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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Volatile Vertex -- Investigating Telaprevir's Promise (VRTX)

There has been a bit of coverage of Vertex Pharmaceuticals (VRTX) lately, including an article at thestreet.com about the gamble the shares represent right now, and I thought I'd try to catch up a little on this high-risk, high reward company.

Vertex is a development stage biotech, famously created over a decade ago to hunt for the elusive AIDS cure (chronicled by the book The Billion Dollar Molecule by Barry Werth), and in the years since subject to some serious volatility as the initial euphoria faded and clinical trials brought both the promise of success and the threat of failure.

They've recently come to investors attention again thanks to the extremely promising drug VX-950, now called Telaprevir, a protease inhibitor for Hepatitis C. In the year and a half or so since Vertex released its initial clinical trial results for this drug the shares have roughly tripled, and while the company has a decent pipeline of other drugs (one for rheumatoid arthritis should go into phase III trials soon, and one for cystic fibrosis into phase II), they have also made clear that they are throwing the company's full resources behind the fast-track approval process for this potential blockbuster.

I bought shares before the first results came out for VX-950, and they were easily available for under $12 ... if the drug fails, which the consensus of course believes is quite unlikely, I would not be surprised if the shares fell by 60-80%. So what does "unlikely" mean?

The expectacions are really remarkably high, and for good reason. For a while, at least, this was looking more like a miracle than just a plain blockbuster -- initial reports and investor chatter had Telaprevir curing HCV in 12 weeks without significant side effects, whereas the existing treatment regimen with Interferon and Ribavarin generally takes at least a year, only works in about half the patients, and has sometimes debilitating side effects that cause many patients to drop treatment.

But as biotech investors have learned time and time again, potential blockbusters and miracle drugs are legion ... actual blockbusters are quite a bit more rare. What kind of confidence can we have that Telaprevir will actually make it through the approval process without significant delays, and be as popular as hoped? After all, Vertex has a bit of a lead in this space, but they're far from the only ones developing a protease inhibitor in the fight against Hepatitis C ... even if their drug does get approved on schedule, there will be competition in fairly short order.

Official data about the clinical trials is not released all that often, and when it is it tends to be accompanied by fairly optimistic commentary from the company -- so sometimes it's valuable to look to other places for information to see if any more intelligence can be gained about the drug's prospects.

For Hepatitis C, there are a lot of sources, even for non-scientists like me. There are some blogs from the folks on the science side that cover biotech development in general, including an always interesting one called In the Pipeline that has a recent note on Vertex and the huge bet the company is placing on Telaprevir. Sources like this can give you a little bit of perspective, since they're not focused on the investment side, and in this case you can read between the lines and see the scepticism and almost feel the tension that must be running through the labs at Vertex right now.

Other science-oriented blogs and HCV-focused bloggers can also help illuminate the actual results for us non-scientific folks, including this one from November that looked in some detail at the problems with Telaprevir monotherapy that I don't think most investors were expecting.

And another interesting source that you can review for a new perspective are the legion of bulletin boards and blogs by and for Hepatitis C sufferers -- HepCNet, the Hepatitis Forum at medhelp.org and the Hepatitis C Forum are a few that I've perused from time to time. At these sites you can sometimes see comments from people who are part of these clinical trials (or so they say, at least), and hear how they're tolerating the drugs (a couple examples here and here). From these sources you can get a little color on the results -- so while the official press release will explain some of the side effects, the potential (and current) patients can often be counted on to really examine those side effects.

And of course, you can see lots of comments on the other side, from people in the trial who are elated at their results (even if they don't actually know for sure whether they're getting Telaprevir or the control), or really hoping for a chance to get into a Vertex trial because of the hope this drug offers.

Along those lines, you really get a sense from these forums of the incredible frustration that those inflicted with the disease have with the existing treatments, including some terrible hard luck stories from the many people who've been forced to suspend treatment because of adverse effects or are waiting for donor livers.

These kinds of sources exist for many diseases, especially the big ones, so you might also have read, for example, the multiple sclerosis bulletin boards a couple years ago and seen that the demand was so strong for Tysabri, Elan's new drug for MS, that patients wanted the FDA to approve it even though there was a concern that it might come at some increased risk of a rare, deadly brain disease.

And of course, you can get an idea of all the developments in treating this disease by reading the news sites that are put together by people with the strongest possible interest in seeing new treatments develop -- there's a good Hepatitis C Information Center, for example, with a feed of all the HCV news you could possibly want.

That's not to say, of course, that all these sources are infallible, or that we should use them for investment decisions -- any more than you should take every note you read on the Yahoo stock message boards as an actionable fact.

Every drug has side effects and problems, and every disease has vocal sufferers who push for treatment at any cost ... and focusing too much on those can cause you to lose sight of the important thing for biotech investors: is the disease worse than the cure, is the drug on average better or safer than existing therapies, and is there a market for it?

I continue to be an owner of Vertex shares, though I took some profits last year and have not bought any additional shares since it got out of the teens. I'm convinced enough of the promise of Telaprevir in this potentially $10 billion market that I'm willing to keep my bet on the table ... but I am fully aware that, especially with the company focused primarily on this drug and already carrying a $4 billion market cap, this is far from a sure thing.

For the many people who suffer from Hepatitis C and who are not helped by the existing treatments, I certainly hope that Telaprevir is at least as successful as Wall Street is predicting. For more about my comments on the financials of the company, and my notes from when I bought and sold shares in the past, just click on the VRTX ticker "label" below for a link to all of my posts on the subject.

disclosure: I own shares of Vertex Pharmaceuticals and do not plan to buy or sell in the near future.

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Earnings Season Thoughts (GOOG, WFR, AKAM, ISRG, VRTX)

This is very likely the biggest single day for me in earnings season -- several of my strongest performing stocks like MEMC Electronic Materials (WFR), Akamai (AKAM), Intuitive Surgical (ISRG), and Vertex Pharmaceuticals (VRTX) are releasing earnings after the close today.

So this seemed an apt time to check up on the earnings releases that I haven't yet mentioned.

Yesterday, Cemex (CX) released their earnings -- and no one was particularly happy with them. The stock split recently, but that didn't have any real impact -- no, the impact was from declining US sales. Cemex had great sales increases in every other major area, including Mexico and Spain, but US sales dipped significantly. I found this very surprising, given the continuing cement shortage in this country, but I expect commercial and infrastructure construction to continue growing over the long term here at home, and with the rest of their markets performing very well right now I'm not terribly worried about a blip in the US. In fact, the news out today that GM was buoyed by its Latin American division gives me a bit of hope that consumption is increasing in that region, and any increase in automobile sales should help push demand for improved road infrastructure. That's a bit of a stretch, but at least it's a stretch on the positive side.

And Google (GOOG), another of my larger positions that has already released earnings, surprised me a little bit as well -- not because they continued to beat estimates handily (beat by more than 12% this time), but because it brought in virtually none of the volatility we've come to expect from GOOG earnings.

Google's now trading at less than a 40PE on current year's earnings (reported and estimated) -- that's about as cheap as it's ever been, though it's certainly not cheap in relation to the rest of the market. I sold about 40% of my Google holdings earlier this year at close to a 100% gain and will be holding these, but I think investors are now so afraid of growth stocks and technology stocks that GOOG is getting attractive again -- over the past two years they have steadily increased earnings, kept their noses clean, innovated with new products that may be monetized eventually, and, most importantly, continued to take market share from all of their competitors around the world.

And Gol Linhas Aereas Inteligentes (GOL), another of my bigger holdings, is managing to maintain very solid margins and increase market share even while they grow their fleet considerably and grow earnings by about 50% -- they're subject to oil prices just like all the other airlines (though Brazilian prices are a lot friendlier than US for jet fuel, in general), but they are growing very quickly without sacrificing profitability. The ADRs have been subject to the strength of the Real, and more significantly the shares have been on a rollercoaster as Varig's restructuring has played out ... but I don't see anything happening to Varig that will hurt GOL significantly, and I think the only thing that will bring trouble to the company is a recession in Brazil that curbs demand for tickets.

Looking forward, we've got AKAM, ISRG, VRTX and WFR all reporting today.

WFR is a company I've written about quite a bit recently -- the collapse of their deal with Motech was disappointing, but the cessation of their supply agreement with Evergreen Solar (ESLR) was an indicator of the upward trend in their market, and the signing of a deal with Suntech Power (STP) today to supply solar silicon wafers for ten years in exchange for an up-front payment and a warrant for STP shares came earlier than expected but is also a strong positive.

And today, WFR will release its earnings after the close -- and they've beaten estimates the last two times out, if not by all that much. Analysts are expecting something in the low-40 cent range for EPS, which would be close to twice their year-ago earnings (a year ago is roughly when the company began turning things around and their shares began climbing). WFR has been much higher than this, at around $48 before the bottom fell out of the market, and is priced at close to a market multiple -- for this kind of growth, that seems a more than fair price to pay.

VRTX should be insignificant -- their earnings don't mean much, because no one is buying this company for their current royalties on a few antiviral drugs that are in production now. No, people are buying Vertex for VX-950, their anti-hepatitis compound that has show remarkable results in early clinical trials. Vertex has made some solid partnership agreements in the last few months and is very well financed to complete these trials, so unless there is news about VX-950 or VX-702 (and I don't believe there will be), I don't think we'll learn much from the earnings release.

AKAM is feeling the pain of growth stocks everywhere -- it has gone up so much that it is hard to consider it cheap even on forward earnings. Add in the fact that now many folks are getting worried about Limewire, which has replaced Bittorrent and Google as Akamai's boogeymen, and I expect that the folks who are sitting on huge returns in this one have itchy trigger fingers. Limewire is actually a real competitor, with a similar business plan to Akamai's, but AKAM is so entrenched with their customers and has such a strong portfolio of clients that I think fearing the upstart is a bit premature right now. Still, any disappointment on earnings release this evening -- any worsening of margins that might bring in the specter of price cutting due to competition, or anything less than a big uptick due to heavy World Cup traffic, could bring another wave of selling. With the demand for faster commercial delivery of audiovisual files continuing to increase dramatically, I still think Akamai is a good place to be in the long run ... even if they get some competition in the space they have owned since they acquired Speedera. But it's not a slam dunk, and the shares aren't cheap right now in my opinion.

Intuitive Surgical has been actually fairly quiet lately. In the last few months it has recovered from the beating it took when they lowballed their first quarter sales numbers (especially since they then beat those lowballed estimates handily), but folks will certainly be watching very closely to see how many of the new Da Vinci S machines they sell, and what kind of penetration they're getting into the prostatectomy field (where they're shooting for 35% of the market by the end of this year) and, perhaps more importantly, into hysterectomies, where they are trying to build a presence in a much larger market. I looked into those with some channel checks in the Spring, but haven't followed up yet in any detail since the last earnings release eased a lot of my concerns. This company has the potential to revolutionize all kinds of surgeries in the years to come, but with hospitals generally hurting I'd be happy to see them just keep up with the sales they had in the first quarter -- in the long run, this will be a cash cow with lucrative instrument sales driving returns as more and more surgeries are performed, but in the short run the shares should bump up and down on the numbers of machines sold.

Should be an interesting day -- the next six hours will go a long way to determining whether or not my portfolio will shortly recover from the beating it has taken in the last two months, but so far I've heard nothing terribly disturbing from the companies I own, and I remain quite optimistic about their long term prospects.

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Vertex-J&J Deal makes good sense (VRTX)

I've held Vertex Pharmaceuticals (VRTX) for more than a year now, and after sellling about a third of my position in the beginning of the year to recoup my entire initial investment I'm enjoying watching the shares recover nicely now -- there's nothing quite like playing with the house's money.

VRTX has had its huge 200%+ run in the past year or so because of the shockingly good results of early stage trials for its VX-950, a protease inhibitor for Hepatitis C that appears to have the most promise among the new crop of HCV drugs that are fighting for approval right now.

Hepatitis C is a global problem without a good drug treatment, and the market is potentially $10 billion in the US alone -- even the lowest estimates are for at least $2 billion in sales of any effective new HCV treatment, but those low estimates probably don't adequately take into account the huge numbers of people who don't currently seek treatment because of the ineffectiveness and unpleasantness of current treatment options.

VX-950 so far looks like it can just about completely eradicate the virus in a very short treatment cycle -- 12 weeks is the most recent test they've run and all accounts were that it was quite effective.

But given the very cautious nature of the FDA, Vertex has also significantly expanded its Phase II testing and will be testing more people and taking more time to establish a stronger safety profile before entering Phase III.

Every clinical trial adds significant expense, and even for a relatively big "small biotech" like Vertex that's in good financial shape the risk increases -- that's why I like the news today.

Vertex has essentially sold global non-North American rights to Johnson and Johnson for VX-950, and in exchange they've gotten a big upfront payment and promises of significant milestone payments and royalties as the drug moves forward, as well as help with the development of the drug. VRTX retains exclusive North American rights.

By doing this Vertex gets two things: They get money, which will help them to advance the trials as quickly as possible and keep up with Schering Plough's HCV protease inhibitor that's also in Phase II; and they get the expertise of a huge pharmaceutical company to help them advance the trials globally and continue the clinical research. And all without giving up the crown jewel of drug markets, the US.

Still no guarantees, of course, and it's certainly possible that this or their other high profile drug, VX-702 for rheumatoid arthritis, will have a surprising failure and make the stock crater (that's why I sold a portion a while back -- back around $40 the stock seemed priced for way too much optimism). It looks good, though, and the fact that Johnson and Johnson is willing to put nearly a half billion dollars into VX-950 is a huge endorsement.

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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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Biotech Bloodletting (VRTX, CVTX)

It's very odd to see the market react so angrily to earnings reports from two companies that we have always known are a long way from having actual positive earnings. With early stage biotechs like many of those in my portfolio, we're buying the hope of future drug performance or approvals .. not the current earnings.

CV Therapeutics (CVTX) and Vertex Pharmaceuticals are getting absolutely pummeled today after releasing their earnings updates last night. Since there was no significant news on either company's pipeline with those earnings releases, it's hard to see good reasons for these drops in share price ... but these are also two very different cases.

In the case of Vertex (VRTX), the company has been trading on the possible approval of it's Hepatitis C drug VX-950, which is still uncertain and is several years away. The market probably overreacted to the potential of this drug when the early clinical results were so spectacular last year, and I'm not surprised to see it dip 10% today ... with so many investors jumping on the momentum train and expecting miraculous announcements every time the company opens the PR gates, there was bound to be some disappointment as soon as it became clear to momentum investors that patience is necessary even with potential blockbuster drugs.

As I wrote a couple months ago when I lightened up my VRTX position, I was worried that the market had bit up the shares to a valuation level that really assumed we would see both of their most promising drugs become blockbusters in the next few years. I still think that's a possible outcome and am holding the majority of my shares, but it's far from certain. I'm not buying any more even though we're seeing some significant drops here, but I've seen no bad news on their pipeline and still expect this one to do very well in the long term.

CV Therapeutics is a very different story, one that's playing out painfully and slowly. Their valuation should be based on their lead drug Ranexa, which is the first new treatment in decades for angina, a huge market. They're also dropping nearly 10% today, and the shares have been weak for months.

It seems that investors are having trouble assessing the performance of Ranexa and Aceon, the drug that CVTX is copromiting with Solvay. We have to wait for results of the Merlin trial for label expansion for Ranexa -- expected at the end of the year (with possible preliminary results earlier) -- to see if the hope for Ranexa becoming a blockbuster-size drug will come through. So all that we have to work with now is the very slow rampup of Ranexa and Aceon sales ... I'm willing to be quite patient with this one, since I am not surprised to see that these two drugs that are new to US cardiologists are taking some time to get traction. I do see a significant amount of risk if the Merlin trial is not enough to convince the FDA that an expansion to treat first-line angina sufferers is in order, but given the lack of other alternative treatments and the lack of efficacy of some treatments for a large number of angina sufferers I'm fairly optimistic.

Ranexa is by no means the kind of blockbuster candidate that VX-950 is for Vertex -- the good performance relative to existing treatments is clear and the drug definitely has a place, but so far we've not seen that it's shockingly good or dramatically better than existing treatments.

So I'm still thinking of taking another nibble at CVTX if the market continues to beat up the shares and build in pessimism about Ranexa's performance ... as I wrote about three weeks ago when most of my biotechs were taking a beating, this might be a solid buying opportunity ... though I've never been able to pluck a falling knife at just the right point.

I'm happy to see that CV has ramped up Aceon to the level that they're finally getting royalty payments, which is a positive sign for the salesforce's presence in cardiologists' offices, and I think the shipments of Ranexa in the second quarter should show some significant improvement as the sales team continues to get some traction -- especially if preliminary results on Merlin continue to trickle in with positive news. Hopefully, the market's pessimism will really set in on Ranexa and bargains will appear ... we're getting close now, but I haven't yet bought more.

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Conflicted -- losing money while being right (MIDD, VRTX)

It turns out that my concern was a couple weeks early on the short term valuation of Middleby and Vertex, but I was right (insert sound of patting self on back) to think that a significant amount of optimism was priced into the shares considering their near-term growth prospects.

So I'm a little conflicted -- I don't like to see any stocks that I own going down and I still own smaller portions of these ... but I am somewhat relieved that my thesis played out in the short term, since at least my rationale turned out to be reasonable.

For those who weren't listening, I lightened up a bit on my shares of Middleby (MIDD -- click to register for free RT streaming quote) and Vertex (VRTX) to protect some huge gains a few weeks ago because I thought the market was expecting absolute perfection from both companies -- Middleby because they are very richly valued relative to their current organic growth, and Vertex because they were valued as if both of their top tier compounds were on their way to blockbuster status without a hitch.

Vertex released a report that their phase II studies of VX-702 worked as expected and had a reasonable safety profile, but it sold off because people were hoping for another immediately obvious blockbuster like VX-950, the Hepatitis C drug that's also in Phase II and setting the world on fire. Not yet.

Middleby was exactly in line with expectations, which certainly appears to not be good enough in today's market ... not when the a stock has been bid up to more than double over the past year.

As I type this, MIDD is down about 8% and VRTX about 6%. Not that big a deal for a long term investor, but worth avoiding if you can.

I still like both of these companies and sold less than half of my position in each, which is the disappointing part. I sold some shares to protect a profit and pull my original investment off the table, but I certainly intend to hold on to the remainder for a very long time in both of these cases. I would have been delighted to see them continue to grow without respite, but of course that never happens.

Emotionally, I was frustrated that both of them climbed immediately after I sold them (Vertex climbed more than 10% in the day after I sold it, just to rub it in), but somehow it's reassuring that they're now back below my selling point because I got a short term call right (for once). Not something that happens often ... and as any market psychologist will tell you, sometimes idiots like me are more excited about being "right" than about making money.

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Biotechs taking off again (VRTX, MYGN)

Great biotech news today in my portfolio on a couple fronts.

Vertex (VRTX -- click to register for free RT streaming quote) released more midstage data that confirms (with a tiny sample of 12) the effectiveness of VX-950, their potential blockbuster HCV drug. The dozen patients given VX-950 in combination therapy with existing standard treatment ALL had their virus count reduced below detectable levels (which is basically as close as we can get at this stage to calling the treatment a "cure").

Not unexpected news here, since VX-950 has been blowing people away since the Spring with it's results, but I'm very happy to see confirmation here in Phase II trials -- and especially that the combination therapy seems to be even more impressive than the monotherapy Phase I trials. It'll still be a couple years before FDA approval, assuming that there are no safety issues, but Vertex is certainly continuing to drive my portfolio higher and help make up for Google's recent dip. I haven't considered buying any VRTX lately since it's so hard for me to justify paying almost three times my cost basis for a new position, but this long-maligned biotech finally seems to be seeing the incredible pipeline production that we all expected from them many years ago.

Myriad Genetics (MYGN -- click to register for free RT streaming quote) also released information today -- earnings, in this case, and they were also very encouraging. No news on their drug development to speak of, and none was expected, but their primary cash-generator (genetic testing) is doing much better than expected and their cash burn is therefore much better than expected. Things are looking up -- but this is a very long term hold as we wait to see how their clinical trials shake out in the next few years. I'm getting more curious about Flurizan as we move forward -- I continue to expect very little from that drug, and the market seems to have discounted it pretty significantly since Alzheimer's treatments have been where small biotechs have gone to die, but there is certainly some potential upside there if it continues to show even tepidly good results in trials.

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Earnings Updates

About half of the companies I own have reported their quarterly earnings, and it is a decidedly mixed bag. I'm going to do a quick summary of how they did, and what I'm thinking about the companies going forward.

So what has happened of significance so far this earnings season?

First, the best ...

Middleby (MIDD) clobbered the baked-in estimates, and showed that CEO Selim Bassoul is still on top of his game at this maker of commercial ovens and cooking equipment. I was lucky enough to buy into this great company earlier this year when it faltered slightly while the founding family was trying to sell out their holdings -- bought some at about $46 and more later on at around $50 over the winter (I found out about this company because it was a Motley Fool Hidden Gems recommendation, one that has since been re-recommended -- that's a great newsletter and I recommend at least giving it a free trial).

Middleby keeps some of the fun in investing by never pre-announcing their earnings release date, so one day the market closes and a lovely surprise bounces up on your browser, as happened last Thursday afternoon. Sales up 15%, international growth still doing great, earnings well above the estimates of the few analysts who follow MIDD ... even with increased debt, which we knew about due to the buyout of the founders shares, and slightly lower margins and higher costs largely due to the acquisition of NuVu and higher steel prices, it's all good news.

Now, some of that might be overstated -- some of the second quarter growth was backlog from Q1's big order volume that squeezed in before a price increase, some of it was from the NuVu acquisition, but I still like the growth going forward. Middleby's fast, efficient, patented cooking systems are being used by many of the restaurant chains that are quickly carpeting the globe with familiar logos and food products, and that doesn't appear to be anywhere near an ending point. Dining out is an international phenomenon, one that certainly began in the United States but that has legs around the world -- and familiar brands that roll out huge numbers of shops with Middleby cooking equipment are leading the way. Even something as seemingly unrelated as energy prices can help Middleby, because higher energy costs mean that the more advanced but much more energy-efficient Middleby ovens are just that much more appealing for restaurant buyers.

And the worst ...

Great Wolf (WOLF) -- bigger, and unfortunately much badder. I was one of I believe four shareholders to not sell out on their latest earnings release, and that could have been a mistake. Thankfully, my WOLF position was relatively small (and is smaller still now) since it's a pretty new portfolio position that I haven't gotten around to really filling out yet.

Normally, if I saw a stock drop like this that I owned and was confident in it would be extraordinarily tempting to buy ... and when I saw the ticker drop like a stone, that was indeed my first reaction, I thought we might just be dealing with a management team that was having a hard time getting to know the "underpromise, overdeliver" Wall Street culture.

Then I read the earnings release, and while I'm holding on because it's not worth selling such a small position and I still have some hope for the company, this one is not going to rocket back up the charts anytime soon. Not only was this a rough spring for Great Wolf in terms of competition eroding their occupancy rates in the few places where they face competition, but man oh man oh man, their occupancy rates fell EVERYWHERE over this six month period, and they weren't exactly super high to begin with. Check out the earnings release here and scroll down to the individual resort results -- nothing promising there.

Now, the silver lining is that Great Wolf is expanding into some very promising areas -- their Williamsburg location openened recently and is getting pretty high room rates, though occupancy is not great yet, and they have very promising parks opening in their core midwestern region -- a partnership park in Ohio and a franchised location in Niagara Falls, Ontario -- as well as some brand new locations that will really be the test of the concept. If they can succeed in the Poconos and in the Pacific Northwest, where the indoor water park is a heretofore unseen novelty, I'll feel much better about their long term future.

So, it's possible that this is a great buying period (A.G. Edwards downgraded it right before earnings, and upgraded it right after with the stock almost 40% lower) ... but not for me, not yet. I'll revisit this holding next year around this time and see how they're doing. The guy who recommended Great Wolf for the fool's Rule Breakers around the time I bought in, has a writeup on his disappointment here, and there's a news article with some quotes from management that are a little less gloomy (though they also give weight to the concern that dependence on leisure spending from the midwest may be a problem for a while with automaker troubles).

And all the rest ...

Akamai (AKAM) reported a great quarter and it looks like the acquisition of Speedera is going to be just as good a decision as we had hoped, though short term cash flow and margins might be a little lower than some were dreaming of. AKAM bumped up a bit on the solid but not breakout news, and I'm happy to keep holding on. Quarterly numbers from the Fool here. Guidance upped about 10%, so it's trading at a pretty fair PE of 30 or so for the current year -- not bad for the growth I expect we'll continue to see.

Marvel (MVL) reported a slightly disappointing quarter, and fell a small amount -- really not significant in the grand scheme of things. Earnings were a little lighter than last year and the spiderman 2 licensing cash flow wasn't quite as long lived as some analysts had hoped -- hard to get worked up about it. They're still backing earnings estimates of a bit over a dollar for the year, which means they're pretty close to a market multiple even in a year when they don't have a blockbuster franchise release (F4 has been a solid hit so far, but it's certainly neither an X-men nor a Spiderman when it comes to blockbuster ticket sales or licensing -- we'll see the next X-Men next year, and Spidey 3 the year following ... plenty of reason to buy huge potential at a fair price right now if you're interested).

MEMC Electronic Materials (WFR) reported a slight drop in earnings, but what I'm looking for from them is in the future -- the next 6 months to a year. Now that the backlog is almost worked out of world semiconductor inventories and business is beginning to boom again, what kind of advantage will WFR be able to gain from having their own low-cost supply of polysilicon? And even without the impact of that, world demand for wafers should be very strong. Earnings made the shares drop slightly, but investors, including me, are mostly interested in what happens for the next year -- is the semiconductor recovery for real? If so, WFR and FORM will boom. According to MEMC's CEO, the company's results may indicate "the bottoming quarter" after a 9-month industry slowdown due a surplus of inventory. I hope he's right.

Formfactor (FORM) reported just a few days after I did my company writeup, and altough the stock tumbled a bit due to delays in the new plant going online, my opinion hasn't changed -- I'm still happy with them, and the market has already found some of the love it had lost for FORM, it has recovered about half of it's earnings-miss fall.

Vertex Pharmaceuticals reported too ... but I don't much care about their quarterly earnings, for this one and all my other biotechs the earnings matter much less (they're all still losing money, though PDLI is close to going cash-flow-positive) than the results of their ongoing clinical trials. The trial results will move the stocks, the earnings almost never do unless they're wildly surprising. VRTX's report was pretty much as expected, and, most importantly, all of their trials for potential blockbuster drugs are on schedule -- nothing pending that should be a big surprise or impacton the stock in the next few months as far as I can tell.

Next Week

I'll have to do this again in a week or two -- I'm taking a no-market-info vacation, which is painful for info addicts like me, and during that time earnings should come out for Click Commerce, CV Therapeutics, Exelixis, FARO Technologies, Lions Gate Films, Protein Design Labs, Rofin-Sinar Technologies, Shanda, Taser and Unive