I hope everyone had a nice weekend!
Will Putin Deliver the Final Energy Rug Pull To Europe?
The war in Ukraine has thrown Europe into a full blown energy crisis that has resulted in a cost of living crisis for many EU countries as food and heating costs soar, manufacturing is hurt, and now new rationing measures are introduced ahead of the fall and winter. Looking ahead this month, the Nord Stream 1 gas pipeline, will undergo its planned annual maintenance from July 11-21, when gas flows will drop to zero, but there are growing concerns that it will not resume operations on time or even worse, that Putin will refuse to turn the gas pipeline back on at all while Europe desperately attempts to fill storage before winter. Just this past week, Russia cut gas flows to Europe to 40% of the pipeline's capacity, blaming delayed equipment repairs and leaving Germany and other European states racing to find alternative energy supplies. Germany's Economy Minister Robert Habeck has said it is heading for a gas shortage if Russian gas supplies remain as low as they are now, and certain industries (like chemical manufacturers, etc.) would have to be shut down if there is not enough come winter. If Nord Stream 1 does have prolonged maintenance or is completely shutoff, European gas storage sites which are are just 55% full currently will miss their storage target of 80% by Nov. 1. Estimates from consulting firm Rystad Energy indicate that if the NordStream 1 gas pipeline flows continue at 40% capacity or stop completely, Europe will only be able to refill storage to 60% and 69% of storage ahead of winter, well short of their needed goal.
In the meantime, European gas prices have resumed their rapid spike as the combination of service interruptions in the U.S. Gulf of Mexico and Nordstream gas pipeline reductions drive prices surging higher. In fact, natural gas prices in Europe are now up >600% since Jan 2020. The Deutsche Bundesbank, the central bank of Germany, has warned that Germany’s economy will shrink more than 3% in 2023 if Russian energy supplies come to a full stop. This would represent the worst economic slump outside of recessions sparked by the COVID-19 pandemic and the global financial crisis. The impacts from this economic contraction will likely not just be limited to within EU borders.
Currently, the energy shock is already taking an economic toll as forward-looking data like orders - inventories in the global manufacturing PMIs are falling sharply for Germany and Italy (shown in chart below), with the drop in this manufacturing indicator on par with 2008 levels ahead of the global financial crisis.
While the Russian invasion of Ukraine formally began on February 24th, the energy sanctions and back and forth rhetoric between EU countries and the Russia may take a turn for the worse by the end of the month. There is a growing sense of fear from key EU officials that there is a real and significant risk that a Nordstream gas pipeline shutoff will occur by the end of the month leaving the EU with significant vulnerabilities in the second half of this year. Germany is now rationing hot water, dimming its street lights and shutting down swimming pools as the impact of its energy crunch begins to spread. If Russia cuts energy supplies further, dramatic policy action from EU countries will need to be taken; the type of steps that the region has not seen for decades (more severe than during the energy crisis of the 1970s).
Some interesting charts from this past week:
1) Nasdaq Still Hovering Around Washout Levels
Below is a 20 year chart of the Nasdaq Composite percentage of stocks above their 200 day MA, 150 day MA and 50 day MA. This past week there was short-term improvement with the % of stocks above 50 day moving out of the lower zone and off the lows in the longer-term measures, but still in the lower zone. The longer term moving averages remain hovering close to historical washout levels.
2) Goldman List of Buy Rated Stocks With Improving Free Cash Flow Yields
Goldman Sachs published a chart this past week of specific stocks with improving free cash flow (FCF) profitability & + Net Income margins & Sales growth. Estimates are included for the next 2 years. Good hunting ground!
3) Crude Oil Dips- But Does Not Breakdown
Crude oil prices hit support levels over the past at the $98 level driven by macro recession fears and demand slowdown. However, prices bounced quickly back above $100 and settled the week at $107. Oil has become even more in focus as prices at pump become a political hot button issue and has been one of the last commodities holding up. Analysts are closely watching how oil moves in the coming months in hopes at an reprieve on energy costs could help reduce the current inflation pressures and dent in consumer wallets.
Stocks I’m Watching
An overall comment; it appears that healthcare, biotech, china, and solar/clean energy themes and industry groups have taken over the mantle for now from commodities and cyclicals in the latest fund rotation. Below are three healthcare/pharma names which look promising.
1) Acacia Healthcare Company (ACHC)
Acadia Healthcare Company, Inc. develops and operates inpatient psychiatric facilities, residential treatment centers, group homes, substance abuse facilities, and outpatient behavioral healthcare facilities to serve the behavioral health and recovery needs of communities in the United States and Puerto Rico. The company operates acute inpatient psychiatric facilities, which cares to stabilize patients that are either threat to themselves or 24-hour observation, daily intervention, and monitoring by psychiatrists; and specialty treatment facilities, including residential recovery and eating disorder facilities, and comprehensive treatment centers that provide continuum care for adults with addictive disorders and co-occurring mental disorders. It also provides residential treatment centers, which treat patients with behavioral disorders in a non-hospital setting, including outdoor programs; and offer therapeutic placement for children and adolescents with emotional disorders.
Acadia is a behavioural healthcare services company which is coming off a strong 1Q earnings beat and exhibiting strong relative strength. Last quarter, Acadia’s revenue for the period jumped ~12% YoY to $616.7M as the same facility revenue and revenue per patient day increased ~9% YoY and ~6% YoY, respectively, driven by a ~2% YoY rise in the patient days. Most importantly, net income rose nearly six times from the prior-year period to $61.9M as operating expenses increased only ~3% YoY. In April, Acadia hired a new CEO, a former President of Humana’s Group, Military & Specialty Segment. Acadia has a long term target to achieve 10+% medium-term organic EBITDA growth target as the company capitalizes on secular mental health services tailwinds. From a technical perspective, Acadia re-tested its weekly base and looks to continue higher as it has seen 3 straight weeks of gains all on increasing weekly volume.
2) Evolent Health (EVH)
Evolent Health, Inc., a healthcare company, through its subsidiary, Evolent Health LLC, provides clinical and administrative solutions to payers and providers in the United States. It operates in two segments, Evolent Health Services and Clinical Solutions. The Evolent Health Services segment provides an integrated administrative and clinical platform for health plan administration and population health management. It offers financial and administrative management services, such as health plan services, risk management, analytics and reporting, and leadership and management; and Identifi, a proprietary technology system that aggregates and analyzes data, manages care workflows, and engages patients, population health performance that delivers patient-centric cost-effective care. The Clinical Solutions segment offers specialty care management services support a range of specialty care delivery stakeholders during their transition from fee-for-service to value-based care, independent of their stage of maturation and specific market dynamics in oncology and cardiology; and holistic total cost of care improvement.
Evolent is a health tech company exhibiting strong relative strength that provides technology-driven solutions for health plans and providers, to simultaneously improve healthcare treatments while also cutting costs. Evolent continues to show strong growth with revenue last quarter coming in at $297.1 million, a 38% increase, compared to the same period in the prior year. For 2022, Evolent has guided to 28% year-over-year growth in dollar-based adjusted EBITDA compared to 2021. Two weeks ago, Evolent announced an M&A deal to acquire IPG, a leading technology and services company providing surgical management solutions for musculoskeletal conditions, from TPG Growth for $375 million. The acquisition is expected to accelerate Evolent Health's position as a leading provider of value-based specialty care solutions and expands its specialty care solutions portfolio to musculoskeletal conditions. From a technical perspective, Evolent is seeing strong volume come in the right side of its weekly base, riding its 40WK moving average to higher prices, and will look to continue higher if market conditions improve.
3) Halozyme Therapeutics (HALO)
Halozyme Therapeutics, Inc. operates as a biopharma technology platform company in the United States, Switzerland, Ireland, Belgium, Japan, and internationally. The company’s products are based on the ENHANZE drug delivery technology, a patented recombinant human hyaluronidase enzyme (rHuPH20) that enables the subcutaneous delivery of injectable biologics, such as monoclonal antibodies and other therapeutic molecules, as well as small molecules and fluids.
Halozyme is an emerging fast growing and highly profitable biopharma which has a number of promising drug delivery products in the pipeline and has been active in the M&A market enhancing its future product roadmap. Halozyme has guided for 20% to 26% revenue growth over 2021 including an increase of approximately 50% over revenues from royalties in 2021 to approximately $300 million. In addition, Halozyme is guiding operating income of $350 million to $380 million, representing growth of 27% to 38% over 2021 operating income. Halozyme is solidly profitable with north of 60% EBITDA margins while trading at just 16X forward P/E. In April, Halozyme announced the purchase Antares Pharma for $960M. Antares develops therapeutic products using its drug delivery systems. Halozyme said the transaction is expected to be immediately accretive to revenue and non-GAAP earnings in 2022 and anticipated to accelerate top- and bottom-line growth and enhance cash flow generation through 2027. Halozyme also noted at the time of acquisition that it was reaffirming its 2022 guidance and its commitment to the three-year $750M share buyback program. From a technical perspective, Halozyme has formed a nice rounded weekly base with a weekly breakout last week and volume is picking up on the right side with buyers stepping in.
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