Top stock ideas (Thu, Feb 22)

Author

Connor Van Ooyen
February 22, 2024

👋 Good Morning!

This is the Yellowbrick Road where I share the best stock ideas from billion-dollar hedge funds, professional analysts, millionaire investors, and more!

Welcome to the 87 new readers who joined yesterday!

Our AI read and summarized 144 stock ideas, 1241 news articles, and 300 insider trades and found:

  • A homebuilder with almost 170% upside potential (featured stock idea)

  • $BAB.L is a vital defense company in the UK, a pharma company with a unique business model, and a toy company with 5.5% dividends(bonus stock ideas)

  • Nvidia posts record revenue up 265% (news)

  • The 3 biggest insider purchases (insider trade)

  • and much more…

Thanks for reading! Have a great day.

Connor

* If you missed yesterday’s email, don’t forget to read it here

FEATURED STOCK IDEA

VALUE INVESTORS CLUB

D.R. Horton, Inc. - $DHI

D.R. Horton, Inc. operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States. It engages in the acquisition and development of land; and construction and sale of residential homes in 118 markets across 33 states under the names of D.R.

Ticker: DHI | Price: $143.76 | Price Target: $380 (+164%)
Market Cap: $47B | Timeframe: 2026

🏡 Homebuilder | 📈 Bullish Idea

D.R. Horton, Inc. (DHI), with its net-cash balance sheet, high returns on equity exceeding 20-30%, successful transition from an asset-heavy real estate company to an asset-light efficient manufacturer, and minimal risk of asset impairment, is well-poised for a valuation rerating. Its competitive edge is strengthened by a consolidating industry where it has been gaining market share, particularly at the expense of smaller builders. With home deliveries growing at a 9.8% CAGR from 51,857 in FY2018 to 82,917 in FY2023, DHI demonstrated admirable financial metrics with revenue, profits, and EPS witnessing 17.1%, 25.4%, and 29.8% CAGRs respectively, over the same period. The company not only enjoys a solid market position but also benefits from a housing shortage in the U.S. estimated between 3,000,000 and 5,000,000 units. As such, DHI is expected to continue growing volumes at a ~10% CAGR, heralding significant investor upside potential. With a P/E ratio of just 10.6x against 2023 EPS and considering its peers and industry quality, a more suitable P/E of 16-20x could justify a price target of around $300-$380 by 2026. DHI's stock holds untapped value, which should surface as its evolved business model becomes more evident, positioning it for a material valuation expansion beyond the historical average P/E of the S&P 500. I and/or others I advise hold a significant investment in DHI, enticed by its quality, growth, and the substantial housing deficit that will underpin demand in the coming years.

Read the full article here. Read time: 6 min

+3 POINTS - WEEKLY TOURNAMENT

How do you rate the featured stock idea?

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Yesterday’s Featured Stock Idea

Coupang ($CPNG)

🟩🟩🟩⬜️⬜️ - Buy (57%)
🟥🟥⬜️⬜️⬜️ - Pass (22%)
🟨⬜️⬜️⬜️⬜️ - Watchlist (21%)

There are 3 more stock ideas after “Today’s Sponsor”

TODAY’S SPONSOR

+15 POINTS - WEEKLY TOURNAMENT

Find your next trade with unusual options flow data

I love using unusual option data to find stock ideas.

It’s the best way to find the stocks the big money (like hedge funds) is bullish on.

And the best tool for screening options flow is OptionStrat.

You can see one of the screens I use in the screenshot where I screen for large, out-of-the-money call trades where the volume is greater than the open interest (indicating an opening position - i.e. buying calls) in small and mid-cap stocks.

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For example, in the screenshot, you can see that someone bought $433k worth of call options on $MHK that expire two weeks from when I took the screenshot.

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It’s one of my favorite ways to find new trade ideas and I’ll share more ways I use OptionStrat in future emails!

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BONUS STOCK IDEAS

FUND LETTER

Silver Ring Value Partners New Position - $BAB.L

Babcock International Group PLC, together with its subsidiaries, provides value-add services for aerospace, defense, and security in the United Kingdom, rest of Europe, Africa, North America, Australasia, and internationally. The company operates through four segments: Marine, Nuclear, Land, and Aviation.

Ticker: BAB.L | Price: 480 | Price Target: 900 (+88%)
Market Cap: $2.4B | Timeframe: N/A

🛩️ Aerospace/Defence | 🇬🇧 UK | 📈 Bullish Idea

Babcock International Group PLC (ticker: BAB.L), a UK defense services company, is amidst a promising turnaround led by a management team experienced in reviving businesses in the same sector. Having rectified previous aggressive acquisition strategies and misleading accounting under prior management, the new leadership has fortified the balance sheet, sold non-essential assets, and laid out a believable plan for margin improvement. I secured a moderate stake at roughly 65% of my Base Case valuation, with an upside potential of a threefold increase and downside risk below 30%. Trading at a high single-digit P/E based on normalized earnings estimates and with a sustainable Debt/EBITDA under 2.5x, Babcock has reinstated dividends. Given the company's unique capabilities within a concentrated oligopoly of essential defense services and the improved company culture under the new regime, I discern both the business and the management quality to be above average, which reasonably skews the odds of successful turnaround in our favor with an anticipated upside of 2x.

Read the full article here. Read time: 2 min

ANALYST REPORT

Royalty Pharma plc: Diverse Portfolio Supports Long-Term Growth

Royalty Pharma plc operates as a buyer of biopharmaceutical royalties and a funder of innovations in the biopharmaceutical industry in the United States. It is also involved in the identification, evaluation, and acquisition of royalties on various biopharmaceutical therapies.

Ticker: $RPRX | Price: $31.24 | Price Target: $52 (+66%)
Market Cap: $18B | Timeframe: N/A

🧪 Biotech | 💸 Royalties | 📈 Bullish Idea

Royalty Pharma plc (RPRX) reported fourth-quarter earnings that slightly exceeded expectations, maintaining a $52 per share fair value estimate and projecting annual capital deployment of $2.6 billion between 2024-2028. Despite challenges, such as a royalty rate dispute with Vertex Pharmaceuticals, Royalty Pharma's diverse portfolio demonstrated resilience, growing receipts by 9% in 2023 to over $3 billion and anticipating 7% growth in 2024. The company’s active deal-making, including seven transactions worth $4 billion in 2023, and its strategy to invest in high-return, clinically validated treatments holds promise. Royalty Pharma enjoys a unique market position by providing large-scale, lump-sum payments to biopharmaceutical companies in exchange for future royalty cash flows, which differentiates it from biotech firms with high R&D costs. The company has seen success in large deals due to its capacity for complex transactions, favorable market conditions, demand for capital in biopharma, and an established market dominance for deals exceeding $500 million. Royalty Pharma's investment portfolio carries a narrow moat, driven by royalties on approved biopharma products with extended patent exclusivities. The firm’s disciplined capital allocation strategies and stable balance sheet support its Exemplary Capital Allocation Rating, outlining a positive investment outlook despite some risks from potential regulatory changes or royalty payment defaults. CEO Pablo Legorreta’s leadership since 1996 has fostered Royalty Pharma's growth, capitalizing on over $20 billion in the industry, against a backdrop of a stable dividend policy and a shareholder-accretive $1 billion share repurchase program.

Read the full article here. Read time: 9 min

ANALYST REPORT

Hasbro, Inc.: Maintaining BUY After 4Q Results

Hasbro, Inc., together with its subsidiaries, operates as a play and entertainment company in the United States and internationally. The company operates through Consumer Products, Wizards of the Coast and Digital Gaming, and Entertainment segments. The Consumer Products segment engages in the sourcing, marketing, and sale of toy and game products.

Ticker: HAS | Price: $50.19 | Price Target: $65 (+29%)
Market Cap: $7B | Timeframe: N/A

🧸 Toys | 💰 5.5% Dividend | 📈 Bullish Idea

Argus maintains a BUY rating on Hasbro Inc. (ticker: HAS), with a target price of $65, embracing the toy company's strong global brand portfolio and its potential in the $30 billion industry, driven by digital products, licensing agreements, content creation, and international growth, especially in Asia/Pacific and emerging markets. The company's strategic shift through Blueprint 2.0 focuses on high-margin core brands and cost savings. Recent selling of eOne Film and TV to Lionsgate for $375 million advances debt reduction and a narrower brand focus. Despite underperformance over the past year and a fourth-quarter EPS miss ($0.38 vs. $1.31 in the prior-year period), HAS shares outperformed the S&P 500 last quarter by 17%. Cost savings are ahead of schedule with $220 million realized in 2023, targeting $750 million by year-end 2025. The stock trades at 15-times forecasted 2024 earnings, which is below the toy company average of 21, and offers an attractive 5.5% dividend yield, signaling value. The company targets debt/EBITDA ratio of 2.0-2.5 and carries a Medium financial strength rating. The recent guidance reflects a varied revenue outlook across business segments and an emphasis on operational costs. Management, led by CEO Chris Cocks and CFO Gina Goetter, is executing the Blueprint 2.0 strategy, aiming for $8.5 billion in mid-single-digit revenue growth and a 20% operating margin. Risks include macroeconomic factors like inflation, downturns in key economies, product appeal, and reliance on third-party relationships. The technical analysis previously showed a bearish pattern, but the stock is now seen as undervalued based on peer comparisons, historical valuations, and the dividend discount model.

Read the full article here. Read time: 5 min

+3 POINTS - WEEKLY TOURNAMENT

Which bonus stock idea was the most compelling to you?

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Yesterday’s Poll Results:

🟩🟩🟩⬜️⬜️ AerSale Corporation ($ASLE) [55%]

🟨🟨⬜️⬜️⬜️ Fidelity National Information Service ($FIS) [23%]

🟥⬜️⬜️⬜️⬜️ Robinhood Markets ($HOOD) [22%]

MARKET OVERVIEW

Are you short-term bullish or bearish on the market?

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Yesterday’s Poll Results: 67% bullish

Just when it looked like things could really start going south for the market, Nvidia comes through and pops 8% on their earnings call. The indexes were split with the S&P and Dow both slightly positive and the Nasdaq and Russell negative. The news sentiment was the lowest we’ve seen since we started tracking and is getting very close to dragging the 7-day average into bearish territory.

STOCK MARKET NEWS

Nvidia posts record revenue up 265% on booming AI business - CNBC 

Fed officials expressed caution about lowering rates too quickly at last meeting, minutes show - CNBC 

Teladoc slides on 'anemic' 2024 sales forecast - Reuters 

SolarEdge tumbles 18% on weak first quarter guidance - CNBC 

Chipmaker Analog Devices forecasts weak Q2 as excess supply hurts - Reuters 

Here's why Capital One is buying Discover in the biggest proposed merger of 2024 - CNBC 

Chesapeake says natgas market oversupplied, plans to cut output, spending - Reuters 

Intel expects to overtake TSMC in making fastest chips this year - Reuters 

Apple releases free new sports app for iPhone - CNBC 

BIGGEST INSIDER TRADES

The insider trades are brought to you by CEO Watcher (another free, weekly email I write). It’s the only newsletter that tracks insider returns to find the best ones. Subscribe here

Director at IOVANCE BIOTHERAPEUTICS, INC. ($IOVA) purchased 5,000,000 shares at $9.15/share ($45.75M total) which increased their vested holdings by 21.7%. Their median purchase size is $26.50M and this is their 2nd largest purchase out of 5 all time (link)

10% Owner at Prime Medicine, Inc. ($PRME) purchased 3,200,000 shares at $6.25/share ($20.00M total) which increased their vested holdings by 26.1%. Their median purchase size is $20.00M and this is their 3rd largest purchase out of 5 all time (link)

Director at IOVANCE BIOTHERAPEUTICS, INC. ($IOVA) purchased 250,000 shares at $9.15/share ($2.29M total) which increased their vested holdings by 78.4%. Their median purchase size is $9,250.00 and this is their 1st largest purchase out of 25 all time (link)

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QUIZ

+3 POINTS - WEEKLY TOURNAMENT

This month’s quiz questions focus on the legendary rise and fall of Long-Term Capital Management which Roger Lowenstein chronicles in his awesome book: When Genius Failed.

An in-depth guide/summary of this book is available on Shortform (a free trial and 20% off using my link!). Shortform has summaries/guides for 1000s of nonfiction books and even connects ideas between books. It’s one of my favorite tools for learning

After the bailout in 1998, what happened to LTCM?

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Yesterday’s Question: How did the Federal Reserve respond to the crisis at LTCM in 1998 to prevent a wider financial meltdown?

Answer: The Federal Reserve, led by Chairman Alan Greenspan, coordinated a bailout by major banks to prevent the collapse of LTCM from triggering a wider financial crisis.

LINKS YOU’LL LOVE

+15 POINTS - WEEKLY TOURNAMENT

Nvidia has only ever surprised to the downside on 3 earnings in the last 10 years

WEEKLY TOURNAMENT

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