Plains All American Pipeline, L.P. (PAA) has oil infrastructure which analysts expect will see growth due to the oil production growth under way in North America. They also highlight this master limited partnership’s dividend as attracting investors and also the organic growth potential of the MLP.
“We continue to like Plains All American. That is also levered to the oil infrastructure thesis, and they put up terrific numbers for the quarter. We continue to believe that we’ll see high single-digit to low double-digit distribution growth rates from them,” said John Edwards, Director and Senior Equity Research Analyst at Credit Suisse Group.
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The distribution growth over the next couple of years is expected to scratch the double digits, and PAA currently has exposure to some of the most growthy unconventional resources names in the United States.
“Plains has a well-positioned asset base. Its footprint covers many of the growing oil plays, including the Permian basin, the Bakken shale, the Mississippian Lime and others. Plains has exposure to the strong crude oil logistics environment, and given its well-positioned asset base, its supply and logistics business should continue to generate strong margins as North American crude oil production grows. Plains also has a large slate of organic growth projects, plans to spend over $1 billion on organic growth projects this year alone, and we believe this provides visibility into future distribution growth potential. We’re expecting about 8% to 10% distribution CAGR over the next couple of years for Plains,” said Elvira Scotto, Director at RBC Capital Markets.
Solar Capital Ltd. (SLRC) has focused on strengthening its balance sheet through a timely combination of debt issuances with very targeted equity offerings, positioning the company with little need to raise capital this year, says Michael Gross, CEO of Solar Capital Ltd.
“As you know, BDCs are required to pay out substantially all of their income, so the only way for us to grow our balance sheet is through issuing additional equity and debt. Timing our access to the capital market is incredibly critical,” Gross said.
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SLRC spent much of 2012 strengthening their balance sheet for the long term by taking advantage of attractive conditions in the liquid capital markets as well as using their investment-grade ratings from S&P and Fitch to access two additional sources of longer-term capital, Gross says.
“The first was the private insurance company market where we raised $75 million in senior notes from insurance companies early last year. Then we followed up in the fourth quarter by raising $100 million in 30-year unsecured notes at 6.75%…The combination of the debt issuances with very targeted equity offerings, which we did for both Solar Capital and for Solar Senior Capital, have positioned our balance sheets so that essentially we have no need to raise capital in 2013,” Gross said.
Berkshire Hathaway (BRK.A) likely bought Burlington Northern Railroad due to the likelihood of extended depreciation of fiat money, and though it is starting ownership with an initial yield of only 4%, BRK.A will see the company retain value thanks to its capacity to pass down input-cost increases, says Christopher P. Bloomstran, President and CIO of Semper Augustus Investments Group LLC.
“Berkshire basically bought the rail at twice capital, a business that had earned 11% on capital in its best year…Berkshire has a track record of earning almost 20% return. So why would you start with a 4% returning asset? Well, it’s a business that if energy prices go up, if diesel fuel prices go up, they can pass through those costs immediately to customers with surcharges,” Bloomstran said.
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On reinvested capital, Berkshire will make north of 8% returns, and the company is in a position to think long term and invest in businesses and assets that will retain value in case of continued decline in global currencies, reflecting BRK.A‘s strategy of investing in solid, resistant companies, Bloomstran says.
“You are basically looking for things that consumers will consume regardless of the price, for businesses that are well-capitalized, properly profitable and well-run,” Bloomstran said. “Berkshire Hathaway is a collection of outstanding businesses that are largely unleveraged that are trading far below replacement or intrinsic value…It’s a collection of businesses that generate substantial amounts of free cash.”
Franklin Resources (BEN) continues benefiting from retail investors’ perceptions that fixed income represents less portfolio risk than equities, and they are expected to continue using this investment strategy until higher long-term interest rates begin to drive losses in bond funds, says Jason Weyeneth, Lead Analyst at Sterne Agee & Leach, Inc.
“I think a name like Franklin Resources is well-positioned in that environment as well as about any environment that I can think of, at least for the near term, for a few reasons. First, within fixed income, BEN is a leader in global bond products, which I believe are an attractive asset class given they are underowned by U.S. retail investors within fixed income allocations, and the strategies are generally lower duration, so there is less interest rate risk as global rates are set to rise,” Weyeneth said.
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BEN also has a sizable equity platform and exposure to global investors, who many times have different goals in mind than domestic investors. Weyeneth says the multiprong strategy of the company along with distribution is expected to continue helping share flows.
“BEN is a very global franchise, so the firm is not entirely reliant on U.S. investors, and global investors often have a different mindset or are influenced by different factors than U.S. investors. And third, I think their equity platform is better positioned than the market perceives. They have a very sizable equity platform, they have generally good performance across that platform, and they have very strong distribution relationships, which I think would drive more than their fair share of flows,” Weyeneth said.
Capital Southwest Corporation (CSWC) is trading at a near 30% discount to its asset value, and is attracting investors with its diversified portfolio, low operating expense ratio and access to private-equity types of investments, says Gary L. Martin, Chairman, President & CEO of Capital Southwest Corporation.
“What I hear a lot about when I speak to our existing investors when I make visits to them, is that they truly respect our 51-year track record of success. They like that the portfolio is reasonably diversified, and they very much like the fact that we operate this very, very efficiently…and although we are publicly held, our operating expense ratio here, as reported by independent third parties, is 1.1% of net assets. The next closest in our peer group is more than twice that, and the average is five times that,” Martin said.
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Martin says that new investors are enjoying access to private-equity types of investments without the burden of typical private equity fund restraints. Additionally, CSWC is trading at a near 30% discount to its asset value and will pay a decent dividend in March, Martin says.
“Our discount over time has ranged from the 12% range to as much as 35%, but at the current time it’s probably little under 30%. Our stock has done pretty well. We have another good dividend being paid in March; it’s ex-dividend now. What that means, in essence, is an investor can spend $1.00 on our stock and basically get the benefit of $1.30 of investment value. Over time, that’s important,” Martin said.
WisdomTree Investments (WETF) gains market share and generates organic growth in the fast-growing ETF industry, expanding margins and displaying significant earnings growth potential by growing its asset base, says Jason Weyeneth, Lead Analyst at Sterne Agee & Leach, Inc.
“The reasons I like [WETF] are, one, the backdrop of the ETF industry. It’s the fastest-growing segment of the overall asset management industry. WisdomTree is very well-positioned within the market; they have been gaining market share and generating tremendous organic growth. Net flows year to date are roughly the same amount as what they generated in all of 2012, which was a record year for them,” Weyeneth said.
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WisdomTree‘s stock has had an excellent run over the past few months, and as its strong fundamentals continue the company should see expanding margins as well as significant earnings power, Weyeneth says.
“I think the strong fundamentals that they are enjoying can continue and drive the next leg of upside for the stock over the next few years. I think there is a tremendous growth story as WisdomTree continues to rapidly grow the asset base and as you continue to see margins expand and the significant earnings power of the business model emerge,” Weyeneth said.
Triangle Capital Corporation (TCAP) has raised its dividend 15 times, portraying a history of net investment income cumulatively exceeding the dividend payout over time, according to Garland S. Tucker III, CEO, President and Chairman of this business development company.
“We’ve had a history of increasing the dividend as our net investment income has gone up. And one last thing here, the fourth-quarter net investment income per share was $0.57, the dividend paid for the fourth quarter was $0.53. We have announced an increase to $0.54, which I think translates the feeling of optimism on our part that going forward we should see some continued growth in NII, which, if that occurs, will translate eventually into increased dividends,” Tucker said.
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TCAP is a traditional mezzanine investor, and Tucker says it’s important for the BDC to have an equity component in his investments either in the form of a warrant, which would be attached to a subordinated note, or an investment along with a sponsor group leading the transaction.
“It’s been important for us as a BDC to have that equity component that helps offset any principal losses that we might have on the sub debt side. From inception to date, our equity gains have more than offset the principal losses in sub debt investments,” Tucker said.
Computer Associates (CA) is one of two large-cap companies writing software for mainframe computers, providing vital transaction processing capabilities for megacap customers, and maintaing a stable business with significant cash flow and some dividend growth, says Brian Frank, President of Frank Capital Partners LLC.
“Mainframe might sound like a term from the 1970s, but it’s used today in things that are mission-critical, like credit card transaction processing and trade execution at Goldman Sachs (GS). So they use mainframe computers primarily from IBM (IBM), and these are the only two companies that actually write the software for it. So it’s an extremely stable business, it has extremely high cash flow and yet they are very out of favor right now because there hasn’t been a lot growth at CA,” Frank said.
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CA increased its distribution in 2012, but the company continues trading relatively inexpensively. He adds that the software developer can withstand macroeconomic pressures and produce cash even when in times of weak macro performance.
“There hasn’t been any contraction either and the cash just keeps coming in. They raised the dividend significantly last year and the stock price still is kind of languishing around the mid-$20s. All the names I mentioned are cycle-proof. If the economy were to get a lot weaker, CA would still be producing a lot of cash. So that’s something we’re intently focused on,” Frank said.
Franklin Resources (BEN) is well-situated to hold its ground in the U.S. through the expected rotation to equities and has the ability to take advantage of growth internationally, positioning BEN as a top-rated asset management stock, according to Lucas Montgomery, Research Analyst at Sanford C. Bernstein & Co.
“The opportunity that really stands out as not getting enough credit for its organic growth is Franklin Resources. But this is a company that has a lot of the advantages that we just talked about: international distribution, international manufacturing, strong third-party distribution…With nearly $800 billion in AUM, it has the size and scale to subsidize expensive investments in international operations, and it is already operational in many non-U.S. developed and developing markets,” Montgomery said.
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Despite investor concerns of how BEN will fare in the rotation out of fixed income due to its asset mix that is skewed toward fixed income, Franklin is poised to be a solid long-term investment opportunity, Montgomery says. He says that BEN‘s type of fixed income product mix as well as the company’s equity products make BEN capable of holding ground through the rotation.
“I am not convinced that when rates do go up, Franklin is going to feel the same amount of pain that some other fixed income managers will, because its fixed income product mix is largely developing market fixed income — very short duration of under two years. I also don’t think some investors give them enough credit for the equity products it has that will allow it to participate in a rotation to equities. And I also think that fixed income will, to a large degree, be self-correcting, so that higher rates will ultimately bring investors back to fixed income, since they can actually hit some yield there,” Montgomery said.
Janus Capital Group (JNS) may be priming itself as an attractive acquisition target through its deal with a large insurance company and newly employed efficiency strategies, while seeing a slight turnaround in investment performance, says Macrae Sykes, Research Analyst at Gabelli & Company, Inc.
“Janus (JNS) announced a deal with Dai-Ichi Insurance (TYO:8750) in August 2012, so it has already executed on signing up a strategic agreement, which does a couple things for them. First, it broadened their international distribution. It enables the company to bring more capital into their products through the partnership and also strengthens, in my opinion, its platform with institutions, given the strength of the large insurance company,” Sykes said.
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Investment performance has slowly been turning for JNS, and Sykes expects to see an improvement in performance fees at the end of the year, as new management has been able to improve efficiency at Janus and has taken cost out while improving its operations.
“Janus has been aggressive in terms of deleveraging their balance sheet, so it has three distinct investment boutiques, which include Perkins Value, INTECH and Janus, and now an emerging fixed income unit, which has been growing very nicely for the last two years. So the company is diversifying AUM and improving its operations where it can, while waiting for the investment performance to turn around,” Sykes said.
