Blooming Lily

Eli Lily (NYSE: LLY) could be one of the biggest comeback story in 2014 among big pharmaceutical companies. Helping the case for Lily are the recent positive news on its cancer drug Ramucirumab and diabetes drug Dulaglutide.

News on Dulaglutide (for people with Type 2 diabetes) showed that the results from its Phase III trial AWARD-6 study indicates that it works as well as the market leading therapy Victoza (from Novo Nordisk, NYSE: NVO). The fact that Dulaglutide is a once-weekly versus once-daily for Victoza would help move patients over to the new drug from Lily.   

News on Ramicirumab showed that in a Phase III study on 1200 patients with non-small cell lung cancer, a combination of ramucirumab, chemotherapy and docetaxel improved overall survival and met its primary end-point. More details on this study would be released later.

LLY is up 15% YTD (till 02/26/2014) handily beating S&P 500 which is flat for the year till date (YTD) and I do not think it is done yet. Additionally it provides a juicy +3% yield. LLY is one of my favorite pharmaceutical plays for 2014. 

Where are the Markets (S&P 500) Heading?

Trailing Twelve Months P/E on S&P 500

• 2013 S&P 500 EPS so far till 02/18/2014: $107.56 (1)
• Index closing at 1840.76 on 02/18/2014 implies trailing P/E=17.18 (TTM).
• Using a population of last 50 years trailing twelve months (TTM) P/E ratio data of the S&P 500 index gives: Mean=18.70, Median=17.76 & Standard Deviation=10.15
• Implies current market valuation close to median of the population but less than mean and market fairly priced based on last TTM earnings. 

Forward Twelve Months P/E on S&P 500

• Forward 12 month S&P 500 earnings estimates: $120.77 (2) on 02/18/2014 and came down from $124.73 around a year back (03/28/2013). 
• Based on the index price of 1840.76 on 02/18/2014 indicates forward P/E=15.24. 
• Markets costly or not cheap on a forward earnings basis since 10 year average forward P/E=13.9 (3). Note that convergence of Forward and Actual Earnings happens over a period of time.

(1) & (2) Standard & Poors: http://us.spindices.com/indices/equity/sp-500

(3) FACTSET: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_2.21.14.pdf 

Chart Analysis

Here is the chart of the S&P 500 and there is some indecisiveness at this level of around 1840. Unless the index break through its previous high of 1851, its not going to be pretty. As you see below in the chart there is a gradual formation of a double top (not fully formed yet) and high probability or potential for a big correction looms ahead. Although we are down ~1% on S&P 500 YTD, chances of a market sell-off remains high. A correction at this stage for the next few weeks could take us down to the 1738 level back again on S&P 500 which we tested during the first week of Feb 2014. Additional correction (or sell-off), if we cannot hold the levels around 1738 could lead us down to around 1650 level on the S&P 500 which is my downside target for this year. Will revisit the levels on a week by week basis.

Best Picks 2014 - YTD (1 month) Performance

Best Picks List 2014

I started the year (Jan-02-2014) with 22 names and got rid of 3 of them by end of Jan 2014. At the same time I added 3 more names as well this month (Jan 2014). This is my current YTD (Jan-31-2014) performance of 2.6% return (beating S&P 500 by 5.2%!) as well as my latest holdings:

Current Holding

Portfolio Additions & Removals

Best Picks 2013 - How did I do?

Best Picks List 2013 

The figure below shows the list of holdings from my model portfolio which I managed actively (well almost, given the fact that I am a part time student with a full time job and which is not asset management!) throughout 2013. Some commentary on individual names from my holdings:

• Cheniere Energy (ticker: LNG) has been a huge winner in 2013 (+130%) for me and I am continue long the stock heading into 2014, since I think it has a big early mover advantage in the transportation of natural gas from the shale rich gas deposits of U.S. (southern Louisiana) to other parts of the world where natural gas sells for much higher price (higher demand) as compared to that of continental U.S. with a much lower price thus presenting a well economical benefit.
• Michael Kors (ticker: KORS) is another name which I have been very bullish throughout the year and continue to be into 2014. Any major weakness in the market would be a reason to accumulate this name which returned +60% in 2013. As we know KORS has been luring consumers away from Coach Inc. (ticker: COH) with its stylish accessories and handbags and I think KORS is not done yet.
• Continental Resources (ticker: CLR) and Oasis Petroleum (ticker: OAS) are two Bakken Shale names which I have been very bullish about and they returned handsomely as well in 2013 with CLR around +59% and OAS around +55% return. Earlier this year OAS made an interesting acquisition of oil properties in the Williston Basin which is going to further bolster and improve its position in the region. Valuation wise as well, I see OAS around $60 based on future growth prospects and hence continue to be long this name in 2014. I also see OAS as a speculative M&A play with any of the 'big' U.S. based on Asian (Chinese or Korean) or other global oil players (Royal Dutch Shell, Statoil, etc.) trying to buy this valuable Bakken shale asset. I have closed my positions in CLR just before the close of the year.
• Pfizer Inc. (ticker: PFE) returned around +26% in 2013 under-performing S&P 500, but I still like this name given the current pipeline and the recent FDA approval of Xalkori. Also diversification of non core assets (e.g. Zoetis, Inc.) had helped the company to streamline its core business. 
• Cornerstone OnDemand (ticker: CSOD) - I offloaded this name after around +60% return earlier this year and planning to re-enter given a broad market weakness. This is the only survivor in the cloud software-as-a-service (SaaS) talent and human resource management space including recruiting, employee performance and learning. Other names in this space including Taleo (ticker: TLEO), Success Factors (ticker: SFSF) and Kenexa (ticker: KNXA) has earlier been acquired by Oracle, SAP and IBM respectively. 
• Allot Communications (ticker: ALLT) and Fusion IO (ticker: FIO) were bad calls on my part which I closed after couple of months of being long. 

Figure A: Best Picks List 2013 - Performance of all holdings

Figure B: Best Picks List 2013 - From my tracking software