New buys -- MYGN and IMAX

I've made two purchases recently of companies that I found out about from my newsletter subscriptions.

First one: Myriad Genetics (MYGN)
Bought July 21, 2005 at $18.28

This one has so far been a short term bust, but obviously I consider my biotech investments to be just that -- investments for the long term, not trading vehicles to bump in and out of. I like the prospects for this one over the next several years as they ride the trend of predictive genetic medicine.

Not unlike Protein Design Labs, which is my most successful investment so far this year, Myriad Genetics pulls down a solid cash flow with one part of their business that is fairly predictable and lower risk, and uses that cash flow for the risky and potentially more lucrative business of developing new products, and in particular new drugs. That makes this a little less boom and bust than some other small biotechs that do not already have ongoing businesses or sales, and their expertise in developing and selling predictive tests should also give them a leg up on drug research and marketing as they work to develop new therapeutics for the same kinds of diseases as those tested for by their genetic tests. It's going to be several years before this one pans out, so unless they are bought out I have no plans to sell at any particular price point in the future.

And the other recent addition is Imax, which I just bought this week.

Imax (IMAX)
Bought August 18, 2005 at $9.90


I think if anyone is going to survive in the movie exhibition space, it's Imax. And I don't think the movie theater will die anytime soon -- there's just something unique about seeing a movie with a crowd, especially a big Hollywood event movie or epic.

It's true that the movie theater is becoming more and more of a hassle for regular visits -- high concession prices, traffic and parking, growing ticket prices, and ads in the theater. But I think the event movie will survive -- will your local enthusiasts be lining up at IMAX theaters for the next generation's Star Wars because the standard theater just doesn't cut it? Maybe.

After all, more and more, those event movies are going to be available on Imax. Batman Begins was a huge hit on Imax this summer, as was The Polar Express during the Christmas season. Imax is contracting out to grow their installed base (that installation is where they make the biggest portion of their income) at a very rapid rate. No longer will these theaters be only in a few big cities, and only in museums or other nontraditional theater spots. There will be more and more stand along Imax theaters, and, most importantly, there will be mini-Imax theaters at your local multiplex. Imax the company gets royalty revenue from the distribution of the films it converts to its format, and it makes money building and servicing theaters and leasing equipment, so although their installation cash is front-loaded they do have a solid and steady cash flow that grows with their installed base.

This phenomenon of event/action/epic movies on Imax is, I think, the key. I've opened a small position here, and I'll make future decisions about what to do (buy more, sell) when I see how they do through a couple key movie seasons -- this Christmas and next summer. If they choose the right films to convert and continue to draw significant crowds, which will cause more theater owners to want to add Imax to their mix, things will be looking rosy. This is a volatile one that has threatened to implode before and has a lot of debt, so step carefully.

technorati tags: MYGN, IMAX, Myriad Genetics, biotech

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

Strange Secondaries part 2 -- TINY

So the Google secondary is a little unusual, and I don't think anyone yet understands why they decided to make a secondary offering right now, when there's no clear need for cash that us individual investors can see.

But the Harris and Harris (TINY) secondary makes a lot more sense to me, even if it's not being particularly well accepted in the market. This was announced a while ago, to some sturm und drang, but I still don't get the concern.

Sure, there's the basic concern about secondaries that we should always have -- they are almost always dilutive, and they almost always have a negative impact on the most widely used metric out there, earnings per share.

But this company is a whole different kind of animal -- Harris and Harris is a publicly traded venture capital firm. They don't have any earnings to speak of right now. What they have is a portfolio of potential -- a portfolio of investments in private companies that have something to do with Nanotechnology. TINY exists to find promising companies in the nanotechnology arena, and to make early state investments in those companies in the hope that over a period of many years those companies will either go public or be acquired at great profit for the early stage investors.

Now, nanotechnology is certainly a reality, but it's not an area where there are already lots of strong operating companies. It is primarily a reality in the lab, and a reality in the minds and plans of technology entrepreneurs, even though in some areas, like semiconductors and textiles, it has already made an impact. The best is yet to come for nanotech, and money making industries should blossom from the technology. But not just yet.

So how does Harris and Harris grow? Two possibilities: They can have successful investments, sell them at a profit, and use that greater sum of cash to invest in more companies; or they can issue secondary offerings to raise more money to invest in more companies. I expect many of these companies to take a long time to develop, so I'd rather not see TINY try to trade their investments in them prematurely -- that kind of churn works against the long term success of even most individual investors, and it certainly works against early stage investors in private companies.

Is the share issuance dilutive? Well, not really -- all TINY shareholders own are the cash on the balance sheet and the investments in companies that may or may not ever pan out. Now there will be more cash on the balance sheet, and more potential ability to invest in tiny technology. That means that Harris and Harris can either diversify their investments further among a promising crop of small nano companies to increase their chances of participating in a big payday at a few of them, or they can make larger investments in the companies they have already invested in, thereby increasing their influence over the companey and their payday if they have decided that some of these companies show much more promise than others.

If you don't think that TINY can effectively invest this additional money in promising nanotechnology companies, that implies that you should probably have never invested in TINY in the first place. There is no shortage of places where they could put money, their investments to date are quite small in each company (relative to the investments made by other VC firms), so it might even be that a larger war chest gives them better competitive positioning amongst the crop of nano VC companies.

This offering makes perfect sense to me. TINY's investments may or may not be the most promising ones avaialable in the nanotech arena, but that's an argument for another day. I don't see how you can argue that there is a better way for them to grow than by raising more money, and increasing their ability to invest in more companies or as a larger participant in the companies they've already identified -- that, indeed, is exactly what they should do.


technorati tags: TINY, Harris and Harris, nanotechnology

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

Strange Secondaries part 1 -- GOOG

Google and Harris and Harris are both fairly large holdings for me, though Google is much bigger and is currently neck and neck with Berkshire Hathaway for the title of my largest individual stock holding. Lots of chatter today about the Google and Harris and Harris secondaries, so I thought I'd post my thoughts, too. First, Google.

The Google secondary, I dont' get at all. The Googlers have done a great job this year, earnings growth is spectacular and free cash is coming in a gusher. They have no debt, and they have always indicated that they aren't interested in major acquisitions (though I assume they'll continue to make small acquisitions with some frequency, a la Picasa, Keyhole and Urchin).

So that begs the question, what do they need $4 Billion for?

One has to assume it's for investing in growth, but it's a little disheartening to see this dilution without a plan that's released to the shareholders. There has been a lot of insider selling as we celebrate the one year anniversary of GOOG going public, but that doesn't bother me at all -- these people toiled for years for the promise of riches, it's fine for them to diversify their investments and cash out some of their holdings when they can.

I hope that they need the money for something good, and I guess I have to trust management to have a plan. I generally like that they are closed-mouthed with the analysts on earnings projections, etc., but I do wish actual news about operations and management plans was a bit more forthcoming. I expect that this money is for more significant expansion overseas, most likely especially in Asia where they have some catching up to do to make it to the top of the search engine heap. I applaud that initiative if that is indeed their aim.

Whatever else I've said, this relatively minor dilution is not enough of a worry for me to sell, and if the share price falls much further than this dilution should mandate I might again be a buyer. My last buy was at $240, and my fuller, somewhat dated writeup on Google can be found here.

technorati tags: Google, GOOG, search

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

Last Week's Losers

So I head off on a lovely vacation, and now, ten days later, have to figure out what happened to my portfolio. Wrote about the winners earlier, so what about the losers?

I didn't sell any of these, but I'm not all that thrilled with them at the moment, either. Some of the drops seem overdone and might be buying opportunities, but I've tried with limited success to catch falling knives before, so I'm just patiently watching. So here they are, the most interesting loser stories from the last ten days of my portfolio:

Click Commerce (CKCM), which I haven't written up my views on yet in detail, got pantsed last week when they released their earnings. Ouch. The stock had been on a tear this year, to be sure, but it was slowly edging down as I packed for the beach, and when earnings came out the next week it fell further, took a nearly 30% haircut overall and my position is now more than 25% underwater. I'm not buying more of this one right now, I don't find it compelling enough to jump in without figuring out better why a fairly good earnings report caused this kind of reaction. That's the danger, I suppose, of owning a company that the momentum junkies fall in love with.

Lions Gate Entertainment (LGF) also got beat up a bit on lower than expected earnings. This falls roughly in the same camp as Marvel or Dreamworks Animation (both of which I wrote up here) ... I don't think analysts or I will ever be able to very accurately predict their earnings and I'm not that worried when they miss them. I like the huge film library, the constant search for new properties and franchises, and the focus on profitability and niche exploitation -- Lions Gate now has to be considered the market leader in horror films, which are among the best profit makers in Hollywood, even as they also lead in producing or acquiring low cost, critically acclaimed and surprise hit films and television programs. Heck, they even released the Moonlighting DVD boxed set -- and the continuing hunger for old TV shows on DVD should also help them continue to grow. Their library makes them a potential acquisition target, but as a film consumer I'd also like to see them remain independent and keep producing and releasing films that major studios won't touch, but which make money and make sense for a smaller player who knows how to handle them.

Cendant (CD) -- So your former chief finally gets convicted, and the stock goes down? OK, so it didn't drop very far, but still. Not sure what' s happening with this one these days, the movement in price doesn't make much sense to me. If you want to buy into real estate brokerages and the travel business, this still appears to me to be a bargain-basement way to do that. The brands are solid -- Century 21, Coldwell Banker, Avis, Budget, Ramada, Orbitz and many others -- and with a nice dividend and a forward PE of 12, your downside is pretty limited, especially now that they're offloading a lot of their odd non-core businesses. This one sits in my Roth and gathers dust, I have no intention of selling it at these prices, but I'm not so in love with them that I'm looking for another entry point, either. Hope to look back in a few years and see it fairly priced, and at that time I'll have to think about it again.

Middleby (MIDD) falls sort of in its own category if we're talking about the week that was. I wrote about their great earnings before I left on vacation, but it appears the blowout quarter spurred some buyers who didn't know what they were getting into, and they all sold last week when it became clear that Middleby wasn't going to grow at 40% a year. I still love Middleby, and their solid growth, great management, smart acquisitions, and steady paydown of debt all look pretty good to me. International growth in restaurants is a good and solid trend, and Middleby is a very good way to take advantage of that with what I consider to be very limited downside (especially now that a little of the great-earnings froth has been worked out).

Harris and Harris (TINY). I honestly don't get why these guys fell -- all of us who own shares are holding on for the long term home runs in nanotechnology, or at least we should be ... their latest release should have very little impact on that, since pretty much all they said is that they're raising more money to invest in more nano companies. They're a venture capital company, that's what they're supposed to do. I haven't written this one up in detail, but suffice to say that I like their business plan, and I'm ready to hold on through what is likely to be some very dramatic swings, especially once their companies start to begin dipping their toes into the public markets or commercializing real nano breakthroughs. Patience, patience, patience with this one.

Akamai (AKAM) bumped back down to earth slightly after a nice earnings run -- not much happened, but I liked their earnings release and I see them steaming happily along. Hard to believe the old dot-bomb has come so far back and become a dominant company with a strong and sustainable business -- especially now that the Speedera acquisition, which took out a major rival, is done. I like it.

CV Therapeutics (CVTX)-- Phase IIIa is complete for Regadenosan, only one more clinical trial to go for this imaging agent. That success is already priced in, it appears, as CVTX didn't move very much when it was released, just tailed off to the downside for no good reason that I can see. Their future drugs will be much more in doubt and future announcements might be expected to really move the needle, I'm just holding on for the ride to see what comes. I see this as a potentially dominant company in the long term, and I'm delighted with my three largest biotech holdings, CVTX, PDLI, and VRTX. PDLI is actually my biggest percentage gainer for this year, just recently passing Google. I'll write more in detail about that big three as soon as I get a little smarter and can type all the big words you have to use when you talk biotech.

And the worst performer of all award for my vacation week goes to ...

Design Within Reach (DWRI), which really disappointed the analysts and investors, and me, with it's latest earnings release and lowered guidance. Growth in sales and earnings is continuing at the 50%+ rate I expected, and I still think that can continue, but they're having significant margin problems due, they say, to the Euro and high shipping costs (most modern furniture is still sourced out of Europe).

Though I must say, I think a 30% haircut is overdoing it a bit, and as I have time to think through the company's prospects and try to figure out whether or not I really believe this business is as strong as the consumer in me thinks it to be, I might be adding if the price stays down here in the basement (I bought my first position around $18, as announced here last month). I think the company has some fairly strong plans in place for dealing with these depressed margins, including changes to their shipping offerings and vendors and attempts to diversify their suppliers across other currencies. Frankly, I don't think the currency issue is predictable enough to worry about -- it should be helpful sometimes, and hurting others, but in the end it ought to work itself out if the rest of the business is successfully managed. The real surprise to me was the extent to which the new studios, even as they performed well in lifting overall sales, ate into the growth of internet and phone sales -- I'll definitely be watching that in the future.

This is still a small position for me, and it sure grew smaller in my absence. Keeping an eye on it to buy more if I think management really is likely to keep sales growth on track and keep the new studios coming -- with their centralized fulfillment and management, I'm fairly certain they should be able to solve any macro shipping cost problems over time.

Is this just a hiccup on the high growth road, or a sign that their plan isn't going to work? Too early to tell, but my gut feeling about the "semi-luxury urban contemporary furniture" market is that it's a good one that's not being adequately addressed by existing big retailers, and I think DWRI has the potential to be a big brand in that space.

technorati tags: CKCM, Click Commerce, Cendant, Middleby, tiny
AKAM
Akamai
CVTX
DWRI
Design Within Reach
CV Therapeutics

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

The Week's Winners

Boy, you go on vacation and you never know what's going to happen to your portfolio. Since almost all of my holdings are, at least in my planning, intended to be long term holds and I'm not looking for selling points, the return to the world of stock tickers after vacation is usually a matter for entertainment as much as anything else.

I don't have stop loss orders on any of my stocks, nor do I leave lowball buy orders out in the ether. Generally, I buy something when I have the money and think it's a good investment (though sometimes, of course, going on sale definitely tips the scales in favor of a stock being a "good investment"), and sell when I no longer think it's a good long term investment or otherwise lose confidence in the company. So even if I were here, I wouldn't have likely made any changes to my portfolio over the last ten days or so ... but it would have certainly kept my attention.

So what happened?

First, the winners -- the stocks that climbed in my absence, usually because they released earnings or otherwise made some kind of news. I'll post a separate message with the losers.

Formfactor (FORM) shot up about 10% on the week, re-entering the nicely priced territory it had previously climbed to this spring with the first indications of a turnaround in semiconductors and optimism that their new plant would be online soon. They took a tumble, but have now bounced almost all the way back and they're one of my favorites to watch right now. Full writeup I did pretty recently is here.

Netease (NTES) -- I just wrote this one up at some length here, but I'm pleasantly surprised to see it continuing to climb. My reason for not selling after a 50% gain is that I fully intended my Chinese internet investments to be volatile and to grow dramatically over time -- why would I sell when that's just what NTES is doing? My main regrets in investing have been from selling too soon -- sometimes way too soon, so I'm trying to fight that. NTES shares boomed because their business boomed, and it has every appearance of nice prospects ahead -- if I didn't already own shares I might wait a little bit and see if it drifts lower before the next earnings release, but I still think NTES looks great going forward, and the ridiculousness of the Baidu IPO tells you the market certainly still has a taste for Chinese technology.


Shanda (SNDA) -- Ditto, only to some extent we're still waiting for Shanda to climb to NTES' heights. Sure, they've doubled in a year or so -- but their earnings are growing at such spectacular rates that I can't see the stock price staying in this trading range for much longer. I bought around $32 and have watched it bounce up to $40, then back down to my buying range and below, then back up in anticipation of great earnings, and up and down and up and down since earnings were released. EPS were a hair short of analyst estimates, but nothing worth worrying about, especially since revenues were well above estimates. SNDA has seen some significant increases in product development and SG&A costs, so I hope those portend the first investments in additional growth going forward. Net income climbing by almost 60% in a company with a PE ratio of about 30 is just plain cheap, in my opinion, and while there's plenty of reason to worry -- regulation, competition, etc. -- that valuation leaves me feeling quite confident in my investment in the market leader. Full writeup here.


Overstock (OSTK), the baby of CEO Patrick Byrne, is just plain fun to own and watch. They had a remarkable week in my absence, though they seem to attract more bad news than good these days. First they fell a bit on average earnings, then they climbed pretty dramatically, as far as I can tell, on the exposure brought about by their short-seller lawsuit (and maybe some reconsideration of the earnings release, which I thought looked promising).

Patrick Byrne is starting to look like the rails are coming off his train thanks to his recent obsession with naked short selling, but I'm pretty confident he'll refocus on the business at hand now that everyone has called him on it and he has handed his fight off to the lawyers. And the business at hand remains great -- Overstock certainly has some tough competition in Ebay and Amazon, but they're building a strong and recognized brand online and feeding it with continued price improvement that keeps customers coming back. I'm a little bit less impressed with the travel business and the auction business for Overstock since they're really entering brand new markets without a real competitive edge over their strong competitors. I'd frankly rather see them focus on the closeouts and Worldstock business, but that's OK, I'm willing to watch and see if I'm wrong.

As for this quarter's earnings for Overstock, they were brought down by a huge technology investment, which I see as a promising investment for future growth and scalability, and by earnings that more or less were in line with estimates -- a hair above, it appears. The key to me is the top line -- they're continuing to grow very quickly, with gross profit more than doubling and revenues up about 72% over last year. That's what we're buying -- a mercurial CEO with a touch of brilliance, a company that sees sales climb dramatically even during what they called a "sluggish" quarter, and a brand name that is being aggressively promoted and backed up with big investments in customer satisfaction. I like it, and I see nothing to be overly concerned about -- if you want slow growth retail, I'd stick with Amazon instead. If Overstock has a few more good days, I just might reach green on that part of the portfolio -- I bought all the way down, so my average price is just a bit less than $50.


Northern Orion (NTO) -- These Canadian copper miners report today, and I expect there won't be anything too shocking. Their big climb came after they announced their new analysis of the feasibility of the Agua Rica site -- and like the biotechs, these guys are valued as much on their future prospects as on their current earnings, though copper in the ground can certainly be considered to be a different kind of bet than one based on clinical trial data.

They are still valued right around their projected net present value of the Agua Rica mine plus cash on hand, with cash flow from Alumbrera still coming in to help them finance Agua Rica. This net present value estimate assumes much lower than current market prices for copper and comparably low prices for gold, the major by-product of the mine, so I think I've still got some margin for safety and will continue to hold NTO as a long term bet on copper. I think the low cost profile of Agua Rica gives me much more downside protection than most other copper miners, and good upside if copper continues to be in worldwide demand in the long term. Full writeup on NTO is also available.


MEMC Electronic Materials (WFR) ... this one didn't show anything dramatic while I was gone, but continued solid climbing on increased optimism for the semiconductor turnaround. Up about 10% from it's lows of ten days ago, which I'll certainly take, but I think much better things are still ahead for WFR. My full thesis is here if you're interested.


Dreamworks Animation (DWA), which had been left for dead, started kicking and coughing on the side of the pool as tepid earnings exceeded the dramatically lowered expectations. The stock reacted dramatically well, with a nice bounce back up, but my position is still well under water. I'm just holding on at this point, waiting to see if management gets its act together and if their upcoming lower profile films in the coming year do well. I'm not worried about the death of the DVD -- in fact, I think the next format, HD-DVD or Blu-Ray, might end up being a nice multi-year earnings catalyst for a lot of these entertainment studios who have significant titles in their libraries that can be re-released in the next format for fans. Dreamworks and Marvel shared writeup sums up my feelings in DWA here.


Provide Commerce (PRVD), better known as the parent of Proflowers, which I consider to be hands-down the best flower delivery service available, continued it's long roller-coaster ride with a grind back up the mountain last week. Sort of like a mirror image of the collapse they had in the spring when they revealed that Valentine's Day sales disappointed, then recovered somewhat with news that Mothers' Day beat their expectations. Earnings beat street estimates, so I am now not far from where I started with PRVD -- I bought at nosebleed levels over the winter, and bought significantly more after the first quarter swoon, so the shares have now climbed back up past my average buy price of about $22. I'm not selling, I think their business model and customer service have them primed to clobber the traditional florists over the long term -- the flowers are just plain better. I'm a happy customer and wish I had noticed when they IPOd because I probably would have bought then.

Like Overstock, I'm not that thrilled about Provide's non-core businesses -- their recent expansion into gift baskets, fruit, and premium meats doesn't resonate for me, and their competition in those areas is tough and well-branded. I don't think they can make the same compelling argument that their product is better and fresher in those areas than the market leaders like Harry and David or Omaha Steaks ... but it's just a small part of the business, with relatively minor costs and good upside, so it doesn't bother me that they're trying.

Will finish my writeup on the week's losers -- Cendant, Harris and Harris, Middleby, Click Commerce, Akamai, Design Within Reach and others -- in the next day or two ... but suffice to say, I haven't sold any of them and so far I don't plan to.

Technorati tags: snda ostk form ntes nto wfr dwa prvd Shanda Overstock Netease

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner