It isn't often that I've been able to say this lately, but the mixed economic data we received today led to an equally mixed reaction from the broad-based S&P 500 (SNPINDEX:^GSPC), which waltzed around the unchanged line throughout much of the day.
The biggest story was the release of the ADP Employment Report earlier this morning, which yielded the creation of 281,000 private sector jobs in June. This is the largest increase in private sector jobs in a year-and-a-half, and a potential signal that the labor market is continuing to improve. Coupled with the fact that weekly initial jobless claims have been hovering close to a seasonally adjusted 300,000 -- a multi-year low -- it's quite plausible that the U.S. unemployment rate could shrink closer to 6% when employment data is announced by the government tomorrow.
In contrast to the ADP Employment data, May's factory orders data, and the weekly release of the Mortgage Bankers Association's loan origination data, both weighed on the S&P 500.
U.S. factory orders for May declined a worse-than-expected 0.5% compared to forecasts that had called for a dip of just 0.3%. The drop was blamed on a 0.4% decline in military goods orders, and reversed an increase in factory orders of 0.8% last month. While it's probably not worth getting into a twist over a one-month decline, continued weakness in factory orders could spell trouble for the U.S. economy.
The MBA's Mortgage Index for the past week fell by a fractional 0.2%, which follows last week's dip of 1%. Normally, a fractional move lower wouldn't be such a big deal; but considering that housing inventory for sale is rising, and 30-year lending rates are heading toward their lowest point in a year, it's a bit disconcerting to see prospective and existing homeowners shying away from locking in historically low lending rates. If this pattern persists, the housing sector could find itself in a world of trouble.
By day's end the S&P 500 digested this mixed data and ended modestly higher by 1.30 points (0.07%), to close at 1,974.62.
Despite the S&P 500 finishing close to the flatline, Internet-based dietary supplements retailer Vitacost.com (NASDAQ:VITC) certainly didn't! Shares advanced a market-topping 26.9% after Kroger (NYSE:KR) announced it was buying the company for $280 million in cash, or $8 per share, a 27.4% premium to yesterday's closing price. The deal shouldn't come as too much of a surprise to investors, considering that its largest shareholder in February asked the company to explore strategic alternatives to boost shareholder value.
The big question, of course, is whether the deal makes sense for Kroger, and if Vitacost shareholders received a fair price. Considering that the move will expand Kroger's online presence in the rapidly growing nutritional products segment, I'd suggest that Kroger's size could make this deal earnings accretive almost immediately. From the perspective of Vitacost, while some shareholders might be disappointed with the final buyout price considering its niche opportunity in the online vitamin market, I'd call $280 million a fair share considering that it was only projected to be marginally profitable, if at all, in 2015.
Small-cap specialty pharmaceutical Zogenix (NASDAQ:ZGNX) added 18.6% after updating Wall Street and investors on the development of more abuse-resistant formulations of its severe pain medication Zohydro ER.
According to Zogenix, it anticipates filing a supplemental New Drug Application with the Food and Drug Administration in October 2014 for a new abuse-resistant capsule, which could hit pharmacy shelves as soon as early 2015. Zogenix believes this will cut down on the potential for abuse by injection or nasal administration. Also, Zogenix is working with Altus Formulation to create an abuse-resistant tablet that it expects to file an sNDA for in the first-half of 2016.
As I stated earlier today, it's great to see Zogenix being proactive about physicians' concerns regarding the abuse potential of its FDA-approved pain med. If Zogenix is able to get both of these new formulations approved, it's possible that a sales surge in 2016 could turn the company profitable on a full-year basis. But, investors should also consider the risks involved here, which include a very crowded arena of chronic pain drugs, as well as Zogenix's ongoing losses before choosing to take the plunge.
Finally, digital photo-based products and services provider Shutterfly (NASDAQ:SFLY) flashed to a 14.9% gain by day's end following a report from Bloomberg that noted that the company is working with investment bank Qatalyst Partners to find a buyer for the company. As the report also states, "preparations are at an early stage and may not lead to a transaction," but that interested parties could include private-equity firms, as well as e-commerce companies.
Although Shutterfly's top-line growth has been consistently good, its bottom-line performance has left a lot to be desired by investors. The reality is that its business model is easily susceptible to competition and margin fluctuations, which means that it needs to be incredibly successful in molding its brand image; otherwise, its share price could fall. I would suggest that at greater than 100 times forward earnings, there are enough reasons to avoid chasing this speculation higher, and would, instead, encourage you to watch Shutterfly safely from the sidelines.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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