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Joe Kunkle
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History/Trading Style: I have been trading for 12 years, since I was 15, and have studied a variety of trading techniques and strategies. I combine many trading philosophies and combine technical analysis, fundamental analysis, and macro-economic analysis into every trade. I mostly trade options... More
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  • Seven Reasons A Boom in Silver is Beginning

    With gold and oil hogging the “commodities spotlight,” silver is too often forgotten. However, a new trend is emerging that indicates a major rally may be starting in silver prices and silver related stocks.

    Over the past few weeks we’ve seen more and more data that supports a rally in silver: from large institutional money making large bullish bets, to technical indicators of a breakout, fundamental valuations well below where they should be, and a possibility of a massive short squeeze.

    The iShares Silver Trust ETF (NYSE: SLV) has gained 18% since the broader markets began to rally in early March, but we could easily see another 25% – or more – in the remainder of 2009.

    All in all, they make silver a must-own in any diversified portfolio.

    Here’s what the smart money is doing in silver right now, seven reasons we could see a rally in silver prices and a few ways you could position yourself to profit handsomely.

    Following the Smart Money

    Like gold, silver isn’t just for jewelry and currencies. It is used for many industrial applications, having the highest electrical conductivity among all metals. Silver’s uses require over 832 million ounces for fabrication into and for products every year.

    More than 60% of silver production is a result of the byproduct of copper, zinc, and lead mining, which has slowed substantially due to the economic slowdown. And production will remain halted until we see significant economic recovery. In order words, nothing looks to increase silver supply any time soon.

    Silver is also a commodity that can be used as an inflation-hedge. With the recent “Dr. Doom” report that the United States is heading into a period of hyperinflation, silver is looking like an attractive alternative to gold.

    And the big money is starting to move into this golden alternative. I’m a big fan of following the professional “smart money” flows for insight into their outlook. Last week we got a huge signal.

    On Friday, a massive options trade took place in the Silver ETF where a trader implemented a strangle selling strategy using the January 2010 $19 calls and $13 puts, to finance the purchase of 75,000 January $14 calls.

    The trader sold 100,000 strangles, so price of the January $14 calls only cost around $0.23 each due to the ratio used. An institution or large investor is making this bullish bet with a lot of conviction regarding where silver prices are heading.

    For those of you not as familiar with options trades, this was a $2.25 million bet that silver will continue to rise throughout 2009. This trade could yield $37.5 million if SLV climbs above last summer’s levels of $19. They would lose large amounts of money if silver were to head lower.

    Another way to look to see what the “smart money” is betting on is in the Commitment of Traders Report for Silver. It showed that as of Friday large speculators are long/short the silver futures at a 6:1 ratio, while the small speculators are long nearly 3:1. The smart money is betting big at almost twice as much as smaller investors.

    It has been speculated that the silver market is so tight that if these speculators were to call for physical delivery of the commodity, prices could explode higher as the system is not prepared to handle that possibility.

    Data from the World Silver Survey shows that supply of silver has basically been unchanged the last 9 years, while demand has also remained steady. Take a look below.

     

     

    You’ll notice that demand has fluctuated over the years, but industrial application have been increasing. This should continue as the economy turns around.

    Seven More Reasons Silver is Going Up

    But for those of you who don’t trust the actions of a few institutions and professional traders, let me also offer a few more reasons why silver demand will surge and prices will go soaring…

    • A large short interest in silver along with the backwardation in prices could cause a massive short squeeze – The shorts do not have the physical silver needed to meet current obligations, and will be forced to buy at progressively higher and higher prices.
    • For the technical traders who like using charts, Silver ETF (SLV) carved out a perfect cup and handle pattern on the weekly chart looking back to early 2008. It broke out of the handle in early May putting an implied target of above $19 on Silver.
    • The fundamental picture also offers a bullish view on where the price of silver is headed. Silver, more volatile than gold in terms of prices, has had a supply deficit for nearly 20 years and the demand continues to surge, but supply is dwindling as shown in Friday’s report that Mexican silver output fell 54.7% in March from a year ago.
    • Silver mine production has been steadily declining over the years. There are many who believe it will be one the first element to become “extinct,” possibly as soon as 2020. That remains to be seen, but the fact that it’s being reported starts to tell you just how much stockpiles have dropped.
    • The historic gold/silver price ratio is 15:1. With gold now approaching $1000/oz, the ratio is currently at 62:1. In order for that ratio to come back into its historical range, silver would have to jump to over $65/oz.
    • With no slowdown seen in gold prices, brought on, in part by the declining U.S. Dollar as large amounts of government stimulus money is pumped into our economy. If the BRIC nations of China and India start buying the silver as an alternative to US Dollars or Treasuries. Silver could see a massive jump in prices.
    • A recent Wall Street Journal article stated that March sales of Silver Eagle coins surged 900% from the prior month, and $1 face value coins are selling for more than $30 on EBAY. Supply has grown so tight due to the high demand for industrial uses that the U.S. Mint had to halt production of American Eagle silver coins.

    Playing the Silver Boom
    Investors can play the silver boom in a number of ways: buying the physical bullion, buying theiShares Silver ETF (NYSE: SLV) or the ProShares Ultra Silver ETF (NYSE: AGQ), or through investing in individual mining companies with a large exposure to silver, and finally options on these securities.

    Some individual mining names to take a look at include: Silver Wheaton (NYSE: SLW), Pan American Silver Corp (Nasdaq: PAAS), and Silver Standard Resources (Nasdaq: SSRI) represent some of the larger more stable companies.

    More speculative names include Coeur d’Alene Mines (NYSE: CDE), Hecla Mining (NYSE:HL), Mag Silver (AMEX: MVG), Endeavor Silver (AMEX: EXK) and Silvercorp Metals(AMEX: SVM).

    When looking for a silver mining company you want a firm with good management, large proven reserves, strong cash flow with strong balance sheets, strong relative ROE (return on equity) and ROA (return on asset) ratios and a positive short-term production forecast – paying attention to silver reserve/resource ratios, or how much they’re producing relative to how much they have in the ground still

    Regardless of the approach you take, having exposure to silver could pay-off in a big way – while at the same time offering safety as an inflation hedge. And signs of an economic recovery later this year will bode well for the precious metal as production ramps higher and industrial uses increase.

    Either way, it’ll pay to add silver to your portfolio.

     

    Disclosure: Recently flipped PAAS calls for 100% profit and now own a stake of SVM.  Also, looking to get long calls of SLW.

     

     

    Jun 02 6:49 PM | Link | Comment!
  • Speculative BioTechs: Finding the Next 10-Bagger

     I am sure by now most of you have seen Vanda Pharma (VNDA) is up almost 900% following the FDA approval of its main drug, but many may be unaware that the shares were trading at less than cash value before the announcement, and were also downt o $1 from highs of $35.

     

    The prudent thing to do is look for other stocks that exhibit many of the same characteristics that Vanda (VNDA) had before it exploded 900%.  The strategy is to buy a basket of BioTechs that trade less than cash value, are down big from highs, and have drugs in the pipeline that could make or break the company.  I have done the screening and here are the names that I found, without doing in depth research on each name.  Feel free to buy a basket of these because if one or two take off, it will more than pay for the others that may fail.  I will leave the in depth research up to the BioTech analyst, but here are the stocks I advise looking to buy a basket of with a brief synopsis of each and links to drug pipelines:

    Jazz Pharma (JAZZ): Trading at $0.74, down from $18 in 2007.  Price/Cash ratio of 0.83.  Has a new CEO and drugs in pipeline for narcolepsy, OCD, social anxiety, and fibromyalgia.  Pipeline

    QLT Inc (QLTI): Trading at $2.09, down from $28 in 2004.  Price/Cash ratio of 0.88. Strongest fundamentals of the group.  Develops opthamology drugs for various eye diseases.  Much of price delines due to lawsuit with Mass General over Visudyne royalties.  Pipeline

    Cell Genesys (CEGE): Trading at $0.54, down from $10.50 in 2004.  Price/Cash ratio of 0.60 with 6% of float short.  Q1 losses shrunk but Dendreon (DNDN) Provenge data hurts CEGE due to competing drug candidate.  LeRoy Kapp, a 10% owner, has been actively buying shares around $0.60.  Company is exploring strategic alternatives.  Pipeline

    Orthologic (OTCQB:CAPS):Trading at $0.68, down from $8 in 2004.  Price/Cash ratio of 0.61.  Development stage company for cartilage, tendon, and dental-bone repair.  Pipeline

    Epix Pharma (OTC:EPIX): Trading at $0.47, down from $23 in 2004.  Price/Cash ratio of 0.80.  Has clinical drugs for central nervous system disorders, lung diseases, and Alzheimer's.  Company may file for bankruptcy if it can't restructure debt.  Pipeline

    Inhibitex (INHX):  Trading at $0.32, down from $12.50 in 2004.  Price/Cash ratio of 0.42.  Develops anti-infective products for Hepatitis C, HIV, Herpes, and more.  Pipeline

    Cyclacel Pharma (CYCC):  Trading at $0.60, down from $7.50 in 2006.  Price/Cash ratio of 0.48.  Develops drugs for various cancers.  Pipeline

    La Jolla Pharma (OTC:LJPC):  Trading at $0.20, down from $65 in 2004.  Price/Cash ratio of 0.57.  Drug developer for Lupis and other autoimmune diseases.  Recently stopped Riquent trials with BMRN.  Pipeline

    Hollis Eden (HEPH): Trading at $0.37, down from $14 in 2004.  Price/Cash ratio of 0.45.  Develops drugs focused on aging related issues.  Pipeline

    Hana Biosciences (HNAB): Trading at $0.29, down from $13 in 2006.  Price/Cash ratio of 0.67.  Develops supportive care products for cancer.  Recently received going concern notice.  Pipeline

    Altus Pharma (ALTU): Trading at $0.30, down from $25 in 2006.  Price/Cash ratio of 0.19.  Develops drugs for gastrointestinal and metabolic disorders.  Recent shakeup in management seen as a plus. Pipeline

    Sunesis Pharma (SNSS): Trading at $0.21, down from $6.75 in 2006.  Price/Cash ratio of 0.68.  Develops oncology related products. Recently secured financing and Q1 loss narrowed. Pipeline

    Spectrum Pharma (SPPI): Trading at $2.70, down from $7.50 in 2007.  Price/Cash ratio of 1.12.  Develops oncology and urology drugs, with Zevalin its big product.  Pipeline

     

    Disclosure: No Holdings

    May 07 9:28 AM | Link | 9 Comments
  • Vanda Pharmaceuticals (VNDA): Tomorrow's Headline Stock

     After the close the FDA announced the approval of Vanda (VNDA) Fanapt, an anti psychotic drug for treatment of schizophrenia, sending share 800% higher in after hours trading, from $1 to $9.70.

    Vanda (VNDA) shares were trading at 0.68x cash value, and I wish I had known the PDUFA data was 5/6 because the opportunity was glaring.

    This is a potential giant market for Vanda if it can steal market share, and also makes Vanda a likely takeover target for a large Pharma. At more than a $15 billion market in 2007 and growing faster than many other markets, if Vanda can steal just 10% of this market, it makes for $1.5 billion in sales, and with 26.7 million shares outstanding, Vanda would price around $56, $28 if it takes just 5% of sales.  

    By 2012, 4 of the top 6 drugs lose patents, making room for generic competition, although if Vanda's drug can show less side effects, we could see it dominate the market.

    Vanda is not a one hit wonder, and has Tasimelteon in the pipeline for the treatment of sleep disorders.  Vanda has 5 Analysts covering it and I expect a multitude of upgrades to come.  Shares were at $32.50 in early 2007 and I see no reason why shares cannot return to that level.  Tang Capital recently called for liquidation of the company, and it will be interesting to see how that shakes out, as Tang can probably find a buyer for the firm now with a much higher value on a potential discounted cash flow basis.

    You can also short some of the other names in sympathy, especially JNJ which is having issues with the FDA and its drug. Schering Plough (SGP) also has a drug in the pipeline, Saphris, and could see selling.

    View of the market:

     

    Disclosure: I own VNDA Shares

     

     

     

     

     

     

    May 06 7:17 PM | Link | Comment!
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