Conviction Buy List
I've been spending a little time looking at Goldman Sachs (GS) lately (nothing new to report, I haven't bought shares ... but I would really like to see a buying opportunity in GS), and as such I keep seeing the news about their "Conviction Buy" and "Conviction Sell" listings.
I kind of like that terminology -- so I'm stealing it.
Here's my Conviction Buy List for our current period of uncertainty -- these are the companies I want to buy additional shares of near these prices, regardless of what happens to the broader market. They each have something special that sets them apart and provides significant opportunity for growth, and I think they're all reasonably or bargain priced today.
1. Gol Linhas Aereas Inteligentes (GOL)
GOL is a great story -- this company trades at a PE of 19, forward PE of 10, and grows at well over 20% (significantly more in past quarters). This is the Brazilian discount airline, and in addition to cutting fares to build ridership they're also cutting costs and increasing efficiency to build profits. Not unlike Southwest and RyanAir, who they model, Gol consistently pushes to bring fares down in order to build a market. They are taking market share from the somewhat more bloated (and larger) business airline TAM in their home country, and helped to push the severely bloated flagship airline Varig into bankruptcy and near irrelevancy now, and they're slowly expanding with short-haul international flights across South America.
I have bought shares well above today's prices in the past, and I may well buy more soon. Prices are currently depressed because the rapid growth of civilian air travel (thanks to Gol and others) has put a severe strain on the air traffic system, a strain that was exacerbated when the crash of a Gol plane (not their fault) last year brought blame on the controllers, who in turn did what they could to paralyze the system. I expect that to work itself out over the next year or two, as Brazil's government knows they have to allow civilian aviation to grow -- they don't have a good highway system or train system, this is the way their citizens need to travel if they want to bring the 20th Century to all Brazilians. When they tell you not to invest in an airline, they're not talking about Gol.
You can see all my past notes on Gol here.
2. American Science and Engineering (ASEI)
Regardless of what you think about politics or defense spending, I think it's a certainty that dramatically increased spending on security is likely worldwide. ASEI plays into that, with technological leadership in scanning products that include huge gantry scanners for cargo containers and trucks, mobile scanners in vans, package scanners for building security or shippers, and personal scanners for airports.
They use patented backscatter x-rays to provide a much better view than conventional x-ray scanners and better illuminate contraband, weapons, or other hidden items in trucks, packages, cars, or on people. Big potential drivers of revenue in the near future are their large project for nuclear material scanning at ports, the buildout of their omniview gantry scanners (only in use at a couple ports so far) to scan containers, and continued very strong sales of their flagship product, the Z-Backscatter Van, including a ruggedized version that appears to be in strong demand from the military even before it has been designed. Even with these tailwinds, and no real correlation to the overall economy, the shares trade at a very small premium to the market (PE of around 20). The earnings are lumpy due to big contract sales that aren't always timed as management would like, but I think any weakness (and I consider these prices near $50 to be fairly weak) is a great opportunity for me to buy more.
You can see all my past notes on ASEI here.
3. Cemex (CX)
This world leader in Cement, aggregate and concrete is somewhat reliant on the US market, including housing, which I think has left prices below where they would otherwise be. But of bigger import are commercial construction and road construction, both of which I think are likely to be very significant. The company has shown that over the years they can be much more efficient, using technology, than any other business in their field, and that they can make acquisitions that are very accretive in fairly short order because of their ability to drive efficiency higher -- the most recent of which, Ready Mix Concrete, nearly doubled their business.
The bid for Rinker that has recently been in the news, which may or may not go through because Cemex doesn't appear to be willing to raise their bid, is not a big concern for me. I think they'll do very well if they pick up this company, though it will increase their US market exposure, but I also think they should continue to perform very well if they don't. They just revised their current guidance to offer a guess that they'll increase EBITDA a little bit this year on lower operating earnings and higher sales, and they are seeing consistent sales growth across all of their big non-US markets (including Mexico, Spain, and the UK). I'd like to see Cemex get more of a foothold in Asia, something they failed to do with their attempted takeover of Semen Gresik in Indonesia due to government interference, but I think their dominant position in North and South America and parts of Europe is very positive. Concerns about the US housing sector have the forward PE down to about 8, which makes me interested in picking up more -- I own shares that I picked up with an average cost of about $30, so I have already bought near these levels, though not recently.
You can see all my past notes on Cemex here.
4. Exelixis (EXEL)
Finally, Exelixis -- the little biotech that could. This small biotech with expertise in cancer targeting has a ratio of new drugs in clinical development to market cap that I don't think you'll find in many other places. They currently have seven drugs in the clinic in various early-stage trials, and they plan to file INDs for three drugs a year to keep the clinic stocked with potential -- all for a well-capitalized little company with a market cap just under a billion dollars. Shares have taken 10-20% swings up and down as I've held them over the past couple years, as minor news is released about their various lead candidates, but there has been no particularly big news yet (they haven't dropped a program recently, or had a drug approved), which means the price fluctuates with guesses about their future.
If you like to bet with solid odds, I think that starting with a strong and deep pipeline, from a company with a highly respected discovery program (they get partnership deals with many in big pharma), and with innovative financing programs to help pay for their expensive clinical trials, gives better odds than most other biotechs -- many small biotechs rise and fall, dramatically, on the results of a single drug. That shouldn't happen with Exelixis, so I continue to think that any depression in the shares is a chance to maybe pick up a bit more. We're right about in the middle of the 52-week range right here, and I've bought both above and below this price in the past. Management has in their sights the development of a leading biotech company that can rival Genentech and Amgen ... that's obviously a hugely ambitious goal, but they are building a pipeline that some of the larger biotechs probably already look at with envy.
You can see all my previous notes on EXEL here.
Of course, I have no special insight into any of these companies and I have no idea whether they'll move up or down in the coming months -- but I think that GOL, EXEL, and ASEI should trade on their own excellent business prospects, with very little care whether the CPI is at a certain level or the U.S. consumer goes broke. CX is a bit more cyclical, but has such a wide global footprint and trades at such a reasonable price that I'm still interested. Over the next five to ten years, these are some of the companies I think I'd like to see as major parts of my portfolio.
I kind of like that terminology -- so I'm stealing it.
Here's my Conviction Buy List for our current period of uncertainty -- these are the companies I want to buy additional shares of near these prices, regardless of what happens to the broader market. They each have something special that sets them apart and provides significant opportunity for growth, and I think they're all reasonably or bargain priced today.
1. Gol Linhas Aereas Inteligentes (GOL)
GOL is a great story -- this company trades at a PE of 19, forward PE of 10, and grows at well over 20% (significantly more in past quarters). This is the Brazilian discount airline, and in addition to cutting fares to build ridership they're also cutting costs and increasing efficiency to build profits. Not unlike Southwest and RyanAir, who they model, Gol consistently pushes to bring fares down in order to build a market. They are taking market share from the somewhat more bloated (and larger) business airline TAM in their home country, and helped to push the severely bloated flagship airline Varig into bankruptcy and near irrelevancy now, and they're slowly expanding with short-haul international flights across South America.
I have bought shares well above today's prices in the past, and I may well buy more soon. Prices are currently depressed because the rapid growth of civilian air travel (thanks to Gol and others) has put a severe strain on the air traffic system, a strain that was exacerbated when the crash of a Gol plane (not their fault) last year brought blame on the controllers, who in turn did what they could to paralyze the system. I expect that to work itself out over the next year or two, as Brazil's government knows they have to allow civilian aviation to grow -- they don't have a good highway system or train system, this is the way their citizens need to travel if they want to bring the 20th Century to all Brazilians. When they tell you not to invest in an airline, they're not talking about Gol.
You can see all my past notes on Gol here.
2. American Science and Engineering (ASEI)
Regardless of what you think about politics or defense spending, I think it's a certainty that dramatically increased spending on security is likely worldwide. ASEI plays into that, with technological leadership in scanning products that include huge gantry scanners for cargo containers and trucks, mobile scanners in vans, package scanners for building security or shippers, and personal scanners for airports.
They use patented backscatter x-rays to provide a much better view than conventional x-ray scanners and better illuminate contraband, weapons, or other hidden items in trucks, packages, cars, or on people. Big potential drivers of revenue in the near future are their large project for nuclear material scanning at ports, the buildout of their omniview gantry scanners (only in use at a couple ports so far) to scan containers, and continued very strong sales of their flagship product, the Z-Backscatter Van, including a ruggedized version that appears to be in strong demand from the military even before it has been designed. Even with these tailwinds, and no real correlation to the overall economy, the shares trade at a very small premium to the market (PE of around 20). The earnings are lumpy due to big contract sales that aren't always timed as management would like, but I think any weakness (and I consider these prices near $50 to be fairly weak) is a great opportunity for me to buy more.
You can see all my past notes on ASEI here.
3. Cemex (CX)
This world leader in Cement, aggregate and concrete is somewhat reliant on the US market, including housing, which I think has left prices below where they would otherwise be. But of bigger import are commercial construction and road construction, both of which I think are likely to be very significant. The company has shown that over the years they can be much more efficient, using technology, than any other business in their field, and that they can make acquisitions that are very accretive in fairly short order because of their ability to drive efficiency higher -- the most recent of which, Ready Mix Concrete, nearly doubled their business.
The bid for Rinker that has recently been in the news, which may or may not go through because Cemex doesn't appear to be willing to raise their bid, is not a big concern for me. I think they'll do very well if they pick up this company, though it will increase their US market exposure, but I also think they should continue to perform very well if they don't. They just revised their current guidance to offer a guess that they'll increase EBITDA a little bit this year on lower operating earnings and higher sales, and they are seeing consistent sales growth across all of their big non-US markets (including Mexico, Spain, and the UK). I'd like to see Cemex get more of a foothold in Asia, something they failed to do with their attempted takeover of Semen Gresik in Indonesia due to government interference, but I think their dominant position in North and South America and parts of Europe is very positive. Concerns about the US housing sector have the forward PE down to about 8, which makes me interested in picking up more -- I own shares that I picked up with an average cost of about $30, so I have already bought near these levels, though not recently.
You can see all my past notes on Cemex here.
4. Exelixis (EXEL)
Finally, Exelixis -- the little biotech that could. This small biotech with expertise in cancer targeting has a ratio of new drugs in clinical development to market cap that I don't think you'll find in many other places. They currently have seven drugs in the clinic in various early-stage trials, and they plan to file INDs for three drugs a year to keep the clinic stocked with potential -- all for a well-capitalized little company with a market cap just under a billion dollars. Shares have taken 10-20% swings up and down as I've held them over the past couple years, as minor news is released about their various lead candidates, but there has been no particularly big news yet (they haven't dropped a program recently, or had a drug approved), which means the price fluctuates with guesses about their future.
If you like to bet with solid odds, I think that starting with a strong and deep pipeline, from a company with a highly respected discovery program (they get partnership deals with many in big pharma), and with innovative financing programs to help pay for their expensive clinical trials, gives better odds than most other biotechs -- many small biotechs rise and fall, dramatically, on the results of a single drug. That shouldn't happen with Exelixis, so I continue to think that any depression in the shares is a chance to maybe pick up a bit more. We're right about in the middle of the 52-week range right here, and I've bought both above and below this price in the past. Management has in their sights the development of a leading biotech company that can rival Genentech and Amgen ... that's obviously a hugely ambitious goal, but they are building a pipeline that some of the larger biotechs probably already look at with envy.
You can see all my previous notes on EXEL here.
Of course, I have no special insight into any of these companies and I have no idea whether they'll move up or down in the coming months -- but I think that GOL, EXEL, and ASEI should trade on their own excellent business prospects, with very little care whether the CPI is at a certain level or the U.S. consumer goes broke. CX is a bit more cyclical, but has such a wide global footprint and trades at such a reasonable price that I'm still interested. Over the next five to ten years, these are some of the companies I think I'd like to see as major parts of my portfolio.
This article posted by One Guy @ 3/16/2007 10:20:00 AM 2 comments
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