2 Stocks that Could be the Next GME or AMC


Loaded Rifle Investing

Think back to early 2020 — a time when r/WallStreetBets was still a dark corner of the internet and the word “Robinhood” conjured images of line-dancing men in a Mel Brooks spoof.

cartoon of a hunter next to a lake with a shotgun aiming at ducks in the sky

Source: ONYXprj/shutterstock.com

What did AMC (NYSE:AMC) and GameStop’s (NYSE:GME) stock have in common?

Answer: they were CHEAP.

The Covid-19 pandemic sent shares of AMC Entertainment plummeting under $3, valuing the theater chain at under 0.05 times price-to-sales (P/S). GameStop sank further — the mall-based retailer’s valuation dropped to 0.02 times P/S. In other words, their market capitalizations looked like a rounding error compared to the size of their businesses.

It’s that cheapness that allowed Reddit users to make millions pumping up shares. NOT the memes… NOT the gamma squeeze. The only way to make 100x returns is buying assets that can potentially rise 100x.

I know it’s tempting to try finding the next Amazon (NASDAQ:AMZN) or Tesla (NASDAQ:TSLA) by snapping up the hottest stocks on StockTwits or recommended by your shoeshiner (if that profession still exists). But remember, even Tesla’s stock traded at less than 2x P/S before embarking on its 10x run in 2020.

Today, we’ll look into a strategy I call the Loaded Rifle — a tactic that one hedge fund manager called “the King of the Value Factors” — and apply it to one of InvestorPlace’s top-performing portfolios, Louis Navellier’s Breakthrough Stocks.

Source: Catalyst Labs / Shutterstock

Chekhov’s Loaded Rifle? Meet Moonshot Bets

The best storytellers often follow a rule coined by Russian novelist Anton Chekhov:

“If in the first act you have hung a loaded rifle on the wall, then in the following one, it should be fired. Otherwise, don’t put it there.”

In other words, if you set up expectations as a novelist, those expectations should be fulfilled.

The same principle holds for lowly valued stocks. When stocks border on zero, they tend to either 1) disappear entirely or 2) rocket back for massive returns.

And good news for investors? Even with the duds, buying low-cost stocks wins in the long run.

According to a study by hedge fund manager James O’Shaughnessy, $10,000 invested in the 50 lowest price-to-sales stocks in 1951 would have outperformed the S&P 500 by 4x by 2003. And when compared to the highest 50 P/S stocks? Cheap stocks outperformed the expensive ones by 65 times.

Ditching the Duds For Even Better Returns

Investors can do even better by avoiding stocks that fizzle out. For instance, removing the ten worst-performing stocks from the 51 <0.1x P/S stocks of 2021 would have boosted average returns by 24%.

So how can investors reduce the duds and focus on the winners?

Easy. You can add in momentum as well.

Long-time Moonshot readers will be familiar with my Momentum Master strategy, which favors fast-growing stocks over slower-moving ones in breakout type markets. It’s a powerful tool in weeding out value traps like Sears Holdings (OTCMKTS:SHLDQ).

Today, I will introduce another momentum tool to the arsenal: Louis Navellier’s Breakthrough Stocks. Louis and his team have picked stunning winners like Digital Turbine (NASDAQ:APPS) and Enphase Energy (NASDAQ:ENPH) early on by focusing on fast-growing companies. Both stocks have risen over 800% since 2019 (Louis’s also no slouch when it comes to risk management, with his worst-performer down just -21%).

Yet Louis’s portfolio is a mix of conservative companies and aggressive ones. So how can a Moonshot investor know which of these companies have 100x potential versus those with just 2x?

That’s right. We go hunting with a Loaded Rifle.

Source: Catalyst Labs / Shutterstock

To help identify more of these massive winners, I’ve taken the Loaded Rifle to Louis’ stock portfolio. And here are the top stocks that have caught my attention.

Big 5 Sporting Goods (BGFV)

Louis and his team recommended Big 5 (NASDAQ:BGFV) back in November when the stock was still trading around $8. He reasoned that Covid-19 vaccinations wouldn’t end demand for camping and sports gear.

He was right. Since recommending the stock, BGFV has almost tripled to $24.

Today, the Loaded Rifle still shows the stock as a “BUY.” Its 0.2x price-to-sales ratio makes the sports retailer the most affordable stock in its sector, and its 6.7x forward price-to-earnings (P/E) ratio provides a margin of safety to the downside.

There are some reasons for the retailer’s cheapness. Big 5 doesn’t generate material sales from e-commerce, and overheads have traditionally run higher than those at competitors like Dick’s Sporting Goods (NYSE:DKS). 30% of its floated shares are sold short, making BGFV a contender for the “least admired company” in the hedge fund world.

But just like GameStop and AMC, BGFV doesn’t need a phenomenal business to generate massive shareholder returns. Because when your starting price is so low, not much has to happen for retail investors to send the price rocketing.

Fulgent Genetics (FLGT)

The great thing about Loaded Rifle investing is that price-to-sales metrics are relative to their industry. 0.02x P/S might look cheap for a low-margin videogame retailer, while 2.0x P/S might be reasonable for a highly profitable tech firm.

So what about healthcare services, an industry where the average company trades at a 7.0x price-to-sales ratio?

That’s where Fulgent Genetics (NASDAQ:FLGT) comes in. At 3.5x price-to-sales, shares in the genetic testing firm are some of the cheapest in its industry. And if you believe Covid-19 testing is here to stay, then Fulgent is a stock to watch.

The genetic sequencing company has become a key player in comprehensive Covid-19 testing. Not only is Fulgent a significant player in the traditional RT-PCR tests, but the company also expects to earn $100 million from Next Generation Sequencing (NGS) testing — a process that can help identify new coronavirus variants.

That creates the potential for massive returns. The company has used its windfall to build a huge cash and receivables pile; that $500 million war chest could help Fulgent compete in the growing genetic testing market. And if Covid-19 testing once again becomes a regular part of life, investors can expect Fulgent to continue producing windfall profits until other PCR testers catch up.

There are, however, some downsides. Fulgent is currently dependent on Covid-19 testing for revenue; removing that income stream would send the firm closer to a 30x price-to-sales ratio (A terrible misfire of the loaded rifle). And like any other biotech firm, it’s unclear whether Fulgent will succeed in finding lucrative markets for its other products.

But for those willing to make a calculated bet on Covid-19 testing, Fulgent Genetics provides a way to protect your portfolio from a new pandemic-related slump.

Bonus: China Yuchai International Limited (CYD)

China Yuchai (NYSE:CYD) isn’t your typical Moonshot bet. With its focus on combustion engines and a 12% dividend yield, this PRC-based firm looks more like a cheap 1990’s conglomerate than a +1,000% potential growth stock.

But make no mistake, CYD is Cheap with a capital “C.” Last week, the Chinese stock sell-off sent shares to a measly 0.2x P/S ratio, and its forward P/E ratio now sits at just 6.7x.

And that means CYD could surprise investors. OEM engine makers like Dana (NYSE:DAN) typically trade at a 10x P/E ratio and have far more debt; China Yuchai could double in price on a simple re-rating (I wouldn’t use options on a firm with such low volatility).

So while CYD might not be a home run like GME or AMC, there’s nothing wrong with hitting a single or double from time to time.

When it Comes to Moonshots, Value Beats Expensive Stocks.

51 The number of companies trading under 0.1x price-to-sales (P/S) at the beginning of 2021.
30 The number of ultralow price-to-sales firms that would beat the S&P 500. On average, these stocks rose 230% in the first seven months of 2021.
1 <0.1x P/S companies that lost more than 50% of their value.
16 Companies with a P/S ratio above 100x that lost more than 50% of their value. The average return for these pricey companies lagged cheap ones by 70% this year.

Digging Deeper Into Reddit Stocks

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Using The Loaded Rifle with Momentum Master

Early on, I introduced the Momentum Master strategy — a playbook to profit from inefficiently-priced markets. Billionaires like 29-year-old wunderkind Sam Bankman-Fried have used the method to arbitrage cryptocurrency markets on a global scale. And I’ve used the same tactic to jump on altcoins from BabyDoge (CCC:BABYDOGE-USD) to GoesUpHigher (CCC:GUH-USD) for 270% and 4,600% gains, respectively. (The same rules also lock in the profits).

Adding the Loaded Rifle strategy to momentum strategies is the financial equivalent of peanut butter and chocolate. It works.

Not only did James O’Shaughnessy’s study find that cheap stocks outperform expensive ones by 65x, but if you add in momentum factors, P/S ratios become 10x more effective.

So for investors looking for the next GME or AMC, it pays to keep track of both momentum and value. Because when the two come together, it’s a strategy that can produce results that will surprise even the pros.

Have a question or comment? Connect with Tom on LinkedIn or email him at moonshots@investorplace.com.

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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.

Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.

Article printed from InvestorPlace Media, https://investorplace.com/2021/08/2-stocks-that-could-be-the-next-gme-or-amc/.

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