Alpha Letter is a newsletter that gives readers investing ideas across different asset classes and strategies. You’re currently subscribed to the free version, which includes ideas that should just be viewed as starting points for your own research. To get out in-depth analysis on stocks we recommend, subscribe to our premium newsletter here.
In this edition of the Alpha Letter, we cover:
Crypto: What’s the next Dogecoin?
Stocks & Options: Sunrun and Occidental’s option flows are trying to tell us something
Dividend Growth: Rotation out of growth stocks into dividend stocks driven by higher proposed capital gain taxes
Looking for the next Dogecoin? Here are some up-and-coming altcoins that have Dogecoin potential.
We looked at altcoins trading under $1 and filtered by trading volume and social media buzz. Here are some interesting cryptocurrencies we found:
Stellar (XLM) - Currently trading in the $0.72 range at the time of this writing, Stellar is uo 8% today and 42% for the week. It’s market cap is $16.8 billion and is currently the most heavily-traded crypto under $1 besides Dogecoin.
Cardano (ADA) - Cardano is one of the most talked-about cryptos on social media right now. I’ve been seeing dozens of mentions about it on Twitter over the last couple days. It currently trades at $1.74 with a $55 billion market cap. It’s focused on payment processing and NFTs, and could be a serious rival to Ethereum.
Siacoin (SC) - Trading at around 3 cents, Siacoin was a big mover Tuesday. It went up 8% on the day and is one of the most heavily-traded altcoins below 10 cents.
Shiba Inu (SHIB) - This one is attempting to ride Doge’s coattails, but could take off if enough people embrace the meme. It was trading around $0.00003393 on Tuesday. Its total volume over the last 24 hours equated to $12.4 billion notional value.
EOS Force (EOSC) - EOS Force is the highest-gaining crypto over the last week among cryptos trading under 5 cents. EOS’ price was around $0.04 Tuesday. It has a market cap of just $44 million, so there is plenty of room to grow if it catches one.
MicroBitcoin (MBC) - MBC has real meme potential. It’s trading at just $0.00007995 as of this writing. It seems like all the good meme cryptos start out trading at far less than a penny. MBC’s market cap is just $3.3 million right now. It’s gained 105% on Tuesday and 138% over the last week.
Keep in mind that trading in altcoins is extremely risky, even more so than penny stocks. There is no intrinsic or fundamental value behind most or all of these altcoins, and the markets are unregulated. Especially low-volume, small market cap cryptos could lead to total losses if the market evaporates.
Stocks & Options
As many of you know, I like to start my trading day with several options scans using the Options Matrix (get a 7-day free trial here).
One of my favorite ones for mid-term trades is the ‘Wall Street Bulls” scan. It finds stocks whose institutional ownership is greater than 70% and identifies call options with executed volume greater than 1,000 on the day.
This scan is a proxy for insider buying, but is much more timely because I don’t have to wait around for SEC filings that show up days after the buying happened.
While not every stock found in this scan will be a quick winner, it gives a good starting point for identifying stocks that have strong Wall Street support.
As of the close Tuesday, here are a few of the calls that show up in this scan:
The two Sunrun calls near the top are out of the money. High short interest in both of those tells me that large bets have been placed on Sunrun hitting $50 and $55 within the next month (Sunrun closed Tuesday at $42.94).
Here’s the momentum analysis on Sunrun from Vigtec’s Live Charts tool:
One other name I saw on several unusual call activity scans is Occidental Petroleum (OXY). The stock fell 7% after its mixed earnings results, but options activity suggests that the market believes the decline is an overreaction.
The option flow during Tuesday’s session was incredibly bullish. More than five times as many calls were traded versus puts (95,309 vs.17,159). Check out the option flow bubble chart below. Green means bullish activity and the size of each bubble corresponds to the total premium traded in each option.
Using Dividends As A Tax Safe Haven
I’m currently operating under the assumption that Joe Biden will be raising the capital gains tax in the near future. The proposal Biden has laid out is to tax capital gains like ordinary income for individuals with incomes over $1 million. For those who are unaware the maximum you will pay on capital gains is 20% now. If this proposal goes through the max you would pay is 39.6%.
If the increased tax proposal ultimately goes through, I am predicting we will see a flight of capital into high dividend growth ETFs and other securities that pay a stream of “recurring” dividends.
Currently, the maximum dividend tax rate an investor will pay on “qualified” ordinary dividends is 22%. Simply stating, if the capital gains rate is increased, there is potential that high income earning investors shift their capital from high growth stocks that don’t pay qualified dividends, to long-term high dividend paying stocks and ETFs to defer capital gains taxes and to receive a quarterly payment at a much lower tax rate.
We think this shift in capital is already beginning to happen, as we highlighted here (search for The WisdomTree US SmallCap Dividend Fund).
To take advantage of this “capital rotation” I have been buying the Vanguard High Dividend Yield ETF (VYM). This high dividend ETF has a yield of 2.8% and is currently up 40% so far this year.
A substantial amount of my portfolio is now in this ETF. I view this ETF as a long-term buy, hold and forget. In addition, I think this ETF can be used as a “cash proxy” — given the long-term performance of the ETF — and when I find something more compelling to invest in I will rotate money where needed.
Investing In Prisons?
Want a controversial value idea you probably don’t want to bring up at a dinner party? Meet prison stocks.
There are two public prison companies and they have just gotten crushed: The GEO Group (GEO) and CoreCivic (CXW).
Both GEO and CXW are at all time lows given the recent executive orders from the Biden Administration, the dividend halt, high leverage, potential change of corporate tax structure (from REIT to corporation) and lower prison occupancy from COVID-19.
Despite the major headwinds these companies have faced, their valuations are just too cheap to ignore. Here is the run-down:
Both GEO and CXW generate significant free cash flow and are trading at all time lows. Investors are beginning to price the equity like it is going out of business.
The management teams at both companies have halted their dividends and will be using cash flow generate from operations to rapidly pay down debt.
GEO and CXW are in the process of monetizing unused real estate. Proceeds could be significant.
The equity is trading under the replacement value if someone wanted to rebuild all of these prisons.
Michael Burry has been a buyer of GEO and CXW.
We plan to write up the investment case for GEO and CXW for paying subscribers in the coming weeks. You can get access to our paid research for only $10 per month.
Our last idea is up close to 30% in less than a month after we identified an idea that we thought the market was totally missing — despite the great operational results. Check out our list of top ideas now.