If there is any doubt about the overall mood of the stock market heading into this Wednesday’s presumed Fed rate hike, consider this: For the first time in as long as I can remember, all but three of our 38 portfolio holdings lost value last week, including all nine of our large-cap Investments Portfolio stocks (see table at bottom). The tech sector is generally regarded as a harbinger of future market direction, i.e., the tail that wags the dog.

As further evidence of an overall market slowdown, the tech-heavy NASDAQ Composite Index lost 4.1% of its value last week, compared to a 3.8% decline in the cap-weighted S&P 500 Index and a drop of 3.3% in the blue-chip Dow Jones Industrial Average. The combined message is loud and clear; after holding steady through the first half of the month, many investors have given in to their fears and decided to sit out this week’s rate hike.

That’s understandable given how quickly a change in stock market sentiment can escalate into an all-out rout as fear turns to panic. There is also the possibility that selling in the bond market may trigger a chain reaction of selling in derivative securities that link bond prices to stocks, currencies and commodities. Let’s hope that doesn’t happen, while recognizing the possibility that it could.

However, even if that does happen it does not necessarily portend anything of any real substance for an individual company. Is Apple going to sell any less smartphones in China next year because a hedge fund manager in London made an incorrect call on the value of the Euro versus the Dollar? No, but if index funds have to sell shares in Apple to cover redemptions from worried shareholders then the short term impact on your brokerage statement could be the same.

The good news is, more often than not these types of technical corrections tend to create short-term buying opportunities as the financial markets struggle to find a new equilibrium. The bad news is many stocks will trade lower in the days and weeks to come until that equilibrium has been found. However, the ultimate effect should be more money flowing into stronger companies, and coming out of weaker ones that became overly dependent on an artificial economy to sustain their revenue models.

That means hang on to your quality stocks until the storm is over, and have a short list of quality stocks you’d like to buy at temporarily depressed prices such as the new “trading recommendation” described below by Dr. Joe Duarte, and one that Rob DeFrancesco believes may attract at suitor as the tech sector continues to consolidate.

By Jim Pearce

Portfolio Update – Medical Profits
By J. Duarte MD

In this issue:

In this issue:

• The Big Picture: Biotech Joins Market in Swoon Mode. Shopping List Grows
• In Depth: New EBIS Pick – Cerus Corp. (CERS) – A Long Shot Blood Safety Play Continues Its Steady Climb
• Trading Portfolio: CLDX Stopped out with 21% gain. New Stock Added to Portfolio: OTIC
• EBIS Portfolio Update: EBIS Portfolio Shows Relative Strength in Difficult Market
• News and Analysis: Cancer Vaccine Offers Hope – Holy Grail Remains Elusive
• Recent 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%.
• Alert: 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%.  
• EW is up nearly 7.9% as of 11/27/14.
• 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%.
• CERS rose 14% in the initial two weeks after we recommended it.

The Big Picture: Biotech Joins Market in Swoon Mode. Shopping List Grows.

Biotech stocks rolled over last week but the broad market took a worse hit. The S&P 500 index (SPX) broke to a new low since its November recovery high crashing through its 50 and 200-day moving averages on higher volume than you’d like to see on a big selloff. Meanwhile, the Nasdaq Biotech Index (NBI) also fell for the week but did not make a new low.

And while there is little to smile about as an investor in any type of stock at the moment, it is a bit of a positive when biotech seems to be holding up a bit better than the rest of the market, although there is no guarantee that this will continue. On the other hand, biotech’s late summer slump was much more aggressive than the rest of the market’s decline, so the lack of a total collapse in the sector, at this stage of the game, may be justified.   Note that biotech stocks did not rebound as strongly as the stocks in the S&P 500 either. And that suggests, although it’s too early to fully know yet, that biotech’s declining phase was essentially ahead of the S&P 500’s. If we’re right on this point then biotech may decline less than the market, and could eventually find its footing sooner than the S&P 500. For now, though, it’s about surviving this decline and making the correct decisions about each individual stock in our portfolio.

We are very pleased with our EBIS and Trading portfolios’ performances in a very tough week for the overall market.   We had no huge hits despite the market imploding. Our CLDX trading recommendation was stopped out with a 21% gain. Our ETF trend trading position, featuring PBE was stopped out with no loss.   We have lowered the entry point on our short selling ETF BIS to $33.   Find the full details on all our portfolio positions below.

Finally, we note that as prices fall and more biotech and health care stocks form bases, we continue to add names to our shopping list. As time passes and circumstances develop, we will continue to add names to our EBIS and our Trading portfolios.

So here is what to do:

1. Continue to pay close attention to the overall market as well as our new Trading Buy Recommendations and our new EBIS picks. Keep a good eye on both biotech and small stocks. This is where the money is going in the current market. Watch the small stock index for clues regarding biotech.
2. Monitor the price of all current positions in your biotech portfolio individually.   Continue to view each stock separately. Keep up with weekly updates or any special alerts, and sell stop updates. This is especially applicable to our trading recommendations. Follow the trading rules strictly and don’t chase stocks that are out of their buying range.
3. Pay attention to news items, especially as related to products, mergers, takeovers and geopolitical events. Always monitor your portfolio’s response to the market and to any news events, especially those in health care 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. The entry point on BIS has been changed on 12/14/15 to an entry point of 33-36. BIS is a hugely volatile ETF and has a new entry point as of our November 9 update. See below for details. Our July 27^th, 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.”
5. Risk is clearly on the rise once again. This means that patience and attention to detail is they key to success. And in this type of market, success means that your portfolio retains as much of its gains as possible. 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.

Trading Recommendations

Our trading recommendations are delivering excellent results at the moment. We added three new stocks as of 11/30/15 and a fourth candidate on 12/14/15. The sell stops on open positions have been adjusted to reflect the closing prices of the week that ended on 12/11/15.  

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.

Alert: New Trading Recommendation: Otonomy Inc. (OTIC) – Buy Range $27-30. Initial recommendation for this stock was 12/14/15. This company could change the course of treatment of ear infections in children, and perhaps even adults over time. It received FDA approval for its extended release version of the antibiotic Ciprofloxasin (Cipro) under its own brand name of Otripio. The initial indication is for use in surgeries after ear tubes are placed in children. The company has several key trials in place for expanded uses.

Alert: 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 was 21%.  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.

Alert: Nearing Sell Stop – Trading Recommendation: Edwards Life Sciences (EW) – Please note that EW split 2:1 last week, so be sure to adjust your limit and stop prices accordingly! (Initially recommended 10/19/15- Bought 10-27-15 at $153 pre-split, or $76.50 post-split) Trading Buy Range is now $76-78 – 12/11/15 closing price $79.85. Sell Stop at $79. For every dollar of price increase, raise the stop loss by $1.

Active- Trading Recommendation: Invacare (IVC) Trading Buy Range $19-21. Bought 11/30/15 at $19.70. 12/11/15 closing price $18.23. Sell stop at $17 (based on 12/11/15 closing price). Recommended 11/30/15. Invacare makes hospital beds, electric wheelchairs and related devices. The stock looks poised for a breakout. It fails to make the EBIS cut based on its lack of profits and having more debt than current assets. It is, however, the type of stock that can rise when the market decides to buy everything related to a particular sector. It also has a knack for growing its revenues.

Waiting to Enter Buy Range – Trading Recommendation: Bio-Rad Labs (BIO) Trading Buy Range $142-146. Sell stop 138 (based on 11/27/15 closing price). Recommended 11/30/15. For every dollar of price increase, raise the stop loss by $1. Bio-Rad is a former EBIS stock which got caught in the early fall selling spree.   The stock has formed a lengthy base and is showing signs of joining the current biotech sector rally. We currently like it based on its technical activity.

Waiting to Enter Buy Range – Trading Recommendation: Vertex Pharmaceuticals (VRTX) Trading Buy Range $134-138. Sell stop at $128 (based on 11/27/15 closing price). Recommended 10/26/15. For every dollar of price increase, raise the stop loss by $1. Vertex makes a leading cystic fibrosis drug and has steady revenues. Unfortunately it still has more debt than assets so it doesn’t make the EBIS cut. It is a good momentum stock when it gets going, though. And it looks as if it’s ready to join the current biotech rally.

In Depth: New EBIS (Emerging Biotech Investment System) Pick: Cerus Corp. (CERS)

Alert: New Buy Recommendation: Cerus Corp. (CBM) – Buy Range $5-7. Recommended 11/16/15. 12/11/15 closing price $6.41.

Cerus Corp. – A Long Shot Blood Safety Play

Cerus Corp. rose 14% in the initial two weeks after we recommended it. The stock remains within our $5-7 Buy range.  

Cerus Corp. continues to move steadily higher. The company is making steady strides to expand its market share and has signed several new deals in the past few weeks as well as initiating a new Phase IV trial for its platelet testing product.   CERS is a tiny, $550 million market capitalization stock that is well stocked with cash, has an interesting pipeline and is in the difficult stage of development where it is pushing for market share in the United States while struggling with the negative effects of a strong dollar since its current customer base is overseas. However, the company has made progress getting its product into key areas of the Southern United States through deals with key blood product distribution not for profit entities.

Cerus developed the INTERCEPT system from virus and other disease causing organism detection in blood products. It currently has FDA approval for INTERCEPT systems for platelets and fresh frozen plasma, key blood components for clotting. It is working on the INTERCEPT system for red blood cells. The company notes that the “the INTERCEPT treatment is designed to inactivate established transfusion threats, such as Hepatitis B and C, HIV, West Nile Virus and bacteria, as well as emerging pathogens such as chikungunya, malaria and dengue.”

The current immigration and the frequency and potentially long lasting nature of the geopolitical situation makes Cerus an interesting long term, speculative buy for patient investors.   In times of trouble, as the likelihood of protracted conflicts, as well as the potential increase for infectious diseases increasing as a result of population migrations, this company has the potential to deliver some interesting surprises.   It is a speculative play but does have some staying power with rising cash levels on its balance sheet.  

The big bet is on the escalation of global conflicts that require increased use and thus testing and safety of the blood supply. If Cerus can get the red blood cell Intercept system approved, it could mean a significant increase in its revenues. Currently, the company has just received Medicare and Medicaid approval (CMS) for upgraded billing codes if a hospital uses INTERCEPT for its plasma and platelet testing and pathogen inactivation. This certification allows the user to charge a higher premium for its blood products.

CERS gets a +7 EBIS rating because it has yet to turn a profit. Yet, given the low price of the stock, and the huge potential, especially in the current market, it’s a great speculative play since it meets most of the criteria for an EBIS stock.   And although it’s a highly speculative bet, this is one of those companies that could turn the corner fairly rapidly under the right set of circumstances. Thus, we see little risk in owning a small position, monitoring the company closely, and adding to the position over time as things develop.

Here are the EBIS details:

The EBIS Score for Cerus Corp. (CERS) is + 7 (HOLD) based June 30, 2015 data.  

• Cash on hand: (+1) Cerus reported $50.8 million in cash compared to $22.8 million in December 2014.
• Cash on Hand growth (year over year) (+1): The year over year cash more than doubled.
• 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)(+0): Revenues shrank by 10% on a year over year basis for the September 2015 quarter.
• Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1) CBM has a 0.31% 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): (0): CERS has no earnings.
• Net Income Growth (Year over Year): (0): CERS has no earning s growth.
• 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 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: Meridian Bioscience Gets Expanded FDA Approval for Whooping Cough detection Test Potentially Expanding Market Share and Customer Base

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) – POSITION CLOSED – Speculative Buy changed to $22-25 on October 5, 2015. Original recommendation: September 21, 2015. DYAX bought 10/7/15 at $22. 11/6/15 closing price was $34.52. Trade return: 56.9%.

Cambrex Corp. (CBM) – Buy Range $45-47. Bought 10/20/15 – 12/11/15 closing price $51.39. Sell Stop raised to $50 on 11/27/15. Dr. Duarte owns shares in CBM.

Masimo Corporation (MASI) – Buy at $40-44. Buy issued July 20, 2015. MPP: $40.65. 12/11/15 closing price: $40.44. Stop Loss raised to $38 on 11/9/15.

Update: MASI beat earnings on 11/5/15. Earnings came in at 36 cents per share on revenues of $152.6 million. Analysts estimated an average of $149.31 million in revenues and 31 cents per share in earnings. MASI beat expectations and gave upward guidance for the future. The company recently 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.

This is the second straight quarter that the company beat expectations. 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 range $18- 21 – 12/11/15 closing price was $19.71. Dr. Duarte owns shares in VIVO. Stock initially recommended on June 29, 2015.

Meridian made news on Friday the 13^th of November when it disclosed a minority stake in Oasis Diagnostics a company that specializes in diagnostic tests that use saliva as the medium for testing. On November 18^th the company received FDA approval for an expanded use of its Illumigene whooping cough testing product, a move that will expand Meridian’s market share and customer base. There were 33,000 whooping cough infections reported in 2014, a 15% increase compared to 2013.

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%.

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.

Alert: Emergent Biosolutions – Downgraded to HOLD based on technical trends and sluggish sales, which suggests possible earnings and revenue problems in the future. Sell stop adjusted.

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 12/11/15 Closing price $36; Sell stop at $35 issued 11/16/15) Dr. Duarte owns shares in EBS.

EBS continues its momentum run but retains its HOLD rating. This remains a defense play given its niche in bioterrorism related vaccination. The company is also selling treatments for chemical weapons related injuries overseas, but not yet in the U.S. The company reported its latest earnings on November 5 after the close and beat expectations delivering 83 cents per share in net income on revenues of $164.9 million. Estimates average $151.42 million in revenues and 56 cents per share.   EBS has a history of positive surprises. The company 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.  

Sales of BioAnthrax, a preventive anthrax vaccine and is working on a new generation of the vaccine were strong in the quarter while overall bio-defense sales slumped. 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 – 12/11/15 stopped out at $48. Return 0%.

Alert – ProShares Ultrashort Biotech ETF (BIS). Buy at $33-36. Sell stop at $30. Recommendation updated on 12/14/15.

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 – Cancer Vaccine Offers Hope – Holy Grail Remains Elusive.

A small German company based in Munich hopes to offer hope to hard to treat patients with acute myeloid leukemia (AML). Medigene’s vaccine is based on the body’s own defense system to build antibodies to cancer. It’s not a new strategy, and it’s one that’s had some success over the last few years. The major problem has been that this type of therapy, based on a key cell type in the immune system called dendritic cells, is difficult to put into a mass manufacturing mode. So while success can be achieved in a small number of patients, the science to make enough of this type of medication in large enough levels to treat thousands of patients is not yet available.

And although Medigene has not solved the puzzle of mass manufacturing yet, it recently reported promising results in patients that have failed other forms of therapy and have run out of options. According to Fierce Biotech, one patient who failed chemotherapy has lived for 21 months after receiving the vaccine.

Aside from the hope this type of therapy provides patients who have little left to turn to, we note that if and when a company can develop a system that can produce dendritic cell based cancer vaccines and these treatments can be used “off the shelf,” it will be the new Holy Grail for cancer biotech treatments.

Why HubSpot Could Attract a Buyer

By Rob DeFrancesco

Thanks to strong momentum in the underlying business, HubSpot (HUBS) stock earlier this month hit an all-time high at $60.11. So far this year, shares of the provider of cloud-based inbound marketing software have gained 66%. With continued solid execution by management, new growth drivers and rising revenue estimates, HubSpot is an attractive buyout candidate for a larger software vendor.

The company helps smaller businesses get noticed in the new world of social media. Organizations are changing the way they market in order to match how people buy things these days. Most marketing budgets have been centered on pushing out a message (via various forms of advertisements) to get people/businesses interested in a product or service. With inbound marketing, the goal is to create valuable content that is interesting enough to pull potential customers in to hear the message.

HubSpot over the past nine years has carved out a successful niche in automated inbound marketing. For 2015, the revenue guidance midpoint of $179 million (up from initial guidance of $161 million at the start of the year) represents growth of 54%. At the end of the third quarter, the company’s customer count stood at 16,854, up 35% from the year-ago level.

HubSpot’s customers are increasingly moving to the more robust (and pricier) Professional and Enterprise versions of the software platform from the Basic offering. About 15% of all HubSpot customers are now on the Enterprise edition (representing about a third of total revenue because of the higher subscription price point).

The company also charges based on database size, meaning it generates more revenue as its customers get larger. In addition, new add-on services on the platform (for website customization, digital ad management and analytics) are generating higher fees. As of the third quarter, average subscription revenue per customer (on an annual basis) was $10,607, a gain of 15% year over year.

In the third quarter, revenue rose 56% to $47.7 million, above the consensus estimate of $44.5 million and the high end of the guidance range. Subscription revenue of $44.1 million advanced 59% (acceleration from growth of 58% in the second quarter and 57% in the first quarter) because of healthy new customer additions, larger deal sizes and strong renewals. The revenue retention rate is holding steady in the high 90% range. International revenue (25% of total revenue) expanded 78%, acceleration from growth of 70% in the previous quarter. Gross margin advanced 500 basis points year over year to 75%.

A positive forward-looking metric: Calculated billings in the September quarter of $52.5 million rose 60%, acceleration from growth of 55% in the second quarter and 52% in the first quarter. The company’s channel network of more than 2,700 partners represents a major driver of new business for HubSpot. In fact, 40% of all new contracts are generated by partners.

For 2016, HubSpot is on track to continue to garner more subscription revenue from each customer because it’s gaining traction with new add-ons— including Connect, which brings together data from various front-office systems (such as Zendesk) into one integrated platform.

More than a quarter of HubSpot’s customers now host their websites on the company’s platform (paying as much as $300 a month). The Website add-on enables users to customize their websites based on the type of visitor, providing personalized content for prospective customers that’s different from what a returning customer would see. The Reporting Dashboard module for analytics (at a cost of $200 a month) looks promising for the year ahead.

HubSpot’s customer relationship management (CRM) solution is a growth wildcard for next year. Marketing automation software is most effective when used in conjunction with a CRM product because the combination provides a smart way to manage sales leads. Since 60% of its customers did not have a standalone CRM solution, HubSpot decided to offer a free lightweight version of its own. While still in the early innings, the product has been seeing good adoption across the customer base. HubSpot in 2016 could experience a nice revenue boost if it decides to monetize its CRM offering by introducing a more advanced version.

The 2016 consensus revenue estimate over the past three months has advanced to $239.6 million from $222.3 million, with the expected growth rate now at 33.8%, up from 28.5%. The highest top-line estimate on Wall Street for next year stands at $260.1 million (growth of 45.2%).

NASDAQ Composite Index:                                                                       

Friday, December 11 = 4,933.47                                                  

Year to Date = + 4.4%                                        

Trailing 4 Weeks = – 3.5%

Trailing 7 Days = – 4.1%           

Weekly Portfolio Performance