Thursday, May 31, 2007

Doubling up

There seems to be a theme developing to my recent trading: doubling up.

Royal Bank of Scotland has been one of my favourite holdings for a while and as a result of their bid for ABN Amro their share price has dropped to ridiculous levels. Analysts estimate that RBS will earn 70 pence per share in 2007 giving it a 2007 PE of 9. This for a company growing at a rate of at least 10% and yielding over 4%!

The market hates uncertainty so while the battle for ABN rumbles on the share price will be depressed. With or without ABN I think RBS is a great company so I will be increasing my holding.

To that end I sold my last position in Vodafone on Tuesday. The market loved the yearly earnings report sending the shares up to almost 160p. However VOD is having a terrible time in Europe at the moment with profits falling in its biggest markets. To counter this VOD is buying into developing countries such as India where mobile penetration is low. However revenue from non-Western European countries is still a small fraction (maybe 20% from the top of my head) of total revenue. The best thing about VOD is their enormous Verizon Wireless investment but after years of agony caused by the VOD share price I am happy to get out at a decent level and put it on my wishlist.

So I now have overweight positions in Google, Genzyme and RBS. I hope I know what I am doing!

Thursday, May 17, 2007

Onyx Pharmaceuticals

Here is another biotech that I do not like. With a market cap. of $1.4 Billion and only 125 employees (according to Yahoo!) Onyx's share price could be inflated.

Onyx is really a one drug company (it does have another drug in phase 1 trials.) Its one drug is Nexavar, currently indicated for advanced kidney cancer, which it markets with Bayer. Nexavar is also in phase III trials for liver cancer, lung cancer and melanoma.

Onyx reports that in Q1 2007 Naxavar sales more than doubled from $24 million to $61 million. However it does not make clear how much of this revenue it received and how much Bayer kept. Maybe it is just me but before I invest in a company like Onyx I would like to understand that exact nature of their partnership with Bayer.

If all the phase III trials come good that Onyx will soar. However if safety issues are uncovered then the stock will plummet.

For me the risks are too great; not for me.

Monday, May 14, 2007

Biogen Idec

Having found a couple of biotech gems recently in Gilead and Genzyme I am currently trawling through the biotechs in the Nasdaq 100 for more beauties.

Amylin Pharmaceuticals was first but as it not currently profitable I ignored it for now as to value it will require an in-depth understanding of its drugs and their markets.

So on to Biogen Idec (BIIB.)

BIIB has a market cap. of $16 Billion, a 2007 PE of 18 and a revenue growth rate of 17%. There is no dividend but BIIB does have a small share repurchase program.

BIIB specialises in Multiple Sclerosis with its main drug Avonex accounting for over 60% of its revenues.

Most of the remaining revenue is made up of its Non-Hodgkin's Lymphoma drug Rituxan which it revenue-shares with Genentech.

BIIB has a new MS drug on the market - Tysabri - which currently accounts for 4% of revenue but is growing fast.

The pipeline is strong with 3 drugs in phase III trials as well as a program to expand the use of Rituxan to MS.

So what do I think of BIIB? I would give it a B grade. The valuation is reasonable and the pipeline looks strong but being so dependant on one drug for revenue is risky as Amgen has recently found out.

The late-stage drugs are not ready to hit the market yet so it may be worth re-visiting BIIB in a year's time.

Friday, May 11, 2007

Trading update

It is all change at the moment as I double up on some tempting opportunities.

In our growth portfolio out went CSR and Dana Petroleum and in came Google. Google has experienced so much multiple contraction in the last 18 months or so that it looked like a screaming buy to me.

In our mortgage portfolio out went the rest of Vodafone. I have been in and out of VOD several times in the last three and a half years and have never made much out of it. In fact the share price is now roughly where it was when I first bought in. Revenue growth is very slow and I think bank shares offer better opportunities for capital appreciation.

In will come Genzyme. GENZ in on a 2007 PE of 20. It is growing revenues at 20% and growing EPS faster as it leverages its scale. It has about five drugs in late stage trials which could hit the markets in the next three years. At its current levels it offers an incredible risk / reward ratio.

Time will tell whether doubling up on these beauties is brave or foolhardy. Either way the ride will be entertaining!

Friday, May 04, 2007

Average up! Underdiversify! Win big with Google!

Enough hyperbole.

My decision last year to double up on eBay certainly was not inspired as those shares are now showing a 20% loss, and that is after a significant recovery from the low of $23 last year. What was I thinking of, buying a company on a forward PE of 40 that was growing at 25%? In fairness I thought eBay was growing at 40% and no one can really explain why it dropped so much last year.

So if I double up on Google will that be any different? Well Google is on a forward PE of about 25 and it just grew revenue at 60%. So the numbers look great but what are the risks?

Loss of market share is one I guess but that is hard to imagine as Google has been growing market share for so long now. Even if market share remains static revenues will grow as the online advertising industry expands and Google reaches into new product areas.

A global recession is another risk. Unlike eBay, Google would be adversely affected by a recession as advertising budgets would be slashed. However as Google's sponsored search is so effective it is likely that other forms of advertising would be dropped first.

International revenue is now almost 50% of total revenues so a slowdown in the US economy would not be a complete disaster.

Google is a buy. So it is bye bye to CSR and Dana Petroleum for now and hello to more Google.

Trading update

Sold ARM Holdings last Friday for a 25% profit in 9 months or so.

The Q1 results were OK but the market was mainly excited about a significant return of capital to shareholders through dividends and share buy backs. Fair enough but I would rather cash in the gain now in the form of the higher share price rather than wait for the dividends or for the buy backs to take effect.

Dollar revenues were only up 14% and at 140 pence ARM is on a 2007 PE of almost 30. Not a bargain by any means.

ARM will go back on my wish list. If it drops below 120p this year I will look at it again.

Wednesday, May 02, 2007

Google going, going, gone!

The summer sale has started early! Line up here for shares in Google at $470 each!

Google may have just increased Q1 revenue over 60% year-on-year but Google is available on a 2008 PE of 24, based on a very conservative estimate for 2008 EPS.

By comparison, eBay, growing revenues at 20%, is on a 2008 PE of 22. Yahoo, also growing at 20%, is on a 2008 PE of 38!

Why is Google so cheap? I guess investors assume that growth at 60% is not sustainable. And they are probably right. But if over the next year Google's growth rate settles down to 30% the shares are still cheap.

Psychologically the shares look like they must be expensive at $470. I think a share split could have a material effect on the share price as Google would look so much cheaper at $47.

In 2005 I doubled up on Google before the Q3 results came out and made a very nice return. Should I do the same now? Probably, as I think the downside from here is limited.

Rest In Peace

To my second child, who did not live more than a few weeks in his mother's womb: Rest in Peace. God bless your soul.