Wednesday, October 8, 2014

Stocks DD Opines : A ruling in the Banana Republic creates a brouhaha and How will Ball Street Journal editorialize it ?


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

Manshattan is submerged by a Flood, a huge calamity. Huge loss is anticipated and there are no private financiers. Anticipating an Armageddon, the Banana Republic Govt writes the HERO law on Manshattan and takes over to support and salvage the properties, in return for a 10% stake in all the private properties in Manshattan, including the private penthouse of a Ball Street Journal reporter. 2 months later the Floods subside and things start to look significantly better. Private financiers are available. However the Banana Republic is beset with its own deficit problems. The Banana Republic govt, in its wisdom, uses an egregiously outdated Manshattan Flood forecast and says we anticipate more money for flood support and hence we will take 100% ownership of all private properties in Manshattan (including BSJ's famous reporter) and all owners of private homes in Manshattan now immediately become renters of the same. Moreover the Govt does not talk to Private financiers who were willing to finance the flood recovery at significantly lower cost.
Manshattan ex-home owners(now renters) file a suit in the Courts of the Banana Republic alleging theft of their homes by the Banana Republic Govt. The Judge presiding over the case rules the HERO law gives Banana Republic Govt the right to 'hero'ically throw out the constitution including the private property rights and No Banana Republic court could even hear the case as guaranteed by the 5th amendment of the Banana Republic's constitution. The Ball street journal Reporter whose home has just been siezed by the Banana Republic, has been told to write a story on this  ? 
What will the Ball street Journal reporter write ? 

If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Friday, August 29, 2014

Stocks DD Opines: An investment methodology


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: I am NOT a registered investment advisor. Investing in stocks is very risky. Please consult your RIA and read all the disclaimer here.

Invest in quality stocks
1. Invest in Strong businesses (high barriers to entry and historically less competition) 
2. Invest in Management with excellent track record for shareholder value creation. 
3. Invest at undervalued prices

Invest in special situations 
1. Firms in temporary Distress 
2. Drug development firms, with an asymmetric reward/risk...where you have strong conviction on an event (Eg: Clinical event). For example, reward could change valuation by 6 times and risk could shave it by 50%. 
3. Firms with huge growth potential but growth is not factored in the price today. (Eg: MMYT 2 years ago)

Where to scout for ideas ?
1. Look for the stocks that the best Funds (that have a good 10-15 year return history) have recently increased position and is in their Top 5 of their portfolio. You can see this in whalewisdom
  • Pershing Square
  • Carl Icahn
  • Baupost
  • Perceptive Advisors
  • Baker Brothers
  • Greenhorn
  • Orbimed
2. If fundamentals have not changed since these funds took their huge positions, research their stock thesis, if publicly available. Activist funds generally publish their thesis. (Avoid shorting as it entails limitless risk)
3. Read the stock coverage in Seeking Alpha including comments
4. Listen to 2 years of Conference calls from Management to get a sense of business and management. Does management sound and act honest and accountable to shareholders and are they dedicated to shareholders.
5. Go over their last 2-3 years of 10-K's and 10-Q's (esp Business, Management outlook, Risk Factors)
6. Look at stock chart to understand how it has reacted to news/business fundamentals
7. Try to develop the bull thesis. Make sure it is not value trap (look for business trends, governance risk, dilution risk, etc) before buying.
8. Sell purely based on valuation, or if a better investment comes along. Good businesses with management having a track record for shareholder value creation can remain in the portfolio even if they are fairly valued.
9. Have a concentrated portfolio
10. Frequently engage with management of the stocks you own. Ask them, "how they plan to improve shareholder value?" Provide ideas or solutions to improve shareholders value. Compliment them, if they have done a good job for shareholders

If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Wednesday, August 27, 2014

Stocks DD Cites: Could Fannie Mae relist in NYSE?


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

http://seekingalpha.com/news/1955705-fannie-mae-job-listing-sends-stock-higher

The GSE job posting that caused this speculation. This could be a red herring (one never knows).
->Link
->Link
Keep in mind, shareholders like Fairholme have rightfully asked the Fannie Mae Board of Directors to re-list the stock in NYSE. Link

It is my opinion relisting is very significant, if at all it happens. Remember most mutual funds and index funds are barred from investing in a OTC stock. 

If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Thursday, August 14, 2014

Stocks DD Cites and Opines: Funds (including one of the best biotech funds, Perceptive advisors) significantly increase holdings in Taro


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: Long Taro.

Here is Q2 Whale wisdom 13F filings- link

As Taro continues to deliver on adding shareholder value, funds have significantly increased their stake. After >120% increase in share price from last year, Taro in June 2014 announced significant price hikes; This, in my opinion, is a signal that the board is continuing its intent on building value for ALL shareholders (as it should be; all shareholders are the owners). Taro's cash at the end of Q2 was ~$650m, expected to grow significantly in the 2nd half. In SUN's Aug 13th earnings call, Mr Shanghvi responding to an analyst question on the use of Taro's $650m cash said "Taro continues to look at potential acquisition opportunities. But we will remain disciplined about acquisition like we have been in SUN also. It needs to make long term business sense in terms of yield expectation post-synergy". This can be listened to between 27-30 min into the call. (I like Taro to lower risk profile and grow inorganically. I would like them look at specialty assets beyond just Derma, for example, an Opthalmology asset like Opthotech.) 

Notable Q2 Institutional shareholding change - Top 10 shareholders hold greater than 4 million shares (30%) out of 13.33 million minority/float shares
  • Consonance founder Mr. Blutt, a physician-businessman was a board member and part of the Corp Governance committee at Questcor. 
  • Perceptive Advisors in a dissidence vote successfully changed the entire Board at Penwest Pharma in 2010
  • While Bluemountain reduced its holdings, we have seen  Schroder, Consonance, Perceptive, Hotchkis, Renaissance and Acadian all buy into Taro. Together the top 10 hold greater than 4 million shares (30%) out of 13.33 million minority/float shares. This is a significant development as Israel provides minority shareholders significant voice and protections including a vote on the 2 independent director seats. There is a suit by Blue mountain and Iszo capital in Israel challenging the last proxy vote for independent director election. Please note that the margin of defeat for minority nominees wasn't wide. Here is Bluemountain's request for investigation of the proxy vote. Note that ALL current members of the Board are nominees from majority.
  • Consonance capital's founder Mitchell Blutt is a physician businessman with significant investment and medical experience and had served on the board and the corporate governance committee of Questcor. As a shareholder, I would like to see such experienced minds contribute ideas (even if, passively) and help take our company to new heights.
  • Joseph Edelman leads Perceptive Advisors and since 1999 the fund has returned an annualized 30.2%. Last year, the fund returned about 48%. Edelman works with six biotech analysts.  Ahead of Amicus P3 data release, Perceptive advisors significantly increased its holdings in FOLD in Q2. Amicus(FOLD) released data in August. The stock has since tripled from Q2. You can see Perceptive's Q2 activity and their current top holdings here
  • In addition, other green shoots can be seen in the Q2 13F filings. Taro is finally starting to be noticed by the most ubiquitous mutual funds of America namely the Dimensional fund advisors, Janus Capital, etc. This is great for the long term as these big mutual funds make the market in most of the listed stocks in blue chip companies. 
Valuation notes: 
Credit Suisse's Mumbai-based analyst recently in coming up with $150 price target has made the following assumptions:
  1. Taken into account only half of the $300m expected EBITDA increase due to the June price hikes. 
  2. Used 9 times EBITDA in valuing Taro (The Agila transaction that closed in Dec 2013 happened at 18.6 times EBITDA)
  3. ROW market potential and Novexatin ($6b Onychomycosis NDA opportunity) have no mention in the report.


ISZO CAPITAL MANAGEMENT LP1,104,168$ 154,849,00080.27%73.74%140
HOTCHKIS & WILEY CAPITAL MANAGEMENT LLC510,952$ 71,656,0000.25%0.19%8955,700
CONSONANCE CAPITAL MANAGEMENT LP378,372$ 53,063,0007.89%4.55%3103,140
RENAISSANCE TECHNOLOGIES LLC371,200$ 52,057,0000.12%0.07%182102,800
SCHRODER INVESTMENT MANAGEMENT GROUP310,800$ 43,586,5920.05%0.00303310,800
PERCEPTIVE ADVISORS LLC301,333$ 42,260,0004.15%1.13%6204,322
GREYWOLF CAPITAL MANAGEMENT LP277,936$ 38,978,0005.77%6.29%63,751
RAGING CAPITAL MANAGEMENT, LLC253,236$ 35,514,0003.78%5.08%96,378
BLUEMOUNTAIN CAPITAL MANAGEMENT, LLC192,389$ 26,981,0000.46%0.86%59285,999
ACADIAN ASSET MANAGEMENT LLC178,791$ 25,071,0000.12%0.02%183139,691
KENNEDY CAPITAL MANAGEMENT, INC.100,711$ 14,124,0000.26%0.21%111639
MOAB CAPITAL PARTNERS LLC93,133$ 13,061,0006.27%4.54%5300
MORGAN STANLEY58,267$ 8,171,0000.00%0.00%221518,382
JANUS CAPITAL MANAGEMENT LLC56,806$ 7,966,0000.01%0.00%72041,455

If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Wednesday, August 13, 2014

Stocks DD Cites: Bill Ackman's letter to investors



Has some correct thoughts on shareholder activism.

If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Tuesday, June 24, 2014

Stocks DD Cites : Valeant's Rebuttal to Allergan's Rebuttal


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

http://valeant.com/Portals/46/PDF/Allergan%200623.pdf

If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Wednesday, May 28, 2014

Stocks DD Opines: Taro's solid performance continues: Why Taro is a good Long-term buy


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Full Disclosure: I am Long Taro.

Taro yesterday reported stellar results as usual. Taro has witnessed some competition in some products. While quarter to quarter fluctuations are expected, the long term story of this ~190+ products low-competition business is very much in-tact.

Short term challenges: Link Quote
We believe that loss in market share (New Rx) in Nystatin-Triamcinolone, Topicort (0.25 percent External ointment), Desonide and Clomipramine were the main reason for lower volumes of Taro in Q4FY14. Taro lost market share by 7 percent in Nystatin-Triamcinolone, 3 percent in Desonide, 16 percent in Topicort (post generic launch of Glenmark) and 3 percent in Clomipramine in Q4FY14 vis-à-vis Q3FY14. Taro raised its sales to more than US$200m/qtr in Q2FY14 and Q3FY14 mainly with substantial price rise in Desonide and Clomipramine, despite losing market share in Nystatin-Triamcinolone and Topicort along with price competition

Remember Taro is very well diversified and I suspect after the Nystatin-Triamcinolone market share loss no product makes up for >10% of overall sales. That's the beauty of this diversified business.


Taro's Stellar 3 year Performance
SalesY-on-Y sales growthEBITDAY-on-Y EBITDA growthEBITDA Margin
Fiscal Yr 2012$543.08$256.1947.17%
Fiscal Yr 2013$671.00+23.55%$346.37+35.20%51.62%
Fiscal Yr 2014$759.30+13.16%$446.87+29.02%58.85%


Why Taro is Long-Term Buy:

Taro is still significantly undervalued both on a short term, and importantly, on a long term (5 year - 27 ANDA's and 1 compelling NDA opportunity) basis.

TARO Valuationin Billions
(rounded to 2 decimals)
Market Cap (05/27/2014)$4.74
Cash$0.63
Debt$0.02
Enterprise Value$4.13
EBITDA$0.45
Assigned EV/EBITDA (as of 05/27/2014 -share price $109)9.23
EV/EBITDA* of Agila (another niche generic pharma) Transaction that closed in Dec 201318.6
Taro's Illustrative Market Value using the Agila Transaction Multiple$208.56per share



Valuation Notes:
Bill Ackman, an activist value investor, in his VRX Presentation values Topical & Opthamology generics business at 20 times EBITDA because of the durable nature of revenues. The above $209 per share assigns ZERO$ to the below value items.
  1. Novexatin (My NPV values it at $53 per share. More details of how I arrive at this value can be found here. Of-course new drug development entails significant uncertainty and risks) - This compelling Onychomycosis New Drug opportunity is entering phase 2b this year.  In essence, an investment in taro today is like getting this potential home run call option for free.
  2. Growth
    1. Organic
      1. Taro has had Double digit organic growth rates in EBITDA and Sales in ALL of the last 3 years.
      2. Rest-Of-World(ex-USA,ex-CAN, ex-UK, ex-Israel) sales in 2012 was 1% of overall sales. ROW potential for some of Taro's products was alluded to in a Sun's earnings conf call last year. This potential is yet to be tapped. The strong growth emerging markets of BRIC and the markets of Japan, Eastern Europe, Western Europe(ex-UK), Australia, South Africa, etc cannot be disregarded.
      3. Taro has announced doubling their production volume capacity with $247m investment in the Brampton facility in 5 years (anticipating growth in next 5 years). This news did not come from Taro, but came from Ontario newspaper.
    2. In-Organic
      1. Excluding the 5-year $247m investment outlay for the Brampton plant expansion, Taro would still be left with ~$390m cash(03/31/2014) which can be opportunistically used to pursue inorganic growth: buy late stage or marketed assets. Taro could even easily take on $100m-$200m in debt (its current debt is ~$18m only) for this purpose.
Other Notes:
  1. The controlling owner Mr. Dilip Shanghvi has a stellar track record for creating value for shareholders. He has returned 38% annually for 20 years in the parent company 
  2. ANDA pipeline waiting approval is now 27. ANDA filing has accelerated. In the Dec Qtr 5 Andas were filed and in the March qtr 3 Andas were filed
  3. Taro makes ~$50m-$60m/year low-risk R&D investment (this is not the big pharma's highly unproductive hit and miss R&D kind) to keep the ANDA pipeline growing and replace aging products and/or loss of revenue due to competition in existing products of its basket of ~200-products 


If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Sunday, May 11, 2014

Stocks DD Cites: Bill Ackman's views on GSE Restructuring, Least risk-path to the preservation of Affordable Fixed rate 30 year mortgage, best path for maximization of value for Taxpayers and his long thesis on FNMA


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

 

Ira Sohn Presentation 2014.05.05


If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.

Wednesday, April 30, 2014

Stocks DD Cites & Opines : Taro Valuation - New developments


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

There are some new market developments that give pointers of how to look at valuation of a Business like Taro. In Summary, I will point to the following:

1. How Bill Ackman looks at/values Topical and Ophthamology Generics
2. Ontario newspaper report on $247m investment to double number of products it brings to market at Brampton facility. This is indirectly a VERY significant piece of information on forward-looking expectation of this business.
3. ROW(ex-USA,ex-CAN,ex-UK and ex-Israel) potential for taro's 190+ products
4. Novexatin - Phase 2a completed Onychomysosis drug with superior competitive advantages that can cannibalize the whole Onychomysosis treatment space considering short treatment duration and the fact that it treats underlying cause/infection unlike existing drugs. Taro's partner on their web site estimates the worldwide market for Onychomysosis in 2022 to be around $6 billion.

1. Bill Ackman ( Activist investor) in his 'Val-gan' presentation(link) has indicated

Durability nature of "Topical and Ophthamology Generics" . 










Comparable Market valuation (without Control premium of ~25%) for Durable Rx products is around 20X EBITDA















At 20X TTM EBITDA($433m), Taro would be valued around $200 per share. Please note the last quarter(oct-dec 2013), ebitda was significantly higher than prior quarters.  Also, note that NOT all products in the portfolio would be Durable. However, it is my belief that the company's new ANDA launches will offset lack of durability in its aging portfolio. Please remember Taro makes ~$50m-$60m/year R&D investment. This is a pretty low-risk investment towards bringing in new Topical generics to the market.


2.  An Ontario newspaper reported yesterday that Taro is planning to DOUBLE its production capacity at the Brampton facility with $247m investment. Link
The Province of Ontario is contributing $7 million toward the $247 million project, which will increase Taro’s plant capacity by 50 per cent and potentially double the number of products it brings to market.
This to me is indirectly a significant piece of information on forward-looking expectation of this business. Businesses and management can give all kinds of forward looking statements, but the one that investor needs to weigh in the most is where money is being actually set aside for growth...Remember, the proof is always in the pudding.
It is not clear what portion of taro's manufacturing happens at Brampton today. Majority of taro's manufacturing happens at Haifa Bay in Israel.

3. ROW potential. Taro's ROW(ex-USA,ex-CAN, ex-UK and ex-Israel) sales in 2012 was only 1% of its overall sales

4. Novexatin (A new drug for Onychomysosis) will likely be entering Phase 2b in H2 2014. Link.

QUOTE
Phase I and IIa clinical studies have demonstrated that NP213 is safe, well-tolerated and effective in resolving toenail infections following just one month of daily applica¬tion (currently available topical treatments require up to 52 weeks of treatment). NP213 is the first fungal nail infection therapy to address both the underlying cause of the condition and the cosmetic issues associated with the infection; by rapidly killing the causative fungi and rapidly improving the nail’s appearance.
QUOTE

You can read what experts say about Novexatin in the above link("expert clinical opinion"). It is my opinion that if Novexatin comes to market, it will not only cannibalize all other competition drugs in the Onychomysosis treatment space including Valeant's and Anacor's drugs, but will also likely be the standard for care for Onychomysosis treatment for a very long time, primarily for 2 reasons:

1. Extremely short treatment duration of 1 month
2. Drug treats the underlying infection

If this drug's clinical trial succeeds and comes to market say in 3 years time, one can do the DCF math, if it captures majority of the $6b market for the 15-20 year patent exclusivity period.

Conclusion: As the above 4 pieces of information are fully understood by the market, we expect Taro to be re-rated significantly from its current share price of $111 per share.

 

If you like to receive free updates on stocks directly to your email inbox, click on the subscribe via mail icon situated on the top right of this blog.