In today’s Exponential Investor

  • Freshly baked stocks
  • Over-expectant markets
  • My #1 crypto investing idea for 2022

When navigating investment markets, we all – or most of us – have one common goal: to get rich.

Of course, this can be done in a number of ways; common stock, commodities, exchange-traded funds (ETFs), bonds, crypto, whisky, wine, art, or indeed anything that can be bought and sold…

Regardless of how you like to tackle these markets, one fundamental observation remains.

Every now and again, the market shows its hand to us. In the subtlest of ways. This is particularly relevant to the stock market.

The tricky part is recognising when that hand is on display and, importantly, being prepared and ready to capitalise on it.

Baking some Rolls

A prime example of a hand on full display, was given by Rolls-Royce Holdings (LSE: RR) recently.

Rolls-Royce is a diversified engineering company, focused on power and propulsion systems for the aviation and energy industries.

Like many other aviation-centric stocks, Roll- Royce endured a torrid time during global lockdowns, as travel restrictions ground the industry to a halt.

On 1 February 2020, before the coronavirus stock market crash, Rolls-Royce’s share price was 235.76GBp.

By 26 September 2020, its share price had cratered to just 38.98GBp ­– its lowest level in around 17 years. Now, the company did also go through a rights issue, raising funds and issuing stock at a price around its September bottom, so shareholders were given the chance to buy more stock cheaply.

However, with the hope of restrictions finally being eased earlier in 2021, its share price crept up, closing at 113GBp on 10 March 2021.

But it’s what happened after that shows us the hand in play.

The following day, Rolls-Royce announced record losses, equating to £4 billion.

These could be regarded as catastrophic, irrecoverable losses that would put the future of many companies in doubt.

Surely, it would be a given that Rolls-Royce’s share price would plummet as a result?

Wrong.

In fact, Rolls-Royce’s share price advanced. On 18 March 2021, it reached a high of 128.71GBp – a 14% increase on the 10 March close. It has since gone on to reach a year-to-date high of 148.88GBp.

It’s some way from pre-pandemic levels, but it still is very much vulnerable to geopolitical risk around travel restrictions tightening or easing.

But what the action from 2020 and 2021 shows us is a clue. A big clue as to what could happen with the stock if we indeed do face similar restrictive headwinds.

And it suggests that press surrounding the company off the back of the pandemic and ongoing uncertainty may be priced into the market or, if you prefer, “baked into the cake”.

Babylon in the time of Omicron

Rolls-Royce isn’t the only stock that peaks and troughs with what kind of decisions governments make around what we can or can’t do or where we can or can’t go.

The same notion can be applied to stock prices that perhaps unsuspectingly, head downwards even after positive news is announced. These include stocks that you would be convinced would do well under the threat of further social restrictions.

Babylon Holdings (NYSE: BBLN) is a perfect example.

The company is a leading provider of digital healthcare-based services, providing quick, virtual access to medical professionals.

We use Babylon Health ourselves, right here in the UK, to get access to GPs much faster than we could ever hope to see a GP at our local practice.

Something like Babylon Health is hard to process or comprehend until you use it for yourself. Remote “telehealth” access to GPs is a game changer.

It will change how we access GP healthcare and advice, prescriptions, all aspects of the healthcare system. Massive sweeping change though doesn’t happen overnight. Many people struggle with the idea of it all, but as we say, from personal experience, it makes seeing a GP not a horrible experience; in fact, arguably it’s even pleasant!

Nonetheless, on 12 November 2021, Babylon announced that its third-quarter 2021 revenues grew a whopping 371% on the corresponding period in the previous year.

That was not to be sniffed it.

It also announced it had increased its membership base by more than 50% over the same period.

None of these numbers surprise us considering our own experience with the company.

However, the market wasn’t convinced.

Despite the positive news, its share price dropped 20.8%, from $10.08 on 11 November 2021, to $7.98 on 21 November 2021.

When a company at the forefront of a considerable disruptive global trends performs like that after good news you do have to ask why?

Has the market already priced in success, and wanted more success? It’s one thing to have good results, but if the market is expecting earth-shattering results, and you don’t deliver, a stock can get punished.

The hand on display though is different to Rolls-Royce. Where the company shows us how a stock could react in a similar environment from time gone by, Babylon shows us the complete opposite, that even in ideal conditions, a negative outcome can be experienced.

The conclusion from Babylon is simple, what do the numbers (not the stock price) tell us?

Growth? Yes. Strong growth? Yes. A market primed for disruption? Yes. An investment perhaps for a long-term portfolio? Well, we’ll leave any decisions like that up to you.

But when looking at the market right now, make sure to read the road, check out what hand is on display.

Is it a stock pushed down due to short term external issues, like Rolls-Royce, but is fundamentally sound? Or is it a stock pushed down to over-expectant markets, yet still fundamentally a sound long-term investment idea, like Babylon?

Just because the stock price isn’t working in favour short, term doesn’t mean a stock can’t still be a quality long-term idea.

Speaking of quality long-term ideas…

On Thursday 16 December I (Sam) am holding a special event. During which, I’m going to give away my #1 crypto investing idea for 2022.

Click here to grab your free viewing pass. As you’ll find out on Thursday, if you understand the true meaning behind this market, you can forget about the likes of Rolls or Babylon, and open yourself to the kind of investment potential that leaves the stock market for dust.

So get your viewing pass now. Mark your calendar for Thursday. And prepare for one of the most important discussions we’ve ever had about the future of our society.

Until next time,

Sam Volkering
Editor, Exponential Investor

Elliott Playle
Junior Analyst, Exponential Investor