Saul’s Knowledge Base states that story stocks should be avoid. We should be investing in stocks that have the financials to support profits whether the company is currently profitable or not. For profitable companies we should be investing in companies that have displayed a high rate of earnings growth relative to their P/E. For unprofitable companies we should be investing in very high revenue growth companies that are on the path to future profits; these high revenue growth companies should also show increasing operating leverage such that we can see the various operating expenses (SG&A, marketing, and R&D) dropping as a percentage of revenue.
Companies that do not fall in the above categories are companies that are relying on the future idea of a huge new market. These companies in Telsa and essentially any development stage biotech company. Companies like CELG are not story stocks but I don’t think that Saul would invest in such companies because their growth rates are too slow. KITE and JUNO were story stocks because there was no clear path to profitability. Saul invested in both of these companies violating his own criteria that are laid out in his own KB. NKTR definitely falls into the category of a story stock, and strictly speaking, this company should not be discussed on this board. Yet, Saul has been invested in NKTR twice.
Personally, I think that being invested in a company like NKTR is ok. I have a position and I intend to keep my position. I think the company can rise 10x (stock price 10X that is) but I feel that such an increase is highly dependent on NKTR-214 changing the way cancer is treated. NKTR-214 will need to become the backbone of IO therapy for NKTR to become a $100B market cap company. My bet is that this will happen but my allocation is around 6%. I will probably cut back my allocation before or after the stock price has doubled. Perhaps it would be better for me to reinvest my NKTR shares into a MDB or a PVTL, companies that I believe have a higher probability to return 10X than NKTR does. Unlike many on this board I got into NKTR when the stock was in the low $20s, but the price that I paid is irrelevant to my current hold or sell decision. Now regarding NKTR, I disagree with Fuma and Cosmid; while I admit that the NKTR-214 clinical trials to date have had a relatively small number of patients, I believe that the data show a high likelihood of success for NKTR-214. The more data that comes out the better the clinical results get; the company reports updates every 2-3 months and the number of responders keep increasing. If you are an investor, then you should really look at the company presented data from ASCO. Particularly take a look at the mechanism of action data that shows how the drug is working. For me these results were VERY compelling. The results show that NKTR-214 seems to be converting tumors to PDL-1 positive and PDL-1 tumors respond to NKTR-214. Looking at NKTR-214 is a red herring because the drug enhances the immune system to respond against the tumor; NKTR-214 works synergistically with other IO drugs and that is the whole point: NKTR-214 will likely be used in conjunction with many other drugs. NKTR-262 is one of those other drugs and so is Obdivo and so is Keytruda. Just remember that all development stocks are story stocks; these companies success are determined by the clinical results and not the calculable earnings results. If you are not up for this then don’t invest in any early stage biotech companies that don’t yet have a blockbuster drug on the market.
Chris