Up 32% This Year, This Health Stock Is Set To Really Take Off

[John Thomas]

A recent piece of correspondence by a regular reader has prompted us to make a brief macro-review before we take on the week.
Please remember where we?ve been.

This is a bull market that has weathered ?

the much ballyhooed ?fiscal cliff?,
the ?sequester?,
the European debt debacle,
the highly anticipated Chinese hard landing,
QE 1,2 and 3 in all its iterations,
a year and a half rise without a correction,
the latest government shutdown,
Bernanke screaming,
Janet Yellen,
Obama Liking it and Keeping it,


and a host of other crises large and small, real and imagined, that have been hammered into our ears by the media for almost five full years.

And yet?

The market keeps rising.

So when the good folks who read our rantings (and we?re forever grateful for each and every one of you!) say that we only have a few hundred Dow points before the top, that the coming January debt ceiling showdown will mark a decisive market turning point, and that the fear of midnight is soon to befall us, we remind you once a

[John Thomas]

This is one of the more hilarious charts documenting the impossibility with which price targets and market forecasts are made each year by Wall Street?s analyst community.

Here?s a Morgan Stanley chart via @ukarlewitz of Fat Pitch Financial:

[John Thomas]

Random Thoughts


I'd like to give thanks to all the folks at Traders Expo, especially Tim Bourquin and Elaina Lowe.

Well, things looked a little iffy way back last Wednesday before I left for Vegas. The Quack had pulled back into its prior trading range. And, the Rusty appeared to be on its way to the bottom of its trading range.

As I said, with things mixed and the overall market not too far from new highs, a few big up days would be just what the Doctor ordered. And, that's exactly what we got on Thursday and Friday.

This action puts the Ps back to all-time highs. The Rusty is also at all-time highs. And, the Quack closed at multi-year highs.

The sector action looks great. Biotech, which had been rolling over, has now come back with a vengeance.

There are a few areas stinking up the joint such as Metals & Mining (especially Gold & Silver), Real Estate, and the Semis (which have been mostly sideways). Overall though, most areas are looking pretty good. Chemicals, Manufacturing, Defense, Brokerages, Regional Banks, Drugs, Insurance, Health Services to name a few are all at new highs.

The above is why we take things one day at a time and resist the urge to get too bearish when a market is not too far from new highs. Sure, fire off a short if you really really like the setup but for the most part, you want to wait to make sure the market isn't just taking a breather.

Okay Big Dave, things are looking good. So, do we buy, buy, buy? Well, not just yet. Enjoy the ride on existing longs. Make sure you take partial profits as offered and trail those stops higher. Since the methodology requires a pullback, hold off on new long side positions for now until the market follows through and pulls back. I'd avoid the short side for now. No need to fight it.

Click here to watch today's Market in a Minute.

Best of luck with your trading today!

Dave
omgmachines.com/ericx
__________

Expert swing trader Dave Landry comments on the charts for the major markets, indexes and sectors for the upcoming trading day in his daily one-minute video.

Make sure your sound is turned up. A new browser window will open and the video will begin playing within a few seconds.

Click here to watch today's Market in a Minute.


You can contact Dave Landry by email at dave@davelandry.com or visit his website DaveLandry.com.

[John Thomas]

The cost of energy production isn't just about money. There are also environment effects.

Last year, according to one environmental group, hydraulic fracturing (commonly known as fracking) alone generated an estimated 280 billion gallons of toxic wastewater, enough to flood Washington, D.C., to a depth of 22 feet. It's no wonder that there's a strong push to institute cleaner practices.

Green initiatives have come to dominate the corporate landscape and are attracting investment flows in record numbers. The performance in alternative energy this year is evidence of this growing trend -- the iShares S&P Global Clean Energy Fund (Nasdaq: ICLN) is up more than 50% year to date. While most of the attention has been focused on renewable energy and clean coal, environmentally friendly sectors like pollution and treatment controls have gone relatively unnoticed.

Calgon Carbon Corp. (NYSE: CCC) is a small-cap stock involved in the purification and treatment of water, air and food, as well as the poisonous emissions from coal-fired power plants. The company has been making tremendous strides in cost reduction, improving operating margins to around 20% from 13.6% just a year ago. (Calgon's leaner operation is one reason the research staff at StreetAuthority's Top 10 Stocks advisory recently named CCC a Top 10 small-cap stock.)

Calgon reported earnings on Nov. 5 and the results were right on line with expectations at $0.22 per share. Gross margins continued to grow, to 33.3% in the most recent quarter from 27.3% a year ago. The demand for activated carbon cloth, used in water, food, and other specialty markets, contributed to a 28.2% gain in consumer sales. The company's cash position climbed 65% from last year to about $30 million, while long-term debt increased only 8.7%, to $48.3 million.

Calgon's stock looks like a value in comparison to CECO Environmental Corp. (Nasdaq: CECE), its closest competitor, trading at around 25 times earnings while CECO trades at over 38. It also looks better from a debt standpoint, with a debt-to-equity ratio of just 0.54 compared to CECO's 1.09. While Calgon's stock is up 44% year to date, CECO's is up 58% and could be due for a pullback.

Looking to the future, Calgon sees opportunity in the mercury removal business. The current annual demand for mercury removal stands at 130 million to 180 million pounds and could grow to as much as 765 million pounds by 2016 as the EPA begins enforcing mercury removal regulations on industrial boilers and cement manufacturers.

The company has been positioning itself to take advantage of the new market by landing long-term contracts in February and September of this year for deals worth an estimated $50 million.

Even better for investors, the company -- which just wrapped up a successful $50 million share buyback program -- may initiate a far more aggressive $150 million to $200 million plan at the suggestion of Starboard Value, which owns about a 10% stake.



Risks to Consider: Like most "green" companies, Calgon is depending upon continued trends in corporate sustainability and tax credits for businesses purchasing their environmental controls. While the company expects the demand for mercury removal to increase by 2016, supply exceeds demand and could continue to do so for the short term.

Actions to Take --> The stock was upgraded to "buy" by BB&T Capital Markets on Nov. 11, suggesting that Wall Street may have finally caught on to Calgon's performance. The stock is currently trading at just over $20, which based on future earnings potential, placing it at about a 25% discount.

- Daniel Cross

[John Thomas]

The cost of energy production isn't just about money. There are also environment effects.

Last year, according to one environmental group, hydraulic fracturing (commonly known as fracking) alone generated an estimated 280 billion gallons of toxic wastewater, enough to flood Washington, D.C., to a depth of 22 feet. It's no wonder that there's a strong push to institute cleaner practices.

Green initiatives have come to dominate the corporate landscape and are attracting investment flows in record numbers. The performance in alternative energy this year is evidence of this growing trend -- the iShares S&P Global Clean Energy Fund (Nasdaq: ICLN) is up more than 50% year to date. While most of the attention has been focused on renewable energy and clean coal, environmentally friendly sectors like pollution and treatment controls have gone relatively unnoticed.

Calgon Carbon Corp. (NYSE: CCC) is a small-cap stock involved in the purification and treatment of water, air and food, as well as the poisonous emissions from coal-fired power plants. The company has been making tremendous strides in cost reduction, improving operating margins to around 20% from 13.6% just a year ago. (Calgon's leaner operation is one reason the research staff at StreetAuthority's Top 10 Stocks advisory recently named CCC a Top 10 small-cap stock.)

Calgon reported earnings on Nov. 5 and the results were right on line with expectations at $0.22 per share. Gross margins continued to grow, to 33.3% in the most recent quarter from 27.3% a year ago. The demand for activated carbon cloth, used in water, food, and other specialty markets, contributed to a 28.2% gain in consumer sales. The company's cash position climbed 65% from last year to about $30 million, while long-term debt increased only 8.7%, to $48.3 million.

Calgon's stock looks like a value in comparison to CECO Environmental Corp. (Nasdaq: CECE), its closest competitor, trading at around 25 times earnings while CECO trades at over 38. It also looks better from a debt standpoint, with a debt-to-equity ratio of just 0.54 compared to CECO's 1.09. While Calgon's stock is up 44% year to date, CECO's is up 58% and could be due for a pullback.

Looking to the future, Calgon sees opportunity in the mercury removal business. The current annual demand for mercury removal stands at 130 million to 180 million pounds and could grow to as much as 765 million pounds by 2016 as the EPA begins enforcing mercury removal regulations on industrial boilers and cement manufacturers.

The company has been positioning itself to take advantage of the new market by landing long-term contracts in February and September of this year for deals worth an estimated $50 million.

Even better for investors, the company -- which just wrapped up a successful $50 million share buyback program -- may initiate a far more aggressive $150 million to $200 million plan at the suggestion of Starboard Value, which owns about a 10% stake.



Risks to Consider: Like most "green" companies, Calgon is depending upon continued trends in corporate sustainability and

[John Thomas]

The first rule of running a biotech company: Don't run low on cash. Once investors smell a cash squeeze coming, they'll hammer shares mercilessly.

That was the painful lesson learned by the executives at Dynavax Technologies (Nasdaq: DVAX). Though DVAX was pursuing the development of a very promising new vaccine, the company was burning through more than $15 million in cash every quarter and was at risk of not making it to the FDA finish line. Shares, which traded around $5 in October 2012, skidded all the way to $1.

The good news is that the company shored up its balance sheet late last month, and shares have finally begun to rebound. And, with a few breaks, DVAX looks poised to rise from a recent $1.45 to $3, $4 or even $5.

Little Company, Big Target Market
DVAX has spent years developing Heplisav, which is a vaccine for hepatitis B, a disease that currently afflicts 240 million people around the world, according to the World Health Organization.

Though there are existing vaccines on the market, DVAX believes that Heplisav offers the promise of earlier and better protection with fewer doses than current vaccines.

It appeared it was going to be smooth sailing through the FDA approval process until late last year. The FDA seeks two virtues from any new drug: higher efficacy and a comparable or improved safety profile compared to existing drugs.

On the first count, the FDA gave a resounding thumbs-up, as an advisory panel voted 13-to-1 in favor of the drug's increased effectiveness. But the FDA also decided that DVAX had not sufficiently proved that Heplisav was safe.

The FDA did not say that Heplisav was unsafe, only that the clinical trials thus far couldn't conclusively prove that the drug was safe. And the company has been scrambling ever since to deliver better data, essentially conducting a completely new Phase III clinical trial. For much of 2013, DVAX has been designing that new trial, and the company recently said that it will get underway in a few months.

Although that Heplisav trial will not be completed until sometime in 2015, management is likely to deliver interim results throughout 2014, which should serve as catalysts for the stock.

Meanwhile, Heplisav is also in front of the European Medicines Agency (EMA), and the company is expected to respond to the EMA's final information queries later in the fourth quarter and in early 2014. European approval of Heplisav would quickly push this stock toward the $2.50 to $3 mark, and shares would likely move higher from there as U.S. approval starts to come into focus.

So, what would this stock be worth if DVAX receives both European and U.S. approval for Heplisav?

The current hepatitis B vaccine market is around $700 million, led by vaccines offered by GlaxoSmithKline (NYSE: GSK) and Merck (NYSE: MRK), which require three doses. But, according to DVAX, poor compliance is an issue, with only 30% of the people that should get all three required doses doing so. Also, the current vaccines have a slow onset of protection and aren't always effective, especially in people over 40, or those that also have other ailments such as diabetes.

DVAX's Heplisav, which provides more rapid protection, has also been shown to have high levels of efficacy in those who are less responsive to currently licensed hepatitis B vaccines, such as men, people who are obese, and smokers, as well as diabetics. This could lead to greater demand for DVAX's vaccine compared with others.

Moreover, Heplisav may come with a higher price tag than current vaccines. As a result, the $700 million market may expand beyond $1 billion if Heplisav gets approved.

Assuming a $1 billion sales base and 15% operating margins, DVAX would be poised for $150 million in annual profits. The company would likely be worth 10 times that peak profit forecast, or $1.5 billion. The company's current market value is below $400 million, so shares appear to have 200% to 300% upside if both the U.S. and Europe approve Heplisav.

Understand that these are rough estimates, and the ultimate market value will be easier to determine once the company's pricing strategies are better articulated. (More than likely, DVAX would be acquired by a large drug company before actual drug sales took place.)

For now, it's safe to say that the current market value sharply discounts future success, as shares are only starting to recover from the balance sheet issues discussed earlier. Notably, trading volumes now exceed 5 million shares in many sessions, up from around 1 million shares per day earlier this year, reflecting a dramatic increase in investor interest.

Another bullish sign is that since Nov. 6, shares have risen in every trading session (though they still remain well below the $5 levels seen a little more than a year ago). I think longer-term shareholders could see the stock move beyond the $5 mark, a more than 200% gain from current levels.

[John Thomas]

This will be an extremely light week of posting at TRB. Thanksgiving, while sometimes active for the markets, is always a quiet time in terms of client service, meetings and scheduled calls. In the meantime, I?ve got my work cut out for me on the following projects:

1. I?m finishing up my second book right now (I?m a co-author) for a spring release. I think people are going to love it, but it?s still in draft mode at the moment.

2. My team and I are working on the new firm?s official website and related material, which we?ve opted to take our time on rather than throw together just because the firm has been launched. Still have no idea what the finished product will come out like, I?m taking a backseat to Barry on that project for the most part.

3. I?ve picked up a couple of interesting speaking gigs I need to be ready for. One speaking engagement I?m particularly excited about is for the employees at a certain recently-public social media giant during the first week of December. I?m so psyched to meet and greet the troops and hopefully have helpful insights to share.

4. I?ve got a series of fun posts planned for the newest, hottest, most aggressive media firm on the web this winter. They?ve got a kickass audience, tens of millions of young professionals and creative-types hitting their posts every day. I really want to kill it for them.

5. We?re integrating a new performance-reporting and portfolio analytics engine for our advisory clients that we?re really excited about. The rollout is expected to take place next week, it?s taken about six weeks so far to build out and is widely believed to be the best in the industry. I think our clients are going to be really excited as they get access to it.

So that?s it from me for awhile. I?ll be making a couple of TV appearances this week and maybe I?ll put up a post or two, but if I?m not around now you know why. In the meantime, I?d suggest you take this time to read as little as possible about the markets, the economy, etc. It will all be waiting for you when you get back.

Enjoy, my friends, see you soon. ? JB

[John Thomas]

Stuff I?m Reading this Morning?

A high level sector look at what top hedge funds bought and sold leading into Q4. (FactSet)

Pros polled by Bloomberg are big-time worried about a bubble. (Bloomberg)

Samsung gets nailed in patent suit, forced to pay $290 million to Apple, which has absolutely no idea what to do with more cash at the moment. (NYP)

All kidding aside, Marissa hasn?t done much to improve Yahoo?s core business, the stock price is 75% ?Asian assets? and 25% her. (CNNMoney)
Dan Loeb buys stake in Japan?s Softbank as a way to play Alibaba?s IPO. Details here: (Reuters)

Using Holiday Sales Forecasts as an Investment Tool is Pointless (YourWealthEffect)

Paulson?s gold hedge fund is now down 63% year-to-date yet is still capable of generating hilarious headlines. (Bloomberg)

The fact that Wall Street guys are still passing around Pessimism Porn charts says we?re not quite in a bubble yet. (BusinessInsider)

Finra is cracking down on ?high risk? or ?rogue brokers? (WSJ)

Ken Fisher: If the broker-dealers get control of the RIA world via regulatory oversight, kiss your ass goodbye. (ThinkAdvisor)

How Wall Street?s changed since the crisis, great chart. (CNBC)

$48M in cocaine washes ashore in Japan (NYP)

[John Thomas]

One of the coolest things about the stock market is that money can be made regardless of the direction of a stock. I've often heard investors lament that they missed a sharp upward move.

Often, these same investors will commit the investing sin of chasing stocks that have made extreme short-term moves to the upside in the hope of momentum carrying shares even higher. While upward momentum can and does take stocks higher, more often than not, prices will quickly retrace the upward spike.

This leaves the stock chasers jumping from one hot stock to the next, wondering why many of their investments are losers.
One solution to this dilemma is to learn how to short. Shorting allows investors to profit from downward moves in price. For those of you unfamiliar with shorting stocks, my recent article on shorting biotech stocks describes the method. The same tactic can be applied to any stock, regardless of sector.

Stocks that have spiked higher often drop in price. This is particularly true if the increase is due to questionable news, hype or other dubious reasons. Just like the stock chasers, short sellers scan the market for stocks that have soared higher in a short time.
Next, these rocketing stocks are researched to determine whether the move was warranted and will be sustained. Sometimes the move is in reaction to a real event, but the shares simply become overextended. Other times, the upward move will be due to hype or any number of questionable reasons. These are the ideal short candidates.

Keep in mind that stocks can simply keep climbing higher, no matter how dubious the reasons. This is why stop-loss orders are critical when shorting.

I think InterCloud Systems (Nasdaq: ICLD) looks like an ideal short candidate of the overextended variety. Its share price recently spiked from a low of $2.20 to a high of $16.69 in just the past week. That's a gain of more than 650%.

InterCloud is a global provider of cloud, managed and professional consulting services for technology companies. It helps support the operation of enterprise, fiber optic, Ethernet and wireless networks. The stock moved from the OTC market to the Nasdaq on Oct. 31 after raising $5 million in a public stock offering.

A massively successful third quarter is what fueled the upward spike. The company reported that revenue increased by 448%, to $16.2 million; gross profits hit $5.5 million, crushing the $1.2 million from a year ago; and net income was $0.26 a share, compared with a loss of $2.16 a share a year ago. While these are compelling numbers, I think the share price increase is unsustainable, primarily due to the daily chart pattern.