Tobin Smith: 3 times more with a yield of 7% – Who still needs FAANG?


Courtesy of Tobin Smith, Transformation research

Of Transformity September Newsletter Part II: We Are Making Big Profits From This Fix With Money, Patience, And Reasonable Expectations

As bloated as the stock market can be, there are still stocks that are going up significantly and paying outrageous dividends, but you need to look beyond FAANG.

This is a photo of the bag that I hit two or three dozen times with a 7 iron every day AFTER the market closes. It takes the tension and frustration out of running, biking, or doing something healthy. I’m showing you this poor innocent punching bag because I’ve been picking stocks and doing business cycle up / down calls for over 20 years (so far so good) and have NEVER seen a more complicated armada negative / positive financial markets. and the political supply chain and geopolitical and inflationary warships all launching macro and microeconomic missiles into the real economy and the stock market at the same time.

To reiterate my subscriber missive from last Friday, when all is not going well at Stock Marketland, this market correction (which we still consider to be at most a 10% correction to SP 4,100, then a new test, of course) had little to do with the Evergrande debacle in China. EvergrandeGate turned out to be exactly what we thought it would be – an opportunity to take a boat of the 10 years of stock market profits made in the past 14 months and accumulate money to reinvest.

The GOOD NEWS is the Fed’s “put” (i.e. the concept that the Fed’s desire to maintain demand for goods and services creating a “wealth effect” for households with flows discretionary cash and moving financial assets) is still alive. . . so as long as the Fed supports us, where is the concern?

The key point of the US stock market 2021-2022 that you should never forget: IF you add up ALL the central banks in the world, the world’s money supply to buy things, stocks and bonds is always exploding exponentially. Overall, the WSJ reports that major central banks are STILL buying $ 300 BILLION in assets PER MONTH.

And so far the case of the long stocks that we have presented and followed since 2010 (and with the money we had on hand going to cash out in February 2020 ahead of the pandemic 41-day bear market) has been your approach to basis of Ockham’s Razor – that in the fog of pandemic war the simplest and most obvious conclusion on how to invest in this environment is always to buy the dips because $ 300 billion a month in reserve bank monetary stimulus is the real “fringe buyer” of financial assets and that $ 300 billion MUST GO somewhere.

Forget the Meme stocks or the Robinhooders buying $ 75 of Tesla stock. These are pipsqueaks compared to the $ 300 billion a month of cash flowing into the capital markets as a true marginal buyer of stocks.

In short, with $ 300 billion in financial assets turned into cash that must be reinvested per month, there could be a ton of disturbing cross-currents and risks of destruction to the economy (see 5% Inflation, La White House and Congress, supply chain disruptions and semiconductor shortages through 2023), at the end of the day, instead of a flashing strobe light blinding new market risks, there is no There’s really just one number that sums up the plethora of risks and where the market actually is and where it’s going here.

The WSJ reports that this $ 300 billion in central bank liquidity per MONTH pushed the assets of EU / Japan / US central banks to $ 25 trillion, from $ 16.2 billion before. pandemic, an annual growth rate of 58%.

And all of that massive stimulus is BEFORE the $ 2 trillion to 3 trillion in new tax spending hits the U.S. economy in 2022 via social and physical “infrastructure” spending en route after the two remaining Democratic senators ( Sinema and Manchin) submitted through the Pelosi / Schumer beacon network.

Key point: If you really think about it (and I usually come to those epiphanies that crush that 7 iron in the bag pictured above!), Is it any wonder that with A) negative 10-year nominal rates in the EU and Japan (and negative rates of 5% ish REAL at 10 years counting inflation rates of 3 to 4%) and B) the massive amount of this liquidity circulating around institutional investors who have turned to US bonds with positive nominal rates (cutting 10-year rates to 1.15% and lower for almost a year) than C) US stocks have risen over 110% since the April 5, 2020 low?

Bottom line: This unique, multi-generational rally was created primarily by the US Fed, and it’s up to the Fed to take away the $ 30 billion per month punch bowl.

And let’s be realistic about politics; My 24 years in Washington and my interviews with dozens of senators, congressmen and women have taught me that despite everything Kabuki theater, “it’s an election year next year – we’re going to increase our chances of keep or get power, right? “

So the bright side of a market that has inferred and interpreted bad news as good news is this: 1) Valuations only look stretched if interest rates normalize over the next two years (index – not a chance) 2) With the world of monetary geniuses printing $ 300 billion a month in new euros, dollars and yen, TINA is still alive and well in the US capital markets.

Key point: it is indisputable that American consumers with financial assets and discretionary income (i.e. the richest 20% of households being incomes that control 70% of discretionary spending on goods and services) spend more as their assets grow.

Net / Net: Central bankers don’t have much tolerance for major market declines and IF the market corrects more than 10% from our target downwards of 4,100, VOILA Ockham’s razor will prevail – the Fed will step in and help the market again.

For now (and until proven otherwise), the Fed’s put is real, and at least for now, it still reigns supreme in protecting and preserving the bull market. actions.

How do you earn 2x-3x your money in our favorite high income energy linked MLPs and ETFs that delivered our clients and subscribers 3 to 1 higher returns in 2021 than the QQQ / SPY indices?

Genesis Energy (GEL) The perfect MLP for 2022 with 2-3x upside potential and double (or triple) its 6.6% yield

I like to buy GEL for under $ 12 and my goal is between $ 32 and $ 36. He has an excellent history of corporate turnaround, particularly in critical energy infrastructure, which also gives me unique exposure to the rapidly growing electric vehicle economy. (PS – I tested a $ 168,000 Lucid yesterday – their factory is here in Arizona… OMG… it makes a rattle and a Tesla look like a Model T.)

Here is why we are forecasting a target valuation of $ 32- $ 36 over the next few years based on a huge turnaround in their balance sheet and a revision to a normal EBITDA multiple for an MLP performing above 10%. :

  • Genesis Energy is currently an over-leveraged middleman MLP that cut its distribution last year from $ 2.20 / unit to $ 0.60 / unit, and the stock crashed at the start of Covid19.
  • YET, the outlook for Genesis is much brighter due to a 30% increase in EBITDA easily achieved over the next 2-3 years with minimal capital investment (they have LOTS of excess offshore pipeline capacity than ‘they already have long-term contracts to fulfill with Murphy Oil).
  • The icing on the EBTIDA cake is a capacity expansion for a key product used in the production of lithium-ion batteries of which GEL is the low cost producer (almost 50% lower)
  • Genesis Energy is trading very cheaply at just 7x 2022E EBITDA and 6.5x 2023E EBITDA. Assuming a normalized valuation of 9x 2023E EBITDA, Genesis units could more than triple
  • The Kicker: Just like when we bought USAC last April at $ 5 a share (now $ 16 +), our expected increase in EBITDA means not only a much stronger balance sheet, but also a likely tripling of distributions. unit implying a return compared to current actions. price of more than 20% by 2023.
  • We are seeking significant incremental contributions to EBITDA from the Soda Ash business, a key component of lithium carbonite used for electric vehicle batteries
  • Sodium carbonate is a key component used in the manufacture of glass (~ 1/2 of global demand) as well as lithium carbonate, a key component in lithium-ion batteries.

Global Sodium Carbonate End Markets

Screenshot 2021-10-04 at 11_11_27 PM

According to GEL’s investor brief, Genesis Energy is the largest North American producer of natural sodium carbonate with a production capacity of 3.5 mm tonnes / year of natural sodium carbonate.

Better yet for investors, Genesis is the low cost producer in North America. Since the cost of producing Genesis soda ash is approximately 50% lower than the cost of producing synthetic soda ash (@ 70% of global production), it has historically sold all of its production capacity to producers at higher costs. students.

Key Investment Thesis: The demand for sodium carbonate for lithium production is expected to grow rapidly.

Also according to GEL’s most recent investor presentation, approximately two tonnes of sodium carbonate are needed to create each tonne of lithium carbonate. In 2020, lithium carbonate equivalent (LCE) production was approximately 292,000 tonnes. By 2025, LCE is expected to reach 1,140,000 tonnes / year, an increase of around 300% and by 2030, industry players and analysts estimate that LCE production will reach 3,000,000 tonnes or 900 % above current levels.

Genesis is also building an expansion project that would increase its natural soda ash production capacity by 1.3mm tonnes / year with the completion of the expansion on track for the third quarter of 2023.

Considering the exponential increase in demand for lithium carbonate, at the time of commissioning of the extension, the increase in demand for additional sodium carbonate would be greater than the capacity extension, or approximately 2 , 28 mm tonnes / year of sodium carbonate by 2025 and 6 mm tonnes of additional sodium carbonate demand by 2030.

I expect Genesis Energy (GEL) MLP to raise the share price from here while paying investors a 7% dividend and going up!

More from Tobin:

Transformity Investor Website

Reviews of my latest book FOXOCRACY

LinkedIn profile

Recent NY Times Editorial

Recent TV interview


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