The Unmitigated Gall of This Week (UBS, CHS, EXEL, PDS)
I expect very bad results from my portfolio companies to come along every once in a while. That's part of why I maintain a very broadly diversified portfolio, and why I focus on a very long time horizon for most of my holdings.
But this week has been abysmal for the short term prospects of several of my investments.
As I wrote yesterday, Precision Drilling (PDS) -- my most recent purchase -- got caught up in the new Canadian tax proposals for trusts, bringing an immediate haircut of 15% or so. Still thinking about the long term prospects on that one, and whether it's worth holding on for what I think will be a good business, and for four more years of low-tax, high-yield dividends before the new law goes into effect.
Earlier in the week, UBS (UBS) disappointed -- their trading results were weak and brought down the earnings for this most recent quarter, and it is starting to look like their investments in expansion are going to put the kibosh on the full exercise of their buyback and on any significant increases in the dividend in the near term. Although the same trading problems impacted most of the major foreign banks and that kind of thing is certainly to be expected from time to time, I may need to look for an alternative investment in this space -- UBS has shown some nice gains over the past year, but the future is looking a little murkier for me in this name.
Then today, both Chico's and Exelixis get pantsed ...
Chico's (CHS) is wearing a bit on my patience -- I fully expect even a company with a history of excellent merchandising to make some marketing or merchandising mistakes on occasion, and with a company as excellent as I've thought Chico's is, I'd consider most of these mistakes to be buying opportunities. But the tought times have really piled up for this retailer -- same store sales growth disappointed through the Spring, and again at the end of the Summer and for the last several months the same store sales have declined, which is unheard of for this company prior to this year. That's led to reduced third quarter guidance today from the company, and another decline by more than 8% in the share price.
Call me crazy, but I'm planning to hold through at least the next earnings call and see exactly what management is doing to fix their problems in same store sales growth. The fact that they are still successfully opening stores, as evidenced by their overall sales growth of about 10%, is encouraging, and I continue to believe that there is ample room for significant expansion for at least their Soma and White House/Black Market concepts (and I really wish they would buy out Lucy, the activewear company that has venture backing from Chico's, Maveron and others, before it gets too expensive).
Just as an aside, Maveron has got to be the most interesting venture firm out there -- using Howard Shultz's money, among others, they've backed not only Lucy, but the Motley Fool, Potbelly Sandwich Works, iFloor, Drugstore.com, and Eos airlines. I don't know what their record is, but they definitely are funding some fun companies.
And back to the bad news, today also brought about a 15% decline in Exelixis (EXEL), one of my larger speculative biotech holdings. EXEL doesn't have any drugs in production yet, and an investment in this company is a bet that their excellent scientific reputation and well-stocked pipeline of cancer drugs is going to bring at least one significant drug to the market.
The odds dipped a little bit today, as EXEL announced a very dramatic safety concern with XL999, one of their drugs in Phase II clinical studies, and from the initial announcement it's not at all far-fetched to assume that this drug will be dropped (nor is it a guarantee, since they are still continuing the study with existing participants even as they pause new enrollments).
They basically found that close to a third of newly enrolled patients in this study had "serious cardiovascular adverse events", and that about 10% of all enrolled patients had similar "events". That sounds awful to me, though I'm not a doctor and I suppose it's possible that the drug may still have some future.
But although this is certainly negative news, it's far from catastrophic for the company -- XL999 was among the more advanced EXEL drugs, one of four in early Phase II studies (there's one in Phase III, though it carries pretty limited financial expectations), so this cuts the chances that one of those drugs will make it through -- but the company also aims to file IND applications to enter the clinic with three new drugs each year, and they have three Phase I drugs and one IND lined up just behind the lead group already.
So if you bought EXEL because you thought XL999 would be a blockbuster, which is unlikely given that none of these cancer drugs have really progressed far enough to wow investors with their efficacy, you are very disappointed today.
If, on the other hand, you bought EXEL because the pipeline is strong and deep, this isn't much of a reason to sell even if the 10-15% haircut is fair -- after all, you'd have had to predict that at least half of their Phase II drugs were unlikely to gain approval.
If you do the math, there is a certain logic to today's decline -- they have eight drugs in the clinic, so -- all else being equal -- one failed drug could conceivably make it fair to downgrade the value of the pipeline by 12.5%, roughly where we are today. Given that it might take 15 years to develop a drug, and that somewhere between 10-20% of all drugs that make it as far as Phase I eventually get approved, you could really get carried away with valuing these companies based solely on probability ... but EXEL, with their strong history in target identification and drug discovery, and their deep pipeline, remains in my portfolio and I hope they'll have better results with some of their other Phase II drugs.
So ... one cruddy week on the back of a women's retailer, an oil and natural gas driller, a biotech company, and a megacap international bank -- if anyone had predicted for me that all of these would get pounded at about the same time, and for different reasons, I'd have thought it very unlikely. Shows what I know.
But this week has been abysmal for the short term prospects of several of my investments.
As I wrote yesterday, Precision Drilling (PDS) -- my most recent purchase -- got caught up in the new Canadian tax proposals for trusts, bringing an immediate haircut of 15% or so. Still thinking about the long term prospects on that one, and whether it's worth holding on for what I think will be a good business, and for four more years of low-tax, high-yield dividends before the new law goes into effect.
Earlier in the week, UBS (UBS) disappointed -- their trading results were weak and brought down the earnings for this most recent quarter, and it is starting to look like their investments in expansion are going to put the kibosh on the full exercise of their buyback and on any significant increases in the dividend in the near term. Although the same trading problems impacted most of the major foreign banks and that kind of thing is certainly to be expected from time to time, I may need to look for an alternative investment in this space -- UBS has shown some nice gains over the past year, but the future is looking a little murkier for me in this name.
Then today, both Chico's and Exelixis get pantsed ...
Chico's (CHS) is wearing a bit on my patience -- I fully expect even a company with a history of excellent merchandising to make some marketing or merchandising mistakes on occasion, and with a company as excellent as I've thought Chico's is, I'd consider most of these mistakes to be buying opportunities. But the tought times have really piled up for this retailer -- same store sales growth disappointed through the Spring, and again at the end of the Summer and for the last several months the same store sales have declined, which is unheard of for this company prior to this year. That's led to reduced third quarter guidance today from the company, and another decline by more than 8% in the share price.
Call me crazy, but I'm planning to hold through at least the next earnings call and see exactly what management is doing to fix their problems in same store sales growth. The fact that they are still successfully opening stores, as evidenced by their overall sales growth of about 10%, is encouraging, and I continue to believe that there is ample room for significant expansion for at least their Soma and White House/Black Market concepts (and I really wish they would buy out Lucy, the activewear company that has venture backing from Chico's, Maveron and others, before it gets too expensive).
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Just as an aside, Maveron has got to be the most interesting venture firm out there -- using Howard Shultz's money, among others, they've backed not only Lucy, but the Motley Fool, Potbelly Sandwich Works, iFloor, Drugstore.com, and Eos airlines. I don't know what their record is, but they definitely are funding some fun companies.
And back to the bad news, today also brought about a 15% decline in Exelixis (EXEL), one of my larger speculative biotech holdings. EXEL doesn't have any drugs in production yet, and an investment in this company is a bet that their excellent scientific reputation and well-stocked pipeline of cancer drugs is going to bring at least one significant drug to the market.
The odds dipped a little bit today, as EXEL announced a very dramatic safety concern with XL999, one of their drugs in Phase II clinical studies, and from the initial announcement it's not at all far-fetched to assume that this drug will be dropped (nor is it a guarantee, since they are still continuing the study with existing participants even as they pause new enrollments).
They basically found that close to a third of newly enrolled patients in this study had "serious cardiovascular adverse events", and that about 10% of all enrolled patients had similar "events". That sounds awful to me, though I'm not a doctor and I suppose it's possible that the drug may still have some future.
But although this is certainly negative news, it's far from catastrophic for the company -- XL999 was among the more advanced EXEL drugs, one of four in early Phase II studies (there's one in Phase III, though it carries pretty limited financial expectations), so this cuts the chances that one of those drugs will make it through -- but the company also aims to file IND applications to enter the clinic with three new drugs each year, and they have three Phase I drugs and one IND lined up just behind the lead group already.
So if you bought EXEL because you thought XL999 would be a blockbuster, which is unlikely given that none of these cancer drugs have really progressed far enough to wow investors with their efficacy, you are very disappointed today.
If, on the other hand, you bought EXEL because the pipeline is strong and deep, this isn't much of a reason to sell even if the 10-15% haircut is fair -- after all, you'd have had to predict that at least half of their Phase II drugs were unlikely to gain approval.
If you do the math, there is a certain logic to today's decline -- they have eight drugs in the clinic, so -- all else being equal -- one failed drug could conceivably make it fair to downgrade the value of the pipeline by 12.5%, roughly where we are today. Given that it might take 15 years to develop a drug, and that somewhere between 10-20% of all drugs that make it as far as Phase I eventually get approved, you could really get carried away with valuing these companies based solely on probability ... but EXEL, with their strong history in target identification and drug discovery, and their deep pipeline, remains in my portfolio and I hope they'll have better results with some of their other Phase II drugs.
So ... one cruddy week on the back of a women's retailer, an oil and natural gas driller, a biotech company, and a megacap international bank -- if anyone had predicted for me that all of these would get pounded at about the same time, and for different reasons, I'd have thought it very unlikely. Shows what I know.
This article posted by One Guy @ 11/02/2006 01:32:00 PM 3 comments
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