Best stock ideas (Fri, Nov 10)

It's evident that despite a temporary 6% dip with no news, LQDA presents a highly favorable investment opportunity with a possibility of doubling or tripling in the next year, and potentially increasing tenfold in 3-5 years. With a focus on pulmonary arterial hypertension (PAH)—affecting approximately 500,000 globally, including 50,000 treated in the U.S.—PAH's severity ranges from asymptomatic to severely activity-limiting. Treatments primarily involve vasodilators like Treprostinil, with Tyvaso (UTHR's inhaled version) leading the $5B+ PAH market. LQDA's Yutrepia, another inhaled Treprostinil variant, challenges Tyvaso, offering higher doses and a low-resistance inhaler, addressing the expanding PAH market, including patients with interstitial lung disease and chronic obstructive pulmonary disease. The drug has been tested and approved, however United Therapeutics filed a lawsuit against Liquidia for patent infringement. Despite UTHR's litigation attempts, the majority of patent claims against LQDA have been invalidated or deemed non-infringed, clearing a likely path for Yutrepia’s market entry. With UTHR's market cap heavily reliant on Tyvaso, if LQDA captures even half of this market, it could equate to a $3.6B valuation for LQDA—a substantial increase from its current valuation, potentially yielding a share price of $15, up 130%, within six months post PTAB appeal.

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FIS is a leading provider of technology services for financial institutions globally. The stock has underperformed in recent years, but we feel FIS is attractive following the announcement of the sale of a majority stake in Worldpay, its merchant acquiring business. The pending sale should enable greater financial flexibility and operational focus for the two separate companies. FIS’s Banking Solutions segment is comprised of outsourced central account processing and back-office technology infrastructure for banks, while FIS’s Capital Markets business offers industryspecific software for a variety of financial services firms. Collectively, these business units are characterized by long-term contracts, strong client retention, high recurring revenue and >40% EBITDA margins. A recovery in the stock will take time, but we believe the odds of success are high, given its greater focus on the banking and capital markets businesses. Its compelling sum-of-the-parts valuation gives us further confidence in downside support.

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Miller Industries is the world’s largest manufacturer of towing and recovery equipment with four manufacturing facilities in the US (its core market) and two in Europe. The company is the dominant player in its space, with a large stable of brands and the largest distribution network in North America, through which it sells products across all 50 states. Miller has a long track record of steady growth and consistent returns with a conservative balance sheet. Further, its management team has a history of sound capital stewardship and dividend payments to shareholders. We believe the company will benefit from ongoing customer demand tailwinds and a favorable pricing environment, while recent capital expenditures and M&A should benefit the margin profile.

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Eurotel, a Polish retail operator with over 300 stores selling telecom and consumer electronics from brands like T-Mobile, Canal+, and Apple's "iDream," is my latest investment. The company has impressively doubled its revenues in the past seven years, maintaining stable gross margins around 17-18%, and last year generated 630 million PLN in revenue with an asset base of just 200 million PLN, leveraging high asset turnover. While there is a dependency on suppliers, Eurotel has diversified since its T-Mobile-centric beginnings, albeit still with a significant concentration risk. The business model, which includes franchising, services, and B2B solutions, requires minimal capital for growth and has a tradition of distributing most earnings as dividends. After a peak year in 2022 with record earnings and dividends per share over 10 PLN—partly due to a one-time gain—2023 projects an earnings shrink to 3-4 PLN/share, attributed to changing customer sentiments, inventory surplus in B2B clients, and tighter financial conditions, alongside concerns over the impact of a higher minimum wage on profitability. However, this downturn seems cyclical, as indicated by the "more normal" EPS between 2019-2021. An estimated earnings power of around 6 PLN/share suggests that at the current price of around 40 PLN, Eurotel presents an appealing investment opportunity.

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Tapestry's fiscal Q1 2024 earnings, powered by Coach's 3% sales growth, surpassed expectations despite weaker performance from Kate Spade and Stuart Weitzman. The company's shares have dipped 33% since announcing the acquisition of Capri for $57 per share, expected in 2024, but the deal is seen as fair and likely to strengthen Tapestry's position in midprice and luxury handbags. Despite a slight sales miss and lowered fiscal 2024 standalone sales guidance to $6.7 billion, due to currency and brand challenges, Tapestry maintains its $4.10-$4.15 EPS projection. Analyst David Swartz believes the shares are very attractive, maintaining a $60 fair value estimate. Coach's success, especially in handbags, and strategic cost-cutting contribute to Tapestry's narrow moat rating, with expectations of a robust presence in the growing Chinese luxury market. The Capri acquisition should enhance Tapestry's global luxury status, though it brings risks including increased debt and potential margin dilution. The company's strategic initiatives and Capri's integration are expected to yield significant cost synergies, supporting long-term growth and profitability. Despite high debt post-acquisition, Tapestry is projected to have strong free cash flow, allowing for future debt reduction and potential share buybacks, while maintaining dividends.

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Dentalcorp, Canada's largest dental practice consolidator, trades at an attractive valuation with a substantial opportunity for growth and margin improvement. Since its inception in 2011, it has grown to over 500 practices and has a pipeline of 690+ potential acquisitions that fit strict criteria, including practice size, revenue, EBITDA, staff age, clinical reputation, and location. Dentalcorp enhances practice EBITDA by 10-15% within a year through operational efficiencies and technology improvements, retaining 95% of dentists post-acquisition with long-term service agreements and incentives. The Canadian dental market, resistant to recession and inflation, is expanding alongside the middle class. Despite market concerns over its high leverage (4.2x net debt to EBITDA), Dentalcorp's debt is largely at fixed rates with swaps expiring in 2026, allowing for manageable leverage reduction through cash flow growth and strategic acquisitions. Currently trading at 9.3x run-rate EBITDA and 8.1x 2024E EBITDA—below the >12x TEV/EBITDA of comparables—Dentalcorp presents over 50% stock price upside, positioning it as an attractive investment in the essential and growing dental services market.

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