Best stock ideas for September 13

The author believes Dollar General is significantly undervalued. They argue DG's business model remains intact despite recent struggles, with its low-cost advantage ensuring continued competitiveness. Though sales and margins have deteriorated post-COVID, the author expects these to normalize back to historical levels. They cite DG's 31-year streak of positive same-store sales growth and its industry-leading efficiency metrics. The author contends DG's core rural customer base makes it resistant to competition from Dollar Tree. Assuming DG's margins recover to 9% and a conservative 11x P/E multiple, DG trades at just 8x normal earnings, an unwarranted discount. Given stabilized margins, projected new unit growth, historical capital return, and modest multiple expansion, the author forecasts 20%+ annual returns over 5 years. They conclude DG is a classic time arbitrage opportunity, punished excessively for near-term headwinds, making shares undervalued.

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Ivan Su, a Senior Equity Analyst, reiterates his above-consensus forecasts and positive thesis for Tencent following its Digital Ecosystem Summit. The analyst argues that the summit bolstered Tencent's network effect, demonstrating the potential of its artificial intelligence capabilities and its array of enterprise solutions' monetisation potential. He holds a fair value estimate for Tencent at $90 per share, highlighting that the company is currently undervalued by 55%. While Su acknowledges regulatory risks and potential competition, he suggests that Tencent's wide network and intangible assets, like user behaviour data, give it a leg up against competitors. There are signs of broad growth potential in various segments, including gaming, fintech, cloud services, and advertising, riding on trends like increased tech spending among corporates, rising adoption of cloud services, and the scalability of WeChat services

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The analyst shows confidence in the investment in Ally Financial, praising its steady growth and stable performance despite recent headwinds. Since its inception as the lending arm of General Motors in the 1920s, Ally has transformed into an independent, branchless online bank providing higher interest rates to depositors thanks to lower overhead costs. The author explains that the firm continues to grow its depositors & loans, boasting 57 straight quarters of customer growth and $139 billion worth of retail deposits. Despite concerns over competition from online banks & changing interest rates, the author believes the bank's conservative executive leadership and attractive business model make it a reliable choice for investment. Notably, the bank's ample liquidity ($42.5 billion end Q2) and expectation management considering used car prices give them a sturdy buffer against potential losses. The author esteems Ally's strategy to grow slowly while remaining profitable, although noted a current weakness in their low-yield mortgage loans. With all the distributable earnings it will generate this decade, there are two scenarios for Ally stock. One, the stock doesn’t rise and management takes out 90% of its current shares outstanding (increasing our ownership by 10x). Or two, when the company generates its entire market cap in earnings by the end of the decade and uses that cash to repurchase stock, the share price will start moving higher. This means the company either gets absurdly cheap or (more likely) the stock starts moving higher over the next 3 - 5 years.

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The author revisits Bayer, having seen the stock price fluctuate and significant changes at the company. The stock was previously outperforming the S&P 500 largely due to activist investor, Jeff Ubben, taking a stake in Bayer. This resulted in the exit of the previous CEO and amplified calls for a break-up of its over-the-counter drug and pharmaceutical units. After a disappointing Q2 results in 2023 and significant EPS and free cash flow per share decreases, the author reassesses the fundamentals of the company. Despite having a high P/E ratio due to a transitionary phase, Bayer has a favorable P/B ratio and presents clear catalysts including macro tailwinds for the crop science industry, core business growth, new management, and the influence of activist investor Jeff Ubben. Nonetheless, the risks include lawsuits from the Monsanto takeover, macro headwinds in Germany, and outstanding long-term debt. Through DCF analysis, the author calculates an intrinsic value of almost €70 per share, indicating that Bayer is undervalued. Thus, despite some financial tumult and PR issues, the author recommends Bayer as a 'Strong Buy.'

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The author maintains a bearish view on U Power Limited (UCAR), noting the multiple challenges facing the China-based automotive company. Operating in the electric vehicle (EV) sector, UCAR demonstrates risks associated with reliance on key customers and suppliers, a Variable Interest Entity structure abetting potential regulatory changes, and restrictions regarding returning capital to investors. Financially, UCAR continues to record net losses with low liquidity in its balance sheet, increasing the likelihood of resorting to debt or issuing more shares. With formidable competition from 4S dealerships, brand-owned stores, e-commerce platforms, and large tech companies, the author also highlights its declining YoY revenue despite the high price-to-sales ratio of 197.73. Regulatory risks emanating from the Holding Foreign Companies Accountable Act and ongoing trade tensions between the U.S. and China further threaten the firm’s stability. As such, the author discourages long-term investment in UCAR, considering the potential for a total loss of capital should any of these risks materialize, and refers to it as a speculative vehicle for active traders in the growing Chinese EV market.

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Veralto Corp (VLTO), being spun-off by Danaher Corp (DHR), is worth attention due to its consistent growth, excellent fundamentals, and renewed capital allocation approach. Anticipated to trade by the end of September, Veralto has recorded annual revenue growth of 9.5%, from $770m in 2002 to $4.9bn in 2022, partly fuelled by 80 tuck-in acquisitions. Recurring revenue makes up 57% of sales due to its 'installed base' business model. The high operating cash flow has mostly gone back to the parent company, Danaher, limiting reinvestment in VLTO. With the spin-off, analysts anticipate greater capital availability for organic growth and perhaps, strategic acquisitions. Pre-spin, Veralto's net debt is expected to be $2.33bn, leverage ~2x on trailing EBITDA of $1.2bn, and a possible price per share of $29, based on a 20x EBITDA valuation. The principal wealth generation avenues post the spin-off are projected to be high ROIC organic growth aligned with secular trends and strategic long-term value accretiveness acquisitions.

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