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INVESTING IDEAS - page 40

Discover and validate investing ideas with valuation models and charts.

Should You Buy Under Armour Inc (NYSE: UA) Now?

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Under Armour Inc (NYSE: UA) investors have enjoyed seeing the stock price increase by 22.8% over the last month. As a mid-cap stock with decent coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s take a look at the company’s expected growth and valuation based on its most recent financial data to see if there is further upside moving forward.


What’s The Opportunity In Under Armour?

Under Armour appears to be overvalued by -22.3% at the moment, based on 9 separate valuation models. The stock is currently trading at $18.50 on the market compared to our average intrinsic value of $14.37. This means that the buying opportunity has probably disappeared for now.

Under Armour Inc Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $18.87 2.0%
5-yr DCF Revenue Exit $20.96 13.3%
Peer Revenue Multiples $16.17 -12.6%
10-yr DCF EBITDA Exit $14.52 -21.5%
5-yr DCF EBITDA Exit $14.04 -24.1%
Peer EBITDA Multiples $7.71 -58.3%
10-yr DCF Growth Exit $10.52 -43.1%
5-yr DCF Growth Exit $7.13 -61.4%
Earnings Power Value $19.40 4.9%
Average $14.37 -22.3%

Click on any of the analyses above to view the latest model with real-time data.

In addition to this, it seems like Under Armour’s share price is quite stable, which could mean two things. One, it may take the share price a while to fall back down to an attractive buying range, and two, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta of -0.25.


Can We Expect Growth From Under Armour?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matters the most, a more compelling investment thesis would be high growth potential at a cheap price.

Under Armour projected ebitda chartsource: finbox.io data explorer

With EBITDA expected to grow on average of 33.6% over the next couple years, the future certainly appears bright for Under Armour. It looks like higher cash flows are in the cards for shareholders, which should feed into a higher share valuation.


What This Means For Investors

Growth investors typically look to invest in companies that are expanding sales, gaining market share and building customer bases. On the other hand, value investors often argue that the most successful investments are in companies that deliver the highest cash flows while trading at the lowest valuation.

But why not put those hands together? A company that has both growth and value characteristics would certainly make the most attractive investment. So what did we find out about Under Armour?

Under Armour has positioned itself so that double-digit growth appears to be a reasonable assumption for the foreseeable future. However, this growth does not look highly attractive at current trading levels. As such, investors may want to hold off on buying or adding to their UA position for the time being.

It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on Under Armour by taking a look at the following:

Valuation Metrics: what is Under Armour’s price to book ratio and how does it compare to its peers? Analyze Price / Book here.

Risk Metrics: what is Under Armour’s CapEx coverage? This is the amount a company outlays for capital assets for each dollar it generates from those investments. View the company’s CapEx coverage here.

Efficiency Metrics: inventory turnover is a ratio that measures the number of times a company’s inventory is sold and replaced over the year. View Under Armour’s inventory turnover here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Can Dividend Investors Find Value In Mercury General Corporation (NYSE: MCY) Stock?

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Mercury General Corporation (NYSE: MCY) is currently paying investors an above average dividend yield of 5.3% while the Financials sector median stands at 2.2%. Even though this makes Mercury General look attractive relative to its peers, it’s useful to understand the company’s future dividend potential. Will Mercury General’s bottom line be the main catalyst driving future growth or maybe its payout ratio? Understanding these components and how they impact value may change your mind on the company’s future prospects.


Is A Dividend Analysis Appropriate?

Dividend Discount Model (DDM) is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments.

However, before walking through my dividend analysis for Mercury General, it’s first helpful to determine if this is actually an appropriate technique to be used when estimating its fair value. Many analysts are often biased towards one specific valuation approach which is typically a mistake that can negatively impact investment decisions and result in trading losses or missed opportunities. Every company has unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. Mercury General’s debt to equity ratio has stayed relatively stable over last few years hitting a low of 15.9% in December 2015 and a high of 22.1% in March 2018. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

We now must determine if Mercury General pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? This helps figure out if the company distributes the majority of its profits to shareholders in the form of dividends.

Mercury General Payout Ratio Table

Source: Mercury General dividend discount model

Mercury General paid out a total of $138 million in cash dividends to shareholders in its most recent fiscal year Dec-17 representing a payout ratio of 95.2%. Therefore, it is fitting to use a dividend discount model when calculating the intrinsic value of Mercury General stock.


How To Project Mercury General’s Dividends

Since forecasting dividends directly can be difficult, the first step in building a dividend discount model is to project net income. So let’s create a net income forecast for the next five years and use that as the basis for our future dividends.

Applying consensus estimates, Wall Street is projecting a healthy growth rate in the company’s bottom-line over the next five years. Net income is expected to grow at an average annual rate of 19% bringing net income to $344 million by fiscal year 2022.

Mercury General Net Income Growth Chart

Source: Mercury General Projected Net Income Growth

I apply the net profit estimates above to drive my dividend forecast. The next step is to project the company’s payout ratio. In my estimates shown in the table below, I select a 90.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

Mercury General Dividend Forecast

Source: Mercury General dividend discount model


Discounting Mercury General’s Future Dividends

The final step is to present value the forecasted dividend distributions using a discount rate. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I concluded a reasonable cost of equity for the company to be 9.7% at the midpoint. Although I don’t walk you through the CAPM assumptions that got me there, you can view the calculations using real-time data at finbox.io’s Mercury General WACC model page.

Mercury General Dividend Fair Value Conclusion

In conclusion, my dividend discount model calculates a fair value per share for Mercury General of $63.57, 34.3% above its current stock price of $47.34. MCY appears to be an undervalued stock based on the company’s future dividend potential alone. Therefore, now may be a good time to purchase shares or increase your position in the company.


What This Means For Investors

An important component of the dividend discount model that investors should understand is that the technique will inherently undervalue a stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. Meaning the approach does not capture value that would otherwise build up as cash on the balance sheet. In practice, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

Understanding that this approach calculates a conservative intrinsic value estimate is a very promising sign for investors searching for an entry point to buy the stock. Shares of Mercury General currently appear to be undervalued based on its future dividend potential alone. This means that MCY may have significantly more upside than what I’ve calculated above.

Although a dividend discount model on its own is not necessarily indicative of a stock’s fair value, it does offer a number of useful insights. This valuation should only be the start of your analysis in relation to your total research. I recommend that you continue your review of Mercury General to gain a better understanding of its underlying fundamentals.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Should You Buy Foot Locker, Inc (NYSE: FL) at $54.49?

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Shares of Foot Locker, Inc (NYSE: FL) are receiving a lot of investor interest as of late due to the stock’s 25.5% increase over the last month. Shareholders are now asking themselves whether the company’s current stock price is reflective of its true value or if shares have even further upside from here.

Let’s take a look at Foot Locker’s value and outlook based on its most recent financial data to see if there are any catalysts for a price change.


What Is Foot Locker Worth?

Welcoming news for investors, Foot Locker is still trading at a fairly cheap price. According to our 11 valuation analyses, the intrinsic value for the stock is $63.66 per share and is currently trading at $54.49 in the market. This means that there is still an opportunity to buy now.

Foot Locker, Inc Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $70.74 29.8%
5-yr DCF Revenue Exit $74.91 37.5%
Peer Revenue Multiples $78.23 43.6%
10-yr DCF EBITDA Exit $71.44 31.1%
5-yr DCF EBITDA Exit $75.94 39.4%
Peer EBITDA Multiples $67.29 23.5%
10-yr DCF Growth Exit $61.53 12.9%
5-yr DCF Growth Exit $61.38 12.6%
Peer P/E Multiples $53.79 -1.3%
Dividend Discount Model $33.74 -38.1%
Dividend Discount Model (multi-stage) $51.29 -5.9%
Average $63.66 16.8%

Click on any of the analyses above to view the latest model with real-time data.

Foot Locker’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta of 0.47. If you believe the share price should eventually reach its true value, a low beta could suggest it is unlikely to rapidly do so anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range.


How Much Growth Will Foot Locker Generate?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

Foot Locker projected net income chartsource: finbox.io data explorer

With net income expected to grow at an average rate of 13.9% over the next couple years, the future certainly appears bright for Foot Locker. It looks like higher cash flows are in the cards for shareholders, which should feed into a higher stock valuation.


Next Steps

While many investors tend to categorize stocks as either value or growth plays, the most successful investors view growth in conjunction with a company’s value. Take legendary investor Peter Lynch for example, who is widely known for popularizing the term growth at a reasonable price (GARP).

GARP is a strategy that combines aspects of both growth and value investing techniques by finding high growth companies that don’t trade at overly high valuations. In the application of this strategy, Lynch achieved 29% annualized returns as the manager of Fidelity’s Magellan Fund from 1977 to 1990. Needless to say the importance of analyzing a company’s fair value in addition to its growth prospects.

Foot Locker’s optimistic future growth does not appear to have been fully factored into the current share price with the stock still trading below its intrinsic value. Therefore, it may be a good time to purchase shares or increase your position in the company.

However, if you have not done so already, I highly recommend you complete your research on Foot Locker by taking a look at the following:

Efficiency Metrics: how much free cash flow does Foot Locker generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin here.

Risk Metrics: what is Foot Locker’s Altman Z score? It’s a famous formula used to predict the probability that a firm will go into bankruptcy within two years. View the company’s Altman Z score here.

Valuation Metrics: how much upside do shares of Foot Locker have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Time To Buy California Resources Corp (NYSE: CRC)?

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California Resources Corp (NYSE: CRC), an energy company with a market capitalization of $1.6 billion, saw its share price increase by 151.5% over the prior three months. As a small-cap stock with decent coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. Is there still an opportunity here to buy? Let’s examine CRC’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.


Is CRC Still Cheap?

According to my valuation models, the stock is currently overvalued by approximately -28.3%, trading at $36.74 compared to its intrinsic value of $26.35. Not the best news for investors looking to buy!

California Resources Corp Valuation Detail
Analysis Model Fair Value Upside (Downside)
Peer Revenue Multiples $34.31 -6.6%
10-yr DCF Growth Exit $27.91 -24.0%
5-yr DCF Growth Exit $22.44 -38.9%
Dividend Discount Model (multi-stage) $20.76 -43.5%
Average $26.35 -28.3%

Click on any of the analyses above to view the latest model with real-time data.

However, will there be another opportunity to buy low in the future? Given that CRC’s stock is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) could mean the price can sink lower, giving investors another chance to buy in the future. This is based on its beta of 5.96, which is a good indicator for share price volatility.


What Does The Future Of CRC Look Like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

CRC projected ebitda chartsource: finbox.io data explorer

With EBITDA expected to grow on average of 17.8% over the next couple years, the future certainly appears bright for CRC. It looks like higher cash flows are in the cards for shareholders, which should feed into a higher share valuation.


How This Impacts You

Many investors separate stocks into value and growth categories based on quantitative metrics. However, one of the most famous investors in the world views this as foolish. In Warren Buffett’s 1992 letter to Berkshire Hathaway shareholders, Buffett touches upon a subject at odds with much of the investment industry:

“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’ Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking… In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.”

While investors tend to categorize stocks into value and growth, some of the most successful investors view growth as simply one component of a company’s value.

CRC has positioned itself so that double-digit growth appears to be a reasonable assumption for the foreseeable future. However, this growth does not look highly attractive at current trading levels. As such, investors may want to hold off on buying or adding to their CRC position for the time being.

But before making an investment decision, I recommend you continue to research CRC to get a more comprehensive view of the company by looking at:

Risk Metrics: how much interest coverage does CRC have? This is a ratio used to assess a firm’s ability to pay interest expenses based on operating profits (EBIT). View the company’s interest coverage here.

Valuation Metrics: what is CRC’s short ratio and how does it compare to its publicly traded peers? It represents the percentage of total shares outstanding that is being shorted. View the short ratio here.

Efficiency Metrics: fixed asset turnover is calculated by dividing revenue by average fixed assets. View CRC’s fixed asset turnover here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

When Should You Buy The Ensign Group, Inc (NASDAQ: ENSG)?

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The Ensign Group, Inc (NASDAQ: ENSG), a healthcare firm with a market capitalization of $1.9 billion, saw its share price increase by 30.1% over the prior three months. As a small-cap stock with decent coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. Is there still an opportunity here to buy? Let’s examine The Ensign Group’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.


Is The Ensign Group Still Cheap?

The stock seems fairly valued at the moment according to 9 separate valuation analyses. Shares are trading roughly 5% above its intrinsic value. This means if you were to buy The Ensign Group today, you’d be paying a reasonable price for it. If you believe that the stock is really worth $33.65, then there isn’t much room for the share price to appreciate beyond where it’s currently trading.

The Ensign Group, Inc Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF EBITDA Exit $42.08 18.7%
5-yr DCF EBITDA Exit $46.37 30.8%
Peer EBITDA Multiples $43.24 22.0%
10-yr DCF Growth Exit $29.68 -16.3%
5-yr DCF Growth Exit $29.48 -16.8%
Peer P/E Multiples $42.27 19.3%
Dividend Discount Model $22.16 -37.5%
Dividend Discount Model (multi-stage) $29.30 -17.3%
Earnings Power Value $18.22 -48.6%
Average $33.65 -5.1%

Click on any of the analyses above to view the latest model with real-time data.

In addition, it seems like The Ensign Group’s share price is quite stable, which could mean there may be less chances to buy low in the future now that it’s fairly valued. This is because the stock is less volatile than the wider market given its beta of 0.48.


What Does The Future Of The Ensign Group Look Like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

The Ensign Group projected revenue chartsource: finbox.io data explorer

With The Ensign Group’s relatively muted top-line growth of 4.7% expected over the next five years on average, growth doesn’t seem like a key catalyst for a buying decision, at least in the short to medium-term.


How This Impacts You

Many investors separate stocks into value and growth categories based on quantitative metrics. However, one of the most famous investors in the world views this as foolish. In Warren Buffett’s 1992 letter to Berkshire Hathaway shareholders, Buffett touches upon a subject at odds with much of the investment industry:

“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’ Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking… In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.”

While investors tend to categorize stocks into value and growth, some of the most successful investors view growth as simply one component of a company’s value.

The Ensign Group’s future growth is relatively low and the stock appears fairly valued at the moment according to our valuation models. As a shareholder, you may have already conducted your fundamental analysis on the company and the stock’s recent appreciation may have been expected. Therefore, it may be time for investors to take some chips off the table. For prospective investors looking to purchase shares of The Ensign Group, it may be worth holding off until the stock develops a larger margin of safety.

But before making an investment decision, I recommend you continue to research The Ensign Group to get a more comprehensive view of the company by looking at:

Risk Metrics: how is The Ensign Group’s financial health? Find out by viewing our financial leverage data metric which plots the dollars in total assets for each dollar of common equity over time.

Valuation Metrics: how much upside do shares of The Ensign Group have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Efficiency Metrics: is management becoming more or less efficient over time? Find out by analyzing the company’s asset turnover ratio which measures the dollars in revenue a company generates per dollar of assets.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

What Do The Dividends Of TransMontaigne Partners (NYSE: TLP) Say About Its Intrinsic Value?

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TransMontaigne Partners (NYSE: TLP) has distributed 144.6% of its profits in the form of dividends over the last twelve months making the stock a prime candidate to be valued using a dividend discount analysis. Operating as an energy company paying a dividend yield of 8.0%, could the small-cap stock be trading at an attractive valuation? Let’s take a look at the future dividend potential of TransMontaigne to see if there is any catalyst for a price change.


Application Of The Dividend Discount Model

The Dividend Discount Model (DDM) is a dividend-based valuation model that estimates the present value of a stock based on assumptions about its future dividend performance.

But before discussing the assumptions used in my dividend discount model for TransMontaigne, it’s first helpful to determine if this is actually an appropriate technique to be used when estimating its fair value. Many analysts find it difficult when trying to figure out the correct valuation methodology for a given company or are biased towards one specific approach. This is often a mistake which can negatively impact investment decisions and result in trading losses or missed opportunities. No two companies are the same and every business consists of unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. TransMontaigne’s debt to equity ratio has been relatively consistent over last few years with a range spanning only 17.4%. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

The next step is to determine if TransMontaigne pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? The table below provides this information in more detail.

TransMontaigne Payout Ratio Table

Source: TransMontaigne dividend discount model

TransMontaigne distributed a total of $53 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 152.8%. It appears that the company meets both criteria. Therefore, it is fitting to apply a dividend discount model when calculating the intrinsic value of TransMontaigne.


Projecting The Future Dividends Of TransMontaigne

The first step in building a dividend discount model is to forecast net income since forecasting dividends directly can be difficult. So let’s create a net income forecast for the next five years and use that as the basis for projecting future dividends.

Finbox.io applies consensus Wall Street estimates for the net income forecast when available. For the next fiscal year 2018, profits are expected to increase 12.2%, then grow 48.4% in 2019 and fall -10.2% in 2020.

TransMontaigne Net Income Growth Chart

Source: TransMontaigne Projected Net Income Growth

I use the projections above to serve as the basis for my dividend projections. The next step is to forecast the company’s payout ratio. In my estimates shown in the table below, I select a 90.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

TransMontaigne Dividend Forecast

Source: TransMontaigne dividend discount model


Calculating TransMontaigne’s Intrinsic Value

Finally, we can now calculate TransMontaigne’s intrinsic value by present valuing its forecasted dividends. Note that we apply the company’s cost of equity to discount the future dividends since these payments are made to common shareholders or equity owners. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I determined a reasonable cost of equity for TransMontaigne to be 15.3% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s TransMontaigne WACC model page.

TransMontaigne Dividend Fair Value Conclusion

My dividend forecast and cost of capital assumptions imply a fair value per share for TransMontaigne of $24.58, -35.3% below its current stock price of $37.65. Therefore, TLP appears to be an overvalued stock and not necessarily a good entry point opportunity.


Conclusion: Dividends Don’t Support Stock Price

Finding the true value of a company can sometimes be difficult but determining an appropriate valuation methodology should not be. Knowing when and when not to use the dividend discount model will help in your investment decision making process.

But it is important to note that a dividend discount model will inherently undervalue a company’s stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. In reality, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

This helps explain, at least partially, why TransMontaigne looks like an overvalued stock based on this approach. Nevertheless, a dividend discount analysis is still a helpful tool in combination with the understanding that it calculates a conservative intrinsic value estimate. Meaning an extremely attractive opportunity would be a stock where (1) a dividend discount model is appropriate and (2) shares looks undervalued based on its future dividends.

While a dividend discount analysis on its own is not necessarily indicative of a stock’s intrinsic value, it does provide helpful insights. I recommend that investors continue their research on TransMontaigne to gain a better understanding of all the factors driving its share price.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

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