3 Amazing Anti-Bubble Bargains That Could Triple In The Next 5 Years

Jun. 15, 2021 6:59 PM ETBABA, BTI, OGN143 Comments98 Likes

Summary

  • The market is trading at some of the most overvalued levels in 20 years. Over the next five years, analysts expect 5% CAGR returns from the S&P 500.
  • That's about 1/3 of what investors have enjoyed for the last decade. But it's a market of stocks, not a stock market, and incredible bargains are always available.
  • Today OGN is 66% undervalued, the best bargain worth buying on Wall Street. Analysts expect 29% CAGR total returns over the next 5 years.
  • BTI is the best blue-chip bargain, offering almost 20% CAGR consensus total return potential over the next five years. This is why I've invested $100K and counting into this global aristocrat Super SWAN.
  • BABA is the best hyper-growth blue-chip bargain, offering over 300% return potential over the next five years, which is why I've bought $90,000 of it for my retirement portfolio.
  • This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »

Success business chart with green arrow up and USA dollars background. Profit and money. Financial and business graph. Stock market growth 3d illustration.
JuSun/iStock via Getty Images

While the market may not be as dangerously overvalued as some permabears may claim, there is no question the market is trading very richly today.

2023 S&P 500 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

2026 S&P 500 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

Analysts expect about 5% CAGR returns over the next five years, and that's assuming earnings grow 13.3% CAGR as expected. That's compared to 14% CAGR over the last 10 years.

But guess what? Even in the most overvalued market in US history, March 2000, there were still amazing bargains to be found. You could even buy blue-chips like Berkshire (BRK.B) at a 50% discount, and Enterprise Products Partners (EPD), was offering a very safe 12% yield.

In other words, it's always a market of stocks, not a stock market. No matter how absurd the broader market gets, something great is always on sale.

Today I wanted to highlight the 3 best bargains on Wall Street from the DK Masterlist, one of the world's highest quality watchlists.

  • All dividend champions

  • All dividend aristocrats

  • All dividend kings

  • All global aristocrats (such as BTI, ENB, and NVS)

  • All 12/12 Ultra Swans (as close to perfect quality as exists on Wall Street)

Dividend Kings Master List Sorted By Most Undervalued

(Source: Dividend Kings Research Terminal)

  • green = potentially good buy or better
  • blue = potentially reasonable buy
  • yellow = hold
  • red = potential trim/sell (33+ historically overvalued)

So let's take a look at why Organon (OGN), British American Tobacco (BTI), and Alibaba (BABA) have what it takes to potentially deliver 200+% returns over the next five years.

In other words, these amazing anti-bubble bargains are set to soar, and too cheap to ignore.

Organon: The Most Undervalued Company On Wall Street

Further Research Including Full Risk Analysis

The market hates uncertainty, and right now Merck's (MRK) new spin-off has a lot of uncertainty.

(Source: FactSet Research Terminal)

Just 3 analysts currently cover OGN, and it's a junk bond-rated company.

Organon Consensus Credit Rating

Rating Agency Credit Rating 30-Year Default/Bankruptcy Risk Chance of Losing 100% Of Your Investment
S&P BB stable outlook 17.0% 5.89
Moody's Ba2 (BB equivalent) 17.0% 5.89
Consensus BB stable outlook 17.0% 5.89

(Source: S&P, Moody's)

There is about a 1 in 6 chance that investors lose 100% of their investment in the next 30 years.

By no means is this an investment that's appropriate for everyone. In fact, it's not even a blue-chip, but a 7/12 speculative average quality company.

  • if it grows as expected it will eventually become a blue-chip quality company

Organon Balance Sheet Consensus Forecast

Year Debt/EBITDA (3.0 Or Less Safe According To Rating Agencies) Net Debt/EBITDA

Interest Coverage (8+ Safe)

2021 4.23 3.70 5.33
2022 4.15 3.26 5.82
2023 4.02 2.79 6.44
2024 3.65 1.98 7.04
2025 3.57 1.42 8.35

(Source: FactSet Research Terminal)

Management plans to deleverage to under 3.5X debt/EBITDA.

By 2025 analysts expect the balance sheet will be safe.

(Source: investor presentation)

The dividend is expected to grow at a modest pace, and consume about 1/4th of free cash flow.

Organon Consensus Dividend/Payout Ratio Forecast

Year Dividend Consensus EPS/Share Consensus Payout Ratio Retained Earnings Buyback Potential Debt Repayment Potential
2021 $0.41 $6.12 6.7% $1,445.37 19.75% 15.2%
2022 $0.99 $6.09 16.3% $1,290.96 17.64% 13.6%
2023 $1.05 $6.26 16.8% $1,318.81 18.02% 13.9%
Total 2021 Through 2026 $2.45 $18.47 13.3% $4,055.14 55.40% 43%

(Source: FactSet Research Terminal)

The low payout ratio will allow OGN to potentially pay off more than half its debt in the next three years, or buy back stock at a rate of 13+% annually at current valuations.

No non-dilutionary offset buybacks are expected for now, but if OGN keeps trading at such absurd valuations, then management says post-2023 it might start repurchasing shares.

To understand a company's valuation, when there is no historical valuation data, we must first know a reasonable estimate of how fast a company will grow.

(Source: investor presentation)

Management says 1% to 3% sales growth over time, and 2% to 4% earnings and cash flow growth.

Organon Consensus Profit Growth Forecast

Calendar Year Sales FCF EBITDA EBIT (Operating Income) Net Income
2021 $6,187 $1,385 $2,240 $2,133 $1,538
2022 $6,204 $1,310 $2,285 $2,152 $1,532
2023 $6,263 $1,352 $2,358 $2,190 $1,573
2024 $6,309 $1,557 $2,598 $2,287 $1,670
2025 $6,325 $1,578 $2,658 $2,339 $1,722
Annualized Growth 0.55% 3.32% 4.37% 2.33% 2.87%

(Source: FactSet Research Terminal)

The 3 analyst consensus is 2.8% CAGR growth.

How on earth can I be so excited about a relatively lower quality company, with paltry 3% expected growth?

OGN doesn't even yield that much, just 3.5% based on the consensus $1 dividend in 2022.

But here's why I've set 25 limits to buy OGN (3 of which have filled), chasing this potential future blue-chip to bottom, as long as the thesis remains intact.

(Source: FactSet Research Terminal)

OGN is currently trading at 4.7X forward earnings, based on management's initial guidance.

It's trading at 1.2X sales, and about 7.8X EV/EBITDA.

These are private equity valuations. In fact, OGN is currently trading at March 2020 valuations.

According to the Graham/Dodd fair value formula OGN is pricing in -7.6% CAGR growth forever.

In other words, according to the father of securities analysis, and valuation, OGN's sky-high earnings yield of 21.3% means that even if earnings fell by 50% every 10 years, you'd still earn very good returns over time.

Metric Reasonable Fair Value (Graham/Dodd) Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025
Earnings 14.1 $86.29 $85.87 $88.27 $93.34 $96.30
Average $86.29 $85.87 $88.27 $93.34 $96.30
Current Price $28.91

Discount To Fair Value

66.50% 66.33% 67.25% 69.03% 69.98%
Upside To Fair Value (Not including Dividends) 198.48% 197.02% 205.31% 222.87% 233.11%

The upside potential to Graham/Dodd fair value for OGN is mind-blowing.

Triple your money in a few years. Not on some speculative IPO, NFT, crypto, or meme stocks, but a slow-growing pharma priced as if it were on death's door when all available facts say it's not.

As long as OGN grows faster than zero, the dividend will likely remain safe.

As long as it grows faster than -7.6% CAGR, long-term investors who avoid becoming forced sellers for emotional or financial reasons will make decent returns.

In other words, OGN is the best anti-bubble fat pitch on Wall Street today.

We might not have as much data as we'd like, but what data we do have says OGN could generate Buffett-like returns in the coming years.

FAST Graphs can't yet forecast OGN's future returns, so I have to do that manually.

  • 2% to 4% CAGR growth consensus range (using 20% margins of error)
  • in-line with management guidance and 2.8% CAGR growth consensus from 3 analysts
  • 12.5 to 15 PE fair value range (based on Graham/Dodd fair value formula)

What kind of returns would investors see if OGN grows at 2% to 4% and trades at 12.5 to 15X earnings in five years?

  • 5-year consensus return potential range: 26% to 32% CAGR
  • consensus is 29.2% CAGR

Organon Risk-Adjusted Expected Return

5-Year Consensus Annualized Total Return Potential 29.20%
Conservative 50% Margin Of Error Adjusted Annualized Total Return Potential (from Chuck and JPMorgan) 14.60%
Bullish 50% Margin Of Error Adjusted Annualized Total Return Potential 43.80%
Conservative Probability-Weighted Expected Annualized Total Return (40% probability that analysts are wrong about any given company's growth rate, according to Peter Lynch, John Templeton, and Howard Marks) 8.76%
Bullish Probability-Weighted Expected Annualized Total Return (20% probability that analysts are wrong about any given company's growth rate) 35.04%
Mid-Range Probability-Weighted Expected Annualized Total Return Potential 21.90%
Ratio vs. S&P 500 9.73
Bankruptcy Risk 17.00%
Probability Of No Bankruptcy 83.0%
Risk-Adjusted Expected Total Return 18.18%
Ratio vs. S&P 500 8.08

OGN offers 8X the risk-adjusted expected return of the S&P 500.

That's better than BTI's 6X, matches BABA's 8X, and is almost as good as TIGR's 10X.

Even the risk-adjusted returns are on par with the greatest investors in history.

Now over the very long term, OGN might not make a great buy and hold forever investment.

  • 3.4% consensus yield + 2% to 4% growth = 5.4% to 7.4% CAGR total return potential
  • vs. 7.9% S&P 500 and 11.0% CAGR aristocrats

However, OGN's deep potential discount to fair value means that for the next 20 years, OGN could very well outperform the aristocrats.

Time Frame (Years) Starting Yield Growth Consensus Valuation Boost

Consensus Total Return Potential (Annualized)

10 3.4% 2.8% 11.4% 17.6%
15 3.4% 2.8% 7.5% 13.7%
20 3.4% 2.8% 5.5% 11.7%
25 3.4% 2.8% 4.4% 10.6%
30 3.4% 2.8% 3.7% 9.9%

For the next 10 to 20 years, OGN represents one of the highest probability/low-risk income opportunities on Wall Street.

British American Tobacco: The Best Blue-Chip Bargain On Wall Street

Further Research Including Full Risk Analysis

(Source: Tipranks)

I've recommended BTI almost two dozen times in the past 18 months. Including dividends, the average 12-month total return is about 19%, and every recommendation has made investors money within a year.

The thesis behind BTI and the reason I've been pounding the table about this Super SWAN for years is simple.

BTI Has A 22 Year Dividend Growth Streak, At Least

(Sources: investor presentations)

This is one of the most dependable high-yield investments in the world.

BTI Dividend Payout Ratio/Buyback/Debt Repayment Consensus Forecast

Year

Dividend Consensus

EPS/Share Consensus

Payout Ratio

Retained Earnings

Buyback Potential

Debt Repayment Potential

2021

$3.01

$4.57

65.9%

$3,579

5.6%

8.6%

2022

$3.20

$4.92

65.0%

$3,946

6.1%

9.8%

2023

$3.44

$5.27

65.3%

$4,198

6.5%

10.7%

2024

$3.58

$5.54

64.6%

$4,496

7.0%

10.2%

Total 2021–2024

$13.23

$20.30

65.2%

$16,219

25.3%

39%

(Source: FactSet Research Terminal)

BTI has a 65% payout ratio policy which will allow it to steadily deleverage while potentially buying back prodigious amounts of stock at the best valuations in 20 years.

(Source: FactSet Research Terminal)

Both on a forward PE and EV/EBITDA basis, BTI is priced for 0.2% CAGR long-term growth.

That's the growth rate at which the Graham/Dodd fair value formula says investors will earn attractive long-term returns.

(Source: Investor presentation)

Management says its plan for a smoke-free future can drive 7% to 9% CAGR long-term growth, basically BTI's historical growth rate.

(Source: FactSet Research Terminal)

Most analysts expect a more modest 4.5% CAGR growth rate. But when you're priced for 0.2% growth, 4.5% growth could deliver about 12.5% CAGR long-term returns for decades to come.

British American Tobacco Total Returns Since 1986

(Source: Portfolio Visualizer)

Which is about what BTI has delivered over the last 35 years.

A time when despite steadily falling cigarette volumes and ever-rising regulatory burdens, BTI has delivered market and aristocrat beating returns.

From bear market lows, such as we see today, investors have been able to achieve Buffett-like returns of 25% to 30% CAGR for the next 10 to 15 years.

If something should go wrong with the investment thesis, we'll know about it.

How We Monitor BTI's Risk Profile

  • 20 analysts
  • 3 credit rating agencies
  • 7 risk rating agencies
  • 27 experts who collectively know this business better than anyone other than management

What do the experts think BTI can deliver from these mouth-watering valuations?

BTI 2023 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

BTI 2026 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

And here's the 5-year return potential according to management's guidance.

BTI 2026 Management Guidance Return Potential

(Source: FAST Graphs, FactSet Research)

I've bought $100K worth of BTI over the past 2 years. In the next 2 years, if the valuation stays this attractive, I'll buy $100K more.

Remember that 100% of my BTI recommendations have made money for investors in the last 18 months, on average 19% total returns within a year.

We're not suffering just because BTI is taking its sweet time returning to fair value. In fact, the longer that takes the more safe and growing income we'll enjoy and the more money we'll make when it invariably returns to intrinsic value.

Alibaba: The Best Hyper-Growth Blue-Chip Bargain On Wall Street

Further Research Including Full Risk Analysis

BABA is not right for everyone, due to its complex risk profile.

How We Monitor BABA's Risk Profile

  • 61 analysts
  • 3 credit rating agencies
  • 7 risk rating agencies
  • 68 experts who collectively know this business better than anyone other than management

Rest assured that if BABA's thesis weakens, strengthens, or breaks entirely, we'll know about it and adjust our recommendations accordingly.

But right now BABA's thesis is as strong as ever.

The growth outlook has actually improved since the regulatory crackdown began in November.

(Source: FactSet Research Terminal)

More and more analysts are covering BABA over time, more than any other company on Wall Street I know of.

And the consensus from all 61 analysts, is a screaming "buy".

The growth consensus from all analysts has been stable between 22% and 26% for the past year.

That was true pre-regulatory crackdown, post-crackdown, and after every impressive earnings announcement, in which BABA has confirmed the hyper-growth thesis remains intact.

Metric Fiscal 2021 Growth 2022 consensus growth 2023 consensus growth 2024 consensus growth 2025 consensus growth

2026 consensus growth

Sales 56% 15% 21% 20% 24% 15%
EPS 36% 1% 27% 21% 20% 21%
Owner Earnings (Buffett smoothed out FCF) -3% 162% NA NA NA NA
Operating Cash Flow 42% 2% 27% 17% 0% NA
Free cash flow 47% -7% 30% 7% NA NA
EBITDA 50% 7% 23% 21% 38% NA
EBIT (operating profit) -2% 37% 39% 32% 11% NA

(Source: FAST Graphs, FactSet Research)

(Source: FactSet Research Terminal)

21.2X forward EBITDA and 17X EV/EBITDA? For a company growing at 25%?

PEG of 0.8? This is blue-chip hyper-growth at a reasonable price.

Metric Historical Fair Value Multiples (all-years) Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 Fiscal 2026
13-Year Median P/S 11.65 $478.82 $622.11 $756.09 $905.21 $1,123.06 $1,293.15
Earnings 32.24 $325.30 $328.53 $415.90 $502.30 $604.50 $732.17
Owner Earnings (Buffett smoothed out FCF) 24.57 $217.94 $571.76 NA NA NA NA
Operating Cash Flow 23.13 $311.33 $317.11 $401.54 $468.38 $467.23 NA
Free Cash Flow 30.68 $412.95 $293.30 $382.27 $409.58 NA NA
EBITDA 33.16 $367.91 $392.68 $481.61 $580.96 $801.48 NA
EBIT (operating income) 45.07 $227.81 $312.83 $435.50 $575.99 $637.29 NA
Average $311.22 $374.20 $454.34 $539.11 $666.51 $934.97
Current Price $214.47

Discount To Fair Value

31.09% 42.69% 52.80% 60.22% 67.82% 77.06%
Upside To Fair Value 45.11% 74.48% 111.84% 151.37% 210.77% 335.94%

(Source: FAST Graphs, FactSet Research)

In fact, BABA is the most undervalued hyper-growth blue-chip on Wall Street.

The upside to fair value is potentially over 300% in the coming years.

Alibaba 2023 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

Alibaba 2023 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

If Alibaba grows as analysts expect, and returns to historical market-determined fair value for BABA growing at 25% CAGR, then the stock will more than quadruple in the next five years.

Bottom Line: Anti-Bubble Bargains Are All Around Us If You Know Where To Look

I know quality, I know value, and I know disciplined financial science.

I've invested $191,000 into OGN, BTI, and BABA so far. Why? Because I know that deep value investing can lead to results like this.

My average ENB recommendation (18 of them), including dividends, has returned 28% CAGR within the first year.

My average PRU recommendation (10 of them), including dividends, has returned 61% CAGR within the first year.

My average MO recommendation (34 of them), including dividends, has returned 28% CAGR within the first year.

My average EPD recommendation (31 of them), including dividends, has returned 47% CAGR within the first year.

My average PII recommendation (12 of them), including dividends, has returned 37% CAGR within the first year.

My average MMP recommendation (9 of them), including dividends, has returned 33% CAGR within the first year.

My average AMZN recommendation (13 of them), has returned 28% CAGR within the first year.

These are amazing results, growth stock in a tech bubble-like returns, but mostly from attractively valued dividend blue-chips.

You don't have to pray for luck on Wall Street, you can make your own luck.

Not through crypto, NFTs, SPACs, meme stocks, unprofitable IPOs, etc, but purely through disciplined financial science.

Today OGN, BTI, and BABA represent the three most undervalued companies on Wall Street worth buying.

I can't tell you when they will return to fair value, but only that as long as their thesis remains intact, they eventually will. And anyone buying at today's valuations is likely to be thrilled with the results when they do.

Retiring rich isn't magic, it's just math.

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This article was written by

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Maximize your income with the world’s highest-quality dividend investments

Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.


The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).


I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.


My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.


With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.


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Disclosure: I am/we are long BTI, BABA, OGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns BTI, BABA, and OGN in our portfolios.

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