Western Downgrade

I was mere cents away from my first triple. And then Western Refining was downgraded by Deutsche Bank. Sorry to hear it, WNR! The share price bounced around: WNR shed nearly $5 after the downgrade, but recovered almost $2.50 today. It'll be interesting to see whether this is just a blip or whether it changes the direction of the stock. Look at the 1-year chart. As of today, it's up 187% since I bought it.

Profits cubed

Cubist announced Q2 earnings today AH. As I'd hoped, they swung to profitability this quarter, and reported great results. Earnings went from a loss of $0.09 to a profit of $0.24. Analysts had predicted $0.16. The stock price is up over 10% in AH trading. I'm off to listen to the conference call...

Fierce Bioanalysis

A recent editorial on Fierce Biotech discusses the Biotech industry, and I thought it was pretty interesting. http://www.fiercebiotech.com/node/7553

RNAi rocks

A big deal was announced between Roche and Alnylam today. Roche bought about 5% of ALNY for $42m, so the whole company is worth about $840m. But that's not all. They also paid $331m to license the RNAi IP, and additional aspects of the deal could make it worth as much as about $1B. FierceBiotech called it a billion-dollar lesson in the economics of RNAi. It just keeps on sounding as though the management of ALNY is doing all kinds of things right. As one of the couple of companies with IP on RNAi, it seems that they are going to leverage it into big deals rather than selling out.

I'm understanding a little better how investing in biotech works. It seems that you need great technology and really good management. That's obviously true in other sectors, but these are especially important in biotech because it's typically such a lag between the company going public and the product coming to market. Once the product is in the market, the only risk is market risk, ie will the product sell as well as expected. CBST is an example that I've discussed before of a company that may be having exactly this sort of problem. (We'll see after next Wednesday's earnings announcement whether CBST has figured this out.) At the stage where ALNY is, though, there's also the risk of whether the technology will deliver on its promise. When Sirna was bought by Merck last year ($1.1B!), the market saw it as a validation of the technology, and ALNY went up to about $22. Since then, ALNY slowly dropped down to $15 prior to today's announcement. (The funny thing is, I was just thinking last week that ALNY was looking cheap. D'Oh!) Now RNAi is again validated by the interest shown by Roche. Right now the market cap is $868m. Is the future growth of RNAi worth more than the valuation from this deal with Roche (ie, $840m)? I think so - it would be more than the $28m difference, I think.

But what happens in the next couple of days? What I've seen before has been that after the excitement wears off, the stock price will drop a little until it finds a new equilibrium. A great example of this is what happened with Novacea recently when they announced a deal with Schering-Plough. I suspect that this will happen with ALNY as well, unless they make another announcement in the near future (which the CEO John Maraganore hinted at in one of the stories I read about today's deal). Also, they'll be announcing earnings in just under a month. It won't be a surprise, but they'll probably be beating whatever analyst estimates there were. Will the stock price respond? Barring earnings surprises, I wonder whether the stock fluctuation exhibited by Arena is more typical - two peaks and three valleys over the last year. All of this makes me wonder whether investing in biotech could be enhanced by maintaining an investing position while also having a trading position. Today I wouldn't mind selling part of my ALNY position, but I guess I'm a little afraid of it not following the pattern I've seen before. (It's already down a bit in afterhours trading.) I sold off a position in Medarex before, and got a little burned by that. Like MEDX, ALNY is a company that I believe in long term. Should I just hang on to what I've got?

Congratulations

Congratulations to VeriFone CEO Douglas Bergeron for being named 'Entrepreneur of the Year' by Ernst and Young. Hopefully this accurately reflects the great leadership that he brings to the company.

MFI Turnover

I turned over my MFI portfolio today. I also turned back the clock a little, and picked new stocks based largely on insider purchases, but also influenced marginally by market caps, Piotroski F-Score, Rule #1 investing and insider ownership. I actually had some difficulty making a few decisions, and debt was often a deciding factor. Here are my new picks:

AMEN - A Texas-based power and land company. Seems that they've been moving their resources to power and their EBIT increased hugely y.o.y. last quarter. I like the idea that if the land and housing market were to turn, this company could become even more profitable.

CHKE - This is a company that owns several brands that are sold at stores like Target. It's done very well over the last year, but the stock price has dropped dramatically after a disappointing quarter. Apparently, both the CEO and the CFO think that the drop has been excessive, and I'll join them in buying shares. About an 8% yield.

HERO - They provide services to oil exploration and drilling companies. They've got very high corporate governance scores at Yahoo! Profiles.

NPLA - They make 'proprietary emerging technologies,' including digital pens for tablet PCs and feedback switches. No debt. Last quarter was huge, and they've been going up since then. Normally, that would make me cautious, but 'the tools' that Phil Town introduced me to are all a strong buy. After the bell today, they announced that the CEO/CFO was resigning. I'm afraid that this will put the brakes on the stock. On the other hand, the price was up 1% after hours.

ROK - Rockwell Automation provides power and control services for industrial automation. Total debt is about 2/3 of cash on hand and the stock is cheaper than the Rule #1 margin of safety. They closed an aqcuisition today, of ICS Triplex, a maker of control and safety equipment.

I struggled in considering a couple of other companies: RURL, KNL and SPLS. Staples (SPLS) of course is the well-known business supply store. Rural/Metro (RURL) operates ambulances in rural areas, and Knoll Inc. (KNL) makes office furniture. Both of the latter two had a huge amount of debt relative to total cash, and that was what eventually got me to decide against them. As for SPLS - I really have no good reason not to buy them based on the level of research that I did. Which, frankly, could've been more. Oh, well, we'll just have to see.

Welcome aboard!

A couple of additional notes. I decided to keep half my holdings of DECK. This was basically for one reason and one reason only: 'the tools' still call it a strong buy. As soon as those turn, I'll sell it and forget it. So my realized gain for this first portfolio is about 34%; the IRR after one year of MFI is 40.5% (only for my MFI stocks).

And this brings me to my second note. My special situations and 'One Up on Wall Street' portfolios are definitely slowing down the rest of my investments. I'm not ready to sell them off, but I am ready to start backing out of them. Over maybe the next six months or so, I'm going to try to make some tough decisions and pare these portfolios back by about 50%. I still believe in some of these companies, but I realize that I've held on to others for too long and there are still others that I shouldn't have bought in the first place.

Spin-off article

I came across this article about spin-offs. Not much new here (the only reference is to You Can Be A Stock Market Genius) but maybe some useful links for further information.