*** The following is the complete text (slightly edited, and plus an extra sentence or two) from Issue #301 of Nate’s Notes, which was published for subscribers on February 7th, 2020, and reflects our opinions of the market and all stocks mentioned as of that date. ***
Small wheel turns by the fire and rod,
Big wheel turns by the grace of God,
Every time that wheel turns ‘round,
Bound to cover just a little more ground…
– from The Wheel (R. Hunter)
Gearing Up For The Next 25 Years…
I want to kick off this month’s issue (and the newsletter’s second quarter century!) by extending a very big and heartfelt “thank you!” to not just those of you who took the time the share feedback and/or personal anecdotes about your experiences with the newsletter as part of last month’s celebration of Issue 300 of Nate’s Notes, but also to anyone and everyone who was part of the newsletter’s first 25 years of existence – it has been both an honor and a pleasure to share my ideas and approach to investing with you as the years have rolled by, and I’m looking forward to helping you continue growing your nest egg (no matter what the market may throw at us!) via a sensible, long-term approach to investing for many years to come as well! Cheers!
Speaking of the years rolling by, relationships, and calls for feedback, one of the messages I received most frequently as part of my request for suggestions last month was some variation of the following: “Nate, I’ve made a lot of money with you and the newsletter over the years, but now that retirement is here (or fast approaching), I’m feeling like I need to start shifting my portfolio into more conservative investments, especially ones that produce income – can you start including those sorts of recommendations in the newsletter?”
Since this was/is clearly something that seems to be on the minds of so many of you (and after spending a lot of time pondering various aspects of the situation), I am very excited to share the following with you…
First, the “bad” news – I have spent the past 25 years building a track record for Nate’s Notes around its ability to find great long-term growth stocks, and though I could allow the newsletter to grow and mature in the same direction as my subscriber base, I have decided that it makes more sense to leave it “as is” than start changing its goals and approach.
That being said, I always write the newsletter as if each of you is going to be a subscriber for life, and since there is no way around the fact that none of us have gotten any younger over the past 25 years, I am naturally excited to let you know that I am going to attempt to meet your “challenge” with not just one, but two new services!
The first will actually be a relaunch of The Wagmore Advisory Letter, a covered call newsletter that I introduced back in 2013… but then chose to put into “hibernation” due to the fact that I fell into an unexpected trap of tying it too closely to Nate’s Notes (long story).
This service will be geared towards those of you who DO like to spend a lot of time watching the market and/or don’t mind seeking higher rates of income in exchange for also taking on more risk with the underlying capital, and it will be published in a “running blog” format similar to the one some of you may remember from the first go round.
Of course, for many of you, “watching the market” is one of the last things you’re hoping to spend your time doing in retirement, and so I am also going to introduce a new newsletter that will attempt to find companies that both pay a dividend and have the potential to provide a bit of growth as well, even if not the sort of growth I look for when choosing stocks for Nate’s Notes.
I am hoping to have both services up and running sometime in the next two or three months, and I’ll keep you posted as the details start to fall into place.
In the meantime, though I am not making any changes to Nate’s Notes itself at this point in time, I can tell you that the other “topic” that came up most often as part of my call for suggestions was the downloadable spreadsheet that includes all of the tables that are in the “pretty” version of the newsletter but are left out of the “bare bones” version.
First, for those of you who have not noticed it before, please note that a little ways further down on the same page of the website that you download the issue from, there is also a link to download an active spreadsheet that includes all of the Portfolio data, etc. associated with the current issue of the newsletter (with an additional “feature” being that it also includes columns with the “% of portfolio” numbers already calculated for you)!
And, in response to suggestions from many of you, please note that there is also now a second spreadsheet available for download that I am hopeful many of you will find more useful and user friendly when it comes to putting the data to use in your own “system” for using the information each month!
I believe the spreadsheet is fairly self-explanatory, but please don’t hesitate to ask if you have any questions (or, heaven forbid, find any mistakes I may have made in setting up the file)… and, just as importantly, please don’t be afraid to reach out if you have some additional suggestions about how the information could be arranged or presented in a manner that would be even more useful for you.
Along with the above changes, there were a lot of other great ideas shared with me that I plan on working into the newsletter and/or website over the next several months, and though some of them will be subtle, I will be sure to point out anything that might impact how you use or interact with my ideas each month – thanks again for all the great ideas that were shared… and here’s to another 25 years of market beating returns! Cheers!
And now, back to our regularly scheduled program…
Though there are still plenty of things to worry about in the world (any of which could eventually prove to be the straw that breaks the bull’s back, so to speak), the bottom line is that, with a few notable exceptions, the major indices and a great many stocks have continued to power higher in the four weeks since last month’s issue went to press… and, though the trend could end as soon as Monday, I believe we can currently say with a high degree of confidence that the bull market is still intact (and, of course, this in turn, means our job is to stay as fully invested as we can comfortably be while still sleeping easily at night).
Of course, fears about the impact coronavirus may have on the global economy are currently dominating the headlines, and though it is certainly possible that things really could grind to a halt if goods and people are not allowed to flow in and out of various parts of the world for extended period of time, this is a case where I would rather see you wait for confirmation of a major slowdown (even if it means you may have to sell stock at lowers prices when the evidence is more clear) than to see you become overly aggressive with your selling at the moment out of fear of what might happen.
To be sure, a number of our stocks could be impacted by the situation, especially since a slowdown for Apple would almost certainly lead to a similar slowdown for all of the companies that sell into the Apple ecosystem (including many of our chip stocks in the newsletter)… and at least a portion of Disney’s operations could also take a hit if travel grinds to a halt due to the fact that nobody wants to risk spending time on a plane to get from one place to another, for example…. but, again, until we see some of these stocks actually start to act poorly (i.e. they’re “rolling over” and starting to hitting lower lows on a regular basis rather than just suffering short-lived pullbacks as traders take profits following each new surge higher), you are encouraged to do your best to just sit tight on as much of your portfolio as you can during this frothy, blow-off stage of the bull market!
Along with concerns about coronavirus, thanks to all that has been going on in the world of U.S. politics these days, I’m noticing that “the election” is starting to come up more frequently as a variable to start worrying about… but, as I’m sure you can guess, along with the fact that I believe it is still too early to try and handicap the election in the first place (we need to know who will be on the ticket to do that!), this is another situation that I want to encourage to approach with as much “courage” as possible (no matter how you are hoping/fearing the election might turn out) – by all means, sell down to the sleeping point if you’re already feeling worried about the potential outcome of the election, but also do your best to leave as many chips on the table as possible until we get more evidence that the market is actually starting to decline in anticipation of one outcome or the other.
And, finally, though it remains to be seen what will end up happening on the interest rate front (especially without knowing how long the coronavirus situation will be weighing on things), I want to reiterate something I’ve said before, namely, whenever things start to seem like they are on “autopilot” when it comes to interest rates and inflation (as seems to be the prevailing wisdom at the moment), something unexpected occurs to keep everyone honest… but, again, our job is to watch for actual signs of such a change in the wind and respond when it occurs rather than try to anticipate where things are headed next.
In response to current conditions, I am not making any sales this month, but I am using the solid relative strength we are seeing in NVIDIA and NXP Semi. as an excuse to add to our positions in these two stocks, taking advantage of the currently depressed prices in First Solar and Cleveland-Cliffs to work on increasing the size of our slightly underweighted positions in each of these commodity/energy-related plays, and, given how their stocks are acting, adding to our positions in three of our biotech-related stocks this month (Bristol-Myers, Luminex, and MannKind); and, though I am not adding to our positions in them this month, I want to also especially encourage you to take a look at Catasys, Electronic Arts, the SPDR Gold Trust, and Disney as potential buys this month.
Wait… what?! MORE MannKind, Nate?! Yes, you read that correctly – when I sit down to rebalance the Portfolios every month, I sift through all of my options and try to figure out which ones are the most attractive… and given all that is going on with the company and the stock these days, I sincerely believe that MannKind is the most attractive opportunity available to us at the moment (so I am buying some)!
The company’s upcoming earnings call is shaping up to be possibly be a “binary event” of sorts – either the company’s CEO, Mike Castagna, is going to provide an update (and possibly “news”) that will prove his plan is actually working even though the stock price still does not reflect the reality of the situation, or he is not going to be able to deliver on that front… and if he doesn’t, it will greatly increase the odds that he will be replaced (and, ironically, the good news for us is that history suggests that, under the circumstances, either outcome is likely to lead to an increase in the stock price from current levels!).
As was suggested might happen in the December issue, scripts did dip a bit in January, but, again history also tells us that there is likely to be a rebound in February and March, and I believe it is particularly encouraging that despite the “dismal” (as described by some on social media) script counts at the moment, the stock is still going up on rising volume and coming down on much lighter volume (which is exactly what we like to see).
That being said, in response to a couple of things that seem to be on investors’ minds these days,
• your guess is as good as mine as to whether or not there is a deal in the works with Amgen or United Therapuetics (or anyone else), but I can tell you that, for a variety of reasons, if “equity stakes” are involved, a buy-in is probably much more likely than a buy-out,
• no, I’m not sure what else is going on in conjunction with an apparent “rebranding” that is underway for the company,
• yes, I really believe “there are only around 40 million reasons why the stock is trading where it is these days,” and unless some unexpectedly bad news happens to hit the stock soon, it wouldn’t surprise me at all to see at least a portion of that built-in (and very sizable) buy order start playing a more significant role in the price action, and, finally
• please don’t forget that if more strength starts to develop, you should look at it as an excuse to buy, not sell!
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:
Catasys (CATS) – Though Catasys’ stock has dropped in fairly dramatic fashion over the past couple of days, the price action is completely consistent with what we would expect in the current market environment… and, along with MannKind’s, I believe Catasys’ stock holds some of the biggest upside potential from current prices IF the frothy, blow-off stage of the bull market is able to continue powering higher in the months ahead.
MannKind (MNKD) – For all of the reasons discussed in the commentary and company write-up sections of the newsletter this month, MannKind is once again listed as a “Top Pick” this time around (and, as you’ll notice, I am even adding a few more shares to both Portfolios this issue in response to how the story appears to be shaping up on a number of different fronts).
SPDR Gold Trust ETF (GLD) – To be sure, a new downtrend could get underway as early as Monday, but, for now, the trend in gold appears to be up… and with so many possible sources of “fear” currently simmering on the sidelines, I believe the odds currently favor more new multi-year highs in the months and quarters ahead!
For the reasons discussed above and below, the Model (Aggressive) Portfolio will not make any sales but will purchase 100 (250) Bristol-Myers Squibb, 1,000 (2,500) Cleveland-Cliffs, 100 (250) First Solar, 250 (1,000) Luminex, 5,000 (50,000) MannKind, 25 (100) NVIDIA, and 50 (200) NXP Semiconductors. We will use the closing prices on Monday, February 10th, for all transactions.
Summary of Recommended Stocks
AdvisorShares Ranger Equity Bear ETF
In the same way that many of the major indices are currently tracing out patterns that might end up turning into “double tops,” share of this ETF are showing signs of possibly having some meaningful support just above $5… and, as discussed in previous issues, though the light volume in this “short ETF” means we can’t assign too much weight to any signals its price action may give us, we can still assign some when using it as part of our assessment of the health of the overall market. As always, there is no need for you to have a position here unless you are a very aggressive investor, and those of you who are not in that category can simply sit on cash instead. HDGE remains a strong buy under $5 and a buy under $7.
As you can see in the chart to the left, Apple’s stock has now recovered from not one, but two, “sharp drops” in the past few weeks, and though the stock is more than due for an extended cooling-off period after the huge move it has made over the past twelve months, I believe is worth noting that these sorts of quick recoveries are very consistent with our bullish assessment of the overall market. For its first quarter, Apple reported revenues of $91.8 billion and net income of $22.2 billion, or $4.99 per share, as compared to revenues of $84.3 billion and net income of just under $20.0 billion, or $4.18 per share, in the same period a year ago. Always in small pieces, AAPL is a strong buy under $280 and a buy under $320.
Though it has also failed to hit a new high for a whole two weeks now, Bristol’s stock is another that is acting exactly how we’d like to see it act for confirmation that we are still in the frothy, blow-off stage of an ongoing bull market! For 2019, Bristol reported revenues of just over $26.1 billion and net income of just over $3.4 billion, or $2.01 per share, as compared to revenues of just under $22.6 billion and net income of $4.9 billion, or $3.01 per share in the prior year. Thanks to the timing and manner in which the Celgene story ended up playing out, both Portfolios are currently very underweighted in Bristol, but, as you can see in this month’s trades, I am taking steps to “fix” this. BMY is a strong buy under $60 and a buy under $70.
As you can see in the chart to the left, Catasys’ stock has taken a fairly sizable tumble over the past two days, and though it is never fun to watch stocks lose value in such a rapid fashion, the good news is that the longer-term uptrend is, at least for now, still very much intact (and, it should be noted, moves like the one we’ve just seen here are actually a good thing at this stage of the game, as they help provide confirmation that we really are in the frothy, blow-off stage of the market cycle). Though I am not adding more shares this month, those of you who are still underweighted in the stock are absolutely encouraged to think about buy a few shares this month. CATS is a strong buy under $14 and a buy under $22.
Not surprisingly given all that is going on with Apple, coronavirus, and worries about valuations in the chip sector, Cirrus’ stock has made some wild moves over the past two weeks! And, while the chart to the right has the potential to take on some pretty bearish tones if the stock falls below $69, at this point in time, the price action is still quite consistent with what we would expect to be seeing in this market environment. For its third quarter, Cirrus reported revenues of $74.7 million and net income of $68.5 million, or $1.13 per share, as compared to revenues of $388.9 million and net income of $76.2 million, or $1.27 per share in the same period a year ago. CRUS remains strong buy under $70 and a buy under $80.
After continuing to drift lower for the rest of January after last month’s issue went to press, I am pleased to report that CLF’s stock appears to have attracted some buyers right at the $7 level, and, now that it has bounced off that level, as long as it can continue to hold above that the level, I think we can also start to feel more comfortable about nibbling at it (but please do remain disciplined about buying “small lots on a regular basis” rather than doing it all at once, at least until it becomes more clear that the stock is not going to keep hitting new 52-week lows). Though DBA and DBC may offer more diversification, I’d rather see you buy CLF as a “commodity bet” at the moment. CLF is a strong buy under $7 and a buy under $10.
Though we can’t say with certainty that the uptrend is still intact until the stock manages to clear $115 on good volume, I am very pleased by the manner in which EA’s stock has already rebounded after taking a sharp tumble in response to the company’s third quarter earnings call at the end of January. For its third quarter, EA reported revenues of just under $1.6 billion and net income of $346 million, or $1.18 per share, as compared to revenues of just under $1.3 billion and net income of $262 million, or $0.86 per share, in the same period a year ago. I am content with our current positions in both Portfolios, but for newer subscribers, this definitely a “first buy.” EA remains a strong buy under $100 and a buy under $115.
On the one hand, I will have no choice but to turn more bearish on the stock if it happens to start hitting new 52-week lows in the weeks and months ahead; on the other hand, however, both Portfolios are slightly underweighted in the stock at the moment, and, as is the case with Cleveland-Cliffs this month, I am taking advantage of the current situation to add a few more shares to both Portfolios as part of this month’s “rebalancing efforts” (and, to be more precise, as those of you who have already downloaded the new “Portfolio Data” spreadsheets can attest, I am increasing the sizes of our Model and Aggressive Portfolio positions by 7.7% and 5.9%, respectively). FSLR is considered a strong buy under $52 and a buy under $60.
As you can see in the chart to the right, there has been more selling pressure than buying pressure in Illumina’s stock since the company announced its full-year results (and gave guidance) in late January. For 2019, Illumina reported revenues of $3.5 billion and net income of just over $1.0 billion, or $6.74 per share, as compared to revenues of $3.3 billion and net income of $826 million, or $5.56 per share, in the previous year. Though the longer-term uptrend will remain intact as long as the stock can hold above the $270 level, I will be the first to admit that if it happens to break through that price point in the months ahead, it will be a very bearish sign for the stock. ILMN is a strong buy under $280 and a buy under $320.
Though I have to admit that I am feeling a little anxious about my decision to buy a few more shares on Monday (we will be using the closing price in the newsletter… and then the company will be announcing earnings just a short while later!), I like the price action we have been seeing in the stock over the past three months, and since it is all part of a longer-term approach to buy small lots on a regular basis, I am actually ok with my decision (but wanted to let you know that I’m not immune to such feelings – I’ve just learned how to dance around them!). Of course, any strength that might develop in response to the earnings call should be bought, not sold! LMNX is now considered a strong buy under $22 and a buy under $26.
As mentioned above, I believe things are coming together in a manner that suggests Castagna is either getting ready to unveil what he’s been working on behind the scenes*… or it is going to become clear that some real change may be needed in the C-suite… and given the company’s current valuation, the way stock has been acting, and the fact that there are still 40 million shares sold short in anticipation of the bankruptcy filing that is now going on its fourth year of not materializing, I also believe the odds are now more skewed in our favor than they have ever been (and, no – I do not see any logical way the warrants mean “there is wall at $1.60,” for those of you wondering). MNKD is a strong buy under $5 and a buy under $10.
*clarification in response to questions from subscribers over the past week: the expected adoption rate for new ways to manage diabetes has been discussed a number of times in the newsletter, and though any updates or insights Castagna can share on the Afrezza front will be welcome, it is updates (and evidence of progress) related to the other pieces of the puzzle (United Therapeutics, RLS, the rest of the TS pipeline, etc.) that I am talking about when I say “working on behind the scenes.”
As you can see in the chart to the right, NVIDIA’s is another of our stocks that has managed to bounce back from a “quick and painful” drop without doing much more than blinking an eye once or twice… and given where I believe we are currently at in the market cycle, I do not see how I can classify such price action as anything but “bullish” when trying to assess the health of the overall market! For now, I would like to see the stock hold above $225 for confirmation that the uptrend is clearly intact (though I believe it can trade all the way back down to the $200 level without doing serious damage to the longer-term chart), and, naturally, you are encouraged to “buy strength.” NVDA is a strong buy under $230 and a buy under $260.
Yep – another stock that has failed to hit a new high for a couple of weeks now (oh no!)… but, during that time, has also “survived” a sharp drop in price and is once again trading above the lows set during the drop. To be sure, a drop back below $110 would give me pause for concern about the health of the overall market, but this is another situation where you should consider “new highs” to be a reason to buy, not sell, the stock. For 2019, NXP reported revenues of just under $8.9 billion and net income of $243 million, or $0.85 per share, as compared to revenues of $9.4 billion and net income of just under $2.3 billion or $6.72 per share, in the prior year. NXPI is a strong buy under $125 and a buy under $140.
PowerShares DB Agriculture ETF
While it is very possible that shares of both DBA and DBC will end up rebounding in a hurry following the dramatic tumble commodity prices have taken around the world in response to fears that the global economy may be heading for a slump as a result of the spread of coronavirus, for now, there is no denying the fact that, aside from “being contrarian just to be contrarian,” there do not seem to be any good reasons to start bidding on commodities just yet. That being said, I continue to believe that, at some point, things will finally start to kick back into gear when it comes to the global economy, and once that day arrives, I also believe the odds continue to favor inflation (continued under “DBC” below) DBA is a buy under $17.
PowerShares DB Commodities ETF
(continuing from “DBA” above) making a return to the stage after an unbelievably long stint on the sidelines (to mix my performing arts and sports metaphors). In the meantime, rather than tie our capital up in these ETFs, I would rather see you put any “commodities money” you have to work in the likes of Cleveland-Cliffs and/or the SPDR Gold Trust if you are interested in increasing your exposure to the overall asset class. To be sure, though almost all of the upward momentum we are seeing in GLD these days is almost certainly due to “uncertainty” rather than fears of inflation, this only means that “signs of inflation” will likely help add fuel to the fire once they do start appearing in the data more regularly. DBC is a buy under $16.
Unfortunately, as you can see in the chart to the right, Qorvo’s is one of the few stocks in the newsletter this month that is NOT behaving as it “should” be if our “frothy, blow-off stage” assessment is, in fact correct; however, the good news is that the stock can actually trade back down to the $90 level without breaking the nearer-term uptrend, and all the way back to $78 without raising concerns about the longer-term uptrend. For its third quarter, Qorvo reported revenues of $869.1 million and net income of $161.4 million, or $1.36 per share, as compared to revenues of $832.3 million and net income of $69.5 million, or $0.55 per share, in the same period a year ago. QRVO is a strong buy under $100 and a buy under $115.
And, as you can see in the chart to the left, Skyworks’ stock is experiencing some of the same challenges as Qorvo’s, with the good news being that it hasn’t actually “broken down” yet (even if it is not threatening to set new highs in the same way that the likes of NVIDIA’s and NXP’s are, for example). For its first quarter, Skyworks reported revenues of $896.1 million and net income of $257.1 million, or $1.50 per share, as compared to revenues of $972.0 million and net income of $284.9 million, or $1.60 per share, in last year’s first quarter. Though I am not adding more shares to our position this month, this is another case where it will be ok to “buy strength.” SWKS is now a strong buy under $105 and a buy under $120.
SPDR Gold Trust ETF
As has been discussed a number of times over the past several months, with the price of gold continuing to hit new multi-year highs on a regular bases, there really is no way around the fact that the precious metal is currently in an uptrend… and though I am comfortable with our current weightings in both Portfolios, (and am therefore putting capital to work elsewhere this month) if you do not yet have a position in GLD (or are still underweighted), you are encouraged to look at rising gold prices as a reason to buy rather than “wait for a pullback,” as history suggests there could still be plenty of upside left for gold if uncertainly levels on a number of fronts continue to increase rather than diminish. GLD is now a buy under $150.
Tekla Life Sciences Investors
Though HQL’s stock has not yet been able to push into new 52-week high territory, given that the $18-$20 range represents a very significant level of resistance on a longer-term chart, it would be especially encouraging if the stock were to first make it back into that range, and then spend some time trading there while we wait to see what the rest of the market is doing in conjunction with the move. Though I am not adding more shares of this closed-end fund to either Portfolio this month, those of you who are newer to the newsletter and want to be invested in biotech but are a little apprehensive about the potential volatility are encouraged to add a few shares of HQL this month. HQL is a strong buy under $15 and buy under $18.
Walt Disney Co.
Yes, coronavirus is going to create some uncertainty over the near-term while we wait to see how quickly and effectively the world is able to respond to the situation, but, as you can see see in the chart to the right, Disney’s stock is pretty clearly in an uptrend… and given where we are at in the market cycle, along with where we seem to be at in terms of CEO Bob Iger’s tenure, I believe the odds favor more gains in the months ahead. For its first quarter, Disney reported revenues of $20.9 billion and net income of $2.1 billion, or $1.53 per share, as compared to revenues of $15.3 billion and net income of just under $2.8 billion, or $1.84 per share, in the same period last year. DIS is a strong buy under $140 and a buy under $155.
New To The Newsletter?
Here are a few guidelines to help you get started:
• Decide how much of your overall portfolio you’d like to allocate to the ideas in Nate’s Notes… and then plan on investing it in roughly equal amounts each month over a period of several months.
• Make your initial purchases based on the “first buys” that are check-marked in the table on the front page of the newsletter (note that you do not have to buy all of them each month!), as well as in the commentary found in the company write-ups.
• Try to invest slightly more money in “core stocks” vs. “non-core stocks” (60%-40%, respectively, is a reasonable ratio to aim for when first starting out).
You can read more on this topic in the May 2013 issue of the newsletter online.
Information contained herein was derived from sources believed to be reliable. However, no guarantees can be made concerning the completeness or accuracy of said information. Nothing herein should be construed as an offer or the solicitation of an offer to buy or sell any security. The Editor and affiliates of the Editor (family members, friends, etc.) may have positions in and may from time-to-time buy or sell any security mentioned herein. Past performance is not necessarily indicative of future performance.