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As the Fed raises interest rates, easy access to cheap money is drying up, and companies that don't make a profit, burn through cash, and rely on borrowing cheap money may be forced to default on interest payments without the possibility of refinancing.
That puts a certain class of stocks in danger that used to be the darlings of the stock market - growth stocks, especially in the tech and biotech industries, whose stock prices were mostly based on high valuations driven by research and development.
Companies like that basically run on debt, which has allowed them to thrive even as they burn through cash.
Well, that's over now. The companies that investors need to focus on are the ones that have a solid business model, make real profits and revenues, and provide things consumers need. It's a moment for "Econ 101," as I've been saying for a while.
But there's still money to be made on growth stocks by betting on their inevitable trajectory - downward. Trading put option spreads on some of these can hand investors 100% or more returns in just a handful of months.
I'm looking at two companies that I think are going to feel the sting quickly and present a prime opportunity for this kind of trade...
This Online Car Dealership Is Bleeding Cash
The first is Carvana Co. (NYSE: CVNA), the Arizona-based online platform for buying and selling used cars in the United States.
As prices for used cars soared during the COVID-era, CVNA was able to obtain cheap capital to buy inventory and then sell it to customers for a tidy profit on each sale. That was great for the company's top line, but it didn't make its way to the bottom line.
From 2018 to 2021, revenue grew 557% from $1.95 million in 2018 to $12.81 billion in 2021. On the bottom line, though, net income went from a $67.34 million loss to a $135 million loss.
Over the same period, net debt grew from $554.6 million to $5.01 billion.
As of the most recent quarter, the company is sitting on $6.75 billion in debt versus just $663 million in cash.
At the current price, CVNA has $79.88 per share of debt - but the stock is only trading at $28.44.
Yikes.
The company doesn't have an actual plan to become profitable anytime soon, which means it needs to continue borrowing money to keep operations afloat. And that's coming at a time when interest rates are rising, consumer confidence is waning, and sky-high used car prices are beginning to soften.
That's a terrible outlook.
At this point, I like buying the CVNA Aug. 19, 2022 $27.50/25 put spread for $1.20 or less. Plan on exiting the trade for a 100% profit or if shares of CVNA close above $32.
PTON Is Failing to Outrun Its Costs
I'm also watching Peloton Interactive Inc. (NASDAQ: PTON), the interactive fitness products provider.
When COVID locked everyone in their homes and kept them out of gyms, PTON exploded in popularity, and it showed in the company's revenue and share price.
From 2018 to 2021, revenue exploded 824.14% from $435 million in 2018 to $4.02 billion in 2021. But on the bottom line, net income went from a $47.9 million loss to a $189 million loss in the same period.
As of the most recent quarter, the company is sitting on $1.68 billion in debt versus just $879.3 million in cash.
Just like CVNA, Peleton isn't expected to generate a profit until at least 2024, which means it will have to borrow more money to keep the doors open and the bikes rolling - and it will have to do that with higher interest rates and waning demand for their products.
At this point, I like buying the PTON Aug. 19, 2022 $10/$9 put spread for $0.45 or less. Plan on exiting the trade for a 100% profit or if shares of PTON close above $12.
I know that investors like you are looking for the information and strategies that will prepare you to meet the challenges of this "new world order" we're looking at. The recession is here, and anyone who doesn't already have $1 million in their retirement account is going to be left holding the bag... unless you act fast.
That's why my colleague, Tim Melvin, and I have developed a survival strategy that will not only get you through the crush of inflation and supply chain chaos, but also has the potential to quadruple your money over the next five years.
You can get all the info here...
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
