Tuesday, July 4, 2017

I have been busy running money for some families, for over 3 years. Decided to take a break and restart the blog while I decide my next move/job.

I have done research on few ideas here, others I have read online on Barron’s and other publications. If you have questions, feel free to write to me on kedar@kedarcap.com

MACRO: The S&P’s 500 is trading for roughly 18x future earnings. The historical norm is 16x. A price/earnings multiple of that magnitude historically has suggested limited upside.
Corporate performance in the U.S. has been pretty good. Revenues were up 7%ish in 1Q17, and earnings were up 14%. Emerging markets are up about 20%, and even some slow-growing European markets have performed well. There are other things happening: some deal activity, and a lot of activist investing. Leveraged buyout firms are flush with capital and ready to invest. So are private equity firms, which are investing in expensive public equities.  The Federal Reserve will likely raise rates again. It is a little behind the curve, and the equity market is a little ahead of itself. Flat or rising rates will limit multiple expansion, which accounted for two-thirds of the S&P 500’s 98% return in the past 5yrs.There might be some moderation in the second half. Complacency is high and volatility is low, so we are set up for a more rugged market in the second half. Then there is also concern about auto loans, which have climbed to about $1.2Tn from $820bn in ’07, and student loans, which are now $1.3T, up from $410bn.
The biggest risk is that the Federal Reserve continues to raise rates as the economy begins to show signs of slowing. The pace of economic activity is an important thing to watch. So is Washington. The rhetoric coming out of Washington is that a lot of positive things are happening. Investors are overly optimistic about what the Trump administration can accomplish.

Internationally, China is delivering 6.5% economic growth like clockwork, although China is slowing, and that is the key to what will happen in the 2H and beyond. A few months ago, China appointed a new head of the China Banking Regulatory Commission to reform the financial sector. Reform means that China will have to squeeze out excessive leverage and systemic risks, and it can’t do that without doing some damage. Right now, China has a mini credit crunch. It is the only country in the world with an inverted yield curve, and not because the central bank has tightened rates. It is because the system has tightened due to reforms. The shadow banking system has been squeezed, and the banking system is short of deposits, so there is a funding problem.

Bed Bath & Beyond (BBBY): It is based in Union, N.J. The stock is down 12% this year. Amazon.com is going to take share from everyone, but it can’t kill everything. They do a great job of selling dorm equipment that can be picked up at a store near campus. As long as the housing cycle continues, that is good for BBBY. BBBY earned $4.58 a share in the FY17 ending February. They can make FY18 is $4.30 a share. At $35, it is at 8.2x. The company just increased its dividend by 20%, and reduced its share from 245m 5yrs ago, to 145m. BBBY is a better-than-average retailer and can be a good money maker over 5 years.

CyberArk Software [CYBR]: A leader in the small, but growing, area of privileged access management security. Its products take aim at hackers attempting to infiltrate corporate networks. CyberArk has a 25% market share and could grow as enterprises shift their focus from protecting firewalls to protecting against targeted user attacks. Unlike a lot of smaller vendors, it is profitable and keeps expenses low. The company could have strategic value to Check Point Software Technologies [CHKP]. CyberArk could generate $2.25 a share of free cash flow in 2019. At 25x earnings along with their net cash, stock can go to $65 a share.
Johnson Controls [JCI]: JCI provides building products and technology solutions, including air systems, HVAC controls, and fire and security solutions. Following the September 2016 merger of Tyco and Johnson Controls, and the spinoff of the auto-parts business, Johnson became one of the largest multi-industry companies. George Oliver, head of Tyco, will become the combined company’s CEO next year. The company will realize more than $1bn, or $1 a share, of cost synergies in the next 3ys. It could produce about $4 a share of cash earnings in the fiscal year ending in Sep-19 versus $2.80 in FY16. That could propel the stock into the mid-$60s in the next two to three years.

Ichor Holdings [ICHR]: went public in December. It trades for $23.31. The company is based in California. It has 25.6m shares, a $597m market cap, and net cash of $10.3m, or 40 cents a share. It was founded in 1999 and later bought by a private equity firm, which recently sold some stock. Ichor is a leader in the design, engineering, and manufacturing of fluid and gas delivery systems for semiconductor capital equipment. Two major customers: Applied Materials and LAM Research [LRCX. Pro forma revenue can be of $576m this year, which will be up 42%. Gross profit margins can be 16.8%. Fully taxed, the company could earn $2.02 a share, versus $1.32 in FY16. Demand in semiconductor land is being driven by two things: FinFET or Fin Field-Effect Transistor, which involves putting many more layers on a chip, and 3D NAND flash memory. Customer spending on semiconductor capital equipment is expected to rise to $36bn this year, from $33.8bn.
Valvoline [VVV]:  makes automotive lubricants. It was a spin-off from Ashland Global Holdings [ASH]. VVV has 200m shares outstanding. The stock trades at $22. The company could generate $2.1bn in revenue. Earnings could climb from $1.20 to $2 a share by 2021.
The company had $1.3bn in debt and VVV could be debt-free by FY21. The company generates a lot of cash. Stock can double in 5yrs. Dividend is 20 cents a share. Electric cars don’t have pistons, so they don’t need lubricants. But Valvoline also sells industrial lubricants and equipment, and will sell other sorts of products over time. There are 1bn cars in the world, and 250mn in the U.S. Another 100mn will be produced this year. If 8% of cars are electric in 5yrs, that’s not a significant impact.

Cott [COT]: There are 139m shares outstanding, and the stock sells for $13, giving the company a $1.8bn market capitalization. Cott has made a bunch of acquisitions and has $2.15bn of net debt. It has a growing private-label business in sparkling water. In recent years, it also entered the home- and office-delivery market for water and coffee in the U.S., U.K., and Europe. Cott will generate about $450m of Ebitda this year and $550m by 2021. U.K. currency-translation problems have caused a bit of an air pocket in the results, as the pound has fallen to 1.29 to the dollar from 1.60 last year. In the next few years, the stock will overcome that. We have a price target of $21.

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