To The Moon

$Desktop Metal Inc.(DM)$

$Etsy(ETSY)$

$Hanesbrands(HBI)$

Today, no fewer than 373 billion-dollar companies trade at negative enterprise value. An enterprising (and deep-pocketed investor could theoretically take any of these firms private and end up with more assets than they started with. High-growth firms like Rhythm Pharmaceuticals (NASDAQ:RYTM and Singular Genomics (NASDAQ:OMIC make attractive takeover targets.

And that brings me to Desktop Metal (NYSE:DM — a firm I’ve already written about at length.

In prior notes, I’ve commented that this 3D printing firm is on the leading edge of an American manufacturing revolution. Its ability to print metal products at high speeds makes it competitive with casting — a labor-intensive process that has stymied many American manufacturers.

Today, I’m adding DM to the top of my list of “buy-the-dip” plays. The 3D printing firm now trades close to its tangible book value, making it a potential buyout target. And though the firm still has a 25% to 35% chance of going bankrupt over its weak cash flow, its valuable intellectual property (IP) and strong sales team give it a reasonable chance of surviving any potential crisis to become a 10x stock.

Meanwhile, “Strong Cash Flows” companies are also on blue-light special.

This week, I’m introducing Etsy (NASDAQ:ETSY as a “buy-the-dip” play thanks to its wide-moat business and strong cash flows.

Since 2017, the ecommerce site has generated a steady stream of profits thanks to its focus on unique, non-commoditized goods. The company generated $620 million in free cash flow in 2021, which it used on value-added acquisitions.

Etsy is also shrugging off the end of the Covid-19 pandemic. Analysts expect the ecommerce firm to grow revenues another 60% by 2024, compared to a -5% decline for fellow work-from-home darling ContextLogic (NASDAQ:WISH.

The recent tech selloff has also moved prices to reasonable levels. Etsy now trades at a 16x forward price-to-cashflow multiple (P/CF, a figure comparable to Amazon’s 18x ratio and far lower than Shopify’s (NYSE:SHOP >500x.

Investors, however, should still exercise restraint with position sizing. If the U.S. economy swings into an unexpectedly deep recession, share prices could theoretically drop below $50 — a 12x P/CF ratio. And Etsy’s current $10 billion market capitalization means it needs to drop 20% to 30% for any would-be acquirer to swallow.

Still, Etsy remains my top “buy-the-dip” ecommerce firm for its ability to generate strong cash flows and the potential for a buyout offer should prices continue to fall.

…And for Protection

Investors seeking stronger protection than Desktop Metal or Etsy should turn to history. As mentioned on Tuesday, Consumer Staples tend to outperform during recessions.

And that brings me to HanesBrands (NYSE:HBI, an innerwear firm that has averaged double-digit return on invested capital (ROIC for the past two decades.

In many ways, HBI looks like a Perpetual Money Machine — abnormally high ROIC and a wide-moat business that does well regardless of recessions or fashion trends.

Even when the economy is falling apart, people still need underwear.

HanesBrands also has a hard-to-beat cost advantage. The firm owns Hanes, Champion and Bonds, giving the parent firm a 32% market share of the North American market and 21% of the Australian one.

The firm also produces 70% of its products in-house, giving it slightly better control over costs in its supply chain.

Today, investors can scoop up HanesBrands for under 8x forward price-to-earnings. Competitors Gap (NYSE:GPS and Gildan Activewear (NYSE:GIL trade for 41% and 30% premiums, respectively.

That said, HBI will face some issues along the way. Shipping delays, rising commodity prices and retail store closures will eat into profits; Wall Street analysts have already cut earnings estimates by 9.3%.

HanesBrands also fails one of the Perpetual Money Machine requirements — the ability to reinvest its high ROIC back into the business. The innerwear business is a mature, zero-growth industry, while activewear is cutthroat and competitive. HBI will have trouble doing much with its expected 20% ROIC besides issuing a steady dividend.

Yet, the longer-term matters far less for those looking to ride out the next 6 to 12 months. When worldwide stock markets are falling apart, HBI offers a combination of strong cash flows and low prices that are hard to beat.

Bottom line: HBI offers the lowest-risk “buy-the-dip” investment, followed by ETSY. DM is the highest risk of the three for its shaky financials, but offers the best potential returns.

The Value of Quant Investing

When I first started trading in my early 20s, I followed the same advice virtually every novice Wall Streeter heeds:

“Buy the dip.”

The old quip has been touted by everyone from Nathan Rothschild to Warren Buffett as a responsible way to invest in stocks.

Yet the data tells a different story.

As a group, lagging stocks tend to keep crashing. Low share prices can make it harder to raise capital, creating a “death spiral” of worsening growth and even lower stock prices. Social messaging boards are filled with stories of people jumping into loss makers like GameStop and getting served another helping of declines.

But a quant-based approach can help us avoid these duds.

By removing the worst cash-flow companies from the lowest momentum quintile of H2 2021 stocks (i.e., all companies earning less than 10% cash-flow-to-sales), returns improve from -38% to -17.6%. Cutting firms with high valuations of >10x EV/CFO from that group further increases returns to a positive 1.1%.

These insights can help investors gain handsomely. Once markets finally bottom out, these top “buy-the-dip” stocks quickly become the gas that powers portfolios to recovery.