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

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

Aviva Facing Tough Decisions As Investors Bail Out

Investors clearly don’t like what’s going on with Aviva (OTCPK:AVVIY, AV.L), as these shares have been pounded down 25% over the past year, with most of that damage coming in the last six months. The similarly weak results from Prudential plc (PUK) and Legal & General Group (OTCPK:LGGNY), particularly when compared to Allianz (OTCPK:AZSEY), Ageas (OTCPK:AGESY), and other non-UK insurers, would certainly argue for a strong Brexit uncertainty/risk component, but I believe Aviva shares are also suffering from a lack of confidence tied to the recent departure of the CEO and uncertainty over the future direction of the business.

Whoever takes the top job at Aviva, he or she will have some difficult decisions to make. The company’s leverage is higher than that of its peers (and higher than it may appear on casual observation), and its hodgepodge of businesses outside of the U.K., France, Canada, and (maybe) Poland don’t necessarily make sense for the long term. While I understand that Aviva may well be untouchable until the Brexit situation is resolved and there’s a new CEO in place, today’s valuation assumes a very weak run of financial results that I think are unlikely to materialize.

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Aviva Facing Tough Decisions As Investors Bail Out

Harsco Executing Very Well Amid Healthy Market Trends

Looking into 2019, it’s hard not to like where Harsco (HSC) is sitting. Although steel stocks have sold off on worries that prices and spreads are past the peak, volume and capacity utilization continues to rise, and companies aren’t talking about cutting back on production yet; in fact, there are capacity expansion plans on the books. What’s more, railroads are back to getting back to their maintenance spending, and the current demand/price environment for natural gas suggests a healthy outlook for heat exchangers used to process gas for transport. As far as looming negatives go, nickel prices are a concern, but that’s about the only issue I see right now.

Harsco shares have corrected pretty sharply from their recent November highs, and I think the ongoing weakness in nickel prices (and worries about the steel sector in general) may be why. Although the stock doesn’t look particularly cheap on cash flow, the EV/EBITDA valuation is a little more interesting and management’s apparent intention to shift towards more environmental mitigation in the metals business could drive better sustained margins in the future.

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Harsco Executing Very Well Amid Healthy Market Trends

Demand Isn't The Problem For Carpenter Technology; Execution Is

Although demand for specialty alloys has been strong almost across the board, progress remains shaky at best for Carpenter Technology (CRS), as the company’s earnings and cash flow are not reflecting what is actually a pretty healthy demand environment. To the extent it makes anybody feel better, Carpenter isn’t the only alloy company to take a beating in the market, as Carpenter, Universal Stainless (USAP), Haynes (HAYN), and Allegheny (ATI) have all been weak over the past six months as investors have been spooked by the 30% fall in nickel prices and the risk of rising costs, not to mention potentially slower growth in 2019.

It’s tough to continue advocating for this company and stock when the results just aren’t coming through. Ramping up the Athens facility has been a much slower process than expected, and management could have done a much better job of forecasting the maintenance-driven earnings shortfall in the last quarter. While the shares do look undervalued below the $50s, and the company’s investments in additive manufacturing could pay off in a bigger way in five to 10 years, it’s tough to keep extending the benefit of the doubt to the company.

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Demand Isn't The Problem For Carpenter Technology; Execution Is

POSCO's Share Price Seems To Be Predicting A Lot Of Doom And Gloom

Add POSCO (PKX) to the list of steel stocks with a confounding valuation, as investors seem to be pricing in a dire future that doesn’t seem fully justified by the financials. The trouble with cheap-looking valuations in commodity stocks is that you can be generally right about a “it won’t be that bad” thesis, and still see significant near-term declines as investors bail out of the sector on weaker prices and spreads.

POSCO shares look exceptionally undervalued now, so much so that I really have to second-guess what I’m missing in my modeling and analysis. While POSCO’s exposure to a weakening auto industry is a worry, as is the company’s new capex-heavy strategic plan, the market seems to be pricing in a pretty dire future for what I believe is at least a decently-run global steel major.

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POSCO's Share Price Seems To Be Predicting A Lot Of Doom And Gloom

ArcelorMittal Has Continued To Skid On Cycle And Capital Allocation Worries

Some of the best spreads in recent memory haven’t been much help to the steel sector over the past year, and now it looks like the cycle is meaningfully slowing down. With steel prices declining around the globe, apparent demand softening, and growing worries about expanding capacity, coupled with shrinking spreads and sell-side forecasts for declining EBITDA, it doesn’t look like a particularly healthy set-up for ArcelorMittal (MT).

I wasn’t bullish on ArcelorMittal back in September, even though the shares “looked cheap” by multiple metrics, and the shares have fallen nearly another 30% since then. I still can’t really bring myself to want to own these shares myself, even though once again the valuation seems harsh by most metrics I can evaluate.

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ArcelorMittal Has Continued To Skid On Cycle And Capital Allocation Worries

Despite A Host Of Challenges, Ternium Is Holding Up

Predicting how investors will react to particular pieces of news can be difficult, and I look at Mexico’s Ternium (TX) as a case in point. You might think that weak demand in Mexico, an ugly situation in Argentina, and a struggling rebound in Brazil would all be pressuring the stock, not to mention the announcement that Steel Dynamics (STLD) is planning to build a large (3Mtpa) plant that will export to Mexico, would pressure the stock, but Ternium has held up better than many others in the steel sector, including Steel Dynamics, Nucor (NUE), POSCO (PKX), and ArcelorMittal (MT).

Even with this recent run of better (or at least “not as bad”) performance, the shares don’t look expensive. While the pricing concerns that trouble me with Nucor and Steel Dynamics do apply here as well, as does the concern about buying shares into what is likely to be declining EBITDA, I believe Ternium could return to growth sooner and that valuation is even less demanding.

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Despite A Host Of Challenges, Ternium Is Holding Up

Nucor Reaping Fat Profits, But Worries Of Prices And Capacity Loom Over The Stock

The frustrating reality of investing in commodity companies/stocks is that the stocks are not always (or even often) performing their best when the company’s financials are at their best, and vice versa. While Nucor (NUE) posted an excellent set of results for the third quarter, and along with Steel Dynamics (STLD) continues to reap the benefits of robust metal spreads, the shares have basically matched the S&P with a mid-to-high single-digit decline over the past few months.

It is possible that this steel cycle may prove to be “stronger for longer”, but I believe 2018 is quite likely the peak EBITDA year for Nucor for at least a few years. Even though the shares trade for what appears to be a low forward multiple on EBITDA, it’s tough to make profits in steel stocks when prices are falling, capacity is rising, and investors have moved on to sectors that they believe have/will have better earnings momentum.

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Nucor Reaping Fat Profits, But Worries Of Prices And Capacity Loom Over The Stock

Steel Dynamics Getting No Love Despite Excellent Margins And Cash Flow

These remain tough days for the steel sector. Although protectionist policies and healthy end-markets have significantly improved the price environment for U.S. producers like Steel Dynamics (STLD), Nucor (NUE), and ArcelorMittal (MT), prices have softened and meaningful capacity expansions are now on the board. With Steel Dynamics planning the biggest expansion so far announced, there are renewed risks that this marks the peak of the cycle, even though the capacity expansion makes a lot of sense for the company for the long term.

When I last wrote about steel stocks in late September, I was concerned that the risk/perception of peaking steel prices and EBITDA would make it difficult for these stocks to get ahead, even though I thought Nucor looked a little too cheap relative to Steel Dynamics and other steel stocks. Since then, both stocks have weakened further, but Nucor has noticeably outperformed Steel Dynamics over that limited time period. The nearly 25% pullback in Steel Dynamics does make the stock more interesting today, and the “stronger for longer” bull argument could still prove valid, but this looks like a tough place to earn market-beating returns.

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Steel Dynamics Getting No Love Despite Excellent Margins And Cash Flow

Where Does Lundbeck Go After A Brutal Round Trip?

I had suggested investors lighten up on Danish drugmaker H. Lundbeck A/S (OTCPK:HLUYY) (LUN.KO) earlier this year, and I wish I had fully followed my own advice and sold out my position, rather than just meaningfully reducing it. Between ongoing disappointments in the performance of its new drug portfolio and the crushing disappointment of its only novel late-stage asset, Lundbeck shares have plunged almost 50% from the mid-year high and now sit down about 10% for trailing 12 months (and back where it was at in late 2016).

At this point I think there is an argument that Lundbeck shares are undervalued, but that will be a tough argument to sell to the Street given the company’s virtually empty late-stage cupboard and the ongoing challenges in its portfolio of recently-approved drugs. On the plus side, Lundbeck has a clean balance sheet and should generate significant cash flow in the coming years, giving management a better set of options to boost the portfolio and near-term performance.

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Where Does Lundbeck Go After A Brutal Round Trip?

Rockwell Automation Still Poised Between Excellence And Uncertainty

Looking into 2019, Rockwell Automation (ROK) seems to be in familiar territory – nobody’s really questioning the operational excellence of this leader in discrete automation, but there are plenty of concerns about end-market health, where industrials sit in the cycle, and whether Rockwell is as well-positioned for the next phase of automation as it was for the last.

I typically shoot for double-digit returns when I invest, and Rockwell doesn’t seem priced to deliver that unless you think long-term FCF growth can reach that grey area between mid-single-digits and high single-digits – a level of performance that’s not impossible, but certainly not conservative to expect. Although I’m tempted to call today’s potential returns “good enough” for a stock that seldom gets all that cheap unless/until industrial stocks really go fan-ward, I do believe there could be another round of angst and stock weakness early in 2019 that could be an opportunity to pick up high-quality industrials like Rockwell.

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Rockwell Automation Still Poised Between Excellence And  Uncertainty

ams AG Decimated On Further Apple Shortfalls

It’s been a brutal stretch for companies exposed to 3D sensing, with ams AG (OTCPK:AMSSY) (AMS.S) and IQE (OTC:IQEPY) having a particularly rough year. Recent weakness tied to Apple (AAPL) has hit the sector hard (including Lumentum (LITE) ), and weak volumes, underutilized capacity, and price pressure have all combined to savage ams’s near-term earning prospects and share price.

Sell-side analysts have slashed their price targets for ams by two thirds over the past four months, with one analyst going from a target of CHF 190 to CHF 23.60, and it remains to be seen just how quickly Android adoption of 3D sensing will develop and whether OEMs will favor the structured light technology where ams is strongest. Although the shares do look undervalued even after a sharp revision to expectations, this isn’t a hill I’m particularly eager to die on and investors need to weigh the potential of 3D sensing adoption against the risk that the adoption curve will be long enough that ams’s advantages will be whittled away by lower-priced Asian suppliers.

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ams AG Decimated On Further Apple Shortfalls

Societe Generale Going Nowhere Fast

There are a few exceptions here and there, but you can’t really win a game by playing defense. Societe Generale management (OTCPK:SCGLY) (SOGN.PA) has had to spend a lot of time cleaning up past messes, but the reality is that the multiple disposals needed to shore up capital have compromised revenue growth. Coupled with a very challenging core French retail banking market, Societe Generale is going nowhere fast and it’s increasingly difficult to see how that changes, as ongoing investments in IT aren’t likely to drive meaningful outperformance.

Societe Generale shares continue to trade at what may look like an unreasonably-low price/TBV, but this bank doesn’t earn its cost of equity capital and doesn’t seem very likely to do so over the next decade. That doesn’t mean that there may not be value here, but it’s hard to get very bullish about a perennial underperformer that simply lacks impressive earnings growth drivers.

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Societe Generale Going Nowhere Fast

Apple (And China) Taking Another Bite Out Of Cognex

Given the multiples and elevated growth expectations, I think you could argue that the market has actually been somewhat restrained in its negative reaction to Cognex’s (CGNX) challenging 2018 and a weaker outlook for 2019. Granted, the shares are down about a third over the past year (much worse than machine vision rival Keyence (OTCPK:KYCCF) ), but we’re still talking about a company trading at a forward EV/EBITDA in the low-to-mid 20’s.

I don’t think Cognex has necessarily seen the worst of the slowdown, and I do have some concerns that growth expectations and mulitples could have further to fall. By the same token, though, Cognex is a rare high-quality, high-growth asset in industrial automation and a significant player in a key enabling technology. Whether on its own or as part of a larger automation company, I believe Cognex’s business will be significantly larger 10 years from now, and that leads me to lean in favor of not getting too cute trying to time the bottom of this recent downturn.

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Apple (And China) Taking Another Bite Out Of Cognex

AxoGen Still In The Doghouse, But The Opportunity Is Compelling

The going hasn’t gotten any easier for AxoGen (AXGN). This up-and-coming med-tech company specializing in nerve repair has spooked growth investors with regard to its revenue growth rate and investors have also grown more concerned over the possibility of more intense competition from companies like Integra (IART) and Baxter (BAX) in the nerve repair market. While all that’s been going on, there seems to have been a general shift away from higher-growth (and higher-risk) stories in the med-tech space.

I’m still bullish on AxoGen, as I believe it addresses a large and under-served market with better products, but sentiment won’t turn around overnight. The 30%-plus long-term revenue growth I expect from AxoGen is hardly conservative, but I do believe these shares can outperform as surgeons become more familiar and comfortable with the procedure/products and increase their orders in the coming years.

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AxoGen Still In The Doghouse, But The Opportunity Is Compelling

Aptose Restarts Its Long Journey

Biotech investors have a lot to contend with just in terms of the risks that go along with novel drug development, but market sentiment is an often-overlooked component as well – one that can cause every bit as much frustration for investors. I was worried a few months ago that Aptose Biosciences (APTO) shares could be at the not-so-tender mercies of the volatile biotech market in the absence of real thesis-changing news, and the shares have continued to fall (another 30% or so) on what has been a generally worsening sentiment in biotech, and particularly for riskier names.

Aptose just announced the enrollment of the first patient in its restarted Phase Ib study of APTO-253, though, and the initiation of CG-806 studies should follow in 2019. Both drugs hold meaningful potential in hematological oncology, but both also face a very long road of clinical and commercial development; a road that swallows up the large majority of candidates. I do believe these shares are back at an interesting price, but will again re-emphasize that this is an early-stage biotech with well-above average risks.

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Aptose Restarts Its Long Journey

JPMorgan Humming Along, But The Market Wants More Than Consistency

JPMorgan (JPM) hasn’t had a bad year (it has outperformed various bank stock indices by 10% or more), but it seems as though the market has had its fill with the sector for at least this part of the cycle. When one of the best in the space is likely to only generate mid single-digit core earnings growth from this point on, I suppose I can see their point, but I believe JPMorgan remains undervalued even on the assumption of slowing macro drivers in the coming years.

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JPMorgan Humming Along, But The Market Wants More Than Consistency

Honeywell Looks Well-Positioned In A More Uncertain Environment

As multiple short-cycle industrial sectors appear to be slowing, Honeywell (HON) looks like a pretty good option going into 2019. This conglomerate’s third-quarter earnings had a lot of moving parts, but the aerospace, safety, productivity, automation, and specialty chemical operations all appear to be in good shape, and the company continues to make progress with its free cash flow conversion. With management taking renewed aim at fixed costs and very likely to deploy significant capital into additional M&A in 2019 and beyond, I like Honeywell’s positioning as both a shorter-term safe haven and longer-term winner.

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Honeywell Looks Well-Positioned In A More Uncertain Environment

Neurocrine Biosciences Smacked On Rising Expectations And Fraying Nerves

The last few months have not been kind to Neurocrine Biosciences (NBIX). The last three months have seen the stock double the roughly 11% pullback in the Nasdaq Biotechnology Index, with the last month being particularly brutal (a 22% drop versus a 7.5% drop). Although sales of Neurocrine’s lead drug continue to develop nicely, the scale of outperformance is shrinking. At the same time, the company has a major make-or-break data release on the way, and investors have also had to contend with some concerns about growing adverse event reports.

My view is that Neurocrine has largely been a victim of its own success and sharp deterioration in sentiment for biotech. Although I can understand some investors want to lighten up ahead of the Tourette’s data, I believe the worries about the rising number deaths in patients taking Ingrezza are overheated. Although I do see the Ingrezza pediatric Tourette’s read-out as a risky event, I still believe these shares are undervalued whichever way that update goes.

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Neurocrine Biosciences Smacked On Rising Expectations And Fraying Nerves

BB&T Committing To Tech Over M&A To Drive Growth

In a relatively short of period of time, both the operating environment and operating philosophy of BB&T (BBT) seem to have changed in meaningful ways. Management has now gone out of its way to make clear that its priorities lie with organic, tech investment-driven growth versus M&A, while the regulatory environment seems to be moving in a direction that will allow BB&T to run a leaner, higher-yielding balance sheet.

While not all of BB&T’s recent updates were universally positive, and my fair value is not really changing at this time, all told I believe BB&T is on a good path. Although I do still believe that there are a few more deals in BB&T’s future, I can’t argue with a management strategic that is focused on being leaner and more responsive while exploiting the bank’s existing specialty capabilities.

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BB&T Committing To Tech Over M&A To Drive Growth