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Geoinvesting Research Contributor Updates
In case you missed it, I just wanted to make you aware of new microcap reports from a couple of our research contributors.
On December 2, 2024 John Manny (@JMAN0670) published a report on a media company that is accelerating its transition to adopt a digital focused business plan versus print. Part of the bullish thesis involved the company selling certain assets:
Excerpt from article:
“Use of Proceeds: the Company stated on its Q3’24 Earnings call: “In terms of how the company thinks about the future use of any potential proceeds, we view this through three distinct lenses: first, the investments in the company we need to build a sustainably profitable media company; second, continuing to be responsible stewards of the company’s pension plans; and third, returning capital to our shareholders.” Given the limited pension contribution needed, and the Company’s dividend paying history, a special dividend is a likely use of proceeds.”
Since John published his report, the company sold two assets for a total of $70 million, and the stock is now up 35.95%..
I actually had a nice initial conversation with John to learn about his investing process. I feel very confident that he will be contributing some great ideas to GeoInvesting in the years to come.
Todd Schuh Published a new idea on a stock in the financial lending solutions industry. Todd thinks the stock can increase 400%.
Previously, he had published 2 ideas on Geoinvesting (both in 2024). They are up nicely, averaging a return of 97.4% as of Friday.
You can visit our Contributor Model Portfolio here
The Russell 2000’s Post-Election Round Trip: Why It Happened and Why We Don’t Care
The Russell 2000 has come full circle, retracing all of its 9.1% gains achieved during the post-2024 election “Trump rally”. Initially, investors rushed to buy on optimism, only to reverse course, partly as uncertainty over the direction of Trump’s policies grew. For example, what will views be on tariffs and Biden’s $1 trillion infrastructure bill?
Tariffs and Infrastructure Misconceptions
Trump’s discussions of tariffs on both China and Canada created fresh waves of uncertainty.
For example, before Friday’s strong gain of 42.4%, Power Solutions International, (OOTC:PSIX) was down as much as 57% from post-Trump win highs, maybe because a Chinese conglomerate owns 51% of the stock.
However, one key takeaway from this environment is that not all stocks are affected equally.
An illustrative case is a specific Canada-based infrastructure stock, , that resides in our Buy on Pullback Portfolio. This stock has declined by 18.5% since Trump threw tariff discussions into the ring. But here’s the twist: the tariffs should have no fundamental impact on this company’s business since its revenues are generated entirely within Canada.
While tariffs dominate CNBC headlines, this company’s real growth driver lies in the billions of dollars expected to be spent on Canadian provincial infrastructure projects over the next several years. On top of that, the company is also expanding into the data center construction market in Canada, opening up an exciting avenue for growth.
On the infrastructure side of things, some stocks have been whacked as people might be thinking that Trump and the Republican administration, while not opposed to infrastructure spending, won’t come through with Biden’s $1 trillion bipartisan infrastructure bill. This is the case because many viewed him as not having come through with some of the promises that he made with the prior $2 trillion infrastructure bill passed during his first tenure as President.
These types of overreactions to headlines offer clear opportunities for investors to capitalize on investor ignorance.
You can see all the infrastructure stocks that we actively track on our infrastructure screen here. The screen has produced 14 multibaggers (56% of the stocks in the screen), so we will welcome pullbacks 🙂. We added six stocks in 2024.
Russell’s Historical Behavior and the Impact of Fed Policy
The Russell 2000’s recent retracement isn’t an anomaly. Over the last year, the index has exhibited a tendency to stage large upward moves, only to retrace part or all of those gains. This cycle has been linked to the Federal Reserve’s monetary policy decisions since the end of last year.
In September 2024, the Fed executed its first rate cut since 2020, which had a positive impact on the Russell 2000 by about 2%, but it took just 1 week for the index to give that all back after investors realized that the Fed was not adopting the easy money policies of the past 15 years. We lent our opinion on this:
“Jerome Powell’s recent comments illustrate a consistent theme he has been emphasizing over the past year: the era of “cheap money” is unlikely to return. Since the aftermath of the 2008 recession, as well as during the COVID-19 pandemic, the Federal Reserve adopted quantitative easing and ultra-low interest rates policies to stabilize the economy. Now, Powell has made it abundantly clear that this period, characterized by negative, near-zero or even extremely low interest rates, is behind us.
This was music to my ears. I was somewhat concerned that the bull market in high-quality stocks that began percolating in 2022 could eventually be threatened if the Fed decided to return to an ultra easy money policy.”
This past week, the Fed announced another rate cut, 0.25 percentage points and its third consecutive cut of 2024, but tempered expectations by signaling that only two more cuts are likely next year. Investors, particularly day traders, are clearly hoping for a return to pre-2022’s “easy money” era.
This, along with Trump policy uncertainties, prompted the Russell 2000 to come full circle to its pre-November 2024 election levels, as it continues to become clear that only modest rate cuts are on the table.
In contrast, at the end of 2023, cooling inflation and supportive Federal Reserve policies to maintain interest rates at the end of 2023 (without much more color) had investors euphoric about the Fed going back to the easy money days.
Quality vs. Low-Quality Companies: The Long-Term Shift Remains Intact
The Russell 2000 index is home to a broad mix of companies, many of which have poor balance sheets and floating-rate debt. While lower rates have provided some relief, they don’t fix the core issues for these businesses. With interest rates normalizing at higher levels than the easy money years,, many of these companies will likely face liquidity crises or insolvency as aggressive rate cuts will no longer come to the rescue.
However, there’s a silver lining for quality-focused investors. The volatility in the Russell 2000 reflects a potential tug-of-war between those who don’t understand that many companies in the index will eventually “die” over time (or at least drop below the required market cap to stay in the Russell), and those who sell during rallies, fully understanding this dynamic.
As low-quality companies exit the Russell 2000 (due to delistings or financial collapses), they will gradually be replaced by higher-quality businesses.
This “weeding out” process theory has been a recurring theme of ours since 2022, when we first identified this structural shift. The broader implications are clear:
- High-quality, profitable companies will eventually make up a larger share of the Russell 2000.
- Investors who prioritize these companies, today, will position themselves ahead of this gradual shift.
The shift will take time, creating a long-term bull market for small cap, micro cap, and nano cap investors who focus on quality.
While market pullbacks can be painful for many, we see it as a welcome buying opportunity.
The long-term bull market for quality small caps, GARP (Growth at a Reasonable Price) stocks, and high-probability turnaround opportunities is still very much intact.
Market pullbacks allow investors to focus on accumulating positions, at great prices, in companies with real long-term multibagger upside.
The most important point to understand is that while money-losing or debt-encumbered companies struggle to survive, for companies with strong fundamentals executing their growth plans, all the market noise is simply that—just noise.
Investors that are able to embrace quality will thrive moving forward, while those who refuse to embrace quality will lose the tug of war as the “zombie” companies seize to exist over time.
~Maj Soueidan
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