Respecting My Intuition on This Healthcare CEF

We must all deal with our feelings and emotions as a part of the investment decision-making process. Sometimes intuition will come to our aid: A stock can look like a great investment, and our timing indicators may look perfect, but there is something not quite right about it. So we wait. Very often factors will come to light later showing that the investment would have been a mistake.

We must not confuse intuition with fear or greed. When the bottom has dropped out of the market, and the headlines say the Dow is going to zero, that is the time to buy. We must struggle against a sinking feeling in the pit of our stomachs in order to jump in at the right time.

The feeling of intuition does not have a physical component like fear or greed. It is just a quiet little voice in the back of your mind, saying: look before you leap.

Several days ago, BioHealth Investor pointed out H&Q Life Sciences Investors (HQL), a remarkable closed-end fund that has a dividend yield of 8%, and is selling at a discount to net asset value, while being invested in many of the most promising public companies in the biomedical industry, and also in some privately held companies. The fund holds warrants and convertible securities in addition to common stock. Some of the portfolio holdings look quite attractive:

Gilead Sciences (GILD)
Conor Medsystems (CONR)
IDEXX Laboratories (IDXX)
Cubist Pharmaceuticals (CBST)
Theravance (THRX)
Lexicon Genetics (LEXG)
Genzyme Corp (GENZ)
United Therapeutics (UTHR)
Exelixis (EXEL)
Epix Pharmaceuticals (EPIX)

The long-term chart shows that HQL has been around since 1992, and briefly traded above 45 in 2000. Since then it has retreated to its former trading zone below 15, and now sells at a 70% discount to the price in 2000.

The fund states it intends to maintain a fixed distribution policy of 2% per quarter, using net realized capital gains; however, if the amount of the distribution exceeds the Fund’s net investment income and realized capital gains, this distribution policy would result in a return of capital to shareholders. This policy will result in significant taxable income and/or tax complications, so it would be best to hold HQL in a tax-sheltered investment account such as an IRA. No problem there.

The short-term chart is a bottom-fisher’s delight. Large investors have abruptly moved a lot of money into this closed-end fund. BioHealth Investor says that includes fund management. There is a clear implication that somebody knows something the market doesn’t know yet.

But my intuition is telling me that something is wrong, so I’m going to leave it alone. There are plenty of opportunities out there and we have to be selective. If HQL goes back to 45 and I miss out on it, that’s okay too; I don’t have to be right all the time.