For those who are newer readers, my general ethos is avoid stocks around earnings - while many get a kick out of the gambling associated with piling into stocks ahead of earnings hoping for the huge win - I find it a very risky game that has more bad outcomes than good. But the big moves in the small percentage of situations keep luring the gamblers... err investors... back to this (ahem) strategy.
Kendle International (KNDL) reports on the 4th and I am going against my normal rules to add quite a bit of exposure ahead of earnings. We've outlined this week how the contract research organizations have been a total disaster of late [Oct 28: Contract Research Organizations Taken to Woodshed] as there are now worries about both the US dollar and pharma companies trying to save money any way they can - including less outsourcing of research.
Since costs are generally higher when they do the work in-house, this seems backwards, but no one said companies were rational. They might also just cut back on drug R&D altogether if credit conditions continue to be poor and funding remains difficult. Those are viable issues, but the stocks have now priced in a ton of bad news. Parexel Interational (PRXL) which had the most blatant warning, along with some company specific issues, has been cut in half in the past 7-8 sessions. Kendle International meanwhile, simply by being in the same industry, also has been cut in half. I don't necessarily expect great things from Kendle as there do appear to be headwinds in the industry, but it is now valued under 10x 2008's estimates, which is cheaper than the company which had the major warning in the sector, PRXL.
Under a portfolio management view, with the understanding I sold long exposure all last week, I am willing to take a flier on this one and do some buying on the long side. #1 the stock has been trashed as if it had the earnings warning, even though it has not and #2 the stock has not participated in the rally - so if this rally has legs (which I have doubts until we break over S&P 985) stocks that have yet to rally should pick up steam. This could also be viewed as a transfer of long exposure from stocks at resistance to those nowhere near it - many of the stocks I sold off now have run up to important resistance levels and face some work to do to continue up. Kendle, at $18, is a full $11 away from any serious resistance if it should provide some reassurance on the call.
I cut some Kendle earlier this week at higher levels during the obliteration of the sector but am now taking it from a 0.9% stake to 2.9% stake. I am also adding to Life Sciences Research (LSR) - same boat, same sector, same chart, same valuation in the lower $16s and taking it up to a 1.4% stake from 0.4%. From $16, the 20 day moving average is way up at $23.
If the market "melts up", I am poorly positioned as are many, so we'll all be scrambling to add long exposure from here. Funny - a week ago to the day the S&P opened limit down in premarket and no one wanted stocks - now my normal sources of info on the web are all rampant bulls. Human emotions - they are a funny thing. Any real move should have sustained legs, so while it is not fun to miss the beginning, we can catch up later if there is any duration to it.
A market let by consumer discretionary is simply not one I believe in - these are simply oversold stocks rebounding from stock prices that signaled the US was shutting down its doors for half a decade. But the action still looks suspicious to me with these huge 2-3% moves in 10 minute spurts. But we're only 8 S&P points away from my 985 point and in this market that can be done in 90 seconds.
Disclosure: Long Kendle International, Life Sciences Research in fund; no personal position