Friday, July 29, 2016

Orchids Wilts In The Summer Heat

The second quarter results from Orchids Paper Products (NYSEMKT:TIS) are a case-in-point as to why I always drone on about "margin of safety" and risk/reward when talking about whether or not to buy a stock. I continue to believe that Orchids is a very well-run paper products company with a bright future and significant growth potential, but the second quarter was a pretty significant example of how "stuff happens" that can't always be fully modeled or predicted.

Based upon what management said on its call, the third quarter (and perhaps the fourth quarter as well) is likely to be more challenging than previously expected, so it is quite possible that these shares go into the penalty box until nice, predictable (hah!) growth comes back into the financials. For my part, an off quarter or two caused by things that just happen in the course of business is no real reason to panic and I think the valuation on the shares is now quite a bit more interesting.

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Orchids Wilts In The Summer Heat

Signs Of Progress At First Cash Financial, But The Model's Changing

While it's a long-term position for me, my feelings about First Cash Financial (NASDAQ:FCFS) have been relatively tepid of late. The impact of a weaker Mexican peso hasn't concerned me much on a long-term basis, but I've been more troubled by First Cash's struggles to generate meaningful growth in its U.S. business and/or wring noticeable margin leverage out of its recent consolidation efforts.

First Cash is still in a tricky position. Trends in the peso and gasoline prices had been moving in a company-friendlier direction, but that has shifted more recently. On a positive note, consumer trends in Mexico remain strong and there are long-awaited signs of improvement in the U.S. business that give a little hope for the coming quarters.

The merger with Cash America (NYSE:CSH) is a major swing factor, though, and one that I believe does add long-term value. The key there is "long term." Overweighting back to the U.S. market is going to meaningfully slow the internal growth rate for a few years, but the greater cash flow generated by this larger U.S. store footprint can, in turn, self-fund a stronger long-term expansion into higher-growth Latin American markets.

My fair value of $53.50 doesn't offer a lot of near-term upside, but a further strengthening of the U.S. business would represent upside, and I'm pleased with how the Latin American business continues to develop.

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Signs Of Progress At First Cash Financial, But The Model's Changing

Lofty Expectations Could Be CEVA's Biggest Threat

It hasn't always been easy for CEVA (NASDAQ:CEVA). While the quality of this IP licensor's DSP technology has never been seriously questioned, the fact remains that Qualcomm (NASDAQ:QCOM) is a major competitive force in mobile baseband, and CEVA has seen significant volatility in recent years in its reported results as mobile partners have come under pressure or exited the industry entirely. Sentiment has definitely shifted, though, as the Street has come around to the significant revenue growth and margin leverage potential as the company's licensees gain share with much more lucrative LTE products and as the IoT market matures.

With the shares up about 75% over the past year, I would argue CEVA's valuation now incorporates a lot of the potential that was ignored just a year ago. A baked-in 16% long-term FCF growth rate isn't ridiculous or impossible, but it isn't what I would call "undemanding".

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Lofty Expectations Could Be CEVA's Biggest Threat

Exciting Business Opportunities At Orbotech

I think there's a lot to like about Orbotech (NASDAQ:ORBK). The company is on the small side - or at least relative to giants like Applied Materials (NASDAQ:AMAT) and Lam Research (NASDAQ:LRCX) - but it doesn't play where it can't be a leader, and the company has three $300 million-plus markets to support growth in the coming years. Management has been pretty savvy at capital allocation and strategic decisions in the past, and I like Orbotech's chances to exploit demand tied to wearables, next-gen phones, IoT, and smarter cars.

Valuation is the fly in the ointment. The shares are near a 52-week high, as are many semiconductor tool companies, and today's price is about midway between my DCF-based fair value (which tends to run conservative for cyclical tech) and my margin-EV/rev-based fair value (which tends to run to the aggressive side). I think value investors would have to grit their teeth to love this one without making higher growth assumptions, but more momentum-oriented investors might find more to like.

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Exciting Business Opportunities At Orbotech

F5 Networks - Where Do We Grow From Here?

I have run hot and cold on F5 (NASDAQ:FFIV) over the years, but that's largely because the Street plays a cat-and-mouse game with the shares based on the near-term prospects for product revenue growth. I liked the shares back in late January when skepticism was running high, and the nearly one-third move in the stock since then has been gratifying to watch.

That said, F5's problems with product growth remain and I don't share the confidence of the bullish sell-side analysts that a new product cycle is going to lead to a sustainable growth recovery, or that a move towards security is the panacea for what ails F5. I do believe this is a well-run business with a sticky, high-margin software/service component, not to mention a lot of options for M&A. Below $100, I'd seriously consider these shares again, but above $120, I'm not a big fan.

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F5 Networks - Where Do We Grow From Here?

Xcerra Waiting For The Next Elevator In The Testing Cycle

It has been a while since I've written about Xcerra (NASDAQ:XCRA), a small hyper-cyclical player in the semiconductor test market. When I last wrote about the company, I thought the shares looked undervalued below $12.50 in May of 2014. The shares did break into the $10s a few times after that, but the momentum in the system on a chip (or SoC) testing market faded faster than expected and Xcerra took an all-too-common cyclical tumble back into the mid single-digits.

The shares do appear undervalued again today, and the company is addressing new markets that meaningfully expand its total potential revenue opportunity. That said, Teradyne (NYSE:TER) and Advantest (NYSE:ATE) have commanding share in the industry and it's far from certain that Xcerra's new opportunities are going to work out as hoped. I can see the appeal here for risk-seeking investors who want to find a high-leverage play on increased semiconductor equipment spending, but I think this is definitely the sort of stock you "date" as opposed to making a long-term commitment.

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Xcerra Waiting For The Next Elevator In The Testing Cycle

Wednesday, July 27, 2016

More Data From Alnylam Pharmaceuticals, But Not Much More Clarity

If Alnylam (NASDAQ:ALNY) pays by the press release, its IR people are doing pretty well for themselves. For all of the data that Alnylam has put out though, it has not necessarily helped to clarify the value picture all that much. In what has been a weak tape for biotech, Alnylam has been even weaker, falling about 25% since my last update versus a roughly 15% decline for the iShares NASDAQ Biotech Index (NASDAQ:IBB). Rival and peer Ionis (NASDAQ:IONS), which uses a different biological approach, is down about 50% over that stretch.

I believe that Alnylam remains significantly undervalued, but there is a huge range in potential outcomes here, with only one late-stage clinical program that I'd argue has shown clean and strong efficacy. While the good news for the bulls is that that leaves a lot of potential upside as trials read out, the bad news is that the value could quickly evaporate if and/or when those trials disappoint. My fair value of $108 today is based on a $54 value per share for patisiran, about $35 for revusiran, almost $10.50 for fitusiran, and the remainder from other pipeline programs.

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More Data From Alnylam Pharmaceuticals, But Not Much More Clarity

Slammed By Weak Energy Markets And Margin Deleverage, Is MOCON On The Way Back?

It has been a while since I've reviewed tiny, illiquid MOCON (NASDAQ:MOCO), a specialist manufacturer of sensitive gas-monitoring equipment that is largely used in the food and beverage industries. The past 15 months have been rough for MOCON, as currency hurt its sizable European business and the sharp contraction in the North American energy sector kneecapped the hoped-for growth from its industrial analyzer business. All told, the shares are down about 15% from when I last wrote, which actually isn't bad considering 2015 revenue missed my target by around 12% and the operating margin was four points lower than I'd expected.

As ABB (NYSE:ABB) recently mentioned, the food/beverage end-market is a healthy one all things considered, and there is ongoing interest in testing/rolling out new packaging options that increase shelf life and "shelf appeal". What's more, and I cross my fingers as I type this, I think there may be reasons to hope that the energy market weakness has bottomed out and could become a tailwind for the company (or at least stop hurting results).

I want to see more from MOCON. I think there are significant opportunities in areas like pharmaceuticals, environmental/worker safety, and perhaps even markets like electronics. There are a lot of small companies in these areas and I think MOCON would better serve its investors over the long term if it was a little more aggressive on M&A (whether to acquire products/technologies or distribution into new markets). I've cut back my margin leverage assumptions and trimmed back my revenue growth expectations, but 6% revenue growth and about one point of long-term FCF margin improvement can still support a fair value above $18.

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Slammed By Weak Energy Markets And Margin Deleverage, Is MOCON On The Way Back?

Tuesday, July 26, 2016

Komatsu Acting Like The Worst Is Over

Shares of Japanese construction and mining equipment giant Komatsu (OTCPK:KMTUY) have been stronger over the past six months than I would have expected. While I thought the shares were worth around $17 to $19 back in January, I thought prolonged fretting about the health of China's construction sector and the global mining industry would have been a bigger headwind.

As it turned out, China has shown signs of a turnaround in construction equipment demand, and that is a significant swing factor for sentiment on Komatsu. What's more, there had been some signs of stability in some of the larger end-market materials for the company's mining business despite the company's repeated outlook that results likely wouldn't start improving (and even then, slowly) until 2017.

The biggest confidence-boosting move, though, may be the most recent. Last week, Komatsu announced an acquisition that had been long in the making - bidding nearly $4 billion to acquire American mining company Joy Global (NYSE:JOY). While an acquisition like this is certainly no guarantee that the mining sector demand will improve, it is a mark of confidence on the part of Komatsu management and it does open the door to meaningful product and financial synergy. If Joy Global's recovery can bring in $3 billion or more of revenue in 2020/2021 at double-digit margins, I believe this deal adds nearly $3/ADR in fair value, while the "no recovery" scenario would put about $2 of value at risk.

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Komatsu Acting Like The Worst Is Over

Ultratech Grinding Out Progress

Credit where due, Ultratech (NASDAQ:UTEK) has finally been rewarding some investor patience. Almost anybody who bought in the last two years is in the black now and three-year holders should start feeling a little more encouraged. Orders are following the upward trend across the industry and there is at least a plausible chance that Ultratech can recapture some of the momentum it lost in sub-28nm nodes as the industry starts moving to 10nm, 7nm and 5nm.

It's also worth noting that despite management's objections, there has been a change in the board of directors. Hopefully this will be a change for the better, but this remains a brutally cyclical business and extremely competitive. At this point, Ultratech doesn't seem undervalued, but owning a fairly-valued highly cyclical company enjoying a cyclical recovery in business isn't the worst thing in the world, as outperform could push estimates, sentiment, and multiples higher in the coming quarters.

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Ultratech Grinding Out Progress

Sunday, July 24, 2016

Seeking Alpha: ABB Posts Better Margins, But The Growth Outlook Is Still Weak

The last quarter has been relatively sedate for the automation companies, ABB (NYSE:ABB) included, as the companies recovered from their panic lows in February and March then hit a flatter patch as the major economies of the world aren't really in a state to support big corporate capex investments.

For ABB's part, the company continues to focus on what it can control - cutting costs and flattening the organization structure (taking out layers of middle management), expanding service offers, and trying to pivot toward higher-growth, tech-driven opportunities in areas like power and automation. I continue to believe that ABB looks undervalued, but that comes with the caution that ABB is heavily exposed to weak commodity verticals like minerals, metals, and energy and there is still substantial uncertainty as to what management will do with its Power Grids business and its M&A plans.

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ABB Posts Better Margins, But The Growth Outlook Is Still Weak

Silicon Labs Delivers On Some Of Its Promises, But Not On Sale

I thought Silicon Labs (NASDAQ:SLAB) looked like an interesting prospect at the start of the year, back when the markets where in the midst of one of their "Run! Flee for your lives!" periods of panic. Since then, the shares are up about 20%, beating STMicroelectronics (NYSE:STM) and keeping pace with NXP (NASDAQ:NXPI), but lagging the likes of Texas Instruments (NASDAQ:TXN) and Microchip (NASDAQ:MCHP).

Silicon Labs is largely delivering what it said it would for its investors. The company has made a big commitment to opportunities in the Internet of Things (IoT), and those commitments are generating double-digit revenue growth, while management continues to harvest the fading Access and Broadcast businesses for cash.

I don't see a lot of amazing bargains within the chip space now, and that goes for Silicon Labs too. While the IoT opportunity seems to be delivering, competition is increasing, and there are any number of examples from the semiconductor industry history that show that market saturation and competition eventually drag down the growth of even the best opportunities (smartphones being the latest example). While I think Silicon Labs is an okay hold today, at least on a relative basis, I'd need to see a pullback or find a valid reason to expect even better growth before getting more bullish again.

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Silicon Labs Delivers On Some Of Its Promises, But Not On Sale

Ixia Needs To Translate Good Technology Into Consistent Performance

Ixia (NASDAQ:XXIA) is the sort of story that can really frustrate a value-driven investor. On one hand, I see quite a bit of margin leverage potential in this model, and I do believe that the company's adjusted free cash flow margins could improve by around 50% over the coming decade. Unfortunately, a lot of that seems to be in the stock price already. What's more, while the company's improving margins would likely generate more investor enthusiasm for higher multiples, tech companies with relatively modest revenue growth prospects always seem to reach a ceiling when it comes to those multiples.

So, there's a value conundrum here. I'm inclined to say that the business is fundamentally a little undervalued now and more aggressive investors can perhaps look toward improving business fundamentals to drive more of a sentiment-based recovery that goes beyond the underlying cash flow value (which, in its own right, is hardly a fixed and inarguable point). All that being said, if that margin leverage fails to materialize, and this is a company that has never earned a compelling a return on its assets, equity, or invested capital, this stock isn't going to do so well.

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Ixia Needs To Translate Good Technology Into Consistent Performance

Seeking Alpha: XPO's Painful Climb Toward The Top

It has been a little over a year since I last wrote on XPO Logistics (NYSE:XPO), and I'd like to say that time flies when you're having fun, but that's not the case. As it concerns XPO, the company has used that intervening time to take a very big step toward its goal of being a market share leader along the waterfront of logistics and freight service, but at the cost of significant investor angst and a sharp re-evaluation of the "right" multiple for the business.

The share's value has fallen close to 40% since I last wrote, and my $50-plus fair value at that time was predicated on the company remaining a growth-oriented asset-light third-party logistics company. Instead, the company has pivoted toward a much more balanced asset-heavy/asset-light mix. While that isn't necessarily a bad strategic move, it does change the long-term complexion of free cash flow generation, the volatility of those cash flows, and the multiple the market will be willing to pay for the shares.

There seems to be a recurrent communication issue between the Street and the company, and that concerns me. I don't know if it stems from management being more freewheeling and flexible in its long-term plan than previously thought, or whether there's more of a "making it up as we go along" element to it. In any case, while I do see meaningful value here, management has a lot of work to do to reassure investors about its long-term strategy and about the true synergies of mixing asset-heavy and asset-light businesses in the transportation and logistics space.

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XPO's Painful Climb Toward The Top

Seeking Alpha: Copa's Stock Recovery Has Outpaced The Business Recovery

It's pretty much a given that the Street will take stocks far too low in bad times and far too high in good times, so I can't say I'm surprised Copa Holdings' (NYSE:CPA) shares are up more than a third since my write-up in late December, when I thought the shares looked undervalued but still vulnerable to ongoing weakness in major South American economies.

It looks as though 2016 will be the bottom for Copa, but it is hard to feel a lot of confidence that the economies of Brazil, Colombia, and Venezuela are going to stage a strong, fast turnaround. That said, the company has been increasing its exposure to healthier economies like the U.S., while doing a good job of responsibly managing capacity and expenses. I still believe Copa can generate over $4 billion in annual revenue in 2024 and good cash flow, but my fair value hasn't moved nearly as much as the share price, so I don't see the same opportunity that I did in December.

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Copa's Stock Recovery Has Outpaced The Business Recovery

Thursday, July 21, 2016

Air Transport Group At A Comfortable Cruising Altitude

I really can't complain about how Air Transport Group (NASDAQ:ATSG) has worked out - the shares are up about 50% from my last update, with the stock shooting up on confirmation of an extensive long-term deal between the company and Amazon (NASDAQ:AMZN) that will see Amazon become the major leasing partner for this cargo aircraft specialist.

In the "so, what's next?" world that is Wall Street, Air Transport is probably looking at a more sedate remainder of the year in terms of big market-moving news. The company has a lot of work to do to get the Amazon agreement up and running, and that is going to bring start-up costs into the financials that will likely obscure the generally solid results of existing operations with partners like DHL and the growing "other" operations like maintenance. Longer term, though, I would not be surprised to see the Amazon relationship expand further, nor to see the company's Chinese joint venture prove to be an underrated growth opportunity.

As for the shares, I think the Street basically has this one dialed in today. I come up with a fair value range of around $14 to $16.50, so there is some upside (particularly if there would be a faster-than-expected expansion of the Amazon relationship), but it's not a striking bargain like before.

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Air Transport Group At A Comfortable Cruising Altitude

Seeking Alpha: A Metalworking Slowdown Creates An Opportunity With IPG Photonics

A lot of what I was worried about concerning IPG Photonics (NASDAQ:IPGP) back in December has come to pass in 2016, as the company has seen weaker manufacturing activity and greater competition in China squeeze the company's once-robust growth rates. The market has reacted pretty predictably too, tossing the stock around between the mid-$70s and $103 as investors try to weigh out the opportunities that double-digit underlying market growth and new product introductions offer against the specter of rising competition and a prolonged slowdown in major end markets.

I certainly can't promise that the third quarter won't bring another downward revision to guidance or that the stock won't see the $70s again. That said, I think IPG Photonics is well placed to maintain its leadership in fiber lasers and expand its addressable market opportunities. Low double-digit free cash flow growth is hardly a conservative projection in my book, but I think IPG Photonics can hit that mark and support a fair value in the mid-$90s.

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A Metalworking Slowdown Creates An Opportunity With IPG Photonics

Kirby Trying To Move Through Treacherous Waters

I'm a little surprised that Kirby (NYSE:KEX) has held up as well as it has since my last update on the company. Down about 1% (though down as much as 30% at the depths of the January "we're all doomed!" market panic), Kirby has climbed back from the depths despite more of the guidance reductions and market deteriorations that kept me on the sidelines back in December of 2015.

I think it is still possible to argue for a fair value in the $70s, but investors are going to have to be patient and the market doesn't always (or even often) work that way. Significant capacity increases in U.S. chemical production capacity, concentrated along the Gulf Coast, should support higher demand for barging, as should demand for refined products. Crude oil, though, is not likely to be the positive influence it has been in the past, and that could complicate and delay the recovery. What's more, while it is always tempting to call a bottom, it can take a while for a business like Kirby's to move off of that bottom in a big way.

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Kirby Trying To Move Through Treacherous Waters

Wednesday, July 20, 2016

Seeking Alpha: HollySys Hanging On, But The Rope Is Slippery

HollySys (NASDAQ:HOLI) has been doing better than I thought it would. Companies in the automation space have recovered pretty well from the doldrums of late 2015/early 2016. While HollySys has lagged the likes of ABB Ltd. (NYSE:ABB), Rockwell (NYSE:ROK), Honeywell (NYSE:HON), and Emerson (NYSE:EMR), the 10% rise in the stock price since my last update is better than I would have expected given the ongoing pressures and challenges in China.

To be sure, the path ahead for the company is not smooth. China, HollySys's largest automation market, has put the brakes on new coal-fired power gen in many parts of the country, and it doesn't seem as though high-speed rail orders are going to come roaring in at a strong pace. Expansion into new process automation, discrete automation, and rail markets should keep HollySys growing, but the stock's apparent undervaluation does come with above-average risk.

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HollySys Hanging On, But The Rope Is Slippery

Tuesday, July 19, 2016

Seeking Alpha: Old Dominion Navigating A Bumpy, Pockmarked Road

When I last wrote about Old Dominion (NASDAQ:ODFL) in December of 2015, I was concerned that a slowdown in the broader U.S. economy was going to weigh on short-term sentiment of this top-notch less-than-truckload (or LTL) carrier. For about a month or so, that did in fact happen, with the shares dropping about 20% to their mid-January lows. Then the industrial rally hit, taking the shares back above $70, before cooling down into summer ahead of yet another small recent rally. All told, the shares are about 2% higher than they were at the time of that last piece - a little worse than Saia (NASDAQ:SAIA), but better than quite a few other peers/comps.

All of that up and down is a pretty good reflection of what seems to be going on in the economy. There are definitely areas of weakness, as manufacturing-heavy MRO distributor MSC Industrial (NYSE:MSM) highlighted recently, but it also seems to be true that the economy is not careering toward disaster. For truckers, it has been messy. The overall upward trend from 2014 is still in place, but there have been some tough months along the way, and the second quarter is not shaping up to be too pretty.

Stock opportunities like Old Dominion are why a lot of professional investors and analysts are grey before age 40. On the positive side, Old Dominion is probably the best-run trucking company out there (at least in the LTL space) and it still has room to grow to over 10% national share and improve its margins even further. It's also trading below its historical average EV/EBITDA multiple. On the negative side, the second quarter is probably going to be ugly on both a revenue and cost/operating leverage basis, and I don't think a big volume/tonnage rebound is in the cards until after this year.

Cyclical stocks like Old Dominion can get very weak during the doldrums, even while everybody acknowledges that better days will come again and the company will do well then. I find the long-term valuation pretty appealing, but this might be the sort of stock to buy in pieces (dollar-cost averaging) if you're concerned about the economy over the next six to 12 months.

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Old Dominion Navigating A Bumpy, Pockmarked Road

Seeking Alpha: Pacific Biosciences Looking More Interesting Once Again

If you're a fan of The Simpsons, the performance of Pacific Biosciences (NASDAQ:PACB) (or "PacBio") may at times remind you of the Homer Simpson "bed goes up, bed goes down" scene. While the company continues to make steady progress in improving its systems and adoption and usage are both increasing, the market has batted the stock around in response to anticipated launch numbers, rumors of a buyout, and concerns over competing systems.

My core thesis on PacBio remains the same. This company has developed a sequencing technology that is very good at doing a limited (but important and significant) number of things within the overall sequencing opportunity. PacBio will never be another Illumina (NASDAQ:ILMN) or Thermo Fisher/Ion Torrent (NYSE:TMO), but it can grow to over $1 billion in revenue over time on the strength of opportunities in areas like microbial/viral genetics, plant/animal genetics, and human genetics and diagnostics (particularly oncology). With that, I still believe a low double-digit fair value is reasonable. Given the pullback in the shares since my last write-up, this looks like it may be a good time for some due diligence on the name.

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Pacific Biosciences Looking More Interesting Once Again

Monday, July 18, 2016

Seeking Alpha: Chart Industries No Longer Left For Dead

Back in January, I thought investors had the sort of opportunity I love to find in the market - the chance to buy a stock that had been pounded because a major growth driver seemed to be evaporating, and pounded to a point where the less exciting, but still profitable, base business more than justified the share price. Such was the case with Chart Industries (NASDAQ:GTLS) back in January, and the shares have come back nicely since then, even though the LNG growth story is still in trouble.

I continue to believe that Chart Industries is a good company in the industrial gas/energy space. With the rebound in the shares, though, I think the dramatic undervaluation has been mopped up and investors now have to have more conviction and optimism about the future of the LNG business to drive a substantially higher fair value. I do believe that the company stands to generate hundreds of millions of dollars from LNG export/import facilities in the coming years, but the move toward a more significant LNG-based transportation chain in the U.S. is farther off and less certain in my view. Chart still looks like an okay stock in my view, but there will be a lot of bumps in the road over the next couple of years, and I think investors should typically shoot for better than "okay".

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Chart Industries No Longer Left For Dead

Seeking Alpha: Orchids Executing Well, But The Valuation Already In Bloom

Orchids Paper Products (NYSEMKT:TIS) continues to be a company that has rewarded investor patience with solid execution. As a growing player in the large private label market for paper personal care products (paper towels, toilet paper, tissues, etc.), Orchids has not only been focusing on expanding its geographical reach and customer base, but also its product line up. Even more importantly, at least from my point of view, the company has continued to find ways to drive costs out of its processes and improve operating efficiencies.

Management's performance has not gone unrewarded, with the shares up another 20% since my last write-up and up close to 50% over the past year. Better still, there are solid reasons to feel good about the company's future - the expansion into the West Coast with Fabrica has gone better than expected, a new plant in Barnwell will be coming on line (in segments) this year, and Orchids is still only a small player in a large market (annualized revenue in the $200 million range out of a total private label addressable market opportunity in excess of $3 billion). Moreover, this is not a company I'd bet against when it comes to finding better ways to make better margins from its business.

All of that said, the valuation is no longer what I'd call a clear bargain. I never like to bet against good companies, and I'm definitely NOT recommending exiting a position here, but even double-digit annualized revenue growth and mid-teens FCF margin projects don't support a substantially higher fair value. I'll be the first to acknowledge that good companies deserve premiums and that a company like Orchids can outperform expectations, but I think the margin of safety here is smaller than I personally like for new positions.

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Orchids Executing Well, But The Valuation Already In Bloom

Seeking Alpha: Novadaq Technologies Growing, But The Market Doesn't Care

Novadaq Technologies (NASDAQ:NVDQ) is a good case in point as to why buying high-multiple med-tech stocks early in their life cycle can be very dangerous. Novadaq has actually been executing well, but concerns about disruptions to sales, a different revenue model, competition, and long-term adoption trends have pounded the stock back down into the single digits - down 30% over the past year and down around 60% from the all-time high.

I don't want to create the impression that Novadaq's success is assured, because it most certainly isn't. Doctors can be shockingly resistant to change, and there is always the risk of a better mousetrap down the line. That said, I think it's pretty interesting that a company that should generate more than $100 million in revenue in 2017 (at a 30% year-over-year growth rate) would be trading below 4.0x that 2017 revenue on an EV/revenue basis (and under 5.0x estimated 2016 rev) when high-growth med-techs routinely get multiples of 6.0x or higher.

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Novadaq Technologies Growing, But The Market Doesn't Care

Thursday, July 14, 2016

Seeking Alpha: MSC Industrial's Struggles Shouldn't Be Ignored

As of this summer, I've been following MSC Industrial (NYSE:MSM) in one capacity or another for 20 years. That's a long time to pay attention to any one company, but throughout that time I have been impressed with MSC Industrial's business plan and the ability of its executives to execute to plan even across multiple management transitions.

What that boils down to is that I do have a lot of respect for this company and I think it is relatively well-run. That said, there are worrying signs regarding the health of this business that I think investors should carefully consider. This may well prove to be one of those rough patches along another positive long-term trajectory, but I do believe the challenges that MSC is facing are growing bigger, not smaller, and that the valuation is not such that the risk-reward balance is inarguably compelling.

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MSC Industrial's Struggles Shouldn't Be Ignored

Sunday, June 12, 2016

Journey's End

My wife, Christina, died early Sunday morning.

She was comfortable, she was not in pain, and she was not alone. In these last few days, the hospice team did a fantastic job of caring for her, and I think the process was as peaceful and soothing as it could have been.

I spent more than half of my life with this woman, but forty-two years is not a fair allocation of years to such a wonderful, talented, brilliant, and kind woman.

She was a geneticist by training, and a paper she wrote based on research done for her PhD thesis was published in Science. Having your first paper published in Science is a little like getting your first tennis racket for Christmas and winning Wimbeldon the following year (maybe that's hyperbole, but allow me a few bragging rights today). She discovered the genetic mutation that causes Type 2 myotonic dystrophy, as well as a type of CCM (cerebral cavernous malformation).

She didn't really like how science is conducted at the academic level, though, particularly as moving ahead in that world often means moving further and further from the lab bench. She transitioned to a role editing science papers for non-English speaking scientists, so she never quite left the field.

Christina was a remarkable partner. Fierce, tough, and stubborn beyond imagination, she was also supportive, loving, and incredibly sweet. She was the type of person who almost never swore (and I don't think she ever swore around anyone other than me), but then she could drop an insanely vulgar, and uproariously funny, joke out of nowhere. It was those contrasts, I think, that made her so much more special to me.

Cancer laid her low. She fought this insidious, relentless disease for at least two years. I say "at least" for while she was diagnosed in September of 2014, we have good reason to believe this disease was "simmering" in the background for many more years than that.

She was incredibly brave. From surgery to radiation to physical therapy to multiple rounds of medication (immunotherapies and targeted therapies), she never complained. She never had to be coaxed into the car to go to the cancer center, and she did her best to take care of herself throughout the process.

In fact, this intensely private person created a public Facebook page specifically to chronicle her life with this disease, and she was completely open and honest about all of the ups and downs, in the hopes that maybe it could help other people in the future.

She never lost hope. She accepted her fate when she was told in April that there was nothing more to be done, but she never gave up. She never stopped reading papers and running through "what if's" or "could we try's?" with me.

I take comfort in the knowledge that there was never going to be any such thing as "enough" time with this remarkable woman. Instead, I'll call myself fortunate to have the time I did with such a person. What's more, I now understand that this process is really the only possible ending for a happy marriage - sooner or later, every great marriage ends in death.

I hope it isn't disrespectful to mention this amid a tribute to her, but my plans for now are to take some time away. While neither of us are Jewish, I think the Jewish practice of a 30-day mourning period has a lot of wisdom in it, and that is what I intend to do. But I will be back. Writing is what I love doing, and she made sure I promised her that I would continue to build my life around those things I love.

Farewell Christina. And thank you so very, very much.