This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
What Jerome Powell Giveth, He Taketh Away
Jerome Powell is coming for your braaaains — err, gaaaaains…
I’ve been warning 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 version of that 80s hit. But instead of the dancing undead, we have zombified meme stocks: MicroVision (NASDAQ:MVIS), Bed Bath & Beyond (NASDAQ:BBBY) and many others fell double-digits on the announcement.
As for the stars of the show? Even they’re looking a little under the weather. My No. 5 pick for 2020, Crispr Therapeutics (NASDAQ:CRSP), shed 12% of its value after the Fed announcement. And Cathie Wood’s once-untouchable ARKK Invest ETF (NYSEARCA:ARKK) is hovering around its 52-week low after dropping 9%.
In all, investors saw $1.5 trillion of stock and crypto value vanish overnight.
Yet there have been some bright spots. Volt Information Sciences (NYSEAMERICAN:VOLT), Armstrong Flooring (NYSE:AFI) and other Moonshot deep value plays are actually up. These “ugly” value plays are partying while other stocks suffer through The Night of the Living Dead.
Also, tomorrow at 4:00 p.m. ET, Louis Navellier is putting on a Special Event called his Big Bet — in which he’ll reveal the next big megatrend and tell you how to get two FREE stock picks that are part of it. The event is free to attend, but you have to register in advance. Go here to sign up now.
Until then, we’ll take another look at these low-cost picks, and see why these undying firms are still worthwhile in any Moonshot investor’s portfolio.
Profits Today, Profits Tomorrow
If you’re only going to learn one financial term, you should make it this one:
Net Present Value (NPV).
The simple concept tells us that $100 in your pocket today is worth more than $100 promised to you a year or two from now. Which is to say, a bird (or zombie) in hand is worth two in the bush.
In Wall Street parlance, future profits are ‘discounted’ to current values. The higher the interest rate, the greater the discount.
And guess what… the concept works.
When the Federal Reserve announced its bond-buying taper and rate rises, companies with profits in the present (i.e., cash-generating value plays) held their own. Meanwhile, firms with expected profits in the future (i.e. unprofitable tech startups) saw their values drop significantly. Cryptos, which have no outright profits, declined the most.
Today’s newsletter highlights some of these firms turning a profit in the present. And don’t worry if these stocks seem straight out of 1982. As I’ve said before, the market doesn’t award style points for getting things right.
Armstrong Flooring (AFI)
In November, I made a somewhat unusual call:
Given its poor momentum, this Pennsylvania-based flooring company violated my Golden Rule of Penny Stock Investing: Buy penny stocks after they start to recover.
But AFI had one game changing factor: its ultra-low price.
“With one of the cheapest valuations in the business,” I wrote in November, “AFI is a bet that many investors should be willing to make.”
The stock would immediately drop 20% (a nice smack to the head for ignoring the Golden Rule). But since then, the story has started to play out. Share prices spiked 60% after the firm announced intentions to sell. And at $2.25, AFI still has plenty of juice left to run.
As rates begin to rise, don’t let this deep value play fly under the radar.
Volt Information Science (VOLT)
When I picked VOLT as my No. 2 investment for 2022, I did so knowing how terrible the firm looked.
“These are the ugly, run-down houses in the abandoned neighborhoods that proper real estate agents avoid,” I said by way of comparison.
Yet these low-margin staffing firms are precisely the companies that perform during inflationary periods. In 1982, VOLT saw shares surge from $2.55 to a $7.17 peak the following year.
The reason has everything to do with NPV. Rising current revenues, plus relatively low baked-in expectations, means VOLT is less sensitive to Fed rate increases. The firm will also benefit from a surging job market.
Of course, today’s labor market is wildly different from that of 1982. Wage growth is far stronger now and staffing firms are struggling to find enough workers.
Still, history does love a good rhyme. And with more people looking to re-enter the labor force, companies like Volt Information Science could relive a bygone era.
Finally, POSaBIT (OTCMKTS:POSAF) has been a surprising winner of the Fed’s “Taper Tantrum.”
This Canadian-based payments firm is a strangely profitable startup, generating $0.9 million in Q3 profits (once you remove non-cash warrant charges). Gross profits have remained stable and the firm now expects to increase revenue by 158%.
This is not your typical money-losing startup. Instead, it’s a fast-growing cash cow.
It’s no surprise then, that POSAF shares have done well, rising 30% since Christmas.
Don’t expect POSaBIT to return 10x in a month. But leave the company to grow for long enough, it certainly could get there.
The Zombies of “Thriller”
Not all has gone well in the world of deep value.
After jumping almost 20% in December, shares of value play Rite Aid (NYSE:RAD) have fallen back to earth. AMC Entertainment (NYSE:AMC) and Bitcoin miner Iris Energy (NASDAQ:IREN) have similarly seen prices fall double digits.
What’s the common thread connecting these firms?
Combined, these three companies share almost $10 billion in long-term debts. And as the Fed starts raising interest rates, these firms will suddenly find their debts far more expensive to service. Instead of paying a 5% interest rate, imagine things doubling to 10% — or beyond…
At a certain point, these struggling firms turn into “Zombie companies,” a term once reserved for debt-laden Japanese organizations. All profits (if any) will be channeled towards interest payments, with zero cash left to pay down principal or reinvest.
That creates an unending problem. Banks won’t shut these firms down, since that would mean no more interest payments. But the cash-drained companies won’t succeed either as they’re sucked dry. Investors are left with “zombies,” unable to live, but likewise unable to die.
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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.