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Third Time A Charm?

By Jim Pearce and Rob DeFrancesco and Joe Duarte on January 26, 2016

There hasn’t been much for stock market investors to be happy so far this year. The S&P 500 Index closed out 2015 at 2043.94, about 7% higher where it ended last week at 1906.90. That’s bad news no matter how you look at it, and clearly cause for concern if it holds up much longer.

But here’s some good news that suggests the market may have found a bottom: Last Wednesday the index closed at 1859.33 before rallying late in the week in response to stabilizing oil prices. The last time the stock market got this low was in August after China announced its first currency devaluation, when the index bottomed out at 1867.61.

And prior to that its previous closing low was 1862.49, reached in October of 2014 during that month’s brief panic over an outbreak of Ebola that reached American shores. That means the three most recent low points for the index over the past two years are virtually identical, within a few points of one another despite occurring several months apart.

That is what technical traders refer to as a “support level”, which acts as a floor that the index cannot penetrate. And each time that happened the stock market rebounded strongly until the next major scare pushed it back down. So, it appears we have now reached the lower level of the stock market’s trading range, suggesting a rally may be imminent.

However, there is a widely held belief among technical traders that after testing a support level three times the index must move strongly one direction or the other, either dropping through it on the downside to its previous support level, or zooming up past its previous highs. I don’t know if there is any empirical evidence supporting that theory, but we will soon find out if it holds true this time.

By Jim Pearce

 

Next Wave Portfolio Update—FireEye Releases Initial Q4 Results

By Rob DeFrancesco

The underlying business at FireEye (FEYE) is performing better than many investors had feared. It will take some time for sentiment surrounding the stock to improve, but at least we know the company is on a path to successfully handling the shifting demand environment across the cybersecurity space. For 2016, FireEye expects to deliver organic billings growth of 20% and be free-cash flow positive.

Last week, FireEye pre-announced solid results for the fourth quarter, with billings expected to come in at $256 million to $257 million (growth of 20.6% year over year at the midpoint), toward the high end of the guidance range of $240 million to $260 million. The company looks for revenue in the December quarter of $184 million to $185 million (growth of 29%), in line with the guidance range of $182 million to $190 million. Full results will be released on February 11.

On the pre-announcement conference call, FireEye management explained how spending patterns in security have changed over the past two quarters. Early last year, organizations responded to the wave of big, well-publicized breaches by making a lot of significant product purchases. Everyone was scrambling to try to boost their security resources all at once. Now that the number of large cyberattacks has calmed down a bit, there is less incremental emergency security spending. Instead, organizations are doing more strategic security purchases based on longer-term buying plans.

There is still plenty of demand for security solutions, but it’s more measured. While deal sizes are smaller, there are more overall deals. In the December quarter, FireEye’s transaction volume rose 34% year over year. While the number of deals over $1 million rose to 47 from 43 in the year-ago quarter, the number of so-called run-rate deals (those valued at between $250,000 and $1 million) advanced 42%. FireEye in the latest quarter added a record 375 new customers, and brought on nearly 1,200 new accounts for all of last year.

In addition to the shift in overall spending patterns, FireEye is seeing increased demand for its subscription-based security offerings and reduced demand for its hardware appliances. In the fourth quarter, recurring subscription and support billings (61% of total billings) rose 31% year over year, while product billings were flat. New billings for subscriptions not attached to an appliance nearly doubled year over year and accounted for 40% of product subscriptions, or more than 17% of total new billings.

FireEye CFO Michael Berry said product billings in the fourth quarter were flat because of (1) fewer very large deals worth more than $5 million, (2) increased purchases of the company’s cloud-based email protection offering over the EX email security product and (3) the fact that several large FireEye-as-a-Service deals included no product component. On the positive front, FireEye closed several large FireEye-as-a-Service deals in the EMEA and APAC regions, including the first $1MM+ deal in EMEA. The move to more subscription-based transactions is welcomed at FireEye because the recurring nature of the revenue provides greater visibility.

FireEye last week also announced the $200-million purchase of iSIGHT Partners, a provider of global threat intelligence. While many security solutions on the market today are reactionary, iSIGHT acts as an early warning system, attempting to stop attacks before they occur. The 250+ cybersecurity intelligence specialists at iSIGHT speak 29 different languages and continuously track the activities of threat actors across 17 countries. The focus is on the attacker, not the victim.

About 90% of iSIGHT’s revenue comes from subscription offerings. The company has more than 250 government and 90 commercial customers. In 2015, iSIGHT had billings of $50 million and revenue of roughly $40 million.

The iSIGHT acquisition adds to FireEye’s advanced threat management platform by providing contextual threat intelligence before an attack occurs. Going forward, FireEye will add new intelligence-based subscription offerings tailored to specific industries. The deal opens up more cross-selling opportunities into the installed customer base. The purchase was a smart one for FireEye because it broadens out the platform at a time when customers are looking to get more of their security demands met by vendors offering a complete set of products and subscription solutions.

FireEye remains a ‘Hold’ in the Next Wave Portfolio.

 

Emerging Biotech Investment System (EBIS) Update

By J. Duarte MD

In this issue:

  • The Big Picture: Central Banks Are in the Spotlight
  • In Depth: One Stock to Own, Novo Nordisk (NVO) Holds Up During Market Crash
  • Short Term Trading Portfolio: Five New Trading Picks Added
  • Long Term Holding EBIS Portfolio Update: Why We Still Like Meridian Bioscience (VIVO)
  • Trend Following ETF Model: Look To Trim Short Biotech ETF Position
  • News and Analysis: FDA Approves Record Number of New Drugs in 2015
  • Shopping List

The Big Picture: Central Banks Are in the Spotlight

Make no mistake about it. If the Federal Reserve, with our without other global central banks, decides that interest rates should fall again, the odds of a rebound in stocks will rise – likely significantly – even if it’s for a limited period of time. The model for the current global economy and its relationship to the machinations of central banks is Japan where stocks rarely respond to economic or individual company fundamentals but do respond to whether the Japanese Central Bank is printing money or not. What that translates to is a continuation, for the broader market, of price changes which are often not related to the fundamentals of companies or of the broad economy. Instead, stocks become an investment vehical of last resort given poor alternatives such as owning and operating a business or properties.

Does that mean that we should ignore biotech company fundamentals? Absolutely not. This is because , despite the distortions introduced into the equity markets by central bank money printing, companies with stronger fundamentals and sound management are likely to move higher during periods of lower interest rates and money printing along with stocks that in normal times would not likely do so. Just look at what biotech stocks did during the recent qualitative easing cycle in the U.S. More important, many of these biotech companies actually put the Fed’s easy money into research and development of new products, which will eventually pay off.

In our January 11, 2016 column we wrote: ‘Investors who follow the tenets of J.P. Morgan investing, “buy when there is blood on the streets,” are likely to be salivating after the start of the new year. And while the current decline in prices is likely to be creating value, a prudent approach may be the most sensible method of proceeding in the short term.’   We also noted that higher interest rates were a significant reason for the panic selling in stocks all around the world. So, it should come as no surprise that when the Dow Jones Industrial Average fell as much as 539 intraday points on January 20th, some central banker somewhere had to start talking about a new Qualitative Easing program (money printing).   Within two days of the event ECB chief Mario Draghi’s hinted at a new round of money printing, perhaps as early as March if things don’t improve, and stocks found a bottom.   The key, of course, is whether this is THE bottom or just a blip on the slippery slope to lower prices.

SPX chart 2016 01 22

NBI biotech index 2016 01 22

 

 

 

 

 

 

 

 

A look at the S & P 500 (SPX) and the Nasdaq Biotech Index (NBI) charts, shows an interesting development. The obscure indicator known as the Ulcer Index (UCI), seen at the lowest panel in the chart has turned lower. That usually means that the trend has turned up since it signals a lower chance of ulcers for investors.   Other indicators such as MACD, RSI, and MACD Histogram, also on the chart are starting to show improvement as well. If you add the rise in negative sentiment to the picture, you can make a case for the action last week being at least an attempt to put in a bottom.

So where do we go from here? We dip our toes in the water and we see what happens, knowing full well that risk remains fairly high but also that the potential for sizeable rewards has also risen on a trading basis.

Here is what to do:

  1. Pay close attention to the overall market as well as our new Trading Buy Recommendations and our new EBIS picks and portfolio updates.   Concentrate on short term trades for the foreseeable future as we look to rebuild our long term holdings.
  2. 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.
  3. Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Focus mostly on what central banks say about interest rates and qualitative easing. If they print more money stocks will have a higher chance of rising.
  4. It’s time to take profits on our BIS trade.   The Sell stop has been raised to $36. 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.”
  5. Don’t get over confident. Risk is still high. But this could be an excellent opportunity to build a superior portfolio. 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.

Short Term Trading Recommendations

These are stocks that have the potential for trending profits over shorter periods of time, sometimes days, but mostly weeks to perhaps months. The fundamentals are secondary in this portfolio, which is geared for momentum type stocks.

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.

Alert: New Trading Recommendation Sanofi (SNY) Buy Range $42-$44. Sell stop $38.

Alert: New Trading Recommendation – Amgen (AMGN) Buy Range $157-$161. Sell Stop $149.

Alert: New Trading Recommendation – Neurocrine Biosciences (NBIX) Buy Range $50-$53. Sell Stop $44.

Alert: New Trading Recommendation – Emergent Biosystems (EBS) Buy Range $36-$39. Sell Stop $32.

Alert: New Trading Recommendation – Sirota Dental Systems (SIRO) Buy Range $104-$108. Sell Stop $96.

Alert: Adjusted Buy Range for Trading Recommendation: Bio-Rad Labs (BIO) Trading Buy Range $130-$135. Sell stop $122 (Recommendation updated 1/11/16). 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.

Adjusted Buy Range for Trading Recommendation: Vertex Pharmaceuticals (VRTX) Trading Buy Range $96-100. Sell stop $86 (Recommendation updated 1/24/16) Initially 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.

Cerus Corp. (CBM) – Buy Range $5-$7. Recommended 11/16/15. Bought 11/16/15 at $5 – 1/22/16 closing price $5.57. Cerus is a niche play on blood testing. The company has a proprietary system used to test plasma for parasites and viruses. It has been expanding its market share steadily in the last 6-12 months. Dr. Duarte owns shares in CERS.

In Depth: New EBIS (Emerging Biotech Investment System) Pick: Novo Nordisk A/S ADR (NVO)

Alert: New Buy Recommendation: Novo Nordisk A/S (NVO) – Buy Range $55-$58. Recommended 12/21/15. Bought at $55 on 12/21/15. 1/24/16 closing price $54.74. Sell Stop $46.

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 but ran into some selling with the market in the first week of the year. 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 name. 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)(+1): 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): (+1): NVO has very reliable earnings.
  • Net Income Growth (Year over Year): (+1): 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. The stocks in this portfolio are companies with long term profits. Our goal for this portfolio is to include stocks which we expect will be held for periods of at least twelve months, but likely longer.

Long Term Holding Portfolio Update: Why We Still Like Meridian Bioscience (VIVO)

Meridian Biosciences (VIVO) Buy $18- $21 – 1/22/18 closing price $18.62. Dr. Duarte owns shares in VIVO. Stock initially recommended on June 29, 2015.

We still like Meridian Biosciences and suggest adding to shares on weakness. The company still has a 4.37% dividend yield and despite its decreased earnings, its results are comparable to its peer group. The longer term fundamentals are still positive given the increased likelihood of rising infectious diseases based on immigration and demographic patterns that are emerging in the U.S.

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.

Meridian delivered $47.07 million in revenues and $8.47 million, or 20 cents per share in net income for its December 2015 quarter. This was a 10.58% decrease in earnings on flat revenues. And while this sounds disappointing, it’s actually a pretty good set of results.   The company’s gross margins increased as did the amount of cash on its balance sheet, which are both excellent signs of management that is looking toward the future. Vivo also kept its quarterly dividend at 20 cents per share.   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%.

Update: Trend Following ETF Model

Alert – ProShares Ultrashort Biotech ETF (BIS). Bought at $30 on 1/4/16. Closing price on 1/8/16 $35.73. Sell stop raised to $36. Recommendation updated on 1/24/16.

PowerShares Dynamic Biotech ETF (PBE) – Bought at $48 on 10/23/15 – 12/11/15 stopped out at $48. Return 0.

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

FDA Approves Record Number of New Drugs in 2015

2015 was a good year for drug approvals with the U.S. Food and Drug Administration approving 45 new medications, a nice improvement from the good prior year where 41 new drugs were approved.  The federal agency was particularly helpful to cancer patients. That being said, it’s important to keep an eye on reality as well. Remember that insurance companies and Medicare are less likely to pay exorbitant prices for new medications. And competition, both from generic drugs as well as for similar drugs in any given category is very tight.

According to Fierce Biotech, Novartis (NVS) came in as a big winner, but so did Pfizer (PFE), Astra Zeneca (AZN) and Amgen (AMGN). Amgen and Novartis have been added to our Trading Portfolios as of 1/24/16. Among the winners was Novo Nordisk (NVO) our “One Stock to Own” for 2016, which we initially recommended in December 2015.

Shopping List

  • Sanofi (SNY)
  • Regeneron (REGN)
  • Novartis (NVS)

2016 EBIS Portfolio Results:

  • Emergent Biosolutions (EBS) (Bought 5/11/15 MPP* 30.63) 1/7/16 Stopped out 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%

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%.
  • 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 – Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Sell Stop Triggered at $78. Bought 10-27-15 at $76.50 post 2 for 1 split). Return 1.96%.

 

NASDAQ Composite Index:                                                                       

Friday, January 22 = 4,591.18                                                  

Trailing 12 months = – 3.4%                                        

Trailing 4 Weeks = – 8.2%

Trailing 7 Days = – 2.3%           

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