Jan 3, 2022

Editor’s Note: Today in Smart Money Monday , Thompson Clark sits down with Mauldin Economics publisher Ed D’Agostino to discuss three of his top stock picks for 2022, how inflation could affect his Wealth Accelerator strategy, and how investors can better prepare for the year ahead.

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Ed D’Agostino: You’re coming off an exciting year, Thompson. You joined Mauldin Economics, launched Smart Money Monday  and High Conviction Investor , and introduced readers to your Wealth Accelerator strategy. Tell me, what can this strategy do for investors in the coming year?

Thompson Clark: Great question. The Wealth Accelerator strategy works in all types of markets—up, down, bull, and bear—because it hinges on allocating a small portion of your overall portfolio to fast-growing companies run by savvy owner-operators. And most critically, these stocks need to be underpriced, or I don’t bother.

Truth be told, I don’t spend much time predicting what the broader market will do next because we’re not buying the market or an index fund. We only buy individual companies.

Ed: Right, but market trends still affect individual stocks. I’m sure you don’t ignore them entirely.

Thompson: Of course not. For instance, high growth stocks were valued at nose-bleed levels toward the end of last year. Now the market has cut some of those names down a bit.

Just look at a UiPath (PATH). It’s a major player in robotic process automation and one of my NoCode watchlist names . This is a good, possibly great company. But buying a great company when it’s overpriced is not a great recipe for profits.

At this point, PATH has sunk nearly 40% since its April 2021 IPO, but it still isn’t cheap enough.

I’m excited to see some of these names like PATH pull back more in the short term. Cheaper valuations might make them more appealing—and maybe even good Wealth Accelerator candidates.

Ed: We know you like small-cap stocks because they’re more likely to grow quickly. But there are thousands of small caps. Which sectors should investors look at to find the best opportunities?

Thompson: I’m very much a generalist when it comes to stock ideas. We’ve talked about my stock database before. It’s up to 1,600 companies, and it spans every sector of the market.

That said, you’re more likely to find Wealth Accelerator opportunities in tech and consumer discretionary than in more stable sectors, like small community banks or traditional REITs, or in lottery ticket stocks, like biotech.

Ed : Investors are understandably concerned about inflation right now. What guidance would you give readers looking to profit in this environment?

Thompson: I usually leave the big macro issues to my colleagues . Yet I can’t help but think these high inflation numbers stem from temporary, solvable issues.

What matters most to me, though, is how high inflation impacts potential Wealth Accelerator opportunities. High inflation readings will lead the Fed to increase interest rates. And higher interest rates mean lower valuations for hyper-growth companies… ones that are currently valued on, say, 2035 profits.

All this is to say, I think fundamentals will come back into favor, and valuation will finally start to matter again.

Ed: Moving along—I know you save your most lucrative investment recommendations for High Conviction Investor , but you’ve also recommended quite a few stocks here, like Franchise Group (FRG), which has had a great run. Could you point to three with the most upside potential going forward?

Thompson: You’re right, Franchise Group has had a fantastic run. It’s shot up 62% since I recommended it.

As for my top Smart Money Monday  picks right now, I’m still a huge bull on Cleveland-Cliffs (CLF) . In the last few years, renegade CEO Lourenco Goncalves has completely transformed the US steel industry. And the stock is trading at around four times 2021 earnings per share, making it one of the cheapest stocks in the US, if not the world.

Earlier this month, Lourenco bought nearly $1 million worth of Cleveland-Cliffs shares. Then other insiders followed his lead, buying another $300,000 worth of shares. This is great stuff. Insiders only buy when they expect the stock price to go up.

Ed: We know you like heavy insider ownership, which you get with CLF. What else should readers look for?

Thompson: Stock buybacks are another great sign. Vistra Energy (VST) , a Texas-based utility and another Smart Money Monday recommendation, is repurchasing gobs of its own stock at depressed valuations. I think the stock has the potential to double from here. Granted, that probably won’t happen this year. But over the next few years, it’s highly probable.

You asked for three of my top picks, though. So, I’ll add AT&T (T) . It’s a huge company, and not the sort of stock we buy in High Conviction Investor . But it’s still a great opportunity.

Last year was terrible for the stock—it dropped around 15%. But 2022 could be its break-out year. AT&T is set to spin off its Warner Media assets and merge them with Discovery Communications (DISCA). The deal should close sometime in the middle of the year.

Once the ink has dried on that, it should remove a major drag on the stock. And from there, the market should value AT&T as a high-performing, high cash-generating telecom company with a steady dividend.

Ed: Thank you, Thompson. It was pleasure catching up.

Thompson : Thank you, Ed. Always happy to chat.