Growth and Value Stock Number Three

 

Stock Market Video

Growth AND Value Stock #3: Celgene (CELG)

This Week's Fortune Cookie

In Case You Missed It

In this week’s Stock Market Video, I point out that the massive market hiccup on Tuesday, October 8, was likely a one-off move, not the start of a larger correction. That doesn’t mean that a larger correction isn’t possible, it just means that the longer-term factors that will produce any such move aren’t changed by this mini-meltdown. It’s time to be a little cautious, weeding out or tightening your leash on your weakest holdings and keeping new buying on low. I also look at some strong stocks in selected sectors.

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Growth AND Value Stock #3: Celgene (CELG)

The third of my 10 stocks that share growth and value characteristics is Celgene (CELG), a pharmaceutical company with a market cap of more than $63 billion, nearly $6 billion in annual sales and an after-tax profit margin of 40.8%.

These numbers are not typical of the growth stocks that show up every week in Cabot Top Ten Trader, but they’re not outlandish, either. A look at the long-term chart for CELG will show you why.

Pharmaceutical companies are closer to thoroughbred racing stables than to factories turning out widgets. While a successful stable will make money from boarding, breeding and selling horses, the only way to strike it rich is to have a horse that wins races. A horse that wins a Triple Crown race generates bucketloads of money.

Pharmas and biopharmas that develop a promising drug and successfully shepherd it through the grueling clinical trial and FDA approval process can turn from unprofitable to profitable in short order.

For Celgene, the Triple Crown winner is Revlimid, an oral cancer drug that’s used to fight multiple myeloma. Of Celgene’s $5.5 billion in revenue in 2012, 68% of it came from sales of Revlimid, which costs well north of $150,000 a year.

Vidaza, Celgene’s treatment for some kinds of bone marrow cancers and blood cell disorders, costs $6,000 per month, with an average treatment duration of 10 months. This brought in 15% of 2012 revenues. Abraxane, a treatment for certain types of breast and pancreatic cancer that costs between $6,000 and $8,000 per month, brought in 8% of 2012 revenues.

The economics of drug treatments are fairly staggering, but you can imagine what an investor in Celgene must be thinking when one of its candidate drugs—the company has a robust pipeline of new drugs and new uses for old drugs in clinical trials—approaches a successful conclusion.

Celgene was first featured in Cabot Top Ten Trader back in March 2003, more than two years before Revlimid was finally approved by the FDA. The company was finding support from investors who had been following the trials results, and were getting their bets down early. The stock was trading at a split-adjusted 6.52.

CELG went on to top 77 in August 2008, which illustrates why growth investors with a taste for risk love drug companies.

At that point, CELG (which doesn’t pay a dividend) ran out of good news, and the stock began trading sideways, dipping to as low as 37 in April 2009. The stock finished 2012 trading at 78.

At that point, CELG looked like a good buy to the value screens used by Cabot Benjamin Graham Value Investor. The stock is still listed in Value Investor with a Maximum Buy Price of 77.88. Roy Ward, Value Investor’s chief analyst, calculated that the stock could be held until it reached a Minimum Sell Price of 112.93, at which point it would be fairly valued and should be sold.

CELG tagged that minimum sell price during the week of March 11, which would have handed a value investor a handsome 45% return in just three months.

But as a growth investor, I have to point out the main beef I have with value investors, which is that they sell stocks that are in strong growth trends! A value investor who sold CELG at 113 would have missed out on a continuing rally that pushed CELG as high as 158 on October 4. (It’s trading at 153 as I write this.)

My only conclusion to the whole story is that stocks that combine the fundamental soundness and low valuation of the value discipline and the momentum of the growth discipline are a pleasure to watch in action.

Next time I’ll feature another biopharma, the fourth in my series of stocks that sit happily on both sides of the Growth/Value table.

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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies and Contrary Opinion buttons by clicking here.

Tim’s Comment: General Patton was one of the greatest U.S. generals that ever lived; he led from the front, and was far fonder of offense than defense. Yet he was not rash. And that is exactly how the greatest growth investors act as well, aggressively, but not rashly. Ironically, General Patton died from injuries suffered in an accident when the car in which he was a passenger was hit by a 2½ ton GMC U.S. Army truck. Some risks you just can't control.

Paul’s Comment: Everything has risk, even some things that people used to view as hedges against risk, like T-bills, bond funds and a sock full of Krugerrands under the mattress. Anyone who has ever put six quarters into a vending machine knows about risk. But Patton knew war inside out, and he knew that the biggest risk lay in tentative action, luke warm execution and fuzzy goals. He would have made a heck of a growth investor.

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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 10/7/13—How to Use Stop-Losses on Small-Cap Stocks

Tom Garrity, editor of Cabot Small-Cap Confidential, delves into stop-losses in this issue. Tom advises using mental stops rather than stop orders to brokers. He also prefers to give small-caps plenty of leash, since they’re a volatile group.

Cabot Wealth Advisory 10/8/13—Cabot’s Top Growth Investing Rules

In this issue, I list the 20 rules for growth investing that Cabot has developed over the years. It’s a ton of good advice that took years of hard lessons to put together, and following the rules can have a huge impact on your results. Stock discussed: Buffalo Wild Wings (BWLD).

Cabot Wealth Advisory 10/10/13—It’s What You Know that Gets You in Trouble

Mike Cintolo, who helms Cabot Market Letter, runs down a few wrong ideas that people have about investing or the economy that keep them from the extra-base hits that really provide your portfolio’s gains for the year. Stock discussed: Continental Resources (CLR)

Have a good weekend,

Paul Goodwin
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory
P.S.

Follow our Growth and Value Stocks Series by subscribing to our free e-letter Cabot Wealth Advisory and get all recommendations delivered right to your inbox!

Related Articles: 

Growth and Value Stock #1

Growth and Value Stock #2



Paul Goodwin can be found on Google Plus.

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