The spectacular rally in the biotech sector since end 201 — culminated in the Nasdaq Biotech Index up 74 per cent in 2013 alone.
This is a sector I track with obsessive interest because it is on the frontiers of medical research, with revolutionary drugs that treat human diseases as varied as immune system disorders, Alzheimers/dementia, Hepatitis C, cancer's lethal (melanoma, leukemia, prostrate, mammary etc) constellation, respiratory diseases etc. The FDA approved no less than eleven oncology drags next year and the venture capitalists in Silicon Valley who were most bullish on social media/cloud even three years ago are now obsessed by the biotech/life sciences bonanza.
Obamacares by expanding insurance coverage for 40 million Americans, is bullish for biotechs and Big Pharma. Of course, drug pipelines are habitually undervalued by the Street making biotech a money making carnival for the cognoscenti. Better VC funding and FDA fast track approvals spelt a unique money making opportunity in biotech — and that is exactly what happened in 2012 and 2013, when biotech was the best performing sector. Multibillion dollar takeover wars, such as Angen's bid for Onyx Pharma last summer, only made the sector sizzle white hot.
My favourite biotech shares since 2011 — Biogen, Regeneron, Gilead, Celgene — have all doubled or more because their cancer/Hep C pipelines captured the imagination of global investors in a world where patient populations have exploded due to aging/demographics, emerging markets wealth creation. Drug pricing growth rates, research and development and virtual global patient populations have all boosted the fundamental financial ballast of the sector. Should investors buy individual small cap, single drug or concept (drug in clinical FDA trials) biotechs? Absolutely not. A failed drug trial can gut a small cap biotech and invariably does, making it Russian roulette played with five bullets in the chamber.
However, the leading large cap biotechs are an entirely different breed. Take Biogen Idec BIIB whose multiple sclerosis drug Tecfidrea could save the lives of millions of human beings. I was attracted to Biogen at 190 because both the FDA and Europe's EMA not only approved Tecfideres but also granted Biogen the data protection moat needed to preempt generic competitors. Biogen Idec's pipeline has at least four other drugs with $1 billion global sales potential now in the FDA clinical trial pipeline. At 280, Biogen is expensive at 28 times earnings. However, if Wall Street swoons in 2014 (it will, clap your hands, Peter Pan!), investors could use option strategies to buy Biogen at 240.
Gilead Sciences (GILD) has tripled in value since I recommended the shares in my KT columns. I was fascinated by Gilead's leukemia pipeline, in memory of a little boy (a friend's brothers) who lost his life from this awful, blood cancer disease. Idelalisib's clinical trials demonstrated it arrested the progression of mutant blood cancer cells. Gilead's main revenue generators $10 billion is its Hep C, HIV/AIDS and viral infection drug menu, Gilead could well become the planet's most exciting oncology investment themes next year. My buy/sell price for Gilead are 62/85.
Amgen is the oldest, biggest biotech blue chip. While EPS growth does not dazzle, Amgen trades at a modest 15 times earnings and its late stage pipeline is a beauty. My buy/sell range on Amgen is $90-130. Biotech shares are best bought after risk off spasm. It is prudent to buy fear and sell greed on Wall Street.
The bullish case for Ford Motor Company
Ford shares were sandbagged from 17 in November to 15 now after the Wall Street grapevine tipped Alan Mulally to succeed Steve Ballmer as Microsoft CEO and management downgraded 2014 vehicle production targets. Once again, the Street has overreacted, thrown out the baby with the bathwater. Ford has a deep bench even if Mulally leaves.
True, Europe is Ford's Achilles heel but Europe has emerged from recession. The luxury Lincoln brand's turnaround is a success, with 17 per cent unit rise in Q3. Construction, contracting and the shale energy bonanza will accelerate the momentum in US light truck sales. Ford has no hesitation in jettisoning underperforming brands, as attested by the closure of Mercury and the sale of Volvo to China's Geely, Jaguar and Land Rover to Tata, the slashing of its stake in Mazda. Ford dominates the US truck market with a 20 per cent market share. Ford is on a roll in the hypergrowth China market. The One Fund strategy is working on a planetary scale.
If Ford can do $2 EPS next year, then one of the world's great auto companies trades at 7.5 times forward earnings on the eve of the first synchronised global recovery since 2007. This is beyond yummy, it is a nirvana trade. Ford can credibly deliver 12 per cent revenue growth next year due to the US and China, though Europe and Latin America are laggards. Higher volumes, new product launches, increased China capacity and a smaller footprint in France/Belgium are all positive metrics, as is the recent increase in capex to $7.6 billion.
I believe a dividend/share buyback hike is inevitable. Ford, in my valuation paradigm, trades at 10 times earnings or $20 by next summer. Strategy? Use any market volatility spasm to sell one year high delta put options on the CBOE. The risk reward calculus is compelling as I actually want to be delivered Ford shares at 14.
In late 2012, I had recommended Toyota Motors as the ultimate winner of Abenomics and my uber-bearish yen view in successive columns. However, after its spectacular move, I believe the easy money in Toyota has long been made. However, it makes no sense not to own Toyota in a world where US light vehicle seasonally adjusted annual rate (SAAR) is 16.41 million units. However, I now believe Honda Motor is my new Gaga Auto share for next year, though only in the ¥3,800–4000 range.
I had recommended Daimler Benz AG in 2012 column in the €34–36 euro range. Daimler AG trades at €62 in Frankfurt as I write. Should newbie investors buy here? Nein. Yet if the world sees the DAX correct by 10 per cent next year, Daimler AG can well fall to €50-52. I am stunned by the momentum/margins in both its core Mercedez Benz division and in Trucks and sheer scale of cash flow, margin, dividend and EPS upgrades. At 50–52, Daimler will trade at eight times earnings, which is a "Wunderbar" valuation. I would hedge euro risk at 1.37 on any Daimler long.
It is entirely rational for investors to daydream over fairy tale stock picks, an occupational hazard for my tribe. After all, I recommended Tesla at 20 in KT and it is now 152. So what if someone launched an electric car blessed by the Politburo in the world's most polluted and populous market? What if the Politburo decided to finance battery/charging infrastructure? Time to revisit Hong Kong and breakfast to the panoramic view of Victoria Harbour.
What next for Japanese shares in 2014?
In retrospect, 2013 was the year of the soaring Nikkei and falling yen in Emperor Akihito's Empire of the Rising Sun, a global macro theme powered by the monetary/fiscal twin arrows of Abenomics. The Fed's soft taper at the December FOMC only reinforced a spike in the ten-year US Treasury note to three per cent, a rise in dollar/yen to105 and 16200 on the Nikkei Dow. Japan was unquestionably the best performing developed stock market in the world, albeit only if investors heeded my call to hedge yen risk at 76 just before the October 2012 elections that put the LDP's Shinzo Abe (grandson of a Tojo wartime cabinet luminary, just to put his recent samurai pilgrimage to Yasukuni Shrine that outraged China and South Korea in perspective) in power. As usual, Japan sceptics abound in Dubai and Wall Street/City, given that my generation of global investors have been traumatised by two lost decades of deflation, zombie banks, revolving door governments, monetary false dawns and a public debt/GDP above 240 per cent (the Abegeddon scenario). So, what next for Dai Nippon in 2014 after a 56 per cent rise in the Nikkei Dow?
Japan's spectacular rally coincided with an epic rise in earnings growth in the Nikkei Dow and Topix, thanks to the yen's plunge, Japan can well deliver 15-20 per cent earnings growth due to corporate restructuring, margin expansion and a fall in crude oil and LNG prices. Is profit taking on the overbought Nikkei possible? Yes, even a 2000 point fall in the Nikkei Dow will not surprise me. Will the yen soar in any spasm of risk aversion? Absolutely, short yen is the most crowded trade among the currency gnomes.
However, risk aversion spasms do not negate the macro fundamental ballast for the Nikkei Dow/Topix at a time when Japan's ageing population has $15 trillion in savings and a mere eight per cent allocation to the stock market. The collapse of the Tokyo property/equities bubble in 1989 also traumatised a generation of Japanese savers, exactly as happened on Wall Street in the two decades after the Great Depression. Yet secular bull markets change mass investment psychology over time. How else did the Japanese turn into basketball loving pacifists after Hiroshima and Nagasaki?
Will Abenomics turn to Abegeddon? No. Abenomics is motivated by a sense of national urgency based on the twin trauma of the Fukushima tragedy and geopolitical fears. The LDP dominates both houses of parliament and Governor Kuroda'sBank of Japan is committed to double the monetary base to achieve two per cet inflation and even expand the most aggressive QE programme on the planet.
Critics who argue that the fabled Third Arrow of Abennomics has not left its political quiver simply do not understand Japan's legislative reform agenda. Abe has taken on the LPD's Stone Age vested interests / rural factions. He has slashed rice subsidies, deregulated electronic power, reformed health care, set the stage for a nuclear restart and new paradigms corporate tax, boosted fiscal governance. The Third Arrow is all too real. Abe-san has outlegislated even Nakasone, Hashimoto and Koizumi.
Will the consumption tax in April kill the economy's GDP golden goose? No. The Cabinet and Diet has approved a $70 billion economic stimulus offset and the Bank of Japan can scale up its "shock and awe" monetary easing. The post tsunami reconstruction continues. The samurai lords of Yamaguchi Prefecture launched the Meiji Revolution and changed world history and the fate of Japan. Shinzo Abe is the lineal descendant of the Yamaguchi samurai clans. He will change Japan and change the world.
Abenomics has shown success a mere year after the election. Machinery orders/capex are on a roll in Japan, a crucial metric. Inflation just rose above 1.2 per cent. Real income growth negates the VAT hike. The gaijin investors powered the first meteoric rise in the Nikkei Dow since Abe's election. Next year, the big flows to Marounuchi will originate from trust banks, life insurance companies, pension funds (GPIF) and Mrs Watanabe. The world is underweight Japan. Japan Inc is underweight Japan. This too will change.
Since autumn 2012, I have recommended investing in megacap auto exporters, brokers and technology firms, notably Toyota Motors, Nomura Securities, Sony and Hitachi. Next year, I absolutely love Softbank (a better Ali Baba IPO proxy than Yahoo), Japanese property firms and the J-REIT's, construction and machinery firms that benefit from the LDP's fiscal largesse.
Is Japan as dirt cheap as it was last autumn after Shinzo Abe won the election? No way. The Nikkei Dow trades at 15 times earnings, 1.5 times book value and 2.4 per cent dividend yield. The big money/double bagger winners in 2014 will be specific Japanese small caps. Domo arigato, Abe-san. Abenomics was a licence to print money in Japanese shares in 2013. I hope to salute the cherry blossoms on Fujiyama and visit the Tokugawa shogunate's castles in Kyoto this spring. Due diligence in Japan is, after all, an investment pilgrimage.