In Search of a Bull Market
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Have You Seen This?

 

In Search of a Bull Market

 

It’s an old stock-market saw – there’s always a bull market somewhere. Even though the S&P 500 is down some 16% year to date, it’s easy to point to commodity and oil stocks and say, “See? There’s your bull market.”

 

Now, I’ve been warning my readers away from Big Oil stocks for over 6 months. But my recommendations of stocks like oil services company like Graham Corp. (NYSE:GHM) have proved that the ever-present bull market hasn’t completely become a cliché.

 

However, I have something else in mind. Biotechs. Believe it or not, in the midst of the bank meltdown, runaway inflation, and U.S. recession, the Biotech HOLDRs (BBH) is at a 52-week high. Over the last year, the BBH

has established solid support at $160, has broken a strong resistance point at $175, and is currently working on a secondary resistance point at $180.

 

With an important sector benchmark like the BBH showing strength, it gives the impression that biotechs are breaking out all over. Well, yes and no.

 

78.9% of the BBH is dominated by three biotech heavyweights – Affymetrix (Nasdaq:AFFX), Genentech (NYSE:DNA), and Gilead Sciences (Nasdaq:GILD).

 

That’s really not enough of a sample to draw any firm conclusions about the overall strength of the biotech sector. Still, where there’s smoke, there’s often fire…

 

                                        Follow the Money

 

About six months ago, my stock research analysts put the finishing touches on a stock-picking machine for my advisory letter, Growth Report. Without going into too much mind-numbing detail, this machine ranks 3,500 small cap stocks on based on 88 criteria every day.

 

The stocks at the top of the list have received the highest ranking based on relative sector strength, relative valuation within the sector, profitability, growth prospects and several other fundamental metrics, with some technical metrics like momentum and expanding volume thrown in to identify stocks that, in addition to being attractively valued, are actually being accumulated.

 

As you might expect, the top rankings have been dominated by oil services and exploration companies for months. But there have been a few surprises. We had great success with a few solar stocks back in March. Canadian Solar (Nasdaq:CSIQ) jumps to mind. And there have been a few tech stocks like Netezza (NYSE:NZ). We even caught a 20% run on Green Mountain Coffee Roasters (Nasdaq:GMCR) back in May.

 

Like I said, there have been some surprises.

 

About two weeks ago, we started getting a new surprise. You guessed it: biotechs. And since the machine only ranks small cap stocks, it wasn’t picking up on the strength of BBH stocks. Something else is going on. And it could be the fire to the Biotech HOLDR’s smoke.

 

                                         Why Biotech?

 

Pharmaceutical stocks are often considered to be recession-beaters because diseases aren’t economically sensitive. But again, there’s something else going on. Biotechs with products in the pipeline are moving higher.

 

If you’re looking for a sector that has the potential to change our very standard of living at a most fundamental level, there aren’t many sectors to choose from.

 

Alternative energy is one. There will be some huge winners in this space. But valuations can be extremely rich. And there’s still not much consensus about which technologies will have staying power.

 

Two years ago, as President Bush was throwing his weight behind ethanol, some of those stocks might have looked like slam-dunks. A quick look at those ethanol stock charts today would give even the most intrepid investor the heebie-jeebies.

 

Yeah, sure, I suppose there are a few tech stocks out there with life-changing potential. But somehow, I just don’t get fired up by iPhones and NetFlix set top boxes. I guess I’m just a dotcom cynic now. 

 

Oil exploration won’t change our lives dramatically, though there are still some interesting profit opportunities in Canada’s oil sands and in America’s own Bakken oil shale regions.

 

                                       Follow the Light

 

Perhaps in these dark economic times, investors are turning a hopeful eye to the one sector that can still fire the imagination that better times lie ahead – biotech.

 

It seems every day, scientists isolate the genetic cause for another disease. Recently, scientists announced that they’ve discovered a genetic cause for the processing quirks that result in autism.

 

If you didn’t know, autism now affects 1 out of every 162 kids in this country. It’s a virtual epidemic. Trust me on this one, parents of kids on the autism spectrum will pay dearly to get their children back.

 

Just today, scientists say they may have isolated a gene associated with a predisposition toward violent crime.

 

Scientists have already managed to turn ordinary cells into stem cells. So I may not have to rely on a Democratic Administration to push stem cell research forward. And for aging Americans, that’s probably a more pressing issue than hydrogen fuel cells.

 

                                      Two Biotech Movers

 

There’s plenty of money on the sidelines, just waiting to be put to work in the stock market. And you won’t find many medium-term investment stories more compelling than biotech.

 

Don’t worry. I’m not going to leave you hanging. Here are two of the stocks my stock-picking machine has turned up.

 

The first is Emergent BioSolutions (NYSE:EBS). Emergent BioSolutions has the only FDA-approved vaccine for anthrax. The company is about one-quarter of the way through a $448 million contract with the U.S. government, so cash-flow shouldn’t be a problem anytime soon.

 

EBS rounded out its anthrax suite with the acquisition of a couple other Phase II drugs. It has a typhoid vaccine in Phase II trials. Plus, it’s a acquiring a recombinant flu vaccine called FluBlok that’s in Phase III trials.

 

Biotechs always carry risk that trials won’t demonstrate the efficacy of a future product. But with a forward P/E of 13, investors seem to be giving EBS the benefit of the doubt at the present time.

 

The second stock is Somanetics (Nadsaq:SMTS), a medical device maker. Somanetics makes the INVOS System which monitors blood oxygen levels in at risk patients. It also makes the CorRestore system which is used in cardiac repair and restoration.

 

I won’t pretend to understand exactly what that means. Quarterly revenue grew at a 39% clip last quarter and earnings grew 26%. The company is doing $42 million in sales and has a strong cash position of $51 million and no debt.

 

The forward P/E is a manageable 25. And the company has been aggressively buying back stock. Perhaps best of all, analyst earnings estimates for this year and next have been revised higher twice in the last two months.

 

Maybe it’s a little early to start talking about a bull market for biotechs. But if my stock-picking machine keeps turning up biotechs, Growth Report readers will be among the first investors to get on board.

 

Ian Wyatt

Chief Investment Strategist

Growth Report

 





Posted 07-23-2008 11:40 AM by Ian Wyatt
Attachment: InvIns.GR..doc

Comments

MadeOmoney wrote re: In Search of a Bull Market
on 07-30-2008 10:28 AM

Great stuff!