The best stocks to own for the long term aren’t average companies that were bought at really low valuations.
No, the biggest stock market winners are tremendous growth companies that were purchased at reasonable values.
There is no disputing the fact that earnings growth is what drives stock performance over the long term.
Average companies don’t have a lot of growth. But great companies grow at a high rate for years and years.
Over a long period of time, your entry price on a stock is dwarfed in importance by the earnings growth the company can generate.
As an investor, I’ve not done well with technology stocks. It isn’t that I lose money owning them; it’s that I often think they are too expensive to buy.
Getting locked on valuation metrics has caused me to miss far too many great long-term growth stocks.
This week, I’ve got a technology stock for you that has a ton of earnings growth ahead of it and could be the rare tech stock that’s undervalued right now.
So let’s run it through The Value Meter.
The company is Alight (NYSE: ALIT).
Alight provides software solutions for payroll, health and benefits processing for large enterprises.
Over the past couple of years, Alight has made a significant investment in its business by upgrading to a cloud-based platform.
That investment is now set to pay off handsomely.
When I started researching the company, the first number that really got my attention was its 98% customer retention rate.
Alight signs three-to-five-year contracts with its customers (with protection from inflation built into the agreements) and gets paid on a per-employee basis.
Every new customer gets added to an ever-growing revenue stream, and a 98% retention rate means the company’s revenue is extremely sustainable.
It is very hard for a company to grow its revenue if it is constantly losing customers. And Alight basically never loses customers.
Alight’s growth engine is also ramping up.
In the company’s “Investor Day” presentation in September, it reported that its revenue had grown from $2.9 billion in 2021 to $3.3 billion over the trailing 12 months, a 14% increase in less than two years.
More importantly, cash flow from operations nearly tripled from $115 million to $330 million over the same span.
With Alight having fully completed its move to a cloud-based platform, I expect the company’s rates of revenue growth and cash flow growth will continue to increase.
But that’s only half the battle… What about its valuation?
The consensus earnings per share estimate for Alight in 2024 is $0.73.
Based on its current share price of $9, that means Alight is trading at just 12.3 times earnings.
It’s pretty rare that I see a chance to get a good technology business at less than 20 times earnings. With that in mind, Alight’s valuation looks great.
Alight is a company that is growing at a good clip, operates a high-margin software business and almost never loses a customer relationship.
Continued earnings growth should drive this stock higher in the months and years ahead.
The Value Meter rates Alight as being “Slightly Undervalued.”
— Jody Chudley
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Source: Wealthy Retirement