The Great Transition

In this issue:

  • The Big Picture: The Great Transition
  • In Depth: Portfolio Spring Cleaning – Goners and the Best of the Lot
  • News and Analysis: Change Is in the Air

The Big Picture: The Great Transition

We avoid tackling heady topics in this column, preferring to stick to our bread and butter of market analysis with a heavy emphasis on biotech and of late to the emerging spectrum of stocks in what we call Applied Technology.  But the times are clearly changing, both in the markets and in our focus. So this issue will be the first in several that will transition to our new publication, which will be unveiled over the next month.  For more details on upcoming changes, we suggest reading the comments from Jim Pearce in this issue’s In Brief article.

SPX chart 2016 04 15

First, we’ll look at the markets.  For several weeks we’ve been discussing the consolidation in the stock market, especially in the S & P 500 (SPX) and in the Nasdaq Biotech Index (NBI). And this week is no different as SPX closed at the lower end of what seems to be a big decision point range for investors, 2080-2100.  The Bollinger Bands (green lines above and below prices) are shrinking and that means that a big move is likely.  We don’t know which way it’s going to go, but it is likely to be dramatic so we suggest paying close attention to the market in the next few days. 

There are so many crosscurrents that it’s difficult to pinpoint which one has more bearing than any other.  But in the short term it’s all about the Federal Reserve and corporate earnings.  To be sure there are plenty of long term issues that can be tied to both of these variables, not the least of which is the notion that at some point companies will have to report their real earnings, not the massaged earnings based on accounting gimmicks and decreased numbers of shares due to stock buyback plans. But that day doesn’t seem to be here yet.  That brings us to the Fed, which has poured trillions of dollars into the universe with very little to show for it in terms of real, tangible economic growth such as what has been the norm in the past.   If you want an intermediate term worry, consider the election.  No one really knows how it’s going to turn out given the new variables in the equation; ie. Mssrs. Trump and Sanders, the self-proclaimed “outsiders.”

It’s tough to know how any of this is going to play out, whether you consider the Fed, earnings, or the election.  With the markets, there are really two major questions.  Are we going to have a buying frenzy? Or are investors going to decide that no matter what the prospects for growing profits and sales in the U.S. will join those of the rest of the world where government regulations control drug prices and profits are less than they have been in the U.S?

NBI biotech index 2016 04 15

The Nasdaq Biotech Index is in a similar position, although it seems a bit weaker than the S & P 500.  NBI has broken above its consolidation pattern that lasted through the month of March and is starting to struggle as it reaches the 3000 area.  As with SPX, it’s hard to know where this is going so we encourage extra attention to this index and to individual biotech stocks over the next few weeks.

As we prepare for our transition to our new publications we are making some changes.  Our guidelines for individual stocks are as follow:                                

  1. We are cleaning up our portfolios.   Several stocks that have been in our Medical Profits portfolio as well as our special situations portfolio will be phased out.  The list will be combined into a single list which is listed below.
  2. Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Politics may overshadow other fundamentals in the short term.  Be aware of this and follow our price guidelines.
  3. Focus on risk management and on the fundamentals of any open position. 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.”
  4. Don’t get over confident and stick with what’s working. Risk is still high in this market but a long term strategy reduces risk because of the time horizon of the expected payoff.

EBIS (Emerging Biotech Investment System) – Portfolio Spring Cleaning

The Goners

As we prepare for the launch of our new publication, we are doing a bit of spring cleaning. The stocks listed below should be sold as they won’t be transitioning to our new digs:

Greatbatch (GB), Invacare Inc. (IVC), Medivation Inc. (MDVN), Neurocrine Biosciences Inc. (NBIX), OmniComm Systems (OMCM), Otonomy Inc. (OTIC), Sanofi (SNY), Sirona Dental Systems (SIRO), Vertex Pharmaceuticals (VRTX).

Also note the following:

Updated Recommendation Alert ProShares UltraPro Nasdaq Biotech ETF (UBIO) – HOLD – Raise Sell Stop to $26. April 15 closing price $29.10. 

This biotech ETF won’t be making the transition but remains a viable trade for a bit as long as we raise the Sell Stop.

The Survivors – Best of the Lot

We’ve performed a thorough analysis of our current portfolio and have come up with a “Best of the Lot” list that will carry us through over the next few weeks.  We will continue to analyze the markets and add positions as warranted, but this is now our model portfolio with updated recommendations.  This is the list of stocks that have survived the cut and updated recommendation Alerts:

Alert – Amgen (AMGN) Raise Sell Stop to $153. Buy until $161. Bought 2/1/16 at $152.75  –  4/15/16 Closing price $160.13.

AMGN remains the bellwether for the biotech sector and remains on solid footing.  The stock has been moving up steadily since February and should continue to move higher if the up trend continues. 

Alert – Biorad Laboratories (BIO) Raise Sell Stop to $132. Bought 5/16/15 at $146.25.  04/15/16 closing price $140.18.

Biorad is the leading manufacturer of Protein A, the key ingredient in biotech drugs that are centered on monoclonal antibodies (MAB).

Cerus Corp. (CERS)  – Buy Range $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 4/15/16 closing price $6.60.

Cerus Corp. is a core long term portfolio holding.  And although the stock is up some 32% since we initially recommended it, it seems as if it’s in a holding pattern, given its $4.80-$6.60 trading range over the last few weeks. Cerus is a long term hold as we await the FDA decision on whether its Intercept System for neutralizing viruses, bacteria, and parasites will be approved to use with red blood cells. It is already approved for use with plasma and platelets.  The potential for growth is huge if the FDA approves Intercept for red blood cell use.  Dr. Duarte owns shares in CERS.

Alert –  Medidata Solutions Inc. (MDSO) Raise sell stop to $36.  – Buy $36-$39.  Bought on 3/7/16 at $36 –  4/15/16 closing price $40.80.

Medidata is the leading number crunching software provider to research and health care companies.  It has become a central player in the drug research data and implementation process for biotech and medical companies.  Dr. Duarte owns shares in MDSO.

Meridian Biosciences (VIVO) – Meridian remains a small but very well run field and laboratory testing company specializing in infectious disease testing kits.  The company remains very profitable and pays a 0.8 cent annual dividend.  It continues to expand its scope and market share through smart and targeted acquisitions.  Dr. Duarte owns shares in VIVO

Novo Nordisk A/S (NVO)Buy Range Extension to $55-59 (4/7/16).  Raise Sell Stop to $49.  Recommended 12/21/15.  Bought at $55 on 12/21/15 – 4/15/16; closing price $56.13.

This is our stock of the year for 2016.  Novo is the leading global provider of diabetes related products.  Novo got a nice boost on 4/6/16 when a UN report noted that Diabetes, the focus of the company’s business model is on the rise around the world.  Novo is all about Diabetes treatments and holds leadership positions in several categories of medications to treat the condition. Novo paid its annual dividend to shareholders on 3/18/16.  The company raised its dividend to $0.7 cents per share this year, up from last year’s $0.53 cents per share. The increase represents a 32% improvement on the payout.  Novo is our stock of the year.  Dr. Duarte owns shares in NVO.  Dr. Duarte owns shares in NVO.

Opko Health Inc. (OPK) Buy Range $8-$11. Bought 2/1/16 at $8. 4/15/16 closing price $10.80. Sell Stop raised to $9.

Opko has an excellent and diversified business model.  It operates the Bio-Reference Laboratories which provides key and very selective blood testing especially for DNA analysis and rare conditions.  The company also develops and markets a wide array of drugs for key markets.  The company’s shares tumbled on March 30 as the FDA delayed expanded approval of the company’s Rayaldee drug.  The stock has come back though, providing those who took a chance a buying opportunity.  To be sure, anything can happen, but barring any more negative news or some type of market related sell off, the stock has worked itself back fairly well.  A good move above the $11 area will likely restore further confidence in the shares.

It’s important to know that the FDA’s issue was not with Opko, but with the company that manufactures the drug for Opko. What that means is that, barring a lack of the manufacturer not fixing the issues, the FDA may still approve the expansion of the drug. Rayaldee is used to control calcium and vitamin D metabolism in patients with advanced kidney disease.

Rollins Inc. (ROL) – Buy at $27-29. Bought 2/22/16 at $27.38. 4/15/16 closing price $27.09. Sell Stop at $22.

Rollins Inc. (ROL) is well positioned for the increasing awareness of how infectious diseases are transmitted, especially via mosquitoes.  This is a very special situation with a relationship to biotechnology in the current environment. Rollins owns Orkin, the exterminating company, and could be a big beneficiary of the current health concerns regarding Zika virus. It also owns other businesses, including TruTech and Critter Control which focus on wild life control. The company also focuses on bed bug and other pest extermination. This is a highly speculative trading situation which may have a short term lifespan but may also be increasingly powerful given the current potential for the rise in incidence of parasitic and animal vector related diseases. Thus, in the current market it’s an interesting story stock to consider.  Dr. Duarte owns shares in ROL.

WhiteWave Foods Company (WWAV) – Buy up to $44.  4/15/2016 closing price $39.92.

In the emerging world of applied science, Whitewave Food, a spinoff from Dean Foods (DF) and is prototypical of an emerging sector, that of applied science without the emphasis on electronic products such as phones and PCs.  The company harnesses the power of nature with its focus on plant based food products.  Heavy on organic and vegan choices, Whitewave is steadily increasing its market share, deploying an aggressive growth strategy, and steadily taking over the super market shelves in the U.S., China, and Europe through the aggressive use of applied science via automation, software and an emphasis on rapid research and development. 

Its products include Horizon organic milk and Silk almond milk.  The healthy food segment is a pure growth play which is resurging under a different guise.  While the banner for healthy foods was carried by Whole Foods (WFM) in the past, Whitewave adds a new wrinkle; it’s as much a science company as it is a food company.  The company has also been mentioned as a possible takeover candidate over the last six months, which makes owning the stock interesting as well. 

News Update and Analysis:  Change is in the Air

As the index charts and the commentary in our Big Picture section illustrate, the markets are poised for some type of big move.  But then, isn’t everything else?  Think about it; the political landscape is unrecognizable, the economy is evolving, and the pace of technological change is breathtaking.  What it all seems to mean is when we eventually look up from whatever we are doing in the next few weeks, months, or years, we may not recognize what we see.  And while that can be daunting, it can also be interesting and perhaps exciting, depending on your point of view.

As investors the first rule of success is to never get used to the status quo.  Just when you think you know what’s going on something comes along and changes it.  So it pays to have a healthy dose of skepticism with your morning coffee but also an open mind.  That’s why we’ve been expanding our portfolio universe from medical stocks to companies that apply science to their business model. And while all companies apply science to their business, some are more science oriented than others.  That’s where we’re headed, to those companies that are like biotech companies, heavy on the science and technology, but not necessarily heavy on the medical aspect of things.  What this approach offers is a broader horizon and a greater potential for opportunity.

So while we could be negative and complain about the election, crummy earnings, or the Fed, we choose to be aware of those things but not to focus entirely on them.  It’s a big world and there are a lot of companies out there who do special things.  We are on the hunt for those, and we will be bringing them to our subscribers.

2016 EBIS Portfolio Results:

  • Emergent BioSolutions (EBS) – (Bought 5/11/15 MPP* 30.63) Stopped out on 1/7/16 at $36. Return 17.63%.
  • Cambrex Corp. (CBM) – Position Closed; Sell Stop Triggered at $50 on 12/18/15. Bought 10/20/15 at $44. Return 13.6%.
  • Masimo Corporation (MASI) –Buy issued July 20, 2015. MPP: $40.65). Sell Stop triggered at $38 1/6/16. Return (-) 6.5%
  • Sirota Dental Systems (SIRO) – Buy Range $104-$108. Bought 1/26/16 at $104. 2/5/16 closing price 106.57. Sell Stop hit at $98 on 2/12/18. Return (-) 5.76%.
  • Vertex Pharmaceuticals (VRTX) – Trading Buy Range $96-100. Bought 2/4/16 at $96. 2/5/16 closing price $86.61. Sell stop hit at on 2/5/16 at $86. Return (-) 10.41%.
  • Emergent BioSolutions (EBS) – Buy Range $36-39. Bought 1/25/16 at $36. 3/4/16 Stopped out at $34 on 2/8/16.  Total return (-) 5.5%.

 2015 EBIS 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%.
  • Celldex Therapeutics (CLDX) – Trading Recommendation Position Closed; Stopped out at 16. Recommended 10/26/15. Buy range entered 10/26/15 at 13.22. Total Return 21%.  
  • Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at 85 on 10/9/15. Trading Recommendation Position Closed: Stopped out at 100 on 11/16/15. Total Return 15%.
  • Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $76.50 post 2 for 1 split). Trading Position Closed; Sell Stop Triggered at $78. Return 1.96%.

Note to readers:  I am looking forward to meeting you personally at our Las Vegas Summit, May 12-13.  As an added bonus and as a special way to thank you I will be revealing a “summit only” stock recommendation in Las Vegas and as a very special bonus I will be discussing my favorite technical indicators in detail to help you in your personal trading.  Hope to see you all there and thanks for your support. And if you have a copy of “Trading Options for Dummies,” bring it and I’ll be glad to sign it. Joe Duarte