*** The following commentary was published for subscribers of Nate’s Notes in Issue #259 on August 12, 2016, and reflects our opinions of both the market and MannKind as of that date. ***
Stocks aren’t lottery tickets. There’s a
company attached to every share.
– Peter Lynch
Cautiously Following The Market’s Lead
For the second month in a row now, I am pleased to report that the performance numbers above are showing gains for not only our Portfolios but the market as a whole as well (at least as measured by the Dow Industrials and the Nasdaq) for the past four weeks… and though I would have to double-check when the last time this has happened two months in a row might have been, I can tell you that it feels like it was an eternity ago!
Naturally, the continued push higher “despite all the negative things that are going on in the world” has caused many of you to wonder whether it is really “safe” to buy into the current rally, or if you should continue sitting on the sidelines with some cash “for awhile longer”… and though there are never any guarantees when it comes to the stock market, I want to address the question by reminding you of a few things regarding our game plan.
The first is to keep one of our favorite mantras in mind, namely our job is to position our portfolios based on what the market is actually doing, not on what we think (or are worried) it might do… and, for now, what the market appears to be doing is heading higher (as evidenced by the new all-time highs being hit by certain stocks and indices, as well as the fact that all five of the indices we use in our not-quite-world-famous Eyebrow Levels table are once again flashing bull market signals for us… even if the BTK biotech is still keeping us guessing on a daily basis!).
Second, you are encouraged to remember another of our favorite mantras: trends often go on for far longer than seems reasonable… and though we did get a definitive signal to move some cash to the sidelines back in January (and we respected that signal), I had been somewhat skeptical for the simple reason that the bull market still had not given us the sort of frothy blow-off phase that almost always accompanies the end of multi-year bull markets. Consequently, though we may have gotten shaken out of positions back in January, there are plenty of reasons to believe that final phase may finally be materializing after all… and, if this is the case, our job is to start putting money back to work!
Which brings us to the final reminder, namely that I am a big believer in always scaling-in to positions over time rather than doing it in one fell swoop… and, as you can see in the trades we will be making in this month’s issue, I am putting roughly 25% of our available capital back to work in the Model Portfolio, and moving a bit further back out on margin in the Aggressive.
Another Round of MannKind Q&A
As the next chapter of the MannKind story slowly gets underway, I want to once again this month try to address as many of the questions that have come in over the past four weeks as possible, while also mixing in a few additional points that I believe are worth making at this stage of the game.
Starting with my thoughts on the company’s recent quarterly earnings call (and, again, I am simply trying to hit the questions that I was asked most often, not address every little nuance of the call that one could ponder if they chose to – some of you ask quite specific questions!):
Yes, I share the number one concern many of you have expressed, namely that “there sure is a lot of debt, Nate!” However (and with an acknowledgement that the point will admittedly be moot if sales of Afrezza never materialize after all), I want to also remind you that not only is the bulk of MannKind’s debt due years from now rather than months from now (the $70 million owed under the loan agreement with Sanofi isn’t due until 2024, for example!), a good portion of the debt is also held by entities that, at least barring nefarious motives, can be considered to be “non-hostile” creditors.
To be sure, “debt is debt” and creditors will naturally be wanting something back when the debt is due; however, assuming the story is still progressing in an acceptable fashion at the point in time when the debt is due, there is no reason to think friendly creditors wouldn’t be interested in rolling their debt into new notes based on prevailing conditions at the time “if needed” (and has happened in the past).
That being said, I want to re-iterate that while I remain extremely confident that Afrezza the product is well on its way to becoming a major player in the diabetes and pre-diabetes markets, I cannot guarantee quite as confidently that MannKind the company will be the beneficiary of this success… and, consequently, you are once again encouraged to not own more than you can afford to lose.
Of course, for now MannKind is the sole owner of Afrezza, and so if we want to invest in Afrezza, we need to do it through MannKind… and though I can’t put quite as high a confidence score on MannKind’s odds of success as I can on Afrezza’s odds of success, I can tell you that IF Afrezza is able to gain a foothold in the market place “soon enough,” getting to buy into the MannKind story at current prices represents one of the best investment opportunities I’ve seen in my 28 years of following the sector… and, as also discussed before, I have (and continue to) put a great deal of my own money towards the idea.
Naturally, the above discussion leads us to a variation of another of one of the most often asked questions, namely, “what does ‘soon enough’ mean, Nate?” Unfortunately, while I am afraid I don’t have a definitive answer for you, I can tell you that based on my interpretation of the rollout plans, the earliest we should be looking for a noticeable uptick in prescriptions would be in late August or early September… and it might not be until near the end of the year that we finally start to see the sorts of “meaningful” numbers that will help to put the debt (and therefore “survival”) question to rest once and for all.
In the meantime – and to answer a question I don’t think I have ever been asked before (but was asked by a number of you a few weeks ago, and rightly so!) – yes, I did find it “odd” that there was only a single question from analysts on MannKind’s earnings call… and yes, I do consider it a sign that we may finally be looking at a true bottom for the stock (knock on wood).
Not only did the single question come from someone who seemed to be fairly new to looking at the company based on what he asked, the fact that nobody else bothered to ask a single question about the rollout of Afrezza 2.0 tells me that the only place for “the analysts” to go from here is back to “starting coverage” of the stock at the first sign of life for Afrezza, and then on to upgrading the stock if the uptick in prescriptions turns out to be sustainable… and if Afrezza turns out to be the real deal (as I believe it is) after all, I stand by the statement I made in an interview on the Forbes.com website a few months ago, namely that I think the stock will return to the $8-$12 range in fairly short order once Wall Street wakes up to the fact that Afrezza is NOT the dud Sanofi – and others – have led us to believe it might be.
“But, Nate – you’ve been saying this for awhile now, and yet the stock is still trading for $1… when is the tide finally going to turn?!” is a question many of you have asked in one form or another over the past few weeks. Unfortunately, the short answer is that your guess is as good as mine; however, I can tell you that, based on the following three observations, I am optimistic that the answer may turn out to be “sooner than expected”:
• no, “they never ring a bell at the bottom,” as the saying goes… but if having but a single analyst ask only one question (and a somewhat outdated one at that) during the Q&A session of an earnings call that happens to coincide with the rollout of a new marketing strategy (and a new “era” for the company, for that matter) doesn’t signal a lack of interest on the part of Wall Street, I don’t know what does;
• further strengthening this belief that everyone who was/is relying on “Wall Street” to tell them whether to buy or sell has already sold is the fact that daily volume on the stock has all but dried up – and, at this point, I believe most of the trading we are seeing is coming from battle weary longs “who have had enough”… and, unfortunately, the market makers know there is no better way to get these folks to cough up cheap shares than to “pull their bids” and see how many shares the drop in price shakes out via stop-loss orders (or newly induced despondency in folks who do watch the market in real time – I can tell you that based on the emails I have received, the recent drop marked “the final straw” for some).
• and, finally, no – there has not been a bump in prescriptions yet; however, not only does the company’s new plan seem to be causing a small but noticeable bump in metrics that are related to prescriptions (Afrezza copay claims and enrollments, for example), the bottom line is that the body of anecdotal evidence related to Afrezza’s superiority is continuing to grow at a slow but steady clip… and, as you know, I believe that in this day and age, social media is going to go a long ways towards helping accelerate the adoption of Afrezza.
Speaking of social media, the above provides a perfect segue for me to not only share a great example of the sort of information that is becoming available for folks trying to learn more, but to also drive home a second point as well. First, the tweet (from @dtroue1003):
#afrezza BG148 before bed, 4U right to sleep, wake 89. Old insulin we wouldn’t even treat a BG 148. Ave BG 190 on pump.
I believe this tweet is important not only because of the fact that someone has taken it upon themselves to publicly share the sorts of exciting results they are getting with this “next generation” insulin, the person who wrote the tweet includes what I believe is an extremely important but under appreciated observation relative to the “night time” aspect of the message, namely, “Old insulin we wouldn’t even treat a BG 148”… and they are absolutely correct!
Using “old” insulin therapies (i.e. the “current” products Afrezza is hoping to replace), most diabetics would be quite content living with (both literally and figuratively!) a blood glucose reading of 148 (which isn’t bad, but it is certainly above non-diabetic levels) at bed time rather than than risk not living (quite literally) by taking “just a little” insulin to try and knock it down a few points; however, with Afrezza, patients are finding that they can feel confident keeping themselves “in range” for literally 24 hours a day… and, in the long run, this will not only result in them having a far lower risk of developing problems with their own eyes, kidneys, and feet, but it will also have the potential to save insurance companies a tremendous amount of money over the long-haul if they’re not having to pay for dialysis, amputations, and the like.
Do the insurance companies see the benefit yet? No… but I don’t see how it will elude them for much longer, especially as those companies who have agreed to cover Afrezza start to build – and take advantage of – their own data sets to work off of.
So, in a nutshell, not only are patients finding they can maintain their blood sugar levels in a far tighter (and healthier) range than they used to be able to, they are obtaining this healthier level of control thanks to the actual pharmacokinetics of Afrezza… and no other insulin on the market currently has the same “fast in, fast out” features that are allowing patients to keep their blood sugars “where they should be” even while they’re sleeping.
To be sure, Mike Castagna and his team have to get out there and hustle their butts off during these early stages of the launch… but if they do, I will be completely shocked if they are not able to generate the sorts of numbers Wall Street is waiting to see before jumping back in (and/or that will force the 80+ million shares that are still short to finally start covering).
Though I would encourage those of you who do make trades more than once a month to at least think about scaling-in to any additional shares you might be thinking about buying in the weeks ahead, since the newsletter only makes trades once a month when the issue comes out – and I am willing to put my name firmly behind the call I have made with this stock – you will notice that I am taking advantage of the current price to increase the number of shares we own in both Portfolios by another 20% this month in anticipation that by this time next month, the outlook will be much rosier for MannKind.
Of course, I could be wrong, and you therefore should not own more than YOU are comfortable owning… especially since, barring a buyout, there will be plenty of opportunities to buy at higher prices and still make nice money over the next ten years, even if you never get to brag that you “bought the stock under a buck.” Hang in there – I really do believe the dawn may be close at hand.
Top Picks (for new money this month)
All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:
Cirrus Logic (CRUS) – Despite all the concerns others are expressing about Apple’s prospects, Cirrus’ stock continues to motor higher (and strength often begets strength!).
MannKind (MNKD) – With evidence supporting Afrezza’s superiority starting to roll in at an accelerating rate, I am optimistic that the stock may finally be ready to return to turn the corner and start heading higher.
SPDR Gold Trust ETF (GLD) – Gold is on a tear, and though it is due for a cooling off period, the pessimism surrounding the move suggests it may decide to just keep heading higher after all.
For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 1,000 (7,500) AS Ranger Equity Bear and purchase 125 (400) Celgene, 200 (500) Cirrus Logic, 200 (500) Electronic Arts, 100 (250) Illumina, 500 (2,500) Luminex, 10,000 (200,000) MannKind, 500 (2,500) Perry Ellis, 250 (1,000) Qorvo, 250 (750) Skyworks Solutions, 50 (200) SPDR Gold Trust ETF, and 100 (500) Walt Disney. We will use the closing prices on Monday, August 15th, for all transactions.