30 January 2011 Any Excuse Will Do.
There was a lot of great stuff in this week’s Barron’s. We are a little pressed for time and despite a late start, we do want to cover as much as possible.
Santoli did a great job of describing how the market was waiting for an excuse to correct and the protestation in Egypt (Which followed the peaceful change of power in Tunisia) provided a great reason to take profits and worry about something else other than China tightening its purse strings and The ABCs of Euro defaults. It worked and we had a nasty correction on Friday. If you were reading we took quite a bit off the table during the week. We did that because of a cash need and because we did thing the market was a bit hyped. You cans see the posts for yourself.
Where will the market go this week? Most are guessing the Suez will not be impacted, and the demonstrations will continue, but Mubarak is under scrutiny of the World stage not to let things get too crazy. My guess is you will hear support for “free” elections this September and the distinct possibility of a peaceful change in government. It might not be the government the US wants, but it will be a quasi-democratic effort. That sentiment should settle things down by weeks end.
Then we will see who is selling and buying. My guess is that once all the big player have felt how good it is to take a profit this last Friday, they might enjoy it some more this week. We are guessing the market to be down another 2 points this week.
With that said, we are in the heart of earnings seasons and any small string of surprises either way could cause havoc and halt the sell off or escalate the retreat. All it would take would be XOM Exxon to miss, along with a miss from the likes of ITW Illinois Tool, and throw in a miss from APC tomorrow and there will be those who swear they got hit by a piece of the sky falling. (Personally we thing all three will be beats and the market will take the beats with a grain of salt.) Others to watch this week which could be market movers, ARMH Arm Holdings in the UK, CMI Cummins, MHP McGraw Hill (Look for a big miss), PFE Pfiezer, UPS (a beat), BSX Boston Scientific, MEE Massey Energy, WU Western Union, WHR Whirlpool, GMCR Green Mountain Coffee (Beat), V Visa, YUM Yum Brands, MRK Merck, RDWR Radware, CLX Clorox, TYS Tyson Foods ( amist due to rising costs), and WY Weyerhaeuser. That is only a few of the hundreds of companies reporting this week.
If that was not bad enough, we have quite a few economic data points headed our way. Monday we find out what we are making and what we are spending. Personal Income and Outlays are announced Monday. Look for both to be up a tenth of a point. That is the guess and we agree. If anything it might be too conservative. Monday will also see the Chicago Purchasing Manager’s Index (PMI). It took a nice leap last month and most are looking for a downward adjustment. With the inventories report quoted last week, We are thing it may be flat with December. Look for a 68 which would beat estimates. (BTW that would be a good thing). Tuesday is motor vehicle sales and the target number is 9.4 million units. We are skeptical but will take their guess. (China is on target to sell close to 12 million units.). The ISM, another manufacturing number and the guess is relative flat at 57.5. Again we are thinking a little more oomph to 58.5. Wednesday we have a BIG event. It is Bennito’s Birthday. Happy Birthday Buddy. The consensus is 55, and we happen to know that is where he will come in. ADP is reporting and we will hopefully see some good employment news and small as it might be. That will be followed by our usual jobless claims number which disappointed last week. Look for a slight improvement. Which will be followed by the overall employment report on Friday. Look for unemployment to remain flat as publics jobs get lost to new hire in the private sector.
So that means, earning should be the driver for the market next week assuming the there are no other Middle East County with dancing in the streets.
Value Vs Growth.
It has been a while since I have seriously read the IBD (Investor’s Business Daily). We used it in the late 80s and early nineties and then again circa 98-2000. We always enjoyed it, but was sometimes overwhelmed with all the data that was presented on a daily basis. In the last two years we have limited our IBD exposure to our Kindle Download everyday. We also used the IBD stock check up (Along with VectorVest) when doing a complete analysis of an equity.
This weekend, we had a chance to once again read through O’Neil’s (Founder of IBD) “How To Make Money In Stocks”. While I do not agree with every single element of the CAN SLIM investment strategy, this book is a great primer and guideline and in my case refresher in some of the mechanics of stock evaluation.
Last night at another great meal at Hanna’s we had one of our guests (and reader) thanked me for suggesting the sell on the 8% drop rule. The do this using stop orders which we also suggested. He indicated that has helped protect his down side and lock in profits. The concept came from the CAN SLIM System.
In review the book in its latest edition, (4th) It got me thinking about some of the basic rules I use for evaluating stocks. At heart we are a value investor and we do use P/E Ratios as one key criteria. We probably always will, but after reviewing this book again and looking at our own portfolio and some of the examples in the book, a much more powerful criteria is EPS Growth.
When you look at Earnings Per Share Growth (Quarter to Quarter for the last year ie 4th qtr 2009 versus 4th qtr 2010) and an average of the last 4 years EPS Growth, and share price performance, EPSG almost always blows away P/E ratio. In fact, higher P/E ratios with 20-25% EPS Growth seem to be stellar stocks.
We bring this to your attention only to point out that we will be slightly adjusting our analysis to include Q T Q and 4 Year Averages of the EPS figures from this point further.
We are committed to learning more about options as we have seen some impressive realized gains in our portfolio since we have started using them. I am wondering how many of you readers have option trading and or margin privileges on your accounts. I ask so I can determine how much of the options contract info I should include in the blog. Regardless we will mention the companies we are optioning and report our wins and losses. Just hit reply and let me know if you are an option kinda player.
A Pharma Update
A few weeks ago, we did a piece on pharma’s and we got into PFE Pfizer (looking back on it and using EPSG as a criteria, we would have probably not bought the stock.) In this week’s Barron’s, there was a good article by Andrew Bary about Big Pharms who need to get some new products on the line and a common strategy is to buy smaller pharms rather than spend the time and monies playing FDA Roulette. The article points out 13 prime candidates for take over in the next 12-18 months. We will not (out of respect for Mr. Bary and Barron’s) provide the entire list but give you a few we checked out that looked interesting or one’s we discovered off the list that looked interesting as well.
Not On The List MATK Martek Biosciences Corporation engages in the development and commercialization of nutritional products from microbial sources, including algae, fungi, and other microbes worldwide. Its products include life's DHA, a vegetarian source of algal DHA omega-3 important for brain, heart, and eye health throughout life, as well as for use in foods, beverages, infant formula, and supplements; and life's ARA, an omega-6 fatty acid, for use in infant formula and growing up milks. In addition, the company's subsidiary, Amerifit Brands, Inc. develops, markets, and distributes branded consumer health and wellness products in mass, club, drug, grocery, and specialty stores. Its products include Culturelle, a probiotic supplement; AZO, an OTC brand addressing symptom relief, detection, and prevention of urinary tract infections; and ESTROVEN, a nutritional supplement brand addressing the symptoms of menopause. Martek Biosciences Corporation also provides contract manufacturing services for the production of enzymes, specialty chemicals, vitamins, and agricultural specialty products. It sells oils containing fatty acids under the names of life'sDHA, DHASCO, Neuromins, ARASCO, and life'sARA. The company markets its nutritional oils primarily to the infant formula, pregnancy and nursing, food and beverage, dietary supplement, and animal feed markets. Martek Biosciences Corporation was founded in 1985 and is headquartered in Columbia, Maryland.
NOT ON THE LIST BIIB Biogen Idec Inc., a biotechnology company, develops, manufactures, and commercializes novel therapeutics in the areas of neurology, oncology, immunology, cardiopulmonary, and hemophilia in the United States and internationally. The company's marketed products include AVONEX for the treatment of relapsing multiple sclerosis (MS); RITUXAN for treating relapsed or refractory, low-grade or follicular, CD20-positive, and B-cell Non-Hodgkin's Lymphoma (NHL); TYSABRI to treat relapsing MS; and FUMADERM for the treatment of severe psoriasis. Its products under development consist of BG-12, a Phase III clinical trial product for the treatment of MS; Humanized Anti-CD20 MAb, a Phase III clinical trial product for the treatment of rheumatoid arthritis and lupus nephritis; Lixivaptan, a Phase III clinical drug for the treatment of Hyponatremia; Daclizumab, a Phase II monoclonal antibody that is being tested in relapsing MS; and Fampridine, an oral compound as a treatment to improve walking ability in people with MS. The company's products under preclinical stage comprise BIIB014, Ocrelizumab, Neublastin, LINGO, and BART for neurology; Hsp90 Inhibitor, GA101, Anti-IGF-1R, Volociximab, Anti-CRIPTO, RAF Inhibitor, and Anti-Fn14 for oncology; Anti-TWEAK, Anti-CD40L Fab, and Anti-FcRn for immunology; and Long-acting rFactor VIII for hemophilia. It has collaboration agreements with Neurimmune SubOne AG; Cardiokine Biopharma LLC; UCB, S.A.; Swedish Orphan Biovitrum AB; Facet Biotech Corporation; Vernalis plc; and Schering AG. Biogen Idec Inc. was formerly known as IDEC Pharmaceuticals Corporation and changed its name on November 13, 2003. The company was founded in 1985 and is based in Weston, Massachusetts.
UTHR United Therapeutics Corporation, a biotechnology company, engages in the development and commercialization of therapeutic products for patients with chronic and life-threatening diseases in the United States and Internationally. It offers Remodulin, Tyvaso, and Adcirca (tadalafil) tablets for the treatment of pulmonary arterial hypertension (PAH); and CardioPAL SAVI and decipher cardiac monitors, and CardioPAL SAVI wireless cardiac event monitors for cardiac arrhythmias and ischemic heart disease. The company's under development products include Oral Treprostinil, which is in Phase III clinical trials for the treatment of PAH and is in Phase II clinical trials for the treatment of peripheral vascular disease; Beraprost-MR, a Phase II clinical trials product for the treatment of PAH; 3F8 MAb, a Phase II clinical trials product for neuroblastoma; Aviptadil, a Phase II clinical trials product targeting pulmonary hypertension and other pulmonary diseases; 8H9 MAb, a Phase I clinical trials product for the treatment of metastatic brain cancer; IW001, a Phase I clinical trials product that targets idiopathic pulmonary fibrosis and primary graft dysfunction; and Glycobiology Antiviral Agents, which are in pre-clinical trials for Hepatitis C and other infectious diseases. United Therapeutics Corporation also provides telemedicine monitoring services to detect cardiac arrhythmias and ischemic heart disease. The company sells its products through sales and marketing staff, specialty pharmaceutical distributors, and pharmaceutical wholesalers. It has a licensing agreements and relationships with Eli Lilly and Company; Toray Industries, Inc.; NEBU-TEC; Mondobiotech; ImmuneWorks; GlaxoSmithKline PLC; Pfizer Inc.; and Supernus Pharmaceuticals, Inc. United Therapeutics Corporation was founded in 1996 and is headquartered in Silver Spring, Maryland.
JAZZ Jazz Pharmaceuticals, Inc., a specialty pharmaceutical company, develops and commercializes products for neurology and psychiatry primarily in the United States. The company's marketed products include Xyrem, a sodium oxybate oral solution for the treatment of excessive daytime sleepiness and cataplexy in patients with narcolepsy; and Luvox CR for obsessive compulsive disorder and social anxiety disorder. The company's late-stage product candidate comprises JZP-6, which has completed two Phase III pivotal clinical trials, for the treatment of fibromyalgia. Its other product candidates in clinical development consist of JZP-8, an intranasal formulation of clonazepam for the treatment of recurrent acute repetitive seizures in epilepsy patients who continue to have seizures while on stable anti-epileptic regimens; JZP-4, a controlled release formulation of an anticonvulsant for the treatment of epilepsy and bipolar disorder; and JZP-7, a transdermal gel formulation of ropinirole for the treatment of restless legs syndrome. In addition, the company is developing oral tablet forms for sodium oxybate. Jazz Pharmaceuticals, Inc. was founded in 2003 and is headquartered in Palo Alto, California.
PLEASE DO YOUR HOMEWORK. We do own some calls on BIIB, and we are looking at UTHR. All four seem to be candidates for takeover and could do well without the big guys.
What we Need this week are Happy Egytians