Michael Genovese covers companies that sell equipment to service providers, enterprises and cloud providers. He breaks down sentiment by sectors. In the service provider market, he says the capital spending of carriers is flat to down into the future. He says the good stories are things related to fiber and optical, and most of his favorite stocks play in the 100G market. Mr. Genovese says the main trend in the enterprise side is the concentration of buying power in the market, as a new class of cloud service providers, the Web 2.0 companies, are building bigger data centers and selling to enterprises.
Full interview available here.
Alex Henderson says the issue in data networking is the shift from private to public cloud causing a diminution of longer-term growth potential. He says suppliers to the Web 2.0 players have significant opportunity, as there is a major upgrade cycle in the data center for scaled-out data centers.
Full interview available here.
Erik Suppiger covers security and networking stocks. Mr. Suppiger says the security sector has been very active, with the volume of attacks growing rapidly. He says different security technologies have become effective for specific types of attacks. In the networking space, Mr. Suppiger says there’s been a significant investment cycle taking place in the data center, and that a lot of cloud buildout has occurred. Another trend is the outsourcing of IT infrastructure with services such as infrastructure as a service, where a lot of cloud providers are building out cloud infrastructure. He shares which companies are best-positioned to capitalize on this buildout.
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David B. Rodgers covers data center REITs. He believes the shift toward a positive sentiment in the industry has been driven by cloud demand. In addition, Mr. Rodgers thinks the strong performance of data center REITs is due to multiple expansion and improving fundamentals. Despite the positive sentiment and performance, Mr. Rodgers is cautious about the sector. According to him, if the hyperscale cloud expansion and demand is unable to keep pace, it could be a potential negative catalyst for investors. Within the sector, he has found the network-centric business model to be the most favorable.
Full interview available here.
Ryan Hutchinson covers data and communication infrastructure. Two of the trends that are making an impact in the sector are the rise of cloud computing and the move toward white box hardware. According to Mr. Hutchinson, broad IT spending is flat, but he does see growth in segments like security and those related to the buildout of cloud technologies. In addition, while the macroeconomic environment has been a challenge for the sector, companies with subscription-based business models have been more insulated than hardware-oriented companies.
Full interview available here.
Senior Portfolio Manager Todd S. Lowenstein of HighMark Capital Management says General Electric Company (NYSE:GE) is restructuring to focus more on its crown-jewel businesses, and is on track to redeploy capital back into acquisitions and shareholder returns.
GE is a terrific example of the type of equity opportunity we seek out. GE has been a relative underperformer for many years now. In the past, it was an empire builder, and during the financial crisis, it got exposed for being heavily reliant on short-term commercial paper financing, essentially funding short and investing long, relying on their AAA credit rating, providing an advantageous funding position. They spent a lot of money building a massive presence in various financial services unrelated to their core industrial business, which resulted in finance at the peak of last cycle becoming close to half their earnings power…
All those financial areas, whether it was real estate, whether it was consumer finance, are being monetized, and the company is being shrunk to fit an attractive set of competitively advantaged, crown-jewel businesses, such as aircraft engines, power generation, health care and locomotive. And they are going to take about $100 billion in capital and redeploy it in industrial acquisitions and shareholder buybacks. They are going to rake in over $100 billion in asset sales and will redeploy that capital back, investing in the industrial businesses, productivity improvements, margin expansion and shareholder returns through stock buybacks and stepped up dividends.
Upside margin improvement is apparent when benchmarking against their peer group and asset return potential, especially on the original equipment side of things as well as on a better recurring services mix, and on capex and operating discipline. We like that the incentive compensation structure for management is being realigned toward an emphasis on returns on invested capital. As a result, we expect an improved margin structure, asset utilization and capital-allocation policies.
So while not an uncomplicated story, however, it is sort of a reset that makes sense to us and that we think is shareholder-friendly. We have some activists now involved in GE who are helping steer the company to the right course, and you have a very handsome dividend yield, so they are paying you as they restructure the businesses for higher and better use. Ultimately, we think this slow-moving transformation will warrant a much higher valuation multiple, higher growth-rate potential, higher-quality earnings, and it’s going to be a very successful investment for our shareholders.
Hendi Susanto covers the technology sectors. According to Mr. Susanto, cybersecurity continues to be a core issue, and it continues to evolve in both intensity and nature. In addition to cybersecurity companies adopting subscription models, Mr. Susanto sees a trend toward security platforms. These platforms give companies a competitive advantage over standalone solutions and allow them to develop new functionalities that can be added to the same platform.
Full interview available here.
Ken Ichikawa Siazon discusses Southeastern Asset Management, Inc., and the Asia Pacific strategy. Mr. Siazon is value-focused and follows a business/people/price discipline. He looks to build a concentrated portfolio with strong businesses. He also wants the businesses to be run by managers who act like owners and to be available at a deep discount. Despite the volatility in Asia, the strategy has the flexibility to invest in the best opportunities regardless of market cap or location. According to Mr. Siazon, some of the trends creating opportunities include the cheapness of equities, the corruption crackdown in China, generational changes in management, the focus on capital efficiency in Japan and the weakness in natural resources.
Full interview available here.
Shayne M. John discusses Decatur Capital Management Inc. and the Mid Cap Growth Strategy. Mr. John is not a conventional growth investor, but rather, he considers himself an earnings cycle investor. An earnings cycle stock is one that is experiencing a period of above-average growth as a result of an internal or external catalyst. According to Mr. John, the catalyst is generally a new product or technology, entrance into a new market or a change in the competitive dynamics in the industry. When the earnings cycle begins, sales and earnings grow faster than expected, and Mr. John aims to capture this anomaly.
Full interview available here.
Todd S. Lowenstein discusses HighMark Capital Management, Inc. Mr. Lowenstein uses patient, contrarian and long-term approaches to achieve attractive risk-adjusted returns. In order to practice patience, the strategies are anchored to superior fundamentals and appropriate valuations that may take up to three years to reach expectations. Mr. Lowenstein combines a top-down perspective in asset allocation with bottom-up security selection. By using a disciplined, collaborative, research-intensive process, he attempts to identify favorable unrecognized industry trends and opportunities that are overlooked by the market. Overall, Mr. Lowenstein looks for undervalued quality investments with enduring attributes and capable leadership.
Full interview available here.
