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Top stock ideas (Tue, Feb 6)
Connor Van Ooyen
February 06, 2024
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👋 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 106 new readers who joined yesterday!
Our AI read and summarized 173 stock ideas, 1212 news articles, and 230 insider trades and found:
A healthcare sterilization services company with nearly 150% upside (featured stock idea)
An update on a bank with a 3.7% dividend, a fund believes $CURN has 100% upside, and a fund pitches an insurance company (bonus stock ideas)
McDonald's posts rare sales miss (news)
The three biggest insider purchases (insider trade)
and much more…
Thanks for reading! Have a great day.
Connor
* If you missed yesterday’s email, don’t forget to read it here
FEATURED STOCK IDEA
FUND LETTER
McIntyre Partnerships holding - Sotera Health Company ($SHC)
Sotera Health Company, trading as SHC, is a leading global provider of mission-critical end-to-end sterilization solutions and lab testing and advisory services for the healthcare industry. The company operates through three segments: Sterigenics, Nordion, and Nelson Labs, offering a comprehensive range of services for sterilization technologies and related lab services.
Ticker: SHC | Price: $15.15 | Price Target: $37 (+144%)
Market Cap: $4.1B | Timeframe: N/A
🧼 Sterilization Services | 🩺 Healthcare | 📈 Bullish Idea
Sotera Health Company (SHC), trading under the ticker SHC with a price target of $37, operates in a duopolistic market offering crucial sterilization services to the medical device and pharmaceutical sectors, maintaining a 100% retention rate with its top customers and demonstrating a steady sales growth of about 10%. Despite the sterilization costs being trivial – about 1% of clients' cost of goods sold – SHC enjoys a robust ~55% EBITDA margin. After its IPO in late 2020, stock prices were strong until legal concerns in fall 2022 led to a slump. SHC's shares have been trading below value at less than 12x forward EV/EBITDA and 15x forward EPS. This undervaluation is attributed to a conjunction of temporary headwinds – inventory normalization at customers leading to missed expectations, unfounded fears of GLP-1's impact on medical procedures, and a hesitancy among investors concerning possible legal issues. Nonetheless, the company's litigation outlook is manageable and similar to its peers. Drawing a parallel with our past experience with CC's stock, legal concerns can initially weigh on stock prices, yet markets eventually adjust. Assuming the headwinds subside, a normalization of SHC's multiples is expected – in line with pre-fall 2022 levels – serving as a catalyst for stock price growth. With a forecast of $700 million EBITDA and $1.50 EPS by 2026, applying an 18x EV/EBITDA and 25x P/E multiple could justify the $37 target, compared to the current price of $15
Read the full article here. Read time: 2 min
+3 POINTS - WEEKLY TOURNAMENT
How do you rate the featured stock idea? |
Yesterday’s Featured Stock Idea
Creative Realities ($CREX)
🟩🟩🟩⬜️⬜️ - Buy (60%)
🟥⬜️⬜️⬜️⬜️ - Pass (18%)
🟨🟨⬜️⬜️⬜️ - Watchlist (22%)
✅ alpo**** - Valuation is attractive and the client list is good. I would wonder about competition and the length of contracts
❌ mikes**** - Very low volume which concerns me for liquidity reasons.
❌ jesan**** - Not sure the world is going to keep filling with digital signs in the 5+ year timeframe
There are 3 more stock ideas after “Today’s Sponsor”
TODAY’S SPONSOR
This AI Startup Investment is Winning
RAD AI has developed technology that transforms the $633B MarTech industry. Its award-winning AI tells brands who their customer is and how to best create content for them.
Investors are taking notice, here’s why:
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2) Dubbed “essential AI” for brands looking to attract new audiences and boost ROI.
3) 3X revenue growth, clients include Hasbro, Sweetgreen, MGM and more.
83% Subscribed, Invest Before Feb. 16th, Closing Soon.
BONUS STOCK IDEAS
WFC’s Citigroup ($C) update
Citigroup Inc. is an American multinational investment bank and financial services corporation headquartered in New York City. It offers a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management.
Ticker: C | Price: $54.50 | Price Target: N/A
Market Cap: $105B | Timeframe: N/A
🏦 Banking | 🔄 Turnaround | 💰 3.7% Dividend | 📈 Bullish Idea
Warren Buffett's direct involvement in investing in Citigroup suggests a significant endorsement, hinting this might be the one successful restructuring among many past attempts. Citigroup boasts the most promising 2024 guidance among large-cap banks, with expected positive operating leverage of 2%-5%, forecasting higher revenues of $78B increasing to $80-81B and reducing expenses from $54.3B to $53.5-53.8B. Despite a formidable challenge to simultaneously boost revenues and cut costs, Citigroup has shown disciplined expense management, with the flexibility to adjust costs by an estimated 10% if revenue targets aren't met. Moreover, Citi has been consistent with its guidance, advocating the completion of its organizational simplification by 2024. Moving forward, Citigroup is streamlining its structure by reducing management layers from 13 to 8, eliminating 20,000 jobs (excluding the impact of its operations in Mexico), and addressing longstanding issues, with the top five division heads (Services, Markets, Banking, Consumer, Wealth) reporting directly to the CEO, indicating a significant transformation at a potential multi-decade inflection point.
Read the full article here. Read time: 1 min
FUND LETTER
Greystone Capital top 5 holding - Currency Exchange International ($CURN)
Currency Exchange International, Corp. (ticker: CURN) is a company that provides foreign exchange services and payment solutions primarily to financial institutions and corporations. They offer services such as banknote exchange and traveler's checks, as well as foreign currency risk management and cash processing solutions.
Ticker: CURN | Price: $17.70 | Price Target: $36 (+103%)
Market Cap: $116M | Timeframe: the next few years
🪙 Foreign Exchange Services | 📈 Bullish Idea
Currency Exchange International (CURN), currently at $18/share, has the potential to grow earnings to $2.25-2.50/share in the next few years due to its promising growth avenues, strong incremental margin potential, net cash balance, and solid profitability. Although the stock remained flat this year, CURN achieved a record top line in FY23, surpassing pre-COVID revenues. The company is facing initial costs but expects higher subsequent revenues from its growth initiatives, which include expanding its Payments business, adding more agent locations at busy airports, and spreading its online FX services throughout the US. A particularly exciting prospect lies within its Exchange Bank of Canada subsidiary, which is setting up trust accounts to manage larger transactions with big financial institutions, promising substantial high-margin revenue growth. CURN has also introduced its first share buyback program, targeting up to 5% of outstanding shares, which should further enhance EPS growth. Despite a momentary dip in operating leverage, the market is expected to recognize CURN's earning potential. Trading at liquidation value, the stock provides a cushion against downside risks and is poised for a potential 100% upside.
Read the full article here. Read time: 1 min
FUND LETTER
Bireme Capital holding: Old Republic ($ORI)
Old Republic International Corporation is an American property insurance and title and deed company that provides a mix of insurance products for both consumers and businesses, including liability and indemnity products for a variety of sectors.
Ticker: ORI | Price: $27.51 | Price Target: N/A
Market Cap: $7.8B | Timeframe: N/A
🏦 Insurance | 📈 Bullish Idea
Our investment in Old Republic (ticker: ORI) has performed quite well since our last letter at the end of May, up about 18% including dividends. The company’s General Insurance (GI) business has been thriving, offsetting the expected declines in Title Insurance profits. Over 2023, revenue grew 8.2% in that segment and margins were robust. GI underwriting has been extremely strong, with the combined ratio (insurance losses and SG&A as a percentage of premiums collected) down to 90%, well below the 2010-2020 average of 97%. We expect combined ratios to normalize from here, crimping underwriting profits, but increased income on the float due to higher interest rates should more than offset these declines. In line with this forecast, investment income grew 26% in 2023 at ORI. We forecast profits in GI to grow from $788m in 2023 to $1.2b in 2027. Consolidated net income at ORI should increase from $750m in 2023 to almost $1b. We believe investors misunderstand ORI because they are too focused on ORI’s floundering title insurance business. However, even if the title insurance business never fully recovers, we believe that the stock remains undervalued today at an $8b market cap. Management seems to agree with our assessment, having repurchased $530m shares on the year. In conjunction with the substantial dividend, this puts the total shareholder yield over 10%.
Read the full article here. Read time: 1 min
+3 POINTS - WEEKLY TOURNAMENT
Which bonus stock idea was the most compelling to you? |
Yesterday’s Poll Results:
🟩🟩🟩⬜️⬜️ Brookfield Infrastructure Partners ($BIP) [58%]
🟨🟨⬜️⬜️⬜️ FLEETCOR Technologies ($FLT) [27%]
🟥⬜️⬜️⬜️⬜️ Thryv Holdings ($THRY) [15%]
MARKET OVERVIEW
Are you short-term bullish or bearish on the market? |
Yesterday’s Poll Results: 71% bullish
The first all-red day in a while. The markets opened very red before getting pretty close to even and eventually ending the day red. Yellowbrick Road readers remain very bullish, though the bullishness has fallen from the high 70s to the low 70s. The news sentiment is also creeping its way toward neutral and if below the 7-day average. Surprisingly, the Fear v Greed index actually rose a couple more points and is nearing the Extreme Greed level.
STOCK MARKET NEWS
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Ron Insana: The Fed may take a slow approach to rate cuts, but this is still a good economy - CNBC
McDonald's posts rare sales miss as Middle East hit weakens overseas business - Reuters
Snap to lay off 10% of global workforce, around 500 employees - CNBC
Novo Nordisk parent to buy Catalent for $16.5 billion to expand Wegovy supply - CNBC
Palantir revenue beats expectations, up 20% from the year-ago quarter - CNBC
Google to face US antitrust trial over digital ads in September - Reuters
Foxconn's January revenue down 20.9% y/y - Reuters
LARGEST INSIDER TRADES
The insider trade is brought to you by CEO Watcher (another free, weekly email I write). It’s the only newsletter that tracks insider returns to find the best ones. Subscribe here
10% Owner at Skye Bioscience, Inc. ($SKYE) purchased 5,206,070 shares at $2.31/share ($12.03M total) which increased their holdings by 115.1%. Their median purchase size is $12.03M and this is their 1st largest purchase out of 1 all time (link)
CEO and President at BBX Capital, Inc. ($BBXIA) purchased 415,395 shares at $11.08/share ($4.60M total) which increased their holdings by 54.0%. Their median purchase size is $1.36M and this is their 3rd largest purchase out of 3 all time (link)
10% Owner at TILLY'S, INC. ($TLYS) purchased 128,928 shares at $7.45/share ($960K total) which increased their holdings by 1.9%. Their median purchase size is $444K and this is their 15th largest purchase out of 53 all time (link)
QUIZ
+3 POINTS - WEEKLY TOURNAMENT
If you like this quiz section, then you are probably like me and love to learn! One way I learn is by using Shortform. They are a website/app that creates summaries/guides for 1000s of nonfiction books and connects ideas between books. Whenever I have a free 10 minutes, I just open their app and learn something new from a book about finance, business, history, etc.
I’ve been lucky enough to partner with them and offer you a free trial and a 20% discount if you use my link: https://shortform.com/yellowbrickroad
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 (20% off using my link!).
Which future Nobel Prize winner, famous for co-creating an option-pricing model named after him, was recruited by Meriwether as a founding employee at LTCM? |
Yesterday’s Question: John Meriwether was one of the biggest money-makers at Salomon Brothers but was forced to leave due to a scandal involving which practice?
Answer: Unauthorized bids in US Treasury auctions. One (or more) of the traders on his team made false bids in an effort to manipulate the market in two-year notes.
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WEEKLY TOURNAMENT
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🏆 This Week’s Leaderboard
john.m**** (34 points)
m_whi*** (34 points)
zz.sto**** (34 points)
Scoring
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MY OTHER FREE NEWSLETTERS
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+3 POINTS - WEEKLY TOURNAMENT
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