Best stock ideas (Fri, Oct 27)

👋 Good Morning!

Our AI read and summarized 214 articles today and found:

  • 2 new hedge fund investments (stock idea)

  • Biden is embracing AI (news)

  • Charlie Munger on being a survivor, not a victim (video)

  • 2 new short ideas (stock idea)

Thanks for reading!

Connor

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TODAY'S SPONSOR
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FEATURED TRADES
HEDGE FUND

🥇 Manole Capital: The Paypal Opportunity

PayPal Holdings, Inc. is an American multinational financial technology company operating an online payments system in the majority of countries that support online money transfers, and serves as an electronic alternative to traditional paper methods such as checks and money orders.

Ticker: $PYPL | Price: $51.40 | Price Target: $92 (+80%) | Timeframe: 1 year

📱 Fintech | 🏦 Payments | 📈 Bullish Idea

The author makes a compelling case for PayPal's undervaluation given its dominant position in digital payments. Despite the stock falling over 80% from highs, the author argues the business fundamentals remain strong with 6% account growth to 431 million and 11% payment volume growth to $376 billion last quarter. The author explains PayPal's transaction margins are facing temporary pressure from competitive discounting, not deterioration in the business. PayPal is sacrificing margin to gain volume share, evidenced by its Braintree unit growing payment volume 30% year-over-year, faster than competitor Adyen's 23% growth. The author believes PayPal's scale provides operating leverage, with potential for margins to expand to Visa and Mastercard's 60%+ levels long-term. Critically, even if margins remain flat, PayPal's impressive free cash flow generation should allow aggressive buybacks to drive EPS growth given its cheap P/E of 10.6x. The author sees secular growth tailwinds persisting with digital payments still early in adoption. While risks exist around execution, the author believes new management plus continued buybacks can drive 50%+ upside even without improvement. Given high growth and deep undervaluation relative to peers, the author sees PayPal as a highly compelling turnaround opportunity.

Read the full article here. Read time: 19 min

HEDGE FUND

🥈 Alluvial Capital New Purchase: Seneca Foods

Seneca Foods Corporation is an American food processor and distributor headquartered in Fairport, New York, USA. Seneca Foods Corporation conducts its business almost entirely in food packaging, which contributed to about 98% of the company's fiscal year net sales in 2017. Canned vegetables represented 65%, fruit products represented 23%, frozen fruit and vegetables represented 11% and fruit chip products represented 1% of the total food packaging net sales

Ticker: $SENEA | Price: $54.51 | Price Target: N/A | Timeframe: N/A

🏭 Food Packaging | 🏷️ Undervalued | 📈 Bullish Idea

The author highlights an investment in Seneca Foods, a supplier of budget-friendly canned vegetables, which despite being less popular, caters to a significant market segment. The market currently undervalues Seneca, trading its shares at half the tangible book value and below the net current asset value, portraying it as a declining entity. However, the author disagrees with this notion, attributing a more favorable position to Seneca due to recent alterations in the canned vegetables industry's market structure. This change came about when Del Monte, in a bid to capture market share, slashed prices and acquired a small struggling producer, a move that backfired leading to its eventual market exit. This exit benefited Seneca, whose profits rebounded, and it even acquired some facilities from Del Monte. With Del Monte's exit and no other competitors stepping in, the author anticipates a lengthy period of healthy profits and stable market share for Seneca. Despite its shares trading at a mid-single digit multiple of 2023 profits, Seneca displayed sound capital allocation, reducing its shares outstanding by 22% over the last five years without any major investment missteps. A unique accounting aspect is Seneca's use of LIFO (last in, first out) inventory valuation, which undervalues its inventory by $300 million, leading to under-stated earnings in times of rising input costs and over-stated earnings when input costs fall. The author emphasizes that while Seneca isn't a growth company or remarkable in return on capital, its shares should not be undervalued at 5x earnings, indicating a dissonance between the market's valuation and the company’s potential profitability.

Read the full article here. Read time: 5 min

REDDIT POST

🥉 Pivotal Growth Awaits NetEase (NTES) with Project Mugen: A Deep Dive

NetEase develops and operates online PC and mobile games, advertising services, email services, and e-commerce platforms in China. It is one of the largest Internet and video game companies in the world.

Ticker: $NTES | Price: $104 | Price Target: $126 (+21%) | Timeframe: N/A

🕹️ Gaming | 🎥 Entertainment/Media | 🇨🇳 China | 📈 Bullish Idea

The author sees strong upside in NetEase based on growth potential from major new game titles, especially Project Mugen which resembles hit Genshin Impact and could boost revenues significantly. The author argues NetEase trades at an arbitrage opportunity with stagnant revenues from 2021-2022 now released to grow again post-regulation. NetEase has diverse revenue streams including gaming, music, and search, with gaming taking 79% share. Acquisitions like Quantic Dreams studios and big cash position support growth. The author conservatively estimates 21%+ upside to a $126 price based on EV/EBITDA and DCF valuations, which exclude the Project Mugen catalyst. With revenues re-accelerating, highly anticipated titles launching, and attractive valuations, the author makes a compelling case for NetEase.

Read the full article here. Read time: 5 min

POLL - FEATURED TRADES
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Which featured stock idea was your favorite?

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Yesterday’s Poll Results (link):

🟩🟩🟩⬜️⬜️ Novo Nordisk ($NVO) [41%]

🟨🟨⬜️⬜️⬜️ NextEra Energy ($NEE) [37%]

🟥⬜️⬜️⬜️⬜️ Summit Materials ($SUM) [21%]

Your Thoughts:

  • ⚡️ tday*** ($NEE): NEE is a safe, regulated utility with income and growth. Buy it and forget about it.

  • 💊 rsok*** ($NVO): The upside seems huge, folks are starting to really pay attention to their health, look forward to the big potential here.

  • 🏗️ mikev*** ($SUM): Lots of rebuilding going on from Biden and storms. Residential building will continue to grow.

Keep reading until the end of the email for the bonus stock ideas!

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DAILY QUIZ
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Which country was the origin of the major financial crisis in 1997, often referred to as the "Asian Financial Crisis"?

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Yesterday’s Question (link): Who is the founder of Bridgewater Associates, one of the world's largest hedge funds?

Answer: Ray Dalio. He started it in his Manhattan apartment in 1975 with $5M and now has over $120B under management.

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WEEKLY TOURNAMENT

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🏆 This Week’s Leaderboard

  1. joes**** (166 points)

  2. d_und*** (166 points)

  3. jlov**** (166 points)

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BONUS STOCK IDEAS

The Bonus Stock Ideas section tends to include more unique trade ideas: short ideas, OTC stocks, foreign stocks, special situations, etc. These are for more adventurous/advanced investors.

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HEDGE FUND

[SHORT REPORT] SUNRUN (RUN): The Case of the Phantom Subscribers

Sunrun is the leading home solar panel and battery storage company.

Ticker: $RUN | Price: $8.72 | Price Target: N/A | Timeframe: N/A

🔋 Battery Storage | ☀️ Solar | 📈 Bullish Idea

The author believes Sunrun is significantly overvalued and presents evidence that its financial reporting is highly questionable. First, Sunrun reports having over 700,000 subscribers currently, but third-party data from the Energy Information Administration shows Sunrun only has around 600,000 customers. This 20% inflation of subscriber numbers allows Sunrun to overstate revenues and earnings. Second, the author argues Sunrun uses unrealistic assumptions in its valuation models to inflate the net present value of its subscriber contracts. For example, Sunrun assumes a 90% renewal rate after initial 20-25 year contracts expire, despite high customer churn being more likely. Sunrun also underestimates future costs like panel removal. Third, the author estimates Sunrun claimed $205 million in inflated investment tax credits in 2022 based on the cash received from tax equity deals versus the number of subscribers added. Given Sunrun's total 2022 subscriber additions were only 99,497, claiming credits for 114,390 systems implies 14,890 nonexistent subscribers. Fourth, the author shows Sunrun's increase in solar assets per subscriber is far below what is implied by its income statement, indicating subscriber growth is overstated. In total, the author believes these discrepancies mean Sunrun has overstated its net earning assets, which make up the bulk of its valuation, by 77-90%. With such fundamental questions about the legitimacy of its financials, the author sees Sunrun's stock as highly overvalued and due for a massive decline.

Read the full article here. Read time: 25 min

VALUE INVESTORS CLUB

ENSTAR GROUP LTD ESGR

Enstar Group Ltd. (Enstar) is a multi-faceted insurance group, which focuses on acquiring and managing insurance and reinsurance companies in run-off. It also focuses on providing management, consultancy and other services to the insurance and reinsurance industry.

Ticker: $ESGR | Price: $235 | Price Target: $587 (+150%) | Timeframe: 3 years

🏦 Insurance | 📈 Bullish Idea

Enstar Group Ltd (ESGR) is the leading insurance run-off firm, which acquires portfolios of discontinued insurance lines, managing insurance loss claims and investing the assets for profits. Despite trading at less than 90% of GAAP tangible book value and about 5x run-rate net income, ESGR offers a compelling valuation with strong Return on Equity (ROE), large insider ownership, and significant share repurchases over the past three years. The core of ESGR's business is efficient claims management, reducing liabilities over time. This unique business model, alongside an exemplary management team, positions ESGR for substantial earnings growth, particularly with the improved market conditions of higher interest rates, a hardened insurance market, and reduced competition from clones. ESGR's economic tangible book value (TBV) is believed to be understated, with our analysis indicating a conservative overstatement of claims reserves by about $60 per share. Additionally, the rise in interest rates has not been reflected on the liabilities side, further understating the economic TBV. The platform value of ESGR, capable of acquiring over $2 billion of run-off portfolios annually without needing to raise equity capital, adds to its attractiveness. Improved investor communication and a significant potential for a higher valuation multiple, particularly with efforts to ramp up asset management for third-party capital, makes ESGR an enticing investment. We project ESGR to generate earnings of more than 60% of its current tangible book value over the next three years, with capacity for further share repurchases and better prospects for earnings growth than ever before. At 1.5x GAAP TBV, ESGR's stock could trade at over 2.5x current levels in three years, highlighting its undervaluation and potential for significant appreciation.

Read the full article here (free with guest account). Read time: 10 min

TWITTER

[SHORT REPORT] AI is a threat to Duolingo

The Duolingo language learning app is the world's most popular way to learn languages. The company's mission is to develop the best education in the world and make it universally available

Ticker: $DUOL | Price: $152.62 | Price Target: N/A | Timeframe: N/A

🤖 AI | 📱 Consumer SaaS | 📈 Bullish Idea

The author presents a mini short thesis on $DUOL, highlighting overlooked competition, especially from Speak, a language app backed by OpenAI with substantial funding and market entry, already claiming to be the top grossing education app in South Korea. While $DUOL's stock rebounded post Google Search's entry into the language learning sector, the author believes investors missed the rising competition from Speak, which recently secured more funding and expanded to the US, posing potential threats to $DUOL’s partnership with OpenAI, especially if Speak gains traction. The author points out $DUOL's high valuation at ~10x revenues with adjusted EBITDA heavily supported by Stock-Based Compensation (SBC) adjustments, despite emerging competitors and slowing growth. Also noted are other risks like numerous emerging AI language apps, Durable Capital downsizing its $DUOL share, and unproven expansion into new areas like math and music, all questioning the sustainability of $DUOL's valuation amidst these challenges.

Read the full article here. Read time: 5 min

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