Allergan, Bank of America and Monsanto: Doug Kass' Views

Doug Kass shares his views every day on RealMoneyPro. Click here for a real-time look at his insights and musings.

Is Biotech About to Go From Goat to Hero?

Originally published at 12:47 PM EDT on May 24, 2016

I've previously written that I've been poised to buy biotechs again, but that I wanted to see some more evidence of price confirmation.

After all, this volatile space has punished anticipatory traders so far this year. (Sometimes I agree with my Real Money Pro colleague James "Rev Shark" DePorre about the value of being reactionary rather than anticipatory.)

Well, I purchased a starter position Tuesday in a basket of biotechs, including Allergan (AGN) - Get Report , Celgene (CELG) - Get Report , Gilead Sciences (GILD) - Get Report and speculative name Intrexon (XON) - Get Report .

Here's a partial rundown of my rationale for this move:

• A Possible Double Bottom. After a brutal nine-month period of underperformance, the iShares Nasdaq Biotechnology ETF (IBB) - Get Report appears to have possibly put in a "double bottom." The ETF breached $400 to the upside 10 months ago before tumbling to around $249 intraday on May 12. But Tuesday, IBB was up some $4 at last check to about $270.

• A Successful Test of 2014's Low? Besides a potential double bottom, IBB might have made a successful test of an important low going back to 2014, as this chart suggests.

• Rotation Opportunity? My expectation is that the U.S. dollar might experience renewed strength over the near term. If so, a rotation out of commodities, industrials and other resource sectors might move money back into former market leaders like biotech.

Position: Long AGN, GILD, CELG, XON (all small)

Originally published May 25 at 12:59 p.m. EDT

Im Not Banking on Banks

Jim "El Capitan" Cramer is endorsing the idea that banks are attractive for near-term appreciation, but I view the near term differently than he does.

While I continue to believe that banks offer outstanding value on a multiyear basis, I'd recommend traders and investors who have six-month time horizons or less consider selling off a portion of their bank holdings.

As you probably recall, I took all nines banks on my "Best Long Ideas" list off of the rundown back in mid-March, writing at the time:

"This is a hard decision for me, as I still believe that the banking sector offers a good multiyear opportunity to the upside. But I'm basing my move on the following factors:

-- The nine stocks have all moved significantly higher from their February lows, with gains ranging from 10% for JPMorgan Chase (JPM) - Get Report to 25% for Bank of America (BAC) - Get Report .

-- I believe banks' consensus earnings estimates are in jeopardy for 2016-17, due to weak current and anticipated capital-markets activity, a flat yield curve and low projected interest rates over the next 12 months. Wall Street's sell side has been slow to respond to these deteriorating fundamentals.

-- Continued costs saving and a lower compliance and regulatory costs should offset the above factors. But I'm fearful that the months leading up to November's presidential election could bring more anti-bank rhetoric from both the Democratic and Republican nominees.

-- Bank stocks have attracted momentum buyers, and I prefer to fade these fickle purchasers in the face of eroding fundamentals.

-- I'm growing increasingly negative on the U.S. stock market. This view makes me more discriminating on the buy side, even for sectors that I like for the intermediate term."

-- Doug's Daily Diary, Taking All Bank Stocks Off of My 'Best Long Ideas' List(March 21, 2016)

It turns out that I was early in selling off the stocks three months ago.

But while I continue to believe that banks offer great multiyear value, I see a number of threats for the sector over 2016's balance. These include:

Overly OptimisticEarnings Estimates
I still believe that analysts' 2016-17 earnings forecasts for banks are too high (although only modestly so).

I note that the two-year/10-year U.S. Treasury spread recently went below 100 basis points, or more than 150 basis points under what we saw a few years ago. That's bad news for banks, which rely on credit spreads to make money.

Unfortunately, my baseline expectation for the next few quarters is that we'll see the yield curve continue to flatten. After all, the Purchasing Managers Index and other recent indicators point to U.S. growth that's disappointing relative to expectations.

A Rally That's Already Happened
Banks have enjoyed a spirited rally recently.

But to me, the time to buy banks stocks was months ago, when share prices languished out of disinterest.

A Tame Fed
I still expect that we won't have any Federal Reserve rate hikes this year.

That's a non-consensus view, but if I'm right, continued low rates should be bad for banks.

Fair Valuations
Bank-stock valuations are reasonable right now, but they're no longer cheap.

And given the fundamental headwinds that I see for the sector, it's hard to envision banks enjoying much expansion to their multiples from here.

Political Problems
I expect financial firms to face renewed political threats from both Democratic presidential candidate Hillary Clinton and her Republican rival Donald Trump.

The Bottom Line
Add it all up and I see few catalysts for bank stocks away from a rotation into the space.

Frankly, I don't see much rationale for this week's strength to continue.

Position: None

Here's What I Know About Monsanto

Just about everyone I know is now long Monsanto (MON).

Originally published May 25 at 2:33 p.m. EDT

My view on the stock?

Call me Jeff Spicoli, 'cause I don't know.

Position: None

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AGN.

At the time of publication, Kass and/or his funds were long/short AGN, GILD, CELG, XON, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.