SG - Uber A Zombie Stock; Ford GM Have Scalability And Expertise - David Trainer

2023-07-06 12:00:00 ET

Summary

• David Trainer has identified a list of "zombie stocks" that he believes will go to zero due to their high cash burn rate and inability to raise new capital.
• These stocks include companies from various industries such as technology, restaurant concepts, and electric vehicles, including Uber, Wayfair, and Rivian.
• On the other hand, Trainer recommends investing in stocks like Valvoline, Ford, GM, AutoZone, O'Reilly, and JPMorgan due to their profitability and strong business models.

Listen to the podcast below or on the go via Apple Podcasts or Spotify .

• 1:10 - Zombie stock list: limited runway, bad business models.
• 3:35 - Uber (UBER) burning too much cash
• 6:00 - Micro bubbles and David's wide variety of longs

This is an abridged version of our recent conversation, It's All About Liquidity - David Trainer .

Transcript

Rena Sherbill: And what would you designate as these many bubbles when you look at the market right now?

David Trainer: Everything on our zombie stock list. We created a zombie stock list right at a year ago, and it's been a pretty phenomenal performer. Obviously, the second half of last year, the great -- the very beginning of this year, there's a bit of a return to nuttiness, and we've seen it even out quite a bit.

The zombie stock list is companies that are burning so much cash that they have less than 24 months of runway. So they have so little cash that they're not going to be able to support their current cash burn rate for more than 24 months. A lot of times, it's just a couple of months, a few months. And then we've seen companies have to raise more capital or cut staff, cut spending drastically.

So it's, first of all, very limited runway, very limited prospects. They'll get bad business models. Almost all of our zombie stocks came from our danger zone stock list. So these were already bad stocks, bad businesses. But zombie stocks were -- are stocks that we believe will go to zero, because they're running out of money. We're in an environment where raising new capital is very expensive and punitive, right?

I mean, rates are a lot higher. I don't know if you tried to - if you look lately, the mortgage rates are a lot higher. HELOC is a lot higher. Everybody's like, and with the rates being higher, and money on the margin becoming tighter, we think lenders are going to be less likely to lend.

Like, if this company's been losing a ton of money and they've just been rolling over their debt, do you really want to be in the - hoping that the music doesn't stop when it's your loan that needs to be repaid?

And lastly, they've got a negative interest coverage ratio, so they don't have enough money to cover their interest payments. So yet another reason why if they do have to borrow more money to continue the cash burn, another reason why lenders would be unlikely to lend or they, if they do lend, will be at a much more expensive rate.

So we've got about, I think, 30 stocks on that list, and it's a variety of industries. So a couple, a lot of them come from the IPO timeframe. But when I think about pockets, it's technology, it's restaurant concepts, it's electric vehicles, certain of those. Everything from Shake Shack ( SHAK ) and Sweetgreen ( SG ) to Wayfair ( W ) to Oatly ( OTLY ), Compass ( CODI ), Sunrun ( RUN ), Uber ( UBER ), Redfin ( RDFN ), Carvana ( CVNA ), Lucid, Rivian ( RIVN ).

RS: What would you say about Uber?

DT: I'd say that's a business that, it's a commoditized industry, right? How many taxi drivers do you know that are billionaires, right? Or taxi companies, right? They've been burning cash at a great rate. They can't do it forever. It was the corporate governance there has been horrendous. It was only within the last, I think, six or 12 months that they admitted that their primary KPI adjusted EBITDA was a bad KPI because it did not result in profits, right?

So really until a short while ago, Rena, they were saying to the world, we're doing great with our adjusted EBITDA. And then when the Fed changed its stance definitively about a year ago, a few months later, when all of a sudden the PU world said, oh, it's not just about growth, we know we care about unit economics and we care about profits now how's that for a change in talk, right? We care about profits now.

Well, the Uber people had to come out and say, the Uber CEO, yeah, we're not going to use this KPI anymore because guess what, it was a complete joke. He didn't use those words, but that's the words I would use when you say that a KPI for a business doesn’t have anything to do with profitability or actually what's good for the business? That's a bad thing.

Valuation is still extremely expensive. And, yeah, I just don't, I think they're going to have a really hard time getting any more debt or continue to fund this business, because it's just not a lot of profit to be made.

I mean there's - tell me what their competitive advantage is, for any of these businesses and how hard is it or not hard, how simple is it for other companies to start up and compete? There’s not really major - many barriers to entry for what Uber is doing.

And when you ask the bankers, as I have talked to bankers who worked on this deal or the Lyft ( LYFT ) deal, the best they can ever come up with for me, when I say, hey, so what is the competitive advantage? Why should someone invest in this? And of course, this is off the record, right?

Their answer is, well, they can raise more money than other people, right? And I guess when your KPI is a number that doesn't result in profitability and you have a license to burn more money, I guess that makes it in the short-term, a better investment. Long-term, I think it makes it a zombie stock.

So they got a long runway, some of these. There's a lot of bad businesses out there that aren't zombie stocks because their runway is so long.

RS: Fine line. So let's get to some good news. What do you like? What are some of the stocks that you're long that you would advise investors to check out?

DT: So, it's a pretty wide variety. We've written fairly recently on stocks like Valvoline ( VVV ). I think that's a great, good old business. Those instant oil change businesses, it's great, right? I mean it's very profitable, growing, feeding a world where people don't change their own oil anymore.

EVs need maintenance, regular maintenance as well. So they're not going away because oil changes are going away. And by the way, oil changes aren't going away all that fast. I think they're still going to be growing for a while. We like some of the legacy automakers.

We think part of the microbubble with the EV startups means that there's an excess amount of capital there that's been effectively taken away from Ford ( F ) and GM ( GM ) and that those firms will leverage what will prove to be the more important advantage, which is scalability, manufacturing expertise into the EV space.

They'll catch up on the technology front and it will ultimately be the scale that they have in place that is very expensive. And so far really, really I don't think Tesla has delivered on. I don't think they've sustainably generated profits at Tesla.

I think a lot of it's false from regulatory credits. And I think a lot of it's false from a really big cutback in R&D and other kinds of expenses that they're going to need in order to not fall behind as fast because they're no longer staying ahead. They're losing market share in pretty much every market.

RS: We just got - and we just had a conversation of Bull-Bear debate around Tesla ( TSLA ) and they were echoing some of those points. So you feel like GM or Ford could overtake them in the EV space?

DT: Eventually, yeah. It's not going to happen tomorrow. But this is a big slow moving industry.

RS: Yeah.

DT: I mean think about how long Tesla's been around, right. And, look, Elon Musk is one of the greatest hypesters of all time. I mean, the amount of capital he's raised for that business and what he's been able to do and it's been in many ways great for the electric vehicle business.

Has it been good for society? Have we tried to push too much money into that? And are a lot of people going to lose a lot of money? Yeah, I think so. But does it help change some behavior? That part is good. That for sure is good. I mean, I think, Elon Musk has done some good things and some bad things. It's hard to paint people with one brush. We're dynamic creatures. He's not the savior. He's not the devil.

RS: Well said.

DT: AutoZone ( AZO ) and O'Reilly ( ORLY ), right. Keeping on the car thing. Those have been two extremely successful picks for us and we still think they look good. And again, they’re just great business models, very efficient that people overlook because they're not as sexy.

Well, let's see here, what else is on the list? For sure meme stocks are on this -- a couple of those are on the zombie stock list. Some of those have got a lot of money though. So they're going to be around for a while. When we get into the nuts and bolts around basic materials, Warrior Met Coal (HCC) is an extremely interesting stock.

A lot of people think coal, ESG, it's terrible. But there are two types of coal. There's metallurgical coal and there's thermal coal. Thermal coal is the stuff that does most of the pollution, is used to create electricity, used to create heat, big pollutant. Then there's the metallurgical coal that's required to create steel or use in about 80% of steel production.

And we need steel like it's going out of stock. We need steel to build all the solar panels and turbines. I mean, in fact, steel is one of the most important ingredients in all the green energy infrastructure. We need steel to build cars. We need steel to build machines, and so this metallurgical coal company has just been decimated valuation wise if it's going to go out of business.

And yet it's supplying one of the most important ingredients to one of the most important, I think, sector, we call it sector, but groups of companies, drivers in the world, and that's steel, steel demand, and for that matter we like couple of steel companies, Nucor ( NUE ) and Steel Dynamics ( STLD ). They’re - all these stocks are trading as if their profits are going to permanently decline by 40% or 50%.

RS: And would you put that just at the sector that they're in?

DT: I'd put it, I'd put it like specifically for steel. So basic materials is a bigger picture. I think there's other opportunities similar to that, that are kind of coming back to the theme I mentioned before. We're getting ahead of ourselves on the big picture with AI and things just and robots doing things, right?

But what's building the machines? What's building the robots, right? What do we need for that? We still need steel. We still need steel for all the stuff that keeps the world going in its current form. So and we still need a lot of basic materials for that matter. And so, yeah, I think those are examples of those kinds of opportunities, if that hopefully that answers the question.

RS: Yeah, I think, it does. What are you looking at in the financials?

DT: We like Zions Bancorp ( ZION ). We like Discover Financial Services ( DFS ). Discover, we put that on our long list a few months ago. It's done extremely well. I think I'm not sure on Zion. I think it's still relatively flat. Both of those are businesses that have got great underwriting and good capital cushions.

I also like Schwab ( SCHW ). Schwab's capital cushion and ratios are quite as strong, but it's a more diversified business. And so I think there's some potential near-term pressure on Schwab and having to sort of raise some more funds.

But ultimately, I think, you're going to get -- you're getting Schwab now at a great discount and same as -- same for Zions, same for Discover. They're all trading as if they're, well, Zions and Discover trading as if profits will permanently decline by a huge amount. Schwab is just way cheaper than we've seen in a long time and we just think it's one of the most prime great businesses in the financial sector out there. Similar with JPMorgan ( JPM ). I've said that JPMorgan is safer than an index fund.

RS: Why?

DT: Because I think - when I say index fund I mean like the S&P 500, because the S&P 500 has got so much junk in it right now with respect to technology and narrative driven, speculative driven stocks.

Whereas JPMorgan is just I mean it's big, diversified, best returns on capital in the business. Huge amount of free cash flow. I think the beta on JPMorgan is going to be better than the beta on the S&P 500 and I think through and through, overall, you've just got a better overall profile of the business. If you aggregate all of the -- all the companies up for the S&P 500, you're looking at a free cash flow of around 3%, and JPMorgan's got 6%.

You're looking at higher returns on capital, but not as good at trends in economic earnings for the S&P 500 versus JPMorgan. When you're looking at valuation for JPMorgan, you've got a price that implies a permanent 20% decline in profits.

The S&P level, you're looking at a price that implies a 450% improvement in profits. And the net present value of future profits is 450% of what current profits are. That's what's baked into the price of the S&P 500. Baked in the price of JPMorgan is a permanent 20% decline in profits. So risk reward here is just phenomenally better.

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