Wells Fargo Clawing Its Way Back

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

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

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Wells Fargo Clawing Its Way Back

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

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

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

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

Fortive Ties The Knot With Gordian

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

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Fortive Ties The Knot With Gordian

Is Old Dominion Already At Maximum Overdrive?

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

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

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Is Old Dominion Already At Maximum Overdrive?

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

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

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

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

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

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

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

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

Roche Reports Positive Clinical Results, But The Market Is Unimpressed

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

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Roche Reports Positive Clinical Results, But The Market Is Unimpressed

BRF's Initial Restructuring Moves Focused On Slimming Down

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

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

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BRF's Initial Restructuring Moves Focused On Slimming Down

Aptose Biosciences Back On Track In The Clinic

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

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Aptose Biosciences Back On Track In The Clinic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Investors Aren't Buying American Axle's Self-Improvement Story

There are more than a couple puzzlingly cheap (or cheap-looking) auto and truck component stocks these days. While production is certainly weakening, the market seems to be pricing in a rather drastic decline in volumes, revenue, and profit margins. To be fair, this sector doesn't have a great track record of earnings "through thick and thin", with quite a few companies sporting low single-digit long-term average FCF margins, but that also doesn't give much if any credit to the margin and liquidity structure improvements these companies made during the good times.

American Axle & Manufacturing (AXL) ("AAM") looks cheap enough that I wonder what I'm overlooking, as low-to-mid single-digit revenue growth and FCF margins averaging out in 4% to 5% range would support a fair value in the $19 to $20 range. What's more, AAM is well-placed to benefit from ongoing efficiency efforts in internal combustion engine (or ICE)-powered cars, a global preference for SUVs/CUVs, and the transition to electrification. Then again, there's a lot of debt on the balance sheet, and a lot of customer concentration risk, and projecting a significant improvement in long-term FCF margins may just be a different form of the loss-producing mantra "it's different this time".

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Investors Aren't Buying American Axle's Self-Improvement Story

Of all the things that have changed in the medical device world in the time I've followed it professionally, the improvement in the quality of care for ischemic stroke patients may be one of the notable. The field has moved from "I'm sorry, but there's nothing we can do" to the introduction of tPA (which gave patients an almost 50/50 chance if they got to the hospital early enough) and now on to stent retrievers and aspiration systems that can boost those long-term survival (with a high quality of life) to more than 50/50 as far as 24 hours away from the onset of the stroke. Even so, these newer mechanical approaches are still not used nearly as often as they should be, and that represents a key growth opportunity for mid-cap med-tech Penumbra (PEN).

Penumbra is the leader in aspiration-based thrombectomy (A Direct Aspiration First Pass Technique, or ADAPT), an emerging alternative that is faster and cheaper than stent retriever systems, but with no observable compromise in efficacy. Penumbra is almost certain to face significant competition from Medtronic (MDT), Stryker (SYK), Johnson & Johnson (JNJ), and others, but with overall market penetration below 20% and opportunities in other fields like peripheral thrombectomy, embolization, and coronary thrombectomy, there are significant revenue opportunities for Penumbra.

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Penumbra: Great Growth From A Better Mousetrap In Stroke Care

Hartford Undervalued And Improving In A Sector That Seems Adrift

Cheapness, relative, or absolute, rarely moves stocks all on its own. More often, it requires a meaningful change in the trajectory of the underlying business (the dreaded overused and misused word "catalyst") or in the perception of the overall sector. In the case of Hartford (HIG), management has done some good things lately - selling the Talcott business, raising prices, and boosting overall underwriting profits - but the larger P&C sector seems to be drifting without much real pricing power and worries about weaker reserves and rising claims inflation.

I continue to believe that Hartford is undervalued and worth owning, but I can't say with much confidence that it's going to be a near-term outperformer. It will take time for the market to fully reward the emerging underwriting profitability improvements and likely even more time for investor love to rotate back to insurers.

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Hartford Undervalued And Improving In A Sector That Seems Adrift

Argo's Top-Line Growth Is Exciting, But ROEs Remain Lackluster

Argo Group (ARGO) has been a frustrating insurance stock to follow for some time, as the company's strong niche underwriting capabilities and meaningful earnings potential have been held back by persistently high expenses. Reinvesting in the business has started to pay off in terms of premium growth, but solid book value growth and ROE improvement have remained elusive.

Even so, Argo has been a strong performer this year, with a roughly 15% year-to-date gain that leaves comps like AIG (AIG), Alleghany (Y), Chubb (CB), Hartford (HIG), and W.R. Berkley (WRB) well in the dust. While stronger than expected first quarter results helped fuel the surge, and I'm bullish on the prospects for technology investments to yield more premium growth, I'm not yet sold on the company's ability to drop that growth down through to the bottom line, and so I'm not seeing a significant amount of undervaluation in the shares now.

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Argo's Top-Line Growth Is Exciting, But ROEs Remain Lackluster

Southern National Bancorp Of Virginia: Well-Placed For Growth, But Also Well-Valued For Its Potential

Bring a good deposit franchise to large, attractive markets that can support above-average loan growth, and good things can happen. Southern National Bancorp of Virginia (SONA) (or “SONA”) does serve attractive growth markets, including the DC metro area and major Virginia cities like Charlottesville and Richmond, and I like the company’s growing deposit share in communities like Charlottesville and Richmond. The deposit franchise is a work in progress, though, as the company has used M&A to drive improvement, but still has a ways to go.

I think SONA is more or less fairly-valued today, as the stock price already seems to anticipate double-digit growth. M&A is an important wildcard, though, as SONA could deploy more capital into consolidating the Northern Virginia/Southern Maryland banking market and/or acquire smaller community banks in or just outside its core operating area to further boost the quality of its deposit base.

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Southern National Bancorp Of Virginia: Well-Placed For Growth, But Also Well-Valued For Its Potential

Franklin Financial Wedged Between A Good Market And Challenged Funding

For Tennessee’s Franklin Financial (FSB), it is the best of times and the worst of times. Credit quality is excellent, and Nashville remains an exceptionally attractive market for loan growth. On the flip side, deposit costs are rising quickly, and Franklin Financial has a relatively poor mix of core deposits, making M&A seemingly all but obligatory if management really wants to maximize the potential of this upswing.

Valuation is an interesting discussion. Franklin Financial looks priced for low double-digit returns, which is good but not exceptional among small banks, and the company’s recent struggles to grow have certainly weighed on sentiment. Patient investors could do well with this name over time, but I think it could frustrate less patient investors who want more quarter-to-quarter action in their holdings.

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Franklin Financial Wedged Between A Good Market And Challenged Funding

Semtech Has Made Progress, But Really Needs LoRa To Take Off

I wasn’t a big fan of seemingly perennial underachiever Semtech (SMTC) back in 2016, and the path since then hasn’t been entirely smooth. The company has done a little better than I’d expected with revenue (beating my circa-2016 expectations by 3% in the last two years), but adjusted free cash flow has been slow to develop, and the company’s key driver, LoRa, has come in well short of management’s targets from a few years ago.

With a strong move in the shares since the last quarter, the stock’s performance has been slightly better than the SOX since my last update, on par with Silicon Labs (SLAB), and below ON Semiconductor (ON) (and well above Maxim (MXIM) and MACOM (MTSI)), but I don’t feel like I’ve missed much with slightly-better-than-sector performance. I’m more encouraged by what I’ve seen recently in the data center and PON businesses, as well as protection, but a lot is riding on increased uptake/usage of LoRa. I’d also note that while I don’t see tremendous value here, the shares have appeal as a takeout candidate.

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Semtech Has Made Progress, But Really Needs LoRa To Take Off