EV space as their multiple per vehicle, versus the multiple on Tesla per vehicle is just quite a bit different.
So we looked and said, if we think EV is going to be a disruptor and is going to continue to grow, who is going to be the beneficiary? With Tesla up 750% last year, it’s hard to get in that car. It’s hard to go for that ride when you look at GM and they’ve got a huge commitment to the space and they’ve got a deep capability and they’ve got extensive infrastructure.
Somebody is going to build this EV industry out. Isn’t Tesla more of a specialty carmaker and is GM more of a general carmaker?
The general vehicle switching to EV — there’s a lot more vehicles that are going to get sold in the $10,000 to $30,000 range than are going to get sold in the $70,000 to $90,000 range. We just felt that GM might be the exposure that we wanted to take to gain EV exposure.”
Get more insight into buying puts and other option strategies by reading the entire 4,363 word interview with Stephen Davenport, exclusively in the Wall Street Transcript.
Stephen Davenport, Decatur Capital Management Inc., email: sdavenport@decaturcapital.com
Bobby Edgerton, Chief Investment Officer, Capital Investment Companies
Bobby Edgerton is a Co-Founder of the Capital Investment Companies and has served as an executive officer of the companies since 1984. He is also the firm’s Chief Investment Officer and has been in the financial services industry since 1979.
After winning the North Carolina State High School Golf Championship, Mr. Edgerton accepted both a basketball and golf scholarship from Wake Forest University and graduated with a B.A. in business and finance.
After graduation, he attained a rank of First Lieutenant in the U.S. Army Signal Corps, where he commanded a thousand-man training company at Fort Gordon, Georgia, during the Vietnam War. During his amateur golf career, Mr. Edgerton played in four United States Amateur Championships.
In this 3,889 word interview, exclusively in the Wall Street Transcript, Bobby Edgerton details his 2021 investment picks and his investing philosophy.
“My philosophy is that the essence of the stock market is twofold, very simple.
Every company, big and small, has two values. Number one is precisely to the penny what the stock market says a company is worth.
Walmart (NYSE:WMT) has 3 billion shares outstanding. The stock is right at $140, so the stock market says the company is worth exactly, say, $400 billion.
Coca-Cola (NYSE:KO) has 4 billion shares outstanding. The stock is around $50, so the stock market says the company is worth $200 billion.
There is no way Coke is worth half of Walmart. But what the stock market does is put an exact value on every stock, which you can’t do. It’s really a range.
So, the essence of the stock market is twofold. You have that first precise value, and then the second is, what are these companies really worth? Or what’s Apple really worth with their technology?
What’s Google really worth, Alphabet (NASDAQ:GOOG)? You can’t pin it down to an exact value.
It’s kind of a range that these companies fit into. And what one wants to do, is when one of these stocks gets oversold, and is selling at a low price for the year, the company is probably worth more than the market is valuing the company.
On the other hand, when a stock goes way up, and they’re at an all-time high, then you might think that some of these companies aren’t worth what they’re being valued at right now.
And I’m talking about the Zooms (NASDAQ:ZM), the Palantirs (NYSE:PLTR), the Oktas (NASDAQ:OKTA). Now, they’ve all gone public. A lot of them don’t have any cash flow or maybe minuscule cash flow. So that’s the essence of the stock market.
I have a five-point program for investing.
If one does these five things, they’re probably going to make money and most importantly, not lose much money.
Number one is you buy companies that have great balance sheets, and in many cases a lot of cash. Not much, if any, debt. And you buy the best companies in the world.
Maybe number one or number two, like Taiwan Semiconductor (NYSE:TSM) in chip manufacturing, or Coca-Cola in beverages, McDonald’s (NYSE:MCD) in fast food, things like that. So that’s the first thing you do. You buy nothing but good companies. You always buy when they’re down, not when they’re way up.
Number two is you never spend a dividend.
You always reinvest your dividends. The average good company like Coca-Cola and Walmart double their dividend every 10 years. Lockheed Martin (NYSE:LMT), the big defense company, quadrupled its dividend last year. If you need dividends to live on, that is another matter.
Number three is savings and premiums.
If you go through your life, or your business life, in your retirement plan constantly accumulating great companies, especially the ones that have sold off, you’re going to do well in the stock market. And so, that’s, kind of, savings.
Premium is something that you obligate yourself to do. Maybe you buy one good stock a month. In a year, you’re going to have 12, and in five years, you’re going to have 60. Even if you might not do well in the stock market, if you saved a lot of money, you’re probably going to be in good shape.
The fourth part of the five-point program is tax.
Obviously, in an ERISA account, where there are IRAs and 401(k)s and the like, you don’t pay any tax until you’re 72. And then you have to start taking out your required minimum distributions.
In a taxable account, if you make your gains, long-term gains, obviously, you pay a lot less tax than you do on short-term gains.
And then the fifth point of the five-point program, and probably the most important, is the two ways you make money in the stock market.
You buy good companies and you hold them forever. You hold them and don’t ever sell. You don’t pay any tax unless they change the rules on you and start having some kind of tax on it, which they don’t do now.
Someone who’s held Coca-Cola for 50 years, or Walmart for 25 years, or Apple, like I have, for 25 years. That’s a good way to make money.”
Bobby Edgerton has some top picks for 2021.
“My number-one turnaround would be Coca-Cola.
Coca-Cola is in the best shape they’ve ever been. James Quincey is, in my opinion, the best CEO they’ve ever had. They’ve had some tough guys back in the day. Doug Ivester was not a very popular guy. He was just a tough guy. But Quincey is a great guy.
I used to run a Coca-Cola bottling company’s retirement plan.
And the owner always told me that Coke did not belong in the bottling business. That’s a capital-intensive business. They should sell concentrate and all the other beverages.
Well, none of them ever did that until Quincey came along and did that. So, Coke, they own stock in their bottlers. Like Coca-Cola European Partners (NYSE:CCEP). But they’re essentially out of the bottling business which I think is a good move.
And Quincey — he just had a massive selling of the beverages that weren’t performing.
Pepsi (NASDAQ:PEP) is a big in-house company with Frito-Lay, where people stay home and they eat the munchies.
Coke is an external company where people get out and they mingle, they go to restaurants, which I think is going to come back. And when that happens and when the sports open back up, then Coke is going to be a big winner.
But it’s in the doghouse right now. And I like buying good companies when they’re in the doghouse.”
Get the other top picks from Bobby Edgerton by reading the entire 3,889 word interview, exclusively in the Wall Street Transcript.
Sam Dunlap, Chief Investment Officer, Angel Oak Capital Advisors
Sam Dunlap is a Managing Director and Chief Investment Officer of public strategies at Angel Oak Capital Advisors and serves as a Portfolio Manager for the Angel Oak Multi-Strategy Income Fund and the Angel Oak Multi-Strategy Income UCITS Fund.
He also manages some of the separately managed accounts for the Advisor’s clients. Mr. Dunlap joined Angel Oak in 2009, and serves as a voting member of the firm’s public funds Investment Committee.
He has also been featured as a television guest on Bloomberg, CNBC, Fox Business, and TD Ameritrade Network as well as quoted in Bloomberg and Barron’s.
He began his capital markets career in 2002 and has investment experience across multiple sectors of the fixed-income market. Prior to joining Angel Oak, he spent six years marketing and structuring interest rate derivatives with SunTrust Robinson Humphrey where he focused on both interest rate hedging products and interest rate linked structured notes.
In this 2,672 word interview, exclusively in the Wall Street Transcript, Mr. Dunlap details the financial thesis for his short term high yield fixed income portfolio.
“As far as volatility is concerned and to your point on volatility within the U.S. — whether it relates to capital markets or U.S. growth ahead, for example — we do think that the Fed and the recent commitment to the zero bound and QE4 is an incredible volatility suppressant, particularly for risk assets.
Hence the mortgage allocation, as I mentioned, is the overweight within the fund at over 65% of the allocation.
Given how profound the Fed’s commitment is to QE4 and buying agency mortgages, we’ve seen interest rate volatility collapse just as you’ve seen volatility collapse across all the risk markets, including the VIX.
We believe this is hugely supportive to continue to suppress volatility, which is supportive for mortgage credit, generally speaking. We think our volatility outlook for the years and months ahead bodes well for the mortgage allocation.
Our goal is to provide investors with the best relative value that will pay over the long run credit cycle, and in addition to low volatility, the U.S. mortgage credit market has been benefiting from positive fundamental credit attributes.
The Fed’s commitment to the zero bound and buying mortgages, as well as collapsing interest rates has been hugely supportive for U.S. housing, which from a fundamental perspective, improved the credit risk profile of the bonds we target within non-agency RMBS.
There were some questions to your point on volatility in the U.S. economy surrounding unemployment and rising delinquencies in RMBS due to the pandemic. As we took a step back and reflected on the post-COVID environment from a top-down standpoint and what it meant for RMBS, we were reminded we were very bullish towards U.S. housing and non-agency RMBS going into COVID due to the incredible supply and demand dynamics supporting U.S. housing.
There’s just a general shortage of supply and rising demand. We became even more bullish towards U.S. housing and non-agency RMBS post COVID. We have been pleasantly surprised to say the least with what has transpired post COVID as it relates to housing and RMBS.
The performance has been extraordinary.
It was not immune to what we saw with the volatility during the March period. As all credit products were particularly hard hit, mortgage credit was not immune to similar spread widening, but the fundamental credit aspects that back the bonds we target have improved dramatically post COVID.
I don’t anticipate potential volatility ahead to change our current outlook and backdrop to the macro tailwinds that benefit mortgage credit over the medium term.
One of the things that we have shifted towards post COVID are more areas of consumer ABS — that is an area that has benefited from similar macro tailwind to mortgage credit.
Rates obviously collapsed on the front end and improved financing costs has really benifitted areas like auto ABS. Additionally, U.S. consumers were in solid shape going into COVID, and in our opinion, U.S. consumers were very well positioned to stave off the worst from the pandemic.
Personal savings rates as a percentage of disposable income were rising going into the COVID crisis, and they subsequently spiked to post-WWII all-time highs. We and other market participants took note.
We believed there were some excellent opportunities within the consumer ABS space, particularly auto ABS coming out of the COVID environment.
That has, again, been a pleasant surprise given our outlook, as used car prices increased dramatically — similar to the dynamic for U.S. houses.
We felt, even if the U.S. consumer were to fall under more undue pressure by not passing additional stimulus, the collateral value that backs the auto ABS were improving in a dramatic V-shaped fashion.
Consumers not only bought homes to escape the ills of the COVID crisis, but they also bought cars.
Our allocation targets were consistent going into the COVID crisis, but that gives you a sense of how we thought of it coming out.
CMBS is an area we actually decreased the allocation after the COVID-related volatility. Commercial real estate is a sector where we have concerns about the integrity of the long-term leases in areas like retail, which was a concern for us prior to COVID; office, given the acceptance of the work-from-home environment; and hospitality, which has been particularly hard hit.
Prior to COVID we were biased towards being up in quality in CMBS. Post COVID we not only maintained our up in quality bias, but we have predominantly targeted agency-backed CMBS in the post-COVID environment.”
A short term high yield fixed income portfolio is difficult to achieve in this market environment but Mr. Dunlap has centered his portfolio on low volatility assets that he believes in.
“Angel Oak Capital Advisors manages approximately $10.8 billion in fixed income. We focus on the U.S. structured credit markets and predominantly in mortgage credit.
This fund from a strategy perspective is approximately $7.4 billion in size. We also have a UCITS version of this fund as well, the Angel Oak Multi-Strategy Income UCITS Fund.
What we seek to identify within the U.S. structured credit markets provides a unique allocation for investors seeking high current income and a unique allocation away from traditional fixed income in the U.S. structured credit markets.
This fund has a unique allocation and an overweight to non-agency RMBS and predominantly legacy non-agency RMBS — bonds that were issued prior to the global financial crisis. It has over approximately 65% of the allocation towards non-agency RMBS.
The allocation gives investors high current income, with a relatively short effective duration profile, which we think is unique given the current environment of historic fiscal and monetary stimulus.
Here, at the zero bound, we are seeking to provide investors high current income, with low interest rate sensitivity.”
Read the complete details of how Angel Oak has developed this short term high yield fixed income portfolio for individual investors by reading the entire 2,672 word interview with Sam Dunlap, exclusively in the Wall Street Transcript.
