March performance recap

The most attractive stocks (-4.1%) underperformed the S&P 500 (+5.0%) from March 3, 2022 to April 4, 2022 by 9.1%. The best performing large cap stocks gained 21% and the best performing small cap stocks rose 23%. Overall, 6 of the 20 most attractive stocks outperformed the S&P 500.

The most dangerous stocks (+1.8%) outperformed the S&P 500 (+5.0%) as a short portfolio from March 3, 2022 to April 4, 2022 by 3.2%. The best performing short large cap stocks fell 11% and the best performing short small cap stocks fell 13%. Overall, 12 of the 19 most dangerous stocks outperformed the S&P 500 as shorts.

The most attractive/dangerous model portfolios underperformed the equally weighted long/short portfolios by 3.0%.

The most attractive stocks all share a high and growing return on invested capital (ROIC) and a low economic price-to-book ratio. Most dangerous stocks have misleading earnings and long periods of growth appreciation implied by their stock market valuations.

Feature of Most Attractive Stocks for April: Nokia Corporation

Nokia Corporation (NOK) is the star stock in April’s model portfolio of most attractive stocks.

Nokia has grown its revenue by 5% compounded annually and net operating profit after tax (NOPAT) by 12% compounded annually since 2013. Most recently, the company’s NOPAT margin increased from 4% in 2018 to 7% in 2021, while the invested capital turns has increased from 1.2 to 1.6 during the same period. Rising NOPAT margins and capital turnover have driven Nokia’s ROIC from 4% in 2018 to 11% in 2021.

Figure 1: Revenue and NOPAT since 2013

Nokia is undervalued

At its current price of $5/share, NOK has a price-to-economic book value (EPBV) ratio of 0.6. This ratio means that the market expects Nokia’s NOPAT to fall permanently by 40%. This expectation seems too pessimistic for a company that has increased NOPAT by 6% per year since 2015.

Even if Nokia’s NOPAT margin falls to 6% (equal to the three-year average, from 7% in 2021) and the company’s NOPAT declines by less than 1% compounded annually for the next decade, the stock worth about $7/share today. – a 40% increase. Discover the calculations behind this reverse DCF scenario. If Nokia increased earnings more in line with historical levels, the stock would have even more potential.

Critical Details Found in Financial Documents by My Company’s Robo-Analyst Technology

Below are details of the adjustments I’m making based on Robo-Analyst’s findings in Nokia’s 20-F:

Income statement: I made adjustments of $1.8 billion, with a net effect of removing $105 million in non-operating revenue (

Result: I made adjustments of $27.8 billion to calculate invested capital with a net decrease of $14.6 billion. One of the most notable adjustments was $5.2 billion in other comprehensive income. This adjustment represents 17% of published net assets.

Valuation: I made adjustments of $21.8 billion with a net effect of increasing shareholder value of $8.2 billion. Besides total debt, one of the most notable shareholder value adjustments was $10.1 billion in excess cash. This adjustment represents 34% of Nokia’s market capitalization.

Most Dangerous Stocks Feature: Dycom Industries, Inc.

Dycom Industries, Inc. (DY) is the featured stock in April’s Most Dangerous Stocks model portfolio.

Dycom’s economic profits, the company’s true cash flow, declined from $15 million in fiscal 2016 (fiscal year is 1/29/22) to -$93 million in in fiscal year 2022. The company’s NOPAT margin fell from 6% to 2%, while invested capital turnover fell from 1.6 to 1.5 during the same period. Declining NOPAT margins and capital turnover reduced Dycom’s return on investment from 9% in fiscal year 2016 to 3% in fiscal year 2022.

Figure 2: Economic benefits since fiscal year 2016

Dycom offers a poor risk/reward ratio

Despite its poor fundamentals, Dycom is priced for significant earnings growth, and I think the stock is overvalued.

To justify its current price of $95/share, Dycom needs to improve its NOPAT margin to 4% (10-year average, from 2% in FY22) and grow revenue by 11% compounded annually for the next decade. . Discover the calculations behind this reverse DCF scenario. In this scenario, Dycom increases the NOPAT by 18% compounded annually over the next ten years. Given that Dycom’s NOPAT has fallen 16% compounded annually over the past five years, I think these expectations are overly optimistic.

Even if Dycom can hit a 3% NOPAT margin (three-year high) and grow revenue 8% per year over the next decade, the stock is only worth $42/share today, down 55% from the current share price. Discover the calculations behind this reverse DCF scenario. If Dycom’s revenue grew at a slower rate, the stock would face even more downside.

Each of these scenarios also assumes that Dycom can increase revenue, NOPAT, and FCF without increasing working capital or fixed assets. This assumption is unlikely, but allows me to create true best-case scenarios that demonstrate how high the high expectations built into the current valuation are.

Critical Details Found in Financial Documents by My Company’s Robo-Analyst Technology

Below are details of the adjustments I make based on Robo-Analyst’s results in Dycom’s 10-K:

Income statement: I made adjustments of $56 million, with the net effect of removing $16 million in non-operating expenses (

Balance sheet: I made adjustments of $588 million to calculate invested capital with a net increase of $257 million. One of the most notable adjustments was $226 million in asset write-downs. This adjustment represents 13% of published net assets.

Valuation: I made adjustments of $1.1 billion, with a net decrease in shareholder value of $816 million. Besides total debt, the most notable shareholder value adjustment was $154 million in excess cash. This adjustment represents 6% of Dycom’s market cap.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.