Saturday, December 16, 2006

Lessons from 2006

2006 has not been a great year performance wise. There are still a couple of weeks left but unless something drastic happens it looks like my growth portfolio will lose about 8% and my mortgage portfolio will gain about 5%. This in not good, especially when the market is up over 10%.

The main culprits were eBay and the US Dollar. eBay's performance demonstrated well the risks of investing in stocks with high multiples. eBay started the year on a forward PE of 45. The forward PE is now 25, and this is after a recovery from the lows of August. Why the extreme multiple compression? Slowing organic growth I guess but I can't really explain such a drastic drop. However with a high multiple stock you never know when such a drop might be around the corner.

The US Dollar lost about 10% compared to GBP, just to compound a bad year. In years of great gains like last year such a drop would just be background noise but in a slow year like 2006 the drop is noticable. Still I am not going to give up on US companies as there are so many great brands across the Atlantic and I believe that dollar has a good chance of recovering somewhat.

The third culprit was a lack of breakout stocks in my portfolio. CSR got the year off to a good start with a gain of 50% but then proceeded to lost all its gains and more.

Google is going to end up with a modest gain for the year, as is Dana Petroleum. Qualcomm is up 5% since I bought it back in July but nothing has gained enough to offset eBay.

The lesson of the year is: diversify! There are plently of great opportunities out there, such as my recent discovery of biotech stocks like Genentech. With most of my growth portfolio invested in large cap technology stocks 2006 was never going to be a good year.

Friday, December 08, 2006

Genzyme not short of natural catalysts

In my last post I looked at an ugly biotech; now for a nice one:

Genzyme (GENZ) is a large, US based biotech with a healthy mix of commercial products and new drugs in the pipeline.

The market cap. is $16B, the forward PE is about 20 and the growth rate is 20%.

"Our products across the board have good traction and momentum" says CEO Henri Termeer.

According to the last 10Q, SG&A expenses have been reduced from 29% of revenue to 27%. This has allowed them to increase R&D spending to 18% of revenue. Now that is NICE!

Compare that to the situation with Alizyme who were having to reduce R&D spending to cut costs and were betting everything on their late stage drugs.

R&D spending is as essential to a biotech as exploration is to an oil company so it is great to see GENZ investing in its future.

According to the 10Q, "Genzyme is conducting more late-stage trials now than at any point in its history." So plenty of scope for future revenue growth then.

The only negatives I have found so far is the ongoing stock dilution through the stock compensation program, and that the shares are denominated in dollars! I am not sure being exposed to the USD is a good place to be at the moment.

The present is good for GENZ and the future should be even brighter. On a forward PE of 20 this looks cheap.