Chasing momentum in red-hot stocks riding behind a hyped trend can pose a hazard to your wealth, provided you’re not putting in the homework and analysis needed to determine whether or not a stock is actually trading at a discount to its true worth (or what some would refer to as intrinsic value).
Of course, not every winning stock at new highs is bound to reverse course. Often, winners find a way to keep on winning. But, at the same time, every few percentage points a stock marches higher, the more you’ll have to pay for admission and the less relative value you’ll get.
When it comes to some of the growthier names that are riding on a boom (think the ongoing AI revolution), it can be really hard to gauge just how much cash flows start to surge down the line. But instead of paying whatever price that Mr. Market commands, I think it makes sense to consider the trajectory while analyzing the potential scenarios that could play out in an uncertain environment.
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Don’t just chase momentum
Indeed, it’s never fun to think about the bear case and how much money you would lose prior to picking up shares of a stock. But, in my view, it’s essential, especially when it comes to names that have been recent multibaggers.
For such names, perhaps perfection (and then some) is already priced in. And, if that’s the case, you could be looking at a business that’s a generational winner poised to keep performing with a stock that might just do the opposite.
At the end of the day, what you pay matters just as much as the calibre of business we’re talking about. The perfect business might not have the perfect stock if there’s too much priced in, leaving very little room for a discount or positive surprise, major sources of alpha for stock pickers.
With that warning out of the way, let’s jump into a name that’s a play on the great AI data centre buildout, with a stock that’s nearly tripled in the past year, gaining more than 185%, at least as of the time of this writing.
Bird Construction: A silent AI winner that can fly higher
Enter shares of Bird Construction (TSX: BDT), a fantastic $4.5 billion mid-cap name that’s rapidly risen up the market-cap rankings of late. Indeed, the lesser-known gem is now becoming an established way to profit from the AI trade on the construction side.
Indeed, its infrastructure construction track record has been a major edge that’s helped it capitalize on one of the biggest infrastructure booms in recent memory. In a way, you could say that Bird Construction was in the right place at the right time. But, most importantly, it had the skill set and talent to make the most of the opportunity at hand.
With data centre buildouts continuing to blast off while Bird’s backlog swells, it feels like the explosive rally in the shares is more than warranted. But, for new investors, the big question is whether the boom is already priced in and whether there’s still more reward to be had for the risks taken on at these heights. With the multi-year data-centre boom poised to drive serious revenue growth while management looks to go after margin gains, it’s hard to bet against the stock.
At just 21.3 times forward price-to-earnings (P/E), I think the stock is very reasonably valued, even cheap if you think the AI data centre buildout is a multi-year effort that’s just kicking off. While I’m no fan of chasing heat, I think Bird Construction has the fundamentals, the narrative, and the valuation that back up the recent run. If management can keep executing, I wouldn’t be surprised if shares aren’t done yet as they break out again.
I have a feeling this isn’t the last we’ll hear about this rising star.
