There’s a lot of doom and gloom around the housing and real estate sector.

But it’s not affecting this week’s Stock of the Week.

This $3 billion company is one of the largest homebuilders in the U.S., and it has multiple “Builder of the Year” awards to it name.

The stock has been on an absolute tear, doubling in the last seven months.

But thanks to solid cash return on capital invested, return on capital employed and return on equity…

Plus pessimism in the sector pushing down growth expectations…

This company should keep soaring higher… without much volatility.

With it undervalued by more than 50%, we could see significant upside from here.

Get all the details on the stock – including the ticker – in this week’s video.

Click on the image below to watch it.

Transcript

How to Pick Solid Stocks Using CROCI

Hello, Manward family. Now, as you know, I’ve been speaking a lot about AI, both in GVI Investor and with stock picks whenever I can, as well as in my weekly updates.

Now, I’m going to take a slight break from that for this Stock of the Week. And the reason is we can’t just keep doing AI all the time, can we? Incredibly important though it is, and I will return to that.

This week’s Stock of the Week is Tri Pointe Homes (TPH).

I’m Alpesh Patel, as you know, hedge fund manager. My team sifts through about 10,000 stocks to give me ones which should meet my attention. Let’s put it that way.

And this one did. It’s a $3 billion company. It’s one of the largest homebuilders in the U.S. It sells its homes through its own sales representatives and independent real estate brokers as well.

Tri Pointe Homes has won multiple “Builder of the Year” awards as well, so it’s a good company in that regard.

Now let’s have a look at what attracted me to the company… other than its huge profits. Several things here attracted my attention.

One of them is on my proprietary Growth-Value-Income, or GVI, rating… which is an algorithm which looks at the growth of a company, the valuation of a company, the dividend income of a company, its momentum as well as cash flow… this was a 7 out of 10. Anything which is 7, 8, 9 or 10 meets my minimum criteria. We scan 10,000 equities, and that’s why we have a scoring system.

CROCI, cash return on capital invested, is a formula invented by Deutsche Bank. And you can look at the links in the bio on that… Sorry, the links elsewhere on this video on that. The CROCI is 9.3%. So a good percentage return – a 9.3% return of capital on cash return on capital invested. Okay, so good returns on capital.

It’s been going up recently. Significantly, in fact. Sortino, which is a measure of reward versus risk, is above 0.3. That is the minimum that I want it to be to suggest that there’s adequate reward, or average return, for the volatility that we’re taking… the risk of missing that.

Volatility, speaking of which, is 15.5%. That’s below 20%, which is what I really want it to be. And return alpha is positive. It’s outperforming the market.

Now, turnover’s been going in the right direction. Profits have been going in the right direction. Pretax profits have been going in the right direction. Total assets have been going in the right direction.

Return on capital employed and return on equity are both measures of how efficiently it can turn capital that it has and shareholder equity into cash and profits. It’s good at that.

For the valuation forecast, P/E is pretty cheap at a 9.7 multiple, so the current share price is 9.7 times its forecast profitability. That’s relatively cheap. Very cheap if it were a tech company, but even for a house builder – even when we’ve got considerations of possible recession, higher interest rates or macroeconomic concerns – it’s still relatively cheap.

Now, forecast growth… This is where we get a few concerns. The turnover is forecast actually not to grow – to have negative growth. So why am I picking it? Well, I think that’s overdone. I think that pessimism is so low that if the company exceeded that low bar, that low pessimistic expectation, then its share price would go up. And that’s really the story here. That’s the angle we’re going for here.

The share price has been on a rip, going up about 100% in the last seven months or so. And that’s the angle we’re playing here. We think that’ll continue higher.

On a discounted cash flow basis, it’s about 60% undervalued. So basically it could double on a discount cash flow basis.

There are no guarantees to any of this, of course. There are no guarantees – even if you tick the boxes of value of growth, income, cash flow, discount cash flow, momentum, Sortino, alpha… all the variety of things we look at – that something will necessarily go up 100%, but that’s the angle here.

Another sort of slight negative… when I look at the return histogram, the variability of the price (a statistical projection of how low the price could drop and the variance it could go in over a 250-day period), it’s quite a wide range. And, of course, you want it to be only positive, but very few companies can achieve that. And you want it to be only going up, but very few companies can achieve that.

So a couple of cautions, but I hope you’ve enjoyed it. I hope it’s also given an insight that despite the economic gloom talk, and particularly in sectors to do with housing, that actually when you look at the hardcore numbers, this is another way to look at these things and focus on data – not on narratives, not on emotions, not on feelings, not on gut instinct. Focus on the data. That’s key.

Thank you very much.