Hello reader, welcome to the latest issue of HX Weekly!

Each week we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

Thoughts on the Markets

An Update on Our FREE IDEA

Almost exactly two years ago, we launched HX Research and our free e-letter – HX Daily.

While there have been some evolutions over the course of the last two years, we are proud to still be sharing our insights with you all every week in this publication – HX Weekly.

Shortly after our launch (on March 19, 2024) we shared a FREE IDEA with our readers.

That idea was to buy shares of Talen Energy Corporation. The ticker for that stock today is “TLN” although at the time it was “TLNE.”

On that day, the stock closed at $87 a share.

Here is the chart of the stock since then with our original entry point circled in green…

Today the stock is trading at almost $375 per share or a greater than +300% return.

Not too bad for less than two years!

We have written a lot about the stock, and you can read those notes and watch those videos here:

Talen Report

Talen Update 1

Talen Update 2

Talen Update 3

Talen Video

The stock has been successful, however, because of the reason that ALWAYS makes stocks successful.

EARNINGS GROWTH.

Here is the chart of the consensus 2027 EBITDA (cash flow) estimates for TLN…

In March of 2024, the company was expected to do $624 million of EBITDA in 2027.

Today, the company is expected to do $2.36 billion or more than three times those expectations two years ago.

This almost identically matches the performance of the stock price over that same period.

Given how vocal we have been with the stock, we often get asked if we still like it at these levels.

The answer is absolutely YES.

In fact, last week there were two news items that has given us even more conviction.

The first was that last Thursday, January 15, the company announced the acquisition of 2600 MW of gas fired generation in the PJM interconnect for $3.45 billion.

This includes three power plants, and the company expects it to add $523 million to EBITDA and $444 million of cash flow.

When you take into consideration the debt ($2.55 billion) used and the stock ($900 million or 2.4 million shares), this means that this acquisition is approximately 10% to 15% accretive to EBITDA and almost 20% accretive to free cash flow per share.

What does all that mean?

That means that the value of the company as a shareholder is arguably 10% to 20% more the day AFTER the acquisition was announced than the day before.

Very simply, imagine you were paying “$X” for every $1 of cash flow and now that same “$X” buys you $1.15 of cash flow.

Everything held equal, the stock should go higher, and this is exactly what it did last Thursday.

Here is a 30-day intraday chart of the stock price…

The green circle on the chart is the move higher.

On the chart, though, you will also notice the red circle the next day as the stock gave back all the gains and a little bit more.

What happened?

The next day, President Donald Trump announced a surprise press conference with some of the major governors from the PJM interconnect.

They asked PJM to hold a one-time “emergency” auction to provide data centers with new sources of power.

The problem they are addressing is that the rapid expansion of data centers has helped drive power prices higher all over the country. This has hit consumers hard.

Our original thesis on TLN was that they would benefit by owning independent power assets in a market that was tight. Not enough supply given the demand.

We had that view two years ago BEFORE the explosion in AI capital spending.

Since then, we have seen essentially a tripling of demand power assets driven by AI.

Why would this announcement hit TLN stock?

First, Trump said that PJM should implement a “price cap” on the auctions for power prices.

In theory, this means that potential upside would be taken off the table as the prices couldn’t go beyond a certain level.

This is certainly a true statement but there is ALREADY a price cap in the PJM auctions.

That price cap has been used in the last three auctions and theoretically saved consumers $13 billion. It was supposed to roll off with the next auction that is supposed to happen this summer.

Bad for TLN, right?

No. Not at all.

That price cap refers to only a small portion of generation in the reserve auctions and the price cap has already been in place.

Meaning that in the current share price of TLN there was nothing being priced in for upside beyond the price cap.

This “news” was essentially more of the same.

The bigger “news” may have been the special auction.

The concept here is that PJM would hold a power auction with data center customers where they would commit to 15 years of power purchases.

With these long-term commitments, new plants could be developed as plant operators could secure long-term financing.

Again, new supply should be bad for incumbent operations like TLN, right?

Nope. Wrong again.

First, an auction like this has never been done.

The press conference asked for it to be done by year-end. This seems impossible but let’s say it gets done in the next year.

From there, any new plant would then have to find a location, secure permitting and also find the actual equipment.

That is at minimum a five to seven year process.

We would not see any real new capacity from these deals in PJM until 2031 to 2033.

We also think that the prices that would be necessary to support these new plant developments would be MUCH higher than current spot prices in PJM.

This would imply higher prices in the near term for an operator like TLN.

Lastly, do you know who the most likely builder of new power plants would be?

Companies that ALREADY operate power plants! Like TLN…

They already have sites, permitting, operating personnel, fuel contracts, and interconnects.

Oh, and they also have a ton of cash flow.

Let’s go back to the EBITDA numbers we started with above.

Here is a quick “back-of-the-envelope” analysis…

After the announcement of last week’s acquisition, 2027 EBITDA estimates for TLN went up from $2.26 billion to $2.36 billion or +$100 million.

The company itself told us the acquisition adds more than $500 million of EBITDA so we think this number will be going up.

On the back of almost $2.8 billion of EBITDA and after accounting for the cost of debt, we think the company could be doing almost $1.7 billion of FREE CASH FLOW.

With a current market capitalization of $18 billion that means it is trading at a 9% free cash flow yield.

That is DOUBLE the rate on government bonds for well-run and scarce assets.

Where do we think it SHOULD trade?

How about a 6% free cash flow yield or almost $600 per share. That is almost +60% higher than current levels.

Our FREE IDEA from 2024 has been a great ride for our readers and we think there is a lot left in the tank!

Given this past weekend we celebrated Martin Luther King, Jr. Day, we thought we would share our post from last MLK day and some thoughts on the inauguration of Donald Trump. After almost a year as President, we still believe what we shared to be true.

Enjoy…

HX Daily Redux

America’s Big Day

The stock market is closed today, but it is still a big day for America.

Today is not only the Martin Luther King, Jr. Day holiday but also marks the inauguration of Donald J. Trump as our 47^th United States President.

As many of our readers know, my personal story is a very AMERICAN one.

My father's family is a mixture of European (German and Scottish) immigrants and Mexican (Spanish and Pueblo Indian.) The Mexican side of the family has been in the territory of the modern United States since the late 1600s. My father was a true child of the rough and tumble-American West.

My mother, Selva, was born in Uruguay, a South American country. She left in the late 1960s, and my uncle was imprisoned, and my grandparents exiled as part of a military dictatorship.

She raised me out West, and we struggled economically.

Throughout our trials, though, she instilled a sense of optimism in me. With a positive outlook (and a willingness to do the work to back it up), she believes anything is possible.

In my opinion, this attitude is very much the underlying attitude of the establishment of the United States.

The idea that we can make the world better. Both for ourselves and others.

There has been much criticism about race relations in the United States over the last few years. Indeed, I think the amplification of social media and special interests has created increased divisiveness.

Taking a healthy step back, though, and looking at racial relations in America, there can be no argument that they have not improved dramatically.

This doesn’t mean there aren’t still issues nor that race relations couldn’t be better, but think about where we were fifty years ago when I was born and where we are today.

No rational nor objective observer could argue that we are not in a better place.

The legacy of Dr. King has continued to live on and progress. Importantly, I think that remembering his approach – one that emphasized peaceful protest and collaboration – is the one that has worked for America.

This also made me think about the inauguration of President Trump.

Trump is the most polarizing politician of our lifetimes. Honestly, I am not sure we will see another politician anytime soon that creates a stronger reaction.

Take another step back, though, and consider how you imagined the transition to another Trump Presidency would have gone these last few months and now.

If you had known he would win, do you think we would have seen mass protests across America? Property destruction and riots?

Would Trump have come out more aggressively against his opponents? Maybe he still will, but so far, he seems more focused on moving forward.

Also, looking at his appointments, I see a very diverse group. There are a lot of rich people, but both women and LGBT are well represented.

My point is that we (America) continue to move forward. We continue to make progress.

Despite everything you hear and read in the media, we continue to get better.

Remember, they want to emphasize the negative to get you to click so they can get their ad dollars. Optimism and hope don't sell like pessimism and despair.

We hope you enjoy the day off from the stock market, and remember that optimism is key to success.

For America and for INVESTING.

Market Wizard’s Wisdom

Founding Father Wisdom

With this year being the 250^th anniversary of America, we are going to begin to highlight some of the wise words of our founding fathers.

While we are sure these men would argue they were no different than any others, they certainly stepped up with a powerful vision at an important time.

A vision that has endured for a quarter millennium and has been behind the greatest nation in world history.

One of the most insightful founding fathers was the first Secretary of Treasury – Alexander Hamilton.

Born in 1755 on the island of Nevis in the Caribbean, Hamilton was born out of wedlock, and his father abandoned the family when he was young. When he was just 13, his mother died and left him an orphan.

On his own, by the age of 16, Hamilton took on a job at a local import-export firm and showed a remarkable proclivity for business. This led him to Boston and eventually he would attend King’s College in New York City. We know it now as Columbia University.

His time at Columbia led him to joining an American militia called the “Corsicans.” His leadership skills quickly became evident, and he was made a captain by the age of 21 and eventually was appointed chief staff aide to General George Washington.

This was only the start of his incredible journey, and we could write thousands of words about the rest. The highlights to us are his role in the writing of the United States Constitution and The Federalist Papers defending it.

He was also named the first U.S. Secretary of Treasury in 1789 by Washington and was the architect of the foundation of our American financial system that continues today. This included setting up many laws and regulations about securities that we still use.

Lastly, he also founded the New-York Evening Post or as we know it, The New York Post.

Hamilton died an untimely death in 1804 along the west bank of Hudson River in a duel with Aaron Burr.

Although Hamilton’s life was cut short early, he left us not only with many of the foundations of our nation but also some great insight.

Here are some of our favorite Hamilton quotes that we think have insight into investing and trading.

Enjoy.

This view is a common one amongst great investors.

The great Charlie Munger was known for his prodigious appetite for reading.

One my favorite recent quotes is this one from Stanley Druckenmiller, “We mostly just sit around reading, thinking and waiting.”

Personally, I read almost ten newspapers and more than twenty-five newsletters and blogs daily.

My favorite one? The New York Post!

This was a very interesting quote to read from Hamilton and references to a “hack” that I myself use.

In order to get through a large volume of reading, there is a skill you can develop where you focus on key words and then center around them.

This is the key to what they call “speed reading.” It is a useful skill!

Here is a video that can help you learn how to do it.

This is one of the most important lessons to learn in both trading and investing.

Many “smart” people get caught up on how they think the markets (and the world) should work.

The SUCCESSFUL ones focus on how it actually works and take advantage of that.

There are a lot of levels to this one.

One level is how often we see investors and the media coming up with “reasons” why the markets are acting the way they do. Inevitably those reasons are wrong.

Our overwhelming desire to reason can negatively impact our ability to be correct.

Also, despite this desire, anyone who has traded the markets know that they are far from reasonable in the short-term.

With our U.S. government debt approaching $40 trillion and a feeling of inevitability about the growth of government, we leave this final wish of Hamilton here to ponder upon.

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].