Today's best stock ideas (Wednesday, October 18)

Baidu, the leading Chinese technology company, has showcased its latest AI model, Ernie 4.0, during its Baidu World 2023 virtual conference. While the company demonstrated some of the new capabilities of this model, which Baidu claims to be on par with OpenAI’s GPT-4, the market was less impressed, with shares falling by a 1% on October 17. There are concerns on how Baidu will address chip sanctions and other key risks that may affect the future development of its AI business. Despite these concerns, the potential growth in online marketing and cloud revenue associated with AI business could increase the company's valuation by USD 7-USD 10, as suggested by an earlier AI scenario analysis. The main competition lies within the online advertising and AI industries, with major players being Tencent and ByteDance. Furthermore, Baidu's AI development and other technologies are currently at the early stage of monetization amidst a highly competitive landscape with rivals such as Alibaba, Huawei, and Tencent having larger market shares. Another risk factor for the company is a potential regulation enforcement on Baidu’s advertising practices, given the past controversies.

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Founded in 1889, Avista is a regulated utility with operations in Washington, Idaho, Oregon, Alaska, and Montana. Avista provides electricity to 411,000 customers and natural gas to 377,000 customers. As interest rates have increased, utility stocks have significantly underperformed the broader stock market. Avista’s stock has also been under pressure as wildfires have become a more obvious risk for investors. We believe Avista is currently generating below normalized earnings. Approximately half of Avista’s electricity is produced from low-cost hydroelectric generation. Weather conditions over the last year reduced the company’s hydroelectric output and increased its cost of production. Additionally, we also expect earnings to lag in 2023 because the company’s last approved rate increase in Washington was insufficient to cover the subsequent unexpected rise in inflation. Avista filed a new Washington rate case in June 2023 that takes higher costs into consideration and, if approved, should go into effect in 2025. Avista is selling at 14x 2023 expected earnings and 13x our normalized estimate. Furthermore, at 1.05x tangible book value, the firm is at a considerable discount to its historical net asset valuation. We expect Avista’s earnings to reach our normalized estimate by 2025 and believe the company’s long-term growth objective is achievable given its territory’s large capital investment needs. While utilities are not risk-free, at Avista’s current valuation, we believe we are being adequately compensated for risk.

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The author aggressively bought into RTX Corporation (RTX), with the belief that it will be one of the long-term winners in their portfolio. Despite the stumble in stock price due to issues in the commercial engine segment run by Pratt & Whitney, the author continues to be bullish about RTX. The company expects to spend up to $7 billion repairs and compensations due to engine recalls but does not envision this affecting their long-term growth outlook. Despite the issues, RTX has seen steady revenue growth and has declared a steadfast commitment of $33 to $35 billion in capital return through the end of 2025. The stock currently trades at a significant discount, providing a potential upside of 30% based on estimates with the potential of annual returns of 27% through 2025. The author also highlights the 3.2% dividend yield as another attractive aspect. Despite near-term headwinds, the outlook for RTX remains strong.

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The author makes a compelling case for investing in Sartorius AG, a leading supplier of biopharma equipment and lab supplies. They argue Sartorius is a high-quality business with strong competitive advantages, including high switching costs, razor-razorblade model, and one-stop-shop offering. The company pioneered single-use bioreactors, an innovative and rapidly growing market. With biologics manufacturing moving towards smaller batches, demand for single-use bioreactors should grow 13% annually. Given Sartorius' quality and underrepresentation in the US, the author believes 16% revenue growth is reasonable. With a €40B addressable market and continued mid-teens growth expected, Sartorius can compound growth for years. Risks include potential competition, but barriers to entry seem high. After recent declines, shares trade at a P/E of 30x, an attractive entry point for this quality growth company. The author sees current levels as a rare opportunity to buy a structural grower at a discounted valuation.

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The author is bearish on Blackstone (BX), as he questions the continued growth in Assets Under Management (AUM) for the company despite a vigorous innovation in private equity. The disparity between total and fee-earning AUM, especially in the real estate sector, only adds to the concerns. The author also challenges Blackstone’s aggressive pursuit of Real Estate Investment Trusts (REITs), despite the risks associated with charging a performance fee for reduced liquidity strategies. Moreover, the author is also skeptical of Blackstone's considerable reliance on rising property prices and warns of the potential impact on fund valuations when interest rates continue to rise or when collateral values start declining. This raises inflation pressure and potential redemption requests, both of which the author views as detrimental to Blackstone. Therefore, the author suggests that a short position in Blackstone is a sensible move.

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The author makes a compelling case that Vonovia SE, a major German residential real estate company, is an attractive long-term investment. They argue that Vonovia will benefit from significant macroeconomic tailwinds once interest rates decline. The supply-demand imbalance in Germany's housing market is worsening as construction lags population growth, especially in urban areas where Vonovia's portfolio is concentrated. This will drive further rent increases, which are currently below the inflation rate. Vonovia's balance sheet remains stable with debt maturities covered until 2024, and an ample liquidity position provides flexibility. The valuation looks attractive based on price-to-FFO compared to peers. Risks include sustained high rates, potential need for further write-downs, and regulatory interventions. However, the author sees the current price as offering substantial upside potential of 40-80% over the next 1-2 years if the thesis plays out, with shares likely to return to the €30-40 range where they traded just a year ago.

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