Shesa's JULY 2021 Investment Blog

 

JULY 2021 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update   

All the U.S stock indexes DOW, S&P500 and NASDAQ have hit all-time record high. We saw a minor pullback in the last few days, but possibly we may see some bounce soon. Why? Because second quarter earnings season has just kicked-off and Q2 is expected to be a phenomenal quarter as earnings and revenue growth are anticipated to be the highest since the great recession of 2008. The corporate America is projected to report humongous 61.9% profit growth and 19.4% revenue growth during the 2nd quarter. Many Banks and financial institutions reported solid results last week. As we know, revenue and earnings are the key parameters for stock market performance. Meanwhile, discussions are in progress for infrastructure and spending bill. According to Senate Majority Leader Chuck Schumer he has put Wednesday deadlines for the bipartisan $1.2 trillion infrastructure bill and the Democrat-only $3.5 trillion spending plan for other top priorities like climate, education, health care and immigration, which is expected to go through the budget reconciliation process. Though, Biden administration has big budget plan which could be inflationary, but it depends on how the budget is being paid. As aforesaid, Q2 earnings are expected to be spectacular, however starting Q3 we will see diminishing revenue and profit growths. So, one important question that comes to my mind is whether the stock market would continue to keep climbing or we can see some pullbacks? I will share my views but before that let’s take a quick look at the stock market indexes. 

Indexes	1/2/21	Close FRI 5/28/21	Change in 2021	% Change in 2021	All Time High	% From All Time High	From LOW (3/16/20)
DOW	30,606.48	34,687.85	4,081.37	13.33	35,091.56	-1.15%	18213.65
S&P 500	3,756.07	4,352.34	596.27	15.87	4,393.68	-0.94%	2191.26
NASDAQ	12,888.28	14,427.20	1,538.92	11.94	14,803.68	-2.54%	6631.42
BTK	5,739.02	5,658.75	-80.27	-1.40	6376.77	-11.26%	3985.72
NBI	4,759.14	5,019.14	260.00	5.46	5466.79	-8.19%	2947.85

 

 

S&P 500 Earnings

Earnings: For Q2 2021, 8% of the S&P 500 companies have reported actual results, 85% of companies reported positive earnings surprises and 90% of the companies reported positive revenue surprises. The earnings growth rate of 69.3%. If 69.3% remains the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2009 which was 109.1%.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 21.4 which is above the 5-year average (18.1) and above the 10-year average of 16.2.

 COVID Cases and Death on the Rise again

Based on CDC, about 56.6% of Americans ages 12 and older have received at least one dose of a Covid vaccine, and 49% are fully vaccinated. After declining for weeks, seven-day average daily Covid deaths have increased by 26% to 211 per day. New Covid cases increased by roughly 70% since last week, while hospitalizations increased by 36%. U.S. health officials says that Pfizer and Moderna vaccines are still highly effective against the delta variant. Probably, in future it may further need booster for people to protect against delta variant! In California, starting last night L.A county has mandated mask to be worn for all indoor activities despite their vaccination status.

Economy News

GDP: Q1 GDP growth was 6.4% quarter over quarter and annual growth of 0.4%  

According to Atlanta FED, GDP growth for second quarter is estimated to go up to 10.4%

U.S Coronavirus Cases: 33.3 million, Death: 594K 

COVID Vaccination: 161 million or 49% of the U.S population have been fully vaccinated and 185 million or 56.4% people have taken at least first dose

Retail Sales: Retail sales was up 0.6% in June

Unemployment rate: 5.9%  in June 2021 

US Total GDP/Economy: $20.93 trillion compared to 21.43T during last blog

Interest Rate: 0.25%

Inflation rate: 5.4% in June vs. 4.2% during last blog. This is highest since 2008. But it can be noted that lumber prices and gas prices have subsidized to lower in last few days/weeks. 

Consumer Confidence: 80.8 vs. 82.9 in the previous month

Business Confidence: 60.6 in June

Current Economy Scenario

Positives

• COVID Stimulus in 2021: $1.9T (Last year $6.5T)
• Infrastructure Bill:  U.S house approved $1.2 trillion planned
• American Jobs plan: Climate Change, elderly care, childcare $3.5 trillion planned
• Expected GDP growth in 2021: 6.7% projected by FED and 3.7% in 2022
• Economy expected to continue to bounce in Q2 : Stimulus effect, more Business Re-opening, higher Employment, Consumer Spending
• Best Earnings Growth expected since 2008: For Q3FY21 the S&P 500 earnings growth of 69.3%. revenue growth 19.7%
• Trillions of dollars still sitting on the sideline and in savings account
• FED has kept Interest Rates low,  and QE is still in place 

Negatives

• Inflation has picked up significantly, highest since 2008, CPI: June 5.4%
• A tightening Fed could be seen as an impediment for the stock market
• Still high Unemployment Rate at 5.9%
• Better Economy does not necessarily mean better Stock Market Return
• Corona Virus cases are rising again and so also deaths due to new COVID variants
• Market valuations have gone up significantly
• I see RISK in the stock market, particularly around AUG, SEPT timeframe

 

A quick glance at Revenue & Profit growth for 2021

Quarter	Earnings %	Revenue %
Q1 (reported)	52.5	10.9
Q2 (underway)	69.3	19.7
Q3 (projected)	23	12
Q4 (projected)	17.4	8.9
FY21 (projected)	34.8	12.1

If we observe the above table, current quarter (Q2) earnings and revenue growth seems to be exceptional, best since 2008. This is one of the most positive aspect of current economy. But the major risk for the stock market is rising inflation and diminishing earnings and revenue from Q3. Hence, I see some risks in next few months, particularly I will be careful in August andSeptember.

 

Wednesday is set as deadlines for Bipartisan Infrastructure Bill, Democrats’ Budget Deal

As mentioned in my opening market commentary, discussions are in progress between democrats and republicans for infrastructure and spending bill. According to Senate Majority Leader Chuck Schumer he has put this Wednesday as deadlines for the bipartisan infrastructure bill for $1.2T and Democrat-only spending plan for $3.5T for other top priorities like climate, education, health care and immigration, which is expected to go through the budget reconciliation process. Though, Biden administration has big budget plan which could be inflationary, but it depends on how it’s being paid. Democrats plan to pay it through increased tax for the wealthy making more than $400,000 per year. Also, they say that corporations need to pay their fair share of taxes which makes sense to me. Otherwise, it’s the individuals who suffers and many corporations make billions without paying any taxes. According to the Institute on Taxation and Economic Policy (ITEP), at least 55 publicly traded firms paid ZERO or negative (-8.6%) federal income taxes in 2020, despite reporting nearly $40.5 billion in combined pre-tax profits!! According to ITEP, some largest corporations who did not pay any tax during 2020 were FedEx, Nike, Salesforce, Dish Network, Verisign, Xilinx, Michaels, FirstEnergy, HP, Nucor etc. In my view each company should have minimum tax requirements like individuals. Billionaires keep making more and more despite the stock market situation, but the low and middle class always suffer. So, the increased tax proposal by Biden administration seems logical to me to minimize the disparities, at least fractionally.

 

Climate change is not only a phenomenon in the USA but all across the globe. It’s encouraging that countries are understanding the need and not saying it as hoax as it was told by our ex-president. In the U.S, now we see that East Coast is flooded with water whereas West Coast is dealing with fire in Oregon and some part of California. Many other states are struggling with unprecedented hot causing electric pools to melt. In Europe, there have been torrential rainfall in west part of Germany and Belgium where almost 200 people have lost their lives. According to European officials, climate change contributed to this week's extreme flooding, which has left entire towns submerged with water. So, climate change is NOT a hoax, it’s the reality and global warming must be contend. This will not only help the whole world, but it could also contribute to abundant economic benefits and create millions of jobs. In my view Biden administration is taking an extremely important step towards the right direction.

 

Will inflation force Fed to raise Interest rate and impact Stock Market?

Inflation is on the rise and currently stands at 5.4%. It has been highest since 2008. But the question is whether it’s going to impact the stock market? When inflation goes up, the price for various commodities goes up, hence FED needs to raise interest rates in order to contend inflation. As a matter of fact, it’s not good for the small businesses because their cost of borrowing goes up, making it expensive for doing businesses.  As far as consumers are concerned, inflation makes prices go up making them expensive. Having said that, I do not think Fed is going to raise interest rates so quickly. Why not? Here are my thoughts:

• Economy is still in a rebounding state
• Many businesses are still reopening
• Unemployment rate is still high at 5.9%, some of the jobs lost may never come back
• Inflation is transitory:  The Federal Reserve says that inflation is transitory. I do agree, because I think these commodities prices are too hot and bound to come back in next few weeks or months. In fact, already lumber prices have dropped significantly, Oil and Crude prices have stabilized, and I do not think this will be sustainable after September once summer gets over. Because travelling will come down. The current rise of prices mostly could be attributed to stimulus check sent to individuals. 
• If Fed raises rates too soon then it would put economic recovery into jeopardy. Also, the stock market could take a sudden downturn causing a bear market

So, what would Fed do?

In my view, Fed will slowly and gradually reduce the $120B asset buying program or so-called quantitative easing (QE). In my view, if inflation still keeps going up then they may reduce QE program by $10 or $20 billion per month. They may start reducing the QE during each FOMC meeting and observe the impact to the economy and stock market. If there is still inflation or stock market goes into bubble then obviously they will start increasing interest rate in a gradual manner. They are not going to pull the trigger instantly, if they do it too fast, it could be catastrophic for the stock market and overall economy, forcing them to lower interest rate again, which is not a welcome sign. 

 

So, in my view, interest rates are not going to get high enough to kill the stock market rally. But obviously that would be an impediment for the stock market. Having said that, stock markets tend to do well in a moderate inflation environment. Because companies have pricing power to raise prices, which improves their profit margins and profits, will ultimately lift their stock prices. But I certainly do not anticipate stock market to keep booming, volatility will remain, and we will see some pullbacks, particularly in August – September timeframe. So, it’s sensible to generate some cash to be deployed when such pullbacks or correction happens.

 

IRS started sending Checks to Millions of Parents

Starting Thursday, 7/15, the Biden administration started sending checks to millions of families as part of  the biggest anti-poverty program undertaken by the federal government in more than half a century. The Treasury Department said it has sent checks to households representing about 60 million children under a provision in a stimulus package Democrats passed in March this year. The benefit expected to cost about $120 billion per year, provides $300 per child younger than 6, as well as $250 per child age 6 and older. The administration said that about 88% of all children in U.S would receive this money.

 

How to determine when to Buy, Sell or Accumulate an Equity?

• Understanding the objectives: One must understand what’s the objective behind buying a particular equity? Am I buying for Trading, Investment or Day Trading? Personally, I hardly buy any stock for day trading as I am very apprehensive. 
• Trading or Investing: If I am buying for trading and my objective is not met then I would SELL it immediately. One has to be very vigilant on the stock being bought for trading.
• Investing: Most of the time I buy an equity in a phased manner. If the stock comes down, I take the opportunity to keep accumulating in small quantities and do dollar cost average. When I buy to it as an investment I would not bother if pay little bit more/less to buy an equity. Because I invest for the long term. If I am investing then also some trading strategy is embedded to get better Return on Investment (ROI).
• Timing: It’s extremely difficult to time the market/stock. But for some stock, it’s immensely important to buy at the right time otherwise we could miss significant opportunity. Nobody knows the top or bottom of a stock. Timing is very crucial, but we can’t always time the market. Sometime the technical can help us determining a good entry/exit point, particularly if we are trading.
• Best Time to Buy a stock: The best time to buy a stock is when there is “blood on the street”, meaning when everybody is scared and running away that could be best times to add/accumulate. But it needs a lot of courage and patience. However, we must understand that we are not “catching a falling knife”. We need to know whether it’s an opportunity or a falling knife? Well, to know that we have to understand whether there is any fundamental change in the stock, its business or any other economic scenario? If there is no change, I will keep accumulating, if there is any change I will reevaluate my strategy.
• How long to keep accumulating? As long as stock reaches %age of the portfolio that we are comfortable of holding unless there is any change with company’s business fundamentals.
• Watch your Stock: Keep watching whether there is any bad news, or anything changed fundamentally that you are uncomfortable. If so, trim or get out depending on the news. 
• Understand stock manipulations: Many times, the institutional investors manipulate and scare retail investors to buy it cheap. Remember, short sellers can create panic and win the battle in the short-term, but war can be won by the investors who does appropriate research, have patience and a vision for the long term.
• Take Profit: Always take some chips out of the table when a stock goes up certain level. This helps us generating some cash and deploy the profit into other stock which may have potential. The same cash can also be deployed, the stock which was sold comes down. Taking profit does not necessarily mean that we will never buy that stock. No one has unlimited money. Stock can be trimmed further or added more depending on the market situation, momentum of the stock and potential of the company. Taking profit also helps us emotionally as we feel more confident rather than repenting that “Oh my God, stock was up so much I did not sell and again it has come down and lost my profit…”.
• Controlling the Emotions: This is the most important parameter of investment, which is difficult to implement. Buying a stock is very easy but selling is the most tedious job. Most of the investors do not know when to sell. It’s not because they are fool, but because of the emotion attached to a stock. When it goes up we think, it’s going up and it would go further up, so why should I sell? Agreed, stock may be going up, but we never know when it can take a dive – that’s greed. When a stock comes down, we always think it will recover so why should I sell at loss. But when it come down further, many investors get out at a wrong time  – that’s fear. While buying a stock, similar approach to be followed. We should not buy a stock when it’s on hype or sell when there is still lot of potential to grow. Many times, people sell their winners too early due to fear or buy at a very wrong time causing huge losses..

Confidence vs. Overconfidence in Investment Decision making

This month let me discuss another aspect of investing. It may not be the emotion but sometimes we feel too confident due to certain aspect of a stock or stock market. We do all our due diligence while buying an equity (Stock, ETF, MF etc.). Having confidence in making an investment decision after the due diligence is enormously important. We must believe and back our decision. However, if we commit a mistake, then we must admit and take appropriate action to rectify the investment decision. Of course, it’s not only applicable for investment but for any other day to day life as well. But I will content in this blog with investment decision making.

 

Sometimes we become overconfident in our judgments and knowledge of a stock or the stock market causing huge losses. Being overconfident makes us blindsided on certain aspect. For example, many people thought that, as long as Fed is standing tall nothing will happen to the stock market. To many extents that’s true, the large caps like Apple, Amazon, Facebook, Microsoft are pulling the indexes up but look at many of the high-flying cloud stocks, renewable energy stocks, biotech stocks, majority of those have been decimated and lost 30,40, 50, 60% of their values. To put this into perspective, here are some facts: 

• 65% of Americans think they’re smarter than others
• 50% of Business owners view their businesses as more than 90% ethical than their competitors
• 93% of American drivers think they’re above average
• 7 out of 10 workers are confident that they are saving for retirement and know how much they will need to live comfortably, but only 44% did the actual calculation
• Most investors think the stock they bought is going to go up because they are intelligent than other investors.
• Most people working in a company think their stock is best and they know everything about their company, but let’s not forget that our life’s income is tied to that company viz. Salary, bonus, increments, 401K, RSU, Stock options etc. When something goes wrong, it could be catastrophic. Hence, it’s better not get overconfident and diversify our portfolio.
• Titanic, which was considered to be an “unsinkable”, sank in the sea 

But why I am writing all these? If overconfidence can sink a ship, it can certainly affect our investing life in many ways, which can take some time to experience the consequences. Bottomline, we should be confident in our investment decision but it’s wise not to be overconfident that can ruin our investments. Always, we keep learning new lessons irrespective of how experienced investors we may be. Once we lean, me must keep it in mind and avoid making the same mistakes in future. 

 

Sectorial Stock Market Performances

Please click below link to view sectorial performances

https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_performance.jhtml?tab=siperformance

Source: Fidelity.com

 

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

 

Agenus Inc. (AGEN)

Agenus Inc is a clinical-stage immuno-oncology company, discovers and develops immuno-oncology products in the United States and internationally, located in Lexington, MA, USA. It’s a small biotech company having market capitalization of only $1.25B but enriched with long pipeline of drugs related to immuno-oncology (Cancer related). Those who attended my last investment meet, I talked about this company. Now I thought it to be appropriate moment to include it in my blog. 

 

In the last few years, immuno-oncology revolution has generated significant evidence showing the power of the immune system to treat cancer. Agenus is not a start-up rather it’s a 27 year old company which has been innovating using its deep knowledge of biology of the immune system to create therapies to optimally target cancer. A few years ago, only a few cancers were deemed immunologically responsive. However, in the last 5 years or so there have been major change in this direction. AGEN is seeing some of its drug like AGEN1181 showing great responses to antibody with enhanced tumor fighting abilities, including cancers that have never responded to immunotherapy, as well as cancer patients with “cold” tumors which don’t generally trigger a strong immune response. So how did they get here? By sticking to our principles that the immune system can cure cancer and the company seems to be in right track. 

 

Why do I like AGEN?

Pipelines: This company has a large number of drugs in the pipeline and some of those have started paying off or have the potential to pay off in the foreseeable future.

Cancer Related (Immune modulating Antibodies): SIX of its drugs are in Phase-2 trial and about 9 drugs are in Phase-1 trial. 

Vaccines: 3 cancer related vaccines are under development, vaccine for Glioblastoma is already in phase 2.

 

Significant Value Generator: The drugs indicated below have huge potential to generate great value for the company and the shareholders in the next 1-5 years. Particularly AGEN1181 has the potential to be a blockbuster drug. We will see the results in next few months on how it goes. 

• AGEN1181

• AGENT-797 (iNKTs)

• AGEN2373

• QS-21 Stimulon

The company currently has 6 drugs in phase-2 clinical trial and 9 clinical programs in Phase-1. All pipelines’ details can be found here: https://agenusbio.com/pipeline/

 

Collaborations: The company also works for new collaboration and has partnership to develop drug with Bristol Myers Squibb, Gilead, Incyte, Merck, GSK, Greater China and AgenTus.

 

BMY Collaborations: On May 18, AGEN came with an agreement with Bristol Myers Squibb. Under the agreement, BMY will become solely responsible for the development and any subsequent commercialization of AGEN1777 and its related products worldwide. Agenus will receive a $200 million upfront payment and up to $1.36 billion in development, regulatory and commercial milestones in addition to tiered double-digit royalties on net product sales. Agenus will retain options to conduct clinical studies under the development plan, to conduct combination studies with certain other Agenus pipeline drugs. This is big deal for such a small biotech company. It not only generates additional revenue but also open the door for more collaborations and brings the notice of institutional investor and money managers. After this deal, the stock has bumped up and has found a strong base between $5.40 – $5.70. Hence, I feel this is right time to take some positions or keep accumulating for long term. 

 

Other Parameters:  AGEN is not a zero-revenue company. It generated $84 million in revenue in last one year and has $119 million in cash. It does not include $200 million royalty from BMY. Institutional investors hold 53% of shares. Though the company do not have an FDA approved cancer drug as yet, we may see some in the next year or so. 

 

My View: AGEN was trading at around $3.25 before the BMY collaboration on May 18. However, since then, the stock has gone up significantly and currently trading at $5.39, up about 40%. The stock had a 52-week high of $5.95, only 9% discount to its high. So, undoubtedly, it’s no cheaper as it was before. Having said that, if its drug pipeline is any indication then we should start seeing some results in not-so-distant future.  I have bought this stock at various price level starting around $2.x till date and still keep accumulating. Because I believe that this company has a tremendous future potential. I mentioned the same during my investment meet. As I have said, time and again, if I see potential in a company then I keep accumulating on any pullback opportunity that I find rather than being too concerned. I take such moment as opportunity rather than getting emotional. 

 

Risks:

Any investment in the stock market is a risk. It depends on the stock market performance and the performance of individual company. Particularly, small biotech stocks are prone to manipulation by institutional investors, money managers and traders. Any failure of the clinical trial or not getting FDA approval immensely risky. Fortunately, AGEN has a long list of pipelines. But one should invest only that much  in biotech, what one is willing to lose. Risk averse investors have to be very careful.

 

My final thoughts: Undoubtedly, AGEN being a small biotech company, risk is pretty high. As said, small biotech companies are very volatile and prone to manipulation. However, failure of one/two drugs should not be catastrophic for the company as it has big pipeline of drugs. I feel that next couple of years are expected to be extremely promising for AGEN. I do not know what could happen in short term but as I have said before, I keep a long-term vision for the promising companies. Hence, I am willing to take calculated risk and put 1-2 or 3% of my portfolio as a long-term investment. I will revisit if and when situation demands.

Shesa’s Blog Portfolio (Updated AUG 26, 2021)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View  (see disclaimer)
STOCK (All prices are in USD)
AAPL	12.9	146.39	1/25/13	1035%	HOLD
FB	47	341.16	11/13/13	626%	Buy on Dip
MA	77.18	387.12	12/12/13	402%	HOLD
AMZN	311.73	3573.63	4/12/14	1046%	HOLD
BABA	67.28	212.1	2/21/16	215%	SOLD (may add later)
EDIT	36.53	42.39	5/28/18	16%	HOLD
SHOP	134.81	1442.63	11/25/18	970%	HOLD
NFLX	297.57	530.31	1/6/19	78%	HOLD
CGC	20.16	19.58	12/10/19	-3%	HOLD
GH	87.53	117.58	9/1/19	34%	HOLD
NIO	4.27	42.8	1/29/20	902%	HOLD
CCL	12	20.92	3/22/20	74%	HOLD (Trimmed)
BYND	76.91	125.95	4/19/20	64%	Accumulate
SPG	54.59	124.5	5/25/20	128%	HOLD
ENPH	45.3	163.45	6/28/20	261%	BUY - long term
TGTX	19.58	37.02	8/2/20	89%	HOLD
BBBY	12.03	27.16	9/13/20	126%	HOLD (Trimmed)
MU	51.61	84.14	10/18/20	63%	HOLD
JKS	62.71	57.89	11/21/20	-8%	Accumulate
SRNE	14.39	7.93	2/14/21	-45%	Good Long term BUY
GBTC	52.96	26.2	3/21/21	-51%	SOLD
PLUG	27.98	26.01	4/25/21	-7%	Good Long term BUY
GRWG	44.41	38.08	5/31/21	-14%	BUY
AGEN	5.39	5.39	7/18/21	0%	NEW ADDITION
ETF
IHF	139.1	267.25	8/16/15	92%	HOLD
QCLN	70.23	61.89	1/3/21	-12%	Accumulate
MUTUAL FUND
FBIOX	11.46	21.97	3/1/13	92%	HOLD
PRMTX	59.45	201.13	12/20/14	238%	HOLD
FSRPX	9.05	24.58	1/15/16	172%	HOLD
FBSOX	37.32	101.19	3/20/16	171%	HOLD
FSMEX	43.66	79.92	9/24/17	83%	HOLD
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. 

 

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 on what I do. 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 put on my blog portfolio and avoid including any security that I do not own or follow. Anybody buying or selling the equities mentioned here is their own risk.

 

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