Global Market Comments
November 5, 2021
Fiat Lux
Featured Trade:
(NOVEMBER 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(BRKB), (COIN), (IWM), (GOOGL), (MSFT), (MS), (GS), (JPM),
(BABA), (BIDU), (JD), (ROM), (PYPL), (FXE), (FXA), (FXB), (CRSP), (TSLA), (FXI), (BITO), (ETHE), (TLT), (TBT), (BITO), (CGW)
Below please find subscribers’ Q&A for the November 3 Mad Hedge Fund Trader Global Strategy Webinar broadcast from the safety of Silicon
Valley.
Q: Have you considered buying Coinbase (COIN)?
A: Yes, we actually recommended it as part of our Bitcoin service in the early days back in July. It’s gone up 62% since then, right along with the Bitcoin move itself. So yeah, buy (COIN) on dips—and there will be dips because it will be at least triple the volatility of the main market. And be sure to dollar cost average.
Q: Do you think the breakout in small caps (IWM) will hold and, if so, should we focus on small-c growth?
A: Yes it will hold, but no I would focus on the big cap barbells, which will lead this rally for the next 6 months. And there you’re talking about the best of tech which is Google (GOOGL) and Microsoft (MSFT), and the best of financials which is Morgan Stanley (MS), Goldman Sachs (GS), and JP Morgan (JPM).
Q: Why not time the webinar for after the FOMC? What will be the market reaction?
A: Well, first of all, we already know what they’re going to say—it’s been heavily leaked in the last week. The market reaction will be initially a potential sharp down move that lasts a few minutes or hours, and then we start a grind up for the next two months. So that's why I wanted to be 80% leverage long going into this. Second, we have broadcast this webinar at the same time for the last 13 years and if we change the time we will lose half our customers.
Q: Why do you always do debit spreads?
A: They’re easier for beginners to understand. That’s the only reason. If you’re sophisticated enough to do a credit spread, the results will be the same but the liquidity will be slightly better, and you can also apply that credit to meet your margin requirements. We have a lot of basic beginners signing up for our service in addition to seasoned pros and I always encourage people to do what they're most comfortable with.
Q: Are you still comfortable with the Morgan Stanley (MS) and Berkshire Hathaway (BRKB) positions?
A: I expect both to go up 10-20% by March, so that’s pretty comfortable. By the way, if you have extremely deep in the money call spreads on Goldman Sachs or Morgan, consider taking profits on those and rolling your strikes up. If you have like the $360-$380 vertical bull call spread in Goldman Sachs, realize that gain and roll up to the $420-$430 March position in Goldman Sachs—that will give you another 100% profit by March. With the $360-$ 380s, you have like 97% of the profit already in the price, there’s no leverage left and no point in continuing, you can only go down.
Q: What should I do with my China position?
A: Sell all your positions in China, realize all the losses now so you can offset those with all the huge profits on all your other positions this year. There I’m talking about Ali Baba (BABA), Baidu (BIDU), and (JD), which have been absolutely hammered anywhere from down 50% to down 70%. And do it now before everyone else does it for the same reasons.
Q: Thoughts on Paypal (PYPL) lately?
A: The stock is out of favor as money is moving out of PayPal into newer fintech stocks. The move down is totally unjustified and screaming long term buy here, but for the short-term investors are going to raid the piggy bank, sell the PayPal, and go into the newer apps. This has been my biggest money-losing trade personally this year because PayPal long-term has a great story.
Q: Will earnings fall off next year due to prior year comparisons or supply chain?
A: No, if anything, earnings are accelerating because supply chain problems mean you can charge customers whatever you want and therefore increase margins, which is why the stock market is going up.
Q: Long term, what would your wrong strikes be?
A: I would say don’t get greedy. I’m doing the ProShares Ultra Technology (ROM) $120-$125 call spread for May expiration—the longest expiration they offer. That gives you about 100% return in 6 months; 100% is good enough for me because then I’ll do the same thing again in May and get another 100%. What’s 100% x 100%? It’s 400% because you’re reinvesting a much larger capital base the second time around. If a 100% profit in six months is not enough for you then you are in the wrong line of business.
Q: Do you think Ethereum (ETHE) has long-term potential upside?
A: Yes, is a 10X move enough? We just had a major new high in Ethereum because they made moves to limit the production of new Ethereum. Ethereum is the superior technology because its architecture avoids the code repeats that Bitcoin does and therefore only uses a third of the electricity to create. But Bitcoin is attracting the big institutional cash flows because they have an early mover advantage. By the way, how much electricity does crypto mining consume? The entire consumption of Washington state in a year, so it’s a big deal.
Q: What should I do about Crisper Therapeutics (CRSP)?
Crispr Therapeutics (CRSP) is my other disaster for this year because ignored the move up to $170—we’re now back into the $90’s again. So, I have 2023 LEAPS on that; I’m going to keep them, I’ve already suffered the damage, but the next time it goes up to $170 I’m selling! Once burned, twice forewarned. And part of the problem with the whole biotech sector is we are now in the back end of the pandemic and anything healthcare-related will get hit, except for the vaccine stocks like Pfizer (PFE) which are still making billions and billions of dollars.
Q: I bought Baidu (BIDU) and Alibaba (BABA) years ago at a much lower price and I'm still up quite a lot; what should I do?
A: If you have the big cushion, I would keep them and look for #1 recovery in the Chinese economy next year and #2 for the government to back off from their idiotic anticapitalism strategy because it’s costing them so much money.
Q: Is Robinhood (HOOD) a good LEAP candidate?
A: Only on a really big dip, and then you want to go out two years. With a stock that’s volatile as hell like Robinhood and could drop by half on no notice, so you only buy the big dips. It’s not a slowly grinding upward stock like Goldman Sachs (GS) and Morgan Stanley (MS) where you can add LEAPS now because you know it’s going to keep grinding up.
Q: How can Morgan Stanley go up when the chief strategist is bearish?
A: Their customers aren't listening to their chief strategist—they’re buying. And the volume of the stock, which is where Morgan Stanley makes money, is going through the roof, they’re making record profits there. And I've got Morgan Stanley stock coming out of my ears in LEAPS and so forth.
Q: What are 5 stocks you would buy right now?
A: Easy: Google (GOOGL), Microsoft (MSFT), Morgan Stanley (MS), Goldman Sachs (GS), and JP Morgan (JPM). Buy whatever is down that day. They’re all going up.
Q: Too late to buy Tesla (TSLA) calls?
A: Yes, it is. Tesla has a long history of 40% corrections; we had one that ended in May, and then it doubled (and then some). So yeah, too late to buy the calls here. Go back and read my research from May which said buy the stock and you get a car for free—and that worked again, except this time, you can get three free Tesla’s. A lot of subscribers have sent me pictures of their Teslas they got for free on my advice; I’m probably the largest salesman for Tesla for the last 10 years and all I got out of it was a free Powerwall (the red one)..
Q: How much higher do you think semiconductor companies will go?
A: Higher but it’s impossible to quantify. You’re getting very speculative short-term buying in there. So, I think it continues to the rest of the year, but with chips, you never know.
Q: Would you be buying Crispr Therapeutics (CRSP) at these levels?
A: Yes, but I would either just buy the stock and not be dependent on the calendar or buy a 2 ½ year LEAP and get an easy double on that.
Q: What about the currencies?
A: I don’t see much action in the currencies as long as the US is raising interest rates. I think the Euro (FXE), the Aussie (FXA), and the British pound (FXB) will be dead for the time being. Nobody wants to sell them but nobody wants to buy them either when you’re looking at a potential short term rise in the dollar from rising interest rates.
Q: What stable coins are the right answer for cryptocurrency?
A: The US dollar stable coin, but for price appreciation, you’re really looking at Bitcoin and Ethereum. Stable coins are stable, they don’t move; you want stuff that’s going to go up 5, 10, or 20 times over the next 10 years like Bitcoin (BITO) and Ethereum (ETHE). That is my crypto answer.
Q: What should I do about the iShares 20 Plus Year Treasury Bond ETF (TLT) $135-$140 put spread expiring in January?
A: If we get another run down to the $141 level that we saw last month, I would come out of all short treasury positions because you’re starting to run into time decay problems with the January expirations. And in case we remain in a range for some reason, I would be taking profits at the bottom end of the range. It was my mistake that I didn’t grab those profits when we hit $141 last time. So don’t let profits grow hair on them, they tend to disappear. We lost six months on this trade due to the delta virus and the mini-recession it brought us.
Q: Will there be accelerated tech selling in December because of the new tax rates?
A: What new tax rates? There has been no new tax bill passed and even if there were, I think people wouldn’t tax sell this year because the profits are enormous. They would rather do any selling in January at higher prices and then defer payment of those taxes by 18 months. I don’t think there will be any tax issues this year at all.
Q: What’s your return on solar power investments?
A: My break-even was four years because our local utility, PG&E, went bankrupt and the only way they're getting out of bankruptcy is raising electricity prices by 10% a year. It turns out that as a result of global warming, the panels have operated at a higher efficiency as well, so we’re getting a lot more power output than originally expected. Now I get free electricity for the remaining 20-year life of the panels which is great because with two Tesla’s and all-electric heating and air conditioning I use a lot of juice. My monthly bill is a sight to behold. I also power the 20 surrounding houses and for that PG&E pays me $1,800 a month.
Q: Do you see China (FXI) invading Taiwan as a potential threat to the market?
A: China will never invade Taiwan. They own many of the companies they're already in, they de facto control Taiwan government from a distance; they would not risk the international consequences of an actual invasion. And we have the US seventh fleet there to stop exactly that. So, they can make all the noise they want but nothing will come of it. I’ve been watching this for 50 years and nothing has ever happened.
Q: Would you buy ProShares Ultrashort 20+ Treasury ETF (TBT) here?
A: Absolutely, with both hands, all I can get.
Q: Can you recommend any water ETF opportunity?
A: Yes there is one I wrote a piece on last month. It’s the Claymore S&P Global Water Index ETF (CGW).
Q: How long can you hold the (TBT) before time decay hurts?
A: It doesn’t hurt, the cost of the TBT is two times the 10-year rate. So that would be 3%, plus 1% a year for management fees, and that’s your slippage on the TBT in a year right now—it’s 4%. Remember if you’re short the bond market, you have to pay the coupon when you’re short. Double the bond market and you have to pay double the coupon.
Q: Is the ProShares Bitcoin Strategy ETF (BITO) a good alternative to buying bitcoin?
A: I would say yes because I’ve been watching the tracking on that very carefully and it’s pretty damn close. Plus there’s a lot of liquidity there, so yeah, buy the (BITO) ETF on dips and dollar cost average.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
November 1, 2021
Fiat Lux
Featured Trade:
(A FINE-TUNED MACHINE)
(MSFT)
What this health crisis did was force us to understand how critical Microsoft (MSFT) and its products, especially Windows, are to the world.
The clamoring for its products whether it be software, hardware, or gaming, spoke volumes to Microsoft’s strategic footprint in the Silicon Valley ecosystem.
That’s part and parcel of why it’s been my go-to, iron-clad tech recommendation for as long as I can remember.
This Redmond, Washington company is an all-weather type of stock and even in an inflationary environment, the first place any business should lean on is Microsoft in order to understand how to ensure that they are able to carve out productivity gains.
And even dealing with constraints, for example, if you have supply chain constraints, one of the goals you want to achieve is run factories or even if that’s your work desk, at the leading edge of the efficient frontier.
That means tools like Microsoft’s cloud products, simulating success is going to make sure that every production run has the least amount of slippage.
So, I think any which way you look, whether it's in the knowledge department, first-line worker, or the cloud products and simulation, utilizing all the stallions in the stable are going to be the best way for any company to deal with inflationary pressures so that they can in fact accelerate productivity the fastest way possible and thereby calculate the fastest way to meet aggregate demand out there.
Microsoft is essentially the best at doing and it’s not even a toss-up.
In a strong inflationary environment, the case for digital transformation strengthens with Microsoft helping others, and this plan is hatched by deploying MSFT’s top-line services to spur digitization as a deflationary force that massages the bottom line.
The signs are everywhere that companies from all walks of life are doing this with Microsoft Cloud quarterly revenue surpassing $20 billion for the first time, up 36% year over year.
Businesses small and large can improve productivity and the affordability of their products and services by building tech in density.
The Microsoft Cloud delivers the end-to-end platforms and tools organizations need to navigate this time of transition and change.
Every organization will need a distributed computing fabric across the cloud and the edge to rapidly build, manage, and deploy applications anywhere.
MSFT is building Azure as the world's computer, with more data center regions than any other provider, delivering fast access to cloud services while addressing critical data residency requirements.
They are partnering with mobile operators from AT&T and Verizon in the United States to Telefonica and BT in Europe, Telstra and Singtel in Asia Pacific, as they embrace new business models and bring ultra-low latency, compute power, and storage to the network and the enterprise edge.
The numbers back up their achievements with 78% of the Fortune 500 using MSFT’s hybrid offerings.
LinkedIn now has nearly 800 million members. Confirmed hires on the platform increased more than 160% year over year. And this quarter, MSFT launched new ways to help job seekers discover roles that align with how they want to work. In a rapidly evolving labor market, companies are increasingly turning to LinkedIn Learning to upskill and reskill their employees.
The totality of MSFT’s dominance translated into MSFT notching first-quarter revenue of $45.3 billion, up 22%.
MSFT will surpass $200 billion of total revenue this year and they will easily surpass $300 billion annually in the next 18 months.
I am highly bullish MSFT — buy on every and all dips.
Global Market Comments
November 1, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LET THE GAMES BEGIN!)
(MS), (GS), (BLK), (JPM), (BAC), (TLT), (TSLA), (AAPL), (MSFT), (GOOGL), (AMZN), (ROM)
Welcome to the first day of November, when the seasonals swing from negative to positive. The hard six months are over. The next six should be like shooting fish in a barrel.
At least that’s what happened in the past. The period from November 1 to May 31 has delivered the highest stock returns for the past 75 years.
So how do we play a hand that we have already been dealt full of aces and kings?
Load the boat with financials, like (MS), (GS), (BLK), (JPM), and (BAC). Notice that when we had the sharpest rise in interest rates in a year, financials barely moved when they should have crashed? That means they will soon start going up again.
You might have also observed that technology stock has been flat-lining when rising rates should have floored them. That means their torrid 20% earnings growth will keep floating their boats.
It gets better. We just learned that the GDP growth rate plunged in Q3 from a rip-roaring 6% rate to only 2%. What happens next? That 4% wasn’t lost, just deferred into 2022. The rip-roaring 6% growth rate returns. That’s why stocks are pushing up to new all-time highs right now.
So, buy the dips. We may have seen our last 5% correction of 2021. The only unknown is how markets will react to a Fed taper, which could come as early as Wednesday. But on the heels of that, we will get a $1.75 billion rescue package, the biggest in 50 years. One will cancel out the other, and then some.
Take a look at the ProShares Ultra Technology Fund (ROM), the 2X long ETF. I just analyzed its 30 largest holdings. Half are tech stocks that have been trash and are down 30% or more. The other half are at all-times highs, like Microsoft (MSFT) and Alphabet (GOOGL).
What happens next when the seasonals are a tailwind? The tech stocks that are down will rally because they are cheap, while the high stocks keep going because they are best of breed. I think (ROM) has $150 written all over it by March.
You’ve got to love Elon Musk, whose net worth is approaching $300 billion. When the pandemic broke, every automaker cancelled their chip orders for the rest of the year while Tesla took them all. Today, Detroit has millions of cars built but in storage because they are all missing chips. In the meantime, Tesla is snagging orders for 100,000 cars at a time.
Like I say, you gotta love Musk. Hey, Elon, call me! Why don’t you just buy the entire US coal industry and shut it down. It would only cost $5 billion, as market caps are so low. That would have more impact on the environment than another million Teslas. Worst affected would be China, where 70% of US coal now goes.
A continued major driver of the bull case for stocks is profit margins of historic proportions.
Q1 saw a 13% margin, Q2 13.5% and Q3 12.3%, and Q3 had to carry the dead weight of a delta impaired GDP growth rate of only 2.0%. Imagine what companies can do in Q4 when the growth rate is returning to a torrid 6% rate.
This has been one of my basic assumptions for the entire year and it seems it was I was alone in having it. This is where the 90% year-to-date performance comes from.
Inflation is Here to Stay, says top investing heavyweights, at least 4% through 2022. That means high inflation, higher financial shares, and higher Bitcoin prices. It’s going to take two years to unwind the mess at the ports that is driving prices.
Covid is Getting Knocked Out by a One-Two Punch, via a new round of booster shots and imminent childhood vaccinations. It could take new cases to zero in a year and give us a booming economy.
S&P Case Shiller is Still Rocketing, the National Home Price Index up 19.8% YOY in August. Phoenix (33.3%), San Diego (26.2%), and Tampa (25.9%) were the hot cities. This will continue for a decade but as a slower rate.
New Home Sales Pop, to 800,000. Annual median prices jump at an annual 18.7% to $408,000. The share of homes selling over $1 million increased from 5% to 9% in a year. It cost $500,000 to get a starter home in an Oakland slum these days. Homebuilders Sentiment Soars to 80. Buy (KBH), (PUL), and (LEN) on dips.
Bonds Melt Up, creating one of the best trade entry points of the year. A successful 30-year auction this week that took yields from 1.71% down to 1.52% in a heartbeat. It makes no sense. Buying bonds here is like buying oil in the full knowledge that someday it will go to zero. I am doubling my short position here. Look at the (TLT) December 2022 $150-$155 vertical bear put spread LEAPS which is offering a 14-month return of 54%. This is the month when the Fed has promised to begin the first of six interest rate hikes. Just buy it and forget about it.
Proof that the Roaring Twenties is Here. It’s demand that is spiking, the greatest ever seen, not supplies that are drying up in the supply chain issue. It should continue for a decade and the bull market in stocks that follows it. You heard it here first. Dow 240,000 here we come.
Apple Blows it in Q3, with millions of its phones lost at sea and no idea when unloads are possible, costing it $6 billion in sales. Revenues were up a ballistic 29% YOY. Buy (AAPL) on dips. I see $200 a year next year.
Amazon Craters, with both shrinking revenues and profits. Supply chain problems about with several billion of inventory trapped at sea off the coast of Long Beach. It plans to hire 275,000 to handle the Christmas rush. The stock hit a one year low. There is a time to buy (AMZN) on the dip, but not quite yet.
My Ten Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
My Mad Hedge Global Trading Dispatch saw a massive +8.95% gain in =October. My 2021 year-to-date performance maintained 88.55%. The Dow Average is up 17.06% so far in 2021.
After the recent ballistic move in the market, I am continuing to run my longs in Those include (MS), (GS), (BAC), and a short in the (TLT). All are approaching their maximum profit point and we have nothing left but time decay to capture. So, I am going to run these into the November 19 expiration in 14 trading days. It’s like have a rich uncle write you a check one a day.
That brings my 12-year total return to 511.10%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 42.90%, easily the highest in the industry.
My trailing one-year return popped back to positively eye-popping 120.60%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 46 million and rising quickly and deaths topping 746,000, which you can find here.
The coming week will be slow on the data front.
On Monday, November 1 at 7:00 AM, the ISM Manufacturing PMI for October is out. Avis (CAR) Reports.
On Tuesday, November 2 at 1:30 PM, the API Crude Oil Stocks are released. Pfizer (PFE) reports.
On Wednesday, November 3 at 7:30 AM, the Private Sector Payroll Report is published. Etsy (ETSY) reports. At 11:00 AM, the Federal Reserve interest rate decision is announced, followed by a press conference.
On Thursday, November 4 at 8:30 AM, Weekly Jobless Claims are announced. Airbnb reports (ABNB).
On Friday, November 5 at 8:30 AM, The October Nonfarm Payroll Report is released. DraftKings (DKNG) reports. At 2:00 PM, the Baker Hughes Oil Rig Count are disclosed.
As for me, I have been known to occasionally overreach myself, and a trip to the bottom of the Grand Canyon a few years ago was a classic example.
I have done this trip many times before. Hike down the Kaibab Trail, follow the Colorado River for two miles, and then climb 5,000 feet back up the Bright Angle Trail for a total day trip of 27 miles.
I started early, carrying 36 pounds of water for myself and a companion. Near the bottom, there was a National Park sign stating that “Being Tired is Not a Reason to Call 911.” But I wasn’t worried.
The scenery was magnificent, the colors were brilliant, and each 1,000 foot descent revealed a new geologic age. I began the long slog back to the south rim.
As the sun set, it was clear that we weren’t going to make to the top. I was passed by a couple who RAN the entire route who told me “better hurry up.” I realized that I had erred in calculating the sunset, it'staking place an hour earlier in Arizona than in California.
By 8:00 PM it was pitch dark, the trail had completely iced up, and it was 500 feet straight down over the side. I only had 500 feet to go but the batteries on my flashlight died. I resigned myself to spending the night on the cliff face in freezing temperatures.
Then I saw three flashlights in the distance. Some 30 minutes later, I was approached by three Austrian Boy Scouts in full dress uniform. I mentioned I was a Scoutmaster and they offered to help us up.
I grabbed the belt of the last one, my companion grabbed my belt, and they hauled us up in the darkness. We made it to the top and I said, “thank you”, giving them the international scout secret handshake.
It turned out that I wasn’t in great shape as I thought I was. In fact, I hadn’t done the hike since I was a scout myself 30 years earlier. I couldn’t walk for three days.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Happy Halloween!
Mad Hedge Technology Letter
October 25, 2021
Fiat Lux
Featured Trade:
(HOW TO PLAY THE TECH EARNINGS SEASON)
(MSFT), (FB), (GOOGL), (AAPL), (SNAP)
The big guns of tech are coming up to the plate for earnings and they could use a strong showing as big tech’s narrative is on the ropes.
They are still the apex warriors of the stock market, and that position is hardly under threat, but there are whispers of a slowdown.
A recipe of high expectations mixed with cruddy forecasts could give us a dip to buy into.
This is what our portfolio would love to be gifted.
Don’t forget we have already seen some misses from tech companies like Snap (SNAP) which plunged 27% after warning that customers are cutting back on digital advertising spending.
The fallout sent other ad tech companies like Twitter and Google significantly lower.
This never used to happen to these companies and that’s important to point out because we just exited an era where ad tech companies could do no wrong.
Now it almost seems like they can’t do no right.
Readers got spoilt, earnings after earnings, these tech companies used to knock it out of the park and much of that high expectation is still leftover, perhaps a legacy concept from the bull market from 2008 to 2021.
These are the bellwether stocks of the broader market that have single-handedly put the rest of their market on their back and carried it higher.
Everyone wants to know if they can still hack it?
Technology companies in the S&P 500 Index are projected to report revenue growth of roughly 19% for the third quarter such as Alphabet at 38% growth, followed by Facebook at 37% and Apple (AAPL) at 31%.
I do believe that they will achieve these lofty estimates but they won’t overperform to the point where buyers line up in spades.
We aren’t in that type of environment now.
These companies have pricing power, and combined with underlying growth drivers, they generate high returns and reinvest in the business and perpetuate that strength.
The price action backs up my concerns with 85% of tech companies having beaten profit estimates, but the stocks have fallen an average of 2.4% the following day.
The lack of response means we are long in the tooth.
If this does become a “buy the rumor, sell the news” type of event, this will give us plenty of discounts to cherry-pick the next day.
The challenge of justifying their valuations means these companies aren’t getting their “free pass” that they used to pocket and manipulate.
They aren’t the darlings of the business world anymore — that title goes to cryptocurrency and bitcoin.
Facebook will tell us how badly Apple’s privacy changes are affecting its ad revenue model.
Consensus is looking for revenue growth of nearly 40% this quarter in Alphabet which in a normal year wouldn’t be that hard to beat but it’s a new normal now.
Ongoing monetization improvements in search advertising through product/AI-driven updates, along with greater-than-expected contributions from businesses like YouTube and Google Cloud can seem them meet their forecasts.
Microsoft (MSFT) expects revenue to grow around 20% in the quarter and we need to look out for if their cloud-computing business maintains strong demand.
Year-over-year comparisons get progressively tougher throughout the year which is an obstacle for MSFT’s durable growth portfolio of Azure/Security/Teams.
Apple could deliver great iPhone sales, but semiconductor shortages are a limiting factor, and the China risk is another big quagmire.
At what point will the Chinese Communist Party stop giving Apple such an easy go of it in China?
Regulatory uncertainty is an overhang — implications of the App Store ruling remain a wild variable.
Amazon is dealing with supply-chain challenges and labor shortages.
Last quarter, revenue missed expectations for the first time since 2018, and the company warned of the reverse of the pandemic-related tailwind for online retail.
Revenue is expected to grow a little more than 16%, the slowest pace since 2015.
The stock has been dead weight this year, which is unlike Amazon.
I do believe we will get a sprinkling of fairy dust that includes margin expansion, but some of these companies will experience a pullback and I will be waiting to aggressively take advantage of these deals.
Mad Hedge Biotech & Healthcare Letter
September 14, 2021
Fiat Lux
FEATURED TRADE:
(IS THIS THE BIGGEST WINNER IN A WINNER-TAKE-MOST MARKET?)
(NVTA), (ARKK), (ARKG), (SFTBY), (AMZN), (EXAS), (AAPL), (MSFT)
One of the most underappreciated names in the biotechnology sector might just be the biggest winner in a winner-take-most market today: Invitae (NVTA).
Despite being at the receiving end of a seemingly endless flogging since the year started, Invitae remains an attractive stock for the likes of Cathie Woods.
In fact, this San Francisco-based company is one of the Top 20 holdings of ARK Innovation (ARKK) and ARK Genomic Revolution (ARKG).
Described by Woods as "probably one of the most important companies in the genomic revolution," Invitae is the sixth-largest holding of the ARK Investment portfolio with more than $1 billion worth of exposure.
Aside from ARK, Invitae also recently attracted the attention of Japanese tech conglomerate SoftBank (SFTBY), which came in the form of $1.2 billion worth of convertible bond investment.
Amid all these, why is Invitae still under-appreciated?
First, it’s essential to understand that biotech companies opt to target particular niches where they aim to maintain high prices and maximize profitability for as long as possible.
That way, they can maintain and continue to boost their profits.
This results in highly prohibitive costs in the healthcare innovation section, which in turn cause rationing of cases because only a select group of patients can actually afford the exorbitant fees for the innovative drug or therapy.
While rationing care and maximizing profits are obviously great for investors, this makes the innovations inaccessible to people who could not shell out the cash to take the tests or treatments.
This is where Invitae comes in.
Basically, Invitae is taking a completely different approach compared to its peers in the biotechnology world.
According to the company, its mission is "to bring comprehensive genetic information into mainstream medicine to improve healthcare for billions of people."
How will Invitae achieve this?
Instead of choosing a single genetic variant to test, which costs over $1,000 each, the company is developing a testing platform that can identify thousands of genetic variants.
The clincher? This will only cost less than $250 for the entire test panel.
This nonconforming approach to biotechnological innovations is what has primarily led to Invitae’s under-appreciation.
However, Invitae’s mission holds incredible potential.
What it means in medical terms is that the company can help about 1 in 6 people suffering from a medical condition with an inherent genetic factor.
What it means in financial terms is that the company holds the possibility of generating several hundred dollars per year from over 2 billion people—a jaw-dropping market opportunity worth $4 trillion.
One of Invitae’s key ideas is to grant people access to their genetic information and then interpret it for them.
To me, this indicates the company’s goal of doing for genetics what Amazon (AMZN) has done for book buyers.
The next question is this: Can Invitae truly accomplish this?
Let’s consider the company’s growth trajectory along with the catalysts ahead.
So far, three catalysts can push the company towards its goals.
First is the steady growth in testing volume. As with most medical procedures, the volume of genetic testing went down during the COVID-19 pandemic. However, this is now rebounding gradually.
In the first quarter of 2021, the billable volume went up by 72% year over year, with roughly 259,000 tests in that quarter alone.
Traditionally, genetic testing is generally driven by orders from doctors and the cooperation of health plans to cover the tests.
Moving forward, we expect pharmaceutical firms to play more significant roles in promoting and even paying for these tests.
Approximately 90% of the pharma pipelines these days are based on genetic conditions.
As these new and innovative genetic treatments gain FDA approval, the pharma companies would have additional vested interest in ensuring eligible patients receive testing. That way, they can drive demand for the therapies they developed.
The second catalyst comprises the oncology sector.
Genetic testing has become the trend, particularly for cancer—an undoubtedly massive and financially lucrative market.
To leverage this growth, Invitae acquired ArcherDX in 2020 in an effort to expand its offerings.
With this purchase, the company can help major cancer centers implement their testing systems while also offering support to healthcare providers who opt not to do their own testing.
The availability of these comprehensive services will serve as critical drivers of income and profitability considering the historically proven high reimbursement rates in the oncology testing segment.
Apart from this, Invitae recently announced its decision to acquire Ciitizen, a consumer health tech firm, for $325 million.
This move will allow Invitae to expand its patient database through the genomic and clinical information gathered from Ciitizen’s platform.
Thus far, Invitae has announced 13 acquisitions over the past 5 years.
The third catalyst is the continuous global growth of Invitae.
Evidently, the mission of reaching 2 billion people requires worldwide expansion—something that the company has been working on.
In fact, roughly 18% of the total billable volume of Invitae in the first quarter came from international transactions, which have the potential to grow faster than their business in the US.
To date, Invitae has been expanding its operations in Japan, Israel, Europe, and Australia.
Meanwhile, Invitae’s incredible potential has attracted other companies as well. Exact Sciences (EXAS) has been linked to the company for a potential merger among the firms interested.
Admittedly, Invitae’s mission to offer affordable and accessible genetic testing to 2 billion people will require many more years before it comes to fruition.
When that day comes, the company will join Apple (APPL), Amazon, and Microsoft (MSFT) as part of an elite group with $1 trillion and over market cap.
The long wait for Invitae to achieve this ambitious goal would be worth it for patient buy-and-hold investors.
