As expected, I am falling a bit faster than market indices, although I'm still ahead: +8.4% vs S&P500, +17.76% vs. FTSE100 and +12.52% vs. Hang Seng Index. Many of my stocks have a higher beta than the market, thus they go down faster. But my stop losses are in place, so I'm not really afraid of a prolonged correction. The only thing hurting my strategy would be a series of whipsaws, that is the market would go up and down 10-20% several times per year. I am very confident in my strategy in the long-term, a big market drop would actually help me outperform even more, as I would be mostly in cash (I go long stocks only when they start reaching new highs, the best ones usually do that precisely at the time the markets bottom). So when everything is going down, there is not much to do for me, I just sit patiently and wait for the next winners to show themselves. I will be doing some adjustments to my US portfolio today, selling at least one stock.
Lupin Ltd. is one the top pharmaceutical players in the Indian and worldwide markets. They generate revenue by manufacturing and selling pharmaceutical formulations (90% of sales) and APIs (active pharmaceutical ingredients), which represent 10% of sales. The markets with a leadership position include Cephalosporins, CVS and the Anti-Tuberculosis. The company was founded in 1968 by Dr. Desh Bandhu Gupta with a seed capital of 5000 Rs., which has grown to a business with a market cap of 41 840 Rs. Cr. (almost 6.9 billion USD). He still owns a significant portion of shares and remains at the helm of the company. Quality of management is one of the factors I consider when picking stocks, and founders almost always do a better job in growing the business, than a "maintenance" CEO brought from outside.
Over the last decade, the company has expanded geographically, with India representing only 27% of sales, and the majority coming from developed markets (58%), and other emerging markets (15%). Lupin is a leader in India's anti-tuberculosis market with a 44.7% market share, and the third largest company in the respiratory segment. Their aim is to enter geographies and therapies only with differentiated products to secure a competitive advantage. 24 out of it's 46 US generics rank no. 1 by market share, 37 of 46 rank in the top 3. The company has 116 products in it's pipeline (in various phases of research or production) that address an estimated 80 billion USD market in US alone. The US and EU formulation division recorded a sales growth of 47% last year accounting for 42% of total sales. Business growth in India reached 23%, with all of it's products doing better than the general market (data from 2013 Annual report):
Other markets of Lupin Ltd. include Australia, Japan (7th largest generic company), South Africa (5th largest), Philippines and several countries in Latin America and Middle East. This part of the business is only 7 years old and has grown 45% last year (higher than the 38% CAGR over the past 5 years).
Lupin is growing very rapidly, and has captured a dominant position in many markets. The company has current assets of 51 billion rupees, more than enough to cover total liabilities of 36 billion. Goodwill represents only 5% of total assets, and the company has reduced total days AR outstanding from 91 in 2012 to 85 in 2013. Receivables grew by 23%, what is a health sign given the 34% jump in sales. Operating cash flow in 2013 stood at 12.5 billion INR, Capex of 5.5 billion INR results in a free cash flow of 7 billion INR and FCF yield of 7.5%.
The stock trades at a trailing P/E of 27, and P/S of around 4 and pays a small dividend of 0.43%. It has got quite a run behind it, but I still think it's reasonably priced given it's future prospects. I always recommend using a stop-loss when buying stocks at new highs. That way you cut losses very quickly when the markets turn, while still enjoying the high potential should the uptrend continue.
Alembic Pharmaceuticals Limited is an Indian pharmaceutical company established in 1907, later spun off from Alembic Ltd. in 2010. The Company operates mainly in the generic (51%) and specialty therapy segments (49%). It is vertically integrated, meaning the company develops, manufactures and markets pharmaceutical products itself, without any intermediaries. Alembic is the market leader in the Macrolides segment of anti-infective drugs in India. It's Vadodara plant has the largest fermentation capacity in the country.
Management has been slowly shifting the whole company from generics to specialty pharmaceuticals, resulting in an explosion of margins and profits: EBITDA margins increased from 10% in 2010 to 16% now, and net profit has quadrupled over the same period. In other words, Alembic is targeting areas with low competition and high profit margins. The company has sales sales presence in 75 countries, and manufacturing facilities approved by regulatory bodies in developed markets. They increased their US portfolio of 3 products in 2010, to 15 in 2013, growing similarly in Europe from 1 to 5 products in the last 2-3 years. The company has many products in it's pipeline in various stages of approval, and plans to launch 8-10 every year. R&D expenses have grown by 26% last year, representing 5% of sales (4.2% in 2012). Four most recognized brands of Alembic (Azithral, Roxid, Althrocin and Wikoryl) are among top 300 pharmaceutical brands. Given these facts, management expects 30% CAGR of sales over the next two years, with significant margin expansion adding to an even greater profit growth.
The Indian pharmaceutical market is very similar to China. Local companies hold a dominant position, with generics making around 80% of total sales. Prices are very low, driven by intense competition. India is the 10th largest market by value, but 3rd largest by volume. The industry is expected to grow at 15% per year till 2020, outpacing an expected 7-10% GDP growth rate. In addition, many investors have realized India offers a low-cost high-quality manufacturing base for global pharmaceutical majors, which has recently caused an acquisition spree by both domestic and foreign companies: Mylan acquisition of Strides Arcolab, merger of Elder Pharmaceuticals and Torrent Pharma, or Gland Pharma bought by KKR.
Alembic Pharma is a very solid company with a clear growth plan and bright future ahead. With P/S of 3, and P/E ratio 21, the stock is very reasonably priced and offers a low risk entry with a high potential profit.
The Group produces drugs in threecategories: hepatitis, cardio cerebral diseases and others. Hepatitis currently represents 46% of sales, while cardio cerebral diseases account for 16% of revenues. Others is a mix of oncology, diabetes, respiratory, anti-infectious and nutrition medicines, accounting for 38% of revenues.
Sino Biopharmaceutical is one of the largest pharmaceutical companies in China, competing in a very fragmented industry. There are more than 3000 pharma companies in PRC, representing 70-80% of the market. The rest belongs to drug majors like GlaxoSmithKline, Pfizer, Novartis or Johnson & Johnson. This is in contrast with developed countries where the top 10 companies usually control half of the market. During 2013, several western drug makers have been accused of bribery (paying doctors to prescribe their medicine), which led to many hospitals avoiding these companies. GlaxoSmithKline even said chinese doctors refuse to meet their sales representatives. This further strenghtened the power and reputation of domestic pharmaceuticals. China's healthcare spending totals around 150 billion USD (one-third of USA), but grows at 25% per year, it has already become the third largest pharmaceutical market in the world. Their current plan is to bring the entire country under medicare in the next 10 years, strenghten medical infrastructure and streamline drug research and delivery.
Chinese pharmaceutical industry is characterized by lack of innovaion. Most companies simply copy products from western drug makers, or create cheap and sometimes very faulty alternatives. On the other hand, Sino Biopharma owns 324 patents and has 95 products under clinical trial or awaiting production approval (39 of those relating to oncology, which could be a new sales growth driver for them). Sino spends 8.7% of turnover on R&D, that's a bit lower than Pfizer's (PFE) 12.5% or Eli Lilly's (LLY) 25%. Their most significant product is Ruzhong, which is a hepatitis tablet, representing 20% of sales (as of September 2013). The group has grown sales by 30% per year (since 2008), accelerating to 34% in the last quarter, ROE stands at 20% with no long-term debt and almost 3 billion in cash and cash equivalents. High growth is expected from this stock, as can be seen by their P/E of 31 and P/S of 4. But that is the case with all best stocks, if you avoid companies with higher valuations, you will automatically miss some of market's best opportunities.
But after a lot of thought, I decided not to buy this one, their operating margins have declined from 26% to 21%, and net margins from 13% to 10.7% in the past five years. I like the business, I like the growth but I don't see a sustainable competitive advantage here, the chinese market is very competitive, they have captured a certain market share, but seem to be slowly losing it. I will monitor this stock further to see if I made a mistake and meanwhile look for other stocks to buy. Since I had some stuff already written about Sino stock, I published it, someone might find it useful.
Every day, I screen for interesting small caps breaking out from their lows on small volume. Today I take a closer look at IMRS and GALE:
IMRIS (IMRS) is Canadian medical company that produces VISIUS Surgical Theatre, a magnetic resonance device which helps doctors provide improved surgeries. Neurological hospitals are using this device to resect brain tumors, cure epilepsy, Parkinson's disease, stroke intervention, aneurysm, and Chiari malformation, and other neurological procedures using deep brain stimulation.
Advantage of the device is that the patient doesn’t have to be moved during surgery, therefore avoiding any potential health complications. High resolution images are available almost immediately, surgeons can take action according to them in real-time (almost 40% of doctors actually modify procedure after iMRI). Almost 8% of patients required additional surgeries after the first one, doctors using iMRI reduced this number to 0.
Recently , IMRS stock jumped 40% on positive news regarding their operations. President and CEO Jay Miller announced, that the total number of patients treated will approach 17 000 by the end of 2014, an increase of roughly 31% in one year over the previous eight years. Hospitals are starting to adopt the device and increase the number of operations and applications for it. The company estimates, that there are 3.6 million procedures around the world, which could be better served with iMRI, that means they are currently addressing 0.04% of the market. Sales for the last 9 months ending September rose to 36 mil. USD (12% increase), if the company captures at least 5% of it’s estimated potential, we could be looking at revenues of at least 4000 mil. USD per year.
IMRS stock is currently selling for 113 million, with 22 million shares floated and a 1.2% short float.
Galena (GALE) is a biopharmaceutical company developing targeted oncology treatments. It’s highly anticipated product is NeuVax, which is a vaccine created to prevent the recurrence of breast cancer in successfully healed patients. In addition, they started selling Abstral, a cancer pain tablet with a 400 mil. USD market potential. The vision of the company is to reduce the cash burn with Abstral and gain patient recognition in preparation for NeuVax launch. The drug reduced breast cancer recurrence from 25% to around 5% in the studied cases. It is currently in Phase 3, which will take considerable time to complete, but will be probably the only effective treatment available to patients. There are 40 000 people suffering from breast cancer recurrence in the US, with an additional 80 000 in EU.
The stock shot up 16% yesterday, after announcing they enrolled the first patient to Phase 2 trials of GALE-301 (Folate Binding Protein - FBP), what is a targeted vaccine aimed at preventing the recurrence of ovarian and endometrial cancers. Both of them are not as prevalent as breast cancer, but are much more aggressive and the chance of a successful treatment drastically declines after they return. There are not many therapies available right now, so any progress in this field would be of tremendous help to patients worldwide.
The company has a market cap of 544 million USD, a total float 104 mil and a short float of 15.3%. The stock hasn't been bought by any insiders recently. Both companies have a lot of potential but it I think IMRS would be a better buy right now, the stock has caught momentum and the company is already generating sales from it's product. Plus, it's a low float stock with insignificant short interest.
1. The Desire to be Right
This is the most prevalent reason for the destruction of traders. Everyone is interested in being right all the time, investors, market gurus, analysts and other pundits are obsessed with guessing correctly the next move. You can literally feel the adrenaline flowing through your body, when you call a stock and it shoots straight up. You don’t care about exiting the trade, or moving your stop-loss, you are just floating in the moment, enjoying the praise and awe of others. If you got into trading because of this feeling, you won’t make much money. In fact, you will lose everything you got. When you make a correct prediction, but you don’t take your profits, or you put a small amount into the trade, what good is it for? On the other hand, if you are right most of the time, but one trade wipes out your capital, what’s the point of trading, do you enjoy gambling so much?
I couldn’t care less if I’m right or wrong, the only important thing in trading is, how much money I make when I’m right, and how much I lose when I’m wrong. The sum of these two is my profit. Chasing a high win ratio doesn’t make sense and leads to the second most common mistake.
2. Cuttting Winners short and letting Losers run
The desire to be right is so strong, that it leads you to take profits quickly, because you are afraid the trade will turn back down and become a loser. Also, you try to pretend your losses don’t exist, hoping they will turn back up and prove you were right once again.
When you make a dollar 9 times out of 10, but lose 10 dollars on the last trade, you are losing money despite being 90% right. If I make 3 dollars on every profitable trade, and lose 1 dollar on a bad one, I can be wrong 70% of the time and still make 2 dollars of profit. Big money is made by portfolio concentration and large trends, if you take profits quickly, you will never catch these gains. Consequently, holding your losers destroys your capital over time and prevents you from participating in other more profitable trades.
3. Being a “News Junkie”
All traders and investors are led to believe, that watching stocks in their portfolio or CNBC news the whole day will give you an edge. That by looking at the same information that millions of people have already seen, you can glean a profitable idea that others have missed! Wake up. Doing that every single day is a huge waste of your life and energy. 95% of time there is absolutely nothing to be seen, and even if there is some big news, the stock prices will react far more quickly than you ever could. The things you read in news are useless, written after the fact, and will only hinder your trading or investing performance. Most of the analysts or financial commentators are amateurs, who just try to explain why the stock market went up or down today. They have never owned stocks and I bet their money is parked in a checking account. Warren Buffet summed it all up: “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway”.
By being glued to a screen all the time, you are missing out important long-term fundamentals of your stocks or the market as a whole. You could be studying investments, doing sports or spending time with your family. Instead, you become obsessed by meaningless short-term movements and start to trade in and out of positions, generating losses and destroying long-term returns.
Have you ever bought a stock, sold it few days or weeks later for a quick profit, and later watch it become a multibagger? Did you ever stop and think, that holding your stocks longer would generate a much higher return than trying to make a quick buck every day? All you need for success in investing or trading is a few big ideas and the patience to sit tight and let them run. Every trader goes through many small losses, but missing a big move is much worse. Remember Jesse Livermore: “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
5. Successful Trading is About Making Money, not Having Fun.
Every trader or investor enjoys the feeling of making money, but If you fail to keep emotions out of this, you won’t be left with any money at all. In fact, you need to learn to turn your excitement completely off and focus on trading. Each one of us needs to go through a very painful process to develop iron nerves and ego control and only after that we are able to achieve high profits. This means, that you need to have the discipline to do nothing. In other words, you have to sit and wait for the best opportunities, while others are having fun. As George Soros said: "If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring."
The only important figure in this business is your overall performance, your profit. It doesn’t matter how many of your calls were correct, nobody cares if you predict the next big crisis or if you picked a stock that went up 200%. The only thing separating professionals from amateurs is long-term profitability.
TCS is an IT services, consulting and business solutions company. They provide end-to-end technology and related services to global businesses. It is the second largest IT services company in the world (behind IBM), and the most valuable company in India by market capitalization. The company has strong domain expertise in banking, financial services, insurance, consumer goods, retail, telecom, media, manufacturing, healthcare and many others.
TCS’ services portfolio consists of application development and maintenance (42.8%), business process outsourcing (12.5%, enterprise solutions & business intelligence (15.2%), IT infrastructure services (11.5%), assurance services (7.7%), engineering and industrial services (4.6%), asset leveraged solutions and consulting (6%). Also, they have launched several new offerings in digital technologies services - mobility, social computing, big data and cloud computing.
Given it's sheer size and scope, the company can offer it's services on a global basis, using it's GNDM platform (Global Network Delivery), which is recognized as an industry benchmark. It means, that they can provide services and support your business anytime anywhere in the world. This gives them a huge advantage against any newcomers, plus maintains a low cost base, as most of it's employee costs come from India (47%). They are also investing more into R&D (718 Rs Cr vs. 525 Rs Cr in 2012), although it still represents around 1.5% of it's revenues. However, the company was recognized by Forbes magazine as one of the most innovative in the world, being both the highest ranked IT and Indian company on the list. Currently, they have 1280 patent applications pending, with 81 already approved.
TCS has grown sales by 28%, EPS by 33% and maintains a ROE of over 30% in the past year. They have very little long term debt and intangible assets make up only 8% of the total base, suggesting they are not overpaying too much for acquisitions. Revenue from repeat customers makes up 98.61% of total, retention of employees at their core IT business stands at 90%, very high compared to some of it's competitors. I really like the business overall, they are an established leader in many regions and fields, plus they have a lot of room in under-penetrated markets as well. The stock is trading at a relatively high level, but it's valuation is still ok. Future growth and innovation strategy is sound, providing a catalyst for further stock advance. I believe one can't do bad over the long-term by buying growing businesses at fair prices, so I'm adding this one to my portfolio.
The vision to see them, courage to buy them and patience to hold them. - Thomas Phelps