2 Stocks to Buy Now — 1 to Sell Right Away

Understanding the Power of Strategic Investment Choices

Investment guru Charlie Munger once humorously remarked, “The only thing I want to know is where I’m going to die so I never go there.” This quip highlights a powerful concept: avoiding potential pitfalls can lead to better outcomes. In investing, this principle translates to identifying and steering clear of companies that are likely to underperform while focusing on those with strong fundamentals and growth potential.

Imagine if you had a tool that could eliminate all high-risk investments. The result would be a portfolio filled with winners, significantly increasing your chances of achieving above-average returns. This idea is similar to how health-focused books suggest making better dietary choices—like choosing a Big Mac over a more calorie-dense meal. While we don’t need magic for investment decisions, we do have tools like bond ratings that provide objective insights into a company’s financial health.

Evaluating Company Performance Through Bond Ratings

In 2020, Moody’s rated 376 S&P 500 companies that were still actively trading. The performance of these companies varied widely based on their ratings:

• Prime-1 (Aaa through A3): +74.7%
• Prime-3 (Baa1 through Baa3): +53.1%
• Not Prime (Ba1 and lower): +52.2%

Avoiding companies rated "Not Prime" could lead to better returns with lower risk. Additionally, some junk-rated firms, such as Pioneer Natural Resources and Rite Aid, have gone bankrupt and no longer trade, further emphasizing the importance of careful selection.

Navigating the Age of Chaos in Investing

Legendary investor Eric Fry suggests we’re entering an "Age of Chaos," where traditional household names may be outpaced by dynamic, fast-growing companies. His approach, "Buy This, Not That," focuses on selecting stocks that will thrive while avoiding those that are likely to decline.

This strategy is particularly relevant in the basic materials sector, which involves mining raw materials. When evaluating companies in this industry, it's crucial to consider the demand for the underlying commodity. Factors like whether demand is rising, stable, or declining play a significant role in determining long-term success.

Tronox Holdings PLC: A Potential Opportunity

Tronox Holdings PLC (TROX) is one of the "Big 3" American producers of titanium dioxide (TiO2), a compound used in paints, plastics, paper, toothpaste, and sunscreen. Despite its cyclical nature, Tronox has shown signs of recovery. Shares currently trade at under $4, well below the typical range of $15 to $20. However, the demand for TiO2 remains strong, supported by industries like construction and AI data centers.

Insider buying has also been a positive indicator, with several board members and executives purchasing shares. While Tronox faces risks due to its leveraged balance sheet and junk-bond rating, the potential for a 3X recovery in the next two to three years makes it a compelling investment.

Companies Benefiting from the AI Revolution

Several companies in the basic materials sector have seen significant gains due to the AI revolution. For example:

• Albemarle Corp. (ALB): +23%
• Plug Power Inc. (PLUG): +17%
• USA Rare Earth Inc. (USAR): +76%

These companies benefit from the growing demand for lithium-ion batteries and hydrogen fuel cells, driven by advancements in AI and robotics. Albemarle, in particular, is well-positioned due to its low-cost Chilean assets and strong balance sheet.

Avoiding Unfavorable Investments

Not all basic materials companies are benefiting from the AI revolution. Alliance Resource Partners LP (ARLP), America’s second-largest coal producer, is a cautionary tale. High production costs and competition from cheaper alternatives like Wyoming’s Powder River Basin make it difficult for ARLP to remain competitive. Analysts predict that much of the Illinois Basin coal industry will disappear in the coming decades, further highlighting the risks associated with investing in ARLP.

Exploring New Opportunities

Eric Fry’s latest presentation offers seven "Sell This, Buy That" recommendations, including companies poised to challenge industry leaders like Amazon, Tesla, and Nvidia. These stocks represent opportunities for investors looking to protect and grow their portfolios in a rapidly changing market.

By staying informed and making strategic choices, investors can navigate the complexities of the market and position themselves for long-term success.