Posts tagged ‘stock’
A Sleepy Stock that Can Wake Up Your Portfolio
In over 35 years of investing, I have rarely encountered a company in such a unique – and frustrating – position as Harmony Biosciences (“Harmony” – HRMY). As a shareholder through my firm, Sidoxia Capital Management, I approach this analysis with a dual lens: as an investor seeing immense value, and as a fiduciary who expects corporate leadership to act in the best interest of its owners.
While Harmony’s executive team has executed brilliantly on its clinical mission, they are currently failing their fiduciary duty regarding capital allocation. Here is why Harmony is a “Diamond in the Rough” that needs a wake-up call.
Harmony Biosciences Overview – A Rare Disease Powerhouse
Harmony is a neuroscience-focused company targeting rare and underserved conditions such as narcolepsy, Prader-Willi Syndrome, and certain rare epilepsies—areas where treatment options are limited or nonexistent.
Today, the vast majority of revenue is driven by narcolepsy, a neurological disorder that disrupts sleep-wake cycles and leads to excessive daytime sleepiness and sudden sleep attacks. While approximately 135,000–200,000 Americans are diagnosed, the true number is likely higher due to underdiagnosis and misdiagnosis.
Harmony’s flagship drug, WAKIX (pitolisant), is on track to surpass $1 billion in annual revenue in 2026, achieving blockbuster status. Importantly, WAKIX is the only FDA-approved narcolepsy treatment that is not a controlled substance as defined by the U.S. Drug Enforcement Administration (DEA), providing a meaningful competitive advantage over alternative therapies.
Significant Growth Beyond WAKIX
Harmony’s long-term opportunity extends well beyond narcolepsy. The company is leveraging the pharmaceutical compound behind its franchise drug WAKIX (pitolisant) to expand and diversify its revenue base into additional CNS (Central Nervous System) indications, with five ongoing Phase 3 registrational programs (see below):
- Pitolisant HD (High Dose) – Idiopathic Hypersomnia (IH) – potential $1.5 billion – $2.0 billion market with possible FDA submission for approval in 2027.
- Pitolisant HD (High Dose) – Narcolepsy – potential to accelerate the growth of $1 billion WAKIX franchise (2026 estimate) by offering enhanced efficacy for fatigue. FDA submission for approval of Pitolisant HD could come in 2027.
- Pitolisant – Prader-Willi Syndrome (PWS) – There are an estimated 15,000–20,000 people in the U.S. with PWS. Over half of these targeted patients suffer from EDS, which is effectively treated with Pitolisant. PWS has a potential of reaching $300 million – $500 million in revenue and receiving FDA submission for approval during the 2nd half of 2026.
- EPX-100 (Clemizole HCl) – Dravet Syndrome (epilepsy with onset at infancy) – expands Harmony into a potential $800 million global market by 2030 with possible FDA submission for approval in the 1st half of 2027.
- EPX-100 (Clemizole HCl) – Lennox-Gastaut Syndrome (LGS) (epilepsy with multiple seizure types) – opens the company to a potential $1 billion market globally.
Collectively, this pipeline has the potential to generate billions in incremental revenue.
A Diamond in the Rough
There are many ways to value a stock, but one common approach is to compare a company’s price-to-earnings ratio (P/E) to that of the S&P 500. Generally, stocks trading below the market’s average P/E are considered cheap, while those above it are viewed as more expensive.
Harmony shares currently trade at approximately 8x trailing twelve-month earnings and 7x its 2026 earnings forecast. By comparison, this represents roughly a -70% discount to the average S&P 500 stock. Based on these metrics, Harmony appears dramatically undervalued—assuming the company’s fundamentals remain intact.
Of course, valuation must be considered alongside growth and execution. On that front, management continues to emphasize strong underlying performance.
And the results support that claim. In less than three years, CEO Dr. Jeffrey Dayno has grown revenue by approximately 74%, from roughly $500 million in April 2023 to over $860 million today, with expectations to exceed $1 billion in annual sales by the end of the year.
But wait, there’s more. The balance sheet tells a similarly compelling story. Over that same period, Harmony’s net cash position (gross cash minus debt) has increased from approximately $201 million to $719 million, even after completing two acquisitions totaling about $69 million (Zynerba and Epygenix). During this time, quarterly revenue growth has averaged roughly +23%, while cash has more than tripled, despite the acquisitions.
What’s more, Harmony’s cash profitability is equally impressive. In 2025, Harmony generated a 40% free cash flow margin, meaning $0.40 of every $1 of revenue converted into free cash flow. That level of efficiency would rank among the top two percent of companies in the S&P 500, placing Harmony alongside some of the most profitable behemoths in the market, including NVIDIA Corp.
Which brings us to the key question: If the stock is this inexpensive and the fundamentals are this strong, why isn’t the company aggressively repurchasing its own shares hand-over-fist? To date, management has not provided a clear or credible answer to this question.
What is the Downside to Harmony?
All this fundamental strength and financial momentum sounds like great news for shareholders—but where’s the risk and bad news? Regrettably, despite strong execution under CEO Dr. Jeffrey Dayno over the past three years, the stock is down approximately -14% (from ~$32 to ~$28 per share).
If everything is going so well, why have investors been so spooked recently? The primary concern centers on potential generic competition for WAKIX, the company’s key drug. To Harmony’s credit, it has already settled litigation with six of seven generic challengers, but one holdout—AET Pharma—has taken the case to trial. Some Wall Street analysts and investors believe the judge may rule in favor of AET, which contributed to a sharp decline in the stock last month.
If Harmony loses, WAKIX’s patent protection—currently expected to extend through 2030—could be materially weakened, potentially allowing generic competition to enter the market as early as late 2026 or early 2027, depending on the timing of the ruling and subsequent developments.
Fear not, says management. They remain confident in their defense strategy. As CEO Dr. Dayno stated, “Pitolisant GR will extend the WAKIX franchise and our leadership in narcolepsy as a line extension of WAKIX with its broad clinical utility. We are on track for NDA submission in Q2 this year with a target PDUFA date in Q1 2027.”
Management believes this next-generation formulation, Pitolisant GR, could significantly mitigate—or even eliminate—the impact of generic competition. Unlike WAKIX, which faces potential patent challenges, Pitolisant GR is expected to have patent protection through 2044.
If the timeline holds, the company expects a substantial portion of WAKIX patients to transition to GR, reducing the impact of any generic entrants. Additionally, even in a worst-case scenario where AET prevails, the financial risk associated with launching an “at-risk” generic—particularly if Harmony were to win on appeal—could be significant enough to deter entry and easily push AET towards a settlement with Harmony.
Am I Missing Something?
When a stock trades at such an egregiously low valuation, I inevitably ask myself, “Am I missing something?” If management is sitting on its hands doing nothing, perhaps Harmony’s fundamental outlook is worse than they are leading investors to believe. If management is unwilling to deploy even a portion of its inefficient, over-bloated cash hoard toward share repurchases – especially with the stock arguably at its cheapest level in history – why should investors commit their hard-earned capital to what could be a sinking ship?
Is it possible that management lacks confidence in the Pitolisant GR NDA data, or that the Q2 NDA timeline could slip? If so, and if AET prevails in court, Harmony’s entire $1 billion franchise revenue base could be at risk.
Management has dismissed these concerns and continues to insist that everything is on track. If that’s truly the case, then – with a clear line of sight into the company’s prospects – Harmony should be aggressively buying back its stock if the outlook is as strong and rosy as they claim.
Actions Speak Louder than Words
According to management, Harmony’s fundamentals remain robust. Not only does Harmony have five late-stage, phase three indications in the pipeline, it also claims to have a near bullet-proof generic competition protection strategy. Yet, with the stock down around -33% from its 52-week high, it is difficult to justify why management is not forcefully repurchasing shares at prices that are currently highly accretive to EPS.
I have raised this issue with senior management multiple times, but unfortunately my concerns have fallen on deaf ears. I’m hardly alone – other investors have voiced similar frustrations but inaction remains the default stance of management. The company’s response to this elephant in the room remains perplexing.
On the most recent fourth quarter conference call with investors, CFO Sandip Kapadia stated, “Business development is a high priority, and our intention is to deploy capital to expand our pipeline and commercial portfolio.” CEO Dr. Jeffrey Dayno echoed this sentiment, emphasizing a “commitment to generate even greater value through the pursuit of smart business development opportunities.”
It’s great that Harmony “intends” to deploy capital and “pursue” opportunities, but the fact remains, Harmony effectively has not devoted a penny over the last two years to capital deployment, and the company has spent next-to-nothing on capital deployment since the company’s IPO (Initial Public Offering) in August 2020.
Meanwhile, the company’s massive net cash balance – currently $719 million – is rapidly expanding by more than $100 million+ per quarter and is on track to swell to $1 billion this year. By the end of 2026, cash could represent as much as two-thirds of Harmony’s total market value, particularly if the share price remains depressed or declines further.
Walking and Chewing Gum
Can Harmony walk and chew gum at the same time? In other words, can the company allocate a portion of its gigantic cash balance toward a monumentally accretive share repurchase program while simultaneously pursuing business development (M&A – Mergers & Acquisitions) opportunities? The short answer is yes.
In fact, Harmony did exactly that in 2023 and 2024 – deploying nearly half of its cash toward share buybacks while ALSO completing two acquisitions that contributed to its expanding pipeline of promising new indications.
Management argues it’s currently evaluating a broad list of acquisition targets. However, one could reasonably contend that Harmony will be hard-pressed to find opportunities more attractive than its own stock. The bar is exceptionally high: identifying highly profitable companies with similarly robust pipelines, that are also trading at a steep discount and offering comparable growth characteristics.
By comparison, Harmony’s own shares appear to trade at roughly a -70% discount to the market, with approximately 50% of its market capitalization in cash, while delivering ~20% top-line growth, and securing a deep pipeline of five Phase 3 programs. Under these conditions, it seems like Harmony buying back their own stock is a no-brainer.
Where Is the Board and Why Are They Not Acting?
This is a question I’m asking, and I hope the board will answer the capital allocation question more thoughtfully. Ideally, the response will come in the form of a material share repurchase (i.e., action).
For those curious, I have identified the distinguished group of Harmony board members, and I intend to pursue an explanation relating to the board’s inaction. Here are Harmony’s current board members:
- Jeffrey S. Aronin (Executive Chairman) – Founder and CEO of Paragon Biosciences.
- Jeffrey M. Dayno, MD (President, CEO & Director) – Former CMO of Harmony; Board-certified neurologist.
- Peter Anastasiou (Independent Director) – CEO of Capsida Biotherapeutics; former Lundbeck executive.
- Antonio Gracias (Independent Director) – Founder/CEO of Valor Equity Partners and Director at Tesla.
- Mark Graf (Independent Director) – Former CFO of Discover Financial Services.
- Ron Philip (Independent Director) – CEO of Orbital Therapeutics and former CEO of Spark Therapeutics.
- Juan Sabater (Independent Director) – Partner at Valor Equity Partners and former Goldman Sachs MD.
- Gary Sender (Independent Director) – Former CFO of Nabriva Therapeutics and Shire PLC.
- Linda Szyper (Independent Director) – Former COO of McCann Health; pharmaceutical sales veteran.
- Andreas Wicki, PhD (Independent Director) – CEO of HBM Healthcare Investments.
I’m not sure whether the board is asleep at the switch, but it has a clear fiduciary duty to allocate capital efficiently and maximize shareholder value. Allowing the balance sheet to become excessively bloated while taking no meaningful action falls short of that responsibility. The company needs to act.
As Harmony’s share price remains stagnant and under pressure, management and the board continue to irresponsibly let cash accumulate. Net cash now represents approximately 45% of the company’s market capitalization. If Harmony were in the S&P 500, this would place it among the top 1% of companies by cash as a percentage of market value – all while trading at roughly a -70% discount to the broader market.
We remain long-term shareholders, but there are only two plausible explanations. Either management is correct, and this represents a generational buying opportunity—or the company knows something investors do not, which may explain the lack of action and the continued buildup of cash.
Bottom line: assuming a successful defense against generic competition and a conservative rollout of the pipeline—including Pitolisant GR and Pitolisant HD—$7 in EPS by 2030 at a 22x multiple implies a $154 price target, or roughly +450% upside from today’s ~$28 share price.
Harmony may be a sleepy stock today, but it has all the ingredients to wake up your portfolio. While management and the board have been slow to act and have yet to fully meet their fiduciary responsibility on capital allocation, I remain optimistic that they will ultimately do the right thing. By deploying capital more effectively – most notably through a meaningful share repurchase at today’s historically attractive valuation – Harmony has the opportunity to awaken significant shareholder value and live up to its full potential.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in HRMY, NVDA, TSLA, GS, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in DFS, HBMN, HLUYY, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Consumer Confidence Flies as Stock Market Hits New Highs
As the economy starts reopening from a global pandemic that is improving, consumers and businesses are beginning to see a light at the end of the tunnel. The surge in the recently reported Consumer Confidence figures to a new one-year high (see chart below) is evidence the recovery is well on its way. A stock market reaching new record highs is further evidence of the reopening recovery. More specifically, the Dow Jones Industrial Average catapulted 2,094 points higher (+6.2%) for the month to 32,981 and the S&P 500 index soared +4.2%. A rise in interest rate yields on the 10-Year Treasury Note to 1.7% from 1.4% last month placed pressure on technology growth stocks, which led to a more modest gain of +0.4% in the tech-heavy NASDAQ index during March.
Comeback from COVID
With a combination of 150 million vaccine doses administered and 30 million cumulative COVID cases, the U.S. population has creeped closer toward herd immunity protection against the virus and pushed down hospitalizations dramatically (see chart below).
Also contributing to investor optimism have been the rising values of investments and real estate assets thanks to an improving economy and COVID case count. As you can see from the chart below, the net worth of American households has more than doubled from the 2008-2009 financial crisis to approximately $130 trillion dollars, which in turn has allowed consumers to responsibly control and manage their personal debt. Unfortunately, the U.S. government hasn’t been as successful in keeping debt levels in check.
Spending and Paying for Infrastructure Growth
Besides focusing on positive COVID trends, investors have also centered their attention on the passage of a $1.9 trillion stimulus bill last month and a new proposed $2.3 trillion infrastructure bill that President Biden unveiled details on yesterday. At the heart of the multi-trillion dollar spending are the following components (see also graphic below):
- $621 billion modernize transportation infrastructure
- $400 billion to assist the aging and disabled
- $300 billion to boost the manufacturing industry
- $213 billion to build and retrofit affordable housing
- $100 billion to expand broadband access
With over $28 trillion in government debt, how will all this spending be funded? According to The Fiscal Times, there are four main tax categories to help in the funding:
Corporate Taxes: Raising the corporate tax rate to 28% from 21% is expected to raise $730 billion over 10 years
Foreign Corporate Subsidiary Tax: A new global minimum tax on foreign subsidiaries of American corporations is estimated to raise $550 billion
Capital Gains Tax on Wealthy: Increasing income tax rates on capital gains for wealthy individuals is forecasted to raise $370 billion
Income Tax on Wealthy: Lifting the top individual tax rate back to 39.6% for households earning more than $400,000 per year is seen to bring in $110 billion
Besides the economy being supported by government spending, growth and appreciation in the housing market are contributing to GDP growth. The recently released housing data shows housing prices accelerating significantly above the peak levels last seen before the last financial crisis (see chart below).
Although the economy appears to be on solid footing and stock prices have marched higher to new record levels, there are still plenty of potential factors that could derail the current bull market advance. For starters, increased debt and deficit spending could lead to rising inflation and higher interest rates, which could potentially choke off economic growth. Bad things can always happen when large financial institutions take on too much leverage (i.e., debt) and speculate too much (see also Long-Term Capital Management: When Genius Failed). The lesson from the latest, crazy blow-up (Archegos Capital Management) reminds us of how individual financial companies can cause billions in losses and cause ripple-through effects to the whole financial system. And if that’s not enough to worry about, you have rampant speculation in SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (e.g., GameStop Corp. – GME), cryptocurrencies, and NFTs (Non-Fungible Tokens).
Successful investing requires a mixture of art and science – not everything is clear and you can always find reasons to be concerned. At Sidoxia Capital Management, we continue to find attractive opportunities as we strive to navigate through areas of excess speculation. At the end of the day, we remain disciplined in following our fundamental strategy and process that integrates the four key legs of our financial stool: corporate profits, interest rates, valuations, and sentiment (see also Don’t Be a Fool, Follow the Stool). As long as the balance of these factors still signal strength, we will remain confident in our outlook just like consumers and investors are currently.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Investors Ponder Stimulus Size as Rates Rise
Stock prices rose again last month in part based on passage optimism of a government stimulus package (currently proposed at $1.9 trillion). But the rise happened before stock prices took a breather during the last couple of weeks, especially in hot growth sectors like the technology-heavy QQQ exchange traded fund, which fell modestly by -0.1% in February. As some blistering areas cooled off, investors decided to shift more dollars into the value segment of the stock market (e.g., the Russell 1000 Value index soared +6% last month). Over the same period, the S&P 500 and Dow Jones Industrial Average indexes climbed +2.6% and +3.2%, respectively.
What was the trigger for the late-month sell-off? Many so-called pundits point to a short-term rise in interest rates. While investor anxiety heightened significantly at the end of the month, the S&P 500 dropped a mere -3.5% from all-time record highs after a slingshot jump of +73.9% from the March 2020 lows.
Do Rising Interest Rates = Stock Price Declines?
Conventional wisdom dictates that as interest rates rise, stock prices must fall because higher rates are expected to pump the breaks on economic activity and higher yielding fixed income investments will serve as better alternatives to investing in stocks. Untrue. There are periods of time when stock prices move higher even though interest rates also move higher
Take 2013 for example – the yield on the benchmark 10-Year Treasury Note climbed from +1.8% to 3.0%, while the S&P 500 index catapulted +29.6% higher (see charts below).
Similarly to now, during 1994 we were still in a multi-decade, down-trending interest rate environment. However, from the beginning of 1994 to the middle of 1995 the Federal Reserve hiked the Federal Funds interest rate target from 3% to 6% (and the 10-Year Treasury yield temporarily climbed from about 6% to 8%), yet stock prices still managed to ascend +17% over that 18-month period. The point being, although rising interest rates are generally bad for asset price appreciation, there are periods of time when stock prices can move higher in synchronization with interest rates.
What’s the Fuss about Stimulus?
One of the factors keeping the stock market afloat near record highs is the prospect of the federal government passing a COVID stimulus package to keep the economic recovery continuing. Even though there is a new administration in the White House, Democrats hold a very narrow majority of seats in Congress, leaving a razor thin margin to pass legislation. This means President Biden needs to keep moderate Democrats like Joe Manchin in check, and/or recruit some Republicans to jump on board to pass his $1.9 trillion COVID stimulus plan. If the bill is passed as proposed, “The relief plan would enhance and extend jobless benefits, provide $350 billion to state and local governments, send $1,400 to many Americans and fund vaccine distribution, among other measures,” according to the Wall Street Journal.
Valuable Vaccines
Fresh off the press, we just received additional good news on the COVID vaccine front. The U.S. Food and Drug Administration (FDA) approved the third vaccine for COVID-19 by Johnson & Johnson (JNJ). This J&J treatment is also the first single-dose vaccine to be distributed, unlike the other two vaccines manufactured by Pfizer Inc. (PFE) and Moderna Inc. (MRNA), which both require two shots. Johnson & Johnson expects to ship four million doses immediately and 20 million doses by the end of March.
So far, over 50 million doses of the COVID vaccines have been administered, and the White House believes they can go from currently about 1.5 million injections per day to approximately 4 million people per day by the end of March. The combination of the vaccines, mitigation behavior, and a slow march towards herd immunity have resulted in encouraging COVID trends, as you can see from the chart below. However, the bad news is new COVID cases, hospitalizations, and deaths still remain above peak levels experienced last spring and summer.
Revived Recovery
Thanks to the improving COVID trends, a continued economic recovery driven by reopenings, along with fiscal and monetary stimulus, business profits and revenues have effectively recovered all of the 2020 pandemic losses within a year (see chart below).
But with elevated stock prices have come elevated speculation, which we have seen bubble up in various forms. With the rising tide of new investors flooding onto new trading platforms like Robinhood, millions of individuals are placing speculative bets in areas like Bitcoin; new SPACs (Special Purpose Acquisition Companies); overpriced, money-losing cloud software companies; and social media recommended stocks found on Reddit’s WallStreetBets like GameStop (GME), which was up +150% alone last week. At Sidoxia Capital Management, we don’t spend a lot of time chasing the latest fad or stock market darling. Nevertheless, as long-term investors, we continue to find attractively valued investment opportunities that align with our clients’ objectives and constraints.
Overall, the outlook for the end of this pandemic looks promising as multiple COVID vaccines get administered, and the economic recovery gains steam with the help of reopenings and stimulus. If rising interest rates and potential inflation accelerate, these factors could slow the pace of the recovery and limit future stock market returns. However, if you follow a systematic, disciplined, long-term investment plan, like we implement at Sidoxia, you will be in a great position to prosper financially over the long-run.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in MRNA, PFE, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, JNJ, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
GDP Figures & Election Jitters
Ever since the beginning of 2020, it’s been a tale of two cities. As renowned author Charles Dickens famously stated, “It was the best of times and worst of times.” The year started with unemployment at a “best of times” low level of 3.5% (see chart below) before coronavirus shutdown the economy during March when we transitioned to the “worst of times.”
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With the recent release of record-high Gross Domestic Product (GDP) figures of +33.1% growth in Q3 (vs. -31.4% in Q2), and a +49% stock market rebound from the COVID-19 lows of March, a debate has been raging. Is the re-opening economic rebound that has occurred a V-shaped recovery that will continue expanding, or is the recovery that has occurred since March a temporary dead-cat bounce?
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For many people, the ultimate answer depends on the outcome of the impending presidential election. Making matters worse are the polarized politics that are being warped, distorted, and amplified by social media (see Social Dilemma). Although the election jitters have many stock market participants on pins and needles, history reminds us that politics have little to do with the long-term direction of the stock market and financial markets. As the chart below shows, over the last century, stock prices have consistently gone up through both Democratic (BLUE) and Republican (RED) administrations.
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Even if you have trouble digesting the chart above, I repeatedly remind investors that political influence and control are always temporary and constantly changing. There are various scenarios predicted for the outcome of the current 2020 elections, including a potential “Blue Wave” sweep of the Executive Branch (the president) and the Legislative Branch (the House of Representatives and Senate). Regardless of whether there is a Blue Wave, Red Wave, or gridlocked Congress, it’s worth noting that the previous two waves were fleeting. Unified control of government by President Obama (2008-2010) and President Trump (2016-2018) only lasted two years before the Democrats and Republicans each lost 100% control of Congress (the House of Representatives flipped to Republican in 2010 and Democrat in 2018).
Even though Halloween is behind us, many people are still spooked by the potential outcome of the elections (or lack thereof), depending on how narrow or wide the results turn out. Despite the +49% appreciation in stock prices, stock investors still experienced the heebie-jeebies last month. The S&P 500 index declined -2.8% for the month, while the Dow Jones Industrial Average and Nasdaq Composite index fell -4.6% and -2.3%, respectively. It is most likely true that a close election could delay an official concession, but with centuries of elections under our belt, I’m confident we’ll eventually obtain a peaceful continuation or transition of leadership.
Regardless of whomever wins the presidential election, roughly half the voters are going to be unhappy with the results. For example, even when President Ronald Reagan won in a landslide victory in 1980 (Reagan won 489 electoral votes vs. 49 for incumbent challenger President Jimmy Carter), Reagan only won 50.8% of the popular vote. In other words, even in a landslide victory, roughly 49% of voters were unhappy with the outcome. No matter the end result of the approaching 2020 election, suffice it to say, about half of the voting population will be displeased.
Despite the likely discontent, the upcoming winner will be working with (or inheriting) an economy firmly in recovery mode, whether you are referencing, jobs, automobile sales, home sales, travel, transportation traffic, consumer spending, or other statistics. The Weekly Economic Index from the New York Federal Reserve epitomizes the strength of the V-shaped recovery underway (see chart below).
It will come as no surprise to me if we continue to experience some volatility in financial markets shortly before and after the elections. However, history shows us that these election jitters will eventually fade, and the tale of two cities will become a tale of one city focused on the fundamentals of the current economic recovery.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 2, 2020). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Filet or Mac & Cheese? Investing for Retirement
The financial crisis of 2008-2009 placed a large swath of investors into paralysis based on a fear the United States and the rest of the world was on the verge of irreversible destruction. Regardless of what the newspaper headlines are reading and television pundits are spouting, individuals have to shrewdly plan for retirement no matter what the economy is doing. So then the question becomes, do you want to be eating macaroni & cheese in retirement, or does filet mignon or alternate five-star cuisine sound more appealing? I vote for the latter.
Despite what the government statistics are saying about the current state of benign inflation, you do not need to be a genius to see medical costs are exploding, energy charges have skyrocketed, and even more innocuous items such as movie ticket prices continue to rise. If that’s not a burden enough, depending on your age, there’s a legitimate concern the Social Security and Medicare safety nets may not be there for you in retirement. It is more important than ever to take control of your financial future by investing your money in a more efficient manner (see Fusion), focusing on long-term, low-cost, tax-efficient strategies. Whatever the direction of the financial markets (up, down, or sideways), if you don’t wisely invest your money, you will run the risk of working as a Wal-Mart (WMT) greeter into your 80s and relegated to eating mac & cheese (for lunch and dinner).
Broaden Your Horizons
The last decade has been tough for domestic equities. It’s true that not a lot of compounding of returns has occurred in the domestic equity markets over the last decade (see Lost Decade), but that weakness is not necessarily representative of the next decade’s performance or the past relative strength seen in areas like emerging markets, materials and certain fixed income markets. These alternatives, including cash, would have added significant diversification benefits to investor portfolios during previous years. Rather than focusing on what’s best for the investor, so much financial industry attention has been placed on high cost, high fee, high commission domestic stock funds or insurance-based products. Due to many inherent conflicts of interest, many individual investors have lost sight of other more attractive opportunities, like exchange traded funds, international strategies, and fixed-income investment vehicles.
Rule of 72
Depending on your risk profile, objectives and constraints, the “Rule of 72” implies your retirement portfolio should double from a $100,000 investment now to roughly $200,000 in seven years (to $400,000 in 14 years, $800,000 in 21 years, etc.), assuming your portfolio can earn a 10% annual return. Unfortunately, this snowballing effect of money growth does not work if you are paying out significant chunks of your returns to aggressive brokers and salespeople in the forms of high commissions, fees, and taxes (see a Penny Saved is Billions Earned). For example, if you are paying out total annual expenses of 2-3% to a broker, advisor, or investment manager, the doubling effect of the Rule of 72 will be stretched out to 9-10 years (rather than the above mentioned seven years). If you do not know what you are paying in fees and expenses (like the majority of people), then do yourself a favor and educate yourself about the fee structures and tax strategies utilized in your investments (see also Investor Confusion). If you haven’t started investing, or you are shoveling out a lot of money in fees, expenses, and taxes, then you should reconsider your current investment stretegy. Otherwise, you may just want to begin stockpiling a lot of macaroni & cheese in your retirement pantry.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and shares in WMT, but at the time of publishing SCM had no direct positions in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC “Contact” page for more information.
Equity Life Cycle: The Moneyball Approach
Building a portfolio of stocks is a little like assembling a baseball team. However, unlike a team of real baseball players, constructing a portfolio of stocks can mix low-priced single-A farm players with blue chip Hall of Fame players from the Majors. Billy Beane, the General Manager for the Oakland Athletics, was chronicled in Michael Lewis’ book, Moneyball. Beane creates an amazing proprietary system of building teams more cost-efficiently than his deep-pocketed counterparts by statistically identifying undervalued players with higher on-base and slugging percentages. According to Beane, traditional baseball scouts were overpaying for less relevant factors, such as speed (stolen bases) and hitting (batting percentage).
In the stock world, before you can scout your team, you must first determine where in the life cycle the company lies. If Beane were to name this quality, perhaps he would call it Time-to-Maturity (TTM). Some companies operate in small, mature bitterly competitive industries (e.g. shoe laces), while others may operate in large growing markets (e.g. Google [GOOG] in online advertising and algorithmic search). Some companies because of negative regulation or heightened competition have a very short life cycle from early growth to maturity. Other companies with competitive advantages and untapped growth markets can have very long life spans before reaching maturity (think of a younger Coca Cola [KO] or Starbucks [SBUX]). Like Beane talks about in his book, many young, promising, immature baseball players flame out with short TTMs, nonetheless many scouts overpay for the cache´ such players offer.
Unfortunately, many investors do not even contemplate the TTM of their stock. Buying juvenile stocks (i.e., private companies like Twitter & Facebook – see article) or elderly stocks in and of itself is not a bad thing, but before you price a security it’s advantageous to know what type of discount or premium is deserved. Obviously, I’m looking for undervalued stocks across all age spectrums, however finding an undervalued, undiscovered late-teen just beginning on its long runway of growth combines the best of all worlds. Finding what Peter Lynch calls the “multi-baggers” is easier said than done, like searching for a needle in a haystack, but the rewards can be handsome.
What creates long runways of growth – the equivalent of winning dynasties in baseball? Well, there are several contributors leading to longer TTMs, including economies of scale, large industries, barriers to entry, competitive advantages, growing industries, superior and experienced management teams, to name a few factors. But like anything, even the great growth companies, including Microsoft (MSFT), turn from teenagers to mature adults. As famed businessman Thomas Brittingham said, “A good horse can’t go on winning races forever, and a good stock eventually passes its peak, too.”
There are many aspects to creating a winning team. If Billy Beane were to draw up factors for a baseball team, I’m confident TTM would be near the top of his list. What you pay for the length of the growth cycle is obviously imperative, but since I’m a strong believer in the tenet that “price follows earnings,” it only makes sense that above average sustainable earnings growth should eventually lead to superior price appreciation. As Bob Smith, successful manager from T. Rowe Price states, “The important thing is not what you pay for the stock, so much as being right on the company.” So if you want to recruit a portfolio of winning stocks, like Billy Beane picks successful baseball players, then include the equity life cycle maturity statistic as a factor in your selection process.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management nor its client accounts have no direct position in MSFT, SBUX, KO, Facebook, or Twitter shares at the time this article was originally posted. Some Sidoxia Capital Management accounts do have a long position in GOOG shares. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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