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Don’t Sell Argos Short

By Benjamin Shepherd and Jim Pearce and Joe Duarte on April 25, 2016

Last week Argos Therapeutics (ARGS) announced its COO was abruptly resigning and the company known for treating aggressive forms of cancer with immunotherapy would lay off 18 lab workers. The share price immediately plunged as a result, falling from more than $12 to below $8 in a matter of days.

As I stated in the alert issued at the time, this development doesn’t necessarily mean the company’s upcoming interim test results for treating HIV and aggressive cancers with immunotherapy failed. Instead, I believe these actions are part of a deal made when the company accepted a $60 million cash infusion from three institutional investors last month.

Institutional investors are experts at examining financial statements, searching for every way possible to extract the highest return on their investment. Had the group discovered during its due diligence that Argos was in dire straits, it never would have invested in the first place, and by last month these investors should have had a good idea of which way the test results would go.

The fact that the investors committed up to $60 million after going through that process suggests they liked what they saw but wanted some financial controls in place to keep the company on budget. Either the COO resigned in protest over the new controls or the investor group wanted someone else in that position who could better execute the group’s strategy. Either way, his departure is inconsequential to the outcome of the interim test results.

For that reason, I believe anyone shorting the stock is taking a huge risk. If the test results are encouraging, then the stock could experience a massive “short squeeze,” with the share price quickly pushed much higher. That would leave short sellers scrambling to buy shares to close out their positions, bidding the price up even more. Earlier this month Silicon Valley venture capitalist Sean Parker sparked public interest in immunotherapy when he committed $250 million to an investment fund dedicated to this type of cancer research. Say what you will about how Parker, a co-founder of the now defunct music file-sharing company Napster, has gone about gaining his enormous wealth in a short time, but he has an uncanny knack for knowing precisely when to jump into an emerging technology.

Of course, all of this is moot if the test results are discouraging. That isn’t out of the question but would surprise us given the treatment’s success in Europe and elsewhere.  For now, though, this type of cancer treatment benefits from Parker’s interest and the miraculous recovery of former president Jimmy Carter, who received immunotherapy treatments for melanoma. Thanks to the bright spotlight immunotherapy is now under, the FDA will be feeling even greater pressure to approve this treatment here in the U.S. so that more cancer patients may benefit from it.

Our conclusion: If you already own Argos shares, hold on to them, and if you don’t, buy them while they are one-third cheaper than they were a week ago.

By Jim Pearce

 

Breakthrough Tech Portfolio Update – A New System for Picking Tech Winners

By Joe Duarte

There is a new theme in our technology stock universe: how non-tech companies apply technology to improve their research, processes, products and, of course, profits. To better identify these companies, we’re building on the methods used in our Emerging Biotech Investment System (EBIS). We’re calling our new method the Applied Technology Investment System (ATIS). ATIS expands our analytics universe to include more companies, giving our subscribers more opportunities to make money.

EBIS identifies small companies with extraordinary growth potential based on earnings and revenue growth, state of product development, product pipeline, and balance sheet strength.  ATIS starts there and includes a company’s ability to tap current trends and to look into the future to create new marketplace trends through science, research and automation.  An ATIS company, therefore, has the potential to become the leader in its field and to lead its peers for the next five to 10 years.

Two current examples of ATIS companies in our portfolio are Medidata Solutions and WhiteWave Foods Co. Medidata sells cloud-computing services to biotech companies and is expanding its business aggressively.  Last week it came in with a blowout earnings quarter and rallied more than 10%. Medidata is the leading number-crunching software provider to research and healthcare companies. It has become a central player in the pharmaceuticals industry. 

WhiteWave Foods has advanced the organic foods business by improving the quality and variety of traditional offerings, such as milk, and by expanding beyond dairy to products such as the highly successful Silk almond milk. The company offers dairy, vegan and organic products, as well as those with no genetically modified ingredients, in a large and growing variety. And it continues to improve the number and variety of its products at its $10 million testing facility in Colorado.

We’ll be adding more ATIS stocks to our portfolio regularly.  A third ATIS stock is our bonus pick in this issue, Celldex Therapeutics, which is featured in the next section. 

As for the markets, they’ve been rallying for nearly three months and are due for some consolidation. Here is a summary:

  • The S&P 500 index has been in rally mode since late February. The next big milestone is 2100. If the index rallies above that mark and builds on that momentum, we expect a move that could take the index as high as 2300 or 2400.
  • The Nasdaq Biotechnology Index (NBI) also has bottomed. It lagged the S&P 500 over the last few weeks, scrambling to catch up. NBI’s next breakthrough point is somewhere between 3000 and 3050. A move above that level could take the index to around 3250.
  • Many biotech and applied technology stocks are doing well, including several of our portfolio holdings: Medidata, Cerus Corp. and Opko Health Inc. This is why we restructured our portfolios and expanded our focus beyond traditional biotech to technology companies with business models built around an applied science dynamic.

Bonus Pick: Celldex Therapeutics (CLDX) – The Two Year Itch

Celldex is a $457 million market cap biotech company with two years worth of cash on its balance sheet. The company could be the next big hit, bust or blip in the long history of biotech startups, but at less than $5 per share, Celldex could be an excellent portfolio addition for investors willing to take on the higher risk for a potentially higher reward. The company has five potential drug candidates in various development stages.

Celldex shares crashed in March 2015, when its leading drug candidate, Rintega, bombed in clinical trials. Rintega is a vaccine for an aggressive form of brain cancer, glioblastoma, but the drug failed to beat the results of the placebo portion of a phase III trial. Rintega has been shelved for now.

Although the stock lost over 50% of its value because of the bad news, not everyone was discouraged.  Two days after the news broke, Celldex CFO Avery W. Catlin, who has had excellent timing in the past buying and selling company stock, bought 42,000 shares on March 9 at $2.80 per share via an options exercise. Before that, Catlin had bought 10,000 shares in September 2015 at $4.50 per share and 25,000 shares at $8.52 per share in November 2015. He then sold 25,000 shares at $18 later that same month. So why is the CFO buying the stock? Only he knows, but his past timing record is worth noting.

As it stands now, Celldex still has a good pipeline of drugs in clinical trials. The drugmaker’s next likely candidate for success is Glenmatubumab (Glenma), a monoclonal antibody that is currently in phase II trials for treating breast cancer, metastatic malignant melanoma and osteosarcoma.  All of these are extremely hard to fight, and any success with Glenma could lead to big gains. Varlimumab (Varli) is another drug in phase II, with the goal of attacking multiple solid tumors including melanoma. Two other drugs, CDX-1401 and CDX-301, are in early trials for some conditions but have advanced to phase II.

Celldex is going after big things by pursuing cures for cancers that currently have no cure.  If the company can deliver the goods on one or more drug candidates, it will be well-positioned to have near exclusivity for treating several of these diseases. And that separates Celldex from the pack, albeit with a high degree of risk. Plus, the company has some deep-pocket partners, such as Bristol Myers, which theoretically could become a potential buyer.

So while Celldex works on these treatments, the stock is cheap and the company’s savvy CFO is buying it. With about two years worth of cash and cash equivalents (about $270 million) on the balance sheet and only about $30 million in current liabilities, Celldex has some time to get its act together. 

Special Options Play

If you’re comfortable with options, consider buying the Celldex January 2017 Call at a strike price of $3.  The reason is that compared with the stock the option is cheaper and its potential for gains, on a percentage basis, is higher. If Celldex encounters any meaningful success, the stock will move, but the option is likely to move more dramatically, giving investors an opportunity to profit from the leverage.  If the stock does nothing by January 2017, the worst thing that can happen is that the option expires worthless. In biotech, especially when you’re dealing with small-company shares, eight months can be a lifetime.

Portfolio Summary

This Week’s Changes:

Alert:  Raise sell stop to $41 and HOLD Medidata Solutions Inc. (MDSO). Bought on 3/7/16 at $36; 4/22/16 closing price: $46.97.  I own shares in MDSO.

No Changes in the following positions:

Amgen (AMGN)Buy up to $161. Sell stop $153. Bought 2/1/16 at $152.75: 4/22/16 closing price: $163.19

Biorad Laboratories (BIO) – Bought 5/16/15 at $146.25; 4/22/16 closing price: $142.11. Sell stop $132.

Cerus Corp. (CERS) Buy between $5 and $7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5; 4/22/16 closing price: $6.65.  I own shares in CERS.

Meridian Biosciences (VIVO)Buy between $20 and $23. Closing price on 4/22/16: $20.75. Stock initially recommended on 6/29/15. I own shares in VIVO

Novo Nordisk A/S (NVO)Buy between $55 and $59. Sell Stop to $49.  Recommended 12/21/15.  Bought at $55 on 12/21/15; 4/22/16 closing price: $56.80. I own shares in NVO.

Opko Health Inc. (OPK) Buy between $8 and $11. Bought 2/1/16 at $8; 4/22/16 closing price: $11.25. Sell Stop raised to $9I own shares in OPK.

Rollins Inc. (ROL)Buy between $27 and $29. Bought 2/22/16 at $27.38; 4/22/16 closing price: $26.94. Sell Stop at $22. I own shares in ROL.

WhiteWave Foods Co. (WWAV) Buy up to $44. Closing price on 4/22/2016: $40.41. I own shares in WWAV. 

 

Special Situations Portfolio Update:  Sell Nimble Storage

By Benjamin Shepherd

After joining the investing team for the new Breakthrough Tech Profits, I’ve been combing through the Special Situations Portfolio to get an idea of how the first-quarter earnings season should go for us.

I have to say, I’ve been encouraged by what I’ve seen, especially because other analysts have bumped their earnings estimates for several of our holdings. Expectations for FireEye (NSDQ: FEYE), Nice Systems (NSDQ: NICE) and Paycom Software (NYSE: PAYC), in particular, have shown solid improvement over the past few months. Although we chart our own course, it never hurts to have others agree with us.

It’s not all good news, though. Nimble Storage (NYSE: NMBL), which designs and sells a flash-optimized data storage platform, has been absolutely crushed so far this year. Shares have fallen by more than 14% after a couple of disappointing quarters.

The company believed its products would revolutionize the data storage market, combining fast retrieval with predictive analytics to speed the process even more, but Nimble has faced an uphill battle in a market that gets more competitive by the day. There are literally hundreds of companies hawking other solutions, and although Nimble’s system is unique, the company has struggled to get a toehold in the market. It’s so bad that CEO Suresh Vasudevan has repeatedly said that the ongoing price war in the data storage market is why the company has missed estimates.

Nimble isn’t expected to release first-quarter earnings until late May, but investors aren’t expecting an improvement. On the contrary, over the past three months analysts have revised estimates for this year sharply lower, widening the company’s expected loss per share from 47 cents to 73 cents. Next year’s estimate also was slashed from an expected profit of 4 cents to a loss of $20 cents.

Nimble has been in our Next Wave Portfolio for more than a year and half, and in that time its share price has plunged from close to $30 to about $7.80 today. At this point, the odds that we’ll recover that lost ground are long, even if the company were to blow expectations out of the water.  But that seems unlikely, as the company’s own guidance was lackluster.

After rising decently in the fourth quarter to $90.1 million, revenue should range between $83 million and $86 million in the first quarter. The company expects to post an adjusted net loss per share between 25 cents and 27 cents. That’s roughly in line with past first-quarter performances, a seasonally weak time of year for Nimble, but frankly still not good enough for a company that’s been in business for nearly a decade now. Given the sharp plunge in Nimble’s share price, other investors are tired of waiting for the company to turn a profit, too.

Sell Nimble Storage.

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