Growth Hoax! What If The Fed Surprises the Market?
(Stocks in this article: Nasdaq: FCEL, Nasdaq: ACAD, Nasdaq: ACOR, NYSE: CRL, Nasdaq: CBST, Nasdaq: DNDN, NYSE: DNA, Nasdaq: GERN, Nasdaq: GILD, Nasdaq: IDEV, NYSE: MDZ, Nasdaq: PGNX, Nasdaq: QGEN, Nasdaq: UTHR)
At times like these, when the Fed seeks to stimulate economic expansion, the sector that should benefit most is “low quality.” However, I view the current market environment illusory, and providing a sort of growth hoax that I expect will be exposed after the Fed's Halloween meeting. Due to my view that the Fed might let the market down with rate inaction or a policy statement that indicates an inclination for forward neutral bias, I looked for short ideas where stocks that have run higher on expansionary rate expectations could give back gains after Halloween.
Expansionary measures are meant to help firms find capital to finance growth at times when a little extra incentive is useful. In that type of environment, the firms that benefit most are the ones financing growth in ways other than through the use of operating cash flow. These are riskier firms, the kind without earnings but with high hopes and debt. At the risk of getting too technical... They benefit also because most, if not all, of their value is found in the terminal portion of the discounted cash flow model, the part outside of the forecast period and most sensitive to changes in cost of capital.
In the period after the start of the Fed's most recent expansionary spurring, you remember the one after the tech bubble burst in 2000-2002, there was an initial premature market rebound before the realization of a tough environment sent stocks lower. However in 2003, when it was clear Fed support would help the economy find traction, it was the "low quality" shares that outperformed.
That period taught me a lesson that I noted well. I learned that lesson as I watched a sell recommendation rise ahead of many of my better run "buy" names. That sell idea that burned the painful, though useful, memory into my young analytical skull was FuelCell Energy (Nasdaq: FCEL), which soared 99% that year. The company was still far from showing signs of operational success, but the stock soared as "low quality" names outperformed. It was a clear case where not so hot operations (read bad company) matched with a scorching hot stock (read good stock).
The current period is considered by many as marking the start of Fed expansionary efforts, and may be behind the outperformance of "riskier" industries of late. For instance, the S&P Biotechnology group was up 9.8% in the 13 weeks through October 12. Over that same 13-week period, the Information Technology (+4.2%) was second in sector performance only to energy (+4.3%), but $80+ oil has a lot to do with that sector's leadership.
I believe the rug (or ruse) of Fed bias is about to be pulled out from under the market. If this latest Fed maneuver is representative of a "one and done" type move, as I outlined on the day of the cut, then the current market run may be short-lived for these names. The hoax would be exposed and the old favorite defensive names would come back to favor, while riskier stocks would lose their luster just as they were starting to polish up. The way to play this ahead of Halloween, is to go short the industries and stocks that got hot around the cut for no other specific reason, and long the names that got cold around that same time.
The Biotechnology Industry has outperformed over the last 13 weeks (Oct 12), while the similarly cyclical Semiconductor Equipment (-1.3%) and Semiconductor (3.2%) industries lagged. I suspect this could be because of market concern that a global economic slowdown could occur and that a U.S. recession is still in the cards.
In compiling the list of short ideas below, I considered names in the Biotech Industry, and also the Life Sciences Tools & Services Industry, which is up 7.8% during the period studied. I screened looking for $5+ stocks of $500 million market cap or more with Standard & Poor's Quality Rankings (Earnings and Dividend Rankings) of B or less (low quality). I also sought 13-week appreciation of 10% to 50%. As you get toward the high end of this range there is likely to be some significant stock specific reason behind the move.
The screen resulted in a lucky group of 13 names. I list them for you below, and in a follow up article I hope to produce, I will pick through the individual stories to try to choose the best few potential near-term losers for you. There is an important caveat to this thesis. If I am wrong on the Fed rate decision, and the Fed cuts rates by more than a quarter point or leaves open the possibility of future rate cuts on Halloween, these shorts should be immediately reversed and you are well served to have stops in place to protect yourself.
At times like these, when the Fed seeks to stimulate economic expansion, the sector that should benefit most is “low quality.” However, I view the current market environment illusory, and providing a sort of growth hoax that I expect will be exposed after the Fed's Halloween meeting. Due to my view that the Fed might let the market down with rate inaction or a policy statement that indicates an inclination for forward neutral bias, I looked for short ideas where stocks that have run higher on expansionary rate expectations could give back gains after Halloween.
Expansionary measures are meant to help firms find capital to finance growth at times when a little extra incentive is useful. In that type of environment, the firms that benefit most are the ones financing growth in ways other than through the use of operating cash flow. These are riskier firms, the kind without earnings but with high hopes and debt. At the risk of getting too technical... They benefit also because most, if not all, of their value is found in the terminal portion of the discounted cash flow model, the part outside of the forecast period and most sensitive to changes in cost of capital.
In the period after the start of the Fed's most recent expansionary spurring, you remember the one after the tech bubble burst in 2000-2002, there was an initial premature market rebound before the realization of a tough environment sent stocks lower. However in 2003, when it was clear Fed support would help the economy find traction, it was the "low quality" shares that outperformed.
That period taught me a lesson that I noted well. I learned that lesson as I watched a sell recommendation rise ahead of many of my better run "buy" names. That sell idea that burned the painful, though useful, memory into my young analytical skull was FuelCell Energy (Nasdaq: FCEL), which soared 99% that year. The company was still far from showing signs of operational success, but the stock soared as "low quality" names outperformed. It was a clear case where not so hot operations (read bad company) matched with a scorching hot stock (read good stock).
The current period is considered by many as marking the start of Fed expansionary efforts, and may be behind the outperformance of "riskier" industries of late. For instance, the S&P Biotechnology group was up 9.8% in the 13 weeks through October 12. Over that same 13-week period, the Information Technology (+4.2%) was second in sector performance only to energy (+4.3%), but $80+ oil has a lot to do with that sector's leadership.
I believe the rug (or ruse) of Fed bias is about to be pulled out from under the market. If this latest Fed maneuver is representative of a "one and done" type move, as I outlined on the day of the cut, then the current market run may be short-lived for these names. The hoax would be exposed and the old favorite defensive names would come back to favor, while riskier stocks would lose their luster just as they were starting to polish up. The way to play this ahead of Halloween, is to go short the industries and stocks that got hot around the cut for no other specific reason, and long the names that got cold around that same time.
The Biotechnology Industry has outperformed over the last 13 weeks (Oct 12), while the similarly cyclical Semiconductor Equipment (-1.3%) and Semiconductor (3.2%) industries lagged. I suspect this could be because of market concern that a global economic slowdown could occur and that a U.S. recession is still in the cards.
In compiling the list of short ideas below, I considered names in the Biotech Industry, and also the Life Sciences Tools & Services Industry, which is up 7.8% during the period studied. I screened looking for $5+ stocks of $500 million market cap or more with Standard & Poor's Quality Rankings (Earnings and Dividend Rankings) of B or less (low quality). I also sought 13-week appreciation of 10% to 50%. As you get toward the high end of this range there is likely to be some significant stock specific reason behind the move.
The screen resulted in a lucky group of 13 names. I list them for you below, and in a follow up article I hope to produce, I will pick through the individual stories to try to choose the best few potential near-term losers for you. There is an important caveat to this thesis. If I am wrong on the Fed rate decision, and the Fed cuts rates by more than a quarter point or leaves open the possibility of future rate cuts on Halloween, these shorts should be immediately reversed and you are well served to have stops in place to protect yourself.
| Short Plays on Fed Inaction If rates are held steady, these names could suffer | ||||||
| Company | Ticker | Price | Market Cap (millions) | Quality Rank | 13-Week Price Appreciation | |
| Acadia Pharmaceuticals | ACAD | $15.00 | $554 | N/A | 47% | |
| Acorda Therapeutics | ACOR | $19.88 | $565 | N/A | 34% | |
| Charles River Labs | CRL | $56.72 | $3,850 | N/A | 40% | |
| Cubist Pharma | CBST | $22.26 | $1,250 | C | 32% | |
| Dendreon | DNDN | $7.54 | $637 | N/A | 42% | |
| Genentech | DNA | $74.43 | $78,370 | N/A | 13% | |
| Geron Corp. | GERN | $7.24 | $546 | C | 17% | |
| Gilead Sciences | GILD | $43.10 | $39,940 | B- | 23% | |
| Indevus Pharma | IDEV | $7.90 | $602 | C | 11% | |
| MDS | MDZ | $21.81 | $2,670 | B | 26% | |
| Progenics | PGNX | $23.74 | $613 | C | 10% | |
| Qiagen | QGEN | $20.79 | $3,130 | N/A | 42% | |
| United Therapeutics | UTHR | $71.74 | $1,510 | B- | 19% | |
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posted by The Greek | 3:14 PM
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