Podcast: Not That Alamo
Ken and Brian Reynolds, CFA, Senior Research Analyst, discuss Argent Large Cap holding CDW Corporation and Small Cap holding Alamo Group, Inc. in the latest episode of Conversations with Ken.
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Ken Crawford: Welcome to Conversations with Ken, a podcast where we discuss relevant topics and investing. I’m Ken Crawford, Senior Portfolio Manager with Argent Capital Management. Hello! With me today is Brian Reynolds. Brian, please say hello.
Brian Reynolds: Hello!
KC: Brian is a Senior Analyst at Argent. Brian, perhaps you could tell people a little bit of your history.
BR: Yeah, sure! I joined Argent in August of 2022, and I came to Argent from Concordia Planned Services. That is the benefits arm of the Lutheran Church – Missouri Synod. There I worked on the investment management team overseeing the assets, primarily their retirement plan, their defined benefit pension plan, as well as their defined contribution. I joined CPS just before COVID, so in January 2020 and prior to that, I spent several years at PNC Capital Advisors as a Small Cap Research Analyst Senior Analyst on that team. And a couple of my coworkers there at PNC are now also Argent team members: Peter Roy and Jed Ellerbrook who came to Argent before I did. So, a bit of a reunion coming here.
KC: Right. And they spoke highly of you, and we were fortunate enough to bring you on board as you mentioned recently. So, welcome! Beyond your history, tell people what you do in Argent today.
BR: Sure! I’m a fundamental Senior Research Analyst, and here at Argent, we have a common analyst pool, which means that I get to work across all the portfolios. We also have a generalist model, which means that we work across sectors and industries as well. So, it’s kind of a go up and down the cap spectrum, bounce around from industry to industry, which keeps things interesting and exciting, and sort of feeds the curiosity that I know all the analysts on the team have.
KC: So you’re talking to Peter and small cap ideas. You’re talking to Kirk with mid cap. You’re talking to Scott with kind of equity focused large companies, and you’re talking to myself for large cap good companies, right?
BR: Laughs. Yeah, that’s right! Yeah, that’s right! Yeah, it’s great. So just got out of a small cap meeting and we had our dividend meeting earlier today. And yeah, we’ll have a large cap later this week. Definitely keeps things interesting.
KC: Okay so, everybody likes to hear about good stock ideas. Can you give me a couple please?
BR: Yeah, sure! One particular holding in large cap we’ve had a lot of success with is CDW. They are a tech distributor. Distributors hold an interesting position in the supply chain. On one side of it, we have these really big IT companies like Google and Microsoft and Cisco. They’re really good at innovating, creating new products, evolving products. That’s what they want to invest their money in. What they don’t have is a very large sales force to satisfy a very large customer base. And so, they see CDW as basically an outsourced sort of sales and marketing firm that can sell their products, get them into the hands of the end users. The end users, and this is increasingly so in a world of complex and evolving IT solutions, they need to go to somebody to figure out what they need. So maybe they know what they want to do, what end result they want to get to, but navigating that, and implementing that, and designing that is typically outside of their core competencies. And so, they’re going to a company like CDW to help them build out their IT stack, their IT infrastructure to accomplish what they want to accomplish as a firm, which increasingly across all industries has a healthy dose of technology associated with it.
KC: And when you talk about the customers, you’re talking about individuals or corporations or?
BR: Primarily, businesses, governments, other institutions, universities, things like that.
KC: And in a slowdown that some people are expecting, perhaps this year and going forward, how would that affect CDW? And what would large cap be thinking on that?
BR: It does present a modest headwind, but companies are generally thinking about their businesses longer term, which is the way that we think about the CDW holding as well. Technology, the importance of technology, running your business and managing your business is becoming more important. Not less. And so, we think they’ll continue to see growth. IT spending typically outpaces GDP, so in a scenario where you think, “maybe GDP will be flat or negative this year,” we still believe that CDW’s and markets will outperform that. They typically outperform their end markets. And then again, just thinking about it from a long-term perspective. We see this as a as a long-term compounder.
KC: We’ve got growth and some stability even if the market or the economy pulls back.
BR: Yeah, that’s right.
KC: Okay, any other picks?
BR: Yeah! Let’s pivot over to a company called Alamo Group.
KC: Ah, Alamo! Alamo Rental Car? No, well.
BR: No, that is not the Alamo Group that I’m talking about. Not the rental car company.
KC: Oh darn.
BR: It’s vehicle related. It’s specialty vehicles, actually. Alamo Group is a small cap company, kind of flies under the radar. And they make specialty vehicles like snowplows, vacuum trucks, excavators that are primarily end up in the hands of state and local governments. And so state and local budgets right now are in pretty good shape, and they’re using some of those increased receipts that have come from higher property taxes, real estate taxes that come from the inflation, which also benefits tax receipts. And they’re investing that into their fleets. That’s been a real tailwind for Alamo Group. It’s a company we have followed for a long time. Excellent capital allocators. Since they designed the product from the ground up, they also own their aftermarket business. And so, there’s a lot of good tailwinds as they’ve been able to expand that installed base to kind of create a flywheel for higher margin profitability.
KC: And this year, we’ve heard a lot about snowfall and weather. Does that help them, hurt them? How does that work?
BR: Yeah! It definitely helps them with a lag. You know, these things do take a bit to put together, but it does get the municipalities thinking about when you see these record snow falls. How well did their fleet perform and is it time to invest in that fleet? Whether it’s upgrading, getting more trucks, upgrading trucks, having more spare parts available, that sort of thing. And so, they’re snowplow business was a standout this quarter, very strong.
KC: And a large cap space like CDW, you’ve got a host of analysts: Morgan Stanley’s Goldman Sachs, dot dot dot covering them. Alamo, not much coverage on research. How does that affect you and how do you ferret out what’s going on with the company like that?
BR: Yeah, that’s a great point! You’re right, Alamo has very little sell side coverage, and then you can layer on top of that. Many large cap companies provide annual guidance or quarterly guidance, and Alamo Group does not do that either, which leaves a lot of uncertainty from quarter to quarter. And so, what I have tended to do is just look at how management has executed in the past, and really that becomes my base of confidence as to how the future should look. Looking at that from a quarter-to-quarter standpoint. Again, when we make these investments, we’re really taking a long-term view.
BR: We’re trying to not get wrapped up in that quarterly beat or miss, but I would say with a company like Alamo, without the guidance and without the sell side coverages, there are greater degrees of beat and miss from quarter to quarter.
KC: So perhaps more inefficiencies that you and the small cap team can take advantage of.
BR: Yeah, definitely! We’ve bought Alamo in small cap since I’ve been here, even though it’s a stock that Peter is familiar with for many years, and it’s those types of opportunities that come from a maybe a big quarterly miss that gives you the chance to get in there at a reasonable valuation and make a good investment.
KC: Well, that sounds great! So, two good picks and a great analyst joining Argent Capital. Brian, thank you for joining us.
BR: Yeah! Thanks, Ken. Appreciate it.
KC: And thank you all for listening. That’s it for me, Ken Crawford, Portfolio Manager, Argent Capital. Again, talking with Brian Reynolds, Senior Analyst at Argent care. Thank you.
Opinions reflect the portfolio managers’ judgment on the date broadcast and are subject to change. A list of stocks recommended by Argent is available upon request. You should not assume that these recommendations are or will be profitable.