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Science, People, IP

January 26, 2013 Leave a comment

or What Qualities I Look For in a Company.

After experimenting with various trading styles, it seems as though I am most comfortable as a Growth Investor.  Of course, the type of trader/investor you are is dynamic and can change with every trade you perform.  I’d like to consider myself a Growth Investor, but I also look at technicals and consider a company’s value before I buy, does that make me a Value Investor or maybe even a Technical Trader?  At our core, however, we all have our favorite ways of trading.  And if you don’t right now, yours will develop as you learn more about the market and what types of companies to which you are drawn.  Are you drawn to companies whose share prices have plummeted due to panic-induced overselling, but are still fundamentally good companies?  You may have been drawn to NFLX or RIMM and caught their recent price pops because they still have valid business plans.

For me, I’m drawn to biotech because of my experience in the drug discovery industry.  I really enjoy researching companies in the sector, seeing what therapeutics they have in the pipeline, and trying to predict how their pipeline fit in with the market.  It also helps me better understand the broader pharmaceutical industry, so I can do my actual, real-life job better. I like picking biotechs that I think will be high growth in the medium to long term.  So the title refers specifically to biotech companies, but the concept can be applied to a company in any sector when analyzing a potential investment of a company.

First and foremost, what is their Science?  In other words, what is the fundamental core of the company’s platform?  In the case of NFLX, their “science” is the ability to stream (almost) any TV show or movie at the click of a button.  No more speeding to blockbuster to avoid a late fee, no more scratched DVDs, and soon say “so long” to the days of sitting on your couch to watch a movie.  You now have the ability to stream anywhere you want.  This is the science behind NFLX and it’s seems to be a good business model.  Of course, they are reliant upon obtaining licenses from the industry for their movies, which is the reason why your favorite movie might not be available to stream.

Second, who are the People who run the business?  What have they accomplished so far in their life prior to their position in the company?  If they are young (as is the case with many tech companies), are they high potential individuals who are knowledgeable enough to know how to solve the company’s problems as they scale?  Look at ALNY, for example.  I’m extremely bullish on them for a number of reasons, but their management team looks solid.  There are Harvard MBAs, MIT PhDs, and a number of notable scientists on the Scientific Advisory Board.  Clearly, some pretty prominent people are leading Alnylam and, as such, I would anticipate them to be able to solve many problems they come across.

Third, what kind of Intellectual Property does the company own?  This particular metric is the X-factor for the company and one often overlooked.  Because no other company or entity can use another company’s IP, a company’s IP can help differentiate it from other companies in the sector.

Solazyme (SZYM) is a company that I’ve had my eye on for some time now because, in my opinion, it fits all my criteria for a fundamentally solid company in which I should invest.  Their Science?  SZYM is developing renewable fuel.  Think about that for 5 seconds.  I like big ideas.  I like ideas that will disrupt common thought.  I like ideas that completely and positively change the way things are done.  To me, this is one of those ideas.

O.K., you say, so they have a solid plan.  What kind of people are running the thing?  A PhD from Caltech, a few NYU MBAs, and a whole heck of a lot of combined operating experience.  And that’s just management, I didn’t even get to strategic and scientific advisors.  Needless to say, I think the team is doing a solid job, and will continue to do so. So, do they have any IP? Yeah, just a few patents.

So why aren’t I fully invested?

SZYM Daily Chart, freestockcharts.com

SZYM Daily Chart, freestockcharts.com

Technicals, technicals, technicals.  Since SZYM’s IPO, they’ve generally been in a downward sloping pennant.  It’s difficult to justify jumping into the stock with a chart looking the way SZYM does.  It seems as though many are scared off from the insider selling that’s been going on.  Particularly, there’s the curious selling from the CEO himself.  He’s essentially been dumping shares on the market monthly.  Regardless, I don’t mind eating crow for 5 years as the stock price most likely drops to $2.50, but they’re ramping up production and in the next few years, they’ll generate some strong revenue.  You heard it here first.

After starting a new portfolio from scratch this month, I’ve hit the ground running this year.

Courtesy of investopedia.com

2013, Stock Only, From investopedia.com

It’s difficult to believe ACHN has a market capitalization of only $744M when you consider that when Inhibitex was bought by BMS, it was valued at $2.5 billion.  I give a price target of $25.

So as you can see, I try to adhere to my investment thesis of picking high growth biotechs that are based on good science, are managed by a solid team, and own some key assets.  These are just a few of the considerations I look at when I’m analyzing a company.  There are others, but that’ll be for another blog post.

As always: It should be noted that all transactions described on this blog were performed on the Investopedia Stock Simulator and not in the real stock market.  I have no actual positions in any stocks mentioned nor will I be initiating any actual positions in the next 6 months.  Furthermore, the information on this blog should not be considered financial advice.  The main purpose of the blog is to educate its readership, myself included, about concepts and ideas that were previously unknown to me.

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