Does Moonshot Investing Make You Uncomfortable? It Should.
Any real estate investor knows you don’t get rich by buying beautiful, fully priced houses. Instead, the best deals come from scooping up questionable properties at steep discounts.
“I was dancing on the skeletons of other people’s mistakes,” said billionaire real estate investor Sam Zell in a 2005 interview. The REIT mogul earned his wealth buying multi-family units during the 1973 real estate crash.
Equity investments are the same. The biggest winners I’ve written about — including bankrupt Hertz (OTCMKTS:HTZZ) and short squeeze Tilray (NASDAQ:TLRY) — went on to gain 250% or more. Neither of those names were particularly loved by the Wall Street elite.
But you already know that.
That’s because you have probably landed some home runs of your own. Every Moonshot investor remembers their first five-bagger. And it probably looked a lot like the bets I talk about here every day.
So how can you find more of these high-potential companies that make traditional growth investors squirm? Simple. Consider the businesses that only private fund managers will touch.
My colleague Luke Lango and I have been doing this for years. And in Luke’s case, he’s picked out seven stocks that look bananas to traditionalists. These companies are small-caps working in cutting-edge industries from AI to mobile e-sports. And Luke’s given us special permission to share part of that list.
To get the full list, subscribe to Luke’s exclusive, technology-focused investment advisory service, Innovation Investor.
Today, we’ll take a deeper look at some of these investments and why it’s normal to feel uncomfortable when you’re buying true Moonshots.
Do You Have the Stomach for Moonshot Investing?
When I graduated from Princeton and became a CFA Charterholder, people expected I would work on Wall Street forever. That “safe” route could have meant spending a lifetime recommending between Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) for significant funds.
“Nobody ever got fired for buying IBM (NYSE:IBM),” went an old saying in the enterprise tech world. And in finance, the same holds for conservative blue-chip stocks.
But I was an exception to the rule — and you probably are too. The more you know about small-cap stock investing, the more inefficiencies you’ll find (and besides, there’s no rule banning ordinary Americans from investing like private fund managers in the stock market).
So here I am, helping folks like you become your own fund manager. Because while the key to incredible financial success might be starting your own business, owning great ones can also get you there.
Moonshots Versus Swarm Trading
But here’s where the problems begin: how do you differentiate legitimate Moonshots from short-term pumps?
Consider Airbnb (NASDAQ:ABNB), the home-sharing website that went public last December.
When ABNB listed that month, I was convinced the shares were worth at least $130 — far higher than the sub-$50 price their bookrunners initially proposed.
Airbnb indeed rose to my target price on IPO day, earning me the satisfaction of knowing that my financial models worked. But then something happened that no discounted cash flow (DCF) spreadsheet could ever predict: retail investors decided to take the stock on a joyride.
ABNB stock was pumped to $220 before swan-diving back to $130 within months. In all, investors who held on at the peak lost a combined $55 billion.
Generation Robinhood? Meet Hyperscale Stocks
That’s why stocks like Robinhood don’t particularly trigger my interest. Yes, the stock has gone up 100% since opening day. But the app-based brokerage firm is already well-developed; the most significant upside was made by venture capitalists who got in years ago.
To invest like a private fund manager, you need to think like one. And that involves considering far smaller companies earlier in their adoption. So today, I’m reviewing two of Luke Lango’s top seven Hyperscale Stocks (as a reminder, you can gain complete access to Luke Lango’s special report on these seven “hyperscale” stocks by subscribing to Innovation Investor here).
Let’s face it. AI is still a long way off from making a good conversation partner.
In 2016, Twitter (NYSE:TWTR) users turned Microsoft’s (NASDAQ:MSFT) AI bot, Tay, into a racist Tweeter by feeding her bigoted primers. And not much has changed since. Whenever I come across online chat support, it still degenerates into 15 minutes of me convincing a robot that I need to talk to an actual person.
But LivePerson (NASDAQ:LPSN) is trying to change that.
In 2017, the 26-year-old company launched LiveEngage, an AI-powered customer service chatbot. It turned out to be a lifesaver for the firm (even if not for me as a customer). As enterprises realized the limitations of offshore support staff, many began turning back to American customer support centers — and used LiveEngage to offset the cost.
Today, LivePerson is growing at 26%, a rate the firm expects to sustain through 2022.
Just take it from Luke Lango: “If you’re looking for an explosive, hyperscale small-cap AI stock to supercharge your portfolio in the Roaring Twenties, LivePerson stock is worth a look.”
But LivePerson isn’t exactly your standard blue-chip investment; CEO and founder Rob LoCascio has long struggled to manage the company’s acquisitions. In fact, since 2015, the firm has been taking write-downs that essentially wiped out all profits.
And it looks like Mr. LoCascio still hasn’t learned his lesson. By 2020, lopsided restructuring costs and rising R&D spend pushed losses to $105 million. M&A is apparently not his strong suit.
That pushed LPSN stock down to a 10x price-to-sales multiple — a ratio that looks more like slower-growing Facebook (NASDAQ:FB) than one representing a rocketship to the moon. But for investors who are willing to take a flyer on Mr. LoCascio’s checkered past, that’s precisely where super-normal returns can get made.
You only need one word to describe the fear of every streaming-service investor: Netflix (NASDAQ:NFLX).
Founder and CEO Reed Hastings’s firm has dominated the world of online streaming. At its peak in 2016, Netflix consumed over a third of all U.S. bandwidth. Today, only companies with billion-dollar war chests seem able to compete — think Apple, Amazon, Disney (NYSE:DIS) and other mega-cap firms.
That’s the reason Wall Street investors have such a love/hate relationship with fuboTV (NYSE:FUBO), a streaming service with prices starting at $65 a month for 118 channels. The startup’s strategy would make any business school professor cringe; the “stuck in the middle” firm is wedged between higher-cost cable TV and lower-cost streaming services. As a result, similar firms such as Sling (NASDAQ:DISH) have failed to maintain customer numbers.
Luke and I, on the other hand, see fuboTV as a bigger bet on cord-cutting. And we’re willing to look beyond the comparisons to Sling.
To us, fuboTV’s focus on sports makes it look far more like ESPN and Fox Sports — the cash cows of the media world. And the firm’s move into sports betting has also drawn in long-term hedge fund investors such as David Einhorn’s Greenlight Capital.
Put another way, fuboTV is starting to shake up the stodgy media business. A talented tech team — plus 105% subscriber growth in Q1 — means this $3.7 billion firm could quickly grow 10x over the next decade.
Getting Comfortable with the Uncomfortable
You’ll notice that Luke and I could have easily given you Google (NASDAQ:GOOG, NASDAQ:GOOGL) (AI) and Netflix (streaming) instead of LivePerson and fuboTV. And if we were working at a white-shoe wealth management firm, that’s what you would have gotten.
But we know you’re not here just to earn your 5.3% cost of equity. I’d bet most of my readers have already invested most of their stock and 401(k) portfolio in broad-based target-date funds.
You’re here because you know that the remaining portion of “fun money” can be the key to super-normal returns. And besides, what’s not to love about landing a Moonshot every now and then?
Learning to Invest in Moonshots
“It’s not supposed to be easy,” Charlie Munger once said about investing. “Anyone who finds it easy is stupid.”
Warren Buffett’s right-hand man had a point. There’s only one way to generate above-average stock returns: you need to be an above-average investor.
Often, people take that truism to extremes. I have a close friend who admitted buying AMC (NYSE:AMC) at $40 last month in hopes of landing a GameStop (NYSE:GME) Moonshot (I talked him into taking profits at $50 before the stock crashed). These investors stake their money on what they think others will do… and then try passing the hot potato before it burns them.
But unless you’re a full-time trader (or quantitative market-maker), gambling on day-to-day momentum isn’t a recipe for lasting success.
Instead, my favorite Moonshots are those that Wall Street dare not touch. My personal favorite was buying into the bankrupt American Airlines (NASDAQ:AAL) / US Air merger back when Warren Buffett still considered the industry a “bottomless pit.”
That’s because, in the world of inefficient markets and mispriced assets, hard research work wins. And only by investing in a non-average portfolio can you achieve non-average results.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.