Tuesday, October 17, 2017

Monsanto Ending On A Position Of Strength

For a company that has been around for a while and leads its industry, there’s an odd cyclical quality to Monsanto (MON) where sell-side analysts seem to get ahead/behind of the company’s growth curve, leading to multi-quarter periods of out/under-performance relative to expectations. Monsanto looks to be late in the game with another outperformance cycle, but that likely matters much less now that the company should be approaching the end of the line as a publicly-traded company.

It remains to be seen if Bayer (OTCPK:BAYRY) will get all of the final approvals it needs to acquire Monsanto. No insurmountable obstacles have appeared yet, but there is still a risk that regulators could dig in their heels and/or demand concessions that Bayer finds unacceptance. Although there’s still about 5% upside between today’s price and the deal price, that’s not really out of line relative to the remaining risk (and time). Consequently, I’m more inclined to look for the exit with my Monsanto position and find new investment ideas.

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Monsanto Ending On A Position Of Strength

PNC Financial Producing Balanced, High Quality Growth

PNC Financial’s (PNC) management is relatively conservative in many respects, but that is not keeping the company from posting good numbers as spreads increase and credit remains benign. Better still, there are plans on the table with respect to expanded commercial lending and improved retail banking efficiency that should support additional incremental growth in the years to come.

Although Bank of America (BAC) has outperformed PNC over the last year, PNC’s share price performance has been quite strong relative to peers like Citigroup (C), JPMorgan (JPM), Wells Fargo (WFC), U.S. Bancorp (USB), and BB&T (BBT). Looking ahead, PNC has above-average growth prospects, but the shares do seem to already reflect a lot of that. Changes to corporate tax law and/or bank regulation could support higher growth rates, but the shares look more or less fairly-valued on the assumption of 6% to 7% long-term growth. That said, in a banking sector without a lot of clear bargains, I do believe PNC is an incrementally better option.

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PNC Financial Producing Balanced, High Quality Growth

For Citigroup, Slow And Steady Could Still Win The Race

Even though Citigroup (NYSE:C) has left something to be desired with respect to the pace of its recovery (particularly next to peers like JPMorgan (NYSE:JPM)), the shares’ 48% rise over the past year and 43% rise over the past three years is hardly embarrassing. Although shareholders of JPMorgan, Bank of America (NYSE:BAC), and PNC Financial Services Group (NYSE:PNC) have fared better over that longer time period, Citi has nevertheless outperformed U.S. Bancorp (NYSE:USB), BB&T (NYSE:BBT), and Wells Fargo (NYSE:WFC).., and could yet have the opportunity to do meaningfully better in the years to come.

I don’t believe Citi has really earned the benefit of the doubt when it comes to management’s performance targets out to 2020, and I do believe there are some optimistic assumptions in there, but I nevertheless believe that expectations are still relatively low. If Citi could generate long-term earnings growth in the range of 5% a year (a little higher than my base case), the shares would look undervalued on the basis of my discounted earnings model. Likewise, if the company can do better in terms of generating return on tangible equity (or if the Street decides to penalize lower-return banks less than it has), there would be upside on a ROTE-P/TBV basis.

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For Citigroup, Slow And Steady Could Still Win The Race

Sunday, October 15, 2017

JPMorgan: Another Quarter, Another Beat

The idea of “core” earnings can seem a little wobbly when it comes to large banks, but JPMorgan Chase (JPM) has been executing well relative to expectations for almost three years now. Not only has JPMorgan maintained a strong position in areas like trading and credit cards, it has shown that it can grow share in retail banking, commercial banking, and commercial services. With that, JPMorgan shares have done quite well over that same time period – handily beating Citigroup (C), U.S. Bancorp (USB), and Wells Fargo (WFC), and outperforming Bank of America (BAC) and PNC (PNC) too, although just barely in the case of PNC.

Although the shares no longer look like a clear-cut bargain, that’s a common issue across the banking sector (if not the market as a whole). It does still look as though the shares are priced for mid-to-high single-digit returns, so I wouldn’t be in a big hurry to sell – particularly as I believe JPMorgan still has opportunities to drive worthwhile revenue and earnings growth in the coming years.

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JPMorgan: Another Quarter, Another Beat

BorgWarner Delivering The Content Growth

BorgWarner (BWA) has had a good year. I last wrote about the stock around the time of its 2016 investor meeting and thought then that the stock was undervalued and that the Street was overly pessimistic about the company’s positioning for the eventual transition away from internal combustion engines. It also didn’t help matters that the company hadn’t been doing a great job with its quarterly financial results vis a vis management guidance and analyst estimates. Since then, organic growth has improved significantly and the company has made a pretty compelling case for how and why it will continue to be a leader throughout the process of electrifying passenger vehicles. The shares have certainly responded – rising nearly 50% since that last article.

It’s harder for me to bullish now given the valuation. I don’t think the company is likely to get the FCF margin leverage it needs to validate today’s price on a DCF basis, though I freely acknowledge that content/share growth and margin leverage are more important drivers to the shares of auto components companies in the short run. This is back on a watchlist for me now, though, as I would like a better balance of opportunity and risk before committing funds to a position.

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BorgWarner Delivering The Content Growth

Dana Doing The Right Things And Reaping The Benefits

Finding an undervalued stock with a solid story behind it is always good, but finding that story getting better with time is even better. That's what appears to be happening with Dana (DAN), as this diversified supplier of components for passenger, commercial, and off-highway vehicles continues to execute well on its plan to grow content, improve margins, and position itself for the evolving demands of its end-markets.

It can be deceptively easy to get caught up in and taken along with Wall Street's short attention span-driven boom-and-doom cycles. With that in mind, I've been cautious about fundamentally overhauling my long-term growth and profitability assumptions for the business. I do like Dana's prospects for value-adding M&A, margin self-improvement, and leveraging a better mix (including more power tech products down the line), but I don't believe Dana is going to suddenly become a FCF-generating machine in an industry where mid-single-digit margins are generally the best that even great companies (like Cummins (CMI)) can do. To that end, while a fair value in the $20s seems reasonable, and I'm comfortable modeling exceptional cash flow growth, today's valuation already seems to be pricing in a lot of progress.

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Dana Doing The Right Things And Reaping The Benefits

Thursday, October 5, 2017

Tenneco Generating Above-Sector Growth While The EV Future Looms


It’s commonly accepted that stock prices are, at least in part, a product of discounted future expectations. The trick here is that how far investors will try to look into the future, and how they view that future, is almost always in flux. And so it is with Tenneco (TEN) – while this leading provider of emissions control and ride performance products is enjoying above-sector growth on the back of increasing content, the shares have gotten smacked around from time to time on worries about Tenneco’s place in the future evolution of passenger vehicles.

Electric vehicles (and battery-powered vehicles in particular) are almost certainly coming, but how quickly they become the predominant vehicle type on the road is an open question and has a lot of ramifications for modeling out Tenneco’s cash flow. Assuming 10% annual erosion in the emissions business starting in the late 2020’s still gives me a fair value around $60, making these shares more of toss-up after this strong rally from the low $50’s.

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Tenneco Generating Above-Sector Growth While The EV Future Looms

Wabtec In A Value-Growth Tug-Of-War

Wabtec (WAB), one of the leading suppliers of parts, components, and systems to the freight and transit train sectors, continues to see turbulent conditions both in its operating results and its share price performance. The stock has gone basically nowhere since I last wrote about the company, but there’s actually been some pretty wide swings between the peak and trough (roughly 35%) over the past year as investors seem to be struggling with a strong “want to like” instinct and some rather spotty financial results.

The shares still leave me a little uneasy. I think Wabtec is well-run and I believe the Faiveley deal will add value both through expense leverage and broadening the company’s horizons (in transit and in non-U.S. markets). But I also believe that freight spending could be weaker than bulls expect, and these shares often react poorly to disappointment. I do believe that mid-to-high single-digit growth can support a fair value in the $80’s, but investors considering these shares need to be aware of that ongoing tug-of-war between the bull and bear camps and the impact it can have on the share price in the short term, and especially around events like earnings reports.

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Wabtec In A Value-Growth Tug-Of-War

Miller Industries Isn't Growing Like It Used To

Ignored by sell-side analysts, Miller Industries (MLR) has long been a company that I’ve liked – the long-term revenue growth is modest and the business is cyclical, but the returns on capital have been better than decent. These shares have done a little better than the S&P 500 over time and quite a bit better than Oshkosh (OSK) and Spartan (SPAR) – neither of which are great comps, but the pool of candidates is limited – and the shares are up about a third from the time of my last write-up.

I’m not as bullish now, though. Sales growth has slowed and margin leverage has started looking wobbly. What’s more, the valuation is more demanding now and there are some macro concerns for the towing industry as a whole. Although these shares are by no means wildly overvalued in my opinion (and could have some leverage to tax reform), I don’t see enough of a discount to fair value to excite me today as a new buyer.

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Miller Industries Isn't Growing Like It Used To

S&W Seed Has To Rebuild Its Growth Credibility

Small-cap growth stories rarely manage to avoid bumps in the road, but the bumps that S&W Seed (SANW) have hit have been larger than average, taking the shares down almost 40% since my article on the company back in October of 2016. In addition to some ongoing challenges in growing conditions, the company has seen serious destocking among major customers in Saudi Arabia and the resignation of its CEO, not to mention meaningful reductions in guidance and expectations.

S&W isn’t past a point of no return, but there’s a fair bit of debt on the balance sheet, not much likelihood of strong near-term cash flow, and a lot of variables that are outside of management’s control. This company could still generate $200 million or more in revenue within the next 10 years, but this is really only a story suitable for investors who can take on risks that are well above average.

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S&W Seed Has To Rebuild Its Growth Credibility

AllianceBernstein's Unsteady Progress Continues To Cap The Valuation

AllianceBernstein Holding LP (AB), the asset manager that is majority-owned by AXA SA (OTCQX:AXAHY), still just can’t get a lot of love on the Street. Although the company has continued to build its assets under management and margins are improving, progress has been inconsistent and AXA likely rattled investors with a major management shake-up earlier this year. AllianceBernstein continues to make progress in areas like its equity fund performance, but investors still seem reluctant to believe that the company can rebuild itself back into a leading money manager.

Even with a longer, slower ramp toward higher margins, AB units still look undervalued to me and they continue to offer a high yield (over 8% as of this writing). I understand that partnerships aren’t for everyone and the influence/control of AXA is another valid issue, but the shares continue to look undervalued to me for patient income-oriented investors.

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AllianceBernstein's Unsteady Progress Continues To Cap The Valuation

Wednesday, October 4, 2017

Cummins Revving Back Up

Cummins (CMI), a very well-run manufacturer of engines and components for trucks and other commercial vehicles, is a case in point as to why I’m often critical of typical sell-side valuation methodologies. Despite the fact that Cummins has been through many up-and-down cycles in the past decades, analysts still manage to freak out during the downswings – slashing estimates, cutting price targets, and just about everything short of walking around lower Manhattan wearing sandwich boards proclaiming that the end is nigh. And when orders for trucks and other equipment start to bounce back and signs of margin leverage reappear, they show a level of excitement close to that of ferrets that have overdosed on Mountain Dew.

To that end, the sell-side’s fair value for Cummins is about 60% higher than it was when I last wrote about the company for Seeking Alpha (in late September of 2016) and the revenue estimate for 2017 is about 14% higher.

I still like Cummins as a company, but the stock is harder to love now. The shares already trade at more than 7x what I think will likely be mid-cycle EBITDA, and seem to be pricing in double-digit annualized FCF growth over the next decade – a number I think Cummins could hit, but that doesn’t leave much room to maneuver (or disappoint). To that end, I’m not all that worried about Cummins’s exposure/vulnerability to electrification in heavy vehicles or competition from vertical integration, but I’m concerned that valuation is back to that point where perceived missteps will be punished harshly.

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Cummins Revving Back Up

Ono Pharmaceutical Needs To Reinvest Its Windfall

Ono Pharmaceutical (OTCPK:OPHLY) (4528.T) has a rare chance to reinvest in a bigger, brighter future, and management needs to execute, as the windfall from Opdivo won’t last forever. While this company has a strong history in manufacturing prostaglandin compounds, Ono has struggled to drive meaningful innovation from its own R&D, and although this Japanese pharmaceutical company can trace its history back roughly 300 years, it’s a small player in the overall Japanese (let alone global) pharmaceutical industry.

Ono currently looks slightly undervalued, but that is giving no credit to value-creation from the company’s cash hoard. While Ono has not historically done M&A, management has sounded more interested in pursuing deals as a way of gaining a foothold in the U.S. and reinvigorating its pipeline. Even so, investors need to consider the risk that growing competition in PD-1/PD-L1 antibodies and potential changes to Japanese drug pricing policy will hit the company’s overwhelmingly large driver of value.

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Ono Pharmaceutical Needs To Reinvest Its Windfall

Sunday, October 1, 2017

Palo Alto May Actually Be Underrated For Once

As a value investor, it’s almost painful to write this, but it looks as though Palo Alto Networks (PANW) may be a bargain when Check Point (CHKP) is not. Although I expect quite a bit more growth from Palo Alto, sales missteps and increased competition from Check Point, Cisco (CSCO), and Fortinet (FTNT) seem to have pushed Palo Alto down to a more interesting valuation even after a significant recovery from the lows earlier this year.

There are, of course, plenty of risks in the security market as enterprise customers try to figure out how to navigate the new cloud-filled landscape, but the basic underpinnings of IT demand seem sound, and Palo Alto has shown that it can combine technical excellence with strong marketing. If my model is in the ballpark, and Palo Alto can generate low-to-mid teens long-term growth in sales and adjusted FCF, a fair value in the $150s seems quite reasonable, with upside if/when the company can reassure the Street that its growth credibility remains intact.

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Palo Alto May Actually Be Underrated For Once

Thursday, September 28, 2017

Newly Slimmed Down, MetLife Worth A Look

MetLife (NYSE:MET) has had more than a few challenges over the past years, with the company battling government regulators over its status as a Systemically Important Financial Institution and battling the markets as weak rates and tough competition have made growth more challenging. Although I do not believe that spinning off Brighthouse Financial (NASDAQ:BHF) meaningfully improves upon a low single-digit growth rate, I believe the shares are undervalued on the potential for increased distributable cash flow and the quality of a more focused, more profitable business.

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Newly Slimmed Down, MetLife Worth A Look

Fortress Transportation And Infrastructure Investors Benefiting From Improving Energy Markets And Growing Asset Deployment

Hindsight being what it is, Fortress Investment Group may wish they had waited a little bit to take Fortress Transportation and Infrastructure (FTAI) public. Energy infrastructure was supposed to be a significant part of this infrastructure fund’s focus, but the company hit the market just in time to see other energy companies dive into their bunkers during the sharp downturn in the energy market. That has complicated the company’s asset deployment/investment plans, but investment is starting to return to the energy markets and FTAI has managed to build up its aviation leasing business in the meantime.

These shares are up about 50% from when I last wrote about them, as investors have turned more bullish on the prospects for deploying capital into markets like energy and as FTAI has put capital to play into assets that are starting to help support the dividend. With that move, the shares are no longer significantly undervalued, but they do offer some modest upside and a dividend yield above 7% that should be supported by funds available for distribution by year-end.

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Fortress Transportation And Infrastructure Investors Benefiting From Improving Energy Markets And Growing Asset Deployment

Wednesday, September 27, 2017

ABB Plugs A Gap

Growth-oriented M&A is often more exciting, but using M&A to fill in gaps in the product line-up can be a very sound use of shareholder capital. Such will prove to be the case, I think, with ABB’s (ABB) acquisition of GE’s (GE) Industrial Solutions business. Although this deal does not generate a significant change in my fair value today, I believe this was a sound move that shores up the company’s low-voltage market presence. I continue to believe that ABB shares are somewhat undervalued, but this company hasn’t had the best execution track record in recent years relative to some peers like Schneider (OTCPK:SBGSY) or Rockwell (ROK).

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ABB Plugs A Gap

SK Telecom Undervalued, But There Are Still Valid Reasons Why

Value and GARP investors know that there will be times where they must sift out the “cheap for good reasons” stocks from their watch lists, and SK Telecom (SKM) is a tough case in that regard. Although I thought expectations were low for the stock back in December of 2015 (and the shares are up about 15% since then, lagging the KOSPI), I had worries about management and competition that have lingered on to today.

The mobile business remains a good source of cash flow, but management hasn’t always (or perhaps even often) made good decisions about what to do with that cash flow. Right now, a lot of controversy surrounds just how far management will subsidize its SK Planet e-commerce operations (specifically 11st.com) and whether the new CEO will once again take the company down the path of M&A.

The shares do look meaningfully undervalued, but value of SK Telecom’s stakes in Hynix and POSCO (PKX) are significant parts of that value (both shares have more than doubled since late 2015) and Hynix in particular has been volatile over the years. I’m still not sold on management, and I’d like to see a greater commitment to returning cash to shareholders, but this could be a name to consider on this recent pullback.

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SK Telecom Undervalued, But There Are Still Valid Reasons Why

Tuesday, September 26, 2017

Nektar Therapeutics Building A More Exciting Pipeline

As Nektar (NKTR) has gotten investors more excited about its pipeline, including a somewhat surprising success with its late-stage pain drug NKTR-181, the shares have done all right since the fall of 2016 – rising more than a third since then (in line with the SPDR S&P Biotech (XBI) and ahead of the iShares Nasdaq Biotechnology (IBB)). The shares don’t look so undervalued to me now, but there are still multiple drivers in the queue for key pipeline candidates that could drive meaningful value.

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Nektar Therapeutics Building A More Exciting Pipeline

Weak Commodity Prices Distract From Adecoagro's Positives

One of the frustrating things about investing in commodity companies is that individual companies can run themselves exceptionally well and still see those benefits largely chewed up adverse moves in the commodity markets they serve. Such has been the case with Adecoagro (NYSE:AGRO). Although Adecoagro has an enviable cost structure in both its sugar/ethanol and farming operations, weaker prices have undermined the company’s earnings power and pressured stock throughout 2017.

I still believe in the quality of Adecoagro, and I still believe that the shares are undervalued based on the company’s long-term FCF potential. Unfortunately, the vagaries of the commodity markets are such that it’s difficult to feel particularly strong conviction about any short-term forecast. That may not bother long-term investors who appreciate a solidly-run business with low costs, good global competitiveness, and attractively long-term growth drivers, but less patient investors may find the commodity-induced volatility is too much bother.

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Weak Commodity Prices Distract From Adecoagro's Positives

American Eagle Following A Familiar Pattern

Teen retailer American Eagle (NYSE:AEO) may not be cyclical in the classical sense of the word, but a quick look at the long-term chart shows that this company and stock have long had a pattern of ups and downs.

The shares dropped below $11 this summer on worries about mall traffic and the impact of heavier promotional activity, as well as more existential worries about the future of store-based apparel retailing, but there is a pattern here. While those present-day worries have some validity, the shares fell below $11 in the summer of 2014, the late summer/early fall of 2011, and the fall of 2008. The fall of 2005 and 2002 were also low points along the way, although 2005 bottomed out above $14 and 2002's decline went below $5.

I'm not suggesting that investors should buy AEO shares just because the stock bottoms out every three years and then recovers. What I am suggesting is that this is a strong brand and a well-run company that has been through the wringer before. The apparel retail market is changing, but change is a constant factor in retail, and I believe American Eagle is better positioned than most to withstand these changes. These shares do look a little undervalued and offer an interesting dividend, but the negative drumbeat is likely to go on a little while longer.

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American Eagle Following A Familiar Pattern

Core-Mark Needs To Start Hitting The Target Again

When I last wrote about Core-Mark (NASDAQ:CORE) almost a year and a half ago, I thought the shares seemed too richly valued even though the company was executing pretty well and had a lot of growth opportunities since then. I didn't necessarily expect the shares to drop about 25%, and I certainly didn't expect the company to start struggling to meet Street expectations for its earnings, but both have happened, and Core-Mark finds itself in a position where it has to rebuild its credibility.

Competitive wins and losses are part of the business, but I'm a little disappointed to see the higher expenses that Core-Mark has seen as it has shuffled its deck of clients. With that, the uncertainty over the Rite-Aid (NYSE:RAD) relationship looms a little larger. While 5% long-term revenue growth and mid-teens FCF growth can support a fair value more than 10% above today's level, the missteps over the past year or so need to lead to some lasting changes (for the better) in how management monitors and operates the business.


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Core-Mark Needs To Start Hitting The Target Again

Saturday, September 23, 2017

Opportunities In 5G And New Services Don't Seem Fully Factored Into Nokia's Price

An open mind is a valuable asset in investing – in my own experience, it's hard not to start the research process without at least some preconceived notions (after all, something prompted you to start the process...), but keeping an open mind at least lets you respond to new information. That's relevant to me in the case of Nokia (NYSE:NOK), as I went in assuming it was not too likely that this very well-known networking equipment company would be undervalued as the market looks ahead to the start of the 5G rollout in a couple of years.

And yet, Nokia may still be worth a look. The shares are widely followed (around 30 sell-side analysts cover it), and the 5G story is no secret, but the market doesn't seem to think that Nokia will manage to get (or keep) better margins in the years to come despite good progress here since the Alcatel deal. These shares are down more than 10% over the past year and up only marginally in the last year, but breaking out into double-digit FCF margins again in four to five years would support a fair value at least 10% above today's price.

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Opportunities In 5G And New Services Don't Seem Fully Factored Into Nokia's Price

Colfax May Have More To Give

I've never been the biggest fan of Colfax (NYSE:CFX), mostly because I've felt in the past that investors and analysts veer into the “fanboy” zone with the comparisons of Colfax and Danaher (NYSE:DHR), overlooking the meaningful differences in business mix and the fact that ESAB (the core of the welding operation) needed a lot of work. Colfax got beat down pretty badly during the industrial recession, with even management acknowledging at one point that they underestimated the speed and severity of the downturn. 

Since the low point in early 2016, though, Colfax shares have bounced back – rising more than 100% from the low and surpassing the likes of Lincoln Electric (NASDAQ:LECO), Dover (NYSE:DOV), and Illinois Tool Works (NYSE:ITW). I'm not surprised that the shares have rebounded as conditions in end-markets like mining, power gen, general industrial, and oil/gas have recovered, but I am a little surprised that there could still be upside in the shares. I don't think that long-term revenue growth of 4% or FCF margins in the 10% to 12% range are all that ambitious, but it seems to support a fair value in the mid-$40's today.

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Colfax May Have More To Give

To Get Its Due, Societe Generale Has To Do Better

French multinational bank Societe Generale (OTCPK:SCGLY) continues to test investor patience with its slow turnaround. While the share price has improved over the past couple of years, the company's return on equity and return on tangible equity remain frustratingly low due to persistently high costs, recent challenges in its CIB operations, and foreign operations that until recently weren't carrying their weight.

SocGen is still somewhat undervalued on the basis of what I don't regard as especially ambitious assumptions, and the shares still yield more than 4%. What's more, key markets like France, the Czech Republic, Russia, and Romania are improving, and management is expected to unveil a new strategy for growth in November that will restore some investor enthusiasm.

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To Get Its Due, Societe Generale Has To Do Better

ON Semiconductor Quickly Clearing Away Doubts About Execution

It has been a good year for ON Semiconductor (ON), and the shares are up over 50% in what has admittedly been a strong market for chip stocks. The Fairchild acquisition is looking like the right deal at the right time, and management has done a lot in just a year to clear up concerns about their ability to execute. Better still, markets like auto and industrial offer good long-term potential, as do entries into markets like servers/datacenters where ON hasn't historically had a big role.

At this point, most of my concerns are about valuation and the overall health of the semiconductor market. Lead times have been growing, and recent industry unit shipments have been well ahead of long-term averages – suggesting the cycle is closer to the peak. With close to half of ON's mix consisting of more volatile product types, some of the company's margin leverage could be at risk if and when the cycle slows. While ON shares don't look overpriced, I would note the risk that even strong individual stories can get dragged down when the wider industry slows.

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ON Semiconductor Quickly Clearing Away Doubts About Execution

After A Strong Run, Check Point Doesn't Look Like A Bargain

I've had a lot of respect for Check Point (NASDAQ:CHKP) for a long time, and the company's less impressive growth rates (and emphasis on margins) compared to Palo Alto (NYSE:PANW) and Fortinet (NASDAQ:FTNT) have created a few buying opportunities over the years. Buying opportunities emerged three times since mid-2015, with the latest run taking the shares up about 50% on renewed evidence that Check Point can still, in fact, generate pretty good revenue growth.

I keep Check Point on my watch list to take advantage of those pullbacks but right now doesn't look like one of those opportunities. I think the company can generate high single-digit long-term FCF growth from here, and I think the opportunities in cloud and mobile are still meaningful, but I want more than the high single-digit return that seems to be figured into today's valuation.

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After A Strong Run, Check Point Doesn't Look Like A Bargain

Thursday, September 21, 2017

Aptose Looking Toward Human Studies

I've tried to go to some length to be clear that Aptose Biosciences (NASDAQ:APTO) is a very high-risk biotech stock, and the company has continued to back up that notion. Management has not been able to resolve manufacturing issues with its promising cMyc-inhibitor APTO-253 and has shifted its focus to another preclinical candidate (CG'806), but progress toward human testing has remained frustratingly slow.

Aptose has been an interesting study in all of the “i's” that have to be dotted and “t's” that have to be crossed to get a drug from the lab and into human trials (let alone through trials and FDA and onto the market). Unfortunately, investors don't buy stocks to learn things and the shares have chopped along below $2 since my last update. I normally don't bother with preclinical biotechs, and I'm not really advising anybody else to either, but I remained intrigued by the strong preclinical signals of efficacy and safety of these two drugs. The odds are that the light at the end of the tunnel is an oncoming train (that's how it goes in biotech and that's not an Aptose-specific comment), but I can still argue for a value well above today's price.

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Aptose Looking Toward Human Studies

Takeda Offers Restructuring And Portfolio Upside

Takeda (OTCPK:TKPYY) (4502.T) is no longer the sleeper pick it once was, as the local shares of Japan's largest drug company have risen more than 25% year to date and close to 35% over the past year (the ADRs have done well too, just not as well as the local shares). Even so, patient investors should be looking at the potential of high single-digit appreciation from here as the company continues to realize the benefits of its restructuring initiatives and reports on key clinical studies

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Takeda Offers Restructuring And Portfolio Upside

Tuesday, September 19, 2017

Alnylam On Its Back Foot Heading Into A Major Event

Alnylam (ALNY) needs some good news and its upcoming Phase III APOLLO read-out on patisiran really needs to hit the mark with respect to efficacy and safety. With a $7 billion market cap, a lot is still expected of this company even though it has had more than a few setbacks in the past year. Programs in hemophilia, porphyria, and cholesterol still have worthwhile potential, but yet another major setback would seriously diminish management credibility and investor confidence in what is still an unproven platform.

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Alnylam On Its Back Foot Heading Into A Major Event

A Window Has Opened For NuVasive

Writing on NuVasive (NUVA) three months ago I said, “Given the history here of the market swinging too far during both the bad times and the good times, I'd be careful buying near the highs, but I'd certainly reconsider if the sector sells off on another bout of health insurance reform uncertainty and/or a company-specific shortfall in earnings/guidance.”

One of those big swings has occurred, with the shares down a quarter since then. The decline hasn't come without some reasons, including a slower U.S. spine market, executive departures, and a subpoena from the OIG, but these don't strike me as long-term issues. Instead, they remind me of a lot of the other short-term setbacks that have created interruptions in NuVasive's long-term run. To that end, I believe strong revenue growth and margin leverage are still in play here, and I believe the shares are actually undervalued.

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A Window Has Opened For NuVasive

Lattice Semiconductor Has To Get Back To Business As Usual

After around a year of speculation and worry, Lattice Semiconductor (LSCC) finally got resolution on the $8.30/share Canyon Bridge takeout offer, as an executive order from President Trump blocked the deal on security grounds after a recommendation from the Committee on Foreign Investment in the United States. This decision wasn't exactly a surprise, as the company had multiple go-arounds with the Committee (including two re-filings), and the shares were down about a quarter year-to-date.

Lattice has a lot of work to do. Guidance and context have been lacking, as management elected not to host conference calls while the Canyon Bridge deal was pending, but revenue and gross margins have been choppy. On the other hand, the company's IP and capabilities in low-power programmable logic devices (including FPGA) and app-specific standard products have value, and the company's cost structure could offer meaningful (and attractive) synergies for the right acquirer.

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Lattice Semiconductor Has To Get Back To Business As Usual

Fortive Exceeding Expectations And Deploying Capital Into M&A

Fortive (FTV) hasn't wasted time showing investors that it fully intends to follow the model and map left by Danaher (DHR). In addition to driving continuous internal improvement, Fortive has started putting shareholder capital to work in M&A – deploying more than $1.5 billion so far this year. Although the deals have been a little pricey, particularly the most recent acquisition, the businesses seem to very much fit in with the vision management has outlined for the company.

These shares have been quite strong year to date and over the last year, so I can't say that the Street is asleep on this name anymore. The appreciation potential in the shares is no longer in that sweet spot I'd like for a new investment, but quality doesn't often come cheap, and I'd note that Danaher did well for investors for a long time despite elevated valuations.


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Fortive Exceeding Expectations And Deploying Capital Into M&A

Sunday, September 17, 2017

Dover Looking To Exit Energy

Analysts have been speculating about Dover's (NYSE:DOV) long-term commitment to its upstream energy business for a little while now, and earlier this week management acknowledged that after completing a strategic review they were looking at “strategic alternatives” for the business. A sale would seem to be the preferred outcome, but management seems committed to getting out of this industry and a spin-off (similar to what the company did with Knowles (NYSE:KN)) is also on the table.

I'm skeptical that this move will add significant value, but I can understand the timing and at least some of the rationale. I think the energy recovery is likely to slow down and the energy segment won't be as much of a contributor to Dover's growth in 2018. What's more, the company is going to have to start reinvesting in the business fairly soon and I believe management is wary of the “tail wagging the dog” and the impact that this segment has had on company valuation. 

Dover shares have been strong since my last update, up close to 15% and well ahead of the S&P 500, as well as peers like Illinois Tool Works (NYSE:ITW) and General Electric (NYSE:GE). The shares have closed that relative undervaluation gap I saw back in May, but investors could still push this higher on optimism around the energy sale process.

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Dover Looking To Exit Energy

First Bancshares An Emerging Growth Story Worth Considering

Bank stocks aren't typically thought of as growth stocks, and that is not unfair, given that quality banks like BB&T (NYSE:BBT) and PNC (NYSE:PNC) probably aren't going to see long-term organic earnings growth much above 5% to 6%. If you're willing to go much smaller, though, and take on meaningfully higher execution risk, you can find some more interesting stories, and I think First Bancshares (NASDAQ:FBMS) is one such story. 

Management has executed on a focused growth plan since 2009, using organic expansion and targeted acquisitions to move into desirable markets in Louisiana, Alabama, and Northern Florida. With the company closing in on $2 billion in assets and meaningful potential operating leverage, not to mention future M&A options, I believe First Bancshares could be looking at high-teens earnings growth over the next three to five years, justifying a fair value in the low-to-mid $30s. Do note, though, that this is a small, off-the-radar bank stock and carries above-average risks.

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First Bancshares An Emerging Growth Story Worth Considering

Thursday, September 14, 2017

Lexicon Thumped Despite Favorable Data

Readers who used to play SimCity 3000 might remember the frustration of seeing “Lack of chocolate sprinkles” as an explanation for setbacks in the game, and I'm reminded of that today seeing Lexicon (NASDAQ:LXRX) shares down over 10% on otherwise positive full data from its Phase III inTandem3 study of sotagliflozin in Type 1 diabetes.

Sotagliflozin isn't a flawless drug and the results of inTandem3 weren't perfect, but I don't believe they were so far out of line with prior trial results to justify the move in the share price. While chatter around other issues pertaining to Type 1 diabetes coming out of the EASD meeting may be contributing to the anxiety, I think the reaction is exceedingly negative and that these shares remain undervalued compared to the potential of sotagliflozin in Type 1 diabetes and Xermelo in carcinoid syndrome.

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Lexicon Thumped Despite Favorable Data

Chemical Financial Offers Some Value And A Proven Growth Model

Today, Chemical Financial (NASDAQ:CHFC) is still digesting the transformative acquisition of Talmer, but this top-10 Michigan bank (and the largest bank headquartered in Michigan) is likely not done with its one-two punch of organic community banking growth and growth through acquisition. Although there has been some turbulence since the deal and the company is still looking at a few quarters where results will be impacted by strategic shifts, the company is on a trajectory for low double-digit earnings growth and should trade above $50 a share.

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Chemical Financial Offers Some Value And A Proven Growth Model

SPX Flow May Still Be Ugly Enough To Love

Life has not been easy for SPX Flow (NASDAQ:FLOW). Based upon what happened to other companies with significant oil/gas exposure like Dover (NYSE:DOV) and Emerson (NYSE:EMR), as well as power generation (also relevant to Emerson), it is no great surprise that a company leveraged to selling pumps and valves to upstream and midstream energy companies would be weak. But then dairy processing weakened significantly and kicked out another leg of SPX Flow's stool. With that, annualized revenue from the last quarter was about 30% below the level of 2012 and the company's efforts to improve its cost structure have largely been buried by operational deleverage.

Not all of SPX Flow's problems have been macro-driven (there have been some self-inflicted wounds along the way), but I do believe that there is a reasonable price for most going concerns and I think SPX Flow may be below that level. Orders have started to improve and I believe margins have bottomed out. Although I'm not looking for a V-shaped recovery in oil/gas, and I believe food/beverage isn't going to grow like it used to, modest revenue growth and margin improvements can drive a fair value close to $40. As a stock that hasn't really rocketed up on its recovery prospects, I think SPX Flow might be worth a closer look.

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SPX Flow May Still Be Ugly Enough To Love

Wednesday, September 13, 2017

Integrated Device Has More To Offer, But Transitions Can Be Tough

It stands to reason that after the strong run in the SOX (up over 40% in the past year and over 80% in the last two years), lingering undervaluation in individual semiconductor stocks is going to come with a “but” attached. In the case of Integrated Device Technology (NASDAQ:IDTI), the company is looking at some decidedly mixed market outlooks, with uncertainty in attach rates for wireless charging, weakness in wireless infrastructure spending, potential for disappointment in server unit shipments, and ambitious targets for the auto and sensor businesses.


I like the collection of technologies that Integrated Device has assembled in-house, and I believe the company can generate double-digit FCF growth from here. Although the shares do not look undervalued on a DCF basis, the shares do still seem to offer some upside on an EV/revenue business and could attract M&A interest. Integrated Devices looks buyable today (although I think MaxLinear (NYSE:MXL) may be more interesting), and it would definitely be a name to reconsider on a pullback into the low $20s.

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Integrated Device Has More To Offer, But Transitions Can Be Tough

Stryker Still Rolling With The Punches

I believe there's a case to be made that Stryker (NYSE:SYK) is among the best-run med-tech companies in the last quarter-century, and maybe one of the best-run companies overall. Through multiple management transitions, numerous M&A transactions, and significant shifts in the med-tech landscape (in terms of technology, competition, reimbursement, etc.), this company has remained a surprisingly consistent grower and a good steward of capital. 

With that in mind, what's a fair price for this company? The shares dropped about 5% on the news of significant issues relating to Sage, but that decline has been almost fully recouped. The second-quarter results marked almost four straight years' worth of 5%+ organic growth and we're now talking about a new streak of close to 7% growth – for a company that is quite large already. I had actually hoped that the Sage news might open a wider window for more value anxious investors like me, but it's tough for me to get excited about buying the shares above the $130's.

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Stryker Still Rolling With The Punches

MaxLinear In A Challenging Transition, But The Upside Is Interesting


Microsemi (NASDAQ:MSCC) has been a good stock for me, generating a double-digit annualized return for the seven-plus years I've owned it, and I like investing on the basis of patterns – figuring out a constellation of attributes that have worked for me in the past and finding them again. With that in mind, I think MaxLinear (NYSE:MXL) might be a name to look at a little more closely.

MaxLinear is not exactly “the next Microsemi,” and the products/markets served are quite different, but here is another growth-through-acquisition story that is underpinned by some solid technological / design capabilities and a desire to grow the addressable market by applying those capabilities to new markets. If MaxLinear can deliver on these opportunities and generate high single-digit revenue growth with improving margins, a fair value range in the mid-to-high $20's seems fair, not including the potential that MaxLinear itself could be a target.
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MaxLinear In A Challenging Transition, But The Upside Is Interesting

Hurco Seeing A Recovery, But It's Choppy

This hasn't been a great year so far for Hurco (NASDAQ:HURC). Although the “industrial recovery” theme is generally playing out, machine tool orders have been choppy and inconsistent at best. For Hurco's part, revenue and margins have recovered slower than I'd expected, making the share price underperformance relative to the S&P 500 not so surprising. I am a little surprised, though, that the shares have lagged those of other machine tool companies like Hardinge, Inc. (NASDAQ:HDNG) and DMG Mori Seiki to the extent they have (roughly 17-20% year to date); Hurco's performance has been somewhat disappointing, but not that much so on a relative basis. 

I continue to believe that Hurco is undervalued, but that comes with the caveat that this is an illiquid and unfollowed company. Moreover, the lack of margin leverage at this stage of the recovery is somewhat concerning. Even so, long-term FCF growth in the mid-single digits can support a fair value in the high $30s, and I believe the prospects remain good for ongoing improvement in the machine tool sector.

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Hurco Seeing A Recovery, But It's Choppy

Monday, September 11, 2017

An Unexpected Management Transition Rocks Lundbeck

One of the frustrating parts about investing is that you can do everything right in terms of due diligence and still see unforeseeable events whack a company's share price. Such is the case this Monday with H. Lundbeck A/S (OTCPK:HLUYY) (LUN.KO), as the stock is down by a double-digit percentage on the sudden announcement of the departure of two key executives, including its CEO Kåre Schultz.

These losses are in the management suite are not good news. No company runs on “autopilot” and strategic direction is an important part of a CEO's role. Although a good operational plan is in place, and the Board of Directors has reaffirmed its commitment to it, a new CEO will almost certainly bring some changes. Bulls can argue that there is at least a chance that the next CEO will be even better, but I believe the market is likely to shift to a “show me” mode for the time being as investors await news on the new CEO and the early-stage Alzheimer's pipeline and whether the company can continue to generate beat-and-raise quarters.

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An Unexpected Management Transition Rocks Lundbeck

Aviva Executing, But The Stock Continues To Test Patience

There are many types of value traps, but one of the most frustrating is when a company executes on its self-improvement plans but can't get much love from the market. Such is the case with Aviva (OTCPK:AVVIY), which has continued to underwhelm in the market since my last update, particularly when compared to the likes of Prudential plc (NYSE:PUK), AXA (OTCQX:AXAHY), and Legal & General (OTCPK:LGGNY). 

The company has done well with its acquisition of Friends Life and subsequent restructuring efforts that have seen it sell down stakes in non-core areas and boost performance in areas like asset management. Nevertheless, the market still seems skeptical about the company's ability to generate meaningful growth and translate excess capital into liquid capital that can be returned to shareholders. Although I don't expect Aviva to be any sort of growth champion, I do believe the company can grow at a mid-single-digit rate, supporting a fair value about 20% higher than today's price.

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Aviva Executing, But The Stock Continues To Test Patience

Euronet's Fee-Based Businesses Continue To Support A Healthy Growth Outlook

Euronet (NASDAQ:EEFT) has been a consummate second-chance stock for me over the years. While this leading operator of ATMs, digital payment, and money transfer systems has maintained a strong record of revenue and EBITDA growth, that performance hasn't always been as consistent as the Street would like. Add in periodic fears about competitors like Western Union (NYSE:WU) and MoneyGram (NYSE:MGI), new money transfer options, and pricing pressure from major partners like Wal-Mart (NYSE:WMT), and the shares have reliably given investors a roughly 15%-20% pullback opportunity at least once a year for a few years. 

These shares have been strong since the bottom of the last pullback, rising about a third since early February (and about 25% since my last update). Both the underlying EFT and money transfer businesses remain strong, and the epay operation is arguably better than it looks as the company transitioning away from mobile top-up and toward newer offerings like iTunes and Google Play, but the shares are not exactly bargain-priced today. 

Given the strong underlying trends in the business and the history of meaningful pullbacks, I'd give this stock a prominent spot on a watchlist in anticipation of another pullback opportunity at some point in the next year or so.

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Euronet's Fee-Based Businesses Continue To Support A Healthy Growth Outlook

Recovering Loan Growth And Long-Term Prospects Argue For Credicorp

Even though lending growth in Peru has slowed dramatically in the past year, as has GDP growth, I can't really complain about the performance at the country's largest bank, Credicorp (NYSE:BAP). The shares are up more than a third since my last update on the company, which most of that move occurring in the last four months as the economic and political situations in Peru seem to be improving. 

I still believe that high-teens long-term ROE can support double-digit earnings growth at Credicorp, but I've become incrementally more bullish on Credicorp's ability to hold on to its strong ROEs as the Peruvian market matures. Credicorp remains a strong player across the board, and management seems committed to sustainable growth and good capital management. Although the shares only seem to be slightly undervalued today, I still believe that they can generate double-digit returns from here with an increasing dividend payout.

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Recovering Loan Growth And Long-Term Prospects Argue For Credicorp

Astellas Changing Its Approach, But Investors Are Skeptical

Astellas (OTCPK:ALPMY) still has quite a bit of work to do. While Astellas is still among the largest of the Japanese drug companies (behind Takeda (OTCPK:TKPYY)) and one of the most profitable (in terms of CROCI), the company has a well-earned reputation for a weak internal R&D effort and a heavy reliance upon partnerships and M&A to drive its pipelines. Making matters worse, the company has had a number of setbacks, including stopping the development of Xtandi in breast cancer and halting its once-promising EGFR inhibitor for lung cancer.

Even with that sour backdrop, Astellas shares could be worth a look. There are credible reasons to believe that Xtandi sales growth could re-accelerate and late-stage pipeline assets like roxadustat, gilteritinib, and claudiximab should help offset the loss of patent coverage for Vesicare (a major sales contributor). Moreover, Astellas seems to have accepted that its internal R&D efforts are not up to snuff, and instead of throwing good money after bad, has chosen to refocus around partnering and external development. It's a risky move, but it arguably does play to Astellas's relative strength as a marketing operation (versus an R&D innovator). With the shares potentially undervalued by more than 10%, Astellas is worth consideration from investors looking to add some OUS pharmaceutical exposure.

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Astellas Changing Its Approach, But Investors Are Skeptical

Fidelity National Information Services Looks Ready To Grow Again

I can't say that FIS (NYSE:FIS) (also known as Fidelity National Information Services) hasn't felt more love this year. While some growth concerns have stalled out the stock a few times in the last three years, the shares have risen more than 20% year to date, outperforming peers like Fiserv (NASDAQ:FISV) and Jack Henry (NASDAQ:JKHY) and more or less keeping pace with First Data (NYSE:FDC). 

While FIS certainly isn't as cheap as it was, the shares still hold some appeal as the company looks toward improving underlying conditions. Not only is management executing very well with its integration of Sungard, it's leveraged to expanding interest margins among its bank customers, aging IT infrastructure, and growth overseas. With the potential to drive FCF growth in the high single digits to low double-digits, FIS's share price could approach $100.

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Fidelity National Information Services Looks Ready To Grow Again

Fulton Financial Looking To Fulfill Its Potential

Sentiment towards a sector has an under-appreciated influence in individual stock performance, and I think Fulton Financial (NASDAQ:FULT) is a case in point. The last year has been pretty mixed for this Pennsylvania-based bank, but its performance has been pretty close to that of Provident (NYSE:PFS) and Valley (NYSE:VLY), with the wider group of Northeast/Mid-Atlantic comparables largely bracketed by S&T Bancorp (NASDAQ:STBA) and F.N.B. (NYSE:FNB). All told, these banks have been benefiting from improving loan demand, improving spreads, and a healthy credit environment, even though they operate in a region with less population and household income growth potential than perennial favorites like Texas, Florida, and the Southeast. 

In the specific case of Fulton, this is an interesting time for the bank, as I feel it is teetering on the edge of some significant developments. These aren't make-or-break in the sense of “will this company still be here in five years?”, but rather will have a lot to do with whether the company can reverse a recent multiyear trend of lackluster profitability relative to its peer group. Getting out from under a consent decree, driving additional consolidation (internal and external), and reaping the benefits of its asset sensitivity and expanding lending capacity could all support meaningfully higher returns, but reversals on these drivers could shrink the multiple and drive underperformance.

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Fulton Financial Looking To Fulfill Its Potential

Tuesday, August 29, 2017

Turbulent Markets And Imperfect Execution May Mean An Opportunity With Benefitfocus

It's great when a stock that you own is supported by a company posting ongoing beat-and-raise quarters with strong revenue growth and impressive margin leverage, but those stories rarely trade cheap for long and especially not in the software sector. On the other hand, if you find an opportunity to get into a story that has double-digit revenue growth potential at a decent price, it's a fair bet that something is not altogether right in the short term.

And so it is with Benefitfocus (NASDAQ:BNFT). I like the basic story here - a company that offers a cloud-based platform of tools that help carriers and employers manage increasing complex healthcare benefit programs. The “but” is that the company has not handled a sales strategy shift very well and it has also seen meaningful turbulence in its market from the uncertainties surrounding healthcare policy in the U.S. I believe both issues are fixable, and I think the stock offers decent upside albeit at the cost of elevated risk.

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Turbulent Markets And Imperfect Execution May Mean An Opportunity With Benefitfocus

Harder And Harder To Find A Spark With Accuray

I tend not to like to write frequently about companies, as I believe investing is best approached as a long-term endeavor and not many short-term moves prove to be all that meaningful. I'm making an exception in this case, though, as Accuray (ARAY) continues to offer a lackluster outlook that suggests only modest progress at best.

With fiscal fourth quarter earnings in hand and guidance for the next year in place, it's tough to find much to get excited about. Management has done a good job of handling the balance sheet, and particularly in managing debt in such a way as to avoid large potential dilution, but the basic trends in the business just aren't improving fast enough to give me much incremental new confidence. While there's still upside even on lowered expectation, it will be hard to see how there's much enthusiasm around this name unless and until order growth meaningfully improves.

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Harder And Harder To Find A Spark With Accuray

Emerson Looking Forward To Improving Process Markets

About a year ago, I was not that keen on Emerson Electric (NYSE:EMR) given what I saw as ongoing challenges in the core business and a management track record that left something to be desired. With the shares up less than 10% in that time versus 11% for the S&P 500, over 15% for Honeywell (NYSE:HON) and more than 35% for Rockwell (NYSE:ROK), at least some of that skepticism was valid. Then again, I also liked ABB (NYSE:ABB) better than Emerson, and ABB has barely squeaked out any gain, so I'm not exactly running a victory lap here.

Emerson looks priced for mid-to-high single-digit returns, which isn't bad given overall industrial valuations, and there is some potential that the recovery in end markets like oil/gas and chemicals could be stronger and that the non-residential HVAC cycle could last longer. The acquisition of Pentair's (NYSE:PNR) valve business was a logical if somewhat risky move and it should give the company a lot of opportunities to improve margins in the coming years. I'd be more excited about Emerson if it were cheaper, but then that's true of a lot of companies, and I think the company's long-term underperformance versus other automation companies like Honeywell, Rockwell, Siemens (OTCPK:SIEGY), and even ABB shouldn't be completely dismissed.

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Emerson Looking Forward To Improving Process Markets

DBS Offers Leverage To Higher Rates And A Recovery In China, But Credit Remains A Concern

Buying good companies that are down on momentary hiccups is a time-tested strategy, and the nearly 40% move in the ADRs of DBS Group (OTCPK:DBSDY) since late October certainly backs that up. As provisioning seems to be tapering off and coming in well below the worst-case scenarios that sell-side analysts were batting around last summer/fall, investors have once again come back to core long-term drivers like DBS Group's strong market share in Singapore, China-driven growth potential, and leverage to higher rates and growing fee-generating businesses. 

I have long liked DBS Group, and I'm generally slow to move away from the stocks of companies I like. That said, the share price now seems to factor in high single-digit long-term earnings growth and low double-digit ROEs, so I really can't say that the shares are dramatically undervalued. There are some concerns again now, though, about credit trends, and investors interested in adding Asian banking exposure should keep an eye on these shares in case the nearly 10% pullback from the recent high stretches out a bit further.

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DBS Offers Leverage To Higher Rates And A Recovery In China, But Credit Remains A Concern

Sunday, August 20, 2017

The Pieces Are In Place For Ongoing Success At Broadcom

It's hard to complain about Broadcom's (AVGO) performance, as this top-tier semiconductor company has seen its shares rise almost 45% since my last update in late 2016. While a few stocks have done better (NVIDIA (NVDA) certainly springs to mind), Avago has by and large doubled the returns of peers like Analog Devices (ADI), Cavium (CAVM), Texas Instruments (TXN), and Xilinx (XLNX). Better still, this is not just a multiple inflation story, as Avago has continued to deliver beat-and-raise performances that support confidence in the ongoing growth potential in areas like handsets and routing/switching.

I don't believe Broadcom is strikingly cheap, but then I wouldn't expect such a large, well-known, well-followed, and well-liked company to be trading at a substantial discount. I do believe ongoing content growth at Apple (AAPL), growth of products like Tomahawk and Jericho in the datacenter, and less appreciated opportunities like its custom ASIC business can continue to support story, and it's not a bad candidate if you find yourself in a “gotta buy something” frame of mind. After all, how often do you find a company that generates more than 60% of its revenue from products where it has 60% or better market share, growth rates above the underlying end-markets, and excellent margins?

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The Pieces Are In Place For Ongoing Success At Broadcom

A Marked Improvement At Turkcell Restores Some Confidence

Shareholders of Turkcell's (NYSE:TKC) ADRs might understandably feel as though they've been cursed. Even when the company is executing very well on its strategy and seeing an exceptional improvement in results, the adverse move in the Turkish lira chews up most of the benefit. Since my last piece on Turkcell around a year ago, revenue expectations for FY 2017 have risen around 13%, and the local shares are up better 20% … and the ADRs are up less than 10%. Strong dividend payments this year sweeten the pot a bit, but Turkcell remains the sort of stock where you feel like you have to cover your eyes and peek between your fingers whenever there's news.

While I'm admittedly being a little flippant about this situation, I do believe Turkcell's strong execution over the past year deserves respect. Likewise, I think the recent trend in performance lends a great deal more credibility to management's long-term strategic view of the company. There is still a lingering shareholder dispute to resolve and ample uncertainty about Turkcell's M&A plays (not to mention plenty of uncertainty about Turkey itself), but the shares look around 20% undervalued today, and that's enough to keep me interested.

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A Marked Improvement At Turkcell Restores Some Confidence