 | Alpesh Patel
Trading Champion |
You may be familiar with today's Stock of the Week. It's a company called Ovintiv (OVV). It's an independent oil and gas producer with assets in the Permian, Eagle Ford, Montney and Duvernay areas. Now, it isn't just the size of its reserves or the amount of sales or capital that the company has that's most important to me. It's actually the fact that I think it's in a good sector. That is critical right now. But let's look at the numbers... [The #1 Stock Under $5. Click Here to Find Out.] In terms of cash flow, we look at cash return on capital invested (CROCI). Ovintiv is at 13%. Now, you'll remember that cash return on capital invested is a measure of the amount of cash a company can generate based on the amount of capital it has invested. This is a formula which was devised by Deutsche Bank and is used by Goldman Sachs Wealth Management for its richest clients. It says that companies in the top quarter, the top 25% by CROCI, generate a 30% return on average over the long term. "Over the long term" doesn't mean you use today's CROCI forever. Every 12 months, you pick a new cohort of companies. So it's a 12-month holding period. And you would end up averaging about 30% per annum. Not every year, not if there's a strong headwind in front of that cohort of stocks - then that portfolio of stocks in the top quartile won't make it. Well, Ovintiv does hit the criterion for CROCI. What are some of the other metrics I look at? The stock has gone up in price over the past six months. The Sortino ratio is a bit low, but I'll allow it. Sortino, remember, is a measure of the amount of average performance a company generates versus the risk of missing that to the downside. Ideally, I want that number to be above 1, but I'll make exceptions depending on the sector. A slight red flag is the fact that the volatility is a bit high. Well, in this market, are you surprised? Volatility has increased across the board for many stocks. The stock price this year, last year, obviously, like many companies in this sector, has been doing incredibly well. Would I have picked it three years ago, four years ago, five years ago? No, we were in tech stocks back then, weren't we all? (And we were fine to be in tech stocks back then.) Here are some other things I like... Return on capital employed and return on equity both tick my boxes. The forecast price-earnings (P/E) ratio is relatively low at around 5. (Forecast P/E means the future ratio of the share price compared with the profitability of the company.) Price-to-free cash flow is around 9. That suggests the share price is relatively low given future projected earnings and profitability. Now, you might say, "Isn't a lot of this dependent upon the price of oil and gas, and also upon future economic global growth? And aren't we supposed to see a global recession?" You're right on all those counts. But I believe there's enough of a buffer that were we to see a global economic slowdown, some of that's already factored into the price. And given the buffer of the strong financials, I think we should still very much be okay with this company. My one red flag is the stock's volatility. If you don't like volatility, you'll just watch this one. You won't invest. You won't get into it. You'll just keep watching it. Turnover has been going in the right direction for the last few years. Pre-tax profits have been a bit volatile, which is reflected in the share price. You can see why I say it's a higher-risk, higher-volatility play... but you can also see why it's done rather well in the current environment. In terms of the stock price momentum, we can see on a longer-term chart a V-shaped reversal in 2020, after oil prices hit basically zero. Since then, the stock has been going in just one direction - up. And whilst oil has come off a little bit, supply constraints and global demand continue to be factors. Therefore, the profitability of companies like this should continue as well. You can also see on the longer-term chart where the stock has been in the past. I'm not saying it's going to go from current price levels to where it was, say, 10 years ago. But if it did, we'd be looking at doubling or tripling our returns. All this gives you a bit of a "tip of the iceberg" insight into what hedge funds like mine are thinking at the moment and how we're going about with our analysis. Click here or on the image below to get my full analysis and to see the charts for this week's Stock of the Week. Happy hunting, Alpesh P.S. Have a stock you'd like me to review? Send the ticker to mailbag@manwardpress.com. Want more content like this? | | | |
Alpesh Patel | Trading ChampionAlpesh Patel is an award-winning hedge fund and private equity fund manager, international bestselling author, and entrepreneur. He is the founder and CEO of Praefinium Partners, a Financial Times top FTSE 100 forecaster, and a senior Dealmaker in the U.K.'s Department for International Trade. As a recognized authority on fintech, online trading and venture capital, his past and current client list includes American Express, Merrill Lynch HSBC, Charles Schwab, Goldman Sachs, Barclays... and more. | | |
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