Stock of the Week: This $1.5 Billion Education Company Won’t Be Cheap for Long
Alpesh Patel|September 25, 2023
AI is transforming education. While teachers and professors battle it out with students over term papers written by ChatGPT… the technology is having a huge impact on the sector.
And education companies that figure out how to harness its power stand to benefit greatly.
Like this week’s Stock of the Week.
It’s a Brazilian education platform that offers courses in medicine, management, dentistry, law, engineering and more.
So we’re getting an international play that’s diversified in its product offerings.
This $1.5 billion company has a “Buy” rating from many big banks… yet it’s undervalued by more than 50%.
Even better… the stock is positioned to make a big move. It could easily double from here.
Get all the details on the company – including its ticker – in my latest video.
Click on the image below to watch it.
Hello, friends, and welcome to another exciting Stock of the Week.
Remember, I want these to be not just lucrative but also educational and informative. And to that end… let me begin. I know I sound a bit parental on that, don’t I?
This week’s company is sort of on the fringes of AI. And I keep banging on about AI, but this company will be impacted by AI, and I think it’ll be positively impacted.
I think it’ll be able to cope with it, and I think there will be huge benefits to it.
It’s called Afya (AFYA).
Let me tell you a bit about the company and how I think there is going to be a future linked to AI.
It’s a medical education group. Now, education is being improved every single second by artificial intelligence, as is so much else.
It’s based in Brazil. So we’ve got some connection there to a very fast-growing economy, part of BRICS. And you’ll have heard about the recent BRICS summit.
And it’s got the kind of angles we look for within the hedge fund.
As you know, I, Alpesh Patel – the founder of both a hedge fund and also GVI Investor – look for these different angles of geographic diversification, being on the cutting edge… as well as, of course, most importantly, the numbers.
The numbers matter the most.
Its education portfolio has several courses in addition to medicine, such as management, dentistry, law, engineering, nursing, psychology and accounting sciences, amongst others.
Now, you might say, “Well, surely AI is going to replace all of these.”
No, it’s not.
It’s going to replace the need for ever-improving education in all of these.
And that’s where I think a company like this will be well aware of what it needs to do and, therefore, could well become one which gives us a different angle into artificial intelligence than the usual…
The usual being chipsets, like a Nvidia.
The company operates through three segments: undergrad, continuing education and digital services.
It’s also interesting to me – and I’ll get to the numbers in a second – because some of these numbers are pretty impressive.
It’s undervalued on a discounted cash flow basis. It’s also being regarded as a buy by the major banks. Earnings are forecast to grow, as is revenue. It’s got a market cap – and you might have thought when I mentioned Brazil, “I’m sure it’s some tiny little company” – actually, it’s got a market cap of $1.5 billion.
Now, to me, that’s impressive. You’ve got to admit, that’s impressive.
The company has, on my proprietary algorithm – which, remember, my GVI algorithm looks at growth, revenue growth, earnings growth, the valuation of a company, dividend yields and so on – it’s got a rating of 9.
The highest it can be is 10. Anything above 7 meets my minimum requirement.
So it ticks that box.
Its forecast P/E ratio is only 13.3. In other words, today’s share price is only at a multiple of 13 times the forecast profits of the company.
That’s cheap for an education company, let alone one which is heavily involved in technology… and is delivering that education and teaches around technology as well.
Cash return on capital invested (CROCI) is at 8.9%. Now, remember, this is a formula used by Goldman Sachs Wealth Management for its wealthiest clients. If you want to understand why cash return on capital invested is so important, click here.
But a CROCI of 8.9%, that’s fine. I’d rather it was a bit higher, but it’s okay. And as you know, for the stocks that I pick as part of my portfolio for GVI Investor… these numbers I’m a bit more stringent on.
Six-month performance is strong.
But Sortino is negative. That’s average return versus volatility. So I’m not so happy about that. But I think that should turn around with a better performance coming forward.
Volatility is 21%. Not too bad at all. Okay.
Now, I think this is the kind of company… [phone rings]… Excuse me, it’s a busy time in the hedge fund business. I’ve got to tell you, there are a lot of calls from a lot of people because the markets are doing well in a lot of pockets.
So I think with the MACD (moving average convergence/divergence), a monthly measure of momentum, I’m expecting that to continue to glide higher.
I am expecting with something like this for it to go back to the kinds of figures it had just a couple of years ago, in 2021, when it was trading around the $30 mark, the $28 mark.
Now, I would say it could double from existing levels. So there’s a lot of upside left in the tank, as it were.
On a discounted cash flow basis, it’s undervalued by, well, 54%, which means if it doubled, it’d be fairly valued.
So as you can see, it has a lot of positives to give it a cushion, a comfortable cushion, which is what we want with companies… and this international company as well.
So yeah, that’s why it came across our radar.
And I hope by explaining all of this in detail, you get a snippet, a sort of “tip of the iceberg” understanding of how in action we’re looking at data, different angles of things, as well as a macroeconomic picture when we’re picking these things.
So we find that is educational.
I better return that call to Warren Buffett, I think it was.
Thanks very much.