Best stock ideas (Thursday)

Webster Financial Corp. (WBS) is a substantially segmented commercial bank, operational across five principal verticals. Despite experiencing a 17.29% drop in its stock price in the trailing twelve months, the analyst argues that Webster’s segmented business strategy offers increased resilience against macro headwinds. He applauds the company’s expectation of significant full-year loan growth, core deposit growth nearing double digits, and rising net interest income despite the industry headwinds. The analyst maintains that Webster’s biggest draw is its undervalued stock price, attributed to the market’s unfounded fear of recent regional bank failures and high interest rates increasing capital costs. Despite its trailing price action, the analyst argues that Webster carries superior multiples-based value and growth capabilities. His discounted cash flow analysis places the company’s current value at $48.10, signaling an undervaluation of 19%. Risks include counterparty risk prevalent in the current macro environment and potential increased compliance costs and risks due to regulatory changes. Yet, with the company’s stronger financial performance metrics vis-à-vis industry averages and analyst estimates projecting an average 1Y price target increase of 27.23%, the analyst recommends Webster as a buy.

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The author believes Virtu Financial is an attractive investment trading at an 8.6x P/E based on his adjusted earnings estimates, well below the 16x multiple at IPO. He is bullish because Virtu has a long history of generating outsized returns as a market maker during volatile periods, including a 118% annualized return in Q1 2020. Despite recent low volatility weighing on profits, Virtu still earns an acceptable 13% return on capital with high free cash flow to support its 5.6% dividend yield and share buybacks. The author sees regulatory threats around payment for order flow and competitive issues in options as overblown. He expects bid-ask spreads and volatility to normalize from currently depressed levels, driving profitability higher. With shares trading at low valuations, limited downside risk, and significant upside as market conditions improve, the author sees Virtu as an attractive investment. The company's shareholder returns and history of cost discipline provide confidence it canoptimize profits when volatility returns.

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BlackBerry plans to separate its Internet of Things (IoT) and cybersecurity businesses, a move that analysts believe should provide better execution and valuation for each company. The IoT business, which includes the QNX software for autonomous vehicles, is expected to grow in the mid-teens over the next decade. Despite struggles and challenges with their go-to-market strategy, analysts believe BlackBerry's cybersecurity business could be an attractive acquisition target for larger cybersecurity companies. BlackBerry has strong government customer relationships that add to its potential attractiveness in such a scenario. Despite leading in embedded automotive software and having a strong focus on security, BlackBerry is seen to be lagging behind competitors like Microsoft and VMware in the enterprise software market, and has struggled to grow organically as a software company. The company's shares are currently viewed as fairly valued. The fair value estimate for BlackBerry remains at $4.90 per share.

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The author provides a bullish analysis on Gravity, a South Korean online game developer and distributor, primarily known for its highly successful MMORPG, Ragnarok Online. The author expects continued sales and profit growth for Gravity, accelerated by successful game launches such as Ragnarok Origin in Taiwan/Hong Kong, and anticipates this momentum to persist with the game’s release in Southeast Asia and a global launch. Gravity is currently trading at extremely asymmetric valuations, providing substantial upside potential with minimal downside risk due to the protection provided by the company's net cash balance. The author identifies Gravity's undervalued IP, growing cash reserves which offer multiple investment and diversification options, and future game pipeline as additional factors supporting the company’s long-term potential. Despite potential capital allocation risks, transparency concerns, and the hit-driven nature of mobile games, the author concludes Gravity could reach a price target of $180 per share, 171% upside from its current price. The author also notes the significant cash pile allows for various capital allocation strategies that could further increase shareholder value.

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IVFH has historically had a poor track-record of shareholder value creation, with substantial cash burn, bad investments into non-core e-commerce segment, excessive compensation and significant equity dilution.However, with the replacement of the CEO earlier this year following pressure from several activist funds, the core food distribution business now appears to be on the brink of profitability inflection.Driven by improved pricing, reduced overheads and slashed marketing costs, IVFH has already managed to turn profitable on EBITDA level in Q2’23 for the first time since 2019 despite Q2 being a seasonally weak quarter. There is substantial runway for EBITDA margin improvement from 2% in Q2’23 to 10% on a normalized basis. This target seems achievable given that IVFH’s margins were at 6% for most of its history with significantly lower scale and excessive overheads. Using a conservative 8% normalized margin estimate, the company is currently valued at only 7x 2024E EBITDA. This is substantially below 12x EBITDA where acquisitions in the food distribution industry have been completed. Valuing IVFH at a 10x EBITDA multiple would suggest nearly a 50% upside from the current share price levels, implying a 30% potential IRR through 2024. Potential catalysts might include operational improvements or disposals of cash-burning e-commerce businesses and potential food distribution business sale to U.S. Foods.

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