RenaissanceRe's High-Quality Model Serving It (And Investors) Well

Hard times tell you a lot about companies, and the combination of a very soft pricing market and recent catastrophe losses have highlighted a lot of what is good about RenaissanceRe (NYSE:RNR). While the shares have certainly lagged the S&P 500 over the past year, and lagged rival/peer Arch Capital (NASDAQ:ACGL), RenRe hasn't done poorly relative to other insurers like Everest Re (NYSE:RE), Aspen (NYSE:AHL), or Validus (NYSE:VR). Throughout this tough period, RenRe's underwriting standards, strong balance sheet, and business flexibility have served the company well, despite some erosion in underwriting profitability.

RenRe is trading at a premium relative to long-term valuation norms. Some of that can be attributed to what I believe is a legitimate and well-earned quality premium, but I do have some worries that investors have been too eager to factor in the benefits of harder insurance markets. While I do still see some upside for shareholders from here, I'd be cautious about establishing a big new position at these levels.

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RenaissanceRe's High-Quality Model Serving It (And Investors) Well

FirstCash Looking Forward To Value-Creating Opportunities

FirstCash (FCFS) shares have done well since my last update in August, with the shares rising about 14% as the company continues to execute very well with its Mexican pawn stores. Looking not all that far ahead, the company should start reaping the benefits of integrating its Cash America stores and converting them to FirstCash’s more sophisticated and efficient IT system as well as expansion into a new Latin American market (Colombia).

Valuation is more of a challenge for me now. I’m very willing to acknowledge that there’s no end-all/be-all approach to valuation, and the market is often happy to overpay for growth, but the risk/reward ratio now is more in keeping with a good hold than a “must buy.”

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FirstCash Looking Forward To Value-Creating Opportunities

Buoyed By The Industrial Recovery, Automation The Next Driver For Lincoln Electric

Managing expectations is an underappreciated part of the investor relations process, but it is all the more challenging when the company in question has earned more than just the benefit of the doubt through years of above-average execution. Lincoln Electric (LECO) has long been an excellent company, but the reactions to the last few earnings releases (significant sell-offs) underline the high expectations that accompany this leader in the welding industry.

I like the long-term prospects for Lincoln Electric. The acquisition of Air Liquide makes the company even more competitive with Colfax (CFX) outside the U.S., and the company's investments in automation and specialized applications like hard-facing should pay off with above-market growth for many years. The "but" is the level of expectations already built into the stock - while I believe Lincoln Electric can deliver long-term FCF growth in the high single digits, I'd need a share price in the low $80s (or below) to get to an attractive total expected return.

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Buoyed By The Industrial Recovery, Automation The Next Driver For Lincoln Electric

Copa Holdings Flying High Again On Market Recoveries And Internal Improvements

Economic troubles in key commodity-driven markets like Brazil, Colombia, and Venezuela certainly hurt Copa Holdings (NYSE:CPA) in the recent past, as the shares dropped around 75% from their peak in early 2014 to their low in the fall of 2015 and accompanied a 20% drop in revenue driven by weaker yields. Since those 2015 lows, though, investors have come back to these shares in a big way - the shares are within 15% of their prior peak (and up more than 50% so far this year) as yields have started to recover and the company has been expanding capacity.

There are a lot of positives that I see with Copa. The challenges in 2014-2016 forced the company's management to take a more critical look at their operations, and I believe efforts to control costs, improve revenue yield, and re-emphasize profitable expansion will pay off down the road. What's more, the company remains well-placed in a critical hub location (Panama's Tocumen airport) and continues to focus on low-traffic routes that don't lend themselves to profitable direct competition. Add in numerous future expansion opportunities and the recovery potential of Brazil and Colombia, and I believe Copa can look forward to strong growth for a number of years.

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Copa Holdings Flying High Again On Market Recoveries And Internal Improvements

Alnylam Pharmaceuticals Wins Another Round

Alnylam Pharmaceuticals (ALNY) scored another big win Thursday morning, with the company's detailed presentation of clinical data on patisiran showing strong efficacy and safety relative to future competitor Ionis's (IONS) data on inotersen in patients with hereditary ATTR amyloidosis with polyneuropathy (also called familial amyloid polyneuropathy, or FAP).

Alnylam's data were quite good, but not a knock-out blow against Ionis's inotersen, as you can expect Ionis to build its marketing message around an easier and more tolerable administration and perhaps compete on price. Still, for Alnylam, this head-to-head competition went about as well as could be expected and should raise the hopes of getting an advantageous label from the FDA.

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Alnylam Pharmaceuticals Wins Another Round

Neurocrine's Ingrezza Launch Continues To Exceed Expectations

To quote from the A-Team, "I love it when a plan comes together." Although it is still very early, Neurocrine Biosciences (NBIX) is executing well on the launch of its wholly-owned drug Ingrezza, and its partner AbbVie (ABBV) continues to move elagolix closer to the finish line for both endometriosis and uterine fibroids - indications that could both support more than $1 billion in royalty-generating sales. Additionally, Neurocrine continues to develop its clinical pipeline, with the company having started a new Phase IIb study for Ingrezza in pediatric Tourette's and planning to move its drug for congenital adrenal hyperplasia (or CAH) into a Phase II proof-of-concept study.

The market is reacting quite positively to the much better than expected revenue for Ingrezza, and the strong initial launch is encouraging, but the next few quarters could be a little more volatile as Neurocrine will have to contend with a competitive launch from Teva (TEVA), sampling, and shifts between the 40mg and 80mg doses. Even so, I believe the shares are undervalued now, with multiple clinical events on the horizon.

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Neurocrine's Ingrezza Launch Continues To Exceed Expectations

Execution Risk Back On The Table At Wright Medical

Orthopedic extremity specialist Wright Medical (WMGI) continues to be a frustrating "two steps forward, almost two steps backward" story, as fiscal third quarter results came in below expectations, and management lowered guidance on ongoing execution issues in the lower extremity business. Although the strength of the shoulder business is a meaningful positive, and the lower extremity business is hardly beyond repair, the company's inability to drive consistent execution relative to its own targets remains frustrating and an impediment to the stock.

I've previously said that Wright Medical is a stock to consider buying in the mid-$20s and selling in the mid-$30s, and I believe that remains the case. While the latest reset to expectations is disappointing, Wright Medical still has the potential to grow revenue at a high single-digit long-term rate and drive FCF margins into the 20%s. "Potential" is one of the dangerous words in investing, though, so investors have to at least consider the risk that Wright Medical's ongoing execution issues remain in place, and/or that rivals like Stryker (SYK) steal the company's thunder in the still-fast-growing extremities market.

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Execution Risk Back On The Table At Wright Medical

Better Late Than Never For MSC Industrial

One of the recent concerns about industrial maintenance, repair, and overhaul (or MRO) supply distributor MSC Industrial (NYSE:MSM) was why this leading distributor of metalworking tools (among other MRO supplies) was not seeing more benefit from the emerging industrial recovery in North America. Those concerns should ease a bit with the strong daily sales reported for the fiscal fourth quarter, but the company's long-term margin leverage remains a key question, and increased competition from Amazon (NASDAQ:AMZN) and now Berkshire Hathaway (NYSE:BRK.A) shouldn't be ignored.

I've owned MSC Industrial for some time, and I've written many times that when there's a conflict between "good company" and "good valuation", I go with the former. That said, there are legitimate arguments as to whether MSC is as good of a company as it used to be and whether today's valuation already captures a lot of what can go right for the business. Although I'm not rushing for the door, and there aren't a lot of clear bargains in the industrial space, it's hard for me to make a buy-case on the stock beyond a play on improving trends (momentum) in metalworking and related industries and at least a few more beat-and-raise quarters.

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Better Late Than Never For MSC Industrial

3M Comes Back Strong In The Third Quarter

With its high valuation multiples and above-average visibility, 3M (MMM) needed a better result than what it delivered in the second quarter – a quarter that was marked by average organic revenue growth, rare pricing weakness, and weak margin performance. Fortunately, for shareholders, 3M came through and delivered a quarter that, while not perfect, was still quite strong on a relative basis.

Valuation is still problematic. I can’t really come up with a set of circumstances whereby these shares look cheap, so I suppose the argument comes down to some version of “almost of all of its peers are expensive, so if you have to own an expensive stock, why not this one?” I still own these shares myself (but it is not a large part of my portfolio), and I think management still has moves to make to drive better results, but I do worry that today’s valuation is setting the stage for unimpressive returns down the line.

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3M Comes Back Strong In The Third Quarter