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This weekly feature is designed to take advantage of our stable of reporters and contributors, who will offer analysis of specific stocks from all angles -- fundamental vs. technical vs. short-term trader and long-term investor.
( DNA), was chosen by the readers
last week; please see our poll below to help determine the next stock to get the "360 Degrees" treatment.
On the Verge by Helene Meisler
The following appeared in the March 8 edition of TheStreet.com's Top Stocks where Helene Meisler puts her 20-plus years of experience in technical analysis to work for subscribers. Click here for information and to sign up for a free trial.
I am always hesitant to recommend a stock in a group that is getting so much attention, but Genentech is down and out yet on the verge of breaking above a downtrend line.
From a contrarian perspective, this is an enticing profile. The stock refused to make a lower low, and should it rally above that downtrend line (I am anticipating that it will cross it), which is just shy of $86, it could get itself to $88.
The stock's refusal to make a lower low and potential to break out above a downtrend line are positive technical developments.
That said, this is a call for short-term traders only, who can take a shot at the upside; I recommend using a stop at $81. Long-term investors should use rallies to take profits as DNA is now trading below its 200-day moving average.
Fully Valued by Justin Ferayorni
Genentech's stock has enjoyed a great run over the last couple of years with the spectacular successes of Avastin and Herceptin. Wall Street now expects Avastin to reach between $6 and $8 billion in sales by the end of the decade after notching "just" $1.1 billion in 2005, its second year on the market. The street's confidence in these peak estimates has been tested though as Avastin's penetration into non-small cell lung cancer and breast cancer has proceeded more slowly than expected in recent quarters.
Until we have better clarity on the ultimate size of Avastin opportunity, I believe the stock will sit in a trading range of roughly $80 to $100 per share. I believe the stock is fairly valued currently and should return between 15% and 20% per year from here. If a competitive threat to Avastin emerges though, Genentech could have a lot of valuation to lose.
Burden of Expectations by Michael Latwis
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Genentech shares have struggled in 2006, falling about 9% as of Wednesday close and lagging both the biotech industry and broad market averages. The troubles started with an in-line earnings report in early January that failed to exceed investor's lofty expectations. Recent reports of product safety concerns have also heightened awareness of the risks to investing in even the most profitable large-cap biotech stocks.
The root of the problem rests in the company's unprecedented clinical success during 2005, which lifted short-term growth to an unsustainable level. Forecasts of decelerating future growth have now flushed out many momentum investors, but continue to weigh on the shares. At over 45 times current year earnings, I expect Genentech's valuation to continue to struggle over the next few quarters. The stock should perform better in the later part of the year, as investors look to 2007, and regain appreciation for a consistent mid-20% grower.
Last year, Genentech revealed new clinical applications for its Avastin, Herceptin and Rituxan oncology drugs. In addition, clinical results for Lucentis turned out even better than expected in the treatment of age-related macular degeneration. Early market adoption led to explosive growth in both the Avastin and Herceptin franchises and over 50% earnings growth for the company overall. This quick acceptance and off-label use by oncologists pulled growth forward, and has minimized the impact of anticipated regulatory approvals. This year the stock has shown little benefit from new indications for Herceptin and Rituxan or the FDA's priority review of Lucentis.
During 2006, the company will also be spending heavily to satisfy the strong demand for its products with further manufacturing expansions and new marketing programs for its upcoming launches. On last quarter's earnings call, management provided full-year earnings growth guidance of 35% to 45%, but consensus was already in this range. The company is expected to update its longer-term growth objectives out to 2010 at its March 17 analyst meeting in New York. I don't expect much excitement from this meeting though, as the company needs to release something truly new and unexpected on the new product front to lift market expectations. I believe DNA will remain a leading new product innovator, but show more gradual progress in future. The company seems most likely to return to a period of rising earnings expectations in early 2007, as new products gain traction and interim spending demands ease.
Momentum has faded in DNA shares this year, and the technical picture looks weak. Volume was not very heavy on the latest sell-off, so it appears that many investors are comfortable holding onto the stock. I expect that this will continue to support the stock at the low-end of its current range, near the $80 level. In the near-term, I don't believe DNA's known catalysts will be able to move the stock into a higher range above the $90 level. A retest of prior highs near $100 is more likely in 2007, so the $80 level looks like a good entry point for longer-term investors. I would become more cautious on the stock with a break below the $77 level, which is where I would place my stop-loss.
TheStreet.com's Top Stocks, Helene Meisler writes a daily technical analysis column for RealMoney.com and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At the time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time.
Justin Ferayorni, CFA, is the founder and principal of Tamarack Capital Management and was an analyst and portfolio manager at Bricoleur Capital. At the time of publication, Ferayorni had no positions in any of the securities mentioned in this column, although positions may change at any time.
Michael Latwis is Director of Health Care Content at TheStreet.com Professional Products. Michael has 10 years of investment experience, most recently with Barclays Wealth management division where he was Associate Director of Research.