BIOTECH STOCKS, GLOBAL INVESTING AND THE GOP DEBATE W/ AARON KATSMAN, PRESIDENT/CEO OF LIGHTHOUSE CAPITAL
On this episode of Oxford Club Radio, Marc starts by discussing last week’s GOP debate – and comments by Jeb Bush – from an economic perspective. Then he welcomes Aaron Katsman, author and President/CEO of Lighthouse Capital, a boutique wealth management firm based in Jerusalem, Israel. The two talk global investment opportunities, current market sentiment and more. And later, Marc addresses the recent dip in Biotech stocks – and what it means for the sector at large.
TRANSCRIPT:
Announcer: It’s time for Marc Lichtenfeld’s Oxford Club Radio, the hardest-hitting half-hour about you and your money. And now, here’s Marc Lichtenfeld.
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Marc Lichtenfeld: And welcome to Marc Lichtenfeld’s Oxford Club Radio. I am Marc Lichtenfeld. Funny how those things work out. Glad you’re with us today. We have a great show. We’re going to be talking with Aaron Katsman. He’s the President and CEO of Lighthouse Capital in Jerusalem, Israel, and he’s also the author of Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing. So we’ll kind of get some big picture stuff from Aaron coming up in a little bit. We’re also going to talk about what’s going on in the markets as well as a little bit of politics to kick things off. As always, best way for you to get in touch with me if you so desire is to go to our web site, OxfordClubRadio.com, and you click on “Contact.” You can email me your questions, your thoughts, your feedback. You can also leave comments, so if anything I say, particularly when it comes to the politics aspect, infuriates you or if you agree with me wildly and suggest that I should be running for President, well, let me know by just leaving a comment in the Comments section right underneath the episode that you’re listening to on Oxford Club Radio. You can also tweet at me or follow me @StocksNBoxing on Twitter.
So Thursday night I watched the Republican debate, as I’m sure many of you did, and one thing really occurred to me, and I find it almost laughable that, in today’s age where there is some sophistication among common people – by common, I mean non-financial professionals – there is some sophistication about how the economy works. I wouldn’t say there’s a lot of sophistication for people who don’t follow the markets, and obviously, if you’re listening to the show, you do follow the markets and economy, so I’m really talking about people who don’t follow this stuff at all, and it just amazes me – and listening to the GOP debate is really what kind of hammered this home for me – how politicians really try to make things very black and white and completely unnuanced at all, and you know, take responsibility or take credit for or blame others for, you know, really big picture things.
And here’s what I mean. So during the debate, Jeb Bush, was asked about his claim that he can return GDP growth to 4% a year over the lifetime of an eight-year presidency of his. Scott Walker was asked about his campaign promise in Wisconsin to bring 250,000 jobs to Wisconsin, and he only brought in half of that. And it just kind of hammered home this idea that these candidates or politicians or governors or presidents or what have you can wave their magic wand and create jobs or create growth. You know, and even – no matter which side of the political aisle you’re on – if you look at the current environment where we had another 215,000 jobs created, we’re at basically the lowest unemployment in 40 years. Now, the Democrats will say, “Well, look what Obama did.” Obama’s not getting any credit. The Republicans will say it wasn’t Obama, it’s – you know, you can’t believe the numbers or there are other factors at stake. And I just love how the Republican governors will take credit for jobs in their state, so I brought in 200,000 jobs. I did this, I did that. It has nothing to do with Obama, it has nothing to do with the federal government, has nothing to do, you know, with that. Obama will say, “I created X million jobs, has nothing to do with the governors of those states where jobs are created.”
So it’s very interesting to me, and it’s quite frankly asinine and ridiculous to believe any politician about any job creation, any job growth that they’re taking credit for or blaming somebody else for not doing because there’s a lot of working parts, a lot of moving parts here. Yes, a president, a governor, a legislature, a Federal Reserve can have an influence. They can make the economic environment more favorable toward job creation and growth, via fewer taxes and things like that, less regulation, or they can stifle it a little bit, but there’s a lot of factors at play. There are a lot of people who have nothing to do with the government. There are a lot of small business owners that decide they need another person behind the counter or they need a new IT guy or they need a couple people in marketing. And, you know, once those people start feeling a little more confident about the economy or their business has picked up, they start hiring people. And it’s just insane to think that Barack Obama or Jeb Bush or Scott Walker or Hillary Clinton or any individual is going to have much of an impact, if any, on these kinds of numbers.
So, you know, when you’re watching the campaigns and all the ridiculous promises that are going to be made over the next a little over a year left until the election, and believe me, every candidate is going to talk about just the amazing things that they can do and these amazing new ideas, and you know what? We haven’t had any amazing new ideas in I don’t know how many years, how many decades. There’s not a lot of new ideas. The economy is a huge breathing animal that goes in cycles. A lot of what happens – job growth, job destruction – is basic economic cycles. The reason that we’re having huge job growth now is that we’re coming out of a huge recession. If it was a lower recession, a kind of a tamer recession, well, then the job growth wouldn’t be as significant. So – and I can tell you, because we’re having such huge job growth right now, my guess is that, in the next eight years, whoever is the president will probably go through a period where jobs come down significantly. And maybe even job losses. It just happens. Things ebb and flow. The economy grows, it shrinks. It grows, it grows – it slows down. Same with job creation. So don’t believe – as Public Enemy said – don’t believe the hype. Don’t believe any politician who says, “I’m going to get GDP growth to this. I’m going to bring back jobs. I’m going to do this.” They don’t. They may think they do. Maybe in their heart of hearts they believe they can, and maybe they really want to, although I don’t even believe that so much. I think the only job they’re interested in is their own. But they’re not going to. There’s just too many other factors at stake so, you know, worry about your own business, your own company, your own community, and not worry so much about what somebody in Washington or who hopes to get to Washington plans to do for the economy, because they aren’t going to do much.
All right, when we come back, we’re going to talk with Aaron Katsman, President and CEO of Lighthouse Capital. This is Oxford Club Radio. Stay with us.
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Announcer: And now back to Marc Lichtenfeld’s Oxford Club Radio.
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Marc Lichtenfeld: Welcome back to Oxford Club Radio. I’m Marc Lichtenfeld. Our guest this week is Aaron Katsman. He’s President and CEO of Lighthouse Capital, also the author of Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing. Aaron, welcome back. Thanks so much for joining us.
Aaron Katsman: It’s great to be back. Thanks for having me.
Marc Lichtenfeld: I would love your thoughts on what we’re seeing in the markets the end of this past week where we saw, you know, biotech and a lot of the momentum stocks, some of the high-flying tech stocks, some of the cybersecurity stocks really get hammered. And from what I’ve seen, hasn’t been a lot of really, you know, devastating news out there for any of these individual companies. Any thoughts on what’s happening with these momentum stocks?
Aaron Katsman: I think this is something that we’ve seen in the past. I remember writing an article for MarketWatch probably about a year and a quarter ago. It was probably the first quarter 2014, and I was talking up biotech stocks and growth tech stocks, and I got hammered in the comments section. People thought, you know, this is the time and stocks were going down, and yeah, they dropped 20% or so, 25% but, you know, then they just moved right back up, and they’ve continued their bull run until now.
Like you said, earnings have been adequate. I don’t think they’ve been terrible. There haven’t been a lot of misses on the downside, and it might just be the case of, you know, slow summer months and not lots of volume and people – you know, some profit-taking going on.
Marc Lichtenfeld: So it’s not different this time, in other words.
Aaron Katsman: I don’t think it’s different. I mean, you know, there’s a lot of – I don’t have to tell you, but there’s a lot of nervousness out there, I think, in terms of the general market, and some of these stocks have had, you know, huge runs, but especially the biotech space, which I actually follow pretty closely with some strategies that I implement for clients. You know it’s not really correlated that much to the stock market. The greater market certainly, if somebody comes up and they pass a – you know, if a firm has a Phase 3 trial with the FDA and they get the thumbs up on some kind of liver disease cure or medication, that stock is going to fly whether the market stinks or whether the market’s in the middle of a bull run. So these aren’t as linked or correlated to the market as many of the tech stocks and obviously other sectors. Biotech is certainly special in that regard.
Marc Lichtenfeld: Yeah, I couldn’t agree with you more. Actually I’ll be talking a little bit about biotech in the next segment, but I wanted to switch gears also, and one of the reasons I like having you on is because you’re, you know, boots-on-the-ground in Israel, which is just a hub of technology and innovation and private equity. And obviously in the United States we’re going through a pretty big private equity boom. Every other day, you hear about Uber’s valuation. Some people in the U.S. might even call it a private equity bubble. Are you seeing the same thing in Israel?
Aaron Katsman: I don’t think so. This – I think 2015 is going to stack up as the biggest year in terms of fundraising for high-tech companies. There have been a lot of ideas – you know, you mentioned cybersecurity before. Israel is by far and away the leader in cybersecurity. I think there’s three or four of the biggest companies that are now publicly traded that have been IPOed in the last year and a half – Imperva, Palo Alto Networks, CyberArk. These are all companies that are now taking on the whole issue of cybersecurity, and a lot of them are started by founders who worked in companies like Check Point, which were the original sort of internet security plays or computer security plays so that they’re the ones who built firewalls for your computer, and a lot of people have left these companies and taken it to the next stage. Obviously because of Israel’s special geopolitical situation, Israel sort of was forced to be on the cutting edge of technology in order to be able to defend itself, and a lot of these technologies are army technologies that have, you know, had consumer applications attached to them, and that’s why you see them in the marketplace now, but yeah, this is a – Israel’s basically on fire when it comes to private equity.
Marc Lichtenfeld: And there’s actually a great book that goes into what you’ve just talked about. I’m sure you’ve heard of it or read it, Startup Nation, which talks about all the technology that has come out of the Israeli military that is now used for consumer and businesses. Let me ask you about this too because another – to me, very interesting aspect of Israel and the Israeli economy is this gas – this huge gas field that was recently found, and I believe they just started drilling there off the coast, and it was supposed to transform the Israeli economy. With energy prices so cheap right now, how is that going? Is that making a difference in the Israeli economy?
Aaron Katsman: It’s coming online right now. Israel always – you know, Israel’s in the middle of the desert, and the only natural resource Israel ever had was its people, and now they actually have a real natural resource, and that’s natural gas, and they’re going to end up being, you know, a net exporter. But I’ll tell you how, even with cheap gas prices, when we – you know, I filled up my tank today at the gas station, and due to taxes and due to all the gas right now being imported, I probably pay three and a half times per gallon what you’re paying in the States. So there’s a real ways to go, and there’s no question that this is going to be a huge, huge driver of the economy going forward.
You know, one of the things, going back, I met this week – I had a cup of coffee with one of Israel’s high-tech pioneers. He has patents on GPS technology, and we were speaking, and I said it’s really interesting because in my view, you know, if you go back to the internet bust of 2000-2001, there was a lot of money flowing into Israel then also, but it – and I actually worked in venture capital then, so I saw all these deals, and the point then was that Israeli technology was ahead of where the market is. Was phenomenal technology, but there was no application for anything. And now it seems that Israel’s sort of clicking and understands that, and the technology is very pertinent to where the market is and what the problems in the market in order to provide a solution. And that’s really, I think, what’s driving that side of the boom.
You know, there’s talk that – going back to the gas, it’s going to add a percent to a percent and a half to GDP every year, so that’s obviously massive, and it should be good for education. They’re going to set up a special fund so that some of the profits from the gas get funneled into a special fund that goes to fund education, which should be good. The one issue currently right now, there’s a big fight how much to tax those who are extracting the gas from the ground. I would assume that that will be solved because we’ve seen in other places in the world where they’ve also had gas finds where the regulation was so severe and the taxes were so high that all the firms who were planning to bring it out of the ground ran, and it still stays in the ground. So it’s a big challenge, but a big opportunity for Israel to really capitalize on this.
Marc Lichtenfeld: Interesting. All right, unfortunately we’re up against the clock, so we have to leave it there, but thanks so much for joining us, and definitely want to have you back again real soon.
Aaron Katsman: Thanks a lot, Marc.
Marc Lichtenfeld: All right, that’s Aaron Katsman, President and CEO of Lighthouse Capital, also author of the book Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing. When we come back, we’re going to dig a little bit more into the biotech sector. This is Oxford Club Radio. I’m Marc Lichtenfeld. Stay with us.
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Marc Lichtenfeld: And welcome back to Oxford Club Radio. I’m Marc Lichtenfeld. So in the interview with Aaron Katsman, he talked about biotech, and this is something I’m dealing with right now in my Lightning Trend Trader service, which focuses on biotech, and he was talking about how, in early 2014, the sector sold off 26%, and when that happened, naturally a lot of investors freaked out. I mean, that’s a big drop. And on Thursday, we saw the biotech sector drop about 4%, which – a little over 4, it was 4.25% – which is equal to about 730 Dow points. So that’s a big move Friday. As of Friday morning, it was down again. And biotech, like Aaron said, a company comes up with a Phase 3 – comes up with a drug for, let’s say, you know, liver cancer and it works and it’s approved, no matter what the market’s doing, that stock’s going to fly, absolutely.
On the flip side of that, because biotech has such enormous profit potential, some of the downdrafts can be pretty scary, and we’re seeing that in biotech this past week where stocks are tanking, going down 10%, really for no reason other than perhaps they issued earnings and they didn’t have anything amazing to say. They didn’t say anything bad. And keep in mind, when I’m talking about earnings, a lot of these companies barely have any revenue. So the earnings per share number isn’t as important as, let’s say, if you’re looking at a company like Caterpillar where, you know, everybody focused on whether the company met expectations and if they raised guidance or not. With a biotech company, if they’re generating $2 million in revenue and losing 80 cents a share, and the estimates were for $3 million in revenue and a loss of 70 cents a share, none of that matters, especially if they don’t have a product out. So it’s a very different thing you’re looking at. It’s always looking at the future. It’s really a completely different way of looking at a stock. You know, most stocks, you really only care about the revenues, the cash flows, the earnings. With biotech, it’s all about the future revenues, cash flows and earnings. And if a drug is going to be able to make it through clinical trials and get approved, that’s what the speculation is.
And so because the profit potential is so large, and it really is – I mean, there are biotech companies that, you know, become 10 baggers within a year or two, become 100 baggers in, you know, 10 years. If they become a blue chip biotech, a stock like Celgene, Amgen, Biogen, look at the long-term charts of those stocks. I mean, you could have bought them for single digits years and years ago and become very, very wealthy if you picked the right stock. But because there’s so much profit potential, there’s certainly a lot of risk, and so these stocks do get hit hard occasionally, and sometimes it’s really for not much of a reason. As Aaron said, maybe it’s a slow summer, so when there is selling, it gets exaggerated. Company comes out with their earnings results and just didn’t announce anything particularly amazing, any new catalysts, so people sell the stock.
There’s a lot of reasons why the stock can fall, and particularly, I think, in biotech. It happens in other sectors too, but especially in biotech. Once they do start falling, people get very scared, because they know that those drops can be significant, and so they’ll just bail and say, “Forget it. I’m taking my risk off the table, I’ll get back in later at another time.” And so the drops can really get quite scary. As Aaron said, the biotech sector dropped about 26% in early 2014 and came roaring back – roaring. And a lot of the stocks that I was in at that time, we got stopped out and either got back into those stocks or other stocks and really made some very big gains in the months and year and a half since then. And every time that the sector has dropped, and it dropped again in – I think it was early – I think it was around March of this year. Wasn’t nearly as bad as 2014, but it was double digits. It was about 10%, 11%. Same thing. Got stopped out, took our lumps, bought some other stocks cheaper and rode them to new gains.
Now, eventually the bull market will end. Eventually the bull market in biotech will end. When that will be, no idea. It certainly doesn’t seem like it should end anytime soon. There’s no reason that I can see. Money is still cheap as far as the Fed is concerned. Companies are coming up with amazing new technologies, amazing new innovations to help fight all kinds of diseases and, like Aaron said, when a company does come up with something innovative, and it gets approved or it has positive results in a clinical trial, that stock’s going to fly. And it kind of doesn’t matter if it’s trading at, you know, a forward P/E of 200. If the stock, you know, really doesn’t have earnings at this point and that forward P/E number’s just based on speculation and the idea of having price targets on these stocks, these things can really, really run.
As anybody who’s ever invested in a successful biotech stock knows, these things can just take off. I mean, look at Ligand Pharmaceuticals. This is a stock that I started following around $15. Been in and out of it a few times. In right now with my subscribers in the $50s, and that was after having taken some profits going from – I don’t have numbers in front of me, but I think about $19 to $40. Got back in at $50, went up over $100. These stocks can just go forever. That’s not accurate. They’re not going to go forever, but you get my drift. They can go. They can really fly. So you just have to be able to handle the risk when they do. If you’re going to invest in biotech, you can’t get upset, you can’t get angry every time they sell off. You have to be prepared for it. You need to have stops in place so the damage doesn’t get too bad if there really is a massive meltdown, but if you have your stops in place to limit your losses, then, you know, it’s kind of part of the price to play the game. You’re going to take some losses now and then. If you’re consistently investing in biotech, you’re going to lose money occasionally. You’re going to get these nasty downdrafts, and your whole biotech portfolio will go kaplooey. Now, it doesn’t mean it’s going to zero. It means if you have stocks in place, you’ll get stopped out. Some of your newer positions, you might get stopped out for a loss. Some of your older positions, if you’re raising your stop, you’re going to get stopped out for a gain, and that actually happened this week in the Lightning Trend Trader. We took some losses, we also took quite a few gains as everything started coming down.
So if you have these protections in place, you get stopped out, like I said, you take some losses, take some gains, but over time, you’re going to make boatloads of money in the biotech sector. If you’re doing it right, if you’re picking the right stocks, if you’ve got a diverse portfolio so you’re not all in cancer stocks or all in hepatitis stocks, you’re across a wide variety of kind of indications, because different segments within biotech get hot at certain times. So just like any portfolio, you’d want to be diversified. But the main thing is, if you have speculative money to invest, and you like the biotech sector, it’s a fascinating sector to follow because, you know, unlike, let’s say, a Caterpillar or a Disney, you know, these products that these companies are coming up with really matter. They make a huge difference in people’s lives and the length of those lives and the quality of those lives. So it’s a fascinating sector to follow, and it’s extremely lucrative. You just have to be able to handle the volatility. And so if you are investing in the sector, you know, take a deep breath. These things happen. Make sure your stops are in place, and get ready for the next ride up, because it should be another big one, just like the last several have been.
All right, my thanks to Aaron Katsman, to Curtis Daniels, Alex Moschina, all of you for listening. We’ll be back next week, same time, same place. Until then, I hope your longs go up and your shorts go down. I’m Marc Lichtenfeld.
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