Friday's jobs report is likely to drive trading patterns throughout the day, while actual and projected earnings numbers could also come into play. Consensus has it that the jobs report should be a relatively positive one, continuing an encouraging trend, but investors are also aware that the positive trend may also factor into the Fed's decision to continue easing off its long-running stimulus program that has provided an economic crutch since the depths of the recession. It's apparent from this week's release of December's Fed minutes that the office is in agreement that the program finally come to an end, but officials plan to tread cautiously as to not spook the markets into a sell-off.
We may see somewhat of a pullback anyway, regardless of action by the Fed. In addition to the clarity behind the easing of the stimulus programs, signs still exist that there is still much work to be done in seeing the economic recovery through to fruition. Weak retailer numbers led to volatile trading on Thursday, a trend that is likely to continue through the earnings season. Individual companies and some analysts are already looking to soften the blow of weak profit margins during the previous quarter, while also lowering year-end guidance. There's no cause for major alarm, as much of this was expected, but the jolly mood of the record-setting last couple of quarters of 2013 may be somewhat dissipating as reality sets in.
The year is off to an exciting start, nonetheless, and here's a few stocks and stories to keep an eye on for Friday, 10 January, 2014 ...
Biotech / Pharmaceutical:
Mannkind Making Noise Again
Drama, intrigue and volatility are routine characteristics of the biotech and pharmaceutical sector, as companies embark on quite the drawn-out journey in bringing new drugs and treatments to market. Mannkind Corporation (MNKD) is certainly no stranger to the turmoil. Over the years this company has experienced numerous peaks and valleys during its quest to bring Afrezza to market. For those that may be new to the Mannkind story, Afrezza is an insulin spray designed to potentially alleviate the need for needle insulin injections for diabetics.
On Thursday MNKD shares spiked by nearly twenty percent on volume just about five times the daily norm, providing an undeniable sign that the company is back in the spotlight and should continue to attract increasing attention as we follow the Afrezza adventure into the next stage of its story, which is another date with destiny - and the FDA - in April, when an approval decision should be rendered for the third time. The last such date, which took place three years ago nearly to the day, ended with a second denial of approval. Mannkind has since conducted the necessary trials requested by the FDA to prove Afrezza worked with the company's next-generation inhaler, which brings us to where we are now observing the pre-decision runup.
It's not a certainty that all companies expecting approval dates with the FDA will experience a runup leading into that date, but it's definitely very common and Thursday's price action is likely just a sign of the volatility to come over the next couple of months. It could also be a sign that the slow and methodical periods of short covering we've seen in the past are over, and what we're seeing here is the makings of a squeeze before the approval date.
That said, just because shares are spiking now, it doesn't necessarily mean that investor sentiment is leaning towards an approval. As we discussed above, such price runs before FDA dates are common, so there's no real reason for investors to try and chase it higher at the current time with a post-approval run in mind. Even if approval does come in, the nature of this sector has it that the run with the largest percentage gains may have already ran. With this being one of the more speculative sectors of the market, the 'buy the rumor, sell the news' crowd generally prevails, and henceforth any entry and exit strategies should be designed while keeping that fact in mind.
A prime example may be BioDelivery Sciences (BDSI), a company whose share price flew high into the Onsolis approval a few years back, only to fall post-approval and never fully recover. Other examples are Amarin Corporation (AMRN) and Dendreon (DNDN), a pair whose share prices also never fully recovered following positive FDA news.
Those are examples of pullbacks after approval was in the bag, but then there's the other possibility, too - the FDA might not approve. It happens more often than not in this sector, even when investors are convinced of otherwise. Should this happen in Mannkind's case, investors can expect a catastrophic share price plummet - a quicker drop than the New York Giants' playoff hopes after their 0-6 start. While the Giants can rebuild fairly quickly (as long as Victor Cruz shows up to practice during camp), investors will see another Afrezza approval as a death knell, and expectations of a product approval on a potential fourth try would be negligible. In fact, it's rare when a product gets even a third try, so there will be some skepticism leading into this approval date - and rightfully so.
Given the scenarios outlined above, investors should maintain levity during this pre-decision runup and beware of the risks associated with going 'all in' on FDA approvals as a whole. Even if they turn out your way, the likelihood of a post-approval decline still exists, as the examples above demonstrate. The higher that MNKD climbs leading into April's date, the more short sellers may be tempted to jump in at those higher prices, as they eyeball the potential profits on the flip side if the FDA fails to approve again. The more shares there are short, the more likelihood that downward pressure can be applied at times inconvenient for the retail guy. Just something to keep in mind.
The counter-argument here is that the more shorts that are hanging on through approval, then the more likelihood of a seismic squeeze if an approval decision is positive. That's a valid argument to hold onto, but beware of the risks when counting on that - not only are you counting on approval, but you're also counting on battling it out with Mr. Shorty, who generally comes to the table with an excess of cash and borrowed shares to apply downward pressure. Sometimes Mr. Shorty even plays the timing of negative pieces that hit the wires via one or a few of the numerous stock market media outlets out there. That's not always a bad thing, though, because one wanting to jump in after an approval can take advantage of any pullbacks as positions consolidate.
There's likely to be numerous points along the way over the next couple of months to play the MNKD spikes and dips, which should allow investors willing to take advantage of that volatility an opportunity with some trading shares to come out ahead of the game before the big day, and maybe just have house money left on the table to ride out the full story.
The worldwide insulin market can be measured in the tens of billions of dollars, so there is the chance that MNKD explodes on approval, if the FDA in fact approves, so a speculative investment here may be worth it for the risk/reward factor, but before letting emotion and hope take over, we've got to keep the risks in mind, too, and the higher MNKD spikes, the higher the risk that an investor assumes.
Will the FDA approve? The FDA is full of surprises, but I'm leaning towards expecting a non-approval again. I believe that if the FDA was overly convinced that Afrezza was such a solid alternative over the needle injection for diabetics, then they would have conditionally approved during the last go-round while testing out the new inhaler. FDA officials are quite the fickle bunch, and I don't think they're impressed.
I've been wrong before and I'll be wrong again, so don't let my opinions sway an investment decision, each investor should conduct his or her own DD and invest accordingly.
Regardless, there's plenty of money to potentially be had in the months leading into the decision, so expect a whole lot more excitement from Mannkind than just what we saw on Thursday.
Internet / Technology:
The Sirius Twists Keep Coming
Generally it's a bad thing when wire headlines indicating that law firms are investigating a company that you have money in, as it usually means the sharks are looking to build a class action suit following a sharp share price decline, but as usual, SiriusXM (SIRI) bucks the trend. News circulated on Thursday that a couple of law firms are "investigating" SiriusXM in relation to the proposed sale of the company to Liberty Media (LMCA), the majority holder. As we discussed earlier this week - where I concede that I may have been a bit dismissive of the prospects of minority shareholder receiving a higher payout than that $3.68 number - shareholders are unhappy with the near-negligible premium placed on shares for the proposed buy-out. Even Ralph Nader has chimed in on this one.
Late week news and share price action, however, indicate that SIRI longs may be emboldened to believe that a higher price may be in store after all, and it could even attract new buyers who are betting Liberty's John Malone folds and ups the buyout price.
There's certainly a chance - and it's even looking like a good possibility - that Malone ultimately ups the ante a little bit before this deal is said and done, but I'd still be hesitant to get too carried away in expected more than just a modest increase in share price. It's no secret that Malone is not making this deal in the best interests of shareholders - in his mind, he's already made sure the shareholders got paid with his bailout of the company when shares were trading at a nickel - he's making this deal to gain full control of all that Sirius revenue money and free cash flow that could be used to secure a deal for Time Warner Cable (TWC), which Liberty would love to consolidate with its cable business, Charter Communications (CHTR).
That Sirius cash would come in handy in warding off a competing bid for Time Warner by Comcast (CMCSA), and since that cash is needed for the deal, Malone is likely to keep steadfast in his desire to fully acquire those minority SIRI shares for as little as possible.
The numbers don't lie, though, and SiriusXM continues to defy critics by adding more subscribers per quarter than estimated. A quickly-rebounding car market helps, as 70% of new vehicles come equipped with SiriusXM SatRad - and the iPad app helps build overseas subscribers, too. Those facts make it difficult for Malone to justify his buyout of the minority SIRI shares for what they would be worth once converted into a third class of Liberty stock.
The question remains of whether or not it matters what shareholders think is fair value, and whether or not a minority rebellion will lead to a higher buyout price. As we stated above, Malone probably feels like he's already paid the existing shareholders by allowing them to buy shares for a nickel in 2009 and then for a buck, two and then three over the years since. When cash is needed to build Liberty into even more of a conglomerate with a Time Warner acquisition, is it a smart deal to raise the SIRI buyout bid even higher to quell shareholders who have already made bank?
That's the question at hand, and that's where I may have been a tad too dismissive earlier this week. Given the recent developments and the pushback from SIRI minority shareholders, it's highly possible that this deal gets pushed closer to the four dollar mark in value - still significantly below where shareholders and analysts consider fair value for the company - but maybe enough of a premium to silence the naysayers who may be more willing to accept the Class C Liberty shares that they'll receive for their SIRI shares when considering the empire that could result from both a TWC and SIRI buyout.
SIRI may still have a push to four in it as this story plays out, especially if speculation hits the wires that Malone will cave and offer more than that $3.68 per share.
Never a dull moment with this company, Siriusly.
Industry / Energy:
Capstone Fuels Share Price Rally
Shares of Capstone Turbine (CPST) were on the fly Thursday and will be worth keeping an eye on during Friday's trading, too, as volume of nearly seven times the norm indicates heavy interest. The quick rally was likely the result of news that the company had received multiple orders - totaling 6.4 MW - from E-Finity Distributed Generation for microturbines to be used for oil and gas operations in the Marcellus and Utica Shale regions. Also, earlier in the week the company announced another 1 MW deal destined for a resort in Hawaii. These two news item exemplify the diverse market opportunities for Capstone's low-emission mircroturbine units and are also a good indication of the demand for those units.
With that in mind, the next question to ponder is whether or not this run has legs. That's where we may see a bit of the 'run, wash, rinse and repeat' cycle that is standard for Capstone trading come into play.
There's little doubt that Capstone has demonstrated the ability to lead the market into the green generation with its microturbine units. It has also demonstrated that it can attract the attention of buyers, investors and high level government executives, as President Obama even gave the company a shout-out in Brazil a couple of years back, during a speech about energy. CNBC has run stories about the company and a deal with General Electric (GE) is in place. At each peak during the CPST share price cycle, shares hit - and sometimes exceed - the two dollar mark, and each time investors wonder whether this will be the time that shares can hold that mark. Each time shares end up declining back towards the dollar mark, and that may again be the case with this latest run.
The chief reason for this stock being unable to hold its gains is that the company has yet to reach profitability. Each quarter it seems to inch closer, but according to the latest analyst estimates, we are more likely than not to slug through another year without meeting that elusive goal - and as long as that is the case, investors should not quite expect this stock's share price runs to hold.
On the plus side, each time the share price does slip down back towards a dollar, it allows those investors holding this one for the long term based on the potential of the technology to add to the long term portfolio while also reloading the trading shares for the next run towards two bucks - which allows the true longs to bank some profits on their investment while still maintaining a foothold of long shares.
The future should still be considered bright here, as Capstone has managed to take well advantage of the global natural gas boom, receiving multiple orders from South America, Russia and the US. As we've seen at the open of the year, those orders are continuing to roll in. For the time being, however, it's probably a wise idea to continue using the trading shares to sell into any rally in order to realize some trading cash until profitability looks to be closer than it is. It's also worth noting that this latest rally culminated while the markets rallied to record highs.
Still a decent long term pick, in my opinion, but for the short term it's smart to entertain the possibilities of a pullback.
Roundup: Overseas trading opened relatively flat on Friday, similar to the end-results of Thursday's session in the US. On the heels of some retail warnings on Thursday, investors will be eyeing the jobs numbers on Friday to look for more signs of recovery that could offset other market detractors for the time being. Although the broad rally looks to have stalled, there's still some great action going on out there in the land of individual stocks and stories, and we're always interested in those.
Happy trading, have a great weekend, and watch that traffic on the GW!!!