There’s a profitable stock recommendation hidden in plain sight. One that offers a potential upside of 100%.
The market is richly valued by almost every measure. So, lay-up values are hard to come by.
This month’s stock trades well below intrinsic value while the market trades in the nosebleed section of price-to-sales and price-to-earnings ratios, and price-to-book values.
That’s after trimming estimates significantly to create an added cushion of safety.
The company’s not a highflier; it’s over 100 years old.
Uber (NYSE: UBER) is imploding due to massive losses and Beyond Meat (Nasdaq: BYND) is shedding a few pounds off its stock price due to secondary offerings. This month’s stock recommendation just generates cash flow. And lots of it.
Where Does That Cash Flow Go?
As I noted in The Rich Investor, stock buybacks have been the key driver of market returns since the bull market began in 2009.
That cash flow — about $2 billion — the company produced can be used to repurchase undervalued stock during a bear market.
In the latest earnings call, management announced it will buyback even more stock. This could be a point of concern. But not all buybacks are created equal.
If management was aggressive and buying stock to boost earnings per share, my Forensic Accounting Stock Tracker (FAST) software would wave red flags. That’s not the case here.
Here’s the FAST ratings for this month’s recommendation:
Revenue Recognition (B): No red flags that the company is artificially boosting revenue. There’s also a low probability of any manipulation on the income statement.
Cash Flow Quality (A): Cash flow quality is strong. Working capital is contributing to cash flow. Cash flow return on invested capital is nearly 18%.
Earnings Quality (B): Operating income exceeds cash flow on a consistent basis. Other earnings quality metrics raise no red flags.
Expectations (A): Expectations are very low. The stock hasn’t moved in years. Recent announcements show some operations below plan. Any positive surprise could lead to big earnings revisions.
Valuation (A): The stock is cheap in a bear market. Even after shaving expectations embedded into the stock, the upside is 100% or more.
Shareholder Yield (A): The company is bumping up dividends and taking stocks out of circulation. It’s a double payday for investors who like to get paid first.
Share buybacks will likely be more important in the future as a signal that the stock is undervalued. The company announced another $250 million in buybacks for 2019.
The trend in gradual dividend increases is likely to continue.
Curious to Learn More About This Month’s Stock Recommendation?
Overall, this month’s recommendation scores an average A. It’s poised to profit.
Curious to learn more about this month’s recommendation? Have a closer look at Hidden Profits.
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