Two months ago we initiated coverage of autonomous (self-driving) vehicles, based on the belief that acceptance of this technology would occur at a faster pace than projected by most analysts. Industry experts predict money spent on this type of technology will swell from current levels of $29 billion to $105 billion over the next five years. And if a company the size of Apple decides to move forward on its smart car project soon, which we think it will, then both the timing and size of that estimate could be materially impacted in a very positive way.

But even if Apple does join the party, we are still looking at a relatively long term time horizon given the degree of engineering complexities, liability issues, and unforeseeable complications that will need to be addressed before all of us leave home for work with a cup of coffee in one hand and a smartphone in the other while our cars chauffeur us to work. For that reason, we don’t expect the “Smart Car” stocks in our Special Situations portfolio to move up in a straight line; the road to long term gains will be bumpy, with many twists and turns along the way.

We have chosen three companies that we believe, taken as a group, represent a smart play on the autonomous vehicle revolution already underway: NXP Semiconductor (NXPI), Mobileye (MBLY) and Covisint (COVS). Recently, all three companies reported quarterly earnings, and so far all of them appear to be on track.

NXP Semiconductor (NXPI), which manufacturers the integrated circuitry that is the “brains” of an autonomous vehicle system, released first quarter results on April 26^th that included a 50% increase in revenue versus the same period in 2015. However, the company reported a decline in earnings per share due to costs associated with acquiring Freescale Semiconductor, coming in at $1.14 a share compared to $1.35 last year.

The costs of the Freescale acquisition had already been factored into analysts’ expectations, so NXP’s share price bounced up 3% based on forward guidance provided by the company that included a 10 – 15% jump in earnings for the next quarter as a result of the merger. Given overall weakness in the semiconductor sector we don’t expect to see significant appreciation in NXP’s share price until the second half of this year, so we recommend buying NXPI up to $97.

High resolution camera manufacturer Mobileye (MBLY) released its quarterly results on May 5^th, highlighted by a jump in first quarter revenue from $46 million in 2015 to $75 million this year. Profitability more than doubled compared to the same period last year, with GAAP Net Income increasing from 4 cents per share to 9 cents.

Mobileye’s share price is about where it was after its IPO nearly two years ago, after peaking above $64 last August. But now that it has established a floor around $35, we feel comfortable owning the stock at current levels. Buy MBLY up to $42.

Cloud provider Covisint Corp. (COVS) is the riskiest of our three picks in this category given its very small size (market cap of $62 million), but also offers the highest potential return given its very low share price (closed last week at $1.53) and strong balance sheet. The company carries no long term debt, and is currently trading at less than its book value of $1.75 per share (of which, $0.93 is cash per share).

The company is scheduled to release its next quarterly and full fiscal year earnings report on June 6^th. Covisint released its previous report back in February, so that news is fairly old by now and isn’t moving the stock. In fact, the company gets very little media attention at all, with only two analysts providing coverage on Yahoo Finance.

Considering that its cloud service platform serves two of the biggest projected growth markets over the next decade, the IoT (internet of things) and autonomous vehicles, it is surprising to see so little attention paid to it. It’s a bit of a gamble, but we think buying it before the annual results – and accompanying forward guidance – are released next week could pay off handsomely, so you can buy COVS up to $2.50.

Jim Pearce

No Insecurity at FireEye

By Benjamin Shepherd

It’s estimated that there are 80 to 90 million cybersecurity events each year and nearly one million new malware threats released every day. Given the sheer number of attacks that occur every minute – never mind every hour or even every day – there’s a huge market for internet security.

FireEye (NSDQ: FEYE) reported its total first quarter revenue was up 34% to $168 million, but surprisingly investors weren’t particularly thrilled with that. They also weren’t happy to see that the company’s GAAP net loss in the quarter went from $0.88 a year ago to $0.98. There was also the unexpected news that Dave DeWalt, the company’s CEO, would be resigning.

However, I don’t see where the news was really that bad. True, product revenue was down 16.2% year-over-year, but that’s mostly because the company is transitioning away from offering hardware and software as one-time purchases. Instead, it is beginning to offer FireEye-as-a-Service (FaaS), in line with the general trend in the industry, which is actually a good thing.

Instead of receiving a single one-time payment for its services, with the FaaS model the company will receive quarterly payments for providing its services. While that shift does create a create a short-term slump in revenue as the company makes the transition, it will smooth out revenue over the long haul. Another upside to the move is that the FaaS model should actually improve FireEye’s gross margins, boosting profitability. We’re already seeing that trend at work, as service revenue shot up 58% in the quarter to $134.3 million.

With more than 4,700 customers in 70 countries, including the U.S. federal and foreign governments as well as a number of large enterprises, clearly the transition to the service model is going well. It also has the advantage of being seen as “best in class” for cybersecurity, with important partnerships with both Visa and HP which can help boost growth. Security is a paramount concern for payment processors – just ask any small business that has had their ability to process credit card payments cut off – so the partnership with Visa is particularly valuable.

While the resignation of DeWalt is being spun in some outlets as a red flag, he’s actually being promoted. DeWalt will be moving up to Executive Chairman of the Board while Kevin Mandia, the company’s current president, is moving up to CEO. So really, the reshuffle is the result of the company’s changing strategy rather than any executive missteps. Nothing to really worry about there.

FireEye undoubtedly faces some pretty serious competition in the space, with deep-pocketed rivals such as Cisco (NSDQ: CSCO) making security products a higher priority. But security is FireEye’s only product and it has spent heavily not only developing its own systems, but also buying up smaller companies with complimentary products. Overall, I believe it holds a defensible segment of the market, though it’s new FaaS model could ultimately make it easier for its users to switch to other companies. That said, I don’t that’s a huge risk since it offers a very effective suite of security solutions.

Continue buying FireEye under $22.

Surf the Whitewave (WWAV) Before It Slips Away

By Joe Duarte

This week we have adjusted the buy ranges for The Whitewave Foods Company (WWAV) and Meridian Biosciences (VIVO).  Whitewave has been increasingly strong of late and seems ready for a breakout. Meridian has been dormant, but pays a nice dividend to patient investors.  We think that the stock is giving us an opportunity to buy on a dip as investors ignore the potential threats of the Zika virus and the company races to deliver a state of the art test for the virus.

Buy the Whitewave Foods Company (WWAV) up to $46

This could be the last opportunity to surf the Whitewave below $50 for a while.  WWAV is a classic Applied Science Investment System (ATIS) stock pick because of its $10 million Louisville, Colorado research and development center where the products are developed and tested.  Furthermore, the company continues expanding its focus on technology in order to speed up its research, development, marketing cycle and its supply chain via an aggressive IT system. 

It’s always a positive development when you’re able to increase the buying range for a stock without having missed a great deal of the potential upside.  But since we recommended WWAV in March, with an initial recommendation to buy between $41 and $44, the stock has performed quite well.   It has done so well that it’s getting close to what could be an explosive break out.  If the stock can get above $45 convincingly, we could see prices get into the low $50 range over the next few weeks.

More specifically, Whitewave looks to be building some buying momentum and is getting ready to add to its recent breakout related to its recent earnings.  The stock has been under steady buying, and has stayed above $42 consolidating in a tight trading range and forming a base from which to launch its next advance.  This type of price behavior is very bullish and is often a prelude to a continuation of the recent move, often with an acceleration of the current trend ensuing.  This is happening because Whitewave is in the midst of a fundamental growth spurt. The company recently reported revenues of $1.04 billion, which beat estimates of $1.02 billion while earnings of 24 cents were just below estimates. Adjusted earnings of 28 cents per share beat estimates of 26 cents per share. More important, WWAV also re-affirmed its Q2 estimates at 29 to 31 cents per share and guided estimates higher for fiscal year to $1.38 to $1.41 per share for 2016.

Whitewave produces Horizon organic milk, Silk almond milk, So Delicious snacks, and Vega protein shakes among other healthy and organic product brands.  The rapid growth via organic development is supplemented by smart acquisitions, including the addition of the popular Earthbound Farm products brand.  Because of its reliance on technology WWAV developed fifty new products in 2015 with a goal of another 50 being released in 2016.

Buy Meridian Biosciences (VIVO) up to $23. 

Meridian Biosciences is a sleeper EBIS (Emergent Biotech Investment System) stock with huge potential based on its easy to deploy and use diagnostic kits for infectious diseases.   We have to admit it; Meridian has been asleep for a long time.  We’ve been bullish on it since June of 2015 and the stock has just been marking time. To be sure, we haven’t lost anything, since it has paid 80 cents in dividends over the period, yielding a nifty 4.25% over the period.    But we’d like to get more out of this stock, so we thought we’d have a look again, and see what we can find.

Meridian’s brand of laboratory tests is Illumigene, and it offers tests for influenza, strep, rotavirus and other diagnostic tests using bodily fluids under the label.  Recently it developed a blood based test for malaria which it is deploying through Africa.  Where the big question is for the company is whether it can rev up its earnings and that may require that it comes up with a test for something very dramatic, such as the Zika virus, on which it is working.  Its malaria test is a significant breakthrough as it is based on a simple method that involves reagents and a drop of blood. It can be administered by anyone with basic training, and it provides a more reliable result within 40 minutes. The old standard required an examination under a microscope of a blood specimen, which was not reliable.  Meridian thinks that it can do the same thing with Zika, which is to create a rapid, easy to administer reliable test that can replace the old standard.  The CDC has asked Meridian to develop such a test for Zika. The company is still awaiting FDA approval for its malaria test.

Meridian had flat earnings and revenues in its March quarter but did improve its gross margins.  It kept its dividend and offered no change in guidance.  It has a solid balance sheet with plenty of cash as well as solid accounts receivables with relatively low debt. It has been acquiring companies with niche laboratory tests over the last couple of years and may continue to do so. There is no panic evident in management who seems to be content to grind out flat earnings for now as it expands its market share via acquisitions and tries to go for the brass ring with its Illumigene platform.

The bottom line, as we see it, is that this remains a long term dividend play for now but that its future could be very interesting if it can develop a reliable Illumigene test for Zika virus. This would be even more significant if Zika delivers on its potential to cause a lot of trouble as the summer season arrives and mosquito populations increase.

Portfolio Summary

This Week’s Changes:

Alert – Meridian Biosciences (VIVO) – Buy limit raised to $23 – 5/20/16 closing price $18.82.  Stock initially recommended on 6/29/15.  Dr. Duarte owns shares in VIVO

Alert – White Wave Foods Company (WWAV) – Buy limit raise to $46.  5/20/2016 closing price $44.69. Dr. Duarte owns shares in WWAV.

Medidata Solutions (MDSO) – Buy up to $42.  Support Level changed to $39. Bought on 3/7/16 at $36 – 5/20/16 closing price $43.05.  Dr. Duarte owns shares in MDSO.