12.19.2019 - 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
Management
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
Equities
The company looks for strong (and accelerating) revenue growth, high (and expanding) gross margins, favorable competitive dynamics
Distressed Bonds
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
Splunk (SPLK)
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 (TLND)
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 & Valuati