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.
Another Moonshot Goes 4x
In November, I sent a newsletter titled “5 Stocks Set to Double This Month.”
From a macro perspective, it was about as poorly-timed as a comedy routine at a funeral. Just several weeks before, I wrote how Fed Chair Jerome Powell’s hawkishness was signaling the top of the market; the tech-heavy Nasdaq index would fall 2% that month and continue into bear territory.
But the five picks became winners. By the start of December, the portfolio had collectively grown 132% — not a doubling, but close enough for my editor to call it a success.
- Longeveron (NASDAQ:LGVN): +652%
- Novavax (NASDAQ:NVAX): +21%
- Argo Blockchain (NASDAQ:ARBK): +1%
- B Riley Merger / FAZE Clan (NASDAQ:BRPM): -3%
- Enservco (NYSEAMERICAN:ENSV): -10%
But what about the laggard Enservco? At first, the oil & gas service provider looked like it was ready to stick to its unfunny standup routine. Shares would drop another 40% by January.
But those who held on would have the last laugh.
As natural gas supplies tightened, ENSV would rise 50%… 100%… 200%…
Earlier this month, the $1 stock hit a high of $8.76.
As America contends with a worsening energy shortage, stocks like Enservco will continue to soar. Because when high operational leverage meets rising demand, you’ll find a rich vein of Moonshot bets ready to rocket higher.
Retail Investors Flock to Energy
Shortly after the Russian invasion of Ukraine, I highlighted three energy stocks rising on investor speculation: Indonesia Energy Corporation (NYSEAMERICAN:INDO), Imperial Petroleum (NASDAQ:IMPP) and Enservco (NYSEAMERICAN:ENSV).
My eventual top pick for the sector was Summit Midstream Partners (NYSE:SMLP), an unrelated mid-stream play with far better fundamentals than the rest.
“As American shale producers ramp up production, Summit’s network of pipelines will find renewed use. Its high financial leverage will also juice returns. The company’s $1.3 billion in long-term debt dwarfs the value of its equity.”
Shares of SMLP have since remained steady, even as oil has gyrated from $140 to under $100.
That’s because these types of picks offer second-order benefits — performance that outlasts an initial spike.
First-order benefits are easier to spot. Hedge funds are already trading shares of Indonesia Energy stock as if they are call options on oil prices (For all intents and purposes, they are). And speculative plays like Imperial Petroleum rise and fall on shipping prices faster than most humans can react.
On the other hand, second-order companies like Summit Midstream offer longer-term value. Algorithms aren’t particularly good at understanding the link between oil prices and new well drilling, leaving room for patient investors to profit. These secondary correlations take more time to play out.
The Second-Order Bets
That’s why high-frequency traders occasionally miss promising plays. Companies like Enservco would peak nearly two weeks after Russian forces began rolling across the border.
Today, many second-order energy firms are still trading for cheap. To get you started, I’ve taken Louis Navellier’s Portfolio Grader and selected stocks that 1) have greater than 10% gross margins, 2) trade for less than 0.3x price-to-sales and 3) score a “B” or higher on his grader. That leaves us with:
- Forum Energy Technologies (NYSE:FET)
- Martin Midstream Partners (NASDAQ:MMLP)
- Nine Energy Service (NYSE:NINE)
- PBF Energy (NYSE:PBF)
Investors will immediately notice that none of these companies actively drill for oil. Instead, these companies are a combination of services, refining and transportation — much like Enservco and Summit Midstream.
Though SMLP remains my top pick, these four have a good chance of riding higher in the next six to nine months as higher energy prices filter through the industry.
Imperial Petroleum Starts Sinking
On the other hand, companies like Imperial Petroleum are no laughing matter.
On Monday, shares of the petroleum shipping company dropped one-third after the firm announced an outsized $60 million stock offer. In less than two weeks, the company has gone from meme favorite to yet another money sink. Shares are down 85%.
The saga echoes that of Castor Maritime (NASDAQ:CTRM), another Reddit favorite that set sail without a planned destination. The meme stock ended up losing virtually its entire value.
The problem comes down to basic economics. The shipping industry (particularly dry-bulk) is a cyclical one, where players can go from feast to famine within a year. Dry-bulk shipping rates hit $80,000 in October 2021 after starting the year under $20,000.
At the same time, ship mortgages are often set at fixed rates.
Investors will immediately see a cash-flow problem. When industries have variable revenues and high fixed costs, they end up with bankruptcies — like Hanjin Shipping, where the world’s seventh-largest shipper disappeared overnight.
IMPP’s outsize offering is also bad news for debt. The $60 million that IMPP raised will only cover 10% of the cost of a new Panamax vessel; the firm will have to borrow more cash.
So although energy prices may continue to rise, don’t bet on a smooth ride up for IMPP or its peers.
Picking Stocks in a Sunset Industry
Over the weekend, I had a chance to go through some of my old investment notes. And my #1 retail pick of 2016 gave me a chuckle:
At the time, the big-box store looked like a dinosaur among the living.
Niche retail firms like Signet Jewelers (NYSE:SIG) and Sally Beauty Holdings (NYSE:SBH) would make Cohen & Co’s “top buy” list for the year. And brick-and-mortar retailers like GNC were still riding a fad of body-building protein shakes.
Yet fast forward six years, and Cohen & Co’s two picks are down 25% and 40% respectively. And GNC would go bankrupt in 2020. So much for “niche retail.”
Meanwhile, Target has outperformed the S&P retail index by a 2:1 ratio, up over 200% since 2016.
There’s a lesson to be learned. When you’re investing in a sunset industry, the big and the strong tend to beat out the smaller upstarts.
In coal, western-based Peabody Energy (NYSE:BTU) and Arch Resources (NYSE:ARCH) have thrived even as Appalachian mines have shuttered due to high costs. And in oil, companies with high-return assets like Occidental (NYSE:OXY) or in-house tech such as Schlumberger (NYSE:SLB) will outperform companies like Indonesia Energy over the long run.
Emerging industries from quantum computing to renewables will be led by fast-moving startups. But in the sunset ones, only the strong survive. And when you’re picking deep value Moonshot plays for the long run, it pays to remember that lesson.
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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.