2 Sensible Trades in a Farcical Market
I'm making incremental moves in a complicated environment.
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Markets have been somewhat farcical for some time now.
Zero days to expiration, or 0DTE options now account for roughly half of the options volume in the entire S&P 500. This volume has doubled in just two years, but 0DTE is only one reason markets now are hard to read.
This week, Roaring Kitty and his merry band of meme stock traders reappeared and given the markets an even more surreal feel. They also have ignited rip-roaring rallies in the likes of AMC Entertainment AMC, which has more than doubled in the past few days.
Meanwhile, in the real-world, inflation continues to be sticky. Tuesday’s PPI report came in hotter than expected, although it should be noted the March PPI numbers were revised down. Chris Versace provided a nice breakdown of the PPI report herenon Tuesday.
BofA Securities also noted this week that U.S. electricity reached a three-year annualized change of more than 8%. This is the highest rate of growth since the early 1980s, it should be noted.
How Am I Playing It?
Given a lack of feel for equity direction at the moment, I continue to make only incremental moves within my portfolio, mostly via covered call orders. Two I did make Tuesday are not exactly swing for the fences trades, but they are the only type I am willing to make now in an uncertain market.
On Tuesday, I added a good slug to my holdings in Acadia Pharmaceuticals ACAD. The shares have overreacted to a recent trial setback and moved below the $15 level. My back-of-the-envelope calculation points to how undervalued this stock has become.
Currently ACAD has a market capitalization of just under $2.5 billion. According to the company’s first quarter 10-Q report, Acadia ended the quarter with around $470 million in net cash on the balance sheet. The company should be nicely profitable this year on approximately 30% revenue growth as sales rise to just under $1 billion.
Acadia also sets up as a logical buyout target as it has projected SG&A and R&D expenses of nearly $800 million for 2024. These would largely disappear if the biopharma were to be acquired by a larger concern with an established CNS salesforce, making any acquisition quite accretive even with a decent buyout premium.
I also added a bit to my holdings to Dynavax Technologies DVAX Tuesday as the stock blipped down as the company got a complete response letter from the FDA. This was for its marketing application for a hemodialysis indication around the company’s hepatitis B vaccine Heplisav-B, for a relatively minor additional population set.
The relationship between the FDA and Dynavax has always been acrimonious, but I expect the issue to eventually to be resolved. It took the governmental agency more than two years longer than it should have to approve the original application for Heplisav-B even though it was clearly superior to the standard of care on the market. The product continues to take market share.
Dynavax also sits on a huge cash hoard. Profitability should increase at a nice clip in the years ahead.
At the time of publicaton, Jensen was long ACAD and DVAX.
