An analysis of my current positions

Investment Analysis Clubs Saul’s Investing Discussions
1

An analysis of my current positions.

Please don’t put too much stock in the exact order of the size of the positions, as they can change from day to day as determined by the stock prices. Note that values are based on yesterday’s closes. (Weds).

I currently have 16 positions so an “average” position would be about 6.6% of my total portfolio.
,
At the current time I have 4 positions that are a lot larger than the others. They average 12.5% allocations, which they have grown into, rather than being bought anywhere near this large. These are, in order, BOFI, SWKS (Skyworks), CELG (Celgene), and SKX (Skechers). These four make up just under 50% of my portfolio, but at least they are widely diversified, being in Banking, Semiconductors and Internet of Things, Biotech, and Footware. As you know, I aim for companies that are growing very rapidly but have normal PE’s, whenever possible. These top four tend to exemplify that policy. Let’s take them in order:

BOFI is a very high conviction internet banking company, doing everything right, growing earnings last quarter at about 40% and growing tangible book value at 37%, and in spite of that is priced at a trailing PE ratio of an incredible 18 times earnings. For more information see Fletch’s wonderful summaries on the BOFI board.

SKWS is growing amazingly fast. The last two quarters for example they grew EPS at 54% and 75%. These were up sequentially as well by 34% and 35%! And it’s not just earnings, it’s revenue too. Last quarter revenue was up 50.5%. And we are not talking small numbers here. They are growing some BIG numbers incredibly fast. That was $718 million, up from $477 million. The quarter before was $587 million, up from $436 million (34.6%). What kind of PE ratio might you expect with these results?.. Well this company is selling at just about 20 times earnings! It’s up a lot this year, but what the heck?

CELG is my only biotech company. It has a flagship product but also has a lot of other products, flagship wanna-be’s building up their sales. And they contract with small biotechs with interesting early products. CELG finances the research and development for rights to market the product (giving the early biotech royalties). Their revenues have had regular year-over-year gains for at least 15 quarters, which is as long as I have tracked them. The same for earnings. CELG only grows at about 20% per year, but it’s like clockwork. Their trailing earnings are now about $3.46, which gives them a PE of 33. They’ve had the guts, and confidence, to put out an outlook for 2017 for about a year now. It’s for earnings of $7.50. They did a 2-for-1 split earlier this year but their price is back up to $114.

SKX is the fasting growing of even this fast growing quartet, in spite of a very reasonable PE of about 22. Its 2013 earnings were up 500% from 2012. Its earnings so far in 2014 are up 175% from 2013. Its revenues are also doing very well and are up 29.5% so far this year. And they are growing fairly big numbers as their revenues will be well over $2 billion this year. However clothing is always faddish and I’ll keep a close eye on this one.

I’ll continue with subsequent positions in another post but we are having guests for the weekend and I have to sign off for now. I will welcome questions or comments and will try to respond promptly.

Saul

For FAQ’s and Knowledgebase
please go to Post #4490

13 Likes
2

Another word on Skechers. I don’t know who they consider their target audience. My wife won’t wear anything else because they are so comfortable. But Skechers also sponsors running shoes and marathon runners, so they are definitely going after sport shoes and are across generations.

1 Like
3

Thank you so much, Saul, for your position analysis. I benefited a lot from your posts and enjoyed your candid opinions. One question I have is that why you picked PE of 20 to do data analysis? Peter Lynch liked to use PE of 15, TomE uses PE of 30 for his superstocks. It seems to me that you found your sweet spot.
Also, would like to know your take on SYNA’s announcement from yesterday
(CFO is retiring and the co provided earlier guidance for the current Q). Thanks!

Zangwei

4

One question I have is that why you picked PE of 20 to do data analysis? Peter Lynch liked to use PE of 15, TomE uses PE of 30 for his superstocks. It seems to me that you found your sweet spot.
Also, would like to know your take on SYNA’s announcement from yesterday: CFO is retiring and the company provided updated guidance for the current Q). Thanks! Zangwei

Hi Zangwei, A PE of 15 would be okay, I guess, if you were talking about conservative, slow-growing, DOW-type stocks. Mine are much faster growing. I accept a PE of 30 on CELG and some other stocks lower down on my list, but if I can get the rapid growth cheap at a PE of 20, that’s great.

As for your question about SYNA, I thought the CFO retiring in February after five years with the company is a non-event. I thought the increase in guidance was good news, and I imagine they expect to beat their new guidance by a nickel or so. I think they announced them together because if they announced the CFO was retiring all by itself, people would have worried something was wrong.

Hope this helps

Saul

For FAQ’s and Knowledgebase
please go to Post #4490

2 Likes
5

Out of your 4 Saul I own 2 - Skyworks and Skechers. I know nothing about BOFI (I’m not US based and haven’t come across them but I will check them out). Celgene are interesting and in an area of the industry that might hold some protection (against Generics and pricing pressure) as well as growth potential (targeted disease areas). They are pretty nimble but potentially niched. Being part of the life science industry and having seen the stagnation since 2000 I am wary about this industry. Clearly in recent decades Novartis, Roche and Gilead have done well but there has been a lot of value destruction or sideways movement too.

I also worry about Skechers and the fashion faddism angle as well as Skyworks getting designed out of products as fast as they get designed in.

Ant

1 Like
6

Ah fashions… A good reason for anybody much older than their mid 20’s to be very careful. When my granddaughter went away to college I lost my last good informant.
I do own a small Sketchers position but will probably be the last to know that “nobody wears them anymore because they are so popular” as Yogi might say.

1 Like
7

Celgene is interesting and in an area of the industry that might hold some protection (against Generics and pricing pressure) as well as growth potential (targeted disease areas). They are pretty nimble but potentially niched. Being part of the life science industry and having seen the stagnation since 2000 I am wary about this industry. Clearly in recent decades Novartis, Roche and Gilead have done well but there has been a lot of value destruction or sideways movement too.

Hi Ant, I don’t have results on CELG since 2000 but 10 year results from Yahoo Finance has them going from $6.83 to $114.13 now. That’s not too bad, roughly a 17 bagger, and definitely doesn’t sound like “stagnation”. Might be worth giving them a look. They seem to know what they are doing. The growth seems to be consistent. They were at $83 a year ago. They were at $39.50 two years ago, etc.

Saul

4 Likes
8

Thanks, Saul. It truly helps. Regarding Anthony’s comments on stagnation of the industry and therefore, companies’ stocks, my take is that, over the past decade or more, the industry went through a tough period. It had a fair number of M&As mainly to cutting down the cost and hope to get 1 plus 1 larger than 2. the reason often quoted to do that is that low hanging fruits had already been picked and companies need to invest more in R&D to fuel the pipeline, but in reality, the industry, as a whole, had not too much to show for despite tremendous amount of R&D money poured in. As part of this industry, I personally witnessed several major pharmas’ stocks went nowhere for a decade or so till recently.
I like CELG, the management team is superb (the interesting thing is the new CFO used to be my company’s CFO); there are quite a few promising drugs that poise to become big and the sales of the biggest drug is still increasing at a healthy pace; the company is teaming up with a lot small biotechs with promising drug candidates, collaborating with academic institues, imho, this is a very shrewd approach. I have only small position so far, wish I bought more when it was 120-ish before the split.
Saul, have you look into GILD? The stock is under pressure recently due to HCV drug pricing issue and upcoming competition from Abbie, Merck, etc. But, the company is not a one-trick pony, HIV franchise is still the best in the world and earns gobbles of money for the company, and there are other drugs in various disease indications. Below is an interesting seeking alpha article looking at “Gilead’s Value Without Its Hep C Franchise”
http://seekingalpha.com/article/2693025-gileads-value-withou…

Zangwei

1 Like
9

and earns gobbles of money for the company

Meanwhile, its other drugs are earning quacks of bucks and oinks of dollars for the company?

Or are you saying this drug is a turkey?

I am going to go out on a limb and bet that you meant “gobs” or “oodles.”

But I like the idea of incorporating animal sounds into our stock analyses.

LTC

Who thinks GILD has moos of promise . . . .

6 Likes
10

Agreed Saul - I didn’t mean Celgene has stagnated merely the broader pharma industry. Some players have done well but most have not. Celgene has clearly performed well.
Ant

11

LOL. Good one, LTC.

Zangwei

12

Saul, have you look into GILD? The stock is under pressure recently due to HCV drug pricing issue and upcoming competition from Abbie, Merck, etc. But, the company is not a one-trick pony, HIV franchise is still the best in the world and earns gobbles of money for the company, and there are other drugs in various disease indications.

Hi Zangwei, I have avoided GILD because so much of its revenue seems based on its immorally and crazily priced Hep C product. I will take another look at it though.

Saul

13

Saul I will have to disagree about the “immoral” drug pricing. If a drug gives you several extra years of life, not only years but quality years of feeling good,is nearly always effective and has far fewer side effects and risks than other drugs, it is a bargain at $100,000. Because of the medical expenses associated with the very common side effects of most other therapies they often wind up costing $100,000 too.

Especially compared to cancer chemo drugs that add a few months of life (if you are lucky because they don’t work at all for many) , much of that extremity filled with very disagreeable side effects. Almost never giving a cure, They aren’t cheap.
http://www.nerdwallet.com/blog/health/2014/09/17/how-much-do…

Of the 12 drugs approved by the Food and Drug Administration for cancer conditions in 2012, 11 were priced above $100,000 for a year of treatment,

Of course we could mandate that no drug treatment would cost more than $29.99 . Then treatments would be cheap but virtually non existent . (sorry couldn’t resist a “cheap” reductio ad absurdum argument :slight_smile: ). But it is obviously a matter of degree.

Cirrhosis will kill you just as dead as cancer.
And it is usually slow and lingering, not an easy way to go. The only alternative when it goes this far are liver transplants. Livers can be in short supply, it is not an easy process for the patient, and is not cheap either. Especially considering the extra medical expenses of being on lifetime immune supression.

9 Likes
14

Thanks Mauser. Everything you said is true. But because you can charge $100,000 for a pill because it will save someone’s life doesn’t mean that it is moral or right. They could probably make a huge profit selling it at $10,000 a pill.

Look, I buy Nasonex nasal spray in the US and France. It comes in the same bottle, same brand, same box, same thing.

In France it costs the equivalent of about $12. In the US they charge us a list price of somewhere around $150-$200-$250 (I forget the most recent price, it goes up every year). The only reason is because they can get away with sticking it to us suckers in the US. (If our insurance company pays for it, rest assured, the increase cost gets passed on to us in insurance premiums).

Now they obviously are making a decent profit selling it at $12 in France, or they wouldn’t be doing it. It probably costs them $4 to $6 to make it. Is it justified or moral to sell the same thing for $200 in the US because they can get it.

We aren’t talking about luxury cars, or fancy watches, or Dior dresses here. We are talking about medicines that people NEED for their health or even to save their lives, not luxury baubles that they can easily do without if they can’t afford them. Thus I think the word immoral is a least a plausible word to consider using, even if you would disagree that it’s the right word.

Saul

24 Likes
15

Saul, I have to be a bit on both sides here. I get that developing drugs is high risk and very expensive, so that one gets one that works one has to not only recover the development costs for that drug, but all the other ones that will never be marketed because they didn’t work. This is a clear setup for a massive disconnect between the cost to produce and the price. Moreover, one never knows how long the sales will keep on since next year someone else may be out with something better, so one can’t count on long term recovery. And, I get that if one market is providing the basic pay back, but another market has regulation that keeps one from getting that kind of pay back, but one can still make some money on each sale, then there is no reason to not sell it in the other market for a drastically lower price. And, if anything, that ups the price in the expensive market since one is trying to recover costs and rake in as much profit as possible before it is superseded.

I suppose that one can complain when the pricing for recovery is highly front loaded and there seems like there is no competition on the horizon. But, certainly, the amorality is greater if the extreme recovery price is maintained when the recovery has happened and one is just soaking in the dollars, the archetype of obscene profit. Still, drugs are a very risky business and it is understandable that one takes profits when one can. And, as Mauser says, this is a cure. It means many years of no related expense for the person or insurance and many years of quality of life free from the issue. Years in which the expense would substantially outweigh the cost of the treatment.

So, I agree that it is shocking, but I am having trouble being fully outraged.

6 Likes
16

I have avoided GILD because so much of its revenue seems based on its immorally and crazily priced Hep C product. I will take another look at it though.

Saul, I’ll jump in here briefly, as I just read this thread. I would normally agree with your side of the argument, but in this case I agree with mauser. The cost/benefit is fairly clearly on the side of Gilead.

The argument about the cost of drugs in the US vs elsewhere is a different discussion. There are no direct price controls in the US, so Gilead will try to charge what the market will bear - of course in reality there are price controls, because insurance companies/medicaire/medicaid/VA will balk at the asked price and refuse to cover or negotiate lower prices. Elsewhere there are effective price controls, and Gilead (and other Pharma companies) will sell at a lower price because they can still make a (lesser) profit.

Back to the cost/benefit. It’s a bit like saying Tesla’s price for the Model S is immoral - who can afford to pay $90,000 for a car? But the fact of the matter is that viewed over a number of years, the Model S is quite a good deal. I have a friend who commutes 128 miles a day in NJ and he has calculated that his Model S will have paid for itself in five and a half years (based on savings in fuel and maintenance) compared to running his Lexus SUV. After that, if he keeps the Model S for 10 or 20 years he will be way ahead of the game.

I’ll try to come back to this discussion tomorrow.

John

2 Likes
17

When you start legislating based on morality and fairness you get monstrosities like the Affordable Care Act. You get banana republic economies like my country has.

Denny Schlesinger

4 Likes
18

If a drug gives you several extra years of life, not only years but quality years of feeling good,is nearly always effective and has far fewer side effects and risks than other drugs, it is a bargain at $100,000. Because of the medical expenses associated with the very common side effects of most other therapies they often wind up costing $100,000 too.

Especially compared to cancer chemo drugs that add a few months of life (if you are lucky because they don’t work at all for many) , much of that extremity filled with very disagreeable side effects. Almost never giving a cure, They aren’t cheap.

As someone who has had the honor of dealing with Hep C and Cancer I can assure you if I were forced to choose only one treatment it wouldn’t be for Hep C.

B

PS Had Hep C for 40 years and never progressed beyond the fatty liver stage, cancer not so long and with far more dismal prognosis treated or not.

1 Like
19

I see no simple answer to the morality issue.

The lack of price controls in the US on prescription drugs, as long as they are in place elsewhere, results in the US providing the bulk of the profits that justify the research that creates many drugs in the first place. If the US had in place controls that required our prices to match those in France, would Gilead have developed Sovaldi or Harvoni at all? Is that morally preferable? Obscene profits can be a great motivator.

7 Likes
20

One important point is that for drug companies to develop new drugs they have undertake the expensive task of trying multiple candidates. Most of these will fail, some only after a super expensive 3 rd stage investigation. Maybe at some point in the future we will have some surrogate for humans that works every time, but for now we don’t.Sometimes all the lab and animal experiments flop .

So each successful drug not only has to ay for itself but the failures too. Only the company is privy to those details of their total costs.

One point about Gilead is that their acquisition team seems very good at picking drug candidates from other companies. Overpaying turns out to have been very smart. And they have a great pipeline , mostly being ignored by the markets. I bought GILD during the PR fuss over the $100,000 price . Because I could see that it was actually cost effective compared to old treatments.

We have lots of new medicines. But new cures are rare.

1 Like