The market has been an absolute disaster, especially for small caps over the last several months. Despite that, we have been on an incredible hot streak in the Canadian markets. Five for our last five, with three of those going up more than 100%:
1. In July we called GobiMin Inc. (GMNFF) (GMN.V) when it was $0.81. It recently had a take-private transaction at $1.84 and is now trading at $1.70 for a 110% gain.
2. In October we called Surge Battery Metals Inc. (NILI.V) (NILIF) when it was $0.10. Material findings of lithium on its property with expectations of more to come has resulted in a $0.285 stock price, a 185% gain.
3. In November we called Fission 3.0 Corp. (FUU.V) (FISOF) when it was $0.12. A massive uranium find has caused the stock to move up to $0.295, a 146% gain. Before we get into our U.S. listed picks, we will provide an update on this one.
4. On December 1, we called Equity Metals Corporation (EQTY.V)(EQMEF) at $0.11. It's $0.185 now for a 68% gain.
5. Finally, on December 6, we called Valeura Energy Inc. (VLE.TO) (PNWRF) after the company announced an extremely profitable offshore oil acquisition at $1.45. It' $1.90 now for a 31% gain.
If you want winners, we have proven that we can find them. Now we are going to suggest two in the United States that we think will have massive runs after tax loss selling and window dressing season is over. Core Scientific, Inc. (CORZ) and Starry Group Holdings, Inc. (STRY). If you like our picks you can follow this blog by clicking the follow button on the top of the left hand panel. We have 1010 followers on here as well as 110 followers on our Canadian blog. You can also follow us on Twitter @StockTradePicks which has over 5,000 followers.
First we are going to talk briefly about FUU. It went up 9% today but we think the run was greatly muted after poor market conditions. It hit an absolutely massive uranium find, 15 meters at 6.97% of U3O8 which contained 5.5 meters of 18.6% U3O8 and one meter of 59.2% U3O8. More results from the 2022 drill program will come in early 2023, so we expect the stock to have a sustained run upwards on hype. We had actually sold the stock after a double, but we are buying back in on expectations of another double or close to it. FUU profits funded the NILI and VLE runs, so we have no issue in buying back in at a higher price.
Now onto our U.S. picks. CORZ and STRY. CORZ has just announced bankruptcy proceedings and STRY is at high risk of it. So why would we pick such troubled stocks? Precisely because they are troubled, but also so oversold that they actually have strong upside potential relative to their troubles. These two former SPACs have dropped like a rock from $10 to pennies in months. They are due for a major bounce.
First, CORZ. The market has already recognized that this sell-off has been overdone as CORZ rose 73% on an incredible 542 million in volume today with more positive activity after hours up to $0.13. The company announced bankruptcy proceedings, but when you actually look at the details, it's not as bad as it seems. CORZ has cash flow positive operations before interest payments, but wants to restructure most of its approximately $900 million in debt by converting it into equity. However, it's very clearly stated that current equity holders will not get wiped out. They are entitled to a small piece of the equity plus warrants that would likely be substantially in the money should bitcoin recover in price.
It's often said that a stock with an excessively low market cap is essentially trading like an option on a sector or its future performance. As a $33 million market cap, CORZ is trading below this level. Let's take a look at Marathon Digital Holdings, Inc. (MARA) and Riot Blockchain, Inc. (RIOT). MARA has a $429 million market cap at a $3.67 stock price and RIOT has a $632 million market cap at $3.78 stock price. A MARA $10 leap expiring in January 2025 is trading at $1.50. A RIOT $10 leap expiring in January 2025 is trading at $1.27.
Follow this logic. An investor has the choice to buy MARA at $3.67 with a $429 million valuation or a MARA leap at $1.50. That leap essentially has a valuation of (1.50/3.67) of $175 million if call options had valuations like stocks do. They don't, but we are just using this idea to paint a picture of how much a post-restructuring warrant on CORZ should be worth. RIOT's leaps would have a $212 million valuation attached to them using the same methodology.
Any type of deal on CORZ would result in warrants that likely would have superior terms to these leaps in terms of length of time to expiry and strike price above market price. Let's say the post-restructuring CORZ is trading at $4.00 with a market cap of around $1 billion. $10 warrants expiring in 2027 would likely be trading around $1.50. Again, they wouldn't have a market cap like how a stock would, but the value inherent in them would be the substantial time value and the bet that the stock would recover greatly should bitcoin move back up. Using the method above, the warrants would have a "market cap" of about $375 million. The difference between choosing to buy stock at $4 with a $1 billion valuation attached to it or warrants at $1.50 with $375 million worth of time value attached to them.
This is an illustration rather than a recommendation of a value on pre-restructuring CORZ. But the stock is currently trading at a market cap of $33 million. There is a LOT of room for upside in this analysis. We are attaching a $0.50 fair value stock price to CORZ, which implies a valuation of $188 million. Even if the restructuring results in a total wipeout of CORZ equity, the value of the warrants alone - based on how the leaps on MARA and RIOT trade - can reasonably be expected to be at least in the $150 to $200 million range. And we don't think equity will be completely wiped out. CORZ existing shareholders will likely get 1-5% of the equity in the new company, plus the warrants.
So what's going on with the stock right now? Plenty of people see value in this like we do. But the stock swung wildly today, hitting a high of $0.19 before selling off to $0.09 by the end of the day. We think there are three factors inducing investors to sell:
1. The final few days of tax loss season. Anyone who purchased shares above $1.00 are likely selling to lock in the loss and offset any gains they had on the year.
2. Window dressing. Institutions that hold this stock likely want it off their books so they don't have to report this failed investment as a holding to their investors when they send out reports, marketing materials and prospectuses.
3. Because of its status of going through bankruptcy, there is a risk that it will be de-listed and kicked to the OTC. It's not guaranteed due to the nature of this restructuring. This deal may involve issuing a boatload of CORZ shares to debt holders so that they own 90%+ of the shares outstanding, rather than coming up with a whole new listing.
We view #1 and #2 as temporary selling pressure that will end in the coming days and #3 as a non-issue if it happens. We actually like stocks that go to OTC because the liquidity dries up and that increases the possibility of massive runs and short squeezes.
Speaking of short squeeze, there are 27 million shares short right now. Given that most shorts are probably up 90% or more, we think covering of the bulk of outstanding shorts is a likely scenario. Why stick around for an extra 5-10% for who knows how long that will take when you can cover your short, take the 90-95% win and go use that margin on some other more lucrative short play? CORZ stock is clearly not going to be wiped out to zero, as implied by the absolute minimum of existing shareholders getting warrants in the restructured company. There's really no point in being a stubborn short now. There won't be a "short squeeze" because shorts are taking massive profits. But we can imagine these shorts who want out of their position, a position started at $5.00 or higher, wouldn't care too much whether they covered at $0.10 or $0.20 or $0.30. They just want the liquidity to exit. Going on the OTC would actually hurt the liquidity so it's better to cover sooner than later.
STRY has been a speeding bullet of investor losses, dumping down to $0.02 in record fashion. The stock is at risk of bankruptcy. However, it's trading like bankruptcy is already here. It has a $3 million market cap when stocks on their literal death bed have higher valuations than that. The company recently announced yet another amendment to its loan agreement that saw $11 million loaned with access to an additional $30 million. With a focus on reducing costs, that should provide the company with at least another quarter of runway.
For some reason, STRY keeps on getting more money from lenders. Even if they are on ugly terms, a company that would be in imminent threat of bankruptcy with little hopes of getting value for creditors would not get any loans at all outside of debtor-in-possession financing. So things must be in better shape than they seem.
In the worst case scenario, STRY should be trading at least for the next several months. That leaves a lot of time for the stock to have a spike or short squeeze. Since it has been kicked to the OTC, STRY's liquidity has evaporated along with its stock price. It actually traded as low as $0.0002 on the day when hardly anyone could buy or sell shares. So a spike the other way to $0.10 is not out of the question. Especially once tax loss season is over. There are 3.3 million shares short, and just like on CORZ, those shorts are likely in the money at above 90%. It makes a lot more sense to cover now than to wait it out for the final two pennies.
STRY is not only a lotto ticket on a reduced liquidity short squeeze, it's a lotto ticket on the strategic review resulting in some material benefit to shareholders. One major advantage of STRY compared to other stocks like CEI or COSM, is that when it got kicked to the OTC, it gave up the idea of a reverse split and heavy raise like what COSM has done recently or CEI has done throughout it's history. It's better to rip the bandage off immediately like STRY has done rather than a torturous constant drip of shareholder losses over many years of reverse splits and dilutions like CEI. The STRY story will come to an outcome shortly. But before then, we are betting on a spike from $0.02.
Disclosure: We are long CORZ, STRY and FUU.V
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