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🤖 Other Ways to Play AI
Plus, a potential treatment for the third highest cause of death — and the stocks that stand to benefit.
Happy Sunday to everyone on The Street.
Quick intro for you all today. In case you missed it I just published the latest edition of the Last Cast Letter. This is a monthly deep dive that's written specifically for those who are interested in direct and private real estate investment opportunities.
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Review
US stocks finished higher Friday after lower-than-expected inflation numbers added to investor morale. The Fed’s inflation index of choice, year-over-year PCE, came in at 5%, compared to analyst expectations of 5.1%. The figure was also notably lower than the previous month’s 5.3% reading, solidifying a downward trend.
Month-over-month core PCE saw a similar decline to 0.3%, compared to the 0.4% estimate, offering a degree of relief after the previous months’ acceleration. Overall, both metrics highlighted consumer prices heading in the right direction, though still far from the Fed’s 2% target.
Across the pond, the Euro Area also saw inflation pressures ease to their lowest level since February 2022 at 6.9%. While the figure was below expectations, it, too, sits well above the ECB’s target, keeping pressure on policymakers to push forward with rate hikes.
Back in the States, Virgin Orbit announced it will cease operations and cut nearly its entire workforce. After failing to secure a funding lifeline, including from majority owner Richard Branson, shareholders sent the stock tumbling more than 40%.
Meanwhile, Loop Capital downgraded JD.com, citing growing competition from Tencent and headwinds from a decision to clean up certain product categories. The analyst maintained the Chinese ecommerce company is still undervalued, but no longer sees a meaningful upside in the near term.
In total for the week, the Dow Jones Industrial Average finished 3.22% up, while the S&P 500 grew 3.48%. The Nasdaq Composite climbed 3.37%.
Preview
Tomorrow, manufacturing PMI will be released for March. This metric has shown four consecutive months of falling factory activity, which often signals declining consumer demand.
On Tuesday, investors will get the JOLTS Job Openings report for February. In January, the number of open jobs in the US fell by 410,000 to 10.8 million. Additionally, a report on new orders for US manufactured goods, or factory orders, will be released.
On Wednesday, the non-manufacturing PMI for March will be released, in addition to the US trade deficit for February. Last month, the US trade deficit increased to a three-month high of $68.3 billion. There will also be an update to the interest rate for 30-year fixed-rate mortgages, which currently sits at 6.45%.
On Thursday, the number of initial jobless claims will be updated. This weekly metric rose by 7,000 to 198,000 for the week ended March 25th but remains historically low, disappointing those hoping for signs of a loosening labor market to influence the Fed in a dovish direction.
Friday will finish out the week with updates on the unemployment rate, nonfarm payrolls, and average hourly earnings for March. In February, the average hourly earnings for employees increased by 4.6% on an annual basis. Inflation rose by 6% over the same period, outpacing wage adjustments by more than a full percentage point.
Earnings Spotlight
Tomorrow, Kirkland’s (KIRK) will kick off the week on the earnings front. The home decor chain has already announced that its comparable sales decreased 5.5% for the 2022 holiday quarter. As the retailer discusses that quarter and the full fiscal year, investors will look for insight into what led to this decrease.
On Wednesday, Conagra Brands (CAG), the parent company of Slim Jim, Swiss Miss, and Orville Redenbacher’s, will hand in its report card, as will Atkins-owner Simply Good Foods (SMPL). Investors will watch closely, as food and beverage conglomerates with expansive consumer goods portfolios offer valuable insight into how inflation affects consumer spending.
On Thursday, updates will come in from the largest beer importer in the US, Constellation Brands (STZ), as well as Levi Strauss & Co (LEVI). The 170-year-old denim company recently announced it would implement AI into its business, using AI-generated images as models to help increase diversity and inclusion. The announcement was met with controversy, with some concerned that the initiative would actually diminish diverse hiring. Investors will look for clarity from the brand.
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Tech Isn't the Only Way to Get AI Exposure
AI Across Industries
Microsoft (MSFT), Alphabet (GOOGL), and Nvidia (NVDA) aren’t the only ways to play the burgeoning artificial intelligence market. Healthcare and cybersecurity should benefit as well.
Ever since Microsoft rolled out ChatGPT and Google launched BardAI, AI has been the talk of the town, as millions clamor to use the technology to write code, papers, and even poems in a matter of minutes. This has driven shares of Microsoft, Alphabet, and chipmaker Nvidia, all of which sit at the forefront of the industry. It’s also helped keep the broader market up, despite concerns about a slowing economy and the regional bank crisis.
Most focus on the ways AI will impact internet search and communications in offices. But some think AI innovations will affect many other industries as well. “Now that we have hundreds of millions of people interacting with generative AI, people are discovering new use cases for it,” BlackRock exec Jay Jacobs told CNBC in a recent interview. “Anywhere where there’s data, AI is going to be useful.”
Data Crunching in Healthcare
That’s particularly true of the healthcare market, which relies on endless data to develop drugs, treatments, and care plans. As it stands, it takes years to develop a drug. But with AI, the process could theoretically be sped up, allowing patients to receive medicine based on unique genomes. AI could also be used to improve discovery times and, by extension, the chance of a drug being a success.
“Now we have these new data sets popping up in these different areas, and you just set [AI] loose on it,” Jacobs told CNBC.
Investors looking for low cost exposure to AI’s impact on healthcare have a few ETFs to choose from. The iShares Genomics Immunology and Healthcare ETF (IDNA) is one. It has $140 million in assets under management and an expense ratio of just 0.47%. ARK Genomic Revolution ETF (ARKG) is another larger option. The ETF has around $2 billion in assets under management and a pricier expense ratio of 0.75%.
Stay Ahead of Hackers with AI
Cybersecurity is another area that should benefit from the explosion of AI capabilities in the coming years. This, too, is an industry heavily reliant on data, requiring fast analysis of massive amounts to stay ahead of developing technology and emerging trends from the hacker community. As such, this industry stands to benefit immensely from AI’s data crunching speed.
There has already been plenty of AI integration in the cybersecurity market. BlackRock’s Jacobs expects more to come. “Increasingly, the cyber defense companies are using AI to try to do more predictive analytics around when and where and how those cyber attacks are going to happen,” said Jacobs.
Exposure to cyber security comes in many forms, including three popular ETFs: the iShares Cybersecurity & Tech ETF (IHAK), the ETFMG Prime Cyber Security ETF (HACK) and the Global X Cybersecurity ETF (BUG).
Chatbots may have taken the world by storm. But that doesn’t mean tech companies are the only ones poised to benefit. As AI seeps into other industries, more companies will be winners. Healthcare and cybersecurity are two ways to play this new growth driver.
If you had to pick, which ETF will outperform over the next 12 months? |
Humana's Headache Won't Become the Flu
Seniors Should Lift Humana’s Stock
Humana’s (HUM) stock is down, but that doesn’t mean it will stay on life support forever. It has older adults to thank for that. Over 80% of its revenue comes from insurance premiums, with the remainder derived from its CenterWell business, which provides seniors with home care and pharmacy services.
Humana’s sweet spot is selling older adults Medicare Advantage plans, which provide seniors Medicare Parts A, B, and D benefits, with little in the way of out-of-pocket costs. These plans accounted for 80% of Humana’s insurance revenue last year, and close to $73 billion in sales. It's one of the largest providers of Medicare Advantage plans, second only to UnitedHealth Group (UNH).
Recent government action has pressured this area of business, leaving the heads of Humana executives and investors pounding. But the health insurer has an antidote, which has bulls pounding the table on the stock. One such analyst is Oppenheimer’s Michael Wiederhorn, who recently named a price target of $630 a share, exceeding the $485 a share it recently traded at.
Blame It on CMS
Ever since the Centers for Medicare & Medicaid Services proposed a price increase for Medicare Advantage plans of just 1.03% in 2024, shares of Humana have been under pressure. That was smaller than expected, and far less than the 8.5% increase seen in 2023. A lower price raise could slow revenue, which has spooked investors, sending the stock lower.
But Humana is taking it in stride, and has a way to counter it. It plans to offer fewer benefits in the plans to protect its bottom line. Wall Street expects sales to grow 9% in 2024 to $112.9 billion and operating margins to come in at 4.9%, up from a projected 4.7% in 2023.
Also, because the population is aging, consumption won’t remain static – over time, there will be a consistent stream of Americans looking to sign up for Medicare Advantage plans. As it stands, health insurance trade association AHIP estimates close to half of 60 million U.S. seniors use these plans. The other half is likely to do so in the years to come, according to an estimate by the Kaiser Family Foundation.
By 2060, the number of seniors in America is projected to reach 95 million. “It’s all about more and more senior citizens signing up for Medicare Advantage,” Igor Krutov, director of research at Vontobel Asset Management, said in a recent Barron’s interview. “The volume growth for MA should be high for years and years and years.”
Margin Expansion on the Horizon
There’s also Humana’s CenterWell business, which the company is ramping up via acquisitions of physician practices. The number of primary care centers it operates stood at 235 at the end of last year, up from 206 in 2021.
The unit is small by Humana standards, but it's fast growing. In the fourth quarter, sales hit $4.1 billion. The business has an operating margin of 6.4%, which is higher than total expected margins of 4.7% this year. As CenterWell becomes a bigger part of Humana’s revenue, operating margins should increase to 5.2% in 2026, resulting in annual EPS growth of about 14% through 2026.
“The stock is driven by earnings growth, which is still attractive,” Cowen analyst Gary Taylor told Barron’s. The analyst has a $581 price target on the stock. Humana’s shares are also trading at a discount compared to rival UnitedHealth. The stock trades for 17.7x this year’s earnings expectations. UnitedHealth trades for 19.2x.
Humana may be suffering from a cold currently, so to speak. But, with the population aging and the health insurer expanding into new growth areas, it shouldn’t become a full-blown flu. It just has to convince investors it's sitting on the right antidote.
Are you bullish or bearish on Humana over the next 12 months? |
Break into Private Equity
Are you dreaming of breaking into the lucrative world of private equity where salaries start above $300k? This is the chance to turn that dream into a reality.
So how do you break into private equity?... Well, you can take the best recruiting course out there: Private Equity Course by the Overheard on Wall Street team (taken by 500+ investment bankers, with many receiving PE offers)
Normally priced at $1,500, for a limited time they’re offering FREE ACCESS to this game-changing course when you sign up for their Insiders membership. Cancel anytime, no strings attached.
In addition to the course, Insiders members receive exclusive, in-depth insights on the most compelling investment ideas and news, giving them the edge they need to succeed in this competitive field.
Don't miss out on this incredible opportunity to jumpstart a career in private equity. Take the first step towards success and get free access to the Private Equity course today.
Sanofi and Regeneron's COPD Opportunity
Drug Shows Promise
Sanofi (SNY) and Regeneron (REGN) are on the cusp of a new multibillion dollar opportunity thanks to their anti-inflammatory drug Dupixent, which is used today to treat moderate-to-severe eczema, asthma, and other inflammatory diseases. But these pharmaceutical companies have found its uses could go beyond that.
The drug was recently tested in a late-stage study of current and former smokers suffering from chronic obstructive pulmonary disease, or COPD. COPD is the third highest cause of death across the globe, and one that's hard to treat. In fact, no new COPD treatments have been released in years.
Enter Sanofi and Regeneron. Last week, they announced positive results of the study, with 30% of trial participants reporting a reduction in the rate at which the disease worsened, compared to those who were given a placebo. That was enough to boost both stocks and excite investors over what’s to come.
Home Run Scenario
The study covered 939 current and former smokers ranging in age from 40 to 80. Sanofi and Regeneron limited the trial to people with type 2 inflammation, which they say is about 300,000 strong in the U.S. alone. Heading into the trial, Wall Street was skeptical. Drug companies have tried in the past to improve COPD medicine – and failed. Now, however, analysts are singing a new tune.
Take BMO Capital Markets analyst Evan Seigerman. He called the trial results “our home run scenario.” Seigerman thinks Dupixent could be worth more than $2 billion in annual sales by 2030. The analyst also said the treatment for COPD could eventually treat two million people in the US and Europe by 2035.
Meanwhile, David Risinger, an analyst at SVB Securities, said based on the trial results, the drug should easily receive quick uptake by doctors and insurers.
Blockbuster Status?
Dupixent, which was approved in 2017 to treat eczema, is already a moneymaker for Sanfoi and Regeneron. Since its launch, the drug has expanded into multiple use cases and is known within the industry as a pipeline drug – or one with the potential to treat more diseases.
In 2022, Dupixent had $8.7 billion in sales. It is projected to hit $17 billion in sales by 2030. “Investors should now seriously contemplate peak sales of $20 billion,” wrote TD Cowen analyst Tyler Van Buren in a recent research report.
That would put Dupixent among the bestselling drugs in the market by the end of the decade. Not too shabby for a drug that started out treating skin inflammation.
Are you bullish or bearish on Sanofi and Regeneron over the next 12 months? |
Last Week's Poll Results
Are you bullish or bearish on Darden over the next 12 months?
🟩🟩🟩🟩🟩⬜️ 🐂 Bullish
🟨🟨⬜️⬜️⬜️⬜️ 🐻 Bearish
Are you bullish or bearish on Axon over the next 12 months?
🟩🟩🟩🟩🟩🟩 🐂 Bullish
🟨🟨⬜️⬜️⬜️⬜️ 🐻 Bearish
Which stock do you think will underperform over the next 12 months?🟨🟨🟨🟨🟨⬜️ Clorox
🟩🟩🟩🟩🟩🟩 C.H. Robinson
🟨🟨🟨🟨⬜️⬜️ Campbell Soup
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