Stock of the Week: The Data Backs This Company’s Potential
Alpesh Patel|February 17, 2023
Data is everywhere… and many companies are doing all they can to get more of it.
Heck, the Chinese government is even sending balloons across America to collect more and more data…
And this week’s Stock of the Week is benefiting from this proliferation of data.
This tech company provides data management software that allows clients to host, protect and back up data in-house and on the cloud.
It is growing earnings at a huge 58% each year… and has a whopping 35% cash return on capital invested. That’s my No. 1 metric for determining how well a stock will do over the next year.
It’s been outperforming the markets… and profit forecasts suggest simply jaw-dropping growth lies ahead.
Get all the details on the stock – including its ticker – in my latest video.
Click on the image below to watch it.
Hello, Manward family. I am, as you know, Alpesh Patel, the chief executive officer of an asset management company which has both a hedge fund and a private equity fund within it.
And each week, I give you my Stock of the Week, which is what I’m going to do this week with the help of my team, who analyze about 10,000 individual stocks and then short list them for me. I then filter that down based on the kind of information I see crossing my desk as a hedge fund manager, the things which help me stay one step ahead – because that’s my job.
Now, everywhere you look, there is data. It is proliferating. Everything in life seems to turn on data and what you can do with that data. The Chinese are even sending balloons across America to collect more and more data… and as I understand it, there’s one which has just been shot over Alaska, and we don’t know where that’s from. So we might have just declared war on some aliens, by the looks of it.
On a serious note about data, the Stock of the Week I’ve got for you today is a company which has been benefiting from that growth in data and that need to protect data from foreign eyes – whether those foreign eyes are on Earth or in space.
Commvault Systems (CVLT) is my Stock of the Week for you.
It was founded in 1988 and is headquartered in Tinton Falls, New Jersey. (I’ll admit, I had not heard of Tinton Falls before. New Jersey, of course, I’d heard of.)
It provides data protection and information management software applications and related services in the United States and – equally importantly – internationally as well.
It’s listed on the Nasdaq. And, as you know, the Nasdaq’s having a pretty good start of the year so far.
The company develops, markets and sells a suite of data management software applications designed to protect and manage data throughout its lifestyle and protect against something called “data sprawl.” I think the phrase explains itself. They allow you to manage backup data and workloads efficiently and securely, both on-premises and in any public cloud.
In addition, the company provides technology and business consulting, education and remote managed services.
Now, that’s important because you don’t want a company that just sells a product. You want it to continuously be able to service that product. As a result of which, the company has become profitable over the past five years, growing earnings by 58% per year.
Yeah, I’ll say that again: 58%.
The market cap is $2.86 billion, and I think it’s poised to go higher.
Let’s look at some of the financials.
Well, on my Growth-Value-Income proprietary indicator score, it’s a 7. Now, anything that’s a 7, 8 or 9, I treat as having met my minimum threshold. And that proprietary indicator, I developed based upon the valuations of a company… its revenue growth, its dividend yields, its cash flow growth, a whole bunch of factors where we want to tick the boxes… but we know not all the boxes are equally important. Valuation is more important, for instance, than dividend yields. We score things appropriately. Anyway, it’s a 7, my minimum threshold.
The CROCI, cash return on capital invested, is 35%. That’s whopping. If you want to know why CROCI is so important, there’s a link at the bottom of this video which will explain why it’s so important to Goldman Sachs Wealth Management and Deutsche Bank Wealth Management and their richest clients… and why it’s linked to good stock price performance.
It’s one of my little edges when it comes to stock picking.
The price over the last six months is good. It’s up. The Sortino, a measure of the average returns versus the risk on average of missing them, that’s above 0.3, which is my minimum threshold, so that’s good. Volatility… not too bad at all, 17%. I’m happy with that. And alpha just means it’s been outperforming the markets, which is what we want.
What else attracted me to this stock? Well, total assets have been rising and then holding steady. Turnover’s been increasing. Operating cash flow’s been increasing. I like that.
I already mentioned CROCI… and return on capital employed, return on equity… all good solid numbers.
Now, turnover isn’t forecast to grow by a large amount. In a way, that’s a good thing because it means the company’s more likely to exceed those forecasts, which would then see the share price rise.
It’s a delicate balancing act between whether you want forecasts to be high – which suggests confidence from the market in the company – or whether you want them to be low so they’re easy to cross over and the price can go up.
And I think with this one, I’m happy. But the forecast growth on pretax profits… 211%. The forecast on profits before interest and tax… 207%. Come on.
The valuation forecast, its P/E, is a little bit expensive, but it’s a tech company, so it’s fine. It’s got a multiple of 26. That means the current share price compared to the forecast profits is at a multiple of 26.
Like I said, a little bit expensive. I can live with that.
Moving on to the stock price… You know I like to look at the technicals, which means the monthly moving average convergence/divergence. It’s flattening. And having done that, it’s just starting to form a base and rise.
The stock price has certainly formed a bit of a base. The target I’d set for this is the September 2021 highs… from May to September, those highs it had back then… That would obviously be an initial target, but there’s the potential to go a lot higher than that as well.
Is the stock undervalued? Well, on a discounted cash flow basis, it is by at least 20%… which means, if it’s 20% undervalued, well, you’ve got a good gain already factored in, and the markets tend to overshoot. As you know, my hurdle is about 40%. I want to see a 40% gain, and if we get another 20% after that, it should look good as well.
So lots of good news with the company, especially the forecast and growth and so on.
Now, the earnings forecast here might be slightly different from the ones earlier. It’s because it just depends on the data sources and how things are forecast by the various analysts who do it.
I hope you got the backstory to that and like the company as much as I do. Thank you.
And the whole point of these Stocks of the Week is to give you a “tip of the iceberg” snippet of what we do in more detail in GVI Investor.
Thank you very much.