Ever stumble upon a treasure chest you almost walked past? That's how I feel about Eli Lilly (LLY) these days. When I last weighed in on LLY earlier this year, I was hesitant, pretty much like a seasoned sailor eyeing stormy seas.
The stock's valuations at the time were sky-high, especially when stacked against its arch-rival Novo Nordisk A/S (NVO). But the market, ever the trickster, loves to flip the script when you least expect it.
Since May, LLY has soared by an impressive 24.5%, leaving most of its pharmaceutical peers scrambling in its wake. Only Viking Therapeutics (VKTX) has managed to keep pace in this high-stakes race.
So, what's ignited this rocket?
For starters, Eli Lilly finally ironed out the kinks in its supply chain. By early August 2024, the shortages plaguing their weight-loss blockbuster, Mounjaro, were a thing of the past.
Those bottlenecks had put a damper on Mounjaro's performance in the first half of 2024, but now the gates have swung wide open.
But that's not all. LLY's got some serious production muscle coming online from the first half of 2025. This isn't just adding fuel to the fire — it's like pouring jet fuel on a bonfire.
That means we could see Mounjaro and Zepbound sales shooting for the moon in late 2024.
Now, here's the masterstroke. In January 2024, Eli Lilly launched LillyDirect, a direct-to-consumer platform that's nothing short of ingenious.
By slashing prices for self-pay patients on Zepbound, they're not just expanding their market reach—they're throwing a wrench into the burgeoning market for compounded GLP-1 drugs.
Let's crunch some numbers for more context.
A four-week supply of 2.5 mg Zepbound via LillyDirect costs $399 out of pocket. That's in the same ballpark as the $199 monthly fee charged by telehealth platforms like Hims & Hers Health (HIMS) for compounded GLP-1 injectables.
Contrast that with the eye-watering $1,790 monthly price tag for Novo Nordisk's Ozempic or the $1,990 for Wegovy, and it's clear why Lilly's strategy is turning heads and opening wallets.
All this momentum has Lilly's management grinning like the cat that ate the canary. They've bumped up their 2024 revenue guidance to a staggering $46 billion — a 34.8% year-over-year leap.
As for earnings, they're forecasting an adjusted EPS of $16.35, a jaw-dropping 158.7% increase from last year. Even a market veteran like me has to tip his hat.
Wall Street analysts are also joining the party, projecting Lilly's top and bottom lines to grow at a compound annual growth rate of 26.1% and 66.7%, respectively, through 2026.
Now, you might be scratching your head and thinking, "Isn't LLY overvalued at this point?"
Surprisingly, despite a forward P/E ratio of 55.39x — well above its historical averages — Lilly's forward PEG ratio sits at a comfortable 1.30x. That's lower than its 5-year mean of 2.19x and even the sector median of 2.00x.
In plain English, there's still some juice left in this orange for value investors.
But let's not get ahead of ourselves. Viking Therapeutics is hot on Lilly's heels with its VK2735 candidate, boasting impressive Phase 3 trial results.
Imagine 14.7% weight loss from baseline in just 13 weeks with their injectable version — that's actually warp speed compared to Lilly's current offerings.
And it's not just Viking sharpening their knives. The GLP-1 arena is set to become a battlefield, with up to 16 new drugs potentially launching by 2029.
So, where does that leave us? I'm cautiously upgrading Eli Lilly to a Buy, but I'm keeping my eyes wide open.
The market is frothy, perhaps a bit too exuberant for my taste. You might want to hold your horses and wait for a pullback into the $780–$845 range before jumping in.
Keep an eye on Lilly's balance sheet, too. Expansion at this scale doesn’t come cheap.
The company’s net debt has swelled to $25.53 billion, a hefty 59.6% increase from last year. Annualized interest expenses are creeping up as well, now at $734.4 million.
It’s not a five-alarm fire, but it’s smoke worth watching.
Eli Lilly has made bold moves in the GLP-1 market, positioning itself as a leader while others scramble to catch up. The question is, are you ready to take a seat at the table?
After all, in the words of the great Kenny Rogers, "You've got to know when to hold 'em, know when to fold 'em." And right now, LLY's hand is looking pretty strong.
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I managed to catch a few comments in the distinct northern English accent of Jim O'Neil, the fabled analyst who invented the “BRIC” term, and who was later kicked upstairs to the chairman's seat at Goldman Sachs International (GS) in London.
Now that the US dollar is in free fall, Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them. As I have been pushing emerging markets all year, this is music to my ears.
By 2030, the combined GDP of these emerging markets, Brazil (EWZ), India (PIN), and China (FXI), will match that of the US. The “BRIC” term is no longer used because the Ukraine War has made Russia the Pariah of international investment.
China alone will reach two-thirds of the American figure for gross domestic product. All that requires is for China to maintain a steady 5% annual growth rate for six more years, the official Beijing forecast, while the US plods along at an arthritic 3.0% rate. China's most recent quarterly growth rate came in at low single digits.
“BRIC” almost became the “RIC” when O'Neil was formulating his strategy two decades ago. Conservative Brazilian businessmen were convinced that the then-newly elected Luiz Ignacio Lula da Silva would wreck the country with his socialist ways.
He ignored them and Brazil became the top-performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
This is not to say that you should rush out and load up on emerging markets tomorrow, as they are still being weighed down by weak commodity prices. This will go away.
American big-cap technology stocks are the flavor of the day, and as long as this is the case, emerging markets will continue to blend in with the wallpaper. Still, with growth rates triple or quadruple our own, they will not stay “resting” for long.
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The small cost of this newsletter pays for itself a thousand times over. My returns mimic those of your portfolio for the year and for that I am grateful.
The only suggestion I would offer is to keep doing what you are doing. It is people like you that will help return the once storied name to Wall Street.
"A central bank is best that governs least, but is prepared to govern radically when called upon," said 19th century man of letters, Walter Bagehot, the first editor of The Economist magazine in London.
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It's been two years since ChatGPT burst onto the scene, and the artificial intelligence world is facing a serious reality check. The skyrocketing energy costs of building and running bigger AI models are putting the brakes on progress.
But before we start sounding the alarm bells, let's take a closer look.
Let's not mince words: large language models are energy hogs. Training OpenAI's GPT-4 model gobbled up enough juice to power 50 American homes for a century.
And as these models bulk up, so do the bills. Today's behemoths cost about $100 million to train. The next generation? We're looking at $1 billion. And the one after that? A cool $10 billion.
And it doesn't stop there. Every time you ask an AI to do something, it's like running up a tab. Summarizing financial reports for all 58,000 public companies worldwide could set you back anywhere from $2,400 to $223,000.
Over time, these "inference" costs can outstrip the initial training expenses. If that's the case, how can generative AI ever become economically viable? This scenario is enough to make any investor uneasy, especially those who've gone all-in on AI.
Just look at Nvidia (NVDA), the chip designer powering most AI models. Its market cap has ballooned by $2.5 trillion in two years.
Venture capitalists have poured nearly $95 billion into AI startups since 2023 kicked off.
And OpenAI? They're reportedly gunning for a $150 billion valuation, which would make them one of the biggest private tech firms on the planet.
But before you start panic-selling, take a breath. We've been here before with other game-changing technologies.
Remember when getting to space seemed impossible? Those innovations now power our everyday lives.
The 1970s oil crisis? It kickstarted energy efficiency and alternative power sources. Fracking made previously untouchable oil and gas reserves accessible, turning America into the world's top oil producer.
We're already witnessing similar creativity in AI.
For example, companies are now developing chips specifically designed for the operations required to run large language models. This specialization allows them to operate more efficiently than general-purpose processors like those from NVIDIA.
Tech giants like Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), and Microsoft (MSFT) are all designing their own AI chips.
In fact, more money has flowed into funding AI-chip startups in the first half of this year than in the past three years combined.
At the same time, the industry is rethinking its approach to AI models. The mantra of "bigger is better" is giving way to a focus on smaller, more specialized systems.
OpenAI's newest model, O1, focuses on reasoning rather than text generation. Other developers are streamlining calculations to squeeze more performance out of existing chips. By mixing and matching models for different tasks, they have slashed processing times.
Taking a good look at how AI companies are pivoting these days, it's clear that the old tech playbook is getting tossed out the window.
Remember when we all thought the big incumbents were untouchable? Well, in the world of AI, that idea's about as useful as a screen door on a submarine. Simply put, the game has changed.
While NVIDIA currently sells four-fifths of the world's AI chips, specialized rivals could start eating into its market share. Already, Google's AI processors are the third most used in data centers worldwide.
OpenAI may have kicked off the large language model craze, but as resource constraints bite, rivals like Anthropic, Google, and Meta are catching up fast.
There's still a gap between these heavyweights and second-tier models like France's Mistral, but it's narrowing.
So, if the trend towards smaller, specialized models continues, we might see a galaxy of AI models instead of just a few superstars. Keep an eye out for these up and coming challengers.
I do believe companies heavily involved with gig workers will not experience a boon in the stock price in the near future.
Consumers are tapped out and there is not much more pricing power they can pass on to manufacture higher profits in the short run.
There is a chance the tide will rise with all boats, but I would wait this one out in gig work stocks.
As a cultural phenomenon, the gig economy is here to stay until they get muscled out by technology.
Americans are used to the 24-hour on-demand goods and services offered by gig workers.
The number one expense line item for these tech companies is labor.
They are actively working to try and reduce the burden.
I believe they are holding out until the vaunted robotaxi is green-lighted.
This change will crater labor expense to a pittance with most of the labor costs flowing towards the managers and executives.
It is the holy grail of the tech industry and we are rapidly approaching this inflection point.
These companies have come a long way.
In 2010, the smartphone application offered a new competitor to the taxicab industry by linking a paying passenger with a private driver using his or her own car.
The largest services are still focused on transportation. Uber and Lyft dominate the on-demand ride business.
Massive retailers like Walmart and Amazon joined in with their own on-demand platforms: Spark Driver and Amazon Flex.
Gig workers are recruited with the situation of flexible hours to earn additional income. However, as independent contractors, gig workers are not entitled to traditional employment benefits like health insurance, and they must take on additional occupational risks, equipment costs, and tax burdens.
In a 2024 economic impact report, Flex, a federal lobbying association supported by DoorDash, Grubhub, HopSkipDrive, Instacart, Lyft, Shipt, and Uber, estimated there were about 7.3 million “active drivers and delivery partners on major rideshare and delivery platforms” in 2022.
A 2022 report published by the consultancy McKinsey & Co. surveyed workers and estimated as many as 58 million Americans, or 36 percent of the U.S. workforce, did some gig work that year.
In its Securities and Exchange Commission filings, Uber describes the classification of its drivers as “employees, workers, or quasi-employees” as an “operational risk” to its business. The same document details the various legal and political challenges involved in maintaining independent contractor status.
Uber’s latest quarterly filing, published in August, said that if drivers win the reclassification through legal means or the passage of new laws, the company would incur significant expenses for compensating drivers and would pass its elevated costs onto riders. Uber also argues reclassification would limit its ability to find workers due to a loss of flexibility.
Uber is smart at attempting to root out the labor expenses. If robotaxis are integrated into the business model, the stock would increase by 500%.
In the meanwhile, workers forget ahead hoping to procure more benefits from Uber.
Uber is hell-bent on avoiding the financial toll of paying full-time workers and will indefinitely try to pin the label of independent contractor on its workers.
This existential threat will end up in courtrooms and Uber has good enough lawyers to stall out the lawsuits.
All eyes are on Tesla and Elon Musk to give insight into what the future of gig work and autonomous transportation looks like.
Uber knows it cannot maintain the status quo and something must be done to cut labor costs.
If that does happen, the stock will quadruple in short time.
As for the short-term, buy big dips in Uber stock.
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“The best investment you can make is in yourself.” – Said Warren Buffett
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We’ve got a lot of data points to get through this week.
Consumer confidence in September is expected to have weakened.And that is really expected to be the overall theme in most data – weakness over strength, thereby giving validity to the Fed’s decision to go 50bps last week.
The Fed’s preferred inflation gauge, the August personal consumption expenditure price index that’s due out Friday is expected to show pricing pressures continuing to pull back from their highs.No doubt, this piece of data may well guide the Fed’s decision on the magnitude of rate cuts come November.
So, back to the rate cut theme, and we saw that the Bank of England maintained its steady course, keeping rates unchanged as August inflation figures failed to show further decline.
On Tuesday, the Reserve Bank of Australia meets.Rates are expected to remain unchanged.This comes amid a strengthening Aussie dollar, with AUD/USD closing at its highest level since January above 0.6800.
If you listen to the media, you will hear all the jibber jabber about the DOW reaching 42,000 for the first time and whether the market can continue to climb.(They are paid to talk, but you are not paid to listen! Take it all with a grain of salt). In other words, receive the information (if you watch/listen to T.V.) with some reservation as all of it may not be entirely credible.
You will also hear the many arguments explaining why the Fed went so big, and what the effects of that will be going forward, and into next year, and what the Fed will do in November and December.
Shut out all that noise.It tends to create confusion, rather than clarity.
The S&P500 is on track to reach the target I gave you many months ago – 5,745.And it will probably rally beyond that target going into year-end.
Next year may be a different story.
We may have many months of sideways movements, and quite possibly an extreme sell-off at some stage.
That sell-off, if it does take place, would create an excellent opportunity to scale into great stocks at cheap prices.
I will keep you up to date with my interpretation of the markets going forward.
But, for now, let’s stick to the present.
MARKET UPDATE
S&P500
Uptrend in progress. The September 6th low of 5403 can be interpreted as a completed corrective Wave ii of 5 and the market can now continue rallying within Wave iii of 5 toward a target of around 6,260.
Advance in progress.Bitcoin completed a complex correction on its August 5th low of $49,577.Now in its Wave 3 advanced toward a target of around $73,830.Support = $62,500/$61,330.
Next targets = $65,000, $68,650/$70,000
CONFLICTS CORNER
AUSTRALIAN CORNER
Housing affordability falls to the worst level on record.
Housing research group Prop Track’s annual Housing Affordability Index reveals the worst conditions for homebuyers on record as continued property price increases and decade-high interest rates remain stubborn.
The analysis found that a median-income household earning $112,000 annually could afford only 14% of all the homes sold last financial year, the smallest share since records began in the 1194-95 financial year.
Just three years ago, the same household could have comfortably purchased 43% of houses or units.
Property prices rose 6.6% nationally over the year to June, the equivalent of a %50,000 increase.The average first-home buyer household now must set aside a fifth of their income for 5.6 years to save a standard 20% deposit for the median home.
PropTrack economist Angus Moore comments that we are on “par with the last period of challenging affordability in 2008 and mortgage repayments today are only a little bit below what they were in the late 1980s and early ‘90s as a share of income.”
Low-income households are effectively locked out of the market, able to buy three in 100 homes.
Yellow Brick Road Home Loans executive chairman Mark Bouris says the reality is many millennials and Gen Zs will not be able to get a mortgage.
Sydney’s median home price is $1.5 million.Tasmania is now close behind.Just six years ago, Tasmania was the most affordable state.Victoria is a close third, with 12% of homes sold last year requiring 25% or less of pre-tax income to meet repayments,
South Australia experienced the most significant decline in affordability over the past year, with 16% of homes available to the state’s average earner.
Western Australia offers the best affordability, with more than a quarter of homes sold last year deemed affordable, followed by Queensland with 15% of properties.
Some relief is on the horizon.Major banks are forecasting rate cuts next year, which has the potential of returning hundreds of dollars into the pockets of mortgage holders each month and boosting new borrower’s limits.
Mr Bouris said it was unfair to lay blame for worsening affordability squarely at the feet of the RBA.He believes the federal government’s lax immigration policies, the state’s reliance on stamp duty revenues, and poor council planning all play a part in Australia’s housing crisis.
WHAT IS…?
Private equity funds are designed to generate enhanced returns by pooling investors’ capital and investing in private companies to drive business growth, streamline operations, and/or support acquisitions.
Investors provide private equity fund managers with the capital needed to invest in strategically identified companies.Unlike public equity managers, private equity managers actively seek to work with management teams to improve companies with the goal of eventually selling shares at a profit and distributing those profits to investors.In return, fund managers receive a management fee, and a share of the returns generated by the fund, further incentivizing value creation and aligning the interests of fund managers, investors, and company management teams.
4/ Winding down & final distribution – exiting remaining positions.
Sample Life Cycle of a Private Equity Fund
Benefits:
Historically, private equity generates long-term outperformance relative to the public markets.
Private equity provides access to a larger investment circle with more opportunities than the public markets.
Private equity managers aim to create value by taking a long-term view, which can help reduce risk, particularly in uncertain markets.
A private equity allocation can provide enhanced return potential and diversification benefits (i.e. uncorrelated investment exposure in a portfolio).
Risk Considerations:
Private equity funds are considered long-term investments, typically with terms of seven to ten years.
Fees:equity fund managers usually charge an annual management fee of 1-2% of assets under management.They also collect performance fees, which can range from 10-20% of any value appreciation generated by the fund.
Private equity funds may use some form of leverage, which offers the potential for higher returns, cut also increases the downside risk.
Private equity funds may not be as transparent as traditional investments, which are required to provide frequent and full disclosures.
QI CORNER
We are witnessing a cultural shift in the average age of marriage and overall marriage rates, couples with the challenges of high entry-level home prices and mortgage interest rates.As a result, many young individuals are opting to rent for more extended periods of their lives.This trend may signal the beginning of a new era where North Americans embrace lifelong renting, akin to many European countries.
The evolving dynamics in marriage and housing choices are likely to have intriguing implications for different real estate asset classes investment returns over the next decade.
(Ross W. McBride, Experienced Real Estate Investment Professional)
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