Top stock ideas (Thurs, Oct 26)

The author makes a strong case for NextEra as an attractive investment based on its premium utility assets and best-in-class renewable energy business. Florida Power & Light, the regulated utility business, benefits from allowed returns near the top of the industry and substantial growth opportunities, estimated at $40B through 2027. This supports the author's industry-leading 9% EPS growth outlook through 2027. The renewable energy unit, NextEra Energy Resources, is adding record project capacity, now at 21GW, supporting the 2023-2026 development target of 33-42GW. Strength here comes from early mover advantage securing prime renewable energy locations plus demand tailwinds. Although NextEra faces heightened regulatory scrutiny in Florida, management believes no liability for alleged violations. With prudent capital allocation, including growing dividends, and proven execution on growth initiatives, the author sees NextEra's 6-8% EPS growth guidance as achievable at the high end. Trading at a discount despite quality assets and leading growth, the author argues NextEra shares offer an attractive opportunity, especially for long-term investors seeking both income and growth.

Read the full article here (paywall). Read time: 8 min

The author initiated a position in Summit Materials (SUM), a construction materials firm with revenue streams from aggregates and cement (40%), ready-mix concrete (30%), and asphalt and paving. Attracted to the industry's inherent advantages like limited competition and long-term demand, especially with recent infrastructure bills benefitting public construction needs, the author sees potential. SUM's recent acquisition of Cementos Argos' U.S. operations, although initially met with a 20% stock price decline due to a perceived high acquisition cost (10x EBITDA) and potential underinvestment by Argos, is seen as a positive move. The acquisition not only transitions SUM towards the more stable aggregates/cement sectors but also expands its presence in growth-centric states like Florida and the Carolinas. The author believes the potential operational synergies and high-return capital investments could offset the initial market skepticism, making the dip an opportune entry point.

Read the full article here. Read time: 4 min

The author believes Novo Nordisk is undervalued by over 50% due to the massive potential in diabetes and obesity treatment, which could drive revenues to $100 billion by 2030. Novo Nordisk has continuously grown revenues over the past decade and now its obesity drugs like Wegovy are seeing surging demand, with the total addressable market estimated at $350-450 billion annually by 2030. The author projects 30% revenue CAGR through 2025, leading to $100 billion in sales by 2030 as Novo grabs 25-30% obesity drug market share. Applying a residual earnings model with 7.8% cost of equity and 4.25% terminal growth, the author's model suggests a fair value over $140 per share versus the current $88 price. The main risks are pricing pressure and regulations in the pharma industry, competition from drugs like Eli Lilly's Mounjaro, and potential supply constraints. But the author sees substantial upside for Novo Nordisk from the huge obesity treatment opportunity.

Read the full article here (5 free per month). Read time: 5 min

The author makes a compelling case that Beaver Coal is an attractive investment opportunity despite being a coal company on the surface. Beaver owns 50,000 acres in West Virginia with mineral rights and has transformed over time into a capital-light royalty and rental revenue model, requiring minimal opex. The author shows Beaver's revenue streams have diversified from 100% coal historically to now include commercial rentals (21% of revenue), timber royalties (8%), methane and stone royalties, and natural gas royalties alongside coal royalties (67%). Revenue has grown over time while opex stayed flat, allowing consistent distribution growth. Critically, Beaver owns prime metallurgical coal reserves leased profitably to Arch Resources and others for export, not thermal coal for domestic power plants. The author argues management's prudent focus on low costs and diversification makes Beaver's inflation-beneficiary business sustainable. While risks exist around coal demand, Beaver has outperformed with a 21% 10-year CAGR, far above the S&P 500's 12.2%. Given the defensive business model and strong history, the author sees Beaver as a long-term opportunity worth further research.

Read the full article here. Read time: 10 min

The author makes a bullish case for Solitron Devices, a small electronics manufacturer. He believes the current valuation is attractive at 5-6x P/E due to short-term uncertainties that are clouding the long-term potential. He expects $20M in revenue by 2024 from existing contracts and the recent Micro Engineering acquisition, with 45-50% gross margins, leading to $5M in operating income. Combined with NOLs and net debt of $800K, he believes the fair value is $50M in 1-2 years, representing 133% upside from current prices. The CEO owns 15% and is focused on increasing intrinsic value 10% annually, so is likely to repurchase shares significantly if the stock stays depressed. The author sees limited downside due to the low purchase price for the acquisition. Main risks are contract renewal risk and lack of organic growth potential, but he believes these are mitigated by the reasonable valuation.

Read the full article here (not in English). Read time: 6 min

The author invested in Talen Energy Corp., a post-bankruptcy firm with diversified power generation assets, notably the Susquehanna Steam Electric Station, a 2.5-gigawatt nuclear plant. Post bankruptcy in May, Talen significantly reduced its debt and, while currently over-the-counter, is anticipated to be exchange-listed soon. The Inflation Reduction Act’s nuclear supports provide a price floor, minimizing hedging costs, and de-risking Talen's business, meriting higher earnings multiples. The nuclear assets could attract larger utilities aiming to boost renewable portfolios, or Talen might segregate them from its traditional gas and coal assets. Additionally, Talen's 95% stake in a data center, adjacent to Susquehanna, presents monetization opportunities due to the high demand for renewable-energy-powered data centers. The author foresees a potential transformation in Talen's structure or ownership within a year, supporting a higher share price.

Read the full article here. Read time: 2 min