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Investing During Periods of Uncertainty & Turmoil

Investing During Periods of Uncertainty & Turmoil

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By Carol K.

In this post, I’m not going to talk politics or speculate on which Party wins or deserves to win the Presidency or control of Congress come January 2021. There are plenty of political pundits offering their take on the coming U.S. election, and if you’re like me, you’re exhausted by the non-stop negativity and political games.  The purpose of this piece is to instill a sense of calm and help self-directed investors survive what we at GMM anticipate will be an epic political storm in the coming months.

Political Risk

While there is always increased market volatility around the time of presidential elections, we anticipate unprecedented nastiness, litigiousness, perhaps civil unrest, the likes of which we have never seen in the United States.  If one has remotely been paying attention in 2020, it is evident that neither Party will politely concede and go quietly into the night.

Furthermore, we believe there is a high probability the final results will not be known for several days after election day.  After that, it is highly likely the (apparent) losing Party will surely contest the results through the judiciary.  Unless, of course, the initial voting count comes in so overwhelming for the frontrunner on November 3, it will leave little doubt about the winner.

Markets hate uncertainty. We believe uncertainty will dominate the markets from November 3 until mid-January. It could easily take until mid-November, for example,  to determine who will control several hotly contested U.S. Senate seats that may flip the balance of power from the GOP to the Democrats in the upper chamber. It’s too close to call with any certainty, although the prediction markets are giving the Democrats around a 60 percent chance of a clean sweep.

Long-Term View 

If I could say just one thing as an investor who is “in it” for the long haul, it would be this: historically, time has been on your side, and we have no reason to believe that will change going forward.  Stocks go up, stocks go down, but looking at the trajectory of the U.S. stock market over the past 90 years, as measured by the S&P 500 index, we see a dramatic rise in stock values.

Through wars, depressions, recessions, civil and social unrest, the stock market may be volatile but has remained a great wealth creator for those exercising the discipline and patience to play the long game.

 

Does the President’s Party Affiliation Impact Stock  Returns?

Many investors hold preconceived notions of how stock returns should look under a Democrat or a Republican President, with most incorrectly believing stocks have historically outperformed under GOP Presidents. Take a look at the table and charts below for market returns by Presidential administration over the past 120 years; you may be surprised, I know I was!

It is essential to keep in context that initial valuation levels matter when new presidents take office.  George W. Bush, for example,  inherited the bursting dot.com bubble, which popped in March 2020.  He then exited office the credit and housing bubble deflating. In both cases, the S&P500 fell around 50 percent.

Suppose the stock market doesn’t correct meaningfully in the next few months, and there is a President Biden. In that case, his new administration will inherit the most overvalued stock market in history, making it difficult for his tenure to be anywhere near the top of the presidential stock market return board.

Embrace Volatility

Compounding the expected volatility surrounding the election, we expect continued fallout from Covid-19 to impact the economy, corporate earnings, and capital markets well into 2021. As of the date of this post, no additional fiscal stimulus funds for individuals, corporations, or small businesses have been approved by Congress as on-going talks between Speaker of the House Nancy Pelosi and Treasury Secretary Steve Mnuchin were abruptly called off by the White House on Tuesday (10/6).  It’s anyone’s guess whether a second stimulus bill will pass and be signed by the President prior to the November 3rd  election but the odds are decreasing by the day.

For long-term investors, volatility and the corresponding market corrections are an absolute gift.  Volatility allows investors to buy stocks for less — often at a 10-20% discount from previous levels or even better, at a nice discount to a stock’s fair market value.

Fair Value

The key is maintaining the discipline to have a well-researched watchlist of stocks ready to go when corrections or volatility hit. One obviously needs to conduct due diligence and develop a good sense of each stock’s fair value.  I like Morningstar’s estimated fair value because their analysts tend to be quite conservative in their valuations and assumptions.

Something I learned the hard way, by losing money or giving up a lot of upside, is when determining fair value, the entry price should incorporate a margin of safety or cushion.   For example, if, say, ABC’s fair value is $70, you may examine it’s beta or it’s cyclicity and decide that a margin of safety of at least 10% or more is appropriate and your desired entry price would be $63 per share or lower.

Many stocks rarely offer a perceived margin of safety because markets place a premium on these stocks for any number of reasons — such as a long-running and well-covered dividend.  Many of the less “sexy” stocks, such as Coca-Cola (K.O.), Pepsico (PEP) or Procter & Gamble (P.G.) trade higher than their expected fair value levels.

High-growth stocks, such as Amazon (AMZN), Tesla (TSLA), Nvidia (NVDA) trade at super high premiums to their book value or trailing 12-month earnings, because of expected future earnings potential merit the sky-high current price-to-earnings (P.E.) ratio.  In other words, the high P.E. ratio is justified given potential explosive future growth.

The Coming Volatility

So then, the expected increase in market volatility we see materializing in the coming months should allow investors to add to existing positions or start new positions at more favorable entry points. This is a good time to carefully look over current holdings and possibly free up some cash if you lack the dry powder to put to work if/when the opportunity arises.

Sectors

Decide which specific sectors you want to be in the near future, run some initial search screens to choose high-quality companies that merit further research. Then, voila, you are ready to construct your “shopping list” with fair values and margins of safety to jump on during the next correction.

Tax Considerations

If you have holdings with outsized profits (in a taxable account), and Democrats take the White House and both houses of Congress, you may want to take some profits by December 31, so your gains will be taxed at preferable 2020 capital gains rates.  I am not a tax expert, just my opinion, and that is what I have been doing.

Quick Update on Previous Recommendations

ARK Invest ETFs: featured in our previous post here:

The ARK Invest family of actively managed ETFs remains on fire.  Cathie Wood and her team have assembled a group of ETFs focused on the future economy, and at the market close on Friday (10/9), her ETFs comprise 5 of the top 10 performing ETFs YTD (leveraged ETFs excluded).

Looking at these returns, especially when compared to the major indices, I think you will agree what many consider a high expense ratio of 75 basis points (0.75%) is well earned by Cathie and her staff.

 

 

 

 

 

REIT Corner

Expected returns for the risk-free bonds are likely to be negative or remain very low for several years, with returns on I.G. corporates only marginally better, which is forcing fixed-income investors to look elsewhere for income.  REITs are an attractive option for income, but in the COVID-19 economy, investors must be very selective as to the type or classification of properties a REIT holds, including the quality of both the properties and, of course, management.

I plan a follow-up to my earlier post on REITs in the coming weeks as my health, and continuing treatment schedule allows.

However, REIT investors must consider that many REITs have cut or suspended their dividends since March when the COVID-forced shutdowns and rent collection woes set in.

Most notably, dividends were affected in the hotel, mall, office, shopping center, and prison REIT sub-sectors.  Hoya Capital Real Estate does an awesome job tracking the current status of REIT dividends on their website, so take advantage of this wonderful resource in your due diligence.

Personal Note

I’ve suffered a setback in my treatment for recurrent Ovarian Cancer; the cancer has metastasized to the liver. My chemotherapy regimen has been adjusted and hopefully will be sufficient so I will not have to undergo surgery.

I am truly blessed to have such wonderful family, friends, and colleagues supporting me in my fight. I couldn’t do it without them!  Special thanks also to my Twitter friends for regularly checking in on me and to Gregor and the GMM staff for entertaining me virtually while I’m receiving chemotherapy treatments. Another fallout from COVID protocols is patients aren’t allowed to have a family member or friends sit with them during treatments, which generally run 6-7 hours.

Disclaimer

The information in this post represents our own personal opinions and are not investment recommendations.  We may or may not hold positions or other interests in securities mentioned in the post or have acted upon what has been written.  

All information posted is believed to be reliable and has been obtained from public sources believed to be reliable. We make no representation as to the accuracy or completeness of such information.

 

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide…

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide Black Lives Matter riots in the summer of 2020, some elite colleges and universities shredded testing requirements for admission. Several years later, the test-optional admission has yet to produce the promising results for racial and class-based equity that many woke academic institutions wished.

The failure of test-optional admission policies has forced Dartmouth College to reinstate standardized test scores for admission starting next year. This should never have been eliminated, as merit will always prevail. 

"Nearly four years later, having studied the role of testing in our admissions process as well as its value as a predictor of student success at Dartmouth, we are removing the extended pause and reactivating the standardized testing requirement for undergraduate admission, effective with the Class of 2029," Dartmouth wrote in a press release Monday morning. 

"For Dartmouth, the evidence supporting our reactivation of a required testing policy is clear. Our bottom line is simple: we believe a standardized testing requirement will improve—not detract from—our ability to bring the most promising and diverse students to our campus," the elite college said. 

Who would've thought eliminating standardized tests for admission because a fringe minority said they were instruments of racism and a biased system was ever a good idea? 

Also, it doesn't take a rocket scientist to figure this out. More from Dartmouth, who commissioned the research: 

They also found that test scores represent an especially valuable tool to identify high-achieving applicants from low and middle-income backgrounds; who are first-generation college-bound; as well as students from urban and rural backgrounds.

All the colleges and universities that quickly adopted test-optional admissions in 2020 experienced a surge in applications. Perhaps the push for test-optional was under the guise of woke equality but was nothing more than protecting the bottom line for these institutions. 

A glimpse of sanity returns to woke schools: Admit qualified kids. Next up is corporate America and all tiers of the US government. 

Tyler Durden Mon, 02/05/2024 - 17:20

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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