A Hidden Gem With Huge Profit Margins
Alpesh Patel|July 29, 2022
An unusual stock caught my eye this week.
Like most stocks, it’s fallen quite a bit this year…
But it popped up on my radar because of its strong financials.
We’re looking at a company that did $100 million in sales last year (that’s a lot of folks buying its products) with a 50% profit margin.
Plus, it’s not a company people would think of when looking for a recession-resistant stock.
That makes it a hidden gem… one that would make a good diversifier for any portfolio.
Get all the details on the stock – including its ticker – in this week’s Stock of the Week.
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I’m excited about this week’s Stock of the Week because it’s quite a different one, but it still meets all the criteria that I tend to look at.
What caught my eye with this one was the stock’s most recent price rises.
We’re looking at Brilliant Earth Group (BRLT). The company designs, procures and sells diamonds, gemstones and jewelry in the U.S. and internationally.
Now, you might think, “Hang on, aren’t we supposed to get a global recession? Who’s buying all of this stuff?”
Well, a lot of people made a lot of money over the last… well, at least the last couple of years… and that end of the market is resilient. It’s resilient to the general peaks and troughs that regular people might face.
The company’s products and merchandise include collections of diamond engagement rings, wedding rings, anniversary rings, gemstone rings and fine jewelry.
That’s another thing which is resilient to recession… People still get married, and people still have to give engagement rings and wedding rings and the like. So I guess there’s an idea here that there’s some diversity. The company is international, and that gives it some protection against market downturns.
Now, in the first quarter of 2022, what were the highlights?
The company delivered 41% net sales growth. Net sales were $100 million. Yeah, people are spending money.
Gross profit was $50 million – or a 50% gross profit margin. That’s not bad, is it?
Net income was $3.4 million, compared with net income of $2.4 million in the first quarter of fiscal 2021. For net income, you can think profits, basically.
Very solid numbers there, right?
Let’s look at some of these financials in a tiny bit more depth.
The stock didn’t have a great start to 2022. Like many stocks, it has fallen sharply. But it looks to my eye as if it may well have overshot to the downside, and that’s why we’re seeing some recent pickup.
By my Growth-Value-Income system – which is my proprietary rating – it’s a 7 out of 10. Remember, this is based on my proprietary algorithm for valuation, revenue growth, profitability, dividend yields… all of these factors.
CROCI, or cash return on capital invested, is 40%. That’s solid. Actually, that’s massive, because we know from Deutsche Bank – which invented CROCI – and from Goldman Sachs Wealth Management that companies in the top quartile, the top 25% by CROCI, tend to be the best-performing companies as a basket of stocks. These companies are not guaranteed to give you phenomenal returns – nothing is guaranteed in the markets – but as a basket of stocks, these tend to be some of the best.
So what do the figures look like?
Turnover’s been increasing. Operating cash flow has been going up. Those are good.
Pretax profits are going up and holding steady as well. Return on capital employed is strong.
This company’s made a lot of investments in the past, and now it’s seeing the returns.
You might say, “Well, is that a commodity price boom? Are all commodities, including diamonds, going up in price?”
Remember, the diamond market is incredibly controlled. It is far more controlled than even the oil market. Very few producers control the price. If it were a free market, a totally free market, diamonds would be next to worthless. But it’s not a completely free market, and that allows producers to, well, boost profitability, as they’re doing at the moment.
What about the price rises and the price movements? Again, I think the falls this year are overdone. The stock has seen a bit of a bottoming out in July, as we’ve seen in most of the market. Now it’s starting to gradually make a move up. It’s still, of course, in a downward trend, but I think we’re likely to see a break to the upside of that or a continued move upward.
So this is an interesting play… a high-risk one, of course. Well, in this market, virtually everything’s high-risk. But this one is high-risk in the sense that it’s not the biggest company, and it’s in a downtrend. But its financials look good.
I think it’s likely to be overlooked as people focus on tech and energy. Therefore, it’s an interesting diversifier for any portfolio.
You can see all the charts and data I looked at for Brilliant Earth Group in the latest Stock of the Week episode.
Send me any stocks you’d like me to analyze. I find it quite beneficial to see which companies readers are interested in.
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