Gary Brode, at Deep Knowledge Investing (DKI) invited me to join his board of advisors. He has shared one of my articles on his site, and I will do the same here. Gary offers actionable ideas that many of my readers have requested. The rest of this post, up to “Mish Epilogue” is by Gary.
Hi MishTalk Readers
I’m Gary Brode. Mish briefly introduced me a few weeks ago. I have a 30-year hedge fund background and in 2020, started Deep Knowledge Investing. DKI works with hedge funds, family offices, registered investment advisors, and individuals like you to help them get better returns in the stock market. We offer subscribers a limited number of high-return high-alpha stock picks as well as macro-based strategic asset allocation strategies, and have been effective in helping our clients and subscribers position themselves for the financial turmoil we’ve all experienced in the markets over the past three and a half years.
Like many of you, I’ve been a Mish reader for well over a decade and am thrilled he’s decided to join the DKI Board of Advisors. We have experts in medicine, digital education, real estate, tax and accounting, casino gaming, public policy including advisors who have worked for four different US Presidents, and exceptional energy and alternative energy people on staff. Everyone involved agreed Mish is a great addition, and I encourage you to check out the full board.
Mish has already contributed an excellent Guest Post On Consumer Credit to the DKI blog, and has kindly invited me to do the same for you. He’s let me know that many of you have been requesting actionable investment ideas which is perfect because that’s DKI’s core expertise.
One position I own in size and think is well-positioned for the current environment is Enova International (ENVA). Enova is a specialty finance company that makes personal loans to people with non-prime FICO scores and extends lines of credit to small and medium businesses. The company was growing quickly and posting very high returns on equity prior to the pandemic. Many people assumed the lockdowns would impair people’s ability to work and repay Enova leading to huge losses. Instead, the opposite happened. People stopped traveling, eating out, and going to events. Their spending plummeted while the government sent most of the country stimulus checks. All of a sudden, Americans’ credit ratings improved and people paid down huge amounts of debt.
This meant Enova’s earnings skyrocketed. That was a positive, but Enova was effectively operating in run-off mode. People paid off their debt which shrunk the size of Enova’s loan portfolio meaning the higher earnings were one-time in nature. The bet we’re taking as investors right now is that the company can re-grow the loan book without overpaying for marketing or experiencing higher credit losses.
That’s exactly what’s happening. For over a year, the company has been originating over $1 billion in new loans each quarter, and credit losses are still below pre-pandemic levels. Marketing spend as a percentage of revenue is coming down, and there is additional room for operating leverage. That means that expenses are growing more slowly than revenue leading to future earnings growth.
While DKI joins Mish in shared concerns regarding much of the current macro environment, it’s a perfect environment for ENVA. The company only makes loans to people who are employed and who have a bank account. Currently, unemployment is low, there are almost two jobs available for each person looking, and due to post-pandemic “revenge spending” and continued high inflation, consumers are spending freely. Simply translated, that means there are a lot of people who want some extra cash and who can afford to make their payments on additional debt. Further, if the company had lowered credit quality to get the new higher level of loan growth, we’d have already seen that in the quarterly releases.
Despite posting growth in revenue, margins, and earnings, the stock is trading at less than 7x next year’s earnings. We think ENVA will continue to increase the loan book, and if the company can continue to improve operating leverage, that will be followed by both earnings growth and a higher multiple. DKI subscribers have done well so far in the name, and I continue to own a large position personally. We also benefitted from an unusual options trade in the name last month that produced almost 40% returns in two months. DKI is opportunistic when we see these opportunities, but please don’t view those kinds of returns on short-term options trades as typical.
For those of you who are interested in understanding our investment process and research better, our Initiation Report is available to subscribers, and there are almost 40 Enova updates on the DKI blog. Those posts are paywalled for subscribers as will be any updates letting people know if I’m buying more, selling, or how we’re hedging these kinds of trades.
If that sounds like something that’s of interest to you, we’re offering MishTalk readers a 50% discount on any individual subscription. You can check out DKI for $25 for your first month or for $100 for six months by using the coupon code Mish50 at checkout. Just so we have good clear communication, please be aware that subscriptions will renew at the regular rate. We still think it’s an excellent value, especially if you’re making money from our ideas, but you’ll have the opportunity to make that decision for yourself.
Here is the Deep Knowledge Investing Subscription Page. Like Mish, we’ve recently made some changes to the website, so if any of you have difficulty subscribing or using the coupon code, please reach out at IR@DeepKnowledgeInvesting.com and we’ll sort out any potential issues and ensure everything is working as promised.
Thanks to Mish for joining the DKI Board and thanks to you for reading. Looking forward to sharing more ideas with you in the future.
Mish Epilogue
Gary’s Deep Knowledge Investing Blog is free with the exception of subscriber only articles. His free articles present ideas, but when to sell articles are subscriber only.
While my focus is global macro, global politics, commodities, and recognizable large caps, the DKI space is much deeper into tradeable equities.
DKI will appeal to readers who want a broader space and more actionable ideas. Please give DKI a look.
Thanks.
Red flag. Pump/Dump and didn’t think Mish would go there.
On the Canadian homebuilders with the global warming trend and US demographics combined with Asian buying I would expect any downturn to be short-lived.
Interesting. I believe that Canada also has a very aggressive immigration policy targeting up to 500k immigrants per year in a country of 40 million. So demand should be there. However, I don’t think there are many publicly listed companies in their building sector. Do you know of any?
I think this is a great addition to the blog Mish. More investment info. And it generated investment discussion in the comment section. Exactly what I want to see. I appreciate ALL investment ideas and discussion. Keep up the good work.
Dave, maybe you missed the thread, but Mish specifically mentioned your past comments/suggestions as rationale to add more constructive trading/investment content vs political bashing.
Now, lets butt heads over Canadian oil co’s viability for fast profits, or shorting the homebuilder sector 😉
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I am pleased that Mish added more investment info. And humbled that he acted on my suggestion to do so.
I am not concerned about Canadian oil “fast profits”. For me, Canadian (and some US) oil has been and will continue to be a long term investment thesis which I have explained here many times.
With many of these companies debt free (or close to debt free), and generating huge cash flows at $70+ WTI, and promising to return that cash flow to shareholders, I expect solid returns for the rest of this decade.
I would not short home builders. Most home builders have stopped building on spec, and are instead building based on firm orders.
“The bet we’re taking as investors right now is that the company can re-grow the loan book without overpaying for marketing or experiencing higher credit losses.”
Bet, the man says. Sorry, that is the wrong word for this time in my life.
I’ll pass.
Good companies involved in making cobalt, gallium, germanium, graphite, indium, lithium, niobium, rare earths, rhenium, tantalum, tellurium, tin, and tungsten commercially available in quantity would seem to be investable.
Chinese Be cautious, I’d suggest a look at Niron Magnetics, It’s not public yet, but Iron Nitride has been near impossible to manufacture until now, it’s a stronger rare Earth magnet than Neodymium.
This company is rumored to be why Musk just announced getting out of rare Earth components, Niron just discovered how to fabricate Iron Nitride at a fraction the cost of Chinese rare Earth’s.
I’m not a pro, this is just my personal observation, not advice, but if/when they go public, I’m in, probably not good for some rare Earth companies though.
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Mark Hulbert has an interesting strategy, at first it seems ridiculously simplistic, until you try it.
His concept is that there are three logical groups for investment advice.
1) Good advice
2) Mistaken advice – though well intentioned, often political, economic or ideologic bias plays a role here. (Think right slanting commentors and the coming USD “collapse” or similar)
3) Bad, intentionally misleading advice – akin to penny pumpers, perhaps paid influencers working on behalf of a hedge fund, etc.
Mark Hulbert would take census, then make a contrarian conclusion against the majority, his strategy is alarmingly effective, similar to the “inverse Cramer” etf idea.
I personally watch “interested” parties for contrarian advice, in 2020 Zerohedge, and especially it’s “American” commenters, was ranting that Putin was going to keep oil at below $15/barrel “forever”, I went nuts on oil, outside my comfort zone and it paid off excellently.
Not to offend ZH fans, but there’s no question they have a pro-Russian bias, I’ve gotten more than a few decent contrarian market ideas from them.
Back around October, not to knock Mish, but I had just entered a long JPY position at 67 and literally the same day Mish was suggesting shorting the Yen, for that example I categorize Mish into #2. I held that position for a month or so, if only for the “dead cat”, for the fact that quite a few were calling for the end of days for Japan at the same time.
Mish hates government debt, Japan’s is the highest debt to GDP in the world, logically Mish “should” have been right, but Japan’s Fed and government is not what it was in the lost decade….lightning striking twice.
I also swung long at SPX 3600 (I’m long/short), despite Mish’s hinting for a potential ~2400 SPX, IMO we were overdue for a 30% rout, but anything more would be a 2008 scenario, We’re not in a 2008 scenario, not even close, the Fed’s intentionally pressing the economy, they can push the other way on a dime and the smart money knows that.
As blogs go, I like Mish, but Mish is human, he has his biases like the rest of us.
We all do.
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It must be nice to always be right. Either that, or hindsight is always 20/20.
I’m also “MarkaD” (Couldn’t figure out my password when Mish changed servers couple years ago), I was here talking about the “contrarian” Mark Hulbert logic on the Yen, that it wasn’t going to be a “Soros” repeat, I was already long, and Mish’s post rattled me, but I stuck it out.
This thread –
https://mishtalk.com/economics/yen-tops-150-vs-the-dollar-for-the-first-time-in-over-three-decades/
For that matter, I have never seen you post an idea, though you do angrily rant about America a lot, despite not being a legal citizen, makes me wonder why you haven’t gone home where it’s so bad here and obviously much better there.
I find the most offensive, loud and obnoxious opinions are usually wrong, and yes, you’re usually wrong, but welcome to America, please enjoy your stay, it’s been our pleasure serving you.
Back in 2020, I was both here and on ZH talking about my oil idea (This name, Frilton), ZH commentors were full of all kinds of bad names for me like “imperialist American”, “Putin’s gonna drive America into the ground”, “Oil’s gonna stay below $15 forever”, n’ such.
TSLA was another great one, ZH was calling for Musk’s failure for years, my guess is the threat of EV’s to Russia’s energy trade, hope no one here was short that one, I certainly wasn’t.
I was a Tesla groupie going back to an article I’d read in 2007, I almost bought A123 because TSLA hadn’t yet IPO’d, thankfully I didn’t.
ZH’s constant threads about the fall of the “America Empire” have made me lots of money over the years, good ole wall of worry type thing, what with the fall of ‘Merica and such, cuz of all it’s Socialism n’ stuff.
Not just ZH though, countless right-wing bloggers, post 2008, calling for the impending “big one” market crash that would make ’08 look puny, because of US debt and “socialism”, or the “kill the Fed!” crowd, all noise, but fantastic contrarian advice.
As for you Ahab, you’re just a parrot, looking to fit in, you regurgitate angry right-wing meme’s as if it were original thought because a barrage of other parrots will just agree with you and give you a sense of belonging.
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I suspect the good ole USA still has a lot more of a good run left. We do much better when we have political and financial competition. Plus our demographics are better than all of the developed world. Our political leadership is a bit aged and stuck in the past, we could use some improvement there.
Let’s see how it goes. Mish expanding to specific stock picks could be interesting.
Uh oh! A stock recommendation with no disclaimers? People are going to go out and buy that stock and if the losses come it will be a game of legal jeopardy.
That’s $400 of free legal advice, you’re welcome.
Buying ENVA around 53 is a mistake. It will go thru a correction next 3 – 6 months and will be a buy 39.96 – 36.56.
Funny you should say this… the first chart–for one year– shows some ‘cycles’ around either heavy speculation or rapid growth, which makes me think that horse has turned around.
As happy as I am to see a constructive addition to Mish’s world, I’m not a fan of specific stock suggestions, more of a top-down, industry, sector or commodity outlook to where I might be able to cherry pick my own idea’s.
Of those, the best ideas come from ground floor observation, like a dock worker noting shipments or oil freighters, a farmer chatting crop yields/weather patterns, a carpenter or plumber talking decreased copper/steel use as codes allow plastic or carbon replacements for structure or piping…etc
I’ll also reiterate Captain’s sentiment, but less scathing, this company plays with fire making higher risk loans, if the Fed has to get more aggressive their loan portfolio is jeopardized.
IMO, though they seem to have hedged the loans effectively, they got lucky with employment and wage levels, but “You can’t fight the Fed” comes to mind, where the Fed’s goal is to slow wage & job growth.
I also checked their chart, they’re roughly 900% up from their 2016 low, if this were a tech or industrial company I’d be a lot more interested.
No denying they’re impressive for having navigated increased interest since last year, but still, too risky for me, the Feds 50 year downward rate trajectory is broken, the lending/banking sector as a % of stocks has topped, imo.
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In my experience, investments based on anecdotal observations tend to be speculative in nature, unless you have the expereince to back them up. More than decade ago, I flew into LAs Vegas , and for miles on the approach, on either side were suburban roads under the sand. No houses, though.
Look down on the approach to Istanbul airport, wind turbines everywhere, all moving at a good clip, Turkey doesn’t have the same special interest/oil lobby the U.S. does. Though I’m sure the “dead bird” argument Trump made is legit, really, I think wind is a good bet, what with Russia playing with oil prices n’ such.
Hedge funds used to send someone out to docked oil freighters (maybe they still do) to check how deep in the water they sat, great gauge for “hidden” supply, not sure if that still works though.
All anecdotal, yes, that alone isn’t investment advice, but food for thought to look into the sector.
Over a decade ago, 2011, I sold FCX 25% off it’s highs, having friends in construction I knew that numerous US states allowing plastic piping to replace copper would greatly reduce demand.
Admittedly, I missed the EV demand factor later in 2020, but that anecdotal observation saved me from losing years’ gains.
But yeah, I’m sure that bitching moaning about “Socialism” and “illegal immigration” makes you beacoup bucks, I like the anecdotal thing myself.
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“Enova is a specialty finance company that makes personal loans to people with non-prime FICO scores and extends lines of credit to small and medium businesses.”
Yup, just what I want to put my money into, a subprime lender. LOL. Forget uranium, silver and palladium. Those are too cheap and can only go up from here. Instead, let’s jump into a company that loans money to ne’er do wells and deadbeats who will absolutely default en masse as soon as it behooves them.
Look at the altman z-score for this ticker. This is a cut and paste from that site (I don’t think I can post the link here):
Altman Z-score of 2.67 is in the grey area. This implies that the company is under some kind of financial stress. If it is below 1.8, the company may face bankruptcy risk.
Enova International has a Altman Z-Score of 2.67, indicating it is in Grey Zones. This implies that Enova International is in some kind of financial stress. If it is below 1.81, the company may face bankruptcy risk.
The zones of discrimination were as such:
When Altman Z-Score = 3, it is in Safe Zones.
When Altman Z-Score is between 1.8 and 3, it is in Grey Zones.
Seems we now know the cost of pumping these risky stocks: a seat on the board of the pump house company.
In today’s environment, I trust you and other commenters on this site more than a company I’ve never heard of before.
The better buy is to wait for a market correction and buy ECGP because when those deadbeats don’t pay back their loans, ENVA will sell them to Encore (debt collector) for pennies on the dollar.
With credit card debt at trillion, student loans at a trillion, and other outstanding loans, ECGP will go to the moon! But you gotta wait for the crash, that’ll be the time to board the money train….Choo! Choo!
There may be even better metals on the Periodic Table, not those already in the news.
… loans money to ne’er do wells and deadbeats who will absolutely default en masse…”
Hey, that’s me you’re talking about!