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.
Moonshots for a Changing World
Can I be candid with you?
I’m getting tired of losing money.
Since December, only one of my top 5 Moonshot picks for 2022 is up. And it was a deep-value pick the newsletter wasn’t supposed to cover!
- POSaBIT (OTCMKTS:POSAF). -38%
- Volt Information Sciences (NYSEAMERICAN:VOLT). +102%
- Ethereum (ETH-USD). -40%
- Crypto.com Coin (CRO-USD). -62%
- Crispr Technologies (NASDAQ:CRSP). -42%
Thank goodness VOLT made it in. It’s helped my top picks cumulatively lose just -16% for the year, outperforming the broader S&P 500 index.
Meanwhile, investors weighted toward high-growth stocks have done even worse. The Nasdaq Composite of tech-heavy stocks has dropped -27%, altcoins have lost -38%, and Cathie Wood’s ARKK Invest (NYSEARCA:ARKK) is down a stunning -61%.
It’s been a terrible year for anyone tasked with covering Moonshot investments.
That’s why regular readers will have noticed a quickening pivot of this newsletter to deep-value. Picks since January have included midstream energy picks like Summit Midstream Partners (NYSE:SMLP) and Martin Midstream Partners (NASDAQ:MMLP) and plenty of beaten-down biotech firms that have managed to go up in a bear market.
More changes are on the way.
Next week, I’ll be revealing a transition that will allow the Moonshot Investor to cover more of these deep-value winners that profit during good times while protecting gains during the bad. You’ll still see plenty of Moonshot picks like Enservco (NYSEAMERICAN:ENSV) and Longeveron (NASDAQ:LGVN). But there’s also going to be a greater focus on the quant-style strategies that find higher-quality stocks.
In a sense, it’s a homecoming; I specialized in all-weather investing before covering meme stocks as the editor of this newsletter.
But in another sense, it’s a continuation of what you’ve been seeing right here. As markets move from expansionary-phase growth into recession, it’s only natural that our tactical strategies also need to shift.
So in today’s newsletter, we’re going to look at why such a change is needed for our current world.
How to Invest in an Early-Stage Recession
Moonshot’s rebalance towards quality-growth stocks has already managed to catch the attention of InvestorPlace CEO, Brian Hunt.
Last week, he asked me a pointed question:
“Is Desktop Metal (NYSE:DM) a good buy?”
Shares of the 3D printing company had already fallen to $4, an 87% decline from its 2021 peak. And President Biden had just toured several U.S. factories to promote the industry.
“Yes,” I responded. “But only if you’re a long-term investor. Otherwise, there’s no way the stock will go up in the near-term.”
That’s because America hasn’t even started its recessionary cycle yet. By any economic measure, we’re only in the “late-expansionary” phase.
Housing is still hot. Labor markets are tight. Late-stage industries from oil to mining are printing money.
And the Fed has raised rates by just 1% of the 4% needed.
In other words, if the Fed is taking us on a road trip to a recession, recent rate hikes barely get us out of the driveway.
“Brian,” I told my boss, “we have at least another 6 to 8 months of pain to come.”
Desktop Metal would fall to $1.50 the following week.
The Winners of Past Pre-Recession Eras
To find a parallel for the disastrous 2022 stock market, investors need to rewind the clock to the year 2000, a period of falling tech stocks, rising interest rates and aging boy bands. That year, Amazon (NASDAQ:AMZN) would lose 82% of its value and talk of “the Valley” would likely conjure up images of a sagging stock chart rather than a Californian tech hub.
But here’s the crucial, often-forgotten fact about that year:
The 2000 crash didn’t happen all at once.
Instead, companies like Amazon would take nearly two years to reach rock bottom. In May 2000, AMZN shares had dropped from a high of $106 to $53 — a 50% loss.
By December, prices had further fallen to $15.
And what of investors who decided that $15 was a good price to “buy the dip?”
They would have lost another 60% of their investment in 2001.
When you’re investing in zero-profit hypergrowth companies, there’s always room for stocks to keep going down.
Today, we’re seeing a similar phenomenon in fast-growing tech stocks. Companies like Desktop Metal have lost 87% of their value…
… Only to drop another 75% the following week.
And they aren’t alone.
Over the past six months, Rivian (NASDAQ:RIVN), Shopify (NYSE:SHOP), Cloudflare (NYSE:NET) and Palantir (NYSE:PLTR) have all lost at least 70% of their values as investors have pulled back from risky bets.
So… what investments will do well over the next several months?
The Winners of the Late-Stage Economic Cycle
To answer that question, consider the industries that outperformed in the second half of 2000.
- Healthcare: Humana (NYSE:HUM) +213%, DaVita (NYSE:DVA) +185%, Laboratory Corp (NYSE:LH) +128%, Henry Schein (NASDAQ:HSIC) +100%
- Energy: FuelCell Energy (NASDAQ:FCEL) +97%, Comstock Resources (NYSE:CRK) +84%, Southwestern Energy (NYSE:SWN) +66%
- Homebuilders: Meritage Homes (NYSE:MTH) +246%, Beazer Homes (NYSE:BZH) +119%, Toll Brothers (NYSE:TOL) +99%, D.R. Horton (NYSE:DHI) +97.3%
- Finance: Hope Bancorp (NASDAQ:HOPE) +139%, Everest RE (NYSE:RE), +118%, Allstate (NYSE:ALL) +98%
Healthcare and energy should come as no surprise. The two sectors have been Moonshot favorites over the past several months — and also some of its top-performing picks.
Louis Navellier’s Portfolio Grader, a quantitative screen of markets, also finds some promising picks in healthcare…
…And in energy.
As the Moonshot Investor transitions over the coming weeks, you’re going to see more of these quality-growth plays.
The third — homebuilders — is a trickier prospect. Though home demand remains high, affordability today is far worse than in 2000.
Nevertheless, some builders are offering a strong combination of low valuations, fast growth and the potential to turn their inventory into high cash flows over the next six months.
My personal favorite in the sector is D.R. Horton (NYSE:DHI) for its history of higher-quality returns, a reasonable 4.8x forward price-to-cashflow multiple and its 2-3x return potential. You’ll hear more about DHI over the coming weeks as the Moonshot Investor makes its transition.
Finally, banks and non-health insurance companies offer a temporary way for investors to profit from a steepening yield curve. These firms profit by raising money at cheaper, short-term rates and investing it in higher-earning long-term assets. A steepening yield curve is a perfect recipe for 2x gains.
What About “Buy and Hold?”
Finally, long-term investors will also want to think about the next six to 10 years, not just the next six to 10 months.
On the one hand, the most significant portion of investor portfolios will always be broad-based ETFs and baskets of high-quality stocks for the long run. These are the beating heart of any retirement portfolio. The staff at InvestorPlace.com and I have long emphasized the importance of risk management and long-term investing.
But on the other hand, smart active investors can also turn small portions of their “fun-money” portfolio into large gains. These are longshot bets that can go 5x… 10x… 100x over long periods of time.
Deep Value, High Growth?
Consider Desktop Metal, the “all-or-nothing case” I mentioned last week.
“Businesses returning to the U.S… could make Desktop Metal worth billions,” I wrote in the note. But a “corporate failure might value the firm closer to a $1.50 buyout price.”
That was back when the stock traded at $4.
Since then, shares have collapsed to $1.50 as markets have realized my warning that “DM could potentially run out of cash before reaching scale.”
But here’s my secret:
Desktop Metal It’s still the same company it was last week.
Not only did the company post a +5% revenue surprise in the interim. CEO Ric Fulop also reaffirmed his 2022 guidance of +131% growth. Given the positive news, I’ll let you decide for yourself if a 1-cent earnings miss and lack of an update on its P50 flagship warranted a 60% price crash.
As the Fed’s tightening policy creates more of these valuation sinkholes, a revamped Moonshot Investor will be here to track these plays. And investors with a nose for quality will surely come out ahead.
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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.