Long-Overdue Portfolio Adjustments

I've been remiss in keeping my portfolio up to date here, having spent much more time hacking away at email teasers on my Stock Gumshoe site that many of you have also been kind enough to subscribe to and read.

But still, I always have intended to keep my portfolio holdings and changes an open book -- so I'm sorry that I'm so late in making these changes here for you to see (and hey, many of them have been short term mistakes so far, so it's not like you're missing anything).

So ... without further ado, here's what I've done over the past month or so.

I sold Naspers (NPSNY), and bought Tencent (TCEHF). With Naspers ADRs going to the pink sheets some of the argument for keeping these shares for Tencent exposure has gone -- volume is much thinner now, and information will be a little harder to find. The other argument for keeping Naspers, that they offer a more diversified exposure to international media and technology properties, is still there, and it still may be the correct one ... but personally, what always attracted me most to Naspers was their major holding in Tencent. There is a significant argument against what I've done if you think Naspers will rebound in its other businesses, because by historical measures the share of Tencent that you get in Naspers is now trading at a discount.

But anyway, Tencent entered my portfolio more than a month ago, before I sold Naspers, and then I added more to my holdings when I sold Naspers a week or so ago. I got a little lucky with the timing, since Naspers has been a little bit depressed due to fear of local market competition and a declining South African currency compared to the dollar, and Tencent has had a nice boom of late.

I've written quite a bit about why I like Tencent, and all of that remains true -- but two things stand out for me: First, that their advertising revenue is growing pretty quickly and they're not showing any signs of losing much IM market share even though their competitors are trying hard; and second, that as a Chinese blue chip trading only in Hong Kong they're going to benefit significantly when more Chinese retail investors are able to invest in Hong Kong.

I think that's likely a significant part of the boost in Tencent shares over the past week or so, the gradual loosening of restrictions on international investing for mainland Chinese -- but I think we're just at the beginning of that trend, and while it's likely to be good news for many Hong Kong-traded Chinese companies (the Hang Seng is at or near highs right now), I think it will be especially good for popular Chinese consumer brands that are only traded in Hong Kong.

And of course, that fits Tencent to a T. I liken this a little bit to the earlier stages of the internet craze here in the US, to some extent -- what were the popular companies for individual investors? The ones they used ... they bought Dell computers, they used Yahoo email or they surfed on AOL, so those were among the more consistently popular investments. Obviously, the exuberance for these investments got out of hand, but I still think that investor psychology to some extent is universal and that the mainland Chinese are going to want to buy shares of companies that they use every day, but which have been until now forbidden investments.

So in for Tencent, out for Naspers. I won't tell you the prices, since these are old trades and you wouldn't believe me -- it would be too easy for me to say I bought Tencent for $3 and sold Naspers for $27, both of which would be significant exaggerations.

What else has changed for One Guy's Portfolio?

Well, I told you about Ambrian, and that has become a significant holding for me as I've added to it through the Summer at what seem to me to be depressed prices. They release earnings this month that I'm very curious to see, but no real news otherwise. Still a very low PE, and still a nice boost from the strength of the Pound for this commodity-focused investment bank.

And I also bought a few shares in one of Ambrian's major holdings and clients, Centamin Egypt (CELTF.PK). This is a gold exploration firm that is trying to revive the Egyptian gold mining industry -- they have an extremely promising mine site near the Red Sea, and they've got a processing plant that's being disassembled in South America and shipped to their mine so that they can begin processing ore next year. The shares are down from where I purchased them, I bought (again on the pink sheets) for 1.05, but what impresses me are the continual upward revisions in their reserve estimates -- every time they drill a a new test hole, it seems, they upgrade the potential gold content of the mine. This, obviously, is a play on the long term price of gold, and some folks might argue that it's a little pricey for a miner that hasn't yet produced (over a half billion dollars already in market cap). Some significant uncertainty remains, particular on timing as they await equipment and plan their mine, but I'm convinced that the risk/reward ratio is quite promising given the richness of the gold field they're aiming to work.

And aside from these pink sheets foreign holdings -- which I also might add more to in the near future, as I would like to own more Swire Pacific and SeaDrill -- I also bought some "regular" companies during the beating the market took a couple weeks back.

I sold my Chipotle LEAP options and used the profits to pick up some Chipotle shares, because I'm not entirely certain that this company will continue to ramp up rapidly but I am sure that the long term prospects are so excellent that I really want some shares in my portfolio. I expect that Chipotle will be to fast food what Starbucks is to coffee and Whole Foods is to groceries, the socially conscious and better tasting alternative (though their food isn't as premium-priced as those two).

I bought Class B shares, at a hair under $90, because I can't come up with any rational reason why the regular shares will trade at a premium forever (CMG is about $10 more expensive than CMG-B). Right now, they're at a premium because some traders don't know about them, the volume is much lower, and McDonald's has many of the class B shares still locked up ... and the difference is possible because B is no longer redeemable for A There was a nice SeekingAlpha summary of the arbitrage opportunity available for Chipotle shares back in June, and while I wouldn't really arbitrage them (short the Class A and go long the Class B) I can't imagine why a long term investor would buy the Class A. Logic will enter the equation eventually.

I also bought some China Fire and Security (CFSG), because it seems to me to be an appealing small cap that plays off of what I can only assume will be significantly increased needs for security and fire equipment as China continues to upgrade their building standards and, more generally, continues to build whole cities from nothing in the blink of an eye. This is a small position that I'm still researching, but the potential looks really good to me.

In other news, I've sold my holdings in two biotechs and used profits to buy LEAP options in those same companies -- Vertex (VRTX) and PDL Biopharma (PDLI). It has worked out well for Vertex, since the stock profits were considerable when I sold and the options have performed very nicely of late as emotion about their HCV drug Telaprevir has again run hot (it runs cold from time to time, too). It hasn't worked out so well for PDLI, though, I did protect more principal from the train wreck that these shares have been of late, but of course the options fell precipitously and may become worthless if PDL is really re-launching itself on a long road toward building as a research company instead of a producing drug company.

To be fair, if your lead drugs continue to disappoint, as PDL's have, it does look appealing to return to the strategy that built the company -- providing basic antibodies for other drugs and letting others take the risks -- I just don't know how long it's going to take them to "right-size" for that plan and redirect their research efforts.

Also in healthcare, I've upped the stability of my portfolio a bit by adding a big pharma name -- Novartis (NVS), which I picked up shares of at $52.99, right around where it's trading now. I like the big generics and over the counter business, their potential pipeline, and the fairly far-off dates for patent expiration for their biggest drugs. This one has been a favorite of analyts all year and has yet to really perform, in part due to some missteps with approvals that seem to me (a non-expert, believe me) to be fairly minor in the grand scheme of things. I thought about buying Pfizer for this part of my portfolio, I was incredibly tempted by their ridiculously high current dividend, but I opted not to make that contrarian play and bet against the problems they're likely to have with Lipitor patent expiration in the near future (still, they do have an awesome cash hoard ... and I might change my mind).

Finally, I just recently picked up a small entry position in HDFC Bank, one of the two Indian banking firms that you can get as an ADR. I bought shares at $83 a week or two ago and am considering adding more if they dip again. I continue to fear that the shares are a little bit expensive, but I also like the growing consumer banking need in India, and banks can often be good proxies for a growing capitalist society. I also do continue to hold the India iPath Exchange Traded Note, too, which is essentially an index fund for the Sensex.

Enough, huh? Other than that, I just have added a tiny position in a company that I probably shouldn't have touched -- mostly because it's an interesting story that isn't making any money, in Raptor Networks, and I continue to dicker around with some small options trading positions that for the last year or so have more or less broken even -- but they keep me busy, and keep me researching new companies (and provide the occasional 1,000% return that really keeps your investing adrenaline levels up).

Overall, there has been more of a trend to foreign investing in my individual stock holdings -- non-US-based companies now make up just under 50% of my portfolio.

I think that's all of the portfolio adjusting I've done that hasn't yet been reflected on the site here -- I'll try to do a better job of keeping up with my writing in the future. I've also got to take a much closer look at some of the real losers in my portfolio of late and try to figure out what to do with them -- that includes Chico's and MMC Energy, both stocks that several of you have emailed me about in recent months, and Akamai, which is still up 100%+ for me but is down close to 50% on the year. Then again, writing about those guys sounds too much like taking my medicine ...

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Indirect Investing

One of the themes that has come up with several companies I'm thinking about or have recently bought is the notion of the "indirect investment", by which I mean the purchase of a company in order to get access to the earnings (or growth,or whatever) of a subsidiary or related company -- either at a discount, or because the subsidiary isn't separately traded, or just for diversification in getting two significant businesses in one package.

Cypress Semiconductor (CY) fits this idea nicely, and I own a few LEAP options in the shares and remain tempted to buy the common stock -- it's a downtrodden semiconductor company which the market doesn't like at all. They haven't had particularly nice margins of late, or anything else to make the Street stand up and cheer, and short sellers are holding about 10% of the float.

Most importantly in my opinion, though, many years ago they bought a tiny company that had technology and designs for manufacturing solar cells, and built manufacturing capacity for that company. They've since IPO'd part of that solar company, called SunPower Corporation, but they still own about 70%. And today, though Cypress is the parent, Both companies trade at similar market caps, with SunPower's enterprise value of about $2.5 billion and Cypress at about $2.6 billion.

So that means, if you buy Cypress you're getting $1.75 billion of SunPower, which means you get the semiconductor business for substantially less than a billion dollars. Now, whether or not the semiconductor business is worth more than that is another question -- but even though it's not growing as fast as solar, there is certainly a market. The Semiconductor Industry Association (they're unbiased, right?) reported 9.2% growth year over year in January, so if Cypress was a proxy for semis as a whole you might be tempted. They do work in many different segments of the semiconductor marketplace, so perhaps there's an argument to be made there.

This may be too widely understood an "indirect investment" to make any money from, especially since Cypress has resisted "unlocking the value" of their SunPower subsidiary by selling it or spinning it off ... Cypress is probably already trading primarily on the value of their SunPower holdings.

In solar power, there's another way that I've held on to a somewhat indirect investment, too -- my shares of MEMC Electronic Materials (WFR) were initially bought because they were cheap, the share price didn't reflect the great position they held in the semiconductor wafer business because of their integrated supply chain and good supply of polysilicon in a tight market. But one of the reasons I've held the shares after a huge advance,and in the face of an uncertain balance between burgeoning silicon supply and hopefully booming demand, is their growing exposure to solar power -- including warrants to purchase five percent of Suntech Power (STP) that they received in exchange for a long-term silicon supply agreement. That doesn't yet move the needle at WFR, but it could very well do so in the future -- or at least cushion any blow from a slowdown in semiconductor demand, should it come.

Moving away from silicon, Naspers (NPSN) is another investment along these lines -- I bought shares recently, and while I like the cash generation of their core media (South African newspaper and pay tv) assets, what I really like is the growth potential of their partially owned division, Chinese IM leader (with the QQ product) and portal company Tencent, and their acquisition spree in emerging markets media and internet companies.

The impact on the market cap is big here, too, since Tencent is roughly a $6 billion company and Naspers owns about 36% ... and NPSN itself has a market cap of about $7 billion, so roughly a third of Naspers' market cap is attributable to their not very profitable (in earnings terms) Tencent holdings, which significantly depresses the company's PE ratio and makes them seem a bit more expensive than they really are.

Tight relationships among corporations can give us opportunities to do this kind of investing in nearly any industry -- Ship Finance Limited, a company I've owned in the past, gets an indirect ride on the profits of former parent Frontline. They own Frontline's ships and get a steady lease rate for them, which they churn out as a high, steady dividend yield ... but if the tanker business takes another turn up they'll get a bonus from a profit sharing agreement whereby they get a portion of all profits over a set level on their tankers. Which is probably why the shares are just about at all time highs while the more leveraged Frontline languishes on the currently tepid prognosis for tanker rates.

This kind of investing is not unusual, of course -- a lot of what professional investors do is try to find hidden values in the companies they're interested in, and many arbitrageurs spend their days figuring out which companies are likely to move to unlock those values in a particular time frame.

Other examples abound -- buying Roche a few years back to get a cheaper bid on the future of Genentech comes to my mind as one example ... and in a related way, biotech and other IP-heavy industries also give us the opportunity to invest in companies because of royalties they receive from successful or promising products.

Using the Genentech example again, this might mean buying PDL Biopharma (PDLI) because of the humanized antibody royalties they get from several of Genentech's big products, including Avastin and Lucentis (though PDLI also has its own issues, including a looming fight with a big investor about their spending habits).

Whatever your focus, it sometimes pays to look a little deeper into the companies that interest you -- maybe the companies that don't appear to be publicly traded are really available for investment as subsidiaries of others, or maybe the shares that look a little too pricey are hiding an unusual gem.

full disclosure: I own shares in Naspers, MEMC Electronic Materials, and PDL Biopharma, and call options on Cypress Semiconductor. I have no position in the other companies mentioned.

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PDL Biopharma -- Bumps in the Road (PDLI)

PDL Biopharma (PDLI) has been one of my favorite biotech companies over the last couple of years.

Unlike many biotechs that are essentially "betting the farm" on one or two unproven drugs, PDLI is built on the foundation of a strong, patented (patent runs to 2014) humanized antibody that brings in a steady royalty stream ... and they use that royalty stream to fund development of their own in-house drug discovery programs.

This notion of using a steady revenue stream from other sources to pay for drug discovery and expensive clinical trials is not new, of course -- the big pharmas all do it, and some other biotechs like Myriad Genetics (with its genetic test development business) or ArQule (which provides outsourced chemistry work for other pharmas) do as well. But it's a little unusual among the big crop of exploratory biotech firms, most of which have no revenue to speak of. PDLI will bring in about $400-430 million in revenues this year, according to the company.

So PDLI is a pretty mature company compared to many, even if it hasn't yet broken through to reach the size or profitability of the huge biotechs like Amgen or Genentech.

And the revenue stream from their royalties looks very solid for the next several years, during which they aim to keep up a rate of 25% compound annual growth. Royalties have begun flowing from their latest Genentech licensee, Lucentis, and they continue to receive royalties from eight other drugs, including potential (or realized) blockbusters Avastin, Tysabri and Herceptin. More than 75 other potential royalty-producing drugs are in development, with eight of them in Phase 3 trials at the moment, so that aspect of the business looks just fine.

But PDLI has hit a spot of trouble this year with their own drugs -- and no matter how much the royalty stream helps with their cash flow, the success of this company will rely on getting some significant sales from several of their own drugs over the coming decade.

Their growth targets and goals today, and their wide array of clinical programs, remain, in the words of CEO Marc McDade from a recent presentation at a biotech investor conference, "intact ... [but] dented in a few ways." The outlook now differs significantly from just a few months ago, at the first quarter conference call, when optimism was higher and pivotal data was expected for several compounds within the year.

The long term goals are in fairly good shape -- they aim to launch three drugs by 2010, at least two of them internally developed products, and there are several candidates that could make that goal reach fruition.

But disappointing delays and clinical failures are wreaking havoc with their short term goals, and with their image (and thus the stock price over this summer). PDLI aimed to have three clinical programs in pivotal studies by the end of this year, and that's not going to happen.

The clinical failures have not been catastrophic -- they failed to reach endpoints on two studies recently, including Terlipressin in Phase 3 (and following their meeting with the FDA, it's quite possible Terlipressin won't move forward). Terlipressin was an orphan drug for a tiny market, so it's medically disappointing but financially probably not that significant that this program is in trouble.

So should we be worried about these recent failures, or that some of their other programs are moving through the clinic a little more slowly than expected?

Well, PDLI is not going to go out of business in the next few months because of this bad news -- but there may be cause for concern.

No matter how much we focus on PDL Biopharma's cash flow from blockbuster drugs like Herceptin, the fact remains that for them to reach a significant level of profitability they're going to need some successful drug products of their own to reach the marketplace ... and for all intents and purposes, at least one of those successes -- and probably two -- will need to come from the big four candidates: Nuvion, Ularitide, Daclizumab and M200, the most promising clinical progams in PDLI's pipeline.

PDLI does have a sales force, and they do have three drugs on the market -- all of which were acquired when they bought out ESP Pharma. The biggest of these is Cardene I.V. for hypertension, and they've also bought the rights to oral Cardene to strengthen their position. Retavase and IVBusulfex are smaller but also profitable in some very specific acute care sectors.

But what they're really hoping is these three drugs pave the way for their other, bigger compounds. So what's the status of their most promising drugs?

Nuvion is a very promising drug for a severe version of end stage ulcerative colitis, and it's generally considered the most advanced drug in PDL's pipeline. It is designed to prevent or delay colonectomies, which happen about 70,000 times a year in this indication, and that's got to be good news for folks who are otherwise forced to have very serious surgery and live with a colostomy bag.

They have a hybrid Phase 2/3 study for Nuvion in the works right now, but it will be well into the Spring of next year before there is a safety decision that could allow them to start even the phase 2 component ... that's a longer wait than I expected. Other supportive or retreatment trials under way, but it's going to be at least a year before we hear anything.

Ularitide is a drug that came from the ESP Pharma acquisition, and one that aims at a much larger patient population: 2 million people a year who enter hospitals with acute decompensated heart failure. They've had positive results in phase 2 in Europe, but are way behind in US clinical testing of this drug. They're starting the first of two phase 3 trials by the end of this year in Europe, but are just now starting Phase 1 in the US for dosing, and they expect the US to end up about a year behind Europe.

And Daclizumab has hit some hiccups recently. Roche has terminated the collaboration for this drug in Asthma, so PDL Biopharma is waiting to see if there is a new partner and won't move forward without one. Thankfully, this drug is promising for several different indications, so two phase 2 trials are underway now. They expect to see some data in about a year for Daclizumab in transplant maintenance (also partnered with Roche) and for Multiple Sclerosis (with Biogen Idec).

M200 (also called Volociximab) is a cancer antibody that has been surrounded by optimistic buzz for a while. This cancer antibody has had several phase II studies, also in partnership with Biogen Idec, trying to determinehow to move forward with clinical testing. It has a similar mechanism to Avastin, though the target and performance differ, and there was some hope (at least from me) that this would show some early breakthrough results. So far, the results are very preliminary and someone like me who's not an expert on pharmacology should probably ignore them ... but I think the fact that no notable news came out of the first round of exploratory testing this summer is disappointing. It looks like cancer buzz at PDL Biopharma may be migrating to its next IND candidate, a new anti-tumor compound that's expected to begin human trials by the end of the year, though there's certainly every possibility that M200 will come through as well.

PDL Biopharma has a lot of things going for them -- they're operating cash flow positive for the first time this year, the royalty stream continues to grow nicely and they're doing a good job selling their current (minor) drugs to hospitals. Nuvion and Ularitide are aimed at launch in the next five years, keep your fingers crossed. And a manufacturing facility is already gearing up for Nuvion and Daclizumab production.

But PDLI's lustre seems a bit dimmer these days. I think it's just that the summer was filled with tepid or disappointing clinical results for several relatively unimportant products, and that the negative headlines ("Trial failed to meet endpoints," "Development partnership cancelled"), along with the incremental delays across their bigger programs, are going to define the image of PDLI in the marketplace until they're able to release some good clinical news ... hopefully, within the next year.

The last time PDLI's stock looked troubled, back in the Spring of 2005, it was a great buying opportunity as fears over Avastin's problems were taken way too much to heart by PDLI investors. I wrote about PDLI for the first time about a year ago, detailing my purchases both before and after that dip in the share price, and my average cost today stands at about $19 ... right where we are now.

More recently, back in May, disappointing earnings and guidance that reflected some of these delays in drug development cut the shares by 30%, again, which is how we get to the current price after a year of highs in the $30s and lows in the low teens.

I'm not buying any more PDLI at these prices, but I'll certainly plan to hold them for the long term ... and if bad news that's unrelated to Nuvion, Ularitide or Daclizumab comes out and brings the shares down further, I may be tempted to add to my position. I'm worried, but I'm trying to put that emotion aside because I think I'm worried about things that aren't that significant to PDL's long term future.

disclosure: in addition to PDLI shares, I own shares of Myriad Genetics (MYGN).

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CVTX Still Falling, PDLI Still Cheap

Interesting day for Biotech investing -- two of my companies released earnings, neither of which could really be called great, and one stayed even while the other continued its flushing spiral.

PDL Biopharma (PDLI), formerly Protein Design Labs, was the mildly positive one -- this company is pretty far along as far as small biotechs go, with several marketed (if small time) products and a deep royalty stream and solid pipeline. They released earnings that show they're continuing to be cash flow positive, if not yet with positive real earnings -- that's a significant step, but not a surprise.

The bad news for PDLI was that one of their minor clinical trials failed. One of the drugs they acquired with their takeover of ESP Pharma last year, a takeover that also brought in all of PDLI's current marketed drugs and helped to bring them to the verge of profitability, failed in a phase three trial.

I was hoping that this failure, in which terlipressin did not meet its primary endpoints but did show some potential good effect, would bring PDLI's share price down even further -- I had a buy order in at $16 in the hope that investors would overreact to this failure and dump the stock on the "failure" headlines without reading further.

No such luck, though it did shoot down for a while in after hours trading. PDLI also released earnings yesterday, which included higher than expected costs but still reflected a reasonable financial position and some very good royalty streams, and the shares are relatively unchanged, though they're only a dollar above their 52-week low.

It was the royalty streams for Genentech's blockbuster drugs that first got me interested in PDLI -- they own the patent on the humanized monoclonal antibodies that enable Herceptin, Avastin and others, so I think that stream of income should only grow in the coming few years.

But the argument for PDLI growing significantly beyond what these royalty streams can do is that they have three solid compounds in clinical trials -- not including terlipressin, which was a bit of a long shot for what seems to be a nearly untreatable disease, and is really being developed by Orphan Therapeutics (PDLI just has US rights if the drug pans out). Terlipressin was the most advanced drug in the pipeline, but the more promising Nuvion and Ularitide are also well advanced in Phase II, and there are three other lower profile drugs in Phase II trials as well (Full clinical pipeline is here). The next year or two should show some really significant clinical results for PDLI, whether good or bad, and as we wait for those results we see them maintaining a solid revenue stream (over $100 million in sales this quarter, up 20%) that's growing quite well and helping to pay for these expensive clinical trials.

PDLI, EXEL and ISRG remain my favorite investments in health care right now, and I think PDLI is criminally cheap at the moment -- perhaps the kneejerk downgrade from First Albany will help to bring the price down a bit, I never thought I'd see 16 again and if I do I will be hard pressed to resist adding to my stake.

CV Therapeutics (CVTX), on the other hand, is just plain depressing. This is largely a one-trick-pony (OK, two tricks -- but neither one is really up to Cirque du Soleil standards). Their two lead drugs on the market are Ranexa and Aceon, and they have some other pipeline drugs that don't have anyone excited, along with Regadenoson, a promising new cardiac imaging agent.

But CVTX shares right now are really just an option on Ranexa, and the news has not yet been nearly as good as investors hoped. Shares dipped by about 10% this morning on dramatically higher costs, largely, I think, because those costs -- without enough offsetting sales increases -- clarify what is already known, that Aceon is not exactly flying out the door, and that CV's new sales force is having a really hard time selling much Ranexa so far.

Ranexa right now is approved on a pretty limited label, as more or less a last resort drug for angina. If you think that's as far as Ranexa will go, you've got no business buying CVTX.

But if you believe, as CV does, that they can get an expanded label for Ranexa and make this into one of the core drugs for chronic angina (which hasn't seen a new treatment in decades, and counts millions of sufferers anxious for relief), then the shares are dirt cheap right here.

So we wait for the FDA.

Ranexa is now in a follow up phase III clinical trial called MERLIN, which is aimed at proving safety and getting the FDA to expand the label. There has been no bad news out of the trial yet, and they recently got permission to move forward with continuing the trial (which means, at least, that the drug is not proving to be dramatically dangerous), but it's going to be the end of the year before we really know anything substantive. With the cautious FDA and a condition that isn't necessarily life threatening or untreatable, the bar is likely pretty high for CVTX to prove that Ranexa is safe.

I have no idea what will happen, and I remain conflicted on this holding -- whenever I think of the millions of people clamoring for new angina drugs to provide an option beyond beta blockers and the like, I get optimistic and think CV has a real chance and a big market opening up to them. Whenever I see the FDA being extra cautious, and the examples of that are legion but include Encysive's recent woes with Thelin, I think CV is going to run through hundreds of millions of dollars to get a "thumbs down" from the FDA, and investors will be left with a portfolio of small time drugs and no real hope of future profitability.

At this point, my shares have fallen so far on what was initially just a small position that it's not worth it to me to sell -- I'll take a chance and hold on to see what the future holds for Ranexa. But until there is news from MERLIN and the FDA, I'm resolved to not buy any more, no matter how cheap it looks.

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Buy on the dip -- PDL Biopharma (PDLI)

I haven't quite caught up on the busy goings-on in earnings land for all my companies over the past week of my absence (huge move up by ISRG, down by Chico's ... I'm getting a little seasick), but I did take a moment this morning to make a small purchase.

After seeing the PDL BioPharma (PDLI) earnings release, and noticing the dramatic decline in the stock price -- around 20% -- I couldn't resist adding on to my position.

PDLI I first bought about a year ago after noticing them named as back-end participants in what I thought would be a boom market for Genentech's Avastin and reading up on several good Motley Fool articles on the company. I wrote about my earlier purchases here and my feelings about the company remain the same. Their earnings weren't as strong as I or the market might have liked, and their increased R&D costs going forward (and the resultant short-term hit to earnings) are clearly what moved the stock down ... but their lead drug candidates are still doing well and they still have royalty claims on a host of exciting drugs including Avastin, Tysabri, and many more. The last big dip I caught was when the Tysabri problems hit, and that was clearly an overreaction since Tysabri will never be a huge part of PDLI's business. I'm hoping that this large dip is going to turn out to have been an overreaction as well.

In the long term, PDLI has a varied pipeline, a lot of royalties coming in, and, at least for now, a reduction in partnership research money that has the market concerned. Since that doesn't impact their sales of their current drugs, or the potential of their pipeline, I'm not all that concerned this year about whether PDLI is making a few cents a share or losing a bit ... it was nice that they broke even on a non-GAAP basis, but this is still an early stage biotech story that I plan to follow for a long time.

Today's purchase at $21 even moves my cost basis up a hair to $19.17 ... I wouldn't be surprised to see it dip further to the high teens, but I like this price.

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Bear Market Blahs -- Where to invest now?

Well, when the market as a whole is taking a tumble like it's doing this week, and my portfolio is almost entirely awash in red, it's hard to get motivated to think about your holdings.

Some are still doing quite well ... PDL Biopharma (PDLI -- click to register for free RT streaming quote)got a fair amount of attention around the time of its earnings release last week -- they would have had their first quarter of positive earnings if not for some one time charges, and forecasts are for real-life earnings in 2006 that will give PDLI a PE ratio for the first time. Always exciting for a biotech. Business Week recently came out with a PDLI article and they make a few good points -- principally that PDLI, though risky, should generally be considered less risky than many similar early-stage biotechs.

And Northern Orion (NTO) continues to steam ahead, enjoying the wonderful tailwind of low-cost mining production and very high copper and gold prices. That one will ebb and flow with the commodity pricing over the next several years until Agua Rica is online -- though some folks think they'll be bought out before then so a bigger company can get their hooks into Agua Rica. Either way's fine with me, this is my only real metals investment and it seems to be doing just fine.

But nearly all of my holdings are tanking this week. Tough news on interest rates is rough on the market as a whole, and especially on the more volatile sectors that I am fairly heavily weighted in like emerging markets, growth stocks and the like. Some of these companies I find tempting for additional investment during this general decline ... GOL is down about 6% today, a rough give-back of most of their recent gains ... ISRG has had a horrible month and is now extremely tempting for another add-on purchase. But I've already committed so much to these two stocks that I'm wary to double down again just yet.

On the flip side, this is the worst time to offload most of my holdings (though I may soon sell Overstock, for reasons I've covered recently, and if I wasn't overly patient I would have already lightened up on my Google position a little -- too bad I didn't foresee their ridiculous problems of the last few weeks). When the market's taking a dip like this, seems to me that it's time to look for new investments that might be going on sale. Here are a couple that I'm thinking of at the moment:

Options Express (OXPS). I've had my eye on this one for a little while as it has had an almost unmitigated upward trajectory. I like a lot of things about the company. I think they're in a great business as options trading is climbing dramatically worldwide, and should climb faster if the market becomes more volatile in the coming year as many people expect. They have a fairly distinguished product that is substantially different from what the major online brokerages can offer for options trading. Though a fairly young company, they are very profitable even though they trade at a current high PE. And they have huge insider ownership, which I always like to see. Insiders have sold a lot of shares recently which is not terribly surprising since they've just completed their first year as a public company, but that's certainly an area of concern to investigate. They also pay a small dividend, which is a nice treat.

Oh, and did I mention that they're getting clobbered today? Down close to 10% as I write this after announcing what I can only imagine are weaker performance numbers than expected. I see that their performance is still up dramatically YOY but down from last month, which might be the reason for the current panic -- I am interested in picking up shares but need to do some more research first. If the price keeps plummeting the dividend yield will be up to 1% in a few minutes.

Markel Corp. (MKL). Markel is a big insurance underwriter, and a lot of folks think of them as a junior Berkshire Hathaway (not unlike White Mountains). Like Berkshire (and Google and others) they haven't split the shares so the stock price is up north of $330 at the moment. And this week, Markel is one of the few companies I'm watching that isn't dropping like a stone.

Markel had a tough 2005 business-wise, as did all the big insurers with hurricane exposure. It now seems like it might be a reasonable time to re-purchase a MKL position for my portfolio given the firming prices for P&C insurance and Markel's excellent investment performance. I owned MKL for a while, selling back in 2004 at a small loss when they weren't doing very well, but they're looking appealing again. Like BRK, they have a large cash hoard (though much smaller than Warren's, of course) and have some solid float performance that gives them free money with which to invest. This would be a nice counterpoint to much of my portolio, given that MKL focuses on value investing in equities with their float. Haven't done much research ye to reacquaint myself with MKL after a year or two of absence, but I've got their latest filings and conference call transcripts to pore through and I'll see if I like what they're doing. 2006 is expected by analysts to be a very solid year for MKL, giving them a forward estimated PE of about 12 ... if I can have faith in those numbers, I think now is a good time to pick up some MKL holdings that I can stash in a retirement account and hopefully ignore for a good many years.

Will let you know if I take any action on these or other ideas that are mulling around in the back of my head.

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More Protein Design Labs, please (PDLI)

Protein Design Labs (PDLI), bought August 30, 2005 at $26.05, April 15, 2005 at $16.84 and April 4, 2005 at $15.09.

When I was trying to put a little more money to work recently I considered a lot of candidates -- some I've mentioned in my wish lists, some in passing as I've posted over the past weeks, but I kept coming back to one of my favorite holdings and decided that was still the best place for my new cash. That's another Lynchism, for those who are counting: Sometimes the best stock to buy is one that you already own.

Protein Design Labs is one of my favorite companies and biggest holdings -- as I've written in a few previous posts, I love the biotechs that have a steady stream of income to support their ongoing drug research programs, especially if they have deep pipelines of promising drugs. Protein Design Labs is the best of that group, in my opinion.

The PDLI story is not that complicated, though simple folk like me definitely have trouble with the science part of it at times.

The basic story is this: PDLI developed and patented a special variety of humanized antibodies that can be used to develop drugs. (Humanized as distinquished from human -- these are mouse antibodies that have been adjusted to be well tolerated by the human body). Other drug companies use these antibodies in their drugs and pay a royalty to PDLI for the use of their patented science. That's where the current revenue stream and some of the future growth comes from -- the drugs using PDLI's antibodies and paying a royalty include some real blockbusters, among them Genentech's Avastin, perhaps the most signficant cancer drug out there right now.

And the back story, beyond this steady and growing cash flow from royalties, is Protein Design's own pipeline of drugs in the clinic and preclinical development, and their acquisition of a stable of on-market drugs and a deepter pipeline with their recent purchase of ESP Pharma.

In the pipeline are three particularly promising candidates for future blockbusterhood: Nuvion, Ularitide, and M200. Nuvion is closest to market and is still itself several years out, but Biogen Idec thought enough of the rest of the pipeline to partner on several of the compounds with a very PDLI-friendly 50/50 split of costs and revenues going forward in addition to a cash infusion up front.

PDLI seems to be on the verge of turning the corner. Will they be the next Genentech or Amgen? That's a lot to hope for, but with continued good managemend and success in the clinic and the lab you never know. We do know that they're projected to go cash-flow positive over the winter and the odds are heavily tilted in their favor with royalties on some very strong drugs, income from the solid offerings of ESP Pharma, and the long-term potential of their own drugs. I like this more than my other biotech holdings, and it's one of my favorite stocks. You'll note that I bought more even after our recent run up, which is unusual for a "buy on the dips" guy like me, but I am confident that the price is fair right now for what I'm getting. I really like CV Therapeutics (CVTX) and Vertex Pharma (VRTX) as well, which are the other core biotech holdings in my portfolio right now (I also have small positions in Myriad Genetics (MYGN) and Exelisis (EXEL) but want to learn more about them before adding more), but PDLI is the top of the heap.

That's all for now -- wanted to get this up since I've been remiss in posting for a few days, will come back later and add more on PDLI as I can. And I've still got some of my other personal favorites to write up in more detail -- not only CVTX and VRTX, but the oddest bird of my portfolio, SpaceDev, as well.

PDLI has a big fan over at the Fool, too, in Charly Travers -- lots of his articles available over there, including a bull/bear debate on PDLI here.

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