Are we setting up for a pullback?

As the talk of reopening the economy begins its valid to ask whether this recent recovery in the markets is sustainable or are we setting up for another pullback when second quarter results are released. As we have noted several times the first quarter results being announced now aren’t giving a true picture of the coronavirus impact. Second quarter results will likely bring this picture into clearer focus.

Looking specifically at the companies in our wacky world consider the following;

After hitting a low of $191.16 back on March 18th Dexcom has recovered closing at $323.40 this past Friday- Insulet closed at $130.01 back on 3/18 and $199.34 Friday- Tandem $47.37 and $72.94 – Lilly $143.09 and $157.29 and finally Novo Nordisk $51.78 and $64.28

Many have asked whether this recent recovery is sustainable or is this just a dead cat bounce? So far only Abbott has reported first quarter results (3/18 close $78.93 Friday close $96.01) which came in pretty much as expected for their diabetes unit. The company while cautious about their outlook didn’t seem overly concerned that the coronavirus will have a major adverse impact for this unit.

Based on our discussions with many of the companies noted above we hearing similar thoughts. With Lilly reporting later this week we should get some further clarity although we do not anticipate any major changes to what we heard from Abbott. As we have noted many times regardless of the coronavirus patients still need their drugs and devices. The biggest unknown is just how deeply the economic fallout will hit items like meeting co-payments.

The other area which likely will be impacted will be new patient starts. Again as we have noted thanks to social distancing it’s unlikely patients will be making any major changes to their therapy regimen or the devices they use. This could hurt a company like Tandem and their Control IQ sales. It also could hurt Novo and sales of their new oral GLP-1 Rybelsus.

Another hazy part of this picture is no one really knows what life will be like when things reopen. Based on everything we have read, and this seems to change daily, the economy will not reopen all at once. Best we can tell it will be phased reopening. Does that mean patients will be flocking to see their physician? Or will patients especially those with diabetes who are at higher risk for catching the virus be extra cautious before they venture out freely? Again we just don’t know.

All things being equal we’re not sure we’d be buying at these higher levels nor would we be selling. Based on everything we know now we don’t anticipate a return to the low levels witnessed back in Mid-March. However the pace of the recovery does give us a moment of pause as it may be too much too soon without enough evidence. As always there are exceptions to this rule and here, they are;

Livongo was at $23 mid-March and closed at $37.30 on Friday. The company has been on quite the roll, but the second quarter is much more important when it comes to new patient sign ups which in turn translates into revenues. With employees working at home we anticipate a much lower level of new patient adds therefore hurting second quarter revenues. Yes, the company exceeded expectations in the first quarter, but the full impact of the virus wasn’t not felt until the end of that quarter. Bottom line Livongo is one stock we would short at these levels.

Dexcom and Abbott on the flip could see increased demand due to the virus as remote patient monitoring and their entry into the hospital market likely will help sales. The wild card here is new patient adds which likely will be adversely impacted. Abbott has the additional plus of being very active in the COVID testing area. We would move cautiously here looking for entry points whenever shares pullback. Long-term both Dexcom and Abbott are solid.

The same can be said for Tandem and Insulet. Long-term we have no doubt both companies will do just fine. Near term it’s all about new patient adds which we believe have slowed due to the virus. This slowdown should create opportunities for entry points.

There is still much we don’t know and should this reopening of the economy backfire all bets are off. As we have seen even with the countries who have begun reopening this virus continues to rear its ugly head. The worst-case scenario would be a re-closing after the reopening this would send the markets into a tailspin.

The best possible advice of course comes from Momma Kliff who noted that it’s best to move cautiously, methodically during times of crisis and not rashly.