The Picks! January 2021 Edition
3 Stocks to Change the World (Riskiest Set of Picks I'll Probably Ever Choose)
Swinging for the Fences: 3 Stocks to Change the World
Babe Ruth finished his career with a record (at the time) of 714 home runs. One of those home runs occurred in the 5th inning of Game 3 during the 1932 World Series when Babe Ruth of the New York Yankees pointed toward the outfield stands, calling his shot. On the very next pitch, he hit a home run to center field. It helped enshrine him as one of the greatest hitters of all time. But lesser known is that he also finished his career with 1,330 strikeouts. Regardless of the potential outcome of his at-bat, Babe Ruth had to step up to the plate to have a chance.
These stock picks could be a home run, or they might be a potential strikeout, but David Gardner of The Motley Fool said it best on his recent podcast “6 Principles of a Rule Breaker Portfolio” from 1/13/21:
“Make your portfolio reflect your best vision for our future.”
Stepping up to the plate are these three companies that will offer a better future for the next generation. Climate change has been largely affected by four main industries: (1) Electricity and heat production, (2) Agriculture, forestry, and other land use, (3) Industry, and (4) Transportation. One of the quicker fixes that we can make is in the transportation industry by transitioning our delivery and commercial vehicles to zero emission vehicles. The first two stocks address this head on with their electrification solutions. The third can provide a tremendous impact to a sizable portion of our world that does not have access to medical imaging. The three picks are:
GigCapital3 (Current Ticker: GIK), will be merging with Lighting eMotors (To Be Ticker: ZEV)
XL Fleet (Ticker: XL)
Longview Acquisition Corp (Ticker: LGVW), will be merging with Butterfly Network (To Be Ticker: BFLY)
The global electric vehicle industry is expected to grow upwards of 25% per year over the next decade as companies like Ford, GM, and Daimler transition to producing zero emission vehicles (ZEV), especially as the one to rule them all, Tesla, has gotten a 10 year head start. Smaller companies like Lightning eMotors and XL Fleet are stepping in immediately and offering electrification solutions for large class vehicles that weigh 10,000 lbs. or more (think Amazon delivery vans to Dump Trucks).
For the Butterfly Network, they are bringing ultrasound into the palm of your hand with their device that connects to an iPhone, presenting ultrasound images on the screen. The ultrasound market is currently $8B, but the industry has also never seen a device this small and low cost, potentially opening up untapped markets not only in the US, but across the world. These portable devices can then provide valuable information for diagnosing and treating a variety of diseases and conditions.
Key Note on SPACs:
Each of the below companies were a SPAC (XL Fleet) or are currently SPACs that will soon merge with their new companies (Butterfly Networks and Lightning eMotors). SPAC or special purpose acquisition companies are basically cash holding companies looking to merge with a private company, giving that private company the cash in exchange for equity in the business. It is another route for a company to go public.
Once a merger is announced, it is rare that the merger does not get completed (but it is possible). By purchasing shares in LGVW, when the merger occurs, your brokerage (Fidelity, Robinhood) will exchange your LGVW shares for the new BFLY shares at no cost to you. This sometimes takes a day or two. You have the option to purchase the SPAC now (Ticker: LGVW) at its current price, or wait until the merger is finalized and Butterfly Networks begins trading under the ticker BFLY.
An Electric Ecosystem for Urban Commercial Fleets
GigCapital3 (Current Ticker: GIK), will be merging with Lightning eMotors (To Be Ticker: ZEV)
Profile: Lightning is the leading electric vehicle designer and manufacturer, providing complete electrification solutions for commercial fleets from Class 3 cargo and passenger vans to Class 6 work trucks, and even Class 7 city buses. Lightning has committed to eradicating commercial fleet emissions, the main cause of urban air pollution. The market cap of the business is anticipated to be approximately $850MM after the merger completes in 2021.
Management: CEO Tim Reeser highlights his savy on this interview where he discusses the company, manufacturing capacity, and future. CTO/COO Bill Kelley also has a wealth of experience within automotive/manufacturing engineering and was the former VP of Advanced Engineering at Borg Warner.
Financial Health: For the 9 months of 2020, ZEV had $5.3MM in sales, growing 279% and outpacing their cost of sales growth of 173%. ZEV needed to go public to begin ramping up their production, especially since they only had $4.9MM in cash and a <$14MM> equity. The merger will bring $273MM of cash to the business to help them build out their full electrification ecosystem the next couple of years.
Revenue Growth: Lightning is the dominant market leader (although the market is extremely young) in the urban commercial ZEV industry, with over 50% market share in Class 3 to 6 EVs in 2020. They also have the distinction of being the only company in the US that has delivered fully functional Class 3 to 7 EVs to the end customer that are in use today. Recently Lighting announced that they have increased the range of their electrification solution to 250 miles, a strong benchmark for electric vehicles.
On the investor presentation, Lightning identified a 195% compound annual growth rate (CAGR) over the next 5 years. The company is also on track to lower cost of goods sold by 50% over the next 18 months. This is a huge potential market and one that Lightning is focused on taking a large piece.
Tailwinds:
Government climate change plans and regulations of emissions.
Tax credits for reducing carbon emissions.
Popularity and demand of companies like Tesla.
Push for net zero carbon emissions by companies.
Headwinds:
Supply chain constraints due to Covid-19.
Competition flooding the market.
Won’t be EBITDA positive until 2022 and free cash flow positive until 2025.
**Please see the Investor Presentation for more information and find the S-4 under SEC EDGAR filings. The merger should be completed the 1st half of 2021.
Electrifying Fleets to Drive Decarbonization
XL Fleet Corp. (Ticker: XL)
Profile: XL Fleet is a leading provider of fleet electrification solutions for commercial vehicles in North America, with over 3,700 electrified powertrain systems sold and driven over 140 million miles by over 200 fleets. XL Fleet is slightly different than Lightning in that they provide the market with cost-effective hybrid and plug-in hybrid solutions, which is currently in higher demand because of the increased range of the vehicles. XL Fleet is working on entering the zero emission vehicle market in the future. XL’s current market cap is $2.6B.
Management: CEO Dimitri Kazarinoff led the hybrid powertrain systems division of Eaton and CTO Mike Kenhard has experience with original equipment manufacturers (OEMs) like Ford and Denso, along with a background in electric vehicle propulsion systems. So far there are two strong ratings on Glassdoor, but not enough to draw conclusions.
Financial Health: Revenue for the 9 months of 2020 was only $9.4MM, a smaller 36% increase versus Lightning, but unlike Lightning they had positive gross profits for the 9 months. The cash position as of 9/30/20 was only $1.58MM with <$32MM> in equity. Another weak financial position, but the infusion of $350MM in cash due to the merger will help the business ramp up production.
Revenue Growth: XL Fleet is anticipating 100%+ growth each year through 2024, and their current sales pipeline of $220MM supports this for the next 12 months. The company should also see an increased TAM as they develop an all-electric vehicle. Right now they have hybrid and plug-in. Their growth story is similar to Lightning’s, but the addressable market allows for the success of more than one company.
Tailwinds:
Same as Lightning
Headwinds:
Same as Lightning
**Please see the Investor Presentation for more information. Go to the SEC EDGAR page to view the XL S-1. XL Fleet already completed their merger with the SPAC Pivotal, so they are trading their ticker XL and will most likely report their earnings for the first time in February 2021.
A Helping Device in Hand
Longview Acquisition Corp (Current Ticker: LGVW), will be merging with Butterfly Network (To Be Ticker: BFLY)
Profile: Butterfly’s goal is to democratize healthcare as an innovative digital health business by making imaging accessible to everyone around the world. Their ultrasound transducer can perform “whole-body imaging” in a single handheld probe. After the completion of the merger, Butterfly’s anticipated market cap will be approximately $2B.
Management: Butterfly has an innovative Founder and Chairman in Dr. Jonathan Rothberg who received the Presidential Medal of Tech & Innovation for next-gen DNA sequencing. The CEO Laurent Faracci served as EVP Health of Reckitt Benckiser. Glassdoor does not have enough information on the company to draw conclusions, although they are experiencing a hiring surge.
Financial Health: For the first 9 months of 2020, revenue grew 81.6% as compared to the previous year, although cost of revenue increased 334% leading to sizable losses. As of 9/30/20, Butterfly had $51MM in cash and $17MM in equity, but the merger will provide more than $500MM in cash to the business to help them operate and continue to ramp up their production to keep pace with demand. As with the other risky picks, each successive earnings report will need to be monitored closely.
Revenue Growth: The company’s revenue is expected to grow at 65% year over year for the next 4 years with long-term gross margins of 70%. Two thirds of the world has no access to medical imaging and two thirds of all diagnostic dilemmas can be addressed through simple imaging. Paired with their current device, Butterfly’s goal is to create an in-home wearable by 2023 that focuses on urology/bladder, cardiovascular, and primary care functions. With a current $8B addressable market, this at home wearable could increase this number dramatically. With the low cast device and data/AI powered software, Butterfly should be able grab current market share while also creating their own niche in new markets.
Tailwinds:
Digital disruption of healthcare.
Increasing need for access to healthcare.
Disruption of older, larger, and more expensive ultrasound units.
Headwinds:
Potential for a larger competitor to create their own portable ultrasound.
**Please see the Investor Presentation for more information and find the S-4 under SEC EDGAR filings. The merger should be completed the 1st half of 2021.
Moonshot Investing
When you invest in a stock, you need to be prepared for that investment to go to $0. The great thing is that the downside is capped at a 100% loss while their is an unlimited upside. The investment could gain 100%, 1000%, or 10,000%. With most investments, companies have a track record to support investing a sizable portion of one’s portfolio in that company.
Side Note: Currently I am comfortable having up to 8% of my portfolio in any one of these strong, growing companies. I call them my high conviction stocks.
But with moonshot picks, they don’t have the proven track record as a public company. The investment is solely based on the ideas that the company has presented and their plan to execute. Reliance will need to be developed on the leadership team, the product offerings and sales, and the potential addressable market. Positions in these companies should be started small early on with successive additions over time as they prove/execute on their plan.
Side Note: I normally put 0.5% to 1% of my portfolio in a moonshot company to begin, allowing their successive earnings reports to help me determine if I should add more, or get out completely.
Make sure to plan out your portfolio accordingly, especially on higher risk investments. A perfect podcast to listen to is Motley Fool’s Rule Breaker Investing. The episode “6 Principles of a Rule Breaker Portfolio” from 1/13/21 will outline some excellent core philosophies of a portfolio.
Thank You!
If you’ve made it this far, then you are an amazing human! Let me know what you think by leaving a comment. Or drop me a question. Share it with others who might appreciate this information. Looking forward to sending out the next issue!
**I am not a financial advisor, so please don't buy/sell anything based solely on what you read here and do your own due diligence.