Tuesday, September 19, 2017

A Current AIM Small Cap Equity Fund Holding: Flotek industries (ticker: FTK) by William Reckamp. "The Struggle for FTK Continues"

Flotek Industries (FTK, $5.51): “Flotek Flooding Investors with Uncertainty
By: William Reckamp, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Flotek Industries, Inc. (NYSE:FTK) develops and distributes specialty chemicals, and down-hole drilling and production equipment for the oilfield service industry.

• Flotek is currently advertising its patented Complex nano-Fluid technologies that supposedly can increase well IRR from 22% to 34% with little associated risk.

• The company has recently sold off its drilling technologies business which net the company $17 million in cash.

• Headquartered in Houston, the company still expects to fulfill orders as it shifts manufacturing from Texas to Oklahoma.

• IBM and Flotek have partnered to create Flotek’s Reservoir Cognitive Consultant, which will allow data scientists and chemists to analyze well data and provide customized chemical solutions to clients.

Key points: The uncertainty of oil prices act as a double edge sword. We’ve seen WTI prices stay between the $45-$50 range in recent months. This has caused Flotek’s share price to float between $5.50-$6 dollars. However with the volatility in prices, upstream companies are looking for improved extraction methods which is cheaper than trying to search for new reserves.

During their August investor presentation, management has expressed considerable optimism in their Complex nano-Fluid technologies. Even during the downturn of oil prices, operators have focused on cost reduction. Upstream clients have flocked to these patented extraction technologies which has caused Domestic Complex nano-Fluid volume (gallons) to grow substantially. The numbers of gallons for these technologies has increased 9 of the last 10 quarters. Even though raw material costs are rising, for the products, John Chisholm (CEO) reassures demand is still there. He states in the 2Q17 earnings call, “Our clients are showing signs of receptivity to a period of increasing pricing as we experienced domestic complex nano-Fluid or CnF revenue outpace volume growth in the quarter.”

Management would like to further match the supply with demand so they have an outlined plan for obtaining this objective. At the end of 2Q17, Flotek was producing 1.5 million gallons of nano-Fluid per month. By the beginning of 2018, they are shooting to expand production to around 2 million gallons per month. Additionally, they have successfully expanded in both the Marcellus and Utica regions which will allow business to increase more quickly into the US northeast region. The new development will likely contribute an extra $.50 a gallon of gross margin.

What has the stock done lately?

Flotek shares have decreased from $5.97 to $5.51 in the past month. Shares rebounded from the monthly low on September 8th at $4.80 largely due to a weekly surge in WTI prices. We have seen an overall downward monthly trend due to an announcement of deteriorating cash flows.

Past Year Performance: Over the course of a year, the share price has fallen 67% from $15.65 to the current $5.21 while WTI prices have grown 4.7%. This relationship begs the question about Flotek’s poor performance. Revenues grew sharply in the first two quarters but it has reported net losses in the last four quarters causing the slide.

Source: FactSet

My Takeaway

It seems as though Flotek is revitalizing its business model and therefore investors should be cautious. They have recently sold off its drilling technologies business and are placing a focus on the complex nano-Fluid technologies segment. Management has made this change seem like a growth catalyst; however, if you look at this internationally they have struggled to sell these products. Flotek’s partnership with IBM seems promising, but they are still in the beginning stages of this technology. Shares have decreased 67% in the last year because they have not reported positive income in the last four quarters. In order to attract investors, Flotek needs to provide an income generating and decisive business model. Hold Flotek until a better energy stock is pitched in the AIM Fund.

Source: FactSet

On Monday, September 18, 2017, Daniel Einhorn of Capital Midwest Fund Visited Marquette's AIM Program

Daniel Einhorn, Venture Capitalist, Visited Dr. Krause’s AIM Class and Talked about Disruptive Technologies

Dan Einhorn in the AIM Room in Fall 2017
Daniel Einhorn, General Partner of Capital Midwest Fund, visited the AIM Room to talk about his recent venture capital experiences.  

Mr. Einhorn has over a decade of venture investment experience, evaluating, screening, and investing in private technology companies based primarily in the Midwest.

The students in Dr. Krause’s AIM class had the opportunity to hear about venture investing from Mr. Einhorn. This is the seventh year that he has visited students at Marquette and discussed private equity investing.  
Dan Einhorn and Dr. David Krause

A list of Capital Midwest's current portfolio companies can be accessed on their website

Disruptive technology is a term which refers to an innovation that creates a new product or market and eventually disrupts an existing market and network, displacing established market leading firms, products, and alliances. The following is from WhatIs.com:

Image result for disruptive technology“Harvard Business School professor Clayton M. Christensen coined the term disruptive technology. In his 1997 best-selling book, "The Innovator's Dilemma," Christensen separates new technology into two categories: sustaining and disruptive. Sustaining technology relies on incremental improvements to an already established technology. Disruptive technology lacks refinement, often has performance problems because it is new, appeals to a limited audience and may not yet have a proven practical application. (Such was the case with Alexander Graham Bell's "electrical speech machine," which we now call the telephone.)

Here are a few examples of disruptive technologies:
    Image result for disruptive technology
  •  The personal computer (PC) displaced the typewriter and forever changed the way we work and communicate.
  • The Windows operating system's combination of affordability and a user-friendly interface was instrumental in the rapid development of the personal computing industry in the 1990s. Personal computing disrupted the television industry, as well as a great number of other activities.
  • Email transformed the way we communicate, largely displacing letter-writing and disrupting the postal and greeting card industries.
  • Cell phones made it possible for people to call us anywhere and disrupted the telecom industry.
  • The laptop computer and mobile computing made a mobile workforce possible and made it possible for people to connect to corporate networks and collaborate from anywhere. In many organizations, laptops replaced desktops.
  • Smartphones largely replaced cell phones and PDAs and, because of the available apps, also disrupted: pocket cameras, MP3 players, calculators and GPS devices, among many other possibilities. For some mobile users, smartphones often replace laptops. Others prefer a tablet.
  • Cloud computing has been a hugely disruptive technology in the business world, displacing many resources that would conventionally have been located in-house or provided as a traditionally hosted service.
  • Social networking has had a major impact on the way we communicate and -- especially for personal use -- has disrupted telephone, email, instant messaging and event planning.”

Image result for capital midwest venture einhornMr. Einhorn serves on various board of directors including: LiquidCool Solutions, Rapid Diagnostek, Physician Software Systems, Always In Touch and PreEmptive Meds. He is a member of the Board of the Entrepreneur Center at Illinois Institute of Technology, and the Southern Methodist University Alumni. He is on the board of COA Youth & Family Centers and the Jewish Museum in Milwaukee. He is a member of the Midwest Health Investment Network. In 2012, he was named Man of the Year for the Milwaukee Chapter of the Leukemia and Lymphoma Society.  

Capital Midwest Fund is a Milwaukee-based venture capital firm that invests primarily in the areas of life science and information technology. The fund concentrates on investments where companies have excellent management and technology, are performing an important function, and will address significant markets. He said that they look for management with successful previous experience; markets that are established and growing; defensible IP positions; and sustainable competitive advantages. 

Image result for capital midwest venture einhorn
Dan Einhorn
Dr. Krause said, "It is a privilege to have Dan join us each year in the classroom. His experience adds to the curriculum and the students enjoy learning firsthand from investment professionals. The students had an interesting and productive dialogue with Dan about disruptive technologies. They appreciate his real-world experiences and straightforward communication style." 

Mr. Einhorn and the other principals of the fund are professionals who have operated in the investment banking, investing, life science and technology industries for many years. They have significant experience in raising money for early-stage companies and sourcing deals. In addition, they have significant experience in assisting management teams prepare viable business plans, evaluate strategic partnerships, and craft lucrative exits.

Monday, September 18, 2017

A Current AIM International Fund Holding: Sberbank (SBRCY) by Adam Hamilton. "Zdravstvuj Comrade, Sberbank Remains Russia's Largest Bank"

Sberbank (SBRCY, $14.01): “Sberbank is Ready to Bear Down”
By: Adam Hamilton, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Sberbank Russia (SBRCY) provides banking services to financial institutions, corporate institutional clients, small businesses, and retail individual clients. The bank provides solutions to over 137 million retail clients and over 1.1 million corporate clients in 22 countries.

• Sberbank continues to dominate the Russian financial sector; as the market leader, it accounts for 40.1% in retail loans, 31.7% in corporate loans, and 54.6% in mortgage loans.

• Management has indicated that it will continue to invest in ways in which customers can control their accounts remotely to improve customer efficiency through online banking channels.

Key points: Loan portfolio growth has been an accelerator of Sberbank’s continued success. Corporate loans have grown 5.4% YOY and retail loans grew 3.1% YOY. Management indicates they expect this trend to continue particularly in the mortgage segment where they account for over fifty percent of mortgage loans. As the economy continues to strengthen and interest rates decrease, the loan portfolio has immense potential as both corporate and retail clients will be in demand for loans.

A key priority of management this year is to improve cost efficiency, which has been instrumental in continuing to produce profitability. The cost efficiency ratio is calculated to be at 33.5%, well below the 38.5% at this same time last year.

Sberbank has a healthy capital base which maintains the capital adequacy needed for the bank, which enables them to support growth and continue to strengthen its capital base. This stemmed and resulted in a total capital ratio of 16.7% and core equity tier 1 capital ratio of 12.3%, respectively, as compared to 12.6%, and 8.9%, respectively last year. Both the ratios were well above the minimum requirement of 8% for Russian banks.

Sberbank continues to develop unique partnerships in order to enhance its business units. In June, Sberbank formed a partnership with Monotown Development Foundation. This partnership was very strategic because it now with the help of Monotown, Sberbank looks to provide more lending to small and medium size enterprises in small towns to create jobs and bring investment opportunities to foster growth in quality of life for its residents. This also helps on the retail banking side, with opportunities to attract a new pool of customers. Another huge deal they made was with RVC to innovate modern banking solutions for clients. This partnership focuses on the exchange of analytical information about new technologies and innovative activities, mostly gearing towards online banking channels.

What has the stock done lately?
Since quarter 2 earnings release, SBRCY has been up 45% after seeing lots of short-term volatility throughout the year. The market continues to undervalue SBRCY and if management continues to prioritize how they are doing now, the stock should continue to be on an upswing over the next year.

Past Year Performance: SBRCY has had a rocky year; however, behind management’s guidance they have rebounded. With the increase of growth organically and inorganically the company’s strategies are geared to perform and produce financial strength in the long term.

Source: FactSet

My Takeaway
The stock is now currently trading at $.14.01 and its outlook shows numerous room for improvement. As the economy strengthens and interest rates decrease, the demand for loans will increase as well, which will drive SBRCY’s growth. I recommend that the AIM international portfolio hold on to Sberbank as of September 2017.

Source: FactSet

Four AIM Students Pitched Stocks on Friday During the Annual AIM Program Visit to R.W. Baird

The Second Set of Marquette AIM Student Equity Pitches Was Delivered on Friday, September 15th in Baird’s Equity Capital Markets Conference Room
Stephen Arcuri presented Argan (ticker: AGX)
On Friday, September 15th, over 40 Marquette students and faculty visited R.W. Baird at their headquarters in downtown Milwaukee. The Baird event was organized by Sarah Sturycz  and Alice Wycklendt (graduate of Marquette University, Accounting and Finance - Applied Investment Management majors, 2012). 

The AIM students heard a presentation about Baird’s Equity Capital Markets Group (including information about their Equity Research, Sales & Trading, Investment Banking, Private Wealth Management and Asset Management functions). Baird representatives presenting to the students were:
  •         Amy Junker, Associate Director of Research/Head of Global Corporate Access;
  •         Patrick Brown (Marquette Finance and IT, 2004, and MSAE, 2012), Senior Vice President of Baird Advisors Fixed Income Portfolio Management Team;  and
  •         Andy O’Connell (Marquette Finance – AIM Program, 2008), Vice President and Fixed Income Credit Analyst of Baird Advisors Fixed Income Portfolio Management Team.
Following a question and answer period, four students in the AIM Class of 2018 presented stocks to a group of over 10 Baird equity analysts – in addition to the Marquette students and faculty in attendance. Prior to the event the student equity write-ups were distributed to everyone in attendance. The stocks presented were:  
AIM seniors at R.W. Baird on 9/15/17
Dr. David Krause, AIM program director, commented on the Baird visit and student presentations, "Again, our visit to Baird will likely be one of the major highlights of the fall semester. Getting off campus and into businesses is important for the students as they have an opportunity to interact with professionals in the workplace."

 The Baird information session is an ideal way for students to begin to understand the different functional areas of asset management and investment banking. Additionally, for the students to have the experience to pitch a stock in Baird’s Equity Capital conference room before a group of analysts is amazing. They did a good job and pitched some very interesting stocks. The visit was a success and we are thankful for our relationship with Baird.”
Networking event after the AIM pitches at Baird

Conversation with members of Baird Advisors
 This week’s equity write-ups can be found at: AIM EquityWrite-Up 9_15_17  (Note: every AIM write-up since the inception of the program in 2005 is archived here). 

Next week's presentations will be back in the AIM Room starting at 3:00 pm.

Sunday, September 17, 2017

Ray Lefebvre of Wells Fargo Asset Management visited Dr. Krause's AIM Class on Friday, September 15, 2017

This week the AIM Program Welcomed Marquette Alumni, Ray Lefebvre, of Wells Fargo Asset Management (Special Value Global Equity Team)

Ray Lefebvre of Wells Fargo Asset Management in the AIM Room

On Friday, September 15, 2017, Ray Lefebvre, CFA, Marquette MBA, Research Analyst on Wells Fargo Asset Management’s Special Value GlobalEquity Team, presented to the AIM seniors in the Class of 2018.  

Ray provided an overview of the history of the Wells Capital Management, a leading institutional investment management firm, and an important part of Wells Fargo Asset Management. He talked about the firm's equity analyst program and encouraged AIM students to consider career options with Wells Fargo's investment teams.

Dr. David Krause, AIM program director said, “Ray has been helping out with our Ins and Outs of Wall Street event for several years – so it was great to get him into the classroom to talk about his experiences within Wells Cap and to talk about the opportunities available to graduating seniors. Ray explained the process the Special Value team follows, which is useful to the students who are considering a career on the buy side.”

Dr. David Krause and Ray Lefebvre
As another representative of a Milwaukee-based investment team, Ray talked about the Special Value Equity Team’s philosophy, strategies, and processes. For instance, their portfolio investment process involves measuring active risk on both a sector and security level; maintaining a long-term investment horizon (3-5 years); and focusing on fundamental analysis and attractive valuations.

Utilizing strong accounting skills, the team pays close attention to firms’ balance sheets; long-term free cash flow generation; and an acceptable reward-to-risk ratio. 

Image result for wells capital managementDr. Krause added, “It is clear that this team manages their five funds with a very disciplined process that follows strict valuation standards and construction guidelines – and as a result they have demonstrated strong long-term, above-peer performance with below-peer risk.”

Image result for Ray Lefebvre wells capital management
Ray Lefebvre
Ray emphasized the importance of strong research skills noting that their strategy employs a rigorous fundamental approach to analyzing financial statements. He indicated that the Special Value Team’s strategy is to seek to own companies that possess the following three criteria:
            1. A durable asset base that provides a long-term competitive advantage
            2. Strong and sustainable Free Cash Flow (FCF) that provides stability and consistency
            3. A flexible balance sheet that is available for accretive deployment

Students had the opportunity to ask Ray questions about fundamental analysis. He indicated that they invest when a target company’s market price meets all of their criteria, and has a market price that allows for meaningful appreciation to their estimated intrinsic value price target and a limited loss of capital to their worst-case price target.

Saturday, September 16, 2017

Amie Hahn and Kristin Holzhauer of Northwestern Mutual Investment Management visited Dr. Krause's Fixed Income class this week

The AIM Program Again Welcomes Northwestern Mutual Investment Management to Marquette’s Campus

On Friday, September 15, 2017, two alumni returned to campus from the fixed income team of the Northwestern Mutual Life Insurance Company.   
Amie Hahn, David Krause and Kristin Holzhauer
Amie Hahn (Marquette AIM 2007, MBA 2011, CFA), Director – Credit Research, and Kristin Holzhauer (Marquette AIM 2011, MBA 2014, CFA), Associate – Credit Research in the Northwestern Mutual Investment Management Co. talked with students about fixed income investing. 

This marks the 12th year that personnel from Northwestern Mutual have visited Dr. Krause’s fixed income and AIM classes at Marquette University.

Image result for northwestern mutual logoFormerly known as Mason Street Advisors, the Northwestern Mutual Investment Management team manages: Public Fixed Income and Derivatives for the NM’s General Account. 

Amie and Kristin work with public investments and their group manages portfolios with the goal of outperforming market benchmarks over a full market cycle and industry peers over the long-term. The team has 50 investment professionals who manage more than $100 billion in assets with each portfolio guided by investment professionals who have specific, but linked, roles in distinguishing security opportunities.

Dr. Krause introducing Amie Hahn and Kristin Holzhauer
Dr. Krause, AIM program director said, “Kristin and Amie did a great job – as usual – they were able to bring the material to life with real-world examples. They talked with the students about their investment process and their approach to bottom’s up credit research, but more importantly, they were able to give examples of how they apply their education to their jobs. They employ a combination of approaches including: Relative Value, Fair Value, and Internal Ratings – to complement their strong Fundamental Credit Analysis.”

Chris Swain, Vice President of NM’s Public Investments, Fixed Income Group, is also a Marquette graduate and has been an MBA instructor for Marquette’s fixed income course. Christi Kubiak, an important friend of the AIM program, was unable to attend this year’s presentation as she was in New York at a conference. Krause concluded, “We appreciate all of the support of that Northwestern Mutual has provided Marquette and the AIM program over the past decade. It was great to see Amie and Kristin again - they continue to give back their time to support Marquette.”