Stock of the Week: An Undervalued Energy Player Whose Earnings Are Set to Soar
Alpesh Patel|April 7, 2023
It’s no secret that it has paid to invest in energy stocks lately.
With oil and gas prices up significantly from where they were just a few years ago, investors have been able to cast a wide net in the sector and profit.
But not all energy plays are created equal. Some businesses are simply much stronger than others.
I think you’ll find our Stock of the Week is a perfect example…
You may not have heard of this company. It focuses on the identification, acquisition and development of oil and gas fields in Latin America – primarily in its home country of Mexico, as well as in Argentina, Brazil and Colombia.
Business has been good indeed. But this under-the-radar stock doesn’t just boast rising earnings due to inflated oil prices…
Analysts also agree it’s deeply undervalued.
That’s one of the big things that captured my attention. But I found plenty more to like about the company when I dug into the numbers.
Get all the details on the stock – including the ticker – in this week’s video.
Click on the image below to watch it.
Hi friends, and welcome to my Stock of the Week. As you know, I’m Alpesh Patel. I’m the CEO of an asset management company which has within it a hedge fund and a private equity arm. So I like to share with these Stock of the Week videos companies which my team has researched. And they normally put a number of names before me, and I look through them, and I try to pick out the interesting ones.
This is to give you a snippet of some of the research which goes into our analysis of companies that look interesting, particularly the types of companies that look interesting enough to make it into GVI Investor. So companies which are growing and well-valued and are generating income and good cash flow. We like to tick a lot of boxes.
What have we got this week? We have Vista Energy. Now, Vista Energy is a Mexico-based company engaged in the energy sector. So you’ve got two benefits here. One is energy. That whole sector still remains undervalued – not because people don’t appreciate the rate of growth in that sector but actually because share prices have not been keeping up with the volume of profits that sector’s been making. Of course, with Mexico, you have a developing market, shall we say. It’s also got operations and business relationships out of Argentina, Brazil and Colombia as well.
Now, what else do we have which is interesting about this company? Well, just about everything. The profitability of the company is strong. Profit margins are at 23.6%, and those are up over last year. Of course they are. You’ve seen what’s happening with energy prices and forecasts. So let’s have a look at some of those in more detail. By my proprietary Growth-Value-Income system, we’ve got this as an 8 out of 10.
Now, what is that? Well, the Growth-Value-Income rating is an algorithm which we’ve developed internally which looks at the valuation of a company, the growth of a company – revenue growth for instance, cash flow growth – dividend yields… all of the factors which we know are important in stock price movement… and then it rates and weighs those based on what we know from our own research and academic research on what those ratings should be. And then it scores everything out of 10. So this has got an 8. Anything with a 7 or higher meets our minimum criteria. This does that. It’s got a CROCI, or cash return on capital invested, of 12.9%.
Now, below on this page, there’s a link where I describe why CROCI is important. It was developed by Deutsche Bank and then used by Goldman Sachs Wealth Management for its wealthiest clients. It’s the cash return on the capital a company employs. And this company has a strong number for that, so that’s good. It’s been performing well recently. The Sortino is a measure the average return versus the volatility, or risk, of missing that return. Anything above 1.0 suggests that it’s a very good reward for the risk you’re taking, and this indeed meets that criterion.
Volatility is 30%, but most of that’s to the upside, so that’s okay. And the alpha is a measure of outperforming the market, and it does indeed do that. So what do we have with this? Well, turnover’s been going in the right direction. Borrowing’s been coming down. Operating cash flow has been booming. All good signs. Return on capital employed is at 30%. Return on equity is at 52%. These are all very good signs. It’s not particularly overly geared. Gearing is basically the borrowing a company undertakes. Turnover is forecast to grow at 15% – that’s good. Profits before interest and tax are forecast to grow 30%. Pretax profits are forecast to grow 25%.
So good, strong forecasts. But are those forecasts so high and optimistic – and so factored into the price – that the company’s likely, therefore, to disappoint? That’s the critical question. Well, actually no. How do we know this? Because if you look at the forecast P/E ratio – in other words, the current share price compared to the forecast earnings, or profits, of the company – that’s only at a multiple of 5.2. That’s low for companies generally, let alone companies in energy.
In other words, the profits of forecast to be very large, but the share price currently is not reflecting that. That’s how we know, that’s the secret. Shh, don’t tell anybody else. And, of course, nothing’s guaranteed in the markets. I wish it was. If it were guaranteed, I’d put every penny I have behind just one stock if there were guarantees. I’d even put my mother-in-law on eBay and take the money and put it into that one stock. But because there are no guarantees, we have to do a lot of due diligence, and we don’t rely on any one stock.
You can see the trend there, solidly rising since September 2020. The one caveat I’d make on all this is if you look at this – this is the monthly MACD, or the monthly momentum – that is peaking somewhat. It suggests it’s overbought and could fall back, so we’ve got to be a bit cautious. On the positive side, on a discounted cash flow basis, it’s 41% undervalued… 41% undervalued by discounted cash flow. So I‘m less worried about the monthly MACD.
Thank you very much. I hope this was educational, informative and entertaining. Thank you to one and all, and have a very happy, peaceful Easter.