5:30pm (EST)

1.  Market Summary

2.  Biodel Update (BIOD) – Time to Shine     

3.  Pfizer (PFE) – The Sky is the Limit

4.  Earnings – Let’s Get Ready To Roll…

5.  Weekly Wrap Portfolio Update  

6.  Week Ahead

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1. Market Summary

The first week back was a successful one for the bulls as used the momentum from the end of 2010 to carry them into the New Year.  The market set new highs in the process and all signs are pointing towards a continued run while the bears hibernate through the winter.  Although there will be pullback, there are numerous support levels that will help keep any attacks by the bears in check as the bulls push towards nice round numbers for the major indexes.

The Dow slipped 23 points on Friday to finish at 11,674.  For the week, the index added 97 points, or 0.8%, as the bulls ran their winning streak to six straight.  The Dow started the year just below our 11,600-11,700 targets but made a strong move and close above them all week.  We said a break above 11,700 could get the Dow to 12,000 over the near-term and the index hit an intra-day high of 11,795 on Thursday.  Support comes in at 11,500-11,350.

The S&P 500 fell 2 points on Friday to close at 1,271 but gained 14 points, or 1.1%, for the week to make it 5 wins in-a-row.  We have been looking for a run up to 1,275 and we got that after the bulls broke out of the 1,250-1,260 range and kissed a high of 1,278 last week.  Next stop should be 1,300 with 1,250 and 1,220-1,200 providing support. 

The Nasdaq, which had its 5-week winning streak snapped last week, dipped 7 points on Friday and settled at 2,703.  However, for the week, the index surged 50 points, or 1.9%, after breaking through the 2,660-2-665region.  Nasdaq 3,000 could be the early horizon which could bring out additional buyers who have been sitting on the sidelines.

Last week, we mentioned the “first 5 days of January” and what “historical” effects they have had on the market over the years.  It is usually a decent indicator on where the market will end up for the year and over the past 60 years we said the last 37 UP “first 5 days of January” have been followed by full-year gains 32 times.  The 23 DOWN “first 5 days of January” have been followed by 12 up years and 11 down. 

The bulls have been on an incredible run and 4Q and yearend results start to come in on Monday.  The bulls have been underestimated for months so the herd could continue to push the market higher if some of the heavy-hitters lift their guidance for 2011 and come in with better-than-expected earnings.  The bears will be hoping for some big misses and lowered revenue guidance going forward.

Earnings could move the market one way or the other this week but all signs are pointing towards a little “nervousness”.  However, over the near-term we expect our aforementioned price targets for the Dow (12,000), S&P (1,300) and Nasdaq (3,000) will be achieved by the bulls.

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2.  Biodel Update (BIOD) – Time to Shine

Biodel (BIOD, $1.90, up $0.02) gets another chance to be in the spotlight. 

On January 13th, 2011 at 9:30 a.m. Pacific Time (12:30 p.m. Eastern Time) Dr. Errol De Souza, President and CEO of Biodel, will present a corporate update, including information about the development of new follow-on formulations of its diabetes drug, Linjeta, and any milestones and timelines, at the 29th Annual JPMorgan Healthcare Conference.  The meeting will be held January 9-13, 2011 at the Westin St. Francis Hotel in San Francisco, California.  To tune in, investors can access the presentation at http://investor.biodel.com/events.cfm.  Chances are that it may be good.  This is a do-or-die event for BIOD, but we are betting on a positive call.  After all, why else would the company issue a call?

It was not long ago that BIOD received a FDA complete response letter on October 30, 2010 asking for more information about Linjeta.  Subsequently the stock price plunged from $3.63 to $1.90.  The studies were conducted on Type I and Type II diabetes patients in the U.S., Europe, and India.  The U.S. and European data showed positive results, but the Indian data showed negative results.  Explanations have included mishandling of the blood samples in which samples were not kept at sufficient temperatures and a poorly controlled patient population.  Regardless of the reason, the FDA will need more data to approve it.  This will probably take another 6 months.

Why this drug is so important is that, as shown in the table below, the company’s next product in their pipeline is still in Phase I trials, meaning its next product is still a long way before getting to approval.  This puts the question that if the company can survive without Linjeta approval.


Linjeta™

Phase III

VIAtab™

Phase I

BIOD-Adjustable Basal

Phase I

BIOD-Smart Basal

Pre-Clinical

BIOD-Stable Glucagon

Pre-Clinical

On face, this doesn’t look good.  But Dr. Souza sounds confident that the company will eventually get the drug approval.  Linjeta, is fast-acting insulin that serves a niche market unmet by current drugs, so approval will have a drastic affect on the stock.  Short interest is high at 31%, so any good news from the conference call may cause a short squeeze, boosting the stock price.

On the cash side, the company has $29 million in its coffers and no debt.  They received a $1.2 million research grant from the IRS to help fund drug studies in its pipeline back in November.  This is a lot of cash for a $50 million company.  Thus, it seems to have plenty of cash for at least 6 months.

For the fourth quarter ended September 30, the company reported a narrower loss of $8.1 million, or 31 cents a share, from $10.5 million, or 44 cents a share, a year earlier.  So they are somehow cutting their losses, even without approval.  Investors seem very willing to give them cash for operations, having gone through multiple public offerings in the past year.  And we highly doubt investors will stop giving the company cash.

The chance of the company partnering with another company is also very possible, especially considering the positive U.S. and European results.  If mishandling affected the Indian data, it should be relatively easy to redo the data.  But more importantly, one of the large drug makers may want to license Biodel’s advanced drug-delivery technology.  All this gives value to the tiny company.


And certainly, investor sentiment seems positive.


From the graph, the stock’s price has stayed about the same since the FDA rejection, but the 14-Period MFI (money flow index) and 14-Period RSI (relative strength index) went up.  Since  , positive money flow must be increasing, negative money flow must be decreasing, or both.  And the increasing RSI correlated with a somewhat stagnant stock price gives a somewhat bullish signal.


Although there is a risk that they report negative news on Thursday, that risk might be well worth it.


As far as the options, there was a little action in the January 2 calls (BIOD110122C00002000, $0.05, flat) but volume was light overall in other months.  It doesn’t make since to play options on the stock, yet, because shares are under $2.  Even on good news, the drug would still need approval so the gains may be limited.  However, over the long-term we think shares can get back to $4 on positive developments and $6 on eventual approval of Linjeta.

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3.  Pfizer (PFE) – The Sky is the Limit

Next week shall be a big one for drug giant Pfizer (PFE) and several others who are presenting at the 29th Annual JPMorgan Healthcare Conference.  The meeting will be held January 9-13, 2011 at the Westin St. Francis Hotel in San Francisco, California.  Investors can access the presentation at:

 http://www.pfizer.com/investors/presentations/presentations.jsp

But regardless of what Pfizer says at the meeting, its fundamentals and technicals point to a bright future.

One of the main themes the company will address is the upcoming patent expirations of cholesterol fighter and blockbuster drug Lipitor.  Surely, the loss of this drug will dampen sales but never underestimate the largest drug maker in the world.  Surely it has several drugs ready for approval within its pipeline, plus, its massive portfolio should be able to pick up the slack.

Its anti-smoking drug seems to be doing well.  When Japan hiked the cigarette tax, people flocked to the drug in an attempt to quit.

http://www.emoneydaily.com/weekly-news-roundup-pfizer-inc-nysepfe-12/6986638 

Wonder what will happen in other countries.  With a large number of worldwide smokers, sales may well approach blockbuster status.

On January 6, the company’s Animal Health division announced the introduction of E. coli Bacterial Extract vaccine to limit the spread of E. coli O157 in cattle, and thus in humans.  Although this may not be a blockbuster, this is a major breakthrough.

The company said it is teaming up with Seattle Genetics (SGEN, $15.59, down $0.15) to develop antibodies for cancer using SGEN’s advanced drug technology and in turn strengthening its pipeline. (SGEN is also a covered call trade for our portfolio).

As of September 27, 2010, Pfizer had 118 drugs in its pipeline: 46 in Phase I, 37 in Phase II, 26 in Phase III, and 9 in registration.  That is slightly down from 133 in January 27, 2010, but it is still a lot.  And it only takes a few blockbusters to make up for Lipitor sales.

Plus, Pfizer should continue to benefit from its 2009 purchase of drug rival Wyeth, which has a strong position in vaccines, biologic drugs, veterinary medicine, and consumer products—areas where Pfizer has little presence.  Further, Wyeth’s investment in promising Alzheimer’s disease drugs may become a blockbuster of its own when it reaches the market.

Comparing PFE to its top competitors is a good way to see how it stakes up.  Below is a list comparing PFE to its competitors and the industry in general.  Statistics are from Yahoo Finance.  The best number in each category is highlighted in green.

G%

year over year quarterly revenue growth (%)

P/B

price/book

tPE

trailing PE ratio

PEG

price/earnings/growth

fPE

forward PE ratio

R/S

revenue/share

P/S

price/sales

%

% short


 

Price

G%

tPE

fPE

P/S

P/B

PEG

R/S

%

PFE

$18.34

39.20

24.04

8.01

2.18

1.66

2.78

$8.35

0.7

Bayer

$71.68

16.10

27.33

12.03

1.35

2.49

2.80

$53.98

GSK

$38.77

0.80

16.13

10.39

2.17

6.49

4.49

$17.18

0.1

MRK

$37.35

83.90

14.44

9.80

2.60

2.05

1.89

$14.61

0.8

NVS

$57.05

13.60

13.14

10.60

2.65

2.01

2.15

$22.01

1.2

Industry

14.60

14.89

2.00

0.75


From the table, all of the major drug makers listed have higher stock prices than their revenue per share.  Besides this fact, two companies seem to stand out, PFE and MRK (Merck).  PFE has the lowest forward PE and price to book ratio.  MRK has the greatest year-over-year quarterly revenue growth and the lowest PEG.  But PFE has the second greatest year-over-year quarterly revenue growth.  So using these metrics, PFE looks cheap.  And the company pays investors well with a 4.4% dividend yield.

Pfizer’s revenue data shows that the company managed to grow revenues each year over the past three years.  Earnings per share fell from 2009 to 2010, as a result side of the Wyeth purchase and other issues but earnings will likely rise next year as Pfizer fully integrates the company into the mix.

Source:  MSN Money

Lastly, the charts seem to also point that the stock will rise.

Source:  MSN Money

At glance, the price chart looks like a double wave.  But notice that the 14-Period MFI (money flow index) is not following the price pattern exactly.  The MFI stayed nearly flat while the stock price increased over the last month and a half.  But the MFI just started to rise with the price in the last week and we pointed this out in our Daily Newsletter.  This means that the stock has more room to grow.

With a great chart, good fundamentals, and a pending conference call, this giant doesn’t look like it will be sleeping anytime soon.

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4.  Earnings

The companies in BOLD, we are looking at as possible trades and we list calls and put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week.  (Quotes as of Friday’s close 1/7/11)

We jumped the gun on Friday and took a stab at an earnings trade on Monday/ Tuesday but it wasn’t Alcoa.    

MONDAY:  Adams Express (ADX, $10.87, down $0.04), Alcoa (AA, $16.42, up $0.06), Apollo Group (APOL, $37.98, down $1.49), First South Bancorp (FSBK, $6.12, down $0.21), Helen of Troy (HELE, $31.57, up $0.28), Lennar (LEN, $19.41, up $0.27) and Suffolk Bancorp (SUBK, $25.31, flat).

TUESDAY: Bank of South Carolina (BKSC, $11.66, flat), H.B. Fuller (FUL, $1.94, down $0.41) and Supervalu (SVU, $8.66, down $0.54). 

WEDNESDAY:  Clarcor (CLC, $43.19, down $0.20) and DragonWave (DRWI, $8.62, down $0.28).

THURSDAY:  Commerce Bancshares (CBSH, $39.67, down $0.50), Intel (INTC, $20.66, down $0.11), Shaw Communications (SJR, $20.65, down $0.37) and Shuffle Master (SHFL, $11.10, up $0.03).

FRIDAYJPMorgan Chase (JPM, $43.64, down $0.84) and Webster Financial (WBS, $19.89, down $0.40).

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5.  Weekly Wrap Portfolio Update (Closing prices as of 1/7/11)     

DryShips (DRYS, $5.40, down $0.05)

January 2012 7.50 call (DRYS120121C00007500, $0.67, down $0.04)    

Entry Price:  $5.25 (1/03/11) sold January 2012 7.50 call @ $0.65

Exit Target: $8

Return: 17%

Stop Target: None

Action:  It was a busy week of news for the company. First, one brokerage firm lowered their estimates for DryShips to $1.03 from $1.17 but maintained a $7 target and “Buy” rating on the stock.  The company also announced that it would use a portion of the proceeds from its sale of Ocean Rig stock to buy two new drilling rig charters and, again, takeover chatter was strong.

DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The options opened at 69 cents so you should have gotten 65-69 cents for selling them.  This lowered the cost basis to $4.60.

If shares are over $7.50 a year from now, you would be “called away” and the trade would make nearly 70%.  We like the risk/reward factor with this trade.

 

Seattle Genetics (SGEN, $15.59, down $0.15)

March 17.50 calls (SGEN110319C00017500, $0.70, down $0.10)

Entry Price:  $15.50 (12/27/10) sold March 17.50 calls @ $0.90

Exit Target: $20

Return: 7%

Stop Target: None

Action:  For those of you just joining us, we did a big write-up on this company back around Christmas which you can read in our archives.  Not much news last week but we like this stock a lot. 

Seattle Genetics opened at $15.80 and shares were at $15.50 at 10am on 12/27/10.  The March 17.50 call option could have been sold for 90 cents.  This lowered the cost basis to $14.60.  Continue to hold.  


Patriot Coal (PCX, $23.19, up $0.69) (COVERED CALL)

January 19 call (PCX110122C00019000, $4.20, up $0.70)      

Entry Price:  $17.80 (12/6/10) sold January 19 call @ $0.95

Exit Target: $20

Return: 38%

Stop Target: None

Action:  Patriot Coal had a strong week and we will likely get called away from us.  Analysts are tripping all over themselves to upgrade the stock and match our $30 price target.  Of course, we got you in a month early but we were hoping the crowd wouldn’t notice how cheap shares were.  They have.

Patriot Coal opened at $17.51 and shares were at $17.80 around 10am on 12/6/10.  The January 19 call could have been sold for 95 cents.  This lowered the cost basis to $16.85. 

If shares are “called” away by next week (which is likely the deal) the trade will make 13%.   

If shares don’t and fall back below $19, we will sell another option to lower our cost basis.


Dendreon (DNDN, $38.20, up $2.78) (COVERED CALL)

February 39 call (DNDN110219C00039000, $1.70, up $0.65)

Entry Price:  $41.96 (9/13/10) sold October 45 call @ $1.30, (11/11/10) sold December call @$1.75, (12/20/10) sold February 39 call @ $1.50

Exit Target: $45

Return: 2%

Stop Target: None

Action:  Shares of Dendreon roared back on Friday after giving Wall Street an update on Provenge, the company’s prostate cancer drug.

Dendreon opened at $41.96 and you could have sold the October 45 call option for $1.30 on 9/13/10.  This lowered the cost basis to $40.66.

On 11/11/10 we sold the December 40 call option for $1.75 which lowered our cost basis to $38.91.

On 12/20/10 we sold the February 39 call option for $1.50 which lowered our cost basis to $37.41.

If the stock gets “called away” from us by mid-February the trade will return 5% from when we first profiled it.

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6.  Week Ahead

There will be a number of economic reports worth watching this week but Monday will be light with no news due out.

On Tuesday, the market will get an update on Wholesale Inventories while on Wednesday Wall Street gets a peak at the MBA Mortgage Purchase Index as well as Import and Export prices.  Investors will also digest the latest Fed Beige Book numbers as well as crude inventories.

Initial Claims and Continuing Claims as well as the Producer Price Index (PPI) and Core PPI figures are due out on Thursday.

For Friday, the market will digest the latest Consumer Price Index (CPI) and Core CPI stats and we get an update on Retail Sales along with the Michigan Sentiment report.  Business Inventories are also on the docket.