Lori Keith, Director of Research at Parnassus Investments, LLC and Portfolio Manager of the Parnassus Mid Cap strategy
Artificial Intelligence is the powerful wave that will wash through the world’s leading economies in this next decade. These three portfolio managers pick the stocks they think will benefit most.
Lori Keith is the Director of Research at Parnassus Investments, LLC and Portfolio Manager of the Parnassus Mid Cap strategy.
She is responsible for portfolio management of the firm’s Mid Cap strategy and oversees sector research activities for the firm.
Ms. Keith joined Parnassus Investments in 2005 after serving as a Parnassus research intern.
Prior to joining Parnassus, she was Vice President of investment banking at Deloitte & Touche Corporate Finance LLC and a Senior Associate in Robertson Stephens & Company’s investment banking division.
Before that, she worked in the management consulting practice at Ernst & Young.
Ms. Keith received her bachelor’s degree in economics from the University of California, Los Angeles, and her MBA from Harvard Business School.
In her interview with the Wall Street Transcript, Ms. Keith develops her thesis for stock picks that will benefit from the Artificial Intelligence investment wave.
“…Our semiconductor holdings have benefited this year, as there’s been significant investment behind a lot of the AI applications, the large language models and semiconductor chips, and also as that has been heavily invested in by the hyperscale players, the system players, spending significant amounts of money to build out their own capabilities.
One particular type of company that we own within that space that’s directly benefited is the semiconductor equipment companies.
That would include names like KLA Corporation (NASDAQ:KLAC) and Lam Research Corporation (NASDAQ:LRCX).
Both of those provide essentially mission-critical equipment that’s needed to design, develop and manufacture this increasingly complex chip technology.
I’d say KLA has a little bit more of a niche in what’s called advanced inspection process control and yield management.
Specifically, they help the chip manufacturers, also known as fabs, to identify the defects in those highly complex chips before they go into production.
So this technology is extremely mission critical.
They have a very wide moat in the sense that they are one of the few players in the world that has the advanced technology that allows fabs to identify those defects and optimize production for manufacturers.
And they are ultimately benefiting as more and more semiconductor fabrication facilities are built.
As you may have seen, the CHIPS Act is funding new sites for semiconductor manufacturing in places like Arizona, Ohio and upstate New York.
Similarly, Europe has significant fiscal stimulus to fund new chip development activity and diversify that outside of Taiwan, where most is today.
Obviously, that continues to drive significant demand for additional equipment purchases from KLA.
Lam Research, another leading company in the semiconductor equipment space, is more focused on memory chips in terms of their specialty, but is also very much benefiting from robust demand for their specialized equipment, used increasingly for higher bandwidth memory chips to power large language models and AI applications.”
Jonathan Cofsky, CFA, Portfolio Manager on the Global Technology and Innovation Team at Janus Henderson Investors
Jonathan Cofsky, CFA, is a Portfolio Manager on the Global Technology and Innovation Team at Janus Henderson Investors, a position he has held since 2022.
He was previously an assistant portfolio manager.
Additionally, he is a Research Analyst and co-leads the firm’s Technology Sector Research Team.
Prior to joining Janus in 2014, Mr. Cofsky was at Sanford C. Bernstein for eight years, most recently as a vice president on the Institutional Investor IT hardware team.
While there, he also was a senior research associate on teams covering software, semiconductors, data networking equipment, aerospace, and defense.
Mr. Cofsky received a bachelor’s degree in economics from Dartmouth College. His top Artficial Intelligence stock picks also include ASML Holding.
“…The important thing is we’re really looking for innovation and that happens globally.
So, some of the best tech businesses over time, like an ASML (NASDAQ:ASML) or TSMC (NYSE:TSM), are not located in the U.S., and we want the ability for our fund holders to find the best technology companies wherever we can…a lot of the innovation starting with semiconductors, but also in software and internet is within the U.S, but you also have really innovative companies all around the world…
So, companies like ASML, which is in the Netherlands, Lam (NASDAQ:LRCX), KLA (NASDAQ:KLAC), Applied Materials (NASDAQ:AMAT) within the U.S., and there are other companies within Japan and Korea, and then TSMC, which is essentially where all the leading-edge chips that go into GPUs or smartphones are made.
And then on the software side, you have Cadence (NASDAQ:CDNS) and Synopsys (NASDAQ:SNPS), which are the two companies that have EDA — electronic design automation — software that allows you to build increasingly complex chips over time.”
Mr. Cofsky hones in on his top pick:
“I think ASML is a great example.
They essentially have natural monopoly in leading edge lithography.
So that’s how you use light to create chips.
And what they’ve done with things like extreme ultraviolet technology — EUV — machines is really taking the laws of physics to their extreme, and it allows you to make increasingly small chips.
And so that’s one example of a really special company. And no one else has been able to replicate what they do.”
Gus C. Zinn, CFA, Managing Director and Senior Portfolio Manager for the Ivy Science and Technology Team
Gus C. Zinn, CFA, is a Managing Director and Senior Portfolio Manager for Macquarie Asset Management’s Ivy Science and Technology Team, where he is responsible for making day-to-day investment decisions for the team’s strategy.
Mr. Zinn joined Ivy Investments in 1998 (Ivy Investments was acquired by Macquarie in 2021) and has served as Portfolio Manager for Ivy Investments since 2006.
He had served as Assistant Portfolio Manager for funds managed by Ivy Investments since July 2003, in addition to his duties as a Research Analyst.
Mr. Zinn earned a bachelor of science and a master of science in finance from the University of Wisconsin-Madison.
He holds the Chartered Financial Analyst designation.
“The AI deployment right now is really focused on sort of the plumbing and building out that infrastructure.
So obviously, Nvidia (NASDAQ:NVDA) is a large holding and that’s done particularly well.
We think Facebook or Meta (NASDAQ:META) is benefiting significantly through their advertising platform and implementing AI.
So, the AI trend is not just about the buildout.
We have a lot of companies that are benefiting from the buildout.
That’s in the semiconductor space, primarily Nvidia, Broadcom (NASDAQ:AVGO), TSMC (NYSE:TSM), semiconductor capital equipment.
The equipment to make these chips is important; we have large positions in Lam Research (NASDAQ:LRCX) and ASML (NASDAQ:ASML).
Micron (NASDAQ:MU) is another one that has done particularly well lately, as the memory content of these AI servers is significantly higher than a regular server.
We’re really levered to that buildout currently.
And I’d say that’s probably where, if you want to say overweight or whatever, is in that buildout of the plumbing.
There’s another kind of group of companies that are benefiting by implementing AI into their companies.
Meta stands out on that front, like I mentioned, and we’re looking for more of those currently, but we see the AI deployment in three phases.
One is the plumbing.
Two is the putting AI features in existing products like the Copilot for Microsoft (NASDAQ:MSFT) and the Microsoft Office Copilots.
We’ll see how those do over time.
Every company is obviously racing to put AI into their existing products.
And then I think there’s going to be a real exciting stage around new companies that come out that are built from the ground up to take advantage of AI.
Probably, those aren’t really public yet, but we’re expecting to see a huge wave of new companies come to market.
And I’m excited to find those opportunities.”
Artficial Intelligence is the next big stock pickers paradise. Get the complete interviews from these three professional portfolio managers and more, exclusively at the Wall Street Transcript.
Carrie Eglinton Manner, President and CEO, Orasure Technologies (NASDAQ:OSUR)
Carrie Eglinton Manner was named President and Chief Executive Officer of OraSure Technologies in June 2022 and brings more than 25 years of health care leadership and transformation expertise to the company.
Prior to joining OraSure, Ms. Eglinton Manner was Senior Vice President, Advanced & General Diagnostics Clinical Solutions, at Quest Diagnostics (NYSE: DGX).
In that role, she was responsible for bringing innovative diagnostic solutions to market in the areas of women’s health, neurology, oncology, cardiovascular, metabolic, endocrinology, infectious disease, and immunology testing services, as well as drug monitoring and toxicology.
She also led Quest’s pharmaceutical services, AmeriPath/Dermpath, and international businesses, as well as their molecular genetics team in pioneering next-generation sequencing innovation.
Prior to Quest Diagnostics, Ms. Eglinton Manner served for 20 years in a variety of leadership roles at GE Healthcare (NASDAQ: GEHC), a division of General Electric (GE).
A champion for inclusion and diversity, Ms. Eglinton Manner was co-chair for Quest’s African American Employee Business Network and GE’s Women’s Network.
Ms. Eglinton Manner received a B.S. degree in mechanical engineering from University of Notre Dame.
Ms. Manner is consolidating the manufacturing and testing sites for Orasure:
” The diagnostics business is based in the U.S., and it is where we are consolidating manufacturing.
We have a headquarters in the Lehigh Valley in Bethlehem, Pennsylvania, and that is both headquarters and our U.S. center of excellence — I should say global center of excellence in manufacturing.
Then, we’re the parent company of DNA Genotek, which is headquartered in Ottawa, Canada, which is that sample management solutions business that is about device collection and chemistry innovation, that allows collection remotely so that people can, like I said, collect samples and send them in.
So part Pennsylvania, part Ottawa, Canada…
Novosanis is about urine collection and the ability to do first-void volumetric urine collection, which is novel and fits within the scheme of how we want to collect samples remotely.
With Novosanis based in Belgium, what we decided was to consolidate that into our center of excellence in Ottawa, Canada.
So we had moved manufacturing of that into Canada last year, and it was really just a matter of time in terms of driving cost efficiency, process efficiency, and sample collection best practices across the business to then close out Belgium, which we’ve announced we will do by the end of this year.”
The COVID 19 global pandemic accelerated Orasure’s development of a world class automated testing platform.
“Building automation capabilities to address the pandemic need was a huge priority during COVID-19 and we built a state-of-the-art manufacturing facility in Bethlehem, Pennsylvania, that we opened in 2022.
It uses very advanced automation technologies and systems which have helped us improve quality and reduce the expense of scrap cost.
It’s helped us enable efficiencies across product lines more broadly because our COVID-19 test shares a platform, for example, with our HIV test.
And so, yes, we’ve used serving the pandemic in order to both create that automation and then translate it back into our portfolio to improve quality and consistency, reliability, while taking out the cost.
Both the site consolidation cost, because it’s allowed us to bring more of that manufacturing into our single facility in the U.S., and just the cost of having processes that were previously manual, which can now be done at high volume.
And it’s also allowing us to insource from Canadian manufacturers.
With our sample management solutions business in Ottawa, we were using third parties for manufacturing those devices.
What we’ve built in Pennsylvania is allowing us to bring that third-party contract manufacturing in-house, and leverage our resources there as well.
When we think about the best practice opportunities, it’s both taking cost out and leveraging capabilities we’ve built to more of our product line.”
Home testing is very relevant for sexually transmitted diseases that patients are reluctant to share with their physicians. Orasure innovation addresses this clinically relevant population.
“Our HIV oral fluid self-test is a hallmark test for us.
It’s the first FDA-cleared oral fluid self-test.
A program like the U.S. CDC’s Together TakeMeHome aims to address underserved populations in the U.S. and help them become aware of their HIV status, which is especially important and actionable since HIV is now preventable with PrEP and addressable with antiretroviral therapy.
The first year of that Together TakeMeHome program had tremendous results and examples where people who had been at risk for HIV now know their status, and now have a pathway to both prevent and/or treat infection, depending on the need.
So I think it’s more opportunities like that which COVID helped bring light to, for public and private partnership…
One of the other exciting partnerships that we shared was to distribute Diagnostics Direct’s test, which is the first FDA-cleared, CLIA-waived syphilis test.
Syphilis is a significant emerging-growth public health issue that happens to be right in that same opportunity to help serve underserved populations.
Many of those with HIV and HCV risk are at risk for syphilis infections.
Being able to partner with Diagnostics Direct to distribute their unique test — we’ve already launched it, we have first orders, we’ve shared that publicly and serve our customers in the U.S. with it — I think it’s just a great example of partnership.”
This innovation from Orasure is also feeding into the lucrative veterinary market.
“We are absolutely adding non-human segments, including animal health, and while those are small volumes today, they represent future growth opportunities.
They build on our scale, our discovery work that we can enable our customers to do in animal health.
Our line of products is in sample management solutions, our DNA Genotek line, which include all-in-one non-invasive kits for the collection, stabilization, and transportation of animal samples for diverse applications, including genetic analysis and microbiome analysis.
Regarding what types of animals, it’s all — barn, field, the clinic or home — we enable animal health through our devices and chemistries, which are uniquely simple, all-in-one, high-quality, and ensure that samples can be tested long after they were collected.
It’s just building onto our strength that we already have in human health.
We have good momentum, and animal health is small volume today, but lots of opportunity.”
To get the full 3,020 word interview with Carrie Eglinton Manner, President and Chief Executive Officer of OraSure Technologies, read it exclusively in the Wall Street Transcript.
Fair Isaac Corporation (NYSE:FICO) CEO Will Lansing
William Lansing is the Chief Executive Officer of Fair Isaac Corporation (NYSE:FICO).
Before joining FICO, Mr. Lansing served as CEO and president of InfoSpace, and also as CEO and President of ValueVision Media.
He was a partner at General Atlantic Partners, a global private equity firm.
Prior to his work at General Atlantic, Mr. Lansing was CEO of NBC Internet, an internet media company and as CEO of Fingerhut, a direct marketing company.
He has also held leadership positions at General Electric, Prodigy and McKinsey & Company.
Mr. Lansing has been on the board of directors of FICO since February 2006.
He also is on the global board of advisors for Operation Hope and the board of directors of SafeGraph.
He received a B.A. degree from Wesleyan University and a J.D. degree from Georgetown University.
He develops his thesis for continuing his company’s excellent stock market returns in this exclusive one on one interview with the Wall Street Transcript.
“[Fair Isaac Corporation (NYSE:FICO) was] founded in the 1950s by a mathematician and an engineer in California, who had this idea that you could apply analytics to data and make good decisions by doing that, make more precise decisions, more predictive decisions.
And so, they started this firm to do that.
And we were really kind of an analytics consulting firm for many years.
We quickly gravitated to financial services because the decisions there are high stakes decisions, they are money decisions, mortgages and auto loans, credit cards. And so, people were prepared to pay more for precision around those kinds of decisions.
So that’s where we focused.
We would build these scorecards for banks, individually — proprietary scorecards for the banks, where they could evaluate the creditworthiness of prospects based on a bunch of different factors. And so, we did this for decades.
There are really two sides of our business.
There’s a software side and the scores side.
So, I’ll take you down the scores track, and then we’ll talk about the software side.
In the 1980s, we partnered with one of the large credit bureaus, Equifax, and launched an industry-wide score.
This was a score available to any bank that was interested, and they could get the data from Equifax and the score from us, and that would inform their views about whether or not to lend money to a prospect.
Then we did the same thing with Experian and TransUnion, two other big credit bureaus, and we became the industry standard.
What happened was lenders really liked it.
They standardized on it because it was a very low-cost way to score a big population, and it met all the regulatory guidelines.
It’s objective, scientific, fair, unbiased, colorblind, gender neutral, and it had a lot of qualities from an analytic standpoint that tied with what the regulators were looking for. So that went pretty well.
And then what happened was the regulators said, this is a pretty good tool for us to understand how much risk the banks have.
So they started to ask for the FICO Score of various portfolios, and then when the banks would securitize their loans, they would sometimes sell their loans to investors downstream.
When they securitize the loans, the investors ask, what’s the creditworthiness of the loan that I’m buying?
And again, the FICO Score was a good objective metric for evaluating that.
The investors started to demand the FICO Score.
And so, we had interest from the lenders, from the regulators, and from the investors, and that combination of all those constituencies kind of established FICO as the industry standard in credit evaluation.
And then finally, we decided to get the consumer involved and we give FICO Scores for free to consumers.
Now, hundreds of millions of consumers get their FICO Score for free, either from their bank or directly from FICO.
So there’s a lot of demand for the FICO Score now and a lot of awareness about it. So that’s the scores side.
And now to the software side.
Back in the 1970s, the management of the company had this idea that they could get beyond just being an analytics consulting firm if they built software.
So, let’s take the intellectual property and build it into software, and then we can get higher margins and greater returns.
So they did that and we built software, again specifically for banks in originations, collections and recovery, credit line management, and fraud detection.
All the major issues that banks wrestle with the risk cycle, the credit risk cycle.
We had software that would solve those problems. And so, we became the industry standard for banks and for bank software.
And then about 12 years ago, we got focused on a path towards building a platform that a bank could use to interact with all of its consumer customers, and we call that FICO Platform, and it’s a decisioning platform.
It lets a bank — it could be a retailer, it could be anyone who has a consumer for a customer, but let’s just use banks, for example, because that’s where most of our business is today — it lets the bank take any data from any source and bring it into the decisioning engine in the platform and then apply the right analytics to answer some question.
The question could be, what do we offer this customer the next time they show up in a branch, or when they call into the call center, or if we’re making an outbound call, what should we offer them?
Or a text, or an email or whatever — whatever that interaction with the consumer is, our software helps the bank to optimize that.
And we’re best-in-class in that.
We have the world’s leading decisioning platform and it’s been adopted by almost half of the top 300 financial institutions globally, and we’re growing very rapidly, over 30% year over year, so it’s pretty popular.”
Fair Isaac Corporation (NYSE:FICO) CEO Will Lansing embraces the development of AI throughout the technology supply chain.
“AI is totally wrapped up with analytics.
I mean, machine learning, artificial intelligence, neural nets, it’s all part and parcel of the same kind of analytics challenge, which is: How do you apply analytics to make decisions, to predict things?
And we’ve been at the forefront of that for over 60 years.
In fact, we first got started with AI right around 1992 with our neural nets and machine learning for our fraud detection software.
And we have many patents in the area of AI and it absolutely is an important thing for our business and informs where we’re going.
We’re not big on hype, but we are big on solving problems for our customers.
And so, obviously, AI is a part of the analytics portfolio that we bring to our customers…
In the area of AI, we’re focused on making sure that we have what we call explainable AI and ethical AI.
We want to make sure that it’s not just a black box, but when you use it, you have to understand: What are the parameters?
What is the AI using to make its decisions?
How is it trained?
And we have some technology, some patented technology, for managing that…
We believe that the consumer should be empowered to make a lot of these decisions about where their data goes.
And so, for example, in the scores business, we’ve launched a score called UltraFICO.
What that does is, it lets consumers decide which of their information should be used for making a credit determination, and they can invite a lender to please look at my checking account.
Look how pristine my behavior is.
Look, I never overdraw.
Look, there’s my income showing up on a regular basis.
I’m a good credit risk. I’m responsible.
So our UltraFICO score is designed to put the consumer in the driver’s seat.”
To get more insight into the AI technology powering Fair Isaac Corporation (NYSE:FICO), read the entire 3,284 interview with Will Lansing, CEO, exclusively in the Wall Street Transcript.
Arbe Robotics Ltd. (NASDAQ:ARBE) CEO and co-founder Kobi Marenko
Kobi Marenko is Chief Executive Officer, Co-Founder and Director of Arbe Robotics Ltd. (NASDAQ:ARBE). An entrepreneur with over 20 years of experience in leading technology and media startups from seed stage to acquisition.
Mr. Marenko was the Founder and President of Taptica, a mobile DSP listed on the London Stock Exchange and acquired by Tremor International, and Founder and CEO of Logia, a mobile content platform acquired by Mandalay Digital.
Mr. Marenko holds a B.A. in Philosophy from the Tel Aviv University.
Arbe Robotics Ltd. (NASDAQ:ARBE) is at the cutting edge of enabling self driving vehicles.
“With this vision, we founded Arbe. I was the first investor in the company; we raised some seed money and built a prototype of a high-definition radar.
We decided to focus on the automotive industry, recognizing that delivery drones are still a long way from becoming mainstream and a viable business venture.
And although we originally planned to buy off-the-shelf RF chips and build our algorithms on existing processors like Nvidia, we quickly concluded that these RF chips didn’t have enough transmitting and receiving channels to solve the driver assist and autonomous driving challenge.
Further, processor chips on the market were not optimized for high channel count radar processing.
Instead, we decided to develop a dedicated processor and high channel count transmitting and receiving chips to provide the foundation for our proprietary algorithms.
With that decision we went from being a software company to being a semiconductor company that develops chips.
And not just chips, three chips — transmitter, receiver and processor — and the reference design for radar systems, all within the strict standards of the automotive industry.
At the time, there was no chip in the industry that met the rigorous qualifications demanded by automotive, both in terms of the qualification process and the level of faults allowable in order to proceed to production.
This was the ultramarathon that we began.
We raised upwards of $70 million overall as a private company.
Then, in October 2021, we merged into a SPAC and started trading under the symbol ARBE, raising another $100 million.
Last year, we raised a follow-on investment of $23 million, for a total of close to $200 million.
We are now in the final stages of bringing those three chips to full automotive production.
We currently have four Tier 1 customers: Magna, the largest North American Tier 1; HiRain, one of the largest Chinese ADAS Tier 1; Weifu, another significant Tier 1 in China; and Sensrad, a non-automotive radar house in Sweden that is designing radar solutions solely on the Arbe Chipset.
By the end of 2024, our Chinese Tier 1s will start serial production of next-gen radar systems based on our chipsets, and will launch a car in China with our product in 2025.
We are in the final stages of selection with around 10 leading European, U.S. and Japanese car companies to implement their hands-free driving software stack that will come to the market during late 2026/2027.”
The hardware/software stack from Arbe Robotics Ltd. (NASDAQ:ARBE) is almost unique.
“For the first quarter, I would say that the main highlight is the fact that a majority of the leading OEMs issued RFQs that validate Arbe’s approach.
Most are stating that high-definition radar based on a high channel count — exactly like what we are developing — is the only way to deliver safe hands-free driving.
In March, the Director of Radar and Radar Perception for Mercedes-Benz recognized the indispensability of a high-channel-count radar and said it loud and clear in a public conference:
The performance demands for ADAS radars necessitate an array of no fewer than 32×32 channels.
It is important to note that only two companies meet this requirement today — Arbe with a 48×48 channel array, and Mobileye with a 32×48 array.”
Arbe Robotics Ltd. (NASDAQ:ARBE) is at an interesting stage in its investment development.
“I think this year represents the first year that we are really in a position, in terms of the technology and the maturity of the product, to win contracts. We expect to start seeing those contracts come, and our basic expectation for this year is to win a few contracts with the leading OEMs.
From here, I believe that the main goal is to start shipping chips to customers in early 2025, and to reach breakeven and profitability in 2026. I believe that by the end of the decade we can be the leading player in next-generation radar.”
Get the complete interview with the CEO and co-founder of this innovative and productive semiconductor company, exclusively from the Wall Street Transcript.
POET Technologies Inc. (NASDAQ:POET) Chairman and CEO Surech Venkatesan
Dr. Suresh Venkatesan is the Chairman and CEO of POET Technologies.
He joined POET from GlobalFoundries, where he served most recently as Senior Vice President, Technology Development.
Prior to that, he led GlobalFoundries’ development and ramp of the 28nm node, was instrumental in the technology transfer and qualification of 14nm, and was responsible for the qualification and ramp up of multiple mainstream value-added technology nodes.
An industry veteran with over 22 years of experience in semiconductor technology development, Dr. Venkatesan has also held various leadership positions with Freescale Semiconductor.
He holds over 25 U.S. patents and has co-authored over 50 technical papers.
He holds a Bachelor of Technology degree in electrical engineering from the Indian Institute of Technology and Master of Science and Ph.D. degrees in electrical engineering from Purdue University.
“What POET does is make these optical transceiver products that enable this light-based communication to occur.
We’re not the first to make optical transceivers. Optical transceivers have been around for a long time, I’d say about 30 years.
But what we’re doing is transforming the way optical transceivers are manufactured.
The world of photonics hasn’t had significant innovations in manufacturing over its period of time, and what POET is trying to do is pioneer a concept that we call the semiconductorization of photonics.
We want photonics manufacturing to look like semiconductor manufacturing, which everybody is familiar with.
What we have developed is this Optical Interposer platform that enables photonics manufacturing to mimic semiconductor manufacturing, thereby bringing economies of scale, lower cost, lower form factor, and more tightly packed components to that world of photonics.
It’s been about five years for us to do the development, but it’s now increasingly clear that these kinds of manufacturing transformations in photonics are going to be essential to meet the needs of the AI segment that is growing like crazy.
The speed demands are intense, and conventional manufacturing techniques don’t come close to meeting this requirement or demand.
POET is one of very few companies that has developed a scalable manufacturing solution to address these growing needs.”
POET Technologies (NASDAQ:POET) is looking to crack the AI market through its top of the line speeds.
“I think the key highlight, from a product availability perspective, is that for the first time we’re now at the leading edge of technology in our company’s progression.
We’ve marched ourselves up from the 100 gigabits per second, and we were one of very few companies in March to demonstrate that our platform was capable of 1.6 terabit per second communication links.
That was a very important development for us that now allows us to get more premium eyes on our product, and we expect to be able to capitalize on that.
I think the big highlight over the past quarter or quarter and a half is driving the collaboration agreements that allow us to get to deploy cutting-edge products in the AI segment, showcasing the capability of our technology to be able to not just meet today’s demands, but to largely meet the demands for the next three to five years.
For our customers, they make an investment in our platform, but it’s an investment that takes them through multiple nodes of technology and multiple nodes of bandwidth increases, if you will, in these AI clusters.
So, that was really the big development for us. It was something that we’ve been wanting and working on for the past couple of years.
We’ve had some delays in our development, but I think we finally broke through, and we were able to showcase that over the past quarter, which was a very important milestone.”
Get the complete roadmap according to the CEO and Chairman of POET Technologies (NASDAQ:POET) in this 2,812 word interview, exclusively in the Wall Street Transcript.
Hans C. Mosesmann, Managing Director, Rosenblatt Securities
Nvidia (NASDAQ:NVDA) and Marvell (NASDAQ:MRVL) are buys and short Intel (NASDAQ:INTC) is the trade of the year according to Hans C. Mosesmann, Managing Director of Rosenblatt Securities Inc.
Prior to joining Rosenblatt Securities, where Mr. Mosesmann is a long-standing analyst, he was an electrical engineer who spent a decade working at the chipmakers Texas Instruments (NASDAQ:TXN) and Advanced Micro Devices before moving to Wall Street in 1996.
Mr. Mosesmann spent a decade at Raymond James & Associates, Inc. (NYSE: RJF) covering the semiconductor industry.
Prior to that, he worked as an equity analyst for several boutiques, including Needham & Company, LLC, Volpe Brown Whelan & Co. and Soundview Securities, as well as Prudential Securities.
Mr. Mosesmann holds a Bachelor of Science in electrical engineering from the University of Florida and an MBA in finance from Loyola University of Maryland.
His current recommended trade is long Nvidia (NASDAQ:NVDA) and Marvell (NASDAQ:MRVL) and short Intel (NASDAQ:INTC)
“Our favorite ideas, and they have been for some time, are Nvidia (NASDAQ:NVDA) and Marvell (NASDAQ:MRVL). We’ve been an extreme bear, if you will, on Intel, very focused on some of the structural problems that they have that the Street is just starting to internalize.”
The long term semiconductor equity analyst is a big Nvidia (NASDAQ:NVDA) bull:
“Nvidia, without a doubt, is at another level, and I think the valuation supports that. You can’t even consider them anymore as a semiconductor company. They’re something else. They’re bigger than that. They’re so powerful that it may be that nobody will ever be able to compete with them.
In order to compete with them, you probably need the entire industry to kind of coalesce and say, OK, we’re going to see if we can stop this. Because going with Nvidia, you really are marrying into a somewhat proprietary kind of platform and structure, and a lot of people don’t like that.
What you might end up seeing is something like we saw over the past 15 years or so with the smartphone market, where you’ve got a proprietary, very powerful and very strong technology roadmap with iPhone, and then you have an Android kind of open platform supported by the rest of the industry.
You have coexistence with those kinds of dynamics that look like they can play out here over time with the Nvidias of the world, as they do battle and collaborate with the Amazons (NASDAQ:AMZN) and Metas (NASDAQ:META) and Googles (NASDAQ:GOOG) of the world.
We’re big fans of how you look at AI — which is very, very early — as it migrates from the cloud, from training of modalities.
Nobody makes money training, you make money producing or going to an inference type of mode, and that’s going to happen more and more at the edge.
Not in the cloud, but between that smartphone or that PC that’s in your office or at home and the cloud.
So everything in between is going to have an AI presence. That includes industrial markets, IoT base stations, and so on.”
Get the complete picture of the AI semiconductor stock boom by reading the entire 2,337 interview, exclusively in the Wall Street Transcript.
PDS Biotechnology is a mid- to late-stage clinical development company working in the area of cancer immunotherapy, with a current focus on HPV-associated cancers.
Dr. Frank Bedu-Addo
Dr. Frank Bedu-Addo has served as president and CEO of PDS Biotechnology (NASDAQ:PDSB) since its inception in 2005. Dr. Bedu-Addo is a veteran biotech executive with experience successfully starting and growing biotechnology organizations.
As Vice President of Drug Development at KBI BioPharma, he oversaw all business and drug development operations. Before KBI, he successfully started and managed Cardinal Health’s East Coast biotechnology drug development operations. Prior, Dr. Bedu-Addo was an Associate Director at Akzo-Nobel, Senior Scientist at Elan (The Liposome Co.), and Principal Scientist at Schering-Plough.
He obtained his M.S. degree in chemical engineering and a Ph.D. in pharmaceutics from the University of Pittsburgh.
Dr. Bedu-Addo says that the cancer therapy they are developing attacks tumors from within.
“One of the ways that cancer thrives in the body is essentially by hiding from the immune system or building defense mechanisms against the immune system. That’s how the cancer continues to thrive and grow in bodies.
What we’re doing is training our immune system and reactivating it to specifically recognize and attack cancer. That’s what we mean by cancer immunotherapy. We have progressed over the last several years.
PDS Biotechnology became a publicly traded company approximately five years ago via a reverse merger with a company called Edge Therapeutics. Since we’ve had that merger and gone public, we’ve gone from having no Phase II human clinical trials to where we are today, where we are running approximately eight Phase II clinical trials, have completed one and are close to completing a second and then moving into the final stages of clinical development.
We have several collaborations. One is with the National Cancer Institute … Others include MD Anderson Cancer Center and the Mayo Clinic. At the National Cancer Institute, we’ve just completed one trial which was looking at all types of HPV-associated cancer.
So, you may know that head and neck cancer, for example, is growing quite significantly. Previously, head and neck cancer incidences were associated primarily with tobacco and alcohol use, and these are now on a steep decline.
However, HPV-associated head and neck cancers are on a steep incline in terms of those incidences increasing dramatically. Cervical cancer is also an HPV-driven cancer, as is anal cancer, vaginal and vulva cancers.”
Thus far, clinical trials have demonstrated encouraging results.
“The National Cancer Institute evaluated our technologies and our products in these cancers together in a clinical trial, demonstrating interesting results in patients who had previously failed initial treatment with chemotherapy and radiation.
Traditionally, those patients will be treated with a checkpoint inhibitor, like Keytruda and Opdivo. With these products, about 50% of these patients will live one year and beyond. At three years, the results drop to a 20% to 25% survival rate.
The trial with our products demonstrated a 75% survival rate at three years. Our proprietary drug combination appears to dramatically promote the survival of these patients.
What was also very interesting is that the NCI took the patients who had also failed traditional approaches with drugs like Keytruda and Opdivo, who traditionally would have about a three to four months survival after failing on all these available therapies.
In those patients, the NCI trial demonstrated that treatment with our triple combination of our IL-12 fused antibody drug conjugate PDS01ADC, Versamune HPV (formerly PDS0101) and an investigational immune checkpoint inhibitor extended survival from about three to four months to about 20 months.
These findings have been very important for PDS Biotechnology to understand how our technologies could potentially help these patients with advanced cancer.
The NCI is also conducting studies in advanced prostate cancer. The initial data from one of those trials was presented at a cytokines conference last year in November, which demonstrated good tolerability of that combination.
They’re combining our IL-12 fused antibody drug conjugate PDS01ADC with chemotherapy, which showed good survival in these patients. That trial is continuing. There’s another trial ongoing in Kaposi sarcoma, which is associated with HIV infection, looking at patients who failed standard therapies and treating them with PDS01ADC.”
Another trial, done in conjunction with MD Anderson Cancer Center, is focused on cervical cancer.
“Today, the standard of care for cervical cancer has been chemoradiotherapy, which has a high rate of recurrence. Even though chemoradiotherapy may work initially in high-risk patients, within six months to a year, patients with large, bulky tumors have a high rate of recurrence.
The team at MD Anderson has found using chemoradiotherapy in combination with Versamune HPV has led to a significantly reduced rate of recurrence to date in their study. At one year, there were no recurrences of the cancer and 100% of the patients responded to treatment.
It was a small population, initially eight patients. And they showed that seven out of the eight had complete elimination of the cancer and no recurrence during that one-year period of evaluation.
We are looking forward to giving updates on these trials as we go through the remainder of the year and in 2025.”
Dr. Bedu-Addo adds that the company’s platform technologies can be applied beyond HPV-associated cancers.
“HPV-associated cancers are really the proof of concept with these technology platforms.
We are now also branching out into the MUC1-related cancers, colon cancer, colorectal, breast, and ovarian cancers. Some ongoing studies at the National Cancer Institute are also looking at prostate cancer and liver cancer.
We are 100% focused today on getting the HPV cancer product to FDA approval, but due to our collaborations, we also have our partners working beyond HPV-associated cancer. So we can quickly bring all those pieces together and expand into a broad range of solid tumors.”
Learn more about the potential benefits of PDS Biotechnology Corp.’s approach to cancer immunotherapy in our exclusive interview.
Andrew Baum, M.D., Citi Research
Citi Research Health Care Analyst Andrew Baum, M.D., maintains a “buy” recommendation on GLP-1 drugmakers Novo Nordisk (NYSE:NVO) and Eli Lilly (NYSE:LLY) despite their lofty valuations.
Dr. Baum is the Global Head of Healthcare Research for Citi Research. Before joining Citi in 2011, he covered European Pharmaceuticals at Morgan Stanley for 14 years. Previous to that he was a U.K. Pharmaceuticals and Biotechnology analyst at Salomon Brothers.
Dr. Baum holds an M.A. degree in Physiological Sciences and an M.D. degree from Oxford University. He is a member of the American Heart Association, American Society of Oncology and the DIA. He is also a Fellow of the Royal Society of Medicine.
He says:
“The momentum remains very much with the two names, which are obesity plays and which have growth rates which have escaped the orbit of the rest of the pharma sector. And so, they are benchmarked more against tech stocks than they are against their pharma peers.
And the investor base reflects that as well. It’s heavily populated by generalists for those names, but less so for the other pharma names, much less so.
So, the two standout names for last year were the two incretin manufacturers, which address the diabetes, but particularly obesity, market, with phenomenal share price appreciation. And that pattern has extended into 2024. And the willingness of investors to continue to envisage ever greater peak sales of these forecasts is unabated.
So this is why you have stocks trading up to 40x times multiples compared to the rest of the sector, because of the expectation of growth and just the sheer size of the obese patient population, which, as you know, is somewhere between one and two, or one in three in the United States.”
Dr. Baum cites the effectiveness and safety record as factors behind the drugs’ rapid adoption.
“Well, these are without doubt the most effective and safest drugs for addressing obesity. And the magnitude of weight loss is 18% plus. And we are just at the beginning of the evolution of these drugs; not to become any more potent, but to be easier to dose, less frequent dosing required.
As well as in the future we may well have an adjunctive therapy which will increase the lean muscle mass at the same time as reducing body fat.
So when you think about the enormity of the public health issues which are attributed to obesity and just the magnitude of how many patients just simply struggle to control their weight — losing weight is one thing, but maintaining the weight once you’ve lost is another.
If you know anyone who’s ever been on a diet, these drugs are a sort of miracle cure. And this has been the case for the best part of 18 months. Media platforms are full of stories of individuals who have gone through miraculous weight loss.
What is as important, if not more important, is that these drugs have a history of being used extensively in diabetics, particularly the Novo Nordisk (NYSE:NVO) drug, for the last 13 years. So, unusually, we have a very long and very large database to provide reassurance on safety.
And given some of the historic obesity drugs of many years ago, where there was a combination of amphetamines called the Fen-Phen diet, very, very effective drugs, but they caused cardiac toxicities. Here, we don’t have this concern because it’s been in millions of patients over a prolonged period. So that’s the first thing that’s different about these drugs.
The second thing, which is as important, is that as well as causing very significant weight reduction and weight maintenance, there has been a stream of positive outcome data for these drugs showing there’s a 20% reduction in the risk of having a heart attack if you’ve already had an event previously, a reduction in the rate of chronic kidney disease. We’re also anticipating similar reductions in diseases such as sleep apnea.
So not only you are getting the cosmetic benefit of patients achieving a goal they’ve sometimes striven for years, but you’re getting very, very significant health benefits.”
Dr. Baum notes that the market has already priced in the potentially wide-ranging impacts of the drug class.
“And the question is, how big is that market ultimately going to be? And today, probably these stocks are pricing in $160 billion in peak sales for diabetes and obesity combined, with the bulk of that being obesity. But it could be double that or more. And the question is, why is that not going to happen? And this really is going to determine the future share price trajectory.
But obviously, when you’re trading on that type of multiple and when the stocks are already discounting a forecast for peak sales which is a multiple of anything in history, obviously you have to be very thoughtful about potential risk to those revenues.
So the two incumbents and market leaders are Novo and Eli Lilly (NYSE:LLY). And if you look at the share price, that’s all you need to know in terms of how effectively the market’s priced it in. And both of them are actively developing the next generation of weight loss and weight maintenance drugs, and in some cases muscle-building drugs in order to continue the lead they have, compared to the competition.
Of course, when you have a market of that size, everyone wants in. And so, there is no shortage of competitors to those companies that currently do not yet have an approved agents, but who are pushing drugs as fast as they can through the clinic, either because they potentially can be dosed less often — so that would be a drug like Amgen (NASDAQ:AMGN); they have a drug that can be dosed once a month, maybe once every two months, maybe less frequently than that, as opposed to once every week. So that’s their play.
And then you have other companies who are developing therapies on the basis of more effective, so greater, faster weight loss. And then you have other companies who are prosecuting the muscle build.
But there are other dimensions to go down, because there’s a whole pack of competition from both pharma and biotech to try and get a slice of this very substantial market opportunity.
We have ‘buys’ on both Lilly and Novo. The valuation makes you somewhat hesitant, but because we’re sort of at the beginning of a cycle, we think there’s risk in stepping away too early. So both those two names with the obesity drugs are very much on our “buy” list. But they’re not at the top.”
Outside of the weight loss arena, Dr. Baum continues to like Merck.
“The name that we added to our most preferred major at the beginning of 2024 is Merck (NYSE:MRK), which is a name that we liked last year. They had a stream of earnings beats on the quarters, they’ve done some great business development, but yet the stock underperformed; it was fairly unremarkable.
And I think a key reason for that is Lilly and Novo have been sucking in all the capital that was going into pharma names, meaning that great stories like Merck just weren’t getting the share price that they truly warranted, given the data and the financials they were delivering.
So, since that time, Merck has received attention from investors and has had a very nice period of share price appreciation. And I think it’s set to continue. It’s not a play on the incretins, the drugs that address obesity and diabetes. Instead, it’s a call on their ability to manage their way through what is going to be the single biggest patent expiration of a single pharmaceutical product, which is Keytruda.
And the market’s been fearful that this drug, which will have peak sales of $35 billion or so, will prove very difficult for Merck to sustain revenues. And then to even accelerate out of that, because of the enormity and the profitability of that drug.
But Merck has been very creative and dynamic in their business development and portfolio management. That makes us confident at least they’re going to be able to manage their way through.”
Read more of Dr. Baum’s views on the large cap pharma sector, exclusively in The Wall Street Transcript.
Conor Flynn, CEO, Kimco Realty Corporation
The Wall Street Transcript interviewed Kimco Realty Corporation (NYSE:KIM) CEO Conor Flynn last month for its annual Real Estate and REIT report.
In the same report, Kimco was selected as a top pick in the real estate sector by both Mizuho analyst Haendel Emmanuel St. Juste and Compass Point analyst Floris van Dijkum.
Mr. Flynn was named Chief Executive Officer of Kimco Realty Corporation and appointed to the company’s board of directors in January 2016. He joined Kimco in 2003 as an asset manager and has held a variety of senior leadership roles within the company, including that of President, Chief Operating Officer, Chief Investment Officer and President, Western Region.
Mr. Flynn holds a bachelor of arts degree in economics from Yale University and a master’s degree in Real Estate Development from Columbia University.
He began the interview with an introduction to the company.
“Kimco’s strategy is formulated around our focus on grocery-anchored and mixed-use assets. Our primary portfolio is focused on the first-ring suburbs of major metropolitan markets, where we provide essential goods and services through our grocery-anchored assets.
Typically our asset is anchored by the dominant grocer, whether it be a traditional like an Albertsons or a Kroger or a Stop and Shop or an Ahold Delhaize, or a specialty grocer like a Whole Foods, Trader Joe’s, or a strong regional player like a Publix or an H-E-B, depending on where you are in the country.
We try to focus on driving everyday goods and services, and then having a merchandising mix that also drives traffic at different points of the day. So, think about your coffee and your bagel shop in the morning, think about your quick service restaurants or fast food for lunch, as well as the grocery store, obviously, driving multiple trips a week.
And then we also mix in what some people refer to as ‘treasure hunter’ concepts like T.J. Maxx, Marshall’s, HomeGoods, HomeSense, Sierra Trading Post, Burlington, Ross. Those are called treasure hunters because the merchandise moves fast and it’s discounted and you’ll see one item and it won’t be there the next time.
So we have a mix of goods and services that keep people coming back time and time again, and it’s not aspirational spending, it’s local. That’s something that we focus on, that we deliver essential goods and services where people are fulfilling their needs, not their wants, and that is something that I think has stood the test of time, whether in good markets or bad markets.”
Mr. Flynn went on to discuss the strategy behind the company’s recent focus on building apartments.
“Our real estate is typically anchored by a grocery store with a big field of parking, and that’s where we’ve used our platform to unlock the highest and best use of our real estate. A lot of that parking area has become upside in terms of value creation for us, because we look at what we can do in the future with that land.
And really, that’s where we’ve started to entitle apartments and multifamily units across the portfolio, where we see a lot of density surrounding our asset. So many times we refer to what we own as the hole in the donut — everything has gone vertical around us, and we’re sitting with a single-story building with a big field of parking. That’s what allows us to look at the future and say, wow, there’s a lot of unlocked potential in our portfolio.
We’ve set a goal to get to 12,000 apartment units, either built or entitled, by 2025. We just crested 10,000, so we’re well on our way, and continuing to look at how to unlock the value that’s in a lot of these wonderful assets we own.”
He notes that the competitive landscape favors retail landlords right now.
“From the fundamental side of it, I would say our supply and demand balance is very strong right now for our sector. Commercial real estate as a whole is going through a pretty seismic cycle versus other sectors.
But for retail, you’re seeing it hit historic lows in terms of vacancy rates and new development supply. And because of very limited new supply, the pricing power that we have on the retail side is a testament, I think, to where retail has come from and where it’s evolved to.
Whether it’s the onset of e-commerce and what that was going to do to brick-and-mortar retail, or the pandemic and having government shutdowns. Through all of that, you’ve come to a point now where vacancies are at all-time lows, you’ve got pricing power on the landlord side, virtually no new development — so supply and demand is very strongly in favor of high-quality real estate owners.
We’re seeing that in our operational metrics, as our occupancy is hitting all-time highs and our leasing spreads on backfilling Bed Bath & Beyond boxes were north of 40% rent spreads versus what they were paying previously. You’re seeing a lot of green shoots of continuing power in terms of the retail landscape.
That being said, it is very challenging to find buying opportunities in this market because there’s a bit of a bid/ask spread between buyer and seller. What we’ve found is we’ve been successful over the past few years doing larger public portfolios, because, in essence, we’re able to buy at a discount due to a limited buyer pool.
That allows us to use our stock as currency by applying an exchange ratio. That allows us to price better than what we can find in the open market.”
Mr. Flynn points to Kimco’s SNO pipeline as an indicator of cash growth going forward.
“When you look at what is on the horizon for us going into next year, we have a significant number of leases that have been executed but haven’t yet commenced paying rent as the spaces are being built out. We refer to this as our ‘signed but not open,’ or SNO pipeline. That is a visible indicator of future cash flow growth.
That’s what gets us really excited, because the signed but not open pipeline is significant for Kimco, totaling $57 million at year end, and again, it gives us a view into the near future.
Cash flows are growing. The portfolio is in really strong shape right now from an occupancy standpoint, but the cash flows and the free cash flow after paying dividends is growing.
That’s what gives us the ability to raise our dividend like we just did in the fourth quarter, and gives us confidence going into what could maybe be a soft economic landing. It wasn’t long ago people were anticipating a recession, right? There is still very much a chance that could happen this year.
But when you look at our portfolio, and you look at the balance sheet where we finished at the end of 2023 with the lowest leverage the company’s had, the most liquidity the company’s had, and with the occupancy where it is and going in the future, our signed but not open pipeline really is showcasing the amount of cash flow that’s going to be coming online — it gets us super excited that we have the ingredients for growth for investors to be really interested in the Kimco story.”
Read the complete interview with Kimco Realty Corporation (NYSE:KIM) CEO Conor Flynn exclusively in The Wall Street Transcript.
Floris van Dijkum, Managing Director and Senior Research Analyst, Compass Point Research & Trading
In a recent interview with The Wall Street Transcript, Compass Point Research & Trading Analyst Floris van Dijkum offered recommendations across REIT subsectors, with the exception of office.
Mr. van Dijkum is a Managing Director and Senior Research Analyst at Compass Point. He joined Compass Point in June 2019, bringing 30+ years of real estate investment, research and banking experience.
Prior to joining Compass Point, he started the REIT research effort at Boenning & Scattergood. Before that, he started the global REIT investment platform at BlackRock, where he served as COO and was responsible for a quarter of the U.S. portfolio.
Mr. van Dijkum began the interview with a discussion of valuations in the REIT sector today.
“Based on consensus estimates, the overall REIT sector trades at a 1.9% discount to NAV, and based on earnings, REITs trade at 17.5 times 2024 FFO. That FFO multiple has increased marginally over the past month as investors have gotten more comfortable on the U.S. economic outlook. REITs on average deliver a 4% dividend yield.
However, not all sectors are valued equally. The property sectors that I cover are currently valued well below the overall REIT sector average. In particular, the retail sectors of malls and shopping centers trade at 28% and 24% discounted multiples, while hotels trade at a 45% lower multiple, despite the fundamentals for these sectors being probably the best they’ve been in nearly a decade.”
He was negative, however, on the fundamentals in the office sector.
“Office will be a challenged sector for the medium term, in our opinion. We currently have no ‘buy’ recommendations in the office space.
In the office sector, post-COVID, the work-from-home concept has really impacted office demand. McKinsey has published a study that expects 18% to 25% lower office usage as more work is done from home. Office usage, according to Kastle Systems, which tracks swipes at buildings, is 50% of what it was pre-COVID. Some markets are getting back to 60% to 70%, but in most national office markets, on average, office usage is still significantly down.
As companies realize they need less office space, they’re going to lease less space. If you look at the U.S. office market, the availability of office space in the country is around 20% — and we think this availability rate is going to go higher.
A lot of companies are currently leasing space they don’t use, so when those leases expire, they’re going to take approximately 20% less space. We think 20% is a good benchmark for what the space reduction needs are going to be going forward for companies.”
In contrast, Mr. van Dijkum was bullish on the mall sector.
“I remain completely out of consensus, and I have been for a couple of years, in that I am a bull on the mall sector. Malls are the best performing REIT segment over the last three years. They outperformed the REIT Index every single year, and have the best total return over the last three years.
Our mall owners still continue to screen incredibly attractively, because they’re undervalued, and part of that is because the national media has been slow to recognize that the A mall business, we think, is one of the best real estate sectors around.
There continues to be negative supply growth, and coming out of COVID, the retailers realized they actually need to operate in store. As retailers seek space where they achieve some of their highest sales productivity, they have leased space and are continuing to lease space in the mall.
The demand for space in the malls — and it’s not just the A-rated malls, it’s also the B-rated malls, but the A malls are seeing a disproportionate amount of demand — means that landlords have pricing power. Occupancy rates continue to trend higher, and we think they can go back to prior peak levels and beyond.
However, we are not there yet. Moreover, rent spreads are double-digit and will probably continue to trend higher going forward, as well.
Couple that with the fact that the mall business has 3% annual fixed rent bumps in all of the lease contracts, it means you’re going to see some very strong NOI growth over the next two to three years, well beyond the 3% cruising speed.
We think malls, A-rated malls in particular, are going to grow by 4% to 5% a year for the next couple of years. And actually, we see no signs of that ending, because there’s less mall space in the country every year.
The luxury brands are expanding outside of their coastal major market focus to throughout the U.S. Luxury brands tend to only operate in two locations, street retail in urban settings and the A malls, and so the A malls are huge beneficiaries.
We’ve written that 5% of Simon’s (NYSE:SPG) shop space in its mall portfolio is taken up by luxury, and that’s going to grow to up to 10%. And it exceeds 20% in 25 of Simon’s best malls.
Luxury tenant sales productivity is multiples of other retailer sales. The average A mall sales are about $700 a foot in our mall database; an A mall is any mall that has tenant sales over $500 a square foot. Open air shopping center sales are, we estimate, around $250 per square foot. So, the average mall sales are nearly three times the average open air sales.
So, from a retailer’s perspective, your sales tend to be much better operating in an A mall than in a typical open air center. And then look at luxury — luxury average sales are north of $1,500, oftentimes north of $2,000 a square foot.
What does that mean for mall landlords? That means that with an occupancy cost of 10% to 12%, mall owners can charge triple-digit rents. Simon’s average rents are $55 a square foot, but luxury is going to pay $150 to $200 per square foot in the mall, so a landlord essentially triples the typical rent.
Of course, only a select number of malls in the U.S. are suitable for these tenants, with Simon owning 40 and Macerich (NYSE:MAC) owning 12, based on our estimates.
We published an analysis on what the impact is should luxury do just 25% of its potential expansion in Simon’s and Macerich’s portfolios, and the numbers are significant. We have estimated that Simon’s total NOI — over $5.5 billion per year — could increase by 9%, and Macerich’s NOI could increase by 14%. Macerich is a smaller portfolio, so it’s more impactful for Macerich than it is for Simon.
These are massive numbers that are not being reflected in the current valuations. The mall sector trades at 12.4 times 2024 FFO, and 11.9 times based on 2025 FFO, and the REIT sector trades at 17.5 times.
The underlying earnings growth in the mall sector is massive, even though the headline earnings growth this year is going to be low because of refinancing of maturing debt. And, by the way, higher interest costs is an issue that the whole REIT sector is dealing with. The average REIT growth in terms of FFO per share is 2.5%. We believe the mall valuation discrepancy screens very attractive.”
You can learn about Mr. van Dijkum’s other top real estate picks by reading the entire 4,303 word interview in The Wall Street Transcript.
