Mad Hedge Biotech & Healthcare Letter
April 9, 2020
Fiat Lux
Featured Trade:
(A SLIVER OF HOPE FOR CORONAVIRUS)
(MYL), (NVS), (BAYRY), (PFE)
To this day, there’s still no solid proof that any drug can treat or prevent infection with the deadly coronavirus. Faced with an exploding pandemic that brings an alarming death toll, the public is eager -- desperate -- for a sliver of hope and some news regarding discoveries of COVID-19 treatment.
Lately, the drug that has been gaining so much attention is hydroxychloroquine. This is primarily thanks to Trump’s endorsement, with the president going as far as labeling it a “miracle” drug.
By now, we’ve become all too familiar with the story behind this “miracle” drug.
Trump was watching TV the night before and saw a feature about a Michigan woman who was suffering from COVID-19 for 12 to 14 days. Her suffering was so intense that she felt she would die anytime soon. One night, she asked her husband to find hydroxychloroquine.
Four hours after taking it, she felt better and eventually recovered.
While health experts are still waiting for conclusive evidence on the drug’s efficacy, this story inspired Trump to urge the public to try it as well.
Aside from describing it as a potential cure, Trump is also recommending hydroxychloroquine as a preventive measure for health workers. His point is that there’s really nothing to lose here. After all, the drug has been used for decades so “it’s not going to kill anybody” compared to completely novel treatments.
In fact, he has been so intent in using hydroxychloroquine to cure COVID-19 patients that he ordered 29 million doses added to the government’s cache of medical supplies.
Just what is hydroxychloroquine?
This is a prescription drug approved to treat malaria decades ago. It can also be prescribed to treat autoimmune diseases such as lupus and rheumatoid arthritis. It’s called by its brand name Plaquenil as well.
Is it really effective to treat COVID-19?
The answer remains unclear. However, there are a couple of studies that point to promising results.
One is a laboratory study using cultured cells. In this research, it was found that chloroquine has the ability to prevent the coronavirus from invading the cells. Obviously, blocking the virus means protecting the body from the illness.
However, scientists issued a word of caution about this.
They reminded us that the drugs that work well in killing off viruses in petri dishes or test tubes do not necessarily translate to the same results in the human body.
As for hydroxychloroquine, studies showed that it can’t prevent or cure influenza and other viral diseases.
This doesn’t mean that hydroxychloroquine is useless as a COVID-19 treatment.
It just shows that more trials are needed to determine its actual effect. Several studies have been launched to figure out the answer to this.
In Detroit alone, there will be 3,000 patients set to participate in the trial to come up with a formal and conclusive study on hydroxychloroquine.
In a nutshell, what the health experts are saying is that the celebration might be a tad premature.
So this leads to a lot of investors to wonder which companies stand to benefit if hydroxychloroquine gets approved as a COVID-19 treatment.
Probably no one.
Keep in mind that this is an old drug, which came to the market sometime in the 1940s. Hence, it’s highly unlikely for it to become a blockbuster drug for any company.
Right now, several companies are already making it, including Novartis (NVS) and Bayer (BAYRY).
However, investors interested in buying cheap biotech stocks might be interested in generic drug maker and Mylan (MYL) are also in the running.
When Trump started touting the effects of hydroxychloroquine on COVID-19 patients, Mylan immediately restarted its production of the tablets.
The company aims to have the drug available in the market by mid-April, targeting up to 50 million tablets for over 1.5 million people.
Like I said, hydroxychloroquine isn’t going to be a high-selling drug for any company.
Nonetheless, this could provide the much-needed momentum for Mylan as its investors start to lose confidence in the company.
With the company back in the spotlight, it can easily redirect everyone’s attention to its upcoming merger with Pfizer’s (PFE) Upjohn unit to form a new company called Viatris.
This combined company will hit the ground running as it buys two assets from Pfizer.
One will be Meridian, which is the maker of EpiPen along with other auto-injectible treatments. The second is Mylan-Japan, which has been the generics collaboration unit of Pfizer and Mylan since 2012.
Both units recorded $598 million in annual revenue in 2019.
Viatris’ portfolio will also include a number of top-selling products like erectile dysfunction and pulmonary arterial hypertension Viagra and arthritis Celebrex.
The lineup will even feature the blockbuster cholesterol drug Lipitor, which generated more than 2 billion in sales last year alone.
According to the terms of the deal, Pfizer shareholders will own 57% of Viatris while Mylan shareholders get 43%.
Due to the upcoming merger, Pfizer went ahead and upped the 2020 guidance for Upjohn’s revenue from the $7.5 billion and $8 billion range to $8 billion and $8.5 billion.
The Viatris spin-off is expected to be completed by mid-2020.
For years, Mylan has been plagued with numerous issues like pricing concerns and even lawsuits.
Hence, this merger with Upjohn is considered a crucial turning point for Mylan. It represents a fresh beginning from this previously embattled stock.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
As you know, the markets are closed tomorrow for Good Friday, so I would like to make a suggestion on a covered call in order to capture the time decay over the long holiday weekend.
My suggestion is to buy Frontline Ltd.(FRO), which is trading at $8.58 as I write this.
Then sell to open (1) April 17th - $9 call for every 100 share you buy.
You should be able to sell them for $0.50.
Limit the stock buy in to 500 shares, which works out to 4.3% of the portfolio.
Assuming you buy 500 shares, it will mean you will sell 5 of the April 17th - $9 calls.
I am limiting the trade to less than 5% of the portfolio based on the extreme market conditions at the moment.
If the calls are assigned next Friday, the return will be 10.7% for just over a week.
Because the markets are closed tomorrow, there will not be a daily update.
Enjoy your Easter or Passover.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
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
April 9, 2020
Fiat Lux
Featured Trade:
(TEN LONG TERM LEAPS TO BUY AT THE BOTTOM)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now, and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allows plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.
Enjoy.
Microsoft (MSFT) - March 18 2022 $180-$190 bull call spread at $2.67 delivers a 274% gain with the stock at $190, up 16% from the current level. As the global move online vastly accelerates the world is clamoring for more computers and laptops, 90% of which run Microsoft’s Windows operating system. The company’s new cloud present with Azure will also be a big beneficiary.
Apple (AAPL) – June 17 2022 $210-$220 bull call spread at $6.47 delivers a 55% gain with the stock at $226, up 14% from the current level. With most of the world’s Apple stores now closed, sales are cratering. That will translate into an explosion of new sales in the second half when they reopen. The company’s online services business is also exploding.
Alphabet (GOOGL) – January 21 2022 $1,500-$1,520 bull call spread at $7.80 delivers a 28% gain with the stock at $226, up 14% from the current level. Global online searches are up 30% to 300%, depending on the country. While advertising revenues are flagging now, they will come roaring back
QUALCOMM (QCOM) – January 21 2022 $90-$95 bull call spread at $1.55 delivers a 222% gain with the stock at $95, up 23% from the current level. We are on the cusp of a global 5G rollout and almost every cell phone in the world is going to have to use one of QUALCOMM’s proprietary chips.
Amazon (AMZN) – January 21 2022 $2,100-$2,150 bull call spread at $17.92 delivers a 179% gain with the stock at $2,150, up 15% from the current level. If you thought Amazon was taking over the world before, they have just been given a turbocharger. Much of the new online business is never going back to brick and mortar.
Visa (V) – June 17 2022 $205-$215 bull call spread at $3.75 delivers a 166% gain with the stock at $215, up 16% from the current level. Sales are down for the short term but will benefit enormously from the mass online migration of new business only. They are one of a monopoly of three.
American Express (AXP) – June 17 2022 $130-$135 bull call spread at $1.87 delivers a 167% gain with the stock at $135, up 28% from the current level. This is another one of the three credit card processors in the monopoly, except they get to charge much higher fees.
NVIDIA (NVDA) – September 16 2022 $290-$310 bull call spread at $6.90 delivers a 189% gain with the stock at $310, up 19% from the current level. They are the world’s leader in graphics card design and manufacturing used on high-end PCs, artificial intelligence, and gaining. They befit from the soaring demand for new computers and the coming shortage of chips everywhere.
Walt Disney (DIS) – January 21 2022 $140-$150 bull call spread at $2.55 delivers a 55% gain with the stock at $116, up 31% from the current level. How would you like to be in the theme park, hotel, and cruise line business right now? It’s in the price. Its growing Disney Plus streaming service will make (DIS) the next Netflix.
Target (TGT) – June 17 2022 $125-$130 bull call spread at $1.40 delivers a 257% gain with the stock at $130, up 16% from the current level. Some store sales are up 50% month on month and lines are running around the block. Their recent online growth is also saving their bacon.
Looks Like a “BUY” signal to Me
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
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