1. INTRODUCTION

In my last couple of blog posts, I have extensively analyzed and discussed several interesting investments that I have added to my equity portfolio. The portfolio can be found on Etoro on this link. In this post, I will discuss several other additions to the portfolio in a more general way in order to provide an overview to the portfolio. Please note that we have already discussed the following stocks in our blog posts (portfolio % in bracets): FNF (14.26%), BAM (12.73%), HOG (11.11%), WBD (7.39%), HPQ (7.41%) and ATVI (4.38%). For the remainder of the portfolio: I have analyzed all businesses in a detailed way and will present my investment thesis as per below.

2. PORTFOLIO ADDITIONS

BESI.NV (8.46%):

BE Semiconductor Industries N.V. (Besi) develops leading edge assembly processes and equipment for leadframe, substrate and wafer level packaging applications in a wide range of end-user markets including electronics, mobile internet, cloud server, computing, automotive, industrial, LED and solar energy. The company currently trades at a PE of 12.71 (industry average 19) which is 37% below their industry average. For example ASML currently has a PE ratio of 38.34. BESI has grown their earnings YoY for Q1 with 79.60% while maintaining a operating margin of 43.41%, profit margin of 38.63% and growing their FCF with 111%. The company is buying back shares and is undervalued compared to its own history, the industry average and the historical industry average. Their valuation, growth, Balance Sheet and FCF all look promising considering the company trades at a current pe ratio of 12.71. Although there currently are fears of an upcoming recession, BESI shows such growth that even when their growth weakens, the company still offers great value. Current price: €47

STLA (8.10%)

Stellantis NV is the kind of company that is valued for complete bankruptcy while the company seems to be actually growing. Stellantis currently has a PE ratio of 2.88 and a dividend yield of 9.25% which seems great on its own. Their price/sales ratio shows that they earn €4 in revenue for each €1 of their shares. The EV/EBITDA of 0.96 shows that Stellantis currently earns more than their entire enterprise value in EBITDA. At the current share price of $13.05, Stellantis has more cash on hand per share which is $16.09 per share. STLA has strong operationg cash flows and FCF’s. STLA is the company behind Fiat, Maserati, Ram, Dodge, Jeep, Peugeot, Citroen, Opel, Abarth, Alfa Romeo, DS Automobiles, Chrysler and Vauxhall. Stellantis is betting big on EV’s and will roll out dozens of EV models in the coming period. Furthermore, Stellantis is aiming to become a transportation tech company instead of a pure car maker and is planning of earning 22% of their revenue from services in 2030. Stellantis has had a merger and is therefore difficult to analyze since their financials therefore change by alot. The company is also betting big on the Indian and other emerging markets car markets and has currently a CEO that has succesfully turned around 2 companies. The share price has dropped heavily in the past months due to fears of recession (which normally hits car companies hard) and therefore looks like a great entry point.

META (6.99%)

Meta, the parent company of Facebook, Instagram and Whatsapp in loading in billions and billions of free cash flow. FY 2021 FCF was $39 B at a current enterprise value of $415B. Meta has a current pe ratio of 13.05 which alone makes the company heavily undervalued. Even if Facebook stops growing or even declines, the company will be loaded with cash for years to come. Please notice that without debt, you cannot go bankrupt! Meta has zero liabilities after substracting their cash holdings. Their profit margin is 31.20% and in FY21 they have bought back shares for $44B and TTM for $50B, which is currently both above 10% of the total marketcap. This means that Meta is able to increase their EPS by 10% yearly, ceteris paribus. Meta’s current gross margin is 80% due to their asset light business model. The stock, however, has sold of nearly 50% which now creates an extreme opportunity and a great entry point at their current share price of $173.06.

XPO (5.99%)

XPO Logistics is planning on spinning of their Best-in-class truck brokerage business which is fourth largest in North America, with a strong digital offering, The planned spin-off will separate XPO into two high-ROIC transportation leaders. Without getting into too much detail here: The aggregate trading price of the stocks of the two standalone companies created by the spin-off is expected to be higher than the price that XPO’s stock would trade at if the two businesses remained combined. The revenue of the spinoff has grown by 63% YoY in FY21. Total value currently for entire XPO is at $5.88B. The spinoff company is expected to be anywhere between $3B – $4B valuation which leads the standalone LTL company stock currently at $1.88B valuation at a 2022 EBITDA of at least $1B. It doesn’t matter how you add up the numbers, there is tremendous value to be found in this deal. I like to compare such bargains with the estimation of the age of an older women: you do not know her exact age, but seeing her gray here you know for certain she is no longer younger than 20,30 or even 40. That will do. The spinoff is expected in Q4 2022. Current price: $51.20

GOOG (5.88%)

Google has had a recent stock split, which makes the stock more accessible towards more (retail) investors and can lead to unit bias. The story here is more or less the same as for META. After losing nearly 1/3 of its value while still maintaining a profit margin of 27.57%, a FCF of $67B in FY21 and buying back $50B of their own shares, the company currently seems highly undervalued with respect to their FCF, balance sheet and growth. Current price: $112.79

OVV (4.49%)

On June 7th, Ovintiv $OVV (Ovintiv Inc) has reached a 52-week high of 63.30. In the past month, however, Ovintiv has reached a recent low of 37.90 mainly due to the falling oil price. We have recently added $OVV to our portfolio because there is value to be found in $OVV . Investors have over-reacted to the recent dip in oil, which has only gone down to prices last seen in April 2022. Investors are therefore neglecting that oil companies have had months to load up on significant profits. Even if oil would go lower, Ovintiv would still remain a highly profitable company that is focused on providing value to their shareholders. From my personal notes: Although Ovintiv seems to be reasonably valued at a PE ratio of 12.70, the forward PE is currently 4.18 and EPS estimates have been frequently revised towards the upside. The company in Q1 had major losses (both incurred and in earnings) on risk management of their oil and gas price derivatives due to the high volatility in oil prices since the war in Ukraine. I expect management to learn from their experience and expect an improvement in Q2 results. $OVV has great free cash flows and has recently started buying back their own shares, in addition to their divdend. The focus is clearly on shareholders value at OVV, as stated by their CEO Brendan McCracken: “We are at the forefront of driving innovation to produce oil and gas from shale both profitably and sustainably. We will generate superior returns and free cash flow by continuously improving capital efficiency and expanding margins while driving down emissions. We will deliver that value to our shareholders through disciplined capital allocation.” $OVV has furthermore sold assets worth 250 million and is ready to distribute the proceeds of the sale to their shareholders. Investors might stay away from oil companies because of the fear of a recession and the accompanying drop in oil prices, but even when oil prices drop Ovintiv seems like a great value play. Based on crude at $65 (well below the current $83.82 as of 1/14/22), the company guides to free cash flow generation of $11B over the next 5 years and $21B in the next 10 years. The company’s market cap is currently $10B and its enterprise value is $16B. It’s returning a significant portion of the capital to shareholders. If crude averages $70 in 2022, the company will return $700M to shareholders (in addition to paying down a significant amount of debt), which implies a yield of 7% at the current $39.53 price.

In other words, there’s a good shot the company will return nearly its entire market cap to shareholders over the next 5 years.” When the company can avoid major losses on risk management in Q2, I expect the earnings of $OVV to be in line with their Q4 2021 EPS of $5. At a EPS (TTM) of 3.22 this would greatly improve the outlook for Ovintiv in the future and might attract new investors looking for solid (cash flow) returns in the following years. A revisit of the recent high of 63.30 seems reasonably achievable in the mid future (i.e. a return of around 50%) and we therefore thank the market for the recent dip in oil companies. Lets see how the Q2 earnings of $OVV turn out on August 03 2022. At the current price of around $40, I am happy to add more to my position.

MT (2.77%)

At a total valuation of $20.4B and a current share price of $23.28, Arcelor Mittal is buying back around $5B of their own shares each year which adds up to around 25% of the outstanding shares. When looking at the pe ratio of 1.45 and the stock shedding nearly 1/3 of its value, somethings do not add up. Sure steel companies suffer in recessions, but at the moment Arcelor Mittal is not even priced for a recession, but for total bankruptcy. They have improved their revenues, net earnings, balance sheet and show tremendous operating cash flows and FCF. Due to the high inflation numbers, I doubt whether we see the historical steel price and iron ore prices any time soon because at these current commodities prices, Arcelor Mittal is loading up alot of cash that can be used to reward their shareholders. Even if things do not work out in the intented way, the share is already priced for total failure so I am willing to wait out the storm and let Arcelor Mittal buy back the entirety of their marketcap in the coming years.

3. PORTFOLIO STRATEGY

The current strategy is to double down on stocks that are down the most in the portfolio while the fundamentals of the business have not deteriorated and have even improved. Furthermore, due to the global energy crisis and macroeconomic environment, I am planning on increasing my stake in Ovintiv. In general, the fund owns great solid businesses in which we have done our research. We have conviction in our holdings and are willing to double down if share prices will still go down in the second half of 2022. We want the companies in which we believe the most to form the largest part of our portfolio. Furthermore, we want to make use of the timings of several spinoffs in the fall of 2022 in order to increase our portfolio value in a rapid way and potentially end the year even with a small profit. Since the fund now owns 13 shares, we rather remain with these current holdings and potentially lower our average entry prices than to find new entries.

DISCLAIMER

Eurykleia Investments is not a registered investment, legal or tax advisor or a broker/dealer. All investment/ financial opinions expressed by Eurykleia Investments are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that the all information is accurate and up to date, occassionally unintended error and misprints may occur.