Time for another wide-ranging ad from Oxford Microcap Trader ($1,995/yr, no refunds), which is the “upgrade” letter from the Oxford Club folks, promising bigger gains by betting on small-cap stocks (and sometimes speculating further by using options on those positions).

The ad comes in the form of another “interview” presentation with Alexander Green, what they call an “Emergency State-of-the-Market Summit”… here’s how the ad describes the situation:

“Alex is predicting a MAJOR market event. And if he’s right, an unusual Fed move could send one group of overlooked stocks soaring 3,000% – or more – over the next 12 months.”

So we’re basically dealing with a situation where the Federal Reserve is almost guaranteed to cut interest rates, starting with the September meeting in a few weeks, and everyone knows that, but the pitch is that everyone’s missing the big opportunity which will come out of that rate cut…

“When Fed Chairman Powell takes the stage next…

“Americans will no longer be wondering if the Fed will cut rates…

“After the most recent meltdown and troubling economic data, the odds of that happening now stand at 100%, according to the CME….

“And just about EVERYONE will be in for a major surprise… if Alexander Green’s bold prediction holds true.

“They’ll also be so focused on the S&P 500 that they will miss a rare group of Fed ‘Power Stocks…’ which historically skyrocket on rate cuts….

“Over the past 75 years, these stocks as a whole have delivered more than twice the return of the S&P 500 in the three months after a rate cut.”

And they pump up Green by mentioning some of his big winners…

“… some of his top Power Stock moves are downright legendary…

“About 18 months ago, he declared that he was personally going “all in” on one.

“And it’s been a blockbuster ever since.”

I guess you can make your own call on what “blockbuster” means, but that’s a reference to Absci (ABSI), which is a small “AI drug discovery” stock that he started touting as his “all in” stock in December of 2022 — since then it has both had a 50%+ drop into the 2023 lows and a 100%+ gain at the highs of six months or so ago… right now it’s sitting on roughly a 70% gain.

The potential for more dramatic 10X or 100X gains from buying into small cap growth stocks obviously means you’re also taking more risk — there’s no way around that, if you’re looking for massive winners in the small cap universe then you have to go into it knowing that losing is part of winning, you’ll have to kiss quite a few frogs to find your prince, and you’ll have to live with those frogs for quite a long time — the transformation to prince doesn’t often happen quickly.

Which means that if you seek 1,000%+ gains, then you can’t also expect to hold these stocks with a 20% or even 40% stop loss to protect yourself, they will almost all hit those kinds of losses at some point along the way. Usually they’ll fall even more, the volatility and ‘bet on the future’ uncertainty that makes 1,000% gains more feasible with small companies, also means that 90% losses are both possible and, especially during market sell-offs, pretty common. I can’t think of many extraordinary long-term performers that didn’t also look like terrible mistakes many times during their rise from small cap hopeful to large cap name-brand market leader.

Green’s pitch is more short-term in nature, though, which is partly because it’s a sales pitch — if you want to convince investors to pony up two thousand bucks for a nonrefundable newsletter, you often need to promise them the potential for extreme gains in a short period of time. So his big bet is that when the Fed starts cutting rates, it will turn into a dramatic series of bigger rate cuts than anyone expects, and his favorite small-cap stocks (he calls them “Power Stocks”) will soar rapidly higher. In his words…

“I was excited at the prospect of a quarter point cut and how it would shoot these stocks to incredible highs.

“But now – thanks to all of this mounting pressure on the Fed – we could easily see rates a full point-and-a-half lower… in a matter of weeks!”

So how does he describe these “Power Stocks?” Here’s a bit more from the “emergency summit”…

“True microcap Power Stocks, like the ones I target, are great little under-the-radar businesses with breakthrough products and rapidly growing sales.

“Most of the biggest, most successful companies on the planet were tiny at some point….

“I’ve studied all of the best ones out there to identify what qualities made them so successful. I’ve narrowed it down to 3 main criteria. And the stocks I’m going to tell you about check all of the boxes.”

And he distinguishes these from his “Next Magnificent Seven” stocks he’s been teasing for a while, which tend to be a bit larger:

“The Next Magnificent 7 are companies that I believe will come to dominate the entire market – So I’m talking about the next Apple, Tesla, Nvidia, etc.

“They are stocks you want to hold for years, because it took them a few years to make their gains.

“But these Power Stocks are much smaller… and therefore have even bigger SHORT-TERM potential.

“And unlike the next Magnificent 7, you’re taking on more risk for the shot at higher gains… they aren’t for everyone.”

(In case you’d prefer the shorthand, the “Next Magnificent Seven” stocks he started pitching a couple months ago were ARM Holdings (ARM), Cloudflare (NET), Exscientia (EXAI), 10X Genomics (TXG), Symbotic (SYM), CyberArk (CYBR) and CRISPR Therapeutics (CRSP), plus bonus pick UiPath (PATH) — you can see my full article on that Next Mag 7 here. — so far, only the two cybersecurity stocks on that list, CYBR and NET, have outpaced the S&P 500 this summer, and CRSP and SYM have fallen dramatically, so the group is lagging the market overall.)

Why do smaller companies generally do better when interest rates are falling? Well, lower interest rates tend to goose the economy in general, so they’re good for most stocks, all else being equal, but Green’s point is that small-cap companies tend to be more cyclical (more tied to the ups and downs of the economy, that is), and tend to be more reliant on floating rate debt, so they get more of an advantage from falling rates.

So what are those three criteria that Alex Green says he uses to pick his “Power Stocks,” and what are the investments he’s recommending today? It’s really four criteria, here’s how they sum up those best bets in the ad:

1. “companies with a market cap of $2 billion or less and trading for under $20.”
2. “companies that have grown sales for at least three consecutive quarters….”
3. “I want to buy them when they are cheap… trading at a great value compared to the overall market.”
4. “very recent insider buying, proof that these companies aren’t penny-stock pipe dreams.”

OK, no real argument with those basic rules — buying small companies with growing revenue, a good valuation, and insider buying ought to be a decent starting point for improving your odds of success.

What, then, are the actual “Power Stocks” he teases in this ad?

He hints at three “secret” stocks, and offers one recommendation for free — the freebie is WisdomTree (WT), the asset management company which runs a lot of specialized ETFs. Here’s what he says about it:

“Since 2020, revenue is expected to jump 71% by the end of this year.

“It’s cheap… trading at about $10 right now. And, in fact, if you see a sudden and drastic increase in price in the next few days, wait for it to come back down in that range.

“AND insiders hold nearly $18 million in shares.

“But again, if you want to buy, make sure you’re getting in at a good price.”

I’m all for ETFs, those are a great and tax-efficient way to get diversification into a portfolio… but I’m not so gaga over ETF managers, even though to some degree those companies which have dominant ETFs are in effect collecting a royalty on investor enthusiasm for the market. I just find that it’s too brutally competitive a market, with no real lock-in for investors (money can leave any ETF any day when sentiment swings), and I have a hard time judging which firm (other than Vanguard, of course) might have an advantage in any given niche. You might well feel differently, of course, and WisdomTree looks like a fine company with a pretty rational valuation.

And what are the secret stocks he teases? He eventually gets to the hints… and, of course, his attempt to thwart your friendly neighborhood Gumshoe…

“OK, so I can’t give away TOO many details. I don’t want to run the risk of a bunch of people Googling these stocks, jumping in all at once and driving up the prices.

“But this first Power Stock I’m targeting is transforming the energy sector with its AI technology.

“Which is paying off… big time.

“It operates in a high-margin, high-demand business. A market that’s set to explode 162% by 2030.

“But there are three specific reasons I’ve identified it as a microcap Power Stock…

“First, its revenue is skyrocketing.

“It’s jumped from $674 million in 2021 to nearly $1.3 billion by the end of 2023.

“Second, it’s incredibly cheap… with shares trading at just 1.2 times book value.

“That means the stock market values the company at 20% more than its book value – which is what the company is worth when you subtract all the debts and the assets.

“And number three… 500,000 shares have been purchased by insiders in the last 6 months… an investment of over $ 5 million.”

He compares this stock to Weatherford International, which jumped from $10 back in 2021 to $130 earlier this year. That’s an oilfield services company that Green says “had a similar setup” a few years ago which led to those gains. So what’s he pitching?

Thinkolator sez this is Helix Energy Solutions (HLX), which is also an oil services company, though their services are different — they provide offshore services, including well intervention and underwater robotics work in places like Brazil, the North Sea and the Gulf of Mexico. They are growing fast right now, and have averaged revenue growth of about 18%/year for the past five years, and they’re still pretty small, with a market cap near $1.7 billion. And yes, they do trade at only a little more than book value, though that’s not all that unusual for oilfield services companies — they usually have quite a bit of debt, and lots of expensive assets (though those assets, like underwater equipment, depreciate rapidly).

There is very little analyst coverage for this small-cap company, but those who provide estimates are guessing that HLX will be roughly flat this year, with about 42 cents in earnings per share, and that earnings will more than double over the next two years… so right now, HLX has a forward PE of about 15 (going by the estimate of 73 cents in earnings for 2025). They reported a pretty good quarter last month, and should report next in late October… and as with pretty much all offshore energy services companies, they should be indirectly driven by oil and gas prices, because companies push harder to develop new fields and improve production at times when energy prices are high and they can earn better margins.

And yes, they are pretty cyclical, and they have a fair amount of debt (they just renewed their latest asset-backed loan), so they might get some extra juice if fed rate cuts provide for lower borrowing costs and more energy demand, leading to more offshore activity. The downside is that these companies tend to be put under tremendous pressure when energy prices collapse — during the oil price collapse in 2015, HLX saw its share price drop from about $25 to $3.

I don’t know where oil prices are headed and in part that will just depend on the pace of economic growth globally, but that super-cyclical dynamic is usually driven by the fact that oil services companies invest too heavily in increasing capacity when prices are soaring, but then find that when prices collapse, the energy companies shut down wells and hold off on new capital investment and the service companies end up sitting on a lot of idle equipment, struggling to pay the debt service on all the money they borrowed to buy that equipment during the boom times. I don’t know Helix’ business specifically, or how they’re positioned in terms of contracts, but that’s the general risk to be mindful of in this sector — falling energy prices lead to oil companies being more conservative, which often leads to waves of bankruptcies and “survival” mergers among the little oil services companies.

What’s next?

“This tiny company recently achieved the impossible…

“This is an insurance company that settled a claim in – get this – TWO SECONDS thanks to AI.

“As McKinsey confirmed this industry ‘is on the verge of a seismic, tech-driven shift’….

“… this company has shown FOURTEEN quarters of consecutive revenue growth. FOURTEEN!

“Revenue is up some 350% or so since 2020…

“It’s had four earnings beats in a row.

“Plus, its stock is trading at 1.7 times its book value – which represents an incredible bargain.”

That McKinsey quote is from an interesting thought exercise from the consulting company on the future of AI-powered insurance, though, of course, analysts and consultants have been predicting the rapid evolution of the insurance business for more than a decade, ever since NVIDIA’s first self-driving car demonstrations caught our attention and got us wondering about how auto insurance would look in a world with many fewer human drivers (and presumably, fewer accidents).

And what’s the stock? Well, Alex Green is exaggerating a little on the revenue growth trajectory, as I count it has actually been eleven quarters in a row of year-over-year revenue growth… or fifteen quarters in a row of sequential revenue growth. But close enough… this is the insurance startup Lemonade (LMND), which was a hot story when it first went public, gathering attention from investors because of its status as a B Corp (certified for social impact) and its ability to grow very rapidly, particularly in the niche of apartment insurance for young urban dwellers. The company’s spiel has always been that they use AI and machine learning to analyze risks more precisely and rapidly than conventional insurers, and therefore can write policies and settle claims much more quickly.

Investors got WAY too excited about that in the early days, and bid the stock up to crazy levels for an extremely unprofitable insurance company (10-15X book value). They are still a long way from being profitable, they are growing nicely but doing so at the expense of heavy reinsurance costs and losses on their policies, though if you’re looking for signs of optimism they have gradually been able to moderate their operating costs, so they’ve doubled their revenue over the past couple years while keeping operating expenses more or less flat… which gives them some potential to eventually grow into their valuation. And “if there’s money left over” they still aim to “give it back to causes,” which appeals to many potential customers — though it’s probably the fast quote and sometimes low prices that probably mostly attract new insurance buyers, no 22-year-old wants to have to call an insurance agent on the phone (and not to put too fine a point on it, there hasn’t been any money “left over” yet, so their donations have mostly been extremely small).

This is finally an appealing story in some ways, now that a lot of the valuation excess has been wrung out of the stock, but it’s still not really clear when, or if, they’ll be able to grow quickly enough to absorb their high gross loss ratio of 79%. That means they can only spend 21% of incoming premium on selling costs (including commissions, in cases where they get customers from agents — which is still pretty rare), or on operating expenses of other kinds. That would be exceptionally low for a regular insurance company, and but perhaps its possible through their technology-driven business processes… and they are managing to keep their customers, which is an important sign (their retention is around 88% now, even with insurance prices soaring and encouraging a lot more shopping around among customers — that’s pretty decent, and is better than some companies).

I speculated on Lemonade early on because I liked the disruptive potential of their technology, and their appeal to young adults, and I learned my lesson about how ugly things can get when an insurance company can’t underwrite profitably… so I’d personally wait until they can generate an underwriting profit before thinking about investing in LMND again (meaning that their gross loss ratio on their policies plus their operating costs equals something less than their premiums written)… but that might mean I’m a little too biased against this stock. In terms of their operating performance they are, at least, on a much better trajectory than they were a couple years ago, so if they can keep that up they might be able to grow into becoming a sustainably profitable insurance company.

I’d just note that AI and “big data” work are a focus of most insurance underwriters these days, and it’s hard to really get an edge — it could be that Lemonade’s real edge is just that they’re willing to lose money on underwriting, and that’s an edge which is hard to sustain. Time will tell.

There has been a little bit of insider buying in LMND this year, though it looks like it was all done by CFO Timothy Bixby, in the $15-17 range, and there was also the usual pretty steady insider selling (and large option grants). Lemonade issued 14 cents in stock-based compensation for every dollar of revenue they pulled in in 2023, which is awfully high for an insurance company… but perhaps looks more reasonable if you think of it as a high-growth “AI” stock and compare to that cohort.

What’s next?

It provides unique travel experiences… thanks to AI.

Again, I can’t give away too many details. I can tell you that it currently trades for about $10.

Its market cap is less than $500 million. And I’d be willing to bet, George, that you haven’t heard of it.

But I don’t see it staying that way for long.

This is another one that’s undervalued by about 20%. So it’s cheap. Which we want.

Total revenue is up a blistering 606% since 2020.

And get this… Insiders own 31% of the outstanding shares.

There are a couple smallish travel services companies which use AI, and which come close to matching those clues — including Despegar (DESP), which is a smallish competitor for firms like Booking.com in Latin America, and Mondee (MOND), which is selling itself more heavily as an AI story (MOND has been clobbered, now down from their $10 SPAC deal price to below $2, with a $150 million market cap, but is at least holding up better than many of the half-dozen other travel tech hopefuls who went public through SPAC mergers during that mania and are now trading for pennies).

DESP is the closest match I’m aware of when it comes to a travel services business priced at “about $10,” with a market cap near $500 million, and with roughly 606% revenue growth since the 2020 lows (for all travel companies, mid-2020 represented a real collapse in revenue — DESP actually had a negative number for their revenue in the second quarter of 2020, which is obviously unusual, so counting growth from that point is very misleading). From their pre-COVID peak, they’ve grown their sales about 40% over five years — which is fine, but certainly not high growth. Over the past year, in a much more normalized world, revenue has grown about 14%. If the stock sounds familiar to longtime Gumshoe readers, that might be because the Motley Fool pitched it as a big winner about 2-1/2 years ago (it was around $10 back then, collapsed to $4 last year, and has jumped from $10 to about $12.50 over the past couple weeks — inspired, I guess, by their mid-August earnings report, which included a strong earnings “beat” and the sale of a non-core business).

So in the absence of other matches, we’ll throw out Despegar as a best guess… but that’s probably not correct, not least because the SEC filings indicate that Despegar hasn’t really had any insider buying over the past year. There is the appearance of insider buying at Mondee, and it was over $10 not all that long ago, so I guess we could stretch that match to them… but their revenue growth has also been slower, and from my quick look all the potential MOND insider buying reported on some platforms appears very misleading, what are classified as “acquisitions” are all grants of restricted stock at zero cost to the executives (and in one case, the CEO’s spouse).

So if you’ve got a better match in mind, please let us know with a comment below… there are a LOT of travel-related startups out there in the world, including many who are trying to lever AI to improve the travel shopping experience, but there aren’t many that are public companies who survived the SPAC crash and still have a market cap near $500 million, a share price near $10, and have also had meaningful growth… but maybe there’s somebody the Thinkolator missed.

And we’ll leave you there, dear friends — two matches and one guess, and you can make your own call on whether these are the kinds of “Power Stocks” you want to own before the Fed’s rate cutting begins in a few weeks. Thumbs up? Thumbs down? Let us know with a comment below… and thanks, as always, for reading…