Best stock ideas (Thursday, October 19)

Despite its share price of $15 being the same as nearly 30 years ago, the focus is on the company's cash generation and management utilization. Trading at just over 6x earnings, near its lowest P/E multiple ever and at a significant discount to the market, it indicates a forward free cash flow yield above 15%. Nearly half of this cash flow supports a 7.5% dividend yield, with a major portion allocated to debt reduction, ensuring investors a steady 7.5% cash return if the stock maintains its lowest-ever valuation, alongside a growing share in a stable business as debt decreases. A discounted cash flow model hints at a "2" starting intrinsic value for shares, marking them as undervalued. The stability in the underlying fundamentals minimizes capital impairment risk, justifying a significant portfolio weight. Compared to larger S&P 500 names, like Apple with expected shrinking revenues and a 29x earnings trade, AT&T stands out. The extreme valuations in megacap tech stocks amidst a shift towards rationality and capital accountability enhance the appeal.

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The author is bullish on Eni S.p.A (E) due to the company's potential long-term outperformance which is not solely tied to the reduction in crude oil production by OPEC+. It also has to do with a substantial reduction in long-term investments within the oil sector, leading to a progressively diminishing supply and an anticipated increase in demand. Unlike its competitors, Eni is a pioneer in the "green" energy sector and demonstrates exceptional managerial efficiency. This article emphasizes on the company’s ability gain significant advantages for long-term growth from its considerable public stake (32.4% of the capital). Eni also has a potentially significant role in the "Mattei Plan", Italy's non-aggressive strategic plan that focuses on stabilizing Saharan and Sub-Saharan regions and creating economic ties to benefit from these countries' energy resources. Eni is the second-largest energy multinational in Africa, and this strategic role could significantly boost its profits. Therefore, the author remains strongly bullish on Eni and maintains a price target of $44.20, which is a potential increase of 34%.

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A new position in the portfolio is the US health insurer Elevance Health. This sector is quite familiar to us. In fact, we also have shares of another health insurer, Humana, in our portfolio, which we first bought in 2009. The sector has been very attractive over the long term and its structure favours big players, which both Humana and Elevance Health are. Because each of these two companies also has some specific risk, we decided to increase our investment in the sector by acquiring this second position. Both companies are high-growth in terms of profitability and we expect their above-average growth to continue for quite some time. Elevance Health benefits uniquely from its exclusive licence for the Blue Cross Blue Shield brand in 14 US states and is the largest US health insurer with revenues of $165 billion. It insures one-third of the population in the states within which it is active. This large market share gives Elevance Health two competitive advantages: lower costs and network effect. It is also worth noting that this is a non-cyclical business whose growth and development is only minimally correlated with the normal business cycle. It perhaps could go without saying that we consider the investment in Elevance Health to bear below-average risk.

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The author presents a bullish case for NVR Inc., the largest homebuilder on the US East Coast with a market cap of $20B. They laud NVR's proven resilience, having generated profits every year since 1993 and its history of thriving during market downturns. The author opines that NVR's disciplined approach of being land-light, regionally focused, and prioritizing profit, combined with its excellent capital allocation (having bought back 60% of shares since the last peak in 2006), are unique attributes no competitors have managed to emulate. They believe NVR's business model positions it well to benefit during housing market crises. The only foreseeable drawback is potentially challenging homebuilding conditions in the U.S., reducing its housing starts.

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The author makes a compelling short case for LL Flooring Holdings following the acquisition offer from Live Ventures. They argue the offer is highly unlikely to be completed given Live Ventures' precarious financial situation, problematic history with the SEC including fraud charges, and inadequate cash to finance the deal. LL already rejected a similar offer from its founder, and is unlikely to accept one from the inferior Live Ventures facing SEC bans. With LL's deteriorating financials, including 6 of the last 8 quarters of revenue declines and ballooning losses, the author sees no strategic rationale for the deal. They expect LL's stock to fully retrace its 40% spike on the Live Ventures news once the market recognizes the low odds of completion. The author is short LL shares based on their belief that the acquisition will not materialize.

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The author makes a compelling case that Viatris is significantly undervalued trading at just 6x EBITDA and 5x free cash flow despite being the 3rd largest global generic drug maker. With legacy branded drugs fading but still generating substantial cash flow, growth opportunities in emerging markets and new generic approvals should offset declines. The current depressed valuation is reminiscent of Pfizer in 2010 amid "patent cliff" fears, yet Pfizer doubled over the next few years as valuation normalized. Similarly, the author sees Viatris returning to growth via M&A and R&D, coupled with deleveraging and buybacks, sparking a normalization to 8-10x EBITDA and FCF. With 101% upside to a fair value estimate of $21, plus 4.6% dividend, Viatris offers substantial reward for the risks inherent in its turnaround.

Read the full article here. Read time: 4 min