Best stock ideas (Friday, October 20)

Ball is the leading global producer of beverage cans. Upslope was long Ball (briefly) in 2022 before I concluded it was too early. No doubt, the company is still facing challenges. Some are temporary and likely to reverse in the near-term (fully leveraged balance sheet, industry over-expansion, overly aggressive carbonated soft drink (CSD) pricing) or medium-term (Budweiser exposure). Others are highly uncertain (GLP-1 weight-loss drug impact) but are being priced with certainty, assuming no actions on the part of bevcan or CSD producers (e.g. Coke, Pepsi) to offset any still-hypothetical pain. Importantly, Ball’s recent announcement that it is selling its Aerospace unit, which has no strategic relevance to the core bevcan business, for after-tax proceeds of ~30% of the company’s market cap, provides a hard catalyst for shares to stabilize in the year ahead. In addition to de-levering the balance sheet – more important than ever, given the rate environment – the divestiture provides Ball with significant firepower to resume buybacks. The transaction should close in 1H 2024 and seems well-aligned with a bottom or rebound across many of the issues Ball has faced of late. Risks still remain – the issues noted above are all very real, but they are all well-known and mostly temporary, in my view. To be frank, we have already been whipsawed with the latest purchase, as I assumed the market would show more immediate appreciation for the divestiture. But the combination of: low valuation for an economically defensive business with troughing fundamentals and a significant cash windfall seems like an optimal setup for even moderately patient investors.

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Dollar Tree shares, currently priced around $107 after a decline from over $160, present an enticing investment opportunity with a 3-year target price of $200. The company is positioned in the resilient dollar store sector, which has been incrementally capturing a larger share in retail. Since 2016, public dollar stores have seen an approximate 8% annual growth, boosting their presence in their target markets from 3.1% to 3.6%. These stores, including Dollar Tree, have a distinct edge due to their unique value proposition, safeguarded from e-commerce competition. This is evident in their impressive long-term returns and continued physical store expansion, even amid the broader challenges in retail. Furthermore, both the Dollar Tree and Family Dollar segments have substantial room for enhancing sales and operational efficiencies. Significant strides have been made in these areas over the past year, with the multi-price model in particular showing promise for future growth, as exemplified by Dollarama. Under the guidance of the newly appointed Chairman/CEO Rick Dreiling, known for his transformative leadership at Dollar General, Dollar Tree is set to overcome its past underperformances. Contrary to market misconceptions linking Dollar Tree's performance with Dollar General's challenges, Dollar Tree has shown to be ahead in its investment strategy. As it begins to capitalize on past investments and leverage forthcoming opportunities, its projected earnings suggest a promising growth trajectory. Based on historical trading patterns and conservative EPS estimates for FY26 at ~$10.75 (before considering buybacks), the stock's potential price range lies between $190-230, translating to a 3-year IRR between 23-30%. This analysis indicates an upside of over 85% over the next three years, making Dollar Tree an appealing investment with limited downside.

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Our largest new position was CVS Health Corp. (CVS). We owned CVS in 2021 through call options, which provided a handsome return. We sold it when it reached our assessment of intrinsic value. In the first half of the year, the stock traded down nearly 40% from its highs. CVS is valued like a pharmacy business in secular decline, while its strategy and assets are far better. CVS owns a healthcare benefits business (Aetna) and a pharmacy-benefits manager (Caremark). It recently acquired Signify Health and Oak Street Health, entering the In-Home Evaluations and primary care spaces enhancing the company’s ability to offer comprehensive healthcare services as we transition to a system more focused on value-based care. Short-term headwinds, such as an unwind from COVID, some unfavorable health care developments and negative headlines from PBM contract losses, weighed on the price. The company is again significantly undervalued, with a trough-level 8.2x P/E multiple well below peers’ 12.2x, with a 3.5% dividend yield. We saw an opportunity to diversify the portfolio with a stable company with a promising strategy and group of assets at an attractive price.

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The author makes a compelling short case against Vita Coco, arguing its 100% YTD stock increase is unwarranted amid undisclosed supplier issues, loss of a major distributor, and partnerships conflicting with its ethical branding. Vita Coco depends on Brazilian supplier Ducoco, which faces litigation over land grabbing from indigenous communities. With demarcation efforts underway, Ducoco's existence is threatened, jeopardizing Vita Coco's supply chain. Child labor concerns in the Philippines supply chain also conflict with Vita Coco's ESG claims. Insiders plan to sell over 26 million shares, nearly half outstanding, signaling a potential pump and dump. The track record of largest shareholder Verlinvest, involved in prior scam Oatly, raises further concerns. With a PE of 54x versus 24-35x for competitors, the author sees Vita Coco as overvalued and likely to crash given its looming challenges.

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The author analyses Lagardère's two business units: publishing and travel retail. Publishing is cited as a rhythmically straightforward business, dependent on the popularity of certain authors and brands. The travel retail unit comprises shops in airports and train stations, generating lower margins due to concession payments and overhead costs. The Q3 results showed a 5% decrease in publishing due to the absence of a popular author but expected it to match last year's results. Travel retail showed good results due to increased activity in regional airports in France, Italy, and Poland as well as the return of Asian passengers in North America. The author praises the company's strategic financial plan for the next 5 years and the fact that it doesn't solely rely on acquisitions for growth. It is for these reasons (and the dividend yield of 6.8% with a €19 share price) that the author considers the shares of Lagardère, with an estimated fair value at €28, a better investment than its major shareholder Vivendi.

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The author presents a persuasive argument that Italmobiliare, an Italian investment entity, is considerably undervalued, with substantial growth prospects. This company specializes in the acquisition and enhancement of premier Italian brands, prominently featuring the rapidly expanding and lucrative Caffè Borbone and Santa Maria Novella in its portfolio. Despite these brands' impressive operational results, Italmobiliare is trading at a significant 50% discount to its net asset value. Remarkably, the combined value of just Caffè Borbone and Santa Maria Novella eclipses the company's entire current market capitalization, not even accounting for other assets and an additional €160M in net cash. Beyond the inherent asset value, Italmobiliare promises investors an estimated 20% annual return, derived from both growth and cash generation. Adding to its appeal, the firm boasts a 3% dividend yield, which is projected to double by 2023. Its resilient competitive advantages, consistent revenue, and lack of debt underscore its position as an attractive long-term investment. While there are concerns, like Italy's political landscape, the combined allure of high-quality assets, pronounced undervaluation, and growth potential positions Italmobiliare as a standout investment opportunity with a favorable risk-reward profile.

Read the full article here. Read time: 35 min