Brian Dress: How Left Brain approaches investing in the face of short-term market dips

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. And today we're talking about staying the course in the search for that kind of growth while the market may be turning slightly away from strong momentum and easy growth. And we're having that discussion with Brian Dress, He's director of research at Left Brain, and you can learn more about him, the firm, and its thoughts on the investment world at leftbrainir.com. They're on Twitter @leftbrainir. Brian Dress, great to chat with you again.

Chuck, great to be here again.

Now, you guys didn't come up with your methodology or your pursuit of high-growth names yesterday, but we do kind of live in a world where, you know, what have you done for me lately matters to a lot of people, and that's especially true in investing. When the market is either turning or pausing or maybe just even burping for a second. With the little hiccup that we've seen in growth trends, meaning a pullback for some of the growth stocks that you guys favor at Left Brain, what are you telling investors to focus on right now?

So Chuck, this is such an important question. You know, we're still always going to be looking for stocks that can double in 2 to 3 years, but the reality is we always have to take a step back when we see market cycles like we're seeing right now and really drill down on what really matters. And that's our core holding. To be honest, I've started to reorient our research a little bit to some of the new sectors that are really taking flight, which are energy, materials, mining, et cetera. But there's a balance between that and sticking to your core holding. So, you know, we want to encourage investors out there. It's important to think about where's the market headed over the next year, but you know, you really can't panic and sell your core holdings either. It's definitely a balance between the two.

Does it change your methodology at all? Because when you are looking for fast growth companies and you find them, but then the growth takes a pause, do you put in trailing stops? Do you do any of the things that a trader might do to say, hey, let's protect our gains? Are there times when you see things like this happen and you're going, okay, we're gonna take a few profits, or we're gonna take some money off the table and at least lock in a few of our wins Even if we think there's bigger winning potential down the line.

We do, you know, I just got off our meeting with our research department and our CEO, and we're definitely making those decisions. You know, we're taking a look at every one of our holdings and deciding, is this a core holding or was this more of a momentum thing or what was it? We don't really put in trailing stops, but we are going to go back and really check our work on the fundamental. I think there are a number of stocks that have run significantly. And we're going to think about trimming up and taking a little bit of profit on some of those. But at the same time, you know, there are core holdings, like I'll just throw out a couple of names, Nvidia and Roku. You know, we still stick to those stories. We believe those stories are intact and we're not going to reposition from those because the last thing you want to do and the worst thing you can do is just look at a couple of months of market turbulence and sell your core holdings. And then, you know, 6 months later, look back and say, wow, What kind of a decision was that? So we don't want to make those rash decisions just because sort of there's some short-term fluctuations in some of the names that we follow.

If we see a pullback like the one we're seeing now, which is not necessarily across the board, do you wind up on the one hand holding fast to some, maybe taking some of those profits, or pulling out of others and saying, here's the faster horse, here's the area where we can still achieve growth? Or when you watch the tide going out Do you figure it will eventually catch everything?

No, we don't necessarily think that. It's important to mention that we're not really interested in sectors necessarily. So we have been skewed toward technology over the last few years, but the reason isn't because we like technology, for instance, it's because we like the growth. And so, you know, we use Jarvis, our securities evaluation application, to tell us what's going on in the market, what's going on underneath the trends that you might see. In the financial media. And what we started to see is there's starting to be growth in other areas than technology. And so yes, we're going to stick with some of our core holdings in technology, no doubt about it, for the most part. And the majority we'll keep, we'll trim around the edges, trim down some of those winners. But like I said, we're going to reorient our research process to start looking at some sectors that we've neglected over the last couple of years as well, to get a fuller picture of where the growth really is. So Chuck, like I said, we don't really love technology for technology's sake, we love it for growth's sake. So we're going to be looking for those next growth drivers.

Which is funny because it means I can't ask you the obvious question. The obvious question would be, so what sectors do you expect to go to? And the answer is, we don't expect to go to sectors, we're going to go look for companies, and if they all happen to be in one or two sectors, then that's where we're going. But out of curiosity, do you have any early hint as to what might at least give you some of the growth you're currently— have been seeing in technology and what you might find yourself gravitating towards?

So the good news, Chuck, is that through our high-yield bond business, we're always looking at the distressed and beaten-down industries. And when you see a rotation like we're seeing, what you're going to see is some of those beaten-down industries start to perform. And so we're expecting that to happen over the next year or two, potentially. We're always bottom up, but a few of the sectors have really intrigued us, and especially energy and real estate investment trusts. With the reopening of the economy, we do expect economic boom times. We think a couple of these beaten down sectors like energy, retail, and REITs, and of course metals and mining might be the leaders going forward. So we're definitely going to reorient our research to answer those questions.

How much do you have to see the market turn before you say, wait, this is showing up across the board, or maybe we have to, you know, start considering changes? Because you've talked about a methodology, but since your methodology does tend to be bottom-up, I would imagine that when it happens with one stock, it's an occurrence. When it happens with two stocks, maybe it's a coincidence, but it's got to happen with three or four or five stocks for it to be a trend that you react to. So how far did it have to go for you to say, we want to react to this now?

Well, to a certain degree, like we said, we want to trim around a little bit on some gains because we know the tide might be going out. And so we have to be prudent in that way. But what we're really looking for is the fundamentals. And so what's interesting in the technology space and in the growth space is a lot of these companies are still driving earnings growth at a really high level. And what we're seeing is just multiple contraction to a degree. So if we're going to really reorient and change our positioning, it's really going to have to be a change in the fundamentals. So that's what we'll be looking for. And that's why we keep up with the 40 or 50 companies that we really follow closely. We keep up with every earnings season so that we can answer questions like what you just made.

Brian, really interesting. Thanks so much for joining me to talk about it.

Thanks, Chuck. Thanks for having me.

Left Brain Thinking is a joint production of Left Brain Investment Research and MoneyLife with Chuck Jaffe. Our conversations are not personalized investment recommendations. 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 hour-long financial podcast at moneylifeshow.com. Thanks to my guest, Brian Dress. He's director of research at Left Brain Investment Research. You can learn more about him, the firm, and all the things they're thinking at leftbrainir.com and on Twitter @leftbrainir. The Left Brain Thinking podcast is available every Wednesday. Please follow us on your favorite podcast app and plan to put your left brain thinking cap on every week. We look forward to seeing you next week.