🗞️ Is Your A/C Running Still?

WHILE YOU POUR THE JOE… ☕️
Calling It Quits

After an embarrassing debate against former President Trump and seeing the polls drop against him, Biden finally came to his senses and dropped out of the presidential candidacy for another term.

This further solidifies the new trend that markets expect to see a Trump win in the coming months, as we mentioned in this post on the dollar's weakness. This will help exporter stocks see some upside in the coming quarters.

It'll be a long road ahead ⏳️, where investors must strategize and figure out how this news will affect the markets and the economy's future.

But, if you're looking for a stock with a higher chance of performing regardless of who makes it to the presidency, let's get on with today's email 📧…

BET LIKE THE HOUSE
A Near Sure Bet

Most investors and consumers in the United States are not aware of new legislation that will affect the way they use their air conditioning (A/C) units 🥶.

Just like governments started imposing a quota to reduce internal combustion engines and replace them with electric vehicles, there is a new rule affecting the rate of greenhouse gas emissions from coolants and refrigerants.

So, think of your grocery stores with freezers and coolers, industrial warehouses keeping safe temperatures for their workers, and every household turning on their A/Cs to avoid a sweat competition.

Pretty large market… Which is being affected by the American Innovation & Manufacturing (AIM) Act 📝. The premise behind this bill is to reduce greenhouse emissions by 40% starting this year and up to 2028.

Emissions will be lowered to a 10-20% limit in 2028. But how does the market achieve this?

Through the reclamation process, which chemically purifies used refrigerants and coolants, companies can remain compliant with the new AIM act.

Hudson Technologies (NASDAQ: HDSN)

That’s where Hudson Technologies stock comes into play, as the company owns roughly 35% of the reclamation market 📈.

In case this isn’t clear yet, Hudson Technologies is in the middle of the AIM Act’s wave of new regulation, which has boiled down to bigger contracts where customers don’t really have a choice.

In other words, Hudson Technologies owns over a third of the market, which is in the middle of the reclamation process that will force the nation to stay compliant with emissions.

Having a nearly guaranteed profit cycle in the making, we believe that Hudson stock is becoming a near-sure bet in today’s market, especially at today’s price.

We’re not the only ones who think there’s a double-digit upside in this stock; we touched upon how Wall Street feels about the stock, and here’s what we found:

• 29.7% earnings per share (EPS) growth 📈 rate for the next 12 months, which we think is conservative considering the massive wave of reclamation claims that are to come.

• Analysts at B. Riley slapped a $16 price target 🎯 on Hudson Technologies, daring it to rally by 81.8% from where it trades today.

• The company is only $400.5 million in size, and small caps are getting major market attention today, so there’s also a momentum trade in the making.

After checking with Wall Street, we did our digging (and hours of keyboard hitting on Excel). We came up with our valuations and projections.

Notice that we projected very little growth ahead to stay conservative despite a high conviction of near sure-bet status in the company’s future financials.

Through these projections, we applied a discounted cash flows (DCF) valuation model to figure out how much to pay for this company and how much of a return we can expect:

We landed on a rough valuation of $13.4 a share, or 52.3% upside 🔥 from where it trades today. But that doesn’t mean we will be buying it right away.

The company has yet to show any financial progress due to the AIM act, and so far, commodity prices and demand are on the decline, so the financials are compressed right now.

This is why we want to buy the stock closer to its net asset value (NAV).

** Quick tip 🔎: Net asset value is basically a company's liquidation value, meaning that if the worst happens, say the company goes bust, this is how much you would receive as a shareholder. You can calculate it as Total Assets minus Net Debt / Net shares outstanding.

For Hudson Technologies, we calculated this NAV value to be $5.10 to $6.20 a share. This is where these levels stand on the chart:

The orange area is the NAV discussed above, but you should keep in mind that stocks rarely trade at the NAV level; instead, they trade at a slight premium to it.

That premium brings us to the blue-shaded area, the market profile excess. This means an area with very little—if any—trading volume, and it acts as a vacuum for prices to either continue their current trends or pivot to the opposite side very quickly.

We will be watching the print (market profile) around this excess to determine how the market feels about the price and whether it will continue to sell off toward the NAV price or pivot to bring us our price targets.

The market profile print shows that the $8.65 to $9.2 a share level is where markets are battling to figure out whether to take the stock back higher or bring it lower to the NAV.

As of the Friday close, it looks like the price might reject the current excess (turquoise lines) and continue down to the next excess below $8.40 a share.

A strategy here will be either to buy the stock outright as it nears the NAV level or start selling cash-secured puts once we see the price stabilize near an excess and gain some strength.

This way, we can afford to wait on the stock and lower our cost by collecting the premium from the short options 💰️.

WEEKSTARTER STOCK
The Names to Avoid

Simply, it’s all about the domestic consumption names, particularly the ones that import most of their stuff since, you know, the United States barely produces anything lately.

The reason behind this thesis is the exact reason why markets are buying into gold to bring it to all-time highs 📈. In short, global participants are betting on a weaker dollar coming up.

If you have the time, we suggest reading this post on gold and what it means for the stock market and the economy in the next few quarters.

A weaker dollar will make companies that import their goods more difficult. It will also put more pressure on domestic consumers, so these stocks will be hit with higher costs and lower revenue 📉.

In this list, you can find the following names:

• Walmart (NYSE: WMT)

• The Home Depot (NYSE: HD)

• Target (NYSE: TGT)

Even though these are great businesses by themselves, they are also among the top 10 importers in the United States and heavily rely on domestic consumption to survive and continue making profits.

So, being hit from both angles will give shareholders in these names a really cloudy future filled with downside risks that could be hedged away by turning the same thesis on its head and investing in this short list of American exporters.

Now that Biden has dropped out of the race, I’d suggest you watch bond yields and gold prices this week 👀 to get a feel for what’s about to come.

Oh, and if you work in investment banking or equity research, please don’t pitch any major domestic names or bigger importers.

NOW GO AND MAKE IT HAPPEN
Misbehaving Markets

Markets are just as statistical as psychological and emotional, so you should understand both sides of the story.

The book that helped me understand this trend is in today’s book recommendation 📖. It’s filled with other topics you might want to Google to really squeeze every drop out of this book.

To your success,

G. 🥃