Featured Stocks In May’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 May: PACCAR Inc. (PCAR: $69/share)

PACCAR Inc. (PCAR) is the featured stock from May’s Most Attractive Stocks Model Portfolio.

Since 2016, PCAR has grown revenue by 17% and after-tax operating profit (NOPAT) by 25% compounded annually. PCAR’s $1.9 billion NOPAT over the trailing twelve months (TTM) is up 20% over the prior TTM period. Profit growth has been fueled by rising NOPAT margins, which are up from 7% in 2016 to 8% TTM. PCAR’s return on invested capital (ROIC) has improved from 14% to 19% over the same time.

Figure 1: PCAR Revenue & NOPAT Since 2016

Sources: New Constructs, LLC and company filings

PCAR Valuation Provides Significant Upside

At its current price of $69/share, PCAR has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means the market expects PCAR’s NOPAT never to grow from its current level. This expectation seems overly pessimistic for a firm that has grown NOPAT by 8% compounded annually since 1998.

If PCAR can maintain TTM NOPAT margins (8%) and grow NOPAT by just 4% compounded annually for the next decade, the stock is worth $83share today – a 20% 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 PACCAR’s 2018 10-K:

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

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

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