Stock of the Week: A Post-COVID Revenge Play
Alpesh Patel|March 17, 2023
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The markets remain on edge as the banking industry continues to show cracks…
And investors are worried too.
So let this week’s Stock of the Week take you someplace warm and relaxing… somewhere far away from the mess in the financial sector.
It’s a vacation resort leader that’s growing profits in a tightly concentrated business. The stock is outperforming the markets as it moves sharply upward… a trend that started at the end of last year.
But I see it going higher as folks take “revenge” vacations after being locked down during COVID. And that means more growth and profits to come.
Get the details on the stock – including its ticker – in this week’s video.
Click on the image below to watch it.
Hello, Manward family. It’s Stock of the Week time again… and what a week it’s been for the stock market, with the collapse of Silicon Valley Bank and a fear of contagion.
I will, of course, in my GVI Investor research service share with you what we’re seeing from a hedge fund perspective. I’ve already spoken to people in the industry and within the government. And yes, indeed, there is concern of contagion not just in banks and the financial services sector but more broadly, triggering some kind of panic.
Of course, we would end up seeing some stocks undervalued because they’re not genuinely affected.
Anyway, we’ll come to more of that later. I want to go back to the Stock of the Week. We have a company which has got nothing to do with financial services, you’ll be pleased to hear, one which my hedge fund team has provided me.
As you know, I’m Alpesh Patel, the CEO of an asset management company which runs a private equity arm, a venture capital arm now, as well, and a hedge fund arm.
A lot of companies cross our desks. We analyze a lot of stocks, and the one that I want to share with you today is Playa Hotels & Resort (PLYA). This is a leading owner-operator and developer of all-inclusive resorts in prime beachfront locations, including popular vacation destinations throughout Mexico and the Caribbean.
They own and manage a total portfolio of just 25 resorts in Mexico, Jamaica and the Dominican Republic. So a nice, tight, concentrated business.
And they’ve reported profitable results. I want to dive into those results in more detail.
Overall, on my Growth-Value-Income rating, we’ve got a score of 7. Now, that’s my proprietary algorithm which measures the revenue growth of the company, the valuation of the company, its share price to profitability, the dividend yields, cash flow… all of those factors. Anything with a 7, 8, 9 or 10 meets my minimum criteria, which this does.
It’s got a CROCI – cash return on capital invested – of 6.9%. If you want to know why that’s important and why Deutsche Bank Wealth Management invented it and why Goldman Sachs Asset Management uses it for its wealthiest clients… then look at the links below, and you’ll see why that figure is so important.
I’d rather it was a little bit higher than 6.9%, but it’s fine for now.
The stock has had a good recent performance. Sortino is a measure of average return to the volatility, or risk, of missing it. In other words, the reward-to-risk ratio. You want that to be as high as possible, of course, but anything above 0.3 I’m okay with.
Volatility is 20%. I can take that. It’s at 20.8%, but I can live with 20%.
And alpha, well, that means it’s outperforming the markets.
I’ll tell you what caught my eye, some of the things that I liked… and, of course, not every stock is perfect. They rarely are.
Turnover’s been moving in the right direction. Total borrowing’s been moving lower. I like the return on capital employed – or ROCE – at 6.8%. I wish it was higher, but that’s fine.
Return on equity is 9.8%, and that’s fine. Turnover is forecast to grow 10%. Good. Profits before interest and tax are forecast to grow 45%. Pretax profits are forecast to grow as well.
The share price relative to forecast earnings, or forecast profitability, is 15.8. That multiple is not cheap, but it’s certainly not expensive.
So good on all of those factors as far as I’m concerned.
You can see the stock price hit a bit of a bottom at the end of last year and has been rocketing ahead. I wonder if some of that is just “revenge spending” by people who were locked up and locked down for so long.
I’m anticipating the stock will continue on the upward trend that it started at the end of last year and the start of this year.
It’s pretty much fairly valued. It’s about right. And you might wonder, “If it’s quite right, why we getting in? Surely, Alpesh, normally you like undervalued stocks.”
If you look at my recommendations in GVI Investor, you’ll see I very much pick undervalued stocks. But this will do. It’s fairly valued and not too bad given the other metrics.
So anyway, that’s the Stock of the Week which caught my attention, particularly because it wasn’t in banking.
I’m sure we’ll come to some of those banking stocks, which will get beaten down and become undervalued in the future.
So keep watching this space, and I’ll certainly tell you what I’m hearing from government and from the hedge fund industry as we go forward into the markets.
I certainly think there’s going to be a heck of a lot of opportunities coming up in the next few weeks.
Anyway, thank you all very much for listening.