Waiting For The Next Overreaction With Exact Sciences

Although Exact Sciences (NASDAQ:EXAS) isn’t that old of a company, a couple general rules of thumb seem to have emerged – the company’s non-invasive Cologuard test for colorectal cancer is going to continue to gain share, and shorts are going to continue to look for any cracks in the wall as a way to keep holding on to their bearish thesis. With the company outperforming expectations in 2017 (to the tune of nearly 170% revenue growth and 70%-plus gross margins) and the share price up nearly another 150% over the past twelve months, patient longs have been well-rewarded for sticking with this up-and-coming molecular diagnostics company.

Not surprisingly, given the robust growth, these shares are trading at a pretty rich multiple today. Although more beat-and-raise performances are certainly possible, and the company has only penetrated somewhere around 3% to 4% of its addressable market, I would wait for another bad news event (likely more perceived than real) before making a big commitment to the shares.

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Waiting For The Next Overreaction With Exact Sciences

Lundbeck Pays Up For A New Clinical Trial Asset

I have maintained for some time that one of the biggest issues for H. Lundbeck (OTCPK:HLUYY) (LUN.CO) is the feeble state of its pipeline. While Lu AF35700 is an interesting and promising asset in late-stage testing for treatment-resistant schizophrenia and Lu AF20513 is an intriguing but totally unproven asset in Phase I for Alzheimer’s, there’s not much else in the pipeline apart from some expanded indications for existing drugs. 

With Lundbeck having recently indicated that the board was more receptive to M&A, the company put its money behind that, announcing Friday morning that it had agreed to acquire privately-held Prexton in a deal heavily skewed to milestones down the road. Although this deal doesn’t meaningfully alter the current investment credentials for Lundbeck, it adds an interesting asset and may mark a more active stance toward recharging the company’s pipeline.

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Lundbeck Pays Up For A New Clinical Trial Asset

Rates And Loss Ratios Remain Risks, But Chubb's Valuation Is Getting Interesting

I have long thought that the managers of ACE, now operating under the name of Chubb (NYSE:CB) after that merger, are some of the best in the business and I continue to believe that that is a strong foundation for a positive investment thesis. That said, the P&C business has been flooded with capital and only recently have there been signs of rate improvement. At the same time, underwriting margins are getting squeezed and I’m worried about the outlook for loss trends.

Like many other insurers, Chubb has seen some share price weakness since January of this year, with the shares off about 10% from the 52-week high and up only a little bit over the last year. While I have some concerns about the impact of higher losses and lower reserve releases, that’s balanced by the reality that good names like Chubb don’t get all that cheap all that often. I do have some “falling knife” worries here, but the share price is getting to a point where long-term investors might want to freshen up their due diligence.

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Rates And Loss Ratios Remain Risks, But Chubb's Valuation Is Getting Interesting

Arch Capital Sliding Back To An Interesting Long-Term Valuation

Although Arch Capital (NASDAQ:ACGL) remains a very well-regarded insurance company, the last year hasn't been so friendly to this company or its peer group. A lot of contributing factors have been at play, including large cat losses in 2017, rising costs, regulatory/competitive changes and so on, pushing the shares down more than 10% and below the performance of peers like Everest Re (NYSE:RE), RenRe (NYSE:RNR), and W.R. Berkley (NYSE:WRB).

When I last wrote about Arch Capital, I said I preferred to wait in the hopes of getting an opportunity to buy the shares in the mid-to-low $80's. That opportunity has arrived, even though analyst estimates have continued to head higher. While these stocks generally don't perform especially well during periods of higher rates (which may seem counter-intuitive given the benefits to their investment income), and pricing power is still limited, I think this may be an opportunity to start a position. Arch Capital looks priced to generate double-digit annual returns from here and this has been one of the best-run insurance companies in the business - a trend I expect to continue, and to continue to benefit shareholders, into the future.

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Arch Capital Sliding Back To An Interesting Long-Term Valuation

Almost Everything Going Right For Shin-Etsu Chemical

When an uncommonly well-run company intersects with stronger than expected underlying end-markets, very good things can happen for the stock. Such has been the case for Shin-Etsu (OTCPK:SHECY), where strong results up and down the line have pushed the shares up another 25% or so from where they were when I last wrote about the company, even after a double-digit pullback from the January high.

I still lean positive on these shares. Although I fully expect the company's growth rate to slow from its recent trajectory, I believe the company's exposure to the strong PVC and wafer cycles as well as exposure to other growing specialty markets, biases the story in a favorable direction. Although the shares have enjoyed a very strong run since 2016, healthy end-markets should still support a high single-digit annual return at this point.

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Almost Everything Going Right For Shin-Etsu Chemical

Healthy Spreads And International Expansion Helping Braskem, But Mind The Risks

Compared to what Braskem (NYSE:BAK) was 15, 10, or even just five years ago, I think it’s fair to say that management has done a good job of improving the business. Braskem is now much less dependent upon naphtha as a feedstock and the company has made strides in diversifying beyond Brazil. The company’s involvement in the Brazilian “Car Wash” scandal was certainly a major black mark against it, but Braskem has nevertheless established itself as a major global chemical company with room for further growth and improvement.

Braskem is leveraged to an emerging recovery in Brazil as well as ongoing demand growth in markets like Mexico and the U.S., as well as other export markets. There are risks tied to a corruption investigation in Mexico that could threaten its supply of attractively-priced ethane, but the company is moving forward with greenfield growth in the U.S. and the shareholder structure may become simpler in the relatively near future. With a discount tied to uncertainties in Mexico and the ownership situation the shares look only a little undervalued, but absolution in Mexico and a cleaner shareholder structure could support a fair value in the mid-$30s even as polyolefin spreads look as though they’ll decline.

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Healthy Spreads And International Expansion Helping Braskem, But Mind The Risks

Weyerhaeuser's Improved Execution Should Pay Dividends

For me, Weyerhaeuser (NYSE:WY) is an example of why valuation always matters. Generally well-valued (if not richly-valued) for its high-quality timberlands and wood products operations, Weyerhaeuser has lagged the S&P 500 for total returns for quite some time. Even when you account for the tax benefits of its REIT status and the housing slump, I would argue that shareholders have had to pay a price for Weyerhaeuser’s often-rich valuations, as well as several strategic missteps in the past.

I believe that Weyerhaeuser is now a better-run company and I do see some upside in the shares now. The Wood Products segment may be nearing its peak, but I expect healthy ongoing contributions from the Timberlands segment, and I believe Weyerhaeuser is a leaner, better-run, and more focused company than it has been in a long time. Coupled with a reasonable valuation, there could be some opportunity here for patient investors.

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Weyerhaeuser's Improved Execution Should Pay Dividends

Louisiana-Pacific Making The Best Of The Cycle

When I last wrote about Louisiana-Pacific (NYSE:LPX) (or “LP”) back in October of 2016, I thought the shares still had upside on the basis of ongoing price/margin leverage in OSB, continued growth in housing, and the growth of the company’s siding business. The shares are up about 50% since then, outperforming most of its peers like Norbord (NYSE:OSB), James Hardie (NYSE:JHX), and Weyerhauser (NYSE:WY) over that time (Ply Gem (NYSE:PGEM) has nearly matched LP, while Boise Cascade (NYSE:BCC) has outperformed), as OSB pricing has exceeded expectations on uncommonly responsible competitor behavior and as the company has executed well on its operating improvements and siding growth plans.

It’s harder to see as much upside now. While OSB pricing has held up, and likely will remain above $300 despite oncoming capacity growth, and siding continues to have strong growth potential, I believe a lot of that is in the share price. I don’t think LP shares are overvalued on the basis of cycle-average EBITDA, but I do believe that 2018 could be the near-term peak and the returns could look more “market-like” from this point.

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Louisiana-Pacific Making The Best Of The Cycle

Hurco Off To A Strong Start

Manufacturers continue to expand and upgrade their capital equipment, and that trend is benefiting small-cap machine tool manufacturer Hurco (HURC). As a company that makes things, Hurco is clearly very leveraged to the health of the global manufacturing economy, but particularly in Germany, the U.S., the U.K., France, and Italy. Although industrial production growth has slowed a bit recently, the overall trends remain healthy in the U.S. and Western Europe, and most industrial companies have guided toward a healthy 2018.

A bi-annual tradeshow in September of this year is likely to create some volatility in quarterly results (with orders slowing into the show, as many companies introduce new models/features at the show), but I expect that Hurco will generate double-digit revenue growth and at least come very close to double-digit operating margin. With the current share price still offering double-digit return potential, I don’t think it’s too late for the stock, but I do think the industrial recovery story is pretty mature at this point.

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Hurco Off To A Strong Start

Komatsu Offers More Than An Upswing In Mining

As often happens with companies that serve deeply cyclical end-markets, the timing and magnitude of the swings in Komatsu's (OTCPK:KMTUY) end-markets have defied expectations. While improving construction and mining markets have been part of the Komatsu story for a while now, the strength of the recoveries (especially in mining) has exceeded expectations, as has Komatsu's operating leverage and execution.

With major mining companies only starting to reinvest in equipment and plenty of room to grow in automation-driven investments, I believe Komatsu could still offer some upside from here. The shares aren't cheap on a free cash flow basis, but that's not all that unusual and a forward multiple in line with long-term averages suggests 10% more upside from here with the possibility of further upward revisions.

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Komatsu Offers More Than An Upswing In Mining

Chart Industries Riding A Recovery But Also Shifting The Business In Meaningful Ways

Chart Industries (GTLS) shares were hammered during the downturn in energy and process industries but are already up about 4x from the early 2016 bottom as the company has benefited from recovering demand in natural gas processing and recovering demand for industrial gasses. Better still, not only has management expanded and diversified its business with the Hudson deal, management seems more interested in backfilling the service and aftermarket opportunities.

With the shares up so strongly (up 80% in the last 12 months), I'm not too surprised that I don't see a lot of low-hanging value here. There are still meaningful opportunities in LNG and I believe the market often underrates the company's core industrial gas business, but today's valuation looks pretty reasonable for a company that should generate mid-single-digit revenue growth and double-digit FCF growth over the next decade.

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Chart Industries Riding A Recovery But Also Shifting The Business In Meaningful Ways

Maxwell Shareholders Could Finally See Some Rewards For Their Patience

Maxwell Technologies (MXWL) hasn't been the easiest stock to hold over the last few years, as the promise of the company's ultracapacitor and dry battery electrode technology has been offset by significant revenue volatility and numerous false starts in what were supposed to be exciting growth markets. With all of that, the shares have lost about 20% of their value over the last three years and have spent most of the last year between $5.50 and $6 (with excursions down to $4.50 and up to $6.50 along the way).

Maxwell remains a tough stock to value, as there is little more to go on than a handful of design wins and potential end-market developments. That said, I think the company deserves more credit than it gets for "keeping the lights on" and using opportunities like the Chinese hybrid bus market to fund R&D and product development in areas like auto electrification, renewables, mass transit, and grid management that could start to pay off in the next couple of years.

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Maxwell Shareholders Could Finally See Some Rewards For Their Patience

HollySys Growing, But Consistency Remains An Issue

HollySys (HOLI) has built a respectable business in process automation and train signaling in China, but inconsistent execution and order growth remain key challenges for management. Expanding its factory automation business has likewise proven challenging, though there has been more progress on this front and Chinese government policy could be a tailwind.

HollySys shares have done well as revenue has rebounded, but the soft order growth in industrial automation could become more of a headwind. I continue to believe HollySys can generate high single-digit revenue and high single-digit to low double-digit FCF growth, and those growth rates can support a double-digit total return, but future growth is tied to management's ability to grow the business beyond its historical strengths.

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HollySys Growing, But Consistency Remains An Issue

Ongoing Share Gains, Innovation, And Leverage Propelling IPG Photonics

Fiber laser innovator IPG Photonics (IPGP) is a good example of why I'm willing to pay up for good companies (and/or hold stocks that otherwise seem richly-valued) - the really good companies out there always seem to find ways to innovate and expand their addressable markets, as well as generate improved operating leverage. IPG has continued to exceed my expectations on both fronts, and the trailing return metrics over the past one, three, and five years (and beyond) have been exemplary.

I don't mind paying up for good companies, but IPG shares do have a track record of significant pullbacks from time to time - whether due to the company not meeting lofty expectations on a quarterly basis or wider concerns about the health of manufacturing spending. The valuation today seems to be pricing in total expected returns in the high single digits, which isn't bad, but I'd much prefer to buy in when the expected returns are in the double digits.

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Ongoing Share Gains, Innovation, And Leverage Propelling IPG Photonics

Air Transport Not Just An Amazon Story

Air Transport Group (ATSG) shares have done well over the past year, but the shares have been stuck in a $6/share trading range since May, as inconsistent execution has blunted some of the benefits of the company’s transformative relationship with Amazon (AMZN). Despite those inconsistencies, management continues to build the business outside of Amazon, adding more 767 customers and launching a long-term effort to expand its potential operating fleet.

I believe Air Transport still has some upside from here, driven by my expectations for high single-digit revenue growth and improving free cash flow generation. I also believe that significant upside remains in the Amazon relationship, as Amazon seems to be serious about building out its independent logistics operations.

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Air Transport Not Just An Amazon Story

PerkinElmer Riding A Strong Cycle And Making Positive Long-Term Shifts

These are good times for PerkinElmer (PKI). The life sciences/pharma tool market is about as strong as it has ever been, and the company's pivot toward diagnostics and services should pay off in the years to come in the form of more revenue stability and better margins. If management can reverse a pretty uninspiring historical trend of underwhelming M&A integration and missing long-term revenue and margin targets, the future could be pretty bright for this company.

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PerkinElmer Riding A Strong Cycle And Making Positive Long-Term Shifts

Microsemi Finds Its Last Deal

Management at Microsemi (MSCC) is known for commenting that in semiconductor M&A, "You buy until you get bought." There have been rumors off and on about potential bidders circling Microsemi for a little while now, and the executive management's compensation plan was certainly structured to reward a deal. Now Microsemi finally found its buyer - Microchip Technology (MCHP), a seasoned semiconductor M&A veteran that should reap meaningful revenue and cost synergies from the deal.

Given the deal price, I don't think Microsemi investors have a compelling need to stay to the very end; a rival bid is always possible, but the price offered isn't such that I think another bid is highly likely. Pre-market indications are that Microsemi won't trade up to the full bid price just yet, though, so Microsemi investors can at least get paid a little for waiting unless and until they have a better idea.

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Microsemi Finds Its Last Deal

Double-Digit Growth Continues To Propel Old Dominion

Forget its top-level performance in the less-than-truckload (or LTL) sector, Old Dominion (ODFL) is one of the better-run companies I've followed for the past decade-plus. Management sticks to what it does best, doesn't jeopardize the model just to please Wall Street in the short term, and continues to build the business for further growth. The only issue with that top-level performance is that it is no secret and Old Dominion's shares are seldom cheap outside of those cyclical downturns where the outlook for the sector is bleak.

Today is the opposite; demand for freight is expanding and Old Dominion is once again demonstrating that it can win share with service quality during such expansions. The shares are already pricing in double-digit EBITDA growth, and I think outperforming those expectations is going to be difficult. While I'd be very slow to sell Old Dominion if I already owned these shares, it's tough for me to argue for it as a buy at today's valuation.

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Double-Digit Growth Continues To Propel Old Dominion

Yet Again, Investors Have To Readjust Expectations For GenMark

The past 12 months have been rough for GenMark Diagnostics (GNMK), as this molecular diagnostics company has struggled to meet its own timelines and live up to Wall Street expectations. While better-than-expected fourth-quarter results gave investors a little renewed confidence, guidance for 2018 brought that honeymoon to a quick end.

GenMark remains a high-risk, high-reward speculative play in molecular diagnostics. This recent flu epidemic has solidified the place of multiplex systems in clinical practice, but GenMark is facing an increasingly difficult competitive market, and there doesn't seem to be as much excitement in the channel as there once appeared to be. A revenue figure of $200 million in 2022, growing to over $400 million in 2027, with double-digit FCF margins can support a meaningfully higher share price, but the company's cash situation is far from ideal, and it really needs to start posting beat-and-raise quarters soon.

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Yet Again, Investors Have To Readjust Expectations For GenMark

FEMSA Continues To Offer Attractive Value

Shares of FEMSA (FMX), a large Mexican consumer conglomerate, are always going to twitch with concerns about Mexico's economy (including the exchange rate with the U.S.), but management has demonstrated over the years that it knows how to build value for shareholders. Recent endeavors like drugstores and gas stations will take time to mature, but the underlying growth story for the company remains intact.

I continue to believe that $105 to $115 is a good fair value range for the ADRs and that opportunities to buy below $100 should be considered by investors who want some exposure to emerging market (especially Mexican) consumer spending growth. Although 2018 could be a little more challenging due to political issues, I believe high single-digit growth potential continues to support a healthy outlook for double-digit long-term returns.

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FEMSA Continues To Offer Attractive Value

PRA Group Back On Firmer Footing

The recent past hasn't been pretty at PRA Group (PRAA), but with a couple of better quarters in hand, it seems reasonable to think that this collector of charged-off receivables is back on track. I don't believe it is realistic to expect the company to get back to the ROE levels of yesterday - the market has changed, and PRA is a much bigger share of the market now - but double-digit ROEs seem possible again, as well as a return to healthy free cash flow generation.

PRA Group is a tough company to analyze, but I expect to see improving collection efficiency metrics, as well as increasing supply, in the coming years. That supports a fair value in the high $30s to low $40s today and makes this a name worth considering on pullbacks.

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PRA Group Back On Firmer Footing

Wright Medical May Be Hobbled Until The Ankle Business Re-Accelerates

Wright Medical (WMGI) shareholders didn't seem to be thrilled about the merger with Tornier, but looking back, it is the Tornier investors who probably have more to regret about that deal. Although backward-looking hypotheticals only get you just so far, it has been the shoulder business that Wright acquired in the Tornier deal that has been driving the business, while Wright's prior core lower extremity/ankle business has weakened considerably in the last two years.

I don't believe the lower extremity business is damaged beyond repair, but management absolutely has to execute better than it has and start regaining momentum versus rivals like Stryker (SYK) and Integra (IART) if the shares are to perform better. I'm still modeling long-term revenue growth in the high single digits and long-term FCF margins in the 20%s, which supports a mid-$20s fair value, but Wright Medical's weak execution makes this a "show me" stock at this point.

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Wright Medical May Be Hobbled Until The Ankle Business Re-Accelerates

At BRF SA, The Flesh Is Still Weak And Investor Spirits Aren't So Willing

It has gone from bad to worse at BRF SA (BRFS), as frequently happens when a company reaches a "critical mass" of mismanagement and poor decision-making. BRF's big miss with fourth quarter results put the cap on what was already a pretty poor 2017, and though BRF has a new management team and a new plan, major investors seem to want yet more change.

I've always thought it was going to take time and patience (a lot of patience…) for BRF to develop, and I don't believe the company is unfixable. That said, there's a lot of work to be done in both the domestic and international operations and plenty of volatility inherent in a commodity-driven business with significant international emerging market exposure. I believe mid-to-high single-digit revenue growth is still possible and, coupled with mid-to-high single-digit FCF margins, can still support a $10-plus fair value from here, but this is a high-risk call that is going to need a couple of years to really play out.

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At BRF SA, The Flesh Is Still Weak And Investor Spirits Aren't So Willing

Outside Of Energy, SPX Flow Still Waiting For The Turn

At a time when many industrial companies are seeing strong cyclical recoveries, SPX FLOW (FLOW) is still well off the pace of many of its industrial peers. Although markets like energy, air treatment, and chemical processing still have scope to improve from here, the company's food and beverage segment is likely to be a slower grower and SPX FLOW is going to have to start making more progress on share-of-wallet and internal margin improvement efforts.

Up more than a third from when I last wrote about the stock, I'm not as bullish on SPX FLOW now as I think the catch-up opportunity has largely materialized. There are multiple places where management could execute better over time, but I think those opportunities have to be considered in hand with the likely slower growth that SPX FLOW will see compared to many other industrials. I don't dislike the shares, but I don't see the opportunity I once did.

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Outside Of Energy, SPX Flow Still Waiting For The Turn

Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

Everest Re (NYSE:RE) has long had a very good reinsurance business - although skewed toward property-catastrophe, the company’s focus on specialty/smaller lines and low overhead costs have helped generate pretty good returns even through recent weakness in pricing. What has been more impressive, though, has been the improvements in the insurance business - a business that management had elected to continue growing aggressively despite a pretty poor history of underwriting losses.

Everest Re management has done a lot to repair investors’ opinion of the insurance operations, and the company has also managed to benefit from M&A-driven dislocations in the market. Now, with insurance prices showing a little strength and higher rates supporting better investment returns, it’s not a bad set-up for the company. Between the too-high highs of last summer and the too-low lows of this past winter, I think Everest Re is more reasonably priced now, but “reasonable” in this case still suggests a total expected annual return in the low double digits.

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Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

Is It Too Late For An Early-Cycle Name Like Parker Hannifin?

Investors have an uncanny knack for swinging between worrying about nothing and worrying about everything. In the case of Parker-Hannifin (PH), it would seem that poorly-communicated, near-term margin issues are disappointing investors who favor margin improvement stories within the multi-industrial space, while worries about where Parker-Hannifin sits in the short-/mid-/late-cycle ecosystem are troubling other investors.

Although I do have some concerns about growth with Parker-Hannifin, I think the stock's valuation is interesting on both an absolute and relative basis, particularly given acceleration in orders and high valuations in the peer group. To me, the shares look priced for high-single-digit to low-double-digit total returns, and you could make an argument that a fair value in the $220s or $230s wouldn't be ridiculous.

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Is It Too Late For An Early-Cycle Name Like Parker Hannifin?

For Roper, More Of The Same Looks Like A Good Plan

What do you say about a company that has averaged a total annual return to shareholders of over 20% the last 15 years, has outgrown its multi-industrial peer group on organic revenue, and generates FCF margins in the 20%’s while shifting the model towards more recovering revenue? All I can really say about Roper Technologies (ROP) is that this is definitely a stock to keep in mind when the music stops and the market cools off.

I discussed the challenges of valuing a stock like Roper the last time I wrote about the company (in which time the stock has risen another 30%), and it’s no easier now. Including the company’s near-term M&A plans into the valuation would suggest a mid-to-high single-digit total annual return is still in play, and I would also note that Roper’s valuation relative to other multi-industrials like Danaher (DHR), Honeywell (HON), Illinois Tool Works (ITW), and 3M (MMM) hasn’t really changed all that much compared to a trailing multiyear average.

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For Roper, More Of The Same Looks Like A Good Plan

Another Phase III Win For Neurocrine Biosciences

Good news continues to stack up for Neurocrine Biosciences (NBIX), with the company's partner AbbVie (ABBV) announcing on Wednesday that its first of two Phase III studies of elagolix in uterine fibroids met all of its efficacy endpoints. This continues a pretty good run of success with Neurocrine's late-stage pipeline and brings another potential multi-billion-dollar drug that much closer to approval and commercialization.

While there are still more steps to go through with elagolix in uterine fibroids (namely, full results from both studies, including safety data), the similarities between the Phase III and Phase II results thus far would suggest that there's not much reason for worry (then again "surprises" are by their nature not expected…). Approval of elagolix in 2019 or 2020 would bring another important revenue generator to market for Neurocrine and this incremental step does modestly boost my fair value.

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Another Phase III Win For Neurocrine Biosciences

Alfa-Laval Still Offers Recovery-Driven Upside And The Potential For Improved Execution

For the most part, well-run multi-industrials exposed to recovering markets are not trading at very attractive prices today, and that makes Sweden’s Alfa-Laval (OTCPK:ALFVY) worth a look. It’s certainly too soon to sound an “all clear” on the company’s large marine business, but order growth has been steadily improving and margin leverage is starting to emerge again. With leadership in multiple recovering markets and the potential to significantly improve returns on capital from here, Alfa-Laval is worth a look.

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Alfa-Laval Still Offers Recovery-Driven Upside And The Potential For Improved Execution

Amidst Cycle Worries, ON Semiconductor's Drivers Are Delivering

Investors are getting more concerned that the semiconductor cycle is long in the tooth and more vulnerable to a downturn, but ON Semiconductor (ON) continues to deliver generally strong results. With significant growth opportunities in autos and industrial, as well as worthwhile opportunities in more specific markets like datacenter power management and wireless charging, not to mention good progress on profitability since closing the Fairchild deal, it's worth asking whether ON might not continue to stand out as the exception.

The valuation here puzzles me a little, as I don't think long-term growth forecasts in the low-to-mid single digits are very high, nor near-term operating margins in the mid-teens, and yet those assumptions would argue for a fair value in the mid-to-high $20s. Caution regarding the Fairchild deal certainly seemed warranted, given the company's poorly-conceived and poorly-executed Sanyo deal, but today's valuation doesn't seem to reflect much optimism about what I think is a pretty solid plan for growing the auto and industrial businesses in the years to come.

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Amidst Cycle Worries, ON Semiconductor's Drivers Are Delivering

Eaton Lacks Sizzle, But The Valuation Is Interesting

It's hard to work up a lot of enthusiasm for Eaton (ETN). The company is frequently a middle-of-the-pack grower, and while the company's efforts to restructure and improve margins have helped, it's not exactly a standout on profitability, nor is it really a clear leader in the markets that really set institutional investors' hearts aflutter these days.

Now, before the Eaton fans light their torches and grab their pitchforks, understand that I have *no* problem with a "boring" company. In fact, a lot of my best-performing investments have been in companies that lack a lot of buzz. What's more, I am intrigued by Eaton's valuation. Unless I'm really missing something, it looks like these shares are offering nearly double-digit total annualized return potential on long-term growth of just 3% or so. In a generally expensive stock market, and with many end-markets improving, I'm warming up to Eaton as a late value-driven play.

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Eaton Lacks Sizzle, But The Valuation Is Interesting

Euronet Latest Pullback Comes With Much Greater Operating Uncertainties

As I've mentioned in past articles on Euronet (EEFT), this is a pretty classic "second chance" stock, as the stock's generally high multiples and the company's somewhat erratic growth trajectory have led to frequent double-digit declines that give investors another chance to get into what has been a pretty good growth story over the past decade-plus.

The shares have chopped lower since the third quarter earnings report, and some soft spots in fourth quarter earnings and guidance (for the first quarter) haven't helped, not to mention ongoing worries about what the EU may do regarding regulation of dynamic currency conversion. I still believe, though, that there are attractive growth prospects in the ATM and money transfer business, as well as the epay segment as it transitions away from mobile top-up. If a revenue growth rate in the mid-to-high single digits and a mid-teens growth rate for EBITDA and FCF are still reasonable expectations, these shares offer meaningful upside into the high-$90s, but the downside risk if EU reforms decimate DCC revenue is significant (into the $60s).

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Euronet Latest Pullback Comes With Much Greater Operating Uncertainties

Nokia Digging In Ahead Of 5G Deployments

Despite a sharp decline after troubling third-quarter earnings, Nokia (NOK) is more or less back where it was the last time I looked at this company, and now we’re all about six months closer to meaningful deployments of 5G equipment (likely to begin in 2018, ramp up in 2019, and really start getting meaningful in 2020). At the same time, the company still has worthwhile opportunities in “ancillary” markets like analytics/automation and enterprise webscale deployments.

Even with the boost that 5G deployments should provide, I do not believe Nokia will deliver all that much long-term growth. Sure, plenty of third-party sources quote figures in the hundreds of billions of dollars for “needed” investment in capacity, but that ignores the realities of the price pressures on companies like Nokia and Ericsson (ERIC), the rise of competitors like Huawei, and the “do more with less” innovations that allow providers to get more out of their installed base.

That doesn’t mean I’m negative on Nokia. I think the shares are still undervalued today, with a possibility that expectations for 5G deployments could improve with time, not to mention potential outperformance from technology licensing and non-traditional/ancillary markets.

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Nokia Digging In Ahead Of 5G Deployments

Sensata's (ST) strong record as a supplier of sensors and controls to multiple markets (but primarily auto OEMs) didn't really protect the shares when growth started to slow in 2015 and 2016, and investors began to worry that newer entrants like Amphenol (APH) and TE Connectivity (TEL) were pushing the company aside. While the 2015-2017 period was not a great one for the company, it looks like the prophets of doom went a little overboard, as Sensata's growth has been recovering and with it the share price as well.

I liked Sensata shares back in May of 2017 when they traded below $40, but it's harder for me to argue that there's substantial undervaluation now. What's more, light vehicle production isn't looking so strong outside of China, and we're in the later part of the semiconductor cycle. I like the prospects for Sensata to continue growing content and diversifying beyond autos, but I don't see the shares as particularly undervalued anymore.

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Sensata Back To A More Reasonable Level

Lattice Semiconductor Looking To Reach That Next Level

Lattice Semiconductor (LSCC) has some meaningful operational challenges left to overcome, not the least of which are pushing out ASIC/microcontroller companies for design wins and leveraging an operating expense structure that is bloated relative to the revenue base. The company is not without opportunity, though, as Lattice's low-cost lower-power FPGAs are winning slots across communications, computing, industrial, and auto end-markets, with future opportunities in so-called "edge" applications like machine vision, artificial intelligence, and AR/VR.

I think investors are right to remain skeptical about Lattice's standalone potential, particularly given that double-digit revenue growth has often been a difficult bar for the company to reach and that it is difficult to drive attractive operating leverage with a relatively small revenue base. Even so, the standalone potential still suggests some undervaluation, and I continue to believe that Lattice could draw a bid of $7 (or more) from a company that wants its FPGA and mmWave technologies.

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Lattice Semiconductor Looking To Reach That Next Level

MaxLinear Testing Investors' Patience

When I last wrote about MaxLinear (MXL), I mentioned the company was in the middle of a transition in its business mix and that this process was likely to lead to above-average volatility in the company’s financial performance. Since then, the company has continued to see not only erosion in legacy businesses but also greater-than-expected weakness in its communications (Infrastructure) market. That has led to meaningful revisions to expectations (around 10% on the top line) and noticeable underperformance versus the SOX over the past six months or so.

The basic story with MaxLinear hasn’t really changed, though. There is still above-GDP growth potential in the core “Connected Home” business, with near-term drivers like the DOCSIS 3.1 product cycle, but the real growth opportunity lies in wireless backhaul, access, and optical interconnects. MaxLinear’s performance should start to improve in the second half of 2018, with a period of double-digit revenue growth and improving margins following. With a fair value still in the mid-to-high $20s, MaxLinear looks like a worthwhile prospect to consider for those who can stomach the near-term volatility.

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MaxLinear Testing Investors' Patience

2018 Brings New Challenges And Opportunities For Alnylam Pharmaceuticals

By any reasonable set of standards, 2017 was a successful year for Alnylam (ALNY), as this biotech reported excellent data from the pivotal study of its lead drug patisiran and advanced other compounds further into development as well. This year will bring a new set of challenges, including the commercialization of patisiran and its transition to a product revenue-generating biotech company. Although I believe patisiran's strong data will lead to it claiming the lion's share of its market, commercialization offers a different set of challenges. What's more, while Alnylam should be looking at multiple commercializations in the next few years, recharging the pipeline may start to become a bigger talking point later this year.

I continue to believe that Alnylam is risky but attractively-priced. Patisiran makes up over 60% of my fair value estimate on the shares, but there are opportunities for additional clinical data on/from givosiran and lumasiran to add more value over the next 12 months.

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2018 Brings New Challenges And Opportunities For Alnylam Pharmaceuticals

Neurocrine Biosciences Shows Again That Sometimes The Tortoise Wins

After a very good 2017, highlighted by the approval and strong initial launch of Ingrezza, Neurocrine Biosciences (NBIX) has a high bar to make 2018 even better. While a carbon copy repeat of the 100% gain in 2017 is likely too ambitious of a target, Neurocrine should nevertheless benefit from ongoing strength in Ingrezza in tardive dyskinesia, the approval of elagolix in endometriosis, and data on Ingrezza in Tourette's, elagolix in uterine fibroids, and '74788 in CAH before the end of 2018.

All told, Neurocrine is on course to be a four-product, six-indication company in 2022, with the company's drugs primarily addressing large markets with little-to-no strong competition. Although my fair value in the low $90s does not suggest huge undervaluation today, I'm using what I believe to be very conservative approaches to the Tourette's and CAH indications and clinical success in those indications could unlock a lot of value. Accordingly, I still think the risk/benefit balance favors owning these shares.

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Neurocrine Biosciences Shows Again That Sometimes The Tortoise Wins

ABB Is Getting There, But The Process Has Been Ugly

There’s an old joke that says if you like sausage, you should never watch how it’s made. I feel that ABB (ABB) has been a little like that – the company has spent most of the past four years restructuring and repositioning the business (including sizable M&A), and while the company is now on better footing, the whole process has left a lot of investors feeling squeamish and put off by the name.

I can’t promise that the new ABB will be a significant improvement over the old one, but I do know that this is a company with leadership in a wide range of end-markets that can (and should) provide above-average growth in the coming years. I also know that ABB is operationally leaner and more focused on businesses that can provide steadier, higher-margin revenue for the long term. I still expect relatively less from ABB than I do some of its closest peers (including Rockwell (ROK)), but mid-single-digit revenue growth and low double-digit FCF margins can support a fair value a little higher than today’s price and high single-digit total returns.

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ABB Is Getting There, But The Process Has Been Ugly

Advanced Energy Industries Continues To Reap The Benefits Of The Semi Cycle

Every once in a while, you see things that make you double-check and triple-check what you're looking at, and Advanced Energy Industries ("AEIS") (AEIS) is a case in point. This manufacturer of key components used in semiconductor manufacturing and a variety of other specialized manufacturing processes has continued to rack up excellent, better-than-expected results. And the shares are … down about 10% from when I last wrote about the company?

Over that same period, a grab-bag of other companies with exposures to many of the same primary markets (including Applied Materials (AMAT), MKS Instruments (MKSI), and Orbotech (ORBK)) are up anywhere from 30% to 60%. Although I thought AEIS was priced pretty richly back at the time of that last update, I'm a little surprised the strong reported financial performance hasn't kept the stock price stronger.

That's not to say that I think AEIS is cheap today. I think there's a "hey, it's not quite as expensive as some other ideas in the space" relative valuation argument, but the expectations that seem factored into the price today are still pretty healthy. That said, if AEIS can continue to leverage the ongoing investments in leading-edge semiconductor capacity and post strong numbers, it won't surprise me if the sell-side starts making "buy this laggard" calls.

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Advanced Energy Industries Continues To Reap The Benefits Of The Semi Cycle

Multi-Color Has A Large Addressable Market, But Mind The Operating Volatility

Multi-Color (LABL) is making a bad habit of posting noisy quarterly results that lead to substantial volatility in the share price. The problems are largely margin-related and have reached a level where they're overriding surprisingly strong organic growth trends in the business, and it is getting harder to believe this issue is going to resolve as the company has the not inconsiderable job of integrating a major acquisition that has a lot of different moving parts.

I had mixed feelings about the Constantia deal when it was announced and I still do - while expanding the business in Europe makes sense, I have concerns about the greater exposure to lower-margin, more commodity-like business. I would have preferred to see Multi-Color acquire more capabilities in higher-margin businesses like healthcare, but that could still come.

The "operating inefficiencies" cited by management and the more erratic margin performance has widened my fair value range on the shares, but I do believe the shares are still undervalued. Multi-Color really needs to post a few good, boring quarters and restore confidence that this combination is a real value-creating event for shareholders.

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Multi-Color Has A Large Addressable Market, But Mind The Operating Volatility

Glimpses Of Progress At Manitex

Small-cap crane manufacturer Manitex (MNTX) has become a much harder company to follow recently. Not only is this company barely followed by the Street, the company’s need to restate earnings for 2016 and 2017 means there’s not much reliable information to go on in terms of recent historical numbers.

The good news is that what information management has provided is broadly positive. Revenue is rebounding, the backlog is growing, and margins seem to be more or less where I thought they’d be. Predicting how far this recovery can take the energy and construction businesses is difficult, and the company is also doing a pretty good job of building out its PM Group business in the U.S. All told, I think today’s stock price is pretty fair and offers double-digit expected returns for a business that still has elevated operating risk.

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Glimpses Of Progress At Manitex

Lundbeck Looks Largely Played Out

I’m often sloth-like when it comes to selling positions in good companies, but it looks to me like the time to part company with H. Lundbeck A/S (OTCPK:HLUYY) (LUN.CO) may be close at hand. Despite concerted efforts to differentiate its new product portfolio, Lundbeck is struggling to gain much headway versus generics in the U.S., while generic competition continues to threaten lucrative profit centers in the mature portfolio. What’s more, the cupboards are pretty bare when it comes to the pipeline, and though management seems more positive on M&A than it has in the past, early-stage assets aren’t likely to garner much enthusiasm.

Lundbeck shares are trading around my fair value, suggesting a total return potential in the high-single digits – which really isn’t too bad today (and part of the reason I’ve been slow to sell). The announcement of a new CEO could also be a stock-moving event (in either direction), as he or she will likely have a vision for Lundbeck that offers at least some change from today. I don’t believe my low single-digit growth expectations are all that aggressive, but these shares are looking pretty “meh” after a strong run driven by new launches and rigorous cost restructuring.

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Lundbeck Looks Largely Played Out

Battered Back Below $3, PacBio's Shares Offer High-Risk Upside

If you like to trade, Pacific Biosciences (or “PacBio”) (PACB) may be right up your alley. If you’re an investor looking to play the ongoing growth in sequencing with a company that has brought differentiated technology to lab, well, this stock may well give you grey hair and some sleepless nights. These shares were at $2.50 in the spring of 2013, over $6 in the spring of 2014, in the $5-$6 range in the spring of 2015, close to $10 in the spring of 2016, in the $5’s again in the spring of 2017, and now back in the $2’s (albeit with a higher share count than in 2013).

This volatility has not come without good reasons, as PacBio has yet to really break through with its technology and products. The installed base does continue to grow, as does usage, but the adoption curve has been very unpredictable due to company missteps, budget uncertainties, and competitive offerings. While this is a very high-risk stock, I continue to believe that there are legitimate, meaningful uses for PacBio’s technology and that ongoing improvements will help reliability and drive a more consistent adoption curve. With a fair value in the $5 range, this very speculative name is worth another look today.

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Battered Back Below $3, PacBio's Shares Offer High-Risk Upside

Lenovo Making Progress, But It's Slow

Slow progress, sometimes frustratingly slow, continues to be the name of the game for Lenovo (OTCPK:LNVGY). Although there were signs of progress in the company’s fiscal third quarter (December) results, the ongoing operating challenges in the mobile business remain significant and there are no guarantees that the progress gained in the Data Center business can be held.

It hasn’t been very long since my last update on Lenovo, but since that time the shares have drifted about 5% lower, underperforming the Nasdaq and HP (HPQ) and basically matching Apple (AAPL) over that brief window. Stretch that window back a year or two, though, and the underperformance becomes much more apparent. That said, I don’t believe Lenovo is done for, and I believe expectations have been worn down to a point where Lenovo should be able to outperform in the coming years.

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Lenovo Making Progress, But It's Slow

Without More Revenue Growth, Check Point's Valuation Is Almost Beside The Point

Normally, investors would be happy with a company that generated more than twice as much operating income growth as revenue growth and actually reduced operating expenses. But then, software isn't a normal sector and Check Point Software Technologies (CHKP) isn't a normal company. In a sector where revenue growth is a major driver, Check Point's focus on expense discipline and organic/internal development hasn't been generating much revenue growth and hasn't helped the share price much next to Fortinet (FTNT), Palo Alto (PANW), or the Nasdaq.

One of my biggest concerns about Check Point is that the company will keep itself lashed to the mast of a ship that's not going anywhere (traditional firewall-type security) instead of taking more aggressive steps toward growth in the evolving enterprise security world. I don't doubt that Check Point has the resources to change its trajectory, but I'm not sure it has the will. With that, although the share price/value proposition is interesting, I'm nervous about buying into a lower-growth software story, given how challenging and frustrating they can be.

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Without More Revenue Growth, Check Point's Valuation Is Almost Beside The Point

A More Balanced Kirby Can Offer More Upside From Here

The past year has been a challenging one for Kirby (KEX), but I believe there is still value in the business and the shares. Although Kirby's core marine business is still seeing some difficult market conditions, management's decision to diversify further into engine/equipment servicing and construction is paying dividends with the recovery in the U.S. onshore energy market. What's more, management has been acting responsibly in its marine business, retiring older capacity, and recently committing to acquire a sizable fleet of newer assets.

The shares have climbed about 25% since my last update, but I see more value on the basis of good demand in the D&S business and recovery prospects in the marine operations. Conditions in the inland market are already getting better, but a coastal recovery is likely a 2019 driver. With mid-single-digit revenue growth and FCF margins moving toward the double-digits, KEX shares should be able to produce total annual returns in the high single-digits to low double-digits from here.

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A More Balanced Kirby Can Offer More Upside From Here

Rexnord Starting Its Cyclical Upswing

Improving end-markets across numerous industrial, consumer, and construction markets have largely mopped up most of the quality undervalued industrials stocks, and Rexnord (RXN) is no exception. The shares are up about 20% since my last update on the company, beating peers in its Process & Motion Control business like Regal Beloit (RBC) and Renold (OTC:RNOPF) and more or less matching its prime rival in Water (Watts (WTS)). Although the shares no longer appear fundamentally undervalued, the relative valuation is a little more appealing, and Rexnord's markets continue to improve, which could offer a little more appeal for less value-sensitive investors.

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Rexnord Starting Its Cyclical Upswing

Bigger And Better, South State Corp Looking To Disrupt The Southeast

South State Corp. (SSB) is following a time-tested strategy - leveraging a low-cost deposit base and strong market share in attractive markets to build a competitive commercial lending-focused banking franchise. There are growing pains throughout that process, though, and South State has yet to post strong returns on equity or capital on a consistent basis. What's more, the shares looked a little pricey around a year ago, and the shares have lagged regional bank peers since.

With Park Sterling in the fold, good organic loan growth, and strong core markets, though, I believe this is a time to revisit South State. Much larger rivals like Bank of America (BAC), BB&T (BBT), Wells Fargo (WFC), and SunTrust (STI) should not be taken lightly, but South State's low funding costs are a strategic asset, as is the company's focus on smaller commercial clients that often don't feel so well-served by the larger super-regional baking franchises. If South State can generate the mid-teens organic growth I expect, these shares look undervalued below $100.

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Bigger And Better, South State Corp Looking To Disrupt The Southeast

Buying Traffic Has Hammered Natural Grocers' Results

When I last wrote about Natural Grocers (NGVC) roughly 18 months ago, I said that I believed the shares would continue to head lower if the company couldn't reverse weak traffic trends. Management has in fact struggled to revive store traffic, and the shares are 50% lower now. Although the company is making decisions that make sense from a long-term perspective (getting more aggressive on price to drive traffic, reorienting marketing around what makes the stores different, and significantly reducing new store openings), it is still very much an open question as to whether Natural Grocers can find the right mix that will bring back traffic and allow for worthwhile margins.

I believe this latest disappointment (after fiscal first quarter earnings) has pushed the shares down to an interesting level, but there are outsized risks here. A multiple of 6.5x my 2018 EBITDA estimate will support a fair value around $8, and my DCF model suggests an even higher target, but models are not guarantees - there's a reason one of the most common words in conjunction with "earnings" is "surprise" - and this is a risky call at this point.

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Buying Traffic Has Hammered Natural Grocers' Results

Crane Seeing A Choppier Recovery

Crane (CR) has always been a little different relative to its multi-industrial peers, so I can't say that I'm all that surprised that this company's recovery has followed a different trajectory. Not that this has done the share price any harm - Crane shares are up about 100% over the past two years, better than Parker-Hannifin (PH), Dover (DOV), Emerson (EMR), and many other peers that have seen sharper boom/bust cycles.

While the recent Crane & Co. ("Crane Currency") acquisition should pay off well over time, the near-term outlook for Crane is relatively tepid, with the company expecting decent (but not market/segment-leading) growth across its businesses in 2018 and not a lot of margin leverage. Some investors may find that Crane shares still make sense on a relative value basis, but I'm not inclined to chase these shares.

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Crane Seeing A Choppier Recovery

Recovering Markets And Improving Margins Propelling IDEX

Things are pretty good these days at IDEX (IEX). Strong, and persistent, recoveries in markets like agriculture and water and ongoing growth in semiconductors have helped drive strong organic revenue growth, which the company has leveraged into improved margins across its businesses. Free cash flow generation has picked up and the outlook for 2018 is attractive.

The "but", as is the case for most multi-industrials, is valuation. If you believe in buying good companies no matter what the price/valuation and/or you're comfortable with implied returns in the mid-single-digits, maybe IDEX still meets your requirements. I'm less comfortable with valuation, though, and while IDEX is generating good results (and is likely to continue to do so in 2018), I'm not willing to pay such a high apparent price.

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Recovering Markets And Improving Margins Propelling IDEX

The Feds Put Wells Fargo In The Penalty Box

I believe most investors expected that there would be meaningful consequences for the long list of consumer banking misdeeds Wells Fargo (WFC) has racked up in recent years. After all, widespread, highly public fraud is not something that regulatory bodies can really just ignore if they want to maintain any semblance of credibility with that same public. In any case, the punishment handed down by the Fed on Friday 2 was unusual and significant.

Wells Fargo will survive the Fed's move, and the impact to earnings in 2018 and 2019 is most likely not going to be all that severe. True, it does sap the bank's earning power just as it seemed to be ramping up again, and it does carry ongoing reputational risk for the bank, but it is not a crushing (let alone killing) blow by any stretch.

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The Feds Put Wells Fargo In The Penalty Box

Roche Drifting Ahead Of Key Data

Things aren't as dire at Roche (OTCQX:RHHBY) as the market may have you believe, but the reality is the company needs to deliver strong clinical data from multiple upcoming late-stage trials. Generics are coming after key drugs that contribute close to 40% of the company's total revenue, and investors need a reason to believe again that Roche can continue to generate worthwhile growth as these veteran contributors start to diminish.

I'm still more or less bullish on the Tecentriq opportunity at Roche, and I believe the company has made more progress with its pipeline than is reflected in the share price. The company definitely needs these upcoming trial read-outs to go well, but I believe the share price undervalues what I believe will be long-term mid-single-digit free cash flow growth.

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Roche Drifting Ahead Of Key Data

FirstCash Continuing To Make Steady, Value-Creating Progress

Leading pawn store operator FirstCash (FCFS) continues to reap the benefits of a disciplined strategy for building out its fast-growing Latin American operations and simultaneous turning around and integrating the acquired operations of Cash America in the U.S. business. That has not only shown itself in improving underlying financial results but also a higher share price, with the stock more than 70% higher than it was a year ago (versus a 36% rise in its only real publicly-traded comp, EZCORP (EZPW)).

I'm a long-term FirstCash shareholder, but it's hard to argue that FirstCash is significantly undervalued today. A more benign USD/MXN exchange rate could certainly help some, the Cash America stores could start contributing positively more quickly than I expect, and/or the LatAm expansion could be even more successful than I expect, but I think the share price is pretty close to where it ought to be considering the growth potential and the operational risk.

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FirstCash Continuing To Make Steady, Value-Creating Progress

Long Products Should Drive A Good 2018 For Nucor

These are good days to be a steel company. Even with the negative impact of higher scrap costs and import competition, revenue and margins are better than they’ve been in some time. For Nucor (NUE), it’s not just about riding the cycle (although the cycle is important), as the company has been continually invested in value-added capacity and executing tuck-in acquisitions to broaden its portfolio. With relatively healthy industrial markets and the prospect of protection from imports, 2018 is looking pretty good for Nucor and peers/rivals like Steel Dynamics (STLD), Gerdau (GGB), and Commercial Metals (CMC).

Price/valuation is a hang-up for me. While an 8x multiple on my 2018 EBITDA estimate would offer some upside (about 5%), that’s about as high as I’d go for the company. There are certainly opportunities for Nucor to outperform in 2018 and drive a higher fair value by virtue of a higher EBITDA estimate, but this isn’t my favorite steel name right now and that’s not surprising as up-cycles tend to favor lesser operators and Nucor remains among the best-run companies in the industry.

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Long Products Should Drive A Good 2018 For Nucor

Grupo Bimbo - Come For The Snacks, Stay For The 10-20% Upside

Grupo Bimbo (OTCPK:BMBOY) (BIMBOA.MX) is probably not a household name to most readers, even though this is the largest baked goods company in the world, operating in over 30 countries and selling over 13,000 products. Those who spend time in Latin American markets are probably familiar with the Bimbo bear mascot, but even those who aren’t probably recognized brands like Thomas’, Arnold, Entenmann’s, Ball Park, EarthGrains, and Sara Lee.

Bimbo didn’t have a great 2017, due in large part to weak margins, but 2018 looks to be a stronger year for the company in its two core operating regions (Mexico and U.S./Canada). While margin-dilutive remains a risk factor, margin improvements paired with modest low-to-mid single-digit revenue growth argue for a share price 10% to 20% higher than today.

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Grupo Bimbo - Come For The Snacks, Stay For The 10-20% Upside

Silicon Labs' IoT Energizer Bunny Keeps Going

Silicon Labs (SLAB) continues to leverage its opportunities in the fast-growing IoT market, and that continues to drive good revenue and profit growth for this relatively small semiconductor stock. Silicon Labs has moved aggressively, largely through M&A, to acquire a strong portfolio in wireless (especially mesh networking and connectivity) technologies, giving it a strong position in home/consumer IoT and allowing it to "punch above its weight" relative to some of its much larger rivals.

While I continue to expect good things for SLAB's IoT business, and I believe the Infrastructure business can leverage growth in optical and 5G deployments, the valuation is not forgiving. Growth and momentum investors likely won't care about the valuation, but with the stock trading at close to five times forward revenue, it may be challenging for the company to grow fast enough to substantially expand that multiple.

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Silicon Labs' IoT Energizer Bunny Keeps Going

Dover's Ability To Create Long-Term Value Still An Open Question

Dover (DOV) reported a good fourth quarter, with a very strong top-line organic growth figure and improved margins across the business. Guidance for 2018 was also pretty positive, and Dover will be moving forward with the spin-off of its energy business ("Wellsite") and a sizable share buyback. All of that is welcome, but it doesn't really mitigate a pretty mediocre long-term track record of value creation.

Perhaps the involvement of Third Point as an investor will spur more changes. Dover is certainly not "un-fixable", but the company does need to better manage the assets it has and come up with a better unified vision for where its expertise and focus will be in the future. Although I'm clearly not a huge fan of management, and the shares aren't cheap, the return expectations here seem more reasonable than for many other multi-industrials, so less valuation-conscious investors may still find some upside.

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Dover's Ability To Create Long-Term Value Still An Open Question

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

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

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

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