Qihoo 360 Technology Co Ltd (QIHU), a player that entered the Chinese search market in August of 2012, is now capturing up to 20% of the country’s search market traffic, and QIHU is expected to see future growth in revenue from the service, says Echo He, Senior Vice President in equity research at Maxim Group.
“The major positive of this stock is that the company entered search market in August 2012, and in the first quarter of 2013 they started to generate revenues through this search service they provided. Although they’re a new company in search — but at the beginning, they were able to grab 10% of the search market traffic, and right now they’re somewhere between 15% to 20%, depending on which source you’re using. It’s making a progress, and seemingly the traffic to this new search service is still growing. As long as the traffic to this service is growing, it suggests the future revenue continue to grow,” He said.
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While the QIHU‘s revenue from search is not making a meaningful impact to the market dominant, Baidu Inc (ADR) (BIDU), He expects Qihoo‘s search traffic to grow, and therefore revenue to continue to grow as well, as the company has a solid model to capture users and user activities.
“Why do I think the company will likely get higher market share than the current level? The major factor is the company has a good way to grab users and user activities. They provided a free service; on top of the free service they added some other services, and they use that free service to make users use their added-on service. One of these added-on services is search,” He said.
Suncor Energy Inc. (USA) (SU), one of the world’s leaders in reserve life for oil, is returning 5% of its stock price back to investors each year, and with Warren Buffett’s recent endorsement is geared up to be a solid play, says Sandy Mehta, Principal and CIO of Value Investment Principals Ltd.
“Suncor is Canada’s largest market cap energy stock. This is a $50 billion market cap company. They’re one of the leaders in the entire world in reserve life for oil; they have 60 years of oil reserves, and they have 80 years of gas reserves. What you see is there is a paradox — that oil prices are near their three-year high, but a stock like Suncor is closer to its three-year low,” Mehta said.
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Though Mehta has been recommending SU since last year, Warren Buffett’s recent $5 billion stake in the company has brought new attention to the stock, Mehta says. Additionally, the company is returning 5% of the stock price to investors each year through dividends and buybacks, setting up SU to be a solid play in the energy market.
“You have a company, again a clear industry leader, trading at a 10 p/e. If you look at the dividend yield plus buybacks, they’re returning 5% of their current stock price to investors every year. The price to book is 1.3 times. The EV to EBITDA is 4.4. We are quite bullish on oil prices longer term, and we think this is a good play. And again, the stock is near its three-year low, and when you have investors such as Warren Buffett coming in, I think that is just an endorsement of the idea,” Mehta said.
QUALCOMM, Inc. (QCOM) and Apple Inc. (AAPL) are both positioned well to meet industry challenges in the shift to mobility and the cloud, as both companies are trading a levels that have room for upside and offer up to 8% cash flow yields, says Eric Kallen, President and Chief Investment Strategist at Hayek Kallen Investment Management, LLC.
“We see technology as an industry in transition. The shift is away from the traditional desktop model to mobility and the cloud…We see this shift as taking place over time, and while it isn’t obvious who the winners and losers will ultimately be, we feel that buying great companies at good prices gives us the ability to position ourselves appropriately,” Kallen said. ”Two companies that we feel are well positioned to meet these challenges are Apple and Qualcomm. Both of these companies are well established in the mobility space, I think you could argue that one of them actually played a large role in creating it.”
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In addition to AAPL and QCOM‘s strategic positions in the move to mobile and the cloud, both companies are holding significant cash piles as well as offering decent dividends and considerable room for upside.
“They both have huge cash piles, offer very respectable dividends and are trading at levels that provide significant room for upside. Apple is trading at about 12.5 times earnings, less if you back out the cash, and offers an 8% cash flow yield. Qualcomm is a little higher, about 14.5 times earnings, but it has a very respectable cash flow yield of nearly 7%,” Kallen said.
Mentor Graphics Corp (MENT) has seen consistent growth since the 2008 downturn, with bookings up 70% last quarter compared to the previous year, as the company leads the market in special purpose computers and physical verification software, says Walden C. Rhines, Chairman and Chief Executive Officer of Mentor Graphics Corporation.
“We have had quite a run here. Over the last five years, our compound average growth rate of earnings, our non-GAAP earnings, have been about 50% per year, GAAP earnings about 35% per year, so it’s been fairly consistently growing ever since the 2008 downturn. The particular strength we saw in the last quarter is a continuation and acceleration of what we’ve seen over the last few years, and it came from two areas,” Rhines said.
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The two areas of growth have been from hardware acceleration, which is the use of special computers and software to verify designs, and the move to the next generation of integrated technology, in particular use of physical verification software, Rhines says. MENT is the market leader in both areas and has seen a significant increase in bookings.
“Mentor has the leading special-purpose computer or emulator in the market today, and the bookings for that particular portion of our product line increased over 160% this past quarter compared to last year, and last year the revenue doubled,” Rhines said. “The other big contributor was the move by our industry to the next generation of integrated circuit technology called 14-nanometer…The move to that generation of technology is causing a retooling among the customer base for the design software, and particularly the physical verification software that allows you to take the actual layout of a design and alter it to make it manufacturable and verify that it, in fact, does what it’s supposed to do. Mentor is the leader in that area and has quite a large market share in the 70% range, and so the strength in that field has been a big impetus for growth for Mentor.”
Skyworks Solutions Inc (SWKS) is poised to benefit regardless of who wins the handset war, Apple Inc (AAPL) or Samsung Electronics Co., Ltd. (KRX:005930), because the company supplies to both, and will also see rewards as more devices move to Wi-Fi, says Harsh Kumar, Managing Director at Stephens, Inc.
“One that we like a lot is Skyworks, SWKS. It’s a great company. We generally like the RF space, but this particular one is very well-run, and they already have very little fat but they continually strive to take fat off their financial statements. The best way to describe this company is it doesn’t matter whether Apple wins the handset war or Samsung wins the handset war or some third competitor wins it. They supply to both. They are very well-represented in the industry itself, and they also are a play in the China upgrade market,” Kumar said.
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Additionally, as the biggest player in Wi-Fi from a radio frequency angle, SWKS should benefit as more devices move to Wi-Fi, Kumar says. He picks this stock as an inexpensive yet attractive investment.
“Next is the Wi-Fi catalyst. They are the biggest player in the Wi-Fi and the Wi-Fi A/C space from a radio frequency angle. So as you hear of more and more devices such as DVD players, set-top boxes, TV are going to Wi-Fi, we think of this company as a very good play. We’ve got $2.54 in earnings, EPS. For September 2014, the company has $2.00 in cash. It’s a very cheap stock trading at roughly 10 times, and I think it could easily trade at a mere 13 to 14 times to get to the low $30s price target. Relative to that, most of my other companies trade somewhere in the high teens. So this will still be a cheaper stock and potentially the multiple for the expand even from there, but it’s very attractive,” Kumar said.
Hertz Global Holdings, Inc. (HTZ) is looking to expand its business beyond airport rentals while also capitalizing on opportunities from its acquisition of Dollar Thrifty Automotive Group, says Eric Kallen, President and Chief Investment Strategist at Hayek Kallen Investment Management LLC.
“Most of us know Hertz from the rental counters at the airport, but Hertz has begun to move beyond just that. Late last year they closed on an acquisition of Dollar Thrifty Automotive Group, which further consolidated the industry from six major players a few years ago to three today,” Kallen said.
HTZ has seen cost savings and cross-selling opportunities with the Dollar Thrifty acquisition, and is currently a reasonably priced stock that has the potential to benefit from not only the acquisition, but from its move to off-airport car rentals and firm pricing trends in the industry, Keller says.
“Hertz has been very active in moving into the off-airport rental car business. These rental arrangements are generally longer and more desirable than what is available at the airport. If Hertz can recognize reasonable synergies from their DTG acquisition, and the industry continues to see firmer pricing, then Hertz, at less than 11x 2014 earnings, looks very reasonably priced,” Keller said.
Novo Nordisk A/S (ADR) (NVO) is playing to the underlying trends and changes in the health care sector as the world leader in diabetic care, with the broadest product portfolio in the health care industry, says Eric Kallen, President and Chief Investment Strategist at Hayek Kalen Investment.
“This sector is seeing a tremendous amount of change. Change is being imposed in part by new regulations, but also by changes in demographics…The demographic changes are more attractive to us. Globally, the population is aging and we are living longer. Coupled with this is the fact that health care continues to be a larger and larger component of GDP,” Kallen said.
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Kallen believes that NVO is a great way to invest in the current health care trends, as diabetes continues to grow worldwide and NVO stands as the world leader in diabetic care.
“A company like Novo Nordisk as a great way to invest in these underlying trends. NVO is a Danish drug company that focuses on diabetes. Given the trends that I just mentioned, coupled with the fact that obesity has really begun to take its toll, diabetes is what we would consider to be a growth disease. Globally, there are nearly 300 million people who suffer from diabetes, and in China, where 114 million Chinese have the disease, it has reached epidemic status. Novo Nordisk is the world leader in diabetes care, and it has the broadest diabetes product portfolio in the industry,” Kallen said.
OncoMed Pharmaceuticals (OMED) has multiple early-stage cancer antibodies in its pipeline that are wholly owned or partnered with GlaxoSmithKline plc (GSK) and Bayer AG (FRA:BAYN) that could drive the stock to the upside by over 50%, says Ted Tenthoff, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“[OncoMed] was a recent IPO this year, and this company is also an antibody-development company or a biotherapeutic company, and they are developing cancer antibodies, and they presently have five early-stage cancer antibodies that are wholly owned and/or partnered with two of the leading pharmaceutical companies, GSK and Bayer. And the really — this is a company that went public at $17 in July, ran all the way up to $31 in its first-day trading, and it’s kind of settled back down around maybe even below that IPO price,” Tenthoff said.
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Although the company has a higher risk profile than average, Tenthoff says OMED has the potential to move back up to around $30 after revealing data at a large meeting in October that could validate the effectiveness of its oncology solution.
“Here I think the valuation is very attractive, trading around $0.5 billion, which for multiple antibodies in the clinic, again, it could represent — we have a $30 price target on it currently, which is over a 50% move, but I think they’re going to have some data at a big scientific meeting in October that could really validate their pipeline, and I think create a lot of value,” Tenthoff said.
Equinix Inc (EQIX) is on track to convert to a REIT on January 1, 2015, after overcoming dislocations in the stock due to the IRS revisiting REIT qualification criteria, and the company should also benefit from overall sentiment improvement around the data center sector, says Todd C. Weller, Managing Director at Stifel, Nicolaus & Co., Inc.
“Equinix is our top pick. We think, from a stock perspective, it’s been under significant pressure. Prior to June quarter results, there was the announcement that the IRS had established a working group to revisit REIT qualification criteria, and that had a negative impact on Equinix, because it created some uncertainty about their efforts to convert to a REIT on January 1, 2015. So that was a company-specific factor that drove a dislocation in the stock,” Weller said.
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Weller believes that while sentiment has been negative, the fundamental trends in the space are overall healthy, and that other data center companies operating as REITs are setting a good precedent. Therefore he sees a high probability that EQIX will convert to a REIT on schedule.
“While there was a little bit of fundamental pressure in the business, we think the guidance reduction was modest, and it seems that 2H estimates are at a reasonable level, so we think a cleaner quarter in 3Q and 4Q could help as well. And then, I think if we just get overall improved sentiment around the sector — because Equinix is looking to convert to a REIT, it does tend to correlate with the data center REITs — to the degree sentiment improves around a stock like Digital Realty Trust (DLR), we think that could benefit Equinix as well,” Weller said.
Regeneron Pharmaceuticals Inc (REGN) is expected to see continued growth with its ocular drug EYLEA due to the company’s Bayer AG (FRA:BAYN) partnership, in addition to future opportunities REGN holds with its rich antibody pipeline, says Ted Tenthoff, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“Look at Regeneron now and a lot of that growth, it certainly commands a premium valuation because of what we’ve been discussing, but a lot of that growth has been from an ocular drug, an eye drug called EYLEA, which is approved for age-related macular degeneration and other indications and is in Phase III studies for diabetic macular edema. So we see opportunities for that drug to continue to grow, especially overseas where they’re partnered with Bayer, which contributes a very high-margin revenue stream,” Tenthoff said.
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Tenthoff also points to REGN‘s significant antibody pipeline as an area of future growth and opportunity. With the stock rising from his initial purchase of $19 a share to upwards of $250-plus a share, Tenthoff is confident REGN will continue to deliver.
“Why I also like Regeneron is they have one of the richest antibody pipelines in all of biotechnology, and it’s — they have the opportunity to create multiple blockbuster antibodies over the next 10 to 20 years. So it’s trading at a big premium. It’s had a big move,” Tenthoff said. “It’s a premium company that I think will continue to do well.”
