Mad Hedge Technology Letter
March 2, 2022
Fiat Lux
Featured Trade:
(WHEN IT RAINS – IT POURS)
(TDOC), (ARKK)
Posts
Don’t get gaslighted by believing that growth companies now are at a discount and primed to shoot higher.
This couldn’t be further from the truth.
Honestly, this is just the beginning of a hard slog to prove to investors they are worth their time of day.
Once investors get a sniff of top-line growth capitulating, investors cash out in droves and try to not be the last one holding the bag.
In many cases, the latest rout in tech stocks has been far more crippling to investor portfolios than what we saw during the stock market collapse of February and March 2020, just after Covid was hyped around the world.
Fintech has been a sub-sector of tech that has been blinded by the light.
The collapse in PayPal shares has been swift and bloody.
From its March 2020 low, shares more than tripled over the next 15 months as usage and revenues soared. And then, just as quickly, the shares collapsed as fintech competition became crowded.
The digital payments specialist has now lost two-thirds of its value since its mid-summer 2021 all-time high. The extraordinary loss has been stark, but it epitomizes the current environment for growth tech.
If investors learned anything from the dot-com sell-off a generation ago, everybody rushes for the exit at the same time to rotate into more attractive companies.
Simply, "can’t miss innovation" are bid up like no other on the way up in a bull market with low rates. Conversely, they overshoot to the downside in a bear market with rising rates.
Growth tech is going to have to shake off this stereotype if they want to perform in this new normal environment.
That’s not to say these are worth nothing, but there is always a time to shine and a time to rain.
Unfortunately for remote medical services company Teladoc (TDOC), it is time for the latter, which is why I strapped on a bear put spread with a 16-day horizon that TDOC will not rise above $79.
If anything, the case for best of breed is getting stronger, such as the likes of Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL).
On the trading front, we took profits on a bear put spread last month on TDOC with a February expiration after the omicron virus peaked in the short-term, meaning that no incremental investor would be interested in buying TDOC in the short term.
TDOC is part of a bigger tech growth portfolio helmed by Cathie Wood's ARKK Invest, and that portfolio has gotten slaughtered this year as Woods has no concept of market timing and indiscriminately buys tech at any price based on a zillion year time horizon.
She also said that she is seeing deflation two weeks ago in this market which is an outright breach of fiduciary duty to investors. Since her interview, Russia has invaded Ukraine and oil has spiked to $110 per barrel of crude.
Any novice investors should just wait for Wood to speak and then do the opposite, and there is in fact an ETF built for that very purpose.
TDOC is ARKK fund’s biggest holding, and they just underwent a relief rally as the market is betting that Jerome Powell will become more dovish. The latest rally is most likely a dead cat bounce.
This is a GOLDEN OPPORTUNITY to sell the hell out of TDOC, and ARKK funds for a no-brainer short-term trade of 16 days as the fresh inflation forecasts should start to trickle in and suppress growth tech again.
This is just the beginning of elevated inflation brought on by another foreign war, and the pockets of Americans are about to be hit by a wave of higher food and energy prices.
That spells trouble for underperforming growth tech and TDOC is the poster child for that.
Don’t buy this stock – if anything, sell the rallies like we are doing here. Growth tech is dead for the foreseeable future.
Mad Hedge Technology Letter
February 18, 2022
Fiat Lux
Featured Trade:
(AVOID ARKK)
(ARKK), (ARKG), (ARKX)
With a reported net worth of a few hundred million dollars, Ark Invests CEO Cathie Wood laid an egg in her interview yesterday defending the company’s lousy recent performance.
It wasn’t so much that tech has sold off and especially growth stocks have bore the brunt of the carnage, but it was her logic behind her answers that raises more questions than answers.
Doing a deep drive into her array of ETFs, there are some headscratchers.
For example, in her ARKX Space Exploration and Innovation ETF (ARKX), why is her 5th biggest holding a Japanese construction company that specializes in making excavators Komatsu?
Her ETFs are full of these stocks that shouldn’t be there and she continues to bang on the drum about her portfolio possessing superior innovation.
Her second largest holding in this same ETF is a 3D printing ETF (PRNT) which also is illogical and has nothing to do with space exploration.
In her ARK Genomic Fund ETF (ARKG) her second largest position is Teladoc (TDOC) which provides remote doctor services through an app.
TDOC has nothing to do with genomics whatsoever.
Her flagship fund ARK Innovation ETF (ARKK) fund is down 60% in the past 365 years and it appears as if the pain is just starting, with huge drawdowns in many of her core holdings.
In the interview, she also gave some bizarre answers.
She reasoned to the viewer that the reason her team avoided Moderna (MRNA) is because the valuation is too high.
This is at the same time she completely ignores valuation for “innovation” stocks that aren’t interested in turning a profit because they are too “innovative.”
A company like TDOC has an EPS of -$5.5 and many of her key holdings are big loss makers which in the era of Central Bank hawkishness is a death knell.
Some of her other key holdings like Roku (ROKU) are down 25% just today and down 77% in the last 365 days.
TDOC is also down 77% in the last 365 days and 7% just today.
I mean for a net worth of a few hundred million dollars, surely, performance could be a little better, right?
What Cathy Wood misses completely is that being in the stock market is about the right and wrong timing which she behaves like it doesn’t exist because her time horizon is forever.
She likes to say “innovation is on sale,” but I would argue, quality is on sale and readers should migrate to higher ground to the likes of Amazon, Google, Apple, and Microsoft.
Wood's response was that other people “aren’t doing the research” which I find to be a ridiculous claim in itself.
In another absolute shocker, she played down inflation as something that has been more or less contained and will work itself through.
Then she highlighted all the “deflationary forces” as the reasons why inflation will be tamed which seems highly unlikely.
She plain out avoided many of the hard questions because she simply had no good response.
She stuck with the marketing pamphlet as if that was all she knew.
Wood also completely ignored anything related to tactical and active portfolio management and her plan is pretty much to stick with what she has even if there are 99% selloffs or drastic shifts in market conditions.
ROKU and TDOC are down 77% and she repeats the same general phrases as if we are in a bull market.
Readers wants to know what the next step is and how to strategically navigate through this bout of high volatility.
To shame the market and blame others on not “doing the research” is quite tone deaf and I could never recommend Cathy Wood and her ARKK fund to anyone.
To give her credit, she got the Tesla (TSLA) call spot on and crushed that one, but the real stock market people know that this industry is a what have you done for me lately industry and only when the tide goes out, we see who’s swimming naked.
Mad Hedge Technology Letter
February 2, 2022
Fiat Lux
Featured Trade:
(GOOGLE IS STILL ON SALE)
(GOOGL), (ARKK), (MSFT), (AAPL)
Google (GOOGL) shares were up 65% last year and I would still call the name cheap in 2022.
It’s interesting for me to see ARK (ARKK) Funds CEO Cathy Woods claim that growth is on sale now.
I take the other side of the argument and would pontificate that quality is for sale, like Google, who has carved out an unrivaled position in the digital ad space.
Their cash cow business is so effective that they are set to achieve $100 billion in free cash flow by 2023.
It’s mind-boggling that a company of this magnitude still trades at a discount even though generating more free cash flow than Apple (AAPL) and Microsoft (MSFT).
Google’s ad revenue was up to $61 billion which was up from $46 billion last year.
These numbers are staggering because of the sheer math it takes to jump to 33% when we are talking about over $50 billion.
Google is so big that the law of large numbers works against them, but they still shrug that off and register these outlandish numbers.
This company is one of the sure-fire bets in tech along with Microsoft and it’s no surprise that the best companies are taking the rest of the market on their back to diffuse this recent volatility.
The plaudits don’t stop there with their critical cloud division growing 45% year over year to $5.5 billion.
The cloud and ad revenue serve as the structural stabilizers to a healthy business and all signs point to Google having tremendous value as a stock.
Google also announced a 20:1 stock split which should allow investors with smaller bank accounts access to the stock.
Apple and Tesla saw huge inflows after they announced stock splits and I see no reason why this should be different for Google.
Fortunately, it appears that supply chain bottlenecks aren’t materially damaging Google’s ad demand.
Now Google is on the verge of cruising by $2 trillion in market cap.
Since we are in a market where outperformers are rewarded, Google is in great shape for 2022 when supply chain problems are set to improve.
I have repeatedly said to stay away from those companies that cannot meet expectations and aren’t cash flow-positive.
There is no more free money to subsidize poor management or a poor product or both.
When we analyze Google’s ad business from a microeconomic level, then it’s easy to understand that businesses cannot get rid of their services because of its deep application for consumers.
People also want deals.
They're looking for value.
For shoppers, Google made it possible to browse and discover the hottest deals for major moments like Black Friday and Cyber Monday on Google Search.
For merchants, Google made it even easier to list promotions via automated imports from third-party integrations like Shopify and WooCommerce.
Google is easily selling ad inventory, attracting new customers, and building brand loyalty.
In the holiday season, the number of merchants using promo features jumped 280% year over year.
Retailers are also turning to Google to help them transform and accelerate growth such as Warby Parker, who drove a 32% year-over-year increase.
They accomplished this by not only opening stores and expanding their contact lens business but also by tapping into Google across services.
Omnichannel bidding, smart shopping campaigns and an expanded presence in Google Maps to promote in-store eye exams contributed to Warby Parkers’ success.
Google is making it easier for viewers to buy what they see and simpler for advertisers to drive action with innovative solutions like product feeds and video action campaigns and emerging formats like live commerce.
Backcountry.com generated a 12-1 return on ad spend with product feeds in 2021 and plans to double its investment in 2022, while Samsung, Walmart, and Verizon partnered with creators to host shoppable holiday live stream events in the U.S.
In short, Google has pricing power, and its strategic position is such that it’s hard not to see rampant growth ahead in the short and long term.
Its cash position is enviable to any tech or non-tech company and at some point a dividend is inevitable.
Even with its success, Google is still investing aggressively for the future and is part of every cutting-edge technology from artificial intelligence to self-driving and even the metaverse.
Mad Hedge Technology Letter
January 14, 2022
Fiat Lux
Featured Trade:
(AVOID ARKK INNOVATION FUND LIKE THE PLAGUE)
(ARKK), (GOOGL), (TDOC), (ZM)
I was a little taken aback by the content and attitude of boutique investment fund CEO and CIO of Ark Invest Cathie Woods as I watched her podcast -- set in a palatial estate with vaulted ceilings.
The line that stuck out to me was when she began to explain that the ARK Innovation ETF (ARKK) is made up of “real companies with real revenue.”
Well, so is the liquor store down the street and that doesn’t mean we should all bandy together with each other, sing kumbaya and bet the ranch on this ETF fund that dabbles in ultra-high growth tech stocks.
She continued to praise her strategy by comparing ARKKs relative success with the dot com crash where companies were based on thin air and accrued massive valuations for nothing.
That’s a bad comparison because it was a different era and time, and just because that market then was frothy, it has nothing to do with a higher ARKK stock price in the short term.
She then explains to us viewers that she has never been so convinced by companies like Teledoc (TDOC) and this is a company that has experienced about a 400% drop in share price in the past 365 days.
The reason she gives support for TDOC is because they do $2 billion in annual revenue and then she followed that up by saying how great Zoom Video (ZM) is because their revenue has gone up “4-fold during the coronavirus” but fails to mention that their stock is down about 400% since October 2020.
She laments that these stocks have recently been treated as “stay at home” stocks and I believe that giving such an excuse to why these stocks have been performing poorly lately makes her look like she doesn’t know what she is doing.
If she champions TDOC for doing $2 billion in annual revenue, then why not invest in Alphabet (GOOGL) which does $180 billion of revenue per year. According to her math, GOOGL is a 90X better investment than TDOC.
In her video interview, she starts to explain the inflationary monster which of course, she has an incentive to downplay. Low rates mean a better environment for growth stocks to operate in.
She continues to explain that used car prices are up 60% but that “bubble has burst” because sales are down 4 recently.
Again, she is grasping for straws here because she has an incentive to.
Another data point she tries to spin off as anti-inflationary is the increase in average wages and explains that a 0.6% increase is the “lower end of the guidance” so that certainly will trend down.
Again, nominal wages have exploded in all industries, and this is again proof she likes to reverse engineer stats to fit her own interests.
During this interview or fireside chat, Woods appears to be an expert at cherry-picking data points that are in her best interest.
She fails to acknowledge that her timing of equity purchases is just as important as the type of stocks bought, and her recent timing has been terrible.
Her response to the underperformance was to blame the market and pontificate that the “dismissal (of her ARKK fund ETF) is misplaced” and “analysts and investors aren’t doing their homework.”
Her attempt to shift blame on the market is comical and the real traders in the room know that the market decides the prices of assets and not anyone or any organization can dictate the market to the market.
Showing a little humility might do her a little good as Ark Innovation ETF suffered an outflow of $352 million Wednesday, the biggest one-day drop since March.
She explains the Fed policy towards higher rates as just “jawboning” and begins to explain how she is seeing some anti-inflationary data coming down the pipeline imminently.
I will tell Woods that this “jawboning” isn’t just that, it’s real. The Fed is poised to react to combat inflation and not raising interest rates as fast as she thought doesn’t mean the narrative immediately evolves into something even close to anti-inflationary.
We are so far from that sentiment and her reaction is to dismiss anything that is a threat to her fund.
Sadly enough, she wants things how it was in 2020, massive amounts of quantitative easing for that capital to flow into her ARKK fund.
I am not saying that won’t ever happen again, but the zeitgeist must overcome the higher rates narrative that has completely consumed the broader market which is why tech growth has been hammered lately.
Her failure to act has meant her investors are down 50% in the last 13 months. Buying at tops are dangerous and even more important, she doesn’t describe the current market and describes only what she wants to happen in the future as it relates to higher ARKK prices.
I wouldn’t call that breaching her fiduciary responsibilities, but she is playing a snake oil saleswoman at her finest.
This could be a case of her thinking that she is playing with houses’ money, a longer time frame shows that ARKK is still up more than 300% since 2017.
If you ever feel like getting into high tech growth, avoid this fund, just buy the stocks you like outright.
This is an example of how ETFs will not work in today’s climate, as ETFs only function properly if they go up every year.
The markets could spend the first third of the year grappling with higher rates, and there will be another time to buy tech growth. For Woods to completely ignore her failure of timing the tech growth market, it shows she isn’t looking out for your best interest as an investor.
Avoid tech growth today until we get through the short-term challenges.
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.
