As a kid, when the holidays rolled around each year I would always get one present that was a surprise. My parents were pretty good at picking out the surprise present, so I definitely grew up loving the “surprise gift”. 

So as the holidays approach this year I wanted to reach into the bag of stocks and pull out a couple of surprise companies that could do well in 2024. These two stocks are unrelated, except for the fact that they should do well at this point in the economic cycle as we see improving economic conditions (for stocks other than just the mega caps), and as interest rates top out. Our “surprise” stocks are Live Ventures (LIVE), and El Pollo Loco Holdings (LOCO).  

Live Ventures (LIVE) is a holding company that purchases middle-market U.S. companies with a value-oriented selection process. Think of them as a mini-Berkshire Hathaway (BRKB).  

Live Ventures owns a number of companies, but two in particular should do well as mortgage rates come in and home equity lines open up again at reasonable interest rates. First, the company owns Flooring Liquidators and Marquis Industries. Both are focused on flooring for the housing market. 

Lower mortgage rates will allow not only for new home sales to accelerate, but will also allow for those “locked” in a 2% mortgage to move, and not pay 7-8% on their new mortgage. This should stimulate a flow of funds back into remodeling on top of new home sales. And that in turn should stimulate demand for both Marquis and Floor Liquidators, which Live just acquired this year. 

Second, the company owns Precision Marshall which makes high end precision ground flat stock and drill rod steel. Throw those terms out at your next holiday party to impress your friends! This means they produce high quality steel that is used to make everything from industrial machinery (drills, blades, etc.) to surgical equipment. 

An uptick in economic activity could unleash a wave of capital investments which have been declining as companies have pulled in their horns in the face of rising interest rates. This would directly benefit Live’s Precision Marshall holding which just recently completed the purchase of Kinetic, a high end blade manufacturer which has been in business since 1948.

In its latest earnings report Live reported a substantial increase in revenue as it built out its product lines via acquisition. As CEO Jon Isaac stated, “…revenue increased 34.1% and Adjusted EBITDA rose by 8.3%. This was largely driven by the strategic acquisitions of Flooring Liquidators, Inc. (“Flooring Liquidators”) and The Kinetic Co. (“Kinetic”), which together contributed a substantial $34.4 million in revenue and $4.0 million in Adjusted EBITDA for the quarter.”

At around $25 the stock trades at just 0.28 times sales and has gross margins of over 34%. The stock has been in a narrow range the second half of 2023, but looks like it could move back to the mid-$30s with a slight downtick in interest rates.

LIVE is an A rated stock in our POWR Ratings with a score of 95.15. Its highest component rating is in Sentiment outpacing over 91% of the stocks in our database. 

Our second “surprise” stock is El Pollo Loco Holdings (LOCO). El Pollo Loco has been managing through rising poultry costs this year, but has turned the corner by raising menu prices and focusing on locking down costs. 

LOCO is an upscale version of a QSR, or quick-service restaurant, providing fresh grilled chicken with a citrus marinade to give it a distinctive flavor. The company calls their concept “QSR+” as they grill the chicken in front of the customer to provide a visual component to their product…dinner and a show as it were.

The company operates around 500 restaurants in 6 states, which leaves plenty of room for growth as they move their juicy chicken concept outward from their base in California. And LOCO’s stock price may be as juicy as their chicken. 

The stock, trading at under $10, has a PE of only 11.5, and trades at just 0.78 times sales. For comparison, McDonald’s (MCD) PE currently sits at over 25. 

In the latest quarter revenue increased to $13.7 million from $6.9 million, almost 100%. As I mentioned above, this was due to a combination of higher menu prices and reduced costs. The company repurchased almost $27 million of stock in the quarter from an equity investor, and completed $1.9 million in public stock buybacks. 

LOCO is rated a B in our POWR Ratings. Not surprisingly its highest component rating is in the Value component where it ranks higher than 91% of the stocks we track. 

Lower rates should directly benefit the El Pollo Loco customer base, which should drive increased sales in what is already a low valuation stock. 

Happy Holidays, and I hope these two “surprise” stocks make you as happy as my childhood surprise gifts did me.   

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LIVE shares were trading at $25.10 per share on Thursday afternoon, down $0.55 (-2.14%). Year-to-date, LIVE has declined -19.81%, versus a 25.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA. More...

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