Buyout Plays Ahead of Earnings

Earnings

Market momentum is Red. Investors continue to sit on the sideline ahead of earnings season. Retail investors and hedge funds have pulled out, and markets are seeking a bottom. But everything comes down to the CPI data set for tomorrow morning. If the CPI figure is well above expectations, we might have to discuss a 100-basis point hike come late July. We’ll wait to see if capital can rush back in as the banks start to report earnings and funds attempt to redeploy capital.

Yesterday, I recommended a few banking stocks that should get your attention ahead of earnings. They all trade under a tangible book value of 1, which means they trade for less than the sum of their parts. Imagine that you have a bank sitting across the street and it’s worth $10 million. It has paid off all its debt, there is $10 million in cash in the vaults, and it’s a sound business. 

Again – it’s WORTH $10 million. But the market is trading it for $8 million. What do you do? You buy the bank and you wait. The same goes with other companies that are clearly takeover targets in any market. Today, I want to show you one such company. Its shares just jumped 193% on Tuesday. The signs were all there. 

What Do You Do?

Think about the stuff we need versus the stuff we want in society. Sure, we want expensive cars, big homes, and lots of fancy gadgets. But we’re facing a recession. We’re tightening our belts. It’s not like it was in 2020. But what do we need? We need bank accounts. 

We need food, we need energy, and we need utilities. Commodities. And… medicine and medical devices. So it didn’t surprise me today when a private equity company, Aurora Capital Partners, stepped in and purchased Sharps Compliance for $8.75 per share. The stock jumped today nearly 200%. The pop comes a few days after the stock traded at 52-week lows of $2.83. 

Sharps operates in the collection of medical waste. If you’ve gone to the doctor’s and taken a needle, you’ve likely seen their red containers for the waste. They collect and dispose of these instruments in doctors offices and hospitals. It’s a necessary business with strong margins and a lot of growth potential. But – like most stocks outside of energy – its sector has seen sharp selling over the last six months. 

What’s interesting is that this stock was getting very close to its tangible book value of $2.56, while price to free cash flow projections sat at roughly $2.72 per share. As this crisis continues, it’s important to ask: What is a company really worth? And then, you want to trade around those price levels. So, let’s do that today. 

Here’s Your Watch List For Earnings Season

I’m looking at companies trading within striking distance of their tangible book value. I’m looking for profitable companies with cheap cash flow. These are companies that actually make REAL stuff – the things we will need regardless of the financial state of the next five years.

And we came up with this list. This should be a very nice starting point to help you find great trades.

These companies make real stuff. Oil, steel, agricultural inputs, and they trade at very cheap levels. I’ll break down how I’d trade some of these stocks depending on their options chains.

Quick Notes on PepsiCo

PepsiCo (PEP) fell on Tuesday after reporting earnings before the bell. 

The company topped expectations. It raised its financial outlook. And it said that more Americans are drinking Pepsi and eating Doritos (is that a good thing?). This downturn is linked to some investors taking profits off the table ahead of CPI, and broader concerns about forward guidance across the entire market. 

Heading into this earnings season, investors should worry a bit about earnings compression. This consists of a company’s earnings increasing…. But the stock price didn’t move because it was too expensive in the first place. I’ll dig deeper into an example when the time comes.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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