Here’s another free stock pick to start the new year. We think now is an especially important time for trust-worthy research, as detailed in our latest training: Unveiling a Trust-Based Rating System for Smarter Investing. We put our money where our mouth is by providing free research and training.

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Which leads us to our free stock pick this week from our Most Attractive Stocks Model Portfolio. This Model Portfolio scans the entire market to find the best stocks. Only the best.

We leverage our proven superior data to ensure we truly know the earnings of every stock we cover.  Our proprietary reverse Discounted Cash Flow models give us unrivaled insight into the valuation of stocks. Combining superior earnings and valuation research produces stock ratings that are proven to outperform. 

So, when we share this free pick, you are getting the product of lots of hard work by many experts using cutting-edge Robo-Analyst technology developed over 20+ years.  In other words, this freebie is valuable.

Keep an eye out for the free pick from our Most Dangerous Stocks Model Portfolio, which will be published this week as well! The work that goes into that report is just as valuable.

Without further ado, you can find the free pick below along with a concise summary of why we like the stock. It is not a full Long Idea report, but it gives you insight into the rigor of our research and approach to picking stocks. Whether you’re a subscriber or not, we think it is important that you’re able to see our research on stocks on a regular basis. We’re proud to share our work.

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We update this Model Portfolio monthly. The latest Most Attractive and Most Dangerous stocks Model Portfolios were updated and published for clients on January 8, 2024.

Free Most Attractive Stocks Pick: Tenet Healthcare Corp (THC)

Tenet Healthcare (THC: $130/share) is the featured stock from January’s Most Attractive Stocks Model Portfolio.

Tenet Healthcare has grown revenue and net operating profit after tax (NOPAT) by 6% and 16% compounded annually since 2013, respectively. Tenet Healthcare’s NOPAT margin increased from 5% in 2013 to 12% in the TTM while invested capital turns fell from 0.9 to 0.7 over the same time. Rising NOPAT margins are enough to offset falling invested capital turns and drive Tenet Healthcare’s return on invested capital (ROIC) from 4% in 2013 to 9% in the TTM.

Figure 1: Tenet Healthcare’s Revenue and NOPAT Since 2013

Sources: New Constructs, LLC and company filings

Tenet Healthcare Is Undervalued

At its current price of $130/share, THC has a price-to-economic book value (PEBV) ratio of 0.7. This ratio means the market expects Tenet Healthcare’s NOPAT to permanently decline by 30%. This expectation seems overly pessimistic for a company that has grown NOPAT by 10% compounded annually since 2018 and 16% compounded annually since 2013.

Even if Tenet Healthcare’s NOPAT margin falls to 9% (below TTM NOPAT margin of 12% and five-year average margin of 10%) and the company’s revenue grows just 2% (below ten-year compound annual growth rate of 6%) compounded annually through 2033, the stock would be worth $160/share today – a 23% upside. In this scenario, Tenet Healthcare’s NOPAT would grow <1% compounded annually through 2033. Should Tenet Healthcare grow profits more in line with historical levels, the stock has even more upside.

Critical Details Found in Financial Filings by Our Robo-Analyst Technology

Below are specifics on the adjustments we made based on Robo-Analyst findings in Tenet Healthcare’s 10-Qs and 10-Ks:

Income Statement: we made over $2.2 billion in adjustments, with a net effect of removing around $1.5 billion in non-operating expenses. Professional members can see all adjustments made to Tenet Healthcare’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.

Balance Sheet: we made over $7.4 billion in adjustments to calculate invested capital with a net increase of over $5.1 billion. One of the most notable adjustments was for asset write downs. Professional members can see all adjustments made to Tenet Healthcare’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.

Valuation: we made over $22.0 billion in adjustments to shareholder value, with a net decrease of around $15.9 billion. The most notable adjustment was for total debt. Professional members can see all adjustments to Tenet Healthcare’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.

This article was originally published on January 24, 2025.

Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.

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