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We are in an interesting phase of the stock market cycle.

The monetary and valuation models flash yellow and red, while momentum and sentiment are bright green. And the Federal Reserve has raised rates at a faster pace than ever before, which is going to hurt stock prices eventually.

Interest rates are a vital component of every valuation model used by analysts, and investment bankers use interest rates as a key component. The higher interest rates climb, the less companies are worth.

Interest expense is also a major line item on many corporate balance sheets: higher interest expense leads to lower profits, another key component of valuation models. Lower profits lower the value of a company.

This is all true and will eventually be reflected in the level of the stock market—but the key word is “eventually.” Right now, no one cares about valuations and profits. The Fed might stop rising rates, and the last few economic reports are excellent. It is time to buy. It all up-up and away from here!

There will be a reality check at some point. There always is sooner or later.

Usually, it is later.

So, what do we do until there is a bargain creation event that allows us to buy stocks aggressively?

Obviously, the answer is to explore the dark corners of the market that no one else cares about. This is an excellent time to go hunting for those unloved, ignored, and deeply undervalued companies.

We want businesses trading for far less than the current value of their assets and cash flows—businesses that have the potential to increase their value over the next several years. These types of companies give us the potential for longshot returns regardless of what the markets do in the interim.

Gray Television Inc. (GTN), which owns TV stations, is an excellent example of a stock that can return several multiples of the current stock price.

No one cares about the stock right now, largely because no one cares about television stations. We want artificial intelligence and breakthrough drugs that will cure every disease known to man and make us gazillionaires by next Thursday. TV stations are passé. Everyone is cutting cords and going to streaming services.

Cool story, bro.

Traditional broadcast networks are still catching more eyeballs every day than any of the streaming services. According to a recent report from Gabelli and Company, streaming service subscribers have fallen from a high of 100 million to less than 80 million today.

Household penetration has fallen from 80% to less than 60% nationwide.

Gray Television owns TV stations affiliated with the four major networks, CBS, NBC, ABC, and FOX, in 113 markets across the United States. The stations owned by Gray reach 36% of the U.S. population. It is the second-largest broadcaster in the country. According to comments from CFO Jim Ryan, most of the company’s stations are the number-one or number-two rated stations in their market.

Gray also owns studios, sports broadcasting, an online business, and a digital content business. The real story, however, is the television stations. This company has produced more than $3.6 billion in revenues and generated more than $600 million in free cash over the past year. Management uses the cash to pay down debt and reward shareholders with a generous dividend of 3.2%.

I get the streaming and cord-cutting story. My wife and I have a few streaming service subscriptions. We also watch more things on cable than on broadcast television, thanks in large part to my love of Major League Baseball and my wife’s affinity for home improvement and food networks.

However, we watch network news, local news, 60 Minutes, and occasional specials on the networks. I also confess to decades-long addiction to Jeopardy, which airs on local stations.

All major sporting events, including the Super Bowl, the World Series, the Women’s World Cup going on now, the NCAA Championship, the NBA finals, the upcoming 2024 Olympics, most golf majors, and just about any other major sports event, will be on broadcast TV. All those ad dollars will flow to the companies, including Gray Television, that own TV stations across the country.

TV stations may not be exciting or sexy now; however, they produce lots of cash flow, and a significant tailwind is building, which will increase the cash flows and value of the stations.

If you thought political ads were bad in 2020, brace yourselves: it is more than just the presidential contest as heated as that will be this time around. All 435 seats in the United States House of Representatives are up for bid, as are 33 Senate seats. On top of that, there are three gubernatorial elections in 2023 and 11 more in 2024. Countless local and statewide offices will also be contested over the next 15 months. Billions of dollars will be spent on advertising.

In 2020 and 2022, Gray captured more political dollars per household than any of its competitors. It will again in 2024.

The corporation owns stations in all the right markets, with a concentration in the eastern half of the United States, where most swing states that will attract massive spending are located. More money than ever before will likely be spent between now and the first Tuesday in November 2024. And Gray Television will capture a lot of that money. That money will be converted to cash flow to pay down debt and pay dividends. And all of this will lead to a much higher stock price.

I will save you the wonky math, but Gray Television as a business is worth close to twice its current stock price. The company’s value, five years from now, will be seven times or more than the current price according to my calculations.

This is common sense, higher probability long-term investing that can deliver higher returns than you ever thought were possible.
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Regional banking stocks saw their prices take a major haircut earlier this year during the banking crisis (perpetuated by the failure of Silicon Valley Bank). SPDR S&P Regional Banking ETF (KRE) saw its stock price drop from about $60 per share to under $40. However, just last week, a large block trade in KRE options

The latest jobs numbers are great, with unemployment at just 3.6%. That’s very, very low. Great news, right? Lots of analysts seem to think so. But that’s because they seem to think things will just continue improving at the same rate as they have so far. In today’s video, I pull up a chart that

While artificial intelligence (AI) grabs most of the financial news headlines in 2023, there is another area of technology that’s increasingly in the spotlight.

This technology is related to the one thing everything else on the planet relies on: water.

Earlier this year, the United Nations World Water Development Report 2023 made for grim reading. Here’s a summary of some of the key points…

Globally, 2 billion people (26% of the population) do not have safe drinking water and 3.6 billion (46%) lack access to safely managed sanitation. Between two and three billion people experience water shortages for at least one month per year, posing severe risks, notably through food security and access to electricity.

The global urban population facing water scarcity could double from 930 million in 2016 to between 1.7 billion and 2.4 billion people in 2050. The UN report added that the growing incidence of extreme and prolonged droughts is also stressing ecosystems, with dire consequences for both plants and animals.

Investor interest in water technology has been on the rise of late, as concern mounts about widespread shortages and contamination, and as companies rush to shore up their water supplies.

Water scarcity will become a defining characteristic of the next few decades. This will end up creating both new opportunities and new risks for investors.

Invest Now in Water Technologies

Demand for fresh water is rising in tandem with the human population and growing prosperity in the developing world. By 2030, water demand will be 40% higher than supply, according to a study by consultancy McKinsey.

A team of analysts at Jefferies recently said that “now is the time” for investors to look at companies working to provide clean water, and I totally agree. The analysts noted that companies are getting increasingly nervous about their water supply, as the effects from climate change become more apparent.

One piece of good news, though, is that government policy is finally starting to offer attractive financial incentives in this space. For example, there are investment credits offered for certain types of wastewater treatment in the Inflation Reduction Act (IRA).

So how can the growing water scarcity problem be tackled?

A recent opinion piece from the Financial Times’ Lex team provides some of the answers.

Bridging the Gap

The article suggested that bridging the expanding gap between supply and demand for fresh water will require investment into three main water technologies.

The lowest cost method involves water conservation, which is particularly important in agriculture. This industry accounts for 70% of water consumed globally.

Some companies, like Lindsay Corporation (LNN), focus on irrigation. Founded in 1955, Lindsay is a leading global manufacturer and distributor of irrigation equipment and technology. Other firms are developing drought-tolerant crops because of growing freshwater shortages.

Next up on the cost scale are technologies to treat and re-use water. Water scarcity poses a major threat to businesses, such as mining companies, that are heavy water users. Unless they can create closed-loop water systems, they risk losing their licenses to operate in many countries.

This creates opportunities for “water-tech” entrepreneurs. Recently, we saw the very first water technologies unicorn, Gradiant. This company has devised new ways of purifying industrial wastewater that contain toxins.

Gradiant promises customers that its technology will allow them to purify and reuse larger amounts of water, reducing the amount they need to source externally. The science seems sound and has attracted corporate powerhouses from a number of industries: chipmakers such as Taiwan Semiconductor and Micron Technology; miners BHP Group and Rio Tinto; and automakers Hyundai and BMW.

Most expensive on the water-tech cost curve is desalination, where a viable technology always seems  to be just around the corner. However, over the last 15 years, the cost of making fresh water from seawater has declined a lot—from $1.50 to $0.50 per cubic meter (264.172 gallons). A number of companies offer exposure to this sector, such as Japan’s Hitachi Zosen (HIZOF).

My thought is to invest in a water technologies company that does a little bit of everything.

Xylem: Let’s Solve Water

The company I have in mind is Xylem (XYL), which sells sensor technologies, smart metering, and data analytics for underground infrastructure. It is focused on solving the world’s most challenging water issues—in fact, its company motto is “Let’s Solve Water.”

Xylem’s products and services improve the way water is used, managed, conserved, and re-used. Xylem serves public utilities, as well as commercial, agricultural, industrial, and residential customers. It operates three business segments: water infrastructure, applied water, and measurement and control solutions.

In May 2023, Xylem acquired Evoqua Water Technologies, a water treatment solutions and services company, in an all-stock transaction valued at $7.5 billion. The combination created the world’s largest pure-play water technology company. Management expects the combined company to unlock new growth opportunities and provide cost synergies of $140 million within three years.

In an earlier deal, in January 2023, Xylem took a minority stake in Idrica, a leader in data management and analytics. The two companies will partner to offer an integrated software and analytics platform that enables water and wastewater utilities to manage all applications and data in one place. The platform is already in use by more than 300 customers.

Finally, after recent acquisitions of smart meter and leak detection companies, Xylem can offer utilities a comprehensive portfolio of products aimed at addressing the problem of non-revenue water (from leaks, etc.).

To sum up, in the past, water-tech adoption has proceeded at a glacial pace. However, the recent round of weather extremes (droughts, record heat, severe storms, etc.) may—finally—encourage investment to flow.

Growing demand for fresh water in developing countries and the need to replace aging infrastructure in developed countries will create long-term growth opportunities for Xylem.

XYL stock is up 42% over the past year, but is unchanged year-to-date as investors shift their focus from so-called boring companies like Xylem to the excitement of AI. Nevertheless, it is a buy anywhere in the $100 to $113 range.
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