8 Bargain Stocks With Big Upside Potential
|Company||What It Does|
|Illumina||Gene-sequencing tools and systems|
|XPO Logistics||Shipping and supply chain solutions|
|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 StrategyDouglas 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 TechnologiesDewees 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.