"I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones," said Nobel Prize winner Albert Einstein.
Mad Hedge Biotech and Healthcare Letter
May 23, 2023
Fiat Lux
Featured Trade:
(HUNTING FOR OPPORTUNITIES IN HEALTHCARE STOCKS)
(LLY), (NVO), (VTRS), (OGN), (MRK), (TEVA), (GI), (CNC), (PFE), (GILD), (AMGN)
I've been riveted by the healthcare sector's most extravagant stocks lately.
Just look at Eli Lilly (LLY), with its jaw-dropping market value of $412 billion, making it the richest pure-play biopharma company ever. And right on its heels is Novo Nordisk (NVO), boasting a market value of $377 billion. It's enough to make your head spin.
But if you're on the hunt for value, these sky-high prices might leave you feeling a bit queasy. That's why I embarked on a mission to uncover some hidden gems in the healthcare sector.
Now, don't get me wrong. These stocks may be cheap for a reason, and it's crucial to exercise caution. When it comes to investment opportunities, it's essential to separate the diamonds in the rough from the fool's gold.
Enter Viatris (VTRS), a rising star in the generic drug manufacturing arena that has caught the attention of savvy investors seeking long-term holdings. But is it the real deal, or just another flash in the pan?
Viatris shows potential with solid revenue from branded generics like Lipitor, Viagra, and EpiPens. These household-name medicines have a lasting market demand. Plus, its generous 5.2% dividend yield surpasses the market average.
But here's the catch: Viatris is currently undervalued and has yet to prove its growth potential. Its stock price took a hit, and sales in the core generic and branded segments dipped. However, there's hope in the pipeline.
With a range of injectable generic medicines awaiting approval, Viatris could be at the forefront of the market.
By 2027, these programs could yield over $1 billion in annual revenue. While not a game-changer for the company's overall revenue, it sets the stage for future earnings growth.
At this stage, I don’t see Viatris as a slam-dunk investment. However, monitoring their strategic plan to reduce debt, improve efficiency, and drive growth is prudent. It's a work-in-progress worth monitoring for future opportunities.
Another company that caught my attention is Organon (OGN), a recent spinout from Merck (MRK) that focuses on women's health and biosimilars. This hidden gem trades at an attractive valuation of just 4.8 times earnings.
Organon & Co. is a pioneering developer and provider of prescription therapies and medical devices catering to contraception and fertility needs.
The female contraceptive market is projected to experience robust growth, with a compound annual growth rate (CAGR) of 8.5% from 2022 to 2027. Notably, Organon is among the top 5 major corporations addressing the demands in this market segment.
But that's not all.
Organon boasts a diverse portfolio that extends beyond women's health. They also offer biosimilar immunology products, two oncology treatments, hypertension therapies, respiratory solutions, dermatology products, non-opioid pain management pills, and cures for male pattern hair loss.
On its first day of official existence, June 3, 2021, Organon's management proudly announced a lineup of over 60 drug products to enhance female health, along with Merck's (MRK) former biosimilars portfolio.
The biosimilars market is projected to soar to $44.7 billion by 2026, showing an impressive CAGR of 23.5%.
As expected, the biosimilars arena has become a bustling hub with both established and emerging companies eagerly entering the space. For instance, Teva Pharmaceutical Industries Limited (TEVA) has high hopes for its biosimilar drug targeting arthritis treatment, expecting it to boost Teva's revenue significantly.
Organon has already witnessed promising revenue growth from its biosimilar drugs, with a remarkable 17% increase amounting to $116 million.
Several drug sales have experienced a surge of over 30% in the United States, Canada, and Brazil. Moreover, Organon's brands have shown strong performance in China and the Asia Pacific/Japan region.
Investing in women's health is not only a wise choice; it's a strategic move that can yield significant rewards for individual investors and portfolios. With Organon's innovative solutions, broad product portfolio, and forward-thinking approach, it stands out as a compelling opportunity in the market.
Now, let's take a look at some intriguing names that have found their way onto the list.
We have health insurance behemoth Cigna Group (GI), trading at a mere 9.9 times earnings, alongside the health insurer Centene (CNC) at 10.3 times earnings. Not to mention the presence of renowned drugmakers Pfizer (PFE), Gilead Sciences (GILD), and Amgen (AMGN) gracing this list of bargain stocks.
These seemingly cheap healthcare stocks warrant close attention for the savvy investor seeking hidden gems. Sure, the term "cheap" can sometimes be misleading, but within these underappreciated names lies the potential for hidden value waiting to be discovered.
Global Market Comments
May 23, 2023
Fiat Lux
Featured Trades:
(THURSDAY, JULY 6 NEW YORK STRATEGY LUNCHEON)
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
CLICK HERE to download today's position sheet.
With the market now scraping the absolute top of the 2023 trading range, it’s time to revisit Short Selling School.
We are also solidly into the high-risk, low-return time of the year from May to November. Historically, the total return for the time of year or the past 70 years is precisely zero.
I, therefore, think it is timely to review how to make money when prices are falling. I call it Short Selling School 101
There is nothing worse than closing the barn door after the horses have bolted or hedging after markets have crashed.
No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media right at the next market bottom.
That is always how it seems to play out.
So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock prices are still rich.
Markets could be down 10% or more by the time this is all over.
There is nothing worse than fumbling around in the dark looking for the matches and candles after a storm has knocked the power out.
I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so.
Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:
Bear ETFs
Of course the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).
In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.
There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.
Still, individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (click here for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.
Virtually all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus), and the (DOG), which profits from a plunging Dow Average (click here for the prospectus).
My favorite is the (RWM), a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).
Leveraged Bear ETFs
My favorite is the ProShares UltraShort S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.
Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry this ETF, or you might be disappointed.
3X Leveraged Bear ETF
The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).
First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.
Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further adding to costs.
Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.
Buying Put Options
For a small amount of capital you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 on Thursday allows me to sell short $145,600 worth of large cap stocks at $182 (8 X 100 X $6.09).
Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these because when the market goes against you, put options can go poof and disappear pretty quickly.
That’s why you read this newsletter.
Selling Call Options
One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stock you already own but may not want to sell for tax or other reasons.
If the market goes sideways or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially they get called away, but at a higher price so you make more money. Then you just buy them back on the next dip. It is a win-win-win.
Selling Futures
This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risk for an entire portfolio of shares by simply selling short futures contracts for a stock index.
For example, let’s say you have a portfolio of predominantly large cap stocks worth $100,000. If you sell short 1 June, 2016 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.
The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem, and the losses can prove ruinous.
But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.
Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.
That said, get the futures markets right, and it is the quickest way to make a fortune if your market direction is correct.
Buying Volatility
Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it through buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.
If markets fall, volatility rises, and if markets rise, then volatility falls. You can therefore protect a stock portfolio from losses through buying the (VIX).
I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.
Selling Short IPOs
Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands, known as “flippers,” don’t have a broad institutional shareholder base.
Many of the recent ones don’t make money and are based on an, as yet, unproven business model. These are the ones that take the biggest hits.
Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus). So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).
Buying Momentum
This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum while falling markets produce falling momentum.
So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.
Buying Beta
Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.
The Index is compiled, maintained, and calculated by Standard & Poor's and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.
The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.
Buying Bearish Hedge Funds
Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.
One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.
Oops, Forgot to Hedge
(A TANDEM SOLAR PANEL COULD BE THE FUTURE)
May 22, 2023
Hello everyone,
We all know about solar panels. Some of us have them. Some of us don’t.
Is there a chance we can make them more efficient?
Bill Gates seems to think so.
His Breakthrough Energy Ventures is exploring the mineral perovskite, which was found about 200 years ago, to see if it can lead to a new, more efficient leader in solar energy.
Apparently, perovskite has a crystal-like structure that could transform sustainable energy by boosting the efficiency of commercial solar panels.
Solar panels accounted for nearly 5% of U.S. energy production last year, up almost 11-fold from 10 years ago and enough to power about 25 million households. Nearly all the solar modules that are used in power generation today consist of conventional silicon-based panels made in China, a technology that has changed little since silicon cells were discovered in the 1950s.
Other materials used, like gallium arsenide, copper indium gallium selenide and cadmium telluride – the latter a key to the largest U.S. solar company First Solar’s growth - can be very expensive or toxic. Backers of perovskite-based solar cells say they can outperform silicon in at least two ways and accelerate efforts in the race to fight climate change. Just this week, First Solar announced the acquisition of European perovskite technology player Evolar.
How does it all work and what are the barriers in silicon-based solar panels?
Photovoltaic cells convert photons in sunlight into electricity. But not all photons are the same. They have different amounts of energy and correspond to different wavelengths in the solar spectrum. Cells made of perovskites, which refer to various materials with crystal structures resembling that of the mineral, have a higher absorption coefficient, meaning they can grab a wider range of photon energies over the sunlight spectrum to deliver more energy. While standard commercial silicon cells have efficiencies of about 21%, laboratory perovskite cells have efficiencies of up to 25.7% for those base don perovskite alone, and as much as 31.25% for those that are combined with silicon in a so-called tandem cell.
Sustainability and cost are also brought into the frame. Perovskite cells can be more sustainable to produce than silicon. Intense heat and large amounts of energy are needed to remove impurities from silicon, and that produces a lot of carbon emissions. It also has to be relatively thick to work. Perovskite cells are very thin – less than 1 micrometre – and can be pained or sprayed on surfaces, making them cheap to produce. A 2020 Stanford University analysis of an experimental production method estimated that perovskite modules could be made for only 25 cents per square foot, compared to about $2.50 for the silicon equivalent.
It looks like many industries in all corners of the world will start production lines in factories for the commercialization of their solar cells before 2025. And it looks like the tandem module will become a breakthrough climate technology. CubicPV has been backed by Bill Gates’s Breakthrough Energy Ventures and they have been developing these tandem modules since 2019.
A tandem module is one which has a bottom silicon layer and a top perovskite layer, and their efficiency can reach as much as 30%. And there are advantages. CubicPV argues that the company’s perovskite chemistry and its low-cost manufacturing method for the silicon layer make the tandem approach economical. CEO of CubicPV, explains that tandem extracts more power from the sun, making every solar installation more powerful and accelerating the world’s ability to curb the worst impacts of climate change. Furthermore, he believes that the entire industry will switch to tandem within the next decade.
How do these cells perform outside a lab environment?
And will the tandem cells have the required stability to be commercially viable?
Japan seems to think so.
They are now building these panels into walls and windows in their buildings.
Exhibited at CES 2023, Panasonic’s 30 cm-square perovskite-only cell has an efficiency of 17.9%, the highest in the world, according to a ranking from the U.S. National Renewable Energy Laboratory. Panasonic says it aims to commercialize its perovskite cells in the next five years.
Perovskite cell inventor Miyasaka believes perovskite-based power generation will account for more than half of the solar cell market in 2030, not by replacing silicon but through new applications such as building walls and windows.
It looks like this mineral could be a big contributor to realizing a self-sufficient sustainable society.
Welcome to a new week.
Have a good one.
Cheers,
Jacquie
Mad Hedge Technology Letter
May 22, 2023
Fiat Lux
Featured Trade:
(BUY EMERGING CHIP COMPANIES ON BIG DIPS)
(SWKS), (CRUS), (QRVO)
So what about these small chip companies that attach themselves to Apple’s future?
The ones like Qorvo (QRVO), Skyworks Solutions (SWKS), and Cirrus Logic (CRUS).
Many refuse to invest in them because they are too reliant on Apple.
I would argue the exact opposite.
It’s exactly because they have strong relationships with Apple that readers need to invest in these stocks.
The issue is that they are highly volatile and missing the optimal entry point can mean the difference between a profit and a loss.
Apple can’t develop everything internally.
It’s just too much to do.
I don’t believe the tech giant could gradually replace most of its third-party components with first-party ones.
Furthermore, I do not see Apple abruptly swapping suppliers or canceling an existing supplier's orders with its competitors to secure lower prices.
As a result, most of Apple's suppliers can negotiate favorable terms.
For 2023, iPhone shipments appear stable as the market continues to recover from weak demand and ongoing macroeconomic challenges, but I believe this is just a short-term blip.
Cirrus Logic mainly sells audio converters and chips, but it also develops other mixed-signal processing chips for wireless headsets, wearables, augmented reality/virtual reality (AR/VR) headsets, notebook computers, and mobile devices. Apple installs Cirrus' audio chips and IC controllers in its iPhones, iPads, and Macs.
Skyworks produces a wide range of wireless chips for the mobile, automotive, home automation, wireless infrastructure, and industrial markets. Apple installs Skyworks' wireless chips in its iPhones, iPads, Macs, Apple Watches, and other devices.
Lumentum is a diversified supplier of optical chips for service providers, 3D-sensing chips which are used in mobile devices, cars, 3D printers, and other industrial machines, as well as commercial lasers for manufacturing various products. Apple uses Lumentum's 3D-sensing chips and lasers to power its Face ID features.
These companies bask in the glory of being connected to Apple when many other chip companies wish they were in the same position.
Cirrus relied on Apple for 79% of its revenue in 2022 and the gains from this contract are precisely why it is great to hold this company's stock.
Skyworks generated 58% of its revenue from Apple in fiscal 2022, while Lumentum generated 29% of its revenue from Apple in 2022.
The semiconductor industry has been prone to cycles. Periods of soaring demand are followed by periods of drought, causing some wild swings in many chip stocks. But some news reports predict that because of the demand for chips throughout the economy, these boom-bust cycles might be over.
Semiconductors are now going into various devices between 5G, cloud datacenters, phones, PCs, laptops, cars are using more and more semiconductors that the demand is becoming so diversified and that supply is becoming so expensive to bring on. It's going to be much more of a steadier business going forward, more like a steady growth business rather than a cyclical business with booms and busts.
Don’t believe the naysayers who urge investors to stay out of chip stocks because of overreliance. That is like saying Warren Buffet is too reliant on Apple which is false.
Wait for a big dip of 15% or 20% to invest in these small chip stocks.
“The AI technology will keep you out of harm's way. That is why we believe in an AI car that drives for you.” – Said CEO of Nvidia Jensen Huang
Global Market Comments
May 22, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or CONCENTRATION OF WEALTH AT THE TOP)
(AAPL), (GOOGL), (AMZN), (MSFT), (NVDA), (TSLA), ($VIX), (JPM), (BAC), (C)
CLICK HERE to download today's position sheet.