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Jubak’s Picks Portfolio


Buy and hold? Not really. Short-term trading? Not by a long shot. So what is the stock-picking style of The Jubak’s Picks portfolio? I try to go with the market’s momentum when the trend is strong and the risk isn’t too high, and I go against the herd when the bulls have turned piggy and the bears have lost all perspective. What are the results of this moderately active—the holding period is 12 to 18 months—all-stock portfolio since inception in May 1997? A total return of 334% as of December 31, 2012. That compares to a total return on the S&P 500 stock index of 125% during the same period.

View Sells

Symbol Date Picked Price Then Target Price Price Now Today's Change Jubak's Gain/Loss
ProShares Short MSCI Emerging Markets ETF
EUM 02/12/2016 $32.45
The plunge in developed market bank stocks--the U.S. KBW Bank Index moved into bear market territory today--is bringing intensified attention to the debt bubble in China. The problem isn't new--some... more
ProShares Short S&P 500 ETF
SH 01/19/2016 $22.59
With the uncertainties of the long weekend behind us and the U.S. markets up slightly on news out of China, I'm adding, as promised last week, the ProShares Short S&P... more
Syngenta
SYT 12/10/2015 $78.48 $94.00
Update February 2, 2016: Update February 2: It looks like a buy out of Syngenta (SYT) is on again. Bloomberg is reporting that China National Chemical, a state-owned enterprise, will announce a formal bid for... more  |  Read Jim's Original Buy
Capital One
COF 12/10/2015 $79.00 $88.00
Financial stocks tend to do well as interest rates rise. What you're looking for in this environment is a bank stock that is likely to show an increasing net interest... more
Synaptics
SYNA 11/10/2015 $92.96 $118.00
Today, November 10, I’m adding Synaptics (SYNA) to my Jubak Picks portfolio. The immediate news behind this decision is a Digitimes report last week that Synaptics has won orders from Apple... more
Alibaba
BABA 10/26/2015 $76.25 $95.00
Update November 12, 2015: Updated November 11. Alibaba’s (BABA) New York traded American Depositary Receipts (ADRs) were down 2% yesterday. I guess traders and investors were disappointed that it took until noon today in China... more  |  Read Jim's Original Buy
Allergan
AGN 07/30/2015 $337.99 $385.00
Allergan’s (AGN) $40.5 billion sale of its generic drug unit to Teva Pharmaceutical (TEVA) is a clear example of addition by subtraction. Before the deal Allergan was the third largest global... more
Novartis
NVS 07/10/2015 $100.02 $121.00
On April 3, 2013, I sold Novartis (NVS) out of my Jubak’s Picks portfolio because at $71 a share I thought the stock’s valuation was stretched. I sold with a... more
Softbank
SFTBY 02/20/2015 $29.59 $42.00
Update September 15, 2015: Update September 15, 2015: While you’re trying to figure out whether Alibaba (BABA) is a buy on its 33% drop since May 22 or a run-for-the-hills sell on a Barron’s... more  |  Read Jim's Original Buy
Hain Celestial
HAIN 03/26/2015 $63.20 $72.00
One number jumps out at me from the deal between Kraft Foods Group (KRFT) and H.J. Heinz. It’s not the $16.50 a share special cash dividend that Kraft shareholders will receive... more
Marathon Petroleum
MPC 04/08/2015 $49.28 $62.50
Update February 3, 2016: Update February 3: Shares of refiner Marathon Petroleum (MPC) are off a huge 8.89% as of 11:30 a.m. New York time on a daunting fourth quarter earnings miss reported this... more  |  Read Jim's Original Buy
Chesapeake Energy
CHK 03/09/2015 $14.24 $19.00
Update October 22, 2014: The rout in oil and natural gas prices—and in the prices of oil and natural gas industry shares—leaves investors with two big related but not identical questions. How low will oil... more  |  Read Jim's Original Buy
Wisdom Tree Japan Hedged Real Estate
DXJR 12/19/2014 $27.00 $32.00
Update July 3, 2015: Update: July 2, 2015. The recent volatility in the Wisdom Tree Japan Hedged Real Estate ETF (DXJR) isn’t surprising—the erratic performance of the Japanese economy and the bear market that... more  |  Read Jim's Original Buy
EGShares India Infrastructure ETF
INXX 01/26/2015 $14.00 $17.50
How about that “other” central bank? With all the attention focused on the European Central Bank’s plan to buy more than $1 trillion in government bonds, on how the shifts in... more
Visa
V 11/05/2014 $63.65 $82.00
Update July 24, 2015: Updated July 24, 2015.  On July 23 Visa (V) reported fiscal year third quarter earnings of 62 cents a share (excluding one-time items), beating the Wall Street consensus of 58... more  |  Read Jim's Original Buy
Itau Unibanco
ITUB 10/31/2014 $15.00 $18.00
When she won re-election to a second term as President of Brazil on Sunday, October 26, Dilma Rousseff promised change. Well, change is what the markets in Brazil got yesterday although... more
HDFC Bank
HDB 11/18/2014 $53.00 $62.00
In my search for stocks that will go up as oil prices go down, I can’t think of a market with more leverage to the downward movement in oil prices... more
Isis Pharmaceuticals
ISIS 05/22/2014 $24.95 $82.00
Update February 1, 2015: Update: January 9. Shares of Isis Pharmaceuticals (ISIS) have been on a tear lately. The stock is up 84% in the three months ended January 8. That brings my gain... more  |  Read Jim's Original Buy
Incyte
INCY 04/17/2014 $44.54 $132.00
Update January 22, 2016: Updated January 22, 2016. It's hard to pay attention to important events at individual companies when markets are obsessed with tiny little macro questions like Are we headed for a... more  |  Read Jim's Original Buy
ARM Holdings
ARMH 10/25/2013 $47.82 $60.00
Update : Update: February 11, 2015. It was all about royalties going into ARM Holdings’ (ARMH) February 11 report on fourth quarter earnings. The worry holding the stock down for much of... more  |  Read Jim's Original Buy
Cheniere Energy
LNG 06/25/2013 $26.71 $34.00
Update December 21, 2015: The board at Cheniere Energy (LNG) has replaced CEO Charif Souki just months before Cheniere becomes first U.S. company to export liquefied natural gas. Good riddance. I’ve been willing to put up... more  |  Read Jim's Original Buy
Targa Resources Partners
NGLS 11/23/2012 $36.97 $60.00
Update April 4, 2014: Not that nothing else matters—the price of natural gas and natural gas liquids is important—but my theory is that at the moment, in the current cheap money environment, the crucial... more  |  Read Jim's Original Buy
Stillwater Mining
SWC 09/25/2012 $11.43 $12.50
Update September 9, 2015: Bad news for the South African platinum sector, which produces about 80% of the world’s platinum. A sharp drop in capital investment beginning in 2008 (when it was an annual... more  |  Read Jim's Original Buy
Xylem
XYL 09/04/2012 $24.08 $47.00
Update April 29, 2014: When Wall Street doesn’t expect much of any growth, a 3.1% year-to-year increase in revenue is reason for dancing in The Street. That’s what’s happening with shares of Xylem (XYL) today.... more  |  Read Jim's Original Buy
Statoil
STO 05/10/2012 $25.92 $24.00
Update July 29, 2015: Update: July 28, 2015. Statoil (STO) reported second quarter results today (July 28) that beat consensus estimates on both earnings (NOK3.15 a share vs. the NOK1.62 consensus) and revenue (NOK138.5... more  |  Read Jim's Original Buy
MGM Resorts International
MGM 05/04/2012 $12.43 $16.00
Update February 5, 2016: The weeklong Lunar New Year holiday starts in China on February 8. This isn't do or die for Macao casinos but it would sure be nice to see traffic to... more  |  Read Jim's Original Buy
OncoGenex
OGXI 03/14/2012 $15.71 $22.00
Update March 10, 2014: Shares of biotech OncoGenex (OGXI) were up 8.9% today, March 10 at the close in New York. Why? Because March 10 is the day before March 11. The company is scheduled... more  |  Read Jim's Original Buy
Yamana Gold
AUY 02/29/2012 $17.25 $14.50
Update February 20, 2014: It’s always hard to judge the bottom of a cycle—and it’s certainly hard for gold right now. I suspect that the recent rally in gold to a close of $1320.90... more  |  Read Jim's Original Buy
Abbott Laboratories
ABT 09/24/2010 $25.80 $46.00
Update March 4, 2014: Fourth quarter earnings and guidance for 2014 announced on January 22 make it clear that Abbott Laboratories (ABT) is a second half story for 2014. (Abbott Laboratories is a member... more  |  Read Jim's Original Buy

Buy ProShares Short Emerging Markets ETF

February 11th, 2016

The plunge in developed market bank stocks–the U.S. KBW Bank Index moved into bear market territory today–is bringing intensified attention to the debt bubble in China. The problem isn’t new–some analysts and yours truly have flagged the huge build up in bad debt in China for months–but what has been a somewhat specialized call now looks to move into the mainstream.

And if the markets in general start focusing worry on China’s mountain of bad debt, then I’d expect the pressure on emerging market financial assets to intensify. Today I’ll be adding a position in the ProShares Short MSCI Emerging Markets ETF (EUM) to both my 12-18 month Jubak Picks and my long-term Jubak Picks 50 portfolios to give me some downside protection in what looks to be a continued downward trend in these markets. I don’t intend to hold this short position for ever. Today the ETF is trading at $32.56 at 1:30 New York time, up 1.89% for the day. Year to date the ETF is up 4.3% and it’s ahead 10.1% over the last three months. If the ETF fell to $28 or so due to an unexpected rally in emerging markets, I’d re-evaluate this short position.

Typical of the heightened attention China’s bad debt is getting–and of the heated rhetoric from China bears (which justified or not has a decided downward effect in the current very sensitive market)–is this story today on Bloomberg http://www.bloomberg.com/news/articles/2016-02-10/bass-says-china-s-banking-losses-may-top-400-of-subprime-crisis noting a call from hedge fund manager Kyle Bass that China’s banking system could see 10% of its assets sucked don he bad debt drain as banks are forced to recognize non-performing loans. (In China there is, always, the question of when the government will decide to force banks to recognize non-performing loans that have been non-performing for years. But Bass and other China bears such as James Chanos think the time it near.)  That would dwarf the losses suffered by U.S. banks during the mortgage crisis and lead to about $3.5 trillion in equity vanishing at China’s banks. To recapitalize its banks, the Chinese government would have to print $10 trillion yuan, which would lead to massive 30% devaluation of the yuan versus the dollar. (While devaluation of some dimension would seem likely to me, a devaluation of 30% would go against everything in recent Chinese policy targeted at turning the yuan/renminbi into a global currency.)

Whether you agree with all of Bass’s calculations or not, it’s hard to see how the problem he’s pointing to doesn’t led to turmoil and slower growth in China–and in the emerging economies that sneeze when China catches cold.

And it’s also hard for me to see how China and other developing economies can turn their problems around in the near term. (In the long-term I’d still like to be long these markets. Right now, though, it’s hard to say when the long-term might arrive.)

Buy ProShares Short S&P ETF

January 20th, 2016

With the uncertainties of the long weekend behind us and the U.S. markets up slightly on news out of China, I’m adding, as promised last week, the ProShares Short S&P 500 ETF (SH) to my Jubak Picks portfolio to provide some downside protection in a market that still looks to be trending lower. Yesterday, January 19, when I posted this buy on my paid site JubakAM.com the ETF was down slightly today to close at $22.59.

I don’t think we’ve found a bottom yet in oil prices, a big driver of the market’s retreat in the first part of 2016, and I think we’re looking at a sour season of reports of falling earnings in the fourth quarter. Guidance for the first quarter looks likely to be a negative as well.

I don’t think we’re headed into a replay of 2007-2009, but things could get scary (if they’re not already.). One of the advantages of putting on a short position or two at this point is that a sense of having down something NOW to protect your portfolio can help relieve the pressure to do something really stupid in a panic later when the market is actually close to a bottom. Adding a short position with an intention of liquidating it when the market turns, also in effect raises the cash available to you for buying when you start to see a bottom and some bargains.

This ETF uses derivatives to track the S&P and to create a inverse of the index. (So it’s supposed to go up when the index goes down. The ETF was up 8.29% for 2016 to January 18.) With $1.93 billion in assets it’s reasonably liquid but not so liquid that it attracts the biggest of the big computer trading programs.

I’m going to continue to poke around on the short side and see if anything else looks attractive enough to recommend for this portfolio.

Update Syngenta on $42 billion all-cash bid

February 2, 2016

Update February 2: It looks like a buy out of Syngenta (SYT) is on again. Bloomberg is reporting that China National Chemical, a state-owned enterprise, will announce a formal bid for the Swiss seed and agricultural chemical maker as early as tomorrow. The price Bloomberg is reporting would be $42 billion in an all cash offer. Syngenta has been a member of my of my Jubak Picks portfolio since December 10, 2015.  I purchased the shares at $78.48, essentially flat with today's close of $78.57. (The New York traded ADRs closed up 6.2% today, February 2.) The bid would work out to a price of $94 a share, slightly below the $96 target I put on the shares back in December and a 19.8% gain from the February 1 close. (I'm lowering the target price to $94 as of this post.) Syngenta is due to report earnings on Wednesday and the numbers are likely to reflect tough times for producers of agricultural chemicals. The Wall Street consensus is looking for revenue to drop 11% year over year. I don't think we're likely to see someone else, such as Monsanto (MON), try to top the bid from China National Chemical. First, it's all cash. Monsanto's previous bid relied on a mixture of cash and stock and with stocks in the agricultural sector down, any competitor would have to match the current all cash price. Second, China National Chemical is able to draw on deep government pockets to finance this deal. It's not clear that U.S. or other developed market banks would be willing to step up to finance competing bid. At $42 billion the offer is hard to justify on purely market fundamentals but for China, a chance to advance its seed and agricultural chemical technology and security make paying the price worth it.

Buy Capital One

December 9th, 2015

Financial stocks tend to do well as interest rates rise. What you’re looking for in this environment is a bank stock that is likely to show an increasing net interest margin.

Like Capital One Financial (COF). In the third quarter net interest margin rose to 6.73%, up 17 basis points from the second quarter. (100 basis points equal one percentage point.) And I think net interest margins will continue to climb in 2016 as the Fed Reserve starts to raise interest rates. Credit card lending accounts for about 40% of the company’s $213 billion loan portfolio (as of the end of September 2015). Credit card loans were up in the third quarter by 12% year over year. Credit card losses were up in October to 3.38%, a 26 basis point increase from September and the bank expects charge offs to climb through early 2016 before falling.

The company has made a number of acquisitions, which to me strengthen the company’s core rather than overwhelming the bank. In 2012 it acquired the ING Direct U.S. online banking business to become the sixth largest depositary institution in the country and one of the biggest online direct banks in the U.S. Recently the bank bought General Electric’s (GE) health care finance business and its $8.5 billion healthcare lending portfolio. That deal pushes Capital One into sector under represented in the bank’s asset portfolio. About 24% of the bank’s asset portfolio is made up of commercial loans but half of that is in real estate lending.

The stock is trading near the middle of its 52-week range (of $67.73 to $92.10) after a disappointing second quarter. A recovery that began with better than expected third quarter earnings of $1.98 a share, above the $1.95 consensus estimate from Wall Street analysts, has taken the stock back to a $79 close on December 9. The stock pays a dividend of 1.9% and sports a forward price –to-earnings ratio of 10.8%.

I will be adding Capital One Financial to my Jubak’s Picks portfolio tomorrow December 10. My target price is $88 a share by October 2016.

 

Buy Synaptics

November 10th, 2015

Today, November 10, I’m adding Synaptics (SYNA) to my Jubak Picks portfolio.

The immediate news behind this decision is a Digitimes report last week that Synaptics has won orders from Apple (AAPL) that will put its LCD driver chips into 2016 iPhones. This is quite a reversal of fortunes since Apple has been working on its own integrated touch controller/display driver chips that would include integrated fingerprint sensors.

But for Synaptics that report of a design win at Apple is just the tip of the iceberg. Along with Synaptics design wins for this type of chip (called TDDI for Touch and Display Drive Integration) with big Android phone makers, I think this announcement cements Synaptics’ position near the center of one of the two big trends for the next generation of smart phones.

What are those two trends? I’ll summarize them here. For a more complete exposition of what I’m calling the next battle for smart phone supremacy, check out my post from Saturday November 7 on my paid subscription site JubakAM.com on where the next wave of growth will come from in the sector and the challenge to Apple’s huge share (92% in 2014) of profits in the sector.

Apple, and Alphabet, (once Google but still GOOG) and Facebook (FB) and Microsoft (MSFT) have all decided that the next wave of innovation in smart phones will require that phones do more local processing using artificial intelligence, for example, to identify images on your phone without requiring your phone to query a big centralized non-local data base. That will speed up applications and let them tackle bigger problems fast enough to work in the mobile world. This emphasis on artificial intelligence also extends into natural language processing so that voice interfaces such Apple’s Siri or Facebook’s Messenger can take on more of the interface load. At the same time smartphone markers are continuing to push ahead with adding touch interfaces with more sensitivity to features such as pressure of touch to create more powerful but not overwhelmingly complex navigation.

This is where Synaptics (SYNA) comes in. The chip company, for which I posted an initial alert on JubakAM.com on Thursday, looks like one of the leaders in building integrated chips that combine display, touch, and fingerprint recognition. For sure, Synaptics isn’t alone in this market—called TDDI for Touch and Display Driver Integration–but the acquisitions of Validity (for fingerprint recognition technology) and Renesas SP (for display driver technology) gives the company a wider product line than most competitors. And I especially like it that recent design wins will put Synaptics into both Android and Apple phones. (Competitors include Atmel (ATML) and Himax Technologies (HIMX).)

The design wins that Synaptics has achieved in 2014 and 2015 should start showing up big time in 2016, which is why I’m adding this stock to my portfolio now. Synaptics closed at $92.96 on November 9. My target price for October 2016 is $118.

(A subscription to my paid JubakAM.com site costs $199 a year. Once you sign up you’ll have 7 days to get a full refund if you decide you don’t like the site or whatever. Recent posts besides the one on smartphones that you might find useful include one on why U.S. stocks shrugged off Friday’s huge job gains and the increased chance (up to 76%) that the Fed will raise interest rates in December and another on why on Monday worries about how that same schedule for a Fed interest rate increase hit emerging market stocks, bonds and currencies so hard that it drove asset prices down around the world.)

Alibaba breaks last year’s Singles’ Day sales record; shows where the growth will come from

November 12, 2015

Updated November 11. Alibaba’s (BABA) New York traded American Depositary Receipts (ADRs) were down 2% yesterday. I guess traders and investors were disappointed that it took until noon today in China for the e-commerce giant to rack up Singles’ Day sales that obliterated last year’s record sales of $9.3 billion. The company finished the day with a new record of $14.3 billion for China’s biggest shopping day of the year.  (Singles’ Day dates back to the 1990s. The cross between Valentine’s Day and Cyber Monday in the United States draws on a similarity between 11/11 and the ideogram for “bare branches,” a Chinese expression for unmarried men and women. Alibaba began to promote the day as an online shopping event in 2009 and the company’s online rivals quickly jumped on board.) In all seriousness, the drop in the ADRs today is most probably a sell on the news reaction. Investors and traders had been worried about slumping retail sales as growth in China’s economy in general slowed this year. Retail sales bounced back in October, climbing 11%, the fastest growth rate this year. With the company crushing the sales record for Singles’ Day, it’s reasonable to look for some profit taking. After all, what does Alibaba do for an encore? The Singles’ Day event and results give some indication of the answer to that question. Alibaba has been looking to add more foreign brands to its offerings expand the top end of its market place and to help raise the company’s profit outside China as it seeks to become a global shopping platform. This year chairman Jack Ma moved the Singles’ Day event to Beijing and enlisted celebrities such as Daniel Craig and Kevin Spacey to the festivities. Best selling items included Nike sneakers, Levi’s jeans, and, of course, mobile phones. Mobile phones, in fact, make up 68% of transactions. I think that sounds like good news for Apple (AAPL.)

Buy Allergan

July 29th, 2015

Allergan’s (AGN) $40.5 billion sale of its generic drug unit to Teva Pharmaceutical (TEVA) is a clear example of addition by subtraction.

Before the deal Allergan was the third largest global generic drug company, according to Standard & Poor’s, with global generic sales of $6.5 billion. With generics accounting for 73% of sales, Allergan is clearly going to be a very different company after the deal.

But what, exactly?

Well, the combination of Allergan’s cornerstone Botox franchise and the recent acquisition of Kythera Biopharmaceuticals for $2.1 billion gives some clues. Botox, a neurotoxin, is a key drug in the growing aesthetics market. Medically Botox is injected in small amounts to weaken a muscle in order to reduce spasms. In the aesthetics market, Botox is injected to reduce wrinkles, crow’s feet, frown lines, and other signs of aging. Because manufacturing neurotoxins is a tricky process and because minute differences in neurotoxins can produce radically different results, Allegan has been very successfully in defending Botox’s market share, estimated at 76% globally. Botox revenues are about $2 billion annually.

Kythera’s key product, recently approved by the Food & Drug Administration, is Kybella, an injectable drug for reducing double chins. Like Botox, Kybella provides a non-surgical option in facial aesthetics. It’s an alternative to surgical methods for reducing subcutaneous fat such as liposuction.

Allergan has already started to expand Botox into new applications. For example, Senrebotase, is a derivative of Botox that only affects pain receptors. And I’d expect a similar effort to expand the market for Kybella.

According to Transparency Market Research the facial injectable market had sales of $3.4 billion in 2013 and is projected to grow at a compound annual rate of 14.6% from 2014 to 2020 to $9.4 billon in 2020.

Now there’s no guarantee that Allergan will spend the $34 billion in cash it received as a result of the Teva deal (the rest of the purchase price was in Teva stock) on building up its aesthetics portfolio. It could also go hunting for new high margin generics to supplement the biosimilar business that it retained in the Teva deal.

But the logic of the Kythera acquisition does point Allergan in that direction and so does the valuation of the opportunities in front of the company. The team of executive chairman Paul Bisaro and CEO Brent Saunders showed a laudable (from a shareholder’s perspective) sensitivity to valuations in the timing of the sale of its generic business to Teva. Teva’s earlier bid for fellow generics maker Mylan (MYL) had pushed valuations for generic drug companies to what looked like a peak so Allergan sold to Teva at a top price. That kind of attention to valuation limits the number of big deal candidates that make sense for Allergan. For example, on valuation it wouldn’t make a whole lot of sense for Allergan to buy AbbVie (ABBV), one of the names floating in the rumor mill after the Teva news broke, at a higher multiple and a lower growth rate than Allergan’s own numbers. On that basis Allergan would find smaller deals, such as the one for Kythera, a better fit.

And unless Allergan wants to attract a bid itself from somebody like Pfizer (PFE) is will have to make a number of acquisitions. The cash from the Teva deal is enough to pay off all of Allergan’s debt and fund a buyback program—both of which would make Allergan a very attractive acquisition candidate itself.

As of July 29 I’m adding Allergan to my Jubak Picks portfolio with a target price of $385 a share by January 2016. The shares closed at $337.99 on July 8.

Buy Novartis

July 10th, 2015

On April 3, 2013, I sold Novartis (NVS) out of my Jubak’s Picks portfolio because at $71 a share I thought the stock’s valuation was stretched. I sold with a gain of 14%.

 

The shares closed today at $100.02.

 

I was wrong and the sell was stupid.

 

One of the problems with being wrong and/or stupid about a stock is that it makes it harder to make good decisions about that stock in the future. In this case I’ve shunned the stock, keeping the mistake alive, because rebuying it would admit that the earlier sell was a mistake. (It didn’t help that because of a clerical error on my part I didn’t note the sell Novartis out of my Jubak’s Picks portfolio and it’s been sitting on that portfolio page as if I still owned it. That error has been corrected as of today. If you want to read the logic, which I found convincing at the time, of that sell see the April 2013 post here http://jubakam.com/2013/04/im-selling-novartis-on-valuation-and-market-risk/)

 

And now I’m looking at Novartis again and trying to figure out whether I can separate my regret at that past mistake from the stock’s current prospects to make a sound buy decision on Novartis today. I think so. And I’m adding Novartis back to my Jubak Picks portfolio on July 10, 2015 with a target price of $121 a share.

 

It was the July 7, 2015, announcement that the U.S. Food and Drug Administration had approved a new heart failure drug, Entresto, from Novartis that drew my attention back to the stock. In clinical trials announced a year ago Entresto had shown a 20% reduction in the risk of death from cardiovascular causes or the risk of hospitalization for worsening heart failure. Novartis called the drug “one of those once-in-a-decade kind of breakthroughs” and predicted that this potential blockbuster could eventually produce annual sales of $5 billion.

 

That estimate could be accurate. More than 5 million Americans and an estimated 26 million people globally suffer from heart failure. And Entresto could replace the existing mainstay treatments for chronic heart failure–drugs called angiotensin-converting enzyme (ACE) inhibitors or angiotensin II receptor blockers.

 

The big issue for Entresto and Novartis is cost. ACE inhibitors are largely inexpensive generics. Entresto will cost about $12.50 a day for a two-tablet a day regimen—that doesn’t seem like so much until you do the math and see that $12.50 a day works out to $4,560 a year. That’s a big nut for insurance plans and Medicare to swallow—although patients who learn that the drug promises a 20% improvement in outcomes are likely to push for Ernesto.

That means that Entresto is likely to have a relatively slow initial uptake as it slowly displaces cheaper generics. Fortunately, for Novartis, the drug doesn’t face major competition in new drugs from competing drug companies, according to Sanford C. Bernstein & Co. Analyst Timothy Anderson told the New York Times that it was highly unusual that there were no major competitors for Entresto on the way, giving it a “long runway.”

That $5 billion projection from Novartis might even be low, according to Credit Suisse. Entresto is a combination of two drugs. One, valsartan, is the active ingredient in Novartis’s current blockbuster drug Diovan. (Diovan is now facing competition from generics.) The FDA approval was for heart failure patients with what’s called Reduced Ejection Fraction. That makes up on 50% of patients with the rest falling into a class called Preserved Ejection Fraction. The drug’s efficacy with that second class of patient is the subject of an ongoing study due to report in 2018. If that report is favorable—about a 40% chance Credit Suisse predicts–it would add another $3.5 billion in annual peak sales.

But while this one drug drew my attention back to Novartis, it’s not the only reason to like the stock. In March Novartis swapped assets with GlaxoSmithKline (GSK). Novartis bought Glaxo’s cancer drug unit for $16 billion and sold its vaccine unit to Glaxo for $7.1 billion. (The two companies combined their consumer health business into a joint venture with Novartis taking a 37% share. Novartis also sold its animal health unit to Eli Lilly (LLY) for $5.4 billion.) That restructuring has given Novartis a stronger focus on oncology at a time when research on cancer drugs is especially exciting and productive. (Cancer drugs also carry higher margins and faster growth rates than the departing units.)

Novartis isn’t especially pricey in comparison to its drug industry peers, trading at a 10% or so discount to the European drug sector competitors. The stock also trades at a discount to its global peers.

Did I mention that I like the steady growth in the drug sector and the stability of these stocks at a time when market volatility is increasing? (Novartis also pays a 2.76% dividend.)

I’d adding these shares to my Jubak Picks portfolio with a target price of $121 by January 2016.

Update Softbank

September 15, 2015

Update September 15, 2015: While you’re trying to figure out whether Alibaba (BABA) is a buy on its 33% drop since May 22 or a run-for-the-hills sell on a Barron’s story over the weekend predicting the ADRs will fall another 50%, spare a moment for what I think is as more compelling buy on valuation in Softbank Group (SFTBY in New York). The ADRs are down 21.7% since April 27, having fallen another 5.2% today (at least partly on news about Alibaba, a big Softbank holding.) But more importantly from a valuation perspective, the Japanese telecom and Asian Internet venture capital holding company now trades for $13 billion less than the value of its biggest holdings. Before I pass on totally from Alibaba, I’d note that I think the Barron’s piece, which begins its call for a 50% drop in Alibaba by saying that the Chinese eCommerce giant should trade at a multiple close to that of eBay (EBAY), is overly harsh. But there is no doubt that Alibaba’s shares are vulnerable. Growth in Alibaba’s Gross Merchandise Value (GMV), a measure of how much stuff Alibaba moves through its Internet marketplaces, fell to 34% in the June quarter from 50% in previous quarters and on September 8 Jane Penner, Alibaba’s head of investor relations, warned of a mid single digit decline in GMV in the September quarter. I’d like to own a piece of Alibaba’s future but I’d like the price to settle along with doubts on China’s economic growth rate. Back to Softbank, a member of my Jubak’s Picks portfolio since February 20, 2015. Softbank’s three biggest holdings--stakes in Alibaba, Sprint (S) and Yahoo Japan—are worth 9.4 trillion yen ($78 billion) according to the company’s website. That’s more than the current $61 billion market cap of Softbank after Monday’s close. But the company also owns stakes in some of Asia’s most promising—and still private—Internet companies such as India’s Snapdeal.com. Snapdeal.com alone was valued at $4.7 billion in its last round of private funding. In all Softbank owns stakes in 1,000 companies. When I added it to Jubak’s Picks I argued that Softbank was the best (and, indeed in many cases the only) way to invest in the next generation of Asian Internet companies. To that argument, I’d now add that it is, at the moment, an extraordinarily cheap way to buy an Asian Internet venture capital portfolio. Cheap, of course, can always get cheaper. But in the case of Softbank you’ve got a big investor who seems to be watching the discount very carefully with the idea of share buybacks, at the least, or a buyout of the entire company. Softbank founder Masayoshi Son is known to have considered a buyout of Softbank three to six months ago (when a higher price on Alibaba had made the discount on Softback even greater.) That plan is no longer under consideration, sources have told Bloomberg, but since then the company has announced plans to buy back 120 billion yen ($1 billion) in Softbank stock. Son, Japan’s second richest man, holds about 19% (about $10 billion) of Softbank’s stock. As of September 14, I’m keeping my target price of $42 for Softbank.

Buy Hain

June 27th, 2015

One number jumps out at me from the deal between Kraft Foods Group (KRFT) and H.J. Heinz.

It’s not the $16.50 a share special cash dividend that Kraft shareholders will receive in the deal.

It’s not the $1.5 billion in annual cost savings that Berkshire Hathaway (BRK.B) and 3G Capital estimate by 2017. (Can you say layoffs?)

And it’s not even the huge 36.7% pop in Kraft shares on March 25, the day the deal was announced.

No, the number that draws my attention is the $28 billion in annual revenue at the combined company.

It’s that number that leads me to add shares of Hain Celestial Group (HAIN) today, March 26, to my Jubak’s Picks portfolio. Yesterday the shares closed up just 0.58% after being ahead almost 4% during the day. The stock was off 0.99% at the March 26 close.

To understand why the Kraft-Heinz deal leads me to a buy of Hain Celestial Group, you’ve got to understand this deal in the context of an extreme challenge to all the big U.S. food companies from Kraft to McDonald’s (MCD). Trends in the market are moving away from them as an increasing number of customers, especially millennials (the generation of consumers who reached adulthood around 2000), increasingly demand healthier, more environmentally friendly, more local food. This trend is part of why Chipotle Mexican Grill (CMG) has been growing and McDonald’s hasn’t.

Plan A at Kraft was to try to re-invigorate growth. Revenue has been essentially flat at near $4.7 billion a quarter since the second quarter of 2013. Revenue growth was forecast at 0.9% for 2015 by Standard & Poor’s before the deal announcement.

The problem boils down to this: How to you get faster growth, given trends in the food market, out of brands such as Planters nuts and Jell-O?

The company has been trying, but the results haven’t been encouraging.

Hence Plan B.

Which is, especially given trends in the sector, a pretty good plan. Cost cutting at Heinz, which 3G acquired in 2013 have taken EBITDA margins (earnings before interest, taxes, depreciation, and amortization) up to 26% from 18%. Kraft’s current margin of 20% should see a significant improvement from 3G’s cuts. The deal will also cut interest payments at Heinz since Kraft’s investment grade credit rating will lower the interest rates that a highly indebted Heinz has to pay. The deal won’t add to the combined company’s debt load and 3G expects to be able to refinance $17 billion in Heinz debt, saving about $1 billion. The deal should also boost Kraft’s international sales since Heinz has much stronger overseas distribution than Kraft does after spinning off its snack division as Mondelez International (MDLZ) in 2012. (Only about 11% of Kraft’s revenue in 2013 came from outside the United States and most of that was from Canada.)

But Plan B is likely to make adapting to a changing food market and reigniting growth more difficult. With $28 billion in revenue it becomes hard to move the needle with internal growth and it becomes hard to find acquisitions that are big enough to provide much of a boost.

Which is where Hain Celestial comes in. The faster growing part of the food industry—those companies that emphasize natural, organic, health, and/or local—is characterized by the small size of individual players. At a market cap of $6.45 billion and annual revenue of $2.15 billion in fiscal 2014 Hain Celestial is one of the bigger companies in the natural/organic food sector. As such it’s one of the few potential acquisition targets big enough to make an attractive target for a big conventional food company looking for growth. That logic led to the immediate pop in the stock after the Kraft-Heinz story broke. And it provides substantial support for the shares.

But I’m actually more interested in Hain Celestial as a consolidator in the fragmented natural/organic good sector. At $2.15 billion in sales the company is small enough so that deals like the 2013 acquisition of Rudi’s Organic Bakery ($60 million in sales) or the 2014 acquisition of Tilda, a basmati rice brand with $190 million in sales, make sense. Hain can use its existing distribution clout to expand the customer base for acquired brands and to get them more shelf space at existing customers—and also use efficiencies of scale to cut costs. It’s a food version of the consolidator strategy that Middleby (MIDD), a member of my Jubak Picks 50 portfolio, has followed so successfully in the restaurant equipment market for years.

Standard & Poor’s projects revenue growth of 23% for Hain Celestial in fiscal 2015 including acquisitions and internal growth (I’d call it “organic” growth but that seems confusing in this context) in upper single digits.

I’ve been looking at Hain as a buy for a while but had put it off because the stock certainly isn’t cheap. It trades at a PEG ratio (PE to growth rate) of 2.14—which is expensive although Kraft trades at a PEG ratio of 3.82. But the Kraft-Heinz deal gives Hain some extra upside as a potential acquisition candidate and reduces the downside risk in the stock as well.

I’m adding it to the Jubak’s Picks portfolio with a target price of $72 a share by October 2015.

Update Marathon Petroleum: Was that a miss?

February 3, 2016

Update February 3: Shares of refiner Marathon Petroleum (MPC) are off a huge 8.89% as of 11:30 a.m. New York time on a daunting fourth quarter earnings miss reported this morning. That is, if it is actually a miss. Marathon reported fourth quarter earnings per share of 35 cents before the market opened today, February 3. That's far below the 69 cents a share Wall Street consensus estimate. But reported earnings included a one-time $345 million pre-tax charge (44 cents a share)  to mark the value of oil held in inventory down to cost or the current market price. (If you buy crude oil today and put it in a tank to refine it tomorrow, the value of that oil in storage fluctuates with the price of oil on the market. Accounting rules say a company has to mark down the value of that inventory to market prices when it believes that the impairment to value is more than temporary. There's a lot of discretion in that judgment but Marathon has decided that oil prices aren't about to zoom back up tomorrow. Of course, if/when they do Marathon will be able to show a  profit on the new value of any inventory purchased at low prices.) If you add this one time charge--which isn't a cash charge--back into earnings, the fourth quarter results show earnings per share of 79 cents, above the 69 cents  share consensus. Which is why when earnings were announced this morning, sources such as the Associated Press, Zacks, and Briefing.com wrote headlines that said Marathon had exceeded estimates by 10 cents a share while Reuters on the other side led with a headline touting  77% drop in earnings. I'd go with the "exceeded estimates" version today. With the recent volatility in oil prices, I think the market tends to sell down anything related to energy--and then ask questions later. (And my reasoning does have some connection to the fact that the Reuters story seems to be sourced from India and I have to question the quality of the editing.) Other than the big pre-tax charge I don't see anything troubling in the operating results. Margins for the gasoline sold at the company's recently acquired Speedway gas station/retail chain did fall in the quarter along with the price of gas but for the year Speedway beat its 2014 results. Refining results were weaker than in the fourth quarter of 2014 but that period set records so that's a tough comparison rather than an indicator of anything wrong at the company. The next dividend from Marathon of 32 cents a share has a record date of February 17. The company did cut its quarterly dividend to 32 cents from 50 cents in the middle of 2015, but at the current annual rate of $1.28 a share (four times the current 32 cent rate), today the stock is yielding 3.5%.  

Chesapeake Energy moves toward investment grade

October 22, 2014

The rout in oil and natural gas prices—and in the prices of oil and natural gas industry shares—leaves investors with two big related but not identical questions. How low will oil and natural gas prices go? And what companies will be hurt the most—and which might actually manage to come out in strong positions when prices stop falling? The consensus is that oil and natural gas prices are headed still lower. Global demand doesn’t look likely to rebound significantly in the short term. Global supply shows no signs of falling. And projections are calling for a warmer than average winter in the United States. All that suggests that the $80 a barrel level for U.S. benchmark West Texas Intermediate won’t hold. (The closing price for December 14 delivery was $80.53 on October 23.) And that natural gas prices are headed below $3.50 per million BTUs. (Closing for November 14 delivery was $3.66.) And I don’t think a drop in oil below $80 or natural gas below $3.50 is necessarily the end of the damage. The Saudis, the swing producer in OPEC, seem determined NOT to cut production now and have indicated a determination to hold onto market share even if they have to see oil prices decline for another six months or more. It’s no wonder that with prices for oil and natural gas headed down, down, down, the share prices of oil and natural gas producers have plunged too. Shares of U.S. natural gas giant Chesapeake Energy (CHK), for example, tumbled to $17.49 on October 14 from $29.61 on June 23. That’s a 42% drop. (I bring up Chesapeake Energy as my example because it is (painfully) a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/. I have a 2.2% loss on that position since I added it to the portfolio on June 7, 2013.) But Chesapeake has staged a small but significant rally beginning on October 15 and accelerating on October 16. In those two days the stock moved up 18.9%. The cause of the rally? Not a radical shift in the dynamics of oil and natural gas supply and demand. Despite a move up in oil and natural gas prices at the end of the week the fundamentals still look dismal. Instead the stock moved up on a huge improvement in company’s ability to manage through the downturn without suffering lasting damage. This was the year that a previously dangerously overleveraged Chesapeake Energy was supposed to see cash flow cover capital spending. Asset sales went to pay down debt and greater financial discipline was going to produce that milestone this year: The company would not have to borrow more money (and increase its debt load) in order to develop all the acreage that it had leased. But the drop in natural gas prices threatened to at best delay that goal and at worst send the company back down the path to the leveraged bad old days. Which is why the stock rallied so strongly on the October 16 news that the company would sell natural gas and oil shale fields on 413,000 acres of the Marcellus and Utica shale formations to Southwestern Energy (SWN) for $5.4 billion. This will be Southwestern Energy’s first major step into oil shale production after focusing almost exclusively on natural gas. (Wells that are included in the deal produce 56,000 barrels a day of oil and natural gas liquids. That will increase Southwestern’s reserves by about one-third.) )  Which may be why Southwestern was willing to pay a premium for the assets above what industry analysts thought Chesapeake could get in the current weak market. (I’ve seen estimates that put the premium as high as 50%.) And suddenly Chesapeake is back in the debt reduction game. The day after the announcement of the deal both Moody’s Investors Service and Standard and Poor’s issued positive outlooks on Chesapeake. With the deal leading to a lower net debt to cash flow ratio for the company, both ratings companies look likely to give Chesapeake’s debt an investment grade rating before too long. The company’s improving balance sheet had let it move up to the top junk bond rating at both Moody’s and S&P. And now the financial markets are anticipating that this latest asset sale will put Chesapeake over the top. For example, Chesapeake’s unsecured bonds maturing in March 202 3 and originally issued with a 5.75% coupon climbed in price on October 16 and 17 to show a yield of just 4.72%. It would be an amazing result if Chesapeake came out of this horrendous drop in oil and natural gas prices with a stronger balance sheet and an investment grade bond rating. But that does look possible. That development wouldn’t prevent the company’s shares from falling along with the rest of the sector, but it would mean that Chesapeake would be in a great position to expand production (and maybe even acquire assets—without increasing its leverage, of course) when the bearish cycle for energy prices ends. I’d hold onto these shares on that improving balance sheet and its potential in the next bull cycle for energy.

Update DXJR

July 3, 2015

Update: July 2, 2015. The recent volatility in the Wisdom Tree Japan Hedged Real Estate ETF (DXJR) isn’t surprising—the erratic performance of the Japanese economy and the bear market that has struck stock markets in Shanghai and Shenzhen are enough to make even the steeliest trader nervous. But the smoothed trend in the ETF, added to my Jubak’s Picks portfolio on December 19, 2014, continues to point upward. (I’ve got a 4.73% gain in the ETF since I added it to the portfolio—plus a 2.58% yield.) And we can thank the same bear market in China that supplies short-term volatility to this ETF for the longer-term upward trend. Every 5% swing in Shanghai right now is sending more investment dollars into Japanese (and especially Tokyo) real estate. Driven by falling markets in Shenzhen and Shanghai, by the yen’s drop to near 20 year lows, and by the prospect of a Tokyo real-estate boom as a result of the 2020 Tokyo Olympics, Chinese investors are flocking into Japanese real estate. Real estate agencies in Beijing run twice-monthly tours to Tokyo and Osaka that combine shopping for consumer goods with shopping for real estate. Real estate agencies in Shanghai are about to jump on the tour bandwagon, Bloomberg reports. (Investments in Japanese real estate also offer a chance to invest cash outside of China, a key goal for wealthy Chinese during the current government crack down on corruption and perceived corruption.) Prices for Tokyo apartments have reached their highest levels since the early 1990s and have climbed 11% in the last two years, according to the Real Estate Economic Institute. But they still look like they have a way to go. Sales to buyers from China and Taiwan jumped 70% year over year in the first quarter of 2015. But apartments in Tokyo remain priced lower than apartments on Hong Kong Island or New York. The average price for a three-bedroom apartment in Tokyo and environs was $434,680 in April versus $1.1 million for a 600-suare foot apartment in Hong Kong and $554,200 in New York. As of July 2, I’m raising my target price to $32 by October 2015.

Buy India Infrastructure INXX

January 31st, 2015

How about that “other” central bank?

With all the attention focused on the European Central Bank’s plan to buy more than $1 trillion in government bonds, on how the shifts in policy at the People’s Bank of China will speed up or slow down China’s economy, on whether the Bank of Japan can revive growth and inflation, on when the U.S. Federal Reserve will raise interest rates for the first time—the surprise move on January 15 by the Reserve Bank of India to cut interest rates hasn’t gotten as much attention as it deserves from investors.

Here we’ve got the classic “good news” interest rate reduction: Inflation has tumbled and that has let the central bank cut interest rates, which will, in equally classic fashion, lead to an increase in economic growth.

Inflation measured at the consumer level rose at a 5% annual rate in December, up from 4.38% in November. Prices at the wholesale level, the measure preferred by the Reserve Bank of India, rose by 0.1% after a 0% increase in November. Industrial production climbed by 3.8% in November and is now up by 2.2% in the first eight months of the 2015 fiscal year versus a 0.1% increase in the first eight months of fiscal 2014.  India’s economy is estimated to have grown by 5.5% in the fiscal year that ends in March 2015. That would put an end to two-years of sub-5% growth.

And the country’s economy still has wind at its back thanks to falling oil prices (India imported $143 billion of oil in 2013), more interest rate cuts (the initial reduction of 0.25 percentage points left the Reserve Bank of India’s benchmark rate at 7.75%), favorable demographics (India is now collecting the same demographic bonus that had helped propel growth in China), and structural changes from the Indian government intended to improve business conditions by improving infrastructure and ease barriers to doing business in the country.  In a year when growth in China is slowing, both the World Bank and the International Monetary Fund see the Indian economy accelerating. The World Bank, for example, forecasts GDP growth in India rising to 6.8% in fiscal 2016 and to 7% in fiscal 2017.

Indian stocks have been on a tear in anticipation of these current and future trends. Mumbai’s Sensex Index is at an all time high with a 37.8% gain over the last 12 months and a 5.5% gain in 2015 through January 22.

These trends are why I added the New York traded ADRs of HDFC Bank (HDB) to my Jubak’s Picks portfolio http://jubakam.com/portfolios/ on November 18, 2014. That pick is up by 13% from that date through January 22.

But not all sectors of the Indian market have moved up as strongly—and now on interest rate cuts and prospects for more business friendly rules and investment in the government budget that will be introduced next month for the fiscal year that begins in April I think it’s time to put some more money into India and into the lagging but about to catch up infrastructure sector.

You know what companies you want to buy. Adani Ports. Ambuja Cement. Bharti Airtel. Reliance Infrastrucure.

The problem is that almost no Indian infrastructure companies sell via ADRs in New York.

The solution is an ETF such as EGShares India Infrastructure ETF (INXX). The fund is relatively small at $45 million in net assets but volume is a decent daily average of 60,000 shares. (I think that would be light for a core holding but that’s not the portfolio role I see for this ETF.) The ETF was up 19.3% in 2014 and was up 8.9% in 2015 as of January 22.

The names in the portfolio are all those I think you’re looking for. Besides the infrastructure companies I mentioned above—all owned by the ETF—you’ll get exposure to companies such as Cummins India and Tata Communications.

I’m adding this ETF to my 12-18 month Jubak’s Picks portfolio today with a target price of $17.50 by October 2015.

Update Visa

July 24, 2015

Updated July 24, 2015.  On July 23 Visa (V) reported fiscal year third quarter earnings of 62 cents a share (excluding one-time items), beating the Wall Street consensus of 58 cents a share. At $3.52 billion revenue for the period was up 11.4% year over year and ahead of Wall Street projections by $160 million. Shares of Visa climbed 7.1% for the day. Today, July 24, shares are up again—4.04% as of 2 p.m. New York time—on news that Visa is talking with Visa Europe, which split off from Visa in September 2007, about purchasing its former unit. Visa Europe accounts for 52% of the European credit card market by volume. As of today, July 24, I’m raising my target price on Visa in my Jubak’s Picks portfolio to $82 a share by December 2015 from the prior target of $78. Shares of Visa are up almost 17% since I added them to this portfolio at $63.65 on November 15, 2014. Visa’s earnings beat on July 23 was the result of a combination of an increase in transaction volumes and an increase in the fees that Visa collects for the use of its branded cards and transaction system. Nothing like a dominant market position to make a price increase possible. Visa accounts for 50% of all global credit card transactions and 75% of all debit card transactions. Visa makes its money from fees on Visa branded cards and from fees on transactions that pass through the Visa network. The worry that hangs over Visa in the long-term is that some digital upstart will put together an electronic payment system that will eat into the use of credit cards. That fear receded a good bit when Apple (AAPL) decided that its Apple Pay electronic payment system would work with Visa, MasterCard (MA) and American Express (AXP) rather than compete with those transaction companies. In its conference call after earnings Visa raised its guidance for earnings growth rate in the fiscal year that ends in September to the mid-teens from the previous low to mid-teens rate.

Itau Unibanco

November 23rd, 2014

When she won re-election to a second term as President of Brazil on Sunday, October 26, Dilma Rousseff promised change.

Well, change is what the markets in Brazil got yesterday although it was change of a kind that surprised just about everyone. And the surprise is big enough and has enough positive long-term implications for Brazil’s finances and stocks that I will be adding the New York traded ADRs of Itau Unibanco (ITUB) to my 12-18 month Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/  tomorrow, October 31.

The surprise?

In the Banco Central do Brasil’s first meeting after the election, Brazil’s central bank raised its benchmark Selic interest rate by 0.25 percentage points to 11.25%. The bank had pretty much sat on its hands during the election campaign while inflation climbed well above the upper edge of the bank’s target. In-country and overseas investors and economists decried the inaction as evidence of the central bank’s lack of independence. Of course, the critics said the bank wouldn’t raise interest rates in any already slow economy when any further slowing might cost Dilma the election. Worries about the politicization of the bank rose to such a pitch that the markets had started to anticipate that Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings would move relatively quickly to downgrade the country’s debt.

A 0.25 percentage point rate increase isn’t a huge move and it certainly doesn’t restore the central bank’s reputation, but given how pessimistic financial markets had become, this surprise produced a rally in Brazilian stocks a day after they had sold off on Dilma’s victory. The iBovespa stock index climbed 2.52% in today’s session in Sao Paulo.

The positive market reaction to a move that will cost the economy growth in the short-term is extremely interesting—and is the reason that I’m buying Itau Unibanco now.

The move to raise rates, the markets believe today, is a sign that Dilma’s second term will move back toward a more orthodox policy of fighting inflation in order to restore faith in Brazil’s economy and its financial discipline. While we’ll have to wait and see how far this move toward fiscal discipline goes—it’s going to take work from Dilma to curb the appetite of the legislative arm of Workers’ Party for more spending and more subsidies—Dilma has the opportunity to send the markets a powerful signal when she appoints a new Finance Minister to replace the thoroughly discredited Guido Mantega. (“Discredited” is what happens when you predict 4% growth and deliver 1% with 6.3% inflation.)

If her choice—and this seems likely after the Banco Central do Brasil’s move—is seen as a voice for fiscal discipline, the markets will cheer. And Brazil will be likely to stave off a credit rating downgrade.

That’s the background for my pick of Itau Unibanco and the reason that I’m pulling the trigger on this pick now.

But I like Itau Unibanco as an individual stocks because the bank, the largest privately owned bank among the six banks that control about 75% of Brazil’s market, has worked hard to control costs and to prevent an erosion of loan quality during Brazil’s consumer credit boom. In the second quarter of 2014, for example, the 90-day delinquency ratio fell by 10 basis points. Net interest income in that quarter grew by 8.9% from the previous quarter as net interest margins improved by 70 basis points.

Going forward Itau Unibanco has a strong domestic and Latin American story to tell. The company is the market leader in credit cards in Brazil with 62 million accounts through its Hipercard and Itaucard brands. (In 2012 it bought the remainder of Redecard, Brazil’s second-largest credit card payment processor. That market share in credit cards would give Itau Unibanco a huge boost to revenue and earnings–if Brazil can right its economic ship so that the economy can generate a little more growth so that tapped out consumers have a little more room on their balance sheets.

In Latin America Itau Unibanco has been a major beneficiary of the divestiture trend by the world’s biggest banks. Partly out of a need to raise capital but also partly out of evidence that it is really, really hard to run a bank that does business everywhere, big global banks such as Banco Santander (SAN), HSBC Holdings (HSBC) and CitiGroup (C) have been selling off banking units to super-regionals such as Itau Unibanco. In 2014 Itau Unibanco acquired control of Chile’s Corpbanca (BCA), which had already acquired Helm Bank in Colombia. Itau is also making a strong push into Mexico where CitiGroup, one of the market leaders, has experienced a series of scandals.

The ADRS of Itau Unibanco popped 10.7% on October 30 on the central bank’s surprise. The move to $14.75 at the October 30 close in New York still leaves the ADRs well short of their September 2 high at $18.32 and even the October 14 “Dilma is trailing in the polls” high of $16. (Caveat investor—this is very volatile stock right now. In between those highs, Itau Unibanco has seen $13.25 on October 1 and $12.86 on October 27, the “Dilma wins” plunge.)

A return to $18, near the September 2 levels, would be a 22% gain from the October 30 close. I think that’s a reasonable initial target price while we see if Dilma can keep surprising the financial markets. One of the advantages of being as disliked by the financial community as she was before the election is that gaining a higher approval rating is a relatively easy task.

It does get harder from there, of course.

HDFC Bank

November 23rd, 2014

In my search for stocks that will go up as oil prices go down, I can’t think of a market with more leverage to the downward movement in oil prices than the Indian stock market. And I can’t think of an individual stock in that market with more upward leverage to falling oil pries than Indian bank HDFC Bank (HDB)—which is why I will be adding the bank’s New York traded ADRs to my Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/  tomorrow, November 18.

The structure of the Indian economy—the country imports 80% of its fuel—and the Indian fiscal and financial cycles are powerfully concentrating the effects of falling oil prices. For example, the government of Prime Minister Narendra Modi has used falling oil prices as an opportunity to end price controls and subsidies to consumers on diesel fuel and natural gas. That’s had the effect of reducing the government’s budget deficit at the same time as the falling cost of fuel imports has reduced the country’s current account deficit. India’s current account deficit has dropped to its lowest level in six years. Expectations are that the Reserve Bank of India will see enough of a decline in inflation (from lower fuel prices) and enough of an improvement in the national accounts to start lowering interest rates around the end of the fiscal year in March 2015. (Consumer price inflation dropped to 5.52% year over year in October, below the central bank’s target of 6%. The Reserve Bank next meets on December 2.) The central bank’s short-term benchmark repo interest rate is at 8%.

Lower oil and fuel prices plus a cut in interest rates would give a big boost to an Indian economy that the State Bank of India, the country’s biggest bank, estimates will grow by 5.8% in fiscal 2015. The Modi government has set a target to increase the growth rate to 7% to 8% within two to three years.

You can get exposure to that story through a broad-based India ETF such as the iShares MSCI India ETF (INDA.) That ETF has gained 31.8% from November 18, 2013 through the close on November 17, 2014.

Or you can look for an individual stock that is likely to leverage those trends even further.

A bank such as HDFC Bank, one of the largest privately owned banks in India, will benefit from a general recovery of growth in the Indian economy and from any interest rate cuts from the Reserve Bank of India. And it will benefit more than almost any other Indian bank. Almost 50% of the bank’s loan book is made up of retail loans—demand for retail loans is likely to pick up with the economy at a faster pace than corporate loan demand and retail loan interest rates tend to come down relatively more slowly than the benchmark so HDFC should see rising net interest margins. The bank has done a good job of keeping lending standards high during the economic slowdown—the gross bad loan ratio is just 1%–and the bank’s capital ratios are in good shape with a capital adequacy ratio of 15.7% as of September 30.

The bank also looks to be positioned to benefit as well from a more relaxed attitude from the Reserve Bank of India and the Modi government as growth picks up and as the country’s fiscal posture improves.

On November 14 India’s Foreign Investment Promotion Board approved an increase in permitted foreign ownership for HDFC Bank to 74% from a previous limit of 49%. That will let the bank go ahead with a 100 billion-rupee ($1.6 billion) sale of shares that will boost the bank’s capital available for lending just as the economy starts to speed up.

That approval is likely to revive talk—and maybe even actual negotiations–of a merger between HDFC Bank and mortgage lender and parent HDFC. The recent scrapping of tough reserve requirements and the recent increase in permitted foreign ownership remove two of the biggest obstacles to a deal which would create India’s largest privately owned lender. A deal, depending on its structure, could lower the cost of funds for HDFC’s mortgage business at the same time as it allowed HDFC Bank to escape current high reserve and restrictive lending allocation requirements. I’d put the merger talk in the “buzz” category of rumors, but a little buzz never hurt a stock price either.

I calculate a target price of $62 for the ADR as of August 2015. That’s roughly a 20% gain from the November 17 closing price of $51.93.

Update Isis Pharmaceuticals

February 1, 2015

Update: January 9. Shares of Isis Pharmaceuticals (ISIS) have been on a tear lately. The stock is up 84% in the three months ended January 8. That brings my gain since I added the stock to my Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/ on May 22, 2014 to 190%. At $72.43 the shares are way over my target price of $55. Time to sell? Has this become just another one of those over-hyped biotechs ready for a tumble? I don’t think so and in fact I’m raising my target price, as of today to $82 a share by April 2015. The news flow recently has certainly been positive. On January 8 Isis told Wall Street that it its actual results for 2014 would be a significant improvement on earlier expectations for a 2014 net operating loss in the mid to high teens and more than $725 million in cash earned by meeting milestones in its development program. (The company is due to report fourth quarter financials on February 26.) And on January 5 Isis announced it had signed an agreement with Janssen Biotech, a unit of Johnson & Johnson (JNJ) to develop drugs to treat autoimmune disorders of the gastrointestinal tract. The deal includes $35 million in upfront payments and the potential for nearly $800 million in milestone payments (plus royalties on any successful products.) This is exactly the kind of validating agreement—big name partner commits significant milestone funds—that drives the price of a biotech stock higher as investors wait for a payoff in the form of actual sales of new drugs. But there’s actually something bigger going on here than the signing of a big new partner to fund the development of new drugs. Isis Pharmaceuticals in the midst of validating a whole new drug technology, called antisense, that works by silencing harmful genes. The company is clearly one of two leaders in drug technologies, called RNA therapeutics, that work at the level of cellular RNA. (The other company is Alnylam Pharmaceuticals, (ALNY), which focuses on RNA interference rather than antisense. On January 9 the two companies announced that they would cross-license their intellectual property in RNA therapeutics.) What that means is that Isis increasingly looks like it is on a path to become not just a biotech that has developed one or two or three significant new drugs, but one that has pioneered a whole new class of innovative drugs with the potential of Amgen’s (AMGN) recombinant protein technology. It’s certainly not guaranteed that Isis grows up to be an Amgen but it is easy to understand the market’s enthusiasm. Amgen trades with a market cap of $118 billion. Even after its huge gain this year, Isis has a market cap of just $8 billion. Isis’s first drug to market, Kynamro for a rare genetic disease that causes very high cholesterol, has been a relative disappointment in sales but it did increase confidence in Isis’s technology. The company has drugs in the pipeline for diabetes, high levels of triglycerides, and blood clotting. Isis has more than 20 drugs in Phase II or Phase III trials in 2014 number and partnerships with Sanofi, Glaxo, Roche, AstraZeneca, and Biogen. The next two years will go a long way to determining if Isis owns a drug technology platform that would make an Amgen-like growth path possible. It’s that possibility that the market is trying to price right now.

Update Incyte

January 22, 2016

Updated January 22, 2016. It's hard to pay attention to important events at individual companies when markets are obsessed with tiny little macro questions like Are we headed for a new recession? Or Is the correction over? But this week Incyte (INCY) and its partner Eli Lilly (LLY) filed an application with the U.S. Food and Drug Administration for the approval of baricitinib, an orally administered selective JAK1 and JAK2 inhibitor, for the treatment of moderate-to-severe rheumatoid arthritis. In the very short run the filing is good news because it triggers a $35 million milestone payment to Incyte from Lilly. Incyte will get another $100 million upon approval. Lilly will lead post-appoval marketing.
In the longer run approval would be a major validation of Incyte drug platform--this would be the second major drug to come out of its JAK inhibitor program. Baricitinib itself has become a much more valuable and compelling drug as competitors have dropped out in the $15 billion rheumatoid arthritis market. Pretty much all current alternatives are less convenient injectable biologics. Other oral drugs--once upon a time baricitinib looked like it would be oral treatment to hit the market, Astra Zeneca has halted development of its oral competitor and Pfizer has been required to submit more data to win regulatory clearance in Europe. The biotech sector has been hit hard in the recent sell off, falling 13.6% year to date as of January 20. And high momentum biotech stocks such as Incyte have been hit even harder--Incyte was down 31.54% for 2016 through January 20. (Incyte rallied 7.48% today, Januaryn 22.) But with the cash injection, the company has sufficient cash in its coffers and with the withdrawal of some competitors the drug has become an even bigger potential winner. Incyte is a member of my Jubak's Picks portfolio. I'm keeping my target price at $132.

Update ARM Holdings

Update: February 11, 2015. It was all about royalties going into ARM Holdings’ (ARMH) February 11 report on fourth quarter earnings. The worry holding the stock down for much of 2014 had been an apparent decline in royalty growth from companies that licensed ARM’s chips to 7% in the fourth quarter of 2013, then to 4% in the first quarter of 2014, and 2% in the second quarter. Royalty growth had picked up in the third quarter of 2014—to 11% year over year—and the company had guided to mid-teens growth in the fourth quarter. That looked like a recovery but would the company be able to deliver? For at least the fourth quarter, the answer is Yes. Royalty growth from the company’s licensing of its chip technology climbed to 16% year over year. (In U.S. dollar terms licensing revenue grew 30% year over year.) Net profit, consequently rose to $111 million from a loss in the forth quarter of 2013. For the rest of 2015 the company said it expects continued momentum in licensing revenue on the strength of growth in smartphone (especially iPhone 6) sales and on the introduction of new smartphones this year incorporating ARM’s 8-A architecture. Shares of ARM Holdings fell for much of 2014 on the fear that growth in royalty revenue had slowed permanently, but it now looks like stock bottomed at $39.28 on October 22. As of the close today, February 11, at $50.31 shares have gained 28%. On the technical charts, ARM finally showed the 50-day moving average crossing back above the 200-day moving average in late January. That pattern is usually an indication of a continued upward trend. The company’s product pipeline also points to continued strength. It’s new Cortex A-72 Maya processor has been licensed to a dozen companies including MediaTek. The design, ARM says, is 3.5 times faster than the ARM processors used in most smartphones sold last year and uses 75% less energy. The company’s new Mali-T880 graphics processor for mobile devices also looks to play into the heated competition among smartphone makers to add bigger displays with more graphics while increasing the speed to the user. ARM Holdings has been a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/ since October 25, 2013. My gain during that period has been an un-awe-inspiring 5.31%. But I think ARM is moving into a product and royalty cycle sweet spot. As of February 11 I’m raising my target price for June to $60 a share from the prior target of $56.

Update Cheniere Energy

December 21, 2015

The board at Cheniere Energy (LNG) has replaced CEO Charif Souki just months before Cheniere becomes first U.S. company to export liquefied natural gas. Good riddance. I’ve been willing to put up with Souki’s huge $142 million compensation package in 2013—not bad for a startup with loaded with billions in debt and not showing any significant revenue. But his latest plan—to ambitious and expensive plan to expand Cheniere from an exporter of natural gas from the United States into a short-term natural gas trading house—threatened, in my opinion, to divert Cheniere’s attention from its core business just as that business started to show actual revenue. I think you can get away with that if you’re Amazon.com (AMZN) and Jeff Bezos and if you’re trained Wall Street and your investors to expect endless investment in new businesses that put off profits indefinitely. But I don’t think the market these days will let you sink more money into an energy business sitting on $9 billion in long-term debt. Especially not when activist investor Carl Icahn has won seats on the board arguing that the company needs to focus on providing returns to shareholders sooner rather than later. I think this is the right move for Cheniere. Cheniere’s biggest competitive advantage is that it will be the first U.S. exporter to market. With natural gas prices so low now and every bear from Jim Chanos to my Aunt Tillie forecasting a big surplus in liquefied natural gas capacity by 2020, I think Cheniere needs to keep its focus on finishing its plants on time and on budget. Revenue sooner rather than later is the key element that investors in Cheniere need.

More capital spending–more cash flow–for Targa Resources

April 4, 2014

Not that nothing else matters—the price of natural gas and natural gas liquids is important—but my theory is that at the moment, in the current cheap money environment, the crucial thing that investors in energy MLPs (master limited partnerships) need to know is whether one of these dividend generating machines has enough new projects to keep distributions to investors climbing. Since master limited partnerships by law must distribute all of their income to investors, the way one of these companies grows is by raising money in the financial markets and then investing it in new pipelines, distribution hubs, refineries, processing facilities, and the like. With money so cheap right now, thank you Ben Bernanke and Janet Yellen, it’s easy for a master limited partnership to profit from the spread between the cost of borrowing money and the returns that projects produce. The hard part right now—after so much money has gone into master limited partnerships to be put to work in the U.S. energy boom—is finding enough good projects to keep the cycle going. From that perspective, the March 31 update from Targa Resources Partners (NGLS) was extremely good news. The MLP announced that because of an increase in exports of liquid petroleum gas first quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) would be 60% higher than in the first quarter of 2013. Liquid petroleum gas isn’t the same as liquefied natural gas. LPG is made from natural gas liquids and it is largely made up of propane and butane rather than the methane of natural gas. Exports of liquid petroleum gas fall under a completely different regulatory scheme than exports of liquefied natural gas. The United States became a net exporter of liquid petroleum gas for the first time ever in 2012 and exports are projected to grow until the United States becomes the world’s top exporter sometime around 2020. The biggest market is Asia where it’s used both for heating and increasingly as the feedstock for chemical production. All those exports to Asia mean a lot of opportunity for investment in new infrastructure. Which along with that increase in EBITDA was the big news from Targa on March 31. Targa’s liquid petroleum gas export capacity climbed to 3.5 to 4 million barrels a month by the end of 2013 and the company projects that it will reach 5.5 to 6 million barrels by then end of 2014. In addition to the $650 million in previously projected capital spending to reach that goal, Targa will add another $50 million in capital spending in 2014 to build a plant to split liquids into butane, propane, and other components. (Total cost for the splitter will be $115 million with the splitter to go into service in 2016/2017.) The company also said it will build a new processing plant in the Bakken shale gas region. Targa is a member of both my Jubak’s Picks portfolio and my Dividend Income portfolio. (The master limited partnership paid a 4.9% dividend as of closing price on April 4.) As of April 4 I’m raising my target price on Targa to $60 a unit in both the Picks and Dividend Income portfolios. (Traditionally I haven’t put target prices on picks in the Dividend Income portfolio, but I’ve have decided to add them gradually as I update these picks.) Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own units of Targa Resources Partners as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

Stillwater Mining is a hold for 2016

September 9, 2015

Bad news for the South African platinum sector, which produces about 80% of the world’s platinum. A sharp drop in capital investment beginning in 2008 (when it was an annual $3 billion) and stretching into 2015 (when it was an annual $1 billion) has hit platinum output hard. Projecting from capital spending, the World Platinum Investment Council calculates that South African output will be below 2015 levels in 2016 and 2017. That would produce ongoing deficits in global supply in those two years. The forecast is for a deficit of 445,000 troy ounces in 2015—which is actually better than the deficit of 785,000 ounces in 2014. The improvement in the supply/demand deficit from 2014 is a result of the end of strikes that decimated production in South African in 2014. Supply is forecast to rise by 9% in 2015 to 7.9 million ounces thanks to the end of the strikes. Demand is forecast to climb 4% to 8.4 million ounces in 2015. But thanks to continued labor unrest in South Africa and the fall off in investment in South Africa’s aging deep shaft mines, the industry is unlikely to see a repeat of the big 2015 increase in supply Eventually that will result in an increase in the price of platinum, which hit a six-year low in August after falling 17% in 2015. The low price for platinum has resulted in a pickup in investment demand from Japanese investors, who buy bar platinum, and from exchange traded funds. My thesis since I added Stillwater Mining (SWC), the only North American miner of platinum/palladium metals, to my Jubak’s Picks portfolio is that South African’s pain would be Stillwater’s gain. That hasn’t worked out very well in 2015 as Stillwater—down 37.92% year to date—has tumbled to match the fall in a South African miner such as Impala Platinum Holdings (IMP:SJ)—down 37.95% for 2015 through September 9. But I think that the continued drop in South African production means Stillwater is likely to turn the corner as platinum and palladium prices gradually recover on the supply/demand deficit. (Shares of Stillwater held steady in August even as commodities in general fell on China growth fears.) The company actually increased capital spending by 9.7% in the second quarter of 2015 from the second quarter of 2014 and managed to take $7 a ounce out of its all-in sustaining costs in that period. Obviously any gain in Stillwater Mining shares depends on a recovery in platinum prices but with South African production continuing to lag, I think there’s a good chance of that happening in 2016. I’d call this stock a hold for patient investors with a target price of $12.50 a share, up from $9.15 on September 9, by September 2016. The shares are down 19.95% since I added them to my Jubak’s Picks portfolio on September 25, 2012.

Finally some growth at stock pick Xylem

April 29, 2014

When Wall Street doesn’t expect much of any growth, a 3.1% year-to-year increase in revenue is reason for dancing in The Street. That’s what’s happening with shares of Xylem (XYL) today. As of 3:00 p.m. New York time the stock was up 3.22%. The catalyst? First quarter earnings of 34 cents a share, 2 cents a share above analyst forecasts, that 3.1% organic increase in revenue to $906 million (when Wall Street was expected $889 million), and earnings per share guidance of $1.85 to $2.00 a share for 2014 (when the Wall Street consensus was $1.87.) I added Xylem to my Jubak’s Picks portfolio http://jubakam.com/portfolios/ back on September 4, 2012 as a pure play on increasing global demand for clean water—and the equipment to purify and move it that Xylem makes. The stock is up 47.5% since then but Xylem has had trouble getting much revenue growth in a global economy where tight government budgets in the United States and the EuroZone have slowed spending on water projects. Organic revenues has edged lower under that pressure so that investors (like myself) who like the long-term story have been left wondering when Xylem might see any growth at all. Certainly this quarter, positive as it is, doesn’t mark a huge turnaround. In its conference call Xylem forecast that 2014 sales would growth by 2% to 4% even as it also noted that global water consumption is growing twice as fast as global population. The company’s response to the current market softness has been to look for efficiencies that would improve margins. That seems to be working: in the just reported first quarter, adjusted operating margins climbed by 150 basis points. As of April 29, I’m tweaking my current target price of $45 to $47 in recognition of Xylem’s progress on increasing operating margins. The stock pays as 1.4% dividend.   Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Xylem as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

Statoil’s second quarter: Better than the average oil company

July 29, 2015

Update: July 28, 2015. Statoil (STO) reported second quarter results today (July 28) that beat consensus estimates on both earnings (NOK3.15 a share vs. the NOK1.62 consensus) and revenue (NOK138.5 billion vs. NOK124.8 billion analyst consensus.) That doesn’t mean Statoil has found some way to magically sell oil for a higher price than competitors. Second quarter earnings may have exceeded analyst estimates but they still fell 27% year over year. What’s the secret to the Norwegian oil company’s relative success at a time when oil continues a collapse from $108 a barrel in January 2014 to a July 28 close at $53.15 (for European benchmark Brent crude)? Statoil’s quarter is a checklist for what an oil company has to do right these days to stand a chance of navigating a plunge in oil prices that still has a while to run. (Statoil is a member of my Jubak Picks portfolio. The position is down 36.4% since I added it on May 10, 2012. ) First, Statoil announced a further cut to its capital-spending budget to $17.5 billion for 2015. That’s down from $20 billion in 2014 and a projected budget of $18 billion reported last quarter. At the same time as the company continued to cut capital spending production climbed with second quarter production, adjusting for asset disposals, up 7% year over year. Second, Statoil has been able to cut costs—and increase efficiency—so that it is finding and producing more oil even with lower capital spending. Unplanned losses (that is production losses that aren’t the result of planned events such as maintenance but are the result of accidents or weather) have fallen from 12% in 2012 to 5% in 2014. Efforts to increase the percentage of oil recovered from mature and declining off shore fields on the Norwegian Continental Shelf have pushed the recovery factor up to 50% with the company targeting 60% recovery. (Increasing oil recovery is an especially profitable endeavor since the company has already built out necessary infrastructure in the region.) Operating expenses fell an additional 15% quarter to quarter. Third, Statoil has either been very lucky or very good at finding new oil to diversify its asset base beyond its traditional concentration in the Norwegian Continental Shelf. The company has announced promising finds in the deep-water Gulf of Mexico, off the east coast of Canada, and off both coasts of Africa (Angola and Tanzania.) Statoil has also recently added U.S. shale assets in the Marcellus, Eagle Ford, and Bakken geologies. All this is backward looking, of course. Looking toward the future, Statoil has potentially lucrative positioning as a major supplier of natural gas to Europe at a time when Western European countries are looking to reduce their emissions of green house gases and to find alternative sources of natural gas to reduce reliance on Russian supplies. Looking that that same direction, the big uncertainty is whether Statoil can continue to reduce costs and increase production at rates that will enable the company to maintain the current $0.221 quarterly dividend. Right now the company’s payout ratio is running at 80% to 100%, which doesn’t leave Statoil with a huge margin for further drops in the price of oil. In the conference call, the company said that it projects that it can maintain the current dividend payout (for 2015, management said) while reducing the payout ratio. The stock currently yields 5.4%. As of July 28, looking at the likelihood that oil prices will stay low for a while, I’m cutting my target price to $24 a share by June 2016 from a prior $28 a share. Statoil closed at $16.48 in New York trading on July 28.

Update MGM Resorts for Year of the Monkey

February 5, 2016

The weeklong Lunar New Year holiday starts in China on February 8. This isn't do or die for Macao casinos but it would sure be nice to see traffic to the Macao properties of Las Vegas Sands (LVS), Wynn Resorts (WYNN) and most especially MGM Resorts International (MGM), since I own those shares in my Jubak Picks portfolio, pick up during this holiday. What I'd particularly like to see is a pick up in VIP and other big stakes gambling because that would indicate that wealthier Chinese have decided that going to Macao isn't going to put them on the radar screens of Chinese anti-corruption investigators. A high roller trip to Macao has been a black mark almost as large as the purchase of a Rolex or anything from Louis Vuitton. We won't know the details on the make up of traffic to Macao until the holiday is over but pre-holiday traffic has been up over last year. Total visitors to Macao climbed 5% from the pre-holiday week in 2015 and the number of visitors to Macao from mainland China was ahead by 11% from the pre-holiday week in 2015. We're looking ahead to the Year of the Monkey so we should be prepared for tricks (and for being pelted with rotten fruit.) A Year of the Monkey can come in one of five varieties. 2016 is a Year of the Fire Monkey who is ambitious and adventurous, but also irritable.

OncoGenex pops today on hopes for major cancer drug news tomorrow

March 10, 2014

Shares of biotech OncoGenex (OGXI) were up 8.9% today, March 10 at the close in New York. Why? Because March 10 is the day before March 11. The company is scheduled to report fourth quarter results on March 11 after the close of the New York market and speculation today is that the company will announce major progress on the Phase 3 trial of custirsen, its drug for metastatic prostate cancer and for advanced non-small cell lung cancer. The company recently announced that the trial had reached the specified number of events required for final analysis and that the results would be reported as soon as they are available. The speculation is that “as soon as they are available” means before the end of March. That’s a major change from 2013 when expectations were that the final results wouldn’t be released until the middle of 2014. After hitting a low at $6.70 a share on November 6, 2013, shares of OncoGenex have climbed 107%. They are still 12.7% below the $15.71 March 14, 2012 price where I added OncoGenex to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .  But I think we’re looking at news on custirsen and the company’s second cancer drug apatorsen in 2014 that will finally move the stock to my $22 target price. The Phase 3 SYNERGY trial for custirsen is a big deal for OncoGenex since the drug represents a novel target for treating advanced prostate cancer. Success in this trial wouldn’t just give the company a substantial new drug but, more importantly, it would validate the company’s approach to cancer as a platform for developing other cancer drugs. It’s the potential for that platform that got Teva Pharmaceuticals (TEVA) to sign on for potential milestone payments of $370 million. I expect to hear something from OncoGenex on its progress in reaching those milestones on March 11. I’m also expecting to hear some news on the Phase 2 trials for apatorsen in bladder cancer. The report on the results of those trials is likely for the second half of 2014. Speculation ahead of the fourth quarter report is that this will be the year that OncoGenex demonstrates the validity of its cancer platform. After the recent run up in the shares on that speculation, the danger is that the actual news could disappoint. I’d hold through any sell on the news dip as long as the reports on the custirsen trials are solidly positive. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of OncoGenex as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

Terrible quarter for Yamana marks bottom for company–if not for gold

February 20, 2014

It’s always hard to judge the bottom of a cycle—and it’s certainly hard for gold right now. I suspect that the recent rally in gold to a close of $1320.90 an ounce on February 20 isn’t likely to hold and that we’ll get a retreat back below $1200 before the year is done. But that’s only my best projection and the market is deeply divided right now between analysts calling for gold to move higher from here (and to finish 2014 higher) and those projecting an end of the year price at $1050 an ounce or so. In this context I can’t say whether this is the time to start buying shares of Yamana Gold. If gold moves lower so will the shares of gold miners. Those shares have by and large outperformed gold itself in 2014. But I do think that Yamana’s fourth quarter earnings report, announced on February 19, does represent something very like a bottom for the company: big impairment charge, big cuts to capital budget and to the dividend, and what looks like a stabilization of the all-in cost of production at a very low level. Impairment for the quarter came to a whopping $682 million against operations in Brazil because of a delay in starting operations and against several exploration projects. That took the loss for the quarter to $536 million. Excluding these items the company earned 5 cents a share in the quarter, down from 26 cents a share in the fourth quarter of 2012. Gold reserves fell by 8%. That is a relatively small reduction in comparison to those being declared by other gold miners recently—Goldcorp (GG), for example, declared a 15% reduction in reserves. Yamana Gold has been relatively aggressive in cutting the price assumptions it uses in calculating reserves (at $950 an ounce versus $1300 an ounce at Goldcorp) so the low price of gold in 2013 has relatively less effect on Yamana’s reserve calculations. For the year Yamana reported that it had reduced exploration spending to $30 million, a 50% reduction from 2012, and that total capital spending of $1 billion in 2013 would fall to $480 million in 2014. The company also announced a big 42% cut to its dividend to an annual 15 cents a share. All-in sustaining costs fell to $947 an ounce in 2013 thanks to cost cutting and the company projected that all-in sustaining costs would dip further to $925 in 2014. Production in 2014 will climb, the company projects, by 200,000 ounces. To me this adds up to a lot of bad news and while I can imagine another batch of negatives if gold plunged below $1,000 an ounce, I think this is enough to mark a bottom for Yamana. Given the uncertainties of the price of gold, I don’t think I’d back up the truck right now, but I’m certainly going to continue to hold the shares in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ I’d buy more if the price fell to $9.50 or less. And I’m keeping my target price at $14.50 a share although I’m stretching out the schedule for that price to November 2014. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Goldcorp or Yamana Gold as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

Abbott Labs looks like a second half story for 2014

March 4, 2014

Fourth quarter earnings and guidance for 2014 announced on January 22 make it clear that Abbott Laboratories (ABT) is a second half story for 2014. (Abbott Laboratories is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ) For the quarter Abbott reported earnings of 58 cents a share, matching Wall Street estimates. Revenue climbed just 0.4% year over year to $5.66 billion, less than the $5.72 billion analysts had projected. A stronger dollar worked against Abbott in the quarter but even taking out currency effects worldwide sales still grew by just 3.3%. For 2014 the company told Wall Street to expect $2.21 to $2.26 a share. That’s slightly ahead of the $2.21 consensus projection by analysts. But that earnings guidance isn’t spread evenly over 2014. In the first quarter, for example, Abbott faces tough year-to-year comparisons with the first quarter of 2013, and what are projected as lagging sales and higher marketing expenses for the period. As Abbott’s fourth quarter earnings report made clear, the company’s infant formula sales still haven’t completely recovered from product problems in Saudi Arabia, Vietnam, and, most importantly, China. Sales of pediatric products outside the United States fell by 3% in the quarter. (Growth in the third quarter hadn’t been particularly robust at 3%.) The first quarter, the company noted, will also see higher expenses related to product recalls in those markets and higher marketing expenses as Abbott spends to rebuild market share and growth. Add a very negative currency effect from dollar strength in the first quarter and the year is likely to begin with disappointingly sluggish growth. I don’t think any weakness in the stock in the first quarter is likely to be big enough to make selling and then rebuying an attractive strategy. But if you’ve been looking to add to a position in Abbott (or to start one) the days or weeks after the first quarter earnings are reported on April 16 might be your best opportunity for 2014 As of March 4 I’m raising my target price for Abbott to $46 by October from my current target of $40 a share. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Abbott Laboratories as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.


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