Picks | Discover high-quality growth stocks to add to your watchlist.
Markets have been on a rollercoaster in 2023, but, maybe these four companies could be your answer to the drama.
In this week’s Edge Picks, we explore:
️ An energy company with high-quality assets and insane capital allocation skills;
A $1 billion semiconductor stock with excellent financial characteristics;
️ A leading industrial service company trading 78% below intrinsic value.
And an IoT firm with 52% gross margins.
Let’s dive in.
|Texas Land Pacific FCF | Texas Land Pacific
Texas Pacific Land (TPL)
If you can get over the steep price per share, Texas Pacific Land is a high-quality pick in the North American energy market. As one of the largest landowners in the US, particularly in the state of Texas, the company is well positioned with a diverse range land assets including commercial, residential, agricultural, and oil and gas properties. This strategic positioning, coupled with its prudent and astute management, has enabled it to create remarkable long-term value for its existing investors, and potentially, future shareholders as well.
Return on Invested Capital: 56.90%
Profit Margin: 64.00%
Earnings Per Share (5-Year): 36.10%
Revenue (5-Year): 34.00%
Debt to Equity: 0.00
Market Cap: $14.662 Billion
Current Stock Price: $1,910.03
Intrinsic Value: $1,888.54
Margin of Safety: 1.14% Above Intrinsic Value
Vast Land Holdings in Prime Texas Locations: Texas Pacific Land possesses a significant competitive advantage in its extensive land portfolio, primarily located in high-growth regions of Texas. These holdings include diverse property types, from urban and commercial real estate to agricultural land and valuable mineral rights. With Texas experiencing rapid population and economic growth, TPL’s land assets are strategically positioned to benefit from these trends, making it a prime choice for investors seeking exposure to the Lone Star State’s robust expansion.
Responsible Land Stewardship: TPL’s careful and responsible land stewardship practices are a distinct competitive edge. The company’s management has a long-term vision for land value appreciation, which includes sustainable development and leasing of properties, prudent use of natural resources, and strategic diversification. This approach not only preserves the long-term value of the land but also positions TPL as a responsible corporate citizen in Texas, further enhancing its reputation and desirability as an investment.
Solid Financial Performance: Texas Pacific Land has consistently demonstrated strong financial performance. Its financial stability is underscored by a conservative and disciplined management approach, allowing it to weather economic cycles effectively. This resilience is a competitive advantage that provides investors with confidence in TPL’s ability to navigate economic fluctuations while delivering consistent long-term growth.
|How Aehr Makes
Semiconductor Measuring Instruments
Coming in at #2, Aehr Test Systems is a dynamic force in the semiconductor testing industry. The company specializes in advanced testing and burn-in solutions for semiconductor manufacturers, catering to the demands of high-reliability markets, including the automotive and 5G technology sectors. With a rich history dating back to 1977, Aehr has consistently demonstrated innovation and adaptability in a fast-paced tech landscape making it a compelling investment choice for those seeking to capitalize on the relentless growth of the semiconductor market.
Return on Invested Capital: 18.40%
Profit Margin: 19.00%
Earnings Per Share (5-Year): 24.40%
Revenue (5-Year): 21.90%
Debt to Equity: 0.08
Market Cap: $1.075 Billion
Current Stock Price: $37.31
Intrinsic Value: $48.79
Margin of Safety: 23.53% Below Intrinsic Value
Expertise in High-Reliability Markets: Aehr Test Systems stands out with its expertise in serving high-reliability markets, notably the automotive and 5G sectors. These markets demand rigorous testing standards to ensure the reliability and durability of semiconductor components. Aehr’s deep understanding of these requirements and its ability to provide tailored testing solutions give the company a distinct competitive advantage.
Advanced Burn-In and Test Solutions: Aehr Test Systems excels in developing cutting-edge burn-in and test solutions for semiconductor manufacturers. Their technology is designed to address the evolving needs of the industry, particularly in the context of complex and rapidly advancing technologies. This forward-thinking approach keeps Aehr at the forefront of semiconductor testing and positions them as a preferred partner for companies striving for quality and reliability.
Proven Legacy of Innovation: With a history dating back to 1977, Aehr Test Systems boasts a remarkable legacy of innovation and adaptability. The company has consistently evolved to meet the ever-changing demands of the semiconductor industry and has earned the trust of leading manufacturers worldwide. This enduring commitment to progress and reliability solidifies Aehr’s competitive edge and establishes it as a promising investment opportunity in the semiconductor testing sector.
|Revenue Breakdown | IES Holdings
IES Holdings (IESC)
Looking to bolster your portfolio? IES Holdings is a leading provider in the industrial services sector delivering excellence across a wide range of industries. The company’s unique portfolio encompasses electrical power, technology systems, and environmental services, making it a powerhouse in vital sectors such as data centers, renewable energy, and government infrastructure. With over four decades of experience, and an unwavering commitment to innovation, safety, and sustainability, IES is a proven partner and a quality investment in the ever-evolving landscape of industrial services.
Return on Invested Capital: 9.50%
Profit Margin: 3.70%
Earnings Per Share (5-Year): 18.32%
Revenue (5-Year): 25.82%
Debt to Equity: 0.04
Market Cap: $1.275 Billion
Current Stock Price: $63.14
Intrinsic Value: $285.08
Margin of Safety: 77.85% Below Intrinsic Value
National Footprint with Local Expertise: IES Holdings leverages its national presence while maintaining local expertise. With offices strategically located across the United States, they can efficiently serve clients nationwide. This combination of a wide-reaching network and localized knowledge positions IES as a preferred partner for businesses seeking comprehensive industrial services with the added advantage of regional insight.
End-to-End Service Offering: IES offers an end-to-end suite of services encompassing electrical, technology, and environmental solutions. This comprehensive range of services simplifies project management for clients by providing a single source for various critical infrastructure needs. From design and installation to maintenance and support, IES’ holistic approach streamlines operations and minimizes the complexity of coordinating multiple service providers.
Proactive Technology Integration: IES Holdings is at the forefront of technology integration in industrial services. They consistently embrace and implement cutting-edge technologies, including smart building systems and renewable energy solutions. This proactiveness ensures that their clients benefit from the latest advancements in energy efficiency, sustainability, and automation, giving them a significant competitive advantage in sectors driven by innovation.
|Market Opportunity Map for Industrial IoT| Digi International
Digi International (DGII)
Surprisingly worth less than $1 billion, Digi International is a technology powerhouse at the forefront of the digital transformation landscape. The company specializes in providing cutting-edge Internet of Things (IoT) connectivity solutions and empowers businesses across diverse industries by enabling real-time data communication, remote monitoring, and secure device management. As IoT becomes increasingly integral to modern operations, Digi International’s commitment to innovation, security, and reliability makes it a top pick for anyone seeking to harness the full potential of the digital age.
Gross Margin: 49.53%
Revenue (5-Year): 61.94%
Debt to Equity: 0.12
Cash on Hand: $219.5 Million
Market Cap: $1.145 Billion
Current Stock Price: $19.08
Explosive Growth in IoT Adoption: Digi International is poised to ride the wave of explosive growth in IoT adoption across various industries. As businesses seek to enhance efficiency, gather real-time data, and improve decision-making, Digi’s IoT connectivity solutions are in high demand. The ongoing proliferation of connected devices, smart systems, and Industry 4.0 initiatives positions Digi for substantial revenue expansion and market leadership.
Increasing Emphasis on Remote Monitoring and Security: The global landscape is witnessing an increasing emphasis on remote monitoring and security, driven by factors like the need for remote work solutions and heightened cybersecurity concerns. Digi’s robust, secure, and scalable IoT connectivity solutions perfectly align with these trends. Their ability to provide reliable, real-time data transmission and remote device management makes Digi a pivotal player in addressing the evolving demands of businesses and institutions worldwide.
Innovation and Adaptability: Digi International’s history of innovation and adaptability is a catalyst in itself. The company continually evolves to stay ahead in the fast-paced technology sector. With a focus on emerging technologies, such as 5G and edge computing, Digi is well-positioned to remain at the cutting edge of IoT connectivity. This commitment to innovation ensures that Digi International not only adapts to industry changes but often anticipates and drives them, making it an attractive choice for investors seeking growth and sustainability in the tech sector.
Our first goal as investors is to never lose
Small or early growth companies (i.e. less than $1 billion market cap) may not be profitable or have a durable competitive advantage quite yet, but they still pack a punch. Investing in these businesses is a tricky game, but if you can spot them before they take off, it may be the only investment you ever need to make. To spot a rising star, the business must be financially stable (i.e. high operating margin, growing revenues, little to no debt, and ample cash on hand), have a large addressable market with multiple catalysts, and a highly ambitious and motivated management team that is willing to do whatever it takes to succeed. If you can find early-stage businesses with these characteristics, then you may be on the path to financial freedom quicker than you think.