Is Icahn Selling Apple?

Investments Portfolio Update

Angst over the slowing Chinese economy finally spilled over to Apple (AAPL) last week, as its share price briefly dipped below $113 before turning around. Its share price was down 4.3% for the week, which in absolute terms equates to a decline in value of more than $52 billion – equal to the entire market cap of a company the size of EMC Corp! In relative terms that works out to more than twice the decrease in the NASDAQ Composite index and over three times the drop in the S&P 500, suggesting that it wasn’t just retail investors at work. My guess is one of Apple’s institutional owners decided to begin unloading the stock, but we probably won’t know that for several more months when mutual funds and pension plans publish their updated portfolio holdings.

Regardless of the reason why, it is a reminder that in the short run even the best managed companies have virtually no control over the vagaries of the stock market. For that matter it may behoove companies with large share repurchase programs – such as Apple – to let their stock price slide before buying it back. From peak ($122.57) to trough ($112.10) last week its price plunged 8.5%. Each 1% drop in share price works out to a savings of almost $7 billion to repurchase it; a lot of money even by Apple’s standards. And Carl Icahn – one of Apple’s largest shareholders and the Donald Trump of corporate raiders in terms of verbosity – has been mysteriously quiet lately since declaring in May that he felt Apple stock should be worth $240/share.

Unfortunately for Icahn, he also made some very large bets in the oil sector which has been getting crushed lately. Is it possible Icahn needed to sell some of his Apple stock to bail out his plunging energy portfolio? One of Icahn’s biggest oil stocks, Chesapeake Energy (CHK), has lost more than half of it is value in 2015. And shares of his publicly traded investment company, Icahn Enterprises (IEP), have declined 16% in value so far in 2015, while the S&P 500 index has gained about 2% over the same period. It is believed that Icahn has most of his personal wealth in shares of this fund.

Of course, this is all speculation, but the timing and magnitude of these events cannot be ignored.  It’s no secret that Apple CEO Tim Cook finds Icahn’s meddling to be an unwelcome distraction regardless of the way they play nice for the media, so it probably wouldn’t bother him much to let Apple’s share price sag for a week or two while his nemesis unloads shares of Apple to prop up his personal balance sheet. Otherwise, I would have expected Apple to step in and buy as much stock as it took to keep its price above $115, which it apparently did not do. For now this is just a fun game of “what if”, but it will be interesting to see how this all plays out if in fact Icahn is in bigger financial difficulty than he is letting on.

Next Wave Portfolio Update

We added Teradata (NYSE: TDC) to the Next Wave Portfolio in May of 2014, when it was trading at $40. Since then it has traded as high as $47, but over the past two quarters it has gradually subsided to a closing price of $30 last Friday after releasing disappointing quarterly results on Wednesday – well below our stop price of $35. We don’t like taking a loss in any of our positions, but it has become apparent that TDC is failing in its attempt to achieve innogration. For that reason we are selling it out of the Next Wave portfolio effective immediately.  If you choose to continue to own it, do so under the belief that it may soon become an acquisition target from one of the larger legacy competitors looking to gain market share in its space, such as EMC or IBM. It is only a $5 billion market cap stock, which could be easily digested by any one of a number of larger tech companies.

Medical Products Portfolio Update

By J. Duarte MD

In this issue:

  • The Big Picture: Managing Biotech’s Turbulence
  • In Depth: Latest EBIS Pick Masimo Corp. (MASI) Beats Earnings
  • EBIS Portfolio Alerts: EBIS Portfolio Components Deliver Outstanding Earnings Performance
  • News Update: Sign of the Times. Emergent Biosolutions to Spin Off Oncology and Drug Segment

The Big Picture: Managing Biotech’s Turbulence.

The biotech sector took a beating on the week that ended on August 7th. And although it was not alone, the S & P 500 also declined, for investors in the sector the losses and the intraday volatility were not pleasant. Thus, we have several things to consider as we sort through the week.  

First, we’ve noted that the 3900-4500 area for the Nasdaq Biotech Index (NBI) is a hugely important trading range. 3900 is key support, while 4500 has been our upside target. NBI closed below 3900 and its 50-day moving average last week. Yet, all is not over for NBI. For one thing, the 50-day average is often an area from which prices rebound. So before we make some bad decisions, we should see what happens at this key chart point.

Second, the companies in our EBIS portfolio that delivered earnings last week had good numbers and mostly upbeat guidance. That means that even though there may be some selling at this point, it is possible that the price declines will turn into a buying opportunity at lower prices given each company’s fundamentals. See the details below.
BIS biotech index 2015 08 07
NBI biotech index 2015 08 07

Third, those investors who followed our suggestion over the last couple of weeks to consider hedging their portfolio by buying shares in the ProShares Ultrashort Nasdaq Biotech Index ETF (BIS) are more likely to have suffered smaller losses in their portfolios. This week’s charts show the excellent inverse correlation between the BIS ETF and NBI.

So, what are the best options for biotech investors at this moment?

  1. Stay vigilant and keep a close eye on each individual position.   Look at the recent earnings and the guidance. Consider what the company is doing and what the most likely outcome will be.
  2. Understand that external forces, especially the Fed and the situation in China’s economy, as well as the current political climate, will influence the performance of all stocks, not just those in our EBIS portfolio. Most important, in this market it’s best to avoid biotech stocks that produce drugs while concentrating on those that manufacture equipment and infrastructure that companies that are developing drugs need or that are used in other areas of health care, such as patient monitoring and diagnostics.   Those are the companies that currently make up the bulk of our EBIS portfolio.
  3. Finally, consider using BIS to hedge your biotech portfolio. Our July 27th, 2015 update has an excellent tutorial on how you may go about doing this. For further reading on portfolio protection techniques and risk management also consider a copy of Dr. Duarte’s “Trading Options for Dummies.”

In Depth: Updated EBIS (Emerging Biotech Investment System) Pick: Masimo Corporation (MASI)

New Pick: Masimo Corporation (MASI) – Buy at 40-44. Sell Stop 34.

Alert – MASI reported adjusted earnings of 43 cents per share, 13 cents ahead of expectations in the second quarter of 2015, while revenues came in at $ 155 million ahead of the $147.93 million estimate. The company raised its full 2015 guidance to total revenues of $621 million, up from $608 million and earnings per share from $1.48 to $1.51.

The stock remains well within its buying range of 40-44 and keeps a 9.5 EBIS rating based on its June 2015 quarter. MASI is a well run company with plenty of cash on its balance sheet and a growth agenda. We like Masimo because it has innovative products, an excellent growth rate, and a nice stash of cash on its balance sheet which it could use to make acquisitions or to plow into research and development.

Masimo manufactures equipment modules that monitor vital signs during difficult clinical and logistical circumstances. Thus, it provides solutions that could make the difference in life or death decisions. Masimo pioneered Signal Extraction Technology (SET) a process that lets the pulse oximeter measure the oxygen content of blood without punctures of arteries at states of low blood pressure, where it become a most critical piece of data. Pulse oximeters are non invasive, clip-on devices, usually placed on fingers, toes, or ear lobes and are used to measure the amount of oxygen in the blood during anesthesia and during patient stays in the intensive care unit. They are increasingly being used in non invasive care units as well in order to measure the oxygen concentration of patient’s blood when they are under the influence of opioid painkillers. The company also has other product lines aimed at the operating room and intensive care arenas that involve monitoring of gases, such as oxygen and carbon dioxide as patients breathe. Masimo is starting to make headways into the length of stay and complication rates of patients during surgeries because its equipment is more accurate in measuring key data than its competition. This puts it in a good position, given the global push, but also the ACA related push in the U.S. toward lower costs in hospital stays. Here are the EBIS details:

The EBIS Score for MASI is 9.5 based on April 4, 2015 data.  

Cash on hand: (+1) MASI reported some $135, 720 million in cash compared to $97 million in the June quarter of 2014.

  • Cash on Hand growth (year over year) (+1): The year over year cash grew by 39%.
  • Revenues (present or not): (+1): The company delivered a 9.7% revenue growth rate in its June quarter compared to the year earlier.
  • Revenue growth (10% or greater): MASI gets a 0.5 on its revenue growth rate of 9.70%, just missing our target of 10%.
  • Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1)MASI has a 80% worst case scenario ratio. That means it
  • Earnings (Present or Not Present): (+1): MASI had a 49% year over year growth rate on earnings as of April 2014.
  • Net Income Growth (Year over Year): (+1): The company has delivered sequential earnings growth for three of its last quarters.
  • Products on the market: (+1): MASI is growing its market share with its wireless systems.
  • Pipeline Strength: (+1): MASI 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: EBIS Portfolio Components Deliver Outstanding Earnings Performance

Update: Meridian Biosciences (VIVO) Buy 18- 21 – 8/3/15 closing price 18.09. EBIS Score 9.5.

Earnings/Dividend update: VIVO met its earnings expectations on 7/23 but fell short on its revenues estimates. The company delivered net income of $9.1 million, 22 cents per share on revenues of 48.2 million vs. expectations of 48.9 million. Management reaffirmed expectations for the full year of revenues of $193 to $200 million. The stock remains near the lower part of its trading range.   Vivo paid dividend of 0.2 per share on July 20th. The dividend yield is a nifty 4.4%, while the stock price is not particularly volatile. This is a combination which makes having a long term perspective worthwhile.

VIVO has a market cap of $767 million but is a consistent 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). Dr. Duarte owns shares in VIVO.

Neurocrine Biosciences (NBIX) (BUY 6/16/16 at 46 – 8/3/15 closing price 46.47 – Sell Stop 40)

Neurocrine Biosciences reported a net loss of $24.0 million, or $0.28 loss per share, compared to a net loss of $13.4 million, or $0.18 loss per share, for the same period in 2014. For the six months ended June 30, 2015, the Company reported a net loss of $25.2 million, or $0.30 loss per share, as compared to net loss of $25.2 million, or $0.35 loss per share, for the first half of last year.   Estimates were for revenues of $650,000 and a loss of 29 cents per share.

The stock has the potential to move to the 55-58 area over the next few weeks to months. 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. Neurocrine is also advancing phase III clinical trials of its NBI-98854 drug aimed at the degenerative neurological disease tardive diskynesia.   Neurocrine expects further input on Elagolix by early 2016.

Neurocrine is a speculative stock. This is a research stage company with no products on the market but several potential blockbusters at key stages of development and nearing the FDA approval process.

Repligen (RGEN) Buy until 44. Sell Stop 32.

Repligen (RGEN) (Trading Buy 4/20/15 – MPP 33.23. Buy 5/11/15 MPP Price 38.45 – 8/3/15 Closing Price 36.47) –

Repligen reported revenues of $21.5 million and net income of 11 cents per share on August 6, 2015. Both were ahead of expectations. Estimates were for revenues of $20.05 Million and earnings of 8 cents per share. The stock has been very volatile of late but remains within our buy area.  

RGEN is the world’s leading producer of Protein A, the basic component of monoclonal antibodies used for research and biopharmaceuticals manufacturing. Biogen and other major drugs are based on monoclonal antibodies (MAB). If the number of new MAB drug candidates decreases it could affect RGEN’s earnings for the future.

In a recent presentation, spring 2015, 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.

Emergent Biosolutions – Buy until 34.

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* 30.63 – 8/3/15 Closing price 34.43) – EBS shares had a very credible week ending on 8/3/15. EBS reported earnings of 36 cents per share for its second quarter of 2015 beating analyst estimates of 26 cents. Revenues climbed 14% from the year-ago period to $126.1 compared to an estimate of 124.25 million.   The company also announced that it will spin off its biosciences unit, whose focus is oncology to investors.  See our news section for details and commentary below.

The previous week EBS announced a $19.7 million two year contract from the Biomedical Advanced Research and Development Authority (BARDA) on July 20th an agency of the U.S. Department of Health and Human Services. EBS also makes BioAnthrax, a preventive anthrax vaccine and is working on a new generation of the vaccine. Dr. Duarte owns shares in EBS.

Bio-Rad – Buy Limit Raised: Buy until 155. Sell Stop 138.

Bio-Rad Labs (NYSE: BIO). Buy (5/18/15 – MPP) 146.25 – 8/3/15 closing price 148.81). Bio-Rad remained in a consolidation pattern as it has been during the last few weeks and is giving investors a rare second chance to enter at the original buy area near 146.

Bio-Rad beat estimates for its most recent quarter on August 6. Revenues were $506.1 million, down 5.7 percent compared to $536.8 million reported for the second quarter of 2014. Net income was 0.97 cents per share. Estimates were for revenues of $498.85 Million and earnings of 78 cents per share. Biorad’s guidance was sketchy as they cited currency effects as being increasingly negative in the future.

Update: Trend Following ETF Model

  • ProShares Dynamic Biotech and Genomics ETF (PBE) (Buy 5/11/15 MPP 55.80 – 8/3/15 Closing price 56.59.) Sell stop 52
  • ProShares Ultrashort Biotech ETF (BIS) – Buy until 29. Stop Loss 25. (Buy 7/27/15 MPP* 27.99. 8/3/15 closing price 28.19.)

*MPP – Median Purchase Price

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%.

I-shares Nasdaq Biotech ETF (IBB) – (Bought 7/7/15 at 375 – 7/24/15 closing price 377.78. Sell stop hit at 380. Gain 1.33%.

News Update:  Emergent Biosolutions to Spin-off Oncology and Drug Segment

Emergent Biosolutions (EBS) delivered an excellent earnings return on August 6th and announced that it will be spinning off its biosciences division as a separate company in mid 2016. EBS expects to invest $50-$70 million in the new company and noted “The biosciences spin-off establishes each as a pure-play company with a focused strategy and enables each company to target investors attracted to its business profile,” according to a company news release.

What’s interesting about this is the timing. EBS is in a great niche with its defense businesses based on vaccines. Yet, its drug development business has little to show for its efforts. What that means is that the company has likely recognized that in the future it will be harder to raise money for research in the highly competitive cancer treatment field. By contrast, EBS can make a lot of money as a defense contractor, especially during uncertain geopolitical times.

Our expectations are that more companies in biotech and large pharma will see this type of strategy as very viable in the not too distant future as third party payers such as Medicare and private insurers decrease the amounts that they are willing to pay for expensive, albeit effective therapies.

NASDAQ Composite Index:                                                                       

Friday, August 7 = 5,043.54                                                

Trailing 12 months = + 15.9%                                        

Trailing 4 Weeks = – 3.2%

Trailing 7 Days = – 1.7%            

Weekly Portfolio Performance

STI Portfolios
INVESTMENTS(adjusted px)(close px)
3CA TechCA$29.14$29.08-0.21%
12Western DigitalWDC$86.06$83.51-2.96%
Portfolio Average-1.34%
NEXT WAVE(close px)(close px)
2Lattice SemiconduictorLSCC$4.92$4.13-16.06%
4Nice SystemsNICE$64.40$66.533.31%
5Nimble StorageNMBL$27.62$26.06-5.65%
6Paycom S’warePAYC$32.00$37.4116.91%
10Varonis SystemsVRNS$20.79$23.5113.08%
Portfolio Average-1.76%
MEDICAL PROFITS(close px)(close px)
2Ekso BionicsEKSO$1.03$1.084.85%
3Emergent BiosolutionsEBS$32.83$34.434.87%
6Meridian BiosciencesVIVO$18.09$18.271.00%
7Neurocrine BiosciencesNBIX$50.12$46.47-7.28%
10PowerShares Dynamic BiotechPBE$59.48$56.59-4.86%
11Repligen CorpRGEN$35.01$36.474.17%
12ReWalk RoboticsRWLK$10.52$9.34-11.22%
Portfolio Average-1.18%