The S&A Digest: Huang's first rule of biotech trading

Huang's first rule of biotech trading... Icahn raises dividend... Klarman's new stock... Censorship at the White House... Credit crisis "has a ways to go"...

 Don't miss our third essay from Dr. George Huang describing how to find the best biotech trades. Today, George introduces another potential trade and gives the first of his four criteria for choosing "no-brainer" biotech trades.

 Extreme Value pick Icahn Enterprises (IEP) increased its dividend 67% over the previous quarter. The company mentioned its "strong liquidity," recently enhanced by the $1.2 billion sale of four Nevada casinos to a Goldman Sachs real estate fund.

Icahn Enterprises is one of a handful of "professional help" stocks recommended in Extreme Value. These are companies run by investors with great long-term track records. When you buy their stocks, you place your capital under their management. Icahn is up 360% since we found it. Berkshire Hathaway (BRK), another professional help stock, is up 53%.

In the last two issues of Extreme Value, we found two more professional helpers trading at deep discounts to their intrinsic values. Click here to learn how to access those reports.

 Unfortunately, there's no professional help stock run by Seth Klarman. You can't even invest in his hedge fund, Baupost Group, which is closed to new money. The deep-value Baupost has returned an average 19.5% since 1983 – often holding more than 40% of the fund in cash. Klarman is highly secretive in his operations and doesn't even disclose some positions to his investors. So when you find out he's buying, take note.

Yesterday, Klarman filed for 1.2 million shares, 5.23%, of Ituran Location and Control (ITRN). The company provides vehicle location and theft-recovery services. According to Yahoo, Ituran trades for 4.6 times earnings and yields 13%.

 More of the same for the greenback... The big news today is the dollar dropping below 100 yen, a 12-year low. And on cue, gold hit the much-anticipated $1,000 mark.

 And what does the government have to say about our failing currency? Nothing... At last Friday's White House press briefing to discuss the U.S. economy, economic advisor Dana Perino was tight-lipped. When asked about $105 oil and the falling dollar, Perino responded:

I'm under strict instructions, and have been from the beginning, to not talk about the dollar, and I'm not going to get fired to satisfy your question.

 Freddie Mac and Wachovia were surprisingly negative, and honest, yesterday. On a conference call, Freddie Mac CEO Richard Syron said housing prices have only dropped one-third as far as he thinks they're going to. Freddie Mac is expecting a total decline of 15%.

Wachovia director Don Truslow told analysts at a conference yesterday, "We have a ways to go." Putting it in baseball terms, Truslow believes the problems in the housing market are "still before the seventh-inning stretch."

 Standard & Poor's published a report saying subprime write-downs will total $285 billion when all is said and done. S&P said the crisis is "past the halfway mark." Halfway mark or not, there's certainly more pain to come...

 In his weekly research note, Societe Generale analyst James Montier mentions, "None of the 80 'AAA' securities in the ABX indexes meets the criteria that S&P themselves define! Yet only one of these bonds has been downgraded by S&P, and none by Moody's." Montier offers this as an example of self-serving bias, the desire to interpret information in order to support one's own interests.

 New highs: Sabine Royalty Trust (SBR), Westshore Terminals (WTE-UN.TO).

 After yesterday's extensive mailbag, we'll keep this one brief. What's on your mind? Tell us here: feedback@stansberryresearch.com.

 "Welcome back! You commented about the pyramid scheme in the Netherlands and scoffed at the investment being tulip bulbs. That's how I felt at the Alliance Conference when Dyson made his presentation on a Canadian pine tree nursery. Yes I know Dyson's pick is not a pyramid scheme and yes I know the overwhelming majority participants at the conference liked the idea. But pine tree nurseries... how's that pick working out so far for those that bought the stock? Guess that's one way of determining a market top in a stock... when the majority of average investors at a conference make a stock their favorite." - Paid-up subscriber Tim Nealon

Goldsmith comment: We included this piece of news because we thought it was ironic that the Dutch were caught up in another mania involving tulips. The first tulipmania hit the Netherlands in the 17th century. It was one of the earliest examples of an economic bubble. Tulip bulbs were so valuable at the time that people traded them for houses and livestock. You can read about it in Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. As far as PRT goes...

Dyson comment: PRT Forest Regeneration Income Trust is now down 35% from where I recommended it. It cut its dividend by 71%, closed one of its nurseries, and now trades below net asset value. However, last month, the Canadian government announced a huge reforestation plan for British Columbia. The market's killing PRT's stock on short-term considerations while the investment thesis I laid out at the Alliance Conference is becoming reality...

 Either way, we're employing a 50% trailing stop on PRT. That limits risk, but gives this small stock some wiggle room.

 "Why would wiring $5000 from time to time trigger a federal investigation? It may have something to do with the USA Patriot Act requiring a Suspicious Activity Report (SARs) to be filled out each time a wiring of $5000 or more is transacted. I only know this because it was on my recent Series 6 licensing exam." – Paid-up subscriber Marc Upton

 "I am a banker and the reason Eliot 'Steamroller' Spitzer got caught is 1, he split a $10,000 wire into 3 separate wires (That's called 'Structuring' which is multiple wires to the same person in a short period of time to avoid triggering a Currency Transaction Report or CTR). AND 2, he asked the bank to take his name off the wire. That is a very 'Suspicious Activity' and that's why he got caught. He forced the bank to file a 'Suspicious Activity Report' or SAR. He brought this all on himself." – Paid-up subscriber Roger Ciriello

Ferris comment: First of all, yes, he brought it on himself, but only by cheating on his wife. Going to a prostitute isn't wrong in itself, even though it's illegal. It's consensual, and therefore no real crime at all.

Second, it's wrong for the government to force banks to spy on banking transactions. It doesn't make the world safer, anymore than taking off my shoes and showing my driver's license to a marginally employable TSA drone. The world is more dangerous when innocent people are treated like criminals for moving their own money where, when, and in what amounts they choose. These situations only exist so Uncle Sam can keep dogs like you and me whipped and cowering in the corner. And it's working well, much to our shame.

Regards,

Dan Ferris

Medford, Oregon

March 13, 2008

How to Spot the Perfect S&A FDA Report Trade – Secret No. 1

By Dr. George Huang, editor, The S&A FDA Report

Last week, I revealed the amazing results of our study on biotech investing (you can see them here and here). In short, we found buying biotech stocks after the FDA hands the company an "approvable letter" can generate one-year returns between 50% and 100%.

But as I alluded to last time, not every biotech suffering at the hands of the FDA makes for a great trade. Indeed, before I can label an approvable letter opportunity a "no-brainer" trade, it must satisfy the FDA Report's four stringent criteria.

The first question I ask is:

Are the FDA's requested conditions reasonably achieved?

After many years of investing in drug stocks, I've learned the demands and conditions that pour from the FDA are more varied than shoes in a woman's closet...

Most times, in order to satisfy such requests, companies need to sit down and chat with the FDA. Conversation topics run the gamut... from the drug's label, to marketing tactics, to the cleanliness of manufacturing facilities, to more clinical trials, laboratory work, and testing. The list is practically endless, ranging from quick and negligible to cumbersome and costly. Determining where the request falls in this severity scale is the first step in evaluating a trade opportunity.

For example, if a drug's label and marketing language is the only concern in the approvable letter, it's reasonable to expect a three- to six-month delay in FDA approval. On the other hand, if the request addresses something like a long-term safety issue, which can only be resolved with a large, multinational clinical trial, you want to turn and run with the rest of the market. This could delay approval by about three years.

So the length of the delay is part of the equation. Generally speaking, anything longer than an 18-month delay is worrisome.

But an equally important and obvious question remains: Will the FDA approve the drug after the company has done all the requested additional work?

Answering this question takes a little bit of experience. For example, you need to know the drug's competitive landscape, both what's now on the market and what's in development. Also, how strong is the data presented thus far? Admittedly, a little luck is involved, as well. In the end, it's a judgment call.

In short, if the proposed delay is reasonably short and the FDA is likely to approve the drug after the delay, then the stock has passed the first of our four trading criteria...

In my next essay, I will unveil the second criteria every biotech trade must meet before becoming FDA Report eligible...

Good investing,

George Huang

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As of 06/21/2013