Interxion Holding NV (INXN) is an attractive player in the network-dense colocation space, poised to benefit from significant capacity growth while also eyeing margin expansion potential, says Todd Weller, Managing Director at Stifel, Nicolaus & Co., Inc.
“Interxion is our top pick, and aside from liking the network-dense colocation space for the reasons we discussed earlier, we view Interxion as an established operator in Europe. We see an attractive fundamental story, as the company should benefit this year from significant capacity growth they experienced in 2012,” Weller said.
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Weller believes INXN has margin expansion potential, has an attractive valuation when compared to peers and is also being viewed as a consolidation candidate, further cementing Weller’s bullish take on the network-dense colocation space.
“We remain most bullish on network-dense colocation, because it is a beneficiary of various secular drivers like mobile, cloud, growth of Internet, social media, etc., and it’s been — you’re kind of making a play on the broad cloud theme as opposed to, you know, making a play on a single service provider, and then again I would emphasize the higher barriers to entry in that area. And so shares of Interxion, INXN, a European network-dense colocation provider, remains our top pick,” Weller said.
Sourcefire, Inc. (FIRE) has received high markings for its next-generation firewall product, and with the company’s strong track record and solid technological foundation, FIRE should benefit over the next several years, says Jonathan Ho, Analyst at William Blair & Company, L.L.C.
“We also like Sourcefire (FIRE). We think that company has a very strong track record in terms of developing solid technology. They recently were given very high markings in third-party studies, such as NSS Labs, for their next-generation firewall product,” Ho said.
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Currently, the market has not fully accepted FIRE‘s product for next-generation firewall, however Ho sees potential benefits over the next several years because of the strong foundation of FIRE‘s technology.
“But this space, the foundation of their technology, seems to be very strong, and from our perspective they can either try to develop that application in-house or they can potentially make an attractive acquisition candidate to someone that has a broader reach today,” Ho said.
Tencent Holdings Ltd. (HKG:0700) is expected to monetize its Internet presence in China through mobile gaming at WeChat, by integrating its Tenpay online-payment platform and through mobile advertisement, says Cynthia Meng, Managing Director at Jefferies & Company, Inc.
“We are very positive about Tencent‘s ability to monetize from WeChat. We think that first approach of monetizing WeChat will come through mobile games. There are a couple of successful precedents in overseas players with LINE in Japan and KakaoTalk in Korea. For example, Korea, within one month of launching mobile games, they already saw very strong pickup, and it was profitable for KakaoTalk. Tencent owns a minority share of KakaoTalk. They already see from the successful launch of mobile games at KakaoTalk, so we believe that Tencent should be able to easily replicate that in China,” Meng said.
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Meng says the double-digit market share of Tenpay along with the data from the WeChat application may allow Tencent to monetize in an O2O manner, and she adds that mobile advertisements are expected to kick in sometime next year.
“Tencent has the number two payment tool in China, with about a 20%, 21% market share in online payments, behind market leader, Alipay ofAlibaba. With the Tencent‘s global positioning and integration with Tenpay, we think they already have comprehensive knowledge of their users on the WeChat with respect to location-based information, with respect to users’ personal interest and social grasps, they should be able to, down the road, monetize from online to offline and offline to online — O2O — that kind of global commerce by offering the ability to transact through Tenpay,” Meng said.
Potash Corp. (POT) stands to benefit from the rising demand for fertilizer by emerging markets, especially as the growth of these nations is expected to be robust over the next decade despite a potentially inflationary macroeconomic environment, says Wally Obermeyer, President of Obermeyer Asset Management.
“An example of a position that would, in our view, play into that pretty well would be Potash Corp., up in Canada. The global demand for food is growing, particularly given rising incomes in China, India and other developing economies. These civilizations will likely need fertilizer to feed their growing populations; this product will likely have pricing power given increased demand,” Obermeyer said.
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Obermeyer says he diversifies his portfolios in the current macroeconomic environment, but one trend with enough power to pull equities through this theme of uncertainty about the inflationary future of the economy is the growth of emerging markets.
“As we look at the situation and try to be good stewards of our client’s capital, we want to balance the potential risks of this large public debt igniting a highly inflationary environment at some juncture. The problem is, we don’t know if this high debt will actually be inflationary. We expect that it will be, but we don’t know for certain; if it does lead to inflation, we don’t know if we’ll see it in six months or one month or seven years. Ultimately, we want to position portfolios so that our clients are in a solid position over a broad range of potential outcomes,” Obermeyer said.
Imperva Inc’s (IMPV) core technology is aimed at protecting data centers from targeted attacks focused on applications and databases, focusing on an important area that traditional cybersecurity investments do not protect, says Jonathan Ho, Analyst at William Blair & Company, L.L.C.
“[Imperva is] a relatively new company that just came public a few years ago, and what their technology focuses on is protecting against attacks that happen to databases and to websites. Their technology is really core in terms of protecting the data center from targeted attacks that focus on applications and databases, which is where most of the important data is stored,” Ho said.
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Web application and database security is an important area because traditional investments in security do not target these areas, and IMPV‘s technology is helping to secure the mechanisms hackers are currently using to gain access at that level, Ho said.
“From my perspective, this will be an important area just because traditional investments in more networking infrastructure are not going to protect at the application level, and Imperva technology really helps to secure some of the mechanisms that the hackers are using today to breach corporate networks or to potentially gain access to information that they just didn’t have,” Ho said.
SINA Corp (SINA) has joined up with China’s largest e-commerce platform, Alibaba, to explore new areas of monetization and expects to generate at least $380 million more in Weibo advertising revenue over the next three years, says Cynthia Meng, Managing Director at Jefferies & Company, Inc.
“We just upgraded Sina to ‘buy’ from ‘hold’ on April 29, and increased target price to U.S. $75, from U.S. $50. Sina announced a strategic alliance with China’s largest e-commerce platform Alibaba, which is paying U.S. $586 million for an 18% stake in Sina Weibo, with an option to increase its stake in Weibo up to 30% at a future date,” Meng said.
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This alliance should be a positive move for SINA, as it is expected to ramp up monetization of its Weibo site, and Meng expects immediate revenue synergies for both SINA and Alibaba.
“This alliance, in our view, is very positive and is expected to generate at least U.S. $380 million more in Weibo advertising revenue over the next three years. In addition, the two large Internet companies will jointly explore new ways to monetize from social commerce, mobile and social media,” Meng said.
Legacy Oil + Gas (TSE:LEG) has seen its stock price decline despite having access to capital and good assets due to a general decline in prices, making this Canadian E&P attractive to investors looking to get midcap exposure to strong netbacks and light oil, says Don Rawson, Managing Director at AltaCorp Capital Inc.
“[Legacy] has really strong netbacks because it is light-oil-weighted, more than 85% oil. The valuation is very attractive now because these stocks have been pushed down indiscriminately, and this is one that’s come down with the market despite being well-managed, having access to capital and good assets. There is a lot of value out there, but I don’t think that you need to be a hero by buying the cheapest names — this is a quality name that’s been sold off heavily,” Rawson said.
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Rawson looks for the ability to generate free cash flow in the midcap companies he covers, because he says this ultimately gives them flexibility to grow into a dividend-paying model, sell into a dividend-paying company or continue to grow at a good rate.
“As you get bigger and bigger, free cash flow is increasingly important, but you also still want some of the things we are looking for in the small-cap names in the midcap space. You want relatively concentrated positions in good economic plays, ones which are economically robust under lower commodity prices, typically high netback plays where there is lots of running room to grow,” Rawson said.
Crescent Point Energy Corp. (TSE:CPG) stands out among Canadian oil and gas E&P companies thanks to its dividend yield, exposure to oil, its conservative approach to credit and its currently attractive valuation, says Don Rawson, Managing Director at AltaCorp Capital Inc.
“Among the yield names, definitely Crescent Point sticks out as a very well-run company with a well-regarded management team and business model. It is focused in a few key top-notch oily resource plays, it has great netbacks and is very conservatively run in terms of its balance sheet, hedge book and track record of managing Street expectations,” Rawson said.
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Crescent Point is currently trading inexpensively compared to historical multiples. Rawson says the 8%-level yield further makes the company attractive.
“It typically trades at a premium multiple supporting its business acquisition model, which has been one of the cornerstones of its strategy in the past. Right now though, it has sold off, and it’s quite attractive on today’s valuation, yielding close to 8%. On our numbers, it’s trading at about eight times debt-adjusted cash flow this year, which is really quite cheap compared to its typical trading multiple historically,” Rawson said.
Gibson Energy Inc. (TSE:GEI) is exhibiting growth while maintaining a cash yield, reinforcing the company’s decision to become a dividend-paying Canadian C-Corp when going public in 2011, says A. Stewart Hanlon, President and CEO of Gibson Energy Inc.
“We looked at a number of different sort of vehicles when we starting looking at the IPO. As you can imagine, we had a fair bit of sophisticated assistance around the table helping us to figure out what exactly was the best vehicle and the best structure for us to enter the market. We considered the MLP model, whether to list in the U.S., and we got to a point where we decided the best market for us is as a dividend-paying Canadian C-Corp,” Hanlon said.
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Gibson Energy referenced other companies within the Canadian midstream space that are well-capitalized and successful while still paying a dividend, such as Keyera Corp (TSE:KEY), Inter Pipeline Fund (TSE:IPL.UN) and Pembina Pipeline Corp (PBA), Hanlon says. He also points to Riversone LLC, Gibson Equity‘s owner, playing a significant part in making the IPO a success.
“When Riverstone took us public, they did not sell off any of their shares other than through the greenshoe. They then did about a billion dollars worth of follow-on offerings over the next 10 months in three very rapid secondaries which were well-received by the marketplace, and then, in support of the OMNI transaction, we did a $403 million equity transaction just in October of 2012. We’ve placed about $1.7 billion worth of equity, utilizing this share structure, and that has been successful,” Hanlon said.
Life Technologies Corp. (LIFE) is a solid player in the fast-growing genomic technology segment, with strong cash flows and access to new sequencing technologies while retaining its place in the broader market, says David Ferreiro, Executive Director and Senior Analyst at Oppenheimer & Co. Inc.
“One that we have liked a lot has been Life because of the really good, stable cash flows and obviously that stock has run a lot lately, because it’s subject to potential M&A. It announced that it was conducting a strategic review, which investors took as it was up for sale. Aside from the cash flows, we also liked the name because it had access to some of the faster growing submarkets like genomics, namely sequencing, while remaining a much broader play on tools market,” Ferreiro said.
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Genomic technology names have garnered significant investor interest recently, given the excitement around new sequencing technologies and their potential applications, Ferreiro says.
“Genomic technologies, like the new sequencing technologies, namely next-generation sequencing, have recently really captured the imagination of investors. Aside from the fact that it’s been the fastest area of growth in the life science tools space, much faster than the broader market, but the potential application to clinical diagnostics and personalized medicine and personalized medicine strategies,” Ferreiro said.
