Updated Returns

I realized it had been a while since the last time that I posted a listing of my actual portfolios with their returns. My overall IRR is 29.8%. By comparison, over the same period, the IRR for the Dow is 16.4%; that of the S&P is 18.2%; the Wilshire 5000 had an IRR of 18.7%; and the Russel 2000 returned 17.2%. So things are going well.

My Motley Fool portfolio is phenomenal. The current IRR is 63.7%. I've been neglecting to mention how this portfolio is doing lately, but there have been a few companies whose stock prices have really moved lately. IIVI has been climbing pretty steadily since I bought it way back in my first round of purchases last July. SDA was a real sleeper until recently, and MIDD and GIGM have been on fire. OYOG is a yoyo no more! EDU had an early drop after I bought it, but has since been bouncing around the low-$40's. Obviously, I'm really happy with the service in terms of straight-up picking of stocks. I also think that I'm learning something. With a little more work and effort, I think that I'll be able to learn a lot.

The Magic Formula Investing portfolio is also doing nicely, with an IRR of 39.7%. DECK has always been doing well, while WNR is a recent addition to my top-movers. VPHM was once my first double, but now has pulled back to the number three slot. FCX was well under the price I paid for it for a while, but has now clawed its way back to positive territory. UEPS seems to keep fighting with that $30 upper limit. It keeps making it there, and then falling back to just a little more than I bought it for.

I notice that the mid-range stocks of the MFI portfolio have had a lower return than the mid-range stocks of the MF portfolio, but the big winners have won bigger - in other words, there's a longer tail for my more moderately-performing MF portfolio (figure). Some of this effect is due to the fact that some purchases are more recent than others; however, this is not all of the effect, because both portfolios include stocks that are recent purchases as well as stocks that are older. In Marshall's study of monthly MFI portfolios, he found that they beat the Russell 3ooo most months. I wonder what the distributions of returns were within each portfolio? Is it the case that each portfolio has a small number of big winners with the majority of stocks giving moderate returns? This may be worth further study...

And finally, here's the biotech portfolio that I've been reconsidering so much lately. There is a bunch to say, though. The IRR is now -2.4%. Since my last post, Cubist found a distributor for Cubicin in Japan, the Merck subsidiary Banyu. They sold the rights for $6M. This seems somewhat low to me. Not that I've got some great insight into what that should have sold for... but it just seems low. And not just to me. A January article over at the Motley Fool predicted that they'd find a distributor, and that it would get them $10-$20M upfront. A big difference! A little good news, MEDX started another phase I trial with MedImmune. This had absolutely no effect on the share price, though. On the other hand, ARNA started a phase II trial, and the stock price dropped ~5%. ARNA and NOVC are also up for reconsideration. But I also want to consider this carefully. The idea with the biotech portfolio was that my understanding of the science would allow me to judge the science, not just base decisions on announcements like these. So, this is something that I'm still working on. Because it's also been an important lesson that the science is just a small part of the whole package with biotech companies.

A couple of notes

Not long ago, I noted that CTRP had looked cheap. It had peaked at ~$74 and dropped to the mid-$50s. I picked up a few extra shares at ~$57. It's now back up to ~$67 just a few weeks later.

Similarly, PAY looks like it may be cheap right now. It peaked at ~$42, backed off to ~$35, and now has gone back up $2 to ~$37. At it's highest, it had gained 40% since I first bought LPMA, at its lowest in the last few days, it was up only 20%. Also, the chart indicators that I learned about in Phil Town's Rule #1 look quite good for PAY right now. I don't have extra cash lying around, but if I did, I'd think seriously about an extra investment in PAY.

WNR is up ~40% in the last month. It announced great earnings 1 March. It seems to me that this is probably because of higher prices for oil; they discussed better margins, but also higher operating costs. It's also due to better refinery throughput. I really liked how positive the CEO sounded about '07, especially Q1. Apparently, so did a lot of other people.

On the other hand, VPHM has plumetted since their peak mid-February. Q4 earnings were down a bit, but 2006 was a stronger year than 2005. Now they announced the sale of senior convertable notes, and the stock price gapped a little lower.

Just to update - my total IRR is 23.3%. My MFI portfolio has an IRR of 40.8%. (In a recent post, I said that it was something like 11% - I just realized that I had accidentally excluded GVHR; so the 11% IRR was wrong. It's not that the IRR jumped 30%!) The IRR of my Motley Fool portfolio is 60.8%. With PAY down a bunch from its high, the IRR of my special situations portfolio is 63%. So, the kicker from my recent post about investing in biotech is that the IRR for my biotech portfolio is -5.8%. This has put me one step closer to revising my opinion of investing in biotech at all.

Mocked by the Market

Just a couple of weeks ago, I held off deciding whether to buy THE or EGY. The other day, THE was bought out at a 28% premium, and jumped ~17%. The market laughs.

Also, I had to laugh today, when the market waited for the Fed announcement before doing anything. Here's the market motion for the day (figure - red, DJIA; blue, NASDAQ; yellow, S&P). Can you guess what time the announcement was at?

Rethinking Biotech

I was looking at some old posts on Fierce Biotech, when I came across one that discusses all of the recent M&A activity in the industry. It points to a BusinessWeek article that I found especially interesting. Based on the article, it sounds as though investing in Biotech is mostly a pretty bad idea.

Biotech startups have no product. It takes years of VC financing before a startup can get a drug to clinical trials. Investors typically like to see at least phase II, and often even phase III clinical trial data before investing. But that's fairly late stage for a Biotech startup. So, without a product, investors (or, speculators) invest based on the probability of a product. That's based on management, on the underlying science, but mostly it seems to be based on any new developments. Cubicin is approved! The stock shoots up 20%. Indiplon is rejected at the highest treatment level! The stock plummets 40%.

The thing is, in my read of the BusinessWeek article, only suckers go through the IPO process. Big biotech and pharma are buying startups. They're interested in startups at a much earlier stage than the IPO stage; they need to make clear to investors that they have a pipeline, and one very effective way to do this is by buying companies that seem poised for success. Companies are well-remunerated for submitting to these giants - the average buyout carries an 86% premium relative to the average IPO (again, according to this same article). So if a company can be bought out, it's to both party's advantage to do so. So if the best biotech companies are being bought out, then what are the companies that are going public? They're the mid-range companies - the ones that are good enough to have products in development, but not sufficiently top-ranked to be bought out.

There are possibly exceptions. I sincerely believe that ALNY and MEDX are two, based on the science. (They're also exceptions because they were already public when this M&A-favored environment unfolded.) Sirna was bought by Merck for the sake of accessing the technology; I don't doubt that ALNY had some sort of similar opportunity. Same for MEDX - Cambridge Antibody Technologies was bought at a huge premium by Astrazeneca last year. MEDX and PDLI are in the same space that CAT used to occupy. So it seems that the management of ALNY and MEDX made decisions based on what they believe to be the future value of each respective company.

But, I've been reconsidering my investment in CBST for a little while now. Cubicin is supposed to be increasing in market share - so where are the dramatically increased profits? Why is VPHM still doing well? (At least, before the recent market turmoil - it was my biggest % gainer not too long ago.) In principle, CBST should be a good investment in the sense that they should be gaining market share with a superior product. Revenues are increasing dramatically, and earnings are growing with 06Q4 as their first official quarter in the black. (Here's a MF article about their year-end report.)

I'm trying not to be a schizophrenic trader, like I was in my earlier days with NBIX and MEDX. So, I think I'll hold on to CBST for now - at least through the Q2 results. But I'm also going to be a lot more discerning about my biotech investments. Also in the near future, I'll reconsider my investments in NOVC and ARNA as well.

The return of "Youch"

OK, I thought that things might be going well after my last post, but, sheesh! My total portfolio was down about 2% today, knocking my IRR down to 21.4%. The IRR of my MFI portfolio is down to 11.2%. It's pretty amazing how things swing from one direction to another. I really don't think I can point to any one stock, either - there's variability, sure - a couple dropped as much as 6% - but others went up, so no one stock was an outlier that drove the portfolio as a whole. I checked the news for some of the companies that were at the bottom end, and there wasn't anything. So this is just the roller coaster of the market for now.

White Swan and New Picks

In Fooled by Randomness, a black swan is described (more or less) as a predictable, but improbable, event that, if it occurs, has disastrous results that are not adequately planned for. I had a small white swan today.

Since last week, the market has inspired only one thought, "Youch." It had been something like 6 straight days of dramatic downturns. Yesterday was my scheduled 'buy' day. You know how they say to stay in cash during a downturn, but they also say that no one can call a bottom. In this case, I think that these sayings were giving me contradictory advice, so I went ahead with my scheduled buy. And today, the market rebounded in a big way. My portfolio did about as well as the NASDAQ, but the point is that there was more in my portfolio than there might have been otherwise. It's amazing how large an affect this had on my IRR. My total portfolio of stocks went from a 24% IRR yesterday to a 30% IRR today; my MFI portfolio was 8.4% yesterday, and 15% today.

Especially of note, I invested more in Ctrip. I first invested at $49, it went up to mid-70s, and now dropped back to about $57 when I bought it again yesterday. It was up 5% today. Also, I see that Optimal Group, my newest MFI stock prior to today, swung to profitability in Q4. It's up 16% after hours.

Oh, and my new MFI picks? WIRE, BLDR, NTRI and MTEX. After all of my complaining about evaluating companies in previous entries, I went somewhat more in depth to arrive at these four. It was still more based on hard data rather than judging things like management conference calls and CEO letters in annual reports - taking what data I could and using that. So I scanned the MFI lists (top 100 of $1M or greater market cap) for high insider ownership, recent insider purchases, increasing EBIT over several years, and a large discount relative to the 52 week high. (This last is based on the 'Blue Light Special' study that Marshall did; his data suggest that MFI stocks that have gone down by 20% tend to recover and do better than stocks that did not drop.) These criteria narrowed the list of 100 stocks to 21. Then I ranked all stocks based on these criteria as well as Earnings Yield and ROC (the MFI criteria), Piotroski F-Score, analyst coverage and market cap (less is better for these last two [arguable, but I think the Tweedy Browne study showed these to be true]). I also ranked them on corporate governance, the semi-black-box statistic on the Yahoo! Finance Profile. These four companies scored highest on these criteria, with the exception that EGY and THE were third and fourth of the top six. I was torn about buying another oil company (after WNR); also, I have been interested in EGY for a while but THE is a recent HG recommendation. In the end, I decided to wait.

I think it's worth mentioning how I looked at an increasing EBIT. I was looking for the fastest rate of growth of EBIT from 2001 to 2006. Using Randy's plug-in for Excel, I was able to easily download these numbers. Bringing them to my handy graphing program, I fit each EBIT to a linear function, and took the slope. (I think that I should have normalized the EBITs to, say, the most recent year. I'm a little upset that I didn't think of this before.) One thing that is becomes clear, especially when you compare the WIRE data with that of other companies (see figure) is that what you actually want in this analysis is an exponential increase, not a linear increase. An exponential increase in EBIT means that the company is efficiently using its resources to efficiently generate a return on capital. Conversely, a linear increase means that the company is doing less business with more cash on hand. I'm not 100% sure that this logic is correct, but I'm basing it off of the Buffett principle that % return is what's important rather than earnings.

Hopefully, today signalled a turnaround from the last few days, rather than a small bump in a continued spiral. One thing about stock investing - it's almost never boring!