Best stock investments
Nicholas Vardy is out with a new biotech pick, and he says that he’s making an “unprecedented offer” for subscribers to his Bull Market Alert ($995/year “on sale”, published by Eagle Financial).
The pitch is partly an argument that biotech and pharma stocks are still where the big opportunities are for investors, but most of the ad is a tease about a “Company X” that he says has a “very strong likelihood” of scoring you “2,000% profits within five years.”
That does happen on occasion, though it is (as you’re probably guessing) exceptionally rare. Depending on how you calculate your returns, when I check my screener there are somewhere between two and 20 stocks listed on major US exchanges that have returned 2,000% or more over the last five years (that’s out of 5,000 or so stocks currently listed on US exchanges). I’m sure that number would have been higher last summer, or if you include unlisted stocks, but it’s still rare. Not quite as rare as winning the lottery — but, of course, nowhere near as lucrative, either, and it costs you more than $1 to “buy in”.
And I hope this doesn’t count as browbeating, but 2,000% returns are also not the kind of investment most of us should spend much time or treasure looking for. That’s just asking for trouble, and the search for that kind of return, if you ease into it over time without thinking much about the big picture, will sometimes let huge amounts of risk creep into your portfolio. Maybe that’s OK for the little speculative flyers that make it fun to invest in individual stocks, if the size of your “play” portfolio is small in relation to your savings or your retirement portfolio — I gamble some from time to time as well, so I’m not trying to be too much of a fuddy duddy — but for most of us those kinds of highly speculative “idea” stocks should probably be considered not as part of a portfolio, but as part of the cost of investing. Speculating on tiny “huge potential” stocks is a hobby, and a potentially very expensive one — it’s not a long-term investment strategy that’s going to work for very many people.
And yes, many of my tiny speculative investments stink right now, so maybe that’s why those thoughts came to mind — but those losses aren’t going to hurt my retirement prospects much, or mean my kids can’t go to college. Moderation, position sizing and diversification matter.
Get off that high horse and get back to the point, right? How is Nicholas Vardy going to make us rich with 2,000% gains?
Let’s sample from the ad to give you some idea of his pitch:
“‘If this pick hasn’t doubled your money* 12 months from now… I’ll do it myself!’
“… mark this exact date, a year from today.
“Because I’m 100% certain that by that day…
“You could at least double your money on the investment recommendation I’m about to give you — if not more….
“If by some chance this hot new pick of mine hasn’t given you the opportunity to double your money over the next 12 months…
“I’ll double it myself in another way (you’ll see how in just a moment).”
I’ll check the details of that “double it myself in another way” promise in a moment, but let’s move right on and see what his “secret” stock is first… for that, we need some more specific clues:
“… if I’ve ever recommended a company that could legitimately score you 20 times your money or more…
“It’s the one I’m about to reveal to you….
“… here’s the biggest reason right now
“This multi-billionaire has the golden touch — and his hands are all over the company I’m talking about”
We get a shadowy picture of this mysterious “multi-billionaire,” a man we’re told is “somewhat bookish” and has an “incredible track record of huge returns on the companies he starts, acquires, or becomes a major shareholder in.”
Here are the bona fides from Vardy about this billionaire:
“I call him ‘Mr. Midas’ — because virtually every company he touches turns to gold…
“This is nowhere near a full list, but among his ‘greatest hits’ are:
– 1,300% profits on a vaccine firm he assembled and subsequently sold to a major U.S. pharma player
– 1,400% profits on a generic drug firm he founded, built up, and sold to a major international drug player
– 3,500% profits on a firm that innovated several biological drug “delivery systems” — which was also bought out by Big Pharma”
OK, so that’s some good info to toss into the Thinkolator, particularly since we’re told that this billionaire is the secret company’s “single largest shareholder”… but we’ll need a little bit more to get a 100% certain match, what other hints does Vardy drop?
“I want to tell you a bit more about Company X.
“Aside from the substantial investment and guidance from the mysterious “Midas Touch” multi-billionaire I mentioned earlier…
“Which is strongly predictive of a 2,000% windfall all by itself…
“There are no less than FOUR other reasons why I’m certain that Company X is going to be a major winner for my readers….
“Company X is exceptionally well diversified within BOTH the biotech and conventional pharma sectors (and beyond)….
“On the conventional drugs side, Company X has an impressive business model that focuses on developing (or acquiring) medications for underserved markets.
“Things like drugs designed specifically to combat chemo-related symptoms… Or to compensate for vitamin deficiencies or chemical imbalances in renal patients (a $3-billion-a-year market alone)….
“Company X also has a biologic division with some novel products in the stable.
“One of the more interesting (and potentially lucrative) ones is a peptide that doesn’t treat anything at all…
“But it does dramatically extend the ‘half-life’ and durability of almost any protein.”
What are the other three reasons he thinks we should buy “Company X?” Here you go:
“Under the expert guidance of billionaire ‘Mr. Midas,’ Company X has recently acquired a major diagnostics and testing firm….
“Bottom line: With just this one acquisition, ‘Mr. Midas’ has made Company X a MAJOR player in the enormous and growing testing and diagnostics segment…
“Plus instantly increasing the company’s revenue stream by over 800% — to nearly a billion dollars per year! ….
“But there’s more…
“Augmenting Company X’s focus on the development and acquisition of diversified innovations is their ongoing quest for strategic investments….
“It’s like buying into virtually the entire global healthcare sector — medicines, diagnostics, and devices…
“Conventional pharma, biopharmaceutical, and natural therapies…
“With both domestic and international exposure…
“Yet it’s not an ETF or biotech fund. It’s a real, flesh-and-blood company you can buy on American exchanges.”
He also says that this stock has “Imminent Buyout Potential” — partly because “Mr. Midas” has sold so many of his past companies….
“According to SEC filing documents, between August 1st and mid-October of 2015 (the latest data currently available)…
“‘Mr. Midas’ directly or indirectly purchased, optioned, or acquired nearly 4 million shares of Company X in 27 separate transactions.
“Now, if that degree of insider buying doesn’t raise a BIG red ‘buyout’ flag with you, I don’t know what would.
“Remember, this ‘build up and sell’ tactic is the MO that put ‘Mr. Midas’ high up on the Forbes 400 list of American billionaires.”
OK, we’ve got to have enough to feed the Thinkolator now, right? Indeed, and we’ve got a certain answer: This is Opko Health (OPK)
And the biggest argument Vardy seems to make on this, as far as fundamental performance goes, is that the testing and diagnostics acquisition they made gives them a bigger footprint and changes the company…
“Based solely on revenue growth from a single recent acquisition — that testing and diagnostics company I told you about…
“Company X’s cash flow just increased approximately 800% overnight.
“And that gives no value whatsoever to the ‘multiplier effect’ of the marketing and support network they acquired as part of that deal…
“Which they can now use to promote their extraordinary pipeline of drugs, biologics, and other products.
“This deal alone — at least from a price-to-earnings standpoint — should spur at least an 800% increase in share price over the next year!”
So what’s that “recent acquisition?” Opko acquired Bio-Reference Laboratories (BRLI) back in August, a deal that ended up costing OPK about a billion dollars in stock (it was expected to be about $1.5 billion, but investors hated the deal and biotech was falling, so OPK stock dropped from about $19 on the announcement to around $12 when the deal closed in August… and has dropped further since, the shares are just below $8 as I type this). That deal is expected to dramatically increase revenue, as it already has, and it might push them into profitability as soon as this year, though it also comes with much higher operating costs and much lower gross margins since the business model changes substantially from “developmental” and “startup” to “operating” with the acquisition.
That “Mr. Midas” is Dr. Philip Frost, who has indeed had a “golden touch” in building up stocks in this sector. And he has been buying up the stock… but that’s been consistent for years, he has bought shares almost every month for the past two years, at prices ranging from $7 to $15 or so, and most of those purchases were very small relative to his overall holdings and wealth (he owns almost exactly a third of OPK shares, worth well over $1 billion — and that’s probably about a third of his net worth, too). Frost built his fortune largely through generic drugs, building up Key Pharmaceuticals and selling it to Schering Plough, then building up IVAX and selling it to Teva, where he then served as Chair until he retired from that company last year.
Will OPK bring another shower of gold for “Mr. Midas?” I don’t know if they’re hoping to get bought out or to build the diagnostics/testing business up into a larger player, or if they have some other strategy in mind. For a relatively small $4 billion company it is confusing to analyze, with lots of relatively minor investments in partner companies and several main lines of business, including drug development as well as testing and new test development.
I can see some merit in the basic argument that increasing scale and market penetration with the BRLI acquisition should help their other testing businesses, which are the 4KScore, a rapid PSA test that they’re trying to ramp up, and the Claros 1 in-office rapid blood testing system. Opko has also been teased a few times as the “Doctor on a Chip” company because of that Claros technology, though I think the jury’s still out on how much testing and diagnostics companies can earn in a competitive marketplace where many tests are less than urgent (they seem to be, at least for now, focused on “esoteric” tests for diagnosing and monitoring specific conditions — not the huge, high volume cholesterol or screening tests that most of us do once a year).
But I don’t really have a sense of what OPK should be worth, and the combination of an established testing company with new diagnostics products and a few drugs in development and a bunch of other investments is, honestly, pretty baffling. They are not in any imminent balance sheet distress, they have enough cash to service their debt and they have substantially more cash flow now from the BRLI acquisition, which will give them some additional flexibility, but they’re not yet profitable or cash-flow positive. Analysts think they’ll earn a few cents a share this year and as much as 30 cents a share in 2017, with continued big growth beyond that, so if they’re right then that $8 share price today looks just fine (that’s about 250X current year earnings, 26X 2017 earnings, or 10X 2018 earnings estimates — they were probably about break-even in 2015 thanks to the acquisition, though they haven’t yet reported a full quarter with BRLI numbers and won’t do so until probably late February).
According to their latest investor presentation this month, the next “catalyst” is likely to be the FDA approval (they hope) of Rayaldee for Chronic Kidney Disease, that’s got a PDUFA date of March 29. Other drugs have data or trial news expected before 2016 ends as well, and they are no doubt hoping for some significant synergies in the testing business, but to a large degree a bet on Opko is a bet on Dr. Frost and on the fact that some of their major initiatives could pay off (or, of course, that they could get bought — though I don’t have any idea who might want to buy them). So I’ll leave you to your Opko thoughts there — do you like the testing businesses, or any of their drug development progress? Think it should be worth more or less than the current $4 billion valuation? Let us know with a comment below.
And if you want the bull argument for the sector as a whole, Vardy also notes that he thinks the bull market in biotech is far from over — he blames the crash on three things: Turing and Clinton (Shkreli’s crazy price hike and perfect media villain status, and Clinton’s tweet about drug price controls; Profit taking after a huge multi-year run; and the collapse (and “crucifixion”) of Valeant.
And he says that these have “nothing to do with the fundamentals that are driving these sectors long-term,” largely the aging global population, increasing health insurance/drug coverage, and the discovery and development of new drugs happening at an “exponential rate.”
I know many biotech investors are in full agreement on that, though I personally have no idea whether or not the sector will take off on another bull run — I agree on the basic demographic influence on health care spending, but the global regulatory environment probably is as important as the basic aging of the population and the increased ability of drugs and medical treatment to help that population grow still older (for a price), and so much of the speculation in individual biotech names is based on events and catalysts and takeovers instead of actual or expected operating financial performance. That’s what keeps me away from most pre-revenue biotech investments (which OPK is not, to be clear), the lack of any kind of “guessable” numbers that I can sketch on a napkin with a straight face: You have to estimate both the odds of success in getting a drug approved and the competitive environment and the prescription volume and cost per treatment to model what the future financials might look like. Otherwise you’re often just comparing to other companies, some of whom might have been beneficiaries of windfalls during a bull market — “Company Z got a drug for Lupus approved and was bought out for X billion, so Company Q has a similar drug in Phase 3 trials and should be worth half of X billion because about half of Phase 3 drugs for this disease get approved.”
I’m not saying that this kind of investing is without merit, just that I don’t understand it and am without skill in the area — and that, plus the fact that Dr. KSS shares a lot of commentary about biotech stocks and many of our readers follow that closely, keeps me mostly out of the sector most of the time (I don’t want to get involved in trading stocks that are heavily discussed by a different author here at Stock Gumshoe, partly because I can see their pieces before they’re published). I do own some biotech-ish stocks personally from time to time, though they tend to be those that are easier to analyze financially (like Ligand, which is highly speculative but is largely a financial company that owns biotech royalties), but most of my health sector investing is done through funds.
What’s that “double your money” performance guarantee that they’re giving you? This is how they describe it:
“If Company X has not given you a chance to at least double your money in the 12 months following the date you sign up for Bull Market Alert…
“I will give you a second full year of Bull Market Alert absolutely free.”
So no, Vardy and his publisher won’t “make good” on your returns if the promised 100% doesn’t happen, nor will they refund the subscription price in a year if it turns out he was wrong… they’ll just give you more of the newsletter, at no marginal cost to him.
Which, not to put too fine a point on it, is like saying “if my advice doesn’t pan out, I’ll give you more if it at no extra charge!”
I don’t mean to criticize Vardy or his publisher specifically, this is all standard fare from the major financial newsletter publishers — just trying to point out that the “guarantee” language encourages you to take much more risk with your money than he’s taking with his “guarantee,” a balance that might steer some people to risky behavior. If you put $50,000 into his “Company X” investment and lose 80% on that investment over the next year (not saying that will happen, but such things do happen sometimes), I’m sure Eagle Financial will indeed come through and give you another year of Bull Market Alert for free. Even if you might be inclined to politely decline the offer. The specific definition of their “can’t lose” offer is that you can get one year of Bull Market Alert for $995 if things go as they expect, and two years for $995 if they don’t go well.
Enough blatheration from me… what do you think? Ready to jump on Opko? Think it will double this year, or get cut in half again? Let us know your thoughts with a comment below.
– Best stock investments