Top trade ideas (Mon, Nov 6)

LSB Industries (LXU), a U.S.-based nitrogen chemicals producer, was reacquired by the Fund in Q3 owing to its appealing valuation and advanced operational strides. With three facilities in Arkansas, Oklahoma, and Alabama, LXU mainly caters to agricultural and mining sectors. The company, under an owner-operator setup with significant insider holdings, has enhanced its balance sheet while expanding capacity for higher-margin products like nitric acid. Poised to leverage a substantial net operating loss balance, LXU's low production cost edge in the U.S. is further sweetened by a 40% discount to the estimated replacement cost value. As U.S. near-shoring gains momentum, LXU is set to benefit in three key areas: awaiting a $100 million USDA grant under the Fertilizer Production Expansion Program, a projected 20% capacity expansion into a deficit-ridden nitrogen fertilizer market amidst rising demand from ammonia-based fuel and mining expansions, and the near-shoring trend minimizing transport to better the environment. Moreover, LXU's domestic carbon sequestration initiative, targeting over 450,000 metric tons of CO2 sequestration with zero capital expenditure, unlocks potential for strategic alliances, royalty revenues, and margin elevation as we step into 2024. The Fund continues to scout and is prepared to capitalize on similar near-shoring investment opportunities.

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TDS and USM, significantly undervalued telco stocks, are considering strategic alternatives to optimize value, with a potential full sale of both businesses due to compelling financial incentives for the controlling Carlson Family. TDS, owning 83% of USM and with a focus on fiber overbuilding, faces a stretched balance sheet, necessitating a sale. USM, a holding company for US Cellular with around 5 million subscribers, also owns valuable assets like cellular towers and unused spectrum. A sale would free the trapped value, offering 50% and 80% upside for USM and TDS respectively, with various buyers including major wireless companies, cable companies, or financial buyers interested due to the substantial assets and strategic partnerships held by these entities. The sale might face regulatory hurdles given the industry consolidation concerns, yet the rural footprint of TDS and USM could mitigate such challenges. Despite the risk of partial sale, the financial logic and the need for capital to pursue their fiber strategy makes a sale a likely outcome, promising substantial returns for investors.

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Estée Lauder (EL) shares dipped by 18.9% on November 1, following Q1 FY24 results, but rebounded 7% to $112 on November 2. Despite a 70% decline since 2021 end, EL maintains a 20.4x P/E based on FY19 EPS and a 2.4% Dividend Yield. Challenges like de-stocking and a sluggish Mainland China market led to a 10.7% organic sales drop in Q1 FY24. An "accelerated" recovery plan aims to boost operating profit between $800 million to $1 billion across FY25 and FY26. With de-stocking expected to end by March, EL anticipates double-digit sales growth in H2 FY24. The revised outlook for FY24 includes an organic net sales growth of -1% to +2% and a Non-GAAP EPS of $2.17-2.42, a decline from previous expectations. Despite lower FY24 forecasts, EL's long-term outlook in the global beauty market remains positive, with potential for a 48% total return (16.5% annualized) by June 2026, assuming a conservative scenario where FY26 Net Income is only 10% above FY19 and exit P/E is at 25.0x. EL maintains a Buy rating with a belief that actual returns could surpass projections if conditions improve favorably.

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Despite recent apprehensions around US banks, particularly regional and community banks due to events in March/April concerning bank runs, undisclosed tech or crypto exposures, and potential recession, a detailed analysis of financial statements reveals minimal stress in many cases, notably in Citizens Bancshares Corporation (CZBS) and M&F Bancorp, Inc. (MFBP). Both banks, having effectively managed their loan books and participated in the ECIP program, are also recognized as Minority Depository Institutions (MDIs) and have received investments via preferred shares on favorable terms, further supported by major US banks like Bank of America and Citigroup in staff, guidance, and syndicated loans participation. Their valuations have decreased over the last quarter along with other small and microcap stocks, yet their high regulatory capital ratios, management of fixed-rate investments in Available-For-Sale portfolios, and benefits from rising interest rates—especially Citizens Bancshares with its low deposit cost base—make them enticing investments. With strong community ties and sturdy balance sheets, they are expected to grow deposits and double their earnings in the upcoming years as loan portfolios expand, also being well-equipped to withstand a recession. Currently, Citizens Bancshares and M&F Bancorp are priced at multiples of 4.8x and 5.9x respectively, both with cash reserves surpassing their market caps, offering further investment exploration opportunities in other non-ECIP US community banks.

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Aerospace supplier, producing aircraft airframe components. Like many in the industry, Magellan’s operations were disrupted by covid (disruptions). The business is now back on track, and earnings seem poised to accelerate going forward given revenue acceleration due to industry tailwinds and margin optimization (both self help as well as easing impact of disruptions). The company is trading at <5x FY24e ebitda, with >20% ebitda growth pa expected over medium term, and peers trading at HSD multiples.

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4MASS, a Polish producer of various cosmetic and protective products, is primed for aggressive growth and international expansion. Incorporated in 2017 in Wołomin, Poland, it has showcased a remarkable revenue CAGR of 95.4% over the last seven years. It specializes in hybrid and classic nail polish, skin and face care, hair growth products, and recently added medical protective equipment to its portfolio. The company operates under four main brands: Claresa, Palu, Stylistic Salon System, and Virsept, each serving different segments of the market including individual customers, professional beauty salons, and spas. Their products are distributed through three primary channels: mass market retail stores, professional cosmetic and beauty salons, and private labels, with notable customers like Biedronka and LPP. As of November 2, 2023, the market cap stands at 139 million PLN ($33.8 million), which has grown 183% since the start of the year. 4MASS trades at a TTM P/E of 10.11x, EV/EBIT of 4.77x, representing a ~62% discount to its conservatively calculated intrinsic value. The company’s growth is fueled by expanding capacity with new factories, vertical integration, and patent moats, with 30.6% insider ownership indicating a strong internal belief in the company's strategy. Through these strategies, it seeks to continually extend its market reach, both domestically and internationally, capitalizing on its cost-effective production to offer quality products at competitive prices, further boosting its market position and shareholder value.

Read the full article here (partially free). Read time: 12 min