Anthony Speciale Stock Market Analyst

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A Special Situations Hotlist for Big Gains No Matter What the Market Does

Today, we’re bringing you a new hotlist made up of special situation stocks that are ready to go regardless of what the market does in one direction or another.

We’ve seen volatility pick up as we move closer to year-end, so we want to stick to the stocks that we think you can buy right now and make a ton of money with no matter what the market does.

We’re going to start with a story about a guy by the name of Boaz Weinstein, Founder and CIO of Saba Capital Management, who we’ve talked about before. He’s probably the best fixed income investor on the planet right now.

Around 2012, he noticed some unusual trading in London fixed income markets that looked like panic trading, so he started taking the other side of those weird, unusual trades. As it turns out, he was absolutely correct.

He had spotted the panicked trading of the “London Whale,” a trader at JPMorgan Chase & Co. (JPM) who kept doubling down on his trades to try to make back his losses. Now, we all know how that story ends…

No matter how much you double down and increase your debt, if you’re in panic mode, the loss is just going to get bigger and bigger. It ended up costing JPM over $6 billion, and a lot of that money went right to Weinstein and his investors.

Now, in 2019, he noticed once again some very strange trading in credit default swaps, which pay off if the credit conditions of a company get worse.

What he noticed was that the credit default swaps for crappy companies that should be priced a lot higher were priced the same as credit default swaps for companies with great credit and a low chance of default.
He bought a lot of swaps on the crappy companies and sold a bunch of swaps on the quality companies. He did not predict the pandemic, but he certainly capitalized on it.

The flight to safety meant that the quality companies did better while the crappy companies did even worse, and his fund ended up by 100% in 2020. Most of that money was made in about a six-week period.

This guy is really good at what he does, and one of his big interests these days is closed-end fund arbitrage. He likes to load up on a position in funds that are trading at a heavy discount to net asset value (NAV) and lean on management to make changes that will eliminate the discount.

It could be a buyback, a tender offer, a liquidation of the fund to return cash, turning the fund into a conventional open-end mutual fund thereby eliminating the discount… He wins most of these, and he’s forced decisions at funds where we really didn’t think he’d be able to.

Salient Midstream & MLP Fund

He has now started building a position in Salient Midstream & MLP Fund (SMM), a closed-end fund that invests in energy mid-stream infrastructure projects like pipelines, gathering facilities and anything that moves natural gas and crude oil from point A to point B.

We’ve talked about several of these companies, and all of them are in the fund. And we can buy into them at about a 14% discount to NAV right now. Last week, Saba Capital, filed a 13D form with the SEC, nominating two members of Saba’s team to the board at the annual meeting.

They’re willing to wage a proxy fight, and they will take it all the way to the end to take over the fund, as they’ve proven before. So, they’re going to do everything they have to do to narrow the gap between the value of the stocks and bonds the fund owns and the current price in the open market.

In the meantime, we’re going to collect a 4.5% dividend on a regular basis, and we believe that energy is going to start moving higher because we don’t think that the coronavirus variant that’s going around is going to have a substantial impact on the global reopening process.

There’s a serious supply and demand imbalance that’s not going to be fixed for years. So, oil and gas will come back in favor, infrastructure projects are going to remain in demand and this fund owns a lot of them.

It’s trading at a large discount to NAV, and Saba Capital has come riding into town with its posse, determined to narrow that discount. So, three ways to make money: Oil and gas assets go up in price, the discount narrowing and collecting a dividend.

I don’t think it matters much what the market does, as long as Weinstein is putting the pressure on Salient Midstream & MLP Fund.

NGL Energy Partners LP

Now, I’m going to give you a few “heroes or zeros,” which means you’re either going to lose a very small amount of money or make a ton of money on them.

NGL Energy Partners LP (NGL) is a crude oil logistics company that’s heavily leveraged with lots of debt. They purchase crude for producers, transport it to refiners for resale and sell natural gas liquids and biofuels and refined products to industrial companies, utilities and consumers.

They have a water business that they transport and dispose of the water that is used in the drilling process. They also do storage terminals and pipelines and other infrastructure. They’re massively in debt, and when things slowed down last year this stock got crushed.

It’s currently trading at about $2 a share, compared to its high of $15 coming into 2020. Could we get there again? Not sure. But there’s certainly a chance if the debt is handled and paid down through asset sales or reorganization not involving bankruptcy.

Or they just return to profits as analysts think they’re going to do in 2022, and they are able to generate enough cash flow to begin paying down the debt. This thing could easily skyrocket in value.

Now, the people in the best position to know what’s going to happen at this company are the company insiders. And recently, the CEO, a VP, a director and the chief counsel of the company began buying back stock, and they were not small purchases.

They were all six-figure purchases, with one of them for almost $1 million worth of stock. So, we’ve got a lot of insider buying going on, and it’s been going on since August. These guys are making big bets that the corner is going to be turned and this stock is going to go from its current price way back up towards that $14-$15 level that it was trading at pre-pandemic.

You could lose $2 a share, or you can make seven to 10 times your money over the next year or two if the insiders are right and they continue to turn this company around.

Kyndryl Holdings, Inc.

Last up is Kyndryl Holdings, Inc. (KD), which was spun off from International Business Machines Corporation (IBM) earlier this year. It’s their information systems infrastructure division and is now the largest one in the world.

They spun it off at $50 a share. Nobody cared. Nobody wanted to own it or saw a lot of upside in the business. And the stock has sold off steadily all the way down to below $20.

That is absolutely ridiculous for a multi-billion company that does about $19 billion in total sales. Yet, the market cap is just about $3 billion.

They offer cloud services, data protection and cybersecurity… Everything your IT system needs at companies both large and small. They’re the largest company providing these services in the world.

Well, finally, insiders have said enough is enough. This drop is ridiculous for a company of this quality and size. They’ve started to buy some stock, with the CEO, CFO and a director all buying stock in the open market recently.

KD trades at just 20% on each dollar of sales, it should be profitable next year and insiders are buying. Will it get all the way back to $50? Not sure, but if it gets just part of the way back, we could make a lot of money from what looks like a relatively low-risk entry point.