The Reopening Stock Market Rally Has Gone Too Far

“Trying to turn something potentially worthless into a pot of cash.”

That’s how one lawyer described Hertz Global Holdings Inc.’s (NYSE: HTZ) recent approval to sell $1 billion in new stock, despite its ongoing bankruptcy.

Hertz is tapping the speculative frenzy surrounding its stock price. Its shares spiked 574% in just three days at the start of June. Over the past month, it was the second most popular stock on the stock-trading app Robinhood.

But since Hertz is progressing through a bankruptcy, this ploy for cash to pay debtholders and to restructure could leave the shares completely worthless.

That’s how you know the mania of retail investors has reached an extreme.

It’s just another example of would-be investors gambling on the stock market, as Ted wrote about yesterday.

And there’s a common theme behind the most popular and top-performing stocks on Robinhood.

Just like Hertz, many of these companies stand to gain the most from a quick rebound in the economy. Top Robinhood stocks include hotels, casinos and cruise lines. These were among the most battered stocks during the sell-off earlier this year.

But a rally in these most speculative companies has gotten ahead of itself for a few simple reasons.

Normal Is Still a Long Way Off

First of all, the return to normal isn’t just slow. In many cases, a return to normal at all remains uncertain.

Just take a look at the chart below. It shows the year-over-year change in seated diners at U.S. restaurants. While activity has recovered from the 100% plunge, it’s still running nearly 80% below levels seen last year:

And there are early signs of another surge in COVID-19 cases, which derails hopes of a V-shaped recovery in the economy.

But that doesn’t mean there aren’t opportunities for investors. In fact, it supports the recommendations that Ted and I have made all along.

Where to Find the Big Bargains … and the Big Gains

Last week, I shared how Ted and I have pinpointed big gains with two themes … deep value and change.

Deep value stocks are ones that fell too far below their profit potential and are supported by a quick recovery in parts of the economy. That includes Ted’s housing recommendation. Look at how quickly growth in mortgage applications have rebounded to pre-pandemic levels:

And here’s another industry that continues to see surging demand.

According to data from NPD Group, video game revenues jumped 52% in the month of May. It’s an industry that I told you about back in April. The Wedbush ETFMG Video Game Tech ETF (NYSE: GAMR), an exchange-traded fund (ETF), is up 16% since I recommended it in that article.

That comes as no surprise as many choose to remain at home.

So instead of gambling on the economy, look at sectors that are supported by changing consumer behaviors.

And know that there’s still plenty of upside left in our deep value and change-driven picks.

Best regards,

Clint Lee

Research Analyst, The Bauman Letter