In this episode of the Left Brain Thinking podcast, host Chuck Jaffe interviews Brian Dress, CFA, Director of Research at Left Brain Investment Research. The conversation centers on how the firm leverages earnings season—reviewing earnings call transcripts, 10‑Qs, and investor presentations—to uncover long‑term fundamentals that drive both growth‑stock and high‑yield bond ideas. Dress contrasts Left Brain’s deep‑dive, management‑focused analysis with Wall Street’s short‑term, model‑driven forecasts, emphasizing the importance of revenue acceleration, margin expansion, new customer wins, competitive dynamics, and balance‑sheet health. He explains the firm’s proprietary “Jarvis” system that flags attractive bond opportunities, using Cleveland‑Cliffs (ticker CLF) as a concrete example. The firm likes CLF’s 5‑20‑year high‑yield bonds (7‑10% yields) because the company’s COVID‑impacted iron‑ore and steel operations have rebounded, generating $150 million of free cash flow and showing a clear path to production recovery. Dress notes the firm’s preference for long‑term holdings, such as the 2040 CLF bond yielding ~8%, and explains that while short‑term price spikes are noted, they do not drive the investment decision. The episode closes with a reminder that the podcast is for educational purposes, not personalized advice.
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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. You can learn more about the firm at leftbrainir.com and follow them on Twitter @leftbrainir. IR. Today we're talking about how earnings season factors into left-brain thinking with Brian Dress, the firm's director of research. Brian Dress, great to chat with you again.
Hi, Chuck, it's good to be with you once again.
This week is a big one in terms of where earnings season is, and earnings season this week is all focused on— all of the FAANG stocks are reporting earnings on Thursday. But separate from that, earnings season is something that Well, we know it can move markets, we know it can move companies, but we don't necessarily understand how it factors into where you're looking at what to buy and sell. So let's talk about that because earnings do play a big part, don't they?
Absolutely, Chuck. For us, the earnings season is like the Super Bowl and the Olympics all rolled into one, and we get it 4 times a year. So that's exciting for us. When earnings season comes around, it's our best chance to gain insights on companies across the whole spectrum of the markets. We get to look at the call transcript, the earnings call, the 10-Q, and the investor presentation each quarter. And we learn great insights about all the companies that we follow and some that we don't follow.
How do you then make use of that? Because the average investor could sit in on the earnings calls or they could get the transcripts and they wouldn't really know what they're looking for or listening for.
You know, a lot of people who invest, they spend hours and hours reading news and sports sports, you know, about their favorite teams. But each quarter, it's about an hour commitment to read the earnings call transcripts for each investment that you have. We like to say there's a lot of value in doing that. You know, when we look at these earnings call transcripts and all the other company reporting materials, we're looking for a few things. Is there an acceleration in revenue growth? Are there changes in profitability or expansions in margin? Did the company have new customer wins during the quarter? And we want to know any updates on competitive dynamics. And finally, we're looking for balance sheet or liquidity situation, any kind of clues that we can get in those concepts. So, you know, there's a lot to learn from these earnings call transcripts and all the associated materials.
But your approach is not necessarily the standard. Here's how Wall Street does it.
We kind of think the approach on Wall Street's a little bit capricious. We would say a lot of these forecasts that you see from Wall Street analysts are based on their proprietary model. We don't have any way of looking into those models. And so when you look at the journalism around these earnings calls, you'll see a lot of, oh, X company beat by 3 cents on the bottom line and that sort of thing. And we think that's pretty myopic. We think that's a little bit too short-term oriented, and we're looking for the long-term trends that we can gain reading from the management of these companies who speak to us every quarter.
Let's see that in action. Let's put that to work. What's a stock or a bond where your reading of the quarterly report, the earnings reports, etc., has made you stand up and take notice?
Good question, Chuck. We've talked to you a lot about growth stocks, but the other side of our business is income securities, and specifically high-yield bonds. Our system, Jarvis, we've talked to you about that ad nauseam, but you know, with the social distancing, Jarvis is one of my only friends I get to talk to on a weekly basis, so Jarvis flagged for us this week a few bonds in the steel industry, but the one that we wanted to talk to you about this week was Cleveland-Cliffs, and that's ticker CLF, which is a company that we've followed for quite a long time.
So CLF, you've made a decision here that you like Cleveland-Cliffs bonds. Let's talk first about why you like the bonds, not the stock, and then everything else that you've learned through earnings season that makes the bonds what you're attracted to.
So for companies like this that have a little bit more leverage and balance sheet concerns, we tend to work in the bond market because if anything goes wrong, the bond investors are the ones going to get paid back. Also, you know, we're looking for income for our clients, and Cleveland-Cliffs has a number of bonds between 5 and 20-year maturity that yield between 7 and 10%, which is extremely exciting in today's low interest rate environment. We read the Q2 call and the Q3 call just came out. At the end of the second quarter, they told us they had quite a bit of COVID impact. And the reason for that is they're an iron ore producer. They also have a steel business. They acquired AK Steel and ArcelorMittal US operations. So they become not only an iron ore producer, but a steel producer. And they were hurt last quarter because auto factories were shut down for 10 straight weeks because of COVID On the Q2 call, this is a great example of how we use these calls. On the second quarter call, the CEO told us they were going to have a sharp return to production in Q3. And we read the Q3 call last week. Lo and behold, that actually happened. They're back to almost normal levels of production in the auto business, and they generated $150 million of free cash flow last quarter. So, you know, they followed through on their promise and forecast. And that's the type of thing we're looking for as we follow a company from quarter to quarter.
But we also saw with Cleveland-Cliffs— again, it's ticker symbol CLF— that functionally we got through the quarter and the stock has had a little spike here. I mean, it's gone way up since the end of the quarter. Now, most of that, of course, has come since they did their earnings call. So that big, quick, sharp action, is that what you anticipated, or it doesn't really affect you when you're looking at the bonds, right?
No, it doesn't really affect us. And, you know, to broaden out the point, we try not to get too caught up in the short-term reactions to earnings. You know, it's great if you're a holder of a stock or bond and there's a reaction after earnings, but we don't want to get too caught up in that. You know, we want to keep our focus on the long term. And for Cleveland-Cliffs, we really like these mergers that they've done because it gives them a great end market for their iron ore production and it helps them to produce high-quality steel through their vertically integrated process. Now with AK Steel and ArcelorMittal, and they're serving the auto business. 73% of their sales are to autos, which is really exciting because That's where most of the profit is made in the steel business these days. So a lot of the trends are in their favor.
We've talked in the past about things like target prices, not something you really do at Left Brain, et cetera. But when you're entering a bond transaction, do you go into it with something that tells you how long you're going to expect to hold, what you're expecting to see, how you build in a sell discipline down the line?
You know, we're generally long-term holders. There's one bond in their capital structure that we were looking at, which is the 2040 bond. And that's yielding almost 8%. And it's a great opportunity to lock in about 8% yield for almost 20 years, which you just can't find out there these days. So for a bond like this, we're generally gonna buy it and put it in our pocket to maturity. But yes, sometimes in these bond positions, we're looking for principal appreciation, and sometimes you do get quick spikes. We do sell once in a while, but for a bond like this, this So this is one that's a long-term hold for our clients.
Brian, really interesting. Thanks so much for joining us. Stay safe. We'll talk to you again soon.
Thanks, Chuck. Can't wait to be back with you again soon.
Left Brain Thinking is a joint production of Left Brain Investment Research and MoneyLife with Chuck Jaffe. Our conversations are not personalized investment recommendations, but are designed to engage your brain. So please do your due diligence before making any financial transaction. I am Chuck Jaffe, your host, and you can learn more about my weekday podcast at moneylifeshow.com or on your favorite podcast app. Thanks to my guest, Brian Dress, Director of Research at Left Brain Investment Research. Learn more about the firm and him and the services it provides at leftbrainir.com and on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday. Please subscribe on your favorite podcast app and come back and see us again next week. Till then, stay safe, everybody.
