3 Stocks For the “Great Rotation to Quality”

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Retail Investors Flee Meme Stocks

It’s hard not to feel bad for Redditors. As of writing, AMC Entertainment (NYSE:AMC) is already down 43% for the year and GameStop (NYSE:GME) isn’t far behind at 33%.

Meme stocks aren’t alone in their miserable performance. Cathie Wood’s ARKK Invest (NYSEARCA:ARKK) has lost over a quarter of its value, even though the Dow Jones Industrial Average is only down 5%.

But retail investors aren’t stupid. Far from it.

Instead, they’ve been quietly rotating away from speculative plays into blue-chip stocks:

“Retail investors’ top picks now look more like they did in early 2020, when the roster of the most-popular U.S.-listed stocks and exchange-traded funds was made up almost entirely of shares of well-established companies in the benchmark S&P 500 and ETFs.” – Wall Street Journal, January 30

According to research from VandaTrack, the top five purchases by retail investors have included three S&P 500 ETFs, Apple (NASDAQ:AAPL) and Advanced Micro Devices (NASDAQ:AMD) since late 2021.

Wall Street perceptions are once again behind the times.

Picking Moonshots, however, becomes more challenging in this climate. With the exception of the rare deep value play, most stocks with 10x potential are unprofitable in the present, making their share prices abnormally sensitive to market pullbacks.

But these same forces have also pushed high-quality Moonshots to rock-bottom prices. So rather than trying to buy the dip on sunset stocks like AMC, we’ll look into three high-quality stocks riding some major technological trends.

Source: Shutterstock

3 Moonshots Riding a Technological Wave

When I invest in long-term Moonshots, it’s a strategic decision where I’m looking at the world 5… 10… 20 years from now. Are we going to be sleeping in our cars while they drive autonomously to work? Or would we dispense with the commute entirely and slap on a VR headset instead?

Meanwhile, quicker turnaround Moonshots like my short-lived recommendations of Shiba Inu (CCC:SHIB-USD) and Solana (CCC:SOL-USD) are tactical. These are bought and sold within a span of months because they’re speculative by nature; their value is entirely dependent on what others are willing to pay.

The best time to invest is when both of these stars align. And in the case of high-quality Moonshots, that’s now becoming the case.

Matterport (MTTR)

If you’ve never done a virtual open house, I suggest you hop on Zillow (NASDAQ:Z) and try it out. The 3D dollhouses are almost unnerving at first; they’re a bit like a real-life videogame (any Sims fans out there?). But after a couple of these tours, you might start wondering why all homesellers aren’t doing it yet.

Well don’t worry: they’re getting there.

As more and more homebuying moves online, 3D mapping firm Matterport (NASDAQ:MTTR) is reaping the benefits. The $2 billion company is now growing at 40% per year and has over 6 million “properties” in its database. Any development in the “Metaverse” will likely involve drawing from Matterport’s vast library.

That also means MTTR shares have never been cheap. As Wedbush analyst Dan Ives conceded in December, “this is a highly speculative story stock” at 40x revenues.

But that was back in 2021.

Since then, Matterport has seen shares tumble 70% to $9. It’s now valued below its original SPAC listing, proving that no amount of growth can ever negate an investor stampede.

And that presents an opportunity.

On a price-to-sales basis, Matterport is now worth about the same as Palantir (NYSE:PLTR), a tech stock in the slower-growing industry of business intelligence. And waiting for MTTR to become profitable before investing usually means missing the boat on supernormal gains.

Matterport isn’t risk-free, of course. Its Metaverse business won’t show results for at least 3 to 5 years and the firm’s relationships with real estate agents seem tenuous at best (few agents seem happy to pay for the pricey monthly subscription).

But given Matterport’s commanding lead in 3D mapping technology, don’t be surprised if the firm ends up looking like a tasty acquisition target at today’s prices. Though momentum isn’t on Matterport’s side, the broad shift to online life certainly is.

OpenDoor Technologies (OPEN)

At InvestorPlace.com, we’ve admittedly had a love-hate relationship with iBuying firm OpenDoor Technologies (NASDAQ:OPEN). On one hand, Hypergrowth Investing’s Luke Lango has called this firm “The Amazon of Houses.” On the other, former InvestorPlace.com analyst Joanna Makris labeled the company as a work of marketing fluff.

I’ve personally always fallen in between. Yes, buying a house through a low-cost dealer can be extremely attractive, especially in real estate markets like Phoenix where houses are relatively uniform. But i-buying is also a capital-intensive business where mispricing homes (even by a couple of percentage points) can bankrupt a firm instantly. Earlier this year, Zillow limped away from its iBuying business after losing an estimated $380 million on bad bets.

But there’s usually a certain price where Moonshot bets become worth the gamble. And OpenDoor is reaching that point.

Since peaking in March 2021, OPEN’s stock has fallen three quarters to $9; much like Matterport, OpenDoor is now trading below its original SPAC value. Meanwhile, the iBuyer value proposition remains unchanged: the company is still exploiting the inefficient process of mortgage underwriting in its use of all-cash offers. The U.S. tax code also plays a role; real estate investors generally only have 180 days to roll tax savings into a new property, so they’re often willing to sell to all-cash buyers like OpenDoor at a significant discount.

The company does have its faults. Much like online-heavy used-car selling sites Carvana (NYSE:CVNA) and CarMax (NYSE:KMX), OpenDoor suffers from an “information asymmetry” problem (also known as the “lemon” problem of the automotive world). If you’re an algorithm making the same offer to hundreds of houses, sellers with the worst houses are the most likely to accept. Analysts estimate that Zillow lost $30,000 per house, due in no small part to this problem.

But companies in other industries have succeeded. Many online car firms use networks of in-person vehicle inspectors to verify quality. And OpenDoor can quickly follow suit if required. Either way, its all-cash offers still give it a leg up over the competition.

Unity Software (U)

Finally, there’s Unity Software (NYSE:U), one of the top developers of 3D gaming graphics. The company’s graphic “engines” power everything from the lighthearted Animal Crossing to immersive VR experience Boneworks. Along with Epic Games, they’re pushing the envelope of what modern graphics cards can do.

The company is also becoming a major Metaverse play. In November, the company acquired Peter Jackson’s Weta Digital in a massive $1.6 billion cash-and-stock deal to catch up with its larger rival. And with share prices down 50% from its November peak, it’s even becoming a takeover target.

It’s not the first time a gaming company has blazed a non-gaming path. Nvidia (NASDAQ:NVDA) stumbled into AI by accident after realizing its gaming graphics cards (GPUs) were far better than CPUs at neural network training. And many of Take-Two Interactive’s (NASDAQ:TTWO) games have morphed into Metaverses.

And that makes Unity particularly interesting. Though shares are still pricey, $100 is a fair price to pay for a burgeoning blue-chip bet.

Source: Shutterstock

The Fake NFTs of the Internet.

Matterport… OpenDoor… Unity… These tech Moonshots are all generating real value for their customers.

NFTs couldn’t be more different.

A study by OpenSea found that over 80% of NFTs created on its free app were “plagiarized works, fake collections, and spam.” It imposed a 50-item limit to its free minting tool before quintupling that figure to 250.

NFT companies are also running into copyright issues. On Monday, Miles Parks McCollum — better known as the rapper Lil Yachty — sued Singaporean-based NFT startup OPULOUS for using his likeness without permission. More high-profile cases will surely follow.

But that hasn’t stopped trade in the most popular NFTs. On Sunday, singer Justin Bieber allegedly purchased a Bored Ape NFT for $1.3 million. And OpenSea’s latest funding round now makes it more valuable than the trading app Robinhood (NASDAQ:HOOD).

High-quality NFTs will surely continue to proliferate. Just be careful of the scams that are sending much of the market falling back to earth.

Buffett Versus Portnoy

In June 2020, Dave Portnoy posted a now-infamous tweet:

“I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now. #DDTG”

Since October, the tables have turned. Financials and industrials — two of Mr. Buffett’s favorite sectors — have outperformed while Penn National Gaming (NASDAQ:PENN) is down two-thirds from its peak.

This is not a battle between “old-school vs. new-age.” Mr. Buffett was a tactical trader in his day, scooping up American Express (NYSE:AXP) during the Salad Oil Scandal of the 1960s. Nor is this a fight between “value vs. growth.” Berkshire Hathaway (NYSE:BRK-A,NYSE:BRK-B) owns $1.6 billion of Amazon (NASDAQ:AMZN) shares and is one of Apple’s largest shareholders.

Instead, it’s about blue-chip versus speculation.

“F*cked around and bought 29 bitcoins today,” tweeted Mr. Portnoy last Saturday. The Barstool Sports founder had just dropped $1 million into Bitcoin at $36,000. And for some, that’s enough reasoning to also buy in; Bitcoin has risen 6% since.

But Redditors appear to be growing tired of playing “follow the Roaring Kitty.” And though few on r/WallStreetBets will admit it, the data shows they’re quietly selling out their stakes while looking for better bets elsewhere.

P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at moonshots@investorplace.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.


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