Category Archives: General

Pointless observations, boring you with details and things no one cares about.

Liars Poker

The other day, I was writing about GPRO and what a wonderful stock it was. Never underestimate the power of the IBs to try to screw the retail investor.

GoPro: GPRO

We try to base our stock buying and selling on known quantities. When these quantities change, it can have devastating results. Just like today.

Nicholas and Jill Woodman gave nearly 6 million shares to their newly started foundation and JP Morgan waived the lockup for the foundation so that they can sell those shares on the open market as early as tomorrow (Oct 3). For holders of GPRO stock, this means that instead of waiting the 180 days (Dec 26th) for insider shares to be sold, we get to see an unexpected and quite possible 25% increase in the share count in one day. Thanks JPM, way to dilute a good thing. The market hates the unknown. We would have been better off if JT Marlin was the underwriter (fictional brokerage house from the movie: Boiler Room) for GPRO. At least we would know that we were going to get screwed.

OK, since I am out on GPRO anyway, no loss. The way I see it, if these shares hit the market. They owe me a 25% drop to account for the dilution and we only got 7% today…I wouldn’t touch this until we pull back to $60. Even then, you might want to dump it before the lockup expires on Dec 26th…assuming there will still be shares locked up by then.

is Celgene backing a winning horse?

Agios Pharmaceuticals: AGIO

Agios might have a blockbuster drug in AG-221. While only in Phase 1 trials with a long way to go, the initial results seem remarkable and provide some hope for the fifty thousand people a year diagnosed and suffering from acute myelogenous leukemia, or AML. Fewer than a quarter of people that have AML survive longer than five years.

There are about thirty gene mutations that correlate with blood cancers such as AML. One of those mutations produces an enzyme known as IDH-2. When IDH-2 mutates, it creates a molecule that alters the genetic code in a cell causing them to multiply and cause devastating problems.

Enter AG-221. Designed to target a mutated IDH-2 that occurs in about fifteen percent of people diagnosed with AML.

Phase 1 trials are usually meant to evaluate the safety of a possible drug. There are so many drugs that never make it past Phase 1 trials, making AGIO’s AG-221 a risky spec, but there have been some rather remarkable results.

AG-221 was set to be tested on ten people suffering from AML. Unfortunately, three people died before they could participate in the test. Of the seven remaining, most had either substantial chemotherapy or even had bone marrow transplants with very poor results. Of the seven patients in the study, five had gone into complete remission and one went into partial remission. The remaining patient showed no improvement. The only reported side-effect of taking AG-221 has been mild nausea and loss of appetite.

The results of this study were presented in April. A very small test group was used. However, in June, Stéphane de Botton, a hematologist at the Institut Gustave Roussy, near Paris also presented interesting results at the European Hematology Association conference. de Botton’s findings showed in a study of thirty-five patients, most of them with AML, ten had died at the beginning of the trial from AML complications. Fourteen patients improved on AG-221 and nine went into complete remission with five that became stable but showed no significant change. Only six showed no improvement and this group of patients reported only minor side effects.

Agios has announced that it will present Phase 1 data on its followup drug in development, AG-120 that targets IDH-1 at the Symposium on Molecular Targets and Cancer Therapeutics on Nov. 18-21 in Spain. I suspect the results will be as impressive as AG-221 since it is almost unheard of for a company to present results from a phase 1 study in front of such a distinguished group of physicians.

Agios might be onto a whole different way of looking at cancer. Instead of targeting the cancer by killing the cell, target the enzyme and try to turn those cancer cells back into productive cells.

The icing on the cake is that Celgene (CELG), a fantastic biotech Juggernaut and BHS fave, owns a 17% stake and is footing the bill for AG-221 in exchange for royalties. Celgene and Agios agreed to extend the discovery phase of their strategic collaboration targeting cancer metabolism, extending the initial period of exclusivity to October 2015 which I expect to be renewed or CELG will make an offer for the remaining Agios stock in a takeover bid at some point (can you say “premium?”).

Celgene: CELG

AGIO is a great spec with a lower risk (made possible due to the backing by CELG) and higher reward potential but it is not for the faint of heart. If you are risk adverse, pick up some CELG at $94, trading at a redonc low of 10x 2015 earnings. CELG has been on sale since the hedge fund wankers have decided to cash out for the year. When they get back in next year, CELG will be on the move to $200. AGIO was down today 7%. I am in.

More info: http://www.newyorker.com/magazine/2014/09/15/transformation-3

When is enough, enough?

GoPro (GPRO) is a beautiful thing. Locking in a 65% gain in less than a month is the way to go, I should do that more often.

GoPro: GPRO

A great strategy to work on is trading around a core position to maximize your gains. Some people use small percentages to do this, I like to use nice even numbers.

Take GPRO as an example. In my previous posts, one of the rules is to not buy in on a stock that trades more than twice the earnings growth, basically we are using the PEG Ratio as a guide. This is my key to cash out of the position with whatever I have left unless you commit to using the house’s money.

Here is how it works:

I did my research and I want to buy 500 shares of GPRO at $45 a share. One of the rules is to divide up the purchase and never commit everything you have to the first purchase. Ideally, on a large position, I would want to break this up in 25% chunks of my 500 goal. However, we will use two purchases for this exercise.

Lets say that we purchased 250 shares at $45 and the next day we hit the bid on 250 shares at $40 per share. This make an equivalent purchase of 500 shares at $42.50. We have established a position.

Over X amount of time (in this case X = 1 Month, whoo hoo!), GPRO goes up 25%. Using this “trade around a core position” method, we should now sell 25% (125) of our shares, keeping the 375 (75%) as our core position and let it run. Effectively, we are still running even since we are out 25% and we are at this point up 25%.

Now we wait for GPRO to take a 3 or better percent decline (adjust this down for a less volatile stock). If GPRO goes up, we make money in our core position. If it goes down the 3-5% or more (and the reason that we bought in the first place doesn’t change) we commit the money from the 25% (125 shares) cash out to buy back in. When GPRO goes back up 10, 15 or even 25%, we sell the 125 shares (25%) and do it all over again and again. This is a great strategy if you pay attention to your stock and want to make a few extra percentage points.

When enough is enough, either by a multi-day ramp up in your stock (like with GPRO today!), you will need to look at adding more shares to the cash out and reassess whether or not to keep trading around the core position. If you hit the one bagger (100%) mark. I would highly recommend cashing out 50% and play with the houses money letting the remaining 50% ride as a freebie. You can always jump back later.

Alibaba…man those Commies know how to be Capitalists

Well, she went IPO today.

BABA
123.99
+0.36 (0.29%)

I tried to get in with a limit of $82, but BABA opened at $92.70. An awesome 36% premium for those lucky bastards that booked a few shares before the open.

Rumor has it that the top 20 Mutual Funds were screaming to get a cool billion dollars worth of BABA each. They obviously couldn’t get everything they wanted before the stock hit the floor, but they made up for it in the open market driving the price even higher.

I’m not bitter, just disappointed. It looks like BABA is going to close at about $93.00 with a forward P/E of 39, it is worth every penny, albeit on the slightly expensive side.  It is important to note that FB, as a comparison has a P/E of 40 and doesn’t have nearly the growth prospects of BABA. With a market cap of over $231B, this is the new power house on the Internet. Jack Ma, in one day, became the richest man in China. Nice run.

BABA has better margins than EBAY, AMZN, GOOG and even FB. It even has a better growth rate. With 50% of the Chinese people not even on the Internet and very low “brick and mortar” competition in China, this is going to be a Juggernaut with great prospects.

Yahoo has roughly a $35B stake in BABA. YHOO’s  market cap is $40B as of today, meaning that if you buy shares, you are only paying $5B for YHOO and you will probably score a sweet dividend at some point. The YHOO brand is easily worth $15 a share, there may even be some upside if the street thinks that YHOO will spend the money wisely.

According to the Mutual Fund Flows, there has been very little new money coming into the market. The good news is that with no new money coming in, BABA had a great open and didn’t take too much away from other stocks. Heck, it might even bring new money into the market due to the publicity of such a great run.

For me, the trade is over for the next few months. No chasing of BABA, just wait until the hype and froth is over. I might even wait for the lock up period expiration and maybe I can catch a deal. Everyone loves a fire sale!

 

 

 

 

 

Get the kids interested early!

My interest and obsession with stocks started in 1987 in marketing class. Mr. Adams was a shrewd business man but also a great teacher. He encouraged us to do the homework, do the research and he started me on my life long interest in the stock market.

I remember Black Monday (Oct 19th, 1987) when the Dow Jones Industrial Average cratered 22% . Even though I was only a teen, I remember the cover of every paper showing traders pulling their hair out, screaming and talking on multiple telephones.

In those days, you needed traders on the floor, a good knowledge of hand signals and a runner that could go the distance. Books like “Liar’s Poker” and movies like “Wall Street” and “Boiler Room” really bring back that excitement and the “irrational exuberance.”.

I won the Stock Market Challenge, sponsored by the Securities and Exchange Commission, in 1988.

I had researched an interesting guy: Henry Kravis. Mr. Kravis was was all over magazines and there were articles about him even in the local paper. Mr. Kravis was head of the Private Equity Firm of KKR (Kohlberg, Kravis and Roberts). Without the internet, other than that IBM XT Mr. Adams had in his office, there was no place to see the ticker or find out the real news, but I had read an article in the three day old IBD that told of a rumor that KKR was interested in RJR Nabisco, the tobacco and food conglomerate.

The next day, Shearson, Lehman, Bros (at this time Shearson, Lehman, Hutton…(of the fame: “when E.F. Hutton Speaks, people listen.”)) had issued a tender offer to take RJR Nabisco private for $75 a share.

I had 10 Large on paper to trade with, but since the margin rules were a bit lax back then, even for the game players, I leveraged it into the 100K that I needed. I was IN!

After I placed the trade, you had to buy even lots back then, KKR jumped in with a bid for $90 a share, allowing it to go forward without the approval of RJR management. The frenzy, as only Wall Street can muster, was on. I thought I knew what I was doing, a dangerous place to be.

Shearson Lehman Hutton and Salomon Brothers hit back with a bid of $112 and it ended up with the RJR Board of Directors actually settling in at $109 with KKR as the victor. The largest leveraged buyout in history at the time.

I had made a cool 30% after the ten weeks was over. Not a bad haul, even today.

The next year, I used that motivation and won the Commodity Challenge, sponsored by the Chicago Board of Trade. Using a drought, a couple of thousand bushels of soybeans, and a strike price that was easily hurdled…it sent me to the windy city and I traded in the pits at the CBOT…not even the president can do that!

The moral of the story is that these early games started me on a life-long interest in the market. Use whatever means to get your kids involved, the laws of compounded interest are on their side.

 

Growth Rate Applied to the Mutiple: Whutup?

Rule:

Never pay more than twice the growth rate (converted to P/E) for a stock.

Most institutional investors, (the big guys behind the oak desks that move the markets) have a rule not to pay twice the growth rate for a stock…it is too expensive.

To determine the growth rate, we use FUTURE Earnings Per Share (EPS) estimates. Stocks trade six, nine, even sometimes twelve to eighteen months in the future and if you use the current or the past EPS numbers, most stocks will look overvalued when they could be actually quite cheap and you may miss the opportunity.

For example:

The company: Vandalay Industries (NYSE: GLC) trades at a P/E of 100 has the following EPS over the last few years:

2012: 1.00
2013: 1.20
2014: 1.40

These numbers show that from 2012 to 2013, GLC had 20% EPS Growth. A pretty respectable rate for the Latex Sales biz. With this rule, we would then expect to pay no more than a P/E of 40. [20% * 2 = Max P/E (Multiple)]. However, from 2013 to 2014, the growth rate slowed to 14.3%, which should cause a contraction to the multiple if we compared it to the year prior. We would now expect to pay no more than a P/E of 28.

Obviously we should sell it if we have it, or not even buy it (maybe even short it?) because it’s over valued. Right?

Wrong. We looked at the future predictions for EPS based on the management numbers and we noted the incredible demand for latex in several industry journals. The predicted EPS from 2014 to 2015 is 2.10, a 50% growth rate from 2014 to 2015 and the if the outlying years are even better, a P/E of 100 is not out of the question and maybe a reasonable valuation.

Additional comments:

1) Expect to pay a higher multiple (than the peers) for the best-of-breed stock. The top dog in the business deserves a bit more…you pay for quality.

2) Expect to pay a higher multiple if the company consistently  beats and raises earnings estimates at the quarterly conference call. We like managers that under promise but over deliver.

 

 

 

 

 

 

Timing is Everything

Timing is everything: Here are a few timing stats.

1) If you wait until 11am-12pm on the first Friday of the month (nonfarm payroll numbers are issued) to buy a stock, you will often score a better deal than you would at the open.

2) When institutions dump a stock or liquidate positions, they typically do it from 1:30pm-2:30pm EST on the trading day. If they can’t liquidate what they need to dump, the “Firm Reload” resumes the next trading day.

3) THE DATE to buy a stock with a dividend is, at the latest, the day before the X-Date.

4) You don’t typically want to buy an IPO before the lockup period expires. Wait to see the waist after the insiders sell.

5) Don’t take a position during earnings season, unless you absolutely have to. The unofficial kickoff to earnings season is the release of earnings by Alcoa (NYSE: AA).

6) If you see your stock in the New York Times, Businessweek or Forbes…the smart money has been already made. Don’t be a piker.

Tax Inversion

Who cares that Burger King is buying Tim Hortons for 11.4 Billion? You should. A lot of people say that it is unpatriotic for Burger King to to try to escape the U.S. Tax Code. First of all, they will still pay U.S. taxes, but they won’t pay nearly as much. Burger King will go from a top 35% tax rate to  15% (26.5% For Ontario). This is a 46.4% reduction.

The most important thing to remember is that it is the CEO and the Board’s primary fiduciary responsibility to make money for their shareholders.

Energy would be better spent to decrease corporate taxes within the U.S. We are the highest in the industrial world. If we would set a flat 15% tax rate, you would see some serious job growth.

What is a difference between a Hedge Fund and a Mutual Fund?

There are quite a few differences, but to us there are only three things we care about:

1) Mutual Fund Managers make money off of churning and fees and there is not much incentive to make money for you.

2) Hedge Funds are not bound by regulations for leveraging but the manager only gets paid when you make money…a little better deal, but the home gamer or retail investor can’t play…sorry.

3) Very few can beat market average. And by market average, I mean the S&P 500…not the Dow Jones.