Author: Patrick McFadden, M2 Global
Covestor model: M2 Global
Don’t get burned by the weather! The weather in much of the US has been a month or two ahead of the calendar in terms of average temperatures. This may skew some of the economic data, including the seasonally adjusted non-farm payroll data produced by the Bureau of Labor Statistics.
The monthly increase in non-farm payrolls from January to February is shown as 227,000 jobs. This is only marginally better than the gain for the same period in 2011, of 220,000, and the economy weakened in the summer subsequently. Given that the warm weather is likely pulling some demand forward and that construction jobs likely have not slowed at the pace seasonality would typically indicate, adjustments for seasonality in the summer may create a double negative effect.
We continue to build our position in Mannkind’s (MNKD) stock, which is developing an inhaled insulin drug called Afrezza. We believe there is a likelihood of a run up into an expedited PDUFA data situation next year. There remains some continuing dilution risk going forward and the FDA and trials can never be fully discounted. However, at the current price of $2.18 per share we believe that there is limited down side to purchasing the stock and placing a tight stop loss just under the all-time low at $2.09.
The company is likely fully funded to complete their current Phase III trials by the end of the year, although we will need to confirm this with the first and second quarter 10Q reports when filed with the SEC. The upside potential is that the trial data, with initial participants completing trials in late summer, begins to roll in positive; thereby pushing the stock up as industry participants and Wall Street receive wind of the data due to ongoing partnership talks.
With the correct partner relationship and with FDA approval we believe that the low $20’s is a likely target for the stock, therefore purchasing with a tight stop at these levels seems a reasonable risk-reward dynamic. An important note on this company is that they hold at least $250 million in wholesale frozen insulin, the main cost of goods sold (COGS) for an approved product sale, and this is not recorded on the balance sheet as an asset.
Since the company has expensed these purchases, any future product sales will have very high gross profit margins. Management has been quoted saying they have enough insulin supply to cover more than $10 billion in future sales. But remember, they need FDA approval first!
Regarding the general market, we published a diversified portfolio in October that has performed, like the market, more than 20% to the upside. We do not believe the market will be up 100% from November 2011 until election day. At these levels we would look to take some profits or hedge positions. As an Alpha hedge, the S&P VIX Short Term Volatility Index (VXX), ProShares Ultra VIX Short Term Futures ETF (UVXY), ProShares UltraShort S&P 500 (SDS) and IQ Hedge Event-Driven Index (HDGE) are looking very interesting at these levels.
