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Happy New Year! And welcome to the first Stock of the Week of 2023.

Thanks to global uncertainty, we’re in a stock picker’s market… and these weekly videos are your guide to it. (So don’t miss a single one!)

The cliché “good things come in small packages” certainly applies to our latest Stock of the Week.

It’s a small manufacturer of packaging materials… but the company has a global reach, with more than 200 locations across more than 30 countries.

That kind of diversification is crucial in the shaky market we’re in.

And even better, Wall Street is underestimating the stock… which means it could see some big gains in 2023.

Get all the details on the stock – including the ticker – in my latest video.

Click on the image below to watch it.

Transcript

Hello, my Manward family, and Happy New Year!

Welcome to the very first Stock of the Week for 2023.

Can you believe how quickly time flies? Let’s hope this year is going to be a lot better for the market more broadly than last year was.

Well, one thing’s for sure. It’s going to continue being a stock picker’s market.

We’re not just simply going to be able to blindly buy anything and everything in a rising tide.

It’s going to be one where I hope and trust that the kind of research my hedge fund does on the stocks that I share with you will be incredibly helpful for navigating these markets and getting the kinds of returns we want to get.

So let’s kick off with this week’s Stock of the Week.

I’ve gone with Greif (GEF).

Now, this is a manufacturing company based out of Delaware, Ohio. (Yes, there’s more than one Delaware.)

They produce steel, plastic and fiber drums and bulk containers. Basically, they’re a supplier of industrial packaging products and services.

They began in Cleveland and now have a global footprint across more than 30 countries and over 200 locations.

I want a global company, and I’ll tell you why…

We need geographic diversification in the current market. Globally, worldwide GDP is set to slow. We’re not sure whether there’s going be a global recession.

That’s why you want the kind of company which has its footprint around the world in different countries, so that if one country does poorly, another can make up the slack.

They’ve got a net income of $376 million. So they’re not massive, but they’re not tiny, either.

They’ve also got a current dividend yield of just under 3%.

I think it’s going to be the dividend-paying companies – and particularly those which have been gradually raising their dividends – which are going to do well this year.

Because I think the big funds are going to – in the world of high inflation – be looking at those kinds of companies to offset some of the costs to a portfolio which arise from high inflation.

What about the financials?

Well, it’s got a Growth-Value-Income (or GVI) rating of 7.

Now, remember, this is my proprietary algorithm, which measures the valuation of a company based on its profitability or its share price, the revenue growth of a company, the dividend yields of a company, the cash flow, the momentum… and then scores it out of 10 across all companies.

So a 7, 8 or 9 out of 10 means it meets my benchmark, and this company does that.

Greif also has a cash return on capital invested of 10%.

Remember, this is a formula invented by Deutsche Bank, now used by Goldman Sachs Wealth Management to pick stocks for its wealthiest clients.

Cash return on capital invested tells you the amount of cash a company is generating from the capital that it has invested.

Now, why is that important?

Well, the research from Goldman Sachs showed that companies in the top quartile – the top 25% by CROCI, or cash return on capital invested – generated on average as a portfolio of companies 30% returns per annum.

Okay. Not every company in the portfolio, not every year. But as a basket, that’s the average. Some years more, some years worse.

This company meets that requirement. So it meets another criterion we want to see.

The price has been steady over the last six months. I think it’s ready for a rise up going forward.

The Sortino ratio, which is a measure of average return versus risk, is not too bad. It’s positive, which is good.

And it’s not a very volatile company either.

And given that I think returns are going to be more and more volatile this year from our portfolios, we want to look for companies which are not going to exacerbate or make that volatility worse. And this company meets that criterion.

So how does it look?

Well, there’s going to be an increased focus on what’s called “quality” companies this year. And we have the CROCI box ticked; return on capital employed, 15% – not bad; return on equity, 27% – good. Dividend-paying – good, ticks that box.

Let’s talk about growth. Now, I think the forecasts for growth with this company, the market forecasts, are unduly pessimistic.

They have priced in too much of a global collapse in the world economy, and therefore the company only has to do a little bit better than what people are forecasting for the share price to rise.

And why do I think it would rise? Well, valuation is at a forecast P/E ratio of just 10.6.

What does that mean? It’s the forecasted profits compared to the share price.

The share price is at a multiple of 10X forecasted profits. That’s a low multiple. The company’s share price should be higher given its forecasted profits.

So I think it’s been battered down.

I’m going to show you some more evidence for that in a second.

Given the direction of turnover, given that borrowing has been decreasing, given that cash flow has been going up, given that pretax profits have been rising, and given that total assets are holding steady… That’s why I think there’s a disparity between the share price and the prospects.

And if we look at the company and its price chart, we can see a company which has slowed down since 2021 to last year – it’s been going sideways.

But if you were to project how it had grown from May 2020 to January 2021, the angle at which it had grown, the share price had grown… Well, that would give you in the next year or so, roughly, a 61% return.

Let me give you one more insight on this.

On a discounted cash flow basis, it looks about 65% undervalued, which is why I think there’s a lot of upside.

You might say, “Well, why don’t you hold it for longer? Why don’t you hold it for two years, three years, four years?”

I could, but I tend to hold for 12 months and then reassess.

In terms of volatility… As I’ve shown, not too bad.

And you can see, however, that there are extreme price movements. And in 20 days, it could drop 20%. But even after 100 days, I mean, that’s just market volatility, even with a relatively low volatility stock like this.

Okay. Hope that gave you lots of insights into how we work within the fund and essentially how a hedge fund thinks.

It’s the “tip of the iceberg” for all my Manward family to understand what we do in GVI Investor, where we go into a lot more detail, a lot more analysis.

So it’s to give you a little bit of a teaser of how the hedge fund industry works and how we analyze things.

Hope you enjoyed it.

Thank you very much.