A Tale of Two Markets

By Joe Duarte • December 21, 2015 • Tech Spotlight

In this issue:

  • The Big Picture: A Tale of Two Markets. S & P Gets Crushed. Biotech Holds Up.
  • In Depth: New EBIS Pick – EBIS Goes Big with Novo Nordisk A/S ADR (NVO)
  • Trading Portfolio: OTIC Gains in Volatile Trading Pattern
  • EBIS Portfolio Update: Emergent Biosolutions Upgraded to BUY. Several Sell Stops Triggered.
  • News and Analysis: Turing Pharma CEO Takes Perp Walk
  • 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%.  
  • 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.
  • Alert: Trading Position Closed – Sell Stop Triggered at $78 – Edwards Life Sciences (EW) – (Initially recommended 10/19/15- Bought 10-27-15 at $76.50 post 2 for 1 split). Return 1.96%.
  • Alert: Cambrex Corp. (CBM) Position Closed– Sell Stop Triggered at $50 on 12/18/15. Bought 10/20/15 at $44. Return 13.6%.

The Big Picture: A Tale of Two Markets: S & P Gets Crushed. Biotech Holds Up.

The week of December 21, 2015 promises to be significant for our “EBIS” and “Trading” portfolios as last week’s action in the markets shook things up a bit. We also have our monthly new addition to our EBIS portfolio and updated information on our Trading Recommendations.   But first, let’s have a look at the big picture.

The Federal Reserve finally raised interest rates and the markets responded with increasing volatility. Simply put, there are too many external and internal variables all vying for investors’ attention in a market that is increasingly illiquid and fraught with rising risk from the growing deployment of robotic trading strategies. That does not mean that sound analysis and strategies can’t lead to success. It just means that we have to be very cautious and disciplined regarding where we put our money to work.

SPX chart 2015 12 18

NBI biotech index 2015 12 18

 

 

 

 

 

 

 

 

 

 

 

The S & P 500 (SPX) has the look of a boxer on the ropes while the Nasdaq Biotech Index (NBI), in comparison, had a quiet week.   The tale of the tape is best explored through the Ulcer Index (UI), the indicator at the bottom of both charts. A rising Ulcer Index means that risk is also rising, such as with the S & P 500. More important is the notion that the UI is barely off of its recent bottom, which means that we could see more downside action in the broader market. If you look at other indicators, you can see that the S&P 500 also closed last week below its 50-day and 200-day moving averages and other momentum oscillators (i.e., MACD and MACD histogram) are also suggesting that further weakness lies ahead.  The NBI chart is much more benign and suggestive of an index that is in consolidation mode. This is interesting and will be worth watching in the next few days and weeks. If biotech fails to fold, especially if the market continues to spiral downward, it will be very positive development.

Anything is possible here so we are erring on the side of caution. Here is what to do:

  1. Pay close attention to the overall market as well as our new Trading Buy Recommendations and our new EBIS picks and portfolio updates. Remain patient as the market will eventually settle down and become more investable.
  2. Monitor the price of all current positions in your biotech portfolio individually.   Look at each stock separately and keep up with Sell Stops and any trading rule that we include in our recommendation.
  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 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.”
  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 12/18/15.  

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.

Active Trading Recommendation: Otonomy Inc. (OTIC) – Buy Range $27-$30. Initial recommendation for this stock was 12/14/15. Bought 12/14/15 at $27.42. 12/18/15 closing price $29.33. Sell Stop $25. 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.

Active Trading Recommendation: Invacare (IVC) Trading Buy Range $19-$21. Bought 11/30/15 at $19.70. 12/18/15 closing price $17.43. Sell stop $17 (based on 12/18/15 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 $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 Buy Recommendation: Novo Nordisk A/S (NVO) – An Atypical EBIS Stock with a Focus on Diabetes

Buy Range $55-$58. Recommended 12/21/15. 12/18/15 closing price $56.45. Stop Loss at $52.75.

Novo Nordisk, based in Denmark, is to Diabetes treatment what Gene Simmons is to KISS, sort of the glue that holds the thing together. And although it’s a large cap stock ($144 billion), it’s not a household word. Yet, diabetics know it because it makes both medications as well as equipment for delivering medication for diabetics. It’s also a mainstream pharmaceuticals company with footprints in hormone replacement therapy, growth hormone treatments and treatments for hemophilia. The company’s semaglutide drug recently delivered improvement in long term glucose control in a Phase 3 trial. Semaglutide also leads to appetite suppression and weight loss, a key component of the treatment in Type 2 Diabetes.

NVO gets a top shelf + 9 EBIS rating because it’s a well run company with a single focus and a top entry in all areas of its niche, Diabetes. It is not a small stock, but it is an EBIS stock because of its focus and its ability to deliver. And in a difficult market it could provide a bit of a safety net compared to other more speculative buys.

Here are the EBIS details:

The EBIS Score for Novo Nordisk A/S ADR (NVO) is + 9 (BUY) based on September, 2015 data.  

  • Cash on hand: (+1) NVO had $18 billion in cash compared to $13 billion in September 2014.
  • Cash on Hand growth (year over year) (+1): The year over year change in cash was +32%.
  • Revenues (present or not): (+1): NVO 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 grew by 20% on a year over year basis for the September 2015 quarter.
  • Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1) NVO has a 0.78% 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): NVO has earnings.
  • Net Income Growth (Year over Year): (0): NVO grew its earnings by 20% year over year in September.
  • Products on the market: (+1): NOV has products on the market and is making strides in expanding its market share.
  • Pipeline Strength: (+1): NOV has one key product in late development stages in its pipeline.
  • Late Stage Clinical Trials and Product Launches: (+1): NOV 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%.

Alert: Emergent Biosolutions – Upgraded to BUY. Buy Range $37-40. The upgrade is based on technical trends and relative strength which suggests that institutional buyers are coming into the stock. The company could also be attracting attention based on its standing as a defense stock as terrorism awareness is on the rise.

Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* $30.63 – 12/11/15 Closing price was $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.

Alert: Cambrex Corp. (CBM) Position Closed– Sell Stop Triggered at $50 on 12/18/15. Bought 10/20/15 at $44. Return 13.6%.

Cerus Corp. (CBM) – Buy Range $5-$7. Recommended 11/16/15. Bought 11/16/15 at $5 – 12/18/15 closing price $5.90.

Masimo Corporation (MASI) – Buy at $40-$44. Buy issued July 20, 2015. MPP: $40.65). 12/18/15 closing price: $41.43. Stop Loss: Raised to $38 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 $18- 21 – 12/18/15 closing price $19.81. Dr. Duarte owns shares in VIVO. Stock initially recommended on June 29, 2015.

Meridian made news on Friday the 13th 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 18th 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.

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 $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 – Turing Pharma CEO Takes Perp Walk

Handcuffed, wearing a grey hoodie and sunglasses, Martin Shkreli walked out of Turing Pharmaceutical’s life as the FBI arrested him for allegedly participating in a Ponzi scheme. In what could be the beginning of a new leg in a bizarre saga, the FBI alleged that Mr. Shkreli used shares of a company he founded, Retrophin, to pay back investors for losses he created while running a hedge fund into the ground. According to Fierce Biotech, based on information obtained via a pending lawsuit filing, “Shkreli and his ‘close personal associates’ drew up a sham consulting agreement” which guaranteed a disgruntled hedge fund investor “66,000 shares of Retrophin and $200,000 of the company’s cash with no expectation of any actual consulting.”

Mr. Shkreli first made headlines several weeks ago when his former company, Turing Pharmaceuticals, raised the price of a malaria drug to $750 per pill from the previous price of $15. As Yogi Berra would have said, this one “ain’t over til it’s over.”