Top trade ideas (Wed, Nov 1)

Bel Fuse Inc. (BELFB), a 75-year-old manufacturer of crucial electronic components for sectors like telecom, aerospace, and transportation, presents a promising investment opportunity amidst market drawdowns. With three operational segments - Power, Connectivity, and Magnetic Solutions, it has a broad product range and a strong market footprint both directly and through distributors in industrial, automotive, and aerospace sectors. Initially seeming commoditized with lower margins, a deeper analysis reveals BELFB's strategic market position, quality reputation, and customer trust. Its safety-critical products have established long-standing customer relations, providing a pricing advantage over time and insulation from competition. This, mirrored by industry peers like TE Connectivity and Amphenol, places BELFB on a growth trajectory. The pivotal entry of CFO Farouq Tuweiq in 2021 reversed previous mismanagement, significantly boosting margins through operational, pricing, and sales reforms, hinting at further growth with enhanced fulfillment and product development. Current momentum across all segments and an upcoming clean net cash balance sheet position BELFB for organic growth and improved capital allocation. Shares acquired at a mid-single digit multiple of EBITDA, below peer valuation, alongside ongoing insider purchases since 2021, emphasize the value appreciation potential. Transitioning from a self-help to a business acceleration narrative, with anticipated operational synergy across segments, BELFB emerges as a compelling investment with a bright outlook.

Read the full article here. Read time: 12 min

Bill Selesky reaffirms a BUY rating on Sherwin-Williams Co. (SHW) post impressive 3Q23 results, with net profit rising to $826.5 million from $737.7 million YoY, driven by higher selling prices across segments, acquisitions, and positive currency translation. The upbeat results prompted a raised full-year earnings guidance to $10.10-$10.30 per share from the earlier $9.30-$9.70. Selesky adjusts his 2023 EPS estimate to $10.20, aligning with the revised guidance midpoint. The analysis highlights growth prospects in various market segments and potential benefits from supply chain optimizations, raw material cost deflation, and stringent cost controls. Despite the cyclical risks associated with SHW’s market segments, the company's vast product range, size, and geographic reach position it favorably. Sherwin-Williams' robust financial posture, marked by a debt decrease and share buybacks, alongside a modest dividend increase, underpins its investment appeal. With a price target of $330, the report considers SHW an attractive investment, trading at multiples below its historical range, underscoring its undervaluation.

Read the full article here (paywall). Read time: 6 min

FirstCash Holdings, Inc. (FCFS), a leading US pawn broker and lease-to-own provider with 2,800 stores, recently rose to a top-5 position due to its undervalued status and two unobserved market upsides. Firstly, a growing pawn service demand, fueled by tighter traditional lender credits and an 80-store acquisition, forecasts a mid-teens EBITDA growth in the pawn segment for the next year. Secondly, over-provisioning of lease losses by its 2021-acquired business, American First Finance (AFF), is expected to reverse from 3Q23, mirroring a significant EBITDA boost seen in peers like PROG Holdings. These factors could help FCFS outperform current consensus EBITDA estimates by ~20% through 2024. Acquired at a low 8x forward EV/EBITDA, with a consistent ROIC above 25%, and managed by a well-regarded team known for successful acquisitions and capital returns, FCFS showcases a promising 30-50% return potential in the next nine months.

Read the full article here. Read time: 8 min

Medical Facilities Corp. (MFCSF), a microcap with minority interests in surgical hospitals across various regions, entered our portfolio recently. Its four core facilities in South Dakota, Oklahoma, and Arkansas provide diverse services like orthopedics and spinal care. By partnering with physicians for hospital ownership while managing administrative aspects and earning revenue via facility fees, a mutually beneficial partnership is formed. Unlike debt-burdened private equity surgical hospital rollups, well-managed MFC proves highly lucrative. Acquired at a bargain due to past mismanagement, activist-led management overhaul and strategy shift aimed at enhancing shareholder value have occurred, although the stock hasn’t fully recovered. MFC’s hospitals, operating for 20-40 years, are regional top performers, with less leverage than peers, benefitting from favorable healthcare trends like an aging population. They've exhibited a soft moat through high patient satisfaction, increased procedure volumes, wide procedure range, and billing transparency, leading to mid-single digit growth in patient volumes and revenues for over a decade. Management’s focus on efficient hospital management, non-core asset divestiture, and capital return to shareholders has seen significant strides like divesting five out of six non-core Ambulatory Surgery Centers, restoring hospital-level margins, and repurchasing nearly 20% shares last year. The vibrant M&A landscape, continuous asset divesting, share buybacks, and potential margin expansion position MFC attractively for a sale or steady top line growth. With a current share price of $6.75 USD, and potential to generate $1.5 - $2.0 dollars in FCF/share in the near term, there's a near 100% upside potential.

Read the full article here. Read time: 12 min

Currency Exchange International (CXI) is a major supplier of foreign banknotes in the US and globally, uniquely positioned in a market with only two other major competitors. The company, spearheaded by founder Randolph Pinna, has seen significant market share gains following the exit of key competitor Travelex, with the pandemic temporarily masking this growth. Despite trading at a modest 8x P/E, it's projected that CXI's earnings will nearly double over the next three years, underscoring the stock's potential to reach an intrinsic value of US$55/share from its current US$15/share. CXI has two major growth opportunities: expanding outside the US, where it is one of only three companies licensed to supply dollar banknotes globally—a market estimated at $380 million in revenues, and deploying its substantial cash reserves of $98 million for strategic acquisitions in the banknotes market. Though CXI's small asset base has caused some initial hesitance among potential large bank customers, a workaround using a major bank as a middleman has been devised to guarantee transactions. Furthermore, despite investor skepticism around the company's cash deployment, management has expressed a keen interest in making acquisitions, especially as some incumbents may look to exit the market. A well-structured acquisition could significantly boost earnings, demonstrate effective cash utilization, and likely enhance the stock's valuation as investors begin to factor in future cash flow from additional high-return acquisitions. With a solid balance sheet, an 8x P/E valuation, double-digit growth rate, and a seasoned CEO with a history of successful M&A transactions, CXI presents a compelling investment opportunity with substantial upside potential and limited downside risk over a 3-5 year horizon.

Read the full article here. Read time: 7 min

Webcentral (ASX: WCG), an Australian micro-cap, recently announced a core business sale, causing its stock to surge over 100% as the sale proceeds, post-debt payment, equated to about 2x the company's pre-announcement market cap. Now trading at ~$0.245 AUD per share with a market cap of $80m AUD, the market currently only values the company's net cash balance, overlooking its profitable remainco and a 1/3 stake in the sold business. Webcentral, a provider of various tech services including cloud solutions and domain registrations, plans to sell 2/3 of its domain and web hosting business for a total of $115m AUD in cash and retain a 1/3 stake valued at $20m AUD. Post-transaction, after settling a debt of $31m and accounting for transaction fees, the company will hold a net cash balance of $84m AUD. Management intends to allocate some funds towards EBITDA-accretive acquisitions, and possibly resume dividends and buybacks. The remainco, post-transaction, is projected to generate ~$45m in revenue and over $5m in net income for FY24, from its array of services excluding the domain business. The rough valuation suggests a stock value of >$0.45 per share, indicating ~80% upside from the current price, making the stock a compelling buy considering the risk/reward setup, where the current price is slightly below the net cash value, while also including a stake in the sold business and the remainco essentially for free.

Read the full article here. Read time: 3 min