Fall is investment conference season in the U.S., and there are always many to choose from every year. One of the more prominent annual conferences in Chicago is the Invest for Kids conference, which raises money for non-profit organizations that support children from underserved Chicago neighborhoods.
This year marked the 15th annual Invest for Kids conference, and several fund managers presented some very interesting investment ideas. Here are some of the best ideas presented at this year’s conference.
Tiffany Hsiao/ Artisan Partners – BYD
First up is Tiffany Hsiao’s thesis for Chinese electric vehicle maker BYD, which Warren Buffett has held for many years, although Berkshire Hathaway
She noted that although Tesla
BYD has actually been innovating in the area of batteries for the last three decades. She also believes the company’s proprietary battery technology provides solutions for all the worries people have regarding buying EVs, which are range anxiety, safety, and the expensive price tag.
For example, BYD’s EV battery pack won’t catch fire when a nail is driven into it. Additionally, BYD’s vehicles can reach a full charge in less than 30 minutes and deliver a 375-mile range.
BYD’s battery packs are cheaper because they are more efficient to manufacture and use less rare-earth materials than other EV batteries. The battery pack usually accounts for about half the manufacturing cost of an EV.
While many fund managers have pulled back on investing in Chinese equities, Hsiao believes BYD is insulated from the risks of investing in China and from other geopolitical tensions. She clarified that any consumption concerns in China aren’t actually due to affordability, adding that when consumers there buy a car, they usually do so in cash. Additionally, EV sales in China continue to surpass expectations despite the tapering growth and economic weakness over the last three years.
Hsiao also believes BYD is somewhat insulated from the growing geopolitical tensions on both the supply and demand side. The company is vertically integrated, manufacturing its own batteries, designing its own vehicles, and creating its own smart electronics.
Additionally, China is the world’s largest EV market with a compound annual growth rate of 5% over the last decade. However, there plenty of opportunities for BYD outside China.
Finally, she also explained why she expects growth in the EV maker’s stock. Hsiao believes that BYD has transformed into China’s domestic EV champion. She also sees lots of alpha ahead for the company as it expands globally. Tiffany also notes that BYD stock is uncorrelated to the U.S. equity market and to large tech companies that investors already own, like NVIDIA
Henry Ellenbogen/Durant Capital – RBC
Henry Ellenbogen of Durable Capital Partners presented his theses for RBC Bearings and JB Hunt, two companies he believes share similar attributes. He said both are managed by executives who have lived through multiple business cycles, including past cycles like the current one in which the cost of capital has been reset to a high level.
Henry adds that zooming out to a longer time frame suggests the current situation may feel more normal than it seems right now. However, he also emphasized the importance of having a management team that can properly balance growth and profitability over longer periods of time.
Of course, it’s hard to predict the future, but Ellenbogen believes we’re living in times that are turning politically and causing significant changes in business, which requires experienced management teams. As the debate over whether there will be a soft or hard landing continues, the current economic environment is getting more difficult.
Taking a more shorter-term view, Ellenbogen focuses on two companies he feels are already pricing in the challenging economic environment. The first is RBC Bearings, which is a $7 billion company.
Ellenbogen likes the company for various reasons, including for its president and CEO, Dr. Michael Hartman, who he believes acts like an owner. He also likes RBC Bearings because he feels it is a quality business. 70% of the company sells mission-critical parts that are very small relative to the broader market.
For the food supply chain, RBC would basically be the preferred brand for the conveyors that go into grain elevators or manufacturing facilities. The other 30% of the business is in aerospace and defense, a market currently supported by ongoing geopolitical tensions in several parts of the world.
RBC Bearings continues to drive organic growth and make strategic acquisitions to grow the size of its business. Henry also notes the company’s ability to deploy capital, adding that when the market cycle gets worse, it’s usually a good time to buy a company like RBC.
Ellenbogen also highlighted JB Hunt’s CEO, John Roberts, who created one of the company’s core businesses. He described the company as “a collection of niche transportation assets” that have made it the market leader in transportation, enabling it to capture higher returns while its competitors generate commodity-like returns.
Sixty percent of JB Hunt’s business is intermodal, which Ellenbogen said the company actually invented in the U.S. The intermodal business is the ability to put goods on a railroad car and transport that while competing with truckload models; JB Hunt is the market leader in that segment.
In fact, he especially likes JB Hunt because of its leadership in the intermodal segment of the transportation industry. Precision railroading has driven significant improvements in efficiency in recent years, but it has been very bad for service quality, especially for more sensitive goods.
Thus, he believes that the poor service quality from railroads has actually helped JB Hunt’s intermodal business. However, Ellenbogen clarified that their investment thesis is actually that JB Hunt, which is already a market leader, is likely to gain share within the intermodal business in the coming years.
The company has been in a contentious arbitration with its core partner for some time, but the two companies are now starting to work together much better. In fact, the partnership is going so well that Burlington is going exclusively to JB on its east-west routes due to the improved efficiency.
As a result, Ellenbogen expects JB Hunt to increase its asset utilization, which should enable it to gain market share. He also pointed to signs that this is already occurring despite the weak economy.
Peter Kolchinsky/ RA Capital – Verona Pharma
RA Capital’s Peter Kolchinsky presented his thesis for Verona Pharma, a biotech firm developing a treatment for chronic obstructive pulmonary disease (COPD). He said chronic respiratory illnesses like COPD are on the rise and have become the third-leading cause of death around the globe. According to the National Heart, Lung and Blood Institute, COPD comes with a total economic cost of nearly $50 billion annually.
Current COPD treatments include inhalable steroids and other bronchodilators to open the airways, but steroid use comes with an increased risk of infection and causes other problems like lumbar spine erosion. Despite those issues, there hasn’t been much progress on new treatments over the last 10 years.
As a result, Kolchinsky feels COPD is a high unmet need and thus a potentially lucrative treatment area for biotech companies. He also thinks combining a bronchodilator with an anti-inflammatory into a single non-steroid drug wouldn’t increase the risk of infection like the current steroidal bronchodilators do.
Verona Pharma is actually working on such a drug, which he believes doctors and patients would prefer due to the reduced risk of infection. Kolchinsky compares the mechanism of action for the company’s COPD drug candidate to that of Viagra, explaining that it enables the lung muscles to relax so that air can flow in while inflammation and slowing the progression of the disease.
Data from Verona Pharma which demonstrates that COPD patients generally tend to feel better when taking its treatment. Kolchinsky sees opportunities for the company to initially launch its single-agent drug and later develop some combined treatments. He expects Verona Pharma to build profits over 14 or 15 years, adding that he thinks the company is “grossly undervalued” at current levels.
Kolchinsky’s price target for Verona Pharma is around $55 a share.
David Golub/ Golub Capital – direct lending
Finally, David Golub of Golub Capital went a slightly different direction, presenting his thesis for direct lending as an asset class rather than any individual stock. Direct lenders are non-bank creditors that lend money to businesses without using an investment bank or other intermediary.
According to BlackRock
In his presentation, Golub explains why direct lending as an asset class outperforms in a wide range of conditions. In fact, he said direct lending has been performing about as well as equities, but with significantly less volatility.
Direct lending strategies have done fairly well over the last 20 years — despite the broad array of different macroeconomic and investing environments we’ve seen during this time. He noted that direct lending tends to carry floating interest rates, enabling it to do well in both high- and low-rate environments.
The fund manager believes that the markets have been dramatically underestimating interest-rate risk, especially during 2022 amid the rapidly rising interest rates. He added that direct lending has also outperformed over the last couple of years because it has earned premium returns relative to the amount of risk involved.
Direct lending strategies earn an illiquidity premium because they involve loans made to private companies, which are illiquid. He also said such premiums are excellent for direct lenders. In fact, Golub Capital has been investing in companies that are smaller than what Golub described as “typical” companies, which usually prefer liquid bonds or the high-yield market as a way to access capital.
Thus, lending to smaller companies with potentially a lower credit rating results in a small premium for the lender.
Individual investors can also invest in private credit strategies like direct lending. David believes the easiest way for investors to tap the private-credit market is by investing in business development companies (BDCs), a type of corporation with an interesting attribute.
BDCs don’t pay corporate taxes, so David believes that provides an efficient way for individual investors to target the direct lending asset class. He added that the BDC market currently offers particularly attractive yields due to the high interest rates, strong spreads, and generally good credit performance.