originally published 10/28/2015 - thestreet · 2015-10-28 · t rw seeer eaders 1 view our premium...

The Growth Seeker Guide to Finding the Next Market Leaders Featuring Chris Versace and Lenore Hawkins

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Chairman’s Club Speaker Series Featuring Growth Seeker

Originally Published 10/28/2015

CHRIS VERSACE

Welcome to today’s Chairman’s Club webinar. I’m Chris Versace and I’m joined today by Lenore Hawkins, and together we are the portfolio management team for TheStreet’s Growth Seeker portfolio that targets small and mid-cap stocks that will be the leaders in years to come.

We’ve recently taken over the portfolio and from our vantage point, two PMs are better than one. You’ve been seeing this at Action Alerts PLUS for some time now, and we think it’s a great strategy as you get twice the experience, twice the ability, and twice the smarts than if only one person was running this portfolio.

Combined, we have more than 40 years as investors working at some of the biggest investment banks and helping individuals manage their investments. In short, we’re excited and hope you are too as we take the reins at Growth Seeker.

While many of you may recognize me from the pages of Real Money Pro over the last four years or seen me sitting in several times for Doug Kass on his Daily Diary, I got my start on Wall Street in equity research back in 1993, and over the following decades I worked at Solomon Brothers, DLJ and FBR covering industrials, housing, technology and the mobile ecosystem communicating my thoughts and insights to mutual fund and hedge fund managers.

Almost a decade ago, I embarked on using a thematic framework that looks at the shifting landscapes of the economy, demographics, technology, psychographics, regulatory mandates and more that form demonstrative tailwinds for some companies, and headwinds for others.

Added to that, I’ve layered in an ecosystem or food chain perspective that looks at a company’s customers and supplier as well as its customers. A great example is Skyworks (SWKS) to Apple. Put the thematic perspective together with the food chain and we can capitalize on pain points, disruptive technologies, and others that give rise to the small and mid-cap companies we want to own today as they become bigger players tomorrow.

It’s those strategies that allowed me to take on the Thematic Growth Portfolio before Growth Seeker.

http://www.thestreet.com/staticFull/special-offers.html?cm_ven_int=hpservicestab




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And for those wondering, I’ve got my MBA in Finance as well as my Series 65 designation. I also teach undergraduate and graduate classes at New Jersey City University, where I also moderate the student run investment management group.

And with that, I’d like to introduce my partner, Lenore Hawkins.

LENORE ELLE HAWKINS

Hi, I’m Lenore Hawkins. I’m a Founding Partner at Meritas Advisors, an investment advisory firm serving high-net-worth families, where I serve as the firms’ chief investment strategist.

I started my career learning about the markets from the ground up at Accenture, working for clients such as the Capital Group, which currently has around $1.4 trillion in assets, and Charles Schwab.

After getting my MBA at UCLA I worked with JP Morgan and later experienced the first generation of those tech unicorns from the inside having worked as VP of Corporate Finance within the dotcom incubator eCompanies, founded by Sky Dayton of Earthlink and Jake Winebaum, Disney’s internet chief. That experience helped give me a keen eye on how to understand and evaluate the new economy firms.

Today, in addition to my work for my firm Meritas Advisors, I also provide investment consulting services for select ultra-high-net-worth families in Europe, primarily in Italy, which is where I am today. My work here gives me a unique perspective on the global economy in general, Europe in particular, and on the ways the U.S. market interacts with the rest of the world.

CHRIS

One other thing. There’s a pretty good chance that you’ve watched one or both of us on FOXBusiness, One America News, Real Vision TV, TheStreet TV, America’s Morning News and more sharing our latest and greatest thoughts on the market, the economy and more. One of the many things we’ll be doing for Growth Seeker is cranking up the video to communicate more with you.

Now that you’ve heard about each of us, you’re probably wondering, “How will they work together?” And that’s a perfectly reasonable and logical question. What you need to know is we haven’t been thrown together as if by accident.

Regular readers of Real Money and Real Money Pro know that we’ve been working together for a





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few years and they’ve regularly read our insights there every Sunday night and Wednesday. In 2016, we’ll have a new book titled Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns out from Wiley Publishing.

Even though Lenore spends about two-thirds of her time in Italy with the rest split between New York and San Diego, while I’m located outside of D.C. and travel every week to New York City area, the beauty of our increasingly connected society is we are in constant contact sharing our latest thoughts, insights, and findings with each other. It’s truly a team approach that has two sets of eyes and ears working for you.

What makes it even better is our respective histories, which together span more than 40 years in and around investing and the markets and give us different vantage points from which to view what’s going on from the global economy to tailwind drivers and more.

We like to think of it as measuring twice before cutting, as one plus one being more than two.

Now that you know who we are let’s turn to what’s going on in the economy, the market, and the Growth Seeker portfolio. Lenore?

LENORE

We are really excited to be here with you today and to be taking over the helm at Growth Seeker, particularly during these challenging times, when growth around the world is more elusive than in decades prior. Investing success requires the ability to distill down the countless amounts of information bombarding us every day into what is most important and impactful for our investments.

We are knee deep in earnings season, as you’ve been reading from our communiques. But before we get into the markets, let’s first talk about the bigger picture of the economy, as that helps guide us in our search for growth, and what we think warrants our attention.

As we are sure you’ve all been hearing, the global economy is slowing. Earlier this month the International Monetary Fund (IMF) cut forecasts for 2015 yet again, projecting 3.1% versus its prediction in July for 3.3% and its April prediction for 3.5%. This means that this year, the world economy will grow at its slowest pace since the global financial crisis.

Last week, Citibank cut its global growth forecast for 2016 for the fifth consecutive month, predicting





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2.8% versus the previous forecast of 2.9%. Keep in mind that Citibank’s chief economist, Willem Buiter, has stated previously that global growth below 3% coupled with a significant output gap effectively represents a global recession. Now that’s just one person’s opinion, but it conveys the importance of these numbers.

If we take a brief tour around the globe, we’ll see that the Eurozone in 2014 finally posted positive growth of 0.9%, after having contracted in 2012 and 2013. The first quarter’s growth rate came in at 0.5% with the second quarter slowing slightly to 0.4%, giving the economy about 1.2% growth year-over-year.

In mid-November, we’ll get the first estimate for the third quarter, which so far is likely to be at around the same pace as the second. On Friday, we got some good news when the Eurozone Markit Composite PMI (Purchasing Manager’s Index) came in at 54 (above 50 is expansionary).

The data for services came in nicely at 54.2 with manufacturing unchanged from the prior month at 52. So there is some growth in the region, though from a historical perspective it is still relatively weak.

So let’s dig into the details.

If we dig a bit deeper, we see that the Eurozone’s largest economy, Germany, is suffering from the slowing in China and Russia, two major export partners with its second-quarter GDP coming in at 0.4%.

Consumer confidence has been falling since the first quarter, but it still maintains an enviable unemployment rate of less than 5%, with a youth unemployment rate of 7%, which bodes well for the nation’s productivity in the future.

France, the Eurozone’s second-largest economy, on the other hand experienced no growth in the second quarter, versus expectations for a 0.2% increase with an unemployment rate of just under 11% and a youth unemployment rate of nearly 25%.

Italy, the Eurozone’s third-biggest economy experienced just 0.2% growth versus 0.3% expected. Unemployment has remained stubbornly high at nearly 12% with youth unemployment over 40%, which is a devastating number for the future of the country.

However, Prime Minister Matteo Renzi has made a lot of progress in reforming the government, so





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despite those rather dour numbers, consumer confidence is higher today than it has been over the past 12 years! Directors are important. We can’t just look at the numbers in isolation.

So things aren’t great in Europe, but they aren’t horrible either. However, a significant growth seems perpetually illusive with rising concerns that the slowing in China and the emerging markets could be a tipping point for the area.

This is likely why the head of the European Central Bank, Mario Draghi, hinted last Thursday that the ECB (Europe’s version of the Fed) is willing and ready to inject more quantitative easing into Europe’s economy. More QE, the heroin of the stock market, was promised and equity indices all over the place soared.

So what about China? How bad it is there? Truth is, no one really knows. The country is based on an ideology that requires opacity at all levels of government, so accurate data or even an honest attempt at accurate data is something we are unlikely to ever get from official sources.

Those sources recently reported that China’s growth in Q2 was 6.9%, close enough to the official target of 7%, but being below, it provides a wee bit of cover for some stimulus. And wouldn’t you just know it! The People’s Bank of China, essentially their Fed, lowered lending rates. A coincidence, we’re sure.

Taking a step back, China has cut their one-year interest rate six times since November of 2014, lowering the rate from 5.6% to 4.35%. But we’re sure everyone there is quite calm!

The Required Deposit Reserve Ratio for Major Banks has been lowered four times since February, from 19.5% to 17.5%. This ratio determines how much leverage banks can have, which translates into loans. The lower the ratio, the greater the leverage. More of nothing to see here folks? We don’t think so.

Here are a few more interesting data points:

• China’s export trade is -8.8% year to date.

• China import trade is 17.6% year to date.

• Railway freight volume is -17.34% year over year.

• China hot rolled steel price index is -35.5% year to date

• Fixed asset investment is +10.3% (averaged +23% 2009-2014)





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• Retail sales are +10.9%, the slowest growth in 11 years

China Containerized Freight Index, which reflects the contractual and spot market rates to ship containers from China to 14 destinations around the world, has just hit its lowest level in history, now 30% below where it was in February and 25% below where it was at its inception 17 years ago.

You get the point. It is slowing and we suspect it is slowing a lot more than the official GDP numbers would indicate.

Why do we care? Because China has been a major supporter of global growth since the financial crisis. When all hell broke loose in 2007 & 2008, China put its infrastructure spending into high gear. That meant that those economies that supply commodities had a backup buyer for their exports when everyone else was crashing, which put a vital floor under global growth.

But China couldn’t keep it up indefinitely, and we are seeing the consequences of that nation’s shift from a primarily export driven, massive infrastructure-building economy to a more domestic demand-driven economy with a lot less infrastructure spending.

China has been Germany’s fourth-largest export partner, with Russia not that far behind. Falling oil prices and sanctions have crippled Russia’s economy, so it also isn’t buying much from Germany. If Germany sells less, it’ll buy less from other nations.

And keep in mind that all those Eurozone countries are just barely eking out positive growth, so small changes will have an impact.

Onto those emerging economies, many of which were benefiting from China’s infrastructure spend, as they are primarily commodity exporters. If we look at what has happened to commodity prices over the past twelve months, you can get an appreciation for just how painful this has been for many of these countries.

Keep in mind that 45% of global GDP comes from commodity export nations. Commodity prices crater, and these nations can buy less stuff from other nations – more headwinds to growth.

In fact, 2015 will be the fifth consecutive year that average growth in emerging economies has declined. This is a serious drag on the advanced economies, which on the other end of the spectrum, will likely post their best growth since 2010, albeit growth that isn’t all that spectacular.





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Japan is still stuck between barely growing and contracting, regardless of how much the Bank of Japan tries to kick start the economy. Japan’s industrial output unexpectedly fell in September, raising concerns that the nation may be slipping back into another recession.

Production declined 0.5% in August following a 0.8% decline in July versus economists’ expectations for a 1% gain. Inventories rose 0.4% in August over July, and expanded in five of eight months this year, which is a hindrance to future growth. With rising stockpiles of unsold goods, companies are less likely to expand output in the future.

As for Latin America, Argentina is still a mess and Brazil is in a recession, with many of the other countries doing alright. Chile is expected to be around 2.5% for 2015, and Colombia 2.8%. Like we said, okay but not great.

Back home, things aren’t awful, but not exactly robust, which is why Chris and I had been predicting for months that the Fed would not hike rates in September. For example, the Industrial production index came in with another decline of -0.4% in September versus expectations of -0.2%, which makes it the fifth decline out of eight reported figures in 2015.

Capacity utilization, which measures to what degree the economy is taking advantage of its ability to make stuff, was expected to drop from 78% to 77.8%. Instead, it fell further to 77.6%, for the seventh decline out of eight readings in 2015. This means the U.S. continues to use less and less of its capacity to make stuff, hardly shocking given the wide misses in manufacturing data reported by regional Federal Reserve banks for August.

September retail sales came in below expectations, rising a seasonally adjusted 0.1% from August versus expectations for 0.2%. The good news is the increase came from a 1.8% month-over-month increase in auto sales. Overall retail sales, when we exclude autos and gasoline, have not grown since January.

U.S. producer prices in September posted their biggest decline in eight months, at a drop of -0.5%, as energy costs fell for the third month in a row. This means that the Producer Price Index is now down 1.1% year-over-year as of the end of September.

U.S. total business sales also declined in September, down -0.58% month-over-month and down -3.09% year-over-year as of August.

Going forward, we still remain very skeptical that the Fed will raise rates. The fact that China is





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continuing to loosen its monetary policy and comments out of the ECB concerning it likely embarking on further easing only add to our skepticism, as the moves by China and the ECB will already put upward pressure on the dollar, harming U.S. exports. A rate hike would only exacerbate the dollar strengthening against other currencies.

Fed tightening has been a trigger in nine of the last eleven recessions, so you can see yet another reason for the Fed to be cautious.

The tough thing now is that with a Fed that can’t seem to make up its mind, investors are left wondering what to do, so they end up selling the good and the bad when they get nervous. This will make for increased volatility, but that also means more opportunities for those that keep focused on the goal and don’t get distracted by shorter-term market dramatics.

CHRIS

Now as you can see, we’re in a slow growth world that looks to be slowing even further, based on what Lenore had to say, which is why we are so focused on growth stocks. Just because the major economies of the world aren’t enjoying strong growth doesn’t mean that there aren’t areas for significant opportunity.

So let’s talk about what we’ve seen in the markets this year and what we expect going forward. We are in the midst, as you probably know, of September quarter earnings with more than a thousand companies reporting just this week alone, and that’s up from more than almost 5 hundred last week.

Now, it’s easy to get to caught up in the fast pace of earnings season, as we’re hit left, right, up, and down from companies talking about their September quarter results and sharing what they see ahead.

We’ve had a number of high-profile misses and some upside surprises, but for the most part, we are seeing slower top-line growth with companies managing to meet or, in some cases, beat bottom-line expectations, even though in most cases profits are down year-over-year or quarter-over-quarter.

We chalk their ability to beat on the bottom line up to a number of factors, including a huge level of buyback activity going on in corporate America thanks to the uber-friendly interest rate environments that we’ve got courtesy of the Fed and, as Lenore pointed out, we don’t see that changing anytime soon.





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Given what we’ve seen from the People’s Bank of China, the commentary from ECB president Mario Draghi last week, and expectations for even Japan to ante up on the monetary stimulus along with a lack of inflation, again, we don’t see Janet Yellen and the Fed raising interest rates later today or candidly, later this year.

Those latest rounds of monetary policy stimulus are likely to keep the dollar strong relative to other currencies, and that’s another thing that we’re hearing about earnings season about the weight of currencies.

As measured by the S&P 500, the market’s trading around 17.4, 17.5 times 2015 earnings, which are looking like they’re going to grow all of 1.4% year-over-year, again, thanks in part to that strong buyback activity. So if we strip that out, it says that earnings from operations are not growing very strong.

Looking ahead to 2016, current expectations for the S&P 500 group of companies call for almost 10% earnings growth year-over-year. Now, if that happens, that would be the best since 2011.

Candidly, we’re more than a little skeptical about the forecast level of earnings growth, given the slowing macro environment and potential for currency headwinds to stick around a little longer than previously thought. So in other words, we’re not buying it.

We see a number of different headwinds and candidly, we’re getting a lot of commentary during this earnings season that reinforces our view. But despite all this, October’s been a really good month for the stock market, far better than most people thought it was going to be exiting September.

Now, what does it mean? It means the market’s trading at around 16 times those aggressive 2016 earnings expectations for the S&P 500. Now, we may get some multiple expansion from here, but we think it will be hard to get a robust amount following the recent market move on a lower quality of earnings beats, lower taxes, and that greater use of stock buybacks.

So as the herd on Wall Street deals with all of this, it tells us that we’re probably going to see more volatility ahead. Now, we’re not afraid of volatility, especially if we’ve seen it coming and we have. We related that out to you guys a couple of weeks ago at our opening salvo to you.

Now, in short, we view volatility as a way to pick up well-positioned companies at better prices so long as the growth prospects and the tailwinds, the reasons why we want to get into these names, remain intact.





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And yes, there are areas of growth out there from pain points, around clogged broadband traffic, and identify theft, disruptive technologies that improve the way we learn, how we educate or where we consume, how we pay for digital and other contact, the impact of changing demographics that will increase demand for healthcare, financial services, and so much more.

There are also headwinds out there, as well, and as important as it is to buy the right stock at the right time, it’s as important to avoid the pitfalls of a company that is hitting a headwind to its business or to its shares.

Now, we want to start talking about the Growth Seeker model portfolio. But as we do, I just have a couple of comments here. Over the last few weeks, we have exited several positions and we avoided some problems like Stratasys (SSYS), which was a great time to exit, and we’ve used that to raise cash.

Again, we’ve had some reservations coming into the earnings season. Pretty much, in our view, all the stuff that Lenore talked about as to why the Federal Reserve here in the U.S. did not raise interests rates is flowing through and we’re seeing that hit corporate America on revenues and profits. We want to be a little more methodical here.

That said, at the same time, we recognize that this portfolio has been a victim of its own success. A lot of the positions have grown significantly and, as a result, if we look at it, 11 positions account for about 60% of your overall assets and, in our view, that’s a little high. And we want to make room so we can do some other things and put the other cash to work, as well.

So we want to be prudent and we’ll trim back those larger positions when the time is right, preferably on strength and I’ll tell you, we’re not there today, but at some point we will be.

Now, the bottom line is we’ve been on the job for about three weeks and we came headlong into earnings season, so we’re just getting started. We ask you to be patient with us just a little bit. You’ve started to see that we’re kicking up the commentary, sharing our thoughts rather frequently with you, and you can expect to see that, but at the same time, we’re going to start rolling out new names and we’re also going to be sharing with you our bullpen stocks, which are the ones to watch.

So we have a lot going on and what I want to do now is segue into the portfolio, and I’m going to hit some of the stocks rated as 1s. The first one is, of course, Amazon (AMZN), 5.6% of the portfolio, price target is $7.25. We boosted that up from $6.50.





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Now, we are up more than 85% in this position and we continue to see more and the reason for that is the company continues to take more retail dollar share. It’s also focusing on bringing more things to more customers by expanding its offering, particularly under the Prime banner, but also focusing on improving time to market, meaning getting products to customers.

We’re heading into their holidays, and the National Retail Federation and others are forecasting 3.7% to 4.0-4.1% growth year-over-year spending for the holiday season. But once again, we continue to see a greater shift towards online and mobile spending, and we think that means greater share gains for Amazon.

And we can’t rule out that demographic shift where teens, tweens, and millennials are going to be doing their holiday shopping on iPads and mobile phones. I’ll even cop that I have started to buy some stuff through Amazon through my iPhone and it’s as easy as could be.

Longer term, we like the international aspects of Amazon as they roll out the Prime offering abroad. We’re seeing it in Europe and their other markets that they’re working in on, and they’re laying the groundwork now with more fulfillment centers and we just see more good things coming.

But historically between now and January is the time to own Amazon shares and we’re going to continue to hold the position. For subscribers that may not be as overweight in Amazon like we are, again at 5.65%, we see good growth up to that $7.25 price target. We would encourage you to take care of it, particularly on a pullback if we get some of that volatility that we’re looking for.

The second company I want to talk to you about is Skyworks. Skyworks is about, round numbers, 6.5% of the portfolio.

Now I have known this company for a very, very long time. I covered it back when I was at FBR on the sell side and I know the management team, Dave Aldrich and his team. These guys are the classic under-promise and outperform. I personally like the stock and Lenore, I think, agrees with me, too, that we’re seeing the company continue to benefit from, in the near term, robust smartphone growth.

Again, Apple is a key customer, but they also serve Samsung, Huawei, and pretty much every other key vendor of smartphones. But over the medium term, we think we’re going to see mobility become more like electricity. What do I mean by that? It’s going to be pervasive and we’re starting to see that now, as more companies start to target the connected car, the connected home, eHealth.





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In fact, right here on my wrist is my old Fitbit, which connects via Bluetooth so we’re seeing eHealth in work right here in the studio, but also too, the Internet of Things, and this is really the industrialization of the mobile Internet with companies like Honeywell (HON) and General Electric (GE) and others targeting this. The fantastic thing about this is in order for all of these things to happen, we need to see some type of connectivity and that means RF semiconductors and to me, that sells Skyworks, so we absolutely love it.

The other thing I like about the company is that they’re not resting on their laurels. They’re using the time when there is strong smartphone growth to go out and acquire PMC-Sierra so they can improve their position in the Internet of Things. We talked about this last week.

We continue to think that Skyworks is in the catbird’s seat for acquiring PMC-Sierra and we think it’ll be very positive, again, not only for the Internet of Things, but also for the company’s margins so we really like that transaction.

Yeah, the stock has gotten knocked around a little bit, no surprise. Up until last night, there was all sorts of chatter about what Apple was or was not going to do and as we saw with the results, Apple came in with a strong number guided nicely for continued growth as the newer iPhone models are out and they’ve got Skyworks content, so we continue to like this name.

Again, we’re kind of topped up in it at 6.5% or so, but for subscribers who want to build their position out, we think their pullback over the last few weeks is a great time to do it for the long-term.

And then, finally, I want to talk about Under Armour (UA), just about 7% of the portfolio. Again, another instance where we are a victim of success, given the strong move in the stock price. Our price target is $120.

Look, we see Under Armour continuing to benefit from the movement towards athleisure. We also see the company expanding its branded presence not only internationally, but in women’s markets, in footwear, and we think there’s a lot of upside and we’re extremely comfortable with the revenue target of $7.5 billion by 2018.

Food for thought: you know Nike is on its way by 2020 to be a $50 billion company without about 25% coming out of athleisure. Under Armour doesn’t even compete in that category, so we see a lot of upside opportunity as the company continues to execute.

Again, this is another one that we saw the stock pullback last week. I think people were concerned





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that the company continues to invest in the short- and immediate-term for long-term growth.

From our perspective, we like that the company is investing, laying the groundwork, laying the infrastructure so it can continue to grow longer term. That doesn’t scare us. Candidly, if a company was not investing for future growth, we would be scared because we would be wondering how can they execute and achieve on this plan.

Again, $7.5 billion by 2018, so we continue to like it. Again, even though we’re topped up, if you’re underweight in your personal holdings, you’re not in tune with the model portfolio percentage, we would recommend using the recent weakness to add to your position.

And with that, Lenore?

LENORE

Ares Capital (ARCC), another one of our number 1s. It’s currently about 4.6% of the portfolio. They’re going to be reporting next Wednesday so we’re looking forward to hearing a lot more about what’s going on with them.

Currently, it’s priced at a little over $15 dollars and unfortunately, it’s been down about 2.5% year-to-date, but that’s what we’ve seen has been happening with most of the companies in this section. The business development companies have all been having kind of a tough time this year. Part of that’s probably with all the instability around interest rates. It’s just been a tough time, in general, with financial services that depend on loans.

However, if you look at the pricing for this, its stock has outperformed most of the competition. Its P/E, its price-to-earnings ratio, is below many of its competitors and its price-to-sale is right in range with the competitors. So we’re not concerned the valuation is a little too much.

We’ve also looked at a report from SunTrust Robinson Humphrey. They believe that the third quarter earnings are likely to be less than exciting, but that the fourth quarter’s probably going to be pretty good, so we’ll be looking for guidance on that.

We also want to hear what they’re going to be doing with some of their loans that are coming due, are going to be maturing in 2016. Hopefully, we’ll get guidance on that with their reporting on next Wednesday.





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Also, yeah, this was a fun one, Fortinet (FTNT), which right now is currently just under 7% of the portfolio and it has not been a fun ride. They just reported last week.

Now, to put it in perspective, we currently have a gain in the portfolio of about 70% on this one. The stock’s up 12% year-to-date, but when they reported, their earnings were not great. They were close. They didn’t quite get everything that they wanted. It met mostly on earnings in revenue, but their guidance wasn’t so great.

That sent the stock reeling because expectations were crazy high and we’ve been seeing a lot of that, where expectations are just out there from the investors and if you’re not perfect, you get hit hard. Fortinet is one of those that did.

Their stock price movement was just brutal, but let’s put this in perspective, too, with what they’ve accomplished in the past. They’ve nearly beaten on eight of the last eight quarters for EPS and sales. So even though they didn’t guide to the higher end of what the street wanted, they usually beat expectations, so we like that.

They’re also in the middle of remodeling their image, going from being a leader in the small to medium to getting more competitive at the large enterprise level. That’s going to require some investments, so we’re not surprised to see a little bit of a hit there.

Overall, this has been a painful one. It looks today, looking at what’s happening, that it’s finding a bottom so we think we’ve taken our lumps right now, and we’re not ready to get out of it at the moment.

Lazard (LAZ), though, that was great. Lazard, about 5.2% of the portfolio. It reported last week and everyone cheered. Posted great results. Shares closed up about 5.4% that day. It beat on both earnings and on revenue and that company’s got basically two revenue sources. One is M&A activity, the mergers and acquisitions, and the other is asset management.

We really like the M&A side looking forward because in this current climate with a lot of cost cutting, we’ve got tough growth headwinds, you’ve got a lot of regulatory. That means a lot of M&A work, so we’re very positive on that for market in general, which means that’s going to be good for the company.

On the asset management side, that is more of a stable source of revenue. It’s going to be over the long haul. We’re going to see some bumps in there because it’s going to be subject to market





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movement. They did take a hit a little bit there. Their revenue coming out of that wasn’t so great, but still overall did well, but not as great last quarter with that because they had a decline in AUM.

But what we like to see is that their assets under management didn’t decline because clients were leaving. It just declined as the market was having a bit of a struggle. We actually saw a net inflow of assets so we like to see that. So that really means that the business is growing, but it’s going to be subject to market forces.

So overall, we’re pretty pleased with Lazard. We think that’s going be a good one going forward.

And finally, Healthcare Services Group (HCSG), our last of the number 1s. They also reported. They’re just under 7% of the portfolio. The portfolio has a gain of about 70% on these guys. It’s up about 22.5% to date.

They’ve got two main service lines. About 65% is housekeeping, which includes laundry, 35% is nutrition services and right now what they’re saying, what we like, is that their growth is only limited by their ability to hire and train management.

Now, that makes us really happy. We like it when they’ve got more growth than they can really handle, but they’re doing a very good job of it because they want to keep up their customer retention. So we think this business stands to gain from very good, long-term demographic trends, the increasing regulatory environment, and all the headwinds with needing to manage costs better.

That’s going to serve to boost the demand for these services and also this a relatively recession-proof industry, which is hard to find, so we’re really happy to see that, as well.

And Chris, do you want to start with the number 2s?

CHRIS

So the company I want to talk about now is Mobileye (MBLY). It’s about 7% of the portfolio. The price target is $70.

Now look, you can tell by the chart that this has been a relatively volatile name, okay. It’s one of those growth stocks, or story stocks if you will, that really hinges on two things: the automatic emergency braking system mandate and longer term assisted driving solutions.





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You know, there’s been a lot of chatter out there, “Oh, I think the OEMs might bring this capability in-house.” Honestly, we don’t believe it. If anything, the OEMs, the Fords (F), the Chryslers (FCAU), General Motors (GM), they are assemblers at the heart of things, so I don’t see them bringing this type of capability in-house.

If anything, I think all of this bodes well for Mobileye. Take a look at their customers, including GM, Honda (HMC), BMW, Tesla (TSLA), Volvo, Hyundai, and the relationships they have on the supplier side that includes Delphi (DLPH), Magna Electronic, Siemens, and others, we think they’re extremely well positioned for this.

The big question is have we heard any push-outs or anything about these models that they’re on. No, we haven’t.

In many ways, I think Mobileye is almost like B/E Aerospace (BEAV) that I’ll talk about in a little bit. B/E Aerospace is going to benefit in 2017 as a number of programs come on-stream then. We see Mobileye that way, as well, where there’s a lot of talk now, but these programs that will be hitting will be hitting later, so we really want to be patient and hold for the long term as these programs hit. Lenore?

LENORE

Last, we’ve got Ultimate Software Group (ULTI), which just reported last night after the close. They did a great job. They didn’t quite beat on revenue, but they beat on EPS. Their forward guidance was spectacular and across the board, people have been raising their price targets, so overall it was good news from them and the market’s responding really well.

CHRIS

Fantastic. And I think that just leaves, Lenore, the number 3, B/E Aerospace that I just mentioned. It’s a 3 stock. It’s about 2.3% of the portfolio or so. Price target is $55 and they reported last week.

Earnings were okay in the sense that they missed on the top line, but they did issue, as I alluded to a few moments ago, very robust 2017 guidance. 2016 guidance is up modestly, but again a lot of these programs that they’re talking about, and they have good visibility in their backlogs, start to hit in 2017.

And they’re seeing revenue acceleration based on the those programs and some synergies and other cost-saving initiatives that they think will allow them to deliver teens EPS growth. Now, I think that’s





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great. I think they have visibility.

Sometimes, we have to separate the company from the stock and understand how the stock trades. And in my years, I’ve seen a number of these what we call these backlog-driven stocks, because as the backlog climbs higher and we have greater visibility, we can see revenues ramp and we can get a better feel for what earnings could be down the road.

When we look at these backlog stocks, it’s the trend in backlog that matters and whether we look at rail, truck, or even aerospace, the issue with these stocks is when the backlog starts to soften. We haven’t seen it yet.

Boeing’s backlog was flat when they reported their quarterly results last week and they’ve announced some new wins. Commentary from other companies touching commercial aerospace continue to be favorable, but given the economic climate that we talked about earlier, we have our eyes on this and if we detect any softening, then we’re going to start to make a move and hopefully exit on some strength.

So that’s the portfolio as it sits today. One of the things that we’re cognizant of is we do have a fair amount of cash, but again, we don’t want to use the frenetic activity of earnings to buy blindly. We want to be careful and methodical, identifying those companies with the right tailwinds behind them.

In my comments earlier, you heard some of the ones that we’re looking at and fairly soon, we’re going to have our bullpen list to show them to you and I can tell you we have companies like Cavium (CAVM) on there.

We have companies like TASER (TASR) on there, maybe a few others touching on like United Natural Foods (UNFI) and some others, so we’re going to take a look at the right opportunity within the framework that we have, which is we have a market cap constraint. We have a share price constraint that we have to deal with. So we’ll be triangling within this box to identify the best companies that we can find to deliver great stock price appreciation based on the growth drivers that we see. So that’s what we’re doing. Get ready for that.

With that, I think we’re ready for some questions. This is from Mahyar up in Toronto.

Q: What are the conditions you would use to trigger an exit from a position?

This is a fantastic question. I say that because everybody loves to buy stocks and I think one of the





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criticism that we’ve heard over the Growth Seeker portfolio is, “Wow. These stocks are flying. They’re up big, but when are you going to ring the register?”

Well, we’ve already started to do a little bit of that. So what would we look for to answer the question? A couple of things. One, we obviously have price targets. We’re constantly evaluating them, but the closer a stock gets to the price target, we’ll start to see some movement. We might downgrade it a little bit. We might trim back if we’re very successful with the right pick, of course, so there’s that.

The second thing, and this is a big one, is we have a thesis. We’ve identified reasons why we want to buy a particular stock. If that starts to change, or the growth profile starts to change for a particular reason, maybe there’s a competitor that’s entered the system, maybe there’s some regulatory mandate that changes something, then we’re going to take action.

Now, on the flip side, the big question is, “Well, okay. That’s if you’re successful. What happens if you are not successful and something happens?” And Lenore alluded to it a second ago with Fortinet, which was, let’s be honest, it was not a fun situation. But we’re going to deal with that. Lenore, do you want touch on how we’re thinking about that?

LENORE

Yeah. What we’re looking at is setting up just how much we’re going to let something slide even if our thesis is right. And as Chris was pointing out, there’s two problems you can have with a stock.

You can have where your thesis changes, the reasons you bought the stock no longer exist. Something’s changed in the fundamentals of the company and then we’re going to want to get out.

But even if we’re right, even if we still love the company, even if everything’s still looks great to us, but market sentiment has just gotten so bad that we don’t really want to ride it all the way down, we’re going to be establishing places at which we’re just going to say, “We’re gonna get out. We’re gonna come back in. We still love the company and we know we will come back in, but we just don’t want to ride this out.” So you’ll be hearing from us on that, as well.

CHRIS

Great. Okay, next question.





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Q: What are the trend lines for the biotech sector in the next four months?

Now, I’m going to do something very smart and I’m going to turn that question over to Lenore because she is more dialed into that than I am.

LENORE

If you look at what’s been going on with biotech, it’s really interesting. If you take a really far step back, the trend line that we’ve seen over the past 10 years has really broken down and so that’s not so great in the first place. It’s nice in that the valuations are coming back down to the more reasonable levels. Not so nice to see that because you’re not really sure how far that’s going to go.

The other problem is we’re heading into an election season. Biotech is always tough moving into an election cycle because that’s one of the favorite, particularly nowadays, one of the favorite things for politicians to bash on. We all saw what happened recently with Hillary Clinton’s tweets about medicine pricing. That’s going to cause us to be very selective.

We do believe that there’s a lot of opportunity in this area. Obviously, with an aging population all over the world from the U.S. to Europe to China to Japan, you’ve got increasing demand for medicines. So there’s a lot of opportunity there, but given the headwinds, we need to be particularly careful.

CHRIS

Okay. Great. Next question.

Q: As managers of a growth portfolio, would you by Facebook (FB) on a pull-back? What would you consider a good entry point?

And this comes from Kathryn in Pasadena, California.

Kathryn, you know, I think that we would love to buy Facebook if we could and this is getting back to what I was saying, too, a little earlier about the parameters for the Growth Seeker portfolio.

Yes, there’s no doubt that Facebook has been a strong stock, a lot of growth as they continue to monetize their platforms, not just Facebook, but Instagram, WhatsApp, and they layer in more video advertising.





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So as an outsider, do I like Facebook? I do. I really do. But as a growth seeker, we’re constrained by certain market caps and we unfortunately cannot buy it. The stock has had a good run so as far as a good entry point, this would be one of the ones that I would be buying on some weakness, not necessarily stepping up to the plate here today particularly when the market’s been so strong. Use that volatility to your advantage.

Lenore, anything? Any thoughts on Facebook?

LENORE

What he said.

CHRIS

Fair enough. How can I argue with that? Okay and then we’ve got one last question.

Q: Please share your thoughts on Harman International Industries (HAR) and United Rentals (URI).

Okay. I’m going to go in reverse order, and this question comes from Theodore in Scottsdale. Theodore, so United Rentals, we exited that position and the thought process behind that was exactly what Lenore was talking about in the comments of the economy where the manufacturing economy continues to slow.

We have excess manufacturing capacity out there, so it’s hard to get excited about a company that rents equipment when there’s too much capacity out there. So for that reason, we trimmed out of it. If the economy starts to turn and we see ISM data, PMI data that points to some improvement, we’d probably circle back.

But again, it depends on where the stock is relative to earnings. So that’s one to watch, although candidly, we don’t see that turning near-term.

And then Harman International, their big play, they go into the automotive market, which has been strong and October data looks very good for domestic auto sales.

Europe continues to be solid. I think the European car registrations were up 9% or so in September. That’s offset by weakness in China and in South America. Harman’s got little exposure there, maybe





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10% of revenue, something like that, so we do like them. I do see them putting in a good strong quarter.

There’s some concern about where they compete in the entertainment complex in the car from Apple and things like that. Remember, Apple’s not putting new hardware in. They’re going to work with the existing infotainment system, so I don’t see that as a headwind.

We actually own it in the Trifecta Stocks portfolio so I am keeping my eyes on it and if it becomes super attractive, we’ll have more to say.

Lenore, anything on either one of those?

LENORE

It brings up one of the ways that we look for things to put into the portfolio. What we’re really looking for, or to just break it down, we want to find really fast-flowing rivers. So that means looking for those sectors that are going to have some great tailwinds.

So we want fast-moving rivers and then we want the fastest boat in that river. We want the companies that are best set up to take advantage of that flowing river.

CHRIS

Wow. Lenore, I could not have said it better myself.

Just stepping back, I think the key mantra here is we’re here on the job about three weeks. We are just getting started. We’re very excited. We’ve got a lot to do. We know it and we’re going to be coming at you.

And at any time you guys have any questions whatsoever, up on the Growth Seeker website, just click email Chris and Lenore. We’ll get them and we’ll be happy to respond as we can. If you have comments, questions, suggestions, by all means, hit us up.

We want to do more and I could keep going on and on and on, but I’m not going to. I’m not going to. Just a lot more coming at you. We’ve got more companies reporting, the bullpen coming at you.

So stay tuned as Growth Seeker kicks into high gear.





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originally published 10/28/2015 - thestreet · 2015-10-28 · t rw seeer eaders 1 view our premium...

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