My trading strategy is based on buying companies with improving fundamentals at proper technical buy points. I explain this concept in the blog Warren Trades. My best trades have something in common: the stock has a solid fundamental and technical picture before I buy it.
This is the list of companies I am currently observing in order to buy them as soon as they break key resistance levels with above-average volume. In the article I detail the fundamental catalyst that makes me interested in the stock.
Sprint: will the current price consolidation end soon?
Sprint (S) has been trading between $5.50 and $6 since October 2012. Prominent hedge fund managers like John Paulson, Eric Mindich and Louis Bacon have been buying the stock in the recent quarters in anticipation that S will break the current $6 resistance and resume its past uptrend.
Sprint has several advantages over Verizon (VZ) and AT&T (T). First, it offers unlimited text, talk and data at cheaper prices than its competitors. For example, S charges $80 while VZ and T charge an average of $125. Second, Sprint also is the undisputed leader in the prepaid or pay-as-you-go market. This is an advantage for customers who want a smartphone but who don't want the monthly expense of the typical unlimited data.
Sprint has been performing strongly, reflected in the recent revenue growth metrics. Sprint's wireless revenue growth rate exceeded AT&T Mobility's wireless revenue growth rate in the last three quarters, and it has also exceeded AT&T Mobility's wireless service revenue growth rate for the last five quarters.
I think that the overall investment case for Sprint is focused in three strong items:
- Network Vision Savings: Sprint recently shut down its IDEN network, which should reduce roaming costs by $700 million over two years. Sprint will record ~$2.4 billion in aggregate savings by 2015;
- Improving industry trends: Industry pricing is rising and subsidies are declining, leading to higher margins and improving returns on invested capital. Sprint stands to benefit more from this trend than other carriers because it has lower margins and greater financial leverage.
- Consolidation: The recent announcement of a capital infusion from Softbank is positive for Sprint as the company is well positioned to participate in the industry´s consolidation.
A top Energy play: Kinder Morgan
I think Kinder Morgan (KMI) is a top Energy play for long-term investors. Shares have been trading between a tight consolidation ($36/38 range) and could be ready to start rising again.
I am very bullish on KMI as management announced its intention to grow its dividend at a 12.5% CAGR through 2015. This is rewarding for shareholders.
KMI shares are a unique investment in that it is a typical corporation, which intends to pay out nearly all of its after-tax cash flow as a dividend. Unlike many other MLPs, KMI is a tax-paying entity structured as a C-Corp thereby allowing investors who are unable (or unwilling) to buy MLPs to participate in the growth of KMP. In other words, KMI attracts a higher investor base than the typical MLP.
Kinder Morgan Inc. owns the general partner of and limited partner units in Kinder Morgan Energy Partners (KMP), one of the largest master limited partnerships. In addition, KMI owns a 20% equity interest in an interstate natural gas pipeline, Natural Gas Pipeline Company of America (NGPL). With its 2012 acquisition of El Paso Corporation, KMI solidified its standing as the leading natural gas pipeline company in North America. According to Credit Suisse, KMI growth has come from a combination of acquisitions and greenfield/expansion projects across a very broad asset footprint, including natural gas pipelines, products pipelines, terminals, and oil production fields.
I think that that there is a lack of securities that share Kinder Morgan's attributes of being a large-cap stock with a 4.5% yield, visible and consistent growth prospects, stable cash flow generated from a broad and diversified energy infrastructure, and a top tier or proven management. Credit Suisse is bullish on KMI because the company can benefit via its ownership of incentive distribution rights (IDRs) to participate in the growth of KMP, as KMP generates a stable and predictable cash flow from fee-based assets that are essential to U.S. energy infrastructure.
Furthermore, because of its corporate structure, KMI can attract institutional owners that may otherwise be constrained from owning MLPs.
Solid growth from smartphones
Either Apple or Samsung can fight all they want in the smartphones market but Broadcom (BRCM) makes money any way. The company is a technology innovator and provider of semiconductors for wired and wireless communications. Its system-on-a-chip (SoC) and software solutions enable the delivery of voice, video, data and rich multimedia content to mobile devices.
Credit Suisse is highly bullish on Broadcom for four key reasons:
- Strong wireless growth from smartphone growth leaders (Apple and Samsung),
- Increasing evidence of connectivity strength to maintain share within a TAM expansion cycle,
- Structural and levered growth in high margin enterprise by way of SAM expansion and the 10GigE product cycle, and
- Accelerated 11ac adoption within consumer and enterprise WiFi markets.
In the last quarter, the company generated strong cash flow from operations. In addition, management increased the quarterly dividend by 10%. While cash flow from operations of $593 million declined 4.5% q/q from the all- time high of $621 million in C3Q, it was still the second highest CFO in BRCM history, driven by higher net income (+14.1% q/q) and 14.4% decline in accounts receivable. BRCM also announced a 10% increase in the dividend to $0.11, representing a dividend yield of 1.3%. Additionally, net cash per share increased $0.38 to $1.17/share from $0.79 from $1.00 due to a $220m increase in cash and equivalents.
Shares are inexpensive at 12.2x 2013 EPS ex-Cash, which is in-line with the peer average multiple of 12.2x. Considering that BRCM is one of the leaders in this space (evident in BRCM FCF Yield of 8.8% vs. peer average at 6.7%) and its strong Infrastructure/Broadband positioning, I think that shares should trade at a premium. If BRCM trades at a P/E of 13x ex-cash, shares could run to $45.
Commvault: watch this Software leader
CommVault Systems (CVLT) has solid earnings growth prospects, with projected earnings growth of 25.0% over the next five years, which is better than the industry average of 17.8%. In addition, its return on equity of 17%, which is higher than the industry average of 11.5%
In the recent quarter, CommVault reported strong December quarter results, with license revenue, operating margin, and EPS exceeding consensus expectations. Revenue outperformance in the quarter was driven by strong product momentum including large enterprise deals and solid sales execution.
Specifically, enterprise deals grew 52.6 % year over year and accounted for~58% of license revenue, versus 56% in the prior quarter and 47% in the year-ago quarter.
CommVault exceeded consensus estimates for operating margin expectations, and management remains confident that operating margins will continue to improve, expecting approximately 375 basis points of year-over-year expansion for fiscal 2013 and margins to be flat or slightly up in 2014 from 2013.
Disclosure: I am long KMI.