Growth Report : Emergent Biosciences

Tech Spending and Stop Losses

Ian Wyatt — Thu, 18 Dec 2008 23:12:00 GMT

Your Daily Profit

December 18, 2008

*****Tech Spending

*****Stop Losses

***** Stock Summit 2008: Profits After the Fall

Dear Investor,

Up 359 on Tuesday, down 99 on Wednesday. I can live with that. But I still have to wonder how long the relative optimism for stocks will last. General Electric (NYSE:GE) was downgraded and received a rare “sell” rating by Sterne Agee & Leach, and, as we saw with Honda yesterday, companies are starting lower 4^th quarter earnings estimates.

We’ve been expecting earnings estimates to come down for some time. But it remains to be seen how much is already priced in. For the financials, it could be argued that the worst is priced.

Consider Morgan Stanley (NYSE:MS). That company posted a $2.37 billion dollar loss during its 4^th quarter, which ended November 30. That worked out to a loss of $2.34 a share. A poll from Reuter’s showed analysts were expecting a loss of just $0.34 a share. A month ago, analysts were expecting a $0.30 profit.

The analysts missed by a mile. They were totally unprepared for such a weak quarter from Morgan Stanley. Sounds like a recipe for disaster, right? Well, after a somewhat rough start to the day, Morgan Stanley shares finished with a 2% gain.

The same thing happened over at Goldman Sachs (NYSE:GS). Goldman lost $2.1 billion, which was roughly in inline with expectations even though there were some wacky calls for losses as high as $6 a share. The stock jumped 14% Tuesday and added another 3.6% yesterday.

*****The Fed’s rate cut helped Goldman and Morgan Stanley out, for sure. But there’s also the mark to market accounting that each company has to use. That means the companies must price all assets every quarter. In the case of mortgage related assets, where the prices are effectively nil, they are forced to take steep write-downs.

Morgan Stanley took around $2.2 billion in write-downs as it re-priced damaged assets. At present, these are paper losses. But it goes to demonstrate the difficulty of earnings estimates. So what looks like a staggering surprise loss may not be quite as bad as it first appears.

Of course, there’s also the flipside, which would be that the assets could be subject to more write-downs in the future. But for now, the companies are getting the benefit of the doubt.

*****We’ve seen the bottom fall out of homes sales, commodity prices, retail sales and lending. Technology spending has remained fairly strong. You may recall I discussed IBM (NYSE:IBM)’s 3Q earnings in Daily Profit as a strong point of the earnings season when it reaffirmed its 2008 full year earnings back in October.

That was then. Now analysts are expecting tech spending to be the next domino to fall. A Citigroup analyst says the first quarter could be the worst ever for software companies. A Gartner analyst is saying “There’s going to be a period of reckoning that’s not going to be pretty…”

IBM and Sun Microsystems (Nasdaq:JAVA) are two companies that could suffer.

IBM sold off sharply in the Fall, dropping from 52-week highs around $130 to as low as $70 a share. A casual look at one- or two-year chart might make it look as though a downturn is priced in. But a look at a longer term chart gives a different perspective.

In late 1999, at the height of the technology bubble, IBM traded as high as $140 a share. Between 2003 and 2007, IBM was range-bound between $75 and $100. In 2007, the stock took off again and rallied to the $130 area in spring and summer of 2008.

Now, IBM is back in that $75-$100 zone. For us to start talking about IBM hitting 10-year lows, like we have with so many other stocks, we’d have to see prices drop to the $50-$60 range.

Sun Microsystems looks even more vulnerable than IBM. Sun was already in a downtrend when IBM was hitting highs in mid-2008. The stock currently trades just above $4 a share.

*****One stock that may be an attractive alternative to the high-end server and software companies like IBM and Sun is VMware (NYSE:VMW). VMware makes “virtualization” software that allows companies to get more bang for their buck from their networks.

The stock has been whacked pretty good this year (what hasn’t?) but may actually benefit from cuts in corporate IT budgets.

*****Finally, I want to address some of the stocks we’ve talked about here in Daily Profit. We’ve managed to get in some positions that are doing well. Both Graham Corp (NYSE:GHM) and Emergent Biosciences (NYSE:EBS) are up nicely since they were first discussed here. It’s time to protect those gains.

Shortly after I recommended a stop-loss on Questcor Pharmaceuticals (Nasdaq:QCOR), the stock started selling off. That stop loss should have taken you out of the position at $8.80, preserving your gains and keeping from suffering as the stock continued to fall.

Now is the time to put in stops on Emergent and Graham. Graham’s got support at $10, so a stop at $9.75 should keep you in on a routine sell-off but take you out if the stock is going to head back to its lows.

A stop-loss at $22 will do the same for Emergent.

Chesapeake Energy (NYSE:CHK) is far more volatile and I also consider it more of a long-term holding. For that reason, I’m content to let it go, for now.

*****Monday’s landmark video investment conference, Stock Summit 2008: Profits After the Fall, was a huge hit. The turnout was phenomenal…thousands tuned in to watch TradeMaster Chief Trading Strategist Benson George give his blueprint for profits in 2009…and his top “breakout” stocks are already showing gains…

Well, it’s not too late for you to share the wealth

I’ve seen this happen more times than I can count. Benson uncovers an absolute gem of a stock with his TradeMaster system, and the profits start rolling in the very next day.

It’s like clockwork. But the thing is, those profits don’t stop after a day. That’s the key to the TradeMaster system. One-day gains turn into two-day gains…and then three-day gains…and pretty soon you’ve got a big winner on your hands.

Now, I want to show you how you start profiting with Benson and the TradeMaster system.

It’s quick. It’s easy. And it won’t cost you a single dime…

Here’s what you do – go to www.TradeMaster.tv to check out the replay of Stock Summit 2008: Profits After the Fall. You’ll discover the secrets to Benson’s amazing trading strategy that’s consistently putting up double-digit gains while the markets collapse around us.

Then accept my invitation to try Benson’s TradeMaster service and get you immediate access to the Special Report TradeMaster’s Top 5 Breakout Stocks. Take some time and watch the video then try the service with no commitment or obligation on your part to continue.

That’s it. That’s all you need to be well-armed to start making some money as soon as the opening bell rings on the New York Stock Exchange tomorrow morning.

Best regards,

Ian Wyatt

Founder and Publisher

TradeMaster Daily Stock Alerts

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Biotechs: An Expert Opinion

Ian Wyatt — Wed, 30 Jul 2008 18:09:00 GMT

Biotechs: An Expert Opinion

Bio-tech stalwart Amgen (Nasdaq:AMGN) crushed earnings estimates Monday afternoon (July 28) and raised guidance to boot. The stock was up 4% on Tuesday. Most biotech ETFs were up 1% or so in response.

That lends a little credence to my recent discussion, I suppose.

The two stocks I mentioned last week have put in a mixed performance. Somanetics Corp (Nasdaq:SMTS) has added $1.50 to $22.58. Emergent Biosciences (NYSE:EBS) is up slightly to $13.00.

Of course, it’s only been a week. And a one-week holding period for an individual biotech isn’t enough to make any money unless you’ve got the kind of insider information that, to paraphrase The Steve Miller Band, might get you rich or might get you busted.

Besides, my stock-picking machine is optimized for medium-term holding periods – from a couple weeks to a few months. It’s been about a month since biotech and medical device stocks started moving. So there should be plenty of upside to come.

With that in mind, I thought it might be helpful to turn to an expert in the biotech field to get some further insight into what’s driving the biotech rally and how long it might last. And who knows, we may even get a couple stocks too…

Biotechs from an Expert

My stock picking machine is great at uncovering profitable investments by following money-flows into individual stocks. However, it doesn’t have much to say about monoclonal antibodies or antisense.

We recently interviewed Dr. Fariba Ghodsian, Ph.D., MBA to get her views on the biotech sector. Dr. Ghodsian is currently Chief Investment Officer and Managing Member of DAFNA Capital Management, LLC, a biotech investment fund. Dr Ghodsian previously worked at Roth Capital Partners as Managing Director of Healthcare Research since 1999. She was a senior biotechnology analyst at Wedbush Morgan, Hancock Institutional, and Lehman Brothers.

In 2002, Dr. Ghodsian was ranked among the top five U.S. biotechnology analysts by the Wall Street Journal.

I don’t know about you, but I have no problem calling her an expert on biotechs.

Biotech Buying

Dr. Ghodsian believes that the potential for premium buyouts are one main reason for the strength in biotechs.

For one, big pharma’s pipelines are barren of blockbuster drugs and patents on existing drugs are running out. That’s why Pfizer (NYSE:PFE) is trading at a 10-year low. It’s also why Roche just ponied up $44 billion to buy the remaining shares of Genentech (NYSE:DNA).

A second factor driving acquisitions is the decline of the dollar. Roche is a Swiss company, so it effectively picks up Genentech on the cheap due to the relative strength of the euro against the U.S. dollar.

Thirdly, in the wake of the Vioxx issue, the FDA has gotten a lot tougher in its drug approval process. So if a big pharma is going to partner with, or acquire, a smaller biotech, it makes sense to wait until later Phase trials show some statistical efficacy. It may cost a little more, but it’s also safer.

Dr. Ghodsian believes the biotechs are well-positioned to demand favorable terms in both partnerships and buy-outs.

What to Look For

Cancer, hepatitis C and diabetes are larger diseases seeing the greatest development. The greatest development in smaller diseases include lupus, immune thrombocytopenia purpura, pulmonary arterial hypertension, cystic fibrosis and pulmonary fibrosis.

Another field Ghodsian sees major developments in is rheumatoid arthritis. “There are major advances with oral drugs in development that would be a great benefit for the patients,” she said. Cardiovascular and gout disease are other areas expected to experience major developments.

Ghodsian likes companies that offer a unique product or a unique way to deliver a drug. Stay away from the “me-too” drugs, where other companies have a similar drug. She also examines the company’s market potential and its chances for success. “Obviously the market size of the drug is important,” Ghodsian notes. “But sometimes companies can thrive very well in very limited markets.”

She says the market should be an attractive one where the disease is difficult enough that the insurance companies would be willing to pay a high premium. She points to Genzyme (Nasdaq:GENZ) as an example of that. The biotech company made a billion dollar drug out of orphan diseases by tacking on a high price.

It goes without saying that the drug must also demonstrate a favorable safety and efficacy profile to warrant approval. Good management is key to getting the drug to market.

Ghodsian also examines the company’s financial resources. “Often time’s biotech companies raise too little money, or are sometimes shortsighted when it comes to financing and I think that bites them in the end,” she said. “So a company that is well financed particularly in this market is important.”

Most of the companies in Ghodsian’s universe are not profitable. Some of the companies she invests in are very late stage, while some are more in clinical development. Among specific stocks she favors include, Isis Pharmaceuticals (Nasdaq:ISIS), Rigel Pharmaceuticals (Nasdaq:RIGL) and Pozen (Nasdaq:POZN).

Looking Forward

My stock-picking machine has churned out a few more promising biotech stocks. Next week, we’ll have a look at those stocks. Plus, I’ll take you inside the electronic brain of the machine so you can get a better understanding of how it consistently pulls up profitable investments.

Best Regards,

Ian Wyatt

Chief Investment Strategist

Growth Report

Ian Waytt is the Chief Investment Strategist for the advisory service Growth Report. Growth Report is focused on profitable small-cap companies. For more information, please visit the www.growthreport.com. Ian also writes a free weekly e-letter called Big Idea Investor. You can sign up to get Ian’s weekly commentary here: www.bigideainvestor.com