Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
What a remarkable week it has been with all of the news relating to COVID-19 vaccines, therapies, and scientific research. It’s fitting that we’ll finish out the week with even more progress.
Today, Pfizer and BioNTech are submitting their application to gain emergency use authorization (EUA) for their COVID-19 vaccine to the Food and Drug Administration (FDA). As a reminder, the companies wrapped up their Phase 3 clinical trials with an impressive 95% efficacy rate.
With the election now behind us, I am confident that the FDA approval for emergency use of the vaccine will come in a matter of days. I expect that health care workers will receive priority, and then high-risk parts of the population will come next.
This, of course, is fantastic news. Just the availability of a vaccine will get us one step closer to normal.
Best wishes to all for a great weekend.
Let’s begin with a question on investing in the companies making COVID-19 vaccines:
Given the news regarding Pfizer and the COVID vaccine, should attention be given to investing with other producers (i.e., Moderna) at this time? Should we be waiting for further projections to be considered?
– William T.
Hi, William, and thanks for writing in. This is likely a question on many people’s minds…
For any readers who missed it, back on November 9, Pfizer and BioNTech announced fantastic results from the clinical trial for their COVID-19 vaccine. They reported that the vaccine was more than 90% effective.
Then, on Monday this week, Moderna proceeded to announce early results from its own vaccine trial, which showed 94.5% effectiveness.
This was followed in quick succession by Pfizer and BioNTech releasing a final analysis of their Phase 3 trial just two days later, which concluded it was actually 95% effective.
It’s almost like these companies really are in a race, each vying for a first-place finish – and the biggest headlines.
So it’s natural for investors to wonder whether a company like Moderna would be a good option for our portfolio. And there’s one key metric that gives us a good picture of the situation and helps us keep things in context: valuation.
Back in May, near the height of the pandemic, Moderna released positive early results on its Phase 1 trial. At that time, Moderna was trading at an astounding enterprise value (EV)/sales ratio of 340. You read that right – the equivalent of 340 years of revenue, not profit.
And even now in November, Moderna’s EV/sales ratio still rests around 130.
Understanding a company’s valuation is critical. Even the best companies are not good investments if they are trading at too high of a valuation. Investing at an irrationally high valuation in a fantastic company will still lead to losses.
We can see the dangers of investing in overvalued technology companies by looking back at the dot-com bust. The founder and former CEO of Sun Microsystems, Scott McNealy, put it best. In an interview in 2000, he said:
We were selling at 10 times revenues [… ] At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?
Sun Microsystems peaked at $257 and plummeted 96% to $9.68. The company’s fall didn’t happen because Sun Microsystems had bad technology. In fact, we still use its Java programming language today. But its valuation was way too high to support its future growth expectations.
I retell this story simply to point out the dangers of investing in a company with an absurdly high valuation, especially now when its main strength is something as timely as COVID-19. I fully expect the pandemic to be in the rearview mirror by this time next year.
So where does that leave companies that have risen on vaccine or therapy news? Especially if they don’t have any other promising products in the pipeline, we can expect to see them fall hard.
Now, McNealy said an EV/sales of 10 was too high. I disagree with him on that. Some companies can justify an EV/sales ratio of 10 or higher as long as they have the gross margins and growth rate to support it.
But an EV/sales ratio of 100-plus is just an absurd valuation… and investors could lose most of their money if they hold on to these companies. Holding those kinds of stocks is not investing; it’s pure speculation.
With all that said, the situation is different when we look at companies that have great underlying technology, an interesting pipeline of drug candidates, strong management, and a competitive advantage… and a COVID-19 vaccine or therapy that is just part of what they are working on. We should be looking at opportunities like that if they come at a reasonable valuation.
And more broadly, the biotechnology sector has been the primary beneficiary of the pandemic. What I mean is that the rapid advancements in vaccine and therapeutic development for COVID-19 have demonstrated that the biotech industry can move at the speed of the information technology (IT) sector. This was never the case before.
This has resulted in record levels of investment from the venture capital (VC) community into early stage biotechnology companies.
We will see hundreds of interesting future initial public offerings (IPOs) in the biotech sector and just as many breakthroughs.
And so many of these exciting, bleeding-edge biotech companies are overlooked and not well understood, which is exactly why all of the model portfolios in my research services include these kinds of companies.
We’re in for a decade-long bull run in the biotech sector, which will provide normal investors an opportunity to make an absolute fortune. And readers can go right here to find out about the top large-cap biotech company currently on my list.
Next, a reader wants to know more about our buy-up-to prices:
Good afternoon, Jeff. I want to first wish you good health and happiness in your life. I am trying to make up for lost time and build wealth at the age of 53 while having to take care of two boys ages five and seven. I appreciate you trying to help all of us novice investors.
Various investment services say to wait for a pullback in the market before investing during these times. It’s confusing because I have watched the market shoot straight up the last five or six months waiting for that to happen… I have taken a beating and don’t know what to do.
My question is related to your recommendations. The buy prices have already gone past your original price on many companies in the portfolio. I just joined a couple of weeks ago after watching the video with you and Chris Hurt, and I’m trying to find out from you if I should just invest in all of your companies with the same dollar amount regardless of price or continue to wait for a pullback?
This market seems to love bad news this year since late March and has not behaved in a normal gray area like it has historically, and I feel helpless, stuck, and I don’t know what would be the best approach. I would like to be able to be financially independent and be able to provide for my boys to go anywhere for college and allow us to live in a nice home with plenty of room for my family.
– Michael B.
Hi, Michael, and thanks for joining us as a subscriber. I know many people are concerned about where the markets will go from here, especially given the fear and panic spurred by the news media about rising COVID-19 cases and the political tensions that haven’t subsided post-election.
If we do end up shutting down the country again, we may very well see another crash like we did this past March. But it’s still unclear whether a drastic measure like that will actually happen. And obviously, that heavily depends on who becomes president in January, something that hasn’t yet been officially determined from my perspective.
I just returned from New York City, which I haven’t been to since February this year. It was remarkably peaceful in the absence of tourists and those who would normally work in the city.
The day after I arrived, NYC announced it was shutting down its public schools. Then several hours after that, there were indications that the city would soon return to a full lockdown.
I’ve started to see anecdotal signs like this across the country. The media is pandering fear and panic again. People are acting irrationally and don’t know what to believe. The U.S. is now testing more than 1.8 million people a day (as of yesterday) for COVID-19 using a test that produces 60–90% false positives.
None of it makes any sense, but it will almost certainly result in more school closures and economic restrictions, which will be bad for the market. I do think that there is a high likelihood that we will experience a pullback between now and February.
On the other hand, I personally remain very optimistic about the potential of the technology companies in our portfolio going into 2021.
As I’ve been writing in The Bleeding Edge, we are seeing enormous potential in technology trends such as the 5G rollout, precision medicine, cloud computing, and artificial intelligence (AI). The COVID-19 pandemic has spurred many of these trends into overdrive this year due to work-from-home measures and the desire for contactless transactions.
And while I can’t give personalized investment advice, here’s what I can say regarding the buy prices for our recommended companies. I determine my buy-up-to prices based on company valuations that I believe are reasonable at any given point in time.
Therefore, in general, if a stock drops below our recommended buy price, then that means it’s a “buy.” An investor is establishing a position at a compelling valuation with plenty of upside potential ahead.
But when these stocks have risen above the buy-up-to price, my official recommendation is patience. Technology stocks have natural volatility that often brings them back within range. New investors will want to wait for one of these dips to build a position.
Plus, every month I publish new investment recommendations in The Near Future Report and Exponential Tech Investor. It’s natural to want to own everything in the portfolio, but it takes time to build a great portfolio of incredible investment opportunities. Doing so at good valuations is how we stack the deck in our favor for outsized returns.
Also, on occasion, I will decide to raise the recommended price. This happens when a company’s growth potential has increased since the time of the original recommendation, and I want to ensure all investors have had the chance to build their position. I always issue an alert to my readers if this happens.
Thanks for writing in and also for joining Brownstone Research. I have two young boys at similar ages, and I share your desire to provide them a great education and a great life. They are my motivation to keep working hard and set an example… and my secret to happiness every day.
I wish you and your boys well, and I’ll be working hard to help you and others just like you make up for that lost time.
Let’s conclude with some kind words from a subscriber:
Dear Jeff Brown,
I have been a subscriber to The Near Future Report for over three years now, and you have changed my life. You are the best mind when it comes to technology investing I have ever seen, and I was blessed to have been given the opportunity to see your expertise.
Due to your stock picks, we were able to dig ourselves out of debt on unforeseen issues with our home. My wife and I are both teachers and have a young child, so without you we would have been in a really tough position. Again, I am so appreciative of you and can’t begin to thank you enough. I can tell you truly care about the people and want to see us be successful.
– Daniel K.
Daniel, thank you for taking the time to write in. I don’t know how to say it, but receiving feedback like this really helps me keep going.
The work that my team and I do is hard and very time consuming, and it takes a lot of grit to get after it day after day. I may make it look easy to beat the market and the best hedge funds, but it’s not easy at all.
People like you are why I take my work so seriously and why I put so much time and effort into everything that I publish. I want to give all my readers the chance to achieve their financial goals, whatever they may be.
I offer sincere congratulations on your success. It is quite the accomplishment to become debt-free, and it’s a critical step on the path to building real wealth.
I’m sure you’ll be happy to know that there is even more to come. The technological advancements over the next few years are going to be remarkable, as will the investment opportunities.
We have so much to look forward to.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Jeff Brown
Editor, The Bleeding Edge
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
