Seeking Opportunity: Creating A Plan Of Investment Action

by: Brian Nichols

Last Monday during a long interview on CNBC, billionaire and Berkshire Hathaway CEO, Warren Buffett, said that stocks are still historically cheap, but not as cheap as they were four years ago. This was his response to a question regarding the best investments right now. Buffett believes, like many, that equities are better and cheaper than government issued bonds, junk bonds, commodities, real estate, etc. Yet, despite this notion, there is still a presence of uncertainty as value is becoming much more difficult to find within the market.

With that being said, there are a lot of people with feelings of confusion regarding investment and trading, and need a plan of action. People don't know whether to jump in, or wait for a better price, or if they should stay out of the market altogether.

Unfortunately, it is human nature to lust for gains, or see money being made, and to try and chase those gains in hopes of making money. It is this fact that has some believing that U.S. equity markets could trade higher, as everyday people see, read, and hear about large returns and decide to invest in the market. But in this market, with it being so volatile and unpredictable, there are a lot of people who could get hurt and lose a significant amount of their life savings with this "trend-seeking behavior" Therefore, I am looking at three areas to help you determine your next move. I am looking at the market as a whole, I am looking at recent changes to my own holdings, and then I am looking ahead to the next week for opportunities that might be valuable to your portfolio.

A Look at the Market

It doesn't quite seem right that we aren't feeling the effects of the sequestration. In the past, our markets would pull back or fall significantly ahead of big government decisions, mostly due to a lack of leadership in Washington. This latest failure in Washington means that many billions of spending from the federal budget will be removed and will affect a lot of working class folks. Strangely enough, this did not impact our markets, as we continue to trade at all-time highs.

While Washington remains a joke and the markets march higher, the Fed continues to implement quantitative easing to keep interest rates at record lows. In a sense, our economy is operating like a recession, yet market sentiment remains high. It doesn't make a lot of sense, and has made finding value a very difficult task, as value investors fight the psychological urge to become momentum investors and capitalize on the uptrends in certain stocks such as Google (NASDAQ:GOOG), LinkedIn (NYSE:LNKD), and workday-stocks that are obviously overvalued compared to peers.

Aside from turmoil in Washington, the Fed trying to play peacemaker, and the overall measure of economic strength (the market) trading at all-time highs, everything else seems to be ticking along quite well. Sure, we don't know the outcome of the European meetings in Brussels, China's GDP target continues to tick lower to a target of 7.50%, and the nation's auto capital is near bankrupt after Michigan Governor, Rick Snyder, declared Detroit to be in a state of emergency, but as long as stocks tick higher these many issues are put on the backburner.

When you stop to think about everything, it may seem a little scary to invest in this market, and is yet another reason that you have to be both responsible and very careful before diving head first into the market. In fact it's probably better to have a plan. With that being said, let's look at how I am positioning my portfolio, with my most recent moves, for both safety and gains.

A Look At My Portfolio

A couple weeks ago I finished a series where I looked at different sized portfolios and adjusted goals and diversification based on the goals of those investors, based on cyclical and secular investments. Right now there is a lot of new money coming into the market, as everyday people see the markets trading higher and believe that now is the time to buy. However, as I explained above, now is when you have to be careful, and have a plan of action for diversifying your portfolio.

For the last month I have made a conscious effort to go through and trim many of my cyclical investments from my portfolio. The problem is that even secular stocks such as Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG) have become expensive. Therefore, I have focused much of my attention on buying stocks that will perform consistently, and are cheap, regardless of the market. I have focused much of my investment strategy around biotechnology, stocks that are cheap and are performing well in the market.

For the first time since January of 2012, I increased my position in Galena Biopharma (NASDAQ:GALE). A couple of weeks ago I had a conversation with an immunologist that was very eye-opening, and I now believe more than ever that the company will succeed in its Phase 3 trial, and is among the most undervalued in its industry. Furthermore, the stock has become consistent, and has found a level trading range. Last year it was the most volatile stock in the market; it was not unusual for the stock to trade with 40% swings in either direction in any given month. Yet despite its 30% return in 2013, the stock has stayed between $1.80 and $1.95 for several weeks. Consequently, I decided to buy an additional 2,000 shares at $1.90 and I believe that, regardless of what direction the market trades, GALE will trade higher throughout the year as investors await interim data on its Phase 3 trial without the fear of financing prior to data.

In addition to increasing my position in Galena, I also increased my position in Eli Lilly (NYSE:LLY), Gilead Sciences (NASDAQ:GILD), and Sarepta Therapeutics (NASDAQ:SRPT) in the pharmaceutical space. I first bought Eli Lilly back on August 8, 2012 at $42.88 and the investment has returned great gains. And although the stock has returned 42% in the last year, there is better value elsewhere. I remain encouraged by the company's pipeline and its ability to maintain sales despite the patent cliff that has hit the industry. In regards to Gilead, I was late to the party, not buying until December of last year. And although it is expensive, with a P/E ratio of 27.40, it is the best of the large biotech names with fast-growing drugs on the market with a very strong pipeline. Lastly, my decision to increase my stake in SRPT carries a little more risk ahead of the company's meeting with the FDA. However, with a market cap of $775 million, this is a stock that I believe could become the next Pharmacyclics (NASDAQ:PCYC) with an Orphan Drug that has sales potential of more than $600 million.

With Gilead Sciences, Eli Lilly, Sarepta Therapeutics, and Galena Biopharma, I significantly increased my position in biotechnology, a space that I believe will provide both gains and security regardless of market direction. However, the problem is that I only increased my position by buying stock in clinical development and large pharma. These four additions do not satisfy the third leg of biotechnology diversification, which is the aggressive growth portion of a portfolio. Thus, I bought two new stocks: Jazz Pharmaceuticals (NASDAQ:JAZZ) and Santarus, Inc. (NASDAQ:SNTS).

Jazz Pharmaceuticals (JAZZ) is not necessarily a "new" stock, as I have owned it on-and-off for many years; however, Santarus is a brand new position in a stock that I have let slip under my radar for the last two years. Both companies have marketed products, revenue growth of more than 60%, and are trading with forward P/E ratios of about 11.0. Hence, I believe that both are great companies to satisfy this portion of the portfolio, and fit nicely with my other position in NeoStem (NBS), Questcor Pharmaceuticals (QCOR), and Spectrum Pharmaceuticals (NASDAQ:SPPI).

Since January 2012 I have been hedging my portfolio with a large position in healthcare. Prior to February, the healthcare space made up 18% of my portfolio; but after recent changes, healthcare makes up almost 30% of my portfolio-a portfolio that is now 84% in equities compared to 89% in equities before (rest in cash). This strategy, including the addition of healthcare or other industries to create safety, was not discussed in the recent "new age" diversification series. However, this strategy along with other more advanced diversification strategies was discussed in my new book. While it would be impossible for me to fully explain the purpose and the benefit to this particular strategy in one article, the idea involves using the principles in the previous diversification series combined with those taught in my book to create safety and gains by being an opportunistic investor.

You may notice that I was previously more invested in cash, yet bought more stock. This implies that I sold out of large positions, which is correct. After noticing that Angie's List (NASDAQ:ANGI) was undervalued to its peers with the same level of growth, I bought it back at $11.13. However, I sold it on Thursday for a near 75% gain due to the fact that internet-based companies trade with higher betas and my belief that a significant correction could soon occur in the market. The same can be said for the financial space. Accordingly, I sold my position in JPMorgan (NYSE:JPM), a stock that I bought after its London Whale debacle. Furthermore, despite my strong long-term outlook for both Pharmacyclics and EOG Resources (NYSE:EOG), I also sold both stocks due to large runs higher and both trading with premiums compared to industry averages. These moves allowed me to more efficiently hedge my portfolio with healthcare-a strategy that I believe will pay off in this market.

A Look at Next Week

My strategy has been clear: Heading into next week my goal is to be prepared for whatever the market may bring after reaching new all-time highs. I have chosen to invest overweight in healthcare; however healthcare is not the only safe place to invest in this market. You can invest in any sector, but the key is to seek individual company value in the market and to become an opportunistic investor in this market in order to succeed. As we look ahead to next week there are a number of stocks that I have on my radar. Here are a few to watch next week:

  • Take a long hard look at Guess?, Inc. (NYSE:GES) on Wednesday as the company reports earnings and is expected to post an EPS of $0.87. First off, this is not a luxury retailer such as Michael Kors, but is along the same lines as The Gap (NYSE:GPS), and retailers in this category have performed quite well in this market. This stock is cheap with a P/E ratio of 12.39 and it pays a nice yield of 3.0%. So with December retail sales being strong, North America being a growing segment of its business, and only 30% of its sales, and the company seeing improvements in e-commerce, GES is a stock to watch next week.
  • Walker & Dunlap (NYSE:WD) is a commercial lending company that announced earnings on Wednesday and traded lower by more than 6.0% on very strong earnings. Sometimes these reactions occur after earnings, and it almost always produces great value. This is a $650 million company that is more than doubling in size YOY and has a servicing portfolio of more than $35 billion that will return consistent growth over the next five years. As a result, there is a lot of upside for this stock that is trading at just 13.31 times earnings. I would watch it closely for a reverse next week.
  • Celldex Therapeutics (NASDAQ:CLDX) opened on Thursday with a loss of more than 10%, this occurring after a 45% one-month gain. The company has two late-stage products in development, and will more than likely see FDA approvals for one, if not both, of these products. The loss came after the company reported a wider than expected loss for Q4 due to increased trial costs. However, the company has liquidity of $189 million, which makes its $16.8 million loss less meaningful. With a market cap of $620 million and two late-stage products, I view Celldex as a low(er) risk investment in the clinical biotechnology space. I'd watch the stock next week following this session of profit taking and wouldn't be surprised if this stock recovers in a few days' time.
  • Mellanox Technologies (NASDAQ:MLNX) traded higher by more than 6% on Thursday and reached the top of its trend around $54. The stock has been unable to break through this level since its earnings collapse and Q4 warning. However, the company announced new customers for its InfiniBand and announced a new partnership with Radware, which then created the gains. With that in mind, watch this stock next week; it could break out regardless of market direction if this news changes sentiment.
  • After an unexplained fall, shares of NeoStem traded higher by 11% on Thursday after the company announced that its PreSERVE AMI Phase 2 trial for AMR-001 will progress further following a safety review. This is a stock that has a long history of trading in large swings, both lower and higher. Once the trend is broken, either way, it usually sees a fairly significant reversal. Therefore, with large gains on Thursday, watch this stock next week to trade higher regardless of market direction.
  • Shares of The Boeing Company (NYSE:BA) have broken out to trade higher over the last couple of weeks. This uptrend began as the company presented plans to redesign the batteries for its 787 after a slew of problems grounded the planes. Now, after a 3% gain on Thursday, and a stock at new 52-week highs, it will be interesting to see if the stock continues to break out into a new range. The stock is currently trading with a forward P/E ratio of 11.25 and a price/sales ratio of 0.73, both of which are below the S&P 500. I'd watch the stock closely and expect it to outperform the market next week.
  • Shares of communications equipment company, Alcatel-Lucent (ALU), rallied almost 4% on Thursday, giving it a two-day rally of more than 7%. This is a stock that had performed exceptionally well in the first month of 2013, but then pulled back. Now, the stock appears to have found a bottom and is back on the uptrend. With a restructure in full swing, new leadership, new contracts, and with it being one of the most upgraded stocks in the technology sector, I'd watch it closely next week to continue its uptrend, possibly retesting 2013 highs around $1.75.


The markets are trading in uncharted territory, which is both exciting, but also scary for the average retail investor. Those invested in the market are making a great deal of money, though with there being so many economic problems, and potential problems that lie ahead, investors must be careful to enter the market with caution, and with a plan of action. This plan of action doesn't have to include biotech, but you do need a good exit strategy and need to seek those stocks that present value compared to the market.

As a result, I will be writing a weekly piece to help you navigate this crazy market and to find potential value. I will include a look at the valuation of the market, any changes to my own portfolio, and a review of stocks that might be presenting value. You can then take the information and use it as you wish to seek and hopefully capitalize on opportunity.

Disclosure: I am long ALU, LLY, SRPT, GALE, NBS, QCOR, JAZZ, SNTS, SPPI, GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.