The Rise of Regeneron Pharmaceuticals

With graduation approaching faster than a Randy Johnson fastball, I’ve been doing an insane amount of networking to find some exciting opportunities for next year.  One of the analysts I spoke to wanted me to create a stock pitch in 5 pages or less.  The requirements were to choose any equity I thought could gain a double digit return with a one year time horizon using fundamental analysis.  As a result, I chose Regeneron (REGN) – a position I’ve held for over a year already.  The stock has had an incredible run over the last two years, but my thesis still remains that the company’s pipeline is greatly undervalued.  I figured I’d post my final report on the blog to spark some debate on whether or not readers agree with my price target of $249.

Click the link below to view the PDF:

Regeneron (REGN) Stock Pitch

I’d love to hear any thoughts, comments or constructive criticism you have on the analysis!

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The Opportunity Cost Of Information

I’ve been struggling a lot recently with the opportunity cost of information. There are times when I’m tempted to spend an entire day weeding through my Google Reader subscriptions…but would that really make me a better investor? I’m usually reminded of this after I send others any interesting posts I come across.  The majority of responses consist of “That’s great…now how is this actionable?” The question never fails to stop me in my tracks, and it continually drives me crazy because its true.

David Merkel over at Aleph Blog attributes reading from many different sources as his #1 investment idea generator – which is certainly true. I’ve written in the past one of my main motivations to read unconventional blogs is to get a sense of what possibilities exist in the market that I may not realize on my own. That said, as I’m writing this post with 317 unread blog posts in my Google Reader, how much is too much? What percentage of these blog posts are actionable and will make me a better or more profitable investor?

Ultimately, pushing to read more articles each day simply gives me a false sense of security. Certainly, the more I know about people’s opinions of market trends and action the more likely I am to make money…right? I’ve yet to be convinced. What really helps me make progress, learn lessons, and take action is when I sit down to write a blog post of my own. It forces me to string together several articles and generate my own ideas on which I can take action. I’m able to send it out to various people in my network and receive feedback. Not only does it help me generate ideas, but I certainly have to put in my due diligence in order to prove my point. If I can’t sell it to others, why would I commit my own money to it?

By reading all 317 of these posts, what am I neglecting to do that would truly be actionable or beneficial? Personally, I think I miss out on networking and publishing my own blog posts. I’ve done a ton of networking over the years, and I actually really enjoy it. My favorite type of person to meet is the relatively older gentleman that’s already made it in life. He still works because he enjoys what he’s doing, but his main focus is spending time with the grand-kids. These guys have nothing to prove and simply tell it like it is. It always amazes me how little they care about the latest trends and fads going on in the market. They’ve seen a million come and go in their day. They take an objective approach to everything, which I truly admire. I think it’s incredibly important to get out and meet these people in person. Their knowledge, experience, and advice will never be conveyed in a blog post.

At the same time, I’ve been trying to limit my blog post intake and focus more on reading primary newspaper articles. While it may be more entertaining to read blogs, it’s difficult to disagree with a “successful/well-known” person’s interpretation of the market. Instead of knowing so much about which bloggers are bullish vs. bearish, I’m making a commitment to read newspaper articles about recent events and generate my own opinions and expectations in a blog post – which should lead to increased action. I love blogging my thoughts because it ensures everything I publish is well thought out and readers do a great job finding holes in my logic or pointing out opposing viewpoints. The action of blogging certainly creates a great habit of shaping and expressing my own opinions.

I’d love to hear your personal opportunity costs of information in the comments section and spark some debate!

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Cytosorbents’ Unique Financing Deal

My main speculative play over the past two years has been in a company called Cytosorbents Inc ($CTSO).  The video above gives a great 3 minute overview of the company’s technology and business model.  However, the main problem for the stock throughout 2012 was a pretty hefty dilutive financing deal.  Thankfully, the CEO – Dr. Phillip Chan – has promised to avoid any dilutive deals going forward and has mainly focused on obtaining grants from DARPA and other US Defense/Medical groups.  Last week, the company announced they had obtained $400,000 in non-dilutive financing, but the stock price still dropped 8%.  While the stock is thinly traded and has a small float, I still believe this was very positive news for the company – so I did some digging.

$CTSO released a press release on Monday stating they had sold their net operating losses (NOL) in order to acquire extra cash.  In all honesty, I had never heard of selling NOL’s or what that actually meant.  Turns out, there’s more to New Jersey than Ed Hardy and beach clubs.  In an effort to further promote the technology and biotech communities in NJ, the state has allowed any unprofitable company in the biotech/tech sector with less than 225 employees to sell their net operating losses.  All it takes is a $2,500 application fee and the state of New Jersey will allocate a portion of their $60M cap to your business and purchase your NOL’s.

But to figure out how NOL’s can be bought and sold I had to turn to an expert CFO (a.k.a my dad) – so bear with me for a bit of a “bean counter” explanation.  A net operating loss is the result of losses incurred over the years – i.e cumulative losses of a business.  According to Federal and State tax laws you’re allowed to “carry back” the losses you paid in the past if you are profitable or to “store up” the losses for when you eventually start becoming profitable and can offset the profits using the net operating losses.  Therefore, you don’t need to pay taxes until you’ve obtained a cumulative profit for your business.  For businesses that have already obtained a cumulative profit, there is an incentive to “buy” an unprofitable company’s NOL and write it off as a loss.  From a federal standpoint, NOL’s are not transferrable and can’t be bought/sold.  However, in order to spark investment and performance in certain industries, New Jersey has made this legal.

As for $CTSO, this is a sweet deal and in no way, shape, or form is it dilutive.  After watching the stock trade over the last two years, especially around news events, my hunch is that it’s mainly held by doctors – not financial types.  The company has a plethora of catalysts coming in 2013 and hopefully expectations will become more reasonable going forward.

For further details on the New Jersey’s net operating loss program take a look at the official description here and FAQ here.

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Valuation is an Art, Not a Science – Twitter Acquires Crashlytics

Picasso

Yesterday was awesome!  I woke up to see my latest post had been featured on Josh Brown’s popular blog, The Reformed Broker, which was super cool and allowed me to receive some great feedback via Twitter!  Then, around 5 pm Eastern, Crashlytics announced it had been acquired by Twitter.  Crashlytics is particularly special to me because I interned for the company from March 2012 until this past August.  Before taking the job, I had set a goal and laid out a strategy to find a start-up to work for that had serious potential of making it big.  By doing so, I was able to act as my own venture capitalist and conduct my own due diligence in order to pick the right company to work for.  My journey and the strategy as a whole was documented in a prior blog post and is definitely worth the read.  As a result, after hearing the news yesterday, I was ecstatic for the entire team at Crashlytics.  When I first joined the team in March there were 6 employees working in a tiny, one-bedroom apartment.  By the time I went back to school in August, the company had grown to 12 employees and a freshly constructed office space of their own.  Since then, growth has continued to skyrocket and they haven’t looked back.  The entire team has done an incredible job working as hard as they can, and it has quickly paid off.

Ultimately, I feel very fortunate to have been granted the opportunity to work for such a great company at an incredible time in their corporate history.  I certainly wasn’t around from day 1, but it was awesome to be able to experience the effects on the company after raising $5M in venture backed financing and seeing them truly take off.  The spring/summer was definitely a great learning experience and wasn’t anything close to what I’ve been taught in business school.

What I find most interesting, however, is how the entire internship and M&A process has related to my interest in investment banking, finance, and portfolio management.  As you can see from my LinkedIn profile, I don’t have any direct investment banking experience, yet I’m still trying really hard to break into the industry after graduation.  I have quickly found that the ultimate catch-22 of the industry is that you can’t work in investment banking unless you have prior investment banking experience – which doesn’t always make sense to me.  We’re constantly berated in business school and I’ve been told by many experienced analysts that valuation is an art, not a science.  As a result, I’m amazed how undervalued operating experience is in financial industries that are so heavily dependent upon accurate valuations of other companies.  For example, in venture capital, operating experience is almost required as it’s one of the most important selling points for entrepreneurs.  Not only will the VC firm give you capital, but they will expertly guide and advise you given their former operating experience.  Shouldn’t that also apply to investment banking?  Wouldn’t clients be more willing to go to a specific investment bank because their bankers know the intricacies of the business, are well-connected/network with other companies in the sector, and are able to unlock hidden value that may not be directly found on the balance sheet?

This thought came to mind today because there have been several blog posts written questioning the motivation behind Twitter’s acquisition of Crashlytics.  As a mobile software company focused on reporting application crashes, what are the synergies Twitter is trying to create?  I can be almost certain that if Twitter hired run of the mill investment bankers to find them an acquisition target, they would never in a million years have thought of purchasing Crashlytics.  I have a very good feeling the incredible network of the Crashlytics’ founders, investors, and employees is what first shed some light on these possible synergies.  Wouldn’t you think, as a banking analyst, that knowing how powerful of a network a company had would greatly affect the value it could fetch when put up for sale?  Why aren’t these qualitative factors (and the knowledge required to formulate them) ever sought after when recruiting for investment banking positions?  Valuation is an art, not a science.

I truly believe, that having analysts at a firm that have legitimate operating experience in the software industry, would have better been able to value a business like Crashlytics.  In fact, I gave a presentation on the company in a venture capital class at Babson last May.  A friend of mine in the class who had worked for a top tier investment bank over the summer (and signed an offer to work full-time starting the next summer) raised her hand and stated that she didn’t see how Crashlytics could be around very long because the market was too small, there’s an incredible amount of mobile software out right now, and they don’t make any money.  From an outsider’s perspective, her response makes sense.  But the true value of the business is the vision of the founders, the network of the company, the culture of the firm, the work ethic of the employees – nothing that would ever show up on any financial statement or model.

I believe using a DCF, LBO, comparable companies, precedent transactions and all of the other models we’re taught in business school are a great first step and get analysts on the right track to finding a company’s true value.  However, it’s the truly qualitative factors – that people who’ve worked  inside the industry will be able to easily find out – that will really unlock synergies and fetch higher values.  For example, someone experienced in a given industry could tell you what types of management styles are prevalent amongst companies or by certain prominent founders.  Different management styles, personalities, and company culture could give great clues as to how a company will spend their cash, how they will decide to grow, and which companies they may mesh better with.  Of course, sector specific focuses by banks and analysts are able to see this value to a certain extent, but is operating experience really a liability to job candidates as opposed to valuation/banking experience?  Artists are taught to think outside of the box while financial modelers are trained as if they’re practicing a science.  Just something to think about…

Again, congratulations to the entire team at Crashlytics and their investors for their hard work and dedication.  They certainly deserve the outcome.  For everyone else, let this Twitter acquisition serve as a great example of ways companies and their bankers can think outside of the box to fetch value and synergies.

**I wish I had equity in the company!

Follow @zringer21 for more commentary and updates!

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Wait…Normal Markets Really Exist?!

etrade

I interjected in a Twitter conversation yesterday between the esteemed Josh Brown and Keith McCullough that sparked an interesting thought.  I’m currently 21 years old and have been involved in the markets (actually investing and researching) since I was a sophomore in high school – which just so happened to be the end of 2007.  Looking back on everything, I’ve learned an incredible amount and gained great experience (albeit losing a fair amount of money in the process) in some incredibly turbulent markets and tumultuous times which, frankly, have baffled a significant amount of “experts.”  Because of this, my view of normal is completely skewed from the older generations of pros and market analysts.  In fact, I don’t even know what normal is!

That said, I am certainly not at a disadvantage by being young and interacting in a market that could be considered a standard deviation or two…or three away from normal.  For starters, there is no argument that this is the best possible time in my career to have learned some of the lessons that I did.  If my (and my generation’s) first bear market were to have come much later in our careers, it could have been much more devastating to our net worth, job status, marital status, etc.  You name it.

Second, I have learned very few people can correctly time the market by calling tops/bottoms.  I’m certainly not a black swan, but going forward in my career, I can assure you I will always be cautious of unexpected events and factor these risks into my portfolio.  I still have a hard time generating scenarios through “what if” analysis because, frankly, I haven’t seen close to everything there is to see.  For example, I would never have been able to say “what if a country leaves the Euro” and plan for those risks.  However, I’ve learned how great of an asset this analysis can be for portfolio managers and frequently work on generating such scenarios.  Because I’m unaware of so many of these possibilities, I’ve taken to reading as many blogs and newspapers (from different countries) as I can in order to get a better sense of what ideas are out there.  I’ve spoken to plenty of older investors who write-off blogs like ZeroHedge as winey conspiracy theorists venting about the world, but it can be one of the greatest ways to think about ideas coming from left field and help to better prevent unnecessary risk in my portfolio.  Plan for the worst, hope for the best…lesson learned.

Most importantly, I’ve learned there’s always a bull market somewhere – it just takes some digging.  I’ve gotten the perception from older investors that emerging markets as well as asset classes other than stocks/bonds are exotic and untouchable.  Look how popular the FOREX markets have become for retail investors in the past 4-5 years.  Every book I’ve read on investing has usually focused on U.S equity and bond markets, but we’ve seen over the last few years that foreign markets and asset classes can present incredible opportunities – hence, the rise of ETFs.  I’ve never had enough capital to open an account on margin, and therefore, I’m unable to short stocks.  As a result, I’ve been forced to look for bullish markets across the globe.  I think the next generation of analysts, portfolio managers, and everyday traders/investors are going to be much more accustomed to “exotic” markets and assets given their market upbringing.

At the end of the day, being 21 during such a volatile couple of years certainly hasn’t helped my current portfolio, but going forward it will most definitely shape my investing strategy and perception of risk.  I’ll be entering the full-time workforce this summer (hopefully), and so will everyone else who began investing around the 2008 financial crisis.  Look out for some interesting investing trends in the years to come that may have been shaped by our initial experiences in the market.

Follow @zringer21 for more commentary and updates!

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A Rumble in the Billionaire Jungle

Ackman Icahn

 

 

 

 

 

 

 

 

By now, I’m sure everyone has heard of the tiff going on between Bill Ackman and Carl Icahn.  Frankly, I think it’s overrated and CNBC has done more to leverage the drama than the London Whale used in his derivatives portfolio.  That said, I was glued to my 19″ dorm room TV this afternoon to watch the slugfest unfold.  The entire bout can be seen here for anyone who missed it.

The vast majority of bloggers and TV analysts have been focusing on the rich history between these two moguls; however, I think the most important aspects of the entire debate were made by Carl Icahn and have been vastly overlooked.  Specifically:

1)  If Ackman wanted to be such a nice guy, why didn’t he just go to the SEC?

Touche, Mr. Icahn!  Obviously, there is a large motive for Ackman to make a killing for his investors if he’s right.  I highly doubt he’ll be as transparent with his tax returns to show how much of the profit actually goes to charity as he’s been with his investment thesis on $HLF.  At this point, he’s just as big of a pump n’ dumper as those lunatics on the Yahoo Finance message boards.  The lesson this taught me, though, has been no matter how right you may be about a fundamental investment thesis on a particular stock, there is no guarantee the market will realize the “truth.”  There needs to be a catalyst to move a stock price in any direction – especially if it’s going to $0.  Ackman has been on record saying he was short $HLF for the past year and a half.  We can speculate he was feeling the pressure of a lackluster year in terms of portfolio performance and needed to create the catalyst himself.  Not the most ethical route he could have taken, but it shows us how much more patient and liquid the market is compared to any portfolio on the planet.

2)  Incredibly poor risk management from the Ackman corner of the ring

Again, Ackman has been on record saying he has 20% of his entire portfolio invested in his $HLF position.  Technically, his investors can pull their money out of the fund at any time which would get him into quite the pickle.  More importantly, however, during the CNBC interview, Icahn gave the possibility of an investor stepping in and purchasing $HLF.  No matter how right Ackman may be about Herbalife, if a wealthy investor or hedge fund/PE fund disagrees with him and sees the price of $HLF cut in half, what’s to stop them from issuing a tender offer and trying to buy the company outright.  Icahn does it all the time!  It takes a great deal of time and effort for any company’s share price to fall to $0.  If $HLF gets purchased or even rumors get leaked, the share price will continue to rise and Pershing Square will be in a world of hurt.  Sure, as Ackman states on the call, that idea isn’t the most likely one out there, but it is certainly possible.  If that happens, he loses 20% of his entire portfolio and his investors will be running for the hills!  That’s terrible risk management, plain and simple.

3)  Where there’s smoke, there’s fire

Given the drama that has unfolded, we can be pretty certain that neither of these Wall Street giants are the most ethical guys on the planet, nor the most charitable.  It just goes to show you how careful one must be in this business.  Greed and self-interest can do some nasty things.  Unfortunately, we all need to learn to plan for the worst (aka lawyer up and consider every single possible risk) while hoping for the best.

While I greatly enjoyed the drama that unfolded on CNBC today, hopefully it can also be used to prevent unnecessary risks in your own portfolio or business deals.  You can learn a great deal from the mistakes of others.

PS I’m definitely putting a “shmuck insurance” clause into my next fraternity dues contract.

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Today’s Volatile Market Expectations

Market sentiment is something that has really piqued my interest lately.  Since the day I started in the markets, I’ve constantly been told that investors’ expectations of future earnings is what drives the stock market.  It wasn’t until I read an analogy, however, that the importance of this phrase truly clicked for me.  In a well-known McKinsey & Company book called “Valuation” by Copeland, Koller, and Murrin the authors describe managing the finances of a public company like running on a treadmill.  If you imagine the market’s expectations as the speed of a treadmill and a public company as the runner it begins to become more clear.  When investor expectations become more bullish, the speed of the treadmill increases (and continues running at that speed).  As a result, a company’s earnings/performance needs to be better than the market’s expectations in order to gain any ground on the treadmill (stock price increases).  If they fail to beat these expectations, the runner begins to fall farther and farther behind the speed of the treadmill.  However, it gets to a point where a company can have a history of beating expectations that the market’s expectations simply get raised too high.  As a result, the most profitable company in the world may still experience a falling stock price by not being able to beat these unrealistic expectations.

A great example of this over the last week has been $AAPL.  Everyone and their mother has written articles attempting to explain the falling share price of America’s beloved stock recently, and many of them may certainly be right.  To me, however, the answer is simple.  $AAPL has done so well over the years that expectations have simply gotten too high.  One slip up in iPhone 5 sales and we’ve experienced a massive sell-off in the stock.  Tim Cook and company just couldn’t continue running 5 minute miles.

Thankfully, I’m not hear to rant about $AAPL.  The treadmill analogy has caused me to pay a lot more attention to market expectations recently.  I think we can all agree the month or two leading up to Fiscal Cliff shenanigans consisted of some very bearish expectations.  Surprisingly, all of the press during this time almost completely disregarded the Euro Crisis.  I find it pretty hard to believe that Angela Merkel’s quote regarding the health of the EU has finally been listened to and acted upon by businesses and investors.  Nevertheless, we saw a nice rally in European equity indexes and especially select financials ($SAN is my current favorite).   Further, once January 1st came and went we’ve seen a nice pickup in US Equity markets as the majority of financial blogs have began focusing on the 2013 bull market…

Despite the large number of bullish articles and posts this weekend, bloggers/journalists are beginning to second guess themselves.  Debates about a secular bull market and fake rallies have all been argued for today.  Frankly, the vast majority of bullish articles have come in the last week and I can’t find any reasons why the bearish arguments (from former bullish investors, writers, and ranters) came out of the blue today.  While this has caused me a great deal of confusion, I think it’s actually a good sign.  It’s still very early in earnings season which means the bearish sentiment should give rise to some nice rallies after healthier than expected companies end up beating estimates.  $IBM was today’s prime example.  I’m hoping for a nice little sell off in order to pick up some names I’m confident in before they announce earnings and hopefully fetch some nice gains.

From here on out, I’ll be using this blog as a trade journal as well as to clear my thoughts and observations on the markets.  More to come this week!

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