Stock of the Week: A CROCI That Blows the Doors Off
Alpesh Patel|May 12, 2023
The world is undergoing a huge digital transformation. As more businesses – and more of our lives – move to the internet and the cloud… network security will be critical.
And the stock I have for you this week is a provider of next-gen firewalls and network security options. Think cybersecurity.
It’s a global leader with a host of awards to its name… and it serves a variety of sectors.
But two things in particular caught my eye…
First, the company has a huge 20% profit margin.
Second, it blows the competition’s doors off with a 42.9% CROCI. It generates more cash than most companies out there.
Yet despite those fantastic numbers… the company is still undervalued.
But it won’t be for long…
You don’t want to miss this one.
Get all the details on the company – including the ticker – in this week’s video.
Click on the image below to watch it.
Hello, Manward family, and welcome to another Stock of the Week.
As you know, as a hedge fund manager, I see a lot of research cross my desk. My team narrows down which are the most important things that should be brought to my attention, and then I pick those to give you as the Stock of the Week.
I’m Alpesh Patel, as you know. Let’s start off with a fascinating company, which I’ve chosen not only because the stock looks good… but actually, to go beyond that, because I think it’s educational and informative, not just in how we or professionals should look at picking stocks but also in terms of what’s happening in the world today. And that’s the great thing about the market: It’s teaching you about what’s happening in the world today.
So the Stock of the Week is Fortinet (FTNT).
It’s a provider of enterprise-level next-generation firewalls and network security solutions. Think of cybersecurity, basically.
Shares trade on the Nasdaq. And as we know, the Nasdaq so far this year has been steaming ahead of any other index.
The company was incorporated in 2000 and is headquartered in California.
It’s got data centers, network access, application security and security management products, as well as a whole plethora of other things, including training services. So it’s diversified in that space.
It’s a global leader, has won a variety of awards and serves a lot of different sectors, which, again, plays into that diversification. It services the tech sector, government, small businesses, financial services, education, retail, manufacturing and healthcare industries as well. So if one of those sectors doesn’t do so well, at least they’ve got all the others to fall into.
Net profit margin is 20%. And that tells you something very positive about the company.
So looking at it… First things first, my proprietary Growth-Value-Income indicator, my GVI indicator, ranks this at a 7.
Now, remember, that’s an algorithm which works out the valuation of a company, its revenue growth, its dividend yields, and then weighs those and comes up with a score out of 10. Anything with a 7 or above meets my minimum criteria.
Similarly, on CROCI – cash return on capital invested – it blows the doors off at 42.9%. That makes it one of the most cash-generative companies for the capital it’s invested anywhere in the world. And if you want to know why CROCI is important, click here to see why Deutsche Bank uses it and why Goldman Sachs Wealth Management uses it for its wealthiest clients.
Fortinet’s price return in the recent past has been strong. Sortino, a measure of return versus the risk of not getting that return, is 0.76. Again, one of the highest scores of any stock out there.
Volatility is hovering around 20%. That’s good. I don’t want something too much above 20% because… well, first of all, I don’t want very volatile stocks, I want to get my returns consistently… but also, lower volatility tends to be correlated with better returns as well.
Let’s then have a look at the broader figures.
Turnover has just been going in the right direction. If anything, the danger with this company is that expectations are so high that even if it does incredibly well, it might miss those expectations – and that could hit the share price. So that’s the risk, that we just expect so much from it.
Operating cash flow’s been going in the right direction. Profit is going in the right direction. Pretax profits, total assets… all going in the right direction.
As I’ve mentioned already, expectations are a bit high. How do we know that? Well, if we look at the forecast P/E ratio – in other words, the current share price relative to the forecast of profits, or earnings, in the future – that’s at a multiple of 45. That’s a high multiple.
The share price is quite high relative to the forecast profits. In other words, we’re expecting a lot from those profits. And of course, a small miss could have big impact on the share price. So we’ve got to be a bit cautious in that regard.
Turnover is forecast to grow 22%, a huge number. Profits before interest and tax are forecast to grow 43%, also a huge number. Pretax profits are forecast to grow 45%. Yep, you guessed it, a huge number.
So really strong fundamentals there with the company.
What about the stock price? Well, we can see back from 2020 right up to 2022, it was just skyrocketing. And then, like so many tech companies last year, it took a bit of a break… took a pause, as it were, which it then reversed – like so many top tech companies – in January of this year. And it has been on an upward move ever since.
So, positive? Yes. Potential downside risk? Yes, of course there is. As we know with technology companies, there can be. And we know with technology companies those stop losses, or those drops, can be quite steep.
So with this one, we’ve got to be mindful of that. But the trend direction looks positive.
On a discounted cash flow basis, it’s somewhat undervalued. That’s good.
That volatility aspect comes into the return histograms. These are a projection, a computer projection, of potential price moves over a 250-day period. And whilst there’s a high likelihood of a positive return, there is nevertheless a downside potential of -35%.
That’s common with many stocks – particularly technology companies, which can be more volatile. So just another thing to be cautious about there before we think, “Oh, this is the godsend.” There isn’t such a thing in stocks.
But overall, numbers are looking good.
I hope you found that interesting, informative, educational… and a little bit fun as well, I hope.
And it tells you something about the world that such infrastructure security companies are doing so well. It’s becoming a more and more dangerous place – not just in the physical world, but the digital world also… which, well, it’s good for companies like this.
Thank you very much.