Top stock ideas (Oct 25)

Robinhood´s competitive advantage is its cultural affinity with younger generations, which manifests as its user interface and experience. They stands to benefit from becoming a financial one-stop shop for users, with Robinhood Gold positioned as the primary catalyst for future financial performance. Their transaction-based revenues will come under pressure in the coming years, and the company risks losing higher-end customers to more senior platforms that are gradually coming to meet the expectations of young traders, but Robinhood has exhibited commensurate signs of anti-fragility since 2021, which reflects management´s exclusive focus on value creation rather than pleasing the market. The company has great long-term potential if it can do the three following things (which the author believes it can): succeeds in fending off Schwab (and other brokerages) and retaining its user base, including the higher-end users; demonstrates that it can then defeat larger indirect competitors like Apple, Block, and any other company with the resources and clout to muscle into the industry; can convert short-term traders into long-term investors while gradually cutting its reliance on trading revenues.

Read the full article here. Read time: 15 min

The author makes a compelling case that Philip Morris is significantly undervalued, trading at just 16x earnings despite strong Q3 results and double-digit growth in heated tobacco products. IQOS sales grew 19% in Europe and 15% in Japan as PM shifts its product mix towards reduced risk products. Though dollar free cash flow per share has grown only 1.5% since 2013, adjusting for currency and one-time items shows 9% CAGR since 2018, reflecting the transformation. With volume declines slowing, positive mix shifts underway, and Swedish Match contributing, the author believes PM can deliver 10%+ EPS growth supporting a higher multiple. With shares offering a 5.7% dividend yield as well, the author sees over 100% total return potential in just 3 years as sentiment normalizes.

Read the full article here. Read time: 7 min

The author argues that First Horizon (FHN), a regional bank with a large asset portfolio, presents a compelling investment opportunity despite a recent decline in share price. The decline occurred after a planned acquisition by TD Bank fell through, which caused the shares to tumble from $25 to $10. Despite changes in the rate environment and the recent banking crisis, the author remains bullish. FHN has demonstrated incremental but consistent growth in its loan portfolio and tangible book value, and has managed its finances conservatively. With $1.28/share in projected earnings, a 5.7% dividend, and the possibility of buybacks due to excess capital, the author argues that FHN is undervalued and should be trading at 1.14x P/TBV valuation or $12.80/share, higher than its current price. The author acknowledges the precarious nature of the banking sector but maintains that FHN's fundamentals and potential for buybacks make it a strong investment prospect.

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The author makes a compelling contrarian case that Alumina Limited is significantly undervalued amidst short-term uncertainties. Alumina owns 40% of AWAC, a major alumina producer facing headwinds including soaring energy costs and regulatory delays. However, closures would tighten global supply, likely offsetting losses and benefiting remaining production. With an enterprise value of just $550 per tonne of capacity versus replacement costs exceeding $1000, sentiment near all-time lows, and potential for regulatory resolution, the author sees Alumina as an above-average business at a cyclical trough warranting a long-term view. Despite near-term clouds, the author believes Alumina's discounted valuation limits downside while offering substantial upside if operations normalize.

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Since bottoming in November 2022, META has been one of the great turnaround stories in 2023. The stock peaked at an all-time high of $382 in September 2021 and then crashed to $89 in 13 months. The shares then soared, reaching $325 in July 2023. For the most part, the rally was consistent, with META getting support from its 10- and 21- day exponential averages (EMA) the entire time. Over the past couple of months, the stock has formed a very tight flag, mostly above its 10- week EMA. The shares have worked off an extreme daily and weekly overbought condition in time (versus price), which is bullish. We would put a stop-loss just below chart support at $290. We would take profits at $350, with the potential for greater long-term gains.

Read the full article here (paywall). Read time: 1 min

The author makes a compelling case that Santos, an Australian oil and gas company, is undervalued trading at a significant discount to peers despite quality assets and strong execution. They propose spinning off Santos' Australian and Alaskan assets to focus the company purely on LNG production. This would unlock substantial value, improve capital allocation, attract new investors, and enhance management focus. With LNG fundamentals attractive, the spun-off Santos LNGCo would be a leading global pure-play with tier-one low-cost projects, robust cash flow, and growth. The spun-off Australian company would be an underappreciated domestic gas champion. By separating the disparate businesses, the author believes Santos' undervaluation would be eliminated, potentially increasing its value by over 40%.

Read the full article here. Read time: 7 min