#93: Coronavirus Investing Series, Part 10 | Brian Dress

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Coronavirus Investing Series: Part 10

This is Part 10 of a special Coronavirus Investing Series. If you
have not listened to Part 1, please click here to get
the overall context/market overview during this unprecedented
time.


You can also listen to:


Part 2

Part 3

Part 4

Part 5

Part 6

Part 7

Part 8

Part 9



 
Summary

Eric Schleien and Brian Dress discuss investment opportunities in
the bond market. Brian Dress is an investment analyst at Left
Brain Capital Management, LLC.  Brian's angle relates to
value opportunities his firm is seeing in the corporate and
municipal bond markets, based on the massive selloff in credit
markets over the past 6 weeks.  Particular discussion points
in this episode include:


 
Discussion of Bond Markets Pre-COVID 

Brian thinks the spreads were far too tight which made it very
difficult to position portfolios with income to match future
expenses.  Investors were forced to take too much risk to
attain yield. This is something we have discussed extensively
before on The Intelligent Investing Podcast.


 
How Credit Cycles Work Historically

The main takeaway here is that credit booms and busts occur far
more often than do booms and busts in the equity markets. 
Savvy investors should be willing to take risks on bonds in
trough phases like this one and gradually lighten the load as
spreads tighten, creating the capacity to take advantage of the
next down cycle. 


Note: high yield bonds have led stock recoveries after every
market drawdown since 1980 (1982, 1991, 2002, 2008-9, 2016) 


 
Observations In Credit Markets 

Brian has noticed indiscriminate selling related to a liquidity
crunch, causing bonds at all levels of credit quality to sell off
heavily.  Brian believes this creates fantastic
opportunities across the credit spectrum, which he and his
company are taking advantage of to reposition clients. I discuss
that in regards to all markets, here.


 
COVID-19 Gameplan 

Brian is upgrading the credit quality of bond portfolios, taking
the opportunity to lock in large coupons on stable companies,
some of which continue to trade at a discount. Markets have been
starved for these types of opportunities in the bond world and,
while many of these have already narrowed, plenty of mispriced
securities are still out there for investors.  There are
still chances to lock in great coupons, along with the potential
for capital appreciation.  Brian believes it is important to
recognize that it is likely we will be in a 0% interest world for
the foreseeable future.


 
Bond Opportunities

After Eric and Brian discussed the general overview/strategy with
respect to bonds, Brian presents a few examples where he sees
opportunity.


Qurate (QRTEA) 8.25% 2030 bonds (Yield to maturity >12% at
current price levels)

Travel and leisure: Delta 4.375% 2028s (yielding >7% at
current prices) and Carnival Cruise (unsecured 2020s and secured
2023s)

Illinois Municipals General Obligation 5.1% bonds: effective
yield of more than 8% for those in highest tax bracket, possible
appreciation potential with interest rates now firmly at 0.



 
New Service

Brian is debuting a new service next week at Left Brain
Investment Research, which is a twice-monthly pay-per-view Zoom
call for investors of all types, where his firm will be
introducing a single bond idea and a single stock idea each month
and explaining the entire research process that went into those
recommendations.  


Brian has his firm's “shelter-in-place” specials available on his
firm's website. 


Listeners can enter the promo code “Eric” on the subscribe page
and receive a full research service (stocks and bonds) for
$99/month for the life of the subscription. 


***FULL DISCLOSURE, I, Eric Schleien, DO NOT MAKE ANY MONEY OFF
THIS PROMO CODE. ALL SAVINGS GET PASSED BACK TO INTELLIGENT
INVESTING PODCAST LISTENERS.


 
LBIR Investment Ideas Forum

Second, Left Brain Research has its LBIR Investment Ideas Forum
with the first two installments coming on April 30 where Brian
and his firm will discuss a stock idea with the same
format.  Listeners can find all the information for these
events on the front page of the LBIR website.


 


 
About Left Brain

Left Brain opened the wealth management business in 2014, a hedge
fund in 2016, and an 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 its 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.


 
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.


 
Staying In Touch With Left Brain Investment Research

Click here for more information on Left Brain
Investment Research

Click here for more information on Left Brain
Wealth Management



 
Staying In Touch With Eric Schleien

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