*** The following is a complete copy of the raw text from Issue #308 of Nate’s Notes, which was published for subscribers on September 11, 2020, and reflects our opinions of the market and all stocks mentioned as of that date. The full issue (which includes all of the performance numbers, tables, and charts referenced in the text-only version below) can be downloaded as a .pdf by clicking the image to left. ***
If you’ve heard this story before, don’t stop me,
because I’d like to hear it again…
– Groucho Marx
Doing More Of The Same This Month
Naturally, I’m not going to complain about the performance numbers that our Portfolios have been putting up lately, but I also am going to make sure you are aware that these sorts of returns are NOT sustainable on a longer-term basis… so please be careful to not allow yourself to fall into a trap of complacency when it comes to watching your own portfolio!
Though there are still plenty of things to be worried about in the world these days, there are also a lot of things to be optimistic about… and, likewise, though many stocks are more than due for a “cooling-off period” after the amazing run they have made since mid-March, one of our mantras in the newsletter (“trends often go on for longer than seems reasonable”) suggests that there could still be additional gains to be had before the party finally comes to an end.
That being said, for all of the same reasons I was doing so last month (the August issue is still available from the same page of the website that you got this issue from – and, in fact, if you are new to the newsletter, you are encouraged to go back and read that issue), I am buying some stocks and selling some stocks this time around, but also making sure to move some additional cash to the sidelines.
I have been getting a lot of emails lately from subscribers wondering what they should be doing with Ontrak after the huge move the stock has made off the lows it set back in March, and I hope the following discussion helps…
First off, your guess is as good as mine as to where the stock might go next, and I can see it just as easily trading back to down to the $30-$40 range as I can see it powering past $100, especially given the thin float and still exceptionally large short position that exists in the stock.
Second, though I have no idea what the stock might do over the shorter-term, I do feel comfortable saying with a fairly high degree of confidence that the company itself is still in its very early stages of growth, and, if this turns out to be the case (and with a reminder that there are never any guarantees in the stock market), I believe the odds are quite good that along with being a larger company 3-5 years from now, for example, it will also sport a correspondingly larger market cap as well (even if there is plenty of volatility along the way).
Consequently, please note that while it is true that the sales of Ontrak that I am making this month may seem quite large relative to the other sales on a dollar basis, the reality is that, just as I am doing with virtually all the other stocks that are being sold this month as well, I am actually only selling 10% of our existing positions in both Portfolios; in addition, please note that thanks to the fact that we built intentionally oversized positions in the company when it was trading at a much lower valuation, we will still have plenty of skin in the game if it turns out the stock is going to continue rocketing higher from here in the weeks and months ahead.
In addition, please note also that even though I am selling a portion of our position this month, this is absolutely a stock that new subscribers should think about starting positions in (but only if the stock happens to dip below its new buy limits between now and next month’s issue, and also with an intentional plan in mind to build a position over several months rather than doing it all at once – see last month’s issue if you want additional commentary as to why!).
And, finally, because it makes a nice segue into the other situation that has been heating up my email box again lately (and with complete recognition that the success of Ontrak so far in no way guarantees the success of MannKind), I would be remiss if I didn’t take this opportunity to say that thanks again to everyone who sent me some variation of the idea that getting to see my approach play out the way it has with Ontrak has helped instill (or restore, in some cases) a nice boost of confidence that there really is a method to my madness when it comes to building oversized positions in stocks when I find them to be especially undervalued, even if the MannKind story has gradually become the most extreme example I’ve ever been through in my 30+ years of doing this, both in terms of the amount of time we have had to wait for “the payoff” to finally materialize, as well as the degree to which valuations have gotten so completely out of whack with reality of what the company and its products/assets are actually likely to be worth on a longer-term basis…
Cutting to the chase (and you can guess the “theme” of each of the types of questions I am being asked for each bullet point)…
• No, I do not share the same disdain for Mike Castagna (CEO) that has been expressed by (understandably) frustrated shareholders online, but that also does not mean, by any stretch, that I automatically think he deserves an “A+” either (as some of you have wondered since I “never say anything bad about him”).
Rather, my approach to investing suggests that it is still too early to know what grade to assign for him, as we are just now getting to the point in the adoption cycle when we really should start to see some traction on the script front (but please note that there are still 9-15 months left on the “window” that I am looking at when I make statements like that, so, again, it is still “too early” to actually assign a grade, even if it would have been great to be assigning an “A+” to everyone in the C-suite by now).
In addition, I believe it is worth noting that, even after the extra dose of “scrutiny” that he received from the company’s Board last year as part of a request from a very vocal group of shareholders, the Board has chosen to keep him in the CEO spot, and this tells me that either the board is completely asleep at the wheel (possible, but not likely, based on my experiences in situations like these), or the board still has a sufficient level of confidence in whatever plan Castagna has been/is still working on “behind the scenes.”
Yes, volume has all but dried up in the stock, and though this admittedly suggests there is not a lot buying pressure yet (which is what you’d expect to see at the end of the “fear” part of the cycle, i.e. the period in which nobody is interested owning the stock), it also suggests there is no selling pressure either… and this is far more important for those of us still involved with the stock at this stage of the game, as it means that the fear portion of the cycle also has likely run its course (or has just about done so)…
…and with Wall Street now starting to take a second look at the story (those of you who are “early, early subscribers” will recall that Celgene and its lead drug, thalidomide, went through a similar “second time’s a charm” experience when Wall Street analysts finally woke up to the story and went from considering the drug and company “an extreme long shot not worth investing in” to “one of our best investment ideas for the next ten years” (paraphrased as best as I can recollect, of course – that was a long time ago!), it would not surprise me at all to see the stock price and volume both start to pick up in tandem as we head into the end of the year.
And, of course, the fact that there is still an additional buy order for 28M shares already built-in to the story thanks to the massive short position that has built up in the stock over the years also means there is the potential for additional “fireworks” as well if the stock ever does gain some unexpected momentum to the upside on meaningful volume (and, in fact, if you look at a chart of the past six months, you’ll see a couple of examples of these “mini-panic buying sprees” that I believe are previews of what is likely to come in the weeks ahead as analysts continue to rethink their outlook for both Afrezza and Technosphere).
• No, I don’t know what the catalyst will be that finally gets the stock moving back towards something that more closely resembles “fair value,” but I do know that things seem to be setting up such that Castagna could “run the table” if he is able to put together a nice string of shots in the months ahead, and I will be watching just as closely as the rest of you to see what happens over the next few months (starting with presentations he will be making at virtual investor conferences this Monday and Tuesday, as well as next Monday – visit mannkindcorp.com for info on how to watch his presentations if you’re interested).
This month’s trades…
As mentioned above , I am using this month’s “rebalancing trades” to a) lock-in a few more profits in some of our stocks that have been doing well lately, b) redeploy some of that capital into other stocks that I believe have better risk-reward ratios at this stage of the game (and/or represent “a hedge,” of sorts – see below), and, after making the trades, c) have a little more cash sitting on the sidelines as part of respecting my own “sleeping levels” in the current market environment (and, for those of you “playing along at home,” assuming prices don’t change much on Monday, please note that this means the Model Portfolio will be sitting on a roughly 12.5% cash position after the trades are made, and we will have paid down another 17% or so of the margin loan in the Aggressive Portfolio).
As far as the trades themselves go,
• because of the massive run-up we have seen in them over the past six months or so, I am selling toughly 10% (give or take a percentage point or two, depending on what share amounts represent “nice, round numbers” for each position) of all of our chip positions, as well as two other “tech” stocks that have been performing well lately, namely, Apple and Electronic Arts;
• I am selling roughly 10% of our gold position simply to raise a bit of capital (it is the third largest position in both Portfolios), and I am selling 10% of our Ontrak position in order to both raise capital and respect my own sleeping levels by locking-in another chunk of the sizable profits that have materialized in such a hurry over the past few months… however, please note that both of these stocks (well, ETF, in the case of GLD) are still tracing out chart patterns that the odds suggest greatly favor additional moves to the upside before their respective rallies run out of steam, so if you do not need to raise capital (and/or are still at a comfortable sleeping level), you may choose to be a little less “aggressive” (I’m selling a whopping 10% of each position!) than I am being in terms how much, if any, you decide to sell out of your own portfolio;
• because they are all still smaller positions in both Portfolios… and most (but admittedly not all) are also tracing out chart patterns that suggest they may be in the early stages of new uptrends (vs. the clearly “later stages” many of the big name tech stocks find themselves in, for example)… I am increasing the size of our positions in Bristol-Myers, Cleveland-Cliffs, Illumina, Luminex, PetMed Express, and both of our commodity ETFs (DBA and DBC);
• though I remain skeptical that the economic outlook is as rosy as some seem to believe it will be, because their charts both suggest that investors may, in fact, be willing to look across “the void of uncertainty” no matter how large it becomes, I am buying a few more shares of both Alaska Airlines and Disney as a way to hedge my own pessimism about what may be in store for us between now and the end of the year, both in terms of the economy and market sentiment in general;
• and, finally, as discussed elsewhere in this month’s issue, because I believe the odds are quite good that MannKind’s stock is not likely to remain this far undervalued for much longer, I am adding a few more shares to both Portfolios (with the same caveat as last month, namely, I may choose to sell some next month if the stock is back to trading under $1.60 after all when the October issue goes to press).
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:
Luminex (LMNX) – Though I can’t tell you when the stock will finally stop falling, I do consider the sell-off to be extremely overdone, and once the stock regains its footing, it should rebound to more realistic levels (so take advantage of the pullback while you’re able to)!
MannKind (MNKD) – As discussed elsewhere in the newsletter this month, the stage certainly appears to be set for “something interesting” to transpire with the stock… and if/when the stock finally starts moving, I believe the first leg up will likely be “a good one” that will take us out of the sub-$2 range from here on out.
SPDR Gold Trust ETF (GLD) – Though I am selling a portion of our very large gold positions in both Portfolios this month in order to raise cash and help pay for our other purchases, I love the way the chart is shaping up, and given all that is going on in the world these days, I believe the price of gold still has a ways to run for us.
For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 100 (300) Apple, 75 (300) Cirrus Logic, 75 (250) Electronic Arts, 25 (100) NVIDIA, 75 (150) NXP Semi., 1,500 (5,000) Ontrak, 50 (200) Qorvo, 50 (100) Skyworks Solutions, and 100 (500) SPDR Gold Trust ETF, and purchase 100 (250) Alaska Air, 100 (250) Bristol-Myers Squibb, 1,000 (2,500) Cleveland-Cliffs, 25 (50) Illumina, 500 (1,000) Luminex, 10,000 (50,000) MannKind, 300 (500) PetMed Express, 250 (500) PowerShares DB Ag., 250 (500) PowerShares DB Cmdties., and 100 (250) Walt Disney. We will use the closing prices on Monday, September 14th, for all transactions.
Summary of Recommended Stocks
Alaska Air Group
As you can see in the chart to the right, Alaska’s stock has continued the slow but steady climb that has been underway since mid-March, and though your guess is as good as mine as to where the stock will go next while we wait to see just how quickly (or slowly) air travel begins to pick-up in the U.S., as mentioned above, I am raising the buy limits and adding a few more shares to both Portfolios this month as a way to hedge my own pessimism about both the economy and the stock market as well (in addition, given the way the chart is looking, I want to increase the size of our very small positions in both Portfolios as part of this month’s rebalancing efforts). ALK is considered a strong buy under $32 and a buy under $44.
Reminding us just how “hot” this stock had been up until just recently, I want to take a minute to point out that during its most recent spurt higher, Apple actually became the newsletter’s first-ever “500-bagger” AND “550-bagger,” with fewer than three weeks passing between the first and second of those two monumental milestones! Of course, the stock is long overdue for a cooling-off period (and one appears to possibly be getting underway), and though I do believe that there are still plenty of growth opportunities ahead for the company, I am also comfortable scaling-back our position a bit in order to both raise some cash and redeploy that capital into other stocks. AAPL remains a strong buy under $90 and a buy under $100.
Though it is frustrating to see Bristol’s stock essentially just trading sideways these days in a trading range between $55 and $65, loosely speaking, I do also find it encouraging on a longer-term basis since these sorts of extended consolidation periods often helps set the stage for bigger moves to the upside once the stock finally manages to break out into new high territory (and assuming that’s the direction it ends up going, of course!). As it stands, though I will become more concerned if the stock does end up dropping below $55 rather than finding support there, I am putting some of our money to work this month to increase our still underweighted position here. BMY remains a strong buy under $50 and a buy under $70.
And, yet again, I am afraid that Cirrus’ stock is tracing out the sort of chart pattern that only raises concerns about the health of the stock (and perhaps the sector as a whole) and does nothing to instill confidence. As I’m sure you can imagine, I will be watching the stock closely, but if it starts to slice through the $50-$55 level between now and when next month’s issue goes to press, it will count as a very bearish “clue” in my book, for sure. In the meantime, though I am selling another chunk of stock out of both Portfolios this month (and it is our smallest chip position), please note that you should still own at least a small position, as my bearishness may be misplaced. CRUS is a strong buy under $48 and a buy under $65.
On the one hand, as you know, I remain concerned that our economy is not actually doing as well as some like to believe it is, and based on this assumption, it suggests that there is no urgency when it comes to increasing the size of our Cleveland-Cliffs positions; on the other hand, however, a) my pessimistic view of the situation could be wrong, and b) regardless of who wins the election in November, I don’t see how another presidential term will be able to go by without our fearless leaders in Washington finally getting around to pass a meaningful infrastructure bill, both to help get people back to work (when appropriate), but also to simply update the worn out infrastructure! CLF is a strong buy under $6 and a buy under $8.
To be sure, EA seems to be very well-positioned to continue benefitting from all the trends that are currently in place for gaming (and mobile gaming, in particular), and the stock could very easily be pushing into new all-time high territory again by the time next month’s issue goes to press; however, I have to admit that the chart to left is one that makes me nervous, simply because if the stock ends up dropping below the very recent lows that have been set as part of the sell off that just took place, my experiences suggest that we may be looking at the beginning of a longer-term slide that could take the stock all the way back down to the $100-$110 level. With patience, EA is a strong buy under $105 and a buy under $130.
As those of you start each month’s issue by looking at the trades I am making have probably already noticed, First Solar is one of only two stocks in the newsletter that I am not doing anything with as part of this month’s rebalancing efforts… and the reason for this is two-fold. First, though the stock seems to still be in a nice uptrend even after this week’s pullback, I still do not have a good explanation as to why it has been performing so well, and since I don’t have one, I don’t have any good reasons to make a trade one way or the other either; second, since it is currently a nice “middle of the pack” stock in terms of weighting (9th largest in both Portfolios), I’m leaving it alone. FSLR is a strong buy under $55 and a buy under $70.
As you can see in their charts, both Illumina’s and Luminex’s stocks abruptly stopped going up at the same time, and though I have looked around for a catalyst that might explain the price action, the only thing I can come up with is that other companies received clearance for their covid tests right around the time of the reversal, and, to be honest, this doesn’t really explain the shift in psychology (or at least it shouldn’t), since neither of the two company’s prospects hinge on needing to be “the big fish” in that segment of the market. Yes, I do have some concerns about what might happen if the stock can’t hold the $330 level in the weeks ahead, but in the meantime, ILMN is a strong buy under $325 and a buy under $375.
Yipes! As you can see in the chart to the right, Luminex’s stock has taken a major tumble over the past six weeks, and as mentioned above, I am afraid that I do not have any solid explanations that would explain the price action. That being said, I continue to believe the company is in fine shape and poised to continue growing nicely in the years ahead (with or without a major role in the covid testing market), and I also continue to believe (but am not trying to suggest that such a deal is currently in the works) that the company’s market cap (which is back to being right around $1B), suggests it could be a potential takeover candidate somewhere along the way LMNX is now a strong buy under $24 and a buy under $30.
If you haven’t picked up on it yet, yes, I am more confident than I have ever been that our patience is finally going to start paying some dividends (metaphorically, of course – I am NOT expecting MannKind to literally start paying a dividend at this point in time!). Not only will the CEO be presenting at three different conferences over the next week-and-a-half, but Andrea Leone-Bay (Chief Science Officer at Receptor Life Sciences, former CSO at MannKind) will also be making a presentation at the Third Annual Cannabinoid Derived Pharmaceuticals Summit next week, and perhaps this will help draw some extra attention to the Technosphere platform as well. MNKD remains a very, very strong buy under $5 and a buy under $10.
Though the chart to the left is still “plenty strong”-looking even after the recent pullback, there is also no doubt that it can also be characterized as “over-extended” and “vulnerable” after running from the mid-$100s to almost $600 in less than twelve months! Yes, the company is still “best of breed” in the chip sector, and yes, the stock could very easily continue to power higher in the months ahead if the market stays strong; however, given my outlook for the market as a whole, along with my decision to move a fair amount of the capital around in both Portfolios this month, I am selling small portions of our positions this month while we wait to see where the stock goes next. NVDA is a strong buy under $350 and a buy under $400.
While I am naturally pleased that shares of NXP have just about made it back to the level they were trading at before the reality of the pandemic started to make its presence felt, I am also concerned that a) they have not been able to clear those levels yet, and, perhaps more importantly, b) the stock has not really experienced any meaningful pullbacks during its climb from $60-ish back to today’s levels (which means there could be a lot of pent-up profit-taking just waiting to hit the stock at the first signs that the rally may be running out steam – as long as the stock stays above $110, I think we’re ok, but if breaks that, the selling pressure will likely accelerate in a hurry). NXPI is now a strong buy under $100 and a buy under $115.
If only there was a way to know ahead of time when stocks would actually make their big moves, eh?! As you can see in the chart to the left, Ontrak’s stock has been on fire lately, thanks in part, no doubt, to a combination of continued progress on the business front by the company, as well as a large short position (as measured against the size of the float, anyway) that is clearly “swimming against the tide” at the moment. Though I am taking some chips off the table in order to lock-in some of the recent gains that have developed for the position, there are still plenty of years of growth ahead, so please do not sell all of your stock (just enough to sleep at night!). OTRK is now a strong buy under $40 and a buy under $65.
Given how both stocks have acted since they were added to The Little River Investment Guide, I have appreciated the humorous comments a few of have shared via email that perhaps I “cursed” them by asking them to do double-duty for us in both newsletters… but, all kidding aside, in the same way that I remain completely confident about the prospects for Luminex, I remain equally optimistic that we will do well for ourselves over the long-haul by continuing to patiently build a position in PetMed Express as well (and, as you can see in the list of this month’s trades, I am doing just that!). With a reminder to buy some of the “core stocks” too as part of your plan, PETS is a strong buy under $28 and a buy under $36.
PowerShares DB Agriculture ETF
Though we will need to see DBC find some support and start to head higher again to help confirm it, as you can in the charts of both DBA and DBC, it appears that the hunch we have been working on in the newsletter for the past couple of months, namely, that commodity prices are actually starting to rally for the first time in several years. Of course, after underperforming for such an extended period of time, it would not be unusual for there to be “a bounce” all on its own, and we therefore need to keep our eyes peeled for signs that what we are looking at right now might be nothing more than such a bounce. On the other hand, however, if we really are looking at (continued under “DBC” below) DBA is a buy under $16.
PowerShares DB Commodities ETF
(continuing from “DBA” above) the start of a new bull market for commodities, something that is quite possible, given the combination of all of the “dislocations” that have built up in the supply-demand equation thanks to the pandemic and a very real possibility that inflation may finally be starting to make a resurgence after all that has taken place in the world of central banking over the past few years (or decades, depending how you like to look at such things!), and if there is a new bull market getting underway, it would mean that our job is to start rebuilding what have intentionally been quite small positions in both Portfolios (and I am taking another step towards doing so in this month’s issue). DBC remains a buy under $15.
On the one hand, I am very pleased that not only was Qorvo’s stock able to “fill the gap” that was created in late July as part of its recent tumble but that it has also managed to pop back above $120 and stay there, at least for now; on the other hand, however, I remain concerned about the chip sector as a whole, and now that Qorvo’s stock has finally broken stride a bit, it gives us a nice set-up to watch for clues about the direction of both the stock and the sector as a whole (and, under the circumstances, probably the market as whole as well) – if it stays above $120, we can breathe easy, but if it happens to drop below $110 in the weeks ahead, it will count as a very bearish sign. QRVO is a strong buy under $100 and a buy under $115.
As was the case with Qorvo’s stock, I am pleased to see that Skyworks’ stock has also finally experienced something resembling an actual round of profit-taking, and now that it has, we have a benchmark of sorts that we can use to gauge the true health of the stock and sector going forward. In particular, I will be watching the $130 level very closely, and as long as the stock can remain above it, we can feel fairly confident that the uptrend is still very much intact; however, if the stock starts to slide into the $120s, we will have to become even more wary, as a break below $120, in my opinion, will be a sign that a larger correction is getting underway for the sector. SWKS remains a strong buy under $110 and a buy under $130.
SPDR Gold Trust ETF
Though I will have to change my tune if shares of this ETF end up trading back down to the sub-$1,600 level in the weeks and months ahead, for now, I continue to love the manner in which gold is continuing to work its way higher in exactly the sort of slow and methodical “step-wise” fashion that we like to see if bull markets are going to remain healthy and robust “for the long run”… and, of course, since gold is one of those commodities that very definitely trades in long cycles, we want to make sure that the bull doesn’t wear itself out by trying to go too far, too fast. For the reasons discussed above, I am selling some of our GLD position this month, but it is very much a “first buy” for new subscribers! GLD is now a buy under $190.
Tekla Life Sciences Investors
Unfortunately, I have to admit that the chart you see to the right is one of the most concerning to me out of all in the newsletter this month, simply because the stock appears to be “rolling over” in a more dramatic manner than I’d like to see given what’s going on with the market as a whole right now (and, thus, it is creating another of those situations in which we don’t know if it is simply marching to its own drummer, or if it will, in hindsight, turn out to have been a canary in the coal mine that we should have paid closer attention to). If you do not own HQL yet, go ahead and buy some, but if you want to put additional money to work in biotech, I would look at MNKD and LMNX first. HQL is a strong buy under $15 and a buy under $18.
Walt Disney Co.
As mentioned above, though I do not share the optimism that others seem to have when it comes to near-term prospects for both air travel and just about every type of business Disney is involved with (except for “streaming,” of course), there is no doubt that the stocks of both Alaska Air and Disney have been tracing out some of the better looking charts in the newsletter lately, and because they are both very well run companies with solid balance sheets, I am using some of the capital that we are raising this month to buy a few more shares of both companies as part of my own efforts to hedge my own pessimism about where things might go from here. DIS is considered a strong buy under $110 and buy under $135.
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.
Reminder: All of the Portfolio information usually found in tabular form in the newsletter can be downloaded from the website as small Excel files via the link just below the “current issue” icons on the “Most Recent Issues of Nate’s Notes” page on the website (the same page this document was downloaded from).