Mad Hedge Technology Letter
January 15, 2021
Fiat Lux
Featured Trade:
(THE CHIP BONANZA)
(MU), (QCOM), (TSM)
Cutting edge smartphones and uncontrollable demand for more data-center processing power means equipment manufacturers will need to include significantly more dynamic random access memory (DRAM).
One of the most influential DRAM manufacturers is Micron (MU) and they are poised for a breakout, which is why I executed a call spread with a February expiration.
Micron just so happens to be the best of breed for DRAM which should elevate the stock to higher highs.
Micron’s DRAM is a must-have input into fueling artificial-intelligence and machine-learning applications, next-generation videogame consoles, and in 5G phones, which typically contain more storage and memory than the prior generations of handsets.
The sudden surge for DRAM and other semiconductor products is setting up a year in which capacity is failing to keep up with demand.
End manufacturers are piling on heaps up pressure on the chip companies to procure the chips they need to produce everything from cars to consumer electronics.
The uptick in demand means that prices for semiconductor products are skyrocketing and this could start to turn into a bottleneck for chip companies that cannot fulfill orders.
There is no panacea to the situation.
There is no switch to turn on to add new chip-making machinery.
It’s an expensive and time-draining exercise that includes ordering half a year out, and even longer now.
There has been a deal-making bonanza lately with Qualcomm (QCOM) acquiring NUVIA for $1.4bn and other deep pockets investors looking to pick off the next chip company to flip.
Taiwan Semiconductor Manufacturing Co. (TSM), the world’s largest contract chipmaker, said it was working with the car industry to address critical shortages.
This will mean a wave of capital investment into new factories that can produce chips.
The boom – bust cycle is starting up again.
The pandemic has had a helping hand in the supply crunch with the demand for laptops because of remote work exploding.
There is simply a heightened appetite for cloud-computing services and the data centers behind them.
U.S. restrictions on Chinese telecom giant Huawei Technologies Co. led competitors to hoard chips and charge excessively for highly sought for parts.
With a severe lack of chips, automakers and consumer-electronics manufacturers are competing for every bit of limited manufacturing capacity.
Corporations are starting to feel the domino effect with Ford Motor Co. announcing it would temporarily furlough a factory in Kentucky this week because of chip shortages that has also led some competitors to change production plans.
The situation is getting so bad that companies are now asking for as much as they can get demanding two years’ supply of chips; and General Motors Co. last month asked suppliers to stockpile a year’s worth of chips.
Bulk orders are normal, but companies are asking for a larger delivery as the availability of chips disappears.
It has literally become a free-for-all triggered by desperation.
Lead times across the industry have risen to six months, from eight to 10 weeks before the pandemic,
For some niche chips, the lead time is up to 20 or more weeks.
Chip sales are expected to grow 6% this year, reaching a record high.
Don’t forget also that the application of chips in automobiles is still a relatively new industry.
Cars didn’t need chips before, but as Tesla has shown you, cars are now iPads on wheels, tricked out with the latest gadgets.
Powerful entertainment systems and driver-assistance functions like rear cameras can’t function without chips.
This all means more demand in a world where companies are fiercely on the prowl for more chips.
Production cycles are long, the development cycles are even longer and there are reliability requirements that increase the cycle times.
Companies can’t just slot in older, weaker chips to power these high-octane systems without reducing the quality significantly.
Chip companies have rung the alarm bells and admitted this dearth of supply won’t be fixed this year.
The demand is so high that the shortage could last until 2023.
Of course, some companies are nimbler than others but in general, this capital-intensive process is like a monolith and moves incredibly slowly.
The bottom line is that these confluences of external and internal forces mean that chip stocks will go higher in 2021.
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
Global Market Comments
January 15, 2021
Fiat LuxFeatured Trade:
(BETTER BATTERIES HAVE BECOME BIG DISRUPTERS)
(TSLA), (XOM), (USO)
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
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
Mad Hedge Biotech & Healthcare Letter
January 14, 2021
Fiat Lux
FEATURED TRADE:
(ARE THESE THE NEW NEUROSCIENCE TRAILBLAZERS?)
(LLY), (BIIB), (MRNA), (DNA)
Aducanumab isn’t going gently into the night.
Positive data from Eli Lilly (LLY) breathed renewed interest in the efforts to find a cure for Alzheimer’s disease, the most common form of dementia and the sixth leading cause of death among Americans.
With 1 in 10 people aged 65 and older suffering from this condition, it’s no wonder that Big Pharma has invested so much in searching for a treatment.
Lilly’s candidate, Trailblazer-ALZ 2, is in its Phase 2 trials. Results showed that the progression of moderate Alzheimer’s disease among patients who took the drug showed a 32% decline compared to a placebo.
In a sector riven by failure and with a potential target market as lucrative as $30 billion annually, investors welcomed Lilly’s news with enthusiasm.
If successful, Trailblazer-ALZ 2 could reach $5 billion in peak sales. As expected, the results boosted Lilly’s stock, with it rising by 14% from $166 to $190.
While the Lilly study is promising, it involved only 272 patients.
This is easily dwarfed by Biogen’s (BIIB) efforts to find a cure for Alzheimer’s. As of last count, the giant biotechnology company’s previous trial for its own drug, Aducanumab, involved over 3,200 patients.
More importantly, Lilly’s Trailblazer-ALZ 2 is projected to hit the market in 2025, while Biogen’s Aducanumab is “ready to go.”
Aducanumab is a monthly infusion designed as a long-term treatment for generally healthy individuals who are beginning to show symptoms of Alzheimer’s disease.
Although this treatment has yet to be approved, the FDA is said to be in favor of its approval.
Outside the US, Biogen has also filed for potential approval in Japan and Europe. All approvals could come by early to mid-2021.
If approved, Aducanumab is expected to reach $12 billion in peak sales.
While this plan is still up in the air, the $12 billion in sales alone could easily justify the entire company’s current valuation.
Despite the uncertainty, Biogen remains promising thanks to the high potential of the existing drugs in its roster and its R&D unit.
In terms of pipeline, the company has at least 30 active clinical programs. Eight of which are already in Phase 3 and filed, including Aducanumab.
In recent years, Biogen has been focusing on expanding its neuroscience segment.
With over $28 billion potential market size, it no longer comes as a surprise why Biogen is pouring in cash in this particular sector.
Bolstering its efforts in the neuroscience segment, Biogen has recently invested in the Series A round of Atalanta Therapeutics, a Boston-based pioneering neurodegenerative diseases biotechnology company founded in 2018.
Attracted by Atalanta’s research on siRNA, which are molecules that can “silence” genes in the brain, Biogen and another biotechnology bigwig, Genentech (DNA), invested a combined $110 million to get a piece of the action.
Specifically, Biogen signed up to collaborate with Atalanta on treatments for Huntington’s along with several other central nervous system disorders.
As for Genentech, the $73.9 billion valued company’s deal with Atalanta covers Alzheimer’s and Parkinson’s.
In both agreements, Atalanta gets upfront payments, milestones, and royalties.
What we know so far is that Atalanta’s siRNA can silence Huntington's disease gene for at least six months. It can also alleviate symptoms affecting the spinal cords, but this part of the research has only been done on nonhuman primates.
Biogen, which has a market capitalization of $41.15 billion, has seen its share price fluctuate dramatically due to concerns over its Alzheimer’s drug.
The company withstood significant volatility in 2020, experiencing over 40% price swings in both directions. This is primarily because of the ups and downs of its Aducanumab trials, which heavily swayed the opinion of market participants.
Moving forward, I expect Biogen to have a massive year this 2021.
That’s the upside of this stock.
Even at its midpoint and if major treatments like Aducanumab fail to gain approval, I still anticipate a respectable year for this biotechnology company. That kind of security is worth paying attention to, and it can also signal its capacity to drive strong rewards.
Biogen has been shunned in the past year due to its volatility.
After all, who would want to invest in an unpredictable drug like Aducanumab when there are major stock indices and newcomers like Moderna (MRNA) making record-breaking highs?
For investors willing to look beneath the surface though, Biogen offers so much more than what meets the eye.
Global Market Comments
January 14, 2021
Fiat LuxFeatured Trade:
(WHAT THE HECK IS ESG INVESTING?),
(TSLA), (MO)
Looking at the New Year equity allocations, it’s truly astonishing how much money is pouring into ESG investing. Maybe it was another year of blistering head worldwide that did it. It now accounts for one-third of all US equity investment.
Last year, BlackRock, one of the largest fund managers in the country, made a major new commitment to ESG investment by rolling out several new ETFs. I thought I’d better take him seriously, as his firm is one of the largest money managers in the world with $7 trillion in assets.
So what the heck is ESG investing?
Environmental, Social, and Governance investing (ESG) seeks to address climate change in any way, shape, or form possible. Its goal is to move the economy and capital away from carbon-based energy forms, like oil (USO), natural gas (UNG), and coal (KOL), to any kind of alternative.
I am always suspicious of investment themes that are politically correct and ideologically directed, as they usually end in tears. I can’t tell you how many people I know who invested their life savings in solar companies to save the world, like Solyndra, Sungevity, American Solar Direct, and Suniva, only to get wiped out when they went under.
As laudable as the goals of these companies may have been, they were unable to deal with collapsing prices, Chinese dumping, and the harsh realities of doing business in a cutthroat competitive world.
As a venture capital friend of mine once told me, “Technology is a bakery business”. If you can’t sell your products immediately, you go broke. Technology always drops prices dramatically and if you can’t stay ahead of the curve you don’t stand a chance.
Still, what I believe is not important. The fastest growing group of new investors in the market today are Millennials, and they happen to take ESG investing very seriously.
There does seem to be a method to BlackRock’s madness. Over the past year, ESG-influenced funds have grown from 1% to 3.6% of total investment. Other major fund families like Vanguard have already jumped on the bandwagon.
ESG can include a panoply of activities, including recycling, climate change mitigation, carbon footprint reduction, water purification, green infrastructure, environmental benefits for employees, and greenhouse gas reduction. There are many more.
There is even an ESG rating system for funds and companies produced by firms like Refinitiv, which scores 7,000 companies around the world based on their environmental sensitivity. Companies like United Utilities Group PLC, the UK’s largest water company, get an A+, while China’s Guangdong Investment Ltd, which supplies water and energy to Hong Kong, gets a D-.
It goes without saying that companies from emerging nations tend to score very poorly. So do manufacturing companies relative to service ones, and energy companies versus non-energy ones.
The ESG concept began in 2005, when UN Secretary General Kofi Annan wrote to 50 global CEOs urging them to take climate change seriously. A major report by Ivor Knoepfel followed a year later entitled “Who Cares Wins.” The report made the case that embedding environmental, social and governance factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies. The snowball has been rolling ever since.
Themed investing is not new. “Sin” stocks have long been investment pariahs, including alcohol and tobacco companies. As a result, these companies trade at permanently low multiples. The newest investment ban is on firearms-related companies.
ESG investment may be about to get a major tailwind. The laws of supply and demand have oil prices disappearing up their own exhaust pipe. Overproduction by US fracking companies has caused supply gluts that will lead to chronically lower prices. The US happens to have a new 200-year supply of oil and gas, thanks to the fracking revolution.
Saudi Arabia just floated their oil monopoly, Saudi ARAMCO, raising a record $26 billion. When Saudi Arabia wants to get out of the oil and gas business, so should you. It’s not because they can’t think of new ways to spending money that they’re unloading it.
That’s why I have been advising followers to avoid energy investments like the plague for the past decade. My recent trade alerts for oil have been on the short side. It’s just a matter of time before alternatives rule the world.
Who is the greenest company in America? That would be electric car and autonomous driving firm Tesla (TSLA). Perhaps ESG investing helps explain the tripling of the share price since June.
What is the top-performing listed stock of the last 30 years? Tobacco company Altria Group (MO), the old Philip Morris.
It’s proof that investment shaming doesn’t always work.
