McKesson is a ‘CASH MACHINE’ at the expense of the US healthcare system, short seller says

Palantir, McKesson, and Private Credit: A Fox Business Alert Analysis

Key Concepts:

• Palantir (PLTR): A data analytics company, currently facing scrutiny regarding its valuation.
• PE Ratio (Price-to-Earnings Ratio): A valuation metric comparing a company’s stock price to its earnings per share.
• Terminal Value: An estimate of a business’s value beyond a specific forecast period, often used in discounted cash flow analysis.
• Short Selling: A trading strategy where an investor borrows shares and sells them, hoping the price will fall so they can repurchase them at a lower price and profit.
• McKesson (MCK): A pharmaceutical distribution company, facing potential political and regulatory challenges.
• Private Credit: Lending activity conducted by non-bank financial institutions, often involving less regulation than traditional bank lending.
• Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
• US1 List (Bank of America): A list of the bank’s top US investment ideas.

I. Palantir Re-Evaluation & Andrew Left’s Position

Bank of America has removed Palantir from its US1 list, despite maintaining a ‘buy’ rating. This follows Andrew Left’s (Citron Research) short position initiated in August when the stock was at $184, and has since fallen to $133, representing a 28% decline. Left has partially covered his short position but remains bearish on Palantir. He attributes this to a broader “software hangover” and believes Palantir will be disproportionately affected, stating, “if software gets a cold, Palanteer is going to get the flu.”

Left initially admired Palantir’s CEO, Alex Karp, and acknowledged the company’s potential, but flagged the stock’s “absurd” PE ratio as a key concern. He now argues that traditional PE ratios are less relevant for software companies, shifting focus to long-term viability and potential disruption. He suggests Palantir could fall another 50% if it fails to maintain its growth trajectory or faces spending cuts. He contrasts Palantir unfavorably with companies like ServiceNow and Microsoft, which he considers “mission-critical” software companies trading at more attractive valuations.

Quote: “If software gets a cold, Palanteer is going to get the flu.” – Andrew Left

II. Shifting Valuation Metrics & Long-Term Viability

Left emphasizes a shift in valuation focus from PE ratios to “terminal value” – assessing Palantir’s potential existence and competitive position over the next 6-8 years. He questions whether Palantir can maintain its growth and avoid being cannibalized by competitors. This perspective highlights a growing concern about the sustainability of high valuations in the software sector, particularly for companies reliant on continued rapid growth. He believes investors should consider a “show me” approach, demanding concrete evidence of sustained performance before justifying current valuations.

III. Alternative Software Investments: ServiceNow & Microsoft

Left identifies ServiceNow and Microsoft as preferable software investments. He believes fears surrounding AI replacing software are “overblown” and that AI will primarily supplement existing software solutions. He anticipates a period of 1-2 years where valuations will remain subdued, advising against expecting a quick return to previous highs. He owns a small position in ServiceNow.

Quote: “Software is going to be around. AI is going to supplement software. It’s not replacement. This is completely overdone.” – Andrew Left

IV. McKesson: A Cash Machine Facing Political Risk

Left has initiated a short position in McKesson, a pharmaceutical distribution company, despite its strong financial performance and positive analyst ratings (six “strong buys” and zero “strong sells”). He argues McKesson profits at the expense of the US healthcare system and faces increasing political risk. He points to a bipartisan bill introduced by Josh Hawley and Elizabeth Warren aimed at breaking up “big medicine,” directly targeting McKesson.

He criticizes McKesson’s business model, describing it as simply “shipping boxes” of drugs without significant investment in R&D. He further alleges that McKesson’s acquisition of oncology centers is a strategy to steer patients towards its own drugs, potentially compromising patient care. He highlights the company’s $8.5 billion fine related to the opioid epidemic and the fact that the CEO overseeing the opioid distribution remains in his position. He suggests McKesson’s high PE ratio is unjustified given these risks.

V. Concerns Regarding Private Credit & Blue Owl

The discussion briefly touches on the private credit market, referencing JP Morgan CEO Jamie Dimon’s warnings about potential risks. Left highlights the lack of liquidity in the private credit market as a major concern, stating that it can trigger a “run” and create a negative feedback loop. He notes that the market has become “saturated” with deals, potentially leading to poor investment decisions. He specifically mentions Blue Owl’s decision to freeze redemptions in one of its funds as a sign of these underlying vulnerabilities.

Quote: “The key to any investment… is liquidity and it’s very scary when there’s no liquidity.” – Andrew Left

VI. Logical Connections & Synthesis

The conversation demonstrates a broader theme of reassessing valuations in the current market environment. Left’s analysis of Palantir, McKesson, and the private credit market all point to a need for greater scrutiny and a focus on long-term sustainability rather than short-term hype. He advocates for a “show me” approach, demanding concrete evidence of performance before justifying high valuations. The discussion highlights the increasing importance of considering political and regulatory risks alongside traditional financial metrics.

Main Takeaways:

• High-growth software companies like Palantir are facing increased scrutiny regarding their valuations.
• Investors should focus on long-term viability and potential disruption rather than solely relying on PE ratios.
• McKesson faces significant political and regulatory risks despite its strong financial performance.
• The private credit market is exhibiting signs of vulnerability due to a lack of liquidity and potentially overextended lending.
• A “show me” approach is warranted in the current market, demanding concrete evidence of performance before investing.