Hello from Bangalore, India… and happy Thanksgiving to all my Manward readers.

I’ve got an unusual Stock of the Week for you…

In that it’s a play on discretionary spending.

You may be thinking… “With worries over a recession, why would you pick a company in an industry that is purely reliant on discretionary spending?”

Well, there’s a good reason for it.

Anyone who’s been following me for long knows I don’t care what a company does or what its story is.

As long as it’s making money and its numbers meet my strict criteria…

It’s a stock worth looking at.

And that’s the case with this one. In a market where most companies are revising their numbers downward, this one is revising its numbers upward.

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

Click on the image below to watch it.

Transcript

Hi everyone. Sorry for the slightly unusual lighting. I’m actually at a hotel in Bangalore and doing this Stock of the Week whilst being out here.

As ever, I have a really good one for you.

And I must say, to all of the Manward family who watch these Stock of the Week videos, happy Thanksgiving in advance for all of you out there.

So let’s kick off with this particular stock. And it’s a slightly unusual one. Because you might think, “With worries of a recession, why would you pick a company in an industry which is purely reliant on discretionary spending?”

Well, there’s a good reason for it… the financials.

The company in question is Monarch Casino & Resort (MCRI). It’s a bit counterintuitive, you might say, for me to go with this one.

They’re a provider of gaming, hotel and hospitality services in the U.S. They operate casinos and hotels, and dining as well. It’s got subsidiaries such as Golden Road Motor Inn, which operates the Atlantis Casino Resort Spa in Reno, Nevada.

Now let’s talk about numbers. Given that its business is discretionary spending – the kind of spending which is gonna get hit if there’s some kind of recession – what made me choose it?

Like I said, it was the numbers. There’ve been upward revisions in the current-year earnings estimates of the company. That’s good because most companies are revising downward in terms of earnings estimates.

The company’s annualized cash flow growth has been 22%. That’s a strong number in absolute terms, but it’s also better than the industry average. So they’re doing something right.

Year-over-year cash flow growth for Monarch is 158%. That’s extraordinary. You’ve gotta admit, that’s extraordinary.

So let’s go into some of these data points in a little bit more detail, shall we?

Well, overall, it’s got a Growth-Value-Income rating – my GVI rating – of 8. Now, remember, any number 7 or above meets my criteria.

I created a proprietary scoring system to make stock picking that much easier. And what my GVI rating does is, it looks at the valuation of a company, its profitability to share price, its revenue growth, its dividend yields, all those kinds of factors.

So this has got an 8 and meets my criteria. It’s a good company.

CROCI is at 14.2%. That’s a good, strong, high number.

Remember, companies which are in the top quartile of all companies, the top 25% of all companies by CROCI, meet this very special criterion.

Let me explain what CROCI is. It’s cash returned on capital invested.

In other words, the cash a company can throw out from the capital that it invests. This company’s in the top quartile.

This was a formula invented by Deutsche Bank Wealth Management. It’s used by Goldman Sachs Wealth Management for its wealthiest clients. What they discovered is, companies in the top quartile, the top 25%, tend to generate as a basket of stocks 30% per annum.

Not every stock and not every year. But as a basket, on average over the long term, they generate 30% per annum… which is why Goldman Sachs Wealth Management use it for their wealthiest clients.

So this ticks that box.

Performance over the past few months is strong. I like it.

Sortino is a measure of the average return of the share price versus the volatility, or risk on average, of missing it.

Ideally, I want that to be above 1.0. But to be honest, anything above 0.3 meets my criteria. It’s good enough.

Volatility is at 21%. I really want that to be 20% or lower. So it’s just out by 1%.

And alpha is a measure of outperformance of the market, and it certainly does that.

Now let’s look at some of the other numbers. Well, the forecast P/E ratio – in other words, its share price compared to the forecast of profits – is at a multiple of 18. The share price is 18 times future forecast profits.

That’s not a bad multiple. It’s not overvalued.

What other things catch my eye? Well, return on capital employed – which is another way of looking at just how efficient a company is at converting capital into returns – is 15%.

Return on equity, another similar measure, is 16%.

These are good, strong numbers.

The company’s efficient at turning capital invested into cash. And why wouldn’t it be? It’s in the cash business, given the industry it’s in.

Forecast growth… Turnover is forecast to grow 20%; profits before tax and interest are forecast to grow 25%.

Turnover’s been going in the right direction… total assets in the right direction… net asset value in the right direction… profitability in the right direction.

So a lot of things are going in the right direction.

The real danger with this company is twofold. One is headwinds from the broader economy, and the other is that too much optimism is factored into the price.

Well, looking at the valuation, that doesn’t seem to be the case.

So let’s have a look at the share price. You can see how it’s been skyrocketing since COVID began. Since May 2020, it’s gone from about $15 to $82. That’s a huge gain.

However, from May 2021 till now… so the last, what, 18 months, roughly… it’s pretty much gone sideways.

We’re at about $82. It’s formed a base around $50. And what I’m really looking for is this to break to the upside, to resume growth.

I don’t think it’ll be an explosive, fourfold increase in the value of the company. But I certainly see growth in that direction, that upward direction. And that’s what I’m anticipating with the company.

What else sort of supports my thesis, as it were?

Well, two other factors…

On a discounted cash flow basis… which is just another way of looking at the company, the cash flow discounted to the present value… it’s a little bit of nifty math that goes into doing that kind of thing… discounted cash flow to its current price. It’s at $82, but it should be at about $117. So you can see it’s about 30% undervalued.

Now, there’s one other factor that sort of attracts me. Whilst it’s volatile, its share price, if we look at past performance (and the past is no guarantee of the future)… whilst it’s volatile – in 20 days, it could be down 32%… in 50 days, it could be down 38%… in 100 days, it could still be down 38% (that’s not very likely, but it could happen) – over 250 days, net-net, you’re likely to end up with a positive return.

So a little bit volatile, as you saw – 21% volatility. There’s a little bit of volatility to the downside, so be careful of that.

This is a high-risk play, but overall, one with a lot of good, strong fundamentals.

So that’s my Stock of the Week.

Whilst there’s all this talk about recession and people cutting back on spending, I’ve gone with a purely discretionary spending play, which is the casino business.

Thank you very much.