Thanks to the low interest rate environment of the past 13 years, lots of companies have a lot of cash on hand.

Many of them are using that cash to update their infrastructure…

And that’s where our latest Stock of the Week comes in.

This industrial manufacturer of wires and cables has made some impressive strides over the past five years… with growth coming in at more than 50% annually.

It’s remarkably cash-efficient… and is forecasting a double-digit increase in profitability.

And while the rest of the market has tanked this year, this stock has stayed relatively stable.

Get all the details on the stock – including its ticker – in the latest episode of Stock of the Week.

Click on the image below to watch it.

Note: I just released an urgent video that shows you how I’m investing my money in this market. If you want to learn how to turn this year’s losses into windfall gains… be sure to watch it here.

Transcript

Hello everyone. I’m delighted to say I’ve got another really good Stock of the Week for you.

So let me take you through the thinking that we do in my hedge fund when we’re looking at companies and the research that we have to do. I also want to give you some of the context of what’s happening in the world today and why I think this is a particularly good, interesting company.

The company in question is Encore Wire (WIRE). It’s a leading manufacturer of a broad range of copper and aluminum electrical wires and cables. They’re made in America and supply power generation and distribution solutions.

Now, you might say, “Wait a minute, if there’s going to be a recession, surely there’s going to be less requirement for energy?”

We’re not actually seeing a reduction in the requirements for energy. And we’re still seeing a lot of companies with a lot of cash on the sidelines making investments in infrastructure.

That’s where this company comes in.

We’re also seeing central governments – particularly in the U.S. – whilst focused on reducing inflation, still very much focused on growth as well.

So that’s the backdrop.

However, specifically what caught my eye and my team’s eye with this company is that earnings have grown significantly – they’re up by 57.5% per year over the past five years. The stock was trading at $143 at the start of the year in 2022. And whilst it’s been relatively flat, I think it could be ready for a breakout to the upside.

Encore has a market cap of $2.5 billion and generates a similar amount in revenues every year as well. It’s profitable, which is good.

There’s a dividend, but it’s nothing really to write home about. It’s nothing special.

Let’s look at my Growth-Value-Income rating. I rate stocks based on valuation, growth and income as part of my GVI Investor research service.

My proprietary algorithm looks at the valuation of the company, the revenue growth of the company and the dividend yields of the company, weighs those factors and then ranks it out of 10.

Anything which is a 7, 8, 9 or 10 meets our minimum requirements. Encore is an 8. That’s good. It meets our minimum requirements.

One of the things that is particularly attractive about the company is its CROCI, or cash return on capital invested. That stands at 26%. That’s the cash the company generates on the capital that it’s invested in the business. That’s a big number.

Why is that important? Well, research by Deutsche Bank – which is now used by Goldman Sachs Wealth Management for its wealthiest clients – discovered that companies which are in the top 25% of all companies by CROCI generate a return, as a basket of stocks, on average, of 30% per annum.

That’s on average. It’s not every stock, and it’s not every year. It’s over the long term: 30% per annum is the average.

Encore meets that criterion. That doesn’t mean it’ll be generating 30% per annum – can’t guarantee that, but it at least meets the cash return on capital invested criterion. It shows that it’s efficient at producing cash, and cash is of course a key component to profits.

It’s had good price return in the recent past, and volatility is just slightly above 20%. I’d prefer if it was less than 20%, but that’s not too bad at all.

The financials are all going in the right direction. I like the turnover. I like the return on capital employed. The return on equity shows Encore is efficient as a company at generating profitability. Turnover is forecast to grow at 11.5%. That’s a good number. Profitability before interest and taxes is forecast to grow at 12%.

So we’re talking growth here.

Pretax profits are forecast to grow at 12.2% as well. Its valuation looks cheap. Based on its forecast profits, the current share price is at only a 4.4 multiple. Normally you’d expect that to be well over 10. It’s the share price relative to the profits. So it’s cheap based on the profits it’s likely to deliver, and that should see the share price continue to rise up.

So all of those factors I like.

What do I see when I look at the stock price? Well, it’s been bumping along since the start of the year, trying to break above $135. It does it a little bit, then drops back. Does it, drops back. Does it, drops back. It’s been knocking on that door for the first, second, third, fourth, fifth time since the start of the year, and I think it’s about time it’s likely to break above that.

Normally with these stocks, we look at a 12-month holding period and a trailing stop of 25%.

One thing to look out for is volatility. As I mentioned already, it’s a little bit volatile. Over the long term, 250 days, it tends not to generate a negative return based on its historical performance.

However, history is not a guarantee of the future. It’s a guide, not a guarantee. Over a 20-day period, it can drop 34%. Over five days, it can drop 20%. If we look at the historical price movements and volatilities, that has happened. Over 100 days, it could be down in negative territory, but what we found over a 250-day period is that it tends to end up positive.

So just be aware of that as well.

I hope you found this analysis insightful. To all my GVI Investor followers, you know that with the deep dive we do and the research we do, this is just a “tip of the iceberg” of how much research my hedge fund team and I go through for everything.

As I said, I hope you found this very instructive. Thank you.