Barron's Streetwise - The Obesity Drug Loophole. Plus, the Outlook for Homebuilder Stocks.

Episode Date: June 14, 2024

Also, a top Vanguard strategist discusses the run-up in growth stocks. Learn more about your ad choices. Visit megaphone.fm/adchoices

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And some people are wondering whether that's a worrisome sign, but one investment bank says, no, it's a buying opportunity. That's one item. The other item is about obesity meds. There's a company out there that's known for selling the kind of stuff you'd feel awkward talking to someone at the pharmacy counter about if you don't want to hear it. Let's do the housing one. All right, but we're coming back to the other one, just so you know. Welcome to the Barron Streetwise Podcast. I'm Jack Howe, and with me, our audio producer, Jackson Cantrell. Hi, Jackson.

Hi, Jack. Jackson Cantrell. Hi, Jackson. Hi, Jack. So home builder stocks in the U.S. have done very well over the past few years, but not since the end of March. Toll Brothers was recently down 8%. Lenar was down 10%. D.R. Horton was down 14%. And the S&P 500 over that same period was up 3%. So what is the problem? It's not mortgage rates, I don't think. I mean, they're high. They're a lot higher than they used to be.

But if you look since the end of March, they went up a bit, then they eased a bit, and now they're not much higher than they started, a little under 7% on a 30-year fixed mortgage. There have been some mixed economic signals, but I don't think that's it either. UBS blames an uptick in home inventory. If you look at listings, the latest data we have from the U.S. Census Bureau and from the National Association of Realtors is for the month of April. One does new homes, the other does existing homes. Together, they count 1.52 million single-family homes for sale, one and a half million single-family homes. Just under a third of that is new homes,

the rest is existing homes. And that number in total, that's a 15% increase from a year ago. Wow, a third of the homes for sale are brand new homes. That seems high. Is that higher than it's been in the last? It is higher. I'll come to that in a moment. There are two concerns here for investors in home builder stocks. As we all know, there's been a shortage of houses for sale and that has kept prices high. And so profits for builders are also high right now. And for publicly traded companies,

they've taken market share because they have the resources you need to be able to get their hands on land and labor. So if this is the beginning of a rush for people to sell homes, you could see these big home builders give up more stock gains. And if you're looking for worrisome homes, you could see these big home builders give up more stock gains. And if you're looking for worrisome news, you can find it in Tampa, Florida. Inventory there is up more than 60%. And in Austin, Texas and Portland, Oregon, prices recently have been falling. But maybe things aren't so bad for builders. If you look at the average since 1982, 1982 Jackson, of course, the year that Eye of the Tiger from the hit movie Rocky III was out. You remember that song, right? Are we

allowed to play that song or would we have to pay someone? We'd have to pay someone. Can we sing that song? How many words of that song are we allowed to sing? Four, maybe five. Or you can use... Rising up. That's about all I know. Anyhow, so they can't charge us for two words. I think we're good there.

Since 1982, there have been an average of 2.36 million single family units for sale. That is 55% more than the latest count. And to answer your earlier question, Jackson, yes, the number of new houses is actually above its average since 1982, but the number of existing homes for sale, that's a much bigger figure, those are about half their average since 1982.

So home builders are doing their best to make up for the shortfall, but it's not nearly enough. UBS says that the houses that are for sale, they skew older and expensive. Redfin, that's an online broker. We spoke with that company on this podcast before. They find that three in five home listings right now are stale, meaning the homes have been up for 30 days or more and they're not in contract. Two out of five are older than 60 days. You get the feeling, and maybe there are folks out there who've been looking around at listings in

their neighborhood and thinking this, you get the feeling that there are some homeowners who are hearing about the tight supply and they're hearing about the high sales prices and they're putting their house out there for a sort of pie in the sky number and they're seeing what they get. Keep in mind that we still have the lock-in effect that has to do with mortgage rates. Again, the 30-year fixed rate is close to 7%. 61% of outstanding mortgages right now are fixed below 4%. And 77%, more than three quarters, fixed below 5%. So there's not a lot of people looking to trade up to a higher mortgage rate. UBS also notes that rising house listings in three states, Florida, Texas, and Arizona, those together represent 41% of the increase that we've seen nationally. But in each of those states, it's a normalization from low levels.

There are some local factors too. Parts of Florida still have damage left over from Hurricane Ian in 2022. They have rising insurance costs, and there might be some angst over what's projected to be a record year for named storms this year. There was a report out this past week from Ned Davis Research. They estimate that the U.S. as a whole is short by 2.2 million housing units. There is a record number of multifamily units that are under construction right now, but the number of permits has been falling, so the boom might not last. UBS takes all of this to mean that builders are in better shape than investors might expect.

They cite two of them that report financial results in the week ahead, Lenar and KB Homes. UBS expects good reports there, and they view the shares as attractively priced. Lennar is about 10 times forward earnings estimates, and KB is nine times. UBS says that, broadly speaking, the homebuilder group has undergone what it calls a vast transformation for the better since the global financial crisis. It says the group deserves a higher valuation. And that is Homebuilders. Let's abruptly change topic. Do I need to signal the change with another 1982 song? Because I could do some

abracadabra by Steve Miller Band. We got plenty of royalty-free music that we have the rights to. All right. I'll leave that to you then. This has been a big year for artificial intelligence stocks. Just last week's episode, we talked about Broadcom. That stock, just since that episode, is up more than 20%. That stock, just since that episode, is up more than 20%. But few stocks can match the performance of NVIDIA this year. It was recently up 162%, just this year. But I'll tell you one stock that's doing even better. It's a telemedicine company that's called Hims and Hers Health. Jackson, tell the good people out there precisely what Hims and Hers Health sells.

Well, I think Hims, correct me if I'm wrong. I will. Got it. Start selling a certain drug that no longer had its patent out. It could be anything. The commercials for it have maybe an older couple looking at a sunset sitting in bathtubs side by side. Bubble bath? What are we talking about here? Erectile dysfunction. I don't even know if I could talk to you right now. I might just need

some time. They also do hair loss. The tagline I'm seeing on their website is telehealth for a healthy, handsome you. And then there's also hers, which offers a variety of similar generic drugs and treatments. That's a decent summary. Thank you for taking the hit on that one. There are other conditions that this company sells medicines for. It is generally the kind of stuff that maybe you might be okay talking to your family doctor about it, but maybe you don't want to bring their entire front office staff into the conversation when you get up there and they say, well, why are you here today? Or maybe you don't want to run the risk that at the drug counter

that they get on the loudspeaker and do an inventory check for whatever it is you're buying for. the loudspeaker and do an inventory check for whatever it is you're buying for. There's the condition you mentioned. There's balding. There's anxiety. There's acne. There are STDs. And I'm not talking about standard deviations.

And it's not all prescription medicines. There's over-the-counter stuff, too. All sorts of concoctions. I'm seeing right here there's something called a delay spray. That's for introducing awkward pauses into a podcast. All right, so the point here is that that stock was going not much of anywhere until the company announced that it was getting into the obesity medicine market. We have talked about this subject many times in the podcast. We've had the CEO of Eli Lillian, that's one of the major participants in this new category of what you might call miracle weight loss drugs, these GLP-1 agonists.

These are drugs that have proven remarkably effective at weight loss. They were initially diabetes drugs. Now they're for obesity, and they're being studied for a range of obesity-related conditions. And sales are taking off. And those shares, shares of Eli Lilly and another major maker of these types of drugs called Novo Nordisk. Those stocks have shot higher and so has shares of HIMS and HERS Health this year. Let me see if HIMS stock is still ahead of NVIDIA. It was recently.

I've got it at the moment up 165%. So that's about equal to NVIDIA for the year. So here's a remarkable thing about this. HIMSS is not a company that has gotten in the laboratory and created a breakthrough on GLP-1 drugs. Jackson, about a year ago, we did an episode on this podcast. This is before our friend Metta went on maternity leave. So I think she was the audio producer at the time. And we had a doctor on, and this doctor was active on TikTok talking to patients about weight loss.

And she said that she could obtain these drugs, the new type of drugs, through a compounding pharmacy, and she could sell them for much less than people would pay if they pursue these drugs in branded form without insurance. would pay if they pursue these drugs in branded form without insurance. One of the main things that compounding pharmacies typically do is, let's say you have a patient who needs a drug, but the patient is allergic to one non-essential ingredient in that drug. The compounding pharmacy can make their own version that doesn't contain that ingredient. But there are also compounding pharmacies that can make drugs in bulk. And some of these pharmacies do that in cases where there are drug shortages. And that's the case here. The chemical in the obesity drug Wegovi, that's listed on the Food

and Drug Administration's website as a drug that is currently in shortage. I guess you can call this a loophole. The FDA does not review compounded drugs that say that they're the equivalent of branded drugs. The drug that HIMS and HERS sells, the compounded drug, that can sell for a discount of 80% or more from what patients would pay if they were buying the branded drug and they were paying full price without, let's say, insurance. This is not the only company to do this. There was another company called Roe. They specialize in the same sorts of treatments that HIMS and HERS has before getting into obesity drugs. They announced that in January. And there's another company called LifeMD. That one is publicly traded. It's quite small. Earlier this month, KeyBank Capital Markets initiated coverage

of LifeMD with an overweight rating. Their price target implies more than 50% upside for the shares from recent levels. They point out that that company can provide either branded drugs or compounded ones. And KeyBank expects obesity to be the main driver of that company's revenue growth this year and next. So none of these companies have invented anything. They're just sort of using this loophole to create generics of these drugs and they can sell them for cheaper? I mean, I guess you could say they invented ordering these things from compounders, but they didn't even really do that because we spoke with a doctor who was already doing that. So no.

And what would close this loophole? Is it the Food and Drug Administration that says, oh, there's not a shortage anymore? Or how does that work? That could definitely close it. If the companies that make these drugs are able to catch up with demand and there's no longer a shortage, then these compounding pharmacies would no longer have a rationale for manufacturing at bulk these same drugs. I'm not a pharma lawyer or an anything lawyer, but that's the way it looks to me. The FDA could also say, look, enough is enough. This is becoming a wild west here with lots of companies offering these things. lawyer, but that's the way it looks to me. The FDA could also say, look, enough is enough. This

is becoming a wild west here with lots of companies offering these things, and we're going to impose some kind of controls. I don't see any sign yet that that's happening. So for right now, we're in this weird situation where you have certain compounded pharmacies that can do this type of manufacturing. And for resellers out there that want to get into this business, it does seem like kind of a pile on. You could imagine more of them announcing that they're going to be participating in this. That raises the question of whether this is a threat to the financial results of the companies that sell the branded versions of these drugs, Chiefly, Lilly, and Novo Nordisk, although more are going to get into the market. I recently asked Deborah Netschert. She's a portfolio manager at a company called

Jenison. She oversees a healthcare portfolio. She feels that the market for these obesity drugs is quite large, and we're still in the very early stages. There's always going to be competition. When you start to tap into a market as big as the obesity market, competition is going to come from everywhere. So there's a lot of companies that are trying to develop GLPs and there's actually a ton of room for additional players in this market. Again, if we've only treated 1.5 million people and we have in the US alone estimates of about 110 million people, we've really only just. alone estimates of about 110 million people. We've really only just scratched the surface of treating these obese individuals.

Thank you, Debra. Debra still has favorable views of both Eli Lilly and Novo Nordisk. Back to hims and hers. Jefferies was unlucky enough to downgrade the stock back in April. That was before the biggest part of the GLP-1 jump. It wrote that the company had done a stellar job of selling in stigmatized categories, but that growth was slowing and there wasn't an obvious new unicorn category,

as it called it. Shares at the time, it figured, were worth only about $15. Recently, they're $24 and change. So that call hasn't worked out. And if nothing changes here, if the FDA continues looking the other way on this and Lilly and Novo can't catch up on manufacturing, then maybe this will be the new unicorn category for hims and hers, at least for a while. That to me feels like a pretty risky reason to own a stock. I'd be worried about what might happen when conditions normalize, but you might feel differently. And that's probably a pretty good spot for a break. Wouldn't you say, Jackson? Let's see. We covered housing. We covered

obesity drugs. You gave some pointers on urological conditions earlier. I think we've got it covered. After the break, we're going to hear from Fran Kinnery. He's the head of Vanguard Investment Advisory Research Center. He's going to tell us whether the stock market is too pricey, whether we should panic. I mean, he's not going to say panic, right? He's from Vanguard. He's going to tell you it's going to be okay. But I want to hear exactly how it's going to be okay.

And by the way, what should we make of bonds? And what about growth versus value right now? That's next after this quick break. Welcome back. I spoke recently with the head of Vanguard Investment Advisory Research Center. His name is Fran Kinnery. And I asked him about stock market-y stuff and some bond stuff too. Let's listen to a few minutes of that conversation.

What do I do with money these days? Where should people put their money? Let's start there. I have heard people say, well, you know, these growth stocks have had such a great run, but you know, that means maybe it's time to put money in value. And it doesn't really seem to have worked a lot over the past 10 years, that rotation. But what do you make of people who are saying that now? Are value stocks particularly cheap or should you not try to get that fancy? Yeah, so value is definitely cheap relative to

its history and relative to growth. The thing is, just because that is the case doesn't mean it cannot get cheaper. Not to use housing as another proxy, but people have been trying to wait for housing to come back down and the housing market continues to go up. So what we would recommend is if someone owns a holistic fund like the S&P 500 or the total market, there's really not much to do. If they do own the components, let's say you owned growth and owned value and growth has done so well and value has done so poorly relative to growth, you would want to rebalance them back to what your initial conditions were. And so if you did own the components, you would be selling the winners being growth and buying the underperformer

value. Do you see any mistakes that you think a lot of investors are making now? Are investors buying too much of something or too little of something or are their portfolios out of balance in some way? We've been studying investor behavior, my team specifically, for 20 plus years at Vanguard. What you would typically see is investors did struggle with rebalancing and chasing performance throughout history. But the last five to seven years, we're seeing investor behavior be very, very well behaved. We think there's some reasons to that. The amount of investors that are advised and getting good advice, which we would call strategic asset allocation and rebalancing, the development

of ETF model portfolios and target retirement funds. And so we're actually very bullish on how investors are behaving with their cash flow. Does anything stand out to you right now about the relationship between stocks and bonds in the US? Does either one look like a better deal than usual relative to the other? Yeah, I would say not. I would say the good news, maybe if I were to say one thing, is that the bond market since the global financial crisis of 2008 up until 2022, so almost 14 years, interest rates were around 0%, 1%. What we are seeing is money markets and bonds

now today being somewhere between 4% and 5%, 5.5%. So that is good news for investors having a positive bond return. But for long-term investors, it's really difficult to see why you would bet against the equity risk premium, meaning if you have a 10, 20, 30, 40 year horizon, we would still think a balanced portfolio for stocks and bonds to play a significant role. Because even though bonds are at 5%, if inflation is at 3%, that's still only giving you 2% real. And what you really want to think about is after inflation returns, because you're going to be spending your money 20, 30, 40 years out, either on college tuition or retirement income, and you definitely want to outperform inflation. What is something that you keep hearing again and again from advisors who come to you with questions? They're hearing from their clients.

Is there a repeated question or concern out there that everyone seems to share right now? I would say a couple. One is non-US stocks. People are questioning what I would say, maybe diversification, whether it be growth and value, like do I still need value? Do I still need non-US stocks? Because they say, I've heard that I should do this for more than 10 years now. And all I really had to do was buy Nvidia and it just keeps going up. So why should I own foreign stocks or value stocks or what have you? Is that roughly the question? Yeah, that's the question, right? Diversification is a strategy that most people don't like. They want to own all Nvidia or they want to own all large cap growth stocks because they've done so well.

But we would try to remind people there were other episodes where you wish you had all international stocks or you had all value stocks. And so again, making sure that your portfolio is balanced, maybe even reminding people diversification 101 means that some parts of your portfolio are doing well, other parts of your portfolio are not. And that is by design, not by, it's a feature, not a bug. There are hundreds of thousands of hedge funds and active managers out there every day buying and selling the price of Microsoft, NVIDIA, Google. And so the price that those securities end up with at the end of the day is pretty close to all of these professionals who have priced in to the marketplace. There's also investors out there that can short stocks. So if they think the stocks are overvalued, would put pressure downward on those securities. So unless you think you have unique access and

information to the world's hedge funds and active managers who are doing this 24-7, I would make sure that you build a portfolio. It's low cost. It's broadly diversified. And not try to second guess the price of the marketplace. But Fran, what about that voice in the back of my head that tells me that I definitely know more than all these people and I can definitely predict the future? What am I going to say to that voice?

Everyone was calling NVIDIA a bubble. And yesterday can definitely predict the future. What am I going to say to that voice? Everyone was calling NVIDIA bubble and yesterday it was up five and a half percent. So I highly warn people. I have two daughters who love Taylor Swift and they tell me that the price of a Taylor Swift concert cannot possibly be a thousand dollars. And I say the price is a thousand dollars or we're not going. Very good. Fran, thanks so much. I learned a bunch. Thanks for taking the time to speak with us. Yeah. learned a bunch. Thanks for taking the time to speak with us. Yeah. Thanks, Jack. Thanks for the fun time. Thank you, Fran. And I want to thank Deborah and thank all of you for listening. Jackson Cantrell is our producer. Look, we're rising up back on the street. I did my time. I took my chances. I went the distance and now I'm back on my feet.

Just a man. Are you reading Eye of the Tiger lyrics? Maybe a little bit. Look, the important thing here is that you can follow the podcast on Apple Podcasts, Spotify, YouTube, wherever you listen to podcasts. If you have a question you'd like answered on the podcast, you just tape it on your phone. Use your voice memo app and you can send it to jack.how. That's H-O-U-G-H at barons.com.

Look, so many times it happens too fast. You trade your passion for glory. We're still talking about questions here, right? All right. See you next week.