Stock of the Week: Tune In for 30% Gains
Alpesh Patel|April 28, 2023
The streaming wars have been hot for quite a while… with new competitors launching and older companies consolidating.
But one media powerhouse in particular has caught my eye.
It’s a global technology and media company with a huge presence in the U.S. It has a healthy balance sheet and pulled in revenues of $121 billion last year.
It not only makes the grade by my proprietary GVI rating system… but also has a dirt-cheap valuation right now.
The share price has come out of a yearlong downtrend and is ready to move up.
We’re looking at an easy 30% gain this year.
Get all the details on the stock – including its ticker – in this week’s video.
Hello, friends, and welcome to another Stock of the Week. Welcome to my little den. I really do let you into my life when I do these Stock of the Week videos… both professionally and personally, I think.
I’m Alpesh Patel. I’m a hedge fund manager and CEO of an asset management company involved in private equity as well as venture capital. Each week my team puts a bunch of reports across my desk from companies that I should take a look at for Stock of the Week.
The one which caught my eye this week is the one I want to tell you about. It’s one which you will have heard of, of course, because it’s actually a very well-known name.
It’s Comcast (CMCSA). As I said, you will of course have heard of it. But let me just take you through what it is about the company which caught my attention.
Of course, you know it as a technology company and a global media company. It has three main primary business areas: cable, NBCUniversal and Sky. It’s one of the largest video and high-speed internet and phone providers in the U.S.
The company had revenues of $121 billion last year. It also, again, has three major revenue-generating segments. Cable accounts for 52% of total revenues. NBCUniversal accounts for 29% of revenues. And Sky accounts for 19% of total revenues.
It has good free cash flow and a good balance sheet. I’ll get into the numbers in just a second. It also pays a dividend – a fairly healthy one. It’s a $159 billion company.
So what were some of the things which caught my eye?
By my proprietary Growth-Value-Income score, this company comes in as an 8. Now, that GVI score is an algorithm which I created to weigh companies by their valuation, by their growth and by their dividend yields so that I could compare companies on a multitude of factors – not just on value, not just on growth, not just on income, but on all of those combined.
And this is an 8 out of 10. Anything with a 7, 8, 9 or 10 meets my minimum criteria, which this one does.
It’s been performing well over the last few months. There’s a slight issue on CROCI – cash return on capital invested. You may well be familiar with that formula. If you aren’t, click here to see why that’s important, why Deutsche Bank and Goldman Sachs follow it as well.
Now the other factors… Volatility is below 20%. I think that’s pretty important. I like that about the company.
The thing which caught my eye with this one is its forecast P/E, a measure of valuation, is only at a multiple 10. In other words, the current share price is at only a multiple of 10 times its forecast profitability. That’s cheap not just by corporate standards but also by the historical standards for this company.
Now, turnover is forecast to be pretty flat, as are profits. So you might say, “Well, if there’s not much growth, Alpesh, who cares about the undervaluation?”
Well, profits per share are forecast to grow. So there is some element of forecast growth in profitability in those profits per share with the company… and dividends are pretty good at 3.1%. A solid dividend yield has become increasingly important this environment.
Turnover has been going in the right direction for at least the last decade. Borrowing’s been coming down, which is good. Operating cash flow has been holding up. So quite a few things to commend it.
One thing in particular I liked about the company is its downward trend, which began in 2021 and finished at the start of 2023. It’s fairly clear which direction that trend is moving in now. It’s an upward trend, which arguably started in September of 2022. And the company is continuing in that direction.
It won’t be a smooth ride up. It may well have some stumbles along the way, for those who follow these things. A slight negative is it almost looks like it’s forming a head and shoulders pattern, but we don’t know that yet. That could be bearish and could push the company back down before it goes back in the direction that I project it will have over the next 12 months. That should give us, from where we are at the moment, just touching something a little bit below a 30% return if our projections are correct.
The other good thing about the company is it’s trading, on a discounted cash flow basis, at about 40% below fair value. Now, that doesn’t guarantee it will go up to fair value, but it’s a pretty good positive factor.
In terms of volatility, when I look at the return histograms, which project the possibilities of the likely kinds of returns we might get over 250 days, there’s a broad range.
It’s somewhat concerning that there could be sharp falls to the downside. So it’s something you’ll want to be aware of. There is a risk, a serious downside risk that the market doesn’t see what we see. And, of course, those return histograms are based on the recent past, when it had been for a long period in that downward trend.
So the market has to now turn around and see this as it has done more recently as an upward-moving stock. And that’s one of the things that we’re seeing.
So I hope you enjoyed that. I hope it provided some education and background in terms of just some of the detail that a hedge fund goes into… a bit of a “tip of the iceberg” compared to the breadth of data that underlies all the analysis that we provide. And I hope you found it entertaining as well.
Thank you all very much.