Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Crane (CR) has always been a bit of an odd duck. While there are plenty of multi-industrials out there, Crane’s $3 billion revenue base and $5 billion market cap makes it a small player among the conglomerates and one with a fairly unusual (albeit very diverse) mix of end-markets. It’s also not especially widely-followed, with only about a half-dozen sell-side analysts covering it and less than 75% institutional ownership. Now add in some odd trends and market signals, and this is a somewhat challenging story to evaluate.

I didn’t like Crane’s valuation back in February of this year, and the shares have underperformed the broader industrial group since then (as well as the S&P 500) with a roughly 10% decline. Now, though, there seems to be growing momentum in the Fluid Handling and Aero businesses, and margins seem to be coming along a little better than expected. If Crane’s late-cycle exposure bears it out as a late bloomer, this could now be a time to consider the shares.

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Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Stronger Traffic And Less Political Panic Benefiting OMAB

I liked Grupo Aeroportuario del Centro Norte (OMAB) (“OMAB”) back in late May, but I didn’t really expect to see a better-than-25% move in the shares in such a short period of time. While OMAB continues to see strong traffic and a healthy Mexican economy, as well as strong execution on costs, the stock also got some leverage from the sharp rebound in the Mexican stock market since the late May lows.

With the big move in the shares, the low-hanging fruit is once again off the table here, but I do believe OMAB remains positively leveraged to a still-healthy Mexican economy. The implied returns for the shares are still good enough to justify holding on, but I’d wait in the hope of a pullback if you don’t already own shares.

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Stronger Traffic And Less Political Panic Benefiting OMAB

Illinois Tool Works Loses A Little Luster

A quarter ago I said I preferred Honeywell (HON) and Eaton (ETN) to Illinois Tool Works (ITW), and in the three months since Honeywell and Eaton have outperformed Illinois Tool Works by about 10%. Now, Illinois Tool Works shareholders are left to digest a second straight disappointing quarter - while ITW hit the organic revenue growth target this time, segment EBIT missed expectations by a few percentage points and management lowered guidance.

I'm not too surprised that Illinois Tool Works is seeing higher than expected cost pressures; if anything, that's a theme this quarter in the industrials. I'm more surprised, though, by what looks like weaker results in areas like auto and electronics relative to peers like 3M (MMM), Danaher (DHR), and Stanley Black & Decker (SWK). With weaker prospects for beat-and-raise quarters across the industrial/multi-industrial landscape, I'm more worried about the risk of re-rating in the second half of 2018 (multiples shrinking back toward historical norms).

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Illinois Tool Works Loses A Little Luster

Stanley Black & Decker Still Not Getting Much Benefit Of The Doubt

Between worries about retail demand, construction spending, auto build rates, and input costs (including tariffs), Stanley Black & Decker (SWK) still hasn’t been getting all that much love. This is part and parcel of the challenges of “buying the dip” as I outlined in my prior piece, though Stanley has only modestly underperformed industrials in general over the past three months (though Snap-on (SNA) has been much stronger), the year-to-date performance is still pretty weak and there are valid reasons to worry that management’s guidance for the second half is too aggressive.

I do see some near-term risks, but I think the valuation is pretty interesting. I do believe the Craftsman acquisition creates some interesting opportunities, and I likewise think Stanley has the option to deploy capital into potentially value-enhancing transactions within fastening. Against that “interesting” valuation, though, is the reality that this company’s track record with respect to ROIC and margin improvement are not great and there are execution risks to consider.

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Stanley Black & Decker Still Not Getting Much Benefit Of The Doubt

Multiple Tailwinds Filling The Sails For Chart Industries

Chart Industries (GTLS) has been through some tough times in its past, but the outlook today is much brighter as multiple tailwinds come together to push results, estimates, and the share price higher. The shares have more than doubled over the past year, and climbed close to 60% just on a year-to-date basis, as the company continues to see strong demand from gas processing, vehicle fueling, industrial gas, and newer opportunities like space vehicles.

Chart Industries has significant untapped potential operating leverage and the double-digit revenue growth I expect over the next few years should push margins into the double-digits. Better still, LNG liquefaction orders remain a very significant potential positive driver in the coming years as global LNG demand continues to rise. That said, today’s price does assume quite a lot of growth already and this is more of a momentum-based story driven by the ongoing top-line outperformance and growing order book.

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Multiple Tailwinds Filling The Sails For Chart Industries

A Window Of Opportunity At Atlas Copco, But Is It Wide Enough To Climb Through?

Atlas Copco (OTCPK:ATLKY) (ATCOa.ST) is one of those top-notch companies that has historically validated the concept of a watchlist – bide your time, wait for your opportunity, and then take advantage when it arrives. Of course, those opportunities always come with caveats – Atlas Copco doesn’t sell off “just because”, and that is the case today. While the slowdown in semiconductor capex orders that rattled investors may well be a temporary blip, nobody knows how big of a blip it will be and it seems less likely that strength in the remaining businesses will produce meaningful additional boosts to estimates during this up-cycle.

Atlas Copco shares do look undervalued on the basis of forward EV/EBITDA, but not yet on the basis of discounted free cash flow and that is my preferred “buy” signal (though “preferred” is by no means the same as “perfect”). I do see some downside risk as the industrial up-cycle ages, and with the possibility of a longer pause in semiconductor order growth, but I wouldn’t try to get too cute with timing this opportunity unless you expect a sharper correction to industrial equipment is on the way.

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A Window Of Opportunity At Atlas Copco, But Is It Wide Enough To Climb Through?

Dover's Core Doing Okay And New Management Brings New Options

I’ve never hid the fact that Dover (DOV) is not among my favorite companies, and over a longer-term holding period, you’d still have done better with names like 3M (MMM), Illinois Tool Works (ITW), Fortive (FTV), Danaher (DHR), and Ingersoll-Rand (IR). That said, Dover shares have been performing meaningfully better on a relative basis over the past couple of years, first with the recovery in the energy sector, then the spin-off of Apergy (APY), and what I believe is building optimism about what a change at the top (a new CEO) could mean in terms of self-improvement.

My complaints about Dover have largely centered around low margins/elevated expenses, weak returns on capital, and a collection of businesses with iffy long-term strategic value. New CEO Richard Tobin seems eager to start work on the expense side of the equation, and I wouldn’t rule out the possibility of management shuffling the deck a little further down the road (selling some businesses and perhaps buying some new ones). While I’m warming up to Dover from a strategic perspective, the valuation still isn’t all that enticing to me, though a longer run of this industrial up-cycle could certainly generate some upside to my expectations.

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Dover's Core Doing Okay And New Management Brings New Options

Neogen's Story Continues To Work

Neogen (NEOG) is the sort of stock that could make value investors tear their hair out in frustration. No question that this is a very good company – basically a “one-stop shop” for food safety and food animal products, Neogen has produced mid-teens long-term revenue growth, 20%-plus free cash flow growth, and an annualized return of over 26% over the past decade, despite almost always sporting exceptionally robust valuation multiples and not hitting its own operating margin goals for five straight years.

Having followed this company for around 20 years, I no longer spend as much time trying to make sense of the valuation – Neogen lives in its own little “pocket dimension” of the market when it comes to valuation, and that either works for you or doesn’t. Fundamentally, though, the company continues to improve its food safety, animal care, and genomics offerings, and as more of the developing world adopts more rigorous food safety testing, I believe Neogen’s market opportunity should continue to grow.

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Neogen's Story Continues To Work

Self-Improvement And Growth Initiatives Making A Difference For Umpqua

Umpqua’s (UMPQ) management change at the start of 2017 has made a difference for this West Coast bank, as the company has moved fairly aggressively to address two of my biggest concerns in late 2016 – a high level of expenses and a lack of clear growth drivers. A new focus on “upper-middle-market” lending should drive profitable C&I lending growth, while Umpqua Next Gen could result in some meaningful expense (a mid-single-digit percentage of 2017 expenses).

Since my last update, Umpqua shares have done a little better than the regional averages and better than peers/rivals like Washington Federal (WAFD) and PacWest (PACW), though not as well as SVB (SIVB) or East West (EWBC). At this point, I believe Umpqua shares are a little undervalued, provided an expectation of double-digit long-term core earnings growth is reasonable.

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Self-Improvement And Growth Initiatives Making A Difference For Umpqua

Life Sciences Performing Well For Danaher

Danaher (DHR) continues to show why it’s one of the more highly-regarded conglomerates; second quarter revenue and margin leverage will most likely be on the good side of average in what is shaping up as a pretty good quarter for multi-industrials. In particular, Danaher’s pivot toward life sciences and healthcare seems like a strong move that will not only drive above-average growth but also above-average margins and below-average cyclicality.

Danaher shares have been pretty lackluster over the past three months, though they continue to stack well on a year-to-date and 12-month basis. These shares are still not what I would call cheap, but waiting for a good entry point with this stock often takes time and patience – those opportunities come, but they don’t come often and investors have to make peace with the risk of being on the outside of a pretty well-run company in the meantime.

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Life Sciences Performing Well For Danaher

Honeywell's Story Getting A Little Sweeter

In prior articles on Honeywell (HON), I had written that I expected this company’s attractive business mix and high-quality management to deliver above-peer results in 2018. So far, that prediction is looking relatively safe as Honeywell continues to produce strong overall results. Better still, the company’s leverage to aerospace and safety should continue to generate good short-term results, while businesses like process automation and productivity look to have strong long-term potential.

Honeywell has lagged the S&P 500 on a year-to-date and trailing 12-month basis, and I can’t really say that the shares are cheap today. The current industrial cycle may not be as late as previously thought, but industrial sector valuations are still pretty high on a historical basis and I am worried that rotation away from the sector could offset the good results from Honeywell. I’m not urging long-term holders to sell, but the price still isn’t at a price that compels me to buy.

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Honeywell's Story Getting A Little Sweeter

Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

I had thought BB&T (BBT) had been making some progress in resolving at least some of the issues that had led the bank to underperform peers like PNC (PNC), SunTrust (STI), Fifth Third (FITB), and Regions (RF) in recent years. One quarter doesn’t really change a story, but BB&T’s lackluster results and guidance do suggest that the turnaround isn’t happening quite as fast or smoothly as the bulls might hope.

While the sell-off after earnings was probably at least partly due to the lower guidance, I believe the market also didn’t like the indications that large bank M&A was likely coming back onto the near-term agenda once the bank is fully clear of its consent orders. Selling BB&T because you don’t like M&A seems pretty silly given that M&A has always been core to this company (and management has never backed away from that as an ongoing long-term driver), but then that’s Wall Street for you.

I can’t say that BB&T is all that cheap today, and I’m a little troubled that BB&T seems to be unable to generate the sort of growth initiatives that peers like PNC have put into place. Although the shares are somewhat undervalued on the assumption of mid-single-digit long-term earnings growth, I won’t make a forceful argument that investors should choose this stock over PNC, U.S. Bancorp (USB) or other options in the banking sector.

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Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

Will Two Straight Good Quarters Mark A Turn For ABB?

As far as ABB (ABB) is concerned, the industrial recovery that has propelled names like Honeywell (HON), Emerson (EMR), Rockwell (ROK), and Schneider (OTCPK:SBGSY) over the past couple of years is just something that happens to other companies. Hampered by large exposures to industries that have been much slower to recover, and troubled by some of its own restructuring and execution issues, ABB has been a frustrating laggard at a time when investors are banking solid profits in many other industrial names.

With two straight better-than-expected quarters and improving orders, though, maybe ABB’s late-cycle leverage is about to start shining through. The outlook for transmission and distribution is still not particularly strong, but the company is executing well in its automation operations and there are signs of life in the low/medium voltage business as well. There remain good reasons why ABB continues to trade at a discount to its peer group, but if ABB can make the most of this late-cycle move, the shares could finally close some of that performance gap.

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Will Two Straight Good Quarters Mark A Turn For ABB?

Texas Capital's Strong Loan Growth And Spread Leverage Is A Potent Growth Cocktail

With some exceptions, bank stock investors have to choose between companies with strong leverage to higher rates (like M&T Bank (MTB) and Comerica (CMA)) and those with stronger loan growth. In many cases, “both” is not an option, which makes Texas Capital Bancshares (TCBI) a pretty exceptional growth story right now.

Deposit costs are rising and Texas Capital’s lending portfolio isn’t exactly low-risk, but I expect above-average growth from this lender to continue, particularly as it expands its national lending opportunities. Valuation is a difficult call; more traditional valuation approaches would say that these shares are quite expensive but traditional valuation approaches don’t necessarily fit a non-traditional growth story.

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Texas Capital's Strong Loan Growth And Spread Leverage Is A Potent Growth Cocktail

Grainger's Pricing Reset Continues To Drive Exceptional Volume Growth

I’ve been critical of several of W.W. Grainger’s (GWW) strategic moves over the years, particularly its overseas business decisions, but the decision to cut prices has proven so far to be a very good move for this company. Against a very healthy backdrop for manufacturing and construction, Grainger has managed to dramatically outperform smaller rival MSC Industrial (MSM) on volume and outperform Fastenal (FAST) on pricing, allowing the company to outperform both on margin and earnings leverage.

Grainger has done a great job of clawing back the mid-sized customers that it lost in years past when its pricing got too high, but what happens when it exhausts that supply remains an open question. There’s still room for distributors to run as the industrial cycle ages, and Grainger’s valuation isn’t unreasonable on an EV/EBITDA basis, but I do think it’s harder to make the long-term valuation case with the shares up roughly 100% over the past year.

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Grainger's Pricing Reset Continues To Drive Exceptional Volume Growth

M&T Bank Posts Better Margins, But Loan Growth Remains Pressured And The Valuation Isn't Skimpy

In a market where larger banks are still struggling to generate strong loan growth, banks with strong leverage to higher rates like M&T Bank (MTB) can do a little better, and particularly if and when they can keep their costs down. What’s more, while M&T Bank’s reported loan growth is being weighed down by merger-related run-offs and 2018 reported growth is unlikely to look great, underlying originations suggest a little more momentum in the business and the betas still look good.

I wasn’t crazy about M&T’s valuation after first-quarter results, and the company has since underperformed not only regional bank indices, but also peers/competitors like JPMorgan (JPM), PNC (PNC), Bank of America (BAC), and Wells Fargo (WFC) even with a nice little post-earnings pop in the stock. Stretch that comparison out to a year and M&T is still an underperformer, lagging all of those aforementioned peers (including Toronto-Dominion (TD)) except Wells Fargo. While the valuation is more reasonable now, I think there are better ideas out there with not only better growth drivers but stronger underlying served markets.

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M&T Bank Posts Better Margins, But Loan Growth Remains Pressured And The Valuation Isn't Skimpy

Weak Asset Sensitivity Offsetting Improving Efficiency At U.S. Bancorp

Value-based calls on bank stocks don’t really lend themselves to quick outperformance, and U.S. Bancorp’s (USB) shares continue to muddle along as the bank works through some operating challenges in 2018. Although the shares have done a little better over the past three months, they continue to lag the peer group on a year-to-date basis, and even Wells Fargo (WFC) has done better on a trailing 12-month basis.

Bulls will point to U.S. Bancorp’s strong historical results and the company’s ongoing status as one of the most profitable (in ROA/ROE/ROTCE terms) large banks in the country, not to mention the strong fee-generating businesses and the opportunity to use M&A to add more scale. All of that is true, but the performance gap has been shrinking, with rivals like PNC Financial (PNC) stepping up their game in recent years. I continue to believe that U.S. Bancorp is undervalued so long as it can generate mid-single-digit earnings growth, but this is a name that’s going to take time to generate alpha.

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Weak Asset Sensitivity Offsetting Improving Efficiency At U.S. Bancorp

PTC Delivering On Its IoT Promises

There was plenty of skepticism, if not outright scorn, a few years ago regarding PTC's (PTC) plan to put its industrial IoT platform ThingWorx at the center of its growth plans. Fast forward back to the present, and not only has PTC continued to grow, the IoT business has grown to roughly parity with the legacy product lifecycle management (or PLM) software business on a new bookings basis. What's more, PTC has brought in Microsoft (MSFT) Azure and Rockwell (ROK) as partners to grow the IoT business, with partnering with Ansys (ANSS) to augment its legacy Creo CAD business with simulation capabilities.

I liked these shares back in the spring of 2017, and the 80% or so move since then has been gratifying to see, particularly as the business seems to be picking up momentum. Although my growth outlook is stronger now than before, in no small part due to the big-name partnerships PTC has added for ThingWorx, the growth in valuation has exceeded the growth in my expectations. Consequently, while I do still like this business and I fully acknowledge the potential that financial outperformance could drive higher multiples, I can't find the undervaluation to call this a good buy unless you're interested in trading more on momentum than value.

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PTC Delivering On Its IoT Promises

Fulton Financial Still Floundering

It looks like the struggle for Fulton Financial (FULT) shares to find some traction is going to go on a little longer. Investors were already a little impatient with the slow progress in resolving the BSA/AML consent orders that have prevented the bank from consolidating its charters and participating in M&A, but now they also have to digest a sizable fraud-related loss and ongoing sluggishness in core lending growth.

Although the potential for better long-term results is certainly here, the shares have already been reflecting that potential for some time, and I believe the lack of execution on that potential goes a long way toward explaining why the shares have not only lagged regional bank ETFs, but peers (in terms of asset size) like Western Alliance (WAL), Chemical Financial (CHFC), Old National (ONB), United Bancshares (UBOH), and UMB (UMBF) on a year-to-date, one-year, and two-year basis.

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Fulton Financial Still Floundering

A Sour Sentiment Toward First Horizon Could Mean Opportunity

"Worse than Wells Fargo (WFC)" isn't a title anybody wants to hold or share these days, but First Horizon's (FHN) share price performance over the past year and year-to-date does have it trailing that larger scandal-plagued rival. Granted, other similarly-sized banks like Signature (SBNY) and FNB (FNB) have been no great shakes over the past year either, but investors really didn't like what they heard from this Tennessee-based mid-cap bank this quarter.

I think this could be an opportunity for long-term investors to consider First Horizon, but the next few quarters could make for a tough holding period, as it is hard to see what would really drive a meaningful turn in performance or sentiment. First Horizon is a well-placed Southeastern bank active in most of the attractive, major MSAs, and one with a good net beta and specialty lending franchise, but the current performance trajectory isn't getting the job done and the valuation isn't so cheap that it's a can't-miss prospect.

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A Sour Sentiment Toward First Horizon Could Mean Opportunity

Exceptional Rate Leverage Continues To Drive Comerica

With one of the strongest net betas (loan beta minus deposit beta) in the banking sector, Comerica (CMA) has continued to outperform, with the shares beating regional peers over the last year and on a year-to-date basis, though lagging more recently. Although Comerica isn’t posting particularly strong loan growth, that’s actually not such a bad thing right now, as loan growth isn’t really what the market is prioritizing or valuing (EPS revisions/growth are stronger drivers at the moment).

Comerica continues to look like a good name to consider for investors who want to play above-average near-term earnings growth, but aren’t as worried about valuation relative to long-term benchmarks. Rising deposit costs do remain a worry, but between regulatory relief, spread leverage, operating leverage, and perhaps some M&A options, Comerica still offers a lot of what the Street currently wants in a bank stock.

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Exceptional Rate Leverage Continues To Drive Comerica

Mellanox Looking Like A Multiheaded Growth Monster

A lot of things are starting to go right for Mellanox (MLNX). Not only is Mellanox well-placed to benefit from the growth of high-performance computing demand in general, it is taking share from rivals like Broadcom (AVGO) and Intel (INTC) as customers upgrade beyond 10G Ethernet and now stands to benefit from both reacceleration in enterprise storage demand, but also the commercial ramp of its Bluefield chip. Add in the fact that management has committed itself to significant operating margin improvements over the next couple of years, and I think Mellanox is a rare mix of expanding markets, growing share within those markets, and improving margin leverage.

Although Mellanox does not look all that cheap on an adjusted DCF basis, growth tech stocks rarely do. What's more, operating margin is typically a powerful driver/determinant of multiples for companies like Mellanox, and progress toward a high 20%s operating margin could put a $100-plus fair value on the table by this time next year.

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Mellanox Looking Like A Multiheaded Growth Monster

First Republic Putting Some Worries To Rest

There aren’t many truly unique business models in banking, but First Republic (FRC) comes pretty close. Specializing in high net worth (or NHW) clients, First Republic combines a “regular” bank focused largely on jumbo mortgages with a fast-growing business bank focused on private equity, venture capital, and non-profit organizations (including private schools) and a fast-growing asset and wealth management business. First Republic is consistent across its businesses in using a “high-touch” service model that prioritizes outstanding customer service, and the concentration of HNW households means that First Republic doesn’t need many branches to operate its business.

The only downside is that First Republic’s qualities are well-known on the Street. Second-quarter results were pretty solid across the board, but the shares already price in mid-teens long-term earnings growth and meaningful improvements in returns on capital. Accordingly, while this is definitely a name I’d look to reconsider on a pullback, the risk/reward balance doesn’t look so interesting to me now.

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First Republic Putting Some Worries To Rest

Alfa Laval Flexing Its Late-Cycle Muscles

I liked Sweden’s Alfa Laval (OTCPK:ALFVY) (ALFA.ST) earlier this year as a late-cycle play on stronger Marine and Energy orders, as well as decent prospects for ongoing growth in the Food/Water business. Much of that has come to pass, and the shares are now about 20% higher than they were at the time of that last article. Alfa Laval has since logged two very strong quarters, and those hoped-for improvements in the company’s three main business lines have materialized with stronger revenue, orders, and margins.

With the strong move in Alfa Laval’s share price, not to mention some growing concerns about how much is left in this current industrial upswing, I believe these shares have moved from good idea to okay idea. The implied long-term return is still in the high-single digits, which isn’t bad, and I won’t be too surprised if the company has at least one more better-than-expected quarter up its sleeve. Still, I wouldn’t push my luck too far, even though I regard this as a well-managed operator in some attractive businesses.

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Alfa Laval Flexing Its Late-Cycle Muscles

For Wells Fargo, Heavy Is The Head That Wears The Asset Cap

In a quarter, thus far, of pretty good bank earnings reports, Wells Fargo (WFC) stands out as an early outlier with a rare core earnings per share miss. Not surprisingly, while Wells Fargo continues to offer up performance metrics that suggest the bank is continue to re-grow its customer base follow its multiple scandals, the burdens of the regulator-imposed asset cap and remediation efforts are weighing on the balance sheet and earnings growth. Although Wells Fargo shares do continue to look undervalued, there are multiple other banks at similar (if not better) valuations that offer a cleaner story.

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For Wells Fargo, Heavy Is The Head That Wears The Asset Cap

Slow Progress Not Getting The Job Done For Citigroup Shares

The year-to-date performance of the banking sector hasn’t been all that impressive, as the benefits of higher rates and loan growth seem to be largely priced into market expectations and investors don’t see any particularly exciting near-term drivers. Even against that backdrop, Citigroup (NYSE:C) has continued to deliver lackluster performance, with the year-to-date performance only slightly exceeding Wells Fargo (NYSE:WFC) and trailing the likes of JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), PNC Financial Services Group (NYSE:PNC), and Capital One (NYSE:COF) (the latter arguably being its best/fairest peer comparison).

Although I think there is significant long-term value in Citi shares even if management falls short of its near-term/intermediate targets (something that the share price already seems to reflect as a given), it’s harder to make the case for near-term outperformance given the bank’s heavy reliance on cards (as opposed to business or mortgage loans) and the fact that a lot of the expense/efficiency benefits won’t show up until 2019 and 2020. Even so, I still believe patient shareholders can be rewarded here, and I think the shares are undervalued below $80.

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Slow Progress Not Getting The Job Done For Citigroup Shares

PNC Financial Is A Great Bank With A Good Valuation In A So-So Market

This has been a pretty mediocre year so far for banks, as the sector has continued to modestly trail the S&P 500 on growing concerns that the rate cycle has largely played out and there aren’t many particularly compelling drivers left. For its part, PNC Financial (PNC) has been a middling performer so far in 2018, underperforming JPMorgan (JPM) and Bank of America (NYSE:BAC), while outperforming Wells Fargo (WFC).

I don’t really see anything in PNC’s second-quarter results that is going to change many minds. The valuation is still attractive, but not so much so that it demands action, and the company’s efforts to grow loans and drive attractive operating leverage are working, but not really that much moreso than expected.

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PNC Financial Is A Great Bank With A Good Valuation In A So-So Market

JPMorgan Leveraging Its Strengths

While loan growth appears to be improving and credit conditions remain benign, not everything is great in the banking sector, as higher deposit costs are starting to squeeze and the yield curve is flattening out. Even so, JPMorgan Chase (JPM) continues to generate very good results as management skillfully runs one of the best banking franchises in the country. As NIM expansion becomes more challenging, I fully expect the bank’s market share growth efforts to pay off, allowing the bank to outgrow many of its peers.

As far as valuation goes, there still appears to be some upside in the shares. An economic slowdown, or even a recession, is certainly a risk to the sector, but mid-to-high single-digit long-term earnings growth from JPMorgan can still support a fair value in the $115-120 range, while the near-term ROTE likewise supports a similar target.

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JPMorgan Leveraging Its Strengths

Bank Of The Ozarks Squeezed By Growing Commercial Real Estate Concerns

I've been concerned about the heavy weighting of some banks toward commercial real estate and construction lending given where we are in the CRE cycle. Apparently, I'm not the only one, as more than a few banks with high ratios of commercial real estate loans to capital have underperformed their regional banking peers so far this year.

This brings me to Bank of the Ozarks (OZRK-OLD) (soon to be "Bank OZK" (NASDAQ:OZK)); this isn't the first time I've been concerned about the combination of OZRK's aggressive construction/CRE lending growth, its aggressive expansion into new markets, and its funding situation, not to mention its valuation, but it does seem like the market is now paying closer attention. The shares do now look undervalued if double-digit long-term growth remains a reasonable expectation, but investors should note the elevated risks that accompany that undervaluation.

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Bank Of The Ozarks Squeezed By Growing Commercial Real Estate Concerns

Yaskawa Electric's Earnings Report Underlines The Uncertainties In Automation

Investors looking to get a clear sense of the near-term direction of key automation segments like servomotors, drives, and robotics will need to wait a little longer, as Yaskawa Electric’s (OTCPK:YASKY) (6506.T) fiscal first quarter earnings report confirmed some worrying trends but also showed some better than expected strength in other areas.

Although Yaskawa shares are down another 10% from when I last wrote, I’m still not completely sold on the valuation argument at today’s price. This “lull” in smartphone-related capex could go on a little longer than expected, and I’m likewise concerned about the potential for weaker semiconductor, machine tool, and auto-related orders. Long term, I like Yaskawa’s position in both motion control and robotics, and the valuation is getting more interesting on an EV/EBITDA basis, but I’m inclined to stay on the sidelines here for now.

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Yaskawa Electric's Earnings Report Underlines The Uncertainties In Automation

Commerce Bancshares Executing At A Very High Level

As the quarterly earnings cycle starts up, Commerce Bancshares (CBSH) has established a pretty high mark for other mid-cap banks to beat. That’s nothing especially new for this well-run Midwestern bank, but the key issue remains valuation. While Commerce Bancshares has been operationally excellent for some time, I believe the high valuation has been a headwind and at least partly explains why the shares have lagged many regional peers in recent years.

Commerce Bancshares has an excellent net beta and good management, and is likely to accumulate a large amount of excess capital in the coming years, but the combination of weak balance sheet growth and still-high valuation limits my enthusiasm for buying the shares.

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Commerce Bancshares Executing At A Very High Level

AngioDynamics Slowly Building Confidence In Its Turnaround

The current CEO of AngioDynamics (ANGO) has referred to his restructuring plan at times as “fixing the plane while its flying”, and that’s not a bad description. Years of questionable management choices and changes in direction left AngioDynamics with a dated, not particularly competitive, line-up of products that have long consigned the company to weak growth and feeble margins, but management’s restructuring plans look sensible and achievable.

Investing in AngioDynamics means taking some measure of a leap of faith that those restructuring efforts will lead to actual organic revenue growth – something the company has lacked for the better part of a decade – and improved margin leverage. The valuation would seem to suggest that the market is still skeptical that AngioDynamics can ever achieve meaningful growth, leaving some upside for intrepid investors if management can in fact deliver.

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AngioDynamics Slowly Building Confidence In Its Turnaround

Fastenal's Familiar 'Strong Growth / High Expectations' Profile

Fastenal (FAST) has long been an interesting case study in the question of just how much investors should pay for growth, as this company has long been a growth leader in the industrial distribution space, and the shares have typically sported a hefty valuation. Arguing for the case of “valuation always matters sooner or later”, Fastenal’s long-term returns (10 to 15 years) aren’t that exceptional relative to the S&P 500, though the company has more or less kept pace with Grainger (GWW) and outperformed MSC Industrial (MSM).

I don’t really have too many doubts about Fastenal’s ability to continue to grow by expanding into adjacent product markets and growing its vending and onsite operations. I also don’t think that the shares are all that unreasonably priced relative to the market’s prevailing willingness to pay for given levels of margin and returns in the industrial sector. Still, given the changing competitive dynamic in the industrial distribution sector and the mediocre long-term returns implied by discounted cash flow, this isn’t a compelling idea for me now.

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Fastenal's Familiar 'Strong Growth / High Expectations' Profile

Broadcom: Crazy Like A Fox, Or Just Barking Mad?

Sooner or later, every highly acquisitive company will do a deal that investors don’t like and that analysts roundly second-guess. Given that Broadcom (AVGO) does most things on a larger scale, I suppose it stands to reason that when they step outside the box for an acquisition, they step way outside the box.

To call Broadcom’s proposed acquisition of CA Inc. (CA) controversial is to strain the word almost to a point of absurdity. As of this writing, the market is set to wipe away over $15 billion in market value from Broadcom, suggesting that the $19 billion deal is a huge, huge mistake. Although I do believe that this deal is a very risky, and largely unnecessary, leap into the unknown, it would seem that the extreme initial reaction is going to create a buying opportunity for at least those Broadcom investors who still remain in the “in Hock we trust” camp.

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Broadcom: Crazy Like A Fox, Or Just Barking Mad?

MSC Industrial Falls Short Again

In what has become an all-too-common pattern, industrial distributor MSC Industrial (MSM) missed the mark in its fiscal third quarter and issued disappointing guidance for the next quarter. This is quite disappointing for a company and stock that badly needs some beat-and-raise quarters to re-establish credibility with the Street, and the fact that the issues seem internal (in other words, strategic/management mistakes) is not going to help matters.

I do continue to believe that MSC Industrial has a good position in a segment of the industrial distribution market that should withstand competitive pressures from Amazon (AMZN) and other online/e-commerce distributors more effectively than many other distributors. I also believe the valuation now offers some upside, though management’s inability to execute on anything on a consistent basis is now a key concern.

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MSC Industrial Falls Short Again

High Expectations Could Be Teleflex's Most Serious Challenge

Ever since deciding to focus exclusively on medical devices, Teleflex (TFX) has done quite well for itself and for its shareholders, with the stock price making a hockey stick formation since 2011. Gross margins have improved more than six points, operating margins have improved similarly (on an adjusted basis), and the company generates attractive recurring free cash flows. What’s more, management has shown on multiple occasions that it can identify, close, and integrate value-creating acquisitions.

Teleflex has a lot going for it right now, including growth opportunities tied to the ramp-up of existing products (particularly UroLift) and new pipeline opportunities. The issue is valuation; the market is valuing Teleflex as a company with double-digit revenue growth, which it will be in 2018, but as that growth rate decelerates, I am concerned about whether there will be enough drivers (or strong enough drivers) to maintain the valuation.

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High Expectations Could Be Teleflex's Most Serious Challenge

Komatsu Sliding Despite Ongoing Order Growth

Even though many companies in the mining industry are saying the capex recovery is only just starting, and companies in the construction space still see more upside for equipment demand, the shares of major equipment manufacturers have been reflecting a very different assessment. Komatsu (OTCPK:KMTUY) shares are down about 15% since my last update in the spring of this year, and down 20% year-to-date though up about 12% over the last year, as investors have been selling down Caterpillar (CAT), Hitachi Construction Machinery (OTCPK:HTCMY), Sany, and Manitowoc (MTW) on worries about cyclical demand and margin pressures from input costs (namely steel), not the mention the risk of accelerating global trade tensions.

As it concerns Komatsu, I think the year-to-date performance might be a little overdone. I do have some concerns about slowing construction demand, but I think Komatsu is looking at a good opportunity in the mining business, and I think the company’s significant investments in automation (both external and internal) will pay off in the coming years. With what appears to be a valuation that is already baking in a lot of weakness, I think these shares are worth another look today.

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Komatsu Sliding Despite Ongoing Order Growth

Like Other Old-Tech Names, Oracle's Value Is Tied To Its Ability To Reignite Growth

Reading the sell-side research on Oracle (ORCL), I’m struck by how frequently the analysts benchmark Oracle’s valuation multiples (whether it’s P/E, EV/FCF, EV/revenue, et al.) against the peer/industry group in an attempt to make the “Oracle is undervalued” case, but neglect to benchmark the company’s revenue growth rate. While margins and free cash flow certainly do matter, revenue growth is a significant near-term driver for valuation multiples, and Oracle’s growth rate is much more in the CA Inc. (CA)/IBM (IBM) neighborhood than the Microsoft (MSFT)/Adobe (ADBE) neighborhood of older tech stocks.

Given the weak growth rate, the recent trends in Oracle’s position in sell-side CIO surveys, and the company’s ongoing challenges with the on-premises-to-cloud transition, I can’t work up much enthusiasm for the stock. While many old-tech companies have faced challenges in their attempts to renew themselves and remain competitive (Microsoft had its issues, IBM is still in the middle of them…), I just don’t see enough of a discount here to take on the incremental execution risk.

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Like Other Old-Tech Names, Oracle's Value Is Tied To Its Ability To Reignite Growth

GenMark Diagnostics Starting To Deliver, But Consistency Is A Key Issue

If you tried to play a drinking game with the number of times I've mentioned consistency and/or execution in relation to GenMark Diagnostics (GNMK), you would risk serious damage to your liver. Even so, the ability of this company to deliver on the promise of its ePlex multiplex diagnostic system is arguably the key variable in the entire investment equation. The question of whether or not multiplex testing delivers value for health care systems is more or less settled, but whether GenMark can generate adequate commercial interest in its system, manufacture them profitably, and develop an adequate test menu in time are not settled.

With good flu-related demand in the first quarter and the recent submission of the gram-positive sepsis to the FDA, I think things are looking better for GenMark, and the shares are up about 50% from last update in March. If management continues to deliver, this could only be the beginning, as GenMark serves a market that can support hundreds of millions of dollars in revenue at better multiples than the shares currently enjoy.

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GenMark Diagnostics Starting To Deliver, But Consistency Is A Key Issue

Brookfield Infrastructure Gets Moving On New Investments

It was only a couple of weeks ago that I wrote about Brookfield Infrastructure (BIP) looking to deploy significant amounts of capital into new cash-generating assets, and the company has moved quickly to do just that. In just that short span of time, Brookfield has participated in two deals with a combined headline value of $4.5 billion, with both deals looking pretty typically “Brookfield-esque” in terms of structure and long-term opportunity.

As is typically the case, Brookfield Infrastructure management provided minimal financial information, and that certainly complicates the modelling process. Even so, I believe these deals add about 1% to the company’s long-term AFFO growth rate and about $2.50/share to the long-term discounted fair value. While Brookfield is usually careful not to bite off more than it can chew, I’d note that the company’s ongoing use of equity and debt to acquire minority stakes leaves open the possibility of more acquisitions in the not-too-distant future.

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Brookfield Infrastructure Gets Moving On New Investments

United Fire Looks A Little Overheated In A Still-Challenging Sector

These are challenging times for the insurance industry, and small-cap player United Fire (UFCS) has not been immune. Healthy reserve releases have helped boost underwriting results, but the top line remains pressured, and management has decided to reinvest in the business by boosting its technology platform - a decision that should pay off long term, but that will pressure expense ratios in the near term. While United Fire has a decent enough business focusing on smaller businesses and offering coverage for commercial auto, fire (and allied lines), workers' comp, and product liability, the valuation more or less already captures the positives of the story.

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United Fire Looks A Little Overheated In A Still-Challenging Sector

Near-Term Trends Masking The Long-Term Potential For ProAssurance

Transitional periods are never fun, and ProAssurance (PRA) is likely looking at a couple of years where core earnings and book value growth will be pressured by rising claims costs. This is a sector-wide phenomenon, though, and many of ProAssurance’s competitors have been less conservative with their accounting assumptions and lack the same quality of reserves, which should lead to stronger industry-wide pricing.

Valuing ProAssurance is complicated by the likelihood that the near-term results aren’t really representative of the long-term earnings power of the business. Although there is a practical reality that insurance companies don’t usually outperform without underlying earnings and book value growth, I believe there is worthwhile long-term potential here.

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Near-Term Trends Masking The Long-Term Potential For ProAssurance

CyberArk Worth Watching For Pullbacks

In a highly competitive and ever-evolving space, CyberArk Software (CYBR) looks like an interesting security name to me. Although there’s controversy and debate about the true size of the Privileged Access Management market, I believe it is a meaningful “second line of defense” that will be increasingly important to mid-sized and larger enterprises, giving CyberArk a chance to further penetrate a market that I believe could be worth somewhere around $5 billion. The valuation isn’t quite where I’d like to be, though, so this is a name I’m relegating to the watch list in the hope of getting a better entry price in the next year or two.

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CyberArk Worth Watching For Pullbacks

Rudolph Technologies Growing Into Expanding Markets, And Priced Fairly

Against a backdrop of generally weakening sentiment, Rudolph Technologies (RTEC) has been a bit of an outlier in the semiconductor equipment space. Up almost 30% over the last year, and over 20% year to date, Rudolph is solidly ahead of peers/rivals/comps like KLA Tencor (KLAC), Lam Research (LRCX), Applied Materials (NASDAQ:AMAT), Nova Measuring (NVMI), and SUSS Microtec (SMHN.XE). What makes that a little odd is that although the company has been steadily growing its addressable market, its revenue growth hasn't been all that outstanding on a peer-to-peer basis and its product exposures (RF, etc.) could be a vulnerability.

Rudolph has done a little better than I'd expected back in 2016, but compared to a stronger equipment environment than I'd expected the "net outperformance" hasn't been all that significant. Although I do like Rudolph's prospects for leveraging ongoing demand for advanced architectures and packaging, as well as its prospects to sell lithography stepper tools into the OLED space, the valuation seems pretty fair at a time when the overall sector is looking pretty wobbly.

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Rudolph Technologies Growing Into Expanding Markets, And Priced Fairly

Wells Fargo Clawing Its Way Back

Wells Fargo (WFC) has shown that it can self-inflict wounds on a level that’s hard to match among the largest U.S. banks. While Wells Fargo is well and truly hated by quite a few people now (including investors), management has been working to rebuild the bank on multiple levels, including employee compensation/incentives, training, compliance, and customer relations. Rebuilding the brand and reputation is going to take a lot longer, and the bank still has serious regulatory headwinds, but the underlying operations haven’t been damaged all that badly.

Wells Fargo looks undervalued, but then so do others like Citigroup (C) and U.S. Bancorp (USB) (both with their own issues/challenges), as well as JPMorgan (JPM) and PNC (PNC). I won’t make a forceful argument that Wells Fargo is a must-own at today’s price, but the long-term potential total returns look pretty interesting and this remains a massive national platform with a very strong retail deposit base.

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Wells Fargo Clawing Its Way Back

In A Tougher Market, W.R. Berkley Has Outperformed

Insurance stocks are not in favor, with well-run companies like Arch Capital Group (NASDAQ:ACGL) and Chubb (NYSE:CB) looking at double-digit year-over-year price declines in their stocks, while Hartford Financial Services Group (NYSE:HIG) and Travelers (NYSE:TRV) are down more modestly. W.R. Berkley (NYSE:WRB), though, keeps on keeping on, with the shares up about 5% over the past year - weaker than the S&P 500, certainly, but above the sector averages for insurance in general and P&C insurance in particular.

This is a tough stock to recommend. While management has put up a very strong track record, and I like the company’s diverse specialty and small-client exposure, as well as its closer-to-the-client decentralized model, I’m concerned about the long-term impact of claims inflation and today’s valuation. I’ve learned over the years not to bet against W.R. Berkley, and the company’s strong investment operations can generate income growth at a time when underwriting profit growth is more challenging, but it’s hard to favor this pricey-looking name when there are rivals trading at what look to be substantial discounts to long-term fair value.

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In A Tougher Market, W.R. Berkley Has Outperformed

Fortive Ties The Knot With Gordian

Fortive’s (FTV) management is not letting the grass grow under its feet when it comes to M&A. While it’s easy to assemble a Greek chorus of industrial CEOs to bemoan the difficulty of doing accretive deals with today’s prevailing valuations, Fortive is beating the bushes, turning over the rocks, and finding interesting opportunities. The latest deal, the nearly $800 million acquisition of Gordian, is Fortive’s biggest commitment to date in the software/SaaS space, but it looks like a sound deal with good growth and margin prospects. Although Fortive’s prospective returns still look too low for me to be really bullish on the shares, it’s easier to like a company that's aggressively redeploying capital not just toward growth, but value-additive growth.

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Fortive Ties The Knot With Gordian

Is Old Dominion Already At Maximum Overdrive?

LTL trucking company Old Dominion (ODFL) has been on my list of favorite companies for a long, long time, but the volatility of the shares hasn’t always made them a preferred option for my own portfolio. Although the trucking industry continues to see red-hot demand and the sector has done pretty well in the market, Old Dominion’s performance since my last update has lagged peers like Saia (SAIA), ArcBest (ARCB), and YRC Worldwide (YRCW), despite no real let up in performance. Keep in mind, though, that if you stretch the performance timeline out to a year or more, Old Dominion starts looking better.

It’s hard not to like a company that is seeing 20%-plus revenue growth, particularly when demand remains very healthy and supply is constrained by labor difficulties. On top of that, Old Dominion has proven itself over and over again with its investments in IT and its ability to recruit, train, and retain employees, and still has meaningful potential areas of growth. Even still, this is a stock where the forward P/E multiple can fall by half from peak to trough (and it recently hit a peak) and I’m not willing to pay a mid-teens multiple on EBITDA for even one of the best less-than-truckload (LTL) carriers.

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Is Old Dominion Already At Maximum Overdrive?

Arch Capital Sticking To Its Guns, But The Street's Unimpressed

You might think that a company with a long track record of strong results would get more benefit of the doubt, but the Street just doesn’t seem to want to buy the Arch Capital (ACGL) story, or its shares. Although the housing market is strong and regulatory changes to the mortgage insurance industry would argue for better returns, while the P&C and reinsurance industries struggle with inadequate pricing power, analysts and investors just don’t want to pull the trigger.

I believe there continues to be an attractive long-term opportunity in Arch Capital shares. The heavy weighting of the mortgage insurance business does indeed change the company’s long-term outlook, but that’s not necessarily a bad thing. In the meantime, the company continues to look for ways to generate acceptable returns in its insurance and reinsurance operations, while maintaining long-term flexibility in the pursuit of double-digit ROEs. With the shares undervalued below $30, I still find these shares attractive.

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Arch Capital Sticking To Its Guns, But The Street's Unimpressed

Lundbeck Finds Its Next CEO, But Finding The Next Spark Could Be Harder

The performance of Danish drugmaker H. Lundbeck A/S (OTCPK:HLUYY) (LUN.CO) since former CEO Kåre Schultz left for Teva (TEVA) would perhaps argue against the idea that drug companies need dynamic CEOs in place to do well – the shares are up about 20% from the time of Schultz’s departure with no replacement in place until now. To be fair, Lundbeck has been coasting on the tailwinds established by Schultz, as the company has been delivering surprisingly strong margin performances with its new streamlined cost structure.

Now Lundbeck has filled the role of CEO, hiring Deborah Dunsire for her first major CEO role since leading Millennium into and through its merger with Takeda Pharmaceutical (OTCPK:TKPYY). I do have some concerns about this hire, and I don’t think the company has managed to catch lightning in a bottle a second time as it did with the hiring of Schultz (an opportunity that was created by a change in the succession planning at Novo Nordisk (NVO)). Moreover, with the shares having performed well, I worry that this could be a “sell the news” excuse for institutions to take profits, sapping the momentum in the shares.

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Lundbeck Finds Its Next CEO, But Finding The Next Spark Could Be Harder

Roche Reports Positive Clinical Results, But The Market Is Unimpressed

Roche's (OTCQX:RHHBY) plans to leverage Tecentriq as its next cancer blockbuster and offset steep looming biosimilar sales erosion have been looking shakier and shakier as the company continues to post okay-but-great data from multiple trials, while chief rival Merck (MRK) continues to post strong Keytruda data. While two recent positive trial read-outs on Tecentriq in lung cancer and breast cancer are certainly welcome, they're not likely going to change the tide of sentiment, and management has work to do to convince the Street it's not an also-ran in the making.

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Roche Reports Positive Clinical Results, But The Market Is Unimpressed

BRF's Initial Restructuring Moves Focused On Slimming Down

Considering how Pedro Parente, the new CEO of BRF SA (BRFS) approached the turnaround of Petrobras (PBR), the initial moves outlined late on Friday June 29 shouldn't be a major surprise to investors. Whether a series of initial asset disposals and restructuring efforts will achieve the monetary target won't be known for a while, it does seem like a cogent approach to getting this struggling Brazilian food company back on track.

The equity call remains more or less the same as it was before - you either believe that Parente will lead a meaningful turnaround here (though it may take a couple of years) or you believe this company is too far gone to be fixed and eventual bankruptcy is the ultimate destination. At this point I believe Parente deserves the benefit of the doubt, and that BRF's strong domestic share in Brazil's processed meat market is worth something, but the stock's slide wasn't interrupted in any meaningful way by the hiring of Parente, and there remains a lot of work to do.

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BRF's Initial Restructuring Moves Focused On Slimming Down

Aptose Biosciences Back On Track In The Clinic

Canadian biotech Aptose Biosciences (APTO) has a lot of work ahead of it, as the company’s two lead drugs haven’t even completed Phase I testing yet. Even so, the preclinical efficacy and safety data on APTO-253 and CG’806 have looked quite encouraging, and I believe this is a highly speculative opportunity that continues to offer interesting upside. Now with the announcement that the FDA has lifted the clinical hold on APTO-253, Aptose is back on track to have at least one, and possibly two, promising compounds in the clinic before the end of 2018.

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Aptose Biosciences Back On Track In The Clinic

As The Market Gets More Fearful About VAT Group, It's Tempting To Get Greedy

”Be fearful when others are greedy, and greedy when others are fearful.” - Warren Buffett

The Street’s unbridled love affair with semi-equipment stocks looks to be over, with investors increasingly worried about the prospect for equipment order push-outs and a general slowdown later in 2018 and into 2019, and perhaps an actual short-term contraction. That’s not great news for Switzerland’s VAT Group (OTCPK:VACNY) (VACN.S), as this leading provider of vacuum valves depends upon a strong semiconductor and display equipment order environment for its own growth.

I do believe there is sufficient evidence to support the idea that 2019 will be a much more challenging year, and there’s really not much visibility at this point. That’s a dangerous set-up, and buying equipment stocks going into a slowdown is often a painful (or at least frustrating) experience. But then, VAT is a significantly above-average equipment provider, and getting too cute about waiting for the ideal entry point could mean never owning the shares.

Investors should note that VAT Group’s ADRs are not very liquid; the local shares are considerably more liquid, but that may not be an option for all investors.

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As The Market Gets More Fearful About VAT Group, It's Tempting To Get Greedy

SB One Bancorp Underway With An M&A Growth Strategy In A Large Metro Market

Tiny bank stocks aren’t on most investors’ radar screens and in many cases there are good reasons for that – many small community banks are sleepy businesses that rise and fall with regional/national economic cycles and pay a decent little dividend. For many of these banks, “excitement” is a bad thing, as it often means unexpected credit losses or other trouble.

But there is a group of small banks that are worth watching, and SB One Bancorp (formerly Sussex Bancorp) (SBBX) is one of them. Banks like SB One use their capital, particularly their equity capital, to grow the business by acquiring other small banks, building up their deposit-gathering franchise, stripping out redundant costs to drive operating leverage, and growing their presence in their core lending markets.

With SB One having just completed its first deal earlier this year and now announced its second, I believe the company is on its way toward a multiyear growth-by-acquisition strategy that could see it profitably consolidate some of the northern New Jersey and metro NYC banking market, generating double-digit earnings growth and good returns for investors.

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SB One Bancorp Underway With An M&A Growth Strategy In A Large Metro Market

Fanuc Still Strong In Robots And Automation, But Trouble May Lie Ahead

I’ve never been quite as fond of Japan’s Fanuc (OTCPK:FANUY) (6954.T) as many readers seem to be, and over the last five years you could have done better with other automation names like Yaskawa (OTCPK:YASKY), Rockwell (ROK), Keyence (OTCPK:KYCCF), or HollySys (HOLI) (though the two-year comps are more forgiving to Fanuc). While Fanuc has done better than I’d expected over the last two years in terms of revenue growth, leveraging a strong rebound in machine tool and robomachinery orders, margins and FCF generation haven’t been all that impressive as business has skewed to lower-margin products.

Now there are macro clouds on the horizon. Weaker smartphone capex demands seem likely to pressure results in 2018 and we may be nearing the point of peak machine tool orders, setting the stage for what could be a nasty decline over the next few years. I do expect Fanuc to continue to see strong growth in robots and robotic components, but I’m just not excited about the valuation today given those challenges and potential risks.

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Fanuc Still Strong In Robots And Automation, But Trouble May Lie Ahead

Power Integrations' Revenue Re-Acceleration Looking More Like A 2019 Event

All you need to be a successful semiconductor loved by investors is perpetual double-digit revenue growth, 60%-plus gross margins, 30%-plus operating margins, a rich buyback, expanding end-markets, and optionality on both ends of the M&A spectrum. See? Simple.

Sarcasm aside, Power Integrations (POWI) has been in a tougher spot recently, with the company missing a few times on the top line and lowering guidance. A slowdown in smartphones and communications and delays in other programs has pushed revenue growth down from the double-digits, and the margins remain sub-optimal. Add in a relatively robust valuation, and I’m not too surprised that the shares have lagged the SOX by a significant degree since my last update, not to mention underperforming peers/rivals like ON Semiconductor (ON). With the shares already pricing in a return to double-digit revenue and a mid-20%’s operating margin, it’s tough for me to see a compelling risk-adjusted opportunity here.

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Power Integrations' Revenue Re-Acceleration Looking More Like A 2019 Event