We’re Getting Smarter, Too
As I mentioned in last month’s edition of Smart Tech Investor (“To Biotech and Beyond“), we are pursuing innogration as it expands into every corner of the global economy. We already have the biotech sector covered like a hypothermia prevention blanket thanks to the expert eye of Dr. Joe Duarte, who updates those companies for us every week using his EBIS system to separate the haves from the have-nots.
But there is a lot more to innogration than just healthcare. For example, this week we are adding three new stocks to our Special Situations portfolio from the smart car sector, which is just now coming into fruition. So I asked the newest member of our analyst team, Will Romov, to take a hard look at the companies vying for leadership in that category and put together a trio of future winners for you to consider.
The stock market isn’t dead; in fact, far from it. Most people may be surprised to learn that the S&P 500 actually closed out the first quarter of this year with a slight gain despite spending the first six weeks of 2016 shedding more than 10% of its value while the Fed pretended not to notice ongoing weakness in the global economy. But now that Janet Yellen has publicly acknowledged as much we are once again seeing capital flow to the most promising investment opportunities.
A Smart Play on Smarter Cars
By William Romov
If you’ve ever been jolted awake by rumble strips carved into the shoulders of a road, you know a smart car technology concept. Now, the rumble strips are built into your seat with cars like GM’s 2016 Cadillac ATS Coupe. And your seat will not only vibrate when you’re about to drive off the road, but also before a front or rear-end collision. With the way people drive around D.C., GM’s Safety Alert Seat feature could also serve as a massage chair!
As we’ve noted in Smart Tech Investor, spending on smart car technology may increase 204% to $137 billion by 2021, according to a PWC research article. Sales are expected to reach $45 billion in 2016 with 61% of those sales coming from safety and autonomous driving technology. One reason for this growth is the European Union’s mandate that all new cars by 2018 come equipped with emergency calling technology (eCall). Similar to GM’s OnStar, eCall devices will automatically alert first responders and send data about an accident.
That’s why we’re adding these three stocks to the STI Special Situations portfolio, as we feel they represent a huge growth industry within the automotive sector that is now only being tapped.
Entry by Acquisition
Chipmaker NXP Semiconductors (NSDQ: NXPI), is the biggest and least risky. The company is unique among automobile semiconductor makers because it only earns a third of its revenue from its auto business, making it more diversified and so less risky than pure play smart car companies. (The other two thirds come from chips sold for identification, infrastructure and portable devices.)
NXP’s customers include auto companies like Hyundai and Mitsubishi and personal tech companies like Apple, Samsung and Sony. Hyundai is using NXP’s chips in its new fleet of Geneses to process information from sensors that monitor CO2 levels in the cabin and ventilate in fresh air, tell the driver exactly which tire is low on air and automatically activate windshield wipers when the sensors detect raindrops.
NXP Semiconductor greatly expanded its automotive business when it bought Freescale Semiconductor for $11.8 billion late last year. Half of Freescale’s sales are to the auto industry, and with the acquisition, NXP became the largest single supplier of automotive chips with a market share of 14%.
NXP Semiconductor’s financials are strong. Revenue has grown by an average of 10% per year for the last four years. Operating cash flows—one of the best measures of a company’s ability to generate cash from its business—have risen year-over-year from $195 million in 2011 to $1.3 billion in 2015. Based on analyst estimates, sales will grow 56.6% in 2016 and it has a price-to-sales ratio of 3.17, which is only slightly higher than the Semiconductor industry average of 2.96, NXPI is a buy up to $90.
Entry by Inception
Israel-based Mobileye (NYSE: MBLY), is the purest player in this industry and has over a decade of experience making software and technology for smart car systems. The company’s products consist of software, chips and devices that can recognize potential collisions and obey traffic signals and signs. Mobileye’s Artificial Vision Technology alerts a distracted driver of a potential collision by issuing an audio cue, and a visual cue on a transparent windshield display.
The company helped pioneer the use of mono-cameras, which are smaller than, and outperform, stereo cameras. This edge has earned Mobileye contracts with Volkswagen, GM, and Tesla Motors. And Mobileye’s business will continue growing at an impressive clip if it can prevent its customers from switching to larger semiconductor companies who might try to profit from the smart car tech trend.
Investors got a scare when Mobileye’s share price dropped from its all-time high of $64 in August 2015 to its all-time low of $24.50 at the beginning of February. Since then it’s rebounded to $33.50. In hindsight, the drop probably came from investors pricing in the threat of competition, which was then exacerbated by the market correction in the start of 2016.
Regardless of share price volatility, Mobileye’s financials show a steady trend. Revenue grew on average by about 89% per year over the last four years. The company’s operating cash flows show a positive trend as well, going from -$9.3 million in 2011 to about $101 million in 2015. Mobileye is a buy up to $39.
Entry by Spinoff
The riskiest of the bunch is Covisint (NSDQ: COVS), but it also has the most potential. A 2014 spinoff of Compuware, works with Hyundai and also with Ford and GM—with whom it just announced a renewed five-year contract in September.
Covisint makes software for Hyundai’s Blue Link, a smartphone application that allows a Hyundai owner to remotely start and stop the engine or set cabin temperature. Blue Link will automatically call for help in a collision, monitor vehicle maintenance, or let users transfer travel directions directly from their phone to the car’s navigation system. This also works through Apple and Android smartwatches.
While many of the Blue Link features have been around for a while, Covisint’s advantage is that all these features are controlled through a single platform. Covisint’s software is also flexible enough to serve customers in different industries. The software that powers Blue Link also powers Cisco’s Service Exchange platform in the network and communications devices industry.
Investors lost confidence in Covisint last year when revenue was flat for the year. Until 2015 revenue grew an average 14.4% per year from $54.2 million in 2011 to $97 million in 2014, but decreased to $88.5 million in 2015. According to CFO Enrico Digirolamo, the 2015 drop came from cutting $8 million of unprofitable business left over from before the spinoff, which was being replaced with new higher margin business.
Nonetheless, Covisint is in a hot industry. Through 2020, analysts estimate a CAGR of up to 39% in the number of devices that will rely on the type of software it produces.
Covisint is a high risk and reward stock and for that reason we don’t recommend buying it on its own. The cloud software business has many competitors including large companies like IBM and Microsoft. The company should continue growing in the presence of large competitors making one-size-fits-all products. Covisint is a buy up to $2.35.
Is Biotech Rising from the Dead?
By Joe Duarte
In this issue:
- The Big Picture: Is Biotech Rising from the Dead?
- In Depth: New EBIS Pick: Whitewave Foods (WWAV) – Food. Science. Momentum.
- Special Situation Trading Portfolio: Biotech ETF Short Term Trade Details. Update on Opko’s FDA Issues
- Long Term Holding EBIS Portfolio: Novo Nordisk (NVO) Increases Dividend
- News and Analysis: Medivation (MDVN) Buyout Rumors Circulate as Political Pressure Rises
- Shopping List
The Big Picture: Is Biotech Rising from the Dead?
The biotech sector is at a key decision point along with the overall stock market. In our previous post we asked if biotech was dead money. At that time it surely looked as if it was. But the stock market is in the business of making fools of us all, which means that as soon as we penned the words to the requiem mass for the sector, the market would have other thoughts. Indeed, it would be a post-Easter miracle if the biotech sector breaks out and starts on a momentum run. But that’s precisely what investors should be looking for. This week’s chart of the Nasdaq Biotech Index (NBI) shows that the index has fought its way back to the top of its recent trading range, with the 2800 area being a key resistance level. And what that could mean is that our portfolio may score some gains.
The overall market as measured by the S & P 500 (SPX) moved modestly higher but faces a tough test at the 2100 area. What that means is that any sustained up side move in the next few days could take the market higher. At the same time any significant failure at these levels is likely to lead to what could be a very meaningful pullback.
In this current environment it’s important to be ready for a move to the up side or the down side. Indeed, the possibility that a short term move to the upside is possible in biotech changes our current position regarding the broader biotech sector. Thus anyone who owns the ProShares Ultra (UBIO) ETF should raise the sell stop to $22 from the $19 previous sell stop. We are tightening the stop in case the rally does not materialize or fails in the early stages. That means that we are now net long biotech via this ETF trade as our Ultrashort ProShares Biotech ETF (BIS) was stopped out at $42 on 4/1/2016.
Our guidelines for individual stocks remain basically unchanged:
- Broaden your horizons while maintaining a biotech focus. Think in terms of individual holdings and of how companies use science and technology to develop, test and manufacture products. Monitor each position separately. If they hold their value there is no need to sell. If they trip their sell stop we recommend selling.
- Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Politics may overshadow other fundamentals in the short term. Be aware of this and follow our price guidelines.
- Focus on risk management and on the fundamentals of any open position. 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 and stick with what’s working. Risk is still high in this market but a long term strategy reduces risk because of the time horizon of the expected payoff.
EBIS (Emerging Biotech Investment System) Pick: The Whitewave Foods Company (WWAV)
Food. Science. Momentum.
In the emerging world of applied science, Whitewave Food, a spinoff from Dean Foods (DF) is prototypical of an emerging sector, that of applied science without the emphasis on electronic products such as phones and PCs. The company harnesses the power of nature with its focus on plant based food products. Heavy on organic and vegan choices, Whitewave is steadily increasing its market share, deploying an aggressive growth strategy, and steadily taking over the super market shelves in the U.S., China, and Europe through the aggressive use of applied science via automation, software and an emphasis on rapid research and development.
If you’ve seen Horizon organic milk, Silk almond milk, tried a So Delicious snack or had a Vega protein shake you’ve experienced a Whitewave product. But what makes this a huge applied science play is the $10 million Louisville, Colorado research and development center where the products are developed and tested. A recent web search we ran just out of curiosity turned up Whitewave job listing that were mostly concentrated in software development, IT and supply management as well as machinery and tool repairs. This confirms two things. The company is expanding, and its focus is on technology in order to speed up its research, development, marketing cycle and its supply chain. This type of attention to detail and heavy leaning on a scientific process that incorporates multiple disciplines has led the company to rapid growth via organic development (sorry) as well as acquisitions, including the addition of the popular Earthbound Farm products brand. In fact, its reliance on technology allowed the company to offer fifty new products in 2015 with a goal of another 50 being released in 2015.
The healthy food segment is a pure growth play which is resurging under a different guise. While the banner for healthy foods was carried by Whole Foods (WFM) in the past, Whitewave adds a new wrinkle; it’s as much a science company as it is a food company. The company has also been mentioned as a possible takeover candidate over the last six months, which makes owning the stock interesting as well.
The only sign of caution is the rising debt that the company has accrued as it expands. This, thus far, has been neutralized by its successful expansion and aggressive sales growth.
Here are the EBIS details:
The EBIS Score for Whitewave Food (WWAV) is + 9 (BUY) based on December, 2015 data.
- Cash on hand: (+1) WWAV had $38 million in cash on hand in December 2015 compared to $31 million in March 2015.
- Cash on Hand growth (year over year): (+1) The year over year cash growth was 24%.
- Revenues (present or not): (+1) WWAV reported $1.03 billion in revenues in its December quarter compared to $911 million a year earlier.
- Revenue growth (10% or greater): (+1) Revenues grew by 16% year over year in the December 2015 quarter.
- Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (0) CERS has a 4.97% ratio, which means it has a lot of debt.
- Earnings (Present or Not Present): (+1) WWAV had a $47.58 million gain in net income in its most recent quarter
- Net Income Growth (Year over Year): (+1) WWAV grew its net income by 47% on a year to year basis
- Products on the market: (+1) WWAV has major products on the market and is making strides in expanding its market share.
- Pipeline Strength: (+1): WWAV has a robust and aggressive research and development program
- Late Stage Clinical Trials and Product Launches: (+1) WWAV has 50 product launches potentially possible for 2016.
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.
Buy White Wave Food (WWAV) up to $44.
Long Term Holding Portfolio Update
Cerus Corp. (CERS) – Buy Range $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 4/01/16 closing price $5.95.
Cerus Corp. is a core long term portfolio holding. The company reported its earnings on March 8th after the close coming in with a 15 cent per share loss and $9.7 million in revenues. Estimates were for $9.72 million in revenues and a loss of $0.16 (16 cents per share) in net income. The stock reacted well, especially in a tough period for the overall biotech sector.
Cerus is a niche play on blood testing and the neutralization of infectious agents including hepatitis, HIV, the agent that causes syphilis and other infectious agents and may be a play on the Zika virus based on case reports and recent data from the company. Cerus has a proprietary technology, the Intercept system, which is used to test blood components, plasma and platelets, for parasites and viruses and to inactivate them. Cerus has been expanding its market share steadily in the last 6-12 months, having signed key agreements for the use of Intercept with key regional blood supply agencies in the south of the United States and elsewhere. It already has a presence in Europe, Africa, and South America, which may be its most important asset at the moment. Cerus, in our opinion, may be a focal company as the Zika virus dynamic plays out, due to its the potentially pivotal role in the prevention of blood supply contamination with resurging infectious agents. It’s important to recognize that Cerus’ potential market is huge, estimated at $2 billion
A key future development is receiving FDA approval for the Intercept System to be used for red blood cells. The global market for blood transfusions is huge, with over 100 million potential transfusions per year possible. Consider that there is now a huge influx of immigrants from the undeveloped world entering Europe but also increasingly the United States. This one dynamic, when coupled with normal travel patterns of Americans to global destinations where mosquito borne diseases are not rare, raises the potential for a resurgence of infectious diseases rarely seen in the U.S., and thus their entering the blood supply. Just recently the incidence of dengue fever, a mosquito transmitted virus that can lead to heart disease has increased in the U.S. where cases have been reported in Texas as well as Hawaii. The state of Hawaii has declared a state of emergency for mosquito borne diseases including dengue fever and the newly recognized and more emergent Zika virus even though their incidence is seen as declining. Dr. Duarte owns shares in CERS.
Meridian Biosciences (VIVO) Buy $20-23 – 4/1/16 closing price $21.08. Stock initially recommended on 6/29/15.
Meridian Biosciences delivered an upside breakout on 3/18/16 as the company announced the release of a new component to its EPIK system of miRNA detection and analysis tools from wholly owned subsidiary Bioline. This addition to the EPIK system will allow research and diagnostics users to figure out what diseases and conditions they may be dealing with via smaller samples and faster response time to results.
We’ve liked Meridian Biosciences for a while and are increasing the Buy Range on the shares to $20-$23. VIVO still has a 3.9% dividend yield and stable earnings. 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 and RNA amplification and enzyme related materials used in research.
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.
Novo Nordisk A/S (NVO) – Buy Range $50-55. Recommended 12/21/15. Bought at $55 on 12/21/15. 4/1/16 closing price $54.98. Sell Stop at $46.
Novo paid its annual dividend to shareholders on 3/18/16. The company raised its dividend to $0.7 cents per share this year, up from last year’s $0.53 cents per share. The increase represents a 32% improvement on the payout. Novo is our stock of the year.
Special Situations: Short Term Trading Recommendations
These are stocks or ETFs 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.
- Special Situation 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.
Updated Recommendation Alert – ProShares UltraPro Nasdaq Biotech ETF (UBIO) – HOLD. Stop loss at $22.
Alert – Raise sell stop to $34. Medidata Solutions Inc. (MDSO) – Buy $36-$39. Bought on 3/7/16 at $36. 4/1/16 closing price $38.66. Sell Stop at $34.
The stock rallied nicely on news that China’s Henlius Biotech, an oncology R & D firm has chosen Medidata’s cloud based big data analytics to help it sort out the results of a major Phase III study in its monoclonal antibody cancer platform.
Medidata provides cloud based big data crunching programs for health care companies at the research level. It not only has apps that help organize and study the research starting from the project stage to the clinical trial stage but it also has an app that allows patient input into the data. The company also has a financial tracking system that lets its clients keep track of who is getting paid and how much as well as keeping trends and other financial variables in focus. They are expected to report earnings in late April. Revenues and earnings have been steadily rising. In the current environment where money for health care expenses is expected to decrease, MDSO is well positioned. Dr. Duarte owns shares in MDSO.
Rollins Inc. (ROL) – Buy at $27-29. Bought on 2/22/16 at $27.38. 4/1/16 closing price $27.36. Sell Stop at $22. Initially recommended on 2/22/16.
Rollins Inc. (ROL) is well positioned for the increasing awareness of how infectious diseases are transmitted. The stock has been steadily climbing since our recommendation on 2/22/16. This is a very special situation with a relationship to biotechnology in the current environment. Rollins owns Orkin, the exterminating company, and could be a big beneficiary of the current health concerns regarding Zika virus. It also owns other businesses, including TruTech and Critter Control which focus on wild life control. The company also focuses on bed bug and other pest extermination. This is a highly speculative trading situation which may have a short term lifespan but may also be increasingly powerful given the current potential for the rise in incidence of parasitic and animal vector related diseases. Thus, in the current market it’s an interesting story stock to consider.
Rollins is not a cheap stock trading at 39 times past earnings. Its most recent quarter delivered modest growth in both earnings and revenues, in the 5-6% range, which although not too exciting, is likely sustainable given the nature of the business. The company continues with a steady expansion plan including the addition of several international franchises, focusing on areas with large pest populations. It continues to invest in technology, recently updating support and analysis systems and including communication and software tools to its employees in order to maximize their interaction with customers. Dr. Duarte owns shares in ROL.
Alert – Close out Trade. ProShares Ultrashort Biotech ETF (BIS) Bought 2/28/16 at $48. Sell stop triggered at $42 on 4/1/16.
Alert – Raise Sell stop to 9 – Opko Health Inc. (OPK) Buy Range $8-$11. Bought 2/1/16 at $8. 4/1/16 closing price $10.41. Sell Stop raised to $9.
Opko shares tumbled on March 30 as the FDA delayed expanded approval of the company’s Rayaldee drug. The stock came back, likely providing a buying opportunity to those who were nimble, as we suggested in our intraweek update. It’s important to know that the FDA’s issue was not with Opko, but with the company that manufactures the drug for Opko. What that means is that, barring a lack of the manufacturer not fixing the issues, the FDA may still approve the expansion of the drug. Rayaldee is used to control calcium and vitamin D metabolism in patients with advanced kidney disease.
Note: We still think the market is wrong on this one as management has expanded the company through acquisitions which have already 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.
Opko delivered a well received earnings report in late February that showed that the company is consolidating its recent acquisitions. It has made several advances on its current business lines and products in development as well as ongoing successes and milestone payments from collaborations from other companies. Dr. Duarte owns shares in OPK.
News Update and Analysis: Buyout Rumors and Political Pressure for Medivation
Shares of Medivation (MDVN) the developer of an important breakthrough treatment for late stage prostate cancer may be hitting the sales block. According to a report by Fierce Biotech, the company may have as many as three serious suitors in Astra Zeneca, Roche and Sanofi.
Readers who follow our Medical Profits portfolio and have been patient with Medivation should be extremely vigilant and may be rewarded. According to Fierce Biotech, Medivation is under “extreme amounts of political pressure” because its high selling drug, Xtandi, a testosterone blocker, sells for $129,000 per dose. The medication which is highly effective in selective cases was developed at UCLA with help from taxpayer funded research grants.
According to the report: “A number of Democratic reps, led by presidential candidate Sen. Bernie Sanders, have this week sent a letter to lawmakers urging the NIH to consider using its power to override Xtandi’s patent and thus allow the drug to be swapped for cheaper new generics–despite its patent being valid for around a decade.”
It’s hard to believe that NIH will act as the lawmakers are recommending. But it’s not out of the question either that something could change. What it all boils down to is that investors who own the stock should start paying close attention to both the news surrounding the shares as well as the price.
- Regeneron (REGN)
- 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 1/6/16. Return (-) 6.5%
- Sirota Dental Systems (SIRO) Buy Range $104-$108. Bought 1/26/16 at $104. 2/5/16 closing price 106.57. Sell Stop hit at $98 on 2/12/18. Return (-) 5.76%.
- Vertex Pharmaceuticals (VRTX) Trading Buy Range $96-100. Bought 2/4/16 at $96. 2/5/16 closing price $86.61. Sell stop hit at on 2/5/16 at $86. Return (-) 10.41%.
- Emergent BioSolutions (EBS) Buy Range $36-39. Bought 1/25/16 at $36. 3/4/16 Stopped out at $34 on 2/8/16. Total return (-) 5.5%.
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%.
- Celldex Therapeutics (CLDX) Trading Recommendation Position Closed: Stopped out at 16. Recommended 10/26/15. Buy range entered 10/26/15 at 13.22. Total Return 21%.
- Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at 85 on 10/9/15. Trading Recommendation Position Closed: Stopped out at 100 on 11/16/15. Total Return 15%.
- Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $76.50 post 2 for 1 split). Trading Position Closed: Sell Stop Triggered at $78. Return 1.96%.
Note to readers: I am looking forward to meeting you personally at our Las Vegas Summit, May 12-13. As an added bonus and as a special way to thank you I will be revealing a “summit only” stock recommendation in Las Vegas and as a very special bonus I will be discussing my favorite technical indicators in detail to help you in your personal trading. Hope to see you all there and thanks for your support. And if you have a copy of “Trading Options for Dummies,” bring it and I’ll be glad to sign it. Joe Duarte