Avoid These Stocks

Andy Snyder|August 25, 2021

It’s a free-money bonanza!

All across the markets, investors, executives and savvy financiers are taking advantage of trillions of dollars’ worth of free cash.

But be careful… or you may be taken advantage of too.

We’ve long written about the huge moneymaking opportunities in the stock market.

“Dow 100K,” we scream as Washington jabs another stimulating needle into the arm of its wide-eyed patient. Thanks to the Fed’s free-money policy, there’s so much money in the economy these days that it’s impossible for stocks not to climb higher.

One reason they’re climbing higher is that companies are buying back their own shares.

We’ve told our Manward Letter subscribers about the immense power of buybacks. In fact, we created an entire allocation of our portfolio just to take advantage of this situation.

Companies are flush with cash and have no place to put it… so they’re buying back their own stocks and rewarding their shareholders.

So far this year… U.S. firms have bought $378 billion worth of their own stocks. Companies in on this trend are outperforming the broad market by about 15%. Focus only on the companies buying the most stock, and the outperformance grows to 50%.

It’s a huge opportunity.

Of course, buybacks aren’t the only way companies are rewarding shareholders.

Dividend payouts are surging just as quickly.

So far this year, some $1.4 trillion has been handed directly to shareholders. In the second quarter alone, payments surged by more than 25%.

Again, with this much money flowing straight into the hands of investors, it’s no surprise the major indexes sit near record highs.

There’s a lot of free money out there.

But pay attention. The news is not all good.

Plenty of companies are taking advantage of this situation and trying to get a bit of free money of their own.

Stay away from them.

Selling at the Top

While dividends are climbing and buybacks are flat-out soaring, there’s another record-setting trend on Wall Street these days…

Stock issuance.

Net share sales are now higher than at any other time in history… including the infamous dot-com boom, when companies were handing out fresh shares to anybody who would take them.

Some of this is good news.

We’ve written a lot about the opportunities in the SPAC (special purpose acquisition company) market. Shares of hundreds of once-private companies are now available to ordinary investors thanks to this powerful trend.

The availability of those shares is one of the leading reasons that the decadelong shrinking of the stock market has reversed. The number of opportunities in the market is once again growing.

But, like we said, only some of this is good.

Many companies are offering shares – and significantly diluting their ownership roster – simply because they can.

You likely heard about how GameStop (GME) took advantage of massive demand for its stock. Despite the fact that it was teetering on the edge of bankruptcy, investors piled into the stock, driving prices to obscene highs.

Management seized the opportunity to print off five million new shares… worth $1.13 billion.

Shareholders, who ignorantly applauded the news, got hosed. Each of their near-worthless shares became worth even less.

And it’s not just the big-name “meme stocks” that are taking advantage of high prices. Again, this is happening all across the market.

Just yesterday, Mister Car Wash (MCW) shareholders watched as their ownership stakes were eroded when the company announced a 12-million-share secondary offering.

B&G Foods (BGS) just announced a $228 million offering. Evelo Biosciences (EVLO) is selling $200 million worth of shares. So is Eloxx Pharmaceuticals (ELOX). And Aemetis (AMTX) is unloading $300 million in brand-new shares.

We could list dozens of companies that have, combined, created billions of dollars’ worth of new shares.

For the companies… it’s like free money.

For shareholders, it means each share they own is worth that much less.

If the companies squander the newfound money or fail to put it to good use, it will spell trouble.

It’s another sign that the Fed’s free-money policy has tipped the markets out of balance.

And as long as the Fed is stepping on the gas pedal and refusing to raise rates… the bonanza will continue.

Be careful.

And choose your stocks wisely.