Stock Reversals

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Jan 30th Weekend Edition- Greater Fool Theory-IPO Hype


Another rough and tumble week ending with the SP 500 down sharply 3 straight days ending the week around 1994, just 4 points over a key 1990 area of support.  Gold and Biotech sectors were the clear leaders in January and at SRP we have several biotech positions, but did miss out for now on the gold stock rally although we estimated in December it would be one of the January winners.  Of note for the first time since 2009 calendar year the earnings expected for the 1st and 2nd quarter for the SP 500 are projected to decline year over year by 2.1% in first quarter and 1.1% in 2nd quarter.  This along with commodity declines, deflation concerns, european worries, and currency wars is finally putting some weight on the market.  Lets keep an eye on the SP 500 at 1972, the mid December 2014 lows as a test this week.  Below that 1900-1910 seems likely

Clearly some individual issues are still moving up but the breadth of the market has narrowed and consolidations are the rule even in the stronger stocks.  Facebook was unable to break out on big earnings, Google had good earnings but is well off the 52 week highs, Apple had great earnings but has not yet broken 52 week highs.  It’s a muddy time in the market, but we still see stocks that appear undervalued to us.

Thoughts on Gold, The Euro, 10 year Treasuries:

Economics 101 will teach you that negative real interest rates are not so good for savers.  In Europe in many zones banks are charging depositors in one form or another to hold funds in savings.  This forces capital to find higher yields and safety that can match if possible. This is why you have seen a strong move into the US Dollar, 10 year treasuries that pay 1.75%, and now Gold as well.  Gold does very well in a negative interest rate environment and after a 3 year bear cycle, it looks to have bottomed at the 50% Fibonacci retracement of the bull cycle highs from the bull cycle lows at 1130 per ounce.  That said, you must be selective in the equities in that sector…. not all geese will lay a golden egg.

IPO Insanity on Friday and otherwise:

Of note we saw some crazy valuation action with a few IPO’s on Friday as the week closed out.  Gene Therapy Biotech,  Spark Therapeutics (ONCE) went public and now trades at 3x the valuation accorded the nearly identical but more advanced biotech uniQure (QURE) which we cover at SRP.  For example, investors bid up the 7 million IPO shares sold at $23 to $50 per share giving Spark a 1.2 Billion market cap.  When they initially priced the offering at $16 the company was to be valued by underwriters at 350 million, which would be in line with uniQure valuation today.  Spark is in phase 3 for a rare disease that causes forms of blindness and effects all of only 3,500 people for a patient target population worldwide. Otherwise they have pre- clinical work ongoing in Hemophilia-B and a few other early indications.  Contrast that with Gene Therapy company uniQure which is already in Phase 1 for Hemophilia-B, already has a Gene Therapy drug approved (Glybera) in the E.U. and pending in the USA, and also has indications for Congestive Heart Failure (26 million target population), Parkinson’s, and Hemophilia-A.  Yet their market cap stands at only 370 million at $21 per share… go figure.  So what did we do at the Firm on Friday?  We bought more QURE, because either investors wake up and bid up shares eventually in QURE, which is based in the Netherlands and doesn’t have the “Sexy” US moniker, or Spark comes down in value. We expect in time QURE breaks out higher and Spark comes back to earth.  uniQure has a proven AAV Vector delivery technology (Same thing Spark is working on) but it has modular and scalable features, and they have 2 manufacturing plants to boot already. We like the discount vs. Spark.

Compare as well our SRP position Celladon (CLDN) which is around 340 million market cap.  A Gene Therapy company with an advanced phase2b systolic heart failure Gene Therapy trial with results due in April. A patient population of 350,000 which is 100x larger than that of Spark (3,500), and yet the market cap is again about 1/3 that of the IPO trading Spark (ONCE).  Celladon has both Fast Track and Breakthrough Therapy designations from the FDA, with a phase 1 result showing 88% response rates.  This is why IPO’s can often be exciting but retail investors often bid them up way above fair valuations and forget the better values sitting right in front of them.  We would rather own CLDN all day long vs. SPARK at current valuations and sleep at night.

Recent samples of IPO pop and drops are GPRO, VSLR, EYES, JUNO, and the list goes on of IPO stocks that get way overbid.  We read through the IPO filings carefully and look for flags and warning signals. Investors don’t do that as a rule, and the stocks can get initially bid up way over fair valuations. This happens because the float is low relative to the total shares outstanding, and if it’s a sexy story worthy of water cooler discussion then the greater fool theory takes over. In the case of Spark, they sell 7 million shares to institutions at $23, and many of them hold the stock. This leaves even less shares available (Float) in which the retail traders clamor after creating a virtual bubble to the upside until valuation gets to absurd levels that make no sense fundamentally at all. He who can sell their stock to the next fool who is willing to pay too much for the business is the profit maker. At some point there are a ton of bag holders, and this will be the case with ONCE we are sure, not to mention Shake Shack, which rose 116% as well.  The Burger and Fries chain  valued at 1.7 Billion which made 3 million profit in 2014… yeah, no. We will pass but thanks… maybe the burgers are good, but not that good.  Valued now at 15 times annual sales vs. 6 times for market leader Chipotle Mexican Grill (CMG).  Outside of NYC the stores do not do nearly as well, we mark this one as way overvalued, we will pass on it and probably short it soon.

Just as a quick sample of how we view things, We would much rather invest in CLDN and their Gene Therapy for systolic heart failure at a 340 million market cap with a patient population 100x great than that of ONCE, than pay 1.2 Billion for a 3,500 patient population and a thin pipeline… but that is the retail market, and it’s why we stick with fundamentals and ignore hype.

New Shorting Service Spring 2015

Moving forward, we plan to initiate a new service in the spring that will focus on shorting overvalued, overhyped, pumped up, garbage post-IPO, and other erstwhile overvalued stocks.  We will look for short to intermediate term holdings that we think will decline in value as much as 15-50% from the point at which we identify the securities to short.  This is actually pretty easy work for us, whether it be a bull cycle, sideways, or bear cycle we can identify overvalued and or overbought stocks every single week. Recently we notified people on stocktwits that KITE was likely to drop from 88 to 62-77, everyone thought we were nuts.  Recently the stock hit a low near 64.  We warned people of VSLR after the IPO in the 13.50 ranges, it now trades near 8.  We warned people of WATT at 15, it’s now trading near 9.  We wrote about GPRO at 88 when the founders cashed out millions of shares before lockup by getting an exemption to fund their charity, that was the biggest top signal we have ever seen. The stock now trades near $49. The list goes on and the new website will outline multiple real examples that were time stamped and what happened afterwards.  More details will follow in the spring, we plan to offer a large discount to SRP members. We have not yet decided on how we will deliver the information or how often and a few other details, or pricing.

The near term should continue to be choppy in the markets. We are thinking a bit contrarian that several areas may be bottoming out that are out of favor. These include Heating Oil, Oil, Copper, Gas, and the Euro currency perhaps even.  If so, contrarian opportunities will be arising near term.  We will do our best to at least bring you some forward thinking ideas at SRP service if not outright trade alerts in those arenas.

This is a bit of a higher risk period near term for swing trades and the like, but below are a few symbols that have caught our eye and we may use for swing alerts or other soon. Certainly worthy of further review:

In the last few weekend editions we highlighted some good winners (not all of course). Among them ZLTQ, SIMO (We got stopped out in market volatility, then it went higher of course), CMPR (made money on it weeks ago, but it has finally continued higher), UVE, EA just to name some.  So its not all dead money in the US market, just harder to find those needles in the haystack.  Below are some fresh names we are looking into.

UIHC–  United Insurance Holdings.  Insurance carriers have higher margins as interest rates drop.

CMPR– Cimpress Holdings- Formerly known as Vista Print, we discussed them recently at SRP and also on weekend editions. They changed their business model to higher margin offerings to small businesses.

ABAX– Healthcare and Medical Supplies business, breaking out of multi week base on volume

BC– Brunswick, best known for bowling but also other recreational products

PCRX– Pacira Pharmaceuticals-  2nd time on list, nearing breakout if it gets over 110. Miracle drug they say…

UA– Under Armour, they are pretty much everywhere with their logos on everything made except maybe the sheets on my bed, but thats just a matter of time. Over $73 breaks it out of a base.

PRXL– Paraxel- 2nd week on list. Needs to hold 59 area though

GILD– Gilead Sciences. We bailed out of this many weeks ago to avoid drama, it fell from 104 to 88 and now back to 104 area. Their Harvoni Hep C drug likely going to push stock higher we think.