Best trade ideas (Monday, October 16)

According to the analysis made by Debbie S. Wang, Insulet is regarded as a technological innovator in the medical device industry, with its unique product, the Omnipod tubeless insulin pump. This device, approved by the FDA, offers a differentiated, user-friendly solution for Type 1 diabetics and has largely seen success in the market, especially among children and teenagers. The recent launch of its Omnipod 5, a smart insulin pump controlled via smartphone, aligns Insulet with its competitors offering hybrid closed-loop technology. However, the unique tubeless design offers a better patient experience, underpinning above-market growth. Looking ahead, there is a slight cause for concern due to the vulnerability to potential comparative or superior models from larger competitors and economic downturns where non-essential medical devices may become less of a priority for consumers. However, the potential for acquisition by a larger competitor like Medtronic or Abbott, in their bid to expand their diabetes portfolios, exists. The analyst maintains a price target of $234 over the long-term period, predicting an estimated 14% growth rate, supported by positive expectations of increased Omnipod adoption, continued innovation and favorable profitability amidst its direct distribution strategy in Europe. However, high uncertainty remains due to heavy reliance on a single product and competitive threats from well-financed competitors like Medtronic and Abbott.

Read the full article here (paywall). Read time: 8 min

The analyst presents a strong case for O’Reilly Automotive, highlighting its robust profitability profile, underpinned by multiple growth avenues such as increasing profitability from company-branded products, steady new store openings, recession resistance and hard-to-replicate, competitively advantaged distribution network. Two significant industry segments have been identified: 'do-it-yourself' (DIY) and 'do-it-for-me' (DIFM). The company has performed exceptionally in both segments, with an emphasis on DIFM characterized by recurring revenues and profitability, largely immune to competition from Amazon and Walmart. The company also excels in terms of the cultural aspect, with significant internal promotion and distribution of responsibility, ensuring a deep bench of longstanding, experienced managers. The very strong financial metrics, such as increasing operating margin, profit margin and return on invested capital, reaffirm the bullish case. While acknowledging minor geographical gaps in the Northeast and the Atlantic coast, the author expects O’Reilly to continue to gain market share, grow its store count, and expand earnings while investing back into the business judiciously, thus further fortifying its competitive advantage. We applaud the Company’s long-held capital allocation discipline: reinvest into more ever profitable stores, pay zero cash dividends, and continue to hoover up the shares. We have long advocated for share buybacks to be executed at least at reasonable valuations, and the Company has cut its share count in half just since 2013. In short, the firm's long-term prospects seem very promising.

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On October 13, JPMorgan Chase reported a robust third-quarter earnings per share (EPS) as loss provisions eased, registering an adjusted 3Q23 EPS of $4.33. This figure marked a significant increase from the $3.12 reported in the same quarter of the previous year and surpassed the consensus estimate of $3.97. A notable driver behind this strong performance was a 17% surge in loan growth, which was significantly bolstered by the acquisition of First Republic Bank on May 1. This strategic acquisition added a substantial $173 billion in loans and $92 billion in deposits to JPM's portfolio. Following these positive developments, JPMorgan revised its financial guidance for 2023. It now anticipates a net interest income of $89 billion, up from the earlier projection of $87 billion, while concurrently lowering its adjusted expense guidance to $84 billion from $84.5 billion. Encouraged by the better-than-expected 3Q results and the raised earnings guidance, we are adjusting our 2023 EPS estimate upwards and give it a target price of $183.

Starting to put on some BILL puts for the rest of year. Sure it’s a good biz but it hasn’t no control of the payment volume. If you believe SMB spending is in for a reckoning for Q4 (which I do) then BILL estimate for the next few Q is way too high

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Hudson Global (HSON), a recruitment processing outsourcer, is viewed with positivity due to a possible significant public-to-private valuation mismatch and potential forthcoming strategic catalysts within the next 6-12 months. The company is currently undervalued with a Risk price of $18 (40% 2023 FCF yield to EV, 1.8x normalized EBITDA), and a Reward price of $64 (10% FCF yield to EV, 10x EV/2024 EBITDA in line with private comps). HSON's stock has been unappreciated, trading similarly to staffing peers who are more exposed to economic cycles. While the company grappled with an acquisition disruption affecting its RPO business, its ongoing business momentum and efforts to regain margin make the stock an attractive investment. The CEO's history of unlocking value through strategic acquisitions further strengthens the bullish view on HSON. The CEO has been an aggressive buyer of HSON stock in the past year, buying >5% of the company with a mid-$20s average price paid. However, some potential risks include its liquidity, 382 limitations, client concentration, key man risk, and macro risks linked with Global labor trends. The author sees strategic actions in the next year (exit or partnership), or a stock tender as potential catalysts.

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Ragnarok Research is bearish on DUOL due to several reasons: vulnerabilities found within the company's software that may reduce Duolingo's revenue, potential flaws within their business models and products, and unethical business practices such as charging for unprovided services. There is also a decrease in unique visitors, reducing the overall number of monthly active users. Alongside this, Durable Capital, the IPO sponsor, has a bad track record (and has already started to sell shares), and Duolingo’s increasing interest income contributing to the net margins is not sustainable in the long run. Duolingo's promotion of its AI in the Duolingo MAX platform is seen as disadvantageous because it is still more expensive than competitors like GPT-4. As a consequence, the market cap to revenue ratio of Duolingo is calculated to be much higher than that of similar companies, indicating a potential overvaluation. Given these points, Ragnarok Research predicts a downward trajectory for the company.

Read the full article here. Read time: 5 min