We are just two days away from Thanksgiving.
The cooking has started around here. The turkey went into the brine last night, and the prep work for the stuffing is underway.
There will only be one issue of Hidden Profits report this week, because I expect you will have better things to do than read about stocks and markets as on Thursday. As such, and because I opened the long-shot window on Thursday, let’s stay with that theme today and look at two stocks that have the potential for massive returns over the next several years.
Let’s not kid ourselves that, like all speculative activities, long-shot investing is betting. The chance of a huge gain, there is also a chance of loss. The trick is to look for companies that have the potential to return several multiples of your original bet.
When I pick long-shots, I am making a multiyear bet that the company can survive, recover, and see the prices of its stock climb by 400%, 500%, or more.
I understand I can lose my bet. That’s why I only use a small percentage of my cash for making long-shot bets.
I think about the money the same way I used to regard my poker and horse racing bankroll when I was much younger: I only bet when I think the odds are in my favor, and the payoff is far more than I can lose. If I do something stupid or have a statistically improbable disastrous run and lose my stake, I am done until I rebuild my bankroll from cash flow. I never divert money from savings or long-term investment accounts to long-shots to make up losses.
I only use a small percentage of the bankroll for each bet, and I employ a Kelly calculator to determine how much to put in each stock.
The formula is based on the work of John Kelly, a mathmagician employed by Bell Labs back in its heyday, who asked the question: “How much of my bankroll should I stake on a bet if the odds are in my favor?” The father of information technology, Clause Shannon, whose work is the basis for telecommunications and the information age, also played an important role in developing the formula.
Ed Thorp, the author of Beat the Dealer and Beat the Market, and who beat the casinos at blackjack and ran hedge funds that crushed the market for decades, used the Kelly criterion in his day-to-day decision-making process. It is a fantastic story, told in the excellent book Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street, by William Poundstone. I highly recommend it.
Both of today’s long shots have the potential for huge returns; however, they could also go to zero if things do not go well. (And if they do zero out, I do not want to hear that you bought the stock on my suggestion and lost more than you can afford.) Before deciding whether to invest at all, decide how much of your cash is for long-shot investing. The Kelly Formula would suggest that about 5% of that small amount should go into each stock.
The first stock is Melco Resorts and Entertainment (MLCO), a Hong Kong-based company that owns casinos in Macau, the Philippines, and Cyprus. While weakness in the Chinese economy has weakened results from the core Macau market, it is important to remember that there are only six concession holders in the that casino market.
As China recovers from coronavirus pandemic lockdowns, Melco can see strong results as gamblers return to the Chinese gambling mecca. The company will be profitable in 2024 and should grow by 20% or more for at least the next decade. Melco has the financial resources and liquidity to survive until Macau fully recovers, at which time the stock should explode higher.
This could be a five-bagger or more for patient, aggressive investors.
The other investment, Sunrun (RUN), is in the residential solar business and has a simple story. The residential solar business is not great right now, thanks to higher interest rates and supply chain issues involving solar panels.
Sunrun uses a solar-as-a-service model that leases solar assets to customers and promises to save them substantial amounts on their energy bills as well as tax breaks and credits. The company is also moving into whole home energy, opening markets like electric vehicle charging and home batteries.
The company is leveraged, but 90% of its debt is nonrecourse and does not impact Sunrun’s ability to survive.
As I said, it is a simple story: the solar industry will survive and eventually thrive. Over the next several decades, this will be an enormous business.
Sunrun has the financial strength and cash-generating ability to thrive until the industry recovers.
When that happens, the stock should explode higher.
Have a fantastic Thanksgiving!