Neogen Pressured On Trade Tensions, But Still Well-Loved

A lot of what you need to know about Neogen (NASDAQ:NEOG) can be summed up thusly - after a nearly 25% pullback from the 52-week on tariff-related headwinds, the shares still aren't even close to undervalued by any conventional valuation approach. As I've said in the past, Neogen shares live in their own world where valuation is concerned, as institutions (over 90% of the ownership base is institutional) seem to be valuation-insensitive when it comes to owning a pure-play on food safety and food/production animal care.

I don't think the headwinds that Neogen is seeing today are going to last indefinitely, and there are significant long-term growth opportunities in both genomic testing and in emerging markets like Brazil and India. I can't get comfortable with the valuation, but if the U.S. and China find a way to make peace on trade, these shares should regain some momentum in 2019.

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Neogen Pressured On Trade Tensions, But Still Well-Loved

Encouraging, If Choppy, Progress At Umpqua

Orgeon’s Umpqua Holdings (UMPQ) has generally been well-liked by investors, which has often meant a less-appealing valuation compared to many peers. Between that popularity, a less asset-sensitive balance sheet than many peers, and general optimism on the company’s efficiency initiative, the shares really haven’t lagged its regional banking peers all that much over the last six or 12 months.

Looking at fourth quarter results, Umpqua seems to be going into 2019 with some decent momentum and attractive prospects for spread improvement on delayed repricings, as well as further cost-reduction benefits from the NextGen process. Although I believe Umpqua is undervalued on both a long-term earnings basis (assuming high single-digit growth) and near-term ROTE, the degree of undervaluation is less than for many banks in its peer group.

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Encouraging, If Choppy, Progress At Umpqua

CenterState Is An Attractive 'Strong Getting Stronger' Story

This isn’t a great point in the banking cycle, as rate hike benefits are tapering off, the economy seems to be slowing, and credit costs are likely to increase substantially from here. That said, if you are still interested and willing to invest in banks, I think Florida’s CenterState (CSFL) is a name to consider. It’s a higher-risk, higher-growth story than ideas like SunTrust (STI), PNC (PNC), or BB&T (BBT), but management has generated some impressive results with a coherent, disciplined M&A and organic growth plan. Moreover, I think CenterState could be a “heads you win, tails you win” situation with respect to M&A – I believe CenterState would be an attractive target to many super-regionals, but they don’t need to get bought for this idea to work.

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CenterState Is An Attractive 'Strong Getting Stronger' Story

At Sandvik, Cycle, Value, And Self-Help Are In A Battle Royale

These are challenging times to evaluate almost any industrial company, but Sandvik (OTCPK:SDVKY) (SAND.ST) cranks that to “11” right now. In the plus column, Sandvik has done some very strong work with self-help over the past few years (streamlining supply chains, reducing overhead/fixed costs, culling low-margin business), and a lot of that improvement is acyclical. Sandvik is also benefiting from a strong recovery in mining capex, and has options to further remake the company through M&A. In the minus column, the cutting tool business looks to be rolling over and it’s tough to make headway when your largest, most profitable business is starting to struggle.

If a significant global slowdown is in fact underway (let alone a recession), it’s going to be tough for Sandvik to outperform. Still, I think Sandvik will manage some additional margin leverage from here while keeping its ROIC up in the 20% range, making this a very tempting name even now.

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At Sandvik, Cycle, Value, And Self-Help Are In A Battle Royale

Stanley Black & Decker's Guidance Doesn't Bode Well For Industrials

Seen by many investors and analysts as a relatively safer play in industrials for 2019, Stanley Black & Decker (SWK) was hammered (down 15%) after reporting earnings, as investors saw more than a few alarming items in the company’s guidance pertaining to some major industrial end-markets. Given the acknowledgement of weakening conditions in key markets like autos and residential housing, not to mention some limits on pricing amid ongoing cost pressure, I expect investors are going to be paying much closer attention to names like Illinois Tool Works (ITW), Ingersoll-Rand (IR), and 3M (MMM) in this earnings/guidance cycle.

As for Stanley Black & Decker itself, the shares do look undervalued, but the back-end loaded guidance for the year and the margin challenges make it a tough call right now, as there could be at least one more cut to guidance before this is over. I’d also note that Stanley Black & Decker hasn’t exactly been a standout either when it comes to metrics like free cash flow growth, despite ongoing cost reduction efforts.

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Stanley Black & Decker's Guidance Doesn't Bode Well For Industrials

Steel's Uncertain Outlook Certainly Complicates The Steel Dynamics Story

Steel Dynamics (STLD) continues to operate well in an increasingly challenging market, and I am relatively bullish on the quality of the management, the quality of the company, and the prospect for improving market share and valued-added mix to help offset some of the mounting challenges the sector is facing.

Cyclical stocks are always challenging to value, and I find that particularly true when the cycle starts to roll over. The market generally prices stocks in sectors like steel on the basis of next year’s EBITDA, but that gets tricky when you realize that the next year’s EBITDA is likely to be lower than this year’s, and the next, and so on. Looking at several different approaches, I think a mid-$30’s to low $40’s fair value is still valid and reasonable, but 2019 may still have some unwelcome surprises for the industry if demand starts to flag.

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Steel's Uncertain Outlook Certainly Complicates The Steel Dynamics Story

More Encouraging Progress From Accuray

Small-cap radiation oncology system manufacturer Accuray (ARAY) has frustrated more than a few investors and analysts over the years, as this company has struggled to gain real traction against Varian Medical Systems (VAR) and Elekta (OTCPK:EKTAY) (to a lesser extent) in the roughly $5.5 billion market for radiation oncology systems. While Accuray has always offered systems with some compelling technologies and capabilities, getting everything in line in terms of system reliability, performance, pricing, software, and marketing support has been a real challenge.

Maybe, just maybe, 2019 will be the year where things finally start to really come together for the company. Orders are coming in better than expected, and if the logjam in China’s market opportunity breaks up, Accuray could be poised to see significant benefits. I don’t believe enough has changed yet for me to move my fair value range from $5.50-6.50, but I do have more confidence that this story is developing in a more positive direction.

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More Encouraging Progress From Accuray

SunTrust Offering A Strong Story Going Into 2019

Both SunTrust (STI) and BB&T Corp. (BBT) seem to have a lot working for them going into 2019, including improving cost leverage from digital investments, stronger-than-average loan growth in relatively attractive regional markets, and strong deposit franchises anchored by long-term leadership in those same markets. And probably not so surprisingly, they’re both priced for things going relatively well.

With what appears to be somewhat limited capacity to fund attractively priced loan growth and the likelihood of higher provisioning expense in the coming years, SunTrust’s earnings growth potential looks lackluster (in the low single digits), but the company pays a good dividend, could have some upside/outperformance potential in the numbers, and the shares are still undervalued, even if not so much so as other Southeast banks like Regions Financial Corp. (RF), First Horizon National Corp. (FHN), or Synovus Financial Corp. (SNV).

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SunTrust Offering A Strong Story Going Into 2019

Signs Of Improved Momentum At Fifth Third Are Welcome

Cincinnati-based Fifth Third (FITB) has never really been my favorite regional bank. With a performance that matches the trailing 12-month performance for the regional indices, beats slightly on a two-year comp and trails modestly on a five-year comp, I can’t say that I regret that position all that much. In fairness to this bank, though, performance has been improving recently, and if management can skillfully reposition the bank for this next phase of the cycle and successfully integrate MB Financial (MBFI), there’s enough upside here to at least consider the name.

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Signs Of Improved Momentum At Fifth Third Are Welcome

Regions Financial's Slow-And-Steady Approach Not Really Standing Out

Regions Financial (RF) has chosen a different strategic approach from many of its peers recently, prioritizing quality over quantity and capital returns over growth. It hasn’t made all that much difference in terms of share price performance, though, as the shares have done about as well as the major regional bank indices, while lagging some peers like BB&T (BBT) and Bank of America (BAC) while outperforming SunTrust (STI) and First Horizon (FHN).

I like Regions’ strong core deposit franchise, and I think there’s some potential in the company’s specialty lending efforts. I also think prioritizing credit quality should pay off over the next few years, but I am concerned about how Regions’ relatively modest near-term and long-term earnings growth prospects will be priced by the market, even though capital returns should be strong. I do believe Regions is undervalued, but then so are most banks, and upside is likely tied to stronger spreads and/or efficiency gains than I currently model.

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Regions Financial's Slow-And-Steady Approach Not Really Standing Out

Citizens Financial An Intriguing Mix Of Opportunity And Challenges

Trying to figure out stocks like Citizens Financial (CFG) might be why I have more than my fair share of grey hair, as there are a lot of intriguing and attractive aspects to the story (including the valuation), but almost as many challenges and issues that may make an investor pause. Although Citizens is one of the largest banks in the country (#13 in assets) and operates in 11 states, it doesn’t really have great deposit share in its biggest MSAs, nor attractively-priced deposits. Likewise, Citizens has done a lot to improve its profitability, but that includes shifting the loan mix towards some riskier categories and that could have repercussions when the credit cycle turns.

On balance, I do think Citizens is worth a close look, maybe if for no other reason than it is likely to be one of the stronger large banks in terms of pre-provision earnings growth over the next two to three years and challenges in categories like CRE aren’t too relevant.

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Citizens Financial An Intriguing Mix Of Opportunity And Challenges

First Horizon Underperforming On Lackluster Numbers

I can’t say that I’m all that surprised that First Horizon’s (FHN) last two quarters have come in below expectations, leading the shares to underperform its regional bank peers by around 5% on average (including underperforming the likes of Bank of America (BAC), Wells Fargo (WFC), SunTrust (STI), Regions (RF), and Pinnacle (PNFP) ). I’d written back in July that I thought the long-term potential I saw was tempered by a tougher near-term outlook, and that has come to pass as loans, spread, and fee income have come in lower than expected.

I’d call my opinion on First Horizon today “positive, with an asterisk”. I believe First Horizon is a well-run bank on a basic level, and I think the strategy that has driven significant in-market growth in Tennessee over the last five years can be successfully applied elsewhere (namely the Carolinas and Florida). I also believe there are opportunities to grow its multi-faceted national specialty lending platforms. The “but” is that management has already laid out fairly ambitious expectations, and First Horizon is trying to grow in some of the most intensely competitive markets in the country. I do believe these shares are undervalued now, but more and more “show me” burden is falling on management’s shoulders.

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First Horizon Underperforming On Lackluster Numbers

Preferred Bank Showing Some Strains, But Still Well-Positioned And Undervalued

 As an exceptionally asset-sensitive bank with a fast-growing Southern California lending business, the past couple of years have been particularly strong for Preferred Bank (PFBC). Prepayments and intense lending competition remain notable headwinds, and the rate cycle isn’t going to be nearly as helpful from this point on, but Preferred looks like a higher-risk, faster-growing small bank that is worth consideration from investors who want more dynamic options in the banking sector.

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Preferred Bank Showing Some Strains, But Still Well-Positioned And Undervalued

Conservatism And Active M&A Remain Issues At People's United

The word lackluster doesn’t really do justice to the frustrating performance from People’s United Financial (PBCT) over the past decade, as the negative return dramatically lags regional bank indices at individual comps like Signature (SBNY) and M&T Bank (MTB), though BankUnited (BKU) and New York Community (NYCB) do have similarly dreary long-term returns.

The problem, I believe, is an ongoing conservatism on the part of management, which depresses yields and profits, and an ongoing willingness to make TBV-dilutive transactions; over the past decade, People’s United has seen 2% annualized contraction in tangible book value per share, while its Northeast peers have grown TBV/yr at a rate of around 5% to 6% on average.

The bull argument is that all of these acquisitions will eventually produce value through scale and improved growth opportunities across a bigger footprint, not to mention the idea that the company’s conservatism will show its merits when the cycle turns sour. I can appreciate a good conservative story (like Commerce Bancshares (OTC:CBSH) ), but with People’s United not looking all that cheap, I can’t say I find the shares all that exciting.

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Conservatism And Active M&A Remain Issues At People's United

Signature Bank Diversifying And Investing For Growth

As was the case for most banks, 2018 wasn’t an easy year for Signature Bank (SBNY), but this New York/private banking-focused specialty bank is going into 2019 with better momentum and a cleaner, more interesting business mix. It also certainly doesn’t hurt that this liability-sensitive bank is looking at the end of the rate hike cycle.

Between growing/expanding the West Coast business, supporting the new private equity and digital asset banking businesses, and the blockchain-based Signet payments business, Signature has some interesting growth opportunities queued up, and I believe there continue to be better-than-worthwhile opportunities out there for service-centric banks at a time when many larger banks are managing their business with a cost focus. If high single-digit core earnings growth is a reasonable expectation over the next five to 10 years, I believe these shares are undervalued below $140.

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Signature Bank Diversifying And Investing For Growth

Commerce Bancshares Well-Rewarded For Its Quality And Stability

When “stuff” starts to go fan-ward in the bank sector, Commerce Bancshares (CBSH) often shines. Conservatively run, Commerce can often get left behind when things are going great, but investors often prize its more reliable earnings performance and credit quality. And even though Commerce isn’t really thought of as a grower, high single-digit trailing tangible book value and core earnings growth, as well as double-digit EPS growth, isn’t exactly bad.

Valuation is still a sticking point for me. Commerce has outperformed its peers over the past six and twelve months, but it’s tough to connect the dots on the valuation today. I like management’s efforts to expand its commercial banking footprint and withstand increasing competition in its core market, but it looks like there’s already a meaningful quality premium built into the share price.

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Commerce Bancshares Well-Rewarded For Its Quality And Stability

A Split Decision From The AdCom Leaves Another Crack In Lexicon Pharmaceuticals

It’s been a tough road for Lexicon (LXRX) with its dual-SGLT inhibitor Zynquista (also known as sotagliflozin), even though the drug has shown solid efficacy from its initial Phase II trials and even though there is still a significant need for more than just insulin therapy for people with Type 1 diabetes. The recent FDA advisory committee meeting (or AdCom) and its 8-8 split decision on whether Zynquista should be approved only muddies the water further, and it is up to the FDA’s reviewers to decide whether the improvements in blood glucose management outweigh the acknowledged higher risks of diabetic ketoacidosis (or DKA) from taking the drug.

Because of the “safety first” mentality of the FDA with respect to diabetes, not to mention the elevated DKA risks that have been seen in trials, I’ve never given Zynquista the sort of approval odds in my model that a drug with its net efficacy benefit would otherwise normally get. Although I’m still positive on balance regarding the drug’s approval chances, a significant source of value for Lexicon's shares is very much still at risk.

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A Split Decision From The AdCom Leaves Another Crack In Lexicon Pharmaceuticals

Fastenal Pitting Operational Excellence Against A More Challenging Macro

Long a margin leader in the industrial MRO distribution space, not to mention a growth leader, Fastenal (FAST) has been reporting incremental margins north of 20% coupled with double-digit sales growth. A downturn in manufacturing PMI doesn’t bode as well for near-term revenue growth, and tariffs could still challenge the price/cost balance in 2019, though the company still has some opportunities with pricing and operational efficiency moves.

Fastenal’s margin superiority has never translated into significant free cash flow superiority over peers like MSC Industrial (MSM) or Grainger (GWW), but the shares have never been held back by DCF-based valuation. Strong margins and ROIC should support a forward EBITDA multiple a little above 14x, but that doesn’t leave much upside from here unless Fastenal can drive some outperformance on margins and/or revenue.

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Fastenal Pitting Operational Excellence Against A More Challenging Macro

Bank OZK Looking For A Little Stability In 2019

It’s been a wild ride for Bank OZK (OZK) (formerly Bank of the Ozarks), as this CRE and construction lending specialist has seen two quarters were almost everything went wrong (the third quarter) and then almost everything went right (the fourth quarter). The exceptionally strong fourth quarter results, and the quick about-face on the Street the sent the shares shooting higher, has largely closed the gap created by the third quarter sell-off, but the shares have still significantly lagged the major regional bank indices over the last six and 12 months.

Looking into 2019, Bank OZK’s heavy exposure to riskier lending (construction and commercial real estate, focused on NYC and Miami) and higher deposit beta will likely lead to higher volatility, but management has taken noticeable steps to diversify the portfolio and improve its deposit-gathering. I do still have worries about Bank OZK’s overweighted exposure to some overheated real estate markets, but in the low $30’s, it’s hard not to like the valuation for long-term holders provided there isn’t a bad recession on the way.

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Bank OZK Looking For A Little Stability In 2019

Sandy Spring Stumbles On Fee-Based Income As Funding Remains A Concern

In what has been an “okay, but not great” quarter for bank earnings report, small-cap metro D.C. bank Sandy Spring Bancorp (SASR) definitely skewed toward the “not great” part, sending the stock down about 10% at the worst point post-earnings. The reaction might have been a little overdone, but funding issues remain front and center, and I have some concerns about ramping competition in the D.C. metro area, not to mention the possible impact to the company’s D.C.-area loan portfolio if the government shutdown stretches on.

I don’t want to harp on the funding/spread concerns, but it’s the biggest risk I see with Sandy Spring, and that has been the case for a little while now. I believe that Sandy Spring has a strong brand and core business in an attractive market (and opportunities to make accretive deals down the road), but that attractive market is drawing in more competition and management will have to rise to the challenge. I believe they can and will, and I believe the shares remain undervalued below the mid-$30’s to $40.

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Sandy Spring Stumbles On Fee-Based Income As Funding Remains A Concern

M&T Bank Not Fully Appreciated For Its Excellence

Despite a sharp rebound since around Christmas, bank stocks still aren’t getting their due as investors remained concerned about the risks of recession, yield inversion, rising credit losses, and generally lackluster net growth prospects. Not surprisingly, then, while M&T Bank (MTB) has held its own with peers like Bank of America (BAC), BB&T (BBT), JPMorgan (JPM), and PNC (PNC), it’s still arguably not getting its full due from the market.

It doesn’t sound as though M&T will generate exceptional loan growth next year, nor exceptional pre-provision profit growth, and that does temper my excitement for the shares. I’d also note that there are other bank stocks that appear to trade at even wider discounts to fair value, including PNC. Considering all that, M&T is still not my favorite name in the bank sector, but I wouldn’t disagree with any long-term shareholder who intends to maintain their position.

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M&T Bank Not Fully Appreciated For Its Excellence

BB&T Ends 2018 On A Strong Note

BB&T (BBT) has a knack for being a little out of sync with its banking peers, and that’s not always (or even often) a bad thing, as BB&T has generally been of the long-term outperformers in its peer group. In this particular case, “a little out of sync” means a little more apparent loan growth momentum heading into 2019, not to mention some potentially above-average benefits to come from tech investments and regulatory changes.

My revised numbers for BB&T support a fair value in the low-to-mid $50s, and I’m perfectly to continue holding these shares in my own account. I can’t really call them a top idea for new money, though, as PNC (PNC) and Comerica (CMA) both look cheaper, as do Wells Fargo (WFC) and Citigroup (C), though those are more troubled and controversial picks today.

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BB&T Ends 2018 On A Strong Note

U.S. Bancorp Shares Still Stuck

Banks have rebounded off of their December lows, but large banks have generally rebounded less strongly, and U.S. Bancorp (USB) less so than many of its peers. Although U.S. Bancorp doesn’t have the risk of a company like Bank of America (BAC) or Comerica (CMA) where a fading rate cycle takes away a major growth lever, and it does still have a high-quality set of fee-generating businesses, the company’s core operating footprint (excluding California) isn’t well-loved, operating profit growth is likely to meander in the mid-single-digits and the cycle as a whole is not favorable to banks with growing concerns about yield inversion and recession.

If you’re patient and don’t really care about how the shares perform over the next six to 12 months, U.S. Bancorp remains one of the best-run banks in the country and the shares are undervalued enough that they should generate an attractive double-digit long-term annualized return from here. PNC (PNC), Comerica, and JPMorgan (JPM) are just as cheap, or cheaper, though, and so I’d at least advise some “comparison shopping”.

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U.S. Bancorp Shares Still Stuck

Quality Not Helping PNC Financial Much, As Growth Concerns Mount

I expressed some concerns with PNC Financial’s (PNC) position vis a vis near-term growth prospects last quarter, and those concerns really haven’t gone away. I think this is a very well-run bank and a solid candidate for a long-term position, but the lackluster results (highlighted by weak loan and revenue growth) have led to relative underperformance compared to other large banks like BB&T (BBT), Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB), and J.P. Morgan (JPM).

Not much has really changed in my basic view of PNC Financial. I do see some risks to the company’s middle-market lending business and its “thin branch” digital banking expansion, but I think those risks are more than adequately reflected in the share price. Likewise, while I don’t dismiss the risk of weaker economic conditions over the next two or three years, just low single-digit adjusted earnings growth is enough to drive an appealing long-term return from here.

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Quality Not Helping PNC Financial Much, As Growth Concerns Mount

Comerica Has Thawed A Bit, But Expectations Are Still Modest

I don’t really evaluate or recommend stocks on a short-term return basis, but I won’t pretend that it hasn’t been nice to see Comerica (CMA) jump over 10% (beating underlying regional bank indices by about 5%) since my December update when I flagged expectations/sentiment as unusually low. Better still, it looks like expectations are still quite modest even after this stock and this sector have both rebounded from their December lows.

I’m still troubled by Comerica’s relatively weak loan growth, though it looks as though that may accelerate in 2019. Likewise, Comerica’s guidance for mid-single-digit net interest income growth could prove conservative as it includes no further rate hikes. I’d certainly recommend keeping an eye on loan growth, credit quality, and spread leverage here, but even just low single-digit long-term growth should be able to support a fair value more than 10% above today’s level.

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Comerica Has Thawed A Bit, But Expectations Are Still Modest

Lackluster Growth And Intermittent Credit Issues Still A Challenge For Fulton Financial

The market turned relatively more bullish on Fulton Financial (FULT) as 2018 wore on, but this Mid-Atlantic bank remains somewhat hamstrung by sluggish growth trends and intermittent credit issues, including a provisioning for a sizable ag credit in the fourth quarter after a fraud-related loss earlier in 2018. On a more positive note, though, cost leverage should improve more markedly over the next couple of years and that should help drive mid-single-digit pre-provision earnings growth.

I like Fulton’s expansion efforts in Philly and Baltimore, and I believe the bank will likely return to M&A in 2020 after the expected resolution of its remaining consent orders and the consolidation of its banking charters. I remain concerned about the bank’s loan growth prospects, though, and I think there are better bargains in the banking sector, including the Mid-Atlantic region.

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Lackluster Growth And Intermittent Credit Issues Still A Challenge For Fulton Financial

Synovus Now Firmly In The 'Show Me' Camp

It's no secret that bank stocks have sold off significantly over the past six months, even with a nice bounce after Christmas, as investors have increasingly priced in a recessionary environment and abandoned the sector for greener pastures. In the case of Synovus (SNV), not only has the market priced in a harsher near-term environment (which may or may not be reasonable given its exposure to higher investment property exposure in the Southeast US), but it has also levied a penalty for the company's decision to acquire Florida's FCB.

I had warned that Synovus shares would probably linger under a cloud for a while after the deal, but I didn't think that would mean a roughly 15% underperformance to regional bank benchmarks in just six months. Synovus isn't going to be a torrid organic grower, it faces plenty of incoming competition in the Southeast, and management still has work to do with its funding mix, but I think the discount today is too wide. I can't say that this is my favorite bank from an operational perspective, but the embedded expectations seem too low to me today.

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Synovus Now Firmly In The 'Show Me' Camp

Wells Fargo Remains Undervalued But Ongoing Regulatory Challenges Pressure Growth

Shackled to “muddle through” performance as long as a regulator-imposed asset cap remains in place, Wells Fargo (WFC) is indeed muddling through. Not much is going for the bank in terms of loan growth or fee income right now, but investors can at least look forward to more substantial capital returns in the near term. Wells Fargo still maintains one of the largest retail banking franchises in the country, and a strong middle-market lending operation as well, but the combination of increasing competitive pressure and economic headwinds is likely to hamper growth. Even so, the valuation is past “undemanding” and these shares do look cheap even considering the issues in place at this bank.

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Wells Fargo Remains Undervalued But Ongoing Regulatory Challenges Pressure Growth

Continued Excellence Driving First Republic, And The Valuation Is Reasonable

First Republic’s (FRC) high-quality growth continues to be recognized by the Street; the shares noticeably outperformed the major regional banking indices in 2018 (by around 20%). Even so, the minimal share price appreciation has allowed the underlying quality of the business to catch up a bit with the valuation, and I think the risk/reward balance is more attractive now early in 2019.

First Republic continues to generate exceptional loan growth, and I think the quality of the franchise – focusing on high net worth individuals, and what I’d call “high potential” younger clients, and a strong focus on customer service – can take the bank further. While a full-blown recession would certainly be a risk factor from here (and credit costs almost have to increase from here), I think this is an opportunity to buy into an attractive business at a reasonable valuation.

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Continued Excellence Driving First Republic, And The Valuation Is Reasonable

JPMorgan Scratched, But Still In Fighting Trim

All good things come to an end, and JPMorgan Chase (JPM) saw its impressive string of 16 consecutive quarterly EPS beats come to an end in the fourth quarter of 2018. Even so, I’d argue the underlying trends in the business are better than sound, and JPM is well-placed to continue growing share in key areas like consumer banking, commercial banking, payments, and custody, while maintaining a strong position in its more volatile trading and i-banking businesses.

The market is already pricing banks like a recession is coming, and while I won’t say that has totally de-risked a potential recession in 2019 or 2020, it has established a more reasonable risk/reward outlook. If JPMorgan can meet my long-term expectations of low-to-mid single-digit core earnings growth, these shares should trade around $120 today.

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JPMorgan Scratched, But Still In Fighting Trim

Shionogi's Strong Core Offers More Capital Return Possibilities

Japanese drug companies are quite a bit different than U.S. and European pharma companies, partly because the pricing/reimbursement environment is much different, but those differences aren’t always bad. In the case of Shionogi (OTCPK:SGIOY) (4507.T), investors can take advantage of a highly profitable company with a strong HIV franchise and a willingness to simultaneously walk that fine line between reinvesting in the growth potential of the business and sharing the benefits with shareholders.

Shionogi’s ADRs are not particularly liquid, and that is an issue for investors to consider, though the shares listed in Japan offer ample liquidity. Although I’d like to see a more efficient sales and marketing operation from Shionogi, the company’s pipeline has exciting assets both in late and early stages of development, and I believe investors can reasonably expect a high single-digit/low double-digit long-term annualized return from these shares.

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Shionogi's Strong Core Offers More Capital Return Possibilities

Renesas Pummeled On Inventory Corrections And Worsening Macro

Japan's Renesas Electronics (OTCPK:RNECY) (6723.T) is a microcosm of what worries me about the semiconductor industry heading into 2019. Elevated lead times and strong orders lead Renesas, its distributors, and its end-customers to build up inventories, and those inventories eventually got much too large, leading to a painful reset as demand has tapered off. In addition to this inventory correction process, there are growing worries about auto unit demand growth in 2019, not to mention demand from factory automation, appliance, and consumer device end-markets. More specific to Renesas is also, I believe, a growing concern over how the company stacks up competitively in the evolving auto semiconductor landscape.

Although I take the risks of share loss to competitors seriously, I think the shares are pricing in an extreme level of pessimism for Renesas's future. Even with near-term margin issues likely capping some of the upside, I believe the shares are just too cheap for one of the global leaders in microcontrollers and a company set to benefit from the acquisition of Integrated Devices.

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Renesas Pummeled On Inventory Corrections And Worsening Macro

A Game-Changing Deal With Amazon Puts Balyo Into The Spotlight

Regular readers will probably already know about my interest in robotics and automation, and I do believe it is a major emerging trend that is going to significant reshape how companies approach manufacturing and logistics. On the logistics side, I’ve spent quite a bit of time looking at automation companies like Intelligrated (now owned by Honeywell (HON)), Daifuku (6383.T), and Cognex (CGNX), as well as maybe less obvious companies like Datalogic (OTC:DLGCF), as I believe companies like Amazon (AMZN), Walmart (WMT), and FedEx (FDX) are highly motivated to find solutions that reduce labor costs, improve accuracy, and accelerate fulfillment.

That brings me to Balyo (OTCPK:BYYLF) [BALYO.PA] – a very small French company that will probably be all but unknown to many readers. This company is tiny (a market cap of only around $125 million), and the ADRs are not at all liquid, but the company’s recent multiyear partnership deal with Amazon is likely to significantly increase the visibility of this robotic intelligence company and accelerate its market penetration. I want to again underline that this company is small and that the U.S. ADRs are illiquid, but there is meaningful growth potential here in a segment (logistics automation) that has an unfortunate lack of direct investment options.

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A Game-Changing Deal With Amazon Puts Balyo Into The Spotlight

Infineon's Rich Content-Growth Mix Going Up Against A Tougher Chip Cycle

With high lead times leading the Street to expect serious inventory corrections and disruptions to sales and orders, leading power management semiconductor companies like Infineon (OTCQX:IFNNY), STMicroelectronics (STM), and ON Semiconductor (ON) have underperformed a weakening semiconductor sector over the past year. Although end markets like electric vehicles, wireless charging, and industrial automation continue to grow (and likely will continue to grow in 2019), lead times are still very high and Infineon is investing considerable resources to support future demand, pressuring free cash flow, and margins in the near term.

Infineon will see significant competition from STMicroelectronics and ON in key areas like auto power semiconductors, but there's likely to be significant underlying demand over the next 10 to 15 years. Infineon is, likewise, well-placed to benefit from the "inverterization" of home appliances, growth in factory automation, and growth opportunities in data centers and 5G wireless. I am worried that the semiconductor down-cycle could be worse than currently expected, but the shares are already discounting a lot and I do see upside from here.

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Infineon's Rich Content-Growth Mix Going Up Against A Tougher Chip Cycle

Dialog Has Managed The Apple Situation Well, But Considerable Uncertainty Remains For What's Next

For a company that relies upon Apple (AAPL) for about three-quarters of its revenue, and has acknowledged that Apple will be switching to insourced options for more than half of that relatively soon, I believe Dialog Semiconductor’s (OTCPK:DLGNF) (DLGS.XE) executive team has managed the ensuing chaos about as well as you could reasonably ask. An IP/asset transfer and revenue-prepay deal de-risks the next few years and gives more clarity on what the new Dialog may look like, and a cash-rich balance sheet gives management M&A options while also funding a decent-sized buyback.

There’s a lot that Dialog still has to figure out. Still, this is a company that should have a non-Apple business with over $500 million in revenue in 2020, growing at a double-digit rate and supporting operating margins at least in the mid-to-high teens. If the company can find a value-building M&A transaction or two (and that’s a bigger-than-normal “if” with this company), there’s a real chance that Dialog 2.0 could be an interesting company. Valuation is more complicated now, but I do still see some upside in the shares, though I’d note that there are a lot of decent bargains in the chip space that don’t have this level of drama or uncertainty.

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Dialog Has Managed The Apple Situation Well, But Considerable Uncertainty Remains For What's Next

STMicroelectronics Discounting A Truly Scary Semiconductor Cycle

I suppose that relative to the perpetually optimistic sell-side, I’m bearish on the semiconductor sector over the next 12-24 months, but I believe the share price of STMicroelectronics (STM) (or “STM”) is now pricing in a truly frightening level of pessimism about the near-term outlook for the industry. STM will certainly face stiff competition from companies like Infineon (OTCQX:IFNNY), ON Semiconductor (ON), Renesas (OTCPK:RNECY), Cypress (CY), and NXP Semiconductors (NXPI) in the coming years, but I believe the company’s strong position in MCU, power management, and sensing is being underrated now, not to mention the possibility for future volume-driven margin gains.

I think STMicroelectronics should be more fairly valued in the range of $17.50 to $21.50, a wide range to be sure, but one reflects the consistent gap between longer-term adjusted discounted free cash flow (which tends to produce lower targets) and the short-term multiples-based approaches that are typically more commonly-used on the Street.

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STMicroelectronics Discounting A Truly Scary Semiconductor Cycle

Geely Hammered As Macro Challenges Trump Company-Specific Positives

China’s Geely Automobile (OTCPK:GELYY) (0175.HK) is unhappily close to erasing two years of progress in the stock market, as the shares have dropped by almost 60% in the last twelve months as China’s eroding passenger vehicle market has finally started hitting the company’s performance. With minimal volume growth expected in 2019 and margin deleverage likely to bite into earnings, Geely’s strong model roster, technological capabilities, and progress on green initiatives likely won’t help much until 2020.

Although I thought the shares looked expensive on cash flow back in late May of 2018, I did not expect Chinese vehicle sales to drop through the floor. The Chinese government has announced that it intends to stimulate consumer spending on cars, but the announcement was short on specifics and the government may well find it hard to make as much of an impact as it would hope. I still see value in what I believe is China’s best domestic automaker, but the risk of further cuts is real and I’d advise waiting to see how the next few months of sales track before trying to buy into this sell-off.

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Geely Hammered As Macro Challenges Trump Company-Specific Positives

Yaskawa Electric Taking A Beating On Diverse Headwinds

Japan’s Yaskawa Electric (OTCPK:YASKY) (6506.T) has taken a beating over the past six months, with the shares down about a third as the emerging weakness I saw in the summer has grown into full-blown troubles across the business. With auto demand likely to weaken from here and no real near-term drivers for improved handset or semiconductor order trends, Yaskawa could be looking at a rough trough period, particularly if management won’t step up and cut costs and production in anticipation of tougher times.

When I wrote about Yaskawa back in July I thought the shares weren’t cheap enough relative to the risk, and that’s basically my position now as well. I think the shares are more or less fairly valued now, and could have some upside if conditions improve, but I really don’t expect that to happen and I think there could be more cuts to expectations on the way. The overall quality and market exposures of Yaskawa make this a name to consider for the long term, but I don’t think today is the best time to buy.

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Yaskawa Electric Taking A Beating On Diverse Headwinds

MSC Industrial Has To Offer More Than Lackluster Growth And No Margin Leverage

MSC Industrial (MSM) has continued to test the patience of its shareholders, as the company’s shares have continued to lag not only the broader industrial sector since the company’s fiscal fourth quarter earnings report, but also fellow distributors like Fastenal (FAST) and Grainger (GWW). I believe the primary issue is a familiar and long-standing one – not only is MSC lagging in terms of organic growth, it’s not showing the hoped-for margin leverage that has been a centerpiece of many bull theses. On top of that, MSC’s exposure to manufacturing is a potential vulnerability has uncertainties build ahead of the upcoming wave of guidance from industrial companies with their calendar fourth quarter reports.

I believe MSC Industrial can be better than this, which is a large part of why I continue to own the shares, but “can” and “will” are not synonyms, and investors have to consider the risk that between internal missteps and a changing competitive environment, MSC will never live up to its growth and margin potential. The shares do appear undervalued on both a DCF and margin-driven EV/EBITDA basis, though, and I believe the potential returns are worthwhile if the company truly does, at last, have its ducks in a row.

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MSC Industrial Has To Offer More Than Lackluster Growth And No Margin Leverage

Materion Leaning Into Mounting Headwinds, But Margin Leverage Is Still Meaningful

Good stock/unattractive valuation combinations are often frustrating, but I’m not really surprised that Materion (MTRN) shares have fallen more than 15% since my last update despite strong margin improvements, as the company’s valuation was pretty healthy back in the summer and there have been some signs of deterioration in multiple end-markets.

I don’t exactly love the set-up in 2019, as consumer electronics, auto, energy, and multiple industrial end-markets all look shaky to varying degrees. On the other hand, while near-term revenue growth prospects aren’t great, I do expect ongoing margin improvement (including double-digit EBITDA margins in 2021) on top of the record profitability already achieved by management’s One Materion strategic plan. I still see upside on an EV/EBITDA basis, but a lackluster long-term ROIC and a less impressive DCF-based fair value mitigate my enthusiasm.

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Materion Leaning Into Mounting Headwinds, But Margin Leverage Is Still Meaningful

Lattice Still Looks Like A Very Interesting Self-Improvement Story

Conditions have gotten ugly in the semiconductor space but not equally so for all players. Companies in the field-programmable gate array (or FPGA) space have held up better, as both Lattice (LSCC) and Xilinx (XLNX) are up about 15% over the past year, well ahead of the 12% decline in the SOX, and both are likewise well ahead of the SOX on a six-month comparison (where Xilinx has significantly outperformed Lattice). Although Lattice offered a very weak guide for the fourth quarter as distributors burn off inventory and Asian customers order less on macro uncertainties, much of that post-earnings drop has been recovered in recent weeks.

I really like the Lattice story. There is scarcity value in the FPGA space overall, and I think Lattice has a meaningful opportunity in focusing on "lower horsepower" FPGAs where Xilinx and Intel (INTC) really don't compete and where Microchip (MCHP) may well not be as focused as Microsemi was. I also believe there is a significant longer-term margin improvement opportunity here, and one that management seems to take quite seriously. The only "but" is valuation; Lattice does look a little undervalued and there is an opportunity for upgraded expectations over time, but it screens out as relatively fairly-valued in a space with a lot of cheaper-looking alternatives.

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Lattice Still Looks Like A Very Interesting Self-Improvement Story

FormFactor Weathering Some Headwinds Ahead Of A Big Customer Transition

With a business driven by chip production volume, and not really by semiconductor equipment capex spending, FormFactor (FORM) has hung in there pretty well during a period where many semiconductor equipment and material companies have gotten hit hard. I thought FormFactor offered a challenging set up of “very good company, decent-to-good valuation, and tough macro/sector” back in August, and the shares are basically flat since then – outperforming the NASDAQ and definitely outperforming semiconductor equipment stocks, but still not exactly a performance to write home about.

Looking into 2019, I am concerned about pressures on the memory business, but recent wins should help offset that. Likewise, I’m concerned about the impact that falling lead-times and weakness in key end-markets like auto may have on chip volume, but FormFactor should benefit from Intel’s (INTC) transition to 10nm as the year goes on. I think a mid-teens fair value is still appropriate, and I see enough value here to make it worth a look, but investors should be aware of the downside risk from a greater negative impact to chip production (both logic and memory) from lead-time corrections and a deteriorating macro environment.

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FormFactor Weathering Some Headwinds Ahead Of A Big Customer Transition

MaxLinear Marking Time Ahead Of Game-Changing Product Ramps

As the semiconductor sector has come under pressure, MaxLinear (MXL) has held up okay since the company's "kitchen sink" second quarter and stable third quarter (even if stable at a lower level). Looking into 2019, while MaxLinear has a lot of work to do to repair its reputation and restore confidence in the long-term growth story, the company at least won't be contending with weaker trends in autos or handsets, and the lead-time-related disruption to sales and order trends are likely to be significantly less impactful here than at other chip companies.

The MaxLinear story still rests on believing in a significant revenue ramp in the coming years, driven largely by 5G (RF transceivers and millimeter modems), front-end optical (metro and data center), and data center interconnects. The potential is there, and the share price today still offers upside, but "potential" is a word that can lose you a lot of money if it's not followed by execution.

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MaxLinear Marking Time Ahead Of Game-Changing Product Ramps

Cypress Semiconductor's Value Obscured By A Growing Wall Of Worry

Given the roughly 15% drop in the SOX over the past six months, it’s not too hard to find chip stocks that look more reasonably-valued, if not cheap, these days. The catch, though, is how well current expectations factor in the numerous risks that seem to be mounting early in 2019 – shrinking lead-times, weakening auto and industrial markets, weakening memory pricing, and so on. Although I do like the business mix at Cypress (CY), and I believe the company is well-placed to gain share in the auto and IoT markets in the years to come, weaker near-term conditions are definitely a risk and I think it will take some time before a margin-driven mid-to-high teens fair value gains any real traction in the market.

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Cypress Semiconductor's Value Obscured By A Growing Wall Of Worry

Costs, End-Market Demand, And Value Creation All Still Challenging For Cemex

Given its exposure to the U.S. residential market, Mexico, and other emerging markets, Cemex (CX) has been dead-center in the middle of what investors really don’t want over the past six months or so. The shares are down about a third over the past year (and down about 25% over the past six months), but at least the company isn’t alone - Argos (OTCPK:CMTOY), Buzzi (OTCPK:BZZUY), Heidelberg (OTCPK:HDELY), LafargeHolcim (OTCPK:HCMLY), Pacasmayo (CPAC), and Elementia (OTC:ELLMF) have all been varying shades of lousy over the same time periods, though Pacasmayo and LafargeHolcim have held up a little better.

I continue to believe that the market has overreacted as it relates to the economic and construction market outlooks for Mexico under the new government, but I do see real risk of U.S. construction (both residential and non-residential) slowing in 2019, and I think Cemex needs to do more in terms of cost reductions and portfolio adjustment (i.e., asset sales) to improve investor confidence. While the shares do not look aggressively valued, it’s hard to get excited about the company unless and until it can consistently outperform on EBITDA and FCF.

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Costs, End-Market Demand, And Value Creation All Still Challenging For Cemex

Strong Ingrezza Sales Should Restore Some Confidence In Neurocrine

In the wake of the disappointing pivotal clinical failure of Ingrezza in Tourette’s and the sharply negative market reaction (likely exacerbated by a weak biotech market overall), Neurocrine Biosciences (NBIX) needed a boost. Investors got that boost with the company’s early announcement of strong fourth-quarter Ingrezza sales and management’s presentation at the J.P. Morgan Healthcare Conference.

I continue to believe that today’s price doesn’t even fairly reflect the value of Neurocrine’s two approved drugs (Orlissa and Ingrezza), let alone the value of the commercial and clinical pipeline (opicapone, NBI-74788, et al). Although the company’s clinical pipeline isn’t as robust as I’d like, strong data from NBI-74788 could add meaningful value to the shares, and Neurocrine has always prioritized pipeline quality over quantity.

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Strong Ingrezza Sales Should Restore Some Confidence In Neurocrine

Alnylam Reports Improved Onpattro Sales Going Into A Busy Year

Alnylam's (ALNY) shareholders have been holding on in the hope of some good news and the company finally provided some with the start of J.P. Morgan’s annual healthcare conference. A stronger quarterly result for the company’s lone commercialized drug (Onpattro) should restore some confidence in this program while management continues to stay very busy on the clinical front.

I continue to believe that Alnylam is undervalued, but the reality is that biotech is not in favor and this company still has a lot to prove. Over half of the value I estimate for the company is tied to clinical programs that have yet to produce pivotal data, and the long-term sales execution on Onpattro is not guaranteed. Likewise, Alnylam is targeting multiple diseases that are challenging not only from a biological perspective, but from a commercial one as all (finding patients, getting them on therapy, etc.). Though I continue to expect meaningful long-term gains from Alnylam, this is by no means a name suited for nervous investors.

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Alnylam Reports Improved Onpattro Sales Going Into A Busy Year

Insteel Navigating A Host Of Uncertainties, With Metal Spreads High On The List

It’s a challenging environment right now for Insteel (IIIN). Although this leading manufacturer of steel wire reinforcing products has an uncommonly good long-term track record for margins and returns on assets, equity, and capital given the cyclical nature of its business, pricing leverage has gotten tricky and non-residential construction spending finally seems to be slowing.

Down about a quarter from when I last wrote about the company, Insteel really hasn’t done any worse than large steel companies like Nucor (NUE) and Steel Dynamics (STLD) or other building material companies like Vulcan (VMC) and Martin Marietta Materials (MLM). Although the share price looks undemanding even if revenue and EBITDA do see some contraction from here, a retesting of past low multiples would represent about 25% to 33% downside risk.

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Insteel Navigating A Host Of Uncertainties, With Metal Spreads High On The List

AngioDynamics Continuing To Slowly Shift Its Mix Towards Growth

Following AngioDynamics (ANGO) may be a little like watching paint dry given the low growth rate (often a severe valuation-limiting issue in med-tech), but the stock has at least outperformed the average med-tech stock since my last write-up in July and has outperformed more significantly over the past 12 months (over 25% versus around 10%).

AngioDynamics remains a hurry-up-and-wait story, with significant potential in the NanoKnife business. Oncology in general remains a worthwhile opportunity for AngioDynamics, and I won’t be surprised to see the company make further portfolio moves, perhaps including the sale of under-performing low-potential segments. Execution has been hit-or-miss here for a long time, though, and while the NanoKnife has meaningful upside on positive trial outcomes, a negative trial result would seriously undermine the value. With around 10% upside in my base case and closer to 20% upside in my bull case, I’d consider this a borderline buy today.

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AngioDynamics Continuing To Slowly Shift Its Mix Towards Growth

Signs Of A Slowdown For Hurco Getting Harder To Ignore

The slowdown in industrial demand that the market has been pricing into stocks since mid-2018 seems to now be showing up in some of the numbers, as the December ISM new orders figure saw a double-digit drop and German factory orders just posted the biggest decline (a little over 4%) in six years. Japanese machine tool orders went negative earlier in the fall, and it is looking as though weakness in China has spread into Europe and may be starting to show in North America.

None of this is good for Hurco (HURC), but it’s not exactly unexpected, as the shares have fallen close to 20% in the last six months. That puts Hurco’s performance a little below the average industrial and in between larger competitors like DMG Mori (OTCPK:MRSKY) and Okuma (OTC:OKUMF), and valuation is already starting to anticipate some revenue and profit declines in the coming years.

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Signs Of A Slowdown For Hurco Getting Harder To Ignore

Strong Comps And Surprisingly Good Operating Leverage Driving Natural Grocers

Natural Grocers by Vitamin College (NGVC) (or “Natural Grocers”) is doing a very good job of answering criticisms that its improved comp sales performance is only a byproduct of margin-compromising price cuts. With more effective promotional activity, restrained store expansion, and appealing operating expense leverage, Natural Grocers has seen not only an improvement in comps but also in margins, driving the shares up 20% since late June.

There are still some operating challenges at Natural Grocers, including ongoing competitive footprint expansions from Amazon’s (AMZN) Whole Foods, Sprouts (SFM), and similar retailers, and I wouldn’t completely ignore the risk of lower oil prices undermining key operating areas like Colorado and Texas. Still, Natural Grocers is managing this strategy shift more adroitly than I’d expected, and an upgraded outlook for EBITDA growth supports a higher fair value.

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Strong Comps And Surprisingly Good Operating Leverage Driving Natural Grocers

Brookfield Infrastructure Has Some Contrarian Appeal

Canada’s Brookfield Infrastructure (BIP) had a rough 2018, with the shares underperforming the S&P 500 by around 14%. Rising interest rates aren’t particularly helpful for a business that uses a lot of debt financing, but I suspect other issues like weak currency in Brazil, rising global protectionism, and some sizable deals in nontraditional areas could have played a role. Whatever the case, Brookfield Infrastructure heads into 2019 with a higher-than-normal dividend yield, cash to deploy, and a refreshed portfolio of assets that should start contributing to distributable cash flow fairly soon.

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Brookfield Infrastructure Has Some Contrarian Appeal

A Sell-Off On M&A Noise Is An Opportunity With Mellanox

Seeing the company lose around $400 million in market value upon the announcement of his hiring is probably not the beginning that new Mellanox (MLNX) CFO Doug Ahrens was looking for, but it’s also not all that unexpected, as the shares had been bid up in the hope that a buyout announcement would soon be coming. From my perspective, I certainly don’t think the hiring of a CFO precludes a deal, and I think Mellanox is worth owning deal or no deal – particularly now that the share price is back in the $80s.

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A Sell-Off On M&A Noise Is An Opportunity With Mellanox

Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

The last year, and the last six months in particular, have been rough ones for Weyerhaeuser (WY) and other companies in the timber, lumber, OSB, and wood products space like Louisiana-Pacific (LPX), Norbord (OSB), Boise Cascade (BCC), and Canfor (OTCPK:CFPZF). Although I’d always expected lumber and OSB prices to correct down from above-trend levels, I didn’t expect the steep (approximately 60%) plunge in lumber and OSB prices over the past six months, nor the apparent topping out of housing starts below 1.5M. Add in trade and tariff issues with China and Canada, and the situation has gotten quite tough quite quickly.

As a company, Weyerhaeuser will be fine. The now-former CEO did a very good job of driving operational efficiency and I believe ongoing operational improvements are becoming a core part of the company’s culture. I also believe Weyerhaeuser’s high-quality timberlands will remain a solid store of value that can support healthy tax-advantaged dividend payments into the future. It will take time for the pricing pressures to work themselves out, but with the yield now over 6%, patient investors may want to start taking a look at this name.

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Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

Revisiting Louisiana-Pacific After A Sharp Correction In OSB Prices

I’d previously written in reference to Louisiana-Pacific (LPX) that I regarded a decline in OSB pricing as a “when, not if” scenario, but I can’t say I was expecting the price to fall roughly 60% from its peak in only about six months. Between new capacity coming online and disappointing momentum in residential construction, though, the operating outlook has deteriorated sharply and taken the share price of LP, Weyerhaeuser (WY), and Norbord (OSB) with it.

Prices went too high in the good times and I believe they’ve overcorrected, but there are a lot of moving parts to the Louisiana-Pacific story, and volatility is likely to remain above-average. I believe the shares are trading too cheaply now on the basis of “full cycle” EBITDA and long-term discounted cash flow, and I believe the market is undervaluing the long-term potential of the siding business, but the undervaluation I see here comes with the asterisk that near-term conditions (and the share price) could still get worse before they get better.

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Revisiting Louisiana-Pacific After A Sharp Correction In OSB Prices

Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

I’m sure some Qorvo (QRVO) shareholders will take exception with this, but more and more this company is reminding me of that kid we all know from high school who was uncommonly talented but somehow just never managed to put it together. Management certainly bears some responsibility (particularly for the ongoing challenges in hitting margin targets), but other issues outside of their control like weak iPhone unit sales have undermined some of the positive drivers.

Qorvo shares look undervalued by most metrics I track, but I think it is fair to ask if revenue and margin leverage expectations are still too high, particularly as high-end handsets don’t seem to offer the growth they once did. There are still credible drivers in markets like IoT, wireless infrastructure, and even handsets, but I’d like to see at least another quarter before stepping up and buying these beaten-down shares.

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Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

Wall Street Seems Skeptical Of Palo Alto's Transition

Past success may buy you a little benefit of the doubt on Wall Street, but only just a little. While it’s hard to quibble with Palo Alto Networks’ (PANW) track record as a disruptor and growth story in the security space, that hasn’t helped the shares so much in recent months. While security spending looks pretty healthy going into 2019 and the death of the firewall (due in part to transitions toward cloud/hybrid-cloud approaches) has been greatly exaggerated, Wall Street does seem uncertain about the company’s pivot toward more cloud-oriented solutions and a new executive leadership team whose career experience in the security space isn’t as deep.

I don’t dismiss those industry experience concerns out of hand, but I think Palo Alto has brought on some talented executives that can help Palo Alto stay nimble and evolve – doing what worked in the past as your end-markets change is a pretty good way to get left behind in technology. Palo Alto looks cheap enough now that I’m a little paranoid and wondering what I may be missing; I get that the market has soured on tech stocks and that 2019 could be a more challenging year than 2018 was, but the shares seem to be discounting a pretty weak scenario today.

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Wall Street Seems Skeptical Of Palo Alto's Transition

Check Point Looks Like An Option To Consider In A Shaky Tech Market

Back when I paid more attention to football, my favorite team had a running back about whom I would say “if you need 3 yards, he’ll get you 3.5 yards; if you need 4 yards, he’ll get you 3.5 yards.” I’m reminded of that whenever I look at Check Point (CHKP), as this leading security software vendor continues to hold a strong position in the enterprise security market despite the inroads made by competitors like Palo Alto (PANW) and Fortinet (FTNT) and steady competition from the likes of Cisco (CSCO), as well as new up-and-comers. Check Point is unlikely to ever be a truly impressive growth story again, but the company’s margins, cash flows, and strong installed base have value – particularly in situations where the market has become much more worried about near-term growth prospects and valuation for software.

Check Point looks a little undervalued to me, and the company could benefit from somewhat easier comps in the coming quarters and improving salesforce execution, as well as ongoing growth in its Infinity Total Protection offering. Check Point isn’t going to be immune to an intense or prolonged sell-off in tech stocks, but I think it can hold up better than most and there’s decent underlying long-term value.

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Check Point Looks Like An Option To Consider In A Shaky Tech Market