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12 Dec

Monday December 12, 2016

by

Good morning,

What a week.  A ‘Dow Theory’ ‘buy’ signal jolted stocks to new highs, as the Dow Jones Transportation Index (DJTA) finally reached a new all-time high on Thursday after two years of falling short during the repeated all-time highs reached by the DJIA.  

The major averages settled on Friday, as follows:

DJIA: 19,756.58; up 3.06%; daily record high

S&P 500: 2,259.53; up 3.08%; daily record high

NASDAQ: 5,444.50; up 3.59%; daily record high

Russell 2000: 1,388.07; up 5.62%; daily record high

DJTI: 9,407.19; up 3.96%; weekly record high

The Dow Theory milestone this week is significant and should bring in some capital still left on the sideline, although, according to an article published by zerohedge.com, ‘active’ fund managers appear to have reached another lofty mark of 100-plus-percent equity exposure.  How much sidelined capital is left?

Go ahead and read the zerohedge article, but look at the author’s analysis with a jaundiced eye, because a broadly-based market bet, driven by excessively cheap money, makes a genius out of all of us.  Right?  And notice, too, from the chart presented in the report, fund managers were under-invested at the bottom of each cyclical lows.  In short, I’m not sold on the author’s conclusion that suggests active fund managers are any better than the public at picking times to buy stocks.

And if we take to this week’s action in stocks with the knowledge gleaned from my analysis last week of the primary driver of stocks since the presidential election, not one of my readers should have missed the weakness in the Japanese yen this week.  Another 1.59% drop of yen to the US dollar certainly had much to do with the nice rise in stocks this week, triggering another short squeeze, as the market’s most-shorted stocks meaningfully outperformed the broad-based rally this week.

The VIX slammed lower by 2.37 points (or -16.78%) by Friday, taking the index to another sub-12 level and a 16-week low!  

I’m not ‘digging’ that, for sure, especially as we move into next week’s FOMC meeting.  The market has priced in a 94.9% odds of a 25-basis-point hike on December 14, which may spell trouble.  But, I’ll get into the FOMC meeting in a moment.

vix

This week’s activity in the fed fund future market, following a surprise decision by ECB president Mario Draghi to taper bond purchases to (euro) 60 billion per month from (euro) 80 billion per month, appears to demonstrate that bond traders are on-board to allow rates to maintain the 65-basis-point post-election spike to a yield of 2.47% on the 10-year US Treasury, a yield of which may cap the stock rally, in my opinion.  As the smart rise in the DJIA, dropped to yield to 2.71%.  Hmm.  Only 24 basis points separates the two asset classes.

As long-term readers know of me, I don’t like surprises that, of course, result in large losses.  If the Fed shocked the market this coming week as Draghi did this week, I fear a rapid change in market psychology.  

In other words, if Yellen and Company don’t raise the target range of the fed funds rate by s5 basis points, as expected, the market will gasp at the negative signal the Fed is sending, creating massive market volatility, in my opinion, as traders come to realize that president-elect Donald Trump has been right all along in his insistence that the Fed is a partisan body.  

However, please don’t read into my comments more than I want you take away.  I do expect a 25-basis-point rate hike on Wednesday, but after all the craziness surrounding the post-election period, I’m not positioning my stock index plays as a bet on Wednesday’s event.  Who knows?  A rate rise may turn out to be the day of inflection in stocks.  You know, we are approaching the 20,000-point mark of the DJIA as the bond market trends lower.  

Didn’t the Nasdaq peak at another round number, 5,000, in January 2000?  Weren’t interest rates on the rise a that time, too?  They were.

As the CRB Index reached a year-to-date return of 24% on Friday, is the bond market really telling us that happy days are here again, or is it telling us that rates are discounting expected higher inflation in 2017?  I assure you, those selling stock transactions for a living have been pushing a meme of the former pretty hard, lately.

But, my bottom line regarding the upcoming FOMC meeting is, as long as the spread between the yields of 10-year Treasury note and the Japanese 10-year note doesn’t trend below 200 basis points (2.00%), we’re going to continue to see money flows coming into US stocks due to my old friend and yours, the yen carry trade (see chart, below).  

ust

From what I surmise from the chart, 200 basis points appears to be the floor on the spread, and the ceiling may be 250 basis points, for now.  Let’s see what happens to the wild card to this juggling act in the bond market: oil.  

Capping oil below $60 will require a strong dollar.  If the dollar falters, the oil price gets a bid and the yen carry trade scheme is thrown into jeopardy.  We’ll know much more about the direction of interest rates, stock, oil, commodities and gold prices following the FOMC meeting on Wednesday.

So, I recommend hedging while out-of-the-money stock Puts are cheap, until after the FOMC meeting.

Okay, let’s talk stocks.  I’ve dropped a couple of stocks from the Watch List, but added a new name.  And I sold a stock position for a painful loss, but the lost has been more than compensated for with my huge FNMA win earlier this month. Going into this week the only small cap name I’m holding is ANFI which I maintain will deliver a nice profit long term. Will I add, probably, but not anytime soon. Here’s my report.

This Week’s JBP Stock Ideas

BALLARD POWER SYSTEMS (BLDP)

As alerted, I sold my 30,000 shares holding of BLDP for a loss of $9,100, a first significant loss in four months.  These hits to my account come from time to time, but overall life has been good this year.

SIENTRA (SIEN)

Okay, onto a new stock to my Watch List, Sientra (SIEN), a maker of silicone breast implants and a budding successful turnaround story from an unfortunate stoppage at its third-party manufacturing facility in Brazil, Silimed Industria de Implantes Ltd.  A little more than a year ago, due to a European regulatory body marketing suspension of all products made at the plant, after flaws were found in some silicone implant products made at the facility, trouble came to Sientra through no fault of theirs.  

Although Sientra manufactured implants at the plant with manufacturing standards approved by the US FDA and independent of other processes at the facility, Sientra voluntarily suspended operations in September 2015 until a third-party inspector verified Sientra’s implants were not among those produced by the methods of other Silimed customers exporting to the European market.  

Following the news of Sientra’s voluntary production suspension, the share price of SIEN crashed to as low as $3.34 by mid-November, from a high of $26.67 reached in late-June.  

As a result of the work stoppage, Sientra’s revenue plummeted in Q1, Q2, Q3 of this year to a fraction of the company’s Q3 2015 peak performance.  But since the stock’s November low, SIEN is coming back steadily following an announcement in early-February that the Brazilian plant is again operating and shipping the company’s product line.  The stock has since been trading back up to the $8 handle, and now trades above the stock’s 52-week moving average.  

Previous customers are coming back to the Sientra, who, at the height of Q3 2015, supplied between 7% and 12% of all implants to a US market estimated to be worth between $200 million and $300 million per-year, and growing.

RECENT NEWS

On December 5, SIEN soared to as high as $10.22 (27.6%), following a news release by the company of an FDA pre-market supplement (PSA) approval for the company’s four new implant styles and shapes.  These will be added to its present line of nine offerings.  The company expects to begin delivery of the four new implant in Q4 2017.

My take: I like the stock for its hidden future trend of higher revenue, as the results of a survey conducted by the company of the customers affected by the work stoppage at the Brazilian plant indicated that nearly all customers expect to order Sientra products again when they become available.  And there is a good reason for this nearly-perfect positive response.

First, Sientra is the only company of the three operating in the US (the other two: Mentor, Natrelle) who offers a two-year guarantee against ‘capsule contracture’, an issue of primary concern of most patients and surgeons.  Sientra’s rate of contracture is, indeed, the lowest of the three makers, and the company also hold the distinction of offering implants with the lowest in incidents of rupture.

This is a big deal, as far as I’m concerned.  Imagine if you were undergoing an implant procedure.  Wouldn’t you want an implant with the highest reputation of product safety?  Of course.

Second, patients report that Sientra implants feel more natural, another big win for Sientra.

In short, Sientra’s implants are best of breed, which weighed heavily on my decision to watch this stock.  I expect revenue to regain the $10 million-plus per-quarter level, and a stock price of between a $12 to $14 handle by the end of 2017.  Therefore, it’s appropriate that I wait for an opportunity to get into the stock for a longer-term play.  I’ll let you know.

Read Sientra’s Quick Fact Sheet

ABOUT SIENTRA

Sientra, Inc., a medical aesthetics company, develops and sells medical aesthetics products to plastic surgeons and patients in the United States.  The company offers a portfolio of silicone gel breast implants for use in breast augmentation and breast reconstruction procedures; and breast tissue expanders.  It also provides body contouring and other implants, including gluteal, pectoral, calf, facial, nasal and other reconstructive implants.  Sientra, Inc. was incorporated in 2003 and is headquartered in Santa Barbara, California.

Source: Finviz.com

GLU MOBILE (GLUU)

Removed from my Watch List.

LENDINGCLUB (LC)

Removed from my Watch List.

TWITTER (TWTR)

On November 5, I alerted a Call position I took in TWTR.

The idea at that time:

The monthly Call, with an expiry of March ’17, and a strike price of $20 can be bought for $1.40 per contract.  Buying 10 Calls limits your loss to $1,400.  So far, the open interest of the March ‘17 contract is 44.58k, an active and popular strike price.

To read my rationale for the Twitter Call, follow the link to my report: ‘Twitter Takeover Play’.

My bet with a Call option includes the possibility a suitor who can fix Twitter’s sluggish attempt to monetize the company better will strike by the expiration of my March 2017 Call.  

At the close of Friday’s trade, the contract closed at $2.02.  I’m well into a profit on my Call option, folks.  Already, TWTR is closing in on $20, with a closing price of $19.65 on Friday.  The stock has broken through its 50-day and 52-week moving averages to the bull side this week.  I’m crossing my fingers for the stock to move higher in a time span a lot earlier than I expected.

ABOUT TWITTER (TWTR)

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

INVITAE (NVTA)

NVTA closed the week higher by $0.28 (4.02%) to $7.24 per share.

On December 7, the company announced at the San Antonio Breast Cancer Symposium (SABCS) the expansion of its Breast Cancer STAT Panel to include a report on genes, ATM and CHEK2, and a faster turnaround time of the reports to as fast as five days.

On December 8, the company announced a collaboration with TME Research to evaluate the benefits of universal genetic testing of breast cancer patients.  TME Research’s mission is “to improve quality and access to emerging technologies and best practices in breast cancer prevention, diagnosis, treatment and patient care.”  The company partners with more than 300 breast cancer practices throughout the US.  This alliance may turn out to be highly lucrative.

As I stated last week, the rationale behind this stock idea is, that the company seeks to lower the cost of genetic testing enough to aid medical professionals with quicker and cost-effective diagnoses, a goal third-party payers have been welcoming with open arms.

Revenue has increased in each quarter since the company began trading on the Nasdaq in Q1 of 2014, with oncology (cancer) testing as the company’s bread-and-butter business—a business which is growing at more than 200% per annum at the company.   

Management expects to become cash-flow positive by 2018, as the growth rate of billable testing has doubled (y-o-y), revenue has nearly tripled, while gross margins have steadily declined.  

At the company’s present billing rate, I expect revenue to easily reach $100 million by the close of 2017, as the number of covered lives (insurance) is expected to increase to 160 million lives by the close of this year, up from 65 million lives in Q3, 41 million lives in Q2, and 5.5 million lives in Q1.  Wow.

So far, Invitae’s performance has been astounding, and I expect further blockbuster growth for the company as the level of awareness of the value of its services increases while costs decline.  The company is slated to become the industry leader early on during this new and fast-growing marketplace.

NVTA is on my Watch List for accumulation or to make a trade at, maybe, $6.00, a price of which may become likely during any significant pullback in the major averages.

UNDER ARMOUR (UAA, UA)

UAA soared $2.96 (9.86%) this week to close at $32.99 per share.  The biggest move was on Wednesday, the day the new stock symbol, UAA, the company’s ‘class A’ shares (with voting rights) began trading.  The ‘class C’ shares (without voting rights) trade under the symbol, UA.  I think the big move in UAA has everything to do with the voting rights attached to the shares.

Last week, I introduced UA to my readers, and offered a rationale for owning the stock, included a suggestion of owning the stock as a long-term play.  I surmised as the reason for the stock’s poor action in 2016 was due to the company’s decision to forgo short-term performance for a better longer-term earnings projection, with which as an potential investors, I agree.

On December 8, Forbes echoed my sentiments of the stock.  In his article, Randy Warren, stated:   

The swoon in the overall stock market in Jan/Feb of 2016 dragged them down significantly. Just after the swoon, the news broke that several key executives were leaving. And perhaps worst of all, as earnings were announced, the discussion became about margin. UAA was planning to invest more heavily in the business which could drag down profit margins. Short sighted investors see this as a negative. Long term investors see this as a positive. But the short sighted were the definite winners in 2016 as the stock continued to struggle. But UAA still has the growth. Most importantly UAA still has Kevin Plank. Expect the stock to rebound to $50 in 2017 which represents a 66% potential gain.

I didn’t suggest a price target of $50 for UAA, but now that Forbes’ Warren mentioned a price in his article, I’ll go along with $50, as this is the approximate target price, which is near the high reached in September prior to the announcement by the company of its change in focus to a longer time horizon for accelerating earnings.

NEW GOLD (NGD)

NGD sacked a good rise this week, jumping $0.17 (4.68%) to close Friday’s trade at $3.80 per share.  This rise interests me greatly, because while NGD was making strong moves higher this week, the GDXJ was dropping.  In fact, GDXJ dropped a stiff 3.61% for the week, and now just hangs on its 200-week moving average.  So, the divergence of price performance this week was quite stark.

As I outlined last week, New Gold’s mining operations aren’t quite typical of the gold mining business.  Unlike its brethren in the business, New Gold mines a substantial amount of high-grade copper, enough in fact to up the percentage of revenue derived from the base metal to as high as 35% of the company’s aggregate revenue.

According to the company’s Q3 earning report, New Gold sold 96,452 ounces of gold during Q3 at an average price of $1,328 per ounce, and sold 24.2 million pounds of copper at an average price of 2.17 per pound, for a total of $180.6 million of revenue from these two metals.  Aside from a tiny portion of revenue derived from silver sales, no other revenue was a factor in this analysis.  In Q3, copper revenue represented 27.6% of total revenue.

Using today’s $1,162 gold price and $2.65 copper price and assume an equal amounts will be sold of each metal in the coming quarters, estimated revenue at the today’s lower gold price and a much higher copper price, calculates to $175.0 million, a measly 2.85% drop from Q3.  Under this supposition, the new price levels of gold and copper calculates to copper revenue reaching 35% of total revenue, up from 27.6% for Q3.  That’s how much of an impact the copper price has on New Gold’s top line.

In other words, when NGD was trading at $6.00 per share in August during a time of higher gold prices, today’s traders have completely overlooked the effect upon New Gold’s revenue following Trump’s presidential win, as the following nearly-four weeks of trading has benefited NGD no differently from other ‘gold’ miners, yet New Gold is really a hybrid gold/copper producer.

For example, Freeport McMoRan (FCX), a major gold and copper hybrid producer, has soared 42.5% since the US presidential election, while NGD has dropped 8.4%.  I bet when New Gold reports earnings in mid-January, many investors will be surprised at the results, if, of course, the copper price maintains its rally.  And so far, Dr. Copper shows no signs of selling off with another $0.02 added this week to the price, to close at $2.65 per pound.

Until next time…

Trade Green!

Jason Bond

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2 Comments

  1. Steve

    The P/E for new gold is 129. Is that a barrier to the potential for this stock?

    Reply
    • Jason Bond

      I don’t think so. It’ll run with gold when gold turns, which I think will be this week.

      Reply

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