Fluidigm Corporation (FLDM) is an unconventional investment opportunity in the genomic technology space as the company is not yet profitable, yet FLDM is seeing strong revenue growth and holds core technologies that will allow them to play in new markets, driving value for years to come, says David Ferreiro, Executive Director and Senior Analyst at Oppenheimer & Co. Inc.
“Fluidigm is a different type of company; it’s more like a biotech. It has revenue right now that’s growing very strongly, but it’s still in that growth mode and hasn’t hit profitability. But they have some core technologies that really set them apart from rest of the market that are allowing them to play in some new markets like single cell analysis that no one else has,” Ferreiro said.
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Fluidigm‘s unique assets will be a value driver for future years, Ferreiro says, making FLDM a solid, albeit untraditional, player in the genomic technology space, which itself is seeing robust growth.
“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.
Gilead Sciences, Inc. (GILD) is set to take more market share of the hepatitis C space as the company develops HCV drugs with a duration of just under a year, and the potential to go even lower, providing a significant opportunity for GILD that could bring high rewards to investors, says David Ferreiro, Executive Director and Senior Analyst at Oppenheimer & Co. Inc.
“The company that I have the most conviction in within the biotech space is still Gilead (GILD), and they have a lot going on in their pipeline. The investor interests over the past year or more around the hepatitis C space, or HCV space, has been tremendous. And certainly Gilead has been leading that charge since they acquired Pharmasset early last year,” Ferreiro said.
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There is considerable market opportunity in HCV due to a significant unmet medical need, large reservoir of patients and a lack of care standards, Ferreiro says. GILD is set to take more market share as it addresses the need to bring forth drugs that are more tolerable, have a shorter duration and are more efficacious, Ferreiro adds.
“Gilead has few drugs in development that seem to work in a range of genotypes…the duration has moved down from just under a year, which is at the current standard of care to 12 to 24 weeks right now with the potential to go lower, so I’d say that’s probably the biggest opportunity out there for Gilead. We already understand this to be a huge opportunity, but there are ways that it can be bigger. For example, we are all still relatively conservative about how well new therapies can penetrate that market. I think that’s the unknown, and could bring much higher reward to the investor,” Ferreiro said.
Capital One Financial Corp. (COF) is expected to overhaul its cost structure and improve its margins over the next few years, gaining more than 20% of its stock price back to return to its previous levels in the mid-70s, says Karen Firestone, President, CEO and Co-Founder of Aureus Asset Management.
“As we’ve studied the stock, the company has begun to address its cost structure, which is very high in certain areas, and we believe that its efficiency ratios and margins will improve over the next couple of years, and COF can again earn over $7 per share and trade for a 10 or 11 multiple, resulting in a mid-70s stock price,” Firestone said.
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Firestone says COF is can be turned around. Although the current stock price is justified due to recent mistakes by the company, she expects the stock to turn around and includes it in her portfolio.
“Capital One Financial is a turnaround situation, selling at $56, with earnings for this year forecast at about $6.35, so it sells for under nine times earnings. The discount is probably justified by investors because of the missteps the company has made over the past year, including two acquisitions, ING Bank and the HSBC (HBC) loan portfolio, that have not worked out as expected,” Firestone said.
First Republic Bank (FRC) focuses on serving a high net worth client base with plans to expand into markets outside its native California, posting positive metrics and faster growth than some of its financial services peers, says Karen Firestone, President, CEO & Co-Founder of Aureus Asset Management.
“The wealth management platform at First Republic includes over $32 billion in assets under management. They still have only about a 1% market share of high-net individuals in the New York area, compared to 13% in San Francisco, their home market, and there is growth potential in other promising markets as well. FRC has a strong balance sheet, very high credit quality and assets that are growing much faster than its competitors. At the current price of $37.5, the stock sells for about 12 times 2013 earnings,” Firestone said.
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Firestone incorporated First Republic in her investment portfolio over a year ago. She uses traditional investment values such as diversification, fundamental research analysis and risk management to build an overall allocation that’s customized for each relationship, incorporating global perspective for the long term.
“Just to elaborate, First Republic was a purchase based on our belief almost 18 months as that the housing market was improving, when this was a contrarian idea. We actually first got to know the firm because one of our clients was switching banks and really liked FRC. We were intrigued and did considerable research, talking to local managers as well as meeting with the top executives,” Firestone said.
Citigroup (C) trades at a discount to book value while generating a fair amount of capital through earnings, and the money center bank is expected to appreciate in the next couple of years as the market prices these characteristics as well as the bank’s international assets and growth prospects, says Moshe Orenbuch, Managing Director at Credit Suisse Group.
“Citi for the very simple reason that we think it sells at not just a discount to book value, but a discount to what it would be worth if you looked at the banks that comprise Citi in the various countries in which Citi operates. Mexico is one of the largest countries for Citigroup, and Mexican banks trade at probably 2.5 times earnings. Brazil is a fairly large component as well; non-Japan Asia in the aggregate is a reasonable driver. And yet Citi as a company still trades at 90% of tangible book. Profitability has been under pressure, and they have a large deferred tax asset, but we believe both of these factors will improve in 2013 and 2014,” Orenbuch said.
Orenbuch says capital levels are healthy among the large banks, and the earnings at Citigroup are fair. The bank’s international presence further highlights its difference with other U.S. banks, making the company stand out among its peers.
“Citigroup is expanding in some of its emerging market countries, and so it has a different path. Everyone is trying to build up their retail mortgage originations, so that when refis go away they can get a bigger share of the purchase market. But there is no guarantee that the purchase mortgage market is going to increase ratably as refis decline. In fact, refis are probably going to come down somewhat faster,” Orenbuch said.
Non-intuitive investment decisions are often the most profitable. A German bank has announced that it is selling shipping loans “on the brink of insolvency” to a Greek shipping company. In effect, the Greek business is rescuing the German bank from bad loans.
A recent interview with Angeliki Frangou, the the Chairwoman and CEO of Navios (NM), Navios Maritime Acquisition Corporation (NNA) and Navios Maritime Partners L.P. (NMM) reveals her strategy for success in the bulk shipping business: “…commodities like iron ore that exist in high quantities in South America and Africa must also reach Asia. So this is the new, important — what we call the Southern Silk route — which connects South America, Africa and Asia. “
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Peripheral European Union economies such as Greece have been cutting pensions and health care benefits in obedience to regional central banks that control new capital inflows. Perhaps Ms. Frangou has begun a new trend: the movement of credit-encumbered assets to more capable businesspeople.
Additional deals of this type may be in the pipeline, as discussed in the press release from Nordbank. Shifting existing assets to more efficient managers regardless of nationality will go far to increase the productivity of slow growth economies. It may also alleviate political tensions.
Targa Resources Corp (TRGP) offers 25% to 30% annual growth in its dividend along with growth potential, while its limited partner Targa Resources Partners LP (NGLS) offers a double-digit total return expected in the next 12 months, says Gregory A. Reid, Managing Director at Salient Partners, L.P.
“[With TRGP] you get a growth rate that’s around 2.5 times to three times as high, so we are looking for 25% to 30% annual growth in the dividend in that case, so that is a better total return opportunity to invest in the general partner. And so what we do in that case is we own both the GP and the LP and achieve some diversification, and those have been fantastic investments for us for the last three to five years,” Reid said.
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Reid owns both stocks in his portfolio, and he says this Houston gathering-and-processing master limited partnership is one of his top MLP holdings. He says MLPs are benefiting from low interest rates and investor desire for yield.
“We own both of them, for different reasons. The limited partner MLP is trading at about a 6% current yield, and we are expecting to see 10% growth this year in their distribution, so that looks like a 15% or 16% total return opportunity when we look at that next 12 months’ return. The general partner is a C-Corp general partner; it yields 2.8% today,” Reid said.
Bank of the Ozarks (OZRK) is an undervalued regional banking stock that is earning a significant 2% on assets and has shown 15% to 17% growth for many years, and the company is well-positioned to continue this rapid growth rate, says Francois Rochon, President and Portfolio Manager at Giverny Capital.
“Ozarks is very well-managed. They are very conservative in their loans so they have very low charge-off ratios. They are very low-cost, so their efficiency ratio is much lower than the average. So they can earn much higher return on assets than the average. They earn something like 2% on assets, which is tremendous,” Rochon said.
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OZRK has a solid CEO in George Gleason, and the company’s small size enables OZRK to continue to grow at a rapid rate in the future, Rochon says.
“Ozarks is not very well-known and not very well-followed, but it has been growing 15% to 17% a year for many, many years now,” Rochon said. “Bank of the Ozarks, [is] still growing pretty fast by making good acquisitions. But I would add that it is not really the banking industry as such that we like; it’s really that we think that we own the three best banks in the U.S., because to us, their CEOs are the best of the sector.”
United States Steel Corporation (X) benefits from the post-Macondo increase in more deep rigs in the Gulf of Mexico, especially as it invested in the area last decade and has a significant tubular business, and changes in interest rates could be beneficial for this company, says Shneur Gershuni, Executive Director at UBS Investment Bank.
“If interest rates were to go up, then the discount rate with U.S. Steel would change with the unfunded pension. That’s equity value that does nothing toward investing in the company itself. Or, if drilling activity increased and the rig count were to go up, that would disproportionally impact U.S. Steel because they’ve got a very sizable tubular business,” Gershuni said.
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Gershuni says U.S. Steel fits the model of a company that invests in itself during times when there isn’t a lot of investor attention on the stock, and he says there may be an improvement on a go-forward basis for the steel company.
“U.S. Steel is benefiting now because in the Gulf of Mexico, post the BP (BP) spill, you have more deep rigs, and U.S. Steel made an investment in that area in 2006 and 2007 when they bought the facilities in the first place. But we definitely like to see companies that are definitely investing in themselves. We like to see companies that take advantage of a quiet period, invest in themselves and improve their earnings profile on a go-forward basis. That definitely contributes to a positive view for us,” Gershuni said.
Wells Fargo & Co. (WFC) trades inexpensively relative to the quality of its management, especially as the banking industry’s performance is improving along with macroeconomic indicators, and the stock is expected to rise and eventually reflect the intrinsic value of the company, says François Rochon, President and Portfolio Manager of Giverny Capital.
“We think these are top guys, and one of the reasons that we were able to purchase them at very attractive level is because investors in general were very pessimistic about this industry. They are now a little less pessimistic than a few years ago, but the industry is doing much better. The real estate market is doing a little better. So anything linked to mortgages should do better going forward,” Rochon said.
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Rochon says the future looks promising for Wells Fargo as investors realize the true value of the bank and return to invest in levels that are more reflective of the company’s merits.
“Wells Fargo has done pretty well lately, but we think the next five years looks even more promising. It’s strange, you never know exactly when or why Wall Street will come back into it, but I am reassured by the fact that in the long run, the stock market always reflects the intrinsic value of the businesses. You don’t know exactly what the timing will be, but in the end, if we’re right about the company, we’ll be right about the stock,” Rochon said.
