When you see my latest Stock of the Week, you may think I’ve gone crazy…

It’s nothing like the technology companies… healthcare companies… or energy companies I’ve shown you before.

In fact, it’s not even a global outfit – something I usually look for.

This stock came up on my radar because it’s got huge growth potential… despite the headwinds we’re seeing in the economy and the markets.

It has strong free cash flow numbers. It’s very disciplined in its spending. And it pays a dividend.

Plus, the stock has been moving sideways for quite a while… and I’m convinced it’s ready to break out.

Get all the details on the stock – including its ticker – in my latest video.

Click on the image below to watch it.

Transcript

Hello, everyone. Welcome to my little man cave again, and welcome, the entire Manward family.

I’m going to give you another… well, I think it’s an outstanding Stock of the Week.

The whole purpose of this is to give you a little bit of a glimpse into how my hedge fund team researches companies. Then, they give me the breakdown. I go into it in a bit more detail. It’s both educational (informative) and, hopefully, a little bit entertaining as well.

Let’s begin with this week’s stock, Churchill Downs (CHDN). It’s a horse racing complex located on Central Avenue in South Louisville, Kentucky.

Now, you might think, “Has Alpesh gone absolutely crazy? This is nothing like the technology companies or the healthcare companies or the energy companies he’s been looking at before.”

Well, it’s famed for hosting the annual Kentucky Derby (even I’ve heard of that). It officially opened in 1875 and was named for Samuel Churchill, whose family was prominent in Kentucky for many years.

It operates through various business segments: racing, casino, online wagering, corporate, and other investments.

Again, you might say, “Wait a minute, Alpesh. You normally talk about global companies, and you talk about technology. What’s going on?”

Well, let me explain what’s going on. In addition to what I’ve already mentioned, the company manufactures and operates pari-mutuel wagering systems for racetracks, off-track betting facilities and other wagering businesses.

Now, I’m not a gambler myself. I don’t necessarily even advocate it. I’m an investor, though, and I am an investor in businesses.

The company shows significant capacity for growth, with strong free cash flow generation. It’s been very disciplined in its capital spending… as you’re about to see as we deep dive into the balance sheet, the profit and loss account, and the cash flow statement in just one second.

It pays dividends. Always good to see. There’s a correlation between paying dividends and stock price movements as well.

It’s also forecast to grow, despite all the headwinds of what’s happening in the global economy.

So let’s dig a bit deeper.

Growth-Value-Income rating… 7.

Now, remember, this is an algorithm proprietary to my firm, where we look at valuation metrics of a company, such as share price to profitability. We look at revenue growth, we look at dividend yields, we look at momentum…

We look at all these various factors, and this has got a 7 out of 10. If it’s a 7, 8, 9 or 10, it meets my minimum criteria. And we weight in our algorithm all those factors of valuation, which is more important than growth, which is more important than dividend yields, which is, let’s say, less important than momentum.

We weight all those factors and come up with a score. So this company meets our criteria.

CROCI… 10%. Now, this is cash return on capital invested. It’s a formula, as many of you’ll know, if you’ve heard me before, invented by Deutsche Bank and used by Goldman Sachs Wealth Management to pick stocks for their wealthiest clients.

What they discovered is, if you take a basket of stocks which are in the top quartile by CROCI – in other words, the top 25% of all companies by their cash return on capital invested, the cash they produce from the capital they invest – then that basket, on average, over the long term, generates you 30% per annum.

You obviously change the basket as companies drop out of that quartile, but so you might hold them for about 12 months.

Not every stock in that basket and not a basket every year will give you 30%. But as an average, overall, that’s what you get. And this one meets that criterion, so that’s good.

Good upward growth so far this year, or second half of this year.

Sortino ratio is a measure of the average return versus the volatility, or risk, of missing it. It’s 0.4. Ideally, above 1.0 is what I want, but very few stocks do that. So anything above about 0.35, I’m happy with.

Volatility is a bit high. It’s a bit of a warning with this one. The volatility is a bit high.

Alpha, its ability to outperform the market, is strong.

So where do we go with this one?

Well, as I said, CROCI’s strong. We’ve got two different figures depending on which time frame you take for this. But whether you go by the 10% or the 14.5%, it’s strong. It’s good.

Forecast growth… Turnover is forecast to be up nearly 12%.

I know profits are not forecast to rise, but turnover’s forecast to rise. Pretax profits are 68% and forecast to rise up.

Forecast P/E ratio… in other words, its valuation… It’s trading on a multiple of current share price to future forecasted earnings of 22. It’s neither cheap nor expensive. It’s sort of in the middle bit over there.

Turnover’s been going in the right direction. Sadly, borrowing’s been rising. But as I said, it’s generating cash, and that’s what’s interesting and important for this one.

This is what the stock looks like. You can see it took quite a hit during COVID and then continued that upward trend. And it’s actually been going sideways for about 18 months.

And we think that that sideways move for 18 months is probably set to now resume on something of an upward trend again.

What we’re setting with this one is a trailing 25% stop loss. And take your profits if you make a 40% return. Hold for 12 months. Those are the sort of rules we’re applying to this one.

On a discounted cash flow basis, it’s undervalued. It’s undervalued by almost 50%. That’s doesn’t mean it’s guaranteed to double in price and become fairly valued, but that’s what it looks like at the moment.

When we look at the return, the statistical returns of this company… This is historic, what we’re looking at. It doesn’t mean it’s guaranteed to do this in the future. And we extrapolate for what kind of ranges it might move in.

Yeah, there’s a wide range. This is why I said it’s volatile.

Even after 250 days, you could be down 27%. You can see there’s a wide range. After 100 days, you could be down.

So it’s one of the more volatile ones. It’s certainly not for the people who are risk-averse. But it shows you the broad factor of things we look at.

Those of you who are my GVI Investor followers will know that we narrow these numbers right down. We look for things which are unlikely to fall statistically and so on.

But this is to give you a snippet, a sort of “tip of the iceberg” of some of the research that we look at.

So thank you very much. Hope you found that informative. And, of course, wishing you all a very Merry Christmas. You’ll hear from me before Christmas, but I want to start wishing you all now.

Thank you very much.