Top stock ideas (Tue, Feb 20)

Vanda Pharmaceuticals Inc. (NASDAQ: VNDA) presents an intriguing investment case as its stock price of $4.15/share trades below its cash and marketable securities value of $6.75/share, based on $388 million in holdings and 57.5 million shares outstanding. Despite this superficially attractive valuation, concerns arise from management's decision to spend $100 million on a product divested by Janssen, ongoing generic competition for its products, potential FDA rejections, and a notable level of litigation. The company's portfolio includes two revenue-generating products, a recent acquisition, and the chance for three FDA approvals in 2024. A bare/main/bull case analysis incorporating various asset outcomes, probabilities of success, and corporate expenses suggests a share value range from $1.65 to $13.97. A Monte Carlo simulation supports this expected value approach but cautions about potential cash depletion and a 20% risk of a negative outcome. Notably, the company's stock price could be significantly influenced by the FDA's approval decisions in 2024, particularly for Tradipitant and Fanapt, with a potential value exceeding the current price if approvals are granted. High levels of equity ownership by the CEO and familial corporate relations suggest a vested interest in the company's success, despite also raising governance concerns. In conclusion, VNDA's assets are likely undervalued, with room for upside if the drug approvals materialize and pessimism seems overstated, warranting attention from investors looking beyond the cash on hand and considering the broader asset portfolio's potential.

Read the full article here. Read time: 7 min

During the quarter, our long-term holding, Capital One (COF), emerged as one of our stronger performers. Notably, the company maintains a diversified deposits base, with approximately 80% FDIC insured, surpassing the industry average. Distinguishing itself as the sole major bank operating entirely in the cloud, Capital One leverages this technological edge for enhanced underwriting capabilities and agile responses to market dynamics. This innovative approach not only reduces operating and fraud costs but also facilitates reinvestment of cash flow into marketing initiatives, such as the Venture X card, fostering brand growth. The recent challenges faced by the banking sector in March underscored Capital One's adept underwriting practices and the resilience of its high-quality deposit base. Capitalizing on the opportunity presented by market volatility, we augmented our position in the aftermath, confident in the leadership of the company's seasoned management team, known for navigating previous economic cycles successfully. With credit card delinquencies gradually normalizing, Capital One has already observed a deceleration in delinquency growth, in contrast to some competitors grappling with past underwriting errors surfacing in 2023. Currently trading at approximately 9 times 2024 consensus earnings and around book value, our enthusiasm for this investment remains steadfast.

Read the full article here. Read time: 1 min

Payfare Inc. (ticker: PAY.TO), with a market cap of CAD $340m and enterprise value of CAD $281m, is a leading financial technology company offering services to gig economy workers from prominent platforms like Uber, Lyft, and DoorDash. Focused on improved worker retention, Payfare provides Earned Wage Access (EWA), digital banking, ATM services, and rewards programs, allowing workers immediate access to earnings, crucial for covering expenses and fostering sustainable gig work. Despite transformative operational leverage achieved post-IPO, resulting in a positive gross and net profit with growing margins, Payfare trades close to its IPO price, with a price-to-earnings (P/E) of 30x and enterprise value-to-sales (EV/S) of 1.6x, which are perceived as low considering the company's growth trajectory. The gig economy is projected to grow to $1 trillion by 2030, with Payfare positioned to scale alongside it, as it holds sticky relationships with its clients and benefits from low competition in its specialized segment—factors that support Payfare's potential for multi-bagger returns. However, investors should weigh the possible challenges of increased competition and future self-reliance of gig platforms on fintech solutions. Payfare's management shows commitment, with significant insider ownership and business focus on developing value-added services. As the gig economy thrives, fueled by cultural shifts and economic pressures, Payfare, with impressive financials and a strong balance sheet, including a free cash flow of $18.8m and no long-term debt, could offer notable upside potential, underscored by a target price of $11 over the next year.

Read the full article here. Read time: 16 min

In October 2023, I initiated coverage on Exxon Mobil Corp (NYSE:XOM), identifying it as a top pick in the international oil sector due to its strong execution, management, and regional positioning. Exxon's acquisition of Pioneer Resources aligns with its strategy to increase US-based oil production. In FY23, Exxon reported $36bn in earnings, a growth of over 40% since 2019, with a >15% CAGR in operating cash flow, despite average crude prices of $82 per barrel. Cost-saving measures contributed to significant margin expansions, with Exxon outperforming peers in capital efficiency by approximately 40%. Its downstream segment accounted for about 42% of total earnings, exceeding the industry average. Despite a drop in downstream earnings, Exxon maintains high profitability and scale. In FY23, the balance sheet improved, and shareholder returns were prioritized, with $15bn in dividends and $17.5bn in share repurchases. Exxon plans to buy back $40bn in shares by 2025. FY23 production remained stable, but growth is expected in regions like the Permian and Guyana, with the Pioneer merger boosting production. My revised valuation anticipates a significant increase in equity value and share price, suggesting a 56% upside from current levels.

Read the full article here. Read time: 6 min