Another Milestone For The Reopening Trade

In today’s edition of the newsletter, we cover the 3 areas:

  • Macro - More restrictions lifting

  • Stocks - Screening for 52-week low micro caps

  • Crypto - How is MicroStrategy (MSTR) valued?

Macro

Thursday marked another milestone for the reopening trade: Georgia joined a few other states in lifting all Covid-related restrictions. While this could mean more cases in the short-term, this is good news for restaurants, physical retailers, and travel stocks. 

Florida is pushing back on cruise-related restrictions by suing the CDC for limiting a critical piece of Florida’s travel economy. Carnival Cruise Lines said bookings continue to surge, but the company may switch home ports if the US rules continue to restrict cruise lines too much. Carnival’s potential move away from US ports is probably the main driver behind Florida’s lawsuit.

Carnival also said that bookings for 2022 are higher than the number made in 2019. The company’s CEO cited “pent-up demand” as a reason to be very excited about the cruise industry over the next couple of years.

The US continues to hit milestones in the number of vaccinations administered. There is still some debate over whether or not vaccines make us totally safe from Covid and its many variants, but I believe that most people are tired of staying home and will embrace a full reopening once they are vaccinated. It’s hard to imagine a scenario where the majority of the US agrees to stay locked down, even if one of the Covid variants turns out to be very infectious and/or deadly.

One negative note for this week was a surprising jump in unemployment claims. Jobless claims for the week ended April 3rd were 744,000 compared to the estimate of 694,000.

As we continue to a supposed “normal”, it will be important to monitor unemployment numbers. If claims keep rising even after most places have reopened, that would be a big red flag that the recovery isn’t completely robust. 

Stocks

Every good investor has a process for finding new stocks. You might already have 5 to 10 stocks you’re researching or watching, which is good. For me, the process is usually:

  1. Identify a potential investment

  2. Due diligence to understand the company

  3. Look for an acceptable entry point

  4. Continue to monitor and decide when to add, hold, reduce, or close position

One step each week to add potential companies to step 1 is running a 52-week low scanner. As a deep value investor, I want to find stocks that are beaten up but will inevitably hit an inflection point. While there are dozens of factors I look for that I cover in the premium newsletter, I’m primarily looking for stocks that are trading for less than they’re actually worth.

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The 52-week low scanner below is for companies below a $250 million market cap that hit a fresh 52-week low today. You can adjust the market cap and industries to fit your own style of investing. Some momentum traders might even run a 52-week high scanner and add those names to their watchlist.

I also add in some financial metrics to my screener so that I can get a quick overview of the business before deciding to dig in. For example, I can identify some potential plays right off the bat by looking at names that have reasonable metrics. 

For example, KANP and CHFS seem to have more “normal” metrics, while something TCAC has a price to book almost at 10,000x. On further inspection, TCAC is a SPAC that is looking to acquire a company in the marijuana industry — which now makes more sense on the valuation metric.

Remember, you never want to blindly buy stocks that show up on the 52-week list. Many of these names are on this list for a good reason. Using a screener like a 52-week low list is just a starting point into further research.

The next step after the screener is to dig into each of these companies filings and financials to understand the business model. If you’re going to take a position in a company, you really need to understand how the business model works and more importantly, how they generate cash flow.

Many beginning investors are often anxious to jump into a new stock once they find one — taking a position after 10 minutes of looking into a company. No matter the company, large or small, buying something you don’t know anything about will more than likely result in you losing your money.

These tiny companies often have very important details that investors need to dig for. So, pull up a 52-week low screener and start digging into the companies you find. You’ll discover some really bad investment, but you’ll also find a hidden gem or two. 

Examining MicroStrategy (MSTR)

MicroStrategy (MSTR) is easily the most well-know Bitcoin-related stock in the markets. It’s up 454% over the last year thanks to its pivot to embracing Bitcoin. 

While MSTR has a separate intelligence software segment, the company is valuable for two reasons when it comes to Bitcoin: it holds Bitcoin as an investment, and it provides other companies resources on how to incorporate Bitcoin and the blockchain into their business models. 

MicroStrategy has gained praise and criticism for its aggressive Bitcoin buying. So far, the bet has paid off.

According to The Street, MSTR holds 91,326 Bitcoin at an average price of $24,214 per coin. As of Thursday afternoon, that’s a profit of 139%. In other words, they’ve turned $2.21 billion into $5.29 billion. 

What’s MicroStrategy Worth?

MicroStrategy’s software business was steadily declining before 2020, but the incredible Bitcoin rally caused a surge in the stock price. It went from $125 a year ago to a peak of $1,315 in February, to $700 today. 

MSTR’s market cap is $6.7 billion, as of this writing. In my eyes, there are three main components of this valuation:

  • The software business - Declining and not very profitable. Is becoming less and less important to the overall valuation of the business each day.

  • Bitcoin on the balance sheet - The 91,326 Bitcoin on MSTR’s balance sheet make up the most concrete component of the valuation. Those Bitcoin could theoretically be converted to cash - about $5.29 billion worth. This means that the Bitcoin investment makes up about 78.9% of the company’s market cap. 

  • Future upside of Bitcoin - Most of the investors in MicroStrategy are likely investing in the company because of the potential upside to Bitcoin. If Bitcoin keeps going up, then MSTR’s investment in Bitcoin keeps appreciating. As Bitcoin and Blockchain technology become more widely-adopted, MicroStrategy’s Bitcoin training and software become more valuable.

Overall, MSTR has become fairly closely correlated with the price of Bitcoin. It’s one of the best public investments to match Bitcoin because a large chunk of its value is based on actual Bitcoin held, rather than many other companies that offer some service that has to do with the blockchain.