Playing the Inflation Game with Moonshots

For most high-growth tech investors, inflation is usually the last thing on their minds.

And for good reason. When tech investors are looking for the next 1,000x Amazon, the difference between 1.5% and 3.5% annual inflation seems irrelevant.

But tiny changes have a habit of upending stock markets. My heart goes out to Cathie Wood, who slapped a $3,000 price target on Tesla just as the carmaker’s share price was plummeting. (It’s down 32% from its January highs). When discount rates are so low, minor changes have an outsized effect on the value of future cash flows.

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But Reddit investors already knew that, whether they said it or not.

Since mid-January, investors have piled into value reopening stocks like GameStop (NYSE:GME) and AMC (NYSE:AMC). Consumer discretionary stocks have outperformed consumer staples by an almost 2-to-1 ratio.

As the economic cycle moves toward rate-rising stages, there’s another deep-value sector that typically wins: basic materials.

Today, let’s take a look at the Moonshots from that world.

Rising Stars: Metals, Mining and Moonshots

Most investors barely think twice about the down-and-dirty companies that dig up stuff from the ground. After all, these basic material companies are usually money-pits of capital expenditure.

But these highly leveraged miners can make phenomenal Moonshot investments … if they’re bought at the right price.

Shares in bankrupt Peabody Energy (NYSE:BTU) — my top pick for our office Christmas stock-picking competition — tripled last winter after the coal mining firm came to an agreement with creditors. Copper/gold miners Comstock (NYSE:CRK) and Filo Mining (OTCMKTS:FLMMF)have gone from penny stocks to winners. (In other words, make sure you pick me for your stock-picking team next year!)

That’s because mining companies are extraordinarily sensitive to commodity prices. When you’re earning 15% gross margins, minor price increases can double, triple or 10x your profits.

Some firms have already started seeing the windfall. With steel prices 90% higher than pre-pandemic levels, analysts now expect U.S. Steel (X) to generate $2.9 billion in EBIT profits this year. That’s 35 times higher than its 2019 $81 million profits! It’s hard to overemphasize the effects of price increases for firms with massive fixed costs.

Commodity prices have risen far beyond pre-pandemic levels

Redditors have already jumped in. Cleveland-Cliffs (NYSE:CLF) — formerly known as Cliffs Natural Resources — is up 65% since March. Clean Energy Fuels (NASDAQ:CLNE) is up 50% since May.

None of these firms are particularly strong long-term investments since high capital costs reduce a firm’s return on invested capital. The average U.S. metals and mining firm generates less than a third of the S&P 500’s median ROIC, according to data from Thompson Reuters. Firms like Glencore (OTCMKTS:GLNCY) virtually ignore their mining operations to focus on trading and marketing. (One can argue most Bitcoin miners also do the same thing).

But basic material companies can also gain the most when investors are cycling from panic to mania. These are firms that can benefit from inflation, rather than suffer.

In today’s list, I’ve scored basic materials companies with 1) low gross margins, 2) cheap prices and 3) high momentum. Steel firms make up half of the U.S. stock list, while mining firms make up more of international*.

Several firms stand out. My old favorite, Peabody Energy, makes #2 on the list, as does Arch Resources (NYSE:ARCH) and penny stock Hallador Energy (NASDAQ:HNRG) for coal. Of these, Hallador’s cheap price-per-share makes it the most tempting Moonshot of the three.

In a similar vein (pardon the pun), Synalloy (NASDAQ:SYNL) and Alpha Metallurgical Resources (NYSE:AMR) have reasonably low starting prices for the enterprising Moonshot investor.

Others on the list will have steadier upside. Verso (NYSE:VRS) is a potential buyout candidate in the slowly consolidating world of paper products. If it does, it will join Domtar (NYSE:UFS) and Georgia Pacific in paper companies going private.

* Please send us a request if you’d like the international list

Falling to Earth: Bitcoin Miners

Speaking of mining, one segment I haven’t heard from recently?

Second-tier Bitcoin miners.

These firms — which include Ebang (NASDAQ:EBON) and SOS Limited (NYSE:SOS) — are off between 75% to 85% from their peaks. Better-known names, by comparison, are down less.

Bitcoin (CCC:BTC-USD): down 37% Marathon Patent Group (NASDAQ:MARA): down 48% Riot Blockchain (NASDAQ:RIOT): down 55%

Why the difference between the haves and have-nots? (assuming that you can call losing 55% a “have”…)

That’s because when it comes to mining Bitcoin, it’s a winner-take-all game; there’s no reward for completing a block in second place.

Ebang, a second-tier mining rig producer, has since fallen far behind #1 Bitmain. The laggard’s flagship model, the E12, sells for a tenth of Bitmain’s A19 price despite having half of its power efficiency.

SOS Limited is also starting to feel the burn. I had written my “breakup letter” to the company right when short sellers Hindenburg and Culper Research issued scathing reports about fraud. The company has lost another half of its value since then.

These firms *will* win if Bitcoin prices come roaring back — much like real-world metals and mining, cryptocurrency miners are leveraged plays on the underlying asset prices. (That’s why it was so strange for Marathon to buy $150 million of Bitcoin in January).

But those looking for better Moonshots need to take an all-or-nothing approach. Rather than settle for these middling companies, I prefer going with 1) high-momentum altcoins, or 2) truly dirt-cheap Bitcoin miners.

High momentum altcoins of the week:

  • AMP (CCC:AMP-USD)- an Ethereum-based digital asset token on the Flexa network. Its listing on Coinbase this week has pushed the crypto into the top-30 by market cap.

  • Shiba Inu (CCC:SHIB-USD)- a “next Dogecoin” token takes off again with a 50% rise this week.

  • SafeMoon (CCC:SAFEMOON-USD)- its cult-like following apparently still considers the developer’s six-figure withdrawals a cost of membership.

Dirt-cheap Bitcoin miners of the week:

Dmg Blockchain (OTCMKTS:DMGGF)- the Canadian-based penny stock has 3,600 ASIC miners on order. The August delivery date makes the firm not only an option, but also a futures contract on Bitcoin prices.

Hello Pal International (OTCMKTS:HLLPF)- another Canadian-based penny stock. This time, it’s a failed social-media firm looking to become the next big Dogecoin miner.

By the numbers: The Cycles of Metals and Mining

177,500 Number of Americans employed by coal companies in 1985. That year, the U.S. produced around 850 million short tons across 3,355 mines. 42,000 Americans employed by coal companies in 2021. The U.S. now only has around 600 operational mines. 79% Percentage of Americans who favor developing alternative energy sources 70% Approximate amount of Bitcoin mining that relies on fossil fuels, according to data scientist Alex de Vries

Interesting Reads: Memes, Private Investing, and Self-Driving Trucks

After rising 40% this week, a self-driving truck company could still gain more. That’s according to research done by Luke Lango and his team.

Bret Kenwell takes a shot at identifying the eight Reddit stocks that could be the next big meme.

Jeff Remsburg asks investing guru Cody Shirk about how private investing turned a throwaway $5,000 investment into $180,000.

I have to admit: I doubt AMC could rise beyond $75. Mark Hake begs to disagree, with a cash-flow model that pins the movie theater company at almost $80.

Closing Thoughts: Here We Go Again … Again

People tend to learn from their mistakes. I, for one, now know that space suit helmets don’t fit in airplane overhead bins.

But the stock market tends to challenge our collective memories.

In the case of basic materials, investors tend to remember only the bad times. Mental images of shuttered coal plants and steel factories get burned into our minds. So too, does losing a bunch of money.

That means it’s occasionally possible to find $10 stocks selling for pennies. Much like bankrupt Peabody Energy, these ugly ducklings will make you think “why on earth would anyone buy such a thing?”

As every contrarian investor knows, however, when the crowd is running in a certain direction, it’s often wise to stop and see what treasures they’ve left behind.

Thomas Yeung is an expert when it comes to finding fast-paced growth opportunities on Reddit. He recommended Dogecoin before it skyrocketed over 8,000%, Ripple before it flew up more than 480% and Cardano before it soared 460%. Now, in a new report, he’s naming 17 of his favorite Reddit penny stocks. Claim your FREE COPY here!

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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Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

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