Mad Hedge Biotech & Healthcare Letter
June 16, 2020
Fiat Lux
Featured Trade:
(THE ONE BRIGHT STAR IN THE HEALTHCARE INDUSTRY),
(ANTM), (TDOC), (CVS), (HUM), (CNC), (UNH)
Posts
The COVID-19 crisis has yanked the rug from under companies across all industries, and among the businesses that experienced a completely altered landscape these days is the health insurance industry. Imagine a business where sales increase fourfold overnight, but the customers can’t pay.
With the unemployment rate rising to historic levels since the pandemic hit, more people are dropping off commercial coverage rolls. Visits to the doctors and other elective procedures have been postponed indefinitely. Even political talks on healthcare reforms appear to be tabled until 2021.
Overnight, some doctors at country hospitals have seen workloads double and the suicide rate soar, while those in private practice are essentially unemployed.
While healthcare stocks are understandably struggling to survive, there are standouts that managed to take the blow without crumbling to ruins.
One of them is Anthem (ANTM).
With a market capitalization of $75.78 billion, Anthem is one of the biggest health insurers in the United States today.
Recently, the company wielded its power to offer $2.5 billion worth of premium credits as a form of financial assistance to its members during the pandemic.
This comes in the form of cost-share waivers, extensions for their virtual care coverage, and even assistance for struggling employers to help in maintaining the healthcare of their own employees.
While a lot of companies have been rapidly downgrading 2020 guidance due to the pandemic, Anthem updated its 2020 forecasts to reflect an increase in its adjusted net income from $19.44 per share to an eye-popping $22.30.
This indicates that Anthem has extra bandwidth for growth primarily thanks to its stable revenue stream, increasing membership, and solid earnings.
In its first quarter report for 2020, Anthem’s operating revenues jumped by 20.7% year over year to reach $29.4 billion, with profits from its IngenioRx launch.
As for its net income in the said period, Anthem raked in $1.52 billion or roughly $5.94 per share compared to $5.91 per share in 2019.
Anthem even increased its dividend by 19% in January.
However, it’s Anthem’s cash flow that continues to impress. From 2019 up until the first quarter of this year, Anthem’s cash flow surged by 58% year over year.
One of the main factors that boost the growth of a health insurance company is membership, and Anthem managed to tick off that box as well in the first quarter.
Anthem’s medical enrollment climbed to 42.1 million members, showing off a 3.2% increase year over year. With backing from government business enrollment as well as commercial and specialty businesses, this number is expected to climb higher this year.
Even Anthem’s inorganic growth ventures promise great results, with acquisitions and collaborations continuously boosting the Medicare Advantage growth of the company.
A good example is its acquisition of the Medicaid members in Missouri and Nebraska via WellCare Health at the beginning of 2020. This led to 849,000 lives added to its government business enrollment since 2019.
Meanwhile, its acquisition of AmeriBen added 452,000 members to its commercial and specialty business sector.
Anthem’s takeover of Beacon Health, which is the biggest independent behavioral health firm in the US, serves to further strengthen its position in this sector. This move added roughly 300,000 Medicaid members under Anthem’s coverage.
In terms of adapting to the needs of its members during the pandemic, Anthem is making more aggressive moves to promote its telehealth services.
Although this sector is currently widely associated with Teladoc Health (TDOC), which has a market capitalization of $12.93 billion, the rest of the league is catching up quick.
Since the average cost per telehealth session is roughly $100 less compared to fees paid in visits to the doctor’s office, this is definitely a platform-managed care providers are looking into.
According to Anthem, its telehealth app recorded over 170,000 new downloads since the COVID-19 crisis started.
It also reported a 250% surge in the demand for its virtual care services.
Anthem isn’t the only health insurer joining the telehealth fray. CVS Health (CVS), Humana (HUM), Centene (CNC), and even industry leader UnitedHealth Group (UNH) has been looking into the service.
In this period of uncertainty, choosing a stable company with a robust outlook and sold at a reasonable price is always a wise investment.
With Anthem’s profits projected to grow by roughly 47% over the next years, this company’s future offers security to its investors. Its impressive cash flow also plays a significant role in its higher share valuation.
Global Market Comments
April 20, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT’S A FED PUT WORTH?),
(INDU), (SPX), (TLT), (ZM), (TDOC),
(NFLX), (UAL), (WYNN), (CCL)
What is a Fed put worth?
That the question that traders and investors alike are pondering.
If the government had taken no action whatsoever in the face of the Corona pandemic the Dow average would easily be at 15,000 today, if not 12,000.
After all, the economic collapse we have seen has been even greater than the Great Depression. More than 22 million unemployed in four weeks? Back then, the Dow Average fell by 90%.
Enter the Feds.
Throw in $6 trillion in expected fiscal spending and $8-$0 trillion in Federal Reserve stabilization of the money markets and quantitative easing, and it makes a heck of a difference. As a result, the national debt will rocket from $23 trillion to at least $32 trillion by next year, a far faster increase than seen after Pearl Harbor.
Stocks love this.
In the past three weeks, the Dow Average has jumped an eye-popping 35% from 18,000 to over 24,000. We are likely trading at 25 X 2020 earnings, but that is just a guess at best. Nobody knows, with essentially all companies withdrawing guidance. On a valuation basis, stocks are now more expensive than at any time since 1929.
You can be excused for being confused, befuddled, and gob-sacked.
All of this adds up to a value of the Fed put of 9,000 in Dow Average terms, 17,000 in a worst-case scenario, and 27,000 if you want to go back to 1933 share valuations.
Stocks here are now priced for perfection. To buy shares here, you are making the following rosy assumptions:
1) The Corona epidemic is peaking and it is clear sailing from here.
2) Shelters-in-place ends in two weeks.
3) Critical shortages of medical supplies end.
4) US Deaths top out at 60,000 from the current 40,000, the most optimistic White House forecast.
4) Business will immediately bounce back to pre-epidemic levels
5) Domestic and international travel resume immediately
If all of the above take place, then at a stretch, shares are justified at maintaining current levels and will churn sideways from here.
Here is what is more likely:
1) We are nowhere close to a peak, especially in states that never sheltered-in-place, and there could be a secondary peak in the fall. At 2,000 a day, US deaths will easily top 100,000 in a month.
2) Shelters-in-place will extend to June in the most populous states.
3) Medical supply shortages will continue for the indefinite future, with 50 states bidding against each other to buy fake masks from China.
4) Dozens of large companies and perhaps a quarter of the country’s 30 million small businesses will go bankrupt before the recovery begins.
5) There is no sign that domestic and international travels are getting off the runway anytime soon.
If that is the case, then stocks here that are wildly overpriced are due for a retest of the Dow 18,000 and (SPX) 2,400 lows.
No matter what happens, traders should be cognizant of an enormous bifurcation of the market that has taken place.
Stay at Home stocks, like Zoom (ZM), Teladoc (TDOC), and Netflix (NFLX), have spectacularly outperformed the market. Many of these had already been recommended by the Mad Hedge Technology letter and the Mad Hedge Biotech & Healthcare letter because they were leaders in their own technologies (click here).
The problem with these companies is that they are all expensive, in some cases trading at hundreds of times their earnings.
Then there are the Reopening Stocks that will deliver outsized returns once we make it to the downslope of the epidemic. These include United Airlines (UAL), Wynn Hotels (WYNN), and Carnival Cruise Lines (CCL), which we heavily sold short near the market top, and led the recovery of the last three weeks.
The problem with these companies is that they may have to go bankrupt first, or at least accept a heavy government ownership and dilution of existing shareholders before they return to normal.
It’s a quandary that would vex Solomon.
I always tell people, if you want to make an easy, reliable, and safe living, get a job at the Post Office. Avoid the stock market.
OPEC cut oil production by 10 million barrels/day, for two months, and then 8 million barrels a day for the rest of the year. Oil prices plunged anyway to a 20-year low at $18.50 a barrel, as it only puts a small dent in the 34 million barrel a day oversupply. It only postpones the day when many energy companies go bankrupt.
The Economy could be turning on and off for 18 months, believes Fed governor Neil Kashkari. He may be partly right. I am expecting two Coronavirus waves to lead to two shutdowns in the spring and fall, and the stock market may reflect the same. If so, stocks are wildly overpriced here, and the bear market could last another year. Sell shorts, or at least add hedges, and buy the (SDS).
US Budget Deficit to top $3.8 trillion this year, the most since WWII. We were already headed for a monster $1.5 trillion in red ink before the virus hit. Now we are pouring gasoline on the fire. It'sis my worst-case scenario, I had the national debt rising from $23 trillion today to $30 trillion in a decade. It looks like that will happen by next year.
Only 90,000 cleared US airport security in one day, down from a typical 2.2 million, or down 95%. It appears that 90,000 people a day don’t care if they get Covid-19 or have already had it. Some 80% of all flights globally are grounded, with many countries now stranded. With massive debt loads, it is only a question of how soon the big US airlines go bankrupt and how much the government gets to own on the way back up. Don’t buy any airlines no matter how cheap they get.
US Retails Sales collapsed by 8.7% as the paycheck-free economics takes hold. The March Empire State Manufacturing Index crashed to a record low of 78% and March Industrial Production is off 5.4%, the lowest since 1946. The parade of the worst economic data in history has begun. And we go into this with stocks at record high valuations, more expensive than they were in January.
Goldman Sachs says this depression will be four times worse than the Great Recession of 2008-2009, likely falling 35% annualized in Q2. Unemployment will hit 15% or higher, but stocks will not retest the March lows. The bounce back in H2 will be bigger than any seen. It more or less corresponds to my view. They must have some smart people at (GS).
March Homebuilder Confidence brings the biggest crash in history, down 42 points to a reading of only 30. It's the greatest decline since the 35-year history of the index. The last time we were this low was in June 2012. Some 21% of builders are reporting virus disruption.
Housing Starts collapsed a stunning 22.3% in March, the worst one-month figure ever recorded. Social distancing makes open houses impossible. But this will be one sector that leads us out of the depression. There is still a chronic generational housing shortage.
Weekly Jobless Claims topped 5.1 million, taking the grim four-week tally to a staggering 21 million. Out of the frying pan, into the fire.
Gilead Sciences (GILD) drug sent stocks soaring, up 900 points overnight. Its Remdesivir brought rapid recovery in already infected patients at the University of Chicago in a phase three trial. The market is hypersensitive to any good Corona news. Sell into the rally.
China GDP took a 6.8% hit in Q1 as the Corona pandemic takes its toll. Services are recovering faster than manufacturing, which is why the smog has not come back yet. And international trade has ground down to zero. Public transit has been abandoned for private cars. It could be a preview to our own recovery.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $18 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance recovered nicely this week, thanks to some frenetic trading. I used the Monday 700-point dive in the market to cover most of my bearish positions and add short-dated longs in Apple (AAPL) and Facebook (FB).
Finally, I dove back into selling short the US bond market on the assumption that unprecedented borrowing will destroy prices.
My short volatility positions (VXX) were hammered again, even though volatility declined on the week. There seems to be heavy short selling of deep out-of-the-money puts on the assumption that the Volatility Index (VIX) won’t rise above $50 again.
We are now up +0.45% in April, taking my 2020 YTD return down to -7.97%. That compares to a loss for the Dow Average of -15% from the February top. My trailing one-year return returned to 33.88%. My ten-year average annualized profit returned to +33.67%.
This week, Q1 earnings reports continue, and so far, they are coming in much worse than the most dire forecasts. The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, April 20 at 7:30 AM, the Chicago Fed National Activity Index comes out.
On Tuesday, April 21 at 9:00 AM, the March Existing Homes Sales are released.
On Wednesday, April 22, at 9:30 AM, the Cushing Crude Oil Stocks are announced.
On Thursday, April 23 at 8:30 AM, Weekly Jobless Claims will announce another blockbuster number.
On Friday, April 24 at 7:30 AM, US Durable Goods for March are printed. The Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well.
As for me, I am sitting here eating a pineapple upside-down cake that my daughter just whipped up. It's my favorite cake made by my mother, which I always got on my birthday.
Of course, I have to wash the dishes. If anyone wants to supplement their trading income, housekeeper and domestic and wants to live in mansions at Lake Tahoe and San Francisco, please contact customer support immediately.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
March 13, 2020
Fiat Lux
Featured Trade:
(Here's Another Tech Corona Play)
(TDOC)
Here is a great health-tech name for you that is up 10% in the past 30 days – Teladoc Health, Inc. (TDOC).
The fallout from the coronavirus has been brutal and we will see the first round of bankruptcies in a few weeks for companies who get hit with that debt service payment tsunami.
The Nasdaq is now down almost 30% in just 3 weeks and I can proudly say that the tech letter avoided the bulk of the carnage.
But aside from the fallout, the pandemic has underscored the desperate societal need and use case for health tech.
The unpreparedness of the U.S. administration has been cringeworthy, to say the least, essentially pigeonholing the virus as a non-American issue or an unreliable media ruse.
The consequences are a government and society bereft of a real health solution, not to mention testing kits.
Our policymakers are reeling.
As the administration has found out, this is not something that a 50-basis rate cut can solve.
Exposing the holes in our health system isn’t fun to do but this is where the use case for technology cross-pollinating with healthcare to create products and services to buttress these types of health scares comes into play.
Seeking alternatives to face-to-face health solutions is becoming a pressing issue.
Remote diagnoses through telehealth services could become an important tool, although physical testing for the virus would have to be done in person.
Influenza pandemics are the perfect environment to enlist services from these types of telehealth services that could disseminate important and crucial guidance and consultation to sick patients.
Especially in the initial screening process of judging whether patients’ needs - immediate action or not - could improve the efficiency of hospitals and clinics.
At the outset of the virus spread, many clinics globally were refusing to test potential sick people because the doctors themselves did not want to take the risk of getting sick.
The lack of ICU hospital beds in the U.S. has been highlighted as an Achilles heel and reducing the numbers of hospital visitors by categorizing them into different need-based groups would help the healthcare professional community on the ground.
We have been swamped by images from Wuhan, China of nurses and doctors being overworked and overwhelmed to sometimes death.
That must be avoided in the future.
Virtual patient traffic at privately held telehealth company American Well has risen about 11% since the first U.S. coronavirus death and an infusion of demand has been recorded at similar companies as well.
If it’s just the basic knowledge of whether going to the supermarket is safe or not or if flying on an airplane or not is feasible, people need to know.
Knowledge is power and knowledge is safety.
Some might get nervous about early viral symptoms and some might seek more information on how to stay safe.
Brad Younggren, Chief Medical Officer of 98point6, offering private text-based diagnosis and treatment via a mobile app, said their physicians were encouraging patients diagnosed with influenza to communicate if they do not improve.
Teladoc said it has been partnering with the Centers for Disease Control and Prevention (CDC) to provide near real-time surveillance data on the spread of the virus.
An $8.3 billion U.S. bill signed into law on Friday to fund the coronavirus outbreak response includes $500 million to waive certain restrictions on Medicare telehealth coverage. That provision is aimed at encouraging senior citizens to choose at-home virtual healthcare services.
Analyzing the tech markets today – they are showing signs of extreme stress.
Tech stocks have been utterly decoupled from fundamentals as the radioactive waste effect from the health scare floors any inkling of optimistic sentiment.
The drawdowns have been heavy which validates the tech letter going 100% cash for the short-term.
The policy missteps have added more turbulence to an already sensitive situation akin to lighting a match and throwing it into the tinder box.
What started out as an exogenous event has morphed into a broad set of externalities crushing whole industries such as travel, energy, banks, airlines, hospitality, and hotels.
Dealing with an oil crisis, health crisis, and interest rate crisis doesn’t just work itself through in a matter of days and tech companies are being repriced accordingly.
Teledoc is one of those companies to keep in mind once the chaos blows over.
Mad Hedge Biotech & Healthcare Letter
November 5, 2019
Fiat Lux
Featured Trade:
(DIALING FOR DOLLARS WITH TELEHEALTH),
(TDOC)
Healthcare consumers are experiencing a crisis. Over the past years, America has transformed into a country with the most expensive costs of care in the world with the American Medical Association reporting that the average spending of one person reaches $11,000 annually.
While this situation obviously burdens the consumers, looking at it from an investment perspective reveals just how much health insurers could stand to profit from it.
For instance, Anthem (ANTM) stock actually rose over 100% in the past three years, thanks to moderate revenue gains and huge bottom line profits. As enticing as that sounds, there are still healthcare companies out there aiming to keep the costs reasonable and the service convenient. One of them is Teladoc Health (TDOC).
Teladoc is a telehealth company that offers health services and medical advice to patients over the phone or via video conference calls. Although this is by no means a replacement of the traditional visits with your healthcare providers, the technology expands the reach of specialists especially when it comes to consultation services. It also provides a convenient platform for patients who will no longer need to actually make a trip to their doctors.
Most importantly, telehealth allows care providers to offer their services at lower prices. So far, spending on telehealth services is estimated to reach roughly $30 billion -- a staggering decrease from the multi-trillion-dollar amount Americans spend on healthcare services every year.
In the next five years or so though, the spending on telehealth services is anticipated to increase by approximately 20%. This could bring spending on this industry to a whopping $100 billion annually. Here is where Teladoc’s competitive advantage comes in.
At the moment, Teladoc is one of a handful of providers that actually has a global presence. The company is available in 130 countries and accessible in 30 languages. With such a broad market, Teladoc revenues showed an 89% increase year over year in 2017 and 79% in 2018. Meanwhile, the first half of 2019 saw the company’s profits hit a 40% increase year over year, with total patient visits rising 73% to reach 1.97 million.
Teladoc has also invested in promising acquisitions. Its $440 million merger with competitor Best Doctors back in 2017 has proved to be a great way to expand quickly and cover more ground.
For the third quarter of 2019, Teladoc once again delivered good results. The company’s revenues increased by 24% to reach $138 million, which surpassed Wall Street’s estimate of $136.5 million. Paid memberships in the United States grew by 55%, which now puts the total at 35 million members.
For its fourth-quarter earnings report, the company is expected to keep the momentum and rake in roughly $149 million to $153 million in profits, with a 2019 full-year revenue to be somewhere between $546 million and $550 million.
Despite the promising performance of Teladoc so far, there are still risks to consider before buying the stock. One of the major concerns is competition. Although Teladoc retains the title of being the leader in the telehealth services industry today, competitors American Well, Grand Rounds, and MDLive are gaining traction as well. Nonetheless, name recognition alone sets Teladoc apart from its rivals. However, the entrance of Amazon via its Amazon Care initiative in September is considered a major threat to the company.
All in all, Teladoc stock remains attractive. As with practically everything in investing, the key is to exercise due diligence and diversifying your portfolio. Teladoc is not a perfect company, but its sheer presence is already disrupting the healthcare industry. This makes the stock a good addition to a diversified portfolio, and the fact that you could be one of the pioneering investors makes it all the more exciting to own.
BUY (TDOC) on the next dip.
