Some of the best investing ideas come from the buy side. SumZero, an online community of fund professionals, shared one of their most actionable ideas with Yahoo Finance: a buy on Ferrari (RACE). Steve Wood, founder of hedge fund Greenwood Investors -- which focuses on special situations and deep value opportunities -- joined Yahoo Finance to break down his positive view on the stock.
The niche automotive manufacturer debuted on the public markets on Oct. 20 at $52 a share and currently trades below that level. But Wood sees considerable upside ahead, particularly because of the company's luxury status.
Ferrari, which could earn a luxury multiple enjoyed by the likes of Hermes and LVMH, embraces exclusivity and scarcity value.
“Auto manufacturing is a cyclical business. Ferrari is not,” Wood says, which means that the Italian car maker enjoys recession-proof demand. For instance, Ferrari's sales were resilient in the 2009 period, even while other car companies were forced into bankruptcy, including General Motors (GM).
What’s more, unlike your standard Mercedes-Benz E-Class or Porsche 911, Ferraris actually appreciate in value over time. Vintage Ferraris are among the most coveted cars in the collector's market.
A loyal and repeat customer base (60% of sales are to existing owners) also aids revenue visibility. The company’s name and history are closely associated with its Formua 1 racing team -- Scuderia Ferrari, the most successful team in Formula 1 history -- further boosting its brand.
In terms of catalyst, Wood suggests investors play the name ahead of the January spin-off of Fiat-Chrysler's (FCAU) remaining stake in Ferrari to Fiat shareholders. “You’re going to get shares of Ferrari, and then what’s left behind is a company that’s going through a very large margin expansion program right now," he says, adding that investors would be getting it for the same price valuation as Volkswagen (VLKAY), which is in the process of navigating an emissions scandal.
All in all, Ferrari's low-volume strategy and emotional appeal have heightened demand for its cars. That, combined with growing margins and geographic expansion means the company is a winning bet, says Wood.
[Disclosure: Wood was long Fiat-Chrystler at the time this article was written and video was taped.]
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