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Why I'd Get Booed at a Value Investing ConferenceBy Dr. George HuangFriday, October 23, 2009 "We never touch biotech."
My friend and value-investing expert Dan Ferris jotted down the quote from Alex Roepers, a value hedge-fund manager with decades of success, and passed it to me with a smirk...
We were attending the Value Investing Congress in New York City earlier this week. Among the speakers were hedge-fund legend Julian Robertson and famous hedge-fund managers like Bill Ackman and David Einhorn.
As you know, most value investors – including these guys – are disciples of Warren Buffett, who famously said he never invests in anything he doesn't understand. Hence, Roepers' reluctance to buy biotech.
When I told other conference goers I was a biotech specialist, many suggested I get a refund. Even though presentations included a prison operator, a satellite communications firm, a teen retailer, and gold stocks... biotech was just too "out there" for these value guys.
Many individual investors feel the same – they're intimidated by the science. The ones that do venture into biotech are mostly looking for lottery tickets.
That's great news for the rest of us...
Because most smart and disciplined value investors keep their distance, it's easy to find huge price distortions. Individual investors can find more value-like setups in biotech than in any other market sector. You just have to know where to look...
Take one of my favorite trades, QLT, for example. QLT is a small-cap eye-care specialist undergoing massive corporate structuring. The stock hovered around $2.50 from last November to June. But the company had almost $2.50 per share in net cash.
At those prices, investors got two profitable drugs worth at least $2 per share for free. That's a situation any value investor would kill for. FDA Report subscribers made over 80% as the market came around.
And it's not unique... The FDA causes most of the incredible price distortions in the biotech sector. Only with the FDA's blessing can a new drug make it to market. But a negative ruling by the agency can crush a stock in a matter of minutes.
Last year, investors deserted European biotech UCB after the FDA rejected its Crohn's disease and rheumatoid arthritis drug Cimzia. During the selloff, the company traded at half the industry average sales multiple. Even if the FDA never approved Cimzia, UCB was downright cheap. When the FDA finally did greenlight the drug, shares soared more than 50%.
So you see, the instantaneous panic selling common to biotech creates huge value. And it happens dozens of times a year. (If you're looking for upcoming value opportunities, check out last week's essay. The first two decisions came and went without much movement. But I've got my eye on the next three for bargains.)
I enjoyed the Value Investing Congress. It's always great to hear smart guys talk about where they find their best ideas. And I was thrilled to hear the value crowd wants nothing to do with biotech...
The fewer smart guys in sector, the more money left for the rest of us.
Good investing,
George Huang
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