Avalara (AVLR): A Potential Wealth Building

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're talking about finding stocks that can change your life, the true wealth builders, with Brian Dress. Director of Research at Left Brain. We're having this discussion because tomorrow, April 8th, is the day for the next installment in Left Brain's series of Fortune Makers Zoom events. It's focused on wealth builders, small and mid-cap stocks with the potential to grow into major players in their industries. If you want to learn more, leftbrainir.com for both the Fortune Makers series and all of their research. Brian Dress, great to chat with you again.

Hey Chuck, it's great to be back with all the left-brained thinkers.

Let's talk first about— you're always looking for growth stocks, but you sometimes will take a theme, like in this case Wealth Builders. How do you say, hey, within the growth stocks that we're finding, let's go find some examples that truly kind of fit a niche and serve a purpose? What makes the Wealth Builders different from from, hey, this is a stock we like?

Yeah, Chuck, great question. You know, we're always trying to create a balanced portfolio. And so a lot of that time that means some large caps, some mid caps, some small caps. And we know a lot of investors out there are looking for something speculative to try to make things really sing in the portfolio. And so we thought of this concept of wealth builders, and we look at these companies that are sort of in this $2 to $15 billion market cap range. So talking about the small cap and the mid-cap companies, and we're looking for companies that we think have the type of characteristics to really turn into category-defining investments or companies. And so, like I said, we're looking for category killers, category definers, and we're looking for innovators who have sort of greenfield opportunities. And what we really like to latch onto is up-and-coming companies that are competing with a legacy solution that's sort of in the 20th century. So that's what we're really looking for with WealthBuilders.

So it's going to point you naturally towards some things that people haven't heard of necessarily. But again, companies that if you're right, they'll be large-cap companies by the time we're done.

Absolutely. You know, we want to go ahead and say right off the bat that these are speculative type of companies and risky. But, you know, we definitely are looking into the future and we see positive possibilities for these type of companies. And this kind of fits into, you know, our long-term viewpoint that you can just find 3 or 5 of these type of investments in your lifetime, you can really change the trajectory of your returns in your portfolio. And so, you know, we're willing to take on a little bit more risk in companies like this just to have that possibility of really taking a company from a small cap or a mid cap to more of a, a category-defining large cap company sometime in the future.

We're not gonna give away what's happening with the event and people can go find it. They can go to the event and even after the event, if they go to leftbrainir.com, they can take a look because it's all being recorded. But let's give a slightly different taste. So I know you're, you're focusing on a couple of stocks in the Wealth Builders event. That means there are a couple of more that must not have made your list. So what's like honorable mention, a good idea of this is the kind of thing we're talking about, but oh, by the way, it's not among our very best ideas because those are being saved for the April 8th event.

Yeah, that's a great point, Chuck. You know, and we were getting together with our investment team and deciding what stocks we were going to cover on the April 8th event. You know, we wanted to choose 3 that we thought really fulfilled the criteria that we're looking for in wealth builders. But like you said, we had a number of honorable mentions and one that really sticks out and I want to talk about is Avalara and that's ticker AVL. We really like this one. It's, it's in the same vein of a small to mid-cap company. That's a category definer, potentially. Avalara is about an $11 billion market cap company. It's actually pulled back about 25% from its highs in December. So bringing it back sort of into that mid-cap range. Avalara has a pretty interesting concept, and that's tax compliance software, and it's cloud-based. 2018, there was a Supreme Court decision, South Dakota versus Wayfair, and what they decided was that states were going to be able to collect tax for interstate commerce that was done online, despite a company not having, say, a brick-and-mortar presence in a particular state. That really threw things into flux for tax compliance, especially for small and mid-cap companies. If you're an Amazon or what have you, you have the resources to deal with the compliance that goes along with tax, you know, taxes of 50 different states. But if you're smaller, medium-sized business, this is a really huge problem for you. And so Avalara has been around for 20 years and sort of dealing with this issue because there has been interstate sales tax for that whole time, but not in every state. And so there is now. And A-V-L-A-R-A, Avalara, What they do is they automate this tax collection. So it's really helpful for these small and medium-sized businesses that don't have the huge resources, let's say a Walmart or an Amazon would have in terms of tax compliance. So that's what we're looking at with Avalara.

In terms of Avalara, I mean, know that you guys look more at a company's potential rather than a holding period or what have you, and you're looking for growth to happen quickly and you don't put price targets on. But as a general rule with this kind of stock, what kind of holding period would you expect? I mean, you're hoping you're going to be catching something that goes pretty quickly, but of course the catalyst is always the toughest thing to figure out. So obviously you're hoping that there's the right catalyst to do the right things over what kind of timeframe?

You know, Chuck, it's really hard to put a timeframe on it. Like you said, we're looking for 5 to 10 years from now for this sort of thesis to really play out and the opportunity to fully be fulfilled. For us, the sell discipline is generally we don't like to sell stock unless the thesis changes or there's some other better opportunity somewhere. So as long as this company, Avalara, stays on the same growth trajectory, which is solidly in the 30s with gross margin in the low 70s, we're going to like it and we're going to stick with it and watch the thesis play out over time. Just because, like I said, this is kind of a greenfield opportunity. There's very few competitors in the marketplace. And Avalara, I think their, their business is about 4 times bigger than the next biggest competitor in this particular segment. So I think, you know, there's a lot of opportunity with the competitive dynamics the way they are, and obviously how much commerce is online now. This kind of sets up for us in a way that, you know, we're ready to watch this thing play out over the next 5 to 10 years.

So that's Avalara, it's ticker symbol AVL. And again, it's a stock, it's getting a green light on your research platform.

That's right.

It's got the green light, but it didn't quite make it into the Wealth Builders event. But if you want to find out what's at the Wealth Builders event, check that out on April 8th or after at the leftbrainir.com website. Brian Dress, great as always to chat with you.

Been a pleasure, Chuck. Thanks.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest, Brian Dress, Director of Research at Left Brain Investment Research. Learn more about the firm and him at leftbrainir.com and on Twitter @leftbrainir. And if you want to learn more about the fortune makers Series Wealth Builders Zoom event on April 8th, or even after April 8th, well, go to leftbrainir.com/wealth-builders. Left Brain Thinking is available every Wednesday. Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on every week. Until next week, enjoy the Fortune Maker Series. Stay safe, everybody.