After Serious Outperformace in 2013, Needham & Company Lays Out 2014's Top Stock Picks

December 20, 2013 12:58 PM EST
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Price: $57.91 +2.28%

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    2 Buy, 9 Hold, 2 Sell

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Needham & Company just released their 2014 Top Picks, which is a good thing since last year's picks outperformed the market with a gain of 36% versus 27% for the S&P 500.

Needham & Company's 2014 Top Picks:

Advanced Energy Industries (NASDAQ: AEIS) (price target $27): Advanced Energy Industries is our Top Pick for 2014, based on its top-line growth potential, strong earnings leverage, and low valuation. Splitting between the solar and semicap sectors, we believe AEIS is an overlooked name despite rising over 50% in 2013. We expect strong management execution will drive earnings growth ahead, enabling the stock to trade higher in 2014

Aerie Pharmaceuticals (NASDAQ: AERI) (price target $18): Our 2014 top pick is Aerie Pharmaceuticals, a development-stage specialty pharma company focused on the glaucoma market. Aerie's product candidates include the phase 3-ready AR-13324, which represents the first potential novel mechanism of action for glaucoma in over 20 years, and PG324, a triple-action fixed-dose combination of AR-13324 and the market-leading PGA latanaprost. These product candidates will target the entire spectrum of current glaucoma pharmacotherapy, a ~$2 billion U.S. market opportunity, and, in our view, could potentially emerge as a best-in-class treatment option given MOA novelty and triplicate mechanisms.

Atmel (NASDAQ: ATML) (price target $10): We model for operating margins to double in 2014 to 18% from 9% in 2013. Over the past several quarters, ATML has continually delivered on its gross margin expansion initiative, having driven margins up roughly 2.5 points from their 1Q13 trough. ATML is only 20% complete with its 1200bps gross margin expansion, which we think will materialize in 1H14. Despite multiple setbacks in the rollout of its XSense metal mesh touch sensor, ATML finally achieved Windows 8 certification in early November, and announced that it secured a design win for XSense and its touch controller in HP’s 10in Omni tablet in December. This coupled with cyclical recoveries in the Automotive and Industrial end markets gives us increased optimism for shares moving into 2014. We would expect ATML to outperform its peer group in 2014, as multiple quarters of R&D investment should begin to bear fruit, margin expansion flows through to the bottom line, and the risk-reward profile looks favorable exiting the year.

Black Diamond (NYSE: BDE) (price target $18): After three years of planning and preparation, BDE launched its first line of Black Diamond branded apparel. The initial line is limited to menswear, primarily for hiking and climbing. The spring and fall lines in 2014 will see a significant increase in SKUs, the initial shipments of women’s apparel, and a sharp expansion in retail distribution. We believe that within five years, apparel will generate more revenue than the entire company’s 2013 sales, and is likely to be around half its total sales.

Broadsoft (NASDAQ: BSFT) (price target $25.50): Broadsoft is our top pick for 2014. Following a challenging year in 2013 in which the company (and the stock) saw headwinds on a number of fronts, we see a much better setup for Broadsoft in 2014. With reset 2014 expectations that require very modest organic growth to be achieved, and with a fast-growing SaaS-like revenue stream from its BroadCloud business, we think company is poised to show much crisper execution in 2014 and likely see its multiple expand from its current level of ~14.5x our ex-cash 2014 NG EPS estimates. We see potential for upward revision to our estimates and our $30 price target, which is based on a reasonable 18x ex-cash multiple applied to our 2014 ex-cash NG EPS estimate.

Clean Harbors (NYSE: CLH) (price target $66): Heading into 2014, we believe CLH is well poised for recovery, and the stock is our top pick for 2014, given the combination of particularly poor sentiment around the name and what we see as conservative guidance that is achievable with very little change to the revenue base. We believe most of CLH’s businesses are faring well, and that those recently under pressure have more upside potential than downside risk. Overall, we expect to see double-digit EBITDA growth for 2014, and we believe that even “met expectations” could drive some expansion of the multiple. We note that our $66 target is based on <8.5x EV/14E EBITDA of $625 million.

Cray (NASDAQ: CRAY) (price target $30): Cray is targeting revenue growth of 15%+ over the next few years with GM% expanding into high 30%s range (based on mix of more storage and YARC) and OM% more consistent trending into 5-10%

Cvent (NYSE: CVT) (price target $48): We highlight Cvent as a top pick for 2014. Despite being up roughly 76% since its IPO pricing in August 2013, we believe that Cvent is still (and somewhat surprisingly) off SaaS investors’ radars. Cvent is a dominant provider of a comprehensive SaaS Event Management platform to event planners and hotels/venues, and represents one of the highest-quality SaaS names in our universe with numerous, untapped growth opportunities. Given the magnitude of the market opportunity, dominant competitive advantages, and numerous potential growth drivers (including monetization of the network), we’re estimating that Cvent could drive solid premium revenue growth rates (and modest profitability) through the intermediate term, which suggests sustained premium SaaS valuations as investors get more familiar with the opportunity. Our price target of $48 is predicated on 12.5xEV/14E revenues, which is relatively consistent with valuations of other upper echelon SaaS stories.

Finisar (NASDAQ: FNSR) (price target $31): Finisar seems more confident in its outlook than it has been in a number of years. The logic of their demand story and the potential for upside to our forecast gives us increasing confidence in the stock. We expect FNSR to solidly outperform the market over the next year, driving solid double-digit top-line growth, expanding gross and operating margins, and further upside to our estimates.

Hologic (NASDAQ: HOLX) (price target $26): We believe FY14 guidance is conservative and leaves room for revenue and EPS upside. While we expected HOLX to guide to roughly flat revenue and EPS in FY14, it instead guided to a 1-3% decline in revenue growth and 8-12% decline in non-GAAP EPS. While HOLX announced a $250 million repurchase program when it reported its F4Q13 results, guidance does not include stock repurchases. We estimate that share repurchases could add up to $0.06, or 4%, to FY14 EPS. The analyst also said CEO Steve MacMillan should help restore investor confidence and they still see potential for restructuring, divestitures, a break-up, and sale of the company.

LifeLock (NASDAQ: LOCK) (price target $18): We believe 2014 is going to be a year of acceleration for LifeLock, a leader in personal identity security and monitoring. One of the key indicators of momentum in LOCK’s business is the Ultimate product option, priced at $25 per month. After several quarters of consistent “low/mid 30%s” attach rate for new subscribers, there was a
jump to “40%+” in the June and September quarters in 2013. We believe the newly adopted segmentation strategies to attract subscribers (new age groups, gender focus, etc.) is providing a growth catalyst for LifeLock. We view LOCK as a well-operating marketing engine, which is now layering on new, incremental marketing
strategies; these changes may result in growth acceleration in CY14, and we believe our estimates for CY14 may be conservative. We reiterate our Buy rating and $18 price target, which is 3.5x EV/CY14 revenue.

MaxLinear (NYSE: MXL) (price target $12): MaxLinear has been one of the best performers in our coverage universe over the past 12 months, consistently meeting or modestly exceeding guidance and expectations. Moving into 2014, we expect continued strong performance as MXL diversifies its revenue stream, executes on its satellite gateway and ODU opportunities, and maintains its leadership position in analog RF design using standard CMOS process technology. We expect MXL shares will benefit from the combination of robust revenue growth and operating leverage in 2014. Our 12-month price target of $12 is based on an enterprise value of 2.5x our 2014 revenue estimate, which implies greater than 35% upside to the current share price.

NPS Pharmaceuticals (NASDAQ: NPSP) (price target $28): NPS launched Gattex for the treatment of Short Bowel Syndrome in February 2013. Management reiterated 2013 sales guidance ($28-32MM) in December and announced that the lower limit of guidance for number of patients on drug by year end 2013 (275-325) had already been reached. Given substantial impact on patient quality of life (1/3 of patients treated for 30 months in the development program no longer require parenteral nutrition) and the absence of a competitive agent on the market or under ($28-32MM) in December and announced that the lower limit of guidance for number of patients on drug by year end 2013 (275-325) had already been reached. Given substantial impact on patient quality of life (1/3 of patients treated for 30 months in the development program no longer require parenteral nutrition) and the absence of a competitive agent on the market or under development, we believe the drug has $1 billion+ worldwide peak sales potential. We expect continued Gattex penetration of the U.S. market and expansion into ex-U.S. markets as well as launch of the company’s second product, Natpara, to drive the stock in 2014.

OncoGenex Pharmaceuticals (NASDAQ: OGXI) (price target $30): Despite a well-executed year, shares of OncoGenex have performed poorly in 2013 and are still trading near 52-week lows. While a rapidly changing prostate cancer landscape may be spooking investors out of owning OGXI, we believe these concerns are nothing new and that the company is well positioned for the long term. The key upcoming driver for OGXI shares, pivotal SYNERGY data, is <6 months away, and our conviction for positive data remains high.

Pandora Media (NYSE: P) (price target $33): The firm cited: Strong Growth, Core Business Momentum, Local Ad Revenue Upside, Greater Pricing Power, Mobile, Internet of Things Growth, International, Strong Consumer Fundamentals and valuation.

Proto Labs (NASDAQ: PRLB) (price target $90): PRLB shares are off more than 20% since the company reported stronger than expected 3Q results in late October and guided to 4Q revenue growth of 25-34%. We believe the pullback reflects profit-taking, with the stock still up more than 65% year-to-date even after the correction, and increased investor focus on 3D printing technology, which we regard as complementary to PRLB’s business rather than a near-term competitive threat. PRLB, which has built a highly profitable business supplying quick-turn, short-run injection-molded parts, has compiled an impressive five-year revenue CAGR of 29%. We believe PRLB can continue growing 25% or more over the next several years as it expands its penetration of a large untapped market, introduces new materials and rolls out new services. We believe PRLB shares can outperform the broader market in 2014 and, with the recent pullback in the stock, we regard it as a top pick for 2014 in our Advanced Industrial Technologies coverage universe.

Rocket Fuel (NASDAQ: FUEL) (price target $75): We believe the scale of Rocket Fuel’s computational infrastructure coupled with its predictive modeling and automated decision making create a disruptive force. Through the application of artificial intelligence, FUEL’s platform increases speed, accuracy and scalability of the ad buying process.

Silicon Labs (NASDAQ: SLAB) (price target $47): The analyst cited: Poised to Capitalize on the Internet of Things, The 2013 MCU Transition Is Over, 2014 Cost Controls To Drive EPS Upside, Trading Near Prior Low Multiples

Western Digital (NYSE: WDC) (price target $100): Despite a more than 90% move in 2013, we highlight Western Digital as one of our top picks for 2014. We believe that investors are only now becoming aware of the company’s place in the Cloud, the SSD opportunity, and what the upcoming year might bring in terms of savings from the expected HGST integration.

Xoom (NASDAQ: XOOM) (price target $40): Xoom is our top pick for 2014. It has been a strong and consistent performer during its first year as a public company, and we expect the momentum to continue next year. We believe XOOM represents an open-ended secular growth story, supported by a large and expanding TAM, high barriers to entry, a scalable operating model, and scarcity value in the FinTech space. We believe there is potential for upside to our and consensus CY14 estimates from the ongoing shift to online cross-border money transfer, boosted by increase in mobile transactions; expansion into new send and receive markets; and an improvement in the loss ratios. We would be aggressively buying on recent weakness and reiterate our Buy rating and $40 target price.

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