Equity Trade Ideas December 2016

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Equity Trade Ideas for December 2016

December 20, 2016

This post focuses on Equity Trade Ideas associated mainly with companies who have a lot of cash stashed overseas.  These companies are mainly linked to technology and healthcare.    These companies may be rewarded by getting a tax break from the Republican party. The money they save could increase their profit and/or encourage them to go shopping to expand their horizon.  

Corporate America had $1.3 trillion, or 74 percent of its total cash, stashed overseas in 2016, according to Moody’s Investors Service Inc. That’s up from an estimated $1.2 trillion, or 72 percent of total cash, a year earlier.  While the top five overseas cash holders are technology companies such as Apple Inc and Microsoft Corp , the pharmaceutical industry accounts for a big chunk of that cash also.

 The five U.S. pharmaceutical companies with the largest cash piles, namely Pfizer Inc, Merck & Co, Johnson & Johnson, Amgen and Eli Lilly and Co, hold nearly $250 billion in overseas funds, according to data from U.S. non-profit research and advocacy group Citizens for Tax Justice.  At the same time, big pharma is in hot pursuit of the next blockbuster drug. Many of the industry’s most successful franchises, from Gilead’s Hepatitis C cure and Biogen Inc’s multiple sclerosis treatments, to AbbVie Inc’s arthritis drug Humira, are all bracing for declining revenues as patents age and competition heats up.  Valuations of biotechnology companies that could be acquisition targets for major drug firms are still hovering near historic lows after being dragged down by election-season political criticism of high drug prices.

“Tax repatriation is a more likely situation now, benefiting large biotech’s and (pharmaceutical companies) with significant offshore cash and a desire to buy mid-cap companies,” RBC Capital equity analyst Michael Yee wrote in a research note.

We talked about Equity Trade Ideas in the financial and technology sector in our post  dated Equity Trade Ideas for September of 2016.  We knew that rates will be going up in December of 2016.

https://securitytradeideas.com/equity-trade-ideas-september-2016/

“Nobody gets to set the agenda unilaterally around here”  because of Separation of power”  said Senate Republican John Cornyn of Texas.   It takes months or sometimes years to implement a political agenda.  We like the beaten up health care sector and don’t feel an immediate thread of  a Republican cutting drug cost.  Thank god decisions and policies  aren’t made  via twitting. We have an aging  population who needs the health sector.   When we age drugs become a necessity and not a choice.

After the historic November 8th election, the talk and the trade have been around Mr. Trump, our President-elect, who likes to be presidential via twitter.  The media is calling it the Trump Rally, where it  probably should be called Jared Kushner’s rally. According to Forbes,  Jared helped Trump win the election.   Jared, Trump’s son-in-law, is the quiet, enigmatic young mogul who delivered the presidency to the most fame-hungry, bombastic candidate in American history.

http://www.forbes.com/sites/stevenbertoni/2016/11/22/exclusive-interview-how-jared-kushner-won-trump-the-white-house/#4c6ca5782f50

We don’t base our trades for different seasons or different presidents. We base our trades on company’s bottom line. If a company is profitable and generates income, then everything else is noise to be avoided.  At the end of the day what matters is a company’s bottom line.  A profitable company is good for an investor and a happy investor is good for the economy.  The U.S. market is driven by corporate profits and macroeconomic indicators such as employment, wages, GDP, and manufacturing data.

Investors like lower corporate taxes (thinking, lower rates may increase corporate profits), less regulation where every new regulation be accompanied by elimination of two old ones according to Trump, greater infrastructure spending, canceling job killing restrictions in the energy industry, withdraw from Trans Pacific Partnership (TPP), repeal Obama Care, reduction of drug prices and repatriation of corporate cash held overseas.  Trump is the loudest protectionism in the White house since WW II.   “Protectionism represents any attempt to impose restrictions on trade in goods and services.”

Be cautious, as the Indexes have gone up too much to fast. Small-cap stocks (Russell 2000 small-cap index) have been some of the biggest winners in the post-election stock rally, but keep them on a short leash.   If hopes on tax cuts and public spending on infrastructure disappear, small caps are likely to lead the stock market lower. Reduction in corporate tax rates would benefit small companies most, says Dirk Effenberger, a strategist at UBS Wealth Management.  Don’t ignore global economic risks. Different strategists have different values for S&P 500 for 2017.  Some believe it will be at 2300 while others believe it will be at 2450. Currently, “S&P Options show investors are cautious.  The 14 Million outstanding option contracts represent about 5 million bullish calls and nine million bearish puts.”  Barron’s November 28, 2016.  Buying  S&P 500 Put Option or put spread hedge may not be a bad idea.

The U.S. dollar is near its highest level since 2002 –which affects the big-cap multi nationals. Selling goods and services at home also means these companies should benefit from any protectionism or restrictions on trade that materialize under the new administration.

“Our main concern is over-optimism about economic acceleration,” Mr. Clissold wrote. “The reality of the fiscal stimulus could be less exciting than the expectations.”   Investors have been buying stocks and selling bonds, betting that the Trump administration will usher in tax cuts, deregulation and fiscal stimulus, which they believe will support growth and inflation in the world’s largest economy.

We all know by now what he says and does don’t match.   Talk is cheap,  strategy design and implementation is timely and expensive.  Also, “Nobody gets to set the agenda unilaterally around here”  because of Separation of power”.     He has “very little idea about trade” said the President of Chamber Mr. Thomas Donohue.   Trump’s idea for a 45 percent tariff on imported from China, if imposed, reduce the country’s exports to the U.S by 21% and slice off 0.9 percent off economic growth. This will have an effect on price of goods sold in Target and Wal-Mart.  Higher tariffs on Chinese goods could also hurt American manufacturers sourcing overseas.

Mr. Trump gives the energy industry a powerful ally.  He wants to build the Dakota Access pipelines enabling millions of barrels of North Dakota oil to come out of the ground.   President-elect cutting income and corporate taxes and eliminating the estate tax – labeled the “death tax”  (good for the richest 10 percent of the population). Eliminating the death tax   would be an enormous gift.  The estate tax may be on the way out.   Goldman Sachs economists predicted in a Dec. 3 research note that the corporate tax rate would fall to 25%, congress will allow expensing of capital spending.  A Louisiana Republican told Bloomberg, “we don’t want to put small business that depend on imports at risk”.   We are sure you all have heard plenty as to what trades make sense with Trump in the office come January 20th.  Most stocks in Financial, Defense, steel and building roads and highways material are at all time high.

Technological innovations have been going on for years. In the 1980’s, we were involved in cutting out Full Time Staff (FTE) from Bank of America offices, by performing office automation.  Education and skill building of American workers is needed in order for them to stay competitive in the global labor market.  In the 1990’s technical jobs were being taken over by cheap labor from India.  Cheap labor is used by businesses, including Trump’s businesses. to make profit.   Automation and Artificial Intelligent (AI) are taking over jobs.  Automation of checkouts will take over jobs in grocery stores.  Robots are already used in the Agriculture sector.  America needs to invest and develop the skill-set of its people so that they can transition with time.

A run in oil and a dollar surge after U.S. election has accelerated with this week’s Federal Reserve interest-rate increase, pointing to a possible reckoning in coming months for economies around the globe.  This   can be alarming. S & P companies doing business overseas can run into problem. Expensive oil can cause inflation.

The WSJ Dollar Index of the dollar’s value against 16 major trading partners hit a 14-year high on December 15, 2016, reflecting expectations that the Fed will pick up the pace of rate increases next year as the U.S. economy gains momentum.  A sharp increase in the dollar stands to have long-lived economic consequences, potentially hampering a U.S. earnings recovery and making the trillions in dollar-denominated debt around the world more expensive to pay back.   “The dollar’s rally could cost the U.S. about 400,000 jobs over the next two or three years in parts of the economy that are exposed to trade.”

Bloomberg Global Economics

MERGERS AND ACQUISITION (M&A)

 

The topic for this post is mainly associated with possible mergers and acquisitions.   Technology and Healthcare sector will be the biggest beneficiaries of tax reduction. Healthcare may be volatile due Affordable Care Act. We have an aging population in the United States and the Health care sector has good valuations due to weakness in the sector.  Goldman Sachs strategist David Kostin estimates , S&P 500 Companies have some $1trillion stashed overseas which Trump is proposing to tax at 10% rate.  “this could result in at least $500 billion returning to shores.

For years, big U.S. drug makers have turned to acquisitions of foreign companies to put their overseas cash to work, rather than bring it home at a 35-percent tax rate. Trump has proposed allowing repatriation of this cash at a 10-percent tax rate, hoping some of it will be spent on hiring and investing in their businesses.  Lower Corporate taxes and possible Merger and Acquisitions for 2017 driven by repatriation of corporate cash held overseas and the need for a tax holiday as they bring the money home.  Investors have been underweight biotech all year, fear of drug price cuts has kept investors away but  money flow may need to shift back over to biotech.  As Dr. J said:  “When there is blood on the street that is when I  buy”.

An investment strategy or a Security Trade Idea could be to buy the stocks of the target company  or to buy a Leap Call Option of the target company in the hope of capturing the profit.  This is a trade idea  that could increase you yearly return.   A Call option that expires in a year or two would be cheaper than buying the stock of the company .  You pay less money to buy a call option  but you will not be paid dividends.  Also, there is a risk of total loss of money with Options as Options are a wasting asset.   It’s a good idea in volatile market.  The new administration will probably have lighter regulations and thus offer an environment of more M&As.

Buying a Leap Call Option:

http://www.optionsplaybook.com/rookies-corner/buying-leap-options/

Target companies:  Harman International Industries Inc. (HAR) who may be acquired by Samsung,  B/E Aerospace Inc. (BEAV)  who may be acquired by Rockwell Collins,  Cabela’s (CAB) who may be acquired by a private company Bass ProShops and  NXP Semiconductors (NXPI) who may be acquired by Qualcomm and WhiteWave Foods (WWAV)  who may be acquired by Danone.

Companies in the technology sector that could be a potential take over targets are : Nimble Storage (NMBL), Pure Storage (PSTG), and  Nutanix (NTNX).  According to Barron’s Nov 28,2016 article”Potential buyers for the three include HPE and CSCO. ”  Both HPE and Cisco are struggling for growth.

However, drug makers are much more likely to spend this money on acquisitions that could revive their drug development pipeline by acquiring smaller peers with promising offerings, as opposed to risking more of their own dollars on research and development, corporate executives and dealmakers say.

Lower Corporate taxes and possible Merger and Acquisitions for 2017 driven by repatriation of corporate cash held overseas and the need for a tax holiday as they bring the money home.  Cisco Systems (CSCO) has $53 Billion stashed overseas.  A 10% tax break will leave CSCO about $10 Billion to invest in new opportunities.   Cisco is struggling for growth.  Apple (AAPL) and Microsoft (MSFT) also have large pile of cash overseas.

David Kostin, Goldman Sachs ‘ strategist , estimates , S&P 500 have $1 trillion stashed overseas, which Trump is proposing to tax at 10%.  Big pharmaceutical companies could benefit from repatriation.  According to Barron’s “Amgen (AMGN) has $29 billion overseas.  According to Wolfe Research data, while Pfizer (PFE) , Merck (MRK) and Gilead Sciences (GILD) are also sitting on large cash abroad.   These companies need to replenish their pipeline via mergers and acquisitions.   Morgan Stanley analyst Mathew Harrison, who counts Amgen among his favorite large cap biotech stocks.    Both Gilead and Amgen have expressed a desire to buy smaller biotech companies.

According to BMO Capital Market Analyst M. Ian Somaiya, companies that could be target include: Neurocrine Biosciences, Inc.  (NBIX),  Ionis Pharmaceuticals Inc (IONS),  AveXis Inc.(AVXS), Retrophin Inc (RTRX), BioMarin Pharmaceutical Inc. (BMRN), and Incyte Corporation (INCY).

A plan to incentivize U.S. companies to repatriate their swelling overseas cash piles could spur a new wave of dealmaking in a pharmaceutical industry seeking to buy its way into growth.

Corporate America had $1.3 trillion, or 74 percent of its total cash, stashed overseas in 2016, according to Moody’s Investors Service Inc. That’s up from an estimated $1.2 trillion, or 72 percent of total cash, a year earlier.

While the top five overseas cash holders are technology companies such as Apple Inc and Microsoft Corp , the pharmaceutical industry accounts for a big chunk of that cash also.  The five U.S. pharmaceutical companies with the largest cash piles, namely Pfizer Inc, Merck & Co, Johnson & Johnson, Amgen and Eli Lilly and Co, hold nearly $250 billion in overseas funds, according to data from U.S. non-profit research and advocacy group Citizens for Tax Justice.

At the same time, big pharma is in hot pursuit of the next blockbuster drug. Many of the industry’s most successful franchises, from Gilead’s Hepatitis C cure and Biogen Inc’s multiple sclerosis treatments, to AbbVie Inc’s arthritis drug Humira, are all bracing for declining revenues as patents age and competition heats up.

Valuations of biotechnology companies that could be acquisition targets for major drug firms are still hovering near historic lows after being dragged down by election-season political criticism of high drug prices.

“Tax repatriation is a more likely situation now, benefiting large biotech’s and (pharmaceutical companies) with significant offshore cash and a desire to buy mid-cap companies,” RBC Capital equity analyst Michael Yee wrote in a research note.

The last time tax considerations fueled a wave of dealmaking in the pharmaceutical industry was in 2014, when companies sought to redomicile abroad through acquisitions, referred to as corporate inversions. But U.S. President Barack Obama subsequently announced curbs to limit inversions, culminating in Pfizer abandoning its $160-billion agreement to acquire Allergan Plc., the biggest attempted merger of all time.

Pharmaceutical M&A involving U.S. companies has been around $90 billion year-to-date, down from nearly $270 billion the year before.

Executives at Pfizer, which has already said it is looking to do more deals after its $14-billion acquisition of cancer drug maker Medivation Inc, have told investors in private meetings that its M&A appetite would grow even bigger if it could bring home its more than $70 billion in overseas cash, according to people familiar with the matter.

Pfizer could potentially use its newfound firepower to buy a company as large as Bristol-Myers Squibb Co, a $92-billion market capitalization cancer drugmaker that fueled takeover speculation after a disappointing drug trial in August sent its stock down more than 25 percent.   Bristol-Myers Squibb’s blockbuster cancer drug Opdivo could compliment Pfizer’s plan to become a leader in immuno-oncology, which seeks to use the body’s own defenses to treat cancer, industry bankers said, without suggesting that any deal is in the works      Another cancer drug company that could attract takeover interest following a cash repatriation is Incyte Corp, as it could make an attractive target for Gilead Sciences Inc if it was able to bring home its nearly $25 billion in overseas cash, bankers said.  Gilead has been under pressure to find a new blockbuster because of declining sales from its aging Hepatitis C franchise and the recent failure in clinical trials of a cancer drug that would have competed with Incyte’s successful blood cancer drug, Jakafi.

Beyond cancer drug makers, other biotechnology companies that could attract takeover interest include those specializing in neurology companies, such as Acadia Pharmaceuticals Inc (ACAD) that have promising treatments for ailments such as Alzheimer’s psychosis and migraine.  ACAD has been talked about in the press as a buy out candidate.

In conclusion, we feel there will be a biotech rally and that with Republican  control of the White House and both branches of Congress brings such a fundamental shift for the sector that more gains inevitably lie ahead, with the normal volatility that always comes with biotech stocks, of course.

http://www.marketwatch.com/story/10-biotech-companies-ripe-for-a-buyout-courtesy-of-donald-trump-2016-11-17

 

 

 

 

 

 

 

 

 

 

 

 

 

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