The good news is that we have a new intermediate-term market-timing buy signal. The bad news is that our long-term market-timing indicator remains negative—and that markets as a whole remain in disarray, with no clear leaders.
Thus, some caution is still warranted, at least until the end of the year, as tax-selling forces will hold some stocks down.
But today’s recommendation is not one of those. Instead, it’s a little-known biotechnology stocks with big connections and great growth prospects.
Cabot Stock of the Week 225
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The good news today is that last week’s market surge—in the wake of the Fed’s decision to lean neutral—triggered a buy signal from our intermediate-term market-timing indicator. The bad news is that our long-term indicator remains negative. But the buy signal is a step in the right direction, as it does indicate that the selling pressures of October-November have passed, and it increases the probability that December could deliver a solid uptrend. So, in choosing today’s recommendation, I went very aggressive in adding a stock that was originally recommended by Tyler Laundon in Cabot Small-Cap Confidential. Here are Tyler’s latest thoughts.
Arena Pharmaceuticals (ARNA)
Arena is a biopharmaceutical company that develops novel, small-molecule drugs with optimized receptor pharmacology designed to work across a wide range of therapeutic areas.
While some drugs take an elephant gun approach, Arena’s drugs work more like a sniper rifle, just targeting the desired receptors found on cells in humans. This targeted approach should improve efficacy and decrease negative side effects.
Arena has a pipeline of assets with blockbuster potential. It also has a few legacy products that bring in a little cash. The catch for investors is that time-to-market for new treatments isn’t short. We’re looking at 2022 before a product hits the market, so you’ll need to be patient. That said, Arena’s market capitalization of $2 billion illustrates the potential! And the company is sitting on $1.3 billion in cash, so there’s little risk of shareholder dilution.
Here is a table of Arena’s pipeline assets, followed by a few details on each.
Let’s start with ralinepag, an oral prostacyclin being developed for the treatment of PAH (high blood pressure in the arteries of the lungs). Ralinepag looks at least as good as the competition and is moving into Phase III trials now. Data should start to come out in 2021. Nearer term, Arena is planning a trial to demonstrate switching from Uptravi (Actelion) to ralinepag. We could see marketing applications in 2021/2022 if all goes well.
Arena recently announced it would out-license ralinepag to United Therapeutics (UTHR) for up to $1.2 billion, plus royalties. This news drove shares up over 20% the day after the announcement, in part because United is already in the PAH market with Orenitram, the only FDA-approved prostacyclin analogue in a tablet form. This deal can be taken as a partial admission that ralinepag is likely a more valuable asset.
The deal also highlights ralinepag’s mid-development stage value. Arena gets an $800 million upfront payment, $400 million in potential milestone payments, and tiered low double-digit royalties on global sales. The transaction also gives Arena a slush fund to help move other assets through the development pipeline. Let’s talk about those.
Etrasimod is an S1P1 modulator being investigated for the treatment of Ulcerative Colitis (UC), Crohn’s, Primary Biliary Cholangitis (PBC) and Atopic Dermatitis (AD). Eventual peak sales potential is likely higher than ralinepag due to the number of possible indications.
The company’s most advanced programs are for UC and Crohn’s. Data from these trials should start to come out in 2019/2020, and we could see NDA filings in 2022, with treatments hitting the market in 2023. Data from the Phase II for PBC should be out sometime in 2019.
Then there’s olorinab, a CB2 receptor agonist moving into controlled Phase IIb trials in both Inflammatory Bowel Disease (IBD) and Irritable Bowel Syndrome (IBS). This is a non-opioid treatment that would be a welcome option for patients and physicians.
Finally, APD418 is being investigated for the treatment of decompensated heart failure (DHF). It has been tested on canines, and Arena plans to move into toxicology studies with data readout by the end of 2019.
This is what Arena’s chart looks like.
It’s a little messy but not atypical compared to other development-stage biotech stocks. The high-volume rally in March on news of favorable Phase II trial data for etrasimod in UC was actually the last hurrah of a yearlong uptrend, and since then the stock has been digesting that gain, with periodic surges on good news. Right now, the converging moving averages mark a decent entry point.
This is an exciting story for the patient investor who is comfortable with some stock volatility. If that’s not you, consider sitting this one out. If it is, start small and average in. There’s no rush here.
Arena Pharmaceuticals (ARNA)
6154 Nancy Ridge Drive
San Diego, CA 92121
858-453-7200
http://www.arenapharm.com
CURRENT RECOMMENDATIONS
In my experience, the average amateur investor makes three common mistakes. First, he has no long-term plan. Second, he is too easily influenced by the news of the day. And three, he doesn’t use charts to his advantage.
Happily, the various Cabot analysts each have a plan; they know to take news with a grain of salt; and they are expert chart-readers. And the result for each of them, in the long run, is success rather than failure. Which is not to say that there aren’t individual failures, especially at a time like the present. But experts know that these times will pass and they work hard to ensure that losses are minimized and upside opportunities maximized—in part by continually tweaking their portfolio by dumping “bad” stocks and buying “good” ones.
Today, in this portfolio, that means selling one stock. Details below.
Alexion Pharmaceuticals (ALXN), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. The stock has been in a wide and loose trading range for the past two years, and we bought recently at the lower end of that range. In her latest update, Crista wrote, “Alexion is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Alexion will present at the Evercore ISI Healthcare Conference on November 27. Analysts expect an updated report on ALXN1210 studies in the first quarter of 2019. Analysts expect EPS to grow 30.0% and 14.2% in 2018 and 2019. The 2019 P/E is 13.6. ALXN has solid seven-month price support near 115, and a wide trading range. Traders and risk-tolerant growth stock investors should buy ALXN now.” BUY.
Canada Goose (GOOS), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, is off to a good start, and capable of breaking out above its old high of 72 any day. Mike recently wrote, “We think this could be the next ‘hot’ high-end brand, similar to Lululemon and Michael Kors in recent years.” BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, continues to pull up and away from its October bottom as investors conclude that the company is serious about putting aside old technology (and models) and embracing new ones. In her latest update, after reviewing GM’s planned plant closings and layoffs, Chloe wrote, “GM will also discontinue some smaller models to focus on more popular and profitable trucks and SUVs as part of its restructuring, which is expected to save the company $6 billion by the end of 2020. The cost savings will help GM fight back against higher tariff costs and waning auto demand in the U.S. Longer-term, GM’s investments in autonomous cars and ridesharing fleets are promising. The stock looks healthy; it gapped up on great volume four weeks ago, built a base around 36, and is now trading at its highest level since July.” BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, has pushed strongly higher over the past two weeks, and today as the broad market sold off, the stock joined the crowd. However, the long-term trend of this small innovative credit card company remains up. HOLD.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, and now in her Growth & Income Portfolio, has had a fabulous two weeks, in part because of an encouraging earnings report. In her latest update, Crista wrote, “GES reported third-quarter adjusted EPS of $0.13 this week when analysts expected $0.16. Third-quarter revenue of $605 million beat the consensus estimate of $598.5 million, at the high end of the $576-$608 million estimate range. CEO Victor Herrero said that ‘adjusted operating margin [finished] higher than our expectations despite unexpected currency headwinds. … We still have a lot of growth opportunities in Europe and Asia; the results in the Americas retail business have continued to show improvement; and we see more opportunities to reduce costs, particularly in logistics.’”
Crista continued, “During the quarter, Guess? recorded a charge of $42.4 million – or $0.52 per share – in anticipation of a fine from the European Commission related to an investigation into a violation of European competition rules. The stock reacted well to strong business prospects in fiscal 2020 (January year end), including ongoing margin expansion. Analysts lowered their 2019 earnings per share (EPS) estimate and increased their 2020 EPS estimate, now reflecting 47.1% and 31.1% EPS growth, respectively. The 2020 P/E is 16.6. The company carries minimal long-term debt.
“GES could appeal to value investors, aggressive growth investors, and dividend investors. The stock has been in a trading range since late March, between 19 and 25. GES recovered quickly from the first of this year’s two major stock market corrections and did not fall out of its trading range during the second correction. In the very short term, I expect the stock to rise to 23, then pull back and rest before heading to 25 thereafter. With a 4% dividend yield, GES is an excellent investment at the current price. Patient investors might get a chance to buy GES on a brief pullback below 21.75.” HOLD.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and now it’s one of the Heritage Stocks in this portfolio, which means that I’ll hold through periods of poor performance to benefit from the positive long-term fundamentals—and I did hold as Chinese stocks trended down for most of this year. But HTHT bottomed at the end of October, buyers stepped in strongly in mid-November, and just yesterday, the stock gapped up on huge volume on the optimistic news about the U.S.-China tariff situation. HOLD.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, remains well above its extreme low of 32 of two weeks ago, which matched its lows of May and July, so that looks like the floor for the stock. But the big question of last week remains—whether buyers will show up soon or whether the stock will languish for months. Fundamentally, the story remains quite sound as Match dominates its industry, and the buying volume over the past week has been slightly positive, so I will continue to be patient and see what the stock can do. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, hit another new high today! In last week’s update, Chloe wrote, “McCormick just increased their dividend by 10%, to 57 cents per quarter, bumping the stock’s yield up from 1.4% to 1.5%. The bump marks McCormick’s 32 consecutive years of dividend increases. The stock looks healthy; MKC has spent the past three weeks consolidating, after rallying to new 52-week highs earlier this month. MKC has been tireless in recent months, but it isn’t overextended—the 50-day line is just down at 140, and the current uptrend just started in June. McCormick makes spices as well as numerous brand-name sauces, seasonings and condiments. Long-term investors can continue to Buy on pullbacks.” HOLD.
MedMen (MMNFF), originally recommended by me in Cabot Marijuana Investor, has the potential to be the leading marijuana retailer in the U.S., so the long-term prospects are especially bright. Short term, however, the stock continues to look terrible. The first problem, as I mentioned last week, was a botched fundraising deal that led to the CFO’s resignation. The bigger problem—or at least more widespread—is that marijuana stocks have been cooling off since mid-October when Canadian legalization kicked in, and there’s no telling how long this phase will last. But the long-term picture for both the company and the industry remains bright, so I’m going to continue to hold patiently, thinking that the worst the stock can do is fall to 2.85, where it bottomed in August. HOLD.
MiX Telematics (MIXT), originally recommended by Paul Goodwin, is the most thinly traded stock in the portfolio, and the chart looks great! The South African transportation fleet technology stock blasted off in late October and continues to build a base around 18. In his latest update, Paul wrote, “MIXT continues to act just fine, holding in a tight-ish range (17 to 18.5) following its post-earnings ramp (13.5 to 19) a month ago. If you own some, just sit tight for now; if you’re not yet in, we’re fine starting a position here and (hopefully) buying more should the stock and market rise.” BUY.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, bounced off its 200-day moving average back in October and November and has been working its way slowly higher since. In her latest update, Chloe wrote, “STAG has been a good store of value and source of income during the last two months; the stock is trading in a tightening range around 26 and pays dividends monthly. The industrial REIT owns properties in 37 states that are mostly used as warehouses and fulfillment centers. High-yield investors can Hold.” HOLD.
Synchrony Financial (SYF), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, continues to trend lower; in fact it’s now probing its lows of late 2016. Crista remains committed to the stock on a valuation basis, even though she expects no progress from the stock for the rest of 2018, but I fear it could lose substantially more ground by year end, so I’m bailing out now. SELL.
Teladoc Health (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, has a great long-term growth story and we have a big long-term profit as well, so we were able to give the stock some rope as it corrected down through its 200-day moving average—falling all the way to 49 at the extreme. But it rebounded strongly after that, having shed all the weak hands, and now it’s back above its 200-day moving average, working to build a base. Fundamentally, I continue to have great hopes for the company as it leads the telemedicine industry in the U.S. HOLD.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio, and I’ll continue to hold as long as I believe the company has great growth potential. Fundamentally, the company is well on the path to growing profitability, regardless of what politicians do with tariffs and tax credits, while technically, the stock is inching closer to its all-time high of mid-2017 at 390. When it eventually breaks out to a new high, that will be a great sign. HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit record highs three weeks ago, but since then it’s been on a normal pullback, and now it’s looking to find support at 290, the level that served as resistance back in September. This is still a healthy pattern, but I’ll downgrade it to hold until I see signs of buying power. HOLD.
WNS Holdings (WNS), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, is an Indian outsourcing firm with a solid growth story. The stock remains well above its lows of October, but there’s little sign of any real buying power. In his latest update, Paul wrote, “WNS doesn’t look bad … but it’s not strong enough for a Buy rating despite the improvement from market timing. We think the steadiness of the firm’s business should eventually lead to another leg up, but we prefer to wait for a push above resistance near 51.5 before jumping in.” HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED December 11, 2018
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