Andrew Hokenson of Pier Capital has Digital Transformation Consulting Companies as 2021 Winners

June 25, 2021
Andrew Hokenson, Senior Equity Analyst of Pier Capital, likes Digital Transformation stocks for 2021

Andrew Hokenson, Senior Equity Analyst, Pier Capital

Andrew Hokenson is a senior equity analyst at Pier Capital. His responsibilities include conducting equity research for the firm’s small- and smid-cap growth strategies. Earlier, he worked at Benefit Providers and Fordham Financial.

In this 3,626 word interview, found exclusively in the Wall Street Transcript, Andrew Hokenson of Pier Capital reveals his current top picks and his methodology for selecting them for his portfolio.

“…We are a bottom-up, fundamental-focused, long-only small-cap growth fund. We manage about $1 billion worth of institutional assets. We’ve been employing the same process since inception for about 35 years.

We have about 100 names in our fund, 75 to 100 names. We can be actively overweight in certain sectors.

We don’t do any closet indexing.

And our overweight can be a natural result of our bottom-up approach. Generally speaking, we have a three-legged stool as far as industries that we tend to have more focus on: tech, consumer and health care. And we don’t invest in REITs.”

Pier Capital equity analyst Andrew Hokenson believes in a deep research basis for his growth stock picks.

“So the investment strategy centers on a core principle, and that principle is that great products or services can create great companies. That’s where our deep research and experience come in.

We believe that great products and services are identified by a superior value proposition. And a value proposition fuels a customer, or retail customers, whether it’s a business or retail decision-making process.

It’s what compels the customer to choose one product over another.

So it’s either the product’s or service’s performance, price, or some combination of those two which create a superior value proposition.

And that value proposition is what we believe is the true essence of what creates disruption in a market. The strength of that value proposition, we believe, is what determines the lifecycle of that product, and therefore the earnings growth potential of that company.

So as the company has greater ability to penetrate that market and even expand that addressable market, that’s what creates that disruption and really what we call a secular growth story.

Now, if we identify this value proposition early enough in the growth phase, these companies have the opportunity to substantially outperform expectations.

We found that to be true time and time again.

So that’s essentially the core philosophy. We do try to back up a lot of what we believe through something we call key performance indicators.

Key performance indicators are a way for us to verify and justify what we find to believe to be a strong value proposition.”

One example of this investing research is the Pier Capital investment theme based on digital transformation.

“I’ll start off with just mentioning that overarching theme we call digital transformation.

Digital transformation is basically turning your business from being an analog, face-to-face process to being done through an app or online or digitally, and in any shape or form.

This is a major secular trend that encompasses a lot of different areas. I kind of drill down a little bit here.

Obviously, I’ll point out that COVID-19 was a huge catalyst for digital transformation. However, when you want to play these stories, there’s some obvious ones that really benefited from COVID.

We don’t really participate in those stories.

We don’t want to really participate in companies where the digital world was used as kind of a crutch during COVID. Instead, we invest in companies where we think COVID served as a proof point.

And I’ll get into more detail about what I mean about that. But things like food delivery.

We thought it was more of a crutch as opposed to a proof point. So we stayed clear of food delivery as a secular disrupter and we focused more on things like real-time analytics. We thought it actually served as a great proof point.

And so, when I drill down into where that goes, I believe that obviously we have a lot of cloud software companies out there these days and those companies had a phenomenal year in 2020.

And while I still think that there are a lot of growth opportunities within software-as-a-service, I do think that the valuations have gotten a little expensive.

This happened late last year, so we’ve been trimming exposure to software for the last year. Now, actually, we’re starting to dabble back into software again. But we are just dipping our toes right now.

I think there could be some more weakness ahead there, but we’re getting closer to where we feel the valuations are right.

So, staying away from software for now, I think another area that’s very interesting are these digital-first consulting companies.

There’s a few of them out there that are publicly traded. These companies help large enterprises with digital transformation.

And it’s a combination of business processes as well as kind of creative designs for app development and creating kind of a digital presence for large enterprises — Disney (NYSE:DIS) being a great example of a company that needs to build a better kind of digital presence. These companies will come in and help with that.

And interestingly, they’ve been doing so well with that. We just see not only new customers come along, but also continued investment from existing customers.

Also, no two industries are the same and certain industries are a lot slower to embrace technology than others for good reason. A lot of it has to with regulatory and compliance issues.

I remember when fintech started becoming very popular, when banks actually started to use technology. That for me was a very big sign that digital transformation is for real.

Because if banks are saying, I’m willing to go through all the hoops to start developing a more digital-based platform, that’s when I knew that this is for real.

And now, after COVID, the health care industry is doing that now.

The health care industry used real-time analytics during COVID and saw the benefit from it, and now they’re stepping in. And a lot of these consulting companies, or at least the ones that I look at, are going to be benefiting from that.

I think that’s a new market opportunity for them that should, I think, help drive future growth.

I do like these digital-first consulting companies. I think that they’re trading at a p/e of around 30 times. I think for some of them, maybe, they will be above a little bit. But a nice p/e multiple for a high-growth story, I think, is very fair.”

Get the complete picture by reading the entire 3,626 word interview with Andrew Hokenson of Pier Capital, found exclusively in the Wall Street Transcript.

Andrew Hokenson, Senior Equity Analyst

Pier Capital

www.piercap.com