Warren Buffett, Graham and Dodd, Classic Value Investing is key to navigating a rising interest rate, rising inflation cycle in the global economy. These three portfolio managers turn this into specific classic value stock picks.
John DeGulis is the President and Portfolio Manager at Sound Shore Management, Inc. Mr. DeGulis joined the firm in 1996. Earlier, he worked at Morgan Stanley & Co. Mr. DeGulis holds an MBA from Columbia Business School and also graduated from Northwestern University.
Peter B. Evans is a Partner at Sound Shore Management, Inc. Mr. Evans joined the firm in 2005. Earlier, he worked at American Express. He is a graduate of Dartmouth College and Columbia Business School.
David B. Bilik is a Partner at Sound Shore Management, Inc. Mr. Bilik joined the firm in 2003. Earlier, he worked at Morgan Stanley. He graduated from Williams College and Columbia Business School.
John DeGulis puts the Sound Shore Fund investment philosophy into simple Warren Buffett type terminology.
“We manage the Sound Shore Fund the same way we do our institutional separate accounts. It’s a large-cap value strategy that is run in the same manner as we have since the firm’s inception in 1978. We screen for what’s cheap out there. Then we do our own fundamental research to come up with a reasonably concentrated portfolio of 35 to 40 stocks. It’s a very straightforward and disciplined process that we apply across all of our accounts, including the Sound Shore Fund…
It’s a value investing style. We are contrarians by nature. We’re looking for stocks that are cheap, but not just statistically cheap on a sort of static ratio basis, if you will, a low p/e — it’s certainly one way to screen and we do that to create our opportunity set. But then we very quickly take that opportunity set and do our own fundamental research to discern which stocks we think are going to be the best risk/reward ratios. So it’s a classic value investment style.”
John DeGulis gives an example:
“I’ll start with Vistra (VST). It is a diversified electricity supplier.
They have both generation as well as a retail business that does transmission and distribution.
It’s an interesting company that came together through a series of acquisitions over the years, but now is one of the largest providers of electricity in the United States.
They have exposure to many markets.
Their biggest market is Texas.
But they also have exposure in the mid-Atlantic, they have some exposure in Illinois and business in California. So it’s diversified geographically within the United States, but still entirely a U.S. business.
And it trades for very, very cheap multiples on both earnings and cash flow today and prospective cash flow and earnings as you look out.
So in today’s marketplace, given everything that’s happened in the electricity markets, their earnings power has increased since we bought it.
And it now trades for a p/e that is, we think, under 10 times what the earnings power is of the business.
And also very importantly, free cash flow, which is critical in a capital-intensive business such as electricity generation, is similarly at very low multiples of earnings.
So when you look out to 2023, and 2024, earnings estimates for Vistra (VST), they’re north of $2.60 a share; the stock is trading at $23.70 today.
We actually think those earnings numbers are a bit low when we look out at the various scenario analysis of what they might earn in 2023, and 2024, given how electricity prices have increased over the last 12 to 24 months.
So we’re looking at a company that’s trading for less than 10 times earnings, less than 10 times free cash flow, that we think is an increasingly important part of the energy infrastructure in the United States.
The other important part about Vistra (VST) is they’re diversified by their fuel source.
So about a third of their businesses encompass retail and electricity transmission and distribution.
Meanwhile, the electricity generating business, which is about 70% of the company, is diversified by fuel source.
They’ve got nuclear, they’ve got coal, they’ve got natural gas, and now they also have wind, solar and some batteries as well.
And so they are increasingly investing in renewables.
You’re going to see that mix shift, continue to accelerate towards renewables and away from carbon over the next 10 to 20 years.
And they have targets set out for both 2030 and 2050 as they execute their transition.
They’ve already closed about half of their coal plants.
They’ll continue to close their coal plants over the next five to seven years — that’s already planned.
They’re putting incremental growth capital principally into solar and battery technology and they’ve already built up a wind business as well.
So you have this transition, much like you’re going to see in many parts of the United States, but also globally as we move away from carbon as our electricity generation continues to transition into more renewables.
But there has to be a pace to it. Obviously, we’ve seen with storms and weather and geopolitical events, there’s a balance to all this.
It’s important to maintain stable electricity in all environments.
And so the trick is that we need to transition to renewable low-carbon or no-carbon sources at the same time, providing good stable electricity as we transition.
It’s a big part of the story.
There is a transition to renewables.
And in the meantime, they are continuing to grow their cash and their free cash flow and they’re generating a tremendous amount of free cash flow that’s going to be returned to shareholders.
In fact, we think they’re going to be buying in upwards of 50% of the stock over a four-year period.
They are about a year and a half into that.
So you’re getting a very significant share shrinkage and return of capital to shareholders in the meantime.
If it trades at what we think is a very fair and reasonable 10 times free cash flow per share, which next year could be north of $3.50, you get a stock into the mid-$30s as a target.”
Peter Evans also has a favorite current example for his Warren Buffett, Graham and Dodd classic value stock.
Their products range from data center routers to glucose monitors to EV charging stations.
In addition to very efficient manufacturing, Flex helps its customers navigate supply chain challenges that we’ve seen of late by nearshoring and then using its scale to source components when there are shortages.
Flex also has a subsidiary called Nextracker, which sells tracking systems for solar panels to increase their efficiency.
Earlier this year, the private equity firm TPG invested a valuation equivalent of over $6 a share.
Their CEO, Revathi Advaithi, who we know from her time at Eaton, refocused the company on less cyclical end markets, like health care and cloud data centers.
And despite having a majority of its earnings in these attractive end markets, core Flex is trading at less than five times earnings.
So just using a modest 10 multiple on this core business, there’s more than 65% upside to our price target. The company is operating very, very efficiently under new leadership…
A slowdown is likely at this point. But if we dig down to a stock-specific level — if I go back to Flex, their free cash flow generation is actually counter cyclical. When there is a slowdown, they wind up selling down their inventory. And they’ve been very good at buying back shares.
Flex has shrunk its share count by about 15% over the last five years.
They have the ability to actually take advantage of a slowdown and a commensurate reduction in their share price to maintain earnings, and then increase that earnings power over time.
We try to find companies that we think can control their own destiny as they go through slow times, as well.”
The portfolio managers agree that now is the best time for Warren Buffett, Graham and Dodd classic value investing style:
“The setup for us, the opportunity set, is a good one for a value style, such as Sound Shore.
And the reasons include that coming into the COVID pandemic, there was a boom in the growth stocks and long-duration assets because of perennially low interest rates.
That era may be ending.
We’re going to move back to, in all likelihood, a marketplace more defined by earnings and earnings growth, which is where we spend most of our time.”
This new market environment favors the Warren Buffett, Graham and Dodd, Classic Value Investing style of Sound Shore Management.
“All the uncertainty that you are now seeing in the market, both economically and politically, gives a lot of volatility and change in market prices that are often more significant than really the value of the businesses.
And that’s what our job is: to find those opportunities.
And so, we’ve been doing this for a very long time, very targeted in the stocks that we own.
But given the amount of disruption that you’ve seen over the last 10 years leading into COVID, and now, today’s marketplace as the Federal Reserve is raising rates, has actually given us an opportunity set that is quite fertile.
As we look forward, we certainly don’t make predictions as to where the equity markets are going to go.
But we do feel like our strategy has every opportunity to do well.
…the firm is 100% employee owned. Our retirement money is in the Sound Shore Fund.
So we’re very much aligned.
We have one strategy.
We’re very much focused on making sure that we’re getting the returns for our investors. So that’s another important point to underline in terms of what differentiates Sound Shore.”
John P. DeGulis, President & Portfolio Manager
Peter B. Evans, Partner
David B. Bilik, Partner
Sound Shore Management
Warren Buffett, Graham and Dodd, Classic Value Investing
A confirmed solar power electricity bull, Charles F. Michaels, CFA, is the Chief Executive Officer, Chief Investment Officer and co-founder of Sierra Global Management, an investment management firm launched in 1996 with holdings in European growth companies including climate-related companies.
Mr. Michaels worked for Goldman Sachs (GS) in London and Zürich where he was a founding member of the company’s European equities business.
He graduated from UC Berkeley in 1978 with a B.S. degree in Business Administration, and from Columbia Business School with an MBA in 1986.
He is also a CFA charterholder. While at UC Berkeley, he became deeply interested in what today is known as “sustainability.”
This led to his support for the funding and founding of UC Berkeley’s Haas Sustainable Investment Fund in 2007, for which he continues to serve as an advisory board member.
He also sponsors the new Michaels Graduate Certificate in Sustainable Business at the Haas School of Business. Additionally, Mr. Michaels serves as an advisory board member for Columbia University’s new Climate School.
He is a confirmed solar power electricity generation investor, with many years leading to this point.
“Sierra Global Management, as it sounds, is a global investment management company, which today is managing two investment vehicles; we manage approximately $130 million.
One is a hedge fund investing principally in Europe, that’s a long and short equity hedge fund. And the other is a traditional long fund investing in companies that have innovative solutions for the energy transition, and that fund is a global fund.
Sierra’s climate strategy is a more recent investment vehicle, having been launched on April 1st of 2021.
Sierra’s hedge fund strategy goes back a long way. We started it back in 1996, in fact October 1st of 1996, so it’s coming on its 26-year anniversary.
As a little background information, I was born and raised in Europe, a German mother, and I studied at UC Berkeley, where I have an undergraduate business degree. And then I went on to work in commercial banking at Wells Fargo Bank (WFC) for about six years — that was both in San Francisco and New York City.
And then in New York City, from Wells Fargo I went to get an MBA at Columbia, where I studied international finance, and then joined Goldman Sachs in Europe, with responsibility out of their Zurich office for building a European equities business from scratch.
So that’s my background.
I would say that something important that I did not mention is that while at UC Berkeley during my undergraduate studies, I wrote my senior thesis on corporate social responsibility, which has become ESG and sustainability.
At Sierra many years later — I would say, looking back, about three years ago — we began integrating ESG into our investment approach, and then that led to a pure “E” fund, the climate strategy.
After integrating ESG for a little over a year, we realized that we really found that the outlook for companies that benefit from the energy transition, and also allocating capital to companies that make this energy transition possible, is really satisfying.
So that’s a high-level description of our firm.
I would add, you can call our headquarters in New York City — we have an office in New York City, we always have since the day we launched back in 1996 — but these days, since COVID began, sheltering turned into being dispersed, and we haven’t gone back to the office and office approach.
We work virtually, and we find that to be more efficient than the old approach, because we’re investing in many different countries of the world.
Just Europe alone, we have investments in over 10 countries, and then when you add the investments we make for the climate strategy, we’re dealing with at least 15 countries for most of our investments.
We want to meet with managements.
We want to have industry contacts in these places.
And we’re speaking to 50 or so brokerage firms around the world, mostly in Europe. That is so much more easily accomplished, in a seamless and efficient fashion, virtually.
We will, from time to time, have physical meetings, go to conferences, meet with companies in their offices, but for the most part we work virtually.
I didn’t tell you about the size of our team — that’s important, too.
Sierra has three analysts.
My role, I spend most of my time on investment management and risk management for the funds, so you can call me the Chief Investment Officer of the funds, but I get deep into the ideas, so I work also almost like an analyst you could say, and so that would be the fourth person who’s operating as an analyst.
We have a president of the firm, Dan Glatt, who manages the business side of the firm, and under him we have a day-to-day business operations manager.
In addition to that we have a CFO, but our CFO is outsourced, not internal.
Historically, we typically had an internal CFO, but we’re very happy working with a very high-level person who is actually working on a part-time basis.
Between the president of the firm and our outsourced CFO and our business manager, that business side of the firm is well taken care of.”
Solar power electricity generation is investment power for this ESG fund manager.
“The opportunity for wind will grow handsomely over the period, and for solar, it’ll grow massively. So, the answer to your question is really one of the biggest opportunities — that is 11% of the energy mix today to almost 40% in 2050 — is solar.
And when you look at solar, there really are a lot of interesting companies to invest in, and if there’s one category where we have more exposure than any other, it would be companies that are beneficiaries of the growth in producing solar energy.
It can be companies that make inverters, solar systems, solar modules, the backend infrastructure for solar, solar trackers, solar farm operators — many ways to invest in solar.
That’s not to say we don’t have other interesting investments that are very different.
We believe nuclear has a role to play, so we have a small investment in nuclear.
I would imagine that our exposure there can increase over time.
We have some investment in wind.
That investment can increase over time.
It’s been bigger in the past, but the wind turbine manufacturers have had supply chain challenges, which has led us to want to limit our investments there.
We also like investing in battery technology facilitating electric vehicles or storage of energy for solar or wind producers.
I mentioned the three main categories — renewable energy, energy conservation, and circular economy.
If you break it down, about 63% of our exposure is in renewables, 20% in energy conservation, and 2% in the circular economy.”
The solar power electricity cheerleader has a negative view of the “green” hydrogen power industry:
“For the European hedge fund, short positions are very important.
An example of a short position would be taking our ESG and the “E” knowledge that we have from our climate strategy and cross fertilizing it in the European strategy as a short.
We have been short, and continue to be short, and believe strongly in this case that there’s been too much hype about hydrogen as a fuel, and specifically hydrogen made with renewable energy, so it would be called green hydrogen.
There’s definitely a place for green hydrogen, but the problem with such hydrogen is that it is way too expensive today.
It’s more of research and development in the area that will lead to producing hydrogen much more cheaply, and when hydrogen can be produced much more cheaply in, let’s say, two to five years from now, then this industry will work better, sales will come through, and the companies will be meeting revenue expectations and meeting earnings expectations.
Today they’re missing revenue and earnings expectations, and they’re losing a lot of money.
So that is one of the key reasons we’re short the most valuable — so that means a lot to short there — hydrogen equipment manufacturer specifically making what’s called an electrolyzer.
And the second reason to be negative in this area is that electrolyzers have been around for a long time, many decades, perhaps 100 years.
I would give credit to the company that we’re short that their technology is definitely differentiated and better than what existed 100 years ago, but the industry doesn’t have big barriers to entry and is one that can be commoditized — is already commoditized, for that matter — and therefore, there will never be an opportunity to make high margins and make as much money as the analysts and many investors expect.
So we expect that this commoditized industry will make lower margins, and that currently it’s challenged because the cost of making the hydrogen is too high.
So that would be an example that’s in the short book of our European strategy.”
Charles F. Michaels has a lot of insight into the solar power electricity generation future of the global economy and more information for the expected failures of alternative energy electricity. Read the entire 4,787 word interview to get the complete picture, exclusively in the Wall Street Transcript.
Gamida Cell (GMDA) and Inhibikase Therapeutics (IKT) are two publicly traded equities with low current valuations and significant upside.
Julian Adams, Ph.D., joined Gamida Cell (GMDA) leadership as Chief Executive Officer in November 2017, bringing more than 30 years of drug discovery and development experience to his role.
He has served on the GMDA board since September 2016.
Prior to his CEO appointment, Dr. Adams served as President and Chief Scientific Officer at Clal Biotechnology Industries (CBI), where he oversaw the Boston office, evaluating investment opportunities and supporting portfolio companies, including Gamida Cell (GMDA).
Before joining CBI, he served as the President of Research and Development at Infinity Pharmaceuticals, Inc., where he built and led the company’s R&D efforts.
Dr. Adams also served as Senior Vice President of Drug Discovery and Development at Millennium Pharmaceuticals, Inc., where he played a key role in the discovery of Velcade® (bortezomib), a therapy widely used for treatment of the blood cancer, multiple myeloma.
Earlier in his career, he was credited with discovering Viramune® (nevirapine) for HIV at Boehringer Ingelheim.
He has also held senior leadership roles in research and development at LeukoSite, Inc. and ProScript.
Dr. Adams has won several awards for his drug development efforts throughout his career, holds more than 40 patents from the United States Patent and Trademark Office and has authored more than 100 papers and book chapters in peer-reviewed journals.
Dr. Adams holds a B.S. from McGill University and a Ph.D. from the Massachusetts Institute of Technology. He also holds a Sc.D., honoris causa, from McGill University.
“The bottom line is the clinical data, our interactions with the hematology/oncology community, and the steady reporting of data further supporting our hypothesis.
We have also engaged in a lot of sophisticated laboratory work to explain how this works at a molecular level.
The story really has come together in the last year with gaining a lot of attention from physicians, both who are on our trials or who are not necessarily on our trials.
Our medical affairs group continues to connect to the transplant community and we have presented over a dozen abstracts in the last year at major medical meetings, all which have been very well received.
As an example, for the bone marrow transplant, for the Phase III program, we have conducted additional studies on the pharmacoeconomics of the product.
There is the potential for better patient outcomes.
Also a feature that is very important in the field of bone marrow transplantation is the ability to match patients at a genetic level to omidubicel, and what omidubicel can achieve and what we showed in our clinical trial is that patients of racial and ethnic diversity have a very hard time finding a match in the registry.
We have been able to have about 95% matching in our clinical trial.
If a patient cannot find an appropriate donor, they will unfortunately succumb to their cancer.
Omidubicel has a less stringent matching criteria for patients.
Moreover, we demonstrated our ability to match racially and ethnically diverse patients in our Phase III study as 40% of the patients in our study were non-Caucasian.
In our lymphoma study, we’ve had patients that are out three and a half years and are disease-free.
And the safety profile, as I’ve mentioned, compares much more favorably to the CAR T therapies in lymphoma, where patients have to be hospitalized, carefully monitored, and there are higher relapse rates.
Also, we have positioned the company for success over the near-, mid- and long-term.
Upon approval of omidubicel, our hematopoietic stem cell therapy candidate, we are in a position to become a commercial biotech company in the first half of next year.
Our mid-term strategy revolves around the success of our GDA-201 NK cell therapy candidate program.
If our company-sponsored clinical trials are successful, we could potentially file a BLA in the next two to three years.
Longer term, or five years out, we are advancing a pipeline of genetically modified NK cell therapy candidates, some of which have already reported promising preclinical data in blood and solid tumor cancers.”
Milton Werner, Ph.D. is the President and Chief Executive Officer of Inhibikase Therapeutics (IKT), a company developing novel protein kinase inhibitor therapeutics to treat neurodegenerative disease and viral infection inside and outside of the brain.
Previously, Dr. Werner served as Vice President of Research at Celtaxsys, a cell-free immunotherapeutics company.
From September 1996 until June 2007, Dr. Werner was a Head of the Laboratory of Molecular Biophysics at The Rockefeller University in New York City.
Throughout his scientific career, Dr. Werner has been an innovator integrating chemistry, physics, and biology into a comprehensive approach to solving problems in medicine, including an explanation of the origin of “maleness” in humans, the mechanistic basis of several forms of leukemia and lymphoma and, more recently, the development of therapeutics that can halt and potentially reverse functional loss in neurodegenerative disease.
Dr. Werner is the author or co-author of more than 70 research articles, reviews, and book chapters and has given lectures on his research work throughout the world.
He is the recipient of numerous private and public research grants totaling more than $30 million.
He is the recipient of several awards, including the Naito Memorial Foundation Prize, the Young Investigator Award from the Sidney Kimmel Cancer Foundation, the Research Chair from the Brain Tumor Society, and a $1 million Distinguished Young Scholars in Medical Research Award from the W. M. Keck Foundation.
Dr. Werner received his Doctor of Philosophy in Chemistry from the University of California, Berkeley, and his Bachelor of Science in Biochemistry from the University of Southern California, and he was an NIH intramural postdoctoral fellow prior to his tenure at the Rockefeller University.
“…We have two active trials ongoing and one recently completed.
Two of the trials were centered on a novel Abelson tyrosine kinase inhibitor that’s brain penetrant, IkT-148009 — 148009, as we often refer to it — evaluated in the 101 Trial, an acronym for that trial, a healthy volunteer and Parkinson’s patient trial that ran between February of last year and was formally closed in May of this year.
In the 101 trial we explored both dose escalation, side effect profile, pharmacokinetics and a variety of safety observations in healthy subjects between the ages of 45 and 70.
Using 148009 in healthy subjects across a wide range of dosing between 12.5 and 325 milligrams once daily showed an outstanding side effect profile — just seven adverse events were seen in 88 healthy subjects, and just five adverse events were seen in 13 Parkinson’s patients who had mild to moderately severe disease, including patients with Parkinson’s who were also taking other medications for Parkinson’s itself.
And there were no clinically significant adverse events.
Only two of the adverse events observed across all of those dosing groups had a possibly related adverse event to the drug in Parkinson’s patients, but nothing of clinical significance, no laboratory abnormalities to speak of.
And so, this drug, despite having very, very high exposures, has a really excellent safety profile so far.
We do not know, obviously, the full safety profile. We’ve only dosed as long as seven days.
Beginning in May of this year, we opened the first of now 11 sites, and there’ll be a total of 40 sites opened for the 201 Trial with 148009.
That’s a three-month dosing trial of 148009 in early-stage Parkinson’s.
These are patients who have a proper diagnosis, have disease progression by a number of standard markers, but who do not take other medications for their disease, so we can begin to evaluate the potential for IkT-148009 to act as a disease modifying therapy in Parkinson’s.
The basis for those trials came from validated animal models that we’ve spoken about for the last couple of years, and the details of which will be appearing in an upcoming publication.
The publication date hasn’t been announced yet, so I can’t disclose more than that.
But in that publication, and many presentations we’ve made publicly, and on our website, we’ve shown that we can both halt disease progression in validated animal models of Parkinson’s disease and actually restore lost function.
And when we restore lost function, we simultaneously clear the pathology of the disease, which is, to my knowledge, the first time any of those accomplishments have ever been achieved in a living organism.
We now see alignment between the doses we’re giving human beings and the drug exposures that they get, and the efficacy in animals where we saw activity.
So we’re hopeful in three-month dosing, which is what the 201 Trial will focus on, that we’ll see early signs of disease impact.
We do not know what the rate of potential recovery in a human being is for Parkinson’s disease, if that’s even possible, because historically, every drug in Parkinson’s or Alzheimer’s, or ALS, or every other neurological disease of its type has no activity whatsoever.
So here is where Inhibikase’s sort of differentiated strategy, I think, has its greatest potential.
And that is why we focus on scientific discovery.
We focus on modeling disease accurately.
We demonstrate therapeutic efficacy in a manner that we think aligns with the human disease.
So that when we go into the clinic, we have potentially a better chance of success.
But obviously, we don’t know whether it will be successful or not just yet.”
Get the complete interviews with Milton Werner, Ph.D., the President and Chief Executive Officer of Inhibikase Therapeutics (IKT), and Julian Adams, Ph.D., Chief Executive Officer of Gamida Cell (GMDA), exclusively in the Wall Street Transcript.
Milton Werner, Ph.D., President & CEO, Inhibikase Therapeutics (IKT)
Julian Adams, Ph.D., Gamida Cell (GMDA)
Nanocap biotech companies with public market capitalizations under $500 million with enough capital in the bank to launch a new product are a sweet spot for investors looking to take advantage of the current market fear.
For biotech companies the Phase III trial is the penultimate step to launching a new prescription drug.
Once Phase III trials are complete, the company creates a “Biologics License Application” or “BLA” submission for the FDA, the Federal Drug Administration.
Once the FDA has approved the drug for sale to the general public, the company can market the prescription drug to MDs throughout the United States.
John Vandermosten, CFA, is a senior biotechnology research analyst for Zacks SCR where he covers a portfolio of small-cap equities. His background includes 20 years of experience in a variety of investment management and research roles across all market cap ranges and throughout the capital structure.
In his 3,514 word interview, exclusively with the Wall Street Transcript, John Vandermosten points out that is has been difficult getting through the FDA process during COVID:
“The regulatory environment has been very difficult during COVID, and a lot of the attention and focus of the FDA has been on COVID and vaccine approval since early 2020, which diverted their attention from approving other drugs.
And also COVID has impacted clinical trials.
In 2020, a lot of those were delayed or held back, because frequently oncology patients are very sick and they don’t want to be exposed to the virus. So there were a lot of potential subjects that didn’t join trials and things were delayed.”
And then last year, it became very difficult to get goods and services — and this is apart from regulatory requirements. The FDA couldn’t do inspections, the FDA had to delay, a lot of times, some of the approval work that they were doing. So it made things very difficult for companies to get drugs approved.
Now that we have vaccines for COVID, the agency’s attention can shift back to regular approvals and we’ll see more focus on some of the products for existing diseases that need attention.”
One of the nanocap biotech companies that John Vandermosten covers has maneuvered through this difficult time and is poised to reap the rewards of its diligence.
“The third recent initiation is BioLineRx (BLRX). It recently completed a Phase III trial for stem cell mobilization in multiple myeloma.
Their lead candidate’s name is motixafortide, and it helps expand stem cells for use in transplantation. And results from their Phase III trials showed a 3.5-fold increase in stem cell mobilization in two apheresis sessions, versus standard of care.
It is 9.3 times more effective versus standard of care for mobilizing over 6 million cells in one apheresis session.
These are impressive statistics that show the drug can help patients needing a hematopoietic stem cell transplant.
BioLineRx (BLRX) conducted a pharmaco-economic study, which showed they could save $30,000 per patient compared to standard of care and improve outcomes…
BioLineRx (BLRX) and their drug motixafortide completed a Phase III trial and they’re preparing an NDA right now; targeting mid-year to submit their product to the FDA.
So as soon as that happens, we could see an answer from the FDA about 10 months later — they could actually have a revenue-generating product by second half next year. And they do have sufficient funds to get there.
Although sometimes companies like to raise a little bit more to give them some negotiating room.
I always think it makes sense to partner with a larger company that already has a marketing and sales group in place.
BioLineRx (BLRX) has said they can do it themselves if they need to, because it’s a relatively small group that they’ll be marketing to. But either way, things are looking good for them. And I think there’s a lot of upside there.”
Dr. Kumaraguru Raja is a Senior Biotech Analyst at Brookline Capital Markets.
Previously, he was Vice President, Biotechnology Research at Noble Life Science Partners.
He started his equity research career in 2010 as a Senior Associate Analyst on the Citi Research biotechnology team.
His expertise includes bottom-up scientific and financial analysis on companies across therapeutic areas and across a spectrum of market capitalizations.
In his 1,876 word interview with the Wall Street Transcript, Dr. Raju has also identified a number of nanocap biotech companies that have drugs ready to go to market and therefore may have tremendous upside.
“Earlier, pharmaceutical companies used to acquire early-stage companies, and they still do, but to a smaller extent.
Typically, the approach nowadays is to wait for Phase III data. And the pipeline is then de-risked, and they are willing to pay more for a de-risked asset than paying less for an early-stage asset.
They are not willing to take that higher risk. And I am not saying that earlier-stage companies are not takeover targets, but we are seeing much less of that more recently.
But a lot of these companies are looking at collaborations too, not just takeovers.
So, in my coverage universe, Dare Biosciences (NASDAQ:DARE), in the women’s health space, has developed a drug for bacterial vaginosis.
It is called XACIATO.
They have a global license agreement with another company called Organon (NYSE:OGN).
So that has happened early this year. So that is a drug which was already approved by the FDA. And they entered into this collaboration agreement following the approval.
So that is one example where the collaboration has happened following the approval.
And some of my companies, they are also acquiring earlier-stage private companies so that they can expand the pipeline, because they have enough cash on the balance sheet and then they can leverage that to buy other smaller private companies, which are in Phase I or Phase II development.”
Nanocap biotech companies are high risk/reward ratios.
Because of the COVID-19 pandemic, they have been clobbered in the public markets over the past 12 to 24 months and investor expectations are close to multi year lows. The FDA is now in the position to review and permit new drugs for the market.
In the recent Biotechnology and Pharmaceuticals Report from the Wall Street Transcript, investors can get detail from both industry experts and the CEOs of many nanocap biotech companies, and determine how to best take advantage of the current fear factor in pharmaceutical stocks.
John Vandermosten, CFA, Senior Biotechnology Research Analyst
Dr. Kumaraguru Raja, Senior Biotech Analyst
Word count: 2,971
TWST: Let’s start with an overview of the company, its history and how it has evolved over the years.
Mr. Rawcliffe: Sure. So Adaptimmune is an integrated cell therapy company. We’re focused with a platform derived from affinity enhanced T-cells and we’re targeting solid tumors. And that’s different. We also have a pipeline of clinical products with a first BLA — Biologics License Application — to be submitted this year for a rare tumor type called synovial sarcoma. We presented data at ASCO this year on that. And we think that will be the first transformative medicine for patients with metastatic synovial sarcoma for several decades, actually.
Behind that we have a pipeline of affinity enhanced T-cells, the most advanced of which other than the one that’s being submitted for the BLA, is across a range of tumor types in a family of trials called SURPASS. And it targets a target that’s present on head and neck, bladder cancer, lung cancer, gastroesophageal cancers. And we’re in mid-stage trials in those indications with the intention to take future products towards the market in due course, and we’re presenting data from the Phase 1 SURPASS trial at ESMO this year. So we are an integrated cell therapy company, submitting a BLA this year, broad platform coming, broad pipeline coming behind that.
And in terms of how we’ve evolved? I think we’ve evolved consistent with the space and our leadership position in it. We, as a company — we’ve been a company for 14 years. So we’re long standing in the cell therapy space. And we’ve seen that space evolve from science projects to real products on the market. And the next frontier, the holy grail for cell therapy is the ability to get cell therapy to work in solid tumors. And that’s where we’ve been focusing all our energy. And we are absolutely at the leading edge of that with the first engineered T-cell therapy in a solid tumor space, with a BLA submission this year.
TWST: I know you have different terminologies here, so I just want to make sure. Is that a part of SPEAR or is that something separate?
Mr. Rawcliffe: So a SPEAR describes the underlying technology platform. It stands for Specific Enhanced Activity Receptor. So it describes the fact that we engineer the T-cell receptors on T-cells to be able to recognize cancer, specific targets on cancer with enhanced affinity. And that overcomes the main thing that happens with your immune system and cancer, which is your immune system just can’t recognize cancer with enough specificity to go ahead and kill it.
And so we engineer the T-cell receptor, which is the business end of the T-cell. It’s the thing that T-cell uses to recognize what it wants to kill. And we engineer that so it can see cancer targets. And then when it does, the T-cell does its job; it kills those targets, and it brings in the rest of the immune system as well to attack that cancer. So the way to think about these cells is like they’re the stormtroopers kicking in the door; if these cells can attack cancer cells, then the rest of the immune system piles in behind to eradicate the tumor.
TWST: And where are you in terms of clinical trials?
Mr. Rawcliffe: So our lead product, or afami-cel, for synovial sarcoma has completed the hypothesis testing cohort for its pivotal trial. We announced that the trial was positive last year with a clear separation between the responses that we see, the response rate that we see and historical controls. And we have RMAT designation with the agency — that’s Regenerative Medicine Advanced Therapy designation — that gives us access to talk to the agency — the FDA — about the program and we’ve talked to the FDA about the pivotal SPEARHEAD-1 trial, and its design and that will be the basis of the BLA that we will submit this year. So that’s the most advanced program.
Then behind that, the next-generation T-cell, with the same target as afami-cel, but with enhanced potency is in Phase I and Phase II trials. The Phase I basket trial we call SURPASS, which is across a broad range of tumors — that’s really a signal-finding study in late-stage patients to try to see where we see responses. And that’s the data that we are putting out at ESMO later this year. And then as we see responses in particular tumor types — we’ve seen responses in head and neck, bladder, and gastroesophageal and ovarian cancers so far.
Based on data in gastroesophageal and ovarian cancers, we initiated a Phase II trial last year in gastroesophageal cancers and plan to initiate another Phase II trial this year in ovarian cancer. And subject to the data, we aim to put those on a path to registration and ultimately becoming a commercial product.
TWST: Is there anything else you have in the pipeline that you’re expecting to be able to present soon?
Mr. Rawcliffe: Yes, so the other very exciting thing that we’ve got is that all of the stuff that I’ve been talking about before and all of our clinical pipeline is what’s known as autologous cell therapy. An autologous cell therapy basically means they’re your cells, and we take them out from each individual patient, we engineer them for our enhanced T-cell receptor, our SPEAR T-cell receptor in there, and we send them back to you. And so it’s a personalized treatment for you, with our engineered T-cell receptor. And that as a process takes time. And it’s obviously patient specific and what we have been working on for six years now.
There are a number of other companies in the space all trying to get a universal cell, donor cell that could go into any patient. That’s very difficult to do. And that’s called allogeneic. So you’ll hear the autologous platforms and allogeneic platforms, and we have both. Our allogeneic platform is in the research phase, is yet to go into the clinic. We plan on filing an IND for that next year. But that’s super exciting for us and for the field.
And if successful, that has the opportunity to have an off-the-shelf cell therapy. So rather than having to go through this complex manufacturing process, which although well-established now and we were good at it, as are the other cell therapy companies in the autologous space, it does take time and it is costly. You would have an off-the-shelf product available immediately for a patient when they received the diagnosis and wanted a cell therapy treatment. And that’s to say our first IND for that will be filed next year.
TWST: I was curious, how did the pandemic impact your research, your work? And where are you now in that process?
Mr. Rawcliffe: I think the interesting thing about the pandemic was, and this is true not just for us and for other biotech companies, I think it was true for the majority of society, is the realization of just how much you can do completely remotely. And at the same time, after a period of time, we’ve found that there were some very important things that it was difficult to do entirely remotely, that some level of face-to-face contact was necessary.
So from a sort of operations of the company perspective we were actually quite successful through the pandemic. We were able to very effectively take everybody remote and then bring them back, and actually our style — our approach to work remotely or in the office — has changed and alongside many others we’re implementing a hybrid model based on specific roles. So I think that is a significant change brought about by the pandemic, that increased flexibility.
The other thing for us, obviously, is clinical trial recruitment. And as well as the operations of Adaptimmune, you’ve got the operations of the hospitals that were also hit, not just in terms of their processes in place to combat COVID in their workplace, which I think puts additional constraints on patients seeking help, but also the fact that many of the hospitals were overrun at certain points in time with large numbers of COVID cases and prioritized those and obviously didn’t prioritize even late-stage cancer patients. And so, there was a definite period of time where recruitment slowed.
I think one of the advantages that we’ve had is that we are running our trials both in North America — U.S., Canada — and in Europe. And actually, when you chart the waves of COVID backwards and forwards, it was rare that all those locations were shut down at the same time. So by and large, we were able to continue to recruit the trials, but there were definite effects on — for example, MD Anderson Cancer Center in Texas was one of our major recruitment sites and went through phases of having very strict COVID responses and a lot of cases, and so on a site-by-site basis, that was significant.
I think, overall, we’ve come through that, I think, quite strongly. I think that’s true of the sector, as well as not just of Adaptimmune. I mean, it’s notable that during the pandemic we recruited our pivotal trial almost entirely during the pandemic. That went fine. We raised a quarter of a billion dollars on the basis of ASCO data that we put out in 2020. And we did that entirely virtually. And we executed a very large deal with Roche Genentech, which we signed at the tail end of last year, so late 2021, but most of that was negotiated through the pandemic, through various waves of the pandemic. So I think we’ve managed to come through it stronger on the other side, although COVID clearly had a significant impact.
TWST: Can you talk about the deal with Genentech and why it’s important?
Mr. Rawcliffe: So I referred earlier to an allogeneic platform. And this is a genuine platform. So whilst we can use it to develop our products, and the first product we will put into the clinic is targeting MAGE-A4 and is wholly owned, which is the same target as afami-cel, but this will obviously be an off-the-shelf version. The applicability of that platform is much broader. And so we’ve had a strategy for some time to make that platform available to partners and to leverage and monetize that platform to some extent, so that they can pursue their own programs and targets of interest on an allogeneic stem cell derived allogeneic platform, which is what our platform is.
And so in 2020, we did a deal with Astellas that enabled them to have a number of targets that we’d work on closely and move through. And then last year, we did a much larger deal with Roche Genentech. They paid us $150 million upfront and they will pay us another $150 million over the five years subsequent to the signing of that. And there’s development milestones downstream, and I forget the exact biobucks number we put out there, but it was — I think it was $3 billion of biobucks associated with the program. But more importantly it’s real validation by an acknowledged scientific leader in the space, Roche Genentech, that Adaptimmune platform can be the basis of a long-term set of products.
And Genentech’s interest is very long term. The deal has two parts to it — one part of which is a very long-term approach to a personalized off-the-shelf therapy that we’re working with our partner Genentech. So it’s super exciting, super validating, and part of the strategy to leverage that platform because it has potential way beyond what we could possibly hope to do with it.
TWST: I was wondering, what are your priorities for the next 12 months to 24 months? And what would make that timeframe a success?
Mr. Rawcliffe: We have four very clear priorities. And particularly in this biotech market, it’s really critical that we’re focused on those. So number one, we are submitting our BLA for afami-cel. That is a gargantuan task. There have only been five successfully filed cell therapy products in history. And so we plan on being the sixth or possibly the seventh. And so there isn’t a roadmap, there’s a lot of stuff that we’re working through with the FDA as we go and we plan on submitting the BLA this year. And subject to regulatory review, that product will then be available commercially in late 2024. So that’s a key priority. And so the BLA itself and standing up a small focused targeted effort to commercialize afami-cel for patients with synovial sarcoma.
Secondly, the SURPASS family of trials. This is the opportunity to make cell therapy mainstream in the solid tumor space because the SURPASS product has shown activity across a broad range of tumors, and prosecuting those trials into late-stage development and towards the market is going to be key to demonstrate the value of our platforms.
Thirdly, is the allogeneic platform that I referred to. Focusing on that and delivery of the IND for MAGE-A4 and progression of the partnerships with Genentech and with Astellas.
And then lastly, we have believed for the longest time that to be successful in cell therapy, you have to own your manufacturing. There’s a whole set of rationale about why that’s particularly important in autologous cell therapy versus in monoclonal antibodies or other therapy types. And we’ve invested significantly in that over the years, and it’s really paid off. The capabilities we have to be able to manufacture ourselves, I think puts us in a very strong position, both when it comes to executing on clinical trials and as we move forward to commercialize that product out of the same facility where we did the clinical trials, actually.
And so, investment in that so that we can supply both the commercial demand for afami-cel in synovial sarcoma, and the late-stage clinical trial demand — that investment in the CMC space is a fourth priority for us.
So, what does success look like? We will be one of the very, very few biotech companies that’s actually commercialized its own product that it discovered eight years ago in the clinics in Oxford and has developed all the way through clinical trials. And we will now be putting that on the market. Not only will we be one of that select group, which is a small group, but we will have done the first engineered T-cell therapy in a solid tumor as well, which is another major first. And we will have established the potential of cell therapy in solid tumors, and that will be a similar step to the one that, for example, Kite Gilead took when it established that you could do CAR T therapy for B cell malignancies for the lymphomas and leukemias. It will show that we have been able to do that for solid tumors, which I think is a huge step for the field.
TWST: I was wondering what are some of the challenges you face? What keeps you up at night?
Mr. Rawcliffe: So, this is a very complicated space. And as is true with all new modalities of therapy, new types of therapy, there’s no playbook for a lot of this. And so what we’ve had to do is build a team who all come with their own skill sets from different places, but who have integrated around getting cell therapies to market and that knowledge to be very different. So that, I suppose it’s unknown. If you’re not comfortable with ambiguity in this space then being the cell therapy CEO is not a good place to be. So I think you’ve got to be comfortable that we’re doing stuff that just hasn’t been done before.
I think there’s not that much that keeps me up at night. I think that historically there has been, and it was when we weren’t sure what the benefit for patients was from our therapies. But the reality is at the moment that everywhere we look in our trials, we see — most of our trials are not blinded – so I see patient data as it comes through, sometimes in semi real time. And so everywhere we’re looking at the moment, we are seeing the positive effects these cells are having on patients. And once you’re convinced of that, all the ambiguity is manageable. Because you can see that scan and that patient had a huge tumor at baseline, and it’s gone now. And so you can see that your cells are doing something.
And so, you know, the road may be unknown, it may or may not be navigated before with certainty. But I think if you believe that you’re doing something profound for patients there’s a hell of a lot of ambiguity you can deal with elsewhere.
TWST: What’s the most important thing a potential investor should know about the company?
Mr. Rawcliffe: Adaptimmune is the leader in engineered T-cell therapies in solid tumors. We’ve built a successful, integrated, completely dedicated and specific company to advance cell therapies. And that’s what’s going to make us successful, establishing these as a mainstream therapy in solid tumors. And the field is enormous. If you think that monoclonal antibodies are a big space, a big target market, a big economic potential, big upside, cell therapy will dwarf that in time. And Adaptimmune is right at the forefront of getting that access.
TWST: Was there anything you wanted to mention that we didn’t discuss?
Mr. Rawcliffe: I think the only thing that is what I just said about where we’re positioned relative to the field. I think that’s the take home for Adaptimmune at the moment. BLA this year, everything to play for.
TWST: Thank you. (CJ)
Adrian “Ad” Rawcliffe
351 Rouse Boulevard
Philadelphia, PA 19112
(215) 825 9260
(215) 825 9459 — FAX
Hartaj Singh is Managing Director and Senior Analyst, Biotechnology at Oppenheimer & Co. and recommends Gilead (GILD) for investors looking for a biotech investment.
Earlier, Mr. Singh was Managing Director and Senior Biotechnology Analyst at BTIG Securities.
He began his sellside career at Lehman Brothers and subsequently moved to the buy side covering biotechnology at Visium Asset Management and Tecumseh Partners.
He began his career as a clinical trial project manager for ClinTrials Research and also worked as a strategic analysis manager for Johnson & Johnson (JNJ), both of which give him experience in clinical trial design.
Mr. Singh has a B.A. in biology from Case Western Reserve University and also did graduate work in computational neurobiology. He received an MBA from Duke University’s Fuqua School of Business.
For investors looking to get started in biotech, Hartaj Singh believes Gilead (GILD) is at an excellent entry point.
“Yes, we have a “buy” on Gilead (GILD).
And we have one of the highest price targets on it.
And it’s just human psychology that if things are not looking good in the outside world, you will generally tend to go to areas or stocks that are safer. So you’ll avoid higher-risk stocks.
And in that kind of an environment, the larger caps look very good. They don’t tend to be as volatile.
The large caps in biotech have already seen their valuations pretty depressed for a few years now, since valuations started declining during the back half of 2015. And since then, because of drug pricing concerns, and some other concerns, large-cap biotech has been undervalued.
So, it’s already cheap; it already looks cheap.
And in a recession, potentially, investors would go to names that seem to be safer. And then Gilead (GILD) screens especially well because it doesn’t have a lot of binary pipeline readouts.
It’s got good likely top- and bottom-line growth of about in the low- to mid-single-digits.
And then it’s got a 4% to 5% dividend yield.
Its dividend yield is probably the best in biopharma right now.
So if you’re looking for a safe haven, what in a very bullish economy would seem like a very boring stock that everybody would avoid, right now Gilead (GILD) may be kind of boring and it has a great dividend yield.
So we think actually Gilead (GILD) should perform better and better, especially if the environment seems to potentially indicate a recession going forward.”
Funding rates have affected startups rather than the Gilead (GILD) level biotechs.
“Biotech consumes a tremendous amount of cash.
There is a number that’s often thrown out, which has been published by various data sources, that it takes about $1 billion to get a drug to market, but that includes all the other drugs that failed.
And one out of every 13 drugs that gets into human beings for clinical trials actually makes it to market. So in biotech, the failure rates are tremendous.
But investors make the money off of the one drug that works, because essentially, it’s a moonshot or star-shot kind of project that more than makes up for all the other losers.
But that also gives an insight as to why biotech is so sensitive to the economic environment.
When cash is very constrained, meaning like in a recessionary environment, the incremental dollar from investors is more and more difficult to get.
And then, of course, sectors like biotech become very difficult to fund. And so, valuations start going down.
When a market is on an uptrend and people have more and more money to spend and can take riskier bets, then biotech is usually one of the first sectors to recover, because that’s when the risk-on mood is around to be invested.
However now, investors will probably gravitate towards projects and companies that have less risk. So there will be fewer preclinical projects, more clinical projects.
And more focus on diseases where there’s a higher understanding of molecular biology, which is called the disease pathology — the underlying way the disease works — and then also where there are validated targets.
And that usually is in oncology, immunology, genetics, and the genetic underpinning of various diseases that become much more interesting.
So you won’t necessarily see somebody going after, for example, ALS or Parkinson’s.
But you’ll see investors go after parts of Parkinson’s or Lou Gehrig’s disease that have an underlying genetic component, and that’s a really a smaller subset of the overall Parkinson’s disease population.
So those areas have become much more focused upon by investors.”
Hartaj Singh has a portfolio approach that includes stocks like Gilead (GILD) but also some riskier companies.
“Percentage-wise, if you’ve got $100 to invest, biotech probably should never be more than $10 — so 10% of your portfolio.
Then, out of that $10, invest about $4 to $5 in companies like Gilead (GILD) and Vertex that are bigger, smart beta; put about $4 to $5 in companies that are smaller and speculative.
Out of that four or five that are smaller and speculative, you probably want to put $2 to $4 in like United Therapeutics and Sarepta, and then $1 into companies where you’re looking for the home run, but which also might go to zero.
So you’re doing a mix of some smart beta with mid-cap companies like United Therapeutics or Sarepta that will give you some alpha and then, you just shade in a little bit of spice with that last dollar to get your home run.
And whether the markets are up or down, I would recommend that over and over again.”
Read the complete 2,892 word interview with Hartaj Singh is Managing Director and Senior Analyst, Biotechnology at Oppenheimer & Co., exclusively in the Wall Street Transcript.
Mr. Takeda highlights his top portfolio picks Hitachi, Sony, Mitsubishi, Tokio Marine, and Keyence in this 2,332 word interview exclusively found in the Wall Street Transcript.
Masakazu Takeda, CFA, CMA, is a Portfolio Manager for SPARX Asset Management Co., Ltd., subadviser to the Hennessy Japan Fund, and he has managed the fund since 2006.
Prior to joining SPARX in 1999, Mr. Takeda was employed by the Long Term Credit Bank of Japan — currently Shinsei Bank — and LTCB Warburg, now UBS Securities.
Mr. Takeda received a B.S. in liberal arts from International Christian University, and he is a CFA charterholder and a chartered member of the Security Analysts Association of Japan.
“We strive to invest in high-quality Japanese companies with a global footprint.
Through our fund, the investor can get exposure not just to the Japanese economy, but also the global economy around the world, whether it’s Asia, Europe or the U.S.
They can get exposure to the global economy through high-quality management teams, high-quality companies with lots of liquidity, with big market caps and with better transparency in terms of accounting.
So I think the Hennessy Japan Fund is an interesting way to get exposure to the global economy over time.
And as I said, they are some of the most well-run companies in Japan with top market share in their respective fields.
We try to focus on just a few key ideas, only 25 to 30 names, and we run a low turnover strategy. We just look for great capital compounders and just let the businesses create wealth for the fund holders.”
Mr. Takeda considers Hitachi to be a valuable “growth stock”:
“Hitachi is one of the largest industrial manufacturing conglomerates and it’s over a century old.
They make everything from industrial equipment to heavy machinery, home appliances, consumer electronics, diagnostics, IT services, railway, social infrastructure, management services, etc.
Up until 2008, Hitachi was actually a badly run company.
After 2008, after the financial crisis, they got their act together and they went through a lot of restructuring.
It became an average-quality company. That was around the mid-2010s.
We just watched the company from the sidelines during that time.
Since around 2016, we noticed that the company was undergoing a transition from being just a pure manufacturing-centric business model to a more asset-light, consulting-based business model.
Now, Hitachi can not only sell hardware to industrial customers, but also sell software services, maintenance, aftersales, operational outsourcing, monitoring services, and so on.
So they can sell this as a package. In a nutshell, Hitachi is now turning into a more software-based, asset-light scalable company.
Despite their core operational history up until 2008, the stock is only trading at 10 times p/e. But we expect the company to grow at 10%-plus for the next three to five years.
So that’s what I mean by “growth in disguise.”
Because of the misperception by the market, even though their expected growth rate is in the low-teens, the stock is trading like a value stock and its return on equity is already 15% after years of restructuring.
We like the quality of the company as it stands today.”
Mr. Takeda considers Mitsubishi to be a similar investment option as Hitachi.
“Mitsubishi Corporation (OTCMKTS:MSBHF) is actually classified under the wholesale sector.
The essence of the business is actually an investment business.
So, Mitsubishi Corporation, they use their own balance sheet to invest in various operating assets around the world, as well as investment securities around the world.
So their balance sheet — it’s a collection of unique assets.
The way to value the business, you should look at the growth rate or per-share net asset value.
And over the last five, 10 and 15 years, they’ve been consistently growing their per-share net asset value.
We look at per-share book value as a proxy for net asset value at high single digit to 10%. And so, we think Mitsubishi Corporation is a growth company.
Yet, the stock is trading at a high-single-digit multiple and just barely one time book with a dividend yield of 4%.
I think the misperception comes from the fact that the bulk of the revenue is generated in commodity businesses — coking coal business, as well as oil and hard commodities.
So the stock is valued just like any oil company out there.
But the fact of the matter is Mitsubishi Corporation is an investment company.
So there are multiple revenue sources and we like its long-term growth track record. And again, moving forward, they have ample investment opportunities globally.
The reason why Mitsubishi Corporation is so unique is because in the old days, post-World War II, the economic recovery period, trading companies played a key role by assisting Japanese companies in import and export operations.
It used to be a commission-based business.
However, around the 1980s and 1990s, a lot of Japanese companies started to build up their export channel.
Companies like Mitsubishi shifted their business model to more of an investment type of business.
That’s how they shifted over the years. We like their investment capabilities.
It’s a business, too, owned by Berkshire Hathaway (NYSE:BRK.A).
Warren Buffett invested in this company in 2019 and 2020.
We’ve been invested in this a lot longer than Berkshire Hathaway.”
The portfolio manager likes his current stock positions:
“Right now, obviously, the market conditions are very challenging.
But given the concentrated nature of our portfolio, our active share is well over 80%.
So, from time to time, our fund behaves very differently from the market, which we cherish.
Our goal is to outperform the index and also produce absolute returns on a mid- to long-term basis at a minimum three to five years on a rolling basis, if not longer.
And based on that, we like our portfolio today.
There are a lot of companies with manufacturing excellence, as well as businesses with strengthening intangible assets, businesses that are trading at value stock-like multiples.
Growth prospects are just as bright as pure growth businesses and the underlying companies in our portfolio, they are very different from each other.
So we consider our portfolio concentrated and diversified, and with that I think we can over time comfortably outperform the index.
Now is a time to be patient.
But for anyone interested in investing in the fund, I think the valuation of the portfolio is becoming increasingly attractive.”
Get more detail on his top picks of Hitachi and Mitsubishi, as well as the reasoning behind the Sony, Tokio Marine and Keyence picks, only in the Wall Street Transcript.
Masa Takeda, Portfolio Manager, SPARX Asset Management Co., Ltd.
Bobby Edgerton believes that Walmart (WMT), the retailing giant, is undervalued because its real estate is carried below actual value. He also believes that the New York Times (NYT) is undervalued, also because the real estate is carried at low values.
Bobby Edgerton is a Co-Founder of the Capital Investment Companies and has served as an executive officer of the companies since 1984.
He is also the firm’s Chief Investment Officer and has been in the financial services industry since 1979.
After winning the North Carolina State High School Golf Championship, Mr. Edgerton accepted both a basketball and golf scholarship from Wake Forest University and graduated with a B.A. in business and finance.
After graduation, he attained a rank of First Lieutenant in the U.S. Army Signal Corps, where he commanded a thousand-man training company at Fort Gordon, Georgia, during the Vietnam War.
During his amateur golf career, Mr. Edgerton played in four United States Amateur Championships.
“If you want to be a really good investor, you need a good philosophy and you need to realize that every company, big or small, has two values.
Number one is precisely to the penny what the stock market values the company at. Walmart (NYSE:WMT) is being valued right now at about $380 billion.
The land and buildings at cost are on the books at $120 billion.
Now, they’ve been buying land and buildings for about 45, 50 years.
So you can imagine what that real estate’s worth now, if you mark it up to some realistic value.
I’d say their real estate is worth at least two thirds of what Wall Street is valuing the whole company at.
What if they securitized that real estate one of these days, formed a REIT, put the real estate in the REIT?
Then Walmart would probably have more cash than Apple. And Walmart is down right now.
And that is insane to sell Walmart now when they’ll cash flow about $40 billion this year.
So depending on whether you use EBITDA or cash flow, or free cash flow, that’s between $30 billion and $40 billion. The stock is clearly undervalued.
So great investors, number one, they buy stocks that have been sold off that are worth more than they’re selling for in the stock market.
And if you do that, you need to know your competence.
You need to have an encyclopedic knowledge of the world’s best companies.
Most people don’t know who Lamb Weston (NYSE:LW) is.
Lamb Weston is a potato company — they sell McDonald’s (NYSE:MCD) about 400 million pounds of french fries a year.
Dentsply Sirona (NASDAQ:XRAY) is the king of dentistry. They service about 600,000 dental physicians worldwide.
How can you be a great investor if you don’t know who these companies are? And the best way to learn that is to read Value Line, a great publication.
If you take the time to go through those 2,000 companies and you know more about more different companies than anybody, you’ve got a great chance of making money.
I have a five-point program.
Number one, when you buy companies, you make sure they’re down and out of favor, but they have a lot of cash and not much debt.
Number two, you reinvest your dividends; you don’t spend your dividends.
Number three, you’re a good saver over time, and you spend your life buying as many good companies as you can.
Number four is taxes. If you make your gains long term gains, instead of being a trader, you’re going to pay a lot less tax.
And the fifth point is that the two ways you make money in the stock market are, number one, you buy good companies and you never sell them — you just let them grow over the years.
For example, you hold Lowe’s for 20, 30 years, you hold UPS and FedEx for 20 or 30 years, Disney, and on and on.
The second way you make money is when you own a stock and it goes from out of favor to in favor — if you sell the good stock that’s up, you can buy two or three good companies that are down.
Every good company has some downtimes, just like sports.
And I tell my clients, especially the ones that come in for the first time, “You’re not buying the stock, you’re investing in the company. So if you buy the stock and you buy and sell it daily, you’re really not investing in the company.
But if you buy Coca Cola when nobody wants it in a down market, or a stock like Disney, which is down right now — buying and selling stock is a lot different than investing in the company for the long haul.”
Aside from Walmart (WMT), Bobby Edgerton also likes the real estate value hidden in the New York Times (NYT) company:
“And maybe my number-two buy is The New York Times (NYSE:NYT).
The New York Times fell on kind of hard times back in 2012.
They had a CEO who borrowed a lot of money, bought The Boston Globe, and bought part of the Boston Red Sox.
They also sold part of The New York Times building.
Then they hired Mark Thompson. He had never run a company before, he was the head of the BBC.
He solidified the company, paid off every penny of debt, got the cash up, and no debt.
Once he got the job done, he then retired.
And in walks Meredith Kopit Levien who began reading The New York Times when she was in high school in Richmond.
She went to UVA and became a star at The Cavalier Daily.
She also shined at a famous consultancy run by David Bradley up in D.C. And she was also a star at Forbes, getting Forbes out of so much print and into more online digital subscriptions.
So The New York Times brought her in.
And now she’s the CEO there.
And personally, I would vote for her for president if she could run.
So The New York Times is now valued at about $7 billion but it’s worth a lot more than that.
They still own 53% of The New York Times building. And the stock is just numerically down.
They now have 10 million subscribers, the majority of which are digital.
And she’s doing a lot of interesting things — specialty apps on the web, like cooking and sports, and more.”
Get the complete interview, only at the Wall Street Transcript.
Axos Financial (AX) and Capital Bank (CBNK) are two small banking stocks that fly under the radar but each has specialized sustainable competitive advantages that the CEOs have developed.
Gregory Garrabrants has been the President and CEO of Axos Financial (AX) since 2007.
Prior to joining Axos Bank, Mr. Garrabrants was a senior vice president and the head of corporate business development at the nation’s seventh-largest thrift, focusing on entry into new business segments, mergers and acquisitions, joint ventures and strategic alliances.
Before his senior executive roles at banking institutions, Mr. Garrabrants served the financial services industry as an investment banker, management consultant and attorney for over 15 years at Goldman Sachs, McKinsey & Company and Deloitte Consulting.
Mr. Garrabrants earned his Juris Doctorate, magna cum laude, from the Northwestern University School of Law and his Master of Business Administration, with the highest distinctions, from the Kellogg Graduate School of Management at Northwestern University.
He has a Bachelor of Science degree in industrial and systems engineering and a minor in economics from the University of Southern California. He is a Chartered Financial Analyst and member of the California Bar.
“…We were one of the first internet-only banks and over time what we realized is that the digital interaction capabilities that would allow us to gain customers were obviously going to continue to become more ubiquitous as the smartphone came out.
So, remember the iPhone came out seven years after the bank started.
So when we first started, we were a little bit ahead of ourselves from a technology perspective because there was no real way to deposit checks online with photo capture and things like that.
There were just certain tasks that we had to do through the mail or things like that that were a little more difficult, but then over time what happened is we put a lot of money into our own platform, which is our own app.
That app allowed us to digitize pretty much every single element of the customer interaction process, not only for consumer banking, but also for commercial banking. It allowed us to take a variety of, I’d say, pain points out of the process with respect to using data to be able to make sure we didn’t hold checks, we approved transactions more rapidly, and all those kinds of things.
I think in general, we’ve continued to evolve the underlying banking process, expanding it from consumer to commercial, but then also launching our own online trading platform.
We’ve launched our own robo-advisor platform so you can manage money through us, you can stock trade, and pretty soon you’ll be able to trade cryptocurrencies through our platform as well.”
The President and CEO of Axos Financial (AX) has a cure for what ails the cryptocurrency market, FDIC insurance:
“I think what we’re doing on the crypto side is very interesting.
We recently announced an alliance with Tassat Pay which allows us to work with institutional crypto clients and allows us to transfer value 24/7 between different participants in the crypto market, which is an important component of settlement because the crypto markets never shut down and you can trade at any time.
So that’s one innovative project we’re doing. We also have crypto trading that’s going to be launched in our online platform and I think we’ll be one of the first financial institutions that have done that.
So we will have integrated banking, stock trading, robo management — so automated wealth management and crypto trading.
Literally somebody could deposit their check, immediately get credit for that check and be able to be in the market immediately for a variety of assets or place some of their savings immediately into the market in a variety of ways.
And so, I think that that does reduce a lot of friction that is currently in the processes that are involved in trying to open a crypto account with some of the existing players.
We also think that particularly given the change in the crypto environment that having recognized players that are where money is FDIC insured with respect to the banking deposits and things like that, there’s some credibility benefit to us doing that business.
Those are just two examples. We have quite a few more.”
Edward Barry joined Capital Bank (CBNK) as Chief Executive Officer in 2012.
Since that time, Capital Bank has rapidly expanded throughout the D.C. area and into Baltimore.
Under Mr. Barry, Capital Bank has consistently been recognized as one of the top performing banks in the U.S.
In 2014, Capital Bank won Product Innovation of the year in payments by Retail Bankers International. In 2015 it was named to the Future 50 by SmartCEO magazine.
Prior to joining Capital Bank, Mr. Barry held senior positions at Capital One Bank (COF), Bank of America (BAC), and E&Y/Capgemini (CAP).
On a more personal level, Mr. Barry believes in giving back, and is on the board of the Mid Atlantic Chapter of The Make-A-Wish Foundation.
Similar to Axos Financial (AX) CEO Gregory Garrabrants, Edward Barry joined Capital Bank (CBNK) as Chief Executive Officer in 2012 in order to differentiate what had become an out of favor financial sector:
“The community banking landscape has been under assault really over the last several decades.
If you just look at the numbers, the number of community banks in America has been steadily declining for very long periods of time.
And the formation of new community banks has slowed.
So you’re seeing every year a net decrease in the community bank landscape.
And that’s really a sad thing because historically the community banks really filled a lot of the gaps from the larger banks.
They’ve been very good on the small business sector and in some of the local communities that tend to get underserved.
And what we saw with the advent of PPP in the COVID crisis, there was a big resurgence of community banks across America.
Most of the PPP loans went to community banks that stepped up in the time of need and were very responsive.
So I think there’s a bit of a renaissance now going on for community banks as they’re seeing opportunities to justify their existence in the marketplace on both the business and consumer side and take advantage of things like fintech to help level the playing field between them and a lot of the larger banks that are out there where they can now go head to head and offer the same suite of services and in many respects a much higher quality of service just given their greater customer intimacy, more flexibility and just being deeply embedded in their local community as opposed to some of the larger banks.”
One point of differentiation for Capital Bank (CBNK) is their Open Sky division.
“OpenSky is a company we acquired several years ago and it was a hidden gem as part of a larger institution.
OpenSky is a digital credit card platform that’s focused on underserved customers.
So really targeted towards people that have had credit blow-ups in the past or people that are new to credit.
So as an example, maybe students, people graduating from college, immigrants — so people that are generally frozen out of the credit markets. And so this is a way for people now to get established or reestablished in the credit landscape.
The number-one reason we hear from our customers that sign up for the product is they want to get a mortgage and they can’t qualify.
So it’s really this way we work with them and help educate them. And we’re trying to build other suites of services around it to help them with their journey of homeownership.
It’s had a lot of success with COVID as a lot of people have really doubled down, saying I want to repair my financial health and my financial lives.
And we saw a big uptick in customer base.
Different from our core community bank lending, the OpenSky business is nationwide.
So we serve customers all across the U.S. through our technology. And we have just over 600,000 customers that are active on our platform, working to improve their financial loss.”
Get the complete detail on both Axos Financial (AX) and Capital Bank (CBNK) by reading the complete interviews with their CEOs, exclusively in the Wall Street Transcript.
Gregory Garrabrants, President & CEO, Axos Financial, Inc. (AX)
Las Vegas, NV 89148
Edward Barry, CEO, Capital Bancorp Inc. (CBNK)
Rockville, MD, 20850
C.H. Robinson Worldwide (NASDAQ:CHRW) and Expeditors International (NASDAQ:EXPD) are only two of the stock picks from these top level money managers that are seeking to buy when others are selling, the traditional way to Warren Buffet level wealth.
Fla Lewis III is Principal of Weybosset Research & Management, LLC. At the start of his career, he went to work at Kidder, Peabody & Co. in 1980.
He was named Assistant Vice President in 1985 and Vice President in 1986. He was affiliated with Kidder, Peabody Asset Management from 1990 until 1995.
In January 1995, he joined Compton Capital Management as Vice President and Senior Portfolio Manager.
Mr. Lewis graduated from Brown University with honors. He was awarded the Samuel T. Arnold Fellowship, Brown’s highest honor for a graduating senior.
After study in Vienna and London, Mr. Lewis received a Master of Arts degree from Harvard.
“It’s in times like these that people are running as hard as they can away from stocks, all stocks.
But it’s a good time to look around, see what’s available out there as babies are being thrown out with the bathwater.
In our case, we’ve bought three new stocks since the first of the year. And remember, we don’t do many transactions.
We bought nothing in 2020, for instance, and that was just because the whole thing happened so fast.
We didn’t understand what was happening, so we didn’t act.
But this time around two companies that I’ve been following for nearly 30 years caught our attention.
I had met up with them in the 1990s and the early 2000s and love the businesses, love the management, loved everything about them, except they were selling at very, very high prices. I just couldn’t get myself to pay those prices.
I’m talking about C.H. Robinson Worldwide (NASDAQ:CHRW) and Expeditors International (NASDAQ:EXPD).
These are two freight forwarding companies.
Their businesses overlap to a degree, but they’re both pretty much in different aspects of the same business. I followed them for a long time, admired them intensely, and just woke up one day earlier this year and discovered they were selling at the cheapest prices relative to earnings, book value, etc., that they had ever sold — I mean ever.
They came public in the 1980s or ’90s. And were selling at by far the lowest prices since coming public.
Nothing had changed except the prices.
The business was the same. And they were selling at prices that were low enough that even I would gladly pay.
And just to show that we’re not afraid of anything, we put some money into a big furniture retailer, RH (NYSE:RH). RH used to be Restoration Hardware.
And RH has been more controversial and more difficult. But we think it’ll work out. If it works out, it will work out very well indeed. And we think it will work out.”
Fla Lewis further details his investment love for Expeditors [Expeditors International (NASDAQ:EXPD)] and C.H. Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)]:
“Our two freight forwarders, Expeditors [Expeditors International (NASDAQ:EXPD)] and C.H. Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)]: Imagine that you own a manufacturing business where I live, Massachusetts.
You source your materials abroad, maybe in Asia.
A lot of your customers are in Europe.
You’ve got to bring stuff from China.
You’ve got to get it from where it’s manufactured to a port across the ocean, through customs, across the North American continent to where you have your facilities and turn out whatever it is that you’re that you’re turning out.
And then you’ve got to get it from Massachusetts across the Atlantic into Europe or wherever it’s going.
Well, you know, it’s going to be some combination of sea and land and air.
And if you’re going to figure out the best way to put all these things together, you better have a pretty good in-house transportation outfit — or you can call C.H. Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)] or Expeditors International [Expeditors International (NASDAQ:EXPD)] and they’ll arrange everything for you.
Expeditors [Expeditors International (NASDAQ:EXPD)] and Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)] are what are called asset-light businesses.
They own no trucks. They own no airplanes. They own no ships.
They’ll just arrange for the best combination of trucks, airplanes, trains, intermodal transportation, whatever, to get whatever it is you’re moving from where you need to move it to you and then to other places.
They just make the arrangements. They don’t move it for you.
It’s complicated. We read about problems in the global supply chain.
Well, these guys are the right ones to help you with it. And they’ve got a lot of experience and a lot of contacts.
They know how to handle these things. You can have your own staff and hope that they are good, or just bring these guys in — and I’ll bet they will save you some money while they’re at it.
So I followed these companies for a long time.
The story has remained largely the same for the past 30 years or so.
So all of a sudden, the price is right, so what are you going to do? We stepped up and bought shares of those companies. They’ve held up pretty well since we bought them.”
David A. Katz, CFA, is Matrix Asset Advisors, Inc.’s President and Chief Investment Officer.
He has overall responsibility for the firm’s investment efforts. After initially working at Management Asset Corporation (Westport, CT), Mr. Katz co-founded Value Matrix Management with the late John M. Gates in 1986.
He served as the firm’s Senior Vice President and Chief Investment Officer and was Head of the Investment Policy Committee.
In 1990, he merged Value Matrix Management organization into Matrix Asset Advisors.
Mr. Katz chairs the Investment Policy Committee and is a Portfolio Manager/Analyst.
He appears frequently as a guest on CNBC and Bloomberg Radio.
He graduated summa cum laude from Union College with a degree in economics.
He also received an MBA from New York University Graduate School of Business.
In addition to the Fla Lewis recommendation of buying Expeditors [Expeditors International (NASDAQ:EXPD)] and Robinson [C.H. Robinson Worldwide (NASDAQ:CHRW)] at current market prices, David Katz has some value picks of his own for investors looking to deploy cash:
“Moving on to the dividend side, a little bit less exciting, but also very good long-term businesses. Air Products & Chemicals (NYSE:APD) has just been beaten up this year from the $300 level.
Now down to the $230 level. It pays a very good dividend. It’s a green play and a very attractive industry leader; we really like management.”
The current market fear feeds Mr. Katz’ long term optimism:
“…You’ve just had a 20% market pullback in the first half of the year.
And the headline is: worst start to the year in 52 years.
Investors are rightfully concerned.
We think the best advice that we can give investors is, if you have a sound long-term plan, you don’t want to change your investment strategy in reaction to the market selloff.
You don’t want to be selling stocks at this point in the cycle if possible.
We think, if anything, you’d want to be a buyer of stocks rather than a seller. You want to stick to your plan.
Generally, if you’re using the stock market to develop your long-term wealth, you’re going to confront many bear markets over your lifetime.
And generally, the market recoveries are very swift.
They occur when they’re least expected.
Your biggest returns occur in the very early stages of a bull market recovery.
And also, you get some significant bounces during a bear market.
So don’t time the market, instead focus on good businesses and good industries.
And one thing that we’re also doing for clients, which we think individuals want to consider, is harvesting tax losses at this point in the cycle, because we don’t think they’re going to be as deep by the end of the year.
So you can lower your tax bill, sell a stock or double up on a stock and then sell it after 31 days.
So tax strategies make enormous sense at this point in the year.”
Words of wisdom from both Fla Lewis III, Principal, Weybosset Research & Management, and David A. Katz, CFA, is Matrix Asset Advisors, Inc.’s President and Chief Investment Officer, exclusively in the Wall Street Transcript.
David A. Katz, CFA, Chief Investment Officer, Matrix Asset Advisors
Fla Lewis III, Principal, Weybosset Research & Management LLC