eBay leaves investors cold

Once again eBay delivered a great set of results this week. And once again eBay disappointed investors with a light forecast for 2008.

The problem for the share price is that investors look forwards, not backwards. And with a revenue growth of 14% predicted at the top end of the forecast, growth hungry investors gave eBay the thumbs down. Revenue has just grown in 29% in 2007 so a deceleration like that is hard to stomach.

The problem as ever is that the marketplace business, which accounts for almost two thirds of the revenue, is struggling to grow having become a victim

New CEO John Donahue is going to make some radical changes to the eBay experience in an effort to re-ignite growth. But this creates a risk that the changes will have the opposite effect. Only time will tell and investors are an impatient bunch.

Assuming that eBay earns $1.70 per share in 2008, eBay is on a 2008 PE of 16. This is incredibly low for a company of eBay's quality.

I think eBay is great value at this price. It has an amazing company in PayPal, $5 billion in cash, a share buy back in progress, a great cash cow in the eBay marketplace and a couple of wild cards in Skype and the classified sites that are in hyper growth mode.

What am I going to do? Watch from the sidelines as normal. I already have a full position in eBay and I am not going to average down.

In 2004 eBay investors had an exciting time as the share price doubled in one year. I am still waiting for those days to return again. Luckily I am a very patient man!

Genentech still expensive

Genentech (DNA) has not been kind to its shareholders recently with its share price declining
steadily over the last couple of years. Now that the excitement of its new blockbuster cancer
drug Avastin has worn off investors are looking down the pipeline and seeing little to get
excited about.

The directors are aware of this and have announced that they are aiming to introduce 30 new
molecules to the pipeline in the five year period ending 2010. In 2007 they introduced 8 new
molecules. This sounds impressive until you find out that they also removed five molecules from
the pipeline last year. The directors do not state if the 30 figure is net or gross!

In general these new molecules do not have names yet and little is known about them. Until some exciting phase II or III results start coming in investors will mostly ignore them.

Another worry for DNA is its new AMD drug Lucentis whose sales actually declined in Q4 year on year. This is because Lucentis is very expensive and doctors are prescribing Avastin as it is much cheaper and seems to be equally effective.

So where is the growth going to come from in 2008? From increased sales and new indications of its existing drugs only. In reality Avastin will be the growth driver, making DNA a bit of a one drug wonder at the moment. Most of the other drugs are growing at single figure rates.

DNA is on a 2008 PE of 20. This is a much cheaper multiple compared to one year ago but still not cheap enough considering that earnings growth in 2008 will probably be considerably less than 20%. And if any new medical or competitive threats arise for Avastin all hell could break loose with the share price.

DNA might be worth another look in 6 months. But for now it seems that the multiple compression is not over.

Market Blues

Well it is a new year but the market is carrying on just like 2007 never ended. Financials are getting hammered, defensive companies are holding up and the market has no direction.

What does the patient investor do in this scenario? Stay cool and look for bargains of course.

If you are in the lucky position of have cash available for investment then there are some great opportunities at the moment.

EBay has been falling again and is back at $30 now - where it was 12 months ago! That puts it on a 2008 PE of 18 - very low for a company growing at 20% and that should do OK in a recession.

UK banks are amazingly cheap. RBS is a good pick at 418p. It is globally diversified, has minimal sub prime exposure and is on a 2008 PE of 6!

For a UK technology play ARM Holdings at 110p has become a buy if you believe that fears of a global slowdown in consumer spending are overdone. It is growing at 20%, has a yield of 2% and a share buy back program. All for a 2008 PE of less than 20.

I am not going to sell any of my defensive holdings to buy into companies that are currently hammered and volatile. I did that last year, selling Google to buy into British Airway and BA seems to go down on a daily basis. But I will accumulate cheap companies on a monthly basis. I already have full allocations of eBay and RBS so that means buying into Barclays, ARM and maybe Land Securities while they are cheap.

One day the market will go up again - honest!

2007 in review

2007 was a bad year.

It was mainly bad for a number of personal reasons but it was also bad for my portfolios. 2007 was a bad time for me to go overweight banks and dabble in real estate for the first time.

The FTSE100 only managed a 4% gain but none of my portfolios managed to beat it.

The best performer was my nest egg portfolio which managed a 2% gain. The star stock was Gilead Sciences which gained 25% in less that one year. My worst decision was to sell my Google shares in August, missing a 20% rise! I used some of the proceeds to buy into British Airways which is now down almost 20%. Ooops!

My mortgage portfolio did OK, only losing 3% despite containing banks and a REIT. The star performer was Genzyme which gained 20%. My best decision was to double down on Genzyme - a decision that was richly rewarded in the second half of the year when Genzyme went up while the market was going down. My worst decision was to buy into a second bank and a REIT in the first half of the year before the credit crunch set in. If I had invested the money in commodities stocks instead the result would have been so different.

My college fund portfolio spent most of the year just containing two banking stocks and consequently performed appallingly. The performance was broadly inline with the UK banking index - down about 30%! Thankfully I will not be needing these funds for a long time and it is just a paper loss. My worst decision was to sell Vodafone and buy RBS. The Vodafone share price then had a great year and the RBS share price had a terrible one. My best decision was not to buy into Northern Rock!

So what are the lessons from 2007?

1) Do not sell a stock that is performing well to catch a falling knife. This refers to my decision to sell Google to buy into British Airways and CSR. Both these stocks had further to fall while Google went on to have the rally that I had been anticipating but had lost patience waiting for. Selling a great stock just to raise funds to buy into a falling stock is a risky business.

2) Diversity wins. My nest egg and mortgage portfolios were held up by my technology and biotech stocks, despite having significant exposure to banks. My college fund which only had banks got hammered. Having said that I think my college fund will be OK in the long term as the two banks it holds are top quality ones that are still profitable and the share prices will recover sharply when the credit crunch starts to ease.

3) Consider investing in an index fund. In the last two years only one of my portfolios outperformed the index over 12 months and none over two years. While it would be boring to give up stock picking if I consistently under perform then I will have to put at least some of my portfolios into an index tracking ETF.

2007 has been bad. If bank stocks recover somewhat this year then 2008 will be a lot better.