RPX Corp (RPXC) acts as the middle man between technology intellectual property aggregators and larger-cap technology equipment manufacturers and software developers, lowering legal fees for all parties involved, says Brian Frank, President of Frank Capital Partners LLC.
“[An] example of a small-cap technology company that we love is RPX Corp., and the ticker symbol is RPXC. Not a very inventive name, but what we like about them is, again, it’s a very stable business. So this is a company that’s trying to be a peacemaker, I would say, between the ‘patent troll,’ meaning the intellectual property aggregators that pretty much just buy up a lot of I.P. and sue the large-cap technology companies. So RPX kind of goes in the middle,” Frank said.
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Frank says RPXC‘s way of reducing legal fees has gained the company business with the large-cap technology companies, and this company makes for simpler, more streamlined legal proceedings thanks to its large client base.
“They have the large-cap technology companies as their client base, they get a very stable fee from those companies and they try and deal with the companies that own the intellectual property. Instead of the I.P. companies having a bunch of lawsuits going on, they can deal with RPXC, which represents 120 clients. This cuts down on legal fees for both sides. Pretty much the only people that lose are the lawyers, and who doesn’t like to hurt lawyers?,” Frank said.
Exxon Mobil Corporation (XOM) trades below fair value while holding some of the best-quality assets among the oil and gas integrated companies, further standing out among peers through its skilled management team and capital-allocation strategy, says Christopher P. Bloomstran, President & Chief Investment Officer at Semper Augustus Investments Group LLC.
“We have a big position in ExxonMobil. We can own 15 different companies in the energy world, but with ExxonMobil we can own the very best assets in the oil patch, the very best management team, the best allocator of capital out there. I would rather own Exxon and their assets and their reserves than any combination of other majors, simply because they’re better, the capital structure is better, they’re better at capital allocation, they buy back shares when they are cheap not because Wall Street tells them that share repurchase is a good idea,” Bloomstran said.
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Bloomstran says he has realized significant profits from his ownership of XOM stocks, and the stock still trades inexpensively. He adds that the oil and gas company’s contrarian strategies have paid off.
“At times, they have gone against the industry in terms of exploration and production budgets. When oil prices were on the way up five years ago, the integrateds were all spending a lot of money on E&P, Exxon really cut back their budget and argued it was going to be cheaper to buy reserves at some point, and they were right. Most importantly, while we’ve made a lot of money on our Exxon position, the shares are still cheap relative to our appraisal of fair value,” Bloomstran said.
CME Group (CME) is an early-stage, interest-sensitive stock set to see accelerating revenues from rising interest rates and the regulation of OTC derivatives, says Brad Hintz, Equity Research Analyst at Sanford Bernstein & Co., LLC.
“The CME has a 98% market share of U.S. dollar interest rate futures. As investors anticipate rising U.S. interest rates, hedging activity on the exchange will increase, and CME revenues will accelerate,” Hintz said.
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Hintz says that CME is near a turning point, as it offers hedging products to the marketplace and as the economy recovers, hedging will become more important. Additionally, CME will be a winner out of the regulation of OTC derivatives, Hintz says.
“We expect the revenues from CME central clearing platform to rise sharply over the next two years both from direct clearing fees but also from the expected electronic linkage of CCP-cleared OTC derivatives and the listed futures market,” Hintz said.
Morgan Stanley (MS) is implementing changes that will bring the company revenue stability and an ability to generate higher ROE, making MS a near-perfect business mix, says Brad Hintz, Equity Research Analyst at Sanford Bernstein & Co., LLC.
“Morgan Stanley is becoming a potentially better version of the old Merrill Lynch. MS will have a high-operating-leverage retail business that will thrive late in an economic cycle. MS will have the massive channel-distribution power of a Merrill Lynch and will be able to charge a premium for access to its clients. Retail will be approximately 50% of MS revenues,” Hintz said.
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Morgan Stanley‘s investment banking business numbers are highly profitable, and the company is strong in equity underwriting and M&A, Hintz says. He adds that the company’s credible trading businesses and a more cautious management team are also positioning MS to benefit as the economic cycle continues.
“Morgan Stanley‘s fixed has reduced proprietary trading and is going to be a customer execution business. High RWA asset positions are rolling off, and balance sheets are being constrained. All these changes imply to us that the new Morgan Stanley will be able to generate higher ROE and less revenue volatility,” Hintz said.
Hawaiian Electric Industries (HE) has geographical protection against new competitors, being located in Hawaii, away from continental U.S. competition, says Paul Sutherland, President of Financial & Investment Management Group.
“We like moats around the business. We like businesses that have theoretical moats. A good example is Hawaiian Electric. A utility company in California cannot come compete with Hawaiian Electric. They’ve got this Pacific Ocean that makes it hard to get their electricity here. So that’s a simple example of a moat,” Sutherland said.
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Sutherland looks for companies with good balance sheets that are not highly leveraged as part of his values-driven approach to investing, as a way to maintain financial flexibility. He also looks for yield and growth, even if slow.
“We are attracted to more conservative, straightforward accounting policies. We like companies that tend to pay dividends, we like dividends — we think that we’re going to have a very slow-growth economy going forward, and we think interest rates will stay low for quite a while, and so we do believe that dividends make sense. You want companies that have really good significant cash flow,” Sutherland said.
U.S. Global Investors (GROW) trades inexpensively relative to the assets the company holds. This mutual fund firm, managed entrepreneurialy by CEO Frank Holmes, specializes in gold, natural resources and emerging market investing, and it is currently investing in smaller-cap companies where much of the appreciation should take place in the next decade, says Paul Sutherland, President of Financial & Investment Management Group.
“[GROW] basically has around $30 million of cash and investments on the balance sheet, and the whole market cap of the company is $58 million. They also own a piece of real estate. So the company is bargain priced, plus you’re getting $1.6 billion of assets under management — maybe it’s little bit less than that as gold stocks have had a rough go in 2013. It’s almost like the market’s saying that this company’s going to lose a half or two-thirds of its assets, and so it’s a very bargain-price asset,” Sutherland said.
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Sutherland says the dividend decrease inordinately affected GROW‘s stock price, leading to a market depreciation which did not take into account the true fundamental value of the company.
“Another reason the stocks got cheap lately is they cut their dividend and decided to buy back shares instead of paying a significant dividend. So I think a lot of investors that owned this because they got a nice dividend sold it because they weren’t getting the dividend, and probably didn’t look under the covers to see whether there was a rational reason for that. I’ve met Frank Holmes, I’ve met his team. They’re good guys, they’re craftsmen, they love managing money,” Sutherland said.
WisdomTree Investments (WETF), the only pure-play ETF provider, is well-positioned to benefit from increased ETF flows, and its growth prospects, product base and strong management team make WETF an attractive play, says Macrae Sykes, Research Analyst at Gabelli & Company, Inc.
“First, it completed a major sale by several insiders, which removed, in my opinion, a technical overhang. Second, it announced a resolution with Research Affiliates in terms of a legacy litigation battle. Third, it changed the back-office agreement with the custodian, which improved its margin going forward. And then, at that time, the valuation was certainly compelling relative to its growth prospects,” Sykes said.
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Sykes says that WisdomTree has since executed very well as it is led by a strong management team, and is benefiting from its solid business model, thus allowing WETF to capitalize on the positive ETF trends in the sector.
“It has had $4.2 billion of net inflows this year — a very rapid growth rate, and the industry trends around its business still continue as ETFs are still a very low percentage of the market in terms of both institutional and retail investor allocation. WisdomTree has a strong product base, an innovative product team and terrific incremental margins just due to the business model. So I think that WisdomTree is very well-positioned and can capitalize on the positive ETF trends and eventually could be a takeover target by a larger financial firm,” Sykes said.
BlackRock, Inc. (BLK), the largest ETF provider, is seeing an acceleration of ETF inflows into equities, and is set to benefit from this potential industry migration due to its immense group of ETFs, says Macrae Sykes, Research Analyst at Gabelli & Company, Inc.
“BlackRock highlighted what it sees as a structural change in the industry. It has seen an acceleration of ETF inflows both into equities and fixed income globally, so there was a significant step to passive ETF investing in the fourth quarter,” Sykes said.
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This migration is significant for BLK because the incremental margins on those flows are very high, despite average fees being lower than traditional mutual funds, and the size of BLK‘s ETF group will allow the company to shift some of its fixed income, Sykes says.
“BlackRock…has such an enormous complex, and to the extent that it can shift some of its fixed income, money-market assets into its higher-yielding equity products, that would benefit them,” Sykes said.
Quality Systems (QSII) is among the few health care IT companies that are expected to comply with the next phase of implementation of electronic health records, and the company maintains steady cash flows while trading at a discount to peers, says Brian Frank, President at Frank Capital Partners LLC.
“A good smaller-cap technology is Quality Systems, and the ticker is QSII. They do health care information technology. So they do electronic health records for physicians and hospitals and laboratories. And there are lots of companies in this space, but QSII is in the top five, and only about the top five competitors will be able to comply with the next phase of implementation. So there is kind of a land grab going on right now,” Frank said.
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Frank says QSII will survive the round of consolidation in the health care IT industry, and its recurring-revenue business model along with the valuation make it attractive.
“There is a lot of consolidation, but what we like specifically about QSII is the valuation. It’s a lot cheaper than most of its competitors, and within the top five, they all have very steady cash flows. Once you install this information technology software, you have to pay maintenance fees every month, and its very high-margin stuff. So it’s a very steady business, it’s not linked to economy and it’s trading very cheap,” Frank said.
Atossa Genetics (ATOS) is focused on the national rollout of the company’s ForeCTYE test, designed to detect breast cancer before its onset, as well as the introduction and launch of three other tests, and is growing organically as it generates revenue from ForeCYTE, says Dr. Steven Quay, CEO of Atossa Genetics, Inc.
“We announced during January the national rollout of the ForeCYTE test in collaboration with our comarketing partner, Clarity Women’s Health of Boca Raton, Florida. This program is intended to introduce the approximately 33,000 OB/GYN doctors and clinics in the country to the ForeCYTE test and to persuade many of them to offer the test to their patients,” Quay said.
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ATOS is also eyeing the introduction and launch of three other tests: FullCYTE, a detailed assessment of women identified by the ForeCTYE test; NextCYTE, a cancer prediction test performed on cancer specimens; and ArgusCYTE, an annual blood test for breast cancer survivors. With the three additional tests and revenue generating from the rollout of ForeCYTE, Atossa Genetics it looking to grow organically through the growth in test volume, yet is also eyeing additional equity capital, Quay says.
“We were able to raise approximately $4 million in our November 2012 IPO, which was less than the $6.5 million that we wanted to raise. Because we are generating revenue now from the test that we are performing, we are able to grow our business organically through the growth in our test volume. But to be opportunistic and to be most aggressive in growing the business, access to additional equity capital is important,” Quay said.
