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Flat and Flatter

When it raised interest rates for the first time in seven years just six weeks ago, the Fed insisted that was the right thing to do given improving employment and steady growth here in the United States. But a barrage of bad news from overseas since then has forced the Fed to reconsider the best way to move forward amid mounting concerns that continuing economic weakness in Asia will eventually spill over onto our shores.

As a result, last Wednesday the Fed took a more “dovish” tone in its monthly report, stressing that it would be watching for signs of economic weakness before taking additional action. Almost immediately the stock market applauded this change in stance, jumping up more than 3% in just two days to close out the week at its highest level since January 12th.

However, the stock market is still in negative territory for 2016, with the S&P 500 Index more than 100 points, or 5%, below its closing level of 2043 at the end of 2015. Last week’s closing value of 1940 puts it well above its support level of 1860, giving the market room to absorb some more bad news without risking a major breakdown.

Of course, it’s going to take a lot more than words to put stocks back on an upward slope, but it should stop the bleeding long enough for investors to take a more rational view of the market. Many more companies will be releasing their quarterly and year-end earnings reports over the next couple of weeks, which will go a long way towards determining a fair value for the market.

In the meantime, for the first time since we launched STI over two years the total return for the NASDAQ Composite Index is virtually identical for the trailing one week, four weeks, and twelve months at roughly -0.5% (see chart at bottom of page). Not sure what that really means, if anything, other there does not appear to be a meaningful trend in either direction over the short or intermediate term.

By Jim Pearce

 

Next Wave Portfolio Update—One to Watch: Atlassian

By Rob DeFrancesco

I am keeping an eye on Atlassian (TEAM), a provider of team collaboration, messaging and project management software. The company went public in early December at $21 a share. The stock opened for trading the first day at $27.67. During the January sell-off, the shares fell to a low of $20.17, a decline of nearly 36% from the post-IPO high of $31.46 reached in late December.

The company releases results for its fiscal second quarter (ended December) on Thursday, February 4. Analysts on average are looking for quarterly revenue of $102.6 million, representing growth of 35%. That growth rate could turn out to be too conservative given that Atlassian over the past four quarters has averaged top-line growth of 49.7%.

At a recent market cap of $4.3 billion, Atlassian trades at 10.1 times the fiscal 2016 (ending June) consensus revenue estimate of $425.2 million. Even with the pullback in the stock price, the valuation still looks extended in this unsettled market environment. But Atlassian has the business momentum to grow into its valuation over time

Atlassian’s software started out as a bug tracking tool for IT programmers. The software (offered via the cloud or as an on-premise version) enables development teams to work together more efficiently, collaborating to solve problems and improve workflows. Since the software is so easy to learn and use, teams from outside the IT department at organizations across many industries now use it as a broad project management tool. The software use cases today include everything from service management and HR to sales & marketing, finance and legal.

Atlassian’s software often gets embedded into workflows, making it a system of engagement for many large organizations. That’s a good thing because it makes the software essential to how organizations work, and difficult to displace. Atlassian benefits from steady, predictable revenue and a strong renewals business. Fully 99% of Atlassian customers that spent more than $50,000 with the company in fiscal 2014 were also customers in fiscal 2015.

Atlassian has five main products: (1) JIRA for team planning and project management; (2) Confluence for team content creation and sharing; (3) HipChat for team messaging and communications; (4) Bitbucket for team code sharing and management; and (5) JIRA Service Desk for team service and support applications.

The company operates in a total addressable market (TAM) of $35 billion, made up of collaborative applications (TAM of $13.5 billion), IT operations management ($9.1 billion), application development ($8.8 billion) and project/portfolio management ($3.8 billion). Atlassian competes with various point solutions from Microsoft, IBM, HP Enterprise, Google, ServiceNow, Salesforce and Zendesk.

Atlassian’s software (some of it available as a free trial or limited free version) has attracted more than 5 million monthly active users across 450,000 organizations in 160+ countries.

In terms of customers (defined as an organization with at least one active paid license worth greater than $10 a month), Atlassian has more than 51,000, up from just 11,000 in the middle of 2010. The customer profile ranges from small organizations that sign up for one product to large companies deploying multiple products across thousands of users. Atlassian counts 79% of the Fortune 100 and 55% of the Fortune 500 as customers.

One of Atlassian’s key growth strategies involves expansion across the installed customer base. As its software spreads virally throughout teams and organizations, users invite others onto the platform to enable more collaboration. Incremental revenue is generated as more users join within an organization, driving the sale of additional licenses, maintenance contracts and subscriptions. Add-on sales are another growth component, as existing users over time usually adopt more Atlassian products. In addition, the company operates Atlassian Marketplace, an online market for selling third-party and Atlassian-built add-ons and extensions for more specialized use cases.

Customers brought on in any fiscal year have expanded their spending since the first purchase of an Atlassian product. On average, customers have spent 7x their initial purchase over the subsequent five-year period on a rolling basis. The company’s average quarterly net expansion rate has been more than 100% for each quarter during the past two fiscal years.

For fiscal 2015 (ended June), Atlassian’s revenue rose 48% to $319.5 million. Subscription revenue (for the cloud-based software) advanced 68% to $85.89 million (27% of total revenue), while perpetual license revenue (for on-premise software) rose 30% to $57.3 million (18% of total revenue). Maintenance revenue of $160.3 million (50% of total revenue) was up 43%. For the three months ended September, revenue rose 50% to $101.8 million, with subscription revenue growth of 77% a primary driver.

 

Emerging Biotech Investment System (EBIS) Update

By J. Duarte MD

In this issue:

  • The Big Picture: Value Beckons
  • In Depth: One Stock to Own, Novo Nordisk (NVO) Remains Rock Steady
  • Short Term Trading Portfolio: New Picks: OPK and SNY. Two Active Trades Open – EBS and SIRO
  • Long Term Holding EBIS Portfolio Update: Meridian Bioscience (VIVO) Pops
  • Trend Following ETF Model: Short Biotech ETF Position Delivers 47% Gain in January
  • News and Analysis: Allergan’s Uplifting Depression Play and an Interesting Arbitrage
  • Shopping List

The Big Picture: Value Beckons

Yes, we CAN have it both ways in this market. Our Short Biotech ETF (BIS) has delivered a stunning 47% peformance since we recommended it on January 4th. We’ve raised the sell stop to $42 after it failed to trip the previous sell stop.   But, if you take the time to dig a bit, you may decide that biotech is suddenly a value bin. And that’s what we’ve been doing. Our chart review has revealed several very inexpensive stocks of companies whose fundamentals are much better than the charts. That means this may be an opportunity for patient investors to buy good quality stocks at a very low price. See our Trading Portfolio for more details.

Boy, what a week we just had! In our January 24 issue of the EBIS update we wrote: “Make no mistake about it. If the Federal Reserve with our without other global central banks decide 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 vehicle of last resort given poor alternatives such as owning and operating a business or properties.”

And on Thursday night, January 28th, the news broke that the Japanese Central bank would lower interest rates into the negative zone, NIRP, for negative interest rate policy. Global markest rallied, and in our opinion, putting on our market analyst hats, this rally could go on for a few more days, and perhaps weeks. But, we still remain cautious. There is still too much uncertainty in the global economy. And at some point, the fundamentals will have their day.

Biotech is suddenly a laggard. Comparing the charts of the S & P 500 (SPX) and the Nasdaq Biotech Index (NBI) tells the story (see charts below). SPX has bounced nicely off of its recent bottom and looks poised for more action to the up side. Biotech, on the other hand may have bottomed, but is still asleep at the wheel as measured by NBI. But if you dig deep enough you can find some value. And that’s where our Trading Portfolio is headed, the value bin.

SPX chart 2016 01 29 NBI biotech index 2016 01 29

 

 

 

 

 

 

 

 

On the long side, we have two new trading recommendations that are open, EBS and SIRO. Both stocks did fairly well last week and are likely to gain a bit more if the market holds up. EBS is a former EBIS stock and is a fundamentally sound company with a bent toward defense. Sirota (SIRO) is a dental equipment company, which tends to trade based on its own dynamics and does follow the market’s overall trend fairly well. We’ve also added two new picks to the Trading Portfolio, OPK and SNY. Get the details below.

Our EBIS portfolio stocks, VIVO, NVO, and CERS all held their own but didn’t set the world on fire during a pretty good week for the overall market. This is a good opportunity to add to those longer term holdings.

So where do we go from here? We continue to trade with part of our portfolio (Trading Stocks) and to invest for the longer term with the other portion (EBIS Portfolio).  

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. We are looking at companies with terrible charts and excellent fundamentals.
  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 then 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 $42. 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 an excellent 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 SA ADR (SNY), Buy Range $43-$46. Stop loss at $39. Sanofi is making the move from our shopping list to our Trading Portfolio. The stock is starting to gather a bit of upside momentum. Sanofi owns Genzyme, an old line biotech stock it bought in 2011. Genzyme’s revenues are growing at a nice clip, 42% year over year in the most recent quarter. Because Genzyme specializes in drugs that treat very rare diseases, it has a fairly decent chance of continuing to deliver the goods. The market is currently not recognizing this dynamic.

Alert: New Trading Recommendation: Opko Health Inc. (OPK), Buy Range $8-$11. Sell Stop $6. We think the market is wrong on this one as it has expanded its company through acquisitions that have delivered profits and operating capital and that buying it now could prove to be an excellent longer term play. We are also looking to add this company to our EBIS list in the not too distant future.

Alert: Active New Trading Recommendation – Emergent Biosystems (EBS) Buy Range $36-$39. Bought 1/25/16 at $36. 1/29/16 closing price $36.72. Sell Stop at $33.

Alert: Active New Trading Recommendation – Sirota Dental Systems (SIRO) Buy Range $104-$108. Bought 1/26/16 at $104. 1/29/16 closing price $106.29. Sell Stop at $98.

Alert: New Trading RecommendationAmgen (AMGN) Buy Range $157-$161. Sell Stop at $149.

Alert: New Trading RecommendationNeurocrine Biosciences (NBIX) Buy Range $50-$53. Sell Stop at $44.

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

Trading Recommendation: Vertex Pharmaceuticals (VRTX) Trading Buy Range $96-100. Sell stop $86 (Recommendation updated 1/24/16) Initially recommended 10/26/15.

Cerus Corp. (CBM) – Buy Range $5-$7. Recommended 11/16/15. Bought on 11/16/15 at $5; 1/29/16 closing price $5.43. 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.

Meridian Biosciences (VIVO) Buy $18- $21; 1/30/18 closing price $19.35. Dr. Duarte owns shares in VIVO. Stock initially recommended on June 29, 2015.

Novo Nordisk A/S ADR (NVO) – An Atypical EBIS Stock with a Focus on Diabetes

Buy Range $55-$58. Recommended 12/21/15. Bought at $55 on 12/21/15. 1/29/16 closing price $55.87. Sell Stop $46.

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 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)(+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)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 1/29/16 $44.12. Sell stop raised to $42. 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

Allergan’s Uplifting Depression Play

Allergan (AGN) has achieved breakthrough therapy status with Rapastinel, a drug that is in Phase III trials.  Rapastinel, is similar to an intravenous anesthetic drug called ketamine. Ketamine is widely used as an intravenous anesthetic in certain clinical situations, such as when dealing with trauma victims or very old and frail patients that must undergo surgery.   In a surgical setting, Ketamine boosts blood pressure and heart rate, by interacting with NMDA receptors in the brain. Its general “upper” effect is also desirable when treating severe depression according to several reports.   Ketamine’s down side is that it is associated with psychotic episodes that in some cases are recurrent. Rapastinel is similar to Ketamine, but has reportedly been as helpful as Ketamine in addressing the depression, without the psychotic side effects.

Allergan is in the process of merging with Pfizer for a $160 billion stock based deal in November 2015 . When the deal was announced, Allergen’s shares were valued at $363.63 per share. As of January 30, 2016 the shares were trading at $284.43, a substantial discount to the offering price. According to the deal, Allergan shareholders will receive 11.3 shares of the combined company per Allergan Share that they hold when the deal is finished. Pfizer shareholders will receive one share of the combined company per Pfizer share that they owned.

Whether this is an interesting arbitrage opportunity or not is worth looking at and considering. Allergan is well off of its November highs while Pfizer is not far from where it was trading when it announced the deal. The bottom line is that Rapastinel may be a big seller for somebody. Pfizer is not known for managing its stock price very well, but it does have a nice stable of products. Allergan has been an acquisition target for some time and was purchased in 2014 by Actavis. Allergan’s most profitable product has been Botox.

Shopping List

  • Sanofi (SNY) has moved up to our Trading Portfolio.
  • 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- Bought 10-27-15 at $76.50 post 2 for 1 split). Sell Stop Triggered at $78. Return 1.96%.

 

NASDAQ Composite Index:                                                                       

Friday, January 29 = 4,613.95                                                  

Trailing 12 months = – 0.46%                                        

Trailing 4 Weeks = – 0.59%

Trailing 7 Days = – 0.50%           

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