Make Room for EMC

Investments Portfolio Update
by Linda McDonough

“Five years from now we will be sharing this planet with 7 billion people who we will be sharing it with 30 billion devices and 44 zettabytes of data and this number is expected to double every couple of years over the future.”  
Zane Rowe, EMC CFO

What is the world to do with all the zettabytes of data spilling out of our laptops and servers and mobile devices? The deluge of data being dumped into enterprises is growing exponentially and is causing a seismic shift in the spending patterns of corporate IT departments.  

EMC Corp. (NYSE: EMC), whose storage solutions already help to alleviate this data glut, has been innovating and integrating new technologies in order to secure its position as the largest data storage provider in the world.

The stock earns a high Smart Tech Rating of 6.5 due to its unique position at the forefront of modern network architecture for big data.  EMC is one of the only companies with all of the tools necessary to bridge old storage methods to current cloud capabilities.  The company generates consistently strong cash flow, offers investors an above average dividend yield of 1.7% and trades at discount to its peer group.  

The company, founded in 1979, was capitalized by co-founders Roger Marino and Richard Egan from selling office furniture. Born feisty street kids, they once dragged desks up flights of stairs to early customers. The company went on to develop memory boards, controllers and RAM disks to help amplify the memory of Prime, HP and IBM computers.

Aptly housed in Hopkington, MA, the starting line for the Boston Marathon, EMC has demonstrated endurance in outrunning competitors in the evolution of data storage solutions. The company, whose revenue was almost entirely tied to hardware sales a decade ago, has been increasing sales of highly profitable software and service storage products.

EMC has successfully navigated the evolution of data storage since 1981 when it developed its first memory boards for Prime Computer.  It migrated from improving hard drive capacity on bulky mainframe boxes in the 80’s to offering redundancy in server farms in the 90’s to offering revolutionary techniques like virtual memory via its purchase of VMWare in 2003.  VMWare’s software allows computers to split up the processing power of a server, improving its storage capacity significantly. EMC was already working on cloud based products in 2009 to address the recent explosion of data stored remotely in private or public clouds. All the while EMC continued to offer and improve its offering of storage hardware.

EMC’s revenue exploded in the early years, almost doubling from $66 million to $127 million the year after its 1986 IPO. In 2014 that revenue base equaled a monstrous $24 billion, almost 200 times that amount. Revenue increased 5% in the most recent year. Although declines in its mature hardware business lines dilute the double-digit growth enjoyed in software and services, the company’s recent purchase of Virtustream should help magnify that growth.

EMC has shown itself to be a crafty acquirer, wisely utilizing its growing pile of cash to find technology assets that augment its current portfolio of storage products.  It has spent over $16 billion on 75 acquisitions since 2005.  In the process it has built up an arsenal of storage products to revolutionize enterprise data centers.

EMC’s product portfolio now allows companies to manage their data, act on their data in real time, protect their data, analyze it and transform it into useful information.  It is one of the few companies offering a full menu of storage solutions, allowing customers to seamlessly migrate all of their data to the cloud.

Most importantly, EMC’s new products, like the Extremio 4.0, outperform physical servers multiple times over, allowing customers to reduce the number of servers needed and generating significant returns on their investments.  While it may seem that EMC is shooting itself in the foot by promoting new products which cannibalize the need for its old hardware, this example illustrates EMC’s vision to aggressively morph into a service and software provider fit for the digital age.

Virtustream, purchased for $1.2 billion in cash this July, delivers unique functionality to EMC.  While EMC already offered products that allowed customers to store data on private or public clouds, little existed to move data between private and public clouds.  Virtustream addresses this hybrid approach.  In addition, its close relationship with SAP allows customers to migrate mission critical payroll or inventory management applications safely to the cloud.  

The next time a computer accurately scans the Zebra Tech bar code on a box of cereal at the grocery store or when a tablet immediately pulls up all your relevant health data at the hospital you can likely thank EMC.

Co-Founder Roger Marino, a scrappy kid from Revere, retired from EMC in 1992 and has gone on to apply his fortune to producing and directing movies.  After suffering from stage IV lung cancer, his co-founder and old Northeastern University roommate, Richard Egan, died from suicide in 2009.  Joe Tucci, who joined EMC in 2000, became its CEO and President in 2001 and chairman in 2006.  

Tucci has been a worthy leader, positioning EMC to richly capitalize on the wave of change disrupting IT storage budgets.  EMC’s efficient operating model has allowed it to stockpile $13 billion in cash, $5.5 billion after deducting debt owed.  

Current estimates assume a slow transition as EMC peels off declining hardware revenue to reveal the vigorous growth of software and services.  Expectations for 4% sales growth and flat earnings for the second quarter, to be reported on July 22nd, look conservative.  EMC is valued at 12 times 2016 estimates of $2.12, a bargain for a company poised to ride the next wave of data storage.

Currently priced near $26, we are adding EMC to the STI Investments Portfolio with a Buy Limit price of $29 and Stop Loss price of $22.

Emerging Biotech Investment System (EBIS) Update
by J. Duarte, MD

The Big Picture:  Biotech Index In-Synch with Bond Yields?

In what could be considered unusual, to say the least, the Nasdaq Biotech Index (NBI) and the U.S. Ten Year Note Yield (TNX) have become synchronized. This is a complete reversal from the relationship of the two markets over the last few weeks, and is hard to explain.   What we like, though, is that NBI remained in an uptrend despite the week’s volatility. That still keeps our bullish scenario intact and we expect the Nasdaq Biotech Index (NBI) to continue  to make its move toward 4500 if it could hold above 3900, just below the 7/10 closing price.  We don’t want to speculate on the fundamentals at this point since the bond market is clearly in its own world.
10 Yr Tnote Yield 2015 07 10 NBI biotech index 2015 07 10

It is a fact, though, that smaller biotech companies, especially the drug research companies in key stages of growth, often rely on debt financing to continue research and operations.  Rising interest rates will likely hurt the ability of many of these companies to raise capital.

Last week we noted that the news that Aetna (AET) is buying Humana (HUM) for $37 billion hit the wires and that a wave of similar mergers in the insurers, could lead to a tightening of the purse strings. This could be negative for biotech companies that develop and manufacture expensive biotechnology drugs and even the specific therapy methods by which some of them may be delivered. 

Another interesting item was the news that Medicare will soon begin to “bundle” payments for hospitals, physicians, and all services into one single fee for joint replacement surgeries. This is the start of a concerted effort by the government to cut the amount of money it pays to hospitals and physicians for orthopedic services.  If this is implemented it is likely to have significant repercussions throughout the medical equipment sector, where very large companies roam the landscape. 

If it works for medical equipment, at least in the government’s eyes, bundling will become the norm for all services and fee for service, which is based on the number of services provided, regardless of the outcome, will be phased out. That would be very negative for drug, biotech, and companies who make money based on the number of units sold.

Again, it’s early on this. But it is worth watching, especially if the health care sector starts to sputter.

In Depth:  New EBIS (Emerging Biotech Investment System) Pick: Meridian Biosciences (VIVO)

New Pick:  Meridian Biosciences (VIVO) – Buy up to 21. 

Update:   The stock closed Friday’s session at 18.67 on rising volume, suggesting that it is gathering momentum and could hit the buy point in the not too distant future.  This is a little known company within an excellent niche whose current strategies are hitting on all cylinders.  Of course, that gets us all worked up since we like undervalued stocks with good management, growing revenues and profits, and good balance sheets that the market has not discovered.

VIVO is a small stock with a market cap of $767 million but is money maker.  The company develops, manufactures, and markets diagnostic testing kits focused on gastrointestinal infections, virus detection, and parasitic illnesses.  It also produces reagents and key testing and DNA amplification and enzyme related materials used in research.  It has recently released a new product, the Para Pak single vial transport system for parasite testing which simplifies the transport of samples to the lab by using one vial instead of the more complicated multiple package systems that are currently on the market. 

We expect VIVO to benefit from the global immigration trend and the potential for infectious diseases to expand their territory via travel related transmission channels.  The company has a well established global platform including a recently opened office in Beijing (January 2015).

And it offers a 4.3% annual dividend yield with a 0.20 per share quarterly dividend.

The EBIS Score for VIVO, which gets a 9.5 rating (March 31, 2015 data) is worth reviewing. 

  • Cash on hand:  (+1) Meridian reported some $47 million in cash compared to $39 million in the June quarter of 2014. 
  • Cash on Hand growth (year over year) (+1): The year over year cash grew by 8.74%.
  • Revenues (present or not): (+1): The company is delivering sustainable revenues with growth.
  • Revenue growth (10% or greater): VIVO gets a 0.5 on its revenue growth rate of 9.17%, just missing our target of 10%.  Still, in this space, where few small companies make money, much less grow their stash at multiple metrics, that’s worth a half point.
  • Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1)Meridian has a 0.147 worst case scenario ratio, which is excellent meaning that it has enough cash on hand to survive some pretty rough times and continue operations.
  • Earnings (Present or Not Present):  (+1): Meridian delivered four quarters of earnings, with the last three showing sequential growth.
  • Net Income Growth (Year over Year): (+1):  The company delivered a 13.97% improvement in earnings on a year over year basis in its most recent quarter.
  • Products on the market:  (+1):  Meridian has a wide catalog of products on the market and is a steady launcher of new products.
  • Pipeline Strength:  (+1): Meridian is tight lipped about its pipeline but continues to launch new products as well as continuing to look for acquisitions.
  • Late Stage Clinical Trials and Product Launches:  (+1): Recent product launches include herpes virus detection and its Para Pak single vial sample transport kit.

The EBIS system consists of eleven fundamental criteria that are updated every quarter after the earnings results for each company are published. Each criterion gets a value of +1 or zero.  A total of 8 or more points earn a Buy rating.  A total of 5-7 points earn a Hold rating.  Less than 5 points delivers a Sell or Avoid rating.  EBIS was introduced in the June 15, 2015 issue of the Biotech Report.

Portfolio Update: 

Sell Alert:  Medivation (MDVN) (Buy 5/11/15 MPP 124.11 – 7/10/15. Stopped out at 108 (-)12.98% ) Medivation finally tripped its 108 sell stop on 7/10/15.  We’ve noted here that as investors start to factor in the potentially negative effects of the ACA’s effects on the flow of money through the U.S. healthcare system companies such as Medivation, with expensive and rapidly growing drugs could run into trouble. 

Although the story for MDVN remains attractive, investors facing the unknown seem to have thrown in the towel. The problems started when company’s leading drug Xtandi failed to deliver positive results in the fight against breast cancer.  Despite its growth in the treatment of prostate cancer, it is likely that the inability of the company to deliver on expanding the patient base, given the potential for price cuts in the future, investors likely decided to bail out while they still had some profits.

Alert:  Hedging Component of Trend following ETF trading model now active.

For aggressive investors, we suggested adding the ProShares Ultrashort Biotech ETF (BIS) to your holdings on a move above 29. The hedging component has been active since June 29th.  See below for more details.  BIS is not for everyone.   It’s a leveraged ETF and its price changes at twice the rate of the Nasdaq Biotech Index (NBI).  Investors who are aggressive and comfortable with hedging their portfolio should consider adding BIS as protection in the near term with a 26.50 stop loss.  Dr. Duarte owns shares in BIS.

Alert: Sell Stop Raised – Neurocrine Biosciences. (NBIX)  (BUY 6/16/16 at 46 – 7/10/15 closing price 48.16 – Sell Stop 38) Neurocrine Biosciences added some more to its recent advance. The sell stop has been raised to 38.  The stock has the potential to move to the 55-58 area over the next few weeks.  We originally highlighted NBIX in our 5/29/15 update.  We like the stock based on the prospects of its Elagolix drug for treating endometriosis a condition of pre-menopausal women linked to the menstrual cycle and pelvic pain.  Dr. Duarte owns shares in NBIX.

Alert: Repligen Consolidates.  37.50-39 Good Buy on the Dip Area

Repligen (RGEN) (Trading Buy 4/20/15 – MPP 33.23. Buy 5/11/15 MPP Price 38.45 – 7/10/15 Closing Price 40.28) – Repligen continues to consolidate with the 37.50-39 area still proving to a be good entry range.   There has been good support for the shares at 37.50. RGEN remains well positioned in the current hyper growing research market as it is a leading manufacturer of one use filtration systems for the separation on antibodies.  It is also the world’s leading producer of Protein A, the basic component of monoclonal antibodies used for research and biopharmaceuticals manufacturing.  In a recent presentation the company reiterated its expectations for rising organic growth rates in the 25-29% range due to recent and scheduled product launches.  The company also noted that they have 350 potential molecules in their pipeline. Dr. Duarte owns shares in RGEN.

Alert: EBS Nears End of Buy Point

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* 30.63 – 7/10/15 Closing price 33.85) – EBS shares remain in a very sustainable looking up trend.   The stock may be bought until the 34 area as part of this breakout.  EBS makes BioAnthrax, a preventive anthrax vaccine and is working on a new generation of the vaccine.  Dr. Duarte owns shares in EBS.

Alert:  Second Chance to Buy Bio-Rad near original Buy Point – Buy until 150.

Bio-Rad Labs (NYSE: BIO). Buy (5/18/15 – MPP) 146.25 – 7/10/15 closing price 147.97). Bio-Rad has been in a consolidation pattern in the last few weeks and is giving investors a rare second chance to enter at the original buy area near 146. Bio-Rad has its earning scheduled to be released on August 4th.  The company makes testing equipment.  BIO is expected to introduce a new line of diabetes testing equipment in Europe this fall and has recently received FDA approval for a high speed diabetes testing system in the U.S.

Trend Following ETF Model Buy Signal Triggered with Hedging component active.

  • I-shares Nasdaq Biotech ETF (IBB) (Bought 7/7/15 at 375 – 7/10/15 closing price 372.80.
  • ProShares Dynamic Biotech and Genomics ETF (PBE) (Buy 5/11/15 MPP 55.80 – 7/10/15 Closing price 58.64.) Sell stop 55.80
  • ProShares Ultrashort Biotech ETF (BIS) (Bought at 29 on 6/29/15.  7/10/15 closing price 28.07. Sell Stop 26.50.

Our trend following ETF model is back in full swing with the ProShares Ultrashort Biotech ETF (BIS) ETF. The large cap weighted IBB portfolio was stopped out with a nearly 3% gain on 6/29/16 during the market’s big decline.  We have a new entry point on IBB at 375.

Dr. Duarte owns shares in PBE and BIS.

Results of trades in Trend Following Model

I-shares Nasdaq Biotech ETF (IBB) (Buy 5/11/15 MPP 352.96 – Sell stop triggered at 363 on 6/29/15 – Gain 2.84%.

*MPP – Median Purchase Price

News Update:   House Passes 21st Century Cures Act

In an interesting development, the U.S. House of Representatives passed a law that would decrease the regulatory burden on drug companies allowing drugs to come to market sooner.  The same bill gave the National Institutes of Health (NIH) $9 billion dollars in increased funding. The FDA also received increased funding. 

Merck Gets Out of Migraine Research

Merck (MRK) sold its stage 3 clinical trial migraine drugs to Allergan (AGN) for $250 million last week.  The migraine space is very competitive and Merck’s relative low price may be a sign that the drugs may not deliver on expectations. The flip side is that maybe Allergan was able to get a pretty good deal. Time will tell.

NASDAQ Composite Index:                                                                       

Friday, July 10 = 4,997.70                                                  

Trailing 12 months = + 11.4%                                        

Trailing 4 Weeks = – 2.3%

Trailing 7 Days = – 0.2%             


Weekly Portfolio Performance        

STI Portfolios
INVESTMENTS(close px)(close px)
3CA TechCA$29.53$30.342.74%
4Cisco CSCO$27.33$27.28-0.18%
12Western Digital WDC$79.82$77.10-3.41%
Portfolio Average-1.58%
NEXT WAVE(close px)(close px)
3Lattice SemiconduictorLSCC$6.09$5.89-3.28%
5Nice SystemsNICE$64.96$64.48-0.74%
6Nimble StorageNMBL$27.60$26.05-5.62%
7Paycom S’warePAYC$34.03$34.461.26%
8Silicon MotionSIMO$34.84$30.81-11.57%
11Varonis SystemsVRNS$21.81$24.0110.09%
Portfolio Average-1.48%
MEDICAL PROFITS(close px)(close px)
1Ekso BionicsEKSO$1.22$1.14-6.56%
2Emergent BiosolutionsEBS$32.36$33.854.60%
3iShares NASDAQ BiotechIBB$370.35$372.800.66%
5Meridian BiosciencesVIVO$18.31$18.671.97%
8PowerShares Dynamic BiotechPBE$57.65$58.641.72%
9Repligen CorpRGEN$40.04$40.280.60%
10ReWalk RoboticsRWLK$10.51$9.63-8.37%
Portfolio Average-1.27%