Aircastle Ltd

Ticker: AYR, Buy below $25.

Why I Would Buy

  1. Cheap– Aircastle trades at about 11x trailing earnings and 10x forward earnings.
  2. Concentrated Institutional Holdings –  More than 35% of outstanding shares are held by two large and savvy institutional investors: The Ontario Teachers’ Pension Plan Board and the Japanese conglomerate Marubeni.
  3. Dividends – AYR yield an attractive 4+%.
  4. Selling Below Book –Aircastle currently trades at 90% of its book value.

What Could Go Wrong

  1. Highly Leveraged –Aircastle like all leasing companies has a large amount of indebtedness. Greater than 70% of the company’s capital structure is debt.
  2. Significant Industry Risks – Aircastle structures it’s leases such that the cashflow from leases does not always the cover cost of their planes, Aircastle counts on being able to sell or re-lease their planes  at lease expiration. This may become difficult to accomplish if there is a prolonged downturn in air passenger or cargo demand, this can  occur due to any number of factors — higher fuel prices, global recession etc.

Disclosure: I am long AYR, please read additional disclosures here before taking any action based on this post.

First Guaranty Bancshares

FGBI

Ticker: FGBI, Buy below $18.

Why I Would Buy

  1. Very Cheap – First Guaranty trades at about 8 times trailing earnings. Other than being an obscure microcap stock, there isn’t anything else that I could find to explain this cheapness.
  2. Significant Insider Holding – About a third of the shares are held by management and directors.
  3. Recent Insider Buying – During the past 12 months 600,000 shares were purchased by company insiders, no significant sales were reported.
  4. Strong Returns on Equity – RoE is one of my favorite metrics for evaluating company performance, First Guaranty has posted some impressive numbers: 
    20112012201320142015
    7.37%10.90%9.31%11.40%12.98%
  5. Low Payout – Despite a healthy dividend of approximately 4%, the payout ratio is just 30%.

What Could Go Wrong

  1. Tiny –First Guaranty had a 2015 net income of $just 14.5 million and a market capitalization of about $120 million. Domiciled in Louisiana, it is the only the 7th largest bank in the state.
  2. Revenue PlateauRevenues have been flat for some years:
    20112012201320142015
    $51 mill$53 mill$47 mill$50 mill$56 mill
  3. Mediocre Safety/Stability Rating –First Guaranty is rated only 3 stars (out of a possible 5) by BankRate.com’s “Safe & Sound” bank ratings system.

Please read disclosure here before taking any action based on this post.

MTS Systems


mts_logo

Ticker: MTSC, Buy below $50.

Why I Would Buy

  1. Insider Buying – Strong insider buying from open markets by directors and officers during the past 3 months. Additionally, no open market sales were made by insiders during the last 12 months.
  2. Niche Market and Longevity – MTS Systems operates in a niche market (testing and sensing technologies), and has survived as a strong player for 50+ years.
  3. Small Cap – MTS System’s market capitalization is a shade over $800 million. Smaller cap companies such as MTS tend to grow faster than large cap ones, and are more likely to be acquired at a premium.
  4. Healthy R&D Spend – MTS has consistently spent about 4% of revenues on R&D. This increases the odds of them being able to maintain and grow market share:
    2012201320142015
    4.04%4.01%4.23%4.20%
  5. Strong Returns on Equity – In excess of 15% annually in recent years, this is an excellent performance:
    20112012201320142015
    27.03%23.56%23.92%16.32%17.61%

What Could Go Wrong

  1. Potential Accounting Concern – MTS’s most recent 10K filing contains the following opinion by their auditors :”MTS Systems Corporation has not maintained effective internal control over financial reporting as of October 3, 2015″. The CEO has acknowledged this weakness and has promised remedial measures. Regardless, this is something potential investors need to keep an eye on.
  2. Declining Profitability – Operating Income has been on a decline despite revenues staying relatively steady, this could be an indication of increased competitive pressures:
     201320142015
    Revenue569564564
    Operating Profit806061
    (in millions)
  3. Recent Large Acquisition – MTS recently announced a very large acquisition: $580 million purchase of PCB group. This deal is to be funded largely via debt, this new leverage adds risks to the capital structure. Additionally, as in any acquisition the synergies may not be realized.

Please read disclosure here before taking any action based on this post.

Gilead Sciences

Gilead_Sciences_Logo_svg

Ticker: GILD, Buy below $90.

Why I Would Buy

  1. Extremely Cheap – Trades at less than 8 times forward price-earnings ratio.
  2. Strong Ratings Consensus – S&P 5 stars, Fool.com 5 stars, Morningstar 5 stars.
  3. Tremendous Returns on Equity – Greater than 25% RoE for each of the past 5 years:

20112012201320142015
44.49%32.30%29.74%90.32%106.64%

  1. Outsized R&D Spend Gilead has consistently spent a very large percent of revenues on R&D. High R&D spending correlates to strong future growth rates:

20112012201320142015
14.66%18.14%18.92%11.47%9.23%

  1. Miniscule Dividend Payout Ratio At less than 10% of earnings, this is an unbelievable metric for a stock yielding more than 2%.

What Could Go Wrong

  1. Reversion to Mean – Revenues are up an astounding 300% during past 3 years; this is a highly anomalous growth rate. Such aberrant growth rates can skew valuation metrics and probably create an illusion of value where one may not exist.
  2. Revenue Concentration Most of the revenue growth came from HCV (Liver disease) medications, which went from near 0% revenue contribution in 2013 to more than 50% in 2015. Merck and other players are beginning to prey upon on this monopoly that Gilead has been enjoying.
  3. Market Wisdom – Market has beaten this stock down to ridiculous valuations — the wisdom of the crowds cannot be dismissed lightly.

Please read disclosure here before taking any action based on this post.