2024-05-01 issue recommended excellent stock list

Albemarle shares are currently undervalued due to our belief that lithium prices are at cyclically low levels. Demand from electric vehicle (EV) sales and utility-scale batteries is on the rise. However, in 2023, batterymakers reduced their inventory, which negatively impacted lithium purchases. Furthermore, the rapid increase in new, higher-cost supply from China has led the lithium market to stabilize. Presently, lithium prices are below the marginal cost of production, prompting supply reductions. We anticipate a price increase in 2024 as demand grows and the market shifts back to undersupply conditions. Additionally, Albemarle's unit production costs are expected to decrease as it expands new capacity and implements overhead cost reductions, leading to sequential profit growth throughout 2024. Albemarle's competitive advantage lies in its cost-effective lithium production, derived from its unique geological resources. Lithium constitutes the company's largest segment, accounting for nearly 90% of its profits. The primary driver of lithium demand is electric vehicle batteries, which represented about 50% of demand in 2023. As EVs are projected to rise to 40% of global auto sales by 2030, up from 12% in 2023, we forecast that they will eventually represent nearly 70% of total lithium demand by 2030, positioning lithium as a key beneficiary of increasing EV adoption. As one of the lowest-cost lithium producers worldwide, Albemarle is well-positioned to benefit from the growing EV market, which will drive higher lithium prices and increased profits. Additionally, with rising lithium demand from utility-scale batteries for energy storage systems, we project that lithium demand will nearly triple from 2023 levels by 2030, reaching 2.5 million metric tons. Supply is expected to struggle to keep up with this demand, resulting in lithium prices remaining above the estimated marginal cost of production of $20,000 per metric ton for the remainder of the decade. We forecast that while lithium prices will remain volatile, they will average around $25,000 per metric ton from 2024 to 2030, leading to strong profits for Albemarle.

Wide-moat International Flavors & Fragrances (IFF) shares appear undervalued due to an economic slowdown impacting volume, with the market concentrating on near-term risks to the company’s profits. Following a couple of years of stagnant sales, there are concerns regarding the company's long-term growth outlook. The primary near-term challenge is the pace of recovery after 2023 profits declined due to reduced volume from customer inventory destocking. However, we anticipate that IFF's specialty ingredients, including flavors, fragrances, and biosciences, will experience normal demand in 2024. This should enable IFF to operate its plants at more typical capacity utilization levels, positively impacting profits. We project modest profit growth in 2024, with a more significant recovery expected in 2025. IFF’s current stock price suggests that investors are doubtful about the company's ability to enhance profits. The company is a market leader in flavors, fragrances, enzymes, and cultures. As consumer demand shifts towards more natural flavors, alongside rising demand for cultures and enzymes, we believe IFF is well-positioned to capitalize on these trends, leading to solid long-term growth. IFF's debt levels are elevated due to the DuPont nutrition and biosciences acquisition in 2021. Management has reduced the dividend by 50% to allocate more free cash flow towards debt repayment. The company has also divested certain businesses, including the recently completed Lucas Meyer sale, to further reduce debt. Additionally, IFF has a pending deal to sell its pharma solutions business, expected to close in 2025. With proceeds from divestitures and dividend savings directed towards debt reduction, we anticipate that IFF's balance sheet will be in a healthier state by the end of 2025.

The acquisition of Newcrest in November 2023 has solidified Newmont’s position as the world’s largest gold miner, surpassing Barrick Gold, with projected sales of approximately 6.9 million ounces of gold in 2024. The newly formed company also boasts significant copper production of about 150,000 metric tons, along with several development projects that we believe hold considerable value and may be underappreciated. We consider Newmont’s shares to be undervalued, particularly in light of its weak sales volume and high unit costs in 2023, coupled with disappointing guidance for 2024. Nevertheless, we anticipate a recovery in sales volume and a reduction in unit cash costs, which should enhance the overall position of the expanded Newmont, placing it around the middle of the cost curve.

Rogers has experienced a significant decline alongside other Canadian telecom stocks, primarily due to concerns over potential increased regulation following the appearance of CEOs before Parliament. However, we believe that any new regulations are unlikely to be overly harsh, as the current market conditions do not justify such measures. Competition remains intense, pricing has remained stable, and the companies have not enjoyed substantial financial gains, yet they continue to invest heavily in enhancing Canadian networks. Rogers is still generating considerable free cash flow and has further synergies to unlock from its merger with Shaw. Additionally, it has emerged as the leading wireless carrier in terms of new customer acquisitions. While Rogers may not experience explosive growth, the prevailing pessimism surrounding the company appears to be excessive. All three major players in the market seem undervalued, but we feel most confident in Rogers' position.

Comcast is currently facing significant challenges, as concerns about slowing broadband customer growth impact its core cable business, while fears regarding increased content investments affect NBCUniversal. We anticipate that broadband customer growth will continue to decelerate due to market maturation, with phone companies likely gaining market share as they enhance their fiber networks. Nevertheless, we expect Comcast to boost broadband revenue through a combination of modest customer additions and strong pricing power. NBCUniversal will need to invest to generate more interest in Peacock, but we remain optimistic about the company's overall position, supported by its robust portfolio of content franchises, successful theme parks, and still highly profitable traditional television operations. With a solid balance sheet, Comcast is well-positioned to allocate most of its free cash flow towards shareholder returns, including a reliable dividend and substantial share repurchases.

VF’s shares are currently trading at a significant discount to our $48 fair value estimate, primarily due to a decline in performance over the past few quarters. We believe that investors are overly focused on recent challenges and are neglecting the company's strong track record in portfolio management and brand development, as well as its potential for sales growth and margin enhancement in the medium term. In October 2023, CEO Bracken Darrell introduced a strategic plan aimed at fostering innovation and new management for Vans, establishing a new platform for VF in the Americas, implementing cost reductions, and reducing debt. The company is also expected to divest at least one major brand to generate capital for debt reduction. We anticipate that VF's valuation will improve as this plan is executed, although it will require time. With brands like Vans and The North Face, VF operates as a narrow-moat company, leveraging its brand intangible assets. Despite being one of the largest apparel firms in the US, VF's share price has significantly declined due to various setbacks, including a notable drop in Vans sales, weak wholesale orders across many brands, inflationary pressures, high inventory levels, and an unfavorable tax ruling. While we recognize these challenges, we view VF’s reduced valuation as an opportunity to invest at a discount in a company that is positioned for enhanced profitability. We project that the firm can elevate its operating margins to approximately 13% by fiscal year 2028. In light of its recent difficulties, VF has reduced its quarterly dividend twice in 2023. Although this is disappointing for income-focused investors, we believe that the company's emphasis on improving liquidity and decreasing debt is a prudent strategy. Additionally, VF has recently attracted the attention of activist investors advocating for cost reductions and the sale of noncore brands. Many of their objectives align with the new strategic plan, suggesting that they are likely to support Darrell's initiatives.

We view narrow-moat Hanesbrands as an attractive investment, currently trading well below our fair value estimate of $17.30. Although the company has faced challenges in recent quarters, we believe the market is overly focused on short-term issues, such as inflation and supply chain disruptions, and is underestimating Hanes' potential for free cash flow generation. Our moat rating is based on the company's strong intangible brand assets. Hanes owns some of the most recognized brands in basic innerwear in the United States, which has allowed many of its products to command favorable pricing and outperform competitors. Hanes has diversified its brand portfolio and expanded internationally, achieving notable success in Australia, where its Bonds brand and others hold significant market shares. The company has divested non-core European innerwear brands to focus on more promising opportunities. Hanes' Champion brand is popular among younger consumers in the athleisure segment. However, due to recent underperformance, Hanes is exploring alternatives for Champion, including a potential sale. While selling Champion would be unfortunate, it could enable the company to reduce debt and concentrate on its innerwear operations in the US and Australia. Hanes' free cash flow to equity was negative in 2022 but rebounded to $518 million in 2023. This improvement in cash flow has allowed the company to reduce its debt from $3.9 billion to $3.3 billion in 2023. Hanes has also eliminated its quarterly dividend, opting to use all available free cash for debt reduction. Given this strategy and our expectation for consistent cash generation, we project that Hanes' debt will decline to $2.5 billion by the end of 2027, even if Champion is not sold. We believe the current low valuation of Hanes' equity reflects concerns about potential declines in cash flow; however, we think its long-term debt has peaked. Additionally, the company has recently renegotiated its debt covenants, which should mitigate the risk of any violations.

We consider Nordstrom to be significantly undervalued, currently trading at approximately half of our fair value estimate of $38.50. Although inflation and other challenges have hindered the company's recovery from the pandemic, we expect earnings to continue to grow. As part of this profit recovery, Nordstrom has reinstated its quarterly dividend payments, resulting in a dividend yield of around 3.5%. Nordstrom's strengths include a loyal customer base, a strong reputation for service, substantial e-commerce sales, and a presence in both luxury and off-price apparel, footwear, accessories, and beauty. However, the department store model has faced severe competition, leading us to downgrade Nordstrom's moat rating from narrow to none. Given the current market dynamics, we do not believe the company can return to the double-digit operating margins it consistently achieved prior to 2014. Nonetheless, we remain optimistic about a turnaround as management rolls out its Closer to You plan, which focuses on e-commerce, expansion in key cities, and a wider off-price offering. As part of its merchandising strategy, Nordstrom plans to boost private-label sales and significantly increase the number of items available through partnerships. Consequently, we anticipate that Nordstrom's operating margin will stabilize around 6% in the medium term, as sales enhancement and efficiency initiatives should provide greater leverage on costs such as marketing, wages, and store overhead. Through effective cost-cutting, efficiency improvements, and a better merchandise mix, we project that Nordstrom will increase its gross margin on net sales to approximately 36% by 2025 (up from about 34% in 2022), while reducing its selling, general, and administrative expenses as a percentage of total revenue to around 32%, down from about 33% in 2023. Recently, the Nordstrom brothers revealed that they are considering the possibility of taking the company private, which we interpret as further evidence of the stock's undervaluation. The family previously attempted to acquire the company for $50 per share a few years ago, but that deal did not materialize.

Polaris' shares are currently trading at over a 40% discount to our fair value estimate of $145. The company's strong brands, innovative products, and Lean manufacturing practices contribute to its wide economic moat. We believe Polaris will continue to leverage its research and development, high-quality standards, and operational excellence to drive demand. Historically, the company has generated exceptional returns on invested capital, including goodwill, and is projected to achieve a 26% return on invested capital (ROIC) by 2033, significantly exceeding our 10% weighted average cost of capital assumption. Despite facing challenges from slowing consumer conversion rates and cautious dealer behavior, we anticipate that long-term demand driven by new product launches will support shipment growth and profit improvements beyond 2024. For 2024, the company expects a sales decline of 5%-7% and adjusted earnings per share (EPS) in the range of $7.75-$8.25, reflecting a year-over-year decrease of 10%-15%. Our forecast indicates a 7% sales decline and an EPS of $7.77. Once dealer inventory is reduced, wholesale shipments are expected to align more closely with consumer demand, as dealer inventory was only up 5% compared to 2019 at the end of 2023. Over the next decade, we project that the company could achieve average sales growth of 3% and EPS growth of 12%.

Hasbro's shares have struggled to keep pace over the past 12 months, exhibiting flat performance compared to a roughly 25% increase in the S&P 500, which has rendered the shares significantly undervalued relative to our $84 fair value estimate. We believe the weak share performance reflects a business in transition, facing unique challenges such as slower entertainment growth due to the 2023 Writers Guild of America strike and the impact of selling the majority of the EOne production business (completed in December 2023). Now that Hasbro is largely free from the low-margin EOne entertainment business, we anticipate a significant improvement in revenue mix, with the high-margin Wizards of the Coast and digital segment projected to account for approximately 34% of sales in 2024, up from 29% in 2023. Additionally, with a renewed focus on core competencies, we expect Hasbro to benefit from more concentrated innovation and a streamlined operating model, supported by the outlicensing of lower-productivity brands to partners, which should help free up working capital. Moreover, due to a stringent focus on expenses, Hasbro aims to reduce gross costs by $750 million by the end of 2025, which will support profit growth. While the company is targeting a 20% operating margin by 2027, we believe it has the potential to achieve this goal by 2025, with long-term operating margins stabilizing around 23%-24%. Therefore, we see a strong opportunity for Hasbro to exceed expectations, driven by its renewed emphasis on product innovation, cost management, and a lean operating profile.

We consider the shares of narrow-moat Bath & Body Works to be attractive, currently trading at over a 30% discount to our fair value estimate of $73. The company possesses a strong competitive advantage in the substantial addressable markets it serves. Its robust brand intangible asset is reinforced by its leading position in the bath and shower, as well as the candle and air freshener sectors, which has been enhanced by Bath & Body Works' swift adaptation to consumer trends. The narrow moat is reflected in a 49% average return on invested capital, excluding goodwill, which we anticipate the business will achieve over the next decade, significantly exceeding our 8% weighted average cost of capital estimate. While we project limited growth in its North American footprint (with over 1,800 owned stores), we expect that product innovation and productivity improvements from new store formats will drive growth in both revenue and profits over time. Additionally, advancements in omnichannel strategies (such as buy online/pick up in store) are expected to remain a key component, while other digital enhancements will contribute to increased conversion rates and profit potential. A strategic emphasis on international expansion is likely to benefit both physical and digital channels, enabling double-digit international sales growth over the next decade and helping Bath & Body Works enhance its brand intangible asset on a global scale. We project that these opportunities will result in average sales growth of 3%-4% in the long term, aligning with global growth forecasts (according to Euromonitor) for the bath and shower and soap industries, thereby facilitating incremental market share gains for Bath & Body Works beyond its already dominant position.

We see value in Sealed Air shares, currently trading 40% below our fair value estimate of $54. Sealed Air manufactures a diverse range of flexible resin packaging, protective shipping materials, and integrated packaging systems. The demand for packaging surged in 2021 due to pent-up consumer demand and supply chain challenges, leading to record financial performance for the company in 2021-22. However, this positive trend reversed as supply chain disruptions eased and inventory levels increased. Many retailers faced excess inventory and had to implement destocking measures, significantly impacting the packaging industry. Management initially provided an optimistic outlook for full-year 2023 and maintained this perspective through the first-quarter earnings report, despite ongoing signs of end-market weakness. However, Sealed Air's second-quarter results fell short of expectations, prompting a reduction in full-year adjusted EPS guidance by over 20%, which unsettled the market. Consequently, the shares have declined more than 50% from their peak in January 2022 and have significantly underperformed compared to packaging peers during this period. Despite the challenges faced in 2023, Sealed Air’s unique business model within the packaging industry remains noteworthy. The company sells packaging equipment and automation solutions, which are utilized by clients for years, differentiating it from other packaging producers that operate on a price-taker basis. Sealed Air’s strong competitive positioning and positive long-term outlook enhance our confidence that the currently undervalued share price will ultimately benefit long-term investors.

Shares of Estee Lauder, a company with a strong competitive advantage, have declined by 34% over the past year, primarily due to a slower-than-anticipated recovery in travel retail in China following the pandemic. We believe the shares, currently trading at a 40% discount to our fair value estimate of $210, offer compelling investment opportunities for those seeking exposure to the attractive beauty care sector. We maintain that Estee Lauder's competitive position remains strong, and the challenges it faces in China are likely temporary and manageable. The company is well-positioned to leverage its strong brands, solid channel relationships, and various research and manufacturing initiatives in Asia. The latest quarterly update from the firm indicated a significant improvement in gross margins, reinforcing our positive outlook on its premium positioning and inventory management in travel retail, with expectations for continued progress. Although Estee reported a 10% sales decline in fiscal 2023 (ending June) due to inventory challenges in travel retail in China, we see no significant change in the premiumization trends within the country or in Estee's long-term brand perception and channel relationships. For fiscal 2024, we now project a 2% revenue decline, reflecting ongoing challenges in China. However, we anticipate a rebound in sales growth to high-single digits starting in fiscal 2025, as we expect Estee to outperform the mid-single-digit growth of the overall beauty market, driven by its focus on premium skincare. We also expect operating margins to expand to the high teens by fiscal 2033, supported by an improved channel mix (moving away from heavy promotions in department stores), manufacturing efficiency gains, and cost-cutting initiatives.

From early 2002 to late October 2023, Tyson Foods’ shares declined nearly 50%, significantly underperforming the Morningstar US Market Index, which fell by 5%, as well as protein-centric peers Pilgrim’s Pride (down 7%) and Hormel (down 33%). Although Tyson has begun to recover, with shares rising approximately 25% since then, they still trade well below our fair value estimate, presenting an attractive risk-adjusted upside along with a healthy dividend yield exceeding 3%. The decline in Tyson’s share price can be attributed to deteriorating financial performance. As of the end of the second fiscal quarter, trailing 12-month adjusted EBITDA had decreased by 31%. As a no-moat food producer primarily reliant on raw meats for revenue, Tyson is vulnerable to fluctuations in both input costs and product prices. Recent challenges have been exacerbated by significant cost inflation and supply-demand imbalances in the beef and pork markets. Additionally, the US cattle supply is not expected to improve in the near term. However, we believe the current share price suggests that these difficult conditions will persist. Meat markets are cyclical, and a return to a more stable operating environment is sufficient to support our valuation. We do not anticipate any structural changes in the meat markets that would lead to a permanent shift in profitability. Therefore, we project moderate top-line growth of 2% over the next five years, with operating margins expected to recover to our 2028 estimate of 7.5%, aligning with historical levels and showing improvement from the fiscal 2023 result of approximately negative 1%.

Lamb Weston shares fell 20% following the fiscal third-quarter earnings report due to a problematic rollout of a new enterprise resource planning (ERP) system. This led to inaccurate inventory estimates at distribution centers, resulting in decreased customer fulfillment rates, lost market share, and inventory write-offs. The company also reported sluggish restaurant traffic, which is anticipated to continue into the fourth quarter. While shares have since rebounded by a high-single-digit percentage, we believe they still present an attractive risk-adjusted upside. However, near-term risks remain. The challenges associated with the ERP system may persist as the company continues its implementation across manufacturing and international facilities. Although management has indicated that fulfillment rates have improved, regaining lost market share may take time. Additionally, inflation in out-of-home dining is making at-home alternatives more appealing, which could further impact overall restaurant traffic. Despite these challenges, long-term valuation catalysts and Lamb Weston's narrow competitive moat remain intact. Even with declining traffic, attachment rates for fries—one of the most profitable menu items—remain high. As consumers adjust to stabilizing inflation, we anticipate a return to typical mid-single-digit growth in fry popularity. Furthermore, we expect Lamb Weston to approach the remaining ERP rollout with greater caution, starting with a pilot program at manufacturing plants rather than a full-scale implementation. The challenges related to traffic and the ERP system do not diminish Lamb Weston's cost advantage or the strength of its intangible assets. The company’s supply chain is heavily concentrated in the low-cost Columbia Basin and Idaho, where high yields result in costs that are 10%-20% lower per pound. Although Lamb Weston has experienced some market share loss due to ERP issues, we expect its strong customer relationships to endure, allowing it to regain share as operations stabilize.

TC Energy is currently facing several investor concerns, including high debt levels, ongoing worries about the future impacts of Coastal GasLink cost overruns, and skepticism regarding the planned liquids spinoff in 2024. However, we believe that the completion of over CAD 5 billion in asset sales, along with an additional CAD 3 billion in prospective sales and CAD 1 billion in optimization opportunities, provides ample capital to reduce debt. The liquids spinoff is expected to be capitalized at five times debt/EBITDA, indicating that more leverage can be removed from TC Energy's balance sheet. Notably, Coastal GasLink is now fully complete and prepared to supply gas to LNG Canada. We anticipate that the liquids spinoff will showcase the quality and growth potential within the gas and power portfolios, particularly in areas such as carbon capture and hydrogen.

In response to shareholder and market concerns regarding expenditures, Exxon has adjusted its plans. Nevertheless, the company continues to uphold a strong pipeline of high-quality projects that should facilitate value-accretive growth. Currently, earnings are subdued due to low oil prices and significantly weak refining and chemical margins. However, Exxon is likely to gain more than its peers from any improvements in these areas. Additionally, the dividend appears secure, making the yield appealing.

We believe the perceived threat to Enbridge’s Mainline tariffs and volumes from the Trans Mountain expansion is exaggerated. The Mainline's reliability, along with the rerouting of Trans Mountain expansion barrels to the US, supports the Mainline’s established position. The acquisition of utilities from Dominion Energy was unexpected, but we see it as a positive move that enhances the stability of Enbridge’s returns. Additionally, focusing on the growth of renewables, particularly solar and wind, which are replacing coal, by investing in established utilities rather than in no-moat pure-play renewables projects is a sound strategy.

SoFi Technologies is currently trading significantly below our fair value estimate of $13. Throughout most of 2023, the company's performance was adversely impacted by the automatic forbearance of federal student debt, a measure implemented under the CARES Act. Prior to the pandemic, approximately 60% of the loan volume in SoFi’s lending segment stemmed from student debt refinancing. Naturally, the incentive to refinance student debt diminishes when payments are suspended, resulting in SoFi’s student loan origination volume remaining well below pre-pandemic levels for several years. However, with the conclusion of student forbearance, a significant obstacle to SoFi’s future performance has been lifted. Despite these challenges, SoFi has demonstrated strong results in its other segments and is making progress toward its long-term strategic objectives. Similar to trends observed in other digital lenders, SoFi’s personal loan volume has experienced a substantial increase, with loan origination more than doubling over the past couple of years. Additionally, the company’s financial-services segment has seen a notable improvement in user monetization, benefiting from higher interest rates, increased debit card transaction volume, and the introduction of SoFi’s new credit card. The acquisition of a bank charter has significantly benefited SoFi, as rapidly growing deposits have allowed the company to enhance the funding structure of its lending operations and financial-services segment. Rising net interest income has been the primary driver of the company’s robust results in 2023, despite the ongoing weakness in student loan origination. Furthermore, SoFi’s banking-as-a-service subsidiary, Galileo, has experienced a resurgence in account growth after a slow start to 2023, with the number of accounts on the platform increasing by over 12.4% from the end of June to the end of December. We believe that the market is overly focused on the short-term risks associated with rising credit costs, overlooking the long-term growth potential that SoFi possesses.

In recent years, the market sentiment surrounding PayPal has fluctuated between optimism and pessimism. The stock experienced a significant increase, roughly tripling during the early stages of the pandemic, but has since declined nearly 80% from its peak, falling to a level substantially below its pre-pandemic price. With market confidence in the stock currently low, we perceive a potentially attractive long-term investment opportunity. Our fair value estimate for this narrow-moat company is $104. We believe the market is overly focused on short-term absolute growth, while it should be concentrating more on relative performance, which we consider a better indicator of the company’s competitive position and long-term value. We acknowledge the challenges the company faces in the near term. However, in the long run, PayPal's prospects are closely linked to the high-growth e-commerce sector, with Venmo offering additional potential upside. Historically, PayPal has shown its ability to gain market share in this area, and we believe the company maintains a robust competitive position. While the intense competition in e-commerce presents challenges, we are confident that PayPal can compete effectively, and we see no evidence in its recent performance indicating a deterioration of its overall competitive standing. Nonetheless, we recognize that future results could vary significantly. Therefore, we consider the stock to be more appropriate for risk-tolerant investors.

We believe the banking sector is currently undervalued. The primary risks to our top picks include unexpected changes in deposit and funding costs, as well as the potential onset of a recession. Although we believe banks are already trading at recessionary valuations, the actual realization of a recession is unlikely to improve valuations in the near term. US Bancorp has experienced a sell-off similar to some regional banks; however, we perceive the risk of deposit outflows as minimal, given its status as the largest regional bank. While the bank does have slightly higher-than-average unrealized losses on securities, we consider this more of an earnings issue (with lower-yielding assets remaining on the balance sheet) rather than a capital concern. Although US Bancorp's earnings may face pressure as interest rates rise, its size, strong competitive position, and relatively favorable deposit situation lead us to believe that the recent sell-off is overblown. Nevertheless, depending on future interest rate movements, there may be additional pressure on the stock, potentially prolonging the timeline for our outlook to materialize.

Illumina continues to be an appealing business, trading significantly below its intrinsic value. Following the entry of activist investor Carl Icahn in spring 2023 and the introduction of new members to the board and executive team, we believe that positive catalysts for the stock are more probable than further downside risks, despite some complexities in the company's narrative. While Illumina may encounter increased competition in its established genomic sequencing technology, we maintain that the elements sustaining its economic moat—intangible assets and switching costs for end users—remain strong. These factors should enable the company to generate economic profits over the long term, particularly with the introduction of its new sequencing instruments. Additionally, Illumina possesses the Grail liquid biopsy assets, which are focused on a burgeoning technology opportunity for the early detection of cancer. This loss-making segment has impacted Illumina's short-term earnings and has been a distraction as previous management engaged with regulators to retain Grail. However, Illumina plans to divest this business by late 2024, which we believe will lead to an immediate increase in earnings. A tax-free spinoff to current Illumina shareholders could effectively address regulatory concerns while providing shareholders with long-term options regarding the Grail technology. In summary, we view Illumina shares as a compelling investment opportunity for those willing to accept significant uncertainty regarding future cash flows and who have a long-term investment perspective.

We are adding Baxter to our Best Ideas list due to its attractive valuation, with shares currently trading at approximately half of our estimated worth. Investors can also benefit from a 3.5% dividend yield while awaiting improvements in market sentiment. Demand is on the rise in most of Baxter's medical supply businesses, driven by increased medical utilization, and new product launches, such as the Novum IQ pump platform, are expected to further enhance demand in the near term. Baxter presents a margin improvement opportunity, as inflationary pressures in its supply chain are easing. Additionally, key new group purchasing organization contracts are set to take effect in 2025, which should positively impact BAX's product pricing. We anticipate that profits will grow at a relatively fast pace in the near term before stabilizing at a more normalized level in the low double digits over the long run. While we acknowledge market concerns regarding Baxter's capital equipment business, the pending kidney care divestiture, and its long-term profit growth trajectory, we believe there is a significant margin of safety in Baxter's shares. The weak performance of Baxter's capital equipment business in the first quarter, particularly the legacy Hillrom assets, was partly due to the Change network outage, which affected smaller caregivers' liquidity and delayed product purchases. These delays are expected to be realized in future quarters. However, we also recognize that internal challenges and competitive pressures have impacted Baxter, especially in its larger hospital-facing assets, where Stryker outperformed in the first quarter. Some of these issues may take longer to resolve, leading Baxter to lower its guidance for that segment for 2024. Given management's credibility issues with guidance, investors seem concerned that the overall 2024 guidance could decline, despite a recent increase following a strong first quarter and the appointment of a new CFO responsible for guidance. There is also a risk that Baxter may sell its kidney care assets below fair value due to divestiture plans and weak market sentiment. We estimate a risk of about $5 per share on Baxter's fair value related to this planned divestiture and market comparables in dialysis. Furthermore, we assess Baxter's moat rating as being on the weaker end of the narrow moat spectrum. If profits do not improve as anticipated, there is a possibility that Baxter's moat could deteriorate to the no-moat category, which could further pressure our fair value estimate without any changes to our forecast. Nevertheless, we still see substantial upside potential in Baxter shares, even if these negative divestiture and moat scenarios materialize.

Moderna's shares experienced significant volatility in 2021. Initially, investors were overly optimistic about the potential of the company's technology, but later became too pessimistic regarding its growth prospects post-coronavirus. While we maintain modest expectations for sales of the firm's COVID-19 vaccine, following the substantial pandemic-driven demand in 2021 and 2022, we believe that Moderna's pipeline of mRNA-based vaccines and treatments is progressing rapidly across various therapeutic areas. By the end of 2023, Moderna had 37 development candidates in clinical trials. Although sales are expected to decline in 2023-24 prior to new product launches, we are increasingly confident in the long-term sales trajectory of the firm's diversified pipeline. We believe that Moderna's technology has been well validated in the development of respiratory virus vaccines (with an RSV vaccine set to launch in 2024 and a COVID/flu combination vaccine anticipated in 2025), oncology (with a potential melanoma launch by 2025), and rare diseases (with possibilities for accelerated approvals).

Humana remains on our Best Ideas list due to its significant discount to our fair value estimate, strong competitive position in Medicare Advantage, and potential for substantial profit growth following a challenging 2024. The company's outlook for 2024 indicates severely reduced profits stemming from mispriced Medicare Advantage plans that may not adequately cover the rising medical utilization expected this year. We anticipate that Humana will address this increased utilization by raising prices and/or slightly reducing benefits, although it is likely to experience a profit decline in 2024. Additionally, the final rate notice for Medicare Advantage plans was weaker than expected, leading to enough uncertainty regarding the firm's 2025 outlook that management decided to withdraw that guidance. Despite this disappointment, the shares remain undervalued at current levels. We believe there is strong potential for Humana to significantly enhance profits once regulators cease efforts to align Medicare Advantage rates with traditional Medicare rates on a risk-adjusted basis, which is expected to be finalized by the end of plan year 2026. Although there is near-term uncertainty affecting the company's typically robust outlook, we remain optimistic about Humana's long-term prospects. Currently, the discounted shares offer a rare combination of a high-quality firm and an attractive valuation in the managed care sector.

ResMed is experiencing robust device sales, while Philips continues to face challenges due to ongoing remediation efforts. Sleep apnea diagnosis rates are on the rise, and ResMed's supply constraints are beginning to ease. Recent declines in share price are attributed to concerns that weight-loss medications may impact the sleep apnea market. However, we believe that the widespread adoption of these drugs will take time due to their higher costs, limited availability, and potential side effects. It's important to note that obesity is only one risk factor for sleep apnea; patients who lose weight may still be classified as obese and would likely continue to benefit from using a sleep device. We anticipate that ResMed will remain a significant player in the sleep apnea sector. For further insights, please refer to our special report, “The Start of Unconstrained Sales for ResMed,” published in July 2023.

TransUnion’s shares have experienced volatility due to modest fluctuations in the company’s business performance and investor uncertainty. We believe the firm’s revenue will remain resilient during a recession, and we find the current valuation, which aligns with the S&P 500 Index, to be attractive given the company’s competitive advantages and business model. Improving trends in the US mortgage market, along with higher pricing from FICO, are expected to enhance profitability. Additionally, the firm has encountered softer revenue in typically noncyclical sectors, such as insurance and tenant screening, due to specific market idiosyncrasies that we anticipate will normalize over time. On the cost front, restructuring efforts and lower interest rates (as the firm has variable debt on its balance sheet) are also expected to support profitability in 2024.

Chart Industries’ first-quarter results and reaffirmed 2024 guidance have reinforced our belief that the stock is undervalued. Although the stock price experienced a significant increase following the first-quarter results, we still anticipate further upside to our $200 fair value estimate. The management team at Chart continues to meet its objectives consistently, and we believe the market's skepticism is unfounded. We view Chart as a compelling growth opportunity, with potential in various sectors such as Big LNG, hydrogen, carbon capture and storage, water treatment, and even space exploration. The company is targeting multiple substantial markets and is also focused on margin expansion. In 2023, gross margin increased by over 500 basis points, and we foresee an additional 300 basis points of expansion potential. Revenue growth for heat transfer systems and specialty products, which cater to many of these markets, is projected to be between 40% and 50% in 2024 compared to 2023 pro forma levels.

Huntington Ingalls, a company with a wide economic moat, currently has shares trading 22% below our fair value estimate of $317. Although the long-cycle shipbuilding sector does not provide the highest margins within the defense contracting industry, it exemplifies the conditions that create a durable competitive advantage and significant visibility into revenue and profitability for decades. The large shipbuilding business allows for extensive planning horizons and insight into program budgets over long periods; however, minor timing shifts in major programs, such as aircraft carriers, can result in uneven quarterly results. We anticipate some potential fluctuations later this decade, contingent on forthcoming revisions to US Navy budgets. The timing of work on two America-class amphibious assault ships expected to begin around 2027 may or may not balance the decline in work on the third Ford-class aircraft carrier, the Enterprise. This concern is primarily operational rather than financial and should not impact the company as long as it maintains sufficient visibility into similar projects as each ship approaches completion. Given that its products take years to construct and are typically produced in small quantities, the potential for margin improvements as the company progresses along the learning curve is limited. This is compounded by the government's ability to negotiate prices, which directly affects the profit margins of each ship. However, this close relationship between the buyer and the company distinguishes Huntington Ingalls from other defense contractors, as it is largely insulated from macroeconomic or market risks. In 2022, the company generated only $50 million in revenue from commercial customers out of a total of nearly $11 billion. As the exclusive provider of nuclear aircraft carriers and turbine-powered amphibious landing ships, and one of only two manufacturers of nuclear submarines for the US Navy, the defense department has a strategic interest in maintaining multiple shipyards in operation and ensuring their financial viability. This policy results in a balanced distribution of work between Huntington Ingalls and General Dynamics, which helps mitigate risk and distribute rewards. While the firm may experience uneven revenue and profits in certain quarters or years due to the lengthy production cycles of its large products, we believe that long-term investors will see positive returns, particularly with the anticipated growth in submarine and destroyer revenue.

Since its founding in 1989, Stericycle has acquired over 500 companies, which contributed to a prolonged period of impressive growth and allowed the firm to achieve unmatched scale. However, as acquisitions began to deviate from Stericycle's core competencies, poor integration efforts led to the accumulation of inefficiencies. Following decades of strong growth and profitability, the company's financial performance started to decline in 2017. With a refreshed management team under CEO Cindy Miller, Stericycle's turnaround strategy has made significant progress. The company has divested nearly 20 noncore, low-margin businesses and successfully reduced its debt leverage ratio to below 3. It is now reinvesting in its competitively advantaged medical waste collection and disposal business, enhancing its autoclave and incinerator infrastructure, including a new incinerator in Nevada, and potentially increasing fleet-related investments in the future. Additionally, Stericycle has implemented a new enterprise resource planning system, along with necessary oversight and standardization across the organization, which has improved revenue quality and operational efficiencies. The operational focus has returned to core competencies, presenting multiple opportunities for enhanced profitability and free cash flow generation. Over the next five years, we project that Stericycle will achieve 4% organic revenue growth, with the adjusted EBITDA margin expanding to 23.5% (up from approximately 16% in 2022-23). We also anticipate that free cash flow will exceed $400 million by 2027. By that time, we believe Stericycle will possess the financial flexibility to pursue prudent acquisitions and potentially repurchase shares.

Kilroy Realty, despite lacking a moat, presents a compelling investment opportunity due to its high-quality office portfolio, which appears attractively undervalued following the recent selloff of office REITs. While we acknowledge the uncertainty surrounding the future of office spaces and anticipate a challenging environment for office owners in the near to medium term, we believe the recent market reaction has been excessive. The current implied valuation of Kilroy’s shares does not align with the prevailing private market valuations of its office portfolio. For long-term investors, Kilroy Realty is worth considering, as its shares are trading significantly below our fair value estimate of $59 per share. We regard Kilroy’s office portfolio as one of the best among publicly traded REITs, with an average age of just 11 years, compared to 30 years for its peers. Additionally, Kilroy’s portfolio excels in other important metrics, such as rent spread and sustainability. The company is well-positioned to capitalize on the growing flight-to-quality trend, as employers increasingly seek to bring employees back to the office. However, there are risks to our investment thesis. The recovery in physical office occupancy levels has been slow; according to Kastle Systems' weekly work barometer, average occupancy in office buildings is still around 50% of pre-pandemic levels. Furthermore, Kilroy’s geographic concentration in California and significant exposure to the technology and life sciences sectors pose additional risks.

Following the successful development of a COVID-19 vaccine in November 2020, the hotel industry, along with the broader REIT sector, experienced a rally as investor confidence grew that business would eventually return to pre-pandemic levels. However, the emergence of the delta and omicron variants of the coronavirus led to a decline in hotel stock prices, while the rest of the sector continued to perform well. Many hotel companies have yet to achieve positive corporate cash flows since the onset of the pandemic; the rise in virus cases has delayed the industry's recovery and prolonged the period of negative cash flows. We see the current situation as an opportunity for investors to acquire Park Hotels & Resorts at a discount to our fair value estimate. We believe the company's balance sheet is robust enough to withstand ongoing disruptions in the hotel industry for the next several years. Although many businesses have postponed plans to fully return employees to the office, which in turn delays the resurgence of hotel demand driven by business travel, we do not expect the current disruption to significantly impact the long-term demand for Park's portfolio of high-quality hotels. Additionally, Park's management has effectively managed hotel net operating income during the pandemic, exceeding our expectations, which gives us confidence in their ability to navigate the current challenges facing the hotel industry. We anticipate that Park will rebound from the pandemic, experiencing several years of strong growth and returning to 2019 peak levels by the end of 2024.

No-moat Realty Income is currently trading at a significant discount to our fair value estimate of $76. We believe the decline in share price since August 2022 is primarily due to rising interest rates. Our analysis indicates that Realty Income is the most interest-rate sensitive REIT we cover, exhibiting the highest negative correlation with interest rates. The company has branded itself as “The Monthly Dividend Company,” attracting many investors during periods of low interest rates. However, as rates rise, these investors may shift their focus to risk-free Treasuries. Moreover, Realty Income sets its annual rent escalators relatively low, which means it depends on executing billions in acquisitions each year to drive growth. The increase in interest rates has narrowed the spread between the company's acquisition cap rates and the weighted average cost of capital used for funding these acquisitions, potentially hindering growth. Despite this, Realty Income has increased its acquisition volume in recent years and continues to acquire at a positive spread over its cost of capital. In 2023, the company executed $9.5 billion in acquisitions at an average cap rate of 7.1%, significantly higher than the average interest rate of about 5% on the debt issued for these transactions. Additionally, the $9.3 billion acquisition of Spirit Realty, which closed in January 2024, is expected to enhance shareholder value. We believe that management will continue to identify opportunities that boost funds from operations, supporting ongoing dividend growth for shareholders. The recent selloff driven by rising interest rates offers investors an attractive entry point, especially if the Federal Reserve signals any rate cuts in 2024.

We believe that concerns regarding Sabre's financial health, amid elevated credit costs and reduced demand for corporate travel due to the pandemic, present an opportunity to invest in a company with network advantages, efficient scale, and switching costs, all at an attractive margin of safety. Sabre's global distribution system encounters manageable competitive risks from the new distribution capability protocol and direct connections, which face significant aggregation and processing challenges to compete effectively with Sabre and its peers. In its first-quarter 2024 report, American Airlines noted weaker sales, attributed to its decision to reduce reliance on Sabre's platform. However, American is now returning to Sabre's network to recover lost corporate business. Additionally, investments in cloud technology, new distribution capabilities, and revenue opportunities in ancillary services, hotel IT, and airline IT further solidify Sabre's customer base, reinforcing its competitive advantages. We estimate that over half of Sabre's pre-pandemic sales were linked to corporate travel, which is recovering more slowly than leisure travel. While we acknowledge that some corporate travel may be permanently replaced by video conferencing and sustainability efforts, we anticipate a rebound in business trips over the next few years as macroeconomic conditions improve and more employees return to the office. We believe that in-person interactions will remain a key differentiator in customer retention and acquisition compared to video calls. Sabre has also enhanced its debt profile. As of early 2022, it had $3.8 billion in debt maturing in 2024-25, but it has since eliminated major debt maturities until 2027 through successful tender offers and refinancing. We believe that Sabre's cash reserves, free cash flow generation, and gradual recovery in platform demand position the company well to manage its maturing debt.

Cognizant is among our top picks in the technology sector, presenting an attractive long-term investment opportunity reflected in our $94 fair value estimate. We believe the market is currently penalizing the firm for past execution and strategic missteps, which we consider to be behind them. Cognizant is well-positioned to enhance its reputation beyond that of a back-office outsourcer, focusing on higher-value technical offerings such as digital engineering, artificial intelligence solutions, and digital transformation consulting. We anticipate that all major IT services firms we cover will benefit from the demand for digital transformation to some extent. We see no reason why Cognizant would be significantly less of a beneficiary than the market suggests. In our view, smaller IT services players are likely to struggle in the digital transformation landscape due to the consolidation of accounts with larger vendors like Cognizant. Conversely, Cognizant offers a diverse range of services that align with digital transformation needs, and we maintain that its financial-services platform is the best in the industry. As a beneficiary of consolidation, Cognizant has the potential to increase switching costs, which underpins its narrow moat, along with its intangible assets. We project a five-year revenue compound annual growth rate of 8% for Cognizant, representing an acceleration of 5% compared to the previous five years. Despite current delays in decision-making, the long-term demand for digital transformation projects remains strong, as evidenced by robust bookings. Cognizant’s trailing 12-month book/bill ratio stands at a healthy 1.3, reinforcing our confidence in future demand for the firm's offerings. We expect a moderate 90-basis-point operating expansion over the next five years, driven by a gradual shift towards higher value-added offerings.

We believe NiSource presents investors with the chance to acquire a high-growth utility that is valued similarly to its slower-growing counterparts. The company's shift from fossil fuels to clean energy in the Midwest is poised to drive a decade of above-average growth. NiSource's electric utility intends to shut down its final coal-fired power plant by 2028, transitioning to wind, solar, and energy storage for generation. We anticipate that NiSource will invest $12 billion over the next five years and potentially up to $30 billion over the next decade, resulting in 7% growth in earnings and dividends.

We believe Entergy presents one of the most compelling combinations of yield, growth, and value within the utilities sector. The market has been slow to recognize Entergy's decade-long business transformation. In 2023, for the first time in twenty years, nearly all of Entergy's earnings will derive from its five regulated utilities in the Southeast United States. However, the market does not assign Entergy the same valuation as other regulated utilities. Entergy's long-term growth potential is often misunderstood and undervalued. We project an annual earnings growth of 8% at least through 2026, which would rank among the fastest growth rates of any U.S. utility. Factors such as population growth, economic expansion, and renewable energy development in the Southeast serve as tailwinds that are not commonly found in other utilities.

We believe NetEase is undervalued due to the market's overreaction to recent regulatory risks, which has overshadowed the company's long-term overseas opportunities. Once license approvals resume, regulatory concerns are expected to dissipate, and earnings revisions should follow as new titles find success internationally. NetEase's business portfolio is stronger than ever. We anticipate continued strong performance, fueled by the global launch of the Harry Potter: Magic Awakened card game, the mobile and console adaptation of Naraka: Bladepoint, and the launch of Diablo Immortal in China. We recommend that investors capitalize on current market weakness to acquire this narrow-moat business, which boasts net cash and over 20% EPS growth, while trading at a 5% free cash flow yield.

We consider Yum China to be a long-term beneficiary of demographic changes in China. There is considerable potential for increased fast-food penetration, primarily fueled by enduring trends such as longer working hours for urban consumers, a significant rise in disposable income, and decreasing family sizes. We believe that investors are undervaluing the company's long-term growth potential and the opportunities for margin improvement as Yum China increasingly transitions towards a franchising model in the long run.

Macao is experiencing a robust recovery from COVID-19 disruptions. As of the third quarter, the industry's gross gaming revenue has rebounded to 69% of the pre-pandemic levels seen in 2019, despite a decline in junket VIP income due to regulatory changes. We believe that Sands China, with its emphasis on the mass market, the largest number of hotel rooms in Macao, and a proven track record in non-gaming activities, is well-positioned to benefit from the ongoing demand recovery in the region.

BYD is confident in achieving its annual sales target of 3 million units, despite prevailing economic uncertainties. In the first quarter, typically a slow season, BYD sold 552,000 units, representing an 89% year-over-year increase and accounting for 18% of its annual target. The company has recently introduced two new models, the Song L SUV and the Destroyer 07, to reinforce its leading position in the mass new-energy vehicle market, along with an entry-level small sedan, the Seagull, aimed at a broader customer base. Additionally, BYD's premium brands, Denza and Yangwang, have launched new models to expand into the luxury segment. The increase in sales volume, coupled with reduced battery costs, may help mitigate pricing pressures resulting from industry competition. Currently, BYD H shares are trading at 0.8 times 2023 sales, which is below the average of 1.3 times for Chinese EV manufacturers. Key near-term catalysts include robust monthly sales momentum and improved profitability compared to competitors.

We believe that the premiumization trend in the baijiu sector will serve as a long-term advantage for distillers, with leading companies poised to capitalize on this opportunity. At present price levels, Luzhou Laojiao stands out as our top choice in the sector, thanks to its robust brand heritage, exceptional product quality, and comprehensive distribution network. We anticipate that the company's proactive national expansion strategy and strengthened partnerships with distributors will enhance its competitiveness, enabling it to achieve higher net profit growth relative to major competitors like Wuliangye over the next five years.

Yili is the leading dairy producer in China, boasting a vast distribution network and strong relationships with retailers across the country. The company has strategically invested in lower-tier cities to distribute its ultra-high-temperature dairy products, which incur lower logistics costs compared to low-temperature products. In the medium to long term, Yili has the potential to broaden its category coverage by leveraging its channel strength. The company has already demonstrated progress in capturing a larger market share in the infant milk formula segment, which presents higher entry barriers than other packaged food categories due to stringent regulatory requirements for product safety.

Asahi's share price experienced a significant decline following a surge in coronavirus cases in Japan, which resulted in a sharp drop in beer demand in bars and restaurants. Concerns that a recession could undermine the company's premium beer strategy also contributed to the decrease in share price. We believe that job losses are more likely to impact lower-income earners, and that demand will gradually recover as lockdowns ease and economic activities resume. While income growth is essential for beer premiumization, Asahi has the potential to enhance margins on mainstream beers by rationalizing rebates if premiumization is hindered by a slower economy. In the long term, we expect Asahi to capitalize on excise tax cuts through 2026 to increase beer prices, a category in which it holds a strong brand presence and over 45% market share in Japan.

We believe that Harmonic Drive Systems' shares are undervalued. The market appears to be overreacting to concerns regarding a potential peak in orders due to the component supply crunch, uncertainty surrounding Nabtesco's timeline for selling its remaining stake in HDS shares, and HDS's decision to list on the Tokyo Standard market instead of the Tokyo Prime market, which has stricter governance and liquidity standards.

We favor Wharf REIC due to its prime retail properties, Harbour City and Times Square. These locations are the largest retail assets in their respective areas, and we anticipate that the company will benefit from the recovery of tourism in Hong Kong. Additionally, Wharf REIC stands to gain from the trend of luxury retail consolidation, as luxury brands are downsizing their presence in other parts of the city while expanding their footprint in key shopping destinations like Harbour City.

China Overseas Land & Investment (COLI), with its significant presence in higher-tier cities in China, is well-positioned to capitalize on the ongoing recovery in homebuyer sentiment. We anticipate that demand for residential properties in affluent cities will remain resilient, resulting in stronger sales growth for COLI. Furthermore, we believe that high average selling prices, combined with effective cost management, will allow COLI to continue outperforming most of its peers in terms of profit margins. We feel that investors are undervaluing COLI's long-term growth potential and margin improvement capabilities, as the company actively pursues a robust strategy for landbank acquisition in key Chinese cities.

We maintain our outlook that the supply and demand for multilayer ceramic capacitors (MLCCs) will remain strong and tighten as the year progresses, driven by the recovery in smartphone production and increased content requirements in the automotive sector. While we consider all passive component suppliers within our coverage to be undervalued, we believe that narrow-moat Taiyo Yuden presents the most compelling opportunity for accumulation. Although we recognize the risks posed by the Russia-Ukraine conflict and the ongoing chip shortage, we anticipate sustained robust demand for high-end MLCCs in the long term. There will be a need for smaller sizes and larger capacities for MLCCs used in smartphones, while automotive MLCCs will require larger capacities, higher reliability, and higher breakdown voltages. We believe Taiyo Yuden will be well-positioned to benefit from this trend.

We are optimistic about Grab Holdings due to its strong market leadership in ride-hailing services across Southeast Asia. The company has reached a pivotal moment, achieving cash flow positivity in its ride-hailing segment, marking a notable improvement from the previous year. Furthermore, its delivery business is experiencing rising operating margins, and Grab has already updated its long-term margin expectations for this segment. We see several new long-term growth drivers on the horizon, including its advertising business, which remains underutilized.

MediaTek is currently trading at a significant discount to our fair value estimate of TWD 1,400 and presents an attractive forward yield. We believe that the short-term concerns regarding the company's potential loss of smartphone chipset market share to Qualcomm create a favorable entry point. MediaTek has substantial opportunities to broaden its product offerings in the midrange to high-end 5G smartphone segments. We anticipate that the company will meet its target of a mid-teens revenue compound annual growth rate over the next three years and may extend this growth trajectory for a total of five years, as it continues to diversify into ARM-based PCs, enterprise computing systems, and automotive infotainment solutions. In our opinion, autonomous driving and augmented reality devices will serve as significant growth drivers beyond the next three years.

Shares in narrow-moat TPG Telecom are currently the most attractive option within our Australia and New Zealand telecom coverage. We anticipate a medium-term earnings recovery across multiple areas and project an adjusted EBITDA compound annual growth rate (CAGR) of 5% over the next five years. The benefits of a more rational mobile market are becoming evident, supported by ongoing growth in fixed wireless and the corporate segment. However, cost reductions from the ongoing transformation program are progressing more slowly than we had previously expected, which is limiting near-term earnings growth during the current capital expenditure phase related to the 5G rollout. Additionally, the overhang from major shareholders whose holdings have recently come out of escrow following the Vodafone merger is causing some investor concern. Nevertheless, these issues are largely reflected in the current share price, particularly in light of the long-term tailwinds for the telecom industry as it transitions to 5G and as the benefits of transformation are gradually realized.

Creeping negative sentiment, driven by short-term challenges and structural changes in the automotive industry, has led to an underappreciation of the fundamental strength and resilience of Bapcor’s automotive-parts business. Currently, a slowdown in discretionary spending is impacting retail, new management must still demonstrate its effectiveness, and the rise of electric vehicles presents a long-term challenge for the trade sector. Nevertheless, we believe that the prevailing near-term pessimism fails to recognize the inherent resilience in the automotive spare parts market, and Bapcor is well-positioned to navigate the ongoing technological transition successfully.

Domino's Pizza is a high-quality company with a substantial growth trajectory. We project a 24% compound annual growth rate (CAGR) in earnings over the next five years, driven by its global store expansion. While Domino’s sales growth has experienced volatility, the share price often reflects short-term trading conditions rather than its long-term potential. The near-term outlook remains uncertain and is dependent on a reduction in elevated inflation levels. Nevertheless, we believe the market is undervaluing Domino’s robust and significant long-term growth prospects. We anticipate the network will expand to 6,200 stores by fiscal 2033, up from approximately 3,800 as of June 2023, which is below management’s long-term goal of 7,100 stores. Achieving management's target would enhance our valuation by 11%.

Shares in wide-moat Endeavour are currently trading at a significant discount to our fair value estimate and provide an attractive fully franked yield. We believe the market is underestimating the defensive long-term earnings outlook, especially as consumers are currently reducing their nonessential spending. However, fiscal stimulus is set to enhance household budgets starting in July 2024. We project that Australian liquor retail sales will increase in the mid-single digits after experiencing minimal growth in fiscal 2024. In the long term, liquor demand is expected to remain resilient, supported by inflation and population growth. We anticipate that the ongoing trend of premiumization will offset declines in per capita liquor consumption. As Australia’s largest liquor retailer, with well-known brands like Dan Murphy’s and BWS, we expect Endeavour’s liquor sales to grow in line with market trends. We consider concerns about regulatory risk to be overstated. Our cautious forecast incorporates the impact of stricter gaming regulations that may limit earnings growth in fiscal 2025; however, we expect group profit to increase at an average rate of 6% thereafter. Management's goal to significantly enhance EBIT in the hotels segment presents additional upside to our valuation. If achieved, this uplift could increase our valuation by approximately AUD 1 per share, or 17%. Nonetheless, it is premature to fully account for this potential, and we project that EBIT from hotels will remain below fiscal 2023 levels until fiscal 2031. In the first half of fiscal 2024, the hotels segment's EBIT rose by AUD 4 million compared to the prior corresponding period.

We believe Santos is not receiving adequate recognition for its ongoing oil and gas developments, and its shares are undervalued. The company boasts a strong balance sheet and low operational costs, including a freight advantage to Asia, positioning it well to endure any cyclical downturns in prices. Currently, crude and liquefied natural gas prices are robust, and gas is increasingly essential for global energy needs, particularly in supporting the growth of renewable energy sources. We project a group hydrocarbon growth of approximately 50% by 2027, primarily driven by the Pikka oilfield development in Alaska and the revitalization of Darwin LNG's output, thanks to new feed from the Barossa gas field development. We anticipate that Santos will largely sustain its earnings in 2027 at levels comparable to the strong performance in 2022, as increasing volumes will counterbalance a return to more normalized pricing.

We consider ASX to be a natural monopoly that provides essential infrastructure for Australia’s capital markets. Although the regulatory environment is becoming increasingly challenging, we believe the business is well safeguarded by its significant economic moat, which is supported by network effects and intangible assets. Additionally, we view the energy transition as an often-overlooked tailwind. We anticipate that it will drive demand for resources, in which Australia possesses strong natural advantages, leading to new listings and sustained revenue from trading and clearing activities.

AUB Group is a highly cash-generative business that offers a network of insurance brokers direct access to insurers, along with exclusive policy wording and pricing, claims handling support, and essential software for business operations. AUB holds equity stakes in the brokers within its network, which collectively account for approximately 10% of premiums written by intermediaries in Australia. The switching costs between customers and brokers, as well as between brokers and AUB, create a sustainable competitive advantage that is expected to support low-double-digit returns on equity over the long term. Brokers earn commissions on the insurance premiums they write, and we anticipate they will benefit from price increases as insurers aim to enhance margins and returns in response to rising claims costs. Contributing factors include inflation, an increase in the frequency and severity of large natural hazard events, and the escalating cost of reinsurance. Additionally, we see potential for brokers to capture market share from the direct channel, as customers facing rising prices may turn to insurance brokers for better deals. AUB's growing ownership interests in network brokers represent a low-risk M&A strategy that bolsters earnings growth. The revenue and cost synergy targets related to the 2022 acquisition of London-based wholesale broker Tysers appear to be progressing well.

Brambles, the world's largest supplier of reusable wooden pallets, holds a near-monopoly position as a pooler in its primary markets. This dominance is attributed to its scale and first-mover advantage, which effectively limits competition. This competitive edge results in a cost advantage, justifying our wide moat rating. A significant portion of the company's earnings comes from large, stable beverage and food companies, which we view as defensive, thereby reducing Brambles' correlation to economic fluctuations. Consequently, we project steady revenue growth with a compound annual growth rate (CAGR) of 6% over the next decade. Additionally, earnings are expected to benefit from improvements in operating margins, driven by the company's efficiency initiatives in pallet repairs and transportation, as well as the adoption of new digital technologies.

The shares of narrow-moat Aurizon present an attractive yield, supported by high-quality rail infrastructure and haulage operations. Significant downside is already reflected in the share price, and our analysis indicates that the risks for investors are tilted towards the upside. Haulage volume was subdued in fiscal 2023 due to wet weather; however, the outlook suggests a recovery in volume and an increase in haulage tariffs in line with the Consumer Price Index. Furthermore, rising interest rates allow for higher returns on the regulated rail track. We believe that environmental concerns are overstated, creating an opportunity for investors to acquire a company of better-than-average quality at a discount. Aurizon primarily transports coking coal from globally competitive mines, and a commercially viable alternative to coking coal for steel production remains distant.

We have added narrow-moat Dexus to our Best Ideas list. The group's office portfolio is currently generating rents that are higher than the market average, indicating potential earnings downside as leases expire and tenants negotiate lower rents. However, with an average office lease length of 4.5 years, there is ample time for the office market to recover. We believe this recovery is likely, as city centers in Sydney and Melbourne are becoming busier. We anticipate increased inner urban activity as significant public transport projects are completed in the coming years, including Sydney Metro, Melbourne Metro Tunnel, and Brisbane Cross River Rail, all of which should positively impact Dexus' locations. Additionally, Dexus' industrial tenants are currently paying below-market rates, allowing Dexus to implement substantial price increases upon lease expiration. We also expect growth in the group's funds management earnings. Dexus is trading significantly below its net tangible assets of AUD 10.04 per security, and we estimate it offers a fiscal 2024 distribution yield of 7.1%, which we believe provides a valuation cushion and compensation for investors as they await recovery.

Pexa's Australian exchange business demonstrates strong potential for exceptional margins and profits, comparable to other financial exchange entities. This potential persists even amid suppressed revenue due to a sluggish property market and increased costs associated with the development and expansion of its exchange infrastructure into new regions and applications. We believe that the market is placing excessive emphasis on the unprofitable UK operations, which we anticipate will either achieve profitability or be discontinued in the coming years.

We believe Just Eat Takeaway is the most favorably positioned food delivery company in Europe. It is better protected against downside risks and has promising prospects if it chooses to expand more aggressively into other delivery fields.We support the company's recent move to invest heavily in its own delivery operations. We anticipate that this will drive profit growth at a faster pace and to higher levels than what the market consensus suggests, particularly in the UK market. We think that achieving such profit growth over the next few years could lead to a substantial revaluation of the company's shares.Currently trading at a significant premium (deep in 5 - star territory), the firm's shares seem undervalued based on both discounted cash flow analysis and relative valuation methods. This presents a significant investment opportunity with a substantial margin of safety for long - term, patient investors.

Swatch enjoys a narrow moat due to its strong brand intangible assets and significant manufacturing scale. The company's valuation is particularly attractive, as it does not fully reflect several favorable trends, such as substantial exposure to Chinese consumer demand, recovery following lockdowns, stabilization in the lower-priced watch segment, the maturation of smartwatches, and the potential for operating leverage.

Admiral boasts a robust balance sheet, impressive returns on equity, an effective management team, and is founded by its owners. The company possesses pricing power and operates under a distinctive business model. Additionally, it is capital-efficient and enjoys an expanding competitive advantage.

We believe the London Stock Exchange Group (LSEG) is the best-positioned financial data and exchange group in Europe. The acquisition of Refinitiv has significantly enhanced LSEG's standing in the lucrative financial data market, bolstering its data distribution capabilities and adding unique data sets to its already robust FTSE/Russell index business. We anticipate that the group will benefit from the ongoing shift from active to passive investment strategies, as well as the emergence of theme-based investment styles, including environmental, social, and governance (ESG) considerations. We believe the market is currently overly focused on the integration risks associated with the Refinitiv acquisition, presenting an excellent entry point for investors looking to acquire a high-quality business with a strong competitive advantage and a long-term growth trajectory.

We believe the market has not fully recognized Roche's robust drug portfolio and its industry-leading diagnostics, which together create sustainable competitive advantages. While challenges from declining COVID diagnostic revenue and competition from generics and biosimilars for older drugs remain, these pressures are expected to diminish in 2024, thereby showcasing the strength of Roche's portfolio of market-leading drugs. We also see the firm's research and development expenditures becoming increasingly efficient, and recent acquisitions in obesity and immunology appear poised for multi-billion-dollar sales potential. As a leader in biotech and diagnostics, this Swiss healthcare giant is uniquely positioned to advance global healthcare towards safer, more personalized, and cost-effective solutions. The synergy between its diagnostics and drug development teams provides Roche with a distinctive in-house perspective on personalized medicine. Furthermore, Roche's biologics constitute three-quarters of its pharmaceutical sales; while biosimilar competitors have encountered development challenges, Roche's innovative pipeline may render these products less relevant upon their launch.

Intertek, one of only three globally diversified firms in the testing, inspection, and certification sector, has faced significant challenges over the past year. Its substantial exposure to China and the consumer sector has adversely impacted its performance, resulting in a notable discount compared to its peers, SGS and Bureau Veritas.

We anticipate a 10% CAGR for Veolia's EPS and dividend from 2023 to 2028. This represents the second highest EPS growth and the highest dividend growth within our coverage. The projected earnings growth will be fueled by efficiencies, including the remaining synergies from the Suez integration and strategic growth investments. Recently, we upgraded the economic moat rating from none to narrow. We believe the market is underestimating the company's competitive advantages and the reduced cyclicality resulting from its transformation, leading to a significant undervaluation.

We believe Fineos possesses investment merits that are not typically found in profitless technology companies. The market appears to underestimate the revenue potential stemming from the adoption of cloud software by insurers, as well as the increasing loyalty of Fineos' insurer customers. Fineos is strategically positioned to secure new business, bolstered by long-standing customer relationships and referrals. Although the company is not yet profitable, it reinvests to strengthen switching costs with its loyal customer base, acquire new business, and maintain its competitive edge. We anticipate share gains through increased product offerings per client, the addition of new clients, and expansions into new regions and adjacent markets. Additionally, there are opportunities for cost efficiencies arising from client transitions to the cloud, the automation of manual processes, and recruitment in emerging economies. We expect Fineos to be able to self-fund its future growth.

Narrow-moat STMicroelectronics is one of our top picks in the technology sector, with fair value estimates of $60 for US shares and EUR 56 for European shares, providing an attractive margin of safety for long-term, patient investors. We are optimistic about the long-term secular tailwinds in the automotive market, as ST is poised to benefit from increased chip content per vehicle, particularly in electric vehicles. The company has experienced significant gross margin expansion in recent years, and we expect it to maintain these margins over the long term. We recognize near-term risks for ST, as it has recently issued a cautious outlook for 2024 revenue and profitability. Additionally, there are warning signs in the broader EV market, including excess inventory, competitive pricing among OEMs, and potentially slower growth than anticipated. However, we believe these near-term risks are already reflected in current market prices, and we see potential rewards for investors willing to endure the current cyclical downturn in the semiconductor sector. In the long term, we are not overly concerned about the expansion of trailing edge chip manufacturing equipment and capacity in China, as domestic chipmakers may attempt to displace companies like ST over time. We believe ST’s diverse product portfolio and high customer switching costs will help the firm remain relevant in the Chinese market and likely in most other global markets. Furthermore, we are not particularly worried about the growth of the silicon carbide-based semiconductor market, and we expect ST to continue as a market leader with strong revenue growth in these products throughout the remainder of this decade.

Narrow-moat Infineon Technologies is among our top picks in the technology sector. Our EUR 50 fair value estimate provides an attractive margin of safety for long-term, patient investors. We remain optimistic about the long-term secular tailwinds in the automotive market, as Infineon is poised to benefit from increased chip content per vehicle, particularly in electric vehicles (EVs). Additionally, we appreciate Infineon’s green industrial power business and its involvement in renewable energy. Infineon has successfully expanded its gross and operating margins in recent years, and we expect it to sustain these margins over the long term. However, the company recently lowered its outlook for fiscal 2024 revenue and profitability. We have observed some warning signs in the broader EV market, including excess inventory, competitive pricing among original equipment manufacturers, and potentially slower growth than previously anticipated. Despite Infineon’s leadership in power semiconductors for EVs, we still anticipate an increase in chip content per vehicle over time. We believe that the near-term risks are already reflected in current market prices, and we see potential rewards for investors willing to endure the latest cyclical downturn in the semiconductor sector. Looking ahead, we are not overly concerned about the expansion of trailing-edge chip manufacturing equipment and capacity in China, as domestic chipmakers may attempt to displace companies like Infineon. We believe that Infineon’s diverse product portfolio and high customer switching costs will help the company remain relevant in the Chinese market and likely in most other global markets in the long run. Furthermore, we are not particularly worried about Infineon’s significant expansion plans in the silicon carbide (SiC) semiconductor market. Even if overcapacity occurs, we expect Infineon to emerge as a leader in automotive and industrial SiC applications, capable of efficiently utilizing its facilities.

RWE's transition from a coal-heavy company to a leader in renewable energy showcases a strong strategy and execution that remain undervalued in the market, even with a clear exit from coal following its agreement with the German government. The acquisition of ConEd's clean energy business positioned RWE as the fourth-largest renewable energy player in the US, a highly attractive market following the implementation of the Inflation Reduction Act. RWE enjoys significant exposure to European power prices and clean spark spreads, attributed to its substantial share of liberalized renewable energy and combined-cycle gas turbine plants. Furthermore, the company typically capitalizes on commodity price volatility through its trading operations.