Alteva Inc (ALTV) has a legacy partnership with Verizon Wireless worth $50 million on a pretax basis, and its thesis is exhibiting reasonable risk/reward in the unified communications business, which is experiencing double-digit growth, says Eric Kuby, Chief Investment Officer of North Star Investment Management Corporation and Peter Gottlieb, Chairman and CEO of North Star Financial Services Corporation.
“This is the type of situation that we find interesting, because though we don’t typically invest in tech companies due to their inherent unpredictability, in this situation we feel that our downside is extremely well protected in the near term due to the Verizon Wireless partnership, with a call option that we are paying very little for at these prices, in the unified communications business, which is growing at double-digit rates,” Kuby said.
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ALTV‘s stock is currently inexpensive due to the uncertainty surrounding how the current CEO will handle capital allocation policies, maintain the company’s high-yield dividend and allocate the proceeds from the VZ partnership, Gottlieb says. However, he sees positive risk/reward at the company’s current prices.
“There is some uncertainty surrounding how the current CEO, who has a background in unified communications, will dictate future capital allocation policies, including if the current dividend, which has an 11% yield, will be maintained, as well as how the proceeds from the Verizon Wireless partnership will be allocated. Ultimately, though, we believe the ALTV thesis possesses a reasonable risk/reward ratio at these prices,” Gottlieb said.
LeapFrog Enterprises, Inc. (LF) creates highly recognizable, quality learning content for children’s education with through its children’s toys, and the company’s solid brand and balance sheet positions the company for more opportunities going forward, says Eric Kuby, Chief Investment Officer of North Star Investment Management Corporation.
“One of our top holdings where we still think there is a nice opportunity is LeapFrog Enterprises, the company that makes the reading learning games for little kids aged three to seven. This is a company that we’ve followed since they went public, and I’d say probably two years ago I had started to think they actually had gotten it right. They’ve got tremendous content, a great brand name, really good distribution, a phenomenal balance sheet, and they were starting to grow,” Kuby said.
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LF‘s potential opportunities are coming from a market misunderstanding, Kuby says, that LF is a device company that is competing with Apple Inc. (AAPL). However, Kuby views the company as more content-oriented, and says that LeapFrog‘s content is unparalleled in the industry and driving the company’s value.
“They’ve developed over a long period of time this world-class content that can’t be replaced. If you are a parent of a three- or four-year-old and you want to buy them something fun to play with but that you also know is going to have stuff that you want them to learn and play with, and you see the LeapPad, you know that’s what it is. So it’s really the content that is driving it, and that content has a lot of other value,” Kuby said.
Prudential Financial (PRU) trades at book value and is expected to see a 10% increase in its stock price while having a dividend yield, and although the stock has seen upside earlier in the year, Randy Binner, Managing Director at FBR Capital Markets & Co. expects it to continue its climb.
“Prudential is our top pick. It has been a good call to be higher beta, higher risk, and we think that it’s going to continue, and so Prudential is our top pick. Even though the stock is up 22% year to date, it’s still only trading at seven times its 2014 earnings, so we think they had a great first quarter,” Binner said.
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Binner the recent drop in insurance stocks made PRU inexpensive, and he expects significant upside from the stock this year. He further says this may present a good opportunity given the insurer is a top U.S. company.
“We think they will have $8 in EPS this year and $9 in 2014. It’s a $75 stock, and so for us, that kind of valuation, upside to target probably about 10%, and you get a 2.5% dividend yield for large, well-managed, diversified global brand. That’s a very good opportunity with the market at a nominal all-time high to buy a top U.S. company for eight times earnings, and so that’s how cheap that the market has left these life insurance stocks,” Binner said.
American International Group (AIG) remains inexpensive and maintains exposure to both life and property/casualty insurance, and it has improved its business practices and turning from an unprofitable operation into a profitable one on an underwriting basis, says Randy Binner, Managing Director at FBR Capital Markets & Co.
“AIG is still not expensive at about 65% of book value. What we like about AIG is that it’s got a life business and a P&C business. We’re generally upbeat on both sides of the insurance industry. In fact, we really like the life insurance side currently. We think life companies are oversold relative to investor fear, and so I would say that the life at AIG is generally underappreciated,” Binner said.
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Binner says AIG has become moderately profitable on an underwriting basis after implementing best practices in its P&C side, making the turnaround easier for this insurance company. He also says AIG offers tax deferral, which could pose a benefit to investors.
“So what’s happening is that in last few years, managers have really tried to bring a lot of best practices to AIG, and so we think that the move from being above a 100% combined ratio,” Binner said. “Finally, AIG has a tax shield. They have a deferred tax asset that they’re going to continue to able to use for the next few years, and we think that’s something the market does not fully appreciate.”
NXP Semiconductors NV (NXPI) grows revenue by identifying key verticals such as automotive and by engaging in a financial strategy that will allow this semiconductor company to eventually grow the p/e multiple on its stock, says William Stein, Managing Director at SunTrust Robinson Humphrey.
“My top pick remains NXPI,” Stein said. “NXPI has a combination of what I see as idiosyncratic revenue growth, from its identification end market, new microcontroller products, and its automotive end market, significant cost savings throughout its P&L and financial leverage.”
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Stein says NXPI is not expected to see meaningful EPS growth from delevering, as some people discuss, but that the company will rather buy back stock in the second half of 2013 and early 2014, lifting EPS estimates and p/e multiples.
“The company has stated that when it achieves 2.0 times net leverage — I model that happening in 4Q13 — it will re-evaluate its use of excess cash, which is currently allocated to debt repurchase. I expect the company to start buying back stock in late 2013 to early 2014. This will lift EPS estimates, and I expect it to lift the p/e multiple on the stock as well,” Stein said.
Hittite Microwave Corp (HITT) displays attractive gross and operating margins while still having an attractive growth profile, thanks to its exposure to some of the higher-growth verticals in the semiconductor space, says Tore Svanberg, Analyst at Stifel, Nicolaus & Co., Inc.
“Our favorite core investment — this is sort of the best-of-breed fundamental, where fundamentals are strong — idea is Hittite,” Svanberg said. “Hittite I think is a perfect combination of growth and profitability.”
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This IC, RF and modules company has seen higher demand than other semiconductor companies due to its exposure to certain verticals, allowing it to generate positive financial metrics.
“Hittite Microwave, HITT, to me this is probably among the strongest companies in this space. They generate gross margins in the 70s, operating margins in the 40s, but more importantly, they also have a very attractive growth profile, because they target some markets that are experiencing more outsourcing now than the last few years,” Svanberg said.
Monolithic Power Systems (MPWR) hit an inflection point and has introduced new products, revamped its staff and is expanding into new markets, all of this after not being able to keep up with capacity in the past, says Tore Svanberg, Analyst at Stifel, Nicolaus & Co., Inc.
“In the case of Monolithic Power Systems, this is our favorite growth idea. This is a company that used to be one of the fastest growing companies in analog in the last decade. They sort of couldn’t keep up with capacity, and they ended up hitting a wall, basically had to restructure and retarget some new markets, and that’s what they’ve done in the last three years,” Svanberg said.
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Svanberg says the restructuring of this semiconductor company to refocus and hit new markets is showing results, and the year 2013 should be the year were they reap what they’ve sown.
“They’ve been introducing a lot of new products, they’ve hired a new sales force, they are penetrating new geographies, and right now, 2013 is sort of the inflection point for a lot of that work and a lot of that R&D investments,” Svanberg said.
Atmel Corporation (ATML) expects an increase in demand for its products in 2013 based on the current semiconductor cycle, and will remain a leader in microcontrollers while also delivering its innovative touch sensor, XSense, that will replace ITO sensors currently used by OEMs, says William Stein, Managing Director at SunTrust Robinson Humphrey.
“Atmel is one of the leaders in 32-bit and 8-bit microcontrollers that are used in a variety of end markets…the company has a very good product portfolio, and we expect demand for these products to recover in 2013, based on our view of the cycle and of what drives it — consumer sentiment momentum. ATML also has a very strong position in microcontrollers that enable touch features in consumer products, primarily handsets and tablets, but also increasingly other products like automotive consoles,” Stein said.
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ATML is also seeing potential in its new touch sensor product called XSense, which is a less expensive and more flexible product that will replace ITO sensors, Stein says.
“Another product cycle is Atmel’s innovative touch sensor called XSense, which replaces indium tin oxide, ITO, sensors that are currently used by touch panel OEMs. ITO is very expensive and brittle; XSense can be manufactured less expensively and it’s flexible, so can be placed on curved surfaces and can be placed right up to the edge of a piece of glass, which is another modest benefit,” Stein said.
Celldex Therapeutics (CLDX) has more than doubled in less than nine months. In fact, the stock is currently trading at 2.3 times its September 2012 price. In an analyst interview in The Wall Street Transcript on September 17, 2012, Boris Peaker, an Executive Director and Senior Analyst at Oppenheimer & Co. covering the emerging biotechnology sector, had this to say about Celldex:
TWST: What are some of the most exciting or promising new drugs, treatments or technologies coming out of your companies right now that investors should be aware of?
Mr. Peaker: The oncology space is actually very rapidly evolving […] Studies often don’t take a very long period of time compared to some other indications, like figuring cholesterol and things like that […] So in the oncology space, some of the interesting new developments are Celldex as a new drug in breast cancer, which is targeting a completely novel target, which is certainly exciting with some of the early stages of development, but the initial data is very encouraging.
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CLDX common closed at $5.88 on September 14, 2012, before the above article was released to the general public. The current price is $13.95/share. Interestingly, SAC Capital, Steve Cohen’s beleaguered investment vehicle, owns over $45 million of Celldex, representing 8.9% of the company’s common shares, according to this SEC filing.
CLDX was included in this model biotech portfolio on September 26, 2012, and Boris Peaker has some more recent picks and insights detailed in this interview. The combination of a sell-off by SAC Capital as massive client redemption requests triggers stock sales from its portfolio and the long term nature of the FDA drug approval process may create some interesting buying opportunities in Celldex.
Mindspeed Technologies (MSPD) is looking for strategic alternatives to bring in some extra capital into the company, and the stock recently saw an increase of about 30%, leading Steve Smigie, Analyst at Raymond James & Associates, Inc., to downgrade the stock to a “market perform” rating.
“Typically, you see a 30% premium for a company that will be taken out, so given the jump and what’s going on with the balance sheet, I decided to make the downgrade, though there are lots of alternatives they can do there. So our ‘market perform’ isn’t saying that there is no upside to the shares. My rating is about the company as it stands today with their issues. I think, however, if you were to do to a sum-of-the-parts analysis, there is room for the parts to be worth more if they were to be sold separately,” Smigie said.
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Smigie says Mindspeed was hoping to get a significant increase in small cells, although the technology seems to be getting pushed out to a certain extent, leading to a re-evaluation of the company strategy.
“Essentially, Mindspeed announced that they are looking for strategic alternatives. They had been hoping to get a pretty big ramp in small cells. We think they have a very good technology there, but at the same time, small cells are getting pushed out a little bit, too. Given their balance sheet, I think they made the decision that they want to evaluate some strategic alternatives, either for the company as a whole or in terms of certain businesses, to bring in some more cash,” Smigie said.
