Broadcom Corp. (BRCM) is the leading supplier of connectivity combo solutions for Apple (AAPL) mobile products like the iPhone, iPad and iPod Touch, making BRCM a safe derivative to the technology giant’s cycle and a top stock pick in the semiconductor sector, says Betsy Van Hees, Vice President of Equity Research at Wedbush Securities.
“We also believe Broadcom is well positioned in the overall mobile market with its connectivity combo solutions, baseband, WiFi, GPS and other mobile solutions. We also like Broadcom’s position in the cloud computing and wireless/wireline infrastructure buildout with the company’s complete end-to-end solutions for enterprise, data centers and service providers,” Van Hees said.
Van Hees also chooses Cypress Semiconductor Corp. (CY) as a stop stock pick, saying CY is a leading supplier of capacitive-touch products for consumer mobile devices like e-readers, smartphones and tablets. She says capacitive touch has become a pervasive trend in the consumer, industrial and automotive.
“Cypress also has a strong product offering in SRAM — that’s a type of memory that is used in networking and communications products. So as we look at cloud computing and the wireless infrastructure buildout, we think that Cypress is well positioned with products to support these end markets,” Van Hees said.
American International Group (AIG) presents a “huge value” opportunity for investors, trading below book value while having positive growth prospects, making it the largest U.S. holding in the Evermore Global Value Fund, says David Marcus, Co-Founder, CEO, CIO and Portfolio Manager of Evermore Global Advisors, LLC.
“A year ago, the Fed owned 92% of AIG. Today it only owns 15.9%. And yet the company is still trading at about 50% of book value, and this is a good book value. Because of the crisis and the bailout, they had to scrub their balance sheet. They really had to get rid of a lot of junk, take charges and write-offs, and so you have a high-quality book value,” Marcus said.
Marcus says the insurance giant is growing again and prospering, and they have no paid back most of the Federal bailout money they received. He says the government is expected to make a profit from the loan, and that AIG has been buying back stock aggressively whenever the government has sold down its stake.
“You have a huge discount. You have a very aggressive, strong management. As a value investor, [AIG] is exactly what we look for. It’s cheap, tons of catalysts, and I think investors are missing one of the great trading and investing opportunities in a huge value name. This is a $52 billion market cap — it’s a big company,” Marcus said.
Apple (AAPL) offers downside protection while paying a dividend, qualifying it for the Dividend Growth Equity Portfolio at Quantum Capital. The technology giant is valued at an intrinsic $800 a share with conservative inputs, says
Howard B. Aschwald, CFA, Portfolio Manager, Chief Investment Officer and Director of Research at Quantum Capital.
“Sometimes stocks stay undervalued for a longer period of time, so one of the other metrics we look at is economic margin change. So this year’s economic margins, are they higher than last year’s and will next year’s be higher than this year’s?,” Aschwald said.
Aschwald also likes Trimble Navigation (TRMB), which he includes in the Mid Cap Growth portfolio. He says the GPS company automates location for things like farm equipment so they operate automatically without the need for human drivers. He says the company is also expanding beyond cars with its value-added location dependent applications.
“I have an intrinsic value on that of $75 a share [for TRMB]. It’s around $50 right now, so it’s still got a ways to go. Sales growth is still projected very nicely at over 13.5%, so that’s one of the other characteristics we look to. A company must have higher sales and higher profits over a five-year period of time,” Aschwald said.
Crescent Point Energy Corp. (TSE:CPG) profitably produces oil and gas at a high netback, a crucial element for a dividend-paying company like TSE:CPG, making it the largest holding in the Dynamic Energy Income Fund, which is managed by Jennifer Stevenson,
Vice President & Portfolio Manager, Energy, at Dynamic Funds.
“[Crescent Point has] enough cash flow to develop their projects as well as enough money to pay me my dividend. Plus, they have a massive inventory of oil project — they have five separate projects that each has resources of 1 billion barrels.”
The fund’s second-largest holding is Vermilion Energy (TSE:VET), an oil play in the Cardium in Alberta. The company also has oil in Australia, France and other parts of Europe.
“In Europe, you make about $9 on gas; in the U.S., you make about $3. So it all depends on where your gas is as to how profitable it is. [Vermilion Energy has] international oil plays in addition to their Canadian projects. The price of oil they receive on international projects is around $114, and West Texas, WTI, is $95. So their oil that’s not in Canada gets another $15 to $18 a barrel, which is very attractive.”
Stevenson also says Pembina Pipeline (PBA) is a large holding in her portfolio. She says the company “recently bought another company that we owned called Provident Energy. They have oil pipelines, oil-processing units, gas-processing plants, natural-gas-liquids fractionation towers and a marketing division. So oil and gas companies don’t always do these activities themselves. They just give their production to a company like this who charges them a fee to process, market and sell it for them. It’s a very much a fixed-fee type of business with much less volatility than E&P companies that are tied much more directly to commodity prices.”
Cypress Semiconductor Corp. (CY) is at a seasonal low, as the market is extremely bearish on the touch controller market where CY is significant player, making RBC Capital Markets Research Analyst Doug Freedman very comfortable recommending the stock, saying that CY has a lot of opportunity to benefit from a continued mobile revolution.
“The market is missing that as the handset production — new products are brought to market, new Kindles are brought to market, ultimately ultrabooks with touch enablement come to market. There is a lot of opportunity for [Cypress] to benefit from what I would call the continued mobile revolution,” Freedman said.
He adds that Cypress has SRAM product family, and that finally the “SRAM business will benefit from the com equipment end market as they continue to return to spending at what I would call more normalized rates.”
Freedman is also positive on NVIDIA Corp. (NVDA), a name he says is underappeciated, as Kepler is expected to increase the GPU market share for the company. Moreover, he says NVIDIA‘s wireless solutions are “doing a fairly good job of building a full suite to their wireless solutions, where they now have a wireless modem solution and an applications processor, which I think is necessary to make inroads, or significant inroads, in the market that they are targeting.”
HollyFrontier Corporation (HFC) has seen strong revenue growth over the past five and 10 years, with solid returns on equity, making it a value play in the small- and mid-cap sector, says Steve Lewis, Portfolio Manager at Verity Asset Management. “[HFC] trades at a very low price-to-earnings ratio when compared to other refiners and also to the industry at large,” he says.
Lewis says the small and mid-cap space offers several value investment options and depending on broad market performance it may yield positive returns on an absolute basis.
“We’re not doing any kind of market timing. However, when you look at the small/midcap value space, there are over 2,000 companies within our market capitalization range of between $300 million and $10 billion,” he said. “That’s a big universe to search within to find underpriced candidates for the portfolio.”
Lewis also likes Joy Global (JOY), a manufacturer and servicer of mining equipment. “That’s another strong area that we like for the portfolio, and the screening metrics are all looking good. Recently, the stock was actually down about 40% from its February 2012 high. We think that looks like a very attractive value right here,” Lewis said
ARM Holdings (ARMH) is putting Moore’s Law to the side, and it is playing in cheap, widespread technology that doesn’t require compatibility with legacy support for older PC platforms, lowering end costs and not engaging semiconductor giants like Intel Corporation (INTC) in the wars to build larger and more sophisticated fabs, says Hans Mosesmann, Managing Director, Equity Research, at Raymond James & Associates, Inc.
“ARM is different. Its model is more formidable because it licenses very, very cheaply, very good technology to many players, and it has been widely adopted in the mobile space and widely adopted in digital consumer and the embedded markets, hard disk drives, and now with Microsoft (MSFT) Windows 8 or the RT version of Windows 8, ARM is for the first time going to have an entry into mainstream computing and the PC market,” Mosesmann said.
Companies like Intel are expected to have a difficult time competing against the low-cost ARM solutions. New platforms like Windows RT are not expected to support legacy software packages, Mosesmann says. This could result in a shift in expectation from the consumer and enterprise side.
“By selling its chips to partners, like NVIDIA (NVDA), Qualcomm (QCOM), Texas Instruments (TXN), and over time other ARM partners like Broadcom (BRCM) and Marvell (MRVL) will be able to sell in the $20, $25 processors that do just a fine job at running Windows as they do today with running Android or running iOS from Apple (AAPL),” Mosesmann says.
Kirby Corporation (KEX) and Rand Logistics (RLOG) are reaping the benefits of strong demand and tight capacity in the maritime transportation business, and these companies face further demand for their services from company-specific end markets, says Kevin W. Sterling, Senior Vice President & Senior Equity Research Analyst BB&T Capital Markets.
“Kirby is the largest chemical tank barge operator, and with low natural gas prices, that’s leading to an increase in North American chemical production. Therefore, Kirby is benefiting from the increase in chemical production as their customers ship more,” Sterling said, adding that KEX enjoys pricing leverage from this current supply/demand balance.
He also says that, “Rand Logistics [is] Great Lakes shipper, and they have a dominant market position shipping commodities on the Great Lakes. Similar to Kirby, Rand is benefiting from a situation of good demand and tight capacity.”
He adds that maritime transportation currently enjoys a more favorable environment than airfreight, with stagnant volumes and declining profit margins.
“If you look at freight forwarders, such as Expeditors International (EXPD) or UTi Worldwide (UTIW), airfreight volumes have been relatively stagnant and recent new product tech launches are driving up airfreight rates, and as a result, the forwarders are facing a margin squeeze,” Sterling said.
Werner Enterprises (WERN) and Celadon Group (CGI) are expected to grow at a higher rate than their peers in the trucking segment, a group that for the most part is homogenous and performs along the lines of the current “Goldilocks” environment, says Todd C. Fowler, Director, Transportation/Logistics & Equity Research Analyst at KeyBanc Capital Markets Inc.
“The two names that we have buys on include Werner Enterprises and Celadon Group. Both of those companies historically have been good operators, but they haven’t historically had best-in-class operating margins. They are working on specific things unique to their organizations to improve margins, which should help them outpace their peers in a slower growth environment,” Fowler said. He adds that WERN is currently debt-free, and CGI‘s acquisition is helping it attract and recruit drivers.
Fowler is more cautious, however, on Swift Transportation (SWFT). Although the management team has reduced costs in the past few years, he says SWFT‘s balance sheet is more leveraged relative to the rest of the truckload peer group.
“We don’t think it’s a risk where [Swift Transportation is] going to be in violation of financial covenants or that they’re not going to be able to self-fund their capex requirements, but for an economically sensitive group like the truckload sector, names that have more balance sheet leverage have a tendency to underperform when there is more uncertainty with financial or economic outlooks,” Fowler said.
Swift Transportation (SWFT), the largest U.S. truckload carrier, is attractive on a valuation basis, trading below expectations for its peer group, as the Street hasn’t yet valued corporate culture improvements and senior-management talent acquisitions, says John G. Larkin, CFA, Analyst at Stifel, Nicolaus & Co., Inc.
“Just to give you a flavor for how cheap that stock looks to us right at the moment, the stock is currently trading at about 8.7 times our 2012 earnings estimate. More typically, truckload carriers are trading in low- to mid-double digit — i.e., low-to mid-teens — multiples,” Larkin said.
Larkin says SWFT‘s CEO, Jerry Moyes, has worked to resolve transportation problems for big box retailers like Wal-Mart (WMT), Lowe’s (LOW), Sears (SHLD) and K-Mart, and he is a well-liked by the company’s customers. Moreover, talent acquisitions have resulted in more profitability for Swift.
“On the operating side, the company has evolved by elevating a fellow by the name of Richard Stocking to the role of Chief Operating Officer. He has put in a lot of what I would call quantitative measurement into the corporate culture. Just about everybody measures, literally, everything that can be measured on a periodic basis to see how each person is advancing in terms of meeting their annual quantitative objectives, whatever it might be — cost within the maintenance shop, productivity on the dispatch floor or safety performance out on the highway. They track all of it and track it rigorously,” Larkin said.
