Rough Start for New Year
The first trading day of 2016 brought with it a painful reminder of just how pernicious the past six months have been on the stock market’s nerves. Within two hours of opening the S&P 500 Index fell by 2.6%, pushing it below the 2,000 level for the first time since mid-October. The tech-heavy Nasdaq Composite Index suffered slightly greater damage, given its greater reliance on Asia for revenue.
Blamed for the drop was weak economic news out of China over the weekend, exacerbating concerns that the global economy will not be able to achieve full health until its most populous nation can stabilize its deteriorating growth curve. Implicit in the chain reaction that followed the Chinese market meltdown in Europe and America is the belief that the value of other developed nations stock markets are inexorably linked to China’s.
All of which begs the question, to what extent is the economic health of the U.S. in general, and tech stocks in particular, dependent on demand for their goods from China? For some companies like Apple it is relatively easy to estimate the near term impact on product sales in China given a certain change in discretionary income, but for many others the long term impact is much more difficult to ascertain.
Given its ascension to a global economic superpower, an economically stronger China is preferable to a weaker one – all other things being equal. Problem is, all other things never are equal and in some cases the most unequal components are also the least visible. As such, we tend to be leery of overreacting to any one piece of news coming out of China (or anywhere else).
Just as the creative process of innogration allows one company to leapfrog ahead of another in market share, one country’s pain can be another country’s gain. For that reason we prefer to remain focused on companies that are outsmarting their rivals and capturing market share wherever it is found, instead of trying to figure out exactly where that market share is going to occur.
By Jim Pearce
Next Wave Portfolio—One to Watch: Infinera
By Rob DeFrancesco
With 2016 expected to be another year of strong growth for cloud services, mobile communications and online video viewership, network bandwidth will once again be stretched to the limit. That’s good news for Infinera (INFN), a provider of optical transport hardware and software tools that enable networks to run faster and more efficiently. Analysts on average look for the company this year to deliver revenue growth of at least 27%.
In the past, data was transmitted optically via a series of big “dumb” pipes. Anything intelligent had to be done with a router. But new functionalities are now included in the optical transport layer. Infinera’s transport solutions—designed to get the maximum value from a network while keeping costs to a minimum—now offer the ability to provision and deliver intelligent next-generation services.
The company’s customer base is broad and diversified. Among Infinera’s customers: 17 tier-1 global service providers, four of the top five cable companies in North America, three of the four largest Internet content providers and multiple wholesale/enterprise carriers.
Infinera’s core product is the DTN-X platform for 100 Gigabit Ethernet long-haul data transport. Introduced in the second half of 2012, DTN-X has helped power Infinera’s solid top-line growth during the past three years. The total addressable market (TAM) for long-haul transport over the next few years is expected to grow modestly, to around $5.5 billion in 2019 from $4.8 billion today.
Due to the continued build-out of regional datacenters, base stations and local exchanges, the real growth for the optical industry going forward will be in the metropolitan and regional portions of the network. Thus, there is high demand for capacity upgrades across metro and local access networks.
By 2019, the metro aggregation market (involving the hand-off of data from long-haul networks into metropolitan areas) is expected to reach $7.6 billion, up from around $5.3 billion today. MKM Partners sees metro aggregation hitting $10 billion by 2020, and believes Infinera has the ability to secure a 15% share, representing a $1.5-billion annual revenue opportunity.
Infinera is well-positioned at the metro level thanks to a series of new products and its recently completed $350-million acquisition of Transmode, a specialist in metro packet-optical applications. Launched last fall, Infinera’s XTC-2 and XTC-2E solutions expand the long-haul DTN-X footprint to tier-2 and tier-3 cities (those with smaller capacity requirements). Based in Stockholm, Transmode gives Infinera a greater presence at service provider customers across Europe. In the latest quarter, the EMEA region accounted for 18% of Infinera’s total revenue, vs. 68% for North America.
In the fast-growing datacenter interconnect (DCI) market, Infinera is steadily gaining traction with its new CloudXpress product, a platform for point-to-point hyperscale bandwidth interconnect applications across regional, metro and campus environments.
DCI, mainly used for connecting regional datacenters, is an emerging piece of the metro optical market. The segment used to be served by sub-optimal, traditional metro solutions designed for basic telecom applications. But the market is now pushing into newer technologies because of data traffic growth, virtualization and the rise of cloud-optimized platforms. The DCI segment over the next four years has the potential to reach a TAM of $2.9 billion, up from around $400 million two years ago.
At the end of the third quarter, Infinera had 14 CloudXpress customers, double the number at the end of the first quarter. A positive sign: Infinera’s largest CloudXpress customers have already placed follow-on orders.
Infinera’s newer XT-500 interconnect solution is similar to CloudXpress, but enhanced for long-haul transport. XT-500 is expected to see solid initial demand because it minimizes power consumption, space and complexity.
For 2015, the Infinera consensus revenue estimate of $884.4 million represents growth of 32.4%, while the 2016 consensus of $1.13 billion indicates growth of 27.6%. At a recent price of $18.12 (down 28% from the 52-week high of $25.24 reached in August), Infinera shares trade at 23 times the 2015 consensus EPS estimate of 78 cents and 19 times the 2016 consensus of 95 cents.
One caution: Limited revenue visibility is a primary risk associated with investing in optical products companies. Customers (especially telecom service providers) tend to buy optical products in stages and often delay high-dollar purchases at the last minute. That often leads to lumpy revenue on a quarterly basis for optical companies. Revenue visibility is often limited to just the next quarter, according to Infinera CFO Brad Feller.
Emerging Biotech Investment System (EBIS) Update
By J. Duarte MD
In this issue:
- The Big Picture: Pins and Needles for 2016
- In Depth: New EBIS Pick –Novo Nordisk A/S ADR (NVO) Rallies
- Trading Portfolio: Trading Portfolio Remains Undecided
- EBIS Portfolio Update: Novo Nordisk Rallies
- News and Analysis: Buyer Beware. KaloBios to be Delisted as Shkreli Issues Widen
- 2015 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%.
- Trading Recommendation Position Closed: Celldex Therapeutics (CLDX) Stopped out at 16. Recommended 10/26/15. Buy range entered 10/26/15 at 13.22. Total Return 21%.
- Trading Recommendation Position Closed: Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at 85 on 10/9/15. Stopped out at 100 on 11/16/15. Total Return 15%.
- Trading Position Closed – Sell Stop Triggered at $78 – Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $76.50 post 2 for 1 split). Return 1.96%.
- Cambrex Corp. (CBM) Position Closed– Sell Stop Triggered at $50 on 12/18/15. Bought 10/20/15 at $44. Return 13.6%.
The Big Picture: Pins and Needles for 2016
Little has changed in the markets since our last update, December 21, 2015. In that issue we noted “the S & P 500 (SPX) has the look of a boxer on the ropes while the Nasdaq Biotech Index (NBI), in comparison, had a quiet week. “ In fact, all we’ve seen since the Federal Reserve raised interest rates is increasing volatility in the S & P 500 (chart below, on left) and a fairly quiet trading pattern in the Nasdaq Biotech Index (chart below, on right).
There are two major macro factors that could influence the market and the biotech sector for 2016. First is the economy and what the Federal Reserve does in response to changes in data over the first quarter. Some of the numbers released in late December, were cautionary, especially the Purchasing Manager’s reports from Chicago and China. To be sure the data from China should always be taken with a grain of salt. But the markets do respond, which is why Chinese data is relevant.
The second major macro factor is the presidential election and the further deployment of Obamacare. So far, the major election issues have been immigration and the war against the Islamic State. But we would expect that at some point in 2016 health care will become a front line issue. That’s because insurance premiums, co-pays and drug prices are all likely to rise in 2016. When this happens, access to important products and services, such as physicians and lifesaving medications may not be as easy as in the past. In other words, access to health care could be much more difficult for individuals in 2016, just as drug prices are likely to increase and insurance companies will be unwilling to pay those higher prices.
To be sure, the overall effect of this dynamic on markets and real life will be dependent on the degree of disruption in the system as the Obamacare tank and its consequences roll onward. But if the situation reaches crisis proportions the candidates from both parties will have to talk about health care. And given the unpredictable nature of the discourse from both parties, what the candidates say, and what Congress and President Obama do during the year could have significant ramifications on stock prices across the entire health care system.
For now, the S & P 500 (SPX) remains range bound, but with a downward bias. The 200-day moving average has seen very difficult resistance since the recovery after the August 2014 market meltdown. NBI, on the other hand, has a much more reassuring look, although it is not a trading pattern that suggests that a huge move to the upside is imminent.
What it means is that discipline and watchfulness are the keys to success as biotech investor in this market. Here is what to do:
- Pay close attention to the overall market as well as our new Trading Buy Recommendations and our new EBIS picks and portfolio updates. Remain patient as the market will eventually settle down and become more investable. But a reliable up trend could still take months to be apparent.
- Monitor the price of all current positions in your biotech portfolio individually. Look at each stock separately and keep up with Sell Stops and any trading rule that we include in our recommendation.
- 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. Keep an eye on news items related to health care. Biotech stocks tend to exaggerate the general trend of the health care sector.
- Consider using BIS to hedge your biotech portfolio during periods of weakness for the market and the biotech sector. The entry point on BIS has been changed on 1/5/16 to $30-$33. 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 is clearly on the rise once again. This means that patience and attention to detail is they key to success. And in this type of market, success means that your portfolio retains as much of its gains as possible. 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 added three new stocks as of 11/30/15 and a fourth candidate on 12/14/15. The sell stops on open positions have been adjusted to reflect the closing prices of the week that ended on 12/18/15.
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: Otonomy Inc. (OTIC) – Buy Range $27-$30. Initial recommendation for this stock was 12/14/15. Bought 12/17/15 at $27.42. 12/31/15 closing price $27.75. Sell Stop at $25. This company could change the course of treatment of ear infections in children, and perhaps even adults over time. It received FDA approval for its extended release version of the antibiotic Ciprofloxasin (Cipro) under its own brand name of Otripio. The initial indication is for use in surgeries after ear tubes are placed in children. The company has several key trials in place for expanded uses.
Active Trading Recommendation: Invacare (IVC) Trading Buy Range $19-$21. Bought 11/30/15 at $19.70. 12/31/15 closing price $17.39. Sell stop at $17 (based on 12/18/15 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.
In Depth: New EBIS (Emerging Biotech Investment System) Pick: Novo Nordisk A/S ADR (NVO)
Buy Range $55-$58. Recommended at $55 on 12/21/15. 12/21/15. 12/31/15 closing price $58.08.
Novo Nordisk A/S ADR (NVO) – An Atypical EBIS Stock with a Focus on Diabetes
Novo Nordisk, became an active EBIS portfolio component on 12/21/15 when it was first recommended. The stock closed 2015 at the upper end of its Buy range of $55-$58. The company is based in Denmark, and its sole focus is Diabetes treatment.
It is a large cap stock ($144 billion), but it’s not a household word. Yet, diabetics know it because it makes both medications as well as equipment for delivering medication for diabetics. It’s also a mainstream pharmaceuticals company with footprints in hormone replacement therapy, growth hormone treatments and treatments for hemophilia. The company’s Semaglutide drug recently delivered improvement in long term glucose control in a Phase 3 trial. Semaglutide also leads to appetite suppression and weight loss, a key component of the treatment in Type 2 Diabetes.
NVO gets a top shelf + 9 EBIS rating because it’s a well-run company with a single focus and a top entry in all areas of its niche, Diabetes. It is not a small stock, but it is an EBIS stock because of its focus and its ability to deliver. And in a difficult market it could provide a bit of a safety net compared to other more speculative buys.
Here are the EBIS details:
The EBIS Score for Novo Nordisk A/S ADR (NVO) is + 9 (BUY) based on September, 2015 data.
- Cash on hand: (+1) NVO had $18 billion in cash compared to $13 billion in September 2014.
- Cash on Hand growth (year over year) (+1): The year over year cash was 32%.
- 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 grew by 20% on a year over year basis for the September 2015 quarter.
- Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1) NVO has a 0.78% 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): NVO has earnings.
- Net Income Growth (Year over Year): (0): NVO grew its earnings by 20% year over year in September.
- 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:
Alert: Emergent Biosolutions – Upgraded to BUY. Buy Range $37-40. The upgrade is based on technical trends and relative strength which suggests that institutional buyers are coming into the stock. The company could also be attracting attention based on its standing as a defense stock as terrorism awareness is on the rise.
Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 12/31/15 Closing price $40.01 – Sell stop at $36 raised 1/4/16) Buy range as of 1/4/16 is $35-$40. Dr. Duarte owns shares in EBS.
EBS has been rallying but could consolidate after a big move up in December. If you don’t own the stock you may want to wait a bit before entering. Buying it above $40 is not advisable during the current move up.
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.
Cerus Corp. (CBM) – Buy Range $5-$7. Recommended 11/16/15. Bought 11/16/15 at $5. 12/31/15 closing price $6.32. Dr. Duarte owns shares in CERS.
Masimo Corporation (MASI) – Buy at $40-$44. Buy issued July 20, 2015. MPP: $40.65. 12/31/15 closing price: $41.51. Stop Loss raised to $38 on 11/9/15. Dr. Duarte owns shares in MASI.
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. 12/31/15 closing price $20.52. 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.
Update: Trend Following ETF Model
PowerShares Dynamic Biotech ETF (PBE) – Bought at $48 on 10/23/15. 12/11/15 stopped out at $48. Return 0%.
Alert – ProShares Ultrashort Biotech ETF (BIS). Buy at $30-$33. Sell stop at $27. Recommendation updated on 1/4/16.
ProShares Ultrashort Biotech ETF (BIS) 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 – KaloBios to be Delisted as Shkreli Issues Widen
This story should be filed under the “Buyer Beware” section of any investor’s playbook.
In our December 21, 2015 issue, in this section we wrote: “Handcuffed, wearing a grey hoodie and sunglasses, Martin Shkreli walked out of Turing Pharmaceutical’s life as the FBI arrested him for allegedly participating in a Ponzi scheme. In what could be the beginning of a new leg in a bizarre saga, the FBI alleged that Mr. Shkreli used shares of a company he founded, Retrophin, to pay back investors for losses he created while running a hedge fund into the ground. According to Fierce Biotech, based on information obtained via a pending lawsuit filing, “Shkreli and his ‘close personal associates’ drew up a sham consulting agreement” which guaranteed a disgruntled hedge fund investor “66,000 shares of Retrophin and $200,000 of the company’s cash with no expectation of any actual consulting.”
Now the next shoe has fallen as Nasdaq informed Kalobios (KBIO), a company that Shkreli bought in 2015, that it plans to delist it secondary to “the exec’s arrest on fraud and looting charges as one of several reasons for the move.”
Here is the most interesting aspect of this story. Shkreli bought the majority the outstanding shares of KBIO after the company said it was halting operations, citing its clinical failures. Shkreli’s stock purchases drove the price of KBIO to $27 as a result of squeezing short sellers including one poor guy, literally, who lost his entire retirement through shorting the stock, and hoped to cover his margin call through a crowd funding campaign.
The whole story is a mess. According to Fierce Biotech, in its delisting notice Nasdaq cited the fact that KaloBios in its filing with the SEC had noted “that its accountants, Marcum LLP, had resigned on December 21, 13 days after they had been engaged.” The Wall Street Journal reported that Kalobios has filed for Chapter 11 bankruptcy protection, hoping that in doing so it can issue “payroll checks to its eight remaining employees.” The Journal also reported that the company plans to appeal its delisting.
NASDAQ Composite Index:
Thursday, December 31 = 5,007.41
Trailing 12 months = + 5.9%
Trailing 4 Weeks = – 0.8%
Trailing 7 Days = + 1.4%
Weekly Portfolio Performance