This week’s Columbus Day holiday brings with it all the usual stories of how the holiday is named for a person who really wasn’t what he seemed to be, and got credited for doing something he didn’t really do. Regardless, Christopher Columbus will forever be credited with discovering America, despite the existence of people already living there to greet him upon his arrival.

In a similar vein, widely followed stock market commentator Jim Cramer used the Columbus Day holiday to announce that he has discovered “old tech stocks” as the ones to own for the remainder of this year. Of course, we have been pushing these same companies for the past two years (with very good results), but I suppose history really is written by the winners.

Regardless, we appreciate Mr. Cramer giving our Investments Portfolio some additional tailwind, driving it up more than 6% last week while the NASDAQ Composite enjoyed a gain of less than half that. Our two biggest winners – Micron (MU) and EMC (EMC) – are also our two most recent additions to the portfolio, after our proprietary BiQ/STR stock rating system identified them each as being oversold earlier this year.

In fact, Cramer seems to be gradually coming around to our “two tier” market expectation that we espoused at the beginning of this year, consisting of an equal number of winners and losers. In addition to “old tech”, Cramer is also pushing the industrial and oil stocks that fueled the “nifty fifty” stock market of my childhood. That means investors will be less patient with momentum stocks that can’t turn a respectable profit, redeploying their capital into companies that can grow earnings in a rising interest rate environment and sharing some of it with their shareholders in the form of a dividend.

Now that Cramer is shouting about these type of stocks, the cat is out of the bag so his devout followers will most likely scour the tech landscape for other mega-cap stocks that are beaten down and paying a high dividend. That bodes particularly well for AT&T (T) and Verizon Communications (VZ), so don’t be surprised to see those two old world stocks suddenly rediscovered by intrepid stock market analysts who set out on a search for China but discovered America, instead.

By Jim Pearce

Portfolio Update – Medical Profits
By J. Duarte MD

In this issue:

• The Big Picture: Biotech Fear Rises as Earnings Season Approaches
• In Depth: New EBIS Pick – DYAX Corp (DYAX) – Trade Activated
• EBIS Portfolio Tries to Right Itself
• News Update: Is the Pricing Uproar Over Yet?

The Big Picture:  Biotech Fear Rises as Earnings Season Approaches

We don’t mind a big shakeup in the biotech space as it could eventually lead to a wide array of buying opportunities.  Yet, as a whole, biotech investors should prepare for a bumpy ride as earnings season approaches.  It’s still early to know what to expect with regard to biotech earnings as many companies in the sector will report in late October and early November. But it’s quite clear that money is not flowing back into this area of the market, which suggests that Wall Street may be betting against a bad earnings season. 

There have already been two warnings that we’ve noted which have led to significant declines. One was in Greatbatch (GB) one our EBIS stocks (details below). The other one was in Illumina (ILMN) a maker of DNA decoding arrays.  A third and lesser known company, LDR Holdings (LDRH) which was on our EBIS radar also took a hit as it reported lower than expected revenues.  The Greatbatch and Illumina declines came on warnings of significantly lower sales for the quarter. That’s not what investors want to hear, especially at a time when the global economy is showing signs of slowing. 

Both Greatbatch and Illumina are possible canaries in the coal mine type stocks.  Greatbatch makes equipment that is used by large health care equipment companies like Medtronic (MDT) , St. Jude Medical (STJ) and Johnson & Johnson (JNJ). A drop in sales for Greatbatch could very well be a sign that the large equipment companies are reducing their purchases. That could be a sign that their customers, such as hospitals, outpatient centers, and other vendors are also noting a slowing and that lower earnings across the entire healthcare sector could lie ahead. 

Illumina’s problems may be more short term than those for Greatbatch, as their sales were also accompanied by decreasing revenue growth.  The stock did rebound as analysts were still bullish as their revenue growth rate is still expected to grow above 10%.

LDR is interesting on its own merits. The company makes orthopedic and neurosurgical equipment focusing on spine surgeries. It recently expanded into small joint replacement technology.  Its technology segment is considered to be at the cutting edge in some areas, including spinal disc replacement. 

The comparison between the chart of the S & P 500 (SPX) and the Nasdaq Biotech Index NBI (SPX) is fairly simple this week. SPX has rallied significantly while NBI is still hugging the lower portion of its recent trading range.  That suggests that investors are not getting very warm and fuzzy about biotech at the moment.   The flip side is that investors with a longer term time horizon may be rewarded if they remain very patient and add look to enter some of the stocks in the sector.

Our best advice is to remain very patient and see what happens over the next couple of weeks before becoming too aggressive.

Conclusion

Our advice remains unchanged:

1. Monitor the price of all current positions in your biotech portfolio. Check our weekly updates or any special alerts, if issued, for any changes.  If your stocks are holding their own, keep them in your portfolio.
2. Watch the response of your positions to external forces, especially during earnings season. Always monitor your portfolio’s response to the market and to any news events and only sell stocks that are showing significant weakness and fall below their sell stop.
3. Consider using BIS to hedge your biotech portfolio during periods of weakness for the market and the biotech sector. Our July 27^th, 2015 update has an excellent tutorial on how you may go about doing this.  Also, see below for our latest BIS recommendation.  For further reading on portfolio protection techniques and risk management also consider a copy of Dr. Duarte’s “Trading Options for Dummies.”
4. If you choose to buy new stocks, be cautious. A good method for building positions in a volatile market 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.

Trading Recommendations

One of our two trading stocks is now active as Alnylam tripped its buy point.  Remember the following:

• These stocks are only recommended as trades based on technical analysis.
• These 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.
• These guidelines are not applicable to our longer term holdings in the EBIS portfolio.

Trading Recommendation Number 1 – Alexion Pharmaceuticals (ALXN) – Trading Buy at 169-173. Sell Stop 159.  For every dollar of price increase on a closing basis, raise the stop loss by $1. 

Alert:  Trading Recommendation Number 2  – Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at 85 on 10/9/15.  10/9/15 closing price 83.16 – Sell Stop adjusted to 79. For any dollar of price increase, raise the stop loss by $1.

In Depth:  New EBIS (Emerging Biotech Investment System) Entry Adjusted

Alert New Buy Zone:  DYAX Corp. (DYAX) – Speculative Buy Range up to $25.  Sell Stop at $17.

DYAX Corp – A High Risk High Potential Reward Diamond in the Rough

Alert: DYAX Corp (DYAX) – Speculative Buy limit changed to $25 on October 5, 2015.  Sell Stop raised to $18.  Original recommendation:  September 21, 2015. 

DYAX bought 10/7/15 at $22.  10/9/15 closing price $24.

DYAX triggered our long entry point on 10/7/15.  It remains a speculative buy. Expect the stock to be volatile.

Portfolio Update:  EBIS Portfolio Tries to Right Itself

Our EBIS portfolio has been more volatile of late.  Generally speaking it makes sense to see if these stocks develop some type of sideways pricing action before adding to any position aggressively.  Details below:

Alert:  Greatbatch Inc. (GB) – Buy issued up to $55 on August 17, 2015.  August 17 entry point at the close was $53.51.  10/6/15 Stopped out at $53.51.

Greatbatch lowered its sales estimates for the fiscal year from $730 million to the $685-$690 million area.  The stock was stopped out on 10/6/15 and will be removed from our portfolio.

Alert: Stop Loss Added – Masimo Corporation (MASI) – Buy up to $44.  (Buy issued July 20, 2015. MPP: $40.65).  10/9/15 closing price: $39.58. Stop Loss at $34.  Dr. Duarte owns shares in MASI.

Masimo remains within our buying range and has held up well in a volatile market over August and September.  It is a crazy enough market though, so we have added a sell stop.  Any sideways action may be used to add to positions cautiously.

Masimo manufactures equipment modules that monitor vital signs during difficult clinical and logistical circumstances.   Masimo pioneered Signal Extraction Technology (SET) a process that lets the pulse oximeter measure the oxygen content of blood without punctures of arteries at states of low blood pressure, where it become a most critical piece of data. 

MASI reported adjusted earnings of 43 cents per share, 13 cents ahead of expectations in the second quarter of 2015, while revenues came in at $ 155 million ahead of the $147.93 million estimate.  The company raised its full 2015 guidance to total revenues of $621 million, up from $608 million and earnings per share from $1.48 to $1.51.    The stock remains well within its buying range of $40-44 and keeps a 9.5 EBIS rating based on its June 2015 quarter.  MASI is a well run company with plenty of cash on its balance sheet and a growth agenda.  We like Masimo because it has innovative products, an excellent growth rate, and a nice stash of cash on its balance sheet which it could use to make acquisitions or to plow into research and development. 

Meridian Biosciences (VIVO) Buy up to $21 – 10/9/15 closing price $17.58.  Dr. Duarte owns shares in VIVO.

Meridian is holding up better than other health care stocks.  We remain positive on the stock but would be patient before buying more at this point.  If sideways action starts to develop it may be used to add to shares slowly.

Earnings/Dividend update:  VIVO met its earnings expectations on 7/23 but fell short on its revenues estimates. The company delivered net income of $9.1 million, 22 cents per share on revenues of 48.2 million vs. expectations of 48.9 million. 

On September 9, management adjusted expectations for the full year of revenues of $195 to $200 million and expects revenue growth in the 3-5% range with earnings in the .86 to .90 cents range for the full fiscal year. The stock remains near the lower part of its trading range.   Vivo paid dividend of 0.2 per share on July 20^th. The dividend yield is a nifty 4.4%, while the stock price is not particularly volatile. This is a combination which makes having a long term perspective worthwhile.

VIVO has a market cap near $800 million but is a consistent money maker.  The company 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. 

We expect VIVO to benefit from the global immigration trend and the potential for infectious diseases to expand their territory via travel related transmission channels.  The company has a well established global platform including a recently opened office in Beijing (January 2015).  Dr. Duarte owns shares in VIVO.

Emergent Biosolutions – Hold in the short term.  Buy up to $36.

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 10/9/15 Closing price $30.49). Dr. Duarte owns shares in EBS.

EBS bounced back on the week that ended 10/9/15.  We recommend patience when considering whether to buy this stock at this point or when adding to existing positions.  Once the stock starts moving sideways we suggest adding to positions slowly.

EBS reported earnings of 36 cents per share for its second quarter of 2015 beating analyst estimates of 26 cents.  Revenues climbed 14% from the year-ago period to $126.1 compared to an estimate of 124.25 million.   The company also announced that it will spin off its biosciences unit, whose focus is oncology to investors.   See our news section for details and commentary below.

EBS showed some weakness in the week that ended 9/4/15.  We are still constructive on the stock but are watching its activity very closely. 

EBS announced receiving a $44 million contract from the Centers for Disease Controls to increase the supply of smallpox vaccine.  The previous week EBS announced a $19.7 million two year contract from the Biomedical Advanced Research and Development Authority (BARDA) on July 20^th  an agency of the U.S. Department of Health and Human Services.  EBS also makes BioAnthrax, a preventive anthrax vaccine and is working on a new generation of the vaccine.  Dr. Duarte owns shares in EBS.

Update:  Trend Following ETF Model

Alert-  Sell ProShares Ultrashort Biotech ETF (BIS) at new stop loss of  $32.  ProShares Ultrashort Biotech ETF (BIS) – Sell and close out the position at  stop loss of 32. (Buy 7/27/15 MPP* $27.99.  10/9/15 closing price $36.60.) 

*MPP – Median Purchase Price

News Update and Analysis – Is It Over Yet?

There is always a trigger for falling stock prices after a long rally.  It’s often a news item that takes the blame.  And this time was no different as the biotech sector has seen its September swoon extend into to October.  It all started when a previously unheard of company, Turing Pharmaceuticals recently bought by an equally unknown hedge fund run by a youthful, and yes previously unknown manager, Martin Shrkeli, hiked the price of a malaria drug from $13.50 to $750 per tablet.  And from there things took off.  CNBC picked up the report and the story went viral.

As we noted last week, the New York Times story penned a missive about Valeant Pharmaceuticals (VRX) and its drug pricing strategies and a second story by Bloomberg showed that many drug companies on a routine basis.  Both these stories kept the vibe very much alive.

So, the question for investors is whether the news cycle has turned away from biotech, or whether this week’s Democrat debate will reignite the issue.  We suspect that the latter may be the most likely outcome as candidates put forth dueling solutions.   Hillary Clinton struck first, when she tweeted that drug companies were “price gouging” consumers.  Mrs. Clinton followed her tweet with a proposal that has two major tenets. 1) Limit the out of pocket costs that chronic pain and chronic condition patients would pay per month to keep their medications to $250 per month, and 2) mandate drug companies to put a specific portion of their profits toward drug development.

Furthermore, reports surfaced last week that suggest that the nearly completed Trans Pacific trade pact (TPP) has some clauses that could limit the ability of biotech companies to hold on to the exclusivity  of their drugs after a shorter period of time than the current 12 years that are the U.S. standard.  The net effect may be to shorten the actual time period of drug exclusivity to anywhere from 5-8 years. In reality many biotech drugs, due to market and scientific as well as manufacturing factors can sometimes keep their exclusivity, and pricing, for anywhere from 13-15 years or longer.

Bottom line: It ain’t over till it’s over.  RIP Yogi Berra.  Truer words were never spoken.

NASDAQ Composite Index:                                                                       

Friday, October 9 = 4,830.47                                                  

Year to Date = + 2.2%                                        

Trailing 4 Weeks = + 0.1%

Trailing 7 Days = + 2.6%             

Weekly Portfolio Performance