Shesa's August - Sept Investment Blog

AUG-SEPT 2019 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update 

U.S and China trade tensions are at its pick. Both countries are adamant on their stand causing turmoil in the stock market across the globe. A 15% tariff on total $112 billions of Chinese goods went into effect from yesterday, September 1. There is no hope for a solution in the foreseeable future. If history is any evidence, August and September happens to be the worst months for investors, hence this year is no different. Furthermore, trade tensions between U.S and China has added more fuel to the fire! The second quarter earnings season is over, many investors/traders goes on vacation during August/September bringing the trading volume lower and making perfect opportunities for short sellers to play the market. Any bad news hits the wire helps them to destabilize the market. The news on inverted yield curve stimulated fear of recession and rocked the financial market to drop like a stone. Federal Reserve has already taken steps to un-invert the yield curve by slashing key interest rates at its most-recent Federal Open Market Committee (FOMC) meeting, but market still seems to be very nervous. For investors, it's very easy to get pulled in by all the information sources coming at once. So, what does an investor do? buy more? sell and sit on the sideline? keep watching for the storm to be over? I will analyze and share my thoughts but before that let’s take a look to the stock market indexes.

Indexes	12/24/18 (LOW)	Close (12/31/18)	Close FRI (8/30/19)	Change in 2019	% Change in 2019	All Time High	Diff %
DOW	21792.2	23,327.46	26,403.28	3,075.82	13.19	27,398.68	-3.63%
S&P 500	2351.1	2,506.85	2,926.46	419.61	16.74	3,027.98	-3.35%
NASDAQ	6192.92	6,635.28	7,962.88	1,327.60	20.01	8,339.64	-4.52%
BTK	3890.37	4,220.85	4,386.71	165.86	3.93	5425.4	-19.14%
NBI	2816.54	3,251.08	3,234.62	-16.46	-0.51	4165.86	-22.35%

Major Economy News

Fed cuts Interest Rate by 0.25%: On July 31, 2019, the Federal Reserve reduced its benchmark interest rate by a 0.25%. Though, U.S economy is still far from a recession, Jerome Powell, the current chair of the Federal Reserve, describes his decision to cut interest rates as a “mid-cycle adjustment to policy.” This has further increased stock market turbulence.

Q2 earnings at a glance: Almost 99% of the companies in the S&P 500 have reported earnings, 75% of S&P 500 companies have reported a positive EPS surprise and 56% of companies have reported a positive revenue surprise. This is really good!

Earnings Growth: For Q2 2019, the blended earnings decline for the S&P 500 is -0.4%. The second quarter marked the first time that the index has reported two straight quarters of year-over-year declines in earnings since Q1 and Q2 of 2016. Please note that the analysts were expecting -2.7% earnings.

Earnings Guidance: For Q3 2019, 79 S&P 500 companies have issued negative EPS guidance and 30 S&P 500 companies have issued positive EPS guidance.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.6. This P/E ratio is above the 5-year average (16.5) and above the 10-year average (14.8).

Retail Sales: U.S. consumers are still spending money. Retail sales climbed a seasonally adjusted 0.7% in July from a month earlier. That news stabilized markets to some extent.

Jobless Claim: The number of people who applied for unemployment benefits in late August rose slightly to 215,000, but good news is that layoffs remain remarkably low more than 10 years after the last recession which further strengthens the argument that we are away from recession.

Home prices in June rose 3.1% annually but it’s down from 3.3% annual gain in May. Home prices in the second quarter up 5% comparing to second quarter of 2018. Falling interest rate may help the home prices to bounce back to some extent.

Donald Trump called the CEOs of the biggest U.S. Banks: On Wednesday, 8/14, the stock market plunged due to concern over inverted yield curve. According to CNBC, president Donald Trump called the CEOs of the biggest U.S. banks (J.P. Morgan Chase, Bank of America’s and Citigroup and asked them to give him a read on the health of the U.S. consumers. The CEOs responded that the consumer is doing well, but that they could do even better if issues including the China-U.S. trade war were resolved.

Apple News - Apple Card: Apple released it Apple Master Card a few days ago. You get 3% discounts in Apple stores; 2% if you use it using Apple pay; 1% on everything else. This could potentially bring another revenue stream for Apple services. The best thing is, you can apply just clicking your Apple Wallet and get the approval of a card in 2-3 minutes. Seeing transactions/bills and payment is extremely easy.

Apple may unveil new iPhone on September 10 in Apple Park in Cupertino. The next iPhones are expected at the event, along with a new Apple Watch.

China unveiled Rate Reform: on 8/17, the People’s Bank of China (PBOC) said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies.

Chinese currency yuan hit an 11-years low last week. The yuan fell to levels not seen since 2008. Please note that devaluing the currency makes Chinese good cheaper and that’s what China seems to be playing due to trade war with U.S.

August and September are Stock Market hurricane time

It’s not only hurricane in Florida or East Coast but the real stock market hurricanes begin in August and peak in September. In recent years, we’ve seen greater volatility in pre-election-year Augusts. If the last three pre-election Augusts are any guide, some dramatic week-long market hurricanes struck during those months. For example, in 2007, was a minor break in a five-year bull market, but it was the first grey spot in the Great Recession of 2008. Remember the real estate bubble had already popped before 2007 but home prices started declining and went till late 2011. The maximum decline of the Dow in July-August 2011 reached 2,180 points  or -17%. The most notable characteristic of August 2011 was daily volatility. After that, the August 2015 correction included a sudden 1,089-point drop on a computer glitch, as bids disappeared from the board in a scary opening. On August 14, 2019; Dow dropped 800+ points and all indexes fell more than 2.5% due to the fear of inverted yield that could potentially cause inflation.

There is endless news, stories, scandals, emergencies, tragedies, and debates these days. A lot of money managers goes on vacations resulting in low volume trading that makes the life easy for short sellers and they take advantage of the situation. The high-frequency traders and algorithm-based traders makes investors life further complicated because they can amplify volatility with low liquidity. August is their time to profit from perfect storms. Any bad-news becomes a paradise for the short-sellers. This year U.S and China trade tensions have further made it “heavens paradise” for short traders to bank upon.

What is so talked (Inverted) Yield Curve?

There are so much of news and views about inverted yield curve what is it why is it so important? In summary “when short-term rates exceed long-term rates, they create an inverted yield curve, which is often taken as a signal that investors are more optimistic about short-term prospects versus the long term, suggesting a lack of confidence in continued economic growth, an inverted yield curve is often seen as an early warning sign of a coming recession. Let me now explain this in a lay man’s term for the understanding of my blog readers. Let’s say you invest in treasury or bond for 1 month and get an interest rate of 2.11%, invest for 3 years and get an interest of 1.67%, invest for 5 year and get the same or less. So, it would be foolishness to invest for long term, take more risk and get less interest! So, why should you invest for 5 years?  Banks have to pay more interest on short term deposits and get less for their long-term debt causing bank’s profitability to decline. As far as the curve is concerned, the yield curve is a plot of the yields on all Treasury maturities i.e. debt sold by the federal government.

In late August, the yield on 30-year was below 2% again at 1.906%, hitting a new record low.  That broke below its prior all-time low of 1.916% hit in early August 2019.  For the first time in 10 years, the S&P 500 dividend was yielding more than the 30-year bonds. Nineteen major countries in the world currently have negative yields somewhere on their bond-yield curve, and only one of them is outside the E.U., and that’s Japan. Some news says, “First yield-curve inversion since 2005, which preceded 2007-2009 recession. Please note that while every recession was preceded with a yield-curve inversion, not every yield-curve inversion has preceded a recession. One has to understand what recession means. A recession occurs when the economy declines significantly for at least six months. There is a drop in the five economic indicators: decline in GDP for consecutive two quarters or more, income goes down, employment goes down, manufacturing goes down, and retail sales declines. Sometimes, we may already be in recession but officially it could be known at later stage.

Turbulence in the Stock market, what’s the biggest RISK?

As said earlier, Federal Reserve did cut interest rate by 0.25% on July 31. But on 8/23; Fed Chairman Jerome Powell, signaled a coming 0.25% interest rate cut at the next FOMC meeting in September, which should have boosted the stock market, but on the same day at around 11am President Trump twitted about Fed Chairman Powell’s dovish speech, while declaring both Chairman Powell and China as “enemies” of the U.S. He also abruptly instructed U.S. businesses get away from China. This resulted into a stock market downward spiral. These conditions put a number of investing strategies to the test – specifically, as to their viability to produce positive results against an inverted yield curve, a strong dollar, spiking gold prices, algorithmic sell programs, geopolitical tensions, the rising prospect of a hard Brexit, a Fed that is behind the curve, Presidential temper tantrums, and most of all an expanding trade war with China.

Particularly talking about U.S – China trade tensions, there is no end at the sight. Investors are running out of patience as stock markets are driven by tweets from Donald Trump. It’s becoming impossible to predict the direction of the market. Now that Trump has told the U.S corporates to plan shifting their business from China, it may further complicate the life of corporate world. The rising uncertainty will force the corporates to hold their capital spending once as they find that consumer spending is coming down. Once consumers senses that their job(s) are risk it will put dent on their confidence and cutting their spending, it’s just a matter of time. If and when that happens, we will not be too far away from recession. Though, I do not expect any recession in the immediate future, but that possibility can’t be ruled out.

As I keep saying, Donald Trump’s strength going into 2020 election is the economy and stock market. So, he must DO something to bring the stock market on track. As concerns spread about slowing growth, although we are not in recession as yet but if history is any evidence then it may be very hard for him to win. Only two presidents since World War II — Harry Truman and Jimmy Carter have run for reelection in the same year of recession. Truman won but Carter lost. It’s too early to make any judgment call. In my view Federal reserve is NOT the risk at this time. I do expect another one or two interest rates cut in 2019. The market volatility may be good for the high-frequency traders and algorithm-based traders but it’s very frustrating for the general investors as they see their portfolio going up and down causing frustration, particularly for retail investors like us. But the biggest RISK for the market is tariff, not FED in my view. Federal reserve just can’t keep cutting rates, what happens when there is no further room to cut interest rate?? They must have some ammunitions left for the bad times e.g. recessions or unforeseen situations. Trump’s proposed tariff plan may not be a bad idea, but it looks like he is too adamant to negotiate. Negotiations is a two-way process (give and take) and China being the second largest economy just can’t bend down to U.S pressure. Probably U.S should define multiple milestones, one for tariff and another one for intellectual property, or IP theft which has been a major contentious issue in trade talks. Trying to resolve all the issues at once do not seem to be plausible. If he (Trump) does not find a way to have some sort of trade deal with China, then that could be a detrimental for his next election. The major backers for him were farmers and they are getting frustrated with the current phenomena.

My Investment Framework under such uncertainties

Decision making under such uncertain situation is very difficult because the situations changes very frequently causing further frustrations. It is painful to see good companies in our portfolio with great revenue and profit get hit hard. When I buy a stock, I do my due diligence, research and ask a question to myself, with all the information that I have, do I believe the company/sector that I want to invest? Do I plan to trade or invest for long term? Trading is a hard job because you have to be watchful every time, it is time consuming and risky too. So, I trade occasionally but focus more on investing for long term. I want to remain invested because timing the market is extremely difficult. You may predict certain variables but not all the variables. These days stock market is simply unpredictable! I do not want to sell and sit with all my money on the sideline. The problem is, you don’t want to sell and be out the day the market zooms. Because most of the gains happens on less than 10% of the time and we do not know which are those days. Don’t invest money you need in next few weeks or months. All I can say is that, markets have become a common place for folks looking for action today rather than investing for a goal or an accomplishment. Sometimes I stick to my convictions but not being adamant if I made a mistake. One has to asses his/her own financial position, time horizon (short/long term), risk taking capability and invest money in the stock market. I avoid trading, rather I prefer accumulating a given stock or sector during bad time as long as I believe that a specific company or sector has future potential. Sometimes I may be right and sometime wrong. We have to remember that, every day is not a sunny day, sometime there may be cloud and sometime there may be rain. There are ups and down in life, the same goes for investment. There may be some bad days or bad weeks in the market, but we have to digest those rather than getting too emotional or panicked.

For example, I wrote about Cannabis sector and it’s a rainy day for the whole sector. There is bloodbath but I still have the conviction that the sector will bounce back in next few weeks/months. However, if and when I realize that the company/sector is not worth taking risk then I will get out without too much of fuss and re-route the money to some other company/sector which has better potential. When I write something on my blog, I care more about the gain/loss of my blog readers rather than my own personal gain/loss. Because when others believe me, I must be overly careful. I have been experiencing the stock market for more than a couple of decades, so getting used to many downturn and volatility but not everybody can digest the same volatility. If we do not like a stock or sector, then it’s better to get out and invest somewhere else. There is always an opportunity to buy something in the market. But one important lesson that I learned in the whole process “patience is key in investing”. The bottom line is, how to utilize the available resources during the downturn is immensely important.

One big takeaway, don’t sell in the middle of a low-volume, high-volatility market panic! One should take profit not at the time when stock prices are significantly down, rather taking profit when time is good, trim a little bit and have some cash available for such situation(s). Taking some chips out of the table is always of paramount importance. It keeps our investment alive and well! If somebody tries to sell in panic when shares are already down for say, 20-30% then it may not be a right move because nobody knows when the market will bounce back. However, it’s better to clean some of the losers and invest with those companies who have solid fundamental or growth prospects. Those stocks are expected to bounce back hard and first as soon as there is a sign of recovery. Agreed that, there may be further declines in the stock market in future depending on many macro and micro economy factors, but U.S. stocks are still the best place to be in, visualizing the overall global economy. As we know, stock market gives the best return on investment comparing to all investment vehicles in the long run. If there are some bad stocks which is sitting on the portfolio without any long-term objectives, then those should be cut down immediately to raise some cash. Another strategy could be wait with patience for the dust to settle. But it’ difficult to find a right entry point and to know when the dust is going to settle..

A summary of the events on U.S – China Trade Deal

If I am not mistaken last year in June the president Trump declared that a tariff will be imposed on Chinese goods. Since then the stock market volatility has accelerated. I am briefing those major events for the benefits of my blog readers. These events have contributed to the stock market volatility one way or other.

Total US tariffs applied exclusively to Chinese goods as of date: US$550 billion.

Total Chinese tariffs applied exclusively to US goods as of date: US$185 billion.

Fast forward, here is the chronology of events for the benefit of my blog readers:

Day 1: July 6, 2018 – US implements first tariff on Chinese goods amounting to US$34 billion.

Day 5: July 10, 2018 – US releases second tariff list, 10% tariff of $200 billion of Chinese goods.

Day 28: August 2, 2018 – US tariffs revisions (US$200 billion): 10%-25% tariff on Chinese goods.

Day 29: August 3, 2018 – China announces second round of tariffs on US products

Day 48-49: Aug 22-23, 2018 – US-China dialogue started for the first time.

Day 49: August 23, 2018 – US and China implement second round of tariffs U.S: 25% tariff on Chinese good, China retaliates 25% tariff on U.S goods.

Day 64: September 7, 2018 – Trump threatens new tariffs.

Day 69: September 12, 2018 – US invites China to re-open negotiations.

Day 74: September 17, 2018 – US finalizes tariffs on US$200 billions of Chinese goods.

Day 75: September 18, 2018 – China announces retaliation for US tariffs.

Day 79: September 22, 2018 – China cancels trade talks with US.

Day 81: September 24, 2018 - US implements tariffs on US$200 billion worth of Chinese goods, China retaliates with tariffs on US$60 billion on Chinese goods.

Day 112: October 25, 2018 – US and China officials resume contact

Day 117: October 30, 2018 – US prepared to announce tariffs on remaining Chinese products.

Day 127: November 9, 2018 – US and China resume trade talks

Day 150: December 2, 2018 – US and China agree to temporary truce

Day 162: December 14, 2018 – China temporarily lowered tariffs on US autos

Day 186-188: January 7-9, 2019 – US and China engage in 3-day trade talks in Beijing.

Day 201: January 22, 2019 – US cancels preparatory talks with China.

Day 209-210: January 30-31, 2019 – US and China hold 2-day trade talks in Washington D.C.

Day 217: February 7, 2019 – Trump says he will not meet with Xi Jinping before trade deal deadline.

Day 221-225: February 11-15, 2019 – US and China hold trade talks in Beijing.

Day 231-234: February 21-24, 2019 – US and China hold trade talks in Washington.

Day 266-267: March 28-29, 2019 – US and China hold trade talks in Beijing after one-month break.

Day 269: March 31, 2019 – China extends the suspension of additional tariffs on US autos.

Day 272-274: April 3-5, 2019 – US and China hold trade talks in Washington.

Day 279: April 10, 2019 – US and China agree to establish trade deal enforcement offices

Day 299-300: April 30-May 1, 2019 – US and China hold trade talks in Beijing and decided to continue talk in Washington next week.

Day 305: May 5, 2019 – Trump threatens to raise tariffs on China

Day 310: May 10, 2019 – US increases tariff from 10% to 25% on $200 billions of Chinese products.

Day 313: May 13, 2019 - China announced to increase tariffs on $60 billion worth of US goods from June 1, 2019.

Day 316: May 16, 2019 – US places Huawei on its ‘entity list’, banning it from purchasing from US companies.

Day 331: June 1, 2019 – China increases tariffs on US$60 billion worth of products .

Day 348: June 18, 2019 – Xi and Trump rekindle trade talks ahead of G20 meeting

Day 356: June 26, 2019 – Tentative truce reached days before G20 Summit

Day 359: June 29, 2019 – Trade talks to restart, ban on Huawei relaxed

Day 369: July 9, 2019 – US exempts 110 Chinese products from 25% tariffs, issues licenses to American Huawei suppliers .

Day 376: July 16, 2019 – Trump threatens tariffs on US$325 billions of Chinese goods (despite promises not to).

Day 390-391: July 30-31, 2019 –  Shanghai trade talks end with little progress being made.

Day 392: August 1, 2019 –  Trump says US will impose 10% tariffs on another US$300 billions of Chinese goods starting September 1.

Day 397: August 6, 2019 – Chinese companies suspend new US agricultural product purchases.

Day 397: August 6, 2019 –  US declares China is a currency manipulator.

Day 404: August 13, 2019 – US and China agree to talk again in two weeks

Day 404: August 13, 2019 – US delays tariffs on certain products to December 15 and removes items from the list.

Day 414: August 23, 2019 – China announces US$75 billion in tariffs on US goods, Trump threatens tariff increases on Chinese goods.

The doldrums in Cannabis stock continues…is it a “short term pain but long-term gain?”

It has been a terrible few months that we’re in an ugly state of affairs for marijuana stocks. Many companies in the sector have lost more than 40-50 or 60% of their values in last few months. I sent a couple of WhatsApp message to the group, I have significantly reduced my position in CGC and added more to my positions on ACB and APHA. These equities have become so negative that not even stock market rallies have been able to save them from its multi-month slide. It will be survival of the best in long run. At this time, I think that ACB is best positioned to be the leader in the whole sector. I term it as a “short-term pain but long-term gain” for the patient investors buying at today’s depressed level. I take these opportunities to add more stock and leaps (long term call options).

Why do I think ACB will be a long-term winner? ACB has the dominance in international presence. As medical cannabis legalization takes hold in other parts of the world, ACB is well-positioned to take advantage. It’s important to note that perception dictates near-term price movements whereas fundamentals ultimately dictate long-term price movements and ACB has that. The company has been beating its peers over the past few quarters with huge volume growth, has a global distribution footprint and is one of the largest legal growers of cannabis in the world. ACB  should become  a sizable player in the soon-to-be multi-hundred-billion-dollar global cannabis market. The company is expected to declare Q2 results on September 10, we will see how it goes. But this is the only largest company who does not have a big deal with any major company outside the industry. But when it happens it may reap the benefits.

Until the negative perception turns around about cannabis sector, neither ACB nor other stock in the sector is going to rebound from this multi-month slide. Hence, anybody anticipating a quick turnaround does not look plausible to me. My anticipation is, we can start seeing some bounce in next few weeks/months as a series of new products, including edibles, beverages and extracts, that will be for sale legally in Canada starting mid-December. And of course, if and when U.S legalization happens that would be a game changer for the industry. Bottomline: I have been accumulating ACB.

Why Golds Price is rocketing higher?

Since May 2019 the gold price have moved from about $1300 to $1520.47 as I write this blog. The sudden move by China to devalue its currency (yuan) and add to that the European Central Bank, the Bank of Japan maintaining aggressive fiscal stimulus (printing money), and the Federal Reserve now beginning to lower short-term U.S. interest rates, current uncertainties of trade war – all these factors have ignited gold rally. If history is any evidence then when it comes to hedging financial calamity, gold represents the ultimate safe haven. In last few weeks, I have added little bit of position on Gold Miners Index (NUGT).

Major Stock Market Performances so far in 2019

Indexes	52 week (% age change)	YTD % Change
DOW	1.69%	13.19%
S&P 500	0.86%	16.74%
NASDAQ	-1.81%	20.01%
China Shanghai Index	5.91%	15.73%
India BSE Sensex	-3.40%	3.51%
Japan Nikki	-9.45%	3.45%
Hongkong Hang Seng	-7.76%	-0.47%
Germany DAX	-3.44%	13.07%

Source: Wall Street Journal

Sectorial Performances since Year-to-Date (U.S Stocks)

IT	28.32% (TOP)
Real Estate	23.68%
Consumer Staples	20.61%
Financials	12.97%
Consumer Discretionary	19.54%
Utilities	18.22%
Telcom	17.66%
Industrials	17.62%
Energy	11.12%
Health Care	4.72%

Source: CNN Business

 

Now let me discuss about my current month’s inclusion to my Blog Portfolio.

Guardant Health Inc. (GH) is a oncology company, based in Redwood City, California. The company provides blood tests, data sets, and analytics within the U.S and internationally. This is a company which is disrupting the way tumors are being diagnosed. Before I get into that let’s see what the company does.

What does Guardant do? Most of us understand the way a cancer can be detected is to have a biopsy, wherein a tissue sample is taken through a painful surgery and sent to the lab for test, wait for a couple of weeks to know/detect cancer. However, let’s imagine a world where cancer can be detected in the early stage with just a liquid biopsy. And in brief that’s what Guardant do. In other words, its technology allows the cancer to be diagnosed just with a simple blood draw rather than going through the old and painful way of cancer detection.   The company offers liquid biopsy tests for advanced stage cancer, such as Guardant360 test. This is a company that is in the forefront of liquid biopsies. I have written about some of the health care stocks before on my blog, but I am including this on my current’s month blog as I visualize it as a great long-term investment.

Why Guardant technology?

As I said earlier, a sample of blood draw can detect cancer resulting into numerous benefits.

(i) Low Cost: For example, a traditional lung cancer biopsy costs about $14,000, whereas Guardant can diagnose that same cancer for $3,500.

(ii) Risk is minimized because one does not need to go through surgery. Particularly taking a tissue from sensitive part of the body is risky and may cause many side effects.

(iii) Test results are pretty fast as tissue is not taken and kept in a lab for weeks, it’s merely a blood test.

(iv) It’s obviously less painful and hardly need any recovery time or restrictions comparing to surgery.

(v)  It’s covered by most of the health care plan.

Their technology can currently be used to detect dozens of cancers. At this time, they are just focused on late-stage cancers in the solid tumor. But in the foreseeable future, they hope to gradually advance their technology to diagnose cancers at early stage. When they get into this market, the market opportunity will be enormous. When that happens, we are talking about market over $30 billion just in the U.S, the global market potential could be potentially around $100 billion. In addition to Guardant Guardant360 it has other products, viz. Drugmakers use GuardantOmni to screen patients for clinical studies involving cancer drugs. It recently launched its Lunar DNA tests to detect early stage cancer and recurrence of cancer for researchers use only, at this time. But obviously the opportunity for these tests will go beyond just research use. If it becomes successful, then the market can be humongous.

Financials: For any investment the most important aspect is a company’s financial position. So, let’s take a glance. Guardant (GH) has already posted explosive growth in the last two quarters after its IPO. In the latest quarter (Q2), GH saw strong uptake in its Guardant360 test. The company said that it’s used by more than 100,000 patients now, prescribed by over 6,000 oncologists and drug-making partners used 5,285 tests during the quarter, up 112% year over year. Revenue for the quarter jumped 178% to $54 million beating handily Wallstreet estimation of $36 million (50% above street estimate). Their net loss came down to just $11 million. The gross margin to expanded from 49% to 69%. This is huge! Furthermore, the company raised their guidance for the year, earlier $145-$150 million, now they are forecasting $180-$190 million.

Current Stock Price: In October 2018, Guardant Health (GH), launched an initial public offering, creating a $1.59 billion market valuation. It went public on October 4, 2019 with an IPO price of $19. However, the stock opened at $27.75. Subsequently, the stock was hovering between $30-40 range till February but gained momentum after the release of their first quarter earnings. After the Q2 earnings the stock rocketed more than 20% and made a new 52 week high of $112.22. However, since then the stock price has also discounted about 22% and currently trading at $87.53. What was the reason behind this drop despite such a strong earnings? I can primarily attribute to a couple of reasons:

• The general doldrum in biotech sector due to continued drug pricing conversation among democrats and republicans.
• FDA delaying a couple of mergers like BMY-Celgene, Roche-Spark Therapeutics has impacted the sector as a whole.
• Sale of Guardant shares by its management team and board members. 

 

Now the big question: Is it a good time to invest in GH stock?

Absolutely, I believe that current drop in the share price has created a good buying opportunity. The shares are still not cheap looking to its current sales and market capitalization as it trades 53 times of current sales. However, that’s nothing new for a growing biotech company. As far as sales of shares by executives are concerned, let’s think for a moment, each individual works in a company to make some money, so what’s bad if they sell little bit of their holdings? I will be concerned if they continue to sell shares in large volume.

 

My Investment Strategy

I missed the IPO, but in general I avoid buying at IPO stock because of many reasons. I guess the only IPO that I bought was Master Card (MA), which has been phenomenal. Meanwhile, I have been accumulating GH for last several months and I continue to add shares in a small lot. As I have said before, I do not put all my money at once with any stock, particularly growth stock. Why is that? Because the stock prices keep fluctuating and nobody the bottom and top. Though, the stock charts may give you some indications, but many times biotech stocks are news driven. So, it becomes difficult to predict the stock price. Having said that, I see significant potential in Guardant Health (GH) and consider it as a long-term winner. For such stock, it’s better to have two strategy, one for trading and major portion of the portfolio should be kept as long-term investment.

 

Risks: Guardant Health (GH) is in healthcare industry and any negative governmental action could put dent in its business. It also depends on future growth of its current product line and particularly I will be keen to see how its Lunar DNA tests perform going forward. Currently, I do not see any major competitors, but any future competition may bring vulnerability for the stock. Furthermore, no stock is immune to the performance of overall stock market and that’s a risk which nobody can withstand. Bottomline is, one must be diligent in investing the amount one can afford to lose and not hesitate to take some profits when required. At present, I will not put more than 2-4% of my portfolio but in the long run I see this stock as a big winner.

A final thought: Sometime investment need patience and some time it needs quick action. As an investor we have to do our due diligence and identify what is needed in a given point of time within our investment framework. At this time, I believe that GH is best positioned to be a long-term winner for those investors who are willing to take risk. And I am willing to take that with Guardant Health. Whether I am right or wrong, only time will tell.

Shesa’s Blog Portfolio (As of Sept 01, 2019)

Equity	Suggest Price	Current Price	Suggest Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	208.49	1/25/13	304%	BUY
FB	47	185.67	11/13/13	295%	BUY
MA	77.18	281.37	12/12/13	265%	HOLD
AMZN	311.73	1776.29	4/12/14	470%	BUY
BABA	67.28	175.03	2/21/16	160%	BUY
EXEL	26.33	19.85	8/20/17	-25%	SOLD on 9/10 @18.91
BRK-B	206.96	203.41	3/18/18	-2%	HOLD – I may sell soon
EDIT	36.53	24.83	5/28/18	-32%	BUY
JKS	14.04	21.87	7/4/18	56%	SOLD on 9/30 @16.11
IQ	26.13	18.29	9/18/18	-30%	Accumulate
SHOP	134.81	385.39	11/25/18	186%	HOLD
NFLX	297.57	293.75	1/6/19	-1%	HOLD
AMRN	17.66	14.99	2/17/19	-15%	BUY - Added more
CGC	45.89	22.78	3/17/19	-50%	HOLD - Trimmed
ACB	9	5.5	4/18/19	-39%	BUY - Added more
SQ	64.66	61.84	5/26/19	-4%	BUY
NBEV	4.66	3.04	6/30/19	-35%	BUY - Accumulate
GH	87.53	87.53	9/1/19	0%	BUY - New Addition
ETF
IHF	139.1	171.39	8/16/15	23%	HOLD - Trimmed
XLY	77.76	119.58	8/16/15	54%	HOLD
MUTUAL FUND
FBIOX	11.46	19.35	3/1/13	69%	HOLD
PRHSX	47.25	75.49	2/2/14	60%	HOLD
PRMTX	59.45	117.53	12/20/14	98%	HOLD
MCDFX	12.37	15.38	12/9/15	24%	HOLD
FSRPX	9.05	16.07	1/15/16	78%	HOLD - Trimmed
FBSOX	37.32	73.46	3/20/16	97%	HOLD - Trimmed
FSMEX	43.66	55.93	9/24/17	28%	HOLD - Trimmed
FOCPX	11.72	12.22	10/21/18	4%	HOLD - Trimmed
Note: Dividends are not adjusted on the price.

Positions CLOSED since last Blog

NONE.

That’s all for today. Wish you great investing! Stay tuned for my next blog. Thanks for your time. If you want to get alert on my investment action, then please subscribe to shesagroup_invest@googlegroups.com or you can also join my WhatsApp group, if interested.

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do NOT provide any professional recommendation to buy/sell any stock, ETF, mutual fund, or any other security(s). As an investor, it’s your hard-earned money and you decide what is best for you. The above are merely my own opinions. Please contact a professional money manager to buy/sell any security. I do not charge any fees or commission by writing the blog except anything from Google AdSense. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow. Anybody buying or selling the equities mentioned here would do it on their own risk.

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