Mad Hedge Biotech and Healthcare Letter
November 12, 2024
Fiat Lux
Featured Trade:
(BONE OF CONTENTION)
(AMGN), (NVO), (LLY), (PFE), (VKTX), (GPCR), (AZN)
Posts
Mad Hedge Biotech and Healthcare Letter
November 12, 2024
Fiat Lux
Featured Trade:
(MEDTECH’S TRUMP CARD)
(RMD), (STE), (TNDM), (JNJ), (BDX), (MDT), (BSX), (SYK), (ZBH)
After seeing Trump sweep back into office, my phone's been ringing off the hook with one question: "What happens to my portfolio now?"
Look, I've been around this circus since covering Reagan in the White House press corps, and I can tell you that market hysteria rarely matches reality.
But this time, we need to pay attention - especially in the $567 billion medtech industry that's about to face some serious disruption.
What's different now? Trump's not just talking about those 10% to 20% blanket tariffs anymore - he's dead serious about slapping a potential 60% tariff on Chinese imports.
And after spending years watching supply chains twist themselves into pretzels during COVID, this is going to hit different.
To understand just how big this could be, let's look at what's really at stake here.
In vitro diagnostics makes up 18% of the medtech industry, and cardiology devices are sitting at $75 billion in 2024, expected to hit $95 billion by 2028.
Those aren't just numbers on a page - they represent real money that could take a serious hit. If these tariffs go through, we're looking at a 3.2% hit to S&P 500 earnings per share in 2025.
And it gets worse - add another 1.5% drop if our trading partners decide to play hardball with retaliatory tariffs.
Given all this, where should you put your money? The answer lies in looking at who's already ahead of the curve.
Well, established players like Johnson & Johnson (JNJ) and Becton Dickinson and Co. (BDX) are looking increasingly shrewd with their local-for-local manufacturing strategy.
They might not give you the same adrenaline rush as scaling Mount Everest, but they're solid holds in this environment.
But they’re not the only companies securing their positions. ResMed (RMD), for instance, just posted third-quarter sales up 11% to $1.22 billion, with adjusted earnings jumping 34% to $2.20 per share.
That's not just good numbers - that's a company that knows how to execute regardless of who's in the White House.
In the same vein, Steris deserves attention. Their "front-shoring" strategy in Malaysia isn't just smart - it's prescient. After years of covering Asia for The Economist, I can spot smart positioning when I see it.
Now, let's talk about some of the bigger players in the room. Medtronic (MDT), our industry giant, is giving me pause.
Sure, they're a global leader, but their heavy reliance on Chinese manufacturing and components is about to become a serious headache under these new tariffs.
Same story with Boston Scientific (BSX) - they've got manufacturing facilities in China that could turn from assets to liabilities pretty quickly.
Stryker (SYK) and Zimmer Biomet (ZBH) are in the same boat, but with a twist. Both companies have been smart enough to spread their supply chains globally, but they're still catching enough Chinese exposure to make me nervous.
When those tariffs hit their component costs, watch their margins. This isn't just about bottom lines - it's about how much wiggle room these companies have to absorb higher costs without passing them on to hospitals and patients.
On the flip side, I'm watching companies like Tandem Diabetes Care (TNDM) with growing concern.
Their heavy Asian supply chain exposure under Trump's trade policies is going to be about as comfortable as my MIG-25 flight at 90,000 feet - and trust me, that wasn't comfortable at all.
But, what’s really telling is where the smart money is flowing.
Keep your eyes on three key trends that are reshaping the industry: supply chain resilience, M&A activity (now up 18% to $57.7 billion), and digital transformation.
About 30% of medtech companies are getting serious about digitizing their operations - and they're the ones to watch.
So, here's my bottom line: Trump's return is going to shake up medtech, but not every tremor is an earthquake.
The winners in this new landscape will be companies that have already diversified their manufacturing outside China, built up strong balance sheets to absorb these tariff impacts, and proven they can adapt - like ResMed and Steris have shown us.
The real champions will be those making serious investments in digital transformation. These are the companies that won't just survive Trump's trade policies - they'll thrive under them.
And if you're still holding onto companies with heavy Chinese exposure?
Well, let's just say it might be time to look for higher ground - and I'm speaking as someone who's made that call at both 20,000 feet on Everest and during the 2008 crash.
The medtech industry isn't going anywhere - people will always need medical devices. But which companies thrive under Trump's second term? That's going to depend on who's prepared for the storm and who's still standing in the open.
Now, if you'll excuse me, I've got some vintage wine to open. Making sense of these markets is thirsty work.
Mad Hedge Biotech and Healthcare Letter
January 12, 2023
Fiat Lux
Featured Trade:
(ALL HAIL THE KINGS)
(ABBV), (JNJ), (ABT), (BDX), (SNY), (BMY)
What is the most exclusive category of dividend stocks? The first answer that comes to mind is the Dividend Aristocrats. These are S&P 500 members that have boosted their dividends consecutively for 25 years.
However, there is another more elite category of dividend stocks that gets less attention: the Dividend Kings.
Although they do not need to be part of the S&P 500, Dividend Kings gain this title by achieving an ultramarathon-like streak—a minimum of 50 years of consecutive payout growth.
However, buying shares of Dividend Kings is not a move for some types of investors. Several of these stocks tend to deliver relatively low growth. Some of these Dividend Kings have been underperforming in the past 10 years.
So, why should you consider investing in Dividend Kings?
Companies under this elite category can be an excellent component of any investor’s retirement portfolio or for those looking for reliable sources of income. Truth be told, most of these businesses offer dividend yields that are notably higher than the average dividend yield recorded by members of the S&P 500.
The consistency and dependability of these Dividend Kings in terms of paying out and boosting their dividend payouts also offer a certain degree of confidence for investors relying on income generated by the dividend stocks they added to their portfolio.
Only a few businesses make it to this category. Two segments comprise a significant part of the Dividend Kings category: the consumer goods sector, with 12 companies, and the industrial sector, with 14. Five utility stocks made it to the list as well.
Rounding up the list are four names from the healthcare industry: Johnson & Johnson (JNJ), Abbott Laboratories (ABT), Becton, Dickinson & Co. (BDX), and AbbVie (ABBV).
AbbVie only recently celebrated its 10th birthday after its monumental spinoff from Abbott back in 2013. In each of the past 10 years, this healthcare giant has hiked its dividend.
To date, the payout has risen by a whopping 270%, all but guaranteeing its standing as a Dividend King—a title it inherited from Abbott.
At the moment, the forward dividend yield of AbbVie is somewhere north of 3.6%, paying out approximately 73.7% of its earnings as dividends.
As expected, this relatively high payout ratio has some investors anxious over the wisdom of sustained hikes. After all, a sharp downturn in earnings could easily demand the company to pay out more in terms of dividends compared to how much its earnings rake in.
Nonetheless, it is critical to put everything in the proper context.
The competitors of the company, such as JNJ, Bristol Myers Squibb (BMY), and Sanofi (SNY), all have reported payout ratios of over 60%. That means AbbVie is hardly alone in this strategy of having a somewhat limited overhead to sustain its decision to continue hiking dividends even in the absence of earnings growth.
Apart from the $57.8 billion in revenue the company generated in the trailing 12 months, AbbVie estimates that two of its newer treatments, Skyrizi and Rinvoq, would rake in more than $15 billion in annual sales by 2025. With nine more candidates submitted for regulatory approval for 2023 alone, it is clear that AbbVie has been working hard to ensure that it creates additional new revenue streams in the near term.
As long as AbbVie continues to commercialize new products and work to develop and broaden the approved indications for its existing treatments to expand the reach of its addressable markets, then it is reasonable to believe that the company’s earnings will continue to climb.
It’s highly likely that most of the Dividend Kings will remain on the list this 2023. For one, there is immense pressure on businesses that have boosted their dividends for 50-plus years to sustain the streak. Besides, no CEO would want to be known as the leader who broke an impressive track record.
As for AbbVie, this stock is an excellent addition to the portfolio of long-investors and those searching for more sources of income. Buy the dip.
