Inflation fears are rising…
And for many folks nearing retirement, it’s happening at the worst possible time.
That’s why it’s absolutely critical to hold a portion of your wealth in solid long-term investments, so your nest egg lasts as long as you do…
But what’s the best way to do it safely and with as little risk as possible?
Dan looks to answer this question by sitting down with the portfolio manager of the Needham Aggressive Growth fund – Mr. John Barr.
Prior to his career on Wall Street, John worked for 14 years in the electronic design and automation industry, giving him unique insights into the world’s high-growth technology companies that many of his colleagues on Wall Street lack.
Today, he works as a co-portfolio manager of Needham Growth fund and portfolio manager of the Needham Aggressive Growth fund.
During their conversation, John explains his philosophy of finding stocks that deliver compounding returns. He looks for what he calls “hidden compounders” before they become “quality compounders.”
He even shares the name of one company in his portfolio that he bought at $7… which today is priced around $140… approximately a 20X winner…
Then he tells Dan about another stock he absolutely loves… But this one is still in the “hidden compounder” stage…
The company trades for around $10 today, and John thinks that long term, it could join the ranks of some of his biggest winners.
If you’re looking to invest in high upside growth stocks, but want to know how to go about it the right way, this is a conversation you don’t want to miss…
Managing Director, EVP, Portfolio Manager at Needham Growth Funds
John Barr is the Co-Portfolio Manager of the Needham Growth Fund and Portfolio Manager of the Needham Aggressive Growth Fund.
2:30 – “Today, we’re seeing record IPO issuance… three or four years ago there were 13 new SPACs that went public. This year so far, it’s like 450! I mean it’s gone ballistic!”
6:45 – As Dan always says, prepare, don’t predict… “You’ll never catch me calling the top… but hey, this is what the top feels like. This is what it feels like when a bull market turns into a bear market…”
10:41 – The quote of the week comes from a press release from the Federal Reserve, dated April 28th… “Inflation has risen, largely reflecting transitory factors…”
16:02 – This week, Dan invites John Barr onto the show. John is the co-portfolio manager of Needham Growth fund and portfolio manager of the Needham Aggressive Growth fund. John started on Wall Street in 1995, working for Needham as a sell-side analyst following technical software companies. Prior to his career on Wall Street, John spent 14 years in the electronic design automation industry.
20:32 – John shares the story of how he transitioned from electronic design automation to the world of Wall Street, “…One thing I realized was, it’s nearly an impossible industry to get into, and it didn’t happen right away…”
25:53 – John explains his investment philosophy… “I look for compounding returns… I look to invest in hidden compounders and then hold onto them through their transition to become quality compounders…”
30:04 – Dan asks John for some examples of quality compounders in his portfolio… “Let’s talk about Vicor Corporation… we bought it around $7 per share in 2014, it’s currently at around $130…”
35:55 – John explains how Vicor grew to a massive demand in data centers… “An earlier investment was the data center operator, Equinox, that was in 2009 or 2010… Data centers use a lot of advanced semiconductors and that has been an area of ripe investment for the funds…”
41:46 – John shares a story of cutting off one of his losers… “One case, I thought I had an entrepreneur engineer running the company, and it turned out he ended up in the tabloids having gone to Sundance and gotten himself into some trouble with a young lady there, and there’s ugly things flying back and forth and I’m thinking, how does this guy have the time to go to Sundance and be doing this? This is not the person I invested in… So that was the end of that.
46:32 – Dan asks John about some of the biggest names in his portfolio… “Well, my predecessor bought – and I have not sold – Apple…”
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris... I'm also the editor of Extreme Value, published by Stansberry Research. Today we'll talk with John Barr... he's a portfolio manager for Needham & Company, and he's focused on growth investing. Can't wait to talk with him.
In the mailbag today: Questions about TradeStops, mortgages, and a Chinese company that's blowing up. And remember, the mailbag is a conversation to talk to me... call the listener feedback line, 800-381-2357, and hear your voice on the show.
For my opening rant this week, I'll talk about something I hardly ever talk about, which is a potential catalyst that could start us down the path to a bear market. That and more right now on the Stansberry Investor Hour.
Longtime listeners of the show and longtime readers of my newsletter, Extreme Value, know I don't do predictions, I don’t call tops, I don't call bottoms, and another thing: I don't do catalysts. When people say, "OK, you say there's all this risk and the market's too expensive but what's the catalyst that's going to make it fall?" And my answer is always the same: "I don't know," and I don't think you have to know. I don't think that's the point at all. I don't think anybody knows. I don't think anybody can say, "This is what's going to cause the market to cave in, and it's going to happen on this date." You just don't get that much precision. Those are predictions. And predictions almost never ever work out and when they do, it's luck.
However [laughs] – however, I looked up a paper recently that I read some time ago, many years ago. It came out in 2003 in the Journal of Finance, June 2003, it's called "DotCom Mania: The Rise and Fall of Internet Stock Prices." And I wanted to look it up because today we are seeing record IPO issuance and there's a lot of SPACs, special purpose acquisition companies, that are coming into existence and part of the record – an initial public offering issuance that's happening today is record SPAC issuance. A few years ago, there were 13 new SPACs that went public. This year so far it's like 450. I mean it's gone ballistic. Everybody has a SPAC... everybody wants to do a SPAC.
And some of the SPACS – a SPAC is a blank-check company. They go public, they raise some cash, and they sit around looking for a company to buy. And some of them buy some great businesses. There's a few of them that are great. But a lot of them – anything that you do 450 of, most of it is going to be garbage. That’s the way it is in a mania, in a full-on speculative mania. Most of the stuff is garbage but a little bit of it's really great, right?
Most dot-com stocks were garbage, but Amazon was in there too. And it's the same with SPACs.
So this paper that I'm looking at is called "DotCom Mania: The Rise and Fall of Internet Stock Prices," by Eli Ofek and Matthew Richardson, came out in Journal of Finance, June 2003. You can Google all that. And there's a sentence in the abstract that kind of underscores what I'm thinking here because the dot-com mania saw record IPO activity as well. And they conclude in their abstract – the last sentence of the abstract, which is just a little paragraph at the beginning of a formal paper that tells you what it's about, they say, "We link the Internet bubble burst to the unprecedented level of lockup expirations and insider selling."
So what's a lockup expiration? When a company goes public there are people who own shares privately – the founder and maybe some of his top lieutenants and so forth, insiders, board members, whoever, early investors, sometimes private-equity companies, venture capital, whoever. There are people who own shares when a company goes public. And it's not required by law, by regulation, or anything, but it's become traditional for them to agree to not sell their shares. They're locked up for some period of time after the company goes public. It's typically, I think for a regular IPO, it's like a month or three or something like that, and for a SPAC it'll be like typically maybe six months after they do a transaction and merge with an actual business.
So you get these lockups where people agree not to sell. Well what happens at the end of the lockup? A lockup expiration. Insiders have been waiting for years and years to convert some of their equity to cash. They want to buy a new house and put the kids through college and all that stuff. So there is selling. And this paper, "DotCom Mania" by Ofek and Richardson, suggests that part of the catalyst that took down the internet bubble. The top occurred in March of 2000, top of the Nasdaq – part of what took it down was the fact that all these IPO lockups expired and there was massive selling. So far, I think the record for IPO issuance this year – I think it was actually in first or second quarter – it doesn't matter, it was just earlier this year is the point. And I know the second quarter was huge and the first quarter was huge for SPAC issuance.
So here we are, we've got record IPOs, record SPAC issuance, and these lockups are going to start unlocking right about now. Yeah, right about now because we're six months after – I'm sorry, end of the first quarter, beginning of the second quarter. So that is a little concerning, isn't it? I mean maybe this is the top. Maybe this is what the top looks like this time around. You'll never catch me calling the top. But I'm going to spend the entire issue of my Extreme Value newsletter this week, which comes out Friday, October 8 this week, and I'm going to spend the whole thing saying, "Hey, this is what the top feels like. This is what it feels like when a bull market turns to a bear market."
And I've got reams of charts and data and stuff that is for Extreme Value subscribers only, and I didn't talk about this catalyst in there because it just wasn't appropriate for the discussion. But in the back of my mind, maybe this will be a catalyst. I don't do catalysts... I'm not saying it will. But maybe the selling that is certain to follow all of these SPACs – and remember the SPACs were issued starting – a whole bunch of SPACs, a record number were issued starting just call it 10 months ago and into the second quarter, so as recently as four months ago, end of the second quarter, and they still have to merge with a company and then the lockup kicks in, and then it's three or six months or whatever it is after that. So these lockups can go into like next year, maybe even 2023 or something. I'm not saying, "This is it, the market's going to fall apart. All the lockups are expiring." No, some IPO lockups are certainly expiring, some SPAC lockups are certainly expiring. But what happens over the next couple of years if we get lots of these SPACs finding merger targets and then the lockups expire? Do we get a ton of selling? Is that going to contribute to the top?
And tops are a process, right? You get various parts of the market topping out and then the momentum kind of builds and leaks over into the S&P 500 and the Nasdaq and the big indexes, the Dow and Russell 2000. And then before you know it – we won't know we're in a bear market until it's down 30% or something, and people won't even be talking about a bear market until it's down a whole lot. That's why I'm always saying, "Prepare, don't predict." For one thing, you can't predict hardly any securities price movements, but you sure as heck can't predict the moment when we all say, "The bear market started." Various sectors top out at different times... it's a process... it can happen over a period of two years or more or whatever, or several months. And then at what point – it's almost like there is no "when." When people say, "When is the top?" it's almost like there is no "when." But I just want to know what it's going to look like. I'm curious to see what it's going to look like over the next few years if we get lots of SPACs merging with lots of companies and lots of lockups expiring. Because if they don't merge with companies, they'll just liquidate and give investors their money back and it won't be any big deal. But if they do merge with a lot of companies, if we see lots and lots of merging of SPACs in the next year, next several months, hmm, that means lots of lockup expirations maybe three or six months or so after that. Very curious to see what 2022 looks like – where are we going to be a year from now? I don't know, and that's why I always say prepare, don't predict.
I'm going to leave you right there with an interesting thought, maybe Google that paper, "DotCom Mania: The Rise and Fall of Internet Stock Prices" by Eli Ofek and Matthew Richardson. Right now, I want to get to my quote of the week. There's actually two quotes in here. The first one was from a press release from the Federal Reserve dated April 28 when Jerome Powell said, "Inflation has risen largely reflecting transitory factors." And in the Federal Open Market Committee meeting minutes, April 27 to 28, which were released on May 19, so almost a month later, there were eight uses of this word "transitory." OK?
And in the minutes they said, "After the transitory effects of these factors fade, participants generally expected measured inflation to ease." So this is why you hear people talking about transitory inflation. That's where this narrative comes from. So recently, on September 28, Jerome Powell was testifying in front of the Senate banking committee about the CARES Act, and he said it's frustrating, the persistent inflation is frustrating. So it went from transitory and now it's frustrating.
Let me tell you how this works, folks. The narrative starts out transitory... everything is going to be fine... inflation is not going to be around long. And then it's, "Oh, it's around longer than we thought. It's frustrating." And the next ratcheting up is going to be something like, "Well you know, it's a little more persistent than we expected but it will fall soon." And then at some point, the narrative is going to be like, "Oh crap. This is it. Gasoline costs $7 a gallon at the pump in the U.S." It's a narrative. It's a story they're telling you to try – it's like the Wizard of Oz, "Pay no attention to that man behind the curtain." The man behind the curtain is inflation and they're trying to get you to pay no attention to the fact that you pay more for everything now, and oil is spiking up, and the Bloomberg Commodity Index is up like 39 or 40% so far this year. Everything costs more. This is inflation. And they don't want you to pay attention to it because they know that the stock market is more expensive than it's ever been in the history of forever. And investors are more leveraged than forever. Margin debt to GDP is higher than forever.
What happens to equity valuations when inflation gets cooking good and hot? They fall. A 30% return on capital business and 10% inflation is 20% return on capital. And guess what? That gets a third less valuation in the stock market, roughly speaking. Or half as much – maybe people get really scared. If you look at a chart of the S&P 500 P/E ratio back from the '50s to now, it's above 15 times earnings almost the entire time except for when? During the 1970s, when it bottomed out. It's like during the Great Inflation of the '70s, it bottomed out like seven times earnings.
So this quote of the week – I'll read the whole quote from the minutes of the FOMC, "Expected surge in demand as the economy opens further, along with some transitory supply-chain bottlenecks which contribute to PCE price inflation temporarily running somewhat above 2%. After the transitory effects of these factors fade participants generally expecting measured inflation to ease." Yeah? B.S. I'm calling B.S. on the Fed. It's a bunch of baloney... it's a narrative. Inflation can kill investors, it's bad for business, they don't want you to know that it's happening. And that's my quote of the week. Obviously I'm worked up about it.
Alright, let's do our interview. Let's talk with John Barr from Needham Growth Fund and Needham Aggressive Growth Fund. Let's do it right now.
I've been talking about the stock market's volatile swings recently on the show and I want to make sure that you have a chance to check out an event that I did with my colleagues, Steve Sjuggerud and David Eifrig, who we talked with a couple times on the show. Throughout this – it's a free online event – and throughout the event we talk really kind of in depth about what's really happening in the stock market and where we think you as an investor should put your money given the current market conditions. We did this video and we had this kind of long conversation about it and I think it turned out great. It's a free event... it won't be online forever, it won't be online much longer at all, so I hope you watch it before my publisher takes it down. So see the event with myself, Steve Sjuggerud, David Eifrig. Just go to messagefromdan.com. Again, short window of time... they're going to take it down soon, so just jot down this URL, messagefromdan.com. Check it out. I think you'll really enjoy it.
Alright, it's time for our interview. Today's guest is John Barr. John Barr is the co-portfolio manager of the Needham Growth Fund and portfolio manager of the Needham Aggressive Growth Fund. John started on Wall Street in 1995, back in the Stone Age, at Needham as a sell-side analyst following technical software companies. He rejoined Needham in 2009 to co-manage the Needham Mutual Funds. John was also a senior analyst at Roberts & Stevens following semiconductor-technology companies. In 2002, John joined Buckingham Capital Management, where he served as a portfolio manager and analyst. Prior to Wall Street, he spent 14 years in the electronic-design automation industry and is a graduate of Colgate University and Harvard Business School. That's really cool, John. Welcome to the show.
John Barr: Thanks, Dan. Great to be here.
Dan Ferris: You bet. I didn't know about the 14 years in electronic-design automation. What was that like? What were you doing?
John Barr: As a portfolio manager this is my third career. The first one was in electronic-design automation where I started in 1981 or so. I held various sales and marketing positions and ran a big product line. These were for companies that were venture-backed and I went through an IPO, a hostile takeover, friendly mergers, hiring, mass layoffs, making quota, setting quota, introducing products, the whole bit. So that gives me a significant industry experience to bring to Wall Street. When an investor asks a company if it was tough to make a quarter, for example, I kind of smile. So I've been there... I've done that. And I think it really helps because I can put myself in the shoes of the companies I'm looking to invest in and understand what they've been through. So it was sales and marketing for software that's used for semiconductor and printed circuit-board design. I also lived in Tokyo while doing that as well. So bases in the U.S. and Japan, covering Asia back in the '80s and early '90s.
Dan Ferris: So that was a busy 14 years for you. You are able to probably say what Warren Buffett has said, "Being a businessman makes me a better investor... being an investor makes me a better businessman," then I would guess.
John Barr: Absolutely right, and just so fortunate to have a chance to move to Wall Street after 14 years of that and I was – the left company I was with was getting ready to – we had just been through a takeover and they were closing down the U.S. operation and I was the last person out the door and stepped back and said, "What do most of these people who live in the New York area do?" and I'd always loved the markets and stocks and I immersed myself in doing a career transition and was fortunate to get a chance to move to the sell side at Needham & Company. That was – and then did that for seven years, including at Roberts & Stevens and that was career number two.
Dan Ferris: I have just a fond place in my heart for Needham. I wish I could remember the fellow's name many years ago, maybe 20 years ago or more – 23, 22 years ago, I was researching some solar panel company or another and I wanted to get really excited about it, and he said, "No, no, no." He said, "Might even be a fraud." And I kind of went ahead with it and he turned out to be right and I turned out to be wrong. From then on I thought, "I'm going to listen. When Needham talks I'm listening."
The way you described the 14 years in design automation with all of the corporate action, the mergers and the IPO and stuff, it seemed a pretty natural transition for you. Was it a big soul search or was it as natural a transition as I feel like it sounds?
John Barr: It was really fun to have the chance to explore Wall Street, and I wrote a report on the industry... I went around and met – I went to the floor of the exchange, I met with traders, I met with portfolio managers, analysts, investment bankers. This was a new world for me. I'd gone to business school but that was 14 years before. So I just immersed myself into it. One thing I realized it's nearly an impossible industry to get into. And it didn't happen right away, and I took another position with a great venture-backed startup.
And then a year later I got a call that Needham was interested in hiring a sell-side analyst to follow the area that I knew very well, electronic-design automation, and didn't have to think about it very long and just jumped at the opportunity. And it turned out to be a great fit. It was a small firm, a partnership, and very focused on small and mid-cap growth equities, companies that I came out of, and I knew my industry.
So it wasn't much of a soul search. The biggest part of it was three young children, a mortgage, and "What are you doing for six months?" So I was fortunate, again, it worked out.
Dan Ferris: I feel like I'm being polite chatting about all this stuff because I want to dive in and as we sit here with growth stocks underperforming pretty dramatically the last couple of weeks just say – and ask you how's your blood pressure, are you worried, does this bother you, how are you feeling here in the early part of October 2021?
John Barr: Great, and generally always do. I view – while invest in growth companies the mission is to create wealth for long-term investors and that means to me picking a few great companies each year, adding them to the portfolio to replace others, and holding these companies for a long time. My average turnover last quarter was 11% annualized. I average about a 10-year holding period. So I pay little attention to the current news or market fluctuations and I really try and find great businesses that I think can compound returns over time, something you've heard and spoken of many times in the past yourself.
Dan Ferris: I know. It's funny because I talk to you about the current market action as though a guy like you is going to care. It's just – because this is a consistent thing, like all the traders we talk to are always talking about cutting losses and position sizes and all the folks like you that we talk to who are managing for the long term are always going, "Don't care about down 5%. It just doesn't mean anything."
Here's the thing, John. When it does come to mean something, probably not for a guy like you but for folks who invest in your funds when they start getting nervous that's when I would guess a portfolio manager's life becomes most difficult. Since you're doing aggressive growth and growth funds I'm going to say Nasdaq, if that's down 30 or 40% then I would imagine the phone starts ringing and clients start going, "Man, we're really scared. Help me out here." What do you tell them?
John Barr: Hopefully in investing in us that they have understood my philosophy and how I invest in the kind of companies that we look for and how the portfolio works over time, number one, and number two I also hope that they have appropriately sized their position and diversified into other things that will perform differently in that type of market. So I think those are two really important aspects that people know what they own, and second, that whatever they are in they understand why they're in it and where it fits in their broader portfolio.
But yes, the calls come and it's not great and yes, I do worry about these stocks and on a very daily basis, but I try to step back from all that and realize I own pieces of a business and these businesses are going to – if they do what I think they're going to do they're going to grow over time.
Dan Ferris: Let's talk about that philosophy of yours that you mention. Let's get to that because that's really why we have you on here, we want to pick your brain and find out that the answer to the basic question that I have for all folks in your business, which is if we were sitting at bar I'd say, "What kind of an investor are you?"
John Barr: I look for compounding returns, and to me, I defined it as I look to invest in hidden compounders and then hold onto them through their transition to become quality compounders. And when they begin to make that transition and then certainly when some of the quality factors are showing through, and that is both subjective factors and objective factors, so the stocks have run, and boy is it difficult to resist the siren song to sell and to hold on. But what I've found is that when the companies that I first invest in, in that transition from hidden to the transition phase, may get a 2 to 3X, which is amazing. But the real return comes from holding them beyond that, and that's in years five through 10, and that's when these go from five to 10... up to 20 or more factors. And that's where the real returns come from. But you've got to get the right companies and have the patience to stay with them.
Dan Ferris: Absolutely. Patience is like numero uno, isn't it? We always wind up with these same few things.
What I’m interested in now is this transition. Is that a transition to profitability or what is that transition?
John Barr: How do I define a hidden compounder? Let's look at that first. I'm looking for a company that can be five to 10 times its current size, and I'm looking for a management team that thinks long term. To me, that means run by founders, run by family, or long tenure. I'm not interested in the hired gun who's been brought in. I'm looking for a management team that thinks long term.
And then the third element is that it's a company that's in an investment phase. So the financials are not showing great results. Revenue may be flat or down, they may have been investing a lot in R&D, so they may have losses, and I would say small losses the company can manage with its current balance sheet because we do not like to take balance sheet risk at all, which does help us outperform in difficult markets.
And any quant can see high ROIC, or the good stuff here... we're looking for a company that is in an investment phase where it's not showing these great results. The stock chart may be flat, it may be down a bit, it's not at a 52-week high. That's where I like to look first. That's what I want to buy. It can take a year or two to build out a position.
Then if my thesis is right, we go into the transition phase and you'll start to see small-revenue growth, you'll see the losses go to break-even, maybe even single-digit operating margins, and the stock will start to work and you may get 50% or 100%. Then if the thesis continues to be right, the transition to quality happens and at this point, you're seeing strong return on capital, you're seeing strong revenue growth, and it's showing up on factor screens as high-quality companies and you get multiple expansion and it's the Lollapalooza effect... so all the good things happen. Again, very tempting to sell along the way here but if my product thesis is right, we stay with them and the returns come in the later stages, the big returns.
Dan Ferris: Have you got an example for us from your portfolio?
John Barr: Yes. Let's talk about Vicor Corporation, and this is first or second-largest, as of June 30, second-largest position in the fund at 9% of the fund. What happens when these companies really start to perform, they grow to the top of the holdings list, so my top 10 holdings are 60% of the portfolio, so very heavily concentrated. Most of these – Vicor is pretty indicative of them – so Vicor is a $6 billion market cap company right now – bought it when it was about 300, so it's about – bought at around $7 a share in 2014, and it's currently at 130. So, pretty close to a 20X.
Now, disclaimer. Not all of our investments turn out to be like this. This could go down at any time, and please investigate it yourself. But it has worked for me.
What do they do? They make small-form-factor power conversion devices. This eliminates the need to convert back and forth between AC and DC power in a data center. In the early 2010s there was not much traction in the data-center market, but in 2015, Google wrote a paper that indicated they were interested in this very technology. Never named Vicor, but if you were really close, the situation you knew – and I thought I knew that this would lead right to Vicor. And it turned out I was right. So this enables 48-volt power distribution throughout a data center and I believe they have Google and they should be well-positioned to win many other data-center customers. The same technology can be very helpful in electric vehicles and other artificial intelligence, processing chips – they all need high power and they have very complex power-conversion requirements.
So this company is $300 million... can it be 1 to 2 billion, 3 billion? I think it can be. OK, management – it's founded by Dr. Patrizio Vinciarelli in 1981... he controls the company through a preferred-class structure. He's got 70 or 80% of the vote, and he invested $400 million in this technology starting in 2004. And the results looked horrible for years. And in 2014, when we bought, it was just as I described. It's losing money, kind of flat revenue, but you had to understand this product and believe it was going to work.
So he had a big vision. He's the founder. He's the CEO. He controls the company and he thinks really long term. And starting a couple years ago, the financials started to turn, went through that transition phase, and is now showing profitability, but I think it's got a long way to go in showing better financial results as well as that revenue ramps.
So if I'm right I think they can earn $10 to $20 a share and more and the company can be five to 10 times its current size. And despite the stock having run up, it could have potential to go up more. So that's Vicor.
Dan Ferris: Congrats.
I want to drill down a bit more on – if you could take me back to 2014, was it simply like picks and shovels for data centers? What was it that really made you say, "This is potential 10X to 15X"?
John Barr: I knew power conversion was important and thought it was going to be important in data centers. And there was a lot of – there was talk of what Google and others were doing, and of course saving power in data centers is a really big deal. So we had that as kind of a backdrop. But the core of their business had been selling into industrial markets. And they had a fine business doing that and when the stock was at $7 in 2014 that kind of gave us the margin of safety to make that bet that this new investment could pay off.
I'll also point out the CFO bought a fair amount of stock in either 2013 or '14, which was an "Aha, what's really going on here?"
Dan Ferris: Obviously something. Let me ask you this, John – you saw this need for power-conversion data centers – was this one of five such picks or did you just focus on Vicor?
John Barr: For our data center, I'm continuously looking and an earlier investment was the data-center operator, Equinix. That was in 2009 or 2010. So, big fan of data centers and things that go into them. But in answer to your question more broadly, data centers use a lot of advanced semiconductors and that has been an area of rife investment for the funds going back to before I was there.
Dan Ferris: I guess what I'm really curious about was you called like the one power-conversion company that became this huge 20-bagger and I was curious to know was that in a small basket of these or you just – for power conversion you just went straight to Vicor.
John Barr: Just straight to Vicor. I've looked at others and other power-conversion companies have done very well. It's been a great area. But Vicor was the one that I picked for this.
Dan Ferris: Interesting. So just part of your makeup as an investor is focus and concentration... 60% in the top 10 names, you didn't buy a basket of power-conversion stocks, you bought one.
John Barr: Right.
Dan Ferris: And your turnover is like, what, 10% or something?
John Barr: Right.
Dan Ferris: So you're a classic, long-term, business-minded, compounding-focused guy but you're also buying, what, pre-profitability, I guess, we'll just call them generally, these hidden compounders. I just find this fascinating that you can be concentrated and doing that. I mean do you find you often are ditching losers and – I mean I guess the answer to that question has to be no because your turnover is so low. You just must be a great picker at this. This fascinates me.
John Barr: I only need a couple of companies each year and I kind of view them as the class of, and Vicor was the class of 2015. When I buy them we're buying at 100 to 200 basis points over a long period of time. And then over the next couple of years, in the transition period, I may buy a little bit more as we get opportunities. And then we let them run. So it's really just needing a few new companies each year, and some get stuck, some just stay at the 100 to 200 basis points, and I sell when I think the thesis is off-track. Some may stay too long and be dead money, but when they're in that hidden stage they can't do the portfolio that much damage. And so it's really when they get into the top 10 or 20 that they become the contributors.
The interesting thing by this transition to quality – I think this is what really helps us outperform in down markets because these companies have good profitability, good return on capital by then, minimal debt, and that outperforms in a down market.
Dan Ferris: You bet. There's nothing like making money to help you make money.
You mentioned not – but you said a company will generally, when we find it, will not be at a 52-week high, and you mentioned what the charts looked like. How important is that technical stuff and what the chart looks like to you?
John Barr: In previous lives, I was really into the technical stuff, but in this life not really, not at all. But – so the chart's really a reflection of what's going on in the business. So if the company hasn't really shown great results the chart is not going to look so great.
Dan Ferris: You're just characterizing the general situation for us. It's not part of your analysis really. OK.
John Barr: That's right.
Dan Ferris: You're a fundamental bottom-up guy all day long.
John Barr: Right.
Dan Ferris: That's awesome. That's my flavor of investing, man. You're buying a business – you're going into business with these people. And you're obviously staying there.
John Barr: Right, we're so lucky to be able to be partners with these entrepreneurs. You think back in our country 120 years ago, what chances were there for us to be financial partners with the great entrepreneurs? Not much. But we can do it now.
Dan Ferris: Do you find that when the thesis breaks and it doesn't work out, does that generally happen when you're early into building the position or have you ever had one really disappoint you after it got to be 5, 6, 7% of the fund?
John Barr: Sure, we have.
Dan Ferris: That's got to be tough to handle.
John Barr: It is. But weigh that – I've had companies that have been in that transition phase that got to be up to that 5 to 6% and then just didn't take off. But the downside was relatively limited. But in a relative performance world that hurts us. In one case I thought I had an entrepreneur engineer running the company and it turned out he ended up in the tabloids, having gone to Sundance and gotten himself into some trouble with this young lady there. And there was ugly things flying back and forth, and I thought, "How does this guy have time to be going to Sundance and doing this? This is not the person I invested in." So that was the end of that.
Dan Ferris: I'll bet.
John, did you listen to our episode with Bethany McLean? She had a wonderful take on this.
John Barr: I did not. I'm familiar with her work but I missed that episode.
Dan Ferris: We were talking about Aubrey McLendon and Elon Musk and all these wacky entrepreneur types and she said, "If you're going after those visionaries you're going to get the whackos and the frauds and the people who show up at Sundance getting involved with some young woman." You can't avoid it. Is that your experience as well?
John Barr: That is very much the exception. You can tell by my description of Vicor, and most of the other companies in the portfolio I like companies that are run by the founders, and in technology, that often means an engineer. And I know they are not distracted... they should not be distracted. They have one mission and that is to build their company and that's it. So no, and we avoid the flashy companies and CEOs that are in the press. We want them working heads down to build their businesses.
Dan Ferris: We talked about the bottom-up things you look for and how you approach the hidden to the quality... that's really cool that you're finding them before they become quality and outperforming and stuff. Is there any type of a top-down component in your analysis at all? Do you think about any of that stuff, the interest rates or anything at all?
John Barr: Dan that's a great question, having been around with gas lines and stagflation in the mid-'70s and coming out of business school into the teeth of Paul Volcker and 20% interest rates – a public company? How about this – my small software company that I was with went public in '87, right before the crash, a week before the crash, in October of '87.
So I've kind of seen these things. And I use a simplifying assumption, which is that monetary policy is easy, and that is just what Fed governors do, and there's only one exception and that's been Paul Volcker. And otherwise, their only job is to make money easy.
And the second is that politicians of all stripes like to spend money and spend more than they have. And both of those things provide reasonable tailwinds for equities and particular equities like those I invest in, which have pricing power and are in unique and growing markets. So yes, so that's my macro.
I don't worry much about it because I have those two underlying themes, but this is just – my fund or these stocks are just part of a portfolio that I hope investors consider all of those other things and that many of you are guests and you have raised in your podcasts over time in other investments in a portfolio.
Dan Ferris: I was asking about the macro stuff because the narrative now is interest rates go up, growth-y tech companies go down. People see that high-quality growth as an alternative because there's nothing to do in the bond market because yields are so low. So I was going to head that way, but it sounds like it doesn't really bother you at all. The recent action, a little bit of malaise in the market for a few days it's just not – doesn't bother you at all?
John Barr: If my companies can do what I think they can on the top line in their new markets, they will power through it. The multiple that they may achieve at the end might be lower. But otherwise, not a concern.
Dan Ferris: Do you have any of those like big famous names? What's the most famous stock in your portfolio?
John Barr: Well, my predecessor bought and I have not sold Apple. So it's not small-cap, it's in the portfolio, but it has incredible return on capital... I believe it can be a lot larger company, but it is not – that's not indicative of the portfolio, but it is the most famous.
Dan Ferris: Give me this example. You sounded like you wanted to give me another example.
John Barr: Yeah, I'll give you KVH Industries, which is a hidden compounder still. It's a $10 stock... it's a couple hundred million in market cap. I have owned it since – it's the class of 2013, and bought it right around this price. So it has not worked yet. But I have patience and belief.
So they're maritime-satellite communications... they make antennas, provide services and content for commercial shipping at sea, and they're in a business-model transition where they went from selling the antennas and services to providing it as a subscription service, all bundled together. And so you've had hidden-revenue growth of the subscriptions while the sales go down. You've seen this transition before in past companies.
Dan Ferris: Absolutely. It's a wonderful opportunity, isn't it?
John Barr: It really is.
Dan Ferris: You see this happening and the market hates it, and you know, long-term, it's brilliant, right?
John Barr: And a key thing is churn – they have minimal churn. In the past, they have been hurt with the energy sector, particularly in the Gulf and the vessels there, not using their service while things were down. But they are gaining market share, they have this hidden transition going on, it's run by a founder, and it provides a great margin of safety with a couple dollars of cash on a $10 stock.
And also their Japanese partner bought stock at this price a couple years ago. They defeated an activist earlier this year, so that is in the cards if they do not perform over time once again, I'm sure. But I think this can be a much larger business than the couple hundred million that it is today and the valuation's attractive.
Dan Ferris: Just on the face of it, I love it. Maritime shipping it's capital-intensive, extremely competitive, it's like the last thing on Earth that I want to be – it's highly cyclical, it's not a great compounder, but then this thing acts like some kind of a royalty, right?
John Barr: Right.
Dan Ferris: It's beautiful.
John Barr: And they need – and on ship, they need the same high bandwidth communications that the rest of the world has. And crew retention in this day and age with vessels out in Long Beach for months at a time waiting to get in, and backed up all around the world.
So I'm hopeful that KVH will be able to move from a hidden up to a quality compounder. To date, I've been wrong, but I haven't lost any money, just opportunity cost.
Dan Ferris: Are you wrong or are you early? I'll bet that's a question you wrestle with.
John Barr: Exactly. I think I'm early, and with this investing style that happens.
Dan Ferris: That's a really good question, isn't it? "Is he wrong or is he early?" and how the heck do you know? How do you ever know? Does everyone really know if they're wrong or early, or do you have to wait until the market tells you, "We were wrong... we were early" or whatever?
John Barr: I stay as long as my thesis is intact. Are they making progress with major customers, in this case, what's the uptake on the agile plans? Is there churn? And if the answer is yes, I stay, even though the stock goes from 12 to nine, back to 11, back to nine, and it's been in this range for a long time.
Dan Ferris: Can you make this a little more concrete for me, John? It's a subscription business... what does a subscriber subscribe to? What do they get?
John Barr: They get an antenna, a maritime antenna, VSAT antenna put on their ship. They get the communication services, so voice and data for the crew and for the ship management, and then they also get entertainment, content, news – all the stuff that we would get through Netflix and subscriptions, so they get all of that bundled together for somewhere between $1,500 – well actually there's a new small-antenna version, so under $1,000 up to a couple thousand dollars a month.
The neat thing about this in the shipping industry is ships are owned by one entity, they're managed by another entity, the crew is placed by a completely different entity. So if you're asking them to put a $200,000 capital investment in place on the vessel who's going to pay for it, and who's – because it's – and because it's some other entity that's benefiting.
But, if you bundled it into op-ex as a subscription and can be returned at any time, it really reduces the barriers.
Dan Ferris: I see, yeah, it does. That's interesting.
So what does the competition look like for this?
John Barr: Competition is siloed, so there are companies that sell antennas, there are other companies that provide communication services, and many of these have been rolled up into private equity. And then there are third parties that supply entertainment and news, and if you don't have the bandwidth to do it it's done by picking up DVDs in one port and dropping them off in the next.
Dan Ferris: That's what we're competing with?
John Barr: Yeah.
Dan Ferris: I think we have a future here [laughing] – that's amazing. It's funny, in 2021, people are picking up DVDs and dropping them off in the next port. I mean it's crazy, isn't it?
John Barr: Right. This really should work. And then there's a new product, a new offering called IOT Watch, which uses the same – antennas and the communications systems to monitor critical systems like the engine room on the vessel. Otherwise, the alternative is some guy on the crew doesn't know anything about the engine and has to go down there, try and diagnose and fix something... and with IOT monitoring you can have the experts right on shore take care of things and diagnose the problem. So that's a new offering that was just launched last year.
Dan Ferris: Wow. Thank you for that. We've been talking for quite a while and I've enjoyed it. The time has just flown by. If you've listened to the podcast you know what's coming. My final question, same for every guest no matter what the topic. And if you could leave our listener with just one thought today what would it be?
John Barr: I think public markets are a great gift for long-term investors and it's just a great opportunity for all of us to build wealth over the long term, perhaps not for speculators and traders, although they have their own ways of making money, but I think the markets are a great gift, and we should take advantage of it, and the best way to do that is to learn about investing and continue to hone your craft as an investor.
Dan Ferris: Well said, well said. I agree. Isn't it just such low-hanging fruit to just get past all the noise, don't be a trader, be a long-term investor. Hold for the long term. That is – it's so simple it's really hard for people to do emotionally, but doesn't it not constitute such low-hanging fruit? Where else would the average person, who might not be an entrepreneur, get the chance at those kind of returns? Nowhere.
John Barr: Right.
Dan Ferris: Well said. Thank you for that, John, and thanks for being here. I appreciate it. It was a good talk.
John Barr: Thank you very much, Dan.
Dan Ferris: Alright. We will definitely be inviting you back sometime. Maybe we'll invite you back in a year and ask you if you're still holding Apple.
John Barr: I'd rather be talking about Vicor and KVH.
Dan Ferris: Of course.
John Barr: Those will be the stories for the year.
Dan Ferris: Alright. Thanks a lot, John.
John Barr: Great. Really, thank you very much. Love the podcast. I think it's the best.
Dan Ferris: That was a good talk, and we got two really good names. I mean Vicor is obviously run up quite a bit, but hey, KVH Industries and they're making a classic transition from just selling these antennas to being a subscription business. And it sounds like the competition is circa 1985 technology or something. It sounds like a very interesting opportunity.
Obviously you have to do your own homework... I just learned about the company just now with you, but I just want you to know that the way John described the business and that transition into subscription it's got great potential.
This is one of the great sort of transformations that has happened in the past, I don't know, just call it decade or more, where these subscription models have come in, and you can really generate some fantastic recurring revenues. They tend to be, you know, less capital-intensive, higher-return type businesses. And it just has a nice annuity quality plus they can grow. They can scale beautifully.
So I really am grateful to John for throwing that one in front of us for further consideration. And yeah, we'll invite him back in a year and see how KVH is doing and Vicor. And by all means, check him out. I'm sure you can just go google Needham Growth and Aggressive Growth Funds and the name John Barr and you'll learn all about him, even more than we did today. Really cool stuff.
Alright, let's do the mailbag – let's do it right now.
Hey, real quick I want to tell you the story. It's a story that a guy named Brian Tycangco here at Stansberry Research is sharing with his readers. Now Brian has been around the block. He's been doing this more than 20 years, just like me. He's recommended like more than 100 different triple-digit winners, so if he's got a story that he wants to tell his readers, I want to hear about it.
And he says that Apple's next device is going to be the biggest tech device, not just in Apple's history, but of your lifetime. The biggest new tech device of your lifetime. And he said the technology is going to be unveiled any day now, so if you really want to make some money off of this you've got to learn about it before Apple makes its official announcement of this new technology device. If you do so Brian thinks you can make a lot of money in the coming months here.
He thinks this recommendation, based on this new tech device of Apple, he thinks this could be a bigger money maker than any of his previous more than 100 triple-digit winners. That's what he's saying. That takes guts. OK?
So to tell people about this he put together a video presentation and it's got everything you need to know about Apple and the device and the big reveal that Apple's going to do. But you really want to go online before Apple starts talking about it in public, so go to messagefrombrian.com and see what Brian has to say. That's messagefrombrian.com. Check it out.
In the mailbag each week you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows and I respond to as many as possible. You can also call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show.
Once again this week we hear from Ludovic H. Ludovic H. writes in every week. He's a very thoughtful investor who has a lot of good questions. And this week he says, "Do you think the restructuring of the Chinese HNA Group is going to cause a massive collapse? A write-off of 60% of the debt and in China there is no well-functioning court system. Domestic and international investors are not treated the same, but it would include the sale of roughly 10% Deutsche Bank and 50% of Hilton." – Ludovic H.
Well, I don't think it would cause a massive collapse. You can see some weakness in Deutsche Bank and Hilton, but I don't think this one event is going to necessarily cause a massive collapse in the Chinese stock market or the global stock market or the U.S. stock market.
And as far as no well-functioning court system in China, I actually don't know – you sound like you know more about that than me, but I would be shocked if the headlines in the next few days or weeks or whatever it was were, "Chinese HNA Group collapses the whole system" or whatever it is. This would surprise me. But it's a good question.
You always want to know. You're always curious. It's good to be curious about what could make something completely blow up. And a highly indebted company having problems could certainly cause some kind of a blow-up. The company is going to blow up, that's for sure. Good question.
Jeff B. is next. He's a paid-up Alliance member, he says. Says, "Hello, Dan. I've been listening to the podcast since its inception, and I love tuning in every week. I've even taken to having my teenaged son, who has shown some interest in investing issues, listen in when I go back and review some of them related to more fundamental aspects of investing. Thank you for all the guest questions and advice."
Thank you, Jeff. Appreciate it.
Jeff says, "I'm just curious what your view of the question of whether to pay off a mortgage if you can or just continue the payments when interest rates are so low. I've read quite a bit on this and it always seems to come down to 'it depends,' especially given some predicted inflationary times ahead. What are your thoughts?" He has another question... I'll answer this one first.
Yeah, so if inflation is coming and you don't mind making these payments and you're relatively young maybe, it certainly makes sense. It is a personal decision, it does depend. That is true. It's a very personal decision. If you just hated mortgage debt and you have the wherewithal to pay it off and get rid of it and it didn't affect your net worth so much, or it freed you up to do other things – it's a subjective decision. There's a lot of inputs. But I can understand it if you wanted to pay it off.
I could also understand if you said, "You know something, it's guaranteed the U.S. dollar is going to be worth a lot less in 10, 20, 30 years," so of course I'm going to stretch these payments out at a dirt-cheap interest rate over as long a period of time as I can because you borrow dollars today and you're paying it off in toilet paper over the next three decades.
It's great, right? So I can understand that too. It's too subjective... I can't give you a definite recommendation of what you should do but those are my thoughts.
Next Jeff says, "As I mentioned, I've listened to the podcast since the beginning. I haven't heard you mention Russian spam recently. Have they given up or have they found a way around it? Thank you, Jeff B."
We found a way around it, Jeff. We don't get any more of that. I complained about it so much they took care of it for me.
Next and last is Faron T. And Faron T. has a question about TradeStops, which we talked about recently with our recent guest, Keith Kaplan. So Faron says, "Dan, I'm a huge fan and Alliance member of Stansberry Research and the Investor Hour podcast. I'm also a lifetime member of the TradeStops suite of products."
"Keith Kaplan underscored the way to get out, ensuring that you have a minimal loss by saying that when the signal turns red, sell. I like it. It makes sense to me. However, all three of the Stansberry analysts have currently outstanding recommendations that are in the red, according to TradeStops."
And Faron is referring to the presentation that you can see at messagefromdan.com with Steve Sjuggerud, Doc Eifrig, and myself, and she says, or he or she, Faron – says, "We all three have current outstanding recommendations that are in the red according to the TradeStops system," and she lists the Extreme Value reds according to TradeStops here, and says, "You agreed that trading your recommendations using TradeStops generated a better return than without, so why are you still holding onto red positions? Should I be selling when the TradeStops signal turns red or wait for the analysts to say so?" Faron T.
You know, Faron, the decision is yours, it really is. Just like the decision is mine whether or not I want to use a trailing stop on a recommendation. And as you pointed out, we have recommendations at Extreme Value where we just don't use trailing stops.
For example, with Equity Commonwealth is one of the ones that's in the red that you listed. Why would I ever sell that? It's a giant pile of cash and a few buildings left over from the Equity Commonwealth real estate portfolio.
So you're just sitting there waiting for the most brilliant real estate investors in the world to either liquidate the rest of the buildings, and maybe pay out all the cash – so you're not going to lose a penny – or maybe we get a big crash in some part of the real estate market and these brilliant people – this is Sam Zell's people, going to the market and making a killing buying up cheap real estate. I mean why would I ever sell it?
And the other positions are the Sprott Silver and Gold Trusts and just silver and gold bullion. So silver and gold are long-term wealth-preservation vehicles. I'm not trading them. I personally don't see any reason to ever sell them, ever. I'll never sell silver and gold. I sold gold one time in my life... I deeply regret it. I'll never do it again.
So that's just part of my strategy in Extreme Value. You may have a different one. So it really is up to you what you do with the trade stop signals and what you do with Extreme Value advice. We can only go so far. I can't reach into your portfolio and I can't say that one decision is best for everybody because it's just not true.
I hope that helps, Faron. It's a very good question. I'm very glad you asked it.
And that's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did.
We provide a transcript for every episode. Go to www.investorhour.com, click on the episode you want, scroll all the way down, and click on the word "transcript" and enjoy.
If you like this episode send someone a link to the podcast and help us to grow. Anybody you know who might enjoy the show just tell them to check it out on their podcast app or at investorhour.com. Do me a favor, too. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. While you're there, help us grow with a rate and a review. We're also on Facebook and Instagram... our handle is @InvestorHour, on Twitter our handle is @Investor_Hour. Have a guest you want me to interview? Drop me a note at [email protected] or call the listener feedback line, 800-381-2357. Tell me what's on your mind and hear your voice on the show. Until next week, I'm Dan Ferris... thanks for listening.
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