Magnifi Communities

While it’s been a rough year for the Ark Innovation ETF (ARKK), a large options trade may suggest a brighter 2023.  A strategist purchased what appears to be a 30,000-lot of covered calls on ARK that expire in February. The covered calls allow for over 10% upside potential in share appreciation before capping out, while […]

A special dividend announcement in my inbox reminded me it’s that time of year: special dividends season.

For certain types of stocks and funds, special dividends point to a high probability of future dividend increases. That’s a big help in a year when falling share prices made us wonder about the stability of our investment choices.

Here are a few special dividends I’m looking at that you still have time to get in on…

Last week, hotel real estate investment trust Apple Hospitality REIT (APLE) announced its regular $0.08 monthly dividend and a special cash distribution of $0.08 per share. The combined $0.16 per share dividend will be paid on January 17, and the ex-dividend will occur on December 29.

The special dividend indicates that APLE will likely return to the $0.10 monthly dividend the REIT paid before the pandemic-triggered economic shutdown.

As a real estate exchange trust (REIT), Apple Hospitality must pay out at least 90% of its net income as dividends. If an REIT has not paid at least 90% as the end of the year approaches, it can pay a special dividend can be paid to meet the legal requirements.

REITs and business development companies (BDCs) operate under the 90% payout rule. If you see one of these companies announce a special dividend payment between now and the end of the year, take a look at the stock. There may be a regular dividend increase coming soon.

Year-end special dividends also show if a company performed better than expectations. If you see a special dividend on a stock that has dropped this year, the stock price is wrong, and the business is doing well.

Investment funds, including mutual funds, closed-end funds (CEFs), and exchange-traded funds (ETFs), must pay out 100% of the net income and realized capital gains the fund received during the year. Many CEFs and ETFs employ a managed dividend policy, in which they pay level dividends based on the expected income for the year.

When a fund with a managed dividend policy earns more than the dividends paid, the fund must pay out any earnings above the dividends paid for the year by the end of the year, in the form of a special dividend.

The InfraCap MLP ETF (AMZA) provides a good example. This ETF owns an actively managed portfolio of master limited partnerships (MLPs) that provide energy midstream services. AMZA has paid a $0.22 per share monthly dividend for the last two years. MLPs have been aggressively increasing dividend rates this year—a big contrast to 2021, when dividends paid in the sector were relatively flat—so I will not be surprised if AMZA announces a special year-end dividend. And if it does, you can count on an increase in the monthly rate for next year.

To recap, when you see a pass-through business, an REIT or BDC, or an ETF announce a special year-end dividend, take a deeper look at the fundamentals. You may have found an excellent dividend growth investment.
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The stock market has proven to be very resilient in recent months. Even as Federal Reserve officials talk about the need for interest rates to be higher than expected for longer than anticipated, the markets have managed to hang on to the idea that if the pace of rate hikes slows, the eventual destination does not matter.

I suspect that the group of traders who believe this have never experienced rapidly rising interest rates or high levels of inflation, and will eventually be proven wrong.

Still, it will be a bumpy road for all of us before everything settles. We have already seen several sharp snapback bear market rallies this year, and I expect to see more before we find an ultimate bottom in stock prices.

The key to not taking it on the chin in markets like we are experiencing today is to avoid getting caught up in the enthusiasm surrounding these fast-and-furious rallies.

Often that is harder to do than it sounds. Here’s how to do it – and what stocks to avoid…

The talking head and financial media can get quite excited about these sudden moves, and you will hear many people trying to call the bottom. But in my experience, the bottom is only in once almost no one is trying to call the bottom anymore—and right now, with a P/E ratio of 21, it is hard for me to think an important bottom is in for stocks.

There needs to be more fear amongst most investors and traders. Everyone is far too complacent for stocks to have reached a significant turning point.

When we see rapid changes in the CBOE Volatility Index, or VIX, alongside soaring high-yield credit spreads begin to blow out, I will feel much more comfortable loading up on stocks.

But until we get an absolute bottom in the markets, the best way to avoid experiencing a devastating permanent loss of capital is to keep away from stocks with deteriorating fundamentals and heavy insider selling. These two factors can be a catastrophic combination even in a bull market, so they’re are far worse under the sort of market conditions we have seen in 2022.

A stock like Workday Inc. (WDAY), the enterprise software company, could hand investors some more ugly losses. The stock is currently down over 35% this year, and could decline further. The fundamentals of the business are getting worse, not better, and insiders have been selling a lot of stock in the open market recently.

Over the last few months, ten insiders have combined to sell over $20 million worth of Workday shares. Workday’s co-presidents, the CFO, and the co-CEOs have all been selling stock consistently in 2022. When the entire C-suite is selling shares of the company they run, it makes a statement—and not a good one.

The stock is rich at 7.3 times sales, and the company is not profitable. Analysts expect them to be profitable next year, but I doubt those estimates are factoring in a recession caused by the Fed’s inflation-fighting decisions.

Even if the analysts are on target, the stock would be trading at a P/E of more than 35, which is rich for a company where the most optimistic observers expect low-teens earnings growth over the next several years.

I also noticed heavy selling at Prothena Corp. plc (PRTA), an Irish biotech company that trades here in the United States. The stock soared higher in late September based on hopes that the FDA would eventually approve their Alzheimer’s drug. Other companies working on drugs for the dreaded disease have also seen abnormal buying activity based on hopes for a working treatment.

Prothena’s drug is still in Phase One trials, so approval—if it happens—is still months, if not years, away. Buying the stock now is a bet that Prothena gets approval before all the other companies working on an Alzheimer’s drug.

It is a big bet, and one insiders have not been making in 2022.

Since the huge price spike, 23 insiders have combined to sell more than $17 million of Prothena shares.

Most of us do not understand biotechnology enough to make intelligent biotech stock picks. In my opinion, no one without the word “Doctor” before their name and more degrees than a thermometer is, in my opinion. The only factors I’ve found that work for most mortals when picking biotech stocks are insider buying and profitability.

Six-figure insider buys at biotech stocks usually mean that good things will happen over the next thirty days for the stock price. Biotech companies with black ink bottom lines often beat the market for extended time frames.

There is no insider buying at Prothena. Instead, insiders are using the unusual price action to take money off the table.

Prothena is not profitable, and there is no expectation of profits any time soon. One lousy report or failed FDA trial, and this stock will be down 50% before you can blink.

Now is the time to focus on avoiding mistakes. Stick to small banks and special situations to provide returns while emphasizing protecting capital.
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Founded in 1923, Novo Nordisk (NVO) is a global healthcare company headquartered in Denmark. Its focus is on diabetes and other serious chronic conditions, such as obesity, as well as rare blood and endocrine diseases.

The company is the global powerhouse in diabetes treatment, with about 30% of the $50+ billion global diabetes market and around half of the $20 billion insulin therapy market.

And now, Novo Nordisk is set to become a major force in the weight loss market, thanks to its drug, Wegovy (chemical name semaglutide).

The World Is Fat

For many decades, doctors approached obesity as an individual problem, best treated with lifestyle modifications like diet and exercise. But now, there is a growing body of scientific research that supports the use of pharmaceuticals in weight management.

This new way of treating obesity couldn’t come at a better time. Here’s why…

Over the past four decades, statistics show that obesity rates around the world have outpaced global population growth. That’s the main reason why analysts at Morgan Stanley forecast that these obesity treatments could soon be among the top-selling drugs globally, with sales soaring from just $2.4 billion in 2022 to as much as $54 billion by 2030.

This brings us to Novo Nordisk’s Wegovy. The drug works by mimicking a hormone known as GLP-1, which is made in the intestines when we eat and helps to regulate appetite. The drug also helps to slow down the movement of food from the stomach to the small intestine, meaning patients feel full more quickly and for a longer period of time.

Synthesized GLP-1 medicines were originally developed to help people with type 2 diabetes better manage the disease by increasing the release of insulin from the pancreas, which aids in the removal of excess sugar from the blood following a meal. One such leading drug is Novo’s Ozempic, which is a multi-billion-dollar seller.

When researchers studied patients on these drugs, they quickly noticed the weight loss and decreased appetite in diabetics taking GLP-1 drugs. So, they then began studying the potential of these drugs in the treatment of obesity.

In 2014, Novo’s Saxenda became the first GLP-1 drug to receive FDA approval for use in weight management. However, Wegovy is far superior because it’s given as a once-weekly injection, instead of being administered daily. And even more importantly, Wegovy produces more weight loss and comes with better cardiovascular outcomes for patients.

Novo’s Supply Chain Woes

It looked like Novo Nordisk would have the obesity treatment market to itself when supply chain issues struck. Late in 2021, a contract manufacturer filling syringes for Wegovy pens for the U.S. market had temporarily stopped deliveries and manufacturing following issues with “good manufacturing practices.”

In turn, Novo Nordisk paused the marketing and distribution of Wegovy. Production resumed by the second quarter of 2022, but manufacturers couldn’t keep up with surging demand, so the company was forced to restrict doses of Wegovy to patients who had already begun using it.

Wegovy has generated about $700 million in sales to date, far short of the $2 billion expected before those supply chain issues struck. However, during the October earnings call, Novo’s management reaffirmed plans to fully launch the drug by the end of the year.

That particular contract manufacturer is still experiencing some problems, so, it is good news for Novo Nordisk that another manufacturer is scheduled to begin producing Wegovy in the second half of 2023, taking the total number of filling sites to four.

The company’s supply chain woes opened the door to a possible rival GLP-1 drug from Eli Lilly (LLY), Mounjaro (tirzepatide). In October 2022, the FDA announced it had granted fast track designation to the medicine, meaning it will enjoy an expedited regulatory review process. Phase III clinical trials should conclude in the spring of 2023, so it’s possible that Lilly’s drug could be on the market around the start of 2024.

Novo Nordisk Is the Clear Leader

Despite the supply chain hiccups, Novo Nordisk remains the clear leader in the GLP-1 market.

Even a cursory glance at Novo Nordisk’s numbers confirm this. Constant-currency demand growth for the company’s GLP-1 products during the first nine months of 2022 showed a jump in diabetes treatments of 44% and in obesity treatments of 75%!

Management once again raised its outlook for 2022 on that news, and is now expecting 14% to 17% constant-currency sales growth (up from 12% to 16%), and with a 10-percentage-point additional boost from currency tailwinds.

While insulin accounts for roughly 50% of Novo’s top line, its GLP-1 franchise (Rybelsus, Victoza, Saxenda, Ozempic, Wegovy) is where the growth lies—it now makes up roughly 40% of sales.

Morningstar analyst Karen Andersen believes Novo Nordisk will have a more than a 60% share—$25 billion of the nearly $40 billion global GLP-1 market—across indications by 2026.

The prevalence of diabetes is expected to soar in the coming decades, as a result of an increasingly

overweight and aging global population. That will only benefit Novo Nordisk as it continues to dominate in diabetes and obesity treatments. And keep in mind, the company is only beginning to feel the impact of soaring demand for Wegovy.

While Novo trades at about 31 times next year’s forecast earnings (far cheaper than rival Eli Lilly at 41 times), I believe NVO stock will be a big winner, outperforming its peer group by a large margin—as it did during the past decade. The stock is trading around $132 a share, up 21%% year-to-date. It’s a buy in the $120 to $140 range.
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