The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, February 13, 2007
Email – # 358
** Blowout Earnings… And A Note Of Caution
Teva Pharmaceuticals (Nasdaq: TEVA), the world’s largest generic-drugs maker, reported blowout earnings today. The shares were up 5% in early morning trade and have recovered nicely since the beginning of the year.
For us, our TEVA spread has come back to life after a dismal second half of 2006 when shares sank after the start of the Israel-Lebanon conflict, since Teva is headquartered in Israel.
Going forward, Teva’s fortunes look better than ever: The company has over 162 applications for new generic drugs that represent over $70 billion in sales. Of course, the company will not get approvals for all of them this year, and will not capture 100% of the sales when they do get approval. But it shows you the potential growth in the company’s portfolio for the years ahead.
We are only concerned about the next nine months, however. In this time frame, there are a couple of catalysts that should propel the shares higher.
- First, you have a massive government push toward some type of universal health care, or at the least, increased coverage for the uninsured. The more people that are insured, the more dollars head towards drug companies.
- Teva is also looking offshore for acquisitions. Recently, the company has been rumored to be on the prowl for a low cost producer, most likely one of many private generic companies in India.
- Finally, the earnings momentum and the apparently successful integration of its massive IVAX acquisition from last year is making Wall Street take notice with increasingly favorable recommendations for the shares.
Market Concerns
Teva is about 20% off its 52-week highs but is gapping closer, having gained over 20% this year alone. We are looking quite good with this position, and if the share price can break $40 by this summer (another 10% from current levels), we will look to take profits.
On another note, I am concerned about the high levels of the stock market in general. We have not had a significant correction in over two years. Markets rarely work this way. And the recent spate of high-priced private equity buyouts, and buyouts in general, has seemingly come to the rescue each time the market is teetering.
Add to this the public offering of a hedge fund at three times the valuation of similar companies in the industry, and this should give you another reason to wonder about valuations.
It reminds me a little of 1989 when United Airlines was in the midst of buyout talks for $180 per share. At the time, it was one of the biggest deals ever. It failed to occur, and the market proceeded to correct very sharply, almost overnight.
The current spate of mega-acquisitions, hedge-fund blowups and easy money financing could create a bubble in the financial markets – something that may end badly and sharply.
We have some put protection in our portfolio with the Nasdaq 100 Index (Nasdaq: QQQQ) strangle play that will last us until the end of the year. We also have defensive positions in gold, and pharmaceuticals.
I am looking for one more short position (we recently closed out our Allstate short position for a profit) to balance the portfolio a little better. Premiums on the put side are high. If they remain high, we may have to enter into a put spread to reduce our outlay. Stay tuned for a new pick soon – most likely a put position.
Karim
Current Portfolio:
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $40 put (WD MN)
Date Purchased: 11/27/06
Current Price: $1.28
Comment: Hold.
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $48 call (YWZ AV)
Date Purchased: 11/27/06
Current Price: $2.00
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $2.25
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $12.72
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $1.53
Comment: Hold.
Company / Symbol: Advance Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $0.75
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Schlumberger (NYSE: ALL)
Option / Symbol: Jan. 08 $60 call (WUB AL)
Date Purchased: 1/19/07
Current Price: $10.80
Comment: Hold
Company / Symbol: Schlumberger (NYSE: ALL)
Option / Symbol: Jan. 08 $65 call (WUB AM)
Date Purchased: 1/19/07
Current Price: $8.30
Comment: Hold. Sold call against Jan. 08 $60 position.
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $15.00 call (VIX BC)
Date Purchased: 5/3/06
Current Price: $0.05
Comment: Hold
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $17.50 call (VIX BW)
Date Purchased: 6/14/06
Current Price: $0.05
Comment: Hold. Sold call against Feb. 07 $15 position.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $6.40
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $3.30
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: 5/23/06
Current Price: $2.40
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $0.85
Comment: Hold. Sold call against January 08 $40 position.
