Tuesday, June 16, 2009
(Cont'd from above)...

Jim (cont'd):   

The best technicians can help us figure out what the huge institutional money managers are doing, by looking for patterns in the action, and following in the footsteps of the big boys... The charts can allow us to quantify, albeit imperfectly, what those investors, who control so much capital, are thinking about a given stock or sector, or the whole market, because the chartists have seen patterns that have been repeated over and over again... and almost always each of these patterns in a stock's price action has prefaced another move, whether the technicians know it or not... they've managed to get at least a little bit inside the heads of the big money managers... The big money guys... well, that's incredible to know what they're doing... incredible.

You can't call your broker and ask him, "Hey, what's Fidelity buying?"... That's the biggest money... The brokers will be fired for giving that kind of information out. So, to get a really sophisticated sense of how the important players are treating a stock, technical analysis - looking at the charts and trying to find patterns - with silly names like "head and shoulders" to borderline pornographic ones like, "reverse head and shoulders"... is the best we can do.

While the technicals are great for trying to figure out what the big money might think, no chart can ever tell you what you should think about a stock...

Witness Sepracor, Inc. (SEPR)... a company you're probably familiar with, as the maker of Lunesta, the sleeping pill...
According to Rick Bensignor, my colleague at TheStreet.com where I'm chairman, Sepracor has a whole lot going for it...

First, it's currently broken out above its 200-day moving average. That's very clear. It clearly broke above that. A long-term measure of a stock's trajectory is the 200-day moving average, which is something that can make a stock really run, if only because so many chartists will be buying it based on the breakout above the 200-day moving... it is a self-fulfilling thing.

Second, you see the downward-sloping redline... it's Sepracor year-long downtrend... and what we see, this is another level it's broken above... it's broken above the year-long downtrend. That is really important and brings in a tremendous number of buyers.

The third thing he likes is that Sepracor has what technicians call "support" from its uptrend from its low of last year, okay... Strong support zone, alright... that's a zone that he thinks is going to be supported. Bensignor thinks this $15.69 stock has support between $15 and $15.50... so if you believe the technicals, and it plays out as planned, the downside should be small.

Big assumptions... but at the same time, Top Gun Trader (i.e., Bensignor) believes that Sepracor's move higher now could replicate its move from the late 2008 lows... Look at this... from a 2008 low to February 2009, a $7.40 move which, if you add it to the stock's lows before the current rally, would suggest... are you ready... Top Gun Trader says this stock is going to $20.00. He says it goes to $20. I mean, that's worth listening to, right? We know Top Gun nailed BAC at $4 bucks.

He's saying we've got a 30% gain coming...

In theory, that sounds great.

What about the fundamentals?...

If Sepracor were to fall just a point, it invalidates Bensignor's entire argument... I don't want to own a stock if I can't justify buying it on the way down. That's what I do as a fundamentalist...

So where does Sepracor stand?...

I think Top Gun Trader is wrong. I think it's headed lower...

Specialty drug companies like this... You've got to look at prescription trends, patent expirations, pipelines... and Sepracor comes up short on each of these three key metrics that I look at.

Its main drug, the sleeping pill Lunesta... That made up 46% of sales in 2008. And for two years, it has steadily lost market share.

Now, there are signs that subscriptions have stabilized and have stopped falling. On the generic front, it's got one out of two patents expiring as early as June of 2012... and nine generic fillers are already waiting to jump into the market. That's not good.

Patent litigation over Zopenex, an asthma medication... that worries me too. That's 40% of its sales in 2008. That's not a good sign.

As for its pipeline, it's almost universally-acknowledged to be sub-standard, to say the least... only nine programs in the pipe total, three in late-stage development. Only one of those drugs is at all exciting, a potentially breakthrough anti-depressant... but most of Sepracor's new products have been undifferentiated from their competitors, and developed for markets with lots of competition... and you know competition just destroys profits. We can't stand that on this show.

Here's the bottom line...

Read Jim's next Segment here  
    

*Note:  Bank of America is a key holding in Jim Cramer's Charitable Trust Portfolio, which you can see here>. 

Read Jim's next Segment here