BankUnited: Valuation And Deposit Costs Offset Sound Growth Investments

There are certainly things to like about BankUnited (NYSE:BKU). This bank has significant operations in an attractive fast-growing market (Florida) and is using an organic growth strategy to expand into attractive markets like Atlanta and Dallas. The bank has also been focused on addressing past deficiencies in its core deposit base, while also returning meaningful capital to shareholders.

Despite those positives, the shares have lagged the larger regional bank group since my last article (up about 9% versus up 25%), as my concerns about the bank's deposit costs and valuation have played out. At this point, BankUnited shares do look undervalued, but so do many other bank stocks, and without more meaningful differentiation in loan growth, spread margin, and/or operating leverage, I don't see what really ought to drive a "buy this, not that" call for BankUnited.

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BankUnited: Valuation And Deposit Costs Offset Sound Growth Investments

Komatsu Beating Estimates And Raising Guidance, But Going Nowhere Fast

In my last article on Komatsu (OTCPK:KMTUY), I noted a growing rift between the performance of Komatsu as a company and the performance of its shares. Since then, the company has continued to execute well, handily beating expectations, but the shares have arguably still lagged what that performance should have earned. Komatsu’s local shares are up about 8%, while the ADRs are down about 8%, versus a 15% move in Caterpillar (CAT) shares, 3% moves at Deere (DE) and Terex (TEX), and a much weaker performance at Volvo (OTCPK:VLVLY) and Hitachi Construction Machinery (OTCPK:HTCMY).

I believe Komatsu is undervalued relative to what the market has typically paid for peak earnings, but I’m also concerned that demand for construction machinery in markets like North America isn’t likely to get much better, and that demand in Indonesia and across the mining sector could likewise soften from here. I see a trading opportunity here, but I’d be careful about not overstaying my welcome.

 

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Komatsu Beating Estimates And Raising Guidance, But Going Nowhere Fast

BRF Shares Look Almost Left For Dead, But Sustainable Momentum Is Still Lacking

Very little is going well for BRF S.A. (NYSE:BRFS) these days. High production costs are sapping margins, while high prices seem to be leading to some demand destruction in the Brazilian processed/branded food business. At the same time, new management has yet to give the Street a clear sense of what they will do differently or how they will achieve meaningfully better results than the frustrating run of inadequate profitability seen for many years now.

That gloom is amply reflected in the share price, which has fallen another 30% since my last update, noticeably worse than the weak results of other protein peers like JBS S.A. (OTCQX:JBSAY), Marfrig (OTCPK:MRRTY), Minerva (OTCPK:MRVSY), and Tyson (TSN). At this point, it’s not too much of a stretch to say that the market is valuing BRF as though it has almost no future and/or that Marfrig will make a lowball offer to sweep up the remainder of the company it doesn’t own.

I honestly don’t know what to tell investors at this point. The valuation seems harsh, but results aren’t going to get meaningfully better soon and I don’t see the company generating enough free cash flow to meaningfully reduce its debt for some time. At a minimum, while expectations may be washed out, investors should remember that it can always get worse from here and this is, at best, a high-risk deep value/turnaround story.

 

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BRF Shares Look Almost Left For Dead, But Sustainable Momentum Is Still Lacking

Carpenter Technology: Navigating Well Through A Turbulent Initial Aerospace Recovery Cycle

These early quarters of the commercial aerospace upswing have had their challenges, with OEMs forced to revise their production schedules in response to unpredictable component availability from their suppliers. This does set the stage for elevated performance risk in the short term, as quarter-to-quarter production may deviate from expectations, but I remain bullish on a multiyear trend of growing narrowbody and widebody aircraft construction.

Carpenter Technology (NYSE:CRS) shares have risen close to 15% since my last update on the company, making them an outperformer in a space where rivals like ATI (ATI), Hexcel (HXL), Howmet (HWM), and Universal Stainless & Alloy (USAP) have seen a little more turbulence in results and sentiment. I continue to believe that Carpenter is well-placed to leverage that growing aerospace demand into improved financials and valuation, and I believe the shares are still worth consideration here.

 

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Carpenter Technology: Navigating Well Through A Turbulent Initial Aerospace Recovery Cycle

Universal Stainless & Alloy Products Takes A Step Back As The Aerospace Recovery Cycle Lurches Forward In Fits And Starts

The recovery in commercial aerospace is real, but it has proven to be considerably less of a smooth upward ramp and more of a drunken lurch, as major OEMs like Airbus (OTCPK:EADSY) and Boeing (BA) struggle to balance uneven production rates and capabilities among suppliers, and those suppliers (and OEMs) continue to struggle with component/supply availability, input costs, labor availability, and just about anything else you care to name. Add in operational challenges (some self-inflicted, others not), and Universal Stainless & Alloy Products (NASDAQ:USAP) ("Universal Stainless") has struggled to maximize these still-early days of recovery.

Down about 10% since my last update, Universal Stainless has lagged other material and component suppliers to the aerospace industry, but only Carpenter (CRS) has really done well over that time, as ATI (ATI), Hexcel (HXL), and Howmet (HWM) have been more "meh" than magnificent.

I've never thought that Universal Stainless was the best operator of the bunch, but I've seen over many years across many cyclical industries that secular upswings tend to produce more dramatic improvements at the less-capable operators, and I believe that will still be the case here. By no means is this the cream of the crop, nor a long-term holding, but I do believe this unfollowed and thinly-traded supplier of specialty steels can still produce attractive returns for more aggressive investors.

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Universal Stainless & Alloy Products Takes A Step Back As The Aerospace Recovery Cycle Lurches Forward In Fits And Starts

Short-Term Noise Shouldn't Drown Out The Attractive Commercial Aerospace Story At ATI

Will the real commercial aerospace market please stand up?

Air travel continues to recover, and airlines continue to look to refresh and expand their fleets, but the progression of the commercial aerospace recovery in 2022 has been choppier than expected. Orders continue to come in and lead-times continue to stretch for key materials and components, but unreliable supply chains and component availability has led to a slower ramp than initially expected.

None of this is particularly good news for ATI (NYSE:ATI) (formerly known as Allegheny Technologies) in the short run, but there is good news in an expanding order book, improving margins, and a multiyear opportunity to leverage strong commercial aerospace demand into cash flows.

ATI shares have risen about 7% since my last update, good enough to beat the market, as well as most other material and component suppliers like Carpenter (CRS), Howmet (HWM), Hexcel (HXL), and Universal Stainless & Alloy (USAP) over that time. Valuation is still relatively appealing, and I think these shares still offer upside.

 

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Short-Term Noise Shouldn't Drown Out The Attractive Commercial Aerospace Story At ATI

PRA Group Languishing Ahead Of New Supplies Of Charged-Off Debt

The pandemic was weird.

A normal cycle would have seen a surge in bad debts that banks and other creditors would ultimately write off and sell to recovery companies like PRA Group (NASDAQ:PRAA) and Encore (ECPG). Unlike prior cycles, consumers got an unusual level of government assistance this time, propping up their solvency and the credit quality of lenders. With that, the expected surge in write-offs never really happened, and PRA Group and Encore have been watching their inventory of charged-off receivables dwindle, hitting cash collections, revenue, earnings and cash flow.

PRA Group shares are down about 25% since my last update, while Encore has done slightly worse. I have no expectations that a quick turnaround in reported financials is around the corner, but I do see rising consumer debt, declining credit quality, and a tougher economic environment in 2023. Should that all play out, charge-offs will start increasing more meaningfully (likely in late 2023 or in 2024), PRA Group will have more to collect, and earnings will rebound. Whether investors want to wait for that rebound is up to them to decide, but the shares do look undervalued below the $40’s.

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PRA Group Languishing Ahead Of New Supplies Of Charged-Off Debt

ITT Pressured By Delayed Cost Recoveries And Weakening Short-Cycle Markets

Above-average organic revenue growth and margin expansion haven't helped sentiment around ITT (NYSE:ITT) all that much, as this diversified industrial has continued to underperform relative to the broader industrial group. A cautious tone from management about 2023 hasn't really helped (even if I think it's a more realistic view than what other companies have offered), and investors are trying to figure out just what the macro outlook for 2023 is going to be.

Down more than 10% since my last update on the company, I have mixed feelings about the stock. I think the company has better cycle exposure than the valuation reflects, but delays in driving better price/cost mix and a heavy exposure to auto builds are not what the Street really wants now. High single-digit long-term annualized return potential isn't bad, but I think it may take a few quarters for these shares to work again, and it's hard to call this a must-own when investors have a wider selection of undervalued industrial stocks to choose from at the moment.

 

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ITT Pressured By Delayed Cost Recoveries And Weakening Short-Cycle Markets

Margin Challenges And End-Market Worries Overshadowing Good Growth At Materion

This has been a tougher-than-expected year for Materion (NYSE:MTRN). While the company has seen strong demand in key core markets like semiconductors, industrial, aerospace, and energy, multiple margin headwinds have worked against the company, depressing reported profits and cash flows and leading to negative estimate revisions. The third quarter in particular was rough for sentiment, with a sharp drop pushing the shares down almost 10% since my last update – underperforming Johnson Matthey (OTCPK:JMPLY), but outperforming the semiconductor market that drives a substantial part of the business.

The margin challenges are disappointing, but not unsurmountable, and I think the share price has already paid the price for the reset of expectations. I do have some concerns about weaker semiconductor volumes in 2023, but I believe heavy industry, oil/gas, and aerospace should remain healthy. I’ve decided to take a more conservative “show me” stance on longer-term margin improvement, but even with those revisions, high single-digit growth can support a higher price for the shares.

 

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Margin Challenges And End-Market Worries Overshadowing Good Growth At Materion

Trane Technologies Offers A Multipart Puzzle Between Industry Drivers, Macro Risk, And Valuation

I described Trane's (NYSE:TT) valuation as "interesting" earlier this year, as the HVAC sector had weakened on a slowing outlook and what I believed to be sector rotation. While I wasn't fully comfortable with the valuation, I thought growth prospects were stronger in the near term than the Street was appreciating, and that has been borne out this year by the company's results.

The shares have appreciated close to 10% since that last article, outperforming not only the broader industrial space, but other HVAC and refrigeration companies like Carrier (CARR), Johnson Controls (JCI), and Lennox (LII). On the positive side, I like Trane's leverage to what I believe can be a multiyear trend of efficiency-driven upgrades, but on the negative side, I have some concerns about 2023 expectations and the valuation.

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Trane Technologies Offers A Multipart Puzzle Between Industry Drivers, Macro Risk, And Valuation

Ingersoll Rand Executing Well And Better Days Are Still Ahead

A year ago I was neutral on Ingersoll Rand (NYSE:IR) shares, as I liked the multiyear growth story underpinned by the company’s exposure to capital spending and certain ESG touch points like energy and resource efficiency, not to mention the M&A optionality, but didn’t love the valuation. The shares have sold off about 5% or so since then, keeping pace with the broader industrial space and outperforming Atlas Copco (OTCPK:ATLKY).

I’m still not exactly thrilled about the valuation, and I don’t feel that my underlying expectations (high single-digit revenue growth and meaningful margin/FCF margin expansion) are conservative. Still, at a time when short-cycle names are rolling over, I think Ingersoll Rand is in better shape than most over the next five years (and beyond). While I’m tempted to hold out in the hope of a better price on a market sell-off, I don’t think there’s anything wrong with owning a good company (and one likely to outgrow its markets and peers) trading at a reasonable price.

 

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Ingersoll Rand Executing Well And Better Days Are Still Ahead

Textron Drifting, As Its Main Drivers Now Are Outside Of Its Control

Wall Street isn’t a sentimental place, but I can empathize if Textron (NYSE:TXT) management and investors are a little frustrated with the circumstances around this aviation company. Supply chain issues are preventing the company from producing Cessna bizjets at targeted rates, while the wait goes on for a major military award that will play a significant role in the future of the company’s helicopter business.

These shares have fallen almost 10% since my last update, underperforming the broader industrial space and other aerospace-leveraged names like General Dynamics (GD), Honeywell (HON), and Lockheed Martin (LMT), and only doing a little better than Boeing (BA). I do have some concerns that expectations for the bizjet cycle are getting too bullish, but I believe Textron can still generate long-term revenue growth in the neighborhood of 5% and the shares look more interesting on that basis, but there’s above-average risk here right now.

 

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Textron Drifting, As Its Main Drivers Now Are Outside Of Its Control

First Citizens BancShares Off To A Good Start With Its Transformative Acquisition

For several years now, investors owning the shares of banks undertaking large mergers have had to wait a while to see the benefits, as the market has taken a “wait and see” approach that has meant underperformance relative to benchmarks until the synergies start showing up. So far, First Citizens Bancshares’ (NASDAQ:FCNCA) (“First Citizens”) merger with CIT is working out well, and the stock has been outperforming on good core operating profits, with early evidence of cost synergies and above-average lending growth.

Up about 15% since my last update, First Citizens has outperformed the regional banking sector by close to 15%, as well as outperforming other commercial-driven growth banks like East West Bancorp (EWBC), Pinnacle Financial (PNFP), Signature (SBNY), or SVB Financial (SIVB). I have some concerns about a weaker macroeconomic environment in 2023 and higher deposit costs, but I’m still expecting high single-digit normalized core growth from this bank, and that continues to support an attractive return in a still-out-of-favor sector.

 

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First Citizens BancShares Off To A Good Start With Its Transformative Acquisition

Werner Enterprises Is More Defensive, But The Street Doesn't Care

Looking at Werner Enterprises (NASDAQ:WERN) back in March of this year, I thought that the company’s stronger skew to the more stable dedicated carrier business (contracted truckload trucking for customers like retailers) would serve the company in good stead as the freight cycle peaked and then rolled over, sending volume expectations and spot rates lower. Well, the cycle has rolled over, but Werner hasn’t been quite as defensive as I’d hoped – the shares have dropped about 10% since then, a little worse than Heartland Express (HTLD), which typically has some counter-cyclical appeal, and a little better than Knight-Swift (KNX).

At the risk of sounding a little flippant, it’s the rare trucking stock that doesn’t look cheap to me today, leading me to wonder whether my assumptions for the next three years (and beyond) are simply too bullish or whether the Street is doing what it often does with cyclical stocks – dumping them almost irrespective of longer-term value in favor of stocks more likely to show earnings growth and margin leverage over the next year or two.

I think it’s the latter, and Werner does still look undervalued to me. It’s a more defensive name, and this would seem like a better time to think of defense first, but investors should remember that cyclical plays are meant as trades (not long-term buy-and-holds) and there will come a time when a shift to more aggressive carriers will be in order.

 

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Werner Enterprises Is More Defensive, But The Street Doesn't Care

Even Considering A Worse-Than-Consensus Downturn, ArcBest Seems Too Cheap

Given the difficulties of predicting the timing and magnitude of the cycles, trucking stocks can create some attractive trading opportunities, but at the cost of elevated risk. I think that’s a relevant consideration when looking at ArcBest (NASDAQ:ARCB) – the shares do look undervalued now, but trucking stocks (including less-than-truckload carriers like ArcBest) don’t perform well when the PMI heads below 50 and there is growing evidence of a meaningful slowdown in industry drivers.

Since my last update, these shares have risen about 15% overall (and they ran up almost 80% toward the end of 2021), outperforming other LTL carriers like Old Dominion (ODFL), Saia (SAIA), and Yellow (YELL). I am concerned that I’m underestimating the degree to which ArcBest will see volumes and profits contract in the coming downcycle, but the shares look undervalued on what I consider to be reasonable modeling assumptions. While the space is a little crowded with ideas now, I think ArcBest is worth a look.

 

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Even Considering A Worse-Than-Consensus Downturn, ArcBest Seems Too Cheap

Heartland Express Has Tools To Offset A Cyclical Trucking Correction

Times are starting to get tough in the trucking industry. High channel inventories and weakening end-user demand are undermining the demand side of the equation and there is now significantly more capacity in the market. With that, spot rates are falling and are likely to collide with (and then briefly go below) spot rates in 2023, or possibly sooner.

That’s not a great set-up for any trucking company, but Heartland Express (NASDAQ:HTLD) is more than just any trucking company. Heartland has a strong operating track record and a solid core of drivers and equipment that stand out in the industry, not to mention long-standing customer relationship. The company also has M&A synergy levers to pull in 2023 that I believe can help offset some of the sector pressures coming in 2023.

Heartland shares have slipped about 4% since my last update, outperforming Knight-Swift (KNX) and Werner (WERN) by about 5%, as well as outperforming the broader transportation sector (the DJT is down about 16% over that time). I don’t prefer Heartland to Knight-Swift, which I recently wrote about here, but I do see Heartland as undervalued and possessing some counter-cyclical attributes that could help over the next six to 12 months.

 

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Heartland Express Has Tools To Offset A Cyclical Trucking Correction

Freight Markets Are Rolling Over, But Hub Group Is Well-Positioned Long Term

It's never easy to buy into a cyclical downturn, as cycles have a way of defying expectations for duration and depth. Moreover, Hub Group (NASDAQ:HUBG) hasn't really sold off all that much from its peak, despite the likelihood of weaker intermodal and brokerage pricing and some fall off in volumes as economic activity slows. I think there are good reasons Hub Group hasn't sold off much, though, as this is one of the best-run intermodal/logistics companies that I follow.

Hub Group shares are up about 40% since my last update, handily outperforming other stocks that I watch in the space, including C.H. Robinson (CHRW), J.B. Hunt (JBHT), Schneider (SNDR), and XPO (XPO). I do see some risk from the spread between longer-term sell-side analyst estimates and management's targets (the sell-side is higher), and likewise, I do see risk that the next 12-24 months could be tougher economically than currently expected, but it's hard not to like the longer-term value proposition here.

 

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Freight Markets Are Rolling Over, But Hub Group Is Well-Positioned Long Term

Lattice Semiconductor Not Immune To A Semiconductor Slowdown, But The Quality Is Still There

Having been bullish on Lattice Semiconductor (NASDAQ:LSCC) back when management launched a turnaround that has driven revenue acceleration and margin expansion beyond even what bulls believed possible, I've also spent a few articles lamenting how the shares ran away from me. While the stock has continued to outperform the SOX index (down 19% versus down 32% since my last update on Lattice), the pullback has at least made the valuation a little more reasonable.

When I say "reasonable", I do mean reasonable in the context of a growth stock. These shares aren't cheap on any reasonable multiples-based approach, unless you try to look at what the market has in the past been willing to pay for growth stories like Altera, Cavium, Inphi, Nvidia (NVDA), or Xilinx. I do believe Lattice can generate the sort of mid-to-high-teens growth that can support such hefty multiples, and I think these shares are worth a look from growth-oriented investors who can accept the risk that growth slows more sharply here and/or simply can't match the level of investor expectations baked into the price today.

 

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Lattice Semiconductor Not Immune To A Semiconductor Slowdown, But The Quality Is Still There

Harsco Seeing A 1-2 Punch Of Softening Steel Volumes And Weak Waste Treatment Margins

Very little has gone right for Harsco (NYSE:HSC) in 2022, as the company’s steel services business has seen weakening volumes and the Clean Earth waste treatment business has crumpled under the weight of cost inflation (also an issue in the steel services business). On top of that, there’s little visibility at this point on the sale of the Rail Services business, which management has been treating as a discontinued operation.

I was concerned about the possibility of further margin struggles at Clean Earth back in March, and the shares have lost about half their value since then. There aren’t really any comps for the company, but I would note that Alcoa (AA) and U.S. Steel (X) have seen similar declines over that period, and the waste management space hasn’t been especially strong either.

At this point, I’m torn between a difficult outlook for the steel industry, a more challenged outlook for the economy in general, the company’s self-help initiatives, and the valuation. The shares do appear undervalued on what I think are conservative expectations, but it’s hard to have much confidence in a bullish call here.

 

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Harsco Seeing A 1-2 Punch Of Softening Steel Volumes And Weak Waste Treatment Margins

A Late-Cycle, Service-Driven Story Is Driving Otis Worldwide Higher

It’s been a while since I’ve written on Otis Worldwide (NYSE:OTIS), and the shares have outperformed my expectations since then, climbing about 15% and outperforming the broader industrial space by about 10%. Relative to other companies with significant non-residential exposure, Otis has outperformed Allegion (ALLE), KONE (OTCPK:KNYJY), while Johnson Controls (JCI) has kept pace, and late-cycle companies have in general been holding up better as investors increasingly worry about short-cycle trends next year.

I understand the appeal of the Otis story – not only are key markets like multifamily housing likely to be stronger than most in 2023, but the company has a multiyear service growth story that is supported by strong execution in recent years. Valuation already reflects a lot of the positives, though, and I do see a weaker non-residential construction environment as a modest potential negative.

 

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A Late-Cycle, Service-Driven Story Is Driving Otis Worldwide Higher

Lagging Late-Cycle Exposure Can Help Allegion, But The Valuation Isn't Compelling To Me

I wasn’t overly fond of Allegion (NYSE:ALLE) when I last wrote about this leading manufacturer of locks, door controls, and access systems, as I thought the shares were getting a bit too much credit for their end-market leverage. The shares have fallen more than 20% since then, underperforming the broader industrial space by more than 10%, as well as underperforming the shares of the company’s largest rival Assa Abloy (OTCPK:ASAZY) – all of that including a nice post-earnings kick of close to 10%.

I’m conflicted on the shares right now. I don’t really like the valuation all that much, and I don’t think my outlook for 5%-7% long-term revenue and FCF growth is exactly conservative. On the other hand, the company still has lagging price action acting as a tailwind, not to mention late-cycle exposure that investors seem to find strategically attractive today. Still, I’m concerned about the health of the construction markets that Allegion serves, and I’d prefer a wider margin of safety before investing my own money.

 

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Lagging Late-Cycle Exposure Can Help Allegion, But The Valuation Isn't Compelling To Me

Aptose Biosciences: Expansion Studies Could Rebuild Investor Interest In This Beaten-Down Biotech

Investing in early-stage biotechs is always risky and almost never easy, and that has certainly been true for Aptose Biosciences (NASDAQ:APTO). Investors have had to deal with unexpected issues tied to its former lead drug luxeptinib and a slow build of positive clinical data for its new lead drug tuspetinib (formerly HM43239, or "239"), and all this while the biotech market has been under pressure.

Heading toward the American Society of Hematology (or ASH) meeting in mid-December, Aptose has been building up its clinical dataset for tuspetinib, and so far this looks like a promising drug worth more than the sub-$70M market capitalization of Aptose as of this writing. Of course, there is still a lot that has to be proven in the clinic, but investors looking for a high-risk play on difficult-to-treat leukemia subtypes should take a closer look.

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Aptose Biosciences: Expansion Studies Could Rebuild Investor Interest In This Beaten-Down Biotech

ArcelorMittal Hit Hard On Weakening Spreads And Evidence Of Demand Erosion

This has been a rough year for ArcelorMittal (NYSE:MT), as weakening demand and higher production costs have started to squeeze steel spreads more intensely. Macro concerns continue to dominate and overshadow the underlying operating improvements at this global steel giant, sending the shares down about 25% since the start of the year.

It’s hard for me to see significantly more downside in U.S. or EU steel prices from here, but commodity markets have a way of surprising in both the good and bad times, and even if prices stabilize near current levels, spreads are going to remain under pressure. As far as positive drivers go, I like ArcelorMittal’s opportunities in India and its focus on returns in mature markets, but those drivers likely won’t do much to offset the difficult macro environment.

ArcelorMittal shares look undervalued by all of the approaches I use, but sentiment on most segments of the steel sector is pretty poor now, and I don’t expect a particularly strong macro backdrop for 2023. This may be a name for more contrarian investors to consider as a longer-term rebound play, but it’ll take patience to work out.

 

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ArcelorMittal Hit Hard On Weakening Spreads And Evidence Of Demand Erosion

Cummins Should Benefit As Production Schedules Normalize, But The Cycle Is A Big Unknown Now

 

A recent surge in truck orders has done wonders for heavy machinery companies exposed to that sector, with the shares of Allison (ALSN), Cummins (NYSE:CMI), and PACCAR (PCAR) up about 15% to 25% since late September as September Class 8 truck orders set an all-time record and October orders came in strong as well. At the same time, component availability is improving, breaking up production logjams, cost inflation is flattening out, and pricing actions are contributing more significantly.

What happens next is the big question. I’ve been expecting Cummins to do well into the first half of 2023, but I’m concerned that higher interest rates, weaker economic conditions, and a worsening freight market will drive weaker demand. I like the long-term outlook for Cummins, particularly after the Meritor deal and with the company’s growing exposure to decarbonization, but I don’t see such a compelling prospective return relative to the cyclical risk.

 

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 Cummins Should Benefit As Production Schedules Normalize, But The Cycle Is A Big Unknown Now

Synaptics Looks Like Icarus Now, But Could Become A Phoenix Again

When it comes to semiconductors, whatever the market gives during the booms it can take away during the busts, and Synaptics (NASDAQ:SYNA) shareholders have been experiencing that over the past year as the shares have been hammered on weakening consumer electronics markets. Down about a third since my last update, the shares have erased significant outperformance over the SOX index and are down more than 70% this year.

I understand the concern over weak PC and mobile demand, not to mention weakening consumer IoT demand. Likewise, I understand the fears that the aggressive pricing realizations that Synaptics took in 2021-2022, and that boosted gross margins above management’s prior long-term targets, will unwind. Those fears are fair to a point, but I think the share price now overlooks the longer-term opportunities in IoT that management has already shown it can successfully target. It may take another six months or so for investors to come back to this name, and maybe longer, but the valuation here.

 

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Synaptics Looks Like Icarus Now, But Could Become A Phoenix Again

Manitex Showing Some Operational Improvement, But Slowing Orders Are A Sentiment Risk

Writing about Manitex (NASDAQ:MNTX) earlier this year, I thought that the company would see evidence of stronger demand in 2022, but that real leverage on that demand would likely have to wait due to cost inflation and component availability. I thought that lack of leverage could be a challenge for the stock, and the shares have been weak - falling close to 40% and underperforming other construction-leveraged names like Oshkosh (OSK) and Terex (TEX).

Looking into 2023, I'm bullish on demand from end-markets like infrastructure construction (roads, etc.) and oil/gas, but I'm less bullish on the non-residential and residential construction markets that make up close to half of Manitex's end-market, and likewise, I'm not as bullish on the metals sector. On top of that, while I understand the reasoning of the company's acquisition of an equipment rental business, investors don't tend to like that kind of diversification.

Valuation doesn't look especially demanding, but I see a risk that margin improvements and healthy deliveries in 2023 will be overshadowed by a weaker macro backdrop.

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Manitex Showing Some Operational Improvement, But Slowing Orders Are A Sentiment Risk

Microchip Technology Standing Out As The Cycle Turns

As the semiconductor boom rolls over, product and market exposure matters more, and that should benefit Microchip (NASDAQ:MCHP) at least to some extent. While the company doesn't have the high-end data center or auto exposure that I believe will serve companies like Broadcom (AVGO), Marvell (MRVL), or onsemi (ON) better over the next 12 months, Microchip does at least have limited exposure to weakening consumer markets, as well as stronger exposure to capacity-constrained specialized components like MCUs and FPGAs.

Microchip shares are down since my last update, but have nevertheless meaningfully outperformed the broader SOX index. Given the outperformance and the market/product mix, I find Microchip more of a "middle option" between beaten-down names with more near-term vulnerability (like companies with high smartphone exposure) and companies with stronger near-term leverage in the data center or EVs (Broadcom, et al). I like what I see as double-digit long-term annualized return potential from here, though, and the valuation makes this a name to consider now.

 

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Microchip Technology Standing Out As The Cycle Turns

Neurocrine Biosciences Hands Out Treats For This Halloween Season

It may have not been on par with a full-size Snickers, but Neurocrine Biosciences (NASDAQ:NBIX) delivered investors a slightly late Halloween treat, as third quarter results confirmed reacceleration in the core Ingrezza tardive dyskinesia franchise. Healthier trends here remove the main source of anxiety around the stock and give the company a somewhat cleaner runway heading into some significant clinical updates over the next year.

I've boosted my fair value in response to stronger Ingrezza trends, but the increase in the share price since my last updates (here and here) doesn't leave a tremendous amount of easy upside right now. Should upcoming trials go Neurocrine's way, though, there is meaningful upside potential to be unlocked from de-risking the pipeline. I'm still positive about the long-term potential of Neurocrine shares, but with the catch-up in the share price, it's not as compelling of an idea as before.

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Neurocrine Biosciences Hands Out Treats For This Halloween Season

Accuray Results Weren't Bad, But There's Still No Growth

Accuray (NASDAQ:ARAY) has put another quarter in the books, and nothing has really changed for the better. There are understandable explanations (or excuses) for the ongoing underwhelming performance, including supply issues and COVID disruptions in China, but the reality is that there has always been some “short-term issue” here to explain away weak performance, but the performance has never improved on a sustained basis.

That’s a grim opening, but with the shares down another 30% since my last update, it’s hard to have a rosy outlook here. It’s not so much that I’ve turned bearish, but there’s only so many times you can talk about progress and potential in the underlying business in the absence of real underlying evidence of progress in the financials. I’ve said in the past that Accuray needs quarterly orders around $100M to really make a go of it, and the company hasn’t been there since the summer of 2021 (and has never achieved it two quarters in a row, I believe).

Is there upside here if management can execute on opportunities in China and Japan? Yes. But that upside has to be weighed against the risk/likelihood that this company continues to drift until it runs out of cash and that any future acquisition is at a fire-sale price.

 

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Accuray Results Weren't Bad, But There's Still No Growth

NXP Semiconductors Offers A Nice House In A Sketchier Neighborhood

For better or worse, investor sentiment on sectors has a significant influence on the price performance of individual stocks; I’ve seen studies suggesting that 70% to 80% of a stock’s movement can be tied back to the sector. I mention that here because I think it’s a critical thing to understand with NXP Semiconductors (NASDAQ:NXPI) – the company’s differentiated end-market exposures have been helping the stock, and I like the long-term growth/valuation balance, but sentiment remains a risk with further downside to broader expectations about semiconductor demand in 2023.

Since my last update, NXP Semiconductor has outperformed the SOX by close to 15%, but lost about 15% of its value (modestly outperforming the wider market). I think auto and some parts of industrial will hold up in 2023, but I do expect a year-over-year decline in revenue and margins and it will likely take time for investors to come back to the name. All of that said, NXP shares look pretty meaningfully undervalued and worth a look from contrarian (or very patient) investors.

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NXP Semiconductors Offers A Nice House In A Sketchier Neighborhood

Live Oak Bancshares: An Exciting Model, But One With Near-Term Risks

There's a lot to like about Live Oak Bancshares (NASDAQ:LOB) for the long term. Banks with high-touch service models and differentiated lending specialties typically do better than average, and Live Oak's embrace of technology-enabled banking could be a major differentiator over time. In the short term, though, I'm concerned about owning a liability-sensitive bank during a period of Fed tightening, not to mention a bank heavily leveraged to small business lending when the economy is cooling.

Valuation is interesting. My long-term discounted cash flow model suggests exciting double-digit long-term annualized total return potential, but short-term multiples-based approaches (ROTCE-driven P/TBV and P/E) are much less accommodating, with the shares trading at a premium during a period where many other growth banks (East West (EWBC), Signature Bank (SBNY), and SVB Financial (SIVB) among others) are trading at high single-digit forward P/E's.

 

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Live Oak Bancshares: An Exciting Model, But One With Near-Term Risks

Regal Rexnord Makes A Big Play For Scale And Diversification

Considering the disruptions created by the pandemic, it's challenging to evaluate the performance of Regal Rexnord (NYSE:RRX) since the transformative combination of Regal Beloit and Rexnord's PMC business in early 2021. Still, the company has more or less stayed on track relative to my initial financial expectations, and the shares had been modestly outperforming the average industrial since my last update.

Now, Regal Rexnord management is taking another big swing at scale, diversification, and growth, announcing an all-cash acquisition of Altra Industrial Motion (AIMC) for $62/share. These businesses should be highly complementary, and I like the opportunities for cross-selling and expense synergy, as well as diversification. While the combined businesses will still have significant short-cycle leverage, not the best thing for the environment I expect in 2023-2024, I like the added exposure to automation and medical markets.

 

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Regal Rexnord Makes A Big Play For Scale And Diversification

Marvell: Great Long-Term Secular Drivers, But Sentiment Is A Threat

This has been a challenging year for Marvell (NASDAQ:MRVL). As fears have grown about a big reset for growth semiconductor stocks in 2023, Marvell shares have lagged the SOX index this year, falling more than 50% year-to-date and underperforming about 10%, and trading down more than 15% since my last update.

I find Marvell shares a little more challenging to evaluate now. I love the company’s long-term leverage to growth opportunities in the data center, particularly as hyperscalers move to 400G and 800G in the coming years, and I also like the exposure to 5G and enterprise networking. What I don’t like as much is the valuation and the level of expectations heading into this next quarter, as sell-side estimates for FY’24 revenue range from $6.3B to $7.8B and this is still a consensus “buy” call.

I do think Marvell is a high-quality growth name, and I think paying up for growth is fine, but I also see more risk than upside to sell-side estimates coming out of the next quarter, and I’d rather risk missing out than buying in ahead of that potential reset.

 

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Marvell: Great Long-Term Secular Drivers, But Sentiment Is A Threat

Johnson & Johnson Goes Back Into Cardiology With A Big Splash

For some time I had felt that Johnson & Johnson (NYSE:JNJ) has been neglecting its MedTech business while building up the Pharmaceutical business into an impressive player in oncology and immunology. While I liked management's more recent comments about investing more time, energy, and resources into MedTech, including more growth-oriented R&D, I thought that M&A could be a valuable tool to accelerate the process.

Apparently so did JNJ management, as the company announced a major deal on November 1 with a deal for Abiomed (ABMD) that could be worth more than $18 billion, and that moves JNJ back into interventional cardiology in a big way. The deal is pricey and comes with above-average risk, but if Abiomed can deliver on multiple pivotal trials with market-expanding potential, and if JNJ can more effectively market Abiomed's technology on a global scale, the deal could still be value-additive over time.

While the deal is huge in med-tech terms, it accounts for less than 10% of JNJ's market cap today and isn't a big near-term needle-mover for valuation. A successful outcome could add more than $10/share to my fair value estimate for JNJ, but that is largely gated by clinical trials that won't finish for some time. JNJ isn't a bargain-basement name, and the shares have moved up since my last article, but I think it still has worthwhile GARP credentials for investors wanting some healthcare exposure.

 

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Johnson & Johnson Goes Back Into Cardiology With A Big Splash

Roche Needs Some Wins

Swiss drug giant Roche (OTCQX:RHHBY) has long enjoyed a strong reputation, but reputations can sometimes outrun or outlast the underlying facts, and I'm getting more concerned that that may be the case here. While Roche has a huge presence in oncology and has done well for itself in newer markets like multiple sclerosis and hemophilia, the reality is that the company's long-term stock performance has lagged its peer group and the company hasn't been able to consistently generate strong economic returns from its large R&D budget.

Roche could really use some meaningful clinical wins now. This was a year of significant clinical read-outs, and thus far Roche doesn't really have any big wins. Not only does that hurt the revenue outlook, but it also saps confidence and sentiment. Valuation isn't really compelling in either direction right now; while I expect many will continue to defend Roche as a long-term buy-and-hold core holding, I think the incoming new CEO may want to think about some internal restructuring with an eye toward generating better long-term returns.

 

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Roche Needs Some Wins

onsemi Standing Out On Execution And Auto Leverage, But Macro Looms As A Headwind

I was quite bullish on onsemi (NASDAQ:ON) back in March due to the company’s strong margin leverage achievements and its exposure to fast-growing semiconductor opportunities like advanced power (silicon carbide (or SiC), specifically). Although the modest decline in the share price since then is a little disappointing, the nearly 30% outperformance to the SOX index does support the general notion that this is a meaningfully better-than-average semiconductor story.

Since early this year I’ve been beating the drum that the semiconductor market was going to see a slowdown, and the market has since moved to accept that as a consensus view. While onsemi does have some negative exposure to industrial end-markets (particularly with legacy products) as well as non-auto/non-industrial markets that are likely to be weaker in 2023, I believe onsemi will fare better than most. Moreover, I see ongoing revenue and margin growth opportunities that make this a standout in its space.

Valuation is still a positive, though onsemi’s better relative performance mitigates some of its appeal on a relative basis, and I do still see a risk that sentiment for the entire semiconductor space could worsen from here. All told, I think this is a stock you can buy here and be happy about it in the years to come, but there is a risk of rockier performance over the next year or two.

 

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onsemi Standing Out On Execution And Auto Leverage, But Macro Looms As A Headwind

ABB Has Rebuilt Belief In Its Execution, But Macro Is Getting More Challenging

I’ve been pretty straightforward in my praise of ABB’s (NYSE:ABB) management team since Bjorn Rosengren joined the company, and they continue to deliver results with significant transformation (selling, divesting, and restructuring businesses) and restructuring, with the company now posting the best margins in many years despite ongoing input/supply chain inflation.

Valuation did get a little ahead of itself, though, and coupled with growing concerns about short-cycle and automation demand in 2023, the shares have underperformed of late. Since my last update, the shares have lost close to 20% of their value, underperforming the broader industrial sector by about 15%, as well as frequent comparables like Eaton (ETN), Rockwell (ROK), Schneider (OTCPK:SBGSY), and Siemens (OTCPK:SIEGY).

I do have some concerns about the macro outlook for 2023-2024, but my concern is more on market sentiment toward ABB than any meaningful alternation in the long-term outlook for major drivers like electrification and automation. Still, with a prospective long-term annualized return back in the high single-digits, this is a name worth at least a spot on a watchlist.

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ABB Has Rebuilt Belief In Its Execution, But Macro Is Getting More Challenging

Truist: Underwhelming Results In What Should Be A Supportive Market

I wrote earlier this year that 2022 should be a better year for “Main Street” banks like Fifth Third (FITB), Regions (RF), and Truist (NYSE:TFC) versus more “money center” banks that are more reliant on capital markets activities and business with large multinationals. That thesis has held up, but Truist has not performed as well as expected (or as well as many peers), and the shares reflect this – falling almost 30% since my last update and significantly underperforming regional banks (as well as money center banks as well).

The SunTrust deal was supposed to create both cost and synergy opportunities for Truist, and these were supposed to propel the company to above-average growth. So far, the results have been underwhelming, and in a macro environment that should favor Truist (particularly with respect to health C&I loan demand), the results just haven’t been there. While I do still believe in the bullish case for Truist, there is work to do here and management bears the burden of restoring investor confidence in a differentiated positive outlook.

 

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Truist: Underwhelming Results In What Should Be A Supportive Market

Alnylam Pharmaceuticals Offers Proven, Undervalued RNAi Platform, But Doubts Around ATTR Program Remain

Alnylam Pharmaceuticals (NASDAQ:ALNY) has built a solid base for itself with multiple product approvals in recent years, but there is still work to be done – de-risk the opportunity for Onpattro in TTR amyloidosis with cardiomyopathy (or ATTR-CM), deliver strong HELIOS-B data, and continue to deliver promising new compounds from the company’s ongoing clinical projects.

Since my last update, Alnylam shares are down about 8%, but have kept pace with the SPDR S&P Biotech ETF (XBI), and over the past year, the shares have significantly outperformed that biotech ETF (+28% versus -35%). With a fair value in the $225 - $240 range by my valuation approaches, I still believe this is a biotech worth owning.

 

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Alnylam Pharmaceuticals Offers Proven, Undervalued RNAi Platform, But Doubts Around ATTR Program Remain

Honeywell Better-Placed Than Most To Take On Next Year's Challenges

In a market that is increasingly worried about what 2023 will hold for the global economy in general and short-cycle industrial markets in particular, Honeywell (NASDAQ:HON) stands out. There are a few parts of Honeywell's business that likely won't be at their best next year, but a solid two-thirds of the business should be seeing strong demand at a time when many other quality industries will be struggling with weaker conditions.

When I last wrote about Honeywell, I lamented the Street's fickle treatment of the shares and thought it was a name to consider if the shares pulled back further. While the shares are now up about 5% from that time, investors did have two opportunities to pick up shares in the $170s (or about 15% below today's price). Right now I see a bit of a split between the valuation and the secular appeal of the shares - I don't see the stock as all that cheap (it seldom is), but I do think it is better placed than most, and could earn a sustained premium to its peers through 2024.

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 Honeywell Better-Placed Than Most To Take On Next Year's Challenges