FEMSA's First Quarter Was Messy, But Basically Positive

With the combination of a late Easter and the impact of new accounting standards (IFRS16), it was likely that FEMSA’s (FMX) first quarter was going to be messy relative to expectations, and so it was. Reported revenue was weaker than expected, but I’d argue core underlying trends remain strong. Although FEMSA management still has much to prove regarding the strategic expansion into pharmacies and fuel stations, the OXXO business still offers significant growth potential and Coca-Cola FEMSA (KOF) seems to finally be on better footing.

The shares do not seem radically undervalued, but I do think they still offer some value and a way to add non-U.S. exposure through a very well-run Latin American consumer/retail company.

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FEMSA's First Quarter Was Messy, But Basically Positive

Alfa Laval Buoyed Again By Strong Marine Results

As has been the case for most multi-industrials, particularly in the capital goods sector, Alfa Laval (OTCPK:ALFVY) (ALFA.ST) has shaken off some of the malaise that had pushed the shares down until relatively recently – while Alfa has outperformed its industrial peers since my last update, the 6-month and 12-month comparisons have Alfa lagging the market as sell-siders and investors have grown worried about what will happen as scrubber orders start to fade.

Although I’m not wild about the valuation (nor the valuation on industrials more broadly), this is still a company that I like quite a bit. I think there’s more opportunity in marine than just scrubbers, and I think longer-term opportunities in food, beverages, life sciences, and HVAC are not always given their due. Give me a 10% to 15% pullback and these shares get much more interesting as a potential longer-term holding.

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Alfa Laval Buoyed Again By Strong Marine Results

Neurocrine Drifting, But The Total Package Is Still Appealing

Although Neurocrine Biosciences (NBIX) has a strong primary commercial asset in Ingrezza, a slower-building but still promising secondary asset partnered to AbbVie (ABBV) in Orlissa, and an improved pipeline, the reality is that the shares of biotechs in Neurocrine’s stage of life can flounder or drift for stretches of time. In the absence of new clinical data to get excited about, investors will instead fixate on short-term details or just get bored and move on, and I think that explains at least some of Neurocrine’s lackluster recent performance.

All in all, though, I still like this stock. I believe Ingrezza still has upside, and while Orlissa is taking longer to build than most investors would like, it’s still a good opportunity. Beyond that, opicapone may still be an underrated opportunity, and likewise with NBI-74788, and Neurocrine has some early-stage assets worth watching now, including its second VMAT-2 compound and its Voyager (VYGR) partnership.

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Neurocrine Drifting, But The Total Package Is Still Appealing

Old Dominion Operating At A High Level, But Some Concerning Signs Are Emerging

When I last wrote on Old Dominion (ODFL) in late December, I thought the share price was getting interesting, but wasn’t quite low enough to entice me to buy in ahead of what I believed would be a slower pace of growth in 2019 and 2020. While there are now some signs that slowdown is emerging, the shares are up about 25% since that article. So, let’s just say that earlier call of “not yet…” is not getting printed out and put on the fridge.

I continue to believe, as I’ve long believed, that Old Dominion is a best-of-breed that deserves a premium. I also believe that the ongoing expansion of online retailing is a positive for the less-than-truckload (or LTL) industry, even if Old Dominion itself isn’t all that weighted toward retail. Still, I’m concerned about a slowdown in short-cycle industrial markets in 2019 and 2020 and concerned that Old Dominion could face a one-two punch of more challenging tonnage and pricing. With that, I’m willing to miss out on further gains in Old Dominion shares rather than chase at today’s price.

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Old Dominion Operating At A High Level, But Some Concerning Signs Are Emerging

Roper's Growth Engine Keeps Humming

As a multi-industrial increasingly driven by its high-margin, asset-light software businesses, Roper (ROP) continues to diverge from the broader multi-industrial category in generally positive ways. Management has built a solid value-compounding engine here, and Wall Street is quite well aware of that, with the shares up another 30%-plus over the trailing twelve months. I do expect Roper to continue to deliver better-than-average organic growth with improving margins, and I believe Roper has a repeatable formula here for successful M&A, it’s increasingly difficult for me to see value in the shares. Yes, there are investors in companies like Roper and Danaher (DHR) that will argue for buying irrespective of valuation, but that’s not my approach and I think shareholders should at least be aware of the risks if Roper’s engine ever has a hiccup along the way.

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Roper's Growth Engine Keeps Humming

Stanley Black & Decker Comes Back With A Stronger Report

A weak, and poorly-received, fourth quarter put Stanley Black & Decker (SWK) in a hole, and while the shares have lagged industrial peers over the last year, the performance since my last update has been noticeably better. With a strong first quarter driven in very large part by the tool business, Stanley’s guidance for 2019 certainly looks more attainable than just three months ago. While I still see risks in the second half of the year from weaker than expected “general industrial” markets, Stanley should be poised to benefit from gradual improvement in auto demand later this year and some self-directed gross margin improvement efforts.

I’m not as interested in the valuation/share price opportunity as I was in January, as the stock has risen more than 20% since then (roughly doubling its peer group). I’m concerned that the market and industrials in particular are ahead of themselves now and I’d prefer to wait for a better entry price before starting a position here.

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Stanley Black & Decker Comes Back With A Stronger Report

Lincoln Electric Still Looking Wobbly, But That's What Buying Opportunities Often Look Like

Situations like the one Lincoln Electric (LECO) presents to investors today are why investing isn’t easy – the business has clearly slowed and there are valid reasons to think it may slow further. And yet, as seen in industry segments like Japanese automation, the market often prices in bottoms and recoveries well ahead of the fact. Lincoln Electric shares look undervalued today, and this is one of the better-run industrials I’ve ever followed, but the company is also starting to expand into some areas that could increase the overall operating risk. All told, I think this is a name to start considering, but investors need to keep their eyes open to the risks of a broader sell-off.

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Lincoln Electric Still Looking Wobbly, But That's What Buying Opportunities Often Look Like

Startlingly Good Results From Atlas Copco Support The Quality Premium Argument

Atlas Copco (OTCPK:ATLKY) won’t have the best quarter among multi-industrials this quarter, Honeywell (HON) and Dover (DOV) already surpassed them in organic growth, but the level of outperformance was startingly high all the same and further supports the argument for Atlas Copco as a best-of-breed multi-industrial. Although there are signs of deterioration if you look for them, management seemed relatively unconcerned about the health of the business.

Atlas Copco ADRs have shot up about 20% since my last update (the local shares have done better), when I said that the shares looked about as promising as they get on valuation. It’s a lot harder to reiterate that argument now, and I’d rather wait for a pullback than chase these shares in what I still believe will prove to be a decelerating macro backdrop.

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Startlingly Good Results From Atlas Copco Support The Quality Premium Argument

ITW's Margins Seem To Be Holding Up Well As Growth Slows

With the blizzard of earnings reports from April 25, and those that came before, it seems clearer to me that shorter-cycle industrial companies are facing a much more challenging growth environment. In addition to the surprisingly weak revenue number from 3M (MMM) (down 1.1%), Sandvik’s (OTCPK:SDVKY) SMS business saw a 1% decline, and Stanley Black & Decker (SWK) saw a 3% decline in its Industrial segment, while all of the discrete automation companies have seen growth slow.

Considering all of the above, the 1.5% contraction at Illinois Tool Works (ITW) this quarter isn’t so shocking or alarming. Perhaps even more important, particularly relative to 3M and Sandvik’s SMS business, is that ITW’s margins held up better – lending some support to the idea that ITW is a company built more for margins and returns than growth, which isn’t such a bad thing when growth gets scarce.

Industrials have rallied since I last wrote about Illinois Tool Works on growing optimism that 2019 growth will be stronger than expected, and ITW has actually outperformed its peer group. Although I don’t have any particular objections to ITW as a hold, I don’t find the valuation exciting enough to start a position here and I still see more risks that growth in North America will slow as 2019 moves on.

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ITW's Margins Seem To Be Holding Up Well As Growth Slows

Rockwell Skids On A Weaker Auto End-Market

The last three months haven’t been particularly kind to Rockwell (ROK), as the share price of what is usually a darling among industrials has lagged the broader industrial sector, and automation peers like Yaskawa (OTCPK:YASKY), Fanuc (OTCPK:FANUY), Nidec (OTCPK:NJDCY), Emerson (EMR), Schneider (OTCPK:SBGSY), and even ABB (ABB). To be fair, it was the significant slide after second quarter earnings on Thursday that did the damage, though the shares had still been lagging most automation companies (except ABB) and were only slightly better than the average industrial before the report.

Like 3M (MMM), Sandvik (OTCPK:SDVKY), SKF (OTCPK:SKFRY), Illinois Tool Works (ITW), and the Japanese automation companies, weakness in autos is a major contributor to Rockwell’s present weakness, but I took management’s guidance and comments as reflective of some potential warnings about spreading weakness in other industrial end-markets – something that I’ve been expecting as this year rolls on. Rockwell shares are now in a tough situation valuation-wise; they’re not so clearly undervalued that I’m inclined to say “just buy and wait for the cycle to reverse), but the valuation is getting more reasonable and this is a stock to watch more carefully now.

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Rockwell Skids On A Weaker Auto End-Market

3M Decimated On Autos, Electronics, And Execution

Thursday’s first quarter earnings report was the worst day for 3M (MMM) shareholders in a long, long time, as a huge double-digit miss at the segment profit line drove a double-digit decline in the share price. While 3M is not going to burn down, fall over, and sink into the swamp, the shares are going to be in the penalty box for a while, and management needs to prove convincingly that they can not only improve margin execution, but restructure the business in the direction of both great margins/returns and at least decent growth.

3M’s valuation is much more reasonable than it has been in some time, but it’s fair to ask and wonder if turning around this supertanker is going to be a longer process. If the problems really are confined primarily to auto and electronics, this is a name to investigate further, but I don’t think investors need to make a snap decision for fear of missing out, as the concerns about 3M’s growth and execution capabilities have been building for a while and won’t go away in quarter.

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3M Decimated On Autos, Electronics, And Execution

Accuray Executing More Consistently, Now Waiting For China To Kick In

As I have said in the past, although the share price really doesn’t reflect it, Accuray’s (ARAY) CEO has done a good job of stabilizing and turning around this business. Product quality and service delivery issues are long since resolved, margins have improved noticeably, and debt has skillfully managed. On top of that, the company has been rolling out product and software upgrades that meaningfully address competitive weaknesses and improve the value of the system to hospitals, and the company has successfully closed a long-awaited JV for the large China market.

And now… we wait. Outside of the China opportunity Accuray remains an “is what it is” business, with the company picking up only modest market share (primarily from Elekta (OTCPK:EKTAY) and old Siemens installations). Not much has really changed about the U.S. market, where Accuray is still generally a distant afterthought, and the Japanese business can’t do it all alone. I do believe these shares remain undervalued, but a lot is riding on the China opportunity, and both Elekta and Varian (VAR) are keenly focused here too, while ViewRay (VRAY) chips away a bit at the U.S. market opportunity.

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Accuray Executing More Consistently, Now Waiting For China To Kick In

Nidec Is A Name To Watch When Industrials Cool

Nidec (OTCPK:NJDCY) (6594.T) has participated in the global industrials rally that has also benefited names like Yaskawa (OTCPK:YASKY) and Fanuc (OTCPK:FANUY), with the same basic result – although Nidec has a bright future as it looks to transition its business to new growth opportunities in EVs, appliances, and industrial motors and controls, the recent rally has already factored in a strong rebound in the underlying business. I’m still bullish on the company, but it’s harder to argue for the stock after the 20%-plus rally since my last update and this is a name I’d flag for a pullback.

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Nidec Is A Name To Watch When Industrials Cool

Fanuc Forecasting The Bottom, While Investors Price In The Recovery

It’s not exactly news that the stock market is a look-ahead mechanism for valuing companies, and that’s particularly important to keep in mind today when looking at factory automation companies. While business continues to deteriorate at Fanuc (OTCPK:FANUY) (6954) and may well not truly bottom out until the fall of 2019, the nearly 30% year-to-date move in the stock (well ahead of the average industrial stock) against a roughly 18% drop over the past year suggests that investors are already starting to look ahead to the recovery in orders, revenue, and profits.

Valuing Fanuc has always been problematic, as the company’s perceived quality has generally earned it a premium (not wholly undeserved in my opinion). Even though I’m modeling in a recovery starting in fiscal 2021 (the fiscal year ending March 2021), including multiple years of double-digit revenue growth and a sharp recovery in margins, the shares are well ahead of where those cash flow streams suggest it should be. With that, I’d prefer to wait for a cooldown among names like Fanuc and Yaskawa (OTCPK:YASKY) before stepping up.

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Fanuc Forecasting The Bottom, While Investors Price In The Recovery

All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

It’s been a wild ride for Silicon Labs (SLAB). Something of a growth darling (at least at times) over the last few years, Silicon Labs actually underperformed the SOX in 2018 and closed the fiscal year with an ugly miss-and-lower. While the shares had followed the year-to-date rally in semiconductor stocks, it was still lagging before a surprisingly strong first quarter seemingly shifted sentiment overnight.

I had previously said I’d be interested in SLAB in the low $70’s, and it never quite got there before this rocket ride back toward $110. Therein lies the problem with trying to be disciplined on price/value, particularly when it involves growth stocks. Although Silicon Labs looks too pricey now, I can understand why at least some investors are piling back in – SLAB is setting up attractive qoq growth rates at a time when many semiconductors still look likely to struggle to post attractive growth.

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All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

STMicroelectronics Still Counting On A Big Finish To 2019

When I last wrote about STMicroelectronics (STM), I cautioned against trying to get too cute about timing a bottom for this leading chip company, particularly when the shares looked undervalued even on the assumption of a tougher 2019. The shares have since risen another 15% or so, lagging a broader chip market rally that has surprised me in its intensity.

I continue to like STM, though perhaps not quite as much as before given the rising valuation, and I like the company’s broad leadership across microcontrollers, PMICs, sensors, MEMS, silicon carbide, and so on, as well as the diverse market exposure to attractive markets like autos, industrial, IoT, and imaging. Although I am still concerned that the big second half rebound that so many chip companies are counting on may disappoint, I still think STM is a stock worth buying and owning today.

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STMicroelectronics Still Counting On A Big Finish To 2019

FirstCash Posts Better Results On Accelerating LatAm Growth

After a disappointing fourt quarter, FirstCash (FCFS) restored some of its growth luster with a better set of first quarter results that included an acceleration of growth in the Latin American store base and improved margins in the U.S. stores. FirstCash remains a solid play on the Mexican consumer and a somewhat countercyclical play on the U.S. economy, though the risk of regulatory changes and new fintech competition shouldn’t be excluded.

At over 14x forward EBITDA, FirstCash shares look more like a solid hold than a clear-cut buy today given where the valuation is. That said, the arrow is moving in the right direction with respect to the underlying momentum in the business, which is why I’m willing to hold on even if discounted cash flow modeling suggests suboptimal returns.

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FirstCash Posts Better Results On Accelerating LatAm Growth

Strong Life Sciences Continuing To Drive Danaher

Danaher (DHR) remains a great case-in-point of the challenge of balancing quality and opportunity with some semblance of value discipline. There’s no real argument I can see that Danaher isn’t a premier player in life sciences alongside Thermo Fisher (TMO) once the deal for General Electric’s (GE) Biopharma business closes, and if anything, the quality of Danaher’s Diagnostics and Environmental/Applied Solutions may be a little overshadowed now.

Still, it’s hard to call Danaher undiscovered or undervalued. I believe the shares are priced to return a solid annualized 7% or so to shareholders, and though that’s below what I’d normally accept for an equity investment, this is a case where maybe the quality argues for accepting a lower rate of return to have a solid core holding like Danaher in a diversified portfolio.

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Strong Life Sciences Continuing To Drive Danaher

Strong Energy Management Providing A Spark For Schneider Electric

I’ve liked Schneider Electric (OTCPK:SBGSY) for a little while now, as I’ve thought the Street hasn’t fully appreciated what I think may be the best energy management/electrification business out there and an underrated automation business that is getting stronger in hybrid/process and is well-placed to benefit from expanding IoT adoption.

Although these shares have lagged peers/rivals like Rockwell (ROK) and Eaton (ETN) (another stock I’ve liked for a while) over the past year, as well as the broader industrial segment, the relative performance has been much stronger on a year-to-date basis and since my last update in mid-February. With the move in the share price, I think Schneider looks more fully and fairly valued now, but it’s still a name that I believe is worth holding and it’s definitely a name to look at again if there’s a market/sector sell-off.

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Strong Energy Management Providing A Spark For Schneider Electric

A 'Boring' Quarter At Bank OZK Is Just Fine

Bank OZK (OZK) has had a rough 12-24 months relative to the “average” bank stock, as investors have grown increasingly worried about OZK’s heavy exposure to riskier construction lending, and particularly in markets like New York City and Miami, as well as its high beta funding structure. While the shares have continued to underperform over the last three months, operating performance has at least settled down.

If a significant recession is right around the corner (or just a rough period in commercial real estate), Bank OZK will have problems – the bank’s underwriting has always been sound, but it’s tough to thrive if and when your neighborhood is on fire. If the bank can navigate this cycle without significant losses and maintain a long-term core earnings growth rate in the high-single digits, though, the valuation on these shares is pretty interesting today.

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A 'Boring' Quarter At Bank OZK Is Just Fine

"Good Enough" Is Good Enough To Keep The Rally Going At Sandvik

Although I thought Sandvik (OTCPK:SDVKY) (SAND.ST) looked beaten down in late January on mounting worries of a global economic slowdown, particularly in manufacturing end-markets, I didn’t expect the 25% rally in the shares since then – a rally that has seen Sandvik’s share roughly double the average strong move in industrials over that same time. Clearly investors are feeling better about the global economy, and Sandvik’s results would lend support to the idea that the weakness in autos hasn’t really spread all that far yet.

It’s much harder to argue that Sandvik is in any way beaten down or overlooked now. While Sanvik’s results, and those of other industrials and multi-industrials that have reported so far, would suggest a softer landing than I’d expected, these shares are now basically counting on a stronger second half that I think may still be too ambitious.

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"Good Enough" Is Good Enough To Keep The Rally Going At Sandvik

First Horizon Seeing Ongoing Challenges In The Core Business

With some turbulence in the core business, rising competitive challenges in its core markets and a comparatively large short interest, First Horizon (FHN) is a more controversial stock than you might initially assume. Management has laid out its case for leveraging its specialty lending franchise to gain share in key growth markets like the Carolinas and Florida while also driving higher efficiency through its “bonefish” restructuring efforts. But the fact remains that spreads are still challenging and competition is still rising.

I believe that sentiment skews negative on First Horizon and that if the company can stabilize and improve, there could be decent rewards here for shareholders. The guide-down for NIM and ROTCE don’t help the case, but a long-term core earnings growth rate around 4% can still support fair value close to $18.

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First Horizon Seeing Ongoing Challenges In The Core Business

Few Sour Notes For Honeywell

At the risk of drifting into the territory of a broken record, Honeywell’s (HON) performance continues to back up my view of the company as one of the best multi-industrials today. With Honeywell’s longer-cycle businesses hitting the sweet spots of their cycles, the company’s growth is finding another gear at a time when shorter-cycle results are likely to be choppier.

With its core businesses doing well (and with runways to do even better) and ample capacity to do more M&A, but no particular necessity, the only issue I have with Honeywell is, predictably enough, the price. It’s tough for me to push my valuation models beyond a fair value of $170 today, and I think Honeywell is now enjoying the status as a Wall Street darling and growth safe haven. Honeywell has earned this love and I wouldn’t advise stepping in front of this freight train, but it’s tougher to get excited about the returns on offer from this high level.

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Few Sour Notes For Honeywell

With More Earnings Reports In Hand, Wells Fargo Looking Even Worse

Expectations have been relatively low for Wells Fargo (WFC) ever since the asset cap was put into place, but this large bank has nevertheless managed to disappoint, with the shares underperforming banking indices by about 12% over the last six months and 10% over the last three months. With a sizable number of Wells Fargo’s peers now having reported their first quarter earnings, a look back at Wells Fargo does not look so good for this struggling bank.

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With More Earnings Reports In Hand, Wells Fargo Looking Even Worse

BB&T Basically On Track Ahead Of Its Game-Changing Merger

Despite the significant long-term potential benefits of BB&T’s (BBT) merger of equals with SunTrust (STI), the market is still generally against M&A in the banking sector, and BB&T shares have lagged regional bank indices a bit since the deal announcement (about 300bp of underperformance). I continue to believe this is a strong merger, though, and I think BB&T shares remain one of the more interesting values among banks in its weight class.

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BB&T Basically On Track Ahead Of Its Game-Changing Merger

U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

As one of the best banks out there in terms of quality, U.S. Bancorp (USB) tends to be better as a “safe haven” or a long-term holding. When bank stocks were falling apart in late 2018, U.S. Bancorp held up a little better, but the shares have also lagged peers since the start of this year as banks have largely kept pace with the S&P 500.

I expect that it is going to be harder for banks to grow going forward, as I think net interest margins are peaking and credit costs are likely to head higher from here. Loan growth is healthy now, but I do still have some concerns about the overall economy. With that backdrop, I think organic growth drivers are going to be more important, and with U.S. Bancorp now free of its consent orders, it has more options to drive growth through organic expansion and branch rationalization. U.S. Bancorp isn’t particularly cheap now, but it’s definitely a name to watch for relative underperformance.

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U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

Dover Starts 2019 Right, But Can It Follow Through?

Dover (DOV) has been on a good run so far this year, up about 36% since the start of the year on a wider rally in industrials, but the performance gap has narrowed a bit over the three months. Still, Dover got off to a strong start in the first quarter, but margin leverage and order growth weren’t all that bulls might hope for, and it remains to be seen whether the general industrial/discrete manufacturing sectors that account for a lot of Dover’s revenue base will hold up as 2019 rolls on.

There aren’t so many bargains left in the multi-industrials now, and I include Dover in that group. I’ve liked the shares in recent months/quarters, but the strong move has soaked up the undervaluation that I saw and I’m still concerned about the level of expectations for the economy and corporate earnings going into the second half. I like the healthy results in fluids, product ID, and industrial businesses, not to mention the longer-term potential from restructuring, but I think the shares factor that all in now.

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Dover Starts 2019 Right, But Can It Follow Through?

Roche Showing Its Operating Strength Isn't Just A Fluke

With six straight quarters of revenue beats in the drug business (and a longer streak overall), I don't think you can call Roche's (OTCQX:RHHBY) operating performance a "fluke", though it is still fair to note that those beats are coming against lowered expectations that factor in greater biosimilar competition and weaker-than-once-expected sales for newer drugs like Tecentriq. Even so, drugs like Ocrevus and Hemlibra are doing well, and even former "disappointments" like Perjeta and Tecentriq are contributing more than expected, while the company continues to manage the biosimilar threat to its three largest drugs.

Roche still has a comparatively modest outlook for EPS growth over the next five years, and that does restrain valuation, but Roche has a deep pipeline with a lot of home run shots that don't factor significantly in most analysts' models. While the odds are slim that any one candidate will make it, collectively there could still be upside from the pipeline and the shares seem modestly undervalued below the mid-$30s.

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Roche Showing Its Operating Strength Isn't Just A Fluke

ABB Balancing The Reality Of Familiar Problems And New Leadership Opportunities

ABB (ABB) continues to be a relatively underwhelming, if not disappointing, player in the multi-industrial space, as the company largely missed out on the recent up-cycle due to various execution issues. While process automation and electrification are still performing relatively well, a global slowdown in discrete manufacturing and automation is creating some near-term challenges, and there is a lot left to do in M&A integration and margin improvement.

The announcement of the departure of the CEO could improve the tone somewhat, but this change is not coming from a place of strength and it is going to take time for the next CEO to make meaningful positive impacts – assuming the board lets that happen. While I do still see avenues for ABB to do better, the upside I see is certainly “at risk” and I don’t regard this as a core holding at this point.

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ABB Balancing The Reality Of Familiar Problems And New Leadership Opportunities

VAT Sees Its Markets Bottoming, But The Market Is Already Counting On That

When I last wrote about VAT Group (OTCPK:VACNY) (VACN.S), a Swiss manufacturer of highly-engineered mission-critical valves used largely in semiconductor and display panel fabrication equipment, I said that the value proposition was precarious due to the prospects for weakening semi equipment demand. That concern played out, with the shares trading down about 33% relative to the price at that last article, as valve sales have since plunged about 40% since.

I also said that I’d be interested in the shares if they dropped another 20%, and while there still would have been some downside from there to the bottom, the shares have rebounded strongly (more than 40%) since the December lows on renewed enthusiasm of an order recovery starting in the second half of 2019. While I think this rally has gotten a little overheated, a pullback of say 10% or so would once again make this a stock to seriously consider given its leverage to what is likely to be strong long-term end-market growth.

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VAT Sees Its Markets Bottoming, But The Market Is Already Counting On That

The Rate Cycle Weighing More Heavily On Comerica

As one of the most asset-sensitive banks that I follow, Comerica (CMA) has a lot to lose from a flattening yield curve that is seeing deposit costs rise while LIBOR-based loan yield grow looks more restrained. Capital and credit quality are still above-average, but average loan growth in the face of rising spread pressure is a tough combination and pre-provision growth is likely to decelerate into the mid-single digits and exit the year in the low single-digits (and possibly stay there a little while).

I’ve felt similarly about Comerica and Citigroup (C) over the past year, insofar as I don’t really love either business, but at the right price there can be some opportunity. At this point, though, I’m concerned about Comerica’s vulnerability to sooner-than-expected rate cuts and its lackluster loan growth and I think it will be harder to answer the “why should I own Comerica?” question positively as core operating income growth stalls and capital returns moderate.

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The Rate Cycle Weighing More Heavily On Comerica

M&T Bank Doing Fine, But Also As Expected

Buying quality can be a frustrating exercise, as M&T Bank (MTB) shares have shown over the last couple of years. Fairly regarded as a conservatively-run, high-quality bank, M&T Bank’s share price performance hasn’t really stood out as exceptional over the last year or two. I do believe there could be more separation from the pack when the economy slows further, though, and there’s another reckoning as to which banks did the best job of managing their credit exposures. As is, the shares look somewhat undervalued, more so in terms of the multiple to tangible book than on a discounted earnings basis, but JPMorgan (JPM), PNC (PNC), BB&T (BBT), and U.S. Bancorp (USB) offer similar or better prospective returns.

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M&T Bank Doing Fine, But Also As Expected

Citigroup Making Slow Progress, Which Is Still Better Than What's Priced In

Being somewhat bullish on Citigroup (C), mostly in the “it’s really not that bad” sense, has felt a little lonely at times, but the shares do seem to have started reflecting a bit of the slow progress that has been underway here. The shares outperformed banking peers over the past year by more than 5% and by a similar amount over the last three months and management has reiterated its target for a return on tangible common equity of more than 13% by the end of 2020.

If we’re only talking about quality, I wouldn’t recommend Citi over JPMorgan (JPM), U.S. Bancorp (USB), PNC (PNC), or BB&T (BBT) (and that list could probably go on a while…). But factoring in the substantial apparent discount to value, and Citi looks like an interesting risk/reward proposition, particularly as the bank’s non-US banking exposure could help offset some of the cycle risk in the U.S. banking sector.

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Citigroup Making Slow Progress, Which Is Still Better Than What's Priced In

Yaskawa Electric's Rocket Ride Anticipates Smooth Sailing

Yaskawa Electric (OTCPK:YASKY) (OTCPK:YASKF) (6506.T) has been a surprisingly volatile stock over the last two years, although it has been one of the best-performing automation stocks over that time, but the 50% move since the start of the year is extreme even by that standard. While many automation stocks have done quite well on year-to-date basis (including Cognex (CGNX), Fanuc (OTCPK:FANUY), and Nidec (OTCPK:NJDCY)), Yaskawa has been the standout as investors apparently not only think that the worst is over, but that demand in markets like China is going to rebound sharply.

Much as I like Yaskawa as a company, I don’t share this view. China’s export-oriented sectors did better than expected in the first quarter, and I don’t see things getting substantially worse unless the trade friction with the U.S. gets worse, but I think a sharp V-shaped recovery is too optimistic given mounting challenges in North America and Europe. With today’s price already anticipating a major long-term acceleration in growth, it’s hard for me to see what can take these shares higher other than just raw momentum.

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Yaskawa Electric's Rocket Ride Anticipates Smooth Sailing

Data On Givosiran And Lumasiran Should Help The Alnylam Story

Even as Alnylam (ALNY) works toward its second commercial drug filing, questions remain about the safety and efficacy of givosiran, not to mention the platform as a whole. But with good full Phase III data on givosiran and encouraging open-label extension data on lumasiran over the last few days, the story has gotten a little better in my view. These shares still remain undervalued, but there remain numerous risks including FDA approval, the efficacy and safety of the lead pipeline candidates, competition, and challenges related to commercialization, including identifying patients and securing reimbursement.

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Data On Givosiran And Lumasiran Should Help The Alnylam Story

First Republic: Okay Quarter, But Valuation And Conditions Are More Demanding

Benchmarking companies and stocks against peers is a time-tested strategy, but what do you do when a company doesn’t really have many true peers? That’s one of the challenges with First Republic (FRC) and its differentiated high-service model focused on providing banking and wealth management services to high net-worth individuals and select lending clients like equity investors, non-profits, and schools. While “it’s different this time” are some of the most dangerous words in investing, it is a relevant to First Republic at least insofar as this model really is different.

These shares have modestly outperformed regional bank indices since my last write-up (when I thought the shares offered a relatively rare entry point at a reasonable price). I don’t think the shares are expensive now, per se, but I do think the valuation is fair and I think First Republic faces some increasing near-term headwinds that could dampen growth and raise a few more pointed questions about how much of a premium the shares really deserve.

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First Republic: Okay Quarter, But Valuation And Conditions Are More Demanding

PNC Financial Posting Healthy Loan Growth, But Cycle Peak Pressures Emerging

In the competition for best-run bank in the U.S., at least among the heavyweights, PNC Financial (PNC) brings a pretty strong case in its favor. While I haven’t always been excited about the valuation on the shares, I liked it back in January and the shares have outperformed the major regional bank indices since then, though the sector has continued to lag the S&P 500.

Looking at the bank again in the light of first-quarter earnings, nothing really changes in my mind. The better than expected loan growth is of course nice to see, and the increases in loan provision expense and deposit costs isn’t a surprise to me. I still have sector-wide worries that we’re descending from a peak and that is going to make share price outperformance more challenging, but this remains a worthwhile holding for those investors who are less inclined to try to time market cycles and would rather have a longer-term position in American banks.

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PNC Financial Posting Healthy Loan Growth, But Cycle Peak Pressures Emerging

Commerce Bancshares Investors Pay For Better Than This

Given that I thought Commerce Bancshares (CBSH) shares were fairly expensive back in January, I’m not all that surprised that the shares underperformed the major regional bank indices since then, particularly as sentiment seemed to be shifting across the market a bit more towards “risk on”. Still, I was surprised to see the first-quarter miss. Seeing as how I believe that Commerce Bancshares’ premium is often justified by analysts and investors on the basis of superior quality and operating stability, I do worry that if this quarter is more than just an aberration, it could mean more significant underperformance for shareholders.

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Commerce Bancshares Investors Pay For Better Than This

Fastenal's Execution Remains Beyond Fault, But The Valuation And Macro Picture Are More Debatable

With investors feeling noticeably better about industrials over the last three months (the Industrial Select Sector SPDR (XLI) is up about 14%), I'm not altogether surprised that the shares of Fastenal (FAST) are up even more, though the 26% move is still exceptional. When industrials do well, Fastenal almost always does well, and at least, some investors certainly seem to be counting on a stronger second half in that sector.

I remain more cautious. I'm more cautious on the macro outlook for the U.S. economy going into this quarter, though I'd be more than happy to be proven wrong by strong beat-and-raise reports from the sector. I'm also cautious on what looks like a "take no prisoners" valuation that leaves no room for company-specific or more generalized headwinds for Fastenal, even though I do believe there are still growth opportunities in place that can drive above-sector mid-single-digit long-term revenue growth.

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Fastenal's Execution Remains Beyond Fault, But The Valuation And Macro Picture Are More Debatable

JPMorgan Back On Track As One Of America's Best Banks

Investors are still generally skeptical about the earnings growth prospects for banks at this point in the cycle, and JPMorgan's (JPM) rare miss for the fourth quarter didn't help. I wasn't that concerned about the miss at the time, and with first quarter results coming in ahead of expectations despite somewhat weak lending, I'm still not all that concerned about JPMorgan's performance and prospects. While a broader slowdown in the U.S. economy would, of course, create new headwinds, and I do believe the bank sector is past the peak in terms of metrics like credit quality, these shares still look undervalued and have appeal as a longer-term core holding.

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JPMorgan Back On Track As One Of America's Best Banks