Independent Security Analysis. Technical Analysis. Fundamental Analysis. Watchlists. My Portfolio.

Independent Security Analysis. Technical Analysis. Fundamental Analysis. Watchlists. My Portfolio.

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Forget Tesla, Invest In Subaru: Why We Think Fuji Heavy Industries Represents An Overlooked, Undervalued Opportunity

By The Wall Street Fox → Friday, October 31, 2014
We first glanced at Fuji Heavy Industries (FUJHY/FUJHF) stock back in 2011 after obtaining the 2011 Subaru Outback via a three year lease. We like practicing the "invest in what you buy/consume" philosophy. The stock was low, trading at approximately $10 per share (and $5 per share for FUJHF). Sadly, all we did was monitor the stock without making a move or doing our due diligence. It's OTC status and lack of liquidity were the main deterrents.

Fast forward three years, and the lease to the Subaru Outback has expired. Instead of buying out the lease/starting a new one, we decided to purchase/finance a used 2012 Subaru Impreza. Naturally, following our purchase, we revisited Fuji Heavy's stock and were shocked to see where it trades at today...$62 (and $31 for FUJHF)! Shares are up some 600% over that three year period!

Does Fuji Heavy still present a lucrative investment opportunity at these levels? Due diligence ensued and here's why we think Fuji Heavy still represents an overlooked, undervalued opportunity.

First, lets briefly talk about the product. Our experience with both Subaru models has raised our standards for how a car should handle, drive, and maintain. These cars have plenty of pep, plenty of room, and are, depending on your standards, fuel efficient (87.5% of their 2015 fleet obtain 32+MPG on highway). The cars have some of the highest safety ratings in the industry and require very little maintenance. Reliability would be an understatement. Subaru has differentiated itself from the competition two ways: by offering symmetrical All Wheel Drive for its entire fleet, and by utilizing horizontally opposed engines (Porsche is the only other automaker to do so).

Ok, so there's the car salesman pitch. Go out and buy a Subaru, they're great cars, and this statistic being touted by the company in recent commercials hits the nail on the head: 97% of all Subaru's made in the last ten years are still on the road. I'm not sure how that stacks up when compared to competitors, but nonetheless, quite impressive. Now, what about the company?

Fuji Heavy Industries was founded in 1953 and is based in Japan. The company derives 93% of its annual revenue from the sale of Subaru automobiles. The company is also a defense contractor for the Japanese government and manufactures Boeing and Lockheed Martin helicopters and airplanes under license. This aerospace division represents 5% of the company's annual revenue. The third business is selling industrial engines under the Subaru Robin brand name, which makes up the last 2% of the company's annual revenues.

When jumping into the financials of this company, I was surprised to see the spectacular growth that this company has been experiencing since 2011. The growth is best summed up in this image from the company's historical financials.

(In millions of yen)
From 2013 to 2014, revenues increased 26%, operating income jumped 171%, and net income increased an astounding 73% (enthusiastically highlighted above). Now, it is important to note that a solid chunk of that increase (about 70% of it) was due to favorable currency conditions, thanks to the yen dropping in value. The rest of FY14's increase was due to a 14% increase in total automobile sales, and a 40% increase in the aerospace division sales. 

Subaru reached its management goals, to sell 850,000 cars annually by 2016, two full years ahead of schedule, but the company's current growth rates are not sustainable, almost entirely due to the drastic price action of the yen. Subaru has placed a new 3 year, and 5 year plan in place that calls for sustainable growth with a focus on quality over quantity. The company plans to sell 916,000 cars in 2015, and 1.1 million by 2020 (for a sense of scale, Ford sold 2.5M cars in 2013). 

Quality Over Quantity (From Fuji Heavy IR Presentation)
We are not big in size as an automobile 
manufacturer, and to continue sustainable growth in the 
future, it is, of course, important for us to concentrate 
our resources on our core competencies and offer 
automobiles with Subaru’s unique appeal. But it is also 
important, after a customer has purchased a vehicle and driven it, for the quality of the car, its performance and the after-sales service to make her/him feel that Subaru is really excellent and that she/he wants to drive another Subaru for the next purchase. To achieve this, we must never be content with mere “good” or “very good” ratings from Subaru users, but rather work to become “a prominent company” in their minds with an evaluation of “outstanding.”
While management is expecting slower growth rates moving forward, because of the notion that the yen will regain lost value after a steep correction, tonight's unexpected announcement of quantitative easing by the Bank of Japan, which will push the yen lower, will be a positive for Fuji Heavy and help sustain stronger than expected growth rates. 

This is one ugly chart, and it just made a new six year low following the BOJ stimulus announcement tonight. It's currently at .903. It should continue its trend lower (which is great for Fuji Heavy). 

Due to Subaru's growing popularity, (Sales Manager at local Subaru dealer indicated that they can not get their hands on enough 2015 Outbacks and Foresters, expecting shortage until early 2015), and the upcoming introduction of the next generation 2015 Impreza, rumored for introduction in December 2014 (each "next generation" release of Impreza has led to record sales numbers), we expect Subaru to beat its 1.1M in annual car sales goal well before their 2020 target (expecting around 2018). 

We believe Fuji Heavy is trading at a steep discount when compared to its industry peers. Below is a comparison of a few competitors current market cap. Subaru, which sold 850,000 cars in FY2014, is valued $5B less than Tesla, which is selling approximately 25,000 cars per year (albeit at much higher prices than Subaru, and Tesla is a cult/hyper growth story so lots of hype). **Keep in mind this chart below % change in net income is not a fair representation due to the Japan automakers large currency gains from the decreased value in the yen.

 Here is a look at September YTD auto sales in the U.S., with Subaru being ranked as the 9th overall brand.

Subaru continues to post impressive growth numbers in the U.S., and they still have plenty of room to stretch their legs. With only 3.0% of the U.S. YTD market share, the company is looking to expand that number by strengthening the U.S. Subaru brand and introducing a fuel efficient SUV model (good timing considering strong SUV growth rates currently).

We think Subaru is striking a chord with families, which it is heavily targeting in its advertising. Here's an ad that we think illustrates one of the many reasons why Subaru is succeeding.

Ok. So to recap, Fuji Heavy offers a solid auto brand, is posting strong growth figures in its financials and auto sales, and is doing a great job with its advertising. The company does ~$24 Billion in annual revenue and is currently valued at ~$24 Billion. The company is posting strong growth rates and is far outpacing most** of its competitors. But wait, there's more.

Fuji Heavy also has an aerospace division that serves as a defense contractor to the Japanese government. While this division only represents 5% of the company's annual revenue, we think that number is going to grow dramatically by 2020, and article screenshots below explain why.

Fuji has been a longtime manufacturer of parts for Boeing's airplane models and that relationship is growing as Boeing grows.

This excerpt from an article in the Japan Times on October 10th points to the possibility of tremendous growth for Fuji's aerospace division.

There seems to be a massive shift in Japanese policy occurring which would allow Fuji Heavy to become a substantial defense contractor not just for the Japanese government, but for others around the world now that Abe is trying to facilitate a domestic weapons export industry.

A few more notes to wrap it up. Fuji Heavy pays a dividend. Fuji Heavy's Industrial engine business provides engines and parts for Snowmobiles, ATVs, Generators, and more. This business unit is posting flat growth, but management is expecting growth in coming years. One large client of Fuji Heavy for this business division is Polaris Industries (snowmobiles). Toyota purchased a 16% stake in Fuji Heavy in the mid 2000's. Fuji Heavy has OTC american ADR as FUJHY at $62. This OTC is more liquid than FUJHF, but you can gain exposure either way, and both have very low liquidity.

We hate buying stocks at new multi-year highs, but with the recent breakout above resistance, and old resistance successfully becoming new support...and the new stimulus from Japan...and the dividend....and the strong fundamentals, we feel compelled to nibble at this security in small bites and build up a position over time. We will be purchasing our starter position in FUJHY beginning tomorrow, and will be holding it for a long, long, long term investment horizon.

This is a diversified company, you are getting strong exposure to the automobile market, exposure to Boeing's success, exposure to snowmobiles made by Polaris Industries, exposure to the defense contracting business, geographical exposure, and much more!

Possibly what impressed us the most when investigating this company, is the managements presentation of their data and the 2020 growth plan they have in place which is all presented on their corporate website. If you want to see the presentation PDFs and see where we sourced our data, here they are:

We feel the OTC status of Fuji Heavy's American stock listing is what has been deterring U.S. investors to jump in, and therefore, it's under owned. However, we don't expect this to change, as the company has signaled no intentions to uplist their ADR's to the NYSE or NASDAQ, and the avg trading volume of these two stock listings is under 15,000 shares.

*FUJHY just released Q2 earnings a few hours ago. We will review the earnings and see if there are any material updates to be included.

UPDATE: We just briefly looked over Fuji Heavy's earnings report released today (Halloween). Fuji posted 16% increase in net sales for first half of 2015 vs first half of 2014. The company increased its forward looking guidance, and the company increased its dividend payment forecast. Both solid signs to see.

Why Our Intention To Sell Castle Brands Is Non Existent

By The Wall Street Fox → Thursday, October 23, 2014
We initiated our core position in Castle Brands (ROX) in the summer of 2013 for approximately $0.35 per share. Since then, our position has soared nearly 500% thanks to improving financial metrics and the near completion of an impressive turnaround. Here's why our intention to sell Castle Brands is non existent.

Please note that our investment horizon in this name is long (years long), and that this is a speculative, risky, small cap name that is subject to volatile price swings. Also understand that since we are up handsomely, we have a large cushion for volatile movements and are unfazed by downward price swings.

First, from a technical perspective, ROX has broken out of a cup and handle pattern (minus the handle, it just straight broke through without the consolidating handle) on strong volume. The measured move from the base of 80c to the top of ~$1.40 points to a 60c measured move higher to ~$2.00 per share. On the flip side, ROX is 45% above its 50 day MA, so we wouldn't be surprised to see a pullback/some consolidation.

Second, we love ROX's products. We are avid fans of Gosling's Rum and the Dark and Stormy mixed drink. To us, there's nothing better than investing in a product that you yourself consume...and enjoy! It's not just the rum though, ROX is responsible for Gosling's Ginger Beer, which is posting strong growth figures, along with Jefferson's Reserve, a whiskey brand that is a true innovator (Ocean aged whiskey anyone?), and a whole list of other liquor brand names.

We are also noticing Gosling's rum and Jefferson's Reserve on the top shelf of more bars, restaurants, and in liquor stores, which is always a good sign.

Third, we think the alcohol space is a good place to be invested in. The alcohol industry is consolidating rapidly with acquisitions left and right. As ROX builds up its brand recognition, especially for Gosling's, we think it makes more and more sense for the entire company to be scooped up. The Rum space is a division of the alcohol industry that is posting some of the strongest growth figures, and it is clear that Rum sales have not yet peaked. It is also clear that, besides Bacardi, there is not one dominant top shelf brand name, and we believe Gosling's is leaving its mark and building up its brand to be that top shelf name as time goes by.

Also, it is worth noting that there are very few companies left out there that have recognizable brand names and sport a market cap of only $260M. All the others have already been acquired, and a ROX acquisition may be inevitable for any of the big industry names that are looking to add a strong rum brand to its arsenal.

Fourth, ROX is finally about to step out of the red and into the black. It'd be premature to exit an investment in this company just as it turns profitable.

And lastly, one more thing to consider:

"Along with higher unemployment and bankruptcy, an economic recession brings increased drinking of alcohol, a study suggests. The increased use of alcohol includes binge drinking, problem drinking, and driving under the influence. The study is published in Health Economics."

 As the economy slumps, alcohol consumption increases.

We think this is a safe name to be in, just in case the economy loses its thunder and stagnates for a period of time, consumption should increase and more attention should be placed on these stocks. 

We have a handsome unrealized gain on our core ROX position, but we think there is plenty of more room to run in the long term, and for the above reasons, our intention to sell Castle Brands in non existent.

We have previous, in depth write ups on ROX and the ongoing progress of its turnaround plan under the Pro Research tab above. Thanks for reading.

Our Largest Position Is TransEnterix, Here's Why

By The Wall Street Fox → Saturday, October 18, 2014
TransEnterix (TRXC) is our largest position, and we explain why below. First, it should be noted that our investment horizon in this name is very long term (2018+), this is a small cap speculative and risky stock that is subject to volatile price swings, and collectively as a group (including friends/family members), we own nearly 30,000 shares, so we benefit greatly from price appreciation and we have a bullish, positive bias in the name.
We first initiated our position in the summer of 2013 when TransEnterix wasn't TransEnterix, it was SafeStitch Medical (SFES), a medical device company focused on minimally invasive procedures. SafeStitch was controlled by Phillip Frost and his affiliates, and we did very well investing in other Phillip Frost stock names (ROX, LTS, NVCN), so we took a blind stab at SFES.

In September of 2013, SFES conducted a reverse merger with TransEnterix, which was private at the time, and just like that, we became invested in an entirely new company that was also focused on minimally invasive medical devices. Shares quickly doubled and we sold our entire position.

But then we did some research into the newly merged company, and what we saw was, to us, a groundbreaking technology that held immense value. We quickly re-initiated our position, and ever since, we have been gradually adding more and more shares to the point where it represents upwards of 40% (rough estimate) of our entire investment portfolio.

Here's the first video we saw that showcases TransEnterix's technology and convinced us to immediately re-initiate our position, this video right here helped us understand everything about the company, its technology, and the market potential for its device, and this video here demonstrated how valuable TransEnterix's technology can be to patients undergoing general surgery. Thank you YouTube for enabling us to make investment decisions.

Now, notice that all of those videos are upwards of 3+ years old, what's been going on since then? TransEnterix's flexible SPIDER was sold as a disposable device for ~$1,000 that was replaced for every surgical procedure. After receiving FDA approval in 2009/CE Mark in 2010 and being on the market for ~3 years (to date, sold ~4,000 SPIDER's), TransEnterix received enough feedback from surgeons that warranted product development for a next generation device. That device is called the SurgiBot, and it will completely alter TransEnterix's business model for the better. This is an inflection point that warrants attention. The left pic is an early model of the SurgiBot, below is the final version.

Instead of selling a $1,000 disposable SPIDER device for every surgical procedure, TransEnterix will sell the SurgiBot to the hospital for a one time fee of $500,000, and then charge $1,000 for the disposable instruments for every surgical procedure, and an annual service fee of ~$50,000. So now TransEnterix will be receiving a nice chunk of change from the one time SurgiBot sale, in addition to recurring revenue from both surgical procedures and annual service fees. Now compare this to the SPIDER's sole recurring revenue stream from surgical procedures.

We strongly feel that this business model is the real game changer that will seriously accelerate TransEnterix's value once the SurgiBot is launched. We also strongly feel that the SurgiBot will receive FDA (510k) approval with no hiccups ~6 months after it files its submission to the FDA, which will occur in Q4 (we are estimating December to be conservative, which leads to approval in ~June 2015 and commercialization shortly after). These two factors, for us, mitigate a serious amount of risk, which is why we feel so compelled to consistently add shares to our position almost every single week (the RobinHood app lets us buy in small lots without the pain of commission fees, so we are constantly adding). Now why are we so confident? Because both of the assumptions we made above have been tested, and proven before.

Intuitive Surgical (ISRG) has the same exact business model, and they're growth (and stock price) resembled a hockey stick following its FDA approvals and commercialization in the early 2000's. This business model works, plain and simple. With regards to SurgiBot FDA approval, we think everything will run smoothly because the SurgiBot utilizes the same core technology as the SPIDER which was already approved by the FDA five years ago. TransEnterix is going by the books with pre submission filing/feedback from the FDA, the FDA signaled that the company will not have to conduct a human clinical trial to obtain approval, and TransEnterix will be able to include data from its 3,500+ SPIDER surgeries in the SurgiBot FDA submission filing. Having a former FDA medical device regulator as an executive employee doesn't hurt TransEnterix's chances of approval either. This company knows what it's doing.

CEO Todd Pope was the former president of JNJ's multi-billion dollar medical device unit Cordis, CFO Joe Slattery was former CFO of Baxano Surgical (BAXS), which is a near bankrupt medical device company that focuses on spine procedures, but before Baxano, Slattery played an instrumental role at Digene Health as CFO which was eventually acquired. COO Richard Mueller has extensive experience at launching successful medical devices, VP Mohan Nathan is a former Intuitive Surgical employee who is enthusiastic about communicating the value proposition of TransEnterix (he's in video above), and the list goes on. Not to mention, TransEnterix has the duo billionaire investment team Phillip Frost and Jane Hsiao behind them, along with ~6 health focused venture capital firms that funded the company when they were founded/still private. Institutional ownership has picked up also since the company was uplisted to the NYSE and included in the Russell 2000 index. Now let's look at a chart.

Above is the weekly. We see a gradual uptrend that continues to show (rising) support for the stock.

Here's the daily chart. We see a clear gap that we feel will eventually, inevitably fill at ~$8.50.

In our opinion, the chart doesn't look bad, we see a lot of sideways churning, and the moving averages are finally falling back near the current price level. And after dealing with that 50% drop back in April, we realized that our view in the company had not changed in the slightest bit, which warranted steady accumulation to bring down our cost average and increase our exposure. Now we simply view these $3.50-$4.00 ranges as a gift that won't last forever. Our current cost average, roughly (we own on multiple brokerages), is the mid $4's.

Why is the SurgiBot even a good buy for hospitals? What is the value proposition? The SurgiBot will cost a fraction of the $2M+ for ISRG's da Vinci device, the SurgiBot is mobile and easy to move between operating rooms, surgeons will conduct operations at the patients side and have full 100% tactile feedback while operating the device (not so for competitor devices), this expedites the training of surgeons for use of the device. The small profile of the SurgiBot allows for more bed assistants during the procedure, the small 25mm belly button incision reduces recovery time for patients and saves costs for hospitals. The SurgiBot provides strength, dexterity, and ergonomics for the surgeon, and the 3D screen with 3D glasses allows all bed assistants to have the same exact view as the surgeon when assisting during an operation, rather than the surgeon staring into a computer console 10 feet away from patient with the only 3D view.

There's a lot more positives to list off. TransEnterix has developed the first flexible ligating shears, which alone is a $2B annual market, and not only are these the first flexible tissue cutting shears, they produce almost zero plume and smoke when cutting through human tissue, which is unheard of. The company has a large IP portfolio and a strong legal team that is confident they did not infringe on any of Intuitive Surgical's patents, which all expire in 2014/2015/2016 anyway. The company already has a base of surgeons under its belt with the SPIDER device and they have some world renowned surgeons who are adamant about their product.

There are risks, JNJ announced they are looking to enter the Surgical Robotics market with their own device, and ISRG has released a single port version of their flagship device but it still carries a hefty price target, is bulky, and is not as flexible as the SurgiBot. TransEnterix is set to become the first true competitor of ISRG to hit the market, but there is another name, Titan Medical, which is developing a similar product but they are more than a year behind TRXC and we feel their competing product is inferior to the SurgiBot because it mimics ISRG's da Vinci in the sense that the surgeon is not patient side and is instead operating via a computer joystick console 10 feet away from the patient and has zero tactile feedback, which is an essential guide surgeons need during operations. The lack of tactile feedback is what has led to severe health complications and even death for patients under ISRG's da Vinci and these events have led to several lawsuits. Regardless of competition, the market is large and expanding every year and there will be room for more than two players. Other risks include the FDA blocking approval of the device (we don't think will happen) or surgeons simply opting to not utilize surgical robotics (we don't think this will happen).

Now, let's talk about hypothetical elementary stock valuation. Most of the Analyst's have an average 12 month $9-$10 price target, but longer term, how big can TransEnterix get? We think big. TransEnterix's market potential is 2M annual surgeries, their low price point allows them to penetrate smaller hospitals and private surgery practices that ISRG cannot enter due to their high pricing, and the company should be approved for multiple surgical applications, expanding its potential market. TransEnterix is currently worth ~$250M, while Intuitive Surgical has a value of $17B. If TransEnterix is valued at just a tenth of what Intuitive is, shares would be trading at levels of $27+ per share. If, over time, TransEnterix manages to grow and be valued at half of what TransEnterix is, shares would be trading at levels of $120 per share. Just some food for thought, obviously those types of valuations will TAKE YEARS AND YEARS to be realized by the market, but we think it is without a doubt in the realm of possibility. And for sh*ts and giggles, if TransEnterix reaches Intutive Surgical's current market cap of $17B, you're talking about a $270+ stock. We like to dream. (ISRG did it, they went from $10 to $600 over a 10 year period).

Thanks for reading our scattered thoughts, these are just our opinions and shouldn't be taken as advice

We have even more information written up in two articles that can be found under the Pro Research Reports tab above. We view this one as a clear long term winner. The company has 6 analysts covering the stock, (all buy recommendations) and we have access to two of those reports. Send an email if you'd like to view the analyst's view/projections.

What They're Not Telling You About The Russell 2000

By The Wall Street Fox → Wednesday, October 1, 2014
The Russell 2000 has experienced some serious technical damage over the past few weeks. From the recent death cross to the large breadth of selling to the downward sloping moving averages, it hasn't been pretty and the move has picked up a lot of traction with financial media outlets. Today the media was hyping the fact that the Russell officially entered correction mode after dropping 10% from its all time high posted back in July. Here's one signal from the Russell 2000 that the media isn't telling you about, and we feel it is quite significant, and may signal a dead cat bounce at the very least. Two words: triple bottom.

After a massive 2013 run up, we believe the small cap index is utilizing 2014 as a period of consolidation before attempting to grow legs and make another run higher. The Russell is taking a breather, this is normal after such a monster run. The index has developed a triple bottom, which is bullish for the long term (if it can hold, that is), and confirms actual consolidation is taking place. While the lagging performance of the Russell 2000 is being hyped by the financial media, and for that matter, when anything is being hyped by financial media outlets, it is wise to take a step back and look at the bigger picture. So let's do that.

We see consolidation, and we see what everyone in panicking about as a tiny blip on the radar. The Russell has broken the 50 day before, consolidated for a bit, and then continued its uptrend. That's how it works in a bull market, we're in a bull market, and we don't believe an Ebola scare or Hong Kong tensions is going to mark a top in this bull market.

Nokia Plays It By The Book. Look For Old Resistance To Become New Support

By The Wall Street Fox →
Nokia has been making textbook technical moves/indicationsfor more than two years. The stock truly goes by the book, which is an old school move, especially when considering the parabolic price action seen in many broad stocks, spanning from momentum names to blue chip companies. Well rightfully so for the Finnish giant (big fish small pond, or small fish big ocean?), Nokia is 143 years old! It's was an easy call back then, it's an easy call right now.

 Looking to add more Nokia or initiate a position? We'd suggest you wait for a potential test of old resistance around $8.35

Following an upwards breakout, old resistance becomes new support. Looks like Nokia wants to test its old resistance level, near the $8.302-$8.36 level, raise its flag and declare it as new support. We feel fundamentals back up the projection drawn above. As the dollar strengthens against the euro, it is reflected in the stock price, and with the dollar keeping up its pace, it can be a slow bleed for Nokia for the next 1-2 weeks if there is no material news released. At the same time, we feel like a strong earnings report showing revenue improvement from recent contract wins and operating margins in the high range of guidance (looking for 9%+), can provide a significant catalyst for strong price action. Earnings are expected 10/23. We continue to hold Nokia for the long, long, very long term. We are patiently awaiting our 2014 dividend...and 2015...and 2016.