Featured Stocks In August’s Most Attractive/Most Dangerous Model Portfolios

The successes of these model portfolios highlight the value of our machine learning and AI Robo-Analyst technology[1], which helps clients fulfill the fiduciary duty of care and make smarter investments[2].

Our Most Attractive stocks have high and rising returns on invested capital (ROIC) and low price to economic book value ratios. Most Dangerous stocks have misleading earnings and long growth appreciation periods implied by their market valuations.

Most Attractive Stocks Feature for August: Builders FirstSource (BLDR: $19/share)

Builders FirstSource (BLDR) is the featured stock from August’s Most Attractive Stocks Model Portfolio.

We first made BLDR a Long Idea on May 15, 2019. Since then, BLDR is up 19% while the S&P 500 is up 3%.

Since 2012, BLDR’s revenue has grown 39% compounded annually while after-tax profit (NOPAT) has grown from -$57 million in 2012 to $311 over the trailing twelve months (TTM). BLDR’s current return on invested capital (ROIC) is 12%, the highest it’s been since 2006.

Figure 1: BLDR’s Revenue & NOPAT Since 2012

Sources: New Constructs, LLC and company filings

BLDR Valuation Provides Significant Upside Potential

At its current price of $19/share, BLDR has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects BLDR’s NOPAT to permanently decline by 10%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 10% compounded annually since 2016.

If BLDR can maintain TTM NOPAT margins (4%) and grow NOPAT by just 3% compounded annually for the next decade, the stock is worth $32/share today – a 66% upside. See the math behind this dynamic DCF scenario.

Critical Details Found in Financial Filings by Our Robo-Analyst Technology

As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings. Below are specifics on the adjustments we make based on Robo-Analyst findings in Builders FirstSource’s 2018 10-K:

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Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

Disclosure: New Constructs staff receive no compensation to ...

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