Stock of the Week: Send Your Portfolio Through the Roof With This Old-Fashioned Play
Alpesh Patel|March 10, 2023
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Here’s one of my investing secrets…
I don’t let negative numbers get in the way of finding a good stock…
Like this week’s Stock of the Week.
It’s a bit of an old-fashioned play in the industrials sector… but it meets all my requirements for growth, value and income.
And it pays a dividend too!
While the stock is cheap and undervalued… some investors may be turned off by the company’s negative growth forecasts.
And that’s where I have an important lesson for you.
Get all the details in my latest video.
Click on the image below to watch it.
Hi, everyone in the Manward family, and welcome to another exciting Stock of the Week.
Like I say, as a hedge fund manager, I get a lot of data crossing my desk. With these videos, I want to give you not just the conventional but things you might not have considered.
And there’s one stock which has stood out for me this week based on the data that has been presented to me by my team.
As you know, I’m Alpesh Patel. I’m the CEO of an asset management company. We have private equity, we have venture capital and we also have a hedge fund arm.
And the company I want to tell you about this week is called Owens Corning (OC). Again, probably not what you were expecting… You were probably expecting a tech company with therapeutics or, Lord knows, a healthcare company, a fintech, whatever else.
No… this one is conventional and old-fashioned, but the numbers are good – and that’s what matters to me more. And there’s an important lesson I want to get across and convey to you.
So Owens Corning is, of course, an American company. It manufactures and markets insulation, roofing and fiberglass composites. So it is very much tied to the housing market, which as it bottoms – because interest rates peak and start to move forward – this company should also match that growth as well.
Its shingles – not the medical type, but the type you put on roofs and flooring and all the rest of it – are known for their high quality, as is the company. It’s a name you’ll probably recognize as a result.
Well, what about the financials? That’s what I want you to really recognize.
My Growth-Value-Income rating for Owens Corning is 7. What does that mean? Well, it’s a proprietary algorithm I created, which allowed me to scan 10,000-odd stocks and weigh those stocks on a scoring system out of 10 based on their valuation, which was given a weighting of about 40%; growth, such as revenue growth; income, such as dividend yields and cash flow generation; and a few other factors.
And this has got a 7 out of 10. Anything which is 7, 8, 9 or 10 meets my criteria. So this one definitely does that.
Cash return on capital invested (CROCI) is 15.4%. Now, that’s really important because it puts the company in the top quartile, the top 25%, of all companies. And it’s a formula which was invented by Deutsche Bank and is now used by Goldman Sachs Wealth Management to advise their wealthiest clients. And what you should be aware of are all the factors which are in the links at the bottom of this message, which explain what CROCI is and why it’s so important for future returns.
Price performance has been good. Sortino – that’s a measure of average reward versus average risk of missing it – is 0.5, which is not bad at all. Anything above 0.3 I’m happy with.
Volatility is nice and low – 14% isn’t bad at all. And that alpha number means it’s also been outperforming the markets.
When I turn to valuation… The forecast P/E of just 10, a multiple of 10, is relatively low. So the current share price compared to the forecast profits is at a multiple of 10, so the share price should – if the forecast profit numbers hit – that share price should rise because that P/E of 10 is below the three-year average of 14.7.
Also attractive are return on equity and return on capital employed. Those numbers just look at the quality of the company, and it’s getting good returns on capital. In other words, it can take in revenues, and it’s very efficient at converting that into profitability.
Dividends… It does pay them, and it’s a pretty good dividend payer as well.
Turnover’s been rising year on year. Borrowing’s been holding flat, so that’s fine. Cash flow’s been improving year on year as well. So have the number of assets. And over the last couple of years, pretax profits have gone up.
All of that’s good, but you’ll have noticed something. That growth number there, forecast growth… Turnover is forecast to fall, earnings before tax and interest are forecast to fall and pretax profits are forecast to fall.
So why have I picked the stock? Well, a very important lesson for everyone is this: When there is one factor which is negative, compared to all the others which are positive, it might suggest that the negativity is overdone and the share price has fallen more than it should have as justified by the other figures.
And therefore, were those forecasts to be beaten because they’re quite low – it’s a low hurdle to jump – the share price should equally jump as well.
And that’s my thesis for this one.
I’m expecting this to continue the upward trend that began in September of 2022, as exemplified by some of the technical indicators… and actually, this year, the stock to make a new high.
Now, when we make recommendations in GVI Investor, we go into a lot more detail of returns over what period, where the stop loss should be, options and so on.
It’s undervalued on a discounted cash flow basis by 36.7%. So were it to get to its fair value – and usually these things overshoot – I would get more than the 40% return that I want for my pension stocks.
So I’m happy with that.
What about the return histogram, which is a measure of the statistical movements which are possible over the next 250 days or 12 months? Not guaranteed, but possible. And there is some downside here – as much as -22% to -25% to the downside – but the probability of that happening is relatively low.
So I think on a risk-adjusted basis of how it might move, I’m comfortable with it, particularly given the fundamentals.
Well, that’s it. I hope you found that interesting, informative, educational and – hopefully – potentially financially lucrative.
Thank you all very much.