Best trade ideas - September 8

The author is highly optimistic about e.l.f. Beauty, a company ranked #33 among 5,884 stocks, ETFs, and mutual funds in their proprietary database that combines momentum and value metrics. Established in 2004 and public since 2016, e.l.f. Beauty, which trades under the ticker ELF, manufactures and sells skincare products and cosmetics under its eponymous brand. They are known for their cruelty-free stance and collaboration with PETA's no-fur campaign. Based in Oakland, CA, e.l.f. has products sold in 17 countries through retailers like Target, Walmart, and Dollar General, and is on track to reach about one billion in annual sales, with a current market cap of $7.5B. The company's earnings have surged recently, with the last quarter showing a 76% rise in sales and an astounding 182% spike in earnings. Comparing its five-year average returns against the S&P 500, e.l.f. yields 62.2% annually compared to S&P's 11.1%. Using consensus analyst projections, the author anticipates the stock's 5-year target price to be $252.88, marking an 82.3% upside from its current position at $138.71. The stock's appeal is heightened by its inherent defensive nature and positive feedback from consumers. However, potential risks encompass a potential economic slowdown, fierce competition from giants like Estee Lauder, and the looming threat of inflation, which might squeeze margins. Yet, despite these challenges, the author views e.l.f. as one of the most compelling small-cap growth stories in the market today.

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Forward Air, a shipping company specializing in last-mile and less-than-truckload deliveries, has recently entered into a merger with a private firm named Omni, with the intention to form a vertically integrated business. The author highlights that the company's decision to bypass a shareholder vote and instead issue preferred shares at a hefty 12% to the private equity firm backing Omni was seen as controversial. This action could likely force shareholders to accept a significant dilution of their stock post-merger, leading to a steep 40% drop in FWRD's stock price from $120 to roughly $70. However, in a twist, the CEO and other executives demonstrated their belief in the merger's potential value by personally purchasing about $2 million worth of company shares in the open market following the merger announcement. Notably, the author has also reviewed Forward Air's past financial performance and noted its consistently above-average returns on invested capital and equity over the past decade, alongside growing revenues and earnings per share, suggesting competent management. The CEO has defended his actions by framing them as a move for long-term growth despite short-term setbacks. This personal investment of $1 million in company shares further complicates the narrative, leaving the author in a quandary over the CEO's intentions: whether they're manipulatively malevolent or just pragmatically opportunistic.

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According to the author, Navitas Semiconductor Corporation (NVTS) offers significant potential for long-term investors due to its pioneering role in next-generation power semiconductors. The company's technology, which includes gallium nitride and silicon carbide semiconductors, could potentially expand the capacity of the broader semiconductor industry. Despite still being a relatively small company, Navitas has a promising portfolio of over 185 patents issued or pending, solidifying its position in this emerging market. It also benefits from its appeal to original equipment manufacturers due to the advantages of its technology over existing semiconductor solutions. However, the author cautions that there are risks involved, such as the company's distance from making an operating profit and the instability inherent in its high customer concentration and significant sales generated in China. Despite these risks, the author maintains that Navitas' potential for multibagger growth over the long term remains a 'Strong buy' proposition.

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Sanlorenzo, trading at 36 euros per share, is the world's second-largest boat builder by construction length and leads the niche market of 30-40 meter yachts with an 18% market share. The author highlights the company's consistent revenue growth of 9.2% CAGR from 2008-2022, with an acceleration to 16.4% CAGR post-2015, alongside a consistent 20% annual profit margin increase over the past five years. Sanlorenzo's diverse operations encompass the Yacht Division, which contributes to 60% of revenues, the Superyacht Division, and the innovative Bluegame Division, akin to Polestar's relationship to Volvo, pioneering hydrogen-powered vessels for the America's Cup 2024. The luxury yacht market is buoyed by the rise in ultra-high net worth individuals, and Sanlorenzo's strategic art partnerships, such as with Art Basel, further solidify its luxury brand positioning. With a loyal clientele often upgrading their vessels, the company's growth trajectory has consistently outperformed competitors. Financially, the company projects a 19.5% EBITDA margin by 2025, with an ambition to hit 1 billion in revenues, translating to a free cash flow of about 100 million. This growth target seems achievable given past performance figures, even during the pandemic. The balance sheet is healthy with €281.9 million in liquid assets. CEO Massimo Perotti's significant stake and insightful management, including the establishment of Sanlorenzo Academy and strategic partnerships, underscore the company's vision and commitment. Based on conservative estimations, the author predicts the stock's value could reach 53.50 euros per share by 2025, indicating a 47% potential upside. The author concludes that Sanlorenzo, symbolizing luxury, strategic growth, and financial stability, offers a promising long-term investment opportunity.

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The author presents a comprehensive evaluation of Cummins Inc. (NYSE:CMI), a global power leader specializing in various powertrains and components. They praise Cummins for its impressive revenue and net income growth, noting a temporary decline in free cash flow due to costs associated with the Meritor Acquisition. Despite this acquisition causing a temporary spike in the Net Debt/EBIDTA ratio, the author highlights the company's historically healthy balance sheet and expects it to normalize soon. Cummins' stock repurchase program, combined with minimal stock-based compensation, exemplifies the company's commitment to enhancing shareholder value. Furthermore, the valuation using a corporate discounted cash flow (DCF) analysis, incorporating unlevered free cash flows and a weighted average cost of capital (WACC) calculated via the Capital Asset Pricing Model (CAPM), suggests the stock is undervalued. With Cummins' return on invested capital (ROIC) consistently outpacing its WACC, the company exhibits value creation, an indication of effective management. Though some investors might be deterred by the cyclical industry and recent stagnation in free cash flow, the author firmly believes in Cummins' potential, ultimately recommending it as a "Strong Buy".

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The author is bullish on Ahold Delhaize, a Dutch food retailer with operations in Europe, the US, and Indonesia. The company's strategic aims focus on driving omnichannel growth, leading a shift towards a healthy and sustainable food system, and amplifying their operational efficiencies. A compelling point for the author is the company's dominance in the market, with a remarkable 96% of their sales originating from markets where they hold a #1 or #2 brand position. Analyzing the company's financial metrics over one, five, and ten-year periods reveals consistent growth in revenue, net profit, cash from operations, and free cash flow. At its current market cap of 27.8 billion EUR, Ahold Delhaize intends to return 7.2% to its shareholders through a combined 2 billion EUR allocation for share buybacks and dividends. Based on revenue projections of a 5% growth over the next decade and other financial assumptions, the author calculates an enterprise value of nearly 60 billion EUR. This suggests an equity value of 45 billion EUR, translating to a potential share price of 45 EUR, a significant rise from its current 28.7 EUR. While not factoring in results from the share buyback, the projected free cash flow (FCF) growth rate of 5% embeds a safety margin of 3.3%. Despite a recent downgrade by JPM, the author identifies no adverse news related to the company and believes its current price offers an attractive margin of safety for promising returns in the future.

Read the full article here (paywall). Read time: 2 mins.