Twenty Days Along the Northwest Passage
Like most financiers, Davide Serra strives to be on top of the world, and in August, he found himself there. Literally. Serra, the founder and CEO of the $12 billion asset-management firm Algebris Investments, co-funded and joined a sailing expedition through the Northwest Passage, the arctic sea route connecting the Pacific and Atlantic oceans. Ever since Norwegian explorer Roald Amundsen led the first crossing, in 1903, the passage has fascinated and frightened sailors with its remoteness, treacherous conditions, and iceberg-laden waters. The fear and fascination were not lost on the 46-year-old Serra, more than 100 years later: “When I was on the 75th parallel north, I understood how small we are,” he told me, back in the relative safety of Algebris’ swanky London offices.
Serra’s record-breaking cruise—his yacht took just 33 days to cover the 3,500 miles from Alaska to Greenland, the fastest ever for a west-to-east route—is not the customary tale of a macho finance dude.
Serra says he bought the yacht, a 72-foot fiberglass cutter, with other investors in 2011 as an educational tool for his four kids. All of his sailing adventures over the past six years, from the Galapagos Islands to Myanmar, from Papua New Guinea to Polynesia, have been driven by that goal.
“The theme was exploring the planet in a sustainable way to make sure the kids understand it,” he says. “We have been in a few atolls where [locals] had never seen a white person. The experience for the kids is to see nature at its wildest.”
To hear Serra tell it, embarking on one of the world’s most dangerous water routes (only one in five boats makes it through the Northwest Passage), with his wife and their kids ages 8 to 15, was both the culmination of a project and a problem to be solved—a bit like deciding whether to buy or sell a stock.
“The issue for us was how to do something that is challenging but to do it as a family,” he says. “So, clearly, it cannot be that extreme; there has to be a combination,” not least because the crew included the 1-year-old son of the boat’s skipper (and co-owner).
The lightweight hull didn’t help. Unlike aluminum or steel yachts that can withstand being hit by floating ice, Serra’s fiberglass boat had to weave extremely carefully around the big frozen blocks. “The only way is training and preparation,” Serra says, repeating a mantra I’ve heard him use in his professional life.
Hence, weeks of rehearsals that involved a mock helicopter rescue, learning about winds and ice, and testing shotguns to fend off hungry polar bears.
In reality, the bears turned out to be less aggressive than many financial deal makers. “Encountering a polar bear on an iceberg was one of the most beautiful experiences ever because you can see how he is the king there,” Serra says. “He is the hunter; he is not afraid.”
Yet, during the 20 days the Serra family spent on the boat, there were plenty of difficult spells, especially when the ice refused to part, threatening to scupper the whole trip.
Serra explains those moments in familiar financial terms. “There’s a risk-management process you live every day. Your mark-to-market risk is: What’s the weather condition; do you take less or more risk today?”
Serra and his group explored an iceberg in Haddon Bay.
Serra and his group explored an iceberg in Haddon Bay. PHOTO: DAVIDE SERRA WITH DRONE MAVERICK PRO DJI
Speaking of perils, I wonder whether Algebris’ investors might have been concerned. After all, Serra’s presence on the trip sounds like a textbook case of “key-man risk” for his funds.
“It’s a plus for investors,” Serra replies. “Investing requires obsession, and you need focus, and at the same time you need to recharge your batteries. If not, stress burns you out.”
Besides, Serra says, he was able to work on financial matters four to six hours a day, thanks to the vessel’s three satellite lines.
Serra also appreciates how formative these experiences are for his children. He says that hearing his son ask about the winds’ strength and the ice’s depth warmed his heart. “He’s 8 years old, and he is asking all the right questions to explore the world. Typically, an 8-year-old would ask, ‘What’s the password for Netflix?’ ”
Serra’s fatherly pride seems even bigger than his explorer’s sense of achievement. “I don’t know how many kids do three hours of dish-washing a day. My kids do it. How many kids do an hour of cleaning the boat every day? How many kids help clean a fish? My kids do it.” So where next for the fiberglass boat and his sturdy crew? Serra says they are done with extreme adventures, at least for a while. “At Christmas, we will probably chill out in the Bahamas,” he says.
“We need some sun, basically.”
Celgene: Two Small-Cap Biotech Stocks It’s Selling
We’ve noted before that owning shares of Celgene includes the bonus of a biotech exchange-traded fund within it.
Celgene (ticker: CELG) owns more than $1.5 billion in shares of more than a dozen smaller drug developers, according to S&P Capital IQ. The company is known for holding steady in these investments, even adding to stakes upon occasion. In December, however, Celgene disclosed in December that it had been cutting back on two positions: CRISPR Therapeutics (CRSP) and Atara Biotherapeutics (ATRA).CRISPR, a Basel-based developer of gene-based medicines, went public in the U.S. in October 2016. Celgene, through a subsidiary, cut back on its investment by selling stock in November and December. It now holds 3.3 million CRISPR shares, an 8.1% stake, as of Dec. 22, down from 4.8 million shares, a 12.1% stake, as of Sept. 30. With the reduced stake, Celgene remains CRISPR’s third-largest shareholder.
CRISPR’s initial public offering was priced at $14 a share and ended 2016 at $20.26 for a 45% gain. Through midday Wednesday trading, CRISPR’s upside momentum has wilted for a 3.3% gain for the year-to-date. Why sell now? Maybe it wanted to lock in gains. In May 2015, Celgene had bought pre-IPO preferred shares that converted to 4 million common shares for about $6.27 a share, using today’s exchange rate for Swiss francs to dollars.Regarding Celgene’s Atara investment, Celgene only sold about 100,000 shares but due to more shares outstanding, its percentage stake slipped to 3.8%, or 1.15 million Atara shares, down from 6.2%, or 1.26 million shares, at the end of 2014. Atara is developing novel treatments for patients with cancer, autoimmune and viral diseases.
Celgene had also invested in Atara before its October 2014 IPO, buying preferred shares that converted into 1.26 million shares for $10 million, or $7.96 each. Atara’s IPO was priced at $11 per share and ended 2014 with a 134% gain. Shares eked a 3% gain in 2015 before tumbling 46% in 2016. For the year-to-date, they have gained nearly 7%.Now that Celgene has declared that its Atara stake has fallen beneath the 5% ownership threshold, it is no longer required to disclose trades or ownership in the stock. It could sell the rest of its Atara shares without further notice.While Celgene has been selling, Morgan Stanley (MS) has been adding to its Atara stake.As for Celgene itself, the company may be entering a “transition year” after suffering some setbacks in 2017.
Glaxo: Expect a Speedy Recovery
Asthma sufferers could soon get breathing room in their budgets. Advair, the world’s top-selling respiratory drug, will probably face generic competition in the U.S. beginning in 2018. It’s the biggest moneymaker for United Kingdom-based GlaxoSmithKline , whose earnings estimates have been sliding, and whose shares have tumbled since the summer.
Now looks like a good time to buy Glaxo stock. To see why, look back to Pfizer (ticker: PFE) seven years ago, on the eve of Lipitor’s patent expiration. The cholesterol pill was a massive seller, with $149 billion in lifetime sales, compared with $108 billion for Advair. From the end of 2010, Pfizer’s earnings per share effectively didn’t grow for five years. Yet shareholders made 120% over that stretch, and not just because of a broad rise in the stock market. As Pfizer gradually worked its way back toward growth, investors lost some of their disdain for the shares. Relative to earnings, the stock went from being 40% cheaper than the U.S. market to 15% cheaper. Healthy dividends added to the gains.
The setup is similar for Glaxo (GSK). Its shares have slid from $44 to a recent $35 and change since summer, putting them at 12.5 times next year’s projected earnings. That’s a discount of 32% to the U.S. market and 15% to the U.K. The dividend yield is 5.6%. Glaxo’s growth slump looks likely to last just two years, in part because it’s less dependant on Advair than Pfizer was on Lipitor at the peak. If shares gradually return to 15 times forward earnings estimates—where they traded as recently as June—investors stand to make more than 40% over the next two years, including dividends.
Advair combines a long-acting bronchodilator to open breathing passages with a steroid to keep them free from inflammation. It’s used to treat asthma and chronic obstructive pulmonary disease, or COPD, a broad term for progressive diseases like emphysema and chronic bronchitis.
The drug has been off-patent since 2016, and compared with complex biologics, it’s a simple chemical compound. But the delivery is tricky. Advair is commonly taken using a device called Diskus, which repeatedly punctures a blister pack of powder for inhalation. Generic challengers have had a bear of a time proving they can duplicate Advair’s dosage because, studies suggest, Advair itself isn’t especially precise in the amount of medicine that makes its way to patients’ lungs.
Generics are coming, however, and the first to market could be an early laggard. Novartis (NVS), through its Sandoz unit, was once so far behind Mylan (MYL) and Hikma Pharmaceuticals (HIK.UK.) in the race to copy Advair that it filed a citizen petition asking the Food and Drug Administration for stricter approval standards. Although the FDA denied the petition, the regulator has held up generics from Mylan and Hikma, which could put Novartis in the lead. Glaxo expects a 15% to 20% revenue decline for Advair in 2018.
Glaxo: Expect a Speedy Recovery
WHY NOT MORE? One reason is that Advair prices have already been falling; the drug’s revenue declined 13% last quarter. Partly this is due to pressure from drug plans. Advair can cost more than $300 for a 30-day supply without a drug plan, or $55 for a 90-day supply with a drug plan, judging by recent prices at GoodRX.com and Caremark.com.
There is also competitive pressure, even without a generic substitute. In May, Teva Pharmaceutical Industries (TEVA) simultaneously launched AirDuo RespiClick and its own generic. It uses the same two drugs as Advair, but in a different mix and with a different device, and so far it’s approved for asthma but not COPD. In November, Novartis released data showing that its steroid-free combo treatment for COPD, called Ultibro Breezhaler, works better than the main ingredients in Advair, the company says.
Glaxo, however, already makes its own steroid-free inhaler, and a three-drug combo, and much more, as part of a respiratory portfolio that includes Advair. Last quarter, total company revenue was 7.8 billion pounds ($10.54 billion), up 4%. Of that, pharmaceutical sales were £4.2 billion, up 3%. Within pharma, respiratory sales grew 1%, to £1.6 billion. Advair sales were £743 million, or less than 10% of company revenue. That compares with 16% for Pfizer’s Lipitor seven years ago. According to UBS analyst Michael Leuchten, Glaxo looks likely to grow its respiratory revenues organically by 1% a year through 2022, even as Advair revenue falls.
In a sweeping asset swap with Novartis in 2015, Glaxo gave up some of its cancer drugs and gained vaccines and consumer products. Its brands now include Excedrin, Theraflu, Sensodyne, Tums, and Flonase. Such products carry lower margins than cancer drugs, of course, but they help offset Glaxo’s risk from drug-pricing pressure and the trend toward consumer-driven health care, which favors over-the-counter medicines.
In April 2017, Emma Walmsley took over as chief executive at Glaxo, and she has been frank about the company’s shortcomings. Relative to its peers, Glaxo has taken too long to develop new drugs, and launched too many that don’t sell well. Walmsley is stopping more than a dozen clinical programs and says she will focus 80% of spending on four core areas, immuno-inflammation, cancer, HIV, and respiratory, while reducing administrative and other costs by £1 billion a year by 2020. That will help fund more research and provide a larger free-cash-flow cushion for the dividend. The goal is to grow earnings per share at a compounded rate in the mid- to high-single digits over the next five years. That is presumably backloaded; Wall Street predicts negligible growth over the next two years followed by a return to 7% growth.
A shingles vaccine looks like a hit. In HIV, Glaxo is poised to take market share from Gilead Sciences (GILD). In 2018, pivotal studies will begin on a drug for multiple myeloma, a blood cancer. HSBC analyst Steve McGarry calls the drug potentially transformative to Glaxo’s growth, with a launch likely in 2020 and billions of dollars in sales. Before then, Advair will be old news and Glaxo shares could hit $47, 15 times the 2020 earnings consensus. That would work out to a 33% gain over two years—plus 11% for two years’ of dividends. Enough to make shareholders feel much better.
Weekly Market Update: Markets stay within striking distance of all-time highs as 2017 comes to a close
S&P futures for good measure once again inched out to an new intra-day high ahead of the final opening bell on the NYSE. The UK FTSE 100 finished the year at an all-time high, as well, before US indices drifted marginally lower, ending the week slightly in the red. In what has been a tough stretch for Dollar bulls, the Greenback is looking to finish out the year on another sour note. The Euro approached 1.20, which has led to the 9% decline for the Dollar Index in 2017, and gold hit a three-month high on the Dollar weakness. WTI crude ended above the $60 mark heading into 2018, and nat gas moved back towards $3. US Treasury prices traded flat to marginally higher, with buying in the belly and short end resulting in modest curve flattening. The benchmark 10-year yield looks poised to finish the year largely unchanged around 2.40%, with much of the curve holding at some of the flattest levels in a decade. For the week, the S&P fell 0.3%, the Dow lost 0.1%, and the Nasdaq dropped 0.8%.
During this holiday-shortened corporate news week, a plethora of companies disclosed how the tax bill would affect their Q4 outlook. Apple weighed on the NASDAQ early in the week after a report surfaced of potentially slow iPhone X demand. Potash and Agrium set the closing date for their merger of equals after receiving clearance from regulators. Adtran slashed its Q4 outlook, noting a slowdown in spending at a domestic Tier 1 customer. And President Trump on Friday suggested USPS should charge Amazon “much more” for delivery services.
Week in Review: Not Missing Much
After four days and 26 total hours of trading, the S&P 500 settled the holiday-shortened week down 0.4% -- and only because of a sell-off in the last 30 minutes of trading on Friday.
The remarkable thing is that there was a 19-point variance between the high and low for the week, both of which were logged on Friday. In other words, it was an extremely range-bound market that lacked conviction on the part of buyers and sellers -- until the last 30 minutes on Friday.
That lack of conviction was plain to see in the volume totals at the NYSE, which were among the lightest all year.
It was no surprise as this is a popular vacation week, and with the stock market having done so well already in 2017, many participants undoubtedly felt comfortable following pursuits that didn't include buying or selling stocks.
It is fair to say they didn't miss much.
The corporate news was very limited. The headline item for the week in that respect included Apple (AAPL), which declined 3.3% and closed just below its 50-day simple moving average during a week when many other stocks didn't move much.
Apple's difficulties stemmed from press reports on Tuesday which highlighted some analysts' concerns about iPhone X demand possibly being weaker than expected in the company's fiscal first quarter. Separately, Apple had some PR issues to deal with, which subsequently led to an apology from the company pertaining to the battery performance of its older iPhone models.
It would be remiss not to add that AAPL had a great 2017, increasing 46%, so it isn't unreasonable to think it might have been subjected to some profit taking at year end anyway. The aforementioned headlines, though, helped in that regard.
The livelier trading action took place outside the stock market.
Bitcoin was the picture of volatility; the 10-yr Treasury yield came in eight basis points to 2.41%; oil prices increased 3.1% to $60.27 per barrel, marking their highest close since 2015; gold prices jumped 2.4% to $1309.20/troy oz.; and the U.S. Dollar Index slumped 1.1% to 92.30.
Economic data was limited and on the mixed side, yet the Chicago Purchasing Managers Index for December created some fanfare on Thursday with its best print (67.6) since March 2011, led by a three-and-a-half year high for the New Orders Index and a 34-year high for the Production Index.
Within the stock market, the lightly-weighted real estate sector topped the list of winners with a 1.3% gain for the week. Price returns for the remaining ten sectors ranged from -1.0% (information technology) to 0.3% (utilities).
As a reminder, the stock and bond markets will be closed on Monday for the New Year's Day holiday and will re-open on Tuesday.
Happy New Year!
Closing Summary: Finishing 2017 with a WhimperThe trading day is done and the year is too. The former wasn't too special, but the latter was. The major indices closed today with losses ranging from 0.5% to 0.9%, unable to live up to the bullish bias that prevailed in pre-market trading.
Today's losses, though, won't ruffle too many feathers considering the major indices registered gains this year ranging from 13.4% (Russell 2000) to 28.2% (Nasdaq Composite).
Friday's action was over early for the bulls as opening gains quickly evaporated and the indices settled back into negative territory not too far from where they closed Thursday's session.
Range-bound and featureless action predominated throughout the day as a lack of concerted leadership, a lack of corporate news, and a lack of economic data succeeded in keeping market participants disinterested for most of the session.
There was some excitement in the final hour of trading, though, which has become commonplace for this stock market.
Unlike Thursday, the final hour featured a wave of broad-based selling interest over the last 30 minutes that knocked the indices out of their range-bound stupor and left them at their worst levels of the day when the final bell of 2017 rang.
The losses were led by the health care (-0.7%), financial (-0.7%), consumer discretionary (-0.7%), and information technology (-0.6%) sectors, all of which were among the market's best-performing sectors for 2017.
There wasn't a news catalyst for the selling, which is apt to be construed as a defensive, profit-taking move in front of the three-day weekend. There is apt to be some chatter, too, that it could reflect a little defensive posturing heading into the first week of the new year when it is thought investors might be inclined to secure long-term capital gains after deferring them at the end of 2017 as the tax bill was being worked out.
We'll know soon enough, but a little selling late today won't spoil an excellent year. The S&P 500, which was up 20% for the year around 3:20 p.m. ET today, closed 2017 up 19.4% (before dividends).
- Nasdaq Composite: +28.2% YTD
- Dow Jones Industrial Average: +25.2% YTD
- S&P 500: +19.4% YTD
- S&P Midcap 400 Index: +14.7% YTD
- Russell 2000: +13.4% YTD
Tesla: positive spin
Disaster remains our bet but there is a path for the carmaker to succeed in 2018
We think 2018 is when Tesla’s wheels should come off. With the make-or-break Model 3 missing milestones, investors will tire of providing cash for dubious debt and equity. Even if deliveries of the delayed car step up, it is too late: rival carmakers are about to clog the roads with new electric cars.
But unlike the myriad short sellers, we hope to be wrong. Public companies can appear to be on the path to extinction, with half disappearing in the past two decades. Elon Musk shows that public markets do not have to be hostile: Tesla’s shares are up almost 50 per cent this year in spite of the setbacks to the Model 3. In the seven years since its IPO, investors have fuelled the dream with almost $10bn via equity and convertible bonds.
How then might Tesla justify an enterprise value of $60bn on less than $300m of annual earnings before interest, tax, depreciation and amortisation?
First, the competitive threat may be overstated. Tesla’s Model S was first delivered to customers five years ago. Centuries of combined experience was insufficient to allow established manufacturers to produce a superior electric car. The Nissan Leaf and General Motors’ Chevy Bolt are smaller and cheaper and yet still sell less.
Second, the perennially skint company may soon receive a flood of cash. Model 3’s initial production has been disappointing, with Tesla expected to limp to 1,000 cars this quarter — a tenth of earlier expectations. But Tesla has mastered complicated production before. It has received about 500,000 pre-orders of the Model 3, each of which required a $1,000 deposit. An average selling price may well be more than $50,000. Even if two-fifths of the waiting list demand their deposit back, that still brings in almost $15bn, or double last year’s total revenues. Finally, Tesla should reach a smooth patch of road: strong working capital and positive free cash flow. The doubters, like this column, can eat their words.
Robo advisers recognise the need for human touch
Online investment platforms are launching over-the-phone and face-to-face services
Robo advisers promised to shake up the UK investment market by using algorithms to deliver low-cost automated services to the masses. However, British investors have found a bug in the system — when it comes to managing their money, they want to speak to human beings too.
The new breed of “robos” are morphing their business models to provide over-the-phone and face-to-face advisory services, recognising that more of a personal touch is needed to win over customers.
Scalable Capital, the European online robo-advice company backed by BlackRock, is launching over-the-phone and face-to-face consultations for a one-off fee of £200 from January after finding a number of clients wanted to talk to human advisers rather than answering its online questionnaire alone.
The company’s 15,000 customers can pick from a range of low-cost passive investment portfolios based on their risk tolerance. Founder Simon Miller said Scalable would help customers complete scheduled risk assessments with an adviser after some of them said it was “a big jump” to complete the automated process alone.
“It gives customers a level of comfort,” he said. “The launch of advice is for those people who want to speak to someone about the service or maybe about their existing investments or financial life. A lot of people may not have access to advice and the idea of a one-off transaction could be very appealing to them.”
The move is the first admission from the robo world that investors may not be comfortable with trusting their money to a website or app without an element of human interaction. This hybrid model is a move away from the original robo proposition as a cheap online alternative for people who could not afford to pay for face-to-face financial advice.
Nutmeg — the UK’s largest robo platform with £1bn assets under management — told the FT it was also working on a low-cost way to offer human financial advice after acknowledging many clients “want to speak to someone”.
The company said many customers wanted isolated, low-level advice but did not need lengthy face-to-face interviews or want to pay the fees that an independent financial adviser would charge for in-person advice.
Chief investment officer Shaun Port said Nutmeg’s customers frequently wanted “reassurance” and could benefit from low-cost one-off advice designed to apply to specific circumstances.
“Customers often want advice around a particular life stage or one element of investment,” he said. “We tend to think about financial advice as sitting down in an interview and reviewing everything about your life, including your mortgage, debts and investments. But customers do not necessarily want everything reviewed. There is far more appetite for more modular forms of advice.”
Mr Port said Nutmeg could use its volume of customer data to automate parts of the advice process and come up with a cheaper hybrid version, combining elements of online-only robo investing and more traditional methods.
“We understand our customers through data,” he said. “When you interact with our service, you are giving us data on your behaviour. It might sound spooky but whereas you might see a financial adviser once a year, we have data on your behaviour and can target our interactions with you based on that.”
The company is in the early stages of developing a product and expects to introduce new services in 2018 for its existing customers.
Robo advisers have made a name for themselves by disrupting the traditional, highly regulated model of personal investment advice. In September, the UK’s Financial Conduct Authority published new guidance on “streamlined advice” — an umbrella term for simplified, focused advice provided by automated robo advisers, as well as more traditional face-to-face or telephone methods.
This goes a step further towards bridging the so-called “advice gap” between low-cost online providers and the traditional service provided by independent financial advisers (IFAs) who typically charge £150 per hour, according to unbiased.co.uk, which many smaller investors regard as too expensive for their needs.
Despite impressive growth in customer numbers, robo advisers still command a relatively small share of the overall market.
Scalable Capital’s assets under management have grown fivefold in 10 months, having hit €500m (£442m) in November. Nutmeg doubled its customer numbers in under a year from 24,000 at the end of December 2016 to 49,000 last month. Over the same period, its assets under management have increased by 67 per cent to £1bn.
Yet according to consumer site Boring Money, robo advisers accounted for less than 1 per cent of the UK’s £192bn non-advised online investment market at the end of the third quarter of 2017.
The new breed of online managers have also struggled to generate a profit from their customers, who tend to have smaller average portfolio sizes than those using traditional financial advisers and wealth managers.
Investors with large portfolios tended to be less comfortable opting straight for a robo solution without any human interaction according to Mr Miller, who said that adapting the robo model could help target older, wealthier investors who were less comfortable using online-only platforms.
“We expect that it will translate into higher average investments,” he said. “Currently our average is around £40,000 and we could see that rise significantly as people who have more money tend to be a little older and will have had experience with [face-to-face] advisers in the past. This move to a fully automated service is a big step for them.”
Both Nutmeg and Scalable Capital said that their customers had always been able to speak to customer service teams either over the phone or via email.