Brien M. O’Brien, Chairman and CEO of Advisory Research, Inc., says Markel Corporation (MKL), a Virginia-based specialty insurance company, has many characteristics his firm looks for in a company and a management team.
“The company has a long history and an earned reputation as a conservative underwriter of specialty insurance products; a strong, entrepreneurial culture; and an exceptional group of managers who think, act and appreciate the responsibilities of capital allocation,” O’Brien says.
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O’Brien adds that Markel Corporation has a proven ability to create shareholder value through the long-term compounding and growth of book value. He believes that management’s ability to to continue to grow book value, even in today’s market, can continue.
“When, and if, interest rates normalize, Markel has the ability through their short-duration and conservative fixed income portfolio to materially increase their investment income, strengthen their long-term returns and further improve their capital deployment, whether within the insurance operations, equity and fixed income portfolios or other business operations,” O’Brien says.
Sarangan Rangachari, Vice President and General Manager for Red Hat Inc (RHT), says the company’s revenue for the first quarter of its 2016 fiscal year was up 10%, compared to its first quarter in 2015. He says applications and the emerging products, including storage, grew 3.5 times more than the Red Hat Enterprise Linux traditional business.
“What comprises that big basket are things like our middleware product portfolio,” he says. “This is the open-source equivalent of things like WebLogic and WebSphere.”
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Rangachari says that as companies start to build the latest and greatest application that are more web-facing than before, Red Hat’s middleware products are coming to the forefront. For instance, he says Cigna has seen a tremendous amount of success building their solution based off of Red Hat’s middleware portfolio.
“So middleware is one with storage, cloud and mobile, making up the four big areas,” he says. “If I were to overly simplify it, the four growth vectors that comprise Red Hat’s emerging markets are platform/middleware, cloud and cloud management, storage and mobile.”
Philippe Courtot, Chairman and Chief Executive Officer of Qualys Inc (QYLS), says the company has customers from just about every industry. He says the strongest sectors are banking, healthcare and insurance.
“There is one segment that Qualys has not really penetrated yet, which is the federal market,” Courtot says. “We are very strong on state, but the federal market was not receptive until very recently to the SaaS or cloud offering.”
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Courtot says Qualys has been doing a number of things to position the company to penetrate the federal market. For example, he says they have virtualized their data centers so they can deliver them on-premise.
“Typically, you see most security companies do 20% to 40% of their revenues with federal, when Qualys today is doing less than 3% with federal and states,” he says. “As you can see, we have a significantly big opportunity with federal here.”
Frederick Moran, Director of Research at Burke & Quick Partners, says one of the stocks he is currently recommending is CyrusOne Inc (CONE). He says the company represents one of the best values, especially relative to growth.
“CyrusOne stumbled a little bit in terms of its topline growth in the first quarter, with revenue improvement of 11% year over year versus an expectation of a low-teens growth rate,” he says. “Then in the second quarter it dropped a bit further to 9%, but a lot of that was related to pass-through power costs, with energy costs going down, so it really didn’t affect their bottom line. CyrusOne did have upside surprise on both EBITDA and AFFO.”
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Moran says CyrusOne has lagged the group this year, but is starting to show some momentum as EBITDA and AFFO are reaccelerating, and the company’s $400 million acquisition has been completed and is likely to be accretive to the bottom line. Moran says management has raised its AFFO guidance, and he thinks the company could post $2.20 in AFFO this year and $2.55 next year, making CyrusOne one of the cheaper stocks in the group.
“They also have a dividend payout with a 4% yield, which is the third highest in the group,” Moran says. “And the combination of that with their excellent growth prospects, which includes a number of data center facilities that have existing shell capacity that could be built out to essentially double the amount of customer-related revenue it could handle, puts CyrusOne on an impressive growth track.”
Frederick Moran, Director of Research at Burke & Quick Partners, says he has an “outperform” rating on DuPont Fabros Technology, Inc. (DFT), which he believes is currently the best value in the group. He says the stock trades at a discount to the group at about 11 times next year’s AFFO of $2.80, and offers a 5.7% annual dividend yield.
“So it’s offering you a generous payout while you wait to see the stock perform more in line with the rest of the group and/or up to its potential as a result of a couple of issues overhanging the stock,” Moran says.
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One of the biggest issues hindering DuPont’s stock is the bankruptcy of Net Data Centers, a customer that accounts for 3% of DuPont’s revenue. Moran says the company curtailed most of its payments to DuPont a few months ago, but he thinks they are looking for a company to buy them.
“Once that takes place, they will re-lease the space from DuPont Fabros on reasonable terms,” he says. “If and when that happens, we think it provides a very positive catalyst for DuPont Fabros stock.”
Managing Director Stephanie Simon of Winslow Capital Management says Celgene Corporation (CELG) has been a spectacular growth story over the last couple of years and is continuing to be an attractive investment.
“Celgene’s major drug is REVLIMID, and that has been on the market, and that company is growing its top line very dramatically currently. They are also in the process of expanding their business, and we like the pipeline there a great deal,” Simon says.
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Simon says she still likes the growth profile for REVLIMID. And, as the company expands its pipeline from here, she expects further growth.
“So it is the growth prospects and the strength of the company that really is attracting us in terms of Celgene,” Simon says.
Jason Gere, Managing Director and Equity Research Analyst with KeyBanc Capital Markets, says Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA) is one of the stocks he is currently recommending. He likes that Ulta’s top line is accelerating, both square footage growth as well as comps through improved merchandising, and growth of the loyalty card e-commerce.
“And as they’re making investments in the business, that top line is going to get you operating leverage over the next couple of years and margin expansion,” he says.
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A combination of topline growth and margin expansion will accelerate the earnings on the bottom line, according to Gere.
“So I do think that’s a high-growth name for investors that I think has a good multiyear runway ahead of itself,” he says.
Benjamin S. Bienvenu, Research Analyst covering the retail broadlines sector at Stephens, Inc., says one of the most important trends he is observing in the retail sector is the impact of lower gasoline prices on the consumer. Gas prices, coupled with improving employment statistics, are resulting in increased miles driven, creating a positive impact for companies like LKQ Corporation (LKQ), Bienvenu says
“Also within autos, I am seeing that theme play out for LKQ, who is a large alternative parts provider,” Bienvenu says. “If you think about a vehicle, it gets into an auto accident and the insurance company needs to make a decision as to whether to repair it or whether to scrap it.”
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When people are using non-OEM parts and choose to repair a vehicle at the cheapest cost, Bienvenu says they would use a part that LKQ would have pulled off of a salvaged vehicle or an aftermarket part sourced from overseas.
“So with more people driving and more accidents occurring, you are seeing increased demand for LKQ’s alternative parts,” he says.
Gil B. Luria, Managing Director at Wedbush Securities, says the hype around Alibaba Group Holding Ltd (BABA) appears to be justified. At the time of its IPO, Luria says Alibaba was the largest, most profitable, fastest-growing company possibly ever.
“That justifies a lot of the attention that they are getting, not to mention that they are in the biggest, fastest-growing market, and they have overwhelming share there,” Luria says. “They have a very colorful Chairman who has drawn a lot of attention to himself.”
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Since the IPO, Luria says Alibaba has calibrated its expectations in terms of what the growth rate is over the last couple of quarters. He says concerns around the health of the Chinese economy have also impacted Alibaba.
“Because Alibaba is the largest Chinese company, that has put them under pressure as well because of that concern,” he says. “But overall, I do believe the hype about Alibaba is justified.”
Managing Director Stephanie Simon of Winslow Capital Management says Nike Inc (NKE) is seeing an impact of the at-leisure trend in retail, where the consumer is buying less casual attire and more athletic wear.
“We are wearing our athletic wear places that we previously would have worn casual wear. Places where we normally might have worn jeans or khakis, people are just keeping on their yoga pants or regular athletic wear,” Simon says. “So that at-leisure portion of retailing is doing very well, and of course, that speaks to Nike’s sweet spot.”
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Simon says Nike is focusing spending and innovation on this area, with footwear and attire that are lightweight and have a style component to them. Despite past headwinds, Simon believes Nike is still a global growth company.
“They had a few misses a couple of years ago, but they have figured that piece of their business out. And so even with the currency headwind in China, their most recent quarter, this summer, it was quite spectacular,” Simon says.
