Tom Yeung here with your Sunday Digest.
In August, I asked you to imagine a magic sorting hat that could separate out every stock that goes down. Any remaining stock would obviously increase in value, guaranteeing a great return.
It’s much like the Eat This, Not That book series that suggests readers consume Big Macs (540 calories, 29g fat) instead of Cheesecake Factory’s Chicken and Avocado Salad (1,830 calories, 130g fat).
If you get rid of all the “bad” in the world, the only things left would be the “good.”
I hope you read that August 17 Digest. Within a month, the two “Buy” stocks had risen 18% on average, while the “Sell” stock had fallen 3%. They have continued to maintain that wide gap.
Essentially, it’s often easier than investors realize to separate attractive industries (like lithium) from unattractive ones (like coal). One is in a literal sunrise industry, thanks to solar, and has a clear role in AI data centers that require the flexibility of lithium-ion batteries. The other finds itself in a sunset industry. The best coal reserves were mined long ago, and we’re left with lower-grade product that fewer power utilities want.
You don’t need a magic sorting hat to tell you that.
Separating “good” from “bad” also works within an industry. Some companies have better management, superior assets, or higher-quality products than their peers. These are the firms to buy.
To walk you through this, legendary global macro investor and InvestorPlace Senior Analyst Eric Fry has put together a presentation that explains his “Buy This, Not That” concept and provides recommendations about which stocks are set to soar… and which ones are about to plummet.
That’s because Eric believes we’re entering the Age of Chaos, a period where previously reliable, household names are upended by a surge of dynamic, surprising companies that are poised to grow faster than we’ve seen before.
In his free presentation, he makes recommendations on what areas are going to be great buys and what should be sold immediately.
Today, I’d like to add one more set of “Buy This, Not That” companies to illustrate how straightforward this concept can be.
Let’s jump in…
Buy This Gem…
At first glance, Hyundai Motor Co. (KRX:005380) is not an obvious “good” company.
The South Korean car company operates in a fiercely competitive market that’s being hammered by U.S. tariffs. Roughly 60% of its cars (which include the Kia brand) are produced outside America, making Hyundai the most exposed car company to U.S. import taxes. A September immigration raid on its Georgia plant further clouded its future.
It’s now a deep-value firm trading at less than 7X forward earnings.
Yet, a deeper dive will quickly reveal that Hyundai has two secret weapons that quietly position it on the “good” side of stocks to buy.
The first secret weapon involves a bit of history….
In 1992, Massachusetts Institute of Technology (MIT) Professor Marc Raibert spun off his robotics laboratory into a company called Boston Dynamics.
From a technical standpoint, his firm was an incredible success. In 2005, Boston Dynamics created “Big Dog,” a four-legged pack mule robot designed for the U.S. military that could carry 340 pounds of supplies. (It was the inspiration for a killer robot in an episode of the hit Netflix show Black Mirror.)
The team followed up in 2016 with a leaner version named “Spot” and a two-legged humanoid one named “Atlas.” The latter has been featured in numerous acrobatics videos and has started doing basic tasks in warehouses and factories.
However, the “brains” of these robots never quite matched the “brawn” of Boston Dynamics’ engineering. For years, robots relied on model-based control. Everything needed to be hand-programmed, limiting their commercial use. Owning Boston Dynamics (and its cash-burning business) turned into a game of hot potato.
In 2013, Boston Dynamics was acquired by Alphabet Inc. (GOOG), and it was later sold to Japan’s SoftBank Group Corp. (SFTBY) in 2017. SoftBank then resold Boston Dynamics to Hyundai in 2020 to cover losses at its flagship Vision Fund.
That’s when AI came around.
Over the past several years, artificial intelligence has given rise to a new field of machine learning. Rather than use explicit equations, modern robots can now use reinforcement learning (a form of AI) to experiment and improve. These systems can even run millions of simulations virtually before taking any action in real life.
That’s helped Boston Dynamics to produce far smarter devices. Its robots can now be controlled with natural language and gestures, and users can expect them to run autonomously. Its Atlas robots can figure out how to perform acrobatics for themselves.
This should put Hyundai on an entirely new growth path. As robots become more capable, firms like Boston Dynamics will see soaring demand for their cutting-edge machines. Household chores… handyman services… even minor construction jobs may someday be performed by humanoid robots. Hyundai itself is already testing Boston Dynamics’ humanoid Atlas robots in its factories.
Hyundai’s second growth area is in electric vehicles (EVs). The company’s Ioniq 5 is virtually tied as the third-most popular EV in America behind Tesla’s Model 3 and Model Y, and reviewers have called it a “sensible and satisfying electric vehicle that doesn’t skimp on personality.” The firm is also a leader in plug-in hybrids and plans to launch a new lineup of extended-range EVs in 2027 that could drive 600 miles or more on a single charge.
Essentially, Hyundai had far less of a brand to initially protect. It saw EVs as a way to be “first” to a new market and built a dedicated battery electric vehicle (or BEV) architecture before most of its competitors. (Its E-GMP platform is shared with Kia and Genesis.) The South Korean government also offered generous subsidies for Hyundai’s EV efforts, driven by the importance of battery technologies to other Korean firms, such as LG, SK, and Samsung.
This means Hyundai’s shares remain too cheap. The upside from electric vehicles could drive shares 50% higher… and the success of Boston Dynamics could double the stock.
Now, it’s important to note that Hyundai is a relatively challenging stock to buy. Its U.S.-traded ADRs (HYMTF) have almost no liquidity, and so investors will need an international trading account that can transact Korean shares.
Still, those able to invest in Hyundai’s stock will be buying a leading EV maker with incredible upside thanks to its ownership of one of the world’s top robotics firms.
… And Sell This Old Timer
Meanwhile, Toyota Motor Corp. (TM) was once everything that Hyundai is now.
In the 1980s, the Japanese automaker gained recognition as a leader in quality manufacturing, thanks to innovations such as “Kanban” and “Andon.” Individual workers could stop an entire production line if they found any defects. (Meanwhile, Hyundai’s Excels were embarrassingly bad.)
Toyota was also among the first automakers to invest in alternative energy. The firm began experimenting with hybrids in 1990 and launched its first-generation Prius in 1997. They followed up with hybrid versions of Camrys, Highlanders, and more.
Additionally, the company leveraged its brand power. Its advertisements in the 2000s heavily featured its STAR Safety System, and its focus on reliability and ruggedness helped propel the Toyota Tacoma to become America’s top-selling midsized pickup.
That turned Toyota into a high-growth, high-return stock. Between 1985 and 2024, the company saw its U.S. market share surge from 6% to 15%, turning every $100 invested in the company into $2,800. They also dominated international markets like Australia, the Philippines, and South Africa.
That means Toyota’s shares have traditionally traded at a premium. Its stock has averaged 10.7X forward earnings since 2005, a 50% premium over Hyundai’s shares.
However, the automaker’s early success is now working against it.
- Reliability. Toyota’s competitors have now largely caught up. Earlier this year, Subaru overtook Toyota in customer satisfaction rankings for the first time, according to the American Customer Satisfaction Index (ACSI). Toyota now shares second place with Mazda. Hyundai, Honda, and GM are close behind.
- Innovation. Toyota was hesitant to develop EVs since management feared the new technology would cannibalize hybrid sales. In 2024, its chairman admitted that EVs would create enormous job losses among its suppliers.
- Profitability. The company’s return on equity has narrowed due to greater competition from both established carmakers like Hyundai and up-and-coming Chinese makers like BYD. Analysts expect returns on equity to fall below 9% this coming year – a departure from its historical 11% average.
- Valuation. Toyota’s premium valuation now puts shares at risk of a selloff. On a price-to-earnings basis, shares would need to fall at least 20% to bring them in line with their peers.
That makes Toyota a relatively unattractive bet compared to Hyundai. Though the Japanese automaker won’t disappear any time soon, its days as the world’s undisputed leader are coming to an end.
Buy This, Not That
In the early 1980s, Morgan Stanley’s quant team began using a strategy called “pair trading.” Their systems sought out historically correlated stocks and placed bets whenever prices diverged. That would allow Morgan Stanley’s team to profit whenever the “spread” reconverged.
In other words, if a company like General Motors Co. (GM) rose one day while Ford Motor Co. (F) declined, the system would buy Ford and sell GM, expecting a turnaround.
Eric’s system takes things one step further.
By differentiating between attractive and unattractive industries, he’s able to spot trades that pay off over far longer time horizons.
In fact, years ago, Eric recommended selling construction company Lennar Corp. (LEN) and buying Valero Energy Corp. (VLO) instead. Within three years, Lennar lost half its value while Valero more than tripled.
Eric provides more details in his presentation here. In total, he reveals seven “Buy This, Not That” trade ideas for the Age of Chaos, offering viewers exciting alternatives to today’s most overrated stocks.
Click here for all the details.
Until next week,
Tom Yeung
Market Analyst, InvestorPlace
