- We think a serious recession is more likely than not, with the signs of crisis and dislocation already showing themselves.
- In big focus are rates, and the house view is that they'll have to rise more than the market expects to deal with supply shortages.
- Disposable income could get meaningfully chopped as inflation is also supply side and harder to tackle, and much leverage has been introduced to the economy.
- It's time to get defensive, thinking of beaten-down stocks with a margin of safety and products that won't decline much during a recession.
- Our main pick is Gilead, but we also propose Imperial Brands and TeamViewer.
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The house view here is that while inflation, to the extent that it's supply side, is actually 'transitory', to nip the persistent component in the bud, rates will have to rise much higher than the markets currently expect, and indeed than pocketbooks can easily handle. Equities as a whole have become extremely difficult to invest safely in, but a very select few companies are defensive enough to be worthwhile holdings to take on at this point in time due to safe products that can resist a very malignant decline, as well as a margin of safety in terms of valuation to offer upside even in adverse events. It's all about beaten-down issues today, and at the top of the list is Gilead (NASDAQ:GILD) for investors to consider, along with a couple of honourable mentions in TeamViewer (OTCPK:TMVWF) and Imperial Brands (OTCQX:IMBBY).
Our note on Gilead here precedes a likely addition to the portfolio. The situation with Gilead is that they acquired a couple of interesting therapies, like mono-clonal antibody therapies in line with what Regeneron (REGN) is pioneering, and that they are trying to push hard into oncology with treatments like CAR-T. Traditionally Gilead has been all about viral treatments, so major in HIV, but also Hepatitis and most recently with COVID-19.
Our concern when we covered Gilead last was that Veklury posed a revenue risk if demand fell off. While towards year end of 2021 it did fall quite meaningfully, the Q1 figures are quite reassuring off reasonably important comps. Our big concern was that Veklury demand would track hospitalisation rates, and that hopsitalisation rates would fall as the virus attenuates and/or as vaccination effects kick in. So the following was good news.
And in that regard, we were very pleased to receive the World Health Organization's revised COVID-19 guidelines. These guidelines now conditionally recommend Veklury for the treatment of patients with nonsevere COVID-19 at highest risk of hospitalization. And earlier this week, Veklury received FDA approval for the treatment of certain pediatric patients for at least 28 days old, highlighting our ongoing commitment to extend the reach of Veklury where we can.
Truvada has gone into LOE (loss of exclusivity) territory, and so has Atripla, both of which are seeing collapsed revenue as expected. Yet remarkably Biktarvy is pushing revenue to avoid much decline despite ongoing issues with diagnosis rates as COVID-19 fears and surges, unfortunately, keep people out of hospitals for much more severe conditions.
Whether excluding Veklury or not from the mix, GILD is delivering growth thanks to its newly acquired treatment areas from a couple of years ago and Biktarvy, which while cannibalising their own markets is also driving a lot of net growth.
Where we were relatively bullish on GSK (GSK) last time we covered higher yield pharma picks on the basis that more of its LOEs were in the rearview, now Gilead has seen most of its LOEs already occur, so the going looks a lot better now than it did a year ago. Excluding LOEs, the growth in HIV was 5%, rather than -4%, which is not the biggest wedge. With LOEs of Atripla and Truvada now having negligible incremental effect, corroborated by management, HIV can start working towards growth in the next year.
With our house view concerning itself with the tail risk of major declines in disposable income and employment issues, we like that GILD firstly provides a margin of safety having languished in no-growth multiple territories for years now at a 7x multiple on EBITDA, pays a nice dividend above 4%, and has HIV as well as other products that have immense pricing power. There is a lot of value here, and there is even reasonable potential for GILD to finally achieve growth. We like this stock quite a lot.
- We recently covered TeamViewer. The recession resistance with them comes from the fact that they have a product which is disruptive enough to be agnostic to market forces. Remote maintenance as well as predictive maintenance and repair will require an AR suite, and TeamViewer's Frontline suite offers that already to marquis clients like Ford Motor (F). Maintenance and repair are massive industries both as a service as well as an internal function. The productivity benefits offered by AR could be meaningful and adoption by major manufacturers reassures us of the product utility. Having traded down recently on the marketing partnership with Manchester United (MANU), which has affected their earnings quite meaningfully, the normalised multiple trades just above 10x, which is ridiculous given the sales growth and the innovativeness of the product.
- We also had a look at Imperial Brands. While there are structural issues with its markets, the situation hasn't been better for them in years in contrast to the price and multiple just above 7x. The situation is that the Russia-Ukraine conflict is creating profit problems for competitors, who had growing and highly profitable markets in both those countries. To repair profits, pricing will have to be used, and this gives more space for Imperial's higher-end brands. Furthermore, Imperial has the broadest discount portfolio which will benefit from downtrading, especially in the US, where there is the added benefit of IQOS from Altria (MO) being harangued by IP issues. Running in a state of managed decline, any period of reduced decline is a moment to buy IMB.
All these are stocks that while with their own risks, offer asymmetric returns in the current environment, especially relative to high flyers that are buoyed by unrealistic expectations about likely outcomes in the economy. If there are clear signs of trouble and you don't have to pay a premium for safety, it's time to buy safety. All these companies offer discounts on top of defensiveness borne of the current environment, with Gilead being the least risky overall and with the most conservative profile for potential economic headwinds. The key risk that remains for GILD is Veklury, which is still a new product for a new market, where things definitely look positive with respect to Q4, but the long-term trajectory is still unclear as it depends on the developments with COVID-19, which looks less severe and important every year. All are clear buys.
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This article was written by
The Valkyrie Trading Society is a team of analysts sharing high conviction and obscure developed market ideas that are likely to generate non-correlated and outsized returns in the context of the current economic environment and forces. They are long-only investors.They lead the investing group Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GILD, TMVWF either through stock ownership, options, or other derivatives. 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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