Stock of the Week: A Blue Chip Play… With a Twist
Alpesh Patel|May 19, 2023
Sometimes the best stocks to invest in are right in front of you… hiding in plain sight.
That’s the case with the stock I have for you this week. It’s one you all know… and you likely use its products.
But what it’s doing with AI makes this a completely different company from the company you think you know.
Right now… this stock has the potential for exponential earnings growth thanks to AI. But that will be the case for only a short time before expectations catch up.
So now’s your chance to get in on one of the bluest of blue chip stocks while analyst forecasts are still low… and before the stock shoots past its all-time highs.
But I’m not talking about just picking up shares…
There’s a way to supersize your returns while this one is hot. And it’s not options.
Get all the details on the company – including the ticker – in this week’s video.
Click on the image below to watch it.
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Hi, Manward family, and welcome to another Stock of the Week. It’s a slightly unusual one, but it’s one which is critically important.
As you know, I’m Alpesh Patel, hedge fund manager, and my team provide me companies that they want me to look at.
Now, this is one that I’ve been invested in for a number of years and in particular have recently been increasing my holdings, and it’s one you all have heard of, and it’s been sitting there in plain sight.
So this week’s Stock of the Week is Microsoft (MSFT). You might think, “That’s crazy, we’ve all heard of it, we know what’s going on.” Actually, what’s happening with AI makes this a completely different company than the company you think you know.
There are companies which – each year or each quarter – deliver their results and they say, oh, we have 1% greater growth or 5% greater growth, whatever it might be.
And that might be, in the case of a company like Microsoft, because of their cloud computing or Microsoft Office, whatever else.
But there are a few companies at specific times in their corporate history which have the ability to just create earnings out of thin air.
And in the case of Microsoft, that’s one of those companies. It’s also the case with Alphabet. And they’re creating them at this time in history through artificial intelligence and what they’re doing in that space.
Why is this important?
Well, because share prices move up because they can exceed expectations.
Expectations in companies like Microsoft and Alphabet are generally set by analysts, and those expectations are fairly linear. So, 1% growth, 2% growth, so on.
These companies at this time, thanks to what they’re doing with AI, can create exponential earnings, and that will happen for a short period of time until expectations catch up.
It’s happening at the moment with Microsoft, but it’s not just the stock that interests me. I’ve actually been investing through it – or rather in it – through leveraged products such as either margin, stock futures or exchange-traded funds.
You can get 2X leveraged exchange-traded funds. That’s the area that interests me. Now, of course, that carries high risk – risk warning – but it’s the exchange-traded fund where, in broad terms, if the stock goes up $1, I make $2. Of course, if it goes down $1, I lose $2.
However, I think the angle is on the upside.
So all those things you think you know about Microsoft (personal computing and so on), they’re not the areas that interest me right now. It is on the artificial intelligence side, and it’s got blue skies ahead.
But here’s what also is interesting…
Of course, it outperforms the market.
It’s got cash return on capital invested of 24. If you don’t know why that’s important, click this link, which will explain why that formula invented by Deutsche Bank and used by Goldman Sachs Asset Management is so important.
My proprietary Growth-Value-Income rating gives it a 7 out of 10. So it’s right up there – despite all the stock price rises, despite its valuation – at 7 out of 10, which means it meets my minimum criteria based on its growth, its valuation and its dividend yield.
The Sortino ratio is over half (0.5), which is its risk versus reward. That’s a good number. I don’t mind it – anything above 0.3 is good.
And volatility of only 13% makes it one of the least volatile. Another word for volatility is risk – risky stocks on the markets by share price movements.
What else catches my eye?
Let’s put some of that artificial intelligence into actual numbers.
Well, of course, the turnover, even before AI, had been going in the right direction. Borrowing had been decreasing… operating cash flow had been increasing… profits had been increasing… all of those things.
This is going to give an additional boost to that, a boost which the market simply hasn’t factored in because none of us know just how big it’s going to be other than it’s going to be big. I think it’s going to be bigger than the linear thinking that we’ve been having about its stock price.
Forecast price-to-earnings ratio – in other words, its current share price relative to its forecasted profitability – is at a multiple of 32. That’s relatively low for a high-growth company such as this.
And you might think, “Yeah, but it’s a massive company.” It is a massive company, but massive companies, elephants like this, can still dance. They can still produce great growth.
Forecasted growth is only 6.4%. I think that’s wrong. That’s where the share price comes in… the share price moves come in when the forecasts undershoot reality. That’s when you get the share prices moving up.
Forecasted profits before interest and tax is 2%. Really? That’s your forecast according to the market out there? It’s too low.
Okay, so those are some of the factors which caught my eye on the company and why I think it’s exceptional.
When I look at the stock price, of course, it’s gone up from a bottom of around $220 just at the end of last year up to about $300 now, and that’s still off its all-time highs. It will hit those all-time highs this year and then some.
I like the 2X leverage because of the reasons I mentioned. The lower volatility means my downside risk is limited.
When I project this forward based on the historic price movements of what might happen in the future, yes, over 250 days, you could get potentially a 37% to the downside move.
You could statistically get that. Is it likely? I don’t think so. Of course, last year the market did fall before all of this AI news. But I think the headwinds are very much removed, and it’s got this positive tailwind behind it.
So I think the downside is limited, but I’ve put the risk warnings out there and I’ve put risk warnings of leverage out there as well. But yeah, the 2X exchange-traded fund leveraged product for me over a 12-month period, 24-month period, is fine.
Now, holding those products over the long term carries risk, okay? Just be warned, there are risks with these things, but I’m willing to add that risk to a stock which is relatively stable such as this.
Okay. So that’s my Stock of the Week. I just had to get that AI story off my chest. It’s one thing to give you names which are lesser known, but sometimes in my industry, one of the reasons we get paid the big bucks is sometimes just to paint the obvious and say, listen, do this, but do it in an interesting manner.
So that’s my angle with this week’s Stock of the Week. Hope you found it interesting, informative and, as ever, educational.
Thank you, Manward family.