Show Me the Money!
Two new purchases for the Model Portfolio that is showing investors some serious cash
As a contrarian investor that likes to invest at inflection points, I don’t always go for the cheapest stocks. In fact, mechanically screening for low P/E ratios often results in buying value traps, or cheap stocks that are cheap for a reason.
When buying a “cheap” stock, investors need to understand why it is so cheap, and why you don’t think they will stay so cheap going forward due to a catalyst or inflection point.
After several months of monitoring and doing my due diligence, I pulled the trigger to buy two new positions for the Hidden Rock Capital Model Portfolio.
The first stock is what I believe to be the best way to play the coming outperformance in Canadian heavy oil stocks. In my article The Dam Has Fallen, I explained why I am bullish on Canadian heavy oil stocks given the shrinking price differentials to global crude benchmarks as well as increasing “lightness” of US shale production.
The stock I have purchased will be one of the biggest beneficiaries of these dynamics, and currently trades at 30%+ free cash flow yield (based on current crude spot prices), which is one of the highest among any major North American oil producer.
The second stock I purchased is a large well-known company that is somehow trading for less than 4x free cash flow despite owning world-class brands, an enormous net cash position, and a fat dividend yield.
Sure, there are some near-term uncertainties that may be keeping the stock price depressed, but the valuation discount seems to be reaching extreme pessimism in my view, presenting a compelling investment opportunity.