Mad Hedge Biotech and Healthcare Letter
March 23, 2023
Fiat Lux
Featured Trade:
(OLD BUT GOLD)
(HUM), (UNH)
The entire point of investing is to place your hard-earned cash to work for you, hoping that one day you will no longer need to work just as hard. A growth investing strategy could deliver just that when executed correctly and offered sufficient time.
Choosing stocks that can survive and even thrive in just about any type of economic environment is typically a critical contributing aspect to the success of an investment strategy. While daunting, this step doesn’t need to be complicated. Investors simply need to focus on picking stocks under sectors of the economy that are vital.
Healthcare is one of the sectors that constantly perform well regardless of the turmoils happening across the globe. This is because patients depend on the goods and services this industry offers at all times.
Narrowing it down some more, the segment in the healthcare world that should be taken into consideration when selecting stocks is the health insurance sector.
The health insurance industry worldwide is projected to grow by 7.1% every year from an already whopping $1.7 trillion in 2022 to approximately $2.6 trillion by 2028.
For companies like Humana (HUM), focusing on older patients is a crucial strategy in dominating this sector.
To date, Humana has roughly 22.3 million members enrolled in its medical, vision, dental, and supplemental programs, ensuring that the company can sustain its operations and still have room to expand. This company has an impressive $64 billion market capitalization, ranking it as the fifth biggest health insurer in the world.
Humana’s pièce de rèsistance is Medicare Advantage. The plans provide seniors with sets of bundled benefits and charge a handful of out-of-pocket payments.
This segment generated around $73 billion in sales last 2022, with the insurance premium offerings comprising over 84% of the company’s revenue. The remaining 16% comes from its newly launched CenterWell platform, which offers pharmacy, home care, and primary care services to seniors. In terms of revenue, these figures put Humana in second place behind UnitedHealth Group (UNH).
Even considering the potential slowdown in adding new members, the sheer number of patients signing up for Medicare Advantage most likely won’t. At the moment, about 30 million of the total 60 million seniors in the United States alone subscribe to the plans, with the other 30 million anticipated to sign up eventually. On top of that, the number of senior patients is expected to keep climbing to reach 95 million by 2060.
Despite the incredible potential of this segment, Humana has more to offer than simply Medicare Advantage.
The health insurer is ramping its CenterWell venture by acquiring more physician practices. In 2022, the number of primary-care units handled by the company rose to 235 from the 206 centers recorded in 2021. Humana collaborates with them in searching for low-cost, reliable options for patients. This strategy is a win-win for both parties.
Although it’s still a tiny business compared to Humana’s Medicare Advantage system, the figures from the CenterWell segment look promising. In the fourth quarter of 2022, it reported $4.1 billion in sales with an operating margin of 6.4%. That’s beyond the health insurer’s anticipated margin for 2023, which was set at roughly 4.8%.
As CenterWell expands in terms of how much it contributes to Humana’s total, the company’s operating margin is predicted to grow to about 5.2% by 2026. This would indicate approximately 14% annual earnings per share growth through 2026.
Humana’s 0.6% dividend yield is a potential turnoff factor, which pales compared to the S&P 500’s 1.6%. Still, this isn’t necessarily bad if given the proper context. Over the past 10 years, Humana’s quarterly dividend paid per share has continuously tripled.
This is a promising indication, especially since the dividend payout ratio of Humana was only 12% in 2022. Hence, the company has nowhere else to go but up. This is because offering a conservative payout enables Humana to maximize its funds and focus on growing the business and strengthening its balance sheet. That’s clearly why the health insurer should have no problems delivering double-digit dividend boosts within the next few years.
Overall, Humana is a demonstrably excellent company, but the stock remains underrated. I suggest you exploit the market’s disinterest in this profitable business and 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
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
Global Market Comments
March 23, 2023
Fiat Lux
Featured Trade:
Trade Alert - (UNG) LEAPS – BUY
(UNG), ($NATGAS), (BOIL)
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
3-23-2023
expiration date: January 17, 2025
Number of Contracts = 1 contract
Natural gas has just given up its entire recent gain. Forecasts of mild spring weather and recession fears 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 a 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 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 errors. 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.
"The three most harmful addictions are heroin, carbohydrates, and a monthly salary," said Nassim Nicholas Taleb, author of Antifragile: Things That Gain from Disorder
Mad Hedge Technology Letter
March 22, 2023
Fiat Lux
Featured Trade:
(IF BITCOIN THEN GROWTH TECH TOO)
(COIN), (MSTR), (BTC), (DOCU), (TDOC)
We are closing in on $27,000 and that’s quite the performance for the digital gold Bitcoin (BTC).
It just was last year when Bitcoin was down in the dumps.
I am not here flogging crypto but tech investors should take heed of what is happening in the riskier parts of the asset markets.
Yes, tech growth is quite volatile, but bitcoin even more so.
The price of Bitcoin is already up 72% this year and that will beat most tech growth stocks including the Teledocs and DocuSigns of the world.
This last strong surge is correlated with global banking contagion with even very liberal-based CNBC stating that Switzerland has become a financial “banana republic.”
Bitcoin is often advertised as the alternative asset class to fiat banking precisely because fiat banking has a history of going to zero.
The blowups at Silicon Valley Bank, First Republic, and Credit Suisse offer credible evidence that the strength of the fiat money banking system is trending down rather than up.
Hence the monster rally and this will just make banking more expensive for the unbanked and give the big banks more power and more “too big to fail” status.
Narratives are more powerful in crypto in generating real price movements than any other asset class and no matter what your thoughts on how powerful that narrative is, people actually believe this.
Cryptocurrency initially attracted interest from a niche group of investors following bank failures and government rescues.
While its popularity has grown among speculative investors in the roughly decade-and-a-half since, it has retained a status among some as being an asset more removed from the banking system than stocks and government bonds.
If the Fed decides to slow down the pace of interest rate hikes this is highly bullish for the crypto and tech growth sector.
Crypto investors have been particularly sensitive to regulatory and interest-rate developments.
They tend to pull money from long-bitcoin funds while adding to short-bitcoin products after the Federal Reserve announces interest-rate increases and regulators take action against crypto companies.
Since regulators started to crack down on some of the biggest crypto players, investors have pulled about $424 million from global exchange-traded products.
It’s been a terrible year to short bitcoin as that trade was last year’s rich uncle.
An important part of investing is to avoid searching for that boat that has left the dock.
Investors betting against crypto exchange, Coinbase (COIN), and bitcoin-buying software intelligence firm, MicroStrategy (MSTR), were down 76% and 62%, respectively, this year.
Some investors remain cautiously optimistic about the trajectory of bitcoin’s price, especially as it has surged against the backdrop of a banking crisis.
Although there could be a vicious pullback from the epic surge so far this year, Bitcoin will likely do well along with tech growth stocks in a paused or lower rate interest environment.
Throw in the bank contagion as a supercharger and 2023 is shaping up to be a great year to buy bitcoin and growth tech on the dips.
