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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
Autoliv
ALV 04/29/2016 $122.47 $149.00
When back on March 29 I gave a thumbs up to Autoliv (ALV) in a post on my subscription JubakAM.com site as a pick for the increasing automaker emphasis upon... more
Bristol-Myers Squibb
BMY 01/22/2016 $64.02 $76.00
More portfolio catchup here. Back on January 22, 2016 I added Bristol-Myers Squibb (BMY) to my Jubak Picks portfolio in a post on my subscription site JubakAM.Com. That buy never made it... more
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 $115.00
Update April 14, 2016: Updated April 14. Shares of Synaptics (SYNA), a maker of touch screen technology, are soaring today on one of those unsourced stories--you know "people familiar with the matter"--that the company's... more  |  Read Jim's Original Buy
Alibaba
BABA 10/26/2015 $76.25 $95.00
Update April 13, 2016: Update April 13. Alibaba Group (BABA) has made its largest overseas investment to expand into Southeast Asia. Alibaba will pay $1 billion to buy shares from the company and from existing... more  |  Read Jim's Original Buy
Allergan
AGN 07/30/2015 $337.99 $350.00
Update April 5, 2016: New rules from the Treasury Department announced on Monday put new obstacles in the way of tax inversion mergers in general--and provided tailored obstacles to Pfizer's (PFE) acquisition of Allergan... more  |  Read Jim's Original Buy
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
Wisdom Tree Japan Hedged Real Estate
DXJR 12/19/2014 $27.00 $32.00
Update March 22, 2016: Update: March 22, 2016. When I added Wisdom Tree Japan Hedged Real Estate ETF (DXJR) to my Jubak Picks portfolio back in December 2014, my idea was that investment flows... more  |  Read Jim's Original Buy
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
Update March 30, 2016: Updated March 30. It looks like Brazil's impeachment rally is back on after a week when it looked like President Dilma Rousseff might be able to slow or divert the... more  |  Read Jim's Original Buy
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 $102.00
Update April 1, 2016: One of the disadvantages to having found an enzyme inhibitor that might work for just about anything from rheumatoid arthritis to colorectal cancer is that ultimately no drug or drug... more  |  Read Jim's Original Buy
Cheniere Energy
LNG 06/25/2013 $26.71 $34.00
Update March 24, 2016: Update March 23. Another big LNG (liquefied natural gas) project has been halted before completion. This time it's the $40 billion Browse project owned by Australia's Woodside Petroleum (WOPEY) and... 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 March 15, 2016: Update March 15. If you're a longer term investor--time horizon 18 months or so--you own MGM Resorts International for the eventual recovery in Macao (2018 I'd estimate) and the opening... 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
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

Adding Autoliv to my Jubak Picks portfolio as earnings report confirms growth story

April 29th, 2016

When back on March 29 I gave a thumbs up to Autoliv (ALV) in a post on my subscription JubakAM.com site as a pick for the increasing automaker emphasis upon safety and driver-assisted or autonomous driving systems, I said I’d like to wait until after the company’s April 29 earnings results. I didn’t want to pick up these shares just as the auto industry reached peak sales and headed into one of its periodic summer slowdowns.

Well, apparently I wasn’t the only one waiting for earnings. Today, after announcing earnings before the open, shares of Autoliv jumped 6.95% as the company blew out first quarter earnings and then raised guidance for the second quarter of 2016. In a market without much in the way of growth to cheer about a company that beats analyst estimates of $1.66 a share by 16 cents a share (earnings were 16.9% better than in the first quarter of 2015) and that beats projected revenue by $90 million deserves a rally–especially when the company then posts positive guidance for the second quarter. Revenue in the second quarter will increase by around 11% with organic sales growth for the full year to exceed 7%. (That 11% guidance is up from earlier guidance for 2% revenue growth.) Adjusted operating margin will be 9% for the full year. (Organic growth is growth before the effect of acquisitions.)

Sure, I now wish I’d bought these shares before earnings but I’m not going to let a short-term disappointment on timing stand in the way of a owning part of a long term growth story. I’ll be adding shares of Autoliv to my Jubak Picks portfolio on Monday, May 2.

Let me take a few items from that March 29 post–a Sector Monday exclusive to JubakAM.com–to give you a little background on why I’m picking Autoliv. (For the complete story subscribe at JubakAM.com for $199 a year and see my JubakAM.com post http://jubakam.com/2016/03/autoliv-another-auto-technology-stock-for-the-age-of-autonomous-vehicles/ )

Autoliv dominates the airbag auto safety market–especially after the massive recalls faced by Japan’s Takata as a result of that company’s airbag inflators shooting shrapnel at drivers and passengers–with a 41% market share in 2015. The story that isn’t priced in to the shares, even after today’s move up, is the company’s business providing radar, vision sensors and other systems for driver assisted braking and driving systems–and to technologies that will, ultimately, lead to autonomous cars. Current models using Autoliv components run the range from the Chevrolet Malibu to the Mercedes E Class. The combination of radar and vision technologies is one that especially appeals to consumers with surveys showing a preference for cars that include both radar and cameras in their safety systems. This new class of safety equipment could generate more than $3 billion in electronics sales annually by the end of 2019. That’s a hefty hunk of growth for a company that saw sales of $9.2 billion last year. Wells Fargo projects 34% compounded annual growth for revenue from active safety systems at Autoliv and 65% compounded annual growth for earnings from this segment.

Autoliv fits in the auto technology theme I laid out at the MoneyShow in Orlando on March 5, although I did not mention the stock in that presentation. You can find the slides from that presentation on this free site at http://jubakpicks-1565237904.us-west-2.elb.amazonaws.com/2016/03/08/cars-the-next-profit-frontier-in-technology/

Today’s earnings and revenue figures re-enforce that picture. Sales growth by segment: airbags 12.2%; seat belts 1.6%; passive safety electronics 17.5%, and active safety (the driver assisted segment) 50.7%. Airbags are by far the company’s biggest segment by revenue at $1.32 billion. Active safety is the smallest at $190 million. Gross profit margin improved by 1.1 percentage point to 20.6%. Adjusted operating margin grew by 20 basis pints to 9.1%.

Autoliv is still not especially expensive. The price to sales ratio is just 1.15–reasonable for the company’s growth rate. The trailing 12-month price-to-earnings ratio at today’s close is 17.7. The shares pay a 1.9% dividend with a May 16 ex-dividend date.

The shares have traded in a 52-week range of $95 to $132.19.

I’m adding these to my Jubak Picks portfolio with a target price of $149 by the end of 2016.

Buy Bristol-Myers Squibb (Original buy January 22)

April 10th, 2016

More portfolio catchup here.

Back on January 22, 2016 I added Bristol-Myers Squibb (BMY) to my Jubak Picks portfolio in a post on my subscription site JubakAM.Com.

That buy never made it to this site or to the portfolio page that acts as page of record. I’m adding it to the page today with the buy at the price on January 22, 2016.

Here’s what I wrote in my post back on January 22:

“In sell offs such as the one that ruled the first three weeks of January, investors and traders usually dispose of high risk, high momentum big winners first–along with anything that belongs to the out-of-favor sector(s) of the day. So along with crushing oil stocks and commodity stocks, this correction or bear (depending on what market you look at) has killed FANG favorites Facebook, Amazon.com, Netflix and Google (well, Alphabet) and it has pummeled biotechnology stocks. The sector as a whole was down 13.6% for 2016 before the recent rally with momentum favorites such as Incyte (INCY) down even harder–31.54% for 2016 through January 20.

Which makes high momentum stocks in biotech a favorite of mine for any recovery. Biotech stocks even get my nod as recovery winners over technology stocks. Biotech stocks are hard to understand and their research pipeline hard to evaluate so, in my experience, they tend to trade on momentum and a few scraps of news. Which means that when you get a return of confidence that coincides with a scrap of news the best of biotech stocks can take off like rockets. For example, Incyte, which I updated yesterday and which is a member of my Jubak Picks portfolio, was up 7.48% in the January 22 bounce/rally.

Of course that means that if this bounce doesn’t turn into a rally, high momentum biotechs like Incyte can fall really hard again. Incyte is a high risk, high volatility stock and it is simply too volatile for many investors–especially those that don’t have a clue about its research pipeline. I think the long-term reward justifies the short-term volatility but I can understand why a stock like this is outside the parameters of many portfolios.

For inclusion in those portfolios in the current market I’d suggest Bristol-Myers Squibb (BMY). It has many of the characteristics of a traditional Big Pharma drug company–for instance a large and diversified lineup of established drugs and a reasonably attractive 2.4% dividend–that damp volatility. (Those divestitures and patent expirations make the stock’s PE ratio and similar valuation measures largely irrelevant at the moment.) The shares were down for 2016 by 8.23% through January 21. But in recent years the company has stripped away many of its non-core products in medical imaging, wound-care, and nutrition to focus on its speciality drug business. Like many big drug companies Bristol-Myers has struggled with the loss of patent protection on big selling drugs such as anti-psychotic drug Abilify–but as a consequence of its asset sales and patent expirations it has wound up with a very concentrated but strong pipeline in immunology and cancer drugs. Both of those are extremely hot research areas for the drug industry right now.

The Big Dog here is a cancer drug Opdivo, which recorded sales of $305 million in the third quarter but which has the potential to grow to a peak of $14 billion in annual sales as it continues to add approval for other cancers. The most recent approval was for lung cancer, but Opdivo has the potential to add indications for renal, head and neck, and blood cancers.

The next big catalyst for Bristol-Myers, even bigger than the January 28 report of fourth quarter earnings, comes in May with important meetings of cancer researchers that will see the announcement of new findings on Opdivo that are likely to point to further applications of the drug. If you want to wait until we’re past this correction and closer to those meetings, I certainly understand. I’m willing to take my 2.4% yield and hold on through volatility in order to get the stock in the mid-to-low $60s. I’ll be adding it to my Jubak Picks portfolio on Monday, January 25, with a target price of  $76 a share for July 2016.”

The January 22 price for this buy was $64.02. The April 8 close was $66.07. The shares got as low as $58.52 on February 2.

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.

 

Update Synaptics on deal rumors

April 14, 2016

Updated April 14. Shares of Synaptics (SYNA), a maker of touch screen technology, are soaring today on one of those unsourced stories--you know "people familiar with the matter"--that the company's talks with a Chinese investor group are live again with a target for working out a deal by the end of April. Synaptics had started discussions about a deal with a state-backed Chinese investment group at the end of 2015. Those talks, with a rumored price of $110 a share, however, were thought to have suffered a fatal blow in January when Philips announced that it had canceled a deal to sell an 80% stake in its Lumileds LED lighting business to an investment group led by China's GO Scale Capital. The cancellation followed on objections from the U.S. Committee on Foreign Investment in the United States to the sale of the Dutch company's division to a Chinese investor. The thinking back in January was that the Philips cancellation showed that U.S. regulators were getting more aggressive in examining Chinese acquisitions. If that scrutiny could nix the sale of a Dutch business to a Chinese investment group, the likelihood of approval for a deal to sell a U.S. company with potentially sensitive fingerprint recognition technology was extremely low. Even though after the Philips cancellation Synaptics and its potential Chinese investors kept talking, a rumored target of announcing a deal by the end of March came and then went without any deal. The thinking today, however, is that if Synaptics is continuing to talk to a Chinese investment group, the U.S.company must have reasonable confidence that it could get approval for such a deal. Note all the caveats and assumptions in today's logic. "If" Synaptics" is talking to Chinese investors in a serious manner, the company "must have received" some indication that regulators would approve the deal. My thinking on this is that a $110 price would yield a nice short-term profit on these shares that I added to my Jubak Picks portfolio at $92.96 on November 10, 2015. But I don't mind holding on for longer than that to let the fundamentals of growth at Synaptics push the stock higher, as the company continues to expand markets for its technology beyond smartphones. When I added the stock to my portfolio, I calculated a $115 target price on those fundamentals. Synaptics is due to report first quarter earnings on April 28.

Alibaba pays $1 billion to drive into Southeast Asia

April 13, 2016

Update April 13. Alibaba Group (BABA) has made its largest overseas investment to expand into Southeast Asia. Alibaba will pay $1 billion to buy shares from the company and from existing investors in Lazada Group. Founded in 2012, Lazada operates online shopping sites in Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. Estimates say that Alibaba will wind up with a two-third stake in Lazada. (Alibaba has an option to buy the remaining piece of Lazada 12 to 18 months after this deal closes.) Sales at Lazada grew to $154 million in 2014 from $76 million in 2013. But losses went to $147 million from $59 million. (Lazada will release full 2015 results on April 14. In the first three quarters of 2015 Lazada saw sales jump 81% year over year to $190 million. Active online customers tripled to 7.3 million. Alibaba itself reports fiscal fourth quarter results on May 5.) What Alibaba gets with the deal is quicker access to a Southeast Asia online market that is forecast to explode in the next five years--but that doesn't at the moment have a dominant player. The e-commerce market for business to consumer sales in Lazada's market area was $10.5 billion in 2015. But that represents just 1.5% of retail sales volume in the region, according to Front & Sullivan. In comparison business to consumer e-commerce sales add up to 12% of retail sales in China and 8% in the United States. There would seem to be plenty of room for growth in Southeast Asia. But growth won't come all that quickly or cheaply. The under-developed transportation and logistics systems of these countries will require Alibaba to build out its own logistical system to get goods to customers, especially to customers outside big cities. In buying Lazada Alibaba gets an existing network of 10 warehouses. Before the deal Lazada's plans were to double the size of that network to 20 in the next few years. (In the region Alibaba also has a stake in Singapore Post.) About 85% of Alibaba's sales currently come from its domestic Chinese market but the company has set a goal of getting 50% of revenue from overseas. The Lazada deal is exactly the sort of development by Alibaba that I saw as a big reason to add the shares to my 12-18 month Jubak Picks portfolio and to my long-term 50 Picks portfolio. I'm leaving my target price for Alibaba shares in the Jubak Picks portfolio at $95 a share. Alibaba's New York traded ADRs (American Depositary Receipts) traded at $77.63 at 12:45 p.m. New York time on April 12. The ADRs show a trailing 12-month PE of 18.3.

Allergan/Pfizer deal is most probably dead; Allergan is a bargain on sell off

April 5, 2016

New rules from the Treasury Department announced on Monday put new obstacles in the way of tax inversion mergers in general--and provided tailored obstacles to Pfizer's (PFE) acquisition of Allergan (AGN), the maker of Botox. I think the rules almost certainly killed this deal's tax benefits--Pfizer would have been able to slash its corporate tax rate by claiming Ireland as its home base after acquiring Allergan--although Pfizer could still go ahead with the merger on its fundamentals. But Allergan's shares dropped 14.7% in today's session as event-driven traders and investors sold since an Allergan-Pfizer merger on the fundamentals is unlikely and almost certainly wouldn't bring the share price premium that the tax-driven deal would have provided. It will take a while for the investor base in Allergan to turn over from those who owned shares because of a chance to score a quick profit on the deal to those who like Allergan because of the fundamentals of the dominant Botox and other cosmetic drug franchise. When I added the shares to my Jubak Picks portfolio back on July 30, one of the things I liked best about the pick was its win/win nature. If the acquisition by Pfizer went through, I could easily see the shares climbing to a target of $385 or higher from the $339.99 close on the day of the pick AND if the deal didn't go through, I thought Allergan was undervalued on the fundamentals of its business and the shares were were at least $370 to $375. Now that the stock has pulled back to $236.35 at the close today, April 5, I'm certainly not selling Allergan. It may take six to nine months for the shareholder base to turn over--that's about how long it's taken in the case of other busted deals of this sort--but I think, on the fundamentals, that a reasonable one-year target price for these shares is $350. (Slightly lower than my prior $385 target because there will be some residual reluctance among fundamental investors to pay up to the full levels of the Pfizer deal.) Due to the mechanics of my Jubak Picks portfolio I don't have any way to buy more shares in this portfolio to add to the position--although that is my recommendation to you. (If you are really cautious you might wait some days until you were certain all the shoes had dropped from this news, but I think buying now is reasonable.) To reflect my "buy more" recommendation on Allergan I'll be adding the stock to my Jubak Picks 50 longer term portfolio. From a long-term perspective I actually like Allergan's stand-alone market dominance more than I like the risks in a combined Allergan/Pfizer drug portfolio. Am I certain that the Allergan-Pfizer deal is dead? As a deal driven by the tax advantages of moving Pfizer's legal domicile to low-tax Ireland, I'm absolutely certain. Key parts of the new rules that the Treasury has put forth seem intended to kill this specific deal. The new three-year look back rule that would penalize "serial inverters" changes the terms of the deal for Allergan because of the company's merger with Actavis.  The new rules for calculating post-deal ownership also seem tailored for this deal since they would push post-deal ownership above the 60% threshold for securing the desired tax status. And I think that's the conclusion that event-oriented money managers have reached too. At the end of 2015 Wellington Management, Clearbridge Investments, Paulson & Co., Viking Global Investors, and Third Point had all each built up positions in Allergan of $1 billion or more. I think a lot of those positions are now much smaller as these money managers have been selling shares of a stock that no longer fits with the strategies mandated by their investment guidelines.

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%.  

Update Wisdom Tree Japan Hedged Real Estate ETF

March 22, 2016

Update: March 22, 2016. When I added Wisdom Tree Japan Hedged Real Estate ETF (DXJR) to my Jubak Picks portfolio back in December 2014, my idea was that investment flows from China into cheaper (and safer from government eyes) Tokyo real estate plus development for the 2020 Olympics would push prices in the Tokyo real estate market higher. Well, I got the direction right. Land prices in Japan rose for the first time in eight years in 2015. But I could sure use a bit more magnitude to that upward trend. Nationwide land prices gained all of 0.1% in 2015. That's better than the 0.3% drop in 2014, but its not exactly the number I was hoping for. I think 2016 has the potential to be a better year than 2015. Prices in the Shanghai and Shenzhen stock markets have stabilized after a volatile 2015--that should give Chinese investors enough confidence to put money to work in Tokyo, Osaka, and Nagoya, Japan's three largest metropolitan areas. Land prices in those three cities outpaced the very small national gain by accelerating to growth of 2.9% in 2015 from 1.8% in 2014. The yen looks like it's got another year ahead of it as a safe haven currency--which makes the yen more expensive but also more attractive as a stable store of value. And, of course, the 2020 Olympics is a year closer than it was in 2015. Back in July 2015 when I last updated this pick, I set a $32 a unit price for this ETF by October 2015. I don't see any reason to change that target now--either higher or lower--but I am extending the time table for that target to October 2016. That target represents a potential 22% gain from the closing price of $26.15 on March 22. At that closing price I've got a 3.15% loss on this position in Jubak Picks.  The trailing 12-month yield on this ETF as of the end of February was 1.85%.

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.

Update Itau Unibanco on return of Brazil impeachment rally

March 30, 2016

Updated March 30. It looks like Brazil's impeachment rally is back on after a week when it looked like President Dilma Rousseff might be able to slow or divert the process. Yesterday, March 29, the Brazilian Democratic Movement Party (PMCB) voted to withdraw from the Rousseff government. The PMDB, the largest party in the coalition government, controls six ministries and all those officials will tender their resignations. PMDB President Michel Temer is also the country's  vice-president and would replace Rousseff if she were impeached or resigned. Last week Rousseff had struck back at her opponents--and Brazil's legal system--by appointing her predecessor and mentor Luiz Inacio Lula da Silva as her chief of staff. That conferred wide legal immunity to Lula, who is facing charges in Brazil's ever widening corruption scandal. With a position in the Rousseff government Lula is immune to prosecution except in front of the country's supreme court, which is know for moving at pre-global warming glacial speed in such cases. But instead of slowing the impeachment process Rousseff's move this week looks to have galvanized outrage over corruption in the Rousseff government (and by other politicians) With millions of Brazilians taking to the streets in protest the PMDB was pushed to join the impeachment camp. The lower house of Brazil's legislature is expected to vote on articles of impeachment in mid-April with an impeachment trial in the Senate to follow, unless Rousseff resigns, in May. Brazil's political turmoil has made it impossible for the country to address runaway inflation and a persistent recession, and any sign of a Rousseff impeachment has been greeted with excitement at the financial markets because it promises to break that deadlock. That's the case today, for example, when shares of Itau Unibanco (ITUB), the country's biggest private bank, were up 2.06% as of noon New York time. The shares finished up 0.8% on the day. I expect that an impeachment rally could easily run through the vote in the lower house this month and to the trial/resignation in May. But fixing Brazil's political problems will require more than a Rousseff departure. Many of Rousseff's most outspoken opponents have themselves been dragged into the anti-corruption investigation and it's unlikely that any successor government would be able to mobilize the support needed to impose big cuts to the government budget and to pass and then implement the reforms that Brazil's economy needs. There's a good chance, therefore, that the impeachment rally will lead to disappointment once Rousseff herself is off the stage. I'm holding my Jubak's Picks position in Itau Unibanco to catch the last stages of the impeachment rally. I'd certainly consider selling on the news of an impeachment vote or resignation.

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.

Some good news from Incyte on rheumatoid arthritis

April 1, 2016

One of the disadvantages to having found an enzyme inhibitor that might work for just about anything from rheumatoid arthritis to colorectal cancer is that ultimately no drug or drug platform will work for everything. And, if you're running your research programs effectively, you should be killing off the least promising applications before the best ones have reached the end of their clinical trials. Disappointment can easily run ahead of good news. That's been true since the days when everybody believed in the philosopher's stone. It's just the way drug discovery works frequently. Incycte (INCY) has been hit twice this year when it withdrew its JAK1 and JAK2 enzyme inhibitors in trials for colorectal cancer (after Phase II trials) and for pancreatic cancer (after Phase III trials) back in January and February. That--along with the sector-wide slaughter inflicted in the risk off plunge in stocks at the start of 2016--is why Incyte shares peaked at $117.79 on December 16 and then bottomed (I think) at $63.05 on March 17. (Incyte has 13 trials set to run in 2016.) Now, though, we're getting some of the trailing good news out of other trials for JAK1 and JAK2 inhibitors. On March 30 Incyte and its marketing partner Eli Lilly (LLY) published results in the New England Journal of Medicine on a 527-subject Phase 3 clinical trial of its JAK inhibitor drug baricitinib for the treatment of moderate-to-severe rheumatoid arthritis. The results show that the drug met its primary endpoint for efficacy versus a placebo. This test is the second of four late-stage trials for baricitinib. Lilly submitted a new drug application to the U.S. Food & Drug Administration back in January that is under review. I'm not going to pretend that disappointing trials aren't disappointing but rheumatoid arthritis is a much bigger opportunity (estimated market size of $15 billion) than pancreatic cancer, for example. Incyte should do $800 million to $815 million in sales for its Jakefi drug for myelofibrosis in 2016, according to the company's most recent guidance. The stock closed at $43.30 today April 1. My new target price is $102 by the end of 2016.  

Update Cheniere Energy

March 24, 2016

Update March 23. Another big LNG (liquefied natural gas) project has been halted before completion. This time it's the $40 billion Browse project owned by Australia's Woodside Petroleum (WOPEY) and its partners. The project is the biggest to be put on hold so far thanks to the plunge in natural gas prices. This, and other cancellations, is good news for Cheniere Energy (LNG), which shipped its first cargo of LNG from its Sabine Pass project last month. The Cheniere tankerful of LNG is the first natural gas exported from the United States. That first mover advantage is a big deal since it enables Cheniere to beat a wave of new projects to market. But the fear has been that these new projects would sink an already foundering LNG market under an ocean of supply. Australia has been seen as an especially big threat to U.S. exports because the country, home to Browse, is so close to lucrative Asian markets. Before the most recent round of project postponements, Australia was forecast to become the worlds largest LNG exporter by 2018, taking over the top spot from Qatar. The global oversupply of LNG was forecast, again before recent postponements, to last until 2021-2022. (LNG prices in Asian markets have dropped by 45% in the last year.) The cancellation of Browse comes just as Chevron's (CVX) $54 billion Gorgon LNG project in Western Australia comes on line. That project, the world's most expensive, took six years to build. Cheniere Energy is a member of my Jubak Picks portfolio.

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: March Madness at MGM

March 15, 2016

Update March 15. If you're a longer term investor--time horizon 18 months or so--you own MGM Resorts International for the eventual recovery in Macao (2018 I'd estimate) and the opening of MGM's new Cotai casino (now projected for the first quarter of 2017), the continued improvement of margins in LasVegas--where MGM owns 30% of the rooms on the Strip--from cost savings, and the scheduled roll-out of a REIT (real estate investment trust) that will hold 10 of the company's Las Vegas properties (and increase profit margins at MGM Resorts International.) I hold MGM Resorts in my 12-18 month Jubak Picks portfolio. In the shorter term, however--let's say you're a trader, for example--you might think about holding for March and the report of the March quarter in April. The NCAA college basketball brings March Madness to the betting books in Las Vegas with estimates of the booking action running as high as $150 million for the tournament. That revenue surge roughly corresponds with what looks like another quarter of improving hotel room rates in the first quarter. RevPAR (revenue per available room) in the fourth quarter on the Las Vegas Strip climbed by 12% year over year at MGM Resorts versus guidance for an 8% increase. With 98% of conference space booked for 2016, traffic growth year over year looks extremely solid. The March period could turn out to be one of those quarters that sends everyone on Wall Street back to their models to raise estimates on MGM Resorts. The shares are already up, as of the March 14 close at $20.81, by 25.7% from the February 9 low at $16.56. On the charts, shares of MGM Resort moved above the 50-day moving average on March 9 and above the 200-day moving average on March 10

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/.

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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