Best trade ideas for September 12

The author is bullish on LGI Homes (LGIH), an entry-level homebuilder in the US, due to a combination of factors. First, there is significant pent-up demand for entry-level housing driven by a decade-long shortage of affordable home construction and demographic shifts with millennials entering the first-home buyer category. Second, the company's unique model in sales and construction, long-tenured, founder-led management team and track record of industry-best return-on-assets boost analysts' confidence in the business's long-term performance. Despite short-term margin pressures and land inventory issues, LGIH's recent price-to-book (P/B) de-rating relative to pre-Covid multiples is viewed as an opportunity for multiple expansion. The author's base case model, accounting for uncertainty around mortgage rates, predicts an 80% increase in the stock price by 2027, generating a 17.5% internal rate of return (IRR). Under more optimistic assumptions, such as faster margin recovery and a re-rating to a P/B of ~2x, the stock could reach a price of $290 by 2027, providing an IRR close to 25%. However, the author acknowledges associated risks, notably the rate sensitivity of LGIH's mortgages and the cyclicality of the homebuilding business.

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The author believes Antero Resources Corporation (AR) is poised for substantial growth in the coming years, expecting the share price to rise to $60-$70. The optimism hinges on increasing demand outpacing supply for natural gas, as geopolitical tensions have made the U.S the go-to place for this commodity. Notably, AR is positioned to benefit from higher LNG demand, given its access to the LNG Fairway and its substantial export capabilities. The company's extensive drilling inventory and efficient operations further strengthen the bull case. AR's balance sheet health, marked by a sub-1x EBITDA leverage ratio, also allows the company to focus on shareholder distributions rather than debt reduction. Despite potential market volatility and economic uncertainties, AR stands favorably for future growth and cash-flow generation. However, the author does caution about the cyclical nature of AR and its sector.

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In this analysis, the author believes that CRH plc (CRH), a dominant building materials company, has sizable upside potential due to its planned shift from the Dublin and London stock markets to the New York Stock Exchange (NYSE). The author argues that this move will elevate CRH plc's profile among US investors and possibly lead to a re-rating of the company's trading multiple. Currently, CRH plc receives around 75% of its EBITDA from North America and is trading at 7.1x its 2023 EBITDA, below its US peers who trade at around 9-10x and above. The author expects an eventual inclusion in major US stock indices, which should further boost the stock. However, the upcoming delisting from European indices may create temporary downward pressure due to potential index-tracking sell-offs. Therefore, it might be fruitful to time the investment carefully. Targeting a 9x multiple on 2024 estimated EBITDA, the author sets a fair value of $68 per share, a roughly 25% upside from current levels.

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The author believes FMC Corporation is significantly overvalued and has a bearish outlook on the stock. They argue that contrary to management's claims, FMC has suffered recent legal defeats globally that invalidate its patents and enable low-cost generic competition to its flagship diamide products. The author contends FMC lost key cases in India and China, where generics can now manufacture and sell competing products at prices up to 80% below FMC's. They further argue that in Brazil, generics are on the cusp of entering as two regulators approved a competitor's generic while FMC fights this in court. The author believes FMC's "process patents" are ineffective at blocking generics. With composition patents expired, they expect FMC's revenue, margins and cash flow to collapse from generic competition. The author cites FMC's already high leverage, poor cash flow, and need to borrow to fund dividends/buybacks. They predict revenue declines of 30-40% in key regions, margin compression from 70% to 35%, and share price falling over 50%. Overall, the author believes FMC already faces generic competition despite management's claims, predicting falling sales, crashing margins, dangerous leverage and an inevitable dividend cut.

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The author argues a bullish stance on American Airlines (NASDAQ:AAL), citing its resilience and recovery from the Covid-19 pandemic's significant impact, robust Q2 revenue of $14.1 billion, and a successful strategized debt reduction of $9.4 billion. Projected record air passenger travel and anticipated fleet growth for 2023, alongside lowered net debt to EBITDA ratio and surpassed earnings expectations, contribute to the author's optimism. At 4.68x forward earnings and 5.34x EV-to-EBITDA, the current share price is viewed as undervalued. The author posits a one-year price target of $20.37 per share, indicating an upside of 45.81%. However, potential risks considered include cyclic recession, fluctuations in fuel costs given its 23% contribution to operating expenses, and labor disputes within the highly unionized airline workforce. Despite these risks, the overall sentiment remains bullish for AAL stock.

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The author of this article displays impressive optimism for Planet, considering their distinct position in the emerging market of earth observation through aerospace technology. Planet's consistent and thoughtful approach to acquisitions is applauded, with six significant acquisitions made over the past eight years. All acquisitions, including Boundless Spatial, Terra Bella and VanderSat, among others, had a clear objective: to enhance Planet's capabilities, from software tools to geospatial analysis, and in each case, Planet was able to accelerate the vision of the acquired company. Excellent relationships, combined vision, and a strong execution strategy make Planet a potential growth platform in the author's view, possibly becoming a substantial company over the next decade. Planet has yet to turn a profit, but the belief is that the incremental improvements and talent acquisitions these deals have provided are setting Planet up for long-term market success.

Read the full article here. Read time: 8 min