3 High-value Moonshots to overcome Powell’s Taper Tantrum
This article is taken from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s 100 potential picks, subscribe to his mailing list here.
What Jerome Powell gives he takes
Jerome Powell is coming for your braaaains – uh, gaaaaains…
I warned people for months that the Federal Reserve was going to act. The last time inflation was this high, Michael Jackson had just released “Thriller,” and the Fed would ultimately be forced to create a mini-recession worthy of the zombie apocalypse-themed song.
Today, the Fed is recreating a new take on that ’80s hit. But instead of the dancing undead, we have stocks of zombified memes: MicroVision (NASDAQ:MVIS), Bed bath and beyond (NASDAQ:BBBY) and many more dropped to double digits on the announcement.
As for the stars of the series? Even they look a little under the weather. My choice n ° 5 for 2020, Therapeutic Crispr (NASDAQ:CRSP), lost 12% of its value after the Fed’s announcement. And Cathie Wood was once untouchable ETF ARKK Invest (NYSEARCA:ARKK) is hovering around its 52-week low after falling 9%.
In total, investors saw $ 1.5 trillion in stocks and crypto stocks disappear overnight.
Still, there were some bright spots. Volt Information Sciences (NYSEAMERICAN:VOLT), Armstrong Floor (NYSE:AFI) and other deep value games from Moonshot are actually on the rise. These “ugly” value games party while other stocks suffer Night of the Living Dead.
Plus, tomorrow at 4 p.m. ET, Louis Navellier is hosting a special event called his Big Bet – where he’ll reveal the next big trend and walk you through how to get two FREE stock picks that are part of it. The event is free, but you must register in advance. Go here to register now.
Until then, we’ll take another look at these cheap choices and see why these everlasting businesses are still worth the money in any Moonshot investor’s portfolio.
Profits today, benefits tomorrow
If you’re only going to learn one financial term, you should make it this one:
Actual net value (VAN).
The simple concept tells us that $ 100 in your pocket today is worth more than the $ 100 that was promised to you in a year or two. Suffice to say that a bird (or zombie) in hand is worth two in the bush.
In Wall Street parlance, future profits are “discounted” to present values. The higher the interest rate, the larger the discount.
And guess what… the concept works.
When the Federal Reserve announced it was cutting its bond purchases and raising rates, companies making profits in the present (i.e., cash-generating value games) held up. Meanwhile, companies whose profits are expected in the future (i.e. unprofitable tech startups) have seen their values drop significantly. Cryptos, which have no outright profits, declined the most.
Today’s newsletter highlights some of those companies making a profit in the present. And don’t worry if these stocks look straight out of 1982. Like I said before, the market doesn’t award style points for getting it right.
Armstrong Floor (AFI)
In November, I made a somewhat unusual call:
Given its weak momentum, this Pennsylvania-based flooring company violated my Golden Rule of Penny Stock Investing: Buy penny stocks after they start to recover.
But AFI has changed the situation: its ultra low price.
“With one of the cheapest valuations in the industry,” I wrote in November, “AFI is a bet many investors should be prepared to make.”
The stock would drop immediately by 20% (a nice slap to the head for ignoring the golden rule). But since then, the story has started to unfold. Stock prices climbed 60% after the company announced plans to sell. And at $ 2.25, AFI still has a lot of juice to run.
As rates begin to rise, don’t let this high value game go unnoticed.
Information Science Volt (VOLT)
When I chose VOLT as my # 2 investment for 2022, I did so knowing how terrible the business looked.
“It’s the ugly, dilapidated homes in derelict neighborhoods that the proper realtors avoid,” I said for comparison.
Yet these low-margin recruiting firms are precisely the companies that operate during times of inflation. In 1982, VOLT saw its shares go from $ 2.55 to a high of $ 7.17 the following year.
The reason has everything to do with the NPV. Rising current incomes, along with relatively low expectations, mean VOLT is less responsive to Fed rate hikes. The company will also benefit from a booming labor market.
Of course, today’s job market is very different from that of 1982. Wage growth is much stronger now and recruiting companies are struggling to find enough workers.
Still, the story loves a good rhyme. And with more and more people looking to re-enter the workforce, companies like Volt Information Science could relive a bygone era.
Finally, POSaBIT (OTCMKTS:POSAF) was a surprising winner of the Fed’s “Taper Tantrum”.
This Canada-based payments company is a weirdly profitable startup, generating $ 0.9 million in profit in the third quarter (after you remove the fees for non-cash warrants). Gross profits have remained stable and the company now expects to increase its revenue by 158%.
It is not your typical startup that’s losing money. Instead, she is a fast growing cash cow.
It is therefore not surprising that the POSAF stock has performed well, up 30% since Christmas.
Don’t expect POSaBIT to come back 10x in a month. But letting the business grow long enough, it sure could do it.
The zombies of “Thriller”
All has not gone well in the world of deep value.
After jumping nearly 20% in December, value shares are playing Rite Help (NYSE:RAD) fell back to earth. AMC Entertainment (NYSE:AMC) and Bitcoin miner Iris Energy (NASDAQ:IREN) have also seen prices drop to double digits.
What is the common thread that links these companies?
Together, these three companies share nearly $ 10 billion in long-term debt. And as the Fed begins to raise interest rates, these companies will suddenly find their debts much more expensive to pay off. Instead of paying an interest rate of 5%, imagine things doubling to 10% – or beyond …
At one point, these struggling companies morph into “zombie companies,” a term once reserved for Japanese organizations with debt. All profits (if any) will be funneled into interest payments, with no cash available to repay the principal or reinvest.
This creates an endless problem. The banks will not close these businesses because that would mean that there would be no more interest payments. But cash-strapped businesses will also not be successful because they are depleted. Investors are left with “zombies” unable to live, but also unable to die.
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As of the publication date, Tom Yeung does not have (directly or indirectly) any position in any of the stocks mentioned in this article.
Tom Yeung, CFA, is a Registered Investment Advisor whose mission is to bring simplicity to the world of investing.