The Prudent Speculator follows an approach to investing that focuses on broadly diversified investments in undervalued stocks for their long-term appreciation potential. Does that mean we build portfolios of 20 stocks…30…? More like 50 and up. We like stocks. And we like a lot of ‘em. We don’t rely nearly as much on “how many” as we do “in which,” but we tend to invest in far more names than most. This expansive diversification, we find, potentially serves us well in two ways: we can further minimize the risk of individual stock ownership, while maximizing the likelihood of finding the truly big winners among the undervalued masses.
As for the “in which” part, readers should know we discriminate among potential investments primarily by their relative valuation metrics and our assessments of stock-specific risk. We buy only those stocks we find to be undervalued along several lines relative to their own trading history, those of their peers or that of the market in general. Our Target Prices incorporate a range of fundamental risks (e.g. credit, customer and competitive dynamic) that we believe the companies may face over our normal three-to-five-year investing time horizon.
This month, we boosted the ownership stakes in three companies in our flagship newsletter portfolio, known as TPS Portfolio.
Civitas Resources (CIVI)
A roll up of several E&P operators in recent years had led Civitas to bill itself as the largest pure-play oil & gas producer in Colorado, but recent transactions have extended operations into the ever-popular Permian Basin. The company now produces about half of its oil equivalent sales volumes from the Permian, with the remainder coming from assets predominantly scattered across the Denver-Julesburg Basin of the Rocky Mountains. Shares have been smacked almost 40% since early May, despite CIVI sporting one of the lowest industry lease-operating and per-barrel expenses, and oil prices remaining above the average 10-year level. We find the earnings multiple remarkably low (6 times NTM adjusted EPS) and like the fixed-plus-variable dividend policy, with the latest adjustment to the variable portion allowing the company to use that money to opportunistically buy back stock. CIVI continues to target paying out a hefty 50% of free cash flow (via dividends or buybacks) after the base dividend is paid and the base yield is 3.8%.
Lam Research (LRCX)
Lam Research is a manufacturer and designer of semiconductor processing equipment used in the making of integrated circuits. The company’s sales are weighted towards memory manufacturers (which can create big swings in the stock price), while smaller portions of total revenue come from silicon foundries and integrated device manufacturers. Shares have slumped since July, but investors were able to breathe a sigh of relief after Lam posted fiscal Q1 EPS of $0.86, exceeding expectations of $0.81 (shares split 10 for 1 on October 1), while revenue of $4.2 billion also came in ahead of the consensus. Lam expects Q2 EPS between $0.77 and $0.97, which was well above the analyst consensus at the midpoint. CEO Vincent Pilette said LRCX has “consistently executed and delivered on our commitments” of adjusted EPS growth between 12% and 15% and mid-single-digit revenue growth laid out last year. We think LRCX remains on a firm footing for its etching equipment, even while competitors like ASML (who Lam previously had as a development partner) have been thumped lately. LRCX yields 1.2%.
ManpowerGroup (MAN)
Manpower is a premier global staffing firm with broad reach and extensive job networks. MAN has branched out into all aspects of human resources and typically generates more than two thirds of its revenue from European markets which have continued to face stiff headwinds. MAN shares were clobbered last month after the company turned in a weak third quarter report. Management comments suggested the company has a long way to go before it escapes a difficult operating environment and analysts have continued to revise their estimates lower. In Q4, MAN expects EPS between $0.98 and $1.08, but bottom-line growth is expected to resume in 2025 and 2026. At this point, we think the selling has outpaced the erosion of the fundamentals, even though it’s a difficult path for MAN to grow its top line (it has not in the past decade). With some improvement in the overall business, we think we can see earnings improve and an additional increase in the share price via a P/E multiple expansion. We still like the strong free-cash-flow generation in addition to a just-hiked dividend that puts the yield at 4.8%.
This report is an excerpt from The Prudent Speculator investment newsletter, of which I am Editor. For more in-depth analysis and exclusive insights like those shared in this article consider joining The Prudent Speculator here.