America’s “Everything Shortage” Is Driving Some Stocks to the Moon
“America is choking under an everything shortage,” observed Derek Thompson at The Atlantic this week. “We are running low on supplies of all kinds.”
He’s right. A recent visit to my local Target (NYSE:TGT) instantly recalled the Great Toilet Paper Rush of 2020… except now cereal and Kit Kats are also missing from shelves. And my local used car dealership is so starved for vehicles (and thus any profits) that they’ve resorted to hanging a “Cars4Cash” sign out front.
But one company’s misfortune is another lucky break…
So which companies are benefiting from these shortages?
Energy and Basic Materials.
Since May, stocks in these two sectors have outperformed everything else — biotech, retailers and Cathie Wood — with a 60% return. The best of these, such as my coal pick Peabody Energy (NYSE:BTU), has topped Bitcoin (CCC:BTC-USD) by an incredible 7-to-1 ratio!
Don’t be fooled by the down-and-dirty nature of energy and basic materials: these companies act much like tech-related Moonshots. When your company has near-zero profit margins, tiny changes in demand can send your stocks up 5x… 10x… 50x — or straight to zero.
So today we’ll take a look at five companies with strong potential to ride America’s “Everything Shortage” into 2022.
The Stocks Riding the Great American Shortage of 2021
In August, Camber Energy (NYSEAMERICAN:CEI) looked a lot like any other struggling oil and gas company. Share prices were bottoming out at 33 cents, valuing the company as a whole at $34 million.
And then Reddit found the stock.
Barely a month later, CEI had risen to $4.85, a 14x return. Anyone who bought options could have magnified gains to 100x or more.
It’s the same pattern that readers should recognize by now. As I outline in my Golden Rule of Penny Stock Investing, if you’re buying a company for pennies at the right point in the cycle, who cares if it peaks at $20?
- Osisko Mining (OTCMKTS:OBNNF)
I first mentioned this company last Monday. Shares had just bottomed out at $1.83 and corporate executives — from the CEO to the CFO — were snapping up stock with their hard-earned money. The Inside Track strategy suggested that insiders knew something we didn’t.
The strategy proved correct.
The following day, Osisko announced a 3,979 gram-per-ton (g/t) discovery at the aptly named Windfall gold project. It’s an incredible find, considering that many active gold mines have concentrations under 10 g/t. With gold prices also on the rise thanks to America’s shortages, Osisko’s discovery is all the more valuable. Investors should jump in at $2 while they still can.
- Dawson Geophysical (NASDAQ:DWSN)
If you’ve never heard of Dawson Geophysical, you’re not alone. Much like Schlumberger (NYSE:SLB), Dawson sells products exclusively to energy exploration companies — an industry seemingly set to shrink over the next two decades as electric vehicles replace gas-guzzling ones.
Yet America’s “Everything Shortage” has made it clear that we’re not in 2040 yet. According to an August report by the International Energy Agency (IEA), demand for oil is now growing at twice the rate of supply. Oil producers are finding it impossible to keep up after years of under-investment.
That’s where Dawson comes in. This seismic data company uses libraries of information (and occasionally some underground dynamite and vibration sensors) to create 3D maps of drilling sites. It’s a stock that rises when energy demand goes up.
With shares at $2 and America finding itself short on oil again, Dawson looks like a great Moonshot bet for 5x gains.
“The grid isn’t ready for the renewable revolution,” Wired Magazine bluntly wrote last week.
Though wind and solar energy are clearly America’s way forward, there are hours when the wind doesn’t blow and the sun doesn’t shine. Other countries have already started feeling the pinch.
China has seen rolling blackouts despite having the world’s largest solar panel capacity. And energy prices in Germany — Europe’s largest producer of renewable energy — are surging as wind energy struggles to keep up.
It’s no surprise that much of the world is turning to nuclear energy to — ahem — plug the gap. Though spent nuclear fuel can take millennia to decompose, it’s also one of the only ways these growing economies can hit their zero-carbon targets by 2050.
And firms like Cameco and Uranium Energy Corp are the ones to watch.
- Cameco. A higher-quality firm with a premium $20 price to match. The firm operates the two richest uranium mines in the world.
- Uranium Energy Corp. A cheaper, higher-risk company trading at $3. The uranium exploration firm will spike if it makes a worthwhile mining discovery.
Both stocks are already up 60% this year. More gains could be on the way.
- Hallador Energy (NASDAQ:HNRG)
Rounding out the “dirty five” is Hallador Energy, a coal company. It’s about as far as you can get from a flying car startup.
But let me make two cases for the firm.
- Value. Hallador Energy trades at 4x EV/EBITDA, the cheapest of all profitable coal miners. Rising energy prices could send the firm up 4-5x by this time next year.
- Growth. The company will start generating 200MW from solar and battery power by 2025.
Neither reason is sufficient to spend all your money on a dying business. But with pure-play solar stocks at high-flying valuations, firms like Hallador are better bets for double-digit returns.
Bitcoin Mining Firms
Not everyone is so lucky with rising costs. On Wednesday, reports revealed that Canadian crypto mining firm Link Global might have illegally siphoned millions of cubic feet of natural gas to power their mining rigs. The Alberta Utility Commission is reportedly pursuing a $5.6 million fine.
And firms like Greenidge Generation (NASDAQ:GREE) — which produces its own mining electricity — aren’t happy either. Natural gas prices are up 90% since the start of the year, putting a damper on any potential mining profits. Shares in GREE are down 50% since I rated it a “sell” last month.
In other words, Bitcoin mining firms aren’t keeping up with BTC’s recovery this time. In fact since July, investors would have made far more money buying Bitcoin than those energy-hungry firms that mine the cryptocurrency.
Mining for Gold Vs. Mining for Bitcoin
|$12.6 billion||Revenues at Barrick Gold (NYSE:GOLD), the largest pure-play gold miner in the world. In 2020, the firm dug up 4.8 million ounces, roughly the weight of the Statue of Liberty.|
|20%||Profit margin at Barrick Gold’s Carlin Mine. Barrick has turned a profit for 23 of the past 30 years.|
|$104 million||Approximate 12-month revenues at Marathon Digital Holdings (NASDAQ:MARA), a Bitcoin mining firm. The company mined 340 BTC in September.|
|-78%||Marathon’s net profit margin for the most recent 12-month reporting period.|
More Moonshot Choices
Want to short sell Camber Energy? InvestorPlace’s Will Ashworth suggests giving it a second thought. Though CEI looks much like “a dog with fleas,” even oil and gas haters know to stay away.
And finally, rising energy prices have also lifted some green energy firms. Dana Blankenhorn explains why SunPower’s (NASDAQ:SPWR) recent move into residential power looks particularly interesting.
Two Words to Make You Rich
In normal times, you won’t find me buying up shares of companies in down-and-dirty industries — imagine betting on horse-drawn carriages!
But these aren’t regular times. America’s “Everything Shortage” has created a temporary windfall for companies at the bottom of the chain.
That’s where two magic words comes into play:
It works like this.
Imagine we own an oil well that generates tiny 3% net margins (a tenth of what Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG, NASDAQ:GOOGL) could make). Now, what happens if prices for everything rise by 15%? Since our well has already been drilled (thus locking in our costs), our net profit could rise to 3+15 = 18%, a 6x gain. That multiplying effect is operating leverage.
As America finds itself running out of things, you can bet that these sunset industries will have one last hurrah.
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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.