Situation: Now we come to feeding the planet. Yes, row crops are a commodity so spot prices can go to extremes and stay there awhile. And yes, agricultural equipment makers can only sell product if farmers have money to spend. On the other hand, there have been improvements in satellite-based technology, 3rd party logistics, and financial services that dial back much of the risk introduced by weather. However, markets and prices have become sufficiently reliable that major countries no longer back up food supplies with large reserves. Similarly, investors are left to cope with consolidation brought on by global sourcing and improvements in planting and harvesting technologies. The supply chains for insecticides, herbicides, fungicides, and fertilizer have been disrupted to such a degree that companies have had to enter into wave after wave of cross-border merger & acquisition activity. To their credit, Dow Chemical and DuPont are US leaders in the Ag Chemical space who have merged without bringing in companies from other countries. Even DowDuPont will have to split into 3 companies in order to devote one enterprise to Ag Chemicals and Seed Development: Corteva Agriscience.
Mission: Highlight the leading companies that support farm production by using our Standard Spreadsheet. Include beef, pork, and poultry processors that have a controlling interest in animal breeding and egg production facilities. Include IBM because it has a monopoly on weather satellites and owns The Weather Channel.
Execution: see Table.
Bottom Line: This is a dicey area for investors, even those who make a study of it. The good news is that the common stocks in all 10 companies remain reasonably priced (see Columns Y-AA), which is saying a lot.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into IBM and CAT, and own shares of HRL.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label biotechnology. Show all posts
Showing posts with label biotechnology. Show all posts
Sunday, October 21
Sunday, June 24
Week 364 - Ethanol Producers
Situation: “Market research analysts at Technavio have predicted that the global bio-fuels market will grow steadily at a CAGR of almost 6% by 2020”. But arguments against blending ethanol with gasoline are building. In 2016, 15.2 billion gallons were produced at 214 plants, with Archer Daniels Midland (ADM), Valero Energy (VLO) and Green Plains Renewable Energy (GPRE) being the main publicly-traded producers. For example, those 3 companies operate 4 ethanol plants in Nebraska that together produced 2.2 billion gallons, representing 31% of the state’s crop. Not only is fuel a big business for the agriculture sector, but the by-product (“distillers grains”) is a rich source of animal feed. For every ton of ethanol produced, there are 0.24 tons of distillers grains.
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 17
Week 363 - Big Pharma
Situation: There are 11 pharmaceutical companies in the S&P 100 Index, with an average market capitalization of ~$130 Billion. Stocks issued by healthcare companies (including hospital chains, pharmacy benefit managers, medical insurance vendors, and drugstores) are thought to be defensive “risk-off” bets, like stocks issued by utility, communication services, or consumer staples companies. But they’re not. Healthcare consumes almost 20% of GDP but it is a highly fragmented industry, rife with government interference seeking full control. Medical innovation for the entire planet has to take place in the United States because the healthcare industry is socialized elsewhere and large amounts of private capital are needed to conduct clinical trials. That innovation makes US healthcare into an ongoing research enterprise. For biotechnology companies, there is an ever-present risk of being eclipsed by another company’s research team. Stockpickers who have some appreciation for biochemistry can perhaps identify biotechnology groups that are onto a good thing. But Big Pharma companies survive by looking to buy those same startups. Can you really scope-out a “good thing” better than their scientists?
Mission: Run our Standard Spreadsheet for the 11 pharmaceutical companies in the S&P 100 Index.
Execution: see Table.
Bottom Line: This is not a game for the retail investor. All she can do is buy stock in one or two of the 11 “Big Pharma” companies, and hope that its CEO can find small biotechnology groups conducting breakthrough science, then buy at least one a year to throw money at. That’s an iffy business. Why? Because large-scale clinical studies (costing hundreds of million dollars) have to be conducted before the bet pays off. Usually it doesn’t. If you’re a stock-picker new to this industry, start by researching the old standbys that reliably pay good dividends: Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY).
Risk Rating: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JNJ and also own shares of ABT.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Run our Standard Spreadsheet for the 11 pharmaceutical companies in the S&P 100 Index.
Execution: see Table.
Bottom Line: This is not a game for the retail investor. All she can do is buy stock in one or two of the 11 “Big Pharma” companies, and hope that its CEO can find small biotechnology groups conducting breakthrough science, then buy at least one a year to throw money at. That’s an iffy business. Why? Because large-scale clinical studies (costing hundreds of million dollars) have to be conducted before the bet pays off. Usually it doesn’t. If you’re a stock-picker new to this industry, start by researching the old standbys that reliably pay good dividends: Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY).
Risk Rating: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JNJ and also own shares of ABT.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, October 15
Week 328 - Precision Agriculture
Situation: Production Agriculture has created its own problems. Worldwide supply has exceeded demand for years. In early 2017, the USDA projected that farm income would fall for a 4th straight year. But it hasn’t turned out to be that bad, since crop prices have coalesced near last year’s levels, and sales volumes have risen. Much of the oversupply results from technological improvements in farming, starting with the buildout of center-pivot irrigation in the 70s and 80s. Weather prediction started improving in the 1990s, and the National Oceanic and Atmospheric Administration (NOAA) now has a number of online tools available to farmers at no cost.
To integrate weather information with soil characteristics on a given farm, we now have professional agronomists who provide specific advice on the use of seeds, fertilizer, water, insecticides, herbicides and fungicides. Agronomists are sometimes employed by equipment or seed vendors, who offer Wi-Fi connections that link information collected on tractors to agronomists. More often, Agronomists are employed on retainer by farmers. Many have university degrees, and others with less training work under supervision for an agronomy service, such as Servi-Tech, Inc.
The application of Global Positioning Systems to agriculture began with patent approval in 1998. Increasingly, agronomists encourage farmers to adopt GPS-based services addressing their entire set of specific needs, a tactic called “Precision Agriculture.” For example, satellite imagery and soil sampling can be used for variable rate seeding and watering. Results at harvest time are analyzed using Wi-Fi linked to a crop-yield computer program on GPS equipped combines. Trimble, Inc. (TRMB) is a leader in this technology, and new combines are increasingly equipped with Trimble receivers.
Mission: Present a table of publicly-traded companies that provide precision agriculture equipment, and explain in the Administration section the specific offerings of each company in the Table.
Execution: see Table.
Administration:
SYNGENTA AG
* Provides a variety of digital tools through strategic collaborations with 1) Lindsay Corporation (manufacturer of center-pivot irrigation systems) to match soil and seed characteristics with water needs; 2) Ag Connections to present a complete range of farm management software in a digital platform.
DEERE
* Recently purchased Blue River Technology, because it makes “tractor-towed robots that can analyze crops and apply fertilizer and pesticides plant-by-plant.”
MONSANTO
* Has started using its experience with thousands of corn seed varieties in various soil conditions in “self-teaching algorithm” to predict how a particular seed variety will perform after a farmer plants it. But the key to Monsanto’s emerging dominance of precision farming is due to a subsidiary: The Climate Corporation. It’s FieldView Platform is mounted on tractors and provides software for integration of various planting and harvesting inputs.
AGCO
* Has purchased Precision Planting LLC, which had been part of a Monsanto subsidiary--The Climate Corporation, and is licensed to retain connectivity with The Climate Corporation’s FieldView Platform.
VALMONT INDUSTRIES
* Has developed the AgSense software app for optimal GPS-managed control of variable center-pivot irrigation systems.
ARCHER-DANIELS-MIDLAND
* Provides daily information and analytic tools essential for precision agriculture planning, augmented by its recent purchase of the Agrible news service.
IBM
* Precision agriculture is increasingly dependent on GPS systems and images of farmland generated by orbiting satellites. Detailed images of quarter sections of farmland are now available, using satellites designed to transmit different types of information with specific uses in farming. Agriculture research has been a specific mission of NASA since 2015. IBM owns “The Weather Channel” and has worked with NOAA since 1996 to improve weather forecasting at a “hyper-local” level. IBM provides most of the hardware and software that makes this possible, and has started applying this to precision agriculture, specifically in Brazil.
RAVEN INDUSTRIES
* Is a pioneer in field navigation equipment and tractor-mounted computers. Its product line has been successful with farmers and is being upgraded almost annually.
Bottom Line: Precision Agriculture is in its early years, but the consolidation phase is well underway. We’ve presented the leading publicly-traded companies above, along with investor information (see Table). These are powerful tools in the hands of the farmer, and will no doubt improve the efficiency and scope of crop production worldwide.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into MON and IBM, and also own shares of CAT and RAVN.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
To integrate weather information with soil characteristics on a given farm, we now have professional agronomists who provide specific advice on the use of seeds, fertilizer, water, insecticides, herbicides and fungicides. Agronomists are sometimes employed by equipment or seed vendors, who offer Wi-Fi connections that link information collected on tractors to agronomists. More often, Agronomists are employed on retainer by farmers. Many have university degrees, and others with less training work under supervision for an agronomy service, such as Servi-Tech, Inc.
The application of Global Positioning Systems to agriculture began with patent approval in 1998. Increasingly, agronomists encourage farmers to adopt GPS-based services addressing their entire set of specific needs, a tactic called “Precision Agriculture.” For example, satellite imagery and soil sampling can be used for variable rate seeding and watering. Results at harvest time are analyzed using Wi-Fi linked to a crop-yield computer program on GPS equipped combines. Trimble, Inc. (TRMB) is a leader in this technology, and new combines are increasingly equipped with Trimble receivers.
Mission: Present a table of publicly-traded companies that provide precision agriculture equipment, and explain in the Administration section the specific offerings of each company in the Table.
Execution: see Table.
Administration:
SYNGENTA AG
* Provides a variety of digital tools through strategic collaborations with 1) Lindsay Corporation (manufacturer of center-pivot irrigation systems) to match soil and seed characteristics with water needs; 2) Ag Connections to present a complete range of farm management software in a digital platform.
DEERE
* Recently purchased Blue River Technology, because it makes “tractor-towed robots that can analyze crops and apply fertilizer and pesticides plant-by-plant.”
MONSANTO
* Has started using its experience with thousands of corn seed varieties in various soil conditions in “self-teaching algorithm” to predict how a particular seed variety will perform after a farmer plants it. But the key to Monsanto’s emerging dominance of precision farming is due to a subsidiary: The Climate Corporation. It’s FieldView Platform is mounted on tractors and provides software for integration of various planting and harvesting inputs.
AGCO
* Has purchased Precision Planting LLC, which had been part of a Monsanto subsidiary--The Climate Corporation, and is licensed to retain connectivity with The Climate Corporation’s FieldView Platform.
VALMONT INDUSTRIES
* Has developed the AgSense software app for optimal GPS-managed control of variable center-pivot irrigation systems.
ARCHER-DANIELS-MIDLAND
* Provides daily information and analytic tools essential for precision agriculture planning, augmented by its recent purchase of the Agrible news service.
IBM
* Precision agriculture is increasingly dependent on GPS systems and images of farmland generated by orbiting satellites. Detailed images of quarter sections of farmland are now available, using satellites designed to transmit different types of information with specific uses in farming. Agriculture research has been a specific mission of NASA since 2015. IBM owns “The Weather Channel” and has worked with NOAA since 1996 to improve weather forecasting at a “hyper-local” level. IBM provides most of the hardware and software that makes this possible, and has started applying this to precision agriculture, specifically in Brazil.
RAVEN INDUSTRIES
* Is a pioneer in field navigation equipment and tractor-mounted computers. Its product line has been successful with farmers and is being upgraded almost annually.
Bottom Line: Precision Agriculture is in its early years, but the consolidation phase is well underway. We’ve presented the leading publicly-traded companies above, along with investor information (see Table). These are powerful tools in the hands of the farmer, and will no doubt improve the efficiency and scope of crop production worldwide.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into MON and IBM, and also own shares of CAT and RAVN.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 15
Week 254 - Cattle (Bos taurus) vs. Row Crops as a Protein Source
Situation: The total mass of humans on earth recently passed 1.0 Trillion pounds. That seems like a lot until you consider that the total mass of cattle recently passed 1.8 Trillion pounds. On average, one member of Bos taurus helps to nourish and allay the hunger of 6 Homo sapiens. Then further consider this information about processing that animal for meat:
“...carcasses are generally 63 to 65% of the 1,250 pounds, or approximately 790 pounds. Some of that carcass is fat that is not consumed, and some is bone (15% or so). Therefore, edible meat cuts and ground beef may be 600 pounds. So, with the example above of 50 bushels of corn fed to a finished animal, now 4.67 pounds of corn were required for each 1 pound of beef...”
While the world population has been increasing at the rate of 1%/yr for the past two decades, the number of people living in poverty has been falling by almost 20 million per year over that period, and is now less than 900 Million. Now that they can afford it, what is the best way to achieve an adequate protein intake for the 20 Million people coming out of poverty each year? Nutritionists have determined that a “Dietary Reference Intake” of 0.8 grams of protein per kilogram of body weight (i.e., 0.36 grams per pound) is needed. This results in a need for 60 grams of protein per day for a sedentary man/woman weighing 165 pounds.
Mission: Determine the most efficient way to achieve a 60 gm/d protein intake without neglecting essential amino acids, lipids, vitamins and vitamin-like substances.
Execution: That mission can be accomplished by eating a 0.6 pound hamburger per day at an estimated cost of $3.00/d at the average US supermarket. That’s too expensive for people living an emerging market economy like China, where in October, 2015, the World Bank updated the International Poverty Line to $1.90/d.
Returning to our earlier example of beef cattle, a steer weighing 1250 lbs has 600 lbs of muscle available for making hamburger that is 85% lean meat and 15% fat. Each pound (16 oz) has ~100 grams of protein and costs ~$5.00 (31 cents/oz). For comparison, a liter of whole milk (34 oz) has 34 grams of protein and costs ~$3.40 (10 cents/oz). A liter of lactose-free milk (Fairlife brand) has 54 grams of protein and costs ~$3.70 (11 cents/oz). A pound of white corn has 44 grams of protein and costs ~$2.50/lb (16 cents/oz). A pound of soybeans has 50 grams of protein and costs ~$3.20/lb when purchased in 10-pound containers (20 cents/oz). A pound of peas has 26 grams of protein and costs ~$0.66/lb when purchased in 20-pound containers (4 cents/oz). A pound of long-grain white rice has 12 grams of protein and costs ~$0.45/lb when purchased in 20-pound containers (3 cents/oz). A pound of whole wheat bread has 58 grams of protein and costs ~$1.95/lb (12 cents/oz).
Cost per gram of protein
Beefsteak $0.130
Whole milk $0.100
FairLife lactose-free milk $0.069
Soybeans $0.064
White corn $0.057
Hamburger (85% lean) $0.050
Long-grain white rice $0.038
Whole wheat bread $0.034
Peas $0.025
As you can see, beefsteak is the most expensive way to meet the 60gm/d protein requirement (13 cents/gm). Whole milk is next most expensive at 10 cents/gm. But when lactose is filtered out of milk (and the remaining constituents are reconstituted), there are 13 grams of protein in a 240 ml serving vs. 8 grams in 240 ml of whole milk. That lactose-free product is marketed by Coca-Cola under the “Fairlife” brand and costs ~10% more than whole milk.
As the sole source of a 60gm/d protein intake, Fairlife costs $3.87/d, 85% lean hamburger costs $3.00/d, whole wheat bread costs $2.07/d, and peas cost $1.52/d. An adult male living at the poverty line ($1.90/d) could be adequately nourished with peas and have 38 cents left for needs like clothing and shelter.
Wheat protein (gluten) and rice protein are among is the least expensive sources of protein. However, both are deficient in one of the essential amino acids. Pea protein is the least expensive source and contains sufficient amounts of all 9 essential amino acids. Milk protein (casein) is deficient in the essential amino acid histidine but histidine is only essential for infants. Corn protein (zein) is deficient in another essential amino acid (threonine). Hamburger, milk, peas and soybeans have all 8 of the amino acids that are essential for adult humans. But only hamburger and milk contain adequate amounts of all of the essential amino acids, vitamins and minerals, and other vitamin-like molecules (carnosine, docosahexaenoic acid, and creatine). Plants lack Vitamin D (except for mushrooms and lichens), Vitamin B12, creatine, carnosine, and docosahexaenoic acid (except for algae and seaweed sources).
In summary, a balanced diet requires that we consume milk and/or meat daily in addition to vegetables, fruit, and cereal grains. Milk and/or meat can be eliminated from the diet only by taking a multivitamin supplement each day that includes Vitamin D, Vitamin B12, creatine, docosahexaenoic acid, and carnosine. A vegetarian also would need to consume peas and/or soybeans every day to ensure that adequate amounts of all 8 essential amino acids have been consumed.
Administration: Create a spreadsheet of publicly-traded companies that package beef and dairy products for sale in grocery stores, and companies that package row crops for sale in grocery stores (see Table). Include only those companies that have a) stock traded for at least 16 yrs, and b) annual revenues sufficient for inclusion in the Barron’s 500 List.
Bottom Line: When it comes to meeting protein requirements in a cost-effective way, companies that package and sell beef and milk products should be at a disadvantage compared to companies that package and sell row crops. Why? Because using row crops as animal feed to produce meat or milk is inefficient. For example, 5 pounds of corn are needed to produce a pound of hamburger meat, given that a 600 lb steer is taken to a “finishing lot” and fed ~2500 pounds of corn over 170 days to gain the 600 lbs of weight needed to be ready for slaughter. However, vegetarians must supplement their diets with vitamin B12, vitamin D, carnosine, docosahexaenoic acid (DHA) and creatine. Once the cost of those supplements is considerable, a vegetarian’s diet has only a minor cost advantage over a diet that includes meat and dairy products. The trend is away from vegetarianism. Since 2002, ~20 Million people a year have emerged from poverty and the demand for meat and dairy products has grown dramatically. This is evident from the 5-year total returns/yr for the 3 meat-packing companies in this week’s Table (see Column F): Hormel Foods (HRL), Tyson Foods (TSN), and Pilgrim’s Pride (PPC).
Risk Rating is 7 on a scale where 1 is a 10-yr US Treasury Note and 10 is gold.
Full Disclosure: I own stock in GIS, HRL, KO, and PEP.
NOTE: Metrics are current for the Sunday of publication; metrics highlighted in red denote underperformance relative to the Vanguard Balanced Index Fund (VBINX at Line 18 in the Table). Long-term total returns in Column C of the Table date to 9/1/2000, which is our reference peak for the S&P 500 Index (1520.77). There have been two peaks since then: October 9, 2007 (1565.15) and May 21, 2015 (2130.82).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
“...carcasses are generally 63 to 65% of the 1,250 pounds, or approximately 790 pounds. Some of that carcass is fat that is not consumed, and some is bone (15% or so). Therefore, edible meat cuts and ground beef may be 600 pounds. So, with the example above of 50 bushels of corn fed to a finished animal, now 4.67 pounds of corn were required for each 1 pound of beef...”
While the world population has been increasing at the rate of 1%/yr for the past two decades, the number of people living in poverty has been falling by almost 20 million per year over that period, and is now less than 900 Million. Now that they can afford it, what is the best way to achieve an adequate protein intake for the 20 Million people coming out of poverty each year? Nutritionists have determined that a “Dietary Reference Intake” of 0.8 grams of protein per kilogram of body weight (i.e., 0.36 grams per pound) is needed. This results in a need for 60 grams of protein per day for a sedentary man/woman weighing 165 pounds.
Mission: Determine the most efficient way to achieve a 60 gm/d protein intake without neglecting essential amino acids, lipids, vitamins and vitamin-like substances.
Execution: That mission can be accomplished by eating a 0.6 pound hamburger per day at an estimated cost of $3.00/d at the average US supermarket. That’s too expensive for people living an emerging market economy like China, where in October, 2015, the World Bank updated the International Poverty Line to $1.90/d.
Returning to our earlier example of beef cattle, a steer weighing 1250 lbs has 600 lbs of muscle available for making hamburger that is 85% lean meat and 15% fat. Each pound (16 oz) has ~100 grams of protein and costs ~$5.00 (31 cents/oz). For comparison, a liter of whole milk (34 oz) has 34 grams of protein and costs ~$3.40 (10 cents/oz). A liter of lactose-free milk (Fairlife brand) has 54 grams of protein and costs ~$3.70 (11 cents/oz). A pound of white corn has 44 grams of protein and costs ~$2.50/lb (16 cents/oz). A pound of soybeans has 50 grams of protein and costs ~$3.20/lb when purchased in 10-pound containers (20 cents/oz). A pound of peas has 26 grams of protein and costs ~$0.66/lb when purchased in 20-pound containers (4 cents/oz). A pound of long-grain white rice has 12 grams of protein and costs ~$0.45/lb when purchased in 20-pound containers (3 cents/oz). A pound of whole wheat bread has 58 grams of protein and costs ~$1.95/lb (12 cents/oz).
Cost per gram of protein
Beefsteak $0.130
Whole milk $0.100
FairLife lactose-free milk $0.069
Soybeans $0.064
White corn $0.057
Hamburger (85% lean) $0.050
Long-grain white rice $0.038
Whole wheat bread $0.034
Peas $0.025
As you can see, beefsteak is the most expensive way to meet the 60gm/d protein requirement (13 cents/gm). Whole milk is next most expensive at 10 cents/gm. But when lactose is filtered out of milk (and the remaining constituents are reconstituted), there are 13 grams of protein in a 240 ml serving vs. 8 grams in 240 ml of whole milk. That lactose-free product is marketed by Coca-Cola under the “Fairlife” brand and costs ~10% more than whole milk.
As the sole source of a 60gm/d protein intake, Fairlife costs $3.87/d, 85% lean hamburger costs $3.00/d, whole wheat bread costs $2.07/d, and peas cost $1.52/d. An adult male living at the poverty line ($1.90/d) could be adequately nourished with peas and have 38 cents left for needs like clothing and shelter.
Wheat protein (gluten) and rice protein are among is the least expensive sources of protein. However, both are deficient in one of the essential amino acids. Pea protein is the least expensive source and contains sufficient amounts of all 9 essential amino acids. Milk protein (casein) is deficient in the essential amino acid histidine but histidine is only essential for infants. Corn protein (zein) is deficient in another essential amino acid (threonine). Hamburger, milk, peas and soybeans have all 8 of the amino acids that are essential for adult humans. But only hamburger and milk contain adequate amounts of all of the essential amino acids, vitamins and minerals, and other vitamin-like molecules (carnosine, docosahexaenoic acid, and creatine). Plants lack Vitamin D (except for mushrooms and lichens), Vitamin B12, creatine, carnosine, and docosahexaenoic acid (except for algae and seaweed sources).
In summary, a balanced diet requires that we consume milk and/or meat daily in addition to vegetables, fruit, and cereal grains. Milk and/or meat can be eliminated from the diet only by taking a multivitamin supplement each day that includes Vitamin D, Vitamin B12, creatine, docosahexaenoic acid, and carnosine. A vegetarian also would need to consume peas and/or soybeans every day to ensure that adequate amounts of all 8 essential amino acids have been consumed.
Administration: Create a spreadsheet of publicly-traded companies that package beef and dairy products for sale in grocery stores, and companies that package row crops for sale in grocery stores (see Table). Include only those companies that have a) stock traded for at least 16 yrs, and b) annual revenues sufficient for inclusion in the Barron’s 500 List.
Bottom Line: When it comes to meeting protein requirements in a cost-effective way, companies that package and sell beef and milk products should be at a disadvantage compared to companies that package and sell row crops. Why? Because using row crops as animal feed to produce meat or milk is inefficient. For example, 5 pounds of corn are needed to produce a pound of hamburger meat, given that a 600 lb steer is taken to a “finishing lot” and fed ~2500 pounds of corn over 170 days to gain the 600 lbs of weight needed to be ready for slaughter. However, vegetarians must supplement their diets with vitamin B12, vitamin D, carnosine, docosahexaenoic acid (DHA) and creatine. Once the cost of those supplements is considerable, a vegetarian’s diet has only a minor cost advantage over a diet that includes meat and dairy products. The trend is away from vegetarianism. Since 2002, ~20 Million people a year have emerged from poverty and the demand for meat and dairy products has grown dramatically. This is evident from the 5-year total returns/yr for the 3 meat-packing companies in this week’s Table (see Column F): Hormel Foods (HRL), Tyson Foods (TSN), and Pilgrim’s Pride (PPC).
Risk Rating is 7 on a scale where 1 is a 10-yr US Treasury Note and 10 is gold.
Full Disclosure: I own stock in GIS, HRL, KO, and PEP.
NOTE: Metrics are current for the Sunday of publication; metrics highlighted in red denote underperformance relative to the Vanguard Balanced Index Fund (VBINX at Line 18 in the Table). Long-term total returns in Column C of the Table date to 9/1/2000, which is our reference peak for the S&P 500 Index (1520.77). There have been two peaks since then: October 9, 2007 (1565.15) and May 21, 2015 (2130.82).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 28
Week 243 - S&P 500 HealthCare Companies
Situation: Obamacare has been a boost for the healthcare industry, bringing 10 million new health insurance clients into the system. And, the Federal Reserve’s main monetary policy since the Lehman Panic, called “quantitative easing,” invested $4.2T (that’s Trillion) in government bonds to bring interest rates down to historic lows. That got people to stop investing in bonds and instead expand their businesses, build manufacturing plants, buy cars, refinance homes, advertise their services, or simply buy stocks. It worked, and investment dollars favored the HealthCare industry. The only “fly in the ointment” is that stocks have become overpriced because bonds are no longer able to compete on a total-return basis. The Federal Reserve is now trying to reverse its “easy money policy” because the economy no longer needs life support. However, this will sink the stock market for a while, including healthcare stocks. But those of you who are building a retirement portfolio can hardly avoid the obvious benefits of owning healthcare stocks, which are a growing client base and an aging population. And that’s just in the United States. Looking internationally, there are almost 20 million people emerging from poverty each year and now able to invest in their health!
Mission: You’ll need to know which stocks you might want to drop and which you might eventually profit from owning (and should probably continue to dollar-average into). So we need to come up with a list of the highest quality HealthCare stocks. We’ll use our standard spreadsheet to highlight both the past rewards of ownership and the likely risks of continued ownership. We’ll start with the list of healthcare stocks in the S&P 500 Index, deleting any with insufficient revenues to appear on the 2015 Barron’s 500 List. We’ll also delete any stocks that haven’t been trading long enough to appear on the 16-yr BMW Method list. Finally, we’ll delete any companies that don’t have S&P bond ratings of at least BBB+ and S&P stock ratings of at least B+/M.
Execution: The above exercise leaves us with 20 companies to consider, only 5 of which are S&P Dividend Achievers (denoting 10+ years of annual dividend increases). Those 4 companies are: Johnson & Johnson (JNJ), Abbott Laboratories (ABT), Becton Dickinson (BDX), Medtronic (MDT) and Stryker (SYK). The other 15 are speculative investments to varying degrees (see Columns D, I, J, K, and O in the Table). The benchmark mutual fund, Vanguard HealthCare Fund (VGHCX), shows stronger risk-adjusted performance than the aggregate of 20 stocks (compare Line 22 to Line 25 in the Table). Its outperformance has been remarkable for decades.
Bottom Line: HealthCare stocks have become a “crowded trade.” If you’ve held several of the 20 stocks on our list over the past decade, you’re likely happy with your choices. The HealthCare industry will likely continue to do well given the demographic trends in the US and internationally with bigger percentages of people becoming insured, entering their sunset years and emerging from poverty. Just keep in mind that the value of these stocks is technology-driven, and a price-appreciation graph for technology-driven stocks will continue to look like a roller-coaster (see Column O in the Table). Only 3 of these stocks have a steady and strong trend of price-appreciation: Johnson & Johnson (JNJ), Abbott Laboratories (ABT), and Becton Dickinson (BDX). If you want to venture beyond these safe havens, the safest and most rewarding move looks to be the mutual fund that represents this industry so well: Vanguard HealthCare Fund (VGHCX) at Line 24 in the Table.
Risk Rating: 6
Full Disclosure: I dollar-average into ABT and also own stock in JNJ, BDX, and MCK.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX, our key benchmark at Line 27 in the Table. Total Returns in Column C of the Table date to 9/1/2000 because that marks the peak of the S&P 500 Index before the “dot.com” recession. There have been two peaks since, in 2007 and 2015, so we’re entering the third market cycle since 2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: You’ll need to know which stocks you might want to drop and which you might eventually profit from owning (and should probably continue to dollar-average into). So we need to come up with a list of the highest quality HealthCare stocks. We’ll use our standard spreadsheet to highlight both the past rewards of ownership and the likely risks of continued ownership. We’ll start with the list of healthcare stocks in the S&P 500 Index, deleting any with insufficient revenues to appear on the 2015 Barron’s 500 List. We’ll also delete any stocks that haven’t been trading long enough to appear on the 16-yr BMW Method list. Finally, we’ll delete any companies that don’t have S&P bond ratings of at least BBB+ and S&P stock ratings of at least B+/M.
Execution: The above exercise leaves us with 20 companies to consider, only 5 of which are S&P Dividend Achievers (denoting 10+ years of annual dividend increases). Those 4 companies are: Johnson & Johnson (JNJ), Abbott Laboratories (ABT), Becton Dickinson (BDX), Medtronic (MDT) and Stryker (SYK). The other 15 are speculative investments to varying degrees (see Columns D, I, J, K, and O in the Table). The benchmark mutual fund, Vanguard HealthCare Fund (VGHCX), shows stronger risk-adjusted performance than the aggregate of 20 stocks (compare Line 22 to Line 25 in the Table). Its outperformance has been remarkable for decades.
Bottom Line: HealthCare stocks have become a “crowded trade.” If you’ve held several of the 20 stocks on our list over the past decade, you’re likely happy with your choices. The HealthCare industry will likely continue to do well given the demographic trends in the US and internationally with bigger percentages of people becoming insured, entering their sunset years and emerging from poverty. Just keep in mind that the value of these stocks is technology-driven, and a price-appreciation graph for technology-driven stocks will continue to look like a roller-coaster (see Column O in the Table). Only 3 of these stocks have a steady and strong trend of price-appreciation: Johnson & Johnson (JNJ), Abbott Laboratories (ABT), and Becton Dickinson (BDX). If you want to venture beyond these safe havens, the safest and most rewarding move looks to be the mutual fund that represents this industry so well: Vanguard HealthCare Fund (VGHCX) at Line 24 in the Table.
Risk Rating: 6
Full Disclosure: I dollar-average into ABT and also own stock in JNJ, BDX, and MCK.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX, our key benchmark at Line 27 in the Table. Total Returns in Column C of the Table date to 9/1/2000 because that marks the peak of the S&P 500 Index before the “dot.com” recession. There have been two peaks since, in 2007 and 2015, so we’re entering the third market cycle since 2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 16
Week 215 - “Buy-and-hold” Barron’s 500 Biotechnology Stocks
Situation: All asset classes are currently high-priced, and biotechnology stocks are the highest priced. If earnings reports don’t surprise on the upside, they’re over-priced and a bubble may be forming. Most companies use borrowed money for approximately half their capital needs, which means they have little in the way of tangible book value. Remember: Assets = Liabilities + Equity. To “make serious money,” you’ll need to focus on asset classes that have strong growth prospects and modest indebtedness. That means technology stocks should be ~10% of your retirement savings. Currently, biotechnology stocks have the best growth prospects, and it is in your best interest to have stock in one or two of those companies. Given that retirement savings should be composed of “buy-and-hold” stocks and bonds, you’ll want a list of candidate biotechnology stocks to choose from. Is there any such thing as a buy-and-hold biotechnology stock?
Mission: Create a spreadsheet of candidate “buy-and-hold” biotechnology stocks from the recently published 2015 Barron’s 500 List.
Execution: This hasn’t been easy but we’ve managed to come up with the names of 7 candidate companies (see Table). Two are “plain vanilla” biotechnology companies: Gilead Sciences (GILD) and Amgen (AMGN). Two are agriculture companies that produce genetically-modified seeds: Monsanto (MON) and duPont (DD). Three are traditional pharmaceutical companies that have sizeable biotechnology divisions: Johnson & Johnson (JNJ), Eli Lilly (LLY), and Bristol-Myers Squibb (BMY). Columns W-Y of the Table contain long-term statistical data available at the BMW Method website (see Week 193). That website lists AMGN and LLY as being “potentially overpriced”, along with the NASDAQ Biotechnology Index.
Bottom Line: The NASDAQ Biotechnology Index at Line 14 in the Table has the big picture. Returns for these stocks are 3 times higher than for the S&P 500 Index over the past 16 yrs (see Column W) but our enthusiasm is dampened by the BMW Method projection of a 53% loss in a future Bear Market vs. a 32% loss for the S&P 500 index. Six of our 7 “buy-and-hold” candidates are speculative by most measures (see Table); only Johnson & Johnson (JNJ) appears to be a better bet than simply putting your money to work in a bond-hedged S&P 500 Index fund (VBINX).
Risk Rating: 7
Full Disclosure: I dollar-average into JNJ, and also own stock in MON and DD.
Note: Metrics in the Table that are highlighted in red denote underperformance vs. our key benchmark (VBINX); metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Create a spreadsheet of candidate “buy-and-hold” biotechnology stocks from the recently published 2015 Barron’s 500 List.
Execution: This hasn’t been easy but we’ve managed to come up with the names of 7 candidate companies (see Table). Two are “plain vanilla” biotechnology companies: Gilead Sciences (GILD) and Amgen (AMGN). Two are agriculture companies that produce genetically-modified seeds: Monsanto (MON) and duPont (DD). Three are traditional pharmaceutical companies that have sizeable biotechnology divisions: Johnson & Johnson (JNJ), Eli Lilly (LLY), and Bristol-Myers Squibb (BMY). Columns W-Y of the Table contain long-term statistical data available at the BMW Method website (see Week 193). That website lists AMGN and LLY as being “potentially overpriced”, along with the NASDAQ Biotechnology Index.
Bottom Line: The NASDAQ Biotechnology Index at Line 14 in the Table has the big picture. Returns for these stocks are 3 times higher than for the S&P 500 Index over the past 16 yrs (see Column W) but our enthusiasm is dampened by the BMW Method projection of a 53% loss in a future Bear Market vs. a 32% loss for the S&P 500 index. Six of our 7 “buy-and-hold” candidates are speculative by most measures (see Table); only Johnson & Johnson (JNJ) appears to be a better bet than simply putting your money to work in a bond-hedged S&P 500 Index fund (VBINX).
Risk Rating: 7
Full Disclosure: I dollar-average into JNJ, and also own stock in MON and DD.
Note: Metrics in the Table that are highlighted in red denote underperformance vs. our key benchmark (VBINX); metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 22
Week 194 - Biotechnology Companies in the Barron’s 500 List
Situation: Biotechnology companies are the high-risk sector of the US stock market. We have not previously discussed companies in this sector, aside from pointing out that Amgen (AMGN) and Biogen Idec (BIIB) had a Durable Competitive Advantage in 2012 (see Week 59). Why? Because our blog is about buy-and-hold stocks that can be expected to pay growing dividends in retirement, which is so attractive to those living on a fixed income. Biotechnology companies, on the other hand, rarely pay dividends because they make products that come off patent ~17 years after FDA approval. That means research and development of the next winning product will consume most of their profits. We’re talking about a growth industry where new technologies rapidly eclipse old technologies, and stability is a mirage.
For investors who like to gamble in the stock market, the biotech sector provides the stocks they’re likely to pick. And they’ll have many to choose from. For instance, the main exchange-traded fund (ETF) for biotech stocks is the SPDR S&P Biotech ETF (XBI at Line 11 in the Table). It tracks the S&P Biotechnology Select Industry Index, which includes 87 companies. The NASDAQ Biotechnology Index (^NBI at Line 14 in the Table) has 151 companies. The Barron’s 500 List of the largest companies by revenue on the New York and Toronto stock exchanges only has the 4 biggest names, plus AbbVie (ABBV) at Line 10 which is a recent spin-off from Abbott Laboratories (ABT) at Line 9. We’ve included ABT as a “big pharma” reference point.
Close examination of the Table, shows that Gilead Sciences (GILD) is the only one of the 4 long-established biotech stocks that is not overpriced by our main criterion, i.e., it has an EV/EBITDA (Enterprise Value divided by Earnings Before Interest Taxes Depreciation and Amortization) less than 14. On the negative side, GILD has a 5-yr Beta of 1.11 and an S&P stock rating of B/M, both of which signify earnings uncertainty. Only Amgen (AMGN) pays a dividend, has a low 5-yr Beta, and carries the minimum S&P stock rating (B+/M) suitable for buy-and-hold investors. You can take a look at the drugs currently being marketed by these 5 companies by consulting the APPENDIX at the end of this blog.
There is an issue with overpricing in the biotechnology industry, with respect to both product and stock prices. Some pharmacy benefits managers (PBMs), e.g. Express Scripts Holding Company (ESRX), will not sell the high-priced GILD drugs for treating Hepatitis C Virus (genotype 1). Instead, ESRX has entered an agreement with ABBV to sell its lower-priced Viekera Pak.
Stock prices for the industry also appear high. Amgen (AMGN) and the NASDAQ Biotechnology Index (^NBI) are more than two Standard Deviations above their 16-yr log-linear trendlines, and have been labeled “potentially overpriced” at the BMW Method website. Experienced investors will look at price/sales (P/S) when such concerns arise. P/S is ~1.8 for the S&P 500 Index. However, the healthcare industry is the most “overbought” of the 10 S&P industries. So, P/S for a typical "big pharma" company like ABT is 3.4, and the 4 biotech firms at the top of our Table have an average P/S of 8.8. It looks like biotech stocks are in a “bubble.”
Bottom Line: If you’re over 50, it is time to focus on retirement savings. You should have at least 4 times your gross annual income in that account by now. None of the 4 biotechnology stocks in our Table with 20 yrs of price data fit the requirements for inclusion in a retirement portfolio. These are high-risk, high-reward stocks. That said, they represent a more prudent bet than competing high-risk assets like gold, international stocks, and high-yield bonds. Those don’t carry anything like the reward potential of biotechnology stocks, given the tens of millions of people per year who move up from poverty to enter the “middle class” in emerging economies like China, India, Brazil, Turkey and South Africa.
Risk Rating: 8
Full Disclosure: I own shares of ABBV.
NOTE: metrics that underperform VBINX have red highlights in the Table; metrics are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
APPENDIX for Week 194
Gilead Sciences (GILD) has $7.7B in cash holdings for future acquisitions, and specializes in anti-viral drugs. Its current products include 1) Truvada is a combination of two other of the company’s drugs, Viread and Emtriva. 2) Complera is a combination of Truvada and Tibotec’s Edurant. 3) Atripla is a combination of Truvada and Bristol-Myers-Squibb’s Sustiva. 4) Stribild is so far approved for use only in the European Union (EU) and is a combination of Viread, Emtriva, elvitegravir, and cobicisat). 5) Ambisome B is marketed for life-threatening fungal infections that often complicate the treatment of AIDS. 6) Viread and 7) Hepsera are used to treat chronic hepatitis B. 8) Tamiflu is used to treat influenza A and B but is marketed by Roche (which pays royalties to Gilead Sciences until the drug comes off patent in 2016). 9) Letairis is used to treat pulmonary arterial hypertension; Gilead Sciences had to acquire Myogen to obtain its patent for Letairis. 10) Ranexa is used to treat chronic angina pectoris; Gilead Sciences acquired CV Therapeutics to obtain its patent for Ranexa. 11) Cayston is used to treat cystic fibrosis that has become complicated by infection with Pseudomonas aeruginosa. 12) Sovaldi (sofosbuvir) is used to treat Hepatitis C; Gilead Sciences acquired Pharmasett for its patent to use Sovaldi against certain genotypes of Hepatitis C in combination with the established drug treatments (interferon and ribavirin), or with ribavirin alone when patients cannot tolerate interferon. 13) Harvoni, a tablet that is taken once a day for treatment of Hepatitis C genotype 1 and is used without interferon or ribavirin. This breakthrough drug has achieved ~95% cure rates in Phase III studies. Biogen Idec (BIIB) has $3.2B in cash equivalents for future acquisitions and is focused on producing drugs and monoclonal antibodies for cancer and autoimmune diseases. Current products include 1) Avonex (beta interferon) is the company’s core franchise, used to treat relapsing multiple sclerosis since FDA approval in 1996. The current version comes off patent in 2026. 2) Rituxan, a monoclonal antibody against CD-20 protein positive B-cells, is an FDA-approved treatment for non-Hodgkin lymphomas and rheumatoid arthritis. It is marketed by Roche via Genentech (Biogen Idec receives royalties). 3) Tysabri (developed with Elan) is FDA-approved for the treatment of relapsing multiple sclerosis. It is under limited distribution because of producing progressive multifocal leukoencephalopathy in patients carrying antibodies to the Jakob-Creutzfeld virus and/or those receiving treatment for more than two years. An assay is now available to detect the JC virus before starting Tysabri. 4) Tecfidera, an orally-dosed drug used to reduce relapses of multiple sclerosis, received FDA approval two years ago. 5) Plegridy, a long-acting version of Avonex, emerged from Phase III studies over two years ago and received FDA approval in August of 2014. 6) Ampyra, a drug produced by Acorda Therapeutics, is used to improve walking in multiple sclerosis patients. Biogen Idec obtained the license to sell the drug outside the U.S. in 2009; conditional EU approval was granted in 2011. Amgen (AMGN) has built up $28B in cash holdings. Current products include 1) Epogen is a genetically-engineered human erythropoietin used to stimulate red blood cell production in anemia caused by chronic renal failure. 2) Aranesp is a recombinant protein that stimulates red blood cell production, and is approved for use in treating chemotherapy-induced anemia as well as chronic renal failure. 3) Neupogen stimulates neutrophil (white blood cell) production in cancer patients undergoing chemotherapy. 4) Neulesta, another stimulant for neutrophil production. 5) Enbrel is a drug for treating rheumatoid arthritis, psoriatic arthritis, and chronic plaque psoriasis that Amgen obtained when it acquired Immunex in 2002. Enbrel has been issued a new patent that extends to 2028. 6) Sensipar, sold on license from NPS Pharmaceuticals, is used to treat hyperparathyroidism secondary to end-stage kidney disease. 7) Vectibix is used to treat advanced colorectal cancer. 8) Nplate is used to treat ITP (immune thrombocytopenic purpura). 9) Prolia (denosumab) is used to treat bone loss due to hormone ablation, postmenopausal osteoporosis, or metastatic prostate cancer. Celgene (CELG) has $6.9B in cash holdings and specializes in using its proprietary small molecule technology to develop drugs that modulate the immune response or inhibit cytokine production--mainly to treat multiple myeloma. Current products include 1) Thalomid (thalidomide) inhibits blood vessel growth and is used to treat leprosy-related illnesses and multiple myeloma. 2) Revlimib, the successor to Thalomid, is used to treat myelodysplastic syndrome and relapsed or refractory multiple myeloma. 3) Pomalyst was approved for use in refractory multiple myeloma in 2013, and is in Phase III studies for potential use in myelofibrosis. 4) Otezla was approved for treatment of psoriatic arthritis in 2014, and is in Phase III studies for potential use in ankylosing spondylitis as well as being up for FDA approval to treat psoriasis. 5) Abraxane (via acquisition of Abraxis BioScience in 2010) is approved for use in metastatic breast cancer, non-small cell lung cancer and pancreatic cancer. 6) Istodax (via acquisition of Gloucester Pharmaceuticals in 2010) is used to treat T-cell lymphoma. 7) Otezla (apremilast) is used for treatment of psoriatic arthritis. AbbVie (ABBV) has $10B in cash and investments but also carries long-term debt of $14B. Current products include 1) Humira, the injectable tumor necrosis factor (TNF) blocker that is the leading treatment for rheumatoid arthritis worldwide. It is also approved for use in juvenile idiopathic arthritis, psoriasis, ankylosing spondylitis, ulcerative colitis, Crohn’s disease, and spondyloarthritis. Its US patent expires in less than two years; competing drugs include Remicade and Simponi (both marketed by Johnson & Johnson) as well as Enbrel (marketed by Pfizer). 2) Tricor and Trilipix, for use in treating high cholesterol or high triglycerides, went off patent in 2012. 3) Niaspan, an extended-release niacin supplement. 4) Synthroid, a long-standing staple for treating hypothyroidism. 5) AndroGel (testosterone replacement therapy). 6) Lupron, for prostate cancer. 7) Synagis, for treating respiratory syncytial syndrome, is only marketed outside the US. 8) Kaletra and Norvir, for treating HIV.
For investors who like to gamble in the stock market, the biotech sector provides the stocks they’re likely to pick. And they’ll have many to choose from. For instance, the main exchange-traded fund (ETF) for biotech stocks is the SPDR S&P Biotech ETF (XBI at Line 11 in the Table). It tracks the S&P Biotechnology Select Industry Index, which includes 87 companies. The NASDAQ Biotechnology Index (^NBI at Line 14 in the Table) has 151 companies. The Barron’s 500 List of the largest companies by revenue on the New York and Toronto stock exchanges only has the 4 biggest names, plus AbbVie (ABBV) at Line 10 which is a recent spin-off from Abbott Laboratories (ABT) at Line 9. We’ve included ABT as a “big pharma” reference point.
Close examination of the Table, shows that Gilead Sciences (GILD) is the only one of the 4 long-established biotech stocks that is not overpriced by our main criterion, i.e., it has an EV/EBITDA (Enterprise Value divided by Earnings Before Interest Taxes Depreciation and Amortization) less than 14. On the negative side, GILD has a 5-yr Beta of 1.11 and an S&P stock rating of B/M, both of which signify earnings uncertainty. Only Amgen (AMGN) pays a dividend, has a low 5-yr Beta, and carries the minimum S&P stock rating (B+/M) suitable for buy-and-hold investors. You can take a look at the drugs currently being marketed by these 5 companies by consulting the APPENDIX at the end of this blog.
There is an issue with overpricing in the biotechnology industry, with respect to both product and stock prices. Some pharmacy benefits managers (PBMs), e.g. Express Scripts Holding Company (ESRX), will not sell the high-priced GILD drugs for treating Hepatitis C Virus (genotype 1). Instead, ESRX has entered an agreement with ABBV to sell its lower-priced Viekera Pak.
Stock prices for the industry also appear high. Amgen (AMGN) and the NASDAQ Biotechnology Index (^NBI) are more than two Standard Deviations above their 16-yr log-linear trendlines, and have been labeled “potentially overpriced” at the BMW Method website. Experienced investors will look at price/sales (P/S) when such concerns arise. P/S is ~1.8 for the S&P 500 Index. However, the healthcare industry is the most “overbought” of the 10 S&P industries. So, P/S for a typical "big pharma" company like ABT is 3.4, and the 4 biotech firms at the top of our Table have an average P/S of 8.8. It looks like biotech stocks are in a “bubble.”
Bottom Line: If you’re over 50, it is time to focus on retirement savings. You should have at least 4 times your gross annual income in that account by now. None of the 4 biotechnology stocks in our Table with 20 yrs of price data fit the requirements for inclusion in a retirement portfolio. These are high-risk, high-reward stocks. That said, they represent a more prudent bet than competing high-risk assets like gold, international stocks, and high-yield bonds. Those don’t carry anything like the reward potential of biotechnology stocks, given the tens of millions of people per year who move up from poverty to enter the “middle class” in emerging economies like China, India, Brazil, Turkey and South Africa.
Risk Rating: 8
Full Disclosure: I own shares of ABBV.
NOTE: metrics that underperform VBINX have red highlights in the Table; metrics are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
APPENDIX for Week 194
Gilead Sciences (GILD) has $7.7B in cash holdings for future acquisitions, and specializes in anti-viral drugs. Its current products include 1) Truvada is a combination of two other of the company’s drugs, Viread and Emtriva. 2) Complera is a combination of Truvada and Tibotec’s Edurant. 3) Atripla is a combination of Truvada and Bristol-Myers-Squibb’s Sustiva. 4) Stribild is so far approved for use only in the European Union (EU) and is a combination of Viread, Emtriva, elvitegravir, and cobicisat). 5) Ambisome B is marketed for life-threatening fungal infections that often complicate the treatment of AIDS. 6) Viread and 7) Hepsera are used to treat chronic hepatitis B. 8) Tamiflu is used to treat influenza A and B but is marketed by Roche (which pays royalties to Gilead Sciences until the drug comes off patent in 2016). 9) Letairis is used to treat pulmonary arterial hypertension; Gilead Sciences had to acquire Myogen to obtain its patent for Letairis. 10) Ranexa is used to treat chronic angina pectoris; Gilead Sciences acquired CV Therapeutics to obtain its patent for Ranexa. 11) Cayston is used to treat cystic fibrosis that has become complicated by infection with Pseudomonas aeruginosa. 12) Sovaldi (sofosbuvir) is used to treat Hepatitis C; Gilead Sciences acquired Pharmasett for its patent to use Sovaldi against certain genotypes of Hepatitis C in combination with the established drug treatments (interferon and ribavirin), or with ribavirin alone when patients cannot tolerate interferon. 13) Harvoni, a tablet that is taken once a day for treatment of Hepatitis C genotype 1 and is used without interferon or ribavirin. This breakthrough drug has achieved ~95% cure rates in Phase III studies. Biogen Idec (BIIB) has $3.2B in cash equivalents for future acquisitions and is focused on producing drugs and monoclonal antibodies for cancer and autoimmune diseases. Current products include 1) Avonex (beta interferon) is the company’s core franchise, used to treat relapsing multiple sclerosis since FDA approval in 1996. The current version comes off patent in 2026. 2) Rituxan, a monoclonal antibody against CD-20 protein positive B-cells, is an FDA-approved treatment for non-Hodgkin lymphomas and rheumatoid arthritis. It is marketed by Roche via Genentech (Biogen Idec receives royalties). 3) Tysabri (developed with Elan) is FDA-approved for the treatment of relapsing multiple sclerosis. It is under limited distribution because of producing progressive multifocal leukoencephalopathy in patients carrying antibodies to the Jakob-Creutzfeld virus and/or those receiving treatment for more than two years. An assay is now available to detect the JC virus before starting Tysabri. 4) Tecfidera, an orally-dosed drug used to reduce relapses of multiple sclerosis, received FDA approval two years ago. 5) Plegridy, a long-acting version of Avonex, emerged from Phase III studies over two years ago and received FDA approval in August of 2014. 6) Ampyra, a drug produced by Acorda Therapeutics, is used to improve walking in multiple sclerosis patients. Biogen Idec obtained the license to sell the drug outside the U.S. in 2009; conditional EU approval was granted in 2011. Amgen (AMGN) has built up $28B in cash holdings. Current products include 1) Epogen is a genetically-engineered human erythropoietin used to stimulate red blood cell production in anemia caused by chronic renal failure. 2) Aranesp is a recombinant protein that stimulates red blood cell production, and is approved for use in treating chemotherapy-induced anemia as well as chronic renal failure. 3) Neupogen stimulates neutrophil (white blood cell) production in cancer patients undergoing chemotherapy. 4) Neulesta, another stimulant for neutrophil production. 5) Enbrel is a drug for treating rheumatoid arthritis, psoriatic arthritis, and chronic plaque psoriasis that Amgen obtained when it acquired Immunex in 2002. Enbrel has been issued a new patent that extends to 2028. 6) Sensipar, sold on license from NPS Pharmaceuticals, is used to treat hyperparathyroidism secondary to end-stage kidney disease. 7) Vectibix is used to treat advanced colorectal cancer. 8) Nplate is used to treat ITP (immune thrombocytopenic purpura). 9) Prolia (denosumab) is used to treat bone loss due to hormone ablation, postmenopausal osteoporosis, or metastatic prostate cancer. Celgene (CELG) has $6.9B in cash holdings and specializes in using its proprietary small molecule technology to develop drugs that modulate the immune response or inhibit cytokine production--mainly to treat multiple myeloma. Current products include 1) Thalomid (thalidomide) inhibits blood vessel growth and is used to treat leprosy-related illnesses and multiple myeloma. 2) Revlimib, the successor to Thalomid, is used to treat myelodysplastic syndrome and relapsed or refractory multiple myeloma. 3) Pomalyst was approved for use in refractory multiple myeloma in 2013, and is in Phase III studies for potential use in myelofibrosis. 4) Otezla was approved for treatment of psoriatic arthritis in 2014, and is in Phase III studies for potential use in ankylosing spondylitis as well as being up for FDA approval to treat psoriasis. 5) Abraxane (via acquisition of Abraxis BioScience in 2010) is approved for use in metastatic breast cancer, non-small cell lung cancer and pancreatic cancer. 6) Istodax (via acquisition of Gloucester Pharmaceuticals in 2010) is used to treat T-cell lymphoma. 7) Otezla (apremilast) is used for treatment of psoriatic arthritis. AbbVie (ABBV) has $10B in cash and investments but also carries long-term debt of $14B. Current products include 1) Humira, the injectable tumor necrosis factor (TNF) blocker that is the leading treatment for rheumatoid arthritis worldwide. It is also approved for use in juvenile idiopathic arthritis, psoriasis, ankylosing spondylitis, ulcerative colitis, Crohn’s disease, and spondyloarthritis. Its US patent expires in less than two years; competing drugs include Remicade and Simponi (both marketed by Johnson & Johnson) as well as Enbrel (marketed by Pfizer). 2) Tricor and Trilipix, for use in treating high cholesterol or high triglycerides, went off patent in 2012. 3) Niaspan, an extended-release niacin supplement. 4) Synthroid, a long-standing staple for treating hypothyroidism. 5) AndroGel (testosterone replacement therapy). 6) Lupron, for prostate cancer. 7) Synagis, for treating respiratory syncytial syndrome, is only marketed outside the US. 8) Kaletra and Norvir, for treating HIV.
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