Time for the second dipping in Bird flu

After getting out from the GNBT last week, I have been looking at an opportunity to play the arrival of Avian flu expected anytime in US. Here are are various ways to play this.

1> Small Volatile Group: This is the group will have most impact and hence the biggest risk if you are proven wrong. Also note most of these companies (Except Embrex: EMBX) are cash guzzling with no income and future potential are all they are selling. This means that you need to "Gamble" a very small portion of your portfolio.

The group is EMBX,gnbt,HEB,BCRX. If you are reading my blog, you know I am in a liquidity preservation situation. Though, I can afford to lose my portfolio, I want to be conservative. So, I will be taking a bet on Embrex - the most stable in the group. I will write another post to discuss the merits for EMBX. In short try to get it as close to $12 as you can. If you are a little adventurous, I would suggest GNBT (as close to $3 as possible). They seem to have a very loyal fan (yes fan) following who are supporting it above 3.

2> Another play is to short chicken stock hoping bird flu will move people away from chicken and put downward pressure on their stock. Mind you this strategy is for short duration only 1-3 months as I think very quickly the fear of chicken will go away and long term all chicken stocks are very strong (healthy lean white meat trend)
Firms are
Sanderson Farms (SAFM)
Gold Kist (GKIS)
Pilgrim's Pride (PPC)

3> you can also bet increased consumption of Chicken's complimentary. It's a simple microeconomics theory. People try to get as close to maximizing the value they get from the basket of good they can afford. Now when Chicken is ruled out as an item. They will move to other forms of meat. Lamb, Beef and Pork. I think all three will experience an increase in demand that may last longer than avoidance from chicken, There is a reason for this stickiness to other meat explained in the domain between economics and psychology - non rational decision making. Without going into detailed theoritical base, I will just say that find stocks of firms dependent solely on these other forms of meat. I didn't get time to do this research, but it's a simple search you can perform. In all teh meats, pork will have closest -ve correlation to chicken as it is also a lean meat.

4> Finally the safest bet. Please note there is nothing called safe investment in stock market. Anyone who sells safe investment is a fraud or fool (FOF). Well you might have already guessed this one. It is in big pharma firms that are in this field.
"A U.S. government-funded study showed that very high doses of an avian-influenza vaccine supplied by Sanofi-Aventis (SNY) were needed to boost people's immune responses to levels that should protect them from the virus.
But even at the highest dose of the vaccine tested, only 54% of volunteers who received it achieved the study's immune-response target, below the 75% rate for which government officials had hoped. That suggests nearly half of people receiving the highest dose might not get full protection."

So, in the event of actual flu outbreak (In my view very unlikely), these firms have great distribution experience as well as required regulatory experience and lobbying groups to push the drug through quickly or as a last resort cash to buy small players will be able to reap great benefit.


Chiron (CHIR) makes cell-based vaccines
Sanofi-Aventis (SNY)
Baxter International
Invitrogen
Roche, the biggest manufacturer of Tamiflu
GlaxoSmithKline (GSK) antiviral Relenza
Solvay

SNY and CHIR were recently given grant to research on Avian flu. Betwen the two I will bet on SNY as CHIR is in acquisition fight. We on the other hand just want to play avian flu not in some acquisition fight.

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Stock chart of all the Stocks Here
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Finally, If you are really creative and have faith, you can buy Clorox (disinfecting wipes) ,3M (face masks & gloves), hospital stocks (for flu services) and a whole lot of firms that provide similar things. Just think what would you do to save yourself from flu.

Portfolio distribution: Diversification

A very good comment about portfolio diversification from Murali, my co-author to renewable energy blog. By the way, he is the guy who first pointed me to look at alternative ethanol energy even before president's State of Union speech.

I agree with him that international and metals are missing from my portfolio. distribution. I, for one, have not been able to fully understand the commodity market. I know what moves them and when, but have not had time to look into them fully. And so have stayed away from them. I did mention in my where to invest post about looking at commodity this year. In fact, that is one of my new year resolutions to understand the commodities market.

About international, I should thank Murali to get this to the front. I do have my 401K account (about 20% of my Ameritrade portfolio) in two international fidelity funds. One is a European fund and other a World fund. As I am young, both are aggresive growth funds. I will update "my current portfolio" with this too. I like following the market, but don't have time to follow everything, so this way I get exposure to international markets, but don;t have to actively follow them.

Most stocks that I buy have a story behind them. There is a logic to why they will go down or up. And as my logic unfolds, I gain from my positions. As I am not a fortune teller, many a times my story doesn't come true. So, when I notice that I was wrong, I close my position and look somewhere else. In fact, that is what happened with GNBT recently, it went up too fast and I couldn't find the reason why so I put a couple of orders so that the position closes earlier.

Now this may a cliche, but this is one of the lessons that I learnt from Warren Buffet. Never invest in something that you don't understand. You should applaud the self control of a man with about tens of billion of cash on hand and Nasdaq market booming. He didn't invest in technology because, as per his statement, he didn't understand them. I believe everyone should develop his/her investment style, but it's always good to learn from your and other's mistakes as well as success.

Finally an unrelated comment; you can over do diversification. Most academic studies have proved that you don't gain much reduction in volatility after 30 stocks. In fact, risk reduction from 20 to 30 stocks is also not big enough.

Portfolio distribution: The issues

After selling GNBT and OXY, my current portfolio distribution is 54% Cash (after recent withdrawal to survive in UK) 6% Pharma and 40% Software.

Ideally, in the current market conditions, I would like to have 20% cash, 40% Technology & Media 10-15% each in Pharma, Oil, and Alternate energy.

The problem is I am not finding any bargains currently. And I am waiting for Keane to show the upside that I expect in next 3-6 months as they increase their margins. So, in the likely event of a stock pull back, I will most probably be loading up Peix. I am not a conservative guy to look at ADM, though I expect that to be a great buy too.

I think Microsoft can wait a couple of weeks as there has been some bad news and market needs to throw that off it's back before it can start my anticipated stealthy (Yes Stealthy!!!) climb. Another Tech player that I am looking at is MARVELL TECH GROUP (MRVL) I think it is at or near bottom and may be turning around. And the stat's look great. 43% YOY quarterly revenue growth. 54% Gross margins. On track to exceed analyst expectations for this year. Institutional and insider bought 2.3% of the firm net over the last quarter. I will jump on it when it crosses the last peak of 58.

About the Oil, I haven't been able to devote enough time to find some Jewel, though I am looking at some like Houston Exploration company (THX) and a couple of others, but am still not thorough enough to recommend any of those.

Alternative Energy Play: Ethanol

Ethanol, that grade school oraganic chemistry compound ethyle alchohol (C2-H5-0H). It was one of the most common compound. Some of my friends even thought of stealing some from lab before they realized that one in lab is not drinkable. So, why I am discussing this in a stock blog. A couple of things have boosted the outlook for the Industry.

1> Last July Congress passed an energy bill that mandates doubling of biofuels ouput by 2012. This January President gave a boost to ethanol manufacturers by giving ethanol and other bio fuels a strong endorsement.
2> Most refiners are phasing out the harmful petrochemical called methyl tertiary butyl ether, or MTBE and will be replacing it with ethanol. MBTE is responsible to complete combustion of gasoline in your engine. This means that consumers get better gas milage and hence lower cost of running their vehicles. This also means less polution as the gasoline burns more cleanly (fully) as well as less gasoline to reach our destination. Ethanol is the replacement of choice.
3> Mckinsey says always have three points :) Many people in midwest are using corn and ethanol to heat their home to reduce high heating bills. I saw some report 3-4 months back that mentioned that it comes 50% cheaper than heating by natural gas. This is and additional demand pressure on the industry.

Coming back to the main demand, the shift from MBTE to Ethanol has taken the industry by surprise and it may be interesting to see how they cope with it. Ethanol can't be transported by pipeline as it is corrosive (Even wondered why you don't get wine in can's;) So, it goes the good old way through ground transport.

I like to invest in industry where there is increase in demand with supply almost at capacity and Ethanol is a good play. Depending on your risk apetite you can choose ADM (Yes our dear big old corn firm) or PEIX( Pacific Ethanol, Inc. -a small Ethanol producer first suggested to me by my friend Murali). But buy it quickly as you want to be onboard this train when the summer fireworks start.

PEIX buy 17.5-18.5 Target 30% increase in 6 months
ADM buy under 35 for a 15-20% pop in 4-6 months

GNBT roller-coaster (March 26th Update below)

A day after writing such glowing reviews about GNBT, here I am telling you that I got out GNBT.

I was tracking this the whole day. The run was great, but it couldn't last and I didn't have heart for that. When it hit about 5, I changed my trade from 18% trailing all my holding to two sells that would give me better price at around Noon. Here is a Yahoo message board posting.


Here is the extract of the posting:

Guys,

My heart couldn't take it anymore. I am leaving. Have ridden this one from 0.94. Sold half at a trailing stop at 1.32 (trigger 1.4 in Jan). Had a trailing 18% on for since then.

Now I have put two orders.

1> half my current holding at stop mkt 4.5 expiring today.
2> Rest of my current holding at 15% (current activation around 4.15) expiring April 30th.

I am happy with my run and wouldn't mind if one or both these orders are filled. This bird has flown too high too quickly for me.



Both my sells were taken out at $4.40 and $4.00 for an average price of $4.20 and an over all average of $2.76 (including 1.32), one of my top five return, almost tripling my initial price of $0.94 in 4 months.

About long-term,

I still like the stock and will be willing to buy back when it reaches below 3
I will have to do more research for the exact entry.



Other stock that I am tracking is MSFT (I like the drop today) and a friend's recomendation VSPC.OB

(UPDATE MARCH 26th)
I think GNBT is a good buy if you can still get in below 3 so I will be looking to pick up some if I find some opportunity.

GNBT on a tear!!!

One of my holding GNBT is having a great run. I came across this firm through Avian flu research that I did. Though, it is not directly involved with Avian flu. I liked their product - spray based insulin. I had read a lot about the technology when I was working at a boutique investment bank. I liked the concept as it is much more painless drug delivery method that needles. So, I added it to my portfolio at 0.94 on Nov 18th. At that time, it's flagship product Oral-Lyn(TM), oral insulin spray product, had been approved for commercial sale in Ecuador for the treatment of patients with Type-1 and Type-2 diabetes, and was in various stages of clinical trials around the world. There is always some theory why I buy stocks. The main reasons for the thinking were

1> Management looked motivated. They have good background, but motivation was the key. They seem to be putting all the right moves.
2> They already had a product which would be generating revenue. I didn't care if they wre first in the US market or third. With the kind of competition for spray based products, I was sure they would have marketing alliances with some big pharma distributor (That's what I call the big pharma companies)
3> They had an Avian flu play in the form of wholly owned subsidiary Antigen Express with it's avian flu vaccine program. I equated avian flu to oil. Any news or supply shock or demand spike increases the price of crude.

So, the story is expected revenue from Equador will inprove it's topline as well as provide more data for clinical trials. Management will get the drug approved in other countries including US (the biggest drug market) in time. Finaly there is Avian flu play as a an icing on the cake.

I was planning to get half out at 1.4 and rest out at 2.5-3 range. A 100% annual expected return, not bad a risky bet on a $50 million firm I am not the kind of person who can watch the market every minute due to my work. So, I put a trailing stop trigger at 1.4 and waited for the first move. and surely it came much earlier than expected. I got a price of 1.322 on Jan 23rd 2006. Then came a number of other good news. They had a positive pre-IND meeting with FDA for Avian flu and other meeting with Canadian and European trials. As of today it is 4.23 and my current trailing order sell price is 3.52. I have already made more than I expected and I am ready to catch any other upside that comes my way. I will make a value judgement in about a month whether I want to keep my trailing order or convert this for the long haul. This company is really showing promise and if they can deliver or one of the two potentials - Avian flu and Oral insulin- it will be a keeper.

MSFT: Windows Mobile and buying strategy

4> Now the fourth and final reason. I will elaborate this later, but in short. Window Mobile is gaining market share if you are talking about new mobile phones. There has been a lot of new mobiles with WM 5 on them. Also, with it's push email technology, this has become a valid alternative ( IMO stronger one) to challange RIM. I agree initially you will see WM5 mostly on exec style smart phones, but soon you will see more and more media phone ( a growing category) with picture, video and music coming with WM5.

One reason for this move is tight linkage between Nokia and Symbian experienced by other cell phone manufacturers. The caveats to this argument is that Nokia still hold a huge market share in cell phone markets and will never ( IMHO;) shift to WM5.
(Detail discussion to follow)

Finally,


Buying strategy: I think MSFT is a great buy as any price below 27.5, but I will be looking to add it to my portfolio if I can get it under 26.5. I feel it is possible to get this price as the stock might fall when the US Market pulls back after the recent run. It should reach around 35 over the next 12 months.

MSFT: X-Box 360 Vs PS 3

3> X-Box 360 Vs PS 3: First let me state why this is important, gaming is the next battle ground. It has already taken over the movie industry and will be gaining in on the PC industry. In fact, gaming consoles will provide the link between PC and Home entertainment convergence.

With the PSP 3 delayed till Nov 2006, X-box 360 is in a great position to gain a market leadership position. This one year lead in console means more than the products sold in the time period. As all the top three consoles are similar in the features at a basic level, the key factor in console selection becomes the content (games) offered on the console. Now let me stake my neck out and put down how the things will play out.

With PS3 not in the market this summer, game developers along with marketers will focus on X-Box 360 system. With an expected 4.5-5 million installed base by summer, they have a great foundation to bank on.

Come November X-box 360 will stake out about 7-8 million install base. That means in the 2006 holiday season, X-Box for the first time have the gaming console leadership. And this in my opinion will shift the momentum towards the X-Box 360 System both in terms of consumers as well as content provider.

Over all, I think X-box 360 and PS-3 will end at parity in this generation of game consoles if Sony doesn’t screw up its holiday 2006 launch. This is an important point, Microsoft has already played its cards well (that’s debatable considering Holiday 2005 Chip shortage) and Sony has to play their cards correctly to gain parity.

Now to some minor tactical issues:

Sony may reduce the price of it’s PS2 to $99 this summer to stop the Xbox 360’s march. Sony has a much lower manufacturing cost compared to X-Box first generation. I don’t know the exact figure, but it is around $30-40. I don’t think it is very likely, as people buying 2nd generation and 3rd generation gaming consoles are totally different consumer segments. So, this will have small impact of probability of having a 7-8 million installed base before holidays though impact of X-box first generation sales will be huge.

Microsoft will release latest Halo game along with the Sony’s PS3 release. This again is a small tactical play. Though “Halo on X-box 360” advertising will give boost to X-box 360 visibility, I think people deciding to buy PS3 will already know that Halo will not be available on PS3 and have taken that into their decision making. Now this analysis assumes that people are rational and make rational choices. This is a whole another discussion on consumer psychology and irrational decision making.

MSFT a Growth Company?

Call me crazy (especially after the last post), but I am getting excited by prospects of MSFT over the next 12 months. months. MSFT is not a typical company that would come in my profile as mentioned in the last post, it surely looks a great buy. Lets me list the reasons.

1> New product pipeline. Windows Vista, Office 2007, Exchange 12 and SharePoint 2006
2> $500 million marketing initiative to coincide with product pipeline.
3> X-Box & PSP3
4> Windows Mobile gaining momentum in cell phone sector.

Though new product pipeline along with the marketing campaign will provide most earnings boost, I am optimist about the last two points also. The only leg that I feel is and will remain weak is a their MSN and internet group. lowering of the advertising revenue is not helping either.

1> New product pipeline: The reason why MSFT has moved in the range from 23-28 since ...it feels like eternity... is that they didn't have a new product in the last 3 years. Software business is like auto makers. New product means new features that people crave. This results in upgrades and hence increased sales. Unlike automakers. this sales comes at very low incremental product cost. So that's the icing on the cake. Please note, like auto makers, they still have to make the necessary marketing investment

So, where does the cost go?
As R&D expense over the last three years. WOW!!! It's like MSFT took a write off for it's cost to make sure that earnings are better for next three years. In a way GAAP forces MSFT to do what other companies try to do by bending the rules.


If you are still not convinced. Try to correlate the firm's revenue with product launches. Conversely, you can also look at APPLE product pipeline (Hardware and Software) and the sales and stock price in early to late nineties.

2> Marketing push: Now as a product firm, once a product is ready they have to invest in marketing and they could not have found a better timing for a marketing push. With all the product coming up so close to one other, there will also be lots of cross selling revenue. When you see a MSFT ad for Xbox, you also start thinking about Windows and Office.

Next posts I will be discussed 3&4 and also the buying strategy