Best stock ideas (Thur, Nov 2)

Torrid Holdings (CURV), North America's largest direct-to-consumer brand for women’s plus-size apparel and intimates, serves over 3 million repeat customers through its e-commerce platform and 640 physical stores. Despite its strong brand and positive business inflection, CURV’s shares are undervalued, largely due to a poorly timed IPO amidst 2021's market skepticism. Since its IPO, the share price plummeted from $21 to $1.50, yet various indicators like high-frequency data and peer retailer feedback signal a business upswing post-summer. Management’s overly conservative guidance, stemming from forecasting wariness, has led to undervalued consensus estimates, presenting an investment opportunity with CURV acquired at a mere 3.0x EV/EBITDA valuation and above 50% FCF yield. Moreover, with major PE firm Sycamore Partners retaining 79% ownership post-IPO, and given its recent privatization of Chico’s at a 65% premium, there's a viable scenario for CURV to follow suit, especially considering its robust $1.2 billion annual sales and around $150 million EBITDA, juxtaposed against Sycamore’s over $10 billion in committed capital.

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Amphenol, a notable designer and manufacturer of electronic connectors and sensors, serves a wide array of markets from automotive to aerospace with a decentralized structure across 130 business units. Despite a modest 5.4% market share in the $235B interconnect and sensor sector of 2022, it leads in several verticals, outpacing competitors like Aptiv and TE Connectivity. Its growth is driven by a blend of organic reinvestment and strategic acquisitions, notably in the automotive sector due to electrification trends. With a robust reinvestment rate and a 9%-21% return on incremental capital over the past five years, Amphenol is well-poised for steady value increase, especially with potential benefits from the rising Department of Defense budget in the military/aerospace & defense vertical. Its global manufacturing presence, unlike the more capital and complexity intensive semiconductor sector, along with a strategic M&A approach, underpins its consistent performance and growth prospects.

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We recently initiated a position in Bread Financial (BFH), formerly Alliance Data Systems, as its share price has dipped to near historical recessionary lows. Bread Financial, specializing in proprietary direct-to-consumer credit cards and deposits, also offers digitally enabled private-label, co-branded credit cards, installment loans, and buy now, pay later (BNPL) options. A management overhaul in 2020 led to a multi-year transformation, streamlining the business model, developing differentiated products, and expanding brand partnerships. The new CFO notably enhanced the company's balance sheet, tripling capital ratios to over 9%, reducing debt by $1.7B, and increasing direct-to-consumer deposits by nearly $5B. Since 2020, BFH's tangible book value surged by over 30%, nearing $40/share. Despite market concerns over potential late fee payment industry changes and weaker consumer spending, management envisions profitability even in a severe recession scenario akin to 2008-09. The current low valuation of BFH, with a price to earnings (FY2) of 3.3x and a 25% discount to the current tangible book value, significantly discounts these marketplace concerns. With management's long-term return-on-equity target notably exceeding market expectations, we foresee an upside potential for BFH over the next 3-5 years to more than triple the current share price.

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UK-based package holiday business Jet2, steered by CEO Steve Heapy and CFO Gary Brown, has grown its market share from 2% to 21% over the last decade, driven by excellent customer service and retention. Despite a 22% stock dip in Q3 from its high earlier this year, Jet2 reported record profits for the summer, doubling its pre-Covid EPS peak to around £1.8/share, aligning with the initial investment thesis when shares were bought at around £5, now trading at £11, and estimated to reach £25. Although currently trading at a decade-low 6x P/E, against an assumed conservative 12.5x P/E, sell-side estimates project another record earnings next year due to strong orders, pricing, and a robust travel outlook. Despite the retirement of Founder & Chairman Philip Meeson, the leadership transition is expected to be seamless with internal promotions and Meeson's continued 20% shareholding. The company's potential to buy back shares at the current low P/E, while continuing to invest in the business, could act as a stock catalyst. With Jet2's leading position in the UK package holiday market, the expectation is for the company to sustain double-digit earnings growth over the next 3-5 years, eventually trading at a double-digit multiple.

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Real estate developer, screening great risk/reward. We have previously mentioned that we have been looking at companies with a relatively large balance sheet and strong (future) cash flow generation in a market / industry that is being pressured due to the macro environment. Aedas is an interesting company that fits this description. The share prices of many companies in the industry have been suffering, but the Spanish (end-)market continues to show relative resilience. Aedas’ pre-sales remained strong, giving visibility on future earnings generation. It even managed to increase pricing in this tough environment. Trading at c. 40% discount to NAV, >14% dividend yield and what looks promising cash flow generation. Potential target if the valuation remains pressured.

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Bausch & Lomb, a prominent vision care company, showcased a positive financial trajectory in its Q3 2023 report, with a 6.9% YoY increase in sales, bolstered by robust demand and a diversified product range. Key achievements included the acquisition of Xiidra, a dry-eye drug from Novartis, and the successful launch of Miebo, an FDA-approved dry-eye treatment. Despite the company's late entry into the daily silicon hydrogel lens market, its strong brand and high-quality products continue to uphold its competitive stance. Bausch & Lomb's strategic acquisitions like Xiidra and innovative products like Miebo are set to significantly enhance its ophthalmic pharmaceutical segment, aiming for a significant market share in the $5.0 billion dry eye disease market. The company's solid footing in vision care, surgical segments, and expanding pharmaceutical portfolio, alongside a proactive approach towards capturing market share in the dry eye disease realm, underline a promising outlook. The fair value estimate is now adjusted to $26 per share, reflecting the potential growth from the recent strategic moves. However, financial risks persist with a high leverage ratio following the Xiidra acquisition, indicating the need for successful product launches and operational efficiency to realize the projected growth.

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