Sometimes you don’t know how much you need something until it’s right there in front of you. That was my family vacation at Fernandina Beach last week…
I hadn’t seen my kids since March. And the whole extended family – 11 in total – hadn’t been together in two years. I powered down the laptop, put my phone in a drawer and soaked in a week of great food, great company and a great beach.
Fernandina beach is the northern part of Amelia Island, which is the northernmost barrier island in Florida. It’s less than an hour from where I now live, but it feels like a world apart.
Amazingly enough, the temperature only strayed above 90 degrees on one day of our stay. Which meant plenty of beach time and bodysurfing the perfect 3 foot waves. I read three books and took a nap every day.
I paid almost no attention to the markets. But I did see the pounding that a couple of my stock recommendations took – Schrodinger (NASDAQ: SDGR) and Lemonade (NASDAQ: LMND) – so I thought that would be a good place to start today.
I recommended Schrodinger on April 3, at $26 a share. I put a $41 price target on it. The stock was up in the mid-$50s for a spell before earnings last week. It’s now down around $37. Yeah, big drop – it got whacked for +20% after earnings.
Now, Schrodinger turned a small profit for the second quarter – $0.06 a share. If you had simply told me that the company turned a small profit when analysts were expecting a pretty heft loss of -$0.47 a share, well, I would’ve expected a little upside for the stock.
Obviously, I would’ve been wrong.
Schrodinger is a software company that licenses an AI powered platform for drug discovery. It also uses its own platform for its own drug discovery. Schrodinger seeks to profit from its discovery process through licensing deals, partnerships or outright sales of the compounds it develops.
The software side of the business is predictable. Software revenue was down very slightly as licensing deals are being reworked. The benefit will begin in the current quarter and total software revenue will be up 15%-18% for the full year 2023.
It’s the drug discovery side of the business that is the problem – if you wanna call it that, and I don’t.
There’s simply no way to accurately predict when a drug will get developed to the point where milestone payments come due or the drug can enter trials or be licensed. In fact, it was a surprisingly large $135 million payment to Schrodinger earlier this year that first drew the stock to my attention.
Those kind of surprises can work both ways. Schrodinger now expects drug discovery to be ~30% lower for full year full year 2023.
Disappointing, yes. Disaster, I don’t think so.
Again, drug discovery simply can’t follow a specific timeline. A disappointing delay now should become an upside surprise in the future – like maybe the phase 1 trial for a leukemia drug that’s starting sometime in the next few months.
Schrodinger shares have a lot of institutional backing. Selling volume has been on the high side since the earnings miss last week, but not excessively so. It does not look to me that institutions are bailing. The stock will probably take a month or two to shake off the bad vibes. In other words, Schrodinger remains one of my top recommendations, but there’s no rush to start or add to a position.
When Life Gives You Lemons…
AI powered insurance company Lemonade certainly gave us lemons last week. At least the share price did, with a 20% beatdown like Schrodinger.
But the earnings report itself was fairly decent. Second quarter revenue was up 109% over last year. Its customer base grew 21% and premium per customer grew 24%. Those are all very good numbers.
The problem for Lemonade is that the company payouts for policy claims was up 8% over last year. If you’ve watched the weather reports this year, you’ve got a decent idea why Lemonade paid out more than expected for claims.
Of course, that’s not good. It also seems pretty easy to fix. Premium prices will have to rise.
But, I think there’s a bigger issue at play for both Lemonade and Schrodinger. And that’s how far these and many other stocks have run this year. I mean, both Lemonade and Schrodinger were better than 100% since April. And the same thing is true for a lot of other stocks out there.
In fact, when I scroll my watchlist (around 60 stocks) today, I see mega-cap tech like Meta (NASDAQ: META), Amazon (NASDAQ: AMZN), Nvidia (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG) showing pretty nice gains today – the exception being Apple (NASDAQ: AAPL).
Pretty much all other tech stocks are essentially flat or lower. That includes the semiconductor stocks…
The S&P 500 has been kind of weak since the July 27 high at 4.607. Last Friday (August 4) was a particularly nasty day. The S&P 500 ramped up to 4,540 on the solid NonFarm Payroll number and then collapsed to close at 4,478…
When traders see a rally as an opportunity to sell like that, well, I take it as a sign that stocks aren’t likely to just jump back to recent highs. I expect there’s more selling to come, and it will hit bigger tech stocks, like what we’ve already seen with smaller tech stocks.
That’s gonna do it for me today. Take care and I’ll talk to you Wednesday…