This Under-the-Radar Stock Has the Right Chemistry

Ingevity Corp. is not well followed by the investment community. That makes it possible for its shares to get inappropriately undervalued, like it is today. Here is how the company describes its business: There has been nothing but good company-specific news on NGVT since its May 15, 2016 spin-off from what was then Westvaco, now called WestRock . Over the past six years, all major business metrics surged as detailed below. If this year's estimate proves accurate, EPS and cash flow per share will both have grown by over 250%. Book value will be more than 550% higher. Shares outstanding are down by almost 10% over that period as well, helping juice earnings per share. Surprisingly, continuous shareholders have only earned 74.1% from exactly six years earlier. That is due strictly to prince-to-earnings compression. NGVT commanded $120.40 (24.4-times earnings) in early 2019 yet is offered right now for less than 12-times this year's estimate. That illogical share price action is unlikely to last. A large catch-up move higher is typically how discrepancies like that are resolved. What should NGVT be selling for based on its own long-term metrics? A more typical multiple appears to be at least 20-times. Throw out the Covid year of 2020 and NGVT's long-term average price-to-earnings was 20.4-times. I'm conservatively using a 19 P/E to call for $120.65 for NGVT by the end of 2023. That's far from an upper limit if the public comes to its senses. Yahoo Finance appears way too low in looking for only $91.38 by this time next summer. That implies NGVT will only sell for 13.3-times fast growing earnings, well below its historically normal valuation. Even so, simply hitting that modest goal would deliver a not-too-shabby 25% over the coming year. Quantitatively-based FastGraphs is much more upbeat on NGVT's future share price trajectory. It sees 19.97-times as the proper P/E leading to fair value projections of $122.82 by the end of this year and $130.61 by Dec. 31, 2023. Whichever source you think might be most accurate the potential upside runs from 25.1% to north of 70% within a year. Most of us would be happy to own stocks with returns like that. NGVT has only had lower P/Es than now twice in history. The first instance came at the Covid-panic low. Astute buyers who picked up shares near $25 were delighted to see almost $90 about a year later. The second time came in March of this year with NVGT at $56.30 (9.2-times 2022 EPS). As recently as Aug. 12, NGVT changed hands at $75.11 intraday. That represented a 5-month, 33.4% bounce. There is every reason to believe the next move up will be even greater. It's time to buy some NGVT shares. I wrote about this stock last February when NGVT was quoted at $66.47. Besides recommending outright purchase I also suggested shorting Oct. 21, 2022 expiration date puts at strikes of $65, $70 and $75. Here is the graphic detailing pricing on those last Feb. 18. Anyone who followed my lead back then locked in potential gains and nice margins of safety as shown below. There are almost exactly two months until expiration day. I'm expecting higher prices for NGVT by Oct. 21. Assume nothing changes up, or down, by then and the table above shows how well the original trades would work out. Sellers of the two more conservative, $65 and $70 strike puts, would see them expire worthless. For option sellers that represents the best-case scenario. Net gains would be either $650 or $920 per each 100-share commitment. Traders who went with the riskier $75 strike price puts would have the last laugh, even though their options still have not quite $2 in intrinsic value. If today was expiration day, they could buy to close those options while netting over $10 per share. They would also have the ability to do nothing, accepting exercise of NGVT shares at a net cost of $62.80 per share. That's not bad when the stock is clearly trading way above that and with excellent forward prospects. Ingevity's options now extend out as far April 21, 2023. Here are what the pricing was for those as of Friday Aug. 19, 2022 with NGVT at $73.03. Those who missed out on selling the October puts, or who did but want more exposure, can now collect generous premiums for shorting those April 2023 puts. Future stock market action can never be guaranteed. NGVT's EPS grew by about 26% since 2020. Its share price has barely changed. Standing ready to buy at below $65 (via selling April 2023 $65 or $70 puts) appears to be another great bet that should work out splendidly.

This Under-the-Radar Stock Has the Right Chemistry

This is not an obvious choice for most investors. But that's part of what makes it a great opportunity.

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