Tuesday, January 8, 2019

Strong Ingrezza Sales Should Restore Some Confidence In Neurocrine

In the wake of the disappointing pivotal clinical failure of Ingrezza in Tourette’s and the sharply negative market reaction (likely exacerbated by a weak biotech market overall), Neurocrine Biosciences (NBIX) needed a boost. Investors got that boost with the company’s early announcement of strong fourth-quarter Ingrezza sales and management’s presentation at the J.P. Morgan Healthcare Conference.

I continue to believe that today’s price doesn’t even fairly reflect the value of Neurocrine’s two approved drugs (Orlissa and Ingrezza), let alone the value of the commercial and clinical pipeline (opicapone, NBI-74788, et al). Although the company’s clinical pipeline isn’t as robust as I’d like, strong data from NBI-74788 could add meaningful value to the shares, and Neurocrine has always prioritized pipeline quality over quantity.

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Strong Ingrezza Sales Should Restore Some Confidence In Neurocrine

Alnylam Reports Improved Onpattro Sales Going Into A Busy Year

Alnylam's (ALNY) shareholders have been holding on in the hope of some good news and the company finally provided some with the start of J.P. Morgan’s annual healthcare conference. A stronger quarterly result for the company’s lone commercialized drug (Onpattro) should restore some confidence in this program while management continues to stay very busy on the clinical front.

I continue to believe that Alnylam is undervalued, but the reality is that biotech is not in favor and this company still has a lot to prove. Over half of the value I estimate for the company is tied to clinical programs that have yet to produce pivotal data, and the long-term sales execution on Onpattro is not guaranteed. Likewise, Alnylam is targeting multiple diseases that are challenging not only from a biological perspective, but from a commercial one as all (finding patients, getting them on therapy, etc.). Though I continue to expect meaningful long-term gains from Alnylam, this is by no means a name suited for nervous investors.

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Alnylam Reports Improved Onpattro Sales Going Into A Busy Year

Insteel Navigating A Host Of Uncertainties, With Metal Spreads High On The List

It’s a challenging environment right now for Insteel (IIIN). Although this leading manufacturer of steel wire reinforcing products has an uncommonly good long-term track record for margins and returns on assets, equity, and capital given the cyclical nature of its business, pricing leverage has gotten tricky and non-residential construction spending finally seems to be slowing.

Down about a quarter from when I last wrote about the company, Insteel really hasn’t done any worse than large steel companies like Nucor (NUE) and Steel Dynamics (STLD) or other building material companies like Vulcan (VMC) and Martin Marietta Materials (MLM). Although the share price looks undemanding even if revenue and EBITDA do see some contraction from here, a retesting of past low multiples would represent about 25% to 33% downside risk.

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Insteel Navigating A Host Of Uncertainties, With Metal Spreads High On The List

AngioDynamics Continuing To Slowly Shift Its Mix Towards Growth

Following AngioDynamics (ANGO) may be a little like watching paint dry given the low growth rate (often a severe valuation-limiting issue in med-tech), but the stock has at least outperformed the average med-tech stock since my last write-up in July and has outperformed more significantly over the past 12 months (over 25% versus around 10%).

AngioDynamics remains a hurry-up-and-wait story, with significant potential in the NanoKnife business. Oncology in general remains a worthwhile opportunity for AngioDynamics, and I won’t be surprised to see the company make further portfolio moves, perhaps including the sale of under-performing low-potential segments. Execution has been hit-or-miss here for a long time, though, and while the NanoKnife has meaningful upside on positive trial outcomes, a negative trial result would seriously undermine the value. With around 10% upside in my base case and closer to 20% upside in my bull case, I’d consider this a borderline buy today.

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AngioDynamics Continuing To Slowly Shift Its Mix Towards Growth

Signs Of A Slowdown For Hurco Getting Harder To Ignore

The slowdown in industrial demand that the market has been pricing into stocks since mid-2018 seems to now be showing up in some of the numbers, as the December ISM new orders figure saw a double-digit drop and German factory orders just posted the biggest decline (a little over 4%) in six years. Japanese machine tool orders went negative earlier in the fall, and it is looking as though weakness in China has spread into Europe and may be starting to show in North America.

None of this is good for Hurco (HURC), but it’s not exactly unexpected, as the shares have fallen close to 20% in the last six months. That puts Hurco’s performance a little below the average industrial and in between larger competitors like DMG Mori (OTCPK:MRSKY) and Okuma (OTC:OKUMF), and valuation is already starting to anticipate some revenue and profit declines in the coming years.

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Signs Of A Slowdown For Hurco Getting Harder To Ignore

Strong Comps And Surprisingly Good Operating Leverage Driving Natural Grocers

Natural Grocers by Vitamin College (NGVC) (or “Natural Grocers”) is doing a very good job of answering criticisms that its improved comp sales performance is only a byproduct of margin-compromising price cuts. With more effective promotional activity, restrained store expansion, and appealing operating expense leverage, Natural Grocers has seen not only an improvement in comps but also in margins, driving the shares up 20% since late June.

There are still some operating challenges at Natural Grocers, including ongoing competitive footprint expansions from Amazon’s (AMZN) Whole Foods, Sprouts (SFM), and similar retailers, and I wouldn’t completely ignore the risk of lower oil prices undermining key operating areas like Colorado and Texas. Still, Natural Grocers is managing this strategy shift more adroitly than I’d expected, and an upgraded outlook for EBITDA growth supports a higher fair value.

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Strong Comps And Surprisingly Good Operating Leverage Driving Natural Grocers

Brookfield Infrastructure Has Some Contrarian Appeal

Canada’s Brookfield Infrastructure (BIP) had a rough 2018, with the shares underperforming the S&P 500 by around 14%. Rising interest rates aren’t particularly helpful for a business that uses a lot of debt financing, but I suspect other issues like weak currency in Brazil, rising global protectionism, and some sizable deals in nontraditional areas could have played a role. Whatever the case, Brookfield Infrastructure heads into 2019 with a higher-than-normal dividend yield, cash to deploy, and a refreshed portfolio of assets that should start contributing to distributable cash flow fairly soon.

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Brookfield Infrastructure Has Some Contrarian Appeal

A Sell-Off On M&A Noise Is An Opportunity With Mellanox

Seeing the company lose around $400 million in market value upon the announcement of his hiring is probably not the beginning that new Mellanox (MLNX) CFO Doug Ahrens was looking for, but it’s also not all that unexpected, as the shares had been bid up in the hope that a buyout announcement would soon be coming. From my perspective, I certainly don’t think the hiring of a CFO precludes a deal, and I think Mellanox is worth owning deal or no deal – particularly now that the share price is back in the $80s.

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A Sell-Off On M&A Noise Is An Opportunity With Mellanox

Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

The last year, and the last six months in particular, have been rough ones for Weyerhaeuser (WY) and other companies in the timber, lumber, OSB, and wood products space like Louisiana-Pacific (LPX), Norbord (OSB), Boise Cascade (BCC), and Canfor (OTCPK:CFPZF). Although I’d always expected lumber and OSB prices to correct down from above-trend levels, I didn’t expect the steep (approximately 60%) plunge in lumber and OSB prices over the past six months, nor the apparent topping out of housing starts below 1.5M. Add in trade and tariff issues with China and Canada, and the situation has gotten quite tough quite quickly.

As a company, Weyerhaeuser will be fine. The now-former CEO did a very good job of driving operational efficiency and I believe ongoing operational improvements are becoming a core part of the company’s culture. I also believe Weyerhaeuser’s high-quality timberlands will remain a solid store of value that can support healthy tax-advantaged dividend payments into the future. It will take time for the pricing pressures to work themselves out, but with the yield now over 6%, patient investors may want to start taking a look at this name.

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Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

Revisiting Louisiana-Pacific After A Sharp Correction In OSB Prices

I’d previously written in reference to Louisiana-Pacific (LPX) that I regarded a decline in OSB pricing as a “when, not if” scenario, but I can’t say I was expecting the price to fall roughly 60% from its peak in only about six months. Between new capacity coming online and disappointing momentum in residential construction, though, the operating outlook has deteriorated sharply and taken the share price of LP, Weyerhaeuser (WY), and Norbord (OSB) with it.

Prices went too high in the good times and I believe they’ve overcorrected, but there are a lot of moving parts to the Louisiana-Pacific story, and volatility is likely to remain above-average. I believe the shares are trading too cheaply now on the basis of “full cycle” EBITDA and long-term discounted cash flow, and I believe the market is undervaluing the long-term potential of the siding business, but the undervaluation I see here comes with the asterisk that near-term conditions (and the share price) could still get worse before they get better.

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Revisiting Louisiana-Pacific After A Sharp Correction In OSB Prices

Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

I’m sure some Qorvo (QRVO) shareholders will take exception with this, but more and more this company is reminding me of that kid we all know from high school who was uncommonly talented but somehow just never managed to put it together. Management certainly bears some responsibility (particularly for the ongoing challenges in hitting margin targets), but other issues outside of their control like weak iPhone unit sales have undermined some of the positive drivers.

Qorvo shares look undervalued by most metrics I track, but I think it is fair to ask if revenue and margin leverage expectations are still too high, particularly as high-end handsets don’t seem to offer the growth they once did. There are still credible drivers in markets like IoT, wireless infrastructure, and even handsets, but I’d like to see at least another quarter before stepping up and buying these beaten-down shares.

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Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

Wall Street Seems Skeptical Of Palo Alto's Transition

Past success may buy you a little benefit of the doubt on Wall Street, but only just a little. While it’s hard to quibble with Palo Alto Networks’ (PANW) track record as a disruptor and growth story in the security space, that hasn’t helped the shares so much in recent months. While security spending looks pretty healthy going into 2019 and the death of the firewall (due in part to transitions toward cloud/hybrid-cloud approaches) has been greatly exaggerated, Wall Street does seem uncertain about the company’s pivot toward more cloud-oriented solutions and a new executive leadership team whose career experience in the security space isn’t as deep.

I don’t dismiss those industry experience concerns out of hand, but I think Palo Alto has brought on some talented executives that can help Palo Alto stay nimble and evolve – doing what worked in the past as your end-markets change is a pretty good way to get left behind in technology. Palo Alto looks cheap enough now that I’m a little paranoid and wondering what I may be missing; I get that the market has soured on tech stocks and that 2019 could be a more challenging year than 2018 was, but the shares seem to be discounting a pretty weak scenario today.

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Wall Street Seems Skeptical Of Palo Alto's Transition

Check Point Looks Like An Option To Consider In A Shaky Tech Market

Back when I paid more attention to football, my favorite team had a running back about whom I would say “if you need 3 yards, he’ll get you 3.5 yards; if you need 4 yards, he’ll get you 3.5 yards.” I’m reminded of that whenever I look at Check Point (CHKP), as this leading security software vendor continues to hold a strong position in the enterprise security market despite the inroads made by competitors like Palo Alto (PANW) and Fortinet (FTNT) and steady competition from the likes of Cisco (CSCO), as well as new up-and-comers. Check Point is unlikely to ever be a truly impressive growth story again, but the company’s margins, cash flows, and strong installed base have value – particularly in situations where the market has become much more worried about near-term growth prospects and valuation for software.

Check Point looks a little undervalued to me, and the company could benefit from somewhat easier comps in the coming quarters and improving salesforce execution, as well as ongoing growth in its Infinity Total Protection offering. Check Point isn’t going to be immune to an intense or prolonged sell-off in tech stocks, but I think it can hold up better than most and there’s decent underlying long-term value.

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Check Point Looks Like An Option To Consider In A Shaky Tech Market

Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

With both fundamentals and sentiment in and around the semiconductor sector noticeably cooling, valuations are getting more reasonable and attractive on a long-term basis, but the correction process still has some distance to go. In an environment where GDP growth seems likely to slow, Silicon Labs (SLAB) could well be looking at a period where the improvements in the business go largely unrewarded by the market until institutional investors feel comfortable moving back into semiconductor growth stories.

I didn’t think Silicon Labs was attractively priced for a “buy” back in August, and the shares are down another 20% or so since then (slightly underperforming the SOX). I still don’t consider today’s price a slam dunk, but I do believe the company is making progress and becoming better-positioned for future growth in multiple end-markets. A price in the low $70’s would be more interesting to me, but I’m hesitant to dive into chip stocks today given the prospect for worsening outlooks for autos and industrial markets and the risk of at least another round or two (if not more) of cuts to expectations.

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Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

ON Semiconductor Feeling The Heat From The Street

That companies like ON Semiconductor (ON) will survive the next phase of the semiconductor cycle is not in doubt to me, but what this corrective phase will look like is still very much up for debate. It’s not unreasonable to think that the adjustment from recent record highs in lead-times will lead to a more painful cycle than that seen in 2015, but then there are secular growth drivers helping ON Semiconductor that I’m not going to just dismiss out of hand.

When I last wrote about ON I said “…but the risk of near-term turbulence is something to consider …”, but I didn’t really think the shares would drop by roughly one-third in just a few months. Certainly the sector-wide declines in semiconductor stocks are being driven more by fear and momentum than truly horrible conditions (and/or outlooks), but that doesn’t make the losses sting any less. Moreover, with no real end in sight to the trade dispute between the U.S. and China, it’s tough to know whether the industry can manage a graceful dismount from the record lead-times as demand slows in markets like auto, handsets, data centers, and industrial.

I think the valuation is still quite interesting for long-term investors, but I also think the near-term still holds outsized risks. While the shares should be trading at least in the low $20’s, sentiment is poor now and semi stocks are likely to stay in the doghouse through at least the middle of 2019.

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ON Semiconductor Feeling The Heat From The Street

CyberArk's Strong Execution Should Outweigh An Imperfect Valuation

As far as I’m concerned, CyberArk (CYBR) is delivering the sort of results that a young company leading a growing (if not emerging) market ought to be delivering. Improved pricing and product positioning, better sales execution, and increasing customer awareness of the importance of privileged access management (or PAM) and secure DevOps (a software development methodology) all seem to be coming together as a strong tailwind for CyberArk going into 2019.

I liked the CyberArk story back in mid-2018, but was less excited about the valuation. The shares are up since then, but not so much that I’m really kicking myself and particularly relative to what I see as stronger underlying improvement in the business. I do worry about the risk of further market de-rating (in other words, lower multiples for stocks in general and tech stocks in particular), but CyberArk does seem undervalued and I’m reluctant to get too fussy about valuation with a strong operating story that still has room to deliver meaningful growth in the coming years.

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CyberArk's Strong Execution Should Outweigh An Imperfect Valuation

With Aerie Soaring, American Eagle Deserves Better

I've talked about the odd cyclicality of American Eagle (AEO) before, and even if there are some valid concerns at this leading, youth-oriented retailer today, I believe the roughly 25%-plus correction in the share price since my last update is overdone. This correction seems to be largely due to management's decision to increase its SG&A spending and sacrifice near-term margins to build future sales growth potential. While I think there are strong arguments for supporting growth at aerie and in the online business, the reality is that margins have a significant influence on retail valuations, and the Street has largely shifted toward valuing traditional retail stocks on the assumption of moderate (at best) growth.

To that end, I believe the Street is overlooking the long-term potential of American Eagle's aerie brand in this shift toward a "retail is no longer a growth sector" mentality. The company's aerie brand has the potential to grow to a $2 billion to $3 billion business over the next decade, adding more than 50% to today's revenue base, and the existing AE brand still worthwhile. Although I don't expect exceptional growth, I do believe these shares are undervalued below the $20s and could have potential into the high $20s.

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With Aerie Soaring, American Eagle Deserves Better

Air Transport Group Shareholders Have A Lot To Consider

It’s been a tough stretch for Air Transport Group (ATSG) since the company’s early October announcement that it would be acquiring Omni Air, with the shares down about 20%. The “good news”, if you really want to call it that, is that the company’s closest comp, Atlas Air (AAWW), has been even weaker, as have FedEx (FDX) and UPS (UPS) (with Atlas and FedEx also underperforming Air Transport on a trailing twelve month basis), as concerns have grown regarding the impact of trade protectionism on cargo/shipping demand. Of course, Air Transport did itself no favors with a miss and guide-down for the third quarter.

Between uncertainties in the global economy, Amazon’s (AMZN) plans, and management’s ability to execute, there’s a lot for Air Transport shareholders to chew on. Underlying aircraft demand seems strong, and management has generally been reliable insofar as being careful about adding capacity ahead of real demand. With the Omni deal, Air Transport will also have a more stable block of revenue coming from the Department of Defense, as well as some longer-term fleet management options. Although these shares do seem undervalued, I’ve lowered my expectations and this is a tough stock to model given the substantial uncertainties in the business.

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Air Transport Group Shareholders Have A Lot To Consider

Friday, December 21, 2018

Milacron Smacked Down On Tariff And Capex Cycle Worries

Life in plastic has not been so fantastic for Milacron (MCRN) lately, as this leading U.S. manufacturer of plastic processing machinery (injection, blow, and extrusion molders, as well as hot runners) has had to deal with a much more uncertain overseas market and a potential near-term peak in the manufacturing capex investment cycle.

Although I thought Milacron’s price was getting a little rich back in June, I didn’t expect the almost 40% drop in the share price over the past six months. Given considerable trade uncertainty and weakness (or at least signs of slowing demand) in key end-markets like auto, electronics, and general industrial, it may be a little while before Milacron sees orders and margins recover. While the long-term story is still interesting and the valuation is much less demanding, this will be a tougher place to make money unless and until the outlook and sentiment for industrials improves.

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Milacron Smacked Down On Tariff And Capex Cycle Worries

After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

This was a challenging, and likely frustrating, year for Alaska Air (ALK) management, as the company still had a lot of the heavy lifting to do in integrating the Virgin acquisition, but didn’t really get to see the benefits yet. At the same time, competitive actions from other airlines like Delta (DAL), United (UAL), and Southwest (LUV) have made managing capacity in the company’s key West Coast markets a little more challenging. All told, then, it’s been a challenging year for the stock (down about 15%), though Alaska Air has fared better than the sector as a whole.

I was lukewarm on Alaska Air back in June mostly due to sentiment and the risk of further negative earnings revisions. The shares are down slightly since then, while EBITDA expectations have fallen about 10%. I believe that sets the stage for a better 2019, and I believe Alaska Air is poised to generate some of the best growth in earnings spread (the difference between RASM, or revenue per available seat mile, and CASM, or cost per available seat mile) in the sector, as Alaska Air gets back to its normal operating prerogatives. A weaker economy and a less disciplined sector are still threats, but I believe Alaska Air should be trading in the $70s today.

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After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

Wells Fargo Still Discounting A Host Of Challenges


Wells Fargo (WFC) has done a little better than I'd expected since my last update, but that's solely on a relative basis, as these shares are still down about 15% since then (versus a roughly 20% drop for banks in general). Wells Fargo is still operating under several clouds; the regulatory and remediation issues are well-known, but the core operating performance of the bank is looking fairly run of the mill as well.

I will not defend the various fraudulent activities that the bank committed in recent years (activities the bank has acknowledged), but whether or not the regulatory consequences have been appropriate is really beyond the scope of the merits of Wells Fargo as an investment idea. Retail and commercial clients are voting with their wallets and choosing to stay with Wells Fargo (for the most part), and although I believe there is a risk that the total bill for the settlements/fines, restitution, and remediation could exceed what management has already reserved for, I do not believe they threaten the bank as a going concern. With a relatively low valuation, Wells Fargo seems to be discounting a sharper decline in the economy than I think is likely, and while there are banks I like better, I do believe these shares are undervalued.

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Wells Fargo Still Discounting A Host Of Challenges

DBS Group Executing On A High-Quality Growth Plan

While investors in North America and Europe have been selling off bank stocks to a degree that seems to price in a coming recession, Singapore’s banks have held up a little better. I was a little concerned about China-related macro risk and efforts to slow/cool Singapore’s housing market in reference to DBS Group (OTCPK:DBSDY) back in August, but the shares have done okay next to most global indices as housing, construction, and manufacturing-related demand have all held up reasonably well.

I continue to believe that DBS Group shares look appealing barring a global recession and/or a serious deterioration in China. Loan demand is likely to slow noticeably next year, but DBS Group should still be poised to benefit from some rate moves while credit quality remains benign. Longer term, I expect meaningful leverage from the company’s investments in digitalization and market entry/development in India and Indonesia.

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DBS Group Executing On A High-Quality Growth Plan

As Trucking Seems Set To Cool, How Cold Will Old Dominion's Multiple Get?

When I last reviewed Old Dominion (ODFL), I said I didn’t want to pay a near-peak multiple for near-peak earnings, even though I think Old Dominion is the best trucking company out there and one of the best-run companies I’ve followed over the years. The shares subsequently rose another 15% on strong volume, pricing, and cost control, but have since fallen almost 30% from that early September peak and now sits almost 20% lower than when I last wrote about the company.

I love the idea of picking up Old Dominion shares when the Street has bailed out on the less-than-truckload (or LTL) sector, but I’m not sure we're at that point of capitulation yet. Forward multiples have been cut in half in past downturns and we’re not there yet, though I don’t expect 2019 or 2020 to be disastrous. Figuring out the “right” multiple is really difficult right now, but I’d strongly urge readers to keep this stock on a watch list, as you don’t get the opportunity to buy great businesses at reasonable prices all that often, and cyclical sectors like trucking can see some pretty unreasonable valuations at the peaks and troughs.

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As Trucking Seems Set To Cool, How Cold Will Old Dominion's Multiple Get?

With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

In a bad market for banks, U.S. Bancorp (USB) has managed “less bad” performance, with the shares doing better than the average bank (down 13% versus a roughly 20% drop over the past year) and better than peers like PNC (PNC), Wells Fargo (WFC), and Citigroup (C), and particularly so in the last three to six months, as the Street seems slightly consoled by U.S. Bancorp’s more bullish loan growth outlook for 2019 and its improving operating leverage.

U.S. Bancorp makes sense as a safe haven/flight-to-safety pick in banking, as the company has long been a leader in efficiency and profitability. While I think U.S. Bancorp may see a little more pressure on spread-based revenue growth than some bulls believe, I think the bank’s strong fee-generating operations will help fill the breach, as will improving operating leverage.

The banks I think are run best and best-positioned for this part of the cycle (JPMorgan (JPM), BB&T (BBT), and USB) seem to offer the least upside from here relative to names like PNC, Wells Fargo, and Citi, and that’s not exactly surprising given the sharp sentiment shift. U.S. Bancorp probably has less upside if 2019 turns out to be better than expected, but I continue to believe this is a solid long-term core holding for more conservatively-inclined investors.

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With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

Citi Getting No Love As Macro Risks Mount

Liking Citigroup (C) has never been a particularly popular call, and to be honest, the skeptics have been right about it this year, as Citi has lagged other large banks like JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), and PNC (PNC) this year, and particularly so over the last three months. With weak pretax margins, some global macro risk, rising credit risk, and ongoing struggles with efficiency, I suppose I can understand why investors wouldn’t be so eager to own this name going into what could be a more challenging 2019.

Defending Citi isn’t really high on my to-do list, as I don’t think it’s a particularly well-run bank. That said, I find it interesting that Citi is valued the way it is, as it seems like the market is much, much less forgiving to under-earning banks than it has been in the past. A long-term earnings growth rate of just 4% could support a fair value in the $70’s, but it is clear to me that Citi has a lot of work to do to both improve its financial performance and its perception.

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Citi Getting No Love As Macro Risks Mount

South State Bank Should Be Near The End Of A Painful Reset

In a poor year for bank stocks, South State (SSB) stands out as an especially weak name, particularly since midyear as successive quarterly misses have led to double-digit downward revisions in earnings expectations for 2019 and 2020. Although South State had advised investors and analysts that there would be an adjustment process as it shifted the mix of loans and funding in its Park Sterling acquisition, the process has led to weaker than expected revenues, margins, and loan growth.

I significantly underestimated just how disruptive this transition would be to South State’s reported earnings, and the shift in sentiment away from banks due to rate and recession worries certainly made a tough situation worse. With South State highly likely to continue with M&A in the future, the challenges with the Park Sterling integration raise valid questions about how tumultuous future earnings may be after other buy-and-restructure deals. I do believe that the current share price undervalues a well-capitalized bank with strong share in some attractive growth markets, but between weak sector sentiment and company-specific investor concerns, it will take some time for this stock to claw its way back.

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South State Bank Should Be Near The End Of A Painful Reset

Crushed By Worries About Mexico's Transport Sector, OMA Looks Interesting For 2019

The election of Mexico’s new president, Andres Manuel Lopez Obrador (commonly referred to as “AMLO”), has effectively pushed many of Mexico’s infrastructure stocks over the edge of a cliff, and Grupo Aeroportuario del Centro Norte (OMAB) (“OMA”) shares have fallen 40% since early October on a host of worries related to the new administration’s policies. Although OMA has the longest to go before its Master Development Plan (or MDP) comes up for renewal (2021) among the three publicly-traded Mexican airport operators, there are nevertheless definite worries that the government will somehow disrupt their operations and that the administration’s plans for managing air traffic and airport needs within the country will create trouble.

As the most domestic-focused of the three airports, OMA has the most to lose if AMLO’s policies hurt air travel in Mexico, but I believe the current price reflects an excessive level of worry. Slower economic growth in the U.S. could filter into Mexico’s economy in 2019, and recent strength in air traffic looks hard to replicate, but I believe OMA can do just fine from here with long-term growth in the mid-single-digits.

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Crushed By Worries About Mexico's Transport Sector, OMA Looks Interesting For 2019

BBVA Still Lacking Value-Creation Amidst Non-Stop Challenges

One of BBVA’s (BBVA) best attributes has also proven to be a seemingly never-ending source of challenges. With a diverse mix of banking operations, including strong exposure to multiple emerging markets, there is always something going on with BBVA, and more recently that has taken the shape of numerous challenges to the ongoing growth potential of the bank. While Spain may finally be turning, the U.S. bank cycle is fading, Turkey is in trouble, and BBVA’s very profitable Mexican operations may be facing a serious threat to a high-margin source of revenue.

BBVA is quite likely in better shape as a bank than its stock, which has been on basically a non-stop downward trajectory this year. While a rate hike cycle could be about to begin in Europe, BBVA’s exposure to Europe isn’t all that large and loan growth may prove disappointing irrespective of rates. I do believe these shares are still undervalued now, and perhaps significantly so, but you can find similar undervaluation with ING (ING) and increasingly with many U.S.-based banks and probably encounter less volatility.

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BBVA Still Lacking Value-Creation Amidst Non-Stop Challenges

Sandy Spring Bancorp Looking Undervalued, But Funding Remains A Risk

With the calendar about to turn and most U.S. banks great and small having been pummeled in recent months, I wanted to review Sandy Spring Bancorp (SASR) again as an idea for 2019. The metro DC region still looks pretty healthy and loan demand does not seem to be a serious concern for Sandy Spring. Deposit growth and funding costs remain a risk, though, as Sandy Spring management has had to get more creative in securing the funds it needs to support profitable growth.

Sandy Spring still sees itself as a buyer, not a seller, but the decline in the share price may well cool near-term deal activity. Although I do think the overall environment for banks has deteriorated somewhat from the middle of 2018, I still believe Sandy Spring can generate high single-digit long-term earnings growth, supporting a fair value close to $40.

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Sandy Spring Bancorp Looking Undervalued, But Funding Remains A Risk

Chemical Financial Beaten Up As Investors Flee From Banks

With concerns about a slowing economy, lackluster loan growth, peaking credit quality and rate leverage, and diminishing operating cost leverage, I can understand why investors have moved on from the bank sector in pursuit of greener pastures. In doing so, though, they sold down several banks beyond a point of valuation that I would regard as fair, and Chemical Financial (CHFC) is one such bank.

Although Chemical Financial is not a perfect bank, and Michigan is not a perfect banking market, I believe this growing mid-cap is likely to maintain above-average pre-provision profit growth unless the economy and rates deteriorate sharply over the next two or three years.


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Chemical Financial Beaten Up As Investors Flee From Banks

Comerica Frostbitten As Wall Street Turns Cold On Bank Stocks

Although I thought Comerica’s (CMA) valuation was a little stretched back in the summer, I thought at the time that it offered the market a lot of what investors wanted. Turns out, those investors have changed their minds about what they want, and in a big way, sending the shares down about a quarter over the past six months. If there’s a bright side to that, it’s that Comerica’s fall hasn’t been much worse than the average retail bank, and there have been a fair few to do worse over that time.

Ongoing weak loan growth and the prospect of peaking rate, credit, and cost leverage has soured the Street on banks heading into what is likely to be an economically less impressive 2019. That, in turn, has led to some pretty startlingly revaluations across the sector. I can’t say that Comerica is my favorite bank idea, but the valuation and business drivers definitely support a closer look.

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Comerica Frostbitten As Wall Street Turns Cold On Bank Stocks

Calyxt Has The Pieces In Place, But Needs Contracts To Light The Fuse

Timing matters with stocks. While the “true believers” won’t ever want to hear it, there were, and still are, meaningful operational risks attached to the Calyxt (CLXT) story. I believe those risks, coupled with a general “risk-off” switch in market sentiment has had a lot to with the ongoing decline in the share price since my last update (today’s Goldman Sachs upgrade-inspired rally not withstanding).

I continue to believe that Calyxt has an intriguing IP position in gene-edited crops and that gene-edited crops may well be a “next wave” of bio-ag innovation that drives a host of improvements for both farmers and consumers. Still, the market’s willingness to accept foods containing gene-edited crop ingredients has yet to be tested, and Calyxt’s unconventional commercialization model creates execution risk. I believe today’s share price significantly overstates that risk, but the share price is likely to remain volatile given that operating profitability is likely four to six years away and the commercialization strategy is unproven.

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Calyxt Has The Pieces In Place, But Needs Contracts To Light The Fuse

ABB Punting Power Grids, But Priming The Pump For Growth Will Take Time

ABB’s (ABB) relatively successful turnaround of its Power Grids business ends the way many, if not most, investors hoped it would – the company is selling off the business. While the transaction is messy, I think management got decent-to-good value for a hard-to-move asset. I also believe the subsequent corporate restructuring is logical and should boost long-term margins, but there’s a grumpy skeptic part of my brain that says a lot of these costs, charges, and restructuring efforts could be used to mask lackluster underlying performance over the next 18-24 months, and I don’t like the extent to which management tried to celebrate their current market positioning.

I still own these shares and I still believe this can be a better-run, more profitable, and more successful business than it is. Whether management has the talent to make that happen is still up for debate. I’m not changing my fair value ($25 per share) at this point, but I would note that the risks and costs are weighted to the near term, while the benefits are weighted further down the line.

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ABB Punting Power Grids, But Priming The Pump For Growth Will Take Time

Danaher's Mix Likely To Be A Real Asset In 2019

It doesn’t seem like there’s as much disagreement now that industrial activity is slowing, and particularly in the so-called early-cycle sectors. Two years into this cycle, autos and electronics have weakened, and there are growing concerns about upstream oil/gas equipment, non-residential construction, trucks, and “general industrial” going into 2019. Challenging as that may be for companies like MMM (MMM) and Illinois Tool Works (ITW), it doesn’t really mean all that much for Danaher’s (DHR), and this multi-industrial’s strong leverage to less cyclical businesses like life science equipment, diagnostics, and water quality should add to the popularity of what is already a very well-regarded company.

Given Danaher’s end-market exposures, I think there’s a good chance that Danaher can continue to report healthy earnings growth trends in quarters where many of its industrial peers won’t. Although the valuation here is hardly cheap, that stronger relative growth could drive “flight to safety” investment decisions, though I do believe Danaher’s high valuation does create a risk of a sharper sell-off if its 2019 results disappoint and its end-markets don’t prove to be quite as safe as commonly thought.

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Danaher's Mix Likely To Be A Real Asset In 2019

Ciena Doing Its Part To Ease The Street's Concerns About The Growth Story

A handful of “surely the good times can’t last” downgrades pressured Ciena’s (CIEN) share price in late September, but the stock has since come back on renewed confidence that those good times actually can last a bit longer, as Ciena continues to gain share in optical systems and gain traction with its new offerings. Moreover, if the software business really is on a better growth trajectory, it will answer some of the concerns about that business and offer another driver of growth over the next couple of years.

The set-up going into 2019 isn’t perfect. Obviously the markets are jittery. On a more company-specific basis, there’s still some risk of disruption from new product introductions from Acacia (ACIA) and Infinera (INFN), as well as risks from service provider budget priorities and a possible slowdown in datacenter growth. Those risks don’t really faze me on a mid-term basis, but could create some choppiness on a month-to-month or quarter-to-quarter basis. Ciena sits toward the low end of my upwardly-revised fair value range, and I’d consider prices in the low $30’s (or below) to be solid buying opportunities for a company with good ongoing leverage to both service provider and datacenter spending.

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Ciena Doing Its Part To Ease The Street's Concerns About The Growth Story

PINFRA Batted Around On Shaky Sentiment Towards Mexico

The honeymoon for Mexico’s new President Andres Manuel Lopez Obrador (often referred to by the acronym “AMLO”) and the relief investors felt immediately after the election didn’t last long, and the cancellation of the Mexico City airport project has certainly not helped. Investors are still struggling to figure out if AMLO is the next Lula, a “leftist” who proved to be quite pragmatic where Brazil’s economy was concerned, or the next Chavez, a leftist who turned Venezuela into a dumpster fire onboard a derailing train. With AMLO’s first budget due in two days (December 15), investors will at least get some sense of the real-world priorities of this new administration and some of the details about how they’ll pursue them.

PINFRA
(OTCPK:PUODY) (PINFRA.MX), the second-largest toll road operator in Mexico, has had a tough year. The shares shot up about 15% in the two months after my last report (wherein I thought PINFRA was undervalued), only to give it all back as the market has turned decidedly more cautious on Mexico’s near-term economic fortunes. There is definitely elevated risk to the PINFRA story, but I really can’t believe that Mexico’s government will upend the concession system that has served the country reasonably well, and the system that will allow it to meet its opposing promises about building out/improving Mexico’s infrastructure without wrecking the company’s budget.

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PINFRA Batted Around On Shaky Sentiment Towards Mexico

GenMark Facing New Challenges Going Into 2019

I can understand if long-term GenMark (GNMK) shareholders feel a little cursed. Although there have been plenty of self-inflicted issues that have dented management credibility and pushed back development and revenue timelines, even when management execution has been good, new challenges have emerged to threaten the company’s longer-term revenue ramp. To that end, adverse coverage decisions, prospects for a more mild flu season, and threats of/from new competitive entrants have cut these shares almost in half from their late summer peak.

GenMark shares do seem undervalued, and I believe the company’s core ePlex platform does address real and legitimate needs in the hospital testing space. I also believe, though, that competitive and reimbursement pressures are unlikely to abate and the company is likely to face some hard choices with respect to funding/liquidity before achieving cash flow breakeven. Accordingly, I have to consider this a pretty high-risk opportunity.

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GenMark Facing New Challenges Going Into 2019

Credicorp Arguably Not Getting Its Due As Loan Growth Accelerates

I don't want to overdo the comparisons, but given that I follow both Credicorp (BAP) and Itau Unibanco (ITUB), it's tempting to compare the evolution of these two top-notch Latin American lenders. More to the point, I see Itau in a place similar to where Credicorp was six to 12 months ago, when the company was seeing improving credit quality but sluggish loan growth as the country's economic situation was sorting itself it. At this point, though, I think Credicorp is in a pretty good place to generate attractive earnings growth, as Peru's economy is going strong, loan demand is accelerating, and the company's digital initiatives are really starting to make a difference.

As far as the stock goes, I was pretty lukewarm on Credicorp six months ago, and the shares are down a bit since then - trailing Itau, but outperforming a collection of other names like Banco de Chile (BCH) and Bancolombia (CIB). Given that I think Credicorp shares are now priced for low to mid-teen annualized returns, I think this is a name to consider again looking into 2019.

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Credicorp Arguably Not Getting Its Due As Loan Growth Accelerates

Canadian Western Bank Battered By Worries About Funding And Loan Growth

It hasn’t been a great year for Canadian banks in general, with the best performer Toronto-Dominion (TD) down about 5% year-to-date. It’s been far, far worse for Canadian Western (OTCPK:CBWBF), though, as the shares have lost nearly one-third of their value on rising worries about funding and the sustainability of healthy loan growth. To that end, I’d note that peer Laurentian Bank (OTCPK:LRCDF), which also focuses on business lending, is down a similar amount.

I was wrong about Canadian Western earlier this year. While I had concerns about the bank’s deposit mix (unsustainable in my view) and dependence on business loan demand growth, I underestimated how quickly and how significantly sentiment would shift. Although the shares do look undervalued now, funding risk is still present, and it’s hard to get excited about a bank with weak core funding, weak operating leverage, and some adverse exposure to energy prices.

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Canadian Western Bank Battered By Worries About Funding And Loan Growth

Neurocrine Hit Hard As T-Force GOLD Turns To Lead

Long and sometimes painful experience has taught me that conservatism is a good way to go when modeling and investing in biotech, and Neurocrine Biosciences’ (NBIX) disappointing trial news Wednesday morning is just another reminder of why that is so. Although there were valid reasons to believe that the T-Force GOLD study would show that Ingrezza is an effective and safe treatment for pediatric Tourette’s syndrome, the drug had failed prior studies in Tourette’s and Neurocrine announced that this well-designed pivotal study has failed as well.

Neurocrine is likely looking at a prolonged stay in the Street’s doghouse, as the ongoing sales ramp of Ingrezza in tardive dyskinesia and AbbVie’s (ABBV) ramp of Orlissa in endometriosis (and later uterine fibroids) likely won’t erase the disappointment of this trial failure, particularly given a weak late-stage pipeline. For more patient investors, though, this is an opportunity to build or add to a position in a promising CNS-focused biotech that has solid revenue-generating assets in hand and an early-stage pipeline with some potential.

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Neurocrine Hit Hard As T-Force GOLD Turns To Lead

Can A New Growth Cycle In Brazil Spark Growth For Itau Unibanco?

It has been an up-and-down year for Brazil’s economy and investor sentiment, so it’s no great surprise that the shares of Itau Unibanco (ITUB) have likewise bounced around. Although the ADRs haven’t really gone anywhere fast when compared to the price twelve months ago, they are up about 30% from my last update on the company on renewed optimism over Brazil’s economy and perhaps some recognition of Itau’s excellent capital and market position.

As far as the potential returns from here, though, I’m not as bullish as I was mid-year. I’m expecting double-digit earnings growth for each of the next five years (and healthy growth beyond that), and that supports a low-to-mid teens annualized return from here, which isn’t bad but not as strong as the 20%+ returns I saw before this run. Where Brazil to enter another “boom” cycle in the economy, there would certainly be upside to my numbers, but then there is also potential downside if the government’s efforts to improve the economy don’t pan out and/or if up-and-coming fintech rivals successfully disintermediate the traditional banks.

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Can A New Growth Cycle In Brazil Spark Growth For Itau Unibanco?

RenaissanceRe Continues To Do Things Its Own Way

I really have to admire a company that gets pushed by a long-term shareholder to conduct a strategic review and sale process only to turn around in less than a month and announce a significant acquisition. With RenRe’s (RNR) acquisition of Tokio Millennium Re from Tokio Marine Holdings (OTCPK:TKOMY), management has made it clear that they continue to see more value for shareholders as an independent company and that, like it or not, they’re going to run the company more or less the way they always have.

I’ve been a long-term admirer of RenRe, so I really have no problem with this decision. Although there is still considerable uncertainty in the market over Jan 1 reinsurance renewal pricing, I think RenRe is sitting in a relatively comfortable (if not good) position as a ready and willing supplier of capacity at the right price, and I believe the TMR transaction is a low-risk deal that could offer double-digit accretion as it plays out.

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RenaissanceRe Continues To Do Things Its Own Way

Roche Still Offers A Respectable Return As Bulls And Bears Slug It Out

I have long found Swiss drug and diagnostics giant Roche (OTCQX:RHHBY) to be a Rorschach test for the market, sell-side analysts, and myself. Given the huge number of moving parts, including significant biosimilar risk, a new generation of differentiated drugs, and a deep pipeline, there’s always news – good and bad – to drive shifts in the game of tug-of-war between bulls and bears.

Although Roche is by no means the end-all be-all in the pharmaceutical space, I believe it remains a credible core holding for those investors who don’t want to take on the risk of betting on more transformative stories (whether that’s pipeline-driven, M&A-driven, or restructuring-driven) or more speculative biotech ideas. I view Roche as more or less reasonably-valued today, but I believe “reasonable” in this case still leaves the prospect of the compounding of high single-digit returns over the long term.

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Roche Still Offers A Respectable Return As Bulls And Bears Slug It Out

Penumbra Should Shine Brighter

I loved just about everything about Penumbra (PEN) except the price/upside when I last wrote about this fast-growing neurovascular med-tech company. Since then, the company has continued to sail past sell-side expectations, but the market has gotten more risk-averse and worries have cropped up about how Penumbra and its growth rate will fare in 2019 against more direct competition from Medtronic (MDT), Stryker (SYK), and other neurovascular players. With that, the shares are down about 6% and I don’t feel like I’ve missed out on all that much (particularly when Penumbra has actually slightly underperformed Medtronic and Stryker in that “risk-off” trade).

I still like this company quite a bit, though, and the growth potential in peripheral vascular may be considerably greater than expected even a year ago. Although competition is a threat, I think it is highly likely that either Medtronic or Stryker buys Penumbra at some point (with a lower, but certainly non-zero, probability of a bid from a company like Johnson & Johnson (JNJ) ), and I’m not too troubled by the robust valuation. Further risk-off behavior in the market, and a general de-rating of growth med-tech, is certainly a risk factor going into 2019, but that’s a risk I’m more and more inclined to take on with Penumbra.

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Penumbra Should Shine Brighter

Everest Re Looking A Little Better, But Reinsurance Rates And Loss Trends Still Up For Debate

I thought Everest Re (RE) looked a little too beaten down back in August, largely on outsized worries about management’s ability to asses and price risk, particularly given significant growth in reinsurance underwriting. Since then, the shares have done a little better than most of its peers including Arch Capital (ACGL) and AXIS (AXS), though hasn’t quite kept pace with RenRe (RNR) and the company’s trailing twelve-month performance looks a little better relative to the S&P 500 than it did before.

Four months doesn’t really change all that much, but I do believe the outlook for cat reinsurance pricing is a little better now, and I think Everest Re has laid out a believable case for growth through targeting opportunities in specialty/niche insurance and harder markets in the reinsurance business. Reinsurance pricing is clearly a wildcard, as is the demand for insurance-linked securities (where Everest has a meaningful presence), and I think the company’s estimates for fourth quarter cat losses could skew high, but the shares still look valued attractively enough to consider buying and holding.

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Everest Re Looking A Little Better, But Reinsurance Rates And Loss Trends Still Up For Debate

At Least A Couple More Quarters Before Copa Is In The Clear

I’ve been cautious on the near-term prospects for Copa Holdings (CPA), and holding off on buying for my own account, because of what I’ve seen as substantial near-term operating risks from challenging economic conditions in key markets like Brazil and Argentina. Those risks have continued to show themselves, with a weak third quarter and guidance leading to meaningfully lower expectations for 2019, as unit revenue and margin growth prospects seem muted for at least a couple more quarters.

And yet, I still keep this name high up on my watch list. I believe Copa is a well-run airline with a proven ability to grow capacity and manage costs effectively. Longer term, I believe the opportunities providing air service to Latin America are considerable and can support a higher share price for Copa. Fuel costs and further economic deterioration in key markets are both significant risks, but Copa could already be in a bottoming-out process.

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At Least A Couple More Quarters Before Copa Is In The Clear

Better Pricing Bodes Well For Lancashire Holdings After A Tough Year

It’s been a challenging year for specialty insurer Lancashire Holdings (OTCPK:LCSHF) (LRE.L), as pricing has been slower to recover in reinsurance and losses from both natural disasters and “regular business” have taken a bite. Not only has Lancashire trailed other more traditional specialty insurers/reinsurers like Everest Re (RE), other Lloyds players like Beazley (OTC:BEAZY) and Hiscox (OTC:HCXLY) have also done better over the past year, though Lancashire has been outperforming more recently and does pay out a sizable percentage of its earnings as a dividend (having recently announced another large special dividend).

Lancashire will always be a challenging company to model, as management doesn’t prioritize or target growth like other insurers, and instead focuses on writing low-frequency/high-severity policies and returning a large percentage of its surplus capital to shareholders. While modeling a volatile business has its inherent challenges, I believe the shares still offer some worthwhile appreciation potential now that rates are firming up.

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Better Pricing Bodes Well For Lancashire Holdings After A Tough Year

Argo Leveraging Its Specialty Focus And Tech Investments

There’s still work to do, but Argo Group (ARGO) management has already started to deliver some of the promised benefits of the company’s multiyear tech investment program. The combination of Argo’s historically strong position in specialty insurance (particularly excess & surplus) and its improving customer service is boosting premium growth, while improved analytics and automation are starting to benefit underwriting and expenses.

Up about 20% from my last update, Argo has definitely exceeded my expectations, as the market has reacted strongly to an insurance story where pricing isn’t such a challenge (fellow E&S underwriter Kinsale (KNSL) has done well too) and where expense leverage is starting to drive visibility into much better earnings. The faster progress with earnings leverage has improved my valuation outlook for the shares, but it’s harder to see how the stock is substantially undervalued even if an adjustment process in the International segment is closer to the end than the beginning.

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Argo Leveraging Its Specialty Focus And Tech Investments

Can Voestalpine's Core Quality Pull The Valuation Up Off The Mat?

In a generally bad year for steel stocks, Austria’s voestalpine (OTCPK:VLPNY) (VOE.VI) has done even worse than most. While the company was once praised for management’s policy of continual reinvest in the business and focus on growth-oriented, high-value businesses, that has all gone by the boards now that near-term results are looking weaker than previously expected.

Much of what I’ve said recently about other steel stocks applies here – for all of voestalpine’s quality and apparently low valuation, it’s tough for steel stocks to outperform when steel prices are declining. Yet, I struggle to reconcile why voestalpine should trade at less than 5x my 12-month forward EBITDA estimate (which is about 5% below the sell-side average). Although I’m reluctant to play chicken with a freight train and go against such strongly negative sentiment as is dominating steel today, the valuation on voestalpine has more sorely tempted to take a flyer on the assumption that 2019/2020 won’t be as bad as the price seems to be forecasting.

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Can Voestalpine's Core Quality Pull The Valuation Up Off The Mat?

Acerniox Waiting For The Cavalry To Show Up

Acerinox (OTCPK:ANIOY) (ACX.MC) could really use some good news where pricing is concerned. Although tariffs have helped shield the U.S. stainless steel market, stainless hasn’t enjoyed the same pricing power or spreads as carbon steel in the U.S., and a surge of imports has hammered pricing in Europe and unwound expectations for a second half improvement. While there are hopes that protectionist measures from the EU will boost pricing in 2019, it doesn’t look as though margins will improve significantly from here.

I was reluctant to recommend Acerinox in my last update, and I’m glad I didn’t, as the shares have lost almost a third of their value since then. Acerinox has held up a little better than fellow Euro stainless players Outokumpu (OTC:OUTKF) and Aperam (OTC:APEMY), and AK Steel (AKS) in the U.S. (while Allegheny (ATI) has held up a little better), but it has been an ugly and disappointing year and it’s still not clear to me that a better 2019 will be good enough to make this a strong performer.

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Acerniox Waiting For The Cavalry To Show Up

Gerdau Looking Toward Better Results

Brazil’s Gerdau (GGB) offers a curious investment proposition today. Although the shares have lagged Ternium (TX) over the past three months, Gerdau has been the best-performing steel stock of the group I follow closely, and by a fairly wide margin (outperforming #2 Ternium by close to 15%). Gerdau is also one of the few steel companies/stocks where there is basically a unanimous expectation of EBITDA heading higher for the next two to three years, largely on the back of an expected recovery in Brazil.

Metal spreads may well have peaked in the U.S. (where Gerdau generates close to a third of its EBITDA), but volume demand growth is expected to continue and Gerdau has under-utilized capacity it can bring into action. What’s more, spreads in Brazil could still improve and Gerdau is still reaping the cost savings benefits of digital investments. Gerdau’s valuation doesn’t scream “bargain”, but in the real world of stock performance, this is still a name to consider given its potential for further upward earnings revisions and its capacity to grow at a time when many peers will see earnings contraction.

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Gerdau Looking Toward Better Results

Sunday, December 9, 2018

Worries About China And Energy Have Pushed Emerson To A More Interesting Level

It hasn’t been a good couple of months for Emerson (EMR). Between worries about weakening conditions in China, weaker oil prices, and relatively conservative guidance with fiscal fourth-quarter results in early November, Emerson's shares have fallen almost 20% since early October – tracking fellow process automation player Yokogawa (OTCPK:YOKEY) and lagging other comps like Rockwell (ROK), Honeywell (HON), and industrials in general. It’s worth noting, though, that Emerson has done comparatively better on a full-year basis and remains one of the better-positioned multi-industrials for a late-cycle 2019.

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Worries About China And Energy Have Pushed Emerson To A More Interesting Level

Alnylam Pharmaceuticals Tries To Rally The Troops With A Blizzard Of New R&D Candidates

There are two criticisms you’ll never read about Alnylam (ALNY) – that management is insufficiently promotional of the company, and that it doesn’t have enough pipeline candidates/ideas. Always a company with many irons in the fire, Alnylam hosted an R&D day Thursday that was a little like drinking from a fire hose in terms of the sheer number of early-stage projects and potential clinical compounds.

In terms of valuation-driving news, though, there wasn’t too much to come out of this event. I am not generally fond of assigning values to compounds before Ph I results are in hand, and I tend to think that assigning values for “platforms” or pre-clinical pipelines is most often used as a way to goose price targets beyond what the actual pipeline would otherwise support. Be that all as it may, I continue to believe that Alnylam shares are meaningfully undervalued, but the company really needs to issue a positive update on Onpattro sales in January to drive better sentiment for the shares.

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Alnylam Pharmaceuticals Tries To Rally The Troops With A Blizzard Of New R&D Candidates

Subtracting Clarity Won't Make The Broadcom Case Stronger

Operationally, I can’t really find much to criticize in Broadcom’s (AVGO) fiscal fourth quarter, even if it does look like the wireless business is looking a little weaker heading into the next year. The central debate on Broadcom remains the CA acquisition and whether this foray into enterprise software can and will generate attractive returns for shareholders. The jury is still very much out on that, though management has made it clear that they look at this as a margin/FCF-rich opportunity and that they’re already willing to consider other enterprise software deals.

As I’ll discuss later, I think Broadcom’s move away from greater transparency is a mistake and disrespectful to shareholders, but it doesn’t really change the intrinsic value. Between a chillier market for semiconductor stocks and ongoing concerns about the CA deal, Broadcom continues to look undervalued below $300.

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Subtracting Clarity Won't Make The Broadcom Case Stronger

Market Skepticism On Mortgage Insurance Still Offering Some Upside In Arch Capital

Arch Capital (ACGL) has had a challenging trailing 12 months, with many investors still not convinced that the company’s major foray into mortgage insurance will prove to be a value-creating move over time, and ongoing concerns about the change in management and the returns available in primary insurance and reinsurance. With that, Arch Capital’s double-digit decline over the past year doesn’t stack up very well next to the performance of Everest Re (RE), RenRe (RNR), or W.R. Berkley (WRB).

I am a little concerned about the uptick in primary insurance core losses, but I believe the Street is still undervaluing the company’s mortgage insurance business and the value Arch can generate from third-party vehicles like Watford and Bellemeade (the second-largest sponsor of insurance-linked bonds behind Everest). With a fair value of around $30, I don’t think Arch Capital is radically undervalued, but I think these shares can offer a solid high single-digit to low double-digit annualized return from here.

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Market Skepticism On Mortgage Insurance Still Offering Some Upside In Arch Capital

Market Worries Overshadowing Ongoing Strength At Alfa-Laval

Alfa-Laval's (OTCPK:ALFVY) shares have corrected sharply since my last update on the company, with the shares down more than 20% on what has been a pretty broad-based downturn for European industrials. Although there are some valid concerns about Alfa’s business mix in 2019 and the need for higher capex spending to support a surge of scrubber orders, there aren’t enough company-specific issues here to think this is more than a broad-based re-rating.

I thought Alfa-Laval wasn’t as appealing of an investment prospect back in July, but I didn’t exactly expect the sell-off we’ve seen in the market since then. While the valuation is definitely more interesting now, there are a lot of other industrials getting cheaper now and I’d be careful about stepping in front of this current market downturn. Still, as one of the better late-cycle names I know, I think this is a name to look at going into 2019.

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Market Worries Overshadowing Ongoing Strength At Alfa-Laval