Investors Alley

Rapid demand growth thanks to the energy transition away from fossil fuels could lead to a shortage of several metals over the next decade unless there’s more investment in the segment. This is according to the Energy Transitions Commission (ETC), a global group of power and industrial companies, consumers, financial institutions, and scientists.

Large supply gaps for lithium, nickel, graphite, cobalt, neodymium, and copper could lead to higher prices and delay the goal of reaching net-zero emissions by 2050, the ETC said in a report. To reduce the risk of shortages, mines need to produce more of these metals. However, the ETC explained, large-scale mining projects can take up to 20 years to come online, and the last decade was characterized by a lack of investment in exploration and output.

ETC Chair Adair Turner said in the report: “In some key minerals—particularly lithium and copper—it will be challenging to scale up supply fast enough over the next decade to keep pace with rapidly rising demand.”

Annual capital investment in energy transition metals averaged $45 billion over the last two decades, compared with the $70 billion needed each year through to 2030 to expand supply, the ETC said.

This opens up lots of opportunities for any company (and its investors) that steps in to try and fill the gap between supply and demand for energy transition metals.

Let’s take a look at a key one…

Move Over Lithium Miners, Here Comes Exxon

One company stepping into the breach is the oil and gas giant ExxonMobil (XOM), which seems to be going all-in on lithium. Bloomberg reports that Tesla, along with several other automakers including Ford and Volkswagen, are in talks with the company to buy lithium.

Exxon—best known for its oil production, which is threatened by the electric vehicle revolution—has been looking to get into the lithium business. The report also says that in addition to Tesla, Ford, and Volkswagen, Exxon is in talks with battery manufacturers Samsung and SK about supplying lithium.

Exxon revealed its seriousness about the lithium business in May. The energy company spent upward of $100 million for some acreage owned by privately held Galvanic Energy. The deal includes more than 120,000 acres in the Smackover formation, upper Jurassic rock found at depths of about 9,000 feet.

A highly sought-after oil and gas prospect in the 1940s, the Smackover is known today more for making Arkansas the world’s second-largest supplier of bromine. Like the bromine, the lithium in the Smackover is found in the oilfield brine. It therefore can be sourced using many of the same techniques used by the oil and gas industry. Thus, Exxon’s interest.

The Smackover’s location puts ExxonMobil in a position to become a key supplier to the growing domestic EV manufacturing base. The U.S. is currently home to just one lithium mine, in Nevada.

Galvanic estimates the acreage holds four million tons of lithium carbonate equivalent (LCE), which it says is enough to help build 50 million EVs. Galvanic also reports that test wells drilled recently showed an average LCE quantity of 325 milligrams per liter, which it says is the highest concentration of any lithium brine reservoir in North America.

Exxon management has wisely decided to partner with another company to expand its acreage in the Smackover. This deal presents a major investment opportunity. Let me explain…

Exxon Teaming with Tetra Technologies

In late June, Exxon agreed to develop more than 6,100 lithium-rich acres in Arkansas with TETRA Technologies (TTI).

So, who the heck is TETRA Technologies? Here is the description from its website:

Founded in 1981, TETRA Technologies is an energy services and solutions company, focused on completion fluids, calcium chloride, water management solutions, frac flowback and production well testing services. Calcium chloride is used in the oil and gas, industrial, agricultural, road, food and beverage markets.

TETRA is evolving its business model by expanding into the low carbon energy markets with its chemistry expertise, key mineral acreage and global infrastructure. Low carbon energy initiatives include commercialization of TETRA PureFlow® ultra-pure zinc bromide clear brine fluid that is used for stationary batteries and energy storage and development of TETRA’s lithium and bromine mineral acreage to meet the growing demand for oil and gas products and energy storage.

The company signed an agreement with Saltwerx to develop 6,138 acres of lithium and bromine-filled salty brine deposits in Arkansas. Saltwerx is a subsidiary of Exxon that it acquired earlier this year when it bought a neighboring Arkansas parcel of 100,000 acres from the aforementioned Galvanic Energy.

By teaming with Exxon, TETRA gains a large partner with capital to help it produce bromine. The company currently buys bromine from Lanxess (LNXSF) to produce a material used by Eos Energy Enterprises (EOSE) to manufacture batteries.

In 2021, TETA started commercial production of a clear zinc-bromide fluid, sourced from Arkansas brine, which it supplies to makers of non-lithium batteries and other energy storage applications.

Even before the Exxon deal kicks in, the company seems to be doing well. On July 31, it reported second quarter results, with revenues hitting a record high (excluding discontinued operations) of $175.5 million. This number was an increase of 25% from the second quarter of 2022 and 20% sequentially.

I really like the deal with energy powerhouse Exxon. Especially when you consider how badly the U.S. needs domestically sourced lithium and bromine in order to create a domestic battery production industry.

TETRA Technologies is a speculative buy anywhere up to $5.50 a share.

Sometimes, the old saying goes, you gotta pull the bat back and swing for the fences.

After all, “ya gotta take chances.” Babe Ruth not only hit the most home runs but also struck out more than most people who played the game.

The inference is that you can risk it all on mammoth swings and settle for an all-or-nothing outcome.

It is a great saying, but it is a complete load of garbage.

In baseball, and in investing. Let me explain with an example of a stock offering huge upside and little downside…

If you haven’t noticed yet, I am a huge baseball fan.

I am also a history buff. Combining the two makes me a baseball history fanatic of sorts.

The high-risk, high-reward approach to home run hitting is not how the homer kings at the top of the all-time list got there.

Many of them did have a lot of strikeouts on their baseball cards, but it is because they had long careers with thousands of at-bats.

The Kings of Swing had a lot of home runs, but they also had high batting averages.

They made contact a lot.

Willie Mays hit 660 home runs making him number 6 on the all-time home run list.

He also had 3293 hits. 2633 of those were not home runs.

After 23 years in the major leagues, Mays retired with a batting average of .301.

As for Babe Ruth, the Sultan of Swan is often cited as the best example of high-risk, high-reward swing-away hitting.

He hit .342 over a 22-year career.

The lowest batting average in the top 10 is Sammy Sosa at .273.

They swung to contact.

Yogi Berra, who was no slouch at the plate with a career .282 batting average and 358 home runs, had a great quote about runs. He once said, “You don’t have to swing hard to hit a home run. If you got the timing, it’ll go.”

Making contact is more important than raring back for a power swing with a hero or zero result every time.

That applies to investing as well.

You do not have to be looking for moonshot penny stocks, options trades, or other highly speculative situations.

Buying solid companies with little or no chance of severe financial distress when out of favor and trading for bargain prices can set up the opportunity for long-term returns of 4, 5, and even more times your original investment.

However, because the company has solid fundamentals and a decent credit profile, the worst-case outcome does not have to be zero.

Under Armour (UA) is an excellent example of a company offering huge long-term returns with little risk of losing all your cash. You still end up making some money over time, no matter what happens, and there is very little chance the stock goes to zero.

Under Armour is a sportswear company that makes clothing that features moisture-wicking material. It is very popular as a wide range of athletes wear the stuff today, and every time I venture out and about, I see several people wearing clothing with the distinctive UA logo.

Under Armour is a competitive business.

To make matters worse, its biggest competitor is Nike (NKE), one of the best athletic wear and marketing companies ever.

I have said for years that someday Nike will buy this company, but it has yet to happen.

Under Armour has bought new faces into the C-suite, including a new CEO. The focus is on rebuilding the brand and regaining market share.

Earnings will hit as the company clears out old inventory and refocuses on items with greater consumer acceptance.

If the rebrand and rebuild are successful, this stock could easily give you a return of 3 times the current stock price.

If things continue to be slow, you could still earn returns that beat a sluggish stock market thanks to valuation and the quality of Under Armour’s balance sheet and income statement.

The company has been paying down long-term debt in recent years, and I expect that trend to continue.

The worst case is a boring stock that matches the broader economy and market.

The best case is a home run that delivers return measures in multiples, not percentages.

It is the stock market version of contact hitting.

A portfolio of companies with similar risk/reward profiles to Under Armour could make your investing career worthy of the Investing Hall of Fame.

Check out the picture on the next page. It’s a beat up building that would’ve turned $25k into $4.1 million. It’s not a real estate play. Actually, with the Fed raising rates, it’s the best asset to buy right now. View this beat up, millionaire-making asset.

Earnings season offers unique opportunities. This is a time when management teams host conference calls for Wall Street analysts. Listening to calls or reading the transcripts gives me insight into how well companies are managed.

I believe that most analysts and investors do not pay enough attention to management teams and whether or not they do a good job.

And listening in this earnings season has made me surer than ever that these are the two best REITS for income investors…

Most stock analysis focuses on financial results. Those results are projected into the future to determine the potential value of a company’s shares. Financials provide a snapshot of the company’s performance for the defined period, usually a calendar quarter. The numbers are scrutinized to determine if the business is operating well or if there could be problems.

However, economic and business conditions constantly change. Analyzing financial results to project from the past into the future leaves out how a business will be affected by changes in the economy and the business sector in which it operates.

When I compare companies in a sector, such as real estate investment trusts (REITs) or business development companies (BDCs), I focus on management’s comments and actions taken to keep their businesses on a positive trajectory. Over the long term, superior management will produce superior results. The better management teams typically share much of what they see and do during the quarterly calls. Here are a couple of my favorite companies and some comments from the recent quarterly discussions.

In my opinion, Arbor Realty Trust (ABR) is the best finance REIT. Arbor focuses on financial solutions for the multi-family property sector. Arbor has increased its dividend in twelve out of the last fourteen quarters, growing by 43%. The company also has the lowest payout ratio in the finance REIT group. Here is a representative quote from CEO Ivan Kaufman:

As we’ve discussed many times, we’ve been laser-focused over the last two years and preparing for what we felt would be a very challenging recessionary environment. In fact, unlike others in this space, we’ve been conducting ourselves as if we have been in a recession for over a year now.

On the property REIT side, Apartment Income REIT Corp (AIRC), also known as AIR, has one of the top management teams in the multi-family property sector from my research. AIR owns and operates apartment communities primarily in coastal cities and the Sunbelt. To lead off the second quarter earnings call, CEO Terry Considine laid out a six-subject discussion of how AIR can provide superior results and navigate the challenges in operating commercial properties in this economy. Here are some of his comments from the call:

The most important question is, what happens next? The apartment business will return to the blocking and tackling of Property Operations, where AIR has demonstrated comparative advantage. For example, with peer-leading retention, we do more of our business in higher-priced renewals with less exposure to new lease rates.

The most important opportunity is to acquire properties at distressed prices, distressed by the relative shutdown of transaction markets as sellers trying to hold on for lower rates to arrive. Here AIR has the advantage of access to abundant equity capital and the opportunity to use the AIR Edge to improve property operations of acquired properties as demonstrated and reported in our earnings release.

A typical earnings call lasts about an hour. It is a full-time job, especially during earnings season, to keep up with management commentary from numerous companies. I enjoy the process, and I believe this approach significantly adds value to my newsletter subscribers.

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.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trades at massive discount, and pays an 8% yield. This is my top pick for income during a rough market. Click here for details.

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.
There’s a new way to collect income every 48 hours without dividends and without taking big risks. I just launched this strategy and it’s one of our top converting in history.Click here for the details.

It’s the summer doldrums in the trading world, so traders are making due with whatever the market is willing to give. For instance, last week a strategist placed what appears to be a covered call trade in the Financial Select Sector SPDR ETF (XLF). This popular financial sector ETF is generally not very volatile and

One of the hottest topics of conversation on Wall Street, and among my colleagues like Tim Plaehn and Tim Melvin here at Investors Alley, is the state of the U.S. commercial real-estate market (CRE).

The story on Wall Street, as articulated by media outlets such as Bloomberg, is that a $1.5 trillion “Wall of Debt”—mortgages due before the end of 2025—is approaching for commercial property owners.

As a result, office and retail properties’ valuations may fall by as much as 40%.

This theory involves property owners being unable to refinance because their property values have fallen so much. Also, lenders—mainly local and regional banks—may be in trouble when property owners default on commercial mortgages.

Keep in mind that commercial property mortgages are almost always adjustable, so rising interest rates hurt property owners with sometimes significant increases in the cost of servicing their debt. And the CRE industry is highly leveraged and interconnected. So, the potential is there that if things go wrong, unexpected and very bad things could happen.

But let’s move away from the gloom and doom and look at the actual state of the commercial property market.

Because the reality is much better than the headlines would have you believe…

Yes, stresses are rising, but they are mostly confined to a small slice of the market: low-quality, or Class C, properties. (There are three classes of office buildings: Class A, Class B, and Class C.) For the overall commercial real estate market, vacancies and delinquencies are above pre-pandemic levels, but are not soaring higher. That’s due to the fact that the U.S. economy still remains strong.

Office REITs

Despite these economic strengths, Wall Street fears about the CRE have created an investment opportunity in a very obvious place: the office real estate investment trusts (REITs)—the companies that actually own office properties.

Even if dividends are included, office REITs have lost half or more of their value since the start of the coronavirus pandemic! Stock market participants have made a collective judgment that profits at these REIT are going to drop by half, even though these firms mainly specialize in high-end properties.

But has the market—as it often does—overreacted? Will conditions really be all that bad for these companies?

Here’s the investment angle… as revealed in a Financial Times article by its U.S. financial commentator, Robert Armstrong…

Three years into the pandemic, and almost a year into a higher interest rates regime and the damage to earnings has not been so great—at least so far. Cash flows are flat to down a bit, not diving off a cliff. In other words, disaster has not struck.

And yet, many of these companies are trading as cheaply, relative to their cash flows, as they have since the depths of the financial crisis. For example, Armstrong looked at three of the largest office REIT firms: Boston Properties (BXP), Vornado Realty Trust (VNO) and SL Green Realty (SLG), which trade at eight, seven, and six times funds from operations (FFO), respectively. As recently as March 2022, their multiples stood at 16, 13 and 11. So in effect, it’s a half off sale!

Nevertheless, I would rather own a different type of commercial property REIT…

Corporate Office Properties Trust

The REIT I have in mind is Corporate Office Properties Trust (OFC). It has a unique focus on owning, operating, and developing mission critical facilities that support key U.S. government defense installations and the supporting defense contractors.

These facilities account for more than 90% of OFC’s core portfolio annualized rental revenues. In the latest quarter, its core portfolio was 92.9% occupied and 95.1% leased.

OFC owns a portfolio of office properties located in select urban/urban-like submarkets in the Baltimore/greater Washington, DC. The company has approximately 194 properties totaling over 23.0 million square feet comprised of 17.7 million square feet in 166 office properties and 5.3 million square feet in 28 single-tenant data center shells.

Its overall first quarter results were strong as funds from operations per share exceeded the midpoint of the guidance range by $0.02. Same property Cash NOI (net operating income) increased 8.3% year over year, which led management to increase full year guidance by 100 basis points. The company also raised its full-year retention rate by 250 basis points—and in February, it announced a 3.6% increase in its quarterly dividend, from $0.275 to $0.285 per share. This marked OFC’s first dividend increase since 2010! That’s quite a statement in the current environment. The current yield is a decent 4.69%.

OFC stock has vastly outperformed most other office REITs. It is down only 6.5% over the past three pandemic years and just 7% lower over the past year. Most of these declines happened this year (-6.3%) as Wall Street turned even more negative on commercial property.

However, with its unique portfolio of defense industry-related properties, Corporate Office Properties Trust will largely be shielded from whatever befalls the overall CRE market.

The stock is a buy at current price levels, in the mid-$20s per share.
While most investors were screaming in terror and selling shares of their bank stocks during the recent “banking apocalypse”… Bank Expert Tim Melvin reached into his cabinet and pulled out his nicest bottle of champagne… Why? Because according to Tim:“This banking collapse just opened the floodgates for a once-in-a-decade investment opportunity.” > >Click here to see how Tim plans to capitalize on it.

It seems like just yesterday—actually, it was October 2021—that Mark Zuckerberg announced Facebook would be rebranded as Meta Platforms (META).

Facebook was going all-in on the metaverse. Some wondered why. After all, the company’s stock was up 70% over the prior two years as the pandemic boosted social media businesses.

A Facebook face plant soon followed that announcement. Wall Street was suddenly worried about things that had been apparent for a while, such as slowing user growth, Apple’s (AAPL) new privacy rules, and the vast amounts of money being incinerated by Meta’s virtual reality division (the center of its metaverse dreams). All of this led to Meta’s stock plunging by 70% in the first nine months of 2022.

But over the last nine months, Meta’s fortunes completely turned on a dime—in fact, its stock has tripled! What happened, you ask?

Once again, the secret sauce was AI (artificial intelligence). Zuckerberg—having touted the wonders of the metaverse last year—is now riding the AI wave.

So, what’s next for Meta?

Meta: AI and Advertising

Meta has done a lot of cost-cutting recently. For instance, it has laid off about 25% of its workforce since November. But, it needs more than that in order to justify its price-to-earnings (p/e) multiple of 35 and its forward p/e of 25.

Meta needs to become a growth company again. And to do this, it is relying heavily on AI-driven enhancements to its core advertising business.

The capital expenditures needed to drive AI advancements (and the metaverse) are centered on the same thing: server and computing power.

Meta has been investing heavily on this front. Over the past two years, its CapEx totaled a cumulative $64 billion, up from $34 billion in the previous two years. The company has guided for CapEx spending in 2023 to be between $30 billion and $33 billion, and a large portion of the spending so far has been on graphics processing units (GPUs) to increase Meta’s AI capabilities. I wonder if Nvidia (NVDA) has sent Zuckerberg a thank you card?

Thanks to Apple’s privacy policy, Meta can no longer track users across the internet. So, to improve its advertising efficiency without the use of website tracking, Meta must use its own proprietary data. It has a lot of it, with billions of users interacting with a range of different content every day.

What Meta does now is bucketing users based on what they do on Instagram and Facebook. Then it sends them ads it thinks they are likely to interact with. This is the end result of Meta’s AI investments, which support the building of its Discovery Engine, which ranks posts regardless of where they come from (a bit like TikTok).

AI Is Helping

The early signs are that these investments into AI are paying off. In the first quarter of 2023, ad revenue rose 4% to $28 billion, the first year-on-year quarterly increase since the end of 2021. Meta appears to be retaking market share in a tough ad spend/macroeconomic landscape in the past 18 months.

Wall Street expects much more to come. In 2022, Meta had $50 billion in operating cash flow and—with its new AI capabilities—analyst consensus expects this to rise to $80 billion by 2026. Keep in mind that the company’s ability to produce strong cash flows has been at the forefront of its success over the past decade. Free cash flow per share growth over the five years to 2019 stood at an impressive 40% per year.

Over the next five years, analyst consensus puts that growth rate at 10%. Yes, that’s a big drop-off, but it is still a healthy level of expansion, considering free cash flow in 2022 stood at almost $20 billion.

Meta’s days of heady growth are likely gone…but so is the worst-case scenario spouted by bears.

I am growing more optimistic about the company’s initiatives in shifting toward a content-driven discovery platform, rather than having ads organized solely on users’ personal accounts, with a greater emphasis on shorter-form video (Reels) content.

Meta seems to have actually bolstered its competitive moat, and is still capable of churning out some growth. And it seems that TikTok’s competitive threat is receding, thanks in part to the U.S. government.

Let’s not forget that Meta has more users (nearly 3 billion monthly active users) and usage time than any other social network. That translates to it providing the largest audience and the most valuable data for social network online advertising.

Meta might not be a mega-high-growth stock anymore, but it is still worth buying as a resilient stock. Use any general stock market to start building a position.
In these “tough market” times, I’ve released my boldest strategy yet. It’s a way to generate hundreds of dollars in income in 48 hours. Sounds risky? I just pulled this off on a volatile regional bank because of how well it works.Check it out for free here.