Most of the activity in portfolios lately has been selling covered stock options to boost the yield on our holdings (attn clients: I’ll be discussing this in more detail with examples in this month’s video update). I did make two purchases in the last week that I wanted to bring to your attention though.
First, I bought stock in Inovalon Holdings (INOV) as a new Growth investment. Inovalon is a cloud-based data analytics company for the healthcare industry that has compiled a proprietary data set of almost 10 billion medical events from 130 million unique patients. In short, Inovalon’s data and systems are designed to spot gaps in care, processes and financial performance of their clients, which include health insurance companies, doctors, hospitals, biotech companies, and medical researchers. They’re approach to tackle our country’s unsustainable climb in healthcare costs is to reduce inefficiencies through predictive data by telling healthcare providers a patient’s medical history along with all other patients in the database with similar health ailments. This allows doctors and hospitals to understand how to best utilize they’re resources to treat the patient quickly and efficiently.
Inovalon went public in February of last year, and like most new IPO’s, the stock was beaten down for the first year. The company expects to grow at a rate in the mid-teens through 2020 but I think they can easily exceed this. I see their platform as benefiting from the “network effect” where the more medical events/patient histories they’re able to collect, the more valuable the platform becomes. With a focus on reducing costs and inefficiencies, and the company’s strong track record of implemented case studies, I see a lot of potential to win new business.
The company has a market value of $2.7 billion, making it a relatively small mid-cap stock in a competitive space. But they’re consistently Free Cash Flow positive and have about $450 million of net cash on the balance sheet. The stock is fairly volatile given its size but it seems to be gaining some traction here so I finally decided to step in and pull the trigger. However, I’m starting small and I hedged the position by simultaneously selling a call option overhead at $20 to collect some income and reduce our cost basis. I’m also looking to sell put options underneath as a way to add to the position if the stock were to dip.
Inovalon (INOV) – 16 month chart (full history of trading)
I also added to our currency-hedged Japanese stock ETF (DXJ). I reduced the position earlier this spring as the Japanese yen was strengthening but I think the yen is approaching levels that will start to make Japanese leaders very uncomfortable and lead to further “intervention” (meaning they’ll try to weaken the yen again). The Japanese stock market has moved with a very tight inverse correlation to the yen (they’re stocks go up when the yen goes down) so we could see their market pressing higher again in the coming months after a year of consolidating. The Japanese market (the Nikkei) is still off about 70% from it’s highs in 1989 making their market much more attractive than US stocks from a valuation perspective. I think the Japanese are going to succeed in weakening the yen (and probably much more than they want to…) and in doing so will inflate their stock market to higher prices. The key for us as US investors is to make sure we hedge-out the currency risk.
Thanks for following and I hope everyone has a great weekend!
Cheers,
Nick