Stock Market Crash, Economic Collapse, Rigged Markets? How to invest rationally!

Good day fellow investors,

Last week I made the news on the topic how one should focus on the businesses he invests in and not so much on the macroeconomics.

I’ve got this interesting email discussing how I am missing many points:

Underlying factors that affect the metrics you used in your article:

  1. The role of the ESF in market ‘rigging’. – U.S. Treasury’s Exchange Stabilization Fund
  2. Stock buybacks from the new tax code (fudging the numbers you are working with).
  3. The key role the central banks are playing by keeping interest rates artificially depressed, thus not exposing the true cost of debt servicing.
  4. The sheer number of Zombie companies and historic high levels of BBB bonds.

Plus, how I should contact Peter Schiff, Gregory Mannerino and I would get quickly to 100k subscribers!

All the above is all correct, if I make a business analysis, I get 2k views, if I put stock market crash in the title, I get 4 times more views.

1 views

And in this article, I really want to put the topics of market rigging, buybacks, low interest rates, zombie companies into an investing perspective because I think there is a big difference between investing and protecting yourself from something that might happen but doesn’t have to happen.

2 keynes

When it comes to investing, the key is to achieve the best risk reward return and always remain solvent, no matter how irrational the market might seem.

Contents

Stock Market Fear and Irrationality

THE MAIN QUESTION IS HOW TO INVEST?

Market rigging!

Stock buybacks from the new tax code (fudging the numbers you are working with)

Artificially depressed interest rates

Corporate credit, zombie companies, government debt

How to invest keeping the risks in mind

THE MAIN QUESTION IS HOW TO INVEST?

One should think about HOW TO GET BOTH; good returns from businesses and protection from what might happen while taking advantage of possible market rigging. That is what I focus on and the message of this article is to try to give more balance to the possibly predominant message on YouTube regarding Stock market Crashes and Economic collapses etc.

We as investors have to focus on how to get the best risk reward return to reach our financial goals. Let’s say that gold explodes in 2034, I bet you that 98% of all those invested in gold at the moment, would not have the patience to wait till then to realize profits. That is one, plus, by 2034, if you have $1k now and you get a 15% return because you understand the market;

You know it is rigged,

You know buybacks are strong,

You know interest rates will remain low, or inflationary due to the huge debt,

You stay away from zombie companies, buy those that will do even better when the competition dissolves!

Your 1k become 8k thanks to the power of compounding, earnings and dividends that you don’t get if you buy insurance. Actually, insurance is a cost.

Let me put the things into perspective!

Market rigging!

The market has been rigged since ever – it is in the interest of most politicians, policy makers and people that stocks go up, pensions go up, everybody has more money, more confidence, spends more and even wages go up a bit – so it is in the interest of the current economies that markets go up, collaterals go down, and everybody is pushing for it to go up.

Take advantage of it.

On silver markets, gold markets, there are many speculators that make it look crazy and rigged because there is no rationality there. You can’t eat gold; no dividend and it doesn’t grow. In the 1980-s the Hunt brothers tried to rig the silver market. They owned 30% of global silver but regulations broke them.

Silver price:

silver price

Stock buybacks from the new tax code (fudging the numbers you are working with)

4 smart

Source: Reuters

$940 billion of buybacks expected in 2019, that is 3% of the market.

There will be ups and downs, but some buybacks are smart if made below book value, or replacement value or intrinsic value, and those values are in the eye of the beholder.

5 bubyacks

Source: Yardeni

Try to find buybacks that increase your value, your ownership and avoid those that destroy shareholder value. Compare many stocks and you will find the difference.

Artificially depressed interest rates

As long as it works, it does good in the short term while it is uncertain for the long term – again, as an investor you have to understand the game and play it wisely. The tide could change with a big inflation, but that is why I invest in businesses that would do well if there is inflation but that also do well in this environment. I get dividends, I get growth, expansion etc.

6 rate

Source: FRED

Corporate credit, zombie companies, government debt

Governments and corporations have increased their leverage as low interest rates allowed for lower borrowing costs. US government debt quadrupled in the last 20 years.

government debt

Source: FRED

However, this situation can be solved with inflation for the government and with bailouts for corporations. Plus, when zombie corporations finally fail, the environment will be healhier for good businesses. I’ll talk more about that in the next article discussing Archer Daniel Midlands (NYSE: ADM) where the CEO actually hopes for higher rates to limit the competition.

How to invest keeping the risks in mind

Now, what I just said, doesn’t mean I completely disregard it, I’m not stupid, I am not invested in companies that would go bankrupt in case interest rates go up, I am looking for both, both good businesses, that offer business returns and protection in case of any kind of crisis.

You have three options to invest your money!

The first option is to focus on protection: gold, put options, Treasuries (if you can call them protection). The second option is to focus on businesses, growth, business returns and investments.

Your $1k becomes $8k in 15 years with a 15% yearly return. If you own gold, and the dollar loses 50% of its value, you are at $2k, no dividends, no business, a lot of stress because you depend on what others are willing to pay, not on actual value.

I must say I did a lot of research on macro, especially when I was writing articles on a daily basis three years ago as that was my job, but my conclusion is, that one should be smart and take advantage of what is going on and not bet on something happening because it is logical to happen.

The situation was crazy in 2009, and many sold what they had fearing the macro voices, I was buying businesses in 2009, nice 5 baggers for me.

2 gdx

I took a loan 4 years ago, bought a house, and it was probably the best risk reward investment in my life. Fearing a crash would have me being without huge gains over the last 10 years.

The third investing option is to have it both. For example, a company I was heavily invested in 2018 was Nevsun Resources, a copper miner with a promising project in Serbia. However, what the market disregarded was that 30% of revenue from the project were from gold, not just copper. So, you can buy investments that give you a business return but also protection just in case some of the above mentioned risks materialize. I am now exposed to silver with my portfolio, but if you would take a look at my portfolio, you would never imagine it has a silver call option in it. That is because I like it both; give me business growth and give me the insurance part for free.

Think about it, although so rational, I reiterate my question, is it and will it actually be profitable to be scared or you should simply see how to get the best out of it all?

To put things into perspective, don’t focus on what should rationally happen due to text books or chicken littles, but put probabilities onto every conclusion. What will happen in the future is probably something unknown, be ready for it by investing in both.

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Prepare For A Currency Collapse

Good day fellow investors,

in the news last Friday, we discussed the earnings of various companies and how a long-term investor should approach those, check the video out if you haven’t. As promised, today we will discuss the economic environment, the FED’s shift in gears and how one should think about long-term investing in relation to what might happen.

I’ll explain how:

  • we are most probably going for a global currency collapse, that will happen sooner or later,
  • the economy doesn’t have to collapse, and
  • how stocks might better than other things.

Just before we start, I wish to thank you all for the great reviews on Amazon, we are in the company of greatness on the Amazon best seller list, with Nobel prize winners like Shiller, legendary investors like Lynch and great trading books like Market Wizards. I thank you all for your support.

18 books

The FED’s pause

Let’s start with the news, the last two weeks were filled with crucial news that is important to systematize and put it into context.

The key piece of information is the FED’s pause and change in rhetoric.

We can say the FED capitulated! The committee will be patient with rate hikes and adjust for whatever might happen.

2 the fed

3 new territory

Source: FOMC

Prior to the FED’s change in heart, there was this expectation that we are in for a global slowdown. After the FED changed its rhetoric, said they will pause to keep the economy up, stocks rallied after the bad end of the previous year.

So, a decline of 15% in the S&P 500 and a 100 basis points increase in the cost of borrowing for the US government, led the FED to stop with raising rates.

19 5 year trasury

Source: FRED

However, the FED capitulating means that the economy isn’t doing good at all because it cannot sustain small hikes!

6 end of cycle

Source: FRED

It is simple, corporations are too leveraged. US corporate debt has almost doubled over the last 10 years. The situation is similar across the globe.

7 coprorate debt

Source: FRED

Governments are too leveraged. Budget deficits are piling all over the place.

8 budet deficit

Source: FRED

Same situation across most of the modern world.

Now, you can tighten interest rates, but that will increase the cost of borrowing for governments, that will consequently force them to borrow more as no politician is going to save money and not spend.

Given the FED, ECB, BOJ and others are ready to do whatever it takes to keep things as those are, the only thing they know how to do is to give more of the same medicine, thus more debt.

NOW, let me make this simple – Q4 2018 – people were selling because of the FED, the economic data was good!

Q1 2019, people are buying because of the FED, the economic data is not that good!

2 truck orders

Source: Wolfstreet

3 italy recession

Source: Reuters

4 germany gdp

Germany

Source: The Independent

My conclusion is that there will be no more tightening, no more normalization because, over the last 10 years, politicians and central banks have seen that interest rates can be low and they are now like junkies on low interest rates.20 trump

Source: Twitter

How to invest and what to expect

I am looking at the data, I look at the FED’s and the politicians’ behaviour and I am thinking;

1) There will be more money printing, much more

The last recession unveiled a tool that hadn’t been really used before, it unveiled the possibility to use central banks’ balance sheets to help the economy. Before 2009, Central banks’ balance sheets had been mostly flat. After 2009, an explosion of money printing is what followed.

9 balance sheet

Source: FRED

We have already seen that governments and corporations went on a borrowing spree to take advantage of the low rates. As it is normal with both governments and corporations, there is never the intention to pay back the debt, their only goal is to make money on the spread between what they are earning from the capital used and the interest rate they have to pay. For example, Apple can borrow at an interest rate of 3% on a 10 year bond, if they use that capital and make 5% on it, they make a lot of money. Debt repayment? Don’t joke, you might kill someone with unstoppable laughter.

With governments, it is even worse. US interest expenditures had been stable as interest rates had been declining and stood low. However, as the FED started tightening, US interest expenditures exploded and given the current budged deficit, higher rates would make the payments unbearable. The usual definition of a Ponzi scheme is when one has to borrow just to pay the interest on the debt.

If interest rates increase by just another 100 or 200 basis points (1 or 2%), the interest payments of the US governments would make most of the budget’s deficit and would force the government to borrow to pay interest expenses.

10 government payments trasury

Source: FRED

What does this mean for the long-term? Well, the FED can control rates until a certain moment, at some point it all breaks down like a house of cards. Interest rates go up because who wants to lend money to a government or corporation that is borrowing just to pay the interest, inflation creeps in as people want to spend their money and the FED has to hike to stop the inflation while still printing to save the economy.

2) Be a debt owner, not a debt holder

Debt holders are the suckers, thus all diversified portfolios like my friend’s portfolio with an investment bank is, will see their values erode. Do you know that in the 1970s, bonds were called certificates of confiscation as inflation would eat up most of their yield?

news portfolio

Source: $13 Million Dollar Portfolio Analysis

Or, any other pension fund in the world will be in trouble too. While working in the Netherlands I did have a pension fund, ABP, where the top investments are government bonds, of course.

11 pension funds

Source: ABP – Dutch pension fund

3) Stocks might do well

However, the situation gets tricky with stocks as those are businesses and businesses, the good ones can transfer price increases, i.e. inflation to customers. A good example is the Argentinian stock market. From February 2008 the Argentinian stock market increased 17 times.

12 argentina

And you thought the S&P 500 did well?!?

However, the Argentinian Peso did almost the opposite against the dollar.

13 peso

So, prepare for a currency collapse down the road. It might happen tomorrow, it might happen in 2029. Whenever it happens, if you are not prepared, you are the sucker and you might lose it all.

4) The world will continue spinning

People often forget that the world will go on, the currency environment might be different but emails will still be sent. The cost might be different.

A good illustrative example is a normal postal stamp in Italy. The price in 1958 was 25 lire while in 1998 was 800 lire.

16 italy 2

The current price is EUR 0.95, thus 2000 lire. So, over 60 years, the price of sending a letter in Italy increased 100 times.

17 current price

The problem is that it will not be linear, it will be explosive so that will take many by surprise most. What to do? Well invest in great businesses, we will talk about one tomorrow, Disney, you can invest in commodities, we will talk about that on Monday with zinc, Glencore, Teck, Anglo American and you can make money on inflation, or at least stay protected as we discussed in the video on inflation this week.

My focus now is on businesses we can’t live without. That will give me protection over the long term, looking at margins of safety and healthy business returns.

If you enjoyed this video, please subscribe to my newsletter with a weekly content overview, that will give you the content you seek.

 

InterContinental Hotels Group Stock Analysis – Overview, Valuation And Investment Approach

  • A company that has seen its ordinary dividend increase 11% CAGR over the last 15 years, must be something special and well worth watching.
  • Asset light businesses are taking over the world due to their high margins and high returns on capital.
  • However, you have to buy them at a fair price. We discuss the expected investing return in relation to the stock price.

InterContinental Hotels Group (NYSE: IHG , LSE: IHG) is a stock that did very well over the past 10 years.

IHG stock price chart

The reasons for such a good performance lie in the high levels of free cash flows the company has been able to generate, its dedication to rewarding shareholders, ordinary dividend growth, industry tailwinds and many special dividends asset sales.

Given the asset light business model and positive long term industry trends, one could assume the growth to continue in the future. The free cash flows are used not only to reward shareholders, but also reinvested with a high return on capital. This is a characteristic only great businesses have. To quote Charlie Munger:

It’s obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn’t sell books, so there’s a lot of twaddle and fuzzy concepts that have been introduced that don’t add much.

In light of the above, I have analyzed the company and summarized my findings in the video.

Video content:

1:10 Company overview – business model, strategy, debt, shareholder orientation

7:12 The industry

8:00 Investment perspective and strategy

If you like this approach to investing; focused on great businesses but patient for opportunistic entry points, please check my Stock Market Research Platform.

Brexit – An Objective Investing Perspective

  • Politics aside, it is important to have a clear investing perspective on how can our portfolio positions be affected by Brexit.
  • For now, markets are pricing in more pain for Europe, than Britain.
  • There are some stocks that should be avoided and some that shouldn’t be impacted at all, on the contrary.

Brexit is a very hot topic in Europe nowadays. However, it is important to separate your investing perspective from whatever might be your political views. I sit down with Niche Masters Fund with head investment manager, Peter Barklin, and discuss his very interesting, objective investing perspective, on the potential implications of Brexit for us as investors.

Just as an interesting note from the video, European stocks (VGK) (IEUR) have been hit harder than UK stocks (EWU). This shows that the Brexit isn’t just all bad for Britain and that we must carefully weigh the pros and cons.

Video content:

0:00 Introduction
1:40 Brexit for investors
3:27 What to own
5:08 Brexit benefits
7:04 Brexit and Europe
10:05 Portfolio positioning
11:29 Brexit risk perspective

Enjoy the video.

www.nichemastersfund.com

Sven Carlin Research Platform: https://sven-carlin-research-platform.teachable.com/

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Stock Market News – The FED, Interest Rates and How to Invest

Good day fellow investors,

The news this week was all about the FED as the FED’s chairman made a speech and their meeting minutes came out on Wednesday. The market reacted extremely positively to the news and new rhetoric.

1 s&P 500

Up 1.55% on Monday, 2.3% on Wednesday.

Something very important it that we have to always do is to differentiate between the FED’s rhetoric and what they will actually do. As we have seen this week, what the FED says has a big impact on markets and changes the economic environment.

So, the FED must be very careful about what and when it says something. Let’s give a quick overview of what has been said and what has been done and then discuss and explain the implications of it.

The topics:

  • Powell’s dovish speech
  • FED’s meeting minutes
  • Economic data
  • Investment risk reward outlook

On October 3 2018, Powell said the following:

we’re a long way from neutral at this point, probably.

This week he said this:

interest rates are “just below” a range of estimates of the so-called neutral level

And this is very important for asset values and the economy! Let me explain:

Everything starts in the economy based on where interest rates are.

2 20 years interest rates

Source: FRED

Why is this so important for the economy and asset prices? Well, first about the economy. People have unfortunately already a lot of debt, be it student debt, mortgages, car loans or credit card loans. Now, if interest rates go up, debt becomes more expensive and consequently interest payments rise and there is less money available for spending.

For example, I have plotted the 30-year mortgage interest rate against the FED’s funds rate.

3 mortgage rate

Source: FRED

You can see how if follows the FED’s rate but what is important is that since the FED started increasing rates, the 30-years mortgage rate went from 3.5% to the current 5%. This means that the cost of a mortgage increased 42% which is huge.

The following chart shows how closely correlated those things are.

4 mortgage rate

Source: FRED

Now, why are Powell’s words so important. Because he now said the neutral rate will be closer to the current level of 2% than what was previously expected, closer to 4%. That 2% difference in the normal rate, makes the difference between a 5% mortgage and a 7% mortgage which is an enormous deal as people have more money to spend elsewhere and the economy doesn’t suffer.

Why did Powell change his rhetoric? Economic data

A look at the FED’s minutes show how they are watching what is going on and allowing for flexibility.

Concern on debt, leveraged loans.

11 debt

The last economic date has been showing weakness signals and therefore the FED changed their rhetoric not to lead the economy into a recession immediately as they usually did in the past. To say it again, when the FED increased rates, usually a recession followed.

The economic data came from various sources.

Home prices have slowed down in growth.

6 home growth

Source: WSJ

Why is this so important, because the economy is based on debt and asset prices going up, a decline in home prices would quickly lead to a 2009 situation.

But, perhaps the most significant information related to the economy is the following.

GM is cutting jobs in order to prepare for a slowdown in the cycle. You can do whatever you want but you can’t fight market cycles.

closing

Even the extremely bullish IMF downgraded its global outlook.

7 global downgrade

Source: Bloomberg

Also, something that summarizes an economy, are business equipment orders, not growing despite the tax cuts and stimulus.

8 equipment orders

Source: Bloomberg

How to invest in this environment?

Now, with everybody yelling that the FED will start the next recession, the FED is changing its policy to not be the one starting a new recession, what happen in the past will not be the next trigger, it is always something new.

Nevertheless, by lowering the normal rate, the FED is going along with the populist policies across the globe as you cannot be the only idiot tightening. So, things will be going along as they are going until they stop going and currencies go to hell. Be careful when owning bonds and business that cannot transfer price increases to customers and business that are alive just because of low interest rates.

For example, car manufacturers in Europe that can borrow at 0%:-)

I am investing in commodities, good businesses that will survive cycles and inflation.

On the economy

It is clear that it is so dependent on stimulus, both fiscal and monetary and that is how it is. One day, the FED and politicians will lose control because they are not allowing for a natural cyclical economy A recession is good as it eradicates the bad. However, bankruptcies are at historical lows.

9 us bankruptcies

Source: Trading Economics

Lower interest rates will make it easier to pay off debt, but we are just postponing the inevitable and making it harder down the road. One day, inflation will knock on our doors, be ready, be hedged and have a long-term mortgage again if the opportunity knocks with a 3.5% 30 year mortgage.

Keep reading, we will simply continue with what we do on this blog, looking for great businesses that are going to do well no matter what happens in the economy and we are going to look for value across the globe and buy when we find it but we will always keep in mind the risks out there.

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How am I investing and how much research I do?

Investing is a very important topic for all of us. However, not all of you can dedicate a lot of time to it. I do research all day long and still the time is never enough. Plus, given a Ph.D. in financial risk management, 3 years of teaching International financial accounting at university level and researching stocks, listening to conference calls and reading annual reports day in and day out, I think I have some skills that few retail, part-time investors have. That is normal for the way we live, I am sure you are much better than me at surgery if you are a surgeon, law if you are a lawyer, software if you are a engineer or in whatever your specialty is.

In the follow video I discuss what I do and how I go about investing.

For those interested in more information, please check my Stock Market Research Platform here:

https://sven-carlin-research-platform.teachable.com/p/stock-market-research-platform

McKesson Stock (MCK) – A Value Investing Perspective

  • MCK has caught the eye of many value investors, even Seth Klarman.
  • I explain where it is that they see value and what is the margin of safety.
  • Investors could reach a 15% long term return from investing in MCK at current levels.

Introduction

McKesson (MCK) came out as a buy within a few value investing funds that I follow, with the largest being Seth Klarman’s Baupost Group. In this report I’ll summarize the risk and reward in an investment thesis and show the value investing perspective on this. Value investing focuses on the value of the underlying business and when the stock trades with a margin of safety to that, it is a buy. So, let’s see what has Seth Klarman been buying.

MCK overview

MCK is a company that distributes drugs, can there be a better business, especially if it is legal? It had $208 billion in revenues in 2018 and operating cash flows of $3.8 billion. It delivers 1/3 of all prescription medicine in North America.

1 mck overview

Source: MCK

We all know the population is aging and there is nothing that can be done in relation to that. Perhaps an interesting trend to invest in and MCK certainly gives us exposure to that. We have to see how big of a moat their business has and whether, and how much, it will be affected by the various Amazons etc. entering the field.

2 distributionSource: MCK

It is important that they can invest in growth but also reward shareholders, we will see later about the return on capital.

9 MCK dividend

Source: MCK

But before, let me compare the bull and bear thesis.

McKesson – Bull and bear thesis

Let’s start with the value investing bull thesis as a few value investing funds have opened a position in MCK.

The main investing thesis is that the stock has declined from a high of $240 to the current lows while the business fundamentals haven’t changed.

4 mck stock price

Source: CNN Money MCK

On the fundamental side, revenues have been growing steadily and doubled over the past 10 years (line 1). Gross margins and operating income have been relatively stable while the dividend has tripled (line 2). Alongside dividends, the company had extra cash to do buybacks as it lowered the number of outstanding shares by 27% over the last 10 years (line 3) but at the same time it doubled its book value (line 4). Operating cash flows have been increasing (line 5) while the business doesn’t really need much capital to grow as the capital spending is just 15% of the operating cash flow or less (line 6). All the above brings to lots of free cash flow that can be used to reward shareholders (line 7). From this point of view, MCK has all the characteristics of a great business.

5 mck fundamentals

Source: MCK Morningstar

When such a great business can be bought at a fair price, value investors jump in. The current market cap is $24.5 billion while the free cash flow over the last 12 months has been $2.7 billion for a price to free cash flow ratio of 9. Also, if I sum up MCK’s free cash flow over the last 9 years, it equals its current market capitalization.

4 mck free cash flow

Source: MCK

This means that if we assume MCK to have the same business results over the next 9 years as it has had over the past 9 years, investors would get their money back in 9 years and still, after 9 years, own the business.

I’ll use Netflix (NFLX) as an example of a company that has negative free cash flows and that is not able to reward shareholders. It is definitely an exciting stock, offering huge growth, but the business model is not amazing and it is not a cash producing business yet. Value investors prefer boring, cash printing businesses, and avoid exciting growth stocks.

6 nflx

Source: NFLX Morningstar

Another positive for MCK is its scale, owning 1/3 of the medicine prescription market in North America is a big deal. It has contracts with CVS Health mail order, Walmart, Albertsons etc. Further, 3 companies control 90% of the pharma distribution market. MCK, AmerisourceBergen (ABC) and Cardinal Health (CAH). It would be extremely costly for new entrants to build what these 3 companies have built, their distribution networks, warehouse efficiency etc.

MCK – Return on invested capital

When it comes to great businesses, return on invested capital is key. MCK has had a ROIC of around 12% over the past 10 years. If the company continues to do that, you can expect its value to compound at that rate. The funny thing is that by investing at the current FCF valuation, you are close to paying a fair price for this.

9 MCK dividend

Source: MCK

Total shareholder returns in 2018 have been $1.9 billion. On the current market cap, that is a yield of 7.7%. This is what you can expect in the future if the valuation remains where it is. But if the ROIC continues to be at 12% and the growth continues, that can only grow.

MCK stock – Fundamentals

MCK’s long term debt is just $8 billion on which is ok on $3 billion of operating cash flows per year.

7 mck long term debt

Source: MCK Morningstar

Despite the buybacks and dividends, the book value has doubled over the past ten years and is currently at $47.73. With $13.16 of free cash flow per share, the return on book value is a staggering 27%. Compound that over time and we can only imagine where will MCK lead shareholders if things continue as those are now. However, there must be something wrong with the company too, if not the stock price would be at $240 as it was a few years ago.

MCK – Bearish thesis

There have been some headwinds lately that have put pressure on the business and consequently on the stock. As Walgreens acquired half of Rite-Aid’s stores, MCK lost part of its revenue and there have been major pricing pressures in the industry that have affected MCK’s profit growth.

Amazon’s threat

Further, the complete drug industry is shifting and there is more pricing pressure from payers. It is inevitable that MCK will feel the pain of this industry trend but, as with any other business, there are always risks, if MCK manages to mitigate those risks by increasing efficiency and cost savings, it will continue to do well for shareholders.

Two other concerns are Amazon (AMZN) and the opioid epidemic issue. We know what has Amazon been doing to retailers over the past decade and when a player like that acquires a company like PillPack, it is a good time to be concerned.

8 amazon

Source: CNBC

The market significantly reacted to the above, but we have to keep in mind that PillPack had revenues of $100 million in 2017, which is not much compared to the $208 billion for MCK.

Now, let us assume the worst-case scenario, that AMZN becomes a big player in the industry. How long is it going to take it to become a significant player there? We have seen it acquire Whole Foods but did it immediately impact other grocery stores and their business results? Of course not.

Further, the population is aging, both in the US and in Europe where MCK acquired German drug wholesaler Celesio in 2013. So, let’s say AMZN takes 3% of the market year by year over the next 10 years. In will end up owning 30% of the market, however, we can expect the market to unfortunately grow at 5% per year.

7 mck growth

Source: MCK

So, MCK could end up growing at 2% per year even if AMZN becomes the dominant player in the industry. However, the market’s growth is an issue that is also putting pressure on MCK due to the opioid epidemic. Before discussing that, let’s say that MCK doesn’t grow at all over the next 10 years. This would mean that its free cash flows would be around $25 billion, what is the current market capitalization. Whatever value is left after 10 years, it would be a bonus to those who invest in MCK today. And that is why value investors have been buying MCK, the cash flows are the value while the future potential is the margin of safety. In case of further stock price declines, someone would probably snap it and bring it private.

The opioid epidemic

If you are an opioid distributor, your goal is to sell as much as you can. This can create a distorted picture of what is actually good for the patient or not. The Daily doses of opioids in the 20 most populous countries shows a staggering statistic. If the US or Germany would fall to the Japanese average, revenues for MCK would decline significantly.

9 opioids

Source: QZ

Just as a note:

  • Opioid pain relief in different countries
  • US gets 30 times more opioid pain relief medication than it needs
  • Mexico gets only 36% of what it needs
  • China gets about 16% of what it needs
  • India gets 4% of what it needs
  • Nigeria gets just 0.2% of what it needs

Source: The Lancet Commission on Global Access to Palliative Care and Pain Relief

I am personally fortunate that since my wife has taken care of my nutrition over the past 7 years I have not taken any kind of pill. So, if my wife gets famous, that is another risk for MCK.

Conclusion – what to expect from investing in MCK?

I really don’t like the big pharma and the way they go about promoting what they make. If the same amount of money would be spent to promoting eating broccoli, people would live much longer. However, I also have a responsibility to show the best risk reward investments out there to my investment community and consequently also invest in the best businesses out there.

When it comes to what to expect from investing in MCK, the first thing we have to keep in mind is the 7.7% investors yield in the form of buybacks and dividends. Further, the capital that gets reinvested will probably yield 12% and the market will grow probably at 3 to 5%. This means that MCK’s revenues will probably double in the next 10 years and profits too. This would bring the stock to double over the next 10 years in addition to giving you a yield of 7.7%. The return from the stock doubling would be 7% that in addition to the 7.7% shareholder yield gives you a return of 15% per year if it remains business as usual for MCK.

If the market calms down, the current concerns become mere overreactions, and the price to cash flow goes to 15, the market cap could quickly jump to $45 billion which implies an upside of 87%.

On the downside, there will probably be some fines, more negative sentiment etc. That might put significant pressure on the stock but not on the long-term business, something to keep in mind.

Am I going to invest?

I am going to look at it a bit deeper, listen to the conference calls, see about my negative feeling for the pharma sector in general and then also compare it to other potential investments.

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How to invest in businesses with dr. Per Jenster

I recently had the privilege to interview dr. Per Jenster. He is a Fullbright scolar, author of many books, former dean of the Kopenhagen Business school, entrepreneur with more than 20 ventures of which many went public for hundreds of millions and he is an investor that has his own hedge fund. A person from whom we can learn very much. Enjoy the interview.

In case you want to reach Prof Jenster or know more about how he invests, please go to … http://nichemastersfund.com

Here is the video and you can find the discussion topics below the video.

0:27 Who is Per Jenster

1:33 What to look when investing in a business

3:59 Fund based on a niche strategy

6:01 Companies we are investing in

8:30 Management

10:00 HIGHER PE for HIGH ROIC

10:44 Index funds

13:10 Trading

14:24 Strategic focus

15:57 Current stock market

18:25 Diversification

20:31 Investing education

21:36 Modern investing

23:32 Learn to be better at investing

 

Nassim Taleb is warnings us – situation worse than in 2007

  • The US government has $21 trillion of debt, but few know and think about the $49 trillion in hidden debt.
  • The global economy is not stable because the core is cracking already, think Italy.
  • Taleb compares this debt environment with a Ponzi or Maddoff scheme.
  • The main message is to be protected (gold, real assets, puts).

In a recent Bloomberg video, Nassim Taleb, the author of Black Swan and probably one of the best estimators of risk, is warning us that the financial situation is worse than it was in 2007.

As Taleb doesn’t share much data in his interview, I have researched each of his statements and attached a few facts to them.

The topics he discusses and I dig deeper into are:

  • (0:00) Introduction
  • (1:23) The bigger debt pile that has just been transferred from housing to governments.
  • (4:16) The hidden debt few are taking into account.
  • (5:48) How the economy is already cracking in some places.
  • (6:32) The high probability of a global currency collapse.
  • (8:01) What will happen and how will it pan out? Inflation.
  • (9:36) 4 ways to protect yourself.

Enjoy the video.