Deep Dive: These small-cap stocks are expected to rise at least 31% in 2017

(This is the last in a three-part series on analysts’ favorite stocks for 2017. The series began with large-cap stocks and continued with mid-cap stocks.)

As we finish this series about analysts’ favorite stocks for 2017, it’s remarkable to see how small-cap stocks have performed in the month since Donald Trump was elected president:

FactSet

Small-cap stocks have run way ahead during the stock market rally since Election Day.

The S&P 500 Index SPX, +0.59%  has returned 5% since Trump’s surprise win, while the S&P 400 Mid-Cap Index MID, -0.19%  is up 11.1% and the S&P Small-Cap 600 Index SML, +0.25%  is way out front, surging 16.1%.

There are big expectations that Trump and the Republican-controlled Congress will be able to move legislative mountains starting next year, including the passage of a massive infrastructure bill, the reduction of taxes, and a repair or replacement of the Affordable Care Act, also known as Obamacare.

An accelerating GDP growth rate and continuing decline in unemployment mean upward pressure on wages, which in turn can lead to rising inflation. Investors have displayed their inflation expectations by unloading bonds, which has pushed up the yield on 10-year U.S. Treasury bills TMUBMUSD10Y, +0.00%  to about 2.4% from 1.88% on Nov. 8 (Election Day).

What can artificial intelligence do for retail?

Higher interest rates in the U.S. means a stronger dollar, which can hurt sales for large companies that rely on exports. But the higher-growth inflationary environment may not blunt small-cap companies, which rely on domestic sales.

Also see: This fund makes the case for active management as stocks get pricey

Here are the 24 stocks in the S&P Small-Cap 600 Index with majority ‘buy’ ratings (among at least three analysts) that are expected to rise the most over the next 12 months:

Company Ticker Industry Closing price – Dec. 6 Consensus price target Implied 12-month upside potential
Spectrum Pharmaceuticals Inc. SPPI, +6.73% Biotechnology $4.14 $10.00 142%
Acorda Therapeutics Inc. ACOR, +0.94% Biotechnology $20.50 $35.25 72%
Nektar Therapeutics NKTR, +2.55% Biotechnology $12.33 $20.33 65%
First NBC Bank Holding Co. FNBC, +8.28% Regional Banks $8.05 $12.90 60%
Flotek Industries Inc. FTK, -3.03% Oilfield Services/ Equipment $11.10 $17.33 56%
R.R. Donnelley & Sons Co. RRD, +1.87% Commercial Printing/ Forms $16.68 $26.00 56%
Medicines Co. MDCO, +6.19% Pharmaceuticals $33.37 $51.45 54%
Vasco Data Security International Inc. VDSI, +6.23% Information Technology Services $14.05 $21.00 49%
Emergent BioSolutions Inc. EBS, +18.92% Biotechnology $26.52 $39.60 49%
Omnicell Inc. OMCL, +2.84% Health Industry Services $32.40 $46.00 42%
Cynosure Inc. Class A CYNO, +6.13% Medical Specialties $44.55 $61.63 38%
LSB Industries Inc. LXU, +2.78% Misc. Manufacturing $8.47 $11.50 36%
Stamps.com Inc. STMP, +1.20% Internet Software/ Services $110.20 $149.33 36%
TiVo Corp. TIVO, +0.70% Software $21.00 $28.40 35%
Ligand Pharmaceuticals Inc. LGND, +0.82% Biotechnology $102.59 $138.17 35%
Almost Family Inc. AFAM, +0.38% Medical/ Nursing Services $39.85 $53.00 33%
Tetra Technologies Inc. TTI, -8.98% Oilfield Services/ Equipment $5.65 $7.51 33%
Comtech Telecommunications Corp. CMTL, +5.02% Telecommunications Equipment $12.75 $16.79 32%
Contango Oil & Gas Co. MCF, +1.23% Oil and Gas Production $9.34 $12.30 32%
Motorcar Parts of America Inc. MPAA, +1.84% Automotive Aftermarket $27.62 $36.25 31%
Cray Inc. CRAY, +1.01% Computer Processing Hardware $19.70 $25.80 31%
Nautilus Inc. NLS, +4.58% Recreational Products $17.95 $23.50 31%
Lannett Co. LCI, +1.04% Pharmaceuticals $23.25 $30.40 31%
Natus Medical Inc. BABY, +1.82% Medical Specialties $38.05 $49.67 31%
Source: FactSet

Here are total returns for 2016 and summaries of analysts’ ratings:

Company Ticker Total return – 2016, through Dec. 7 Share ‘buy’ ratings Share neutral ratings Share ‘sell’ ratings
Spectrum Pharmaceuticals Inc. SPPI, +6.73% -31% 100% 0% 0%
Acorda Therapeutics Inc. ACOR, +0.94% -52% 56% 33% 11%
Nektar Therapeutics NKTR, +2.55% -27% 100% 0% 0%
First NBC Bank Holding Co. FNBC, +8.28% -78% 60% 40% 0%
Flotek Industries Inc. FTK, -3.03% -3% 100% 0% 0%
R.R. Donnelley & Sons Co. RRD, +1.87% -15% 67% 33% 0%
Medicines Co. MDCO, +6.19% -11% 91% 9% 0%
Vasco Data Security International Inc. VDSI, +6.23% -16% 67% 33% 0%
Emergent BioSolutions Inc. EBS, +18.92% -30% 83% 17% 0%
Omnicell Inc. OMCL, +2.84% 4% 67% 33% 0%
Cynosure Inc. Class A CYNO, +6.13% 0% 100% 0% 0%
LSB Industries Inc. LXU, +2.78% 17% 100% 0% 0%
Stamps.com Inc. STMP, +1.20% 1% 100% 0% 0%
TiVo Corp. TIVO, +0.70% 26% 80% 20% 0%
Ligand Pharmaceuticals Inc. LGND, +0.82% -5% 83% 17% 0%
Almost Family Inc. AFAM, +0.38% 4% 75% 25% 0%
Tetra Technologies Inc. TTI, -8.98% -25% 93% 7% 0%
Comtech Telecommunications Corp. CMTL, +5.02% -31% 67% 33% 0%
Contango Oil & Gas Co. MCF, +1.23% 46% 67% 33% 0%
Motorcar Parts of America Inc. MPAA, +1.84% -18% 100% 0% 0%
Cray Inc. CRAY, +1.01% -39% 80% 20% 0%
Nautilus Inc. NLS, +4.58% 7% 45% 43% 0%
Lannett Co. LCI, +1.04% -42% 67% 33% 0%
Natus Medical Inc. BABY, +1.82% -21% 100% 0% 0%
Source: FactSet

Those total returns underline how careful you must be when selecting stocks. Many of the worst performers on the list are in the health-care sector, and the political-season bashing has taken its toll. It’s uncertain what the health-care landscape will look like two years from now, with so many moving parts, including Obamacare and drug pricing.

You need to do your own research in any companies of interest and form your own opinion about whether a company’s strategy will enable it to succeed in the long run. As you can see, a great deal of patience may be required.

Here’s how well these companies have increased (or not increased) sales per share over the past 12 months:

Company Ticker Sales per share – past 12 months Sales per share – previous 12-month period Growth of sales per share
Spectrum Pharmaceuticals Inc. SPPI, +6.73% $2.35 $2.51 -6%
Acorda Therapeutics Inc. ACOR, +0.94% $11.35 $11.15 2%
Nektar Therapeutics NKTR, +2.55% $1.23 $1.58 -22%
First NBC Bank Holding Co. FNBC, +8.28% $10.13 $8.73 16%
Flotek Industries Inc. FTK, -3.03% $5.34 $6.96 -23%
R.R. Donnelley & Sons Co. RRD, +1.87% $158.20 $167.11 -5%
Medicines Co. MDCO, +6.19% $2.99 $7.29 -59%
Vasco Data Security International Inc. VDSI, +6.23% $4.92 $6.38 -23%
Emergent BioSolutions Inc. EBS, +18.92% $11.20 $10.98 2%
Omnicell Inc. OMCL, +2.84% $17.96 $12.94 39%
Cynosure Inc. Class A CYNO, +6.13% $17.63 $14.52 21%
LSB Industries Inc. LXU, +2.78% $21.45 $30.97 -31%
Stamps.com Inc. STMP, +1.20% $18.31 $11.18 64%
TiVo Corp. TIVO, +0.70% $6.49 $5.89 10%
Ligand Pharmaceuticals Inc. LGND, +0.82% $4.19 $3.50 20%
Almost Family Inc. AFAM, +0.38% $60.17 $53.33 13%
Tetra Technologies Inc. TTI, -8.98% $9.45 $14.97 -37%
Comtech Telecommunications Corp. CMTL, +5.02% $23.85 $18.71 27%
Contango Oil & Gas Co. MCF, +1.23% $3.92 $7.66 -49%
Motorcar Parts of America Inc. MPAA, +1.84% $19.99 $18.50 8%
Cray Inc. CRAY, +1.01% $13.54 $17.70 -23%
Nautilus Inc. NLS, +4.58% $12.44 $10.14 23%
Lannett Co. LCI, +1.04% $16.16 $11.27 43%
Natus Medical Inc. BABY, +1.82% $11.31 $11.17 1%
Source: FactSet
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Jeff Reeves’s Strength in Numbers: 17 unpopular investing predictions for 2017

It’s December, and that means rampant speculation about what’s to come when we turn the calendar to a new year.

Predictions are funny things because we love to read them, even though we know they will be wildly incorrect. After all, if so many “expert” pollsters with doctorates got Donald Trump wrong by making educated guesses based on the data at hand, why in the world should you bother to read the rambling opinions of anybody?

If that hasn’t scared you off, however, I’ll cut right to the chase and express my personal — and, in many cases, unpopular — predictions for 2017. Here they are, in no particular order:

1. Twitter will (still) not be acquired: Don’t bother to click on those rumor-mongering headlines. Twitter TWTR, +0.05%  is a money-losing niche product with no growth path — not to mention a tarnished brand and a part-time CEO who isn’t exactly a change agent. The best idea I’ve read about for Twitter is for a benevolent purchase by a non-profit group to save it from the trash heap. But at $15 billion in market value, that ain’t gonna happen any time soon.

2. AI will win “top tedious tech acronym” in 2017: We all love a good tech narrative, and virtual reality was probably the most overused and overhyped technology of 2016. That was due to a 180% run in the shares of video-technology leader Nvidia NVDA, -1.78% as well as the augmented-reality buzz in Pokemon Go and other similar touchstones. But, alas, tech bloggers have a short attention span and need something new and shiny in 2017… and artificial intelligence (AI) seems to be where they are headed.

3. Uber will not IPO: The ride-sharing app has zero problems raising capital without tapping public markets, and the much-talked-about valuation of some $60 billion looks even better when it exists in the insulated private markets that wouldn’t be subject to greater transparency (and, subsequently, greater shareholder griping). Wall Street needs Uber for the juicy underwriting fees, but Uber doesn’t really need Wall Street.

4. The U.S. stock market won’t budge: With the Dow Jones Industrial Average DJIA, +0.72%   at almost 20,000, the market has already priced in a business-friendly environment in Washington and the hope of moderately better global growth in 2017. At the same time, valuations are at historic highs and corporations continue to invest in buybacks over sustainable long-term growth to revenue and profits. We may add a few percentage points since there are no good alternatives to U.S. stocks, but not much more than that.

5. Interest rates won’t budge: The U.S. is all but assured to get an interest-rate increase this week at the Federal Reserve’s policy meeting. But, as in 2016, we will see lots of talk and no action from central bankers in the new year.

6. Emerging markets won’t budge: With the general trend of a stronger dollar and higher rates, capital outflows remain a risk. On top of that, specific issues continue to plague key markets: China’s slowing growth, India’s cash challenges and Brazil’s political turmoil — to name a few. It’s hard to imagine investors flocking to those regions.

7. The VIX will briefly top 25, but it won’t matter: Except for people who write clickbait headlines about the VIX VIX, -7.04% these spikes are a non-event. We continue to be stuck in a long-term downtrend for the “fear index,” notwithstanding the occasional blip like Brexit or Trump’s election that skew the CBOE volatility measure briefly higher before it reverts to the mean. Yawn.

8. Active managers will finally outperform as a group: In a range-bound environment like this, then, the stage is set for “stock pickers” to once again prosper by focusing on in-favor sectors and tactical trades instead of broad themes. And after the pain of the past decade, many in the bottom tier of active managers have been sent packing and the survivors are better equipped to succeed.

9. Value will top growth: The narrative of “reflation” is a cause for holiday cheer, but don’t confuse that with growth in sales or profit margins. The bottom line is that corporations continue to rely much more on buybacks and efficiencies to make their earnings-per-share numbers, and there simply isn’t that much growth to come by. There will be individual exceptions, of course, but once sure-fire sectors like health care will not yield the easy pickings and earnings surprises that they used to.

10. Buybacks will set another record: Related: A recent note from J.P. Morgan JPM, +0.43%  predicted corporate buybacks to top $500 billion in 2017. I’ll bet the “over” against that forecast.

11. Unemployment won’t top 5%: The labor market is at full participation and employers don’t have a deep pool of applicants to draw from. If Republicans do go hard after immigrant labor sources as they promised, spanning both legal and illegal workers, it’s nigh impossible for the employment stats to soften up.

12. Oil will drop to under $40 again: OPEC’s planned production cut is all the rage, but it’s still “drill, baby, drill” for domestic oil producers. We are living in an age of energy efficiency and oversupply, thanks to fracking, and it’s only a matter of time before oil softens up again. After all, these small-cap explorers still have to pump at capacity lest they default on their junk bonds.

13. Big tax changes won’t happen: You’d think a Republican majority would be able to push through tax reforms. But if you think all members of the GOP think alike, you didn’t pay attention to the presidential race. Between the establishment and the Tea Party, and between bright red states versus moderates in the midterms, legislators won’t be able to come together in a meaningful way on tax policy. Maybe we get a vanilla cut that makes headlines, but don’t expect a game changer.

14. The federal deficit will soar: Of course, any kind of stimulus spending or tax break pushed through Congress as a “thank you” to conservative voters won’t be paid for. There just isn’t enough economic growth or potential budget cuts outside of the third rail of Social Security to achieve that. Thus, simple math shows a bigger federal deficit under President Trump.

15. America will fret less about millennials: Yes, household formation is at a 50-year low, and the average 30-year-old makes less than their parents did. But that’s what happens when you take out over $10,000 in debt only to graduate at 23 into the worst recession in almost 100 years. However, as the economy mends and as younger Americans age into the season of life when they think about marriage and homeownership, some of those metrics will begin to improve — and, hopefully, some Boomers will stop freaking out.

16. Craft beer sales will stumble: Legalized marijuana is increasingly the vice of choice in America. And if you do prefer alcohol, you’re probably drinking expensive bourbon or mixing fashionable cocktails like a negroni. Why pay $12 for a six-pack when you could be buying a big bottle of booze that lasts? And won’t it impress your pretentious friends more to talk about unpronounceable liquors from Europe instead of the latest craft beer company that just got bought out by Anheuser-Busch InBev BUD, +0.87% ? I just don’t see how craft sales can keep this run going.

17. You will be better off than you were in 2016: All this nonsense aside, the stock market and the United States always continue to be better than they were in years past. Keep a long-term perspective, and don’t fall for the pessimism and fear mongering on Facebook.

Jeff Reeves owns no stocks mentioned in this article. Follow him on Twitter @JeffReevesIP.

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Market Snapshot: What’s old is new again: Trump inspires clamor back to stock picking

In true out-with-the-old-in-with-the-new fashion, investors are abandoning their post-financial crisis mentality of panning for yield and cycling into big bets based on what they think a Trump administration will bring, with an eye on how the Federal Reserve may clash with those policies.

Stocks surged to records Friday and have been on a tear since the surprise presidential election of Donald Trump a month ago, setting new closing records on nearly a daily basis. The Dow Jones Industrial Average DJIA, +0.72% posted its fifth week of consecutive gains, rallying 3.1%, while the S&P 500 index SPX, +0.59% also gained 3.1% on the week, and the Nasdaq Composite index COMP, +0.50% surged 3.6%. The Russell 2000 index RUT, +0.12% closed at a record with a 5.6% gain on the week.

With the Fed widely expected to raise rates on Tuesday following their policy meeting, investors will look for how the central bank couches their expectations for the pace of future rate increases over the coming year, said Nicholas Colas, chief market strategist at Convergex, in an interview.

Other than that, the current rally in stocks is appearing not to be an anomaly as some have suggested, Colas said, but a dramatic shift in thinking on the part of investors, many of whom were caught off guard by the election having been committed to the business-as-usual investing of the past eight years.

“I think the number one thing here is that you have the same party controlling Congress and the presidency,” Colas said. “Republicans own the economy for the next two years.”

Source: Convergex

Falling correlations means more selective stock picking.

One major trend supporting a broad shift in thinking has been a sudden drop in stock correlations, the strategist noted. Up until the election, sectors were more of less moving in lockstep with the broader S&P 500 on macro events and central bank policy. In other words, the higher the correlation, the more sectors and individual stocks moved in lockstep with one another. That all changed following the election, when investors started taking a hard look at which sectors and individual stocks were the most likely to benefit and be hampered by a Trump administration.

In a note, Colas pointed out that average sector correlations dropped to 56.8% in November, their lowest level since October 2009 when Convegex started tracking the metric. That’s down from 66% in October, and 79% in September, meaning investors are becoming more selective in their stock picks.

Read: Stock market’s velocity after Trump has investors talking Dow 20,000—and beyond

The financial sector was been the biggest winner, with the sector rallying nearly 19% since the election. That sector has also seen one of the biggest drops in correlation to the S&P 500 along with other large correlation drops being in the industrial and energy sectors.

Ugly ducklings are getting the love at the expense of the swans.

One of the reasons Colas believes this rally has legs is that many investors are playing catch-up in these under-owned sectors, and that takes a while to turn around. Very few portfolio managers have been even-weight or overweight financial stocks since the Great Recession, and weak capital investment and infrastructure spending has had the same effect on the industrials sector.

“It’s like you had a bunch of ugly ducklings that suddenly became swans,” Colas said.

To pour money into those unloved sectors, investors are selling off overbought positions in darlings like tech and health-care, he said, and that takes time to play out.

Going even past a so-called Santa Claus rally, stocks may climb higher until at least Trump’s inauguration on Jan. 20. That’s when Trump’s first 100 days in office will have to contend with Janet Yellen’s Fed, which could create tension for investors. That will be a time for investors to take stock of what’s worked and what hasn’t and fine-tune their strategy, Colas said.

While Trump has promised policies concerning deregulation and lower taxes, Yellen’s Fed still needs to be on watch for a sudden overheating of the economy and rising inflation.

“The Fed could be the hand brake on the economy next year, because if there’s stimulus then Fed has to worry about inflation, and there’s going to be tension,” Colas said.

Read: Fed to hike interest rates next week while ignoring the elephant in the room

Then again, with dwindling confidence in the Fed, investors may just come to regard Yellen as a lame-duck Fed chairwoman with her term ending in February 2018, Colas noted.

While earnings season is pretty much over, a few notable companies are set to release results, namely, Oracle Corp. ORCL, +0.42%  and Adobe Systems Inc. ADBE, +0.78%  on Thursday.

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Balchunas on ETF Fee War Spreading to Junk Debt (Audio)

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Balchunas Says `Great Cost Migration’ Continues (Audio)

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Market Extra: Beware of panic buying in bank stocks

Buying of banking stocks has reached panic proportions, suggesting a trend reversal over the next couple of weeks may be likely.

The SPDR Financial Select Sector exchange-traded fund XLF, +0.21%  rose 0.2% Friday, closing at the highest level since Feb. 1, 2008.

Financials have been the best performer of the S&P 500’s 11 key sectors since Donald Trump was elected president, with the sector tracking stock (XLF) soaring 18.8% since Nov. 8, compared with a 5.6% gain in the S&P 500 index. SPX, +0.59%  The XLF produced this week its best rolling one-month (22 sessions) percentage gains since August 2009, as the financial crisis was ending.

Investors appear to be banking that President-elect Donald Trump will provide a Goldilocks scenario for financials, as his promises of lower regulations, lower corporate taxes and a revived economy that results in higher longer-term interest rates are just right for the sector.

A number of technical warnings signs have flashed, however, suggesting the postelection buying frenzy is petering out:

On Thursday, 73% of the S&P 500 financial sector hit 52-week highs, the most since Feb. 13, 1997, and the second highest percentage since 1990, according to Jason Goepfert, president of Sundial Capital.

His research suggests that the previous five-largest surges in 52-week highs in financials GSPF, +0.13%  produced a median loss of 1.9% over the next week, and a decline of 2.5% over the next two weeks. In comparison, his data showed the average for all days was a gain of 0.2% in a week and a 0.4% rise in two weeks.

“There is no doubt that momentum is impressive in the sector—the problem is that it seems to have entered panic mode and that rarely lasts,” Goepfert wrote in a note to clients.

Sundial Capital, FactSet

The uptrend would eventually resume, with a vengeance, as the sector would swing from a loss of 0.7% after a month to a gain of 2.7% after three months and to a 9.2% surge after six months, Goepfert said.

Trading volume, which is viewed by many market experts as a sign of investor participation, has been trending lower for the XLF. And trend followers always feel the more, the merrier.

Volume spiked to a 5 ½-year high of 268.9 million shares on Nov. 9 as the XLF jumped to an 8 ½ year high. Volume exceeded 200 million shares again on Nov. 10 and Nov. 14, or well more than double the full-day average, as prices kept climbing.

FactSet

But volume has even reached 150 million shares since that first week, and had dropped to 116.9 million shares on Thursday, even though the XLF closed at the highest level since Feb. 1, 2008. In other words, buying interest has already waned. On Friday, the XLF rose to a near nine-year high, but volume dropped to a below-average 95.6 million shares.

The momentum indicator, which measures the rate of change of a charted instrument, had peaked at an overbought level of 14.30 on Nov. 22, when the XLF closed at $22.25. Since then, the XLF has climbed over 6%, but the momentum indicator has dropped to a neutral reading of 6.57.

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This pattern of rising prices and falling technicals is referred to as “bearish divergence.” These divergences aren’t necessarily sell signals, given that they can persist for long periods. But because they imply a “failure to confirm” the uptrend, according to the Market Technicians Association, they warn not to be so quick to buy on a dip.

By themselves, the warning signals are potent enough recommend selling, but combined they can send a compelling message.

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Wal-Mart, Wells Fargo and others earn top scores for LGBTQ equality

Wal-Mart WMT, -0.64%   joined a record number of corporations in earning top scores for lesbian, gay, bisexual, transgender and queer-inclusive company policies, according to a yearly report from leading civil rights organization Human Rights Campaign.

“Even in the face of relentless attempts to undermine equality, America’s leading companies and law firms remain steadfast and committed to supporting and defending the rights and dignity of LGBTQ people,” HRC president Chad Griffin said in a statement.

The Corporate Equality Index rates companies based on how inclusive their policies and benefits are toward lesbian, gay, bisexual and transgender employees. It uses five categories as measurement: non-discrimination policies, employment benefits, LGBTQ diversity and inclusion, public commitment to LGBTQ equality and “responsible citizenship.”

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Of the 887 companies surveyed in this year’s report, 517 earned a perfect 100% score—the most in the 15-year history of the index. Other corporations celebrated their 100% scores on Twitter this week, including Wells Fargo WFC, -0.16%  , American Airlines AAL, +2.90%  , Citi C, -0.07%   and General Motors GM, +3.17%  .

The vast majority of these companies now offer same-sex domestic partner or spousal benefits at 98%, while 93% had adopted equal employment policies. The number of companies offering transgender-inclusive health care jumped to 647 from 511 last year.

Wal-Mart is one of many companies to update its health benefits to be more inclusive and got its highest score ever — 100%, up from 40% in 2008.

Also see: Why I ditched Wells Fargo for a virtual bank

There are no federal laws offering the same protections on the basis of gender or sexual orientation, although there are U.S. laws that explicitly ban workplace discrimination based on race, religion and disability. In 28 states, workers can still legally be fired for their sexual orientation and President-elect Donald Trump has promised to repeal related laws protecting federal workers.

Because of these and other anti-LGBTQ legislation proposed in the past years, the HRC report says, the private sector has outpaced lawmakers in implementing progressive LGBTQ policies.

“We are committed to fostering an inclusive work environment for our more than 2 million associates around the globe,” a Wal-Mart spokesman told MarketWatch. It’s good publicity for a company that has frequently clashed with labor unions over pay and conditions and, in October, raised salaries for entry-level managers above the new overtime threshold.

Mike Gregoire, chief executive officer of N.Y.-based CA Technologies CA, -0.41%  , another company that received a 100% score, said its progressive policies are not only helpful for its company culture, but also for its bottom line. “We cultivate a diverse workplace because we know that a variety of perspectives and individual experiences informs our products and services, while making our entire organization more creative and collaborative,” he said.

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How the fiduciary rule could change your relationship with your adviser

Anticipate changes to the way you work with your financial adviser, thanks to new regulation expected in April.

On Thursday, Department of Labor assistant secretary Timothy Hauser and Marcia Wagner, attorney of labor law and fiduciary matters, spoke during a MarketWatch Facebook Live interview about the new responsibilities advisers have under this regulation.

The financial services industry has been abuzz this year after the Department of Labor released its fiduciary rule, which places greater emphasis on advisers working in their clients’ best interests on retirement accounts. Under the new rule, there will be more transparency of what fees clients are paying, the value of the service they receive and the investment products going into their retirement portfolios. An optional contract for advisers to receive commissions would give clients legal rights to sue upon a breach.

Rumors swirled that the fiduciary rule would be repealed after Donald Trump was elected president, and critics have argued — even pushed lawsuits against the Department of Labor — that it should be dismounted because it will hinder financial advice for small accounts too costly to manage and take brokers and insurance agents out of business. Wagner said though a repeal is legislatively possible, it would not be in the few months between inauguration and the rule’s April 2017 deadline.

Some financial advisers already abide by a fiduciary standard, such as registered investment advisers with the Securities and Exchange Commission and financial planners with a Certified Financial Planner (CFP) designation, but the rule will regulate anyone offering investment advice on retirement accounts, including individual retirement account (IRA) rollovers, and being paid for that service. This includes independent broker-dealers, advisers who primarily sell securities and often charge commissions on their investment recommendations.

Industry watchers expect the rule will soon extend to all investment portfolios, and John Bogle, founder of investment firm Vanguard Group, agrees it should.

In the meantime, financial firms are under pressure to comply with the rule. If you work with a financial adviser for a retirement account, or you’re about to, here’s what you’ll likely see:

Fees will be a main focal point in your discussion

The rule is not all about fees, but they are a large part of it. The government has made it clear in its push for the fiduciary rule that high fees, or too many fees, drastically affect the amount of money an investor comes away with when it’s time to retire, some $17 billion in losses, from fees, a year according to the White House. Advisers can charge for financial advice in a variety of ways, including assets under management, which is a percentage of the total amount of the client’s money an adviser is managing, a flat hourly fee or an annual charge known as a retainer fee.

Clients also pay for underlying fees of funds in their portfolios. The point of the fiduciary rule isn’t to find the cheapest fees or the adviser charging the lowest amount of money, but rather to ensure the quality of the service is on par with what clients are paying, and that advisers are looking out foremost for the client. “It doesn’t have to be a race to the bottom,” Wagner said.

Financial institutions have already weighed in: J.P. Morgan Chase & Co. (JPM) and Commonwealth Financial Network said they will stop charging commissions on IRAs and Merrill Lynch Wealth Management said it wouldn’t allow clients to open commissions-based accounts beginning in April, instead opting for fee-based IRAs. Other firms stated they plan to keep commissions-based IRAs: Morgan Stanley (MS) said it would comply with the DOL rule using the best interest contract exemption, where clients must sign documents stating they understand their advisers’ compensation.

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You might not get the same investment products you once did

Portfolio holdings will be under scrutiny under the rule, to ensure that the products invested meet clients’ objectives and at the best price. As a result, passive products such as exchange-traded funds will be favored under the fiduciary rule because of their transparency and low cost.

Comparatively, some firms are moving away from using mutual funds because their variable compensation cannot be justified under the rule. In other words, if it’s not easy to explain why it’s the best product, firms find it may be safer not to use them altogether for retirement accounts. Robo-advisers are one of the expected winners of the fiduciary rule, mainly because they favor passive products and are easily available to investors starting out. “This may be a good way to deliver advice to small investors,” Hauser said. “You can get good advice and bad advice from these things so the need for a fiduciary standard applies to both.” (Critics, however, question how much of a fiduciary they can be given their robotic nature.)

It will become a lot easier to sue

Advisers will still be allowed to charge commissions on the advice they offer if their clients sign the best interest contract, which must be implemented by January 2018 and states the client understands they are being charged in this manner but that their adviser is still held to a fiduciary standard. The contract provides investors with enforcement rights, where a breach of the contract can lead to legal action. Plan participants of employer-sponsored retirement accounts were always protected under the Employee Retirement Income Security Act of 1974 (ERISA), which allows them to file a class action lawsuit and be made whole for whatever violations of which they were the victims. The fiduciary rule seeks to bring that same protection and benefit to investors with IRAs.

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The Ratings Game: Biogen gains on new Eli Lilly Alzheimer’s data, as beta-amyloid hypothesis ‘lives to see another day’

Two weeks ago, a scientific approach to developing an Alzheimer’s disease treatment looked dead in the water.

Come Friday, it had a faint pulse.

Full data from a failed Eli Lilly and Co. LLY, +0.83% clinical trial sent Biogen Inc. BIIB, -1.43%  shares up as much as 5.1% in morning trade, recouping and more the losses of two weeks prior. AC Immune SA ACIU, +11.54% also developing a treatment using the “beta amyloid hypothesis” — which targets protein fragments that some believe are responsible for the disease — saw shares rise as much as 10.8% in morning trade.

Eli Lilly’s solanezumab didn’t meet its primary endpoint, which was for patients to show less of a cognitive decline. But secondary endpoints — which showed the drug’s effect on other measures of function and cognition — were statistically significant, leaving “hope in the beta-amyloid hypothesis for remaining candidates,” said Leerink Partners’ Paul Matteis.

“Amyloid hypothesis lives to see another day,” proclaimed J.P. Morgan’s Cory Kasimov.

A panel of doctors discussing the results of the late Thursday presentation differed on how significant the results were for the beta-amyloid hypothesis, with assessments ranging from neutral to positive. The discussion was “quite encouraging (relative to what it could’ve been),” Matteis said.

Most of the “limitations and liabilities” of Eli Lilly’s drug and late-stage trial “point to a materially higher likely effect, and likelihood of development success, for Biogen’s drug,” said Leerink Partners’ Geoffrey Porges, who rates Biogen outperform with a $355 price target, about 17% above the price stock was trading at Friday.

Read more: Biogen in promising but risky limelight after Eli Lilly’s Alzheimer’s drug fails

Also encouraging were apparently positive early-stage results for Biogen’s aducanumab treatment. Results, which had been leaked Thursday and ultimately prompted a release by the company, are scheduled for a Friday presentation.

The newest results continue the “extremely compelling” evidence for aducanumab’s effect on plaque removal, said Stifel’s Thomas Shrader.

“It’s extremely clear Aducanumab both gets into the brain and removes existing plaque. This removal of plaque remains somewhat controversial with respect to disease relevance,” since that mechanism may not actually treat Alzehimer’s, he said. Cognitive and behavioral outcomes of the trial were also positive, he noted.

Related: What Eli Lilly’s hard fall in Alzheimer’s treatment race means for its competitors

Lilly’s Alzheimer’s drug fails, and more

A drug developed by Eli Lilly to treat patients with Alzheimer’s Disease symptoms failed a closely watched clinical trial. Plus, WSJ’s Dan Neil reviews the new 2017 Buick LaCrosse. Photo: Getty

The prognosis of the beta-amyloid hypothesis remains mixed.

Despite positive notes in Eli Lilly’s data, “the clinical effect was small in all cases (~7-15%), and a LLY representative on the panel noted that even if the trial had met [statistical significance] on the primary there would have been significant discussion around clinical meaningfulness/whether to move forward,” said Kasimov, who rates Biogen overweight. “Panel docs generally agreed that the drug appeared to be doing something, but the effect size was very small” and may be better for those with very early Alzehimer’s, called protodromal Alzehimer’s.

And, ultimately, Eli Lilly’s solanezumab “still failed in a very highly powered study,” Matteis said, reducing the odds of AC Immune SA’s crenezumab — which he rates outperform with a $12.05 price target — by five points to 35%.

See: Merck’s Alzheimer’s drug data fuel hopes for new treatment

The Eli Lilly results may also support the crenezumab drug being developed by Roche RO, +0.30%  and AC Immune SA. Its higher levels of dosing now appear more promising, Matteis said.

But Eli Lilly’s solanezumab itself should be wrapped up, said Leerink’s Seamus Fernandez, who called CTAD results “the end of sola’s siren song.”

“In our view, the data presented did little to confirm or refute the beta amyloid hypothesis, given the tiny “benefit” in EXPEDITION3 relative to the almost complete absence of real biomarker effects,” Fernandez said. “LLY conducted a superb clinical study though, which gives us confidence that efforts targeting beta amyloid plaques directly (eg. BIIB’s [OP] adacanumab, Roche [NR]’s gantenerumab and crenezumab), or through beta amyloid production (BACE inhibitors from [Merck & Co. MRK, +1.70% ] [MP] and LLY [OP]/[Astra Zeneca AZN, +3.31% ] [OP]) in “early” AD (mild/prodromal) can be credibly viewed as definitive tests of the amyloid hypothesis.”

Biogen shares have dropped 2% year-to-date, compared with a 10.2% rise in the S&P 500 SPX, +0.28% Eli Lilly shares dropped 19.3% year-to-date.

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