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Investment Ideas

With the market taking a breather here just shy of the all-time high I’m beginning to wonder if my year end forecast is going to come true. Initially I felt that given the fantastic run we’ve seen over the last few years, this year would be a lot choppier. The choppiness may be bad for broad market indexes but for me I see it as a very good thing. It’s a stock pickers market and well, I’m a stock picker.

Whether you look at the trailing 12 months, 6 months, or year to date numbers, the healthcare sector has been leading the market. More specifically, the biotech part of healthcare. It’s the companies that are out there coming up with new drugs to bring to the market. The innovators, the risk takers, the ones that swing for the fences. With spring training underway, put your helmet on, grab the Louisville Slugger and step up to the plate.

The biomedical and genetics industry we categorize these stocks into is one of the largest industries we follow at Zacks with 173 stocks in the space. The Zacks Industry Rank is near the top third of the 265 total industries. Filled with Zacks Rank #1 (Strong Buy) and #2 (Buy) stocks I decided to throw in another metric to find the best trading ideas. Part of the Zacks Rank equation is last quarter’s EPS earnings surprise. Stocks that have surprised earnings to the upside in the past have a higher likelihood of beating earnings in the future. I sorted stocks in this industry by EPS surprise last quarter and looked for top ranked stocks that trade on the big board or NASDAQ above $5.

The first stock I found is Zacks Rank #1 (Strong Buy) Emergent Biosolutions (EBS) a biopharmaceutical company that develops vaccines. Among their portfolio is the only FDA approved vaccine for the prevention of anthrax infection. Last quarter’s EPS surprise of 80% pushed this stock to the top of my screen.

Earnings estimates took a hit in early 2011 and were revised sharply downward. This pressure pushed the stock down from the $24 range it hit in 2011 down to lows almost half that amount in 2013. Looking at the price and consensus chart, earnings have strengthened considerably over the last year and in the last three months or so we are starting to see upwards revisions. This seems like the beginning of a great turnaround story stock.

Along with the earnings turnaround the technical picture has turned bullish. It’s always good to see a chart that starts in the lower right of the screen and ends in the upper right. The stock has been stepping patiently higher price level by price level over the course of the last year. Higher swing lows have marked the stock’s ascent. Right now the stock is threatening to enter a trading range for the short term. The 25 day moving average displaced to the right by 5 days (25x5 SMA) is below the stock price and moving sideways. After the aggressive run the stock made from an early November low of $18.28 to a January high of $25.70 a bit of a pause it to be expected. With the stochastics still very overbought at 89 I would wait for another pull back or a breakout above the January high to initiate a position. At this level your downside risk lies all the way down below $22, well over 10% below where EBS trades today.

With a Last EPS Surprise of 73.08%, Horizon Pharma Inc (HZNP) out of Northbrook, IL is the second stock on my screen today. The company focuses mainly on arthritis medications. Horizon has surprised to the upside three of the last four quarters. This Zacks Rank #2 (Buy) stock is set to become profitable in 2014 with EPS estimates rising from 6 cents to 10 cents over the last 30 days.   

Nothing says momentum like a move from $2 to $12.60 in six short months. The stock has been red hot as it breaks higher and higher. That doesn’t mean that we have missed the boat. Along the rise in the last six months, twice the stock has pulled back to support at the 25x5 SMA, giving better buying opportunities. Right now we are trading over 30% above the 25x5 at $9.54 and the stochastics are well into overbought territory. The next earnings report is slated for March 13, 2014 and could be another major catalyst to the upside. It’s never wrong to buy high and sell higher, keeping good risk parameters on this breakout could help carve a winning trade for you.

 Rather than spend millions of dollars on R&D hoping to find a pot of gold at the end of the rainbow, Medivation (MDVN) acquires promising technologies in the late preclinical development phase and tries to develop them cost-effectively. Medivation’s goal is to keep a portfolio of four to six programs at all times. Currently MDVN has drugs in its portfolio to deal with Alzheimer’s, Huntington’s disease and prostate cancer. Last quarter’s EPS surprise of 35.71% helped push this stock to a Zacks Rank #2 (Buy). MDVN reports today after the bell with consensus estimates of a loss of 11 cents while our Most Accurate Estimate sits at a 5 cent loss. MDVN has surprised to the upside by an average of 32.57% over the last four quarters.  

Another big momentum story is developing here as well. Rocketing from a mid-October low of $48.15 to the $85 level it trades at today the stock has lots of positive energy behind it. After reaching an all-time at $87.46 the stock pulled back to the low $70s before retesting the highs. Today’s earnings could be exactly what the stock needs to break through the previous high. I know I’ve said it before but it’s rare to see a stock blast though to $90 on heavy momentum without hitting $100 shortly after that. The stock currently trades well above the positively sloped 25x5 at $78.59 and the stochastics are well overbought at 88.35. I would look for this to be a breakout play after the news tonight. If earnings miss or guidance is bad then take careful note of price action should the stock pull back to the 25x5.

 

  

 

 

  

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