Admittedly, in terms of leadership, there’s little to get excited about right now. But I do have two strong opinions.
First, I continue to receive emails from subscribers asking about stocks like Google (GOOG), Research in Motion (RIMM), Apple (AAPL), Baidu (BIDU) … you know, all the Nasdaq 100-type names that were big winners in the last bull market. All these stocks are beaten down. And many investors are thinking they’re so “low” now that they’re good buys, even if for just a trade.
I profess not to know what these stocks will do in the next couple of weeks. But I do know that, at the end of the day, what you should be looking for are stocks and sectors that can make sustained upmoves over a period of two months, six months or longer. And beaten-down, over-owned former leaders are not high-odds plays.
In fact, I wrote about this in Cabot Market Letter two issues ago (when I advised selling First Solar (FSLR), another former leader). On average, once big winners top, they fall 70% or more from their peaks. Just to put that in perspective, to fall 70%, a stock must drop 25% … then drop 25% again … then drop 25% again … and, finally, drop another 29%! Do the math–it’s true. Trying to catch these falling knives, while always tempting, can burn you.
Instead, I’m content to find the groups that could lead the next upturn. Are there any? Yes … the biotechs and medicals. One reason I’m favoring this broad sector is because most of these stocks really never led (and, hence, became over-owned by institutions) during the last bull market.
Thus, there are fewer potential selling pressures during these bearish times–and we’re seeing that now, as most of these stocks continue to hold up well–and there are more potential buyers once the new bull market begins.
Some names I like include Alexion Pharmaceuticals (ALXN), which has triple-digit growth, a unique drug, and a stock that’s been building a base for seven weeks; Illumina (ILMN), the King of Genetics, which, despite a big run in recent years, is trading tightly; and United Therapeutics (UTHR), whose stock is in a flat-ish trading range, and with earnings that are up 100%-plus in each the past two quarters.
But the one I’ll highlight today is Cubist Pharmaceuticals (CBST), which made an appearance in Cabot Top Ten Report two weeks ago. Here’s what I wrote:
“Cubist Pharmaceuticals is an interesting biotech company, with an established, rapidly-growing drug on the market and the potential for other hits in the quarters ahead. Right now, the company’s fortunes are tied to Cubicin, a once-daily treatment, delivered via an IV injection, for complicated skin and subcutaneous tissue infections. Management believes Cubicin can be a $750 million drug in the U.S. alone, and it’s well on its way to doing that–already, more than 520,000 patients have been treated, and it’s been taking huge market share from its main competition (a drug called vancomycin). One analyst opined that because Cubist’s solution can treat some infections that vancomycin can’t, the $750 million goal might be conservative. The company is also in Phase II trials for a product that will lessen blood loss during surgery (a potential $500 million product), but in the near-term, Cubicin is producing great revenue and earnings growth, and analysts see another 50% earnings gain in ’09. It’s a good story.
The stock is consolidating in the 21-24 range, putting the finishing touches on a multi-year base. A break above 24, along with some broad market strength, would tell me a new advance could be getting underway.