A Short But Sweet Update (inc. thoughts on MannKind) 6/29/14
***The following is a reprint of the Inter-Issue Commentary that was published for Nate’s Notes subscribers over the weekend***
As discussed so many times before, one of our main jobs as investors is to identify what the underlying trend of the market or a particular stock happens to be, and then position ourselves to ride that trend for as long as it remains intact.
As it stands (and as you can see in the Eyebrow Levels table below), all five of the major indices I use to gauge the health of the overall market are still well above the levels to which they would need to fall back to in order for me to start considering the possibility that the uptrends they are currently in may be coming to an end.
Consequently, though there are a number of things we could worry about that might cause the rally to end sooner rather than later, our job continues to be to simply sit tight and stick to our game plan of being as fully invested as we can comfortably be while still sleeping easily at night.
And, speaking of sleeping more easily at night, in case you have not yet heard, I am very pleased to share with you that the FDA finally granted approval for MannKind’s inhalable insulin Afrezza yesterday afternoon!
As you know, this journey towards approval has been a very long and nerve-racking one ever since we first got into the stock back in 2009, but after years of waiting (and more than just a few “scares” along the way!), this chapter of MannKind’s history is finally behind us and the company’s attention can now shift whole-heartedly towards partnering and commercializing the product!
To be sure, there were several warnings and contraindications attached to the approval, but despite what you might read in the various “short” articles that will still undoubtedly come out in the days ahead, they are all pretty much in line with what was anticipated (the drug is not recommended for folks with COPD, asthma, or lung cancer, for example), and thus they should not be looked at as a reason to doubt the product (even though that will be the author’s intent should you happen to read such an article!). In addition, the sorts of additional post-approval studies that are being asked for are also in-line with expectations and quite typical for drugs as part of their final approval and labeling requirements.
With this approval, the last major piece of uncertainty has now been removed, and those of you who have been holding off buying the stock due to an aversion to risk can feel much more comfortable about starting to build a position.
The stock will almost certainly be extremely volatile in the days and weeks ahead while the large short position that has been established over the past couple of years starts to unwind itself (or at least gets shifted from the hands of short sellers who were betting on a rejection from the FDA into the hands of short sellers who believe that since a previous – but very different! – version of inhalable insulin was a commercial flop, Afrezza will be too), and thus you are strongly encouraged to a) stick to the buy limits for the time being, and b) plan on averaging-in to the stock over a period of several weeks or months (i.e. please do NOT go “all in” at the open on Monday morning – I am a big believer in always scaling-in and -out of positions, especially in circumstances like this).
The next major event we should be looking for will be the announcement of a partnership (or partnerships), as well as some additional guidance as to how the company plans on funding operations between now and the eventual launch of Afrezza.
Ideally, a partnership agreement will include an upfront payment of some sort, but other options include a secondary stock option and/or another debt offering (both of which would likely be derided by short sellers, but, at the end of the day, would represent yet another nail in their coffin… so if such news does come out, please don’t let the naysayers scare you out of your stock via that route either!).
And, finally, the results of the ultimate test as to whether or not Afrezza will be a success won’t be available until the product has actually been on the market for a quarter or two and we have a chance to see actual sales numbers… but this event is still a long ways off, and so it is important to keep in mind that any guesses and sales estimates (be they bullish or bearish) you might see published are nothing more than speculation (and will remain so until later next year).
In the meantime, you’ve got a stock that is trending the right direction and just had a huge amount of uncertainty removed from its outlook, and thus you are encouraged to breathe a huge sigh of relief… and then sit back and let the stock market “do it’s thing” once you’ve established your position!
Congratulations again to all of you who have had the patience and courage to come along for the ride so far – I appreciate your interest (and confidence) in my ideas… thanks again!
“Eyebrow Levels”
(used to help us gauge the overall health of the market*)
current | one eyebrow | two eyebrows | |
DJIA | 16,852 | 15,900 | 15,400 |
Nasdaq | 4,398 | 3,900 | 3,750 |
S&P500 | 1,961 | 1,825 | 1,740 |
BTK | 2,764 | 2,300 | 1,975 |
SOX | 629 | 550 |
510 |
*As long as all five indices are trading above their “one eyebrow” levels, it is a sign that the current uptrend is still intact; however, if the indices start to dip below those levels, it will cause me to raise an eyebrow and wonder if the trend my be coming to an end… and if both eyebrows go up, it will mean that things are deteriorating in a hurry (and you should start looking for a “Special Alert” from me in your email box).
The next issue of Nate’s Notes will be dated Friday, July 11th, and posted to the website sometime on Sunday, July 13th.