Why I'm Passing On Four Green Screen Stocks

Part of the process of picking the winners from the Green Screen lists are weeding out the stocks that don’t meet all of the criteria we have for investment (growth potential, moat, recurring revenues, great leadership).

This is a faster process than finding the truly great candidates, because it only takes one "no" in the criteria list to say "no" to the stock.

With that in mind, I want to briefly share thoughts on a number of stocks that I’m removing from consideration today.

Atlas Energy Solutions (AESI): We’ve covered the oil and gas space a few times in the past, and the viewpoint doesn’t change here: this is a TOUGH industry to consistently make money in, given the wild swings in commodity prices and the boom and bust nature of the industry. The midstream segment is one area where investors have a chance, but Atlas is on the upstream side. I just think these are way too hard to calculate a reasonable fair value for, and for that reason it gets crossed out.

TAL Education (TAL): TAL provides education and learning services in China. Well, my thoughts on investing in China are no secret - just stay away! TAL’s history is a good example. Originally a provider of K-9 after school tutoring products, new regulations passed in 2021 required these kinds of companies to go non-profit. TAL had to change its whole business model and now relies on "enrichment learning and content solutions". The entire business model is rather murky to me. An easy pass.

Vertex (VERX): Vertex is a company that provides automated calculation, compliance, reporting, and strategic tax services. The firm reminds me a lot of Avalara, which was purchased by private equity last year. Tax is (obviously) a very complex part of business - you have to deal with sales taxes, VAT charges, income taxes, payroll taxes, etc., and federal/state/local variations of each. It sounds like an interesting business. But, like Avalara, the numbers just don’t back up the story here. Despite being a modest growth company (mid-teens revenue growth), Vertex barely generates any free cash flow at all - like Avalara. Maybe there just isn’t a profitable business opportunity in this space? Whatever the case, I’m unimpressed with the financial readout and giving it a pass.

Lululemon (LULU): I went into Lululemon fully expecting to come out with a recommendation. This is an extremely strong apparel brand with strong pricing power and an e-commerce presence that drives close to half of sales. Lulu has an excellent balance sheet and very good cash profitability for the sector. Down over 25% since its last earnings, the stock looks close to fair value, too. I don’t think it is a bad choice for consideration. The only reason I’m rejecting it is the industry. First, apparel sales are not really recurring revenue - consumers have lots of options and (most) don’t buy clothes every week or month. Second, apparel stocks have burned investors more often than not. Even seemingly strong brands like Under Armour, Levi’s, Abercrombie, and Gap have performed below-market to disastrous. The long-term success stories are few - LULU being one of them to this point. Lululemon might buck the trend, but it will be difficult, and even just a few minor missteps could spell trouble for investors. I’m looking for something a bit more anti-fragile.


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