Video: An $8 Billion Tech Stock With Good Optics for 2022
Alpesh Patel|January 14, 2022
I’d like to introduce you to my latest video series… Stock of the Week.
Each week, I’ll share with you one stock that hits all my metrics for growth, value, income, CROCI (cash return on capital invested) and more.
These are stocks that are in the top 1% of all stocks… and show the most potential to hit average annual gains of 40% or more.
And they’re the types of stocks that I share with subscribers to my GVI Investor research service.
We’ll kick off this new series with an $8 billion tech stock that is a key player in three huge sectors of the economy that are only getting bigger.
It’s also undervalued, which is why I think it’s poised for big growth this year.
It checks all my boxes… and that’s why it’s this week’s Stock of the Week.
Watch the video below!
And let me know if there’s a stock you’d like me to run through my system by sending an email to firstname.lastname@example.org.
Hi everyone. So I want to do a new thing each week. I want to give you a stock of the week, okay? And what this does is it gives you an insight into how I look at stocks, the depth and detail into which I go. And I’ll also educate you a bit on the process and also see and show you why you really should watch these stocks of the week as well.
So, as you know, I’m Alpesh Patel, and I’m a hedge fund manager, and I’ve been investing since, what, I was about 12-years-old. I’ve written 18 books on investing, post for the Financial Times, you know all of this.
So let’s get on with my first stock of the week for this week, a company called Lumentum Holdings. So I’ll give you a bit of background on them, they’re a California-based technology company. They provide two types of optical and photonic products, for that read optical, component that are used in telecommunications. Now that’s the first thing that’s important, telecoms networking equipment. That’s a sector which is not declining. It is nowhere near declining as a sector. And commercial lasers for manufacturing inspection and life science lab uses, another keyword, life science lab uses. And it’s not an area which is going to be declining anytime soon either.
So when we take in that big, big world view, what do you find? Some good areas to be in. Its segments are opcoms and lasers. The firm is also expanding it into new optical applications, good it’s expanding, such as 3D sensing laser diodes, 3D, the world’s going that way. I’m not talking about metaverse and all the rest of it, I’m just saying 3D is more where we’re moving towards for consumer electronics. Consumer electronics are growing, growing, growing.
It generates maximum revenue from the opcom segment. The opcom segment product include a wide range of components, modules, and subsystems, blah, blah, blah, blah. I mean, that’s just not very helpful is it? To support customers, including carrier networks for access, metro long haul, good. So it’s got everything from local to international. And here’s something which is also interesting: submarine undersea applications. And again, that’s how the internet travels around the world. So all very, very good.
Financials, now this is what got me all interested. It’s this, so you got the company Lumentum, there’s the epic code, right? It’s right there, L-I-T-E, value growth income on my scale from one to ten, it’s an eight. Now, once it’s a seven, eight, nine, or 10, I treat them all the same. I don’t think nine is better than an eight. Though technically it is, but you can’t forecast that precisely into the markets, as we all know, because the markets don’t give you that kind of guarantee.
Cash return on capital invested, 20.7%, that’s one of the highest. It’s in the top quartile of all companies, the top 25% of all companies. And we know what that means. According to the data, it means longer term those companies as an aggregate produce about 30% per annum returns, not guaranteed, not every year, but as an aggregate. So that’s good to have that cash return on capital invested, measure of cash flow.
Good momentum over the last six months, not troubled by these markets, which is good. Sortino, measure of reward and risk, 0.8. Above a half, which is good. Ideally I want it above one, but you can’t have everything. 0.8 is more than good enough. Alpha outperforming the market, so that’s good. Volatility at 20, now the reason that’s in pink is it’s just a bit… I prefer it below 20 if I can get it, but it’s very difficult, 20.2%, it’s fine, it’s great, I’m all right with it.
As you can see telecoms company listed on NASDAQ; price/earnings growth ratio, 0.33, that means it’s undervalued. Now look, it’s had some great years, 31%, 88%, a couple of mediocre years, can do better. And I think that’s why we should be up for a good year this year.
So let’s start off with all of this first of all, like I said, cash [inaudible 00:04:11] on capital invested, there’s other measures of quality over there, I’m not going to go through every single one, it’ll drive you nuts, but there’s a lot of greens there. Good earnings, good earnings for forecasts. Pre-tax profits, good. Price-to-cashflow, not overvalued. In fact, if anything on a valuation, below its three year average, could be up for a good rise. So a lot of positives there, a lot of positives for me on that.
Of course, I’d like to see some things higher. I’d like to see forecast turnover growth to be higher, but you can’t get everything. You can see over here, you can see turnover has been jumping quite a bit, it steadied off a little bit, forecast is set to keep steady, and then increase.
Earnings, profits in other words, that’s been good, good pretax profits, all jumping upwards, almost exponential. Total borrowing, it’s leveled off, whilst it was increasing, it still leveled off while net asset values are up and current assets are up. So I’m less bothered about the current liabilities and borrowing being high because it’s actually buying assets at the same time.
Operating cash flow been increasing, good. They’re getting lots of cash through the door, that’s important. Capital expenditure leveled off, so not so worried about that.
So of the key metrics, and whole lot of boxes I need to tick, I’m getting a lot of green lights. And then the issue becomes well, which of these are the most important? Well, as I said already, for me, it’s all these factors here, and I’ve got green lights on value, growth, income, momentum, cash flow, consistent out performance of the market, and pretty much a green light on volatility.
Anyway, that’s my stock of the week for this week. I’ll be doing more of these. Just again, it gives you an insight. It’s not a stock recommendation for the next 12 months as such, not like the detailed ones that my private clients get on the Manward Newsletter, but it’s more a broader insight for everybody else. Just so you get a viewpoint of the kind of analysis that I do. Just a bit of a snippet, a tip of the iceberg, as it were, to give you a bit of a taster; a bit of a taster and a teaser you might say.
Hope that was helpful. Hope it was also educational for you as well, and instructive, and just part of the value that I like to deliver, and an insight into how I analyze things.
Thank you all very much indeed. I’m Alpesh Patel, and wishing you a very good and a happy new year, and a very good week ahead as well. Thank you.