1,000 Stocks to Avoid... Also, the Poster Child of AI Hype, and a Personal Note...

This is a stunning statistic...

It's from a recent report by my friends at Kailash Concepts headlined, "The Art of Stock Picking Returns." As the report puts it...

Over 33%, or ~1,000 of America's largest listed companies, lose money or cannot afford to pay their interest expense. Let that sink in.

That's right... More than one-third of the stocks in the Russell 3000 Index, which tracks the 3,000 largest U.S.-listed stocks, don't make any money and can't afford to pay their interest expense. That's something to really pay serious attention to as rates rise, especially for companies that have debt expiring soon.

Just this morning, the Wall Street Journal ran a story headlined, "Junk-Rated Companies Are Borrowing Again." Simplified, I would call it "junk getting junkier," which isn't good for companies that aren't making any money. According to the article, speaking of speculative-grade companies...

Altogether, these companies issued almost as many bonds in January and February as they did in the entire second half of 2022, when rising yields slowed borrowing to a trickle. 

But regardless of when these companies need to raise cash, it doesn't really matter if they're not making any money – and I'm talking about real money, not some made-up metric. As Kailash put it in the report... 

This is not complicated. Don't give your money to companies that lose money or cannot afford to pay the interest on debt they owe. Those indebted companies have to pay back the principal as well as the interest.

The significance of this is that what worked in a bull market (buying stock indexes) might not work anywhere near as well in this kind of market... 

And the market we're in now is one that we may be in for an extended period of time.

This gets us back to those 1,000 stocks...

Kailash cleverly uses them to argue that in this market, good old-fashioned stock picking is likely to work best.

Sure, the folks at Kailash are talking their book – they sell data used by stock pickers, and they also have a related entity that manages money.

But sometimes people who talk their book aren't just doing it for personal gain... Sometimes it's because they know what they're talking about.

And to be candid, simply weeding out the "loss makers and zombies," as Kailash calls them, would have outperformed the Russell... even in the bull market. Take a look at this chart from the report...

Just remember, following the herd doesn't keep you from losing money... It merely means that if you lose money, you'll be in good company.

To which I say, at the very least, weed out the known losers and zombies. And there are 1,000 of them hiding in plain sight.

Moving on, AI continues in the spotlight when it comes to hype surrounding AI...

There is simply no company that was more in the right place at the right time with the right name than C3.ai.

Even its stock symbol – AI – positioned it as a hypster’s dream if and when the public’s fascination with AI took off, which it has...

In a throwback to another era of stock market bubbles – way back in the olden days of a little more than a year ago – its stock has been the closest thing to a pure play on AI hype that can be found.

As I wrote in an Empire Financial Daily in December 2021...

Software company C3.ai's (AI) valuation is even more astounding. Unlike DocuSign, which at least is profitable, C3.ai went public just about a year ago and has never earned a dime.

As my friend Adam Lashinsky wrote in Business Insider just days before C3 went public, this company's initial public offering ("IPO") filing was rife with red flags. Among them... C3 appeared to be a company in search of a business, or at least a hook for its IPO. 

Consider that... it originally was named C3 Energy for its software, which was geared to the oil and gas industry.

It then christened itself as a company whose software connects sensors, prompting it to change its name to C3 IoT – the "IoT" standing for Internet of Things, at that time a sure-fire aphrodisiac for investors.

Then, less than 18 months before going public, it reinvented itself yet again... this time, as C3.ai, with artificial intelligence as the lure.

The AI branding, as its stock has shown, was brilliant, but branding only goes so far...

At this point, C3 is pure speculation, with limited customers tied mostly to one industry – oil & gas. Traders are having a field day “playing” the short squeeze, which has catapulted the stock to a near-double in one month.

There’s no question... the stock could go higher. If I could use that emoji here of the guy shrugging his shoulders, I would, because with these kind of stocks, anything is possible. But just remember, this is a stock that in December 2020 soared more than 140% on the first day of its $40 IPO and with a few weeks had more than quadrupled to nearly 180.

At the time it was the poster child of a market run amuck, before ultimately losing more than 90% of its value, settling down at roughly $11 in January...

It has since nearly tripled, even after recently reporting a quarter with wider losses and most other metrics that would and should give investors pause. Not surprisingly, more than a few short sellers who like picking apart the numbers have had a field day here.

Will their concerns be proven valid?

I have no idea, and it hasn’t mattered... so far.

But if we’ve learned nothing else from the last bubble – and all of those that preceded it –the faster they rise on hype, the higher the risk.

Look no further than, well, C3 itself. The only question now is whether history will rhyme or repeat itself.

Finally, switching gears to a personal note...

Three years ago last Saturday, I had heart surgery to replace my aortic valve and repair my ascending aorta. if I didn't have the barely visible remnants of the scar, I would never know anything had been done. If you're wondering what life is like after that kind of surgery, here's a very short video I shot to celebrate three years.

Also, on every anniversary, I get up on my soapbox with this reminder/PSA... 

If you were ever told you or a family member or friend have a heart murmur "but it's no big deal," get a second – or even a third – opinion.

No matter what anybody says, it should be monitored – preferably by a cardiologist. You need to find out what shape your valve is in. An echocardiogram takes an hour and is painless. Untreated, a heart murmur can result in heart failure and a path you don't want to go down.

And just because you don't have symptoms is no excuse. I was pretty much asymptomatic during the 40-plus years after I learned I had a "murmur." I have been monitored every year since – twice a year, then four times a year as things progressed.

Mine was ultimately believed to be a bicuspid aortic valve, based not just on echocardiograms but also MRIs and CT scans.

But when they went under the hood – surprise! – they found a rarer unicuspid...

That was something not even the artificial intelligence ("AI") generated 3D model showed... and not something usually found in someone my age.

At the point of surgery – on March 4, 2020 – I was only starting to have what, in retrospect, were slight symptoms. By monitoring it so closely, I avoided heart damage (but was darn close) and also learned that I had an aortic aneurysm, which was also repaired – avoiding something worse down the road.

As a bonus, you get an angiogram when you have open-heart surgery. I had passed the heart stress test with flying colors... but it's only about 70% accurate. As good as I eat, the doctors found a minor offshoot of one of the main arteries that was 80% blocked. Had I not found it, I ultimately would've had angina and possibly a heart attack. (The doctors can't say for sure.)

I consider myself extremely lucky, but they say you create your own luck... In this case, I know I did.

And by the way: Not everybody who has a murmur needs treatment... but not knowing whether you do is playing roulette.

(This originally ran at Empire Financial Research, where I also write two investment newsletters, Empire Real Wealth and Herb Greenberg’s Quant-X System. For more information, click here and here.)