GT Advanced Technologies Inc (GTAT) has been a participant in the long-term secular growth trend of LED lighting and solar panels, and while the stock has been volatile, the company’s credit is solid and they are showing more cash on their balance sheet than debt, says Kenneth E. Lee, Managing Member of Bridgehampton Capital Management LLC.
“Our largest holding that we’ve published is GT Advanced Technologies (GTAT)…The company makes equipment that helps manufacture LED lighting and solar panels, and so their business has been in a long-term secular growth trend. But there has been some overcapacity in the industry recently, so the stock has gone out of favor. The reason we like this name for this type of trade is that it has been very volatile, but the credit looks solid to us. They have more cash on their balance sheet than they have debt, they have a business model in which they can scale their expenses very quickly,” Lee said.
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GTAT is an example of one of Lee’s firm’s hedge trades, where the firm owns the convertible bond. They seeing upside potential in the convertible should the cycle turn between now and its maturity in 2017, Lee says. He explains how his firm can benefit from this kind of trade.
“If the cycle were to turn between now and maturity in 2017, we have upside potential in the convertible…Essentially we stripped out the debt that is trading at effectively a very attractive yield, and we’re able to capture some of the volatility from that equity as well. That’s the kind of trade that we believe really fits nicely into a portfolio where you do have some long exposure, because in this particular trade we believe we can make money, depending on how it’s hedged, in up or down markets or with the stock going up or down, as long as we’re right about our credit analysis,” Lee said.
IDEXX Laboratories, Inc. (IDXX) is a dominant player in the reference lab and point-of-care veterinary diagnostic spaces, and the company is continuing to grow organically with significant amount of margin leverage and strong cash flow, says Nicholas Jansen, Analyst at Raymond James & Associates, Inc.
“We like IDEXX as well from a long-term standpoint. They certainly have a great portfolio of assets, and they’re growing organically in the mid- to high single-digits with significant amount of margin leverage over the next three years to five years, which should drive midteens EPS growth during that timeframe,” Jansen said.
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Being a dominant player in the reference lab space with over $300 million of reference lab revenue, and taking up approximately 80% of the market share in point-of-care diagnostics segments, IDXX is looking for strong cash flow to drive EPS growth in the future, Jansen says.
“If you have a longer-term time horizon, I think IDEXX fits that nice little mold of great management, good products, margin expansion and strong cash flow to drive improved EPS growth year over year for the next couple of years,” Jansen said.
Union Pacific Corporation (UNP) has been growing its earnings in the double digits and continues on that path as the domestic economy continues growing, transporting cargo across the continent with its railroad business, says Gary Bradshaw, Senior Vice President and Portfolio Manager at Hodges Capital Management.
“Their dividend isn’t big, yielding 1.8% currently, but they raised it 15% this year. Union Pacific’s earnings are growing dramatically and should be about $9.50 in 2013. That’s 15% above the $8.27 they earned in 2012. And in 2014, we think they’ll earn $10.80 to $11 a share,” Bradshaw said.
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Bradshaw says UNP‘s rail business has more than made up the loss of the coal hauling in North America with the transporting of mass quantities of oil to the refineries, and hauling cargo from the shale plays.
“As the economy continues to grow, Union Pacific is moving more cargo, auto parts and housing lumber, and then you have this big shale boom going on in energy all over the United States, where instead of building new pipelines, the railroads are hauling mass quantities of oil to the refineries,” Bradshaw said.
The Procter & Gamble Company (PG) continues innovating and building value for its brands of household personal hygiene items, raising the dividend and lifting the stock price up potentially by 50%, says Gary Bradshaw, Senior Vice President and Portfolio Manager at Hodges Capital Management.
“The stock is not necessarily dirt cheap, trading at about 18.5 times this year’s earnings, but it is a fabulous company that I think will trade at a premium to the market multiple. Procter & Gamble over the next three years could earn $6 a share. You put a 20 times multiple on that, and I can see how Procter & Gamble could eventually be a $120 stock,” Bradshaw said.
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Bradshaw says PG has brands worth $26 billion and the company has a history of raising the dividend for 52 straight years, most recently by 7%. Some of its brand innovation can be found in the ubiquitous Gillette razors, Head & Shoulders shampoo and Tide detergent.
“Think of Tide detergent. Five or six years ago my wife would send me to the store to get a box of Tide, and I’d bring out this great big orange box. Then three years ago, I’d go get this gallon jug of Tide liquid detergent. Today, I buy Tide PODS, which are little packets that have the detergent, the freshener and the softener all in one,” Bradshaw said. “It’s very innovative, what they’ve done.”
General Motors Company (GM) is currently trading at an attractive discount in the low $30s as the company eyes significant upside potential with new product rollouts and its business in China, says Kenneth E. Lee, Managing Member of Bridgehampton Capital Management LLC.
“We think on a fundamental basis, with $10 of cash per share on the balance sheet plus significant net operating losses and having rationalized their pension obligations materially by purchasing insurance over the last year or so, that General Motors stock in the low $30s is attractive,” Lee said.
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Lee’s price target for GM is $45 to $55 a share, and he believes the current discount results from concern about the overhang from the government and a lack of sponsorship by the investment community. However, Lee sees significant upside potential with the company’s solid business in China and its new product rollout.
“We believe their products are quite good, they have an excellent business in China, and they’re rolling out new products all this year that have been getting good reviews. And that product refresh should put them in a good position to compete with other manufacturers. As a value investor that’s looking for significant upside potential, we think that there is good value here with limited downside potential,” Lee said.
Research In Motion Ltd (BBRY), doing business as BlackBerry, is currently trading at an attractive price relative to the company’s value, as BBRY has solid assets which are generating cash, shows approximately $5 in cash per share on its balance sheet and holds zero debt, says Kenneth E. Lee, Managing Member of Bridgehampton Capital Management LLC.
“[BBRY] rated very highly on our capital structure rating tool last year around this time, and we started to take a deeper look at it as a software company rather than as a hardware company. The stock is trading around $14, and they have no debt; they have approximately $5 in cash per share on the balance sheet. They’ve been generating significant cash from their legacy message-delivery business, they also have a significant amount of intellectual property, and we believe their enterprise message delivery software platform, which is device agnostic, is going to be very powerful going forward,” Lee said.
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BBRY‘s stock price is currently attractive to Lee, as he believes the company will see limited downside over the next 12 to 18 months, due to the value and potential of the company’s assets.
“We view the breakup value of the company as $18 to $22, excluding the value of this new BlackBerry 10 operating system and devices. So for us, at $14 currently, this is very attractive, because we feel there’s limited downside. Obviously there’s no guarantee of that, but we feel from our analysis that the downside is relatively limited over a 12-month to 18-month time horizon because of the value of the software assets and the security business. And the device business has potentially significant upside because the operating system is, in our opinion and based on our research, superior, particularly in the way it multitasks and provides security to the user, when compared to the other dominant operating systems out there,” Lee said.
Johnson & Johnson (JNJ) is growing after having corrected recall issues from last year. It also changed its CEO and bought Synthes, which provides the company with exposure to the growing business of medical devices in Europe, says Gary Bradshaw, Senior Vice President and Portfolio Manager at Hodges Capital Management.
“For the first time in a long time, we think the stock of Johnson & Johnson, which is AAA rated, is going to continue to do real well. The stock yields 3.09%, and they just recently raised their dividend 8%. They’re buying in stock, cash flow is extremely strong, and it’s a very high-quality company that we think is well positioned to continue to grow,” Bradshaw said.
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Bradshaw says JNJ has been raising its dividend for over 50 years, and the flow of capital out of bonds should eventually end up in blue chips like Johnson &Johnson.
“We think as bonds continue to sell off, there is going to be a big wave of money that will go into equity income, and even though equity income has pulled back temporarily, we think it’s just a correction. And these blue-chips that are growing their earnings and raising their dividends will be great beneficiaries of money coming out of the bond market,” Bradshaw said.
Lockheed Martin Corporation (LMT) manufactures the F-35 Joint Strike Fighter that is on its way to replace F-15 and F-16 planes, supplying air power to the U.S. Air Force, the Marines, the Navy and several other countries, growing its sales along with its dividend, says Gary Bradshaw, Senior Vice President and Portfolio Manager at Hodges Capital Management.
“Here’s a company that today yields 4.43%, that raised their dividend 15% in 2012, and I think they will raise it at least 10% this September. So you have a 4.43% yield today, they’ll earn around $9 a share, and the stock is at $103.67, so it trades at 11.5 times earnings,” Bradshaw said.
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Bradshaw expects the defense company to grow despite sequestration, and he highlights the company’s strategy to return cash to shareholders as another reason to invest in the company.
“In addition, Lockheed is buying in shares each year, so their share count is obviously getting smaller. We think Lockheed could trade 13 times earnings, so we see appreciation in the share price. We think it could go to $130 over the next 12 months or 18 months, but we see the dividend increasing on top of the 4.43% yield, and it should continue to be a very good total-return vehicle,” Bradshaw said.
Vertex Pharmaceuticals Incorporated (VRTX) is a well-founded biotechnology company that has stuck to its strategy to continue its success despite the stock’s volatility, says Eric H. Jostrom, Chairman and Chief Investment Officer of Ipswich Investment Management Co., Inc.
“We have been very happy investors in Vertex (VRTX). We know that the stock can be a bit of a yoyo, but we think the company was well founded years ago, and it has stuck to its knitting and continues to be successful. But when the stock is as volatile as it is, when you have a move like it had in the last couple of months, overnight, prudence says you’ve got to pick some of the fruit, which we’ve done,” Jostrom said.
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Jostrom’s firm is taking a more aggressive approach to investing in the biotechnology sector as opportunities become more prevalent in the space, particularly in the genomic area where companies are seeing positive cash flow.
“What we do like, and this is probably the more aggressive money that we have put to work in, is biotechnology. We believe that companies that are known for very high burn rates have come a long way, and in the genomic area there are opportunities here and there, where there are some biotech-related companies that actually have positive cash flow. And they are growing and developing from a one-product company to a two-product and so on,” Jostrom said.
Whirlpool Corporation (WHR) increased its dividend 25% in the last quarter, reflecting optimism on the company’s future as WHR implements new technology into products to make a solid overall suite, says Eric H. Jostrom, Chairman and Chief Investment Officer of Ipswich Investment Management Co., Inc.
“The combined company of Whirlpool, Maytag and Amana is a world-class company with an excellent franchise and branding, and it has implemented technology in their products making a very good overall suite. It’s a very conservative company, but it is with some uplift in that the board increased the dividend 25% in the last quarter,” Jostrom said.
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Jostrom believes that the dividend increase reflects optimism from the board on where the company is going, thus cementing Jostrom’s reasons behind moving his investment from Toll Brothers Inc (TOL) to Whirlpool.
“We have sold Toll Brothers (TOL). We bought it when it was a bit up, but we felt that the stock was not responding the way it had done historically to the housing cycle. And even though it’s a terrific company, there is no dividend, and we didn’t think we were getting the confirmation of the housing trend in it. So we have exited that, but at the same time, we decided we wanted to stay at least tangentially invested in housing, so we essentially moved that money into Whirlpool (WHR), which has worked out very well thus far,” Jostrom said.
