Update On Currently Recommended Stocks

Report Overview

I periodically update my recommendations and that is the objective of this report. I also spend some time on my analytical approach and investment philosophy. If your investment style is frequent trading, you should not waste your time reading this report.

I have four Buy recommendations for stocks that have very significant near term catalysts. These are Cytokinetics (CYTK), Antares Pharma (AIS), Northwest Biotherapeutics (NWBO) and Portola Pharmaceuticals (PTLA)

My five other buy recommendations are Repligen (RGEN), Cryoport (CYRX), Bristol-Myers Squibb (BMY), Alimera Sciences and Agenus (AGEN).

There are three stocks that I could potentially upgrade; these are pSivida (EYPT), AMAG Pharmaceuticals (AMAG) and Windtree Therapeutics (WINT).

In case you are curious about technologies or companies that I am looking at, I have spent the last several months looking at gene editing (CRISPR) and to a lesser extent gene therapy. I think that CRISPR will have a profound impact on human existence. It is still very early days for this technology which reminds me of where Amgen (AMGN), Genentech (GNE) and Biogen (BIIB) were in recombinant DNA technology in the 1980s. More on all of this later.

Analytical Approach and Investment Philosophy

My Experience

I started as an analyst over 40 years ago (time flies) first specializing in the analysis of pharmaceutical companies. In the early years, I followed over 20 leading US companies but pipeline failures forced merger after merger so that this has been winnowed to six giant, multinational companies. Drug development is a very high risk business. I was also an early follower of biotechnology companies as I was the first Wall Street analyst to cover Amgen and actually called on Genentech before they became public a public company. I have visited literally hundreds of biopharma companies over my career (yes you read that right) and listened to the presentations of hundreds more. My longevity has allowed me to see how businesses develop (or not) over not just years, but decades. I also had stints as director of research at Smith Barney and Hambrecht & Quist which provided considerable experience in observing how other analysts approached picking stocks. I have also always managed my own portfolio over the years putting my money where my mouth is.

So what have I learned from all of this experience? Absolute humility! Selecting good stocks is extremely difficult. Just when I think I have probably made every type of mistake possible I make a new one. Specializing in biopharma companies also gives an edge in making mistakes as the risk profile in drug development is extremely high relative to most industries. Anyone investing in this area is going to have blowups and I know I certainly have had my share. I provide this history because it has shaped my investment philosophy. I don’t make any claims whether it is better or worse than other approaches-that is for you to judge- but it is mine.

My Analytical Approach

Every investment situation is different and past experience may not be a guide to future success or failure, but here is how I go about recommending stocks. I firmly believe that great investing starts with finding great companies or as is often the case for emerging biotechnology, companies that will become great if they successfully develop a product. To do this, you have to have some understanding of the numerous technologies these companies are researching. This presents a particular challenge in biopharma because this requires some understanding of how the drug works in the body which in turn requires some grasp of what it is doing to the body at the cellular or even molecular level. This is a daunting challenge, but I don’t propose that only molecular biologists can have an opinion. Anyway, I hope not because I am a layman. I believe that most investors can come to understand the key aspects of any technology without going into PhD depth, but it requires time and effort.

If understanding the technology was all that was required to pick great stocks we would just line up PhDs in the appropriate disciplines, but I am sure this would not work. In addition to understanding how a drug affects the body there are a formidable array of other issues as important or more important. I list some of these in no particular order of importance:

  • Designing and conducting clinical trials is essential to success. It may be the case that as many drugs fail because of the clinical trial design as because the drug just doesn’t work.
  • Knowing the size of the addressable market and the degree of need for better therapy.
  • The potential competitive situation with existing drugs as well as those in clinical development
  • The competence of management to manage through the challenging situations that always occur.
  • Successfully commercializing a drug after approval. Managed care now has enormous power and reimbursement issues can sometimes have an enormous negative impact, especially in the early years.
  • Having the ability to raise capital to adequately fund the company through first the clinical development and then commercialization stage. This can depend very importantly on the investment bankers and venture capitalists promoting the stock.
  • There is enormous, highly sophisticated manipulation of stock prices by hedge funds working in concert with trading desks of market makers. I believe that this is one of the largest criminal enterprises in the US.
  • The other important factor(s) that always unexpectedly emerge.

Investing is hard work and if you are not willing to put in the time I recommend that you buy an S&P index fund. This is not such a bad idea as the average annual return for the S&P 500 since its inception in 1928 has been approximately 10%. I don’t know if the future will be better or worse, but as long as the US and world economies continue to grow, I would expect continued positive returns. Unless you have decided at this point to put all your money in an S&P index fund (a good conservative strategy), let’s continue on my stock picking approach.

I Don’t Trade Stocks

I have found through painful experience that I cannot trade stocks on a day to day, week to week or month to month basis. I am not particularly chagrined by this failure because in my 40 years of investing, I haven’t found anyone else who can do it although I have listened to literally thousands who claim that they can.

Trading stocks to me is like gambling; the odds are against you. Companies and stocks are different. A company has intrinsic value and over time for good companies, this translates into increasing stock price (not without some bumps in the road). In contrast, stocks are commodities so that their value at any point in time may not reflect the inherent value of the underlying company. Stocks like all commodities are subject to volatile investor sentiment so that in the short term stock prices can be wildly over or under valued when we look back through the prism of time. Investors usually have a herd instinct and are most confident when they share a consensus view, but stocks often are already discounting the consensus so that even if a highly anticipated event occurs it may have no impact. Going with the consensus can work out OK if you are a long term investor, but in the short term you inevitably get caught up in crowd psychology that too often leads to buying high and selling low.

Another very real danger in trading is that if you trade out of a great company destined for years of growth and strong stock performance, you may never get back in. This is especially true if you sell a stock and it unexpectedly (for you) increases in price. It is very hard in this case to repurchase a stock so that investors focused on short term trading will often miss great long term opportunities. I think you can guess that you will not see many in and out trading recommendations from me. In 2017, I have made just two recommendations-Cryoport and Portola.

My Investment Antithesis is Jim Cramer

One way of highlighting my style of investing is to take a look at my antithesis, the TV personality Jim Cramer. I pride myself on knowing what is required to be a competent analyst based on my personal experience, managing hundreds of analysts as research director and observing other analysts. Watching Cramer to me is like a highly trained chef watching someone scramble eggs.

Humility is not Cramer’s long suit as he swaggers about the TV set continually reminding us that he is the smartest investor on the planet. He believes that he can interview a management for the first time and based on a few minutes of conversation tells us that he understands the salient investment issues of the company and can instantaneously make a brilliant investment decision. Believe me folks, it doesn’t work like that. It takes a considerable amount of time to analyze a company and to get a feel for the stock price. The Cramer formula is one of disaster for individual investors.

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Disclosure: None.

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