Top trade ideas (Fri, Nov 3)

The Joint Corporation (JYNT), a prominent franchisor of chiropractic clinics, is transitioning to a cost-effective franchise model to boost its financial standing, despite an 86% drop in EV per share from 2021. The firm aims to open 100-120 new franchises in 2023, amidst a strong revenue per share growth of 40% from 2021. Q2 2023 reports showed a 23% increase in adjusted EBITDA to $3.2 million, driven by both company-owned and franchised clinics. The appointment of Lori Abou Habib as Chief Marketing Officer aims to address the slowdown in new patient count through enhanced local marketing. Aggressive share purchasing by Bandera and significant accolades from reputable business rankings affirm JYNT's market potential. Despite its high-risk nature due to past financial restatements and local market saturation, intrinsic valuation analysis indicates that JYNT is undervalued, making it a compelling, albeit risky, investment opportunity as it navigates through operational transitions to realize its financial promise.

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NatWest's Q3 2023 results triggered a 14% share price decline, mainly due to fears surrounding Net Interest Margin (NIM), which fell from 3.27% in Q1 to 2.94% in Q3, impacting the Return on Tangible Equity (ROTE) which dropped from around 20% in Q1 to 14.7% in Q3. Despite this, the bank's strong customer relationships and economies of scale are expected to support better NIM and ROTE compared to competitors. The outlook suggests that deposit stabilization and structural hedge tailwinds will support NIM in the coming quarters. Even at a conservative 10% ROTE, the stock is viewed as undervalued, with a medium-term target of 14-16% ROTE. At 178.2p per share, a 64% total return is forecasted by 2026, affirming a Buy rating. Management's targets focus on cost efficiencies and capital return to shareholders, with an emphasis on a sub-50% Cost/Income Ratio and a 40% Payout Ratio. The primary risks include credit losses and potential governmental actions, given the UK government's 38.6% stake in NatWest. However, the bank's prudent mortgage portfolio and the managerial strategy are expected to mitigate these risks. The valuation at 0.66x P/TNAV and a 8.7% Dividend Yield, alongside the bank's share repurchase programs, further bolster the investment case for NatWest.

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Fossil Group (FOSL), a global luxury goods company, seems significantly mispriced with exceptionally low market expectations despite its wide array of owned and licensed brands in fashion watches, jewelry, and accessories. The company recently unveiled a transformation plan aimed at generating $300M in operating income benefits by 2025, over 20% of annual revenue, focusing on boosting sales productivity through a digital-first approach, revamping pricing/promotions, closing unprofitable stores, reengineering operations, streamlining overhead, and enhancing capital efficiency. Although ongoing sales headwinds have led to the current share price discounting much of the anticipated transformation plan benefits, the share price is now below the cash per share on the balance sheet, deeply discounted to the $6+ tangible book value. The net asset reproduction value stands over $1B. Successful execution of the transformation plan could yield significant upside, potentially 5 to 10x the current share price, as the normalized free cash flow is projected to exceed the current market capitalization. A comparable transaction like Tapestry, Inc.'s (TPR) recent acquisition of Capri Holdings (CPRI) in the luxury sector at an Enterprise Value to Revenue multiple of 1.5x starkly contrasts with Fossil's sub .1x valuation, hinting at a substantial embedded value potential from a successful transformation.

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JD.com, a Chinese e-commerce giant, has a mixed fundamental outlook due to its below-target 5-year average profit margin and increased shares outstanding over the last 5 years, although it's taken steps to halt share issuance and initiate a $3 billion share repurchase program. Founded in 1998, JD has grown into a formidable Alibaba competitor, diversifying from electronics into various categories, and investing in AI, autonomous technology for logistics, boasting the largest drone delivery system globally. Strategic alliances with Tencent, Walmart, and ASUS have bolstered its competitive stance. In 2023, JD announced plans to spin off JD Property and JD Industrials, retaining majority control while inviting outside investment. The firm operates several business segments, including JD Retail, Dada (on-demand delivery services), JD Logistics, JD Health, JD Property, and JD Industrials, each playing a crucial role in its extensive business ecosystem. The management, led by founder Qiangdong Liu, has a history of sound capital allocation, recently paying a sustainable dividend with a yield of 2.46%. The bull case for JD lies in the end of the tech crackdown in China and its current undervaluation, which could lead to a price appreciation if growth resumes. However, the bear case involves fears of delisting, a slowdown in revenue growth, and intense competition within China's e-commerce space, particularly from Alibaba and Pinduoduo. Despite these challenges, JD’s aggressive market share defense strategies and a projected expansion of the Chinese e-commerce market hint at its potential to maintain a significant stake in the sector. Valuation comparisons show JD in a favorable light against peers, and a conservative DCF model suggests a buy price of $39.79 and a fair value price of $62.07, indicating the stock's current undervaluation at $25.65.

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Revolve's Q3 2023 results showed net sales of $257.6 million, surpassing forecasts, although sluggish demand due to macroeconomic pressures led to a 48% market cap dip, amidst a 16% fall in luxury spending in the US. Revolve aims to expand wallet share through category layers, cross-selling, and international growth post-macroeconomic recovery. Active customer count rose by 11.6% to 2.5 million, showcasing effective marketing, but lowered average order value and high return rates signal ongoing consumer demand issues. Despite lower EBITDA margins, long-term prospects appear promising with an emphasis on digital engagement and an asset-light, digitized approach for resonating with a young, engaged customer base. International expansion and cross-selling between Revolve and its luxury FRWD marketplace, along with investments in tech like virtual try-ons, could potentially mitigate return rates and boost sales. Amid these efforts, risks from competitive and macroeconomic factors, alongside the need to maintain a strong brand amidst digital shelf space competition, are notable. The company's intrinsic valuation was lowered to $29.50, reflecting a cautious macro outlook with a return to double-digit operating profit margin anticipated by 2027. This still provides over 120% upside from the current prices.

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John Wiley & Sons ($WLY), a 200-year-old publishing firm now diversified into research, academic, and corporate training segments, presents a value opportunity as a former CEO departs and an interim CEO makes a significant over $500k open market share purchase. Previous management's poor capital allocation, spending $800m on M&A with little to no earnings, led to a drastic earnings drop in FY24. Despite this, WLY's historically stable business nature and current undervalued standing at 13x earnings versus a historical 15-17x, alongside a plan to reverse earnings drop, sets a promising outlook. Further intrigue comes from asset sales of over $315m book value, with potential proceeds possibly directed towards debt reduction, further acquisitions, or buybacks. This setup, marked by a management change, insider purchases, stable cash flow, asset sales, and cheap valuation, aligns for a potential market correction to its historical performance.

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