#73: Brian Dress | Left Brain Investment Research | 3 Distressed Bonds | 3 Undervalued Equities
Dec 19th, 2019 by Eric Schleien
Today I had the pleasure of having on Brian Dress who is an investment analyst at Left Brain Investment Research. We discuss 3 equity ideas and 3 bond ideas. We also delve into a bit about his firm's process as well.
- Click here for more information on Left Brain Investment Research
- Click here for more information on Left Brain Wealth Management
History/Background of Left Brain
Left Brain opened the wealth management business in 2014, hedge fund in 2016, and investment research platform in 2019. A differentiating characteristic of Left Brain's investing platform is an emphasis on selecting individual securities, particularly individual bonds in the high yield space. Brian genuinely enjoys and gets excited to share his investment philosophy with both individual investors and advisors. The company has slowly built up their investment staff in order to cover a large universe of high yield bonds (about 900) and about 200 stocks. What they've come to realize is that many advisors lack the resources to replicate this type of research apparatus, so they decided to create a product to provide this research to advisors so that they can select stocks and especially high yield bonds that will help clients achieve income goals in a compressed interest rate environment.
Data-Driven Bottom-Up Approach
Left Brain has a data-driven, bottom-up approach that incorporates technology to rank securities on the basis of a number of quantitative and qualitative factors, including revenue growth, gross margins, competitive dynamics, and accelerating results. The company portfolios are concentrated, as they view this as an allocation model with the best chance to deliver superior results and excess returns; usually no more than 20-25 stocks at any given time, particularly in the hedge fund.
Characteristics Left Brain Looks For In Analyzing Securities
Company management is paramount in both equities and credit. Left Brain wants to see a history of success for the CEO, a strong capital allocation strategy, and an alignment of interests with investors (“skin in the game”); also for equities and bonds, they want to see strong fundamentals in the underlying business, no matter what the valuation or possible yield compensation
The company looks for strong (and accelerating) revenue growth, high (and expanding) gross margins, favorable competitive dynamics
For distressed bonds: Left Brain looks for deleveraging (either through improved EBITDA or retiring debt through asset sales), improving trends in operating metrics (revenue, EBITDA, total debt), high yield compensation per unit of leverage (Debt/EBITDA), and most importantly, a strong Free Cash Flow (FCF) profile
Equities Discussed On The Intelligent Investing Podcast
One of the strongest companies in Silicon Valley working in the data analytics space could be considered Splunk. Splunk’s platform allows non-technical workers to query company data using natural language (“Google for your data”) to gain insights both about customers and operations. Left Brain is attracted to Splunk’s 30% annual revenue growth and 53% growth in recurring revenue, which are both quite high for a company trading at 9x forward revenue; as an $18 billion market cap company, still plenty of room for Splunk to grow before maturing as a business.
Changing Business Model
Splunk is changing business models to discontinue all perpetual licensing: recurring revenue model leads to higher gross margins. Splunk has gained penetration in the enterprise, winning several 8-figure deals in the last quarter, including a major partnership with Domino’s
Talend is a small French cloud computing company (mkt cap ~$1B) that does data integrations that help companies gain valuable insights using data. The company trades in the US as an ADR. Despite a small size, Talend has over 3500 customers including HP, Citigroup, GE, Astra Zeneca, and Lenovo.
Financials & Valuation
Talend has Annual Recurring Revenue is up 27% YoY. However, what Left Brain really likes is that cloud revenue has grown more than 100% annually for the last 13 straight quarters. Talend, despite the strong growth, trades at a very low multiple relative to peers at less than 4x forward revenues.
This is Left Brain’s Stock of the Year for 2020. Left Brain has rotated some of thier long-held Netflix (NFLX) positioning for ROKU, who they think has less business risk as ROKU is not a content creator. Streaming is one of the market’s strongest trends: ROKU offers an operating system that integrates all streaming platforms (built into 1/3 of TVs shipping today). ROKU offers a non-intrusive advertising platform that we think the company can monetize as advertisers seek any platform to advertise that is not Facebook or Google. In addition, Revenue growth is strong at 52%. Today, the stock trades at a 12x forward revenue multiple. Brian is confident that ROKU can keep growing at a pace that justifies the multiple.
Bonds Discussed On The Intelligent Investing Podcast
YPF 8.5% 2025 bonds
The YPF 8.5% 2025 bonds currently yield in excess of 12%. YPF is an Argentina-based integrated oil play that has been in existence since 1922, surviving through many difficult economic times in Argentina’s history. The company has a strong credit profile relative to Argentina sovereign bonds. The downgrade in Argentina sovereigns dragged down YPF bonds, making them attractive for Left Brain.
In addition, the company has no currency exposure to the Argentine Peso, as debt and revenue are both denominated in dollars (oil market revenue always remits in USD). The company has flattish revenue growth; cutting CapEx aggressively by pursuing Joint Venture (JV) partners to save on CapEx.
The company's leverage of under 3x (Debt/EBITDA) is very low relative to other energy exploration companies.
Transocean (RIG) 7.5% 2031 bonds
Transocean 7.5% 2031 bonds currently yield 12.6%. Transocean is a best of breed company. In addition, the company has by far the best rig fleet of any oil service provider (31 of the 100 best offshore rigs worldwide).
RIG management says offshore drilling activity is picking up as oil prices begin to stabilize. RIG’s high-spec rig fleet positions the company well to take advantage of any improvement in the oil market.
RIG Leverage is currently high, but should drop dramatically if rig utilization improves and raises EBITDA (increased earnings is RIG’s best path to deleveraging). In addition, RIG has five straight years of positive Free Cash Flow, despite a difficult oil industry environment.
Furthermore, RIG has $12 billion in backlog business, $2.5 billion in cash on the balance sheet, and $4 billion in total liquidity.
L Brands (LB) 6.95% 2033 bonds
L Brands 6.95% 2033 bonds have a current yield near 9.5%.
10% revenue growth at Bath and Body Works (40% of the business) and flattish growth at Victoria’s Secret (the other 60%).
Victoria’s Secret recently hired a new CEO from successful women’s brand Tory Burch, giving us hope that LB can turn around the VS business.
Company leverage is under 3x, making the 9.5% yield very generous for a company that appears to be quite safe according to Brian.
LB has 23 consecutive years of positive Free Cash Flow, making their ability to service their debt very robust. Their store closure strategy has helped bring down leverage slightly over the past few quarters.