Archive for July, 2008

Introducing MANDA

Friday, July 18th, 2008

Yesterday we looked at established funds whose primary focus was buying M&A target stocks just after the acquisition announcement was made. I mentioned that Mario Gabelli, the manager of the Gabelli ABC Fund, has been doing this for 15 years. Although his year-to-date return is down -3.2%, he’s never ended a year in the red. The fund’s ten year average is a modest 6.7% but risk is minimal and best of all, the fund does quite well in bear markets. So why am I bringing this up again?

Being in a competitive mood, I thought “Hey, why don’t I give Mario a run for his money?” So, I’m going to set up my own M&A fund to see if I can outperform the big guys. But what to call it? Well, after spending about three seconds on this I decided MANDA (M and A) would suffice. It’s not the most clever title but it’s one that I’ll (hopefully) be able to remember.

The MANDA Fund set-up
The fund will open with $100,000 in capital. Trades will be entered on the target company at the first possible moment after the announcement is made. The majority of announcements are released when the market is closed, so those trades will be executed as soon as the market opens. (According to my broker, market-on-open orders are not guaranteed to be executed at the opening price.) If the announcement is made during market hours (which rarely happens), a trade will be entered as soon as possible as I’ll need a few minutes to assess the deal. I’m allowing $10 as the trading fee which includes commissions ($9.95/trade) and regulatory costs which typically amount to only a few cents. No trade will be more than $10,000 or 10% of the total portfolio value. Account interest will be included at current rates and no margin will be used. As for terms, I’ll be looking primarily at cash-only deals (no stock swaps), but if there’s a compelling cash plus stock swap, I’ll consider that, too. Evaluation will also be based on the terms of the deal: hostile takeovers and ones fraught with financial and/or regulatory issues may not make the cut. That’s about it.

The first two trades
On July 10th, Dow Chemical (DOW) announced it will be buying Rohm Haas (ROH) for $78 in cash. The deal, partly financed by Warren Buffett and the government of Kuwait (Dow just sold its plastics division to Kuwait Petroleum), is expected to close sometime in early 2009. On the date of the announcement, Rohm stock opened at $73.80. I’m picking it up today for $74. The company just raised its dividend to $0.41/share. Beginning in 2002, the company has consistently paid quarterly dividends–February, May, August, and November. If I can collect two of those at the current price, that will give me a total gain of $4.82/share for a six-month return of 6.5% or 13% annually. Pretty good. Even if Rohm fails to pay a dividend, the six-month return will still be a decent 5.4% (10.8% annual return).

My other holding is Community Bankshares (SCB) which I highlighted in my June 26 blog. I bought that for my own portfolio on that day at $18.85/share and will be adding it here at that price. The expected six-month yield (including dividends) for SCB is 12.4%.

Current portfolio and future picks
When I find a compelling takeover candidate, I’ll let you know on the day that I enter a trade. Current portfolio picks will be shown in the MANDA portfolio which will be located under Portfolios in the Blog Topic section to the right (as soon as I do a little layout rearranging).

Let’s see if we can beat Mr. Gabelli’s ABC Fund. Go MANDA!

M&A Funds

Thursday, July 17th, 2008

I mentioned before that putting out a daily blog is draining, especially one where I try to offer something original (it always is to me). Well, today is one of those days where the creative juices seem to be stalled. I’d rather be at the beach than tickling the keyboard ivories, but my conscience won’t let me play hookey. So to come to a truce between the angel whispering in one ear and the devil in the other, I’m going to put in a short post today.

Post-take over Taco Funds
My last recipe (July 7) concerned itself with buying companies after a takeover was announced. I thought that was my own idea but Mario Gabelli beat me to it by only fifteen years. Apparently he has two funds that operate according to this strategy. The first is the Gabelli ABC Fund (GABCX), so named because the strategy is as easy as ABC. The second is the AXA Mergers & Acquisitions Fund (EMAAX) which has only been around since 2002. It’s a bit riskier than the ABC because it can also invest in potential take-over targets. There are two other funds in this space (that I know of): the Merger Fund (MERFX) and the Arbitrage Fund (ARBFX). Compared with these two, the Gabelli Funds have the lower expense ratios combined with higher returns, although they do require a higher initial investment ($10,000 for the ABC Fund compared with $2000 for the Merger Fund). In fact, the ABC Fund has never had an unprofitable year.

The Upside
A major upside is that these funds outperform the S&P during bear markets. For example, in 2000 the ABC Fund returned 10.7% while the Vanguard Index 500 Fund (VFINX) that mirrors the S&P returned a dismal -9.1%. These funds have a bear market decile ranking of 1 which means that they outperform 90% of the fund universe in recessionary markets. Now these funds don’t boast stellar returns (ten year average of the ABC Fund is 6.7%) but their other selling point is their low risk making them very safe investments.

The Downside
The downside to these funds is pretty obvious. The S&P clobbers them during bull markets. Also, a souring economy can stem the takeover tide. When M&A activity dries up, Gabelli stuffs fund cash into T-bills so at least the investor is getting that rate of return. However, the falling dollar hasn’t stopped global M&A activity, with foreign companies eying the relatively cheap American valuations. (Witness InBev’s recent takeover of Anheuser-Busch.)

All-in-all, if you don’t know where to park your money and you want a better return than cash during bear markets, these funds could be for you. Based on fees and returns, the Gabelli ABC Fund would be my choice. If you have the time and would rather pick and choose your own stocks, review Recipe #13 as well as my April 29 and 30 blogs. For a current example, look at Community Bankshares (SCB) which I highlighted in the June 26 blog as potentially sporting a return of over 12% in six months (24% annual return).

There. I’m done. I hope the angel on my shoulder is satisfied ’cause I’m treating the little devil to an afternoon off.

Everyone needs the occasional day at the beach.

Chip Dip

Wednesday, July 16th, 2008

A strange day in the market, what with the airlines, financials, and Detroit automakers all operating in the green. The other head-scratcher are the semis–the silicon chip variety as opposed to the trucking kind. Looking at the chip makers, there are very few that are in the red. What’s going on here?

Well for starters, Intel late yesterday reported its second-quarter profit climbed 25 percent, helped by strong sales of laptop processors. The Street took this as a good sign for investors wary of possible slowing PC demand. An analyst at Deutsche Bank reiterated his Buy rating and set a $26 price target. Although the news was good, it didn’t have a drastic effect on the stock which rose today by only 1%. In contrast, shares of Altera (ALTR) gapped up by over 12% this morning on news that its second-quarter income jumped almost 22% due to higher sales and improved margins. Comparing the two charts, Altera’s is much more exciting than Intel’s, and that would be my pick of two. The chart shows resistance at $24 which is 10% above its current $21.65 price.

My Chip Pix
It’s the general consensus of industry analysts that the chip makers will fare much better in the second half of this year, the only caveat being that the consumer can’t close her pocketbook. In the past, computer sales were driven by corporate infrastructure; now, sales are much more consumer dependent. There’s been plenty of jawing recently about which chip makers will fare the best based on fundamentals. If you’re interested in getting in on this sector (and now could be an excellent time), I’ll leave fundamental analysis to you. Besides, you should be doing this type of research anyway. Listen to Cramer!

Okay. I’ll stop shaking my finger. Based purely on chartology, here are my candidates for Technical Best of Breed (TBB).

The Blue Ribbon Winners
Altera (ALTR)
is my top chip choice and frankly there aren’t a whole lot of dazzling candidates, at least for now. But things are starting to look up. Broadcom (BRCM) has recovered nicely from its multi-year low, gaining over 75% since March. It’s been range-bound for the past several months and is nudging up against major resistance at $30. It reports earnings after the bell on July 22nd and if investors like what they hear, a jump above $30 could make for clear sailing to the next resistance level at $36.

The Runners-up
The following aren’t my top choices, but they’re performing well in the “Sporting Compelling Charts” category. Included are their current prices, expected earnings dates, and earnings estimates. (A denotes after-the-bell and U is unconfirmed.)
Flextronics (FLEX): $9.20. Earnings 7/24. Earnings estimate: $0.28
Skyworks (SWKS): $10.30. Earnings 7/17 A. Earnings estimate: $0.17
National Semi (NSM): $21.30. Earnings 9/5. Earnings estimate: $0.34
QLogic (QLGC): $16.30. Earnings 7/21 A. Earnings estimate: $0.29
SatCon Technologies (SATC): $2.80. Earnings 8/04 U. Earnings estimate: -$0.07
Silicon Storage (SSTI): $3.20. Earnings 7/29. Earnings estimate: -$0.09

Sun Chips
I can’t conclude a discussion of the semis without at least paying lip service to the solar guys.This group has gotten bruised along with their less exotic brethren, but even they too are starting to turn up. If you like channeling stocks, look at Evergreen Solar (ESLR) and First Solar (FSLR). Rangebound as they have been, if this group does well, expect them to break overhead resistance. Trina Solar (TSL) jumped by a whopping 12% today off major support. Other stocks with bullishly biased charts are JA Solar (JASO), SunPower (SPWR), and LDK Solar (LDK).

Other ways to dip into chips

If you’re still a tad wary of picking individual stocks you can buy the SMH which is the Semiconductor ETF. The stock is bouncing off $28 major support and could be heading back towards resistance at $34. Another way to play it involves options. Yes, I know you might not want to risk playing options in this sector because who knows? If the Grinch steals Christmas this year, chip profits will definitely suffer (along with everyone else’s). But there is a way to cover your butt and your profits. Assuming the stock in question is optionable, you can purchase calls on the stock and simultaneously buy puts on the SMH. The SMH puts are your hedge against downside risk.

As I said, I don’t know if the chips are going to amount to more than a hill of beans in the upcoming months, but if they do, now is the time to get in on the action. Remember, if you’re heavily weighted in only a few sectors, it’s always a good idea to diversify your holdings especially when a promising opportunity arises. Considering today’s winning sectors, I’d much rather risk diversifying into the chips than into the airlines, financials, or auto makers. (I do think, though, that when we can see the clouds clearing over the credit crisis that financials will be looking mighty attractive, but I don’t think right now is the right time.)

Note on today’s market action: Although the market seems like it put in a bottom yesterday, I believe this to be another bear trap. I think we need complete capitulation before a true reversal can take place and that won’t happen until the VIX hits the 35 mark. That’s my tune and I’m stickin’ to it!

VIX Plays

Tuesday, July 15th, 2008

Yesterday we delved into the mysteries of the VIX looking at it from an historical perspective and what it portends for the market. I also tossed in my two cents concerning ways to play the market when the VIX hits various levels, saying that a rise above 30 generally signals that a market turnaround (even if it’s a short-lived one) is imminent. Well, earlier this morning the VIX did rise above 30. As of this writing (about an hour before market close), the major market indices look to be forming bottoming tails–another tell-tale signal of market reversal. So, the question of the day is: how can we make a quick buck from a market reversal? Let’s review some of our options.

The Set-Up
Being a scientist and mathematician at heart, my favorite intellectual pastime is to play variations on a theme of “What if?” Today’s hypothesis goes like this: “Let’s suppose the market will turnaround, either tomorrow or in a few days. How can we best profit from an upturn?” Well, we can either buy index tracking stocks such as the Diamonds, the Spiders, or the Qs; we can employ some sort of bullish index option strategy such as buying long calls, selling puts, or putting on bullish spreads; or we can use the reverse options strategies on the VIX which also has liquid options. To guide us towards the correct answer (or answers), we need to look at what would have happened in previous similar scenarios. In science, the more data you have the more accurate your results, but since I don’t have a staff of lackeys to cater to my every whim, I’ll have to make do with selecting one previous scenario, and the one that I’ve selected is the last one when the VIX hit 35 on March 17th. This was also the day the S&P 500 (as well as other major markets) put in a bottom and reversed course for the next two months. Now two months is a relatively long time for a bear market rally. Going back further to the previous two VIX 35 events that occurred last August and this January, you’ll see that the market corrected for only a week to ten days. So, what I’m going to do is use seven trading days (weekends not included) as my holding period.
Stocks or Options?
For simplicity, let’s look at the following scenarios:
1. Buying the tracking stocks on the Dow, the S&P 500, and the Nasdaq 100: DIA, SPY, & QQQQ
2. Buying call options on the above tracking stocks
3. Buying puts on the VIX
That’s the setup. The following table shows the results.
[Note: Commissions are not included. End of day prices were used. Annualized returns based on 251 trading days (this is accurate to within a day or two. I’m too lazy to count the number of trading days this year.)]

I know I’ve gone through a similar exercise before but I wanted to do this again to see how put options on the VIX would compare and you can see that the results aren’t nearly as good as using call options on the tracking stocks. It seems that you’ll get the most bang for your buck by playing the Qs, either by buying the stock or the at-the-money options. Remember, too, that there’s more leverage involved with options meaning that you don’t need nearly as much capital to make a similar return. (See the example below.*) So, if you’re interested in potentially making a quick buck, set an alert for when the VIX hits 35 and enter your play. Just remember to exit within a week or so if you’re using short-term options as any longer than that and you’ll start losing money due to time decay.
Viva la Vix!
*Example: Options vs. Stocks–The advantage of leverage
Let’s say we have $1000 to make a trade. Using the data for the Qs in the above example yields the following results (assuming no commission costs):
Stock (QQQQ)
Initial cost on 3/17: 24 shares x $41.48 = $996
Sell price on 3/26: 24 x $44.70 = $1073
Net Profit: $77
Option (QQQQ June41 Call)
Initial cost on 3/17: 3 contracts x $3.19 = $957
Sell price on 3/26: 3 contracts x $5.14 = $1542
Net Profit: $585
You can see that options return more than seven times that of the stock.

The VIX, the Market, and the Investor

Monday, July 14th, 2008

I know this title sounds like it could be a Chronicles of Narnia sequel, but the relationship between the VIX and the market is more than just a fairytale. You’ve heard me mention that the VIX is the volatility index, but exactly what is it and what does it tell us? Technically, the VIX is the measure of volatility on the S&P 500. It’s an invention of the CBOE (Chicago Board of Options Exchange) along with their other volatility products that cover these benchmark indices: Dow Industrials-VXD, the Nasdaq 100-VXN, the S&P 100-VXO, and the Russell 2000-RVX. (Note: There’s also a volatility index on crude oil, the OVX.) The VIX and its brethren reflect the market’s expectation of 30 day volatility and are constructed using the implied volatilities of calls and puts on a wide variety of near-term index options. Just like the standard deviation of a rate of return, the VIX is quoted in percentage points. As of this writing, the VIX is trading at 28.81, a relatively high value.

The Vix and the market
The VIX is regarded as a leading barometer of investor sentiment and inherent market risk. It is negatively correlated* to the S&P 500, meaning that if the VIX moves higher, the S&P will move correspondingly lower. The monthly chart of the VIX and the S&P below shows this to indeed be the case. You can see that during bull markets, the VIX stays low. The 90’s bull market was marked by a VIX that stayed in the low 20s. The latest bull run from 2003-2007 had VIX values in the 10 to 15 range. Why the difference? Pre-2003 the CBOE derived the VIX from the implied volatilities of only eight at-the-money put and call options on the S&P 100. Since then, the VIX has expanded to use more options based on the S&P 500. This allows for a more accurate view of investors’ expectations on future market volatility which is reflected in the chart.

How to use the VIX
Okay, so now you know what the VIX is and what it represents. But how can you, the investor, take advantage of it? For one, you can use it as a strategy guide for your own investing. For example, last July the VIX broke through its upper level resistance of 20 and stayed there. What the VIX was telling us was that people were starting to get jittery. That was the time to lighten up on long positions and start using protective strategies such as stock and index puts. Since then, the market tumbled while the VIX rode higher. The chart below shows the VIX making a series of higher highs and higher lows, with each low bouncing off its 20dma (not shown in the chart). The lows formed a perfect trend line that was subsequently broken on April 1st when the market reversed course and began heading up. But unfortunately, the rally was short-lived. The VIX traded below 20 for a month before it turned back up trading through the 20 mark at the beginning of June. And as we well know, the market has been skidding downhill since.

Several years ago, the CBOE began offering options on the VIX. (There are VIX futures, too.) The options are liquid but they’re also volatile. Used appropriately, they can reduce portfolio risk while maintaining returns. (For further info click on the CBOE link below.) This is their conservative side. If you have a speculative streak, you can play them as you would any other option but I’d be extremely careful; the implied volatility on these options can be high. In other words, the volatility index is a volatile index. Buying puts at extreme highs could land you a tidy return in a very short amount of time. I haven’t done this so I can’t put the Dr. Kris seal of approval on it, but next time the VIX heads north of 30 (which it’s threatening to do any minute), I might just take on a small position and see how it works out.
VIX Strategies
You may wish to take note of the following strategies based on VIX movement:
Falling below 20: Start covering short positions and bias your portfolio towards the long side. As the VIX drops, keep adding to long positions.
Staying below 15: Utilize all bullish strategies, including more aggressive plays.
Rising above 15: Use covered calls to protect long positions. Wait until the VIX falls below 15 before initiating new long positions.
Rising above 20: Start unwinding aggressive positions. Collar long stocks if you’re planning on keeping them. Start buying stock or index puts. (Can also buy VIX calls as another portfolio hedge.) If VIX remains above 20, lighten up on long positions.
Rising above 25: Cash out of long positions if possible or fully protect the ones you keep. Enter short positions or buy Contra ETFs.
Rising above 30: If you have short positions, starting writing covered puts.
Near or above 35: The market is ready to capitulate. Speculators can buy index calls or VIX puts. You’ll have to be on your toes to catch this one as the VIX kisses this level for only a moment.
What is the VIX telling us now?
The above chart shows that the market doesn’t turn around until the VIX reaches the mid-30s (typically 35). The VIX hasn’t even reached 30 which to Dr. Kris’s eyes means continued market decline.
I hope I’ve given you a better picture of the VIX. Unlike the wardrobe in the Chronicles of Narnia, there’s no magic behind it except in how you use it and for that, the wand to make your portfolio returns grow is in your hands. May the power of the VIX be with you!
*The CBOE lists the VIX/SPX correlation coefficient at -0.86 (current as of June 2007) which is a high measure of negative correlation. (+1 is perfect positive correlation; -1 is perfect negative correlation; and 0 is no correlation)
Reference: Using VIX options to reduce portfolio risk:

Earnings Etouffe Redux

Friday, July 11th, 2008

My very first recipe was Earnings Etouffe. In a nutshell, the strategy is simply to buy stocks that have raised their earnings guidance and sell them just before their next earnings release. In my April 7th blog, I mentioned 15 stocks that had raised estimates that I thought would be good candidates for this recipe. Since second quarter earnings season has just kicked off, I thought I’d go back to these stocks and see how well they would have performed.

Portfolio construction
The First Quarter Earnings Etouffe Portfolios were constructed according to the following parameters:
1. $5000 per position, giving a total portfolio value of $75,000 (15 stocks x $5000)
2. No margin was used; account interest of 2.5% paid quarterly
3. All transactions reflect end of day prices
4. $9.95 commission/trade (no other fees included)
5. Thirteen stocks were purchased on 4/7/08; MANT was purchased on 4/15 due to volatility and FCN was bought on 4/16 when it bounced off of support. (I mentioned both of these issues in the April 7th blog.).
6. Stocks were sold according to two scenarios:
Scenario #1: Stocks were sold just before their earnings were released. (This is according to the Earnings Etouffe recipe.)
Scenario #2: Stocks were held over earnings and sold on or after the date of release, depending on the time. (Companies reporting before the bell were sold at that day’s market close; those reporting after the bell were sold at the close of the following day.)

Comparison of the two scenarios So, how did these two portfolios perform? Porfolio #1, the one where stocks were sold just before earnings, gained 3.5% (18% annualized return), while Portfolio #2 in which stocks were held over earnings gained only 2.3% (14% annualized return). What’s interesting to note is that the field was evenly divided: 7 stocks fared better after earnings, 7 fared worse, while one essentially remained the same (FTD) . (See table) Although the percentage is even, the results obviously weren’t. Two stocks, VVI and ASTE, dropped significantly which contributed to the underperformance of the second scenario. Now fifteen stocks is by no means a representative sampling but it still illustrates my point of selling before earnings.

Comparison with the S&P 500
Compared with each other, Portfolio #1 outperformed #2, but they both outperformed the S&P from April 7 – June 17. During that time, the benchmark index was down 1.6%. From this it seems that the tenets of this recipe are valid even in times of market decline. So if you’re interested in playing this strategy, now is a good time to familiarize yourself with Recipe #1 and go stock hunting. Don’t forget that you also have the option of using options, thereby increasing returns. There’s still plenty of time to get in on this earnings season. Good luck and happy weekending!

Sexy Biotechs

Thursday, July 10th, 2008

For the past two days we’ve been judging best of breed among the drug sector. Tuesday’s lineup included the Wholesale/Distributors and Generic drug makers. We found several decent plays but there was little else that warranted more than a passing yawn. The excitement quotient picked up yesterday with some attractive candidates lurking in the Ethical Drug industry (Big Pharma), and today’s contest portends to be even better because on tap is the sexiest group of them all, the Biotechs.

The Lineup
There are hundreds of companies in the Biotech group ranging in size from micro- to large-cap with an estimated majority falling near the lower end of the scale. I looked at the chart of every single one and am happy to report that the most attractive stocks were found among the large-caps, although I did find a couple of decent small-cap stocks and one micro-cap. Okay, enough of the introduction and on with the show.

The Beauty Queens
Winning in all departments (including the much-dreaded talent portion of the beauty contest) are the following:
Illumina (ILMN): 5000% is how much this stock has gained in the past five years. But is it too pricey now that it’s trading just under $90? Maybe. It’s P/E ratio is catching up to its growth rate. For now, the company is slightly undervalued but it won’t be if the price goes much higher. However, the company said recently that it expects second quarter profit of 37 to 40 cents per share, topping the 28 cents expected by analysts. Perhaps this good news is being priced into the stock…? All I know is that the Chicken Little in me would wait until after their next earnings announcement on July 22nd before deciding whether or not to jump in.
Celgene (CELG): This stock took a tumble along with the rest of the market last October. It bottomed out in December (earlier than most) and has been rising steadily since. Poor drug trials by a competitive product have helped the company’s bottom line. At $71/share, it’s closing in on its all-time high of $75 and change. I’d look to buy it here. Note that an analyst at Jeffries just raised company EPS estimates as well as the target price from $77 to $81 per share.
Techne (TECH): This company develops, manufactures, and markets instruments and other products for use in biotechnology and hematology world-wide. It’s revenue, earnings per share (EPS), and EPS growth rate have been increasing steadily along with its share price. The deca-levels ($10 levels) seem to form resistance for the stock. It cleared the $70 hurdle a couple of months ago and is now looking to take-out the $80 level. If it does that on volume conviction, I’d be a buyer. Earnings aren’t until Aug.5, but if it reports much better than expected results like it did on April 29th, you could see the stock leap well over the $80 mark, if it hasn’t surpassed it by then.
Emergent Biosolution (EBS): This is one of the small-cap companies I mentioned above. It develops and manufactures vaccines for a wide variety of applications including anthrax, an agent of bioterrorism. The stock plummeted from a high of $17.75 to under $5 last December. It dug itself out of the trench and is now trading at $12. The company is currently involved in a he-said-she-said type of lawsuit which doesn’t seem to be affecting the stock price. A good entry point would be a bounce off its 50dma. Earnings will be reported later in August.
Savient Pharmaceuticals (SVNT): Since 1995, this stock has steadily risen from under $2 to a high of over $28 per share. It’s now trading about a buck below the high; breaking that level would be a bullish sign. It’s gout treatment posted positive phase III clinical trial results which sent Wall Street pundits into takeover speculation mode as this treatment has dollar signs written all over it. (See my note below regarding takeovers in this sector.) The company has not announced the date of its next earnings release but if it’s like years past, it’ll be somewhere late in July or early in August.
CombiMatrix (CBMX): This may be the smallest of the companies promulgated here, but it wins the bathing suit contest hands-down. The company fabricates material arrays, including DNA microarrays, which are used in a variety of applications. It is also involved in biodefense and nanomaterials development. Can this company stuff a wild bikini or what?! Although its sales are comparatively small, its growth rate has been enormous. It was recently added to the Russell Microcap Index. The stock is having a tough time staying above $11 and if it can do that, I’ll be a buyer. Earnings are scheduled for late July or early August. Also, please keep in mind that the average daily volume on this stock is only 20,000 shares, so use limit orders when entering trades.

The Runners Up
Here’s a list of more good companies that didn’t quite make the grade, either because they’re trading off their highs or are in the process of recovery. For one reason or another, their charts weren’t as compelling as the ones above. You’ll have to do your own research on these since I don’t have the time nor the space, but for what it’s worth, the MSN Stock Scouter gave them all an 8 (out of 10) which is very good and my investment software rated them all a “Buy” except for Gilead and Martek which were rated as “Holds.” In no particular order, here are the runners up: Myriad Genetics (MYGN), Martek Biosciences (MATK), Gilead Sciences (GILD), ViroPharma (VPHM), Onyx Pharmaceuticals (ONXX), and Alexion Pharmaceuticals (ALXN). Genzyme (GENZ) almost made the cut but I’m not quite sure if the stock’s current rally is for real or just a head-fake. I’d like to see it break its $82 high first. As a consolation prize it’s awarded Miss Congeniality.

Well, now you’ve got a nice list of drug stocks to add to your buy list. One thing I noticed in my perusal of this sector is the inordinate number of recent takeovers. Considering the large quantity of companies in this sector, it’s not unreasonaable to expect a certain amount of consolidation, what with many of the major drug developers cutting costs as their key revenue drivers lose patent protection and face stiff competition from generic equivalents. With increasingly lackluster offerings, big pharma is turning to biotechs to help them beef-up their product pipelines. Of course, one could always play the take-over game by trying to identify those companies prime for the picking, but considering the sheer number of drug stocks in the micro-cap universe, that seems almost as impossible as pushing an elephant through a keyhole.

Frankly, I can think of better things to do.

The "Ethical" Drug Stock Pix (aka Big Pharma)

Wednesday, July 9th, 2008

Yesterday we looked at the ugly ducklings comprising the wholesale/distributor and generic segments of the drug sector and found little to recommend. Today will be a different story as there are many beaten down companies that deserve our attention. I mentioned that before yesterday, the drug sector had been on a stealth rise and was perched in the number 12 spot. Because of yesterday’s across the board gains, the sector not only made the Top 10 list but the Top 5 list as well. Yep. It’s now Number 5 with a bullet. I can’t guess how much higher it can go–trying to topple the utilities and petroleum sectors will be no small feat. But the drug sector isn’t the only one that has done well as of late; so has its partner, the healthcare sector, which is currently sitting in the number four spot. (FYI, the Market sector composed of long and short ETFs holds the number three position.) Healthcare is a subject best left for another time for today we’re going to be judging the best of breed in one of the other two remaining drug sector industries: the Ethical drug makers (don’t ask me how the term “ethical” came to denote big pharma). Biotechs, the last industry, is left for tomorrow.

The Beautiful Swans, Part I: The “Ethical” Drug Makers
This industry covers most of the major drug makers and it also includes some of the smaller ones. First on the list is Vivus (VVUS). This stock was a darling ten years ago when it was trading over $40/share. The company develops and markets sexual dysfunction drugs for both men and women. In 1997, it came out with Muse, an erectile dysfunction drug. A short time later, Pfizer introduced Viagra which not only killed the market for Muse but for the stock, too. In just one year, Vivus lost over 90% of its value, trading under $3. However, since the middle of 1995 its been upward bound and is now trading just over $8. Its Qnexa drug is in stage III clinical trials for obesity and in stage II trials for diabetes. The results look promising. They also have a couple of other sexual dysfunction drugs in clinical trials and recently sold a menopause treatment to K-V Pharmaceuticals in May, 2007 which gave the stock a nice boost on the behind. Today, it’s looking a tad overextended; I’d wait for a pull-back before placing my chips on the table. One cause for concern is that insiders have been selling quite a bit of stock over the past year. Is there something they know that we don’t?

After losing nearly 50% of its value since fall 2006, AstraZeneca (AZN) made an about-face in the middle of March and is now trading at $48, nearly 37% above that low. This is one darn fine company, rated a 10 by the MSN Money Stock Scouter. Among many of its successful and lucrative products include the highly publicized Nexium and Crestor. The stock recently broke above its 50dma on a weekly chart–a positive technical event that signals a continued rise in price. Another good sign is that the company has been steadily increasing its dividend which now stands at $1.82 annually for a 3.9% dividend yield.

Other stocks that are rising from the ashes are Schering-Plough (SGP), King Pharmaceuticals (KG), and Novartis (NVS). I like the price action on the first two but am a bit hesitant about recommending Novartis. Sure, its price has increased by nearly 24% in the past several months but this is exactly the reason I’m being standoffish–at least for the moment. Its chart is looking toppy and I’d like to see it take a break before entering a trade. The other two companies have been steady eddies, and their consistent price pattern is something I find more reassuring. Schering blew out last quarter’s estimates and is reporting good phase III test results with its hair follicle stimulating drug. King Pharmaceuticals is recovering from a two-year low. It recently broke heavy resistance at $10 and is rising steadily. The fundamentals on this company seem to be lackluster, but they did beat analysts’ estimates for the past two quarters. I’m recommending this stock purely on the basis of its chart action.

There are three other stocks here that have been doing exceptionally well: Elan (ELN), Wyeth (WYE), and Valent (VRX). The reason that I’m not giving them two thumbs up is that they all look over-extended and are likely due for a breather, but I’d keep them on a watch list.

My plan for today was to include the biotechs but there are literally hundreds of companies in this group and it’s taking me much longer to analyze than I had expected. Tomorrow I promise this will all be wrapped up, but you won’t be disappointed ’cause there’s quite a few sexies in the lineup.

Trading Note: I’m seeing large topping tails on the the PPH and the BBH (the pharmaceutical and biotech ETFs) and in many of the drug stock charts. This generally bodes ill for continued upward movement in the short-term. Keep this in mind if you’re looking to buy either the ETFs or some of the underlying stocks. Patience, in this case, is a virtue and will ultimately be rewarded.

A Shot in the Arm or Another Bear Trap?

Tuesday, July 8th, 2008

Who pushed oil and commodities off their lofty ledge? Hello! Is NOTHING sacred??? Geesh! Just when you think you’ve got this market all figured out…Is there nothing left to buy?

Maybe. There is one sector that has been rising stealthily, unseen beneath the blinding curtain of the falling dollar and rising energy and commodity prices. Just last week, this sector was 30th in the rankings but as of yesterday, it’s now perched in the twelfth position. And if today’s action is any indication, it could break into the Top 10 tomorrow. What is this sector? No, unfortunately it’s not the financials–yet. It’s another beaten down sector, the drug stocks.

The case for drugs
The chart of the PPH, the Pharmaceuticals Holder (an ETF), shows that it’s up 4% over its multi-year low at $66.50, a number that it hit three days ago. But it has three resistance levels at $72.50, $75.50, and $77.50 to clear before I’d be a firm believer. The Biotech Holders, the BBH, paints a rather different picture. Sure, the daily chart has been trending up for the past six weeks, but if you look at the weekly and monthly charts, the forecast may not be as rosy. The stock has declining steadily since 2005, and the pennant that it’s now forming can be construed as a bearish sign. Just to be on the safe side, I would personally wait until the price cleared $182 before I put on full positions in the biotechs.

The four major industries
I have no idea if this sector rally will hold, but it’s worth a look just in case. What I’m going to do is to pick what I feel are the most compelling stocks in each of the sector’s four industry groups: the Generic drug makers, the Ethical drug makers (the large-cap pharmaceutical companies are in this group), the Biotechs, and the Wholesale/Distributors. These groups are composed of many companies and to try to include them all in one blog is too much for me as I’m perenially short-staffed. So, the plan is to tackle the ugly ducklings today and leave the beautiful swans to tomorrow.

The Ugly Ducklings

The Wholesale/Distributors

This is the least compelling group of them all. In fact, with the exception of one stock, it’s downright fugly. The two major names here are Amerisource Bergen (ABC) and Cardinal Health (CAH). Both are down over 30% from their recent highs and both are sitting at major support. McKesson (MCK) is the other major player. Its near 4% gain today is but a small step in the right direction. It’s going to have to break $60 for me to even consider it. No, the only compelling stock here is Owens and Minor (OMI). The stock has risen almost 70% in two years and the bounce off of its $44 support yesterday combined with a nice gain today signals that a break to new highs could be in the offing. The company is in good financial shape, too. Zacks recently included it as part of its Discounted Fundamental Strength strategy which identifies stocks with strong fundamentals and low valuations. As an added plus, the company pays a dividend (current D/Y is 1.7%).

The Generics
This is another small group and only slightly better looking than the above. The biggest names look to be the most compelling. Teva Pharmaceuticals (TEVA) tops the list. Despite a disappointing trial result for its MS drug yesterday, it was upgraded today by a Goldman Sachs analyst. This left me scratching my head until I saw that Goldman owns 8.5 million shares of the company’s stock. Okay. Now that makes sense. Chart-wise, the stock has been sliding away from its all-time high of $50 put in several months ago. It’s currently bouncing off support and if it manages to keep moving in a positive direction, I’d hold onto it at least until it retests its high. On the other hand, if it continues in the downward direction, I’d dump it if it breaks below $42.
Nothing else in this space warrants a buy recommendation (and TEVA barely gets that). The “not-as-ugly-as-the-others” awards go to Perrigo (PRGO), Barr Pharma (BRL), Watson Pharmaceuticals (WPI), and Mylan (MYL). All have recently been trending up but hey, so have a lot of other stocks. There’s nothing in this sector to get excited about at the moment.

Now that we’ve cleared the stage of the coyote uglies, we’ve got room for the real lookers–the biotechs and big pharma which we’ll be judging tomorrow. ‘Til then!

Handy-Dandy Financial Resources

Thursday, July 3rd, 2008

For those of you who are “staycationing” over the Fourth and find yourself with way too much time on your hands, here’s a short list of some financial websites that I use regularly for research and information that you might like to peruse. Now, most folks rely on one of the more common, comprehensive sites as their primary source of financial information such as Yahoo! Finance and MSN Money Central, but there are other sites that provide niche products that these don’t. Since this is a holiday-shortened market day, Dr. Kris & Co. is taking off early. So without further ado, here are the sites that I find useful along with a few brief highlights.

The Do-All/Go-To Sites
The following sites offer a variety of resources, tools, and (mostly) free services: business news, stock charts, market stats, company descriptions, mutual fund/ETF/bonds/currency centers, earnings events and economic calendars, SEC filings, insider trading, analyst upgrades/downgrades, stock screeners, financial blogs, investment newsletters, email alerts, streaming financial videos, educational tools on all aspects of investing (including options) and personal finance including calculators and portfolio trackers. And the list goes on and on. You can easily spend several hours if not the better part of a day just getting to know one of these. Of the sites below, Yahoo! and MSN are the most comprehensive.

Yahoo! Finance:
They have a new feature called Tech Ticker that is basically one big blog along with streaming video clips.
MSN Money Central:
Offers a stock screener and email alerts that Yahoo! doesn’t.
Google Finance:
This site isn’t nearly as comprehensive as the other two which may be a big plus for you “less is more” type folk.
You can enter their over-hyped contests from here.
Offers a nifty free screening tool plus two weeks free use of their research wizard. (Note: Some of their stock screens are subscription only.)

The Niche Sites
These are a few of the sites that I use to find specific info fast.

Full Disclosure (now
Bare-bones site featuring economic highlights, previous and upcoming earnings estimates and results for all listed companies, earnings/conference call/splits/dividend/economic events calendars. I use this site all the time.
Good investor education tools including a comprehensive financial dictionary, a description of each market index, and a free options course.
The Uber-Site for ETFs and mutual funds. They also offer in-depth reports on over 6000 hedge funds. It’s by subscription but there’s a two week free trial.
Have some fun in the financial horoscope section which includes celebrity horoscopes and a money matchmaker.

Options Sites
The CBOE offers free online options tutorials and courses and is the place to go for options pricing and everything else options-related. The OIC also offers free options classes as well as downloadable options software. Both links are at the top of the page.

The above sites are just the tip of the financial information iceberg. If you’ve always wanted to learn options, this weekend would be a great time to sit in front of your air conditioner with the baseball game in the background and your computer tuned into an online options course. I just may do that myself and brush up on a few strategies…or I just might lie on the beach and read.

Have a safe and fun Fourth!