Momentum is Red. Markets continued to break down on Thursday after the Federal Reserve announced plans to raise interest rates to 3% and told investors that it would continue to act until inflation is tamed. We’re waiting for this market to spiral into a level of capitulation. Small- and mid-cap stocks remain under intense pressure, while investors have started to crowd into FAANG stocks.
As I noted yesterday, the markets remain under deep stress. Momentum is extremely negative, and we’re not finding much of a bid in this environment. I warn anyone who is shorting to take profits along the way. There is a possibility that this market experiences a short squeeze very soon. I’m convinced that it would rival the squeeze that we saw in early June. There’s a lot of negative sentiment right now. Funds are extremely short right now. But there has to be some value out there somewhere, right?
Let’s take a look at a few cheap, buy-and-hold stocks that can provide unique upside when this storm ends. Remember, this will be at least a two-year buy-and-hold process. The markets don’t anticipate any level of rate cuts now until at least next September. So buy these stocks… and don’t look at them until there is a Presidential Election.
Pick Three in a Downward Environment
As I’ll note today, we want to focus on companies that make real things. Things we need to survive… not technology and gadgets that we wish for during Christmas. Today, we’ll keep our focus in the energy, shipping, and healthcare industries. And we’ll find companies to own on the cheap.
Value Play No. 1: Friedman Industries
With a market capitalization under $55 million, Friedman Industries (FRD) is off nearly every major investor’s radar. The company has survived every recession dating back to the 1970s and manufactures high-quality steel products in vital industries. The Texas-based company produces steel used in tubing for oil production, cargo containers for shipping, and vital parts for the railroad, building, and gas pipeline sectors. Simply put, it operates in critical businesses and stands to benefit from government infrastructure demand.
This stock is comically inexpensive, the result of its tiny market capitalization and much larger competition. The stock trades today at $7.30 per share, as negative momentum continues to hit even good companies with tangible assets.
The tangible book value (liquidation value) puts this stock at nearly $11.65. That means if it went out of business or a suitor arrived, shareholders are looking at this level as an exit. That price represents about a 59% upside from today’s level.
I’m also happy to see that the EV-EBIT (takeover measure) is under 4.
This is an incredibly inexpensive stock and one that warrants your consideration. Yes, it might be a bumpy road in the coming months, but this is where I’d prefer to deploy capital. Down in the bottom of the value chain, and far away from the unprofitable tech giants or semiconductor stocks prone to bigger moves down due to rising interest rates.
Value Play No. 2: TransGlobe Energy
Staying away from the U.S. energy side and turning our attention to Canada… and Egypt. I know when you think “oil” you think about the global energy powerhouse that is Egypt. But let’s dig under the hood on TransGlobe Energy (TGA).
The company has a strong Piotrotski score of 7 (out of 9) and strong balance sheet management with a Z score of 4.31. The company is cash rich and sitting in an oversold territory with a 9-day RSI at 30. On the takeover numbers, the oil producer has an EV-EBIT of just 1.13, making it an attractive acquisition target in the future. I like this stock as a long-term buy and hold under $3.00.
Value Play No. 3: Co-Diagnostics
We’re still going to get sick. We’ll still require testing. And we’re likely to see consolidation in the health diagnostics space as costs continue to rise. So, 2020’s COVID-19 small-cap wonder Co-Diagnostics (CODX) is back on the board with the stock now tumbling under $3.00. While the company needs to improve its balance sheet this year, it has a very good Z score at 6.14. It is far away from any debt distress levels, and it has a ton of cash on the balance sheet.
The company should return a lot of money to its shareholders, especially with the stock trading at less than the tangible book value of the company. It’s trading at a 0.95x tangible book level. This is simply incredible value. Its margins are equally impressive. Operating margins are north of 37%, it generates a 22.8% return on equity, and its EV-to-EBIT level is so small (0.04) you might need a microscope to see it. This is one of the cheapest stocks on the public markets. Buy it and don’t look at it for a very long time.