Market Update Plus Good News for Acadia and Academy Sports

In this market where the stresses of the “banking crisis” combined with central bank shenanigans are creating volatile trading conditions, good news has been hard to come by. Happily, in this issue I am reporting on the good fortunes of two of our portfolio holdings, Acadia Pharmaceuticals (NSDQ: ACAD) and Academy Sports and Outdoors (NSDQ: ASO).

First, however, it’s important to discuss the general market trend.

The stock market is at a crossroads, as the S&P 500 index (SPX) is straddling its 200-day moving average. This particular price chart point is important because it’s the dividing line between bullish and bearish trends.

If SPX falls below it decisively it would be a very negative development, as it would spark more selling from computer traders (algos) programmed to trade with the market’s trend.

A closer look at the chart shows two concerning developments:

  • The Accumulation Distribution Indicator (ADI) rolled over on 3/17/23. That’s a sign that short sellers moved back into the market; and
  • The On Balance Volume (OBV) line broke down to a new low. That suggests that other investors began to sell their stocks in expectations of lower prices.

Together, these two signs along with the market’s indecision about the 200-day moving average on SPX are cautionary.

Moreover, the banking crisis continues to unfold, as the situation with Credit Suisse (NYSE: CS) evolves while worries about the safety of deposits at midsize and regional banks in the U.S. unfolds. It’s important to recognize that if Credit Suisse fails, the odds of an international banking crisis and a rapid drop in stock prices will follow.

Finally, the Federal Reserve meets on 3/21 and 3/22. I have hopes that the central bank will at least hold off on a rate hike. But I am not holding my breath. The European Central Bank raised its rates by 50 basis points last week, even though they were fully aware of the problems with Credit Suisse.

I would breathe a sign of relief if the Fed surprised the markets by pausing its rate hike cycle. I would be more bullish if the central bank lowered interest rates by a quarter point. But I think the odds of either of these outcomes are very low.

The bottom line is that although I have a growing shopping list of stocks, many of them in the technology sector, I am keeping my powder dry for the moment on recommending new picks.

Acadia Finally Gets a Win from the FDA

Acadia Pharmaceuticals announced on 3/13/23 that the FDA had approved trofinetide as a treatment for the congenital disease Rett’s syndrome which impairs the neurological function of 6000-9000 patients in the U.S. alone.

As I noted here recently, Acadia Pharmaceuticals had a date with destiny and the FDA as the company’s drug aimed at a congenital developmental disorder known as Rett’s Syndrome was up for approval review from the FDA. Acadia is a well-run company with one other successful product on the market Nuplazid, the leading treatment for Parkinson’s related psychosis. Nuplazid continues to steadily grow its sales with 2022 growth checking in with a very respectable 7% year over year increase in 2022.

The approval of trofinetide puts the company back on the right path to further growth and repairs the damage from an FDA rejection of Nuplazid for the treatment of Alzheimer’s related psychosis. Trofinetide (DAYBUE) is the first drug approved for the treatment of Rett’s syndrome. DAYBUE is expected to be available to patients by April 2023.

Interestingly, although the mechanism for how the drug helps with symptoms of the condition in humans. Animal studies show that it increase the branching of nerve cells (dendrites) as well as improving the adaptability and function of the connections between nerve cells. This suggests that further research may lead to an expansion of the use of the medication.

Acadia also has other potential drugs in development including a late trial potential treatment of schizophrenia which is showing some promise. Let’s hope it can build on its positive momentum.

The stock has recovered nicely after the post Alzheimer’s snub by the FDA and is now consolidating above its 200-day moving average, a bullish sign. On the other hand, its ADI and OBV turned lower on 3/17/23. That suggests that if the overall market turns lower, so will these shares.

On the other hand, there is good support between $17 and $19. This is a good time to keep a close eye on this stock and to consider adding to positions, or entering if you’re a new subscriber once the overall market situation calms down.

Academy Beats Expectations Again as it Capitalizes on the Great Outdoor Megatrend

In a recent Stocks to Watch article, I described the steadily growing mega trend of participation in outdoor activities. This company is in the thick of it for sure and its earnings report for Q4 2022 and its full fiscal year show it.

Sporting goods retailer Academy Sports and Outdoors beat its quarterly earnings expectations for the sixth consecutive time. The beat is especially impressive as the most recent quarterly beat came during a period of economic challenges due to higher interest rates and inflation. Comparable store sales were lower compared year over year, while sales at new stores, higher average tickets, improvement in online sales and a continued store expansion helped to curb the decline.

Revenues were flat, $1.79 billion versus $1.81 billion in the year. Margins and cash flow were solid. Moreover, guidance was moderately positive as the company expects a continuation of flat sales at the higher end of the recent range while expecting steady growth in other measures resulting from the addition of 15 new stores, 2 more than in 2022.

This is excellent performance in the current economy and the market recognizes it.

Cash on the balance sheet was $337, 145 (million) compared to $486 million in 2022 while inventories rose 9%. Long term debt was reduced by nearly $100 million while the company raised its quarterly dividend by 20%. The reduction in cash is primarily due to the ongoing store expansion campaign and generally higher costs of operation.

All in all, ASO is balancing its steady growth as well as delivering on a fiscally responsible balance sheet as they continue to profit from the steadily growing macro trend toward outdoor activities.

Holding Steady

Shares of ASO are in a well-defined long-term uptrend. The general area surrounding the 50-day moving average has been an excellent support level offering an opportunity to add to shares since the stock broke out in July 2022. Moreover, the stock generally rallies ahead of its earnings and then consolidates until the next earnings report.

I don’t see anything that suggests that this pattern will change. On the other hand, in this market it pays to be cautious, so I recommend giving the stock a bit of room here before adding new shares, unless it shows that it has enough momentum to move above the $65 area. As history shows, it’s been a better bet to buy shares after the stock pulls back to the 50-day moving average.

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