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There is no shortage of stocks to invest in that are delivering triple digit returns.
Scholar Rock, Miragen, Zedge, Socket Mobile – even Tupperware is up nearly 1,000%.
The problem is hindsight is great, but each of these and the other climbers have huge problems in the future.
Take the valuation. Do you want to risk something with weak profits to their share price? Do you want to risk a stock with poor cash-flow (CROCI).
Do you want to speculate on a loss-making company?
Maybe you like news and to spray and pray in your stock selection? Sure, go ahead, make your day.
Stocks to Invest In – Looking Backwards to See Forwards
And what about companies which, despite recent gains, don’t have a history of outperforming the market (Alpha)? Surely they will revert to mean? Do you want to gamble on them suddenly changing their spots to be outperformers.
And despite recent rises, perhaps you’d like the highly volatile one but does not deliver returns (Sortino)? Surely not.
So where does the leave us. I’m fed up. I wish I could gamble and speculate on the duffers, the poor performers or the shooting stars.
But there is not a strategy which allows you to do that and have consistent success.
You end up throwing the dice and too often getting nothing to show for it as the shooting star burns out and crash lands.
When it comes to stocks to investing in, I kept drilling and drilling until I could find stocks with fair valuations, momentum, growth, returns, not too volatile—the Goldilocks stocks.
Naming Names
Systemax (SYX) Insperity (NSP)
Of course, I could have picked others. In future, I will. I added in news analysis too. No stock is perfect. Dunkin may have peaked, for instance.
So what’s the thinking? Remove all the bad data, filter it out. What you’re left with should be what has a decent chance of not letting you down.
After all in a bull market everyone is a genius. It’s when things go south that you need the insurance of growth, value, income, returns, cash-flow. Of course news is also important.
With Systemax, and Dunkin they beat earnings and that caught my eye. Insperity provided similar good news recently.
Deeper Dive
Want a deeper dive?
For Q3, Insperity (NSP +8.4%) reported a growth of 21% in adj. EPS to $0.91; adj. EBITDA rose 13% to $57.6M led by outperformance in worksite employee growth and pricing amid pandemic.
Average number of worksite employees paid per month in Q3 rose 1.7% Q/Q to 231,750, above the higher end of expected range; client retention for both Q2 and Q3 remained at historical levels of 99%.
Average pricing increased 4.4% Y/Y offsetting the 3.8% Y/Y dip in average paid WSEEs.
Total revenues dropped 3% Y/Y to $1B, due to the FICA deferral program instituted as part of the CARES Act; gross profit grew 8% to $185M.
As of Sep.30, 2020, adj. cash stood at $213M and $130M remains available under its $500M credit facility.
During the quarter, the company authorized an expansion of its stock repurchase program by an additional 1M shares thereby taking the total shares available for repurchase to 1.2M.
“We are pleased with our recent sequential growth and expect paid worksite employees to return to near pre-pandemic levels by the end of the year,,” SVP, Finance, CFO and treasurer Douglas S. Sharp commented.
Q4 & FY20 updated guidance: Q4 adj. EPS and adj. EBITDA guidance indicate an expected shift in the timing of health care utilization during the pandemic into Q4.
For Systemax, Yahoo put it like this:
Taking into account the latest results, the consensus forecast from Systemax’s twin analysts is for revenues of US$1.01b in 2020, which would reflect a credible 3.5% improvement in sales compared to the last 12 months. Per-share earnings are expected to accumulate 6.7% to US$1.68.
Yet prior to the latest earnings, the analysts had been anticipated revenues of US$966.4m and earnings per share (EPS) of US$1.36 in 2020. There’s been a pretty noticeable increase in sentiment, with the analysts upgrading revenues and making a sizeable expansion in earnings per share in particular.
It will come as no surprise to learn that the analysts have increased their price target for Systemax 29% to US$36.00on the back of these upgrades.
Of course, another way to look at these forecasts is to place them into context against the industry itself.
For example, we noticed that Systemax’s rate of growth is expected to accelerate meaningfully, with revenues forecast to grow 3.5%, well above its historical decline of 7.5% a year over the past five years.
By contrast, our data suggests that other companies (with analyst coverage) in a similar industry are forecast to see their revenue grow 4.7% per year.
Although Systemax’s revenues are expected to improve, it seems that the analysts are still bearish on the business, forecasting it to grow slower than the wider industry.
Getting Out
As every General knows, getting in is the easy bit; it’s the getting out that get’s you killed. My general rule is to hold for 12 months, or a drop from 25% from the high point since purchase, whichever happens first.
Read that again. It sounds simpler than it is.
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Alpesh Patel
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