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.
Mark Madsen, CFA, MAcc is a Portfolio Manager of the Grandeur Peak Global Reach Fund (GPROX) and the Grandeur Peak Global Contrarian Fund (GPGCX), and Guardian Portfolio Manager of the Grandeur Peak International Opportunities Fund (GPIOX).
He is also a Sr. Research Analyst with a specialty focus on the industrials, energy and materials sectors globally.
Mr. Madsen joined Grandeur Peak in 2016 following four years working as a Senior Equity Analyst in a family office. Mr. Madsen has been a research analyst since 2004, when he began his career at Wasatch Advisors.
Mr. Madsen began as a junior analyst and was later promoted to a senior research analyst, working on the Wasatch Small Cap Value Fund (WMCVX). He developed an expertise in the energy, industrials and financial sectors.
After four years, Mr. Madsen left Wasatch to found Red Desert Capital in Las Vegas, Nevada. As Founder and Portfolio Manager, Mr. Madsen successfully launched a concentrated portfolio based on a bottom-up fundamental value investment strategy. He was later recruited by a client to manage a family office in St. George, Utah.
As the Chief Investment Officer, he developed an all-cap equity portfolio, managed an income portfolio and was responsible for tracking and evaluating third-party managed accounts.
In this 2,467 word interview, exclusively in the Wall Street Transcript, the Grandeur Peak portfolio manager puts his spin on stcok picking, with many in detail:
“The Global Contrarian Fund is more of a value-based fund, so we’re looking for high-quality companies that are trading at a really attractive valuation.
Oftentimes, they’re trading cheaply either because they’re undiscovered and nobody knows about them, or they’re undervalued because of current market conditions. And because they might have hit a bump in the road that’s either company specific, or related to more of a macro-based factor…
…We want to make bets on companies that are, again, high quality and have great long-term prospects. And we’re willing to be patient and own those companies even if in the current environment that business is not doing particularly well at the moment.
So we’re hoping to find companies that are trading at a cheap valuation. And we think that means that the market has missed something, and so we are willing to make a bet when perhaps somebody else isn’t.”
“One example of a company that we like is an IP and patent firm in Australia called QANTM Intellectual Property (ASX:QIP). And QANTM is the second largest player in the patent market in Australia. And it is a more recent name.
…Another one of the names we like that is listed in Hong Kong is Plover Bay (HKG:1523).
Plover Bay specializes in making hardware and software, in SD-WAN — products that enable customers to aggregate different sources of bandwidth into one stream of bandwidth — and that’s called SD-WAN technology.
We think the company has a bright future as 5G is rolled out globally. So there’ll be more and more uses for its products.
And we like that the company is 80% or 75% owned by its founder. It’s continuing to grow at a healthy rate, but also at the same time it pays out a really healthy dividend yield.
One of the companies that we’ve done really well with in Vietnam is called Hoa Phat Group (HOSE:HPG). Hoa Phat produces steel. They make a wide range of steel products. And there’s been a voracious appetite for steel within Vietnam.
So the company has built out new manufacturing centers and new infrastructure within the country. And Hoa Phat expanded its capacity over time, but that capacity has readily been absorbed by the market.
The stock has always traded at a really reasonable multiple and we also like that despite the fact that it’s growing really fast, it has done a good job of also paying a dividend and returning some cash to shareholders over time.”
Get the complete detail from Mark Madsen of Grandeur Peak for these and others by reading the entire 2,467 word interview, exclusively in the Wall Street Transcript.
Joshua R. Schachter, CFA, is a Senior Portfolio Manager of the Snow Capital Small Cap Value and the All Cap Value portfolios. He joined Snow Capital at the firm’s inception in 2001. Mr. Schachter’s duties include security research, selection and portfolio management.
In this 2,165 word interview, Mr. Schachter details the stock picking process at Snow Capital and highlights many top stock recommendations for 2021.
“Our investment philosophy is extremely unique. We believe there’s a behavioral finance component to investing that most people either fail to recognize or fail to incorporate into their investment process.
When Wall Street likes something, they give it a high p/e — price-to-earnings ratio. When they dislike it, they give it a low p/e. And in practice, when they dislike it, there’s something wrong.
And what’s happening is the discount rate is going up from some fear or uncertainty. And when that discount rate goes up, it contracts the net present value of the future cash flows and earnings and that’s what’s contracting the p/e.
So we go into those situations with a contracted p/e and look for a catalyst to change the market’s opinion of those future cash flows and earnings.
To get what we call p/e expansion to some future normalized level, our competitive advantage is figuring out what that p/e should be in the future and figuring out the catalysts to make it get there.”
This unique Snow Capital method creates an interesting opportunity for their investors:
“CNO Financial is my favorite insurance company. It’s primarily a provider of annuities and life insurance serving the middle markets.
They do have some legacy long-term care insurance liabilities, in which they’ve done a very nice job of siloing the risk. They’ve done that through reinsurance contracts, price increases, and other mechanisms to minimize their liability to long-term care.
CNO, I believe, will be acquired in the future. But between now and then, they have a significant amount of free cash flow to be able to return to the shareholder in the form of buyback and dividend yield that is 2% currently.
Their buyback is a significant piece of the puzzle for investors; it could approach 10% a year for the company. So, this is a free cash flow machine.
They are growing their end markets through new distribution, direct to consumer, which has grown during the COVID pandemic. And it’s so cheap. It trades at 10 times earnings with that roughly 10% free cash flow yield because of the taints of the long-term care overhang, which I think is overblown.”
Another group of financial stocks are also top 2021 picks from Snow Capital:
“Thinking about the financial sector, you have two different categories in our portfolio. We have banks — and we have a number of banks that are in the midst of a transformation operationally that will really enhance earnings power.
Some of those banks that are noteworthy are First Horizon (NYSE:FHN), TCF Financial (NASDAQ:TCF), Umpqua (NASDAQ:UMPQ) and BankUnited (NYSE:BKU).
Those four banks are in the midst of redefining their leverage inside their income statement and really enhancing their efficiency and are very attractively priced based off of our normalized earnings power once they’re done with the changes.”
Get the complete picture on these and other top 2021 picks from Joshua Schachter at Snow Capital, exclusively in the Wall Street Transcript, by reading the entire 2,165 word interview.
Michael Nicolas has been a co-manager of the Oakmark Fund since 2020. He is also an investment analyst at Harris Associates and a VP of the Oakmark Funds. He started at Harris Associates in 2013 after serving as a managing director at Lakeview Investment Group. Prior to that, he was a senior analyst at Stratford Advisory Group.
In this extensive 4,036 word interview, Mr. Nicolas discusses the Oakmark Funds investing process and philosophy and illustrates with many detailed top stock picks.
“At Oakmark, we adhere to a proven, bottom-up investment process. We look to identify individual companies trading for meaningful discounts to our estimate of intrinsic value, and where we expect per-share value to grow over time.
Furthermore, we want to make sure that the management teams that run our companies are properly aligned with us, and that they think and act like owners of the business.
We spend an awful lot of time studying the track records and the capital allocation history of the management teams we’re considering investing with, which is critically important given our willingness and ability to own a company for a long time.
In terms of my own evolution relative to earlier in my career, I’ve gained a much greater appreciation for how important management quality can be in affecting investment outcomes.”
This leads to an idiosyncratic value based portfolio:
“…the way we define value is different than many of our peers. We don’t require a current or prospective portfolio company to trade for a low multiple of the earnings or book value they publish in their audited financial statements.
Our CIO–U.S. Equities, Bill Nygren, has written at length about the flaws of solely relying on generally accepted accounting principles — or GAAP — to determine how profitable or valuable a company is.
At Oakmark, we often go to painstaking lengths to recast a company’s financial statements in order to reflect what we believe its true economic earnings power to be, which can sometimes look quite different than how GAAP would define it.
For these reasons, you’ll see a mix of what I would call traditional value names in our portfolio, like many of our financial holdings, and non-traditional value names, like Alphabet (NASDAQ:GOOG)…”
Some recent picks also highlight the Oakmark Funds investment philosophy:
“The two most recent positions that we’ve added to the portfolio were CBRE Group (NYSE:CBRE) and Keurig Dr Pepper (NASDAQ:KDP).
CBRE is the largest commercial real estate services firm in the U.S. The company has significant scale across its various service lines and geographies, which enables it to consistently invest more than smaller peers into the research, tools and technology that customers value.
This industry-leading value proposition has driven consistent share gains for CBRE in recent years, as large clients have been attracted to the company’s differentiated capabilities and the best brokers have been attracted by the steady stream of clients.
We expect CBRE to continue to gain market share in the highly fragmented brokerage industry for many years to come while it further transitions away from transaction-driven commissions and toward more contractual fee revenues.
There’ve been some outsized fears around “work from home” that have caused the company to sell for less than 13 times our estimate of mid-cycle earnings. We think this is an attractive price for a high-quality and well-managed business like CBRE.
The other name that we recently acquired was Keurig Dr Pepper. Keurig Dr Pepper is one of North America’s leading beverage companies and commands a strong market position in single-serve coffee and flavored sodas.
Keurig’s competitive advantages are many. It has a low-cost production footprint, the largest installed base of brewers and exclusive brand partnerships, which allow it to collect a toll on most pods sold in America today.
We believe Keurig’s brands should deliver steady growth, consistent market share gains and significant excess cash flow. It’s an above-average business trading at a meaningful discount to the market, its beverage peers and historical private market transactions.”
To get more detail on these and many other stock picks, read the entire 4,036 word interview with Michael Nicolas of Oakmark Funds, exclusively in the Wall Street Transcript.
Larry Mendelson has been HEICO Corporation’s Chairman of the board since December 1990 and has been Chief Executive Officer since February 1990. He had been President from September 1991 through September 2009.
Mr. Mendelson has been a member of the board of governors of the Aerospace Industries Association — AIA — in Washington, D.C., of which HEICO is a member. He is the former Chairman of the board of trustees, former Chairman of the executive committee and a current member of the Society of Mount Sinai Founders of Mount Sinai Medical Center in Miami Beach, Florida.
In addition, Mr. Mendelson is a trustee emeritus of Columbia University in the city of New York, where he previously was trustee and Chairman of the trustees’ audit committee. Mr. Mendelson is a certified public accountant.
In this 3,672 word interview, Mr. Mendelson explains his company’s performance and future value creation for investors.
“We focus on high margins, products with high margins, protected markets, really arcane products, products where we have a leg up on competition, either that we have the technical know-how that is very, very difficult to duplicate by a competitor.
And we do not want to sell a complete system. We like to sell parts that go into large systems. For example, we supply aircraft parts; we supply aircraft engine parts.
And in addition to that, we supply parts that we manufacture, design, develop all over the aircraft, in the avionics, the landing gear, in the cabin, you name it, and you’ll find our individual parts, but we normally do not make the entire system.
In addition, we make lots of electronic components, uplinks, downlinks to satellite systems.
As a matter of fact, these satellites that go to Mars, Jupiter, Pluto, that land on comets, so many of their electronic components are made by HEICO’s subsidiaries.
And in addition, we do work for the defense industry. Our business is composed of two divisions, electronic technologies and flight support.
Flight support is primarily commercial aviation. And in the electronic technologies, close to half of our business is related to the defense sector.”
Larry Mendelson emphasizes the quality of earnings for HEICO:
“…More important than earnings per share is cash flow generation because it’s very possible, and many companies do have capex expenditures or other expenditures, where earnings per share is one thing, but the cash flow from the earnings per share is considerably less than the earnings per share.
So it might be 75% of reported earnings per share is really cash. In our case, over the years, the cash flow is generally 140%, sometimes as high as 180%, of reported earnings per share.
And the name of the game, business is cash flow. You cannot buy groceries in your local supermarket with earnings per share.
You can’t grow a company just with earnings per share; you need cash. So sophisticated investors look at HEICO as a cash flow generator. And that is what we’ve groomed the company to be. And that is what investors like. We call that the quality of earnings, that the earnings produce cash, not just a paper profit.”
Mr. Mendelson emphasizes that the quality of the company’s cash flow is matched by the quality of HEICO’s products:
“…We make very, very sophisticated electronics for satellites. For us, it doesn’t matter if Lockheed has the order or Boeing has the order for the satellite.
Either one will probably come to us for that particular electronic need that they specify. We will be there, and our history of successful and very high-quality products assures repeat business.
In the space business, if you supply a $5,000 or a $10,000 part, which we do, and it doesn’t function, the result is that somebody, who’s got $200 million, $300 million, $400 million of space junk floating around the Earth, doesn’t accomplish its mission.
They have to be very, very certain of high quality. And they’re not very anxious to save a few thousand dollars and go try somebody new, which they’ve never tried before, and find out that, “Oh, my goodness, that product really didn’t last. It should have lasted, but it didn’t. It doesn’t function, and now our space satellite is in trouble.” So they will go back to sources where they have long experience on extremely high quality.
And that’s what our subsidiaries do.”
Get the complete 3,672 word interview with CEO Larry Mendelson, exclusively in the Wall Street Transcript.
Andrew Spodek is the Chief Executive Officer of Postal Realty Trust and is a member of the board of directors. Mr. Spodek is the Founder and CEO of the predecessor entity, Nationwide Postal Management, Inc. NPM, founded in 2004, was the largest manager of USPS-leased properties in the United States.
Mr. Spodek has over 20 years of experience exclusively focused on investing in and managing post office properties.
Prior to founding NPM, Mr. Spodek led acquisitions and property management for his family’s private real estate investment activities. Mr. Spodek sits on the board of directors of the Association of United States Postal Lessors.
Mr. Spodek earned a M.S. in real estate from New York University and a BBA in finance and international management from Boston University.
In this 2,643 word interview, exclusively in the Wall Street Transcript, Andrew Spodek explains how his company is building a portfolio of post office real estate.
“My father — who had been in the real estate industry for his entire career — had been brought an opportunity to purchase a portfolio of postal properties in the early 1980s. Before this, he didn’t know that the Postal Service even leased their buildings. After doing some diligence, he ended up purchasing them and loved the assets, and he continued to buy them from there on out.
In the early 2000s, my father semi-retired, and I created a management company to operate his portfolio, and I began to buy postal properties on my own.
What I didn’t realize at that time, but what I realize now in retrospect, is that we were one of the only institutional owners and operators of postal properties. As we continued to acquire, we established ourselves as the largest owner of postal properties.
A few years ago, we started exploring the idea of creating a REIT around our portfolio.”
Mr. Spodek has further developed his postal portfolio into a more attactive financial package:
“What I also realized was how fragmented the market was and that even though we may have been the largest owner of postal properties, we were very small relative to the market. If you think about postal real estate in general, you have roughly 23,000 postal properties throughout the country.
Those 23,000 postal properties represent about $1 billion in gross annual rent. Of the 23,000 postal properties, 16,000 are owned by single-asset owners. That’s 16,000 people owning 16,000 postal property assets — that’s how fragmented this market is.
As a result, we decided to pursue this public market opportunity and completed our IPO in May of 2019.”
The assets are very attractive from a real estate perspective:
“Number one is the Postal Service pays their rent during good times and bad, whether it is during a government shutdown or the current pandemic that we’re dealing with.
Number two is the Postal Service very rarely moves.
Over the past 11 years, we’ve maintained a 98% retention rate. The Postal Service, in general, is very committed to the towns and communities that they’re based in. They have significant capital invested in the buildings they occupy, and they have very strong ties to their local communities. Additionally, these postal properties are part of a distribution network; removing one of the stops on the network is disruptive to the overall network in general. For all of those reasons and more, the Postal Service very rarely moves.
The third important consideration is that we’re able to operate hundreds of these buildings all over the country from our office on Long Island without the need to have any employees on-site at the properties.”
The value of the USPS is the value of the properties:
“It seems logical that the Postal Service that sees millions of Americans every day would be the most effective way of getting these packages to the American people. I believe the Postal Service’s last-mile distribution network is their competitive advantage in the package delivery industry.
It’s important to also understand that the Postal Service is a government agency and is the second-largest employer in the country. The Postal Service provides a critical need to the communities and American people that it serves.
In a situation like we are all living in today — with shelter-in-place due to COVID-19 — the value and need of the Postal Service is more relevant and important than it ever was.
The people that live throughout this country that need to collect their Social Security checks, medicine or any other resources look to the Postal Service. The Postal Service is there to provide uninterrupted delivery. And if the Postal Service were a private company, the chances of them being there and operating reliably at this size and scale and at this pace during a time like this is highly unlikely.”
Mr. Spodek emphasizes the quality of the management for the Postal Realty Trust:
“So first and foremost, I think it’s important that everybody understands that we’re internally managed by a team that’s been in this space for decades. We have very deep and long-lasting experience owning and operating and dealing with this particular tenant. I think that that’s key to everything.
It translates into the management and operation. It translates into acquisitions. It translates into the relationships that we have all over the country. Those relationships are with vendors and owners and intermediaries and brokers and the Postal Service.
It’s important to recognize when you’re investing in a company like ours, it’s not just about the tenant and their credit but also to understand that being diversified geographically is an advantage as well.
We currently own 549 properties in 45 states. Having that type of geographical diversification is very beneficial. Understanding that these postal properties are well-located in the towns they operate in is also important.”
Get the entire picture of the Postal Realty Trust by reading the complete 2,643 word interview with Andrew Spodek, exclusively in the Wall Street Transcript.
Russell A. Colombo is President and Chief Executive Officer of Bank of Marin Bancorp. He is a lifelong resident of Marin County in the San Francisco Bay Area. He received a Bachelor of Science degree in agricultural economics and business management from the University of California, Davis and his Master of Business Administration in banking and finance from Golden Gate University.
Mr. Colombo joined Bank of Marin in 2004 as Executive Vice President and Branch Administrator after 29 years in banking at Comerica Bank, Security Pacific and Union Bank in San Francisco.
He was appointed Executive Vice President and Chief Operating Officer of Bank of Marin in 2005 and assumed the position of President and Chief Executive Officer in 2006.
In his current role, he leads the premier community and business bank in the Bay Area, with 22 branches, five commercial banking offices and one loan production office located across Marin, Sonoma, Napa, San Francisco, Contra Costa and Alameda counties.
Mr. Colombo is a board member of the California Bankers Association, Past Chairman of Western Independent Bankers Association and is a member of its executive committee and Chairman of the Citizens Oversight Committee of SMART — Sonoma Marin Area Rail Transit.
In this 1,474 word interview, exclusively in the Wall Street Transcript, Mr. Colombo details his COVID 19 crisis management.
“Small-business owners with up to $50 million in revenue. That’s our primary customer, and we do a lot of lending to real estate investors. With the small-business owners, we finance the business, and we likely would finance the building where they operate as well.
We also do a lot of commercial real estate where we are providing loans to investors to purchase commercial real estate. That’s a mixed bag in this pandemic environment, depending on what type of commercial real estate you’re financing.
We don’t have a lot of hospitality; we have a few hotels, and frankly, all of them are empty right now.
But in most cases, we have guarantors with liquidity.
Wine business is suffering certainly because people aren’t visiting wineries, but they are selling a lot of wine wholesale, in the grocery stores.
Overall, the loan portfolio is in solid shape, and while we are bound to see additional challenges, we expect to weather this storm just as we have past downturns.”
Mr. Colombo goes into more detail:
“Like everybody else, I’m worried about how quickly the economy can come back once we get through this crisis. And that’s going to impact everybody.
I think this will have a significant impact on commercial real estate values. We’re looking at our portfolio very carefully to see where there are potential issues in valuation.
I will say this, values have accelerated in the Bay Area, primarily driven by technology. We have been careful about not advancing into very high valuations, which we think are a little bit too high.
We have scaled back what were our advanced rates to adjust for that, because as I looked at our real estate portfolio, it’s in really good shape, and I’m confident we’ll get through this issue.
Like all banks, we put in programs for companies and real estate that we financed to go to interest-only or even for payment deferrals, and we’ve had approximately 17% of our portfolio do that, but none of which am I really tremendously worried about.
There’s no question the hospitality area is going to be the big challenge coming out of this. We don’t deal with a lot of restaurants today. We do have some hotels, not a huge number, but a few, and those are going to be challenging.
Now, the good news is, on most of them we either have low loan-to-value ratios or very strong guarantors, or in many cases both.
Overall, I will say, I’m optimistic, and the bank is in very good shape.”
Read the entire 1,474 word interview with Mr. Colombo to get the complete detail, exclusively in the Wall Street Transcript.
