Today's best stock ideas (Monday, October 23)

We added to our energy exposure in the quarter, buying shares in Kosmos Energy (KOS), an exploration and production services company with assets in Africa. The company is differentiated in the exploration & production (E&P) space because of its growth profile (+30% YoY in 2024), long reserve life (>20yrs, nearly double the sector average) and focus on liquified natural gas (LNG). We see this as a classic case of time arbitrage where the market is myopically focused on the near-term risk the company will miss production targets for new assets while ignoring the long-term intrinsic value. After years of investing in project development, it is close to moving into the harvesting phase with production expected to grow 30% YoY in 2024. At the same time, capital expenditures should fall 30% YoY leading to very strong FCF yield of >25%, which will initially go towards debt paydown. At these levels, the company will generate more than its current market cap in FCF over the next 5 years at $90 Brent prices. With the combination of gas-heavy reserves and inflecting cash flow generation, we think Kosmos is significantly undervalued and a potential acquisition target.

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The author makes a compelling case that Bank of America is significantly undervalued and has substantial upside potential. Despite a proven track record of mid-teens return on tangible common equity, BAC trades at just 8.5x normalized earnings and 1.15x tangible book value. In Q3, core fundamentals remained healthy - deposits, net interest margin, and net interest income were stable as higher rates offset modest deposit outflows. Management expects NII to decline modestly in 2024 before resuming growth. Non-interest revenues remain below pre-COVID levels, but should recover cyclically with economic growth. Expenses continue to fall, while credit costs are in-line with pre-pandemic levels. Though Basel III requirements will reduce ROTCE to a low-double-digit level, the author believes a 10% earnings yield merits a 10x P/E multiple. With shares offering a 3.5% dividend yield as well, the author sees 91% total return potential through 2026, driven mostly by multiple expansion as the valuation normalizes to historical levels. Given the rock-solid fundamentals and substantial undervaluation, the author sees Bank of America as offering highly attractive risk-reward for long-term investors.

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The author makes a compelling case that IAC is significantly undervalued based on a conservative sum-of-the-parts analysis. IAC's equity stakes in ANGI, MGM, and corporate net cash equal $47 per share, essentially IAC's current market price. This implies investors get holdings in Turo and DotDash Meredith for free. Turo, the "Airbnb for cars", has strong fundamentals with 62% GMV CAGR over 4 years and 36% take rate. The author believes Turo warrants a valuation of $9.8 per IAC share. Though DotDash Meredith has struggled after its acquisition, early signs of a turnaround emerged last quarter, suggesting upside if realized. With legendary dealmaker Barry Diller controlling 41% of voting rights and aligned insiders owning 20% of equity, IAC has an exemplary track record of incubating assets like Expedia and Match. Its operational expertise provides confidence value can be unlocked. The pending Turo IPO could serve as a catalyst. Trading below liquidation value before accounting for crown jewel assets Turo and DotDash Meredith, the author sees substantial upside for IAC shares as the market recognizes its undervaluation.

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The author makes a compelling short case against XPEL Inc, arguing the supplier of automotive protection films has understated its reliance on Tesla and faces disruption from its longtime supplier partnering with PPG. Despite XPEL's claim that Tesla accounts for only 5% of revenue, the author surveyed 143 installers who estimated Tesla represents 25-35% of XPEL's business. Installers noted Tesla critical for growth given its paint issues. With Tesla insourcing films, it poses an existential threat to XPEL's bull case. Moreover, XPEL's key supplier entrotech formed a joint venture with PPG to integrate protection technology directly into OEM paint, disrupting XPEL's aftermarket solution. Entrotech confirmed it is already working with Detroit automakers to make XPEL's wraps obsolete within 5 years. Trading at 24x EBITDA and 52x free cash flow despite scrubbed disclosures and risks, pervasive insider selling totaling $164 million, and loss of Tesla and entrotech as growth drivers, the author believes XPEL is substantially overvalued. They see significant downside as the market recognizes XPEL's deteriorating fundamentals and critical risks.

Read the full article here. Read time: 16 min

The author expresses a bullish stance on $PAC.AX, a boutique asset manager with minority stakes in several other asset managers, notably a 5% stake in $GQG.AX, representing 25-30% of $PAC.AX's NAV. When Regal proposed a $10.5 bid in cash and stock for $PAC.AX, followed by $GQG.AX's announcement of their intent to bid as well, $PAC.AX's stock surged to mid $10s against a last reported NAV of $11.92. However, Regal then withdrew their bid due to alleged inadequate engagement from PAC, causing the stock to fall below $10. The author criticizes the market's reaction as illogical, arguing that PAC.AX’s supposed lack of engagement with Regal was strategic, expecting a superior bid from $GQG.AX. The author underscores GQG's reputational stake in this deal, never having done a deal before, and being vocally rational about this transaction. Recent communications from $PAC.AX's chairman hints at a near-future sale and bolsters the author's belief in a near NAV closing price, projecting a minimum of $11.5. They highlight the attractive merger math at $9, portraying a downside of $1 and upside of $2.5 with a 32% closing chance, asserting this as a lucrative scenario given the evidences. They note the stock's liquidity at about $500-600k daily, considering it manageable, and overall find the current valuation wildly undervalued, presenting a robust investment thesis.

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The analyst argues Sphere Entertainment Co. (SPHR) is significantly undervalued due to market miscalculations of its gross margins and unique business model. Its giant 20,000-person live event theater, Sphere Las Vegas, projects to have margins above 80%, significantly higher than analyst predictions of 50%. This is due to Sphere’s unique content ownership model. Unlike traditional venues that must pay a significant percentage of revenues to performers and teams, Sphere owns 90%+ of its content, benefiting from box office, concession sales, and advertising revenues. In the next couple of years, the company is speculated to painfully transition from building the Sphere to operating it, resulting in large profitability increases. Although there have been heavy costs associated with the build ($2.3 billion), these have been paid by past investors. Going forward, the analyst postulates the business's costs will be mostly variable in nature (staffing, utilities, food, and beverages), implying a high break-even point but also high profit potential after reaching it. With these operational efficiencies and continued success with Sphere Las vegas, the analyst forecasts an adjusted operating income of 30% and a stock price of $90 by 2025, showcasing a strong bullish stance.

Read the full article here (5 free per month). Read time: 16 min