New Oriental Education & Technology ADS (EDU): EDU is a Chinese provider of foreign language training and test preparation courses for admissions and assessment tests in the U.S., the PRC and Commonwealth countries. In addition, it also offers primary and secondary school education, development and distribution of educational content, software and other technology, and online education. Its shares fell 12.1% on Tuesday after the company reported earlier that morning what appeared on the surface to be a good earnings report for the August quarter. The company beat analyst estimates for both revenue ($272 million versus $264 million) and earnings (63cents versus 57cents), and reported in-line guidance for the next quarter ($124-$129 million versus $128 million). However, it reported a 10% quarter-over-quarter drop in the deferred revenue balance in the current quarter to $175 million, and it also indicated in its earnings conference call that its margins would be weakened going forward by a decline in its higher-margin customer base in Beijing, and Shanghai, plus a shift in focus to smaller class sizes. EDU trades at a premium forward 23 P/E, in the top one-third of its historic P/E range, while earnings are projected to increase at 25% compounded annual growth from 75cents in 2011 to $1.16 in 2013. While the company has excellent growth fundamentals, it is unlikely that we will see it break above $30 in the near-term, so we would look to sell it on any rebound.
Sequenom Inc. (SQNM): SQNM operates in the field of industrial genomics, providing products, services, diagnostic testing, applications, genetic analysis products that translate the results of genomic science into solutions for biomedical research, translational research, molecular medicine applications, and agricultural and livestock research. Its shares were up as much as 13.2% at the open yesterday after the company announced the launch of its MaterniT21 LDT non-invasive prenatal test for down syndrome. The launch was announced as expected shortly after the results from a clinical validation study of MaterniT21 LDT were published in the journal “Genetics in Medicine.” However, the price dropped off precipitously after the close, as much as almost 20% from peak to trough yesterday, and closed down 11.3% for the day.
The slide was in part precipitated by a report from Rodman & Renshaw in which it maintained a Market Perform rating on SQNM despite the launch of the MaterniT21 LDT, based on its concerns that SQNM may not be able to capture good margins from the diagnostic tests. Furthermore, Piper Jaffray (PJC) also downgraded SQNM from an overweight to a neutral rating in a research note issued to clients on Tuesday, indicating that with the launch behind, it now sees the SQNM story shifting to an execution/reimbursement story with more risk around commercialization.
We recommended a buy on SQNM earlier in our review of the healthcare sector on August 8, based on the blockbuster potential of the MaterniT21 LDT test, and continue to stand behind that call. The test is successful at detecting nearly all (99.1%) positive cases of fetal Trisomy 21 (the condition that is the cause of approximately 95% of observed Down Syndrome) with a very low false positive rate. Furthermore, the MaterniT21 LDT detects the fetal DNA in the mother’s blood as early as ten weeks into the pregnancy, and thereby reduces the risk of fetal injury or miscarriage associated with current prenatal tests that are more invasive as they require a sample of either amniotic fluid or placenta.
Jazz Pharmaceuticals (JAZZ): JAZZ develops specialty drugs to treat unmet medical needs. It currently markets Xyrem for the treatment of both cataplexy and excessive daytime sleepiness in patients with narcolepsy, and Luvox CR extended-release capsules for the treatment of obsessive compulsive disorder. Its lead product candidate in phase 3 pivotal clinical trials is JZP-6 for the treatment of fibromyalgia. Its shares fell off 6.2% yesterday after the publication of a warning letter it received from the FDA on October 11, citing violations related to a “failure to develop adequate written procedures for the surveillance, receipt, evaluation, and reporting of post-marketing adverse drug experiences to FDA” and a “Failure to submit adverse drug experience (ADE) reports that are both serious and unexpected to FDA within 15 calendar days of initial receipt of the information by the applicant.” The warning letter to JAZZ was among six that the FDA issued October 11, and as such it appears that the company should be able to address it through administrative process changes. However, the sell-off may create an opportunity to buy into this high-growth stock at discount prices. At Tuesday’s closing price, it trades at a forward 11 P/E while earnings are projected to increase at 56% compounded growth rate from $1.55 in 2010 to $3.75 in 2012. We would look to accumulating this stock if it falls to the low- to mid-$30s.
PMI Group Inc. (PMI), Radian Group Inc. (RDN), MGIC Investment Corp. (MTG) and MBIA Inc.(MBI): All four are in the same business, offering private mortgage insurance for homeowners who put down less than a 20% down payment when purchasing homes. RDN in addition to that through its Financial Guaranty segment also insures and reinsures municipal bonds, structured finance transactions and other credit-based risks, and provides credit protection on various asset classes through financial guarantees and credit default swaps. PMI was up 23.8%, RDN was up 10.6%, MTG was up 8.6%, and MBI was up 8.0% on Tuesday.
The mortgage insurers generally tend to rise and fall in packs, and in this case the driver seems to have been the Freddie Mac (FMCC.OB) release of its U.S. Economic and Housing Market Outlook for October that also led to a sharp rally among homebuilders and many associated homebuilding stocks. The Freddie Mac report showed apartment rents rising, and new construction starts and loan originations as related to apartments rising, signaling the return of traditional lenders that had curtailed activity during the recession. Overall, this is a strong positive to the overall health of the housing sector, including for the mortgage insurers that have been in a slump since 2007 due to the housing crisis and the resulting homeowner defaults. The increasing possibility of a recovery in the U.S. housing market reduces the risk of bankruptcy or further dilution among the mortgage insurers. As in the case of homeowner default, they have to cover the insured value of the mortgage, which generally varies from 20% to 50% and higher. Furthermore, it presents the scenario of rising sales related to a recovery in the housing market.
The stocks of homebuilders also rallied sharply on this news. Among the strongest movers in the group were DR Horton Inc. (DHI), a builder of single-family detached as well as attached homes in 26 states, that was up 11.0%; KB Home (KBH), a builder of single-family attached and detached homes in 9 states, that was up 11.1%; Lennar Corp. (LEN), a builder of single-family attached and detached homes in 14 states, that was up 9.6%; and Toll Brothers Inc. (TOL), a builder of single-family detached and attached homes in luxury residential communities in the U.S., that was up 12.1%.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.