October 2020

Can this Dividend King Be the Next Vaccine King?

One area that Johnson & Johnson (JNJ) has not been a leader in for the past years is vaccine development.

That could change soon however.

Among the healthcare companies racing to develop a COVID-19 vaccine these days, JNJ has been a heavy favorite to come up with the most potent candidate.

Although the company started its clinical trials two months after Moderna (MRNA) and the partners Pfizer (PFE) and BioNTech (BNTX) started theirs, JNJ might release results even earlier than November.

This is because JNJ’s vaccine candidate, called Ad26.COV2.S, worked quickly on the patients after only a single dose.

In comparison, Moderna and Pfizer’s candidates need a first dose and then, after a month, a second dose or a booster shot.

While it could take a month or two for Moderna and Pfizer’s vaccines to take effect, those given Ad26.COV2.S could be protected after two weeks.

Moderna and Pfizer both use messenger-RNA technology for their vaccines, while JNJ utilizes a hollowed-out virus to deliver the DNA instructions to the relevant cells to trigger a protein spike and provoke an immune response.

This is the same method the company used in its Ebola vaccine, which has been instrumental in the immunization programs in Africa.

Inasmuch as Ad26.COV2.S offers incredible potency compared to other candidates, there is one potential trade-off: our immune system might later on start to resist the drug.

However, JNJ is attempting to resolve this issue by developing a booster shot for future use.

Meanwhile, Moderna and Pfizer’s vaccine candidates could be given as many times as possible without that risk.

JNJ’s vaccine can also be distributed and stored without any special handling unlike its rivals, which require lower temperatures. This means that the vaccine can be delivered to even the less-developed facilities.

Other than eliminating the logistical problem of people failing to get a second shot of the vaccine, JNJ’s one-shot regimen can guarantee that governments can vaccinate 1 billion people annually.

Only a handful of the manufacturers can match that claim, offering JNJ an edge regardless of the seven-month head start of the other developers.

Apart from JNJ, Pfizer, and Moderna, more companies have started their late-stage vaccine trials. The list includes AstraZeneca (AZN), Inovio Pharmaceuticals (INO), Novavax (NVAX), and Sanofi (SNY).

Outside its COVID-19 programs, JNJ has been delivering solid results despite the ongoing crisis.

The company’s pharmaceutical division showed notable growth in the second quarter, with its immunology drugs leading the charge.

In terms of sales in this quarter, rheumatoid arthritis and Crohn’s disease drug Remicade raked in $935 million while severe rheumatoid, psoriatic, and ankylosing spondylitis injection Simponi brought in $526 million.

Meanwhile, psoriasis medicines Stelara and Tremfya generated an impressive $1.7 billion and $342 million, respectively.

JNJ is also expanding its portfolio to cover the biotechnology market. So far, one of its most telling moves is its $6.5 billion all-cash acquisition of Momental Pharmaceuticals.

Buoyed by these promising results, JNJ boosted its full-year revenue guidance for 2020 with operational sales estimated to reach somewhere between $81 billion and $82.5 billion.

JNJ has been widely known for its consumer products, but the truth is that the company’s forte is actually healthcare.

In 2019, JNJ’s pharmaceutical sector comprised nearly 50% while medical devices generated roughly one-third of the company's total sales. These figures may very well be the reason why this stock is gaining traction among retirees.

After all, healthcare is where the money lies – and JNJ is now the biggest healthcare conglomerate in the world.

In fact, the company serves over 1 billion patients on a daily basis and 12 of the products in its portfolio can easily generate $2 billion in sales annually.

The company’s cash flows have also been steadily increasing, setting off an impressive 58-year streak of consistent and consecutive dividend boost every year.

Needless to say, JNJ has been hailed the “Dividend King” in the healthcare sector for decades now.

Simply looking at JNJ profile, track record, and pipeline, it’s clear to see that buying and holding JNJ shares and reinvesting the dividends you receive along the way could give your portfolio a substantial boost.

October 6, 2020 - MDT Pro Tips

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

Trade Alert - (DKNG) October 5, 2020 - BUY

Tech Alert

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

October 5, 2020

Tech Letter

Mad Hedge Technology Letter
October 5, 2020
Fiat Lux

Featured Trade:

(THE AMAZON OF LATIN AMERICA)
(MELI), (AMZN), (ASML)

The Amazon of Latin America

Tech Letter

If you thought you missed profiting off of Amazon then you’re in luck; you still have another chance with the South American iteration of Amazon – MercadoLibre (MELI).

This e-commerce and payments platform in Latin America boasts presence in 18 countries within South and Central America but derives the bulk of its revenue from three countries: Brazil, Argentina, and Mexico.

MELI is the entrenched e-commerce player in the region and has multiple retailer solutions such as MercadoLibre Marketplace (an online platform for the buying and selling of merchandise), Mercado Pago (an online payments solution), and Mercado Envios (a logistics solution).

The company's market-leading position revolves around a strong network effect that has allowed it to expand its exploding user base as well as its gross merchandise volume (GMV).

In 2015, MELI had around 145 million registered users, and that number has more than tripled by 2020.

The tectonic shift toward digital transactions network caused by the pandemic means the number of items sold jumped 66% year over year to 284 million, and the number of unique active users climbed 27% year over year.

It’s undeniable that the company has strong tailwinds backing its overarching story.

MELI was already primed for a strong growth trajectory before the pandemic crushed the global economy.

The company was savvy in introducing new and useful services over the years to solve digital bottlenecks, and its suite of services made customers stickier toward its platform.

Hosting an integrated e-commerce and payments platform meant an unrelenting buildup of new vendors and users coming on board over time.

MELI looks set to take the next step in e-commerce penetration.

Although its growth has been phenomenal over the last decade, I believe the company may be on the cusp of doubling its growth rate because of the rapid digitalization by businesses.

A share repurchase program has been set in motion and I do believe they will dip into this financial tool once the global economy stabilizes.

Getting into the weeds, MELI expanded its category-take rates to Chile and Mexico in Q2 2020, with Brazil and Argentina set for last half of 2020.

For online marketplaces like what Amazon and eBay offer, the take rate refers to the fees and commissions that the companies collect on sales by third-party sellers which is critical to overall revenue.

The successful take rate rationalization could drive sellers to list more of their inventory and reduce prices.

With this increased supply, MELI should be seeing the cascading benefits of an improving shopping experience and rising conversion rates.

Scaling this beautifully translates to lower per-unit logistic costs such as sequential 23% decrease in unit shipping costs.

Ala Amazon, its drive to step up the buildout of its own logistics network to take down the dependency on Correios in Brazil is yielding meaningful results and also places the company to potentially buttress a greater amount of free shipping subsidies as the unit cost of deliveries continues to swan dive.

Logistics transforming into a higher reliability, faster shipping times, and greater cost savings offering can be passed along to the consumer upgrading the quality of service.

Soon, MELI is expected to invest in Consumer Electronics and price competitiveness could see the company grab market share taking down yet another adjacent industry.

At some point, like Amazon, MELI will target the grocery market and will have the logistic infrastructure in place to do the same type of 1-day “free” shipping that Amazon guarantees.

On the digital payments side of the business, MELI has sold over 1 million mobile point-of-sale (mPOS) devices, versus 900,000 during Q1 2020, driven primarily by smaller merchants.

The individual bull case for MELI is rock-solid but feeling out the global state of affairs is a must in a quickly changing environment.

With an onslaught of stimulus in Europe and the U.S. to deal with the pandemic, China’s economy beginning to recover, and a weaker dollar, foreign markets are becoming more attractive to U.S. investors.

Emerging markets could turn from stock market pariah to darling in a nanosecond and if investors are comfortable with targeting companies in higher growth markets, then MELI should be an option.

Emerging markets broadly have lagged behind developed market peers over the past decade, even as some fund managers have found investing in domestically-oriented companies in India, China, or Brazil hugely rewarding—just look at the outperformance by foreign brand names like Alibaba Group (BABA), Meituan Dianping and HDFC Bank (HDFC) in India just to name a few.

It’s true that more developed markets have the advantages of greater trading liquidity, minimal systemic risk, better corporate governance, and greater access to dollar-denominated debt that emerging markets’ companies don’t benefit from.

Therefore, investors seeking a conservatively biased portfolio should only focus on U.S. tech brand names that have moats around their business model.

Another second derivate play would be to find U.S. tech companies that siphon a big chunk of sales in emerging markets and are U.S. companies like Apple (AAPL), Nvidia (NVDA), and Mastercard (M).

Each secures between one-third and two-thirds of sales from emerging markets. But with those companies vulnerable to the geopolitical trip wire between the U.S. and China, proportioning a small amount of the portfolio to a Latin American tech growth firm could produce alpha.

Another quick recommendation is ASML, a semiconductor chip company from the Netherlands.

It’s an option generating outsized sales coming from emerging markets but is headquartered in an economically responsible country.

This Dutch tech firm boasts positive free cash flow yields, a sign the company is generating ample cash to operate and also reinvest in itself.

Investors who can stomach greater risk levels and desire growth should take a serious look at MELI, plus the myriad of other tech recommendations I offered if MELI doesn’t suit your appetite.

MELI

October 5, 2020 - MDT Alert (CLVS)

MDT Alert

With the $6 call on CLVS expiring Friday, I would like to suggest you sell another round of calls for this week.

CLVS is trading around $5.82 as I write this.

And the $6 call that expires on Friday, October 9th can be sold for $.20.

I suggest you collect the 20 cents.

Here is the trade.

Sell to Open (1) October 9th - $6.00 Call for every 100 shares you own.

You should be able to sell them for $.20 for every option.

If the calls are assigned this Friday, the return will be about 12% in total.

This alert applies to you only if you are long the shares in CLVS.

October 5, 2020 - MDT Pro Tips

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

October 5, 2020

Diary, Newsletter, Summary

Global Market Comments
October 5, 2020
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or IS HISTORY REPEATING ITSELF?)
(SPY), (INDU), (DIS), (TLT)

The Market Outlook for the Week Ahead, or Is History Repeating Itself?

Diary, Newsletter, Summary

In 1919, President Woodrow Wilson traveled to Europe to negotiate the end of WWI and the Versailles Treaty. Midway through the talks, he suffered a major stroke and was hustled back to the US in an American battleship, the USS George Washington.

The Spanish Flu pandemic was underway, killing millions, so it was thought best to keep the whole matter secret. The president’s wife essentially ran the country for the last three years of Wilson’s administration, claiming to represent the president’s wishes.

This was the history that flashed through my mind when I learned of President Trump’s Covid-19 infection on Thursday night. The presidential election is now effectively over. All fundraising has ceased. It is now an open question whether Trump can even live until the November 3 election. He is, after all, a high-risk patient. Any remaining public campaign events on which the president thrived is out of the question.

The minute the president got sick, media coverage has been wholly devoted to Covid-19. That was not in the Trump plan. Not at all.

The London betting markets soared from a 60% chance of a Biden win to 90% minutes after the Covid-19 news broke. The only question is the extent of the landslide. This election won’t go anywhere near the courts or the Supreme Court, as the stock market has been pricing in. If there is another big gap down, you should be picking up stocks by the bucket load as fast as you can.

Fund managers who thought Trump had a chance of returning will spend this weekend pouring over Biden’s economic policies. All investment decisions will now be made based on the assumption that these will be the policies in force for the next 4, 8, or 12 years.

Think:

higher taxes
more economic stimulus
big infrastructure spending
more quantitative easing
grants to state and local municipalities
no inflation
low-interest rates
more alternative energy subsidies
the return of the Paris Climate Accord
more regulation of the oil industry
end of the trade wars
rejoining the NATO alliance

Oh, and the huge technological advancements and the burgeoning profit opportunities that have emerged in response to the pandemic? We get to keep those.

That is great news for long-term investors. All of this combined is very pro-investment and pro stock market. It firmly solidifies my own Dow target of 120,000 in a decade and another Roaring Twenties and coming American Golden Age. Now, we even have the trigger.

That explains why the market made back a hefty 500 points in hours, even turning positive on the day for a few fleeting moments. On a six-month view, the upside risks are far greater than the downside ones. An S&P 500 of $3,500-$3,700 by yearend is within range, up 6%-12% from here.

The September Nonfarm Payroll Report bombed, coming in at 661,000, well below expected. The headline Unemployment Rate is at a historically high 7.9%. The U-6 real “discouraged worker” jobless rate is at 12.6%. Leisure & Hospitality was the big winner at 318,888, Healthcare gained 107,000, and Retail posted 142,000. Local Government lost a staggering 232,000 jobs and towns run out of money.

US Q2 GDP came in at a horrific negative 31.4% in the final read, the worst in US history. It’s a tough economic record to run for office on. The first Q3 GDP read will not be released until October 29, five days before the presidential election, and should be up huge.

US Capital Goods hit a six-year high, up 1.8% in August. July was revised upward as well. The boost may be short-lived as stimulus money runs out.

Office Rents won’t recover until 2025, says commercial real estate leader Cushman & Wakefield. Some 215 million square feet of demand has been lost due to the pandemic. Many knowledge-based workers are never coming back to the office.

Pending Homes Sales hit a record high in August, up a mind-blowing 8.8% from July and a staggering 24.5% YOY. Hot housing markets are seeing 11%-20% YOY price increases. The northeast saw the biggest gains. This trend has another decade to run. Buy before they run out of stock.

Case Shiller rose 4.8% in July as its National Home Price Index shows. Phoenix (9.2%), Seattle (7.0%), and Charlotte (6.0%) were the price leaders. A stampede to the suburbs fueled by record-low interest rates is the main driver. Look for these trends to continue for years.

Consumer Confidence soared in September, from 84.8 last month to 101.8. Those who have money are spending it. Those who don’t are waiting in lines at food banks, disappearing from the economy. New York bankruptcies surged 40%. If you haven’t spent the past decade investing in your online presence or yourself, you’re toast.

Disney (DIS) laid off 28,000 to stem hemorrhaging losses at its theme parks, hotels, and cruise line. It will take a year to come back. Clearly, their recent $78.3 billion purchase of 21^st Century Fox movie and TV studios last year was poorly timed, just before the pandemic, and they borrowed massively to close it. And they had a major presence in China! It’s one of the biggest mass layoffs since Corona began to decimate the economy.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.

My Global Trading Dispatch pushed through to a new all-time high last week on the strength of a position that I kept for a single day. All I needed was the 700-point dive in the Dow Average in 24 hours to realize half the maximum profit in my short (SPY) position. When the market offers me a gift like that, I take it, no questions asked. I am back to a rare 100% cash position, waiting for a bigger dump to buy.

The risk/reward in the market now is terrible. I believe we have to test the 200-day moving averages before it’s safe to go back in with the indexes and single stocks.

That takes our 2020 year-to-date performance back up to a blistering +35.46%, versus a loss of 2.87% for the Dow Average. October shot out the gate at +0.96%. That takes my 11-year average annualized performance back to +36.12%. My 11-year total return returned to another new all-time high at +391.37%. My trailing one-year return popped back up to +51.82%.

The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 210,000, which you can find here.

On Monday, October 5 at 10:00 AM, the ISM Non-Manufacturing PMI Index for September is released.

On Tuesday, October 6 at 9:00 AM EST, the JOLTS Job Openings for August is published.

On Wednesday, October 7 at 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out. At 2:00 PM EST, the Fed Minutes from the last Open Market Committee Meeting six weeks ago are disclosed.

On Thursday, October 8 at 8:30 AM EST, the Weekly Jobless Claims are announced.

On Friday, October 9, at 2:00 PM The Bakers Hughes Rig Count is released.

As for me, I’m headed up to Lake Tahoe again to escape the thick clouds of choking smoke in the San Francisco Bay Area. Also, the polls for the presidential election in Nevada open on October 17 and I have to VOTE!
Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Is History Repeating Itself?

No Smoke Here

October 2, 2020

Diary, Newsletter, Summary

Global Market Comments
October 2, 2020
Fiat Lux

Featured Trade:

(SEPTEMBER 30 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (AMD), (JPM), (DIS), (GM), (TSLA), (NKLA),
(TLT), (NFLX), (PLTR), (VIX), (PHM), (LEN), (KBH), (FXA), (GLD)