HX Research - FREE IDEA

SPECIAL FREE IDEA FOR HX RESEARCH READERS

A couple of weeks ago, we published our first FREE IDEA for subscribers to our publications at HX Research. 

Readers who took advantage of that opportunity have done nicely and could have produced income of $911 in just a few weeks! 

When we published that previous idea, we shared that our firm - HX Research - offers free and paid newsletters. 

This letter—HX Daily—is our daily free letter where we discuss what is happening in the market and economy and give our thoughts about trading and investing. 

With our paid products, we make the introduction available to our readers on a complimentary basis. Still, we save the actual idea for our paid subscribers. We appreciate and respect their support! 

To help introduce our service to more readers, we have decided to post a "FREE IDEA occasionally." We will give this idea to our paid subscribers a few days or weeks earlier but then make it available to everyone. 

We will not do this often, but considering it's our second month of operations at HX Research, we wanted to share our first free idea. 

The FREE IDEA we shared a few weeks ago was from our TRADING strategies.   

We expect to hold the ideas in these strategies for just a couple of months and target a high single-digit to low double-digit return. That adds up across the 100+ ideas we publish in a year in those two strategies… 

Today, we share a FREE IDEA from our long-term "buy-and-hold" INVESTING strategy called HX Legacy. 

Our goal in this strategy is to find opportunities that can be held for many years.   

Our return goal is also much higher. We only get involved if we think there is at least a +50% to +100% return potential across 18 months or longer. Ideally, we like to find positions that can go up threefold, fivefold, or even tenfold. 

You need time to make those kinds of returns, so we have a much longer holding period. 

This week's FREE IDEA is a perfect example of this strategy. 

It is a company that almost no one has ever heard of, and even most of Wall Street's analysts don't know about it. It also owns one of the rarest and most valuable assets on Earth.   

An asset that will be key to the AI revolution happening around us right now! A recent announcement of a deal with e-commerce giant Amazon sent the shares +20% higher in just a few days. 

Our paid HX Legacy readers who took advantage of buying this idea when we first recommended it a month ago are +25% so far on their investment. 

With the stock having gone up so quickly, we would be patient and build a position over a few weeks or months, continuing to see an upside of +50% or more from these levels. 

We hope you enjoy this idea… 

“Climate Change.”

No two words in the last few decades have caused as much dissension or angst politically, economically, and emotionally.

People have extreme feelings on the subject.

Whether you think climate change is real and man-made or a complete scam, there is no doubt that the concept is having a massive impact on the global economy.

Despite this significant impact, finding ways to make money off the theme has been challenging.

Usually, when you have an idea driving trillions of dollars of economic change, there are many ways to play it. This one has been difficult.

However, this month's HX Legacy idea is an awesome idea that is a beneficiary.

This idea combines the best aspects of many ideas that where we have crushed it in the past.

It is an unknown stock with no analyst coverage and excellent business visibility and is deeply undervalued. Oh – and it is one of the rarest assets on Earth!

Pique your interest? If so, read more here…

INSIDE THIS ISSUE:

•  The REAL Math Behind Nuclear

• The New Nuclear Age

• An Undiscovered, Underfollowed Opportunity

• A VERY Rare and Valuable Asset

• Clear Path to Value Realization

The REAL Math Behind Nuclear

One of the few terms out there that is as controversial as “climate change” is “nuclear power!”

Look up the word "nuclear" in the Cambridge Dictionary, and one of the definitions is:

“Being or using the power produced when the nucleus of an atom is divided or joined to another nucleus.”

Until writing this report, we hadn't thought about the components of an atom since High School science class! Remember that it is made up of neutrons and protons. These are held together by something that, in physics, is called "the strong force.”

The nucleus makes up much less than .01% of the atom's volume but typically contains more than 99.9% of the atom's mass. That means a tiny, tiny piece makes up a massive amount of the weight of it.

Very simply – nuclear power is created when we break apart the neutron and proton and release a HUGE amount of energy. This separation process is called “fission.”

In the version of nuclear power that we have harnessed for power, we usually take an unstable atom – like uranium and use heat to cause it to lose one of the protons. That process creates much more heat, releasing the other protons and generating even more heat.

Think of it like lighting the corner of a piece of paper on fire. You need a match to do it, but once you do it, the whole paper burns.

Nuclear fission first became feasible in the 1940s because of the work of the U.S. government-funded "Manhattan Project." How many of you have seen the award-winning movie Oppenheimer that came out last year?

Since its beginning, nuclear energy has been controversial. What began as an attempt to harness physics for the benefit of humanity was initially used to cause one of the single most significant human-created losses of life in the bombings of Hiroshima and Nagasaki.

Nuclear was born controversy!

Across the next 50 years, though, nuclear energy was harnessed to create one of the planet's cleanest and most sustainable forms of energy production.

Economically, it is incredibly cheap and efficient. Environmentally – while there are concerns about nuclear waste disposal – it IS zero-emission.

Although controversial from the start, the rational case for the benefits of nuclear energy is complex to argue against.

Why is it so cheap and effective?

First, it is the power of the uranium. One pound of uranium can produce as much electricity as roughly 2 MILLION pounds of coal! You can run a nuclear plant for a year with uranium that could fit in a truck; the same amount of coal necessary would take 25,000 (!) rail cars.

Take a penny and hold it in your hand. The power from uranium weighing as much as that penny equals five tons of coal!

Uranium is a hell of a lot cleaner and cheaper to both transport and store than coal. Or oil, for that matter.

It is the single most efficient fuel humankind has ever managed to harness.

Wait – aren't "renewables" like wind and solar even better?

They don't involve using an underlying fuel, and the supply of wind and sunshine IS limitless.

The problems are reliability and storage.

The wind isn’t always blowing, nor is the sun always shining. The world still needs power when those aren’t around. As of yet, we don’t have great ways to store that power when it is created.

Unlike wind and sun, though, nuclear is always ON. It can produce cheap and efficient power round-the-clock to power our world.

The real problem with nuclear in the last forty years has been an image problem.

We will borrow an analogy from our old friend GM - readers who listened to our Hard Money Podcast know who we are talking about!

He compares the fear of nuclear power to a fear of flying.

Take a step back and consider your actions when flying in a modern commercial airplane. You are getting into a metal box, traveling at 30,000 feet in an oxygen-deprived environment, and burning (essentially) mini-rockets to propel you at hundreds of miles an hour. That is crazy!

Despite that, however, flying is safe. VERY safe.

Believe it or not, you are more likely to be struck by lightning than die in a plane crash!

Despite what you have heard about nuclear incidents in the past – Three Mile Island, Fukushima, and Chernobyl – the history of safety around atomic energy is stellar.

Let’s take those three incidents as examples. Do you know how many people died in each of them?

The answers are zero, zero, and seventy-eight.

Consider also that Chernobyl was built starting in 1978 by the Soviet Union. Have you ever read about Soviet air safety in the 1970s and 1980s?

The point is that the empirical evidence behind the safety of nuclear power is overwhelming.

Despite this incredible safety and efficiency track record, nuclear has remained a hot-button issue for political parties. However, we think we may be seeing the dawn of a new atomic age…

The New Nuclear Age

Why do we think this is the case?

At the start of our report, we discussed our BIG issue, "climate change," for the entire world.

Addressing our climate issues – whether you think they are real or not – is big business.

Increasingly, we are also seeing a growing global consensus, especially in the United States, to support nuclear energy on both sides of the political spectrum.

Historically, the “left” had argued against nuclear energy on perceived environmental issues around safety and waste disposal.

The factual evidence, however, has not supported these claims. The “left” is also increasingly focused on mitigating climate change and moving our power generation away from fossil fuels.

Given the issues with solar and wind, there is no genuinely feasible way to do that without embracing nuclear energy.

We have seen this recently in actions out of the Biden administration. Right now, the following initiatives are taking place…

• There is a $6 billion fund to help update, maintain, and extend the lives of U.S. nuclear power plants.

• $2.5 billion is being invested in next-generation nuclear technology projects.

• More than $40 billion TOTAL will be spent on nuclear energy in the next decade.

• Both parties agreed on tax credits to help preserve and expand the existing US nuclear fleet.

•  There has even been some discussion of turning old coal plants into nuclear plants!

• Finally, there has been a decision to create a “Strategic Uranium Reserve” like our “Strategic Petroleum Reserve.”

We have long been proponents of the benefits of nuclear energy. For the last 20 years, this felt like "wishful thinking."

Despite the overwhelming case for the expansion of nuclear power, there was no support. NOW it is there!

An Undiscovered, Underfollowed Opportunity

We will take a step back from our discussion of nuclear energy and bring it back to stocks. We are here with this newsletter to give you actionable investment ideas to make you money!

Across my thirty-year career, one of my strategies' most prosperous investment areas has been finding companies that were unknown and underfollowed by Wall Street.

Sometimes, this would happen because the company was small, and no one had heard of it.

This was the exception. Most of the time, it was because the company had undergone some corporate "action" that created the stock, actions like a spin-off from another company or – in the case of this month's HX Legacy idea – a BANKRUPTCY.

Now – some of you might read that word and panic.

Bankruptcy? Why would you buy a business that has gone bankrupt? Doesn’t it have to be a BAD business?

This is a fundamental misunderstanding of bankruptcy, especially for large companies.

These companies usually don't declare bankruptcy because the underlying business is terrible or losing money. They go bankrupt because of their balance sheets.

You have a fundamentally sound and profitable business with more debt and obligations than they can handle. This could result from a change in the industry or economic environment. Sometimes, it could be bad management.

This month’s idea is one of those situations.

The power generation company Talen Energy Corporation (OTC: TLNE) is the company.

We will tell you more about the company's operations momentarily, but let's start with the history.

Back in 2014, utility company PPL Corporation (NYSE: PPL) decided to take the unregulated energy business and combine it with the power generation business of a private equity firm called Riverstone. The new company was called Talen Energy.

This company IPO’d in 2015 but was bought out and “taken private” by Riverstone about 18 months later.

Riverstone took this stable business and put on quite a bit of debt. The reliability of power generation typically allows these companies to support this debt.

Unfortunately, power prices in their markets deteriorated, and they made some poor hedging decisions. The core profitability of their operations remained sound, but the debt load and the profits that flowed through after the hedges put them in a bind. As a result, they filed for Chapter 11 bankruptcy in May 2022.

Remember what we said about bankruptcy for large companies?

The company re-emerged as a public company just a month later, trading in the "Over the Counter” or “OTC” market. What does this mean?

You are probably familiar with the major stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ. To be listed on these well-known exchanges, companies must meet several requirements regarding historical operations.

Companies just emerging from bankruptcy do not typically meet these requirements. As a result, they list on the much less liquid OTC exchange.

This impacts the volume of the stock traded as many institutions can’t trade on these exchanges. You can see this in the volume traded in TLNE shares.

The company has a market cap of almost $4 billion and trades roughly $3 million worth of shares a day. Compare this to another publicly traded utility of a similar market cap – Portland General Electric Company (NYSE: POR) – which trades closer to $20 million per day.

This is a problem for institutions but an opportunity for our readers.

The low trading volume is also a disincentive for brokerage analysts to cover the stock. There are only three that cover it right now. POR has ten.

The better news for investors is that TLNE doesn't have to remain on the OTC exchange. Usually, after a company has emerged from bankruptcy and posted a few quarters of results, they are able to "uplift" to one of the major exchanges. We think that TLNE will do precisely that in 2024.

This will be a real catalyst for the stock and help drive it much higher.

A VERY Rare and Valuable Asset

So, what exactly is Talen Energy?

Here is a busy slide from a recent company presentation…

A lot is going on there, but what the slide actually says is that they own 15 power plants. Those plants generate 12.4 Gigawatts of electricity from power generation assets, including nuclear, gas, and coal units.

About half this power generation comes from their crown jewel asset – a nuclear power plant in Pennsylvania called Susquehanna. Here is another slide from the company presentation…

This facility was opened in 1983 and stretches across 1,075 acres with 1,130 on-site employees. It generates 2.5 MW of power and has two decades of regulator-approved life left, with a high likelihood of getting another 20-year extension.

This is the sixth-largest nuclear facility in the USA and delivers top-quartile cost performance.

To put this in perspective, there are only 54 nuclear units in the United States and 413 on the planet.

This plant cost $8 billion to build between 1973 and 1983. It is not an exact analogy, but that would be more than $40 billion in today's dollars. Remember, the ENTIRE company's market cap is less than $4 billion.

Nuclear power plants are rare because they are expensive and complex to build. No one wants one built next to their house! We discussed before, however, that it is the most efficient power source on Earth.

This is a scarce and valuable asset!

This brings us back to one of the questions from before – if the asset is so great, how did it go bankrupt in the first place?

We previously mentioned some of the political initiatives around nuclear energy; one was a game-changer for TLNE.

Back in 2022, as part of the painfully named Inflation Reduction Act ("IRA"), a provision put an annual pricing floor of $44/MWH.

To incentivize the maintenance of nuclear capacity (because it is super clean!), the government established a "floor" price at which it can be sold. There also is no limit to the upside.

The problem for TLNE before was that they were fully exposed to the power price market, which moved against them…while they had a lot of debt.

Coming out of bankruptcy, they have much less debt, and now they are essentially guaranteed profitability. Oh yeah – with no limit to the upside…

A lot has changed for TLNE in the last few years.

We aren’t going to dive into them, but the company does own a bunch of other assets.

There are the rest of the power plants they own, which have value. They also own some data centers and crypto mining operations that benefit from their power generation assets. Finally, there is a lawsuit they are involved in that could be worth up to $100 million for them.

All of these have value for them, but the nuclear power plant is the real story.

Clear Path to Value Realization

At HX Legacy, we love finding valuable assets that investors need help understanding.

When you think you find one, you must ask yourself the question – why does this opportunity exist?

In the case of TLNE, we know that the bankruptcy process created a situation with much complexity and little coverage. This is why the asset is so undervalued.

We are excited about TLNE stock not only because of the value of this asset but also because other companies out there agree with our view.

The largest operator of nuclear power plants in the United States is Baltimore, MD-based Constellation Energy Corporation (NYSE: CEG).

Want to know how good owning nuclear capacity has been in the stock market? Check out the stock chart of CEG…

Constellation owns a plant around 100 miles away built around the same time with a similar design and identical reactors. Given the similar nature of the plants and how close they are on the map, there would be a ton of cost savings from combining the companies.

CEG is a $42 billion market cap company that could easily acquire TLNE at a substantial premium.

Another big nuclear generation company is Vistra Corp. (NYSE: VST). Check out their stock chart…

Vistra just acquired another company called Energy Harbor, making it the #2 nuclear operator in the company. It has a $15 billion market cap and has been very vocal about looking to continue to do more acquisitions.

In addition to the two nuclear generation leaders, other large utility companies like Public Service Enterprise Group (NYSE: PEG) have a decent atomic fleet and a $30 billion market cap.

This is without getting into potential private equity buyers. Who wouldn't want to own one of these super-rare assets in this new nuclear era?

What is it worth?

Today, the company has a market capitalization of less than $4 billion. It also emerged from the bankruptcy with a reduced debt load of roughly $2 billion. This gives the company a value of $6 billion.

In finance, this is called the "Enterprise Value" or "EV.”

How much is their nuclear asset worth?

During their bankruptcy process, there were bids of $4.5 billion and $4.8 billion for the entire company.

We also mentioned that the #2 player in the nuclear industry – VST – had recently bought another atomic operator. This company they acquired had inferior assets to TLNE, and they paid around 11x times cash flow.

With the increased visibility on power prices, we think TLNE could be doing upwards of $600 million in cash flow in a couple of years.

Multiply these two numbers together, and you get $6.6 billion. That is 10% more than the entire company's value – JUST for the nuclear plant. Remember that the plant cost $8 billion to build in the 1970s.

This is also on the 11x multiple VST paid for inferior assets. We think the TLNE assets could sell for more – especially to a buyer like CEG with significant cost savings.

What is the rest of the company worth?

We won't walk you through all the math, but it's worth another $1 billion.

Put these numbers together, and you can get to $8 billion for the whole company. Apply that to the stock price, and you can get close to $100 per share. That is more than +50% from current levels.

Given this type of asset scarcity, we could see it go even higher.

Position Update - Talen Energy Corporation (OTC: TLNE)

On March 4, TLNE moved forward with monetizing its non-core assets – in this instance, the data center business they had built. 

They announced a deal to sell their data center campus to Amazon Web Services for $650 million: $350 million at the deal's closing and $300 million in the future as certain milestones are achieved. 

To put that number in perspective, that is more than double the $300 million they have invested in the assets. 

There is also an agreement that AWS will develop up to 960 MW at the location, which will be more than three times the current capacity. They agreed to a power contract with TLNE that locks in significant demand. 

While this transaction is only a tiny part of the company's value, it highlights the strategic value of Talen's unique nuclear asset. 

Position Update - Talen Energy Corporation (OTC: TLNE)

The company reported on May 13 and reported solid numbers.

At the start of May, they had sold a portfolio of generation assets in the ERCOT (Texas) market for $723 million of net proceeds. These assets generated $70 million of EBITDA.

With the sale of these assets, the company did bring their full year guidance down from $640 million to $840 million to a range of $600 million to $800 million. You will notice that is a difference of -$40 million and not the $70 million from the sale.

This is because the company is seeing better earnings out of their remaining portfolio and brought the guidance there up by $30 million.

The company also raised their share repurchase program to $1 billion. They noted that their current leverage is at 1.2x net debt/EBITDA and they feel comfortable going as high as 3.5x. Using the mid-point of the current EBITDA guidance ($700 million) that would be $1.6 billion of shares or over a quarter of the shares outstanding.

They also said that they have pre-sold 88% of their 2024 output, 38% of their 2025 output and just 17% of their 2026 output. This means they have big exposure to rising power prices.

Meanwhile they are at least 85% contracted on their fuel and none of their uranium is coming from Russia.

We are just now entering into what we think is just the 2^nd inning of a power super cycle – like we saw in the late 1990s.

We are confident that the company will continue to beat these numbers and that there will be big upside.

We remain very comfortable with the business and the operating upside.