Issue 1
06/11/04
Cheap Land and Extreme value in Biotech
Dear Friends,
Welcome to issue number 1 of the investment advice newsletter, Investing With Mom. As the name suggests, this newsletter is built around the advice I am currently giving my own mother, Polly M. Prior. I will mostly recommend stocks, as that is the most common level of investment access for the vast majority of people, and only make recommendations that I believe to also be in the best interests of my mom. This is different from most other investment newsletters you may receive or hear about, in that they do that which will gain them the most notoriety. It is my belief however, as my slogan suggests, that investments that are good for my mom are also good for you.
Absolute Returns:
My investment philosophy is mostly value orientated, but also includes turnaround stocks and insider buys, simply because I am looking for the best opportunities for my mom to make money. In fact, my goal is to achieve absolute returns that are preferably in excess of 25% annually over a period of years. This means that I am willing to sit on some losses until they turn around, if they are truly value plays. Most stocks however, will have an exit strategy through a stop loss. One of the two stocks that I will mention below fits that true value description perfectly, the other stock, while technically in the early stages of growth, I will argue is also a value play, just in a different sense. Thus, while I do have a stop loss in place, it is set much lower than normal, simply because I do not wish to be stopped out purely on
volatility.
Full Disclosure
One final comment before I make my first recommendations. I will initially be using my mom's current portfolio as the basis of the newsletter, even though the portfolio was begun last October. Future recommendations will come only after I'm convinced that my mom and I should also invest in them. Thus, in the spirit of full disclosure, we will wait a full 24 hours after the newsletter is sent out, before we invest. Since my mom is not yet a tycoon, there will be some stocks she doesn't buy and I will inform you of that decision by placing them into a secondary portfolio. The main portfolio will only hold those stocks that she owns, too. This distinction as well as any other information you may desire regarding Investing With Mom will be on our brand new website, www.investingwithmom.com within a few hours of each edition's publication. To keep this first edition short, I will only be
mentioning the two companies currently in my mom's portfolio that I consider to be the best buys, right now! The rest of the portfolio's explanations will be in the newsletter, and online, as soon as possible.
Biotech Value
The first company I want to mention, while not technically a value play probably ought to be reevaluated as exactly that. While it is a biotech company that has yet to make a dime in profit, it is at this moment only a few months away from the first of several announcements on the road to superstardom in the arena of curing cancer. The reason I refer to it as a value play is simple, it's currently sitting just a few pennies above its all-time low and yet I believe it to be worth between 5 and 6 times as much. The company I'm referring to is Antigenics (AGEN - NASDAQ). It is currently in the middle of setting its 52 week lows, while testing its all-time low of $6.50/share, which is just 10% below its current value. The market cap is currently less than $350 million; however its number one drug, Oncophage, is worth closer to $2 billion, that's billion with a b. The basic science behind it
is simple, the doctor takes a sample of the patient's tumor and then Antigenics creates a personalized vaccine using heat shock proteins. When injected back into the patient, this personalized cancer therapy has DOUBLED survival rates in skin cancer patients. Even better news however, was released this week at the American Society of Clinical Oncology (ASCO) conference in New Orleans. Antigenics released data on a current trial where patients who have had no help from the best cancer wonder-drug on the market, Novartis' Glivec, have shown a 68% response rate. In other words, 11 out of 16 patients responded to Antigenics' therapy after recording no response to the best drug currently available! Now while that alone is amazing, Antigenics is already working on ways to boost the response rate through additional trials. Now all the data in the world is nice, but if you don't own it, you
can't sell it once it's approved by the FDA, and in a world full of R&D risk management, Antigenics has managed to go it alone. They own 100% of all worldwide rights to the sale of Oncophage. On the other hand, just because you own it doesn't mean anybody will buy, unless you can show that the drugs won't kill you before they kill the disease, right? I mean what about the 5 who have yet to respond? What kind of side effects have they endured to still see no response? The answer is plain and simple, none. Antigenics has shown in separate clinical trials for multiple forms of cancer, that Oncophage has no serious side effects. Ok, ok, I can hear you asking about the payoff. Well, Oncophage is currently in Phase III FDA trials for 2 separate cancers: skin and kidney, and advanced Phase II FDA trials for 3 more cancers: Non-Hodgkin's Lymphoma, Colorectal and Gastric. Based on conservative
estimates, FDA approval should come by the end of 2005 with regards to both of the Phase III trials and although it could come quicker than that, I say Antigenics is more likely to be bought out, first! Now to return to my valuation argument, let's assume that each of the Phase III cancer vaccines is conservatively worth just $700 million in sales, and that each of the Phase II cancer vaccines is currently only worth about half that. Even if you discard the remainder of Antigenics pipeline, which would be the conservative thing to do, you still come up with a valuation of well over $2 billion, or $35 to 40/share by the middle of 2006, if not sooner. I say buy up to $11 for a sure triple, unless they get bought out beforehand. Just so you all know my mom and I will be buying more at this absurdly low price on Tuesday, 24 hours after the markets reopen. We are however, setting a 50% stop
loss on our original investment, which means that we will only sell if the stock drops below $5.50. That gives anyone who buys at the current level a 25% margin of error, versus 5-6 times upside. Not a bad trade off, if you ask me, especially for a 2 year investment!
Cheap Land
My second recommendation is a true deep value play in every sense and is more so than anything else in the market today. In this day and age of overpriced tech stocks and 2 bedroom homes that sell for over $300,000 throughout California, what would you say to an offer for $250/acre land? You'd probably say that I was nuts, right? Well what if I told you that not only was the land being sold at a value of $250/acre, it also comes with first rights of access to the California Aqueduct and direct access onto Southern California's main Interstate artery, I-5? What if I told you that of the 270,000 contiguous acres on this property, over 136,000 are currently developable and they sit just 60 miles north of downtown Los Angeles? In fact one major project lies in LA County! What if I told you that over the last 2+ years, direct sales of land have resulted in an AVERAGE sales price of
$25,000/acre, but that there's an 11,700 acre project called Centennial that is a master-planned residential community being developed for sale at nearly $250,000/acre! It's all true and the company is Tejon Ranch (TRC - NYSE). Even if you threw in the rest of the company for FREE, the land alone is worth in excess of $3.5 billion! This means for a company currently trading for around $35/share, it should really be $250/share. Now if this company is so wonderful, how come it isn't worth that much, right now? Well mostly because Tejon Ranch doesn't market itself as a real estate developer for very obvious tax reasons. Which company do you think would pay more in taxes, a sleepy agricultural company, or a heavy hitting real estate developer with over 100,000 developable acres within commuting distance of LA? That being said ground breaking is scheduled for the Centennial project by late
2006, so I'm going to hold on to my shares until they're worth $250. At which point I recommend we sell, but until then I don't care how low they go, I won't sell because it's worth too much to do otherwise. Buy Tejon Ranch up to $41/share and don't sell until you get 6 times your money. This is not a stock to put money in that you'll need within the next 4 years, but the company's land is worth so much that it can't help but eventually reach the correct valuation.
In closing, I realize that neither of these stocks is without risks, but I believe the long term value so outweighs any risks as to make the opportunities almost too ridiculously good to pass up. I also realize that a couple years may seem like an awful long time to hold, but I promise you'll thank me later. If you've already heard of and invested in both these companies, I hope you'll realize this is a reminder to stay the course and not give up on them until they are fully valued.
In my next issue, I'm working on a pair of brand new recommendations, one of which owns more proven natural gas reserves than Exxon, but it's perceived market value is less than half. They will have to wait however, until issue number 2, which should be in your in-boxes on Monday, June 21st. In the meantime, if you haven't planned to do so already, I highly encourage you to watch the memorial for the greatest President since Lincoln, this morning. Goodbye dear Ronald Reagan, farewell and thank you, for without you there would have been no opportunity for the massive amount of wealth created over the last 20 years, to flourish. Nor would the millions in Eastern Europe, Central and South America share in the same democratic freedom that we have for so long enjoyed. Nothing more can be said to do you justice, Mr. Reagan, except thank
you.
Yours for good investments,
Andy Prior
