Sleeping Well… and enjoying the bull market! 10/3/18

*** The following is a complete copy of the raw text from Issue #284 of Nate’s Notes, which was published for subscribers on September 14th, 2018, and reflects our opinions of the market and all stocks mentioned as of that date. The full issue (which includes all of the tables and charts referenced in the text-only version below) can be downloaded as a .pdf by clicking the image to left. ***

Way down deep, we’re all
motivated by the same urges.
Cats have the courage to live by them.

– Jim Davis (creator of Garfield)

Sleeping Well… and enjoying the bull market!

As was the case last month, a big inter-issue move in MannKind’s stock has once again helped both Portfolios make bigger moves than the market as a whole on an isssue-to-issue basis… and, as you can see in the performance table above, I am very pleased to report that the move was in our favor this time around!

In addition, though there are a few stocks in the newsletter that are starting to lag the market in a somewhat alarming fashion, I am also very pleased to report that many of our other stocks are showing great relative strength these days (even if not to the same degree as MannKind), and the price action we are seeing in the likes of Apple, Cleveland-Cliffs, Illumina, Luminex, and NVIDIA these days, for example, is exactly the sort of action we would hope to see if we were looking for additional confirmation that we are, in fact, moving even more solidly into the frothy, blow-off phase of the bull market that has been underway for several years now.

Tackling the issue of the stocks that are lagging the market first, along with Electronic Arts and First Solar (whose underperformance can pretty clearly be tied to “nothing more” than the current status of global economic relations), I have to admit that I am also somewhat concerned by price action we have been seeing lately in a number of chip stocks… and though some are acting well, the fact that a growing number of stocks in the sector are starting to trace out chart patterns that suggest the sector may finally be “rolling over,” know that I am watching the situation especially closely for signs that will let us know with a bit more certainty whether the pullback is just part of a healthy round of profit-taking in the context of an ongoing bull market… or if the group is actually acting as the canary in the coal mine for the rest of the market (and, unfortunately, it is still too early to know for sure),

On the flip side of the coin, however, not only are all of the stocks mentioned above acting extremely well these days, all five of the indices I use to gauge the health of the overall market are still flashing “bull market” signals for us (see the revised Eyebrow Levels table below for more information).

And, since our game plan calls for us to position our portfolios based on what the market is actually doing rather than what we think (or are worried it might do), you are naturally encouraged to be as patient as you can about taking profits in the current market environment, while also “selling down to the sleeping point” as needed if you ever find yourself starting to lose sleep over the size (or direction) of either a particular stock or your portfolio as a whole.

As you know, as the market has continued to creep higher, I have found it necessary to honor my own “sleeping point,” and, over the course of the past couple of issues, we have paid off a bit of our margin debit in the Aggressive Portfolio and moved roughly 11% of the Model into cash; however, I want to remind you that since “peace of mind” is such an important part of finding success in the stock market, you should aim for whatever number helps you sleep at night… even that means your own portfolio is only 50% invested, for example! Not only does the peace of mind you’ll have by selling down to your own sleeping point make it worthwhile, you’ll have the added bonus of knowing that if the market does happen to head higher from here while you are “less than fully invested,” it will likely be doing so with a vengeance.

That being said, though I am selling a few more shares of the some of the stocks that have been underperforming lately, based on how the overall market is acting, how some of the underlying stories are unfolding, and because I naturally want to start a position in the new stock I am recommending this month, I am putting some money back to work on a net basis this month (and will be sitting on roughly 8% cash in the Model after this month’s trades, if you’re wondering).

New Recommendation: Catasys (CATS – $10.51)

As mentioned last month, while a combination of us being in the late stages of a bull market (which makes “bargains” scarce) and it being hard to find anything more compelling than I have found the MannKind story to be while the market cap has been sitting down here under $500 million (or even $1 billion), now that MannKind appears to be entering a new era and is likely to require much less “hand-holding” in the months (and quarters… and years!) ahead, I am finally ready to recommend a new stock that I believe also has the potential to generate some significant gains for us in the years ahead based on its market cap today versus what it has the potential to be worth in, say, five years if the company continues to execute on its business plan.

Catasys is an up-and-coming company that has created a comprehensive program (called OnTrak) that is designed to help health insurers reduce claims costs associated with members who have behavioral health disorders that also cause or exacerbate other co-existing medical conditions.

In a nutshell, Catasys has developed a proprietary data analysis platform that it combines with predictive modeling techniques to identify individuals in a healthcare plan who suffer from chronic conditions, but, because they may not be receiving the support they need to successfully manage these underlying conditions, end up costing the plan a great deal of money on other “secondary” items like ambulance transports and visits to the ER that can be prevented (or minimized) with even a small increase in the amount of support that is provided to the patient.

Once the individuals in a plan have been identified, the OnTrak program kicks in and a 52-week intensive outpatient program begins in which the patients are engaged and provided with nurses (or other appropriately qualified “coaches,” depending on the underlying situation), sometimes in person, sometimes via video conferencing (or perhaps both), and this coach proactively works with the patient to gain better control of their underlying condition (which, in turn, leads to fewer “secondary” events in the patient’s life).

Initially, the company was focused primarily on patients who suffered from behavioral or mental health related illnesses such as substance abuse, anxiety, and depression, but as its data analysis platform has grown, it has also begun to tackle patients with other co-morbid (“more than one chronic illness”) conditions such as diabetes, hypertension, coronary artery disease, COPD, and congestive heart failure… and with the massive amounts of data that are becoming available for analysis thanks to the digitizing of health records over the past several years, it is becoming possible to sift through this data with ever increasing accuracy to identify patients that are strong candidates to find success with a program like OnTrak.

Though the numbers will obviously vary from patient to patient, Catasys claims that it is reducing claims cost by roughly 50% for the health plans it is currently working with across the country, and though other companies will undoubtedly be joining the fray, Catasys appears to be establishing itself as an early leader in being able to provide this service to insurers (and once their plan is in place and generating results, it will be that much harder for competitors to come in and knock them out that position).

Along with being at the forefront of the sort of data analysis that is becoming possible in this era of digital medical records, Catasys also benefits from the fact that its Founder and CEO is Terren Peizer; though I was not familiar with his name before I started following the company, I can tell you that he has had a long and successful career that started in finance but has gone on to involve the starting, buying, and/or selling of a number of companies along the way, and, given his still quite large stake in Catasys (more on this below), it would not surprise me if the goal here won’t be to eventually sell the company as well.

As just mentioned, though his stake is technically held by Acuitas Holding Group, LLC (his personal holding company), Mr. Peizer is the largest shareholder in Catasys – of the 15.9 million shares outstanding, he still own 10.4 million of them!

On the one hand, this is a good thing, as he’s clearly in a position to do well if the company does well, but, on the other hand, I want to make sure you understand that because he owns so much of the stock, there are very few other shares available for trading, and, frankly, this extreme lack of liquidity is one of the biggest risks I see in recommending the stock at this point in the company’s history (simply because even the slightest amount of buying – or selling – pressure has the potential to cause large swings in the stock price).

That being said, this is a situation that lines up nicely with the idea that I first read about in a quote from Warren Buffett, namely, “if we bought the stock today and then the stock market closed for five years, do we think our investment would be worth quite a bit more when it re-opened?”… and, as mentioned above, given where things currently stand in the race to digitize everything, I think the odds are good that Catasys will be a quite bit larger company in five years than it is today.

Of course, the stock market isn’t likely to be closed for five years, and thus, I want to remind you of a couple of things that are worth keeping mind before you make a decision about adding Catasys to your own portfolio, especially if you are someone who likes to watch stocks on a daily basis and may sometimes “get sucked into the action:”

• First, as mentioned above, the float (i.e. the stock available to be traded on the open market) is extremely small, and thus, you are encouraged to be especially disciplined about not “chasing” the stock if it starts to head higher in a hurry (and, likewise, not be too quick to panic if suddenly takes a large tumble “on almost no volume”), and

• Second, given Mr. Peizer’s large position and the typical path to growth for a company like Catasys, there will almost certainly be at least one secondary offering along the way so that Mr. Peizer can liquidate a portion of his holdings and the company can raise additional capital, and I just want to make sure you know ahead of time that “dilution” will almost certainly be taking place at some point along the way.

CATS is considered a strong buy under $10 and a buy under $15.

An Upgrade For MannKind

As many of you know, MannKind recently announced that it has signed a deal with United Therapeutics (UTHR – $123.92) under which MannKind will receive $45 million upfront, up to an additional $50 million in milestone payments, and low double-digit royalties on any sales that may come from United Therapeutics’ effort to commercialize treprostinil delivered via the Technosphere platform. Also, the agreement stipulates that there may be additional payments and royalties involved for another unnamed compound that United Therapeutics is interested in.

Now that the company has put some money its coffers and given itself the largest cushion that it has had time-wise since getting Afrezza back from Sanofi, as well as set a very nice mark against which future deals for other Technosphere candidates can be negotiated, I am even more confident that the company really is entering a new era. It is becoming more and more clear that Mike Castagna has the train back on the tracks in a big way, and so, along with adding a few more shares to our already intentionally large positions this month, I am also upgrading MannKind by making it a “core stock” going forward. Thanks for your patience with the story!

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:

Cleveland-Cliffs (CLF) – Though they are both exhibiting great relative strength these days, I decided to go with Cleveland-Cliffs as my first “top pick” this month instead of Apple… but you can certainly include Apple on the list if you want four top picks to choose from this time around!

Illumina (ILMN) – Illumina’s stock is continuing to trace out a “text book” example of exactly the sort of chart pattern we like to see on a long-term basis, and the great relative strength should be looked at as an excuse to buy rather than sell!

MannKind (MNKD) – As discussed elsewhere, I think it is fair to say that a new era has, in fact, officially gotten underway for the company… and yet the stock has barely budged!

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 75 (500) Electronic Arts, 200 (1,000) First Solar, 50 (500) Qorvo, and 50 (500) Skyworks Solutions and will purchase 5,000 (25,000) Catasys, 100 (500) Celgene, 500 (5,000) Cleveland-Cliffs, and 10,000 (100,000) MannKind. We will use the closing prices on Monday, September 17th, for all transactions.

Summary of Recommended Stocks

AdvisorShares Ranger Equity Bear ETF

As is to be expected based on the fact that the market is continuing to power higher, shares of HDGE have continued to drift lower over the past four weeks, and though they have not yet started to hit new all-time lows, they are right on the cusp of possibly doing so. As mentioned in previous issues, this “inverse ETF” (which is actually short a basket of stocks, unlike many other inverse ETFs that are built around futures and options contract) is only in the newsletter for those subscribers who are very aggressive with their money and are looking for a vehicle that won’t just preserve capital in a down market, but, at least in theory, should make money during a bear market. HDGE is considered a strong buy under $7 and a buy under $9.

Apple

As you can see in the chart to the left, Apple’s stock has continued to power higher in the four weeks since last month’s issue went to press, and though the run will eventually come to an end, I want to remind you that, for now, you should be as patient as possible when it comes to taking profits. The company is continuing to find success in expanding the “services” side of its business, and several of the new features that have been added to the new Apple Watches (esp. those related to monitoring health) ought to only help accelerate the progress the company has been making in dominating that “new” product category. I am raising the buy limits a bit this month, and AAPL is now a strong buy under $215 and a buy under $235.

Catasys

Though it can be psychologically difficult to buy a stock that has already tripled off its 52-week low, I want to remind you that not only is this a long-term investment and “today’s market cap is likely to seem cheap compared to where it could be in five years,” but we are also at a point in the market cycle in which this sort of stock has the potential to triple again if the bull market can hang on for awhile longer, so don’t be afraid to start nibbling (but, again, also please be wary of “chasing” it due the thin float!). Fun Fact: long-time subscribers will recall that CATS was also the ticker of Catalyst Semiconductor, a small company recommended in 2001 and eventually bought out in 2008. CATS is a strong buy under $10 and a buy under $15.

Celgene

After looking like it might be gearing up to test the $100 mark as August came to an end, I’m afraid that Celgene’s stock has since pulled back a bit; the good news, however, is that the price action we have been seeing lately is helping to boost my confidence that the stock really is forming a base from which we ought to get one more nice run as part of the climax of the bull market. Due to the “pruning” that we have been doing over the past nine months in response to the poor relative strength of the stock, both Portfolios have become somewhat underweighted in the stock… but the time has come for us to start growing our positions again. Especially as a “first buy,” CELG is a strong buy under $78 and a buy under $90.

Cirrus Logic

After looking like it might finally be regaining some traction, I am afraid that Cirrus’ stock took a fairly dramatic tumble this week in response to changes that have been made in Apple’s iPhones… and, while this is hardly “end of the world” news for Cirrus, I am afraid that it is yet another piece of news that is causing investors to shy away from the stock. We have already sold a fair amount of the stock out of both Portfolios, and I do not feel any need to shrink our positions even further. At some point, we will either start to rebuild our positions or decide that it is time to move on from the stock, but for now, I am content sitting on our small positions while watching and waiting. CRUS remains a strong buy under $35 and a buy under $42.

Cleveland-Cliffs
In response to the company completing the sale of its Asia Pacific operations and recently announcing that it plans to pay off roughly $220 million in senior debt that is due in 2020, I am pleased to report that the stock is once again starting to power into new multi-year high territory. Though you are naturally encouraged to lock in some profit if it will help you sleep at night, given how the story is shaping up (and especially in light of where we are at in the overall market cycle), I am raising the buy limits a bit and adding a few more shares to both Portfolios this month… and, provided you are not already overweighted in the stock, you are encouraged to do the same! CLF is now a strong buy under $9 and a buy under $13.

Electronic Arts

Grrr! As mentioned in last month’s issue, as long as the stock could hold above $125, I could feel comfortable saying the uptrend was still intact; however, as you can see in the chart to the right, not only did EA’s stock fail to hold above that level, it actually “gapped down” to well below to that level a few weeks after last month’s issue went to press, and, at least for now, it has failed to mount any sort of meaningful rally following the drop. Though it is still too early to know whether EA is trying to warn us ahead of time that the market is rolling over… or if it might instead roar back with a vengeance… I am taking a few more chips off the table this month “just in case.” EA is considered a strong buy under $110 and a buy under $120.

First Solar

Unfortunately, along with EA’s stock (and a few others in the newsletter this month as well), I am afraid that First Solar’s is also bucking the trend of the overall market these days, with the only “silver lining” being that it is much easier to say with a high degree of certainty that the stock is a fairly major casualty of the global trade war that is currently underway (so at least we know what we are dealing with). That being said, though I am taking a few more chips off the table this month in order to redeploy that capital into other situations that are not facing the same headwinds, I do still believe in the company on a longer-term basis (so please do not sell your entire position!). FSLR is now a strong buy under $44 and a buy under $50.

Illumina

As pointed out last month, you really cannot find a more picture-perfect example of the sort of price action we like to see in our stocks than the chart to the right… and though the trend could come to an end as soon as Monday, I am sure that you know by now that my advice is to continue being as patient as possible about taking profits (but DO sell down to your own “sleeping point” if your position is becoming “too large”), and, perhaps just as importantly, please don’t be afraid to buy the stock at current prices, especially if you are still working on building up to having a “full” position (and there is nothing wrong with buy just a share or two, if that’s all you can afford). ILMN is now a strong buy under $335 and a buy under $360.

Luminex

Though the large drop that we saw in the stock back in early August clearly took some wind out of its sails at the time, as you can see in the chart to the left, the stock has been doing nothing but working its way steadily higher ever since then… and, again, this is exactly the sort of action we would like to see to help us feel confident about our assessment of where we are at in the overall market cycle. Both Portfolios currently own “enough” Luminex for the time being, but it is a “first buy” for new subscribers, and if you become a holder of record by September 21st, you will be eligible for the $0.06 per share dividend that will be paid on October 12th. With patience, LMNX is now a strong buy under $28 and a buy under $32.

MannKind

As mentioned above, now that Mike Castagna has taken “the cash concern” off the table (at least for the foreseeable future, and perhaps once and for all), as well as put Technosphere “in play” in a big way, I (finally!) feel comfortable upgrading MannKind to “core stock” status. That being said, I will still be doing a “hard check-in” regarding script counts in both the October and January issues, but given where we are at in the rollout of Afrezza (and especially with the recent infusion of cash to accelerate promotional efforts), I remain optimistic that we are going to start seeing some significant growth in prescription counts over the next 3-9 months. MNKD remains a very strong buy under $5 and a buy under $10.

NVIDIA

After giving us some pause for concern that a dreaded (at least by chartists) “triple top” might have been forming as last month’s issue went to press, I am very pleased to report that rather than breaking down, NVIDIA’s stock has since pushed back into record high territory again… and though it’s not quite as pretty as Illumina’s, as you can see in the chart to the right, NVIDIA’s stock is also tracing a textbook example of the sort of price action that we would expect to in this stage of the bull market. This is another stock you are encouraged to be building a position in “even though it’s up so much already,” and even if you can only afford a shares at a time. NVDA is considered a strong buy under $260 and a buy under $280.

NXP Semiconductor

Unfortunately, NXP’s is not faring as well as NVIDIA’s these days, and though it did bounce a bit heading into this weekend, I am afraid that the fact that it tumbled into new 52-week low territory in response to a recent “analysts day” event does not bode well for the performance of the stock between now and the end of the year for the simple reason that it is clearly becoming a candidate for tax-loss selling, especially after spending the last two years trading higher in hopes of the eventual buyout by Qualcomm that never came. Though I did start nibbling at the stock again last month, I am not doing so this month (but will continue to watch the story closely). NXPI is now considered a strong buy under $82 and a buy under $90.

PowerShares DB Agriculture ETF

Not much new to say about either DBA or DBC this month, other than to point out yet again that, at some point, I do expect commodities to “catch a bid” across the board… and once they do, you can rest assured that I will become much more aggressive about adding to our positions in these two ETFs. However, in the meantime, I believe both of these ETFs can be included on the list of situations that are being impacted by an artificial “friction” that is making it difficult for investors to know what a “fair” price to pay for something is going to turn out to be, and, consequently, I do not think we need to be in any rush to get involved beyond the very small positions that we have (continued under “DBC” below) DBA is a buy under $18.

PowerShares DB Commodities ETF

(continuing from “DBA” above) already sold down to in both Portfolios. That being said, it is always easier (at least in my experience) to buy something that has gone up in price if you already own some from a lower price, so those of you who do not yet have a position of any sort in either of these two ETFs but do have an interest in being involved in commodities at some point may want to think about starting a small position at current prices “just in case” (and it’s ok you’re not one of those folks and you would rather stick with just owning stocks – like HDGE, DBA and DBC are also “optional” ideas for those subscribers interested in them). I am lowering the buy limit a bit this month, and DBC is now a buy under $18.

Qorvo

As mentioned above, though the SOX semiconductor index is still trading above its one eyebrow level, I am getting a little concerned about the fact that so many of our chip stocks appear to be “rolling over,” and, as you can see in the chart to the right, after managing to hold above $80 for an extended period of time, I am afraid that Qorvo’s stock may be joining the move to the downside as well. To be sure, it is not hitting new 52-week lows yet… and the whole group could turn around tomorrow if something definitive happens to finally put an end to the trade wars… but I am selling a few shares this month in order to redeploy the capital elsewhere. QRVO is considered a strong buy under $65 and a buy under $80.

Skyworks Solutions

And, if you know I am concerned about the price action we have been seeing in Qorvo’s stock lately, then you know I am even more concerned about what’s going on with Skyworks’, as it is a situation where the stock IS already starting to hit new 52-week lows… and, as much as I still like the company’s long-term prospects, I will be the first to admit that the chart to left is clearly becoming a very bearish-looking one! That being said, please note that I am sticking to the game plan and simply selling off another small piece of our position in both Portfolios this month rather than simply exiting “in one fell swoop,” and you are encouraged to take this same disciplined approach as well. SWKS is a strong buy under $84 and a buy under $92.

SPDR Gold Trust ETF

Though it is still far too early to declare the downtrend that has been underway since last April “over,” I do find it somewhat encouraging that the price of gold has at least paused to catch its breath rather than sliding on an almost daily basis. As mentioned in previous issues, I am surprised by how gold has been acting for the past twelve months (or longer), and though we already own “enough” gold in both Portfolios, I can tell you that I remain confident that the price of the precious metal is eventually going to start heading north again… and once it does, I will be looking at it as a reason to start buying more aggressively rather than an opportunity be “lightening up” (just to help you with your own game plan). GLD is a buy under $116.

Tekla Life Sciences Investors

No, there’s not much to glean from the chart to the left, other than to point out that if shares of this closed-end fund happen to climb back over $20.50 in the days or weeks ahead, we will be able to count it as a small but useful clue about the direction of the biotech sector as a whole. In the meantime, for new subscribers who are not yet familiar with the story, please note that this fund represents a somewhat conservative way to participate in biotech stocks with a single purchase; however, please note that if you can stomach the volatility, you will likely get more bang for your buck by owning individual biotech stocks, especially given where we are at in the current market cycle. HQL remains a strong buy under $18 and buy under $21.

Walt Disney Co.

After making a great run for us in the two months leading up to last month’s issue, Disney’s stock has pulled back a bit in response to what, at least for now, appears to be the sort of healthy profit-taking we would expect to see during this phase of the market cycle. That being said, however, it is hard to not be at least a little concerned that the stock actually registered its lowest close since last month’s issue as this issue is going to press, and so we have to be on the lookout for signs that perhaps something more serious is starting to unfold (especially since the chip sector is already forcing us to wonder if perhaps the market is actually less healthy than it appears). DIS remains a strong buy under $106 and a buy under $115.

What To Do In This Market?! 2/2/18

*** The following is a complete copy of the raw text from Issue #276 of Nate’s Notes, which was published for subscribers on January 5, 2018, and reflects our opinions of the market and all stocks mentioned as of that date. The full issue (which includes all of the tables and charts referenced in the text-only version below) can be downloaded as a .pdf by clicking the image to left. ***

Time is your friend; impulse is your enemy.

– Jack Bogle

What To Do In This Market?!

As you can see in the year-to-date numbers above, both our Portfolios and the market as a whole are off to great starts so far this year; however, I want to caution you the odds are very low that we will continue to make 9.3% every four days in the Aggressive Portfolio for the remainder of the year, for example, so please don’t get too carried away with your expectations!

That being said, not only is a strong start to the year often indicative of how at least the first half of the year is likely to go for stocks, in this case, the very sizable gains we have seen in just four days also go a long ways towards confirming my belief that we are, in fact, in the final, frothy blow-off phase of the bull market, and this, in turn, suggests to me that it is more important than ever for me to make sure that older and newer subscribers alike know what they should be doing with their portfolios at this stage of the game.

To be sure, it is hard to feel comfortable putting money to work in stocks “that have already gone up so much,” but I hope the following discussion helps those of you who may be feeling anxious about the current situation to feel better about putting your money to work (or leaving it “in play”) at this point in time… and though it is mainly intended for new subscribers, it should also be helpful for what my emails suggest may be a fairly large subset of subscribers who “took money off the table too early in NVIDIA, Apple, etc. and are now struggling to find the courage to put it back to work.”

The first thing I want to remind you of is that I am a big believer in always scaling-in (or -out) of positions with several smaller trades over a longer period of time rather than doing it all in one fell swoop, and though there is no right or wrong way to use the newsletter, I write on the assumption you will use the approach to some degree while you build up your “Nate’s Notes Portfolio,” and then, once it is established, you will make changes similar to the ones I make when I do a (usually minor) rebalancing of the newsletter’s Portfolios each month.

If you follow this approach either as part of getting started or as part of rebuilding your portfolio with cash you might have moved to the sidelines over the past couple of months or quarters, I want to remind you of what might happen next if you put, say, 25% of your capital to work this month…

A) The bull market might end tomorrow and stocks will start going down for an extended period of time. If this happens, you will be glad that you only have 25% of your portfolio at risk (the rest is still in cash), and you can start to take the same sort of “defensive action” as those subscribers who were already fully invested might be taking based on the newsletter’s recommendation,

B) Stocks could simply trade sideways between now and next month’s issue, in which case it won’t make much difference whether you’re in stocks or in cash, as the returns generated on either will be “about the same,” or

C) Stocks could continue to rally, in which case you will be glad that you had a least a few chips on the table for the move… and this “getting ahead a bit” should, at least in theory, help make it a little easier from a psychological standpoint to put money to work when you repeat this exercise again next month.

Of course, the above discussion begs the question “but how will we know when it is time to take defensive action, Nate?”… and the answer is that we will be watching the “Eyebrow Levels” table that can be found a little further down in the newsletter!

In order to help take emotion out of the picture (as well as to give subscribers some sense of what I am watching for in between issues), the Eyebrow Levels table was introduced to the newsletter many years ago, and, in a nutshell, it gives us a way to know whether the action we are seeing the market on “down days” is truly scary… or just feels scary (but, in reality, is just regular volatility as part of an ongoing bull market).

As you can see in the fine print associated with the table, as long any of the major indices I watch are trading above certain levels, I’m willing to say an uptrend is still intact for that particular index; however, if an index drops below its one eyebrow level, for example, it will cause me to raise an eyebrow… and while having just one of the indices drop below that level is not considered a cause for alarm (every once in awhile, biotech stocks and/or chip stocks fall out of favor while the rest of the market continues climbing higher, for example), if all five of the indices do start to “break down” at the same time, it means it is time for us to shift gears and start moving money back into cash.

Naturally, as part of my overall approach to always trying to move in or out of positions in smaller rather than larger pieces, this shift will happen over an extended period of time rather than all at once, with the situation being different from “standard operation procedure” in that 1) a recommendation to make trades might come in-between issues (versus the usual “once a month when the issue comes out”), and b) rather than selling off pieces of just a handful of stocks like we usually do, we will probably sell “a little bit of everything across the board” (with a few possible exceptions here and there – we might be buying gold in the face of a declining stock market, for example).

Having said all of that about why I think you should go ahead and start scaling-in to positions “even after the huge rally we’ve had” (and what to watch for in terms of knowing when it is time to start reversing course), I also want to remind you of a few of the “mantras” that have helped the newsletter become one of the top-performing newsletters in the country as I, myself, have become more comfortable with them over the years – though they are all actually very logical, they can be tough to master (i.e. learn to trust!) from an emotional standpoint!

The first is that 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.

The second is that trends often go on for far longer than seems reasonable.

And, finally, since peace of mind is one of the key components of being a successful investor, it is important to remember that it is always ok to sell down to the sleeping point whenever we find ourselves worrying “too much” about our portfolios (i.e. if being 30% in cash even though the newsletter might still be 100% invested helps you sleep at night, there is nothing wrong with it!).

Putting all of this together, I hope that those of you who may have more cash on the sidelines than you’d actually like to have there will find the courage to start slowly putting it back to work in the stock market (“you can’t win if you don’t play,” as the old saying goes), especially now that you may also have a better understanding of the “Eyebrow Levels” table and how it fits into what we are trying to do in the newsletter.

MannKind

Yes, I am going to “pound the table” one more time with regards to MannKind, simply because after all of the talk above about how to muster up the courage to buy stocks “that don’t really seem that cheap,” I want to make sure that everyone realizes that even in bull markets one can often find bargains… and due to an extraordinary set of circumstances (most notably, a massive short position), I believe MannKind currently represents one of those situations.

No, I cannot promise you that MannKind is eventually going to work out for us as an investment, but I can tell you that I grow more confident with every passing month that Afrezza is all it is cracked up to be… and since, for now, owning MannKind represents the only way for us to participate in the Afrezza story, we own the stock.

That being said, I believe Mike Castagna (along with others he has brought in since becoming CEO) is doing a fine job of both restructuring the company from a financial standpoint, as well as working to change the dialogue around Afrezza in both the insurance world and in doctors’ offices.

As discussed many times before, it has historically taken 18-36 months for new ways of managing diabetes to finally start to “take hold” with doctors, and this story is playing out again with Afrezza; however (and admittedly with no way to guarantee it), I believe that the odds are good we are finally reaching a point in the adoption process where the rate of growth in prescriptions each week is finally going to start to feel meaningful… and though there are folks out there who spend a lot of time trying to quantify what the growth rate might look like as time goes by, I think that knowing that it is almost certainly going to be “up and to the right” is really all we need to keep in mind as “common sense investors” – the mealtime insulin market is huge, diabetes is a global problem, and provided MannKind can keep the lights on, it will eventually turn into a big winner for us.

As discussed above, this is absolutely another situation in which you will be far better off if you make small purchases on a regular basis than you will be trying to time a single large purchase. As always, don’t own more than you can afford to lose…

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:

First Solar (FSLR) – Though it would not surprise me at all if the stock ends up spending some more time trading sideways before it makes its next move, if that move ends up being to the upside, it ought it to attract another round of daytraders and momentum players to the story!

Illumina (ILMN) – Of all the charts in the newsletter this month, Illumina’s is probably one of the most bullish looking… and you are encouraged to look at any additional strength in the stock as a reason to buy rather than sell (provided it is still under the buy limits, of course).

MannKind (MNKD) – There are never any guarantees, but I remain optimistic that 2018 may finally be the year that Wall Street starts to return to the story… and if/when the stock starts to move, the first leg up could be a fairly fast and furious one!

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will not make any sales this month but will purchase 50 (100) Apple, 50 (250) Celgene, 1,000 (5,000) Cleveland-Cliffs, 250 (2,500) Luminex, 2,500 MannKind, 200 (2,000) Perry Ellis, 300, (1,000) PowerShares DB Cmdties. ETF, and 50 (250) Walt Disney. We will use the closing prices on Monday, January 8th, for all transactions.

Summary of Recommended Stocks

AdvisorShares Ranger Equity Bear ETF

Yipes! As you can see in the chart to the right (and, not surprisingly, given how well the market as a whole is doing these days!), shares of this “short ETF” have continued to slide with a vengeance in the face of the rally we have been seeing in the market as a whole for the past several months! The most aggressive of my subscribers may want to think about adding a few shares to the positions as a contrarian bet, but everyone else should be looking at other ideas this month… and we can all celebrate the fact that this chart counts as yet another piece of confirmatory evidence that the uptrend is still very much alive and well! As a small position for aggressive investors only, HDGE is a strong buy under $7 and a buy under $9.

Apple

Despite being hit with a number of small but meaningful “negatives” over the past few months that almost certainly would have caused a sizable drop in the stock if we were in a bear market, I am pleased to report that not only has Apple’s stock managed to absorb any selling pressure that might have been generated by the news, it is actually trading less than $2 away from all-time high territory (and it is hard to call that situation anything but “bullish”)! To be sure, the trend could change tomorrow, but for now, you should view the uptrend along with the fact that Apple is still fairly “cheap” as two reasons to start or add to your position (even if only a few shares at a time!). AAPL is a strong buy under $165 and a buy under $185.

Celgene

The bad news is that Celgene’s stock has not been able to get back above $110 again after a very quick (and completely irrational!) drop from around $140 to under $100 in less than a week back in October, but the good news is that, at least for now, it does seem to be slowly but surely regaining some traction and working its way higher. Celgene will be making a presentation first thing Monday morning at the JP Morgan Healthcare Conference in San Francisco, and given the company’s leadership role in the sector, all eyes and ears will be focused on what Celgene has to say, as it will likely help set the tone for both the conference and biotech stocks all week. CELG is a strong buy under $100 and a buy under $112.

Cirrus Logic

As you can see in the chart to the left, after getting hit with what was probably a sizable wave of tax-loss selling as November came to an end and December got underway, Cirrus’ stock has been slowly working its way over the past couple of weeks; however, I don’t think we can actually call it a new uptrend unless the stock can also get back over $58, and so I believe we are better off watching and waiting for now rather than being in any sort of rush to buy back the shares we sold last month. That being said, given my outlook for the market as a whole, I am raising the buy limits a bit this month for those of you who are interested in being a bit more aggressive with chips stocks. CRUS is a strong buy under $48 and a buy under $54.

Cleveland-Cliffs

Cleveland-Cliffs’ is another stock that needs to climb a bit higher before we can actually say it is in a new uptrend (versus merely trading from one end of a trading range to the other), but it certainly looks like investors are taking another look at the company as 2018 gets underway… and given that we are still very underweighted in the stock in both Portfolios, I feel comfortable adding a few more shares to both Portfolios in response to the great near-term relative strength (even if I’d really like to see it over $9 for confirmation that the up move might be the start of something bigger). As a great way to add a little diversification away from biotech and high-tech stocks, CLF is now considered a strong buy under $7 and a buy under $10.

Electronic Arts

After giving us a bit of a scare by tumbling fairly dramatically just before last month’s issue went to press, I am pleased to report that EA’s has since rebounded nicely… and though there are never any guarantees in the stock market, my experiences suggest that the sort of “spike down” followed by an abrupt reversal that you can see in the chart to the left is actually one of the more bullish sorts of patterns we could have hoped to see following the slide! We’re pretty heavily-weighted in the stock at this point, and though newer subscribers may want to start a position, I think I would rather wait to see what the next month or two brings before we get too aggressive. EA is now a strong buy under $105 and a buy under $115.

First Solar

And, speaking of bullish patterns, I think it is fair to say that the chart to the right is a textbook example of the sort of “rally… then consolidate without giving up much (if any) of the gains… then rally again” price action that we wish all of our stocks would exhibit! Solar stocks tend to go in and out of favor with investors based on nothing more than a change in sentiment, but for now, they are clearly “in favor!” Both Portfolios already own “enough” of the stock, but those of you still working to start or build positions are definitely encouraged to make it one of your “first buys” this month, especially if it does start to breakout into new 52-week high territory in the weeks ahead! FSLR remains a strong buy under $66 and a buy under $74.

Illumina

Though it is doing so in much more of a linear fashion than the stair-step pattern we are seeing with First Solar’s, Illumina’s stock is also moving higher in a very steady but consistent manner that pleases me greatly! And, of course, part of the reason I like seeing this sort of action is that if my thesis regarding the overall market turns out to be correct, this linear climb is going to start looking more and more parabolic as time goes by! No, the stock is not really “cheap” anymore, but it is clearly in an uptrend, and this, along with the fact that Illumina is a “best of breed” company in the sector, means that it is a stock we want to own as much of as we can without losing sleep. ILMN is now a strong buy under $220 and a buy under $235.

Luminex

After giving us some hope that it might finally be breaking out of a multi-year trading range back in November, Luminex’s stock instead reversed course and headed south for the remainder of the year. The good news is that it appears to have reversed course just as abruptly again as the new year got underway, and though it is still too early to call it a true reversal, I am willing to buy a few more shares in both Portfolios this month based on my outlook for the biotech sector as a whole. In addition (and as mentioned before), I believe Luminex’s current market cap puts it in “the sweet spot” in terms of being an easy acquisition candidate. With patience, LMNX remains a strong buy under $19 and a buy under $23.

MannKind

Though the stock did seem to experience a bit of tax-loss selling as the year came to a close, the volume has been very light lately, and, as you can see in the chart to the left, both times that real volume has come into the stock over the past twelve months, it is has caused the stock to rise sharply. I am not adding any more shares to the Aggressive Portfolio since it is currently sitting on a nice, round, and intentionally large number number of shares for its position, but I am adding a few more to the Model this month, and I can tell you that I have also added to my personal position in MannKind a number of times over the past month or so. With patience (and thick skin!), MNKD is a very strong buy under $5 and a buy under $10.

NVIDIA

While I can’t complain at all about the way NVIDIA’s stock has been acting during the first four trading days of 2018, it would have made my job a whole lot easier if it could have clearly pushed its way into new all-time high territory ahead of this month’s issue rather than coming up just shy of that (and, in doing so, leaving us to “worry” that perhaps a dreaded double-top is being formed on the chart… though, to be clear, I’m mainly referring to how the traders in the world will see the story, not about my own personal “worry”). It is hard to believe this stock was trading right around $25 just two years ago – it will be interesting to see just how high this run can take it! NVDA is now a strong buy under $200 and a buy under $215.

NXP Semiconductor

Like you, I am anxious for Qualcomm (QCOM – $66.47) to either up its bid and finally get its tender offer to buy NXP done and over with or recognize that its current bid isn’t going to be enough and just drop the offer altogether. In the meantime (especially if you have followed the newsletter’s lead and already sold a sizable portion of your stake in the open market), those of you who do not have positions should look at other ideas instead, and those of you who do have positions should continue to just sit tight – if the deal goes through, you’ll likely get more than $110, and if it doesn’t, though the stock will likely drop at first, we will be ready to once again buy it aggressively. NXPI is a strong buy under $90 and a buy under $105.

Perry Ellis

As you know, I’ve been lightening up on our Perry Ellis position for awhile now out of concern about the future of retail, but, as you can see in the chart to the left, this approach is proving to be the wrong one take! Consequently, though I do still have concerns about the longer-term outlook for retail (and especially since I do believe we are in a phase of the market cycle in which “just about everything should start going up”), I am more than willing to start buying back some of the shares we sold a few months ago – yes, I am buying them back at a higher price than we sold them for, but I am also buying them back with more confidence that the trend is working in our favor now. PERY is a strong buy under $23 and a buy under $27.

PowerShares DB Agriculture ETF

While shares of DBC have been acting pretty well lately (see below), I am afraid that the chart pattern being traced out by DBA is still a fairly bearish looking one, even after the nearly straight up run we saw during the last three weeks of December. Though I do very strongly believe that all commodity prices are going to end up rallying at some point in the next several years in response to monetary conditions that have been created around the world over the past several decades (and past 5-10 years, in particular), I also know that we need to respect whatever trend is in place when it comes to deciding what to do with our money… and, for now, the trend for ag commodity (continued under “DBC” below) DBA is a buy under $20.

PowerShares DB Commodities ETF

(continuing from “DBA” above) prices still seems to be “lower” (and, consequently, I am quite content just sitting on an intentionally small position for the time being). Shifting gears, however, I am pleased to report that industrial commodities have slowly but surely been gaining some traction on the pricing front, and, as a result I am willing to devote a little more capital to our positions in both Portfolios this month. That being said, please recognize that DBA and DBC are both in the newsletter for diversification purposes, and neither of them should be among your largest holdings (though I have no problem at all with being fairly aggressive when it comes to buying GLD). DBC is now considered a buy under $19.

Qorvo

Unfortunately, Qorvo’s is another of our chip stocks that, on the one hand, seems to have found some support after taking a sizable tumble in late November and early December, but, on the other hand, still has not rallied in a convincing enough manner to make me feel comfortable saying the downtrend is actually over just yet. That being said, given where I believe we are at in the overall cycle for the market, the odds do probably favor a resumption of the uptrend “soonish,” but for the time being (and especially with the JP Morgan Healthcare Conference taking place in the week ahead), you are encouraged to focus on biotech instead for new purchases this month. QRVO is a strong buy under $64 and a buy under $70.

Skyworks Solutions

Given the similarities in their charts, it should come as no surprised that everything I just had to say about Qorvo’s stock applies equally well to Skyworks’… and, for those of you playing along at home, I need to see Skyworks’ stay above $90 (and Qorvo’s above $60) in the weeks ahead to keep me from turning more bearish on not just these stocks but the sector as a whole (though, naturally, if these two stocks are weak, it will almost certainly mean we’ll be seeing a similar breakdown in our official barometer for the sector, the SOX semiconductor index). We sold a few shares last month, and I am content just sitting tight on the remainder of our positions for the time being. SWKS is a strong buy under $95 and a buy under $105.

SPDR Gold Trust ETF

As has been noted in the newsletter a couple of times now, it really is remarkable just how dramatic of a “sawtooth” pattern the price of gold has been tracing out for the past year or two. No, I don’t think it has anything to do with conspiracy theories, but I do think it tells us that whenever large players have decided to build on or liquidate all or part of their positions, they have been doing so in a very patient and deliberate manner… and though there are never any guarantees this behavior will continue in the future, it does suggest to me that if the current (already dramatic) move takes us into new 52-week high territory, we need to look at it as a reason to buy more gold rather than sell it. GLD is now considered a buy under $128.

Tekla Life Sciences Investors

Though it still has to hold above $20 and then start to work its way higher again for me to be fully convinced, I do have to say that the chart to the left is one of the few in the newsletter this month that is showing enough of a bounce after its decline that I might be willing to say the worst is behind us. And, as you can probably guess, with the JP Morgan Conference taking place next week, a number of the stocks that are held by this closed-end fund may see a little bump in share price if the conference is able to inspire confidence this time around (of course, sometimes it triggers a sell-off in the sector if a few big companies deliver negative news, so don’t count your chickens just yet!). HQL is a strong buy under $19 and buy under $23.

Walt Disney Co.

Though a rally of some sort was to be expected after the lengthy tumble Disney’s stock went through for most of 2017, I have to admit that even I have been surprised by the strength and magnitude of the rally that, in hindsight, seems to have gotten underway back in November! That being said, as you can see in the chart to the right, the rally has involved some rather volatile swings as part of the stock working its way higher, and as tempting as it might be to try and start to trade these large swings, I want to remind you that my experiences suggest you will be far better off continuing to make small purchases on a regular basis rather than trying to get fancy and time things. DIS is a strong buy under $108 and a buy under $115.

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.

Looking Back… To Help Us Look Ahead 5/19/17

*** The following is a complete copy of the raw text from Issue #268 of Nate’s Notes, which was published for subscribers on May 12, 2017, and reflects our opinions of the market, MannKind, and all other stocks mentioned as of that date.  The full issue can be downloaded as a .pdf by clicking here. ***

I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up – companies go from doing poorly to doing well, or small companies grow to large companies.

– Peter Lynch

Looking Back… To Help Us Look Ahead

As you can see in the performance numbers above, our Portfolios finally managed to gain a little traction on an issue-to-issue basis (though, as was hinted might happen in the Inter-Issue Commentary that was put out roughly three weeks ago, MannKind definitely did its part to stretch the rubber band in the downwards direction before rebounding sharply this week)!

That being said, since I know many of you are quite anxious about the situation, I want to start this month’s issue by reminding you of two of our favorite mantras in the newsletter, namely, “trends often go on for (far) longer than seems reasonable… and 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.”

Though there have been pockets of noticeable weakness here and there during the rally that got underway after Trump was elected, I think it is fair to say that the market as a whole is pretty clearly in an uptrend at this point in time… and the chip stocks, in particular, have absolutely been on fire lately!

In addition, I also want to remind you that not only are stocks in “rally mode” at the moment (suggesting it is wiser to buy/hold them than it is to sell them), history also suggests they are rallying as part of what chartists like to call the “frothy, blow-off phase” that almost always occurs at the end of bull markets… and it should be noted that it is this phase of a bull market that often produces the most wealth for investors who are able to successfully navigate it.

Of course, “navigating it” is easier said than done, and though I know many of you are going to be tempted to start trading the wild swings that are starting to appear as volatility increases in many of our stocks, I want to remind you that part of how the newsletter has risen to the top of Hulbert’s long-term rankings is by simply “sitting tight” during this phase.

By all means, if some of your positions have grown to a size that makes you feel anxious when you’re lying in bed at night (“what if it drops 20% tomorrow – I’ll feel like such a dummy for not taking profits when I had the chance”), please do not hesitate to sell down to what we call “the sleeping point” in the newsletter; however, in an ideal world, you will also be as patient as you can possibly be when it comes to taking profits (but please do keep your eye on the Eyebrows Level table below for signs that tide might be turning, as it could happen at any time!).

MannKind

As you might imagine, I have been asked a lot of questions about the MannKind story via email and on various message boards over the past couple of years… and though I could probably fill a book if I attempted to answer all of them, I believe the following two questions are especially relevant and worth discussing as part of this month’s issue (and I hope you find my answers to be both entertaining and enlightening as you ponder your positions in ALL of the stocks being recommended in the newsletter, as the same philosophy I am applying to the MannKind situation also holds true for the rest of the stocks as well, even if they have not been as “controversial” or taken as long to start proving themselves).

Why are you so obsessed with MannKind, Nate?

In a nutshell (and to clarify), what I have actually been “obsessed” with is helping my subscribers feel confident about the investments I have gotten them into… and because the MannKind story has hardly been playing out in the manner I originally thought it would, I have felt an obligation to keep my subscribers updated as the story has continued to unfold.

However, along with this desire (and willingness!) to “own” the story rather than run away from it and pretend it doesn’t exist, the other reason I have spent so much time discussing the story is that I am also “obsessed” with outperforming not only the market, but the rest of my peers in the newsletter industry as well… and though you’d never guess it from the price action in the stock over the past three years, MannKind has actually fit the bill as a leading candidate among those in the newsletter to help achieve this goal whenever I have sat down to write a new issue almost every month since Afrezza was approved back in June 2014.

Of course, as those of you who have been involved with the story since then (or even earlier) know all too well, the stock has become one of the most extreme examples I have ever seen of what is called an “inefficient market,” and though the parallels I am about to draw between Celgene and MannKind in no way guarantee MannKind will go on to become a success, I hope they do help you better understand why I remain so optimistic about the MannKind/Afrezza story.

I’ve heard you say it before, Nate, but it’s still not really clear to me – how does the MannKind story compare with the Celgene story?

As just mentioned, though I cannot promise you that MannKind will go on to be a big winner for us the way Celgene has, I do want to point out that Celgene also brought many years of heartache and misery for us before it finally managed to get off the ground… and then soar to such amazing heights for us.

In particular (and to give you some background on the company that most folks probably aren’t aware of since it is known today as “a leading pharmaceutical company”), I want to take you back to 1988 when I first got interested the stock market, met Jim McCamant (the Founder and Editor of both The Medical Technology Stock Letter (MTSL) and The AgBiotech Stock Letter (ABSL)), and started working for Jim.

Whereas MTSL was focused exclusively on the still relatively small industry of biotechnology as it related to healthcare, ABSL was focused on the even smaller and more obscure universe of companies that were using the tools of biotechnology in areas outside of human healthcare… and one of the companies in the basket of stocks that we followed in ABSL that especially caught my eye from my very earliest days of working for Jim was Celgene.

At that point in time, Celgene was focused on becoming a leader in the field of “bioremediation” (using microbes to clean up toxic waste), but it also had a small division that excelled at producing chirally-pure versions of certain molecules that come in left- and right-handed versions (I’ll leave it to you to google the topic if you’re interested in learning more)… and, as fate would have it, as part of having this tiny presence in the world of pharmaceuticals (at least it’s how I remember the story), the company became aware of some interesting research that was being done at Rockefeller University in which the infamous drug thalidomide was being used – quite successfully – to treat certain types of cancers.

After learning more about the research, Celgene announced out of the blue one afternoon that it was going to be shifting gears from being a bioremediation company to becoming a full-fledged pharmaceutical company based on the rights it had secured related to the new research on thalidomide (which was a compound that had already been around for years, albeit it with a horrible reputation – as those of you who are old enough to remember will recall, this drug had been prescribed to women in Europe to treat morning sickness… until it was discovered that even a single dose could cause extreme birth defects in babies!!).

Naturally, though Wall Street had never been terribly excited about the potential of bioremediation in the first place, the idea that Celgene was now going to try to break into the oncology industry… using thalidomide as its lead product… and attempt do so without a marketing partner (virtually unheard of for a small, start-up biotech company at the time)… made the stock the butt of many jokes around Wall Street (including the early versions of internet “bulletin boards” that were starting to pop up n the early and mid-90s), and it was virtually impossible to for the company to raise money on reasonable terms (and launching a new drug always requires cash “no matter what”!).

In fact, while looking through old issues to refresh myself on what was actually going on back then, I was amused to discover that in the April 1998 issue (we had been in the stock for roughly 2 1/2 years at that point), I wrote “I remain concerned about the large amount of stock that has been sold in the last eighteen months [shares outstanding had almost doubled in that time period] and am therefore sticking with the current buy limits for now.  Perhaps I am being too cautious, having personally chased this stock into the mid-teens at least twice since 1990, only to see it fall back to $6 again, but I do not feel the need to apologize for taking a “better safe than sorry” attitude with the stock.”

Of course, as time went by, it turned out that my assessment of thalidomide had been correct… the “massive dilution” proved to be de minimis relative to the size of the markets Celgene was going after… and, in hindsight, we should have been aggressively adding shares rather than playing it safe at that point in time (though the stock was trading around $10 at the time, that number would now be roughly $0.40 thanks to all the splits that have taken place).

No, there was no massive short position in the stock the way there is with MannKind today, but based on how that story has turned out… along with many others that have “tried our patience before paying off” over the years… I have learned to stick with common sense and remain patient during prolonged periods of “market inefficiency” rather than abandon my position in a stock.

Though I have made the observation before, in the case of MannKind, not only do I feel even more confident that Afrezza is truly superior to its competitors than I did about thalidomide relative to the existing oncology drugs it was hoping to dethrone, I also feel more confident that, because we are talking about an already known and understood drug (insulin) that is being used in a patient population that already has extensive networks and support groups built-in to its culture, it really is just a matter of time until Afrezza becomes the drug of choice among diabetics (both T1s and T2s… and pre-diabetics as well, for that matter!).

Of course, this brings us to the question that is on everyone’s mind, namely, “does MannKind actually have “enough” time to achieve success?”… and, as discussed a number of times in recent issues, though I do not know exactly what CEO Matt Pfeffer has planned to make sure he keeps the lights on “long enough,” I can tell you that whenever I have spoken with him… and CCO Mike Castagna… I have not come away with the sense that they are worried about running out of money.

Naturally, the most obvious way to raise money is to sell more stock, and it should come as no surprise that our friends on the short side have been taking every opportunity they can find lately to warn us on message boards, blogs, etc. about the “imminent dilution” that is coming our way… and all I can do is tell you that it will NOT be the end of the world if MannKind ends up selling more stock.  The evidence is continuing to grow that Afrezza really is all Al Mann claimed it would be (and perhaps even more), and if you’re worried about “all the dilution,” just go back re-read the passage I excerpted from the April ’98 issue… and then ask yourself if you wish you would have loaded up on Celgene at that point in time “despite the lack of clarity about where money was going to come from” – great pharmaceutical products are worth every penny management spends to get them across the finish line, and given that Afrezza, at least in theory, is an even more “sure thing” than thalidomide was, I really do want you to stop worrying what even a “massive” 50% dilution would ultimately mean for your investment!

That being said, there are plenty of other ways Matt could also raise money besides selling stock, but again, I want you to focus on the product itself and remember the corollary to what was just stated above, namely, there will always be folks willing to put capital up in exchange for the opportunity to participate in a great pharmaceutical product… especially one that has already passed clinical trials, been approved by the FDA, and proven itself in the real world (as Afrezza has done and is doing).

And, speaking of real world situations, as many of you undoubtedly noticed, for the first time in a great while, MannKind’s stock was not only “up big,” but up big on big volume as well earlier this week.  In fact, volume was close to 30% of the outstanding shares, and though I can’t promise you that this means some of our friends on the short side have finally changed their minds, I can tell you that the volume certainly suggests that the tide may finally be turning.  As discussed many times before, though the first round of short-sellers to cover will be able to lock-in some profits on their short position, those who are slower to cover will be lucky to keep their profits… and those who are slowest to cover will likely learn the hard way what a “short squeeze” actually looks like.

No, we are not out of the woods yet, but with MannKind finally talking about gearing up to start selling Afrezza on an international level, a new collaboration agreement being put in place with a startup diabetes management company called One Drop (who, coincidentally, recently signed an agreement to provide its services to the government health agency in the United Arab Emirates), sponsorship of a reality TV show focused on managing diabetes, regular TV ads getting ready to air in select markets, and the company moving forward with enrollment in a number of different clinical trials involving Afrezza, I feel comfortable once again pounding the table in this month’s issue to remind you that whereas it was unlikely we would ever “get another Celgene” out of MannKind starting from a market cap of $2 billion, for example, I do feel extremely confident telling you that from the current market cap of just over $100M, it IS absolutely possible that we might eventually get a 300-bagger here too if the stock does turn the corner and start heading higher from here (and, to be honest, if the stock does manage to turn the corner, I think the path to success may even be an easier one than the one Celgene had to take).

As always, please do not own more than you can comfortably sleep with at night (or afford to lose, if it comes to that), but my gut is telling me that sometime in the next month or two, we are going to find out that either the company is going out of business… or is on its way back towards fair value ($1-$3 billion for this stage of its existence?) as part of a move that history suggests should also take it well past “fair value” and deep into overvalued territory as part of the normal fear-greed cycle that normally drives stock prices (especially those in the biopharma space!).  Stay tuned!

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) and Skyworks Solutions (SWKS) – Chips stocks are still on fire, and both of these stocks are tracing out patterns that suggest they may be getting ready for another push into new-high territory.

Illumina (ILMN) – Though the stock has pulled back a bit from its recent high, the sector seems to be heating up… and if this stock can clear $200 in the months ahead, it ought to run nicely for us.

MannKind (MNKD) – What else can I say that hasn’t been said before (and spelled out as clearly as possible in this month’s issue)?  I really do believe we are finally approaching an inflection point for both the Afrezza prescriptions and the stock price, and you are encouraged to place your bets accordingly!

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 1,500 (5,000) Cliffs Natural Resources and 200 (1,000) NVIDIA and purchase 250 (1,500) First Solar, 5,000 (100,000) MannKind, and 275 (1,580) Tekla Life Sciences.  We will use the closing prices on Monday, May 15th, for all transactions.

Summary of Recommended Stocks

AdvisorShares Ranger Equity Bear ETF

Shares of this “short ETF” have rallied a bit in recent weeks as earnings have started to come in for many of the companies that it is short, and though its small size means we cannot rely too heavily on this ETF for guidance about where the market might be heading next, we’ll always take every piece of information we can get when it comes to staying on top of investor sentiment… and if shares happen to climb back up to $9.50 (or above!) in the weeks ahead, be sure to keep your eyes on the Eyebrow Levels table as well for additional signs that the market might be weakening.  Reminder: this ETF is mainly just for those of you with more aggressive (i.e. “riskier”) appetites!  HDGE is a strong buy under $8 and a buy under $10.

Apple

As you can see in the chart to the left, shares have Apple have continued to rally nicely in the five seeks since last month’s issue went to press… and though the trend could reverse itself at any time, it is hard to call the current situation anything but “bullish!”  For its second quarter, Apple reported revenues of $52.9 billion and net income of $11.0 billion, or $2.10 per share, as compared to revenues of $50.6 billion and net income of $10.5 billion, or $1.90 per share, in the same period a year ago.  In addition, the company also announced that is is expanding its share repurchasing program and raising the dividend to $0.63 per share.  Even if only a few shares at a time, AAPL is considered a strong buy under $140 and a buy under $160.

Celgene

After spending a couple of months bumping up against the $125 barrier without finding much success in breaking through, I am afraid that Celgene’s stock has taken a bit of a tumble over the past week or so.  That being said, the stock can trade back to $110 (or thereabouts) without doing too much damage from a chartist’s perspective, and so, for now, you are encouraged to maintain a bullish outlook on the stock.  For its first quarter, Celgene reported revenues of $2.96 billion and net income of $941 million, or $1.16 per share, as compared to revenues of just under $2.5 billion and net income of $801 million, or $0.99 per share, in last year’s first quarter.  CELG remains a strong buy under $118 and a buy under $130.

Cirrus Logic

No, it has not managed to break through $65 in a convincing manner yet, but, as you can see in the chart to the left, Cirrus’ stock has been bumping up against that level for a little over a month now… and though there are never any guarantees, based on what is going on with the rest of the sector, I would not be at all surprised if we see the stock start to push into new all-time high territory as the start of another leg up sometime in the next few weeks.  For its fiscal 2017, Cirrus reported revenues of $1.5 billion and net income of $261.2 million, or $3.92 per share, as compared to revenues of just under $1.2 billion and net income of $123.6 million, or $1.87 per share, in the prior year.  CRUS is a strong buy under $60 and a buy under $68.

Cliffs Natural Resources

As you can see in the chart to the right, Cliffs’ stock has continued to tumble in the five weeks since last month’s issue went to press, and though my gut is telling me it is probably a solid buy at current prices, because I am less confident about the outlook for iron ore versus insulin, for example, I am taking a more cautious approach and lightening up a bit on our positions in both Portfolios this month.  For its first quarter, Cliffs reported revenues of $461.6 million and a net loss of $29.8 million, or $0.11 per share, as compared to revenues of $305.5 million and net income of $108.0 million, or $0.62 per share, in the same period last year.  Provided you already own plenty of other stocks, CLF is now a strong buy under $4 and a buy under $6.

Electronic Arts

 As you can see in the chart to the left, EA’s stock gapped up nicely a few days again in response to a strong earnings report and guidance from the company!  For its fiscal 2017, EA reported revenues of $4.8 billion and net income of $967 million, or $3.08 per share, as compared to revenues of $4.4 billion and net income of just under $1.2 billion, or $3.50 per share, in the prior year (which, it should be noted, included a $453 million tax credit).  At some point, the stock will likely experience a sell-off of some sort; however, it is hard to call the current price action anything but “bullish,” and you are encouraged to buy on any pullbacks that may present themselves.  EA is now a strong buy under $95 and a buy under $105.

First Solar

Though I would really like to see First Solar above $40 to feel more confident that a new uptrend may, in fact, be getting under way for the stock, I do find it encouraging that in response to the company’s most recent earnings report, not only did the stock gap up, but it has also continued to power higher since then as well.  For its first quarter, First Solar reported revenues of $891.8 million and net income of $9.1 million, or $0.09 per share, as compared to revenues of $876.1 million and net income of $195.6 million, or $1.90 per share, in the same period a year ago.  Since First Solar is still one of our smallest positions, I am adding a few shares this month.  FSLR is a strong buy under $33 and a buy under $39.

Illumina

After briefly rallying into new 52-week high territory following the release of its first quarter results late last month, Illumina’s stock has pulled back a bit.  For the first quarter (which included a number of one-time items), Illumina reported revenues of $598 million and net income of $372 million, or $2.52 per share, as compared to revenues of $592 million and net income of $90 million, or $0.60 per share, in last year’s first quarter.  Along with many of our other “big name” recommendations, this is another situation where you are encouraged to patiently build a position as time goes by, even if it means only buying a couple of shares at a time due to the “high” stock price.  ILMN is a strong buy under $170 and a buy under $190.

Luminex

Yep – as you can see in the chart to the right, Luminex’s is yet another of our recommended stocks that gapped up nicely in response to a positive earnings report and guidance a few weeks ago!  For its first quarter, Luminex reported revenues of $77.8 million and net income of $9.2 million, or $0.21 per share, as compared to revenues of just under $63 million and net income of $8.8 million, or $0.21 per share, in the same period a year ago.  Both Portfolios already own “enough” Luminex, but those of you who are still underweight the stock in your own portfolios are encouraged to add a few more shares as part of a longer-term game plan to slowly build a position.  LMNX remains a strong buy under $17 and a buy under $21.

MannKind

Though it certainly applies to all stocks, I chose this month’s quote because Peter Lynch is absolutely correct that those are really the only two reasons (even if he calls them one) stocks ever generate truly sizable returns for investors… and, in my book, MannKind is on the verge of qualifying on both fronts (with Sanofi’s efforts counting as the “poorly run” piece of the puzzle).  As it stands, due to what I believe is an extreme inefficiency in the pricing of the stock that has been created by short-sellers, I am taking advantage of the current price to increase the size of our Aggressive position by 20% while only increasing the cost by 3.5%… and you are encouraged to join me!  MNKD is a strong buy under $5 and a buy under $10.

NVIDIA

Though it is admittedly still quite a ways behind Celgene and Apple, I think it is far to say that NVIDA is currently next in line when it comes to stocks in the newsletter that are doing an especially good job of reminding us just how practical Peter Lynch’s approach to beating the market actually was (and still is!)… and what’s especially exciting is that even though our initial recommendation was at roughly $4.50, many of our subscribers who were involved back then also got to buy it at even lower prices as well!  Though the trend could change tomorrow, you are encouraged to view the recent price action as an excuse to buy/hold rather than sell… and so, with patience, NVDA is now a strong buy under $100 and a buy under $125.

NXP Semiconductor

As we have been counting on all along (even if it took a little longer to manifest itself than I originally expected), NXP’s stock has continued to climb in a slow-but-steady fashion towards the $110 price target implied by the tender offer that is currently on the table from Qualcomm (QCOM – $55.32).   Though the deal is likely to go through, for those of you still keeping tabs of the quarterly results “just in case NXP doesn’t become part of Qualcomm,” for its first quarter, NXP reported revenues of $2.2 billion and net income of $1.5 billion, or $3.79 per share, as compared to revenues of $2.2 billion and a net loss of $587 million, or $1.16 per share, in last year’s first quarter.  NXPI is a strong buy under $90 and a buy under $105.

Perry Ellis

Ugh – as you can see in the chart to the left, Perry Ellis’ stock has done nothing but slide for the past six months!  Of course, as discussed a bit in last month’s issue, the most likely reason for the selling pressure is the fact that department stores and major retail brands have been throwing in the towel left and right over the past year in response to the massive shift in retail shopping habits that is taking place around the globe; however, as also mentioned last month, though the outlook for the industry as a whole does not look terribly bright, consolidation and “buyouts” are a natural part of the process… and Perry Ellis would make a great takeover candidate.  PERY is now a strong buy under $16 and a buy under $20.

PowerShares DB Agriculture ETF

Though the chart of DBA looks the most promising relative to CLF and DBC on a shorter-term basis, I will be the first to admit that none of them is actually that bullish-looking at this point in time.  Naturally, this suggests that you may want to focus your energies looking at other recommendations in the newsletter, but if you’re still working on building out a somewhat diversified portfolio and have zero commodity exposure yet, the charts suggests that DBA ought to be your first purchase among the three.  Looking further out on the time horizon, however, I continue to believe that, at some point in the not-too-distant future, the odds favor a fairly sizable and prolonged move (continued under “DBC” below) DBA is a buy under $22.

PowerShares DB Commodities ETF

(continuing from “DBA” above) higher in commodity prices, and so those of you who have already established meaningful positions in most of the other stocks being recommended may want to consider taking advantage of the current weakness in both of these broad-based commodity ETFs to start small positions in each of them “just in case the next move is higher.”  That being said, please also recognize that “strength often begets strength”… and, currently, there is much better strength being generated elsewhere (and, of course, as a contrarian play, I don’t think you’ll ever get a better “high flyer” opportunity than what’s being presented with MannKind’s current share price!).  With patience, DBC is a buy under $16.

Qorvo

Though Qorvo’s stock is admittedly down a bit from where it was when last month’s issue went to press, I am actually quite content with the pattern that is being traced out in the chart to the right (especially when looked at in the context of what’s going on with the rest of the sector… and the market as a whole).  For its fiscal 2017, Qorvo reported revenues of just over $3 billion and a net loss of $16.6 million, or $0.13 per share, as compared to revenues of $2.6 billion and a net loss of $28.8 million, or $0.20 per share, in fiscal 2016.  We currently own “enough” Qorvo in both Portfolios, but it should definitely be among your list of “first buys” if you are new to the newsletter.  QRVO is a strong buy under $64 and a buy under $72.

Skyworks Solutions

As you can see in the chart to the left, Skyworks’ stock is continuing to trace exactly the sort of slow-but-steady uptrend we like to see if we are looking for confirmation that we’re in a bull market… but probably not close to the end of it just yet (in which case, the stock would be “going parabolic” rather than trending higher in a linear fashion, for those of you keeping score at home).  For its second quarter, Skyworks generated revenues of $851.7 million and net incomes of $224.9 million, or $1.20 per share, as compared to revenues of $775.1 million and net income of 208.1 million, or $1.08 per share, in the prior year’s second quarter.  Provided you’re scaling-in over time, SWKS remains a strong buy under $98 and a buy under $105.

SPDR Gold Trust ETF

On the one hand, it is somewhat discouraging that the price of gold has pretty much done nothing but slide in the five weeks since last month’s issue went to press; on the other hand,  however, a) the slide has been fairly gentle, b) shares of this ETF have still not broken below $110 (which is a point at which I will start to become more concerned), and c) based on everything that is going on the world, I can argue that most signs are still pointing towards an eventual “period of worry” on the part of investors around globe… and whether that period gets underway on Monday – or not for another year or two – I do believe very strongly that once it does, the price of gold is going to soar!  Consequently, GLD is a buy under $120.

Tekla Life Sciences Investors

As you can see in the chart to the left, shares of HQL finally managed to clear $20 as April came to an end; however, they have since pulled back to just above that level… but given what is going on with the rest of the sector, I believe the odds favor a move higher in the weeks ahead.  Consequently, I am adding a few mores shares to both Portfolios this month, but please don’t try to read too much into the “odd lots” I am buying in each of the Portfolios (at least in the Aggressive), as I am simply choosing numbers that bring us back to roughly a round number in each Portfolio.  In addition, please note that this move is most definitely a vote of confidence in “biotech.”  HQL is now a strong buy under $19 and buy under $22.

Walt Disney Co.

Unfortunately, though most of Disney’s business units are doing fairly well, investors have (not surprisingly) chosen to focus on “the ESPN situation” when it comes to the outlook for Disney… and, as you can see in the chart to the right, the stock has fallen in semi-dramatic fashion in the week-and-a-half that have passed since earnings were reported.  For its second quarter, Disney reported revenues of $13.3 billion and net income of just under $2.4 billion, or $1.50 per share, as compared to revenues of just under $13.0 billion and net income of $2.1 billion, or $1.30 per share, in last year’s second quarter.  In small purchases as part of disciplined game plan, DIS is considered a strong buy under $105 and a buy under $112.

“All-in” on MannKind (MNKD) 1/27/17

*** The following is excerpted from Issue #264 of Nate’s Notes, which was published for subscribers on January 20, 2017, and reflects our opinions of the market, MannKind, and all other stocks mentioned as of that date. ***

The world doesn’t make sense,
so why should I paint pictures that do?

– Pablo Picasso

Still Too Early To Say Much…

First off, I want to acknowledge that the bulk of this month’s issue is once again devoted to discussing MannKind; however, I also want you to know that it is being done on purpose because a) I believe we are at a point in the MannKind story where the tide is either going to turn or it’s not (and so it is worth “pounding the table” sooner rather than later), and b) to be honest, until we see what Trump actually plans to do as President (versus talk about doing as President-elect), I believe it is far more useful to spend time discussing a situation that is at least somewhat “knowable” than to spend a great deal of time reflecting on what a Trump presidency might mean for the stock market as a whole (though rest assured that the topic is also on my mind daily, and it will be discussed in future issues as more information becomes available!).

That being said, as you will notice when you look at the charts of our recommended stocks in this month’s issue, The Trump Rally appears to be alive and well, especially when it comes to our chip stocks, and though it is still too early to know which way the market is going to go once it finally breaks out from the “flatline” pattern it has been tracing out heading into Inauguration day, if it happens to go higher, you are strongly encouraged to look at the move as a reason to add to your positions rather than take profits (beyond the ones that you may need to take in order to allow yourself to sleep more easily at night if certain positions have grown “too large”).

On the flip side, however, as you will see in the Eyebrow Levels table below, the BTK biotech index is continuing to lag the market, and at least a portion of the reason for this is that Trump has spent some time talking about going after the pharmaceutical industry… and so we will need to watch this index especially closely to see how investors end up responding to whatever moves Trump ends up making (or perhaps not making?) as his term gets underway.

Again, my apologies for not spending more time playing “what if” with regards to Trump – for all of the reasons cited below, rest assured that this will likely be the last time I will choose make MannKind the focus on an entire issue… and I hope the fact that virtually all the rest of our positions are “acting well” helps to make up for the fact that I am going out of my way to lay out the case for MannKind one last time before the next chapter of the story gets underway!  Cheers!

“All-in” on MannKind

After surging close to 30% in a single day shortly after last month’s issue went to press, MannKind’s stock has pulled back a bit and has spent the past couple of weeks consolidating nicely in the $0.60-$0.70 range… and, while it is true that we would all like to see the stock return to a more reasonable valuation as quickly as possible, a “two steps forward, one step back” chart pattern is not only the more likely path to higher prices (barring a piece of catalytic news, of course), but it is also the sort of price action I would actually prefer to see, as history suggests it will help to set the stage for a longer, more sustained rally as it picks up steam.

Of course, the question is whether it can/will pick up steam… and though we will only know the answer to that question in hindsight, I hope the following set of thoughts gives you some optimism that the tide may finally be turning for us.

First off, with recognition that one of our favorite mantras in the newsletter is “trends often go on for longer than seems reasonable” (so I can’t claim to be all that surprised), the downtrend in MannKind’s stock has gone on for far longer than I ever thought possible (especially given the sorts of results patients are reporting once they’ve learned how to dose Afrezza).

Not only have shareholders suffered through what turned out to be “a lost year (and then some)” thanks to Sanofi’s lack of effort to promote the product, but short sellers have been relentless with their selling… and, as mentioned before, I firmly believe that absent the “extra” 100 million or so shares that have been dumped on the market over the years, the stock probably never would have fallen below $3 or $4.

Of course, at some point (and unless they can force the company into bankruptcy), these short sellers will need to buy back those shares in order to close out their positions, and though they are clearly not doing so in droves just yet, I believe the price action we saw right after last month’s issue went to press may have been a preview of what’s to come.  As mentioned before, honest-to-goodness short squeezes are far more rare on Wall Street than folks like to think they are, but when they do happen, they can be spectacular to watch (and, ideally, benefit from!).

And, while I am no way guaranteeing that one will develop around the MannKind situation, based on what I am seeing in the marketplace – along with the emails I have received from subscribers over the past several months – I do believe believe very strongly that virtually all of “the float” (all of the outstanding shares that are not held by management or other insiders, i.e. all of shares that “float” back and forth between regular old investors who buy and sell them on the open market) is now held by investors who are planning to hold their shares “to the bitter end, no matter which way it goes,” as everyone else who didn’t have the stomach for the story has already given up and sold their shares.

While this “ultra-thin float” doesn’t mean much as long as volume remains low and a small number of buyers can get their orders filled by the sellers on the other side of the trade (and vice-versa) without moving the stock much, as we saw a little over a month ago, as soon as a buyer of any size attempts to establish a position, they quickly discover that there isn’t really much stock available for sale unless they are willing to become more aggressive with their bidding.

No, MannKind is hardly a “darling of Wall Street” at this point in time; however, given how the story is unfolding, I believe the odds are improving every day that this “unloved dog of a stock” is on the verge of getting a second look from investors, and given just how large the disconnect has gotten between “current value” and “true value” of company… along with the very large short position… and a sizable cadre of biotech analysts who only have one direction they can go with the stock (from “sell” back to either “hold” or “buy”)… and the aforementioned ultra-thin float (especially when measured against the size of the short position)… it may only take one or two big buyers to finally set the gasoline drenched stack of wood on fire.

Naturally, I’m sure many of you are wondering at this point why I seem to be more optimistic today than I have been in awhile, and the answer is that in addition to the price action itself, I am also very pleased with a number of “news” events that have taken place over the past five weeks – in particular, Matt Pfeffer’s presentation at the JP Morgan Healthcare Conference (JPM) and the hiring of another “high profile” individual from Amgen (in this case, Stuart A. Tross, Ph.D. to head up Human Resources, Information Technology and West Coast Facilities for MannKind as it enters the next stage of its evolution).

Not only is the hiring of Dr. Tross interesting for the simple reason that he is also coming over from Amgen (which is where Mike Castagna came from as well), it provides us with indirect evidence that perhaps things aren’t as bad “behind the scenes” as they sometimes appear to those of us who are trying to figure out what’s going on from this side of the curtain (and, of course, though I am not predicting an Amgen buyout, his arrival has helped to fuel a buzz on social media that he and Mike are there to “get MannKind structured as an Amgen-like entity so that Amgen can hit the ground running once they take over”).

Moving on from such exciting speculation, however, I want to point out that along with the “obvious” factoids that were presented at JPM (see below), I was also struck by two things in particular while listening to Matt’s presentation – not only did he make the presentation with much more confidence and “presence” than he has in during past presentations, even more importantly (in my humble opinion), “the pitch” regarding Afrezza has undergone a significant transformation… and though I haven’t asked him about it yet, I am guessing that all of the “extra” talking points that were made are a direct consequence of the information that was gathered during the first round of having a salesforce on the ground in doctors’ offices figuring out what works and doesn’t work in terms of educating doctors and patients alike about the product (and if this hunch is correct, I believe it bodes well for the next round of the rollout, which is due to get underway early next month).

And, speaking of which, that is one of several items I want to mention from the JPM presentation, namely, we learned that, for a variety of possible reasons, the company is transitioning from using a contract sales force to hiring all of its own sales reps.  Not only will this allow the company to offer a more enticing incentive package (via stock options), the fact that they are making the move at all suggests, once again, that things are not as dire on the financial front as they appear on the surface.  An unfortunate (but minor and temporary!) consequence of this transition is that Matt hinted that we are once again in a period where there isn’t much going on in terms of sales people trying to generate new prescriptions while the in-house staff gets brought up to speed, and though I know many of you are concerned about “the woeful lack of scripts,” I want to remind you that despite the “dismal” numbers week after week, the stock is actually up over 50% from where it was a month ago… and this is yet another clue to me that anyone who wanted to sell the stock probably already has.

Along with this news about hiring an in-house salesforce, we also learned that MannKind is moving forward with the filings required to sell Afrezza in a number of regions that essentially only require “FDA approval and some paperwork,” namely, Brazil, Canada, Mexico, Australia, MENA (Middle East and North Africa), UAE (United Arab Emirates), and it is also evaluating what would be required to gain approval in “Europe and other regions.”  Of course, the company could simply be bluffing, but if they are not, this sort of language once again suggests that they feel much more confident that there will be money around to implement the plan than there might appear to be on first glance by an outsider (or in any one of a handful of persistently bearish blog articles you can read on a weekly basis!).

Not only does the company appear to be moving forward with plans to grow sales of Afrezza in both the U.S. and abroad, it seems to be moving forward with other applications of the Technosphere platform at a slightly more aggressive pace than it was forced to take prior to the settlement with Sanofi (a turn of events that I want to remind you not only changed the financial position of the company by quite a bit, but also made it significantly easier for the company to start talking with other potential partners who may have been reluctant to get involved while Sanofi still had a tentacle involved in the story).  Along with its efforts to develop inhalable ephinephrine (efforts that include what the company has called a “successful” meeting with the FDA back in December), the company is moving forward with projects to develop inhalable treprostinil and palonosetron, with an eye towards eventually partnering those products once they are further along in the clinic.

And, speaking of “the clinic,” I believe it is also worth noting that Matt also pointed out at JPM that MannKind is moving forward with plans to conduct pediatric, dosing, and time-in-range clinical trials with Afrezza.  In addition, once the commercial(s) have been approved by the FDA (expected in the April time-frame, if I remember correctly), MannKind is planning to rollout its first direct-to-consumer (DTC) TV ads (in very targeted markets at first, mind you).  As you might imagine, these clinical trials and TV ads will all require time, personnel, and, money to bring them to fruition… and, once again, these are all things that it would appear on a first glance that MannKind does not have at its disposal, but, reading between the lines, may have “lined up” after all, even if a partnership and/or buy-in (or perhaps even a wildly unexpected – by outsiders – ramp in Afrezza scripts?) that would provide additional capital hasn’t actually been announced/revealed yet.

Moving on to a topic that is less optimistic in nature, as you know, MannKind’s stock is in jeopardy of being “delisted” sometime in mid- to late February if it is not able to get back over $1 and stay there for 10-consecutive trading days; however, to help allay some of the fears that have been expressed to me via email over the past several weeks, I want to remind you of the following things…

First off, even if the stock has not managed to get back over $1 and stay there long enough in time to meet the criteria to avoid delisting, the company can file for another six-month extension (and such petitions are almost always granted), or, alternatively, the company could guarantee the stock price would be over $1 by simply convincing shareholders to approve a reverse split of the stock.

However, I think it is also extremely important to keep in mind that even if the stock does end up getting “delisted,” the only thing that actually changes is that rather being traded on THE Nasdaq trading system, the stock will instead be traded on a “lesser” platform… and while this will undoubtedly cause some investors to steer clear of the stock (and/or cause some institutions to sell their positions based on their by-laws that might require them to only invest in stocks traded on Nasdaq, for example), as mentioned above, I believe everyone who was interested in selling as a result of concern about delisting has already done so.

In addition, and perhaps most importantly, I want to make it clear that your shares would still represent exactly the same thing they represented before the delisting – they would simply be trading on a less prestigious (and, almost certainly, less liquid) “exchange”… and, ironically, I believe it is worth noting that if the stock stopped trading on the main Nasdaq system, it would, in theory, make it even more difficult for the shorts to find shares to cover with IF they ever decide to start covering their position… so, in some ways, it might be worth rooting for delisting; other than that, you will still be a shareholder with the same ownership position and voting rights that you had prior to the delisting (so please don’t let anyone on the interwebs convince you that your shares will instantly become worthless).

Finally, to wrap up what has become a much longer write-up than I was originally planning on putting together for you this month, I want to re-iterate what I said last month, namely, that I think we really are at a point in time where the stock is either going to make it, or it’s not… and, while it will take a bit longer before I would be willing to admit failure and start scaling-out of our position, I do think the odds are very good that IF the story is shaping up the way I think it is, we could see Wall Street returning to the story (i.e. starting to bid up the stock) any time between now and mid-March.

In response to all of the above (and because I believe so very strongly in the underlying value of Afrezza itself), I am making one final “all-in” bet and increasing our position size by 25% in both Portfolios this month… and, barring some bizarre twist, the next trades the newsletter will make in the stock will be sales, either  to take some well-deserved profits or to begin the process of scaling-out of our intentionally large positions.

As has been said a number of times, please do not invest more in the story than you a) can afford to lose, and b) can sleep with comfortably at night; however, provided you are still below your threshold on both fronts, I encourage you to step up to the plate and add a few more shares alongside me – “inefficient markets never last forever,” and I really am convinced this is one of the most extreme examples of “the mispricing of assets” I have seen in my 29 years of following the stock market.  Stay tuned!

MannKind

As mentioned above (and in last month’s issue as well), I believe we are at a critical juncture in terms of how Wall Street is going to handle the MannKind/Afrezza story going forward… and though I may turn out to be wrong, based on my very strong belief that the company is currently trading for a small fraction of what it is actually worth, I am comfortable pushing the rest of my chips into the pot at this stage of the game and waiting to see what happens.  And, along those lines, I will make the “bold” prediction that by the end of this year, we will either be mostly out of our position… or MannKind will have moved onto the list of “core stocks” that we intend to “hold forever.”  MNKD remains a very strong buy under $2 and a buy under $5.

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) – Yep, it’s the same three stocks as Top Picks this month, and for all the same reasons – Cirrus’ stock is bumping right up against its all-time high, and this is always a “bullish” indicator for a stock (at least on a shorter-term basis).

MannKind (MNKD) – As mentioned elsewhere in the newsletter, we’re approaching the “do or die” point for the stock… and so if you have been waiting to buy some, it’s probably time to place your bet.

Skyworks Solutions (SWKS) – not only is the chip sector continuing to act well, it is hard to interpret the recent “gap up” in Skyworks’ stock as anything but “bullish.”

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 250 NVDA and purchase 50 (200) Apple, 100 (400) Celgene, 250 (900) First Solar, (300) Illumina, 20,000 (400,000) MannKind, 750 (2,000) PowerShares DB Ag., 700 (3,000) PowerShares DB Cmdties., 200 (500) Qorvo, 100 (500) Skyworks Solutions, and 50 (200) SPDR Gold Trust ETF.  We will use the closing prices on Monday, January 23rd, for all transactions.