In this edition of the Alpha Letter, we cover:
My due diligence process for finding winning stocks
What industries I am bullish on
But first, a word from our sponsor:
FINAL DAYS TO INVEST IN AI MOWER SET TO DISRUPT $100B COMMERCIAL MARKET (Sponsor)
From golf courses to public parks to country clubs, grass needs mowing, which makes commercial landscaping a booming, $100B industry in the US alone. But, labor costs are high and margins are razor-thin.
That is, until Graze Mowing brought their sophisticated, autonomous, AI-enabled mowers into the picture. With machine learning and computer vision, they've developed proprietary technology to tackle commercial landscaping like nothing you've seen before. And they're 100% electric-powered, eliminating 75% of the fuel costs and over 50% of the labor costs associated with traditional lawn mowing.
With over $5M raised already, and $19M in preorders alone, you can join the investors and entrepreneurs excited to reinvent commercial mowing.
Invest in Graze before the round closes 6/30!
My Due Diligence Process
I love investing in hated industries. It is what I have always done. Find the most unloved industry and do a deep dive into the fundamentals of its business model. Find the best companies in the hated industry and if/when I get comfortable I will bet heavy. This is my process:
Identify an industry that everyone hates
Make a list of the companies in this industry
Force rank these companies by their balance sheets — I will typically start researching the companies with the best balance sheets
Build a financial model(s) for the company I think is the best to survive
Read through multiple years of financials and earnings transcripts (transcripts are in my opinion the best way to forecast future free cash flows)
Speak with the management team(s), industry experts and do channel checks
Build financial models for the competitors and repeat all of the above steps
Invest heavily if I get comfortable
Depending on how complex the industry/companies are in the sector this process can take upwards of 1-2 months. By the end of the due diligence process I should be one of the top analysts on that one given company in this sector.
I should note, I typically try to focus on the smallest companies in these given sectors due to the lack of competition from other professional investors. When you are investing in sub-$100 million market capitalization there is very little competition from Harvard MBA analysts who have been trained for years. Your competition is typically a retail investor who invests spare change on the side with a full-time job outside of investing.
Earlier in 2021 I was primarily focused on the retail industry. The retail industry has been one of the most hated industries for a long-time. If you asked anyone on Wall Street why they avoided retail they would say something like, “well Amazon risk.”
Utter bullsh*t. It was the most typical statement from a lazy analyst who didn’t want to or has never tried to understand how a physical retail store generates cash flow. But that was where the opportunity lied. No one was touching retail stores due to the “Amazon risk” and when COVID-19 came around the last remaining value guys dumped these stocks off a cliff.
My thought process for the retail industry was pretty simple by the time 2021 came around.
Any retailer who have survived this far isn’t going to go bankrupt
Costs were dramatically slashed at corporate and the store level giving potential for massive operating leverage should store sales return (think post Great Recession era — the same thing happened here)
There was less competition due to bankruptcies so if sales did return the ones left standing would take a larger share of the pie
There were multiple companies trading at a fraction of their 2019 price levels giving investors significant upside should their thesis work
It was a slam dunk for me. Everything that I laid out in the bullet points worked and continues to work. I wrote up three different retailers in March and April that are now up over 100% each (or more).
There isn’t many opportunities left in retail (besides this one that I wrote up in June —only up 6% so far with another 50% upside to go potentially) so I have begun to look in other industries for more hated ideas.
What Industries I Am Looking At
Here is a list of industries I am currently focused on. This is not exhaustive as I am always curious to learn how other businesses make money. But this is where 90% of my time is spent at the current moment.
Energy Industry: I really like coal companies here. Thermal and metallurgical coal. Coal is probably one of the most hated industries around due to the impact it has on the environment and the consistent bankruptcies the industry has faced. But there are multiple tailwinds that should allow both the thermal and metallurgical industry to thrive over the next few years. I have identified one company that I think will do very well over the next 12 months. I also plan to write up another idea this coming week so keep an eye out. I am also looking at a couple of energy service names to the traditional oil and gas industry that should do well as oil is now over $70/bbl.
Agriculture/Fertilizers: Not really a hated industry but there is a good opportunity I have identified that could be a multi-bagger. Rising corn prices combined with a drought have pushed fertilizer prices sky high. The company I have identified (see write-up here) is trading around $60/unit. The last time fertilizer prices were this high (back in 2012) this company was trading for $320/unit with 60% less capacity than it has today. This is a super cyclical commodity cycle we are in and I think it continues.
Traditional Media: The traditional media space looks pretty interesting right now. Newspapers, radio and television. Wall Street hates this space due to new competitors in the tech industry (think Netflix, Spotify, Google, etc.). A lot of these companies are trading like they don’t have a terminal value and some are trading under cash value. Junk Bond Investor recently wrote up two media companies that I am long (find them here and here).
Private Prisons: This is probably the most hated industry out there. The two public companies The Geo Group ($GEO) and CoreCivic ($CXW) are highly levered, contentious and trading at multi-decade lows. GEO and CXW recently bounced up from their lows on a short squeeze. If they get hammered again it could be worth a deeper look.
Gold Miners: I own physical gold given the reckless spending and debt levels governments across the globe have been doing. I penned an article title “I have been accumulating gold” that details my approach to physical ownership. To get operating leverage I have been doing some research into a few different junior gold miners. So far I have only taken a position in one. Gran Colombia Gold Corp. ($TPRFF) seems pretty interesting given the assets and value metrics. I will be spending some time on this one.
Dry Bulk and Oil Tankers: Two different industries but similar opportunities. Dry bulk carriers are making a lot of money right now as there is a significant amount of demand from iron ore and lack of new build ship. Ship rates have skyrocketed and everything is flowing to the bottom line. Oil tankers are still in the hole but should experience demand as the price of oil is rebounding and individuals are beginning to travel again. I also like how oil tankers are trading like no one wants them.
Malls: There are some class A mall owners that still haven’t recovered due to COVID. This is another hated sector that Wall Street pretty much avoids due to the “Amazon Risk” I talked about a few bullet points up. I am not as familiar with the business model here as I haven’t done a deep dive but this is a space I plan to look at in the coming weeks. The The Macerich Company ($MAC) has had a great run but is still trading way below its pre-COVID highs. This is a name I would like to know well.
What industries/companies are you bullish on? Drop them in the comment section below.
The Week Ahead
I will be dropping a research report this coming week on a special situation commodity idea for subscribers. I think in the short-term this stock will re-rate 10-15% higher with potential to go up >50% in the mid to long-term due to the current commodity tailwinds. Be sure to keep a look out for this idea. Get instant access to this stock idea along with all of my prior research for only $10/month.
Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.
Alpha Letter is a publisher of financial information, not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.
THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.
No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.
Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.
The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.
For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.
alphaletter.co (“Alpha”) is a website owned and operated by Substack. Alpha is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Alpha in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Alpha is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Alpha does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Alpha does not verify the adequacy, accuracy or completeness of any information. Neither Alpha nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Alpha nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis
How To Find Winning Stocks
Sounds like a sophisticated and solid approach! Love that you build financial models, speak to stakeholders and do the same for competitoers. In case you don't already do so, speaking to customers to further evaluate product/service quality might be quite beneficial (depending on the sector/company of course).
Haven't read one of your specific DDs yet, but I'm very keen on how detailed you describe your findings (which financial metrics are important and why, conditions for thesis to become invalid, to whom you've spoken and maybe a summarised transcript, etc.).
I wonder what your thoughts are on these two:
https://youtu.be/L-ahF-f5oYM (brilliant guy)
https://youtu.be/tOs9DTQXOKg (very interesting for growth companies)