May 17, 2021
Bryant VanCronkhite, CFA, is a senior portfolio manager and co-team leader for the Special Global Equity team at Wells Fargo Asset Management.
Previously, Bryant was a senior research analyst on the team, which he joined before the acquisition of Strong Capital Management.
Earlier, Mr. VanCronkhite was a mutual fund accountant for Strong. He earned a bachelor’s degree and a master’s degree in accounting from the University of Wisconsin, Whitewater, and is a certified public accountant
In this 3,657 word interview, exclusively in the Wall Street Transcript, VanCronkhite of Wells Fargo Asset Management details the investing philosophy that underpin his top picks:
“The Special Mid Cap Value strategy is an approximately $13.5 billion strategy which today focuses on U.S. equities that possess a very specific set of criteria.
That criteria is a unique competitive advantage that we’ve identified through a durable asset base. That asset base provides very strong and ongoing free cash flow.
And importantly, the unique part of our process really revolves around our ability to identify companies that are well positioned to use their balance sheets to drive future free cash flow growth, and that balance sheet can be used for things like acquisitions, organic investments, stock buybacks, dividends, and vertical integration.
There are a lot of ways companies can use balance sheets to create value. But our process uniquely understands and identifies that opportunity. And we try to exploit a market inefficiency that really doesn’t give credit for those balance sheet-driven choices until after it’s visible through the income statement.
And through that lens, we deliver outperformance versus our benchmark and peers over rolling three- and five-year time periods. And we do so historically with a lower tracking year than our peer group on a very consistent basis.”
One unusual outcome from this idiosyncratic Wells Fargo Asset manager is a well known retailer:
“One of the areas in which we’re finding opportunity is the consumer staples sector. Investors have sold staples — even shorted staples — to reallocate capital into more cyclical industries to gain exposure to the reopening trade. And that’s left some very attractively priced companies.
And one example today would be BJ’s Wholesale Club (NYSE:BJ). BJ’s is a mass merchant retailer similar to the Costco (NASDAQ:COST) business model where customers pay an annual membership fee to access the club and purchase food and furniture, electronics, apparel, etc.
And they do so because there are usually very attractive prices within these clubs. And during the pandemic, BJ’s saw a significant increase in membership, which drove a meaningful acceleration in free cash flow. And the market rewarded the stock originally. But more recently, concerns over retention of membership growth has caused the stock to lag the market.
Our view on this is that the market is underappreciating the general stickiness of memberships. Once a customer has tried and benefited from shopping at BJ’s clubs, they tend to stick around and become longer-term members.
We think the market is also missing the degree to which the free cash flow growth has improved the balance sheet. And importantly, through our process, this now creates opportunity for BJ’s to strategically deploy that capital to sustain and grow future free cash flow.
So we expect them to accelerate new club openings, where they’re going to shift their product allocation to higher-margin items. They’re going to invest in higher-margin services.
All of these balance sheet-driven choices will drive higher revenue, better margins and higher future free cash flow than the market expects. And the relative attractiveness and the valuation are driven by a rotation away from staples in the near term, which we appreciate, but it’s creating a very attractive reward/risk opportunity within BJ’s today.”
Another Wells Fargo Asset Management favorite is a real estate brokerage:
“…A company that’s classified in the real estate sector, but really, it’s not a REIT. It’s a business service company called CBRE (NYSE:CBRE). We think many people commonly see CBRE signs as they are driving down the street and the signs are on buildings.
CBRE is one of the leaders globally in real estate transaction services, so helping landlords find tenants or helping people sell their real estate.
CBRE is a name we’ve owned for several years and continue to hold as one of our larger positions, because they too have gone through a business transformation. They used to be exposed meaningfully to transaction volume.
So whether a business lease was closed or a property was sold, that drove a lot of their earnings and free cash flow. Over the last decade, they’ve made several acquisitions and invested in technology and assets and services that will drive their business towards more of a service-oriented or recurring cash flow stream.
And the market begins to appreciate that.
But the added benefit of CBRE right now is that not only have they done a phenomenal job in navigating the pandemic and the recession, but we’re now seeing the uptick in business activity as people try to navigate how to deal with real estate in a new world, and that will drive additional needs for CBRE’s asset base, for their expertise, and all of that will result in strength of earnings in the future.
They’re doing this now with an incredibly underlevered balance sheet, which provides meaningful optionality for continued investments, both in organic growth and through acquisitions.
We believe CBRE is taking share from a very fragmented competitive base. And ultimately, we think that the future free cash flow is meaningfully underappreciated at today’s valuation.”
Another Wells Fargo Asset Management pick is looking for a big rebound from the pandemic panic:
“We do believe the economy is going to see a period of strength behind both monetary and fiscal support and the general recovery of the economy as we reopen.
And so one of the sectors that we find meaningful value today is the industrial sector. That’s a very diverse set of stocks. But one of the companies that we like a lot and have owned for a while, continue to hold at the top of our portfolio, is a company called AerCap (NYSE:AER).
AerCap is an airplane leasing organization. And through the cycle, they provide a highly predictable cash flow stream that is reinvested back into organic growth through the purchase of new planes and re-leasing them to clients, but also returning capital to shareholders through attractively priced buybacks.
And that combination of balance sheet allocation has driven strong growth in book value and stock price appreciation historically, something that we’re obviously very, very drawn to.
However, the pandemic caused air travel to grind to a halt. And many of their customers — think of global airlines — experienced financial hardship. AerCap had to work with their customers through these difficult times and, in our opinion, did so beautifully.
And at the same time, they have not been sitting on their hands. They use the opportunity of stress in their industry to grow their business. And most recently, they announced the acquisition of GE’s (NYSE:GE) aircraft leasing business.
The strength of AerCap’s balance sheet allowed them to play offense, while many of their peers were playing defense, frankly, and that we believe will ultimately drive compounding of wealth for their shareholders, including us. And this acquisition does several things for them. But importantly, it amplifies their strong competitive advantage. Scale in this industry is very important and very meaningful.
On top of that, the pandemic, in our opinion, will drive continued share shifts to leasing from buying of airplanes by their airline customers. The shift to leasing in addition to the individual steps the company made through acquisitions will, we think, drive much higher free cash flow in the future.
Both those elements we think are underpriced. The stock has appreciated nicely. Though many stocks are exposed to the reopening process, the steps that AerCap has made during the pandemic to improve their competitive advantage and drive higher market share through the acquisition of GE’s financing business, we think, is still underappreciated today.”
Get the complete detail by reading the entire 3,657 word interview with Mr. VanCronkhite of Wells Fargo Asset Management, exclusively in the Wall Street Transcript.
Managing Director & Senior Portfolio Manager
Wells Fargo Asset Management