Things looked rather ugly for the S&P 500 on Thursday.
First, the S&P 500 fell off a short-term high as momentum continued to break lower. Then, it retested that critical 200-day moving average at 3,940… and broke lower late Thursday.
We’ll see how the market performs over the next two weeks.
After today’s jobs report, there are more questions than answers on what comes next. The Consumer Price Index (CPI) and the Producer Price Index (PPI) are set to bring fireworks next week.
Then on March 22, 2023, we’ll get a decision from the Fed on interest rates. Before Friday’s jobs report, the probability of a 50-point hike on the Fed funds rate hit 80%.
Now is the time to start planning. What happens if this market REALLY sells off in the coming weeks? What do I do with my money?
I want to show you that opportunities will form in the long term. And it all starts with the help of… who else?
Other People’s Money
Everyone loves the movie The Big Short, the iconic tale about greed and the financial collapse of 2008.
People love the film Wall Street because of the chatter about “greed” being “good” and the fact that money never sleeps in the world’s economy.
My favorite financial film is Margin Call, which tells the tale of an investment bank ditching worthless assets before the rest of the market catches up to their scheme. The only character in the film with any level of redemption is probably a dog.
But if you’re a value investor, it’s hard to argue against the 1991 classic Other People’s Money.
The film stars a slightly miscast, but still excellent Danny DeVito.
He plays a fund manager named “Larry the Liquidator,” a notorious, activist shark who buys up shares in undervalued companies and then forces their sale to a bigger company.
Ben Graham and Warren Buffett would be proud of this character.
Larry targets a small-town conglomerate called New England Wire & Cable Company in the film. He also falls in love with the founder’s daughter, but that’s not really important…
When he meets the founder, he explains that he values all of the company’s assets at $125 million – the land, the fully funded pensions, the machines, and anything that could be sold at auction.
In a worst-case scenario, the company might be worth $100 million or $25 per share.
Larry’s looking for a bargain. And when he scanned a list of companies that looked cheap, he discovered that the stock was trading at $10 three weeks prior.
“That’s a 10 for a $25 item,” he says. “What a sale.”
Larry sees a 150% upside.
Welcome to the Liquidation strategy.
What Is This Strategy
Here’s how it works…
Larry values all the real estate, fixtures, equipment, and inventory.
He comes up with what is known as the “rational liquidation” value of the company.
That’s $25. That would be the tangible book value of the company.
In a market where things are falling, many companies start to trade under their liquidation value. This means if the company went belly up or sold tomorrow, the shareholders would receive at least the tangible book value of the company.
Now, this might sound too simple, right?
But it’s a classic investing strategy that takes a rational valuation of the company going to auction… and determines what the company is worth at effectively scrap value.
We use tangible book value to find some of these names and then assign a rational value of what it would be worth in a worst-case scenario.
Excluding financials, real estate, and healthcare, 287 companies are trading under the tangible value. But let’s add a Z score – reducing the bankruptcy probability – and focus on companies that make stuff.
27 names pop up with a Z score over 3 and operate at under 80 cents on the dollar. Now, add a strong F score, and you’re in business.
We have two names that pop up.
Second, Tandy Leather Factory (TLF).
This stock trades for $4.40, but has a tangible book value of $6.15. It only makes $81 million a year in revenue, which means that institutions aren’t paying any attention.
Its F score is 7, and its Z score is 4.19. Its debt-to-equity ratio is very low, and even fair value puts the stock around $5.10.
Let’s put the stock at auction at a whopping 85 cents on the dollar.
That’s a price of $5.22.
And that’s an 18.6% upside from today’s share price.
Odds are you didn’t even know this opportunity existed.
So, let’s put it all together with Danny DeVito and a leather jacket.
You’re welcome, America.
A quick bit of housekeeping here before you go…
IN CASE YOU MISSED IT: Starting around the middle of next week, WealthPress Hub will be coming to you under – and from – a new name: TradingPub.
You’ll still hear from me every day. And I’ll continue to send you popular articles from other top market experts.
I’ll tell you more about what you can expect on Monday.
To your wealth,
Market Momentum is Red
The S&P 500 broke much lower, and remains red after the jobs report on Friday. There is a lot of action right now, with the markets facing the CPI and PPI numbers next week. Also, don’t forget that Quad Witching will hit us next Friday. If you’re tired of all this back and forth, consider going long with the best inflation-beating stocks. It all starts with our value and income plays over at Tactical Wealth Investor.