Andy Marsh is President and Chief Executive Officer of Plug Power Inc. Mr. Marsh joined Plug Power as President and CEO in April 2008. Under his leadership, Plug Power has led innovation, bringing the hydrogen fuel cell market from concept to commercialization.
Early on, Mr. Marsh identified material handling as the first commercially viable market targeted by Plug Power. Today, the firm’s fuel cell solutions are leveraged by world leaders such as Amazon, Walmart and Carrefour to power industrial electric vehicles.
As CEO, Mr. Marsh directs all aspects of the organization’s objectives and focuses on building a company that leverages a combination of technological expertise, talented people and sales growth. Mr. Marsh continues to spearhead hydrogen fuel cell innovations, and his ability to drive revenue growth 300% has landed Plug Power on Deloitte’s Technology Fast 500 list in 2015, 2016 and 2017.
Previously, Mr. Marsh was a co-founder of Valere Power, where he served as CEO and board member from the company’s inception in 2001 through its sale to Eltek ASA in 2007.
Under his leadership, Valere grew into a profitable global operation with over 200 employees and $90 million in revenue. Prior to founding Valere, he spent almost 18 years with Lucent Bell Laboratories in sales and technical management positions.
Mr. Marsh is a prominent industry voice. Nationally, he is the Chairman of the Fuel Cell and Hydrogen Energy Association, and sits as a member of the Hydrogen and Fuel Cell Tactical Advisory Committee — HTAC.
Internationally, Mr. Marsh represents Plug Power in their role as supporting members of the Hydrogen Council, a global initiative of leading energy, transport and industry companies. Mr. Marsh holds an MSEE from Duke University and an MBA from SMU.
In his 2,774 word interview, exclusively for the Wall Street Transcript, Mr. Marsh details the advantages of his company’s alternative energy formula:
“What is not always captured is the degree that they are more cost effective than internal combustion engines. You can power an electric vehicle in two ways: lithium batteries or a fuel cell.
So why would you ever choose a fuel cell? Well, if you are driving a vehicle like a car, 4% of the time, you can charge it at home using batteries. They are the perfect solution.
But if you’re thinking about applications that are asset intense, then fuel cells have three unique advantages. One is, a fuel cell can fill up a car within five minutes.
Think about if you are driving a delivery van like a FedEx truck, and it has to go 150 miles a day. Filled up with hydrogen, it can be on the road all day. You can travel up to 500 miles often without a refill.
With batteries, a car has to recharge every five or six hours — and charging it may take an hour.
When companies like DHL and others want fast fueling, they like the energy density of fuel cells at certain points because it is 10 times that of battery electric vehicles. Because of that, you can carry more packages on board.
We also show a slide that was developed by DHL that shows battery electric vehicles running for 100 miles as Class 3 vehicles that cannot meet the minimum requirements for the number of packages you can put on board.
Fuel-cell-powered electric vehicles, because of the higher energy density of a hydrogen tank versus batteries, can go way over 500 to 600 miles and still exceed the minimum requirements for how many packages you can put on board.”
The Plug Power CEO guided to full year and future year goals:
“Our guidance for 2020 is to do over $300 million in gross billings, with $20 million in EBITDA.
If you look at our plans going forward, by 2024, we have been very public about our plan to be a $1 billion revenue company with about $750 million coming from our traditional business with customers like Walmart, Amazon, Home Depot, BMW, throughout the United States and in Europe.
We expect $200 million from on-road vehicles. We are doing some exciting work with a company like Lightning Systems that is providing vehicles to Amazon, and we have a number of other partners we have been engaged with.
We see the stationary market being a $50 million market opportunity for us. We have laid out a five-year plan that says, at the end of 2024, our revenue will be $1 billion, our EBITDAs will be $200 million, and our operating income will be $170 million.”
These financial results have translated Plug Power into a dominant market participant:
“Five years ago, we were essentially the best system integrator in the fuel cell industry. But since that time, there has been a high level of integration at the system level, whereby we do hydrogen fueling stations, fuel cells and the aftermarket service.
We have a data center in Dayton, Ohio, that monitors our products 24/7. We also today are North America’s largest MEA supplier. The MEA is a critical component, much like a thin film battery layer in a fuel cell.
We are the largest manufacturer in North America of fuel cell stacks.
So when you start looking at the heart of our fuel cell engine, most of the critical components are actually designed and manufactured by Plug Power. We are really excited that we are beginning to move into large-scale hydrogen generation and distribution.”
The dominance is the basis for a long term strategy:
“One, if you look at the revenue and the customer set that Plug has developed, we are where most of our competitors are aspiring to be. Plug Power is doing business every day with Amazon, Walmart and Home Depot.
Two, no one has the broad technical and business capabilities that we do to meet all the needs in the supply chain for the emerging hydrogen economy from hydrogen generation to building fuel cell stations to building high-end fuel cells or capabilities in MEAs. These achievements just uniquely separate us from our competition.
I would go as far as to say that, when you look at the market cap and then the revenues for our competitors, as in comparing us to folks like Nuvera, Nikola and others, Plug Power is greatly undervalued with its revenue and EBITDA potentials, and it has a much higher growth trajectory than they were projecting for the next five years.
An investor sent me a note last night that Plug Power is really the undervalued gem in the fuel cell industry.”
Read the entire 2,774 word interview with the CEO of Plug Power Andy Marsh, exclusively for the Wall Street Transcript.
Michael E. Hoffman joined Stifel in 2014 and is a Managing Director and Group Head of Diversified Industrials Research, covering Environmental Services and Pest Control. He is based out of the Stifel Baltimore office.
His past awards include ranking #2 in pollution control from Institutional Investor, Greenwich Associates, and Reuters and top ranked with Starmine for Commercial Business Services estimates and stock picking. Mr. Hoffman has been an analyst for more than 32 years, having also been an analyst with Wunderlich Securities, Friedman Billings Ramsey, Credit Suisse, Robertson Stevens, and Salomon Brothers.
He was director of research at Wunderlich, president, chief operating officer, and director of research with Caris, deputy director of research, head of fixed income research and group head of diversified industrial research with FBR, and head of global value research at Credit Suisse.
Mr. Hoffman earned a B.S.E. from Widener University and an MBA from the Johnson School at Cornell University. He is the 2001 owner/rider winner of the Maryland Hunt Cup, an errant golfer and avid fly fisherman.
He is a member of the National Waste and Recycling Association Hall of Fame Class of 2020.
In this 2,255 word interview, exclusively in the Wall Street Transcript, Stifel analyst Mr. Hoffman offers some recommendations for ESG portfolios looking to add waste management securities.
“I’ve been a sell-side analyst for 33 years. Within that timeframe, I’ve always covered environmental services, which at one time was called pollution control.
Through time, I’ve covered staffing companies and multinational, multi-industrial conglomerates and defense. I’ve always had, at the root of my coverage, the environmental services space. I’m also the group head of the industrials coverage at Stifel…
In the solid waste, if there’s a major difference on a global basis, it’s the European countries, predominantly more so than anywhere else in the world, that have walked away from landfill as the primary form of disposal, which from our perspective, had more to do with land space than viewing landfill as bad for the environment.
All of Europe fits inside the upper-eastern quarter of the United States, and they have more people than the U.S. With one quarter of the landmass, why would Europe use good land for disposing of your waste on a long-term basis if there are alternatives? And that is why Europe embraced waste energy which is referred to as energy-from-waste (EfW).
In Europe, waste-to-energy is the primary form of disposal, and then recycling with some volume that has to go into landfill.
In North America, our primary source of disposal is landfill, partly because we have an abundance of land and partly because it’s the lowest-cost option.
It’s also an extraordinarily highly engineered solution too, which is often lost in the conversation. Since 1994 with the final rulemaking of the Subtitle D, which governs the design, operation and lifecycle costs and financial obligations of operating municipal solid waste landfills — this is one of the most highly sophisticated civil engineering source solutions to waste management.
And it’s one of the most reliable, consistent and lowest-cost bioreactors available for converting organics and capturing the energy value of organics in a waste stream.”
According to the Stifel star analyst the solution in North America is engineering intensive:
“…Landfills generate methane, which is a greenhouse gas. What is usually lost is how effective the design is in capturing that methane and then converting it into energy.
It is an effective, reliable way to do it and much more cost effective than, say, the only other method that can be done at scale, which is anaerobic digestion. They’re extraordinarily expensive.
They require power prices in the $60, $70 a megawatt, where spot energy prices today are $25 a megawatt. And it’s not without its own air pollution-related issues. So a modern landfill is a very effective solution and it works for us here in North America because we do have an abundance of land.
Today, solid waste is using a piece of land that doesn’t have risk associated with it, like ground water or surface water access that are too close to the site.
These landfills are a highly engineered, fully lined, multiple-layered system that capture the liquids generated in a landfill called leachate.
The landfill is lined with a 12-millimeter high-density polyethylene liner, which a vacuum can be drawn on the seals. There’s a 30-year obligation to monitor the site once it’s closed to assure that there’s no risk to human health and the environment.
Once capped, a vacuum can be drawn on the landfill in order to pull the gases off. Modern Subtitle D landfills are extraordinary civil engineering projects in how to manage a landfill lifecycle, economically and environmentally, and so a safe way to manage waste.”
Stifel analyst Michael Hoffman explores several companies providing this service:
“There are five recommended publicly traded solid waste equities. By size: Waste Management (NYSE:WM), Republic (NYSE:RSG), Waste Connections (NYSE:WCN), GFL Environmental (TSE:GFL) and Casella Waste (NASDAQ:CWST) — largest to the smallest.
All of them operate landfills. All of them have landfill gas operations, with about 1 million tons of waste under the cap to support LFG generation…
We just published our 2021 outlook and one of our top picks for 2021 is GFL Environmental; it’s the most attractive relative value within the group.
We have a “buy” on all of our solid waste; there is a stock for virtually any type of investment style. GFL, on a relative value basis, compared to the peer group, based on enterprise value or free cash flow yield, is the most attractive entry point.
The other way the market tends to look at this is sustainable sales, profit and free cash flow growth rates. Waste Connections is a compelling stock year in and year out, because it tends to be a high-single-, low-double-digit free cash flow growth compounder year in and year out.
We think Republic is deemed as extraordinarily reliable, repeatable equity, and with solely U.S.-based revenues.
Waste Connections, Waste Management and GFL all have both U.S. and Canadian, which introduces currency translation. Sometimes its currency is favorable and sometimes it is not; however, it is all translational, not transactional, so really should not matter.
Casella is deemed a very attractive small-cap play the market has rallied around over the last year and a half. There have been a lot of non-traditional small-cap money looking for high-quality recurring revenue stories with good underlying organic growth characteristics, a good free cash growth compounder, and Casella fits that bill.”
Get the complete detail on these and other compelling Stifel recommendations from the Hall of Fame analyst Michael Hoffman in his complete 2,255 word interview, exclusively in the Wall Street Transcript.
Hugh Wynne is Co-Head of Utilities and Renewable Energy Research at SSR LLC, an independent research firm providing in-depth analyses of industry trends for institutional investors in both the public and private equity markets.
SSR also provides advisory services to electric utilities, utility regulators and the suppliers of power generation and energy storage equipment. Prior to joining SSR, Mr. Wynne was Managing Director and Senior Research Analyst at Bernstein Research, where he was responsible for the regulated utility, independent power and renewable energy sectors.
In that role, he was ranked nine times by Institutional Investor in its annual All-American Research Team poll.
Mr. Wynne’s power sector research has focused on the critical long-term trends driving structural change in the industry, including the scale, structure and cost of the investment in renewable generation and energy storage required for states and utilities to achieve their CO2 reduction targets; the impact of increasingly stringent environmental regulations on the coal, oil and gas-fired fleets; and the challenges that the growth of renewable generation presents both to competitive power markets and the traditional utility business model.
Before joining Bernstein, Mr. Wynne was Vice President of Finance at ABB Energy Ventures, the power project development subsidiary of ABB Asea Brown Boveri, where he was charged with making equity investments in and arranging non-recourse financing for major power generation and transmission projects globally.
Previously, Mr. Wynne was a Senior Vice President at Lehman Brothers’ Utilities and Project Finance Group. Mr. Wynne holds a B.A. degree from Harvard University, where he graduated magna cum laude and was elected to Phi Beta Kappa, and a M.A. degree in economics from Stanford University.
In this 3,801 word interview, exclusively with the Wall Street Transcript, Hugh Wynne gives investors detailed advice on renewable energy stocks.
“So basically, what we’re seeing is that, one, there are state and corporate targets being set for much lower levels of carbon output and thus much higher levels of renewable generation.
Those targets will be met primarily by substituting the output of new wind and solar power plants for the output of the existing coal- and gas-fired power plants. And because the cost of fuel and the variable cost of operation of those fossil fuel plants is relatively high — maybe $25 per megawatt hour — a large portion of the capital cost of building new wind and solar resources — which in the case of solar may be $35 per megawatt hour — will be offset by savings from fuel that’s not burned and variable costs that are not incurred to run the existing fossil fleet.
So we see the opportunity here to make a very large investment in renewables, but to do so in a way that has a limited impact on the cost to supply electricity because of the savings at fossil fuel plants.
Just to give a sense of the scale of that investment, when we did an analysis of 25 of the vertically integrated utilities in the country that have set targets to reduce CO2, we found that in order to achieve those targets, those 25 companies would need to invest capital equivalent to about 20% of their current regulated asset base, or rate base, over the next decade.
So on average this is a big investment relative to their existing assets. Moreover, the range around that average can be pretty large. There are some companies that may have to invest amounts equivalent to half or even two-thirds of their current rate base to achieve their CO2 reduction targets.
While sharing in the rapid growth of renewables, utilities have characteristics that we think will set them apart from other growth stocks in the renewable space.
The most important of these is that utilities are regulated monopolies.
They’re not subject to competition in their service territories. Their returns on capital are supported by regulated electricity rates and revenues, and those allowed returns on equity which are currently over 9.0% or maybe 800 basis points above the yield on long-term U.S. Treasury bonds.
So a very substantial equity risk premium is available on these stocks, and yet their returns are protected from competition and are historically insensitive to the economic cycle. Regulated utilities pursuing investments in renewable generation thus offer growth with very low variability on earnings, so low betas.
In sum, we find regulated electric utilities a unique way to play the growth of renewables, in that they earn returns well in excess of their cost of capital and, in the absence of competition, the stability of these monopoly earnings makes them far less risky growth stocks than some of the other alternatives out there.
Not to mention that they still trade in line with the S&P 500 as opposed to an extravagant premium.”
This important insight leads to specific stock picks from Hugh Wynne:
“Some of the stocks that have quite robust renewable growth opportunities are also stocks that we find attractive in terms of their relative valuations, regulatory environment, and power demand growth.
Two stocks that fall in this bucket are Pinnacle West (NYSE:PNW) and Entergy (NYSE:ETR). What particularly interests us about these two companies is scale of the opportunity for them to invest in new renewable resources as the means to reduce their exposure to coal- and gas-fired generation.
At Pinnacle West, we estimate that the capex required to achieve their CO2 reduction target could be equivalent to as much as 40% of the company’s existing regulated asset base. It’s possible that PNW’s regulators will not permit it to own all those new renewable assets, and will require that some portion be owned by independent power producers.
But as a vertically integrated utility in a regulated state, Pinnacle West is in a good position to incorporate a significant part of this investment into their rate base. We think the same goes for Entergy, where we believe that the scale of investment required to meet their carbon emissions targets for 2030 is equivalent to about a third of their existing regulated asset base.
So we’re bullish about these companies due to their attractive growth potential as they transition to renewable energy to meet their own carbon reduction targets — particularly as their share prices suggest that investors are not incorporating this growth into their valuations.”
Some other recommendations from Hugh Wynne recognize a variety of positive factors in the renewable energy sector:
“During the recent rally in renewable energy stocks, the owners of renewable power projects have underperformed the renewable equipment manufacturers.
Yet we think the yieldcos have become more attractive as their stocks have appreciated and their cost of capital has fallen, allowing for larger and more accretive acquisitions of renewable assets. Among the names we find most compelling in the space are NextEra Energy Partners (NYSE:NEP) and Brookfield Renewable Partners (NYSE:BEP)…
Also, some renewable equipment manufacturers that are currently underperforming may offer opportunities. First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR), for example, have failed to keep up with some of the other renewable equipment manufacturers due to investors’ concerns regarding the expiration of U.S. tariffs on imports of solar panels.
Yet with Democratic control of the Congress, the Biden administration will be in a position to implement policies that are far more supportive of renewable energy. First Solar and SunPower will benefit, and they’re currently the cheapest renewable equipment companies around.”
Get the full insight by reading the entire 3,801 word interview with Hugh Wynne, exclusively with the Wall Street Transcript.
Timothy Winter, CFA, is a portfolio manager of The Gabelli Utilities Fund, The Gabelli Utilities Trust, The Gabelli Global Utility & Income Trust, and the Love Our People and Planet ETF and a research analyst covering the utilities industry for GAMCO Investors, Inc.
He joined the firm in 2009 and has over 25 years of industry experience. Previously he served over 15 years as research analyst covering utilities at AG Edwards, as well as Jesup & Lamont and SM Research.
Mr. Winter has received numerous awards and recognition for his work in the industry.
He was a three-time All-Star Wall Street Journal winner and five time ranked number-one Electric Utility Team by Institutional Investor. In 2018 he received Thomson Reuter’s U.S. Analyst Award and was ranked the number-one stock picker in the electric utility sector and water utility sector and number two in the gas utility sector.
In this 2,454 word interview, exclusively in the Wall Street Transcript, this award winning analyst for Gabelli explains how to profit from the alternative energy investment theme.
“It’s an exciting time in the utility and power sector because it’s undergoing a great transformation, which is really just the “greening” of the sector.
The industry is moving from primarily fossil-fired power generation — coal and gas — to renewable generation like wind and solar battery storage. The industry is retiring old coal plants and replacing them with efficient gas plants, wind and solar plants.
Utility-scale battery storage is becoming ever more necessary to make wind and solar power less dependent on weather. That’s on the supply side.
On the demand side, there is rooftop solar, electric charging stations and a trend to electrify industrial processes that use oil and gas. The electric grid also needs to be modernized to handle greater electric flows and two-way flows, and hardened to increase reliability during extreme weather events, like hurricanes and wildfires.
Basically the theme of alternative energy and green energy just runs through the entire sector. Investing in infrastructure is what utilities do, and the infrastructure is going to have to be moved from being a fossil-fired-oriented system to a renewable energy system.”
This leads the Gabelli stock picker to some large cap investment opportunities:
“NextEra Energy (NYSE:NEE) and its 60%-owned yieldco, NextEra Energy Partners (NYSE:NEP). NEE and NEP are the largest U.S. renewable players and own portfolios of wind, solar, and have huge backlog of future development opportunities.
NEE is the largest utility in Florida, with plans to develop 10 GWs of solar over the next decade, and its renewable development subsidiary owns 27 GWs of renewables with another 15-20 GWs under development.
NEP grows by either developing wind and solar, or by acquiring existing projects from its parent NEE, which owns 60%. NEE plans to grow 6-8% per year and NEP plans to grow the distribution 12-15% per year.
Also Brookfield Renewable Partners (NYSE:BEP, NYSE:BEPC), which is two different tickers because there’s BEP, and then there’s the tracking stock, the BEPC. Brookfield is also one of the one of the world’s largest renewable developers with a 19,000-MW portfolio of renewables.
A lot of that is hydro, but they are also developing considerable amount of wind and solar, and potentially offshore wind. BEPC is going to be a 10%-plus grower with a nice dividend yield.
There’s Orsted (OTCMKTS:DNNGY), which is the Denmark company that is the world’s largest offshore wind developer. I would add EverSource (NYSE:ES) and Avangrid (NYSE:AGR) as large utilities with significant and growing non-regulated renewable development businesses. AES is a transforming utility and power developer with a global renewable portfolio and pipeline with a commercial-oriented battery company. The whole industry would be considered as beneficiaries of alternative energy in the transformation of power — the greening of the system.”
Other players find a place in the Gabelli portfolio:
“It is definitely early but that doesn’t mean it’s too early.
Plug Power (NASDAQ:PLUG) is once again garnering a lot of attention. I say that because it also did in the tech bubble of 2000. There are a couple of established green hydrogen players.
One is Nel (OTCMKTS:NLLSF), another is Ballard Power (NASDAQ:BLDP). There are a number of larger players trying to get into the business, including NextEra Energy who has got a pilot program. Electrolyzers will be a significant key to getting to a net zero carbon economy, because the hydrogen produced from an electrolyzer is perfect for use with hydrogen fuel cells…
Utility-scale batteries is one thing that we’re looking at it. Other than Tesla (NASDAQ:TSLA), which trades at too high of valuations for us, and large multi-nationals like Panasonic (OTCMKTS:PCRFY) and LG Chem (KRX:051910), we like newcomer EOS Energy (NASDAQ:EOSE), which is a pure play with a utility-scale battery.
We also invest in lithium players like Livent (NYSE:LTHM) and Albermarle (NYSE:ALB).
Also, green hydrogen is on our radar because natural gas has been an extremely important part of getting where we are even today in the transition to renewable. The transition from coal to renewable requires that we use natural gas as a transition fuel.
Natural gas backs up wind and solar when the sun doesn’t shine, or wind doesn’t blow. Natural gas is cleaner than coal and oil and has gotten so cheap that it’s led to a number of new gas-fired plants over the years, and today gas has become almost 40% of U.S. electric generation, which has led and will continue to lead to coal plant retirements. So gas has been extremely important.
Now, the problem is, gas is now being viewed as a dirty fossil fuel in some camps, and natural gas can’t exist in a net zero carbon economy without carbon sequestration. The hope is that green hydrogen can today replace natural gas.
You can blend it into natural gas up to about 10%. And moving forward, hopefully, we’ll get to the point where it could become a much more meaningful, if not 100% source of replacing natural gas. It also can power fuel cells, where you can have a distributed fuel cell at the industrial site, or the commercial site, or even at a residential home. So we’re looking at that.”
Get the complete information on these renewable energy stock picks by reading the entire 2,454 word interview with Timothy Winter, exclusively in the Wall Street Transcript.
Pavel Molchanov is Senior Vice President and Energy Analyst for Raymond James & Associates.
He joined the firm in 2003 and has been part of the Raymond James energy research team ever since. He became an analyst in 2006, the year he initiated coverage on the renewable energy/clean technology sector.
In this role, he covers all aspects of sustainability-themed technologies, including solar, wind, biofuels, electric vehicles, hydrogen, power storage, grid modernization, water technology, and more. Within the Raymond James energy research team, he also writes about the broader topics of geopolitical and regulatory issues, climate change, and ESG investing.
This Raymond James analyst has been recognized in the StarMine Top Analyst survey, the Forbes Blue Chip Analyst survey, and The Wall Street Journal Best on the Street survey. He graduated cum laude from Duke University in 2003 with a bachelor of science degree in economics, with high distinction.
In this 2,012 word interview, exclusively in the Wall Street Transcript, Mr. Molchanov points out the implications of the COVID 19 global pandemic and government regulation on publicly traded alternative energy stocks.
“So for example, biofuels, which are used in the transportation market, and usually blended into gasoline and diesel, have been affected much like demand for gasoline, diesel and jet fuel has been impacted. Fewer vehicles on the road means less demand for biofuels. That impact has been substantial, particularly in the first half of the year.
By comparison, impact on solar and wind has been slim to none. For one thing, electric power consumption has been much more stable compared to transportation fuels.
Simply put, even if people are working from home, or doing in-home learning instead of going to school, they need electricity. So anything relating to electric power has been much more resilient amid the pandemic, and that includes solar and wind.
Electric vehicle sales have an interesting bifurcation to them when we look at 2020. The first half of the year, when, for example, many dealerships were closed because of lockdowns, all automotive sales fell off a cliff.
Electric vehicle sales dropped also, though not as much as conventional auto sales. But since the middle of the year, we have seen a remarkably strong rebound in electric vehicle sales. In fact, the most recent data for the month of October shows global electric vehicle sales up 128% versus a year ago, which is exceptionally strong growth.”
The implications of climate change are also an investment theme for the Raymond James Senior VP Pavel Molchanov:
“…One of the corollaries of that is rethinking the electric grid.
The structure of the electric grid, in many ways, resembles what it was 100 years ago, which is a centralized behemoth. Well, when people are working from home and using more electricity at home, they want the most reliable electricity supply possible, not just in the office building or in the factory, but at home.
So that speaks to more widespread adoption of rooftop solar, smart meters, and batteries that can support a more distributed electric grid. And it also speaks to more deployment of software by utility companies for collecting and managing all of the data that comes from these distributed endpoints.
Making the grid less centralized and more distributed also creates greater resilience. This has a linkage to the pandemic, but also to the overarching megatrend of climate adaptation.
When we think about climate change, there are two essential concepts: mitigation and adaptation. Mitigation involves keeping climate change from becoming even worse than it already is, through more use of renewable power, more electric vehicles and so on.
But there is another facet too, which is adaptation. The reality is that, even with mitigation, the impact of climate change on human society and the economy will not go away, probably ever, certainly not anytime soon.
So that means we have to adapt and learn to live with the reality of higher temperatures, more extreme weather. A more resilient power grid is one of the means of adaptation to the reality of climate change.
Whether it’s wildfires in California, Australia and Brazil, or hurricanes in Puerto Rico and Texas, a more digitized and more distributed grid will provide greater protection against extreme weather patterns that are among the consequences of climate change.”
The Europan Union regulatory environmental laws are also seen to have a profound effect on stock picking, according to the Raymond James analyst:
“…The heads of governments of the European Union, all 27 members, approved the European Climate Law.
The Climate Law is, in my view, the most important environmental policy decision of 2020, and arguably ever. For the first time, a major economy, the third largest economy in the world, has committed to carbon neutrality by 2050. And this is not simply rhetoric or PR — this is legally binding for every country within the EU.
To reach carbon neutrality, which is also known as net zero emissions, every facet of the European economy will have to be transformed over the next three decades. Power plants and transportation are the obvious things that will need to change.
But it’s not only that, because half of emissions are outside of power plants and transport. Buildings will have to become much more energy efficient; agriculture and the water industry will need to reduce their carbon footprint; and the industrial sector — everything from chemical plants to food processing — will need to aim towards carbon neutrality.
This is a historic and exciting moment for decarbonization globally.”
The Raymond James recommendations for specific stock investments flow from these and other detailed analysis:
“The first one is Enviva Partners (NYSE:EVA). Enviva is the purest way for investors to play the theme of the European Climate Law. Enviva happens to be the only U.S.-based energy company of any kind, renewable or otherwise, where practically 100% of revenue comes from the European market.
Enviva is the world’s largest supplier of utility-grade wood pellets. It sells those pellets under contract to utilities in the U.K., Belgium and Denmark. There are opportunities in Japan as well, but as it stands, nearly 100% of the revenue comes from Europe.
So when we think about how can investors get leverage to the European Climate Law, Enviva is the most direct way of achieving that.
Second idea is Itron (NASDAQ:ITRI). Itron is one of the four major multinational companies that provide smart meters and other grid modernization solutions for electricity, water and natural gas.
Most of Itron’s revenue is hardware, but about 10% is software and managed services, which is recurring revenue. Smart meters are an interesting technology because they enable climate mitigation and also adaptation. Smart meters are useful for mitigation because they support a rising share of renewable power in the electricity mix, and they support adaptation because they make the grid more digitized and intelligent, which increases resilience vis-a-vis extreme weather.
Third idea is Primo Water (NYSE:PRMW). Primo Water provides reusable water bottles to homes and businesses. Why are reusable water bottles relevant for the energy transition? First, making plastics involves petrochemicals and that takes energy, but more importantly, single-use plastics — whether it’s bags in the supermarket or water bottles — are very difficult to recycle.
In the U.S., for example, 90% of plastics either goes into landfills or is combusted, so only 10% is recycled. Plastic waste has a serious effect on pollution of the world’s oceans and other waterways. Eliminating single-use plastics is difficult, but one of the solutions is having homes and businesses use reusable bottles instead of single-use plastic bottles, and Primo is one of the few top-tier distributors of reusable water bottles.
The fourth idea — and this one is also related to water, but from a very different perspective — is Energy Recovery (NASDAQ:ERII).
Energy Recovery is the only publicly traded company which is 100% tied to desalination. Desalination is an essential facet of climate adaptation. As we experience global warming, one of its consequences is more droughts. Water is becoming more scarce — we see that in places like Cape Town, South Africa, and Chennai, India.
If water from conventional sources, meaning rainfall and aquifers, is no longer enough, where will it come from? One of the key sources of new supply is desalination.
Energy Recovery provides a very specific solution for desalination. This company has practically a monopoly in supplying a device called a pressure exchanger. This is a small component of desalination plants, but a very important component, because it reduces the amount of energy needed to desalinate water by up to 60%.
This makes desalinated water more affordable and reduces the environmental impact of a desalination facility.
And I will just conclude with this: If there is ever a time when safe, reliable water supply can make the difference between life and death, it’s in the middle of the pandemic, when from the very first day we have been told that washing hands with soap for 20 seconds is the best thing we can do to protect ourselves.
For communities where water is scarce — and this is particularly true in emerging markets like South Africa and India — desalination is crucial. By making water for these communities more affordable, Energy Recovery is not only serving an environmental cause, but a very important societal benefit as well.”
Get all the details on these picks and more by reading the entire 2,012 word interview with Pavel Molchanov of Raymond James, exclusively in the Wall Street Transcript.
Alexander Roepers, 61, is the President and Chief Investment Officer at Atlantic Investment Management, which he founded in 1988. He has 38 years of experience in the sector.
He founded Atlantic in 1988. Earlier, he worked at Thyssen-Bornemisza Group and Dover Corporation. He received an MBA from Harvard Business School in 1984 and a bachelor’s degree from Nijenrode University, the Netherlands School of Business in 1980.
In this April, 2020 2,927 word interview, exclusively in the Wall Street Transcript, Mr. Roepers develops the basis for his top performing portfolio:
We try to provide superior returns for our investors over time. And we believe that concentration of capital and research on highest-conviction ideas can achieve that.
Our investors obviously have many other investment options, managers, ETFs and stock funds to invest in, so we need to stand out over time with superior performance.
More diversified funds tend to look and act more like an equity market. Hence, we have felt strongly all along that this kind of concentration is crucial to be able to achieve superior performance over time…
We’ve been known as an activist firm. However, we have made it clear to our investors and the companies we invest in that our activism stops at the point where we become illiquid.
We have no interest to being on the board of a company or to fight a proxy battle or to do anything that restricts us from buying or selling the shares.
Quite often, our buying or selling of shares is for dynamic sizing of the position. Therefore, we also call our form of constructive activism, “liquid activism.”
Even so, we feel that our engagement with these companies always improves our due diligence and puts us in a position to have a better judgment as to what is likely to happen or not happen. At the same time, we develop a strong rapport with management and urge them to pursue an agenda that will enhance and accelerate shareholder value.”
This leads to some we researched portfolio picks:
“The first one is a company called O-I Glass (NYSE:OI), formerly Owens-Illinois. It’s the world’s largest maker of glass bottles. That’s all they do.
They do it in 77 plants around the world. And they have sales of about $6.5 billion. Only 25% or so comes from North America. The rest is from outside the U.S., including Europe, Latin America and Australia.
OI has largely grown through acquisition in what was, for quite a while, a challenging business that was under attack from aluminum and plastic packaging.
OI basically won the glass packaging consolidation war and became by far the largest in the world with a monopoly or duopoly position in most of the 21 countries in which they operate. So that gives you a sense for the company.
They have struggled a bit in recent years. Number one was the dollar strength, which caused their foreign earnings to be translated at a lower rate. They manufacture in places like Brazil and Europe and sell there.
They don’t hedge FX, so the foreign earnings translation has been quite a drag on reported U.S. dollar earnings.
Secondly, they did a large acquisition in Mexico in 2015, which caused debt to increase quite a bit. It didn’t help that since then the Mexican peso has declined, even though it has been a good acquisition.
Recently, the market has not favored stocks that have higher leverage levels. So at our urging, the company has undertaken a program of asset sales and selected divestitures, which is ongoing. We believe that they’re going to be successful in improving the balance sheet near term with the help of asset sales.
Due to the coronavirus crisis, OI stock got hit, trading now at around $7 per share with a market cap of about $1 billion. Their total net debt level is about $5 billion, which is around four times EBITDA.
OI shares are currently trading at about six times EBITDA. Between some divestitures and an improvement in market sentiment, we are seeing this company achieve about $2 in earnings per share in 2021.
At an achievable p/e of 10 times, you would have a triple on the stock from here. Also, at an EV to EBITDA of 7.5 times, which is in line with where transactions take place and where peers trade, you would also get to the $20-plus per share in 12 to 18 months.
The debt is trading fine, the covenants are well-met, and the debt maturities are stretched out. We feel strongly that the company will be resilient and come through this crisis well.
Clearly, the consumption of the end product, which is wine, beer, liquor and fancy waters in glass, remains relatively stable even in an economic scenario like the one we are in.”
OshKosh is another similar portfolio stock:
“The next one we’d like to mention is a company called Oshkosh (NYSE:OSK). This is a diversified manufacturing company.
A good chunk of their business, about 42%, is so-called access equipment, sold under the brand JLG, which you might have seen across construction sites in the United States.
It’s an orange-looking vehicle that typically is rented by contractors to help with construction or maintenance projects on buildings and infrastructure. They’re the leader in this particular field.
Clearly, OSK’s access equipment unit is a beneficiary of ongoing maintenance and new construction as well as a potential new infrastructure bill and a resurgence in homebuilding.
This unit also has a good European business. While access equipment has some cyclical elements to it, it is a solid business overall, and when you combine it with the rest of Oshkosh, it makes for an attractive company.
The rest of OSK includes a defense business, which is a leading maker of armored vehicles for the military, which represents 27% of sales. This unit has a strong backlog. Further, OSK owns the leading maker of firetrucks and emergency equipment, under the brand name Pierce, which has been a solidly trending and resilient business.
Finally, OSK manufactures other specialty equipment like cement and garbage trucks. In all, OSK is a quality maker of heavy equipment with different end markets, strong economic resiliency and solid backlogs, particularly on the military side.
OSK’s current enterprise value is $4.3 billion and sales of $7.6 billion this year. Even with adjustments to earnings for the coronavirus crisis, OSK is trading at about nine times earnings per share on 2021 fiscal. Their fiscal year ends in September. The stock currently is about $64 per share, and we expect it to go up to something like $90 a share, which is where it was about two months ago, in the next 12 months.”
This accurate prediction for OshKosh is an example of the detailed stock picks in this April, 2020 2,927 word interview with Mr. Roepers, exclusively in the Wall Street Transcript.
Paul Lambert, CFA, is a Portfolio Manager at Tocqueville Asset Management L.P. Mr. Lambert is the Portfolio Manager of the Tocqueville Opportunity Fund and for several private wealth clients of the firm.
He also provides research support for the U.S. Multi Cap Equity Strategy at Tocqueville Asset Management. Prior to joining Tocqueville in 2010, Mr. Lambert served as a securities analyst at Key Bank where he worked within their Asset Recovery Group helping middle-market companies to restructure their debt.
Mr. Lambert received his A.A. from Dean College in 2005 and a B.S. from Babson College in 2007. Mr. Lambert also holds the CFA designation.
In this 2,504 word interview, published in March of 2020, Mr. Lambert predicts the success of his top picks for the rest of the year:
“The Tocqueville Opportunity Fund (MUTF:TOPPX) focuses on small, medium-sized U.S. companies that exhibit clearly defined sustainable competitive advantages tied to secular growth opportunities.
These companies typically offer a disruptive technology that makes their customers more productive and efficient, or have a product or service that is extremely difficult to replicate.
The sector weightings in the fund are 56% in technology, 20% in health care, 15% industrials, 5% financial and 2.5% in consumer discretionary. Our largest positions include Shopify (NYSE:SHOP), Paycom (NYSE:PAYC), Paylocity (NASDAQ:PCTY), Fiserv (NASDAQ:FISV) and Fidelity National Information Services (NYSE:FIS).”
His evaluation of Shopify in March of 2020 was spot on:
“Shopify reported earnings on February 12th, and their revenue growth and operating leverage were better than consensus. Currently, Shopify is experiencing higher demand for their Shopify Plus model, which caters to larger brands looking to increase brand awareness for specific products.
We, TOPPX, continue to hold Shopify as it provides small, medium-sized business owners with a complete solution for starting and running a business.
Essentially, you can go to Shopify with an idea and you can be off the ground in hours, whereas the legacy solutions would take you days, even weeks to get going.
Shopify offers its customers website design, payment facilitation, inventory management, search engine optimization and marketing help. Within the last year, the company has rolled out a fulfillment option offering merchants cost-effective alternatives to deliver products to its customers.
SHOP has also been tremendously successful in attracting businesses to use the platform. And as a result, it has a treasure trove of data that it can leverage to make its customers more successful.
For example, Shopify can tell merchants which website designs have been most successful, recommend optimal marketing spend in various channels, such as Instagram, and even can make financing available for product expansions.
These efforts enable its merchants to become successful and, as a result, make Shopify more successful as more sales are consummated through the platform, creating this flywheel effect.
The valuation for Shopify is at a premium, but I view it as justified because they have such a small market share. As of last quarter, they have 1.1 million merchants on the platform. And their target market, if you include international, is greater than 60 million. Shopify is still in the early days of capitalizing on this addressable market and cross-selling new products and services.
Prolonged success can attract competition, and people frequently ask, “Why isn’t Amazon (NASDAQ:AMZN) coming in and doing this?”
And feedback from the customers and from the merchants I talk to is, “With Shopify, if you want to build a brand, you’re going to use their solutions because they can give you the tools to be successful, whereas platforms such as Amazon and eBay (NASDAQ:EBAY) are exclusively geared to sell products at the most competitive prices,” so that is the important differentiator.
I think the company is aware of what Square (NYSE:SQ) is doing.
In fact, Square bought a company named Weebly, and they’re trying to replicate it. But Square comes at you from a payment’s perspective, whereas Shopify offers a more holistic solution.
So yes, Square is a competitor, but the Shopify brand has engendered a very loyal customer base, and every customer that I have talked to really likes how Shopify approaches their business. Shopify’s take rate is typically 3% on average compared to Amazon and eBay, who charge anywhere from 10% to 15%.
One could make the case that Shopify is providing a more complete solution and yet charges less.”
This one pick alone from Mr. Lambert’s portfolio suggestions would have been a game changer for most investors but he has several more:
“We’ve owned Paylocity for years. The company provides payroll and human resources services for its customers. Paylocity targets small to medium-sized businesses and concentrates its offering on those companies that employ 20 to 1,000 employees.
Paylocity sizes its addressable market at roughly 600,000 businesses and only serves 20,000 today.
The incumbents in this market are ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX). These companies have been slow to innovate, giving companies like Paylocity a chance to disrupt with an efficient, easy-to-use technology offering.
Paylocity has developed an application in which an employee can, on their mobile device, view their paycheck, see their taxes, clock in or out if they are an hourly employee, execute yearly health care elections and enrollment, complete any compliance-related matter, and check their 401K and view their health savings account balance in one easy-to-use application.
From the employer’s perspective, pushing these tasks to the employee saves time and outsources the complexity of payroll, workers’ comp and the remittance of state and local taxes to Paylocity.
The company has demonstrated the offering is compelling and scalable, and recurring revenue has been growing at 25% annually and generating EBITDA margins above 20% with long-term margins targets of 30% to 35%.
We believe the growth the company has been achieving is sustainable given 50% of its growth comes from the churn at the incumbent providers, which I mentioned above. The other 50% comes from new business creation and referrals from channel partners.
Given Paylocity’s relatively small revenue run rate of $600 million compared to ADP and Paychex’s combined revenue of $14 billion, we are confident Paylocity can sustainably grow revenues 20%-plus with higher EBITDA generation as the company continues to scale.
On an enterprise value to sales metric, the company trades at 12 times, which compared to other SaaS providers isn’t that expensive, especially given its profitability.
If one subscribes to the Rule of 40, which is revenue growth plus profitability growth, Paylocity screens as one of the more attractive candidates on that basis.”
To get the rest of Paul Lambert’s top picks and his reasoning behind them, read the entire 2,504 word interview, exclusively in the Wall Street Transcript.
McGavock Dunbar, CFA, is Principal and Director of Research at Vulcan Value Partners. Mr. Dunbar joined Vulcan Value Partners in 2010. Prior to joining Vulcan Value Partners, Mr. Dunbar worked as an associate in the investment banking department at Susquehanna International Group.
Mr. Dunbar earned his MBA from the University of Virginia Darden School of Business. He also has a Master of Education and Bachelor of Arts from the University of Virginia, with a double major in history and religious studies.
In this 2,664 word interview, published exclusively in the Wall Street Transcript in 2020, Mr. Dunbar reveals his investing philosophy and some top picks. Readers can now see if his stock appreciation predictions were correct.
“We have one overriding investment philosophy. And that investment philosophy is looking for companies that have a really stable value, stable intrinsic value, and then waiting for the market to give us an opportunity to buy them at a discount. So we are value investors, as the name implies.
And perhaps in contrast to many other value investors, we’re not just going around looking for cheap stocks. Instead, we’re looking for really good businesses that produce free cash flow, that have high returns on capital and that have a competitive moat.
We think those are some indicators of a stable value long term.
And if a company has a stable value, we’re able to execute our value investing discipline with confidence. We know that the margin of safety should remain until the stock price rises rather than disappearing because the intrinsic value falls.”
This philosophy by Mr. Dunbar has led to some interesting long term appreciation:
“Two thoughts to keep in mind: Number one, the times that the market recognizes intrinsic value can be episodic.
And I think that over the last 12 months, 2019 was really one of those times where prices appreciated rapidly toward intrinsic values. To set the stage for 2019, we saw increased volatility through the second half of 2018, as the rest of the world was getting worried.
We saw this as a tremendous opportunity to add to businesses while their margins of safety were actually increasing since their values were stable.
So while the rest of the market may have been getting more worried, we were actually getting pretty excited.
So we made some changes in the fourth quarter of 2018 that I think led to the good performance in 2019. We bought or added to NVIDIA (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Qorvo (NASDAQ:QRVO) and KKR (NYSE:KKR). The last two were the biggest contributors to the strong performance in 2019 for the Focus strategy.”
This pick has performed well since this March 2020 interview with Mr. Dunbar:
“Qorvo is a business we own and added to significantly in Q4 of 2018 and throughout 2019. It is one of the three major players in the RF filter technology business.
RF filters are, to put it simply, the components within connected devices that allow them to connect to the internet via the spectrum. So any connected device — a cellphone, handset, tablet and in the growing internet of things devices — will need some RF filter components in order to connect to cell towers.
It’s an oligopoly industry with really only three players: Qorvo, Skyworks (NASDAQ:SWKS) and Avago, which is a division of Broadcom (NASDAQ:AVGO). Because of the nature of their industry, barriers to entry are very high. It will be very difficult for a new entrant to enter this industry.
Qorvo has the type of qualities that lead to what we would consider a stable value. They also produce a tremendous amount of free cash flow.
Over the long term, they are growing their free cash flow very quickly. Qorvo had been experiencing a bit of a growth plateau over roughly the last two years, as there was a pause in demand before the 5G wave kicks in. And really, it will provide a nice tailwind to growth over the next several years.
The pause in growth coupled with some of the noise around Huawei and the global trade wars led to pretty significant stock price volatility. That’s what we’re trying to take advantage of with Qorvo. The stock price has appreciated a good bit in the past 12 months.
We think because of the nature of the 5G opportunity and the growth there as well as some smart capital allocation where the company was repurchasing shares at what we thought was 50 cents on the dollar, we think the intrinsic value has compounded quite nicely, and the stock remains significantly discounted to intrinsic value. So that’s Qorvo.
I’ll also mention that in our more diversified portfolio, the large-cap portfolio, we own the competitor Skyworks as well. We own both businesses in that portfolio.”
Mr. Dunbar is not a fan of large scale M&A for his portfolio stocks:
“We look at all of the acquisitions that our businesses make very carefully. And as a matter of fact, our approach to valuation does include a careful look at comparable transactions in the marketplace.
Typically, we’re valuing our businesses on an absolute value approach — a discounted cash flow analysis. But we’re checking our longhand math against our own proprietary database of comparable transactions. So we’re paying a lot of attention to M&A.
As it regards to the businesses in our portfolio, M&A is a capital allocation decision. We speak to our management teams a great deal about their priorities and their views on capital allocation.
One of their priorities may include doing acquisitions. Generally speaking, we would view large acquisitions with skepticism.
We think they have a quite a bit higher degree of risk, and we would become worried around most large acquisitions made by the companies in our portfolio.
However, many companies can do tuck-in acquisitions quite nicely and have strong capabilities around doing these types of acquisitions.”
Get all the top picks from the Vulcan Value portfolio by reading the entire 2,664 word interview, published exclusively in the Wall Street Transcript.
Jonathan S. Raclin, a Principal of Barrington Asset Management, Inc., has been Managing Director of the Enterprise Portfolio. Mr. Raclin graduated with a B.A. from St. Lawrence University and an M.A. from Northwestern University.
Following service as a Commissioned Officer, United States Marine Corps, Mr. Raclin was associated with White, Weld & Co. as a Partner of William Blair & Company, L.L.C., and as Executive Vice President for Capital Markets with The Chicago Corporation.
He is a former Regional Chairman of The National Association of Securities Dealers, a former President of the Bond Club of Chicago and of the Attic Club. He previously served as a director of the St. Simon’s Land Trust, and has been President of the Coastal Georgia Historical Society and Co-Chairman of Emmi Solutions, LLC, a privately held health care information company.
He is recently retired as a director of The Public Broadcasting Service in Washington, D.C.
In this 2,793 word interview, exclusively in the Wall Street Transcript, Mr. Raclin brings his many years of market experience to bear on maintaining his clients fortunes:
“At the end of 2019, the enterprise portfolio, which is the template for all of my clients, was up 51% for the year. All of my clients own the same assets. And that’s all I owned as well. But they may own them in varying amounts depending upon their individual circumstance; some may need more cash, some may need more growth. But they all own the same thing.
Coming into the beginning of 2020, things worked very well until we ran up against the virus.
Up until then, I was running at approximately 10% cash, 10% gold and silver, and 80% was evenly divided between the large-cap Liberty Equity Fund and the smaller-cap Liberty Growth Fund.
When we hit the virus, it became extremely, immediately, apparent to me that the companies that make up the stock market were not going to be impacted anywhere near as much as the much larger number of smaller companies that didn’t have the access to capital, didn’t have the resource.
So while McDonald’s may be able to survive, the local restaurant might not.
And I think that the casualties for this situation are going to be extraordinary. And they’re not only going to be extraordinary in terms of businesses that are no longer with us, but unemployment, what it’s going to do to commercial real estate, what it’s doing to the transportation industry, and what’s happening to an incredible number of just small businesses.
As a result of that becoming pretty apparent early on, I went to a much larger component of cash, and the gold and silver fund. Today I’m approximately 43% between the cash and in gold and silver, and the balance between the two equity income funds. And the portfolio is up 17% year-to-date.
I think that there are three major risks in the stock market today. The first one is obviously the consequences of the pandemic. I don’t think anybody has a good idea how big this problem is going to be, how long it’s going to last. We’re all hopeful about the vaccine.
But that’s going to require an extraordinary amount of manufacturing capability, and challenges related to just distributing it. From what I understand, it requires being shipped at below-freezing temperatures.
And thirdly, just administering what appears to be not only one, but two doses, when you can hardly even get people to take a regular flu shot. So I think it’s going to be a lot more difficult than perhaps what has been seen today.”
The investment manager does single out Cognex as an individual stock that he is tracking:
“If I had to pick an individual stock — though I would not buy it today because I think it is extraordinarily overpriced — there is a company that is traded on the NASDAQ called Cognex (NASDAQ:CGNX).
They are in the industrial technology space; they manufacture machine vision equipment. So think about high-speed manufacturing for electronics or automotive parts or anything that is coming down the production line at high-rated speed.
Quality is exceptionally important because the components tend to be individually not worth very much money, but if the components are not properly manufactured, the damage could be huge. And it’s almost impossible for any individual to inspect each one going by at very high rates of speed. Machine vision basically is taking a picture of everything that is going by on the line and measuring it against what it’s supposed to look like.
And Cognex is an extremely profitable company. With 85% margins, a tremendous amount of cash, no debt, and extremely well managed.
But it also has a certain degree of industrial cyclicality to it. Cognex is currently trading at about 72. If, for some reason, the market declined rapidly, and Cognex dropped to, maybe, $50 a share, at that point, I would become extremely interested.
And would go to each of my clients and say, I don’t buy individual stocks, but this is something that I think you should look at. And on the very, very few occasions, I’ve done that over the past 20 years, all of my clients have basically said go ahead. But I wouldn’t buy it today, because I think it’s just a way too expensive, that’s all.
And I’m very valuation conscious. A good friend and former institutional client of mine said, “a significant portion of what you get is based upon what you paid to start out with.” So being extremely focused on what I’m paying has kept me out of trouble.”
To get more detail, read the entire 2,793 word interview with Jonathan Raclin, exclusively in the Wall Street Transcript.
Thomas A. Reynolds IV is a managing director of Artisan Partners and a portfolio manager on the U.S. Value team. In this role, he is a portfolio manager for the Artisan Value Equity and U.S. Mid-Cap Value Strategies, including Artisan Value and Mid Cap Value Funds.
Prior to joining Artisan Partners in October 2017, Mr. Reynolds was a portfolio manager for Perkins Investment Management at Janus Henderson, where he co-managed the Perkins Small Cap Value strategy and the Perkins All Cap Value strategy.
Mr. Reynolds joined Perkins in 2009 as a research analyst covering the U.S. financials sector and was later promoted to portfolio manager. Earlier in his career, he worked at Lehman Brothers in the financial institutions investment banking group and fixed income sales and trading.
Mr. Reynolds holds a bachelor’s degree in anthropology from Dartmouth College and a master’s degree in business administration from the University of Chicago Booth School of Business, where he graduated with honors.
In this 2,670 word interview, exclusively in the Wall Street Trancript, Mr. Reynolds reveals his firm’s investing philosopy as well as some current top picks and the reasoning behind them.
“The Artisan U.S. Value team has an absolute-return, risk-aware, value investing focus. We seek cash-producing businesses in sound financial condition, selling at undemanding valuations. Said differently, we’re looking for opportunities where the business is on our side, the balance sheet is on our side and valuation is on our side.
These are our margin of safety criteria.
Our structure is intentionally flat — with four generalist portfolio managers and one research analyst taking a very collaborative approach to investing — which is a result of high trust and confidence in each other’s capabilities.”
The value investing focus is metric driven:
“Research suggests that the demand for growth corresponded this summer with a surge in retail participation in options markets. Social media and fintech collided with idle capital to drive a flurry of speculative activity and boost valuations.
Imagine buying out-of-the-money call options on stocks trading at 30 times revenue with no earnings.
And as it turns out, large institutional investors like SoftBank (OTCMKTS:SFTBF) were reportedly making the same basic trades, amplifying the trend.
I think those momentum trades, those so-called YOLO stocks, seem to be very different from growth-at-a-reasonable-price stocks or the FAANG stocks, which actually generate tons of free cash flow — at least some of them. Maybe not Netflix (NASDAQ:NFLX), but if you’re looking at Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG), those have been very, very high cash-returning or cash-generative businesses over time.
So there’s not a single environment that we think is better or worse. But what we’re trying to do is anticipate a whole range of outcomes, and understand points where the market is taking the view that there’s a single outcome, which results in mispricing of risk.
For example, we agree with secular trends, such as e-commerce, online payments, social media’s dominance of ad spend. And we also agree COVID-19 has accelerated the demise of levered and outdated competitors, such as malls and retailers within those malls.
Still, it seems the broad consensus from both market participants and economists is we should treat COVID-19 as a transitory event and therefore position for continued cyclical economic recovery. Now while we consider that an outcome, it isn’t the only outcome, and we need to take into consideration any number of items that could knock that consensus off-track.”
This leads to an interesting top pick:
“One holding, which is in our mid-cap strategy but is emblematic of our process, is Lamar Advertising (NASDAQ:LAMR). It’s one of the largest outdoor advertising companies in the United States.
Think billboards, highway signs, what you see on a bus or on the subway, in airports, etc. — what’s known as out-of-home advertising. This industry has been outside of digital media’s onslaught, making it pretty much the only traditional advertising segment that’s been able to grow over time because its reach and efficacy are unchanged by digital media.
If you think newspaper, yellow pages, magazines, radio, they’ve all been significantly disrupted — even TV is being disrupted more recently.
But digital media has a harder time disrupting the act of viewing a billboard while sitting in traffic or driving between cities in the Midwest because America still drives, and billboard advertising cannot be skipped or blocked. It’s a good business to be in. And the measurement keeps improving thanks to data analytics.
Over time, digital billboards have been added into the traditional analog mix — the customer mix is evident as you drive around. You see local services and entertainment, local attorneys or doctors, you see restaurants, whether it’s a local restaurant or national chain like McDonald’s (NYSE:MCD).
Now this whole market in 2019 was close to $9 billion in revenues, and Lamar approaches this market differently than peers. A publicly listed peer like Clear Channel (NYSE:CCO) or Outfront (NYSE:OUT) will derive three-quarters of its revenue from urban markets, and Lamar is actually the inverse.
It’s more focused on smaller local and rural markets — a focus which leads to attenuated business results, especially on the downside. So it’s kind of a perfect get-rich-slow, steady-compounder-type niche.
Lamar owns and operates about 157,000 billboards, about 3,500 of which are digital billboards — the growth area of the industry. Prior to the COVID crisis, the company was adding about 200 of these billboards a year, which, depending on location, can drive 5 to 10 times more revenue than an analog peer.
And the turnover of the digital billboards can be quicker, which can lead to higher profitability.
The company has an attractive moat, due in part to federal, state and local regulations prohibiting rapid billboard proliferation, such as the Highway Beautification Act. For example, you can’t put another billboard within a certain distance of an existing structure. And so that helps control supply.
On the demand side, Lamar focuses on areas where it can own 80% of the market, which helps create a disciplined pricing environment. And the company has a strong balance sheet.
Luckily, it refinanced its capital stack in Q1 2020 before COVID concerns hit, putting it in a strong position. It has very strong cash flow and an attractive valuation. Furthermore, the Reilly family runs Lamar like a family business, focused on the long term — something we like and appreciate as investors.”
Get more top picks from Mr. Reynolds value oriented portfolio management by reading the entire 2,670 word interview, exclusively in the Wall Street Trancript.
