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In this edition of the Alpha Letter, we cover:
Crypto: Dogecoin had a wild ride this weekend. Should you buy some?
Stocks & Options: 4 stocks with unusual options volume last week
Top Idea: Update for subscribers on an idea we are accumulating
Dogecoin was all over the place this weekend. It went as high as 73 cents in anticipation of Elon Musk’s appearance on Saturday Night Live. The show didn’t live up to the hype and Doge tumbled to as low as 42 cents after Musk called the crypto “a hustle” in an SNL skit.
Now Doge is back into the 0.50’s on news that a SpaceX rocket will be named Doge 1.
So is Dogecoin a good investment?
The short answer is no. You may get lucky and hit a quick 100% gain, but you could just as easily lose 90% or more. There is no intrinsic value to Dogecoin. It goes up when Elon Musk tweets a meme about it. Does that sound like a rational market movement?
If you’re looking to hit 1,000 to 1 bets, I think trading in “shit coins”, as small alt cryptocurrencies are sometimes called, is a reasonable place to look. But you have to be very careful with position sizing and realize that you’re essentially gambling. You may hit it big and make easy money very quickly, but you could easily lose it all.
Besides the risks with the actual currencies, keep in mind that the markets for Doge and other altcoins have a whole set of problems you wouldn’t see in stocks. Robinhood frequently has trouble executing buy and sell orders on Doge when volume is high, which usually causes a crash. It actually happened on Saturday during SNL.
In my opinion, the blockchain and cryptocurrencies like Bitcoin and Ethereum have real-world applications for payments and are becoming more and more relevant in the investing community. If you’re serious about creating long-term wealth, those are the only cryptocurrencies worth being involved in.
Speaking of creating long-term wealth, the only factor that really matters in the long-run is cash flow. A business is valuable if it can generate consistent, growing free cash flows over a long period of time.
Of course some businesses don’t produce positive cash flow but are worth billions. The only reason those companies are worth anything today is because investors expect that they will generate positive cash flow at some point in the future, and are discounting that projected cash flow to come up with a value today.
Recently we've had the opportunity to review a stock research platform, TheStonksHub. They release weekly research reports on various stocks and from the articles we've read the quality of research exceeded our expectations. Their most recent report on DraftKing's detailed a bird’s eye view of the entire Online Sports Betting industry.
Brokers usually charge tens of thousands per user for their premium research. To our surprise, TheStonksHub proved to be a great alternative for an extremely affordable price. They have a free trial so give it a go and read as much content as you can to see if it's a good fit for you. Use this link to receive 10% off the platform.
Stocks & Options
Part of my trading routine is checking the options flow, both for the market as a whole and for individual names on my watchlist. I use Vigtec to track option flow - check out their 7 day free trial here.
Here’s a look at the overall option flow for the market as of the close on Friday:
The bubble sizes represent total premium traded. SPX was the largest name traded in the options market Friday in terms of total premium. This bubble chart gives us a quick look at the sentiment of the market. The big difference I’ve noticed this week compared to the last few weeks is that market sentiment is much more mixed now.
Take May 4th for example:
Just two weeks ago, nearly every bubble on this chart would be green. What I’ve been noticing the last couple of weeks is that the indexes (SPX and QQQ) have been bearish or neutral while large caps like Tesla, Amazon, and Apple have been bullish.
This difference is important because it tells me that the indexes are due for a bit of a cool-off, but there is still plenty of money rotating into individual names. Specifically, it seems that the market is most bullish on large cap tech stocks that have revenue and earnings, while speculative tech with little to no revenue is still falling.
One other name I’ve been seeing pop up on my Options Discovery Scans is Metlife (MET).
Several MET call options have been trading at unusually high volume. For example, the 6/18 $55 call’s volume spiked more than 900% Friday compared to the average for the previous 10 days.
Here are a few other stocks whose call option volume was extremely high on Friday:
Energy Transfer LP (ET)
Cenovus Energy (CVE)
VanEck Gold Miners ETF (GDX)
I search through the discovery scans to find calls with unusually high volume a couple times per day. You always need to check for the reason the call volume is up to help determine if the rally may already be over. For example, a company may be reporting earnings after the bell. In that case, put volume could also be way up, so there likely is no edge in trading on the increased call volume.
However, a large spike in call volume can be a warning sign that a rally in the underlying stock is forthcoming. I never buy into companies just because option volume is up. Rather, I search for companies with increased call volume, cross out the ones who don’t fit my investing model, and then start or add to positions in the companies that I like. In other words, even if the stock doesn’t immediately spike, I will still be okay holding those companies.
Update To Alpha Subscribers
Speaking of high dividend yields. We recently provided an update on a stock we are long and continuing to accumulate.
This is a company with a $73 million enterprise value with normalized free cash flow in the $20-25 million range.
The company has net cash of $47 million and will likely reinstate its dividend sometime in 2021.
If the dividend is reinstated at the prior rate the yield would be over 5%.
The best thing about this investment is the market sold off the stock yesterday (by over 8%) because it simply doesn’t understand the story.
Subscribers can view the research report here.