First Bancshares Running Its Playbook And Significant Earnings Growth Should Follow

Although very active since my last update on the company in September of 2017, the shares of First Bancshares (FBMS) have been a relatively average performer over that span of time, with a return close to that of regional banks in general and in the middle of a comp group including ServisFirst (SFBS), Renasant (RNST), MidSouth (MSL), and National Commerce (NCOM). While the company has executed on two M&A deals entirely consistent with the growth plan I expected here, operating performance has been a little lumpy.

I continue to believe that First Bancshares offers an above-average level of earnings growth potential, return potential, and risk. Integrating its acquisitions should drive meaningful operating leverage in 2019 and beyond, and loan growth should likewise drive good earnings momentum. With plenty of acquisition opportunities left in its core operating footprint (and/or target footprint), I expect additional M&A in the years to come.

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First Bancshares Running Its Playbook And Significant Earnings Growth Should Follow

Chemical Financial Investing For Future Growth

Chemical Financial's (CHFC) performance has been somewhat mixed since my last write-up on the company (in mid-September 2017). Although the company has reported some healthy quarters relative to expectations and the banking sector, in general, has benefited from the tax bill passed in 2017, investors have been surprised by the company's willingness to increase spending to build the business. With that, the shares are up close to 20%, which isn't bad, but isn't quite as strong as regional banks in general and other Michigan banks like Comerica (CMA) and Independent Bank (IBCP), though better than Mercantile (MBWM) and Flagstar (FBC).

Although Chemical Financial isn't exceptionally cheap, I believe there is still worthwhile upside here for long-term investors. Management's efforts to hire more commercial bankers should benefit loan growth in 2H'18 and beyond, and I believe the company is making investments to support a larger banking franchise long term (including additional M&A). I'd like to see more progress on improving the deposit mix, but that's not something any bank can fix in just a couple of quarters.

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Chemical Financial Investing For Future Growth

Ciena's Business Should Ramp From Here

Recommending purchasing Ciena (CIEN) when it trades into the low $20s and then lightening up in the mid-to-high $20s has worked relatively well for a little while now, but I’m starting to wonder if Ciena may be about to take that next step where the mid-$20s become the “new low $20s” and where the Street has more confidence in the growth outlook for the company’s converged packet business, as well as more confidence that margins will recover in the coming quarters.

Although there’s a lot left to prove, Ciena has taken some good initial steps towards demonstrating that it has an attractive business outside of Verizon (VZ) and AT&T (T), including data center, tier-2 communications, cable, and non-US customers.

I don’t think these shares are dramatically undervalued, but I think a double-digit annualized return is possible from here (even if just barely double digit). I would note, though, that I’m not giving the company full credit for management’s mid-term growth and margin targets; if the near-term performance justifies more faith in that vision/projection, there would be additional upside.

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Ciena's Business Should Ramp From Here

Is The Value At Compass Diversified Holdings Worth The Hassle?

The older I get, the more I find myself in the position of Danny Glover's character Roger Murtaugh from Lethal Weapon, famous for repeatedly saying, "I'm getting too old for this ." Although Murtaugh went ahead and did those things anyway, I do believe there's a relevant takeaway for investing - sometimes, a stock just isn't worth the hassle, and I'm starting to wonder if that's the case with Compass Diversified Holdings (CODI).

While Compass does indeed have a diverse group of businesses and has a long track record of paying out tax-advantaged distributions, the underlying growth of the businesses has never been all that spectacular, and the distribution payments haven't grown since 2012. I understand the appeal of the tax-advantaged income that Compass produces and maybe even the skew toward smaller businesses, but considering the management fees, the tax hassles, and the lackluster track record the portfolio companies, I'm no longer as confident that the discount to fair value is "unreasonable" as opposed to just being fair compensation for the potential headaches.

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Is The Value At Compass Diversified Holdings Worth The Hassle?

Splitting Up The Business May Finally Unlock The Value Of Prudential's High-Quality Asian Operations

Despite a transformative de-merger announcement, Prudential PLC (PUK) (PRU.L) hasn’t been a great performer since my last write-up on the company in January. The U.S. ADRs are down about 5%, lagging the British local shares and rivals like Aviva plc (OTCPK:AVVIY) and AIA (OTCPK:AAGIY), though outperforming MetLife (MET) and Lincoln National (LNC) over that period.

I continue to believe this is an undervalued insurer, and perhaps the separation of the UK & Europe business from the much faster-growing Asian businesses (as well as the African and U.S. businesses) will prove to be a case where the parts are worth more separately than together. While there are some valid worries about the U.S. variable annuity business, the Asian business continues to generate strong growth, and I believe these shares are around 15% undervalued.

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Splitting Up The Business May Finally Unlock The Value Of Prudential's High-Quality Asian Operations

A Strong U.S. Market Can Support A Higher Price For Acerinox

Acerinox (OTCPK:ANIOY) hasn’t done as well as I’d expected since my January write-up, but it has been a relatively good house in a bad neighborhood, as stainless steel peers like Aperam (OTC:APEMY) and Outokumpu (OTCPK:OUTKY) have been considerably weaker, as have many other steel companies like ArcelorMittal (MT), Nucor (NUE), voestalpine (OTCPK:VLPNY) as investors worry about whether the cycle is peaking.

I regard Acerinox as a “rental”, not a long-term buy, with the company strongly leveraged to higher stainless prices in the U.S. (where it has around 35% to 40% share) but also vulnerable to lower prices in Europe and protectionist policies that could hurt its facilities in South Africa and Malaysia. Although I think there is still 10% to 15% potential from here, and possibly more if the cycle has longer legs, the long-term return potential is not all that appealing and investors often bail on these stocks when pricing momentum fades.

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A Strong U.S. Market Can Support A Higher Price For Acerinox

AerCap Continues To Execute, But Not Getting Much Credit For It

AerCap (AER) is a very good company, but these shares can be a little frustrating to hold, as the market doesn’t always seem to want to give them the sort of multiples that the performance would otherwise suggest is reasonable. Looking past that short-term turbulence, though, the shares have done well over the last five and 10 years, as management has shown that it can responsibly manage its fleet, create value at multiple points in the business, and share the proceeds with shareholders (in the form of buybacks).

Although I think earnings growth could be more challenging in the next couple of years, I like the valuation and I think these shares are attractive into the low-to-mid $60s. Between profitable leasing and value-creating portfolio management, AerCap looks well-placed to continue to benefit from global growth in air travel and the economic realities of the industry where AerCap often has better access to credit than many of its customers.

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AerCap Continues To Execute, But Not Getting Much Credit For It

Will Cemex Ever Get All Its Ducks In A Row?

If you want a good working example of a value trap, Cemex (CX) could be it. While management deserves a lot of praise for the ongoing deleveraging (not to mention guiding the company back from the brink years ago), its inability to meet its own guidance and deliver consistent performance has remained a real sticking point. What’s worse, there are valid concerns about the quality of the company’s infrastructure in some of its key markets.

I’m tired of sticking my neck out for Cemex, but the shares still seem to be pricing in a pretty bleak future. About 1% annualized FCF growth would be enough to support today’s price and even the most bearish analysts don’t think that’s likely. Cemex shares could offer worthwhile returns, then, but it is still an open question as to when management will produce the results that will drive those returns.

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Will Cemex Ever Get All Its Ducks In A Row?

OceanFirst Financial Offers Value During A Transition Year

New Jersey's OceanFirst Financial (OCFC) has done okay since I last wrote about the company in January, with the shares more or less tracking with smaller Northeast community banks (or slightly outperforming) and offering a little outperformance relative to larger regional/super-regional banks like Bank of America (BAC), PNC Financial (PNC), and Toronto-Dominion (TD). Organic loan growth has weakened recently as management has chosen to be more disciplined on price, but accretion benefits have been stronger than expected and the company's deposit performance has been good.

OceanFirst is not wildly undervalued, but I think this is a good combination of a below-the-radar growing bank with disciplined management and a good business plan/profile. I believe OceanFirst has more options to pursue M&A in the relatively near term, and I believe the shares should trade in the low-to-mid $30s.

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OceanFirst Financial Offers Value During A Transition Year

Fifth Third Changes The Plan, But The MB Financial Deal Looks Sound (Albeit Pricey)

By and large, bank investors tend to crave and reward consistency, predictability, and conservatism, so it is not that unusual to see the market punish, at least temporarily, surprising moves. To that end, Fifth Third’s (FITB) acquisition of MB Financial (MBFI) seems like a well-reasoned, if expensive, deal that augments Fifth Third’s operations in positive ways. And yet, even though good (just good, not “great”) execution on this deal seems likely to drive more accretion than a buyback would have, investors still sold the shares on the news (with the stock regaining some of that the next day).

I’ve had my reservations about the stock because of valuation, but the shares have been quite strong until the deal announcement – beating peers/rivals like KeyCorp (KEY), Huntington (HBAN), U.S. Bancorp (USB), PNC Financial (PNC), and JPMorgan (JPM) over the past year. Although I still don’t see the value in these shares that many investors apparently do, I think the MB Financial deal is an understandable deviation in the company’s strategy and a solid move on balance.

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Fifth Third Changes The Plan, But The MB Financial Deal Looks Sound (Albeit Pricey)

Valeo In A Lull, But Bringing In The Orders

I continue to be both frustrated and intrigued by Valeo (OTCPK:VLEEY) (VLOF.PA). When I last wrote about this large auto parts supplier, I wrote that there was a credible risk of near-term disappointment in revenue and margins and that has come to pass. The local shares are down about 6% from the time of that last article, lagging peers like Continental AG (OTCPK:CTTAY), Autoliv (ALV), BorgWarner (BWA), Schaeffler (OTC:SFFLY), and Faurecia (OTCPK:FURCY), though the performance since my first write-up in 2014 has been solid.

While the near-term weakness is certainly a drag, the company's strong order flow is quite encouraging, and particularly so in the hybrid/EV joint venture with Siemens (OTCPK:SIEGY). Valeo shares could struggle a bit for another couple of quarters, but I like the valuation here and the long-term opportunity to leverage future growth in hybrid and electric vehicles.

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Valeo In A Lull, But Bringing In The Orders

ams AG's Business Wins Offset Some Of The Near-Term Apple Turbulence

Growth semiconductor stories aren't where you go if you can't handle some drama and volatility, and ams (OTCPK:AMSSY)(AMS.S) has certainly provided that. Although the shares have basically matched the SOX since my last write-up in mid-January (and outperformed Finisar (FNSR) and Himax (HIMX)), it hasn't been a smooth ride as investors have had to digest some encouraging wins as well as a big cut to guidance on reduced expectations for Apple's (AAPL) high-end phone production.

I continue to believe that ams is a good way to play the growth of 3D sensing, not just in consumer devices but also in auto and industrial applications. There will be no shortage of competition, and ams' relationship will likely add volatility (and likely some margin challenges), but I think the long-term potential is worth it.

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ams AG's Business Wins Offset Some Of The Near-Term Apple Turbulence

Gruma's Margins Are Improving, But Forex Is Taking A Toll

Mexico-based tortilla giant Gruma (OTC:GPAGF) (GRUMAB.MX) hasn’t made the progress I’d hoped for back in January. Although the company is showing some of the margin leverage I was hoping for, forex-related pressure on revenue and inconsistent results in Europe have weighed on results. With that, the illiquid ADRs are down about 15%, with a similar decline in the Mexico-listed shares. Although I do still see upside in these shares, and I believe it’s a well-run food company with leverage to improve margins in the U.S. and Mexico, as well as growth opportunities in markets like Europe, the ADRs are quite illiquid and I can certainly understand investors who decide it’s not worth the hassle.

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Gruma's Margins Are Improving, But Forex Is Taking A Toll

K2M Disrupting The Market, Growing, And Still Undervalued

Innovation can still produce results even in a sluggish U.S. spine market, as seen with the ongoing growth at companies like K2M (KTWO) and Globus (GMED). In the case of K2M, the story is still about the company's disruptive product development in degenerative and complex spine, supported by a strong platform in 3D-printed implants. With that, the shares have done okay since my last update - rising close to 10%, which is not as good as Globus, but pretty good next to other med-techs in the spine space like Stryker (SYK) and NuVasive (NUVA).

I continue to believe that K2M shares are undervalued. The company's liquidity and cash flow situation is not ideal, but spending money on product development and competitive rep hires to support those product launches makes sense, and I believe the company will get to double-digit FCF margins within five years. With that, I'd consider buying into the mid-$20s.

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K2M Disrupting The Market, Growing, And Still Undervalued

NuVasive Not Getting, Or Deserving, The Benefit Of The Doubt Yet

Investors remain reluctant to give NuVasive (NUVA) much benefit of the doubt, and based upon the company's recent performance, I can't say I blame them. Although I wrote back in January that I thought it would take time for the company to rebuild investor confidence, I'm still surprised to see the nearly 10% drop in the share price over that period, while Globus Medical (GMED) has shot up nearly 20% and K2M (KTWO) has risen close to 10%.

There are a lot of issues with NuVasive right now, including a fairly spotty history of earnings quality, worries about competitors poaching away reps, and signs that NuVasive's new products aren't producing the same growth leverage as before. What's more, as NuVasive has grown to become a bigger player in the spine market, it's harder and harder for the company to separate itself from the challenges in the market.

Valuation is tricky. On a cash flow basis, the expected return isn't as high as I'd like to see given the risks. On the other hand, med-tech doesn't often trade on cash flow and the shares do look undervalued, perhaps significantly so, on an EV/revenue basis. There's some appeal here as a turnaround story, but NuVasive will be granted little quarter or patience by the Street if results don't start meaningfully improving.

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NuVasive Not Getting, Or Deserving, The Benefit Of The Doubt Yet

MetLife Moving Past Some Self-Inflicted Challenges And Toward Unlocking Value

MetLife's (MET) performance over the past year hasn't been all that good, but it has at least been better than that of many of its peers. Although MetLife has done a lot to clean up and improve its business, the company still has a track record of inconsistent results (often punctuated by large charges) and headwinds like lower returns on equity from its run-off business and spread compression in its U.S. retirement business.

I think expectations for MetLife are low and that the shares could be positioned to outperform as a result. The company's earnings growth outlook is rather modest, and that is a concern, but I do believe book value growth should improve from here and exceed core earnings growth. If and as that happens, the multiple should expand and MetLife should get more of its due, but investors should appreciate that this name is highly likely to be more tortoise than hare.

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MetLife Moving Past Some Self-Inflicted Challenges And Toward Unlocking Value

Fidelity National Information Services Offsetting Growth With Margins

Fidelity National Information Services (FIS) has been a so-so performer since my last update on the company in August of 2017. Although the shares are up around 10% since then, slightly better than the S&P 500, the shares have lagged Fiserv (FISV) and Jack Henry (JKHY). I believe this underperformance is due at least in part to FIS's slow pace of organic growth and the challenges the company faces in accelerating that growth to a meaningful degree.

Providing banking and payments technology to banks and other financial institutions remains a good business on balance, and FIS has opportunities to drive further margin leverage and/or pursue value-additive M&A. Even so, the total return potential here looks somewhat lackluster, suggesting the shares are an okay hold but not an especially exciting buy candidate.

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Fidelity National Information Services Offsetting Growth With Margins

Global Payments Executing On Its Vision And Delivering Margin Leverage

It may sound uncomfortably similar to "it's different this time", but Global Payments (GPN) is a prime example of how good companies always seem to manage to find a way to do better than expected. In the case of Global Payments, it has taken the integrated payment and omni-channel concepts and run with them, combining/folding payment functionality into broader offerings of specialized software and services that not only make the customer relationships stickier but more profitable as well.

Global Payments sports high multiples and high expectations, and I wouldn't ignore the competitive threats posed by existing head-to-head rivals (not to mention potential future threats from companies like Amazon (AMZN), Square (SQ), and PayPal (PYPL)), but I believe Global Payments' integrated and omni-channel offerings, as well as its strong global position, make it a formidable player in the market. A high single-digit revenue growth rate from here can support a fair value in the $120s, but I would expect this stock to sell off pretty sharply if the earnings momentum were to falter.

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Global Payments Executing On Its Vision And Delivering Margin Leverage

AllianceBernstein Reaping The Benefits Of Past Decisions

I'm pleased with how AllianceBernstein Holding L.P. (AB) continues to perform. The units are up around 10% from when I last wrote about this company, the yield remains quite attractive, and better still the company is reporting improved revenue and profitability as decisions made years ago by prior management start to pay off for the company.

AllianceBernstein isn't, and never will be, suitable for everybody. AXA (OTCQX:AXAHY) owns a majority stake of the business and regular unitholders have virtually no say in the operation of the business. Moreover, the distributions from partnerships like this can have more complicated tax treatment than regular dividends. Even so, I believe AllianceBernstein is well-placed to continue bringing in assets under management and leveraging its existing infrastructure to generate higher margins and higher distributions for unitholders.

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AllianceBernstein Reaping The Benefits Of Past Decisions

Aptose Approaching The Clinic With 2 Very Interesting Assets

It has been a long road, but Aptose (APTO) is closing in on getting its two lead drugs into clinical trials. The company still has to resolve a manufacturing-related clinical hold for APTO-253 and finish its pre-IND work on CG’806, but Aptose should have both compounds in human testing in 2019 with initial results from at least APTO-253 before the end of 2019.

Aptose remains an exercise in weighing significant market potential against significant risks and a long road to travel before commercialization. Both APTO-253 and CG-806 have produced intriguing, arguably exciting, pre-clinical data suggesting that they could both be real players in hematology, but the entire point of the clinical trial process is to weed out those drugs that look good in pre-clinical testing but cannot deliver the goods in real-world testing. I believe Aptose shares are undervalued, but investors need to understand and appreciate the significant risks involved and the near-certainty of meaningful future dilution.

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Aptose Approaching The Clinic With 2 Very Interesting Assets

S&W Seed Following A Better Plan, But Execution Remains A Key Unknown

Small-cap seed company S&W Seed Company (SANW) has certainly weathered some ups and downs in recent years, not all of which were or are in management's control. While the company has taken cogent steps to build out and improve its alfalfa business, policies in key markets like Saudi Arabia have undermined the company's progress. At the same time, though, the company has suffered from a sometimes-incoherent and scattered set of corporate priorities.

New management has been clear about what it wants to do, and most of the new plan sounds good to me. It's going to take time for these plans to bear fruit, though, and the company doesn't have much of a safety net left to withstand significant disappointments or delays. While there's certainly upside from here if management can get the business stabilized and growing again, the risks are high, and the company's ability to execute under new management is still unproven.

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S&W Seed Following A Better Plan, But Execution Remains A Key Unknown

Strong Orders Drive A Rally For HollySys

China’s HollySys (HOLI) has continued to outperform its peers in 2018, though HollySys too had been drifting lower since early March. With strong orders in the automation business in the March quarter, though, it looks like investors feel a little more confident in the prospects of HollySys continuing to penetrate new markets in its core China market.

Consistent execution has long been a challenge for HollySys management, and the situation is not helped by volatile ordering patterns from its primary rail customer. That said, the company has been expanding its automation product offering and continues to gain business in new market verticals. While the shares don’t look like a particular bargain relative to the underlying risks, high single-digit revenue growth should support double-digit returns for shareholders.

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Strong Orders Drive A Rally For HollySys

Carpenter Is Seeing Good Demand Growth, But Operating Leverage Remains A Work In Progress

While it has been frustrating at times, specialty alloy company Carpenter (CRS) has been making progress. The shares are up 11% from when I last wrote about the company, beating the S&P 500 over that time and matching Allegheny (ATI), but lagging Haynes (HAYN) and Universal Stainless (USAP). Along the way, the company has been posting some good revenue growth, though margin leverage has been more of a laggard than I'd hoped.

Carpenter shares do still look undervalued, though the 20% or so gap in valuation I previously saw has now shrunk to around 10%, and I'm a little concerned that my out-year margin assumptions are a bit too aggressive. Still, demand is taking off in the aerospace market, the company is still doing well in the medical and transport market, and oil/gas demand continues to recover. What's more, there seems to be a real sense of urgency on the part of customers to get the company's Athens facility qualified, something that should lead to meaningfully higher utilization and significant margin leverage.

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Carpenter Is Seeing Good Demand Growth, But Operating Leverage Remains A Work In Progress

Rexnord Seeing Its Process Markets Kicking In

Rexnord (RXN) was arguably a bit of a late arriver to the industrial recovery, but the company ended the year with good revenue growth numbers. Given the company's leverage to process industries and institutional construction, this next year should be relatively stronger for Rexnord than its peer group, and management continues to prune the portfolio and pursue additional cost reduction opportunities.

I thought the shares offered some reasonable relative value back in February, and the shares have done okay since then - up more than 5% and outperforming both the S&P 500 and many industrial/multi-industrial peers (though relatively in line with close peers like Timken (TKR) and Regal Beloit (RBC)). The valuation still looks okay on a relative basis, though I think there are some other industrial names out there with more upside.

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Rexnord Seeing Its Process Markets Kicking In

Ternium Continues To Surpass Expectations And Still Seems Too Cheap

Ternium (TX) confounds me at times. This Mexico-focused steelmaker has an above-average track record when it comes to margins and returns on capital, operates in a pretty stable region, has access to multiple growth markets, and has been investing in growth projects at what appear to be good future IRRs. And yet, Ternium trades at one of the lowest forward multiples in the group even after a good run in the share price.

As Ternium continues to beat and raise, my expectations go up as well. I do see some risk that EBITDA could reach a near-term peak in 2019 or 2020, but the company’s leverage to recoveries in Argentina and Brazil makes that a tough call, and there are still significant opportunities to gain share in its home market. Even at 4x my new 2018 EBITDA estimate, it looks like there’s double-digit upside left in these shares.

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Ternium Continues To Surpass Expectations And Still Seems Too Cheap

Expectations Seem To Have Caught Up To Gerdau

Brazil's Gerdau (GGB) has remained one of the strongest performers in the steel sector, as the company is benefiting from a healthy combination of end-market recoveries in Brazil and North America and better management discipline. Gerdau's management team still believes that they can drive North American margins into the double digits and that the recoveries in Brazil's construction and infrastructure sectors are only getting started.

All of that sounds great, but price/value remains a hang up for me. Unlike many North American and European producers, I don't think Gerdau is going to see a near-term EBITDA peak in 2018 or 2019. I'm willing to give Gerdau a higher EBITDA multiple than I would for most steel companies, but it takes a 12-month EBITDA estimate of over R$6B and a multiple of over 7x to drive a compelling fair value from here.

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Expectations Seem To Have Caught Up To Gerdau

ArcelorMittal Seeing The Fruits Of The Cycle

The last year has been good for most steel companies. Not surprisingly, ArcelorMittal (MT) shares have done well, with the stock up almost 5x from its 2016 lows and up about 40% over the past year as higher steel prices boost revenue and EBITDA. What's more, the steel market continues to look relatively healthy, and ArcelorMittal has a few of its own drivers that could support a higher price from here.

The good times won't last forever, but it does look like these shares have more room to appreciate. Although I'd at least consider stocks like Acerinox (OTCPK:ANIOY), Steel Dynamics (STLD), Ternium (TX), and voestalpine (OTCPK:VLPNY), I can't argue that ArcelorMittal's valuation isn't interesting relative to its current prospects.

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ArcelorMittal Seeing The Fruits Of The Cycle

The Clock Is Ticking Louder As PacBio Must Generate More Revenue And Shrink Its Cash Burn Rate

If you want to know what the market thinks about Pacific Biosciences (PACB) consider this – the sell-side revenue expectations for 2018 are now about 15% lower than they were three months ago, and the share price is more or less flat. It’s not quite that simple, as there have been some large moves (in percentage terms) in that time, but the shares continue to reflect what I regard as a “we’ll believe when we see it” attitude on the part of many investors.

I’ve said in the past that I now regard PacBio as a very speculative stock, and that remains the case. I do believe the company’s technology is valuable and important, but it is clear that commercializing that technology is no easy task. While I would not be at all surprised to see PacBio acquired within the next 12 months, I likewise wouldn’t be surprised if the company is forced to pursue highly dilutive financings to keep the lights on and is eventually strangled by a lack of access to funds and its inability to reach cash-flow breakeven.

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The Clock Is Ticking Louder As PacBio Must Generate More Revenue And Shrink Its Cash Burn Rate

Cosan Undervalued On Strong Underlying Execution

Cosan (CZZ) isn’t, and never will be, the easiest stock to own. In addition to a complicated ownership structure, the company is heavily exposed to commodity market prices that it cannot really influence and the volatility of the Brazilian real. Even so, I believe Cosan management continues to do a good job of managing the business and controlling what it can; the company’s sugar/ethanol and fuel operations are run quite efficiently, and management has already shepherded a meaningful improvement in the Rumo rail operations. In addition, management has signaled that at the holding company level (the CZZ shares), they are ready and willing to start returning more cash to shareholders, preferably through buybacks.

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Cosan Undervalued On Strong Underlying Execution

Short-Term Pain, But Long-Term Upside, At Renesas Electronics

In the month since I last wrote about Renesas Electronics (OTCPK:RNECY)(6723.T) the shares had been doing pretty well relative to the overall semiconductor space and peers/comps like Texas Instruments (TXN), Infineon (OTCQX:IFNNY), and STMicroelectronics (STM). Unfortunately, Renesas announced that there would be further inventory corrections in the second quarter related to product transitions that would pressure gross margin, and management didn’t explain it particularly well.

While the market for microcontrollers in general, and particularly those used in advanced automotive applications, is going to be intensely competitive, I believe Renesas’s share price still undervalues the opportunity. The company has strong share across its addressed markets, has been increasing R&D and trimming SG&A, and has shown that it can integrate large acquisitions. While longer lead times across the chip sector are a threat, and Renesas may be pressured by weaker comps in auto in 2018, the longer-term outlook is still quite attractive.

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Short-Term Pain, But Long-Term Upside, At Renesas Electronics

JPMorgan Going From Strength To Strength

With the dust settled from the first quarter earnings cycle, I believe JPMorgan (JPM) continues to offer an investment case built around one of the strongest banks getting even stronger. Between loan growth, credit quality, fee income growth, and organic growth prospects, I think JPMorgan remains one of the best-positioned banks today, and one that has the luxury of reinvesting in its own business. JPMorgan’s qualities are well understood by the market, and the shares don’t offer tremendous upside, but they are still very much worth holding.

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JPMorgan Going From Strength To Strength

Middleby's Recent Run Of Disappointments May Mark A Transition

With the shares down 20% over the last year, 10% over the last two years, and EPS misses in three of the last four quarters, there are clearly still some issues with Middleby (MIDD). This growth-by-M&A foodservice equipment vendor has long been a somewhat controversial name, but free cash flow margins have been eroding and so too as organic growth in its core Commercial Foodservice business.

If you invest long enough, you start to see patterns, and Middleby seems fit the pattern of a company that once consistently outgrew its end-markets, expanded its margins, and enjoyed robust valuation multiples as a reliable growth stock, but is now transitioning to a new phase of its cycle. These transitions are usually chaotic and are marked by revenue and margin volatility, as well as weaker valuations as the growth crowd moves on to greener pastures and new investors enter the mix.

I don't really know whether that is truly what's going on with Middleby, but the company is definitely losing the benefit of the doubt with Wall Street, and I believe revenue growth is likely to normalize into the mid-single-digits in the coming years. The valuation is getting more interesting, but the shares are likely to remain volatile until the company shows it can settle back into a new growth groove.

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Middleby's Recent Run Of Disappointments May Mark A Transition

BRF SA Looking At A Long Road Back

"How can it get any worse?" certainly has a place of distinction among the most foolish validations that investors will try to use with struggling companies, and Brazil's BRF SA (BRFS) is a case in point. In addition to ongoing criminal investigations, BRF has been effectively banned from the EU for the time being, is facing rising costs and weak market share, has high debt and modest near-term free cash flow prospects, and has to find a new CEO and craft a turnaround strategy.

BRF's new board does appear to be an upgrade, and the company still has some positives going for it - including a meaningful overseas presence and a still-strong presence in the Brazilian market. While the valuation may look modest relative to the long-term potential of a successful turnaround, investors need to appreciate that such a turnaround is going to take time, and success is far from certain.

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BRF SA Looking At A Long Road Back

Innospec Has The Opportunity To Leverage Self-Help And Growth Markets

Small and not widely followed, specialty chemical company Innospec (IOSP) has a pattern of nearly annual sharp pullbacks that give investors another chance to get into what has been a pretty good growth and quality story over the years. There are a lot of moving parts here, and management needs to work on the profitability of the Oilfield segment, but I like management’s track record as well as the growth prospects for a specialty chemical company focused on products that offer important performance enhancements to markets that will pay for them.

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Innospec Has The Opportunity To Leverage Self-Help And Growth Markets

Celldex Trying To Regroup With Its Early-Stage Assets

It was clear back in April that Celldex Therapeutics (CLDX) would be restructuring and realigning its priorities after the failure of its Phase III METRIC study of glembatumumab ("glemba") in triple-negative breast cancer, and after the first quarter earnings report, investors have a clearer picture of management's near-term plan.

Unfortunately, this new plan is still relying on assets that have either shown lackluster initial signs of efficacy (varlilumab or "varli") or are in very early stages of development. Assigning more than 10% odds of success to any of these programs based on the data seen to-date requires a leap of faith, but the good news (if you can call it that) is that the Street isn't assigning them much more value than that.

At this point, it really is about the data and management's ability to pull a rabbit out of its hat. Should the varli combo studies, or one of its other current clinical programs, show strong efficacy sufficient to support more robust odds of approval, the shares will likely react strongly and Celldex will be able to raise more cash on better terms. That's a long shot, and Celldex's poor drug development history shouldn't be ignored, but Celldex does at least still have multiple shots on goal and enough cash to get them at least to the point of early-stage data in human studies.

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Celldex Trying To Regroup With Its Early-Stage Assets

Wright Medical Improving, But At A Choppy Pace

Wright Medical’s (WMGI) deal for Tornier was well-timed – not because it has driven amazing synergies by combining strong lower and upper orthopedic extremity franchises but because the growth in Tornier’s strong shoulder product line-up has offset surprising and disappointing weakness in Wright’s core lower extremity business. It looks there are some signs of life in the lower extremity business, though, and ongoing maturation of the expanded sales force and new product introductions should drive better results throughout the year.

Wright Medical shares look a little undervalued now, but the company’s performance hasn’t really built up much trust with investors. The potential FDA approval of an injectable form of Augment could still be on the way, and Wright still has M&A takeout potential, but inconsistent performance has been the rule for here for a little while.

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Wright Medical Improving, But At A Choppy Pace

There's More Upside To Manitex As The North American Crane Market Recovers

The market for cranes in North America seems to be coming back nicely after a difficult trough cycle brought on by the sudden downturn in the energy sector, but Manitex (MNTX) have flattened out some - while the stock is up a healthy 50%-plus over the past year, it's basically flat since the time of my last write-up on the company. In that time, Manitex reported restated financials and continued to see good demand and order growth in its core crane operations.

Manitex shares still look somewhat undervalued on discounted cash flow and potentially more exciting on EV/EBITDA, particularly as EBITDA should ramp up significantly over the next couple of years. Investors shouldn't lose sight of the risks, including an earlier peak to crane demand and rising input costs, but Manitex is an interesting under-followed machinery recovery story.

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There's More Upside To Manitex As The North American Crane Market Recovers

PRA Group Once Again Exceeds Expectations On Healthy Cash Collections

The changes PRA Group's (NASDAQ:PRAA) management have made over the last few quarters continue to pay off in terms of improved performance. Although the shares haven't offered much performance over the past year (particularly when compared to rival Encore (NASDAQ:ECPG)), the company appears to be on a better trajectory and expectations are moving higher. With double-digit return potential from here and the potential for operating conditions (and results) to improve further, this remains a worthwhile name to consider.

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PRA Group Once Again Exceeds Expectations On Healthy Cash Collections

Maxwell Scores Another Auto Win As High Voltage Lags

Maxwell Technologies (MXWL) has long been a frustrating stock for growth investors, as the company's ultracapacitor products have a lot of promise in a wide range of growth markets but the execution on commercialization has been painfully slow. Although the company's first quarter results aren't going to quiet the bears who argue this is a perpetual "wait until next year" story, I believe the partnership/design win with Geely (OTCPK:GELYF) is a big deal, and I believe the company can still benefit from a utility transmission and distribution expansion cycle.

Valuation is never simple with a company on the cusp of potentially significant but very uncertain commercial adoption curves. While I believe $6 to $7 is a fair range now, investors should expect above-average risk and volatility, given that so much of the value lies beyond the next few years.

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Maxwell Scores Another Auto Win As High Voltage Lags

MaxLinear Hit Hard On Yet Another Reduction In Guidance

In March, I wrote in reference to MaxLinear (MXL) that "the road from here to there isn't going to be straight or smooth", but I didn't expect a crevasse to open up and swallow the stock. MaxLinear's first quarter miss and guidance reduction were arguably not as bad as the stock performance would suggest, but the timeline for revenue acceleration seems to keep sliding, and management credibility is potentially becoming an issue. The shares do seem undervalued now, but with worries about a wider slowdown in semiconductors, ongoing issues in optical, and delays in the revenue ramp, this is going to be a challenging hold for the near term.

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MaxLinear Hit Hard On Yet Another Reduction In Guidance

Simply Not Screwing Up Again Feels Like A Win With Core-Mark

The operating issues I highlighted in my last write-up on Core-Mark (CORE) continued to weigh on the company through fourth quarter earnings, with the shares down another third or so since the time of that article. Management has continued to struggle to generate attractive incremental margins from new chain store wins, while Berkshire Hathaway’s (BRK.A) (NYSE:BRK.B) McLane continues to compete aggressively for business and cigarette volumes continue to erode.

First quarter results offer some hope that maybe management and the sell-side have their expectations dialed in correctly, as there wasn’t a negative pre-announcement, results came in more or less on target, and management reiterated its full year guidance. While Core-Mark has been a big disappointment for a while now, perhaps management’s operating improvement initiatives are finally gaining some traction.

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Simply Not Screwing Up Again Feels Like A Win With Core-Mark

Lundbeck Thriving On Cost Control

Kåre Schultz left H. Lundbeck A/S (OTCPK:HLUYY) (LUN.CO) to take over as CEO of Teva (TEVA) in the fall of 2017, but the man's legacy as CEO continues to drive strong profit growth at this Danish drugmaker. While Lundbeck continues to benefit from surprisingly strong sales of its older drugs and is seeing good growth in its new generation, the corporate restructuring carried out by Schultz has led to significant margin leverage that continues to drive better than expected profit growth.

Between a surprising positive decision from the FDA on Trintellix labeling and this very strong quarter, the shares are up more than 15% over the last month and up more than a quarter year-to-date. As the Street dials in the latest positive cost guidance, I believe quarterly beats of similar magnitude are going to get harder and harder to achieve. What's more, Lundbeck's pipeline is unlikely to provide much positive news in the short term, so I have some concerns as to what can/will continue to push these shares even higher.

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Lundbeck Thriving On Cost Control

Change Is Coming At GEA Group, But It May Take Time To Arrive

When I last wrote about GEA Group (OTCPK:GEAGY), I said there were still meaningful risks that the company could disappoint investors even further… and that's exactly what they have done. With yet another weak quarter in the books, and no credible prospects for a near-term reversal in what is now a long trend of disappointment, this is a tough stock to own today.

There are some pieces of good news, though. First, the management that steered GEA Group into this mess is on their way out. Second, the underlying assets and operations still have value and, I believe, can generate attractive returns with the right plan/management in place. Although the shares still look undervalued after once again lowering expectations and could have significant long-term turnaround potential, investors buying/holding today should probably accept that it's going to be a year or longer before there's real change at GEA Group.

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Change Is Coming At GEA Group, But It May Take Time To Arrive

Kirby's Recovery Prospects No Longer Undervalued

As the inland barge business seems to be bottoming out and the company's diesel engine business benefits from the oil/gas recovery and M&A-boosted scale, Kirby (KEX) shares have continued to perform well. Up another 10%-plus since my last write-up in February, it's harder to argue that the company's prospects are now undervalued. While I wouldn't rule out the possibility of further upward estimate revisions on a stronger inland barge recovery and/or even stronger growth in the diesel engine business, it looks like Kirby is back to a more typical valuation.

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Kirby's Recovery Prospects No Longer Undervalued

Signs Of Progress (And Value) As MTN Group's Turnaround Progresses

Many emerging market telcos have done alright over the past year, though MTN Group's (OTCPK:MTNOY) performance in local currency terms has remained lackluster as management works to set right the many mistakes of past management. The ADRs have performed better, though, and there is still some worthwhile upside here as the company looks to reinvest in its network to drive customer satisfaction and, eventually, revenue and earnings growth.

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Signs Of Progress (And Value) As MTN Group's Turnaround Progresses

Societe Generale's Ongoing Stumbles And Struggles Explain The Value Gap

Savvy, attentive investors can find bargains in the market, but it is usually a good idea to stop and ask why a given stock appears undervalued, as not all cheap-looking stocks are bargains. France's Societe Generale (OTCPK:SCGLY) is a case in point. A turnaround story that just won't turn around, Societe Generale continues to produce "it's always something quarters" that leave the market and investors disappointed.

At this point, it is difficult to come up with compelling reasons to own Societe Generale beyond its low apparent valuation and the prospect that these ongoing struggles might prompt a more dramatic rethinking of the company's strategy. That said, the company's prominent position in France likely limits how much activist investors can accomplish, and likewise any M&A activity may be challenging if Societe Generale isn't in the driver's seat. While these shares do appear to have double-digit upside, the company has really done nothing to engender trust in its ability to meet even modest long-term growth expectations.

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Societe Generale's Ongoing Stumbles And Struggles Explain The Value Gap

In A Still-Challenging Market, Chubb's Strengths Stand Out

Insurance has been one of the worst-performing segments of the finance sector, and Chubb’s (CB) superior quality hasn’t shielded it, as the shares are down about 4% over the past year and down about 10% year-to-date. While claim inflation and lower reserve releases are issues, as is the fact that last year’s catastrophe losses didn’t resolve the excess capacity issue in the industry, Chubb’s market position seems to be affording it above-average pricing power and the company’s capital position gives the company options to fund organic growth, M&A, or capital returns to shareholders.

I believe $145 to $155 is a fair price for Chubb shares, but investors will need to have some patience for this sector to come back into favor, as book value growth reaccelerates in 2019.

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In A Still-Challenging Market, Chubb's Strengths Stand Out

Atlas Copco's Premium Valuation Comes With High Expectations

I don’t know that there’s any real doubt or debate that Sweden’s Atlas Copco (OTCPK:ATLKY) is an exceptional company and worthy of premium valuation. Just how much of a premium is reasonable, though, is very much up for debate as the shares' nearly 20% pullback off its 52-week high raises the question of whether there’s been enough of a dip in valuation to wade in.

For now I’m inclined to hold off. Between growing worries of a short-cycle slowdown, significant uncertainty about capital spending in the semiconductor space, and possible turbulence related to Atlas Copco’s spin-off of Epiroc, I’d rather wait until the dust settles a bit more and there’s a real gap to what I think the underlying fair value of this excellent conglomerate is.

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Atlas Copco's Premium Valuation Comes With High Expectations

Doubts About Arch Capital's MI Business Have Created A Meaningful Valuation Gap

It has been a pretty mixed year so far for insurance companies, with particular business mixes/exposures explaining a lot of individual performances. Reinsurers like Everest Re (RE) and specialty insurers like W.R. Berkley (WRB) have been doing alright, while broader P&C players like Chubb (CB) and Hartford (HIG) have been a little weak. And then you have the mortgage insurers like Radian (RDN) and MGIC (MTG) that have been having a tougher time of it.

Combing the traits of specialty P&C and reinsurance as well as mortgage insurance, it is perhaps not so surprising that Arch Capital's (ACGL) performance has reflected that blend - Arch has underperformed its non-MI peers but outperformed its MI peers. While I understand some of the Street's anxiety about the mortgage insurance space, particularly now that it's such a large part of Arch's underwriting income, I continue to believe that the shares look attractive on a long-term basis.

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Doubts About Arch Capital's MI Business Have Created A Meaningful Valuation Gap

Commercial Vehicle Group Finally Seeing Margin Leverage As The Peak Approaches

It has taken longer than expected, but Commercial Vehicle Group (CVGI) is at last seeing meaningful margin leverage and solid incremental margins in response to significant volume growth in the commercial truck and off-road vehicle segments. Now, the question is how well the company can do before North American commercial truck orders peak and decline, and how much growth in businesses outside of heavy-duty trucks can compensate.

CVGI’s valuation is tricky, as is often the case for cyclical companies and especially when key cycles are at or near peaks. On one hand, even on what would seem to be a modest forward EBITDA multiple, the shares appear cheap, and likewise with DCF, but it is very much an open question as to whether CVGI can hold these improved margins as volume in its core business declines and as investors shy away from the sector.

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Commercial Vehicle Group Finally Seeing Margin Leverage As The Peak Approaches

Despite Recurrent Market Jitters, Alnylam Is Closing In On Multiple Drug Approvals

Holding shares in Alnylam Pharmaceuticals (ALNY) isn’t for the weak-hearted, as seen recently in reaction to a competitor’s unexpectedly strong clinical data. While Alnylam has long been volatile, and remains risky given the nature of the diseases it targets and its reliance on biomarker data, it is also close to its first drug approval and what may well prove to be a multiyear run of drug approvals that will quickly make the company a player in rare diseases.

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Despite Recurrent Market Jitters, Alnylam Is Closing In On Multiple Drug Approvals

Lundbeck Gets An Unexpected Boon From The FDA

Things really do seem a little different at the FDA these days. The FDA's commissioner, Scott Gottlieb, has talked openly of wanting the agency to take a different approach to its interactions with the biopharma industry, speeding up processes, removing certain roadblocks, and generally shifting more toward a "let the market decide" philosophy. Although there are a lot of moving parts to that, some of them quite controversial and beyond the scope of this piece, it has had an immediate impact on H. Lundbeck (OTCPK:HLUYY) (LUN.CO).

Lundbeck made a surprising announcement late on May 2 that the FDA had chosen to grant expanded labeling claims for its depression drug Trintellix. Although this change is not going to make a night-and-day difference for the company, it is a positive development all the same and one that I believe could boost Lundbeck's long-term revenue growth rate by close to 1% and its fair value by more than 5%.

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Lundbeck Gets An Unexpected Boon From The FDA

Lexicon Pharmaceuticals Still Has Much To Prove

FDA approval of a new drug is supposed to be the biotech equivalent of firing off a starting pistol, but that hasn't been the case for Lexicon Pharmaceuticals (LXRX). Due in part to the drug's mechanism of action and external economic factors outside of the company's control, the ramp of its approved drug Xermelo has been frustratingly weak. At the same time, there's still ample uncertainty and outright skepticism regarding the company's drug sotagliflozin ("sota") for diabetes.

Although I continue to believe that Lexicon shares are undervalued by the market, substantially in fact, it's going to take some meaningful positive news to break the company out of these doldrums. Accordingly, investors are really going to need to have some patience for this story to work out.

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Lexicon Pharmaceuticals Still Has Much To Prove

Harsco's Restructuring And Improving Commodity Markets Have Boosted Results

It has been a painful process, but Harsco's (HSC) share price is almost back to where it was five years ago and up sharply from sub-$4 lows two years back from today. Much better operating conditions for Harsco's steel mill customers have certainly helped, and the shares have somewhat mirrored steel producers like U.S. Steel (X) and ArcelorMittal (MT) over the last two years, but I wouldn't undersell the company's committed efforts to exit bad contracts and restructure the business for better margins.

Now Harsco is looking at a healthy (albeit probably peaking) steel sector and significant recovery growth in heat exchanger demand. The Rail business isn't doing particularly well, but that is not so surprising and remains a long-term project. Valuation is tricky, as I'll discuss later, but I believe you could make a relative valuation argument to support a higher share price from here.

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Harsco's Restructuring And Improving Commodity Markets Have Boosted Results

PerkinElmer Lagging A Bit

It has been a so-so year thus far for PerkinElmer (PKI), and that has been true for many other life sciences companies as well. Thermo Fisher (TMO) and Danaher (DHR) have been stronger (with just under double-digit returns year to date), but Waters (WAT) and Mettler Toledo (MTD) have been weaker, and PerkinElmer has at least kept pace with the S&P 500.

While I like PerkinElmer's biopharma, diagnostics, and food safety businesses for the long term, the underlying performance for 2018 looks like it is on pace for "good, not great". With the shares trading a little below my typical hurdle rate but still offering a high single-digit estimated annualized return, I'd call this is a "high-interest hold" at this point.

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PerkinElmer Lagging A Bit

Margin Leverage Can Drive Parker-Hannifin Higher, But The Outlook Is A Little Murky

Like many industrial stocks, Parker-Hannifin (PH) seems caught in that tug-of-war between good present-day results and growing worries about the prospects for continued growth as 2018 moves along. Although Parker-Hannifin's orders have remained pretty strong, shrinking ISM new order numbers are a warning sign and expectations may be too high for incremental margins in the next few quarters.

Parker-Hannifin management has done alright with segment-level margins in recent years, and I like the opportunities the company has ahead in filtration, aerospace, and engineered materials as well as its core motion and flow/process control operations. The shares do look undervalued if Parker-Hannifin can deliver on its long-term margin targets, but I wouldn't say that expectations are at a can't-miss level.

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Margin Leverage Can Drive Parker-Hannifin Higher, But The Outlook Is A Little Murky

A Short-Cycle Deceleration Is Hitting Rockwell Automation

Rockwell Automation (ROK) does well when the economy is expanding and companies are spending more on factory capex - Rockwell’s performance correlates reasonably well to U.S. industrial production. Now, though, it is pretty clear that the vital auto end-market has slowed considerably, and there are signs that electronics is going the same way, while growth in heavy industries will weigh on Rockwell’s margins.

Rockwell is by no means a bad company, but the shares have often carried a premium for presumed superiority that may not be entirely deserved. What’s more, expectations for the second half of the year are not exactly easy. I definitely believe Rockwell is the sort of name you want to buy on pullbacks, but investors who want to start adding today should at least be prepared for the risk that things will get worse before they get better.

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A Short-Cycle Deceleration Is Hitting Rockwell Automation

Margin Challenges And Growing Cyclical Worries Have Dimmed Rexel

The performance of industrial distributor stocks on a year-to-date basis really covers the map. Grainger (GWW) has been performing exceptionally well, Ferguson (OTCQX:FERGY) has done alright, HD Supply (HDS) is more or less flat, but the electrical distributors Wesco (WCC) and Rexel (OTCPK:RXEEY) are each down about 15%. Although some of Rexel’s trouble can be attributed to frustration and disappointment in the pace of margin improvement, I also believe growing worries about the industrial cycle are playing a role.

I like the value in Rexel shares, but there are risks with both execution and macro factors – it is tough to hold a good/improving company when investors are selling out of the sector. I’m bullish on the prospects for construction in Europe and ongoing improvements in the U.S. business, but if discrete manufacturing is slowing down, it will be harder for management to hit its margin improvement targets.

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Margin Challenges And Growing Cyclical Worries Have Dimmed Rexel

Inogen Continues To Generate Some Of The Best Growth In Med-Tech

Trying to figure out a fair value for a med-tech company in its high-growth phase is a really good way to look stupid, and so it is for me with Inogen (INGN). While I really like the growth story at this leading developer and manufacturer of portable oxygen concentrators, I thought valuation was already pretty generous based upon what investors typically pay for this sort of growth.

That was less than a month ago, and the shares are up another 25% as Inogen delivered a blowout first quarter and offered what looked like pretty conservative guidance for the remainder of the year. With Inogen largely setting the pace in terms of product features/capabilities and not much serious competition looming in the short term, I can understand why investors continue to bid up this fast-growing med-tech player.

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Inogen Continues To Generate Some Of The Best Growth In Med-Tech

Emerson Getting A Strong Push From Recovering Process Automation Markets

In a market where many multi-industrials have started to see signs of fading end-market growth, Emerson's (EMR) exposure to process automation, and particularly U.S. onshore oil and gas, is helping the company drive noticeably better growth. Better still, management has been positioning this business to be more competitive outside of its core petrochemical end-markets, while also showing that it is committed to supporting its non-automation business as well.

Valuations have slid back for many multi-industrials, but Emerson has been a relative outperformer this year and doesn't look particularly cheap on a cash flow basis. That said, investors pay up for growth and will pay higher near-term multiples for companies with strong ROICs and Emerson is likely to offer both strong top-line growth and robust ROICs for the near-term.

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Emerson Getting A Strong Push From Recovering Process Automation Markets

Eaton Not Getting Much Love At All

This has been a rough quarter for the multi-industrial sector. Companies like 3M (MMM), Illinois Tool Works (ITW), Parker-Hannifin (PH), and Rockwell (ROK) have their stocks take a hit despite earnings reports that haven’t been all that bad. High valuations and expectations have certainly played a role in this cycle, but I believe investors are also getting more evidence that significant end-markets like autos, electronics, some commercial vehicles, and parts of the “general industrial” category are noticeably slowing.

I do have some of those concerns about Eaton (ETN), and I would expect fading momentum in segments like Vehicle and Hydraulics as the year goes on. On the other hand, Eaton’s exposure to aerospace, commercial buildings, and sub-sectors like data centers and harsh/hazardous environments should offer better results. All told, expectations seem very low for Eaton and this might be a name to consider if you’re still looking for some industrial exposure at this later point in the cycle.

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Eaton Not Getting Much Love At All