Mad Hedge Biotech and Healthcare Letter
June 13, 2023
Fiat Lux
Featured Trade:
(BUCKING THE TREND)
(VRTX), (ABBV), (CRSP)
The notion of "Sell in May and go away" hasn't exactly proven true this year in 2023. Surprisingly, the stock market has been experiencing an impressive upward trend, especially in June, and there may still be further potential for growth.
Allow me to share one of my favorite examples that embody both profitability and consistent expansion, all while enjoying a significant competitive edge.
In the biotechnology and healthcare sector, Vertex Pharmaceuticals (VRTX 1.94%) fits the description perfectly.
This company stands out as the undisputed leader in the market for cystic fibrosis treatments, offering a unique portfolio of drugs that specifically target the underlying cause of this genetic condition.
These groundbreaking medications, known as CFTR modulators, have successfully been introduced to the market, with Vertex Pharmaceuticals spearheading the way by bringing forth four of them.
Vertex has been continuously making remarkable progress in the field of cystic fibrosis (CF) treatment.
A notable achievement is the expanded approval of their drug, Kalydeco, by the U.S. Food and Drug Administration. It can now be used to treat CF patients as young as one-month-old, marking a groundbreaking milestone as the first CFTR modulator ever approved for this age group.
Kalydeco has also been a significant revenue generator for Vertex, ranking as their second highest-earning drug with an impressive $553 million generated over 12 months.
But there's more to Vertex's success.
Their flagship medication, Trikafta, takes the lead as their best-selling drug, raking in a staggering $7.7 billion in revenue in 2022 alone.
Recently, Trikafta received approval to treat children as young as two years old with specific mutations, providing relief to nearly 1,000 more individuals in the cystic fibrosis patient community.
The long-lasting patent protection of Trikafta, with approximately 14 years remaining before expiration, holds great significance for Vertex Pharmaceuticals. With a relatively modest patient population of 88,000, the company has ample opportunities for further growth.
The robust revenue and profits of Vertex's CF franchise speak to their success in this area. Additionally, AbbVie's (ABBV) decision to discontinue its CF program further solidifies Vertex's monopoly in the cystic fibrosis field, strengthening its position for continued success.
While capitalizing on the expanding market for cystic fibrosis treatments, Vertex Pharmaceuticals also targets underserved areas to drive long-term growth.
One promising drug candidate in their pipeline is VX-548, a non-opioid medication designed to address acute pain conditions, which is nearing commercialization.
Moreover, Vertex has a highly promising candidate in its pipeline that goes beyond cystic fibrosis.
Collaborating with CRISPR Therapeutics (CRSP), the company eagerly awaits regulatory approvals for exa-cel, an innovative treatment for sickle cell disease and transfusion-dependent beta-thalassemia, in both the United States and Europe.
Exa-cel represents just the tip of the iceberg when it comes to Vertex's upcoming arsenal of new drugs.
The company holds great optimism for VX-548, a cutting-edge non-opioid therapy targeting acute pain, as well as its triple-drug combination for cystic fibrosis, which features vanzacaftor.
Both treatments are undergoing Phase III trials, with expectations for completion in late 2023 or early 2024.
Additionally, Vertex is conducting a pivotal trial for inaxaplin, a potential treatment for APOL1-mediated kidney disease that impacts a larger patient population than cystic fibrosis.
Needless to say, Vertex has been experiencing an exceptional streak, consistently outperforming the market over the past year. The best part is that its potential to generate significant returns extends well into the next decade.
While Vertex possesses a variety of potential approvals for treating cystic fibrosis, some of which may materialize before 2028, its CF-related revenue is expected to grow substantially even without factoring in those additional approvals.
Analysts anticipate a solid annual increase of 8.2% in the company's overall revenue over the next five years. Although this growth rate is commendable for a biotech industry heavyweight, it falls short of Vertex's impressive 38% annual growth achieved in the previous five years.
From my perspective, the projected 8.2% growth appears rather conservative.
This sentiment is particularly amplified when considering the imminent potential approval of exa-cel, an innovative gene-editing therapy targeting sickle cell disease (SCD) and beta-thalassemia (TDT).
After all, the initial market value of exa-cel could soar to a staggering $64 billion, and given the life-altering impact it offers, a price tag of approximately $2 million per treatment is justifiable.
Honestly, I'm hard-pressed to find anything negative to say about Vertex. This prominent biotech company is constantly delivering positive news and making significant strides on all fronts. 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
June 13, 2023
Fiat Lux
Featured Trades:
(Trade Alert - (X) LEAPS – BUY)
CLICK HERE to download today's position sheet.
BUY the US Steel (X) December 2025 $20-$23 at-the-money vertical Bull Call spread LEAPS at $1.29 or best
Opening Trade
6-13-2023
expiration date: December 19, 2025
Number of Contracts = 1 contract
I normally don’t look at industries that are besieged by foreign competition, undercut by cheap imports, bedeviled by union problems, are major polluters, and whose principal product has declined in output by 32% since 1970, from 140 million tons a year to only 94.7 million tons.
However, I learned a lot covering the Japanese steel industry for Rupert Murdoch’s Australian newspaper for a decade during the 1970s.
In fact, I learned so much that President Jimmy Carter offered to appoint me as Deputy US Secretary of the Treasury for International Affairs so I could negotiate a steel pact with Japan. I turned the job down because as a G-15 I would only earn $15,000 a year.
Did I also mention that I was a dummy in the 1970s?
Walking in and out of steel mills all over the world for a decade there is one thing I learned for sure. There is no better call on the global economy.
US Steel (X) is the largest steel producer in the United States. In 2022, (X) knocked out 22.4 million tons of steel. Over the last 53 years, it has dealt with the onslaught of competition from Japan and China by becoming the most efficient blast furnace steel producer in the world.
As a result, (X) is highly leveraged to any increase in global steel demand. Its principal customers are the auto, construction, housing, shipbuilding, and oil industries.
(X) is in the half of the stock market that is currently discounting a deep recession. If we get one, the current share price is justified. If we don’t, the shares are overdue for a nice run-up. That makes (X) an ideal LEAPS candidate.
To learn more about US Steel, please visit their website at https://www.ussteel.com
I am therefore buying the US Steel (X) December 2025 $20-$23 at-the-money vertical Bull Call spread LEAPS at $1.29 or best.
Don’t pay more than $2.00 or you’ll be chasing on a risk/reward basis.
If you are looking for a cheap lottery ticket, then here is a lottery ticket.
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 more than 2:1. That is the probability that US Steel (X) shares will rise over the next 32 months.
If you want to get more aggressive with more leverage, use a pair of strike prices higher up. This will give you a larger number of contracts at a lower price.
Please note that these options are illiquid, and it may take some work to get in or out. Start at my price and work your way up until you get done. Executing these trades is more an art than a science.
Let’s say the US Steel (X) December 2025 $20-$23 at-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $1.25-$2.00. Enter an order for one contract at $1.30, another for $1.40, another for $1.50, 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.
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 if (X) shares are slightly higher than unchanged in 32 months it will generate a 132.6% profit with this position, such is the wonder of LEAPS.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it until you find the real price.
This is a bet that US Steel will close above $23 by the December 19, 2025 options expiration in 32 months.
Here are the specific trades you need to execute this position:
Buy 1 December 2025 (X) $20 call at……..…….………$9.00
Sell short 1 December 2025 (X) $23 call at……….……$7.71
Net Cost:………………...........………….………..…….….....$1.29
Potential Profit: $3.00 - $1.29 = $1.71
(1 X 100 X $1.71) = $171 or 100% 32 months.
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Mad Hedge Technology Letter
June 12, 2023
Fiat Lux
Featured Trade:
(GREEDFLATION WINS OUT)
($COMPQ), (UBER)
Tech companies are doing well and so is the overall stock market.
It doesn’t make sense to listen to all the doomsday personalities going on national TV to scare us out of making money.
Just zone them out – they are useless.
Back in the real world, the excellent performance is great news for holders of US tech stocks who have been carrying the load in 2023.
The tech-based Nasdaq index ($COMPQ) has returned 27% YTD and anyone betting on an “earnings recession” has had their head handed to them.
Mr. Market has continued to look through any risk presented and shrugging it off like it doesn’t matter.
We have been waiting for that recession which hasn’t arrived for almost 3 years now.
People will have to continue to wait too as the job numbers have been excellent.
Instead, we should focus on why tech companies are doing so well and what makes their balance sheets tick.
In a widespread industry survey, 89% of respondents said US companies have been raising prices in excess of their own costs since the pandemic began in 2020. Almost four out of five said that tight monetary policy is the right way to tackle profit-led inflation.
The surge in corporate markups cannot be understated and tech companies have done exceptionally well with Uber (UBER) rides more costly as just one little example among many.
Margins soared in the initial pandemic years, and have defied convention by remaining historically high since then.
The unique circumstances of the pandemic – severe supply constraints, followed by an unprecedented burst of stimulus-fueled demand – lie behind the widening of profit margins, which hit 70-year highs in the US.
Even if margins come down a little because customers start to balk at high prices, the price reductions will be most likely incremental.
Standard economic theory holds that profit margins are “mean-reverting’’ – in other words, they tend to be pulled back to normal levels. It’s supposed to work like this: An industry with high profits should attract new entrants, with increased competition forcing margins lower.
However, many tech companies are operating as de-facto monopolies in their subsector and possess an unprecedented amount of pricing power for the products they sell.
This has led to the idea more colloquially known as “greedflation.’’
Until a rising backlash against monopolies or oligopolies triggers buyer protests, the tech playbook should be to buy those companies that look most similar to monopolies.
Ultimately “greedflation’’ is great for holders of tech stocks and not necessarily good for US consumers.
Clearly, there is a profit honeymoon with the likes of big tech raking in the dough.
They can even push out aggressive and abstract products like the Apple VR headset for $3,500 per clip.
That’s not a defensive strategy as well as absorbing billions to develop the product.
Coupled with the lust for anything generative AI, the conflation with higher margins has triggered a momentous rally in tech stocks.
As we narrow down our paths for the rest of the year, a demonstrative easing cycle is setting up promising to catapult tech stocks another leg up from current levels.
The considers that inflation is dropping fast from 5% to 4% and projections could find us in the 3%-ish range in the next month or two which is a strong tailwind for tech stocks.
It’s hard to see where the sellers come in and I would continue to buy every small dip in every quality tech stock name.
“Take risks now. Do something bold. You won’t regret it.” – Said CEO of Tesla Elon Musk
(SUMMARY OF JUNE 7, 2023, MAD HEDGE WEBINAR)
June 12, 2023
Hello everyone,
Hope you had a wonderful weekend.
Welcome to a new week.
Title: The Next Rotation is Here
The Mad Hedge Traders and Investors Summit. Don’t forget to register.
Lunches
July 6 New York
July 13 Seminar at Sea
July 19 London
Trade Alert Performance
June 0.01%
2023 year to date +61.74%
+658.93% since inception
40 out of 44 trade alerts profitable.
Trading opportunities very few.
Positions
TSLA 6/120-130 call spread 10%
FCX 6/32-35 call spread 10%
20% long
80% cash
VIX – at $13.
Method to My Madness – A Bipolar Market
Equity allocations are at a 15 year low with massive amounts of cash in 90-day T-bills.
Expect funds to pour into stocks in the second half of the year as per the Mad Hedge play book.
Big rotation out of cash into Industrials, commodities and energy is near.
Bonds weaken – looking for another 0.25% rise June 14th.
Summer will present the best buying opportunity of the year. Precious metals and commodities should be at the top of your list.
Global Economy
Non-farm payroll soars by 339,000 in May for the 10th consecutive month of increases.
Unemployment jumped 0.3% to 3.7%.
The biggest rise in unemployment for three years.
Inflation continues to fall 0.4% in April.
China’s PMI dives – struggling out of the post-covid world.
Stocks
They are not reflecting the massive increase in earnings and the large multiple expansion.
Record $8.5 billion poured into tech stocks last week – “the Magnificent Seven”.
Don’t forget to take profits in tech if you are a short-term trader.
Tech could move sideways before the next move up.
Rotate into commodities, industrials, and energy.
If a Black Swan decides to land on us, it could take the S&P500 down 17-20%.
“The Magnificent Seven” has made new highs for the year. (Apple, Google, Meta, Amazon, Salesforce, Nvidia, and Tesla).
LEAPS candidates
CAT Caterpillar
FCX Freeport McMoran
X US Steel
GS Goldman Sachs
MS Morgan Stanley
Bonds
Bonds plunge on a red-hot May non-farm payroll, which suggests another quarter point interest rate rise from the Fed at the June or July meeting.
Fitch puts US debt on credit watch. First time since 2011 Moody’s downgrades from AAA to AA+.
Treasury to issue $1 trillion in Y-bills within weeks after debt ceiling deal, pushing short-term yields up.
Keep buying 90-day T-bills now pushing a 5.2% risk-free yield.
Looking for 2.5% yield by the end of 2023.
June bond ETFs (JNK) and (HYG) are a great high-yield play.
Foreign Currencies
US$ jumps on May nonfarm payroll suggesting another ¼ point interest rate hike from the Fed at the June13-14 meeting.
Any strength in the dollar will be temporary.
Rapidly worsening economic data sparking recession fears.
10 consecutive months of inflation is another indicator of a slowdown.
Looking for new dollar lows by the end of 2023.
Buy FXE, FXB, FXY, and FXA on dips.
Energy and Commodities
Saudi Arabia cuts again adding another 1 million barrels a day reduction to the existing 2 million one.
The goal is to prevent a price collapse in the face of a slowing global economy.
Oil collapse is signaling a recession as is weakness in other commodities, even lithium.
Tesla becomes world’s largest selling car.
Buy (USO) on dips as an economic recovery play.
China expects LNG price spike later this year due to coming supply shortages and a recovering economy.
Precious Metals
Fear of rising interest rates causing metals to drop and bounce around a lot.
JP Morgan recommends adding cash and Gold.
Gold headed to $3000 by 2025.
Soon-to-be falling interest rates is the main driver here, and the winter season in crypto.
Silver has a higher beta and is a better play.
Russia and China are also stockpiling gold to sidestep international sanctions.
LEAPS candidates
GOLD Barrick Gold
GDX VanEck Vectors Gold Miners ETF
SLV iShares Silver Trust ETF
WPM Wheaton Precious Metals
Real Estate
30-year fixed rate mortgage jumps back to 7.0%.
Worst case, home prices go sideways from here until lower interest rates launch a new bull market in housing.
Home builder sentiment up for the 10th straight month, as it will be for the next decade.
CCI – Crown Castle International – great income play, with 5.50% yield.
Next Webinar is on June 21, 2023.
Wishing you all a week filled with adventure and wonder.
Cheers,
Jacquie
Global Market Comments
June 12, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BULL MARKET IS BACK!)
($VIX), (X), (FCX), (TSLA)
CLICK HERE to download today's position sheet.