In this issue:

• The Case for Exoskeleton Stocks
• Nimble Stumbles, Other Holdings Fare Well
• Keeping Our Eye on the Ball For You

The Case for Exoskeleton Stocks

By Jim Pearce

Regulatory approval, legal decisions and even uncertain politics make these companies ripe for acquisition.  

It’s been 10 months since we last took a hard look at the trio of exoskeleton stocks in our Special Situations portfolio.  Since then, two of them (Ekso Bionics and ReWalk Robotics) have drifted lower, while Parker-Hannifin is about the same. That performance is in line with the overall market, as the Standard & Poor’s 500-stock index is also down about 1% over the same span.

Also hampering performance has been general weakness in the healthcare sector as a whole this year, and biotech stocks in particular. The entire group tends to move up and down in concert as investor interest in healthcare waxes and wanes with each new twist in the business and political climate. But the healthcare sector is nothing if not cyclical, so it is only a matter of time before it rebounds.

For the sector as a whole that day may not come until after the presidential election. Not only is it unclear which party will win the White House, but also who each party’s nominee will be. Whether that person is Donald Trump or Ted Cruz, or Hillary Clinton or Bernie Sanders, matters just as much as which party wins the election in November.

Until then I don’t expect much movement from most large-cap healthcare stocks, which may partially explain why Abbott Labs announced last week that it will spend $19 billion to buy St. Jude Medical to expand its cardiovascular care products. Who knows how the next president may feel about this transaction, so better to get it done now while the regulatory environment favors industry consolidation.

For that reason I think at least one or both of our small-cap exoskeleton stocks could come into play later this year. With a market cap of only $100 million and a share price less than $1, Ekso Bionics (EKSO) could be an attractive candidate for a company looking to acquire the technical expertise and intellectual property rights for exoskeleton medical products. Originally designed for military applications, these robotic body suits also restore mobility to patients with various neurological and muscular-skeletal disorders.

Until recently, the problem was cost. A single body suit from Ekso costs about $80,000, far beyond the reach of most patients, many of whom are either retired or disabled and living on a tight fixed income. Another issue was acceptance from the Food and Drug Administration (FDA) and, by extension, recognition from the insurance industry of exoskeletons as valid medical treatment. For that reason most insurance companies won’t cover exoskeletons, putting the entire cost burden on the patient.

Now, however, that may be about to change. One month ago Ekso announced that “it has received clearance from the FDA to market its Ekso GT robotic exoskeleton for use in the treatment of individuals with hemiplegia due to stroke”  and individuals with certain spinal cord injuries. One of our other holdings, Parker-Hannifin (PH), announced that it, too, had received FDA clearance to begin marketing its motorized leg braces.

The fact that both of these companies received approval at virtually the same time implies that the federal government believes exoskeleton technology has advanced to the point that it is safe for consumers to use. With that major hurdle overcome, the next step is to convince insurance companies to cover exoskeletons as acceptable medical treatment. That won’t be easy given the cost, but already there are signs that the law will soon favor patients.

Our third holding, ReWalk Robotics (RWLK), priced under $10 with a market cap of $117 million, announced in February that it recently won two legal cases involving reimbursement denials from insurance companies that were overturned on appeal. Undoubtedly, both these cases will move further up the legal chain, but an eventual final ruling in their favor could set a precedent for all exoskeleton makers. The company also disclosed that the Department of Veterans Affairs (VA) purchased six of its devices to evaluate. The VA also issued a national policy for using these devices, recognizing them as the “standard of care for qualifying veterans with spinal cord injury.”

To be clear, this technology is still in its nascent stages and smaller players, such as Ekso and ReWalk, are still at risk of going under if they cannot become profitable before running out of investor capital. But at this point the potential for these companies to generate revenue from exoskeletons may be sooner than we thought last June when we first wrote about this technology. The products have gained official FDA acceptance, and the legal system has delivered several important decisions requiring insurance coverage.

Incidentally, both ReWalk and Ekso are scheduled to announce earnings next week (ReWalk on May 5, and Ekso on May 10). Earnings are a moot point as neither of these companies are close to turning a profit, but their press releases may include forward guidance that could move their share prices considerably. Even if that doesn’t happen, I suspect some of the bigger healthcare companies are taking a hard look at these small producers with the idea of buying their way into this future revenue stream.

Our opinion: Buy both ReWalk and Ekso to diversify your risk and increase the odds of holding whichever company gets bought out first.

Nimble Stumbles, Other Holdings Fare Well

By Benjamin Shepherd

In last week’s update I changed our recommendation on Nimble Storage (NYSE: NMBL) to a “sell” mainly because first quarter earnings were going to be disappointing. That seems to have been a timely move since the shares have lost more than 9% over the past week alone and I don’t see it getting any better.

With all but one of our remaining Next Wave holdings reporting earnings this week (keep an eye on your inbox for updates), I thought it would be helpful to run down the more notable earnings expectations for the quarter.

Zendesk (NYSE: ZEN) has been racing higher since the market swoon earlier this year, gaining more than 50% since early February while the NASDAQ Composite is up by a bit more than 11%. While earnings are expected to be in line with last year’s first quarter at a $0.10 loss, revenue is expected to shoot up from $42.2 million to $66.1 million and investors are clearly happy about that.

Providing a customer service platform that allows its clients to track everything from recurring issues to overall satisfaction in almost real-time, Zendesk has clearly been a hit with customers in its own right. Its software is also incredibly adaptable, allowing outside developers to provide their own customizations, so Zendesk clients can get exactly what they want and need to power their customer service departments.

Thanks explosive sales growth, Zendesk is now among the top ten fastest growing companies in the SV150, a who’s who of the top tech companies in the Silicon Valley.

Buy Zendesk up to $25.

While Arista Networks (NYSE: ANET) hasn’t made quite such dramatic gains since the February bottom, largely thanks to rival Juniper Networks sales and an earnings warning back in April. The latter has faced a tough sales environment thanks to a slow start to enterprise spending this year and extremely tough competition.

Those problems haven’t bled through to Arista, though, thanks to its innovative new line of switches. First quarter revenue is expected to jump from $179 million last year to $237 million, while earnings per share are expected to gain better than 16% and hit $0.60.

Arista Networks is a buy on dips under $62.

EPS at FireEye (NSDQ: FEYE) is expected to come in at a $0.50 loss as compared to a $0.48 loss in the same period last year. That said, much as with Zendesk, investors like that revenue is expected to shoot up from $125.4 million last year to $171.7 million.

Providing security platforms to monitor and mitigate threats to computer networks, FireEye is beginning to emphasize a more subscription-based revenue model that should provide steadier growth and wider profit margins. The move was only just announced in March but shares have shot up more than 40%, especially since a number of notable Wall Street analysts have said the move appears to be doable.

Buy FireEye up to $22.

Finally, Paycom Software (NYSE: PAYC) is expected to turn in extremely favorable results, with year-over-year EPS rising from $0.12 to $0.20. Revenue is also expected to post a solid gain of better than 30%, rising to $83.5 million.

Revenue growth has been a big positive for Paycom over the past couple of quarters as demand for human resources management software has been quite strong. That’s hardly surprising given the solid jobs growth we’ve seen over the past few years, especially at the smaller companies that Paycom generally serves. The company’s dashboard to help companies track their compliance with Affordable Care Act requirements has been particularly popular.

Buy Paycom Software on dips under $33.50.

Keeping Our Eye on the Ball for You

By Joe Duarte

ATIS Update

The stock market dipped last week, but our Applied Technology Investment System (ATIS) portfolio held up fairly well. 

• Meridian Biosciences (MDSO) reported earnings of 24 cents per share—in line with expectiations–and revenues of $51.3 million, slightly below expectations of $52.09 million.  The company affirmed its full year guidance.
• Rollins Inc. (ROL) reported earnings of 15 cents per share, which were in line with estimates, but beat revenues nicely, coming in at $352.7 million, versus $345.31 million.
• Novo Nordisk (NVO)’s report was also positive. The company reported higher sales for its three major drugs. Sales of Victoza increased15%,   Levemir  was up 9% and Tresiba rose117%.  Sales in international operations grew by 15% with the U.S. being the best performing country with 12% rise (3% in DKK).  The company confirmed its sales growth is expected to increase 5% to 9% in local currencies, while operating profit is expected to grow at the same pace in local currencies.

Novo also announced “top line” results on April 28 from its global Phase 3a trial of semaglutide, saying that the medication “significantly” reduces the risk of major cardiovascular events.   Semaglutide treats type II diabetes by improving control of blood sugar with low risk of inducing dangerous blood sugar levels, and it also causes weight loss by decreasing appetite.  The study reached its endpoint of reducing cardiac deaths, myocardial infarctions or non fatal strokes.  Novo expects to submit semaglutide for approval in the U.S. and Europe in 2016.

Market Capsule

• The S&P 500 finally stalled, failing to rise above 2100. We noted last week that this was a key chart point.  Now the index could be headed as low as the 1977-2036 trading range.
• The Nasdaq Biotech Index (NBI) also rolled over as it failed to rise above the 3000-3050 trading range closing the week at 2805.35. NBI could be headed for a test of its recent lows near 2500. This could be a significant negative influence on biotech stocks in our portfolio as well as the market at large.

Our ATIS portfolio held its own last week and may do so this week as well given the niche nature of the stocks in the portfolio.  This is earnings season and there is a lot going on.  We are watching the market and our portfolio with care and will be sending updates as needed. 

In Focus: Buy CERS Ahead of Earnings

Cerus Corp. is expected to report earnings on May 3, 2015.  Estimates are for an earnings loss of 16 cents per share and $8.29 million in revenues.   A review of the last four earnings reports shows that the stock is nearly 24% higher within six weeks of the release of earnings.  If this pattern holds up the stock may move as high as $8 per share within six weeks of earnings. The stock closed at $6.26 on April 30, well within our $5-$7 recommended buying range.   It’s important to note that if this pattern repeats the shares may dip in price after the report, so a good strategy is to buy a few shares ahead of the report and to buy the rest of the position if the stock dips in expectations of an eventual bottom and a rise in price over the next few weeks.

This is a special situation for a stock that remains a long term holding in our ATIS portfolio.  I own shares in CERS.

What may also make this stock move in the next few days is its connection to the Zika virus.  Reuters reported on April 29 that Puerto Rico suffered its first Zika-related death in February.  Cerus makes the Intercept system for the neutralization of parasites and viruses in platelets and plasma.  The company has been steadily increasing its market share and is expecting the FDA’s decision on the use of the Intercept system for use in red blood cells.  If the FDA approves Intercept for use on red blood cells, the stock is likely to move significantly higher given the growth potential for the company’s earnings and revenues.

Portfolio Summary

This Week’s Changes:

Celldex Therapeutics (CLDX), Buy $4-$7.   4/29/16 closing price $4.  Dr. Duarte owns shares in CLDX.

No Changes in the following positions:

Medidata Solutions (MDSO) – HOLD.  Bought on 3/7/16 at $36 –  4/29/16 closing price $43.63.  Sell Stop $41.  I own shares in MDSO.

Amgen (AMGN) Buy until $161. Sell Stop $153. Bought 2/1/16 at $152.75  –  4/29/16 closing price $158.30

Biorad Laboratories (BIO) Bought 5/16/15 at $146.25.  04/29/16 closing price $141.85– Sell Stop $132.

Cerus Corp. (CERS)  – Buy Range $5-$7. This stock was initially recommended 11/16/15. Bought 11/16/15 at $5 – 4/29/16 closing price $6.26;  I own shares in CERS.

Meridian Biosciences (VIVO) – Buy $20-23 – 4/29/16 closing price $19.11.Stock initially recommended on 6/29/15.  I own shares in VIVO

Novo Nordisk A/S (NVO) – Buy  $55-59 (4/7/16) .  Sell Stop to $49.  Recommended 12/21/15.  Bought at $55 on 12/21/15 –  4/29/16 closing price $55.79.   I own shares in NVO.

Opko Health Inc. (OPK) Buy Range $8-$11. Bought 2/1/16 at $8. 4/29/16 closing price $10.75. Sell Stop raised to $9.  I own shares in OPK.

Rollins Inc. (ROL) – Buy at $27-29. Bought 2/22/16 at $27.38. 4/29/16 closing price $26.87. Sell Stop at $22.  I own shares in ROL.

White Wave Foods Company (WWAV) – Buy up to $44.  4/29/2016 closing price $40.21. I own shares in WWAV.