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 if I told you that one of InvestorPlace‘s biggest winners this year outside of Moonshot’s picks — a 1,506% gainer — had nothing to do with tech?
It wasn’t a growth stock…
Nor was it a cryptocurrency…
And it certainly wasn’t a meme stock…
Instead, this was a long call option by veteran investor Eric Fry on Freeport-McMoRan (NYSE:FCX), a copper miner that lost $4 billion just four years prior. By opening a position at $1.64, Mr. Fry gave his pick plenty of room to grow. It’s a strategy he’s used consistently to earn stunning returns.
(To learn more about Eric Fry’s investment services, click here.)
His deep-value pick follows a similar pattern as other penny stock winners in 2021. My call on Hertz (NASDAQ:HTZ) when prices were at $2 would eventually net a 1,200% gain. And Louis Navellier, InvestorPlace stalwart, picked out RV maker Lazydays (NASDAQ:LAZY) when it was still trading down at $10.
These are the ugly, run-down houses in the abandoned neighborhoods that “proper” real estate agents avoid.
But we all know that the market doesn’t award points for style. If you’re walking away with a 50x return (assuming the risk profile was the same), no one cares if you did it on a hot stock like Tesla (NASDAQ:TSLA) or a turnaround like American Airlines (NASDAQ:AAL).
Today, we’ll take a look at my second-favorite investment for 2022 — a diamond-in-the-rough pick that insiders are quietly snapping up.
My No. 2 Pick For 2022
My “big ugly” pick for 2022 is a company that deserves the title:
Volt Information Sciences (NYSEAMERICAN:VOLT).
Despite its name, VOLT has little to do with “information” or “sciences.” Instead, it’s a staffing firm that provides contract workers as well as direct placement and contingent-to-hire services.
In other words, it’s a company that took the Covid-19 pandemic on the nose. Revenues at Volt plummeted 18% in 2020 and the firm would lose $32.5 million by the end of the year. Similar losses were seen at rivals Robert Half International (NYSE:RHI) and Kelly Services (NASDAQ:KELYA). When the American labor force shrinks by 8 million people in a single month — as it did in February 2020 — employees and contract worker companies alike quickly find themselves out of work.
Investors also felt the crush. VOLT shares lost 75% of their value just weeks into the pandemic. By March 2020, the stock had sunk to $0.71, the lowest point in its 39-year history.
Green Shoots of a Post-Pandemic World
Yet the staffing industry is recovering faster than critics expected. In October, Volt announced its revenues had increased 17% from the prior year, erasing all pandemic-related losses. Q3 profits also increased to a positive $1.6 million.
Any average American could tell you why:
Our economy is rebounding.
In November, the U.S. unemployment rate dropped to 4.2%, a level seen in only four of the past 20 years. Suddenly, it’s companies that are having trouble finding workers.
That has put staffing firms on a rocket ship to Mars. Gross margins in the industry are up across the board: Volt’s 16.6% is the highest margin it’s seen since 2011. When it comes to cyclical companies, staffing firms take volatility to another level.
With so many staffing companies to choose from, why buy VOLT in particular? The answer comes down to three factors.
- Share Price. Volt’s $2.50 price makes it one of the cheapest staffing firms on the market. On a price-to-sales basis, its 0.07x ratio puts it in the 99th percentile of inexpensive companies.
- Operational Leverage. The company’s margins are likewise some of the lowest in the industry, so economic improvements will have an outsized impact on Volt’s bottom line.
- Insider Buying. Corporate executives have been buying shares in the range of $3.30 to $3.50. Insider buying typically outperforms the market, especially when multiple executives are buying — a fact I outline in my Insider Track strategy.
Put another way, a return to an “average” level of profitability and valuation multiples would send VOLT shares in the $4.20 to $4.50 range, a 75% upside. And if its baseline net profit margin rises to 3%, shares are worth $10 to $12.
Danger! High Voltage
Not everyone, however, will find an investment in VOLT particularly agreeable.
Firstly, many investors rightly dislike the staffing service industry. Contract workers receive limited benefits and no paid time off (PTO) from their employers, making CEO Linda Perneau’s $1.5 million pay package seem completely out of touch to some. And academic studies have long shown that contract workers are more likely to get hurt on the job due to less training and supervision.
Secondly, any unexpected economic hiccup will send VOLT crashing back down. The omicron variant has already shown the underlying weaknesses of government healthcare response. Who knows whether 2022 will bring a more deadly coronavirus variant or a mishandled taper?
And finally, Volt has seen its share of poor managers. Former CEO Michael Dean failed to turn the company around and there’s no guarantee that current leadership can move VOLT into higher-margin businesses.
But for those willing to take a bet on the U.S. economic recovery, this under-the-radar staffing firm is as cheap as they come.
The Deep Value Derby
I won’t sugar-coat this:
Deep-value investing is hard.
Many of these risky stocks will go to zero. Telling your golf buddies that you own VOLT (or a near-bankrupt copper miner) takes a certain “I-don’t-care-what-you-think” attitude in life.
But companies on the brink of collapse also make some of the greatest investments. Anyone buying Apple (NASDAQ:AAPL) when it teetered on bankruptcy in 1997 would have earned an 144,000% return over the following 24 years. And stars from Amazon (NASDAQ:AMZN) to General Electric (NYSE:GE) also had moments where people weren’t sure whether they would succeed.
Not every deep-value investment will work out. But those that do have the power to return 10x… 20x… 50x… your investment. And that makes it all worthwhile.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at email@example.com or connect with me on LinkedIn and let me know what you’d like to see.
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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.