Stock of the Week: A Solid Bet on the Great Outdoors

|July 24, 2023

Oppressive heat is blanketing much of the U.S… and Europe.

Is anyone still going outside?

Well… this leading outdoors company isn’t worried.

It owns more than three dozen popular sporting and outdoor brands. Sales have topped $3 billion… cash flow is strong… and borrowing is down.

The company meets my criteria based on growth, value and income… and it has an excellent 20% CROCI – cash return on capital invested. That means the company is generating a lot of cash relative to how much capital it’s investing.

Plus… the stock has low volatility… is outperforming the market… and is primed for a breakout.

What more could you want?

How about a dirt-cheap forecast P/E… and a deep undervaluation?

Much like an adventurer’s hiking pack… this Stock of the Week is jam-packed with valuable assets.

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

Click on the image below to watch it.



Hi, friends. Welcome to another exciting Stock of the Week.

As you know, my team within the fund put a whole bunch of ideas in front of me, just like in the TV series Billions, and then I shout and scream at them and eventually come down… I don’t do that, honestly. I don’t need human resources behind me… I then come down on the best idea that they’ve pitched and presented, and so is the case this week.

So as you know, I’m Alpesh Patel, the person behind GVI Investor. And this week’s interesting Stock of the Week – I didn’t want to just keep doing tech and AI, that’d be too easy, wouldn’t it? – is Vista Outdoor (VSTO).

It’s headquartered in Anoka, Minnesota. I’m sure you’ve all been there. If you haven’t, you must visit. It sounds great.

It’s got more than three dozen renowned brands that design, manufacture and market sporting and outdoor products.

Now, you might say, “Alpesh, there’s a massive heat wave across the United States. Europe’s on fire. Who the heck’s going outdoors? Should we not be looking at air conditioning companies?”

Don’t worry, we’ll get to those things.

Vista Outdoor is trading on the New York Stock Exchange. And it has, as I said, outdoor products and sporting products.

So how, when something doesn’t look perfectly in line with what’s happening in the broader economy, can we look at it? Well, there’s a reason. I’ll explain. And the reason is the financials. It’s the numbers. It doesn’t matter what it makes. If the numbers are amazing, the numbers are amazing.

The company sells its products through big-box and specialty independent retailers and distributors, as well as through brand websites and owned stores.

Vista Outdoor reports financial results that show sales of $3 billion. Well, it’s a big world out there. It’s a big outdoors.

Cash flow is strong. Leverage, or borrowing, is down and certainly under control.

So let’s just look at some of those numbers in more depth so you get an insight into how we look at these things.

First of all, on my proprietary Growth-Value-Income score, it’s got a score of 7. Now, 7, 8, 9 or 10 meets my minimum criteria.

Remember, this is my proprietary sort of algorithm, as it were, which calculates the scores of all stocks based on their valuation, based on their growth, based on their income. So 7 is perfect.

CROCI, cash return on capital invested – remember, that’s a formula invented by Deutsche Bank and used by Goldman Sachs Wealth Management for their really rich clients – that’s at 20%.

If you want to understand CROCI in more detail, go here. But CROCI at 20% means this company’s generating a lot of cash for the capital that it expends. That’s good. That feeds into and trickles down into all sorts of things, such as share price and profitability.

Sortino is at 0.5. That’s a measure of reward versus risk. That’s good, that’s a good number. Volatility is below 20%, so I’m happy with that. And alpha tells us it’s been outperforming the market.

Forecast P/E is only at a multiple of 6.2 and is below its three-year average. Looks undervalued, doesn’t it?

Turnover is going in the right direction. Assets are going in the right direction as well. Operating cash flow is going in the right direction. So a lot of good things.

Some concerns, okay. It’s not the perfect company. Turnover growth is forecast to dip a little bit. Growth of profits before interest and tax is forecast to dip. Pretax profits are forecast to go down.

So that means that should the company do better than those pretty poor forecasts, the share price should go up because that negativity should be reflected in the share price, of course.

Return on capital employed is at 22%. Return on equity, which is another measure of just how efficient it is at turning capital into profits, is at 19%. All good numbers.

Well, let’s look at the stock and how it’s been performing. And as you would expect with those forecasts, for the last 2 1/2 years, so since January 2021, it’s pretty much gone sideways. It’s at January 2021 levels. And since January 2022, it’s actually gone down.

So it’s had ample time for its share price to show nothing, regroup, deliver more results, capture more profitability.

And now, I believe… looking at what I call the monthly MACD, the moving average convergence divergence, which is the measure of momentum… it looks like it might be looking to go from roughly the price it’s at now and not quite double but at least get up to about 43%.

Let’s look at the return histogram, which is a measure of sort of statistical price distributions and what hypothetically could happen. Yeah, it’s a wide range. Could drop. It’s high-risk in the sense that over 250 days, there is a slim possibility of a 54% loss. That’s often the case with stocks. Hey, if you don’t want any losses, don’t want any risk, then it’s cash you’re looking for.

But on a discounted cash flow basis, it’s some 75% undervalued. Doesn’t necessarily mean that it will achieve full valuation, but 75% undervalued is another sort of “green flag,” as it were, another tick in its box.

Hopefully you like that and well, the little touch of my humor as well, and found it interesting, informative, educational and entertaining… That’s why I am here.

Thank you very much.