John Kartsonas serves as ETF Managers Group, LLC’s Dry Bulk Shipping Expert and Partner in the BDRY ETF, the first and only freight futures exchange-traded product exclusively focusing on dry bulk shipping.
From 2011 to 2017, Mr. Kartsonas was a senior portfolio manager at Carlyle Commodity Management, a commodity-focused investment firm based in New York and part of the Carlyle Group.
He was responsible for the firm’s shipping and freight investments. During his tenure, he managed one of the largest freight futures funds globally.
In this 3,542 word interview, exclusively in the Wall Street Transcript, Mr. Kartsounas explains his investment vehicle.
“As an ETF, the ticker symbol is BDRY, and investors can buy and sell like any other stock. It’s listed on the New York Stock Exchange and is one of 3,000-plus ETFs that are available to investors…
BDRY is the first and only of its kind globally. There is no other shipping ETF available today. It is the only way for an investor to invest directly into the shipping market.
BDRY provides investor opportunity to invest directly into shipping rates, something that has never happened before. It’s very similar to other commodity ETFs like oil and gold ETFs.
BDRY owns exposure to shipping rates directly. These are freight rates. The shipping rate is the price that miners and commodity producers pay to transport their goods around the world.
For example, if you are a miner and you mine coal, you have to transport it from, let’s say, the United States to China, so you have to hire a ship and pay the ship owner to transport that good from point A to point B.
That cost is called the shipping rate. These rates define the global shipping market.
Everything that has to do with shipping has to do with the shipping rate.”
Mr. Kartsonas has more detail on the investment thesis:
“For example, when you talk about construction and infrastructure spending in China, it is all about steel. China has to produce steel to build bridges, roads, new residential, commercial buildings and so on.
In order to manufacture steel, you need the raw material, which is iron ore. China imports, basically, most of its iron ore from Australia and Brazil.
So for China to continue to grow, it needs to keep importing raw materials, and that means more demand for shipping.
That is basically at the heart of the shipping investment thesis. It is all about global growth, mainly in Asia, reflecting demand for raw materials.
Dry bulk shipping is a market very focused to the Asian economy.
It is uncorrelated to most of the day-to-day headlines that you see in the U.S. markets. It is not really affected by the day-to-day macro narrative, whether that is interest rates, economic data points or policy changes.
It is a very idiosyncratic market because shipping rates move up and down based on real supply and demand for ships and goods to transport.”
To get the complete picture on this interesting new investment vehicle, read the entire 3,542 word interview with Mr. Kartsounas, exclusively in the Wall Street Transcript.
Nicholas J. Westrick, CFA, is Vice President and Senior Portfolio Manager at Stewart Capital Advisors, LLC. He is the lead analyst for consumer discretionary and technology and often works closely on evaluations of telecommunications companies. Previously, he was a credit analyst for S&T Bank.
In this 2,787 word interview, exclusively in the Wall Street Transcript, Mr. Westrick expounds on his investment philosophy and top picks.
“We consider ourselves what we call business perspective investors. What that means is, we don’t view a company as the ticker in your portfolio. We take the perspective of being owners of that business.
We look for businesses we can understand and that have the potential to have high returns on capital, free cash flow generation and the ability to grow that cash going forward.
We want companies that can benefit from long-term trends — with innovation and brand power — to kind of exploit those trends.
We are also interested in how management has handled operations, capital allocation and the balance sheet in the past, and make a reasonable guess of what we can expect going forward.
And then, I think the easy part of all that is we use a discounted cash flow model to bring those projections back and give us an intrinsic value of each company we’re looking at.”
One beaten up stock pick highlights this investment philosophy:
“In the infotech area, one that we hold in our portfolios that’s really been beat up lately — that I think benefits from data collection, especially — is something like Western Digital (NASDAQ:WDC).
They’re simple to understand. They got a lot of catalysts in the market. They have a joint venture with Kioxia.
Their balance sheet became a little dicey after the SanDisk acquisition, but management has traditionally had great capital allocation, operational management, and they’ve been a producer of cash flow.
And we would expect that to continue given the new management that just took over the executive suite there. They’ve shown that they’re willing to clean that balance sheet up.
But really, they’ve kind of priced with the semiconductor space and the pricing within that on the SSD — solid-state drive — side.
And we feel that maybe they’ve looked at that individual unit as the whole company, and really, relatively speaking, if you break the two units out, we think each one of them holds more value than they’re getting credit for in the enterprise value right now.
So I think if Kioxia ever does happen to finally go public, then you could start to see maybe that valuation increase.
Management has decided to separate the HDD — hard disk drive — and SSD units within the company, maybe just to sort of force the market to recognize that there’s value within each one of those units and possibly set it up for the possible catalyst of a flash spinout.”
The portfolio manager also sees value in some retail stocks:
“I think Kohl’s (NYSE:KSS) is one of them. And then, Walmart (NYSE:WMT) is always willing to go anywhere they can make some money, and I think that’ll continue.
But it’s going to be really tough in areas with declining populations for a lot of retail chains to survive, especially with the advent of online shopping.”
Get the complete picture by reading the entire 2,787 word interview, exclusively in the Wall Street Transcript.
Gregory Powell was named Chief Investment Officer at Miller/Howard Investments in 2020. He oversees the portfolio management team and is the designated lead or co-lead Portfolio Manager on the firm’s core strategies. In addition, he holds a position on Miller/Howard’s executive committee.
Mr. Powell joined Miller/Howard in 2017 as a portfolio manager and Deputy Chief Investment Officer. He was promoted to CIO in 2020, after the retirement of Founder Lowell Miller. Earlier, he was a portfolio manager and director of research at AllianceBernstein.
He received a bachelor’s degree in economics/mathematics from the University of California Santa Barbara, and a Ph.D. and M.A. in economics from Northwestern University.
In this 3,338 word interview, exclusively in the Wall Street Transcript, Dr. Powell illustrates the dividend investing portfolio management technique that he utilizes for his investors.
“…We take the stocks that pay dividends, setting aside the roughly two-thirds of stocks that don’t pay dividends. And then, we decile those, with the highest decile being the ones with the highest dividend and so on down the line. Our sweet spot is deciles seven to nine.
So decile 10, those are the highest dividend yields. Those typically are riskier. We generally don’t start looking there.
At times, we will invest in that space.
But in general, we’re looking for yields that are below that. So currently, just to put a number on it, in the current market, deciles seven to nine goes roughly from 2.8% yield to about 6% yield.
Now, in recent years, dividend stocks have underperformed the overall market.”
Dr. Powell explains many of his current portfolio picks:
“I think Citigroup (NYSE:C) is just extremely interesting. It’s selling for a large discount to tangible book.
And if we were talking about an industrial company, that would be kind of almost a confusing statement because what on Earth is their book? But a book for banks, tangible book is very simple.
It’s the loans plus the securities on your balance sheet, plus some other items, but those are the dominant assets. And then, you subtract off your deposits, debt and any reserves you have for credit. And there’s your tangible book.
And so for Citi to be selling at less than that is really remarkable. And it’s a testament to their underwhelming performance over the last decade, but I think it’s a very interesting moment in time because they have improved.
And now they’re getting a new CEO. There are lots of opinions about what she should do. But she has a background from McKinsey.”
Another interesting pick is in the auto parts business:
“I think Magna (NYSE:MGA) is very interesting. Magna is an auto parts company. It really has a very broad range of products it produces from structures to seating systems to powertrain.
They also assemble vehicles for OEMs — original equipment manufacturers. So for example, they assemble low-volume vehicles for BMW (ETR:BMW), Mercedes, Jaguar, Toyota (NYSE:TM). But what makes them interesting, though, is they’re not an OEM.
And so in the auto industry right now, you have these new companies coming along, and we don’t know about a lot of them.
But companies, such as Apple (NASDAQ:AAPL), are looking at building electric cars, and they’ve got all this secretive work going on.
You have some like Fisker (NYSE:FSR) that’s about to launch an SUV, so you have the very new companies that don’t have a lot of experience in the industry but have technology usually in their tech company, typically involving electric powertrain and autonomous driving.
And so the reason I think Magna is so interesting is their base business is actually very good, selling to companies like General Motors (NYSE:GM) and Ford (NYSE:F), and generates good free cash flow.
They’re just fine now, but they’re actually positioned really well for what’s coming because they are the ideal partner for these new companies that are coming along.
And so just recently, Fisker, which is a company out of Southern California that’s developed an electric SUV, they chose Magna exactly for this reason. Magna is going to assemble their vehicle.
But Fisker is also going to use the deep engineering capabilities that Magna offers. It’s just a very interesting name that kind of works as a value stock and could potentially transition into a growth stock.
And all of the stocks I mentioned pay a good dividend.”
To get more portfolio picks read the entire 3,338 word interview with Dr. Powell, exclusively in the Wall Street Transcript.
Richard L. Soloway is Founder, President and CEO of NAPCO Security Technologies, Inc. He is an international expert and counselor in security issues and trends. He is a board member emeritus of the Security Industry Association — SIA. He received Ernst & Young’s “Entrepreneur of the Year” award in 2001. He has over five decades of security industry experience.
In this 2,924 word interview, exclusively in the Wall Street Transcript, Mr. Soloway details the strategic vision he has crafted for NAPCO and how this will translate to significant returns for his investors.
The company has positioned itself for near term growth:
“This is a very exciting time in our history because two major paradigm growth drivers have emerged that we have captured.
These are, one, recurring service revenue generated by our latest product lines. The recurring service revenues now have an annual run rate of $27.5 million with 80% gross margins. Our year-over-year quarters are growing at roughly 35% to 40%.
Two, the urgent need for school security upgrades across the U.S., many K-12, colleges and universities, most of which have no systems in place to keep active shooters and trespassers out of the schools and colleges. This is a large market opportunity of $4.9 billion in the security alarm market and $1.2 billion in the educational market.
The paradigm shift away from legacy copper and 3G telephone infrastructure is huge and is happening now. Our unique StarLink radios and alarm systems for fire and burglary are creating this steady stream of RMR growth.
NAPCO is financially strong, has zero debt, a strong cash position and industry-leading margins. ”
This positioning has significant implications for new investors:
“…We went from a manufacturer solely of security equipment that hooked on to copper phone lines for communication and sold to dealers to now a manufacturer of cellular radio security equipment, which cellularly sends the signals to the dealers’ central stations through our cloud, which is called a network operating center — NOC. That’s how the alarm communication now happens.
And you have 100 million residential buildings that are now going to have to be converted from copper wiring to cellular service.
You have 5 million commercial buildings that have to also be converted to cellular, both in the burglary and the fire sectors of commercial security.
And it’s a tremendous opportunity that should be wonderful for NAPCO for the next 10 years as these conversions are happening from copper wire to cellular.
And we have a leading line of cellular radios for the conversion and a leading line of control panels for new work using cellular that’s built into it.”
This will lead into an exciting growth phase:
“Our fiscal year ends on June 30. Our run rate target for services revenue for on or about our fourth quarter 2021 is $40 million.
Five years thereafter, we are targeting annual sales to be $300 million, of which $150 million would be the run rate of recurring revenue and $150 million of sales of component equipment.
Therefore, recurring monthly services will constitute 50% of our revenue…when we do the $300 million, we are targeting to be 50% gross margin on the manufacturing and 80% gross margin on the recurring revenue.
And that makes for a very, very handsome profit for the company.”
David Ashley, CFA, is Portfolio Manager and Managing Director of Thornburg Investment Management. He joined Thornburg as associate portfolio manager in 2011 and was named portfolio manager in 2019. Mr. Ashley earned a B.S. in finance and MBA from the University of Delaware in 2001.
Eve Lando is Portfolio Manager and Managing Director of Thornburg Investment Management. Ms. Lando joined Thornburg’s municipal team in 2019 as associate portfolio manager and was named portfolio manager in 2020.
Ms. Lando holds a B.A. in urban studies from Columbia University and a J.D. from Brooklyn Law School, with a concentration in business law studies. She has extensive experience in municipal bond research and analysis, with particular focus on deal structures and legal covenants.
These two portfolio managers are excited about their prospects for returns in the market and reveal several top picks in this 4,272 word interview, exclusive to the Wall Street Transcript.
“In terms of how we are approaching the market, we are positioning the portfolio. March was a pretty exciting period. We did a lot of interesting things in the portfolios.
We were one of the sole bidders during that week to week and a half in March, when there was no liquidity.
We were able to add some decent securities to the portfolios, so some Illinois general obligation bonds, which we weren’t heavy buyers of because of credit and valuation concerns, but during that period, we added around $30 million to Limited Term itself at 6% yields and $0.92 on the dollar.
Right now, those are valued at $1.12 to $1.13 for price. The valuation is under 3% now. We did that with Illinois, and we did it with a lot of high-grade credits, with nothing too long there, unfortunately, because everybody was selling the shorter higher-grade paper. We worked more on the one- to eight-year range.”
The COVID 19 pandemic has added many risk points:
“On the desk, as early as the start of the year, we started credit discussions on immediate or future impact of the epidemic on municipal credit.
In the beginning, we were talking about restrictions on air travel to Asia, as in declines in shipments, so we want to talk about U.S. sport sectors. We started projecting the impact of lower oil and gas prices on states that are oil-producing.
Realize there was a heavy toll on hospitals, with the surge of numbers of cases. Things were moving to emergency care that historically has a lower reimbursement cost. As more states and local governments went into complete lockdown, and more COVID-19 cases were reported here, we proceeded in expanding.
We started with what we call a worry list. Airports were on the list, and ports, hospitals and long-term care facilities.
Those were the most immediate group of credits that had immediately rising expenses and/or drastic drops in revenues.
Then, we added everything connected with the tourism industry, so we are talking about hotels, concert halls, museums and anything with direct links to the occupancy tax or ticket sales or appropriations for nonessential projects. Those made our worry list as well.
It is true that munis historically have very low default rates, but our market is also fragmented, so we have nearly 80,000 issuers operating through 50 different states, meaning that they are issuing debt using 50 different legal frameworks and regulations. In this situation, we are consumed with understanding the resiliency of revenue streams.”
The portfolio managers familiarity with their municipal bond issues is impressive:
“For MTA — Metropolitan Transportation Authority — we have pared back that position across portfolios but not completely.
We also did some swaps during the March period to reset book yields. But in terms of the Strategic Municipal fund, we had $5 million roll off on September 1 of this year. That weighting is going to go down organically, so we have not addressed that one since it is organically going to roll off.
Connecticut is also one of our larger positions in that fund, so two for the state of Connecticut and one University of Connecticut, which is wrapped by an assured guarantee, so no issues there with the credit per se, especially based off the book yields. We are comfortable holding a slight overweight to those positions.
Kentucky is a prepaid gas bond. Those are backed by corporate credits with Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), etc.
Those performed really well. When we first bought them back in 2018 and then 2019, we continue to rally so we are able to book those at really good yields. They sold off really hard during the March period.
During that period, we pared back some of prepaid gas just because of the downside performance that we didn’t like. Today, though, they rallied way back and are even tighter than they were before.”
Get the complete picture on municipal securities risks and opportunities by reading the entire 4,272 word interview with these two portfolio managers, exclusive to the Wall Street Transcript.
Jacques R. Elmaleh, CFA, is a Senior Portfolio Manager, the Director of Research and a Principal at The Colony Group. He brings over 20 years of experience working with clients as a portfolio manager and director of research specializing in growth, dividend income and international equity strategies.
Brian Presti, CFA, is a Senior Portfolio Manager and the Director of Portfolio Strategy at The Colony Group. As the Director of Portfolio Strategy at The Colony Group, Mr. Presti assesses macroeconomic, financial market data and trends to determine appropriate investment opportunities and asset allocation.
In this 2,162 word interview, exclusively in the Wall Street Transcript, these two veteran professional investors look ahead to 2021 with some interesting observations on the market and top picks in their portfolio:
“We have always had three primary objectives that we want to help our clients achieve with sustainable investing: to have a positive societal/environmental impact, earn a competitive financial return while reducing risk and enable our clients to align their investments with their values.
Regarding this last objective, specifically, we strive to enable clients to target or impact specific issues that they feel the most passionate about.”
This investment philosophy has broad implications:
“From a portfolio design and implementation standpoint, our sustainable investments fall into two main categories. The first category is what we call “core sustainable funds.” These are broadly diversified funds that provide diversification both across and within different asset classes.
We have identified what we believe are appropriate investments in a wide range of asset classes, including domestic equities of all market capitalizations, international equities, both developed and emerging markets, as well as taxable and tax-exempt fixed income.
However, realizing that clients have specific passions or issues that they may want to tilt or impact within their portfolios, we also integrate thematic funds.
Thematic funds tend to be more targeted, concentrated funds that are investing in companies impacting a particular issue, whether that be the environment or women’s issues or water, just to name a few.
Integrating thematic funds allows us to customize each portfolio to align specifically with each client’s unique set of priorities and sustainable objectives.”
This leads to specific stock picks. One example:
“We will talk about the United Nations’ Sustainable Development Goals — SDGs — in more detail later, but an example of a company addressing an SDG is Brookfield Renewable Power (TSE:BRF-A). It addresses U.N. SDG number seven, which is affordable and clean energy.
Brookfield Renewable Power is a Canadian company whose goal is the decarbonization of the global electricity grid. They generate 57 terawatts annually through renewable sources exclusively, which avoids 27 million tons of CO2 emissions every year. This equals to the displacement of all the CO2 emissions generated by the city of London.”
Another example of sustainable investment picks:
“The United Nations has 17 Sustainable Development Goals that they have established as goals to make things better. These include no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable energy and clean energy, decent work and economic growth, industrial innovation and infrastructure, reduce inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace, justice, and strong institutions and partnerships for the goals.
Nomad Foods (NYSE:NOMD) is an example of a company working on SDG number 12, which is responsible consumption and production. Additionally, they also contribute to SDGs life below water and life on land as well.
There are many companies, like Nomad, that address more than one sustainable development goal. Part of our research in synthesizing an investment thesis includes determining which goals are being addressed.”
Get the complete information on these and other stock picks from Jacques Elmaleh and Brian Presti by reading the entire 2,162 word interview, exclusively in the Wall Street Transcript.
Mason D. King, CFA, is a Principal of Luther King Capital Management. He joined the firm in 2004 and serves as a Portfolio Manager and Equity Analyst.
Prior to joining LKCM, Mr. King was an equity analyst at Hester Capital Management and a private equity investment analyst at Pacesetter Capital Group and Crates Thompson Capital. Mr. King graduated with a Bachelor of Arts in English literature from Princeton University and a Master of Business Administration from the University of Texas at Austin and also completed the TCU Ranch Management Program.
In this 3,788 word interview, exclusively with the Wall Street Transcript, Mr. King details his current top picks.
“The investment philosophy has been very consistent throughout the many decades of our existence, and really, it comes from fundamental bottom-up research into each company and industry.
Our analysts look for competitively advantaged companies with strong managements, with better-than-industry and better-than-broader-market growth prospects, with investment capital returns that also exceed not only our cost of capital but also their peers.
With strong managements, they can allocate the internal shareholders’ capital generated through earnings back into growth at these attractive rates of return.
It’s a pretty basic approach from that standpoint — invest in the company and invest in the management. Then, let them compound the capital with lowest frictional costs incurred with taxes by effective capital allocation and compounding in attractive marketplaces.”
One example of the global research by Luther King Capital Management:
“One that’s pretty interesting, and we’ve been invested in for a little over a year now, is Fluidra (BME:FDR). It’s a Spanish company.
It is a small-cap name and is the smallest name in our portfolio but is one that we’ve been particularly excited about. It has been well-positioned from a growth-in-a-cycle standpoint in this environment, and that’s because they are one of the largest providers of pool equipment and chemicals into the global market.
The company went through a merger with Zodiac in 2018. It was a Spanish company, and Zodiac was a U.S. company.
This created a global leader in pool supplies. Some of the brands they have are Jandy and Polaris. And this puts them in a great position to capitalize on what we’re seeing in the pool industry today.”
Another example illustrates the value based, bottom up research of Mason King:
“Another one is CSL (ASX:CSL), and it is a blood plasma and fractionation company that is based in Australia. This is a little bit different in that it is actually an oligopoly.
During a rationalization of the industry that occurred about 20 years ago, many of the blood collection and even fractionation companies failed. Correspondingly, there was a global consolidation within the industry to three remaining companies that control nearly 100% of the capacity.
With that discipline came better visibility and consistency in returns.
They manage their supply through both company-owned donation sites as well as sourcing blood plasma from external sites in order to have some diversification in their sourcing.
They bring that blood in and basically fractionate the blood, separating out all the proteins and effectively marketing those proteins to health care needs throughout the world. Albumin is a big product that comes out of that; that market continues to grow. CSL is dominant in that refined product.
There are many treatments and vaccines that are dependent upon these blood proteins. As long as we continue to suffer certain ailments and as long as we continue to treat them with existing blood proteins, then they’ll continue to have a market.
CSL has been a consistent grower through the years. They also have a lot of revenues within the United States as well as tapping into a growing Chinese market.
There are no domestic Chinese competitors at this point in time, principally due to the health standards and safety standards of CSL and the other two competitors, which are significantly higher than what exists in China today. Not to say that they can’t get there, but there’s higher confidence in the existing participants right now.”
Get all the details on this pick and many others by reading the entire 3,788 word interview with Mason King, exclusively in the Wall Street Transcript.
Brian Boyle, President and Portfolio Manager of Boyle Capital, has been in the investment industry since 2000.
Prior to founding Boyle Capital in 2004, he was a portfolio manager for DCM. He has managed a broad number of mandates, including high net worth individuals, institutional pension plans, private funds and a public mutual fund.
Over the past decade, Mr. Boyle has generated attractive returns by employing a deep-value concentrated approach to investment selection. He holds a B.S. in finance and economics from the University of Northern Iowa, where he graduated summa cum laude.
In this 3,945 word interview, exclusively in the Wall Street Transcript, Mr. Boyle discusses his investment philosophy and current top picks.
“Our general investment philosophy is based on value principles, and that is a word that is very subjective because value means different things to different people.
Ultimately, we’re looking to get an investment at a discount to what we believe the value of it is. We do not come into it with some preconceived notion of what a business should be trading for but rather look at the investment opportunity in the context of what is available today, and to the extent that we can find things that are trading at a level that we believe compensates us for the risk involved and we understand it, then we’re willing to allocate capital to it.
We would be considered more concentrated as well, so not only are we value managers, but we tend to run more focused portfolios, where we do not subscribe to the Noah’s Ark theory where two of everything is better.”
The universe of stock picks that conform to these principles has narrowed in recent years:
“Things that have very high quality and high certainty of cash flow — so your Microsofts (NASDAQ:MSFT) of the world, your Apples (NASDAQ:AAPL) of the world — have been crowded out.
People have piled into those things and have taken them to valuations where, regardless of how those businesses perform over the next decade, and they most likely will perform just fine, we think the investment returns from those businesses over the next decade are going to be lackluster given where valuations are at.
If you go through history, you will find periods of time where that has been the case: Walmart (NYSE:WMT) in the early 1990s, Microsoft in the late 1990s/early 2000s are two good examples of great businesses that performed just fine, yet investors didn’t perform that well because the expectations that were embedded in those share prices were so unrealistic that the stocks had to consolidate.
When we look at the big names today that everybody knows and likes, the Facebooks (NASDAQ:FB), Amazons (NASDAQ:AMZN), Googles (NASDAQ:GOOG), Apples of the world — great businesses, but we do think the future returns from those are likely to be more muted.”
The search for value has some odd conclusions:
“The original terms of the 2008 agreement were that the taxpayers would agree to put funds into Fannie and Freddie — ultimately, they extended a line of credit that equaled $400 billion, $200 billion each — and for any outstanding balance the Treasury received a 10% dividend on any outstanding balance. Treasury also received warrants entitling them to 79.9% of the companies for a nominal amount.
From 2008 to 2012, the companies needed capital to deal with losses that they had on paper. The companies were generating sufficient cash flow; however, they were having to take reserves for what they anticipated future losses to be, and as a result of those accounting losses, they needed to draw down on the Treasury lines of credit.
In 2012, on a Friday afternoon in August, the Obama Administration through Treasury Secretary Geithner at the time and the Acting Director of the FHFA, Fannie and Freddie’s
The next quarter, Fannie and Freddie
There’s a saying that the wheels of justice grind slowly, but they do grind exceedingly fine, and we are seeing that at play in these cases. As we have this conversation here on the 15th of October, the end game for all of this is starting to come into focus because the Trump Administration put out a memo last spring directing the Treasury Secretary to come up with a plan for reforming the housing finance system in the United States.
Fannie and Freddie
The Trump Administration came out with this memo last March, and the hallmark of the memo was to end the conservatorships of Fannie and Freddie. That kicked off what has been a series of steps by the regulator, Mark Calabria, who came into his role as Director of Fannie and Freddie last April. That series of steps has involved them starting to build capital at the entities and taking steps to hire financial advisers.
They both have hired their own financial advisers. Fannie has hired Morgan Stanley (NYSE:MS). Freddie has hired JPMorgan (NYSE:JPM). Ultimately in an effort to put them in a position to get out of conservatorship.
They cannot get out of conservatorship until they build up their capital, and they cannot build up capital until the outstanding litigation is resolved. In July of this last summer, the Supreme Court decided to take up the cases of Fannie and Freddie, and those cases are scheduled for December 9.
Based on a case that was ruled in the prior term having to do with a single-director agency, the odds are very high in our view that the Director of Fannie and Freddie, the FHFA, will be ruled unconstitutional as a result of the structure that’s in place.
We also think that this ruling, based on Supreme Court precedent, will afford backward-looking relief, which would ultimately vacate the sweeping of profits illegally by the entities, which is ultimately what the lawsuits are trying to accomplish.
All of that is to say that post the election, in a couple of weeks, the Trump Administration, should they win, will have roughly a month to make a decision as to what they want to do with this situation.
They could settle the cases with the shareholders and not allow it to go to the Supreme Court, or they could allow the case to go to the Supreme Court, which takes away from them some of the control of the path forward.
Should the case go to the Supreme Court and the government wins, they’ve effectively cut off their ability to go out and raise capital because the Supreme Court would have blessed the taking of property. Should they lose, they’ll end up exactly where they would end up on a settlement.
However, they would have spent another nine-plus months going through the courts, and who knows what the equity markets, the real estate markets would look like at that time, and what the attractiveness and the appetite for a Fannie and Freddie offering might look like at that particular time.
We have an investment — and we’ve continued to add over the last couple of years, including not too long ago around current levels — in the junior preferred shares of Fannie and Freddie. The junior preferred shares at one time would have been the senior preferred stock in the capital stack. However, when the government infused capital into Fannie and Freddie back in 2008, they infused it into the newly created security, the senior preferred stock.
In order to facilitate a capital raise, the Treasury will have to recognize that it’s been fully repaid on its original investment, and once that’s done, the book equity of Fannie and Freddie would fully cover the junior preferred shares.
That would potentially mean the securities that we own trading around $9 today would arguably be worth $25 a share at some point over the next couple of years as the capital-raising process unfolds, so it’s a highly attractive investment near term.
The opportunity is available because of the uncertainty around the government’s treatment of their investment but also obviously the election, which is less than three weeks away here. The election outcome has some people sitting back waiting for the outcome to play out.
If Trump loses, we still anticipate that the actions taken by the current administration will move on, and we would expect in a lame-duck period that they would execute on the amendment to the underlying agreement that would still put this in a permanent spot.
There will certainly be a lot more clarity in the next three weeks. Our belief is, regardless of the outcome, by the end of the year, the necessary actions will be taken that will put this in a permanent spot, and that’s why we have made this our largest investment today.”
Get more investment ideas by reading the entire 3,945 word interview with Mr. Boyle, exclusively in the Wall Street Transcript.
John Buckingham is Principal and Portfolio Manager of Kovitz. Mr. Buckingham joined AFAM Capital in 1987 and Kovitz in 2018 as part of the Kovitz acquisition of AFAM.
He has more than 30 years of investment management experience and serves as Editor of The Prudent Speculator, which has been a trusted newsletter for over 40 years. Mr. Buckingham chairs the AFAM investment committee, leading a team that performs comprehensive investment research and financial market analysis.
In this 6,387 word interview, exclusively in the Wall Street Transcript, Mr. Buckingham stays true to his investing philosophy:
“Benjamin Graham says, when shopping for stocks, choose them the way you would buy groceries, not the way you would buy perfume.
Unfortunately, these days, we’re in an environment where investors are fascinated or fixated on stories, on companies that appear to be able to grow significantly, especially given the pandemic, and they’re paying little attention to the price they pay for those stocks.
We saw the euphoria around the Tesla (NASDAQ:TSLA) stock split, and somehow people thought that because it was cheaper in price, it was worth more, and so the stock was bid up significantly by a lot of investors, even though a stock split doesn’t alter the pie, if you will. It’s still worth the same. It should be worth the same.
I would imagine, given that many value investors have closed up shop, we’re one of the few that are left that have been disciplined, consistent and patient in implementing our strategy. ”
The Buckingham portfolio is biased towards dividend payers:
“We want to buy quality companies, we want to buy them at reasonable prices, and we want to be patient with them and milk the dividend income.
I didn’t mention dividends yet, but if you look at Fama-French data going all the way back to the 1920s, dividend-paying stocks have outperformed non-dividend-paying stocks by over 1 percentage point per annum. And by the way, they’ve done so with lower volatility.
Investors are always looking for higher returns and lower risk, if risk is defined as volatility, and market history shows that dividend payers give you the holy grail, so to speak, which is higher returns and lower risk or lower volatility.
So we do like dividend payers, and especially in the environment today, where interest rates are extraordinarily low, dividend payers make a whole lot of sense to us.”
One example of a current Buckingham pick is Nordstrom:
“For those who are willing to be maybe a little more speculative, we also recently bought Nordstrom (NYSE:JWN), which is the department store giant…in looking at Nordstrom, we think it is a name that discounts a tremendous amount of bad news.
It doesn’t discount bankruptcy, of course, but it discounts a lot of negatives that we do not think are going to materialize, so we feel we’ve got a margin of safety.
But again, it is a very volatile stock, as it has been going up and down 3% every day it seems.”
To get all of John Buckingham’s picks and the detailed analysis underlying the decisions to buy them, read the entire 6,387 word interview, exclusively in the Wall Street Transcript.
Stephen Bonnyman is Co-Head, North American Equity Research and Portfolio Manager of AGF Investments Inc.’s Canadian and global resources portfolios.
Working closely with the AGF research teams, Mr. Bonnyman focuses on identifying resource companies with solid balance sheets, advantaged cost structures, attractive valuations or unrecognized growth. Mr. Bonnyman is a member of the AGF Asset Allocation Committee, or AAC, which is comprised of senior portfolio managers who are responsible for various regions and asset classes.
In this 2,856 word interview, exclusively in the Wall Street Transcript, Mr. Bonnyman explains the philosophy underlying his portfolio management:
“This fund had some challenges because we had a couple of industries that were heavily impacted by COVID. An example of that would be the energy space, which has had a bit of a double whammy. One, a large contraction in demand resulting from the COVID-19 pandemic globally.
And secondly, the massive acceleration in the renewables theme, which has started to treat the fossil fuel industry as if it was completely dead in the water, which we don’t think is entirely the case. But that would be one very real example.
Another within our investable space would be real estate, where concerns are obviously in place as to whether the work-from-home and the COVID structures that we’ve put in place to cope are going to be longer-lasting, change the nature of how we interact and how we utilize our real estate space.”
A sector shift has been apparent in 2020:
“Right now, our largest overweights would be in utilities. And that’s a reflection of two parts. One, the interest rate structure that reflects utilities. And secondly, the bulk of that exposure exists within the renewable schemes, so names like NextEra (NYSE:NEE), Boralex (OTCMKTS:BRLXF), NPI (TSE:NPI), where we’re looking at specific themes.
Where are we underweight at the moment? We are underweight real estate. Obviously, the challenges facing the market right now have not played out. And I think we’ve got to look at how many of these survived through this structure.”
Mr. Bonnyman sees an immediate opportunity in silver investing:
“I might add, SilverCrest, we own in a large part because of its valuation. This, in our eyes, was one of the most exciting exploration plays available within our sort of investable framework.
And we’ve been invested in the company for quite a long time since it emerged as a junior exploration company. So while we like silver, our ownership of SilverCrest is based more upon the exploration and development capability of the company than necessarily on its underlying commodities.
To answer your question directly, yes, we do like silver. The silver market is a combination of gold and an industrial metal. It’s sometimes referred to as gold on steroids.
As we get through the election, as we start to emerge from the pandemic, industrial demand for silver will accelerate and increase. And we think it has, in fact, a higher return potential than gold as a raw metal from this point forward.”
To get the complete interview with Mr. Bonnyman, read the entire 2,856 word interview, exclusively in the Wall Street Transcript.