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Top stock ideas (Thu, Jan 25)
Connor Van Ooyen
January 25, 2024
YBR Portfolio // About // Sponsor YBR // YBR Premium
👋 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 113 new readers who joined yesterday!
Our AI read and summarized 123 stock ideas, 1325 news articles, and 185 insider trades and found:
HPE has 84% upside and a 3.4% dividend(featured stock idea)
$ARIS and $MLR have 50% upside (bonus stock ideas)
Mortgage demand down 9.4% (news)
3 insiders at $FAST sold large chunks of stock (insider trade)
and much more…
Thanks for reading! Have a great day.
Connor
* If you missed yesterday’s email, don’t forget to read it here
FEATURED STOCK IDEA
BLOG POST
Hewlett Packard Enterprise ($HPE)
Hewlett Packard Enterprise Company (HPE) is an American multinational enterprise information technology company that provides solutions and services for servers, storage, networking, consulting and support, all designed to help organizations accelerate their digital transformations.
Ticker: HPE | Price: $15.73 | Price Target: $29 (+84%)
Market Cap: $20B | Timeframe: end of 2025
💻 Enterprise Tech | 💰 3.4% Dividend | 📈 Bullish Idea
Hewlett Packard Enterprises (HPE) is transitioning into a higher quality technology provider with a focus on networking, servers, storage, and associated services, generating $21.5 billion in revenue. The company is reorganizing from historic segments, highlighting potential in its Intelligent Edge, High-Performance Compute & AI (HPC/AI), and Storage/Greenlake (Hybrid Cloud) divisions. HPE's Intelligent Edge, leveraging Aruba networks, seeks to achieve a low double-digit CAGR and around 25% operating margins by FY26 through drivers like remote work and IoT. The HPC/AI segment, boosted by Cray acquisition, anticipates double-digit growth and targets 10% operating margins by FY26, tapping into the AI market that favors HPE's compute and storage solutions. With the aim of a 7% CAGR for Storage by FY26 and strong growth in Greenlake's Annual Recurring Revenue, HPE's earnings power has increasingly come from these higher growth sectors. The company also plans to generate over $10 billion in free cash flow through operating efficiencies and divestitures, committing to a higher shareholder capital return. HPE’s stock, undervalued due to misinterpretation of its financial structure, particularly regarding its financing division, trades at 4.5x EBIT, while peers have higher multiples. Using PE multiples per division and a conservative approach for capital deployment, including M&A at 15x EBIT, a price target of $29/share is projected by the end of 2025, offering a 35% IRR.
Read the full article here. Read time: 5 min
+3 POINTS - WEEKLY TOURNAMENT
How do you rate the featured stock idea? |
Yesterday’s Featured Stock Idea
Navitas Semiconductor ($NVTS)
🟩🟩🟩⬜️⬜️ - Buy (56%)
🟥⬜️⬜️⬜️⬜️ - Pass (20%)
🟨🟨⬜️⬜️⬜️ - Watchlist (24%)
✅ callbo**** - I own a gallium nitride charger, and love it! I am strongly considering buying more more each member of my family. Great product, great future. I have looked into investing w this company before ever reading this article
✅ danda**** - Sounds like a great company. Love the risk to reward, so it is a buy for me
❌ fictiona**** - Anything that is reliant on China is too risky for me.
There are 3 more stock ideas after “Today’s Sponsor”
TODAY’S SPONSOR
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BONUS STOCK IDEAS
BLOG POST
Taking a fresh look at $XLE
The Energy Select Sector SPDR Fund (ticker: XLE) is an exchange-traded fund that seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Energy Select Sector Index, which includes companies from the oil, gas, consumable fuels, energy equipment, and services industries.
Ticker: XLE | Price: $81.67 | Price Target: N/A
Market Cap: N/A | Timeframe: N/A
🛢️ Oil/Gas | 🔄 Turnaround | 📈 Bullish Idea
Investors have been shunning the Energy Select Sector SPDR Fund (XLE) due to a defunct bullish thesis that has yet to manifest the anticipated entrenched inflation and supply shortages, despite global capacity exceeding pre-pandemic levels and sanctions having a lesser impact on supply. Additionally, the US's rise to a net energy exporter has reduced the strategic importance of the Strategic Petroleum Reserve (SPR). With energy being the most hated sector according to the Bank of America Fund Manager Survey (FMS) and record shorting in derivatives markets, sentiment is at an all-time low. Contrary to the negative sentiment, the strong financial health of US energy companies and their conservative valuations—evident from net debt/EBITDA ratios plummeting from 3x in 2017 to 0.7x—suggest a mispricing. Moreover, oil remains vital for economic growth, and industries like road and airline traffic are poised for recovery. With the potential for economic growth to outpace current modest expectations, and considering geopolitical risks and the upcoming US presidential election, XLE, driven by undervalued and financially robust US energy firms, presents a favourable risk/reward opportunity, particularly as a hedge against tail risks.
Read the full article here. Read time: 13 min
BLOG POST
Miller Industries: Remains Underfollowed And Undervalued
Miller Industries, Inc. is an American company engaged in the manufacturing of towing and recovery equipment, including wreckers, car carriers, and rotator vehicles, and it serves towing operators, municipalities, and related industries.
Ticker: MLR | Price: $40.30 | Price Target: $60 (+49%)
Market Cap: $464M | Timeframe: 1 year
🚗 Towing/Recovery Equipment | 🏭 Manufacturing | 💰 1.7% Dividend | 📈 Bullish Idea
Miller Industries, Inc. (NYSE: MLR) has experienced over 30% revenue growth for three consecutive quarters and saw operating margins double to 8.6% in the most recent quarter, signaling strong financial performance post a capex cycle which expanded capacity for backlog fulfillment. However, the stock price remains stagnant, undervalued given my continued buy rating with projections pointing to MLR reaching $60 within a year based on conservative 2024 earnings estimates. Miller benefits from increased miles driven post-pandemic, an aged vehicle fleet, infrastructure construction driven by fiscal policy, and demand from general construction shifts towards manufacturing, warehousing, and data centers, despite lower office and retail construction. The company's strong backlog, enhanced manufacturing capabilities, recent easing of supply chain issues, a potential demand increase due to future EPA regulations, and military vehicle upgrades are set to sustain growth. Miller's culture prioritizes employee development, innovation, and has a robust topline growth history with expanding margins over time. It remains under the radar with no sell-side analyst coverage, often resulting in market overlook despite outperforming earnings expectations, earning $3.64 per share in the first nine months of 2023. My revised model argues an $85 intrinsic value per share, taking modest revenue growth and operating margin expectations alongside other financial assumptions. A dividend increase and ongoing debt reduction could serve as minor catalysts, but liquidity concerns exist due to a daily trading volume of only $1.5 million. Long-term, with improved financial awareness, I see MLR progressing towards its intrinsic value, with interim goals of $60 and ultimately, $85 per share.
Read the full article here. Read time: 4 min
FUND LETTER
Rewey Asset Management holding: ARIS Water Solutions ($ARIS)
Aris Water Solutions, Inc. (ticker: ARIS) is a company that specializes in water handling and recycling, providing environmentally responsible water solutions to the energy industry, particularly focusing on the needs of oil and gas operators in the Permian Basin.
Ticker: ARIS | Price: $8.12 | Price Target: $12 (+48%)
Market Cap: $473M | Timeframe: N/A
💦 Water Handling/Recycling | 💰 4.3% Dividend | 📈 Bullish Idea
ARIS Water Solutions, valued at $484 million, operates in water disposal and recycling for the Permian Basin's oil and gas sector, trading at $8.39, 33% lower than its IPO price. Despite its ties to oil production levels, not prices, ARIS is often misunderstood by the market. The company provides essential services in an area where water is scarce, offering a high-value solution with its pipeline and recycling infrastructure that poses a significant barrier to entry for competitors. ARIS boasts a robust financial profile with long-term customer contracts, a 2.3x net debt to EBITDA, $24 million in cash, and an extended $350 million credit facility, evidencing room for growth and M&A potential. Forecasting strong revenue growth, margin improvement, and increased free cash flow in 2024, ARIS’s resilient business is reinforced by partnerships with major oil players and its strategy to cut costs and improve operational margins. Its ESG initiatives, which include pipeline networks reducing truck usage, water reuse and aquifer recharge, and a partnership with industry giants for environmentally friendly water treatment and carbon trapping, enhance its attractiveness for ESG-focused investors. With shares priced attractively at 6.4x and 5.4x 2023/2024 EBITDA estimates and a compelling 4.3% dividend yield, our conservative target for ARIS is $12, implying a 43% potential upside, excluding additional valuation from ESG activities.
Read the full article here. Read time: 2 min
+3 POINTS - WEEKLY TOURNAMENT
Which bonus stock idea was the most compelling to you? |
Yesterday’s Poll Results:
🟩🟩🟩⬜️⬜️ Schlumberger Ltd ($SLB) [55%]
🟨🟨⬜️⬜️⬜️ Sociedad Quimica y Minera de Chile ($SQM) [33%]
🟥⬜️⬜️⬜️⬜️ Unilever Plc ($UL) [12%]
Your comments:
🛢️ mikemcg*** ($SLB): I've gotten killed on energy stocks. The dividends and buying opportunity make it interesting. At some point, the same thing that hit the bottom should bounce back, it’s just a matter of staying power and patience.
🔋 emoj*** ($SQM): With restrictions on exports from China, the mining of lithium and gallium are in higher demand (see the risk from Navitas), further elevating this stock.
MARKET OVERVIEW
Are you short-term bullish or bearish on the market? |
Yesterday’s Poll Results: 73% bullish
The markets cooled off just a tiny bit, but everything else keeps getting more bullish. Yellowbrick Road readers, the Fear v Greed index, and the news sentiment are all at the highest they’ve been in 2024!
STOCK MARKET NEWS
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Tesla gross margin falls in fourth quarter - Reuters
eBay to slash about 1,000 roles, or approximately 9% of full-time employees - CNBC
Alaska Airlines found loose bolts on 'many' MAX 9 airplanes -CEO - Reuters
ASML fourth quarter earnings beat expectations, keeps outlook unchanged - Reuters
AT&T's race with cable, equipment writedown hurt annual profit forecast - Reuters
SAP plans job changes or buyouts for 8,000 employees in restructuring plan - CNBC
IBM shares rise after earnings top estimates in 'uncertain, volatile' economy - CNBC
Microsoft crosses $3 trillion in market cap - CNBC
Apple ramping up plans to integrate AI into iPhones: report - New York Post
FEATURED INSIDER TRADE
The insider trade is 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
3 big insider sells at $FAST:
SENIOR EXECUTIVE VP at FASTENAL CO ($FAST) sold 23,590 shares at $69.25/share ($1.63M total) which decreased their holdings by 64.3%. Their average sale size is -1,483,060.00 and this is their 2nd largest sale out of 7 all time (link)
Director at FASTENAL CO ($FAST) sold 34,042 shares at $68.48/share ($2.33M total) which decreased their holdings by 63.0%. Their average sale size is -2,331,250.00 and this is their 3rd largest sale out of 5 all time (link)
SENIOR EXECUTIVE VP at FASTENAL CO ($FAST) sold 19,564 shares at $69.02/share ($1.35M total) which decreased their holdings by 56.3%. Their average sale size is -618,594.00 and this is their 3rd largest sale out of 8 all time (link)
QUIZ
+3 POINTS - WEEKLY TOURNAMENT
The term "unicorn" in the venture capital industry refers to a startup company valued at over what amount? |
Yesterday’s Question: Which economist is credited with developing the Efficient Market Hypothesis?
Answer: Eugene Fama! He also did work on portfolio theory and asset pricing
LINKS YOU’LL LOVE
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SECRET QUESTION
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WEEKLY TOURNAMENT
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🏆 This Week’s Leaderboard
jamesmc**** (119 points)
guisse*** (119 points)
mmckel**** (119 points)
Scoring
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+10 points for replying to this email
+15 points for clicking on an ad/sponsored link
+50 points for referring a friend
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A few other newsletters you may be interested in if you still want more to read
Morning Brew (link) - keep up with business news in 5 minutes a day
Ambition Chronicles (link) - rags-to-riches stories
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