📈Top 5 Buys July 2024
5 Undervalued Quality Businesses ✅
Hi there investor 👋
Welcome to the July edition of Top 5 Buys.
In case you missed it:
As a premium member, you can access our Top 10 Buys 2024 here.
In this article, we will discuss our top stock picks for July 2024.
Let’s get into it 👇
The Greed to Fear index is pointing towards Greed
After a brief visit to the fearful side, the market is back in “Greed” territory.
Usually, we see the best opportunities during market fears (especially market panics). However, some parts of the market are selling off and posing decent opportunities for long-term investors.
The S&P 500 is making new all-time highs
The S&P keeps going higher after a short pitstop in April/May.
We see Big Tech pave the way to lead an AI-related hype train that is set to revolutionize their business (we just don’t know quite how yet).
In addition, Semiconductor companies have made significant gains this year awaiting a new bull market.
The grass is not always greener on the other side
Many investors have shiny object syndrome.
They will jump on one strategy when it looks profitable - for example, high growth in 2021. And they will abandon this strategy when something else (more shiny) appears.
This is a classic mistake investors make. It results in buying high and selling low (we want to do the opposite).
Stay true to your investing strategy, don’t change it due to short-term underperformance. If you hold quality value-creating companies at solid valuations, you will do well over time.
What is a good buy?
Our analysis process is outlined fully in our guide, read by more than 300 investors.
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We have also outlined a simple valuation method in our free valuation cheat sheet. One can use several methods, but we like to keep it simple.
First, we want to determine business quality by understanding the business, how it makes money, the different business segments, the growth potential for each segment or product/service, the margins, return on capital, and competitive advantage.
Second, we want to understand the historical valuation and price to earnings/cash flows the company has traded at. Then we use a simple discounted cash flow analysis to determine what direction the company is heading.
High-quality businesses, bought at fair prices, yield great long-term returns.
Disclaimer: This is not investment advice, always do your own due diligence and make your own investing decisions.
Top 5 Buys July 2024 🏰
Evolution AB $EVVTY 🎰
Evolution AB specializes in developing, producing, and marketing live casino games and solutions for online gaming operators.
This includes popular games like roulette, blackjack, baccarat, and poker.
Evolution also offers software and online casino platforms accessible on various devices.
Key fundamentals:
Gross Margin: 100%
Operating Margin: 62.57%
Return on Invested Capital (ROIC): 40.14%
Revenue growth 3Y: 33.73%
Earnings per share growth 3Y: 34.09%
Forward PE: 14.43
Forward FCF yield: 6.3%
Evolution has grown its operating revenue by 24.87%, operating income by 24.06%, and free cash flow by 18.47% since 2021.
In the same period, the stock price has gone from 131.7 to 87.73 (-33%).
The PE ratio has contracted from a 2021 high of 57.6 to now 17.2, resulting in a negative stock price development regardless of the growth.
3 reasons why Evolution is a good buy
Forward PE of 14 with 400M EUR approved of buybacks (Buybacks at 7% earnings yield) with an expected long-term EPS growth of +14%.
Successful expansion in multiple markets - Asia, North America, and Latin America.
Easier comps in 2025 (2024 earnings are subject to higher tax rates in Malta; therefore, the comparison to 2023 is tough).
Lululemon LULU 0.00%↑ 🎽
Lululemon Athletica is a Canadian athletic apparel retailer specializing in high-quality yoga, running, and training gear.
Founded in Vancouver in 1998, the company operates 655 stores worldwide and sells its products through various channels, including e-commerce, mobile apps, and wholesale partners such as fitness centers and yoga studios.
Lululemon's product range includes clothing, accessories, and footwear for both women and men, and it has a significant presence in North America, China, and other international markets.
Key fundamentals:
Gross Margin: 58.34%
Operating Margin: 22.78%
Return on Invested Capital (ROIC): 33.48%
Revenue growth 3Y: 25.46%
Earnings per share growth 3Y: 32.26%
Forward PE: 19.48
Forward FCF yield: 5.2%
3 reasons why Lululemon is a good buy
PE of 20 (17x NTM earnings) vs. historical median of 42
Highly profitable with high cash conversion
Strong brand & rapidly growing international segments
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