Mad Hedge Technology Letter
February 7, 2024
Fiat Lux
Featured Trade:
(IS BABA WORTH A TRADE?)
(BABA), (PDD)
Remember when Chinese tech was supposed to topple Silicon Valley?
That was just a few years ago and it is mind-boggling how the situation has had a sudden about-face.
Chinese tech has been left twisting in the wind of mediocrity while American tech has forged through and seized the opportunity to become the best tech industry on the planet.
Some of the weaknesses are quite glaring and the most obvious one comes in the form of Chinese e-commerce company Alibaba’s 75% nosedive from a 2020 record high.
The crash has flattened its valuation to an all-time low and put its market capitalization on a par with upstart rival PDD Holdings (PDD).
Alibaba’s revenue for the three months through December only rose 5.6% from a year ago, the slowest growth in three quarters amid difficult economic conditions and steep discounting.
Forward earnings estimates for the company have fallen about 4% over the past month.
China’s online retail market is saturated and the backdrop is getting worse.
Alibaba and JD.com are the old men in the nightclub club while fresh faces like Douyin Mall, run by TikTok owner ByteDance are chomping at the bit.
At the same time, persistent deflationary pressure and declining wages have driven a price war that is being won by discounters like Pinduoduo, the local equivalent of PDD’s Temu.
Alibaba is forecasted to cede market share as they face fierce competition from rivals like Douyin and PDD.
Another focus would be whether they are able to import new drivers to maintain their overall growth.
Alibaba spent $9.5 billion on share buybacks last year, a record high.
Revamp efforts led by the company’s new management include scaling down non-core business while stepping up investment in global expansion and artificial intelligence.
It’s focusing on improving core operations, including moving resources from its Tmall site to Taobao in order to better meet demand for cheaper products, though it may take time to see results.
This focus on lower prices will lead to weaker revenue growth, which is certainly negative to near-term sentiment and share price. The company’s core business growth will likely “remain lackluster in the next four quarters.
With many things in China, this is a race to the bottom and BABA is getting a proper taste of that Chinese medicine.
Lower prices are met with even lower prices and it becomes a war of attrition.
Investors don’t like to hear that.
In the most recent earnings report, net profit declined by 77%.
Overall sales growth last quarter rose by just 3%.
This company used to be a supercharged growth company and in just a few years, they have almost been swept into the dustbin of history.
BABA stock is down today over 5% from the poor earnings report as the stage is set for BABA to hardly grow at all in the foreseeable future.
Many from Gen Z have remarked how discount e-tailers like PDD’s Temu have flooded American social media platforms with ads.
This trend has resulted in negative impacts to BABA’s staying power in e-commerce and the profit margins are in the firing line as we speak.
At $73 per share, the stock might be in for a dead cat bounce for a trade.
Long term, the stock has lost its luster and lost its mojo.
BABA shouldn’t be touched with a 10-foot pole as the entire Chinese economy goes through the motion of a slowly forming zombie corporate structure.
(THREE STOCKS TO BUY IN 2024)
February 7, 2024
Hello everyone,
The stock market has started the year in a positive mode with big tech rallying strongly. The S&P 500 is up around 4% year to date after a 24% rise in 2023.
What could sour the mood?
Political tensions, still-high inflation levels, and uncertainty about when the U.S. Federal Reserve will cut interest rates.
All these factors have raised questions about which sectors – and stocks – will outperform looking ahead.
Let’s concentrate on three, I believe will perform well this year.
1/ Microsoft (Stock Price as of 02/06/24 - $403.66)
This company has a focus on cloud computing and mobile technology. Microsoft’s Windows operating system dominates the PC market globally at around 90%. Robust revenue from other segments like Azure, Office 365, and Dynamic CRM are contributing to revenue.
Last week, Microsoft reported a 17.6% year-over-year increase in its revenue for its quarter ending Dec. 31.
Microsoft has a huge diversity in software applications making it a key player in digital transition. It has a strong presence in cloud infrastructure and ties with Open AI making it well placed to meet the rising demand for generative AI.
Over the last 12 months, shares in Microsoft are up almost 60%. Of 52 analysts covering the stock, 48 give it a buy or overweight rating at an average price of $460.37, according to FactSet data. This gives it an upside potential of almost 12%.
My Recommendation: Buy the stock on dips. Average in.
Option Recommendation: One-year LEAPS out of the money.
2/ ExxonMobil
Despite the mixed sentiment on the energy sector presently, amid ongoing geopolitical uncertainties and fluctuating oil prices, I am optimistic about this stock for the long term.
Last week, the stock reported quarterly earnings that beat analysts’ expectations, but profit fell compared to a year before on lower oil prices.
Let’s scan the long-term horizon for this stock.
# Long-term potential from low-carbon investments.
# Strong balance sheet supporting higher capital returns.
A key catalyst is in the pipeline for Exxon with its acquisition of Pioneer Natural Resources valued at almost $60 billion. The deal is expected to close by mid-2024.
Production volume in the Permian Basin located in West Texas and New Mexico is tipped to more than double to 1.3 million barrels of oil equivalent per day once the deal closes.
Other opportunities include growth prospects from the company’s discoveries in Guyana between 2025 and 2026.
Over the last 12 months shares in ExxonMobil are down over 8%.
Of 29 analysts covering the company, 19 have a buy or overweight rating on the stock at an average price target of $124.94, giving it an upside potential of around 22.5%, according to FactSet data.
My Recommendation: Buy small parcels in this stock now. Average in.
For those who trade Options: One-year LEAPS out of the money. You could look at 105/110 or even 110/115. Expiration: January 17, 2025.
You can buy the stock or do the option or do both.
Analyst Price Projections for ExxonMobil
Barrick Gold (Stock Price as of 02/06/24 - $15.09)
Beyond tech and energy, metals get a big tick also, and I favor Canadian miner Barrick Gold here.
There is a positive outlook on gold due to geopolitical uncertainties, making it a reliable safe haven investment during economic challenges. Spot gold prices are up around 7.5% over the last 12 months.
Kevin Teng, CEO of Wrise Wealth Management Singapore argues that despite the lag in performance among gold miners compared to the rising gold prices since 2023, Barrick Gold, being one of the largest gold miners, is poised to benefit from the expected price recovery.
Teng goes on to explain that he is expecting a “sequential improvement” in the company’s output following the expansion in its production of copper production to 240,000 metric tons from the current 150,000 metric tons in its Lumwana copper mine in Zambia. A similar boost in production levels is also expected at its Reko Diq copper-gold project in Pakistan.
So, it is apparent that Barrick Gold’s expansion plans collectively position it for potential growth in the coming year.
Shares in Barrick Gold are down over 15% over the last 12 months.
Of 23 analysts covering the company, 16 have a buy or overweight rating on the stock at an average price target of 29 Canadian dollars ($21.52), giving it an upside potential of almost 40%.
My recommendation: Buy the stock in small parcels. In other words, average in.
If you trade options, I suggest one-year LEAPS. You could look at the 15/17 January 17, 2025, Bull call spread LEAPS.
You can just buy the stock or just do the option. Some people buy the stock and do the option. It’s your choice as are the number of shares or options you purchase.
Cheers,
Jacquie
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
February 7, 2024
Fiat Lux
Featured Trade:
(DUMPING THE OLD ASSET ALLOCATION RULES),
(WHY WATER WILL SOON BE WORTH MORE THAN OIL)
What to do about asset allocation is the one question that I get every day which I absolutely cannot answer.
The reason is simple: no two investors are alike.
The answer varies whether you are young or old, have $1,000 in the bank or $1 billion, are a sophisticated investor or an average Joe, in the top or the bottom tax bracket, and so on.
This is something you should ask your financial advisor if you haven’t fired him already, which you probably should.
Only advisors who read the Diary of a Mad Hedge Fund Trader should merit your attention. At least they’re going the extra mile trying to figure things out.
Having said all that, there is one old hard and fast rule, which you should probably dump.
It used to be prudent to own your age in bonds. So, if you were 70, you should have had 70% of your assets in fixed income instruments and 30% in equities.
Given the extreme overvaluation of all bonds today, and that we are probably just entered a 7-10 year bull market for stocks, I would completely ignore this rule.
Instead, you should probably run a 50/50 portfolio, half in bonds and half in growth stocks. You can get 7% a year or more in yields these days in junk bonds and get a great inflation hedge to boot.
You will also own what everyone else in the world is trying to buy right now, high growth US stocks.
Allocation: Are You Him?
Or Him?
Mad Hedge Biotech and Healthcare Letter
February 6, 2024
Fiat Lux
Featured Trade:
(SETTING THE TABLE FOR STEADY GAINS)
(ABBV), (ABT), (PFE), (GILD), (DNA), (MRNA), (AMGN), (LLY)
Here's a nugget of wisdom from someone who's sailed the investment waters more times than I've had hot dinners: diversification is your best friend. Think of it as the Swiss Army knife in your investment toolkit.
Now, if there's one treasure you'd want aboard your investment ship, it's a dividend stock. Not just any old stock, though. I'm talking about AbbVie (ABBV).
Since it waved goodbye to its parent company, Abbott Laboratories (ABT), in 2013, it has boosted its dividend payouts by an eye-popping 290%. With a yield hanging around 4% and delivering a 130% total return over the past 5 years, long-term investors undoubtedly struck gold.
Unfortunately, 2023 has turned into the kind of year we'd rather forget. The end of Humira's patent was looming like a dark cloud, threatening to rain on AbbVie's parade by letting generics flood the market. The horror, right?
But, plot twist: the anticipated disaster was more of a light drizzle. Despite the competition, Humira still brought in a cool $11.1 billion. Sure, it's a dip, but not the plunge we feared.
Meanwhile, AbbVie's been on a shopping spree, snapping up Immunogen and Cerevel for a combined total that's a smidgen under $19 billion. It's like they're collecting Infinity Stones, diversifying beyond Humira into areas ripe with potential.
And let's not forget their foray into the realm of Antibody Drug Conjugates (ADCs) — the hot ticket in oncology.
While AbbVie’s not throwing around cash like confetti, like some of their peers including Pfizer (PFE), Gilead Sciences (GILD), Genentech (DNA), they're making notable moves. It's a bit like betting on the dark horse; if their ADCs and CNS ventures hit their stride, we're all in for a treat.
Amidst all this innovation and expansion, AbbVie hasn't lost sight of what gets investors' hearts racing — a solid dividend. It's the kind of steady reliability that's as comforting as your favorite cozy blanket.
As if those aren’t enough, the company just threw us a curveball that's got Wall Street buzzing more than my neighbor's annoying leaf blower on a peaceful Sunday morning.
In its recent earnings report, AbbVie not only beat the revenue expectations for its fiscal fourth quarter but decided to sweeten the deal by raising its long-term sales outlook.
Despite the concerns about Humira, AbbVie still posted fourth-quarter earnings that had their investors nodding in approval, even if they were a tad lower than previous years’ glory days. With revenue hitting $14.3 billion, surpassing the street's guess of $14 billion, it's clear the company isn't just hanging in there; it's throwing punches back.
The immunology portfolio, while taking a 12% hit, isn't down for the count, thanks to Skyrizi and Rinvoq. These two rising stars, which are quickly becoming the Batman and Robin of the biopharmaceutical world, are not just filling Humira's big shoes; they're sprinting.
With the duo’s sales surging by 52% and 63%, respectively, it's no wonder AbbVie is adjusting its binoculars and raising its long-term guidance for these drugs to a whopping more than $27 billion by 2027.
That's a $6 billion jump from their previous forecast. If that doesn't scream confidence, I don't know what does.
And just for a bit of perspective, while AbbVie was basking in the glow of success, its peers had a mixed day at the market. Pfizer took a slight tumble, Moderna (MRNA) and Amgen (AMGN) dipped their toes into the red, while Eli Lilly (LLY) floated up, riding a wave of optimism.
So, as we move forward this 2024, you might be wondering, "What's next for AbbVie?"
Well, if I were a betting man (and let's be honest, investing is betting with extra steps), I'd say we're not likely to see AbbVie pulling a rabbit out of a hat.
But, and it's a big but, we're talking about a company that's as expertly managed as a Michelin-starred kitchen. They've got a knack for serving up share price growth and dividends that leave investors coming back for seconds.
So while AbbVie might not be dangling the next blockbuster breakthrough in front of us, their steady march forward is as promising as finding a shortcut on your morning commute. We might not see the stock skyrocket overnight, but a climb to around $180 per share? That's not just possible; it's on the menu. And right now, with its recent earnings report, it's as good a time as any to pull up a chair to the AbbVie table. Bon appétit.
Global Market Comments
February 6, 2024
Fiat Lux
Featured Trade:
(Trade Alert - (JPM) – LEAPS EXPIRATION)
EXPIRATION of the JP Morgan (JPM) January 2024 $130-$135 at-the-money vertical Bull Call spread LEAPS at $5.00 or max profit
Closing Trade
1-19-2024
expiration date: January 19, 2024
Number of Contracts = 1 contract
I am running through the expiration math on this LEAPS trade for you because we are going to do many more of these this year, so It’s important that you understand it.
Those who did this trade last March and then threw up on their shoes were paid big time for their discomfort. On January 19, the JP Morgan (JPM) January 2024 $130-$135 at-the-money vertical Bull Call spread LEAPS expired at the $5.00 max profit. Investors earned a handsome $250 or 100% in 9 months for each contract they owned.
(JPM) is the class act in the global banking sector, and CEO Jamie Diamond is the best CEO in the country. The regional banking crisis pulled forward any recession and therefore the recovery.
There will be no interest rate rises for a decade. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.
And here is the sweet spot. Fears of a recession increasing loan default rates knocked $20, or 14% off the $145 high in (JPM) shares last year. When recession fears faded in 2023 interest rates remained historically high and (JPM) profits and the share price rocketed.
To learn more about the company please visit their website at https://www.jpmorganchase.com
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Notice that the day-to-day volatility of LEAPS prices is minuscule 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.
This was a bet that JP Morgan would not fall below $135 by the January 19, 2024 option expiration in 9 months.
Here is the specific accounting you need to close out this position:
Expiration of 1 January 2024 (JPM) $130 calls at……...…$40.31
Expiration of short 1 January 2024 (JPM) $135 calls at…$35.31
Net Proceeds:……….………………….………..………….…..........$5.00
Profit: $5.00 - $2.50 = $2.50
(1 X 100 X $2.50) = $250 or 100% in 9 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 at
https://www.madhedgefundtrader.com/ltt-vbcs/
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.
Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.
