Mad Hedge Technology Letter
January 24, 2025
Fiat Lux
Featured Trade:
(HUMANOIDS TO THE RESCUE OR NOT)
(TSLA)
Dr. Doom Nouriel Roubini needs to lay off the fear porn – I’m not taking the bait this time. Sorry Roubs!
Roubini is sounding the alarm bells on humanoid robots, but I think it is more of a case of fear-mongering than anything else.
After all, like most economists, Roubini isn’t a trader, he is an academic who sits behind the scenes and goes after those juicy sound bites that the media need to publish stories.
He wasn’t taking profits in great tech trades like when I captured profits on Netflix just the other day.
His idea goes like this…
He thinks the big breakthrough right now is the evolution of humanoid robots that essentially follow individual workers on the factory floor, on a construction site, even a chef in a restaurant, or a housekeeper. It's terrifying, but it's happening in the next literally year or two.
For this level of transformation in one year, I believe the percentage chance of this coming to fruition is less than 2%.
My understanding of the humanoids is that the software will take 10 years to figure out the nuances.
Roubini — known as Dr. Doom for his bleak economic forecasts — said human jobs would be lost to humanoids.
Instead, an LLM (large language mode) learns about everything in the world, the entire internet follows your job, my job or anybody else's job in a few months, then learns everything that a construction worker, factory worker, or any other service worker can do, and then can replace them. And I think that it's going to be a revolution — it's going to affect blue-collar jobs like we've never, ever seen before.
The humanoid robot market could reach $7 trillion by 2050, Citi research recently found. Those robots — such as Tesla's (TSLA) Optimus — may be able to do everything from cleaning your home to folding your laundry. The robots could create job loss as routine tasks get automated.
There is a higher likelihood that this humanoid from Tesla will be used as staging to convince investors to buy more tech stocks.
Tech companies have a huge problem on their hands and there hasn’t been a lot of great brain activity to find a real solution.
Venture capitalists have been lamenting the lack of real innovation in tech products like Mark Andreessen and Peter Thiel.
The humanoid is here to get investors to buy more tech stocks in companies that aren’t innovating.
Tech companies are cutting staff to beat earnings and that isn’t a sign for top-notch growth.
Investors need to separate the fluff from reality.
The reality is that big tech companies still make enormous amounts of profit but have failed miserably in finding something new.
Apple CEO Tim Cook is still figuring out what next to do after selling the iPhone to Chinese people.
The humanoid operating on AI software might give tech stocks an extra 6-month cushion before investors pull the rug.
Enjoy the bull market while it lasts. I executed a bullish trade in Dell which is part of the AI story.
AI stocks will go higher and humanoid stocks will too – not because they will make money, but because investors still buy the hype.
(PRESIDENT TRUMP IS PRIORITIZING AI)
January 24, 2025
Hello everyone
President Trump is prioritizing the push forward of AI.
Which companies are likely to benefit?
Think of (ORCL) Oracle, (MSFT) Microsoft, and (ANET) Arista Networks
Earlier this week, a $500 billion joint venture was announced between OpenAI Oracle, and Softbank, which aims to strengthen artificial intelligence infrastructure in the U.S.
Shares of Oracle and Microsoft have rallied nearly 15% and 3%, respectively, since the start of the week. Microsoft is an investor in OpenAI.
Solita Marcelli from UBS notes that the project requires more computing and electricity, which may point to greater investments in grid infrastructure and power transmission.
Kash Rangan, a Goldman Sachs analyst, believes Oracle and Microsoft are prime winners from the government’s prioritization of AI.
Rangan notes that Microsoft is in a prime position to benefit from this project as the company has a strong balance sheet and capital expenditure for 2025. Oracle, however, may take longer to benefit, but the tailwind will certainly gather strength in the years to come. Analysts are seeing the probability of more capital AI investments for Oracle, which could boost its cloud infrastructure revenues at a compounded annual growth rate exceeding 50% through 2027.
The Stargate venture also sees Arista Networks as a potential big winner too. The company has exposure to Oracle, Microsoft, and OpenAI, as well as the strength of its ethernet switching portfolio. Piper Sandler’s James Fish argues that “given switching represents >50% of networking spends, and Arista’s? 30% share of high-end datacentre switching, we see this as a +$6B [serviceable addressable market] over 5 years.”
Fish also points to (PSTG) Pure Storage, as an “underappreciated way” to invest behind Stargate to meet storage capacity, estimating a $10 billion total addressable market.
(I recommended Oracle, Microsoft, and Arista Networks on January 6, 2024.
Oracle was at $104, Microsoft was at $372, and Arista Networks was at $248.00. Arista Networks had a stock split on December 4, 2024, which took it back to $62.00.
TRADE ALERT
(TPB) TURNING POINT BRANDS
Turning Point Brands manufactures, markets, and distributes branded consumer products. The company operates through three segments: Zig-Zag Products, Stoker’s Products, and Creative Distribution Solutions. Zig-Zag Products segment markets and distributes rolling papers, tubes, finished cigars, make-your-own cigar wraps, and related products as well as lighters and other accessories under the Zig-Zag brand. The Stoker’s Products segment manufactures and markets moist snuff tobacco and loose-lead chewing tobacco products under the Stocker’s, Beech-Nut, Durango, Trophy, and Wind River brands. Its Creative Distribution Solutions segment markets and distributes other products without tobacco and/or nicotine to individual consumers through the VaporFi B2C online platform, as well as non-traditional retail through Vapor Beast. In addition, it markets and distributes cannabis accessories and tobacco products. The company sells its products to wholesale distributors and retail merchandising, drug stores, and non-traditional retail channels. The company was formerly known as North Atlantic Holding Company Inc. It changed its name to Turning Point Brands Inc in November 2015. The company was founded in 1988 and is headquartered in Louisville, Kentucky.
A shareholder return of 138% over the last 12 months is not too shabby for this company. Most analysts rate it a strong buy or a buy and see it rising more than 20%. Earnings are forecast to grow by 14.04% per year. Earnings grew by 294.6% over the last year.
Recommendation: Scale into the stock. And/or you could try a bull call spread like a 60/65 with an April 17 expiration, or a 60/65 with a July expiration.
So, your trade would look like this:
Buy 1 TPB 60 call
Sell 1 TPB 65 call
When I was looking at these trades the limit price for the April expiration was $1.48 and the limit price for the July expiration was $1.95.
Prices will be all over the place by the time you receive this, so purchase at best.
QI CORNER
SOMETHING TO THINK ABOUT
Cheers
Jacquie
Global Market Comments
January 24, 2025
Fiat Lux
Featured Trade:
(SOME SAGE ADVICE ON ASSET ALLOCATION)
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 Biotech and Healthcare Letter
January 23, 2025
Fiat Lux
Featured Trade:
(THE HARD TRUTH ABOUT THIS BIOTECH'S PIPELINE THAT WALL STREET DOESN'T GET)
(MRK), (AMGN), (AAPL)
Earlier this month, while reviewing my biotech holdings during a layover at Chicago O'Hare, I got an interesting call from a long-time reader.
He was panicking about Merck (MRK) after seeing it trading near its 52-week lows, convinced the pharmaceutical giant was headed for trouble.
"Have you seen what Medicare negotiations did to Januvia?" he asked, referencing the 79% price reduction. "And Keytruda's patent expires in 2028!"
Here's the hard truth about this biotech's pipeline that Wall Street doesn't get: while everyone's fixated on Keytruda's patent cliff, Merck has quietly tripled their late-stage pipeline in just over three years.
We're talking more than 20 unique assets in late-stage development, plus another 50 in early stages.
The last time I saw this kind of pipeline expansion was during the early days of Amgen (AMGN), which turned out pretty well for investors who saw past the obvious.
Actually, Merck's current "crisis" also reminds me of the time I bought Apple (AAPL) right after Steve Jobs announced the iPhone. Everyone worried about the risk, while I saw the opportunity.
Merck just posted Q3 2024 numbers that would make most CEOs envious: revenue up 7% year-over-year to $16.7 billion.
Keytruda, their cancer blockbuster, grew 21% to $7.4 billion. Even their Animal Health division jumped 11%. These aren't the numbers of a company in trouble.
Speaking of investors, they've enjoyed a 126% total return over the past decade with Merck, despite more ups and downs than my last flight through turbulence.
The company's 5-year average Return on Equity sits at 25% (recently climbing to 28%), with Return on Invested Capital steady at 20%.
With a Weighted Average Cost of Capital around 8%, there's plenty of room for growth.
Yesterday, I was discussing these numbers with a former FDA commissioner (who shall remain nameless) over coffee.
He pointed out something fascinating: Merck's R&D spending is increasing alongside revenue growth. That's like a tech company doubling down on product development – exactly what you want to see in pharma.
For dividend hunters (and I know many of you are), Merck offers a 3.3% yield with a 7% five-year dividend growth rate.
The payout looks sustainable too, consuming 68% of earnings and 55% of free cash flow. It's not going to make you quit your day job, but it's better than the 1.4% you'll get from the S&P 500.
Looking at valuation, Merck trades at a P/E of 20.5, below its historical average of 22.3.
My own growth projections suggest a 13% annual rate going forward. Optimistic? Perhaps. But with their robust pipeline and near-term analyst projections, I've seen crazier things work out.
The company just announced a $15 billion share repurchase program, including plans to spend $7.5 billion over the next 12 months. When management puts that kind of money where their mouth is, I tend to pay attention.
Yes, Keytruda's patent cliff in 2028 is real. But so is Merck's late-stage pipeline of antibody-drug conjugates (ADCs) – think smart missiles in the war against cancer.
And unlike some biotechs, Merck has the financial muscle to weather any storm, with decreasing net debt and a solid cash position.
Remember what I always say about buying straw hats in winter? Merck right now is like finding a premium pharma stock in the discount bin.
Just like my friend who panicked and sold everything after the November 8 election (and missed the subsequent rally), sometimes the best opportunities come disguised as problems.
As for me, I'm looking at Merck as a potential long-term hold. The company's fundamentals remind me of other great turnaround stories I've traded successfully over the years.
With the healthcare sector currently out of favor and Merck trading near its 52-week lows, this might be one of those moments we look back on and wish we'd bought more.
And speaking of patents, maybe I should patent my strategy: “Buy great companies when everyone else is afraid.” Though I suspect Warren Buffett already beat me to that one.
Global Market Comments
January 23, 2025
Fiat Lux
Featured Trades:
(WHY WATER WILL SOON BE WORTH MORE THAN OIL),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR),
(WHY WARREN BUFFETT HATES GOLD),
(GLD), (GDX), (ABX)
After seven years in the penalty box, gold is finally starting to come alive, and the Armageddon crowd is absolutely loving it. Maybe after ten years of rising, stocks are finally expensive on a relative basis?
These are the guys who are perennially predicting the collapse of the dollar, the default of the US government, hyperinflation, and the end of the world.
Better to keep all your assets in gold and silver, store at least a year’s worth of canned food, and keep your untraceable guns well-oiled and supplied with ammo, preferably in high-capacity magazines.
If you followed their advice, you lost your shirt.
I have broken many of these wayward acolytes of their money-losing habits. But not all of them. There seems to be an endless supply emanating from the hinterlands.
The “Oracle of Omaha” Warren Buffet often goes to great lengths to explain why he despises the yellow metal.
The sage doesn't really care about the gold, whatever the price. He sees it primarily as a bet on fear. I imagine he feels the same about Bitcoin, the modern tulips of our age.
If investors are more afraid in a year than they are today, then you make money on gold. If they aren't, then you lose money.
The only problem now is that fear ain’t working.
If you took all the gold in the world, it would form a cube 67 feet on a side, worth $5 trillion. For that same amount of money, you could own other assets with far greater productive earning power, including:
*All the farmland in the US, about 1 billion acres, which is worth $2.5 trillion.
*Seven Apple’s (AAPL), the second largest capitalized company in the world at $731 billion.
Instead of producing any income or dividends, gold just sits there and shines, making you feel like King Midas.
I don't know. With the stock market at an all-time high and oil trading at $75/barrel, a bet on fear looks pretty good to me right now.
I'm still sticking with my long-term forecast of the old inflation-adjusted high of $2,300/ounce.
It is just a matter of time before emerging market central bank buying pushes it up there. And who knows? Fear might make a comeback too.
(PLTR), (MSFT), (AMZN), (GOOG), (ORCL)
Back in the early days of my career, I watched countless "revolutionary" tech companies come and go, each promising to change the world with their shiny new algorithms. But Palantir (PLTR) caught my eye for an entirely different reason - they were actually getting their hands dirty with real-world problems while everyone else was still writing whitepapers.
Let me put this in perspective. While most tech firms were trying to convince their first customers to sign proof-of-concept agreements, Palantir was already knee-deep in the kind of work that makes three-letter agencies sit up and take notice.
Their Gotham platform became such a fixture in intelligence circles that it's practically government-issued equipment now, like those ubiquitous office coffee machines, only significantly more sophisticated.
The numbers tell the story better than I ever could. In their latest quarter, Palantir raked in $727 million in revenue, up 30% year-over-year.
That translated into a GAAP net income of $144 million - not bad for a company that some skeptics dismissed as just another government contractor with a fancy PowerPoint deck.
But here's where it gets interesting. Their U.S. commercial business shot up 54% compared to last year.
That's not just growth - that's the kind of acceleration that makes venture capitalists spill their artisanal lattes. It reminds me of the early days of Microsoft (MSFT), when suddenly every business decided they needed Windows, whether they understood it or not.
Speaking of relationships, Palantir has been building quite the rolodex. They're working with everyone from Amazon's (AMZN) AWS to Microsoft's Azure, Google's (GOOG) GCP, and Oracle's (ORCL) Cloud. It's like being invited to all the cool kids' parties and actually showing up to each one.
This Switzerland-of-software approach has helped them spread their AI capabilities faster than a viral tweet.
The government business, though - that's their secret weapon. Remember when I mentioned those three-letter agencies? Palantir's Gotham platform has become so embedded in the intelligence community that trying to remove it would be like trying to extract coffee from the Pentagon's budget.
They're not just selling software – they're providing the digital infrastructure that modern intelligence operations run on.
Meanwhile, their commercial "boot camp" approach to onboarding new clients is pure genius.
While other tech companies treat implementation like a drawn-out Victorian courtship, Palantir gets companies up and running faster than you can say "digital transformation."
I've seen so many enterprise software rollouts in my day, and most of them move at the pace of continental drift. Not Palantir's.
And the numbers? They're even better than the execution. Their adjusted free cash flow exceeded $1 billion on a trailing 12-month basis.
Their "Rule of 40" score - a metric that combines revenue growth and profitability - hit 68. For those keeping score at home, that's like batting .400 in the major leagues.
Looking ahead, Palantir isn't just positioned for growth - it's positioned for dominance.
They're expanding into next-generation autonomous solutions, JADC2, and manufacturing OS modules. It's like watching a chess player who's already thinking five moves ahead while everyone else is still learning how the pieces move.
The question isn't whether Palantir is good at what they do - they clearly are. In a market where AI capabilities separate the winners from the also-rans, Palantir isn't just playing the game - they're changing the rules.
But at $153 billion with a heart-stopping forward P/E of 176, even the best technology can make for a terrible investment.
And let's not forget - their heavy reliance on government contracts means they're just one budget cut away from a really bad quarter.
I've watched too many market cycles to chase stocks at these levels. The time to back up the truck on Palantir will come - probably during the next tech selloff when the momentum crowd dumps everything indiscriminately.
That's when you'll want to pounce on this AI powerhouse. For now, keep your powder dry and put this one on your shopping list for when prices better match reality.
