Bank Of America Flexing Its Muscles As A Consumer Banking Titan

Despite a more challenging operating environment, those banks with legitimately strong franchises and cogent growth plans (particularly those with a strong IT/digital element) continue to prosper. I liked Bank Of America (BAC) back in May, and not only have the shares outperformed the banking sector as a whole, they’ve outperformed the S&P 500 as well. Likewise, BofA stands out favorably in its mega-bank peer group, though my preferred choices, JPMorgan (JPM) and Citi (C), have done a little better over that time.

While I still love JPMorgan, Bank of America seems to have a little more appeal now on a valuation basis. This isn’t just a valuation call either; although BofA’s loan growth has come back to earth a bit, the bank continues to take share in the consumer banking market and the company’s ongoing tech investments can unlock further operating leverage down the road.

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Bank Of America Flexing Its Muscles As A Consumer Banking Titan

Still More Chaos At Nektar, But There's Value In The Pipeline

Nektar (NKTR) shares have remained volatile, with new turbulence tied to the rejection and abandonment of pain drug NKTR-181, another restructuring to the Bristol-Myers (BMY) partnership, and ongoing uncertainty about the clinical and commercial profile of its key asset bempegaldesleukin (“bempeg”). While the shares are up more than 10% since my last update, a little worse than the return of the two largest biotech ETFs, the shares had been substantially higher less than a week ago – after the release of slides ahead of the JPMorgan Healthcare Conference and the unsuccessful FDA AdCom meeting on NKTR-181.

I think there are valid questions about management here, and it’s hard to feel good about any investment when you’re not really confident about management, but I believe the potential of bempeg in melanoma supports the valuation and I do still see upside from here, though it’s far from what I’d call a high-confidence pick.

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Still More Chaos At Nektar, But There's Value In The Pipeline

XPO Logistics Shifts Gears Yet Again

Is there really any overarching plan in place at XPO Logistics (XPO)? I ask that because this company has shifted gears so abruptly so many times over the years, that transmission has to be pretty well stripped by now. First the company was going to be a roll-up of asset-light logistics services companies … then it became decidedly more asset heavy. And now management apparently is looking to (or at least willing to consider) auction off everything but the U.S. less-than-truckload business.

I shouldn’t complain – these shares are up 75% from my bullish call back in June (and were up about 50% before the announcement of the strategic review). And you know, if the overarching plan is to create maximal value for shareholders by whatever legal means necessary, that’s not so bad. Either way, with break-up values in excess of $100/share now in play and no real sense of what the long-term strategy is now, I can’t say I’m as bullish on the shares now.

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XPO Logistics Shifts Gears Yet Again

Alcoa May Be Bottoming Out, But Management Still Has A Lot To Do To Improve Costs

Despite liking management’s portfolio transformation plan, I wasn’t very bullish on Alcoa (AA) in late October, and my primary concerns – that the company is too high up on the cost curve and can do nothing about global overproduction – have come home to roost again, with management forecasting a “balanced” market for alumina in 2020, but an oversupplied aluminum market.

These shares still look undervalued relative to my expectations, but even after a 15% or so drop from that last article, I’m still not keen to own the shares. My basic approach on commodities is that you find the better opportunities in situations where there is a supply bottleneck that will take time to work out and/or where the supplier has a cost advantage. Neither really applies to Alcoa, and while I think further capacity curtailments, closures, and/or sales can improve the long-term viability of the business, I’m just not keen on trying to wring performance out of this name.

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Alcoa May Be Bottoming Out, But Management Still Has A Lot To Do To Improve Costs

PNC Financial Comes Up A Little Short Where It Counts In Q4

Given what I thought was only “okay” valuation back in October, I’m not too surprised that PNC Financial (PNC) shares have done only slightly better than its peer group over the last three months. It’s a well-run, well-liked bank, but with core earnings only a bit better than expected, valuation is perhaps a more pressing concern right at the moment. I’m still not really enthusiastic about PNC as a new buy idea. It’s a fine bank, and a fine hold, but I don’t see enough growth differentiation here to really support a significantly higher share price.

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PNC Financial Comes Up A Little Short Where It Counts In Q4

Eagle Bancorp Had A Curiously Challenging Quarter, But There's Still Value Here

The share of Eagle Bancorp (EGBN) have had a relatively mediocre run since my last update in October, with the stock more or less tracking the broader performance of regional bank stocks. Although Eagle’s fourth quarter had some pretty curious moving parts, I believe the bank is still in fundamentally good shape and well-positioned to take advantage of the growing, less cyclical Washington, D.C. economy.

With ample surplus capital and the bank already spending on preparations to exceed the $10B asset threshold, I think an acquisition is at least plausible. Either way, while I don’t think the shares are hugely undervalued, there’s still worthwhile upside here on a risk-adjusted basis and the potential of double-digit annualized returns for shareholders.

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Eagle Bancorp Had A Curiously Challenging Quarter, But There's Still Value Here

Rate And Operating Leverage Challenges Counterbalancing U.S. Bancorp's Valuation

The trouble with excellence is that once you attain a high standard of performance, the improvements that follow don’t seem quite as impressive. Start an exercise program today, and you’ll probably see rapid improvement over the first few months … but after a year or so, those improvements will be slower and harder-earned. That may well be one of the primary issues for U.S. Bancorp (USB) now, as this well-regarded and highly profitable bank struggles to offset spread headwinds and operating leverage challenges.

I still wonder whether investor frustration with the slow progress here may eventually force management toward a more dramatic step like a large acquisition or merger of equals. Management certainly seems more open to the idea than before, but I wouldn’t make that a base-case assumption. In any case, U.S. Bancorp does appear to offer better-than-average upside here, but with sentiment in a “what have you done for me lately?” sort of place, it may take time for this more defensive name to shine.

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Rate And Operating Leverage Challenges Counterbalancing U.S. Bancorp's Valuation

Wells Fargo's Results Show The Amount Of Work Left To Be Done

In quarter that has so far seen earnings reports that I’d characterize as okay-to-good, Wells Fargo (WFC) once again stands out for the wrong reasons. Not only was there barely any positive news of significance in the quarterly results, I’m not sure investors will be patient with a turnaround process that is going to take years – particularly with management indicating that it was going to take most of 2020 for the new CEO just to complete his review of the business.

Of course it’s more important for Wells Fargo’s turnaround to be done right as opposed to right now, but as I said, Wall Street is not a forgiving or patient place, and 2020 results are likely to be weak. Low single-digit earnings growth can still support a fair value in the mid-$50’s, but it’s tough to reconcile above-average long-term potential with considerable short-term challenges.

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Wells Fargo's Results Show The Amount Of Work Left To Be Done

Robust Loan Growth Continues To Feed The First Republic Growth Machine

Understanding what a business does well and not messing that up in the pursuit of even more growth is an underappreciated business talent, but First Republic (FRC) has that going for it with its management team. While management often fields questions from investors about building or buying its way into new markets, continuing to drive market share growth within its core high net worth (or HNW) market in California, New York City, and Boston continues to drive exceptional performance for this specialized bank.

The biggest challenge for First Republic may be funding its loan growth, but so long as the market is willing to keep paying a premium for the shares, equity raises make sense. While the HNW market is likely not as bulletproof as the bulls want to believe (let’s see what happens in the next real tech stock washout…), I have no problem assuming that First Republic will generate double-digit loan and core earnings growth for a long time to come (at least on an annualized basis). Valuation isn’t as extreme as relative comparisons may seem (there really aren’t many, if any, truly fair comparables), but if loan growth slows, the multiple will definitely be at risk.

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Robust Loan Growth Continues To Feed The First Republic Growth Machine

Citigroup Slowing Rebuilding Credibility In Its Self-Improvement Story

Being bullish on Citigroup (C) has never been a particularly popular call for me, but the shares are up 16% since my last piece, the best among the U.S. mega-banks I follow, and up about 42% over the last year – better than JPMorgan (JPM), Bank of America (BAC), PNC (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC). Yes, Citi-haters, I know the three-year comps and beyond are not nearly so favorable, but I think Citi’s results have supported the idea that there’s a credible plan in place here and the performance gap is closing (even if slowly…).

My bullish call on Citi has never been predicated on the belief that it is the best-run bank in the U.S., nor the one with the best prospects. Rather, my thesis was and is that the valuation doesn’t adequately or accurately reflect the growth potential of the business. Provided a long-term core growth rate of around 2% is still valid, these shares are undervalued below $90.

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Citigroup Slowing Rebuilding Credibility In Its Self-Improvement Story

JPMorgan Adds Another Quarter To Its Remarkable Performance Run

I’m sure the truly dedicated can find something to nitpick in JPMorgan’s (JPM) fourth-quarter results, but I view the quarter as a strong performance even against what has been a pretty remarkable run of quarters across the banking cycle. While the underlying health of the U.S. economy remains a concern (more on the corporate side now than the consumer), as does the ongoing impact of low rates, JPMorgan has shown it can adapt to the environment, and I still see meaningful opportunities for both organic growth and operating leverage.

The only issue now is that the Street is up to speed on this name; the 14% move in the shares since my last update (roughly double the underlying bank sector) has brought the stock to my fair value estimate, even after post-Q4 adjustments. There’s nothing wrong with owning one of the best of the best at fair value, though, and I won’t put it past JPMorgan management to deliver upside to my core long-term 3% underlying growth estimate.

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JPMorgan Adds Another Quarter To Its Remarkable Performance Run

Hit By Weaker Fourth-Quarter Sales, Bossard Is One To Watch

If you’re an American investor, the odds that you’ve ever heard of Bossard (OTC:BHAGF) (BOSN.SW) are quite low. Frankly, considering the size of the company, you could easily be a Swiss investor and never have heard of this company. Be that as it may, this is a high-quality industrial name well worth knowing, as this growing fastener distributor and industrial solutions provider has a solid global growth opportunity.

Bossard shares were down about 10% in Switzerland on its top-line update for the fourth quarter, but the underlying results weren’t meaningfully different than expected. Weakness in both the EU and U.S. industrial markets are clearly areas of concern, but Bossard is highly leveraged to a turnaround in short-cycle industrials. The shares aren’t in my buy zone yet on a DCF basis, but they already have some upside on an EV/EBITDA basis and this is a name to watch if industrial stocks sell off further through this reporting cycle.

Investors should note that there is virtually no liquidity in the ADRs and the Swiss shares themselves aren’t especially liquid, though daily liquidity of over $3 million should be sufficient for most individual investors.

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Hit By Weaker Fourth-Quarter Sales, Bossard Is One To Watch

Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help

These have been some interesting times for Acerinox (OTCPK:ANIOY) (ACX.MC), as this leading producer of stainless steel has had to navigate a weakening demand environment and volatile input prices. All things considered, I believe Acerinox management is doing pretty well, and I think the acquisition of VDM Metals will prove to be a savvy move down the line.

While I still liked Acerinox back in May, I thought there were other, better options to consider. Since then, Acerinox has done pretty well (local shares up 15%, the ADRs up closer to 20%), but Gerdau (GGB) and Aperam (OTC:APEMY) have done better, while Ternium (TX) has done worse (neither Gerdau nor Ternium compete in stainless). I still believe that Acerinox is undervalued, and while there is risk to the 2020 demand outlook, I like this company for its above-average productivity and efficiency, as well as its wider set of options to improve performance even further.

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Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help

CapitaLand May Finally Be Breaking Out On A Clearer Path To Strong, Sustainable ROEs

I’ve long lamented that no matter what CapitaLand (OTCPK:CLLDY) (CATL.SI) did, it just couldn’t seem to break out above S$4/share. That seems to be changing, though, as investors have not only gotten more bullish on the near-term prospects for Singapore’s property market, but also management’s commitment and ability to drive long-term ROEs toward the double-digits (including gains and revaluations).

I’ve been bullish on CapitaLand for a while, and I still am. With demonstrated successes in Singapore and China to build on, and significant growth opportunities in India, Vietnam, fund management, and managed residences, I believe CapitaLand is well on its way with a plan that will deliver better returns for investors. I believe fair value is at least another 15% higher from here, with upside beyond that if management execution can shrink the risk premium in the shares.

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CapitaLand May Finally Be Breaking Out On A Clearer Path To Strong, Sustainable ROEs

Neurocrine Knocked Back On Ingrezza Concerns And Maybe The Lack Of A Buyout

Expectations can be irrational and still have power – that’s about the only reason I can see for why Neurocrine (NBIX) shares were as weak as they were coming out of the company’s JPMorgan Healthcare Conference presentation. Investors went into this conference with inflated expectations regarding biotech M&A, and it likely didn’t help matters any that Neurocrine management was once again cautious on sales guidance for Ingrezza in Q1’20.

Neurocrine is an interesting position now. The strong commercial success of Ingrezza is allowing the company to augment a so-so internal R&D effort with licensing deals that have brought the company some interesting opportunities in Parkinson’s and epilepsy, and the company’s congenital adrenal hyperplasia drug crinecerfont still appears to be underestimated in my view. With a fair value of over $130, I still see meaningful upside in these shares.

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Neurocrine Knocked Back On Ingrezza Concerns And Maybe The Lack Of A Buyout

Alnylam Pharmaceuticals Beats Again, But The Bar Keeps Moving Higher

Closing the books on a very successful 2019, Alnylam (ALNY) didn’t offer all that much that was new at the JPMorgan Healthcare conference, and that more than anything may well explain why the stock didn’t perform particularly well after the company’s presentation. It looks to me as though a lot of stocks, particularly in biotech, were set up for a “buy into the conference, sell during the presentation” trade, as there hasn’t yet been much in the way of thesis-changing news (let alone the M&A activity some were hoping for) coming out of the meeting.

Turning back to Alnylam, though, there’s still a great deal to like about this biotech. Last year saw several successful trial read-outs, particularly the extensive trials done by The Medicines Co (now owned by Novartis (NVS)) for inclisian, largely de-risk the company’s platform, and other studies have validated the company’s new delivery chemistry – chemistry that should prove key in targeting diseases outside the liver. On top of all that, the company has a well-balanced pipeline with two drugs lined up for possible approval in 2020 and multiple compounds in Phase III and Phase II testing.

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Alnylam Pharmaceuticals Beats Again, But The Bar Keeps Moving Higher

Cementos Argos Offers High-Risk/High-Reward Leverage To Colombia And The U.S.

When I wrote about Cemex (CX) the other week, I mentioned Cementos Argos (OTCPK:CMTOY) [CCB.CN] as a name to consider for investors who wanted better leverage to volume growth in Colombia and the U.S. Cementos Argos ("Argos") has the advantage of not being burdened by less productive assets in less appealing regions, though the company has plenty of debt, and the company's "value over volume" strategy in Colombia is uncomfortably similar to a strategy pursued unsuccessfully by Cemex in Mexico. On the other hand, Argos is a leader in a Colombian market that is seeing construction spending just starting to grow again, and is likewise benefiting from a strong strategic position in the U.S.

Valuation is mixed, but there is significant operating leverage in this model, and a modest outperformance on the top line would translate into not-at-all modest leverage in earnings and cash flow. My base-case suggests around 15% to 20% undervaluation, but over 30% if the business can accelerate to COP 10B or better in 2020 (7.5% or better year-over-year growth).

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Cementos Argos Offers High-Risk/High-Reward Leverage To Colombia And The U.S.

MTN Group Still Facing Profitability With No Prosperity

I've been doing this for over a quarter-century now, and MTN Group (OTCPK:MTNOY) may well be the most frustrating stock I've owned and followed over that time. While there have certainly been management missteps in this company's history, even a good management team with a good plan hasn't been much of an elixir for the ailing stock price, as constant regulatory nonsense across its operating area, as well as other macro challenges, has mitigated any of the benefits.

These shares may now be the cheapest they've ever been, but it's hard for me not to conclude with a "… so what?", particularly with some significant upcoming license renewals and ongoing economic and political challenges in South Africa. Maybe I'm getting ready to throw in the towel at the low point, but it's honestly difficult to recommend these shares even despite significant apparent undervaluation - a good management team and a good valuation are often highly valued, but the significant ongoing external issues are an inescapable and unignorable negative part of this story.

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MTN Group Still Facing Profitability With No Prosperity

Commercial Metals Looks Mispriced Given Generally Favorable Market Trends

I'm probably closer to bearish on steel than bullish, but I do see some select opportunities that are worth a look, and Commercial Metals (CMC) seems to be one of them. Unlike the market for flat-rolled steel, I see a better supply/demand balance in CMC's core long markets, particularly given how consolidated the U.S. rebar market is now after the CMC-Gerdau (GGB) deal in 2018. Add in some growth from infrastructure projects, decent non-resi trends, improving fabrication results, and some opportunities for network optimization, and I think CMC has some potential.

I think CMC shares could be more than 10% undervalued now, with long-term annualized return potential in the double digits. Certainly a lot rides on whether above-trend metal spreads can be maintained, but CMC management has made several smart moves and seems underappreciated relative to flat producers facing more structural challenges.

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Commercial Metals Looks Mispriced Given Generally Favorable Market Trends

CK Asset Executing On Its Diversification Strategy And Getting Little Credit For It

I wasn’t bullish on CK Asset Holdings (OTCPK:CHKGF) (1113.HK) back in July, largely because I didn’t see a big enough discount to fair value to compensate for the risk of the company’s ongoing strategic shift toward owning/operating more recurring-revenue assets in lieu of property development. CK Asset’s management team was pretty good at property development, but the track record in these new ventures is much shorter and some of the initial investment decisions have been more than a little curious to me.

The shares have since lagged the Hang Seng Index, falling about 7%, but outperforming other property developers like Sun Hung Kai Properties (OTCPK:SUHJY), Swire (OTCPK:SWPFF), and Henderson Land (OTCPK:HLDCY). I certainly didn’t have the Hong Kong protests in mind when I passed on buying these shares, and I’m not about to take credit for being right when such a significant exogenous factor came into the market.

As things stand now, though, I’m more bullish on this company and the shares. The acquisition of Greene King made sense to me, and I think I have a better sense of what management is looking to do in the future with its non-property development operations. There’s still quite a bit of uncertainty here between macro/political factors and CK Asset’s ongoing leverage to property development, but at a 25%-plus discount to my estimate of fair value and a healthy dividend, I like the risk/reward a lot more.

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CK Asset Executing On Its Diversification Strategy And Getting Little Credit For It

Aptiv Leading The Way In Advanced Safety, But There Are Some Road Hazards

Being a pioneer tends to have a pretty binary outcome – they either name schools after you, or you end up feeding the scavengers in the middle of nowhere. I don’t think Aptiv (APTV) is really looking at such a stark set of outcomes, but I do see this company as a pioneer in active safety for passenger vehicles with a rich multiple to match.

I think we’re going to see a cool-down of expectations around autonomous driving in 2020, and with that I think Aptiv’s rich multiple could be at risk. I do like the underlying business, not only for its leverage to active safety, but also its leverage to connectivity/infotainment and vehicle electrical systems. A pullback (more than the 10% already seen) could create an attractive long-term buying opportunity for a company that I think can generate above-average long-term growth, including double-digit FCF growth.

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Aptiv Leading The Way In Advanced Safety, But There Are Some Road Hazards

Acuity's Volume Declines Are Worrisome, But The Market Reaction Seems Extreme

The markets typically care more about margins than revenue … until they don’t. While Acuity Brands (AYI) once again did well on the margin lines, the market seemed more than just spooked by the severe year-over-year erosion in volume. I’d also assume that the weaker call on non-residential construction, one of the markets expected to be stronger for multi-industrials this year, didn’t exactly help matters.

I don’t love lighting as a business and I think Acuity has a long way to go before its more sophisticated control and IoT businesses kick in meaningful contributions. Even so, I’m surprised the shares trade where they do. I mean, I get that the market doesn’t like lighting stories, but that seems overdone here. It’s tough to buy into a sector that I don’t really like, and I know the undervaluation here could persist (particularly if volume stays so weak), but the valuation is enough to make this a name to keep watching.

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Acuity's Volume Declines Are Worrisome, But The Market Reaction Seems Extreme

Investors Shrug Off A Soft Quarter From Yaskawa Electric

My biggest concern going into the calendar fourth quarter earnings cycle is that investor expectations for a 2020 recovery are set too high and that company guidance this time around may not be enough to support valuations that are already above historical averages. If Yaskawa Electric’s (OTCPK:YASKY) (6506.T) are anything to go by, those worries may be overdone.

Yaskawa had a soft quarter, but investors not only shrugged it off but seemed to embrace evidence that the worst is over … even though management’s guidance leaves a very challenging bar in place for the fiscal fourth quarter. While I still like Yaskawa’s business quite a bit, and I think the company is well-placed to leverage growth in automation across a range of industries (particularly in China), the valuation seems to already reflect that.

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Investors Shrug Off A Soft Quarter From Yaskawa Electric

Innospec Leveraging New Growth Opportunities And Driving Margin Leverage

While I liked Innospec (IOSP) back in May, I never got the dip into the $70’s that I was hoping for, as the company has done a very good job of executing on some emerging growth opportunities in Fuel Specialties, as well as its long-term plan within Oilfield Services. Even the execution in Performance has been commendable, as the loss of volume to a significant customer and some adverse mix-shift has been offset by surprisingly resilient gross margins.

My biggest concern for Innospec going into 2020 is the risk that weak U.S. onshore drilling and fracking activity could sap the momentum in the Oilfield business. While Fuel Spec likely won’t see the same sort of volume growth it has in recent quarters, the longer-term opportunity in low-sulfur marine fuel (under IMO 2020) looks appealing. Valuation for this almost-uncovered specialty chemical company isn’t ideal, but management has shown the virtues of its diversified business model and it will likely take some weak quarters to open a window of opportunity.

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Innospec Leveraging New Growth Opportunities And Driving Margin Leverage

Sika's Growth Slowed Significantly In Q4, Making Valuation More Of A Concern

I’ve said it before and I’ll probably have to keep saying it until I stop writing – valuation, in and of itself, doesn’t often move stocks. To that end, while I thought Sika (OTCPK:SXYAY) (SIK.S) was expensive back in July, I’m not surprised it’s held up reasonably well (more or less in line with BASF (OTCQX:BASFY) and Arkema (OTCPK:ARKAY), behind RPM (RPM), better than Saint Gobain (OTCPK:CODYY) and inline with the Swiss market). This is, after all, one of the best specialty chemical companies I know, and the company’s presentations at its October capital markets day made a strong case for exceptional performance for at least the next five years.

Sika’s fourth quarter revenue disappointed investors, but was in line with my expectations for the most part. I am concerned that 2020 could be a tougher year for non-residential construction (it will almost certainly be slower), but I’m not betting against Sika’s ability to continue to gain share through innovation while also driving higher margins. The problem is that that’s already in the share price, and I can’t really see how these shares offer above-average potential.

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Sika's Growth Slowed Significantly In Q4, Making Valuation More Of A Concern

Repligen Gives Investors A Pure Play On Bioproduction

Seven of the top 10 best-selling drugs in the world are antibodies, biosimilars are starting to disrupt the pharmaceutical industry, and Big Pharma is investing billions in gene therapy. On top of that, roughly half of the drugs in biopharma pipelines today are biologics (antibodies, cell therapies, gene therapies, etc.). All of that means an exceptionally attractive market opportunity for companies like Repligen (RGEN) that sell what amounts to the picks and shovels of the biologics industry.

I believe Repligen’s strong position in purification and filtration, as well as emerging opportunities in areas like analytics, give the company a good shot at a prolonged streak of 20%-plus revenue growth and 20%+ FCF margins. While the shares do trade at around 15 times forward revenue, I’m not sure they’re as expensive as that snapshot approach to valuation may suggest, particularly with the company gaining share in a large market set to grow at a high-single digit rate for many years to come.

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Repligen Gives Investors A Pure Play On Bioproduction

MSC Industrial Muddling Through A Tough Environment, But Margins Remain A Key Concern

I've not been particularly gentle in my assessments of MSC Industrial (MSM) management over the years, as I think the company has been slow to react to the changing realities of the distribution sector, and when it has reacted, it hasn't done so particularly well (I can't remember which sales strategy we're on now…). It's even more frustrating to see that in the context of underperformance relative to Grainger (GWW) and Fastenal (FAST) and the changes/adaptations those companies have been making.

My chief concern remains the margins, particularly with management acknowledging that its latest strategy, shifting from a focus on spot-buy to deeper managed inventory relationships with customers, will lead to lower gross margins. Less pressing, but still relevant, is whether the U.S. industrial economy will, in fact, see that second-half rebound that the Street has been counting on. For now, I see MSC shares priced to generate a total annualized return in the mid-to-high single digits, including a roughly 4% yield without the special dividend, and it's not a particularly compelling name beyond its higher-than-average dividend.

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MSC Industrial Muddling Through A Tough Environment, But Margins Remain A Key Concern

SFL Still A Little Island Of Relative Calm In An Always-Volatile Shipping Industry

With a prudent management team, good access to capital, and healthy contract coverage, SFL Corporation (SFL) offers investors a bit of an oasis in a usually-turbulent shipping industry where sudden shifts in geopolitics or trade can lead to fast, bruising changes in rates that hammer shipping operators. While there will always be questions about this or that part of SFL’s portfolio, I think management has more than earned the benefit of the doubt and this remains a solid option for investors who prize income and are willing to accept higher risks to get it (SFL is well-run, not risk-free).

SFL shares are up about 15% from when I last wrote about the stock, but the market environment is no less turbulent. My total return expectations really haven’t changed much from then, but the dividend is now a bigger portion of that potential return and in the $14’s, I’d say the stock is more or less fairly valued.

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SFL Still A Little Island Of Relative Calm In An Always-Volatile Shipping Industry

PerkinElmer Refocusing On Its Best Growth And Margin Opportunities

In a strong market for life sciences, a market that has seen Sartorius (OTC:SARTF) jump more than 70% over the past year, Bio-Rad (BIO) more than 60% over the past year, and Thermo Fisher (TMO) over 45%, PerkinElmer's (PKI) almost 30% climb doesn't seem quite so special. Part of the issue is an ongoing challenge with the company hitting its growth and margin targets (it seems like it can do one or the other in a given period, but not both), but I believe the lack of leverage to bioproduction is a drawback as well. Although a new CEO and a shifted set of priorities could help the former, it doesn't look as though PerkinElmer management is contemplating a major near-term shift in the business mix.

As is so often the case for me in life sciences today, I like the companies but not the valuations. Mid-teens annualized FCF growth would only support a mid-single-digit annualized return at today's level, so I can't really call this a favorite idea now. The stock has proven to be volatile over the last couple of years, though, so this is a name worth considering for a watch list.

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PerkinElmer Refocusing On Its Best Growth And Margin Opportunities

A More Diverse Advanced Energy Is Looking At Multiple End-Market Drivers

The cyclicality of the semiconductor industry is a challenge for all equipment suppliers. Advanced Energy Industries (AEIS) has tried to offset and mitigate that cyclicality by deploying capital into diversification efforts. These efforts haven’t really worked so well historically; the solar inverter business was a small-scale disaster, and the other acquisitions haven’t really done all that much. Now management is hoping that its biggest-ever deal will change that, with the Artesyn acquisition giving the company exposure to near-term growth trends in 5G and data center and long-term opportunities in med-tech and industrial.

Advanced Energy has done well since my last update, rising close to 40% as the stock has followed other semiconductor suppliers higher since the fall. I was bullish on the stock then, but modeling has gotten a lot more challenging with the addition of Artesyn, and AEIS management guidance suggests a less robust margin/cash flow recovery from the semiconductor business than in past cycles (or Artesyn margins are going to really weak). Unlike many semiconductor equipment stocks, I don’t think the shares look all that expensive, but I want to emphasize the higher level of modeling uncertainty.

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A More Diverse Advanced Energy Is Looking At Multiple End-Market Drivers

VAT Group's Valuation Back In Rarified Air

With logic and foundry orders looking healthy and memory at least looking as though its bottomed, a host of semiconductor equipment stocks have done well over the last year or so, including vacuum valve specialist VAT Group (OTCPK:VACNY) (VACN.SW). While this stock gave investors a few of the 10% pullbacks I said I was hoping for in my last article, the shares have been on a good run since August, with a total gain of over 30%.

At this point I can’t say that I see a lot of value in the shares, though I do think sell-side estimates are too low and the stock could be set up for at least a couple of beat-and-raise quarters that expand the multiples even further. I already have expanding share and expanding market opportunities, as well as new record highs for margins in my model, though, and I just can’t see a lot of appeal here other than as a trading/momentum opportunity.

Readers should note that the stock’s ADR is exceptionally illiquid; the Swiss-listed shares offer much better liquidity.

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VAT Group's Valuation Back In Rarified Air

Stryker Continues To Cut A Swath Through Med-Tech

Like one of the traction cities out of Mortal Engines, Stryker (SYK) continues to roll along, executing well with its core businesses, but also eagerly gobbling up technologies and product portfolios that management believes can aid its long-term growth prospects. While the third quarter wasn’t perfect down the line and the Wright Medical (WMGI) deal isn’t without some risk, Stryker rolls into 2020 with a lot of momentum and healthy prospects across its business.

As perhaps the best med-tech company out there now, Stryker continues to command a premium valuation. While a company with this combination of growth, organic growth, and margin power should be highly valued, I believe market outperformance increasingly relies on multiple expansion that seems less likely to me.

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Stryker Continues To Cut A Swath Through Med-Tech

Zimmer Biomet Showing Long-Awaited Progress In Its Turnaround

Zimmer Biomet (ZBH) (“Zimmer”) has certainly had some issues since the acquisition of Biomet. Between integration challenges, manufacturing problems (including FDA warning letters), and slow underlying market growth, and other challenges to boot, the shares have dramatically lagged rival Stryker (SYK) and the medical device sector as a whole. The story over the past year is quite a bit different, though, as the shares have climbed more than 40%, beating even mighty Stryker, as CEO Bryan Hanson’s turnaround efforts have started to bear fruit.

From where I sit, the real question is the extent to which Zimmer can reignite organic revenue growth and drive better margins. Med-tech valuations tend to be driven by a blend of margins and revenue growth, and the latter is where Zimmer comes up a little short. Although I’m not particularly bullish on drivers like ROSA, Zimmer may yet have enough in the tank to beat revenue growth expectations and see further positive rerating. I’d call these shares more of a hold now, but one with improving underlying quality and upside if it can deliver that improved growth rate.

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Zimmer Biomet Showing Long-Awaited Progress In Its Turnaround

ViewRay Climbing A Steep Hill As It Tries To Disrupt The Radiation Oncology Market

Small-cap rad-onc company ViewRay (VRAY) certainly doesn't lack for ambition, as it is trying to disrupt the $5 billion radiation oncology equipment market with its MRI-guided MRIdian system. While ViewRay brings a lot of positives to the table that should presage meaningful market growth, the reality is that treatment approaches often change much more slowly than investors would otherwise expect and it's not clear to me that cancer centers will see the same advantages in ViewRay's approach.

While I believe ViewRay has a better chance of disrupting the market than Accuray (ARAY) (which I own), there are lots of lessons from the Accuray experience that apply here - particularly radiation oncologists' satisfaction with the status quo and their lack of perceived need to change. Still, with the shares already pricing in very little chance of long-term success, this name could hold interest for more speculatively-minded investors, particularly after a recent capital raise that brought in some interesting strategic investors.

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ViewRay Climbing A Steep Hill As It Tries To Disrupt The Radiation Oncology Market

Improved Execution Has Significantly Boosted Colfax's Credibility

Credit where due - not only has Colfax (CFX) management reduced the cyclicality of the business in a relatively short time, it has also added a credible acyclical healthcare platform and improved the execution of its ESAB welding business. That progress has translated into strong outperformance, with the shares up almost 40% since my last update and leaving Colfax as one of the best-performing industrial/multi-industrial stocks of 2019.

With the move, the undervaluation I saw back in May has been corrected. From here on, the story is about ongoing execution in the Med Tech segment and the speed and magnitude of a short-cycle recovery for welding. With decent long-term revenue growth prospects (3% to 4%) and significant margin/FCF margin improvement potential, this is a name I'd watch through earnings as a potential buy on a pullback, should the welding business disappoint and/or overall sector guidance for the year lead to a broader de-rating.

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Improved Execution Has Significantly Boosted Colfax's Credibility

The Key Mexico Market Is Likely Bottoming, But Cemex Management Has A Lot To Prove

More clunker than clinker over the last five years, Cemex (CX) has chopped steadily downward since mid-2017 as the company continues to see weak results in Mexico (compounded by share loss), lackluster results in the U.S., and frankly not much good news anywhere in the business. On top of that, I’m starting to question if management has the right idea regarding its asset sale initiatives – selling assets and deleveraging is a good idea on balance, but I’m worried that management may be selling the flowers and keeping the weeds.

I don’t think the operating environment in Mexico is going to get much worse, but that’s not a compelling bull thesis, nor is “but it’s cheap!” I do think the market is pricing in pretty unimpressive performance, but shouldn’t it? When’s the last time Cemex really impressed anybody with its execution? There could be value here, but if I want to go shopping for bargains leveraged to Mexican infrastructure I’d rather own PINFRA (OTCPK:PUODY) or pay up for a company like Grupo Aeroportuario del Centro Norte (OMAB).

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The Key Mexico Market Is Likely Bottoming, But Cemex Management Has A Lot To Prove

Look Past The Choppy Near Term, And Chart Industries Looks Appealing

There’s no “one size fits all” approach for reconciling choppy short-term trends with more exciting long-term drivers, but I find these situations can often lead to above-average investment gains for the patient investor. Chart Industries (GTLS) definitely has some near-term risk to lower natural gas-related spending in the upstream and midstream markets it serves, and some industrial cycle risk as well, but I believe those short-term risks pale next to the long-term opportunities in LNG, alternative fuels, and new end-markets.

I’m pretty bearish on U.S. onshore oil & gas spending, but I’m not sure the market is yet and that is my biggest near-term concern with Chart Industries. Longer term, I’d highlight the risk of political action against large-scale LNG exports from the U.S. as a key concern, even if it is not particularly likely. Even with those risks, though, I think the long-term opportunity is pretty interesting; it’s a pretty easy call at $60 and even here closer to $65, I still like Chart as an idea in 2020.

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Look Past The Choppy Near Term, And Chart Industries Looks Appealing

Lincoln Electric Is A Name To Watch Through Earnings

With the earnings cycle about to ramp up again, this is a good time for investors to put together watch lists to take advantage of any earnings or guidance “freak outs”, not to mention sector-wide moves on revised expectations for 2020. Given that industrials have started to soften a bit after a strong rally from October to December, and that many investors and sell-side analysts are explicitly modeling a strong second-half rebound in 2020, there could be some vulnerability here to lower expectations and more caution on that rally.

I regard Lincoln Electric (LECO) as one of the best small/mid-cap names in the industrial sector, and it’s not a stock that investors often get the chance to buy at attractive prices. While I do believe the return prospects from today’s price aren’t ideal, I do see the company’s business bottoming out, with opportunities on both the revenue and margin side in 2020 and beyond. Were the shares to break $90 (let alone retest $80), this would be a name to seriously consider.

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Lincoln Electric Is A Name To Watch Through Earnings

IDEX Corp: A Best-Of-Breed Process Tech Player

The CEO of one of the med-tech companies I covered as an analyst was fond of saying, “The bigger they are, the harder they hit,” when explaining why he steered his company into defensible niches largely ignored by large players, and that is largely the approach taken by IDEX (IEX) in its process technologies business. Despite competing in a wide range of “typical” process industry end-markets, IDEX has focused on pumps, meters, precision fluidics, dispensing equipment, and clamps that occupy highly-defensible, mission-critical slots in segments that don’t attract competitive attention from mega-cap rivals.

I continue to love IDEX as a business, but the valuation is problematic even if you believe that U.S. markets are going to return to growth in 2020. While I am very bullish on the long-term outlook for the company, and acknowledge that I may be underestimating future contributions from M&A, it’s tough to make the numbers work as they are, and so this occupies a spot high on my watch list for now.

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IDEX Corp: A Best-Of-Breed Process Tech Player

Better End-Market Exposures Helping Rexnord Into 2020

I liked Rexnord (RXN) a year ago, or at least I thought the company’s valuation was curiously low on a relative basis given the company’s end-market exposures and cost-reduction efforts. Since then, Rexnord has indeed leveraged that better end-market exposure, driven more costs out of the business, and adapted quite well to tariffs. The market has noticed as well, with Rexnord’s roughly 20% move up since that last article doubling the return of its industrial peer group.

Rexnord’s relative valuation isn’t quite so appealing now, but I do still see high single-digit to low double-digit return potential that is a little better than the average industrial. Although Rexnord’s leverage/exposure to industrial production and capex is a risk, I like the company’s exposure to opportunities like non-residential construction, aerospace, and food/beverage, and I think there’s relatively little destocking risk at this point. All in all, I’d say Rexnord is straddling that buy/hold line, and I think it still offers relatively better upside than many of its peers.

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Better End-Market Exposures Helping Rexnord Into 2020

Hurco Grinding Through The Machine Tool Downturn

Although the shares were down on the day of the announcement, I can't really say that Hurco's (HURC) fourth quarter earnings surprised me all that much. True, revenue and margins were a little worse than I expected, and so too with orders, but this is what downturns look like and I had written previously that I expected at least two more soft quarters as the company worked through this downturn.

Additive manufacturing remains a long-term threat to machine tool companies like Hurco and DMG Mori (OTCPK:MRSKY), but I still see enough demand to support low single-digit long-term growth in Hurco's core high-spec market. I expect revenue to decline for the full year next year, but I believe Hurco will start seeing a recovery in orders (in the first or second quarter of 2020) and I do believe that low single-digit long-term revenue growth, double-digit EBITDA growth, and long-term FCF margins in the mid-single-digits can support a double-digit annualized return from here.

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Hurco Grinding Through The Machine Tool Downturn

Bimbo's Short-Term Challenges Are Intensifying, But There's Value For The Patient Investor

If Grupo Bimbo’s (OTCPK:BMBOY) (BIMBOA.MX) Osito, its white teddy bear mascot, were real, it would be pretty black and blue after the last couple of quarters. While Bimbo’s margin-improvement efforts in the U.S. do seem to be paying off, the company has seen a long run of market share losses compress revenue growth. Worse still, Mexico’s economy has slowed significantly and new labeling laws could weaken volume further, while the Latin American operations south of Mexico remain underperforming.

I was pretty cool on Bimbo back in late June, preferring Gruma (OTC:GMKKY), and Gruma shares have outperformed by about 20% as Bimbo’s near-term outlook has eroded. Given the ongoing share loss in the U.S. and near-term challenges in Mexico, I can’t say Bimbo has already seen the worst of this cycle, and the near-term challenges are meaningful. On the other hand, if the company can manage just 3% to 3.5% revenue growth and 75bp to 100bp of FCF margin improvement over the long term, the shares look priced for a long-term annualized return in the high single digits.

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Bimbo's Short-Term Challenges Are Intensifying, But There's Value For The Patient Investor

Gruma Undervalued, Particularly With Premium U.S. Products Performing Well

Gruma (OTC:GMKKY) (OTC:GPAGF) (GRUMAB.MX) shares haven’t exactly been on a tear over the last six months or so, but the stock has at least outperformed the Mexican stock market as a whole and trailed the S&P 500 only modestly. This middling market performance comes despite real progress on important fronts for the company – particularly the expansion of its premium product line in the U.S., which has helped drive volume and market share growth.

These shares look undervalued to me, with underlying assumptions of mid-single-digit revenue growth and mid-to-high single-digit FCF growth, as well as a forward EBITDA multiple of less than 10x.

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Gruma Undervalued, Particularly With Premium U.S. Products Performing Well

Roper's Share Price Has Flattened, While The Compounder Model Hums Along

To paraphrase a long-time reader, it's worth asking if Roper (NYSE:ROP) is more wily or Wile E. Coyote - is this M&A-driven decentralized growth model truly something special (and something sustainable), or has valuation run off the cliff with nothing left to support it other than the fact investors haven't yet looked down?

Valuation is never an exact process, but I do think Roper is more the former (a special company/model) than the latter (a sentiment-driven future train wreck). Roper doesn't buy growth so much as it buys market share, moats, and margins (three M's, that 3M (MMM) would do well to copy in its M&A strategy), and the company's decentralized model gives it a range of potential targets that is far wider than almost any of its peers. What's more, the company is increasingly software-centric, given its asset-light model with high recurring revenue and less cyclicality. I'm not suddenly reversing course and declaring Roper a bargain, but I do at least see why investors value this company as they do.

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Roper's Share Price Has Flattened, While The Compounder Model Hums Along

PacBio Now Officially On Its Own Again, But Still Has Potential

The writing was on the wall for a while, and now Illumina (ILMN) and Pacific Biosciences (PACB) (“PacBio”) have bowed to the inevitable and terminated their merger agreement. Illumina will no longer attempt to acquire PacBio’s long-read sequencing capabilities and PacBio will have to go it alone, for now, and try to drive higher placements and usage of its new Sequel II system to reach a sustainable level of business.

For Illumina, this is no worse than a moderate setback in the short run, with the long-term consequences dependent on both how important long-read sequencing becomes in the market and what they can accomplish with their own internal R&D. For PacBio, this is clearly a serious challenge – the payments from Illumina will certainly help tide them over, but long-term viability, let alone success, are far from assured. Even so, there is some appeal here for more aggressive investors given PacBio's solid long-read technology and Illumina's tacit validation of that technology through the attempted acquisition.

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PacBio Now Officially On Its Own Again, But Still Has Potential

PINFRA Undervalued As Weak Mexican Economic Data Has Spooked Investors

As something of a proxy for Mexico itself, or at least its infrastructure, I can’t say that the weak performance of PINFRA (OTCPK:PUODY) (PINFRA.MX) shares, flat since my last update, is wholly unreasonable. Mexico’s economic growth has been feeble after all, with GDP declines in the last two quarters and the full year expected to finish out at barely above flat. That has translated directly into weaker traffic for this leading Mexican toll road operator, along with weaker revenue and EBITDA results (net of an acquisition).

While the short-term response may be understandable, I think it still undervalues the long-term potential of this company. Mexico’s government has shown definitively in my view that they will respect the rights and needs of concession operators in the country and work to create “win win” situations where Mexican citizens get access to the infrastructure they need, while the companies building and maintaining that infrastructure earn reasonable returns. With potentially billions in new road and projects on the way, and a chance for some improvement in Mexico's economy in 2020, I think the double-digit implied return potential here makes this a name worth considering.

Investors should note that PINFRA ADRs are not particularly liquid.

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PINFRA Undervalued As Weak Mexican Economic Data Has Spooked Investors

Better Cameras Mean Better Opportunities For Alps Alpine

Not only has the 2019-2020 smartphone cycle gone better than expected for component suppliers like Japan’s Alps Alpine (OTCPK:APELY) (6770.TO), the outlook for the next couple of years has improved meaningfully, with more OEMs guiding to meaningful upgrades in their camera offerings. With OEMs realizing that cameras are an important point of differentiation with consumers, Alps Alpine looks set to benefit from improving sales of more sophisticated camera actuators while the auto business bottoms out.

That stronger camera actuator outlook has done wonders for the stock, sending the shares up almost a third since my last update on the company. I thought the shares were undervalued then, but I underestimated how quickly sentiment would shift on the fall introduction of Apple’s (AAPL) new lineup (among other OEMs). While the shares may not be quite so undervalued now, the improved actuator outlook does drive value and the shares still offer attractive annual return prospects from here.

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Better Cameras Mean Better Opportunities For Alps Alpine

Kirby's Core Business Back To Its High Tide

Kirby (KEX) is a story of two businesses right now, one very much back to the historically strong operating performance, and the other struggling to find a bottom amid a significant decline in onshore oil and gas equipment spending. Fortunately for Kirby shareholders, it’s the Marine business -- the business that has always driven value for the company -- that is doing well, while management looks to minimize losses in the Distribution and Services business for the time being.

Valuation has often been a challenge with Kirby. The shares have underperformed the market since my last write-up, but I did note in that last piece that readers might want to try to buy shares below $75. That opportunity came about a month later, and investors who bought below $75 are holding a decent 20% gain over a roughly four to five-month holding period. While Kirby’s Marine business is definitely doing well again, and returns of capital to shareholder could be on the horizon, I still have trouble making the valuation work below $75.

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Kirby's Core Business Back To Its High Tide

Happy New Year!

Wishing you all a healthy, happy, and rewarding new year in 2020.

Geely Auto Emerging From China's Auto Downturn In Better Shape

“Chaos isn’t a pit. Chaos is a ladder.” David Benioff & D.B. Weiss through Petyr Baelish, Game of Thrones

The last year and a half has been tough for Chinese automakers, as the Chinese auto market goes through its first real downturn since the market really became a major opportunity for both global and local producers. Amid the chaos, though, I believe Geely Auto (OTCPK:GELYY) (0175.HK) has continued to perform well and distinguish itself a bit further from the pack of domestic OEMs. With improving results in its new vehicle lineup, particularly SUVs, and a strong platform of electrified models, I think management’s goals of becoming the #2 domestic automaker in China and holding 10% market share within five years are no worse than plausible.

Up more than 25% from my last article, the market has responded favorably to Geely returning to volume growth ahead of the broader market. While the potential returns are not quite exciting at this level, the risk isn’t as high and I believe the stock remains a decent idea for investors who want to play the growth in China’s auto industry.

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Geely Auto Emerging From China's Auto Downturn In Better Shape

AxoGen Working Its Way Out Of The Penalty Box, But Execution Is Key

With much less progress than expected on sales productivity and surgeon utilization, 2019 has been a tough year for AxoGen (AXGN). The shares have recovered quite a lot of ground from their September/October lows, but if this rally is going to continue, the company must shift to beat-and-raise quarters and reassure the Street that 20%-plus revenue growth is attainable – a development that I believe will hinge on improving sales rep productivity and surgeon utilization of the company’s grafts.

It’s not unusual for small med-tech stories to stumble, but that makes it no less frustrating for shareholders. I continue to believe that AxoGen has a differentiated product platform backed by legitimate data, but that’s not all it takes to run a successful med-tech business. These shares are still in Wall Street’s penalty box for having missed revenue growth expectations, but there is still upside into the mid-$20s over the next 12-18 months if management can deliver on improved productivity and utilization metrics and rebuild the buy side’s confidence in the name as a growth med-tech story.

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AxoGen Working Its Way Out Of The Penalty Box, But Execution Is Key

Wabtec's Better-Than-Expected Performance Has Shrunk Some Of The Fear Discount

Once a Wall Street darling, Wabtec (WAB) had lost a lot of that luster, as the company’s expensive foray into transit via the Faiveley acquisition hadn’t really produced the hoped-for benefits and investors worried about the size, quality, and growth potential of the large GE Transportation deal, particularly with the looming changes in how Class 1 rails operate. While those concerns were, and are, valid, the shares have managed to modestly outperform the S&P 500 since my last update, with better-than-expected execution apparently easing some of the fear discount.

The company’s revenue outlook remains challenging, with near-term pressures from weak rail traffic growth and stacked locomotives and uncertain share growth potential in international markets. Margins are looking stronger, though, and I think Wabtec is on pace to get to mid-teens FCFs margins a little sooner than I’d previously expected (three, possibly four years, earlier). With the shares offering okay appreciation potential on discounted cash flow and seemingly undervalued on the basis of margins and returns, this is still a name worth considering for 2020 given the overhang of uncertainty if not outright skepticism.

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Wabtec's Better-Than-Expected Performance Has Shrunk Some Of The Fear Discount

Tenneco Still Unsteadily Walking A Tightrope

Back in June I wrote that Tenneco (TEN) was one of the more complicated stories in the vehicle parts group that I follow, as the company’s very high leverage meant that even objectively small changes in modeling assumptions could have outsized impacts on the implied fair value. I also said that I didn’t really like the fundamental story, as the company’s opportunity to grow content in hybrid light vehicles and commercial vehicles was offset by mixed margin leverage, a questionable management team, and ample uncertainty on the DRiV spin-off.

Not a lot has changed. Although Tenneco has done a little better since that piece relative to names I like better like BorgWarner (BWA) and Dana (DAN) (Valeo (OTCPK:VLEEY) has outperformed), I don’t feel like I’ve missed much on a risk-adjusted basis. Although there’s definitely outsized upside here if Tenneco management can get margins moving in the right direction (and/or figure out some attractive asset sales), that outsized upside comes with outsized risk, as the company will need almost 15 years to earn out its debt if margins don’t improve more than I expect.

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Tenneco Still Unsteadily Walking A Tightrope

SLC Agricola Still Differentiated On Quality, Less So On Valuation

Brazilian ag company stocks have perked up recently (or at least Adecoagro (AGRO) and SLC Agricola (OTCPK:SLCJY) ), finally driving some good news for investors who’ve seen a difficult stretch with these stocks. Specific to SLC Agricola, the shares are up about 30% from my last article on the company, helped by both ongoing strong equation by the company and improving commodity prices. I also believe the company’s ongoing efforts to drive toward an asset-light model are contributing, with another sale-leaseback transaction at an attractive premium to the appraised value.

The biggest challenge I see with SLC Agricola is whether the company can continue to pass over ever-higher hurdles. Management believes they can improve yields and profit margins even further, but they’re already one of the best in Brazil, and bad weather or adverse commodity market moves can undo a lot of that in the short term. Increasing sale-leaseback activity could still add value, but the shares aren’t an easy valuation call anymore.

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SLC Agricola Still Differentiated On Quality, Less So On Valuation

Insteel Struggling Under An Unbalanced Tariff Policy

I wasn't all that interested in Insteel (IIIN) back in January of this year, as I was worried that this manufacturer of steel reinforcing products would struggle due to an unbalanced tariff policy that basically forces the company to buy overpriced inputs (wire rod) but compete with cheaper downstream imports sold by companies that can avail themselves of cheaper wire rod in international markets. Much of that has come to pass, with the shares basically flat for the year and sandwiched between the performance of other steel companies like Commercial Metals (CMC), Nucor (NUE), and Steel Dynamics (STLD).

In that last article, I said that Insteel would be more interesting below $20/share, and investors got that chance a few times this past year, with those who bought below $20 at least showing a profit for their efforts. Although I think pricing pressure should ease up some on Insteel in fiscal 2020, gross profit margins are going to remain under pressure and I expect this to be another challenging year.

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Insteel Struggling Under An Unbalanced Tariff Policy

Adecoagro Finally Getting Its Due As The Street Wakes Up To The Story

You never know when a fundamentally undervalued situation will suddenly flip; the Street can be stubborn and seemingly illogical for frustratingly long periods of time. Whatever made investors finally reexamine Adecoagro (AGRO), I’m glad to see it, as the shares are finally reflecting more of the underlying value that I’ve seen there for a little while. More likely than not, investors are waking up to the realization that 2019 is/was the end of a five-year capex investment cycle that suppressed free cash flow, not to mention some recent positive trends in both sugar and ethanol.

I still think Adecoagro is undervalued, but just not to the same extent as before. I believe the Argentina-related risks are manageable, and I’m fairly bullish on the near-term prospects for ethanol in Brazil. Sugar prices remain a wildcard, but it looks like the balance of factors is tilting more in the company’s favor than it has for a while.

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Adecoagro Finally Getting Its Due As The Street Wakes Up To The Story

DBS Group Dragging As Rates And Slow Loan Growth Weigh On Near-Term Growth

When I last wrote about DBS Group (OTCPK:DBSDY), I noted that “a credit loosening cycle in the U.S. and increased trade tensions could create some near-term challenges,” and those challenges have in fact materialized for this leading Singaporean bank. Still, the company has handled these challenges well and the growth outlook hasn’t been compromised all that much, particularly as credit and net interest margins have held up better than expected.

DBS Group shares have eked out a slight gain since that last piece due to the dividend (the share price is down modestly), and the shares have done about as well as OCBC (OTCPK:OVCHY) and the Singaporean market, while United Overseas (OTCPK:UOVEY) and Standard Chartered (OTC:SCBFY) have both done a little better. Despite a lackluster run over the last year or so, I still believe this is a very high-quality Asian bank with good leverage to growth in China, South Asia, and Southeast Asia, and though it might take a little time for the shares to work, I think it’s still a good name to consider.

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DBS Group Dragging As Rates And Slow Loan Growth Weigh On Near-Term Growth