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“Race to the Bottom”: Week of August 12, 2019

Bullseye Brief

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Bullseye Brief
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Portfolio

Portfolio Changes

Allakos Inc. (ALLK) – SELL – The stock exploded 200% last week, blowing through my target within days of buying it. Phase II data was excellent and shorts had to cover. I have sold two-thirds of the position and am scaling out of the balance.

Applied Therapeutics (APLT) – BUY – I am buying in the mid to low $8s, which is where the stock seems to have found its home post-IPO.

Aurinia Pharmaceuticals (AUPH) – BUY – New position in the current issue and I’m buying in the low $6s.

EOG Natural Resources (EOG) – ADD – Trades to a three-year low on the oil puke and I’m adding to my position.

Obseva (OBSV) – ADD – I’m adding to this leader in women’s health in the $8s. It’s conducting four promising drug trials, and interim updates during last week’s earrings call were positive. All eight analysts say BUY, and their targets range from $16 to $44. Ultimately, I think Obseva will get bought by a large pharmaceutical company.

Pioneer Natural Resources (PXD) – ADD – Trades to a three-year low on the oil puke and I’m adding to my position.

Picks Making News

Antero Resources (AM) – This stock is in my face… down 27% in three weeks… but I still think it’s a buy. The stock now trades at 6.9x earnings and yields 17%, which tells me the market is pricing in a major adverse event. This could mean a dividend cut, debt downgrade, or possibly a repricing of throughput contracts in the event of a Ch. 11 filing by parent Antero Resources… the exploration side of the company. All of these scenarios are highly speculative, and not particularly likely in my view… but wholesale liquidation by #2 shareholder Warburg Pincus suggests otherwise. We may get more clarity this week when hedge funds file 13Fs, but so far Warburg is the only top 20 holder to have reported significant selling. Again, I think it’s a buy.

Aurinia (AUPH) – Reiterates optimism in its current Phase III trial for lupus nephritis, with the two-fold goal of presenting final data in Q4 and submitting a new drug application with the FDA early next year. Separate Phase II trials for dry eye and kidney scarring are progressing as planned. Additionally, the company hires several key marketing personnel in anticipation of scaling towards commercialization.

Corindus Vascular (CVRS) – I chickened out and it cost me. I wanted to buy the stock under $2 (it was $2.20) and within three months of my write-up it gets bought by Siemens for $4.28. Lesson here: Don’t be cute and argue over pennies to make the P&L look better in the near-term. If it’s a strong long-term story, buy the stock.

Lumentum (LITE) – Pops 8% on strong earnings… revenues rise 34% YoY. Optical Communications are very strong across the board, whether for face scanning to unlock iPhones or for lasers to beam data along fiber optic cables.

Salesforce.com (CRM) – Closes its landmark acquisition of data-visualization enabler Tableau Software, then two days later announces a $1.4B deal to buy Israeli-based ClickSoftware to accelerate its cloud platform.

Sinclair Broadcasting Group (SBGI) – I’ll buy it $40ish… at the 200-day moving average. – This new pick trades to the bottom of my buy zone last week, as the market implodes and earnings disappoint… a function of higher costs associated with the pending FOX Sports acquisition and lower revenues related to the contract dispute with Dish Network. So this one is a little messy. I’ve done nothing yet, but I do want to own it because cash flow will triple once the transaction closes. Additionally, the company is building what I think will become the go-to platform for national sports betting.

Viacom (VIAB) – CNBC reports that CBS and Viacom have begun formal negotiations over valuation, in the much anticipated purchase of Viacom by CBS. Last week the two companies reportedly agreed on theoretical management reporting lines, so this is an important sign of progress. Last year’s scuttled transaction pegged Viacom at $33.50. Currently the stock is $31.

Weight Watchers (WW) – Finally a little love. Subscribers rise to 4.8M, a new 2Q high and the stock rises 40%. Three vocal bears reverse their ratings from SELL to BUY. Now we need some follow-through so I can start making money.

Zynerba (ZYNE) – Rises 12% on positive data in the Fragile X Syndrome trial, where 85% of participants showed statistically significant reductions in the autism-like symptoms which define this disease. These data were published in a well-respected scientific journal, and management presented at two conferences last week.

Trader Talk

Race to the Bottom

Three countries lowered interest rates last week in response to China’s decision to let the yuan fall below seven to the dollar (India, Thailand, and New Zealand). Lower interest rates generally coincide with weaker exchange rates… creating an export advantage for the country with the lowest FX… and since no one want to see competing Chinese products get even cheaper, they are outdoing one another with rate cuts. The downward spiral has become so acute that $15T of the world’s sovereign debt now trades at a negative yield. This is crazy… imagine loaning your money to the government and paying for the privilege. I don’t know how this ends, but it’s bad. I have cut exposure significantly, selling 13 names in the past six weeks. I am still long 36 stocks, but raising cash feels like the correct decision amid so much stress. Bottom line: We need a trade deal. The world as a whole needs to see that mom and dad… the US and China… can actually make up and can sit together again at the dinner table.

Disclosure: Bullseye Brief

The author holds open positions (as of 9/27/19): ZYNE,APTV,TDOC,NVDA,BAC,MPC,CRM,FB,DXJ,MKSI,INTC,NLTX,APLTMFTAI,LITE,F,QRVO,URI,GS,AMLP,OBSV,

ZION,KRE,NOK,PXD,UNH,BABA,FXI,SBGI,EOG,UBER,WW,VIAB,VRAY,AUPH,WB,AM,AVEO

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