PRO Weekly Digest: Focusing On Ways To Play Rising Interest Rates

|
Includes: AGO, ATZAF, HUBS, ILG, KCLI, LGGNY, LILA, NGS, SCHYF, SGPRY, TDG, WBT
by: SA PRO+ Editors
Summary

We highlight several notable Sohn Investment Idea contest entries and use the Idea Filter to search for ways to play rising interest rates.

Revisiting the bullish thesis on Natural Gas Services Group.

Welcome to the latest issue of the PRO Weekly Digest in which we publish highlights from our PRO coverage. Comment below or email us at pro-editors at seekingalpha.com to let us know what you think. Find past editions here. PRO subscribers can access interviews by following the SA Interviews account and view past interviews under the same account.

Click here to read the interview with Zander Rosenbluth.

PRO idea playing out

ILG, Inc. (NASDAQ:ILG) is up ~100% since Safety In Value shared their contrarian bullish thesis in March 2016 (mispricing due to merger arb related selling; catalysts include new points program and ILG itself could be an acquisition target). In an update article last month, Safety In Value said they sold their shares as the valuation is now full and the multiple re-rating has played out as expected, due partly to recent merger rumors.

Call from the archive - NGS

Natural Gas Services Group (NYSE:NGS) is down ~5% since Rigel Mercantile Limited shared their bullish thesis in March 2017. While the headline numbers from Q1 results may appear disappointing, management noted that operating performance was better than expected and utilization/pricing pressure should improve in 2H. As the original price target calls for ~80% upside, this may be worth revisiting.

PRO Weekly Digest idea playing out

In a previous version of the PRO Weekly Digest, we said it may be a good time to take another look at the bullish thesis by SakonnetInvesting on West Marine (NASDAQ:WMAR). Since then, the stock is up ~40% after it recently agreed to be acquired by Monomoy Capital Partners.

New Seeking Alpha contributors to watch

Pricing Power Investing shared a bullish thesis on TransDigm (NYSE:TDG). TDG is the best-in-class operator in the aerospace industry with margins far in excess of peers with the ability to consistently compound FCF at a high rate for years; mispricing exists due to unwarranted concerns over defense-related sales.

Notable Sohn Investment Idea contest entries

Aritzia (OTC:ATZAF) Kara Stessl: Published on July 6, 2017. The market is undervaluing Aritzia based on the recent weak retail performance of its U.S. competitors without adequate consideration for Aritzia’s attractive fundamentals and compelling growth strategy.

HubSpot (NYSE:HUBS) by Short Biased: Published on July 6, 2017. TAM is small, competition is high and market saturation makes consensus revenue unlikely while unit economics are challenged and misunderstood, which makes near-term profitability unlikely; everyone is bullish - high risk asymmetry given peak valuation and no intrinsic value.

Sands China (OTCPK:SCHYF) by Kevin Lo: Published on July 7, 2017. Sands China to benefit from opening of the HZMB bridge at the end of 2017, which should relieve the bottleneck of players from entering Macau; additional opportunities may arise from their ability to monetize the trophy retail space.

Welbilt (NYSE:WBT) by Rational Short Investor: Published on July 7, 2017. Unfavorable product mix and key customer exposure limit its ability to increase margins while industry trends are poor; meeting guidance is critical to company staying on side on debt covenants, though this is unlikely; WBT should trade at a material discount to MIDD given lower margins and growth rate, substantially higher leveraged balance sheet and disappointing execution track record.

LiLAC (NASDAQ:LILA) by Stephen Saroki: Published on July 7, 2017. LiLAC, which is significantly undervalued relative to peers, possesses the dominant fixed broadband network in the vast majority of its markets and is poised to benefit from substantial growth of data, inferiority of other data transfer alternatives, and exceedingly low levels of broadband penetration.

Singapore Press Holdings (OTCPK:SGPRY) by Warren Chan: Published on July 7, 2017. SPH has failed to replace the persistent fall in core print advertising income while the shift-to-digital secular headwind hits the company’s core businesses in newspapers and retail malls simultaneously.

Idea screen of the week

Each week we use the PRO Idea Filter to find potential ideas based on a recent news event. This week, PRO Editor John Leonard, CFA looks at ways to play rising interest rates.

Insurers are one of the key beneficiaries of higher rates - and with the Fed steadily raising rates and long bond yields rebounding off the lows of the year, I ran a screen of PRO long ideas in the Property & Casualty Insurance, Life Insurance, Surety & Title Insurance and Accident & Health Insurance sectors.

Three ideas turned up in this screen that might be of interest (prices as of July 6 close):

Kansas City Life Insurance (OTC:KCLI) by Safety In Value: Published on June 12, 2017, up ~5% since publication; author's price target offers an additional ~40% upside. A well-run insurer trading at a significant discount to book that should be re-rated as rates continue to rise; an under the radar idea as the company went dark (though still reports financials and trades in reasonable volume).

Legal & General (OTCPK:LGGNY) by Labutes IR: Published on May 7, 2017, up ~5% since publication; author's price target offers an additional ~15% upside. Attractive relative/absolute valuation with good growth prospects, a high (and sustainable) dividend yield and potential M&A target.

Assured Guaranty (NYSE:AGO) by Tim Travis: Published on March 30, 2017, up ~15% since publication, author's price target offers an additional ~40% upside. Mispricing due to fears over Puerto Rico however AGO continues to generate excess capital and new business, compound book value and repurchase shares.

About the PRO Weekly Digest

PRO members automatically receive the Weekly Digest and other PRO content in their inbox. If you are not a PRO member and would like to be notified of this, click follow at the top of this article to follow the SA PRO Editors account, or click to subscribe to the free newsletter below to receive these in your inbox. You can view all past PRO Weekly Digests here. And if you're interested in SA PRO, check out the details here to sign up or learn more.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Check with individual articles or authors mentioned for their positions.