Category: Uncategorized

Biotech stocks have gone parabolic over the past year, to a point that many have started calling them a bubble. Here’s the thing about sustained market trends – they always have an explanation, they always have a catalyst. In this case, I don’t refer to our natural desire to live longer and healthier in a world that is aging quickly. There is one very simple reason why healthcare stocks have become a bastion of momentum – The Affordable Healthcare Act.

Under Obamacare, there are more people with health insurance and therefore more people being able to afford expensive drugs – subsidized by the taxpayers. The system is not sustainable in the long-term, but it will boost many biotech companies’ cash flows in the next few years. The stocks market has been discounting exactly that.

The trouble with healthcare names is that many people are afraid to touch them for anything more than a quick trade or dedicate a sizable part of their portfolios. Biotech stocks are considered too volatile, too explosive, too unpredictable. In any given year, usually the best and the worst performing stocks come from the biotech sector. From one side of the coin, you could have $JAZZ, which went from $1 in 2009 to $150 today. From another, one day you could wake up to a 50% haircut if your company’s drug does not get a FDA approval. Not all biotechs are from the same pond.  $JAZZ didn’t get from $1 to 150 overnight. It has been consistently trending for 5 years. It has been consistently growing its earnings.

There are two types of forecasts – lucky and wrong. Here are my educated guesses and speculations about 2014:

1) In 2014, we will see an uptick in Volatility and correlation. All corrections in 2013 were minor and took the form of sector rotation. The deepest $SPX pullback in 2013 was less than 8%. We will see a lot deeper correction in 2014 – to the tune of 15% to 20% that will test and slice below $SPX’s 200-day moving average. This correction will be an amazing buying opportunity for both, long-term investors, who will be able to snatch high-quality brands at lower prices, and for momentum investors, who will be able to buy breakouts from sound weekly bases. The best time to buy a long-term position is when the main market indexes are down 10% and select, high-growth stocks start breaking out to 52-week highs despite the general market weakness.

2) The best performing stocks of 2014 will come from an industry very few people expect. The best performers in 2012 and 2013 had 3 common traits:
a) they came from industries that almost everyone hated at the beginning of each respective year. Those industries were hated, because they lost many investors a lot of money in the previous several years.
b) those industries were highly shorted
c) after underperforming for > 2-3 years, more and more members from those industries suddenly started to appear on the 52-week high list
In 2012, housing stocks were the brightest stars in the market – when they started to clear new 52-week highs from solid bases, the housing recovery was still questionable and no one believed those moves. In 2013, solar stocks came out of nowhere and crushed all other industries. Many watched in disbelief and mocked them, while left for dead solar stocks rallied 200% to 1000%. The one industry that currently meets the above mentioned 3 criteria is shipping. Watch the shippers. They have the potential to be the biggest surprises in 2014.

3) Upside momentum will continue to work. Here’s a little “secret” about price momentum as an equity selection tool. It works best with neglected stocks.

4) Some of the biggest losers of 2013 will turn into the biggest gainers in 2014. It happens every year with liquid stocks. Look at $NFLX, $BBY and $FSLR. Mean reversion works in over-followed, highly liquid names such as the members of the S & P 500 and the Nasdaq 100. The absolute worst performing $SPX stock for the past couple years is $JCP. There are two scenarios for $JCP in 2014 – it either files for chapter 11 (it is pretty much priced for that) or it finds its footing and rallies more than 300%.

5) Apple will come up with a bigger-screen iPhone and it will be awesome. It will be a huge success, but it will cannibalize from its iPads’ sales. Apple will also launch smart watches with bendable glass – it will be a huge hit and a new catalyst for it. Carl Icahn will call Tim Cook and invite him for steak. He will tweet about it.

6) $TWTR will reach $80 at some point, but it will have a 50% correction along the way – it is something typical for all long-term market winners.

7) More people will start paying for everything with their smart phones. Credit cards will gradually become relicts and collector items.

8) All crypto currencies will experience 80%+ correction at some point in 2014. This will be a buying opportunity. Venture capitalists and angel investors will invests tens of millions of dollars in startups, specializing in Bitcoin-like technology.

9. Facebook will buy Tinder.

10. $HLF will go over $100 and Bill Ackman will cover part of his short. He will keep the bulk of it until he retires or until he is right, whichever comes first. His company will see an increase in redemptions.

2013 has been an year of huge comebacks and massive short squeezes. Some of the most hated stocks in 2012 – NFLX, FSLR, BBY, ended up being among the best performers in 2013. Let’s take a look at the S & P 500 five best and worst performers from 2012 and how they have done in 2013 so far:

The worst S&P 500 performers in 2012 were:
$HPQ -42.7%
$JCP -42.8%
$BBY -46.5%
$AMD -55.6%
$APOL -61.2%

Here’s how they have done in 2013 so far. Aside from the continues disaster in JC Penney and the subpar performance in Apolo, the other three have had quite a comeback. The average 2013 gain of the 5 worst 2012 performance is +68%.

Here are the top 5 SPX performers from 2012

$BAC +109.4%
$EXPE +115.1%
$WHR +118.7%
$S +142.3%
$PHM +187.8%

How have the top 5 performers of 2012 done in 2013 so far? Their average performance so far in 2013 is 24.9%, which is about average market performance.

Here are the best 5 SPX performers for 2013 so far: NFLX, MU, BBY, DAL, PBI
And the worst 5 S &P 500 performers for 2013 so far: JCP, NEM, CLF, TDC, EW