🗞️ Trump Stocks FTW

WHILE YOU POUR THE JOE… ☕️
Count Your Money

It may not look like this waterfall, but close to it. I mean, that would at least be the case if you followed our stock picks over the past 2-3 weeks 🎯.

First, it was calling the top on Tesla (NASDAQ: TSLA), which crashed and brought out shorts with a return of nearly 13% in a week 🔥. Then, it was Starbucks (NASDAQ: SBUX), which we literally posted about on Monday. That stock was up over 4% in a single day.

Oh, but best of all, there is Potlatch (NASDAQ: PCH); since we called our view on that stock, it has rallied by over 12%, and it doesn’t look like it will stop anytime soon.

Look, we work very hard on our trading ideas and even more so on long-term investments like the time we pitched Nike (NYSE: NKE). But besides the point, the least you could do is share your profits with us, at least next time when you take on one of our calls.

Sharing our newsletter with your peers also goes a long way, so that works, too.

Anyway, speaking of our next big call, let’s get on with today’s email 📧…

LONG-TERM THINKING
Solar Stocks Will Run, But This One Will Fly

It’s a big call, but that’s where the big money is made 💵. After an assassination attempt on former President Trump, the markets have pretty much priced in that he will win the election in November.

Knowing what that was like for certain stocks during 2016-2020, markets are already positioning themselves for another Trump stock market. First of which, the energy sector is going to be pivoting like none other.

Why? You can thank Biden for virtually wiping out all of the U.S. domestic oil production, making us dependent on Russia and other countries for our oil needs. Oh, and when the Ukraine war started, we had to tap into our oil reserves since we couldn’t import more Russian oil.

Trump has already indicated that he will take care of this when he gets back into office. He will spark the domestic oil industry 📈 to bring it back to its former levels, which is good for certain stocks.

This is what the oil sector looks like now, well, for the past three months. All of the driving factors are now showing expansion readings for the past quarter:

• Overall manufacturing index expansion, which is accelerating.

• New order expansion, accelerating again which means more upcoming production in domestic oil.

• Bingo, more production underway, so the domestic names will see rising profits soon more likely than not.

Go ahead; you can buy your favorite oil stocks before the election, especially now that the results look done. But there’s one little problem:

The Energy ETF has already started outperforming the S&P 500 over the past month, so it looks like you’d be too late ⌛️ for the oil play.

But don’t worry, here’s precisely what we can do to play the next ‘Domino’ in this chain.

Got Solar?

What happens if oil prices go up, and everything from gasoline to electricity to every major power source also starts going up?

Well, you’re going to start seeing a lot of efforts for us to go into and adopt other energy sources. When the same thing happened in 2022, when oil reached $130 a barrel, there was a sudden outburst of YouTubers claiming to be solar millionaires.

Oh, and all over social media, too, it was like being a solar salesperson was the most obvious career path. But as oil is back to and below $85 a barrel 📉, that’s not the best choice anymore. In fact, I know some of them who are going back to their old jobs.

Anyway, we have reasons to believe that the cycle in solar stocks is about to start again, especially now that we feel comfortable with oil prices going higher on a potential Trump win.

But, not all solar stocks are made equal, especially overseas ones. Another thing that will be sure of a Trump administration is tougher tariffs on China, God I miss the twitter wars Trump would set off.

If Trump does set off tariffs for Chinese goods, that includes the polysilicon (the main ingredient making solar panels work) that comes out of China. And guess what? Like most everything else, China exports over 80% 🌎️ of the world’s silicon, enabling the rotation into cleaner energy.

And that’s where this stock comes into play.

Daqo New Energy (NYSE: DQ)

Daqo is a Chinese polysilicon maker. It is not only China’s largest but also the world’s largest.

Most investors miss one point: the United States isn’t the leading nation when it comes to the solar revolution; it’s actually China. So, we felt comfortable digging into this stock despite the risk of China tariffs because most of Daqo’s demand will come from China or other Asian nations.

Deal Breakdown

In true investor fashion, here are the main drivers that we identified when projecting and valuing this business so that we can make a sensible decision on whether or not to invest in it:

• Price of polysilicon in the open market, or how much Daqo is selling it for

• Polysilicon sales volume today versus a year ago, to get a feel for where the market is today

• Cost of Polysilicon production, so we can accurately project expenses and profits moving forward

Keeping all this in mind, here’s what our model looks like:

Which isn’t far away from what Daqo reported in its latest quarterly financial results:

Notice that we are still projecting a base case below the actual market state for polysilicon prices and costs.

Keeping our conservative views in mind, which can turn on a dime when and if oil prices head higher and when interest rates go lower to boost manufacturing investments and Chinese infrastructure projects (which include solar), we believe our valuation targets may very well be on the lower end of the spectrum.

Sure, these compounded average growth rates (CAGR) seem on the bolder end of things. However, they are still well below the historical average that Daqo has pushed out before.

With this in mind, this is what our valuation model 🎯 looks like on a Discounted Cash Flows (DCF) basis

**Quick tip 🔎: a DCF model values a company based on one question. That question is, “How much should I pay today for the future stream of income that this business could generate for me?”.

For Daqo, the answer is roughly $79 a share, or 359.3% higher 🔥 than where it trades today, woah.

For reference, this is the worst year of the polysilicon cycle. The business is still operating under the base assumptions that would deliver this valuation, so imagine what it would look like once the cycle is back on all cylinders.

For reference, look at the company's returns on invested capital (ROIC), which are over 20% 🫰. This means any dollar reinvested into the business (or invested by you) will potentially grow at this rate on an annual basis.

High ROIC businesses eventually see their stock prices catch up to reality, so relax if you see the stock crashing for a bit longer.

STOCK OF THE WEEK
Smile For the Camera

You know how our stock picks have been kicking butt lately? Apart from Daqo above, we are looking to get into another subscription software stock that could make new headways in the coming quarters.

Shutterstock (NYSE: SSTK)

Whenever you see a GIPH or any live animation in the news or other newsletters, you can thank Shutterstock for that media piece.

Recently partnering with Meta Platforms (Facebook), this company now has exclusive access to WhatsApp and Instagram’s API 👀 to give its users content in GIPH form and other images.

You know how Uber connects drivers to riders without owning any cars? And how Airbnb connects hosts to guests without owning any homes? Shutterstock connects media buyers to media producers (photographers, videographers, and other content creators) for a fee.

Now, this creates an even better model than just one-off sales revenue. You have to be part of the Shutterstock ecosystem to have access to content and to post your content for others to download, and that comes at a subscription price.

So, keeping this in mind, here’s what the drivers for the business look like:

Notice that while subscribers are declining, average revenue per customer is up. This is because Shutterstock's customer base is shifting with the economy.

More enterprises (big businesses) are buying content from Shutterstock as they digitize their business and media to scale on the Internet. If they don't, they might as well close their shops.

These larger enterprise budgets 📑 are to thank for rising revenue per customer despite seeing fewer active subscribers.

Lost subscribers are small businesses or medium-sized influencers and media companies, which are now on a tighter budget due to slowing business activity 📉 in the United States, inflation, and high interest rates.

The stock sold off on the news of slowing subscribers, but now you know this isn't as bad as it seems. With interest rate cuts on the horizon, it wouldn't be far from reality to expect a rally in this company's cycle.

How Much We Think it’s Worth

You know the drill; we ran our models 🔢 to ensure our projections aligned with reality. We are not assuming any sort of comeback from the smaller customers but rather staying with the historical spending ranges from the enterprise customers that are now dominating Shutterstock’s revenue stream.

With this in mind, here’s what our valuation suggests:

$87 a share, we are directly daring Shutterstock shares to rally by just over 100% 🔥 from where they trade today. And the company has just the right financials to get it done.

• Gross margins over 60%

• Net income margins over 10%

• Return on invested capital (ROIC) over 15% currently compressed due to recent acquisitions of GIPHY

• Only 18% of capital is debt, very low for a technology stock

• Trading at 12.7x its 5-year average free cash flow, anything below 15.0x can be considered a potential deal

NOW GO AND MAKE IT HAPPEN
Expand Your Arsenal

For those of you still in college (which is most of our subscribers), please take advantage of all your free time right now; I know it doesn’t seem like much, but trust me, it’s going to get real busy real soon.

Today’s book recommendation 📖 will put you miles ahead of your peers and help you prepare for any career in financial services, as it’ll make you a better auditor and analyst and give you props for a kickass financial model.

To your success,

G. 🥃