2024-10-30 issue recommended excellent stock list

We believe Albemarle shares are currently undervalued, as lithium prices appear to be at cyclically low levels. Demand from electric vehicle (EV) sales and utility-scale batteries is on the rise. However, the rapid influx of new, higher-cost, lower-quality lithium supply from China and Africa has shifted the market from undersupply to oversupply, resulting in a decline of over 85% in prices from their all-time highs in late 2022. Presently, lithium prices are below the marginal cost of production, prompting supply reductions. We anticipate a price recovery in 2025 as demand increases and the market stabilizes. Furthermore, unit production costs are expected to decrease as Albemarle expands its capacity and implements overhead cost efficiencies. Consequently, we project that Albemarle's unit profits will improve in 2025 compared to our expectations for the latter half of 2024. Albemarle's competitive advantage lies in its cost-effective lithium production, derived from its unique geological resources. Lithium constitutes nearly 90% of the company's profits, with electric vehicle batteries being the primary driver of demand, accounting for approximately 50% of lithium demand in 2023. As EVs are projected to rise to 40% of global auto sales by 2030, up from 12% in 2023, we estimate they will represent nearly 70% of total lithium demand by that year, positioning lithium as a key beneficiary of increasing EV adoption. As one of the lowest-cost lithium producers worldwide, Albemarle stands to gain from the growing EV market, which will drive higher lithium prices and enhance profitability. Additionally, with increasing demand for lithium from utility-scale batteries in energy storage systems, we forecast that lithium demand will nearly triple from 2023 levels by 2030, reaching approximately 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, which we project to be $20,000 per metric ton. While we expect lithium prices to remain volatile, we anticipate they will average around our $20,000 marginal cost estimate over the next decade, leading to robust profits for Albemarle.

Wide-moat International Flavors & Fragrances (IFF) shares appear undervalued as the market is currently focused on near-term risks to the company’s profit recovery following a significant decline in 2023. After experiencing stagnant sales for a couple of years, there are concerns regarding the company's long-term growth outlook. In 2023, profits decreased due to lower volumes resulting from customer inventory destocking. However, we anticipate that IFF's specialty ingredients, which include flavors, fragrances, and biosciences, will experience normal demand in 2024. This normalization should enable IFF to operate its plants at more typical capacity utilization levels, positively impacting profits. We project profit growth in 2024, with a more substantial recovery expected in 2025. The current stock price of IFF suggests that investors are doubtful about the company's potential for long-term profit growth. IFF is a market leader in flavors, fragrances, enzymes, and cultures. As consumer demand shifts towards more natural flavors and the demand for cultures and enzymes increases, we believe IFF is well-positioned to capitalize on these trends, leading to solid long-term growth. The company's debt levels are elevated due to the acquisition of DuPont's nutrition and biosciences division in 2021. In response, management reduced the dividend by 50% to allocate more free cash flow towards debt repayment. Additionally, the company has divested several businesses to further reduce debt, resulting in improved leverage ratios. IFF is also in the process of selling its pharma solutions business, with the transaction expected to close by mid-2025. With proceeds from divestitures and savings from the dividend reduction directed towards debt repayment, we anticipate that IFF's balance sheet will be in a healthier state by the end of 2025.

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 stubbornly high, and the companies have not enjoyed substantial financial gains, all while continuing to invest heavily in enhancing Canadian networks. Rogers is still generating considerable free cash flow and stands to benefit from additional synergies resulting from its merger with Shaw. Furthermore, 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 excessively pronounced. Each of the Big Three telecom companies seems 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.

We consider the shares of narrow-moat Bath & Body Works to be attractive, currently trading at over a 50% discount to our fair value estimate of $67. 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 a swift adaptation to consumer trends. The narrow moat is reflected in the 37% average return on invested capital, excluding goodwill, that we anticipate the business will generate over the next decade, significantly surpassing our 8% weighted average cost of capital estimate. While we project limited growth in its North American footprint (with nearly 1,900 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 high-single-digit average international sales growth over the next decade, which will help 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 additional market share gains for Bath & Body Works beyond its already strong position.

We believe narrow-moat Hanesbrands is an attractive investment, trading at approximately a 55% discount to our fair value estimate of $15.80. Our moat rating is based on the company's intangible brand assets. Hanes owns some of the most recognized brands in basic innerwear in the United States and Australia, which we believe has allowed certain products to command favorable pricing and outperform competitors. Recently, Hanes sold Champion to Authentic Brands Group for an appealing price of $1.2 billion, with the potential for an additional $300 million in earn-outs. Although this sale may reduce future cash flow, we believe it mitigates risk for shareholders, as the proceeds are being used for debt reduction. Furthermore, we anticipate that the sale of Champion will positively impact margins, allowing Hanes’ management to concentrate on its more profitable innerwear segment. Hanes generates approximately 70% of its sales in the U.S., but also has international growth opportunities, particularly in Australia, where its Bonds brand and others hold significant market shares. With improved cash flow, Hanes has reduced its debt from $3.9 billion at the end of 2022 to $3.3 billion at the end of 2023. The company has eliminated its quarterly dividend and plans to allocate all available free cash for debt reduction. Given this strategy, the proceeds from the Champion sale, and our expectations for steady cash generation, we project that Hanes' debt will decrease to $1.8 billion by the end of 2027, resulting in a debt/EBITDA ratio of below 3 times.

We rate VF as a no-moat company, as its largest brands—Vans, The North Face, and Timberland—have faced varying degrees of struggle since the pandemic. Despite this, VF’s shares are trading at a significant discount to our $39 fair value estimate. In October 2023, CEO Bracken Darrell introduced a strategic plan called “Reinvent,” which aims to drive innovation, implement new management for Vans, establish a new platform in the Americas, reduce costs, and decrease debt. VF has already made strides in this area by selling Supreme for $1.475 billion in cash. We anticipate that VF's valuation will improve as the Reinvent plan is executed, although this will take time. As one of the largest apparel firms in the US, VF operates in appealing categories; however, its share price has declined sharply due to several setbacks, including a notable drop in Vans sales, weak wholesale orders across many brands, inflation, high inventory levels, and an unfavorable tax ruling. While we recognize these challenges, we believe VF’s reduced valuation offers an opportunity to invest at a discount in a company that is positioned for enhanced profitability. The firm’s adjusted operating margin was a disappointing 4.5% in fiscal 2024, but we expect it to gradually improve to historical levels as Vans and The North Face regain sales growth in the Americas. During its October 2024 investor event, VF set fiscal-year 2028 targets that include an adjusted operating margin of at least 10%, an adjusted gross margin of at least 55%, an adjusted SG&A margin of 45% or less, and net leverage of 2.5 times or below. We consider these targets to be reasonable. In light of its recent difficulties, VF reduced its quarterly dividend twice in 2023. While this may be disappointing for income-focused investors, we believe the company's emphasis on enhancing liquidity and reducing debt is advantageous for shareholders. Additionally, VF has attracted the attention of activist investors advocating for cost reductions and the divestiture of noncore brands. Many of their objectives align with the strategic plan, suggesting they are supportive of Darrell's initiatives.

We consider Nordstrom to be significantly undervalued, currently trading at a 40% discount to our fair value estimate of $38.50. Although the company's recovery from the pandemic has been lackluster, it consistently generates cash flow, and we expect its earnings to improve. Additionally, Nordstrom provides a dividend yield exceeding 3%. The company'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, due to intense competition that has severely impacted the department store model, we classify Nordstrom as a no-moat company. Given the current market dynamics, we do not anticipate that the firm will return to the double-digit operating margins it achieved consistently before 2014. Nevertheless, we foresee a potential 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 its private-label sales and significantly increase the number of items available through partnerships. Consequently, we believe Nordstrom's operating margin will stabilize around 6% in the medium term, as sales enhancement and efficiency initiatives should enable better cost leverage in areas such as marketing, wages, and store overhead. Through effective cost-cutting, efficiency improvements, and a refined merchandise mix, we project that Nordstrom will elevate its gross margin on net sales to 36% by 2027, up from less than 35% in 2023, while reducing its selling, general, and administrative expenses as a percentage of total revenue to 32% from 33% in 2023. Peter and Erik Nordstrom, along with Mexican retailer El Puerto de Liverpool, have proposed taking Nordstrom private. The Nordstrom family and El Puerto de Liverpool collectively control approximately 43% of the outstanding shares and have offered to purchase the remaining shares for $23 each. We believe this offer does not adequately compensate minority shareholders for the anticipated improvement in profitability, and we are maintaining our (significantly higher) fair value estimate. The proposal is currently under review by a special committee of independent board members and requires approval from a majority of outside shareholders. Given our assessment of the offer as insufficient, we believe there is a strong possibility that the committee will request an increase. Nonetheless, we view the buyout offer as further evidence that the stock is indeed very undervalued.

Polaris' shares are currently trading at over a 30% discount to our fair value estimate of $110. 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 22% return on invested capital (ROIC) by 2033, significantly exceeding our 10% weighted average cost of capital assumption. Recently, the stock has faced pressure due to challenges related to slowing consumer conversion and cautious dealer behavior, which we view as temporary issues. Consequently, the company has revised its 2024 outlook following its third-quarter results, now anticipating a 20% sales decline (down from a previous estimate of 17%-20%) and adjusted earnings per share of $3.25 (revised from $3.50-$4.00). We project a 21% sales decline and an EPS of $3.25. Once dealer inventory is optimized—expected to decrease by 15%-20% in 2024—wholesale shipments should align more closely with consumer demand. We are optimistic that long-term demand driven by new product launches will foster shipment growth and profit enhancement beyond 2024. From 2025 to 2033, we forecast the company will achieve an average sales growth rate of 3.3% and double-digit growth in earnings per share.

We continue to see value in Sealed Air shares. The company produces a diverse range of flexible resin packaging, protective shipping materials, and integrated packaging systems. In 2021, packaging demand surged due to pent-up consumer demand and supply chain challenges, leading to robust end-market demand. Consequently, Sealed Air achieved record financial performance in 2021-2022. However, this positive trend reversed as supply chain disruptions eased and inventory levels began to rise. Many retailers faced excess inventory and were compelled to implement inventory destocking measures, which significantly impacted 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. As a result, the shares have declined significantly from their January 2022 peak and have underperformed relative to packaging peers during this period. Despite these recent challenges, Sealed Air’s unique business model in the packaging sector remains noteworthy. The company sells packaging equipment and automation solutions, which are utilized by clients for years, creating a long-term relationship that mitigates the price-taker dynamic affecting other packaging producers. Sealed Air’s strong competitive positioning and favorable long-term outlook enhance our confidence that the currently discounted share price will ultimately benefit long-term investors.

Hasbro's shares have significantly outperformed the broader market in 2024, achieving a 34% increase year to date, compared to an approximate 18% rise in the Morningstar Global Markets Index. Despite this performance, we believe the shares remain undervalued relative to our fair value estimate of $83. We think investors have not fully recognized Hasbro's successful business transition, which included the divestiture of its entertainment segment, positioning the company to achieve structurally higher operating margins. We anticipate a notable improvement in revenue mix, with the high-margin Wizards of the Coast and digital segments projected to account for about 36% of sales in 2024, up from 29% in 2023. Additionally, by concentrating on core competencies, Hasbro is poised to benefit from enhanced innovation and a streamlined operating model, supported by the outlicensing of lower-productivity brands to partners, which will help free up working capital. Moreover, due to a rigorous focus on cost management, Hasbro aims to reduce gross costs by $750 million by the end of 2025, which will aid in profit growth. While the company is targeting a 20% operating margin by 2027, we believe it has the potential to achieve this target as early as 2024, 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 control, and a lean operational structure.

Shares of wide-moat Estée Lauder have declined by 35% over the past 12 months, primarily due to weak demand in China and investor skepticism regarding the firm's profit recovery strategy. We believe the shares, currently trading at a 50% discount to our $176 fair value estimate, offer compelling value and recommend them to investors seeking exposure to the attractive beauty care market. Although the weak consumer environment in China has created short-term challenges for Estée and its beauty peers in reviving market growth, we maintain that the premiumization trends and Estée Lauder's competitive position remain strong. We believe the current challenges in China are manageable as the company leverages its strong brands, solid channel relationships, and various research and manufacturing initiatives in Asia to enhance its positioning and long-term growth prospects. While we project low-single-digit sales growth for fiscal 2025 due to ongoing issues in China, we anticipate revenue growth will accelerate in subsequent years at mid- to high-single-digit rates, as we expect Estée 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 improve to the mid-teens by fiscal 2034, supported by a more favorable channel mix (moving away from heavy promotions in department stores), manufacturing efficiency improvements, and cost-cutting initiatives.

Trading at approximately a 40% discount to our $57 fair value estimate and offering a 4%-5% annual dividend yield, we believe narrow-moat Kraft Heinz should be on investors’ radar. Market skepticism appears to focus on concerns about the firm's ability to avoid significant and lasting volume contraction in the face of persistent inflationary pressures, reduced consumer spending, and increased competition, including more aggressive promotions from other brand operators and private-label products following recent price increases. However, we contend that this concern is misplaced, as the company has moved away from previous management's focus on short-term profitability and cash flow. Over the past five years, Kraft Heinz has strategically pursued sustainable efficiencies, increased brand investment (in marketing and product innovation to a mid-single-digit sales growth level more in line with peers), improved its capabilities in category management and e-commerce, and utilized its scale to adapt more effectively to changing market dynamics. We believe the company is committed to maintaining this approach. Collectively, these initiatives are expected to drive low-single-digit annual sales growth while sustaining operating margins in the low-20s.

From the beginning of 2022 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 nearly 30% since then, they remain well below our fair value estimate, presenting an attractive risk-adjusted upside along with a healthy dividend yield of approximately 3%. The decline in Tyson’s share price can be attributed to deteriorating financial performance, as evidenced by a 62% drop in adjusted EBITDA from fiscal 2022 to fiscal 2023. 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. This vulnerability has been exacerbated by rampant cost inflation and ongoing supply and demand challenges 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 all that is needed to support our valuation. The chicken market has already started to recover, with 12-month trailing adjusted EBITDA increasing by 3% at the end of the third quarter of fiscal 2024. Furthermore, we do not anticipate any structural changes in the meat markets that would necessitate a permanent alteration in profitability. Consequently, we project moderate top-line growth of 2% over the next five years, with operating margins expected to recover to our 2028 estimate of 7.4%, aligning with historical levels and improving from the fiscal 2023 result of approximately negative 1%.

From early April to late July 2024, Lamb Weston shares experienced a significant decline, falling by 50% following two disappointing quarters. In its fiscal third quarter (ending February), the company faced challenges due to a problematic rollout of a new enterprise resource planning (ERP) system, which resulted in inaccurate inventory estimates at distribution centers. This led to decreased customer fulfillment rates, loss of market share, and inventory write-offs. In the fiscal fourth quarter (ending May), the company was unable to regain lost market share, compounded by sluggish restaurant traffic that further intensified its difficulties. Additionally, the industry is currently undergoing an investment cycle aimed at expanding capacity, which poses risks to Lamb Weston's utilization rate and profit margins. The near to medium-term outlook appears challenging, as these headwinds are expected to persist. However, the long-term valuation catalysts and Lamb Weston's narrow competitive moat remain intact. Despite the decline in traffic, attachment rates for fries—one of the most profitable menu items for restaurants—remain high. As consumers adjust to stabilizing inflation, we anticipate a return to typical mid-single-digit growth in fry sales. Furthermore, while the company is contending with short-term excess capacity, we believe that long-term demand growth and the recovery of lost market share will help restore utilization rates to the high-90% range. Although shares have rebounded by approximately 50% since late July, we still see significant upside potential. Importantly, 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. Despite losing some market share due to ERP issues, we expect Lamb Weston to maintain strong customer relationships and successfully recapture share as its operations stabilize.

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

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 significantly 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 placing too much emphasis on short-term absolute growth, whereas it should focus 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 rapidly growing e-commerce sector, with Venmo offering additional potential for upside. We maintain that the company holds a strong competitive position within this space. While the intense competition in e-commerce presents challenges, we believe PayPal is well-equipped to navigate this landscape, and there are no indications in its recent performance that suggest a significant weakening of its long-term competitive position. Nonetheless, we recognize the possibility of results fluctuating in either direction. Consequently, we view the stock as more appropriate for risk-tolerant investors.

SoFi Technologies is currently trading significantly below our $13 fair value estimate. Throughout most of 2023, the company's results were 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, leading to 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 continued to deliver strong results in its other segments, making progress toward its long-term strategic objectives. Similar to trends observed in other digital lenders, SoFi’s personal loans have experienced a considerable increase in volume, with loan origination more than doubling over the past couple of years. The financial-services segment has also seen a notable enhancement 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 proven advantageous for SoFi, as rapidly growing deposits have allowed the company to significantly 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. Additionally, SoFi’s banking-as-a-service subsidiary, Galileo, has experienced a resurgence in account growth after a sluggish 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 drivers that SoFi possesses.

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 short 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 extending the timeline for our outlook to materialize.

Moderna's shares have experienced significant volatility, with investors initially overly optimistic in 2021 regarding the company's technological potential, followed by a more pessimistic outlook on its growth post-coronavirus. While we maintain modest expectations for sales of the firm's COVID vaccine after the substantial pandemic-driven demand in 2021 and 2022, we believe that Moderna's pipeline of mRNA-based vaccines and treatments is progressing swiftly across various therapeutic areas. Despite a decline in sales during 2023-24 in anticipation of new product launches, we are confident in the long-term sales trajectory of the firm's diversified pipeline. We see strong validation of Moderna's technology in respiratory virus vaccines (with an RSV vaccine set to launch in 2024 and a COVID/flu combination vaccine expected in 2025), oncology (with a potential melanoma launch by 2027), and rare diseases (where accelerated approvals could occur by 2027).

Baxter remains on our Best Ideas list, with shares currently trading at a significant discount to our valuation. In recent quarters, demand for many of its products has been improving due to increased medical utilization. Additionally, new product launches, such as the Novum IQ pump platform, are expected to further enhance demand in the near future. Baxter also presents a margin improvement opportunity, as inflationary pressures in its supply chain are subsiding, and important new group purchasing organization contracts are set to take effect in 2025, which should positively impact its product pricing. Overall, we anticipate that profits will grow at a relatively rapid pace in the near term before stabilizing at a more normalized rate in the high single to low double digits over the long run. While we acknowledge the near-term market concerns related to Baxter's capital equipment business and the recent hurricane that disrupted production at a key IV solutions facility, we believe there is a substantial margin of safety built into the shares.

Humana remains on our Best Ideas list, highlighting the significant discount at which its shares are trading compared to our fair value estimate, its robust competitive position in Medicare Advantage, and its potential for substantial long-term profit growth. The company's outlook for 2024 indicates severely reduced profits due to mispriced Medicare Advantage plans that may not adequately cover the rising medical utilization expected in 2024. Additionally, initial star ratings for 2025 marketing and 2026 bonus payments have declined significantly. Although the company is contesting these star ratings in court, this situation introduces uncertainty regarding Humana's intermediate-term profit trajectory, leading many investors to sell their shares. While these investors may be acting out of fear, we believe that those with a long-term investment perspective should seize the opportunity presented by Humana's discounted shares, which offer a rare combination of a high-quality firm at an attractive valuation in the managed care sector.

Wide-moat HII, a former subsidiary of Northrop Grumman, is the largest military shipbuilder in the US. While the company benefits from extraordinarily long planning horizons and budget visibility, small shifts in the timing of major programs can lead to lumpy quarterly results, which we believe have impacted the stock. Nevertheless, HII's strong ties to the US Department of Defense, its status as the sole provider of nuclear aircraft carriers and turbine-powered amphibious landing ships, and its position as one of only two producers of nuclear submarines for the US Navy position the company for recurring profits well into the future. The long-cycle shipbuilding business does not yield the highest margins in the defense contracting industry. However, it exemplifies the conditions that provide a durable competitive advantage and significant visibility into revenue and profitability for decades. The large shipbuilding sector offers extensive planning horizons and budget visibility, although 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 upcoming revisions to US Navy budgets. The timing of work on two America-class amphibious assault ships expected to commence around 2027 may or may not offset the decline in work on the third Ford-class aircraft carrier, the Enterprise. This concern is more operational than financial and should not impact the company, provided it maintains sufficient visibility into similar work at each of its two shipyards as projects near completion. HII's products take years to build and are typically produced in small quantities. The potential for margin gains as the company progresses down the learning curve is limited, especially since the government negotiates the price of each ship, affecting the available profit. This close relationship between the buyer and the company distinguishes HII from other defense contractors, as it is highly insulated from macroeconomic or market risks. In 2022, HII generated only $50 million in revenue from commercial customers out of nearly $11 billion in total revenue. Additionally, the Defense Department has a vested interest in maintaining multiple shipyards in operation and ensuring their financial viability. This policy results in a balanced distribution of work between HII and General Dynamics, mitigating risk and distributing rewards. While the firm may experience uneven revenue and profits in certain quarters and years due to the multiyear production cycles of its large products, we believe long-term investors will be rewarded, particularly with the anticipated growth in submarine and destroyer revenue.

We believe that the current discount on Chart Industries' stock offers a significant opportunity for long-term investors. Although recent timing shifts in new orders have led to a slight reduction in 2024 guidance, backlog cancellation rates remain low at approximately 1%, indicating that the long-term outlook remains strong. Additionally, Chart’s book-to-bill ratio is around 1, suggesting that demand is robust despite the timing challenges of projects. We are confident that Chart will continue to reduce its leverage and can achieve a net debt/EBITDA ratio of 2-2.5 times. The market has yet to fully recognize the strength of Chart’s consistent aftermarket exposure resulting from its Howden acquisition, as well as the company's potential to enhance margins through further cost synergies. We maintain that Chart is an attractive growth story, with opportunities in sectors such as Big LNG, hydrogen, carbon capture and storage, water treatment, and even space exploration. These areas present numerous substantial markets for the company to pursue, alongside efforts for margin expansion. In 2023, gross margin increased by over 500 basis points, and we anticipate an additional 300 basis points of expansion is achievable. Furthermore, heat transfer systems and specialty products, which serve many of these markets, are projected to experience revenue growth of 40%-50% in 2024 compared to 2023 pro forma levels.

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 will return to its 2019 peak levels by the end of 2024.

No-moat Kilroy Realty’s high-quality office portfolio 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 selloff has been excessive. The current implied valuation of Kilroy’s shares does not reflect the private market valuations of its office portfolio. We suggest that long-term investors consider adding this stock to their portfolios, as it is currently trading significantly below our fair value estimate of $59 per share. Kilroy’s office portfolio is regarded 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 areas such as rent spread and sustainability metrics. The company is well-positioned to capitalize on the flight-to-quality trend, which is gaining momentum as employers seek to encourage employees to return to the office. However, there are risks associated with our investment thesis. The recovery in physical office occupancy levels has been slow. According to Kastle Systems' weekly work barometer, the average occupancy of office buildings is still around 50% of pre-pandemic levels based on the latest data. Another risk factor is Kilroy’s geographic concentration in California and its significant exposure to the technology and life sciences sectors.

No-moat Realty Income is currently trading at a significant discount to our $76 fair value estimate. 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. As "The Monthly Dividend Company," it attracts many investors when interest rates are low; however, these investors may shift to risk-free Treasuries as rates rise. Moreover, the company sets relatively low annual rent escalators, which means it depends on executing billions in acquisitions each year to drive growth. Rising interest rates have 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. Nevertheless, Realty Income has increased its acquisition volume over the past several years and continues to acquire at a positive spread over its cost of capital. In 2023, it executed $9.5 billion in acquisitions at an average cap rate of 7.1%, significantly above the average interest rate of around 5% on the debt issued for these transactions. The company's $9.3 billion acquisition of Spirit Realty, which closed in January 2024, is expected to be accretive to shareholder value. We believe management will continue to identify opportunities that enhance 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 announces any rate cuts in 2024.

We believe that the current environment of elevated credit costs and reduced demand for corporate travel due to the pandemic, along with concerns about Sabre's financial health, presents a unique opportunity to invest in a company with network advantages, efficient scale, and switching cost benefits 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 effectively compete with Sabre and its peers. In the first half of 2024, American Airlines reported weaker sales as a result of its decision to reduce emphasis on GDS platforms. However, American is now returning to GDS networks to recover lost corporate business. Additionally, investments in cloud platforms, new distribution capabilities, and sales opportunities in ancillary services, hotel IT, and airline IT further solidify Sabre's customer base, enhancing its competitive advantages. We estimate that over half of Sabre's pre-pandemic sales were linked to business travel, which is recovering at a slower pace compared to leisure travel. While we acknowledge that some corporate travel may be permanently replaced by video conferencing and sustainability efforts, we anticipate a gradual rebound in business trips over the next few years as economic growth continues. We believe that in-person interactions will remain a key differentiator in customer retention and acquisition compared to video calls. Sabre has also strengthened 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 the 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 errors, 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, and 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 more 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 alongside 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 also expect a moderate 90-basis-point operating expansion over the next five years, driven by a gradual shift towards higher value-added offerings.

The market responded negatively to New Fortress Energy's inability to achieve key production milestones at its inaugural LNG production facility, raising concerns about near-term debt. However, we believe this reaction is an overreaction to short-term setbacks, as there is a clear trajectory for volume growth and debt reduction through 2027 and beyond. While tight LNG markets currently limit the company's business model, we anticipate that as these conditions improve by 2027, the company will generate sufficient cash flow to manage its debt and enhance the utilization of downstream power generation.

Electricity demand growth in Evergy's Kansas and Missouri service territories has been notably strong. Year-to-date, residential demand has increased by 2.2%, and new industrial demand from companies like Google, Meta, and Panasonic is expected to sustain total demand growth above 2% for at least the next three years. This heightened demand is likely to create more growth investment opportunities. Improvements in regulatory ratesetting in Kansas, along with anticipated rate increases in Missouri, should enhance earned returns. We project a 6% annual earnings growth at least through 2028. As of late October, Evergy's dividend yield stands at 4.3%, one of the highest among US utilities, and we anticipate another dividend increase in the fourth quarter. Additionally, Evergy's price-to-earnings (P/E) ratio of 16 as of late October represents a 15% discount compared to the median P/E for the US utilities sector.

We believe NiSource presents investors with the chance to acquire a high-growth utility that is currently 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 is set to close its final coal-fired power plant by 2028, transitioning to wind, solar, and energy storage for generation. We anticipate that NiSource will invest $17 billion over the next five years, potentially reaching $35 billion over the next decade, which should result in 7% annual growth in earnings and dividends.

Tencent's business is widely recognized for its enduring competitive advantages, proven success, and strong financial health. With WeChat's impressive user base of 1.3 billion in China, this established platform still has significant potential for enhanced advertising monetization, especially through its additional services like Video Accounts and WeChat Search. Coupled with anticipated growth and margin improvements in its gaming, fintech, and cloud sectors, Tencent is well-positioned to achieve a comfortable mid-teens earnings CAGR over the next five years. Importantly, the company's valuation remains very appealing. Excluding its investment portfolio, Tencent's shares are currently trading at approximately 15 times forward earnings. Furthermore, the company shows a strong commitment to returning value to shareholders, distributing around 80% of its earnings back to them. This is accomplished through a mix of about 30% in dividends and 50% in share buybacks, highlighting Tencent's focus on shareholder value.

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 rapid 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.

PDD is moving away from the American market, which is expected to lower regulatory risks. Meanwhile, Temu is performing well according to the data we have monitored.

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 room inventory in Macao, and a proven track record in non-gaming activities, is well-positioned to benefit from the ongoing demand recovery in the region.

Geely is one of China’s leading automakers, having sold nearly 1.7 million cars in 2023. We maintain a positive outlook on Geely as its new energy vehicle (NEV) initiatives continue to progress. The NEV-focused brand Galaxy has successfully gained traction since its launch in 2023, while the premium brand Zeekr is steadily increasing its delivery rates. With strong vehicle sales year to date, management has raised its 2024 full-year vehicle volume guidance to 2 million units, reflecting a 21% year-over-year growth. The company anticipates a 70% year-over-year expansion in NEV sales. With a robust model lineup from Galaxy and Zeekr, we believe Geely is well-positioned to further enhance NEV penetration, which is favorable for its transition to electrification. The increase in sales volume and declining battery costs could help mitigate pricing pressures amid industry competition. We believe investors may be underestimating the long-term earnings potential of the company’s various new energy brands. Near-term catalysts include strong monthly sales momentum from Galaxy and Zeekr, as well as a recovery in profitability.

Budweiser APAC is the leading beer brewer by sales value in China, holding approximately 40% of the premium segment market share. The company benefits from a comprehensive nationwide distribution network and a diverse portfolio of international premium beer brands, supported by the substantial resources of its parent company, Anheuser-Busch InBev. Additionally, Budweiser APAC has successfully digitalized its channel management, providing a competitive advantage over its peers and positioning itself to capitalize on premiumization opportunities as volume growth stabilizes. We anticipate that the long-term premiumization trend in China's beer market will persist, despite current sluggish consumer sentiment, due to a favorable competitive environment and the shared objectives of major brewers to pursue price growth in the long run.

We believe the market has a differing perspective on the outlook for lithium prices, which is a crucial factor in valuing IGO. In our view, lithium prices are approaching a cyclical bottom, presenting an appealing entry point for investors. Currently, lithium is trading significantly below our estimate of the marginal cost of production, and we anticipate a price recovery as demand from end markets increases and higher-cost supply is phased out. IGO's main asset is its minority stake in Greenbushes, recognized as one of the highest-quality and lowest-cost hard rock lithium mines globally. This asset provides IGO with a narrow economic moat. We project that lithium demand will nearly triple by 2030 compared to 2023 levels, primarily driven by the growth in electric vehicle sales. To accommodate this demand, IGO intends to expand Greenbushes' capacity by approximately two-thirds by the end of the decade.

Shares in no-moat TPG Telecom are currently undervalued. The advantages of a more rational mobile market are becoming evident. In a three-player mobile network landscape, each player is increasingly focused on achieving returns on their substantial capital investments, particularly in the rollout of 5G. We anticipate that this rational competitive behavior will persist, supported by ongoing growth in fixed wireless services. The anticipated completion of the AUD 5.3 billion sale of the corporate telecom unit will further highlight the benefits of TPG's mobile-focused strategy, while the proceeds from the sale will alleviate any remaining concerns regarding TPG’s balance sheet. The positive effects of cost-cutting and business simplification initiatives are already starting to materialize, coinciding with a moderation in the current capital expenditure pressures from 5G and IT modernization. The presence of major shareholders whose holdings have recently come out of escrow following the Vodafone merger may be causing some investor unease. However, these concerns are adequately reflected in the share price, particularly in light of the long-term growth prospects for the telecom industry as it transitions to 5G.

Domino's Pizza Enterprises is a high-quality company with substantial growth potential. We project a 20% compound annual growth rate in earnings over the next five years, driven by the global expansion of its store network. While Domino's sales growth has experienced volatility, the share price often reflects short-term trading conditions rather than its long-term prospects. The near-term outlook remains uncertain and depends on enhancing store economics. Nevertheless, we believe the market is undervaluing Domino's significant and intact long-term growth potential. We anticipate the network will reach nearly 6,000 stores by fiscal 2034, up from approximately 3,800 as of June 2024, which is below management's long-term target of 7,100 stores.

Negative sentiment stemming from short-term challenges, management changes, and structural shifts in the automotive industry has led to an underappreciation of the fundamental strength and resilience of Bapcor’s automotive-parts business. A slowdown in discretionary spending is impacting retail in the near term, and the new management team will need to demonstrate its capabilities. Additionally, the rise of electric vehicles presents a long-term challenge for the trade business. Nevertheless, we believe that the current pessimism overlooks the inherent resilience in automotive spare parts, and Bapcor is well-positioned to adapt to the ongoing technological transition.

We believe the market has a short-sighted perspective on IDP Education, influenced by recent declines in volumes and regulatory uncertainties. While we acknowledge that the short-term outlook appears weak and forecast a decline in IDP’s earnings for fiscal 2025, we anticipate that the company will continue to gain market share as the industry favors quality operators like IDP. We see significant long-term value, as the caps on foreign students are temporary and address short-term cyclical issues. The pricing outlook is also positive in the near term, with IDP negotiating better terms and universities planning to increase tuition fees due to an undersupply. We expect IDP to benefit from the long-term macroeconomic factors that support the international education sector.

Endeavour shares are currently trading at an attractive valuation with a fully franked yield. We believe the market is underestimating the company's defensive long-term earnings outlook, especially as consumers reduce nonessential spending. However, fiscal stimulus is expected to enhance household budgets in fiscal 2025. We project that underlying Australian liquor retail sales will increase in the mid-single digits after experiencing minimal growth in fiscal 2024. In the long term, liquor demand remains resilient, supported by inflation and population growth. We anticipate that the ongoing trend of premiumization will offset declines in per capita liquor consumption. As the largest liquor retailer in Australia, with well-known brands like Dan Murphy’s and BWS, Endeavour's liquor sales are expected to grow in line with market trends. Additionally, we believe that concerns regarding regulatory risks associated with the group's gaming operations are overstated and already reflected in the current share price.

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 shift. Currently, Luzhou Laojiao stands out as our top choice in the sector, thanks to its rich brand heritage, exceptional product quality, and comprehensive distribution network. We anticipate that the company's proactive national expansion strategy and enhanced collaboration with distributors will further strengthen its competitive position, enabling it to achieve greater net profit growth relative to major competitors like Wuliangye over the next five years.

We believe that Harmonic Drive Systems shares are undervalued, as the market has overreacted to several factors: worries about order peaks due to the component supply shortage; uncertainty regarding 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.

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 believe that the demand for residential properties in affluent cities will remain resilient, resulting in stronger sales growth for COLI. Furthermore, we anticipate 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 believe 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 favor Wharf REIC due to its premier 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 gain from the resurgence of tourism in Hong Kong. Additionally, Wharf REIC stands to benefit from the trend of luxury retail consolidation, as luxury brands are downsizing their presence in other parts of the city while increasing their space in key shopping destinations like Harbour City.

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 in our coverage to be undervalued, we believe that narrow-moat Taiyo Yuden presents the best 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 multilayer ceramic capacitors 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 favor Sony due to its emphasis on acquiring and utilizing appealing content to create recurring revenue streams that facilitate long-term monetization from customers, including in gaming, streaming music, and movies. Additionally, the company maintains a disciplined approach in its consumer electronics sector to safeguard profitability and cash flow through careful inventory management. Overall, Sony's business portfolio is significantly less susceptible to economic fluctuations, allowing it to generate robust earnings growth even in uncertain conditions. The company aims to achieve double-digit growth in operating income as part of its three-year midterm plan.

We are optimistic about Grab Holdings due to its leading market position in Southeast Asia's ride-hailing sector. The ride-hailing segment has reached a pivotal moment and is now generating positive cash flow, marking a notable improvement compared to last year. Furthermore, its delivery business is achieving higher operating margins, and Grab has already updated its long-term margin expectations for this segment. We see several new long-term growth drivers, including its advertising business, which remains underutilized.

We believe Santos is not receiving adequate recognition for its ongoing oil and gas developments, and its shares are undervalued. With a strong balance sheet and low operational costs, including a freight advantage to Asia, the company is well-positioned 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.

Ramsay is experiencing robust growth in patient revenue; however, group profitability is being affected by inflationary pressures, reduced government support, and increased investment in digital initiatives. Despite these challenges, we anticipate long-term margin expansion as Ramsay reduces its reliance on agency staff, normalizes case mix and volumes for nonsurgical services, improves capacity utilization, and realizes efficiencies from digital investments. Notably, labor shortages are beginning to ease, and Ramsay is actively investing in recruitment and training. The company has also negotiated higher reimbursement rates to address cost inflation and has strengthened its balance sheet by divesting its stake in Ramsay Sime Darby. For further details, please refer to our Ramsay Stock Pitch published in December 2023.

Aurizon shares 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. Although haulage volume was weak in fiscal 2023 due to wet weather, 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.

As the largest supplier of reusable wooden pallets globally, Brambles typically holds a leading position in its operating markets. We attribute this to its scale and first-mover advantage, which limit competition. This advantage contributes to a cost edge, resulting in our wide moat rating. A significant portion of the company's earnings comes from major beverage and food corporations, which we view as defensive, thereby reducing Brambles' correlation to economic fluctuations. Consequently, we project steady revenue growth at a compound annual rate 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.

We have recently downgraded Dexus' moat rating to none and reduced our fair value estimate to AUD 9.60 per security from AUD 10.60 following the transfer of coverage to a new analyst. Nevertheless, we believe Dexus should still be considered a Best Idea. The company's office portfolio is of high quality, and the transition to hybrid working enhances its attractiveness. Most of its office towers are premium or A-grade and are primarily situated in the central business districts of major Australian capital cities, with a significant focus on Sydney. As the trend towards quality continues, well-located, high-grade buildings like those owned by Dexus are expected to remain in demand. Additionally, the industrial portfolio is currently undervalued in terms of rent. Dexus is likely to implement substantial price increases when existing leases expire. We also anticipate that the funds management segment will continue to draw investor inflows, thanks to its scale, management expertise, and track record. The securities are trading significantly below the firm's net tangible assets of AUD 8.97 and offer a fiscal 2025 distribution yield of 5%, which we believe provides a solid margin of safety for investors as they await recovery.

We consider SiteMinder to be a strong industry leader with a substantial and attainable market opportunity. We anticipate that the hotel industry will consolidate around larger software providers, such as SiteMinder, which can distribute significant fixed technological and regulatory costs across a broader customer base. In our opinion, economic downturns will further expedite this trend. Additionally, we believe that SiteMinder's new platform products will raise switching costs and foster network effects, leading to considerably higher terminal margins.

Narrow-moat APA Group is a high-quality company offering an attractive yield. We anticipate strong near-term revenue growth, driven by elevated inflation that enhances Consumer Price Index-linked tariffs and the completion of ongoing developments. APA is well-positioned to benefit from the transition to renewable energy, with continued investments in wind and solar farms. Additionally, its core gas transmission networks are expected to gain from the increasing use of gas to support intermittent renewable power supply. Furthermore, APA plans to assist remote mines in Western Australia in replacing diesel generators with a combination of solar panels, batteries, and gas turbines, which will help lower carbon emissions and operating costs for these mines.

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.

Kering, the second-largest luxury group by revenue, is currently trading at 16 times consensus earnings, which we believe are nearing trough levels, indicating a potential 90% upside to our fair value estimate. While the momentum of Kering's flagship brand, Gucci, is slowing, the brand's strong recognition, substantial marketing resources, control over over 90% of its distribution, and access to top managerial and creative talent position Gucci to sustain its pricing and desirability over the long term.

Richemont owns the largest, fastest-growing, and most profitable brands in luxury jewelry, specifically Cartier and Van Cleef & Arpels. This industry is characterized by high entry barriers. These brands cater primarily to affluent clientele, which helps mitigate cyclical risks. Additionally, Richemont has adopted a more cautious pricing strategy compared to its leather-goods peers following the pandemic, making jewelry a compelling choice for luxury buyers. The company boasts a robust balance sheet, with over EUR 7 billion in net cash, positioning it well to navigate economic downturns.

Prudential is a long-term savings and insurance company primarily operating in Asian markets. The company's share price is currently depressed due to uncertainties surrounding its earnings and dividends, which have been exacerbated by divestments and a rapid turnover of chief executives. We believe that the strategic plan in place will yield financial benefits, allowing the company to reinstate its dividend.

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 rise 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 have recently upgraded Philips' moat to wide due to its leadership position in imaging and image-guided therapies. The company's track record has been inconsistent, marked by several self-inflicted setbacks that have damaged its reputation and eroded investor confidence. However, we believe that resolving the sleep care issues, concentrating on its high-performing segments, and the introduction of a new management team can help shift the narrative positively. Our valuation indicates that Philips trades at a discount compared to larger competitors on a multiple basis, which we find justified given their stronger competitive positions and Philips' broader range of potential outcomes. The company has significant work ahead to regain investor trust, but even with a higher margin of safety, we view the shares as undervalued at current levels. A focus on profitability is crucial. The company's operating margins have been severely impacted by the sleep care challenges, as well as by substantial component sourcing difficulties and margin compression in imaging. At present, Philips significantly trails its imaging peers in terms of profitability, but we anticipate that the company will begin to close this gap, albeit not entirely.

We believe the market has not fully recognized Roche's robust drug portfolio and its industry-leading diagnostics, which together create sustainable competitive advantages. The challenges posed by declining COVID diagnostic revenue and competition from generics and biosimilars for older drugs are diminishing as we approach 2025, allowing the strength of the firm’s portfolio of leading drugs to come to the forefront. We see the company’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 a safer, more personalized, and cost-effective model. 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.

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, as we believe the market is underestimating the company's competitive advantages and the reduced cyclicality resulting from its transformation. Consequently, we view the stock as materially undervalued.

We believe Fineos possesses investment merits that are not typically found in unprofitable technology companies. We think the market underestimates the revenue potential stemming from the adoption of cloud software by insurers and the increasing loyalty of Fineos' insurer customers. Fineos is well-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 through client transitions to the cloud, automation of manual processes, and hiring 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 $52 for US shares and EUR 48 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 sustain these margins over the long term. We recognize the near-term risks facing ST, as it has recently lowered its 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 it 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 maintain its position 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 maintain these margins over the long term. However, the company has recently lowered its outlook for fiscal 2024 revenue and profitability. We also observe 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 anticipate a continued 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 it remain relevant in the Chinese market and 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 the automotive and industrial SiC sectors, 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.