We Look at Refiners and Biotechs – and We Stare Down the Bear

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Oil refiners have been on a scorching run.

If you acted on our Oct. 31, 2011 recommendations ("Strike Black Gold With These Two Stocks") of refiners HollyFrontier Corp. (NYSE: HFC) and Valero Energy Corp. (NYSE: VLO), you've done exceptionally well.

HollyFrontier shares are up 64.8%. And Valero has done even better: Its shares have soared 76.5%.

I asked Dr. Kent Moors – our resident energy expert and the editor of several energy-related advisory services here at Money Map Press – what he sees for refiners.

"Refinery stocks have done very well for our subscribers … and they remain very good picks," Kent told me. "We are now seeing clear signs of a breakout in the oil sector, but it's important to keep in mind that the market will remain choppy for some time."

When I asked him to list his favorite refinery stocks, Kent specifically cited HollyFrontier and Valero as part of this "short list." Valero, in particular, is among the best-positioned for an upward market.

So what's Kent's advice? Well, he believes these stocks still have plenty of upside. So if you don't own any refiners, he views these stocks as solid profit opportunities, and says they are solid buys.

But risk-management remains crucial.

With new positions, be sure to employ "trailing stops." Kent recommends 30% with these stocks under current market conditions.

And what if you have a big profit? If you were among the Private Briefing subscribers who bought HollyFrontier and Valero shares when we first recommended them, you can continue to hold them. But he suggests that you lock in some of your gains by taking some of that money "off the table." Then you can let the rest ride.

We'll have more to say about refinery stocks very soon.

Another look at biotechs: In Wednesday's Private Briefing report Insiders Are Stocking Up on This Biotech, we updated the three oncology stocks that we recommended in our "Biotech Buyout Binge" report from last April.
As it turns out, we have yet another update to offer – on Vical Inc. (Nasdaq: VICL) and Pharmacyclics Inc. (Nasdaq: PCYC).

Shares of the San Diego-based Vical surged as much as 7.8% yesterday, and closed 5.93% higher, as reports of insider buying continued to circulate. As we told you yesterday, company insiders – including CEO Vijay B. Samanthave snapped up 133,750 Vical shares since the start of the year. And James R. Singer, already a 10% beneficial owner, added to his stake by spending $1.7 million to purchase an additional 464,300 shares at prices ranging from $3.51 to $3.99. The purchases were made in July, August and September, but were disclosed on Jan. 15, according to a Securities and Exchange Commission filing.

Pharmacyclics shares edged up as much as 1% after TheStreet.com upgraded that biotech from a "Hold" to a "Buy."

Since we told you the stock was a "Buy" back in April (eight months and 142% ago), it wasn't the upgrade that got my attention – it was the logic TheStreet used to justify the upgrade.

I wanted to pass it along since I thought you'd find it interesting, too.

According to yesterday's report, Pharmacyclics' strengths "can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Some of the other points the research report made offer good lessons in how to evaluate biotech stocks. These other points include:

  • Rocketing Revenue: Pharmacyclics is experiencing "very impressive" revenue growth that far outstrips its peers. Since the same quarter one year ago, revenue has soared by 277,454%. The Lesson: Top-line growth is very important for a "development-stage" biotech like Pharmacyclics. It means there's money coming in, either from product sales, milestone payments from partners, or from other funding sources.
  • Very Cool Cash Flow: Net operating cash flow has significantly increased by 825.21% to $81 million during that same time period. Most biotechs are cash-flow negative – to the tune (on average) of a minus 60.52%. The Lesson: A biotech's "burn rate" – the pace at which it's using up its cash – is important because it tells you whether the firm will need to raise additional capital in its journey to self-sufficiency. When it has to raise more money, the firm "dilutes" (diminishes) your stake in the company. And you invested to increase your wealth – not to give it away.
  • Freedom From Debt: Pharmacyclics has no real debt, meaning its debt-to-equity ratio is zero. The company also maintains a "quick ratio" of 11.42, which means it can cover its short-term cash needs. The Lesson: Cash is everything to a biotech that's trying to establish itself as a going concern. Again, you want to invest in companies that won't be going back to the financing well.

We Tell the Bear to Take a Hike … For Now: Although I chose to end my newspaper career back in 2005 (I wanted to do the kind of work I get to do for you each day), I'm still a news junkie. But now I look for stories, trends, developments and research that I can use to help you. That was my mindset yesterday when I came across the ETFTrends.com report "High-Yield Bond ETF Pullback a Warning Signal for Equity Bulls?"

According to this story, the $16.3 billion iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) – the largest exchange-traded fund that tracks high-yield corporate ("junk") bonds – was down from a multi-year high for the fourth-straight trading session yesterday.

Analysts watch junk bonds to track the general health of the credit markets, and to assess investor willingness to assess risk. Historically, a reticence toward risk that leads to a fall in junk bonds often turns out to be an "early warning signal" for a downdraft in stocks.

I asked Chief Investment Strategist Keith Fitz-Gerald if he believed that was the case here – that this was a signal that stocks were headed for a big sell-off.

"Historically, BP, it's true that this has been a cause for concern," Keith told me. "But today, with the incessant Fed meddling that we've seen, my instincts tell me that this historical linkage is busted … or at least is broken to a degree that I wouldn't put the same level of confidence in this indicator that I might have had five or 10 years ago. So my answer is that I don't believe this is an early warning signal."

[Editor's Note: Did you profit from our "Biotech Buyout Binge" recommendations? How about from our oil refiner picks? We'd like to hear your story. Drop us a note at PrivateBriefing@MoneyMorning.com. And remember - unless otherwise noted - we recommend that investors employ a 25% "trailing stop" on all holdings.]

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