Dealmaker’s Diary: A Power Player That’s Shockingly Undervalued

Alpesh Patel|October 3, 2024

The utilities sector is having an “electrifying” year… it’s up nearly 30% while the S&P 500 is up not quite 20%.

But this utilities infrastructure provider is doing even better. It’s up nearly 40% over the year.

It’s no surprise when you dig into the numbers. The repairs and maintenance segment of the business is a cash cow.

Plus… the stock has been in a beautiful trend since 2020. That’s right; even when the markets faltered in 2022… this stock continued its steady march upward.

Yet it’s surprisingly undervalued!

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

This the kind of research my clients pay thousands for… but you get it for FREE as a Total Wealth subscriber.

Click on the thumbnail below to watch.

TRANSCRIPT

It’s Dealmaker’s Diary time, friends, and my Stock of the Week. Remember, my team puts a lot of stocks in front of me, and they pitch their best ideas. I then narrow that down, look at the data for myself, and work out what I like the look of. And I’ve got one for you this week I’m really excited about…

Quanta Services (PWR).

Let me tell you why…

You likely know that the utility sector has been doing rather well. Actually, it’s one of the best performing sectors so far this year.

Quanta Services is a contracting company that works in infrastructure solutions. Utilities and renewable energy are going in one direction, upward. Communications, that whole sector’s been growing and looks like it’s going to continue. You know the energy industry requires a lot of infrastructure.

They offer design.

They offer installation.

Here’s the important bit: repair and maintenance. That’s an ongoing service – a cash cow.

I like the fact that Quanta is internationally diversified. The U.S., Canada, and Australia are the key markets for them.

It’s got repeat business. The person who installs it is the person who knows it well, and if anything goes wrong with it, they’re the ones you call back.

Decarbonization, electric vehicles… these are the reasons why it’s doing incredibly well, but it’s the financials mean more to me.

Narratives are one thing, but the numbers get me excited.

On my Growth-Value-Income rating, it’s an 8. Now remember, that’s my proprietary algorithm that works very well indeed. Anything with a 7, 8, 9, or 10 based on the valuation of a company – that’s profitability to share price – based on its revenue growth, its sales growth, its dividend yields, its cash flow growth. Momentum’s thrown in there as well. And then all those facts are weighed. Anything with a 7, 8, 9, or 10 ticks my box.

Forecast P/E is a little bit steep. You’re paying $34 for every dollar of profit that the stock produces. Now I know that’s a bit rich, so we’ve got to put our hands up on that one.

However, here’s where everything else looks very exciting.

Cash return on capital invested is above 10%.

That’s a critical benchmark. Generally, as a rule of thumb, anything above 10% with CROCI, they tend to meet the Goldman Sachs Wealth Management criteria for companies which should generate 30% annual returns in their stock prices.

Not guaranteed, but historically, on the testing that they’ve done, that’s what happens. This ticks that box.

Sortino is above 1. It’s very rare to get stocks with a Sortino above 1. That means the stock’s average return is greater than the volatility and the risk you’re taking for that unit of return.

Volatility, speaking of which, very low. Phenomenal.

Alpha, amazing. Seven percent. Normally, you’re looking at about 1% with companies.

Look at that trend on the chart. Look at that beautiful trend since January 2020.

Very few companies produce trends like that. I really want you to have a look at 2022. Most companies fell in 2022. This stock didn’t.

The thing is, it’s a bit overbought on the momentum. But Nvidia’s been overbought on momentum for about five years. Some of the best companies often are.

Yet on top of everything that I’ve just said, when you look at discount cash flow, the stock is undervalued, which I was really surprised about. I was expecting it to be overvalued.

Everybody’s seen it. Everybody loves it. What the heck?

So I’m surprised we’ve got some undervaluation going on, which again gives us some room for the upside. So a lot of boxes ticked.

You can see why it makes my Stock of the Week. Thank you very much.