Thursday, April 2, 2009
(Cont'd from above)...

But you can still find some great deals… broken stocks that represent terrific values… ones that have yet to really participate in the rally… you just need to know what to look for… and it is my job as your investing coach to teach you… stocks are just like any other piece of merchandise… and being a good investor is just like being a good shopper… when you go to the mall, you look for sales… you go thru the clothes on the discount rack… you try to find bargains, right… clothes that have been marked down even though they are in perfectly good shape… of course, a lot of the merchandise that has been marked down is really damaged goods… perhaps a ripped seam that can unravel… or an actual hole that can’t be repaired… some stitch that is bad… and you would never buy it… the same goes for stock… plenty of the ones that have gone down big and stayed down deserve to be exactly where they are… because the underlying companies are broken… the difference is that sense many people can’t discern between a good company with a broken stock… and a broken company with stock that accurately reflects that… a lot of investors end up taking home stocks that are the equivalent of a sweater with only one arm… or jeans, where one leg is a half a foot longer than the other… or banged up used electronics that don’t work.

The trick is telling the difference… I like to teach you using examples… and right now I think one of the best examples of an intact healthy company with a broken stock is Celgene Corporation (CELG*)… which we used to like… went down, and now we are really in it…

CELG, for all of you home gamers…

This is a stock that is owned by my charitable trust, where I play with an open hand, telling you what moves I am going to make in the trust before I make them… and you can follow along at ActionAlertsPlus.com… Celgene is the quintessential broken stock, it has gone from hero to zero in nearly record time… it now trades at $40.77... holy cow, I mean yesterday it was at $36... but now it is only 3 points above its 52 week low… Celgene is down 47% from its 52 week high of $77... and it has a very bad week.

On Tuesday night, Celgene pre-announced a worst than expected first quarter… and said that it would miss the streets 4 year estimates as well… the stock immediately got a 10% haircut in after hours trading… it reminds me of when Research In Motion guided down, of course, that one is up $13 now… it was after Celgene had already been grinding its way lower for months and months… mostly because of something called multiple contraction… Celgene is a fast growing bio tech company… and it used to have a high price to earnings multiple… but Celgene and others like it saw their multiples shrink as investors dumped them during the seemingly endless sell off… so now we have got a company that has just pre-announced a worst than expected quarter… normally my rule is that you have to wait at least 30 days after a negative pre-announcement before you buy.

So why am I so positive that Celgene is just a broken stock and not a broken company… why did I just buy it for the trust… why did I pull the trigger… well, let’s think… because the fundamentals are intact… the negative pre-announcement doesn’t change the positive story that made me like Celgene in the first place… and neither does its broken stock… that is how you tell whether or not a damaged stock is damaged goods… Celgene dominates the blood cancer market that is called Revlimid, that is mainly for multiple myaloma, but has multiple indications… and they are working on even more… meaning that it could be used to treat even more kinds of cancers… that is bio tech gold… it has a strong balance sheet and superior management… and Celgene has the highest growth rate of any large capitalization bio tech stock… any… the pre-announcement didn’t change that… in fact, instead of just the headlines, if you looked and did the deep dive on the details of the pre-announcement you can see exactly why I think this company is far from damaged goods.

Celgene guided took merely 20% earnings growth in its first quarter… it maintained its long term growth of 25% and 30%… that is a great forecast… just 20% growth is considered a disappointment with a fast grower like Celgene… the company disappointed because it is being hit by the recession… even bio techs are recession proof… more people who are unemployed means fewer people with insurance, thus fewer people who can pay for Revlimid, which costs about $6,000 a month… and another problem with the quarter is that Vidaza, Celgene’s drug for a number of different blood disorders is taking longer than expected to roll out in Europe.

Now, look if Revlimid was week than I would say that this is a broken company… but Revlimid prescriptions were up in January, up in February, and up in March… it is still taking share and it remains on track to do $1.7m in sales… if Vidaza wasn’t gaining share, I would also say that it is broken but it is taking share… Celgene’s management is going to be punished… it is now from Missouri, no longer from Summit, New Jersey, where I am from… and where I ran the soap box derby a couple of years ago in Celgene’s driveway… I think the company will be eager to please shareholders after the disappointing guidance… stock is now trading at a ridiculously low 19 times the new 2009 earnings estimate… I think that these are beatable now… now that the depression is over…. that means that Celgene trades at just .6 to .7 times its growth rate.. usually stocks don’t trade for less than 1 times their growth rate… so I see this as a chance to get into a stock with a terrific long term story at a great low price despite the multiple contraction… beautiful balance sheet, pristine $3.1b in cash… should generate $900m in cash flow this year… not broken at all.

Here is the bottom line on Celgene…

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