A Year-End Triple Play

12/10/2004 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

"While I remain concerned about where we will go in the early part of 2005, I do want to take advantage of the upcoming Santa Claus rally," says Michael Murphy, Here, the editor of the The Tech/Biotech Trader offers three new trades to play a year end rally.

"ASE Test Limited (ASTSF NASDAQ) of Taiwan is the world's largest semiconductor testing company. They test everything digital logic, analog, mixed signal and memory chips, as well as wafers.  For example, after Taiwan Semiconductor makes a wafer full of chips, it would be sent to ASE for testing. Good chips are then identified, and the wafers are sent to Siliconware Precision, for example, to be sawed and packaged. The individual chips are then sent back to ASE for final testing, and then on to the customer. Wall Street’s negative drumbeat on everything related to semiconductors has knocked the stock down from a January 2004 high of $16.40.

"ASTSF is selling for nine times this year’s earnings estimate of 70 cents a share, with a 16% growth rate.  They’ll earn 50 cents to 70 cents in 2005, depending on how well the semiconductor industry does. I’m expecting positive industry sales next year, and 65 cents looks reasonable to me. Buying the industry leader during a period of industry stock price weakness is usually a good strategy for investors. For traders, though, I am only looking at the next four to eight weeks for a move. I think ASTSF is headed up to at least test its 200-day moving average at $7.50. If the December quarter comes in a bit better than expected thanks to strong holiday sales, the stock should get close to the $9.50 to $10 range.

"Millennium Pharmaceuticals (MLNM NASDAQ) is a genomics research-driven powerhouse with two significant products: Integrilin, a clot-busting drug, and Velcade, a novel proteasome inhibitor used for multiple myeloma and other cancers. Revenues from these products help fund an aggressive R&D operation, but the company is still not profitable and does not expect to be until 2006. MLNM is an expensive stock, no doubt about it. Their $3.86 billion market cap is steep for a company with no profits, but they have $762 million in cash and equivalents, plus another $219 million in other current assets, and little debt.

"The company is developing an aggressive drug pipeline with over ten candidates in clinical trials. Velcade, in particular, is a blockbuster in the making, still at the very beginning of its life cycle. Later in the month, the company makes a go/no-go decision on putting Velcade into Phase III for lung cancer. I’m expecting that trial to go forward, which should bolster investor enthusiasm. Any further announcements on new indications for Velcade, such as in ovarian or prostate cancer, would generate more excitement. Buy for a $15 target by year end, and use $11.50 as a stop loss.

"My third recommendation is a much smaller and riskier company, Praecis Pharmaceuticals (PRCS NASDAQ), which trades with a market cap of just $110 million, despite having an approved product on the market and two further products in clinical development. The approved product, launched last January, is a treatment for advanced prostate cancer that works by lowering testosterone levels. Unfortunately, it carries a slight risk of severe allergic reaction, so only physicians registered with Praecis can administer the drug, something that has kept sales slow. Plenaxis was launched this January and the company or this product could become an attractive takeover candidate.

"Meanwhile, the company is just coming off its 52-week low, trading under cash value. Plenaxis is also pending European approval. In addition, other pipeline products including Apan, a treatment for Alzheimer’s, and PPI-2548, a non-Hodgkin’s lymphoma treatment, both in Phase I development. Finally, we’d note that there is utter indifference among analysts and professional investors, which suggests that most of the weak hands have already been washed out of this stock. We may see some tax-loss selling in December, but I think PRCS is set to rally nonetheless on strong seasonality. Buy PRCS under $2.40 with a $3.50 target in the first quarter."

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