Don’t Be Afraid To Buy Strength 9/8/17

*** The following is a complete copy of the Nate’s Notes Inter-Issue Commentary that was published for subscribers on September 3, 2017, and reflects our opinions of the market, MannKind (MNKD), and all other stocks mentioned as of that date. ***

Don’t Be Afraid To “Buy Strength”

After tumbling sharply in the days just before the August issue of Nate’s Notes went to press, I am pleased to report that the market found its footing shortly thereafter, and though many of the major indices are still struggling to punch their way into new all-time high territory, I am very pleased to report that a number of big name stocks are already starting to do so.

In addition, as you can see in the Eyebrow Levels table below, not only are all five of the major indices I use to gauge the health of the overall market still flashing “bull market” for us (and by a pretty wide margin, in most cases!), but the BTK biotech index is continuing to outperform the others in impressive fashion as well… and this is exactly what we have been hoping to see to provide additional confirmation that we’re on the right track with our game plan at this stage of the market cycle!

Consequently, there is not a lot of new information I can (or need) share with you about our game plan this time around, other than to remind you of the mantras that have helped the newsletter generate the sorts of returns that it has as the years have gone by, namely:

  • trends often go on for far longer than seems reasonable, which means
  • 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
  • though folks are always encouraged to “sell down to the sleeping point” whenever they start to feel anxious about a position (either because it has grown substantially in size or because the stock is acting poorly), during bull markets, our job is to be as patient as possible when it comes to taking profits.

Along with the above, I also want to remind you of two additional points that may help some of you feel more comfortable with the situation as you work on building up your own portfolio, namely, 1) as counter-intuitive as it seems (and feels from an emotional standpoint!), you should always feel comfortable “buying strength” during this phase of the bull market (provided a stock is still under its buy limits, of course), and 2) there is absolutely nothing wrong with buying “only” three or four shares at a time of an “expensive” stock (i.e. one that is trading for $100 or more, as is the case with many of our stocks these days thanks to the great runs they have made over the past several years), especially if you are taking the sort of long-term approach that we advocate in the newsletter.

Of course, though I am especially excited about the way things are shaping for biotech stocks, it is hard to not also like the price action we are seeing in not just the chip stocks, but also many of our other stocks as well – Apple (AAPL), Electronic Arts (EA), First Solar (FSLR), the SPDR Gold Trust (GLD), etc. – and so, provided the stocks are not trading above their buy limits (which I want to remind you may be revised again in the September issue two weeks from now, depending on circumstances… so please be patient before chasing stocks above their current buy limits!), you are encouraged to be fairly aggressive about adding to your positions more-or-less across the board at this stage of the game.

And, speaking of stocks that are acting well and should be bought, what IIC would be complete without an update on MannKind (especially since I have heard from a number of folks over the past few weeks who “finally bought some” in response to the sudden surge in price and volume we have seen in the past week or so)…

MannKind (MNKD)

As just mentioned, MannKind’s stock has been surging lately, and though it gave back some of its gains on Friday, it is still up roughly 60% in the three weeks since last month’s issue went to press – a very welcome turn of events, eh?!

Naturally, the sharp uptick in price (which was accompanied by a correspondingly impressive uptick in volume, I might add – always a welcome sign if you’re long a stock!) has prompted a number of you to ask “what the heck is going on with MannKind, Nate – why is it going up all of a sudden?”

Unfortunately, there has not been any news that I am aware of that can explain the recent price action; however, my experiences tell me that one of two things is probably going on… and perhaps both of them are occurring in tandem.

The first possibility is that, plain and simple, someone (i.e. one or more institutions or investment funds) has stumbled upon the situation and taken an interest in the story.

As you know, I believe “fair value” for the stock at this stage of the game (never mind 2-5 years from now after Afrezza has made additional progress in penetrating the market) is probably somewhere in the $1B-$3B range (i.e. $10 – $30 per share), and history tells us that, at some point, Wall Street is going to collectively recognize this “mispricing of assets” and quickly bid the stock up to where it “should” be trading (interestingly, though the recent price action seems to have caught the attention of more of you, I believe this inevitable “normalization” process may have actually started back in early May when we saw close to 60M shares trade hands over the course of just a few days).

Not only does history tell us that “inefficient markets never last forever,” it also suggests that the more dramatically a biotech stock overshoots on the downside, the more dramatically it is likely to overshoot on the upside as well… and the current situation is made all the more interesting by the fact that the whole reason the market cap ever fell below $1B in the first place (in my humble opinion) is because of the relentless short-selling that has put pressure on the stock ever since Afrezza was approved back in 2014.

Naturally, in the same way that this “artificial” selling pressure caused the stock to drop on the way down, the “extra” buying pressure that will be added to the market if/when the folks who have shorted the stock finally decide to close out their trades by repurchasing the shares they sold short will only add fuel to the fire… and though short squeezes are far more rare than folks like to think they are, I continue to believe the situation surrounding MannKind is certainly ripe with potential.

Second, along with the possibility that investors are simply bidding for stock that they believe is significantly undervalued, after following biotech for close to 30 years now, I can tell you that that it is not at all uncommon for stocks to move “because someone knows something” before it has been shared with the rest of the world… and given how many possible news items might be coming to fruition with MannKind these days (new funding, a new partner(s), label changes, an unexpectedly large jump in scripts, a buyout (or buy-in), etc.), it would not surprise me at all if one or more of these events may be playing out behind the scenes as well.

That being said, regardless of what is actually triggering the rally, I think the most important feature of the move is that it is taking place on “legitimate” volume – yes market makers and/or short sellers can easily push the stock around and play games when the volume is minuscule, but in this case, there appears to be some “real money” behind the action… and, given that the action associated with the surge in volume is pretty clearly skewed to the buy side (whether you’re looking at the action in early/mid-May or just in the past few days), I believe it is a sign that we can feel comfortable being involved on the buy side as well.

No, we’re not out of the woods yet, but given that Deerfield seems to be content acting as a “friendly creditor” while Castagna gets things up and running under his vision as CEO, I continue to believe that the odds are continuing to move more and more in our favor with each passing week – Afrezza is proving to be the real deal, and as this revelation slowly but surely gains a foothold in the medical and investment communities, I believe we will continue to see additional gains in the stock.

As always, please do not buy more MannKind than you can sleep with at night (or afford to lose, if it comes to that), but please also recognize that this is another situation where you should not be afraid to buy strength, as it will only be confirmation that Wall Street is becoming more and more comfortable buying back into the story (and, as mentioned above, I really do believe you will be getting the stock “on the cheap” if you buy it anywhere under $10!).

Thanks again for your patience with the story – perhaps we’ll get some news next week, but if not, the company will also be presenting at a conference the following week, and that will at least give us an updated perspective on where things stand when the September issue goes to press (publishing dates below).

“Eyebrow Levels”

(used to help us gauge the overall health of the market*)

current one eyebrow two eyebrows
DJIA 21,988 19,500 17,800
Nasdaq 6,435 5,700 5,300
S&P500 2,477 2,225 2,075
BTK 4,233 3,200 2,750
SOX 1,119 950
775

*As long as all five indices are trading above their “one eyebrow” levels, it is a sign that the current uptrend is still intact; however, if the indices start to dip below those levels, it will cause me to raise an eyebrow and wonder if the trend my be coming to an end… and if both eyebrows go up, it will mean that things are deteriorating in a hurry (if you see eyebrow levels being broken, start looking for a “Special Alert” from me in your email box).

The next issue of Nate’s Notes will be dated Friday, September 15th, and posted to the website sometime on Sunday, September 17th.

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