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20 Jun

Monday June 20, 2016

by

Good  morning.

I hope you enjoyed your weekend.

Let’s dig into the Swing & Long Term trading game plan for this week.  But first, a quick recap of this week’s market action and my observations.

The uncertainty surround the “Brexit” vote on June c23 continues to weigh on stocks in addition to the implications for future Fed policy for stocks after the shockingly-bad jobs report for the month of May.  As I’ve previously stated, though stocks may increasingly come under pressure from the flow out of stocks and into bonds until Britain’s landmark vote is completely discounted, longer-term I’m very bullish of stocks, as I see the Fed already back-pedaling from its ‘hawkish’ rhetoric—as I’ve consistently anticipated in these LT Reports.

Another week of cautious trading left the major averages modestly down for the week, with the DJIA, S&P 500 and Nasdaq falling 0.33%, 1.19% and 1.92%, respectively.  Thursday afternoon was the pivotal period of the week, when news of a shooting of British Member of Parliament Jo Cox stunned traders into closing the pro-Brexit, safety trade of choice.  Following the news, stocks immediately reversed their declines; and after soaring as high as US$1,318.90 the gold market abruptly retreated back to its $1,280 level of support.  

In gold terms, the DJIA had traded as low as 4.1% on Thursday, a massive move.  However, by the close of trading Friday, that big move was pared to 2.99%, still an impressive move to demonstrate the force of money flows into safety this week.

West Texas Intermediate Crude (WTIC) bounced nicely from its 50-day moving average and was little changed by the end of a tumultuous week of trading, of which at one point bashed WTIC lower to as much as 9.8% from the $51.67 achieved the preceding day (Thursday).  Wow.  

The massive swings in the oil market ran concurrently with the movement of the VIX, the latter of which had reversed its upward bias to a downward one.  From the low of 12.72 achieved during the previous week to last, the VIX reached as high as 22.89 this week during the height of Thursday’s harrowing market action.

But as I stated at the top of the LT Report, I’m very long-term bullish on stocks.  And to buttress my “crazy” contention (as I outlined in my last report) that the Fed is taking us to a mere taste of what a Weimar-like scenario will look like in the coming quarters, read a post this week on Zerohedge.com, titled, In Furious Tirade, Citi Lashes Out At “Utterly Misguided” Central Bankers, Invokes Weimar Republic’s Von Havenstein, that discusses similar sentiments made in a note to clients by CitiGroup analyst Gregory Marks.

My “take” on the action this week is, simply: disengage from long positions until further notice from me.  There’s no circumstance I can foresee at this time that would impel me to jeopardize your/my portfolio.  However, I have two new stocks to add to my Watch List, and want to discard three stocks from the list.  So, let’s get our hands dirty and discuss the LT Report portfolio I have lined-up for you during this wait-and-see period.

This Week’s JBP Stock Ideas

Again, until the markets settle down from the politics in Europe, I won’t be initiating trades (with one possible exception).  And as you know from my emails on Tuesday and Thursday, after 15-straight wins, my long winning streak has come to an end.  I took a $2,120 (-11%) loss in SQ and a $2,180 (-10%) loss in UEPS.  But considering the damage within the internals of the major indexes of the past two weeks, these are relatively small losses, which makes me very happy in the sense of exercising discipline and delivering performance to my reads this year.

For now, I’ve dropped from my watch list, ZAGG, Inc. (ZAGG), Energous Corp. (WATT) and Groupon (GRPN), but may bring any of these stocks back in at any time.  They’re all good trading stocks.

Santander (SC)

So far, my SC trade is working as planned.  On June 7, I shorted 1,000 shares of this toxic company at $12.61, and scored another $0.84 per share this week (for an aggregate profit of 17.1%). Given the flight to quality of the past two weeks, I feel good about my chances of SC moving lower still during what I see as more movement by investors away from junk quality.  I am nearly certain Santander and investors have not priced in much higher default rates and/or its ability to pass-through junk paper to maintain margins.

FutureFuel (FF)

FF, the bio-based specialty chemical company traded down by 2.34% this week, and appears to be headed for $10, the next level of support. but ended the week down 2.9% to close at $10.70.  Again, I see no news and more weak hands selling this stock, so I’m still idle on FF until more visibility in the markets becomes available to me.  

Sientra (SIEN)

Sientra, the leader of the breast implants business, traded well this week, closing up 1.1% to $6.44.  My target to sell is $20, with a holding period estimated at 18 months.  Though the stock has reached the upper bound of my buying range, I’m holding off acquiring any long positions in any stocks this week (with a possible exception, as I mentioned).

Diebold (DBD)

Diebold, Inc. (DBD) is a new stock idea.  And you may not believe why I like this stock.  Crazy central banking policies bring about crazy solutions to age-old problems experienced prior to days of modern banking and insured deposits.  The concept of making an insured deposit at “any old bank” didn’t begin until the Great Depression, specifically 1933.  So, few of us are old enough to remember the days of uninsured deposits held in uninsured banks.

Well, my friends and colleagues, those days are coming back, but with one twist.  Back then, depositors were paid to take the risk of ‘lending’ money to a bank in the form of a deposit for reinvestment by the bank via borrowers.  Today, banks are insured and deposits are insured (up to a point, especially with the threat of ‘bail-ins’), but instead of receiving a rate of return on a deposit, the world’s banks are sliding into negative interest rates.  You are forced to pay the bank to hold your money.  So, today, instead of worrying about some common thief stealing your savings, the bank, itself, is literally stealing from you!

With approximately $7 trillion of sovereign debt now carrying a negative interest rate, it appears to me that the Fed, too, will be joining Japan, Denmark, Sweden and Switzerland in the negative interest rate scheme.  German appears to be next.  

Read how rich people are protecting themselves from negative interest rates in Japan, Europe, and soon in the U.S.:

Here’s how negative interest rates can change people’s attitudes about money

Safe sales are skyrocketing because of negative interest rates

Safe Sales Rocket in Japan Amid Negative Interest Rates

Japan: The dash to stash

Can you ever imagine working a lifetime, accumulated $1 million dollars for a deposit in a bank to fund your retirement, and then receiving a bill for $416.67 per month to hold your money in a bank?  Well, many in Japan and Europe aren’t paying it?

Among a wide array of services and products, Diebold makes safes, deposit boxes and other “physical barriers.”  According to the company’s fiscal 2015 annual report, Diebold earns revenue of approximately $311 million from its “physical barriers” business.  

Diebold’s total revenue clocked in at $2.35 billion for fiscal 2015.  And according to the company’s guidance, Diebold expects fiscal 2016 revenue growth of between 0% and 2%, or a growth of $47 million—tops.

Here’s my thinking about Diebold’s future revenue.  Admittedly, it’s rough, yet sound in logic.  With the U.S. (and other countries Diebold services) nearing negative interest rates, what growth would the company’s “physical barriers” business achieve when more and more depositors are affected by negative interest rates?  Fifteen percent, 25%, or more?  We suspect at least 35%, which would add $108 million to Diebold’s top line, or a 4.6% beat in revenue.

So, at this point you may be thinking: “So what?”  A measly 4.6% beat to the top line is no big deal.  Well, the last time Diebold achieved a ‘beat’ on revenue well beyond expectations was in fiscal 2014.  In that year, revenue climbed 5.8% following guidance of 3.5%.  Anticipating the renewed growth at the company, DBD soared 43.7% in late 2013 and into early 2014 following Q2 and Q3 earnings surprises for fiscal 2013.

As I don’t know when the explosion of Diebold’s “physical barriers” will become evident to traders, I look at DBD as a long-term play, with a 50% move higher from the stock’s present $24 and $25 range by late 2017.

Horizon Pharma (HZNP)

And finally, a play I really like right now: HZNP.  

Horizon Pharma is specialty biopharmaceutical company and maker of ACTIMMUNE, RAVICTI, BUPHENYL, AMMONAPS, UEXIS, VIMOVO, PENNSAID, MIGERGOT, RAYOS, LODOTRA and KRYSTEXXA.

Treatment, market and revenue percentages of these 11 drugs can be found in Horizon’s Current Presentation.  The drugs in bold-type font are currently in various stages of FDA trials, though Horizon does receive some inconsequential revenue from these four drugs through the company’s partnerships.

Since the high of $39.49 achieved in June 2015, HZNP has been in decline, down 58.1% to $16.56.  What happened?  Starting with the Valeant Pharmaceuticals fiasco in October 2015 and the Martin Shkreli circus (remember him?) of earlier this year, HZNP has come under pressure as being identified as another “price gouger” in the Orphan Drug business, a business in which Horizon makes a substantial chunk of revenue.  Since the Shkreli spectacle, the two remaining U.S. presidential candidates have campaigned on and promised to straighten out the issue of “price gouging” within the healthcare industry.  Investors have been running scared ever since.

So, let’s address the issue of “price gouging,” first, then I’ll present the basic fundamentals of the stock and multiple potentials for big pops in the stock price during the coming rally in the stock I foresee, well into 2017.

As far as campaign rhetoric matching action, I don’t believe any proposed legislation would end up draconian in substance.  Sure, guys like Shkreli won’t be able to raise drug costs by 5,556% as he did at Turing Pharmaceuticals, but to actually draft legislation that would stop Horizon from pursuing important Orphan drugs is a completely different matter.  So, my bottom on this point is: don’t worry too much about Horizon giving up its business model anytime soon.

Now let’s look at what I believe is an impelling story to own HZNP.  First, Q1 revenue of $204.7 million was up 81% from Q1 2015.  Adjusted EBITDA for Q1 2016 of $72.0 million was up 122%, year-over-year; and adjusted cash flow for Q1 2016 reached a whopping $67.9 million.  So, we’re looking at some serious growth at Horizon.

On the earnings front, Wall Street analysts expect earnings per share to reach $2.34 for fiscal 2016, and $2.65 for fiscal 2017, which calculates to a forward P/E of 7.07 and 6.25, respectively.  Using the Nasdaq P/E of 22.15 as a comparison, HZNP would have be trading at, maybe, $55 per share.  Amazing.  

With a growth rate as high as Horizon’s, the year-ago stock price of nearly $40 wasn’t that far off, in my opinion.  How much the depressed valuation may be attributable to election-year politics is difficult to estimate, but I suspect most of HZNP’s decline can arguably be assessed from electioneering rhetoric.  Overall, on a fundamental basis, alone, I like the stock more than any of my stock ideas in recent memory.

And when I consider the ‘pop potential’ of any of Horizon’s candidate drugs making headlines from FDA stage graduations, I know I’ve found a good potential play all the way around—both an excellent short-term and long-term play.

And it gets a little better.  Usually I take with a grain of salt whatever Goldman Sachs has to say about some matters (which I won’t go into at this time), but when it comes to digging into the details of bio pharmaceutical companies, I listen intently for nuggets of information.  In the case of HZNP, Goldman is on-board with me with this company, and has recently initiated a ‘Buy’ recommendation (June 6) at $18.83, a cool $2.27 premium to today’s price.  At near $16, I’m accumulating this stock; it may be my only exception of the coming week.  I’ll let you know in an Alert.

Trade Green!

Jason Bond

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4 Comments

  1. kyle converse

    Jason,
    New to the long term newsletter. This post says you shorted SC on June 7 but I don’t see it in your portfolio. What am I missing?

    Reply
    • Jason Bond

      We covered for a win on that one.

      Reply
  2. Eric Nelson

    Any long term ideas coming soon?

    Reply
    • Jason Bond

      I don’t trust this bounce for long term entries just yet but did just take FNMA for starters.

      Reply

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