Lessons From Stocks We’ve Bought and Sold This Year

As we approach the end of the year, it’s a good idea to review the state of the PCA portfolio.

In this issue, I’ll look at one stock that I recently recommended and two stocks that we sold earlier in 2022. Then I’ll discuss whether I made the right calls.

Spoiler alert: It’s all about management’s decisions and price charts.

Gilead Rises Beyond Expectations

When I initially recommended biotech giant Gilead Sciences (NSDQ: GILD) earlier this year, I expected the stock to move steadily higher. Instead, we’ve seen shares skyrocket.

I based my decision to recommend (and buy) the shares on the fact that most investors saw Gilead as a leader in antiviral treatments. Most recently, the company made billions from its COVID treatment, remdesivir.

But as I noted in my recommendation, Gilead’s shares had been stale for a long time. There was little to be excited about in the way of new products, at least as the market saw things.

Still, the price chart told me that something was up. So I dug deeper and discovered that Gilead’s cancer drugs were achieving greater acceptance by doctors. This was applicable especially to its breast cancer treatments and its gene therapy unit’s increasing successes.

As I pointed out in my initial article: “Gilead’s management team wisely shopped around for new income streams and settled on buying Kite, a cancer treatment company whose gene therapy was gaining headlines but little actual traction.

“Kite was a leader in CAR-T (chimeric antigen receptor T-Cell therapy), a combination of immuno and gene therapy whose platform was in the middle stages of development, but struggling for financial support given the complexity of the clinical trials and operational challenges.

“In came Gilead, with its deep pockets and vast resources, and it looks as if the combination has finally begun to pay off, as Kite’s CAR-T portfolio has begun to gain support. The upshot is that Gilead’s stock is showing signs of life.”

In fact, that’s exactly what happened. Gilead’s next earnings report beat forecasts, and the company upped its guidance based on higher expectations for its cancer treatments.

As the price chart shows, the stock has come a long way in a short time. Therefore, I am expecting a consolidation period or a moderate pullback in price over the next few weeks.

If you bought Gilead shares early on — as I did — this would be a good time to take some profits.

A Lesson Learned

When a price chart suggests money is moving in, but the story for the stock is not so good, it pays to dig deeper. In this case, it was all about management’s savvy move into cancer therapies.

By recognizing this important development early, we were able to get into a big winner before the crowd.

Tandem Is Still Suffering From Low Sugar

I recommended the sale of shares in diabetes-related care company Tandem Diabetes Care (NSDQ: TNDM) in May. The stock had been recommended by the previous PCA editorial team in October 2018 at an entry price of $30.18.

I recommended a sell stop of $70 on the shares on May 8, 2022, and the stop was triggered on May 9, 2022. Since then, TNDM has lost an additional 60% of its value, trading near $38 on November 20.

Happily, we sold the stock for a 105% gain. Yet it’s important to understand why we were successful in selling TNDM so we can apply the lessons to other stocks.

Tandem was originally recommended as a growth stock based on its ability to expand its business globally. Unfortunately, due to COVID and its aftermath, the company began to struggle and its business began to shrink.

Since May 2022, the company has delivered three losing quarters. Its most recent quarter included a threefold decrease in earnings compared to the May 2022 quarter.

Moreover, despite the company’s upbeat outlook and increase in sales, its management team lowered its guidance for the next several quarters.

In other words, Tandem’s management team is running into significant headwinds and is unable to work out a plan for future profits at the moment.

The Price Chart Was Correct

There were two very prescient findings in the price chart that developed prior to my setting up the sell stop on TNDM. These findings got us out with plenty of time.

Accumulation Distribution (ADI) began to fall in mid-April. That’s a sign that short sellers were establishing positions in the stock. This was combined with a rolling over of On Balance Volume (OBV), a sign that sellers were joining the shorts.

Finally, the stock broke below its 50- and 200-day moving averages, which were the major support areas in the April-May period.

Bottom Line

Tandem’s money-flow indicators (ADI and OBV) correctly predicted the future action in the stock. That’s a sign smart money was selling ahead of earnings.

Moreover, the company has failed to right the ship, which is why the shares continue to hover near their recent lows.

Why Pacira Was a Good Sell

I recommended the sale of Pacira Biosciences (NSDQ: PCRX) on June 20, 2022. Since then, the stock has mostly gone nowhere.

Pacira has some promising products. Its long-acting local anesthetic, Exparel, had shown steady growth in sales as more surgeons have deployed it for post-surgical pain control. The goal of the product was to decrease opioid usage.

Unfortunately, Exparel is expensive. With hospitals and surgery centers struggling with post-COVID surgical volumes, that high cost has led to a slowdown in sales.

However, Pacira’s management has failed to adjust. Pacira failed to develop discounts or preferred-customer arrangements. Even worse, the company made no real attempt to cut expenses in order to fix the issue.

And to make things worse, management began to use COVID as an excuse for sluggish sales.

The net result was a loss of confidence from investors and a sell-off that was recently made worse when the company revealed an earnings loss after several quarters of gains.

Price Chart Analysis

We sold the stock at $53 (a 14.5% loss). Since then, Pacira has lost nearly another 8%.

The price chart tells us that we should have sold the stock sooner. Trouble was brewing as early as April 2022, when shares broke below their 50-day moving average.

On the other hand, the price stabilized and Accumulation Distribution (ADI) rose, a sign that short sellers were moving away.

But the main reason I recommended we sell the stock is that buyers never returned, and PCRX’s On Balance Volume (OBV) got worse over time.

In fact, OBV has yet to recover. We’re not likely to see an end to the selling pressure for some time, either. There is a large Volume by Price bar (large bar, left of chart) around $50, which will provide some resistance and will likely prolong the sell-off.

Bottom Line

PCRX was also a good sale, although our timing was off. However, the stock has lost more money since we sold it, so it could have been worse.

Again, the lessons here are clear. Management’s actions are crucial when it comes to influencing the behavior of buyers, sellers, and short sellers. Moreover, price charts don’t lie.

And in this case, the short sellers in April were correct.

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