Meds, Metals and Bears
The sharp market break of 2008 has made it clear that the bears are in control, which means you should remain in a highly defensive position. But money has to flow somewhere, and it appears that, for the moment, pharmaceutical and metal stocks are in favor. This week’s Top Ten sports three pharmaceutical stocks, two other medical names and two precious metal stocks – and most of them have good-looking chart patterns. Just be aware that even strong stocks can get hit in bearish environments, so your emphasis should be on building your watch list, holding cash, and making just token new buys until the storm passes. Our favorite pick this week is Pharmaceutical Product Development (PPDI), a steady company whose bottom line is set to accelerate this year. The stock just broke free from a long consolidation after a bullish outlook, which should offer support on any retreat.
| Stock Name | Price | ||
|---|---|---|---|
| AUXL (AUXL) | 0.00 | ||
| BMRN (BMRN) | 0.00 | ||
| CPHD (CPHD) | 0.00 | ||
| DV (DV) | 0.00 | ||
| GOLD (GOLD) | 0.00 | ||
| LKQX (LKQX) | 0.00 | ||
| MATK (MATK) | 0.00 | ||
| MLNM (MLNM) | 0.00 | ||
| PAAS (PAAS) | 0.00 | ||
| PPDI (PPDI) | 0.00 |
(AUXL)
Why the Strength
When it was founded in 1999, Auxilium’s mission was to focus on developing drugs to treat urology and sexual health, and the one product the company has brought to market, Testim, has validated that approach. Testim is a testosterone gel that treats hypogonadism, a condition marked by low levels of testosterone production. This FDA-approved product has been marketed in the U.S. since February 2003 and revenues are growing nicely. But Auxilium is branching out beyond its core mission. In development, for example, is Xiaflex, a collagenase enzyme that’s in Phase III FDA trials for treatment of Dupuytren’s contracture and Phase II trials for Peyronie’s disease and frozen shoulder syndrome. Beyond that, the company is developing a transmucosal drug-delivery system featuring a membrane that adheres to the upper gum. In the front line for this system are two product candidates that treat pain, and a third that treats overactive bladders. The company also has rights to six additional pain products using the membrane, as well as hormone replacement and urologic disease. All this development has kept the company unprofitable, but the losses are shrinking, and institutional investors are quietly climbing on board; at last count, 45 mutual funds owed the stock.
Technical Analysis
AUXL came public in July 2004 at 8, bottomed at 4 in 2005 and has been trending upward since. It appeared here twice in late 2006 and then again last September and October. Today, it’s coming off a normal correction to its 50-day moving average, and we like the volume on the rebound, which suggests the stock will eventually push through its recent high of 31.
AUXL Weekly Chart
AUXL Daily Chart
(BMRN)
Why the Strength
BioMarin Pharmaceuticals is a company approaching the transition from a small, money-losing drug developer to a small, profitable drug developer. The difference is huge. BioMarin now has three approved products, Aldurazyme and Naglazyme, which are used to treat an enzyme deficiency called mucopolysaccharidosis, and Kuvan, which treats phenylketonuria (a medical disorder that can lead to mental retardation and seizures). The approval of Kuvan earlier this month caused the wave of buying that pushed BioMarin’s stock up and earned it its first appearance in Top Ten. Institutional investors are signing on rapidly, but there are still just 173 of them, which leaves lots of potential big buyers out there. The company is expected to turn profitable in 2008, and its first quarterly report with positive earnings could produce another positive reaction in the stock. BioMarin is clearly on the growth track.
Technical Analysis
BMRN has had a great run since early 2005 when it was trading at 4. The stock had a long, gradual advance to get from there to 21 in February 2007, then corrected for five months. Since then, the stock has had another advance and another consolidation before the December 14 news about Kuvan that keyed the stock’s one-day leap from 30 to 36. Since that gap up, the stock has held its gains and even moved up a little. We think that a dip back to that 35 level would provide a prudent entry point.
BMRN Weekly Chart
BMRN Daily Chart
(CPHD)
Why the Strength
Today, patients have to fear hospitals as well as diseases. The Centers for Disease Control and Prevention has found that one in 10 hospital patients will get an infection, of which at least 5% are fatal. These infections cost the U.S. economy $6.7 billion in 2002, according to the CDC, and laboratories can take up to 72 hours to identify the infective agent. But Cepheid, a developer and marketer of diagnostic tests, makes a $25,000 fully-integrated genetic analysis system called GeneXpert that can, among other infections, identify Methicillin-resistant staph infections in about an hour. This state-of-the-art testing system has been adopted by the U.S. Postal Service for anthrax testing and the Department of Veterans Affairs is another potential customer. Revenue figures have been growing, although not steadily, but every system sale generates continuing income in the form of $69 single-use cartridges. Another big client or a transition to profitability would give Cepheid a huge boost.
Technical Analysis
CPHD was just another low-volume, speculative stock until March 2007, when rumors began to fly about some big contract wins. The stock was trading at 7 at that point, but took off to 12 in just four weeks. After building a new base for a couple of months, the stock took off again and has — with a couple of corrections along the way — ripped its way to 30 with some huge volume spikes. It’s always good to see a stock resisting a bearish market, and CPHD looks like it has some fuel left. Look for a pullback below 30 as an entry point.
CPHD Weekly Chart
CPHD Daily Chart
(DV)
Why the Strength
2007 was a stellar year for for-profit educational institutions. Companies like DeVry, already drawing plenty of students and investment dollars, finally began to get some respect. These schools make a point of serving students excluded by more traditional institutions of higher education by cost, time, age or location. For-profit institutions overcome those barriers by offering flexible schedules and online courses, catering to adults and working students and often being more affordable than their non-profit counterparts. Furthermore, the vocational and technical degree programs at institutions like DeVry cater to the demands of the marketplace: students who want marketable skills and a steady job are flocking to these schools by the thousands. Accordingly, DeVry now offers career-oriented associate, bachelor’s and master’s degrees at over 80 locations nationwide, in areas like accounting, business administration, healthcare technology and computer programming. DeVry’s third quarter report revealed a plump 11.6% after-tax profit margin, and caused analysts to revise their estimates upward. Long-term, we like it.
Technical Analysis
DV was a great growth stock from 1991 to late 2000, when it peaked at 42. But the slowdown in the tech industry in subsequent years took its toll, and for seven years that old high stood … until the third-quarter earnings report of 2007 was released. That report brought a surge of buying power that gapped the stock from 40 to 55 in one day, and since then the stock has been consolidating that gain, building a base on which to resume that advance. Both the 25 and 50-day moving averages are right at 55.
DV Weekly Chart
DV Daily Chart
(GOLD)
Why the Strength
Randgold Resources is a mid-sized gold explorer with operations in West Africa. The company’s oldest project, in Morila, began churning out the yellow metal back in 2000 and production remains strong – third-quarter production leapt to more than 130,000 ounces from 87,000 in the quarter before; full-year ’07 production should reach a huge 475,000 ounces, at a cash cost of just $289 per ounce. Randgold’s Yalea project in Luolo is smaller (58,000 ounces in the third quarter, 250,000 for the year), but again, we like the relatively low cash cost of $398 per ounce. All told, analysts expect continued production gains in 2008, which should lead to a 70% jump in earnings as the firm rakes in huge amounts of cash by selling at elevated prices. This isn’t the most liquid name in the group – just 46 mutual funds own shares, and the stock trades less than a million shares a day – but both the stock’s and group’s actions look healthy.
Technical Analysis
Like all gold stocks, GOLD broke out of a long consolidation in early September and enjoyed a nice run-up through mid-November. A short base-building period ensued, but that led to a fresh breakout this month. Interestingly, volume on the recent breakout wasn’t as impressive as at some of the bigger names in the group (like Barrick Gold) but, since the original September breakout, GOLD has racked up some of the best gains in the sector, a sign of leadership. If you’re looking to add some gold to your portfolio, consider buying on a drop of a couple of points.
GOLD Weekly Chart
GOLD Daily Chart
(LKQX)
Why the Strength
LKQ (the name is derived from “Like Kind and Quality”) is America’s largest supplier of automotive replacement parts. With 38 plants throughout the U.S., it dismantles over a thousand vehicles per week. It has tens of thousands of door assemblies available on a next-day basis, as well as thousands of late-model front-ends and thousands of low-mileage engines and transmissions. It has glass, sheet metal parts, steering columns, air conditioning components, refinished wheels and more, all pulled out of vehicles destined for the scrap yard. And it sources new replacement parts from manufacturers, primarily in Taiwan. The company is virtually invisible to the average consumer, but to people in the auto fixing business, from the body shop man to the insurance adjuster, there’s no doubt that LKQ leads the industry. And it’s being recognized by professional investors as well; over 160 mutual funds own the stock. We like the way management has kept after-tax profit margins at 6% or better over the past three quarters, a sign that efficiency is improving. We like the recession-proof aspect of the industry. And we like the action of the stock. But we don’t particularly like the recently reduced earnings estimates or the fact that the stock just split two-for-one, which often occurs near tops.
Technical Analysis
LKQX came public at 4 (split-adjusted) in 2003, and had climbed to 12 by early 2006, when it built a 17-month base at that level. It finally broke out in July 2007 (it appeared here in August) and then proceeded to run all the way to 24 by late December. A correction then took it down through its 50-day moving average to support at 19. And last Friday, the stock popped up above its 25-day moving average! Rather impressive.
LKQX Weekly Chart
LKQX Daily Chart
(MATK)
Why the Strength
Martek Biosciences is making its first Top Ten appearance, boosted by a turnaround in its core business. The company makes and sells “life’sDHA”, a vegetarian source of the omega-3 fatty acid DHA, which has been shown to benefit brain, eye and heart development, especially in infants. Because of that, Martek’s additive has been a big seller with makers of infant formulas and foods – for example, the firm recently inked an exclusive ten-year supply agreement for Abbott Laboratories’ food divisions. The firm is also diversifying into other areas (its DHA is being added to certain Beech Nut cereals, Minute Maid fruit juice and even some animal feed products), but infants are where the money is. The company has been plagued by execution issues in recent years, but now a turnaround is underway – sales and earnings have picked up steam the past two quarters, and the quarter ahead looks good. All told, we like it, although management’s checkered past makes this a more speculative play.
Technical Analysis
MATK just hit bottom in March and May of last year, so the upmove is somewhat fresh … but also less proven. The good news is the stock formed a new base late in the year, with two powerful volume clues in December, a very tight two-week pause around year-end, and a nice breakout this month. MATK did get yanked lower in last week’s market debacle, but overall, it’s a good pattern. If you’re game, you can buy around 30 and keep a tight stop in place.
MATK Weekly Chart
MATK Daily Chart
(MLNM)
Why the Strength
Millennium’s drug development approach is remarkable for its foundation in cutting-edge genetics research. The company develops therapeutics based on an advanced understanding of the molecular progression of diseases, producing drugs that fight cancers and inflammations at the molecular level. Working at this level also means therapies can be “personalized” for specific patient populations based on differences in their DNA. The immediate benefits of personalization are more effective treatment regimes and a lower incidence of serious side effects. Right now, sales of oncology drug Velcade account for 45% of Millennium’s revenues. Velcade is FDA-approved for treatment of multiple myeloma (a cancer of the white blood cells) and mantle cell lymphoma in patients who haven’t responded to other therapies. Other applications are currently in Phase II and III clinical trials. Millennium’s development pipeline also includes a number of drug candidates for treatment of inflammatory diseases like asthma, multiple sclerosis and rheumatoid arthritis, diseases that are currently treated only at the symptomatic level.
Technical Analysis
MLNM was a huge winner back in 1999-2000; it soared from 10 to 90! But then, like most stocks, it gave a lot back, and today it’s still working to get back to that old high. Last fall the stock climbed from 10 to 16 (it appeared here on December 10 trading at 16) and now it’s working to break out above that level. There’s no selling pressure yet, which is impressive given the market. If you buy, keep a tight stop under 14.
MLNM Weekly Chart
MLNM Daily Chart
(PAAS)
Why the Strength
While gold prices are getting the headlines, the “other” precious metal is threatening to follow in the yellow metal’s footsteps – silver prices are just now breaking out of a year-and-a-half long basing period, topping $15 per ounce this month. That’s helping Pan American Silver, a Canada-based company that has operations around the globe, including in Peru, Mexico, Argentina and Bolivia. The recent results are encouraging (third quarter production rose 38% from the prior year, thanks to a couple of new projects, boosting sales and earnings nicely), but what’s most impressive is that management has cranked out twelve straight years of production growth, and is targeting 25 million ounces of output in 2009, up from an estimated 17 million last year. In other words, this is a true growth company, and when you combine that with potentially higher silver prices, the bottom line could get a big lift in the quarters to come. We like it.
Technical Analysis
PAAS has actually been in a general, choppy uptrend for the past few years, thanks to solid underlying business trends and uptrending silver prices. But the last few months have surely shaken out many weak hands – last August’s huge plunge did the trick. PAAS recovered nicely after that, briefly hitting new peaks before backing off in November and early December. Now the stock is knocking on the door of new highs. We feel it will eventually get going, but the market will have a say in the meantime. Buying a little in the mid 30s could work out … just be sure to keep the stock on a tight leash if you do.
PAAS Weekly Chart
PAAS Daily Chart
(PPDI)
Why the Strength
Pharmaceutical Product Development is a contract research organization that helps pharmaceutical, biotech and medical device companies discover and develop new products and get them through regulatory review and onto the market. PPD has offices in 30 countries and more than 10,000 professionals on staff. The company makes money by helping its partners shorten the process of getting new drugs to a sellable state. As PPD’s motto states, “No one gets medicine into the system faster.” This kind of business has its occasional big payoffs in the form of milestone and approval payments, but it’s also steadier than most small pharmas; the company has been profitable every year at least since 1998, and revenues are still growing consistently. An optimistic 2008 profit outlook (analysts are looking for a 35% earnings gain) sparked buying that earned the stock its second Top Ten appearance. A small dividend ties a bow on this nice package.
Technical Analysis
PPDI’s first appearance in Top Ten came back in January 2003, just as the stock was going to sleep for a year. It then embarked on a steady advance from the beginning of 2004 to the middle of 2006, rising from 12 to 41 in the process. Then came a 17-month consolidation — a 15-month shallow cup with a two-month handle — before the January 9 breakout on the earnings guidance. After such a textbook basing pattern, PPDI looks to be worth a nibble, but look for a dip to support at 42 as protection from the negative market environment.