Mad Hedge Biotech and Healthcare Letter
March 9, 2023
Fiat Lux
Featured Trade:
(TRUE GAME-CHANGERS OF BIOTECH)
(SPRT), (CRSP), (VRTX)
These days, the stock market is so scrutinized that there are only a handful of sectors where an investor can find undervalued stocks capable of outperforming an index fund.
The biotechnology world is one of these industries, and now is a great time to invest in it.
The potential for the majority of biotechnology companies is not really their current earnings or even their valuations. It’s actually hinged on whether these businesses could deliver positive clinical results for potential blockbuster treatments and whether the FDA approves the candidates. No matter how hard you look, you can’t easily find these types of information in companies' income statements and balance sheets.
Actually, the widely diversified SPDR S&P Biotech (XBI) has declined by over 50% since its peak of $174 per share in February 2021. One of the critical reasons biotech dropped in the past two years is the rise of dodgy IPOs, which inevitably collapsed and notably lowered investors’ confidence in the sector. Another reason is the rising interest rates, particularly in 2022, which forced many biotech companies to borrow money just to sustain their research operations.
These past weeks, though, valuations have become attractive. Rates have also been noticeably rising, and opportunities are starting to present themselves. Since 2022 was the year that focused on multiple clinical trials, 2023 is anticipated to be the year for new product launches.
Currently, the FDA has at least 75 new biotech candidates awaiting regulatory approval. This means 2023 could easily surpass 2018, when 56 drugs were approved, as the year with the most approvals.
All these will only benefit you if you find the right biotechs, especially with the word “game-changing,” which seems to get tossed around too casually in the biotech world. The truth is, many things are described as “game-changing” and “groundbreaking” when they are not. Still, there are exceptions.
One of the exceptions is Sarepta Therapeutics (SRPT). This biotech has a gene therapy treatment targeting muscular dystrophy, which is anticipated to receive FDA approval by May 2023.
Duchenne muscular dystrophy (DMD) is a genetic disorder that primarily affects boys, although in rare cases, it can also affect girls. It is caused by a mutation in the gene that provides instructions for making a protein called dystrophin, which is essential for muscle function and stability.
Without enough functional dystrophin, muscles become weak and damaged over time, leading to progressive muscle weakness and wasting. There is currently no cure for DMD, but there are treatments available that can help manage symptoms and improve quality of life.
Aside from Sarepta, other companies working on treatments for this condition include Pfizer (PFE) and Solid Biosciences (SLDB). However, Sarepta leads the rest in terms of clinical progress.
The global market for Duchenne muscular dystrophy treatment was valued at USD 2.4 billion in 2020 and is projected to increase at a compound annual growth rate (CAGR) of 40.5% between 2021 and 2028.
Another exception is CRISPR Therapeutics (CRSP), which is poised to play a significant role in the gene editing movement in the biotech world.
The company has been working with Vertex Pharmaceuticals (VRTX) on an exciting gene-editing treatment, named exa-cel, which targets rare blood diseases, sickle cell disease and beta-thalassemia.
Exa-cel uses CRISPR/Cas9 gene-editing technology to modify a patient's own blood-forming stem cells outside the body, with the goal of correcting the genetic mutation that causes these blood disorders. Aside from being a game-changer for patients with these conditions, this therapy could alter the financial landscape of CRISPR Therapeutics as it would rake in billions in revenue for the company.
If the FDA gives the green light for exa-cel, CRISPR and Vertex become red hot stocks to own. Meanwhile, having an approved rare disease gene-editing therapy in its lineup, plus its modest valuation of $3.8 billion, would make CRISPR an extremely attractive acquisition candidate.
The biotechnology sector has experienced significant growth in recent years, driven by advances in technologies such as genomics, gene editing, and synthetic biology. These technological advancements have enabled biotech companies to develop more precise and targeted therapies, potentially revolutionizing the healthcare industry.
While the biotechnology sector offers many promising opportunities, it is also a highly competitive and risky industry. Biotech companies often face significant regulatory hurdles and long development timelines, and many of their products fail in clinical trials. Additionally, biotech companies require substantial capital investments, which can be challenging to secure.
Investors looking into adding game-changing companies to their portfolio should consider Sarepta, CRISPR, and Vertex. I recommend you buy the dip.
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
March 9, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON MARCH 14-16)
(Trade Alert - (UNG) – BUY LEAPS)
CLICK HERE to download today's position sheet.
BUY the United States Natural Gas Fund (UNG) January 2025 $14-$15 deep out-of-the-money vertical Bull Call debit spread LEAPS at $0.25 or best
Opening Trade
3-9-2023
expiration date: January 17, 2025
Number of Contracts = 1 contract
Natural gas has just given up half of its recent gain today and is now down 14%. Forecasts of mild spring weather and falling demand are the reasons. So, I am diving back in.
Natural gas at one point fell some 80% since it peaked in June of 2022. It is now down so much that you have to buy it even if you hate it.
The much-predicted nuclear winter in Europe never showed. Instead, the continent enjoyed one of the warmest winters on record, with some ski resorts completely devoid of snow. To save Europe’s bacon, the US government ordered the diversion of dozens of natural gas carriers from China to Europe. The Middle East also ramped up its gas exports.
Now, we have recession fears. Storage in both Europe and the US is near all-time highs.
What happens next is that Covid burns out in China, allowing the economy to recover and sending the demand for natural gas through the roof. The Freeport McMoRan’s export facility in Quintana, TX that blew up a few months ago is coming back on stream.
That screeching sound you hear is natural gas wells being shut down, which happens every time we approach the $2.00 price in gas. That is sowing the seeds of the next shortage. That sets up an easy double for gas from here. While gas may not yet have hit its final bottom, it is close enough to do a trade here.
While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is 300% in little less than two years. That is the probability that (UNG) shares will rise over the next 23 months.
I have been through a half dozen energy cycles in my lifetime, and I can see another one starting up.
I am therefore buying the United States Natural Gas Fund (UNG) January 2025 $14-$15 deep out-of-the-money vertical Bull Call debit spread LEAPS at $0.25 or best.
Don’t pay more than $0.50 or you’ll be chasing on a risk/reward basis.
I think all carbon energy sources eventually go to zero over the next 20 years as they are replaced by alternatives, but we will have several doubles in price on the way there. This is one of those doubles.
But don’t ask me. I only drilled for natural gas in Texas and Colorado for five years in the late 1990s using a revolutionary new technology called “fracking.” I moved on after making a fortune, buying gas for $2 and selling it on for $6 or $7.
To learn more about the United States Natural Gas Fund (UNG), please click here.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the United States Natural Gas Fund (UNG) January 2025 $14-$15 deep out-of-the-money vertical Bull Call debit spread LEAPS are showing a bid/offer spread of $0.10-$0.90, which is typical.
Enter an order for one contract at $0.10, another for $0.20, another for $0.30, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
A lot of people ask me about the appropriate size. Remember, if the (UNG) does NOT rise by 85.9% in 23 months, the value of your investment goes to zero.
If by chance (UNG) rises quickly, which it might, you don’t have to wait the full two years. You can take profits at any time.
The way to play this is to buy LEAPS in ten different companies. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work you triple your money.
You never should have a position that is so big that you can’t sleep at night, or worse, need to call John Thomas asking if you should sell at a market bottom.
Keep in mind that (UNG) has a substantial “contango” of 35% to overcome. That means the futures one year out are selling at a 35% discount. So, gas has to rise by 35% in a year for you just to break even. The contango covers gas storage charges and the cost of carry for borrowed money.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that an 85.9% rise in (UNG) shares to $15 will generate a 300% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 3.5:1 across the $14-$15 space.
I have done the math here for a single contract. You can adjust your size accordingly.
If you want to get much more aggressive on the natural gas trade, you can buy the ProShares Ultra Natural Gas ETF (BOIL), a 2X long leveraged ETF. Keep in mind that 2X ETFs have much higher costs, wider dealing spreads, and greater tracking error. This is really designed for short-term or even day trading. (BOIL) is down a staggering 97% from its June high.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that the (UNG) will not fall below $15 by the January 17, 2025 options expiration in 23 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (UNG) $14 call at………….………$2.60
Sell short 1 January 2025 (UNG) $15 call at….………$2.35
Net Cost:………………………….………..………….....….....$0.25
Potential Profit: $1.00 - $0.25 = $0.75
(1 X 100 X $0.75) = $75, or 300% in 23 months
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
“Bull markets do best when you’ve got a wall of worries, what I’m worrying about is nobody is worried anymore,” said super bull Ed Yardeni.
Mad Hedge Technology Letter
March 8, 2023
Fiat Lux
Featured Trade:
(WHAT'S UP WITH RIVIAN)
(TSLA), (RIVN)
With the US 10-year Treasury yield sitting today at around 4%, there simply isn’t a rapacious appetite to invest in unproven EV stocks.
This is how the cookie crumbles when lending terms are tight.
The 4% yield today is about 8X higher than it was in July 2020 when the 10-year yielded half of a percentage point.
Funding and borrowing billions for tech startups is part and parcel of developing a new tech company.
However, the incremental interest payments from the extra 8X yield are exorbitant enough for investors to refrain from pulling out their wallets.
A lot of investor roadshow presentations are now getting shelved permanently.
It has to be a slam dunk otherwise venture capitalists are pouring their capital down a black hole which is essentially why the venture capitalist movement is frozen.
So we must turn a suspicious eye when unproven EV company Rivian announces a plan to sell $1.3 billion in bonds to shore up capital.
It couldn’t have come at a worse time as debt markets are expensive to tap with rates surging.
I suspect the yield on this debt to be anywhere from 11-15%.
Even more laughable, they labeled this return to the capital markets as the “green” debt offering.
Rivian says it intends to sell $1.3 billion worth of “green” convertible senior notes due in 2029, with the option to grant an additional $200 million worth of convertible notes to the original purchasers.
Rivian explained to us that it intends to use the capital it raises for “green” or environmental purposes. I believe these statements are a sign that upper management is becoming too woke.
RIVN just needs to stay in their lane and make damn good EVs, and by that, I mean better than Tesla, and not tell everyone how “green” they are. Nobody cares about their greenwashing.
EV makers are also big polluters and many studies show that they accrue a bigger carbon footprint than the production of combustible engine cars.
Of course, the EV makers sponsored research that says the complete opposite and I believe the truth lies somewhere in the middle.
Lithium mining is a source of pollution and can have negative environmental impacts. Used of damaged Lithium Ion batteries pollute as well.
Rivian said these projects could include activities tied to clean transportation, renewable energy, circular economy (i.e., recycling batteries/metals), energy efficiency, and pollution prevention.
Is this just a ruse to mask investors from its adjusted EBITDA loss of $5.22 billion in 2022?
Hard to say, yet I do know it is convenient to leverage its “green” image to wash the losses from their backs to get more time to figure out how to make the numbers work.
The company is forecasting another adjusted EBITDA loss of $4.3 billion for 2023 and that’s the real reason they need to tap the debt markets.
This EV maker is a cash-burn machine, and looking for someone to be the sugar daddy.
This is all happening while Rivian is developing its next factory in Georgia, where its next-generation R2 vehicles will be built. Rivian says production of that vehicle will start in 2026.
Ultimately, this company does make a good product, and reviews of the EV have been positive, but the management is doing a poor job with the financials.
They might run out of money before the Georgian factory is finished and I believe desperately seeking funding at the worst time in history has to do more with shoddy management and botched accounting.
In short, the stock has gone from $130 to $15 today and much of the negative news has been discounted into the price.
It’s been a constant sell-the-rally stock for quite some time, but I think that will finally reverse itself when RIVN gets into single digits and from that point, it has a good chance to bounce to $20 per share.
Long term, I would stay away for now until we get some confirmation of their balance sheet improving. Tech companies with woefully mismanaged balance sheets aren’t the place to hide right now because tech stocks are too volatile.
Global Market Comments
March 8, 2023
Fiat Lux
Featured Trade:
(INVESTING IN A STATE SPONSOR OF TERRORISM),
(AFK), (GAF), (EZA)
CLICK HERE to download today's position sheet.
With the US dollar about to peak out and resume a decade-long plunge, it’s time to think outside the box.
How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped?
Another country lost four wars in the last 40 years.
Still interested?
How about a country that suffers one of the world’s highest AIDs rates, endures regular insurrections where all of the Westerners get massacred and racked up 5 million dead in a continuous civil war?
Then, Africa is the place for you, the world’s largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo.
Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms.
Goldman Sachs has set up Emerging Capital Partners, which has already invested billions there. China sees the writing on the wall and has launched a latter-day colonization effort, taking a 20% equity stake in South Africa’s Standard Bank, the largest on the continent. There are now thought to be over one million Chinese agricultural workers in Africa.
The angle here is that all of the terrible headlines above are in the price, that prices are very low, and the perceived risk is much greater than actual risk.
Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. These numbers remind me of those found in Japan during the fifties, right after it lost WWII.
The reality is that Africa’s 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure.
For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It’s like the early days of investing in China in the seventies when the adventurous only played when they could double their money in two years because the risks were so high.
This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has 29% of its holdings in South Africa and 20% in Nigeria. There is also the SPDR S&P Emerging Middle East & Africa ETF (GAF). For more of a rifle shot, entertain the iShares MSCI South Africa Index Fund (EZA). Don’t rush out and buy these today. Instead, wait for emerging markets to come back in vogue. I will send you a trade alert when this is going to happen.
