2019 Archive - Mad Hedge Fund Trader

Jump on the Vertex Bandwagon

The biotech industry has at least 500 stocks listed on the market today. These companies range from huge biotech firms with several blockbuster drugs to humble money-losing startups still on the lookout for their first big break.

Among these companies, Vertex Pharmaceuticals Incorporated (VRTX) presents a compelling case that could attract investors.

Recent developments on Vertex's triple-combination treatment for cystic fibrosis (CF) have been predicted to spur the company's revenues this year in a major way. If the results of the studies turn out successful, then Vertex is on the verge of becoming the sole treatment provider to at least 90% of the people suffering from this severe genetic condition. That’s a nice monopoly to have.

While the recent developments have yet to aggressively show its effect in Vertex stock, the company has already recorded an impressive 160% growth since 2017 and this is anticipated to go higher in the years to come.

At present, the annual revenue of Vertex is recorded as $3 billion, while major competitors like Pfizer has $53.4 billion, Bristol-Myers Squibb has $22.6 billion, and Novartis has $51 billion. In order words, there is plenty of room to grow.

Just how far can Vertex shares go?

Let's take a look at previous reports on the company. Its December 2018 financial report reveals that its earnings per share jumped by 113% year-over-year to $1.3. Its quarterly revenues increased by 40% and reached $869.44 million -- a gigantic 39.7% leap from the $622.63 million it achieved during the same period in the previous year.

While the March 2019 EPS for this company is anticipated to go down to $0.68 compared to the $0.76 recorded the same period last year, its 2020 EPS is projected to get a 49.46% boost. With that estimate, Vertex is expected to reach its long-term annual earnings growth rate of 53.86%.

How can investors be sure that Vertex continues with its remarkable progress?

The company's moves in the past months have been quite promising. A major factor that could guarantee its success is its dominance in the CF market. At the moment, Vertex has three approved CF drugs available in the market: Kalydeco, Orkambi, and Symdeko.

Of these three, two are already considered as blockbuster products while Symdeko is poised to hit the $1 billion yearly sales mark this year.

Another promising reason to invest in Vertex is its move to expand the addressable CF market it currently covers. If the company succeeds in cornering the market for treating younger patients, then its target population will increase from 39,000 to 44,000.

Vertex is also working towards gaining approval for a triple-drug combo this year. The biotech company projects an additional 24,000 patients globally to benefit from this triple-drug regimen.

Should all these plans fall into place, Vertex would see a 75% expansion on its addressable CF market in the years to come.

Although CF has been the focus of Vertex in the previous years, the company also intends to widen its scope and plans to conduct early-stage clinical studies for at least two new diseases this year.

This move would prove to be beneficial in the long-term considering the decision of AbbVie Inc (ABBV) to join the triple-drug CF race. So far, AbbVie has a long way to go before it can catch up with Vertex's progress in this arena especially since the latter practically has a monopoly as it alone offers the drugs that can treat the underlying causes of CF.

Vertex's collaboration with CRISPR Therapeutics (CRSP) on gene-editing treatments, which aim to treat rare blood disorders beta-thalassemia and sickle cell disease, is yet another promising development for the company.

All in all, Vertex is a good biotech stock to invest in today. However, its plans are not foolproof.

There remains the risk that its pipeline candidates fail at clinical trials or that the company loses its bids for regulatory approvals. Nonetheless, it's a promising stock to add to your portfolio especially since the company has more than doubled its stock in the past two years.

High risk, high gain. Welcome to the world of biotech stocks.

Eleventh Year Anniversary of the Mad Hedge Fund Trader

Diary, Newsletter

The Diary of a Mad Hedge Fund Trader is now celebrating its 11th year of publication.

During this time, I have religiously pumped out 1,500 words a day, or eight double-spaced typed pages, of original, independent-minded, hard-hitting, and often wickedly funny research.

I’ve been covering stocks, bonds, commodities, energy, precious metals, real estate, and agricultural products.

You’ve been kept up on my travels around the world and listened in on my conversations with those who drive the financial markets.

I also occasionally opine on politics, but only when it has a direct market impact, such as with the recent administration's economic and trade policies.

The site now contains over 11 million words or 13 times the length of Tolstoy’s epic War and Peace.

Unfortunately, it feels like I have written on every possible topic at least 100 times over.

So, I am reaching out to you, the reader, to suggest new areas of research that I may have missed until now which you believe justify further investigation.

Please send any and all ideas directly to me at support@madhedgefundtrader.com/, and put “RESEARCH IDEA” in the subject line.

The great thing about running an online business is that I can evolve it to meet your needs on a daily basis.

Many of the new products and services that I have introduced since 2008 have come at your suggestion. That has enabled me to improve the product’s quality to your benefit.

This originally started out as a daily email to my hedge fund investors giving them an update on fast market-moving events. That was at a time when the financial markets were in free fall and the end of the world seemed near.

Here’s a good trading rule of thumb: Usually, the world doesn’t end. History doesn’t repeat itself, but it certainly rhymes.

The daily emails gave me the scalability that I so desperately needed. Today’s global mega enterprise grew from there. Today, the Diary of a Mad Hedge Fund Trader and its Global Trading Dispatch is read in over 140 countries by 24,000 followers.

I’m weak in North Korea and Mali, in both cases due to the lack of electricity. But that may change.

If you want to read my first pitiful attempt at a post, please click here for my February 1, 2008 post.

It urged readers to buy gold at $950 (it soared to $1,920), and buy the Euro at $1.50 (it went to $1.60).

Now you know why this letter has become so outrageously popular.

Unfortunately, I also recommended that they sell bonds short. I wasn’t wrong on that one, just early, about eight years too early.

I always get asked how long will I keep doing this?

The government tells me that the latest I can start drawing down on my retirement funds and Social Security is 70. That’s some three years off for me.

Given the absolute blast I have doing this job, that is highly unlikely. Take a look at the testimonials I get only an almost daily basis and you’ll see why this business is so hard to walk away from (click here for those).

In the end, you are going to have to pry my cold dead fingers off of this keyboard to get me to give up.

Fiat Lux (let there be light).

The Death of Another Startup

Tech Letter

In a story that starts across the pond in Watford, England, BevMo! look-alike wine retailer Majestic Wine (WINE.L) has landed itself on the endangered species list.

If you don’t know, Majestic Wine is the largest specialty wine retailer in Britain.

The company revealed it would shutter most domestic locations and change its name to the internet wine distributor it bought in 2015 called Naked Wines.

The news is another glaring reminder that niche retailers have been muscled out of the picture and don't possess the business model to compete in the most dynamic and innovative sector in the world – groceries and the ecommerce surrounding it.

America isn’t the only country grappling with the dreaded Amazon effect.

In a drastic readjustment of strategy, Majestic Wine has given up on its physical presence choosing to up their investment in the online space before the window of opportunity closes.

The decision to bet the ranch on its Naked Wines online division and the subsequent news of the restructuring hit shares hard dropping 10%.

As of today, Naked Wines loses money as it attempts to lure in new online customers, and the higher costs have hit the bottom line.

The downfall of companies such as Majestic Wine directly correlates with the success of deep discount German supermarkets Aldi and Lidl that take a refreshing surgical approach to cost and convenience.

They use data analytics to make bold decisions, but they aren’t online retailers.

Hybrid strategies are being increasingly effective at solving complicated transnational problems.

The rise of the duo has outsized ramifications for the US supermarket industry, just only a few years after coming to America, they have penetrated with success.

If I had to sum up their model, I would describe it as Whole Foods quality meets Walmart prices with a truncated catalog of items and a superstar German management team.

In 2018, Aldi had already captured over 3% of market share in six of eight American markets, while Lidl had seized 3% of market share in five and seven markets.

This might not seem impressive in the world of supermarkets, but this is a resounding victory, it usually takes more time to convince new shoppers to switch their allegiance.

Not only have they made inroads in the US market, but they are the fastest-growing supermarkets by market share in Britain.

Much of the blame of Majestic Wine’s demise can be levied on these deep discount upstarts that act in real time allowing management to seamlessly shift products, alter floor designs, and capitalize on operational efficiencies on the ground.

Aldi plans to ramp up its British operations by remodeling the current 1,800 stores and open another 400 stores by 2022.

Up to 20% of products are continuously changing, giving another nod to the efficient management team in place.

They plan to offer 40% more prepared foods and wholesale changes in the business model are a hallmark of the company.

Covertly, they have single-handedly crushed the competitive advantage for Majestic Wine by offering medium-tiered wines for as little as $2.

And the $2 price point is not just a teaser rate, their wine selection is stocked full of options of $2 to $4 making it strenuous to compete on price.

You don’t need a full-blown online operation if management systemically executes and these two are proof.

Consumers are voting with their feet for Aldi and Lidl with British market share doubling since 2012 while every other supermarket has flatlined or decreased.

Some of the tactics spearheading the new jolt of positivity are minimizing staff while implementing a cozy design layout making it possible to conclude shopping in a streamlined fashion.

They are pedantically selective in what products they sell by offering only 1,750 products compared to big-box supermarkets that routinely sell up to 40,000 products.

Why sell 10 versions of ketchup or 50 types of flavored soda?

Being able to truncate the floor space by not wasting it with unlimited choices allows the company to deliver cost savings back to the customers.

They have also gone the Amazon route by producing an in-house brand by sourcing local ingredients and again, seeking to deliver back savings to the consumer.

The smaller space of the stores means shelves are less deep and items leave quickly, a specialized team is in place to refill products as quickly as possible.

The employees are also benefiting from this scheme by becoming the highest paid grocery staff in England surpassing the average industry wage by more than $2 more per hour.

Effectively, Lidl and Aldi are cherry-picking the industries' best practices then marrying it up with big tech’s best practices, and executing on a superior level to rave reviews from the consumer from America, Britain, and continental Europe.

Applying data analytics to reformulate strategy can be used for a recipe for success instead of copying Amazon.com.

The waters are treacherous for Majestic Wine as reverse globalization cast a dark cloud over consumer sentiment with Brexit causing the British pound to materially weaken stripping Brits of discretionary income.

The currency weakness has increased import costs of wine and an immediate threat of a hard Brexit forced the firm to import an extra 5 million to 8 million pounds of stock guaranteeing it is hedged against any delivery bottlenecks in the case of a calamitous “no deal.”

If Brexit does leave the European Union without a deal, tariffs will be slapped on imports the next day amongst other headaches.

Just as heinous, a “no deal” will force wine companies to fill out more than 600,000 additional forms that will cost the wine industry £70 million, and the need to carry out thousands of individual laboratory tests on all wine imports.

UK wine inspectors will face an immediate uptick in workloads with every handwritten VI-1 form needing to be analyzed and stamped before wine can enter from Europe.

If you visit Britain this summer, expect pricier spirits, expect more Lidls and Aldis in the area, and short the new e-commerce firm Naked Wines on every rally on the London Stock Exchange.

THE CALM BEFORE THE STORM

March 27, 2019 - Quote of the Day

Tech Letter

“We're running the most dangerous experiment in history right now, which is to see how much carbon dioxide the atmosphere... can handle before there is an environmental catastrophe.” – Said Founder and CEO of Tesla Elon Musk

Mad Hedge Hot Tips for March 26, 2019

Hot Tips

Mad Hedge Hot Tips
March 26, 2019
Fiat Lux

The Five Most Important Things That Happened Today
(and what to do about them)

1) Mueller Report has No Market Impact, with the Dow Average up a scant $14.51. No Bombshells here. It’s “RISK ON.” Buy the dips. Click here.

2) Apple Announces its New Streaming Service, Apple TV Plus, and the stock falls on a “sell the news” drop. Roku is included in the package, so buy (ROKU). The Apple offering is weak enough to allow plenty of room for Disney to launch its own streaming service, Disney plus, at the end of this year. Prepare for an onslaught of princesses. Buy (DIS) too. Click here.

3) The Existing Yield Inversion is Fake. Real yield inversions crush stock markets when short term rate soar, not collapse, so the bear market is on hold. Foreign investors have already figured this out and are pouring money into US stocks. It’s “’RISK ON” baby. Click here.

4) Home Price Appreciation Hits a Four-Year Low, with the S&P Case Shiller National Home Price Index growing only 4.2% YOY in January, down from 4.6% the previous month. Las Vegas, Phoenix, and Minneapolis are still showing the biggest gains while San Francisco and Seattle are seeing the biggest price drops. Avoid homebuilder (ITB). Click here.

5) Housing Starts Drop 8.7%, in February. Yes, falling prices will have that effect on a market. Avoid homebuilders more. Waiting to buy at the coming bankruptcy auctions. Click here.

Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:

(WHY I’M SELLING SHORT TESLA SHARES),

(TSLA)

(PINTEREST COMES OUT)

(PINS), (FB), (AAPL), (GOOGL), (AMZN)

March 26, 2019

Diary, Newsletter, Summary

Global Market Comments
March 26, 2019
Fiat Lux

Featured Trade:

(WHY I’M SELLING SHORT TESLA SHARES),
(TSLA)

Why I’m Selling Short Tesla Shares

Diary, Newsletter

The news is out that new Tesla (TSLA) new car registrations in the major states are falling off a cliff. California, New York, and even Texas are the major culprits.

The company says the ramp up in mass production of the Tesla 3 is the main reason, and that car registrations, in any case, are a deep lagging indicator. (No kidding! I bought a Model X P100D in Nevada in November and it is still not registered).

Analysts say it is because the electric car subsidy was chopped in half by the Trump administration this year from $7,500 to $3,750 per vehicle, and it is going to zero next year, thus demolishing the Tesla 3 market for entry-level low-end buyers. They also point to the company’s fragile financial condition which could be going bankrupt at any time.

For whatever reason, I believe that the shares will break two-year support on the charts and plunge to new lows. At the very least, Tesla shares are capped for the time being.

I, therefore, sold short Tesla shares yesterday.

As much as this looks like a great short-term trade, I love Tesla long term and see it as a potential ten bagger from current price levels. Tesla will become the world’s largest car company within a decade and become the first car company with a $1 trillion market valuation.

As long as I have been following Tesla since the early venture capital days, it has been going bankrupt. It was going bankrupt during the move in the share price from $16.50 to $394, and it is going bankrupt today.

When I pulled up to the Fremont factory last week, I couldn’t believe what I found. There was a version 3 supercharger that would top up my battery at the staggering rate of 1,000 miles an hour!

That meant that with 50 miles of range left on my 300-mile range Model X battery, I could get a full charge in 15 minutes! The electric power was coming down the cable so fast that it had to be liquid-cooled.

I pinched myself to make sure I hadn’t fallen into a Star Trek movie. The V3 supercharger will soon be available across the country. No other car company is close to achieving something like this.

The fact is that I have been subjected to an unrelenting torrent of bad news, rumors, and envy since I first bought the shares at $16.50 ten years ago. This is the most despised company in the universe and regularly sits among the top five companies with the greatest short interest, often above 25%.

But I guess this is what happens when you take on big oil, the Detroit big three, the advertising industry, labor unions, and the entire Republican party all at once. By my calculation, Tesla is a disruptive threat to about 50% of the US GDP all at once.

I ignore them all and just look at the numbers. Here they are.

1) Tesla has increased its total production from 125 when I bought my first Model S1 in 2009 to 245,519 in 2018. It should hit 500,000 by the end of this year when the Shanghai factory comes online. They have gone from employing 100 people to 50,000.

2) With the completion of the Sparks, NV Gigafactory, battery prices are collapsing and are now 50% cheaper per mile than any other competitor, 4.1 miles per kWh versus 2.5 miles.

3) Tesla’s costs for batteries have cratered from $1,000 per kWh ten years ago to $100 per kWh today and are expected to drop to $75 per kWh in a few years. Below $100 per kWh Teslas are cheaper to run than conventional gasoline-powered cars, even without the tax subsidy.

4) Tesla now makes half the lithium batteries in the world, and that figure is growing by 50% a year.

5) Tesla’s vast national charger network will soon become the country’s largest electric power utility and that will also become an enormous money-spinner. They just raised prices to 30 cents per kWh versus a cost of 5 cents. Assuming that 5 million cars buy a 70-kWh charge three times a week, that works out to a $13.65 billion a year profit.

6) Anyone who actually reads Tesla’s balance sheet can see that the company is now spinning off $1 billion in free cash flow. It is investing in new plant and equipment at a prodigious rate.

7) With a market capitalization of $44.5 billion, Tesla just trails General Motors (GM) at $51 billion, but surpasses Ford Motors at $34 billion, and therefore can raise new capital to finance its hyper-growth any time it wants.

More product at high prices at a prodigiously falling cost sounds like a pretty good business model to me. Oh, and climate change is about to become the top political issue for the 2020 presidential election. Who is the big winner in that case?

Tesla.

March 26, 2019 - MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more

March 26, 2019

Tech Letter

Mad Hedge Technology Letter
March 26, 2019
Fiat Lux

Featured Trade:

(PINTEREST COMES OUT)
(PINS), (FB), (AAPL), (GOOGL), (AMZN)

Pinterest Comes Out

Tech Letter

The Facebook (FB) of digital images is on deck and has filed to go public.

I'll give you the skinny on it.

Pinterest (PINS) has slightly different lingo - they call digital images pins, a collection of pins, a pinboard, and the users that post pins are pinners.

Aside from this little creative wrinkle, Pinterest does little to help flow my creative juices.

That's not to say they are a bad company, in fact, it's quite refreshing that on the financial side of the equation, Pinterest is a solid financial enterprise.

They make money and aren't going to burn through their cash reserves anytime soon.

This should give some peace of mind to potential investors looking at snapping up shares of Pinterest.

Even though they are not a bad company, I cannot promote them as a firm revolutionizing technology in the way we know it, they certainly don’t, and never will, at least at the current pace of innovation.

Pinterest derives almost 100% of its revenue from digital ads à la Facebook, they do not sell anything and much like Facebook, the user is the product by way of mining private data and selling them over to third-party ad agencies who subsequently sell targeted ads on Pinterest’s platform.

As I read through Pinterest’s S-1 filing with the SEC, an overwhelming portion of the content is reserved for the litany of regulatory risks that serving digital ads, curating others' content, and the international risks that pose to Pinterest growth story.

As with most tech growth stories, this particular narrative must orbit around the strength of incessantly growing its domestic and international user base.

I surmise that part of the reason they desire to go public is because of the 265 million in global quarterly monthly users have reached the high watermark.

Therefore, this calculated risk of going public is entirely justified as the cash out for the venture capitalist and private owners that invested in this company as a burgeoning toddler.

Or the owners see catastrophic downside from the regulatory landscape which has been increasingly volatile in the past few quarters and wish to get out as soon as they can.

Let's make no mistake about this, Pinterest does not control its own destiny, and their success will be based upon external factors that they cannot control.

Some of these factors have already reared their ugly head, the most relevant example was when Google (GOOGL) changed its image search algorithm which disrupted Pinterest’s image function.

This was an example of third-party content originators clamping down on their willingness to allow Pinterest to populate content on their proprietary platform, and the lack of availability of content or the decreasing nature of it will sting the hope of increasing web traffic on Pinterest going forward.

Pinterest has clearly disclosed in its IPO filing that they are reliant on crawling third-party search engine services for third-party photos, this content is curated into their platform and credited to the original user.

I would classify this type of technology as unimpressively low grade and Pinterest will be susceptible to many more possible disruptions in the future.

In layman terms, if the stars do not align, Pinterest will be the first to feel it, and strategically speaking, this is a poor position to strategically operate from.

If Pinterest cannot serve the specific content that incites the tastes of pinners, this could destroy retention and engagement rates leading to a damaging downdraft of ad revenue.

Pinterest's feeble business model will certainly call for new investments in and around more innovative parts of technology.

What we have seen most successful technology companies flirt with are full-fledged recurring revenue models, and bluntly, Pinterest does not have one.

The likes of Microsoft, Amazon, Google, and Apple have pivoted hard towards this subscription model proving they can have their own cake and eat it too.

Funnily enough, Pinterest pays AWS, Amazon’s cloud arm, an extraordinary amount of money to store the pins or digital images on AWS Cloud platform to the tune of almost $800 million per year showing how beneficial it is to be on the other side of the equation.

Pinterest does benefit from a robust brand reputation and its footprint in America is quite large.

However, one group of potential customers have clearly been left out in the cold - Males.

The firm has been famous for being the go-to image platform for young mothers and generally speaking, American women born in the 1980s.

According to data analytics, it appears that content that males gravitate towards is not present on the platform and will need to be addressed going forward to grow users.

Another crucial problem that must be addressed is the lack of domestic growth in the user base.

In Q1 2018, Pinterest achieved 80 million monthly active users, however, fast forward to Q4 in 2018 and the number had barely inched up to 82 million monthly active users.

From Q1 to Q2, there was a dramatic deceleration in the number of monthly active users falling by 5 million to 75 million monthly active users.

The company blamed this on Facebook changing their password security causing users who rely on Facebook passwords and username entrance data to be temporarily stonewalled from entering Pinterest.

Millions decided to avoid the hassle and just stop using Pinterest because they were unable to enter the platform, causing major carnage to Pinterest’s ad-supported revenue model because of the hemorrhaging usership.

Unfortunately, bigger platforms such as Facebook and Google are not responsible to telegraph these structural changes in policy to Pinterest which means that this type of loss of usership could be a bi-annual or annual exercise in damage control.

Losing 10% of your user base based on someone else’s systemic changes is a bitter pill to swallow.

Investors must ask themselves why a premium search engine like Google search want to allow Pinterest to continue to curate its images for ad revenue effectively skimming off of Google’s top line?

As you have seen, Google has hijacked many of these types of business initiatives by taking on these opportunities themselves, dismantling the choke points, and going in for the kill.

The main avenue of user expansion is its international audience, and sadly, the average revenue per international user is a paltry $0.09. This number was up sequentially from the prior quarter which was $0.06.

If you compare the revenue per user with America, then it's easy to understand why the company wants to go public now.

Management presided over a sequential increase of American revenue per user from $2.33 to $3.16 in the prior quarter and the same growth will be hard to maintain and replicate spurring the higher-ups to cash out.

International growth is staring down a barrel of a gun with restricted access by governments who do not allow this type of service in their countries such as China, India, Kazakhstan, and Turkey.

The impact of these broad-based bans decodes into Europe being the only possible answer to user growth in revenue terms and total usership.

To state that Pinterest is confronted by widespread global risk is an understatement.

However, the low-hanging fruit would be squeezing more revenue out of the American user and I would guess that the ceiling would be around $7 per user in the near-term.

If management hopes to eclipse the $7 per American user, they will have to migrate into more data generative strategies such as video.