The bitcoin rally marches on, as the cryptocurrency hits $92,000. Mike Tyson and Jake Paul put on what can questionably be called a fight. Just a few years ago, such events might have seemed like they’re pulled out of a random name generator. When the headlines are wonky, the market can often follow suit. We’ve seen record highs, but also record high valuations, with the Schiller CAPE ratio nearing heights only seen a few times in history.
At New Constructs, there’s no need for a random name generator to navigate the market. Instead, we leverage our superior fundamental research to identify the best and worst risk/reward in the market, no matter a raging bull or bear market.
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Below we feature a stock from our Most Attractive Stocks Model Portfolios. This feature provides a concise summary of how we pick stocks for these Model Portfolios. 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.
We’re not giving you the name of the stock featured, because that’s only available to our Pro and Institutional members. But, there’s still so much to see here. We want you to see how much work we do; so you know where to set the bar when evaluating research providers.
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We update this Model Portfolios monthly. November’s Most Attractive and Most Dangerous stocks Model Portfolios were both updated and published for clients on November 6, 2024.
October Performance Recap
In the Most Attractive Stocks Model Portfolio, the best performing large cap stock gained 11%, and the best performing small cap stock was up 20%. Overall, 19 out of the 38 Most Attractive stocks outperformed the S&P 500.
This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior[1] fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.
All of our Most Attractive stocks have high (and rising) return on invested capital (ROIC) and low price to economic book value ratio.
Featured Stock: Consumer Cyclicals Company
This company has grown revenue and net operating profit after tax (NOPAT) by 2% and 4% compounded annually since 2013, respectively. The company’s NOPAT margin increased from 4.8% in 2013 to 5.7% in the TTM and invested capital turns rose from 1.8 to 2.0 over the same time. Rising NOPAT margins and invested capital turns drive return on invested capital (ROIC) from 9% in 2013 to 12% in the TTM.
Figure 1: Revenue and NOPAT Since 2013
Sources: New Constructs, LLC and company filings
This Most Attractive Stock Is Undervalued
At its current price of $11/share, this stock has a price-to-economic book value (PEBV) ratio of 0.4. This ratio means the market expects the company’s NOPAT to permanently decline by 60%. This expectation seems overly pessimistic for a company that has grown NOPAT by 4% compounded annually since 2013 and 18% compounded annually since 2018.
Even if the company’s NOPAT margin falls to 3.1% (equal to ten-year average NOPAT margin and below TTM NOPAT margin of 5.7%) and revenue grows just 1% (below ten-year compound annual growth rate of 2%) compounded annually through 2033, the stock would be worth $14/share – a 23% 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 this featured stock’s 10-Qs and 10-Ks:
Income Statement: we made over $7.4 billion in adjustments, with a net effect of removing over $2.1 billion in non-operating expenses. Professional members can see all adjustments made income statements on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made over $75 billion in adjustments to calculate invested capital with a net increase of just over $1 billion. One of the most notable adjustments was for asset write downs. Professional members can see all adjustments made to balance sheets on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made nearly $49 billion in adjustments to shareholder value, with a net decrease of around $12 billion. Apart from total debt, the most notable adjustment was for excess cash. Professional members can see all adjustments to valuations on the GAAP Reconciliation tab on the Ratings page on our website.
…there’s much more in the full report. You can start your membership here or login above to get access to this report and much more.