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Courtesy of Tobin Smith, Transformity Research

From Transformity's September Newsletter Part II: WE Make Great Profits From This Correction with Cash, Patience & Reasonable Expectations

As inflated as the stock market may be, there are still stocks that have significant upside that are paying outsized dividends — but you have to look beyond FAANG.

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This is a picture of the bag I smack two or three dozen times with a 7 iron every day AFTER the market closes. This works off tension and frustration, after I run or bike or do something healthy. I show you this poor, innocent punching bag because I have been picking stocks and making up/down business cycle calls for 20+ years (so far so good) and I have NEVER seen a more complicated armada of negative/positive market-moving financial and political and supply chain and geopolitical and inflationary warships all launching macro and microeconomic missiles into the real economy and the stock market all at the same time.

To reiterate my subscriber missive from last Friday, while all is not well in Stock Marketland, this stock market correction (which we still see as at most a 10%-ish correction down to SP 4,100-ish and then a retest, of course) had little to do with the China Evergrande debacle. EvergrandeGate turned out to be exactly what we assumed it would be--an opportunity to take a boatload of the 10 years of stock market profits made in the last 14 months and build some cash to reinvest.

The GOOD NEWS is the Fed "put" (i.e., the concept that the Fed's desire to keep the goods and services demand creating "wealth effect" for households with discretionary cash flow and financial assets rolling) is still alive and kicking . . . so as long as the Fed has our back, where is the worry?

The Key Point About the 2021-2022 US Stock Market You Should Never Forget: IF you add ALL the world Central Banks together, the world's money supply to buy stuff and stocks and bonds is still exponentially exploding. All in, the WSJ reports that major central banks are STILL buying $300 BILLION in assets PER MONTH.

And so far, the long stocks case we have made and followed since 2010 (and with the cash we had on hand by going to cash in February 2020 PRE the 41-day pandemic bear market) has been your basic Ockham's Razor approach—that in the fog of the pandemic war, the simplest, most obvious conclusion as to how to invest in this environment is always buy the dips because $300 billion per month of reserve bank monetary stimulus is the real "marginal buyer" of financial assets and that $300 billion HAS TO GO somewhere.

Forget the Meme Stocks or Robinhooders buying $75 shares of Tesla. They are pipsqueaks compared to $300 billion a month of new cash money sloshing into the capital markets as the real marginal buyer of stocks.

In short, with $300 BILLION in financial assets being turned into cash that has to be reinvested per month, there might be a ton of worrisome cross currents and economy-killing risks (see 5% inflation, The White House and Congress, supply chain disruptions and semiconductor shortages till 2023), at the end of the day, instead of a flashing strobe light of blinding new market risks, there is really just one number that sums up the plethora of risks and where the market actually is and where it goes from here.

The WSJ reports that this $300 billion of Central Bank liquidity per MONTH has surged EU/Japan/US Central bank assets to $25 TRILLION from $16.2 trillion before the pandemic--a 58% yearly growth rate.

And all that massive stimulus is BEFORE the $2-$3 trillion of new fiscal spending hits the US economy in 2022 via the social and physical “infrastructure” spending on its way after the two remaining Democrat Senators (Sinema and Manchin) are beating into submission by the Pelosi/Schumer tag tream.

Key Point: IF you really think about it (and I usually come to these epiphanies smashing that 7-iron into the bag pictured above!) is it any wonder that with A) negative nominal 10-year rates in the EU and Japan (and negative 5% ish REAL 10year rates counting 3-4% inflation rates) and B) the massive amount of that cash swishing around institutional investors that went into positive nominal rate US bonds (taking 10-year rates down to 1.15% and lower for almost a year) that C) US stocks up over 110% since the April 5th, 2020 bottom?

Conclusion: This once-in-many-generations everything goes up rally was created primarily by the US Fed, and it's the Fed's to take away the $30 billion a month punchbowl..

And let's be real on the politics; my 24 years in DC and interviewing dozens of Senators and Congressmen and women taught me that despite all the Kabuki theatre, "thar is an election year next year--we shant ffff up our chances to keep or get power, shall we?"

Thus the silver lining for a market that has inferred and interpreted bad news as good news is: 1) Valuations look stretched only if interest rates are going to normalize in the next couple of years (hint—not a chance) 2) with the world 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 an indisputable fact that US consumers with financial assets and discretionary income (aka the top 20% of household be income 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 downturns and IF the market corrects 10%+ to our 4100 downward target, VOILA Ockham’s Razor will prevail — the Fed will step in and help the market all over again.

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

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

Genesis Energy (GEL) The Perfect MLP For 2022 With 2-3X Upside Potential and Doubling (or tripling) It's 6.6% Yield

I like buying GEL Under $12 and my target is in the range of $32 to $36. It has a great business turnaround story--especially in critical energy infrastructure which also gives me unique exposure to the rapidly growing EV economy. (PS--I test drove a $168,000 Lucid yesterday--their plant is here in Arizona…OMG…it makes a rattle and roll Tesla look like a Model T.)

Here's why we are forecasting a $32-$36 target valuation over the next few years based a huge turnaround on their balance sheet and a revisit to a normal EBITDA multiple for an >10% yielding MLP:

  • Genesis Energy is currently an over-levered midstream MLP that cut its distribution last year from $2.20/unit to $0.60/unit, and the stock collapsed amid the onset of Covid19.
  • YET the outlook for Genesis is much brighter due to an easily reached 30%+ increase in EBITDA in the next 2-3 years with minimal capital investment (they have a LOT of excess offshore pipeline capacity they have already long term contracts to fill with Murphy Oil).
  • The icing on the EBTIDA cake is an expansion of capacity for a key product used in lithium-ion battery production which GEL is the low cost producer (almost 50% lower)
  • Genesis Energy trades very cheap at just 7x 2022E EBITDA and 6.5x 2023E EBITDA. Assuming a normalized 9x 2023E EBITDA valuation, Genesis units could more than triple
  • The Kicker: Just like when we were buying 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 in distributions/unit implying a yield to current stock price of over 20% by 2023.
  • We are looking for significant incremental EBITDA contributions from the Soda Ash Business, a key component for lithium carbonite which is used for batteries for electric vehicles
  • Soda ash is a key component used in the manufacture of glass (~1/2 of global demand) as well as lithium carbonate, a key component of lithium-ion batteries.

Soda Ash Global End Markets

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According to the GEL investor deck, Genesis Energy is the largest North American producer of natural soda ash with 3.5mm tons/year of natural soda ash production capacity

Even better for investors, Genesis is the low-cost producer in North America. Because Genesis soda ash cost of production is about 50% lower than the cost to produce synthetic soda ash (@70% of world production), it has historically sold out its entire production capacity from the higher cost producers.

Key Investment Thesis: Demand for soda ash demand for lithium production is expected to grow rapidly.

Again according to GEL’s most recent investor presentation, about two tons of soda ash are required to create every one ton of lithium carbonate. In 2020, lithium carbonate equivalent (LCE) production was ~292,000 tons. By 2025, LCE is projected to reach 1,140,000 tons/year or ~300% increase and by 2030, industry players and analysts estimate that LCE production would reach 3,000,000 tons or 900% above current levels.

Genesis is also constructing an expansion project that would expand its natural soda ash production capacity by 1.3mm tons/year with completion of the expansion on track for the 3Q of 2023.

Given the exponentially rising demand for lithium carbonate, by the time the expansion is placed in service, the increase in demand for additional soda ash would be greater than the capacity expansion, or ~2.28 mm tons/year of soda ash by 2025 and 6mm tons of incremental soda ash demand by 2030.

I expect Genesis Energy (GEL) MLP to increase in share price from here while paying investors a 7% and growing dividend!

More from Tobin:

Transformity Investor Website

Reviews of My Latest Book FOXOCRACY

Linked-In Profile

Recent NY Times Op-Ed

Recent TV Interview