Mad Hedge Technology Letter
October 11, 2019
Fiat Lux
Featured Trade:
(CISCO’S DOWNWARD SPIRAL)
(CSCO)
The technology infrastructure company Cisco sold off over 2% after Goldman Sachs analyst Rod Hall downgraded the stock to neutral from buy.
His downgrade was based on a guess that enterprise spending will weaken further, and that telecom spending will continue to remain unimpressive.
This shows you how far the bank of the elite has fallen and the quality of their research considering Cisco’s earnings report was in August and this call should have gone out far earlier.
Goldman Sachs (GS) has trimmed headcount fiercely as their traditional businesses from IPOs to trading have been squeezed to suffocating levels forcing the bank to go into the subprime segment with the Apple (AAPL) credit card.
In Silicon Valley, Cisco’s shares will be subdued for the foreseeable future because the telecom segment is softening up as we motor into 2020 nicely, noted by Goldman.
The headwinds stem from the slow adoption of 5G and requisite carrier network automation implementation.
If you thought 5G would happen with a mere snap of the fingers, you are wrong. It will be implemented in agonizingly slow stages with lots of trial and error along the way.
Enterprise spending has also tapered off boding ill for the company that supplies the foundational technology to the software startups.
Adding fuel to the fire, waning business confidence at large enterprise driven by trade volatility as opposed to a broader macro slowdown is somewhat disconcerting and Cisco will most likely trade sideways in a stupor until external catalysts either pick up the stock or the bizarre world of geopolitics slams it down.
The floor of the stock is solid and deeply rooted in the profitability of the stock.
This is a great company and is one of the premier brands that slide in nicely in most offices in Silicon Valley.
The company isn’t a growth company, yet not written off into the legacy dustbin, and the sudden paradigm shift to value has made this stock even more attractive.
The 7% revenue YOY growth last quarter is not a problem as risk appetites are reigned back as the economic cycle ends.
EPS grew to $3.10 highlighting the ultra-profitable nature of the company.
Many of the recent tech selloffs in individual names have been induced by sour forward-looking outlooks and Cisco followed suit calling for 0-2% revenue growth, and GAAP EPS growth of -14% year-over-year.
The company has turned to the exciting revenue stream of subscriptions accounting for around 70% of the company's software sales.
This has created inflated net margins with Cisco improving from 16.7% five years ago to 25.8% today.
Cisco is a cash cow generating $15.8 billion of cash flows from operations, up 16% year-over-year.
The bump up in cash flow has made it easier to justify M&A which Cisco has routinely turned to in an effort to shore up different areas of the business.
A dividend was initiated in 2011 providing shareholders with strong annual double-digit percentage increases.
Financial engineering doesn’t stop there with Cisco's buyback approach resulting in reducing its outstanding share count by roughly 16.3% over the past 5 years adding to the profitability narrative.
Macro-risks have gone up the wazoo in the external market and Cisco is a legitimate candidate for a short-term trade to safety at these levels and a long-term investment.
Considering that their Chinese business is only in the single digits and revenue growth is in the high single digits, value-added management should make this company even more compelling.
And as the next wave of 5G adoption hits, this stock will experience a tidal wave of asset appreciation.
I can guarantee that the best is yet to come, and the status quo isn’t all that bad too.
“There are two equalizers in life: the Internet and education.” – Said Former CEO of Cisco John Chambers
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
Global Market Comments
October 10, 2019
Fiat Lux
Featured Trade:
(IS AIRBNB YOUR NEXT TEN BAGGER?)
Mad Hedge Biotech & Health Care Letter
October 10, 2019
Fiat Lux
Featured Trade:
(THE GREAT PLAY IN ANIMAL HEALTH CARE)
(ZTS)
When I first heard about this industry, I thought it was a joke. I was wrong. The harsh truth is that many animals in the US get better health care than at least half of the humans. Animal health care is in fact a gigantic and hugely profitable business.
Recession or not, the animal healthcare industry seems to thrive as people continue to go to great lengths to provide the best options for their furry friends.
Unfortunately, the undeniable effects of economic downturns have forced not only ranchers and farmers to downsize their operations but domestic pet owners to cut their budgets for their beloved animal companions. Despite the threat of the next market crash, a number of investors believe that Zoetis (ZTS) is a good stock to hold.
The $48 billion global animal health company develops, sells, and distributes pet medications for ticks, allergies, and fleas. Zoetis also manufactures vaccines along with animal feed additives, veterinary diagnostics, and even anti-infectives. Aside from treatments for your plain vanilla cats and dogs, the animal health leader also offers products for poultry, horses, cattle, pigs, and fish.
The latest news to bolster the confidence of Zoetis investors is the highly anticipated regulatory approval of oral canine drug Simparica Trio. This chewable tablet for dogs is currently under review not only in the United States but also in Japan, Brazil, Canada, and Australia. Once approved, this drug will be marketed as an all-in-one treatment for heartworm disease, ticks, and internal parasites.
If approved, Simparica Trio is expected to become the next blockbuster product of the company by 2020. Sales of the drug is estimated to reach $1.36 billion in 2022, with $1.14 of incremental earnings per share.
With Zoetis’ move to focus on high-margin animal items, it’s no question that the Pfizer spinoff will remain on top of the game even with the recession. In fact, the company derived 41% of its 2018 total revenue from items for cats and dogs alone compared to the 31% competitor Eli Lilly spinoff Elanco (ELAN) raked that year for similar products.
In terms of total revenue, Zoetis reported $5.8 billion for last year’s work while Elanco raked in $3.1 billion. That allowed Zoetis to convert 24% of profits into income during the said period. Zoetis’ blockbuster items, such as Simparica, Clavamox, and ProHeat, also didn’t disappoint this year.
However, there’s no such thing as a risk-free investment.
One reason for Zoetis’ consistent reports of high margins is the fact that veterinarians remain the main distribution channel for animal products. While its 24% net margins obviously provide an adequate elbow room, the company could be pressured if owners decide to purchase from third-party channels like retail stores or online shops.
Taking into account the 2019 revenue guidance from the company that indicates at least 5% of year-over-year growth, Zoetis’ dominance in the market appears to remain firmly on solid ground.
Throughout the years, the leader in animal healthcare has consistently grown its revenue and maintained a solid gross margin. It has stayed ahead of the pack by snapping up value-creating acquisitions and developing new products.
A good example of Zoetis’ ability to spot promising mergers is its $2 billion acquisition of veterinary diagnostics firm Abaxis (ABAX) in July 2018. This deal is estimated to deliver at least $200 million in revenues this year, indicating its massive contribution to the $270 million year-over-year growth in the company’s profits in the first half of 2019.
Another exciting acquisition is nutrition solutions developer Platinum Performance, a deal which is expected to be wrapped up by the third quarter of 2019. While this deal is not anticipated to provide a major financial impact to Zoetis’ performance this year, it’s expected to give the company’s equine and pet care portfolio a substantial boost in the years to come.
Zoetis has been hailed as one of the most promising companies in the animal healthcare industry today. Since its IPO in 2013, the shares of this Pfizer (PFE) spinoff has reached a total return of 242% -- lightyears ahead of the 137% total return of the S&P 500 within the same period.
Buy Zoetis on the dip.
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
Mad Hedge Technology Letter
October 9, 2019
Fiat Lux
Featured Trade:
(WHAT’S BEHIND THE CHINESE TECH BLACKLIST)
(FTNT), (PANW), (CRWD), (CYBR)
The administration banning 8 Chinese tech companies screams one thing – American cybersecurity will become more important than ever before.
Interestingly enough, most of the entry list included Chinese own version of cybersecurity companies which usually participate in heavy-handed censorship including facial recognition startups Sensetime, Megvii and Yitu, video surveillance specialists Hikvision and Dahua Technology, iFlyTek, Xiamen Meiya Pico Information Co and Yixin Science and Technology Co.
All of these companies have “borrowed” American source code while applying American designed semiconductors to create a business aiding the interests and model of the Chinese Communist Party.
As the stakes become higher, American companies too will have to grow cybersecurity budgets, and instead of budgeting for mass authoritarian censorship, American companies will need to spend to protect the technology and networks they develop from getting pillaged from totalitarian regimes.
If American tech companies renege on the Faustian bargain of doing business in China for their technology, then it will force the Chinese to acquire this sensitive technology by any means possible and that doesn’t involve sitting on the emperor’s chair in Beijing.
What does this mean for the broader trade war?
Even if we get a mini deal, it won’t address that the main guts of the trade conflict entails killing off Chinese tech in the way we know it now.
Being able to agree on some sort of enforceable mechanism is a pipe dream, even if an enforceable mechanism is agreed on, who will enforce the enforceable mechanism?
That’s how tricky it is for corporates doing business in China and now the NBA (National Basketball Association) has received a small sampling of the trade war with one innocuous quote by Houston Rockets General Manager Daryl Morey who tweeted then deleted his democratic support for the Hong Kong freedom movement.
The ban of these 8 Chinese companies means they will no longer be able to purchase U.S.-made technology parts to use as inputs of a censorship business model that goes against democratic values.
The trigger for the blacklist was the way these technologies were used to imprison ethnic Muslim minorities in Chinese Xinjiang province paving the way for China to lash out again against the U.S for the ban.
Not only has China applied the technology to Chinese nationals, they have exported this technology to African states and are allowed access to the data which could theoretically be exploited for additional economic and political gain about which they essentially have no qualms.
Chinese foreign ministry spokesman Geng Shuang has characterized this move as “interfering in China’s internal affairs” and as you probably believe, he expressed great unsatisfaction with this move as Chinese and American delegations plan to meet shortly to hash out their differences.
The 8 banned companies will need to source alternative tech in the same way that Huawei Technologies has done.
Huawei was banned this past April under national security premises blocking access to US-made software for its handsets and devices, such as Google’s Android operating system and Microsoft’s Windows.
This will hurt certain semiconductor manufacturers like Nvidia who sell artificial intelligence chips for video surveillance to Hikvision and semiconductor stocks have sold off hard on this news.
Washington’s move has laid bare the fierce struggle for technology supremacy and America’s refusal to allow Chinese technology companies to reign supreme off of ill-gotten intellectual property and American semiconductor chips.
It could be the final straw in corporate America funding China to take down itself or at least another step to disengaging with the Sino cash cow.
And this new episode is almost guaranteed to usher in a flight of capital to American cybersecurity companies as Chinese hackers open up a new frontier to hack the best of America’s intellectual property.
I envision the likes of Palo Alto Networks, Inc. (PANW), Fortinet, Inc. (FTNT), CrowdStrike Holdings, Inc. (CRWD), and CyberArk Software Ltd. (CYBR) as good long term buy and holds that offer quality exposure to the cybersecurity story and the future growth of it.
