*** The following is excerpted from Issue #264 of Nate’s Notes, which was published for subscribers on January 20, 2017, and reflects our opinions of the market, MannKind, and all other stocks mentioned as of that date. ***

The world doesn’t make sense,
so why should I paint pictures that do?

– Pablo Picasso

Still Too Early To Say Much…

First off, I want to acknowledge that the bulk of this month’s issue is once again devoted to discussing MannKind; however, I also want you to know that it is being done on purpose because a) I believe we are at a point in the MannKind story where the tide is either going to turn or it’s not (and so it is worth “pounding the table” sooner rather than later), and b) to be honest, until we see what Trump actually plans to do as President (versus talk about doing as President-elect), I believe it is far more useful to spend time discussing a situation that is at least somewhat “knowable” than to spend a great deal of time reflecting on what a Trump presidency might mean for the stock market as a whole (though rest assured that the topic is also on my mind daily, and it will be discussed in future issues as more information becomes available!).

That being said, as you will notice when you look at the charts of our recommended stocks in this month’s issue, The Trump Rally appears to be alive and well, especially when it comes to our chip stocks, and though it is still too early to know which way the market is going to go once it finally breaks out from the “flatline” pattern it has been tracing out heading into Inauguration day, if it happens to go higher, you are strongly encouraged to look at the move as a reason to add to your positions rather than take profits (beyond the ones that you may need to take in order to allow yourself to sleep more easily at night if certain positions have grown “too large”).

On the flip side, however, as you will see in the Eyebrow Levels table below, the BTK biotech index is continuing to lag the market, and at least a portion of the reason for this is that Trump has spent some time talking about going after the pharmaceutical industry… and so we will need to watch this index especially closely to see how investors end up responding to whatever moves Trump ends up making (or perhaps not making?) as his term gets underway.

Again, my apologies for not spending more time playing “what if” with regards to Trump – for all of the reasons cited below, rest assured that this will likely be the last time I will choose make MannKind the focus on an entire issue… and I hope the fact that virtually all the rest of our positions are “acting well” helps to make up for the fact that I am going out of my way to lay out the case for MannKind one last time before the next chapter of the story gets underway!  Cheers!

“All-in” on MannKind

After surging close to 30% in a single day shortly after last month’s issue went to press, MannKind’s stock has pulled back a bit and has spent the past couple of weeks consolidating nicely in the $0.60-$0.70 range… and, while it is true that we would all like to see the stock return to a more reasonable valuation as quickly as possible, a “two steps forward, one step back” chart pattern is not only the more likely path to higher prices (barring a piece of catalytic news, of course), but it is also the sort of price action I would actually prefer to see, as history suggests it will help to set the stage for a longer, more sustained rally as it picks up steam.

Of course, the question is whether it can/will pick up steam… and though we will only know the answer to that question in hindsight, I hope the following set of thoughts gives you some optimism that the tide may finally be turning for us.

First off, with recognition that one of our favorite mantras in the newsletter is “trends often go on for longer than seems reasonable” (so I can’t claim to be all that surprised), the downtrend in MannKind’s stock has gone on for far longer than I ever thought possible (especially given the sorts of results patients are reporting once they’ve learned how to dose Afrezza).

Not only have shareholders suffered through what turned out to be “a lost year (and then some)” thanks to Sanofi’s lack of effort to promote the product, but short sellers have been relentless with their selling… and, as mentioned before, I firmly believe that absent the “extra” 100 million or so shares that have been dumped on the market over the years, the stock probably never would have fallen below $3 or $4.

Of course, at some point (and unless they can force the company into bankruptcy), these short sellers will need to buy back those shares in order to close out their positions, and though they are clearly not doing so in droves just yet, I believe the price action we saw right after last month’s issue went to press may have been a preview of what’s to come.  As mentioned before, honest-to-goodness short squeezes are far more rare on Wall Street than folks like to think they are, but when they do happen, they can be spectacular to watch (and, ideally, benefit from!).

And, while I am no way guaranteeing that one will develop around the MannKind situation, based on what I am seeing in the marketplace – along with the emails I have received from subscribers over the past several months – I do believe believe very strongly that virtually all of “the float” (all of the outstanding shares that are not held by management or other insiders, i.e. all of shares that “float” back and forth between regular old investors who buy and sell them on the open market) is now held by investors who are planning to hold their shares “to the bitter end, no matter which way it goes,” as everyone else who didn’t have the stomach for the story has already given up and sold their shares.

While this “ultra-thin float” doesn’t mean much as long as volume remains low and a small number of buyers can get their orders filled by the sellers on the other side of the trade (and vice-versa) without moving the stock much, as we saw a little over a month ago, as soon as a buyer of any size attempts to establish a position, they quickly discover that there isn’t really much stock available for sale unless they are willing to become more aggressive with their bidding.

No, MannKind is hardly a “darling of Wall Street” at this point in time; however, given how the story is unfolding, I believe the odds are improving every day that this “unloved dog of a stock” is on the verge of getting a second look from investors, and given just how large the disconnect has gotten between “current value” and “true value” of company… along with the very large short position… and a sizable cadre of biotech analysts who only have one direction they can go with the stock (from “sell” back to either “hold” or “buy”)… and the aforementioned ultra-thin float (especially when measured against the size of the short position)… it may only take one or two big buyers to finally set the gasoline drenched stack of wood on fire.

Naturally, I’m sure many of you are wondering at this point why I seem to be more optimistic today than I have been in awhile, and the answer is that in addition to the price action itself, I am also very pleased with a number of “news” events that have taken place over the past five weeks – in particular, Matt Pfeffer’s presentation at the JP Morgan Healthcare Conference (JPM) and the hiring of another “high profile” individual from Amgen (in this case, Stuart A. Tross, Ph.D. to head up Human Resources, Information Technology and West Coast Facilities for MannKind as it enters the next stage of its evolution).

Not only is the hiring of Dr. Tross interesting for the simple reason that he is also coming over from Amgen (which is where Mike Castagna came from as well), it provides us with indirect evidence that perhaps things aren’t as bad “behind the scenes” as they sometimes appear to those of us who are trying to figure out what’s going on from this side of the curtain (and, of course, though I am not predicting an Amgen buyout, his arrival has helped to fuel a buzz on social media that he and Mike are there to “get MannKind structured as an Amgen-like entity so that Amgen can hit the ground running once they take over”).

Moving on from such exciting speculation, however, I want to point out that along with the “obvious” factoids that were presented at JPM (see below), I was also struck by two things in particular while listening to Matt’s presentation – not only did he make the presentation with much more confidence and “presence” than he has in during past presentations, even more importantly (in my humble opinion), “the pitch” regarding Afrezza has undergone a significant transformation… and though I haven’t asked him about it yet, I am guessing that all of the “extra” talking points that were made are a direct consequence of the information that was gathered during the first round of having a salesforce on the ground in doctors’ offices figuring out what works and doesn’t work in terms of educating doctors and patients alike about the product (and if this hunch is correct, I believe it bodes well for the next round of the rollout, which is due to get underway early next month).

And, speaking of which, that is one of several items I want to mention from the JPM presentation, namely, we learned that, for a variety of possible reasons, the company is transitioning from using a contract sales force to hiring all of its own sales reps.  Not only will this allow the company to offer a more enticing incentive package (via stock options), the fact that they are making the move at all suggests, once again, that things are not as dire on the financial front as they appear on the surface.  An unfortunate (but minor and temporary!) consequence of this transition is that Matt hinted that we are once again in a period where there isn’t much going on in terms of sales people trying to generate new prescriptions while the in-house staff gets brought up to speed, and though I know many of you are concerned about “the woeful lack of scripts,” I want to remind you that despite the “dismal” numbers week after week, the stock is actually up over 50% from where it was a month ago… and this is yet another clue to me that anyone who wanted to sell the stock probably already has.

Along with this news about hiring an in-house salesforce, we also learned that MannKind is moving forward with the filings required to sell Afrezza in a number of regions that essentially only require “FDA approval and some paperwork,” namely, Brazil, Canada, Mexico, Australia, MENA (Middle East and North Africa), UAE (United Arab Emirates), and it is also evaluating what would be required to gain approval in “Europe and other regions.”  Of course, the company could simply be bluffing, but if they are not, this sort of language once again suggests that they feel much more confident that there will be money around to implement the plan than there might appear to be on first glance by an outsider (or in any one of a handful of persistently bearish blog articles you can read on a weekly basis!).

Not only does the company appear to be moving forward with plans to grow sales of Afrezza in both the U.S. and abroad, it seems to be moving forward with other applications of the Technosphere platform at a slightly more aggressive pace than it was forced to take prior to the settlement with Sanofi (a turn of events that I want to remind you not only changed the financial position of the company by quite a bit, but also made it significantly easier for the company to start talking with other potential partners who may have been reluctant to get involved while Sanofi still had a tentacle involved in the story).  Along with its efforts to develop inhalable ephinephrine (efforts that include what the company has called a “successful” meeting with the FDA back in December), the company is moving forward with projects to develop inhalable treprostinil and palonosetron, with an eye towards eventually partnering those products once they are further along in the clinic.

And, speaking of “the clinic,” I believe it is also worth noting that Matt also pointed out at JPM that MannKind is moving forward with plans to conduct pediatric, dosing, and time-in-range clinical trials with Afrezza.  In addition, once the commercial(s) have been approved by the FDA (expected in the April time-frame, if I remember correctly), MannKind is planning to rollout its first direct-to-consumer (DTC) TV ads (in very targeted markets at first, mind you).  As you might imagine, these clinical trials and TV ads will all require time, personnel, and, money to bring them to fruition… and, once again, these are all things that it would appear on a first glance that MannKind does not have at its disposal, but, reading between the lines, may have “lined up” after all, even if a partnership and/or buy-in (or perhaps even a wildly unexpected – by outsiders – ramp in Afrezza scripts?) that would provide additional capital hasn’t actually been announced/revealed yet.

Moving on to a topic that is less optimistic in nature, as you know, MannKind’s stock is in jeopardy of being “delisted” sometime in mid- to late February if it is not able to get back over $1 and stay there for 10-consecutive trading days; however, to help allay some of the fears that have been expressed to me via email over the past several weeks, I want to remind you of the following things…

First off, even if the stock has not managed to get back over $1 and stay there long enough in time to meet the criteria to avoid delisting, the company can file for another six-month extension (and such petitions are almost always granted), or, alternatively, the company could guarantee the stock price would be over $1 by simply convincing shareholders to approve a reverse split of the stock.

However, I think it is also extremely important to keep in mind that even if the stock does end up getting “delisted,” the only thing that actually changes is that rather being traded on THE Nasdaq trading system, the stock will instead be traded on a “lesser” platform… and while this will undoubtedly cause some investors to steer clear of the stock (and/or cause some institutions to sell their positions based on their by-laws that might require them to only invest in stocks traded on Nasdaq, for example), as mentioned above, I believe everyone who was interested in selling as a result of concern about delisting has already done so.

In addition, and perhaps most importantly, I want to make it clear that your shares would still represent exactly the same thing they represented before the delisting – they would simply be trading on a less prestigious (and, almost certainly, less liquid) “exchange”… and, ironically, I believe it is worth noting that if the stock stopped trading on the main Nasdaq system, it would, in theory, make it even more difficult for the shorts to find shares to cover with IF they ever decide to start covering their position… so, in some ways, it might be worth rooting for delisting; other than that, you will still be a shareholder with the same ownership position and voting rights that you had prior to the delisting (so please don’t let anyone on the interwebs convince you that your shares will instantly become worthless).

Finally, to wrap up what has become a much longer write-up than I was originally planning on putting together for you this month, I want to re-iterate what I said last month, namely, that I think we really are at a point in time where the stock is either going to make it, or it’s not… and, while it will take a bit longer before I would be willing to admit failure and start scaling-out of our position, I do think the odds are very good that IF the story is shaping up the way I think it is, we could see Wall Street returning to the story (i.e. starting to bid up the stock) any time between now and mid-March.

In response to all of the above (and because I believe so very strongly in the underlying value of Afrezza itself), I am making one final “all-in” bet and increasing our position size by 25% in both Portfolios this month… and, barring some bizarre twist, the next trades the newsletter will make in the stock will be sales, either  to take some well-deserved profits or to begin the process of scaling-out of our intentionally large positions.

As has been said a number of times, please do not invest more in the story than you a) can afford to lose, and b) can sleep with comfortably at night; however, provided you are still below your threshold on both fronts, I encourage you to step up to the plate and add a few more shares alongside me – “inefficient markets never last forever,” and I really am convinced this is one of the most extreme examples of “the mispricing of assets” I have seen in my 29 years of following the stock market.  Stay tuned!

MannKind

As mentioned above (and in last month’s issue as well), I believe we are at a critical juncture in terms of how Wall Street is going to handle the MannKind/Afrezza story going forward… and though I may turn out to be wrong, based on my very strong belief that the company is currently trading for a small fraction of what it is actually worth, I am comfortable pushing the rest of my chips into the pot at this stage of the game and waiting to see what happens.  And, along those lines, I will make the “bold” prediction that by the end of this year, we will either be mostly out of our position… or MannKind will have moved onto the list of “core stocks” that we intend to “hold forever.”  MNKD remains a very strong buy under $2 and a buy under $5.

Top Picks (for new money this month)

All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:

Cirrus Logic (CRUS) – Yep, it’s the same three stocks as Top Picks this month, and for all the same reasons – Cirrus’ stock is bumping right up against its all-time high, and this is always a “bullish” indicator for a stock (at least on a shorter-term basis).

MannKind (MNKD) – As mentioned elsewhere in the newsletter, we’re approaching the “do or die” point for the stock… and so if you have been waiting to buy some, it’s probably time to place your bet.

Skyworks Solutions (SWKS) – not only is the chip sector continuing to act well, it is hard to interpret the recent “gap up” in Skyworks’ stock as anything but “bullish.”

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 250 NVDA and purchase 50 (200) Apple, 100 (400) Celgene, 250 (900) First Solar, (300) Illumina, 20,000 (400,000) MannKind, 750 (2,000) PowerShares DB Ag., 700 (3,000) PowerShares DB Cmdties., 200 (500) Qorvo, 100 (500) Skyworks Solutions, and 50 (200) SPDR Gold Trust ETF.  We will use the closing prices on Monday, January 23rd, for all transactions.