While some tech companies, like Hewlett Packard, are splitting up to move forward, others are consolidating via acquisitions that accelerate the implementation of their strategic plans. In this week’s issue we’ll look at two such deals that affect our portfolios, one of which we discussed briefly last week (EMC) and another we just learned of over the weekend (DYAX).

In last week’s issue of ST50WM we outlined the terms of Dell’s offer for EMC, and why we think now is a good time to take the money and run. In this week’s issue I’ve asked Linda McDonough to expand on the terms of that arrangement so you’ll understand our reasoning. Long story short, unless a competing buyer shows up to bid up the price for EMC we think there is more risk the existing offer from Dell may fall apart than there is upside potential in the fractional shares of VMware that come along with it.

As for Dyax, when Dr. Duarte added it to his Medical Profits portfolio in September it was trading in the low $20s, which his model suggested was too cheap so he issued a buy alert. Turns out he was right, as a buyout offer has emerged that amounts to a 50% gain in less than two months! Similar to EMC (but for different reasons) he recommends selling your shares now to lock in the gain to eliminate the possibility of the deal falling apart.

Both of these transactions illustrate why our value-based approach to evaluating tech stocks on a fundamental basis is the safer way to profit from them. Momentum stocks can be more fun to own at first, but eventually most of them end up costing you a lot of money. As famed investor Benjamin Graham observed, in the short run the stock market behaves more like a voting machine that measures popularity, but in the long run it acts more like a weighing machine that determines substance. 

Jim Pearce

Investments Portfolio Update – Awakening the Tech Giants
By Linda McDonough

The giants are no longer sleeping.  In fact, they are wide awake and creating a commotion in the tech world. Not long after Dialog Semiconductor’s $5 billion deal for Atmel and Hewlett Packard’s break up plans, private company Dell stormed out with a $67 billion offer for EMC on October 12th.

Dell is offering $24.05 in cash per share plus .111 shares of a newly issued VMware tracking stock. EMC owns a majority stake in VMware, the memory software company it purchased 11 years ago. The tracking stock allows EMC, and now Dell, to retain majority ownership of VMware while allowing investors to enjoy some of the future gains in VMware.

Dell’s purchase offer comes at an opportunistic time.  EMC’s revenue and profits have struggled recently.  Results for EMC’s third quarter, released on Oct. 21st illustrate its difficulties.  Revenue adjusted for foreign currency grew 2% but earnings declined slightly.  The results were shy of analysts’ estimates, sending the stock lower.  

Although EMC is up 12% since news of the deal first leaked to the media, it is down 16% from its 52-week high last December.  VMware has been hit even harder due to fears that the issuance of tracking shares will weaken demand for the actual stock and due to fears that deal distractions will hurt growth.

Long time STI subs may recall that we captured a nifty 25% profit in EMC in 2014, then bought it back again this July for another 6% gain. Upon adding it to the portfolio we discussed EMC’s transformation into a data storage superstar, the primary reason for Dell’s interest.

Dell, who went private in November 2013, has been busily re-engineering itself from a purveyor of laptops to a broad scale IT services company. As a private company Dell has shared few details of its metamorphosis but an aggressive marketing campaign unleashed last April highlighted Dell’s readiness to dominate the IT services industry.  The campaign encouraged companies to be “future ready” by pushing data out to the cloud with the help of industry professionals, aka Dell.

Dell and EMC are responding to seismic shifts in the computing landscape.  Enterprises all over the world are grappling with how to manage, analyze, store and protect the troves of data being dumped into their networks.

New batches of data are partly the result of lightning fast advances in telemetry which allow sensors to collect data from almost any device.  Think of all the miles synced from your Fitbit to your computer, the heaps of data collected from low flying drones and the thousands of instructions sent to Amazon robots trolling the warehouse floor.  Add this to the already tremendous amount of information being created each day by companies across the globe.  Much of this data is being pushed out to the cloud.  Customers need help reining in this mass of information.

EMC’s storage business is clearly an allure to Dell but cybersecurity is another driving force. With new reports of hacking surfacing on a daily basis, customers recognize the dire need to protect their data.  Dell’s 2011 purchase of SecureWorks, an information security company, helped beef up its offerings but EMC brings additional security features to the altar.  EMC first bought RSA, a data security firm, in 2006. Continued development of RSA’s software has produced a portfolio of cybersecurity products that can be integrated into EMCs storage offerings and Dell’s products.

EMC’s $1.2 billion purchase of Virtustream in July added software that allows customers to seamlessly move data between private and public clouds.  The network of the future not only connects webs of computers from multiple locations but also delivers data to and from on-premise and public clouds.  Virtustream’s software helps manage this complex task.

The allure of operating as a private company is likely quite strong for EMC.  Earlier on, when EMC needed funding from the public markets to invest and grow its business, it made perfect sense to be a public company.  However, now that EMC is generating enough cash flow to finance its growth, going private via the Dell purchase is a reasonable decision.

Michael Dell has long exalted the tremendous benefits of operating as a private company. Without the pressure of reporting quarterly results, Dell has been able to invest in projects that may not generate revenue or profits for some time.  The freedom to focus solely on customer needs has allowed Dell to strengthen its position in the market.  On its merger conference call, Michael Dell noted that Dell has hired 6,000 new sales people in the past six months!  Although it will be some time before these sales people are fully productive, Dell does not have to worry that the additional expense will bite earnings in the short term.  Although investors do not have access to Dell’s financial record, the company’s debt was upgraded by Standard & Poor’s and Moody’s last winter, a clear sign of financial improvement.

Unfortunately for EMC shareholders, the road stops here.  With EMC private, they cannot share in the future success of the combined company.  However, STI will be on the lookout for new investments in which to place the cash received from the Dell deal.

Portfolio Update – Medical Profits
By J. Duarte MD

In this issue:

• The Big Picture: Rally May Be Losing Steam
• In Depth: New EBIS Pick – Cambrex Corp. (CBM) – Enters Buying Range. Earnings Report Due on 11/3/15.
• Trading Portfolio Positions Hit Buy Points. Sell Stops Adjusted.
• EBIS Portfolio Update: DYAX Gets Buyout Offer. Earnings Report Week Arrives for EBIS Portfolio
• News Update: Is Pfizer-Allergan Conversation a Sign of Even More Biotech Deals?

The Big Picture: Rally May Be Losing Steam

The rally that has taken the S & P 500 (SPX) well above the August 24 and September 28 double bottom seems to be losing steam. Given the fact that the biotech index has had a less than stellar bounce compared to the S & P 500, it is now likely that we could see a pullback of some sort in prices over the next few days. To be sure, this is not unexpected, given the fact that there is a great deal of uncertainty in the world, especially with regard to the U.S. political situation and specific to this weekly update, the situation in the health care system where there is rising pressure for pharmaceutical companies to cut prices on drugs.

The chart of the S & P 500 shows that the index is above its 20 (green dotted line), 50 (blue line) and 200 day moving averages (red line). This is positive. But it’s only a snapshot, and it’s a situation that can change. From a short term standpoint, the price reversal near the close on October 30 was not very comforting. At the bottom of the chart, the MFI indicator, which measures money flowing into the S & P 500, topped out a week ago. That suggests that investors have been putting less money into stocks. Less money going in usually turns into lower prices.

A look at the chart of the Nasdaq Biotech Index (NBI), shows that the anemic bounce off of the September lows didn’t get a whole lot better, as NBI has yet to make it back to its 200 day moving average. Furthermore, a look at the bottom panel on the chart, the ROC indicator, which measures momentum, suggests that NBI’s albeit feeble bounce is losing some of its upward momentum.

Does this mean that stocks are about to crash? Not necessarily. But the suddenly worsening technical data suggests that, at least in the short term, the market and biotech seem to be losing a bit of their recent steam. This could be a big week indeed.

Conclusion:

1. Pay close attention to our new Trading Buy Recommendations and our new EBIS picks as these are our most solid picks at the moment.
2. 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 and add to positions as they re-enter their buy ranges from lower prices as they recover.
3. Earnings season is about to pick up for biotech. Pay special attention to your stock’s action in response to earnings and check our weekly updates for release dates and expectations. 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.
4. Consider using BIS to hedge your biotech portfolio during periods of weakness for the market and the biotech sector. BIS is hugely volatile but is still above our sell stop recommendation. See below for details. 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.”
5. 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

Several of our trading recommendations hit their buy targets and are now active long positions. See below for full details. The sell stops on open positions have been adjusted to reflect the closing prices of the week that ended on 10/30/15.  

Trading stocks are only recommended as trades based on technical analysis.  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.

Celldex Therapeutics (CLDX) Trading Buy Range $12-14. Sell Stop at $10. (Buy range entered – 10/30/15 closing price $12.06. Sell stop at $10. For every dollar of price increase, raise the stop loss by $1. This is almost an EBIS stock. The company is working on a vaccine for aggressive brain cancers. It has plenty of money on its balance sheet but is high risk and has not been able to make money consistently. In this market, it may be worth exploring on a trading basis.

Trading Recommendation Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $153) Trading Buy Range $153-156 – 10/30/15 closing price $157.15. Sell Stop at $143. For every dollar of price increase, raise the stop loss by $1.

Trading Recommendation – Alnylam Pharmaceuticals (ALNY) – Trading Buy triggered at $85 on 10/9/15. 10/30/15 closing price $85.95 – Sell Stop adjusted to $79. For every dollar of price increase, raise the stop loss by $1.

Trading Recommendation – Alexion Pharmaceuticals (ALXN) – (Issued 10/12/15 – Bought at $169 on 10/26/15. ) Alexion finished the week of 10/30/15 above its trading Buy Range at $169-173. Sell Stop was raised to $166 to protect the recent gains. For every dollar of price increase on a closing basis, raise the stop loss by $1.

In Depth: New EBIS (Emerging Biotech Investment System) Pick: Cambrex Corp. Nears Buy Point

Alert: New Buy Recommendation: Cambrex Corp. (CBM) – Buy Range $45-47. Bought 10/20/15. 10/31/15 closing price $45.97. Sell Stop at $40.(Updated 11/2/15).

Cambrex Corp – Overlooked and Underpriced Generic Drug Manufacturer

CBM entered its Buy range on 10/20/15. CBM will report its third quarter earnings and financial results on 11/3/15 before the market opens. Analysts estimate $101.09 million in revenues and 38 cents per share in earnings.

Cambrex Corp. manufactures active pharmaceutical ingredients for brand name and generic drugs that treat pain management, cardiovascular, central nervous system, endocrine, gastrointestinal, skin, respiratory and urinary conditions. The company specializes in all areas of development and manufacturing from the transition from research and early stages of FDA approval to the full industrial ramp up stage of drug marketing.   Cambrex offers a huge library of compounds that include commonly prescribed drugs as well as potent anesthetics and mood influencing drugs.

The stock has withstood the recent selling spree in the health care sector and will report earnings on October 29, 2015 before the market opens. In its July earnings call management upgraded expectations and guidance noting that it expected “full-year 2015 expectations for revenue growth in the Innovator category to be between 31% and 34% over last year versus our prior expectations of 27% to 30% growth.”

If there is no earnings disappointment, we would expect Cambrex to move up nicely over the next few months, barring negative external events. The company is well positioned, especially in the current market where high priced drugs are under scrutiny.

Here are the EBIS details:

The EBIS Score for Cambrex (CBM) is + 9 (BUY) based June 30, 2015 data.  

• Cash on hand: (+1) Cambrex reported $62.6 million in cash compared to $26.5 million in September 2014.
• Cash on Hand growth (year over year) (+1): The year over year cash grew by 31%.
• Revenues (present or not): (+1): Cambrex reported $106.635 million in revenues in its June quarter.
• Revenue growth (10% or greater)(+1): Revenues grew nearly 31% on a year to year basis.
• Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1) CBM has a 0.94% ratio, which means that it cover all its expenses in the case of a catastrophic hit to the company.
• Earnings (Present or Not Present): (0): CBM has steadily growing earnings.
• Net Income Growth (Year over Year): (0): CBM had a 18.9% earnings growth year over year.
• Products on the market: (+1): DYAX offers a wide array of products on the market.
• Pipeline Strength: (+1): CBM has several important products in late 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.

Portfolio Update: Earnings Report Week Arrives for EBIS Portfolio

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:

DYAX Corp (DYAX) – Speculative Buy changed to $22-25 on October 5, 2015. Original recommendation: September 21, 2015. DYAX bought 10/7/15 at $22. 10/30/15 closing price was $27.53. Sell Stop at $25. Dr. Duarte owns shares in DYAX.

Alert: DYAX received a $5.9 billion dollar buyout offer from Shire Pharmaceuticals. The stock, early on Monday morning, 11/2/15 was trading above $36 per share, a nearly 33% premium over the 10/30/15 closing price. We recommend sale of the shares.

DYAX reported earnings on 10/28/15. The company reported a loss of $11.7 million, or 8 cents per share, missing analyst expectations. Revenues of $24.7 million also missed expectations of $25.6 million. The stock ended the week unchanged, a sign of relative strength and rare investor patience in the current market. DYAX was added to the NYSE Arca Biotech Index (BTK) on October 15.

DYAX is getting very close to having a real shot for FDA approval for DX-2390, a treatment of Hereditary Angioedema (HAE), a genetic disorder that occurs in 1 in 10-50,000 people.   HAE causes swelling of tissues in the body in response to antigens. DX-2930 is a monoclonal antibody that blocks kallikrein, a key substance in the chemical reaction in the body that leads to the swelling. In some cases HAE, especially of the tongue or the airway, can be very serious or deadly.   DYAX already has one product on the market, also aimed at treating HAE; Kalbitor.   Sales for Kalbitor in the second quarter of 2015, at $17.8 million, a 7.2% increase measured year over year. DYAX, although having solid fundamentals for its stage of development as a company, is a high risk stock due to its dependence on niche drugs and potential FDA approval issues.  

Masimo Corporation (MASI) – Buy at $40-44. (Buy issued July 20, 2015. MPP: $40.65). 10/30/15 closing price: $39.68. Stop Loss at $34. Dr. Duarte owns shares in MASI.

Update: MASI will announce earnings on 11/5/15 at 4:00 P.M. Analysts estimate an average of $149.31 million in revenues and 31 cents per share in earnings. The company received good marks on its anesthesia monitoring equipment at the recent American Society of Anesthesiologists meeting in San Diego.

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 $18- 21 – 10/30/15 closing price $19.01. Dr. Duarte owns shares in VIVO. Stock initially recommended on June 29, 2015.

Meridian continues its basing action and is expected to report earnings during the November 2-5 time frame. Estimates average $46.64 million in revenues and 0.21 cents per share.

The stock pays a 20 cent dividend and yields 4.4%.

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.

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.

Alert: Emergent Biosolutions – Downgraded to HOLD based on technical trends. We would have to see this stock get back above $33 convincingly before we consider upgrading to BUY again.

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 10/30/15 Closing price $32.15) Dr. Duarte owns shares in EBS.

EBS will report its latest earnings on November 5 after the close. Estimates average $151.42 million in revenues and 55 cents per share.   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.  

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 – New Entry point established for PowerShares Dynamic Biotech ETF (PBE) – Bought at $48 on 10/23/15 – 10/30/15 closing price $50.02. Buy Range: $48-51. Sell Stop at $46.

Alert – ProShares Ultrashort Biotech ETF (BIS) was stopped out at $32. Buy at $34-36. Sell stop at $30.

Alert– ProShares Ultrashort Biotech ETF (BIS) was stopped out at $32. 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 – Is Pfizer-Allergan Conversation a Sign of More Biotech Deals?

The big news of the week that ended on October 30 was the conversation about a possible merger between Pfizer (PFE) and Allergan (AGN). And the first news that hit biotech on November 2^nd was the buyout offer of DYAX, an EBIS portfolio stock, by Shire Pharmaceuticals. This, in our opinion, is a sign that we may be headed into deal season in biotech. And why not? The recent decline in prices in the sector is making some of the smaller companies with drugs in late stages of development attractive to the deep pocket large pharmaceuticals with fewer blockbusters on their books.

Pfizer is a great example of the dynamic. It doesn’t have any boffo drugs at the moment and Allergan has Botox and a cache of other high dollar sellers. Allergan is also headquartered in Ireland, at least on paper, while Pfizer is housed in New York. So aside from a big difference in current drug portfolios, Allergan is paying lower taxes than Pfizer.

It’s called a tax inversion and it’s not a new strategy. Remember Medtronic did the same thing a while back. The bottom line is that Pfizer wants to pay lower taxes and this is the way it sees to get there at the moment.

Don’t cry for Pfizer, though, as it’s expected to earn $13.5 billion on revenues of $48 billion this year, although that’s down from an $18 billion profit five years ago. Pfizer’s revenue declines are expected to bottom out this year as it loses its patent on the anti-inflammatory blockbuster Celebrex. It lost big bucks when the cholesterol lowering drug Lipitor also went generic. Pfizer is also thinking of splitting into two companies in the next couple of years. One would be focused on older medications while the other would be all about new meds that traditionally make big money, at least for a while.

There are two big things to consider here, and they are related to the Affordable Care Act. One is that taxes in the U.S. are seen as limiting profit potential for large pharmaceutical companies. The other is that there are likely to be more deals as time passes. And it’s the latter that is of big interest to this weekly report. Deals will likely involve biotech companies with higher frequency, especially those companies with drugs in late stages of clinical trials with good results. And that’s why we’ve expanded into trading stocks to go along with our “Steady Eddie” EBIS stocks. It’s looking as if the deal-making is about to heat up as the new year unfolds.

NASDAQ Composite Index:                                                                       

Friday, October 30 = 5,053.75                                                  

Year to Date = + 6.9%                                        

Trailing 4 Weeks = + 4.7%

Trailing 7 Days = + 0.4%           

Weekly Portfolio Performance