Your Wednesday Update

Despite Selling Pressure, ABX & ATK Look Strong

Dear Bottarelli Research Member,

I had a feeling Genentech (DNA — NYSE) would sell off today. That’s why I recommended that you take your profits on two occasions prior to today’s earnings announcement. It turns out that advice was dead on the money.

In my experience, whenever a stock rallies leading up to an earnings announcement, nine times out of ten you want to take your profits prior to the actual announcement — simply because pre-emptive rallies like this rarely live up to expectations. More often than not, this leads to a “buy on rumor, sell on news” situation no matter how good (or bad) the earnings report actually is. That’s the case today with DNA.

As you can see from the chart above, DNA is down 4% after reporting an 80% surge in second-quarter profits. Last evening, DNA reported net earnings of $531 million, ($0.49 a share) compared with $296 million ($.027 a share) last year. Excluding one-time items, DNA’s per-share profit was $0.56 — soundly beating the consensus estimate of $0.47.

Specifically, breast-cancer therapy Herceptin sales more than doubled — going from $152 million to $320 million. Avastin sales also gained 72% — going from $246 million to $423. Great numbers, right? You bet! So why is DNA down?

The Food and Drug Administration has requested more documentation about using Avastin as a breast cancer treatment. This request could extend the review and potential approval beyond the FDA’s November 22^nd action date, which is the sole reason the shares are lower.

All told, I still love DNA’s future growth potential. In fact, I think the stock should be trading for $100. But for now, it’s a good thing we took our profits off the table and are now standing on the sidelines. If another attractive entry point comes up, we’ll get back into DNA calls. But for now, let’s take a break on DNA and use our CELG October 50 Calls (LQH JJ) as a way to remain indexed to the biotech sector.

Looking at our two August put positions on Avid Technology (AVID) and Medtronic Inc. (MDT), I’d still like to maintain each trade. This morning, AVID jumped up to $34.87 which may have triggered some stop-loss orders. But that morning pop was only a momentary blip. Since then, the stock has given up all the gains and is now trading down on the day.

This reversal has pushed your AVID August 35 Puts (AQI TG) back to $2.40/$2.50 per contract. Based on this quick move, I’ll continue to monitor the position, especially since there looks to be more downside coming in AVID. In fact, they’ll announce second quarter results on Thursday, July 20^th, and if the first round of Q2 earnings announcements from 3M, Alcoa, Lucent, or even DNA are any indication, AVID could be selling off come the 20^th of July.

I’d also like to maintain our MDT August 50 Puts (MDT TJ). Yesterday, The Wall Street Journal ran an article titled, “Worries for Medical-Device Market Loom Ahead of Earnings Reports.” The article makes the argument that Wall Street will basically ignore the earnings results from medical-device companies like Boston Scientific, St. Jude, and Medtronic and lean more heavily on future growth forecasts in the company’s key device markets — along with dealing with the threat of government reimbursement cuts.

You see, payment-system changes proposed by Medicare could significantly slash reimbursement for medical devices, which means the sector is likely to remain weak until the final plan is announced around August 1^st. This comes at a bad time, because the world-wide defibrillator market is already slowing down. This year, it has grown only 4.1%, which is down from a prior forecast for 6.3%. Some analysts were even calling for 14% growth!

The reason I like MDT is because they’re the very last company to report earnings. Competitors like St. Jude are scheduled to report on July 19^th and Boston Scientific on July 27^th. Any sector-wide weakness based on any announcements from the companies below could help push MDT shares lower.

Abbott Labs: July 19

Baxter: July 20

Boston Scientific: July 27

Stryker: July 20

Zimmer: July 26

St. Jude: July 19

Medtronic: Late August (specific date not announced yet)

In terms of our three upside positions, every one of them looks good. Geopolitical tension has helped precious metals stage a nice rally, as gold futures were trading today up $8 at $651 per ounce, silver was up $0.16 to $11.71 an ounce, platinum was up $20 to $1,274 an ounce, and palladium was up $3 to $332 an ounce. This has helped our longstanding gold play on ABX October 30 Calls (ABX JF) trade as high as $2.85.

Also profiting off the geopolitical tension is our other longstanding upside play on weapons and space systems Alliant Techsystems (ATK – NYSE). On Monday, ATK received one of two technology demonstration contracts from the U.S. Army to develop a precision guidance kit for its 155mm Howitzer. Although the terms of the deal were not disclosed, this could lead to another big contract for ATK in the next 6 months.

The company is scheduled to report earnings on Thursday, August 3^rd, so look for a run-up prior to the announcement. When it’s time to take profits, you’ll be the first to know! Until then…

Lock and load,

Sincerely,