Private equity investing is all the rage with pension funds and college endowments ramping up returns with their estimates of the value of their limited partnership shares.
There are value investment portfolio managers who see incredible discounts to these estimates of value in their publicly traded portfolios.
Private equity investments at a big discount to public valuations: is this a current sweet spot for investors?
Scott Hood and Evan Fox detail their logic in two exclusive interviews in the Wall Street Transcript.
Scott Hood, Chairman and Portfolio Manager, First Wilshire Securities Management
Scott Hood, CFA, CFP, serves as Chairman and Portfolio Manager at First Wilshire Securities Management Inc. He joined First Wilshire as an analyst in 1993, was promoted to Chief Executive Officer in 2001, and became Chairman in 2019.
“…On the institutional side, we’ve noticed there’s been less and less interest in active management, and a lot more interest in private startups, private equity, and maybe real estate.
We have studies going back over 90 years on the market and value and small cap and mid and large and international, and we’ve been in this remarkable time of a very few large tech stocks in the U.S. dominating the world’s returns.
So, I spend a lot of time on the more technical aspect of that, and also trying to give examples of these hundreds of small companies that trade almost like private equity.
They’re like private equity without the high valuations; there are all these great companies that are a bit forgotten, because there’s not as much interest in those inactive and small companies.
On the individual side, say high-net-worth individuals, I spend a lot of time explaining First Wilshire and our research process and what’s different.
You asked, what are people worried about?
They were worried about politics, so we had to explain that there really hasn’t been a correlation between who got elected and performance in the stock market.
Every time there’s an election, there’s a big group of people who say, “I’m getting out of here if so-and-so wins,” so we’ve tried to put this into broader, historical context, to explain that it’s probably not a good idea to take all your money and make extreme decisions based on a single election.
And then we’ll spend time explaining that, well, when the market’s gone up a lot, people tend to feel more excited, and then they have too much money in the market, and then when things get a little scarier, they tend to take money out — and usually it should be the opposite.
I guess I’ve learned in decades in the business that psychology can be more important than earnings, growth and valuations, so we spend a lot of time with the clients on that.
I explain a lot about our history and our firepower.
We’re all, I’d say, academic, investing business nerds.
We don’t have a marketing department, so we’re not out there banging the drum about First Wilshire.
And the problem is, most companies are all about marketing and not much on the meat and potatoes, and they bring in massive amounts of assets to be put willy-nilly into the same junk that everybody else has.
Somebody like us, who does so much work with such a long track record, we have to explain to clients the difference between us and these other companies that they may have a more favorable impression of them than they should, in our opinion of course, just because the marketing dollars are hitting them in the right way.
Obviously, I’m a little sour about that.”
One small cap company that is wildly undervalue according to the First Wilshire portfolio manager is Aviat Networks (NASDAQ:AVNW).
“There’s a company called Aviat Networks (NASDAQ:AVNW).
They’re based in Austin, Texas.
Aviat does private networks, and in this case “private network” refers to a private cellular and internet network in an area where it works better to do microwave and radio technology rather than wiring an entire area.
Say, a large industrial park, or stadiums use these and are a growing area.
Multiple dwelling unit projects are a growth area.
The company provides the equipment, software, design and installation for these systems.
They had three years of really strong revenue growth and earnings.
Then they had — and this was the time we got interested — an internal control accounting issue.
It was the first quarter last year, and the stock really got hit.
It wasn’t material and it wasn’t intentional, but it really hurt the stock.
Then they came back with strong quarters again, just the stock hasn’t caught up with the performance.
It’s a low p/e company.
It’s trading about 8 times next year’s earnings estimates.
Balance sheet is in good shape.
A lot of growth opportunity ahead.
You look for turnarounds, in a sense.
When they have a problem, you take a look.
A lot of times they’re down for a reason, and it’s going to be hard to turn it around.
We didn’t feel that was the case here.
We felt that the business was in great shape, and the discount that came from the accounting interruption was just too much.
And it’s recovered a little bit, but has a lot further to go.”
Evan D. Fox, Co-Portfolio Manager for Pzena Investment Management
Mr. Fox became a member of the firm in 2007.
“For small caps especially, I think those first couple of questions — why does it exist and is this a good business — make it important to understand that many of the companies that we’re investing in are leaders in some sort of niche market, and that’s what creates the fantastic opportunities.
They’re not going after markets with tens of billions of dollars of revenue.
Instead, we have companies like Shyft Group (NASDAQ:SHYF), that is a leader and one of two companies making step-in vans, which are the ones UPS and FedEx use.
We also own MasterBrand (NYSE:MBC) and American Woodmark (NASDAQ:AMWD), which are leaders in making kitchen cabinets throughout the United States.
And Steelcase (NYSE:SCS), which is one of the two largest office furniture manufacturers in the world.
We have a whole range of other companies that are leaders in specific areas, and that’s what makes it exciting — that we can have fantastic businesses that many people have never heard of.”
Private equity investing through the public market: get the complete exclusive interviews plus many more only at the Wall Street Transcript.
Matt Ehrlichman, CEO, Chairman, and Founder of Porch Group Inc.
Matt Ehrlichman is the CEO, Chairman, and Founder of Porch Group Inc.
Prior to founding the company in 2011, Mr. Ehrlichman was Chief Strategy Officer at Active Network, responsible for ~85% of the company’s P&L.
Mr. Ehrlichman joined Active Network in 2007 and helped grow its revenues from ~$65 million in 2006 to ~$420 million and an initial public offering in 2011.
Before joining Active Network, Mr. Ehrlichman was co-founder and CEO at Thriva, which was acquired by Active Network in March 2007 for ~$60 million.
Mr. Ehrlichman built Thriva out of his dorm room at Stanford University, where he received his Bachelor of Science in Entrepreneurial Engineering and Master of Science in Management Science and Engineering.
In 2014, Mr. Ehrlichman was named USA Today’s Inaugural Entrepreneur of the Year.
Homeowners insurance is Mr. Ehrlichman’s new business focus.
“For a lot of the big legacy insurance companies, the strategy is to sell your insurance product and then hope that the customer never talks to you and you don’t talk to that customer.
They hope they don’t ever file a claim.
We want to be better.
We believe there’s an opportunity to be better than simply hoping there’s never communication.
We want to provide this complete solution around their home, around their move, and then ongoing using our tools to help them manage their home.
We believe that homeowners want to be able to maintain their home and if there are key risks with their home, to let them know proactively if there’s a big weather system coming in.
There are some things they can do to make sure their home’s protected, to make that easy for the consumer.
So, it’s a more proactive experience that simply makes managing and owning a home easier at the end of the day.
That’s different.
I’d also say that generally in the homeowners insurance industry, there are a lot of legacy carriers that, given all of the weather trends, that are just saying, “Hey, we want out. We’re not going to take more business in these places.”
And because of the data and the insights we have, and just how the business has been successful, we want to help homeowners and homebuyers, especially those who have maintained their homes well.
That allows us to meet consumers where they are, which is they need protection for their home. We’re here to partner with them.”
Mr. Ehrlichman has just radically altered the homeowners insurance business model of Porch.
“For a number of years, Porch has been the insurance carrier.
What that means is when there are losses, claims, costs, weather events, that we experience, we pay the claims and we experience that volatility.
One thing we’ve been working on for quite some time — years now — is what we’ve accomplished at the start of January, which is to form what’s called in the industry a reciprocal.
You can think about it kind of like a mutual company.
In the insurance industry, a lot of the big insurance carriers, they’re actually owned by the policyholders.
That’s what the reciprocal is.
We don’t own this reciprocal entity.
It’s actually owned by the policyholder members.
We, as of January, become just the manager, the operator of the reciprocal.
So, all the employees stay with Porch Group.
We run the business, make sure its pricing, the claims are handled really well.
But the reciprocal pays for the claims costs when they come up.
The volatility happens there.
And now our business is set up as just very simple, very clean.
We get commissions and fees back from this reciprocal for managing our business.
That will make us an easier business to predict for investors.
It’ll make it a more valuable business over time because we don’t experience the weather volatility.
Now we go and we help grow the reciprocal and our fees just continue to go up as that reciprocal entity grows…We just announced…the first quarter operating under our new go-forward business model as the manager of the reciprocal instead of the carrier itself.
And so, the results that we demonstrated were going to be important no matter what, just so investors could see a proof point for how this business looks going forward.
Great news: The results were exceptional.”
Going forward, Matt Ehrlichman sees a bright future for Porch once interest rates drop.
“We see three broad trends.
First, homeowners and homeowner purchases.
Existing home sales obviously are still sluggish, and we expect that to continue until mortgage rates come down.
We’ve been in this period for a couple of years now and all that means is that there’s pent-up demand.
As soon as rates go down, we expect the volume of home sales to increase.
That helps our business very directly.
Secondly, weather trends would be the other broad trend; weather is and will become worse.
Again, the great thing for us is that doesn’t impair us in a way that it did previously.
In fact, as weather is worse, homeowners insurance premiums will go up, and we will generate higher management fees.
And third, I think, generally homeowners insurance carriers are making sure that the prices and value proposition is set such that they can remain in business.
They can remain healthy and be able to generate the appropriate amount of profit.
That’s important because we want to make sure that we’re aligned with the market on that and the market’s really moved to make the adjustments that it needs, so that the businesses can remain healthy.”
Matt Ehrlichman believes the homeowners insurance business he has created with Porch is more than just a profit and loss statement.
“At the end of the day, I’ve been fortunate to have built some successful companies before Porch.
So, this is my last company.
The whole purpose of building one more company was to try to build a great company.
That’s the word that we talk about.
Build a company that when you look back when you’re old, you’re deeply proud of.
Certainly, that includes building something that’s really big and really valuable, but it also includes building a company that’s a great place to work, building a company that has a deep sense of values and connection between people.
The first thing that you’ll see up on the wall when you go into a Porch office is, “No jerks, no egos.”
We believe that you can be a good human, you can be kind to one another and still go build something great. Right?
That is a really important part of my job: to make sure that we have just exceptional people, that we’re all aligned on where we’re heading.
We’re all connected by this shared set of values that sets us up to just do great work every day, go solve those next problems that are in front of us.”
Read the entire 3,104 word interview with Matt Ehrlichman, the CEO, Chairman, and Founder of Porch Group Inc. (NASDAQ: PRCH) exclusively in the Wall Street Transcript.
Value stock investor experts advise that the long run strategy is going to win out.
Andrew Wellington, Chief Investment Officer, Lyrical Asset Management
Andrew Wellington is the Chief Investment Officer of Lyrical Asset Management LP, which he co-founded with his longtime friend, Jeff Keswin.
He has been a value investor for over a quarter century.
After spending five years in management consulting, in 1996 Mr. Wellington joined Pzena Investment Management as a founding member and its first research analyst.
Five years later, in 2001, he joined Neuberger Berman, where he went on to run their institutional mid-cap value product.
At Neuberger, Mr. Wellington’s investment performance improved his fund’s three-year Morningstar rating from three stars to five stars, while product AUM tripled from $1.1 billion in 2003 to $3.3 billion in 2005.
After Neuberger, he spent two years in activist investing at New Mountain Capital.
Mr. Wellington graduated summa cum laude and as the top graduating senior from the University of Pennsylvania’s Management & Technology Program in 1990, earning a Bachelor of Science in Economics from the Wharton School and a Bachelor of Science in Engineering from the School of Engineering.
His value stock investor advice is simple: good beats bad.
“When we founded Lyrical, our goal was to generate the highest returns we could over the long run.
We didn’t have to be value investors.
We could invest anywhere we thought would generate the highest returns.
But looking at the data, the cheapest stocks are where you find the highest returns, and so we are value investors.
We look for our investments in the cheapest 20% of the market, the cheapest quintile.
This is now my 30th year as a value investor, so I’ve been doing this a very long time.
Over the first dozen years or so of my career, I was sifting through this cheapest quintile of the market, and I began to observe a few things.
I noticed that I was a lot more successful as an analyst when I analyzed a good business than when I analyzed a bad business.
When I analyzed a good business, things tended to work out a lot more often.
The real world is unpredictable, and all kinds of unexpected things would happen.
But good businesses found a way to adjust, adapt, be resilient, and still end up making about the same earnings I projected it to.
Bad businesses were the opposite.
A lot of things could go right, but if only one or two things went wrong, I ended up with earnings much worse than I projected, and that made them much harder to get right.
And so that was one observation — that good businesses tend to work out a lot better than bad businesses.”
His value stock investor methodology leads to Ameriprise:
“Despite not owning any banks, financial services is currently the largest sector exposure in our portfolio.
How can we have such a big exposure to financials without owning any banks?
Well, we have found many great businesses that provide services that are financial, but don’t have the huge tail risk that banks have, and are thus much more analyzable.
And that brings us back to Ameriprise.
Ameriprise is in the wealth management business with about 10,000 financial advisers.
They are also in the asset management business, primarily consisting of Columbia Threadneedle.
Rather than lending money and hoping to get it back like a bank does, Ameriprise takes in money from clients and charges them fees on it, so it doesn’t have the tail risk that a bank does.
Ameriprise has been a very well-managed company.
If you go back to the dawn of the financial crisis, the end of 2007, before the crisis started, they’ve compounded their earnings at over 15% a year since then.
And yet, over that same period of time, the S&P 500 has only grown its earnings at about 5.5%.
So, this is a company that’s growing two to three times faster than the S&P 500.
And yet the S&P 500 has a multiple of over 20 times earnings, and Ameriprise has a multiple that is less than 14 times earnings.
We like getting two to three times the growth of the market for a huge discount.
On the other hand, while it’s had this great growth rate for over 15 years, and it’s had a low multiple for over 15 years.
The market has not recognized this great earnings stream yet.
So, it’s taken a lot of patience, but just because we haven’t gotten the multiple expansion doesn’t mean that it hasn’t been a worthwhile investment.
Because the earnings growth has been so good, the stock has still been able to do very well without that multiple expansion, and we can continue to patiently hold on to it.
Our thinking is that if they continue to grow their earnings faster than the market and their multiple doesn’t go up, well, that’s a good outcome.
But the market should be greedy and selfish and recognize that it can get a bargain and get this great earnings growth at a much cheaper price, and that should drive the multiple up over time.
And if that happens, then it’s an even better outcome.
Just because re-valuation takes a long time doesn’t mean that’s a bad outcome.
It’s suboptimal. You always have a better outcome when re-valuation happens quickly.
But this is the importance of owning good businesses that can compound their earnings.
The only way you really lose on any investment is you get the earnings wrong or you get the price wrong.
The way you get the price wrong is you pay too high a multiple for a stock, and even if over time you get good earnings, the multiple compresses and hurts your return.
Another value stock investor, and one the Wall Street Transcript has interviewed before, is Scott Hood, CFA, CFP.
“By sticking to cheap stocks we take away the risk of overpaying, and it just comes down to the underwriting risk of getting the earnings wrong.”
Scott Hood, Chairman and Portfolio Manager, First Wilshire Securities Management
Scott Hood serves as the Chairman and Portfolio Manager at First Wilshire Securities Management Inc.
He joined First Wilshire as an analyst in 1993, was promoted to Chief Executive Officer in 2001, and became Chairman in 2019.
Mr. Hood is a Chartered Financial Analyst and a member of the CFA Institute.
He is also a CFP professional.
He serves as a board member of The Mount Wilson Observatory and The Sierra Madre Mountain Conservancy.
Mr. Hood holds a Bachelor of Science from The Stern School of Business at New York University.
“If it’s a severe undervalued situation, it can correct pretty fast, and I’d say every year that goes by things move quicker.
Whereas you could find something that was cheap and it could stay cheap for a little longer, it can happen a little sooner now, there’s maybe a little more information moving around or being discovered sooner.
So, if it’s a quick turnaround and the stock goes up a lot, then it can move into an overvalued position sooner.
When we buy, in a typical case, the one or two analysts that cover the company don’t like it, something’s gone either sideways or down, and after some research we might become sufficiently comfortable that things are turning around and the market is punishing them too much.
Sometimes it’ll take years before we get into a stock.
Sometimes it could be a week or two if we really find something undervalued.
And then we slowly acquire it.
You have to be very careful in your trading — we have internal trading, one dedicated trader with backups and technology — to not spook the market when we’re getting in or out.
We try to hold our cards close to the vest.
The typical pattern of stock ownership for us would be something that’s trading under 10 p/e with over 10% growth, and people don’t realize the growth and business power yet.
And later, once it starts trading a lot above its historical p/e, the industry p/e, once the analysts have all come back and said “we love it,” we tend to move out of it into something else cheap and misunderstood.
One change we’ve made over the last 20 years is we might hold it a bit longer even though it’s gotten back to a decent valuation.
We’ve found that companies can run a lot more.
So, as long as we are really confident in the coming quarters’ operations of the company, we might wait another few quarters before we fully get out of the stock.
Actually, a lot of companies will trip up again, and we’ll come back into them years later.
One we’ve had is IMAX (NYSE:IMAX).
You’ve heard of the company IMAX that does the movie equipment and production to produce the highest quality movie experience.
We owned it at one point — actually I think we were one of the top owners of IMAX many years ago — and it was a real turnaround situation.
We got out of it about eight years ago, and then got back into it last year.
So, the same ideas can keep coming around, and if we’ve owned them before, we generally have a fairly high level of knowledge of the company and can get back up to speed quicker.
We’re always looking back at what we’ve owned.
If it comes back into our buying range, we can do it again if everything lines up.
IMAX was a funny case, because you had COVID hit; people didn’t go to theaters, and people learned how much better it was to be at home and not in a sticky theater seat.
But if you do go to a theater, you’re going to want to see the best, something you can’t get at home.
If you’re going to make that trip to the theater and the cost and effort of it, it better be special. And IMAX is a completely different experience.
There was a bad film slate coming out of COVID, and also due to the strikes, and so the material was weak.
The stock was really down.
Then there was a great slate coming, and then they had “Oppenheimer.”
“Oppenheimer” was a beautiful movie on IMAX. Less than 2% of the screens that “Oppenheimer” was being shown on were IMAX screens, but they did over 20% of the revenues.
That shows you the power of the brand of IMAX. They’re global, and they have a big backlog.
But the point is, you watch companies.
The decision to get in is certainly based on valuation and what you know about the company.
And then once you’re out, you keep following them, and you might get another chance.
We might own something twice in a 10-year period, and each time we own it we get in knowing more, and we learn more as we go through the cycle with them.”
Read all the interviews with value stock investors in the current 2025 Value Investing Report, exclusively in the Wall Street Transcript.
The AI revolution has seen investor returns skyrocket for certain semiconductor manufacturing companies.
Tore Svanberg, Analyst, Managing Director, Stifel Financial Corp.
Tore Svanberg is an Analyst and Managing Director at Stifel Financial Corp.
Mr. Svanberg is a Managing Director in the Technology group, covering semiconductors with a focus on analog, connectivity and processor semiconductors.
He has been an analyst for 22 years and has been recognized for his work by The Wall Street Journal’s “Best on the Street” Analyst Survey.
His insight into the upstream components of the AI expansion for semiconductor profits is an important consideration for investors looking to capitalize on this trend.
“First of all, you’re right; there is an exemption for semiconductors, especially exports coming out of Taiwan.
As you may know, Taiwan is the hub, especially for fabless semiconductor companies where you have TSMC (NYSE: TSM) manufacturing wafers for U.S. semiconductor companies.
So, semiconductors are exempt today.
Again, that would be that direct impact, right?
Then, if you think about moving further up the value chain to actual phones and other consumer electronics, yes, you’re right, some of those are also exempt.
But again, keep in mind that as of today, there’s basically a blanket 10% tariff on anything.
Then there’s exemptions.
Obviously, China is the big topic, where the tariff rate is significantly higher than that 10%.
And I guess that’s where, obviously, there has been some encouraging developments from the negotiations that get started on Saturday.
Both parties are working to bring tariffs down, but there is still some uncertainty as it relates to the final numbers as the negotiations include other topics than just economics and trade.
But what’s very interesting, again, from an electronics perspective, is that this sort of U.S.-China trade war didn’t start on “Liberation Day.”
It started almost a decade ago.
I would say a lot of electronics manufacturing has already moved outside of China, especially to places in Southeast Asia.
So here we have countries like Malaysia, Vietnam, Cambodia, and, as you may recall, on April 2, some of those tariffs were very, very high.
I think that’s why investors kind of freaked out, because if those tariffs are going to be high, we have a serious problem.
Obviously, now we have this 90-day window where those tariffs are now more at 10%.
And then there are negotiations going on with each country to see where that number is going to settle down.
But yeah, already a lot of manufacturing has moved away from China and into Southeast Asia.
I think that’s a very important point to make.”
The AI computing process in very energy intensive and requires specification compliant components to make it all work.
“Certainly AI has become a very important growth driver for the semiconductor industry.
But I think what’s sometimes not clear from an investor perspective is how AI is going to impact the whole space.
Up until now, of course, everyone’s been really excited, but Nvidia (NASDAQ:NVDA), because they are the leader in GPUs and obviously GPUs are the bedrock of high-performance compute that you need for AI.
But I think what’s not as well understood is that it’s not just about compute.
You need networking technology, you need power.
There are a lot of semiconductors that go into building an AI cluster.
The two areas that I’m very focused on are on the networking side.
There, you have copper connections and optical connections, and then there are all different types of standards within the networking industry.
And then on the power side, of course, a lot of these AI clusters use an immense amount of power, all the way from the grid to the actual GPUs and CPUs themselves.
There are certainly companies there that I cover that benefit from that as well…
On the networking side, we have companies like Marvell (NASDAQ:MRVL).
They are benefiting from the optical networking that is required in these AI clusters, especially for scale out of AI.
Then, on the copper side of things, which is used more for scale up, we have companies like Credo Technology (NASDAQ:CRDO), also Astera Labs (NASDAQ:ALAB).
All three of these companies have very high exposure to AI infrastructure.
If you then take it a level further down, you have companies like MACOM (NASDAQ:MTSI) and Semtech (NASDAQ:SMTC), which are also benefiting quite a bit from both optical and copper connections.
But their percentage of exposure to these markets is not as high.
So, here we’re talking about maybe 20%, 30% exposure, whereas the previous three companies that I mentioned have anywhere between 60% and 100% exposure to AI infrastructure.
On the power side of things, we really like Monolithic Power Systems (NASDAQ:MPWR).
This is a company that historically has done really well handling the power for the processors themselves.
Whether it’s GPU or CPU power management, they are the leader.
But they’re now also taking things to the next level and working on what we call rack power.
They’re trying to optimize the entire power envelope all the way from direct current transmission that’s coming into the data center, all the way to the actual processor power management.
Monolithic Power is definitely a company that I think is going to continue to benefit a lot from the trends we’re seeing for rack power.”
The AI sector growth may also lead to even more semiconductor stock upside.
“Companies like Texas Instruments, Onsemi, NXP, they all talked about the beginnings of a recovery in the industrial market, which was a bit of a surprise to investors.
I still think there’s a debate out there, whether that is tied to pull-ins because of tariffs or whether we are actually starting to see the beginning of a new capex cycle.
My guess is that it’s probably a little bit of both of those things.
Obviously, if we’re going to see a more sustainable capex cycle, we are going to have to see interest rates continue to come down.
That’s very important for industrial capex.
But we also obviously need to see a little bit more certainty around the tariffs and how those play out over the next few months.
But I would say that is the one area that was a bit of a surprise so far during earnings season.”
Contrarian investing, or being greedy when others are fearful as Warren Buffett says, is a difficult concept for most US equity investors.
“When you’re working for a large bank like Oppenheimer, you’re being compensated well and you are really treated with respect. And there’s just that platform that is amazing. But I wanted to do my own thing, to invest in myself and my own business.
So, I founded Tecumseh Partners. And what Tecumseh Partners does is advise biotech and financial firms on valuation, communication, and strategic positioning.”
Hartaj Singh, Founding Partner, Tecumseh Partners
Hartaj Singh is a Founding Partner of Tecumseh Partners, advising biotech companies on valuation, strategy, and investor engagement. He also writes The Biotech Capital Compass, a newsletter focused on biotech market trends.
Mr. Singh’s 30+ year career spans biotech equity research, hedge fund investing, and consulting — previously at firms like Oppenheimer, BTIG and Lehman Brothers.
With an MBA from Duke and a background in computational neurobiology, Mr. Singh brings a science-driven approach to biotech investing.
“There’s a lot of medical tech that’s exported to China.
So, I think wherever there’s a manufacturing-intensive CDMO model — and I believe WuXi (OTCMKTS:WXXWY) and other firms participate there — those could have some initial headwinds.
Firms that really depend on a global supply chain as a way of operating, for example those firms with Chinese fill and finish or API sources — those could be really impacted.
And then I’m not a medical device analyst, but I do imagine that there’s probably going to be some counter tariffs from China back to the United States.
So, if there’s anything from the drug side, more likely medical device and diagnostics that are going to China, they will probably get hit.
And then the second portion of this is from a biotech perspective.
There has been a lot of licensing acquisition both from the U.S. going to China and China going across the United States.
And that might slow down. Things may cool considerably in terms of boardroom appetite for cross-border deals.”
The contrarian investing thesis for biotech and pharmaceutical companies is a wide area for Hartaj Singh.
“High quality names — and in biotech, what I mean by high quality, is that I think of it as mentally picturing a diamond.
And a diamond has four points when you’re looking at it.
And for biotech, the top point of that diamond is revenues, the bottom part is earnings.
To the right is future competition and to the left is the pipeline.
So, I think companies where you can check those boxes, for example, like a Gilead, like a Regeneron, or like a Vertex (NASDAQ:VRTX), with good revenue growth, and good earnings growth.
Neither of them is perfect — to the right, not a lot of competition in the future, or muted competition, at least in the next five, 10 years.
And then to the left, a good pipeline. These companies check those boxes.
On the smaller cap side, United Therapeutics (NASDAQ:UTHR) definitely checks that box.
There’s a Chinese company we like called Akeso (OTCMKTS:AKESF).
They kind of hit the four points of that diamond.
So, I like those companies because they’re just quality names and you can buy them and keep a low cost base even if they’re being impacted by this tariff volatility.
We also like U.S.-centric commercial companies.
Most commercial-stage biotech companies have 70% to 90% of their revenues from the U.S., which shields them from much of the tariff risk.
So, you actually do away with all that tariff stuff.
Once people get a little bit of time to calm down and away from this tariff volatility, biotech will become a very attractive sector, because the vast majority of commercial companies have more than two-thirds of their sales in the United States.
What’s not to like about that setup?
We also like strong balance sheets and near-term probability, near-term catalyst, PDUFA events.
So the biotech model for large caps and small-to-mid caps won’t be really impacted once this tariff induced volatility calms down.
Because if your clinical catalyst works, or you get a drug approved, or your sales are better than expected, that stock will work, and we like that.
So as an example, we like this company called Avadel (NASDAQ:AVDL).
They’re the second company launching into narcolepsy and with just a very strong execution on the launch of their product called LUMRYZ.
It’s a strong specialty pharma model.
They’re second to Jazz (NASDAQ:JAZZ).
But McKinsey published a study just a few years ago showing that even second-to-market companies captured 25% to 40% market share.
We like Regeneron, in our diversified U.S.-heavy revenue base.
You look at Eli Lilly (NYSE:LLY), people talk about obesity and diabetes.
But the thing is, this company is going to grow multiple double-digits for the next two, three years.
What’s not to like about that?”
Contrarian investing can also be applied to large cap, dividend paying drug companies.
“If you look at the larger cap side, you can definitely see an aging population.
These biopharma companies are looking at Alzheimer’s, arthritis is still big, cardiovascular disease.
But Alzheimer’s and cardiovascular disease especially.
Biogen (NASDAQ:BIIB) and Lilly have made very large investments in Alzheimer’s.
Sales maybe aren’t doing great right now, but once they start picking up, as we saw with biologics 10, 20 years ago in oncology for example, it becomes a huge area for investment.
So, I like to look at Alzheimer’s, cardiovascular disease.
Novo (NYSE:NVO) and again Lilly are seeing therapies for weight loss and an aging population.
The obesity epidemic, GLP-1 growth for Lilly, Novo Nordisk, ripple effects in NASH, sleep apnea, CV — for the larger biopharma companies that’s the area of interest I’m looking at.
For rheumatoid arthritis, there are seven approved anti-TNF medications, and even the seventh one is doing about $1 billion to $2 billion in sales.
I believe that’s the UCB (OTCMKTS:UCBJY) product.
So, when you have a large area like obesity, you can have four, five, six companies do very well in the long run.
And then lastly mental health.
In that area, increasing demand for neurology, even smaller companies are going there.
On the small cap side, when I look at VCs, AI is the rage.
In biotech, AI is just another tool for us. We’ve been doing what’s called “in silico drug development”; that is drug development on a silicon chip.
That’s been a term for 40, 50 years as opposed to in vitro, or in vivo.
So in a petri dish or in a living thing.
In silico drug development will catch a pretty rapid tailwind with AI.
We’re already seeing that.
And the smaller companies, VCs are going to look at that not just in terms of, for example, designing drug molecules or finding diseases where current drugs could be more useful.
But in advancing X-ray techniques and imaging techniques.
Imaging is actually very amenable to AI.”
A contrarian investing case study can be made for Moderna.
“We were long Moderna in 2020, 2021.
Then we downgraded in 2022, and we held there until early 2024 when we upgraded again. But that was based on the idea that their sales, which they thought would be $3 billion, $4 billion last year, would continue that way. And actually, sales numbers just keep on coming down for Moderna.
If the pandemic hadn’t occurred — and Moderna hadn’t generated $15 to $16 billion in vaccine revenue at its peak — then 2024’s $3 billion-plus revenue run rate would actually look quite impressive.
They did their IPO in late 2018. So now, seven years later, it grew to $1 billion to $2 billion in sales, and getting closer and closer to breakeven.
Companies like Vertex, Regeneron, Genentech — how long did it take them to become breakeven?
Closer to 10 years.
We actually did that analysis when I was at Oppenheimer, published that note that it takes biotech companies about 10 years from the point of an IPO to becoming breakeven.
Moderna is right on track.
I think the nucleic acid vaccines will do great.
And they will continue to get more products approved in therapeutic vaccines.
At some point the current negative sentiment will shift and this will become a pretty big buying opportunity.
But right now, first and foremost, the company has to prove that their revenue estimates can’t keep on coming down.
They’ve got to show us a few quarters and one to two years of increasing revenues and getting products to market.
And I do think Moderna management is among the best.
But there’s been a little bit of overpromising, and underdelivering over the last two, three years. What they need to do now is underpromise and overdeliver.”
Get all of Hartaj Singh’s contrarian investing picks and pans exclusively in the Wall Street Transcript.
Bear markets often cause substantial losses for US equity investors particularly in highly volatile technology and biotechnology stocks.
Jeremy A. Ellis, CFA, a Portfolio Manager/Analyst at Campbell Newman Asset Management, emphasizes dividend growth stocks.
Jeremy A. Ellis, CFA, Portfolio Manager/Analyst at Campbell Newman Asset Management,
“…Our investment philosophy is that a company’s dividend policy is tangible evidence of management’s confidence in future earnings growth.
Our focus there is really on the policy, not necessarily the yield.
We view this as a total return strategy, where we view that dividend policy as a signal from management that is more insightful than their verbal or written commentary, because it involves a non-retrievable cash payment to shareholders.
When we are doing our research, we’re really looking for companies with growing earnings.
We believe that the payment of a dividend, along with the expectation that it needs to be increased every year, imposes an important discipline on management, and that makes them better allocators of shareholders’ capital and ultimately promotes more consistent and predictable earnings over time.
Ultimately, what we’re trying to do is deliver a strategy that participates strongly in up markets and protects in down markets and outperforms our benchmark, which is the S&P 500, over a market cycle. ”
Bear market protection is built into the Jeremy Ellis investing philosophy.
“The research that was done by the team on dividend growth found that when a company initiates a dividend, fewer increase it the next year, and fewer increase it the third year after that.
But by the time you get to five years, it really starts to become institutionalized in the company philosophy, and imposes an important discipline on management that makes them a better allocator of shareholder capital and promotes that consistency in earnings growth that we’re looking for.
So, that’s how we break down the universe, with that dividend factor really being the most limiting and differentiated factor for us.
From there, we do have a valuation overlay, where we look at a company’s price-to-earnings ratio on next year’s earnings, and we look back over 20 years, so we can get some different market cycles in there.
We’re looking to buy companies at 70% or less of that 20-year peak, so we’re making sure we’re not paying peak earnings and we have room to grow over the market cycle.
Ultimately, we’re building a concentrated portfolio of 25 to 35 high-quality stocks that have delivered consistent growing earnings and a consistent growing dividend.
We build that on a bottom-up stock picking basis. We want this to be a best ideas portfolio. We’re letting the high-quality stocks drive where we go in terms of the portfolio construction.”
Bear market dividends provide a downside cushion, and this has led Jeremy Ellis recently to financial stocks.
“…One area that has become built up over the last two years is the financial sector, where we’re carrying an overweight position relative to the benchmark, and that’s through the collection of a number of high-quality businesses.
What we’re looking for there is high-quality recurring business models that can deliver strong growth with consistency, and we tend to avoid areas that have strong macroeconomic sensitivities or significant credit risk.
If you look at our holdings there, our largest position has been Arthur J. Gallagher (NYSE:AJG), that’s one of the leading insurance brokers in the industry.
They help clients understand the risks that they have as a business and help place insurance.
Importantly, they aren’t taking the underwriting risk themselves, and instead are taking a commission on the insurance placed.
They’ve been benefiting from being in a high-risk insurance market and overall insurance premiums going up.
We’ve obviously seen property levels going up, we’ve seen overall for corporates a lot of excess risk needing to be placed, and they benefit from that.
So, that’s our largest holdings, but if you look across our financial sector, we have a number of businesses that fit the profile I discussed.
We have both MasterCard (NYSE:MA) and Visa (NYSE:V) in the payment space, who continue to benefit from strong consumer payments over time globally.
But they continue to diversify their businesses into not only going after the commercial opportunity as that becomes more of a digital card-based business, as well as adding more services to their businesses.
And so, you’re seeing them be very strong, consistent growers.
We also have both S&P Global (NYSE:SPGI) and Moody’s (NYSE:MCO).
The first thought for many is that those are the rating agencies.
They are the two largest rating agencies, but both of them have diversified their businesses greatly over the last number of years into different data and subscription services type business models, where now over half their business for both companies come from those diversified recurring sources.
We also have both Nasdaq (NASDAQ:NDAQ) and Intercontinental Exchange (NYSE:ICE), which owns the NYSE.
Similarly there, I think the first reaction by many is those are exchange trading businesses, but similar to S&P Global and Moody’s, both have diversified greatly over the last number of years, and similarly have greater than half their business models coming from recurring nature type businesses.”
Bear market protection also leads Jeffrey D. Lent, a Partner at Torray Investment Partners and the Portfolio Manager for the Torray Equity Income strategy, to stocks with growing dividends.
Jeffrey Lent is also the Co-Portfolio Manager of the Torray Fund (TORYX) and the firm’s concentrated growth strategies.
“We’re looking for recurring, non-cyclical revenue. I think everyone says that, but we solve for the recurring by running that regression analysis on the revenues, earnings and cash flows, to find companies that are producing positively sloped but consistent outcomes.
When a company’s data plots are all over the place, we question the quality of the business model.
I don’t want to say we’re dogmatic, but we’re very much guided by that process, and that’s very key to understanding our firm and our three different products, which all have a track record of outperforming when markets get dicey, as the time period we’re in now.
That’s when we really shine, and you really see the value of our process and insistence on these robust but steady fundamental outcomes.
Sticking to that process — and I think you see it across the portfolios — that’s really our differentiating factor.”
The bear market stock picks from Jeffrey Lent are idiosyncratic.
Jeffrey Lent, Partner, Torray Investment Partners, Portfolio Manager, Torray Equity Income.
“One is a non-traditional piece of paper, it’s a preferred, and it is not owned for any of the things that I just described — steady, robust, recurring, non-cyclical revenue — it is owned simply as an incredible hedge against the likely largest risk of an equity income or a fixed income stream, which is higher interest rates.
The company is Sallie Mae, and they issued probably 25, 26 years ago now a preferred stock (NASDAQ:SLMBP).
I own it for its terms.
I don’t own it for the business, I don’t own it for the name, I’m not trying to have a credit quality upgrade to get paid.
This piece of paper is priced at three months SOFR, plus 170 basis points.
That’s the coupon, and your coupon will clearly rise as three-month interest rates rise.
It trades at a discount, it’s $75 on $100 par, so you’re getting it at $0.75 on the dollar.
And that math, that SOFR plus 170 basis points right now at a $75 price, is getting you a 9% or 10% yield.
In this world, with all of the concerns that we have right now, straight up higher interest rates based on inflation are probably the biggest threat to future income streams.
I’ve owned that paper for a long time.
It has never really produced the capital appreciation I would have expected, but the coupon has gone straight up the last three years, since 2022.
We all had that miserable year of 2022 when the Fed was raising interest rates every meeting.
So, its coupon went from $1.84 at the end of 2021 to $6.40 in March of 2023.
It was the perfect hedge in the biggest threat dynamic that I can think of for the portfolio.
I own that simply as an anchor to windward.
If higher interest rates are going to threaten the economy and cash flows, I want to own this paper for that time period and for that possible downside outcome.
So, I’ve owned it for a long time.
I do somewhat ignore the credit rating, but I feel very comforted because the common is doing well, the company is buying back stock and raising their dividends, so I feel somewhat insulated being in the preferred.
But I own it simply for those straight math terms that are on the paper; that’s the reason we have this in this portfolio.”
Bear market insurance is also provided by another lesser known dividend growth stock.
“This one is Royalty Pharma (NASDAQ:RPRX), and it’s very much like a private equity company.
They make investments in future pharmaceutical royalty streams, so they will partner with biotech and pharmaceutical companies on a certain product or molecule and invest in the probability of a positive outcome from the development of that drug, and then they will participate in the future royalties that it produces.
The founder has a background in investment banking.
His team has the biomedical research backgrounds.
What we need them to do is pick the right molecule, pick the right drug program, and then price it correctly.
Innovation and R&D are expensive and very risky. Different stakeholders — academics, foundations, biotech and pharmaceutical companies — approach RPRX looking for capital in exchange for royalties on either existing or future products.
Stakeholders prefer to partner with RPRX because it is non-dilutive and does not leverage their balance sheet.
RPRX evaluates and selects deals based on their due diligence.
So, there are two things that Royalty has to get right: Pick the right molecule, and pay the right price for that future royalty stream.
The CEO has a long, very successful track record of doing just that, paying the right price.
He was an investment banker at Lazard, and so he gets the future cash flow discounting pricing correct, and his team guides him to the different drug development opportunities.
The real unspoken attraction here is, these guys get to legally use non-public information, inside information, and as shareholders of RPRX we get to benefit from that — because behind the protection of an NDA, they get to go in with their drug company partner and look at all of the data that isn’t publicly available to public pharma or biotech investors.
So, they get to see all of that while they make their offer of Royalty capital.
They can’t then go buy the stock or do anything like that.
There’s nothing nefarious going on.
But they get to see a lot of things that a public investor in that same company doesn’t get to see as they make their capital commitment, and that’s really unique, very private equity like, but with the overlay of a very specific biotech specialty.
Private equity has high returns, number one.
Biotech has high returns, number two.
But with the added knowledge and experience and capability of pricing these things, they have a very high success rate.
It’s a $15 billion-ish market cap company, and there are less than 100 people working there, so it’s a highly lever-able business model.
They don’t use leverage, that’s not my point, but it’s highly scalable.
They can do this over and over and over again, as long as they have capital, and they have a very good track record of doing this.
And the dividend is growing at a very nice clip right now.
It’s just under 3%, but they’ve raised it several times, and they’re buying back stock.
That’s another attribute that’s quite prevalent in the Equity Income portfolio — buybacks. I like businesses and management teams that are understanding of and capable of paying the owners of the business, paying the shareholders either by retiring shares or paying and raising their dividend.
I like that mindset.”
Find out all the bear market stock picks from these two highly efficient portfolio managers by reading both interviews, exclusively in the Wall Street Transcript.
Nicolas Owens, Industrials Equity Analyst, Morningstar Research Services
Tariff beating stocks may be the best bets for investment for the rest of 2025, here are three from Morningstar Analyst Nicolas Owens.
Nicolas Owens is the Industrials Equity Analyst for Morningstar Research Services, LLC, a wholly owned subsidiary of Morningstar, Inc.
He covers the Aerospace & Defense sector, including Boeing, Airbus, major North American commercial airlines and defense contractors, and key suppliers to the aerospace industry.
“I cover commercial aerospace, defense contractors, and major North American airlines. Included in that are a handful of companies that are suppliers to military and aerospace names — like Hexcel (NYSE:HXL), Heico (NYSE:HEI), and TransDigm (NYSE:TDG).
I’d say the biggest change on my coverage in the last year is that I took over General Electric or GE Aerospace (NYSE:GE) from my colleague who covered it as a conglomerate.
That is the major global franchise in jet engines and that’s more or less all they do anymore because they’ve broken themselves up.
So that’s the biggest recent change in my coverage…
Tariffs are mostly a concern for commercial aerospace, and companies like Bombardier (OTCMKTS:BDRBF) that makes business jets in Canada, and we have yet to see them stick.
So, I haven’t made any changes to my forecast.
And I recently spoke with Bombardier and they haven’t made any changes to how they’re running the business until they know more about what tariffs are going to stick.
Then the third bucket would be — and this certainly has caused investor uncertainty and the stocks to trade down on the defense sector — just uncertainty about budgeting, which is, in a way, normal.
There’s usually some budget uncertainty in the early couple months of the year of a new administration; kind of back and forth with Congress and funding.
But you have an added layer now with Elon Musk and the cost cutting measures under DOGE that people don’t know exactly how, or what, will play out.
Basically, that is one of the major reasons that the defense stocks have traded down recently after having performed quite well for several years.
And we think some of them are looking kind of interesting.
They don’t usually get this cheap.”
The cheap Tariff beating stocks include Huntington Ingalls (NYSE: HII), General Dynamics (NYSE: GD), and Northrop Grumman (NYSE: NOC).
“…Among the cheapest names on my list right now, the very cheapest is Huntington Ingalls (NYSE:HII), which is rated five stars.
And that is likely trading down with the other defense contractors.
So, 99.5% of its revenue comes from the Defense Department, but it also has a specific set of issues around its ability to book revenue in submarine shipbuilding at a profitable rate.
And that is going to be addressed in a new contract that they sign with the Navy, along with General Dynamics (NYSE:GD), sometime this year.
That stock has traded down quite aggressively over the last couple quarterly releases.
The next handful of companies, including Bombardier, which is cheap because of tariffs, are these major defense contractors.
And the two names that I would highlight are Northrop Grumman (NYSE:NOC) and General Dynamics.
They’re both very solid operators with interesting business portfolios.
There’s continued or ongoing uncertainty around defense budgets and the potential changes to how contracting and procurement might evolve under the DOGE or other news.
But the companies say they welcome changes to the defense contracting process.
And I don’t actually believe that the Trump administration is interested in lowering defense spending overall.
We’ve seen some headlines about memos being prepared to look at 8% cuts of the defense budget, but that is just a normal process of identifying programs that might be able to give way to fund other things that the administration wants to do.
I do not expect the net budget to shrink there.
And so, Northrop and GD are interesting because they don’t often get as cheap as they are today.
They could be at an interesting entry point.
I think we’ll know in the next three to six months what some of the fallout, or lack thereof, of these concerns will be.”
Tariff beating stocks are evaluated more on long term contractual demand rather than local wars requiring weapons inventory replenishment. Nicolas Owens identifies these stocks.
“…How investors get excited if we are sending some rockets and artillery shells to Israel or Ukraine doesn’t really track to how these companies make most of their money.
Most of their money comes from long term development contracts, which are things like ballistic missiles, submarines, F35s, long range bombers, that type of blockbuster program.
And the phrase “deterrence” is really important.
The whole idea is if your enemy or the potential aggressor can see what you have and they can see what you’re building, and they will think twice about causing trouble if they see that what you have and what you’re building might be more or stronger than what they have.
And when you’re in a military conflict, the spending shifts or can shift, especially if it’s a prolonged conflict, from long term development projects like the Next-Generation Bomber, to things like munitions, staffing, fuel.
Like, if you look at Desert Storm, they spend enormous amounts just moving gasoline to the front line.
So that’s the risk or the concern that investors should have if there is some kind of prolonged conflict.
And that’s why I said that it’s not cut and dried that military conflict is good for defense contractors.
They make more money more reliably during peacetime developing for peacetime that is, let’s say, prolonged by developing the things that are meant to deter aggression.
And that is the Trump administration’s policy.
They want to end the conflicts in Israel and Europe and they want to continue to build a credible, strong deterrent to, most prominently China as the global near-peer or potential aggressor.”
Read the complete interview to get all the insights and stocks picks from Nicolas Owens of Morningstar.
Chris Snyder, Research Analyst, Executive Director , Morgan Stanley
The Trump Tariffs are the largest single market dislocation since China joined the World Trade Organization.
Chris Snyder, CFA, is a Research Analyst and Executive Director at Morgan Stanley, covering U.S. multi-industry, which includes a wide range of verticals. Mr. Snyder and his team are known for their in-depth thematic work on U.S. Reshoring.
“…If you look at my companies, they continue to show pretty steady growth in that mid-single-digit range.
The reason my capital goods coverage has bifurcated versus manufacturing output is because these companies are efficiency providers and this is why we are positive on U.S. Industrials.
The only reason a customer upgrades a capital good is to drive some sort of efficiency.
That could be energy savings in the case of HVAC, it could be labor productivity in the case of automation companies.
All these companies have some efficiency value-add.
It’s usually cutting out electricity or cutting out labor.
And if you look, electricity and labor have inflated 30% versus 2019.
From the customer standpoint, when you’re doing your ROI and payback analysis, it’s just better than it used to be, because the costs you’re offsetting have now gone up 30%, and they’re still continuing to inflate at a faster rate than history.
Essentially, my companies are providing more value to the world and that’s a good thing.
Providing more value generates demand and allows more margin to accrue to them.
For example, if the paybacks on your HVAC system just got cut in half, I’m not going to let you take all of those economics.
I’m going to get a little taste myself.
Then, the second reason, and this is what our team is the most known for, is U.S. reshoring.
The U.S. industrial economy hasn’t grown in 25 years; since China joined the World Trade Organization in 2000, the industrial economy hasn’t grown.
That includes the capex that we’re putting into it to grow the fixed asset base and it also includes the production, like the widgets coming out of these facilities.
My companies have been fighting a zero-growth market for 25 years.
I believe that this is changing for a variety of reasons, and we see growth returning to the industrial economy.
That will allow our coverage to collectively grow topline and earnings at a faster rate than history.”
Trump Tariffs will benefit the US stocks that Chris Snyder and his team at Morgan Stanley covers.
“I certainly think industrials are well-positioned for tariffs.
If you step back, and you could say every end market, if the prices of the goods have gone higher, then the demand for those goods are less; that’s just the elasticity.
And it’s fair to say the same thing about industrials, but relative to, say, consumer or these other verticals, industrials have a very positive offset.
And that’s just that protectionism in tariffs, I believe, will drive more investment into the country, and that benefits my companies.
For example, the U.S. is about 55% of the revenue in my coverage.
The companies are multinationals, but the U.S. is their home market.
The U.S. only accounts for about 16% of global industrial production.
So, we’re just shifting activity to where they have the best market share, where they do the best margins.
That’s the positive offset, and I think it’s going to bring more investment into the country, not only for the companies that build this stuff, but also the companies that service the production or sell into that production thereafter.
That’s because you build these facilities, but then they’re here and that brings a long tail of opportunities after the initial capex or investment cycle.”
Chris Snyder and his team at Morgan Stanley believe the USA is will benefit from the Trump Tariffs with its unique consumption economics.
“It just felt like we came out of a 45-year period where global manufacturing capex just searched for low-cost labor.
Like that’s the motivation, I have to go find it.
The U.S. always loses when that’s the case.
Now, I think it’s increasingly driven by access to technology, capital, and power, and those are parameters where the U.S. will win.
So, I think, collectively, the U.S. is going to take share of capex.
Regarding a lot of these foreign countries, I think there will be a lot of complaints, and obviously foreign countries don’t like the tariffs, but they will continue to serve the U.S. market — they do not have a choice.
The U.S. accounts for about 30% of global consumption.
That’s equal to the EU and China combined. It’s the best demand region in the world.
The other thing that’s less appreciated is that it’s the best margin region in the world.
Certainly, all of my companies do the best margin in the U.S., but we’re talking to our international counterparts and digging up as many numbers on this as we can find.
For the most part, international companies also do their best margins in the U.S.
I think you would struggle to find any other country in the world where foreign companies are doing their best margin in your market.
I think it would be very difficult to find that.
If you think about the U.S., it’s the best demand region and it’s the best margin region.
If you raise the cost to serve it, it’s going to still be an important market that they have to attach themselves to.”
Humanoid robots are one sector poised to benefit from the Trump Tariffs.
“One, we’ve seen a lot of advancement on the HVAC and the cooling side.
Data centers play into that, with things like liquid cooling, and companies like Vertiv (NYSE:VRT) that can sell into the higher density AI data centers.
Also, on the automation side of the house, we published a very big report this week on humanoid robots, which some of our colleagues here at Morgan Stanley, especially on the auto team, have led the debate on.
Obviously, it’s early stage there, but to me that is something that everyone needs to be watching, because it really is going to dramatically change the landscape of global manufacturing.
Point one: If you think about it from a U.S. versus a low-cost manufacturer perspective, it will lower everyone’s cost curve.
But the U.S. factory workers make, say, five, six times as much as Asia counterparts, so the savings is much stronger here.
It is also a structural competitive advantage as we continually squeeze out labor.
Everyone saves.
The U.S. and Europe, and any developed region will save the most.
Point two, which I think is very interesting is, when we think about these humanoid robots, where are they going to be made?
I think they’re going to be made domestically. I think there’s going to be extreme sensitivity around these supply chains, and that’s going to drive more protectionism and investments in the U.S.
Point three is power.
The market is not thinking about this yet but the next thing we’re going to think about in manufacturing is power bottlenecks.
This is where the U.S. really stands out.
Electricity prices in the U.S. are about 25% cheaper than in Europe.
Asia pays about $14 per MMBtu to import liquefied natural gas — LNG — from us.
We pay about $3.50; they’re paying four times as much as we are.
Then, when we think about humanoids, the cost is powering them.
If you compare the U.S. to Asia, right now our workforce, humans, is a lot more expensive.
If you look out into the future and the biggest cost of the workforce is actually the electricity to power them, well, now the calculus has very dramatically changed.
Again, that’s very far looking out, of course, but manufacturing facilities are very long-lived assets.
These are mega-projects.
They take four or five years to build, and then they serve these companies for 30 to 50 years thereafter.
So, when you make these regional capex decisions, you’re very forward-looking, and have an appreciation of where the technology is going and ultimately what that means for the cost profile a decade or two down the road.”
The Top Three Trump Tariff trades recommended by Chris Snyder and his team at Morgan Stanley.
“Of the three stocks right now that we really would be recommending, the first one would be Trane Technologies.
I talked about this theme of being an efficiency provider. I think the value of efficiency has never been higher than it is right now, and there’s no company that plays into that better than Trane.
They are the HVAC technology leader.
They reinvest the most in the business.
They’re always the ones that are pushing the envelope on, on innovation.
When we think about the demand in the market right now, the reason it’s good is not because we’re building a ton of stuff. It’s because we’re seeing very proactive upgrades, because the paybacks have gotten so much better.
Those benefits primarily accrue to the company that is providing the most efficiency.
So we really like Trane.
After that, it would be Rockwell.
Rockwell is the U.S. leader in factory automation.
They’re the cleanest beneficiary of U.S. reshoring, of a Trump presidency and the opportunities that that brings.
And they’re coming out of a cyclical trough.
In fiscal 2024, they were negative 10% organic. We see really nice acceleration, orders turning the right way.
That’s another stock we very much like.
The third one would be Eaton (NYSE:ETN).
Eaton is the leading supplier of electrical systems and solutions in the United States.
They touch every good secular trend you could want.
They sell into reshoring, data centers, utility investment.
They really are checking all the big boxes.
And, particularly on the reshoring side, the power opportunity there is still underappreciated.
Everyone’s focused on data centers consuming electricity.
Data centers account for 4% of U.S. electricity consumption.
The manufacturing economy accounts for 26%.
And that manufacturing industrial consumption has been down since 2000 because we haven’t grown production.
If I’m right, and production returns to growth, structurally, you’re going to start to see the industrial economy pull on the grid as well.
And that’s coming off a much higher 26% starting point.
Then over time, as we layer in things like humanoids and robotics and just more automation equipment, the pull is going to go even higher.
Even on the power side, I still think it’s very much underappreciated. Everyone’s just so hyper-focused on data centers and I think they’re missing this, which is a great opportunity for them, of course.
But I think the manufacturing side is really important because it adds duration to it.
Everyone’s always worried: “What about when data center capex stops growing?”
But we have a very nice kind of off-ramp here that just adds duration to the positive demand story.”
Get the complete interview with Morgan Stanley Executive Director Chris Snyder, exclusively in the Wall Street Transcript.
REITs or Real Estate Investment Trusts provide current cash on cash returns in addition to a piece of increasing real estate values.
Alexander D. Goldfarb, Managing Director and Senior Research Analyst, Piper Sandler.
Essex Property Trust is one of the 3 top picks from Alexander D. Goldfarb. Mr. Goldfarb is a Managing Director and Senior Research Analyst at Piper Sandler.
Previously, he was a Managing Director and the Senior REIT Analyst in the research department of Sandler O’Neill + Partners, L.P.
Mr. Goldfarb joined the firm in 2009 following two years as a Director and Senior REIT Analyst at UBS and five years at Lehman Brothers, where he was a Vice President and REIT analyst.
“Any good real estate person would tell you, it’s never been a better time to own real estate, right?
If you ever find a real estate bear, you know they’re not involved in the industry.
So, that’s for starters.
That said, last year was certainly a tough one for REITs.
They definitely underperformed the broader market on elevated interest rate concerns.
And this year is no different; the 10-year has been volatile so far.
It was trending up towards 5, now it’s pulled back in.
The group was selling off, now it’s rallying.
So, the macro is what’s driving the performance of the stocks, less so the fundamentals.
What’s really interesting, and one of the reasons why we’re so bullish on real estate, is if you look back since the end of the Second World War, every time this country has had a boom-bust in real estate, there’s either been excess inventory, excess availability, some issue in the banking system — and if you look today, we actually have none of that.
Occupancies are pretty healthy.
We have economic and employment growth.
Very little new supply, even in apartments, where there is a massive supply wave that’s coming to an end this year.
The cost of construction is daunting, such that for the most part, it doesn’t really pencil.
Banks aren’t providing construction loans, so anyone who is building is doing it from their own pocket.
And the final element are the banks, which the regulators are not pressing to foreclose, so a lot of lenders are doing blend and extend.
I think initially there was a general view that blend and extend was not a legit strategy, but people have quickly come around to realize that it’s no different than if a freighter runs aground: The owners don’t immediately call in the breakers to rip the ship apart and junk it, right?
They wait for the tide to do its thing.
Will the tide be able to refloat the ship?
Same thing with loans.
Just because a loan may not be compliant with today’s lending terms doesn’t necessarily mean it’s a bad loan if the lender and the operator can see where the income growth of that property is going.
Clearly, there will be bad loans. No NOI, it’s going back to the lender.
But otherwise, the regulators realize that there’s no point in pressing banks to aggressively foreclose or recapture, take back loans if they don’t have to.
And the positive for REITs is, because the REITs tend to be lower levered than the private sector, and they have access to public equity, they’re just in a better capital position to be able to execute their plans and take advantage of real estate that comes to market.”
REITS or Real Estate Investment Trusts are Alexander Goldfarb’s bread and butter.
“Right now, real estate is actually in a great position.
Think about rents that are biased to the upside, because replacement cost still exceeds where buildings are trading at and there is no new supply; you have a growing economy; and tenants are much more conscientious about the quality of the landlord.
What that means is that dividends should steadily grow, and asset values should increase.
The hindrance to asset values is rising debt costs, but assuming debt costs stabilize and then the rent streams grow, that’s a positive for valuations.
So, REITs should be able to prove that they have an upward bias and inflation protection about them.
And in an environment like today, where we still have inflation pressure, that should be a positive.
If you look at the Trump policies’ bigger picture — less regulation, more energy production, getting government out of the way — these are all positives.
I don’t think many people would say having government involved in the market is a good thing.
It’s like elementary school; you don’t want the teachers in the playground.
You do want the teachers watching to make sure that kids aren’t fighting with each other, but you don’t want them directing how kids are to play.
And that’s what government should be — make sure that the rules are enforced, make sure that everyone is staying in their lane, make sure that at least the way the markets operate is fair.
But as far as how companies interact, how the private sector works, that’s something that the private market should do.
Pulling government out of that, promoting more energy production, more natural gas, more oil — people forget that tractor-trailers drive, figuratively and literally, a lot of the economy.
You can see it right now, that the push into EVs or windmills or solar ends up adding cost, and it makes the grid more unstable, it makes energy costs higher, it pulls dollars away from other areas that could be put to work in a better fashion.
The interesting thing is, people will say, well, tenants today, they want green buildings, or they want renewable. I disagree.
People want inviting environments.
There’s no one who says, give me a dirty, less efficient building.
People want windows, they want a lot of natural light, they want open landscapes.
They don’t want pollution.
But when you build a building and you make it efficient for operation, and it has all the qualities that the tenants want, that’s the important part, not necessarily a check the box.
As a result, I think under Trump, real estate benefits in that regard, because hopefully it means that there’s less focus on getting a green stamp of approval versus building efficient buildings that tenants want.
Often they may be the same thing, but not always.”
There are 3 REITs that Alexander Goldfarb recommends.
“Our top pick for the year is Essex (NYSE:ESS), and this was done at the beginning of the year, before the L.A. fires, so it’s not related.
The reason why we picked Essex as our top REIT for the year is we like the market positioning.
Very little new supply on the West Coast versus the rest of the country.
Second, you had the continued unwind of the COVID rent moratorium; apartment units are replacing non-cash-paying renters with actual legitimate cash ones.
And then finally, Northern California has lagged since COVID and rents have barely moved, whereas rents everywhere else are up 20%-plus.
So, there’s a lot more upside, especially as tech hopefully this time gets back to work in the office.
So, we like Essex a lot.
There’s another company, Curbline (NYSE:CURB), which is the spinout of SITE Centers (NYSE:SITC), focused on convenience retail.
What’s really impressive about this story, apart from the fact that it was well seeded with capital — $800 million in cash, debt free balance sheet — is rarely in REITland do you see management teams take on an entirely new challenge.
Meaning, this management team said, you know what, SITE is a good company, but it doesn’t have the future that we think can be competitive, so we’re going to create this new company and spin it out of SITE, call it CURB, and focus on convenience retail assets.
And they haven’t said it, but our view, and the market’s view, is SITE is going to be liquidated, similar to what this management team did with RVI a number of years ago.
That really captures people’s attention, because they are truly taking 100% risk.
If they stayed at SITE, they could just clip a coupon on compensation, try their best, and attend NAREIT twice a year.
Here, they’re actually trying to create a whole new company, and that’s something that we generally don’t see often, apart from IPOs.
I think that speaks volumes.
The company is well set up.
Earnings growth north of 10% a year.
Certainly from a balance sheet capital position, well stocked.
And, so far it’s resonated well with investors.
Another name that we continue to like is SL Green (NYSE:SLG).
The management team is highly productive.
Whenever they have announcements, it’s almost always good.
Hard to think of an announcement they’ve had that has not been additive.
And they really have a lock on Midtown office around Grand Central, which is one of the hottest, if not the hottest, submarkets for office in the country — that and Century City in L.A.
So, they’ve really done well in concentrating their portfolio, and they’re benefiting right now as availability rates on Park Avenue have dropped below 7%.
Even in premier office, availability is below 7%.
Rents continue to move upward.
And what’s good for the buildings is that the operating expenses and the leasing costs really don’t change, so all of that accelerating rent just drops to the bottom line.”
REITs are the investment vehicle focus for 2025. Read all the interviews, exclusively in the Wall Street Transcript.
High yield publicly traded companies are available in the current market, for example the Plymouth REIT yields close to 6%.
For example, Jeff Witherell runs the highly regarded industrial Plymouth REIT.
Jeffrey E. Witherell, CEO and Chairman, Plymouth Industrial REIT
“The data will show you that the smaller spaces are performing better than the larger spaces.
And again, there are more users for 50,000 square feet than 500,000 square feet, just by definition.
An example would be Columbus, Ohio.
If you looked at their vacancy rate last year, it was approaching 14%, but 10% of that was the bigger box and 4% was the smaller buildings.
You can see the same with Indianapolis; most of the vacancy is sitting in the larger boxes.
The second part of that is that when a developer builds a warehouse doing speculative development, outside of just the cost of doing it, the developer can make more money by building a bigger building and then selling it.
It’s just that economy of scale in the sense that if they can put $100 million to work in a large building and they can make a profit off of it, it’s probably going to be larger than if they built a 100,000-square-foot building.
There’s a variable cost, obviously, of the construction of a larger building, but your design, permitting, bringing water, sewage, power to the facility, things like that, those are fixed, whether you’re building 200,000 square feet or 1 million.
The speculative development over the last three or four years has been mostly concentrated in the larger buildings — it’s more profitable for them to build those — and that’s where we’ve somewhat overbuilt.
That’s not my opinion, that’s the data.
The data shows that these 1-million-square-foot buildings are sitting empty for extended periods of time, where we are right now.
That should get absorbed over the next several years, and we should be back to a much healthier market for those sized buildings.”
The high yield from Plymouth will be supported by well researched trends in the marketplace.
“At the very end of the year, we announced the purchase of a portfolio of properties in Cincinnati for about $20 million.
That was Phase 1 of the portfolio; Phase 2 should be closing soon, and that is going to add another $20 million of real estate in Cincinnati.
So the second part of that should be closing here momentarily, and then we have a few other things under contract.
This Cincinnati property is a Plymouth property.
It’s a perfect example of what we would call shallow bay, about 260,000 square feet.
There are about 20 tenants in there, and the WALT that I mentioned before is just under three years.
Again, we like the ability to work with smaller tenants, be able to renew them, and then obviously mark-to-market the rent.
The rents in those spaces are going to be below market, and when the renewal comes up over the next two to three years, we’ll be marking those rents to market, so there will be an increase in rent for us.
That’s how you grow the business, and that’s how you increase income and dividends to shareholders.”
David Spreng , Founder, Chairman, President, CIO & CEO Runway Growth Finance Corp.
“Runway Growth Capital was founded in 2015 to be the investment adviser to Runway Growth Finance Corp., formerly Runway Growth Credit Fund Inc., a private business development company that is now publicly traded under the ticker symbol RWAY.
Shortly after inception, I was joined by Tom Raterman, our CFO and COO, and Greg Greifeld, our CIO and Head of Credit.
Over the course of the next 15 months, the balance of the BDC was raised.
We went public in 2021.
Our mission is to support passionate entrepreneurs in building great companies.
We are like venture capital, except VCs invest in equity, i.e., they own a piece of your business, while we invest in debt or make a loan so that your ownership isn’t diluted.
We lend capital to companies looking to fund growth with minimal dilution, primarily in the technology, health care, and select consumer industries.
In turn, we aim to produce superior risk-adjusted returns. We do this through our publicly traded BDC, as I mentioned, RWAY, and our private partnership, LPGP funds.
We operate from office locations in Silicon Valley where I sit, Chicago, New York and Boston.
In October of last year, we announced a definitive agreement for Runway Growth Capital to be acquired by BC Partners Credit, the $8 billion credit arm of BC Partners, a leading alternative investment firm with approximately $40 billion of AUM.
Through careful growth and strategic partnerships, we’ve been able to expand our offerings and continue building a portfolio that totals approximately $1.3 billion of AUM for Runway.”
The high yield is supported by a superior position in the balance sheet.
“We specialize in providing first lien loans.
That means first money out if something goes wrong.
They’re all senior secured debt financings to late- and growth-stage companies with investments typically ranging from $10 million to $100 million.
Though we expect our target range to increase to $30 million to $150 million following the combination with BC Partners Credit.
Our strategy is focused on constructing a high-quality portfolio of senior secured loans to differentiated companies in tech, health care, and select tech-enabled consumer services, including both sponsored and non-sponsored opportunities.
We are a principal preservation, credit first, downside focused private debt manager, prioritizing lending to established businesses with substantial revenues, significant enterprise value, and proven in-demand products or services well beyond the prototype stage.
I can give a couple statistics on the portfolio.
Roughly, our average company is doing well over $100 million in revenue.
It’s been around for more than 15 years and it’s raised more than $150 million of equity capital.
So, we believe these aren’t high-risk startups.
These are very advanced, late-stage, venture backed, and occasionally PE-backed companies.
One might historically think of venture debt as being focused on early-stage companies.
That is not the case.
We do not lend to early-stage venture companies that present equity-like risk.
We’re very much focused on credit first, a considerably safer investment in as advanced companies as we can find.”
New Lake sports a high yield of over 10% at current prices, albeit in a sector that has its issues.
Anthony Coniglio, President, CEO and Director, NewLake Capital Partners Inc.
“We founded NewLake back in early 2019, when we saw the opportunity to provide much-needed real estate capital to this emerging high-growth industry that is the cannabis industry.
What was unique about it was the opportunity to step into an industry that was highly regulated but had a significant disconnect between state and federal law that drove a significant gap in the capital available to the industry.
In particular, we noted that real estate was critically important to this industry — to cultivate, manufacture and dispense — and because of the federal prohibition on cannabis, it eliminated all traditional forms of real estate.
Most real estate carries debt, and those debt provisions include a restriction on leasing only to businesses that are legal, and so cannabis businesses by definition violate all those real estate debt agreements.
Therefore, you had a significant gap in the properties available to the industry versus the needs of the industry.
We thought we could get above-market yields, and indeed we did and continue to get above-market yields that reflect the uniqueness of what we do, the lack of competition, but also there’s an element of risk premium that’s in the pricing as well.
Having been around business for over 35 years now, I’d say there are few stories where the competitive landscape is better six years after you started versus when you did.
We sit here today in January of 2025 as the second-largest owner of cannabis real estate in the United States.
We own 32 properties across 13 states with 12 of the leading cannabis operators in the country, names that people who are familiar with the industry would be well aware of, like Curaleaf or Cresco or Trulieve.
We continue to have what we think is the best portfolio that’s out there, and it’s a testament to the underwriting approach.
And so to summarize, the opportunity set was, there was very little competition providing real estate capital to the sector.
We stepped in, we started the company, we’ve deployed over $400 million, second-largest owner, and quite frankly, many of the competitors that were existing when we started and were developed during our life cycle have fallen away.”
The high yield is supported by extensive real estate investment experience.
“But because we’re also a real estate investment trust, we complemented that with lots of real estate experience.
Some of the readers may be familiar with our Chairman, Gordon DuGan.
He was the CEO of W. P. Carey, one of the largest triple net lease REITs in the world. He left W.P. Carey to run Gramercy Property Trust, and took that business from a roughly $300 million market cap company and sold it to Blackstone for over $7 billion.
He’s been involved in real estate for his nearly 40-year career, as has Peter Martay and David Weinstein, other people on our board, so significant real estate experience.
What we’re trying to do is marry that cannabis experience with the real estate experience, and develop an underwriting approach that combines that expertise. Here are two examples.
One is the deal structure.
We understood this is an emerging industry, and so from the beginning, when we structured our leases, we always included provisions that would anticipate financial difficulty or regulatory uncertainty.
One example would be, we always cross collateralize security deposits and cross default leases amongst the different properties, in a way that makes it easier to preclude default and position us well should there be financial difficulty.
We also look at the jurisdiction.
This is critically important, because we focus on jurisdictions that are limited license.
When you think about cannabis, this is very much a state-by-state business.
The way New York approaches cannabis is different than the way Pennsylvania does, and different from Florida, different from Illinois, etc.
Understanding those nuances is critically important.
We focus on those states where there’s not a proliferation of licenses, the way you would see in Oregon or Michigan or in Colorado, where many of the financial difficulties have been.
It’s a state such as Pennsylvania, where you have to go to a package store to purchase liquor, where there’s a limited number of licenses and those licenses have intrinsic value, and they also create a better operating environment for the tenant, which improves the cash flow profile of the property.
If you improve the cash flow profile of the property, you’re improving the likelihood you get paid rent.
I’m going to leave it there, and say this combination of significant real estate experience with significant cannabis experience and focusing on these limited license states — that has allowed us to preserve and grow value for our shareholders.”
All these interviews with high yield public companies and more are available exclusively in the Wall Street Transcript.
