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.
Phil Grodnick founded Minneapolis Portfolio Management Group in 2004. Earlier, he was Senior Portfolio Strategist for Minneapolis Portfolio Management Group at Wachovia Securities and was a Senior Portfolio Management Director at Salomon Smith Barney.
Previously, he managed equity and balanced portfolios at Dean Witter Reynolds, where he also was director of the institutional and retail municipal bond departments and assistant branch manager in Minneapolis, Minnesota.
Mr. Grodnick oversaw portfolios at EF Hutton & Co., Bache Halsey Stuart and EI DuPont & Co. In 1966, Mr. Grodnick was admitted as an Allied Member of the New York Stock Exchange with Loewi & Co., of which he was a principal. He began his career at Piper Jaffray & Hopwood.
Harrison Grodnick, CFA, founded Minneapolis Portfolio Management Group in 2004. Earlier, he was Senior Portfolio Manager for Minneapolis Portfolio Management Group at Wachovia Securities.
Previously, Mr. Grodnick was an Assistant Account Manager in the institutional trust department of Firstar Bank of Minnesota.
Rob Britton joined Minneapolis Portfolio Management Group in 2011. Earlier, he was a vice president with GLP, an international merchant bank whose minority investors are Goldman Sachs and Oaktree Capital Management.
He worked in both London and New York City during his tenure with GLP, where he analyzed and sourced distressed debt and special situation opportunities on behalf of some of the world’s premiere financial institutions.
Before joining GLP, he was an investment banker at Citigroup and structured high-yield financings in support of leveraged buyouts. Mr. Britton received an MBA from Columbia Business School with a concentration in finance and economics.
In this 4,034 word interview, exclusively in the Wall Street Transcript, these 3 asset managers with over 100 years of investing experience between them, pick their best ideas for investors.
“This latest decade of popular investing, where you have a handful of companies dominating the S&P 500, has been wonderful for those who have been along with the herd. It makes you feel comfortable.
But trees do not grow to the sky and valuations always have to have meaning. And value investing today is probably more important from a wealth preservation standpoint, given the risks that are associated with all of those popular names that are so heavily weighted in all of the popular indexes today.
The value-based names that have been unloved carry, as Phil mentioned, enormous potential going forward, but at the same time with substantially less risk.
I just want to add that we are witnessing one of the wider valuation gaps in history between the value stocks and the growth stocks.
I don’t think that value investing ever is really out of favor. It’s the most classic style and proven style of investing throughout time. You’re looking to buy good assets at a discounted price. That’s always a good idea.
And the fact that now, where you have the S&P selling at north of 21 or 22 times earnings, many value stocks are selling much, much, much lower. I believe the Russell 2000 value index is at around 15 times.
So while we’re individual stock pickers, and talking about market and index multiples isn’t how we think about investing, it’s a good barometer to show that there is tremendous opportunity in the many ignored value-style names that are out there.”
This has translated into an impressive long term track record:
“…Since our inception, we have averaged net of fees above 11% a year. And that’s across different interest rate cycles, market corrections, and an extended period of value being incredibly unpopular.
For the past 10 years, we have continued to create meaningful wealth for our clients over this time period.”
The resulting stock picks are often idiosyncratic:
“We are big believers in the future of electric vehicles, for example. We believe that the world will continue to evolve from 2% of electric vehicles on the road today to probably 13%, perhaps, in the next decade, and well over 90% by 2050.
The question is, as investors, how do we want to benefit from that? And so, you look at the popular indices and Tesla (NASDAQ:TSLA) was just recently added after its historic rise to the S&P 500. I believe Tesla trades at about 1,000 times earnings. But I believe Tesla probably trades at 22 times sales.
We ask any business owner in America, if someone knocked on the door and offered 22 times sales, how long it would take him to sell their business. It’d be pretty quick. In our portfolio, you won’t find companies like Tesla or Microsoft.
Instead, you’ll find companies like Orion Engineered Carbons (NYSE:OEC). This is a wonderful maker of carbon black. Carbon black is a material that is used to — among other things — make tires. Some 70% of it is used to make tires. So, the rubber taken out of a tree is non-shapeable, it doesn’t hold its form very well, especially against water and the climate and the sun. But it takes carbon black added to the rubber to make it essentially a tire.
What’s interesting about tires is that it’s an interesting way to play the growth of electric vehicles, because there are two things electric vehicles have, compared to the internal combustion engine car. One is that they’re heavier because of the batteries. Two, they have tremendously more torque. These things result in tires being used up about 30% faster on electric vehicles than a regular internal combustion car.
We buy companies like Orion Engineered, which will benefit from this transition to electric vehicles. But instead of paying 22 times sales, or 1,000 times earnings, Orion Engineered is trading at less than 1 times sales, and is trading at 10 times earnings.
And as a company that has been all but forgotten about by the general market during its time of mega cap U.S.-centric tech domination that’s on everyone’s lips these days. So those are the types of businesses you’ll find in our portfolio.”
To get more of these value investors top recommendations, read the entire 4,034 word interview, exclusively in the Wall Street Transcript.
Tore Svanberg is Managing Director and Senior Research Analyst at Stifel, Nicolaus & Co., Inc. Mr. Svanberg has been with Stifel, Nicolaus & Co. since 2010, covering the technology sector, including semiconductors with a specializing in analog, mixed-signal semiconductors.
His past awards include The Wall Street Journal’s “Best on the Street” survey award.
Mr. Svanberg has been an analyst for more than 15 years, having also been an analyst with Thomas Weisel Partners, Piper Jaffray & Co. and Robertson Stephens. Mr. Svanberg is a graduate of Franklin College, Switzerland and earned an M.A. in international policy studies from the Monterey Institute of International Studies.
In this 3,894 word interview from July, 2020, exclusively in the Wall Street Transcript, Mr. Svanberg details his stocks picks and the basis behind them.
“I cover three subsegments of the semiconductor industry: analog, connectivity and processors. So if you look at those three, I do believe some are going to be holding up better than others.
Take analog, for instance, it has the closest ties to the macro economy, and because of that, we expect this segment to be the most negatively impacted by COVID-19.
Connectivity would be the one sector that we believe would be actually benefiting the most from COVID-19. So connectivity would include things like 5G spending but, more importantly, spending on broadband, which is obviously becoming really important in this COVID-19 era.
Processors, I would say, fall somewhere in between. There are certain parts of the processor industry that are benefiting from aspects like data center spending and servers, but then, there are also certain parts of the processor space that are tied to the automotive or industrial market in such a way that things are not going as well.”
This outlook led to some specific recommendations for the last six months of 2020:
“…For companies in my space, my top pick is a company called Inphi (NYSE:IPHI). They are providing semiconductor solutions for the optical part of this broadband superhighway. I also like a company called Silicon Labs (NASDAQ:SLAB), which is primarily a private player in connectivity for the IoT part of the broadband. Then, I also like a company called Power Integrations (NASDAQ:POWI).
That is not as related as much to communications, but it is a company that is benefiting from new technologies and new trends, especially in areas like fast charging…Let me start with Inphi, which is our top pick.
What I admire the most about this company is that it has done a tremendous job investing in its business over the last six to seven years. Ever since the CEO, Ford Tamer, took over, he has just been relentlessly investing in different parts of the optical networking space.
They sort of started in the long-haul market and then pivoted into data centers, and now, they are starting to become a big force in what we call DCI, or data center interconnect. So here is a company that has outspent competition significantly by investing the R&D dollars in the right areas and, perhaps more importantly, timing that investment perfectly.”
The business requirements of today’s telecommunications market drives the stock picks for Tore Svanberg:
“There is a bit of a misperception of what IoT connectivity really means.
Today, a lot of us think about things like 4G and eventually 5G. Obviously, we’re very familiar with standards like Wi-Fi and Bluetooth, but the reality is that IoT is an exceptionally fragmented industry, so there is not going to be a one-fit-for-all connectivity technology.
What Silicon Labs has done is basically develop connectivity technologies for all the various different types of IoT needs or use cases. So they are not only a dominant player in, let’s say, an area like Bluetooth or also now getting a lot of traction in Wi-Fi, but they’re also a leader in connectivity technologies like Zigbee, Thread and Z-Wave.
Believe it or not, these are actually the more dominant connectivity standards, especially in areas like the connected home, smart home, smart cities, and so on and so forth…this is a company that put a stake in the ground almost 10 years ago by basically saying they want to be the semiconductor provider of the internet of things.
This was a time when a lot of companies basically were very skeptical about what IoT really meant. But for them, this was basically a completely new market that was going to take over a lot of semiconductor growth over the following decades.
They have done a tremendous job, both from an M&A perspective but also with their investments of building that business.”
Get the complete picture by reading the entire 3,894 word interview with Tore Svanberg from July, 2020, exclusively in the Wall Street Transcript.
Brian Langenberg, Principal and Strategist, of Langenberg & Company advises clients globally with a particular focus on industry, energy, resources, infrastructure and education as well as providing investment strategy to institutional investors.
He appears on CNBC, Fox Business News, CNN and other media.
Mr. Langenberg was first recognized by the Institutional Investor All-America Research Team in 1999, and he or his firm have earned subsequent awards in II, The Wall Street Journal and StarMine helped by research innovations including the seminal Multi-Industry Greybook in 2001, ROIC-based deal analysis, revenue component analysis and business unit trends.
Mr. Langenberg is also a former Naval Intelligence Officer with expertise in geopolitics, logistics and trade, and uniquely integrates geopolitical analysis and macroeconomic assessment with bottom-up fundamental research.
He teaches in the U.S. and Asia and serves as a mentor for the CFA Global Investment Challenge.
In this October 2020 3,723 word interview, exclusively in the Wall Street Transcript, Mr. Langenberg analyzes his sector for high value investment opportunities:
We split the sector into three buckets: one, diversified industrials and electrical equipment; two, aerospace/defense; and three, machinery. Our comments will be split into before COVID and after COVID because those are two different worlds.
So if you think about through late last year, the U.S. industrial economy had been doing pretty well. You’d seen net production growth but also net employment growth in the United States, fueled by both corporate tax reform, lower regulation, just all the good stuff. Obviously, when the virus hit, it is the game changer that the world has been living through.
With respect to outlook, we have the near-term stuff and then the structural. In recent months, the U.S. economy has bounced back to at least halfway from the COVID low, including industrial production and job recovery.
At this exact point in time, beyond filling current demand, we are in a holding pattern on incremental investment and hiring until we know the results of the presidential election. The presidential election has three possible outcomes, either Trump, Biden the historical centrist or Biden the meat puppet for the left. There is a wide range of policy implications in that set of potential outcomes.”
This outlook leads to some specific stock recommendations:
“Start with Boeing. The stock right now is trading somewhere in the mid-$160s. At one time, and I think it was pretty fully valued at the time, the stock was close to $400.
Now, you had something happen pre-COVID, which is two 737 crashes, and it’s purely their fault for how that whole upgrade was handled. I don’t think there’s anybody on planet Earth outside the company that would disagree with that and hopefully nobody inside the company either. So that already hurt the stock.
But when I look at those shares now, and if you’re willing to take a longer-term view, I think Boeing is a very attractive name, very attractive.
The other name I would point out, but this is not for immediate gratification, is General Electric (NYSE:GE). Now, what else could go wrong? I’m sure there’s always something else. And in fact, there are some conversations now where they’re probably going to end up being charged and paying some fines for the bad accounting around the insurance unit they sold several years ago. Now, that’s the bad news.
The good news is that was under previous management’s watch. You have an outstanding Chief Executive Officer, Larry Culp. And while right now it’s a $7 stock with too much debt, it literally does trade like an aviation stock because that’s where much of the profit is being generated. I think long term you can see a nice recovery there as they fix the power business.
There’s a lot more to GE, but I’m just making the key points. Those are my two best ideas with aerospace leverage.
Moving on, depressed oil prices have created opportunity for those willing to be patient. Although our core sector is industrial, energy — including exploration, production and infrastructure — became the crack cocaine end market over the past several years for industrial companies seeking organic growth. Now, at $40 oil, bankruptcies go up. People don’t punch so many holes in the ground. It’s bad right now.
And let’s face it, we still have a large overhang of excess oil pent up from earlier this year, when for a period of time production was 100 million barrels a day, and consumption was only 70 million. You still have excess inventory. But I expect that to burn off.
And if investors are patient, there’s no reason not to take a look at Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BKR). Pick your flavor. Although, I would submit that Schlumberger and Halliburton, probably the higher-quality names there, those both look very interesting.”
Brian Langenberg also points out that the Presidential election will have enormous consequences for his sector:
“I would point out Northern Ireland. When they cut a peace deal and slashed corporate taxes, industrial production and employment boomed, poverty dropped, and living standards rose. Peace and prosperity go together.
When the corporate tax rate was cut from 35% to 21%, it made every dollar of business profit in the United States worth 20% to 25% more.
Now, a big multinational company, they’ll have a tax department; they can find interesting things to do. But your $100 million, $200 million or $500 million manufacturer trying to slug it out in the States, if before you had a $5 million capital investment, throwing off $1 million of pretax income, before that tax reform, your after-tax return was maybe 13%. You kept your plant going; you didn’t go nuts.
Post tax reform, earning almost an 18% return, you invested. You put money in on purpose.
Here is one example. Part of it was cycle, part of it was tax, but once the tax reform was passed, the next year, the percentage increase in robots purchased for use in U.S. factories went up like 17%, 18%. Tax really matters. And it’s dramatic.
And so going into this election, look, one party said, “We will raise corporate taxes.” If you think about where to put a piece of capital investment, you’re going to wait until you know what that answer is. At this point, the U.S. is only in the first innings of realizing those benefits. Tax reform became effective in early 2018, so U.S. manufacturers have only had two corporate planning cycles under the lower tax rate.”
The results will be seen in this coming year:
“Companies are completing their strategic planning like, frankly, right now, with some contingency planning. You move forward on stuff you would do in 2021 irrespective of outcome…And let’s just say, you take corporate tax rates of 21% back to 35%. That means incrementally you are going to be doing more stuff in Mexico relative to the United States, period. There’s no question about that.
Now, you’re going to go back to China? Not so much. Because I think there is an emerging bipartisan understanding, outside of Wall Street, that China is not our friend. If you haven’t figured that out yet, you’re hopeless, right? So both parties get that.
But there are other places to go, like Vietnam, which is starting to industrialize quite rapidly, other countries in Southeast Asia that certainly want to play. So that’s where we don’t know until we know. And capital will wait until they are certain of what the rules are going to be.”
To get the complete picture, read the entire 3,723 word interview with Brian Langenberg, exclusively in the Wall Street Transcript.
Andrew Nowinski is Managing Director and Senior Research Analyst of D.A. Davidson & Co.
Mr. Nowinski joined D.A. Davidson in 2019 after working for the previous eight years with Piper Jaffray, where he was a top-ranked analyst covering security and software infrastructure. He previously was an analyst with Raymond James, following work as a senior software engineer.
He earned an MBA and bachelor’s degree in business from the University of Minnesota’s Carlson School of Management.
Mr. Nowinski is part of a team of award-winning analysts whose coverage focuses on nearly 400 publicly traded companies in select industry verticals, including technology, financial services, consumer and retail, diversified industrials and services, and real estate.
D.A. Davidson’s Equity Capital Markets group provides capital markets services and products that include investment banking, institutional sales, trading, research and corporate services. The firm’s industry-driven research team is supported by a dedicated group of sales and trading professionals.
In this 3,049 word interview, exclusively in the Wall Street Transcript, Mr. Nowinski analyzes the software security market and picks some outstanding investment opportunities.
“More people are working remotely now, and hackers try to take advantage of that. With more people working remotely, they have to connect to their corporate networks via VPN, likely using home PCs or unprotected laptops.
If a hacker was able to place malware on your PC or laptop, that malware could gain access to your corporate network whenever you connect via VPN. You would essentially be walking malware into your corporate network right through the front door…”
The methodology was business practice oriented:
“We recently published a very simple framework for the stocks that we think will weather the downturn better than others. And what we said was, first, the solution needs to be a critical component of the infrastructure.
And then second, it needs to be cloud-based, which is easier to deploy, and then third, it needs to support remote workers given that all companies are now requiring employees to work remotely.”
Back in April, Mr. Nowinski picked some 2020 winners:
“So we’ll start with Zscaler. So Zscaler is a 100% SaaS solution, software as a service. It doesn’t require any hardware at the customer site. Number two, they’re growing revenue north of 50%.
Their two core products are called ZIA and ZPA. ZPA directly benefits or helps users connect from their home office back to their corporate network.
So we believe Zscaler’s ZPA service is directly benefiting from the COVID-19 pandemic, which is driving up their revenue growth. And then, when those employees presumably return back to their corporate office, hopefully in a few months, they may add on additional license for ZIA.
We also like CrowdStrike because it’s another high growth SaaS name. All of their products are built off of a single software agent. They’re the only vendor that can track malware on your endpoint over time. And the “over time” component is the key differentiator for CrowdStrike.
Oftentimes, very sophisticated malware can change, can morph into something much more malicious over a period of three to six months. CrowdStrike uses the cloud and their Threat Graph database to analyze that malware over time.
This enables them to block that malware when it does become more malicious. It really is the best endpoint solution in a $20 billion market. We think they can continue to grow at a very high pace indefinitely.
Next, with regard to Okta, they offer a cloud-based SaaS solution for single sign-on and multifactor authentication. It simplifies how users log in to their applications and also reduces the attack surface area. You sign in once to their dashboard, and their dashboard or their platform then logs you into the 50-plus applications you might have access to. That’s their flagship product.
But they’ve built many other products off of that as well, where they can provide multifactor authentication and other tools for securing access to your application, and it could be either cloud-based applications or even on-premise applications.
That’s another company that is growing north of 50%, and we think they will continue to build out their platform, enabling them to keep that growth rate going at that pace.
And then finally, Proofpoint, which as I said is a cloud-based e-mail security solution. So when companies transition from on-premise Microsoft Outlook to a cloud-based solution like Microsoft Office 365, they want to move their e-mail security with it to the cloud. Proofpoint provides a cloud-based e-mail tool, which is best-in-class at stopping malware.
They don’t just scan for known malware threats, but they look for links and attachments inside your e-mail and follow those links and attachments to their original source to block them before they ever get to your inbox.
So if Proofpoint determines that there’s some malicious content in that e-mail, you’ll never even see it in your inbox, so it won’t infect your data center or the rest of your applications. There’s no opportunity to click on that link because they’ve already deemed it malicious.
So it is a best-of-breed solution. And at a time when more hackers are sending in these e-mail phishing attacks, it’s a really important tool to have. They are growing revenue in the 20% range, but we believe that given the influx of phishing attacks, the demand trends are actually very strong right now and should remain strong going forward for the remainder of the year.”
Andrew Nowinski also made some additional 2020 predictions back in April:
“Another one in our survey that also benefited is Mimecast (NASDAQ:MIME). We don’t actually cover Mimecast, but they’re an e-mail security provider with a very good platform. And that’s one that we also saw pretty strong demand for.
On the firewall side, the firewall vendors, like Fortinet (NASDAQ:FTNT), had decent results because I think the biggest downturn in demand really happened in the last two weeks of March. And we think Fortinet likely put up a good March quarter. But we’re more concerned with the pipeline for Q2 as it relates to Fortinet.
The pipeline in Q2 looks like it’s getting more challenging. It is going to be more challenging to implement firewall refresh deals in Q2, especially if we’re still in quarantine during that time period. So we are a bit concerned with Fortinet and their ability to guide above the Street for Q2.
Now, we just upgraded SailPoint (NYSE:SAIL) yesterday. SailPoint’s results in the survey were not great and were still net negative overall, but the results are getting better. It’s not as bad as it was in Q4. And we saw a 50% increase in their cloud solution; that’s called IdentityNow.
Over 50% of revenues from resellers were generated from their IdentityNow solution, and that’s up from 33% last quarter. So that’s a big driver of valuation. And that’s one that we think will help them put up good numbers in Q1.
And then second, their pipeline for Q2 actually looked fairly promising. They had the second-best overall pipeline heading into Q2. So we upgraded SailPoint, and that’s trading at about 3.2 times EV to sales. We felt like the valuation is largely washed out at this point, particularly with survey results getting better. So that’s how we’re positioning for these companies that are set to report.”
Get the entire 3,049 word interview with Andrew Nowinski, exclusively in the Wall Street Transcript.
