The Weekend Blitz: Finding Value, Market Behavior, & Diversification Related Plays

by: Brian Nichols

Last weekend's "Blitz" created great discussions and produced questions that have been tremendous. This week I am looking at several stock-specific questions, while in previous weeks I have looked at diversification related topics. I will continue to take questions through Seeking Alpha,, or through Twitter in the week prior to future postings. This week's questions cover broad topics. Therefore, I hope you enjoy, learn, and at the end, feel free to chime in.

Click here to view last week's "Blitz" user ramsaii asks, "What is your opinion on SNV, will it be a good investment?"

Synovus Financial Corp (NYSE:SNV) is a regional bank with headquarters in Columbus, Georgia and branch offices in four other southern states. The company has seen a 46% rise in valuation over the last year, but as one of the TARP recipients during the recession, it has lost large value over the last five years.

Synovus has the same opportunity in this emerging housing market as any other bank in the space. It is in a good region and has made a very conscious effort over the last two years to improve its balance sheet and pay off its debts. With that being said, I think the determining factor of upside in value rests in how the stock compares to the industry, or how it stacks up when retail and institutional investors compare banks for a potential investment.

Unfortunately, the assets of any bank are near impossible to sort. Because of the complexity, retail investors have relied on and have turned their attention to a popular metric when assessing the value of a bank, and that is its book value per share. To be fair, this may not be the best way to value a bank, but there is a striking correlation between those that trade far below book value per share and those that trade higher than its book value, compared to market performance. Fundamentally, this may not be the best way to value an investment. However, the goal is to make money-and as I've explained on countless occasions (and in great detail within my book), perception and market psychology control short-term performance, which then creates value, and fundamentals dictate long-term performance. As a result, finding those common drivers in value is what will create buying opportunity; allow me to explain with the chart below.



Stock Price

Book Value Per Share

Percent of Book Value per share

One-Year Stock Performance

Synovus Financial






Bank of America












Popular Inc


















Wells Fargo






BB&T Corporation






All data collected from Yahoo! Finance

The companies above were not chosen with any particular metric in mind, but rather by stocks that I follow and that I consider to be the most watched in the space. In the paragraph above I explained that finding distinctions and finding patterns is one of the most important requirements in finding value in the market. The chart above shows that investors may be determining their investment decision in the banking sector based on book value per share.

As you can see, the stocks that trade with the deepest discount to book value have performed the best over the last year, as housing and the market has risen. The stocks such as WFC, BBT, and JPM have seen the least upside, and also trade above their book value. This is a very simple strategy, but sometimes it's the simple strategies that return the best gains. In regards to Synovus, one must realize that it still has several fundamental problems ahead, and has performed exceptionally well compared to its book value per share. Therefore, its strong performance might suggest underperformance, and that it may be wise to invest elsewhere, such as Bank of America-at least until banking stocks trade at higher premiums.

Seeking Alpha user joechang23 asks, "Brian. How about XPO? Are you still long?

Last week I received two questions regarding XPO Logistics (NYSEMKT:XPO), and to answer the first question, yes, I am still long and, yes, it is still my largest holding. The second question was in regards to a recent presentation by Landstar System (NASDAQ:LSTR) at the JPMorgan Aviation, Transportation, and Defense Conference. At this conference, executives at Landstar seemed quite defensive at the bare mention of XPO Logistics, and according to Seeking Alpha user, catamount, don't appear to know how to handle such an aggressive player in the market.

I urge everyone to read this transcript, about 2/3 down, and the way company executives describe the aggressive strategy of XPO Logistics. Landstar never mentions XPO specifically, but the tone of the conversation seems quite amateurish, as if Landstar doesn't know what to say or how to make XPO's strategy sound bad. Because after all, Landstar probably wishes it was in the same situation as XPO, to buy up competition with an aggressive CEO that has deep pockets who seemingly can't miss. Landstar, on the other hand, is seeing no revenue growth and has cash and short-term investments of just $109.81 million, about a third of XPO Logistics.

So why might companies such as Landstar and even C.H. Robinson Worldwide (NASDAQ:CHRW) not know how to handle the emergence of XPO Logistics? The answer is simple: This is a company that had revenue of just $158 million to end 2010, but one that is now on pace to report sales greater than $500 million in 2013 and is on pace to report revenue of more than $1 billion in 2014 (company guidance). The CEO, Bradley Jacobs, is aiming to build his fifth multi-billion dollar company of his career (one being United Rentals), and during its last quarter, the company saw revenue growth of 146.1%, by far the transportation sector leader.

This is a company that is growing rapidly, hiring about 60 people a month, and could not only take significant market share from Landstar, but could also steal investors who are sick of Landstar's underperformance. As a result, it is probably normal that Landstar receives a lot of questions about XPO and that company executives don't feel comfortable in answering those questions. My guess is that over the next two to three years those defensive answers will become even more common, but I don't think XPO executives will lose any sleep over it.

Seeking Alpha user JersONEr asks, "Biotechnology makes up 30% of your portfolio, do you spread it out equally?"

This is a good question, and to answer this question I want you to think about the fundamental behavior of a hedge fund. These funds will typically invest in indexes to perform with the market, yet will invest overweight in one to two sector(s) that they believe will outperform the market. My "new age" diversification strategy involves picking stocks within the different sectors that are undervalued relative to the market, but then also hedging my portfolio with an overweight space. In this case, I chose the healthcare space because it is secular and because, over the last five years, it has led the market with the most number of 100% plus annual performances. However, I do not equally diversify all "11 stocks" that I own within this space.

In the past I have discussed this topic in detail, and even more so in my book; but I break the healthcare sector into three sections: Large pharma, undervalued growth, and then clinical. If we look at my healthcare holdings as "100%", then I would invest 40% in large pharma, 40% in undervalued growth, and then 20% in clinical. But since healthcare makes up 30% of my portfolio, the weight of clinical on my portfolio would only be 6% total, which is then split into three to four investments (currently six).

The reason that it is split into several different investments is because these are higher risk investments. Therefore, I typically invest very small amounts while these companies are small or microcap stocks. Typically, this is all you need for large returns, as $4,000 four years ago would be more than $350,000 if you bought Jazz Pharmaceuticals. In fact, I was onboard the plane when it began to take-off, although I sold. For this reason I have decided to never invest more than I can risk in these stocks long-term, which is why I am still holding GALE after a 210% return, expecting it to be the next Jazz. To better explain, take a look at my healthcare holdings below and its percentage of my total portfolio:




Percent of Portfolio

Eli Lilly


Large Pharma


Gilead Sciences


Large Pharma


Jazz Pharmaceuticals


Undervalued Growth




Undervalued Growth


Questcor Pharmaceuticals


Undervalued Growth


Galena Biopharma




Sarepta Therapeutics








Celldex Therapeutics




ImmunoCellular Therapeutics




OncoSec Medical




One user asks, "What is your next GALE?"

Last year I had a real good year in the pharmaceutical industry, especially in the clinical development space. I had bought stocks such as ImmunoCellular Therapeutics, Celldex Therapeutics, ACADIA Pharmaceuticals (NASDAQ:ACAD), NeoStem, and of course Galena Biopharma before the large uptrends occurred. Now, just because I have returned large gains doesn't mean that all will earn FDA approvals; but my goal has always been to buy clinical biotechnology companies at such an undervalued price that, even if they fail in clinical studies, my losses will be bare minimum. The way I do this is by investing very small amounts in companies that have large peak sales potential, good data, and have flown under-the-radar.

Fortunately, last year was a special year for such value, but in the past I have always been picky when buying such stocks. Prior to last year I had chosen very few stocks-almost nothing in 2011 or 2010-but did invest in Jazz Pharmaceuticals , Questcor Pharmaceuticals, and Spectrum Pharmaceuticals (NASDAQ:SPPI) when each was a microcap stock. However, if I had to pick one small company that is sparking my interest, I'd have to say it's OncoSec Medical.

The company has come up in discussion at various points in the last year; therefore I have familiarity with it. Not only do I follow a writer who covers the company, but it was also the subject of discussion during my recent interview with an analyst/immunologist. In the interview, the analyst described it as "promising and represents the next generation (of immunotherapy)". I find it to be an interesting company because it takes a very effective immunotherapy product and then, with a device, it increases the potency, while decreasing the harsh side effects of the drug. Dr. Rahul Jasuja explains this to perfection; you can read it by clicking here.

The problem with finding a stock in this space is that they all sound promising in early trials. The key is finding one with catalysts and one that is cheap. After looking at OncoSec, there is not a company in this space that has more catalysts. The company will announce data for three trials, initiate two larger studies, and complete enrollment on two of its more significant studies in 2013. So far, all data has been positive and, in the past, the stock has more than doubled with data, but then falls back during the periods of no data. So with a data-packed year, it is very possible that it could maintain gains, which is why I am taking a small position in the company. However, like I said, it is a risk, and investors should never invest more in a speculative company than they are prepared to lose.

Twitter user @waqar95136 asks, "In regards to Spectrum, is this the right situation for when Fear and Panic is your friend?"

The question from this Twitter follower is in response to a chapter in my book entitled, "Panic and Fear are your best friends" and the question itself is good because the topic can be confusing. The goal is to teach investors how to spot value when a stock falls lower by identifying what caused the stock to fall. In many cases, an investor can use an illogical trend (such as if a stock falls lower after strong earnings) to return some of the best gains. In the book I used several personal experiences, such as with Harley- Davidson (NYSE:HOG) back in 2011, and how its losses created opportunity. But like I said, this only works if you can distinguish between what's fear/greed induced and what's fundamentally induced.

In the case of Spectrum Pharmaceuticals, guidance of a 60% drop for its best-selling drug, Fusilev, created a loss of 40%. Therefore, it was not fear/greed that created the loss, but rather a fundamental shift. When this occurs, a recovery is historically much slower, if in fact a recovery ever occurs. With that being said, I would not touch Spectrum Pharmaceuticals at this point in time, regardless of stock performance. As far as I can see, management has flat out lied to investors regarding guidance, demand, and possibly surrounding past pricing. In this market, value is scattered throughout, so I find it useless to waste time on a stock with deceitful management.


If you have a question about any of the stocks I follow, a market-related question, or would like my opinion on a specific topic, please feel free to send me an email or provide feedback in the comments section below. The goal of this series will be to provide analysis from the previous week, or to talk about market-related events that might change the direction of the market. I hope you enjoyed this, found it beneficial, and that you will keep the questions coming.

Disclosure: I am long XPO, BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Brian Nichols is long all 11 stocks included in the biotechnology section. The percentages displayed are based on close of market March 13.

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