Market Thoughts - 01-16-21

Disclaimer: This post does not constitute financial advice. Author has a long position in Gilead and HEXO. Do your own due diligence before making an investment.

Hello, everyone. Thanks for reading Market Thoughts.

Today we’ll be talking about Gilead and HEXO.

It’s definitely been a wild week. JPM2021 unfortunately went by without any major action. Was hoping to see that Roche/Gilead buyout pre-market on Monday the 11th.

Instead, Gilead revised their guidance for Q4, and announced a new capital allocation strategy for 2021. It includes increasing the dividend, debt repayment and share buybacks. All these things are usually very positive for the share price, but Gilead still closed red on Monday. The price action was so weird I did a mid-week article on it.

Here’s a one-week Gilead chart.

@YahooFinance

The stock price recovered from the ridiculous dip on Tuesday and Wednesday. At first glance, it seems like the manipulators are back working their classic gully formation. (You can read more about this in our second Gilead/Roche merger article: How are the manipulators keeping Gilead constantly in the red?)

Basically they dump it to keep it red, then buy it back up again to almost even, which allows them to dump it again and keep it permanently red. People don’t like red stocks. So, they stay away from it.

@YahooFinance

One oddity this week was that Gilead was green several days in the after-market. This represents a shift in the manipulation. For the last six months they’d been keeping it red during the day, red after-hours, and red pre-market, to give Gilead the illusion of being a bad company, which is ludicrous given it’s near 25B in revenues, growing dividend, and fantastic pipeline.

Roche was up roughly 2% for the week on above average volume. It seems Cathie Wood of ARK has been loading up big-time. Many people are speculating as to why. Perhaps because Roche is about to steal Gilead for cheap. If Roche goes up 2%, then Gilead would need to go up 8% just to keep the spreads between their market caps even.

The larger the spread between Roche and Gilead, the easier it is for Roche to buy them out. Don’t see it? Just use some hyperbole. Imagine Roche goes up 100% in the next two years and Gilead stays flat. Roche would then have a market cap of 600B, and Gilead would be stuck at 79B. Easy to gobble.

People were talking about Gilead being at seven-year lows in December. This is only true if you don’t take into account inflation and share buybacks. Which means it’s probably closer to nine or ten-year lows.

January 15th was a particularly important date for Gilead options. The open interest was extremely high. Max pain was $62.50, but the stock closed at $63.33. (Rare for Gilead not to burn the most options.)

Roughly 175,000 contracts expired worthless. (See next photo.)

@Barchart

Roughly 71,000 contracts were in the money. (See photo.)

@Barchart

This means about 7.1 million shares will trade hands before the Tuesday open. It’s possible that whoever is accumulating Gilead used the 60 strike calls to buy a lot of shares sneakily on the cheap. This is really starting to remind me of when Porsche made the surprise announcement that it had (through derivatives) bought the majority control of Volkswagen, causing a record-breaking short squeeze.

So, given last week’s bizarre action, I wouldn’t be surprised to wake up to a merger announcement or a stellar data dump on Tuesday morning. Gilead’s stock price is so ridiculously low given its revenue and growth potential it cannot stay at this price level for long.

Even if there is never a buyout, look for Gilead to recover to at least $70 within a few months.

Gilead’s intrinsic value is closer to $90. Any merger/buyout would need to be north of that.

If you think there will be a buyout, then the best options are probably short-term OTM lotto calls. This week I grabbed a bunch of 70s and 75s for Jan 22nd, and Feb 19th.

If you think there will never be a buyout, then deep OTM 2023 leaps are probably your best option if you like the company/pipeline. It’s a tricky scenario. If there’s a merger at $90 then your $100 calls are worthless. Be careful which one you pick.

Moving on to another sector…

Weed companies went a big run this week. Before the election I bought some HEXO leaps in case the democrats won the election and weed stocks went parabolic again. This looks like maybe to be the case, but I’ll dump them on any sustained weakness.

Given that wholesale prices of marijuana have gone down or stayed flat pretty much every month, everywhere that’s legalized it, I’m not convinced there’s a great long-term business there. I’m open to exploring it further as the industry matures, but for now a lot of these companies feel greasy.

A lot of marijuana companies seem like scams designed to transfer money from investors to management. Most don’t make any profit, and when times are bad they print new shares to sustain their bloated salaries. I don’t think the people running some of these weed companies could successfully manage a hotdog cart, let alone a billion-dollar corporation.

Any bet I make on HEXO, or related companies would be on the mania associated with these stocks, not on their fundamental strengths or growth opportunities.

The unfortunate reality of the market today is that mania is often a better investment than fundamentals.

That’s all for now. Have a nice weekend. – David Stone