The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide

The bubble isn’t burst yet.

Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures


were stronger.

Gold futures

fell while oil futures

edged higher.

The British pound

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple

and Facebook

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

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My Current View Of The S&P 500 Index: September 2020 Edition

This month’s article will outline why I will again remain 100% allocated to the SPDR S&P 500 Trust ETF (SPY) with my retirement assets in September. First let me review my performance in August. All of the equity ETFs I monitor moved higher in August. The market, as measured by the S&P 500 index, rose 7.01%. As for my pension plan assets, I had a slightly lower gain of 6.98% in August which equaled the return of SPY. My investment objective of preserving my capital was met however I did not beat the overall market as measured by the S&P 500 index. Table 1 below shows my returns and allocations for the month of August and Table 2 below shows my returns for the past 12 months.

Table 1 – Investment Returns for August

Table 2 – Investment Returns Last 12 Months

To review the purpose of this series of articles, my retirement account only allows me to buy the following four ETFs: iShares Core U.S. Aggregate Bond ETF (AGG), SPDR S&P 500 ETF, iShares Russell 2000 ETF (IWM), and iShares MSCI EAFE ETF (EFA). I can also have my money in cash. The question is how to decide where and when to allocate money to these various ETFs.

I use my moving average crossover system combined with relative strength charts to determine how to allocate my pension plan assets. My moving average crossover system uses the 6 month and the 10 month exponential moving averages to identify which of the four ETFs are in a position to be bought. If the 6 month moving average is above the 10 month moving average, then the ETF is a buy. I call this setup being in bullish alignment. When the 6 month moving average is below the 10 month moving average, the setup is referred to as a bearish alignment. When a bearish alignment happens, I don’t want to hold that asset. See Chart 1 below for a long-term look at the S&P 500 index using my moving average crossover system.

Chart 1 – Monthly S&P 500 Index with 6/10 Moving Averages

You can see that the moving average crossover system provided some excellent long-term buy and sell signals that would have allowed investors to capture long duration moves in the index; while avoiding costly drawdowns. Avoiding these costly drawdowns allows me to meet the objective of capital preservation.

I employ this strategy because I do not want to experience a large drawdown with my pension assets. During the 2008 – 2009 market crash many people didn’t even look at their retirement statements because they were afraid of what they would find. I submit that if those people would have used a market strategy similar to what I outline in this series of articles, they would have been able to avoid much of the decline during the bear market and consequently would have had less emotional stress during that time period.

The following charts show the current status of the ETFs that I am allowed to buy in my retirement account.

Chart 2 – Monthly SPY with 6/10 Moving Averages

SPY was the big gainer for August as it rose 6.98%. Really nothing has changed from my comments last month. SPY remains above both of the moving averages. The moving averages remain in bullish alignment and are starting to separate more which is bullish. SPY remains above the dashed green support line. Lastly SPY had a very strong bullish candle and closed at a new high. What is not to like? Well, volume for the month was very low. Often the summer months have lower volume so perhaps it is not too much to worry about. SPY is bullish and my money will remain in SPY for August.

Chart 3 – Monthly IWM with 6/10 Moving Averages

IWM had a good month gaining 5.48% in August. IWM is now in bullish alignment. It was the fifth month in a row that IWM had a positive gain. IWM is now closing in on its recent highs. One negative aspect for the month is that IWM had low volume. As mentioned last month, perhaps this is due to this being the summer and often summer months have low volume. Who knows? I will continue to monitor this ETF.

Chart 4 – Monthly IWM:SPY Relative Strength

IWM underperformed SPY by 1.41% in August. The ratio is at its most recent low. Small cap stocks just can’t outperform the large cap tech stocks at this time. As mentioned last month, before I allocate money to IWM instead of SPY I need to see this ratio close above its 10 month moving average. Once that happens then it may be prudent to allocate a portion of my retirement funds to IWM. I will continue to monitor this ratio.

Chart 5 – Monthly EFA with 6/10 Moving Averages

EFA also had a good month in August gaining 4.72%. EFA is now in bullish alignment, albeit just barely. It has risen for five consecutive months and is approaching its previous high. Volume declined for the month.

Chart 6 – Monthly EFA:SPY Relative Strength

Chart 6 shows that EFA underperformed SPY by 2.11% in August. The ratio has hit a new low, again confirming the decision to invest in SPY over EFA. The ratio remains below both moving averages and the two moving averages remain in bearish alignment. As a proponent of trend following, I will wait until I see more improvement in this ratio before I allocate money to EFA over SPY. I will continue to review this ratio looking for the ratio to close above its 10 month moving average before I consider adding money to EFA.

Chart 7 – Monthly EFA:IWM Relative Strength

EFA underperformed IWM again in August by 0.72%. The ratio remains inside the green box. Neither ETF can gain on the other. At this time there is no compelling reason to invest in EFA over IWM. I will continue to monitor this ratio.

Chart 8 – Monthly AGG with 6/10 Moving Averages

AGG had its first decline in four months as it fell 0.82% in August. AGG remains in bullish alignment. One item that was interesting to me was that the volume in AGG was higher in August than it has been in several months. This is in stark contrast to the equity ETFs shown previously whose volume all declined in August. This ETF will be interesting to watch moving forward now that the Federal Reserve has announced a major policy shift concerning inflation.

Chart 9 – Monthly AGG:SPY Relative Strength

Chart 9 shows that AGG underperformed SPY by 7.29% in August. This result has the ratio in bearish alignment now which was mentioned in last month’s article. It is really no surprise that this happened. Nothing has really changed here. Investors prefer stocks over bonds. This ratio is why I won’t place any of my retirement assets in AGG anytime soon. I will continue to monitor this ratio and look for evidence of a change in investor preferences.

To summarize this month’s article the three equity ETFs all gained while AGG, the ETF concentrated in bonds, lost money in August. All four ETFs are in bullish alignment which is a new development. SPY was the biggest gainer for the month as investors still prefer US large cap stocks over small caps and international equities. This is confirmed by Charts 4 and 6 which show the ratios at new lows. I will continue to allocate 100% of my money to SPY as SPY is in bullish alignment and IWM and EFA are underperforming SPY.

Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Competitive Advantages Of Inovio’s COVID Vaccine Makes Current Low Price A Buying Opportunity (NASDAQ:INO)

Investment Thesis

Inovio 1-year share price performance. Source: TradingView

A couple of weeks ago I added 4 biotechs developing COVID-19 vaccines or adjuvants to the Pure BioTech model portfolio I run at my marketplace channel Haggerston BioHealth: Inovio (INO) – the focus of this article – Vaxart (VXRT), Novavax (NVAX) and Dynavax (DVAX).

Unfortunately, I got my timings wrong, since all 4 stocks have dropped by >14% since I added them, but I remain confident that my thesis – that there are many more twists and turns ahead in the race to develop a COVID-19 vaccine, and therefore, a huge amount of price volatility for investors to capitalize upon in the short term, and that over the long term, this period of supercharged development will create sustained share price gains for a number of companies and lead to a variety of effective treatments – remains true.

I believe Inovio’s share price has declined primarily because it has not been selected as a “finalist” by the US Government’s Operation Warp Speed (“OWS”) program, but this fact does not overly concern me. Amongst those chosen, and awarded funding are AstraZeneca (AZ), Johnson & Johnson (JNJ), Moderna (MRNA), GlaxoSmithKline (GSK) and Pfizer (PFE) which suggests to me that, wildcard Moderna aside, OWS has plumped for big pharma over biotech.

That is probably the safe option, but my own feeling is that true innovation comes from the biotechs that more often than not, supply the drug candidates that make big pharma rich, through development deals and acquisitions, since biotechs lack the financial clout to self-fund late-stage R&D, or compete in the post-commercialization market.

Bears may point to the fact that Inovio has yet to commercialize a drug of any kind in more than 30 years of trying, but due to the fact that the pandemic is an unprecedented event and the task of creating a vaccine is a unique challenge, I believe that this should be discounted as a criteria for judging a company’s prospects of success.

In many ways, Inovio has operated more like an R&D center than a late-stage biotech pushing for commercialization in recent years – which has allowed the company to slowly but steadily progress a number of vaccine treatments into late stage trials, and develop a sophisticated delivery system involving plasmid DNA and in vivo, cellular administration techniques that are safer and have a longer lasting effect.

Although Inovio has missed out on the multi-billion funding agreements the US government has signed with its finalist candidates, and others, e.g. Novavax (NVAX), the company has raised ~$450m in 2020 and secured a deal with the Department of Defense worth $71m to develop its CELLECTRA smart delivery device.

The company says it is on track to deliver 1m doses of its INO-4800 vaccine in 2020, and 100m doses by 2021, but investors have backed away from the stock owing to unexpected delays in approval for, and enrollment in late-stage trials. This has caused Inovio’s share price to retreat from $32 to $12.13 at the time of writing, and I make this a buying opportunity.

I expect the company to commence late-stage trials of INO-4800 by the end of September, and based on early data sets, which suggest that INO-4800 has generated the most durable response of all vaccines trialed to date, I expect data readouts from these trials to put Inovio back in contention to be one of the first vaccines approved for treatment of COVID-19.

In the long run, however, I am more interested in INO-4800 being one of the superior treatments to get to market, rather than one of the earliest, and I also believe there is a reasonable chance of one or more of its HPV or cancer vaccines securing approval from the FDA, which could help the company achieve peak sales of >$1bn. Hence, I am bullish on Inovio.

A COVID vaccine would create upside that is hard to quantify, but would certainly be substantial, whilst the downside case is limited by Inovio’s multiple shots at goal and satisfactory funding position. I am hoping to see the share price exceed its current 2020 high of $32 before the end of the year.

Analysts’ consensus target price is currently $15.6. Without the COVID angle, I would be setting a 1 year price target of $15-$20.

Company Overview – SynCon & CELLECTRA

Inovio is primarily concerned with the design, development and rapid commercialization of DNA medicines to treat diseases associated with human papillomavirus (“HPV”), cancer, and infectious diseases, using 3 different types of product candidates: DNA vaccines, DNA immunotherapies and DNA encoded monoclonal antibodies (dMABs).

The company has developed a unique approach that uses a proprietary immunotherapy platform, SynCon that precisely encodes optimized antigens or transgene proteins into close-circular DNA plasmids that generate an immune response in vivo, leading to the production of preventive antibodies and / or the activation of therapeutic CD8+ T cells.

Inovio’s medicines are delivered using the company’s specially developed and proprietary CELLECTRA smart device, which uses electric pulses to create temporary pores in the cell membrane to ensure the delivery of nucleic acids into the cell. Inovio believes this increases the cellular uptake of its optimized plasmids by 1000x compared to an injection, as well as avoiding unwanted immune responses caused by the activation of additional antigens contained within a vector – Inovio’s plasmids result in the production of only the desired antigen.

Inovio’s SynCon and CELLECTRA design and delivery system explained. Source: corporate presentation.

The company has tested CELLECTRA in more than 2,000 patients and 6,000 administrations and found it to be safe and effective, not requiring an anaesthetic, and with no anti-vector response generated.

There are different configurations of CELLECTRA including intramuscular delivery of DNA medicines and intradermal/subcutaneous delivery, and Inovio was recently awarded $71m of funding from the Department of Defense (“DOD”) to support the large-scale manufacture of its next generation device, CELLECTRA® 3PSP – designed to administer Inovio’s COVID vaccine INO-4800 directly into the skin – and associated arrays.

The current version of CELLECTRA has received CE mark certification, whilst Inovio hopes to secure FDA approval for the device ahead of its planned use in the US military and US population as a whole, as part of the DOD agreement.

Current Pipeline

Inovio DNA Medicine pipeline. Source: company website.

According to research from the Centers for Disease Control (“CDC”), 80m Americans are currently infected with HPV, with 14m new infections annually. If untreated, HPV can quickly progress to low-grade cervical dysplasia, which affects around 1.1m Americans, high grade anal, vulvar, or cervical dysplasia (~150k people), and eventually cervical, anal, head and neck, or vulvar cancer (~40k).

VGX-3100 is Inovio’s most advanced vaccine treatment for HPV, and is currently in pivotal phase 3 trials (REVEAL1 & REVEAL 2) of HPV-related precancerous cervical dysplasia, and high grade squamous Intraepithelial lesion (“HSIL”) with results from the cervical dysplasia arm expected to be announced in Q420. In a phase 2b trial, VGX-3100 met its primary and secondary endpoints, of regression to cervical intraepithelial neoplasia (“CIN”) grade 1 or normal, and regression to normal and virological clearance.

INO-3107, developed to treat rare disease Recurrent Respiratory Papillomatosis, has had an IND accepted for a phase 1/2 study – with the primary endpoint being a doubling or more in the time between surgical interventions – and been granted orphan drug designation.

MEDIO457, developed to treat head and neck and cervical cancers, is being developed in collaboration with AstraZeneca (AZ), who have paid $27.5m up front, and committed up to $250m in development and commercial milestones, plus double-digit tiered royalties, to acquire the candidate, which it is also trialing in combination with its PD-L1 inhibitor durvalumab in HPV associated cancers.

DNA immunotherapy candidate INO-5401, designed to treat brain cancer Glioblastoma Multiforme (“GBM”) is being developed in collaboration with Regeneron (REGN). Results from a 52 patient phase 1/2 trial, released in May, showed that 85% of newly diagnosed GBM patients were alive for at least 12 months or more following treatment, and no serious safety concerns were reported.

Analysts have estimated that peak sales of INO-5401 and INO-3107 could reach up to $1.4bn in annual sales, although it is worth pointing out that the success rates of vaccine candidates even in late stage trials are lower than one-in-three.

COVID Vaccine

Inovio was one of the first companies out of the blocks with a SARS-Cov 2 vaccine, designing a solution within hours of the release of the genetic sequence of the coronavirus by Chinese scientists in January this year.

INO-4800 was designed to precisely match the DNA sequence of the virus and targets the surface antigen Spike protein of the SARS-Cov 2 virus which causes coronavirus. The vaccine was first manufactured in January.

By March, Inovio had initiated pre-clinical studies, and received $5m funding from both the Bill and Melinda Gates Foundation, and in April the company initiated its first clinical trial in humans in the US – enrolling 40 patients – after receiving an IND from the FDA, and also raised $150m to fund development, at a price of $7.7, as well as receiving $6.9m of funding from the Coalition for Epidemic Preparedness Innovations (“CEPI”).

This early progress saw Inovios’ share price briefly spike from a price of $4.4 in early March, to $14, and then spike to $16 in early May, when it released pre-clinical data – published in the journal Nature – that revealed robust neutralizing antibody and T cell immune responses in mice and guinea pigs. 3 separate assays were used to confirm the presence of virus neutralizing antibodies and activity, and antibodies were also detected in the lungs of the vaccinated animals – an encouraging sign given that coronavirus targets the respiratory system.

In June, Inovio expanded its phase 1 trial to 80 additional participants, including older adults, and announced positive preliminary results. 94% of participants receiving a 1mg or 2mg dose four weeks apart, administered using CELLECTRA, demonstrated binding and neutralizing antibodies and T cell immune responses, with no serious adverse safety events reported.

INO-4800 clinical trial progress. Source: Inovio corporate presentation.

Additionally, in the OWS’ non-human primate study in which Inovio participated, durable antibody and T-cell responses were observed more than 4 months after the initial dose, whilst memory T and B cell responses reduced viral loads and resulted in faster clearance of lungs and nasal passages. Inovio pledged to commence a phase 2/3 trial in July / August, pending FDA approval, and began clinical trials in South Korea and China.

At this point, with a number of positive data sets released, $71m from the DoD, and $150m of funding raised, Inovio looked like a clear front-runner, despite missing out on the OWS finalist program, and the company’s share price rocketed to $32. Profit taking and one or two bearish analyst reports dropped the price back down to $19, but the stock was soon soaring again, peaking at $27 in late July.

Unable to Sustain Momentum

Late July represented a high water mark for Inovio in terms of share price and progress however – since August, Inovio has demonstrably failed to build on its significant momentum.

The proposed phase 2/3 trial has been put back to September at the earliest, , and Inovio stock crashed back down to $14 after management had little to update analysts with in its Q220 earnings call.

The reasons for the delay are unclear, but could be related to issues gaining trial approval from the FDA, or possibly due to supply issues Inovio has been experiencing with its plasmid supplier VGXI, which informed Inovio in June that it was unable to produce sufficient quantities of plasmids. Inovio subsequently asked VGXI to hand over its plasmid manufacturing technology to its contract manufacturers, which the company has refused to do, which has resulted in Inovio taking VGXI to court.

The delays could additionally hint at the fact that as a fundamentally research and development based drug developer, Inovio is struggling to maintain the rapid pace of development due to its lack of experience in this field, or, a more doomsday scenario, that the company has uncovered data that suggests the vaccine’s efficacy or safety profile is not up to scratch.

Meanwhile, other developers have moved ahead in the race. Moderna will shortly commence a phase 3 trial, AstraZeneca may be close to securing an Emergency Use Authorization (“EUA”) nod from the US government, and Sanofi has entered human trials with a promising treatment developed in collaboration with GlaxoSmithKline (GSK).

And furthermore, now that the FDA – aiming to secure a quick approval for a vaccine to meet its Jan ’21 deadline – has set the bar for vaccine efficiency at just 50% compared to placebo, it could certainly be argued that Inovio has dropped off the pace at the worst possible time.

Too early to discount Inovio’s differentiated and economical solution

As mentioned in my intro however, I believe it is far too early to discount Inovio and INO-4800. Market-watchers who wish to will be able to uncover new reasons to discount one vaccine treatment and promote another on an almost daily basis, which is why there has been so much market volatility to date.

When the prize for developing a COVID vaccine has been estimated to be anything from $70bn to >$100bn, or $40bn in after tax profits, or perhaps as much as $150bn, at the high end (think of how much a vaccine will save the government, economy, and healthcare system over time) it is no wonder investors are desperate to back the right stock.

But in reality, I do not see things playing out as simply as there being one winner and hundreds of also-rans, since there are many different variables to consider.

Moderna, for example, may be considered a current front-runner, but its vaccine is also likely to be expensive – estimated at between $32 and $37 based on deals Moderna has already made – since it needs to be stored in sub-zero conditions. Inovio’s vaccine, on the other hand, can last up to 1 year at room temperature, and up to 5-years when refrigerated at between 2-8 degrees centigrade.

The US government has purchased 100m doses of Pfizer / BioNTech’s vaccine for $1.95bn, which works out at ~$20 per dose, whilst other companies – AstraZeneca and JNJ, for example – have pledged to provide their vaccine on a non-profit basis during the pandemic. But there are other costs to consider, such as administration.

Importantly, Inovio’s CELLECTRA based administration system may prove to be more economical and environmentally friendly than using disposable needles, swabs, and gloves. The battery powered devices can be stockpiled in large quantities without maintenance, making them ideal for use during a pandemic.

Most important of all is efficacy, and at this point, it is still anybody’s guess which vaccine will prove the winner in this regard. If a vaccine is approved in January 2021, for, say, 100m initial doses, with an option to buy 200m more doses, but in the interim period, Inovio, say, publishes demonstrably superior results from a late-stage trial, and has sufficient manufacturing agreements in place, then surely governments around the world will turn to the new solution.

Signs that INO-4800 could still prove to be a winner

Under normal circumstances, vaccine development takes up to 5 years at the very least, whereas under pandemic conditions, firms with little or no experience (e.g. Moderna), or big pharmas trying to build a respiratory-based vaccine from scratch in a matter of months, may not be the best options.

Granted, big pharma can use their financial leverage and influence to accelerate the development process, but this is a risky strategy that goes against tried and tested approaches and there is no prior proof that it can work. As far as Moderna is concerned, no mRNA drug of any kind has ever been approved before.

Inovio, on the other hand, has a great deal more experience of the R&D side of the vaccine development process, which suggests that, although it may take longer to develop, the company’s vaccine may prove eventually to be the superior product.

Its anti-vector technology, for example, is likely to create a more durable response and cause less side-effects. Its cellular delivery system, as already mentioned, is a more effective dosing solution that gets more of the vaccine to the right parts of the body. INO-4800 generates T-cell responses and may be superior at targeting the lungs and nasal passages. The vaccine itself does not require an adjuvant.

Some have argued that Inovio does not have the funds to advance its late stage trials, but this is not the case. The company completed sales agreements of $121.7 million and $330.0 million during the three and six months ended June 30, 2020, and its current cash + short term investments stands at nearly $400m.

That is significantly less than rivals such as Novavax, which has received $2bn from the government, Moderna and its big pharma rivals, but, given its cash burn of $161m in the first 6 months of 2020, enough to ensure Inovio can keep going until late 2021 without needing to tap the market for funds, and in that time it may well succeed in attracting new partners and more funding.

During the Q220 earnings call, CEO Joseph Kim re-iterated that the company’s target was to provide at least 1 million doses of INO-4800 vaccine this year, and 100 million doses in 2021


Inovio’s progress – or rather, news of Inovio’s progress, has been disappointing in the last month or so, while the news-flow generated and funding secured by its rivals has suggested that the company is being left behind in the race to develop a COVID vaccine. I see the cons relating to Inovio as follows:

There appear to be concerns relating to manufacturing, and the delays to Inovio’s late-stage trials have not been properly explained. The company does not have a track record of getting its treatments over the line when it comes to securing FDA approval, and would certainly benefit from a funding injection since it is also running multiple late-stage vaccine trials that are a drain on resources. Finally, going forward, enrollment could be a trickier process with so many late-stage trials ongoing, which could delay trial progress.

These are the negatives I see in relation to Inovio and the bear case for its stock price declining. But I believe the positives outweigh the negatives.

Despite the way the market reacts hysterically to company news flow and the actions of the government, the COVID vaccine race is really just beginning. Inovio has been working on perfecting its vaccine design and administration tools for 30+ years – this R&D advantage may translate into INO-4800 ultimately becoming the safest and more effective long-term solution.

The main criticism of the company is the delay to its phase 2/3 trial and limited data sets to date, but what data there has been has been not only strong – generating antibodies and memory T and B-cells, but strong specific to the requirements of a COVID vaccine i.e. targeting the respiratory system with a larger payload and no anti-vector activity that could cause severe side-effects further down the line.

Although I am not trying to suggest that Inovio is the clear leader in the COVID vaccine field, from a pure investment perspective, my expectation is that the company will deliver plenty more price catalysts in the coming months.

In the seesaw COVID-19 vaccine market, Inovio’s price is currently trading at a 62.5% discount to its late June peak of $32, and that price is likely to be low in comparison to the price the company’s shares could achieve if it can prove that August was simply a slow news month, and that it is still on track to start a major phase 2/3 trial in September, or thereabouts.

In conclusion, it is still too early to discount Inovio’s chances of delivering a successful COVID vaccine. If the company’s share price spiked to $32 on its early stage data, then investors ought to expect that, when genuine progress is reported, as I suspect it will be, the price will match or exceed its previous high.

If you like what you have just read and want to receive at least 4 exclusive stock tips every week focused on Pharma, Biotech and Healthcare, then join me at my marketplace channel, Haggerston BioHealth. Invest alongside the model portfolio or simply access the investment bank-grade financial models and research. I hope to see you there.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in INO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Enerplus: A Well-Positioned Independent For The Current Environment (NYSE:ERF)

Enerplus Corporation (NYSE:ERF) is an independent exploration and production company with operations throughout North America. Although the company was originally a Canadian royalty trust and is one of the largest independents in Canada, it has since expanded from its roots and is now active in some of the most prominent basins in the United States. Admittedly, there is still a great deal of fear surrounding independent upstream companies due to the still low energy price environment, but Enerplus has a long history of being able to prosper throughout the whole cycle. Let us investigate and see if this company could be right for your portfolio.

Although Enerplus was originally founded in 1986 as a Canadian royalty trust, today most of the company’s production actually comes from the Bakken shale.

Location Production (boe/day) % Crude Oil
Canada Waterfloods 8,200 94%
Bakken Shale 49,500 80%
Marcellus Shale 37,237 0%

We can see that the majority of the company’s production is oil and not natural gas. In the past, this is something that many people liked about the company because oil production was considerably more profitable than the production of natural gas. Unfortunately though, oil prices also fell much more than natural gas as a result of the COVID-19 outbreak. As we can see here, West Texas Intermediate crude oil sold for $61.18 per barrel at the start of the year but has since fallen to $40.62 per barrel, which is a 34.26% decline:

Source: Business Insider

At its lowest point, West Texas Intermediate crude oil was actually selling for $-37.63 per barrel, which would have been a 161.63% decline from its price at the start of the year. Natural gas prices did not decline by anywhere close to this magnitude. Therefore, those companies that produce primarily oil would have been hurt much more by the coronavirus-driven energy price decline than natural gas producers like Range Resources (RRC).

One method that independents often use to reduce their exposure to large fluctuations in commodity prices (like what we saw earlier this year) is the use of hedges. This generally involves things like the use of puts and calls or futures contracts to lock in prices for the sale of their production. The purpose of this is to ensure that revenues and cash flows do not fall too much if energy prices do. Enerplus is no exception to this. Here are the current hedges that the company has in place:

Source: Enerplus Corporation

As is the case with most options and futures contracts, these may be settled in cash. Thus, the company may still see its actual revenue from selling its products decline, but then make up for it when the hedges settle. In the end, it does not really matter because the company is still receiving the money. As we can see, the prices that Enerplus has locked in are considerably higher than current prices, which explains why Enerplus expects to realize a significant gain this year off of its hedges.

Another thing that many companies have been doing to weather the current environment is to reduce their expenses in various areas. Enerplus is also no exception to this. The company originally planned to spend between $520 and $570 million on capital expenditures such as drilling new wells in 2020. It has now reduced that by 45% to $300 million in order to preserve its capital. In addition to this, the company has suspended all drilling and completions activity in North Dakota. This may be a good idea due to the relatively high cost of drilling in that area, but there is a downside. This downside is the relatively high decline rate of wells in the Bakken. As I pointed out in an earlier article, the production of a well in the Bakken shale declines by 69% on average in the first year:


As Enerplus currently produces 49,500 barrels of oil equivalents per day in the Bakken, the company could see this as low as 15,345 barrels of oil equivalents per day if it does not drill any more for the next year. Admittedly, this is probably a pessimistic estimate because some of its wells in the basin are older ones that will not see such severe production declines, but it still seems obvious that the company will see some very noticeable production declines depending on how long it keeps drilling suspended.

Fortunately, Enerplus’s primary acreage in the Bakken is one of the best areas in which the company can operate. The company owns 66,300 net acres in Fort Berthold, which allows its wells to perform in the top quartile of all wells in the Williston basin.

Source: Enerplus Corporation

One of the nice things about this area is that it has some of the lowest costs in the Bakken. In fact, Enerplus only needs to realize a $38 per barrel price in order to break even on the wells that it drills in this acreage:

Source: Enerplus Corporation

Some readers might note that the price of West Texas Intermediate was well below this level for a good portion of this year. While that is correct, please keep in mind that due to the hedges that we have already discussed, Enerplus is receiving a much higher price than today’s (mid-$50/bbl on much of its production). Thus, we can see that the company is still able to make a profit off of the wells that it drills in this acreage.

Enerplus also owns acreage in the Marcellus shale, which produces natural gas. The company owns 34,000 net acres, primarily in the northern parts of the basin:

Source: Enerplus Corporation

The economics of producing natural gas in the Marcellus basin are decidedly better than the economics of producing oil in the Bakken. First of all, even at the start of April, natural gas prices were only down 29% from the start of the year, which was much less than oil. This makes some sense as people under stay-at-home orders still need to heat their homes and cook their food. While the demand for natural gas from industry may have declined due to the economic shutdown, it retained its demand from the utility and consumer sectors. It is also much cheaper to produce natural gas in the Marcellus than it is to produce oil in the Bakken. In fact, as we can see above, Enerplus still expects that it will be able to be cash flow positive even with natural gas prices at today’s levels. With that said, we can see evidence that the company is correct here:

Source: Enerplus Corporation

As we can see here, based on the company’s current cost structure in the Marcellus, it should be able to generate a free cash flow of $0.61 per thousand cubic feet if it averages a $2.25 per thousand cubic feet realized price this year. While this is still a 39% decline compared to last year, it is still a profit, which is something that we very much like to see.

While the company’s current acreage in the United States is quite impressive, it has managed to identify some expansion opportunities. One of these is in the Denver-Julesburg basin in Colorado. The company recently acquired 40,000 net acres in the northern part of the Wattenberg field in Weld County:

Source: Enerplus Corporation

This is an area that has a significant quantity of oil in place, although Enerplus has not disclosed exactly how much. The company has drilled some test wells though, which performed comparably to what its peers have been seeing out of their wells in the core area of the basin. As such then, the company has identified 400 sites for future drilling in order to begin production in the acreage. It is uncertain when the company will actually begin bringing these resources into production, however. As already discussed, Enerplus has cut back considerably on its planned capital spending this year so it is quite possible that these cuts include the postponement of its plans to develop this area. Thus, we may not see this growth opportunity begin to play out this year.

It is also somewhat uncertain exactly how large this growth opportunity is. The well production of the largest operators in the Denver-Julesburg basin varies fairly considerably. This chart shows peak well production of the wells operated by some of the largest operators in the basin:


As we can see, the usual peak output for a well in this basin is about 500-800 barrels of oil equivalents per day, but the numbers can vary considerably depending on the particular characteristics of the well. Enerplus has identified approximately 400 locations, so if we go with the midpoint of 650 barrels of oil equivalents per day, then if it drilled all of the wells at once, that is about 260,000 barrels of oil equivalents per day at peak production. Of course, the company will not do that. At the moment, it has not provided a timeline for when any of the company’s wells in the basin will become operational. Nonetheless, we can see that this basin could provide some potential future growth.

One of the most important things for us to keep an eye on with regards to independents in today’s environment is the strength of their balance sheets. This is because a large percentage of the production growth that the United States has seen over the past decade was financed by high-yield debt so the drop in energy prices may begin pushing some companies into bankruptcy. I discussed this in an earlier article and we have already seen this playing out with companies like Chesapeake Energy (OTCPK:CHKAQ). Fortunately, Enerplus has a reasonably strong balance sheet. One way that we can see this is by looking at the company’s debt maturities. Here they are:

Source: Enerplus Corporation

As we can see here, Enerplus has enough cash on its balance sheet to cover all of its debt that matures this year. Its untapped revolving credit facility is also large enough to cover all of the $469 million in senior notes that come due between now and the end of 2026. Thus, we can conclude that Enerplus will not have any difficulty covering all of the debt that is coming due even if the market is unfriendly to the company’s attempts to refinance. Admittedly, I would not want to see the firm have to use this revolver to pay off its maturing notes, but it is certainly an option.

We can also see the strength of Enerplus’s balance sheet by comparing the company’s debt to its cash flow. As of March 31, 2020 (the latest date for which data is available), Enerplus had $114.746 million in current debt and $541.950 million in long-term debt for a total of $656.696 million. In the first quarter, Enerplus reported adjusted funds from operations of $113.2 million, which works out to $452.8 million annualized. This gives the company a net debt-to adjusted FFO of 1.14. This is a reasonably low figure that provides us with confidence that Enerplus will be able to weather through the current environment and ultimately return to both growth and prosperity once conditions improve. We can see this by comparing this metric to some of its peers:

Company Net Debt-to-Adjusted FFO
Enerplus 1.14
Cabot Oil & Gas (COG) 0.7
Whiting Petroleum (WLL) 2.85
EOG Resources (EOG) 0.35
QEP Resources (QEP) 2.79

It is important to note that adjusted funds from operations is a non-GAAP figure so all of the companies above may calculate it in a slightly different way. Nonetheless, they do provide the figures as a basis for peer comparison by analysts, so they are generally calculated at least somewhat similar. As we can see, Enerplus generally compares fairly well with its peers. This tells us that the company should be able to carry its debt easier than some of its peers.

In conclusion, Enerplus Corporation appears to be one of the better positioned firms for the current environment. The company has some of the best acreage available in the Bakken shale, and while this is an expensive area to produce in, its hedges and efficient operations should still allow it to make a profit. It also appears to be taking all the necessary steps to preserve its capital and avoid unnecessary expenses. The company also boasts the potential for future growth in the DJ basin and boasts a very strong balance sheet. Overall, Enerplus may be worth considering for your portfolio.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Genuine Parts Company: Current Crisis Is A Tailwind Based On Precedent (NYSE:GPC)

Among the aftermarket players which we think are especially interesting in an environment where income might be tight and automobiles themselves are not turning over, Genuine Parts Company (GPC) comes across as the best income pick with one of the least speculative theses. With delayed durable purchases, vehicles become old and prone to failure, and GPC seems healthy enough to be able to capitalise well over the medium term with its network of autoparts stores in Europe, North America and Australia. Where much of automotive might see a slow recovery, GPC is an exposure that has a tailwind in a depressed macro environment as ours once the risks of lockdowns are more certainly behind us. With a 3.67% dividend yield, higher than what many of its peers can maintain, GPC strikes us as favoured income pick in this environment, worthy of addition to portfolios.

The Core Thesis

The investment thesis revolves around one key thematic, which is that during low-income periods, people postpone their durable goods spending due to limited cash for large outlays. Cars are one of the highest-ticket items in this category, so people opt for sticking with their current vehicles instead of buying new ones. But as cars become older and more prone to failure, maintenance frequency and costs begin to rise. For a company like GPC, this is a core value driver. Given that the majority of its market is in the US, we can leverage US statistics to substantiate why GPC might be well-positioned in the post-COVID-19 world.

(Source: Genuine Parts Company FY 2019 results)

Although the May unemployment numbers may have initially looked positive, the reality is that there is still an alarming portion of Americans that are still struggling with employment, enough where the American economy will certainly be impacted. Indeed, this time the drop in employment has been more dramatic than even in the 2008 crisis, which indicates that some of the notable changes observed during that economic downturn are highly likely to manifest now.

Looking at data for vehicle age from IHS Markit, between 2002-2007 light vehicle age in the US increased by 3.5%. Then followed the 2008-2013 period, where the age increase was 12.2%, coinciding with the financial crisis and the period immediately after. Finally, there’s the 2014-2020 period, where the age growth rate has settled at a more normalised rate of 4%. We can expect some uptick in this figure for at least a year coinciding with the current macro headwinds, but it is uncertain how permanent the nature of the current unemployment rise and economic hardship is, although it is likely to be longer than shorter given the real economic impact.

Other Geographies

The EU is GPC’s second-largest aftermarket geography. Based on data from the European Automobile Manufacturers’ Association (ACEA), the EU motor vehicle fleet is already relatively old. Passenger cars are now on average 11.1 years old, vans 11 years and heavy commercial vehicles 12 years. These figures, which indicate an older average age than in the US, mean strong underlying fundamentals for GPC which are likely again to get a boost with COVID-19. Indeed, European figures had also followed similar cycles to the US, with substantial growth in passenger cars occurring between the 2005-2010 period likely driven by a post-crisis environment.

(Source: GPC Investor Presentation)

(Source: European Automobile Manufacturers’ Association)

Finally, there’s the Australian market, where GPC sales account for 7%. According to the Australian Bureau of Statistics, the average age of all vehicles registered in Australia was 10.1 years, unchanged since 2015. Again, an older baseline age, and also presenting a similar precedent during the 2008-2013 period with a marked increase in car age.

Valuation and Dividend

From 2008 to 2013, GPC reported a revenue CAGR of 27%, and the company achieved even higher rates of growth in profitability.

(Source: Mare E-lab Research Database)

In that period, the stock price moved from a bottom of $28 per share to $87 per share at the end of 2013, making for an impressive 210% capital appreciation. Indeed, similar levels of return could have been achieved investing at the March lows. In the long term though, even the valuation at pre-COVID-19 levels might be attractive, as a medium-term boost from more frequent maintenance visits could bolster the company’s finances, not only covering its dividend but also giving it the resources to continue in an inorganic, private equity-like expansion. In the last crises, the price went from sold-off levels to pass stalled levels and reach new highs.

Regarding the dividend, in fiscal 2019, operating cash flow was $892 million and capital expenditures were $298 million, giving free cash flow of $594 million. The dividend required a $439 million outflow, resulting in a dividend-to-FCF ratio of roughly 74%. Naturally, the situation this year is likely to look a little different. Periods of lockdown will have inevitably cut some cash generation opportunities from the outlook. However, there is substantial margin in the coverage, and for a business that is likely to see a major rebound, and which probably benefited from low operating leverage during the lockdowns due to its distribution business model, the dividend seems relatively safe to us, especially since it’s already been confirmed for the 2020 annum. This adds another year to the company’s storied dividend track record, where GPC has paid a cash dividend to shareholders every year since going public in 1948.

(Source: GPC Investor Presentation)

Risks and Concluding Remarks

Cars are generally becoming more sophisticated and less prone to breakdowns, constituting a secular trend to the detriment of the business. Nonetheless, the increases in car age that we saw after past crises are doubtlessly not the result of sudden, punctuated innovation.

There are other concerns though. A second-wave lockdown response would damage the company’s finances. The main impact would be that the end-markets wouldn’t be depreciating their cars through use. Despite being able to weather weak periods due to low operating leverage, this is a concern and would continue to harass the fundamental value drivers of GPC’s business.

Despite these concerns, the thesis for GPC is less speculative than for most other auto players, which indeed has earned it a quick recovery. With lower income, people will defer purchases, and with lower gas prices, use of the car will not be prohibitively expensive even for hard-hit households. People sticking with their old cars will mean business for GPC, and even in the event of negative developments, leverage is not excessive at 2.1 ND/EBITDA, with the dividend being ample and well-covered by cash flows. With better financial prospects than many other businesses, even outside automotive, GPC looks like a favourable pick in a recessionary environment.

Disclosure: I am/we are long GPC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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