Hello, and welcome to another Stock of the Week.

The goal of this series, as you know, is to give you insights from my experience as a hedge fund manager and show how my firm analyzes and researches companies.

So, what is this week’s stock?

It’s a business advisory company that has managed to rise while many other stocks are down. It was up in 2018… up in 2019… up in 2020… and up in 2021.

So far this year, it’s up again.

Now, you might think that means this stock is expensive. But as you’ll see in today’s video, the numbers suggest this resilient company still has plenty of room to run.

I’ll show you everything I’m seeing. Get all the details on the stock – including the ticker – in this week’s Stock of the Week.

Click the image below to watch the video.

Transcript

Hello, and welcome to another Stock of the Week.

The goal of this series, as you know, is to give you insights from my experience as a hedge fund manager and show how my firm analyzes and researches companies.

You’re getting the real insider look into what proper due diligence should look like. And while we can never guarantee that the markets will only go up and up and up (they don’t), we can at least do our due diligence so that if we wake up at 3 a.m., we can rest assured that we did the research and feel good about the decisions we made.

So, what is this week’s stock?

FTI Consulting (FCN), a New York Stock Exchange-listed company. It’s a firm that generates sales by providing professional business advisory services to customers.

It operates through five segments. The majority of the company revenue is derived from serving customers in the U.S. First quarter revenues in 2022 were three-quarters of a billion dollars. (We’re not talking small here.) That was an increase of 5.4% from the year before.

Now, you might say, “Well, wait a minute, Alpesh, what about recession?” You’re right. Recession can affect every single industry. That’s why we want to do our due diligence and look in detail at any company we’re considering.

FTI’s revenues come from a multitude of sectors, and that gives some degree of comfort. It works in corporate finance… and it works in forensic and litigation consulting as well. The importance of that is it’s not reliant on just one segment of society.

It also does economic consulting. It’s got a technology segment. It does all of these things, as well as, by the way, strategic communication. You can see that if you’ve got a business that’s spanning multiple sectors, then, by nature, it’s got a degree of diversification.

So what do the numbers look like?

Well, what I like about this company is the stock price was up in 2018, when not many stocks were. It was up 55% then. It was up 66% in 2019. It was up in 2020 – not much, but it was up. In 2021 it was up 37%, and so far this year it’s up again.

You might say, “Well, hang on, if it keeps on rising, is it overpriced and expensive?” We looked at my proprietary Growth-Value-Income algorithm, which weighs the valuation of a company – i.e. its share price relative to its profitability – as well as its revenue growth, its dividends, all of these factors… and this company came out as a 7 out of 10.

Now, anything that is a 7, 8, 9 or 10, I treat equally, and that means the company meets my criteria. I also look, as you know, at CROCI – cash return on capital invested. This company’s CROCI was 12.6%. It’s a solid number.

Why do I look at cash flow? Well, as many of you who watch my Stocks of the Week will know, companies that rank in the top 25% in cash return on capital invested tend to generate a 30% per annum return over the long term.

I don’t mean you should hold them forever. What I mean is, if you were to hold the top quartile this year – the top 25% of companies by CROCI – for 12 months, then hold next year’s top quartile for 12 months after that, and then do the same the year after that… you would, over the long term, have a 30% per annum return.

Not every year. It’s not a bank account. It’s not guaranteed. The people who found this in their research worked for Goldman Sachs Asset Management, and they use it to pick stocks to this day. It was invented, actually, by Deutsche Bank. So I think CROCI is one of many important factors to consider.

As I said, the price has been up over the last six months. The stock has a Sortino ratio of greater than 1, which is rare. That means the reward, or the average return relative to the volatility of the stock, is high. The returns are high compared with volatility, so you’re more likely to get the returns when the Sortino is above 1. That’s a good thing. It’s something that we want.

FTI’s volatility, by the way, is only 9%, which is phenomenal. That’s below Microsoft‘s (MSFT) volatility. I can tell you, it took a lot of hunting to find a company like this for us. So what are the other factors? Well, in terms of quality, return on equity, good; return on capital employed, good; cash flow, good.

Now, what about valuation? It’s got a forecast price-to-earnings ratio of 26. That’s a strong multiple, and it means the market is factoring in quite a bit of share price growth. Should the company not meet those profit or earnings expectations, you can expect it to get punished, more so than if the market were pessimistic and the company’s forecast price-to-earnings ratio were a lot lower.

That is something of a concern. But you can’t get the perfect company. I like the fact that turnover keeps increasing, borrowing is in check, operating cash flow keeps increasing, net asset values keep increasing, and pretax profit has been increasing or holding steady at the very least. Total assets are increasing. All of these are very positive things.

If I then look at the most recent stock price right up to now, I see there’s strong momentum to the upside. We see that from this year’s results, anyway, in terms of the share price performance. I see there’s good, strong upside momentum and still, I think, upside to be had in this.

In short: I like FTI. I like that we found it. Also, I like the fact that I can share with you through Stock of the Week some of the insights of what we do for our full-time students in my GVI Investor research service. We go into a lot more depth there, of course, and offer a lot more analysis.

This is the tip of the iceberg, just to explain to you how we do things around here. Thank you very much. I hope you enjoyed that little insight.