Mad Hedge Biotech and Healthcare Letter
June 20, 2023
Fiat Lux
Featured Trade:
(THE RISE OF THE TRILLION-DOLLAR PHARMA)
(LLY), (NVO), (AAPL), (MSFT)
Posts
It's hardly a surprise when we think of titans like Apple (AAPL) and Microsoft (MSFT) topping the trillion-dollar club. After all, these tech leviathans have their tendrils in the lives of billions worldwide.
But guess what? This playground isn't just for tech heavyweights.
There's another contender in the ring, flexing its muscles from the biotechnology and healthcare sector: Eli Lilly (LLY).
Even as I write, I can almost hear the gears of potential turning. Eli Lilly could soon be donning the badge of the biopharma representative in the trillion-dollar league. What's more, this could happen sooner than you might think—say, before we're toasting to 2030.
Today, Eli Lilly stands proud with a market cap hovering over $410 billion, rubbing shoulders with the crème de la crème of the pharmaceutical world.
To reach the coveted trillion by 2030, it needs to rev up its growth engine by almost 166% in the next six or so years.
Given that its market cap ballooned by 178% since May 2020, we're not betting against the odds here.
Let's dissect this potential behemoth and scrutinize its growth prospects, valuation, and their likely dance over time.
With a trailing 12-month net income of $6.2 billion and a price-to-earnings ratio lingering around 69, Eli Lilly isn't exactly shy.
This valuation is higher than the industry standard but not bloated like some tech stocks.
Credit its remarkable net income growth of around 14% per annum over the last decade to persistent R&D investment, the frequent launch of new sought-after medicines, and strategic label expansions for its already-approved drugs.
Now, the market is giddy with anticipation, pricing in growth that surpasses its own impressive average. This is likely due to Eli Lilly's ambitious ventures into thriving markets with treatments for conditions like diabetes, obesity, and chronic kidney disease.
If Eli Lilly maintains its current PE ratio and boosts its earnings by a mere 13.5% each year between now and 2030, it will rake in a net income of about $15.1 billion, nudging its market cap just above $1 trillion.
A lofty goal? Perhaps, but Eli Lilly isn't one to back away from a challenge.
The question hanging in the air like an eager balloon is whether the company can maintain this steady pace.
Analysts are optimistic, predicting an EPS of $8.76 in 2023 and around $16 in 2025. This promising growth is tied to the launch of new medicines from its four programs awaiting approval decisions and a Phase 3 roster filled with 21 promising programs.
Meanwhile, Eli Lilly is acing its game in another affluent market: obesity treatments.
The company has long been a trailblazer in diabetes and obesity drugs, and its recent approval of Mounjaro, a revolutionary treatment for Type 2 diabetes, adds another feather to its cap.
Mounjaro has made waves, garnering $568.5 million in sales in the first quarter, and is predicted to hit peak annual revenue of $25 billion.
Obesity, a global health concern responsible for at least 2.8 million deaths yearly, opens up another massive market for Eli Lilly.
Branded anti-obesity drugs could hit $44 billion in risk-adjusted sales by 2030, up from a modest $2.5 billion in 2022.
As it stands, Eli Lilly's primary contender in this arena is Novo Nordisk (NVO).
So, can Eli Lilly flex its muscles and reach a market cap of $1 trillion by 2030? Signs point to a resounding yes.
With a steady stream of treatments on the horizon and a projected growth trajectory through the end of the decade, it seems to be business as usual for Eli Lilly.
However, like a precarious game of Jenga, the entire venture hinges on its valuation. As long as investors see sunny days ahead, all's well. But maintaining a P/E ratio of around 70 isn't a walk in the park. A dip in performance or a market crash could bring the whole structure down.
That being said, don't let these concerns hold you back from joining Eli Lilly's growth ride. Come 2030, you'll probably be smiling at your investment, whether or not Eli Lilly cracks that 13-digit milestone.
Mad Hedge Technology Letter
June 16, 2023
Fiat Lux
Featured Trade:
(THE SKINNY ON AI)
(CRM), (NVDA), (MSFT), ($COMPQ)
(CRM), (NVDA), (MSFT), ($COMPQ)
One misunderstanding about generative artificial intelligence is that it is advertised as the panacea that will cure the economy and global business in one second.
It’s not.
These types of technologies take time to absorb and integrate.
The type of hype surrounding AI feels like every tech company should 100X revenue next year.
That’s not going to happen right away.
It’s obviously going to be an incremental phenomenon instead of a parabolic rise.
People also seem to miss there will be a swath of AI failures that will disappear into the dustbin of history and everything in between.
Just because Nvidia (NVDA) and Microsoft (MSFT) are making hay during this hot money AI investor pandemonium, doesn’t mean all tech companies will.
In the long term, access to high-quality artificial intelligence will unlock a long-term productivity miracle.
The United States economy is suffering from a bout of unproductivity as young workers mostly spend their time perusing Instagram than tangibly delivering results.
Moving a finger is a hard slog these days for Generation Z.
The net result is poorly trending productivity gains.
Productivity growth in the US has been a paltry 1%.
This week alone brought two examples of generative AI's potential for economic output.
First, a new McKinsey study identified 63 generative AI use cases spanning 16 business functions that could unleash $2.6 trillion to $4.4 trillion in economic benefits annually.
The same study found that generative AI could perform each of more than 2,100 detailed work activities such as communicating with others about operational plans.
Generative AI has the potential to change the anatomy of work, augmenting the capabilities of individual workers by automating some of their individual activities.
Current generative AI and other technologies have the potential to automate work activities that absorb 60 to 70 percent of employees’ time today.
Meanwhile, software company Salesforce (CRM) launched its new GPT enterprise products designed to boost worker productivity.
The company introduced "AI Cloud" at a New York City investor day. Salesforce says its AI Cloud product will allow marketers to auto-generate personalized content for customers and developers to auto-generate code.
Salesforce employees also showed off coming AI functions in the workplace collaboration platform Slack.
It’s true that this AI wave is going to be the biggest that anyone has ever seen, but it will take time to get there.
I think there are meaningful lags in AI's impact. And the idea there will be a surge in economic growth in the next seven to ten years because of AI and technology.
It won’t happen in 2 or 3 years.
Goldman Sachs estimated recently that generative AI could expose the equivalent of 300 million jobs globally to automation over the next decade. That's a nice way of saying a person may lose their job to a robot.
AI could also eventually increase the annual global Gross Domestic Product (GDP) by 7%.
There is the thought that AI will make production faster and more voluminous but the quality and understanding will be poor. Just like all those online chat assistants that companies use. If you have a very specific question not covered by the FAQs they just spit back unhelpfulness.
The takeaway is that there will be winners and losers, but it will take time.
In many cases, the outsized winner is someone we have never heard of that brings something new to the table.
A critical part of this investor play is to avoid AI failures as well because there is bound to be a pile of body bags on the way to AI riches.
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own a deep in-the-money options position that expires on Friday, June 16, and I just want to explain to the newbies how to best maximize their profits.
This involves the Tesla (TSLA) June 2023 $120-$130 in-the-money vertical bull call debit spread.
Provided that we don’t have another 80-point move down in Tesla in ten trading days, this position should expire at its maximum profit point.
So far, so good.
Your profit can be calculated as follows:
Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit
(12 contracts X 100 contracts per option X $1.20 profit per option)
= $1,440 or 13.63% in 25 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning, June 19 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next quarter end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
You Can’t Do Enough Research
Mad Hedge Technology Letter
May 31, 2023
Fiat Lux
Featured Trade:
(WILL CHINA WIN THE AI WARS)
(NVDA), (MSFT)
The two tech heavyweights are basically what the generative AI wars are going to come down to.
Who do I mean?
The United States and China are naturally involved in a larger economic spat that has come to define the world we live in.
What’s the good news?
The Yanks are clearly ahead in the technology that could define the future of the human race.
China’s bread and butter has been to steal vital intellectual property, reverse engineer it, then roll it out for mass adoption.
The strategy has been incredibly effective in launching the Chinese to the second-biggest economy in the world.
Rinse and repeat, right?
China won’t be able to just “copy” generative AI unless they can poach the competition, but since American corporations know the Chinese playbook, I doubt they would allow IP secrets to leak out like a broken toilet.
It most likely appears as if the Chinese and their own Silicon Valley or lack of one will need to create this by themselves.
Funnily enough, American artificial intelligence developed from a non-profit OpenAI as it researched the Transformers machine learning model, which eventually powered ChatGPT.
This environment never existed in most Chinese companies. They would build deep learning systems or large language models only after they saw the popularity.
US investors have also been supportive of the country's research push. In 2019, Microsoft said it would put $1bn into OpenAI.
China, meanwhile, benefits from a larger consumer base. It is the world's second-most populous country, home to roughly 1.4 billion people.
China lives in a world where speed is essential, copying is an accepted practice, and competitors will stop at nothing to win a new market.
This rough-and-tumble environment makes a strong contrast to Silicon Valley, where copying is stigmatized and many companies are allowed to coast on the basis of one original idea or a lucky break.
Creativity and entrepreneurship aren’t valued in China.
At the fundamental level, Chinese tech companies might not be able to hang because they won’t have access to suitable materials.
High-performing computer chips, or semiconductors, are now the source of much tension between Washington and Beijing. They are used in everyday products including laptops and smartphones, and could have military applications. They are also crucial to the hardware required for AI learning.
US companies like Nvidia currently have the lead in developing AI chips and that supply is choked off by the US administration.
For now, the US seems to be ahead in the AI race, and there is already the possibility that current restrictions on semiconductor exports to China could hamper Beijing's technological progress.
However, China's ability to manufacture high-end equipment and components is an estimated 10 to 15 years behind global leaders and that could be the determinant between winning and losing.
Readers need to invest in the AI stocks like Nvidia on every dip and the best of the rest to participate in one of the greatest tech trends in the modern era.
Mad Hedge Technology Letter
May 26, 2023
Fiat Lux
Featured Trade:
(RIDE THE ELEVATOR UP WITH GENERATIVE AI)
(NVIDA), (FOMO), (APPL), (MSFT), (META), (GOOGL), (AMZN)
Part of these artificial intelligence executives going on record to sound out the problems with AI is mostly to protect themselves if this weird digital experiment goes disastrously wrong.
They have mostly said that AI going rogue is a real possibility and could end mankind.
Obviously, we hope that doesn’t happen.
Much of the tech market gains this year have been because of the technology surrounding AI.
Strip that out and the gains will look paltry.
A good example is Nvidia (NVDA) offering legendary guidance to the demand of their chips because of the need to install them in AI-based technology.
The AI narrative truly has legs – it will be the theme that defines 2023 in technology stocks.
The Big 7 tech stocks will possess explosive qualities to their stock precisely because of this thesis.
Then there is the fear of missing out (FOMO).
Every financial advisor is pitching AI as an investment of a lifetime – something that cannot be missed by their clients.
Therefore, I do expect meteoric legs up in shares of Nvidia, Apple, Microsoft, Tesla, Amazon, Facebook, and Google in 2023.
These 7 stocks dominate the tech market and the generative AI gains will mostly manifest themselves in these 7 tech firms.
Yet there are dangerous concerns that AI could also destroy these companies and the internet which we interface with, because the changes could erode the trust in platforms by populating fake photos like deep fakes.
In Washington speech, Brad Smith calls for steps to ensure people know when a photo or video is generated by AI.
Brad Smith, the president of Microsoft, has said that his biggest concern around artificial intelligence was deep fakes, realistic-looking but false content.
Smith called for steps to ensure that people know when a photo or video is real and when it is generated by AI, potentially for harmful purposes.
For weeks, lawmakers in Washington have struggled with what laws to pass to control AI even as companies large and small have raced to bring increasingly versatile AI to market.
Last week, Sam Altman, CEO of OpenAI, the startup behind ChatGPT, told a Senate panel in his first appearance before Congress that the use of AI interferes with election integrity is a “significant area of concern,” adding that it needs regulation.
Lawmakers need to ensure that safety brakes be put on AI used to control the electric grid, water supply and other critical infrastructure so that humans remain in control.
It’s hard to know what is fake and real these days. Fake photos of politicians getting attacked or fake videos of tigers roaming around freely in Times Square New York look weirdly authentic.
AI is getting so good that nobody knows what is real anymore.
I’m sure some of you saw the recent Tom Cruise deep fake where the fake Tom Cruise is telling the audience that he does a lot of “industrial clean up” along with his own stunts. Honestly, I could not tell it was fake, and most people wouldn’t. It caught me – hook, line, and sinker.
As it stands, ride this generative AI to riches in the short-term, but be aware that this technology could blow up the internet or make the internet unusable because of security and trust reasons.
DEEPFAKES LOOK AND SOUND TOTALLY REAL IN 2023
Global Market Comments
May 22, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or CONCENTRATION OF WEALTH AT THE TOP)
(AAPL), (GOOGL), (AMZN), (MSFT), (NVDA), (TSLA), ($VIX), (JPM), (BAC), (C)
CLICK HERE to download today's position sheet.