Quality of the manager and the manager’s credit track record are the number one factors to look at when buying a BDC because high interest rates cannot make up meaningful losses of principal in the investment vehicle, says Greg Mason, CFA, a Director and Senior Equity Analyst at Stifel Nicolaus & Co., Inc.
“Getting your money back and having low credit defaults and low credit loss rates is the key to maximizing returns in the BDC space. So the number one thing we look at is currently credit quality, and more importantly, the historical credit quality of the manager,” he said.
Mason likes Golub Capital BDC, Inc., (GBDC), a relatively new BDC in the sector, because of its conservative manager and asset base, with a lot of first-lien, lower-yielding, safer investments. He also recommends GBDC due to its available capital to make new investments.
“So while we don’t have a long-term historical public track record, their private track record, they’ve been around since 1994 with $6 billion of middle-market loans,” Mason said. “They’ve got a great private long-term track record, and the current portfolio has constituted such that it should be much lower loss rates, higher credit quality.”
Excellent access to capital, good liquidity and strengthening commercial real estate fundamentals continue to stabilize the outlook on the U.S. REIT sector, says Steven R. Marks, a Managing Director at Fitch Ratings Ltd.
“Having this strong access to capital has enabled REITs to have good liquidity positions,” he said. “Further to the stable outlook has been that commercial real estate fundamentals at the property level have varied across sectors, but have generally been within our expectations.”
Marks puts Simon Property Group Inc. (SPG), which focuses on retail properties, at the higher end of the ratings scale of U.S. REITs in his coverage universe. He says he likes SPG because of its low leverage, conservative management and good liquidity.
“In terms of retail, we revised our view on the fundamentals for retail across the entire retail sector to stable,” Marks said. “It’s actually been the one property type where we’ve been surprised at how consistent the performance has been, at least for the last year, and we expect that the performance is going to be certainly not gangbusters, but somewhere between 0% to 3% same-store NOI growth.”
The BDC industry is currently fairly valued on an absolute and relative basis, which has led to a positive bias on the sector given industry conditions, with selectivity as the key to outperformance, says Vernon C. Plack, CFA, Director of Research at BB&T Capital Markets.
“BDCs provide investors with a high-dividend-paying investment with growth potential that also gives access to the private debt and equity markets. However, they are not without risk, and we have seen volatility in these names like we have seen in other industries,” he said. “From our perspective, selecting the right BDCs is key.”
Plack names Ares Capital Corporation (ARCC) as a top pick in the BDC industry. He says Ares Capital has one of the best investment track records since going public in 2004, and it is best in class in terms of talent and infrastructure.
“We believe the company has available capital to continue to grow its portfolio, and as a result we believe we will continue to see both solid earnings and dividend growth. Additionally, we believe the stock is a compelling value today, selling just under net and yielding about 10%,” Plack said.
First-quarter earnings show that landlords continue to have pricing power as REITs in the apartment segment still offer strong numbers and opportunities for investors, despite some bearishness from potential raises in rates and competition from rental homes, says Alexander D. Goldfarb, a Managing Director and the Senior REIT Analyst at Sandler O’Neill + Partners, L.P.
“While they are seeing move-outs because of rent increases, they are also seeing those move-outs backfilled by new tenants who are paying those rents, so you are seeing a cycling out of the trough renters who are being replaced by people where the rent is more commensurate with their incomes,” he said. “And as far as competition from houses, it’s still not there.”
Goldfarb likes Post Properties Inc. (PPS), an Atlanta-based apartment company, which he says has been operating on all cylinders over the past several years, while its management has been delivering strong portfolio performance. He says despite a weak performance in the 2000s, coupled with getting a bit over their skis with developments and two condo projects, Post continues to weigh on the stock, so it still trades at a healthy discount to NAV.
“Post still has another two years or so of runway to continue to put down strong numbers, plus, again, management wants to improve the balance sheet. They never lost their investment-grade rating during the downturn, which is a credit to them, but they do want to move it up a notch, and moving it up will lower their cost of funding. Again, another positive for the stock,” Goldfarb said.
Liberum Research continues to view the American economy in a more positive light than has been seen by the majority of analysts and economic forecasters. Despite the worrying overall employment numbers and incredibly weak job growth that has been registered of late, Liberum expects these numbers will improve as we move into the late summer and early fall. We are still very concerned about the severe economic problems in Europe and hope to see a change of strategy by Germany in conjunction with the other large European members to deal with the problems facing Greece, Spain, Italy and Portugal. If the severe austerity approach of the European Community continues, Liberum will be forced to re-evaluate our assessment but we expect growing pressures will force it to change.
Here in the United States growing executive turnover remains one of the few bright spots for the United States economy. While our assessment for the future of the U.S. economy is a lone voice, we still see real hope for growth in the economy and in overall jobs. Last month’s job numbers so far do not jive with our forecast but we still believe there is a real chance for a change in these numbers going forward. For the next few months, Liberum expects to see reasonably robust turnover in the nation’s corporate executive ranks. We expect these growing turnover numbers will translate into a slow but steady growth in jobs.
Below is a breakdown of the key executive category percentage increases for May 2012 compared with May a year earlier and the previous month of April 2012. The year to year changes overall were quite positive while the month over month executive turnover numbers again showed a slowing in the trend but unlike the previous month to month comparison actually showed growth.
Below are four graphical representations of the total executive turnover changes in the month of may for CEOs, CFOs, C-level changes (as defined by Liberum Research) and Board of Director Changes. The numbers continue to show growth.
New entrants in the telecom and multimedia sector are causing disruptions across the traditional communications pyramid, which are creating investment opportunities in the space, however investors can continue to benefit from the larger, more established names as part of this secular trend, says Kristina Salen, a Portfolio Manager for Fidelity Asset Management.
“So the great thing about telecom is you can get some of these exciting secular trends that we were discussing previously, but you can also participate in those changes through companies, which have very predictable topline growth, high cash flow generation, and therefore, a propensity to return that cash to shareholders in the form of dividends and/or buybacks,” she said.
Salen gives Walt Disney Co. (DIS) as an example of a large-cap name in the multimedia space that has performed well over time despite any disruptions or shifting secular trends in the space. She says from a content perspective in the telecom sector, content tends to be branded so it tends to have high barriers to entry, and Disney has been able to benefit from this advantage.
“It’s really difficult to replicate Disney. And because the brand has resonated with the consumer, it has tended to do well no matter what the device. Disney has done well on a mobile phone, on television set, on a computer, in a book format and on the iPad,” Salen said. “So I don’t have to worry so much about secular shift at the top of the pyramid.”
Investing in portfolios made up of undervalued securities can offer investors faster growth than the equity indices, and an income for clients, who are approaching or in retirement, and want as high an income as they can get with low risk, says Malcolm Gissen, Founder and Investment Adviser of Malcolm H. Gissen & Associates Inc.
“For those people, we’ve developed an expertise in finding lesser-known assets that will provide 7%, 8%, 10% dividends without undue risk,” he said. “As a philosophy, we believe in buying undervalued, unappreciated, underfollowed, lesser-known and beaten-down securities.”
Gissen favors Uranium Energy Corp. (UEC), a uranium producer, who is currently undervalued. He says there is greater development of the nuclear power industry than ever before, despite the Fukushima disaster. Gissen also expects nearly half of the uranium supply to the U.S. to end by the end of 2013 after the expiration of a treaty with Russia.
“What will happen to uranium prices when 45% of the uranium supply to the United States goes away, in addition to the construction of 61 new plants? That’s why we are invested in Uranium Energy Corporation, which is currently producing uranium in situ in Texas,” he said. “After Fukushima, the company lost more than half its value; it offers a great buy, a great opportunity.”
When recapping first-quarter numbers against the main themes in the communications solutions sector, investors should focus on names with strong secular growth outlook that are basically at the cutting-edge of those trends and in mobile data or data growth, in general, says Daniel Meron, an Analyst at RBC Capital Markets.
“Broadly speaking, the overriding theme in my coverage is the ability to gather information, or if you will, communications solutions, and then, how do you process and analyze the data?” he said. “And we are seeing that there are various companies along the axis depending on where they are in the maturity of the cycle and their positioning within the industry.”
On a long-term basis, given secular growth, good potential to risk, Meron likes Allot Communications Ltd. (ALLT), which provides network-traffic management for carriers and enterprises. He says Allot has strong numbers, and has specifically continued its strong growth because carriers are looking to manage the data growth and benefit from that.
“If you go back to Allot, the management says data traffic is an overriding theme across the world for any mobile carrier. But you’ve seen the adoption of smartphones, or just the increased usage of broadband, over the network set up. So in that respect, companies like Allot can see growth even in macro-constrained areas, like Europe,” Meron said.
New technology coming out of the software industry is creating opportunities for innovation as the sector moves from the historically, well-defined desktop environment, with user devices being PCs, to now alternate operating systems from different manufacturers for tablets and smartphones, as well as PCs, says Mark Moerdler, Ph.D., a Senior Research Analyst at Sanford C. Bernstein & Co., LLC.
“Then, there are all of the changes occurring in the data center as you move from completely on-premise, to some mix of on-premise, the cloud and private cloud. We also see the move to new alternate types of databases. It’s creating lots of opportunities for all the companies within our coverage area,” he said.
Moerdler has an “outperform” rating on Microsoft Corporation (MSFT) because he sees the cloud creating opportunities for Microsoft, with the Office365, Dynamic CRM Online, Azure which is Microsoft’s platform-as-a-service, PaaS, as well as a number of other offerings. He also believes Windows 7 is the standard in the corporate world, while Windows 8 in the consumer world creates the next generation for which these companies will continue to develop.
“Microsoft has been a company that hasn’t been as organically innovative as some other companies have. Right now, we see a lot more organic innovation going on in the company than we’ve seen before,” Moerdler said. “And we think that creates a great opportunity for the company to beat the Street’s expectations and to prove that some of the bear cases are wrong and to do that in a reasonably short time horizon.”
The roughly $20 billion shift from traditional advertising media to digital, meaning online and mobile platforms, over the next three to five years is expected to benefit companies that help advertisers better target consumers and/or measure the effectiveness of various marketing solutions, says Mark Zgutowicz, a Vice President and Senior Research Analyst at Piper Jaffray & Co.
“The biggest shifts we still see coming from print. For instance, newspaper share of advertising spend continues to outpace time spent on the medium. Roughly 15% of U.S. advertising dollars are spent on newspapers, when only 4% to 5% of time per day is actually spent reading the newspaper,” he said. “Compare this to time spent online, which is in the high 20% range. However, only a low 20% percent of ad dollars are directed online.”
Zgutowicz recommends Meredith Corp. (MDP), a traditional magazine publisher with a burgeoning digital platform. He says Meredith is the early stages of migrating more of its 30 million annual magazine subscribers to the tablet format in order to develop an attractive scalable platform to sell premium-priced interactive advertising to a more engaged customer.
“The opportunity here is twofold. The first is migrating their traditional print magazine members eventually to a tablet subscription, which saves the company around 40% in printing, postal and distribution-related costs,” Zgutowicz said. “The second digital growth driver, is the company’s in-house digital agency, enabling advertisers to best reach the female demographic direct through Meredith-branded content and sites.”
