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

[John Thomas]

Here at StreetAuthority, we're constantly on the lookout for stocks worthy of our Top 10 Stocks advisory -- and a stock doesn't attain that status by accident.

One energy company in particular is a perennial Top 10 Stocks favorite. I profiled this company two years ago, calling it "the safest oil stock to buy." The results since then haven't been bad at all.

Including dividends, investors who held shares of ConocoPhillips (NYSE: COP) enjoyed a compound annual growth rate of 31.8%, handily outperforming the S&P 500 Index's rate of 27.3%.

One might think that COP's chart indicates its run is done. Quite the contrary.

[John Thomas]

"There's no shame in holding cash."

It's a refrain you hear from many fund managers these days after witnessing the market grind ever higher. And no hedge fund manager has uttered that phrase more than Baupost Capital's Seth Klarman. The legendary value investor has actually started returning money to clients, finding few real bargains in this market.

But when Klarman does spot an investment opportunity, he goes big. Lately, he's been building sizable stakes in a pair of young companies that few would consider to be deep value plays. They are contrarian plays from a contrarian investor.

Idenix: A Blockbuster Or A Blowup?
An estimated 150 million people are infected with hepatitis C, making it one of the most widespread diseases in the world for which current treatments are considered to be inadequate. Though there are current treatments such as Interferon, a recent Wall Street Journal article noted that "a growing number of people infected with hepatitis C are putting off therapy, choosing instead to roll the dice and wait for a new generation of drugs to become available."

First out of the gate is Gilead Sciences (Nasdaq: GILD) and its sofosbuvir drug, which got a 15-0 thumbs-up last month from an FDA advisory panel. AbbVie (Nasdaq: ABBV) is expected to seek FDA approval for its own hepatitis C drug in 2014.

But Klarman thinks Idenix Pharmaceuticals (Nasdaq: IDIX), with its hepatitis C drug candidate IDX20963, could be the blockbuster in this market. He started buying shares of Idenix in 2011, and thanks to ongoing buying efforts (including a purchase of 3 million shares in this year's third quarter), now owns nearly 30 million shares, worth roughly $135 million at current prices. That makes him the company's largest stockholder.

[John Thomas]

For a landlord, there's absolutely no better tenant than this one.

Every year, the 12,000 employees at the U.S. government's General Services Administration (GSA) are tasked with spending roughly $66 billion dollars on all of the goods and services needed to keep our government running. The biggest expense: real estate. Although Uncle Sam owns nearly 10,000 buildings, he's also the nation's largest renter.

The government never bounces a rent check, and tends to look for long-term, stable leases. And as it turns out, renting to the government is quite profitable. A top landlord to Uncle Sam throws off sterling cash flow, which translates into a rock-solid 7% dividend yield for investors. That's a lot of reward for little risk.

I'm talking about Government Properties Income Trust (NYSE: GOV), a real estate investment trust (REIT) that leases more than 10 million square feet spread across 82 buildings, mostly to the public sector. (Roughly 68% of revenues are derived from the U.S. government, another 20% from state governments, 7% from the private sector, and 5% from the United Nations).

A sample of tenants includes:

-- The Centers for Disease Control (CDC) in Atlanta
-- Many of the Federal Bureau of Investigation's (FBI) satellite offices
-- A U.S. Army Logistics Center
-- The state of Oregon's capital complex

Apparently, business is good. While the national office building vacancy rate hovers at around 14.8%, according to Reis.com, this landlord has a vacancy rate around 7%. Equally important, this REIT's vacancy rate tends to be stable in any economic climate compared to commercial office buildings, which saw a spike in the vacancy rate up to the 18% to 20% range when the U.S. economy slowed in 1987, 1991, 2002 and 2009.

And GOV's key tenant is staying put. In the most recent quarter, the average lease renewal was for a term of 20 years.

With government spending under pressure, it's fair to wonder if GOV might start to see government tenants consolidate into fewer office spaces. "We really are not seeing impact specifically on our properties from sequester," noted CEO David Blackmon on a recent conference call, adding that "the buildings we have in the D.C. market tend to be relatively strategic to the government tenants. So fortunately for us, it hasn't had a real effect on occupancy at our portfolio."

Wondering how can GOV afford to pay out such robust dividends? The answer lies in the company's judicious use of debt leverage. Thanks to locked-in cash flows, GOV can borrow at low interest rates, and a debt-to-EBITDA ratio of 3.5 means that a little equity goes a long way. Over the past three years, GOV has generated net profit margins in excess of 20%. In contrast, Boston Properties (NYSE: BXP), the country's largest office REIT, has net profit margins in the 10% to 15% range.

Minimal organic growth
To be sure, the government's need for office space is likely to remain stable, but isn't expected to grow in coming years.

[John Thomas]

"Water, water everywhere, nor any drop to drink."

This line from Samuel Taylor Coleridge's poem "The Rime of the Ancient Mariner" is apropos not only for those lost at sea but for the Earth in general.

The Earth is indeed the "water planet," with more than 70% of its surface covered with the liquid. However, more than 97% of this water is unusable salt water, meaning freshwater accounts for less than 3% of the world's supply. Of that total, more than 70% is frozen, resulting in a very limited supply of usable freshwater. Only 0.007% of all of Earth's water is available for human use.

[John Thomas]

BAML: Here comes the big bank breakout

I?ve been talking about the idea that banks would / should lead the market into the next leg of the rally for a few weeks now. It appears that this breakout for the big bank stocks ? which had been trapped at resistance since July ? has already gotten underway. While most traders reference the XLF financial sector SPDR ETF when talking about bank stocks, the KBW Index is really the grandaddy, the old school traders? standard.

Here?s BAML?s ace technical strategist Stephen Suttmeier with an important call on that index:

The KBW banks Index (BKX) is consolidating within the rising channel from late 2012 and is set up for a breakout that would set up a rally to channel resistance at 74-75. A break above 67 for the BKX would would complete the bullish consolidation?
Also, a steepening of the yield curve (10-year Treasury yields minus 2-year Treasury yields) tends to coincide with stronger relative price performance for the BKX vs. the S&P 500.

Here?s Stephen?s chart of the yield curve vs the BKX : S&P 500 ratio:

[John Thomas]

Stocks remained relatively unchanged on Wednesday as U.S. retail sales were up in October. The Commerce Department announced that sales were up 0.4% in October surpassing economists expectations of a 0.1% increase. The increase in retail sales was the largest gain in nearly four months. One element dragging on the index was gasoline sales. They were at the lowest levels in over two years. This was partially attributed to the cheaper price of gasoline resulting in a lower price tag at the pump. Fuel sales were down 0.6% in October. When subtracting gas, sales were up 0.5%. Gennadiy Goldberg, a strategist with TD Securities, said, ?The stronger retail sales figure were driven by solid performance of furniture (1.0%) and electronics (1.4%) sales during the month. Clothing sales and eating and drinking also rose 1.4% and 1.0%, respectively.We believe stronger performance of these categories may have been a factor of consumers using the savings from lower gasoline prices to finance additional purchases or of retailers clearing inventories. If the former is true, with gasoline prices likely to remain contained in the near-term, we may see stronger consumption trends persist over the next few months.? There was also a revise of September?s sales data from the original decline of 0.1% to a flat 0.0%.

General Motors (GM) announced they will re-innovate their small pickup truck, the Chevrolet Colorado. GM revealed the model at the Los Angeles Auto Show on Wednesday morning. The new model has very little in common with the older version; the 2015 Colorado weighs in roughly 900 pounds less than the original model and is 16 inches shorter. It comes with bike racks and other modern accessories that GM hopes will attract ?lifestyle buyers,? as the company calls them. They are aiming to create their success of the company?s well known Forester SUV. Sales of the smaller SUV are up nearly 61% in the past two years. Alan Batey, senior vice president of Global Chevrolet, said, ?If there was a brand, a domestic brand, that could fill that space and really provide those types of things, we thought Chevy was a good place to do it.? GM are also looking to attract those individuals who need a smaller truck, one that is not as big as the Silverado or the GMC Sierra. Batey continued to say, ?We didn?t want to just create a really pretty truck that?s accessorized but can?t do anything.?

J.C. Penney (JCP) announced that their net income loss for the third-quarter was more than they were expecting. The company reported a net loss of $489 million, or $1.94 per share. This is a substantial loss compared to this time last year when net income dropped $123 million or $0.56 per share. The company did say that sales for the coming quarter are still encouraging. J.C. Penney is expecting to have more than $2 billion in liquidity at the end of this year. Shares of the stock were still trading higher as expectations remained high for positive comparable-store sales in the fourth-quarter.

That?s all for the day.
All the best,
Jack Aubrey, Oakshire Financial

[John Thomas]

Stocks remained relatively unchanged on Wednesday as U.S. retail sales were up in October. The Commerce Department announced that sales were up 0.4% in October surpassing economists expectations of a 0.1% increase. The increase in retail sales was the largest gain in nearly four months. One element dragging on the index was gasoline sales. They were at the lowest levels in over two years. This was partially attributed to the cheaper price of gasoline resulting in a lower price tag at the pump. Fuel sales were down 0.6% in October. When subtracting gas, sales were up 0.5%. Gennadiy Goldberg, a strategist with TD Securities, said, ?The stronger retail sales figure were driven by solid performance of furniture (1.0%) and electronics (1.4%) sales during the month. Clothing sales and eating and drinking also rose 1.4% and 1.0%, respectively.We believe stronger performance of these categories may have been a factor of consumers using the savings from lower gasoline prices to finance additional purchases or of retailers clearing inventories. If the former is true, with gasoline prices likely to remain contained in the near-term, we may see stronger consumption trends persist over the next few months.? There was also a revise of September?s sales data from the original decline of 0.1% to a flat 0.0%.

General Motors (GM) announced they will re-innovate their small pickup truck, the Chevrolet Colorado. GM revealed the model at the Los Angeles Auto Show on Wednesday morning. The new model has very little in common with the older version; the 2015 Colorado weighs in roughly 900 pounds less than the original model and is 16 inches shorter. It comes with bike racks and other modern accessories that GM hopes will attract ?lifestyle buyers,? as the company calls them. They are aiming to create their success of the company?s well known Forester SUV. Sales of the smaller SUV are up nearly 61% in the past two years. Alan Batey, senior vice president of Global Chevrolet, said, ?If there was a brand, a domestic brand, that could fill that space and really provide those types of things, we thought Chevy was a good place to do it.? GM are also looking to attract those individuals who need a smaller truck, one that is not as big as the Silverado or the GMC Sierra. Batey continued to say, ?We didn?t want to just create a really pretty truck that?s accessorized but can?t do anything.?

J.C. Penney (JCP) announced that their net income loss for the third-quarter was more than they were expecting. The company reported a net loss of $489 million, or $1.94 per share. This is a substantial loss compared to this time last year when net income dropped $123 million or $0.56 per share. The company did say that sales for the coming quarter are still encouraging. J.C. Penney is expecting to have more than $2 billion in liquidity at the end of this year. Shares of the stock were still trading higher as expectations remained high for positive comparable-store sales in the fourth-quarter.

[John Thomas]

In early 1997, the world was in awe of the record growth of Southeast Asia's "tiger economies" as markets opened and foreign investors rushed to fund new ventures.

However, by January 1998, stock markets across the region had lost as much as 70% of their value, and the crisis had spread to the rest of the emerging world. Even behemoth Russia wasn't immune, defaulting on its debt that same year.

Such massive and rapid growth relied on a constant influx of dollars to fund deficits and pay higher amounts of foreign debt. At the first sign of economic cracks, foreign investors withdrew their accounts, leading to a plunge in currencies and leaving the region's governments unable to pay debt denominated in now more expensive dollars.

Now it seems another emerging market has not learned much from that episode -- and may be doomed to repeat it soon.

A Financial Crisis With A Latin Flair
Latin America escaped the most recent crisis in 2008, with the region managing 4.5% growth in 2010. The iShares Latin America 40 (NYSE: ILF) jumped 120% in the two years after the March 2009 lows, outperforming the S&P 500 Index by 40%. Housing prices have increased dramatically for more than a decade, and credit for homeownership flows like water.

From my vantage point in Colombia, I talk to investors regularly -- and few want to acknowledge that trouble could be on the horizon. The Colombian national soccer team made the World Cup selection for the first time in six years, regional economies are strong, and Brazil is hosting two major events in the next three years.

And that brings us to the tipping point.

Athens Calling
In 2004, the world marveled as the Olympics returned to its Greek homeland in Athens. Greece spent $16 billion on those Summer Games, 10 times the original budget, in hopes that tourist dollars would pay the bills when they came due. Four years later, Greece was bankrupt; nearly a decade later, the country has just entered its sixth straight year of recession with a 28% unemployment rate.

Now Brazil has won the right to host the 2014 World Cup and the 2016 Summer Olympics. The country is spending more than $14 billion on World Cup projects, $3.3 billion of which will be spent on stadiums that are unlikely to have much real economic use after the games. The largest stadium being built, the Estadio Nacional, will hold 70,000 spectators. In comparison, the entire 57 games of the recent regional championship brought in only 50,000 people.

Brazil bid a $14.4 billion budget for the 2016 Olympics, equal to about 4% of the country's total tax revenue of $338 billion. If the 2007 Pan American Games, held in Rio de Janeiro, are any indication, the budget for the World Cup and the Olympics could be dwarfed by cost overruns. The Pan Am games were originally budgeted to cost $177 million with final estimates topping $1 billion for the event, over budget by sixfold.

Even if the cost overrun for the 2016 Games is not as bad as the Pan Am games, it will almost definitely run over budget. Every Olympiad since 1960 has gone over budget, by an average of 179% in real terms. That overrun would put the Brazil Olympics at $25.8 billion. Add this to World Cup spending of at least $20 billion, and Brazil's fiscal position looks precarious at best over the next few years.

Brazil desperately needs infrastructure spending, and some of the event budgets will be put to good economic use. The problem is that the lasting benefit accounts for only a small portion of the total spending.

An Unsustainable Path
Inflation in Brazil has begun to take hold, with consumer prices jumping 5.8% last month from a year ago. This is well above the central bank's 4.5% target and likely means that the 9.5% benchmark interest rate will continue upward. With the surge in public spending on the Cup and the Games, inflation is unlikely to moderate, but higher rates could choke off other business spending. Lower economic growth will hit tax revenues and the public burden could become unsustainable.

[John Thomas]

In early 1997, the world was in awe of the record growth of Southeast Asia's "tiger economies" as markets opened and foreign investors rushed to fund new ventures.

However, by January 1998, stock markets across the region had lost as much as 70% of their value, and the crisis had spread to the rest of the emerging world. Even behemoth Russia wasn't immune, defaulting on its debt that same year.

Such massive and rapid growth relied on a constant influx of dollars to fund deficits and pay higher amounts of foreign debt. At the first sign of economic cracks, foreign investors withdrew their accounts, leading to a plunge in currencies and leaving the region's governments unable to pay debt denominated in now more expensive dollars.

Now it seems another emerging market has not learned much from that episode -- and may be doomed to repeat it soon.

A Financial Crisis With A Latin Flair
Latin America escaped the most recent crisis in 2008, with the region managing 4.5% growth in 2010. The iShares Latin America 40 (NYSE: ILF) jumped 120% in the two years after the March 2009 lows, outperforming the S&P 500 Index by 40%. Housing prices have increased dramatically for more than a decade, and credit for homeownership flows like water.

From my vantage point in Colombia, I talk to investors regularly -- and few want to acknowledge that trouble could be on the horizon. The Colombian national soccer team made the World Cup selection for the first time in six years, regional economies are strong, and Brazil is hosting two major events in the next three years.

And that brings us to the tipping point.

Athens Calling
In 2004, the world marveled as the Olympics returned to its Greek homeland in Athens. Greece spent $16 billion on those Summer Games, 10 times the original budget, in hopes that tourist dollars would pay the bills when they came due. Four years later, Greece was bankrupt; nearly a decade later, the country has just entered its sixth straight year of recession with a 28% unemployment rate.

Now Brazil has won the right to host the 2014 World Cup and the 2016 Summer Olympics. The country is spending more than $14 billion on World Cup projects, $3.3 billion of which will be spent on stadiums that are unlikely to have much real economic use after the games. The largest stadium being built, the Estadio Nacional, will hold 70,000 spectators. In comparison, the entire 57 games of the recent regional championship brought in only 50,000 people.

Brazil bid a $14.4 billion budget for the 2016 Olympics, equal to about 4% of the country's total tax revenue of $338 billion. If the 2007 Pan American Games, held in Rio de Janeiro, are any indication, the budget for the World Cup and the Olympics could be dwarfed by cost overruns. The Pan Am games were originally budgeted to cost $177 million with final estimates topping $1 billion for the event, over budget by sixfold.

Even if the cost overrun for the 2016 Games is not as bad as the Pan Am games, it will almost definitely run over budget. Every Olympiad since 1960 has gone over budget, by an average of 179% in real terms. That overrun would put the Brazil Olympics at $25.8 billion. Add this to World Cup spending of at least $20 billion, and Brazil's fiscal position looks precarious at best over the next few years.

Brazil desperately needs infrastructure spending, and some of the event budgets will be put to good economic use. The problem is that the lasting benefit accounts for only a small portion of the total spending.

An Unsustainable Path
Inflation in Brazil has begun to take hold, with consumer prices jumping 5.8% last month from a year ago. This is well above the central bank's 4.5% target and likely means that the 9.5% benchmark interest rate will continue upward. With the surge in public spending on the Cup and the Games, inflation is unlikely to moderate, but higher rates could choke off other business spending. Lower economic growth will hit tax revenues and the public burden could become unsustainable.

Brazil 2014 Budget

Ministry of Planning and Budget
The government already spends 43% of its annual budget on debt and interest payments with only 6% going to education and health programs.
Now squeeze out upward of $45 billion of spending (13% of the budget) for the World Cup and Summer Olympics and huge cuts will need to come from somewhere or a default is imminent.

The value of the local currency, the real, has already fallen more than 12% this year, and higher inflation plus weak economic growth could cause it to fall further. This could lead to problems paying the country's dollar-denominated debt -- much like what happened during the Asian crisis of 1997. The country has been able to raise funds fairly easily, with a recent $7 billion 2025 offering -- but will it be able to pay the money back?

In recent research by Wells Fargo Securities, Brazil ranked fifth of 28 countries deemed most vulnerable to a crisis. The research focused on credit growth, ability to meet dollar demands on foreign debt and the exchange rate. Brazil ranked second on the list for highest increase in private sector debt to GDP since 2009, signaling that recent growth in loans may be too rapid.

More ominously, protests against corruption and the high price of the World Cup erupted in Brazil this year. Ultimately, I think the burden from the games will result in a change in the government and a default on debt. State-controlled Petrobras (NYSE: PBR) could be hardest hit as the government wipes out shareholders to prop up the debt situation. Shares are already down 70% from the 2009 high but could fall much further.

With presidential elections looming next year, Brazilian politicians will probably follow the typical playbook of boosting social spending to win re-election and worrying about the bills later. This may temporarily stave off a collapse, but the situation becomes more dire and inescapable as we look to 2015 and beyond.

Metals miner Vale (NYSE: VALE) has rebounded from its low this year but could also fall victim to the government's need for funds. The shares may be supported over the next year on infrastructure spending, but the long-term outlook is negative.

Beyond individual Brazilian companies, a bankrupt Brazil would almost certainly throw the rest of Latin America into a regional recession. The country accounts for more than 40% of the regional economy and imports more than $26 billion in goods and services from Latin American countries. In the same Wells Fargo study, six of the top 10 countries most vulnerable to crisis are in Latin America, with Colombia, Argentina, Peru, Chile and Mexico also seen as at risk.

Risks to Consider: Shares of the largest Brazilian companies are not expensive at 14 times trailing earnings and could get a boost from infrastructure spending in the short term. Investors may miss out on some rebound pricing but would do well to avoid a possible major crash in the long term.

Action to Take --> Spending ahead of the presidential election in 2014 may drive the economy for another year, but I would avoid Brazilian companies as long-term investments. Keep an eye on spending for the Cup and the Games to signal when you may want to take profits on other stocks from the region. A collapse of the government might not cause world markets to buckle, but it would definitely affect regional names and probably emerging markets across the globe.

- Joseph Hogue




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[John Thomas]

Random Thoughts


The Ps ended slightly lower. So far, their recent breakout remains intact and they only appear to be pulling back.

When it comes to the indices, it is a bit of a tale of two markets.

The Quack doesn't look quite as good. It sold off a bit on Tuesday. This action puts it back below its recent breakout levels. On a net net basis, it hasn't made any forward progress in nearly a month.

The Rusty got hit the worst. It lost over ?%. It too hasn't made any forward progress (net net) in quite a while.

The action in the Rusty is indicative of what happened internally. Most stocks and sectors got hit fairly hard.

Things are getting a little mixed.

Although they ended lower, areas such as Defense, Transports, Manufacturing, and Retail only appear to be pulling back from their uptrends.

Some areas like Drugs and Health Services (which actually ended slightly higher on Tuesday) have pulled back to prior breakout levels.

The Semis got whacked fairly hard. This action keeps them sideways at best.

A few big up days would be just what the Dr. ordered to get this now mixed market moving.

Longer-term things still look pretty good. When things get a little iffy, I like to plot the 50day moving average as a reference. In general, this will help to keep you on the right side of the market. This is especially true if you use the concept of slope (positive) and "daylight" (lows greater than the moving average).

So what do we do? I still think that it is too early to fight the longer-term trend, especially with the market just off of new highs. Sure, fire off a short if you really like the setup (we are short NCR) but the main focus should still be on the long side. This doesn't mean you should load the boat. I'm still not seeing a tremendous amount of setups. I am seeing a few Trend Knockouts (TKOs, email me if you need the pattern). I like this pattern (especially when the stock closes poorly) when the market becomes questionable because the stock will really have to rally to trigger---i.e. the stock will have to prove itself. If the market stays mixed or rolls over then there is no trigger. No trigger, no trade.

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