Brian Flanagan, manager of the Thrivent Mid-Cap Stock Fund, bought shares of Twitter near the end of 2016, just as the company started figuring out how to make better use of its data and improve the targeting of its ads.
Twitter TWTR, -0.60% which went public in November 2013, was “clearly ... not monetizing,” Flanagan said. “If you look at the revenue generated per user for Facebook FB, -0.25% and Google [the main subsidiary of Alphabet Inc. GOOG, -0.12% GOOGL, -0.25% ] compared to Twitter, Twitter was clearly underperforming. The two biggest issues were: How do I makes sure I am targeting ads correctly on Twitter, and how do I measure the effectiveness of the ads?”
Flanagan, in an interview on Dec. 14, touted not only Twitter, but also regional banks and his favorite airline stock. The Thrivent Mid-Cap Stock Fund TMSIX, +0.35% which has $1.8 billion in assets, has easily outperformed the benchmark S&P 400 Mid-Cap Index, especially in recent years.
Thrivent Mutual Funds is a subsidiary of Thrivent Financial, which is headquartered in Minneapolis and had $116 billion in assets under management at the end of 2016.
The Thrivent Mid-Cap Stock Fund has a five-star rating from Morningstar. Here’s how it has performed against its Morningstar category and the S&P 400 Mid-Cap Index MID, +0.27% :
| Total return - 2017 through Dec. 15 | Avg. return - 3 years | Avg. return - 5 years | Avg. return - 10 years | Avg. return - 15 years | |
| Thrivent Mid-Cap Stock Fund, Class S | 17.4% | 16.6% | 18.7% | 10.1% | 12.3% |
| Morningstar Mid-Cap Blend Category | 14.8% | 9.4% | 13.5% | 7.8% | 10.4% |
| S&P 400 Mid-Cap Index | 15.3% | 12.4% | 15.3% | 9.9% | 11.9% |
| Sources: Morningstar, FactSet | |||||
Companies in the S&P 400 Mid-Cap Index have market valuations of about $1.4 billion to $5.9 billion, which means mid-cap funds aren’t exposed to the tech giants that dominate the large-cap S&P 500 Index SPX, +0.20% MID, +0.27%
Twitter reported third-quarter revenue of $590 million, down 4% from a year earlier. But the silver lining was that its “data licensing and other” revenue increased 22% to $87 million.
Flanagan, who began managing the Thrivent Mid-Cap Stock Fund in 2004, said the fund purchased shares of Twitter late in 2016, which was remarkably good timing, considering how well the shares have performed since then. Twitter has surged 36% in 2017, and but only 18% in the past 12 months, after declining for three years in a row. So Twitter is volatile.
According to Morningstar, the Twitter position made up 1.7% of the fund’s assets as of Sept. 30.
Flanagan is enthusiastic about Twitter’s efforts to improve its marketing.
“They have better targeted ads and have used third party tools to measure how the ads are utilized,” he said.
He was especially impressed with the ad-campaign service Twitter is offering businesses for $99 a month, which was rolled out in November, and its news partnership with Bloomberg and Cheddar, which Flanagan described as “kind of a CNBC for millennials.”
Sell-side analysts have also been impressed with the company’s efforts. Twitter was up 11% on Monday, after analysts at J.P. Morgan upgraded the stock to “buy” from neutral. It remains to be seen how many will jump on the bandwagon, as only six of 38 analysts polled by FactSet rate Twitter the equivalent of a “buy,” while there are 21 neutral ratings and eight “sell” or equivalent ratings.
Among the major challenges ahead for Twitter are making its new content channels easy for users to find.
Most investors are aware that Facebook and Google make a lot of money by gathering and selling user data. Flanagan sees a bright future for Twitter in this area as well, even though the company is coming from behind.
“You can use Twitter data, integrated into an number of topics for your company — algorithmic trading, sentiment management, supply chain management,” he said.
Also see: 2018 will be a big year for Twitter (and its stock)
I mentioned to Flanagan that I have repeatedly criticized Twitter for doling out large amounts of stock-based compensation to executives, relative to revenue. This was measured against sales because Twitter was not profitable. Flanagan said he agreed with concerns about the dilution of shareholders’ stakes in any company, but also said Twitter had improved in this area.
He is correct, as Twitter’s stock-based compensation during the third quarter came to 17% of revenue, compared with 26% in the third quarter of 2016 and 29% in the third quarter of 2015.
The fund
The Thrivent Mid-Cap Stock Fund is heavily weighted to financial companies, which made up 20% of the fund as of Sept. 30, and also industrials (19%) and technology (19%). Flanagan said that makeup was not by design, but the result of his bottom-up analysis, assisted by Trivent’s staff of analysts. The fund takes a combined growth-and-value approach to invest in companies that are expected to increase earnings at a faster rate than the overall market, or are trading below the market when measured by several price ratios.
Here are the fund’s top 10 holdings as of Sept. 30:
| Company | Ticker | Industry | Total return - 2017 through Dec. 15 | Total return - 3 years | Total return - 5 years |
| Applied Materials Inc. | AMAT, -2.63% | Electronic Production Equipment | 64% | 135% | 419% |
| Zions Bancorporation | ZION, +1.44% | Regional Banks | 17% | 92% | 152% |
| Southwest Airlines Co. | LUV, -0.09% | Airlines | 31% | 59% | 561% |
| Oshkosh Corp. | OSK, +1.03% | Trucks/ Construction/ Farm Machinery | 0% | 106% | 231% |
| Red Hat Inc. | RHT, +0.93% | Software | 85% | 118% | 156% |
| First Republic Bank | FRC, -0.14% | Regional Banks | -4% | 78% | 186% |
| Alliance Data Systems Corp. | ADS, +1.06% | Data Processing Services | 6% | -14% | 68% |
| Steel Dynamics Inc. | STLD, +0.35% | Steel | 14% | 116% | 231% |
| Raymond James Financial Inc. | RJF, +2.32% | Investment Banks/ Brokers | 28% | 68% | 151% |
| Huntington Ingalls Industries Inc. | HII, -1.11% | Aerospace and Defense | 31% | 139% | 509% |
| Sources: Morningstar, Factset | |||||
You can click the tickers for more information, including news, price ratios, charts, ratings, financials and filings.
Regional banks
There were two regional banks in the fund’s top 10 holdings as of Sept. 30 — Zions Bancorporation ZION, +1.44% and First Republic Bank FRC, -0.14% — and Flanagan said he became especially interested in the space 18 months ago because of their relatively low valuations.
“We felt valuation should probably be better than it has been historically because the volatility of earnings should be lower because banks are looked at more closely [by regulators] than they were in the past,” he said.
Flanagan still sees a special opportunity for this industry group, because of the discussions in Congress about reducing the regulatory burdens and capital requirements brought about by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
He considers the banks “way overcapitalized,” which means investors may benefit from dividend increases and share buybacks if regulations are relaxed. Banks can also expand their lending activities more rapidly if capital requirements are scaled back.
The Federal Reserves’s actions to increase short-term interest rates are likely to continue as the U.S. economy is not showing any signs of slowing. This means wider interest-rate spreads for most banks, which helps profitability.
The icing on the cake is the tax legislation that President Trump is expected to sign this week. With domestic businesses, the regional banks “are heavily taxed,” Flanagan said.
Zions is up 17% this year, and First Republic Bank is down 4%. FRC, -0.14%
Southwest Airlines
Even though shares of Southwest Airlines Co. LUV, -0.09% have returned 31% this year, Flanagan still thinks there’s plenty of opportunity for additional gains, “starting with the macro.”
People are “buying fewer things,” he said, while focusing on experiences, for which they need to travel.
More specifically, he is impressed with Southwest’s new revenue-management system, which is allowing more flexibility with pricing, as well as the company’s work to standardize its fleet. And again, as a domestically oriented airline, Southwest will be a major beneficiary of a lower federal income tax rate.