CEO Gerald Mattys of Tactile Systems Technology Inc (NASDAQ:TCMD), a manufacturer and provider of products focused on treating chronic illnesses in the home setting, says his company has opportunities ahead in the lymphedema and wound care markets.
We built the platform of directly serving patients at home because we believe it could be leveraged into other clinical indications. We have shown that it can be done by our acquisition of ACTitouch. Before ACTitouch, we were a lymphedema only company. We acquired the ACTitouch and now are a lymphedema and wound-care company. We do see this as a platform along with reimbursement “know-how” and direct sales as all aspects that we can leverage.
Having said that, we are in a very under-penetrated market right now with lymphedema, and with awareness just increasing as we speak, we see a huge opportunity in front of us to continue pursuing the lymphedema market in the United States. We believe this represents and opportunity for Tactile Medical to continue growing at 20%-plus revenue growth per year going forward.
Our longer-term strategy is to leverage the platform, but in the short term, we see the lymphedema and wound market opportunities as very compelling and will be the primary focus areas of our growth plans in the coming years.
Right now we have a “buy” rating on STERIS. We upgraded the stock about three weeks ago. It is the one company in the midcap world that has been left behind in this rally, as it has been integrating a very large, very complex acquisition over the course of the last 12 to 18 months.
They have missed expectations primarily because they were too optimistic in its outlook following the acquisition of Synergy Health. There was nothing fundamentally wrong with this company; it has actually had a very positive outlook and has a lot of really good businesses with market leadership.
For most companies, 5% growth is fairly good, but in the context of the promising 7% growth to start off last year, it changes expectations. The company has been through a lot of the integration and divested several underperforming businesses. Post those changes, management focus is now back to revenue growth, and we believe the timing is right for it to play catch-up to the rest of its peer group.
Managing Director Vijay Kumar of Evercore ISI says Baxter International (NYSE:BAX) is a special turnaround story in the medical devices space with the company expanding operating margins at a surprising pace.
In Baxter, if you look at what this company has done in terms of expanding its operating margins, it has been nothing short of remarkable. We have seen turnaround stories in the space, but truly what is happening here with Baxter is special. This is more so. I don’t think anyone doubted that there was room for expanding margins, but it is more the pace at which we have seen this expansion. It has taken the Street by surprise.
So when you think about this company, it has grown earnings north of 20% for the last 18 months. We think they will continue to grow earnings into the high teens for the next, call it, three-plus years.
Given that sort of earnings visibility and a clean balance sheet, extremely low leverage levels and potential upside optionality from capital deployment if they were to lever up their balance sheet, their CEO, Joe Almeida, who sold Covidien to Medtronic a few years ago and has been known in the industry for portfolio optimization, we do think there are a number of levers that the company has to drive superior earnings growth over the next three years. That visibility is what investors like in terms of consistent execution. That probably is the primary reason why we favor Baxter in an environment like this.
The part of the market we like most, and I would say part of this relates to our concern that we are near the end of this great market rally, is looking for bigger blue-chip companies. And so GE (NYSE:GE) is one that we like very much and one that has also lagged the market rally in the last year or two, and we think it has a lot of features. It’s obviously a big industrial company that should benefit from what is likely to be some significant increases in infrastructure, where they are a big player.
And they seem a bit tarnished by their exposure to the energy industry, and I think that’s why it has lagged, but in reality, oil and gas is only about 14% of their revenues. And so you know, although that’s been a bit of a drag on their profitability and so on, we think that’s turned around somewhat, and also, they’re doing well in many of the other areas, like in their health care area, their power and water area, and aviation, so those are all areas where I think they’ll benefit.
They’re also a big global player, which we find appealing because we do think valuations outside the U.S. these days are probably a little bit more appealing, and growth is likely to pick up there more relative to here in the U.S., and so they are benefiting from that. They trade at a p/e of just 17 based on this year’s expectations, which is a little below the market, despite the fact that most industrial companies actually trade at a premium. And then, you also have the benefit that they have a yield of about 3.4%, well-above the market, very sustainable, and so if you get kind of a flattish market where the stock isn’t moving and the market is not moving, at least you’re getting 3.5% or so on your yield.
Citi has done well, but I think the market is still undervaluing the business. And this whole deregulatory process has provided a catalyst for the banks, but they have pulled back a little bit recently.
And what’s interesting, at least in regard to the stress test, is that you don’t need any legislation to go through for the burden of the stress test to be reduced. You just need President Trump to appoint the new Vice Chair of Federal Reserve for Supervision who will have oversight over the stress test, and even small changes in that burden can actually be a needle-mover for banks. Once Trump does that, he’ll just need 51 votes in the Senate to pass that through confirmation, and we believe that whomever that ends up being will reduce the burden a little bit.
We think the U.S. banks have, in aggregate, over $200 billion in excess capital. And Citi really is sort of the black sheep, and yes, there are risks with Citi that are different than, say, Bank of America (NYSE:BAC) or Wells Fargo (NYSE:WFC), the latter being domestic banks that have low-cost deposit bases that allows them to earn fatter spreads than Citi. But we still think Citi is undervalued. The core retail-, investment- and custodial-banking franchises, having gone through bankruptcy, remain fully intact. They’re very profitable.
Managing Director Hans C. Mosesmann of Rosenblatt Securities says NVIDIA Corporation (NASDAQ:NVDA) is an early leader in the artificial intelligence space and is creating competition for companies like Intel (NASDAQ:INTC).
NVIDIA is without a doubt the leader in what I would call GPGPU computing. So it is called General Purpose GPU computing, and it has significant implications in terms of artificial intelligence.
Autonomous driving is a subset of artificial intelligence because it is not just about getting a car from point A to point B, and making sure that you can stop and avoid obstacles and things like that. It is about how the car interacts with the occupants of the car, not only the driver but the passengers as well, to make sure that the entire experience is safe and entertaining…
But in terms of delivering the computing power necessary to enable this kind of next-generation artificial intelligence or self-driving car we like NVIDIA with their Drive PX supercomputer. And then there are lots of opportunities within this type of vehicle for intelligent-type chips to deal with the power train, the instrumentation cluster, climate control and AI sensing inside the vehicle.
Director of Bank and Equity Strategies Marty Mosby of Vining Sparks says State Street Corp (NYSE:STT) has a strong organic growth strategy as it leverages technology investments and invests in new products and services.
Another bank that we like, one of the trust banks, is State Street, which has invested in its technology and is going to leverage that into operational efficiencies in the second half of 2017. It has a strong pipeline of new business at what we think is better pricing than what State Street just lost in the recent BlackRock (NYSE:BLK) announcement, when there was a transition of $1 trillion dollars to one of its competitors in its core custody assets.
We think that their new growth and new business will more than offset that as they move forward, and they’ve invested in a new product and service that they’re rolling out that I think can be very valuable to their primary customer base, which is institutional investors, where they can help them understand flows in the market much better and in real time — much better information than anybody has up till this point.
Managing Director Evan Calio of Morgan Stanley says Chevron Corporation (NYSE:CVX) has a large number of projects coming into the market, which is one reason why it is his top pick among the oil & gas majors.
Within the majors, Chevron remains our top pick, where we expect the single largest free-cash-flow inflection relative to the major oil peers. Chevron has the largest number of projects that are coming into the market. These are projects that they have invested in over a long period of time, the last five-plus years, that are going to begin production.
So the free-cash-flow inflection is the capex rolling off, the production starting up, and with that large free-cash inflection amongst majors, we expect the recycle into their Permian Basin position, which is the most differentiated amongst the majors, to drive better dividend growth prospects and dividend coverage ratios relative to peers. So it’s a combination of projects working through the portfolio and the free cash flow being invested into a relatively differentiated higher-return/shorter-cycle growth asset in Texas.
Progressive is the fourth-largest auto insurer in the country, and they gain market share literally every single year. The internet has disrupted many industries. Now, it’s disrupting car insurance.
Online sales are growing faster than sales from your local agent, and that’s probably not a surprising statement, but what’s interesting is that several top players — names like State Farm, Countrywide and Nationwide — have invested significantly in their agent network and they don’t want to cannibalize it with an online presence.
So as customers start shopping online, Progressive just keeps gaining market share, and that’s not going to stop. Interestingly, State Farm, Countrywide and Nationwide are all structured as mutual companies instead of for-profit companies. So they are not even trying to make money. We think that Progressive has a bright future.
Portfolio Manager Gregg Abella of Investment Partners Asset Management says Kinder Morgan Inc (NYSE:KMI) is currently paying down debt and rightsizing its balance sheet, which should put the company in position to pay a better dividend going forward.
Kinder Morgan is previously a high flyer in the MLP space. They subsequently converted into a C-Corporation, but it is one of the larger, if not the largest midstream and downstream energy companies, meaning oil and gas pipelines and storage.
In January, the company held an analyst day to lay out its plans for the coming year, and while the energy sector has been a real downer for the last two and half years, the company is using this opportunity to use its own internal cash flow to pay down debt and rightsize its balance sheet. It is doing all the right things to maintain its dividend-paying capacity and remain an investment-grade credit.
And we think that over time, that strategy will pay off and that the ability for them to pay a better dividend going forward, in the years to come, will probably start to become evident in the later part of this year or early part of next year.