Sean-Paul Adams, Senior Research Analyst, B. Riley Securities
Sean-Paul Adams is a Senior Research Analyst at B. Riley Securities covering business development companies (BDCs) and the broader specialty finance sector. Prior to joining B. Riley Securities, he served as a senior research associate at Raymond James, where he worked on equity research coverage of BDCs and various specialty finance verticals.
Mr. Adams holds a Master of Science in finance from the University of Florida’s William R. Hough Graduate School of Business and a Bachelor of Science in finance from the University of Florida.
He explains the current state of the BDC sector in this way:
“…We’re seeing a convergence of three different factors.
One is declines in the interest rate and the underlying SOFR curves as well as spreads.
We’re also seeing a re-evaluation of dividend run rates that have been assessed from previous highs, and that’s a natural change.
It’s good for the BDC vehicles to re-assess their dividend policies as these interest rates are coming down.
However, there have also been portfolio realizations that have been largely negative.
This has created this convergence where you’re seeing, usually in this quarter specifically, dividend policy changes, large realized losses or unrealized losses, as well as some significant portfolio marks that have been making headlines.
So it’s this convergence of three things, and there has been a lot of publication about some of these larger private credit events that have made people in general jumpy.”
The worst is past for many BDCs according to Mr. Adams.
“Right now, there’s a lot of BDCs that have taken either dividend changes or have very comfortable earnings coverage for their forward earnings versus their dividend policy.
Those BDCs are unlikely to have near-term dividend changes.
However, when you start looking at other BDCs that have not evaluated their dividend policies, where they have for the past couple quarters earned right at or under their current dividend payout rates, those are likely to cut their dividend.
As far as credit events, you have to start evaluating the historicals of the BDCs themselves and start looking at what their origination policies were or what their underwriting track record was, especially when you start looking at either 2008 or 2021.
So there’s several BDCs who have a track record of having extremely strong credit underwriting quality, very strong standards, and also very high recovery rates.
When you look at Ares (NASDAQ:ARCC) historically, they have a very high recovery rate even for credits that have gone on non-accrual.
So when you look at those BDCs in specific — BDCs like Sixth Street (NYSE:TSLX) — we expect to have optimal portfolio credit quality and for that to not significantly deteriorate or change throughout our forecast periods.
However, there are BDCs that have had changes in their earnings or significant portfolio credit updates this quarter, FSK (NYSE:FSK) or New Mountain (NASDAQ:NMFC) for example.
Those are a result of a convergence of factors. There’s been higher levels of PIK in the portfolio and there’s also higher levels of aggregate non-accrual rates.
A lot of these changes announced this quarter have been proactive, which is, “Hey, we’ve either had portfolio sales to get our PIK rates down and we’ve taken that cut immediately,” which is selling below par.
Those changes can somewhat be looked at as a benefit in that they’ve taken the hit and cut out the fat and excess.
But what led you to that point?
The PIK rate and the earnings quality has been on a decline for several quarters, and that has led to taking this loss now.
For some of those BDCs, we expect there to be either flat performance or there could be continued incremental deterioration.
However, it’s important to note we don’t believe there’s going to be outsized credit events where this is similar to the 2008 crisis.”
If the worst is over, where would Mr. Adams put an investment now?
“For my more medium-term, long-term holding, I’m a huge fan of OBDC, the Blue Owl platform.
I believe that when you’re evaluating BDCs that have had large outsized quarters, in which you’re looking at 5% to 10% drops in NAV, they are trading at that discount while having the underlying portfolio metrics at or akin to peers trading at a much higher premium.
So OBDC is trading at a discount akin to peers that have had large portfolio losses in NAV, while their actual performance was stable.
When you evaluate their current discount versus Ares, Blackstone (NYSE:BXMT), or TSLX, they are trading at a very large material discount while having ROE metrics, NAV metrics, and portfolio structure similar to their peers, while trading at the discount akin to BDCs that have had 20% or 10% drops in NAV.
I believe that’s a near-term accretion when you’re baking in a very, very large near-term portfolio risk to that platform when the underlying portfolio isn’t even outsized for technology.
OTF, the sister BDC, is traditionally oriented toward technology and software, but OBDC, the software and technology aspect of it is not outsized.
It has diversified into several different sectors.
So I believe it’s more headline risk, which for me is the most interesting because it creates true valuations where the valuations of the BDC are not trading in sync with their underlying credit performance metrics.
That’s why it’s an outsized buy.
I think when you look in the near term at other BDCs, we’ve seen that Carlyle (NASDAQ:CGBD) similarly has been affected by headline risk.
They’ve had several management changes, as I’m sure you’re aware.
That has led them to trading at a 30% to 40% discount to NAV, but the underlying credit metrics of the vehicle are quite strong.
So my take is that when you look at BDC vehicles, you have two that are trading at a very large attractive discount.
If you’re chasing those 15% dividend yields on current trading prices, you can look at either of two types of vehicles.
One, vehicles that have had very large outsized losses in the portfolio where you’ve priced in that risk — New Mountain, FSK.
Those vehicles I believe have an appropriate risk discount assigned to them.
Then there’s headline risk, which is Blue Owl and CGBD, Carlyle.
They are currently trading more on the headlines and not the actual results, and that’s more of the disparity between the retail ownership and the actual markets.”
Mitchel Penn, Managing Director and Senior Analyst, Oppenheimer & Co.
Mitchel Penn, CFA, is Managing Director and Senior Analyst covering business development companies for Oppenheimer & Co. Inc.
Prior to joining Oppenheimer, he followed business development companies at Janney Montgomery Scott.
In addition, he was an Equity Portfolio Manager/Financial Analyst at Legg Mason Capital Management from 2001 to 2012 where he specialized in financial companies.
Prior to this, he managed fixed income portfolios at Legg Mason Capital Management and Aetna.
He began his career as an accountant at Price Waterhouse in 1981.
Mr. Penn is a member of the Baltimore CFA Society and has served as president and also on the board of directors.
He holds a B.A. from Villanova University and an MBA from the University of Chicago.
This highly experienced BDC investment advisor sees alot of opportunity in the current sector.
“The BDCs right now are trading at right around 78% of book, so they’ve priced in quite a lot of bad news.
You have to be aware of that because people come out and say, “Hey, we think credit losses are going to be worse than we thought.”
Well, they’ve already priced that in.
A lot of BDCs have priced in the losses that you would typically see in a recession.
You’ve got some BDCs that are trading at 50% of book.
The other thing that’s happening is people are worried about software.
We don’t have any good data in terms of credit losses on software, but there’s a lot of speculation that AI could impact credit losses on software companies.
We do expect some spread widening in software loans in the next few quarters which would likely lead to markdowns.
As an analyst, we track credit losses every quarter, but we haven’t seen any major trends there.”
BDCs as a sector cover a wide range of possible investment vehicles.
“We cover 33 names and the market cap ranges from $80 million to $13.5 billion.
We only have nine “buys” and some of those are small BDCs and some of those are big BDCs.
So, we don’t find a correlation between size and ROE.
There are big BDCs that perform lousy, and there are small BDCs that perform lousy, and there are big BDCs that perform really well and small BDCs that perform really well.
We look at the ROE, and if you earn above your cost of equity capital, then you should trade at book or better.
If you earn below your cost of equity capital, you should trade at a discount to book.
The way to think about expected ROE is to look at historical ROEs for BDCs.
If the BDC historically earns 6% ROEs, it’s hard to predict that they’re going to earn 10% going forward.
We kind of use history as a judge.
We actually look at the five-year average ROE.
We have data since IPO for everyone but we find the best correlation between ROE and price-to-book is the five-year average ROE.
If you think about it, BDCs tend to make five-year loans.
They borrow pretty much in the five-year debt market.
So five-year trailing ROE ends up being a pretty good predictor of price-to-book and we find that the correlation is high.”
The top picks from Mr. Penn are in synch with Mr. Adams.
“Right now, we like Ares (NASDAQ:ARCC).
Ares is running its leverage at 1.1 times, which is lower than the group, with 1.2 times.
Their ROE since IPO is 11.2%, so they have a good ROE historically.
They’re trading at 94% of book, so that is very attractive.
Typically, they trade around 1.1 times book.
Another one we like is Golub (NASDAQ:GBDC).
Their ROE since IPO is 8%, but on a trailing two-year, it’s 8.7% because they recently changed their fee structure so they’re generating a slightly higher return.
They are trading at 82% of book, so they are essentially pricing in the losses that you would see in a recession.
The next one is Blue Owl (NYSE:OBDC).
They’ve generated a 9.6% ROE since IPO and 9.3% trailing two.
They trade at 77% of book.
Again, they’re pricing in the losses that you would typically see in a recession.
Those would be our top three.
If we had to add two others: Crescent Capital (NASDAQ:CCAP), they trade at 68% of book.
Their ROE since IPO is 8.5%. At 68% of book, they’ve priced in all the losses you would typically see in a recession.
And our last one is Sixth Street (NYSE:TSLX).
They are trading at 1.1 times book and their ROE since IPO is 12.5%, and on a trailing two is 11.2%.
The issue that TSLX has is they have 40% of their portfolio in software.
They’re not a tech fund, however, it’s a little higher than the average BDC, but they have a great track record in underwriting credit.”
Read these exclusive full interviews from Mr. Adams and Mr. Penn and many more only at the Wall Street Transcript.
ENGLEWOOD, CO – Lightwave Logic Inc. (NASDAQ:LWLG) shares reached a new 52-week high today, March 12, 2026, as a decade-long quest for “optical ubiquity” hit a major commercial milestone. The company announced a strategic development agreement with Tower Semiconductor to integrate its polymer modulators into Tower’s PH18 silicon photonics platform — a move that effectively moves the technology from the laboratory to the global assembly line.
A Decade in the Making
For long-time observers of the company, today’s news is the culmination of a vision first detailed years ago. In our 2015 interview with then-CEO Thomas Zelibor, he described the company’s goal to solve the “physical wall” facing data centers.
“Data centers are reaching their throughput limits,” Zelibor noted in 2015. “The company that solves these problems while achieving the price point of one dollar per gigabit… is going to dominate that market.”
Today’s partnership with Tower Semiconductor suggests that the “one dollar per gigabit” goal is closer than ever, as the deal allows customers to design polymer-enhanced chips using standard foundry tools (PDKs) for the first time.
The “V8 Engine” Goes into Production
The transition from research to revenue was accelerated by Dr. Michael Lebby, who led the company through its technical validation phase before retiring as CEO in late 2024. In a 2023 interview with us, Dr. Lebby used a now-famous analogy to describe why polymers would eventually displace traditional semiconductors:
“Replacing the chip is in some ways like an old four-cylinder motor car and putting a V8 in it,” Lebby told us in 2023. “Our chip represents putting the V8 into the motorcar… boosting up the performance and lowering the power consumption.”
The current leadership, under CEO Yves LeMaitre, is now focused on the “car factory” part of that analogy. By integrating with Tower Semiconductor, Lightwave is no longer just selling a “V8 engine” — it is providing the blueprints for the entire industry to build one.
Why Today’s Move is Different
While Lightwave has announced partnerships before, the Tower Semiconductor deal is a “Design Win” catalyst because it includes:
Market Outlook
With a cash runway extending into late 2027 and a 147% revenue surge reported in 2025, Lightwave Logic is successfully shaking off its “pre-revenue” reputation. Under LeMaitre’s commercial-first strategy, the company is finally delivering on the “all-optical” future that its founders described to us over a decade ago.
Ryan Zimmerman, Managing Director and Medical Technology Analyst, BTIG
There is a growing trend towards the introduction of medical robotics into human surgery.
This former director of surgery for a major Chicago hospital and equity analyst picks the latest and most innovative participants in this high return business sector.
Ryan Zimmerman is a Managing Director and Medical Technology Analyst at BTIG.
He provides coverage across the medical technology sector, focusing primarily on orthopedic and surgical companies.
Prior to BTIG, Mr. Zimmerman was a senior associate at Canaccord Genuity, providing medical technology coverage with an emphasis on musculoskeletal companies.
Previously, he was the Director of Surgery at Advocate Christ Medical Center, where he oversaw operations for a Level 1 trauma hospital in the Chicago area.
Mr. Zimmerman also held hospital management roles at Presence Health and was a fellow in hospital management at the University of Pennsylvania Health System.
He is board certified in hospital management and is a fellow in the American College of Healthcare Executives.
Mr. Zimmerman earned a B.S. in anthropology and zoology from the University of Michigan and a Master of Healthcare Administration from the University of Illinois-Chicago School of Public Health.
“The lens we look through is consistency of execution, whether internal expectations are higher than external expectations — meaning can the company consistently beat and raise numbers quarter-to-quarter. And can management drive, and can the business model support, growing leverage and improving profitability over time?
Those are the lenses through which we look at companies. If we can see that consistently, that’s a good set of criteria when we look for growth companies.
We cover a variety of sectors in medical technology — everything from surgical robotics, orthopedics, ophthalmology, neurovascular, etc.
All of them have nuances, pockets of growth which we are excited about.
Certainly, certain markets are more mature.
Areas like joint reconstruction or cataract surgery are more mature, and so the valuations associated with those companies can be lower just given the maturity of those markets and the growth rates associated.
But within that, you still look for those that are taking share, exceeding those growth rates, and so forth.
So I wouldn’t say that you can’t find opportunity in one market versus the other. We think you can find opportunity in all market segments within medtech.”
The older Americans get, the more we want to remain young and medical robotics satisfies that market demand.
“Certainly, there are demographic trends that support continued uptake, and Stryker has done a fantastic job of positioning itself to capitalize on that.
And in tandem with that, physicians have been looking at robotics as — I don’t want to call it standard of care, but it’s certainly becoming to the point where two-thirds of Stryker’s knees are done robotically and I believe over a third to a half of their hips are done robotically now in the U.S.
It’s lower outside the U.S., but I think what you’re seeing — I’ll give you a little anecdote: When Stryker first launched its Mako system many years back — they acquired the system in 2013 — we had asked them how many sites could potentially have a robot in knee replacement, and they said about 2,500.
Today, their installed base stands at 3,000.
So they’ve eclipsed even their earliest expectations in terms of the adoption.
And last night on their earnings call, they were asked a similar question and they said, “We don’t think there’s an upper limit.”
Ultimately, robotics could become standard of care in knee replacement and we’re certainly moving towards that in the orthopedic field.”
New innovations in the medical robotics sector are powering new investment opportunities.
“I certainly think there are a lot of benefits to robotics in the sense that it does reduce variability and it does improve surgical outcomes in a lot of instances.
It is also a marketing tool — there’s no doubt about that.
As far as downside goes, the systems are costly.
Sometimes there is concern about dominance in a given market and the ability of one manufacturer to dominate over another and not have optionality in certain markets.
That isn’t the case for orthopedic robotics, but it’s certainly a theme.
And it’s been a theme in the surgical and the soft-tissue side with Intuitive Surgical’s (NASDAQ:ISRG) dominance for so many years in soft-tissue robotics.
But that’s starting to change with newer systems coming to market.”
New medical robotics systems mean new stocks.
“One of the areas that we are excited about right now is the use of AI in areas such as spine surgery.
And there’s a company that we recently took public called Carlsmed (NASDAQ:CARL) out of Carlsbad, California, that uses the patient’s images to produce implants for spine surgery that are personalized to the patient using AI to help produce that.
This is very novel, and the clinical outcomes are improved.
It’s no different, in my view, than buying a custom suit that fits better versus a suit that’s off the rack.
And the benefits afforded with that are personalized to the patient.
So this is a growing trend we are seeing in medicine and something we’re watching closely.”
Read the entire interview and get all the newest updates on medical technology stocks, exclusively in the Wall Street Transcript.
Matthew DeCicco, Director of Equities, Portfolio Manager, Lord Abbett & Co.
Matthew DeCicco, CFA, is Director of Equities and a Portfolio Manager for Lord Abbett & Co. He is responsible for directing Lord Abbett’s equity investment activities, including portfolio management and equity research.
He also is a Portfolio Manager on the Innovation Growth Equity team and is responsible for contributing to the management of the firm’s growth equity strategies.
In addition, Mr. DeCicco co-chairs the firm’s Partnership Committee and serves on the firm’s Investment and Management Committees.
Mr. DeCicco joined Lord Abbett in 1999 and was named Partner in 2020.
Prior to his current role, he served as a Research Analyst and later a Portfolio Manager for Innovation Growth strategies.
He has worked in the financial services industry since 1999.
Mr. DeCicco earned a B.S. in business administration and economics from the University of Richmond’s Robins School of Business and an M.S. in biotechnology from Johns Hopkins University.
He also is a holder of the Chartered Financial Analyst (CFA) designation.
His investment philosophy powers the high growth stock winners at Lord Abbett.
“We invest in high-growth innovative companies.
I tend to say this line every time I meet with one of our clients or potential clients: The reason we do that is because we think the potential of innovative companies is systematically underappreciated by the market.
We see it time and time again, and we think it’s because the market underestimates the magnitude and duration of these truly disruptive companies.
There’s a view that, because of the law of large numbers, this level of growth can’t continue in the future.
What we try to do is arbitrage the value that is earned through the power of compounding with the value that is perceived in the stock at current prices.
And that sounds great, but we have this process that we’ve had in place for over 20 years that’s really purpose-built to specifically identify these disruptive companies, with the idea that if we find them early enough, we can drive meaningful share price appreciation.
Our process mixes both qualitative and quantitative elements, and it’s really three steps.
The first step is very much about us evaluating the quality of the business, and so this is a qualitative assessment by our team of analysts and portfolio managers that focuses on four key attributes.
First and foremost, it’s the business model itself. How scalable is the business model?
How visible are the revenues and earnings?
Is the business asset light?
The second thing we spend a lot of time on is management.
Again, we have a team of analysts and portfolio managers who are out meeting with companies hundreds of times a year, listening to earnings conference calls.
First and foremost, it’s important that these management teams are competent and credible, but mostly that they do what they say they’re going to do.
We do like founders.
We also like people who we’ve worked with before, who we’ve invested with before, so we love it when we find a company that has a CEO who maybe started a business prior that we invested with, had a successful experience, and they’re starting something new.
So, the second attribute in the qualitative assessment is really around the management team itself.
Third is the competitive advantage.
You’ve got a company that you love today, it’s generating great revenues and earnings today; what is it about the company that leads you to believe that that is sustainable three, five, seven years into the future?
Competitive advantage could come in the form of intellectual property, it could come in the form of a really good product pipeline, it could come in the form of some sort of manufacturing expertise, but something that differentiates the company competitively.
And then last but not least, we pay attention to the industry conditions in which the company is operating.
An example that is good to bring this to light: Say in the last three years you found a great company in the housing industry, maybe it’s a tech-enabled way to disrupt the way houses are bought and sold.
Well, that’s great, except the housing industry’s been in a difficult stretch for the last three years.
You’ve had rates go up, and now in the last year or so, for lack of a better term, you’ve had affordability concerns that have suppressed the health of the housing market.
So, you could have a great company but the industry conditions aren’t as favorable.
We love when we find a good company with the attributes I mentioned that’s also in an industry that’s very healthy.
That’s just the first step, which is very much a qualitative assessment, and that is our way of identifying what a company’s potential is.
We think of that first step as very much, OK, does this company have the raw ingredients to become much bigger in the future?
Potential alone, though, is not enough.
So, our second step, which we call operating momentum, is a measure of if a company’s realizing its potential. This is very quantitative — you can look at a lot of figures to determine this — and it’s very much fundamental analysis that is purpose-built for looking at high-growth companies.
What I mean by that is, if you’re a value investor, you might look at things like price-to-book, or pay a lot of attention to the normalized free cash flow yield.
We think that works very well in a certain universe of stocks.
But if you’re looking at high-growth stocks, you have to use a very different set of fundamental metrics, and it could vary by industry.
Some of those things are obvious things, like what’s the revenue growth and what’s the earnings growth?
Also things like, how high are the gross margins?
A high gross margin company typically means that they are extracting a lot of value for whatever service or product they’re delivering.
What’s the size of the total addressable market?
How penetrated is the company in the total addressable market?
Is the company executing quarter in, quarter out, better than expectations?
Do they have a key product, and how is that key product doing versus expectations?
These are very quantifiable things that we can measure each and every quarter, things that we can track when we’re meeting with the companies that we invest in.
Again, think of it as, OK, we’ve got a company with great potential from that first step; is it actually realizing that potential with good operating results each and every quarter?
And then, last but not least, the third step in our investment process is an analysis of the company’s price momentum.
You can think of this as our assessment of recognition.
So, if we’ve got a great company with great potential, and it’s realizing that potential through very good results, we want to see if it is being recognized by the market.
Does anyone else care?
Again, this is something that we can measure very quantitatively, and we look at it through two different lenses.
The first is absolute price momentum, which is just how the stock’s doing compared to its own history. And the second is relative price momentum, which is how the stock is doing compared to all other stocks.
We can rank not only the stocks in our portfolio with these metrics, but also every stock in our investment universe.
You can think of our investment process as a Venn diagram, and you can think of our portfolio as really built at the center of the Venn diagram of these three process steps, where the companies that have the most potential, that are realizing that potential, where it’s being recognized by the market with good price momentum — those companies earn the most capital in our portfolio.
I would say by the nature of what we’re looking for, these very high-growth companies, 80% of what we do ends up in fields related to technology, health care, consumer, and communications.”
David Schuster, Portfolio Manager, Brown Advisory’s Small-Cap Fundamental Value
David Schuster is the Portfolio Manager for Brown Advisory’s Small-Cap Fundamental Value strategy.
Prior to joining Brown Advisory in 2008, he was a Managing Director for the financial institutions mergers and acquisition advisory group of Citigroup and a Managing Director in the M&A practice of Lazard Freres.
Mr. Schuster received his BSBA from Georgetown University.
After graduating from college, he served as an officer in the United States Army.
His fundamental analysis of industrial niche companies is informed from his experience on the M&A investment banking world of Lazard Freres:
“When we talk about value, we are first and foremost looking for companies that are generating high levels of free cash flow, but we are also combining that with a focus on finding companies that are trading at inexpensive valuations.
What that translates into for us is doing a real granular look at the financial statements, really understanding what the drivers of the business are.
In the small-cap space, there are oftentimes a lot of companies that are either misunderstood because of people’s perceptions of the company, maybe they are not well covered, or there might be some nuance around the balance sheet or the income statement that people just aren’t really appreciating from a valuation perspective.
We are looking for companies, as I said, that are generating that free cash flow, but also that we are buying at what we think are attractive levels.
Typically, for a lot of the companies we are thinking about things on an EV-to-EBITDA basis.”
One current example of this in their portfolio is a niche industrial product producer.
“One of our largest investments right now is a company called Ingevity (NYSE:NGVT).
It’s a good example of a company that’s generating attractive levels of free cash flow but still trading at a low valuation. It’s a little bit under $2.5 billion of market cap.
Just because you are a small-cap company doesn’t mean that you don’t have an attractive franchise, and I would say Ingevity has a very attractive franchise.
Their core business, they’re a leader in providing and selling activated carbons in these honeycombs that are sold to the auto and truck market.
They’re used to reduce emissions.
It’s a small, niche-y product, but they have probably 90% market share across the globe.
There are probably a billion of their products in service, literally across the world.
The business has very attractive margins; you’re looking at EBITDA margins north of 50%.
Obviously, over the last couple of years there’s been a lot of pressure, concern around EVs and the demise of the internal combustion engine, and that has been one factor that has put a lot of pressure on the stock.
The other thing that had happened was they had embarked on an M&A program that was unsuccessful.
About a year and a half ago, they brought in a new CEO who has really worked to clean up the portfolio and has been exiting a lot of non-core businesses and refocused the business just on its core elements.
And to give you a sense, we think the business next year will probably do $350 to $360 million of EBITDA.
Compared to today’s stock price, which is about $65, if you took the cash that’s on the balance sheet, the cash from some of these asset sales, and then put what we’d call a reasonable multiple on the earnings power of this business, you get to $100 to $120 per share, so really attractive upside.
At the same time, they’re not sitting on this cash.
They are actively out in the market buying back their shares, which we think from an owner’s perspective will increase our return at the end of the day as they reduce the total number of shares.”
Another portfolio example for this experienced money manager is an unknown player in the pharmacy space:
“I mentioned the health care space.
Another smaller company is called Guardian Pharmacy (NYSE:GRDN).
It’s about an $800 million market cap.
Once again, small company but really attractive franchise.
They are one of the largest pharmacies serving patients who live in assisted living facilities in the country.
They probably service about one in four residents.
If you think about the elderly population, they are living in assisted living facilities and taking multiple medications multiple times a day.
Guardian packages all the medications that this population needs and facilitates it in a way that helps the staff deliver those medications to the patients.
It’s a business that doesn’t need a lot of capital to grow, and they are able to take this dominant position and just continue to grow.
It has really attractive margins and overall trading at what we would consider not an expensive stock by any measure.”
The overlooked small cap sector is ripe for upside according to Mr. Schuster:
“The small-cap space does run in these long trends.
You can see sometimes these trends are seven, eight, 10 years long.
This last 10 years or so, as you point out, certainly the large-cap space has dominated returns.
As we talk to clients, that seems to be something that they have all seen, and a big question is, how long before that rotation might change?
We were thinking through the last couple of years, and especially in the middle of 2023 and the end of 2024 it started to feel like it was starting to shift back to small and certainly back to value.
Although, the advent of AI really captured investors’ imagination, and we have seen small once again trail.
I think what we have seen toward the latter part of 2025 and certainly into 2026 is that finally there are a lot of investors who have looked at some of the extremes that we’re at.
One of the statistics we look at is small caps as a percentage of the S&P 500.
Right now, according to Furey Research Partners, we are just a little bit under 6%.
The long-term average is under 11%.
So, that has caught people’s attention and refocused them.
I don’t spend a lot of time thinking about the valuations or the business prospects of the Mag 7, but certainly the magnitude of the market cap that’s in those versus the small-cap sector is quite stark.
So, we’ve certainly talked a lot about it, but what’s interesting is we have actually started to see it.
Year to date, small caps are up pretty materially relative to the broader market, and since the early part of last year we have seen small caps finally outperform.
I don’t want to be calling a turn for small or calling a turn for a rotation into value, but what we know is when those do happen, the relative returns that can be generated in the small-cap space can be quite significant for quite some period of time.
I think that’s one of the reasons why our clients think of using small cap and small cap value as part of a broader portfolio to capture some of that excess return.”
Get the complete interview along with all of David Schuster’s top picks, exclusively in the Wall Street Transcript.
Paul Andre Huet, CEO, Americas Gold and Silver Corp. [ticker: USAS]
80% of it Comes From China.
Most of the rest comes from this one mining company — and it’s incidental to the precious metals this company primarily produces.
Paul Andre Huet is CEO of Americas Gold and Silver Corp.
With over 35 years of experience in senior leadership and mining, Mr. Huet has held a multitude of prominent roles.
Previously, he was Chairman & CEO of Karora Resources Inc. from 2018 to 2024 until its merger with Westgold Resources.
Prior to that he was President, Chief Executive Officer and Director of Klondex Mines from 2012 to 2018, until its acquisition by Hecla Mining Company.
Mr. Huet has a strong command of capital markets and has served in all levels of engineering and operations of Mining.
Mr. Huet graduated with honors from the Mining Engineering Technology program at Haileybury School of Mines in Ontario, and successfully completed the Stanford Executive program at the Stanford School of business.
In 2013 Mr. Huet was nominated for the Premiers Award in Ontario for outstanding college graduates; he is currently a member of OACETT as an applied Science Technologist and an Accredited Director.
“Antimony is part of the critical minerals list.
It’s one of the most important elements we need for missiles, for bullets, for night vision.
It’s very, very critical. In fact, in 1942, when World War II was ongoing, our mine was a significant supplier of antimony to the U.S. war effort.
At the moment, 80% of the world’s antimony processing is done in China.
We need antimony.
We need about 50 million pounds per annum, and we’re not generating it.
Americas is currently the largest domestic producer of antimony.
We’re mining 500 tons of ore a day.
It’s in our tetrahedrite ore so we mine and mill it every day.
What’s extremely important is to understand that the antimony comes to us at no additional cost.
We’re primarily a silver mining company but we also mine copper, lead and antimony.
By the way, all of those elements are on the U.S. critical mineral list.
But the antimony is so important.
In fact, we were able to renegotiate an off-take agreement with Ocean Partners to ship our concentrates up to Canada and start getting paid for our antimony.
However, the reality is that it should stay here in the U.S., given that we produce it here.
In fact, I’ll soon be flying into Washington, D.C., for meetings that include several members of the U.S. government to discuss antimony and how we can help solve this problem, given that we’re already producing it.
We have produced 450,000 pounds of antimony year-to-date at our U.S. operation.
I don’t think anybody can come anywhere near to that anytime soon.”
Mr. Huet manages several different mines through his company.
“There’s no doubt that doubling the silver production and some of the operational successes we’ve had at both our mines were key.
I’ll start with the Galena complex.
We were able to double that production only because we had debottlenecked some very critical parts.
First and foremost, we tested and tried a brand-new mining method — long hole stoping.
That’s a method done by using a long hole drill to drill and blast holes from an upper drift, down to a bottom drift — i.e., 120 feet long, 60 feet deep and 3 feet wide.
Then big chunks of the stope are blasted and the ore from the lower drift is scooped out, at which point the blasted/excavated section is filled with a cemented mix to reinforce the rock.
These are technical things, but they’re so important to the success of the future and getting back to 5 million ounces per year.
Our Galena mine in 2002 produced over 5 million ounces of silver.
Last year, it was maybe 1.2 million.
So, we’re on a path now to get back to that 5 million but we will not stop there.
With the acquisition of Crescent, we have the potential to be significantly higher than 5 million ounces of silver per year.
What are some of the other changes that were very critical?
Well, there were some key projects that were so important to that quarter and achieving those ounces.
To achieve those ounces, both of our operations had to run very smoothly.
And again, I’ll stick to Galena.
We had a 10-day planned shutdown during that quarter to improve the capacity in our main hoisting shaft.
It was phase one of two phases of work we need to do.
Phase one was very successful.
We were scheduled for a 14-day shut down, but we did it in 10 days.
What it allowed us to do is very significant.
It allowed us to take this shaft that has been there for over 60 years and double its capacity.
When we inherited this mine and this shaft, it was able to skip at a rate of about 40 tons per hour.
We went from a 1,750 horsepower to a 2,250 horsepower motor, with an additional motor for redundancy.
In changing the motor, we’re able to skip much faster, going up and down that shaft much quicker.
We’re now at a capacity of 80 tons per hour.
That doubled the capacity.
We can move up to 1,500 tons per day.
It’s the first time in the history of this mine that that’s ever been done.
That was significant, coupled with the fact that we bought over 10 new pieces of equipment underground there, and the new mining method.
So, the new team, the new mining method, the new equipment, and the debottlenecking of the shaft have allowed us to get to that production of 765,000 ounces of silver.
Over at Cosalá, we’ve been targeting toward getting into a brand-new zone, the El Cajón and Zone 120 silver-copper deposits referred to as EC120.
At the end of the quarter, we started achieving tons and ounces from EC120, so we were there a little sooner than expected.
That, coupled with the results from Galena and all the changes at Galena, have made Q3 a strong, strong quarter for us.”
Read the entire interview with Paul Andre Huet, CEO of Americas Gold and Silver Corp., exclusively in the Wall Street Transcript.
John A. McCluskey, President and CEO, Alamos Gold
John A. McCluskey is the President and Chief Executive Officer of Alamos Gold (NYSE: AGI) and has held this position since 2003, when he co-founded the company with mining hall of famer Chester Millar.
He is also a Director of the World Gold Council.
In 2023, Mr. McCluskey received the Viola R. MacMillan Award, given by the Prospectors & Developers Association of Canada for showing leadership and a willingness to take risks in the acquisition and development of the Island Gold mine in Northern Ontario.
In 2018, he received the Murray Pezim Award for Perseverance and Success in Financing Mineral Exploration by the British Columbia Association for Mineral Exploration, in recognition of his role in the acquisition, financing, and encouragement of successive discoveries at Mulatos, as well as his ongoing success as CEO of Alamos.
Mr. McCluskey had only the strength of his convictions to start his current mega gold producer.
“We had been looking at grassroots exploration in Mexico when we realized that making progress in market conditions like that was very tough going, so we more or less shelved the company.
We continued to pay its fees and so forth but were waiting for a turn in the market.
By 2001, I went to my partner at the time and said, “You know, this has to be the bottom. The gold price has been down for five years now. We should see if we can make an acquisition.”
We then pursued the Mulatos project in Mexico, which we bought off of a major mining company.
There were two little junior companies involved in the district at that point, and we signed an options purchase agreement and then merged with the other little junior.
That was in February 2003 and is also when I took over as CEO.
At that point, we had a $15 million market cap.
Since that time, the company has grown from a little exploration and development company to a mid-tier producer that this year will do just under 600,000 ounces of gold production.
We now have a market capitalization of roughly US$15 billion…
All good things start in a bear market, not in a bull market.
Generally, if you jump on the bandwagon, it’s going to be very difficult to create value.
But for these very cyclical commodity-driven markets, you’ll find the cost of entry is very, very low.
There’s very little competition.
It’s very difficult to raise money.
It’s a much tougher thing to do.
But it’s also where the best opportunities lie.
I think about the Chinese character for the word “crisis,” which combines two other characters.
It’s the one for danger and the one for opportunity.
That really applies here.
The market was in a crisis with gold prices.
The day we signed the option agreement, the gold price was about $264 an ounce.
All the major producers were hedging, just trying to stay in business.
They were selling off assets, like the Mulatos mine, and they were selling them off quite cheaply.
We were able to buy Mulatos for about US$8 million, plus a royalty.
They had spent $50 million developing the project.
But that’s what happens in a bad market.
There was probably about 2 million ounces of gold to find.
When we looked at that resource, we realized there’s probably about a million ounces of it that even at very, very low gold price assumptions, you could still profitably mine.
But it was a completely different project.
If you assumed that the gold price would eventually recover, that would become a very, very valuable project.
And that’s in effect what happened.”
The efficient management of growth in a gold mining company has a lot to do with the generation of future cash flows.
“Back in 2003, our first project had no permitting and no water rights.
Those are essential to developing a mining project.
I mean, there was virtually nothing completed.
We were at a standing start with everything required.
Also, back then I think we had four employees in the company.
But by June of 2005, the project had been fully permitted.
We completed a feasibility study, raised all the capital, hired all the people, built the mine, and poured our first bar in July 2005.
So, we pulled the whole thing together in two years.
I don’t know too many stories that could equal that one.
And as it would happen, the gold price when we started was under $300 an ounce.
But by 2005, the gold price was trading around $500 an ounce, and it continued to rise.
We signed the option when gold looked like it would never recover again but by the time we were in production, it had almost doubled.
By 2011 the gold price was peaking at $1,900 an ounce.
So our timing was really unbelievable, because from the production — we were producing about 150,000 ounces a year from the Mulatos Mine and we had just amazing costs — we were generating incredible cash flows.
By 2015 the market had pulled back again, to $1,100 an ounce, which was an ideal opportunity to start making acquisitions again.
We had nearly $400 million in retained earnings on our balance sheet, capital we used to go out and make acquisitions.
Through the merger with AuRico Gold in 2015, we acquired the Young-Davidson mine.
We completed a multi-year expansion in 2020, and it’s been generating over $100 million a year in free cash flow since then.
It’ll do almost $200 million a year in free cash flow this year.
In 2016, we took over a little junior company called Carlisle Goldfields.
I think we bought them out for about $25 million.
Today, based on the drilling that we’ve done on that deposit called Lynn Lake, it’s sitting with 3 million ounces of gold.
The project now has all of its permits, and we’re in construction.
We acquired it for next to nothing back when that gold price was $1,100.
Then in 2017, we did probably what many would argue is the best transaction that we’ve ever done, we acquired Richmont Mines in Ontario, which had a project that we really liked called Island Gold.
It was quite small when we took it over, but we invested very heavily in exploration and development.
Today, the Island Gold Mine has nearly 7 million ounces in reserves and resources and continues to grow.
We’re producing around 150,000 ounces of gold a year, and our costs are just a little more than $1,000 per ounce.
So we’re making tremendous cash flow from that mine.
Last year, we had the opportunity to acquire the company right next door to Island Gold called Argonaut Gold, which included its Magino open pit deposit.
Island Gold is a high-grade underground deposit and runs 11 grams per tonne.
There are about 5 million ounces of resources at the Magino deposit that grades about one gram per tonne.
It’s quite a contrast to Island Gold.
They are very, very different types of deposits, but we are now operating them basically together.
The open pit mine material is getting crushed and fed into a 10,000 tonne per day mill.
As part of integrating these two projects, we plan to double the mill’s capacity from 10,000 tonnes, to up to 20,000 tonnes a day.
Between now and 2029 through increasing our underground mining and our open pit mining rates, we intend to turn the mine into one that can produce over 500,000 ounces of gold a year.”
Read the entire interview with John A. McCluskey, the President and Chief Executive Officer of Alamos Gold, exclusively in the Wall Street Transcript.
Jonathan Brandt, Senior Equity Research Analyst, HSBC.
Jonathan Brandt, CFA, is a Senior Equity Research Analyst at HSBC. He is head of HSBC’s LatAm cement, construction and real estate equity research team and also covers the LatAm pulp and paper sector.
He joined HSBC in February 2010 as a LatAm metals and mining analyst, before transitioning to the pulp and paper sector in March 2013.
Previously, Mr. Brandt was a buy-side analyst for six years at a major U.S. investment firm, covering commodity companies in LatAm and EMEA.
He holds a bachelor’s degree in economics from Wesleyan University and is a CFA charterholder.
Mr. Brandt has a definitive outlook for copper prices over the next 2 to 3 years.
“Copper has been in focus for a while.
The attention, ebbs and flows over time, but there’s a structural deficit story to be told for copper.
Demand should continue to be strong, led by renewable energy, green investments, EVs, an so forth.
To a large extent, that’s offsetting whatever weakness we’ve seen in the more traditional uses of copper, such as the impact on trade and manufacturing, slower economic growth, higher interest rates…
And then more, if you combine that with supply issues.
So that’s really been the driver over the past several months.
Also, Freeport (NYSE:FCX) had an accident at their Grasberg operations.
And we saw negative revisions to a few mines in Latin America.
Codelco had an accident at one of their mines.
So that has led to a pretty sharp downturn in supply growth expectations for 2025 and into 2026.
And so, we’re looking at a deficit market for at least 2025 and 2026, but then potentially into 2027.
And then we just don’t have the supply growth coming in copper like we have in other commodities.
So, it’s certainly possible that we’re looking at a structural deficit.
Now that’s been discussed at length for the past five to seven years, that we’re entering into a structural deficit.
It hasn’t necessarily materialized, but with some of the issues that we’re seeing on the supply side, as well as the continued demand growth, it’s definitely something that could be materializing here in the next year or two…
Copper is a second derivative of AI.
It’s used in power generation and electrical components of AI.
So, as AI is going to demand more and more energy, there should be a secondary positive impact on copper.
So by that, I mean, AI itself will use a little bit of copper.
But it’s really the power requirements of AI that will help spur demand for copper.”
James Steel, Chief Commodities Analyst, HSBC
James Steel is HSBC’s Chief Commodities Analyst with specific responsibilities for precious metals.
Mr. Steel joined HSBC in May 2006.
Previously he ran the New York research department of a large U.S. commodities brokerage house.
He also worked for The Economist in the Economist Intelligence Unit covering commodity producing nations.
Mr. Steel’s primary duties at HSBC include the production of daily market reports, including long-term outlooks for precious metals.
These include supply/demand and price forecasts, as well as qualitative analyses.
Mr. Steel studied economics in London and New York.
James Steel has a long term view on the price of gold and the mining stocks that will benefit.
“Over the long run, it’s inversely related to the dollar and it’s inversely related to the real yield on the U.S. 10-year.
Now, that relationship has broken down in the last few years.
But generally speaking, gold is inversely related to the real yield, be it negative or positive on medium term bonds and also on the dollar.
But you have to be careful because those relationships have taken a bit of a hit in the past couple of years…
I talk to all sorts of companies that are related to gold.
Without disclosing any clients specifically, HSBC is a massive physical bullion house.
We’re the biggest in the world.
So we have mining clients, we have recycling, fabrication, smelting, mints, central banks, hedge funds, jewelry makers, retailers.
So, we keep abreast and we service this entire range moving from it coming out of the ground to it being invested in and everything in between.
And so, yes, it’s one of the things that make being an analyst at HSBC a little simpler than in other companies because we have a massive huge physical client base that allows me to draw a lot of information.”
Volatility in the gold market is the theme for 2026 according to Mr. Steel.
“I think the market is going to be very volatile.
Very volatile.
We’ve had a lot of new entrants into the market and they’re certainly sophisticated investors, but they’re not necessarily experienced in gold.
So, this new money that’s come in — like we’ve seen it in the stock market and I’m sure you’ve seen it in many other areas that you cover — this is going to add to the volatility.
And any change in monetary policy, or any change in the geopolitical risk thermometer.
For example, say a settlement in Ukraine, and we’re not saying there will be one, we’re just using that as an example.
So, if the stock market correction continues to the point where we get a lot of liquidation in the gold market, or if we get a change in the House and the Senate in the midterms or elections abroad, all these things I think are likely to keep the market very volatile.
And that’s why we’re looking for spikes higher consistently in the first half of the year before we finally begin to moderate and settle down.
Because you can’t avoid the fact that the jewelry market and coins and small bars are being hit very, very heavily by this high price.
And most gold is bought in the emerging markets, not in Western markets.
And they’re very price sensitive.
And so, when the market does stop going up for any length of time, that could come to bear.
So, I’m looking for a very wide trading range next year.
It’s going to be a very exciting market.
Very exciting.”
Read the entire interview with Mr. James Steel and Mr. Jonathan Brandt of HSBC exclusively in the Wall Street Transcript.
NVIDIA Co-Founder, Chairman and President Jen-hsun Huang
JEN-HSUN HUANG co-founded NVIDIA Corporation in 1993 and has served as President, Chief Executive Officer and a member of the Board of Directors since its inception.
He spoke with the Wall Street Transcript on the record in July of 2000.
Unlike the current market, by July of 2000 the Dow Jones Index had dropped 10% from January of that year.
Mr. Huang was awarded the Ernst & Young Entrepreneur of the Year honor in June 1999 in recognition of his achievement in building NVIDIA from a start-up to the second largest supplier of desktop 3-D graphics processors in the world.
He was also elected as a member of the RAND Board of Trustees in October 1999.
Prior to founding NVIDIA, he held senior engineering and marketing positions at LSI Logic Corporation and at Advanced Micro Devices.
Mr. Huang holds a BSEE degree from Oregon State University and an MSEE degree from Stanford University.
Mr. Huang laid out his strategy 25 years ago:
“NVIDIA was founded seven years ago. We were founded with the vision that 3-D graphics would transform the PC into a much more important consumer platform than was the case in 1993.
Our longer-term vision is that 3-D graphics will be a pervasive medium and that it will be used for all kinds of applications, whether it’s e-commerce, entertainment such as video games or education, such as helping you with your homework or letting you virtually explore the Museum of Modern Art in 3-D.
That was why we started the company, and NVIDIA today has 500 people.
It’s a large company, growing very rapidly.
We’re one of the fastest growing companies in the world today, and our market share is currently about 25% of the PC desktop.”
JEN-HSUN HUANG pointed out that the computer gaming market was a key driver for the NVIDIA innovations that have led to it’s current success.
“NVIDIA is recognized as a leader in 3-D graphics, and so there are several trends that are going to affect the way that the PC industry utilizes 3-D graphics.
First of all, Sony’s efforts with the PlayStation 2 game console will force the PC industry to significantly raise the bar in 3-D graphics performance.
All of the content that is being developed today and that will be available in the next 12 months encompasses and embodies substantially richer 3-D graphics because of competition created by the capabilities of the PlayStation 2.
Again, this has forced the entire PC industry to raise the bar on its own capabilities in the world of 3-D performance.
The second thing is broadband Internet driving PC multiple media capabilities all over the place.
The more broadband capability we get ‘ the more streaming videos, streaming audios, streaming 3D ‘ the more we are going to be able to utilize these functions on the PC.
This increased broadband capability will drive the multimedia content and capability of the PC-based platform substantially higher.
The third major trend we see is that chip integration, which is enabled by Moore’s Law, will continue to transform the traditional, core logic business into a 3-D graphics business.
In certain segments of the market, it will no longer be cost effective to have a separate computer processing unit (CPU), such as a Pentium
processor, and a separate graphic processing units (GPU).
The integration of these two key components will drive costs down in such cost-sensitive markets as e-machines, without significantly sacrificing performance.
Graphics processing is much more complex than general computer processing, and our expertise is obviously in the graphics end.
So this trend toward integration is going to create new opportunities for us.”
The trend is your friend according to CEO and Chairman Huang:
“The biggest single opportunity is the explosion of digital devices that are connected to the Internet ‘ game consoles, PCs, mobile
devices, hand-held devices, plus a new category of product called Pocket PCs, which are completely sold out.
Whether portable or stationary, these devices will require more and more rich graphics and rich audio.
All of these devices need rich multimedia.
NVIDIA is recognized as a leader in multimedia technology: in your 2-D graphics digital video, HDTV quality video, and 3-D graphics ‘ all of which are capabilities that NVIDIA is known for.
I think NVIDIA is well positioned to take advantage of this explosion in digital devices.”
One compelling insight into the future growth of NVIDIA under JEN-HSUN HUANG is the quality of their customers in the year 2000:
“Today our targets are the PC industry, the workstation industry, the consumer electronics industry ‘ the Who’s Who of each industry.
On the PC front customers include Dell, Compaq, IBM, HP, Gateway, Sony; in Europe, NEC Packard Bell and Siemens/Fujitsu.
In other words, the major PC OEMs of the world are all customers of NVIDIA.
On the workstation side, 100% of the world’s workstation companies buy graphics processors from NVIDIA today: Silicon Graphics, Compaq, Dell, HP and IBM.
On the consumer electronics side we have partnered with Microsoft to develop the key components in Xbox to compete with Sony Playstation 2.”
The supply side was also covered as JEN-HSUN HUANG had already covered semiconductor inputs from TSMC:
“NVIDIA’s business clearly is growing very fast.
We are one of the fastest growing semiconductor companies in the world.
We have grown 100% year-over-year for the last several years.
For the foreseeable future, we are going to continue to grow very quickly.
So I would say that my greatest concern is growth and whether our partners can grow as fast as we can.
And with rapid growth is the challenge of retaining a highly focused culture and vision internally.
So those are my greatest concerns these days.
…Our single most important partner is TSMC.
TSMC is the world’s largest foundry, located in Taiwan.
It is the world’s most respected foundry, and we are one of their largest customers.
It is a terrific partnership.
TSMC is absolutely terrific and world-class.”
From his office in Santa Clara at the time, JEN-HSUN HUANG did not hedge on what he saw in the future for NVIDIA:
“The reasons are actually pretty simple.
The explosion of visual devices has created a huge multimedia market.
We are the best in the business, the most focused in the business and the single best pure-play of multimedia in the world.”
Read the complete year 2000 interview with JEN-HSUN HUANG of NVIDIA in the Wall Street Transcript and get more start up public semiconductor companies in our latest Technology Report and Semiconductors and AI Report.
Vitaly Umansky, Global Gaming Senior Analyst, Seaport Research Partners
Vitally Umansky is the Global Gaming Senior Analyst at Seaport Research Partners and has been based in Hong Kong for the past 18 years.
Prior to Seaport, Mr. Umansky was the Global Gaming Analyst with Bernstein Research (Sanford C. Bernstein) for nine years.
Before research, he was in private equity and advisory in the gaming and leisure industries; was CFO of New Cotai Holdings, a private equity backed casino development investment and company; and earlier in his career was with Merrill Lynch investment banking in M&A and leveraged finance, where he did work in gaming, leisure and hospitality, among other industries.
“I do global gaming.
I’m based in Hong Kong, and I frequently travel to the U.S.
My coverage is largely the gaming stocks that have Asia exposure, both the large caps in the U.S. and Hong Kong-listed Asian gaming stocks.
We’re going to be expanding coverage down the road to include more U.S.-oriented gaming companies, as well.
I’ve been doing equity research since 2014.
I previously was with Sanford Bernstein, and I’ve been with Seaport for about two years.”
“The first company in my coverage reported yesterday afternoon, so it’s good timing.
Las Vegas Sands (NYSE:LVS) had the best performance that they’ve ever had in Singapore, which is their flagship property.
The Marina Bay Sands, which is the largest casino in the world, blew away all expectations, well above consensus estimates and significantly above my bullish estimates for that market.
That’s probably been the biggest surprise so far.
It’s literally just getting underway, so you haven’t had that many companies reporting yet in the gaming space — it’ll be happening over the next two or three weeks.
But I think if you look at the entire market, that Las Vegas Sands’ result in Singapore will probably stand out as one of the biggest surprises of the third quarter results.”
Mr. Umansky focuses in on the online gaming sector.
“In my coverage, MGM is a half-owner of BetMGM, which is the third-largest online operator in the United States.
They pre-reported their Q3.
They’d been having some problems, but the last two quarters they’ve been seeing a nice turnaround.
They’ve engineered some changes within the company.
They’re much more focused on the online casino piece of the business, which is more profitable than sports betting.
You’ve got operators like DraftKings (NASDAQ:DKNG) and Flutter (NYSE:FLUT), which owns FanDuel, which dominate the sports betting market in the United States.
I think the biggest question around the sports betting market coming out of these earnings and management conversations is going to be around prediction markets — a new market that’s been developed by other operators who are unlicensed gaming operators, and they’re trying to implement a sports betting type of business without complying with state law, using a federal loophole in the Commodity Futures Trading Commission rules to try to create what they do not call a gaming market, but is effectively a gaming market.
In the long run, if it’s allowed and if the lawsuits that are currently in process go the way of the prediction markets, they are a new competitive force within the online sports betting industry.
That’s something to keep an eye on. But overall, the online business in the United States is the growth market for gaming in the world right now.”
The international “whale” high-roller in the Las Vegas market looms large in investor’s minds but perhaps it should not.
“The bulk of the business in Las Vegas is U.S.
International business has been a very small piece of Las Vegas, 5%, for some operators maybe a little bit more, a little bit less for others.
That business is softer.
The Canadian business, for example, has seen a significant drop off in visitation into Las Vegas.
As we’ve seen, the overall number of tourists coming into the United States from Canada dropped off dramatically.
This is largely in light of some of the new regulations and laws passed around visitation, in terms of potential risk for tourists coming in and what they have to deal with, and there seems to have been backlash, especially from Canadians, about coming to the United States.
If you look at Florida, for example, not necessarily a gaming market, but visitation to Florida, which was a really big destination for Canadians, especially in the winter months, softened dramatically.
We’re seeing a significant amount of residential real estate being put up for sale by Canadian owners who no longer want to come to the United States.
The same thing is happening in Las Vegas.
They’re just not coming.
We’ve seen a 40% or so drop in the number of airline seats flying into Las Vegas out of Canada.
So, it’s definitely been in decline.
However, recently there have been some new airline routes into Las Vegas. Air France, for example, now has a direct flight from Paris to Las Vegas.
They haven’t had that in a long time.
Overall, international business has been soft, but it doesn’t impact the regional casino market in any way whatsoever.”
More insight into the current gaming market and interesting plays in the new online gaming sector are revealed in our interview with Chad Beynon.
Chad Beynon, Managing Director and Head of U.S. Research at Macquarie Capital (USA) Inc.
Chad Beynon is a Managing Director and Head of U.S. Research at Macquarie Capital.
Since 2007, Mr. Beynon has headed its consumer sector coverage and has been conducting research and publishing reports on gaming, lodging and movie theater companies.
In 2012, Mr. Beynon received recognition as one of Institutional Investor’s Rising Stars of Wall Street in gaming and lodging as voted on by corporate clients.
Prior to joining Macquarie, Mr. Beynon worked at Prudential Equity Group covering the beverage sector, followed by the gaming sector.
Mr. Beynon graduated from the University of Maryland, double majoring in finance and logistics/supply chain management.
“It’s difficult to appreciate the wealth effect from rising equity prices and home prices for higher income earners, but it’s really helped the economy.
In addition, we believe that up to 40% of U.S. homeowners don’t have a mortgage anymore, so their liabilities have come down.
And, as mentioned, they continue to prioritize spending on travel, whether it’s bucket list types of items, taking their families on vacations, or just exploring parts of the world that they’ve only read about in a book.
And then shifting to the digital landscape, we continue to see a healthy shift towards digital versus. retail experiences.
This includes mobile gaming — sports betting or iGaming — media streaming, as well as wellness trends aided by technology.
In addition, improved technology has benefitted the travel experience, from booking to curating the experience.”
“The second one that we like is Churchill Downs (NASDAQ:CHDN).
This is a $10 billion market cap company.
They have a prize-winning asset in the Kentucky Derby, which generates money from sponsorships, media, ticket sales, and wagering around the Kentucky Derby, which is the first week of May every year.
That event continues to grow.
They also have exposure to land-based casinos that benefit from the horse racing industry in states where the local governments are trying to maintain the level of investment in that horse racing industry.
The company also increases their dividend by 7% per year, which is rare in the space.
They have acquired 5% of their own stock this year.
And we think they’re trading at a fairly attractive valuation.
So, that also fits into the higher end spending category.
A second thematic is towards digital, particularly the picks and shovels side of technology.
Within sports betting there are two companies that provide the official data to the leagues, to the teams, and also to the media broadcasters.
And importantly, they are the leader in sports betting integrity, so when we see potential issues from a sports betting integrity standpoint, these companies also serve as the whistleblower.
They are extremely important to the leagues, which continue to see rising valuations.
These companies include Sportradar (NASDAQ:SRAD) and Genius Sports (NYSE:GENI).
They essentially have a duopoly in the space.
They have deep moats around their data collection processes, and they continue to work with advertising companies to increase the value of their business.
Next, we do want to have exposure to the B2C side of this sports betting growth, and that leads us to DraftKings (NASDAQ:DKNG).
This company is a top two player domestically in sports betting and iGaming.
Recently there’s been some competition in the prediction markets, which are a highly contested form of trading.
These trades or contracts may be around potential outcomes of an election, a game show, or even the World Series.
There are legal issues around this, but we think DraftKings will come out of this in great shape, regardless of the decision.
Last week, they even made an acquisition in this space, so they essentially bought an insurance policy to participate in this space if it remains legal, and if it doesn’t remain legal, we think it’s a value stock at these current levels.
Bottom line, they’re growing 20% and currently trading at below average valuation levels.”
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