Stock of the Week: A Clean Shot at a Double
Alpesh Patel|October 14, 2022
In a market where virtually everything is taking a hit, I’ve found a Stock of the Week for you that I really like.
It’s a company that provides services that will only grow in demand as environmental issues move to the forefront of government policy.
Its profit margins are growing, which gives the company a good buffer in all the current economic headwinds.
Shares are also cheap when compared with future earnings… and hugely undervalued.
There’s the potential for a double with this one… which is why I could see the smart money getting in straight away.
Get all the details on the stock – including its ticker – in the latest episode of Stock of the Week.
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Hi everyone. Welcome to another Stock of the Week.
My team has scoured, what, about 10,000 companies, as they do for both my hedge fund and all the work that I do. And they’ve given me a stock which I really liked.
And then I’ve drilled down further and want to introduce it to you.
The company is Clean Harbors (CLH), and it provides environmental and industrial services, including hazardous waste disposal, for companies.
Well, there’s only going be a growing demand for those kinds of services given the global pressure on making sure the environment is at the forefront of government policy.
Clean Harbors’ clients include Fortune 500 companies, small waste generators, and federal, state, provincial and local governments.
So it has vertical exposure, from the top right down to the most local of companies.
It’s expanded organically and through acquisitions to around 400 service locations in North America, including 50 hazardous waste management facilities across 38 U.S. states, seven Canadian provinces, and into Mexico and Puerto Rico as well.
The company has a lot going for it.
Net profit margins are about 6.7% higher than last year. That’s good. That gives it a bit of a buffer in case the economic headwinds mean it has to get a squeeze on profit margins.
The company is forecasting annual earnings growth at 4.8%. I can live with that.
Now let’s have a look at some of the key numbers…
We’ve got a Growth-Value-Income rating on my GVI indicator of 7. (Anything that’s at a 7, 8 or 9 gets greenlighted by me.)
Remember, my Growth-Value-Income rating is based on an algorithm – the proprietary algorithm we created – which looks at companies based on their valuation.
There’s profitability to share price, there’s revenue growth, dividend yields… a whole host of these factors, which are then weighted and put into a number, and that gives a really quick good look at whether or not the company meets our quality bar.
Clean Harbors also has a 7.2% CROCI.
CROCI, or cash return on capital invested, was invented by Deutsche Bank and is used by Goldman Sachs Wealth Management to pick stocks for its wealthiest clients.
What they discovered is companies in the top quartile, the top 25% by CROCI as a basket, generally tended to produce a 30% per annum return.
Not every year, not every stock, but as a basket over the longer term, that was the average.
Obviously, when the markets fell in 2008, nobody got that, but as an average – some years more, some years less – and as a basket.
Well, this one is sort of slightly outside that 25% top quartile, but it’s close enough for me to like it… and share price hasn’t been doing too badly.
It has a Sortino of 0.3 – that’s its average return versus the risk of missing it. It’s a positive number. It’s above 0.3, which is important for me.
Volatility is below 20%, which is also good. I don’t want volatile companies in this market environment.
What are some of the top-line numbers which attracted me?
Return on capital employed is 8.4%. Return on equity is 14.2%. All fairly good numbers, you know, nothing wrong with them.
With forecast growth, turnover is forecast to grow 33%. That might be overly optimistic, but that’s a pretty good, attractive, strong number. I think you’d agree.
For forecast valuation, let’s have a look at P/E ratio. The current share price relative to forecasted earnings is trading on a multiple of 16. So the current share price is 16 times forecasted earnings.
That’s relatively cheap.
In other words, let’s assume forecasted earning are hit. That means the share price is cheap relative to what those earnings are going to be coming out at in due course.
So we’ve got some good upside there.
Turnover has been holding steady as well. And whilst borrowing’s increased, I don’t see a problem with the company’s ability to meet the financing of that debt.
That’s probably the only thing which is sort of a bit of an amber for me.
Operating cash flow has been going strong as well… and total assets and pretax profits are moving in the right direction.
So a lot of things going in the right direction.
Now, when I turn to the share price – this is the curious thing – it’s been moving up and down, as you’d expect with all stocks, but in a sort of opening triangle shape.
Now, either it’ll keep going upwards from where it is now, or, more likely, it’ll keep moving within those boundaries, probably move down in the near term just due to greater economic headwinds and then start upwards.
So you’ve got an image of which way it could go, probably down in the near term, and you’d might want to wait and then resume upwards.
For those who can’t wait and are more risk-loving, they’d just get in now, accepting the fact that, yes, it could easily drop 25% from current levels before going back up again.
And of course if it did drop 25% before going back up again, then my projections are that you’d probably be looking at a 75% return if you got in once it did take that 25% hit.
Now, you might be thinking, “If it’s going take a 25% hit, why are you looking at it at all?”
Virtually everything at the moment is taking a bit of a hit, which is what’s giving us those better returns later on after those share prices have dropped.
That’s why the clever money is getting in the markets right now and determining, “Right, when do we pull the trigger?”
And with a stock like Clean Harbors, I think there’ll be group of people who will get in straight away.
There’ll be a group of clever money, smart money people who will say, “Well, let’s just see if it drops a bit more before getting in so we get a better price.”
Not expecting it to drop because it’s a bad company, but so we get a better price.
And to reiterate those points that I’ve just made, on a discount cash flow basis, we see this as 51% undervalued even at current levels.
So we see the potential for it to double… but not just that. In terms of statistical movements of the share price – how volatile it can be over a 250-day period – worst case, what we see is it’s not that volatile.
Yes, there are periods – 20 days, 50 days – where it could have an extreme drop of 22%, 25%, as I mentioned earlier…. but it tends to regain that.
So statistically, when we measure that, it does tend to, after falls, come back up to the mean, to a longer-term average in price.
And that’s a good, attractive aspect of the stock.
Of course, we’d like stocks which only go up and up and up and up… but that doesn’t happen.
So hopefully you’ve got a bit of an insight here into the kind of research analysis we do in GVI Investor… the kind of detail we go into when we’re making decisions.
Thank you very much.