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Solid Q1 Earnings Fail To Boost Pharma ETFs

Like the past several quarters, the healthcare sector has impressed with strong Q1 earnings. This is especially true as total earnings for 79.2% of the sector’s total market capitalization are up 8.8% on revenue growth of 11.2%, with earnings and revenue beat ratios of 80% and 70%, respectively. In fact, healthcare is the fourth best performing sector in terms of earnings growth trailing autos, construction, and consumer discretionary. Among the most notable players, Johnson & Johnson (NYSE: JNJ ) was the first major drug company to report earnings on April 19, followed by Eli Lilly and Company (NYSE: LLY ) and Bristol-Myers Squibb Company (NYSE: BMY ) on April 26 and April 28, respectively. Two other major U.S. drug companies – Pfizer (NYSE: PFE ) and Merck (NYSE: MRK ) – reported on May 3 and May 5, respectively. These industry primes posted solid results raising their full-year outlook that boosted investors’ confidence in the space. Notably, Eli Lilly missed our earnings estimates while Merck lagged on the revenue front. Johnson and Johnson Earnings in Focus The world’s biggest maker of healthcare products continued its long streak of earnings beat and beat our estimate on the top line buoyed by strong prescription drug revenues and a weakening dollar. Earnings per share came in at $1.68, four cents ahead of the Zacks Consensus Estimate and 7.7% higher than the year-ago earnings. Revenues inched up 0.6% year over year to $17.5 billion and edged past the Zacks Consensus Estimate of $17.42 billion (read: Healthcare ETFs to Buy on Blockbuster J&J Q1 Results ). Johnson & Johnson raised its guidance for fiscal 2016. The company now expects revenues in the range of $71.2-$71.9 billion compared with the previous forecast of $70.8-$71.5 billion. Additionally, the earnings per share guidance has been raised from $6.43-$6.58 to $6.53-$6.68. The Zacks Consensus Estimate at the time of the earnings release was pegged at $71.5 billion for revenues and $6.52 for earnings per share. These were higher than the mid-point of the company’s projection. JNJ has gained 0.2% to date since its earnings announcement. Pfizer Earnings in Focus The U.S. drug giant also topped the Zacks Consensus Estimate for both the top and the bottom lines, and raised the guidance for fiscal 2016. Earnings per share of 67 cents and revenues of $13.0 billion were ahead of our estimates by 12 cents and $1.0 billion, respectively. Notably, earnings per share grew 32% while revenues jumped 20% year over year. For fiscal 2016, Pfizer upped its revenue guidance to $51-53 billion from $49-$51 billion and earnings per share guidance to $2.38-$2.48 from $2.20-$2.30. The mid-points were much higher than the Zacks Consensus Estimate of $51.3 billion for revenues and $2.29 for earnings per share at the time of the earnings release. Shares of PFE are down 0.4% since the earnings announcement. Merck Earnings in Focus Earnings per share came in at 89 cents, four cents ahead of the Zacks Consensus Estimate and 4.7% higher than the year-ago earnings. Revenues slipped 1.2% year over year to $9.3 billion, and were slightly below the Zacks Consensus Estimate of $9.5 billion. Merck now expects earnings per share in the range of $3.65-$3.77 and revenues in the band of $39.0-$40.2 billion for 2016. This is in contrast with the previous guidance of $3.60-$3.75 and $38.7-$40.2 billion, respectively. The Zacks Consensus Estimate at the time of the release was pegged at $3.71 for earnings per share and $40.1 billion for revenues. The stock has lost about 1.3% following its earnings announcement. Bristol-Myers Earnings in Focus Bristol-Myers reported earnings per share of 74 cents, outpacing our estimate by 8 cents and increasing 4% from the year-ago quarter. Also, revenues rose 9% to $4.39 billion and edged past the Zacks Consensus Estimate of $4.24 billion. Like the other drug makers, the company also revised its earnings per share outlook upward to $2.50-$2.60 from $2.30-$2.40 for fiscal 2016. The low end was much higher than our estimate of $2.42 at the time of the earnings announcement. Revenues are expected to grow in the low double-digit range. Shares of BMY are down 1.5% to date since the earnings announcement. Eli Lilly Earnings in Focus Earnings of 83 cents at Eli Lilly missed the Zacks Consensus Estimate by a couple of cents and came in 5% lower than the year-ago earnings. Revenues grew 5% to $4.86 billion but fell short of our estimate of $4.87 billion. However, Eli Lilly raised its 2016 earnings per share guidance to $3.50-$3.60 from $3.45-$3.55 and revenue guidance to $20.6-$21.1 billion from $20.2-$20.7 billion. The Zacks Consensus Estimate at the time of the earnings release was pegged at $3.55 for earnings and $20.7 billion for revenues. Shares of LLY have tumbled 3.41% since the earnings release. ETF Angle The string of earnings beat and upbeat outlook failed to boost pharma stocks and ETFs as the industry is grappling with drug pricing issues. Below, we have highlighted the ETFs in detail: PowerShares Dynamic Pharmaceuticals Portfolio ETF (NYSEARCA: PJP ) This is by far the most popular choice in the pharma space that follows the Dynamic Pharmaceuticals Intellidex Index. The product has AUM of about $1.1 billion and sees good volume of around 192,000 shares a day. The fund charges 56 bps in fees and expenses from investors. Holding 23 stocks, the fund invests over 5% share each in the in-focus five firms. The ETF shed about 7.4% over the past 10 days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. iShares U.S. Pharmaceuticals ETF (NYSEARCA: IHE ) This ETF provides exposure to 42 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus firms occupy the top five holdings in the basket accounting for combined 40.6% of total assets, suggesting heavy concentration. The product has $607.8 million in AUM and charges 45 bps in fees and expense. Volume is moderate as it exchanges about 52,000 shares a day. The fund has lost 7.9% over the past 10 days and has a Zacks ETF Rank of 3 with a Medium risk outlook. SPDR S&P Pharmaceuticals ETF (NYSEARCA: XPH ) This fund provides exposure to the pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of over $465.9 million, it trades in moderate volume of around 190,000 shares a day and charges 35 bps in fees a year. In total, the product holds 40 securities with the in-focus five firms taking nearly 5% share each. The product was down 9.73% in the same period and has a Zacks ETF Rank of 3 with a Medium risk outlook. Market Vectors Pharmaceutical ETF (NYSEARCA: PPH ) This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. Pfizer, Bristol-Myers, Johnson & Johnson and Merck make up for over 5% share each while Eli Lilly accounts for 4.7% of assets. The product has amassed $261.3 million in its asset base and trades in a moderate volume of about 105,000 shares a day. Expense ratio came in at 0.36%. The fund has lost 5.3% over the past 10 days. It has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. Link to the original post on Zacks.com

Best And Worst Q2’16: Energy ETFs, Mutual Funds And Key Holdings

The Energy sector ranks last out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Energy sector ranked ninth. It gets our Very Dangerous rating, which is based on aggregation of ratings of 22 ETFs and 100 mutual funds in the Energy sector. See a recap of our Q1’16 Sector Ratings here . Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the sector. Not all Energy sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 144). This variation creates drastically different investment implications and, therefore, ratings. Investors should not buy any Energy ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Four ETFs are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Rydex Series Energy Service Portfolio (MUTF: RYVIX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. Market Vectors Oil Services ETF (NYSEARCA: OIH ) is the top-rated Energy ETF and MainStay Cushing Renaissance Advantage Fund (MUTF: CRZZX ) is the top-rated Energy mutual fund. Both earn a Neutral rating. iShares US Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) is the worst rated Energy ETF and Saratoga Advantage Energy and Basic Materials Portfolio (MUTF: SBMBX ) is the worst rated Energy mutual fund. Both earn a Very Dangerous rating. 178 stocks of the 3000+ we cover are classified as Energy stocks. LyondellBasell Industries (NYSE: LYB ) is one of our favorite stocks held by CRZZX and earns a Very Attractive rating. Over the past five years, LYB has grown after-tax profit ( NOPAT ) by 10% compounded annually. Over the same time period, Lyondell’s return on invested capital ( ROIC ) has improved from 17% to a top-quintile 22%. Additionally, over the past four years, LYB has generated a cumulative $14.8 billion in free cash flow . Despite the strength of the business, LYB is undervalued. At its current price of $88/share, LYB has a price-to-economic book value ( PEBV ) ratio of 0.8. This ratio means that the market expects LYB’s NOPAT to permanently decline by 20% from current levels. If LYB can grow NOPAT by just 4% compounded annually for the next decade , the stock is worth $139/share today – a 58% upside. Hess Corporation (NYSE: HES ) is one of our least favorite stocks held by IEO and earns a Dangerous rating. Contrary to GAAP net income, which has fluctuated wildly over the past decade, Hess’ NOPAT has only worsened by declining from $1.7 billion in 2005 to -$859 million in 2015. Over the same time period, Hess’ ROIC has fallen from 11% to -2%. In a large disconnect from reality, HES has risen over 50% over the past three months, which has made shares more overvalued. In order to justify its current price of $57/share, Hess must immediately achieve positive pre-tax margins (from -22% in 2015) and grow revenue by 20% compounded annually for the next 20 years . In this scenario, 20 years from now Hess would be generating $254 billion in revenue, which would nearly equal oil giant Exxon’s 2015 revenue. The expectations already embedded in HES are unrealistically high. Figures 3 and 4 show the rating landscape of all Energy ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Declining Housing Starts Equals Big Profits

Since peaking at 2,111 on April 20, 2016, the S&P 500 has rolled over. The broad market index now sits at 2,050 – nearly 3% lower in just a couple of weeks. The S&P 500 chart below has a distinctly negative look to it. Click to enlarge As the S&P 500 peaked, the moving average convergence divergence (MACD) momentum indicator showed significant negative divergence. This is a strong warning sign that the current rally is exhibiting exhaustion and could be vulnerable to a reversal. The S&P is well-below its 9-day exponential moving average (EMA) of 2,068, which means the market could test its 50-day moving average at 2,035. But given recent negative readings on a host of economic reports here and around the globe, there’s a real possibility that a much deeper move is in the cards. And should the market pass through the 2,035 level, there is no real support until roughly 1,980. That’s another 3.4% from current levels. For this reason, traders should use any strength in the market to unload long positions, while also adding short positions. One possible short position is the S&P Homebuilders Fund (NYSE: XHB ) You see, the homebuilding sector is vulnerable here to a sharp pullback. Below is a chart of XHB… Click to enlarge This chart looks eerily similar to the S&P 500 chart. It shows that XHB has also fallen below its 9-day EMA, while also sitting at its 50-day moving average. This means the $34 level effectively becomes XHB’s new level of resistance. This provides an excellent opportunity to short XHB. With the close proximity to the new resistance level at $34, we can quickly exit the position if resistance with a small loss if resistance breaks. On the other hand, if the nine-day resistance holds, XHB should fall to one of the lower support lines at about $31.20 or as low as $30.20. Now, we hold that the $30.20 price target best aligns with our expectation of a moderate pullback (~3.4%) in the S&P 500. This make $30.20 a reasonable target over the next few weeks. XHB closed at $33.29 today. Now, by taking a short position at this level, we’re risking $0.54 per share if the stock moves higher. Conversely, we stand to pocket $3.00 per share if we’re right and XHB moves lower. That gives us a good risk/reward setup. But we can mitigate our risk even further by purchasing put options on XHB instead of shorting the stock. Here’s how… Let’s assume you’d typically short 500 shares of a recommended stock. At today’s price of $33.29, you’d pony up about $16,650 to short the shares. Now, most investors are willing to absorb a 10% drawdown on shorted stocks should the stock run the wrong direction. This would limit your loss to $1,665 before you exited the position. But, because $1,665 is the most you’re willing to risk, you could instead use the $1,650 to buy the puts. But let’s reduce our risk even further by cutting our maximum loss in half… The XHB June $34 puts closed Thursday at $1.15. With $825, you can purchase seven put options on XHB. Since each option contract covers 100 shares, that gives you control of 700 shares of XHB – versus the 500 shares you would have shorted with the $16,665. You’ve reduced the risk on this trade, while also increasing the potential reward by controlling more shares. This is the right way to speculate with puts. Of course, if we’re wrong on this trade, you could lose 100% of the money you used to buy the puts. But it’s far better to lose 100% of $825 than to lose 10% of $16,665. And if we’re right on this trade, you can make more money by owning seven puts than by shorting 500 shares. So, by purchasing puts instead of shorting the shares, we reduce our risk and increase our potential reward. It makes for a more intelligent trade for managing risk/reward. Here’s the trade in a nutshell… Buy the XHB June $34 put options (XHB160610P0003400) up to $1.25. This option closed yesterday at $1.15 when XHB closed around $33.29 per share. You should be able to get into this trade as long as XHB is trading above $33.30 per share by the time you enter your order. If the stock falls and the option moves out of range, or if the option spikes higher as a result of this recommendation, give the trade a day or two to come back into range. Going forward, if XHB falls to our downside target at $30.20 per share, the June $34 puts will be worth at least $3. That’s a 161% gain on the trade. Once the options have double in price, sell half the position. This will eliminate any chance of a losing trade. Then focus on maximizing profits if XHB moves lower. One caveat…. It’s important to remember this is a speculative trade. We’re buying short-term options in anticipation of a stock market pullback. There’s no guarantee the market will fall or that XHB will decline even if the broader market falls. You can lose everything you put into this trade. So, please, limit your risk to less than half of what you would normally be willing to lose on the stock. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.