In this article, we are going to do just like a World Cup coach, but for the Stock Market. Let’s pick the winning 11 stocks and point out the possible reasons why each can be a good investment in the long run. We’ll be using the same charts for every stock that will consist of the weekly price, cash from operating activities, and price-to-cash flow ratio and/or price-to-sales ratio.
The team is: Goalkeeper (ETF SPY), Defense (EIX, IIPR, GTY, CTO), Midfielders (PBF, CPG, SMCI, PFGC), Forwards (ENGIY, VIST).
Stock #1 – The Goalkeeper – SPY (The market)
SPY an ETF issued by State Street Global Advisors. This investment has an AUM (Assets Under Management) of $375B and an average trade volume of $30B. The expense ratio it’s low (0.09%). The formal definition of this ETF is as follow:
- What is SPY? SPY tracks a market cap-weighted index of US large- and mid-cap stocks selected by the S&P Committee.
- SPY Factset Analytics Insight: SPY is the best-recognized and oldest US listed ETF and typically tops rankings for largest AUM and greatest trading volume. The fund tracks the massively popular US index, the S&P 500.
You can find much more information about SPY or any other ETF in this link. This ETF has been performing quite well in the last 10y: 12.89% annual compound rate while the S&P500 has performed 12.99%. Despite the current bear market, SPY is one of the easiest way to follow the biggest stock market in the world (United States of America). If you believe that the American economy will recover, then you must believe in SPY. Since the goalkeeper is the last line of defense, we are picking SPY due to the fact that this ETF represents the whole economy and not only a specific stock.
As can be seen in Figure 1, SPY has followed an upward trend for almost 10 years.
Stocks #2 to #5 – The Defense – EIX, IIPR, GTY, CTO
The role of the defense line is to protect the goalkeeper. The main idea is to add stocks capable of generating recurrent cash flows, preferably undervalued, and with a good growth prospectus.
Stock #2 – EIX (Energy industry)
Edison International (EIX) is “leading the transformation of the energy industry“. The company has 136 years of history, $14.9B of operating revenues, and 13k employees. Utilities is a great sector, strongly regulated, and with a track record of sustainable profits.
The company has the ability to pay consistent and safe dividends along with good inflation protection. Figure 2 shows the weekly price chart of EIX, the annual cash from operating activities, and the P/CF ratio. During 2016 to 2018, the company generated over $3B of cash flow.
Due to the recent market conditions, this number has diminished significantly but it can soon recover. The stock is trading at $9.84x P/CF, a little below the Utilities’ Sector Median of $11.25.
Stock #3 – IIPR (Cannabis is here!)
Innovative Industrial Properties (IIPR) is the “leading provider of real estate capital for the regulated cannabis industry“. Cannabis’s a controversial sector and recently faced a historical reform with the American president John Biden. Even with the reform, the sector is still far away from a true widely open market and regulation is hostile.
This one’s a risky play, but we are picking to our defense due to the high cannabis market potential in the long run. The company has shown an amazing growing cash flow that can accelerate consistently in the future.
Stock #4 – GTY (Real estate power)
Getty Realty Corporation (GTY) is specialized in the “acquisition, financing and development of convenience, automotive and other single tenant retail real estate.” This investment represents one of the largest REIT (Real Estate Investment Trust) in the market. The majority of its portfolio (70%+) consists of a very resilient sector (Convenience & Gas).
The company’s cash flow increased from $36M in 2016 to $86M in 2021, a 19% year-to-year growth. The portfolio looks resistant to possible upcoming recessions and the cash flow may keep expanding well in the upcoming years.
Stock #5 – CTO (Real estate power again)
CTO Realty Growth (CTO) is a REIT that “owns and operates a portfolio of high-quality, retail-based properties located primarily in higher growth markets in the United States“.
The company’s well-positioned in the market and it has over 7% of forward dividend yield. Even during a possible recession, CTO can manage to deliver consistent returns. The CTO stocks are being traded way below the real estate sector median of ~13x P/CF.
Stocks #6 to #9 – The Midfield – PBF, CPG, SMCI, CTO
The midfielders have the role to assist the forwards, protecting the defense, and acting as an interconnection between them.
Stock #6 – PBF (Here comes the oil industry)
PBF Energy (PBF) is “one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products in the United States.“
The company had consistent growth in its cash flow from 2016 to 2019 (a 12,5% annual increase). The low demand brought on by COVID in late 2020 led the PBF to report a big loss in the 4th Quarter. In 2020, the cash from operating activities ended up negative at – $633M.
It looks like the 2021 cash flow has been back on track with a positive value of $477M. The company looks way undervalued in relation to its peers in the Energy sector being traded at only 1.22 P/CF while the Energy sector trades at 5x P/CF.
Even though the recession and inflation can hit this company really hard, the possible higher future oil prices and better demand can push its results back to $1B of cash flow. PBF looks too undervalued to let it go.
Stock #7 – CPG (Here comes the oil industry again)
Crescent Point Energy (CPG) is a “leading North American oil producer focused on the development of high-return resource plays“. We’ve talked about it here. Like it was mentioned before, CPG is a Canadian oil and gas company based in Calgary, Alberta. Canada is among the top 5 crude oil-producing countries in the world.
The company had a consistent cash flow during the period. From 2017 to 2022, only 2020 returned a cash flow lower than $1B. CPG succeeded in its endeavor to reduce its debt and generate higher returns to shareholders via dividends and share buybacks.
We have no idea how the oil prices will perform in the future, but the fact that CPG is trading at 2.86x P/CF along with a strong cash flow generation and low leverage makes this stock a must-have for the long run.
Stock #8 – SMCI (Hello, semiconductors)
Super Micro Computer (SMCI) is “a global technology leader committed to delivering first-to-market innovation for Enterprise, Cloud, AI, and 5G Telco/Edge IT Infrastructure”. The company fits well with the “disruptive technology” definition. SMCI is one of the largest suppliers of servers in the world. Before you think about Intel, Nvidia, or AMD, think about Super Micro Computer.
The future of this company relies on the growth of (just some examples) IT solutions, Telecommunication, Artificial Intelligence, GPU, and servers. The negative cash flow in 2022 is related to a company’s strategy to build an inventory of strategic components like memory, SSDs, GPUs, and CPUs.
The negative cash flow makes the P/CF to mean nothing at 705x P/CF (this is just an example why this metric can be tricky sometimes). Take a look at Figure 8.
If we move to other metrics like price to sales, then we can have a better view of SMCI. Figure 9 changes the P/CF to P/Sales. Note that the price skyrocket 180% since July ’22, but the P/S ratio only increased 102%. This means that the price has grown up more than the sales, maybe this is related to an expectancy of higher future growth.
Even during a recession, shortage of components, and problems in the market supply chain as a whole, the company looks strong and with good numbers to overcome the challenges. Its P/S ratio it’s way below the Information Technology (IT) Sector Median of $2.69 which can indicate a lot of room to grow.
The world depends on these components and the show must go on. I believe that Super Micro Computer can highly benefit from increased demand.
Stock #9 – PFGC (Food. Time to eat.)
Performance Food Group (PFGC) is a “foodservice industry leader driven by associates determined to provide the best customer experience“. The company is in the Consumer Staples sector which has a completely different dynamic than IT and Energy.
PFGC stock has climbed from its low of $7.XX to $60.XX, an almost 10x increase. The food index commonly moves faster than inflation. Since eating isn’t optional (you’ll die if you don’t), some companies are able to pass the costs to the consumers.
The cash from operating activities has proven to be persistent and started to increase again since its low level in 2021 of $65M. The company has a comfortable debt position, but it’s not undervalued. Its P/CF ratio shows that the stock is being traded in line with the sector.
On the other hand, its margins, profitability, growth, and EBITDA guidance can make this stock a good option to hold in the long run.
Stocks #10 to #11 – The Forwards – ENGIY, VIST
Forwards have the responsibility of scoring goals for their teams. The game usually is decided by them. They must be fast, versatile, skilled, and strong.
Stock #10 – ENGIY (Utilities sector)
Engie (ENGIY) it’s a French multinational enterprise that invests in renewable energies (wind, solar, geothermal, biogas, biomethane, biomass, green hydrogen, hydropower), energy solutions, thermal energy, and infrastructures. the company “takes on the challenge of the energy transition through its three businesses: electricity, natural gas and energy services”.
The company managed to deliver outstanding cash flows above $10B from 2015 to 2018. Engie is heavily investing in energy transition and part of this disbursement is being covered by the cash flow generated. According to Catherine MacGregor (CEO):
“ENGIE’s consistent focus and strong ability to execute on the strategic plan, which is aimed at simplifying the Group and accelerating growth in our core businesses, notably in Renewables, where we target to reach 50 GW by 2025“
Considering its track of profitability and growth, adding 50GW of renewable can considerably push net profits and margins in the long run. The stock is being traded at a cheap 3.75x P/CF in a strongly regulated market with a historical track of growing returns. Maybe it should be a good idea to take a better look at this stock.
Stock #11 – VIST (Energy)
Vista Energy (VIST) it’s an Argentinian “leading independent operator, with its main assets in Vaca Muerta, the largest shale oil and shale gas play under development outside North America.”
The company it’s growing fast in a country facing an adverse macroeconomic perspective. Not only P/CF, but almost all of its metrics are considerably undervalued in relation to the Energy sector. This can be related to current Argentina’s crisis and annual inflation higher than 50% a year.
If the oil recovers its historical price levels and demands start to move, this stock may be a big winner in the long run. It looks like the possible high future returns surpass the risks.
This exercise presented 11 companies from various sectors like energy, real estate, utilities, foods, semiconductors, and oil. Something very interesting to note is that the price tends to follow the stocks’ results in the long run.
IIPR is a good example of increasing cash flow, even during the bear market when the price declined by more than 50% from its ATH. Situations like this one can point to a good opportunity (cash flow going up and price going down) that may be reflected on the P/CF metric that will decrease much faster.
For other examples like SMCI, the P/CF couldn’t tell us much since the company is using its cash flow to acquire a big amount of inventories in order to protect its capacity to deliver customer orders. In this case, we’ve decided to use the P/S metric instead.
It’s advisable for the investor to do the homework that is to learn the basics of corporate finance and gather as much information as possible from the stock market analysts. If this is done, a good opportunity would be found much faster. Don’t let fear drive your investments’ decisions. Seek for knowledge.
The stock analysis presented on Echo Chamber site is meant to be used for educational purposes and doesn’t represent any kind of financial advice such as buying, selling, or holding shares of any particular stock. Past performance is no guarantee of future results. Investments in variable income can result in the loss of wealth.
The objective of this analysis is to didactically present just a few metrics that can be used to analyze an asset. A full analysis must go further and consider many other financial statements like the income statement, balance sheet, and complete cash flow.
In addition to that, knowing the company, the sector, the economy, and the administration’s guidelines about the company’s future along with basic knowledge of corporate finance are required in order to perform a full stock valuation.
It’s strongly advisable that any investor conduct their own research on any company prior to investing in it. Any suggestion from third parties should be carefully analyzed and used as input, a part of the information needed in the investment decision-making process.
The choice of using the TradingView platform it’s personal without any commercial purpose. I consider this platform one of the best available in the market. The free version offers enough resources for a good analysis, but the paid plans can also offer much more value depending on the investor’s objectives and expertise to use the information available.