Author: Raj Gupta

Raj Gupta is Director, Research Analyst. After joining the firm in 2002 as a research analyst, Raj was appointed senior equity analyst in 2006, and lead senior equity analyst in 2014—largely because of his ability to select outperforming stocks. He acts as an expert in the O’Neil Methodology and contributes to the direction of product and service line development. He recommends securities for addition to or removal from the U.S. Focus List, or USFL, and the associated alerts to clients. During his tenure, he was part of the leadership that developed the Global Focus List, which marked the firm’s successful expansion into international equity recommendations. He is also a lead on the IPO Rewind report and contributes to weekly summaries on the performance of the U.S. market. Much of his expertise is delivered as highly customized service to clients. RAj earned his Bachelor’s degree in Economics from the University of California, Santa Barbara. He began working at the firm directly out of college, driven by his passion for investing and stocks. An avid soccer player, he built and managed an adult league in the Los Angeles area, in which he still plays. He also enjoys international travel; he and his wife commit to at least one major adventure a year.

Market View

Posted on by Raj Gupta

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to display resilient action, gapping up Monday and constructively holding gains throughout the week. The S&P 500 is still trading just below 200-DMA resistance, while the Nasdaq is again approaching upper channel line resistance. Distribution stands at four and two days, respectively, with no expiration next week. Support remains the rising 10- and 21-DMA.

Transportation and Consumer Cyclical led all sectors this week while long-term leading sector, Health Care,
lagged, trading relatively flat. All 11 sectors are now above their respective 50-DMA, but just three (Technology, Retail, Health Care) are trading above their respective 200-DMA. Top-ranked industry groups outperforming this week included Database Software, Design Software, Media Software, Semiconductors, Outpatient Care, Payment Processors, and Restaurants. 82% of S&P 500 stocks are trading above their respective 50-DMA, up from 58% last week. 31% are trading above their respective 200-DMA.

We maintain a positive view of the general market. Indices continue to trade above support with limited distribution. Though many ideas have become extended from prior pivot points, multiple new ideas continue to surface each week as the market broadens. Further, we have yet to see concerning technical action among leading names. Continue to selectively increase risk in high quality ideas coming out of constructive bases, while also offensively locking in partial gains in very extended ideas.

Zoetis

Posted on by Raj Gupta

Key points from this report:

 

  • BUY Zoetis; stock breaking out of early-stage base: The stock broke out of a stage-one 11-week cup-with-handle base, turning actionable. Though veterinary traffic slowed over the last several months due to COVID-19, the company is already seeing business pick up as the economy reopens. The company holds a leading market share within the $150B animal health industry and is expected to benefit going forward from their newly launched Simparica Trio, increasing penetration into veterinary diagnostics, and an already established best-in-class dermatology portfolio. For these reasons, we believe Zoetis will continue to beat consensus EPS, which they have done consistently over the last five years.
  • Simparica Trio launch: On February 27, Zoetis received FDA approval for its Simparica Trio, subsequently launching the drug in April in the U.S. Simparica Trio is an oral combination product for the prevention of fleas, ticks, and heartworm. Zoetis expects a $4B global market opportunity in the parasiticide space, with the U.S. being the largest market at $2.5B. Thus far, Simparica Trio has been launched in the U.K., Spain, Italy, and Canada and also received approval in Australia. Management now expects $100M–125M (~2% of total revenue) incremental revenue from Simparica Trio in 2020, up from $150M previously. Simparica Trio has the potential to become the first billion-dollar animal health drug by 2023.
  • Looking forward: Zoetis will participate in an investor conference on May 27. Q2 results are expected in August. For 2021, consensus expects revenue and EPS growth of 10% and 19%, y/y, respectively.

Market View

Posted on by Raj Gupta

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq staged back-to-back upside reversals to close the week, holding above key support levels and keeping an overall low distribution count. Distribution now stands at three days on the S&P 500 and two on the Nasdaq, with no expiration for two weeks. To remain constructive, we would like to see the S&P 500 and Nasdaq hold above Thursday’s intraday lows at 2,766 and 8,705, respectively.

 

Health Care, Retail, and Technology held up well this week, while lagging sectors such as Utility, Capital Equipment, and Transportation sharply declined by 4–6% each. Despite the pullback, eight of 11 sectors remain above their respective 50-DMA. Top ranked industry groups outperforming this week include Mining, Managed Care, Medical Equipment, Biotech, Enterprise Software, Software Security, Gaming Software, Internet, Discount Retail, and Beverages. 127 of 197 industry groups and 58% of S&P 500 stocks are trading above their respective 50-DMA.

 

We maintain a positive view of the general market. Indices remain above key levels of support with limited distribution. Most importantly, leadership is very strong with multiple ideas hitting higher highs despite the pullback in the major averages. Continue to selectively increase risk in fundamentally sound ideas coming out of constructive bases or rebounding off logical levels of support.

AbbVie

Posted on by Raj Gupta

Key points from this report:

 

  • Buy AbbVie: The stock is breaking out of a stage-one cup-with-handle base in heavy volume, turning actionable. On May 8, AbbVie announced the completion of its acquisition of Allergan (AGN) after receiving clearance from the U.S. Federal Trade Commission. The deal was closed yesterday. This removes an overhang as the deal was initially set to close in Q1. AbbVie now expects its diversified on-market portfolio to drive existing ex-Humira sales to ~$30B, with combined revenue of ~$50B (+51% y/y) this year. The transaction is expected to be 10% accretive to adjusted EPS in 2021, with peak accretion of more than 20%.
  • Allergan acquisition de-risks AbbVie portfolio: Allergan markets a portfolio worth $15.7B, primarily focused on four key therapeutic areas including medical aesthetics, eye care, central nervous system, and gastroenterology. The combined entity will be the fourth largest pharmaceutical company by revenue with nine blockbuster drugs. The acquisition is expected to mitigate the effect of Humira’s loss of exclusivity in 2023. Humira’s contribution will reduce to 40% of total revenue from 60% now.

Market View

Posted on by Raj Gupta

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq rallied strongly this week, with the
Nasdaq now positive for the year. The next level of resistance for the S&P 500 is the flattening 200-DMA at
~3,000, while the Nasdaq faces resistance at ~9,315. Support for both indices remains the rising 10- and 21-
DMA. Distribution has been a non-factor with both indices at just two days.
Energy, Technology, and Consumer Cyclical led this week, each rising more than 6%. Ten of 11 sectors are now
trading above their respective 50-DMA, up from just five last week. Top ranked industry groups outperforming

over the last week include Enterprise Software, Database Software, Financial Software, Software Security, Semi-
conductors, Electronic Measuring, Internet, and Biotech. 73% of S&P 500 stocks are now trading above their re-
spective 50-DMA, up from 51% last week.

Market View

Posted on by Raj Gupta

U.S. Market
The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq reversed off early week gains to
close flat for the week. Despite a sharp pullback Friday, both indices avoided distribution as volume came in below Thursday’s spike. Distribution now stands at two and three days, respectively, with one set to expire on the
S&P 500 next week. Support remains the rising 21-DMA on both indices (S&P 500: 2,797; Nasdaq: 8,421).
Lagging sectors led this week with Energy, Consumer Cyclical, and Basic Material rising +2% each, while Retail,
Health Care, and Utility fell 2–4% each. Five of 11 sectors are trading 1% or more above their respective 50-
DMA, with three trading just below that level. Top ranked groups outperforming this week include Financial Software, Enterprise Software, Internet, Computer Tech Services, Beverages, Cleaning Products, Discount Retail,
Managed Care, and Mining. 51% of S&P 500 stocks are trading above their respective 50-DMA, up from 38%
last week.

Lonza Group

Posted on by Raj Gupta

Key points from this report:

 

  • Buy Lonza: The stock is breaking out of a 10-week consolidation into all-time highs. On April 17, Lonza announced a trading update, reporting Q1 revenue growth of 7.4% y/y and reiterating 2020 guidance of mid-single-digit revenue growth. The company has had no major supply chain disruptions and has benefited by receiving more than 40 clinical and commercial inquiries related to COVID-19. We believe Lonza will continue to benefit from a global biologics market that is expected to have a 9% CAGR through 2025, with biologics outsourcing revenue to more than double to $23B in 2022 from $10B in 2017.
  • Capacity Expansion: Anticipating strong demand, Lonza is expanding its single-use bioreactors capacity through its Visp facility, which is introducing three innovative CDMO offerings (Ibex Design, Ibex Develop, and Ibex Dedicate) spanning the complete product lifecycle in one location. The facilities are already fully booked ahead of expansion.
  • Looking Forward: The company expects CHF 7.1B in revenue by 2022, at a 9% CAGR, and adjusted EBITDA margin of 30.5% (from 27.4% in 2019). The company also expects its pharma & biotech segment revenue growth to be in the high-single-digits through 2022, with 30%+ core EBITDA margin in 2022. Lonza will present H1 results on July 24.

Market View

Posted on by Raj Gupta

U.S. Market
The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq are consolidating gains with low
distribution. The S&P 500 is trading at its 50-DMA, while the Nasdaq is trading at its 100-DMA. Distribution
stands at one day each, not including Thursday’s stalling action. The 21-DMA remains a key level of short-term
support.
Four of 11 O’Neil sectors are trading above their respective 50-DMA, with leadership largely isolated among
Technology and Health Care stocks. Despite Energy leading over the last five sessions, the sector remains 6%
below its 50-DMA. Top ranked industry groups outperforming over the last week include Mining, Biotech, Diversified Health Care, Pharmaceuticals, Medical Products/Equipment, Medical Software, Enterprise Software, Gaming Software, Semiconductors, Telecom, and Internet. 38% of S&P 500 stocks are now trading above their respective 50-DMA, up from 30% last week.

Danaher

Posted on by Raj Gupta

Key points from this report:

 

  • Buy DHR: The stock is actionable as it forms the right side of a new stage-one base with support at its 50-DMA. Despite withdrawing 2020 guidance due to COVID-19, the company is still expected to report double-digit earnings growth over the next two years, driven by its acquisition of GE Biopharma, a fast-growing life science business where multiple peers have reported strong Q1 results, as well as stable and recurring revenue, that has led to a good earnings stability factor of 4.
  • Preliminary Q1 Revenue: On April 13, the company announced that it expects Q1 revenue growth of ~3% and non-GAAP core revenue growth of ~4.5%. Consensus was expecting a 13% y/y decline.
  • Peer Read-Through: Developed Market Focus List company Sartorius (SRT3X.DE) and Thermo Fisher (TMO) reported a good set of Q1 results. Sartorius reported Q1 revenue growth 5% ahead of consensus and adjusted EBITDA 6% ahead. The company’s bioprocessing division (77% of revenue) grew 23% y/y and revenue is expected to grow 17–21% y/y, versus previous guidance of 11–14%, with a 40bps expansion of EBITDA margin to 30%. Thermo Fisher gapped up more than 5% after reporting the life sciences segment grew 10% y/y in Q1 with 310bps in operating margin expansion. This bodes well for Danaher’s life sciences segment, which makes up nearly 40% of revenue.
  • Looking Forward:  The company reports Q1 results May 7. Danaher is expecting 3% revenue growth for the quarter. Consensus is expecting a revenue decline of 11% and EPS growth of 24% y/y in Q1. For 2020, consensus is expecting revenue and EPS growth of 14% and 15%, y/y, respectively. For 2021, consensus expects revenue and EPS growth of 10% and 15%, y/y, respectively.

Bristol-Myers Squibb

Posted on by Raj Gupta

Key points from this report:

 

  • Buy BMY: The stock is actionable as it forms the right side of a new base in heavy volume after recently regaining both its 50- and 200-DMA. BMY’s $74B acquisition of Celgene will be 40% EPS accretive in 2020 with $45B of expected free cash flow generation over the first three years. The combined company will have nine products that each generate more than $1B in annual revenue as well as near-term launch opportunities representing ~$15B in revenue potential. We believe BMY will benefit from both earnings accretion and multiple expansion given that the company is currently trading at just 8x 2021 consensus adjusted EPS.
  • Recent News: On April 20, BMY and EXEL announced positive phase 3 top-line results evaluating Opdivo in combination with Cabometyx (tablet used for the treatment of advanced kidney cancer) in previously untreated renal cell carcinoma (most common type of kidney cancer). The results met the primary endpoint and BMY will submit detailed results at an upcoming medical conference. Kidney cancer is a multi-billion-dollar annual opportunity, resulting in EXEL gapping up more than 25% on the news.
  • Ozanimod Drug Approval: In June 2019, the FDA and EMA accepted Celgene’s new drug application for ozanimod indicated for the treatment of people with relapsing forms of multiple sclerosis (MS). On March 25, 2020, BMY received FDA approval for Zeposia (ozanimod), and on March 27, BMY received a positive opinion from the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency for ozanimod. European approval is expected in H1 2020. Consensus calls for ~$1B revenue for ozanimod in 2022.
  • Looking Forward:  BMY has postponed its Investor Bay, which was scheduled on April 2, due to COVID-19.  The company will assess the situation and will decide the new date. Q1 results will be announced on May 7. Management guided for 2020 revenue of $40.5B-42.5B (+59% y/y) and EPS of $6.00-6.20 (+30% y/y). Consensus calls for revenue and EPS of $41.8B and $6.14, respectively for 2020. Management also provided 2021 EPS guidance of $7.15-7.45, bracketing consensus of $7.41.