Thursday, May 29, 2014

Profiting with Stock Option Volatility

There's been a lot of talk about volatility in stocks lately.

But today, I want to focus on options volatility and what it means for the options investor.

So let's start off with a definition:

Volatility measures the rate at which a security moves up and down. If a security is moving up and down quickly, volatility will be high. Conversely, if a security is moving up or down slowly, volatility will be low.

Options volatility is largely pinned to the underlying stock.

Traditionally, option traders look to buy options when volatility is low since premiums are lower.

And traders look to write options when volatility is high as option premiums tend to be higher.

Of course, the trick, like anything, is knowing what's high and what's low. If you're buying options with low volatility, you then want to see the volatility increase. And vice versa, when writing them.

But I do want to say, volatility is only one item in determining an option trade. Putting on an option solely because of volatility would be a mistake. But understanding how volatility affects your premium is important.

Volatility can also tip you off that something big might be getting ready to happen.

When option volatility is low, there is a high probability that a big move could be getting ready to occur.

Interestingly, when volatility drops and things are kind of quiet in the market, that's often when things heat up all of a sudden. The smart options trader will look to buy options in that environment - whether he's bullish or bearish - by buying calls or puts.

Because in addition to the option increasing in value due to moving in the right direction, it'll also increase in value because of the increase in volatility.

This happens because as volatility increases, there's an increased likelihood of rapid advances and larger price swings. That also means the higher the likelihood of an option trading in-the-money by expiration, the more it's worth to the buyer of an option.

And the writer of the option demands a higher premium for taking the other side of the trade because he's now taking more risk that he won't profit.

Looking at the other end of the spectrum, when volatility is high, or excessively high, the market is full of traders, and people are looking and expecting big things to happen.

Often times, that's when nothing happens, and the market falls into a trading range for while or slows down.

In this environment, volatility starts to shrink as the probability of large swings in the market shrinks. For the option writer, the risk of having an option he wrote get in-the-money by expiration has diminished. And for the option buyer, the chance of it getting in-the-money has shrunk as well.

As such, the writer demands less premium to cover his risk. And the purchaser pays less as his probabilities shrink as well.

So the buyer wants to see volatility trend up. And the writer wants to see the volatility trend down.

So for the writer, after volatility has trended up for a while, he will look to cash in on this by writing options as he expects volatility to cool down and maybe trend lower, increasing his chances of success.

A great way to think of volatility is this: if a security was trading at $50, and it had a 20% volatility, that means there's a greater likelihood that the security could trade within a 20% range (20% above $50 or 20% below $50) over a period of time.

That's a great way to wrap your mind around volatility.

In future examples, we'll talk about volatility and how to use it to your advantage in a practical sense.

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Tuesday, May 27, 2014

Investing in Stock Brokerage Earnings Growth

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Headquartered in New York, E-TRADE Financial Corporation provides online brokerage and related products and services individual investors and stock plan participants.

The Company provides these services to customers both online and through their network of customer service representatives and financial consultants. The company also operates a bank for deposits generated through its brokerage business.

ETFC was incorporated in 1982 and had its IPO in 1996.

Excellent First Quarter Earnings

On April 23, E*TRADE reported its Q1 results. Net income for the quarter was $97 million-- highest in about seven years, and up from $35 million in Q1 of 2013. At $0.33 per share, it was also substantially better than the Zacks Consensus Estimate of $0.23 per share. ETFC has beat/met Zacks estimates in all of last four quarters, with an average quarterly surprise of 52.5%.

According to the management, “overall positive investor sentiment elevated brokerage activity to its highest level in nearly five years, which aided our record net new brokerage assets and brokerage account retention”.

Daily average revenue trades (DARTs) for the quarter were 198,000—up 24% from the prior quarter and 33% from the prior-year quarter.

ETFC got 72,000 net new brokerage accounts during the quarter, taking the total to 3.1 million accounts. During the quarter, customers added a record $4.1 billion in net new brokerage assets--an annualized growth rate of 7.5%.

As of March 31, 2014, bank and consolidated Tier 1 leverage ratios were 9.7% and 7.0% respectively, up from 9.5% and 6.7% at the end of the previous quarter.

Positive Earnings Estimates Revisions

After excellent results, analysts have raised their estimates for the company. Zacks Consensus Estimates for the current and next year are now $1.06 and $1.23 per share up from $0.95 and $1.20 per share respectively, 30 days ago.

The following chart shows the positive earnings momentum for the stock:

Rising estimates sent ETFC back to Zacks Rank #1 (Strong Buy) after the results.

Solid Industry Rank

Zacks industry rank for “Investment Brokers” is currently 37 out of 265 (top 14%).

The Bottom Line

ETFC is a Zacks Rank#1 (Strong Buy) stock. Further top Zacks Industry Rank also indicates strong chances of outperformance in the short- to medium- term.

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Friday, May 23, 2014

Memorial Day Weekend Stock Picks

3 Stocks for Memorial Day Weekend by Zacks Investment Research

After being stuck indoors through long and harsh winter, more Americans are expected to head outside on Memorial Day weekend. According to AAA, more than 36 million people are expected to travel a minimum of 50 miles over this period.

Travelers to Rise

Data from the annual survey released last week reveals that the number of people heading out for the holiday weekend this year could be the highest since 2005. That year, 44 million people traveled over the holiday weekend. The projected increase this year is being attributed to a rise in the number of employed citizens and an increase in disposable income.

The number of people traveling will be 18% higher than the figure recorded in 2009. During that year, only 30.5 million Americans decided to travel on the Memorial Day weekend. Since 2011, numbers have been on the rise once again.

Drivers Lead the Pack

The report also predicts that most travelers will literally hit the road, with 31.8 million expected to drive. This is 1.3% higher than last year’s figure of 31.4 million. A major incentive for this increase is the reduction in gas prices. An increase in supply has significantly reduced prices from last year’s average of $3.63.

However, the number of air travelers will also increase, by 2.4% to 2.6 million. Another 1.7 million will take a bus or train or go on a cruise. This is an increase of 6.5% compared to last year.

Will It Cost More?

Traveling this weekend could be costlier than last year, says AAA. At around $169 per night, you would have to pay $3 more for a hotel room compared to last year. Similarly, the average cost of a round-trip plane ticket will increase from $215 to $227 this year.

At $44 a day, car rentals will experience an increase of 1% compared to last year. However, personal income has increased by 3.4% from last year and so the rise in prices should not be a deterrent to travelers.

Below we present three stocks poised to benefit from the increase in travel this weekend, each of which also has a good Zacks Rank.

Avis Budget Group, Inc.

Avis Budget Group, Inc. (CAR) provides vehicle rental services through a network of approximately 10,000 car and truck rental locations in the U.S., Canada, Australia, New Zealand, Latin America, the Caribbean, and parts of Asia. The company was founded in 1946 under the name Cendant Corp., which it later changed to Avis Budget Group in 2006 after a spinoff.

Avis Budget Group holds a Zacks Rank #1 (Strong Buy) and expects earnings growth of 26.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 19.38.

Delta Air Lines Inc.

Delta Air Lines Inc. (DAL) is the second largest U.S. airline and provides scheduled air transportation for passengers and cargo throughout the U.S., and around the world. The company’s route network is centered on the hub system that it operates at airports in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York- John F. Kennedy International Airport (JFK), Salt Lake City, Paris- Charles de Gaulle, Amsterdam and Tokyo-Narita.

Currently the company holds a Zacks Rank #1 (Strong Buy) and expects earnings growth of 15.4%. It has a P/E (F1) of 12.76.

Royal Caribbean Cruises Ltd.

Our third choice is Royal Caribbean Cruises Ltd (RCL). The company has five cruise brands Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises and CDF Croisières de France. Additionally, it has 50% investment in a joint venture with TUI AG, which operates the brand TUI Cruises.

Apart from a Zacks Rank #2 (Buy), Royal Caribbean Cruises expects earnings growth of 26.3%. It has a P/E (F1) of 15.73.

The increase in temperatures will provide a welcome boost to companies related to travel and tourism. This is why these stocks would make for good choices for you ahead of this holiday weekend.

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Tuesday, May 20, 2014

Review If the New Years Markets Predictions Came True

Which Asset Class is Living True to Its New Years Resolution?

By Market Authority

“Should Old Acquaintance be forgot, and never thought upon”

Along with singing off-key renditions of “Auld Lang Syne” and making (soon-to-be-broken) resolutions, investors were spending New Year’s Eve 2013 scaling out of their bond positions at the lows of the past year. Towards the end of 2013, it appeared that the long-term love affair with bonds was ending as the Fed began scaling back on bond purchases. However, old acquaintances are not quickly forgot.

Since New Year’s Day 2014, the TLT (the ETF which closely tracks the US Treasury 20+ year bond) has risen 12% and outperformed all major asset classes. The following chart shows TLT’s “dip and rip” in the past year:

And here’s the 2014 performance of TLT vs SPY and GLD:

The Fed has tapered (slowed down) the pace of monthly asset purchases from $85bln a month to $45bln a month. And this taper is expected to continue throughout the year. The largest buyer of bonds is fading out of the picture, yet those assets are still outperforming the market. How can that be?

For starters, this is hardly a new phenomenon. Previous bouts of Quantitative Easing have raised, not lowered, interest rates.

QE programs are intended to raise economic growth and create inflation. In the case of QE3, the Fed is targeting a 6.5% unemployment rate and a 2% inflation rate. When investors expect growth to improve and inflation to pick up, they demand a higher interest rate to lend money. As the Fed ends QE, some investors fear that growth hasn’t quite reached escape velocity, the rate needed to escape the Great Recession and continue on the path of long-term economic growth. Thus, these concerns compel investors to rotate back into safer assets (re: US Treasuries).

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Monday, May 19, 2014

Investing in Footwear Earnings Growth

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Although many retail names were hit hard by the cold weather, a few have managed to post strong results. Interestingly, the footwear segment has been an especially strong performer with a number of companies in this space beating out results.

One such company that is a great example of this trend is undoubtedly Skechers (SKX - Trend Report), a California-based firm that is now up nearly 100% over the past year. Yet with such a strong performance, investors might we wondering if the good times can continue for SKX, especially given the rocky trading in a number of other surging names.

Fortunately, there are plenty of reasons to be optimistic about this stock for the long haul, though investors may first want to look at the recent earnings from SKX to get a better picture of the trends in place.

SKX Earnings

For the most recent earnings report, SKX absolutely crushed the consensus estimate. Earnings came in at 61 cents a share, far better than the 33 cent per share profit that analysts were expecting. This follows up a strong beat for SKX to close out 2013, and it actually helped to push the average beat over the last four quarters to a truly impressive 125%.

The company is looking to expand its store count this year, and given its strong performance in an otherwise difficult quarter for retail, many analysts are starting to raise their estimates for SKX’s full year outlook. In fact, in the past sixty days not a single estimate has gone lower on Skechers for either the current year or next year time periods.

Estimates in Focus

The magnitude of the earnings estimate revisions have also been impressive, as the consensus estimate has surged up to a point that the company is now projected to see earnings growth of 90% for the current year. The current year consensus has actually moved from $1.81/share 30 days ago to $2.06/share today, while investors have noticed a similar increase for the next ear period too. For that time frame, estimates have moved from $2.24/share 60 days ago to $2.69/share today, suggesting that the long term future for SKX is looking pretty bright.

Thanks to these factors, SKX has earned itself a Zacks Rank #1 (Strong Buy), meaning that it is in rare company from this earnings estimate revision perspective. And according to our research, companies with such favorable metrics on this front tend to outperform the market by a very wide margin.

Bottom Line

If this wasn’t enough for investors, it is also worth pointing out that SKX’s industry of retail shoes apparel is ranked in the top 20% of all industries, so there are definitely some positive trends in place for this outperforming corner of the market. Plus, when you add in the fact that SKX is currently the only stock that has a ‘Strong Buy’ rating in the industry, and it becomes clear that Skechers should be a top pick for your portfolio.

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Friday, May 16, 2014

Financial Market Surprises for the Second Half of 2014

I have been thinking quite a bit about what is going to happen to the stock market in the remaining months of 2014. Below are four surprises that have a good chance of occurring in the coming months that are not currently widely reflected in common thinking.

Surprise #1

When Zacks Investment Management was a much smaller company we used to have our holiday parties around a table. Ben Zacks, my uncle and the other primary portfolio manager at Zacks, would go around the table and ask everyone which way they thought the market was headed. Based on whatever was happening in the market that month and the fact that people who worked at an asset management firm were being asked to state where the market was headed, most people wound up agreeing the market was heading in a given direction. Ben, after hearing everyone’s view would then pronounce that the market was headed in the other direction. The whole thing usually elicited a chuckle, but the exercise contained a very important lesson. When everyone believes the market is headed in a given direction that belief is reflected in market prices. As a result the market actually is more likely to head in the opposite direction.

Currently, there is a widespread belief throughout the media and individual investors that the market has come too far for too long. The crashes of ’08 and ’00 loom extremely large in investors’ minds and as a result while bullish sentiment is rising, it is not anywhere near the levels we usually see during a bull-market.

As a result most investors seem to see the market as overdue for a correction. I am not immune to the current zeitgeist. In my quarterly commentary for the first quarter of 2014 I also was looking for a pull-back or market correction. To some extent there is currently too much worry, too much concern about the stock market. Caution has not been thrown to the wind, as soon as speculative social media stocks rally they are immediately brought back down to earth. It is not the behavior we tend to see at the top of the bull market - cab drivers are not talking about owning Netflix ( NFLX ) stock and telling me I am crazy for preferring Johnson and Johnson ( JNJ ). Basically, too many people in the market are looking for a correction, there is some speculation but not what should be occurring after a five-year bull market.

Surprise: The Market does not pull-back over the next few months but instead the bull-market continues to climb the wall of worry.

Surprise #2

Economic growth in the first quarter of 2014 was very subdued. Much of the problem was based on the weather. The weather also helps explain why utilities as a sector did a little better than expected and retailers were under pressure. The natural state of the economy is expansion at a rate which is higher than population growth. Right now consensus expectations are for GDP growth just under 2% for the rest of 2014. I think it is possible for GDP growth to surprise to the upside. The reason is that there is likely to be a weather-payback.

In a healthy economy when the weather pulls back spending the spending does not disappear. The people who were going to engage in purchases and did not because of the weather just postpone the purchases until later. If someone was looking to buy a car in the first quarter of 2014 and they delayed their purchase because it was too cold and snowy to head to dealerships, they generally buy the car in the next quarter. As a result of the weather payback, it is very possible that just as GDP growth surprised to the downside in the first quarter it will surprise to the upside in the next few quarters. Additionally, employment seems to be firming and financial conditions are improving. Financial uncertainty is being reduced. All of this points to the possible surprise.

Surprise: The economy improves above trend due to weather payback, earnings of retailers surprise to the upside.

Surprise #3

There has been a huge push towards alternative assets by pension funds. I truly believe this push is wrong-headed. If all hedge funds were truly market neutral and bore no net equity exposure than for one hedge fund to generate returns another hedge fund would generate losses. There is only so much alpha to go around for a given hedge fund strategy. Essentially, hedge funds simply battle it out for this alpha. For instance, in risk arbitrage where a firm bets that an announced acquisition is going to close there is a limited number of announced acquisitions.

The alternative asset game is a zero-sum game. For some participants to win, others must lose. Long-only equity investing is not a zero-sum game because the pie – or aggregate returns of market participants can be positive across the board. The reason is that corporate earnings in aggregate generally grow over time and if P/E multiples remain relatively constant the stock market indexes head higher. It is very likely for every long-only equity investor to make money on average over the next ten years, it is impossible for every hedge fund to make money on average over the next ten years.

As a result of the market pull-back in ’08 the allocation to alternative assets increased dramatically. Large institutional investors became risk averse but they still needed returns, they turned to hedge funds. The timing as it often is with these things was completely off.

The alternative asset boom is likely to end not with a bang of hedge fund implosions but with the whimper of underperformance relative to the broad market. Interestingly enough Warren Buffet made a bet with a fund-of-funds that the S&P 500 would outperform a fund whose sole purpose in life is to pick other hedge funds to invest in. So far, Buffet is winning the bet.

Surprise: The institutional money in hedge funds continues to underperform the long-only market indexes. The towel begins to be thrown in later this year and the institutional money finds a new home being long the stock market.

Surprise #4

I have been calling for inflation for quite a long time. Yet, the ten-year yields started 2014 around 3% and now it is down to 2.6%. I believe that despite the pullback in quantitative easing the Fed’s bond buying is still making up huge chunk of the reason interest rates are going lower. It is looking more and more likely that quantitative easing is working better than most people anticipated. Despite the Fed pulling back on bond buying, interest rates have not shot up like they did in the late half of 2013.

I still expect that the Fed’s bond buying will be done by the second half of the year and anticipate inflation as measured by core consumer price inflation to rise from 1.2% in 2013 to 1.4% in 2014.

Government debts can only be repaid through raising taxes, cutting spending or inflating the currency. Common sense seems to indicate that the currency must be inflated to deal with the current budget debt. However, there is still an almost permanent increase in labor supply keeping wage inflation in check. Historically there has never been a period of price inflation without wage inflation. It is looking more and more likely that interest rates will not be rising.

Surprise: Inflation actually comes in lower than expectations. This causes interest rates to remain very low and allows fixed-income investments not to fall in value. As a result of lower than expected interest rates the P/E multiple of the market actually moves higher.

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Wednesday, May 14, 2014

Time to Short Sell Technology Stocks with David Einhorn?

Prophetic Short Seller Sees a Tech Bubble. But Does it Even Matter? By Market Authority

Modern finance has its share of prophets. For these widely followed investors, disclosing a new position can lead to an immediate move in share price. Warren Buffett’s prophecy is powerful enough to move a stock’s value by 10%. Some believe that George Soros caused the Asian financial crisis merely by disclosing short positions in the Thai Baht and the Indonesian Rupee.

David Einhorn is a smart man, and his legacy is growing. The founder of Greenlight Capital started the fund in 1996 with $900,000. Since then, he’s generated an average annual return of 20% and the fund’s assets under management have swelled north of $10 billion. In April 2008, he announced a short position in Lehman Brothers, accusing the firm for improperly accounting for massive illiquid real estate investments. Five months later, the firm filed for bankruptcy and Einhorn catapulted into the ranks of financial prophets capable of moving markets.

When Einhorn makes a huge tech bubble call, it would be pertinent for you to pay attention. He made the following comments a few weeks ago:

“There is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.”

He categorized the current bubble as “an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm.”

In an investor letter, he outlined three reasons that back his theory:

The rejection of “conventional valuation methods”.

Short sellers being forced to cover positions.

Big first-day pops for newly minted public companies that “have done little more than use the right buzzwords and attract the right venture capital.”

Nobody can ever say for certain how long a bubble will last. As Keynes infamously remarked, “The market can stay irrational longer than you can stay solvent.” Perhaps the public finally gets excited and propels tech stocks to even more ludicrous valuations. Cab drivers aren’t tipping us to buy Twitter (TWTR) like they were with Yahoo (YHOO) 15 years ago.

Yet there’s a silver lining to this cloud. Without the widespread acclaim for the tech bubble, the collapse should only hurt the 1% that has benefited from the meteoric rise in tech valuations. And this is a segment of the population that is well-insulated from a sudden income adjustment, as they’ve been the prime beneficiaries of QE. Thus, the economic fallout from a bursting tech bubble should be well contained and not dramatically impact GDP.

There are signs that the tech bubble is deflating in a self-contained manner already. Look at the 3-month outperformance of the SPY (blue line) over the tech-heavy QQQ (green line):

Not every bursting bubble needs to be as dramatic as the dotcom or housing crisis. Pay attention to who owns the assets to assess the fallout.

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Monday, May 12, 2014

Investing in Waste Management Earnings Growth

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2014 has been very rough for a number of small and mid cap securities as bubble fears have plagued the space. In fact, the Russell 2000 is down close to 4.5% so far in 2014, including a roughly 5.4% loss in the last month alone.

However, while many small cap stocks have floundered in this environment, a few have been able to fight through the pessimism and prosper. A great example of this is the often-overlooked US Ecology (ECOL - Trend Report), a stock which has soared by over 25% so far in 2014.

ECOL in Focus

US Ecology is a Boise, Idaho based company that provides waste treatment, disposal, and recycling services, mostly in the Western United States, though it has branched out to Canada, Texas, and Michigan as well. The firm specializes in a variety of waste services including hazardous, industrial, and radioactive management.

As you might guess, this is a relatively ‘wide moat’ business that can be difficult to break into for many firms. This has allowed ECOL to prosper in a variety of market conditions, and makes it an interesting (and seemingly less risky) way for investors to tap into the small cap space.

This has really come in handy for investors so far in 2014, as the stock has easily outperformed its peers in the Russell 2000 on a YTD look. Yet while there have been big gains, investors have to be wondering if this trend can continue in the near term. We certainly think so, at least based on some positive earnings activity in the past few weeks.

ECOL Earnings

US Ecology has been a very solid performer at earnings season, as the company hasn’t missed earnings in several years. Its most recent report was particularly solid though, as the company crushed the Zacks Consensus of 34 cents a share, posting EPS of 44 cents, marking a surprise of 29.4%.

Thanks in part to this string of beats, as well a strong pipeline of upcoming projects, and many analysts are starting to think more favorably about ECOL’s short term earnings future. In fact, earnings estimates for next quarter, this year, and next year have all been universally revised upwards in the past two months.

The biggest jumps were seen in the current year and next year figures though, suggesting greater promise for the long term future of ECOL. The consensus for this year’s earnings has moved from $1.57/share a week ago to $1.75/share today. Meanwhile, for next year’s earnings, the consensus has moved from $1.73/share to $1.94/share in a week’s time, further underscoring the newfound bullishness on this company.

Still Room to Run?

Given this positive movement in terms of analysts’ estimates, there is still reason to believe that ECOL has room to move higher. Plus, since many other small caps are facing severe pain as of late, this could be a safer play in that market capitalization level for skittish investors.

It also doesn’t hurt that ECOL has earned itself a Zacks Rank #1 (Strong Buy) based on this positive earnings estimate revision activity, suggesting that the firm will continue to outperform. This is especially true since ECOL just saw its stock get upgraded to #1 territory within the past week, meaning that there is still time for investors to get on board this wide moat company that has proven it can easily beat estimates as well.

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Friday, May 09, 2014

Successful Startup Investments

Here’s the Secret to Successful Startup Investments by Market Authority

Yesterday, we touched on the enormous growth in the “Internet of Things”: connected devices that can store data and respond to changing environments and smart technologies that increase productivity and convenience. Some of these discoveries will be readily adapted, while others will fail miserably. How then do we decide which technologies will succeed in the Internet of Things?

A few years ago, a successful tech investor taught me a simple principle that distinguishes technologies that succeed from technologies that fail. It’s the same rule that angel and venture capital investors follow when making seed investments:

Every worthwhile technology must “take the pain away.”

“Taking the pain away” describes a solution to a problem. “Pain” is the stress or anxiety we encounter in our daily activities (The Italian side of my family refers to it as “agita.”) A new technology’s success depends both on the magnitude of the problem and the viability of the solution.

In the 1993 film Falling Down, Michael Douglas plays William Foster, a recently divorced and laid-off white collar worker that goes on a violent rampage through the streets of LA in an attempt to arrive on time for his daughter’s birthday party. It wasn’t the divorce or the job loss that really set Foster off. It was the traffic.

Traffic causes an enormous amount of agita for two reasons: the onset is unexpected and the duration is undetermined. How many times have you felt helpless sitting in traffic with no idea how long the jam will last? We can all agree that a technology able to quantify how long you’ll be idling on the New Jersey Turnpike, allowing you to postpone breakfast with the boss, would be very valuable. Perhaps that same solution can detect where the rubbernecking is occurring and offer another route.

Waze, a mobile app that provides user-submitted traffic info and route details to drivers, solves this problem. Winners of the Best Overall Mobile App award at the 2013 Mobile World Congress, Waze was acquired by Google in June 2013 for $1 billion. At the time of the acquisition, Waze had already been downloaded 50 million times.

The app is simple to use and eliminates an enormous amount of traffic pain. Enter your destination and Waze sources data from other users on potential routes to determine the optimal route. The app then provides turn-by-turn navigation to arrive at the intended destination in the shortest amount of time possible. While Waze can now only be accessed via mobile, the connected car will be a standard for automakers in the near future.

The Waze app has rapidly achieved success because traffic is a nightmare. There’s another area in the venture capital space, however, where money is flooding into solutions and these are solutions looking for a problem: mobile payments.

For the last few years, one startup after another has tried to “take the pain” away from the laborious task of taking your credit card out of your wallet and swiping it. (I hope you can detect my sarcasm). Countless VC dollars have been thrown at a dozen apps intended to replace your wallet. None of these has been widely accepted by consumers.

The failure of mobile payments is clear: consumers don’t experience agita from pulling out a credit card when making a payment. At least not enough pain to facilitate the process of finding an app that makes paying easier. Traffic causes humans to devolve into steering-wheel-banging, horn-blowing creatures; reaching for your credit card does not.

Some of these apps rely on scanning NFC chips which are already found in most credit cards. Other payment platforms involve the cumbersome task of pointing a mobile phone at the register and snapping a photo. Both actions still require the fumbling around in one’s pocket, purse or backpack to obtain the payment device.

Unlike Waze, mobile payments remains a solution looking for a problem. If Starbucks customers start going on violent rampages while waiting in line, then perhaps we’ll find a viable solution to take their pain away.

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Wednesday, May 07, 2014

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Monday, May 05, 2014

Investing in Biotechnology Healthcare Earnings Growth

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By Zacks Investment Research

The Biotech Bubble Burst of 2014 will forever be remembered by the sector's investors and traders for the pin that did the pricking in late March: a letter from US Representative Henry Waxman of California to Gilead Sciences (GILD - Trend Report) about the pricing of their hepatitis C drug Sovaldi.

The drug launched in December and was on its way to blockbuster status -- generally regarded as at least $1 billion in annual sales -- almost immediately. But at $84,000 for a 12-weak treatment regime, it certainly raised some eyebrows.

"Our concern is that a treatment will not cure patients if they cannot afford it," wrote Waxman along with other House Democrats from the Energy and Commerce Committee.

The Real Cause & Effect Fallout

In the weeks following that letter, the Nasdaq Biotechnology Index ETF (IBB), fell nearly 20% and completed a full 24% correction off its all-time high of $275 down to $210.

The undisputed leader of the pack, Gilead, fell 16% after the letter and also corrected 24% in total off its all-time high near $85 set in February.

But two realities became fairly obvious during that bio-wreck selling...

1) The Biotech sub-sector was already frothy in Q1 and the Waxman letter was only an additional, if not the final, straw

2) The chances of Congress impacting drug pricing, without insurer support, is considered slim by most industry analysts

Why would healthcare insurers not jump at the chance to get Congress to intervene in Gilead's pricing for Sovaldi?

Because the alternative for the cure that Sovaldi provides could be much more expensive. Estimates for liver transplants run between $400,000 and $500,000.

Another element here for insurers like Aetna (AET - Trend Report) and UnitedHealth (UNH - Trend Report) is that while these blockbuster drugs for rare or life-threatening disease get all the headlines about costs, the industry has actually been saving more money with the steady underlying growth of the generic drug business.

The Gilead Earnings Path

This is not to say that some day there won't be legislative action to regulate drug pricing. This first shot across the bow gets a conversation going that could be very productive and educational for all sides.

Lawmakers need to understand the R&D dollars that a company and its investors are willing to risk with experimental drugs. The science alone is not their reward and if too many limits are placed on potential profits, less R&D might ever be started.

So while that national conversation begins, let's look at the earnings growth path of one of the strongest biotech franchises on the planet. Below is the Zacks Price & Consensus chart for Gilead, showing the strong ramp in estimates after the spectacular Sovaldi sales numbers started pouring through in the past month.

The anticipation of a strong Sovaldi launch was so over-the-top, that when the company reported a 92% beat in its bottom line EPS number two weeks ago, estimates actually came down a bit.

With such a big drug launch, analysts are still getting their models tweaked to forecast full-year sales estimates which have ranged from $5 billion to $11 billion.

Clearly with Sovaldi bringing in sales of $2.3 billion in its first full quarter on the market, the figures show the high acceptance level among physicians and insurers for this life-saving treatment. The only disappointing part was the company not raising its guidance or providing specific guidance for Sovaldi sales.

Why GILD is a Core Biopharma Holding

Sovaldi will be probably a cash cow for GILD for at least a couple of years. Even if the company does $10 billion in sales annually they are still only treating a small fraction of the market, with 3 to 4 million in the US afflicted with HCV and over 150 million globally. This is a huge market which Gilead dominates.

Plus, GILD has a productive HIV/AIDS pipeline. And its blood cancer drug, Idelalisib, could eventually compete with Pharmacyclics (PCYC - Trend Report) Imbruvica in the treatment of chronic lymphocytic leukemia.

You can see the company's full drug pipeline on their website. But suffice to say that when they beat the consensus top line number by 25% with $5 billion in revenues, this is a biopharma powerhouse with surprising cash-generating capabilities.

After the company's Q1 report, Deutsche Bank analysts raised their price target on shares from $132 to $135. Hardly a real bump, but it reaffirms their stance on the long-term growth they saw coming last quarter.

I'm with them for the long-term on that call. At $78, the stock is trading at only 9X next year's projected consensus EPS of $8.50. But at a $120 billion market cap, it will take a while to even get to $100. So that's why GILD is the perfect "slow-and-steady" stock for biotech investors.

It's a core holding of many institutions and will only become more so with these growth projections. Buying the stock in the $70s is probably a good place to begin new positions. And don't miss those dips down into the $60s either.

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