W.R. Berkley Looking To Better Days, But The Market Is Already There

Commercial insurance companies are enjoying pretty high multiples on an historical basis, even though the market remains concerned about pressure on rates and claims inflation. W.R. Berkley's (WRB) recent performance is part of the reason I harp on valuations - although W.R. Berkley's operating results haven't been bad, the shares have lagged peers/rivals like Travelers (TRV), Hartford (HIG), and Chubb (CB) over the past year.

Looking at 2018 and beyond, I'm not bothered by W.R. Berkley's relative growth prospects. I think the company still has good growth prospects in a range of markets, and the company's more aggressive than average approach to investments (including real estate) has reliably contributed positively to income. My concern remains valuation, as the company trades at a high-teens multiple to forward EPS, and the shares seem to be factoring in a pretty exceptional level of growth.

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W.R. Berkley Looking To Better Days, But The Market Is Already There

Stryker Producing Excellent Results, But Expectations Are High

This year will be the 25th year I've followed med-tech (holy crap I'm old…), and Stryker (SYK) continues to amaze me. Apparently, Stryker never got the memo about "trees not growing to the sky" and the need to settle into a quieter middle age. In addition to pursuing growth-oriented M&A to augment existing businesses and address new markets, Stryker continues to do an excellent job of managing its long-held core businesses.

A business that performs as well as Stryker should command premium valuation, but how much of a premium? High single-digit FCF growth suggests an expected return of around 7% to 8%, and maybe that's not bad expected return/risk balance for a company like Stryker. Still, I believe the expectations are a little too high now, and I'd want a better expected return before buying in - even for one of the best-run companies out there.

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Stryker Producing Excellent Results, But Expectations Are High

Danaher Back On Track To Start 2018

It can get a little ugly when darlings lose their luster, and Danaher (DHR) took some dings in 2017, leading to underperformance relative to other multi-industrials like Fortive (FTV), Honeywell (HON), 3M (MMM), and Illinois Tool Works (ITW). Considering the last couple of quarters, though, it looks as though Danaher is back on better operational footing and that 2018 will be a more "Danaher-like" year.

Given that Danaher spun off most of its industrial exposure, I still see the risk that Danaher will underperform some of those aforementioned peers for a little longer, as industrial recoveries spur greater growth. Longer term, though, I'm not really concerned. Like Honeywell, I can't really say that Danaher is "cheap", but it does appear to be less expensive than most of its peers and something of a relative bargain.

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Danaher Back On Track To Start 2018

Datalogic Leveraging Its Product ID Know-How Into Larger, Faster-Growing Markets

Automation takes many forms, and product ID is arguably an under-appreciated part of the automation story. Italy's Datalogic SPA (OTC:DLGCF) (DAL.MI) is leveraging a strong foundation in retail data capture (scanners in particular) into new areas and gaining share in markets like manufacturing, logistics, and healthcare as more businesses turn to advanced identification technologies to improve production flows, improve accuracy/reduce errors, and lower overall operating costs.

Datalogic's ADRs are not especially liquid, but these shares are nevertheless worth a look as companies like Honeywell (HON) bring a higher profile to the opportunities to automate in areas like warehouses and logistics. With fragmented competition in the manufacturing and logistics spaces, I believe Datalogic could generate long-term revenue growth in the high single-digits with improving margins and perhaps attract the attention of larger players looking to bring more technology to factory floors and warehouses.

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Datalogic Leveraging Its Product ID Know-How Into Larger, Faster-Growing Markets

SUMCO's Rocket Ride May Not Be Over Yet

In the world of silicon wafers, two companies stand apart – Shin-Etsu (OTCPK:SHECY) and SUMCO (OTCPK:SUOPY). These two Japanese companies control close to 60% of the market between them, and an even larger share of the most sophisticated and demanding wafer types. I wrote about Shin-Etsu here, and now, it is time to take a look at SUMCO – a company that is benefitting from strong wafer price increases and healthy volumes as fabs continue to ramp up production of memory and logic chips.

SUMCO has already enjoyed a strong run and the wafer sector is cyclical. Right now, the industry is going through a significant up-cycle, but capacity additions have been restrained, and the outlook for wafer pricing over the next few years is healthy. While a lot is already in the share price, I don’t think SUMCO’s potential is tapped out just yet.

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SUMCO's Rocket Ride May Not Be Over Yet

Data Center Driving IDT Ahead Of New Launches And Revenue Opportunities

While it may just be a slowdown within a bullish up-cycle, many segments of the semiconductor industry have gotten more challenging recently. Investors have gotten nervous about volume growth in smartphones, particularly on the high end, and data center and communications spending has been slower to pick up than expected. Those are all key markets for Integrated Device Technology (or "IDT") (IDTI), but the company is leveraging new product cycles to continue to generate good growth.

Although valuations are generally pretty high around the semiconductor space, there does still seem to be some opportunity left for IDT to go higher, particularly if the strength in computing continues, and the company sees more growth in communications and consumer markets. I would also note that although IDT is probably close to the limits of what it can achieve for near-term margin leverage, the accretion potential to an acquirer makes this a serious candidate to be bought out.

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Data Center Driving IDT Ahead Of New Launches And Revenue Opportunities

Operational Clouds Have Opened Another Window At Alaska Air

Airlines in the U.S. have shown an uncommon level of discipline for the past decade, setting the stage for a nice boom period where most industry participants have been able to make some good money. Nothing that good lasts forever, though, and there are emerging signs that airlines are getting a little loose with capacity in the interests of competition.

With Alaska Air (ALK), there are concerns that go beyond that competitive industry backdrop. The integration of Virgin America (NASDAQ:VA) hasn't been completely smooth and it looks as though the company might be slipping a bit on much-vaunted metrics like cost control and customer experiences. All of that has led to a roughly one-third drop in the share price from its early 2017 peak and underperformance relative to some of its larger rivals.

I'm cautiously bullish on Alaska Air now. I'm bullish because I think modest growth can support a fair value in the $70s based upon both DCF and EBITDAR. I'm cautious because individual stocks don't often outperform when the entire sector goes into disfavor, and I think there could be some more bumps in the road as Virgin America is fully integrated and as rivals respond to the new, larger, more competitive Alaska Air.

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Operational Clouds Have Opened Another Window At Alaska Air

GEA Group's Struggles Look Like A Potential Window Of Opportunity

GEA Group (OTCPK:GEAGY) underscores one of the challenges in the market today – if you want to pick up shares of an industrial company at a decent (or maybe even “cheap”) valuation, you’re going to pay for it in others ways. In the case of GEA Group, that’s consistency and quality, as the company announced another miss for the fourth quarter and gave disappointing guidance for 2018.

The good news/bad news at GEA Group is that this is a generally good collection of assets that aren’t being run particularly well. With activist investors now involved, I believe there will be more pressure on management to start hitting their efficiency targets and I think the Street would generally welcome a change in management if it comes to that. Priced to generate a high single-digit return from here, I think GEA Group has some appeal, but this stock will require patience and an above-average ability to stomach some near-term volatility and disappointment.

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GEA Group's Struggles Look Like A Potential Window Of Opportunity

Asset Sensitivity Not Getting It Done For Fulton Financial

Despite above-average asset sensitivity, Fulton Financial (FULT) doesn’t seem to be making as much progress as some of its peer/rival banks. Double-digit revenue and pre-provision net revenue (or PPNR) growth in the fourth quarter certainly weren’t bad, but expectations were already high and it looks as though Fulton’s loan growth prospects have slowed.

There are still avenues by which Fulton can outperform – getting out from under its consent decrees (whenever that happens) will be a help on both the M&A and cost front, and there is more room to leverage hires made in its commercial lending group. Still, with expectations setting such a high mark, it would seem that not even double-digit earnings growth is enough to drive an exciting fair value at this point.

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Asset Sensitivity Not Getting It Done For Fulton Financial

Growth In Aerospace And An Oil & Gas Recovery Bode Well For USAP

As has been the case for other specialty alloy companies like Allegheny (ATI), Carpenter (CRS), and Arconic (ARNC), the last twelve months have been good to Universal Stainless & Alloy Products (USAP), as aircraft suppliers gear up for major product ramps and other key users like oil/gas and heavy industry recover. USAP has actually been the best performer of the lot over the past year, but I believe there is still more potential upside as orders grow, margins scale up significantly, and potential trade actions restrict import competition.

Investors should note that this is a riskier than average stock. The business is exceptionally cyclical and this really isn't a candidate for a long-term buy-and-hold approach.

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Growth In Aerospace And An Oil & Gas Recovery Bode Well For USAP

Honeywell Looking At Improving Markets And Strategic Options In 2018

I don’t exactly think that Honeywell (HON) is undervalued right now, but it is probably about as close to undervalued as I’m going to find in the large-cap multi-industrial space, or at least outside those stories that need significant self-improvement. With good growth in safety and productivity, ongoing growth in chemicals, a recovery in process automation, and improving conditions in aerospace, 2018 should be a pretty good year for Honeywell. What’s more, the company’s upcoming spin-offs should improve the overall long-term growth outlook and Honeywell has more than enough liquidity to make a significant strategic acquisition or two. Like I said, this stock is not cheap, but the implied return is a little more palatable than for many of its peers.

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Honeywell Looking At Improving Markets And Strategic Options In 2018

Atlas Copco Executing Well On Rising Tides

Having followed Atlas Copco (OTCPK:ATLKY) for quite some time, it’s hard to come up with new ways to compliment what has long been one of the best-run industrials out there. Management follows a clear model that prioritizes market leadership, close customer relationships, service and support, and a long-term focus that means they don’t fire engineers or sales reps just because of a market downturn. The results are what they are – a trailing decade of double-digit annualized free cash flow growth, double-digit returns on capital, and outperform relative to both the S&P 500 and its peer group.

And as is so often the case, the valuation on the shares is a major hang-up for me. Yes, I know there are long-term investors in stocks like Atlas Copco and peers/comps like Illinois Tool Works (ITW) (one of the few comparables to outperform Atlas over the last decade), Ingersoll-Rand (IR), Eaton (ETN) and so forth that will argue to just buy and hold irrespective of valuation, but that’s not my approach. Although I don’t expect to be able to buy Atlas Copco shares at substantial discounts to fair value, past history suggests there will be opportunities again in the future to buy in at a more reasonable level of future expectations.

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Atlas Copco Executing Well On Rising Tides

Clockwork Excellence Of Execution From Illinois Tool Works

Stop me if you've heard this before - a well-run global conglomerate is still finding ways to generate decent organic growth and strong operating leverage, but the market already seems to be well ahead in terms of valuation. And so it goes with Illinois Tool Works (ITW). While ITW remains a strong execution story, it's hard to see value in the shares. Still, given ITW's reputation as a great operator leveraged to growth in North America and Western Europe, it won't surprise me if the valuation stays robust as long as the markets remain healthy.

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Clockwork Excellence Of Execution From Illinois Tool Works

Renewed M&A Chatter Outweighs An Okay Quarter For Microsemi

Microsemi's (MSCC) CEO made a statement not so long ago that has been repeated more than a few times recently - in the semiconductor world, you're buying until you get bought. Buyout chatter is once again swirling around Microsemi, and a deal price could easily exceed $70 for this diversified player. In the meantime, though, the company's performance continues to be a little mixed - not actually bad, but not providing the beat-and-raise momentum that investors typically want to see.

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Renewed M&A Chatter Outweighs An Okay Quarter For Microsemi

3M's Ongoing Performance Forcing A Change In Perceptions

If there's any stock that has benefited from the unwind of GE (GE) as a go-to "safe and steady" idea, I would argue it is 3M (MMM). Chronically maligned as a sluggish, short-cycle play, I believe 3M has demonstrated in the last few years that it is more nimble and less cyclical than commonly perceived. Although I cannot defend the valuation on the shares today (as is the case for so many of its peers), at least the arrow is pointing up for 3M in terms of both performance and guidance.

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3M's Ongoing Performance Forcing A Change In Perceptions

High Expectations Remain The Theme For Rockwell Automation

In turning down a rather rich bid from Emerson (EMR), Rockwell (ROK) certainly signaled that the board has a lot of confidence about where this leading automation player is heading. Although Rockwell isn't, and never has tried to be, "all things to all customers", the company's strong presence in process and hybrid automation and its emerging industrial IoT platform doesn't make that confidence completely unfounded.

As is so often the case with Rockwell, valuation continues to be my primary concern. While there are some valuation approaches that suggest Rockwell's valuation isn't excessive, it's not a bargain either, even if Emerson was willing to pay more than today's price to own the company.

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High Expectations Remain The Theme For Rockwell Automation

PINFRA Looks Undervalued, With A Healthy Growth Pipeline

Investors are clearly concerned about the future holds for Mexico, and I believe that has created a window of opportunity with Promotora y Operadora Infraestructura ("PINFRA") (OTCPK:PUODY), a major operator of toll roads in Mexico. With close to 30 toll roads in its portfolio and a high likelihood of adding more in the near future, not to mention opportunities in areas like ports, PINFRA generates very strong, repeatable free cash flows that I do not believe are as economically sensitive as the market fears.

I don't expect PINFRA to duplicate the remarkable growth it has shown over the last decade, but it doesn't need to in order to generate strong results for shareholders. Mexico needs to upgrade its infrastructure and I believe PINFRA's proven track record of execution leaves it well-placed to win bids sufficient to generate ongoing growth in the 6% to 7% range, supporting a fair value about 15% to 20% higher than today's price.

Investors should note that PINFRA's U.S. ADRs, though sponsored, are not especially liquid.

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PINFRA Looks Undervalued, With A Healthy Growth Pipeline

Alps Electric's Shift Towards Auto Will Unlock More Growth

Serving the smartphone industry, and Apple (AAPL) in particular, can be a mixed blessing. While the volume, revenue, and profit potential can be considerable, the smartphone industry is highly competitive and worries about shipment growth can create a lot of volatility. So it has been for Alps Electric (OTCPK:APELY) - while this leading component manufacturer for phones and autos has done well recently with its smartphone-facing business, worries about demand for the iPhone X have played a big role in the recent 15% drop in the share price.

I like the fact that Alps is shifting more towards auto, as I think the company has a wide range of technologies/capabilities that fit with where the auto sector is moving. Although the shares have performed pretty well since my last update (up around 40%), I think there could be another 20%-plus move in the shares as investors calm down about the smartphone business and start seeing more progress in the auto business over the next 12 months.

Investors should note that Alps' U.S. ADRs are not especially liquid.

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Alps Electric's Shift Towards Auto Will Unlock More Growth

Saddled With Investor Worries, Cemex Deserves Another Look

I’ve come across a lot of reasons not to invest in Cemex (CX), the Mexico-based global cement company. Some say the company is too complex, others that it has pursued global expansion irrespective of value, and still others that there’s just too much risk in its “value over volume” approach, particularly recently in Mexico.

I’d never argue that Cemex is a flawless investment candidate, but I’d argue the stock’s underperformance relative to peers like Martin Marietta (MLM), Eagle (EXP), LafargeHolcim (OTCPK:HCMLY), and Buzzi (OTCPK:BZZUY) is overdone. Not only is Cemex making significant strides in deleveraging, I believe there is more operating progress than commonly thought, as well as better prospects in its core Mexico and U.S. markets.

Although using free cash flow modeling for a company like Cemex is very tricky, I believe EV/EBITDA is less desirable given the importance of “I” (interest expense) as well as the fact that such a one-year metric doesn’t reward the progress I believe is to come.

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Saddled With Investor Worries, Cemex Deserves Another Look

Leadership In China Driving A Bright Future At A.O. Smith

A.O. Smith (AOS) doesn't try to do everything, but focusing on doing what it does with a high degree of operating excellence has produced great results for shareholders - the market returns over the past five and 10 years have been well ahead of the norms for other appliance companies like Whirlpool (WHR) or Electrolux (OTCPK:ELUXY), while revenue growth, margin leverage, and returns on capital stack up very favorably as well.

That's great and all, but that's in the past right?

I expect that A.O. Smith's North American business will remain a mid-single-digit grower with very healthy margins, while exceptional growth from the company's efforts in China (and, further down the road, India) should keep overall revenue growth in the high single digits for quite some time to come. A.O. Smith's excellence is well-represented in the share price, though, and it's tough to see how this is a bargain unless you have very bold expectations for future revenue growth and margin leverage.

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Leadership In China Driving A Bright Future At A.O. Smith

Acerinox Has More To Offer As A Trade

Commodity companies don't easily lend themselves to long-term buy-and-hold strategies, but they can still generate good gains for investors willing to be a bit nimbler with their moves. Acerinox (OTCPK:ANIOY) (ACX.MC) is up more than 50% from its cycle lows in 2015-2016, but these shares still appear to have some upside based on improving stainless steel demand, healthy pricing, and reasonable competition. What's more, while commodity stocks don't really trade on full-cycle cash flows, Acerinox is exiting a capex reinvestment cycle as the market is turning up - a positive development for margins and cash flows.

There is no easy answer to the "right" multiple to use in EV/EBITDA analysis, but I believe an 8x multiple is reasonable for Acerinox, given its place in the cycle and the stainless steel market. With such a multiple, the shares look about 10% undervalued with potential upside from a stronger/longer stainless up-cycle that would support even higher EBITDA estimates.

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Acerinox Has More To Offer As A Trade

Steel Dynamics Augmenting The Steel Up-Cycle With Its Own Excellence

One of the traits that often trips up investors in commodity stocks is the reality that it is often the inferior companies that do better during market upswings. To that end, while Steel Dynamics (STLD) remains one of the best-run steel companies out there (and frankly, one of the best companies I think I've followed), the shares have notably lagged the likes of U.S. Steel (X), AK Steel (AKS), and ArcelorMittal (MT) since the sector troughed early in 2016. Fortunately, there is some compensation - while holding cyclical stocks like Steel Dynamics is often not such a good idea, Steel Dynamics's outperformance during the downswings helps to compensate, and the shares have done far better than its peer group over the last five years.

In any case, these are good days to be a steelmaker, and I expect Steel Dynamics's own operating excellence to maximize the value in this upswing. The company has done a good job of building share in targeted markets like autos, and I see ongoing opportunities for the company to improve its portfolio over the next few years. Valuation is a little trickier, though. Modeling cyclical commodity companies is a brutal exercise (nobody saw this big recovery two or three years ago), but I don't see as much value in Steel Dynamics as I do in other metal names.

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Steel Dynamics Augmenting The Steel Up-Cycle With Its Own Excellence

A Spark At Accuray - Will It Catch Fire This Time?

The problem with small-cap radiation oncology company Accuray (ARAY) is not that it never has good quarters. The problem is that the company has never been able to put together a good run. With two pretty good quarters in the hopper, though, maybe the actions that management has taken over the past couple of years are starting to make a real difference in order flow and revenue conversion.

I'm still skeptical (and still a shareholder), but if management is playing it safe with guidance, there might be some actual momentum in the business now. I will explain my thinking later in this piece, but I'm now more comfortable with a valuation approach that suggests a fair value in the mid-$7s, making Accuray worth a look if you can take on the risk that this is yet another head fake in what has been a frustrating pattern of "two steps forward, 1.9 steps backward" for many years.

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A Spark At Accuray - Will It Catch Fire This Time?

Cerner Looking Toward New Opportunities To Drive The Next Leg Of Growth

It's hard not to respect what Cerner (CERN) has accomplished over the years. Not only is this one of the leading companies in healthcare IT, but the stock's 20% annualized return over the past 15 years is double that of the S&P 500 and about a third better than its peer group (health IT services), as the company has delivered double-digit growth in revenue and 20%-plus growth in free cash flow. All of that said, it's harder for me to make such a bullish case today, with the shares already discounting better than 10% long-term annualized free cash flow growth. Although developments like the VA contract and ongoing growth in the population health business should help stoke ongoing growth for many years to come, I'd prefer to wait for a pullback.

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Cerner Looking Toward New Opportunities To Drive The Next Leg Of Growth

Prudential PLC Marrying Strong Growth With Disciplined Capital Return

All things considered, I think the changes in the insurance markets are starting to favor P&C insurers again over life insurers, but that doesn't mean that there still aren't opportunities in the life space. Names like ageas (OTCPK:AGESY) and AXA (OTCQX:AXAHY) have done pretty well, and there is ongoing opportunity in names like Aviva (OTCPK:AVVIY). I'm also adding Prudential PLC (PUK) to this list, as I believe this company's high-growth Asian operations, better-than-assumed U.S. operation, and improvable U.K. operations all contribute to a value that is about 10% above today's price. I'd also note that Prudential PLC has prioritized returning capital to shareholders, with a 5% annual growth target and over 10% actual growth over the past decade-plus.

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Prudential PLC Marrying Strong Growth With Disciplined Capital Return

Volume Remains The Critical Driver For Insteel

Insteel (IIIN), the country's largest independent manufacturer of steel reinforcing products, is a challenging company to evaluate as an investment. On one hand, I believe this company is run along very sound lines, with management looking to drive higher value-added sales and consolidate the industry, while also distributing cash to shareholders through dividends, special dividends, and buybacks. On the other hand, this company is basically a "commodity-plus" type of business, where demand is largely outside of management's influence, where pricing spreads have significant influence, and where capacity utilization is critical to margins.

I wasn't thrilled with the valuation when I last wrote about Insteel (in September of 2016), and the stock chopped lower until starting to rebound this fall. At this point, I am cautiously optimistic/bullish on the company's prospects. Demand should improve to a level that can drive attractive capacity utilization and pricing should continue to help spreads - both of which are good for margins. Valuation remains tricky, though, as I think the company needs to get over a $110M/quarter run-rate in sales to really offer attractive upside.

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Mellanox Pushed Toward Higher Margins, But Ample Uncertainties Remain

Although I've generally been bullish on Mellanox (MLNX) over the last five years, this semiconductor company (and stock) has had its issues, including an apparent unwillingness (or inability) to communicate clearly with investors regarding strategy decisions and priorities. On top of that, the company's R&D-heavy business plan has kept a lid on margin expansion - one of the prime value drivers for semiconductor stocks, and particularly, now as the world seems to think that Broadcom's (AVGO) margin-driven strategy is better than the revenue growth-driven strategies of yesteryear in semiconductors.

While management seems to regard the involvement of Starboard (a noted activist investor) as an unwelcome distraction, the reality is that Starboard is not wrong in taking management to task for the underwhelming stock performance - over the past five years, you would have done far better with Broadcom, Cavium (CAVM), Marvell (MRVL), or even Intel (INTC) than Mellanox. With management paying more attention to margins, the shares actually look a little undervalued now and potentially more significantly so as an M&A play.

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Mellanox Pushed Toward Higher Margins, But Ample Uncertainties Remain

Rotork Needs To Add A Self-Improvement Kicker To Its Cyclical Recovery Story

Although I thought Rotork (OTCPK:RTOXY) (ROR.L) had more upside on the cyclical recovery theme back in late May, the 25% move in the shares since then was frankly more than I expected, as Rotork and peers like Emerson (EMR), Weir (OTCPK:WEGRY), and SPX Flow (FLOW) have seen strong moves on the emerging recoveries in process industries like oil and gas. While Rotork's revenue hasn't come back yet (on an organic basis), order growth has been strengthening and 2018 should be a much better year.

The cyclical recovery is only part of the story at Rotork, though. Margins have been weakening for a while, and it appears that the company is finally ready to do something about that. While a margin-boosting self-help program on top of a cyclical recovery could certainly boost cash flows, a lot is already baked into the share price.

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Rotork Needs To Add A Self-Improvement Kicker To Its Cyclical Recovery Story

Halma's Model Continues To Drive Value For Shareholders

Strong revenue growth and healthy margins remain a heady mix for industrial investors, and Halma (OTCPK:HLMAF) (OTCPK:HLMLY) (HLMA.L) is a good case in point. The market has amply rewarded this diversified European safety, health, and environmental conglomerate for its ongoing growth, with the shares up 25% or so since the last time I wrote.

Halma's model of steadily acquiring leading businesses in defensible niches has a lot of room to run, but it's hard to reconcile what I regard as a very good long-term model with today's valuation. Trading at close to 20x next year's EBITDA, it's hard to argue that this is any sort of overlooked hidden gem at this point.

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Halma's Model Continues To Drive Value For Shareholders

PAX Global May Be Pounded Down Into Bargain Territory

When last I wrote about PAX Global (OTCPK:PXGYF) ((0327.HK)), the latest story was the company's now-former CFO throwing a temper tantrum at a sell-side analyst (Timothy Lam) who had the temerity to be negative on the stock. By the way, not only did that tirade cost the CFO his job, that bearish analyst was right - the stock has fallen more than 40% since then, and a lot of what the analyst pointed out as bearish concerns (a weakening position in China, inflated expectations for developed market adoption, weak service offerings) have become significant issues.

I do have some real concerns about PAX's position in its home market, as well as its ability to penetrate developed markets like the U.S., but I also see solid execution in markets like Brazil as a sign that PAX isn't beyond redemption. I have slashed back my expectations to single-digit revenue and FCF growth, but even those lower projections support a fair value almost 60% higher than today's price. Although this is a very high-risk name, I'm starting to wonder whether these shares have beaten down to a point where they offer a good return on the risk.

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PAX Global May Be Pounded Down Into Bargain Territory

How Long Will 'Good Enough' Be Enough For BB&T?

The fourth-quarter earnings report for BB&T (BBT) is a bit of a Rorschach test for investors - do you focus on the decent revenue growth and high-single-digit pre-provision profit growth, or do you fret about the weak lending growth, the modest improvement in tangible book value growth, and the likelihood that results in the first half of 2018 will be relatively sluggish before lending activity picks up later next year?

I've been a shareholder of BB&T for some time, and I continue to believe this bank has a good management team and a strong long-term plan for the business. That said, even with long-term earnings growth in the high-single digits (above most of its peers), the shares don't look undervalued today.

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How Long Will 'Good Enough' Be Enough For BB&T?

Lackluster Earnings And Guidance Create An Opportunity In Alcoa

Alcoa (AA) is not the easiest stock to follow or own. While Alcoa enjoys a solid position on the cost curve for both bauxite and alumina and has made progress with its aluminum costs, there are a lot of moving parts to the model that management has little or no control over, including the hard-to-predict behavior of the Chinese government toward its smelters. Longer term, I'd like to see Alcoa pursue an upstream merger to further consolidate the industry and create more cost-cutting opportunities, but in the meantime, the outlook for aluminum in 2018 should some upside.

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Lackluster Earnings And Guidance Create An Opportunity In Alcoa

A Rare Window Of Opportunity With U.S. Bancorp

There are some things you just sort of take for granted as an investor, and U.S. Bancorp (USB) being richly-valued is one of them - after all, U.S. Bancorp has built a well-earned reputation for generating some of the best long-term results in the banking sector. And yet, the shares haven't done so well over the last year; the roughly 11% rise in the share price lags Wells Fargo (WFC) and BB&T (BBT) and comes up well short of PNC (PNC), JPMorgan (JPM), and Bank of America (BAC).

I can't believe I'm saying this, but I actually think U.S. Bancorp may be slightly undervalued now. I am concerned that USB's rivals are closing the gap and that it will be hard-pressed to match the returns of yesteryear ("trees don't grow to the sky" and all that), but with ongoing opportunities to grow its branch-based business and fee-generating businesses, I think there may actually be an opportunity here in the shares, even as the growth outlook for the first half of 2018 is perhaps rather sedate.

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A Rare Window Of Opportunity With U.S. Bancorp

Building Credibility And Value Still A Work In Progress For Citigroup

Investors remain skeptical that Citigroup (C) will hit the 2020 targets that management laid out this summer, and the share performance has been lackluster - since the third quarter, Citigroup's performance has trailed JPMorgan (JPM), Bank of America (BAC), and Wells Fargo (WFC) by a pretty significant margin. While Citi isn't blowing the doors off with its recent performance, and I continue to believe that the bank will come up a little short of its 2020 targets, it's not like Citigroup is doing a horrible job either.

I believe Citigroup's business model will always be an impediment to its performance, but I also believe that this is a business that can generate returns above its cost of capital and that it is trading below fair value today - a rare occurrence among larger banks. If Citi can generate around 5% adjusted earnings growth from here, $80 looks like a reasonable fair value, and the shares are worth a look for patient investors who want exposure to large-cap banks without overpaying.

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Building Credibility And Value Still A Work In Progress For Citigroup

Comerica Delivering The Growth, But Not Cheaply

It's hard to call Comerica (CMA) cheap, but bank investors want growth, and this very asset-sensitive, C&I-focused lender is likely to produce a lot of it in the coming years relative to its peers. Although I don't really expect superior loan growth from Comerica, the combination of higher net interest margins, higher fee income, better expense leverage, benign credit, and lower taxes can be a powerful one, and Comerica should generate attractive growth in the coming years (with a big jump between 2017 and 2018). Even though I understand that investors will pay up for growth, I struggle to understand paying such a high premium for Comerica, and there are several other banks I'd consider before this one at today's prices.

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Comerica Delivering The Growth, But Not Cheaply

FLSmidth Should See A Sharper Recovery In 2018

Like its peers in the mining capex space, FLSmidth (OTCPK:FLIDY) (FLS.CO) has already seen a sizable recovery in its share price from the worst lows of the cycle, but there should be more in store as orders improve in 2018, and the company benefits from meaningful operating leverage. Although FLSmidth has exposure to a still-challenging cement market that other mining companies like Metso, Outotec, and Weir don't have to contend with, I think it is notable that FLSmidth has management to get this business close to breakeven even at historically weak levels of activity.

The cyclicality of FLSmidth is a major issue when it comes to considering these shares as a long-term holding, but that cyclicality can nevertheless benefit shareholders in the near term. If mining equipment orders and revenue continue to strengthen through 2018, I believe these shares can outperform with 10% or more upside from here in the short term.

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FLSmidth Should See A Sharper Recovery In 2018

Lanxess Getting More, But Not All, Of Its Due

Turnarounds take time, and one of the challenges companies in that position have is convincing the Street that it actually will be different this time. To that end, while shares of Germany’s Lanxess (OTCPK:LNXSF) (LXSG.DE) are up more than double from the early 2016 lows, the company has only been recently getting much credit for management’s efforts to transform the business from a highly cyclical, heavily commodity-oriented company to a more stable specialty-oriented chemical company.

With the shares recently breaking out above EUR 70 (or $80), there isn’t huge upside to these shares anymore, but I do believe the shares are about 10% undervalued as the company goes into its next leg of transformation and turnaround. Although 2018 volume growth may be lackluster, top-line disappointments could be a buying opportunity provided the underlying margin performance continues to head in the right direction.

The U.S. ADRs do not have very good liquidity, so I would caution investors to be careful about buying them (use limit orders), and I would suggest that those investors who can buy the local shares should do so.

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Lanxess Getting More, But Not All, Of Its Due

Ams AG: 3D Sensing And Sensibility

Investing in chip technologies tied to smartphones always comes with certain risks, including serious price erosion, rampant competition, and the risk that your customers will eventually replace you with their own internally-developed chips. Even so, Austria's ams AG (OTCPK:AMSSY) (AMS.S) looks to be worth a closer look on the basis of the company's strong integrated approach to 3D sensing and opportunities to generate growth in areas like industrial/auto, audio, and environmental sensing on top of significant opportunities in handset-based 3D sensing.

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Ams AG: 3D Sensing And Sensibility

Growing Scale And An Attractive Franchise Should Drive Gains From OceanFirst Financial

Although overshadowed by markets like Texas, there is still money to be made providing banking services in the New York City-Pennsylvania corridor. With a community bank approach that emphasizes quick decisions and deep customer relationships, OceanFirst Financial (OCFC) looks well-placed to leverage fast-growing operating scale and attractive funding costs in some relatively attractive markets.

OceanFirst looks about 10% to 20% undervalued on the basis of adjusted earnings growth of around 9% to 12% over the next five years. Those estimates don't include additional M&A beyond the announced Sun Bancorp deal, but I would expect management to look for additional deals to bring it closer to the $10 billion regulatory threshold. Although 2018 will be a busy year with the integration of Sun, back-office expense reduction efforts, and ongoing loan repositioning, a return to organic lending growth toward the end of 2018 and more meaningful expense leverage in 2019 should start driving attractive organic earnings growth numbers.

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Growing Scale And An Attractive Franchise Should Drive Gains From OceanFirst Financial

Lancashire Holdings Heavily Leveraged To Improving Prices

Bermuda-based, London-run specialty insurance company Lancashire Holdings (OTCPK:LCSHF) (LRE.L) hasn't had the best run in recent years. Even with a 25% rally from its 2016 lows, the shares are down almost 20% over the past five years as the company endured withering price erosion across its property, energy, and specialty markets. While the company's combined ratio remained healthy due to the company's disciplined underwriting approach and its policy of cutting exposures when rates are not adequate, Lancashire nevertheless saw a 30% decline in book value as it returned capital to shareholders and saw a 10% decline in premiums.

I believe operating conditions are much more favorable for Lancashire now. Rates improved at the January renewal, and Lancashire has adequate capital to deploy to take advantage of hardening markets. Improving energy prices should also help the energy business, while the company's third-party capital management business can leverage its underwriting capabilities to generate lucrative fee income. Last and not least is the scarcity value of a well-run Lloyds operator that could attract M&A attention.

I'm not expecting especially strong earnings growth, but even modest growth can support a fair value more than 10% above today's price, with further upside possible if and when the markets harden further. Investors should note that the company's ADRs are not very liquid, and those investors who are willing and able to invest in the local shares would likely be better-served going that route.

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Lancashire Holdings Heavily Leveraged To Improving Prices

Ongoing Excellence At PNC, But At A Price

PNC Financial (PNC) continues to reap the benefits of sound strategic decisions ahead of this upturn in the rate cycle. The shares have responded to this outperformance, with the shares up more than 75% over the past two years and up a third over the last year - not quite as good as JPMorgan (JPM) or Bank of America (BAC) but still a very solid performance next to its regional bank peers.

Although PNC isn't especially asset-sensitive, the company's strategy of building its middle-market commercial and asset-based lending should continue to support growth as well as the company's willingness to lend in consumer areas like autos where other banks are pulling back. Lower taxes will certainly support a higher earnings growth rate and it may also support a decision to monetize the company's BlackRock (BLK) stake. I expect PNC to generate earnings growth at a mid-to-high single-digit rate on an adjusted basis, but the share price already amply reflects the growth prospects.

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Ongoing Excellence At PNC, But At A Price

Weak Core Growth Remains The Theme At Wells Fargo

It’s still early in the reporting cycle, but Wells Fargo (WFC) looks like it will once again be on the wrong side of average when it comes to growth in revenue, core earnings, loans and the like. While the self-inflicted messes of Wells Fargo’s multiple scandals certainly aren’t helping, this is an issue that goes back several years and reflects ongoing challenges in growing this huge retail bank.

Although Wells Fargo shares do look undervalued on the basis of mid-to-high single-digit earnings growth (helped by a lower tax rate), you have to believe that the company will be able to hit its goals with respect to cost reductions and get its loan/earning asset growth going again. I think it will probably take a couple more quarters, but I do expect Wells Fargo to post better growth rates in the second half of 2018. With few undervalued options in the space, the risk/reward may be worthwhile here, though Wells Fargo still has work to do to restore its reputation with investors and customers.

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Weak Core Growth Remains The Theme At Wells Fargo

JPMorgan Beats The Mark Again, But Could Do Even Better

Say what you will about managing earnings and expectations, but 12 straight quarters of better-than-expected earnings from JPMorgan Chase (JPM) is still a credit to the quality and strength of this bank. JPMorgan continues to outdo its competitors when it comes to loan growth and deposit-gathering, while running its earning assets through a very competitive cost structure.

Although JPMorgan has become a little less asset-sensitive, the company still has levers to pull to drive greater profitability. As strong as the company’s retail banking operations have been, the ROE is still below management’s target, and commercial lending is starting to show some growth. Between ongoing loan growth, expense leverage, and the benefits of a lower tax rate, JPMorgan should be able to grow earnings at a mid single-digit to high single-digit rate, with even greater EPS growth by way of ongoing buybacks.

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JPMorgan Beats The Mark Again, But Could Do Even Better

CK Hutchison Holdings Needs To Find A New Driver

CK Hutchison Holdings (OTCPK:CKHUY) may be a Hong Kong-based conglomerate, one that is no longer involved in property development or management after a transaction that created CK Property (now CK Asset Holdings (OTCPK:CHKGF)) in 2015, but that doesn't mean it offers investors all that much exposure to Hong Kong or mainland China. Close to 60% of CK Hutchison's EBITDA comes from Europe, much of that from U.K., which makes the company considerably more leveraged to the health of the European economy and the uncertainties surrounding Brexit.

On the positive side, CK Hutchison has done a lot to improve the profitability of its telecom operations, and its Husky energy operations should be able to post much better results with the improvements in oil and gas prices. Retail is more mixed, but likely to turn up in Europe, while the ports and infrastructure operations look more sedate. All told, CK Hutchison shares look a little undervalued on a cash flow basis, but I'd like to see the company put more capital to work as a way of driving more value-creation for shareholders.

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CK Hutchison Holdings Needs To Find A New Driver

CK Asset Holdings Prizing Profits Over Property Pure-Play

When CK Asset Holdings (OTCPK:CHKGF) [1113.HK] was originally created as Cheung Kong Property, the idea is that this would be more or less a pure play on property development and management in China and Hong Kong. That lasted about a year or so, before management announced an intention to diversify beyond property and pursue more of a conglomerate-type structure with investments outside of property development or property management.

Although there are some concerns and drawbacks to this move, net-net, I think it is a positive decision for shareholders. Rather than being tied to the ups and downs of the property cycle (which is looking more “down” in CKA’s core markets), the company’s managers can see fit to recycle and allocate capital wherever the best long-term opportunities may lie. The company hasn’t abandoned property, but can now (I believe) make better long-term decisions without having to stick to a rigid mandate.

Valuing this company ahead of what is almost certain to be additional investments in non-property assets is challenging. I believe the company can generate good adjusted earnings growth (around 7%) even with single-digit ROEs, supporting a fair value of over $10.50 for the ADRs, but there are a lot of unknowns about the composition of earnings five or 10 years down the line.

I would note that CKA’s ADRs do not offer good liquidity. Investors who have the option to invest in the Hong Kong-listed shares should certainly consider doing so.

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CK Asset Holdings Prizing Profits Over Property Pure-Play

CapitaLand Broadening Its Focus To Include More Higher-ROE Services

Singapore's largest property developer, CapitaLand (OTCPK:CLLDY) (CATL.SI) had a pretty good 2017. Helped by improving conditions in Singapore and China, not to mention significant project openings, CapitaLand's local shares climbed 20% and the ADRs did even better.

Although these aren't the easiest shares to own, and it's not a simple company to model, I continue to believe the story and opportunity are worthwhile. CapitaLand management has shown repeatedly that they can successfully develop and manage properties and recycle capital into new value-creating projects. What's more, the company is a good play on the rising middle class in China, and to a lesser extent, Vietnam, India, and Indonesia. With the shares still about 10% to 15% undervalued, CapitaLand looks like a reasonable option for investors who want exposure to consumer-centric real estate in China and Southeast Asia.

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CapitaLand Broadening Its Focus To Include More Higher-ROE Services

K2M Looking To Move Past A Disappointing 2017 With Innovation-Fueled Growth

The last year, and especially the last six months or so, hasn't been very friendly to the pure-plays in the spine space like K2M (KTWO) and NuVasive (NUVA), and though Globus (GMED) has had no such problems. In the case of K2M, this company's focus on complex and degenerative cases hasn't spared it from some of the same overall pressures that have hit the sector, and the shares were down about 15% from the time of my last article before a recent rally shrunk that underperformance a bit.

Although K2M's recent underperformance is a little concerning, the company still has a strong line-up that should drive better results in 2018 and beyond. Competition remains a risk, but K2M has brought innovation to a space that has generally been overlooked and that has helped serve as a "force multiplier" for the sales effort of this relatively small company. While I wouldn't buy (or recommend) a stock on the basis of M&A potential, K2M looks like an attractive digestible target, but the shares have enough standalone upside to justify a closer look.

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K2M Looking To Move Past A Disappointing 2017 With Innovation-Fueled Growth

Gruma Looks Like A Simple, Undervalued Story With Multiple Levers

Gruma (OTC:GPAGF)(GRUMSAB.MX) hasn’t been an especially rewarding stock for investors in recent years, as the shares have traded within a somewhat narrow band over the past two and a half years. Despite that lackluster recent history, I believe shareholders could see better returns in the coming years as the company leverages improving growth prospects in markets like the U.S. and Europe and drives simultaneous margin improvement. In the shorter term, Gruma should also benefit from lower input costs, new plants scaling up, U.S. tax reform, and a potentially weaker Mexican peso.

I’m looking for mid-single-digit long-term revenue growth from Gruma, as the company continues to expand its branded products business in the U.S. and leverages underlying volume growth, while also seeing more market expansion in Mexico. My FCF growth expectations are considerably more ambitious, but driven by my expectation that Gruma will pass through some “breakpoints” where FCF generation should scale up quickly. All told, I believe Gruma shares are about 20% undervalued today.

Investors should note that since Gruma canceled its ADR program, the ADRs are not very liquid. That is a drawback (and a risk factor) to the investment thesis, though investors can consider the option of buying the local shares (most brokers that offer international trading include Mexico in their offerings).

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Gruma Looks Like A Simple, Undervalued Story With Multiple Levers

MSC Industrial Can't String Together Two Strong Quarters

With a higher valuation come higher expectations. MSC Industrial (MSM) had been enjoying a solid run since its last quarterly report, a report which brought some much-needed encouragement back to analysts and investors after a prolonged stretch of lackluster results and increasingly threadbare explanations from management. Fiscal first quarter results were unfortunately a step in the wrong direction, with the company coming up a little short on revenue and margins and management not really having a lot to say to brighten the story.

I’ve been conflicted about MSC shares for a while now, as I think the underlying trends in margins are more worrisome than management wants to acknowledge and that management’s comments on the business have not instilled confidence. On the other hand, this is a company with a long track record of double-digit returns on capital (even at the bottom of the cycle) and good share in a manufacturing/industrial sector seeing a strong rebound.

I don’t think MSC shares are ridiculously expensive, but then I also think we’re at a place in the market where you have to be more careful about company quality, valuation, and momentum (momentum in the sense of business conditions/performance, not stock performance). As I’ve said many times, I’m reluctant to part with the shares of a company that has performed well for me, but I will say I’m much closer to the exit now than the entrance.

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MSC Industrial Can't String Together Two Strong Quarters

Globus Medical Revving Up Into 2018

I’ve thought highly of Globus Medical (GMED), but I really didn’t expect the strength in the stock that the market has delivered since my last write-up. The shares have risen more than a third in a little more than six months and close to 80% in the past year, with the stock really taking flight after third quarter earnings. I believe at least some of this is due to Globus Medical offering pretty clean growth in a spine market where growth has become harder to find recently, not to mention the upside from the company’s entry into trauma.

It’s not all that comfortable to be on the negative side of a story with momentum, but I struggle to make the numbers work with Globus now. I do believe the company’s new robot platform, trauma products, and strong overall portfolio in spine can drive high single-digit revenue growth and double-digit FCF growth, but that’s already in the share price and I’m not comfortable paying more than 5.5x forward revenue. That being the case, I’ll be cheering from the sidelines for the time being.

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Globus Medical Revving Up Into 2018

A Sluggish Spine Market Keeping The Pressure On NuVasive

NuVasive (NUVA) is a case in point for a couple of things I've long believed about stocks. First, the process of revising earnings and expectations usually takes multiple quarters. Second, "buy on pullbacks" is actually hard advice to follow, as good companies don't often get all that cheap unless there are some legitimately scary (or at least nerve-wracking) issues going on with the company.

Although NuVasive shares eventually showed a little positive momentum after my last piece, the shares are down about 10% from that level now after another sell-off tied to the company's guidance at a major sell-side industry conference. With a less robust outlook for 2018, I've trimmed back my expectations some, but I still believe the shares are undervalued on the basis of long-term growth in the mid-single-digits. NuVasive has work to do to restore investor confidence, though, so I don't expect a sharp turnaround outside of an unexpected event like a buyout.

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A Sluggish Spine Market Keeping The Pressure On NuVasive

DMG Mori Running On A Global Tool Recovery

Companies appear to be opening their wallets for capital investment once again, and that has been very good news for DMG Mori (OTCPK:MRSKY) ((6141.TO)). This Japanese (and German) leader in the machine tool space has seen its share price almost triple from its early 2016 lows and rise almost 80% in the last year as the company starts to leverage its strengths into an improving order cycle.

With 2017 being the first year of growth off a trough, DMG Mori ought to be looking forward to at least a few more years of solid order growth, fueled by underlying drivers that include a need to replace aging machinery, a need to automate to remain cost-competitive and deal with a skilled worker shortage, and new technologies. Even so, the strong run in the shares has already captured a sizable chunk of the value, and I would note that analysts don't seem ready to believe that this cycle will be as strong as past cycles.

DMG Mori is more richly-valued than Hurco (HURC) (which I own), and there are valid reasons why it should be - it's the largest player in the field, and it has exceptional scale and operating leverage, among other reasons. What's more, there would seem to be room for analysts to raise their expectations in the future if this cycle matches prior upswings. That said, a lot here is riding on the overall health and growth of global manufacturing, so the current spread between the share price and fair value isn't as robust as I'd like.

I would also warn U.S. investors that the ADRs for DMG Mori are not liquid at all. The Japanese shares, however, have no such problem and are a better option for those investors able and willing to go to the added trouble.

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DMG Mori Running On A Global Tool Recovery

Alnylam Intensifies Its Focus On Rare Disease

Alnylam (ALNY) had an active 2017, with its first new drug application (or NDA) submitted to the FDA and multiple clinical read-outs, and 2018 is likely to be no less busy. This new year should see the company get its first FDA approval and begin its first commercial launch, in additional to more incremental data on several programs, including data that could potentially support an NDA filing for givosiran before year-end. Moreover, management has not been shy about leveraging good news to raise funds, leaving the company with close to $1.7 billion in cash to start the year.

Alnylam remains a risky biotech. While approval for its lead drug seems highly likely, the FDA could still surprise the company and there are still relevant questions about how the drug will fare in the real world. The company’s pipeline likewise still contains ample risk, though Alnylam has actively worked to identify biomarkers that can help point toward efficacy relatively early in development. With upside close to $140, there are still valid reasons to own Alnylam, but this is now a well-liked stock with a robust market cap that is many years away from generating the sort of earnings to support that optimism.

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Alnylam Intensifies Its Focus On Rare Disease

Hurco Rebounding With The Machine Tool Cycle

With machine tool orders picking up around the world, these are better days for Hurco (HURC), a small and somewhat specialized manufacturer of machine tools. The shares have reflected at least some of the improving market conditions, with the stock up over a third over the past year, beating the S&P 500, but lagging fellow small-cap tool manufacturer Hardinge (HDNG) over that time.

This past year (2017) marked a return to growth in the industry and a switch from the “peak to trough” to “trough to peak” cycle. If this next cycle is anything like the past, there should be another three to five years of growing orders, fueled by ongoing factory automation, the replacement of older, inefficient tools, and growth in markets like aerospace. Even if this cycle is on the shorter end, Hurco should be looking at a few years of revenue growth and margin leverage opportunity, and management has shown in the past that they can capitalize on healthy markets.

Valuation is tricky. Cash flow-based modeling in such a cyclical industry is hard and it tends to lead toward undervaluing companies on the way up and overvaluing them on the way down. Moreover, there are opportunities for Hurco to exceed my expectations in the U.S. and with gross margin improvement. So although the shares aren’t especially cheap on a DCF basis, a 7.5x multiple to my 2018 EBITDA estimate offers some additional upside.

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Hurco Rebounding With The Machine Tool Cycle

Valeo Stuck In A Construction Zone, But An Attractive Highway Awaits

This has been a challenging year for French auto parts supplier Valeo (OTCPK:VLEEY

, VLOF.PA). With recent disappointments in the company’s revenue growth and ongoing investments in electric vehicle (or EV) and driver assistance technologies pressuring margins, the shares haven’t performed quite as well as investors might have hoped. What’s more, there are near-term challenges like the status of Korean OEMs within China that could continue to pressure revenue in the short term.

Even so, I believe these are short-term impediments to a strong long-term story. Along with rival Continental AG (OTCPK:CTTAY), Valeo is carving out a strong position in the emerging EV ecosystem, and the company is well placed to capture significant content share in hybrids and pure electrics. Other opportunities like driver assistance remain attractive as well, with Valeo having an uncommonly broad technology footprint. A long-term target of 8% revenue growth and low-teens free cash flow growth is hardly conservative for any established auto parts company, but I believe Valeo’s leverage to EVs and ADAS can support it, and those projections in turn support a fair value about 10% higher than today’s price.

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Valeo Stuck In A Construction Zone, But An Attractive Highway Awaits

Rexel Plugged Into Improving Trends

Distribution is a tough business, and Amazon's (AMZN) entry into industrial distribution has not made life any easier for companies like Grainger (GWW), Fastenal (FAST), Rexel (OTCPK:RXEEY), or WESCO (WCC). Even so, I think there's a worthwhile opportunity in Rexel today, as the market seems to be overestimating the threat from Amazon, and underestimating the benefits to be had from an improving construction market in Europe, self-directed internal improvements, and the benefits to be had from further consolidation.

I don't expect torrid revenue growth from Rexel, but I do expect some growth and improving margins to drive more compelling FCF growth, as new management responds to an activist investor's involvement with far-ranging self-improvement initiatives. With around 20% to 25% upside from here, Rexel looks well worth considering.

Rexel's ADRs are not liquid, and that is a shame. Investors can nevertheless look to the Paris-listed shares (RXL.PA) which have far more liquidity and which are available through many larger brokerages.

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Rexel Plugged Into Improving Trends

2018 Will Have Challenges, But Itau Unibanco Poised For A Return To Growth

This latest downturn in Brazil has been a challenging one for the banking sector, and management at Itau Unibanco (ITUB) has consistently overestimated loan growth and underestimated credit deterioration. That notwithstanding, management has steered this bank well through a tough period, and the shares have done well in 2017 as conditions in Brazil continue to improve.

2018 is likely to be a challenging year for the banking sector, as loan growth is likely to improve but not enough to offset compression to net interest margins. With likely limited options to reduce costs and cost of risk, I would expect earnings growth to be "meh" in 2018, but with a much stronger outlook for 2019 and 2020. Further complicating this outlook is the presidential election cycle in Brazil and its potential impact(s) on the cost of capital.

I think Itau Unibanco can beat the S&P 500 over the next couple of years, but I think the likely returns (low teens) are pretty well offset by the risks, so I wouldn't call this a slam-dunk buy. As a quality play on Brazil, and Brazil's return to growth, though, it's not a bad longer term holding to consider and especially on dips/pullbacks.

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2018 Will Have Challenges, But Itau Unibanco Poised For A Return To Growth

Veeco Instruments Battered As Doubts Mount

This has been a lousy year for Veeco Instruments (VECO), as this supplier of tools for the LED and semiconductor markets has seen its share price cut in half on repeated earnings disappointments, an unexpected litigation outcome, and growing worries about the company's long-term margin and growth leverage. While the acquisition of Ultratech earlier in the year achieved the company's goal of diversification, it seems to be coming at the cost of even more volatility and uncertainty in the business.

I can see some upside in the shares from here, but it's not clear to me that it is worth the hassle and the risk. Veeco is going into 2018 with a strong backlog, but the MOCVD market could be approaching a near-term peak and serious emergent competition is eroding margins. In the advanced packaging and semiconductor businesses, Ultratech's historical volatility is continuing and there are no guarantees on the timing or magnitude of LSA or packaging-driven growth.

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Veeco Instruments Battered As Doubts Mount