January 2, 2014
- Biotech’s decade of depression: The startups that won’t go public
- Underwhelmed: Terrible timing and fee-eating monsters to blame
- Chinese gold: Our macroscope says the trend is on track
- Currency curiosities… downsides of base metals… remember ABIRD… and more!
“A simple rule dictates my buying,” said Warren Buffett: “Be fearful when others are greedy, and be greedy when others are fearful.”
By some accounts, he said this during a talk at Columbia University at age 21. He definitely said it in The New York Times at age 78 in the midst of the 2008 meltdown.
We bring it up on the first business day of the new year to help expand on something we said late during the old year — that many voices are wary of a “bubble” in the biotech sector for 2014.
We have no opinion ourselves… but we did suggest that when a sector index shoots up 60% in one year, the dart board approach to picking stocks in that sector likely won’t work as well the following year.
“My experience with biotech stocks,” writes Stephen Petranek, our new biotech specialist and former editor-in-chief at Discover magazine, “is that it’s not wise to think of them as a group. As is true with most things, generalizations don’t offer good information — specifics do.” With apologies to the late Paul Harvey, we turn to Mr. Petranek this morning for “the rest of the story.”
2013 was “a banner year for IPOs of biotech companies,” he says. At least 34 of them by his count. “But frankly, I wish it had been more of a blowout and that the blowout had started five years ago.”
“Biotechs have been depressed for a decade,” Stephen says, perhaps counterintuitively.
“The truth is that there are hundreds of small startup companies that have great ideas, great products and great futures — but they haven’t gone public. In many cases, the reason is purposeful — so they won’t get gobbled up by a Big Pharma company before they’ve had a chance to show what they can do.
“Examples abound of companies with great drugs that went public too soon and got eaten by a pharma giant. Then the originators watched helplessly as their drug — which actually worked and was sailing through to Food and Drug Administration approval — was canned by marketing pros and bean counters who decided the return on investment just wasn’t good enough.”
“What’s lost in the hubbub about all these new IPOs soaring,” Stephen explains, “are two things.
“First, a lot of them have gone down in value, not up. Second, and more importantly, the surge of IPOs now only reflects the dearth of biotech IPOs in the last 10 years. It has been a desert out there for investors in this critical field.”
That is, 35 IPOs in one year might seem like a lot… but averaged over the last 10 years, it’s nothing. The number this year is likely to be another 35-40.
And yet… “a lot of biotech stocks seem to keep going up without any good reason,” Stephen concedes. “Despite mighty thin pipelines and drugs still stuck in Phase 2 trials, a lot of biotechs seem to have climbed on pure hope.
“I too am worried about a January-April 2014 sell-off of the overall market. And we all know that stocks floating on hope get hit the hardest in downturns.”
Here’s the thing: “Even in a severe downturn,” says Mr. Petranek, “specific biotech stocks can move dramatically upward, because success in this area depends on success in trials research and FDA decisions.”
Ray Blanco, part of our tech team with Stephen, likens it to a gold miner: The price of gold can crater, but a company that hits a foot-thick vein of gold will be rolling in dough.
In the event of a downturn, that presents an ideal buying opportunity for the right companies. Back to Buffett as we wrap up our thoughts on the matter: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
[Ed. Note: Stephen and Ray have amassed an impressive portfolio of biotech plays with the potential to “move dramatically upward” in spite of what’s happening in the broad market, or even within the biotech sector. For access to their bleeding-edge research, look here.]
The numbers are in: Manufacturing stays solid.
The sector expanded in December for the seventh consecutive month. And, the ISM survey added this morning, the overall economy grew for the 55th consecutive month.
But upon writing, stocks could care less…
The Dow is down 88 points, to 16,488. The Nasdaq has shaved off 29 points, to 4,148. And the S&P dropped 11 points, to 1,837.
“Investors are going to take a deep breath and try to assess a new set of data for the year,” Jack Ablin, the chief investment officer at BMO Private Bank in Chicago, told Reuters before the numbers hit, “that may mean waiting until we see employment data next week.
“Some of [the decline] is natural profit-taking for tax purposes, move your gains into the following tax year.”
Meanwhile, precious metals are up. Gold added $18 this morning, to $1223.40. And silver is up 70 cents, to a hair above $20.
The S&P 500 begins 2014 having risen 29% during 2013. Alas, most retail investors did nowhere near that well.
“A study from Dalbar over the last 20 years,” says our Jonas Elmerraji, “showed that individual investors’ gains came out to around half of the annual returns the S&P 500 earned over that period. Ouch!” A chart from BlackRock shows an even worse picture…
“Between 1992-2011, the average investor fared worse each year than just about every other asset class out there,” Jonas marvels. “How is it possible?
“For starters, most investors are terrible at timing markets. Too many folks held onto stocks through the carnage of 2008, only to sell near the bottom in 2009. And many of those people haven’t dared to get back in since, missing out on a 160% rally from the bottom.
“Then there are the fees. Wall Street is a fee-eating monster designed to nickel-and-dime your portfolio away commission by commission and charge by charge. Even investors who stuck to their guns by parking their cash in mutual funds saw their performance numbers knocked down by hungry management fees.”
Within Jonas’ specialty — the small-cap space — the year was even better than the broad market typified by the S&P 500. His closed positions racked up an average 40% gain, beating out the S&P by 11%. His open plays are averaging 71%, including three stocks that have thus far pulled in 637%, 203% and 187%.
And according to Jonas, there’s still plenty of room for growth in many of his open plays.
Throughout 2013, Jonas said three factors would deliver outsized gains: “keeping a deep-value focus, sticking with small stocks and buying exciting businesses. I still think that’s very much the case as we head into 2014.”
For access to Jonas’ very best plays for the new year, check this out.
Here come the alarmist headlines about China’s gold imports. The mainland brought in 107.36 metric tons of gold through Hong Kong in November — down from 147.92 the month before.
“People already have enough gold after recent purchases because prices had been steady in November,” an anonymous Hong Kong dealer suggested to Reuters.
As always, we step back from the noise of the month-to-month moves, paying more attention to the year-over-year numbers. And they’re still up.
There’s every reason to believe that strength will stretch into 2014. “The People’s Bank of China plans to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers of the precious metal,” says Reuters.
Currency curiosity, Part 1: When paper money counted for something. Four U.S. bank notes dating to the 1880s with a face value of $3,500 are about to go to auction.
They will likely fetch $5.7 million when they go on the block in Orlando a week from tomorrow.
Worth far more than even the gold value…
The rarest of the bunch is this $500 gold certificate from 1882. “The only other one in the world is in the Smithsonian museum as part of the Federal Reserve collection,” Dustin Johnston from Heritage Auctions tells the Daily Mail. “Amazingly, it has come from the estate of a deceased turn-of-the-century U.S. banker, along with three very scarce $1,000 notes.”
Let’s run the numbers: $500 then was about 20% of a typical salary. It’s equal to roughly $11,500 today. Or so says the Daily Mail, presumably relying on the consumer price index.
But in gold terms? At $20.67 gold, $500 was equal to a little over 24 ounces. At $1,200 gold today, that’s $29,000 in purchasing power. Just sayin’.
Currency curiosity, Part 2: The Bank of Canada is about to melt down 200,000 century-old gold coins to balance its books.
“Canada’s first gold coins had barely been minted before Ottawa yanked them out of circulation a hundred years ago,” explains The Globe and Mail, “in an effort to stop gold from leaving the country during the First World War… The coins have been the subject of whispers among collectors curious what happened to the $5 and $10 gold coins that Ottawa had pulled out of circulation. The mystery was lifted late last year [2012] when the Bank of Canada announced it would be offering 30,000 of the bank’s 246,000 coins for sale to collectors.”
The sale is now complete. “It’s the most popular topic for 2013, for sure,” says Vancouver collector Michael Wang. “My wife was about to kill me when I told her I bought this thing.”
Going, going, gone…
Others, who already owned some of the coins that remained in private hands the last century, are rather upset that the new supply has driven down the value…
“I commend your reader of The 5 for considering base metals as a possible store of value,” writes a reader as we carry on an unexpectedly lively discussion, “but there are some potential downsides involved.
“Unlike gold and silver, iron rusts, and exposure to lead (hot or not) can cause mental deficiencies in humans. Copper is a prime target for thieves, often drug addicts trying to finance their habits, who then sell it as scrap.
“All of which can be dealt with, of course (forewarned is forearmed), but this will increase one’s carrying costs.”
“The guy who wants to store base metals and long-term consumables speaks of storage in the USA,” writes one of our regulars. “The way things are going, when the most popular commodity for confiscation (the dollar) finally sinks to its true purchasing power, the biggest crooks in ‘town’ (the ones that were voted in) will go after real assets.
“Do you really think that there is enough intelligence not to pull another Maduro (Venezuela’s president)? Seems that the crooks have forgotten that the late Soviet Union didn’t work. At least gold and silver are portable and easily stored further away from the reach of the crooks.
“If there are true elections to come, remember the acronym ABIRD — vote for Anyone But Incumbents, Republicans, Democrats. Guess what the hand sign is! But I doubt that there are enough intelligent voters for that, either. Too bad we can’t hire Mujica (Uruguay) to run the country.”
“There was a recent article (or two, but no more),” another reader chimes in, “on the shutting down of the last lead plant in the U.S. You have not commented on this, but it directly impacts the manufacture of bullets, which while the government was shut down became available, but are running in shorter supply now.
“Anyway, because they finally got the lead supply stifled, whatever bullets were released by the various government agencies’ purchases are now being throttled.
“Lead would be a very good item to ‘hoard’ and keep handy. I wouldn’t want to store it somewhere other than where I could readily access it, if you could get it in the first place.”
“Most of economics is complex. This, for once, is not,” writes our final contributor. “Relative to the base metals versus gold and silver debate, if one wants to go that route, do what Kyle Bass did — he bought, if I recall correctly, 20 million nickels.
“Worst case, in deflation, he has $1 million in nickels. Best case, in hyperinflation, there will be some kind of secondary market eventually for what the metal is truly worth, I would suspect.”
The 5: We’ve given Mr. Bass’ strategy our heartiest endorsement!
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. 2014 will be the year of “equity crowdfunding.” If the term makes you scratch your head, just know that it’s the way you, the retail investor, can invest in the Microsofts and Intels of the future — before they go public.
We explain it all in a mere two minutes and 22 seconds when you watch this video…