Best stock ideas (Mon, Nov 13)

In the third quarter, we initiated a position in Fiserv, a company we've been tracking for some time. Fiserv operates in two mutually reinforcing businesses: it provides essential technology services to numerous global banks and credit unions, enabling mid-sized financial institutions to offer competitive digital banking services more cost-effectively. Additionally, Fiserv is involved in payment processing, with its Clover payments acceptance system set for strong growth in the coming years due to its advantages in transaction speed, fraud protection, and operational controls. While Clover has a small market share presently, it's poised for double-digit growth, contributing to Fiserv's solid earnings expansion. With the stock trading at a low-teens multiple of expected 2024 earnings, it represents an attractive investment opportunity for consistent long-term growth.

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Weatherford International (NASDAQ: WFRD) is a global oilfield service provider reaping the benefits of the oilfield services boom post-bankruptcy, with a stock rise since the COVID lows. Despite the consensus on a well-supplied oil market, forward indicators suggest otherwise, with increased drilling and exploration activities leading to service rate hikes. Weatherford has reported robust earnings, with a projection of double-digit revenue growth for 2024, focusing on Middle East markets. The company offers differentiated services and competes effectively, also investing in new technologies enhancing safety and efficiency, resulting in higher margins and impressive revenue growth. It also benefits from high industry utilization rates, with potential to capture more market share. However, Weatherford is trading at a significant discount (~60% EV/EBITDA basis) compared to peers, despite a strong free cash flow performance, indicating an ~80% upside potential if re-rated to match peers. With additional capacity to meet market demand and secure multi-year contracts buffering short-term oil price fluctuations, Weatherford is poised for significant growth, despite potential recession risks. Overall, Weatherford presents an investment opportunity with a likely upside due to its higher margin services, under-utilized equipment, and unjustifiably low valuation relative to peers.

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Fidelity National Financial (NYSE: “FNF”) stands as the top title insurance agency in the U.S. and a key player in title-related real estate services, also holding an 85% stake in F&G Annuities. Despite the cyclicality of title profits, which are expected to halve in 2023 from the peak in 2021, FNF maintains industry-leading title margins and profitability. This cyclical downturn is mirrored in FNF's stock price, which has swung from ~$50 to ~$32, reflecting more than a 60% variation in valuation. The regulated nature of title fees limits competition, thereby solidifying FNF's market position. With the highest market share and returns but trading at the lowest multiple among peers, FNF is undervalued. FNF's diversification into life insurance via F&G Annuities has made its cash flows less cyclical, supporting effective capital allocation. Under William Foley’s leadership since 1984, FNF has a history of astute capital allocation, including spinning off Black Knight Financial and Fidelity Information Services. With management owning over $450M in stock and a proven track record in value creation, FNF's current valuation suggests an implied 14% normalized free cash flow yield for its title segment and a P/E of ~8x 2024E EPS for the company as a whole. This positions FNF's intrinsic value at over 40% above its current stock price, marking it as an attractive investment opportunity.

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Curaleaf, a no-moat cannabis company with a presence in 19 U.S. states, reported sluggish third-quarter earnings, with a marginal 1% increase in net revenue and a decreased adjusted EBITDA margin of 21% (down from 26% last year). The company's long-term potential remains, driven by aggressive growth through acquisitions, including the recent addition of Deseret Wellness in Utah and European player EMMAC Life Sciences. Curaleaf's focus has shifted from a medical cannabis market to a more balanced portfolio with recreational cannabis, particularly after acquiring Cura Partners and Grassroots. Despite challenges such as federal prohibition, high competition in certain states, and an illicit market affecting sales, the company is strategically exiting less profitable states to improve margins. Analyst Kristoffer Inton anticipates lowering the fair value estimate from $17 to a slightly lower figure due to the revenue weakness. Nonetheless, Curaleaf is considered undervalued, with potential growth opportunities in new markets and states like Florida and Ohio legalizing adult use. The company's long-term strategy, including expansion into the European market and a robust U.S. presence, is seen as positive, despite the current regulatory uncertainties and the slow pace of federal legalization. The company aims for a significant market share, leveraging its coast-to-coast U.S. footprint and low-cost production in Europe. While facing ESG risks and a challenging regulatory environment, Curaleaf's capital allocation is deemed exemplary, with sound investment decisions and a strong balance sheet.

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ZBRA is the largest player in the global automatic identification and data capture (AIDC) market. It sells purpose-built, enterprise-grade devices (i.e. barcode scanners, RFID technology, & mobile computing devices) that require substantial engineering prowess and robust support and servicing for mission critical applications. Sources of moat include scale, a vast, global distribution network, close customer relationships, a reputation for innovation, a comprehensive solution set, and bargaining power. We’re attracted it its strong balance sheet, compelling valuation and secular tailwinds. ZBRA’s ability to provide automation, data analytics, and supply chain visibility solutions positions it well to capitalize on the growing demand for these services across various industries.

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Thermador, a distributor akin to AO Johansen, offers products from over 800 manufacturers in plumbing, heating, and related sectors to a diverse clientele, which safeguards its role in the market as a 'solutions-oriented' business with a solid acquisition-driven expansion, now encompassing about 15 companies. With a strong financial record featuring a 12-21% Return on Equity, low debt leverage (0.4x Net Debt to EBITDA), and a 3.5x revenue increase over 15 years, Thermador appears resilient despite potential short-term declines due to the construction downturn in France and Europe. The company's sound fundamentals and the ability to buy attractive acquisition targets at reasonable prices present a compelling investment opportunity, especially at the current valuation of 10x 2022 PE / 8x LTM EV/EBIT.

Read the full article here. Read time: 12 min