Tech’s Turn to Tank
It had to happen sooner or later; after soundly beating the overall market in 2015, the tech sector is now taking its turn under the harsh glare of market scrutiny. As a result, the tech-heavy NASDAQ Composite Index declined 5.5% the first week of February, coming on the heels of a nearly 8% drop in January.
Of course, more so than any other industry the tech sector is susceptible to big price swings magnified by the momentum-ish nature of some of its biggest companies. It was just two months ago that Netflix traded as high as $130; last week it dropped below $83. Even worse, only a week ago LinkedIn was priced above $190, but has since dropped below $110.
However, if you look beneath the surface of the index you’ll see an interesting dichotomy. It’s the value stocks that are not only holding their own, but in some cases actually appreciating in value. Many of them are “fallen angels” that have already suffered a crash of their own, but now seem reasonable in comparison. Even perpetually under loved IBM appears to have found a floor, bottoming out near $120 in late January before gradually rising above $125 last week.
That may mean nothing at all, or it could indicate something quite important. If the tech sector really is the market bellwether it is generally believed to be, then does this shift signal a transition from growth to value stocks for the next leg up in the stock market? And if so, is time to begin loading up on some of the “boring” tech names that are already trading at low valuation multiples?
Only time will tell, but it may be time to begin compiling a list of value-priced tech stocks to acquire in the months to come. We think the current stock market sell-off will not abate until it rotates through every sector, but after that the foundation should be set for the next broad-based upward movement.
By Jim Pearce
Next Wave Portfolio Update— Tableau Software
By Rob DeFrancesco
Following the Nasdaq Composite’s 7.8% drop in January, many investors have become frazzled. Individual stocks are being sold off at just the slightest whiff of conservative guidance for the year ahead. On Friday, the market cap of Tableau Software (DATA) was cut in half after the company reduced its 2016 revenue guidance midpoint by $15 million. A 1.75% decline on the top-line outlook resulted in a 49% pullback in the Tableau share price.
The stock’s sharp overreaction to the downside should not take away from Tableau’s promising long-term growth story. Stocks over the short term are often illogically mispriced, reflecting the emotional nature of the markets. For long-term investors, significant pullbacks can present opportunities to accumulate promising companies at more reasonable valuations.
Granted, Tableau sported an elevated valuation going into the fourth quarter earnings report. But the stock wasn’t trading at such an outrageous multiple compared to the company’s expected growth rate that it warranted such a severe sell-off on what would be considered a fairly minor guide-down in a more hospitable market environment. In this case, the harsh downside reaction had a lot to do with a shift in perception, as Tableau had been seen as a growth stalwart, consistently putting up quarter after quarter of phenomenal expansion.
Things changed a bit in the December quarter. While Tableau still delivered top-line growth of 42%, the degree of “the beat” was significantly less than what investors had become accustomed to, with revenue of $202.8 million coming in $2 million above the consensus estimate, verus an average beat of $11 million over the consensus during the past 11 quarters.
In addition, on the earnings conference call CFO Thomas Walker said the company began to see some softness in spending in North America in terms of deal flow, particularly with respect to follow-on purchases. The international business (26% of total revenue) remained solid, growing 63% year over year.
The company generates about three quarters of license revenue each quarter from existing customers that are expanding their Tableau deployments. In the latest quarter, some customers began to expand in smaller increments, according to Walker. Thus, it makes sense that fourth quarter license revenue growth of 31% showed significant deceleration from growth of 57% in the prior quarter. With the sudden influx of some cautionary signs, Walker said the company was “taking a prudent stance on guidance.” For the first quarter, the revenue guidance range of $160 million to $165 million came in 9.5% below the consensus at the midpoint.
It’s fair to say investors were shocked by the sudden cautiousness because Tableau just finished up an excellent 2015 in which revenue grew 58%, license revenue expanded 51% and more than 12,500 new customers were added, bringing the total customer base to more than 39,000 (up nearly 50%)—including 17,000+ located outside the U.S. In the fourth quarter alone, Tableau added a record 3,600 new accounts. The company’s data visualization analytics software is now used by 88% of the Fortune 500, including 96% of the Fortune 100. All of the top 20 financial services firms, the 20 largest tech companies and the 10 largest U.S. telecom operators are now on Tableau.
The company worked hard to land its big customers, and it now has the potential to significantly expand its presence across those enterprise accounts by adding new users. In the fourth quarter, Tableau closed 414 deals worth more than $100,000 each, up 36% from the year-ago level. Included among those large transactions were 20 deals over $1 million. Since we know Tableau’s initial average order size is less than $10,000, the vast majority of the big deals involve follow-on business with current customers.
The bears will say Tableau is facing increased competition from Microsoft’s Power BI offering as well as solutions from Qlik Technologies (QLIK) and other smaller vendors. Perhaps the large number of alternative options is making some customers pause a bit before spending more with Tableau. CEO Christian Chabot on the earnings call admitted the competitive dynamic had gotten a little tougher at the low end of the market. However, he also said no one competitor stands out as a cause of the demand pause; overall deal win rates remain stable across the board.
For 2016, Tableau now expects revenue of $830 million to $850 million (growth of 27% to 30%), below previous guidance of $845 million to $865 million. At the recent market cap of $3 billion, the forward revenue multiple on the guidance midpoint is down to just 3.5. Even if Tableau were to come in at the low end of its outlook, the harsh valuation reset to the downside looks overdone.
Tableau Software remains a ‘Buy’ in the Next Wave Portfolio.
Emerging Biotech Investment System (EBIS) Update
By J. Duarte MD
In this issue:
- The Big Picture: How Much Longer Before A Bounce?
- Alert – In Depth: Updated Recommendation – One Stock to Own, Novo Nordisk (NVO)
- Short Term Trading Portfolio: Active Trades Hold. Short Biotech ETF Continues Rally.
- Alert – Long Term Holding EBIS Portfolio Update: CERS: Huge Potential as Zika Virus Play
- Trend Following ETF Model: Short Biotech ETF Position Makes New High – 60% Gain
- News and Analysis: Death In French Marijuana Related Drug Trial
- Shopping List
The Big Picture: How Much Longer Before A Bounce?
As we write, the U.S. stock market looks ready to start a new week on the down side. What else is new? But don’t fret too much. If you’ve followed our recommendations and have been paying attention to our trading rules, you’ve been able to rest a bit easier than you may have otherwise, since many of our big winners were stopped out early in this rout, while we’ve been fortunate to cut losses short in most cases.
Last week we noted that the biotech sector is now a value bin, and we’re not changing our mind. At some point we will be able to buy stocks in this sector at much cheaper prices. For now, we continue to work one stock at a time and continue to hedge our bets. One thing is for sure. A hedged portfolio can be a good source of a good night’s sleep. While the biotech sector has taken its lumps lately, our Short Biotech ETF (BIS) continues to do its job well. The ETF has now delivered a stunning 60% paper profit as of February 5, since we recommended it on January the 4th. We’ve raised the sell stop to $44 on BIS effective February 8.
So the market has had a few days to think about the negative interest rates in Japan (NIRP), and traders are voting with their feet. The initial rally after the January 28 move to NIRP fizzled out and stocks closed the week of February 5 below where they were befor the NIRP move. And while some investors may be looking to throw in the towel, there are some technical signs that the selling is starting to fizzle in the sector. In fact, the harder the selling in the next few days, the more likely will be the odds of a bounce.
Consider the charts of the Proshares Ultrashort Biotech ETF (BIS) and the Nasdaq Biotech Index (NBI) from the close of trading on February 5. Focus on the MACD histogram indicator (blue bars) at the bottom of both charts. While BIS has made a new high, the MACD histogram has not. On the NBI chart, we see the mirror image. The index has made a new log but the MACD histogram has not. These two indications are confirmatory and are telling us that the respective trends – up for BIS and down for NBI – are losing momentum. The same is true for the RSI indicator (top lines of both charts). The RSI for NBI is hugging the oversold terriroty while the RSI for BIS is close to overbought. What these technical indicators are suggesting is that the potential for a trend reversal is rising.
So it may feel as if the end is near. Yet, the charts show that there is the potential for a bounce in the works. For one thing the pessimism is so thick that you can cut it with a knife. And why not? Everything that used to work is no longer useful. And while this time may indeed be different, and it could be the big one, it’s important to remain both vigilant and disciplined. There is no substitute for paying attention to your portfolio and to consider your alternatives both in the current market and in the future by focusing on company fundamentals and your individual time frame.
Of course the devil is in the details. A meaningful trend reversal would be one that lasts for several weeks to several months and would give us adequate time to position our portfolios adequately. We may or may not get one. Only time and events will tell. For now we remain hedged and focused on our active trading recommendations and our long term EBIS stocks which are all holding up fairly well.
Here is what to do:
- Pay close attention to the overall market as well as our Recommendations, adjustments, 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 and expanding our shopping list.
- 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. Stories about biotech stocks are likely to increase given the political situation in the world, the U.S. election and the rise in viral outbreaks due to globalization and geopolitically related migrations.
- It’s time to take profits on our BIS trade but it won’t let us. The Sell stop has been raised to $44 as of February 8. 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.”
- Don’t get over confident. Risk is still high. But this could be an excellent opportunity to build an excellent portfolio for the long term. 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.
Active Trading Recommendations:
- Alert – ProShares Ultrashort Biotech ETF (BIS). Bought at $30 on 1/4/16. Closing price on 2/5/16 $47.51. Sell stop raised to $44.
- Opko Health Inc. (OPK) Buy Range $8-$11. Bought 2/1/16 at $8. 2/5/16 closing price $8.28. 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.
- Emergent Biosystems (EBS) Buy Range $36-$39. Bought 1/25/16 at $36. 2/5/16 closing price $35.78. Sell Stop $33.
- Sirota Dental Systems (SIRO) Buy Range $104-$108. Bought 1/26/16 at $104. 2/5/16 closing price 106.57. Sell Stop $98.
- Vertex Pharmaceuticals (VRTX) Trading Buy Range $96-100. Bought 2/4/16 at $95. 2/5/16 closing price $86.61. Sell stop $86.
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. 2/5/16 closing price $48.90. Sell Stop at $42.
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 fell during the week that closed on 2/6/16 in a very difficult market. We still like it and think that over the next few weeks, the stock could be bought at much cheaper prices for those who plan to hold it for an extended period of time of at least 12 months. We are doing something very rare at this point, lowering our sell stop to $42 from the previous $46.
At this point, investors who hold the stock have two choices based on their own goals. Those who wish to hold it for at least 12 months should hold the stock and wait to buy it at lower prices. Those who have a shorter term mentality should adhere to our new Sell stop and sell it at $42.
This is our stock of the year, however, and we are planning on managing this trade for a good while. We don’t think that the market is basing its decision on fundamentals at this point while we acknowledge that this is a risky market.
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 ten 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: CERS: Huge Potential as Zika Virus Play
Alert: Cerus Corp. (CBM) – Buy Range $5-$7. Recommended 11/16/15. Bought 11/16/15 at $5 – 2/5/16 closing price $5.43. Cerus is a niche play on blood testing and may be a play on the Zika virus. The company has a proprietary system, the Intercept system, which is used to test plasma for parasites and viruses and to inactivate them. It has been expanding its market share steadily in the last 6-12 months.
Analysts Dan Cohen and Scott Matusow make an interesting case for Intercept, noting an August presentation by the company regarding the Zika virus and the potential use of Intercept as a way to reduce the spread of the virus via the blood supply. The authors also noted that CERS has received approval in Brazil for such a use with Intercept. Both authors report ownership in shares of CERS.
CERS offers huge upward profit potential given the increase interest in the Zika virus. The company already has received favorable notice with the FDA regarding Ebola, chikungunya and dengue. A clinical trial is currently underway for Ebola. CERS currently has FDA approval for testing plasma and platelets, but not red blood cells. Studies are under way for red blood cell application of the Intercept system. The bottom line is that it is plausible to consider that CERS shares could spike at any time within the next twelve months if its Intercept system proves to be useful in the treatment of Zika virus by early detection and eradication of the virus via testing and treating of the blood supply.
Dr. Duarte owns shares in CERS.
Meridian Biosciences (VIVO) Buy range $18- $21; 2/5/16 closing price $18.74. 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 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%. Dr. Duarte owns shares in VIVO.
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%.
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
Death in French Marijuana Related Drug Trial
One person died and six were injured while three others may have irreversible brain damage as something went terribly wrong in a Phase I clinical trial for an anxiety treatment in France.
The drug in question is Portuguese pharmaceutical company Bial’s BIA 10-2474 which acts on the brain’s endocannabinoid receptor system, the same system where marijuana asserts its effect. The French clinical study company Biotrial was conducting a Phase I clinical trial which is a test to see if the drug is safe on healthy volunteers. The study, ongoing since July 2015, was proceeding without trouble until January 6 when Biotrial increased the dose given to eight newly enrolled patients.
According to new revelations one of the subjects developed a headache and was hospitalized. It is being reported, however, that the subject’s condition worsened and Biotrial was not notified by the hospital. Thus seven other subjects received the drug and further complications developed. The investigation is also raising questions about Biotrial’s disclosure information and the time it took for the company to report the situation to the proper authorities in France. There is also some speculation about whether the medication should have been given to subjects who use marijuana.
There have been media reports that conclude that currently available marijuana is extremely potent and has the potential to become addictive as well as causing irreversible brain damage to younger users even with “casual” use. There is also conflicting data and opinion on the subject, which remains a legal and political hot potato.
- Regeneron (REGN)
- Novartis (NVS)
- Bio-Rad Labs (BIO)
- Amgen (AMGN)
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 on 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: 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, February 05 = 4,363.14
Trailing 12 months = – 8.04%
Trailing 4 Weeks = – 2.70%
Trailing 7 Days = – 5.44%