Jan
28
Jan
21
Dear New World Investor:
Does this market want to go up, or not? The long consolidation that started this 86-day cycle ended on December 31, with a spike low down to 1114.81. After a nasty down day last Friday, we came back from the three-day weekend to watch the S&P close almost on its 16-month high at 1150.23 on Tuesday, concluding a very nice 11-day rally. But yesterday the S&P probed lower levels than it visited last Friday, and today it went all the way back down to the area of the December 31 spike low.
As the emergency broadcast system announcer says: “This was a test. This was not a real emergency.” So far, the S&P has passed the test. A little fear was injected into the market as the VIX Fear & Greed Index moved back over 20. Consolidations can be benign affairs that drift stocks sideways for several days, or they can be nasty drops that build up negative sentiment quickly. No need to tell you which this one is.
As long as the S&P stays over 1115, I think we can be confident this drop will be short and be the launching pad for the long-awaited move to and maybe over 1160. The daily fractal dimension is back over 55, so the market is fully re-energized for its next trending move. If that move is down and 1115 fails, we’ll probably see another test of the 1080 to 1090 zone that held us down for so long. But I am still very bullish for the next couple of months, simply because the economy is still growing well and the credit markets are unlocking.
This morning we heard that the Conference Board leading indicators confirmed what the Economic Cycle Research Institute numbers have been telling us since last March. The indicator jumped 1.1% in December, well above the 0.7% increase that economists expected. The November rise was revised up from 0.7% to 1.0%. December was the ninth straight month the leading indicators have gone up. I don’t know what the folks predicting a double-dip recession are seeing; I think they’re just dismayed they missed the bottom last May.
In the credit markets, last week companies raised $11.7 billion in the high yield debt market, aka junk bonds. That was the biggest junk bond week ever. Banks are making good money underwriting debt issues, and the big investors are stretching for yield in this low interest rate environment. Assuming Ben Bernanke gets confirmed for a second four-year term as Fed Chairman by the Senate before his first term expires on January 31, we should have low interest rates until inflation soars out of control. I still think that will happen during his second term, and he will be forced to resign before his a full 14-year term on the board of governors ends in January 2020. But for now, his shell game is working and both the economy and the stock market should continue higher. The good earnings report from Google after the close will help.
The V-Shaped Recovery
In addition to the strength in the leading indicators, surveys of U.S. consumer spending have turned quite bullish. There’s nothing like putting the old year behind to turn people more optimistic. There has been a surge of spending plans on household improvements and autos, the latter now at the best levels since the Cash for Clunkers program. Of course, spending plans are recovering from very low levels, and there are still just as many people saying they will cut back over the next 90 days as say they will spend more. But the “cut back” camp was nearly twice as large as the “spend more” camp just two months ago, and those saying they will cut back are falling faster than the “spend more’ group is increasing. The remainder in the “about the same” camp are still around 60% of all responses, but slowly falling as “spend more” increases.
A year ago, 67% were in the “cut back” camp, and only 13% in the “spend more” camp. For the first time in six months, the January survey showed more people thinking the economy is improving (36%) than getting worse (23%). We’ve come a long way.
Consumer electronics spending plans in the U.S. are showing the typical seasonal weakness, but don’t be fooled. Chinese New Year has become almost as important a driver as Christmas, and most tech companies are and will guide for a decent March quarter thanks to Asian spending, on top of an excellent December quarter.
Coming Events
All times below are ET, and most of the presentations and slides are archived on the companies’ websites so you can listen to them.
Tuesday, January 26
ERES – ERT – 4:00pm – Jefferies Global Healthcare Services Conference
ROCM – Rochester Medical – 4:30pm – December quarter earnings conference call
INFN – Infinera – 5:00pm – December quarter earnings conference call
Thursday, January 28
SNDK – SanDisk – 5:00pm – December quarter earnings conference call
Where We Are In The $2,000-to-$1,080,000 Sequential Trade Sequence
Please see this updated explanatory page if you are not familiar with how four trades can turn $2,000 into $1,080,000 by the end of October.
BioCryst Pharmaceuticals (BCRX) is in limbo (again) as we await confirmation of the pricing for Rapiakuta (peramivir) in Japan, and some guidance from Shionogi as to how many patients they expect to supply during the remainder of this flu season, or March fiscal year, or calendar year, as well as future years. The CEO has said they need to provide up to 600,000 doses after approval, and expect to supply three million patients a year. The Flash Alert that I sent yesterday was based on the Google Translate version of a Japanese article that had pricing nailed to the yen, and said the company expects to supply 10.8 million people. Other computer-based translation programs said the proper translation is 108.000 people, which makes little sense. BioCryst said they will put out a press release on the pricing and commencement of commercial sales, which is supposed to happen tomorrow, but until we get some clarity on Shionogi’s real guidance, it’s going to be hard to figure out exactly how big a deal this is.
Even further, there should be a Japanese government stockpile order, possibly announced as early as tomorrow. Japan has rightly given up on Tamiflu for seasonal flu, and they are very aggressive about building their national stockpile of antiviral drugs. They could easily order 30 million doses of Rapiakuta to cover 25% of their population, and it is possible the tradeoff for the lower price per milligram in Japan was the promise of a huge order. Or, they could order only one-tenth of that to cover the three million patients in Shionogi’s most recent guidance. We just don’t know.
Whatever it is, this is somewhere between very good news and great news. BioCryst is often called a swine flu play, but do you know how many clinical trials they have done against swine flu? None. Peramivir is a seasonal flu drug that will have large recurring revenues for at least five to ten years. Yes, it works extremely well against swine flu (H1N1), too. And also bird flu (H5N1), and the various mutations of these. The very deadly D225G mutation of the swine flu that ripped through the Ukraine and has been seen in almost every other part of the world also is susceptible to peramivir. Because people die in a couple of days if they get this mutation, there is no question of using Tamiflu or Relenza. An intravenous version of Relenza might work, but Glaxo SmithKline has shown little interest in developing it. After the low price per dose for peramivir in Japan, I expect their interest in this project went from “little” to “none.”
So when do we get paid? There has not been a third wave of flu in the U.S. yet, and the CDC says they have had just under 1,000 requests for peramivir, so they have a large inventory left. The next expedited approval will be in Korea, and we should start seeing some Latin American countries ordering soon. But the key to finally getting BCRX up to my target price will be the news from Japan, and that will come soon. By the time we get to the BCRX conference call on February 4, we should have many of the answers. I am hopeful that call will fill in any missing pieces on the royalty schedule and commercial milestone payments, and the Wall Street reports after that call will be the latest we have to wait to have the rest of the world realize what we already know: BioCryst has the only intravenous antiviral approved to treat hospitalized patients, many of whom will die without it. If the D225G mutation is the primary virus in the 2010-2011 flu season, about half of those who go to a hospital will die without peramivir. That is a disaster of the size that brings down governments.
Last Friday, BioCryst announced that the forodesine pivotal trial in cutaneous T-cell lymphoma (CTCL) has completed enrollment, and we will see top-line data in the second half of 2010. This study is being conducted under a Special Protocol Assessment, and if successful will lead to filing for approval in CTCL. Also, the Phase II trial of forodesine in the much larger chronic lymphocytic leukemia (CLL) indication has enrolled 15 of its required 26 patients. Top-line data here is also expected in the second half of 2010.
The list of upcoming news at BioCryst is unchanged this week, as we await formal pricing and guidance news from Shionogi and the BioCryst press release. BCRX remains a Top Buy up to $11 for my $30 short-term target after more orders are announced, and $50 after peramivir becomes the only approved intravenous antiviral.
Major News Coming to Drive Our Stocks
This list has its own page – click here.. I’ll comment on any changes here, and you can always click the new link under Member Resources. This week I changed the QuickLogic (QUIK) reporting date to the just-announced February 9, and added for Infinity Energy Resources (IFNY): “IFNY expects to have a partner by the end of March.” Next week I will have to slide the Electro-Optical Sciences (MELA) date range for the Advisory Panel meeting and approval by a month, as the company still expects eight weeks notice.
Biotech MegaShift
Rochester Medical (ROCM) reports next Tuesday. I am looking for $10.3 million in sales and one penny in earnings, as they continue to invest in marketing. Guidance should be about the same for the March quarter, due to seasonal purchasing patterns. ROCM remains a Top Buy all the way up to $20, which I think we will get to in 2010. Then I think we will see my $40 target price in 2011, as investors pile on to the rapid underlying growth rate.
Content on Demand MegaShift
Infinera (INFN) also reports next Tuesday. They should do about $88 million in sales and lose eight cents a share, with guidance for a sequentially flat March quarter, again due to seasonal ordering patterns. They may give 2010 revenue guidance well above the current consensus for $368.3 million. Buy INFN under $10 for a $20 target in 2010 and my $30 target in 2011.
SanDisk (SNDK) will report next Thursday. I expect them to report above the consensus at $1.2 billion and 70 cents a share, due to strength in the Far East markets. They also should guide above the consensus for the March quarter. Assuming that finally gets the stock over $30, I will put on a tight stop loss at $30, and then we’ll try trailing it up to $35 or so.
Hyperinflation MegaShift
Gold dipped again today to $1,103.2 an ounce, in part due to a rise in the U.S. dollar to a five-month high against the euro, and in part due to worries that China really will cool growth this time. I expect the dollar to rally for a little while longer, but I think the Chinese government cares a lot more about domestic unrest than they do about inflation. My recommendations in the precious metal exchange-traded funds (ETFs) are getting very close to slipping under their respective buy limits, so our patience should be rewarded. I don’t think there will be another chance after this to get these ETFs under the current buy limits.
A Short-Sale or REO House
Sam Zell, one of the craftiest and best real estate investors, says home prices are going up. In a CNBC interview he said: “I think we’ve seen the bottom of the housing market. I think it will continue to recover for all of 2010. There are still a lot of foreclosures. There are still a lot of last year’s stories that have to be cleared. But it’s very clear that we’re starting to see prices increase.”
Excepting the warmest southern part of the country, almost no one is out buying houses right now. This is the time to make a low-ball offer on a house already owned by the bank (REO, or Real Estate Owned) or via a short-sale on a house headed towards or in foreclosure. There’s still cheap financing available from the FHA and other government entities. The banks and the government are giving away real wealth. Take it.
Paramount Gold & Silver (PZG) said that MineralFields Group exercised its C$1.25 warrants to buy 3.6 million shares of stock for C$4.5 million. These are not registered shares – MineralFIelds can’t flip them into the open market – and Paramount will use the money to drill more holes at the San Miguel Project.
They also separated the CEO and Chairman roles and elected a current board member, Robert Dinning, as Chairman. He is a Chartered Accountant with experience in mining corporate finance. PZG also formed a Corporate Governance Committee comprised of the independent directors of the board. Both of these moves make them look like a more substantial, serious company. You can load up on PZG at current prices and all the way up to $2 for my $15 target.
New Energy Technology MegaShift
The big news here was Germany’s decision to cut solar subsidies by 15% this year, instead of the usual 5%. These are the “feed-in” tariffs that set the price utilities have to pay for solar-generated power. The utilities, in turn, pass the higher costs on to their customers. Part of the reason for the government’s decision is to try to force lower solar panel prices. All the solar stocks were nicked, some worse than others. The market research firm iSuppli says this will cause a burst of demand in the current quarter, followed by a slump in the June quarter. They are implying that the feed-in tariff is locked in, depending on when a solar power production facility goes into operation. I’m not so sure that’s how it really works, and I expect more of a hit in the current quarter.
However, this is a long way from a devastating reduction, and while it will pressure solar panel prices, the two panel companies we own, Canadian Solar (CSIQ) and Suntech Power (STP), are low-cost suppliers. Germany accounted for 51% of global solar system installations in 2009, and I believe will still be the largest market in 2010. Germany accounts for more than half of Suntech Power’s sales.
Energy Conversion Devices (ENER) does not make panels, they make thin-film photovoltaic roofing material. During the solar sell-off last Friday, ENER stock actually went up, although it finally was nicked today. The company agreed to build a 30 megawatt solar laminate facility in France, where they relocated their European headquarters last year. They are getting government incentives to build the plant, and France is playing catch-up to Germany with high feed-in tariffs.
We bought all three of these stocks knowing that solar cannot compete with oil below about $90 a barrel without subsidies, so they are all somewhat vulnerable to changes in government policy. But China continues to pour money into energy independence, and the U.S. stimulus program for alternative energy is going to help the U.S. market become significant on the world scene. I don’t see any reason yet to change my expectations for our solar stocks.
Cree (CREE) dropped hard last Thursday and Friday, hitting my $56 stop-loss. On Tuesday morning, Brigantine Advisors analyst Ramesh Misra cut his rating to Sell from Hold, even though he expected a good December quarter and raised his earnings estimate. A few hours later, Cree reported blowout results and the stock jumped more than 17% yesterday.
They did a record $199.5 million in sales and 38 cents a share pro forma, far above the Street consensus for $188 million and 30 cents. They guided for revenue of $215 million to $225 million and 41 cents to 44 cents a share in the current quarter, again far above the consensus for $189.2 million and 29 cents. The CEO said consumers are buying more LED light bulbs instead of less efficient incandescents, in spite of the still-substantial price difference. He also announced that Cree light bulbs will be available in about 650 WalMart stores, as an initial deployment.
Cree will do about $1.65 this calendar year, so at today’s close of $62.61 it selling for about 38X earnings. That’s awfully enthusiastic for a 22% growth rate. We squeezed a lot of extra dollars out of this stock using a trailing stop loss. If you didn’t follow my stop loss exit last Friday, (1) good for you, and (s) now is the time to sell CREE.
Ocean Power Technology (OPTT) elected Charles Dunleavy, their Chief Financial Officer, as the new Chief Executive Officer. Normally, I am not a fan of CFOs running technology companies, unless the essence of the business is finance, such as a leasing company. However, he has been doing more than counting beans all these years, and OPTT’s technology platform is very stable. The job from here is contract wins, partnerships and finance. Also, George Taylor remains as Executive Chairman and is very active in management. The stock has been strong, but OPTT is still a Top Buy while it is still under $10 for my $40 target, maybe in 2011.
Rentech (RTK) got some more lawsuits from the leeches of the “plaintiffs bar.” Pay no attention; they will be settled out of court and RTK’s insurance company will pick up the tab. Or maybe they will have the cojones to beat them in court, and send them back under the rocks they came out from. The Brean Murray brokerage firm picked up coverage last Friday with a “Buy” rating, unintimidated by these specious lawsuits. Buy RTK under $3, which the stock can get to in 2010. After that I am looking for $5 or $6 in 2011 and my $8 target in 2012.
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Restaurant.com sells $25 gift certificates to restaurants in your area for only $10. But your Editor has found a way to get a discount of 70% on top of that. When placing your order, just enter in the secret code “FEAST.” A $25 gift certificate for just three bucks? Yep, at least for a while. Most of these deals require purchasing a minimum amount in addition to the discount, or buying two entrees, or adding an 18% tip before applying the discount. And you always have to tell them at the time you order that you’ll be using the Restaurant.com certificate. Still, if you eat out, it will save you money, or give you a less costly way to try out a new place. Click here to buy your gift certificates. As always, I do not get a cut, commission or kickback from anything I recommend.
Your reading my way through the 50 best science blog posts of 2009, and enjoying an impressive use of duct tape Editor,
Michael Murphy, CFA
Founding Editor, New World Investor
Top Buys
Biotech MegaShift
ARNA — Arena Pharmaceuticals — Value Buy — Lorcaserin diet drug works and will be approved in 2010.
BCRX — BioCryst — Timely buy — Got FDA Emergency Use Authorization and HHS contract; Shionogi pricing and overseas orders next
DNDN — Dendreon — Timely Buy — About to announce marketing partners for Provenge
ROCM — Rochester Medical — Timely Buy — New Medicare regulations are accelerating use of ROCM catheters
Content on Demand MegaShift
AKAM — Akamai Technologies — Value Buy — Leading Internet acceleration and content delivery company
HLIT — Harmonic — Value Buy — Leading video processing equipment company
QUIK — QuickLogic — Timely & Value Buy — Superior programmable logic chips plus new backlight technology contract wins
Hyperinflation MegaShift
PZG — Paramount Gold & Silver — Value Buy — Junior gold exploration and development worth $15 if they prove up 5 million ounces
New Energy Technology MegaShift
CLL.TO — Connacher Oil & Gas — Value Buy — Best technology for extracting oil from Canadian tar sands
GSX — Gasco Energy — Value Buy — Natural gas prices have bottomed and new California oil drilling projects will drive the stock
OPTT — Ocean Power Technology — Value Buy — Leading wavepower company with over $3.50 a share in cash
HTM — US Geothermal — Value Buy — Geothermal electricity producer with actual revenues
WiMAX MegaShift
ALVR — Alvarion — Value Buy — Leading producer of WiMax equipment operating in 80 countries
TWER — Towerstream — Timely & Value Buy — Leading supplier of wireless business telecom services approaching cash flow breakeven
Jan
13
