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Aug 3, 2018

8 Bargain Stocks With Big Upside Potential Investopedia Market

investopedia.com

8 Bargain Stocks With Big Upside Potential

Mark Kolakowski


Investors looking for undervalued stocks in an expensive market should consider equities that are likely to be lifted by big themes that include a growing U.S. economy, expanding U.S. consumer spending, and the increasing use of Big Data, according to Sarat Sehti and Ned Dewees, managing partners of Douglas C. Lane & Associates, as reported by Barron's. Their top picks include these 7: Illumina Inc. (ILMN), XPO Logistics Inc. (XPO), Facebook Inc. (FB), Oracle Corp. (ORCL), First Republic Bank (FRC), Maxar Technologies Ltd. (MAXR) and Harris Corp. (HRS). An 8th pick, as discussed with Barron's, is IAC/InterActiveCorp (IAC), the parent company of Investopedia.
Company What It Does
Illumina Gene-sequencing tools and systems
XPO Logistics Shipping and supply chain solutions
Facebook Social media
Oracle Data management and cloud services
First Republic Private banking, business banking, wealth management
Maxar Earth imagery, mapping, data and analytics
Harris Defense electronics and communications
IAC Digital publishing and services

Track Record and Strategy

Douglas C. Lane manages $5.4 billion, and its equity composite has delivered an average annual return of 10.2% since inception in 1995, versus 9.3% for the S&P 500 Index (SPX), per Barron's, which adds that co-managers Sehti and Dewees look for long-term themes and have a "go-anywhere, concentrated portfolio."
While they seek out bargain stocks, their approach is different from that of many value investors. As Sehti told Barron's: "our tendency is to look for stocks that are out of favor, but that doesn’t hold us back from buying growth stocks as well. We may think a stock is undervalued based on its core intrinsic value or its growth rate, even a high growth rate. Stocks don't have to have a specific metric for us to buy them."
Dewees adds, "we're patient investors." Three stocks to which they gave particular attention in their discussion with Barron's were Illumina, Harris and Maxar.

Illumina Inc.

Biotech firm Illumina is their largest holding. As an example of the eclectic approach to value investing in the Douglas C. Lane portfolio, Dewees notes that Illumina has grown from a mid cap to a large cap stock since they bought it, and it now trades at a hefty valuation multiple of 60 times projected 2018 earnings. However, the company is growing fast, with second quarter revenues up by 25% and adjusted profit up by 74% from year-ago figures, both handily beating analysts' estimates, per Investor's Business Daily.

Harris Corp.

Dewees and Sehti call Howard Lance, who ran defense electronics company Harris from 2003 to 2011, "very experienced and capable," and note that he "did a great job" there. Now Lance is CEO of Maxar, and he is a big part of their enthusiasm for that company.
Harris reported strong results for its third quarter of fiscal 2018, per their earnings call slide deck, as presented by Seeking Alpha. Revenue grew in all three of its major segments, with orders up 27% and backlog up 22% year-over-year. Expanding profit margins and strong free cash flow allowed for a $115 million return of capital to shareholders, through a combination of dividends and share repurchases.
Harris is expected to be a "one-stop shop" for the $20 billion Federal Aviation Administration (FAA) project to modernize the U.S. air traffic control (ATC) system, per AviationWeek. Additionally, a strong outlook for U.S. defense spending in 2019 has propelled the stock recently, according to another AviationWeek report.

Maxar Technologies

Dewees and Sehti had invested in DigitalGlobe, a company that is, per its website, "the world's leading provider of high-resolution Earth imagery, data and analysis." In 2017, it was acquired by Canadian satellite company MacDonald, Dettwiler & Associates, whose CEO was Howard Lance, formerly of Harris Corp. The combined company was renamed Maxar Technologies.
Expecting Lance "to accomplish a lot more," Dewees notes that Maxar sports an attractive valuation of only 11 times projected 2018 earnings, while offering a dividend yield of 2%. A big U.S. government contract with the old DigitalGlobe, which represents 15% of Maxar's revenues, is up for renewal in 2020, and he is confident that the business will be retained by Maxar.
A particularly valuable business owned by Maxar, per Dewees, is a library of satellite images that is useful in a host of analytics. Maxar offers additional value by hosting this library on a cloud-based, open-source platform that facilitates the development of apps and algorithms by users. While small right now, he likes the fact that this business is "asset-light" and "growing fast." Sehti and Dewees value Maxar at $100 per share, more than double its closing price of $45.77 on August 2.