Michael Scaldini’s past portfolio columns.
Making a Pitch for HASI
In December, members of the Brown Advisory Student Investment Fund enjoyed a rare experience—the opportunity to see the president of a publicly traded company make an investment pitch to them.
Jeffrey Eckel, president and chief executive officer of Hannon Armstrong Sustainable Infrastructure (HASI), visited campus Wednesday, December 2nd to pitch investment opportunities in HASI to Washington College’s Brown Advisory Student Investment Fund.
Hannon Armstrong Sustainable Infrastructure is an Annapolis investment firm founded in 1981 that makes debt and equity investments in projects that increase energy efficiency, provide cleaner energy, or positively impact the environment. The firm held its initial public offering in April of 2013, while simultaneously restructuring to a real estate investment trust (REIT) for tax purposes.
“We went public for two reasons,” Mr. Eckel said. “One, we think, and I certainly believe, that climate change is the defining issue of my generation… . And the second is that it is an enormous opportunity to make money. Basically, we see the opportunity to refinance the U.S. electric power business, which is the most capital-intensive business in the world.” Eckel himself has been the fifth largest shareholder since 2000—and even more notably, Hannon Armstrong is the first Wall Street company in which every employee is a shareholder.
Brown Advisory Student Investment Fund students asked the CEO how he expected HASI stock would perform in a time of declining oil prices. Will companies still adopt sustainable energy projects when traditional energy has become so affordable?
Eckel replied that while oil prices are affecting the transportation industry, changes in crude oil do not impact the necessity for sustainable household and business energy use. Eckel emphasized that HASI can make above average returns “by making disciplined financial investments that are on the right side of the climate change line.” HASI, he said, is able to invest in over 150 companies that many big banks cannot fully fund due to restrictive lending policies.
One of the Brown Advisory students, Zachary Revak, a junior business management major, said he learned a lot: “I thought Mr. Eckel was a great speaker. He talked about the energy business and how we are trying to make it energy efficient. And I think we need to really consider it, because energy efficiency is going to be a major player in the future.” Hearing a pitch from a CEO was an entirely new experience for the Brown Advisory students; the program hopes to host more local companies for investment talks in the coming semesters.
– Emily Summers ’16, Chief Investment Officer, Brown Advisory SMIF
Amazon and CBI
Let’s start with Amazon, a long term holding in the fund. Amazon.com Inc. (AMZN)’s third quarter of 2014 was very disappointing. Amazon’s stock was down over 10% since mid-July and experienced a $437 million operating loss for the 3rd quarter. This can be attributed to the write downs taking place for the Fire Phone which cost Amazon $170 million in inventory charges.
The Fire Phone is Amazon’s version of the smart phone that competes with Samsung and Apple for market share. The Fire Phone debuted at $199 but the price was slashed to 99 cents just weeks after it was introduced. The enormous impact of the Fire Phone failure is evident in how Amazon’s spending exceeded their sales for the 3rd quarter.
Amazon remains hopeful that sales will pick up as they approach the holiday season, which historically has been their most lucrative time of the year. But, they have scaled down their holiday season projections which has resulted in decreased investor confidence. The short term, seasonal outlook for Amazon remains unclear, and it will be important to track and analyze how Amazon responds to the Fire Phone catastrophe.
I would suggest holding on to the stock until we see 2014 holiday seasonal results so that we may start to see if there is an upward trend in retail sales and margins. By doing this, we could wait for the stock to increase in price and then decide if we want to sell the stock and get out, or ultimately wait a little longer into 2015 to see if profit margins improve and then sell the stock. I think we should sell the stock, but it is just a matter of timing to determine how long we should wait.
The second holding I want to talk briefly about is Chicago Bridge & Iron Company (CBI), purchased in April 2013. CBI is a large multinational conglomerate engineering, procurement and construction company. It specializes in projects for oil and gas companies and is known for managing some of the largest onshore pipeline projects and large bulk liquid terminals and storage tanks. It designs pipelines for crude oil, natural gas, refined petroleum products, and various other chemicals.
The company has experienced over a 48% decline in stock price from the April 2014 high price to the October low of $43, which has raised investor skepticism about the potential of CBI stock.
Interestingly enough, Warren Buffet has purchased additional shares of CBI this year, and this came days after short sellers drove down the price of the stock by postulating that CBI was artificially increasing their earnings. Berkshire Hathaway is the largest stakeholder with a holding of 9.88% of the stock and could likely purchase more shares to increase their holdings.
Meryl Witmer, a Berkshire investor and director, explained that CBI stock “rallied almost 80 percent in 2013 and extended its gains at in the first quarter, closing at $81.75 on March 31”. It appears that investors remain unsure of what to conclude about the long-term potential of CBI stock, but Berkshire has used this uncertainty to their advantage and we will see how this pans out in the long-run.
It is tough to decide what the Alex. Brown program should do in regard to this stock. I would suggest holding the position until we review the 2014 Q4 results. I think there is a lot of potential for this company and that it will be beneficial to purchase additional stock in the future.
Doing Business in China
For companies such as Apple (APPL), Volkswagen AG (VLKAY), and Coca-Cola (KO), China is one if not the most important market to access. However, Western companies will have to navigate a complex and difficult terrain. Rising consumer power, new media, and state control can throw up sudden unexpected challenges to “business as usual”.
Recently Apple, under pressure from the Chinese media, issued an apology for customer service blunders including differing warranty policies and lower quality customer service. Volkswagen AG also recently came under fire over complaints that its direct shift gearbox transmission caused cars to change speeds while driving. Volkswagen AG recalled all cars using the gear box.
“Companies,” says Jack Perkowski in Forbes, “have to accept China for what it is, not what they would like it to be.” Likewise, investors must be aware that companies who choose to operate in China will face the immense bargaining and regulatory power of China. Investors must have confidence that they can maneuver properly to avoid these conflicts with the Chinese state.
To learn more about this issue read this Wall Street Journal article.
Carpe diem, Warren Buffett
After the 2008 collapse of Lehman Brothers, billionaire investor Warren Buffett was approached by Goldman Sachs CEO Lloyd Blankfein to take a stake in the investment firm. Mr. Buffett accepted a deal to purchase preferred stock at $115 with a 10% yield, and the right to purchase 43.5 million additional shares below market value.
The agreement with Buffett gave Goldman Sachs a critical boost to its capital reserves during the dark days following the Lehman collapse. For his part, Buffett got a great deal: today the stock is valued at $146.
Yesterday Buffett traded away his right to purchase additional shares of stock below market value—in exchange for another 10 million shares at no cost. With the agreement, Goldman Sachs avoids a potential dilutive stock sale.
Should the Alex. Brown Fund follow Buffet into the financial Industry? Warren Buffet is working with enormously higher levels of capital, which means he can buy securities at rates far lower than we can. And as these recent doings make clear, he’s got the clout to wangle sweetheart deals even from the biggest financial players. With the strangling regulations placed on the financial sector, members of Alex. Brown have not made additional investments in this sector. But we’ll keep a close eye on finance for signs of growth we can profit from.
You can read more about Buffett’s big Goldman deal in this Wall Street Journal story.
The Clock Ticks on Cyprus
Lending institutions in Cyprus have been closed since March 16, leaving ATM’s as the only access to cash depositors have. After rejecting an initial proposal Parliament has begun reviewing another plan that would allow authorities to restrict noncash transactions, curtail check-cashing, limit withdrawals and convert checking accounts to fixed-term deposits.
Cyprus’s latest plan is presently being considered by the troika of international creditors comprised of the ECB, the European Commission, and the International Monetary Fund. There has been no indication whether they will accept it or not.
How does the news in Cyprus affect our markets? Experts argue the Cyprus crisis will further dampen the Euro-Zone recovery with some extremists arguing that a break by Cyprus will set a precedent for other small economically distressed nations to follow.
Though the European Union is a key market for U.S manufactured goods and technologies, U.S. financial markets continue to climb based on bullish news regarding the housing and energy sectors. The overall market does not seem bothered by the events in Cyprus. Much of the downward activity affiliated with the crisis has been summed up as investors looking for an excuse to sell equities and lock in profits.
Emerging Markets Look at Europe with Vexation
Despite the slow recovery in the United States and continued stagnation in Europe, the global economy is still growing at an incredible pace. Goldman Sachs forecasts global economic growth to measure an annual growth of 4.1 percent from 2011 to 2020. (For perspective, none of the previous three decades saw growth surpass 3.5% per annum.)
Emerging market economies have been acknowledged as the driver of economic growth for quite some time but Goldman Sachs’ Jim O’Neill, creator of the BRIC acronym, believes that investors don’t yet appreciate the power of emerging yet. China has been growing so fast, he notes, that it “creates a Greece in 12 and half weeks”.
There are multiple investment products that allow American investors to profit from this immense growth. Most major investment banks offer mutual funds and ETF’s (which can be bought and sold similar to stocks) though these often require minimum investments of thousands of dollars. Investors can also buy into indexes of stock exchanges such as the Nikkei in Japan or BOVESPA in Brazil which will contain shares of all the companies traded on that market.
Click here to read more about this topic.
Gold, the most famous of the universal currencies, experienced a boost this week as concerns over Italy’s elections—potentially a blow to the Euro—and deep spending cuts in the U.S—packing a potentially recessionary punch—stoked fears across world markets.
When investors grow fearful of prospects for economic growth, they often turn to gold—in this sense buying gold is a basic hedge strategy, and is a clear sign of investor anxiety in broad economic growth. Prior to this week, gold prices had been decreasing steadily from the record high $1,888.70 in August 2011, due to increased opportunities in equity markets.
Despite the past year and a half of subsiding prices, some major hedge fund managers have continued to hold substantial investments in gold. John Paulson of Paulson & Co. remains a bullish proponent of gold investments; he holds nearly 2.2 million shares in the SPDR Gold Trust ETF (GLD). He believes gold prices will climb, due to an eventual expansion in money supplies by major central banks and the accompanying rise in inflation. On the other hand, George Soros, the prominent global investor, showed his contrary opinion by pulling his $100 million out of GLD last year—just to keep it interesting, though, sources suggest this does not indicate that Soros is “souring on gold” but seizing other opportunities. Whatever the future holds, one thing is sure: Gold will remain the safe harbor of choice for those who see trouble ahead.
Wall Street Shopping Spree
Mergers and acquisitions have taken center stage after several new deals over everything from airline companies to food producers were announced last week. After the financial crisis of 2008, M&A transactions took a sharp tumble, as corporate heads focused on procurement and debt reduction to increase production and profit growth.
Five years into the this unsettling new economic era of flat or slow growth, many companies seemed to have reaped all the benefits of these strategies and are now ready to begin investigating possible acquisition deals in order to generate the growth rates investors demand.
The largest of these transactions include Berkshire Hathaway and 3G’s proposed acquisition of Heinz Inc. for $23.6 billion, Silver Lake Management’s offer of $20.7 billion for Dell, and Comcast’s take-over of NBC Universal from General Electric for $18.1 billion.
What do these transactions say about the market? An increase of M&A transactions generally follows an upward trend in stock markets and investor confidence. With the S&P 500 rising 6% over the past 12 months and a rally in the credit markets, business have access to cheap credit, making these deals much easier to fun.
The Google antitrust decision
On Thursday January 4, the Federal Trade Commission ruled that Google (GOOG) di not violate Antitrust laws in the United States through search engine manipulation. This decision comes after 19 months of legal proceedings. This is a huge win for Google.
Google is the world’s largest search engine, processing almost 320 million search requests per day. The influence Google has over consumers is immense. The company was accused of “unfairly promoting its own Web properties over competing sites in its search engines.” Such manipulation could have devastating effects on companies unwilling to cooperate with Google’s service terms.
Fortunately for investors, the verdict of the FTC was “Not Guilty.” Google stock is up 1.98% since the decision. It plans to expand further into social media and other projects are underway. Already at a stock price of $769 as of February 5, some investors question how much higher the value can go. But most don’t. I believe Google’s stock value has room to grow as they expand into new markets.
NY health exchange
The Patient Protection and Affordable Care Act, passed by President Obama in 2010, mandates that all states have a Health Exchange set up by 2014. On December 14, 2012, the U.S. Department of Health and Human Services conditionally approved New York Governor Andrew Cuomo’s blueprint for the state’s Health Exchange. [For more info, this Wall Street Journal blog post is useful.]
The Exchange will be an online forum where customers, including businesses, can seek insurance policies that fit their needs and budgets. Officials estimate nearly one million new customers will be able to afford healthcare due to the Exchange.
Participation in the Exchange allows insurance providers such as Cigna (CI) and United Health Group (UNH) access to these one million potential new customers. This is a fantastic opportunity to grow their customer base. Yet there is a major risk.
The basic purpose of insurance is to spread costs amongst as many customers as possible to lower costs and risks to each individual. If so, costs should go down and insurance companies will see increased profits. If not then their liabilities will increase along with each new customer causing a decrease in profitability.
December 3. While businesses and consumers wait for clarity on America’s ‘fiscal cliff’ before making big decisions on spending and investments, activity within credit markets has picked up. States and cities such as Atlantic City, NJ, have begun selling bonds in order to raise capital for infrastructure projects and services (see this Wall Street Journal article for details).
A bond, essentially, either transfers ownership of debt, or sells new debt. The bond seller promises to pay back the principle with interest over the course of the bond’s maturity. Bonds can be an effective tool for investors with a fixed-income focus within their portfolio.
Are any state-issued bonds particularly attractive for investors? One state to look at might be Virginia. AAA rated bonds in the state are yielding between 0.8% and 2% over maturity lengths of seven years or more.
Similar New York state bonds, as a comparison, have yields between 1% and 1.75%.
Be careful, though: bonds are more complex than stocks. In addition to price, critical factors to understand for any given bond include maturity length, and credit rating.
November 26. Black Friday delivered its annual boost to consumer spending levels and retail earnings last week—with a few twists from previous years. Instead of opening at midnight, retailers such as Walmart, Target, and Toys“R”Us opened their doors as early–or late–as 8 pm on Thanksgiving evening.
Department stores and retailers with strong online sales divisions saw a huge increase in revenue. The data-analysis firm comScore reported that over $1 billion in sales were conducted over the Internet during the holiday weekend.
Considering this spike in online shopping, I would recommend taking a close look at retailers such as Macy’s (M) or Amazon (AMZN), which both benefited from Black Friday online sales. This Wall Street Journal article provides more details on the early Black Friday sales figures.
November 16. We often assume that the key to competitive success is to have the newest, shiniest products to show off. So it’s an odd notion that seeking out and using old equipment can actually help increase profits. But this is exactly the strategy that Delta Airlines CEO Richard H. Anderson has embraced–with visible success.
(This Wall Street Journal piece tells the story.)
Delta Airlines (DAL) has been buying aging planes–at substantial markdowns–from airlines like China Southern Airlines CO. and Southwest Airlines. With the savings, Delta has been able to pay down debt, reduce fees, and focus on returns to investors instead of market share.
Consider what this may mean not just for Delta, but for competitive position in the broader air-transportation industry. How will companies such as Boeing (BA) and Atlas Air World-Wide Holdings (AAWW) react?
Nov. 9. What’s the business impact of a natural disaster like Hurricane Sandy? Thousands of homes need to be repaired. Infrastructure like telephone lines, roads, subways, water lines needs to be restored or rebuilt.
So where can we expect growth opportunities? One company I’m especially intrigued by is Honeywell (HON), a wide-ranging company that deals with public and private-sector infrastructure contracts. I expect it to be very busy in the post-Sandy cleanup phase.
For a broader take, this Wall Street Journal article gives a good perspective on the business impact of Hurricane Sandy.
Bottom line: Savvy investors have to be as attuned to weather events and natural disasters as quarterly reports. You’ve got a whole world to keep track of.