Why Abbvie (NSDQ: ABBV) and Smart Sand (NSDQ: SND) Jumped and Why We’re Tossing Despegar.com (NSDQ: DESP)
The market continues to behave sloppily and is one of the worst I can remember in some time. Despite the domestic economy entering the year on solid footing (with some of the highest growth rates in recent history), major speed bumps are emerging from external sources, smashing into high valuations. Nervous investors are selling in the face of any uncertainty.
Tariffs, first and foremost, are a big problem for just about every global public company. Despite wishes that all production could occur using U.S. citizens, companies have been adjusting their supply chains to a global focus for a decade. Changes cannot be made overnight to accommodate 20-25% increases in the cost of goods.
Tech equipment companies are suffering from a pause in demand due to excess chip inventory and a shift to new product introductions. Although I expect this to be a temporary glitch, these stocks are leaders in the Nasdaq and will continue to drag down this index until demand perks up.
Data and advertising companies like Facebook (NYSE: FB) and Alphabet (NSDQ: GOOG) are suffering from slowing demand. Part of this is due to the law of big numbers and user growth following the natural curve of growth. Part is due to increased scrutiny over privacy practices. The strangle on growth caused by this new restriction is not likely to dissipate soon.
How I rue the day that I waited to reinstate a bearish trade on Facebook and Omnicom (NYSE: OMC), stocks where we held puts in late spring. Although it feels risky buying puts in a strong market, buying them while the market is cratering is even more frightening to me. I continue to look for less risky bearish trade ideas and am confident I’ll be delivering some soon.
In the meantime, the brief bounce from the mid-term resolution sputtered out quickly. I continue my work to find trade ideas less likely to be whipped around by an emotional market. I am constantly “reading the tea leaves”, looking for groups that behave better than the market for new bullish ideas and those acting badly for bearish ones.
Around the Portfolio:
AbbVie (NSDQ: ABBV) delivered a much needed 8% jump last week on news of new product development. The company and Momenta (NSDQ:MNTA) announced patent license agreements over proposed biosimilar adalimumab product.
AbbVie will grant Momenta a non-exclusive license on specified dates to AbbVie’s intellectual property relating to HUMIRA in the United States and in various other countries around the world in which AbbVie has intellectual property.
Momenta’s U.S. license will begin on November 20, 2023. This agreement slows the introduction of competing versions of Abbvie’s most significant drug, Humira, in the U.S. Competing products will continue to join the European market.
ANI Pharma (NSDQ: ANIP) lifted a bit on a solid earnings report and good news about future product launches. It will launch a generic form of Concerta in Q1 19. Concerta is a $1.3 billion branded drug with very high price points. According to management, this will be the biggest product launch in the company’s history.
Production of commercial levels of its corticotropin gel continues on schedule with the company on track for submission to the FDA in the first quarter of 2020. This schedule is in line with prior guidance. It should be reassuring to investors that the company has remained on track building volume of this hard-to- manufacture drug.
Merrill Lynch added BJ’s Wholesale (NYSE: BJ) to its Endeavor List, a list of its highest conviction stocks.
Despegar.com (NSDQ: DESP) missed already reduced earnings and revenue estimates. Revenue fell 8.7% to $121.25 million, roughly $2 million less than estimates. Although management highlighted that the company is performing better than peers, it will likely be some time before the Latin America market regains its health. This stock is too expensive to wait for the rebound, so I am selling it at a loss.
Smart Sand (NSDQ: SND) enjoyed a brief rally last week. The company reported revenue and earnings better than expected by analysts. Management continues to be bullish on 2019 demand for its Northern White fine grade fracking sand.
The company has spent a considerable amount ($112 million year-to-date) to build up rail transportation and silo storage for its product. This spending eats up all of the increased cash flow generated, which has more than tripled since last year.
I expect the stock to tread water until the price of oil lifts. Almost 60% of the company’s sand capacity is sold at fixed contracts, giving it a relatively reliable flow of profits to cover this build-out phase. Any thaw in the buildout of pipeline capacity in the Permian basin would help to lift oil prices. Oil produced in this region is stuck due to full pipeline capacity and must be moved to refining areas on the coast via rail or truck.
While the bulk of Smart Sand’s production resides in areas outside of the Permian Basin, its revenue is tied to the price of oil which is unfortunately pressured by the Permian’s logistical problems.