In the Blink of an Eye
The stock market has barely budged since Thanksgiving, with the S&P 500 Index up just 0.1% over the past two weeks. This is supposed to be the time of the year when portfolio managers are furiously unloading their underperforming stocks and replacing them with this year’s clear winners to make themselves look smart. Instead, they seem to be waiting to see who blinks first as the Fed ramps up to begin raising interest rates next week while OPEC effectively disbands after decades of controlling world oil prices.
The dissolution of OPEC is long overdue, and contrary to the concept of globalization. And since lower oil prices are a net benefit to most nation’s economies (with the exception, of course, of the relatively few countries that are net exporters of oil), that should leave more money available to be spent on things that enhance productivity, especially technology.
But it’s next week’s interest rate hike that has everyone on edge. Although the accepted mantra is that the market has already priced in a rise in rates since the Fed has been so deliberate in telegraphing its arrival, nobody really knows to what extent that may trigger a chain reaction in the universe of related financial contracts that peg bond prices against all other major financial assets. What may start out as a subtle slide could turn into an all-out rout in the blink of an eye if panic ensues.
That’s why nothing much is happening in the stock market at the moment. Today’s sell-off is followed by tomorrow’s rally, a cycle that has repeated itself ever since the Fed discontinued Q.E. late last year. My sense is that this will soon come to an end now that all of the major macroeconomic repercussions from the “Great Recession” of 2008/2009 will have been realized by the time this month is over: China has devalued its currency, Greece did not destroy the Eurozone, the price of oil has cratered, the U.S. dollar has strengthened, and soon interest rates will be back on the rise.
Quite frankly, most of that is good news for American technology companies. Yes, some of them will continue to struggle with the slowdown in China’s economy, and gradually rising interest rates may cut into corporate profits a tad. But on the whole tech stocks are positioned to thrive in 2016, which is why they are faring better than the overall market, with the NASDAQ Composite Index up more than 8% in 2015 compared to a 1% gain in the S&P 500 Index.
By Jim Pearce
Next Wave Portfolio Update—One to Watch: LinkedIn on the Rebound
By Rob DeFrancesco
After stumbling earlier this year, LinkedIn (LNKD) looks to have its act together once again. Sales execution in the core Talent Solutions unit has improved, while strong demand for smaller ads placed within user news feeds is offsetting a decline in premium display advertising. The company’s newer offerings are beginning to kick in and the recently completed Lynda acquisition in learning management is already contributing more revenue than initially expected. Recently trading at $241.50, the stock has rebounded 45% from the 52-week low of $165.57 reached in August.
In the third quarter, LinkedIn’s revenue rose 37% year-over-year to $779.6 million, well above the consensus estimate of $755.6 million and the high end of the guidance range of $745 million to $750 million. Investors liked that the majority of the outperformance on the top line came from accelerated growth in the core business, not the Lynda purchase. Talent Solutions revenue (64% of total revenue) advanced 46% to $502 million. Within the Talent unit, Hiring revenue of $461 million rose 34%. Adjusted for currency headwinds, Hiring was up 39%, accelerating from second quarter constant-currency growth of 36%.
The two main drivers in the latest quarter for Talent Solutions: operational improvements across the field sales teams and strong online growth. LinkedIn’s Hiring business is often misunderstood, as it’s really a cloud-based human capital management (HCM) software platform, with a focus on recruiting. LinkedIn has nearly 40,000 enterprise accounts. Debuting early next year: an updated version of the Recruiter offering, featuring additional functionalities and a more intuitive search mechanism (making it easier for smaller enterprises to use).
Marketing Solutions revenue in the latest quarter of $140 million (18% of total revenue) gained 28%, with Sponsored Updates (ads seen within user feeds) more than doubling year over year. With the premium display ad business on the decline, Sponsored Updates now account for about half of Marketing Solutions revenue. Premium Subscriptions revenue of $138 million (18% of total revenue) rose 21%; Sales Solutions represent over a third of the unit’s revenue, with the Sales Navigator product (aimed at sales professionals) starting to gain traction with larger enterprises. A new partnership with EY (formerly Ernst & Young) centered around Sales Navigator should provide a boost in 2016.
LinkedIn recently reached 400 million members (monthly unique visitors in the third quarter totaled 100 million). About 70% of the member base is outside the U.S. and 80% of all net member additions come from international markets. China is the fastest growing market on an absolute basis (there are now 13 million+ members in the country, up from 4 million in February), while India so far this year is the #2 market in terms of cumulative membership additions.
LinkedIn’s engagement in emerging markets should improve now that the company has rolled out its updated mobile app, which is faster, better organized and more personalized. In the latest quarter, 55% of all member traffic flowed through the mobile app, up from 53% in the prior quarter.
For the fourth quarter, the company sees EPS of 74 cents (the consensus was 67 cents) on revenue of $845 million to $850 million, vs. the consensus of $845.9 million. The company also raised 2015 revenue guidance, a move that was well received on Wall Street. Expectations were muted going into the latest earnings report, so many analysts were surprised by the renewed upside momentum. Sterne Agee CRT upgraded LinkedIn to ‘Buy’ with a price target of $300, while RBC Capital raised its target to $300 from $275. Mizuho Securities took its target up to $285 from $240, pointing out the company faces easy comps in the first half of next year.
With Talent Solutions on the upswing and newer growth drivers (including the Lynda acquisition) showing more promise, there is a better chance for upside to estimates next year. As of now, the 2016 consensus revenue estimate of $3.9 billion represents growth of 30.5%, vs. 34.6% growth expected this year. Given that LinkedIn should be valued as an enterprise cloud-software provider, the forward revenue multiple of 8.1 is reasonable based on expected growth and increased odds of upside revisions.
Always volatile, LinkedIn shares remain below the all-time high of $276.18 from February. Another solid earnings report for the fourth quarter would give more institutional investors greater confidence in the company’s longer-term growth story.
Portfolio Update – Medical Profits
By J. Duarte MD
In this issue:
- The Big Picture: Biotech Rally Stalls amid Interest Rate Fears
- In Depth: New EBIS Pick – Cerus Corp. (CERS) – A Long Shot Blood Safety Play Show Signs of Life
- Trading Portfolio: Three New Picks Wait for Catalyst – BIO, VRTX and IVC
- EBIS Portfolio Update: EBIS Portfolio Continues Steady Performance
- News and Analysis: Merry Christmas President Carter
- Recent Portfolio Results:
- DYAX Corp (DYAX) – Position Closed. Company taken over. Originally bought 10/7/15 at 22. 11/6/15 closing price was 34.52. Trade return: 56.9%.
- CLDX is up nearly 50% as of 11/27/14.
- EW is up nearly 7.9% as of 11/27/14.
- CERS rose 14% in the initial two weeks after we recommended it.
The Big Picture: Biotech Rally Stalls amid Interest Rate Fears
Boy, what a crummy week we just had in the stock market. Santa Claus took a detour as the advance in small-cap stocks bled into the biotech bounce of the past few weeks leaving investors with a sinking feeling. You can blame it on the Fed if you want, since it looks as if interest rates are going up on December 16th. But, no matter the reason, it was a disappointing week, even despite the Friday bounce as stocks just seemed to lose their footing all the way around prior to the big rally.
On a macro view, and of concern, was the rising number of declining stocks on the New York Stock Exchange on a weekly basis. If this type of action continues it could lead to re-establishment of the down trend that seemed to have been arrested, at least on an intermediate term basis.
The chart of the Russell 2000 Index (RUT) and the Nasdaq Biotech Index (NBY) remain almost in lock step, which tells us that keeping an eye on the action in the small stocks still makes sense, especially for our EBIS portfolio which is designed for small stock ownership.
If there is a positive to last week’s action it is that neither RUT nor NBI broke below their respective 50-day moving averages. But, let’s not kid ourselves, the market has turned a bit on the slushy side, and anything can happen, especially when you add the uncertainty created by the terrorist attack in California and the increasing volatility of the presidential election.
The big picture stuff to focus on is the 200-day moving average on both the Russell 2000 and the Nasdaq Biotech indexes. If buyers can’t boost prices above these key technical levels in the not too distant future, the bulls could run into some turbulence as interest rates and geopolitical events become the focus of daily activity.
So here is what to do:
- Continue to pay close attention to the overall market as well as our new Trading Buy Recommendations and our new EBIS picks. Keep a good eye on both biotech and small stocks. This is where the money is going in the current market. Watch the small stock index for clues regarding biotech.
- Monitor the price of all current positions in your biotech portfolio. Continue to view each stock separately. Keep up with weekly updates or any special alerts, and sell stop updates. This is especially applicable to our trading recommendations. Follow the trading rules strictly and don’t chase stocks that are out of their buying range.
- Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Always monitor your portfolio’s response to the market and to any news events, especially those in health care and only sell stocks that are showing significant weakness and fall below their sell stop.
- Consider using BIS to hedge your biotech portfolio during periods of weakness for the market and the biotech sector. BIS is a hugely volatile ETF and has a new entry point as of our November 9 update. See below for details. Our July 27th, 2015 update has an excellent tutorial on how you may go about doing using this ETF to hedge your portfolio. For further reading on portfolio protection techniques and risk management also consider a copy of Dr. Duarte’s “Trading Options for Dummies.”
- Risk seemed to be decreasing, but it is clearly on the rise once again. Caution is never a bad idea since things can change rapidly in this market. A good method for building positions is to buy small lots of stock over a few weeks to months, depending on the overall trend. When this is coupled with a long term time horizon it’s much easier to weather the volatility.
Our trading recommendations are delivering excellent results at the moment. We have added three new stocks as of 11/30/15. The sell stops on open positions have been adjusted to reflect the closing prices of the week that ended on 11/27/15.
Trading stocks are only recommended as trades based on technical analysis and momentum. These are not stocks meant for long term holding periods.
- Trading stocks are not EBIS type stocks. This means that they are more volatile and that any moves by these stocks, up or down, can be very fast and treacherous.
- Follow the trading guidelines and recommendations issued with each stock in detail.
- Trading guidelines are not applicable to our longer term holdings in the EBIS portfolio.
Active- Trading Recommendation: Invacare (IVC) Trading Buy Range $19-21. Bought 11/30/15 at $19.70. 12/4/15 closing price $19.41. Sell stop at $17 (based on 12/4/15 closing price). Recommended 11/30/15. Invacare makes hospital beds, electric wheelchairs and related devices. The stock looks poised for a breakout. It fails to make the EBIS cut based on its lack of profits and having more debt than current assets. It is, however, the type of stock that can rise when the market decides to buy everything related to a particular sector. It also has a knack for growing its revenues.
Waiting to Enter Buy Range – Trading Recommendation: Bio-Rad Labs (BIO) Trading Buy Range $142-146. Sell stop at $138 (based on 11/27/15 closing price). Recommended 11/30/15. For every dollar of price increase, raise the stop loss by $1. Bio-Rad is a former EBIS stock which got caught in the early fall selling spree. The stock has formed a lengthy base and is showing signs of joining the current biotech sector rally. We currently like it based on its technical activity.
Waiting to Enter Buy Range – Trading Recommendation: Vertex Pharmaceuticals (VRTX) Trading Buy Range $134-138. Sell stop at $128 (based on 11/27/15 closing price). Recommended 10/26/15. For every dollar of price increase, raise the stop loss by $1. Vertex makes a leading cystic fibrosis drug and has steady revenues. Unfortunately it still has more debt than assets so it doesn’t make the EBIS cut. It is a good momentum stock when it gets going, though. And it looks as if it’s ready to join the current biotech rally.
Trading Recommendation: Celldex Therapeutics (CLDX) Trading Buy Range $12-14. Sell stop at $16 (based on 11/27/15 closing price). Recommended 10/26/15. Buy range entered 10/26/15 – 12/4/15 closing price $16.89. For every dollar of price increase, raise the stop loss by $1. This is almost an EBIS stock. The company is working on a vaccine for aggressive brain cancers. It has plenty of money on its balance sheet but is high risk and has not been able to make money consistently. In this market, it may be worth exploring on a trading basis.
Trading Recommendation: Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $153) Trading Buy Range $153-156 – 12/4/15 closing price $162.02. Sell Stop at $158. For every dollar of price increase, raise the stop loss by $1.
Alert: Trading Recommendation Stopped Out: Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at $85 on 10/9/15. 11/6/15 closing price $102.57 – Stopped out at $100 on 11/16/15. Total Return 15%.
In Depth: New EBIS (Emerging Biotech Investment System) Pick: Cerus Corp. (CERS)
Alert: New Buy Recommendation: Cerus Corp. (CBM) – Buy Range 5-7. Recommended 11/16/15. 12/4/15 closing price $5.78.
Cerus Corp. – A Long Shot Blood Safety Play
Cerus Corp. rose 14% in the initial two weeks after we recommended it. The stock remains within our $5-7 Buy range.
Cerus Corp. is a tiny, $550 million market capitalization stock that is well stocked with cash, has an interesting pipeline and is in the difficult stage of development where it is pushing for market share in the United States while struggling with the negative effects of a strong dollar since its current customer base is overseas. However, the company has made progress getting its product into key areas of the Southern United States through deals with key blood product distribution not for profit entities.
Cerus developed the INTERCEPT system from virus and other disease causing organism detection in blood products. It currently has FDA approval for INTERCEPT systems for platelets and fresh frozen plasma, key blood components for clotting. It is working on the INTERCEPT system for red blood cells. The company notes that the “the INTERCEPT treatment is designed to inactivate established transfusion threats, such as Hepatitis B and C, HIV, West Nile Virus and bacteria, as well as emerging pathogens such as chikungunya, malaria and dengue.”
The current immigration and the frequency and potentially long lasting nature of the geopolitical situation makes Cerus an interesting long term, speculative buy for patient investors. In times of trouble, as the likelihood of protracted conflicts, as well as the potential increase for infectious diseases increasing as a result of population migrations, this company has the potential to deliver some interesting surprises. It is a speculative play but does have some staying power with rising cash levels on its balance sheet.
The big bet is on the escalation of global conflicts that require increased use and thus testing and safety of the blood supply. If Cerus can get the red blood cell Intercept system approved, it could mean a significant increase in its revenues. Currently, the company has just received Medicare and Medicaid approval (CMS) for upgraded billing codes if a hospital uses INTERCEPT for its plasma and platelet testing and pathogen inactivation. This certification allows the user to charge a higher premium for its blood products.
CERS gets a +7 EBIS rating because it has yet to turn a profit. Yet, given the low price of the stock, and the huge potential, especially in the current market, it’s a great speculative play since it meets most of the criteria for an EBIS stock. And although it’s a highly speculative bet, this is one of those companies that could turn the corner fairly rapidly under the right set of circumstances. Thus, we see little risk in owning a small position, monitoring the company closely, and adding to the position over time as things develop.
Here are the EBIS details:
The EBIS Score for Cerus Corp. (CERS) is + 7 (HOLD) based June 30, 2015 data.
- Cash on hand: (+1) Cerus reported $50.8 million in cash compared to $22.8 million in December 2014.
- Cash on Hand growth (year over year) (+1): The year over year cash more than doubled.
- Revenues (present or not): (+1): Cerus reported $8.45 million in revenues in its September quarter compared to $9.587 million a year earlier. The decrease is largely attributed to currency translation and slowing business in Europe. The company is expanding its market share in the U.S.
- Revenue growth (10% or greater)(+0): Revenues shrank by 10% on a year over year basis for the September 2015 quarter.
- Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1) CBM has a 0.31% ratio, which means that it cover all its expenses in the case of a catastrophic hit to the company and still have money to regroup.
- Earnings (Present or Not Present): (0): CERS has no earnings.
- Net Income Growth (Year over Year): (0): CERS has no earning s growth.
- Products on the market: (+1): CERS has products on the market and is making strides in expanding its market share.
- Pipeline Strength: (+1): CERS has one key product in late development stages in its pipeline.
- Late Stage Clinical Trials and Product Launches: (+1): CBM has several important products in critical stages
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: Meridian Bioscience Gets Expanded FDA Approval for Whooping Cough detection Test Potentially Expanding Market Share and Customer Base
Our EBIS portfolio has been more volatile of late. Generally speaking it makes sense to see if these stocks develop some type of sideways pricing action before adding to any position aggressively. Details below:
DYAX Corp (DYAX) – POSITION CLOSED – Speculative Buy changed to $22-25 on October 5, 2015. Original recommendation: September 21, 2015. DYAX bought 10/7/15 at $22. 11/6/15 closing price was $34.52. Trade return: 56.9%.
Cambrex Corp. (CBM) – Buy Range $45-47. Bought 10/20/15 – 12/4/15 closing price $52.56. Sell Stop raised to $50 on 11/27/15. Dr. Duarte owns shares in CBM.
Alert- Masimo Corporation (MASI) – Buy at $40-44. Buy issued July 20, 2015. MPP: $40.65). 12/4/15 closing price: $41.07. Stop Loss: Raised to $38 on 11/9/15.
Update: MASI beat earnings on 11/5/15. Earnings came in at 36 cents per share on revenues of $152.6 million. Analysts estimated an average of $149.31 million in revenues and 31 cents per share in earnings. MASI beat expectations and gave upward guidance for the future. The company recently received good marks on its anesthesia monitoring equipment at the recent American Society of Anesthesiologists meeting in San Diego.
Masimo manufactures equipment modules that monitor vital signs during difficult clinical and logistical circumstances. 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.
This is the second straight quarter that the company beat expectations. 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.
Meridian Biosciences (VIVO) Buy $18- 21 – 12/4/15 closing price $19.60. Dr. Duarte owns shares in VIVO. Stock initially recommended on June 29, 2015.
Meridian made news on Friday the 13th of November when it disclosed a minority stake in Oasis Diagnostics a company that specializes in diagnostic tests that use saliva as the medium for testing. On November 18th the company received FDA approval for an expanded use of its Illumigene whooping cough testing product, a move that will expand Meridian’s market share and customer base. There were 33,000 whooping cough infections reported in 2014, a 15% increase compared to 2013.
Meridian delivered a mixed earnings report on November 5, 2015, beating on revenues at $47.5 million and missing on its net income by one cent at 20 cents per share. Estimates averaged $46.64 million in revenues and 0.21 cents per share for earnings. This was a reversal of the previous quarter. The stock paid a 20 cent dividend on 11/12/15 and yields 4.4%.
VIVO 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.
Alert: Emergent Biosolutions – Downgraded to HOLD based on technical trends and sluggish sales, which suggests possible earnings and revenue problems in the future. Sell stop adjusted.
Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 12/4/15 Closing price $37.75 – Sell stop at $35 issued 11/16/15) Dr. Duarte owns shares in EBS.
EBS continues its momentum run but retains its HOLD rating. This remains a defense play given its niche in bioterrorism related vaccination. The company is also selling treatments for chemical weapons related injuries overseas, but not yet in the U.S. The company reported its latest earnings on November 5 after the close and beat expectations delivering 83 cents per share in net income on revenues of $164.9 million. Estimates average $151.42 million in revenues and 56 cents per share. EBS has a history of positive surprises. The company 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.
Sales of BioAnthrax, a preventive anthrax vaccine and is working on a new generation of the vaccine were strong in the quarter while overall bio-defense sales slumped. Dr. Duarte owns shares in EBS.
Update: Trend Following ETF Model
Alert – New Entry point established for PowerShares Dynamic Biotech ETF (PBE) – Bought at $48 on 10/23/15 – 12/4/15 closing price $50.29. Buy Range: $49-51. Sell Stop at $48.
Alert – ProShares Ultrashort Biotech ETF (BIS) was stopped out at $32. Buy at $34-36. Sell stop at $30.
Alert– ProShares Ultrashort Biotech ETF (BIS) was stopped out at $32. ProShares Ultrashort Biotech ETF (BIS) – (Buy issued 7/27/15 @ MPP* $27.99. 10/27/15 closing stopped out at $32 – Return + 14.3%.
*MPP – Median Purchase Price
News Update and Analysis – Merry Christmas Jimmy Carter: High Profile Remission Could Boost Melanoma Treatment Awareness
President Jimmy Carter delivered some good news to cancer patients last week as he announced that his most recent brain MRI showed “no sign” of the malignant melanoma metastatic disease that had previously been there. Mr. Carter has been receiving Keytruda (pembrolizumab) and radiation treatments.
Keytruda is monoclonal antibody that blocks key cancer proteins from binding to cells and lets the body’s immune system fight the disease. Keytruda, marketed by Merck (MRK) received fast track approval for melanoma in 2014 and has been reported to be effective in fairly advanced cases of melanoma with a favorable side effect profile. We’re sure that as far as the Carter family is concerned, Keytruda is a Godsend.
Here is what’s great about this; a few years ago, metastatic melanoma to the brain, or anywhere else was almost certainly a death sentence. Yet, in the last few years the advances in fighting this common and deadly cancer have been impressive, and President Carter’s remission could be a turning point for public opinion and improved funding for the medications and the doctors, hospitals, and clinics that take care of cancer patients.
More importantly, patients have another way to fight advanced cancer. That means that Mr. Carter will get to hang around a bit longer and spend time with his loved ones. He will eat Christmas dinner with his family this year and perhaps for many more. He will continue to build houses for the poor. And he will hopefully express his thanks to the doctors, nurses, and scientists that have given him a literal new lease on life even at 91. But, perhaps even more important is the fact that Mr. Carter is a high profile person whose life has just been extended by what some may call an “expensive” medication that raises health care costs. And yes, Keytruda costs $12,500 per dose, an estimated $150,000 per year. Yet, isn’t life priceless? Who should decide whether anyone gets a second chance? And isn’t it wonderful, if you are Mr. Carter’s family to know that you can still have the old fellow around a little longer just in case you didn’t show him you cared enough?
We are not being sentimental here. But healthcare is in big trouble. And with the likes of unscrupulous companies like Valeant and Turing in the pharmaceuticals industry, and the trench warfare mentality between the government, health insurers, hospitals, doctors and everyone in the industry engendered by Obamacare, lots of the positive things that drug companies, and the health care industry at all levels, with all their warts and regardless of their financial gains, do for humanity have been forgotten of late. We can all learn to consider all angles of such heady matters as drug costs and how to divide the pie among those who are eligible before making harsh judgments. And we can be compassionate. Merry Christmas President Carter and may your remaining time with us be spent profitably. As they say, there are no coincidences.
NASDAQ Composite Index:
Friday, December 04 = 5,12.27
Year to Date = + 8.8%
Trailing 4 Weeks = + 4.2%
Trailing 7 Days = + 0.3%
Weekly Portfolio Performance
PowerShares Dynamic Biotech