MORNING BID – Volatility, or lack thereof

Apr 23, 2014 13:06 UTC

It was another disappointing night for those looking for heavy volatility out of those reporting earnings – the trio of biotech stocks many were looking at, Gilead, Illumina and Amgen, had varying results, but they didn’t show the kind of bounce that some people were expecting.

In after-hours action Illumina was moving around 7 percent, short of the 11 to 12 percent move the options market was looking for, and Gilead was up around 3 to 4 percent, less than the six percent gain that the options market had factored in. Following the disappointment among those betting on volatility post Netflix-earnings — and the stock still moved a lot, just nowhere near as much as expected — it raises questions about whether some investors might start to temper expectations when it comes to overall volatility, because putting down money on a big swing has been a bit of a loser so far.

The earnings season is young, of course, so there’s still time and lots of momentum stocks out there that can surprise on the upside or downside, so there’s lots to come. The most notable, of course, is Apple, due out after Wednesday’s close. Some positive analyst revision activity of late suggests that the company’s results could surprise on the upside, even if this quarter is generally a transition one for the most valuable U.S. company because it’s a time when it is gearing up for new products later in the year.
What will be notable to watch are the parade of results that lean on the snow as a crutch for an overall poor performance.

Embattled retailer bebe showed some of that with their warning on Tuesday. While weather may have had something to do with it, it’s more notable that the retailer has posted losses for six straight quarters and their EBIT margins are of course negative when lots of their peers are still doing relatively well – be it Ann Taylor, the Body Shop, L Group, or what-have-you.

The myopic expectation that companies will get away with saying the snow is the cause of all their problems is on a par with Olaf, the snowman from Frozen, and his optimistic expectations for what life would be like for a snowman in summer. (Let it go, folks. Let it go.)

Meanwhile, several sectors including industrials and transports are hitting all-time highs again. It appears to be only a matter of time before the S&P 500 rebounds to its all-time high and puts it in striking distance of moving past 1900, a sign of health in the economy even as there are concerns about China’s growth percolating within the likes of IBM’s report and next week’s US GDP figure isn’t going to come in all that great either.

Where’s the juice coming from? As Reuters correspondent Caroline Humer pointed out in a story overnight, for health care names it’s from M&A activity that culminated in the Valeant bid for Allergan, one that Mike O’Rourke of JonesTrading compared unfavorably to the MCI/WorldCom deal all those years ago that represented the apex (and the nadir, really) of the telecom M&A boom of the late 1990s.

Big-cap pharma has been left behind a bit when compared with biotech – the biotech names are up about 125 percent in the last two-plus years even with the recent selloff, while the pharma giants have gained about 55 percent. The thing is, the latter gain is still pretty solid, so there’s that.

MORNING BID – Biotech swings into earnings

Apr 22, 2014 12:48 UTC

Earnings get a bit less boring with a slew of biotechnology and medical device names out Tuesday, most of them after the closing bell.

Among those that will be most watched are Gilead Sciences, sort of the linchpin of this whole selloff the market’s been dealing with in the last several weeks, Illumina, one of the market’s biggest high-flyers in the last couple of years, and Amgen, which compared with these biotechnology names might as well be a telephone company in terms of volatility and overall sex appeal.

The declines in Gilead and other biotech names have been striking, as the stocks have underperformed the S&P 500 by double-digit levels since the full-scale run out of these names began late in February. Unfortunately the options market suggests the action after the closing bell (or even through the end of the week) might be a bit underwhelming. Ryan Detrick of Schaeffer’s Investment Research notes that the amount of bullish call buying compared with put-buying (bearish bets) in both Amgen and Gilead ranks at about the 55th percentile over the past year.

For Gilead, that means over the last 10 days we’ve seen about 218 call options written for every 100 put options, a healthy but unspectacular bit of action that points to generally bullish tidings. It’s certainly not something that suggests worry among investors after Gilead has been one of the market’s duds since late February, and especially since mid-March when lawmakers asked the company to justify its $90-gazillion price tag for its hepatitis C drug.

The at-the-money straddles (buying a call and put option at the strike price closest to the current price) suggest a move of about 5 to 6 percent by the end of the week, which also isn’t that exciting (this is biotech we’re talking about).

The more interesting action looks like it’s coming out of Illumina Pharmaceuticals, which has been basically hammered since it started to sell off with the rest of the momentum names in February – so much so that Goldman Sachs says their underperformance compared with the S&P 500 is enough to warrant a look as they might end up exceeding estimates. That would certainly put a spring in the stock’s step.

Parsing out what the options are saying here is a bit more difficult; Illumina doesn’t have any weekly options, so you’ve got to judge by the monthly contracts that expire in mid-May. Those are real bearish – Schaeffer’s shows a 10-day put-to-call ratio that’s more bearish than 98 percent of readings over the last year, so people clearly aren’t enamored of the selloff in this name and are protecting themselves against more hell to pay in this one.

The mid-May straddles suggest a move of 13 percent by the middle of next month, so that’s not all that reliable a guide for what’s going to happen this week, unfortunately; it just suggest more volatility.

“You can almost say Illumina is a typical biotech; Gilead is in the middle, a little more established, and then Amgen which does not really have a biotech tone to it with the option premium,” said William Lefkowitz, chief options strategist at vFinance Investments. (Amgen’s a pretty staid one in terms of options. The move expected is 3.4 percent by the end of this week, and it hasn’t been crushed the way other names have been, plus, its an $89 billion market cap company, or four times the size of Illumina).

MORNING BID – A week overflowing with earnings

Apr 21, 2014 13:00 UTC

Markets head into a busy week of earnings with a bit of uncertainty around whether the major companies out there will help continue the momentum in the stock market that was regained last week after some weeks of lackluster trading.

As put in Reuters’ Wall Street Weekahead, there’s something for everyone this week, from the old-line tech companies like Microsoft that have been the recent beneficiary of the switch away from the high-flying names like Netflix and Facebook (which also report this week) to some big industrial names like General Motors – which has plenty of its own issues with the recall – to Dow components like AT&T and McDonald’s.

So far, earnings have been a mixed bag. There have been some good results from a few Wall Street banks, weak numbers from others, and results out of the likes of IBM and Google that fell short of expectations as well. The fact that old tech names like Microsoft and Cisco are up on the year even as the Twitters of the world are down on the year does suggest more attention to alpha generation in a way that didn’t exist in 2013.

With that in mind strategists for the most part have been trying to point more specifically to stocks that appear undervalued or at least less-loved by the analyst community. Three of those reporting this week are Microsoft, DuPont and Travelers, which Credit Suisse quantitative strategists identified as contrarian picks as analysts in general have been more enamored themselves of the momentum stocks that carried the day in 2013.

All three of those, as well as a few others, will report in a week that will see about one-third of S&P 500 names report for the quarter. But what will be interesting again to see (and here we are again in the equity market looking ahead to the future) is whether second-quarter growth figures recede or if they’ve hit a trough earlier than is usual, which may be happening. After Friday’s spate of generally strong results, second quarter year-over-year earnings growth estimates ticked up to 8.1 percent from 8.0 percent. That’s still down from 8.4 percent at the beginning of April, and much more than on January 1, but if it represents the nadir for this period, that’s a good sign for those concerned about long-term growth in stock prices and for economic demand.

A number of sectors have seen a generalized improvement in their estimates (consumer discretionary stocks are still seeing estimates cut), which points at least to optimism going forward. Dan Greenhaus of BTIG notes that a handful of notable names have seen strong year-over-year revenue growth including Baker-Hughes, United Rentals, Pepsico, and Sandisk. The latter cuts against the grain of those forecasting weak results from companies with large Chinese exposure.

Make no mistake, earnings will dominate the week. Here are a few other names coming to whet one’s appetite: Gilead Sciences, Amgen, Alexion, and Celgene, all biotech names that have been favorites at one time or another, and of course Apple, the largest U.S. company by market value. If year-over-year expectations improve by the end of the week, that’s certainly a promising sign for the current quarter we’re living in.

MORNING BID: Running on Empty

Mar 25, 2014 12:44 UTC

The most interesting developing trend in the U.S. equity market has been the recent stumble in the biotech and momentum-oriented names, be it Gilead Sciences, Biogen, Netflix or a few others. The biotechs were a group often cited as having entered a “parabolic” stage, which in market parlance refers basically to “going up and up and up in a straight line.” The move wasn’t anything on the order of the homebuilders during the housing bubble of 2006 to 2007, or the tech giants during the latter stages of the tech run – a 300 percent gain versus 700 to 800 percent gains back in the other cases. That doesn’t mean we won’t see an ongoing breakdown, though some of the selling abated late in the Monday session.

But the Nasdaq Biotech Index has now dropped sharply through its 50-day moving average. More worryingly, the Nasdaq Composite sits just five points above its 50-day moving average of about 4221, and the Nasdaq 100 barely managed to close above that level as well on Monday. “Three consecutive down days have been a rare occurrences in this tape,” said Michael O’Rourke, chief market strategist at JonesTrading. “That makes the intraday lows registered today in both single stocks and the indices important support levels to watch. Violations of those levels should be problematic.”

The thing is, there aren’t a lot of catalysts to push those stocks – or those of 3-D printer stocks, like 3D Systems, which is down 38 percent year-to-date, or Xone Systems, down 42 percent for the year, and Voxeljet, down 35 percent on the year. Some of this reflects concerns about slowed economic growth, or perhaps that investors have had their fill of these types of stocks when the market is facing quite a bit of uncertainty. A number of strategists have pointed out how the Federal Reserve’s reversal of its bond-buying campaign hasn’t unduly affected the equity market. That’s true in the broadest sense, that major indexes like the S&P still track pretty close to record levels despite valuations that are a bit dear to many.

But one area where you see the reaction to less money flopping around is that it runs away from names that have had their way for a while.

Take 3D Systems, which StarMine sees as worth about $15.64 a share rather than the current $57 level that it’s bouncing around. Among the biotech names that have been running into the sun (running on…runnin’ on empty…), Biogen’s intrinsic value is about $183.90 per Starmine, not the $318.50 place it has been in. Alexion trades at $159 a share, rather than the $79 Starmine figures based on valuation of expected growth models over the next decade, and Acorda Therapeutics is a $13 stock rather than a $38 stock.

Robert Sluymer, technical analyst at RBC Capital, said “we expect many of the growth leadership names to back and fill well into Q2, possibly later before they are suitably oversold/timely from an intermediate-term” basis. He notes that the stocks are tracking the flattening in the Treasury yield curve that would seem to support a heavier lean on defensive names, at least in the near-term.