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A Bull Market – But Only in the Index

The market keeps going up – literally every day – but you would never know if it you just looked at stocks.

Well, some stocks that is. Large cap stocks are on fire. The mega-cap tech stocks that I got into a few weeks ago have been on a tear. Typically boring stocks like Deere and Caterpillar are in a whole other world. Yet almost every day they go a bit higher.

But if you aren’t in the high-flying mega-caps then woah, man, it is nasty out there.

I think Thursday was the epitome of what is going on. The S&P was on fire, up 46 points, over 1%. But I could list dozens of stocks that were not just down for the day but down big.

And I’m not just talking about perennially out of favor sectors like oil or gold. These are former market leaders and darlings that were pummeled.

Plug Power, the hydrogen fuel cell leader of the next energy age, was down 8%. Exone, the Ark owned (they own nearly 10% of the company!), high flying 3D printing stock, was down over 6%. On Wednesday the leader of the Bitcoin banking revolution (and previous portfolio holding) Silvergate was down 15%.

Apart from Tesla, the EV stocks are getting shellacked. Apart from Tesla, the ARK stocks are getting shellacked. Even the SaaS names, which have had some recovery over the last few weeks, remain 10%, 20%, or 30% below their highs of mid-February.

Always Overthinking

Honestly, I should have stuck with my original thesis – buy mega cap tech (Facebook, Amazon, Google) and touch nothing else. Because everything else (except for the gold stocks, which I did manage to pick the bottom in) has been a drag on my portfolio.

I was right about Facebook and Amazon and I have done well on them. But much of those gains have been negated by the down moves of Intellicheck, Eastside Distilling and Biomerica – remember I (foolishly) bought those back.

I have since ended up selling down some of these small-cap positions. I am sheepish to admit another flip flop but they just haven’t been “acting” right. I still own all 3 names but the size of the positions is smaller. I sold out of Rada completely again.

It is a bizarre twist that in a market that only goes up, if I ignore the mega-cap stocks I own, what is doing the best are the short positions.

In the one portfolio where I can own puts and have shorts, I am doing better because stocks like Plug Power, Exone and Silvergate have free fallen. But where I have to be long only, I’m basically running to stand still as these small-cap losses offset mega-cap gains.

It is confounding. You wonder what to do? Do you double down on small-caps because if the market is this strong how can they continue to be this weak? Do you sell the shorts that are working because how can they keep going down in a roaring bull market? Do you sell the large-cap winners because this market must be broken if so many of the former leaders are going down and so inevitably they will break down too?

Bull Markets in Hubris and Valuation

The one thing that you CAN’T seem to do is put on index shorts. Believe me I try. Individual stocks may go down every day but the indexes only go up.

I read the Einhorn letter a couple days ago. He describes how his firm was killed by their shorts in Q1. They were hurt so bad they took them off and replaced them with shorts on the indexes.

That makes me go hmmm. How many other funds have given up shorting individual stocks and are now shorting the S&P? And how many of those funds are seeing that trade go completely and totally south as the niche stocks they own (because they are smart guys) go down while the index goes up?

That makes it very hard to hold too much short the S&P. As much as I want to be a bear, the market won’t let me.

But this can’t go on forever. I really should write a post on valuations and hubris, both of which are in huge bull markets.

Valuations of some stocks are just mind-blowing to me. That Caterpillar trades at 28x earnings, roughly double the average multiple of the last five years, while its revenue is not expected to get back to 2019 levels until 2023 does not make much sense. Or that EPAM Systems, which is basically an IT outsourcing company, can go parabolic to 60x earnings in a job market that is still far from healthy.

Hubris is best seen in stocks like Sea Limited or Peloton, twitter DARLINGS, which, well, I don’t even know where to start. What astounds me are that those most vocal about these names have nothing useful to say about them. I have yet to see the Twitter longs post a single thoughtful point, they don’t even bother refuting the bear case, they just say they aren’t worried (which, to be fair, they have had no need to be for the last year) and the bull case seems mainly to be “look at how fast these online/stay-at-home businesses grew during the pandemic”, rocket ships, diamond hands and so on. How can these guys be the “winners”?

But I am betraying my inner curmudgeon. Must – keep – an – open – mind.

What is Working

The only thing I know right now is that the big cap stocks are working. So I am trying to do more of that. I moved some of the profits out of Amazon and Google but I put that money and more into the large-cap drug stocks. I mentioned in a previous post that I had bought Bristol Myers and Abbvie. I decided to buy even more Bristol Myers (it is my largest position now, overtaking Facebook), and I added a new position in Eli Lilly. I may add Merck as well.

Bristol Myers

Bristol Myers has full-year 2021 guidance of $7.35-$7.45 per share. They also have a ~3% dividend. That puts the stock, even after having a nice move this week, at under 10x earnings.

There are not many stocks that you can say trade under 10x earnings right now. In fact, outside of the drug stocks, a few banks, and OTC listed names that are hard to own in any size, I don’t think there are any stocks that you can say trade under 10x earnings in this market.

And yes, Bristol Myers has some pipeline issues with drugs running off patent and they will need to replace those drugs. But still – 9x earnings.

And those pipeline issues are not imminent. From 2020 to 2025 Bank of America is estimating 4% top line growth. Even further out, with run-offs of Revlimid, Opdivo, and Eliquis, BMY still will only see a -2% annual decline in revenue – and that assumes the company does not do anything to stem it.

Eli Lilly

Eli Lilly is not as cheap as Bristol Myers (it trades at 23x this year’s earnings) but that is because Eli Lilly has a far better pipeline of drugs and therefore more potential for growth in the future.

Their drug tirzepatide (a diabetes & obesity candidate) exceeded expectations and performed better in head-to-head competition with Ozempic (from Novo Nordisk) in recently released data.

And Eli Lilly has an Alzheimer drug, Donanemab, that could be another blockbuster if approved.

Lilly just announced results for the Ph2 trial on Donanemab. Those results appeared to be very positively. But after Lilly released more details a month or so later, the market soured on it.

The reason is because Donanemab both worked and did not work.

It worked in the sense of doing what it was supposed to do – the drug removes amyloid plaque from the brain. Donanemab reduced amyloid plaque by 78% versus the placebo.

But, what it did not do is improve the disease as much as hoped. The drug showed a 3 point improvement on a cognitive measurement technique called the integrated Alzheimers Disease Rating Scale (iADRS). The hope had been that the improvement would be double that.

What that means is that Donanemab will not see accelerated approval. But Donanemab will still go to a Ph3 trial. So the drug is far from dead.

Meanwhile the stock took a big hit because when Lilly came out with the preliminary results in January, they focused on the plaque reduction. All the analysts upgraded the stock and the price of the stock jumped to $210. Then the complete results were released and the stock was sitting with all these bagholders that lost their conviction.

I just think that at $180, in this market, and with the Alzheimer drug very much alive and kicking, Lilly is another good bet.


The final good bet that I added a few weeks ago is Novavax, though it has already moved quite a bit. My thought there was that the problems with the AstraZeneca and J&J vaccines were going to become a bigger issue over time.

While I would happily take the AstraZeneca vaccine if I could, that is because here in Canada getting a vaccine remains elusive. Once the vaccine production begins to catch up with demand, I think the AZ and J&J vaccines are going to lose their market share to competition like Novavax.

Novavax has their Ph3 results coming up in the United States and Mexico. Now it is possible that those results could fall flat, but given that the Ph3 trial in the UK already showed strong efficacy, that seems unlikely.

Meanwhile we have started to get the first rumblings that the vaccine may be dosed every year – like a flu shot. If that is the case, companies like Novavax and Moderna are way too cheap. Novavax trades at 11x this years earnings and 7x next years earnings. Moderna trades at 7x this years earnings. Those numbers make sense if this is one-and-done, but they seem too low if we have to be inoculated for COVID every year.

A Sucker for Pain

And even with all my reticence with index shorts, I did add back some hedge for the IWM and NASDAQ when I added back the small cap names (and of course I have lost money on both ). I also added a small position in the VXX late this week, which has been hammered of late.

I fully expect to be balled over on these, but hopefully if I am it will be because some of these micro-cap stocks have finally perked up.

A Bet on Biotechs

I have an awful lot of cash. While I am trying to not be in a hurry to use it (for all the reasons that I have explained in the past few posts), it is hard to pass when I see a decent looking trade.

As I wrote back in December, I am more inclined to believe that we are seeing a new bull market in the Biotech group than I am for other sectors. A longer-term chart of the XBI, which consolidated for years heading into this break, certainly looks that way.

Well, if that’s what I think then at some point I have to put my money where my mouth is. Therefore, after selling out of many of my biotechs during my portfolio purge last month, I have decided to buy back one of those names back and add a couple of others.

The one I am buying back is Renalytix. I wrote about the stock previously here.

Renalytix is developing a platform that will help physicians diagnose chronic kidney disease (CKD) early on. The platform is called KidneyIntelX.

KidneyIntelX takes in a range of patient data, including validated blood-based biomarkers, inherited genetics and personalized patient data from the EHR system. It uses a repository of patient histories with CKD to compare to the patient data, and then, using an “AI” algorithm, it spits out an assessment of where the patient stands in terms of risk of having or developing CKD.

This is a brand-new platform, so the company does not have any revenue yet. What they have so far are partnerships that look pretty good to me.

Their first partnership was with Mount Sinai health system. Right now, they are in the process of rolling out their first test reports to physicians in the Mount Sinai network. Mount Sinai will use KidneyIntelX to manage their 65,000 patients with DKD (that is diabetic kidney disease). They have another 150,000 patients with CKD.

Next Renalytix announced a partnership with Davita in January. Davita is one of the largest providers of kidney care services (205,300 patients at 2,809 outpatient dialysis centers) in the U.S. They wwill rollout KidneyIntelX to three states to start with, in hopes of identifying CKD patients earlier on.

Finally Renalytix announced this month that they had secured a partnership with the University of Utah to implement KidneyIntelX system-wide at University of Utah Health, which would include 1,700 clinicians across six states.

Renalytix also said in their March Q2 news release that they expected more partnerships announced before their June YE.

There is an upcoming catalyst this week. Renalytix should hear back from the FDA on their final submission for breakthrough device designation. In February 2021, the FDA sent written notification to Renalytix stating that it expected the final review process would return to normal no later than April 15, 2021.

If Renalytix gets final approval, which I would assume they will, KidneyIntelX will be approved for Medicare coverage via a rule called Medicare Coverage of Innovative Technology (MCIT). This rule, which was just finalized by HHS in January, provides for “opt-in national Medicare coverage determination for medical devices and diagnostics approved or cleared out of the FDA Breakthrough Device designation program.”

Pricing for the test has already been finalized at $950 per. The number of people that have CKD in the United States is 37 million and the Medicare spend on CKD is $120 billion. Worldwide the number of people with CKD is 850 million (!!).

There is a big problem with catching CKD early on. 38% of patients with CKD initiate dialysis with little or no prior clinical specialist consultation, and up to 63% of patients with CKD initiate dialysis in an unplanned fashion with a central venous catheter and/or during emergency hospitalization.

When I look at the Stifel initiation report for Renalytix, they estimate revenue of $46 million in 2022 and $85 million in 2023. These numbers were primarily based on the Mount Sinai patient population (Renalytix did not have Davita or Utah Health partnerships at the time of the report) so they should be even higher now.

The stock is not cheap – the market cap is about $800 million at this level. But if Stifel is right about how many tests and how much revenue we’ll see, it could begin to look very reasonable on a P/S basis, particularly if those 2022 and 2023 numbers go up with Davita and Utah Health.

What’s more, I know this market is all about TAM and quite honestly this looks like a very big TAM to me. Unless I’m missing something (which is possible – maybe there is a hiccup with the FDA or the test volume Stifel is estimating is too optimistic) then the stock could go quite a bit higher I think.

The second biotech I have added is a new position. Lyra Therapeutics.

I have had Lyra on my radar since December. It is one of those stocks where my timing has sucked. I had resolved to buy it on February 10th – the day before the stock popped $3 on an analyst initiation report.

I waited and waited and now it is pretty much back to that level. So I bought it.

Lyra has developed a drug delivery system to the nasal cavity, called their XTreo platform. XTreo is a patch that is implanted by the ENT during a “brief, noninvasive procedure”.

The patch carries with it momestasone furoate (MF), which is the standard of care treatment for chronic rhinosinutitis (CRS). The MF dose is time-released to the cavity and will last 6 months.

The upside of XTreo is that it can deliver the drug directly to the site of the inflammation rather than through a nasal spray or injection. The six months of time-release means the patient does not have to be compliant with administering it multiple times a day. And maybe most importantly, the indication that Lyra is going after is very broad – CRS with and without nasal polyps – which means that they will cover a lot of patients if approved.

The last point is the most important one I think. There are a number of drugs out there that treat CRS, but none with quite the combination that Lyra’s drug and delivery, LYR-210, offers.

The closest comparison is IntersectENT’s Sinuva. It was approved in 2017. Like LYR-210 it is a patch and it time releases MF. But it was only approved for post-surgery patients with nasal polyps. That is a small population. In 2020, which admittedly was likely impacted by covid, Sinuva only did about $5 million in revenue.

Optinose’s Xhance did much better – $48 million in revenue in 2020 after $30 million in 2019. Xhance is a nasal spray, it has to be administered twice a day, it is $425 per dispenser and each dispenser only lasts 15-30 days.

Merck’s Nasonex, which is the original MF nasal spray, did $200 million last year. But the drug has been off-patent since 2014. Merck did a little under $1 billion in sales with Nasonex the year before generics came to market.

Bank of America estimated 1.8 million patients a year that would qualify as the pre-surgery addressable population. At $2,000 per procedure that would be $4 billion of TAM.

Lyra had Ph2 results released in December and they were viewed unfavorably by the market (you can see that the stock tanked early-December, when they were released). But the issues with the results seem to have had more to do with COVID then with the performance of LYR-210.

The company could not enroll as many patients as they wanted, and because they had a smaller enrollment pool they needed a bigger effect from the drug versus the placebo to get the P-value (estimate of clinical significance) that they needed.

As it turned out, LYR-201 still reached clinically significant results for 8, 12, 16, and 24 weeks of treatment (it is the 7,500 micro-gram dose you want to look at in the chart below). But they did not for 4 week data, which was the primary endpoint.

Here’s the thing – the Ph3 trial that they expect to start later this year is not going to use the 4 week endpoint. It is going to use a 24 week endpoint. This should be a far lower hurdle for them to leap over.

Lyra has a ~$150 million market capitalization and about $75 million of cash. While it is not a perfect stock – I mean the indication is crowded, Optinose is in a Ph3 of their own for CRS, and Lyra isn’t developing a new drug, just a new way of delivering it – it seems like a reasonable bet on decent results now that the stock has tailed back off.

So those are the two I wanted to talk about.

We’ll see. I might be wrong – maybe the run in biotechs is over and they are back to a bear market. But I just find that hard to believe given the liquidity in the market, the strength of the market, and the chart of biotechs having broken out from such a long base. Anyway, we will find out shortly if this is an extended downturn or just another test.

Half Right and/or Half Wrong

One of my favorite books on investing is the very first book Jim Cramer ever wrote, called Confessions of a Street Addict. He wrote the book quite a while ago, before he had a show on CNBC and had turned into kind of a meme of his own, back in 2002.

Cramer was a hedge fund manager and a pretty good one. The book is about those hedge fund years. It has a lot of insights on how he managed the market with his fund.

There are some nuggets in the book that I have taken to as my own rules. Three of those are what Cramer used to do when he began to fall behind. He used 3 maneuvers when his fund was not doing well and he could not break the slump:

  1. Circling the Wagons
  2. Maidens to the Volcano
  3. Going Flat

Circling the wagons is when you pare back to a few positions that you have the highest conviction in, selling everything else.

Maidens to the Volcano is a sacrifice – sell the positions you love the most to appease the trading gods.

Going flat is the nuclear option, selling everything, good and bad.

I do all these things when I start to get frustrated with how my stocks are doing. Usually in stages of grief.

I start by circling the wagons, selling positions I’m not certain of in the first place. This time round it was stuff like Renalytix, Arca Biopharma, Millendo Therapeutics – stocks that I think could go up, but have some reservations about.

With my portfolio still not going up enough on up days and going down too much on down days, I start chucking the maidens. My first maiden this time around was Rada Electronics. Love the stock. Sold it, about 50c from the bottom too. Sold Intellicheck, this time better timed as it kept coming down. Sold most of Eastside Distilling.

Still not working. Market rallies, my portfolio does nothing. Market falls, my portfolio falls. A couple of days of this is enough. F- it – I’m going flat. Sell everything other than a few mega-cap positions like Facebook and Amazon and Google that were the only things that are working. Dump everything else, long, short and otherwise.

I sit on that for a few days. I ruminate. At first, I feel a huge wave of relief. My portfolio is not going up, but it is also not going down. I’m out. I can take a step back. Not worry about reading the news. I write something about how I don’t get this market, stepping aside, blah, blah blah. But what I really need is some perspective and I only get that when I step away for a few days.

But then the next stage of the process starts. I begin to get that gnawing feeling. I have not been looking at the market, not paying much attention, but nevertheless I’m getting anxious – anxious about being out.

So I start drilling down into that anxiety. What am I anxious about? Which stock am I craving?

I’m doing the work now on those names that are gnawing at me. Going through the numbers again, reading my notes. It is easier to do the work because I have no skin in the game. Do I really want to own this? Is it really worthwhile? Oh yeah, I forgot about that, this is a good idea. How is the market not seeing this?

Through this process I begin to see what I really want to own and what I did not need to. The stocks that give me that gnawing feeling, and where I take that second look and think man, that is a good idea – those are the one’s I buy back. The stocks that don’t – those are the one’s I should not have been holding in the first place.

Call it a process. A cleanse. I seem to need to go through this every so often.

The stocks that really gnawed on me? Rada. Intellicheck. Eastside Distilling. Biomerica. To a lesser extent, Smith-Micro. I bought those all back, some with even more conviction than before.

It is a terribly inefficient process. I will have to pay taxes on all those sales I made. I had to buy Rada back well above where I sold it. Obviously I’m paying all these trading fees on flushing everything out and then buying it back.

But I don’t know how else to do it? I never get clear-headed until I’m out. I never know what I really want to own until I don’t own any of it.

So anyway, that’s my last couple of weeks. This market is too strong. I was very right to get out of the index hedges. I was right to get into the mega-caps.

In addition to Facebook, Google and Amazon, I also bought the pharma stocks I mentioned in an earlier post – Bristol Myers, Abbvie and Lilly. I added to my Facebook position. I bought back Sharpspring, I stock I owned last fall. I’m still short puts on the high-flyers, though I feel like I screwed that up by not going for the EV names like RIDE, AYRO, GOEV, NKLA, and XL. Those are the real losers here and I kinda missed that.

And I was wrong to get out of all the micro-caps. But it was a necessary wrong. I had to get out, only to see what I needed to get back into.