Mary Throop and Kevin Elliott manage global portfolio investments for ultra high net worth investors. Teamed up at Summerhill Capital, the pair emphasizes conservative high-dividend-yielding Canadian equities and look for companies with significant advantages over their industry peers. In the Canadian financial sector, the stocks the portfolio managers “like and own are Bank of Nova Scotia (BNS), for its emerging market growth exposure and solid wealth management business; TD (NYSE:TD), best platform in the U.S.; and Royal (RY), best capital markets exposure.” In a recent interview, they picked Bank of Nova Scotia (BNS), or ScotiaBank, as their favored Canadian financial stock.
Elliott praises the exposure of BNS to international economies: “[BNS] has global exposure and it is expanding outside of Canada. The other banks in Canada are essentially competing within the Canadian market.” He says this competition and the relatively small size of the domestic Canadian market increase pricing pressures and lower margins.
Throop, formerly the Managing Director of International Equities for CIBC World Markets, encourages investors to see Canadian banks as “a great way to get exposure to both the Canadian market and the Canadian dollar, as the Canadian banks are some of the best capitalized and have some of the best ROEs in the world.”
Throop also cautions investors against several popular Canadian industry sectors: “Based on valuation, the ones that would concern us the most are the traditionally defensive sectors like the utilities and pipelines, because they’ve become very expensive by historical standards. People have been chasing income, so they’re buying the yield stocks indiscriminately.”
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The switch to portable computing will drive consumers to cloud storage solutions. According to “Best on the Street” equity analyst Mark Miller, cloud storage “is estimated to provide 25% of storage now, [and] is forecast to provide up to 60% of all storage by 2020.”
The greater use of video by mobile device consumers implies a ‘back to the future’ upside for industry stalwarts such as Seagate Technology (STX) as hard drives are no longer bundled into personal computing devices but instead become the mainstays of data center storage.
“We project that by the end of this decade you’ll still see 75% to 85% of all storage on hard drives. The reason for that is the lower cost of storage on hard drives,” Miller said in a recent interview. “Seagate reported shipments of nearline drives, which are used for cloud infrastructure, sequentially grew 23% last quarter.”
The high dividend rate and low relative p/e of Seagate also contribute to Miller’s bullish call on the stock, but its primarily the high-margin storage drive business that reinforces this award-winning stock pickers’ investment thesis: “Seagate has about 55% share of the enterprise drive market. Margins of these drives are double or more than the margins of drives in a laptop PC.”
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NetApp (NTAP) stock has proven surprisingly resilient, even as virtualization penetration is no longer a major growth driver in data hosting and unstructured Big Data takes center stage, says Brian G. Alexander, Managing Director and Director of Technology Research at Raymond James & Associates, Inc.
“A lot of investors expected them to guide lower, and that wasn’t the case,” Alexander said. “They seem to be gaining momentum, and maybe related to that, I was surprised that more of my peers didn’t upgrade the stock, given that that was the second consecutive quarter that NetApp failed to disappoint.”
Alexander rates NTAP an “outperform” name, and he says the company seems to have stabilized after a period of consecutive missed guidances in 2012. He also says the company surprised with its resiliency relative to EMC Corporation (EMC) and the overall market, which showed weakness and caught some off guard.
“That would suggest to me that they have reached a level of stability, and given that they just refreshed their largest product line, what they call the 3000 series, one would think that that momentum should continue, and perhaps part of their previous weakness in sales was customers anticipating a product refresh and maybe holding off on some purchasing,” Alexander said.
Anadarko Petroleum Corporation (APC) explores for resources in East Africa and has exposure to gas projects in Mozambique, Tanzania and Kenya. Robert Cordray, Director at Guggenheim Securities, LLC, recommends the stock and expects some legal overhangs to be resolved favorably.
“As far as top picks in my group, I really like Anadarko. We have thought and we continue to think that the Tronox case is overblown. We recommend clients be in that stock now, ahead of the resolution, as we think the stock legs up after Tronox and doesn’t look back,” Cordray said.
Cordray says exploration companies like APC are a potential source of significant alpha, and he says investors are looking for some of these larger deepwater exploration opportunities, which can result to be great catalysts for the stocks.
“You also have multiple exploration catalysts, both from international exploration and the Gulf of Mexico. You also have probably one of the better performers in the U.S. onshore and conventionals, all wound into one company. We certainly like that,” Cordray said.
EMC Corporation (EMC) is staying abreast of the newest data storage trends like the adoption of flash technology and its incorporation into the server through acquisitions to keep its portfolio continuously fresh, says Brian G. Alexander, Managing Director and Director of Technology Research at Raymond James & Associates, Inc.
“If you look back over the last, maybe not two quarters but two years, with EMC buying Isilon, EMC buying XtremIO, they truly are, in my opinion, visionaries when it comes to understanding technology trends and how to best position themselves for where the product is going, not necessarily where it’s been,” said Alexander.
Alexander has a “buy” rating for EMC, and he says the company is poised to overcome weaknesses in storage demand through its wide portfolio strategy in which the company includes leading technologies in the industry and an effective company execution.
“EMC historically has been a company with not necessarily the best technology, but it had the best sales force, and over the last few years it has really broadened its portfolio to include leading technologies like Isilon, like Data Domain, obviously Vmware (VMW) on the virtualization side, and also technologies like Avamar,” Alexander said.
Equinix (EQIX), the biggest global player and operator in network-neutral colocation, recently saw multiple expansion due to its driving toward a REIT-conversion process, standing out in among peers for Todd C. Weller, Managing Director at Stifel, Nicolaus & Co., Inc.
“Equinix gained 100%-plus last year,” Weller said. “The REITs have historically traded at a premium to the operating companies. We think a lot of that premium has been the tax benefit of being a REIT and the increased cash flows associated with that, so that was a big driver of Equinix’s valuation.”
Weller says some of EQIX‘s REIT benefits include not having to pay corporate taxes, which translates into a 35% to 40% tax savings, although he doesn’t shy away from reminding investors that the data center space is a capital-intensive business and the company will have to access external capital to fund this growing business.
“The event’s happened, and as you think about 2013 for Equinix, we think the catalyst reverts more around the fundamentals, the growth, potential upside to estimates,” Weller said. “You could see some upward drift in the multiple, because it does now get pegged a bit to the REITs, so to the degree we get some more uplift in the REIT multiples, as people get comfortable with the wholesale space, that could benefit Equinix as well.”
Western Digital Corp. (WDC) remains solid in its data storage device manufacturing business, mixing some flash solid state drives with its HDD products, while reducing manufacturing costs through its consolidation with Hitachi Storage Technology, earning the stock a “buy” rating over its peer Seagate Technology plc (STX) from Mark Miller, Senior Research Analyst at Noble Financial Group, Inc.
“Long term, Western Digital’s execution has been better than Seagate’s execution, and while Seagate’s share has remained more or less steady, there is always the possibility of some share loss due to the expiration of the long-term purchase agreements Seagate signed with their OEM customers after the flood. Seagate’s large share of the enterprise drive market makes it more susceptible to the incursion of SSDs into tier 0 storage applications,” Miller said.
Miller says there is also interest in the stock from a yield perspective, and WDC is generating large amounts of capital for distribution among shareholders. Miller says the company is currently allocating 50% of its free cash flow to either share buybacks or dividends.
“Seagate and Western Digital are generating large cash flows, have very healthy earnings outlooks, and they are trading at modest p/e multiples. They’ve also been very proactive in redistributing their earnings back to the shareholders, either through dividends or through share buybacks. Dividend stocks have come back in fashion now with a lot of the Baby Boomers retiring and looking for income,” Miller said.
Hutchinson Technology (HTCH) may return to profitability after implementing a series of cost-reduction measures, and the stock could get closer to its former glory of $25 per share and 55% market share of the suspension-assembly market for data storage, says Mark Miller, Senior Research Analyst at Noble Financial Group, Inc.
“The firm has suffered several years of losses, and its share is down to 22%. Hutchinson used to make $2 a share. The stock is up 50% over the last six or seven months, the thought being that they have made significant cost cuts which, in combination with potential share gains via new programs and higher component counts, could take them to profitability,” Miller said.
The industry is moving toward a new type of suspension called dual-stage actuator, where Hutchinson is growing market share. The industry, Miller says, is also increasing the the drive platter count, and the number of suspensions per drive is increasing accordingly, since areal density growth is falling behind the growth in demand storage.
“These are the opportunities for Hutchinson to get up to this breakeven level of 125 million units in volume without drive shipments growing much. It’s still a very risky stock. Cash is low, but they’ve done a good job conserving it. It’s not for the faint of heart, but it is quite possible they could turn around,” Miller said.
FirstMerit Corporation (FMER) is a smaller regional banking company that, due to its efficiency, is primed to be either a successful acquirer or takeover candidate, says Tom Mitchell, Senior Analyst at Miller Tabak + Co., LLC.
“Smaller companies like FirstMerit (FMER) and Huntington Bancshares (HBAN), both have had really excellent credit-management approaches,” Mitchell said. “They’re relatively small-capitalization, they’re both being run very efficiently; we think that they both could turn out to be very successful acquirers.”
FirstMerit‘s efficiency, credit management and management team also work in its favor to set them up as a prime takeover candidate, Mitchell says.
“Those qualities and characteristics could make them excellent takeover candidates either for foreign buyers, Canadian banks or larger U.S. banks that want more exposure to the Midwest,” said Mitchell.
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Continental Resources (CLR), a winner of the resource-grab phase in the Williston basin, could benefit from the heavy resource potential in the basin, says Eli Kantor, Senior E&P Equity Research Analyst at IBERIA Capital Partners.
“Given the vast disparity between oil prices and gas prices, you’re going to want to own the companies that have significant unbooked resource potential in the oil-centric basins,” said Kantor.
CLR is leading the industry in delineating the lower Three Forks/Sanish formations and is also testing a pilot later this year focused on tighter well-spacing, both which have the potential to double or triple resource potential and results that could influence valuation for Williston basin producers, says Kantor.
“In the Williston basin there are two overarching catalyst trends that we think investors should be paying attention to: the delineation of the lower Three Forks/Sanish, TFS, formations, and downspacing assessments,” Kantor said. “We expect a handful of new results to be announced over the next 12 to 18 months that should provide investors with better understanding.”
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