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02/27/2015 10:00 am EST
Kevin Kennedy uses a momentum-based technical strategy to uncover strong stocks that have consolidated recent gains; here, the editor of Coolcat Report discusses three new stocks on his buy list, each coming from the biopharmaceutical sector.
Steven Halpern: Our guest today is Kevin Kennedy, editor of the Coolcat Report. How are you doing today, Kevin?
Kevin Kennedy: I’m doing great, Steve. Thanks for having me on the program.
Steven Halpern: Thank you for joining us. You do some momentum-based strategy to select stocks. In particular, you’re attracted to technical setups that involve a stock moving to new highs followed by a pullback and a consolidation. Could you expand on that?
Kevin Kennedy: Sure. Well, we publish free reports—both monthly—dealing with stocks. We cover micro-caps, small-caps, larger stocks and the NASDAQ 100 and we also have a report that deals with ETFs. On the stock side, I basically use an approach that I’ve discussed with you before—3M approach—market, momentum, money management.
Basically, I’m looking for a strong market underpinning, so don’t really want to be too aggressive when the market’s weak. In a strong market, I want to look for the basically stronger stocks; stocks that are making new highs, strong six month relative strength and so on.
Then, naturally, you need some kind of money management approach so that you can take some profits along the way and cut your losses when you’re wrong.
Basically, what I do is I look for stocks that have made a low, actually a 52-week low, and now they’re moving up and they’re making new highs, or at least six month highs, and then they’re pulling back.
Typically, nothing goes straight up, so what you look for is something that’s pulled back in the last month or so. Then what I like to see is them have that pullback and then have a one-week rise.
Maybe you’ve hit the bottom, maybe not, but at least you’ve identified a stop area that is defensible. You don’t really want to have a stock that’s 30% below your buy price—because, obviously, you can lose 30%—so I try to look for stuff that has bounced up a little bit, but still is not too far extended off its recent low, maybe like within 10%.
Steven Halpern: Several of your latest ideas that meet this criteria all fall within the biopharmaceutical sector. Is it unusual to see some of the ideas in the same all-market-niche pop up on your buy screens at the same time?
Kevin Kennedy: I wouldn’t say it’s surprising. I mean, again, I think strong sectors kind of drive the market and definitely it’s another thing you want to look at. I’m not really gung-ho on seeing a stock pick that’s in a laggard sector and is really the only one moving in that group.
Obviously, the biotech group I mentioned, several years the NASDAQ biotech index has six straight years of double digit gains off of the 2008 lows. It’s actually gone up more than five times since then, tripled in the last three years, doubled in the past two. It’s up 11% this year.
Furthermore, we’ve seen these kinds of stocks have been doing well for us, so if it ain’t broke, don’t fix it. We’ve have had some other positions besides the ones I’ll discuss today that have done well and so we’re kind of going to keep drilling in that well.
Steven Halpern: So, let’s apply your investing strategy to some individual ideas and one of your recommendations is Achaogen (AKAO) and that company’s developing anti-bacterials to treat multi-drug resistant infections. Could you tell us what’s attracted you to that position?
Kevin Kennedy: Well, as you mentioned, they’re dealing with serious bacterial infections and they may have some other drugs in pre-clinical trials, so they’re not necessarily a one-trick pony. This is a fairly recent IPO that came public last March, about $13, and got up to almost $20 and then kind of started to slide and actually fell all the way to $7.72 in late September.
Then it started to bounce and it got a nice little boost in December when an article noted that one of the analysts that follow it said it might be a possible acquisition target.
It moved up to like $14, a little bit above $14 in December, and then it’s pulled back since then—had a six week losing streak—but kind of stopped the slide in early February and we’ve recently added it to our portfolio. It basically has a recent low of $10.84 and it not trading too far above that right now.
Steven Halpern: Another recommendation in this sector is XenoPort (XNPT) which is developing drugs for the treatment of neurological disorders. What was the attraction there?
Kevin Kennedy: This is a company that—they do have some sales, they actually have some products that—they have a drug called Horizant that treats restless leg syndrome and shingles, and they have a few other drugs in their pipelines that are treating things like psoriasis, multiple sclerosis, and Parkinson’s disease.
They’ve got $47 million in sales, market cap’s about nine times that, so that’s typical in these biotechs. You’re buying the hope so to speak. This stock, they’re losing money but they’ve got plenty of cash on hand to weather the storm. This stock’s been around for a while.
It came public in ’05, actually traded above $66 in ’08, had earnings, had sales, was going gangbusters, then kind of crashed to earth, lost 91% of its value, hit a low in the low threes last May and then it started to rise from there.
It got up to $9.60 in January, and then again pulled back, four straight losing weeks, fell 32% off its high, and again, had that really mini rally and then that’s basically where we’re buying it. It’s about a $7 stock right now and its low is not far below that.
Steven Halpern: We have time for one other, and unlike the smaller-cap nature of the companies we’ve just discussed, one stock that’s a buy in your portfolio of larger caps is Kite Pharma (KITE). What’s the story here?
Kevin Kennedy: Again, this is another fairly recent IPO. It came public actually in June at about 25 and zoomed up to like $89 in January, and then it pulled back into the 50s. It has a recent low of 59.22 and is in the mid 60s as we speak. Again, it’s not too far off of that. It’s 28% off its high.
They’ve been getting some real good attention in a recent Wall Street Journal article. They develop cancer immunotherapy products, so they’re dealing with lymphoma and a lot of malignancies. They’ve got an innovative cell therapy treatment, so they’re getting a lot of good buzz.
They’ve got a deal with Amgen, a collaboration license agreement. No sales. A $2.7 billion market cap, so again, there is a lot of hope built into this name, but they’re supposed to go profitable next year—they are expected to—and have plenty of cash on hand and have the right momentum profile.
Steven Halpern: Again, our guest today is Kevin Kennedy, editor of the Coolcat Report. Thank you so much for joining us.
Kevin Kennedy: Thanks, Steve.
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