Stock of the Week: This Tech Stock Won’t Feel Much of the Market’s Pain
Alpesh Patel|June 24, 2022
With almost every stock in the S&P 500 down in recent days, you may be wondering just how on earth I can have a Stock of the Week for you.
Well, the market’s downturn simply means I have to research harder and dig deeper to find stocks that meet my criteria.
And this week, I’ve got one that will surprise you.
It’s a company that will be recession-resistant because it’s not consumer-focused. It’s in a sector that may see a downtrend for a quarter or two but will rebound quickly if it does.
And with more than $1 billion in global sales, this company won’t feel much pain from a weakened economy.
For all the details on the stock – including the ticker symbol – click on the image below to watch this week’s Stock of the Week.
With almost every stock in the S&P 500 down in recent days, you may be wondering just how on earth I can have a Stock of the Week for you. What possible stock could I find in this environment?
And you’re right. That’s what you should be asking.
The advantage I have – being from the hedge fund industry – is that I can be honest with you. I don’t have a conflict of interest with you. I don’t need you to succeed. (But I want you to succeed!)
Therefore, I can say, “You’re right. What an awful time to be thinking about a particular stock.”
We’ve had to research harder, research deeper… And if it’s not a time to earn (and sometimes it’s just not in the stock market), then we have to have the patience to know it’s a time to learn.
If nothing else, we’ll learn from our Stock of the Week… how I chose it, why I chose it.
Our Stock of the Week is Super Micro Computer (SMCI).
And now you might be thinking, “Alpesh, tech stocks in this environment? Are you kidding?”
Like I said, we’ll learn something at the very least – even if you don’t act upon this particular Stock of the Week.
A Super Stock
Super Micro Computer provides high-performance server technology services to cloud computing. Company solutions include everything from servers and storage – what’s called Blade workstations – to full racks and networking devices.
It’s all the lovely stuff that I like to see when I go to IT guys and say, “Show me the real stuff. I don’t want to just see the stuff on the internet… I want to see the hardware.”
Yes, there might be a recession, but the recession is really going to mostly hit consumers and consumer-based companies. Of course there’ll be some impact on all technology companies and, really, the whole economy. But cloud computing, data centers, big data, high performance computing, the Internet of Things… I’d expect that even if it takes a blip down for a quarter or two quarters or three quarters, the sector is going to rebound.
The company’s net sales are $1.36 billion. So we’re not talking small stuff. And it has good gross margins of 15%. That’s solid. It gives you good room to maneuver. Super Micro Computer is also global in its sales.
Now let’s have a look at the financials.
Solid and Sound
By my proprietary Growth-Value-Income rating, it scores a 7 out of 10.
Now, anything that’s got a 7, 8, 9 or 10, I treat as equally as good. And that’s my minimum requirement. Remember, this is my algorithm which weighs the valuation of a company based on its profitability relative to its share price… based on its sales to its share price… and looks at discount cash flow. It also incorporates and weighs the revenue growth, earnings growth and dividend yields of a company. We know that, historically, all these things are important, even though their weights differ at different times in the economic cycle.
But we know they’re all important in determining share price performance.
So that algorithm saves me a hell of a lot of work and allows us to dive deep into things.
Next up comes CROCI, or cash return on capital invested.
Now, as you’ll know if you’ve watched my Stock of the Week videos or if you follow GVI Investor, CROCI was invented by Deutsche Bank and is used by Goldman Sachs Wealth Management for their richest clients.
It calculates the cash returned on the capital invested in a company. And the more cash that’s returned, the more efficient a company is at generating cash. That’s been shown to correlate with stock price performance over the long term… in fact, 25% per year. That’s not an interest rate return or a guaranteed return… but on average, over the long term, companies that are in the top quartile by cash return on capital invested will generate 25% per year.
This company isn’t in the top quartile, but it’s got solid, sound cash flow. Okay, 5% – no problems with that. It’s a good, solid number.
As for the stock price performance… 2020 and 2021 were both positive years. This year, it’s off a little bit, but I think it’s one of those which, like most of the market, has fallen off. It hasn’t fallen as much as the market and will be well set for any rebounds.
When we dig deeper into the company numbers… we see turnover and operating cash flow have been holding up well. I also like to look at pretax profits and total assets, which are both growing. Return on capital employed and return on equity look good.
As far as valuation, the forecast price-to-earnings ratio of just 9.4 is cheap. That fills me with a degree of confidence.
Sure, I look at what the consensus ratings are and what – on average – analysts think the stock will get to and what return that would mean for me, but those things are lesser concerns for me. It’s up to me, really, to work out what I think.
When I look at the longer-term price performance of this company, I can see there’s a bit of an upward trend, which started pretty much in late 2018, early 2019. By January 2019, the upward trend started. It sometimes gets away from that and has weeks when it falls (this happens).
We’re looking at this stock after some of those falls, and so it’s closer to the baseline of the trend. I’d say the upward moves could probably fall a bit more, maybe get down to about $39, $38 before the stock touches that upward trend and then continues onward as it has done for the past three years. And in this case, if you project that forward, you’re probably looking at closer to $50 if all of that works out as planned.
Now, you might say, “In this market, Alpesh… Thank you very much. I’ve learned a lot from the things you look at. I’m going to sit this out.”
That’s perfectly fine. And I want you to know that’s fine. I’m here to give you that extra bit of comfort that comes from saying, “Hey, if you want to sit it out, that’s perfectly fine.”
Many of you will say, “Yeah, I like the sound of this. I’m going to keep watching this. I’m going to see if it pulls back a bit more and then look to get in at that support, given the fundamentals, and then rise forward.”
So there are different ways of looking at these things. But most importantly, I want you to be well informed and well educated… and know that you’ve got a friend on Wall Street – let’s put it that way – at least one friend on Wall Street to give you insight into the U.S. markets (and no less a hedge fund manager as well).
Take care out there.