Eyeing a potential 'buy the dip' opportunity in electricity producers; Avoid MicroStrategy; Beware long-term investing in airline stocks; I'm cheering the latest news about the Sackler family and Purdue Pharma
1) There was a lot of turmoil in the markets yesterday – driven by fears over a Chinese artificial-intelligence ("AI") startup called DeepSeek...
As I covered in yesterday's e-mail, DeepSeek says it spends far less than other AI companies by using cheaper chips but appears to deliver comparable performance.
Of course, things are still unclear about DeepSeek and its impact on the AI sector – as this new Heard on the Street column in the Wall Street Journal notes: DeepSeek Won't Sink U.S. AI Titans. Excerpt:
The selloff seems excessive. Much remains unknown about DeepSeek's claims, including what sorts of chips the company had access to despite the effect of sanctions. Several chip analysts on Monday disputed the notion that DeepSeek built something on par with advanced U.S.-based AI models at such a low cost. "DeepSeek DID NOT 'build OpenAI for $5 million,'" wrote Stacy Rasgon of Bernstein. "The 'DeepSeek' moment is driving investors to shoot first and ask questions later," wrote Joshua Buchalter of TD Cowen. "While DeepSeek's achievement could be groundbreaking, we question the notion that its feats were done without the use of advanced GPUs to fine tune it," wrote Atif Malik of Citigroup.
And as the articles continues, the "AI race" and associated funding isn't likely to slow down, either:
More important, such a technical breakthrough is unlikely to cool the AI race or even cut down the funds being poured into it. Addressing the comparison of DeepSeek to Sputnik, Edward Yang of Oppenheimer said the Space Race didn't result in less money going out the door. "Increased competition rarely reduces aggregate spending," he wrote in a note to clients. Pierre Ferragu of New Street Research noted that more advanced "frontier models" will still need to push the technical edge and use the most advanced computing resources, while smaller "lagging edge" models will push to develop more cost-efficient AI features.
When it comes to the market action yesterday, I can't remember the last time there was such a divergence between the Dow Jones Industrial Average, which rose 0.7%, and the tech-heavy Nasdaq Composite Index, which tumbled 3.1%.
As I expected, leading AI chipmaker Nvidia (NVDA) got hammered (it fell 17%)... while investors, after initially pushing Meta Platform's (META) stock down by 3.5%, realized that it would likely benefit from lower-cost AI and rewarded it with a 1.9% increase.
But the biggest losers were electricity producers like Vistra (VST), Talen Energy (TLN), and Constellation Energy (CEG). These stocks collapsed by 28.3%, 21.6%, and 20.9%, respectively.
All three stocks have been absolute monsters over the past three years – rising five- to nearly 10-fold:
This rise was driven by investor excitement about surging AI-driven demand for electricity – a theme my team and I at Stansberry Research were early in identifying for subscribers of our Commodity Supercycles newsletter.
In fact, Commodity Supercycles subscribers who followed our advice to buy Constellation and Vistra last May are up 29% and 53%, respectively.
So does yesterday's big sell-off present a buying opportunity for stocks of electricity producers?
Well, Enrique Abeyta – my friend and former colleague from my old firm, Empire Financial Research – thinks so. As he posted on social platform X yesterday:
I'll confer with my team here at Stansberry Research and see what I can write publicly for now, as we always share our best insights first with our paid subscribers.
If you aren't one already, you can learn how to become a Commodity Supercycles subscriber – and find out how to gain access to the full portfolio and specific advice for our open recommendations – as part of a special presentation right here.
2) Longtime readers know that I'm wary of cryptocurrencies. And I'm particularly wary of any stock or fund in which you're paying $2 for $1 worth of the cryptocurrency...
That makes no sense.
But that's what you're doing when you buy the stock of MicroStrategy (MSTR) – it's effectively nothing more than a bitcoin holding vehicle that has a market cap of about $86 billion as of yesterday's close, despite recently only holding around $47 billion worth of bitcoin.
Its stock has done even better than the electricity stocks, rising by roughly 14 times in the past two years:
But as a result, MicroStrategy has morphed from a reasonable way to own bitcoin – paying $1 or less for $1 of the underlying bitcoin the company holds – to a silly way. It's now just a meme stock.
And now it has a tax problem, as this recent WSJ article highlights: MicroStrategy Suddenly Has a Tax Problem, and Needs Help From Trump's IRS. Excerpt:
After years of raising money through stock and debt offerings to buy bitcoin, MicroStrategy owns a stash worth about $47 billion, which includes $18 billion of unrealized gains. In an unusual twist, it could have to pay federal income taxes on those paper gains – even if it never sold a single bitcoin. The tax bill could total billions of dollars starting next year, according to a new disclosure this month by MicroStrategy that has received little attention.
Usually investment gains aren't taxed until the assets are sold. But under the Inflation Reduction Act passed in 2022, Congress created a "corporate alternative minimum tax" in which MicroStrategy now finds itself ensnared. The tax rate would be 15%, based on an adjusted version of the earnings that MicroStrategy reports on its financial statements under generally accepted accounting principles. Its best hope is that the Internal Revenue Service adopts new rules that let MicroStrategy off the hook.
And that's not all – as the article continues:
If it did have to pay taxes on unrealized bitcoin gains, the company might have to sell some of its bitcoins to come up with the cash, because the rest of MicroStrategy's businesses aren't profitable. Doing that would defeat the purpose of its bitcoin roll-up strategy. It also would make MicroStrategy one of the least tax-efficient ways imaginable for investors to get exposure to bitcoin.
Avoid MicroStrategy's stock at all costs.
3) It's good to see a couple of airline stocks doing well – though I don't think this is any sort of proof that the legendary Warren Buffett was wrong, as this WSJ article from last week notes: How United and Delta Are Disproving Buffett's 'Bottomless Pit' Theory. Excerpt:
Guess which S&P 500 stock has gained 154% over the past year, beating Nvidia, Tesla and Netflix? Nothing related to artificial intelligence, data processing or energy: It is United Airlines.
The airline reported bumper fourth-quarter earnings this past week and suggested that 2025 could be a much better year than Wall Street was expecting. Its large trans-Atlantic footprint is an important advantage as a strong dollar encourages Americans to vacation in Southern Europe, even during the winter.
Similarly, shares in Delta Air Lines have risen 77% over the same period, with chief executive Ed Bastian saying that 2025 will be the best financial year in the company's 100-year history. And all this is happening amid elevated oil prices – usually a big negative for airline stocks. It highlights a complete reversal of the pessimism that surrounded the sector last summer.
Are investors wisely anticipating the next supercycle in air travel or are they getting ahead of themselves and throwing their money into what Warren Buffett characterized in 2008 as "a bottomless pit?"
This isn't a sector in which one can practice long-term-buy-and-hold investing. As Jonathan Ornstein – the CEO of Mesa Air (MESA) – wisely told me back in 2003: "You can't own airline stocks. You can only rent them."
4) I'm glad to see the latest development with the Sackler family and their privately owned drug company, Purdue Pharma...
Longtime readers know I've written about the Sacklers and Purdue many times over the years (most recently on July 1).
Decades ago, the company developed a powerful opioid-based painkiller, OxyContin, and marketed it to the masses while deceiving patients, doctors, and regulators about its addictive properties. This triggered the opioid epidemic that has killed hundreds of thousands and devastated large swaths of middle America.
Fortunately, the Supreme Court recently overturned a disgracefully lenient settlement that shielded the family from liability... and, as a result, a new, more fair agreement was just struck. Here's a WSJ article from last week with the story: Purdue Pharma's Sacklers Agree to New $6.5 Billion Deal for Opioid Lawsuits. Excerpt:
Purdue Pharma's owners from the Sackler family have struck a new $6.5 billion settlement of mass litigation alleging they fueled addiction, reopening a path to end the longest and costliest corporate bankruptcy case stemming from the U.S. opioid crisis.
The Sackler family members won't receive a blanket shield from liability from civil lawsuits, the main point of contention in a previous agreement that was struck down by the U.S. Supreme Court last year. The Wall Street Journal reported earlier this month that, following the high-court ruling, the Sacklers agreed to increase their settlement contribution to $6.5 billion over time, up from $6 billion under the previous plan.
Thursday's agreement is the latest from a major pharmaceutical-industry player that made, sold or distributed opioids, and like the others, the Purdue funds will largely go to local and state governments to help communities hard-hit by addiction. Purdue will also make a $900 million payment as part of the settlement plan, which requires approval from the court overseeing its chapter 11 case and could be subject to objections.
I hope lawyers keep pursuing the Sacklers until they've disgorged every penny of the family's blood money.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.