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.
|Symbol||Date Picked||Price Then||Target Price||Price Now||Today's Change||Jubak's Gain/Loss|
|iShares 7-10 Year Treasury Bond ETF|
|Update July 12, 2016: Update July 12. The yield on 10-year Treasuries rose to 1.52%, the highest level this month (and prices fell). Last week the yield on the 10-year Treasury hit a record... more | Read Jim's Original Buy|
|Update July 5, 2016: Updated July 5. Warning: This post contains more than you ever wanted to know about automobile airbag technology. But "more than you ever wanted to know" is "what you need to know"... more | Read Jim's Original Buy|
|Update June 6, 2016: Update June 6. The spring/summer meeting of the American Society of Clinical Oncology is the occasion of the year for drug companies reporting new research on cancer treatments. This year... more | Read Jim's Original Buy|
|ProShares Short MSCI Emerging Markets ETF|
|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|
|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|
|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|
|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|
|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|
|Update May 31, 2016: Update May 31. Near the end of Casablanca, Vichy French Captain Louis Renault shuts down Rick's Cafe saying, "I'm shocked, shocked, to discover gambling is going on in here." At... more | Read Jim's Original Buy|
|Update May 10, 2016: Update May 10. Allergan (AGN) reported first quarter 2016 earnings and revenue today. These results are really the first chance that investors in Allergan have to assess the state of... more | Read Jim's Original Buy|
|Update June 7, 2016: Update June 7. Softbank (SFTBY) continues to pay down debt. The Japan-based telecommunications and Internet venture capital investor plans to sell part of its stake in Alibaba (BABA) for $10... more | Read Jim's Original Buy|
|Update May 25, 2016: Update May 24. On May 4 natural and organic foods producer Hain Celestial Group (HAIN) announced fiscal third quarter 2016 earnings of 49 cents a share, in line with Wall... more | Read Jim's Original Buy|
|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|
|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|
|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|
|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|
|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|
|Shares of Ionis Pharmaceuticals (IONS) no longer look like a falling knife and I’m adding them to my Jubak’s Picks portfolio http://www.jubakpicks.com/the-jubak-picks/ . One of the biggest cancer conferences... more|
|Update May 9, 2016: Update May 9, 2016. Incyte (INCY) reported earnings of 12 cents a share for the first quarter today before the markets opened. That was below the 15 cents a share... more | Read Jim's Original Buy|
|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|
|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|
|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|
|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|
|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|
|Update June 1, 2016: Update June 1. If you look REAL hard I think you can see signs of a bottom in the Macao gaming market. Which would be good news for MGM Resorts... more | Read Jim's Original Buy|
|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|
|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|
July 12, 2016Update July 12. The yield on 10-year Treasuries rose to 1.52%, the highest level this month (and prices fell). Last week the yield on the 10-year Treasury hit a record low of 1.318%. The climb in Treasury yields is likely to be temporary, in my opinion. The market is coping with a series of big auctions this week. An auction of three-year Treasuries on Monday attracted the weakest demand in seven year. Today an auction of $20 billion in U.S. Treasuries was the weakest demand since 2009. The trend toward higher yields and lower bond prices isn't limited to the United States. The yield on German 10-year bunds rose by 8 basis points to a negative 0.9%. Yields on the French 10-year bond climbed 7 basis points to 0.19%. And the bond market faces intense competition for cash from a continued rally in U.S. stocks that had taken the Standard & Poor's 500 stock index to 2154.70, a new all-time record, as of 3 p.m. New York time. The Dow Jones Industrial Average also hit a new all-time high today. When the S&P 500 is climbing 0.82% in a day, the argument for buying 10-year Treasuries yielding 1.52% gets a little weaker. But the dynamics driving Treasury yields lower (and prices higher) in the longer term remain in place. At 1.52% for a Treasury and a negative 0.9% for a German bund, U.S.bonds have an immense relative yield advantage that's likely to keep cash flowing into the U.S. bonds. And yields in Europe seem set to go lower. Deutsche Bahn today become the first non-financial company to sell a bond in euros with a negative yield. More than $3.3 trillion in European sovereign debt trades now with a yield below 0%. Inflation expectations continue to fall. By the Federal Reserve's preferred measure, inflation is now rising at just 0.9% annually. The bond market is now trading with expectations for just a 1.3% inflation rate in 2021-2026, according to Bloomberg. That's the lowest level of implied 5-year inflation in Bloomberg data that stretches back to 1999.
July 5, 2016Updated July 5. Warning: This post contains more than you ever wanted to know about automobile airbag technology. But "more than you ever wanted to know" is "what you need to know" to value the prospects of airbag and auto safety sector leader Autoliv (ALV.) I added Autoliv to my Jubak Picks portfolio on April 29, 2016 on the strength of its market dominance in traditional auto safety technology--seat belts and airbags--and its growing position in the new driver-assisted safety technologies such as radar and vision systems for things like crash avoidance and lane guidance. (For more on Autolive and those technologies see my March 29 Sector Monday post http://jubakam.com/2016/03/autoliv-another-auto-technology-stock-for-the-age-of-autonomous-vehicles/ .) On June 29, however, Autoliv announced that Toyota Motor (TM) would recall 1.43 million vehicles with defective airbags that had been produced by Autoliv. (The vehicles recalled include the Prius hybrid, Prius plug-in and the Lexus CT200h manufactured during October 2008 to April 2012.) Most of the recalls are in Japan ( 743,000) but the effort includes 495,000 in North America. Now a recall of 1.43 million vehicles that contain your product because of a defect in that product is never a good thing. And it's especially not a good thing when it comes while a major competitor, Takata, is in the midst of a recall that has reached 60 million vehicles and includes at least 13 deaths apparently caused by defective airbag inflators sending pieces of metal flying in the passenger cabin. My first thought when hearing of the recall involving Autoliv was "Oh, no! The airbag maker I recommended because it wasn't Takata has the same huge problem." That, fortunately, doesn't seem to be the case. The defect in Autoliv inflators is a result of substandard welds by a subcontractor. Autoliv's side-curtain inflators use compressed gas and a solid propellant to inflate the airbag. (Side-curtain airbags are designed to provide protection in the case of a side-impact crash. The Takata airbags involved in that recall are, primarily, driver and front-passenger airbags.) A defective weld in the metal tubing used in the inflator caused a crack in the inflator. During hot weather, the compressed gas could become over-pressurized and break through the crack in the inflator. Autoliv says that the process for manufacturing the inflator was changed in 2012 and that the problem, while serious, is a contained defect limited to a flaw in manufacturing at a subcontractor. At least that's what Autoliv says. The facts seem to support the company position. The side curtain airbags that partially inflated were all in parked cars subject to hot weather. The recall is, so far, limited to Toyotas made from 2010 to 2012 as you'd expect if the defect were corrected by 2012. And, again so far, since the airbags that partially inflated were in parked and untenanted cars there have been no deaths or injuries. The problem with inflators at Takata is very different. Takata's propellent, the explosive that helps inflate the airbag, is based on a solid compound called ammonium nitrate, which can break down over time when exposed to moisture or high temperatures. Once ammonium nitrate has broken down, it can burn violently and cause the inflator to over pressurize and explode. (Autoliv does not use ammonium nitrate.) In the early stages of the investigation into injuries and deaths involving its airbags, Takata blamed the problem on mishandling and improper storage of propellant during assembly. And there's no doubt that manufacturing problems were involved. Reuters has reported that documents it reviewed show that in 2002, for example, a Takata plant in Mexico allowed a defect rate six to eight times above acceptable limits. And the New York Times has published stories saying that Takata knew about the airbag issues as early as 2004 and conducted secret tests to verify the problem instead of notifying safety regulators. Takata has vigorously disputed the Times' stories. One of the big issues in the Takata investigation is why the company used ammonium nitrate at all in its airbags. Back in 1998 Takata had developed a new propellant, based on tetrazole, that promised to be a reliable and effective propellant. Takata, in fact, praised the compound as giving it a technological edge over its competitors. In spite of that, however, Takata had switched to an alternative formula, using ammonium nitrate, by 2001. The company says that its engineers determined that ammonium nitrate produced gas more efficiently and with fewer emissions. Experts in mining and explosives have offered the New York Times and the U.S. Congress a different explanation. "It's cheap, unbelievably cheap," Paul Worsey, an expert in explosives engineering at the Missouri University of Science and Technology, told the Times. Ammonium nitrate is more suitable for large demolitions in mining and construction, he noted. "It should not be used in airbags." (Takata disputes that cost was a factor in the move to ammonium nitrate.) As best as I can figure right now, Takata has a huge problem that goes right to heart of the company and its products. Autoliv has a serious but limited product defect problem to fix. The company has pegged the hit from the Toyota recall at a range of $10 million to $40 million net of any insurance recovery. If this is the case, though, why, you should ask, have shares of Autoliv taken such a huge hit recently? They closed at $124.48 on June 23, dropped to $113.50 on June 24, and then closed at $107.46 on June 27. Those dates should ring a bell. June 23 was the data of the Brexit vote in the United Kingdom and June 24 and June 27 were the dates of the big Brexit sell off in global markets. Autoliv, a company headquartered in both Auburn Mills, Michigan, and Stockholm was, first of all, vulnerable to the immediate knee-jerk selling in everything with any link to the United Kingdom and the European Union. Second, right now Autoliv is particularly vulnerable to any slowdown in the European auto sector--such as might happen with the post-Brexit vote chaos--because in its guidance last quarter for the second quarter and the rest of 2016, the company upped its forecast for revenue growth in 2016 from its prior forecast on the basis of a recovery in its European business. That news led to a substantial pop in the price of Autoliv shares to $125.72 on May 4 from $112.95 on April 25. (I added Autoliv to my Jubak Picks portfolio on April 29 in a timing decision based on the strength of that guidance.) If Brexit is going to lead to a slowdown in growth in the European auto sector, then it's only reasonable for the stock to give back the gains it posted on that improved guidance. If I didn't own Autolive in my portfolio now, I'd be sitting on the sidelines waiting to see if I could get it at the July 1 close of $106.90 or slightly lower after the company reports second quarter earnings on July 22. My expectations are that the company's guidance for the rest of 2016 won't be as positive (Ya think?) as it was in the first quarter before Brexit. I don't know if it will be negative enough to push the stock down further or if the recent drop has priced in these lower expectations. But I'd be looking to see if I could pick up a bargain on any market over-reaction This is all short-term stuff. The long-term story at Autoliv in traditional auto safety and the new safety technologies lumped into the driver-assisted category is intact and still promises substantial growth in the years ahead. So I'll be holding these shares here with that perspective. And if I were allowed by the format of this portfolio, I'd be adding shares to this position on the drop. When I added these shares of Jubak Picks on April 29, I set a target price of $149 a share by the end of 2016. Given Brexit and the pull back in shares that's almost certainly optimistic now, but I'm going to leave that price in place until after the company reports on July 22. The shares currently trade with a yield of 2.14%.
June 6, 2016Update June 6. The spring/summer meeting of the American Society of Clinical Oncology is the occasion of the year for drug companies reporting new research on cancer treatments. This year Bristol-Myers Squibb (BMY) has had a great meeting with a research report showing that in a trial of patients with the most common and often deadly form of lung cancer 39% getting a mixture of Opdivo and Yervoy saw their tumors shrink after treatment. A second group that got Opdivo but with a smaller dosage of Yervoy saw a 47% improvement rate. (Lung cancer is the most deadly cancer in the United States and kills more than 158,000 people every year.) The results of the trials advances Bristol-Myers' Opdivo as a key foundation for multi-drug combinations for the treatment of cancer and especially for patients with high levels of PD-L1, a protein that helps suppress the immune system. Opdivo belongs to a class of drugs known as checkpoint inhibitors that are designed to shut down some of the mechanisms that cancer cells use to evade the immune system. Imuno-oncology is one of the fastest growing and most promising areas of cancer drug research. By 2022 immuno-oncology drugs are estimated to make up a $34 billion sales market, according to Credit Suisse. That investment bank estimates that Bristol Myers has 38% of the immune-oncology market. (Roche has 23%, Merck 20%, AstraZeneca 12%,and Pfizer 7%, according to Credit Suisse.)
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.)
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 $45.18.
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.
February 2, 2016Update 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.
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.
April 14, 2016Updated 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.
May 31, 2016Update May 31. Near the end of Casablanca, Vichy French Captain Louis Renault shuts down Rick's Cafe saying, "I'm shocked, shocked, to discover gambling is going on in here." At that point one of Rick's employees steps up to the captain and, handing him a bundle of cash says, "Your winnings, captain." I've got much the same attitude of cynicism towards the recent news that the U.S. Securities and Exchange Commission is investigating Alibaba's (BABA) accounting practices. Let me be clear, I don't think it's okay that Alibaba cooks its books, double-counts revenue that it sends to Alibaba controlled companies, or spins off some of the most interesting parts of Alibaba (such as Ant Financial Services Group) to officers and friends. But you can't tell me that you didn't know this is how Alibaba--and many other Chinese companies--does business. If you own Alibaba, as I do in my Jubak's Picks portfolio, you own it despite these practices. But shocked? I don't think so. The news, released on May 26, that the SEC was investigating Alibaba's account took the stock down about 7% to $75.59. Shares have since rebounded to $82 at the close of New York markets today (before news that Japan's Softbank Group (SFTBY), another Jubak's Picks, would be selling $7.9 billion in shares to reduce its own debt took Alibaba down 2.62% to $79.85.) U.S. regulators are investigating Alibaba's accounting practices. At issue is the way that it accounts for revenue at logistics company Cainiao Network, which is 47% owned by Alibaba. Essentially the issue is what Alibaba pays Cainiao for its shipping services, whether transactions with Cainiao can be treated as arms-length dealings, and whether Alibaba is using Cainiao to inflate Alibaba's results for big shopping events such as the annual Singles' Day. I think that in all likelihood Alibaba has violated SEC rues in all of those areas. The question, though, is whether it matters to investors in the short run. In March Cainiao, with all its faults and baggage, raised $1.53 billion in its first round from investors that include Singapore's Temasek Holdings. Similarly, in April Ant Financial Group raised $4.5 billion in the biggest private placement ever, setting up the company for a huge IPO. There are real issues with Alibaba that should be determinant in a decision to invest in the stock or not. China's economy is slowing, which means Alibaba's growth rate is slowing. And the company will have to get more revenue growth from non-Chinese markets. Is the company and its management headed by Jack Ma good enough to make a successful go against companies such as Amazon (AMZN) on neutral ground in Europe and India? To say the jury is still out understates the risk. How will Alibaba--can Alibaba--handle the transition from its current warehouse light structure where it relies on the companies that sell through its network to fulfill orders from their own warehouses to something like the Amazon logistics model with a heavy investment in warehouses? (The issue with Cainiao that concerns me is whether that company is being used not just to inflate revenue but also to hide Alibaba's spending on logistics infrastructure.) In the short run Alibaba is a single stock play on sentiment and momentum in China's shift to a consumer economy. In the long run Alibaba will have to answer questions about whether it can profitably compete in non-Chinese markets where the playing field is level. Which makes the investing problem figuring out when the long-run kicks in. In the short run I'm leaving my target price at $95 a share.
May 10, 2016Update May 10. Allergan (AGN) reported first quarter 2016 earnings and revenue today. These results are really the first chance that investors in Allergan have to assess the state of the company since its merger with Pfizer (PFE) died at the hands of changes in tax treatment for companies trying to cut their tax rate by moving their headquarters to lower tax jurisdictions. (Ireland in this case in a process know as "inversion.") The easiest thing to understand about today's results was that the company's board of directors has authorized a share repurchase plan of up to $10 billion. Of course, like most repurchase plans there's no guarantee that the company will actually buy $10 billion in stock. In fact, Allergan will initially buy $4 to$5 billion in shares over the next four to six months and then see if the share price then lends itself to more purchases. The shares are down 28.58% in 2016 through May 10 so a share buyback now seems a good use of some of the $36 billion that Allergan will receive in June from the sale of its generics business. So does the company's indication that it will use $8 billion to pay down debt. (Adding in the $2.2 billion in cash already on Allergan's books, the company will still have $20 billion to so for acquisitions.) From here the quarterly results get really hard to parse thanks to all the one time items listed in the quarter: amortization, acquisition-related expenses, research and development expenses resulting from the acquisition of R&D assets, Pfizer-related expenses, acquisition accounting valuation related expenses and severance associated with acquired businesses. Accounting for those items according to GAAP rules (Generally Accepted Accounting Principles) shows a loss from continuing operations of 38 cents a share. (The GAAP loss in the first quarter of 2015 was $2.80 a share.) The non-GAAP pro forma earnings per share, however, were $3.04, up 15% from $2.65 in the first quarter of 2015. Net revenue is somewhat clearer, but thanks to all Allergan's acquisitions and mergers, the picture is only somewhat clearer. Revenue from continuing operations rose by 48% in the first quarter to $3.8 billion from $2.6 billion in the first quarter of 2015. But that included the revenue from all those acquisitions and mergers. I think investors can get a better picture of current growth by looking at individual branded products such as the company's Botox business. First quarter 2016 revenue for Botox rose to $637.5 million, up 17% from $558 million in the first quarter of 2015. The future for revenue growth depends on existing branded products such as Botox, and the Restatis eye treatment (sales up 22% year over year) and from three recently launched drugs to treat irritable bowel syndrome (Linzess) , sagging chins and chin fat (Kybella), and schizophrenia (Vraylar). The recently launched Linzess irritable bowel syndrome drug showed 46% sales growth in the first quarter. The company projects that these three recently launched drugs have the potential to reach annual revenue of $1 billion. The challenge for Allergan and CEO Brent Saunders is to convince investors that Allergan isn't just only a merge and acquire rollup built around financial engineering, but that it should instead be valued on the cash thrown off by the Botox franchise and by new drugs that extend that franchise (Kybella, an injectable to remove chin fat), and by the promise of the newly approved drugs and of drugs in the pipeline. (An interesting early stage drug candidate is Heptares for the treatment of Alzheimer's.) From that perspective, the decision to use up to $10 billion on buying back shares and $8 billion to pay down debt are important indicators that Allergan doesn't intend to chase another block buster deal just for the sake of making a deal. Same goes for management's talk about looking for smaller bolt-on product acquisitions. The market is reasonably skeptical and Allergan will have to stay its new course. But the raw materials are certainly there. The stock closed up 5.28% on May 10. I'm setting a new and lower intermediate target price of $255 for these shares, down from my prior target price of $350 on April 5. (There's resistance at that level that will take a while to work through. How long a while? It depends on general market conditions, I'm afraid.) I think it will take a while for the market to get over the collapse of the Pfizer deal, but it will get over it. The shares closed at $225 today, May 10.
June 7, 2016Update June 7. Softbank (SFTBY) continues to pay down debt. The Japan-based telecommunications and Internet venture capital investor plans to sell part of its stake in Alibaba (BABA) for $10 billion, and its shares in GungHo Online Entertainment, a Tokyo game developer, for $685 billion,and its position in Finnish game developer Supercell Oy for an estimated $3.5 billion. The asset sales won't turn Softbank into a AAA-credit by any means. (The company currently earns a credit rating from Standard & Poor's and Moody's Investors Service one notch below investment grade.) Softbank will still carry $110 billion in debt and its purchase of Sprint is still an albatross around the company's neck. The money-losing mobile phone operator has recorded seven staight years of losses and has $10 billion in debt coming due in the next three years. But the asset sales should help close the considerable gap between the market value of Softbank on June 6 of $68 billion and the value of the stakes it holds in public companies of $87 billion. And then, of course, there are the still private investments in Snapdeal, an Indian e-commerce site, Housing.com, ride-hailing service Ola, in the U.S. Social Finance, an online lender, and other Internet startups. The planned asset sales and debt reduction have already led to a rally to a three-year high in the company's bonds due in 2020. The asset sales also make room for new venture capital investments. (I added Softbank to my Jubak's Picks portfolio on February 28,2015 because I think it is the best way to buy a piece of the next wave of Internet companies in Asia.) The company has told analysts that it has 20-30 investment targets under review and that it plans to invest $3 billion annually. One of those investments was announced this week: Softbank and Alibaba have formed a cloud computing service company targeting Japanese customers. (Alibaba's cloud revenue almost tripled to $153 million in the March quarter.) Softbank will own 60% of the cloud venture. If the market simply valued Softbank's shares, which closed today at $$28.49, at the value of its stake in public companies, the stock would be worth $36.44. At the current market price, in other words, you get all the private Internet investments for free. As of June 7 I'm keeping my target price for Softbank at $42 a share. The stock is up 13% year to date and down 3.72% since I added it to Jubak Picks.
May 25, 2016Update May 24. On May 4 natural and organic foods producer Hain Celestial Group (HAIN) announced fiscal third quarter 2016 earnings of 49 cents a share, in line with Wall Street projections. Revenue of $749.86 million, up 13.1% year over year, beat projections by $16.69 million. The company told Wall Street to expect slightly (and I mean slightly) better than expected revenue and earnings for the full fiscal year: $2.95 billion to $2.97 billion, up from the consensus of $2.94 billion and earnings of $2.00 to $2.04 a share, above the current $2.02 consensus. That seemingly mildly positive report has sent the shares up 18.2% from the May 3 close of $41.09 to the close today, May 24, at $48.56. That continues a great run in the shares from the January 25, 2016 low of $33.46 and Hain is now up 20.2% for 2016 to date. (Unfortunately I added Hain to my Jubak's Picks portfolio back on March 26,2015 and that position is still underwater to the tune of 23.2%.) So why the strong positive reaction to a mild revenue beat and a slight uptick in guidance? Two reasons, I think. First, Wall Street analysts have decided that the slump in the company's growth is over. Revenue climbed 13% year over year and earnings per share climbed 9% year over year. Second, the company said it is looking at cutting costs so that more of that revenue growth turns into earnings growth. To take the two points one at a time. First, the growth slump had raised fears that the company was falling victim to increased competition in the very hot healthy, natural and organic foods market. As revenue has increased for that segment conventional grocers and big box retailers such as Target (TGT) and Wal-Mart Stores (WMT) have all moved to grab a slice of the pie. That has posed problems for healthy, natural and organics grocer Whole Foods Market (WFM)--more competition has meant pressure on margins--and there was certainly reason to think that the same phenomenon would hurt Hain Celestial Group. However, it increasingly looks like analysts and investors who pointed out that Hain Celestial operated a different business model than Whole Foods had a good point. Hain Celestial is a company that sells its branded healthy, natural and organic products through distribution channels that include conventional grocers (55% of sales) and big box retailers--as well as through Whole Foods and similar retailers. Hain Celestial has focused on building distribution in those channels so that it can capture growth no matter what channel it comes from. Margins are indeed lower in the conventional and big box channels but by capturing the growth in those new channels Hain Celestial keeps the ability improve margins by cutting costs in its own hands as revenue grows. And thats why, second, the plan to cut costs is so important. If Hain Celestial can increase efficiency as it grows revenue, then the increased competition (and higher sales) in the segment from conventional and big box retailers actually can work to the company's benefit. Talk about cost cutting is always just talk until the results show up (or not) on a company's bottom line, but Hain Celestial has a good record of managing costs and increasing efficiency at the smaller companies it has acquired over the years. For example, SG&A expenses have fallen as a percentage of sales each year since 2010. I think this commitment to cut costs has a good chance of being more than just talk. In the aftermath of the quarterly earnings announcement (and indeed in the weeks leading up to it) Wall Street analysts raised their target prices on the stock--something I always like to see after a stock has climbed 20% or so. Jefferies raised its target price to $55 from $50, for example. Oppenheimer had earlier raised its target price to $44 from $38. Morningstar, which has set its own target price at $47, forecasts 11% compounded average annual growth in revenue through 2020 and sees operating margins climbing 250 basis points to 13.5% from 2016 to 2020. The big punishment dished out to Hain Celestrial in 2015, when the stock fell 31%, means shares are still reasonably priced at 24 times projected earnings for fiscal 2016. (Over the last five years Hain Celestial has traded at an average price to earnings ratio of 32.6) As of May 24, I'm reducing my target price from an overly aggressive (for a modestly growing U.S. economy, which accounts for 51% of company sales) $72 a share to $60. That's still roughly 20% above the current share price.
February 3, 2016Update 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%.
March 22, 2016Update: 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%.
July 24, 2015Updated 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.
March 30, 2016Updated 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.
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.
May 29th, 2014
Shares of Ionis Pharmaceuticals (IONS) no longer look like a falling knife and I’m adding them to my Jubak’s Picks portfolio http://www.jubakpicks.com/the-jubak-picks/ . One of the biggest cancer conferences of the year—that of the American Society of Clinical Oncology—begins on May 30 (and runs through June 3.) That meeting always provides a boost to biotech drug companies (even if their strongest drug candidates aren’t cancer drugs.) Isis is headed into the conference with strong momentum from the May 22 release of results from its trial of ISIS-FXIRx anticoagulant in patients undergoing knee replacement surgery. The incidence of blood clots and bleeding in the trial were significantly lower, Isis reported, than for patients receiving the approved anticoagulant, enoxaparin. (The drug is currently in mid-level trials and Ionis does not yet have a partner for its development.)
With the addition to Ionis today the portfolio is heavier than I’d like on biotechs. My April pick of Incyte (INCY) does give me a biotech focused on cancer. My earlier pick of OncoGenex (OGXI) has been a major disappointment on April 28 bad news on Phase 3 trials for prostate cancer. I’ll look to sell that position after collecting any potential conference bounce. (Shares of OncoGenex were up 2.14% today as of 3 p.m. New York time. That is a bit of the pre-conference bounce that the whole sector will see—in my opinion.
Basically my strategy here is to use the huge sell off in biotech to trade up to stocks with the best potential in the biotech sector (Incyte and Ionis in my opinion) now that prices have corrected.
Even with today’s (May 22) big gain of 10.04% as of 3 p.m. New York time, shares of Ionis are way down on the sell off in biotech and other momentum stocks that began in February. The stock’s February 21 closing high was $59. The shares were trading at $25.53 as of 3 p.m. today. I’m adding the shares to the portfolio with a target price of $55 a share.
Isis has one of the strongest pipelines in biotech with 30 drug candidates in clinical development. It’s an overstatement to say that Isis owns “antisense” technology, but the company is a dominant player in that approach to drug development. And it looks like 2014 and 2015 will bring enough positive news on clinical trials across a wide variety of diseases to demonstrate the value of that position in antisense to the market. (To be very general, antisense technology focuses on developing compounds that bind to a specific gene to interrupt the production of disease-causing proteins. For example, ISIS-FXIRx targets Factor XI produced in the liver. High levels of Factor XI raise the risk of dangerous blood clot formation.)
Other drugs under development at Ionis include drugs for Huntington’s disease, for spinal muscular atrophy in infants and children, for myotonic dystrophy, for hepatitis B, for high cholesterol and high triglycerides, for prostate cancer (with OncoGenex), and for other cancers with AstraZeneca.
As with all biotechs, you’ll need patience and a tolerance for market volatility (understatement alert.)
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, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Incyte, Ionis, or OncoGenex 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.
May 9, 2016Update May 9, 2016. Incyte (INCY) reported earnings of 12 cents a share for the first quarter today before the markets opened. That was below the 15 cents a share expected by Wall Street analysts. Of course, the stock fell--NOT. Incyte finished up by 3.07% for the day. At any young biotech, it's all about the future. Can the company keep generating the numbers that keep hopes high for the future? If it can, nobody much cares about a miss in the present. The question in valuing a stock of this sort is figuring out how much future you get for your investing buck. The future reported by Incyte looks pretty good. Of course, there's current growth. Revenue climbed 65.4% from the first quarter of 2015. Operating income rose 622%. On top of that the company announced higher guidance for future sales of its current lead drug, Jakafi. Instead of 2016 sales of $800 -$815 million, Incyte told Wall Street to expect $815-$830 million from Jakafi. Revenue for the first quarter for Jakafi came to $183 million, so the company is pointing to a significant increase in quarterly run rate in Jakafi sales. (Jakafi sales were up 59% in the first quarter of 2016 from the first quarter of 2015.) In addition, in the future category, Incyte announced that it would acquire the European operations of ARIAD Pharmaceuticals (ARIA) and an exclusive license to develop and commercial ARIAD's cancer drug Iclusig in Europe and 12 other countries. Incyte will also pay up to $135 million to fund the ongoing clinical development of Iclusig for other cancers including leukemia. As important as Iclusig may or may not be (sales doubled in 2015 from 2014 to $112 million) for investors with an eye to the future what's intriguing about the deal for Incyte is that the company has bought ARIAD's European marketing operation. Between a quarter and a third of ARIAD's 2015 sales of Iclusig came from Europe (with the rest from the United States) so it looks like there's solid upside for Iclusig sales in Europe with a bigger sales budget. Adding to its European marketing muscle also gives Incyte the potential to capture more of the sales in Europe of its own future drugs. That potential will be important if Incyte and its marketing partner Eli Lilly (LLY) get approval for Incyte's second drug, baricitinib for rheumatoid arthritis and psoriasis. The companies have submitted the drug to the U.S. Food and Drug Administration and to its European counterpart. In its release today Incyte pointed toward a potential 2017 approval. And finally, in the future, there's a drug called Epacadostat that is in clinical trials in combination with cancer drugs. The upside in Epadadostat is that it could be a way to work around some of the key problems with drugs that use the body's own immune system to fight cancer. Tumors have their own defense systems that protect them from the attacks launched by the immune system and Epadaostat offers solutions to some of these problems. In addition the drug seems to work in combination with other immune-system cancer drugs without triggering negative responses in the patient that require ending treatment. With immune therapies for cancer being one of the hottest areas of drug development, the future for Epacadostat would seem potentially highly promising. So far 2016 hasn't been kind of shares to Incyte--down 33% for the year to date as of the May 9 close. The year hasn't been kind to biotech in general as the market has steered away from the risk presented by a stock that is valued on future prospects that can be difficult, shall we say, to project accurately. The fear, of course, is that a biotech trading on future earnings won't deliver and will then take a huge fall. So far, at least that doesn't seem a danger for Incyte, where the future hangs on more than one product. To me the drop this year offers a buying opportunity--if you agree with my assessment of future prospects. My first target price goal is a return to the 200-day moving average of $108 from today's close at $72.86.
March 24, 2016Update 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.
April 4, 2014Not 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.
September 9, 2015Bad 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.
April 29, 2014When 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.
July 29, 2015Update: 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.
June 1, 2016Update June 1. If you look REAL hard I think you can see signs of a bottom in the Macao gaming market. Which would be good news for MGM Resorts International (MGM) and the planned first quarter 2017 opening of the MGM Cotai. (That casino/hotel would increase MGM Resorts percentage of Macao rooms to 7.6% from the current 3%.) Gross gaming revenue in Macao fell 9.6% year over year in May but revenue climbed 6% from April. (Revenue had dropped 9.5% year over year in April.) Back in the Las Vegas market, revenue from the Las Vegas Strip, where MGM Resorts International has the dominant room and property share, fell 1.54% in May year over year. That drop isn't as good as a gain in revenue, but it is reassuringly stable. And yesterday, May 31, MGM Resorts announced that it would acquire Boyd Gaming’s (BYD) 50% stake in Atlantic City’s Borgata hotel and casino for $900 million, giving MGM Resorts 100% ownership of the Borgata, which has been Atlantic City's best performing casino pretty much since it opened in 2003.. MGM Resorts will sell the entire property to MGM Growth Properties, it's new REIT, for $1.18 billion. As of June 1 I'm raising my target price on these shares to $26 from the current $16 on signs of an impending bottom in Macao and the ahead-of-schedule progress on the company's cost-cutting plan. MGM Resorts had set a goal of $200 million in cost reductions for 2016 with a resulting increase in EBITDA margins to 30% in 2017. In the first quarter MGM Resorts reported a 524 basis point improvement in EBITDA margins to 30% putting MGM Resorts in a position to handily beat its 2017 margin goal. (EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It takes 100 basis points to make up 1 percentage point.) Shares of MGM Resorts International were trading at $23.17, up 1.44%, as of noon on June 1.
March 10, 2014Shares 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/.
March 4, 2014Fourth 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/.