Today's top ideas (Thur, Nov 9)

👋 Good Morning!

Our AI read and summarized 236 articles and found:

  • Two new hedge fund positions, including a legal arbitrage opportunity (stock ideas)

  • Microsoft hits all-time high (news)

  • An investor who turned a few thousand into billions (article)

  • Preferred shares of a stock with a 20% dividend (stock idea)

  • and more…

Thanks for reading! I hope you have a great day.

Connor

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FEATURED TRADES
HEDGE FUND

🥇 Diamond Hill Small Cap new position: Ducommun

Ducommun Incorporated provides engineering and manufacturing products and services primarily to the aerospace and defense, industrial, medical, and other industries in the United States.

Ticker: $DCO | Price: $49.62 | Price Target: N/A | Timeframe: N/A

🛩️ Aerospace/Defense | 🏭 Manufacturing | 📈 Bullish Idea

Ducommun is a critical Tier 1 and Tier 2 supplier of advanced material aerostructures and electrical components to the defense and commercial markets. Via targeted acquisitions, the company is increasing its higher-margin engineered and aftermarket business. Simultaneously, management is working to improve organic margins by reorganizing its operational and physical footprint. We are particularly attracted to Ducommun’s electronic systems business, which engineers, manufactures, fabricates and integrates a wide range of high-performance components and systems for commercial and military aircraft, missile systems, ships and radars. While we believe the market sees Ducommun as a commercial aerospace stock, we believe management’s focus on the defense side of the company’s business is bearing fruit, and we believe it will capitalize on a productive M&A strategy moving forward.

Read the full article here. Read time: 8 min

BLOG POST

🥈 OTIS: Compounding Lifetime Value

Otis is an American company that develops, manufactures and markets elevators, escalators, moving walkways, and related equipment.

Ticker: $OTIS | Price: $80.85 | Price Target: 10% IRR | Timeframe: N/A

🛗 Elevators | 🏷️ Value | 📈 Bullish Idea

Otis's New Equipment segment is under pressure with Q3 NE orders decreasing by -10% y/y. However, the NE backlog increased by 2%, and Otis’s total backlog remains strong, providing clear visibility into the next 18-24 months. Despite being a service-driven business, segment strength was noticeable, especially in Q3 service where adj. net sales were $2.088 billion, a 10.3% increase y/y. With annual savings target of $150 million, Otis is pushing to recognize the savings starting mid-2025. Despite some market downturns, with its 170-year history, Otis may regain its favorable position if the New Equipment segment improves. The company's shares are trading at 21.7x FY’23 free cash flow and more than 2.4% of outstanding shares may be retired per year moving forward.

Read the full article here. Read time: 7 min

HEDGE FUND

🥉 Burford Capital special legal situation

Burford Capital Limited, through its subsidiaries, provides legal finance products and services worldwide.

Ticker: $BUR | Price: $13.23 | Price Target: N/A | Timeframe: N/A

🧑‍⚖️ Legal Products |🚨 Event Driven | 📈 Bullish Idea

Burford Capital, a pioneer in the litigation finance industry, stands out in our portfolio as a robust investment opportunity, distinguished by its ability to fund and fight legal claims for parties hesitant to endure the financial and temporal demands of litigation. With impressive track records in claim realizations and a shift towards a capital-light asset management model through raising funds externally, Burford's market performance is anticipated to be largely uncorrelated with broader economic trends. The firm's exceptional claim against Argentina in the YPF case, where it was awarded $6.2 billion—over double its market cap of $2.9 billion—offers a significant "kicker"; even a partial collection post-legal fees could essentially equate to acquiring Burford's entire operation at no extra cost. The outcome, potentially influenced by Argentina's imminent presidential election, could see a favorable settlement or alternative routes to leverage the award, cementing Burford as a particularly attractive investment with both unique business resilience and a significant pending legal windfall.

Read the full article here. Read time: 12 min

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

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Yesterday’s Poll Results (link):

🟩🟩🟩⬜️⬜️ PayPal ($PYPL) [38%]

🟩🟩🟩⬜️⬜️ Casella Waste System ($CWST) [38%]

🟥⬜️⬜️⬜️⬜️ Shopify ($SHOP) [24%]

A surprising lack of love for Shopify! PayPal has become more popular with Yellowbrick Road readers since the last time it was a featured stock idea.

Your Thoughts:

  • ♻️ mikev*** ($CWST): The waste crisis in the US is a problem and only getting worse. If I was a long-term investor I would add a position, its liquidity is too low to trade.

  • ♻️ emoj*** ($CWST): There will always be a need for waste management - and many hooks to energy and recycling to boost.

  •  💸 joey and bjen*** ($PYPL): Bank stocks are at a low and it’s a great turnaround opportunity.

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

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DAILY QUIZ
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WEEKLY TOURNAMENT

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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.

BLOG POST

Petrobras preferred stock: Still cheap

Petróleo Brasileiro S.A. - Petrobras explores, produces, and sells oil and gas in Brazil and internationally. The company operates through Exploration and Production; Refining, Transportation and Marketing; and Gas and Power.

Ticker: $PBR-A | Price: $13.86 | Price Target: N/A | Timeframe: N/A

🛢️ Oil/Gas | 💰 20% Dividend | 📈 Bullish Idea

The author holds Petrobras preferred shares as their largest position. Petrobras has not experienced dilution since 2019, maintains a steady market cap, and has even sold assets without significantly affecting cash flow, instead boosting oil production and focusing on lucrative deepwater fields. With the new Lula administration, concerns of excessive taxation or a pivot to green investments have not materialized; the company plans modest “low-carbon investments” and has demonstrated a pro-oil stance. Since Lula's return, there's been a shift towards more offshore drilling, indicated by oil-friendly government policies and increased production targets. Petrobras's valuation remains discounted compared to its international peers, despite its superior production profile and shareholder-friendly dividends—the second highest globally in 2022 after Saudi Aramco. Preferred shares ($pbr.a) are more attractive than common due to dividend preference, a buyback program, and an 8% discount without significant loss due to lack of voting rights, given the government's controlling stake. Exit strategy centers around reaching fair value in the Brazilian context, eyeing a 10% forward dividend yield, and monitoring market opportunities. Petrobras's dividends are robust, expected between $10-13B at lower oil prices and potentially higher with increased production and favorable oil markets. The investment hinges on expanding market access, a bullish stance on oil prices, anticipating Brent to average above $90, underpinning expectations of a re-rating for Petrobras amidst high dividends and rising production.

Read the full article here. Read time: 7 min

BLOG POST

An undervalued small-cap growth story

EGL has four business units, all committed to the protection of the environment by improving air quality, reducing carbon emissions, enhancing waste to energy production and lifting water quality.

Ticker: $EGL.AX | Price: 0.21 AUD | Price Target: N/A | Timeframe: N/A

♻️ Environmental Solutions | 🏷️ Undervalued | 🇦🇺 Australia | 📈 Bullish Idea

The Environmental Group (EGL) stands out as an undervalued small cap growth prospect with a broad portfolio of environmental solutions encompassing waste management, air pollution control, gas turbines, and manufacturing and servicing of boilers. Under the leadership of CEO Jason Dixon, who has a successful track record in the industry, EGL has reinvigorated its operations and streamlined contract terms for improved cash flow. The company is positioned to benefit from multiple long-term growth themes, including the transition to renewables, the circular economy, the critical minerals boom, and PFAS treatment. With EGL's strong balance sheet and expectations of over 30% EBITDA growth in FY24, it offers an attractive entry price, trading at 9-10x EV/EBIT, making it an enticing investment opportunity for those seeking exposure to a range of promising sectors.

Read the full article here. Read time: 9 min

BLOG POST

Adore Beauty - Risk/reward still favorable. LONG

Adore Beauty Group Limited operates an integrated content, marketing, and e-commerce retail platform in Australia and New Zealand.

Ticker: $ABY.AX | Price: 1.04 AUD | Price Target: 2 AUD (+92%) | Timeframe: 1 year

📦 E-commerce | 🇦🇺 Australia | 📈 Bullish Idea

Adore Beauty (ABY.AX) maintains a favorable risk/reward profile as a long investment, trading at an attractive valuation with a share price of A$1.01, up from A$0.96 since the October 15 analysis. The company's recent trading update confirms sustained growth with revenue up by 4.7% YoY to A$47.5m, a growth in active customers by 1.5%, and a returning customer increase of 4.7%. ABY is on track to re-accelerate to mid-teens growth and is working towards greater than 8% EBITDA margins within 2-3 years, currently reiterating a 2-4% EBITDA margin for FY24. The stock remains undervalued at approximately 6x FY25 EBITDA and 0.3x FY25 sales, with potential to achieve normalized margins. There's speculation around a possible strategic or private equity acquisition due to the company’s involvement with UBS, an angle that may provide a swift value increase. The one-year price target is set around A$2.00 per share, based on a 15x FY25 EBITDA multiple, suggesting substantial upside, which reinforces the long position.

Read the full article here. Read time: 4 min

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