My Response to Dan Ferris

Addressing the big news of the day... My response to Dan Ferris... The market looks a lot like it did in 1999... A critical lesson for investors... Don't buy bad companies... We're in a bubble (and that's a good thing)...

Editor's note: Before we get to today's regularly scheduled content – a guest essay from Empire Financial Research editor Enrique Abeyta, in which he introduces a corner of the market you might've never considered before – we must first address the big news of the day...

Almost exactly one month before the election, President Donald Trump and his wife, Melania, have both tested positive for COVID-19. After the news broke overnight, all three major U.S. indexes started down sharply this morning... The Dow Jones Industrial Average and S&P 500 Index regained some of the losses throughout the day, but the Nasdaq Composite Index closed down more than 2% today.

Our colleagues at the Stansberry NewsWire have been covering this story from a few different angles throughout the day. As NewsWire editor C. Scott Garliss wrote this afternoon...

Markets hate uncertainty…

The news this morning that President Donald Trump and First Lady Melania have tested positive for COVID-19 has increased questions about the presidential campaign and its outcome. That's causing investors to be more uncertain.

And when investors become more uncertain, they have a tendency to sell first and ask questions later.

Scott went on to detail precisely what we can learn from the situation, based off his decades of Wall Street experience. You can read his full analysis right here. And if you're not already regularly following the NewsWire team's posts, we encourage you to sign up for their free updates.

The NewsWire is a great way to keep up with all the news that's moving the markets... and how it influences the stocks in your portfolio. It's our first stop each morning to keep up with what's going on.

Now, let's move on to what we originally planned to talk about today...

Roughly a year ago, we first introduced Digest readers to Enrique. He joined our corporate affiliate Empire Financial Research in 2019 after spending more than 20 years on Wall Street, including leading three different major hedge funds.

Enrique also served as the CEO of digital media and e-commerce firm Project M Group before reuniting with his longtime friend and Empire founder Whitney Tilson.

A self-described "make money investor," Enrique doesn't care if his market insights are controversial... as long as he helps his clients – and now, subscribers – grow their wealth.

And today, he's pounding the table about an incredible opportunity to profit in a little-known corner of the market. Coincidentally, in last Friday's Digest, our colleague Dan Ferris urged investors to be cautious in this space. As you'll see, both of them can be correct...

I (Enrique Abeyta) greatly enjoyed reading my colleague Dan Ferris' Friday Digest last week...

Like Dan, I spend a great deal of time looking back at history.

And without a doubt, the stock market environment has entered into a new phase – one we've seen before. Simply put, it's a period of extreme volatility.

Volatility is a funny thing. It doesn't technically mean stocks will go down. Rather, it means they'll move a lot.

That's what we're seeing right now... Stocks in certain areas of the market – like electric vehicles, special purpose acquisition companies ("SPACs"), gaming companies, bankruptcies, etc. – are experiencing huge moves in their share prices.

In my 25-year career on Wall Street, the period it most resembles – and it resembles it closely – is 1999.

The funny thing about that period is that people mostly talk about the ridiculous frauds like Pets.com and theGlobe.com, as well as the market's historic crash (especially the Nasdaq) that followed.

But they don't talk about how, for disciplined traders and investors, it was some of the most profitable years of their careers.

The traders took advantage of the opportunity, and the investors scooped up the value stocks that were left for dead amidst the wreckage.

I bring this up in the context of Dan's essay because I wholeheartedly agree with him...

This new phase of the market is bringing on much greater risk for investors!

But I'd like to add a few additional points to his argument...

One, this new phase will create incredible, once-in-a-generation investment opportunities. And two, the most important rules for both trading and investing always work, regardless of the environment...

• Buy low and sell high
• If a stock you own quickly takes off, book some profits
• Get rid of any stocks you own that are in an extended downtrend
• Buy long-term winners when they take a "breather" (i.e., buy the dip)
• Most important, buy stocks of good (hopefully great) companies

The two stocks Dan mentioned – Nikola (NKLA) and the now-delisted Akazoo – are great examples of what not to do...

As Dan wrote...

I'm sure a lot of folks will push back on my dislike of SPACs...

But nobody can argue with the fact that most SPAC deals don't turn out well... or even that frauds – possibly including Nikola – have occurred before and will occur again.

Greek music-streaming service Akazoo went public via SPAC about a year ago. And it soon turned into a fraud Charlie Ponzi would have been proud to have done himself...

The company claimed that it had 5.5 million subscribers. But unfortunately, most of them didn't actually exist. That's brazen stuff... just the always-smiling, always-confident Ponzi's style.

And as the Financial Times reported in August, all the initial backers of Modern Media Acquisition – the shell company that merged with Akazoo – lost every penny as a result of the fraud from Akazoo's previous management.

The fact that Nikola and Akazoo were SPACs is somewhat irrelevant. Anyone who did even a modicum of analysis should have had serious reservations about these companies.

Take Nikola, for example... Whether its technology is real – regardless of what ex-CEO Trevor Milton said – it didn't take a rocket scientist to see that the company was going to generate zero revenues for the next few years.

No profits is one thing, but Nikola has no revenue...

Zero. Zip. Nada.

As I told my subscribers last week...

In the big picture for a startup or a venture-capital situation, that isn't necessarily an issue. With proper funding, many developmental companies start with no revenues and grow to a massive size. Electric-vehicle maker Tesla (TSLA) and e-commerce giant Amazon (AMZN) both once had no revenues... and look at them today!

The difference, though, was that we weren't buying these as public companies with multibillion-dollar valuations.

Of course, company profitability and stock price performance can be drastically different. In fact, Nikola went from $10 per share at the beginning of this year to an intraday high of more than $90 in early June – all with no revenue.

To be successful in the market, you want to be highly selective when looking for trading opportunities. One of my main rules is generally to avoid investing in companies that aren't profitable. And no revenues? That's not even an option.

It doesn't mean these kinds of stocks can't work... Again, look at what NKLA shares did.

But what it does mean is that there are thousands of public companies to choose from for trading and investing. Why speculate in something that has no revenue when you can find so many other companies that do?

My point is that regardless of whether it was a SPAC, Nikola was a pure speculation.

Find good (or great) companies with real revenues, profits, and a strong position in its market and you can lower your risk in even the most volatile areas of the stock market.

This brings me back to SPACs...

The problem with Nikola and Akazoo wasn't that they were SPACs, but rather that they were bad companies...

Right now, many investors are looking at the surge in SPAC issuance, the sector's checkered history, the "blank check" proposition of it all, and several high-profile blowups... and are declaring it a "bubble."

I agree with them! To me, a bubble is defined by a surge in enthusiasm for an asset class that leads it to unsustainable levels.

By that definition, the new issuance surrounding SPACs definitively puts it in bubble territory.

It's highly unlikely that the current pace of issuance – especially as a percentage of total new stock issuance – persists.

As far as their share prices go, it ultimately comes down to the companies that these SPACs take public. If a SPAC takes a lousy company public, it will be a bad stock.

With so many SPACs out there and sponsors getting antsy to make a deal, many of them will inevitably make bad investments. Our job as investors is to avoid those stocks.

But one thing Dan didn't mention in his essay is that SPACs offer a unique advantage for investors...

After a sponsor announces the deal, the SPAC shareholder gets a free look at the investment. And if you don't like it, you don't have to participate... You simply get your initial capital back.

Nothing else like this exists in the stock market.

You certainly don't get that choice with a traditional initial public offering ("IPO").

With an IPO, both the company and the analysts are severely limited in the type of information they can share with the public. In fact, it's even called the "blackout" period. During this time, they're specifically not allowed to make "forward-looking statements."

On the other hand, after SPAC management (the "sponsor") has announced a deal, it can share all kinds of information about the company, including forward guidance.

Shouldn't it be easier for investors to separate the good companies from the bad companies (like Nikola and Akazoo) when you have more information to go off?

Participation from the sponsor is also important...

When a big bank like Goldman Sachs takes a terrible company public, it doesn't worry much about its reputation. Goldman will always be Goldman.

But the best SPAC sponsors have serious reputations to consider... This doesn't mean that they can't be wrong from time to time. Nikola and Akazoo's sponsors are experienced and successful – in fact, I know them and can personally vouch for their intelligence, work ethic, and investing acumen.

In many ways, I agree with Dan that the SPAC market is in a bubble right now...

But as I mentioned earlier, I believe we're in the early stages of a historic moment in market history... And for the next few years, SPACs will present some of the best short- and long-term investment opportunities I've ever seen in my 25 years as a professional investor – including running billion-dollar hedge funds on Wall Street and my time as an editor at Empire Financial Research.

Dan, as a student of the markets, I know you know better than to paint all SPACs with a broad brush.

Of course, the bubble will have its losers. And folks who are reckless will come out with scars to prove it.

But how often do you get to partner with world-class investors and get a free look at a deal before deciding whether you like it?

As long as you do your due diligence to make sure the company is great, you should be rewarded handsomely for it in the years to come.

That's where I come in...

Next Thursday, October 8, at 8 p.m. Eastern time, I'm hosting an event called the SPAC Investment Summit. It promises to be unlike any other in the history of investment newsletters.

There, I'll explain everything you need to know to successfully navigate these uncharted waters... discuss why I've never been more bullish than I am right now... and more. We've even secured an exclusive interview with investing legend Bill Ackman, who launched his own SPAC a few months ago.

Don't miss the world premiere of this event. Save your seat right here.

New 52-week highs (as of 10/1/20): Autohome (ATHM), Dollar General (DG), iShares U.S. Home Construction Fund (ITB), Jushi (JUSHF), Lennar (LEN), and The Trade Desk (TTD).

In today's mailbag, thoughts on some points raised by a subscriber yesterday. Do you have a comment or question? As always, e-mail us at feeback@stansberryresearch.com.

"I wanted to reply to Peggy F.'s comments about the state of science & medicine. I certainly agree that there is a lot of hubris in the people who think they have all the answers. I remain skeptical about genetic modification. I'm not sure what the 'holographic universe' even means. But then she delves in to the metaphysical – how the ancients used the body's meridians to activate self-healing. However, activating those meridians didn't eliminate smallpox, tuberculosis, polio and so forth. And of course she then attacks everyone's favorite evil empire, 'Big Pharma.'

"In a 25+ year medical career, I've seen the products of the evil 'Big Pharma' change & save lives, and seen diseases that were death sentences like heart failure, cancers & HIV go to manageable, if not curable. I have colleagues living with their cancers controlled by monoclonal antibody treatments that would have been dead 10 or 15 years ago. I don't think activating the meridians would have been sufficient.

"No human endeavor is perfect but I do think the arc of progress has been for the better. The average life spans that are bankrupting Social Security are evidence of this progress. We all have a lot to learn. I saw a quote that made me think of Stansberry's focus on lifelong learning... 'If you're the smartest guy in the room, you're in the wrong room." – Stansberry Alliance member Douglas V.

Regards,

Enrique Abeyta
Phoenix, Arizona
October 2, 2020