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Wall Street will look back on 2020 as a year of extremes, but the great vaccine boom was definitely one of the most exaggerated. Those of us who grabbed stocks like Moderna Inc. (NASDAQ:MRNA) have reason to cheer.
But I don’t think the cheering will continue now that Moderna and other companies have translated theoretical COVID-19 vaccines into Food and Drug Administration (FDA)-ready programs. Hope for vaccines made a lot of people rich.
Nobody doubts that. The question is whether these stocks have further upside to capture in the foreseeable future.
MRNA: Already Priced for The Blockbuster
Even mighty Moderna has shifted into a much lower gear as the initial rush into vaccine stocks subsides.
This once-obscure company quadrupled its market capitalization in the first 140 days of the year. Many investors had never heard of it until the pandemic, but suddenly everyone wanted a taste.
After all, it felt like the rest of the world was collapsing and MRNA was one of the few stocks that could legitimately deliver a solution, instead of just contributing to the market’s endless problems.
However, when the world didn’t actually end, the push into now-crowded solution stocks started hitting their natural limits. We took a triple-digit-percentage profit on a vaccine-related stock in my IPO Edge portfolio and moved on.
It took MRNA another 200 days to triple again. Do that math and you’ll see that the gains were slowing down and the once-hyperbolic jumps were flattening out.
Furthermore, while the stock now seems comfortable holding a $60 billion market footprint, it’s up only 2% in the past two weeks of great news for the vaccine makers.
Yes, the FDA is reviewing the lead programs now. We could be lining up for freedom from the virus in a few months. As a key developer of those vaccines, MRNA stands to make a lot of money.
The only problem is that there isn’t really enough money in vaccines to support a $60 billion company. We know a lot more about the numbers than we did back in February, when this was still only a $20 stock.
MRNA’s management has promised that the company can distribute up to 500 million doses of its vaccine in the coming year, while keeping the price down to about $50 per shot in wealthy countries.
That’s maybe $25 billion in revenue, which is spectacular for a company that was barely able to bring in $60 million a year before the pandemic. It’s a mega-blockbuster, vaulting MRNA straight into the lower ranks of the Big Pharma giants.
Unfortunately, vaccines are expensive to produce. So, margins are slim. I suspect the combination of MRNA’s especially sophisticated techniques and the need to build out a global manufacturing infrastructure from scratch mean that only 15% of that $25 billion will turn into profit.
Suddenly, we’re looking at a $60 billion company that’s earning, at best, $3 billion a year. A 20X multiple isn’t a dealbreaker anywhere in the market right now, but it doesn’t leave a lot of room for additional upside, either.
We call companies with these metrics “fairly valued.” They’ve come as far as they can, until something changes to take cash flow up another level.
Where does MRNA go from here? Wall Street sees profit and sales alike dropping once the initial vaccinations have been administered. That’s not the kind of cash flow catalyst we want to see.
Better Biotech Out There
If you’re holding MRNA for the long haul, hang in there. Maybe in 2023 or 2024, the company will be ready to get in front of the FDA for a second time and start making more money.
Until then, I’d frankly rather buy into Pfizer Inc. (NYSE:PFE) at a relative discount. PFE has a vaccine, too. Management is ready to pump out 1.3 billion shots next year.
Admittedly, PFE is an established company with a lot of drugs on the market as well as in the pipeline. The vaccine won’t move the overall needle as far as it did with MRNA.
But PFE is also cheap at around $40. If you want a vaccine stock, buying it here is the equivalent of getting into MRNA back below $100.
You’re also capturing a 3.7% dividend on PFE while you wait for COVID-19 to go away. That’s a yield worthy of my Value Authority portfolio… if only it wasn’t packed with stocks I like even more.
What really interests me about biotech is how inexhaustible innovation really is in this space. There’s always another MRNA in the wings.
While it might take a given company four to five years to go from hope to headlines, biotech investors need to be patient. We’re here for the long haul.
If you’re looking for those blockbuster returns on a shorter timeframe, IPO Edge has all the innovation and a one-year timeline. The methodology is simple: we buy new stocks, hold them for up to that year and then cash out with whatever the market gives us.
We’ve captured a half dozen triple-digit-percentage wins so far this year. Overall, our money is working at an annualized rate above 50%. That’s pretty close to instant gratification.
After all, the S&P 500 climbs about 10% in a typical year. Maybe it needs a decade to triple. Every stock we can double or triple in a 12-month period opens the door to truly awesome lifetime returns.
I’m talking more about IPOs on my Millionaire Makers radio show. Now there’s a podcast (Spotify)(Apple) as well to keep you focused on opportunities to build real wealth while avoiding obvious threats.
CANNABIS CORNER: CANOPY DID THE RIGHT THING
After a great couple of weeks, cannabis stocks took a big step back on news that giant Canopy Growth Corp. (NASDAQ:CGC) is scaling back its Canadian operations.
A nervous market took the announcement as a negative factor. I think it’s a great decision for the industry, if not for Canopy itself.
Management wants the operation to be profitable. Evidently, running so many cannabis-growing facilities across Canada doesn’t fit into that agenda.
Cutting 220 jobs and closing several farms will save the company about $200 million a year. What I like about this is the way it will also remove incremental supply from an already glutted market.
Big Cannabis has a supply problem. Too many companies tried to grow their way to economies of scale and flooded the world with cheap plant product.
Canopy has given up on that infinite growth plan. Consumer demand just isn’t there. Management sees that now.
I wish all the cultivators would follow suit. Until they do, I’d rather own the small retail and next-generation cannabis stocks than the giants.
We’re in the green in my IPO Edge. I can’t wait to add new names. Canopy and company don’t qualify . . . they’re too big, and frankly, they’re old news.
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