Mad Hedge Biotech and Healthcare Letter
October 19, 2023
Fiat Lux
Featured Trade:
(THE UNSUNG HERO OF PHARMA DISTRIBUTION)
(MCK), (CI), (UNH), (PFE), (MRK), (LLY), (NVO), (CAH), (COR)
McKesson (MCK) is the silent behemoth of the U.S. corporate world that's likely slipped under your radar. As the ninth-largest U.S. company by revenue, it doesn’t grab the headlines like some of its pharmaceutical peers. However, with a robust 22% stock gain this year alone, investors might want to sharpen their focus on this quiet achiever.
Now, you might mistake McKesson for a pharmacy benefit manager like Cigna Group's (CI) Express Scripts or UnitedHealth Group’s (UNH) OptumRx. But it doesn't stand shoulder-to-shoulder with pharmaceutical giants such as Pfizer (PFE) or Merck (MRK). Instead, its pivotal role ensures that prescription medications, consumed by a large fraction of Americans, reach their intended destinations.
Their operational model cuts through the noise: acquire medications from manufacturers and deliver them seamlessly to pharmacies. This spans local establishments and major national chains, including stalwarts like Walmart (WMT) and CVS Health (CVS).
Distributing medications is intricate. Not any logistics company can step up to the plate. These drugs, strictly governed by regulations, demand precision in handling and transit. Specific conditions are mandatory to retain their efficacy and, ultimately, their trust with consumers.
Newcomers in the pharmaceutical space, such as Ely Lilly’s (LLY) Mounjaro and Novo Nordisk’s (NVO) Ozempic, are set to further accelerate McKesson's growth trajectory. McKesson's operations, in tandem with Cardinal Health (CAH) and Cencora (COR)—the former AmerisourceBergen—underscore the dominance of this trio in the industry.
Given their consistent performance and notable market share, there's no mistaking their leadership. From an investor's lens, their well-established distribution networks translate to attractive returns.
The narrative enveloping McKesson has matured, particularly in the wake of the pandemic. Pre-COVID-19, the air was thick with concerns – potential drug price regulations, whispers about executive remuneration, and the ever-looming shadow of opioid liabilities.
In recent history, McKesson navigated tumultuous waters. They confronted their role in the opioid saga, culminating in a staggering $7.4 billion settlement spanning two decades. Such a settlement, rooted in claims of McKesson's hand in opioid distribution, marked a challenging chapter in the company's journey. But, like all resilient entities, they emerged with lessons and a sharper focus.
Refocusing on its core competency in drug distribution, the future projections for McKesson radiate optimism. Sales are on track for a 10% rise by fiscal 2024, aiming for the $304 billion mark. On the earnings front, a hike of 4.8% is forecasted, reaching $27.20 a share, followed by a notable ascent to 13.4% in fiscal 2025 – a jump to $30.84 a share.
While profit margins have hovered around the 4.8% range over half a decade, the company's cash flow paints a promising picture. With a robust $5 billion cash flow from the previous fiscal year, the announcement of a $6 billion share repurchase plan indicates a stronger, more liquid financial position.
McKesson’s journey, past and present, casts it as a promising investment, both for its operational prowess and its strategic repurchase blueprint. Examining its financial statements reveals a commendable reduction in net debt over the past triennium.
When McKesson is pitted against the likes of Cardinal and Cencora, optimism for its prospects feels natural. Projections indicate a growth rate between 12-14% in the years on the horizon, potentially crowning it as an industry vanguard. Valued at 15.6 times forward earnings, even if it inches above its five-year mean, the stock's appeal remains intact. Given its robust growth metrics, the stock seems a potential bargain, especially when juxtaposed with fellow S&P 500 members.
And there's more in the mix. With McKesson poised to ride the wave of prescription surges, particularly from premium medications like Ozempic, Wegovy, and Mounjaro, revenue streams seem destined for an upward course. A sentiment echoed by industry comrades, Cardinal and Cencora.
To encapsulate, in the expansive tableau of the pharmaceutical sector, where innovation meets timely delivery, McKesson etches its mark. As the healthcare matrix continues its evolution, especially in a world reshaped by a pandemic, the resilience and growth story of McKesson becomes hard to sidestep for the discerning investor. It's high time investors pivot their gaze towards this under-the-radar giant, poised for more milestones.
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
October 19, 2023
Fiat Lux
Featured Trade:
(WHO WAS THE GREATEST WEALTH CREATOR IN HISTORY?)
(FB), (AAPL), (GOOG), (AMZON),
(XOM), (BRKY), (T), (GM), (VZ), (CCA),
(WHY DOCTORS MAKE TERRIBLE TRADERS?)
Who’s been buttering your bread more than any other?
Which publicly listed company has created the most wealth in history?
I’ll give you some hints.
The founder never took a bath, was a devout vegetarian, and dropped out of college after the first semester. The only class he finished was for calligraphy. And he was a first-class asshole.
Silicon Valley residents will immediately recognize this character as Steve Jobs, the co-founder of Apple (AAPL).
In 43 years, his firm created over $3 trillion of wealth for his shareholders, making it the largest in the world.
Until a decade ago, Exxon (XOM) held the top spot, creating $900 million in new wealth, although to be fair, it took 100 years to do it.
To be completely and historically accurate, most of the original seven sister oil companies are decedents of John D. Rockefeller’s Standard Oil Company.
Add the present value of these together, and Rockefeller is far and away the biggest money maker of all time. And he made most of this before income taxes were invented in 1913!
Reviewing the performance of other top-performing companies, it is truly amazing how much wealth was created from a technology boom that started in the 1980s.
Investors’ laser-like focus on the Magnificent Seven is well justified.
That’s why I often tell guests during my lectures around the world that if they really want to be lazy, just buy the ProShares Ultra Technology ETF (ROM) and forget everything else.
Another college dropout’s efforts, those of Bill Gates Microsoft (MSFT), produced an annualized return of 25% since 1986. That made him the third greatest wealth creator in history.
It also made him the world's richest man, until Jeff Bezos and Elon Musk came along. Gates is thought to have single-handedly created an additional 1,000 millionaires as so many employees were aided in stock options.
Facebook (FB) is the youngest on the list of top money makers, creating an annualized 34.5% return since it went public in 2012.
Alphabet (GOOG) is the second newest on the list, racking up a 24.9% annualized return since 2004.
Amazon (AMZN) is 14th on the list of all-time wealth creators and has just entered its 20th year as a public company.
Being an armchair business and financial historian, many runners-up were major companies in my day, but generate snores among Millennials now.
Believe it or not, General Motors (GM) still ranks as the 8th greatest wealth creator of all time, even though it went bankrupt in 2008.
Ma Bell or AT&T (T) ranks number 17th but was merged out of existence in 2005. A regrouping of Bell System spinoffs possesses the (T) ticker symbol today.
Among its distant relatives are Comcast (CCV) and Verizon Communications (VZ).
Warren Buffet’s Berkshire Hathaway (BRKY) ranks 12th as an income generator, with an annualized return of only 11.94%.
Its performance is diluted by the low returns afforded by the textile business before Buffet took it over in 1962. Buffet’s returns since then have been double that.
Analyzing the vast expanse of data over the last 100 years proves that single stock picking is a mug's game.
Since 1926, only 4% of publically traded stocks made ALL of the wealth generated by the stock market.
The other 96% either made no money to speak of, or went out of business.
This is why the Mad Hedge Fund Trader focuses on only 10%-20% of the market at any given time, the money-making part.
In other words, you have a one in 25 chance of picking a winner.
A modest 30 companies accounted for 30% of this wealth, while 50 stocks accounted for 40%.
You can only conclude that stocks make terrible investments, not even coming close to beating the minimal returns of one-month Treasury bills, a cash equivalent.
It also is a strong argument in favor of indexed investment in that through investing in all major companies, you are guaranteed to grab the outsized winners.
That is unless you follow the Diary of a Mad Hedge Fund Trader, which picked Amazon, Apple, Facebook, Google, NVIDIA, and Tesla right out of the gate.
If you want to learn more about the number crunching behind this piece, please visit the research of Hendrik Bessembinder at the W.P. Carey School of Business at Arizona State University.
Such a Money Maker!
At one of my recent Strategy Luncheons, I had the pleasure of sitting next to an anesthesiologist who was a long-time reader of my research.
As much as he loved the Diary of a Mad Hedge Fund Trader, he confided in me that his trading results were awful.
I told him I knew why.
Doctors, scientists, aircraft pilots, and even anesthesiologists all share the same bedeviling problem as trading dilettantes.
As smart as they are to plow through 12 years of college studying subjects of mind-numbing difficulty, obtaining MDs, PhDs, and ATPL licenses, they are terrible when it comes to trading their own stock portfolios.
A doctor friend once confessed to me that as fast as he was taking money in at his seven-digit a year private practice, he was shoveling it out the door in trading and investment losses.
And if he got mad at it, or grew stubborn, the losses then compounded. He considered it a disease, or an addiction.
I have to admit that I once suffered from the same malady, as I was originally trained as a scientist and mathematician.
That is until I identified the problem and dealt with it.
And here is the dilemma.
Science, medicine, and flying high performance aircraft all require tremendous degrees of precision. The practitioners have to be exactly right about everything all the time.
If they aren’t, people die.
Let me give you some examples.
I happen to know that the daily dosage for the heart drug, Digitalis, is 0.25 mg per day. If you accidentally raise that to 0.50 mg, you die, especially if you have a small body weight.
I also happen to know that the stall speed of a Boeing 787 Dreamliner is 125 miles per hour. At 126 miles per hour, everything is fine.
But at 124 miles per hour, you risk stalling on approach, crashing, and killing everyone aboard, especially if it is hot and humid, wind shear is present, and you are overweight.
So as far as doctors are concerned, the premium is on precision.
This absolutely does NOT work in the stock market.
For precision means buying stocks at their absolute lows and selling them at the perfect top ticky highs. The problem is that this is impossible.
I have been trading stocks for 55 years and can think of only a handful of times when I nailed the perfect highs and lows. When I did, it was purely because of random chance.
By insisting on perfection in his stock execution, doctors miss every trade. They then get frustrated and chase the market, throwing all discipline out the window. This is where the losses ensue.
I can almost see the knowing nods of agreement out there.
It gets worse.
Doctors are used to working with a perfect set of facts, a lab report, a pulse rate, a temperature, or an MRI scan.
In the stock market, you have to deal with the fog of war.
The facts you have at hand may or may not be true. New, contradictory information is getting dumped on you all day long. And the guy on TV is usually telling you the exact opposite of what you should be doing.
After a couple of decades, you get used to operating in a world of uncertainty.
You learn which information sources to trust and which ones to ignore when the fur starts to fly.
After much practice, you learn how to make the right decision when push comes to shove.
Unless doctors work in an emergency room or in combat with the military, they don’t get to learn how to make decisions in the fog of war.
To them, it all seems like a mass of confusing and conflicting information. For the perfectionist, it’s their worst nightmare.
No wonder they lose money.
So doctors have three choices when it comes to their investment portfolio.
They can index, balance stocks against bonds, and get used to subpar returns.
They can hand it over to a professional financial advisor, out of harm’s way.
Or they can learn the tricks of the trade that I have, which is the purpose of this newsletter. If you learned from my own half-century accumulation of mistakes, you don’t have to repeat them yourself.
Your portfolio will love it!
Now that I have your attention, I have this new pain in my right hip that has been bothering me ever since I was in Ukraine.
Trading in the Fog of War
When you look at the size of the US workforce over the next 30 years, it is going to increase by 30%. That compares to Japan, where it is going to be shrinking, Europe, where it is contracting, and even China, where it turns down. The idea that the baby boomers are going to overwhelm this huge growth in the workforce is a myth,” said Scott Minerd of money manager Guggenheim Partners.
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 Technology Letter
October 18, 2023
Fiat Lux
Featured Trade:
(THE MORAL HIGH GROUND MANIFESTO)
(ABNB), (META), (VENTURE CAPITALISM)