Trump’s Inflation Triggers

Tariffs, Immigration, And Taxes Affect The Big Picture

Looking To This Sector As a Hedge For Biotech

Below is the most recent issue of Biotech Frontiers, from analyst Erez Kalir.  In this issue, Erez provides one buy recommendation and two sell recommendations for stocks in the current Biotech Frontiers portfolio. In addition to hosting Porter & Co. Biotech Frontiers on our website, we also make it available as a downloadable PDF. Subscribers can access this issue as a PDF on the “Issues & Updates” page here. If you have any questions, please give Lance, our Director of Customer Care, and his team a call at 888-610-8895 or internationally at 443-815-4447. Again, thanks for being part of Porter & Co.

Legendary hedge-fund investor David Tepper had already bounced back from two big drawdowns in his money-management career. In 1998, his Appaloosa Management fund suffered heavy losses after Russia defaulted on its sovereign bonds and rocked emerging markets. Then in 2002, Appaloosa, like many others, found itself holding a portfolio of losers after the dot-com and telecom bubbles burst spectacularly. In both these instances, Tepper’s fund roared back, producing huge gains in the year after these losses.

Yet despite this resilience, at the end of 2008, Tepper found himself in an uncomfortable position. Early that year, he had foreseen the calamity that would engulf the financial sector and had raised a giant pile of cash to take advantage of it. But the market’s decline over the course of 2008 proved so steep that even after having cut his risk ahead of time, Appaloosa was still down nearly 27% as the year drew to a close – an awfully deep hole to climb out of.

So Tepper did what had helped him be successful throughout his career: In his own words, he “tried to figure out the inflection point.” In Tepper’s paradigm, every investment situation – a bankruptcy, an emerging economy, or a market-wide financial crisis – has an inflection point, a moment when things shift decisively. If you can grasp the inflection point even a little bit sooner than others, you can make a fortune.

Tepper saw the inflection point clearly in February 2009, when the U.S. Treasury created two stimulus programs – the Financial Stability Plan and Capital Assistance Program. Together, the measures laid out the U.S. government’s intention to save large troubled banks by purchasing their preferred stock, at a time when the market had utterly abandoned them. As Tepper himself explained:

When the white paper came out, the government tipped its hand. If the government was going to raise equity for the banks, it meant it was establishing a floor under the equity indicating at what price that floor was. Essentially the government was telling us that it wasn’t going to let the banks fail.

Having identified the inflection point, Tepper and his colleagues at Appaloosa began pouring money into shares of financial institutions. Because they’d connected the dots before most others, they were able to buy shares at steeply discounted prices, often paying pennies on the dollar for securities of large banks and insurers such as AIG (AIG), Bank of America (BAC), and Citigroup (C).

Appaloosa would finish 2009 with a 120% gain… making a cool $7 billion in profit for its investors. The fund’s resounding comeback from its 2008 decline would secure David Tepper’s unofficial spot in the investor’s Hall of Fame forever.

Like David Tepper, my old boss Julian H. Robertson – another investment Hall of Famer – had a knack for spotting inflection points and a keen appreciation for how important they can be. I’ve previously written about how Julian’s investment mind was like a Champion Swiss Army Knife, equipped with the right tool for every occasion. But his most important tool was his capacity to zero in on the Big Picture when the Big Picture mattered. 

Julian used this skill to do David Tepper one better: Julian made a fortune shorting financial stocks in 2008… then he made another fortune buying them at depressed prices, like Tepper, in early 2009.

Seeking to apply the lessons of the greats by focusing on the Big Picture when it matters has already served us well here at Biotech Frontiers. In our very first issue, in January 2024, we recommended buying a basket of 10 biotech stocks to take advantage of a recovery in the sector. Over the ensuing two months, many constituents of this basket exploded higher. 

But in mid-March, we identified an important negative inflection point – a disconnect between the market’s anticipation of interest rate cuts and what the Fed would likely be able to deliver given the stickiness of inflation. We made a difficult call to sell most of the basket we had recommended just two months earlier to lock in profits before the market’s disappointment with the Fed swept them away. That proved to be the right call.

In this issue, we’ll be focusing on another Big Picture inflection point. I’ll share what I foresee happening, why I think it’s crucially important for our biotech holdings as well as every other investment in your portfolio, and what I suggest you do to help protect yourself. This issue does not contain a new biotech stock recommendation. But as I hope you’ll agree by the end, the perspective I’ll share with you could prove exponentially more valuable – if you use it well.