Dear Louis, Today, we’re going to sell three of our holdings. And while I’m long-term bullish on all three positions, I believe that its prudent that we continue to take a more defensive stance, build our cash positions, and continue to shift towards assets that will do well in this current environment. To that end, I’m recommending we take some nice profits on Microchip Technology (MCHP) and sell half of our position in Vertex Pharmaceuticals (VRTX). We’ll also close out MercadoLibre (MELI) for a loss. At today’s prices, we’ll record gains of around 95%, 92%, and a loss of 34%. As a reminder, these returns are based on our model portfolio. I understand individual returns may not fully reflect our model. However, if we followed our recommended buy-up-to prices, all of us should be recording a fantastic gain on our first two positions. I want to thank readers for being patient with our sells. I’m sure it was tempting to liquidate our entire portfolio with all the volatility in recent months. But I strongly believed we would see some strength return to equity markets, which would give us much better exit points. That’s what has happened. Since bottoming on June 16, the Nasdaq composite index rose 23%. That said, we’re not out of the woods yet. I still suspect we’ll see politicians try to juice the economy going into the election. This was clearly the goal with the most recent $737 billion “Inflation Reduction Act.” I put that in quotes because, as I told The Bleeding Edge readers last week, this act has nothing in it to reduce inflation… I jokingly referred to it as the Inflation Continuation Act of 2022. This is a form of stimulus, plain and simple, and it will ultimately require the Federal Reserve to print money in order to buy Treasuries so that the government can sustain its massive trillion dollar plus annual deficit. This fiscal policy combined with what I suspect will be a dovish pivot by the Federal Reserve will create conditions for a possible rally going into the election. But this isn’t guaranteed. Some of the Fed governors continue to push for large interest rate hikes. That’s why I believe it’s smart for us to take profits off the table and take a more conservative position until we have a clear view on the direction of the Federal Reserve. With that being said, we’ll want to sell into strength in the coming months. And that’s why we’re selling these positions today. We’ve seen recent rallies and I believe this is a good exit. Let’s look at each company. We invested in Microchip Technology (MCHP) in 2018. The company is known for its microcontroller (MCU) technology used extensively in the automotive industry. At the time, Microchip had also been making several strategic acquisitions to gain a foothold in the fifth-generation wireless networks buildout. I anticipated we’d see 50% returns in two years. However, as demand increased, we held on longer for greater upside. And that’s what we got. We’ll record nearly a 100% return by selling today. Microchip is still a great company, and the demand trends from the 5G rollout and automotive are still intact. However, Microchip’s growth is slowing. And in a market like this, investors are likely to punish the stock for any stumble. We did what we set out to do with Microchip. Let’s secure a win and look for other opportunities. Shares of Vertex Pharmaceuticals (VRTX) have been on an absolute tear this year. The stock is up 34% year-to-date. This makes it the top-performing stock in the Nasdaq 100 so far this year. Vertex has shown incredible strength this year. With its dominance in treating cystic fibrosis (CF) and strong therapy pipeline, we expected to make 77% in three years. And our patience has paid off… Vertex is one of my favorite large cap companies in the biotech sector. And I expect several advancements in Vertex’s drug pipeline will push the stock higher. Two specific treatments I’m excited about are the genetic treatments for APOL-1 mediated kidney disease (AMKD) and Type-1 diabetes. Both of these drugs are potential blockbusters. They have the potential to add multiple billions of dollars of revenue per year if approved. However, in a market like this, it makes sense to take a more conservative approach. What I’m recommending we do is to sell half of our position. With Vertex up close to 100% from our entry point, we’ll be able to recoup almost all of our initial investment. And we’ll able to benefit from any future upside without having to worry about any volatility. As for MercadoLibre (MELI), this is such a great company with incredible prospects, but this market is unforgiving. Our thesis is playing out as planned, but we had unfortunate timing for this investment. We entered this position just before inflation became an issue and ahead of the conflict between Ukraine and Russia. This is relevant for reasons I’ll explain below. MercadoPago, MELI’s digital payments, is booming. MELI total payments volume (TPV) surpassed $30 billion during the second quarter, up 71.5% from a year ago. And MercadoEnvios, MELI’s logistics service, is performing exceptionally. In the second quarter of this year, Meli shipped over 264 million items. This is 19% greater than the 222 million items shipped in all of 2018. It’s not MercadoLibre’s business that worries me. It’s the market it serves. MELI is the leading e-commerce platform in Latin America. Brazil, Argentina, and Mexico account for 55.4%, 22.4%, and 16.7%, respectively, of MELI’s revenue. And all three of these countries are being hit hard by inflation. Brazil recently recorded an annual inflation rate of 12%. Mexico is above 8%. And Argentina is at a staggering 71%. Inflation at these levels has the potential to impact discretionary spending in these countries. And in the event we see severe food shortages which appear more and more likely, third world countries will be particularly hard hit. In the US, on average, we spend about 4.8% of our per capita GDP on food at home. But in countries like Argentina and Mexico, people spend between 15% - 25% of GDP on food. Higher food prices for most of America and western Europe will be more of an inconvenience. But in poorer countries, residents may be spending half of their income on food. That will lead to these people spending much less on discretionary items that get delivered from MercadoLibre. MercadoLibre is still a great business. And is setting itself up for long-term success. But if inflationary forces and supply chain disruptions continue to impact world trade, MELI’s costumers will be hardest hit. And that will lead to lower share prices. The risk vs. reward profile has changed, and I believe the smart move is to protect capital right now. We can always re-establish positions down the road when conditions change. I recommend we exit our position until we have a clearer vision for future economic activity. And we can use our losses to offset any capital gains taxes. Action to Take: Sell shares of Microchip Technology (MCHP) and MercadoLibre (MELI).
Sell a half position in Vertex Pharmaceuticals (VRTX). | Regards, Jeff Brown
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