Another 'Ugh' Quarter From ABB

Looking at second quarter results, and reexamining the results over the past few years, it’s pretty clear that for all of the positives ABB (ABB) may have, including a strong portfolio of products and technologies across its electrification, automation, and robotics platforms, these assets have been badly mismanaged for years, and it’s going to take a while to climb out of this hole. New management, particularly if an outside hire is made for the CEO role, could help change the tone more quickly, but fundamental improvement will take a while and the cycle is now moving against the company.

I can’t honestly provide good reasons for choosing ABB over other automation investment options like Emerson (EMR), Rockwell (ROK), or Schneider (OTCPK:SBGSY) other than valuation and expectation. This company has beaten down to a point where I think the inherent value of the assets provides upside, but the competence of the board is very much up for debate and waiting for the ABB ship to turn could be a longer wait than most investors want.

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Another 'Ugh' Quarter From ABB

Japan's Nidec (OTCPK:NJDCY) (6594.TO) is going through some challenges today as demand for motors and related components in markets like autos, appliances, and industrial end-markets softens, but the long-term story continues to look strong. Nidec continues to rack up wins for its EV traction motors, and Nidec looks like an appealing option for companies that want to get electric vehicles on the market sooner rather than later. Likewise, the long-term opportunity for smart DC motors in areas like appliances and industrials is quite attractive.

Valuation remains the biggest "but" to the story. The shares did pull back some after my last article on the company, but they've largely recovered, and the valuation is hard to reconcile with the admittedly above-average growth opportunity here. High single-digit prospective returns are tempting, but I'm inclined to hold out for a better prospective return before investing my own money.

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Good EV Orders Support The Long-Term Nidec Story

Check Point Going Nowhere Fast

It is an oversimplification to say that software investors care only about growth, but growth is nevertheless a key driver of multiples. Check Point (CHKP) may be working hard behind the scenes, but the reality is that the company continues to lag rivals like Palo Alto (PANW), Fortinet (FTNT), and Cisco (CSCO) when it comes to revenue and billings, and it’s hard to see any meaningful reacceleration on the horizon.

The good news, if you want to call it that, is that I don’t think there are many investors interested in Check Point who expect a lot of growth out of the company. If the different billing cycle for Infinity is in fact obscuring underlying growth and this security as a service platform can catch on with more larger clients, Check Point could outperform. I’m not sold on the strategy though, and I continue to believe that Check Point has been surpassed by some of its rivals. The prospective return is getting more interesting, but isn’t high enough to coax me to take the risk.

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Check Point Going Nowhere Fast

Teradyne Benefiting From Earlier, Stronger Orders For 5G, Handsets, Wireless, And Memory

I thought Teradyne (NASDAQ:TER) looked undervalued on excessive pessimism back in January, but I didn't see this 60% run in the shares, as Teradyne has managed to keep putting together strong quarters relative to expectations, sending sell-side estimates higher along the way. Although there were some fears going into this quarter that Teradyne was "pulling in" demand from later in 2019, I'm not so sure that theory holds water anymore.

The record Teradyne has relative to earnings expectations is impressive, so much so that I have to wonder whether management plays it intentionally too conservative just to give themselves leeway. Whatever the story may be on that, the fact is that the company is seeing good semiconductor test demand and is gaining share in memory, while the near-term headwinds in industrial automation have been pretty well anticipated by the market. Valuation is no longer attractive, though, and I don't see that same "hey, it's not so bad" trade opportunity that I did before.

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Teradyne Benefiting From Earlier, Stronger Orders For 5G, Handsets, Wireless, And Memory

Healthy IoT Growth And Better Margins Support Silicon Labs

I’ve sort of thrown in the towel on valuation where Silicon Labs (SLAB) is concerned, accepting that the market is wiling to pay premiums beyond what I think is fair or reasonable to hold a position in one of the closest things to an IoT pure-play in the chip sector. To that end, my prediction from my last update that Silicon Labs could be a relatively attractive name in a growth-starved chip sector has helped up reasonably well, with SLAB continuing to outperform the chip sector as a whole.

Valuation doesn’t seem to be a consideration here; or at the very least, the Street is choosing to focus more on the buyout premiums paid for wireless assets like Cypress (CY), Quantenna (QTNA), and Marvell’s (MRVL) portfolio (3x-6x sales) than historical norms. Provided that Silicon Labs keeps growing, the party may not come to an end soon, but I have a hard time paying up to this extent.

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Healthy IoT Growth And Better Margins Support Silicon Labs

Always-Reliable People's United Financial Executing To Plan

People’s United Financial (PBCT) is an exceptionally reliable, consistent bank – quarterly earnings rarely deviate more than a couple of pennies from expectations and PBCT management has been uncannily accurate in projecting its asset sensitivity over time.

What’s also reliable and consistent is the lack of value-added growth – although the company’s 15-year tangible book value per share growth record isn’t bad (8% annualized growth), the 10-year record is poor (down 1.5%), and the bank basically never earns my estimate of its cost of equity (the highest reported return on equity in the last 15 years is 10.1%). With that, it’s not so surprising that the bank’s performance over the last 5 and 10 years is lackluster, trailing the regional bank average by about 3.5%/year over the last five years and more than 8%/year over the last 10 years.

I like the company’s decision to remix its loan book and focus on growing its higher-yielding leasing business, and I don’t have any particular objection to the United Financial Bancorp (UBNK) acquisition, though I have to wonder about so many bank management teams I respect noting sub-optimal returns from serial M&A, particularly in the context of the less-than-stellar performance record from People’s United. The shares do look a little undervalued and pay a decent dividend, but history shows a pretty good tie between tangible book value growth and shareholder value growth (total returns), and I’d like to see TBVPS growth become a bigger priority here.

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Always-Reliable People's United Financial Executing To Plan

Fifth Third Showing Steady Execution And A Little Aggression On Middle-Market Lending

I’ve never been a big fan of Fifth Third (FITB), but I have to give credit where it’s due – management has been executing pretty well of late relative to its stated plans and goals. As far as the shares go, it has only recently started diverging (positively) from the peer group, so I still don’t feel as though I’ve missed out on all that much by being relative “meh, it’s okay… I guess” toward the shares.

At this point, with MB Financial in the fold and pretty bold middle-market growth plans, I’m leaning a little more positive on the shares. Although Fifth Third does look a little undervalued here, I do have some concerns that Fifth Third could see more spread compression than is currently in the sell-side expectations. On balance, below $30, I think it’s an okay name to consider, though still not my favorite bank.

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Fifth Third Showing Steady Execution And A Little Aggression On Middle-Market Lending

FirstCash Keeping The Throttle Down On Strong Long-Term Opportunities In Latin America

Up more than 40% on a year-to-date basis (and up about 16% over the past year), there’s not much to complain about with FirstCash (FCFS). The integration of Cash America is gradually producing better results in the U.S. store base, and the Latin American operations continue to grow well as FirstCash benefits from serving an underbanked customer base.

It’s harder to recommend these shares, though. I do see a long runway for growth in Latin America – Mexico isn’t fully penetrated, Colombia is barely penetrated (by FirstCash), and Peru is one of many untapped markets – but a lot of that growth potential appears in the share price now. These shares give investors plenty of second chances, though, so those investors who regret missing the bus may want to wait for one of those eventual pullbacks to add shares.

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FirstCash Keeping The Throttle Down On Strong Long-Term Opportunities In Latin America

ASML Has A Lot To Live Up To

In terms of moats, how do you not love ASML (ASML)? Not only is the company almost the only game in town in deep ultraviolet lithography (or DUV) with around 85% share, they are the only game in town in next-gen extreme ultraviolet lithography (or EUV), a new product category that will start to contribute much more meaningfully to revenue in the second half of 2019 and into 2020 and beyond. As lithography is a critical step in chipmaking, that puts ASML in a commanding position in a critical part of the foodchain, particularly as EUV tools are effectively essential for chip nodes below 7nm (and useful at 7nm).

There are some points of controversy around the stock, particularly with respect to the ramp timeline for EUV tools, how deeply EUV tools will penetrate the memory segment over the next few years, and the sort of gross margins that the company can really generate. The bigger issue for me, as an investor, is valuation. A virtual monopoly supplier in a growing industry certainly deserves a premium, but I’m not entirely comfortable with what looks like a prospective annual return on the low end of the high single-digits.

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ASML Has A Lot To Live Up To

The ams AG Roller Coaster Shoots Back Up

Will the real ams AG (OTCPK:AMSSY) (AMS.S)please stand up? In just the past year ams has given shareholders a wild ride, with the shares losing 75% of their value from August of 2018 through the end of 2018 on a very disappointing adoption curve for new Apple (AAPL) phones and worries about overall adoption trends for 3D sensing technology and competition. Since cratering in late 2018, the shares have nearly tripled on signs of VCSEL share gains, wins on multiple Android platforms, a new under-OLED sensor, and a renewed focus on margins and efficiency.

For better or worse, I think the answer is “both”. I think both are the “real” ams, and this turbulence is par for the course when technologies come to market, and particularly when those technologies enter a market where consumer behaviors are changing (slower/longer phone replacement cycles). I do like the momentum in under-OLED sensors, though, and I think ams is on a much better track now. I’m less positive on this flirtation with OSRAM (OTC:OSAGY), as I worry ams may overpay and ultimately distract itself from its core opportunities.

Based upon where ams appears to be now, relying heavily upon management’s guidance for the second half of 2019, I believe the shares are still meaningfully undervalued. It is well worth remembering, though, just how quickly expectations can change and the magnitude of price moves that can drive.

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The Ams AG Roller Coaster Shoots Back Up

Stronger Margins A Welcome Surprise From Stanley Black & Decker

There’s no “just one thing” that matters above all else when it comes to industrial companies and market valuations, but margins count for a lot. That makes Stanley Black & Decker’s (SWK) surprisingly strong second quarter margin performance all the more welcome, and particularly so with the company recently outlining a path to meaningful further margin improvement over the next three years.

Weaker end-markets remain a risk for the remainder of 2019, and management’s guidance seems a little conservative relative to the performance seen in the second quarter, but Stanley Black & Decker seems to be on better footing and with drivers still yet to materialize (expanding the distribution channels for Craftsman, for instance). The shares aren’t all that cheap now, but on another dip below $140, it would definitely be a name to consider.

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Stronger Margins A Welcome Surprise From Stanley Black & Decker

Steel Dynamics Hoping To Put A Rough First Half Behind It

I’ve been relatively bearish on the outlook for U.S. steel companies this year, and so far that call has mostly worked out, with earnings coming in lower than initially expected for both the first and second quarters. While Steel Dynamics (STLD), Nucor (NUE), U.S. Steel (X), and Commercial Metals (CMC) are all up on a year-to-date basis, their performance has lagged the broader markets and the industrial sector. More specific to Steel Dynamics, while I thought this one looked a little better than Nucor from a valuation perspective last quarter, I thought Nucor had a better product mix for the near term conditions, and the share price performances have been pretty similar.

Both Nucor and Steel Dynamics managements are more bullish than I am about their second-half prospects. I see the key non-residential construction market continuing to slow (still growing, but a decelerating rate), I’m not optimistic about a big recovery in auto volumes, and I see more risk of inventory destocking across machinery and manufacturing leading to more sluggish steel demand growth. Although Steel Dynamics’ valuation isn’t bad, I see more downside risk to expectations and performance than upside risk, and I’m inclined to stay on the sidelines with U.S. steel companies.

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Steel Dynamics Hoping To Put A Rough First Half Behind It

Crane Executing Well Despite A Lot Of Cross-Currents

The good, and bad, of running a conglomerate is that there’s always a lot going on – it’s relatively rare for a diversified business to see all of its units doing well (or poorly) at the same time. In the case of Crane (CR), Fluid Handling (or FH) is doing well on underlying strength in a range of process industries, and Aerospace & Electronics (or AE) is likewise benefiting from strong trends in the commercial aerospace market. On the flip side, the Payment and Merchandising Tech (or PMT) business is dealing with challenging comps in the currency business and Engineered Materials (or EM) is suffering from weakness in the RV market.

All told, though, Crane is doing well in absolute and relative terms, and while there are some signs of slowing momentum, I believe the company will hit its near-term targets and generate mid-single-digit long-term FCF growth. I don’t know whether CIRCOR (CIR) management can be persuaded to see reason, but Crane has other M&A prospects to consider, and the valuation remains surprisingly reasonable.

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Crane Executing Well Despite A Lot Of Cross-Currents

Marinus Hammered As Its Phase II Post-Partum Depression Studies Come Up Short

Marinus (MRNS) has been a controversial stock for some time, as the company looked to challenge Sage’s (SAGE) Zulresso with its “similar but different” compound ganaxolone, and questions about the efficacy of the drug and its chronic clinical timeline slips dogged the stock. Writing about the shares in late September of 2018, I very nearly top-ticked the stock and the shares declined sharply into the end of 2018 on growing doubts about both the post-partum and epilepsy pipelines before recovering into the mid-single-digits through April of this year.

With Phase II data in hand, the market certainly thinks that Marinus has little-to-no chance of seriously challenging Sage, and looking at the data I’m forced to concur. Maybe there’s a path here for the IV-only form of ganaxolone in severe PPD patients, but I think it will be a very steep climb to get any traction on Sage, particularly with the Phase III results of Sage’s oral drug SAGE-217, and I think the oral-only approach is likewise a non-starter.

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Marinus Hammered As Its Phase II Post-Partum Depression Studies Come Up Short

Lincoln Electric's Shares Look Stronger Than The Business

Wall Street is an expectations game in the short term, and I think that’s likely the best explanation for Lincoln Electric’s (LECO) roughly 10% move over the past couple of weeks (including a 4% move after reporting second quarter earnings). Management’s relatively calm guidance certainly didn’t hurt, but underlying results weren’t so strong and I’m a little surprised that the Street took a margin shortfall without much consternation.

I do believe that Lincoln is a quality company and certainly a high-quality industrial, and the shares have done well over the long term despite the cyclicality of the business. I don’t think we’re in the clear yet with respect to the industrial sector, but if the shares pull back again below $80, I think this is a name to consider.

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Lincoln Electric's Shares Look Stronger Than The Business

Liability-Sensitive Signature Bank Investing In Next Growth Drivers

At a time when asset-sensitive balance sheets are starting to really take a bite out of bank earnings, Signature Bank’s (SBNY) liability-sensitive balance sheet certainly stands out. That isn’t to say that Signature is going to reap a windfall as rates decline, but whereas many banks are look at 10bp-20bp of spread compression (or worse) over the next year or two, Signature will likely see some modest improvement. On top of that, Signature has been investing fairly aggressively to expand its private banking and venture/private equity banking capabilities.

With what I think will prove to be manageable exposure to New York multi-family real estate and new growth opportunities to pursue, I believe Signature is undervalued. Pre-provision profit growth over the next couple of quarters won’t look very exciting, and could well limit share price appreciation, but by early 2020 I believe the Street will start rewarding the stock for the above-average pre-provision profit growth it should start delivering.

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Liability-Sensitive Signature Bank Investing In Next Growth Drivers

Eagle Bancorp Clipped On Spread Pressures And Corruption Worries

It’s been a rough week for Eagle Bancorp’s (EGBN) shareholders. One of the fastest-growing, most profitable commercial banks I know, Eagle saw its share price hammered on a combination of weaker second quarter results and a vague disclosure that Eagle is involved in an investigation tied to the activities of its former CEO Ron Paul, with the latter being the far more surprising and troubling news item.

Valuing Eagle right now is especially difficult. The spread pressures that this spread-based lender are facing are significant, and the company is having to slow down some of its more profitable lending to get its balance sheet in better place. On top of the uncertainty of just how much rate cuts will impact the business and the loan demand outlook in the D.C. area, there’s the open-ended question as to whether Eagle itself is being directly investigated and could face some sort of sanctions down the line. While I do believe the core operations of Eagle are undervalued, the investigation overhang is considerable.

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Eagle Bancorp Clipped On Spread Pressures And Corruption Worries

Epiroc Seeing Margin Leverage As OE Orders Fade

This is a tricky time in the cycle for heavy machinery manufacturers, and mining equipment manufacturer Epiroc (OTCPK:EPOKY) is no exception. Aftermarket demand remains healthy and service orders continue to rise, but original equipment demand is clearly fading from the year-ago recovery levels. Longer term, Epiroc is well-placed to benefit from increased miner interest in automation and electrification, and the company also has a meaningful margin leverage angle.

I believe the market more or less has this story priced correctly now. There’s an argument that Epiroc shares should be worth a little more on the basis of strong margins and returns (ROIC, et al), but on the other hand, my DCF-based approach suggests a high single-digit annualized return from here on the assumption of mid-single-digit revenue growth and high single-digit FCF growth over the long term.

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Epiroc Seeing Margin Leverage As OE Orders Fade

Citizens Facing Spread Compression And Credit Risk, But Fighting Back With Self-Help Measures

Citizens Financial (CFG) remains very much a work in progress, with an almost even balance of things to like and things to lament. Building a stronger core deposit franchise remains high on the list of things-to-do, and that won’t get easier with rivals like Bank of America (BAC), JPMorgan (JPM), and PNC (PNC) pushing harder into Citizen’s footprint (not to mention competition from other in-footprint rivals like M&T Bank (MTB) ), but Citizens’ proactive hedging should help mitigate spread pressure and the company’s active remaking of its balance sheet should help on credit risk. Beyond all of that, too, is a new efficiency program (TOP VI) with pretty ambitious targets.

Citizens has outperformed a bit (relative to other regional banks) since my January update on the company, but that outperformance came with the post-Q2 earnings jump, so that doesn’t count as a “win”. Looking ahead, it’s hard for me to get really excited about Citizens, although it is a little undervalued. I think BofA, JPMorgan, and PNC all have more dynamic plans underway and other banks like OceanFirst (OCFC) are more interesting from a valuation perspective, but Citizens does have the sort of counter-cyclical drivers I want to see now and the stock price is still trading below my valuation estimate.

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Citizens Facing Spread Compression And Credit Risk, But Fighting Back With Self-Help Measures

Hedging And Cost Control Enough For Regions Financial To Outperform

There is no shortage of bank stocks that look undervalued today, but the key is to find banks that will somehow stand out in the next, more challenging, phase of the cycle – a cycle that will see spread compression from rate cuts, so-so loan growth prospects, and rising credit costs. I thought that Regions Financial (RF) was undervalued back in January but lacking in catalysts, and the shares have lagged regional bank indices by about 3% to 6% since then.

Regions is looking a little more interesting to me now, though. Management’s forward-thinking hedging strategy should limit some of the spread compression damage, and management is likewise focused on continuous efficiency improvement as a key driver over the next few years. Credit costs are a concern, and Regions doesn’t have great fee-based offsets, but this is an incrementally more interesting story and the mid-single-digit pre-provision profit growth I expect from Regions over the next three to five years could drive relative outperformance.

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Hedging And Cost Control Enough For Regions Financial To Outperform

Nucor Upgrading Its Mix, But Plenty Of Challenges Remain

It’s a good thing to be a darling; Nucor (NUE) continues to miss expectations and analysts continue to lower expectations, but the sell-side more or less has kept up a drumbeat of “surely it will get better from here”. Although 2019 EBITDA expectations are about 9% lower now for 2019 (and 7% lower for 2020) relative to the time of my last update, Nucor remains a consensus “Buy” call from the sell-side and the shares are up slightly from where they were at the time of that last article (albeit with a dip below $50 along the way).

With evidence accumulating to support the short-cycle slowdown thesis, I’m incrementally less positive on Nucor, and I think steel companies are going to have a harder time making these recent price hikes stick with sluggish auto demand, weakening non-residential activity, and growing weakness in a range of manufacturing and machinery markets. I do believe that Nucor is a best-in-class operator but I’m not sold on the risk-reward tradeoff at these prices; yes, the P/E ratio is in the single-digits, but that’s for a company that’s like to post negative EPS growth of around 6% over the next five years and negative 15% over the next three years.

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Nucor Upgrading Its Mix, But Plenty Of Challenges Remain

Winter Is Coming For Banks, But Bank OZK May Have A Trick Or Two Left

I’ve been fairly bearish on Bank OZK (OZK) for some time, as I thought the bank’s heavy exposure to variable-rate construction and CRE lending was the wrong mix for this point in the cycle. With the shares down another 8% since my last update and down about 30% over the past year, that thesis has largely been playing out, and over the past quarter new concerns about spread compression have built up.

Oddly enough, I think Bank OZK may be better-positioned to resist spread compression than many investors might think. A high loan/deposit ratio (though far from the worst) and high-beta asset book are risk factors, but Bank OZK’s high-cost deposit base actually may give the bank more maneuvering room than banks like Commerce Bancshares (CBSH), Comerica (CMA), and M&T Bank (MTB) with low-cost deposit bases that probably can’t/won’t go too much lower.

I’m a little concerned there’s a future shoe to drop with respect to credit, but Bank OZK’s strong underwriting history should earn management more of a benefit of the doubt than they’re getting. Likewise, loan growth may not be spectacular in the near term, but management is working hard to diversify the loan business. I’m still worried about sentiment over the next couple of quarters, but the valuation is getting harder to ignore, and more patient (or aggressive) contrarian investors may want to sharpen up their due diligence.

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Winter Is Coming For Banks, But Bank OZK May Have A Trick Or Two Left

The Latest Objections To The Illumina/Pacific Biosciences Tie-Up May Well Be Insurmountable

The United Kingdom's Competition and Markets Authority (that country's antitrust regulator, in essence) had already forwarded the Illumina (ILMN) - Pacific Biosciences (PACB) merger on to a Phase II review, but on July 19, investors got a look at the agency's reasoning, and it doesn't look good for the deal prospects. With the U.K.'s regulator insisting upon looking at short-read and long-read sequencing technology as effectively the same thing, the body has found that the deal would further consolidate a market already dominated by Illumina and potentially lock new entrants out of the market.

I do not agree with the CMA's assessment, but my opinion is beside the point. While the investigative process and hearings that are part of Phase 2 review will give Illumina and PacBio another chance to make their case that the two technologies are quite different, the tone of the report suggests an uphill climb. Consequently, while Illumina's $8/share offer to PacBio does still stand as a best-case near-term outcome, I believe it is more prudent to look at PacBio from a standalone perspective.

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The Latest Objections To The Illumina/Pacific Biosciences Tie-Up May Well Be Insurmountable

SKF Sees Industrial Revenue Contract On Broad Weakness

There are a lot of reports left for the second quarter reporting cycle, but so far it’s looking like my call for weakening industrial markets (particularly short-cycle markets) is playing out, as several high-quality industrial players are seeing weakness, including SKF (OTCPK:SKFRY). Although management tried to strike a positive tone, industrial organic sales slipped into contraction, the weakness is broad-based across its markets, and the company hasn’t been working down its inventory.

Even with the prospects of a U.S. rate cut increasing, I’m concerned about how industrial stocks like Atlas Copco (OTCPK:ATLKY), Illinois Tool Works (ITW), Parker-Hannifin (PH), Sandvik (OTCPK:SDVKY), and SKF will perform over the next 12 months given how past cycles have played out. A more meaningful decline in inventories would be a welcome sight (in the past, inventory corrections have usually predicted rebounds), but that could still be some distance away. As is, while SKF’s valuation is not demanding on a margin/returns basis, the high single-digit annualized return implied by discounted cash flow isn’t enough to coax me into taking the risk that things get worse before they get better.

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SKF Sees Industrial Revenue Contract On Broad Weakness

M&T Bank Facing Accelerating Headwinds

Relative to where things were at the time of the first-quarter earnings, expectations for the rate cycle and bank sector spread margins have changed pretty significantly, and to the detriment of most banks. M&T Bank (MTB) hasn’t performed very well since my last update on the company, as although this remains a very well-run “overgrown community bank” with a very good core franchise in the Northeast, it is also significantly exposed to these worsening spread headwinds.

M&T’s net interest margin could fall about 20 bps from here, and that is going to make it very hard to generate pre-provision profit growth, even though management has been adding hedges to limit the risk. I think M&T’s quality reputation has preserved the share price to some extent already, and I don’t see a lot of near-term upside in the shares at this point.

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M&T Bank Facing Accelerating Headwinds

Chart Industries Really Just Getting Started

Chart Industries (GTLS) is still really difficult to model, but I said in my last piece that these shares would have a lot more appeal in the mid-$70s and here we are... and that’s with the company logging a big LNG order in the meantime and likely to book a few more before 2019 is over. I do have some concerns about a near-term slowdown in industrial gas demand, but that is counterbalanced, at least in part, by active efforts on management’s part to cultivate new market opportunities.

As fits a company that is difficult to model, with 2020 revenue possibly 70% (or more) above 2018’s level, Chart Industries shares are beastly difficult to value. The shares do look undervalued on discounted cash flow, but that assumes a reasonably accurate assessment of the size, duration, and profitability of the LNG building boom. The shares could be even more undervalued on a multiple-based approach (the average sell-side target is over $100), but with not even Chart management knowing what normalized earnings will look like over the full cycle, the “right” multiple is pretty much a guess.

Said simply, I think you can buy Chart here and make money, and possibly a lot of money when sentiment fires up again, but this will be a volatile stock.

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Chart Industries Really Just Getting Started

Fee Income And Loan Growth Helping BB&T, But Asset Sensitivity Is A Growing Risk

BB&T (BBT) has done okay over the last quarter, slightly outperforming the regional banking averages since the first quarter. BB&T’s strong fee-generating businesses are increasingly valuable as net interest margin compression looks to intensify, and the bank’s merger with SunTrust (STI) appears on track for a Q3/Q4 close. Unfortunately, while the merits of the deal still look quite sound on a long-term basis, both banks have exposure to tightening spreads over the next year.

Factoring in the impact of rate cuts, tempered in part by loan growth and fee-based income growth, as well as the deal benefits, I believe BB&T is modestly undervalued below the mid-$50’s. Cost savings and loan growth will be invaluable offsets to margin pressures in 2020, but given the challenges seen with past mergers of equals in the banking sector, I expect a “wait and see” attitude from many investors on these shares.

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Fee Income And Loan Growth Helping BB&T, But Asset Sensitivity Is A Growing Risk

Strong Acyclical Growth Burnishing Danaher's Growth Star Status

As short-cycle industrial end-markets weaken further, Danaher’s (DHR) exposure to acyclical growth markets like life sciences and diagnostics looks better and better. A decent top-line beat and acceleration in those two segments certainly helps bolster the argument for Danaher as a company and a stock that has much less to worry about as the global economy slows, and margin growth across most of the business certainly doesn’t hurt either.

This is the broken record part of the show, but valuation remains the prime issue with Danaher. I have no doubt that I’ll hear again from the “you buy this and hold forever” crowd, but there are a number of stocks where that argument has been made before and investors ended up seeing big losses as circumstances changed. Danaher looks priced for a mid-single-digit annualized return on par with Honeywell (HON) or Dover (DOV), and with what I see as a high likelihood that industrial/mulit-industrial earnings estimates and multiples will be heading lower in the second half, Danaher’s valuation could continue to remain elevated as the company is poised to offer a lot more core growth than many of its peers.

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Strong Acyclical Growth Burnishing Danaher's Growth Star Status

Dover Seems To Be Holding Up Well, And Self-Help Has Yet To Materialize

Dover’s (DOV) share price performance over the past quarter has been so-so, only slightly outperforming the overall industrial sector. Still, the company continues to deliver improving margins and decent organic growth at a time when many short-cycle industrials are starting to struggle. With exposure to multiple longer-cycle process markets with healthier near-term fundamentals and a refrigeration business that should be bottoming, I like Dover’s cycle exposure more than many industrials, but weakening orders (down in Q2 after flat performance in Q1) and a possible re-rating of the sector remain concerns.

Valuation is my biggest issue with Dover. I do think the company has a better end-market mix, and that should help the company post relatively better results over the next couple of quarters. On the other hand, the implied returns from my valuation models are on par with those of Honeywell (HON) and “Honeywell or Dover?” isn’t a question that I have to ponder very long.

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Dover Seems To Be Holding Up Well, And Self-Help Has Yet To Materialize

Honeywell Living Up To Its Safe Haven Reputation

In a quarter where it has becoming increasingly clear that short-cycle industrial markets are slumping and long-cycle markets are starting to wobble, Honeywell’s (HON) steady performance and minor beat-and-raise for the second quarter certainly solidifies the safe haven credentials that have been part of my bullish thesis on the stock. With a strong Aerospace segment and steady performance in Building Tech and PMT offsetting temporary weakness in Safety and Productivity, there’s not much that concerns me about the performance for the company.

What does concern me is the valuation. Although Honeywell has modestly outperformed industrials since my last update, almost all of that outperformance came in the post-earnings jump. Moreover, I’m concerned that we’re going to see a downward revision cycle after this earnings reporting cycle across industrials and a reset in valuations as investors accept that the second-half rebound thesis is looking pretty shaky. I do believe that Honeywell’s valuation could continue to exceed historical norms as institutions flock to own one of the few industrial stocks that’s “working”, but I don’t like playing the game of assuming that above-trend valuation will continue to expand at a time when the sector is seeing downward re-ratings.

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Honeywell Living Up To Its Safe Haven Reputation

U.S. Bancorp Doing Fine, With Opportunities To Counterbalance Spread Pressure

For the most part, U.S. Bancorp (USB) thrives on consistency. That makes quarter-to-quarter reporting a little less exciting, but if you want excitement, U.S. Bancorp really isn't the stock for you anyway. Second quarter results were another solid performance from a reliably solid bank, and U.S. Bancorp's combination of low spread compression and healthy fee-based revenue growth was encouraging relative to increasing spread pressure.

U.S. Bancorp might have more going for it than you'd think at first glance. With net interest margins likely to narrow even more over the next year, investors will do well to find banks that can offset that pressure. For U.S. Bancorp, growing fee-based businesses, organic de novo branch growth, and branch consolidation can all help offset that pressure. Like PNC Financial (PNC), which also has some valuable spread counterweights, U.S. Bancorp isn't particularly cheap, but the shares still look like a decent hold here.

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U.S. Bancorp Doing Fine, With Opportunities To Counterbalance Spread Pressure

Comerica Shares Struggling As The Street Prices In Rate Cuts

The upside and downside of asset-sensitive balance sheets aren’t mirror images of each other, but it is nevertheless safe to say that highly asset-sensitive banks like Comerica (CMA) have a lot to lose as the Fed shifts toward rate cuts. Making matters worse, Comerica’s low-cost deposit base doesn’t give much leeway for further cuts and the high loan/deposit ratio limits flexibility. Oh, and based upon second quarter results, it looks like there are some credit concerns in the energy portfolio.

It’s not so surprising that these shares have been weak – down more than 10% since my last update, and down about 26% over the past year. While the correction in the share price already seems to discount a lot of bad news, Comerica could still see worse than expected net interest margin compression, higher credit losses, and even weaker pre-provision profit performance than is already baked into the share price. Comerica’s hedging strategy should help some, and the share price definitely seems to discount a lot of bad news, but it’s hard for me to see what might inspire the Street to a “c’mon, it’s not THAT bad!” sort of rally in the near term.

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Comerica Shares Struggling As The Street Prices In Rate Cuts

PNC Financial (PNC) has been consistent in their belief that they can best serve investors by pursuing selective organic consumer and commercial bank growth opportunities in lieu of whole bank M&A, and the last couple of quarters would seem to suggest that they're on to something in the commercial bank, as PNC continues to outpace its peers in loan growth. With spreads likely to get worse from here, PNC's organic growth potential may well help it stand out from the crowd.

I liked PNC a quarter ago, and the shares have outperformed the banking sector since then (and the market as a whole). The shares are trading closer to fair value now, but PNC offering a more credible case that it can offset spread compression with organic growth and above-peer loan growth, I'd be inclined to prefer a fairly-valued PNC to some undervalued bank stocks with less impressive near-term drivers.

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PNC Financial Leveraging Organic Growth As A Not-So-Secret Weapon

It's Harder To Defend Wells Fargo Absent Meaningful Progress

It was never reasonable to assume the Wells Fargo (WFC) was going to fix itself quickly, but not unlike Citigroup (C), these shares have suffered as the management has failed to make the hoped-for progress in areas like operating cost reductions. Add in an ongoing regulatory/legal headwind, an ongoing CEO search, weak lending, and the prospect of more intense spread compression, and it’s harder to stay positive in the absence of better progress on operating efficiency.

I do think Wells Fargo will get itself sorted out eventually, and the core of the business is still strong – it is still one of the largest branch banks in the country, the #1 or #2 deposit-holder in about half of the country, one of the largest CRE lenders, the largest asset-backed lender, and a leader in consumer areas like auto and mortgage, with room to grow in areas like card and payments. The problem is how long it takes to get ROEs moving toward the mid-teens and generate real profit growth. The valuation here is hard to ignore, but this is going to be a frustrating hold until a new CEO is in place, and even then there will be risks tied to whatever restructuring plan that person puts into place.

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It's Harder To Defend Wells Fargo Absent Meaningful Progress

Sandvik Knocked Back As Signs Of Slowdown Accumulate

I suppose it’s still early in the second quarter reporting cycle, but I’m pretty much sold on the idea that the industrial economy is most definitely slowing, though in the interests of transparency, that’s been my expectation for a while, so there’s a risk of seeing what I want to see. Specific to Sandvik (OTCPK:SDVKY), shares have fallen more than 10% since my last update on the company, as those signs of slowdown continue to build and a second half rally seems less likely.

I like Sandvik as a business, but it’s tough to get excited about a company with heavy auto and general industrial exposure at this point in the cycle, particularly when past downcycles at Sandvik have lasted a little more than a year. Perhaps stimulus (the market expects the Fed to cut rates) will lead to a shallower, briefer downturn, but I think there could still be too much optimism for a second half rebound in the market. Sandvik shares are now a bit below my fair value estimate, though, so this is a name to keep a closer eye on if the pullback continues from here.

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Sandvik Knocked Back As Signs Of Slowdown Accumulate

PacWest Running Hard To Stay In Place

PacWest (PACW) is in a strange place right now, as management actively tries to upgrade and de-risk the loan book, offset major pressure from paydowns and payoffs, and figure out how to profitably grow deposits in an environment of increasing deposit cost pressure. While core earnings per share were basically in line with expectations, spread compression still remains a risk.

I still like the basic business that PacWest is in – niche commercial lending for smaller businesses and financial products for tech and VC firms like the capital call lending that has also been a growth driver for First Republic (FRC). It’s going to be hard for PacWest to make much core earnings headway with high repayment levels and rising deposit costs, but the longer-term potential is still attractive and the bank’s large dividend yield will pay investors to wait, though investors should realize that this isn’t “money for nothing” and the business strategy pursued by PacWest is riskier compared to typical community banks.

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PacWest Running Hard To Stay In Place

Alfa Laval Swamped By Surprisingly Weak Marine Orders

Writing about Swedish conglomerate Alfa Laval (OTCPK:ALFVY) (ALFA.ST) after first quarter earnings, I said, “Give me a 10% to 15% pullback and these shares get much more interesting as a potential long-term holding.” With disappointing orders in the second quarter and increasingly shaky investor sentiment around industrials, Alfa Laval shares have now pulled back a little more than that 15% target.

In the short term, there are still risks. Alfa is benefiting from record high orders in Energy, and I’m not confident that that is sustainable. Elsewhere, ship contracting has been below expectations, raising some concerns about the near-to-medium-term outlook for the Marine business. Still, this is a quality multi-industrial leveraged to multiple attractive trends, and while this may not be the bottom, I think the price is attractive for long-term investors.

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Alfa Laval Swamped By Surprisingly Weak Marine Orders

Yield Curve Concerns Are Yet Another Worry For Synovus

Georgia-based Synovus (SNV) continues to confound me. I realize that it’s not the best-run bank in the region, and I realize there are outsized risks in buying an aggressive, fast-growing Florida bank like FCB with large exposure to Florida real estate at or near the peak of the cycle, but the bank’s operating performance since the deal has been pretty steady and it seems to me that the Street continues to price in an ugly scenario of curve-based spread compression and elevated credit losses.

Credit quality is one of those “you don’t know until you know … you know?” risks with any bank, and I do think there is downside risk for Synovus here as the rate cycle reverses course and the Fed starts an easing cycle. It would seem to take a pretty grim set of assumptions to backwards-calculate today’s price and I don’t that’s the most likely path for Synovus. That said, the shares have lagged the bank sector since my last update, so clearly my bullishness is out of step with the Street’s sentiment.

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Yield Curve Concerns Are Yet Another Worry For Synovus

Roche Getting A Little More Benefit Of The Doubt

Roche (OTCQX:RHHBY) shares have given back some gains recently, retreating about 5% of a 52-week high set in early July, but all in all things are looking better for this giant Swiss drug and diagnostics company, and the market has noticed. Estimates over the next three years are about 10% higher than they were just before first quarter earnings, and there doesn’t seem to be quite the same fretting over Roche’s vulnerability to biosimilars, nor the lackluster profile of PD-L1 inhibitor Tecentriq versus competing drugs from Merck (MRK) and Bristol-Myers (BMY).

Between what looks to be strong momentum in the U.S., a solid pipeline both within and without oncology, and the flexibility to stay active on M&A/in-licensing, I’m comfortable owning Roche going into the second quarter earnings report next week. With a fair value in the mid-$30s based upon low single-digit revenue growth, mid single-digit FCF growth, and current exchange rates, I still see enough upside to justify owning these shares.

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Roche Getting A Little More Benefit Of The Doubt

Can M&A Break Fulton Financial Out Of Its Rut?

Fulton Financial (FULT) is an okay bank, but I think investors need to focus on bank’s that have something more than an “okay” story, and particularly so in less exciting markets like the Mid-Atlantic. I wasn’t all that excited about the return prospects for these shares back in mid-January, and the shares have since lagged other Mid-Atlantic banks I like better like OceanFirst (OCFC) and Sandy Spring (SASR), not to mention performing on the lower edge of “average” for regional banks over the last six months.

These shares have been stuck between $14.50 and $18.50 for a while, and at almost $16.50 as of this writing, they’re squarely in the middle of that range. With growing pressure on spreads and not many obvious catalysts to spark faster loan growth, it’s tough to see what will break the shares out, unless management gets going on the long-awaited M&A plan. With the shares priced pretty much exactly where I think they should be, I don’t much to get excited about either positively or negatively.

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Can M&A Break Fulton Financial Out Of Its Rut?

Weak Loan Growth And Tighter Spreads Pinching Commerce Bancshares

I haven’t been very bullish on Commerce Bancshares (CBSH), as I think the market assigns too high of a quality premium relative to this Midwestern bank’s lackluster growth profile and its-good-but-not-THAT-good credit quality. With the shares continuing to underperform the market and the sector since my last update, and second quarter results coming in weaker than I expected, I don’t really see much reason to change my core stance on the bank.

Commerce does have a lot of capital, too much really for its needs, and what management plans for that capital is a meaningful potential driver down the road. Whole bank acquisition would be an atypical move for this bank, but acquiring fee-generating businesses in the payments area is a possibility. As is, though, I think Commerce is an expensive, low-growth bank without even much of a dividend to pay for patience.

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Weak Loan Growth And Tighter Spreads Pinching Commerce Bancshares

First Republic Facing A Tighter Squeeze On Spreads

Private banking-focused First Republic (FRC) remains one of the best bank growth stories in its size bracket, but even high-quality growth stories aren’t immune to cyclical pressures. While First Republic is confident that they can maintain mid-teens loan growth, higher competition for loans is limiting yields while deposit costs continue to rise, and expected rate cuts aren’t likely to help the situation. On top of that, the departure of a significant wealth management team is yet another reminder that companies don’t grow in smooth, uninterpreted arcs very often.

I’m concerned that First Republic management is underestimating the impact of spread pressure in the second half of the year, and I think the company’s model limits their ability to offset these challenges with further expense reductions. Although I think the current valuation is still high relative to the risks of a couple more miss-and-lower quarters, I’d keep this name on a watchlist.

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First Republic Facing A Tighter Squeeze On Spreads

Just 'Okay' Is Still Pretty Good For JPMorgan

It’s a testament to the quality of JPMorgan (JPM) and the run it has established over the last four or five years that the company had to reassure investors on its second-quarter call. JPMorgan’s earnings weren’t bad, and I don’t think many large banks will do substantially better, but investors have gotten used to JPMorgan setting the pace and not just delivering “okay, I guess…” results.

JPMorgan has been one of the better performers among the large banks over the past year, and I’ve been pretty consistently bullish on this name. Given its leverage to recurring revenue sources that is almost “subscription-like” in its persistence, I think this bank has incrementally less to fear from the rate cycle, and I believe it can and will be among the better growers in its weight class. While the shares are not dramatically undervalued, I still see enough undervaluation to merit buying and holding these shares.

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Just 'Okay' Is Still Pretty Good For JPMorgan

A Mostly On-Target Citigroup Slowly Grinding Higher

Citigroup (C) has been a frustrating and unpopular long call, but the shares have at least outperformed the larger banking sector over the last quarter and the last year. Citi continues to trade well below where its return on tangible common equity suggests it “should” (based on long-term relationships between ROTCE and P/TBV), but that’s not an uncommon occurrence in the bank sector, and generating a higher ROTCE remains a frustratingly slow process for this bank.

Given the significant gaps in profitability (as measured by pretax banking profits) between Citi and peers like JPMorgan (JPM) and Bank of America (BAC), there would seem to be ample room for improvement, but Citi management seems disinclined for more comprehensive restructuring, even while lamenting (some might say “whining about”) the comparative valuation of the shares.

I continue to believe that the inherent value of Citi leaves the bank and its management in a “fix it... or we’ll find somebody who will” state, and I think the board may come under pressure to make some changes if ROTCE doesn’t improve more dramatically over the next 12-18 months - something that could be difficult given where we are in the rate and credit cycle. Either way, I believe these shares remain meaningfully undervalued, but it’s going to take a lot of patience and a high frustration threshold to own these shares.

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A Mostly On-Target Citigroup Slowly Grinding Higher

Real Change At AngioDynamics, Or Just Another Reshuffling Of A Lackluster Deck?

AngioDynamics (ANGO) has been a crappy stock over the long term, with a 10-year annualized return of only a bit more than 5% and a 15-year annualized return that is even worse. Over that same period, Medtronic (MDT) would have earned you about 12%/year, Becton, Dickinson (BDX) 15%, and Teleflex (TFX) close to 23%. And lest you think this is a case of Wall Street losing the thread, annualized revenue growth at AngioDynamics has been just 6% over the past decade – well below what the Street typically wants from smaller med-tech names.

Is AngioDynamics changing for the better? Management disposed of its lower-margin, low-to-no-growth NAMIC fluid management business at a solid price and wants to reinvest in areas with better growth potential like oncology and thrombus management, and U.S. clinical trials of NanoKnife are getting underway. All of that is fine, and NanoKnife could still represent some meaningful upside, but it’s tough for me to get excited about a med-tech business with core growth in the mid-single-digits.

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Real Change At AngioDynamics, Or Just Another Reshuffling Of A Lackluster Deck?

Atlas Copco Keeping Its Best-In-Class Position, But Markets Are Weakening

Given the long-term performance of Atlas Copco (OTCPK:ATLKY), I can understand why sell-side analysts look for excuses to get more positive on the name, and despite multiple data points of spreading weakness in multiple industrial end-markets, consensus EBITDA has risen about 7% in just the past three months. Even so, the shares have actually lost a little ground since my last update, dropping about 3% and lagging the industrial sector by about 6%, as some investors remain concerned about the high multiple in the face of likely peaking margins in the near term.

Atlas Copco acknowledged weakening trends in its industrial markets, and I'm comfortable with the general notion that, if the best companies are seeing weakness, it's worth listening to those warnings. I remain very positive on the long-term outlook for the business, but with the shares seemingly priced for only mid-single-digit long-term annualized returns, I don't see enough return to compensate for the risk.

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Atlas Copco Keeping Its Best-In-Class Position, But Markets Are Weakening

Fastenal Still The Best House On The Block, But The Neighborhood Isn't Looking So Good

Without having seen Grainger's (GWW) results yet, I feel pretty confident in assuming that Fastenal (FAST) will come out of this quarter with the best set of results among the large industrial distributors. Although Fastenal is seeing worse gross margin pressure than MSC Industrial (MSM), they're growing their business more effectively and offsetting gross margin pressures with strong execution on operating expense items - something MSC has long promised, but that Fastenal actually delivers.

I don't think there's much argument now that industrial end-markets are slowing, and so too is non-residential construction. That still leaves plenty of debate for how much worse things will get, as Fastenal management maintains that the broad "general industrial" category is still holding up well. Either way, I'm not inclined to pay the premium valuation that Fastenal shares carry today; I do think Fastenal is an exceptionally well-run company (and exceptional companies deserve premiums), but I don't like paying up for companies with deteriorating end-markets.

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Fastenal Still The Best House On The Block, But The Neighborhood Isn't Looking So Good

MSC Industrial Offering Weaker Execution On Lower Expectations

As an investor, I err to the side of being too patient with under-performing companies with good underlying businesses and that has been the case with MSC Industrial (MSM). I wasn't impressed with the company's performance last quarter and the near-term prospects for the industrial sector, and the shares are down another 10% or so since then.

Although management is taking a few modest positive steps and the dividend yield is pretty good, I remain concerned that the company doesn't really have a strategy for driving better performance in a world where customers have increasing price transparency and where the internet is eroding the company's historical competitive advantages. Valuation is not demanding now, but I consider this a future source of funds now given the ongoing issues with management execution.

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MSC Industrial Offering Weaker Execution On Lower Expectations

Strong Trading Drives A Healthy Beat At First Horizon

In a quarter where I believe a lot of regional banks will continue to report “okay, but not great” earnings, First Horizon’s (FHN) second quarter earnings certainly stand out. While some will discount the importance of a beat driven by the bank’s bond trading operations, there were some other underlying positives including good expense control and solid deposit cost control.

I think First Horizon may be a little better-positioned for upcoming rate cuts than commonly believed, and I continue to believe the shares are relatively attractive on a valuation basis.

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Strong Trading Drives A Healthy Beat At First Horizon

Excessive Bullishness Takes Its Toll On Yaskawa As Reality Comes Home To Roost

When I last wrote about Yaskawa (OTCPK:YASKY) in April, I thought the market and sell-side analysts were far too willing to buy into management’s story that the worst was over in the factory automation market. I thought that because Yaskawa had seen a severe drop in its Chinese business, but weakness had yet to really manifest in the U.S. and Europe. A quarter later, the shares are down about 15%, Yaskawa has another quarterly miss in the books, and the outlook is still pretty shaky.

To be clear, I still like Yaskawa as a company, but I have some serious reservations about the stock even after this correction. Management’s unwillingness to lower guidance after a sizable first quarter miss raises the risk of a bigger readjustment/correction, and I’m concerned that excessively high expectations on the part of management will lead to worse-than-necessary margin pressures from excess capacity. I still think the shares are overvalued by about 10% to 15%, and I’d note that commentary on the auto and semiconductor sectors still isn’t very positive.

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Excessive Bullishness Takes Its Toll On Yaskawa As Reality Comes Home To Roost

Milacron Becoming Part Of Under-Followed Hillenbrand's Diversification Strategy

All’s well that ends well, I suppose, and Hillenbrand’s (HI) $18 cash-and-share offer for Milacron (MCRN) gives those shareholders a decent exit on what has been a frustratingly volatile business, with some potential upside if they choose to stick with Hillenbrand for the long term. For Hillenbrand, Milacron is another big step in its diversification program; one that makes some sense, but isn’t coming cheap.

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Milacron Becoming Part Of Under-Followed Hillenbrand's Diversification Strategy

Cisco Plugs In Another Acquisition

As I lamented in the comment section of my last article on Cisco (CSCO), it's a particular curse of investment writing that companies will sometimes post meaningful news in between the time you submit an article and it's published, and that happened last week with Cisco's announcement of its intended acquisition of Acacia (ACIA).

I don't think the acquisition of Acacia is an unalloyed positive for Cisco, nor without some risks, but it is very consistent with Cisco's demonstrated strategy to shift away from M&A as a tool to enter new markets and towards using it as a tool to strengthen its capabilities in existing businesses. Coherent optics and pluggable modules are definitely a credible area for Cisco to focus, and I don't completely discount the possibility that Acacia, combined with the earlier deal for Luxtera, will help Cisco's lagging efforts among hyperscale customers. On balance, this is a credible use of shareholder capital, but not one that changes my basic view on Cisco, which is that of a good company, but not a compelling stock to me right now.

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Cisco Plugs In Another Acquisition

Shin-Etsu Going Through A Choppy Bit, But Still Attractive

I was a little cautious about Japan’s Shin-Etsu Chemical (OTCPK:SHECY) back in August of 2018, largely due to the risk of how the market would react to the ongoing correction cycle in semiconductors, not to mention the risks from a macroeconomic slowdown affecting businesses like PVC/Chlor-alkali and Silicones. Since then, the shares are down about 6% (versus a roughly 6% rise in the S&P 500), though the company has done pretty well relative to expectations and the challenges in these businesses are likely to be relatively short-lived.

I believe Shin-Etsu is about 20% to 25% undervalued today, and I believe this company is both one of the best-run in Japan and one of the best-run in the chemical/specialty chemical space. Timing is tricky, though. I do think there’s some risk of a “lower for longer” correction cycle in the more industrial-exposed businesses, but I also think waiting to buy the shares at the absolute bottom is a good way to miss out. All told, for investors with a longer horizon and who are willing and able to overlook some near-term underperformance risk, I believe these shares are worth considering.

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Shin-Etsu Going Through A Choppy Bit, But Still Attractive

Geely Hits A Pothole Amid Emissions-Driven Discounting

When I wrote about Geely (OTCPK:GELYY) (0175.HK) in June, I mentioned "a lot of turbulence" in the outlook for the Chinese economy and significant ongoing risks to the outlook for second-half vehicle sales as the Chinese auto sector goes through a brutal correction. Those risks have already come home to roost, with Geely posting a disappointing June sales figure and warning that first half results will miss expectations, while also reducing the full-year sales target.

As my expectations for Geely were already below the sell-side averages, I can't say this news is all that much of a surprise. The big unknown is the extent to which Geely's underperformance was driven by aggressive discounting from rivals and whether the company's line-up of newer models will see better demand in the second half. Management's guidance is not particularly encouraging on that score, and while I do think the shares are undervalued, I don't think investors need to rush to buy into this very turbulent and troubled sector.

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Geely Hits A Pothole Amid Emissions-Driven Discounting

Sika's Excellence No Longer A Secret

It’s been a while (almost two years) since I last wrote on Sika (OTCPK:SXYAY) (SIKA.S), but almost everything that has happened since then has strengthened my view that this is an excellent, if fairly obscure to American investors, specialty chemical company with significant long-term growth potential and a prudently aggressive management team.

With the shares up more than 50% (on the Swiss exchange), Sika shares have significantly outperformed peers and rivals like BASF (OTCQX:BASFY), RPM (RPM), GCP (GCP), and Arkema (OTCPK:ARKAY), so much so that I do worry that the shares have gone too far relative to the weak/weakening underlying trends in construction and autos. This is a stock I’d love to own at a better price, and I’m not entirely convinced I’ll get one, but I think this is a risky time to buy a company with stretched multiples and weakening underlying markets.

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Sika's Excellence No Longer A Secret

Expectations, Not Competition, May Be Cisco's Biggest Threat

Up more than 30% over the past year and more than 100% over the past five years (handily beating the Nasdaq over both periods), Cisco’s (CSCO) share price is at a level not seen since the dot-com bubble, when Cisco’s revenue was only about 40% of what it will likely be for this current fiscal year. While Cisco has certainly had its ups and downs over the years, losing share to later entrants like Huawei and Arista (ANET), and making some highly questionable M&A deals, the company’s more recent focus on software, service, and automation is very much in keeping with some of the bigger trends in enterprise IT.

Although the sell-side continues the “will they or won’t they?” debate about the prospects for Cisco benefiting from an upgrade/refresh cycle in campus switching, Wi-Fi 6, 5G, and ongoing spending growth in enterprise IT, the Street has already voted with its wallet, and Cisco already trades with robust growth and margin expectations in the price. While a mid-to-high single-digit annualized potential return isn’t terrible, particularly for a company with Cisco’s quality, I see more risks than upside given where valuation already is today.

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Expectations, Not Competition, May Be Cisco's Biggest Threat