Mad Hedge Biotech and Healthcare Letter
April 8, 2025
Fiat Lux
Featured Trade:
(YOUR ALL-WEATHER HEALTHCARE FORTRESS)
(CI)
I've stared down bears in Yellowstone, MiGs over Moscow, and market crashes that would make your financial advisor need therapy. But nothing gets my pulse racing like finding a massively mispriced asset hiding in plain sight.
Ladies and gentlemen, I give you Cigna (CI) – the financial equivalent of discovering an abandoned Ferrari with the keys still in the ignition.
Two nights ago, at a private dinner with three healthcare CEOs, I heard something that confirmed what my models have been screaming for months: Cigna isn't just surviving healthcare's perfect storm – it's secretly thriving in it.
At $331 per share, we're looking at a rare beast: a value play with growth-stock upside.
I've spent enough time hanging around hospital C-suites to know when something smells like money.
Healthcare has been absolutely battered these past couple of years – staffing shortages, skyrocketing utilization rates, and the mother of all pandemic hangovers. Yet here's Cigna, delivering 8-9% year-over-year earnings growth.
What really gets my investment juices flowing is watching Cigna’s strategy play out beautifully. In fact, they just closed their Medicare business sale to HCSC in Q1, a move so smart it makes me want to applaud slowly from across the room.
I was having dinner with Medicare Advantage executives last month, and these folks were practically in tears over reimbursement rates. "It's like trying to run a restaurant where customers expect filet mignon but only want to pay for ground beef," one said, nursing his third scotch.
By reducing Medicare exposure, Cigna is saying, "We'd rather control our destiny than beg government bureaucrats for pennies." Companies that pivot away from heavily regulated, margin-compressed businesses typically emerge looking like they've been on a financial fitness program.
Here's the cherry on top – practically all proceeds from the Medicare divestiture are funding stock buybacks.
Cigna already has a track record of reducing share count that would make other CEOs jealous. One of my former students who now runs healthcare equity research at a bulge bracket bank messaged me privately that his team is dramatically underestimating the EPS impact – like forecasting a drizzle when there's a monsoon coming.
As both an insurer and pharmacy benefits manager, Cigna occupies rarefied air. Their ability to steer members toward lower-cost biosimilars isn't just smart business – it's practically printing money.
During my last Mad Hedge Fund Trader conference, I arranged a private tour of Cigna's specialty pharmacy operations for some of our Concierge members, and what I saw confirmed my thesis: their integration of medical and pharmacy data gives them insights that would make McKinsey consultants salivate.
And can we talk about prior authorization? If you've dealt with health insurance, you know it's bureaucratic torture that makes the DMV seem like a day spa. Remarkably, Cigna is reducing these requirements.
A Cigna EVP I've known since our Harvard Business School days told me over golf that their internal data shows customer retention improving by double digits from these changes alone.
Let's get down to the numbers. Like I said earlier, even during healthcare's darkest days, Cigna delivered 8-9% EPS growth. Using that as my bear case and applying a conservative 3% terminal growth rate, we're looking at a fair value of $432.79 per share.
But if they execute on their 10-14% EPS growth strategy, the fair value jumps to $508.40. That's 33-53% upside from current levels – the kind of return profile that usually comes with significantly more risk.
In 40 years of trading everything from Japanese derivatives during the Nikkei bubble to Texas fracking plays, I've learned that when everyone panics about an industry, the smart money quietly pounces on the gems.
Cigna isn't just any healthcare company – it's the one with enough foresight to shed Medicare exposure right before what my Washington contacts warn will be a reimbursement bloodbath.
Mark my words: By this time next year, when I'm recounting this trade over sake in Tokyo, Cigna won't be our little secret anymore – and neither will the 33%+ returns sitting on the table right now.
Well, that's enough financial wisdom for one day. My trading screens are flashing, my yacht captain's texting, and somewhere in the Himalayas, a summit is wondering where I've been.
Global Market Comments
April 8, 2025
Fiat Lux
Featured Trade:
(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
I’m not necessarily advocating a short sale here after markets have lost a staggering $10 trillion in market cap, from $50 trillion down to $40 trillion.
But a single tweet could trigger a 5% rip-your-face-off rally at any time and only then can you have another shot at betting the market will continue its downtrend.
So I am going to review my short-selling school once again so you can witness the spectacular performance that all of these short plays have delivered.
Some asset classes are reflecting the fact that we are already in a full-blown recession, while others are not. In case we DO go into a recession, knowing how to sell short stocks will be a handy skill to have.
It will become essential to be knowledgeable about all the different ways to add downside protection.
While you are all experts in buying stocks, selling them short is another kettle of fish.
I therefore think it is timely to review how to make money when prices are falling. I call it Short Selling School 101.
I don’t think we are going to crash to new lows from here, maybe drop only 10% at worst. So, some of the most aggressive bearish strategies described below won’t be appropriate.
If you have big positions in single stocks, like Apple (AAPL), you can execute the same kind of strategy. Selling short the Apple call options to hedge an existing long in the stock looks like the no-brainer here. You should sell one option contract for every 100 shares.
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, great closing the barn doors after the horses have bolted.
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.
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 points 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 by 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.
Virtual 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 Ultra Short 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 allow 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 stocks 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 risks 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 a short 1 September 2025 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 rise, then you have a big problem, and the losses can prove ruinous.
However, 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 by 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 by 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,” and 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). As you can tell from the chart below, (IPO) was a warning that trouble was headed our way since the beginning of March. 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 has 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
“If you die a rich person, you’ve failed,” said steel pioneer Andrew Carnegie, who gave away $11 billion during his lifetime, including building a library in every town in the United States.
(CRWV), (MSFT)
My old college roommate owes me. Big time.
"It'll be fun," he promised, arm around my shoulder at our reunion. "Just judge one high school investment competition. They're brilliant kids!"
Twenty years of friendship, and this is how he repays me for helping him land his first bulge-bracket banking gig? Sitting through PowerPoint presentations from teenagers explaining cryptocurrency to me like I'm their technologically-challenged grandfather?
I'm adding this to my mental ledger, right next to the time he convinced me to go mountain climbing in Nagano during a blizzard while we were both covering the Japanese financial markets in the '80s. I still have the frostbite scars to match the losses in my first Nikkei futures account.
The grand finale was a particularly confident team pitching CoreWeave (CRWV) with the kind of unbridled enthusiasm usually reserved for Marvel movie premieres and PlayStation launches.
"It's the backbone of the AI revolution!" declared their 16-year-old team leader. When I gently asked about profitability timelines, they looked at me like I'd suggested valuing companies by counting their office furniture.
"That's old-economy thinking, sir," the young man informed me, actually patting my shoulder sympathetically.
I'm plotting my revenge – maybe I'll volunteer my friend to chaperone his daughter's senior prom – but I couldn't help laughing because these kids perfectly captured today's market psychology: growth at all costs, profitability as an optional future feature.
CoreWeave has certainly turned heads with its 9.75% jump to $61.36 since publication - outperforming the S&P's modest 1.62% gain.
The market loves a good AI story, and CoreWeave is spinning a compelling narrative as the specialized cloud infrastructure company powering the next generation of artificial intelligence.
But as my father used to say while reviewing balance sheets, "Revenue is vanity, profit is sanity, and cash is reality."
And CoreWeave's reality? It's burning through $5 billion in cash annually with the enthusiasm of a lottery winner on their first Vegas trip.
To put that burn rate in perspective, that's like buying a new private jet every week and using it exclusively for paper airplane competitions.
The company's $5.2 billion in net debt (even after its $1.5 billion IPO raise) isn't just concerning – it's downright alarming. In my experience, tech companies carrying debt exceeding 20% of their market cap tend to underperform the market by about 30% over the following three years.
Even more concerning than the debt is CoreWeave's customer concentration. With 60% of business coming from Microsoft (MSFT), they're not in a partnership – they're in a hostage situation.
During my hedge fund days, I witnessed a promising analytics startup derive 40% of revenue from a single client. "We're diversifying rapidly," the CEO assured investors before their anchor client cut spending by half, and the company's valuation followed suit.
Microsoft isn't known for charity work – they're calculating, strategic, and hold all the leverage in this relationship. If Microsoft catches a cold, CoreWeave catches pneumonia and has to be rushed to financial intensive care.
The growth numbers are admittedly eye-popping – 1,346% revenue growth in FY2023 followed by 737% in FY2024. These are the kind of statistics that make investors jump in without reading the fine print.
And CoreWeave's biggest red flag? $2.5 billion of debt coming due in the next 12 months while the company only has $2.8 billion cash on hand.
That's cutting it closer than the time I had to navigate through the Kyber Pass in a questionable Land Rover with a failing transmission and half a tank of gas. Both scenarios keep you wide awake at night wondering if you'll make it to your destination.
Could CoreWeave defy financial gravity? It's possible. Markets aren't always rational, especially when AI is involved.
The stock could double to $100 per share in the coming weeks purely on speculative fever. I've watched stocks with worse fundamentals moonshot on nothing more than wishful thinking and buzzwords.
Another upside scenario: what if another major tech player becomes a significant customer? That would diversify away from the Microsoft dependency and potentially create a competitive bidding situation.
But betting on a white knight scenario is like buying real estate in a flood zone because someone might build a dam upstream – technically possible, but not the way smart money plays the game.
I'm an inflection investor – I look for companies at the point where their prospects improve, not where hopes and dreams collide with financial reality. When the fundamentals are this challenging, I prefer to watch from the bleachers with my popcorn rather than take the field.
This might turn into the next meme-stock frenzy – and if it does, I'll tip my hat to the traders who time it right – but sustainable businesses build wealth, not speculation.
I'll be watching CoreWeave's next earnings report with interest, but my investment dollars are staying far away from this particular AI rollercoaster. Some thrill rides just aren't worth the ticket price, no matter how exciting the promotional materials make them look.
And as for those bright-eyed high school students who pitched CoreWeave with such conviction? I'm sending them each a copy of "Security Analysis" by Graham and Dodd with the profitability chapters highlighted in neon yellow.
My college roommate can handle the shipping costs. After all, he still owes me.
Mad Hedge Technology Letter
April 7, 2025
Fiat Lux
Featured Trade:
(THE NEW NORMAL FOR SEARCH ENGINES)
(GOOGL), (TRIP)
Google (GOOGL) search has altered the way it does business by implementing AI in its headline search engine.
When an internet user searches through Google’s engine, Google’s “AI Overview” offers a short summary as the first result at the top of the page.
This is the new normal so get used to it.
The data they use for the AI Overview is scraped from third-party websites and that has meant many websites have suffered a massive hemorrhage of page views since 2024.
In some cases, independent websites have reported a reduction of up to 90% of website traffic on their own pages and many of these have gone out of business.
The traffic pullback has been felt across the web and has spanned topics — fashion and lifestyle, travel, DIY and home design, and cooking.
Some creators say Google has recently made so many changes to search, coinciding with its testing of AI-powered features and an effort to rid its results of AI-generated spam, that it has choked traffic to independent websites in favor of forums like Reddit and Quora, as well as larger media brands.
Other times, once-popular sites whose domains were sold and repurposed by clickbait farms have been highlighted by Google.
According to the data firm BrightEdge, the sites receiving the most referral traffic from AI Overviews are primarily big players, like TripAdvisor (TRIP), Wikipedia, Mayo Clinic, and Google’s own YouTube, rather than smaller publishers.
The power dynamic between Google and individual creators is so lopsided that many publishers have no leverage to even negotiate anything substantial.
At a stock level, this is great news for Google as they will be able to command a more reliable ad revenue model because internet users won’t need to migrate out of the Google ecosystem.
Many of the big tech platforms are designed as “wall gardens” – a one-stop shop for everything digital.
Smaller content creators relied on Google to help catalyze web traffic and those days are long gone.
Content creators should expect a 90% drop in traffic via Google.
This development is healthy for Google’s chances to stay in the AI competition.
No doubt, they are competing with X.com’s Grok AI and ChatGPT’s AI. That is no small feat.
Unfortunately, the smaller content creators will get elbowed out of the way.
Even Google Maps has integrated with Travelocity reviews lately.
Travelocity integrates with Google Maps to help users find hotels, motels, and inns on an easy-to-use map view, allowing them to plan their trips and share their itineraries.
I believe there will be a continuous reliance on priority bigger platforms for data partnerships precisely because they have the money to pay for it.
“AI Overview” will keep Google Search relevant for longer while increasing Google ad revenue, but it has an uphill battle to climb because I believe the quality of its AI still lags behind the leaders.
IT would make sense to start the dollar cost average into Google shares at $135 per share and $120.
I want to put a ding in the universe.” – Said Co-Founder of Apple Steve Jobs
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