With continued uncertainty in the macro landscape, investors are struggling to identify stocks that generate alpha despite the turbulent investment environment. This article seeks to pinpoint stocks that have an edge. These are companies which we are more optimistic than the Street and reveals opportunities that the market has not yet priced in.
Rite Aid Corporation (RAD) While a fundamental turnaround still seems difficult, Rite Aid represents an attractive near-term buy as it stands to capitalize on the WAG/ESRX dispute, the generics wave, and company sales initiatives. The stock could also benefit from continued M&A speculation, as a takeout by Walgreens could eventually make sense. The company could have a $100-150 million EBITDA benefit from Walgreens share gains and the generic wave. It could also have interest in acquiring RAD to gain additional scale.
Key Catalysts: Monthly comps and earnings results over the next 3-9 months should provide the necessary signposts that support our near-term investment case. Rite Aid is set to benefit from the upcoming 'wave' of new generic drug launches that began with the release of generic Lipitor in December 2011. The company also stands to benefit from potential share gains from Walgreens.
Kinder Morgan Energy Partners (KMP): Kinder Morgan Energy Partners is a "core" MLP holding based on its size, geographic footprint, diversified asset base, proven strong track record, investment grade balance sheet, demonstrated access to capital, and strong management. Despite KMP's high percentage of distributable cash flow (~46%) being paid to the general partner, KMP has been able to sustain a competitive distribution growth rate over many years, and expected to continue, sustain an above average distribution growth rate for the next few years of approximately 8%.
Key Catalysts: KMP is likely to grow both organically and via drop downs (over $10B in pipeline assets from which to choose) from Kinder Morgan Inc. (KMI) post merger (closed May 24) with El Paso Corp (EP).
Archer Daniels Midland (ADM): Archer Daniels Midland would benefit from a 12-14% increase in U.S. corn production, strong origination out of North America in the fall to compensate for the weak Brazilian soy crop, temporary shutdowns of ethanol plants by competitors outside of the corn belt, and full realization of $150 million in savings from workforce reductions and the elimination of financial reporting redundancies by March, 2013. The market continues to view ADM as an unpredictable, cyclical business that lacks capital discipline. But new management is in the early stages of engineering cultural and strategic change that will drive capital returns and earnings structurally higher. ROIC and EPS will approach peak levels in FY 13 as the company enjoys the benefits of a big U.S corn crop, executes cost reduction programs, buys back stock, and allocates capital to higher return projects in growth regions like Paraguay and Eastern Europe.
Key Catalysts: (1) June 21 USDA World Agricultural Supply and Demand Estimates (for corn and soy), (2) July 31st 4Q Earnings release.
Fusion-io (FIO): FIO's differentiated technology and business model, leverage to emerging Web 2.0 content distribution trends, and high ROI enterprise solutions will likely enable healthy revenue growth with solid margins.
While some argue competition will pressure FIO's gross margins, it is expected to be durable given: (1) a unique approach of writing to flash; (2) a highly software-enabled, feature-rich solution that increases differentiation; furthered with IO Turbine, which lowers virtualization cost 70-80% and should contribute to revenues in the back half of 2012; and (3) a growing direct sales force and expanding channel presence.
Key Catalysts: 4Q12 earnings release to highlight three key points: i) continued positive inflection in gross margins; ii) solid FY13 gross margin guidance, alleviating commoditization concerns; and iii) solid revenue outlook. Meanwhile, an announcement of an OEM agreement with Cisco (CSCO) would highlight continued market penetration.
Huntington Bancshares (HBAN): HBAN has upside to 2H12 and long-term EPS driven by high quality revenue items. HBAN has very high EPS revision potential and believe shares are cheap relative to intrinsic value and further valuation expansion as core fundamentals improve.
The market is underestimating the earnings leverage and the management's first objective now is to show operating leverage (may be modest due to low rate environment) even with investments like Meijer/Giant Eagle that enhance long-term EPS but will increase expenses modestly in the near-term.
Key Catalysts: 1) 2Q12 Earnings - Update On In-Store Branch Buildout Progress and Strong Loan Growth; 2) 3Q/4Q Earnings' Expect Operating Leverage.