🗞 Not Those Chips, the Other Ones

WHILE YOU POUR THE JOE… ☕️
Grand Finale

No, that’s not Michael Myers. It’s Joe Biden, the former “Mr. President” who walked off into the rainforest last weekend to give us all a sense of suspense only Halloween movies do.

However, the scary aspect came from what could have been his final act as president, enabling Ukraine to have long-range missiles to defend itself against Russia.

Russia’s Putin has said that if Ukraine carried these sorts of weapons, he wouldn’t hesitate to launch a nuclear attack. Now, here’s what I’m thinking.

The market didn’t react to the news; if anything, it just ended up stretching a bit higher. Arms and defense companies like Lockheed Martin did nothing on this, meaning Trump has been accepted as having the final say.

This is a good thing, by the way ✅ 

Speaking of scary, let’s get on with today’s email 📧…

SUSPICIOUS ACTIVITY
Big Bag of Popcorn Time

The reality is that the most overextended names in the stock market are found in the semiconductor space. While the rallies here were true, we think that the fundamentals have begun to shift.

This shift began with Super Micro Computer stock, which was recently sold off because of certain legal allegations surrounding its accountancy practices, allegations that border on accusing the company of fraud. 👀 

Now, there are accusations, and then there are facts. Hindenburg Research made the same accusations of Roblox stock, and we fully recommended you buy that dip. A few days later, the stock was up over 30% 🔥 in a single day.

Today, we are telling you the opposite for Super Micro Computer stock, as the evidence points to substantial downside risk in the stock's financial statements.

For those non-finance people in the audience, let me make this as simple as possible. You see that first highlight for net income? Super Micro earned $352.7 million in the quarter. 💵 

But

As seen in the second highlight, they issued roughly 6 million more shares during the same period. So, the question becomes, why was there a need to dilute investors and raise more cash if they ended up making so much money?

That’s the thing, they didn’t make any money, and here’s how you can tell just in case someone wants to start an argument with you:

This is the bit of the cash flow statement the company posted in its past quarter, and you can see one major disconnect from what they reported in their income statement.

If the company produced a net income, why would they have a net operating outflow of $2.5 billion? 📉 

I’ll tell you why: They inflated their earnings by recognizing sales and income before delivering the chips they apparently sold.

This is a major red flag in accounting terms because if these orders are not reflected in the next income statement, net income will go from a positive $300 million to a multi-billion loss.

And this is coming from a guy who bought the dip this week and is sitting on over 100% return on call options, but I’ll be sure to short this thing as soon as there’s a timeline for the financial release.

To attempt to fix this situation, Super Micro Computer has hired a new independent auditor in BDO USA.

The problem is

This firm has been in trouble before for breaking accounting rules, paying multi-million dollar fines in the process.

The implications for Nvidia will be tested this week, though I think that since Super Micro Computer represents only 9% of revenue, it might be okay.

So here’s the thing: If SMCI goes down with its suspicious ship and brings Nvidia down with it, I think it’ll most likely be a dip to buy, given all the people standing ready to defend the stock’s high valuations. 📈 

 TRADE OF THE WEEK
Healthy Choices, Healthy Rallies

So you know how RFK Jr. has been appointed to be the head of health for the United States? Well, the guy’s a stud, and he can climb benches better than most guys in their 20s.

One of his main objectives is to get mainstream junk food brands to change their old ways and get on with their health regime.

This triggered a reaction from the classics like McDonald’s, Pepsi, and Coca-Cola.

For a good reason, though, you know what they are. 📉 

Just look at those dips guys, these are supposed to be the stocks and brands that never have more than a 10% drawdown from highs, so the market is definitely having a fit from RFK.

That’s fine though, these brands have enough international exposure to diversify away from whatever health measures are taken in the United States.

In fact, I would start buying here if I didn’t have as much time to manage a portfolio, as we can almost assure you that these names will be back in a quarter or two.

But

There is one domestic name that isn’t going to diversify their sales exposure as easily but that we still think is worth taking a look into:

Yep, Celsius stock.

We missed out on this one during earnings, though it was a 0.3% hit to our fund given that it was an earnings swing or “lottery.”

Now, we’re back to investigating the stock from another angle, and we’re willing to take on a longer-term call option position if it makes sense.

And guess what, it does.

This is the market and volume profile for the stock, and it looks like most of the volume for the year has been clipped around these levels.

In case you’re new, this is the setup we saw in Walgreens stock before it ran over 20% after earnings.

Anyway, from this formation, we think that the stock could get to a high of $46-$50 🎯, and the options distribution agrees:

Notice in the top line chart where most of the volatility is, between the $40-$50 strikes. The volatility here is over 180%, so it’s expensive.

We like expensive; it means people are willing to overpay just to get the position and be exposed to whatever the future holds in the stock so it can reach that strike by that date.

At the same time, volatility falls for the same strike over a longer date; for example, January 2026 has only 70% volatility (less than half).

That makes no sense, as there should be more volatility the longer you go out, but markets are just not willing to do the math on that because there’s too much uncertainty.

We know, however, that options might be mispriced based on the wrong assumption that prices will be a nice, even curve into the future.

So, running a Black Scholes valuation model for the January 2026 $50 strike calls gives us a fair value of $3.52 a contract. 🎯 

And that is exactly where the contract trades, so based on today’s distribution, there is no discount.

But, that changes very quickly when you realize how tight the curve is right now due to compressed volatility:

Not very realistic, is it?

The market is pricing only $12 dollar moves for the next year, and we know that this stock has some traders betting on a $20 move at least. 💥 

So, when we price this options contract at the right volatility (170% on the low end), it is now worth up to $14.32 a contract, four times more than it is today. 🔥 

Now, here is a breakdown of what markets think of the stock and why we believe they will carry it higher eventually:

Celsius is now the most discounted stock in the beverage industry, and the big money knows this (hence the most volume clipped here for the year).

More than that, it is the second most expensive on a forward P/E ratio, and just like the $45-$50 call options, we like when people are willing to overpay for a position here.

The difference maker here is ultimately the P/B ratio of 17.2x for Celsius, which is head and shoulders above the other names in the beverage space. There has got to be a reason for the premium.

That reason is the fact that Celsius is getting punished like other junk food brands without actually being a junk food name itself, and the market will have to correct this discrepancy sooner rather than later. 🫰 

NOW GO AND MAKE IT HAPPEN
Make it Make Sense

One saying from today’s book recommendation 📖 stuck to me ever since I read it. “Heads, I win; tails, I don’t lose much.” That is the mentality of Mohnish Pabrai, one of the legendary investors in Wall Street.

Inside the book, you’ll learn to think in ways where you can find setups like the ones we pitched here for Celsius, where the payoff is much bigger than the potential risk.

To your success,

G. 🥃