JAZZ Pops on FDA News

As you read this week’s update, I’m on my way to the airport to head to the San Francisco MoneyShow. If you’ll also be there, I do hope you’ll stop by to say hello. I look forward to meeting your fellow GameChangers members, and I’ll be sure to let you know what the mood is like at the show and what’s on investors’ minds.

Let’s start by continuing our discussion of Jazz Pharmaceuticals (JAZZ), which I urged you to sell earlier today in a Flash Alert. We got a fantastic 25%+ pop in just two weeks, and I wanted to be certain we held on to those gains.

As we discussed in the Alert, the FDA posted documents containing the panel’s review of JZP-6, Jazz’s drug that is being considered by the agency for treatment of fibromyalgia. The comments were favorable, saying JZP-6 appears to be effective, so it’s even more likely than before that the panel on Friday will recommend full approval.

So why did we sell? Today’s action means the market is already pricing in the likelihood of the panel recommending approval. That’s not to say it’s fully priced in because if there’s one thing for certain with the FDA, it’s that nothing is for certain with the FDA.

The panel may recommend approval of JZP-6, but that doesn’t ensure smooth sailing to a final decision. The agency could delay a final decision, ask for more information, place restrictions on what the drug’s label could say, or any number of other things that make investors head for the exits. As I mentioned in the Alert, the downside risk from here in a worst-case scenario is probably 50% or more.

Don’t forget, JZP-6 is a very similar compound to what’s known on the street as the “date rape” drug. It is also highly addictive. It has already been approved to treat narcolepsy, and Jazz had to establish special provisions to manage the potential for patients abusing the drug. I do think the FDA will think seriously about the fact that approval for fibromyalgia, which affects more of the population than narcolepsy, would mean the drug is far more widely prescribed and therefore harder to control.

I still put the odds of approval in the 80% range, which is pretty high, but the stock’s surge changes the risk/reward analysis. Given the FDA’s penchant for unpredictability, a volatile market and the fact that the stock ran 25% in two weeks, the smart decision is to declare victory and bank those profits. If you didn’t today, I recommend you sell JAZZ tomorrow.

I will continue to watch JZP-6 and JAZZ closely. If there is a short-term setback that doesn’t change the long-term probabilities, it’s possible we could jump back in and scoop up the stock at a cheap price. I’ll be sure to let you know if we get another opportunity.

Sell TGT

I also want you to take advantage of today’s strength and sell Target (TGT) if you own the stock.

TGT was up 2.5% today after aggressive cost-cutting, and a spike in its credit card business helped the company’s latest earnings report, which was released this morning. Net income rose more than 14% to $679 million, up from $594 million in the same quarter a year ago. Sales, however, rose a meager 3.8% to $15.1 billion. Comparable store sales, the metric that is the most accurate in depicting real results, were up by just 1.7 %.

Statements from management were overall pretty cautious. Gregg Steinhafel, Target’s CEO, said the company was in a strong position to remain profitable “regardless of the pace of recovery.” And Kathryn Tesija, Target’s vice president of merchandising, said, “Consumers have gained confidence and are willing to spend more than a year ago, but they remain cautious about the future and very thoughtful about how they spend their money.”

That’s a conservative way of saying that sales are improving, but at a slow pace.

We brought TGT into the GameChangers portfolio from ChangeWave Investing. There’s no question it’s a solid company and has been a game changer in the retail space, but tepid growth projections aren’t conducive to big stock gains. I set our buy limit deliberately low for the stock, wanting us to add new money to it only if it pulled back considerably. It came down near our $48 entry point in early July and has bounced 7.5% since then. If you own TGT, I recommend you sell into the recent strength and take advantage of the better opportunities on our GameChangers Buy List.

WMB Remains a Top Pick

I have received some emails from you asking about my latest thoughts on Williams (WMB), and I continue to like this stock’s potential for a run to $30 – which would be more than 50% gains from current prices.

First, let’s review the second-quarter results: Williams earned $0.27 in the quarter, which was below the Street’s consensus of $0.30. This was mainly because of weaker-than-expected results at majority-owned Williams Partners (WPZ), which dragged the price on WMB lower. The partnership reported second-quarter earnings per unit (EPU) of $0.66, well below the Street consensus of $0.78 due to unplanned downtime at several petrochemical plants that drove lower volumes. However, a closer look shows that demand for natural gas liquids (NGLs) remains resilient given strong margins, albeit slightly down sequentially as the Street had anticipated.

Beyond that, quarterly results were actually very upbeat, and guidance was especially encouraging. On the exploration and production (E&P) front, production grew sequentially and appears on track for double-digit growth in 2011. As for the pipeline & infrastructure side of the business, NGL margins remain robust, and new projects and the acquisition of a 50% interest in the Overland Pass NGL pipeline add earnings upside.

I would summarize the positives for Williams as follow:

• Strong NGL pricing and volume growth
• New construction of natural gas infrastructure
• Solid returns on its Piceance assets and upside in its new Marcellus Shale acreage. With Marcellus production expected to become the second-largest E&P contributor by 2013, Wall Street will soon be hearing an appealing “two basin” story that will resonate well and raise investor interest (as well as acquiring interest). 

On top of that, the stock is a good value right now. WMB trades at a very low 4X the Street’s 2011 earnings forecasts versus a historic range of 5X–8X. When applying this higher multiple, as well as factoring in a takeover premium, I still see a clear upside path to our $30 target. Continue to buy WMB below $22.50.

My Take on SuperMedia

There’s no question that SuperMedia (SPMD) has been a huge disappointment so far. I own it personally and am in the red with you. We’re at the point where we have to analyze the potential benefits of staying with the stock versus cutting our losses and moving on.

As we talked about when I recommended SPMD, very few analysts are following the company as it comes out of bankruptcy. Most of the time that is good news, as increasing analyst attention usually drives the stock higher. In this case, it hasn’t helped us because no analysts have jumped on board as the stock has continued to slide.

As I posted in the SPMD forum on our GameChangers site, I wanted to talk with the most visible analyst who covers the stock, Ian Zaffino of Oppenheimer & Co. I have logged a number of calls to his office and have been unable to connect with him, but just today, he downgraded the stock from “outperform” to “perform.” (I’ll continue to try to reach him.)

The bottom line is that this company is out of favor with the Street right now and the last standing analyst has thrown in the towel. Ironically, this often indicates a near bottom. It’s a turnaround story, and analysts are looking for this once-bankrupt business to prove itself before they’ll touch it.

I continue to believe the company is moving in the right direction and is leveraging opportunities to become an online presence in the local consumer-to-business markets. I’ve dug back into SuperMedia’s numbers, and one thing that still stands out at me is the $247 million of revenue in the second quarter, which was 60% growth over $154 million in the first quarter. The company is also managing expenses and reduced costs $156 million over the year before. Bad debt expenses also declined in the first half of the year.

As long as the company is rising from the ashes, the question is more about timing than direction. Small businesses are critical to the company’s success, and the fragile economic recovery has no doubt slowed SPMD’s growth. I expect the recovery to progress, and the stock is so oversold that even a little bit of good news and/or positive analyst comments will likely result in a sizable pop.

That’s why it makes sense for us to stick with SPMD for now, but my patience is not unlimited. I hate sitting on dead money, and if we don’t see signs of life in the near future from the company and the stock, we will move on. In the meantime, I will continue to watch both very closely.

Applied Materials Increases Guidance

Applied Materials (AMAT) just reported earnings after today’s close. I’ll be digging more into the report and listening to the conference call, but an early look at the results show solid performance and strong guidance.

Here’s a quick update as I head for my plane: Applied earned $123 million, or $0.09 per share, which is a wide swing from the loss of $55 million, or $0.04 a share, in the same quarter a year ago. Excluding a restructuring charge, AMAT earned $0.29 per share, ahead of analysts’ expectations of $0.25. Revenue increased 10% to $2.5 billion, slightly ahead of estimates. New orders were up almost 8% from the previous quarter.

Looking ahead, management of the world’s largest semiconductor equipment maker projects earnings for the current quarter to be $0.28–$0.32 per share. Analysts were banking on $0.26

We have a $17 target on AMAT, and the company’s third-quarter results give me confidence that we’ll get there. I remain bullish on the company because it is well-positioned to benefit from broad-based capital spending growth that we anticipate. In particular, Applied Material’s exposure in deposition and expansion into new markets such as advanced packaging should allow it to post solid revenue growth in semis in the coming quarters.

Buy AMAT up to $13.50.

CSCO Rebounds

When Cisco (CSCO) CEO John Chambers disappointed the Street with his conservative and tempered guidance last week, the fallout was harsh. The banks just couldn’t help following the herd, and much of the stock’s slide was due to the downgrades from the Street: downgraded to perform from outperform at Oppenheimer; downgraded to equal-weight from overweight at Barclays Capital; downgraded to market perform from outperform at BMO Capital. Deutsche Bank maintained their buy and believes guidance is conservative based on macro conditions and spending sentiment. But the analyst still reduced the target price to $28 from $32.

All of this brought the shares down from a pre-announcement closing price of $23.73 down to $21.36 the next day. As I mentioned to you in last week’s update, right after earnings were released, I thought it might come back below our $23.50 buy limit, which it did. I hope you were able to take advantage of the overreaction and buy on the dip. The stock has climbed back to $22.41 today. I continue to target $30.

Have a great week. As I mentioned, if you’re at the San Francisco MoneyShow, please stop by to say hello. I’d love to meet you in person. In the meantime, I’ll be watching our stocks and will be in touch if there are any dangers to avoid or opportunities to take advantage of.

Sincerely,

Hilary Kramer
Editor, GameChangers