Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

With both fundamentals and sentiment in and around the semiconductor sector noticeably cooling, valuations are getting more reasonable and attractive on a long-term basis, but the correction process still has some distance to go. In an environment where GDP growth seems likely to slow, Silicon Labs (SLAB) could well be looking at a period where the improvements in the business go largely unrewarded by the market until institutional investors feel comfortable moving back into semiconductor growth stories.

I didn’t think Silicon Labs was attractively priced for a “buy” back in August, and the shares are down another 20% or so since then (slightly underperforming the SOX). I still don’t consider today’s price a slam dunk, but I do believe the company is making progress and becoming better-positioned for future growth in multiple end-markets. A price in the low $70’s would be more interesting to me, but I’m hesitant to dive into chip stocks today given the prospect for worsening outlooks for autos and industrial markets and the risk of at least another round or two (if not more) of cuts to expectations.

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Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

ON Semiconductor Feeling The Heat From The Street

That companies like ON Semiconductor (ON) will survive the next phase of the semiconductor cycle is not in doubt to me, but what this corrective phase will look like is still very much up for debate. It’s not unreasonable to think that the adjustment from recent record highs in lead-times will lead to a more painful cycle than that seen in 2015, but then there are secular growth drivers helping ON Semiconductor that I’m not going to just dismiss out of hand.

When I last wrote about ON I said “…but the risk of near-term turbulence is something to consider …”, but I didn’t really think the shares would drop by roughly one-third in just a few months. Certainly the sector-wide declines in semiconductor stocks are being driven more by fear and momentum than truly horrible conditions (and/or outlooks), but that doesn’t make the losses sting any less. Moreover, with no real end in sight to the trade dispute between the U.S. and China, it’s tough to know whether the industry can manage a graceful dismount from the record lead-times as demand slows in markets like auto, handsets, data centers, and industrial.

I think the valuation is still quite interesting for long-term investors, but I also think the near-term still holds outsized risks. While the shares should be trading at least in the low $20’s, sentiment is poor now and semi stocks are likely to stay in the doghouse through at least the middle of 2019.

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ON Semiconductor Feeling The Heat From The Street

CyberArk's Strong Execution Should Outweigh An Imperfect Valuation

As far as I’m concerned, CyberArk (CYBR) is delivering the sort of results that a young company leading a growing (if not emerging) market ought to be delivering. Improved pricing and product positioning, better sales execution, and increasing customer awareness of the importance of privileged access management (or PAM) and secure DevOps (a software development methodology) all seem to be coming together as a strong tailwind for CyberArk going into 2019.

I liked the CyberArk story back in mid-2018, but was less excited about the valuation. The shares are up since then, but not so much that I’m really kicking myself and particularly relative to what I see as stronger underlying improvement in the business. I do worry about the risk of further market de-rating (in other words, lower multiples for stocks in general and tech stocks in particular), but CyberArk does seem undervalued and I’m reluctant to get too fussy about valuation with a strong operating story that still has room to deliver meaningful growth in the coming years.

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CyberArk's Strong Execution Should Outweigh An Imperfect Valuation

With Aerie Soaring, American Eagle Deserves Better

I've talked about the odd cyclicality of American Eagle (AEO) before, and even if there are some valid concerns at this leading, youth-oriented retailer today, I believe the roughly 25%-plus correction in the share price since my last update is overdone. This correction seems to be largely due to management's decision to increase its SG&A spending and sacrifice near-term margins to build future sales growth potential. While I think there are strong arguments for supporting growth at aerie and in the online business, the reality is that margins have a significant influence on retail valuations, and the Street has largely shifted toward valuing traditional retail stocks on the assumption of moderate (at best) growth.

To that end, I believe the Street is overlooking the long-term potential of American Eagle's aerie brand in this shift toward a "retail is no longer a growth sector" mentality. The company's aerie brand has the potential to grow to a $2 billion to $3 billion business over the next decade, adding more than 50% to today's revenue base, and the existing AE brand still worthwhile. Although I don't expect exceptional growth, I do believe these shares are undervalued below the $20s and could have potential into the high $20s.

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With Aerie Soaring, American Eagle Deserves Better

Air Transport Group Shareholders Have A Lot To Consider

It’s been a tough stretch for Air Transport Group (ATSG) since the company’s early October announcement that it would be acquiring Omni Air, with the shares down about 20%. The “good news”, if you really want to call it that, is that the company’s closest comp, Atlas Air (AAWW), has been even weaker, as have FedEx (FDX) and UPS (UPS) (with Atlas and FedEx also underperforming Air Transport on a trailing twelve month basis), as concerns have grown regarding the impact of trade protectionism on cargo/shipping demand. Of course, Air Transport did itself no favors with a miss and guide-down for the third quarter.

Between uncertainties in the global economy, Amazon’s (AMZN) plans, and management’s ability to execute, there’s a lot for Air Transport shareholders to chew on. Underlying aircraft demand seems strong, and management has generally been reliable insofar as being careful about adding capacity ahead of real demand. With the Omni deal, Air Transport will also have a more stable block of revenue coming from the Department of Defense, as well as some longer-term fleet management options. Although these shares do seem undervalued, I’ve lowered my expectations and this is a tough stock to model given the substantial uncertainties in the business.

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Air Transport Group Shareholders Have A Lot To Consider

Milacron Smacked Down On Tariff And Capex Cycle Worries

Life in plastic has not been so fantastic for Milacron (MCRN) lately, as this leading U.S. manufacturer of plastic processing machinery (injection, blow, and extrusion molders, as well as hot runners) has had to deal with a much more uncertain overseas market and a potential near-term peak in the manufacturing capex investment cycle.

Although I thought Milacron’s price was getting a little rich back in June, I didn’t expect the almost 40% drop in the share price over the past six months. Given considerable trade uncertainty and weakness (or at least signs of slowing demand) in key end-markets like auto, electronics, and general industrial, it may be a little while before Milacron sees orders and margins recover. While the long-term story is still interesting and the valuation is much less demanding, this will be a tougher place to make money unless and until the outlook and sentiment for industrials improves.

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Milacron Smacked Down On Tariff And Capex Cycle Worries

After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

This was a challenging, and likely frustrating, year for Alaska Air (ALK) management, as the company still had a lot of the heavy lifting to do in integrating the Virgin acquisition, but didn’t really get to see the benefits yet. At the same time, competitive actions from other airlines like Delta (DAL), United (UAL), and Southwest (LUV) have made managing capacity in the company’s key West Coast markets a little more challenging. All told, then, it’s been a challenging year for the stock (down about 15%), though Alaska Air has fared better than the sector as a whole.

I was lukewarm on Alaska Air back in June mostly due to sentiment and the risk of further negative earnings revisions. The shares are down slightly since then, while EBITDA expectations have fallen about 10%. I believe that sets the stage for a better 2019, and I believe Alaska Air is poised to generate some of the best growth in earnings spread (the difference between RASM, or revenue per available seat mile, and CASM, or cost per available seat mile) in the sector, as Alaska Air gets back to its normal operating prerogatives. A weaker economy and a less disciplined sector are still threats, but I believe Alaska Air should be trading in the $70s today.

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After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

Wells Fargo Still Discounting A Host Of Challenges

Wells Fargo (WFC) has done a little better than I'd expected since my last update, but that's solely on a relative basis, as these shares are still down about 15% since then (versus a roughly 20% drop for banks in general). Wells Fargo is still operating under several clouds; the regulatory and remediation issues are well-known, but the core operating performance of the bank is looking fairly run of the mill as well.

I will not defend the various fraudulent activities that the bank committed in recent years (activities the bank has acknowledged), but whether or not the regulatory consequences have been appropriate is really beyond the scope of the merits of Wells Fargo as an investment idea. Retail and commercial clients are voting with their wallets and choosing to stay with Wells Fargo (for the most part), and although I believe there is a risk that the total bill for the settlements/fines, restitution, and remediation could exceed what management has already reserved for, I do not believe they threaten the bank as a going concern. With a relatively low valuation, Wells Fargo seems to be discounting a sharper decline in the economy than I think is likely, and while there are banks I like better, I do believe these shares are undervalued.

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Wells Fargo Still Discounting A Host Of Challenges

DBS Group Executing On A High-Quality Growth Plan

While investors in North America and Europe have been selling off bank stocks to a degree that seems to price in a coming recession, Singapore’s banks have held up a little better. I was a little concerned about China-related macro risk and efforts to slow/cool Singapore’s housing market in reference to DBS Group (OTCPK:DBSDY) back in August, but the shares have done okay next to most global indices as housing, construction, and manufacturing-related demand have all held up reasonably well.

I continue to believe that DBS Group shares look appealing barring a global recession and/or a serious deterioration in China. Loan demand is likely to slow noticeably next year, but DBS Group should still be poised to benefit from some rate moves while credit quality remains benign. Longer term, I expect meaningful leverage from the company’s investments in digitalization and market entry/development in India and Indonesia.

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DBS Group Executing On A High-Quality Growth Plan

As Trucking Seems Set To Cool, How Cold Will Old Dominion's Multiple Get?

When I last reviewed Old Dominion (ODFL), I said I didn’t want to pay a near-peak multiple for near-peak earnings, even though I think Old Dominion is the best trucking company out there and one of the best-run companies I’ve followed over the years. The shares subsequently rose another 15% on strong volume, pricing, and cost control, but have since fallen almost 30% from that early September peak and now sits almost 20% lower than when I last wrote about the company.

I love the idea of picking up Old Dominion shares when the Street has bailed out on the less-than-truckload (or LTL) sector, but I’m not sure we're at that point of capitulation yet. Forward multiples have been cut in half in past downturns and we’re not there yet, though I don’t expect 2019 or 2020 to be disastrous. Figuring out the “right” multiple is really difficult right now, but I’d strongly urge readers to keep this stock on a watch list, as you don’t get the opportunity to buy great businesses at reasonable prices all that often, and cyclical sectors like trucking can see some pretty unreasonable valuations at the peaks and troughs.

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As Trucking Seems Set To Cool, How Cold Will Old Dominion's Multiple Get?

With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

In a bad market for banks, U.S. Bancorp (USB) has managed “less bad” performance, with the shares doing better than the average bank (down 13% versus a roughly 20% drop over the past year) and better than peers like PNC (PNC), Wells Fargo (WFC), and Citigroup (C), and particularly so in the last three to six months, as the Street seems slightly consoled by U.S. Bancorp’s more bullish loan growth outlook for 2019 and its improving operating leverage.

U.S. Bancorp makes sense as a safe haven/flight-to-safety pick in banking, as the company has long been a leader in efficiency and profitability. While I think U.S. Bancorp may see a little more pressure on spread-based revenue growth than some bulls believe, I think the bank’s strong fee-generating operations will help fill the breach, as will improving operating leverage.

The banks I think are run best and best-positioned for this part of the cycle (JPMorgan (JPM), BB&T (BBT), and USB) seem to offer the least upside from here relative to names like PNC, Wells Fargo, and Citi, and that’s not exactly surprising given the sharp sentiment shift. U.S. Bancorp probably has less upside if 2019 turns out to be better than expected, but I continue to believe this is a solid long-term core holding for more conservatively-inclined investors.

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With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

Citi Getting No Love As Macro Risks Mount

Liking Citigroup (C) has never been a particularly popular call, and to be honest, the skeptics have been right about it this year, as Citi has lagged other large banks like JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), and PNC (PNC) this year, and particularly so over the last three months. With weak pretax margins, some global macro risk, rising credit risk, and ongoing struggles with efficiency, I suppose I can understand why investors wouldn’t be so eager to own this name going into what could be a more challenging 2019.

Defending Citi isn’t really high on my to-do list, as I don’t think it’s a particularly well-run bank. That said, I find it interesting that Citi is valued the way it is, as it seems like the market is much, much less forgiving to under-earning banks than it has been in the past. A long-term earnings growth rate of just 4% could support a fair value in the $70’s, but it is clear to me that Citi has a lot of work to do to both improve its financial performance and its perception.

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Citi Getting No Love As Macro Risks Mount

South State Bank Should Be Near The End Of A Painful Reset

In a poor year for bank stocks, South State (SSB) stands out as an especially weak name, particularly since midyear as successive quarterly misses have led to double-digit downward revisions in earnings expectations for 2019 and 2020. Although South State had advised investors and analysts that there would be an adjustment process as it shifted the mix of loans and funding in its Park Sterling acquisition, the process has led to weaker than expected revenues, margins, and loan growth.

I significantly underestimated just how disruptive this transition would be to South State’s reported earnings, and the shift in sentiment away from banks due to rate and recession worries certainly made a tough situation worse. With South State highly likely to continue with M&A in the future, the challenges with the Park Sterling integration raise valid questions about how tumultuous future earnings may be after other buy-and-restructure deals. I do believe that the current share price undervalues a well-capitalized bank with strong share in some attractive growth markets, but between weak sector sentiment and company-specific investor concerns, it will take some time for this stock to claw its way back.

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South State Bank Should Be Near The End Of A Painful Reset

Crushed By Worries About Mexico's Transport Sector, OMA Looks Interesting For 2019

The election of Mexico’s new president, Andres Manuel Lopez Obrador (commonly referred to as “AMLO”), has effectively pushed many of Mexico’s infrastructure stocks over the edge of a cliff, and Grupo Aeroportuario del Centro Norte (OMAB) (“OMA”) shares have fallen 40% since early October on a host of worries related to the new administration’s policies. Although OMA has the longest to go before its Master Development Plan (or MDP) comes up for renewal (2021) among the three publicly-traded Mexican airport operators, there are nevertheless definite worries that the government will somehow disrupt their operations and that the administration’s plans for managing air traffic and airport needs within the country will create trouble.

As the most domestic-focused of the three airports, OMA has the most to lose if AMLO’s policies hurt air travel in Mexico, but I believe the current price reflects an excessive level of worry. Slower economic growth in the U.S. could filter into Mexico’s economy in 2019, and recent strength in air traffic looks hard to replicate, but I believe OMA can do just fine from here with long-term growth in the mid-single-digits.

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Crushed By Worries About Mexico's Transport Sector, OMA Looks Interesting For 2019

BBVA Still Lacking Value-Creation Amidst Non-Stop Challenges

One of BBVA’s (BBVA) best attributes has also proven to be a seemingly never-ending source of challenges. With a diverse mix of banking operations, including strong exposure to multiple emerging markets, there is always something going on with BBVA, and more recently that has taken the shape of numerous challenges to the ongoing growth potential of the bank. While Spain may finally be turning, the U.S. bank cycle is fading, Turkey is in trouble, and BBVA’s very profitable Mexican operations may be facing a serious threat to a high-margin source of revenue.

BBVA is quite likely in better shape as a bank than its stock, which has been on basically a non-stop downward trajectory this year. While a rate hike cycle could be about to begin in Europe, BBVA’s exposure to Europe isn’t all that large and loan growth may prove disappointing irrespective of rates. I do believe these shares are still undervalued now, and perhaps significantly so, but you can find similar undervaluation with ING (ING) and increasingly with many U.S.-based banks and probably encounter less volatility.

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BBVA Still Lacking Value-Creation Amidst Non-Stop Challenges

Sandy Spring Bancorp Looking Undervalued, But Funding Remains A Risk

With the calendar about to turn and most U.S. banks great and small having been pummeled in recent months, I wanted to review Sandy Spring Bancorp (SASR) again as an idea for 2019. The metro DC region still looks pretty healthy and loan demand does not seem to be a serious concern for Sandy Spring. Deposit growth and funding costs remain a risk, though, as Sandy Spring management has had to get more creative in securing the funds it needs to support profitable growth.

Sandy Spring still sees itself as a buyer, not a seller, but the decline in the share price may well cool near-term deal activity. Although I do think the overall environment for banks has deteriorated somewhat from the middle of 2018, I still believe Sandy Spring can generate high single-digit long-term earnings growth, supporting a fair value close to $40.

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Sandy Spring Bancorp Looking Undervalued, But Funding Remains A Risk

Chemical Financial Beaten Up As Investors Flee From Banks

With concerns about a slowing economy, lackluster loan growth, peaking credit quality and rate leverage, and diminishing operating cost leverage, I can understand why investors have moved on from the bank sector in pursuit of greener pastures. In doing so, though, they sold down several banks beyond a point of valuation that I would regard as fair, and Chemical Financial (CHFC) is one such bank.

Although Chemical Financial is not a perfect bank, and Michigan is not a perfect banking market, I believe this growing mid-cap is likely to maintain above-average pre-provision profit growth unless the economy and rates deteriorate sharply over the next two or three years.

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Chemical Financial Beaten Up As Investors Flee From Banks

Comerica Frostbitten As Wall Street Turns Cold On Bank Stocks

Although I thought Comerica’s (CMA) valuation was a little stretched back in the summer, I thought at the time that it offered the market a lot of what investors wanted. Turns out, those investors have changed their minds about what they want, and in a big way, sending the shares down about a quarter over the past six months. If there’s a bright side to that, it’s that Comerica’s fall hasn’t been much worse than the average retail bank, and there have been a fair few to do worse over that time.

Ongoing weak loan growth and the prospect of peaking rate, credit, and cost leverage has soured the Street on banks heading into what is likely to be an economically less impressive 2019. That, in turn, has led to some pretty startlingly revaluations across the sector. I can’t say that Comerica is my favorite bank idea, but the valuation and business drivers definitely support a closer look.

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Comerica Frostbitten As Wall Street Turns Cold On Bank Stocks

Calyxt Has The Pieces In Place, But Needs Contracts To Light The Fuse

Timing matters with stocks. While the “true believers” won’t ever want to hear it, there were, and still are, meaningful operational risks attached to the Calyxt (CLXT) story. I believe those risks, coupled with a general “risk-off” switch in market sentiment has had a lot to with the ongoing decline in the share price since my last update (today’s Goldman Sachs upgrade-inspired rally not withstanding).

I continue to believe that Calyxt has an intriguing IP position in gene-edited crops and that gene-edited crops may well be a “next wave” of bio-ag innovation that drives a host of improvements for both farmers and consumers. Still, the market’s willingness to accept foods containing gene-edited crop ingredients has yet to be tested, and Calyxt’s unconventional commercialization model creates execution risk. I believe today’s share price significantly overstates that risk, but the share price is likely to remain volatile given that operating profitability is likely four to six years away and the commercialization strategy is unproven.

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Calyxt Has The Pieces In Place, But Needs Contracts To Light The Fuse

ABB Punting Power Grids, But Priming The Pump For Growth Will Take Time

ABB’s (ABB) relatively successful turnaround of its Power Grids business ends the way many, if not most, investors hoped it would – the company is selling off the business. While the transaction is messy, I think management got decent-to-good value for a hard-to-move asset. I also believe the subsequent corporate restructuring is logical and should boost long-term margins, but there’s a grumpy skeptic part of my brain that says a lot of these costs, charges, and restructuring efforts could be used to mask lackluster underlying performance over the next 18-24 months, and I don’t like the extent to which management tried to celebrate their current market positioning.

I still own these shares and I still believe this can be a better-run, more profitable, and more successful business than it is. Whether management has the talent to make that happen is still up for debate. I’m not changing my fair value ($25 per share) at this point, but I would note that the risks and costs are weighted to the near term, while the benefits are weighted further down the line.

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ABB Punting Power Grids, But Priming The Pump For Growth Will Take Time