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Apple, Inc. (AAPL) is a technology company founded in 1976 that designs and sells consumer electronics, computer software, and online services. Initially well-known for its line of Macintosh personal computers, the company rebranded itself from Apple Computer, Inc. to Apple, Inc. since it had shifted its focus to mobile devices. The iPhone, iPod, and iPad allowed the company to establish itself as a leader of both market and profit share in the mobile device space.
At the time of investment, growth of iPhone sales occurred at a much slower rate than analyst expectations (8 percent vs 30 percent). The stock price of AAPL dropped nearly 40 percent as a result to P/E ratio of 9.97x. However, Apple had a record breaking Q4 in 2012 with a 58% growth in iPhone sales, 26% growth in iPad sales, $8.2B in profits.
Our investment thesis suggested that AAPL was, then, undervalued due to being oversold, and that the continuing development of the Apple product ecosystem through iCloud and the soon to be released Apple TV would lock-in customers and drive future sales. This thesis played out as the stock price returned to its previous high, and surpassed that in August 2014.
American Airlines is the world’s largest airline, operating both domestic and international networks. It offers carrier and airfreight services with a fleet of modern 903 aircrafts. As a founding member of the Oneworld airline alliance, American Airlines partners with other airlines to strengthen its international network.
The airline industry is characterized by high barriers to entry with intense competition. American Airlines implements a frequent flier program for customer retention. The progressive movements toward consolidation have led to revenue optimizing processes that drive up industry profitability. At the time of investment, American Airlines was in a process of executing a merger with US Airways to restructure a more efficient airline.
Despite being traded at a discount compared to its competitors, investors were hesitant as a result of the airline’s file for bankruptcy in 2011. Our investment thesis believed that the execution of the merger would be successful under experienced management and American Airlines’ superior network strength. Since the merger, the stock price has both risen and tapered down, leaving a potential upside to be realized.
AMERICAN CAMPUS COMMUNITIES, INC. (ACC)
American Campus Communities, Inc. (ACC) is one of the largest developers of student housing in the United States and the first student housing real estate investment trust (REIT) to be publicly traded. As a REIT, American Campus pays no corporate income tax and distributes 90 percent of income as dividends.
Private housing has become increasingly popular with university students due to students having increased independence, having full-size rooms and kitchens, and often signing leases at lower costs that traditional on-campus housing. Additionally, universities have recently been faced with greater pressure to carefully manage their endowments, and contracting private developers has allowed them to house students with lower costs to themselves.
According to our investment thesis, ACC is a solid stock due to its committed and experienced management, its strong revenue growth up till the time of investment, and its opportunity to capitalize on an expanding student housing market. There was a strong increase in share price until early 2015 when it began falling due to American Campus’s shrinking profit margins and underperformance compared to the rest of the industry. Despite nearly declining to purchase price, dividends from the stock have resulted in a sizable gain.
ARGAN, INC. (AGX)
Argan Inc. (AGX) is a holdings company, founded in 1961, focused on operations through its wholly-owned subsidiaries Gemma Power Systems LLC, Atlantic Projects Company Limited, and Southern Maryland Cable Inc. The subsidiaries are concentrated in Power Industry Services and Telecommunication Infrastructure Services.
When we invested in Argan during September 2013, the company was largely off the radar of the market despite the fact that Argan had begun several high potential projects including the high margin Panda Patriot Energy Project and the Panda Liberty Energy Project. The Panda Projects coupled with an announcement of a special cash dividend, as well as insider buying, prompted us to further analyze the company. The basis for our investment thesis was that Argan was undervalued according to our analysis due to low exposure of its high margin projects.
After several strong quarters and the completion of several projects, Argan’s stock saw a significant price rise. Argan is still working on the Panda Projects that they started in 2013 which are due to be completed on schedule during 2016 along with a large combined cycle power plant project that Argan contracted with Moxie Freedom LLC during July 2015 due to be completed in 2018.
ALIBABA GROUP HOLDING LTD (BABA)
Alibaba (BABA) is a large Chinese e-commerce company that offers a diverse range of websites that connect Chinese manufacturers with overseas buyers. Alibaba’s core business holds many advantages in the Chinese market. Its business model eliminates the need to warehouse inventory and leads to better operating margins. It dominates 80% of Chinese e-commerce and holds both first mover advantage and support from the Chinese government and banking sector.
Our investment is based on sustainable long-term growth in Alibaba’s many businesses. Alibaba is strategically positioned to monetize its vast share of the mobile gross merchandise volume and capitalize on the growing consumer trend of making purchases on mobile devices. Looking forward, its expansion into e-finance through partnerships with PayTM and Lending Club presents continued growth opportunities in new markets like India.
Since our investment in Alibaba several months after its IPO, Alibaba’s stock has been relatively flat, losing its initial gains during the July drop in Chinese stocks. However, Alibaba’s continued growth in mobile sales and efforts to expand into e-finance through strategic partnerships remain on track and poised to provide significant return.
BLACKBERRY LTD (BBRY)
BlackBerry Ltd. (BRRY) is a global leader in mobile communications that revolutionized the mobile industry when it was introduced in 1999. Currently, the company is completing its transition to an organizational structure with four core areas of business: Devices Business, Enterprise Services, BTS business and Messaging. Across all four of these segments, BlackBerry's services are renowned for productivity and the delivery of the most secure end-to-end mobile enterprise solutions in the market.
Our initial investment was based upon the emergence of new management, current CEO John Chen. He planned to deemphasize the device business, a market in which Apple and Samsung were dominating, and focus on enterprise software through its BES platform. BlackBerry has since become the market leader in the enterprise market through high-touch enterprise sales force and an expanded partner ecosystem.
The current launches of its Internet of Things (IoT) Platform and BES12 are serving as catalysts for a prospective rise in BlackBerry's stock price. As the company works towards maintaining its market leadership in the enterprise mobility segment, a rise in investor sentiment and revenue will drive the success of BlackBerry.
JUNIPER PHARMACEUTICALS INC (JNP)
Juniper Pharmaceuticals Inc. (JNP), the rebranded version of Columbia Laboratories Inc. (CBRX), is a specialty pharmaceutical company founded in 1986 specializing in pharmaceutical development and licensing, clinical trial manufacturing, and pharmaceutical analysis and consulting services. The company focuses its products around hormone deficiency and women’s health medication using its Bio-adhesive Delivery System.
As with all pharmaceutical companies, Juniper’s performance depends heavily on the approval of their products by the FDA. At the time of investment, Juniper’s clinical study, COL-1077, was approaching a final decision by the FDA for approval. Juniper’s stock price reflected the overall opinion of the market that the FDA would deny the application for releasing the associated products to the public.
Our investment thesis and market research suggested that Juniper was undervalued and that a successful FDA review and initial proof of concept for the clinical study COL-1077 was predicted to occur in the first half of 2015 and work as a catalyst for Juniper’s stock price. Juniper’s study was in fact approved and their stock price has seen a substantial rise since then. Along with continuing success from their revenue diversification efforts, Juniper has seen a strong year-over-year growth in their overall total revenue.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
The Federal National Mortgage Association, or Fannie Mae, is a government-sponsored enterprise that generates revenue by purchasing mortgages meeting its credit standards from lenders, guaranteeing and securitizing them, and then selling these mortgage-backed securities to institutions like insurance companies, pension funds, and investment banks. By doing so, Fannie Mae increases liquidity for lenders and attempts to make mortgages more accessible to middle- and low-income borrowers.
Since the 2008 financial crisis, Fannie Mae has been in a government conservatorship under which it must send nearly all of its profits directly to the U.S. Treasury as dividends. This has prompted numerous institutional investors to file lawsuits against the federal government, arguing that the government has violated the Takings Clause of the Fifth Amendment by not compensating Fannie Mae’s shareholders.
The prospective risk and reward of an investment in Fannie Mae’s stock depends almost solely on the results of these lawsuits, and as a result, Fannie Mae’s stock has seen considerable price volatility as sentiment swings back and forth. However, the potential reward of a favorable ruling for shareholders could mean a return to pre-conservatorship stock price levels, warranting this stock a small place in our portfolio.
GENCOR INDUSTRIES, INC. (GENC)
Gencor Industries Inc. (GENC) is a manufacturing company specialized in the design and creation of heavy machinery used in the production of asphalt and other highway construction materials. Their primary products include asphalt production plants, combustion systems and industrial incinerators, and fluid heat transfer systems.
Our investment thesis was predicated on Gencor’s strong product differentiation through superior burner and heat transfer system design, as well as expected growth in the highway construction industry. As the federal government is the highway industry’s largest customer, highway material demand is heavily dependent on the federal highway budget. At the time of investment in April 2014, the federal highway budget was set by a transportation bill subject to an extension vote. We anticipated an extension with an increase in the budget as part of our investment thesis. Congress has extended the bill since then to the present day, but not with the projected budget increase.
Since our investment, Gencor’s price has remained relatively stable. Increased product demand is still possible through an upcoming vote to extend and increase the federal highway budget for six years. Gencor remains poised to take advantage of the demand increase through their established brands and quality product designs.
Gilead Sciences, Inc (GILD)
Gilead Sciences is a large-cap biopharmaceutical company that discovers, develops, and commercializes therapeutics. Gilead’s areas of focus include HIV, Hepatitis B & C, and oncology, and the company adds to its portfolio of therapeutics through internal discovery and clinical development programs as well as through product acquisition and in-licensing.
Gilead’s loss of a contract with a major pharmacy benefit manager (PBM) and obligation to sell one of its most desirable products at a considerable discount caused a selloff of the stock last spring. This was in spite of Gilead’s extensive pipeline, dominant market share in the fast-growing HCV and HIV therapeutic markets, and new contract with another large PBM. Our estimates strongly suggested that the price discount would be more than offset by volume growth given trends in both domestic and overseas markets.
Assessment of Gilead’s industry-leading profit margins and ROE/ROI figures, initialization of new dividend and stock buyback programs, and multiples far below those of its competitors, led us to conclude that the company’s shares were trading at a steep discount. The stock has since realized a substantial price increase, and we remain confident in Gilead’s strong fundamentals and ability to generate stable cash flows in the coming years.
Aerojet Rocketdyne Holdings, Inc (AJRD)
Aerojet Rocketdyne Holdings, Inc. (AJRD), formerly GenCorp, Inc. (GY), is a technology-based company, providing innovative solutions in the aerospace and defense, energy and real estate markets. Its major products are missile defense equipment, tactical systems, and space launch systems. It has a great competitive advantage in that it has a legal monopoly due to an approval from the FTC and the industry itself has huge barriers to entry.
The company’s major revenue driver is the DoD budget, which had been decreasing since the past few years at the time of investment. Our investment thesis suggested that the company was being improperly valued due to the budget cuts and the latest budget emphasized particularly on prioritizing the missile defense, which suggested a lucrative opportunity for the company. Our research also showed that the land on the company’s books was not marked-to-market under GAAP and was represented at the price at which it was bought in 1950s, which was an insignificant amount compared to its present value. The land was going through development before it would be sold, which would increase the value of the company.
Our thesis has been proven correct and the stock price has seen a substantial upside since our investment, with revenues growing over 15%.
Murphy USA Inc. (MUSA)
Murphy USA (MUSA:US) is a national gas station and convenience store operator, with over 1,200 locations throughout the South and Midwest United States. The company spun off from the larger E&P parent company Murphy Oil (MUR:US) in August 2013. The gas station industry is characterized by three main objectives: opening high-traffic locations, generating high-volume sales, and sourcing gasoline for the cheapest possible cost. Our investment thesis for MUSA is that the company will leverage its competitive advantage in the coming years to gain market share. Murphy USA’s competitive advantage stems from a long-standing partnership with Walmart, which gives Murphy access to desirable, high-traffic locations. Murphy USA is also able to acquire gasoline cheaper than its competitors due to its economies of scale and its proprietary midstream terminal and pipeline assets.
PTC Inc. (PTC)
PTC Inc. (PTC) is a computer software company specializing in 2D and 3D design software. It provides for all aspects of product development and management, including Computer Aided Design (CAD), Product Lifecycle Management (PLM), Application Lifecycle Management (ALM) and Software Lifecycle Management (SLM), with now entering into Internet of Things (IoT).
PTC has a very well established business in the CAD and PLM segments. PTC Creo, PTC Mathcad, PTC Windchill, PTC Creo View, and PTC Integrity are very well positioned in the market. PTC’s revenue stream has been shifting to a subscription model from a license model that would lead to steadier revenue. The software firm has also been improving its operational efficiency; its margins have been consistently increasing. Furthermore, PTC hopes to enter the Internet of Things segment with the recent acquisition of Axeda and ThingWorx.
Our investment thesis mainly lied upon the massive growth expected in the IoT sector and PTC’s ability to tap that potential through its new acquisitions. Our investment remains safe even if there is not enough growth in the IoT sector because of PTC’s well-established business and focus on improving operational efficiency.
The stock reached our target price in May 2015. Still, due to the expected growth in the IoT sector, we expect a lot more upside from the stock.
RigNet Inc. (RNET)
RigNet Inc (RNET) is the largest pure-play remote communications provider for the oil and gas industry providing voice and broadband services through custom tailored, technology neutral solutions.
Our thesis revolved around three main factors. First, we felt that RigNet had been unfairly punished by the downturn in oil prices. At its core, RigNet is a communications company offering essential services to remote assets and should not be as closely tied to smaller shifts in oil prices. Second, there was uncertainty around recent management changes, but many of the individuals were drawn from RigNet’s largest competitor, Harris CapRock. Lastly, a recent acquisition had diluted some margins. However, the company had successfully integrated and improved the operations of a prior acquisition. We also identified an increasing focus on tertiary services that grow average revenue per unit (ARPU) and consistent growth in market share as additional catalysts.
RigNet has continued to be pulled down by oil prices that have fallen below our projected floor of $65-70, leading to a decrease in rig counts, a metric that can have significant effects on revenue. The company remains a vital component of operating rigs and is positioned to capitalize on an improvement within the energy sector.
U.S. Silica Holdings, Inc (SLCA)
U.S. Silica is the leading supplier of silica sand, which has a variety of applications, including usage in the industrial processing of glass, chemicals, and fillers. It is a material that is used as a proppant in the process of hydraulic fracking to extract oil and natural gas from shale rocks. U.S Silica holds an extensive number of silica reserves and production facilities to produce and sell commercial silica.
Industry trends indicate that the U.S. is expected to become the largest producer of both oil and natural gas energy by 2020. An increasing access to shale deposits through technology and the position of natural gas as the designated alternative to coal, allows U.S. NGL exports to be significantly cheaper in international markets.
U.S. Silica has matched the industrial advantage and strengthened the company’s focus on its Oil & Gas Proppants operating segment. This change is supported by consistent revenue growth and a strong growth rate. With U.S. Silica’s evolving focus backed by industrial growth, our investment thesis grounds itself in the vast expansion opportunities that put U.S. Silica in a solid position to take advantage of the huge foreign market potential.
SWK Holdings Corporation (SWKH)
SWK Holdings Corporation (SWKH) was incorporated in July 1996. It has since, become a leading healthcare capital provider by offering customized financing solutions to a broad range of life science companies, institutions and inventors. It focuses on monetizing cash flow derived from commercial-stage products and related properties through royalty purchases and financings.
Within the healthcare provider sector, large cap capital providers are inclined towards large scale transactions because their financing methods are better suited for those companies. As a smaller firm, SWKH intends to fill a niche that is undeserved in the sub-$50 million transaction size. At the time of investment, SWKH was completely under followed with no analyst coverage. This not only signified undervaluation but also explains the low cost basis at which we purchased its stock.
A key driver of our investment thesis is that SWKH is an extremely valuable NOL asset. The company currently has $421 million of federal net operating loss (NOL) carryforwards. These will expire between 2021 and 2032, fitting into our long term investment plan entirely. Since our initial investment, SWKH has continued to increase and diversify the healthcare related companies it is invested in and has seen its stock value nearly double.
Trinity Industrials Inc (TRN)
Trinity Industries is a highly diversified heavy industry conglomerate with five business groups: Rail, Construction Products, Inland Barge, Energy Equipment, and Railcar Leasing and Management. Trinity is a leader across many industries, and their core business, the Rail Group, which manufactures railcars that transport oil and other industrial products, dominates supply with a 44% share of the industry backlog.
At the time of investment, the Dept. of Transportation was mandating the replacement of the industry standard DOT-111 oil railcars, which make up 69% of the current US fleet. Replacing these railcars would spur enormous demand for Trinity’s products in the coming years. Furthermore, a recent lawsuit involving one of their products had depressed their stock price, but after extensive research, we felt confident that Trinity would win the lawsuit, serving as a catalyst for the stock price to increase. Even in the event that they did not, our financial analysis suggested that the stock would still return an upside.
Though Trinity has had to pay additional fines due to the lawsuit since our investment, Trinity’s strong performance across all its businesses mitigated those losses, and we expect to see continued success and stock price appreciation in the future.
IDT Corporation (IDT)
IDT Corporation (IDT) is a telecommunications and technology company. Founded in 1990, the firm provides a wide range of products including high-performance computing, mobile and personal electronics, network communications, and wireless infrastructure. The firm also owns a variety of smaller business and operates as a holding company.
The firm went under a fundamental restructuring after a decline in the sale of prepaid calling cards in 2008. Subsequent sales and spin-offs of portfolio companies since that time have been catalysts for stock appreciation. In addition to shedding non-core business assets, the company continues to expand into telecom services. The firm employs 1,250 people over 21 countries. As a long-term play based on the market’s improper valuation of IDT’s segments and the world’s increasing dependence on telecommunications, the position further concentrates the portfolio’s weight toward a technology-driven future and the fund’s macroeconomic perspectives.
This fund is open to all members of USIT and is managed by a majority vote after each stock pitch at the weekly general meeting. Every week, a different portfolio manager takes turns assembling a pitch team to present a top idea from his or her fund, so the All Star fund represents the best investment ideas from all the other portfolios. Consequently, this strategy allows for optimal diversification across all industry verticals, maximizing return while ensuring capital preservation. Our members directly benefit from exposure and participation in the idea generation process and quantitative analysis necessary to generate positive alpha.