Global Market Comments
December 16, 2020
Fiat Lux
FEATURED TRADE:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
I will start today’s letter by listing six more data points showing how overbought stocks have become.
1) While the number of outstanding shares in the US has remained unchanged since 2006, thanks to M&A, buybacks, bankruptcies, and privatizations, the average weighted share price has more than doubled from $50.15 to $137.00.
2) The Volatility Index (VIX) has just collapsed from a high of $41 in November to $20 today.
3) The Mad Hedge Market Timing Index has just soared from a record low of 2 eight months ago to 76 today, deep into “SELL” territory.
4) 2000 forward stock earnings growth has collapsed from 26% a year ago, to 0% in a few months.
5) Almost every investor now bullish once more, now that their stocks are going up.
6) The stock market has had its best month since 1987. Grizzled, long in the tooth readers can’t be more cautious right now.
This all leads to the urgent question of the day, WHICH stocks do you buy as we approach market tops? The answer is very simple. You buy cheap ones. And what are the cheapest stocks out there?
Commodity stocks.
My friend, Jim Umpleby, said that we are just entering a ten-year super cycle in commodities.
Jim should know. He is the CEO of Caterpillar (CAT), a company I have been following for 45 years. I even have one of their cool worn yellow baseball caps from years past.
Thanks to the 2017 tax bill, companies can now buy Caterpillar’s bulldozers, backhoes, and heavy trucks, and expense 100% of the investment in the first year. (Last year, I bought a new $162,500 Tesla Model X using the same break). That makes a purchase of (CAT)’s products one of the best tax breaks ever.
Needless to say, this has created a stampede to buy the companies heavy machinery because they fear this tax windfall will be reversed by the next administration. This is equipment with a 30-year life or longer.
Industrial commodities are in fact the perfect sector to buy right now. Take a look at the long-term chart for copper prices, which are a great bellwether for the entire industry. They are imminently poised to make a long-term upside breakout.
Copper last peaked at the beginning of 2011, when the Chinese infrastructure build-out suddenly outdrew to a juddering halt. Prices cratered from $4.60 a pound to a lowly $1.90. Mines were sold off, mothballed, or permanently closed at a record rate.
Copper prices fell so low that the US Mint finally started making a profit on pennies they struck.
Then a funny thing happened.
Copper bottomed, assisted by the global synchronized economic recovery I have been writing about for years. Then at the beginning of this year, investors smelled a recovery in a severely oversold, bargain basement, lagging sector. Copper prices jumped from $2.60 to $3.6, up 42% since June.
The share prices of copper and other major commodity producers went ballistic. Freeport McMoRan (FCX), the world’s largest copper producer, (whose management is a long-time reader of this letter) has just seen its stock jump six-fold from a near $4.00 a share to $24.00. If this sounds rich, recall that the peak during the last cycle was at $51.
Other big commodity producers did as well. Australia’s BHP Billiton (BHP) leaped 41% in a month!
You may think that it’s too late to get into the commodities space, but you’d be wrong. Having covered the sector for nearly a half-century there is one thing you learn quickly. While you can shut down a mine in weeks, it can take years to bring them back on line.
As for developing a new mine from scratch, that can take a decade by the time you get the design, permits, infrastructure, equipment, and labor in place.
My Australian readers tell me that (BHP) is flying young skilled workers from Brisbane an incredible 2,000 miles to work in Northwest mines in a six week on, six week off work schedule and paying them $200,000 a year to do it. And they’re making a profit doing this!
The bottom line here is that a short squeeze has developed for industrial commodities which will last for years.
Oh, and that global economic recovery? It is on vacation until the pandemic ends. That could happen in a few months, and no more than a year.
At least you have something to buy now besides more technology stocks. As much as we here at the Mad Hedge Fund Trader all love them for the long term, they are extremely overbought for the short term. Up 50% in a month? I’ll pass.
Commodities Are In Our Blood
Hey John and the MAD Team, here's an advance Happy New Year!
You really nailed and keep nailing great reversals and trends that are just beginning to deserve a watchful eye. I nailed it today, so far, just buying the JPY pairs, and shorting the big bond, this past couple of weeks.
I'm still a bit stuck on futures, but I realize the safety in your spreads is a lot smarter...Thx for all you know and for all you do.
Rod
Alberta, Canada
Mad Hedge Biotech & Healthcare Letter
December 15, 2020
Fiat Lux
FEATURED TRADE:
(DON’T BUY ASTRAZENECA FOR ITS COVID-19 VACCINE)
(AZN), (PFE), (MRNA), (ALXN)
AstraZeneca (AZN) is one of the leaders in the COVID-19 vaccine race, but you wouldn’t have guessed it by observing the stock price in the past months.
The indifference might be rooted from the company’s recent issues with its vaccine candidate, AZD1222, which includes dosing errors and lack of transparency on their trial data.
In comparison, frontrunners like Pfizer (PFE) and Moderna (MRNA) have been gaining back to back approval from the FDA and even from investors.
Let me tell you why this doesn’t really matter for AstraZeneca anyway.
For one, AstraZeneca won’t even make a profit from its COVID-19 vaccine candidate. In fact, the British drugmaker pledged earlier this year that it will sell AZD1222 at no profit.
So, what is the financial benefit of AstraZeneca’s vaccine?
The potential big win from this COVID-19 program is not from AZD1222 itself, but from AstraZeneca’s long-acting antibody cocktail.
This treatment could be the solution needed to prevent the progression of diseases among patients who are already infected with the virus. It can also be used as a preventive measure, which can last up to 12 months, for those who cannot take a vaccine.
If AZD1222 gains approval, then this COVID-19 vaccine is projected to add $3 billion—an impressive 30%—to AstraZeneca’s 2021 profits.
The approval of this technology would also fall nicely in place with the rest of AstraZeneca’s plans.
Since the start of 2020, AstraZeneca has made it clear that it would start pivoting to focus on rare diseases.
Its latest plan towards developing this expertise is the $39 billion acquisition of biotechnology company Alexion Pharmaceuticals (ALXN).
Here’s the nitty-gritty of this massive merger.
The $39 billion price tag comes in the form of cash and stock, putting each share at $175. Alexion shareholders will get $60 in cash on top of 2.1 AstraZeneca shares for every share they own. Aside from that, Alexion will own 15% of the newly formed company.
If everything goes according to plan, then the deal will be completed by the third quarter of 2021.
This acquisition will significantly expand the R&D programs of AstraZeneca, especially its highly specialized and rare diseases sectors.
This combined company is estimated to rake in double-digit growth in its revenue through 2025, with the company potentially gaining significant synergies of roughly $500 million annually – a fair price that could easily justify the premium price AstraZeneca paid for the merger.
AstraZeneca should also be able to expect double-digit increases in its core EPS accretion for the first three years, with the company realistically anticipating a strong FCF with a strong investment-grade rating.
Now, let’s take a look at what Alexion brings to the table.
Alexion is one of the most promising biotechnology companies to date, which managed to achieve significant growth since its IPO. From 2017 to 2020, the company managed to boost its annualized revenue by 20%, growing from $3.5 billion to $6 billion.
With a market capitalization of $34.21 billion, it has invested a significant part of its budget to the development of rare disease drugs.
The most popular products in Alexion’s portfolio are chemotherapy drugs Ultomiris and Soliris, which generated $4.3 billion in combined sales in 2019 alone.
For 2020, sales of these two treatments are expected to rise by 17% to reach $5 billion.
Prior to this deal with AstraZeneca, Alexion has been engaged in an acquisition spree since 2018.
It managed to snap up four smaller biotechnology companies for $4 billion in total, with its $1.4 billion purchase of Portola Pharmaceuticals as its most recent deal.
Truth be told, the performance of Alexion’s rare disease treatments in the market didn’t skip a beat despite the pandemic in 2020.
In fact, these products have been substantially outperforming expectations that the company itself presented in January.
With this merger, AstraZeneca will gain access to Soliris and its widely successful follow-on medication Ultomiris.
Apart from these mega-blockbuster drugs, AstraZeneca will also get its hands on a handful of treatments for rare metabolic diseases, making the company on pace to rake in roughly $840 million in revenue for this year alone.
With all these plans in place, it’s clear that the strongest reason to buy AstraZeneca is not its COVID-19 program.
Buy this stock for the promising long-term prospects not only for rare diseases, but also for its treatments in cancer, cardiovascular diseases, and even diabetes. Buy it as well for its consistent growth, with the company braving the pandemic headwinds and achieving 10% revenue growth and a 16% jump in core EPS to date.
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
December 15, 2020
Fiat Lux
FEATURED TRADE:
(A NOTE ON OPTIONS CALLED AWAY),
(TSLA), (TLT), (BABA), (JPM), (CAT)
Today, I would like to make a suggestion on a covered call.
And it is on a stock we traded in the past. The stock is iQIYI Inc. (IQ).
IQ is trading around $22.40 as I write this.
My suggestion is to buy IQ at the market. Then execute this option trade.
Sell to Open one December 18th-$23 call for $.25 for every 100 shares you buy.
If these calls are assigned this Friday, the return will be 3.8% for four days.
Based on the nominal portfolio limit the stock buy in to 300 shares, or 6.7% of the tracking portfolio.
If the calls are not assigned this Friday, then I will continue to sell calls against the position.
IQ does have weekly options.
Mad Hedge Technology Letter
December 14, 2020
Fiat Lux
Featured Trade:
(NVIDIA’S SHOW OF FORCE)
(NVDA), (AMD), (APPL), (OTC:SFTBF), (INTC), (QCOM)
One of the best buy and hold tech stock has to be Nvidia (NVDA).
They are positioned at the vanguard of every major cutting-edge technology in the world such as self-driving technology, data center, and artificial intelligence.
Their cash cow business of manufacturing GPUs (graphics processing unit) which are essential to video gaming has been bolstered by the shelter-at-home movement.
Video games as an activity or something to just pass the time has never been so popular and Nvidia is the best of breed in this department.
The key takeaway from Nvidia’s asset portfolio is the diversity.
They aren’t beholden to any one division and I wouldn’t bet anytime soon that video games are going to go out of fashion because of the generational tailwind occurring.
In fact, the underlying Nvidia stock has risen more than 120% in 2020 and semiconductors have proven to be an astute place to put your money in during the pandemic.
The same goes for competitive rivals such as Advanced Micro Devices (AMD), Intel (INTC), and Qualcomm (QCOM) who explore some of those same markets.
Nvidia counts Amazon (AMZN) Web Services as a customer for data-center chips. It is partnering with VMware (VMW) and Amazon on an AI-driven cloud platform for big businesses.
Be mindful that semiconductor stocks are volatile because of the boom-bust nature of their business cycle.
Global chip sales cratered in late 2018 and fell 12% in 2019.
They rallied early this year on signs of an industry recovery and on a U.S.-China trade deal, then sold off on coronavirus fears.
The trade war has also thrown a spanner in the works of global chip production.
Production was first halted in China and then put global economies under strain.
Despite the pandemic, the semiconductor industry will return to growth in 2020.
Chip sales will rise by 5.1% to $433 billion this year and accelerate to 8.4% in 2021.
The spread of 5G wireless networks is a key catalyst.
Moving forward, it’s highly likely that U.S. lawmakers maintain an anti-China doctrine, and Nvidia and AMD derive only 1% to 2% of revenue from Huawei.
In fact, other companies are more exposed like Cisco and Intel.
How well is Nvidia doing?
They increased revenue by 57% year over year in the third quarter predominately due to its data center business, which grew revenue by 162% over the same period.
In Q3, the data center division accounted for $1.9 billion of the company's $4.7 billion of revenue.
Nvidia is also growing through acquisitions with its blockbuster pending $40 billion acquisition of chip design licensor ARM Holdings from Softbank (OTC:SFTBF).
ARM’s acquisition will help NVIDIA maintain the best of breed quality through 2021 and beyond.
That is important because the semiconductor industry is becoming more cutthroat with many big players sourcing chips in-house after deeply investing in this technology.
Apple (AAPL) recently unveiled its own stable of Mac processors, the M1, making its debut in late 2020. Manufacturing chips is historically a capital-intensive activity, and new chips don’t roll out that fast. In any case, cash-rich companies the size of Google and Apple have the firepower to pull this off.
ARM holds many unique patents forcing many companies to license from them, Apple can customize those designs, and the actual fabrication is outsourced to Taiwan Semiconductor (TSM), the largest and most technologically advanced semiconductor fabricator in the world.
In this specific case, Intel is the direct loser from the production of Apple M1 chips and at this point, this is becoming an existential crisis for Intel.
The acquisition of ARM is a gamechanger, and not just because NVIDIA would gain access to new markets like CPUs for mobile as early as 2021.
Integrating with ARM signals NVIDIA's future shift toward licensing of technology - a far more stable business model than the traditionally cyclical nature of semiconductor industry sales driven by upgrade cycles.
It all comes down to the quality of NVIDIA's chips which remain highly competitive in secular growth areas of tech, such as data centers and artificial intelligence. This alone should keep NVIDIA high up investors' list for years to come.
Demand for the new Nvidia GeForce RTX GPU has been “overwhelming” and the company completed its Mellanox acquisition, a tech firm that sells adapters, switches, software, cables, and silicon for markets including high-performance computing, data centers, cloud computing, computer data storage, and financial services, in April, helping it to double down on their revenue drivers.
Sales for Nvidia's chips remain robust across some of the most desirable end markets and there is nothing meaningful out there to suggest that Nvidia won’t continue its overperformance next year even if the shelter-at-home economy stops.
I am highly bullish on Nvidia stock into 2021 and beyond.
